1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________ .
Commission File Number 0-14706
INGLES MARKETS, INCORPORATED
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-0846267
- ------------------------------- ---------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
P.O. Box 6676, Asheville, NC 28816
-------------------------------------------------
(Address of principal executive offices) (Zip Code)
(704) 669-2941
--------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the 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 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO .
--- ---
As of May 2, 1997, the registrant had 8,969,268 shares of Class A Common Stock,
$.05 par value per share, and 12,877,471 shares of Class B Common Stock, $.05
par value per share, outstanding.
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INGLES MARKETS, INCORPORATED
INDEX
Page No.
--------
Part I - Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -
March 29, 1997 and
September 28, 1996 3
Consolidated Statements of Income -
Three Months Ended
March 29, 1997 and
March 30, 1996 5
Six Months Ended
March 29, 1997 and
March 30, 1996 6
Consolidated Statements of Changes in
Stockholders' Equity -
Six Months Ended
March 29, 1997 and
March 30, 1996 7
Consolidated Statements of Cash Flows -
Six Months Ended
March 29, 1997 and
March 30, 1996 8
Notes to Unaudited Interim Financial Statements 9
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition 13
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security
Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Exhibits
11 Computation of Earnings Per Common Share
Three Months Ended
March 29, 1997 and
March 30, 1996 23
Six Months Ended
March 29, 1997 and
March 30, 1996 24
27 Financial Data Schedule (for SEC use only)
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Part I. Financial Information
Item 1. Financial Statements
INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 29, SEPTEMBER 28,
1997 1996
(UNAUDITED) (NOTE)
------------ -------------
CURRENT ASSETS
--------------
Cash $ 28,723,709 $ 22,418,003
Receivables 15,316,727 15,197,129
Inventories 127,221,934 128,364,435
Other 4,962,525 3,935,825
------------- -------------
TOTAL CURRENT ASSETS 176,224,895 169,915,392
PROPERTY AND EQUIPMENT - Net 559,394,341 530,227,505
----------------------
OTHER ASSETS 7,156,250 7,821,820
------------ ------------- -------------
TOTAL ASSETS $ 742,775,486 $ 707,964,717
============= =============
NOTE: The balance sheet at September 28, 1996 has been derived from the
audited financial statements at that date.
See notes to unaudited interim financial statements.
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INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONCLUDED)
LIABILITIES AND STOCKHOLDERS' EQUITY
MARCH 29, SEPTEMBER 28,
1997 1996
(UNAUDITED) (NOTE)
------------ -------------
CURRENT LIABILITIES
-------------------
Short-term loans and current
portion of long-term liabilities $121,891,375 $ 54,274,426
Accounts payable and accrued
expenses 98,642,113 107,134,357
------------ ------------
TOTAL CURRENT LIABILITIES 220,533,488 161,408,783
DEFERRED INCOME TAXES 23,334,578 22,034,578
---------------------
LONG-TERM LIABILITIES 278,645,426 349,511,494
--------------------- ------------ ------------
TOTAL LIABILITIES 522,513,492 532,954,855
------------ ------------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock, $.05 par value;
10,000,000 shares authorized;
no shares issued - -
Common stocks:
Class A, $.05 par value; 150,000,000
shares authorized; 8,866,868
shares issued and outstanding
March 29, 1997; 5,097,291 shares
issued and outstanding
September 28, 1996 443,343 254,864
Class B, $.05 par value; 100,000,000
shares authorized; 12,979,871
shares issued and outstanding
March 29, 1997; 13,006,859 shares
issued and outstanding
September 28, 1996 648,994 650,344
Paid-in capital in excess of
par value 90,926,219 50,139,088
Retained earnings 128,243,438 123,965,566
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 220,261,994 175,009,862
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $742,775,486 $707,964,717
============ ============
NOTE: The balance sheet at September 28, 1996 has been derived from the
audited financial statements at that date.
See notes to unaudited interim financial statements.
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INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
-------------------------
MARCH 29, MARCH 30,
1997 1996
------------ ------------
NET SALES $376,142,746 $364,223,309
COST OF GOODS SOLD 284,109,081 279,898,927
------------ ------------
GROSS PROFIT 92,033,665 84,324,382
OPERATING AND ADMINISTRATIVE
EXPENSES 77,868,870 72,072,746
RENTAL INCOME, NET 1,346,304 1,239,253
------------ ------------
INCOME FROM OPERATIONS 15,511,099 13,490,889
OTHER INCOME, NET 824,057 909,479
------------ ------------
INCOME BEFORE INTEREST
AND INCOME TAXES 16,335,156 14,400,368
INTEREST EXPENSE 7,171,723 7,269,661
------------ ------------
INCOME BEFORE INCOME TAXES 9,163,433 7,130,707
------------ ------------
INCOME TAXES:
Current 4,100,000 2,900,000
Deferred (600,000) (200,000)
------------ ------------
3,500,000 2,700,000
------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM 5,663,433 4,430,707
EXTRAORDINARY ITEM- EARLY EXTINGUISHMENT OF
DEBT (NET OF INCOME TAX BENEFIT) (354,116) -
------------ ------------
NET INCOME $ 5,309,317 $ 4,430,707
============ ============
PER-SHARE AMOUNTS:
Earnings per common share:
Primary earnings per common share
before extraordinary item $ .26 $ .24
Extraordinary item - early extinguishment
of debt (.02) -
------------ ------------
Primary earnings per common share $ .24 $ .24
============ ============
Fully diluted earnings per common share
before extraordinary item $ .26 $ .23
Extraordinary item-early extinguishment
of debt (.02) -
------------ ------------
Fully diluted earnings per common share $ .24 $ .23
============ ============
Cash dividends per common share:
Class A $ .165 $ .165
------------ ------------
Class B $ .150 $ .150
------------ ------------
See notes to unaudited interim financial statements.
