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 28, 1998
--------------
[ ] 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
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 1, 1998, the Registrant had 9,277,741 shares of Class A
Common Stock, $.05 par value per share, outstanding and 12,787,998 shares of
Class B Common Stock, $.05 par value per share, outstanding.
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INGLES MARKETS, INCORPORATED
INDEX
Part I - Financial Information Page
----
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
March 28, 1998 and September 27, 1997 .................................... 3
Condensed Consolidated Statements of Income
Three Months Ended March 28, 1998 and March 29, 1997 ..................... 5
Six Months Ended March 28, 1998 and March 29, 1997 ....................... 6
Condensed Consolidated Statements of Changes in Stockholders' Equity
Six Months Ended March 28, 1998 and March 29, 1997 ....................... 7
Condensed Consolidated Statements of Cash Flows
Six Months Ended March 28, 1998 and March 29, 1997 ....................... 8
Notes to Unaudited Interim Financial Statements ................................ 9
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition .............................................................. 14
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders ......................... 23
Item 6. Exhibits and Reports on Form 8-K ............................................ 23
Signatures ............................................................................... 24
Exhibits
Exhibit 27.1 - Financial Data Schedule for the period ended March 28, 1998 (for SEC purposes only)
Exhibit 27.2 - Financial Data Schedule for the period ended March 29, 1997 (for SEC purposes only)
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PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 28, September 27,
1998 1997
(UNAUDITED) (NOTE)
------------ ------------
CURRENT ASSETS:
Cash $ 23,063,911 $ 25,389,386
Receivables 19,093,429 15,571,536
Inventories 141,903,296 141,259,929
Refundable income taxes 2,500,000 2,400,000
Other 4,932,791 3,786,873
------------ ------------
Total current assets 191,493,427 188,407,724
PROPERTY AND EQUIPMENT, Net 694,761,011 606,362,801
OTHER ASSETS 7,530,242 7,812,188
------------ ------------
TOTAL ASSETS $893,784,680 $802,582,713
============ ============
NOTE: The balance sheet at September 27, 1997 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
CONDENSED CONSOLIDATED BALANCE SHEETS (CONCLUDED)
LIABILITIES AND STOCKHOLDERS' EQUITY
MARCH 28, September 27,
1998 1997
(UNAUDITED) (NOTE)
------------ -------------
CURRENT LIABILITIES:
Short-term loans and current portion of long-term liabilities $100,377,741 $ 58,776,976
Accounts payable and accrued expenses 107,473,445 99,346,604
------------ ------------
Total current liabilities 207,851,186 158,123,580
DEFERRED INCOME TAXES 28,299,578 26,434,578
LONG-TERM LIABILITIES 433,457,551 395,042,113
------------ ------------
Total liabilities 669,608,315 579,600,271
------------ ------------
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;
9,277,666 shares issued and outstanding March 28, 1998;
9,058,441 shares issued and outstanding September 27, 1997 463,883 452,922
Class B, $.05 par value; 100,000,000 shares authorized;
12,788,073 shares issued and outstanding March 28, 1998;
12,788,298 shares issued and outstanding September 27, 1997 639,404 639,415
Paid-in capital in excess of par value 92,765,167 90,924,742
Retained earnings 130,307,911 130,965,363
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 224,176,365 222,982,442
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $893,784,680 $802,582,713
============ ============
NOTE: The balance sheet at September 27, 1997 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
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
------------------------------
MARCH 28, March 29,
1998 1997
------------ ------------
Net sales $393,513,196 $376,142,746
Cost of goods sold 296,458,795 284,109,081
------------ ------------
Gross profit 97,054,401 92,033,665
Operating and administrative expenses 85,276,539 77,868,870
Rental income, net 1,517,850 1,346,304
------------ ------------
Income from operations 13,295,712 15,511,099
Other income, net 1,616,074 824,057
------------ ------------
Income before interest and income taxes 14,911,786 16,335,156
Interest expense 9,705,327 7,171,723
------------ ------------
Income before income taxes and extraordinary item 5,206,459 9,163,433
------------ ------------
Income taxes:
Current 845,000 4,100,000
Deferred 1,030,000 (600,000)
------------ ------------
1,875,000 3,500,000
------------ ------------
Income before extraordinary item 3,331,459 5,663,433
Extraordinary item-early extinguishment of debt -- (354,116)
(net of income tax benefit)
------------ ------------
Net income $ 3,331,459 $ 5,309,317
============ ============
PER SHARE AMOUNTS:
Earnings per common share:
Basic earnings per common share before extraordinary item $ .15 $ .26
Extraordinary item-early extinguishment of debt -- (.02)
------------ ------------
Basic earnings per common share $ .15 $ .24
============ ============
Diluted earnings per common share before extraordinary item $ .15 $ .26
Extraordinary item-early extinguishment of debt -- (.02)
------------ ------------
Diluted earnings per common share $ .15 $ .24
============ ============
Cash dividends per common share:
Class A Common Stock $ 0.165 $ 0.165
------------ ------------
Class B Common Stock $ 0.150 $ 0.150
------------ ------------
See notes to unaudited interim financial statements.
