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 June 28, 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 August 1, 1997, the registrant had 8,970,132 shares of Class A Common
Stock, $.05 par value per share, and 12,876,607 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 -
June 28, 1997 and
September 28, 1996 3
Consolidated Statements of Income -
Three Months Ended
June 28, 1997 and
June 29, 1996 5
Nine Months Ended
June 28, 1997 and
June 29, 1996 6
Consolidated Statements of Changes in
Stockholders' Equity -
Nine Months Ended
June 28, 1997 and
June 29, 1996 7
Consolidated Statements of Cash Flows -
Nine Months Ended
June 28, 1997 and
June 29, 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 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibits
11 Computation of Earnings Per Common Share
Three Months Ended
June 28, 1997 and
June 29, 1996 24
Nine Months Ended
June 28, 1997 and
June 29, 1996 25
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
JUNE 28, SEPTEMBER 28,
1997 1996
(UNAUDITED) (NOTE)
------------ -------------
CURRENT ASSETS
--------------
Cash $ 26,331,682 $ 22,418,003
Receivables 18,115,845 15,197,129
Inventories 128,997,632 128,364,435
Other 3,352,737 3,935,825
------------- -------------
TOTAL CURRENT ASSETS 176,797,896 169,915,392
PROPERTY AND EQUIPMENT - Net 578,006,668 530,227,505
----------------------
OTHER ASSETS 7,528,586 7,821,820
------------ ------------- -------------
TOTAL ASSETS $ 762,333,150 $ 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
JUNE 28, SEPTEMBER 28,
1997 1996
(UNAUDITED) (NOTE)
------------ -------------
CURRENT LIABILITIES
-------------------
Short-term loans and current
portion of long-term liabilities $ 94,368,918 $ 54,274,426
Accounts payable and accrued
expenses 100,070,849 107,134,357
------------ ------------
TOTAL CURRENT LIABILITIES 194,439,767 161,408,783
DEFERRED INCOME TAXES 24,734,578 22,034,578
---------------------
LONG-TERM LIABILITIES 321,364,341 349,511,494
--------------------- ------------ ------------
TOTAL LIABILITIES 540,538,686 532,954,855
------------ ------------
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; 8,970,057
shares issued and outstanding
June 28, 1997; 5,097,291 shares
issued and outstanding
September 28, 1996 448,502 254,864
Class B, $.05 par value; 100,000,000
shares authorized; 12,876,682
shares issued and outstanding
June 28, 1997; 13,006,859 shares
issued and outstanding
September 28, 1996 643,835 650,344
Paid-in capital in excess of
par value 90,924,742 50,139,088
Retained earnings 129,777,385 123,965,566
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 221,794,464 175,009,862
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $762,333,150 $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
-------------------------
JUNE 28, JUNE 29,
1997 1996
------------ ------------
NET SALES $386,392,333 $370,352,342
COST OF GOODS SOLD 291,075,697 282,834,547
------------ ------------
GROSS PROFIT 95,316,636 87,517,795
OPERATING AND ADMINISTRATIVE
EXPENSES 81,185,722 72,663,246
RENTAL INCOME, NET 1,441,782 1,600,288
------------ ------------
INCOME FROM OPERATIONS 15,572,696 16,454,837
OTHER INCOME, NET 446,768 437,567
------------ ------------
INCOME BEFORE INTEREST
AND INCOME TAXES 16,019,464 16,892,404
INTEREST EXPENSE 7,975,477 7,195,702
------------ ------------
INCOME BEFORE
INCOME TAXES 8,043,987 9,696,702
------------ ------------
INCOME TAXES:
Current 100,000 2,200,000