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INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
SIX MONTHS ENDED
-------------------------
MARCH 29, MARCH 30,
1997 1996
------------ ------------
NET SALES $757,258,256 $721,629,574
COST OF GOODS SOLD 574,297,472 554,937,363
------------ ------------
GROSS PROFIT 182,960,784 166,692,211
OPERATING AND ADMINISTRATIVE
EXPENSES 153,733,578 141,145,363
RENTAL INCOME, NET 2,676,933 2,234,600
------------ ------------
INCOME FROM OPERATIONS 31,904,139 27,781,448
OTHER INCOME, NET 1,103,754 1,479,263
------------ ------------
INCOME BEFORE INTEREST
AND INCOME TAXES 33,007,893 29,260,711
INTEREST EXPENSE 15,287,807 14,507,888
------------ ------------
INCOME BEFORE INCOME TAXES 17,720,086 14,752,823
------------ ------------
INCOME TAXES:
Current 6,700,000 5,900,000
Deferred 100,000 (300,000)
------------ ------------
6,800,000 5,600,000
------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM 10,920,086 9,152,823
EXTRAORDINARY ITEM- EARLY EXTINGUISHMENT OF
DEBT (NET OF INCOME TAX BENEFIT) (565,275) -
------------ ------------
NET INCOME $ 10,354,811 $ 9,152,823
============ ============
PER-SHARE AMOUNTS:
Earnings per common share:
Primary earnings per common share
before extraordinary item $ .53 $ .50
Extraordinary item - early extinguishment
of debt (.03) -
------------ ------------
Primary earnings per common share $ .50 $ .50
============ ============
Fully diluted earnings per common share
before extraordinary item $ .52 $ .46
Extraordinary item-early extinguishment
of debt (.02) -
------------ ------------
Fully diluted earnings per common share $ .50 $ .46
============ ============
Cash dividends per common share:
Class A $ .33 $ .33
------------ ------------
Class B $ .30 $ .30
------------ ------------
See notes to unaudited interim financial statements.
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INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
_____________________________________________
PAID-IN
CLASS A CLASS B CAPITAL IN
...COMMON STOCK... ...COMMON STOCK... EXCESS OF RETAINED
SHARES AMOUNT SHARES AMOUNT PAR VALUE EARNINGS TOTAL
--------- -------- ---------- -------- ----------- ------------ ------------
BALANCE,
SEPTEMBER 30, 1995. 4,577,541 $228,877 13,326,609 $666,331 $48,599,088 $114,322,189 $163,816,485
NET INCOME . . . . . - - - - - 9,152,823 9,152,823
CASH DIVIDENDS . . . - - - - - (5,508,590) (5,508,590)
EXERCISE OF STOCK
OPTIONS . . . . . . 200,000 10,000 - - 1,540,000 - 1,550,000
COMMON STOCK
CONVERSIONS . . . . 12,725 636 (12,725) (636) - - -
--------- -------- ---------- -------- ----------- ------------ ------------
BALANCE,
MARCH 30, 1996. . . 4,790,266 $239,513 13,313,884 $665,695 $50,139,088 $117,966,422 $169,010,718
========= ======== ========== ======== =========== ============ ============
BALANCE,
SEPTEMBER 28, 1996. 5,097,291 $254,864 13,006,859 $650,344 $50,139,088 $123,965,566 $175,009,862
NET INCOME . . . . . - - - - - 10,354,811 10,354,811
CASH DIVIDENDS . . . - - - - - (6,076,939) (6,076,939)
EXERCISE OF STOCK
OPTIONS . . . . . . 439,200 21,960 - - 4,283,565 - 4,305,525
CONVERSION OF
CONVERTIBLE
SUBORDINATED
DEBENTURES. . . . . 3,303,389 165,169 - - 36,503,566 - 36,668,735
COMMON STOCK
CONVERSIONS . . . . 26,988 1,350 (26,988) (1,350) - - -
--------- -------- ---------- -------- ----------- ------------ ------------
BALANCE,
MARCH 29, 1997. . . 8,866,868 $443,343 12,979,871 $648,994 $90,926,219 $128,243,438 $220,261,994
========= ======== ========== ======== =========== ============ ============
See notes to unaudited interim financial statements.