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INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
SIX MONTHS ENDED
----------------------------
MARCH 28, March 29,
1998 1997
------------ -------------
Net sales $796,561,452 $ 757,258,256
Cost of goods sold 601,986,148 574,297,472
------------ -------------
Gross profit 194,575,304 182,960,784
Operating and administrative expenses 170,763,318 153,733,578
Rental income, net 2,947,059 2,676,933
------------ -------------
Income from operations 26,759,045 31,904,139
Other income, net 1,817,341 1,103,754
------------ -------------
Income before interest and income taxes 28,576,386 33,007,893
Interest expense 18,754,922 15,287,807
------------ -------------
Income before income taxes and extraordinary item 9,821,464 17,720,086
------------ -------------
Income taxes:
Current 2,585,000 6,700,000
Deferred 1,065,000 100,000
------------ -------------
3,650,000 6,800,000
------------ -------------
Income before extraordinary item 6,171,464 10,920,086
Extraordinary item-early extinguishment of debt (net of income tax
benefit) -- (565,275)
------------ -------------
Net income $ 6,171,464 $ 10,354,811
============ =============
PER SHARE AMOUNTS:
Earnings per common share:
Basic earnings per common share before extraordinary item $ .28 $ .54
Extraordinary item-early extinguishment of debt -- (.03)
------------ -------------
Basic earnings per common share $ .28 $ .51
============ =============
Diluted earnings per common share before extraordinary item $ .28 $ .52
Extraordinary item-early extinguishment of debt -- (.02)
------------ -------------
Diluted earnings per common share $ .28 $ .50
============ =============
Cash dividends per common share:
Class A Common Stock $ 0.33 $ 0.33
------------ -------------
Class B Common Stock $ 0.30 $ 0.30
------------ -------------
See notes to unaudited interim financial statements.
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INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Class A Class B Paid-in
Common Stock Common Stock Capital in
------------------- --------------------- Excess of Retained
Shares Amount Shares Amount Par Value Earnings Total
--------- -------- ---------- --------- ------------ ------------- -------------
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
========= ======== =========== ========= ============ ============= =============
Balance, September 27, 1997 9,058,441 $452,922 12,788,298 $ 639,415 $ 90,924,742 $ 130,965,363 $ 222,982,442
Net income - - - - - 6,171,464 6,171,464
Cash dividends - - - - - (6,828,916) (6,828,916)
Exercise of stock options 219,000 10,950 - - 1,840,425 - 1,851,375
Common stock conversions 225 11 (225) (11) - - -
--------- -------- ----------- --------- ------------ ------------- -------------
BALANCE, MARCH 28, 1998 9,277,666 $463,883 12,788,073 $ 639,404 $ 92,765,167 $ 130,307,911 $ 224,176,365
========= ======== =========== ========= ============ ============= =============
See notes to unaudited interim financial statements.