Deferred 3,000,000 1,600,000
------------ ------------
3,100,000 3,800,000
------------ ------------
NET INCOME $ 4,943,987 $ 5,896,702
============ ============
PER-SHARE AMOUNTS:
Earnings per common share:
Primary earnings per common
share $ .22 $ .32
============ ============
Fully diluted earnings per common
share $ .22 $ .29
============ ============
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)
NINE MONTHS ENDED
------------------------------
JUNE 28, JUNE 29,
1997 1996
-------------- --------------
NET SALES $1,143,650,589 $1,091,981,916
COST OF GOODS SOLD 865,373,169 837,771,910
-------------- --------------
GROSS PROFIT 278,277,420 254,210,006
OPERATING AND ADMINISTRATIVE
EXPENSES 234,919,300 213,808,609
RENTAL INCOME, NET 4,118,715 3,834,888
-------------- --------------
INCOME FROM OPERATIONS 47,476,835 44,236,285
OTHER INCOME, NET 1,550,522 1,916,830
-------------- --------------
INCOME BEFORE INTEREST
AND INCOME TAXES 49,027,357 46,153,115
INTEREST EXPENSE 23,263,284 21,703,590
-------------- --------------
INCOME BEFORE INCOME TAXES 25,764,073 24,449,525
-------------- --------------
INCOME TAXES:
Current 6,800,000 8,100,000
Deferred 3,100,000 1,300,000
-------------- -------------
9,900,000 9,400,000
-------------- -------------
INCOME BEFORE EXTRAORDINARY ITEM 15,864,073 15,049,525
EXTRAORDINARY ITEM-EARLY EXTINGUISHMENT
OF DEBT (NET OF INCOME TAX BENEFIT) (565,275) -
-------------- -------------
NET INCOME $ 15,298,798 $ 15,049,525
============== ==============
PER-SHARE AMOUNTS:
Earnings per common share:
Primary earnings per common share
before extraordinary item $ .75 $ .82
Extraordinary item - early extinguishment
of debt (.03) -
-------------- --------------
Primary earnings per common share $ .72 $ .82
============== ==============
Fully diluted earnings per common share
before extraordinary item $ .74 $ .76
Extraordinary item-early extinguishment
of debt (.03) -
-------------- --------------
Fully diluted earnings per common share $ .71 $ .76
============== ==============
Cash dividends per common share:
Class A $ .495 $ .495
-------------- --------------
Class B $ .450 $ .450
-------------- --------------
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 . . . . . - - - - - 15,049,525 15,049,525
CASH DIVIDENDS . . . - - - - - (8,296,818) (8,296,818)
EXERCISE OF STOCK
OPTIONS . . . . . . 200,000 10,000 - - 1,540,000 - 1,550,000
COMMON STOCK
CONVERSIONS . . . . 265,600 13,280 (265,600) (13,280) - - -
--------- -------- ---------- -------- ----------- ------------ ------------
BALANCE,
JUNE 29, 1996 . . . 5,043,141 $252,157 13,061,009 $653,051 $50,139,088 $121,074,896 $172,119,192
========= ======== ========== ======== =========== ============ ============
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 . . . . . - - - - - 15,298,798 15,298,798
CASH DIVIDENDS . . . - - - - - (9,486,979) (9,486,979)
EXERCISE OF STOCK
OPTIONS . . . . . . 439,200 21,960 - - 4,283,565 - 4,305,525
CONVERSION OF
CONVERTIBLE
SUBORDINATED
DEBENTURES . . . . 3,303,389 165,169 - - 36,502,089 - 36,667,258
COMMON STOCK
CONVERSIONS . . . . 130,177 6,509 (130,177) (6,509) - - -
--------- -------- ---------- -------- ----------- ------------ ------------
BALANCE,
JUNE 28, 1997 . . . 8,970,057 $448,502 12,876,682 $643,835 $90,924,742 $129,777,385 $221,794,464
========= ======== ========== ======== =========== ============ ============
See notes to unaudited interim financial statements.