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INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED
--------------------------
MARCH 29, MARCH 30,
1997 1996
------------ ------------
Cash Flows From Operating Activities:
Net income $ 10,354,811 $ 9,152,823
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization expense 18,701,294 15,831,881
Receipt of advance payments on purchases
contracts 500,000 2,000,000
Recognition of advance payments on purchases
contracts (2,173,258) (1,240,625)
Gains on disposals of property and
equipment (537,240) (1,455,082)
Deferred income taxes 100,000 (300,000)
Extraordinary item-early extinguishment
of debt (net of income tax benefit) 565,275 -
Increase in receivables (104,622) (2,676,827)
Decrease (increase) in inventory 1,142,501 (5,360,604)
(Increase) decrease in other assets (200,206) 19,896
Decrease in accounts payable
and accrued expenses (6,080,167) (2,408,345)
------------ ------------
Net Cash Provided by Operating Activities 22,268,388 13,563,117
------------ ------------
Cash Flows From Investing Activities:
Proceeds from sales of property and
equipment 891,747 2,023,241
Capital expenditures (48,895,889) (51,069,172)
------------ ------------
Net Cash (Used) by Investing Activities (48,004,142) (49,045,931)
------------ ------------
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt 56,652,658 48,714,551
Principal payments on long-term debt (26,559,784) (26,662,239)
Proceeds from short-term borrowings, net 5,000,000 21,000,000
Proceeds from exercise of stock options 3,025,525 1,200,000
Dividends paid (6,076,939) (5,508,590)
------------ ------------
Net Cash Provided By Financing Activities 32,041,460 38,743,722
------------ ------------
Net Increase in Cash 6,305,706 3,260,908
Cash at Beginning of Period 22,418,003 20,120,776
------------ ------------
Cash at End of Period $ 28,723,709 $ 23,381,684
============ ============
See notes to unaudited interim financial statements.
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INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
March 29, 1997
A. BASIS OF PREPARATION
In the opinion of management, the accompanying unaudited interim
financial statements contain all adjustments necessary to present
fairly the Company's financial position as of March 29, 1997, and the
results of operations, changes in stockholders' equity and cash flows
for the three month and six month periods ended March 29, 1997 and
March 30, 1996. The adjustments made are of a normal recurring
nature. Certain information and footnote disclosures normally
included in the annual financial statements prepared in accordance
with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and
Exchange Commission for Form 10-Q. It is suggested that these
unaudited interim financial statements be read in conjunction with the
audited financial statements and the notes thereto included in the
1996 Annual Report on Form 10-K filed by the Company under the
Securities Exchange Act of 1934 on December 23, 1996.
The results of operations for the three month and six month periods
ended March 29, 1997 are not necessarily indicative of the results to
be expected for the full fiscal year.
Certain amounts for the three month and six month periods ended March
30, 1996 have been reclassified for comparative purposes.
B. EARNINGS PER COMMON SHARE
Primary earnings per common share is computed by dividing consolidated
net income by the weighted average number of shares of common stock
and dilutive common stock equivalent shares outstanding during the
period (22,004,684 and 20,632,180 for the three month and six month
periods ended March 29, 1997, respectively and 18,474,353 and
18,425,683 for the three month and six month periods ended March 30,
1996, respectively).
Fully diluted earnings per common share gives effect to the assumed
conversion, if dilutive, of the Convertible Subordinated Debentures,
after elimination of related interest expense, net of the bonus and
income tax effect. The weighted average number of shares used to
compute fully diluted earnings per common share were 22,039,458 and
21,001,838 for the three and six month periods ended March 29, 1997,
respectively, and 21,920,578 and 21,917,329 for the three and six
month periods ended March 30, 1996.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which must be adopted
by the Company and reflected in its financial statements for the
periods ending on or after December 27, 1997. At that time, the
Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods. Under
the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded.
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The impact of Statement 128 is expected to result in an increase of
$.01 in primary earnings per common share for both the three months
ended March 29, 1997 and March 30, 1996. Statement 128 would not
impact the calculation of fully diluted earnings per common share
for these three month periods.
The impact of Statement 128 is expected to result in an increase of
$.01 in primary earnings per common share for both the six months
ended March 29, 1997 and March 30, 1996. Statement 128 would not
impact the calculation of fully diluted earnings per common share
for the six months ended March 29, 1997. The impact is expected to
result in an increase in fully diluted earnings per common share of
$.01 per share for the six months ended March 30, 1996.
C. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Receivables are presented net of an allowance for doubtful accounts of
$114,788 and $106,073 at March 29, 1997 and September 28, 1996,
respectively.
D. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
March 29, September 28,
1997 1996
------------ -------------
Accounts payable-trade $ 69,964,852 $ 74,850,388
Property, payroll and
other taxes payable 8,113,642 8,694,621
Salaries, wages and
bonuses payable 6,929,056 9,696,321
Self-insurance reserves 4,575,000 4,515,000
Other 9,059,563 9,378,027
------------ -------------
$ 98,642,113 $ 107,134,357
============ =============
Self-insurance reserves are established for workers' compensation and
employee group medical and dental benefits based on claims filed and
claims incurred but not reported. The Company is insured for covered
costs in excess of $350,000 per occurrence for workers' compensation
and $150,000 per covered person for medical care benefits for a policy
year. Employee insurance expense, including workers' compensation and
medical care benefits, net of employee contributions, totalled
$2,642,462 and $2,184,926 for the three month periods ended March 29,
1997 and March 30, 1996, respectively. For the six month periods
ended March 29, 1997 and March 30, 1996, employee insurance expense
totalled $4,660,444 and $4,149,030, respectively.