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INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
----------------------------------
MARCH 28, 1998 March 29, 1997
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,171,464 $ 10,354,811
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization expense 21,576,353 18,701,294
Receipt of advance payments on purchases contracts -- 500,000
Recognition of advance payments on purchases contracts (1,418,879) (2,173,258)
Gains on disposals of property and equipment (1,335,930) (537,240)
Deferred income taxes 1,065,000 100,000
Extraordinary item-early extinguishment of debt (net of income tax benefit) -- 565,275
Increase in receivables (3,578,684) (104,622)
Increase (decrease) in inventory (643,367) 1,142,501
Increase in other assets (249,419) (200,206)
Increase (decrease) in accounts payable and accrued expenses 12,508,377 (6,080,167)
------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 34,094,915 22,268,388
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and equipment 3,202,414 891,747
Capital expenditures (115,495,344) (48,895,889)
------------- ------------
NET CASH (USED) BY INVESTING ACTIVITIES (112,292,930) (48,004,142)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 88,989,888 56,652,658
Principal payments on long-term debt (27,554,807) (26,559,784)
Proceeds from short-term borrowings, net 20,000,000 5,000,000
Proceeds from exercise of stock options 1,266,375 3,025,525
Dividends paid (6,828,916) (6,076,939)
------------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 75,872,540 32,041,460
------------- ------------
NET (DECREASE) INCREASE IN CASH (2,325,475) 6,305,706
Cash at beginning of period 25,389,386 22,418,003
------------- ------------
CASH AT END OF PERIOD $ 23,063,911 $ 28,723,709
============= ============
See notes to unaudited interim financial statements.
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INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
March 28, 1998
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 28, 1998, and the results of
operations, changes in stockholders' equity and cash flows for the three month
and six month periods ended March 28, 1998 and March 29, 1997. 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 1997 Annual Report on Form 10-K filed by the
Company under the Securities Exchange Act of 1934 on December 22, 1997.
The results of operations for the three month and six month periods
ended March 28, 1998 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
27, 1997 have been reclassified for comparative purposes.
B. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Receivables are presented net of an allowance for doubtful accounts of
$108,012 and $113,726 at March 28, 1998 and September 27, 1997, respectively.
C. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
March 28, September 27,
1998 1997
------------- ------------
Accounts payable-trade $ 78,258,021 $ 67,219,567
Property, payroll, and other taxes payable 7,696,925 9,678,603
Salaries, wages and bonuses payable 6,854,546 9,700,404
Self-insurance reserves 4,660,000 4,400,000
Other 10,003,953 8,348,030
------------- ------------
$ 107,473,445 $ 99,346,604
============= ============
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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, totaled $2,443,683 and $2,642,462 for the three month periods
ended March 28, 1998 and March 29, 1997, respectively. For the six month periods
ended March 28, 1998 and March 29, 1997, employee insurance expense totaled
$4,697,252 and $4,660,444, respectively.
D. LONG-TERM LIABILITIES
During the six month period ended March 28, 1998, the Company obtained
$88,989,888 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:
Long-term lines of credit, interest rates at
less than the prime rate $46,500,000
Weighted average interest rate of 7.42%,
maturing 2003, secured by equipment 28,022,719
Weighted average interest rate of 7.78%,
maturing 2005-2008, secured by real property 8,703,569
Other 5,763,600
-----------
$88,989,888
===========
During April 1998, the Company obtained a loan under a line of credit
at an interest rate less than the prime rate maturing in May 1999. The proceeds
of this debt were used to reduce short-term borrowings outstanding at March 28,
1998. Short-term borrowings of $6 million have been reclassified to long-term
liabilities at March 28, 1998 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 six months
ended March 29, 1997.
E. 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 19, 1998
and on October 13, 1997 to stockholders of record on January 9, 1998, and
October 3, 1997, respectively.
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F. SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for interest and taxes is as follows:
Six Months Ended
-------------------------------------------
March 28, 1998 March 29, 1997
----------------- ------------------
Interest (net of amount capitalized) $18,077,515 $16,907,718
Income taxes 2,527,610 5,293,322
G. LITIGATION
Ingles is a defendant in a lawsuit recently filed by four employees
claiming gender discrimination. The plaintiffs are seeking to have the lawsuit
certified as a class action so that the claims being asserted can be asserted on
behalf of other past, current and future female Ingles employees. This lawsuit
had not been certified as a class action as of May 11, 1998. The action seeks
injunctive and declaratory relief, along with unspecified monetary damages.
Management believes that this case is without merit and intends to vigorously
defend this case. While the ultimate results of this litigation cannot be
determined, management does not expect that the resolution of these proceedings
will have a material adverse effect on Ingles' consolidated financial position
or results of operations.