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INGLES MARKETS, INCORPORATED AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
--------------------------
JUNE 28, JUNE 29,
1997 1996
------------ ------------
Cash Flows From Operating Activities:
Net income $ 15,298,798 $ 15,049,525
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization expense 28,367,593 24,096,235
Receipt of advance payments on purchases
contracts 674,000 2,409,955
Recognition of advance payments on purchases
contracts (2,833,870) (2,046,237)
Gains on disposals of property and
equipment (754,869) (1,938,124)
Deferred income taxes 3,100,000 1,300,000
Extraordinary item-early extinguishment
of debt (net of income tax benefit) 565,275 -
Increase in receivables (2,895,311) (2,934,069)
Increase in inventory (633,197) (6,068,947)
Increase in other assets (628,782) (839,956)
Decrease (increase) in accounts payable
and accrued expenses (4,438,560) 8,156,659
------------ ------------
Net Cash Provided by Operating Activities 35,821,077 37,185,041
------------ ------------
Cash Flows From Investing Activities:
Proceeds from sales of property and
equipment 1,192,118 2,620,986
Capital expenditures (77,412,529) (83,827,004)
------------ ------------
Net Cash (Used) by Investing Activities (76,220,411) (81,206,018)
------------ ------------
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt 106,177,583 84,714,551
Principal payments on long-term debt (45,403,116) (31,789,888)
(Payments) proceeds from short-term
borrowings, net (10,000,000) 1,000,000
Proceeds from exercise of stock options 3,025,525 1,200,000
Dividends paid (9,486,979) (8,296,818)
------------ ------------
Net Cash Provided By Financing Activities 44,313,013 46,827,845
------------ ------------
Net Increase in Cash 3,913,679 2,806,868
Cash at Beginning of Period 22,418,003 20,120,776
------------ ------------
Cash at End of Period $ 26,331,682 $ 22,927,644
============ ============
See notes to unaudited interim financial statements.
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INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
June 28, 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 June 28, 1997, and the results of operations,
changes in stockholders' equity and cash flows for the three month and nine
month periods ended June 28, 1997 and June 29, 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 nine month periods ended
June 28, 1997 are not necessarily indicative of the results to be expected
for the full fiscal year.
Certain amounts for the three month and nine month periods ended June 29,
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 (22,297,408 and
21,226,367 for the three month and nine month periods ended June 28, 1997,
respectively and 18,589,972 and 18,466,117 for the three month and nine
month periods ended June 29, 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 22,434,271 and 21,581,217 for the
three month and nine month periods ended June 28, 1997, respectively, and
21,964,657 and 21,847,132 for the three month and nine month periods ended
June 29, 1996, respectively.
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 month periods ended
June 28, 1997 and June 29, 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 $.02 in
primary earnings per common share for both the nine month periods ended June
28, 1997 and June 29, 1996. Statement 128 would not impact the calculation
of fully diluted earnings per common share for these nine month periods.
C. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Receivables are presented net of an allowance for doubtful accounts of
$113,765 and $106,073 at June 28, 1997 and September 28, 1996, respectively.
D. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
June 28, September 28,
1997 1996
------------ -------------
Accounts payable-trade $ 69,761,793 $ 74,850,388
Property, payroll, and
other taxes payable 8,133,295 8,694,621
Salaries, wages and
bonuses payable 8,259,780 9,696,321
Self-insurance reserves 4,685,000 4,515,000
Other 9,230,981 9,378,027
------------ -------------
$100,070,849 $ 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 $2,434,483 and $1,807,343
for the three month periods ended June 28, 1997 and June 29, 1996,
respectively. For the nine month periods ended June 28, 1997 and June 29,
1996, employee insurance expense totaled $7,094,927 and $5,956,373,
respectively.