E. LONG-TERM LIABILITIES
During the six month period ended March 29, 1997, the Company obtained
$56,652,658 in long-term loans. The proceeds were used to reduce
short-term borrowings outstanding under existing bank lines of credit.
Additional short-term debt was subsequently incurred to pay for
capital expenditures and for general corporate purposes. Details of
the new long-term debt are as follows:
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Interest rate at 8.15%, maturing 2004
secured by real estate and equipment $ 4,529,934
Interest rate at 7.43%, maturing 2002,
secured by equipment 5,500,000
Interest rate at 8.00%, maturing 2002,
secured by equipment 21,500,000
Interest rate at 8.13%, maturing 2002
secured by equipment 5,310,376
Interest rate at 8.61%, maturing 2004,
secured by real estate and equipment 4,812,348
Interest rate at LIBOR plus a specified
margin, maturing 1998, unsecured 15,000,000
-----------
$56,652,658
===========
On December 6, 1996, the Company announced its intention to redeem all its
outstanding Convertible Subordinated Debentures ("the Debentures") on January
20, 1997. The holders of the Debentures had the right to convert their
Debentures into shares of the Company's Class A Common Stock at $11.10 per
share before the close of business on January 16, 1997.
Approximately $36.7 million of the Debentures were converted into approximately
3.3 million shares of Class A Common Stock. The remaining outstanding
Debentures ($.8 million) were redeemed at 101.8% of face value plus accrued
interest on January 20, 1997.
The write-off of unamortized loan costs and redemption premium of $565,275 (net
of the income tax benefit of $350,000) relating to the converted Debentures is
included as an extraordinary item in the accompanying statement of income for
the six months ended March 29, 1997.
F. DIVIDENDS
The Company paid cash dividends of $.165 for each share of Class A
Common Stock and $.15 for each share of Class B Common Stock on
January 13, 1997 and October 14, 1996 to stockholders of record on
January 3, 1997 and October 4, 1996, respectively.
G. SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for interest and taxes is as follows:
SIX MONTHS ENDED
---------------------------
March 29, March 30,
1997 1996
------------ ------------
Interest (net of
amount capitalized) $ 16,907,718 $ 14,292,574
Income taxes 5,293,322 8,456,090
H. STOCK OPTIONS
The Ingles Markets, Incorporated 1997 Nonqualified Stock Option Plan
(the "Plan") was adopted and approved at the Annual Meeting of
Stockholders on February 18, 1997. The maximum number of shares of
the Company's Class A Common Stock available for issuance under the
Plan is 5,000,000 shares.
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During February 1997, options to purchase 1,150,000 shares of Ingles
Markets, Incorporated Class A Common Stock were granted to employees
under the Plan. The option price per share was the fair market value
at the date of grant. Included in the options granted under the Plan,
are options for 100,000 shares each granted to Robert P. Ingle,
Chairman of the Board of Directors and Chief Executive Officer of the
Company, and Vaughn C. Fisher, President and Chief Operating Officer
of the Company. These options may be exercised within a one year
period beginning one year after the date of grant or within three
months after death, disability or retirement with the consent of the
Company. The remaining options to purchase 950,000 shares may be
exercised within a one year period beginning five years after the
grant date or within three months after death, disability or
retirement with the consent of the Company. All options automatically
terminate upon termination of the optionee's employment for any other
reason.
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Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 29, 1997 COMPARED
WITH THE THREE MONTHS ENDED MARCH 30, 1996
NET SALES
Net sales for the three month period ended March 29, 1997 increased $11.9
million, to $376.1 million, up 3.3% over sales of $364.2 million a year ago.
Sales this quarter compared with the comparable quarter last year were somewhat
impacted by the weather. During the fiscal 1997 quarter the Company
experienced two "snow scares" compared with four the prior year.
Inflation in food prices, estimated to be less than 1.0%, continues to be lower
than the overall increase in the Consumer Price Index.
The Company's focus is on growing sales. Subsequent to quarter end, sales
growth improved despite increased competition from other food retailers,
supercenters, mass merchandisers and restaurants. The Company expects this
sales trend to continue for the balance of fiscal 1997, as the Company
continues to place the highest emphasis on superior customer service, expands
square footage by opening new stores, remodeling and/or replacing existing
stores and works toward improving productivity at other store locations.
GROSS PROFIT
Grocery gross profit, as a percentage of sales, increased because of an
aggressive purchasing program. Benefits were also achieved from the Company's
category management program and increased private label sales.
Meat, produce, frozen food, deli and bakery gross profit, as a percentage of
sales, improved due to better merchandising, aggressive purchasing and pricing
programs and better control of inventory shrinkage.