Various other legal proceedings and claims arising in the ordinary
course of business are pending against Ingles. In the opinion of management, the
ultimate liability, if any, from these other pending legal proceedings and
claims would not have a material adverse effect on Ingles' consolidated
financial position or results of operations.
H. EARNINGS PER COMMON SHARE
The Company adopted Financial Accounting Standards Board Statement 128,
Earnings Per Share at the beginning of fiscal year 1998. Statement 128 replaced
primary and fully diluted earnings per share with basic and diluted earnings
earnings per share. Under the new requirements for calculating basic earnings
per share, the dilutive effect of stock options is excluded. The calculation of
diluted earnings per share is similar to the old method. All per share amounts
in the accompanying income statements for all prior periods have been restated
to conform to the requirements of Statement 128.
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The following table sets forth the computation of basic and diluted
earnings per share for the three month periods:
THREE MONTHS ENDED
--------------------------------
MARCH 28, 1998 March 29, 1997
-------------- --------------
BASIC:
Income before extraordinary item $3,331,459 $5,663,433
Extraordinary item-early extinguishment of debt (net of income tax
benefit) -- (354,116)
---------- ----------
Net income $3,331,459 $5,309,317
========== ==========
Shares
Weighted average number of common shares outstanding 21,963,519 21,628,184
========== ==========
Basic earnings per common share before extraordinary item $ .15 $ .26
Extraordinary item-early extinguishment of debt -- (.02)
---------- ----------
Basic earnings per common share $ .15 $ .24
========== ==========
DILUTED:
Income before extraordinary item $3,331,459 $5,663,433
Add after tax and bonus effect of interest expense applicable to
Convertible Subordinated Debentures -- 2,723
---------- ----------
Diluted earnings before extraordinary item 3,331,459 5,666,156
Extraordinary item-early extinguishment of debt (net of income tax
benefit) -- (354,116)
---------- ----------
Diluted earnings $3,331,459 $5,312,040
========== ==========
Shares
Weighted average number of common shares and common stock
equivalent shares outstanding 22,300,374 22,004,684
Additional shares assuming conversion of Convertible
Subordinated Debentures -- 17,988
---------- ----------
Weighted average number of common shares outstanding as
adjusted 22,300,374 22,022,672
========== ==========
Diluted earnings per common share before extraordinary item $ .15 $ .26
Extraordinary item-early extinguishment of debt -- (.02)
---------- ----------
Diluted earnings per common share $ .15 $ .24
========== ==========
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The following table sets forth the computation of basic and diluted
earnings per share for the six month periods:
SIX MONTHS ENDED
----------------------------------
MARCH 28, 1998 March 29, 1997
-------------- --------------
BASIC:
Income before extraordinary item $ 6,171,464 $ 10,920,086
Extraordinary item-early extinguishment of debt (net of income tax
benefit) -- (565,275)
----------- ------------
Net income $ 6,171,464 $ 10,354,811
=========== ============
Shares
Weighted average number of common shares outstanding 21,908,761 20,257,478
=========== =============
Basic earnings per common share before extraordinary item $ .28 $ .54
Extraordinary item-early extinguishment of debt -- (.03)
----------- ------------
Basic earnings per common share $ .28 $ .51
=========== ============
DILUTED:
Income before extraordinary item $ 6,171,464 10,920,086
Add after tax and bonus effect of interest expense applicable to
Convertible Subordinated Debentures -- 89,859
----------- ------------
Diluted earnings before extraordinary item 6,171,464 11,009,945
Extraordinary item-early extinguishment of debt (net of income tax
benefit) -- (565,275)
----------- ------------
Diluted earnings $ 6,171,464 $ 10,444,670
=========== ============
Shares
Weighted average number of common shares and common stock
equivalent shares outstanding 22,287,178 20,632,180
Additional shares assuming conversion of Convertible
Subordinated Debentures -- 359,798
----------- ------------
Weighted average number of common shares outstanding as
adjusted 22,287,178 20,991,978
=========== ============
Diluted earnings per common share before extraordinary item $ .28 $ .52
Extraordinary item-early extinguishment of debt -- (.02)
----------- ------------
Diluted earnings per common share $ .28 $ .50
=========== ============
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This Item 2 should be read in conjunction with the unaudited condensed
consolidated financial statements included in Item 1 hereto.