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E. LONG-TERM LIABILITIES
During the nine month period ended June 28, 1997, the Company obtained
$106.2 million in long-term loans. The proceeds were used to reduce
short-term debt, to fund capital expenditures and for general
corporate purposes. Details of the new debt are as follows:
Weighted average interest rate of 7.82%,
maturing 2002, secured by equipment $ 42,775,301
Weighted average interest rate of 8.39%,
maturing 2004, secured by real estate
and equipment 9,342,282
Weighted average interest rate of 6.56%,
maturing 1998, unsecured 15,000,000
Weighted average interest rate of 8.67%,
maturing 2007 ($25,000,000) and 2017
($14,000,000), secured by real estate 39,000,000
Other 60,000
------------
$106,177,583
============
During July 1997, the Company obtained a $10 million bank loan at an
interest rate of LIBOR plus a specified margin. The proceeds of the
loan were used to reduce short-term borrowings. Short-term borrowings
of $10 million have been reclassified to long-term liabilities at June
28, 1997 pursuant to this refinancing.
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 nine months ended June 28,
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 each
of April 14, 1997, January 13, 1997 and October 14, 1996 to
stockholders of record on April 4, 1997, January 3, 1997 and October
4, 1996, respectively.
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G. SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for interest and taxes is as follows:
NINE MONTHS ENDED
--------------------------
June 28, June 29,
1997 1996
------------ ------------
Interest (net of
amount capitalized) $ 24,427,424 $ 22,213,981
Income taxes 8,601,367 9,598,245
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.
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.
OVERVIEW
Ingles Markets, Incorporated ("Ingles" or the "Company") is a leading
supermarket chain with operations in six southeastern states. At June 28,
1997, the Company, headquartered in Asheville, North Carolina, operated 194
supermarkets in North Carolina, South Carolina, Georgia, Tennessee, Virginia
and Alabama. Ingles' strategy is to locate its supermarkets primarily in
suburban areas, small towns and rural communities, where management believes
the market may be underserved by existing supermarkets.
The Company's supermarkets, featuring brightly lit and spacious aisles, offer
the customer a broad selection of nationally advertised food and non-food
products as well as quality private label items, all at competitive prices with
an emphasis on convenient locations and superior customer service. Each store
is staffed with helpful, friendly employees who provide customers with fast
check-out and carry-out service. Substantially all stores are located within
250 miles of the Company's 760,000 square foot, state-of-the-art warehouse and
distribution center located outside of Asheville, North Carolina.
In conjunction with its supermarket operations, the Company owns and operates
74 neighborhood shopping centers, all but three of which contain an Ingles
supermarket. The Company also owns and holds for future development or sale
numerous outparcels and other acreage located adjacent to its store and
shopping center properties.
The Company owns and operates, as a wholly-owned subsidiary, a milk processing
and packaging plant which it purchased from Sealtest in 1982. Today, Milkco,
Inc., is the second largest milk processing and packaging plant in North
Carolina. Not only does it provide 90% of the fluid milk needs of Ingles'
stores, it also provides dairy, citrus and bottled water products to outside
retailers, food service distributors and grocery warehouses in eight states.
These customers represent approximately 57% of its business.
During fiscal 1995, 1996 and thus far in fiscal 1997, the Company has
undertaken a very aggressive capital expenditure program which it believes will
ensure the continuing success of the Company and improve monetary returns and
build stockholder value over the long term. Capital expenditures in fiscal
1995 and 1996 exceeded $100 million each year and are expected to be
approximately $100 million in fiscal 1997.
During the prior fiscal year and the first nine months of fiscal 1997, the
Company has opened 14 new MegaStores which offer the customer a wider range of
convenience and service, including a deli-bakery, sit-down cafe, floral
department and video store. The MegaStore also provides greater selection in
both food and non-food products. It is designed with the departments and space
to keep pace with consumers' changing demands.
New store growth is but one measure of the Company's continuing commitment to
success - equally important is its ongoing renovation and modernization
program. During fiscal 1996 and thus far in fiscal 1997, the Company has
expanded, remodeled and/or replaced ten older stores. In addition, during the
first nine months of fiscal 1997, minor remodels ("face-lifts") have been
performed at 12 existing store locations.
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The Company plans to continue to expand, remodel and grow. Its aim is to
become one of the most modern supermarket chains in the industry.