The Company's wholly-owned subsidiary, Milkco, Inc., expanded and increased its
business in areas that produced higher profit margins, primarily in the area of
food service sales.
Overall, gross profit for the period was $92.0 million, or 24.5% of sales,
compared with $84.3 million, or 23.2% of sales, last year - an improvement of
one hundred and thirty basis points.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses, as a percentage of sales, increased from
19.8% last year to 20.7% this year. The cost of labor at store level,
depreciation and amortization expense, taxes and licenses and insurance, as a
percentage of sales, increased.
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The increase in depreciation and amortization expense resulted from the
Company's aggressive capital expenditure program this year and last year.
Insurance expense was higher due to increases in the cost of employee group
medical and workers' compensation coverages.
The Company's goal for the balance of fiscal 1997 is to reduce operating and
administrative expenses, as a percentage of sales. The Company believes that
increased sales volume combined with a renewed emphasis on decreasing and/or
controlling critical expense items and improving productivity should help
achieve this goal.
RENTAL INCOME, NET
Rental income, net was $1.2 million last year - $1.3 million this year. The
increase was due to an increase in gross rental income, $.2 million, net of
increased expenses, $.1 million, associated with the remodeling of shopping
centers.
INCOME FROM OPERATIONS
Income from operations for the period was $15.5 million, or 4.1% of sales,
compared to $13.5 million, or 3.7% of sales, last year - an increase of 15.0%.
The improvement in operating income was mainly due to the increase in sales and
higher gross profit margins.
OTHER INCOME, NET
Other income, net decreased $.1 million. Fiscal 1997 and fiscal 1996 include
gains of $.6 million and $.5 million, respectively, on the sale of two
outparcels of land located adjacent to shopping centers owned by the Company.
Other miscellaneous income in fiscal 1997 decreased $.2 million.
INCOME BEFORE INTEREST AND INCOME TAXES
Income before interest and income taxes rose 13.4% - from $14.4 million, or
4.0% of sales, last year to $16.3 million, or 4.3% of sales, this year.
INTEREST EXPENSE
Interest expense was $7.3 million last year - $7.2 million this year. The
decrease was due to the redemption by the Company of its Convertible
Subordinated Debentures.
INCOME TAXES
Income tax expense, as a percentage of pre-tax income, was 38.2% this
year - 37.9% last year.
INCOME BEFORE EXTRAORDINARY ITEM
Income before the extraordinary item increased 27.8%, to $5.7 million, or 1.5%
of sales, this year, compared with $4.4 million, or 1.2% of sales, last year.
Primary earnings per common share before the extraordinary item rose from $.24
last year to $.26 this year.
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EXTRAORDINARY ITEM - EARLY EXTINGUISHMENT OF DEBT
(NET OF INCOME TAX BENEFIT)
On December 6, 1996, the Company announced its intention to redeem all its
outstanding Convertible Subordinated Debentures (the "Debentures") on January
20, 1997. The holders of the Debentures had the right to convert their
Debentures into shares of the Company's Class A Common Stock at $11.10 per
share before the close of business on January 16, 1997. During the quarter
ended March 29, 1997, approximately $22.6 million of the Debentures were
converted into approximately 2.0 million shares of Class A Common Stock. The
remaining outstanding Debentures ($.8 million) were redeemed at 101.8% of face
value plus accrued interest on January 20, 1997. The unamortized loan costs
and redemption premium associated with the early extinguishment of this debt
written off during the quarter (net of the income tax benefit) was $.4 million.
NET INCOME
Net income for the period ended March 29, 1997 increased 19.8% to $5.3 million,
or 1.4% of sales, compared with $4.4 million, or 1.2% of sales, last year while
primary earnings per common share was $.24 in both fiscal periods.
SIX MONTHS ENDED MARCH 29, 1997 COMPARED
WITH THE SIX MONTHS ENDED MARCH 30, 1996
NET SALES
Net sales for the six month period ended March 29, 1997 increased $35.6 million
to $757.3 million, up 4.9% over sales of $721.6 million last year.
Approximately 60.1% of the dollar increase in sales resulted from an increase
in grocery sales. The Company's wholly-owned subsidiary, Milkco, Inc.,
contributed 3.5% of this increase. The balance of the dollar increase in sales
resulted substantially from increased sales in the perishable departments.
Good promotional strategy, effective marketing and merchandising techniques and
a continuing commitment to provide the customer with a broad selection of
quality food and non-food products, including private label items, at
competitive prices, helped boost sales. Sales also benefited from the opening
of new stores this year and last year and the expansion, remodel and/or
replacement of existing stores. In fiscal 1996 and in the first two quarters
of fiscal 1997, ten new stores were opened, ten older stores were expanded,
remodeled and/or replaced and one older store was closed.
At March 29, 1997, the Company operated 191 supermarkets in six states: North
Carolina (60), South Carolina (28), Georgia (76), Tennessee (23), Virginia (3)
and Alabama (1).
GROSS PROFIT
Gross profit for the period was $183.0 million, or 24.2% of sales, compared to
$166.7 million, or 23.1% of sales, last year - an increase of 9.8%.