Unless the context requires otherwise, references herein to "INGLES"
include Ingles Markets, Incorporated and its subsidiaries.
Certain statements contained herein and elsewhere in this report which
are not historical facts are forward-looking statements that involve risks and
uncertainties referenced elsewhere in this report. See "LIQUIDITY AND CAPITAL
RESOURCES--FORWARD LOOKING STATEMENTS."
RESULTS OF OPERATIONS
GENERAL
At March 28, 1998, Ingles operated 201 supermarkets in North Carolina
(64), South Carolina (31), Georgia (79), Tennessee (23), Virginia (3) and
Alabama (1). Ingles operates on a 52 or 53 week fiscal year ending on the last
Saturday in September. The unaudited condensed consolidated statements of income
for the three month periods ended March 28, 1998 and March 27, 1997 both include
13 weeks of operations. The unaudited condensed consolidated statements of
income for the six month periods ended March 28, 1998, and March 27, 1997, both
include 26 weeks of operations. Comparable store sales is defined as sales for
grocery stores in operation for the entire duration of the previous fiscal year.
Replacement stores and renovated stores are included in the comparable stores
sales calculation. A replacement store is defined as a store that is opened to
replace a store that is closed nearby. A renovated store is defined as a store
that has been substantially remodeled and may include additional retail square
footage.
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COMPARISON OF THE THREE MONTH PERIOD ENDED MARCH 28, 1998 TO THE THREE MONTH
PERIOD ENDED MARCH 29, 1997
The following table sets forth certain income statement components
expressed as a percentage of net sales for the three month periods ended March
28, 1998, and March 29, 1997:
Three Month Period Ended (1)
----------------------------------------------------------------------------------
MARCH 28, 1998 March 29, 1997
----------------------------------------------- -------------------------------
PERCENTAGE
AMOUNT PERCENT OF INCREASE Amount Percent of
(THOUSANDS) SALES (DECREASE) (thousands) Sales
----------------------------------------------- -------------------------------
Results of Operations:
Net sales $393,513 100.0% 4.6 % $ 376,143 100.0%
Cost of goods sold 296,459 75.3% 4.3 % 284,109 75.5%
-------- ----- --------- -----
Gross profit 97,054 24.7% 5.5 % 92,034 24.5%
Operating and
administrative expenses 85,277 21.7% 9.5 % 77,869 20.7%
Rental income, net 1,518 0.4% 12.7 % 1,346 0.3%
-------- ----- --------- -----
Income from operations 13,295 3.4% (14.3)% 15,511 4.1%
Other income, net 1,616 0.4% 96.1 % 824 0.2%
-------- ----- --------- -----
Income before interest,
income taxes and
extraordinary item 14,911 3.8% (8.7)% 16,335 4.3%
Interest expense 9,705 2.5% 35.3 % 7,172 1.9%
-------- ----- --------- -----
Income before income taxes
and extraordinary item 5,206 1.3% (43.2)% 9,163 2.4%
Income taxes 1,875 0.5% (46.4)% 3,500 0.9%
-------- ----- --------- -----
Income before extraordinary
item 3,331 0.8% (41.2)% 5,663 1.5%
Extraordinary item (2) -- -- (100.0)% (354) 0.1%
-------- ----- --------- -----
Net income $ 3,331 0.8% (37.3)% 5,309 1.4%
======== ===== ========= =====
EBITDA (3) $ 25,913 6.6% 0.4 % $ 25,815 6.9%
======== ===== ========= =====
(1) The three month periods shown are each 13-week periods.
(2) The extraordinary item represents the early extinguishment of debt (net
of the income tax benefit) in connection with the redemption of all
Ingles' then outstanding Convertible Subordinated Debentures.
(3) EBITDA represents earnings before interest, income taxes, depreciation
and amortization and the extraordinary item. Management believes that
EBITDA is a useful measure of operating performance because it allows
for a means of comparing Ingles with other companies that operate
supermarkets, many of which do not own the real property on which the
supermarkets are operated. EBITDA is unaffected by the debt and equity
structure of Ingles. EBITDA does not represent cash flow from
operations as defined by generally accepted accounting principles
(GAAP), is not necessarily indicative of cash available to fund all
cash flow needs and should not be considered as an alternative to net
income under GAAP for evaluating Ingles' results of operations.