The foregoing is a summary of the Company's business and properties and should
be read in conjunction with the more detailed description included in its
annual report on Form 10-K for the fiscal year ended September 28, 1996.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 28, 1997
COMPARED WITH THE THREE MONTHS ENDED
JUNE 29, 1996
NET SALES
Net sales for the three month period ended June 28, 1997 increased $16.0
million, to $386.4 million, up 4.3% over sales of $370.4 million a year ago.
Sales this quarter compared with the comparable quarter last year were somewhat
impacted by increased competition. Other factors contributing to this slow
growth, were low food price inflation (estimated to be less than 1%), internal
competition attributable to our opening new stores near existing Company stores
and generally soft economic conditions.
The Company's focus currently is on growing sales. The Company is committed to
maintaining its market share (and increasing it where possible) throughout its
area of operations by: maintaining clean easy-to-shop conveniently located
stores; providing a superior level of customer service; pricing aggressively;
expanding its square footage by opening new stores, remodeling and/or replacing
existing stores and by improving productivity at its other store locations.
GROSS PROFIT
Gross profit for the period was $95.3 million, or 24.7% of sales, compared to
$87.5 million, or 23.6% of sales, last year - an increase of 8.9%.
A larger percentage of sales came from higher margin perishable departments,
increasing gross profit overall. Grocery gross profit, as a percentage of
sales, was positively impacted by an aggressive procurement program. Meat,
produce and bakery gross profit, as a percentage of sales, improved due to good
merchandising and aggressive purchasing and pricing programs.
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.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses, as a percentage of sales, increased from
19.6% last year to 21.0% this year. The cost of labor at store level,
depreciation and amortization expense, repairs and maintenance, insurance and
store supplies, as a percentage of sales, increased.
To ensure the Company remained competitive and in order to attract and retain
good qualified personnel, the wage structure at store level was revamped in
April 1997. Depreciation and amortization expense was more
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because of the Company's aggressive capital expenditure program this year and
last year. Increases in refrigeration repairs and common area maintenance
caused repairs and maintenance to go up. Insurance expense was higher due to
increases in the cost of employee group medical and workers' compensation
coverages. Supply costs increased due to increased cost and usage.
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 $1.6 million last year - $1.4 million this year. The
decrease was due to a decrease in gross rental income of $.1 million and
increased expense of $.1 million associated with the remodeling of shopping
centers.
INCOME FROM OPERATIONS
Income from operations for the period was $15.6 million, or 4.0% of sales,
compared to $16.5 million, or 4.4% of sales, last year. The decline in
operating income was mainly due to soft sales and higher operating and
administrative expenses net of the improvement in gross profit.
OTHER INCOME, NET
Other income, net was $.4 million in both fiscal 1996 and 1997.
INCOME BEFORE INTEREST AND INCOME TAXES
Income before interest and income taxes was $16.0 million, or 4.1% of sales,
this year compared to $16.9 million, or 4.6% of sales, last year.
INTEREST EXPENSE
Interest expense was $7.2 million last year - $8.0 million this year. The
increase was principally due to an increase in debt to fund the Company's
aggressive capital expenditure program.
INCOME BEFORE INCOME TAXES
Income before income taxes was $8.0 million, or 2.1% of sales, this year
compared with $9.7 million, or 2.6% of sales, last year.
INCOME TAXES
The provision for income taxes yielded an effective tax rate of 38.5% this
year - 39.2% last year.
NET INCOME
Net income for the three month period ended June 28, 1997 was $4.9 million, or
1.3% of sales, compared with $5.9 million, or 1.6% of sales, last year. Fully
diluted earnings per common share were $.29 last year - $.22 this year.
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NINE MONTHS ENDED JUNE 28, 1997 COMPARED
WITH THE NINE MONTHS ENDED JUNE 29, 1996
NET SALES
Net sales for the nine month period ended June 28, 1997 increased $51.7
million, to $1.144 billion, up 4.7% over sales of $1.092 billion last year.
Approximately 52.9% of the dollar increase in sales resulted from an increase
in grocery sales, 6.4% from increased sales of Milkco, Inc. and the balance of
the dollar increase from increased sales in the perishable departments.