A larger percentage of sales came from higher margin perishable departments,
increasing gross profit overall. Grocery gross profit, as a
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percentage of sales, was positively impacted by effective buying, an aggressive
merchandising and pricing program, good promotional strategy and improved
product mix. Meat, produce and frozen food gross profit, as a percentage of
sales, improved due to good merchandising and aggressive purchasing and pricing
programs.
By increasing its business in areas that produce higher profit margins, namely
food service sales, the Company's wholly-owned subsidiary, Milkco, Inc., was
able to increase its gross margin thirty-two basis points.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses, as a percentage of sales, were 20.3%
this year compared to 19.6% last year. The cost of labor at store level,
depreciation and amortization expense and taxes and licenses, as a percentage
of sales, increased. The increase in depreciation and amortization expense
results from the Company's aggressive capital expenditure program last year and
this year.
RENTAL INCOME, NET
Rental income, net increased from $2.2 million last year to $2.7 million this
year. The increase is due to an increase in gross rental income, $.6 million,
net of increased expense, $.1 million, associated with the remodeling of
shopping centers.
INCOME FROM OPERATIONS
Income from operations for the period was $31.9 million, or 4.2% of sales,
compared to $27.8 million, or 3.8% of sales, a year ago - an increase of 14.8%.
The increase in operating income is due to the increase in sales, the related
increase in gross profit and the increase in net rental income.
OTHER INCOME, NET
Other income, net decreased $.4 million. Fiscal 1996 includes gains of $1.4
million on the sale of four outparcels of land located adjacent to shopping
centers owned by the Company - fiscal 1997 includes gains of $.6 million on the
sale of two outparcels. Other miscellaneous income increased $.4 million.
INCOME BEFORE INTEREST AND INCOME TAXES
Income before interest and income taxes rose 12.8% - from $29.3 million last
year to $33.0 million this year.
INTEREST EXPENSE
Interest expense was $14.5 million in fiscal 1996 - $15.3 million this year.
The increase was principally due to an increase in debt to fund the Company's
aggressive capital expenditure program, net of a reduction in expense ($.6
million) resulting from the redemption by the Company of its Convertible
Subordinated Debentures.
INCOME BEFORE INCOME TAXES
Income before income taxes was $17.7 million, or 2.3% of sales, this year
compared with $14.8 million, or 2.0% of sales, last year.
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INCOME TAXES
Income tax expense, as a percentage of pre-tax income, was 38.4% this year
compared with 38.0% last year.
INCOME BEFORE EXTRAORDINARY ITEM
Income before the extraordinary item rose 19.3%, to $10.9 million, or 1.4% of
sales, this year compared with $9.2 million, or 1.3% of sales the prior year.
Primary earnings per common share before the extraordinary item increased from
$.50 last year to $.53 this year.
EXTRAORDINARY ITEM - EARLY EXTINGUISHMENT OF DEBT
(NET OF INCOME TAX BENEFIT)
On December 6, 1996, the Company announced its intention to redeem all its
outstanding Convertible Subordinated Debentures (the "Debentures") on January
20, 1997. The holders of the Debentures had the right to convert their
Debentures into shares of the Company's Class A Common Stock at $11.10 per
share before the close of business on January 16, 1997. Approximately $36.7
million of the Debentures were converted into approximately 3.3 million shares
of Class A Common Stock. The remaining outstanding Debentures ($.8 million)
were redeemed at 101.8% of face value plus accrued interest on January 20,
1997. The unamortized loan costs and redemption premium associated with the
early extinguishment of this debt (net of the income tax benefit) was $.6
million.
NET INCOME
Net income for the six month period ended March 29, 1997 increased 13.1% to
$10.4 million, or 1.4% of sales, compared to $9.2 million, or 1.3% of sales,
last year. Primary earnings per common share was $.50 for both six month
periods.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Net cash provided by operating activities for the six month period ended March
29, 1997 totalled $22.3 million. Net income for the period was $10.4 million
and depreciation and amortization expense was $18.7 million. Accounts payable
and accrued expenses decreased $6.1 million, and inventory decreased $1.1
million. The recognition of advance payments on purchases contracts was $2.2
million.
Accounts payable-trade, excluding non-cash additions of property and equipment
of $5.2 million and $6.0 million at March 29, 1997 and September 28, 1996,
respectively, decreased $4.1 million. Salaries, wages and bonuses payable were
$2.8 million less, the income tax benefit from the exercise of stock options
was $1.3 million and other accrued expenses increased $.5 million.
The decrease in accounts payable-trade is due to decreases in expense and DSD
payables partially offset by increases in certain other payable
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categories. Salaries, wages and bonuses payable were less primarily because of
the payment of annual bonuses accrued at September 28, 1996.
INVESTING ACTIVITIES
Net cash used by investing activities - primarily expenditures for capital
assets - was $48.0 million. The Company's capital expenditure program was
devoted primarily to obtaining land for new store locations, the construction
of new facilities, the renovation, modernization and/or expansion of existing
stores and the installation of electronic scanning systems in eight stores. A
portion of these expenditures were for new stores, store expansions, remodels
and/or replacements expected to become operational in fiscal 1998.