Net sales growth for the quarter was fueled by the addition of 10 new
stores between the end of the March 1997 quarter and the end of the March 1998
quarter. Ingles celebrated the opening of its 200th store in the March 1998
quarter. Perishable department sales experienced the largest percentage growth
due to both effective
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merchandising and marketing techniques and the increased perishable space
available in the new larger concept stores. Sales growth overall has been
impeded somewhat by increased competition and low food price inflation.
Sales for the Easter holiday fell in the 13th week of the March 1997
quarter and will fall in the June quarter for 1998. The timing of Easter
resulted in a comparable store sales decrease of 1.07% for the quarter. However,
comparable store sales based on only the first twelve weeks of the quarter were
slightly positive.
Ingles continues to review its marketing plan and to develop new
strategies for improving business. In September 1997, Ingles began a "Register
Tapes for Education" program in which schools collect Ingles register tapes and
redeem them for equipment. Ingles has also started totaling all specials and
double coupon savings on the bottom of customers' receipts to show the savings
from shopping at Ingles and has begun a marketing campaign to support the
program. Ingles intends to continue to implement its plan to update and
modernize its store base to meet the needs of its customers and to combat
competition.
Gross profit, as a percentage of sales, continued to hold strong at
24.7% of sales, up from 24.5% of sales the prior year, primarily as a result of
increased sales in the higher margin perishable departments. Expanded perishable
departments in the newer prototype stores contributed to this increase.
Increases in labor costs, depreciation and amortization expense, taxes
and licenses and repairs and maintenance were the major contributors to an
increase in operating and administrative expenses.
The cost of labor at store level grew due to both the revamping of the
store wage scale in April 1997 and the hike in the minimum wage in September
1997. Low unemployment rates in many of Ingles' operating areas increased
competition for employees. Ingles adjusted its wage scale in order to attract
and retain competent personnel. Expanded higher margin, but labor intensive,
perishable departments in the new prototype stores also increased labor costs,
as a percentage of sales.
As a part of Ingles' overall growth and renovation strategy,
depreciation and amortization expense and taxes and licenses have risen. Ingles'
ownership of larger, more capital intensive stores resulted in higher
depreciation expense and property taxes. Interest expense increased $2.5 million
mainly as a result of increased borrowings used to fund capital expenditures.
(SEE "LIQUIDITY AND CAPITAL RESOURCES-CAPITAL EXPENDITURES.") Ingles has
incurred additional costs in its ongoing efforts to bring its store base up to
modern standards and believes strongly that the investment will build
stockholder value over the long-term.
Increased repairs and maintenance expenses resulted primarily from
elevated refrigeration repair costs and higher garbage removal costs in general,
and more expensive lighting maintenance and floor cleaning at the larger new and
expanded stores.
Ingles is reviewing and monitoring operating and administrative costs
and working to develop plans to curtail expenses without negatively effecting
sales or customer service. For example, advertising expense, as a percentage of
sales, declined due to increased usage of cooperative advertising during the
quarter and bad check expense improved due to a new check verification system
that is now fully operational in most of Ingles' stores.
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Ingles is taking a precision approach to define areas of cost control that will
not deter Ingles from its goal of improving sales by giving customers what they
want.
The increase in rental income, net was due to an increase in gross
rental income of $.4 million, net of increased expense, $.2 million, associated
with the operation of shopping centers.
Gains on the sale of assets totaled $1.3 million in the March 1998
quarter, compared with $.5 million in the March 1997 quarter, and are included
in other income, net.
For the current year three-month period, income tax expense as a
percentage of pre-tax income declined to 36.0% this year compared to 38.2% last
year, due primarily to the Work Opportunity Tax Credit and lower state income
taxes.
Net income declined to $3.3 million for the quarter, or $.15 per
diluted share, compared with $5.3 million, or $.24 per diluted share, last year.
Although net income declined, EBITDA (earnings before interest, income taxes,
depreciation and amortization and the extraordinary item) improved slightly to
$25.9 million for the 1998-quarter compared to $25.8 million last year. (SEE
FOOTNOTE 3 UNDER PRECEDING TABLE.)