Identical store sales (grocery stores open for the entire duration of the
previous fiscal year) decreased 1.2%.
In addition to the factors mentioned in the discussion under the three month
heading, sales this year were somewhat impacted by the weather. During the
second quarter of fiscal 1997, the Company experienced two "snow scares"
compared with four the prior year.
Although sales for the nine month period were not up to our expectations, we
are committed to the long-term growth of the Company. During fiscal 1996 and
in the first three quarters of fiscal 1997 fourteen new stores were opened, ten
older stores were expanded, remodeled and/or replaced and two older stores were
closed. We plan to continue to expand our store base, remodel and replace
existing stores, update them on a regular basis and invest in other programs
and technologies that will help improve and generate sales.
During the fourth quarter of fiscal 1997, we plan to open five new MegaStores
and expand, remodel and/or replace seven existing stores.
GROSS PROFIT
Gross profit for the period was $278.3 million, or 24.3% of sales, compared to
$254.2 million, or 23.3% of sales, last year - an increase of 9.5%. Grocery
gross profit, as a percentage of sales, improved because of aggressive
purchasing, pricing and merchandising programs, good promotional strategy,
better product mix and strong private label sales.
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 substantially.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses, as a percentage of sales, were 20.5%
this year compared to 19.6% last year. The cost of labor at store level,
depreciation and amortization expense and repairs and maintenance, as a
percentage of sales, increased. Reasons for these increases are discussed in
the analysis of the three months results. In addition, taxes and licenses and
the cost of insurance were up.
RENTAL INCOME, NET
Rental income, net increased from $3.8 million last year to $4.1 million this
year. The increase is due to an increase in gross rental income, $.5 million,
net of increased expense, $.2 million, associated with the remodeling of
shopping centers.
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INCOME FROM OPERATIONS
Income from operations for the period was $47.5 million, or 4.2% of sales,
compared to $44.2 million, or 4.1% of sales, a year ago - an increase of 7.3%.
The increase in operating income is due to the increases in sales, gross profit
and net rental income.
OTHER INCOME, NET
Other income, net decreased $.4 million. Fiscal 1996 includes gains of $1.9
million on the sale of five outparcels of land located adjacent to shopping
centers owned by the Company; fiscal 1997 includes gains of $.9 million on the
sale of three outparcels. Other miscellaneous income increased $.6 million.
INCOME BEFORE INTEREST AND INCOME TAXES
Income before interest and income taxes rose 6.2% - from $46.2 million last
year to $49.0 million this year.
INTEREST EXPENSE
Interest expense was $21.7 million in fiscal 1996 - $23.3 million this year.
The increase was principally due to an increase in debt to fund the Company's
aggressive capital expenditure program, net of a reduction in expense ($.6
million) resulting from the redemption by the Company of its Convertible
Subordinated Debentures.
INCOME BEFORE INCOME TAXES
Income before income taxes was $25.8 million, or 2.3% of sales, this year
compared with $24.4 million, or 2.2% of sales, last year.
INCOME TAXES
Income tax expense, as a percentage of pre-tax income, was 38.4% in both fiscal
periods.
INCOME BEFORE EXTRAORDINARY ITEM
Income before the extraordinary item rose 5.4%, to $15.9 million, or 1.4% of
sales, this year compared with $15.0 million, or 1.4% of sales the prior year.
Fully diluted earnings per common share before the extraordinary item decreased
from $.76 last year to $.74 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.
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NET INCOME
Net income for the nine month period ended June 28, 1997 was $15.3 million, or
1.3% of sales, compared to $15.0 million, or 1.4% of sales, last year. Fully
diluted earnings per common share was $.76 last year - $.71 this year.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Net cash provided by operating activities for the nine month period ended June
28, 1997 totalled $35.8 million. Net income for the period was $15.3 million
and depreciation and amortization expense was $28.4 million. Accounts payable
and accrued expenses decreased $4.4 million, and receivables increased $2.9
million. Deferred income taxes were $3.1 million and the recognition of
advance payments on purchases contracts was $2.8 million.