FINANCING ACTIVITIES
New cash provided by financing activities totalled $32.0 million. Proceeds
from the issuance of long-term debt aggregated $56.7 million. The proceeds of
this debt were used to reduce short-term borrowings outstanding under existing
bank lines of credit. Additional short-term debt was subsequently incurred to
pay for capital expenditures and for general corporate purposes. Proceeds from
short-term borrowings, net were $5.0 million. Principal payments of long-term
debt were $26.6 million. The Company paid cash dividends of $6.1 million.
Proceeds from the exercise of stock options were $3.0 million.
FINANCIAL STRENGTH
At March 29, 1997, the Company remained in sound financial condition. Total
assets were $742.8 million and stockholders' equity was $220.3 million compared
with $708.0 million and $175.0 million, respectively, at year-end, September
28, 1996. Favorable inventory turnover rates (cost of sales/inventory on an
annualized basis) in 1997 of 9.0 helped generate cash flow from operations.
Return on assets (income before the extraordinary item/total assets annualized)
increased from 2.8% last year to 2.9% this year. Return on investment (income
before the extraordinary item/average stockholders' equity annualized) improved
from 11.0% in fiscal 1996 to 11.1% in fiscal 1997.
CAPITAL REQUIREMENTS
The Company's new store opening, expansion, remodeling and/or replacement plans
are continually reviewed and are subject to change. The Company's ability to
open new stores and expand, remodel and/or replace existing stores is subject
to several factors, including the acquisition of satisfactory sites and the
successful negotiation of new leases, and may be effected by zoning and other
governmental regulation.
During the six month period ended March 29, 1997, three new stores were opened
and three older stores were replaced. During the balance of fiscal 1997, the
Company expects to open seven new stores, perform minor remodels ("face-lifts")
at fifteen existing store locations and expand, remodel and/or replace three
older stores. Additional capital expenditures will be made to: (1) upgrade
and replace existing store equipment, (2) install electronic scanning systems
in new and existing stores and (3) secure sites for future store expansion.
Fiscal 1997 capital expenditures, in the aggregate, are expected to be
approximately $100 million. Some of the
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expenditures that will be incurred during the fiscal year will relate to assets
that will be placed in service in fiscal 1998.
FINANCIAL RESOURCES
At March 29, 1997, the Company had lines of credit with nine banks totalling
$141 million; of this amount $48.5 million was unused. The Company monitors
its cash position daily and makes draws or repayments on its lines of credit.
The lines provide the Company with various interest rate options generally at
rates less than prime. The Company is not required to maintain compensating
balances in connection with these lines of credit. Of the $92.5 million
outstanding under existing bank lines of credit at March 29, 1997, $21.5
million was on a long-term basis. The Company plans to obtain long-term
financing to repay $50.0 million of the short-term bank lines of credit
outstanding at March 29, 1997 during the third quarter of fiscal 1997. The
Company had unencumbered property with a net book value of approximately $240
million which is available to collateralize additional debt.
On December 6, 1996, the Company announced its intention to redeem all its
outstanding Convertible Subordinated Debentures (the "Debentures") on January
20, 1997. The holders of the Debentures had the right to convert their
Debentures into shares of the Company's Class A Common Stock at $11.10 per
share before the close of business on January 16, 1997. Approximately $36.7
million of the Debentures were converted into approximately 3.3 million shares
of Class A Common Stock. The remaining outstanding Debentures ($.8 million)
were redeemed at 101.8% of face value plus accrued interest on January 20,
1997. The unamortized loan costs and redemption premium associated with the
early extinguishment of this debt (net of the income tax benefit) was $.6
million.
The Company believes, based on its current results of operations and financial
condition, that the financial resources available, including amounts available
under long-term financing arrangements, existing bank lines of credit and
internally generated funds, will be sufficient to meet planned capital
expenditures and working capital requirements for the foreseeable future,
including any debt servicing required by additional borrowings. The Company
believes that its current new store opening, expansion, remodel and/or
replacement program will not have a material adverse effect on the availability
of these financial resources or on the sufficiency of these resources for the
purpose described. There can be no assurance, however, that the Company's
results of operations and financial condition will not change in the future
based on a number of intangible factors. These factors may include, among
others, increased competition, changing regional and national economic
conditions, adverse climatic conditions affecting food production and delivery
and changing demographics. In addition, for such reasons, there can be no
assurance that the results of operations from the new, expanded, remodeled
and/or replacement stores will meet or exceed the results of operations of
existing stores.
QUARTERLY CASH DIVIDENDS
Since December 27, 1993, the Company has paid regular quarterly cash dividends
of $.165 (sixteen and one-half cents) per share on its Class A Common Stock and
$.15 (fifteen cents) per share on its Class B Common Stock for an annual rate
of $.66 and $.60 per share, respectively.
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The Company expects to continue the payment of regular dividends on a quarterly
basis. The Board of Directors, however, reconsiders the declaration of
dividends periodically, and there can be no assurance as to the declaration of
or the amount of dividends to be paid. The payment of dividends is subject to
the discretion of the Board of Directors and will depend upon the results of
operations, the financial condition of the Company and other factors which the
Board of Directors deems relevant.