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COMPARISON OF THE SIX MONTH PERIOD ENDED MARCH 28, 1998 TO THE SIX MONTH PERIOD
ENDED MARCH 29, 1997
The following table sets forth certain income statement components
expressed as a percentage of net sales for the six month periods ended March 28,
1998, and March 29, 1997:
Six Month Period Ended (1)
----------------------------------------------------------------------------
MARCH 28, 1998 March 29, 1997
-------------------------------------------- ------------------------------
PERCENTAGE
AMOUNT PERCENT OF INCREASE Amount Percent of
(THOUSANDS) SALES (DECREASE) (thousands) Sales
-------------------------------------------- ------------------------------
Results of Operations:
Net sales $ 796,561 100.0% 5.2 % $ 757,258 100.0 %
Cost of goods sold 601,986 75.6% 4.8 % 574,297 75.8 %
--------- ----- ---------- -----
Gross profit 194,575 24.4% 6.3 % 182,961 24.2 %
Operating and
administrative expenses 170,763 21.4% 11.1 % 153,734 20.3 %
Rental income, net 2,947 .4% 10.1 % 2,677 0.3 %
--------- ----- ---------- -----
Income from operations 26,759 3.4% (16.1)% 31,904 4.2 %
Other income, net 1,817 0.2% 64.6 % 1,104 0.2 %
--------- ----- ---------- -----
Income before interest,
income taxes and
extraordinary item 28,576 3.6% (13.4)% 33,008 4.4 %
Interest expense 18,755 2.4% 22.7 % 15,288 2.0 %
--------- ----- ---------- -----
Income before income taxes
and extraordinary item 9,821 1.2% (44.6)% 17,720 2.4 %
Income taxes 3,650 0.4% (46.3)% 6,800 0.9 %
--------- ----- ---------- -----
Income before extraordinary
item 6,171 0.8% (43.5)% 10,920 1.5 %
Extraordinary item (2) -- -- (100.0)% (565) (0.1)%
--------- ----- ---------- -----
Net income $ 6,171 0.8% (40.4)% $ 10,355 1.4 %
========= ===== ========== =====
EBITDA (3) $ 50,152 6.3% (3.0)% $ 51,709 6.8 %
========= ===== ========== =====
(1) The six month periods shown are each 26-week periods.
(2) The extraordinary item represents the early extinguishment of debt (net
of income tax benefit) in connection with the redemption of all Ingles'
then outstanding Convertible Subordinated Debentures.
(3) EBITDA represents earnings before interest, income taxes, depreciation
and amortization and the extraordinary item. Management believes that
EBITDA is a useful measure of operating performance because it allows
for a means of comparing Ingles with other companies that operate
supermarkets, many of which do not own the real property on which the
supermarkets are operated. EBITDA is unaffected by the debt and equity
structure of Ingles. EBITDA does not represent cash flow from
operations as defined by generally accepted accounting principles
(GAAP), is not necessarily indicative of cash available to fund all
cash flow needs and should not be considered as an alternative to net
income under GAAP for evaluating Ingles' results of operations.
Ingles' opening of 14 new stores, the replacement and expansion of nine
stores and the renovation and expansion of one older store between the beginning
of fiscal year 1997 and March 28, 1998 helped to drive sales growth. Comparable
store sales for the six-month period declined .47%. However comparable store
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sales based only on the first 25 weeks of the six-month period (excluding the
Easter week sales in March 1997) were slightly positive. Ingles opened three new
stores and replaced four older stores with new stores during the 1998 26-week
period.
Gross profit continued on its upward trend to 24.4% of sales this year
from 24.2% of sales last year, primarily as a result of increased sales in the
higher margin perishable departments.
Increased labor costs, depreciation and amortization expense and
repairs and maintenance drove up operating and administrative expenses, as a
percentage of sales. (SEE DISCUSSION UNDER "COMPARISON OF THE THREE MONTH PERIOD
ENDED MARCH 28, 1998 TO THE THREE MONTH PERIOD ENDED MARCH 29, 1997.")
Other income, net includes $1.3 million in gains on the sale of assets
for the March 1998 quarter and $.5 million in gains on the sale of assets for
the March 1997 quarter.
The increase in interest expense is attributable to additional debt
incurred to fund expansion and renovation. Capital expenditures for the 1998
six-month period totaled $115.5 million.