Accounts payable-trade, excluding non-cash additions of property and equipment
of $5.0 million and $6.0 million at June 28, 1997 and September 28, 1996,
respectively, decreased $4.1 million. Salaries, wages and bonuses payable were
$1.4 million less, the income tax benefit from the exercise of stock options
was $1.3 million and other accrued expenses increased $.7 million.
The decrease in accounts payable-trade is due to decreases in expense and DSD
payables partially offset by increases in certain other payable categories.
Salaries, wages and bonuses payable were less primarily because of the payment
of annual bonuses accrued September 28, 1996 net of the current year accrual.
The increase in receivables is principally the result of an increase in rebates
and allowances due from suppliers and refundable income taxes.
INVESTING ACTIVITIES
Net cash used by investing activities - primarily expenditures for capital
assets - was $76.2 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 thirteen stores.
The Company now has 148 scanning stores.
Since January 1995, the Company has installed debit/credit card payment systems
in 144 stores providing the customer more ways to pay for their groceries.
Scanning and debit/credit card payment systems are installed in every new and
remodeled store. In addition, electronic benefit cards for government
entitlement programs are now accepted in several stores where the state has
such a program replacing traditional food stamps.
Some of the capital expenditures incurred thus far this fiscal year were for
new stores, store expansions, remodels and/or replacements expected to become
operational in fiscal 1998.
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FINANCING ACTIVITIES
Net cash provided by financing activities totalled $44.3 million. Proceeds
from the issuance of long-term debt aggregated $106.2 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. Payments on
short-term borrowings, net were $10.0 million. Principal payments of
long-term debt were $45.4 million. The Company paid cash dividends of $9.5
million. Proceeds from the exercise of stock options were $3.0 million.
FINANCIAL STRENGTH
At June 28, 1997, the Company remained in sound financial condition. Total
assets were $762.3 million and stockholders' equity was $221.8 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 8.9 helped generate cash
flow from operations. Return on assets (income before the extraordinary
item/total assets annualized) was 2.8%. Return on investment (income before
the extraordinary item/average stockholders' equity annualized) was 10.7% 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 nine month period ended June 28, 1997, seven new stores were opened
and three older stores were replaced. During the balance of fiscal 1997, the
Company expects to open five new stores, perform minor remodels ("face-lifts")
at three existing store locations and expand, remodel and/or replace seven
older stores. Additional capital expenditures will be made to: (1) upgrade
and replace existing store equipment, (2) install electronic scanning systems
and debit/credit card payment 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
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 June 28, 1997, the Company had lines of credit with eleven banks totalling
$161 million; of this amount $90 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 $71.0 million outstanding
under existing bank lines of credit at June 28, 1997, $20.0 million was on a
long-term basis. The Company plans to obtain long-term financing to repay
$10.0 million of the short-term bank lines of credit outstanding at June 28,
1997 during the fourth quarter of fiscal 1997. The Company had unencumbered
property with a net book value
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of approximately $200 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 from
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.
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.
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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 72% 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 workers' 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 nine month period ended
June 28, 1997, increased .06%.
IMPACT OF INFLATION
Inflation in food prices during fiscal 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,
through improved gross margins.
IMPACT OF SFAS 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 month periods ended June
28, 1997 and June 29, 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 $.02 in
primary earnings per common share for both the nine month periods ended June
28, 1997 and June 29, 1996. Statement 128 would not impact the calculation of
fully diluted earnings per common share for these nine month periods.
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Part II. Other Information.
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
for the quarter ended June 28, 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: August 11, 1997 /s/ Robert P. Ingle
--------------------------
Robert P. Ingle
Chairman of the Board and
Chief Executive Officer
Date: August 11, 1997 /s/ Jack R. Ferguson
--------------------------
Jack R. Ferguson
Vice President-Finance
and Chief Financial Officer
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