INSURANCE
The Company maintains general liability, automobile and excess liability
coverages. The Company carries $10 million liability insurance coverage on
four aircraft used in its business. The Company carries casualty insurance
only on those properties where it is required to do so.
Because of the sharp escalation in the cost of insurance, the Company has
elected to self-insure certain other costs representing approximately 73% of
the total cost of insurance. Risks and uncertainties are associated with self-
insurance; however, the Company has limited its exposure by maintaining excess
liability coverages. The Company believes that its mix between insurance and
self-insurance is prudent, is in accordance with general industry practice and
is in the best interest of the Company.
Self-insurance reserves are established for worker's compensation and employee
group medical and dental benefits based on claims filed and claims incurred but
not reported, with a maximum per occurrence of $350,000 for workers'
compensation and up to a maximum of $150,000 per covered person for medical
care benefits for a policy year. The Company is insured for covered costs in
excess of these limits.
Insurance expense, as a percentage of sales, for the six month period ended
March 29, 1997, increased .02%.
IMPACT OF INFLATION
Inflation in food prices during fiscal years 1997, 1996 and 1995 continued to
be lower than the overall increase in the Consumer Price Index. Ingles primary
costs, inventory and labor, increase with inflation. Recovery of these costs
has to come from improved operating efficiencies and, to the extent possible,
improved gross margins.
IMPACT OF SAFS 128
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which must be adopted by the Company and reflected in
its financial statements for the periods ending on or after December 27, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded.
The impact of Statement 128 is expected to result in an increase of $.01 in
primary earnings per common share for both the three months ended March 29,
1997 and March 30, 1996. Statement 128 would not impact the calculation of
fully diluted earnings per common share for these three month periods.
The impact of Statement 128 is expected to result in an increase of $.01 in
primary earnings per common share for both the six months ended March 29,
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1997 and March 30, 1996. Statement 128 would not impact the calculation of
fully diluted earnings per common share for the six months ended March 29,
1997. The impact is expected to result in an increase in fully diluted
earnings per common share of $.01 per share for the six months ended March 30,
1996.
Part II. Other Information.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of Ingles Markets, Incorporated was
held Tuesday, February 18, 1997. Matters submitted to a vote of the
stockholders at this meeting were as follows:
(1) Election of nine directors for the ensuing year. John O. Pollard
and J. Alton Wingate were elected by the holders of Class A Common
Stock by the following vote: (a) Mr. Pollard: 6,363,970 votes for,
302,416 votes withheld, 0 abstentions and 0 broker nonvotes and (b)
Mr. Wingate: 6,368,000 votes for, 298,386 votes withheld, 0
abstentions and 0 broker nonvotes. Robert P. Ingle, Vaughn C. Fisher,
Anthony S. Federico, Jack R. Ferguson, Robert P. Ingle, II, Laura
Ingle Sharp and Ralph H. Gardner were elected by the holders of Class
B Common Stock by the following vote: (a) Mr. Robert P. Ingle:
12,419,093 votes for, 3 votes withheld, 0 abstentions and 0 broker
nonvotes and (b) Mr. Fisher: 12,418,943 votes for, 153 votes withheld,
0 abstentions and 0 broker nonvotes and (c) Mr. Federico: 12,419,093
votes for, 3 votes withheld, 0 abstentions and 0 broker nonvotes and
(d) Mr. Ferguson: 12,419,093 votes for, 3 votes withheld, 0
abstentions and 0 broker nonvotes and (e) Mr. Robert P. Ingle, II:
12,418,868 votes for, 228 votes withheld, 0 abstentions and 0 broker
nonvotes and (f) Ms. Sharp: 12,419,093 votes for, 3 votes withheld, 0
abstentions and 0 broker nonvotes and (g) Mr. Gardner: 12,419,093
votes for, 3 votes withheld, 0 abstentions and 0 broker nonvotes.
(2) The Ingles Markets, Incorporated 1997 Nonqualified Stock Option
Plan was adopted and approved by the following vote. Holders of Class
A Common Stock (1 vote per share): 3,456,931 shares voting for,
1,201,826 shares voting against, 66,584 shares abstaining and 0 broker
nonvotes. Holders of Class B Common Stock (10 votes per share):
12,408,368 shares voting for, 7,653 shares voting against, 3,075
shares abstaining and 0 broker nonvotes.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is filed as part of this report. The exhibit
number refers to Item 601 of Regulation S-K.
Exhibit 11 - Computation of Earnings Per Common Share.
Exhibit 27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K. There were no reports on Form 8-K filed by the
Company for the quarter ended March 29, 1997.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
INGLES MARKETS, INCORPORATED
Date: May 12, 1997 /s/ Robert P. Ingle
----------------------------
Robert P. Ingle
Chairman of the Board and
Chief Executive Officer
Date: May 12, 1997 /s/ Jack R. Ferguson
----------------------------
Jack R. Ferguson
Vice President-Finance and
Chief Financial Officer
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