Income tax expense as a percentage of pre-tax income declined to 37.2%
this year compared to 38.4% last year, due primarily to the Work Opportunity Tax
Credit and lower state income taxes.
Net income for the 1998 six month period was $6.2 million or $.28 per
diluted share, compared to $10.4 million, or $.50 per share last year.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
Ingles generated $34.1 million of cash from operations during the
26-week period ended March 28, 1998. Depreciation and amortization expense
totaled $21.6 million, receivables increased $3.6 million and accounts payable
and accrued expenses increased $12.5 million.
The increase in receivables was primarily the result of higher rebates
and allowances due from suppliers. The increase in accounts payable and accrued
expenses resulted primarily from timing differences in accounts payable-trade.
Cash used by investing activities totaled $112.3 million. The primary
use of this cash was the $115.5 million of capital expenditures during the
period. (SEE "CAPITAL EXPENDITURES" BELOW.) Capital expenditures were partially
offset by $3.2 million of proceeds from the sale of assets.
Ingles' financing activities provided $75.9 million in cash for the
six-month period. Proceeds from long-term debt totaled $89.0 million, while
payments on long-term debt were $27.6 million. Ingles used the proceeds of the
long-term debt to reduce short-term borrowings outstanding under existing bank
lines of credit. Ingles generally funds its capital expenditures from short-term
lines of credit and later refinances with long-term debt. Ingles subsequently
incurred additional short-term debt to pay for capital expenditures and for
general corporate purposes. Proceeds from short-term borrowings, net were $20.0
million.
Dividends paid totaled $6.8 million. Ingles 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
since December 1993. Ingles expects to continue paying regular cash dividends on
a quarterly basis. However, the Board of Directors periodically reconsiders the
declaration of dividends. Ingles pays these dividends at the discretion of the
Board of Directors and the continuation of these
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payments, the amount of such dividends and the form in which the dividends are
paid (cash or stock) depends upon the results of operations, the financial
condition of Ingles and other factors which the Board of Directors deems
relevant.
CAPITAL EXPENDITURES
Ingles believes that a key to its ability to continue to develop and
retain loyal customers is providing conveniently located, clean and modern
stores which provide customers with good service and a broad selection of
competitively priced products. As such, Ingles has invested and will continue
to invest significant amounts of capital toward the modernization of its store
base. Ingles' modernization program includes the opening of new stores, the
expansion and renovation of selected existing stores, the relocation of other
existing stores to larger, more convenient locations and the minor remodeling
of its remaining existing stores
Capital expenditures totaled $115.5 million for the six-month period
ended March 28, 1998. Ingles' previous projections for fiscal year 1998 capital
expenditures were approximately $100 million. The previous projections did not
include capital expenditures relating to the purchase of two shopping centers
(including supermarket facilities), 11 leased supermarket facilities and all
furniture, fixtures and equipment at each supermarket location from Bruno's,
Inc. during March, 1998 or capital expenditures relating to the acquisition of
five shopping centers in which Ingles was a tenant.
The investment in the former Bruno's stores is a departure from Ingles'
usual plan of building stores from the ground up. Ingles viewed the acquisition
as a good opportunity from both a grocery operation and real estate perspective.
The stores are all in Ingles current operating market. Ingles leased two of the
supermarket locations to other supermarket chains and sold the equipment at
these locations to them. Ingles will operate at least five of the other stores
as Ingles supermarkets. Ingles is carefully evaluating the other six locations
to determine whether the best potential is to lease the stores to third parties
or operate them as Ingles supermarkets.
Ingles believes that each of the five shopping centers it acquired in
which it was a tenant provided a good real estate investment. The acquisition
will allow termination of rent payments currently being made by Ingles for these
stores.
Ingles opened three new stores and four replacement stores in the
six month period ended March 28, 1998. Ingles incurred a portion of the capital
expenditures for construction of three new stores, five replacement stores, two
major renovations and improvements to five former Bruno's locations to be opened
during the balance of calendar year 1998. Ingles will make additional capital
expenditures for sites for future store locations, equipment at these stores,
upgrades in equipment and technologies in existing stores and at Ingles'
corporate headquarters and for warehousing and transportation equipment.
Ingles anticipates that fiscal 1998 capital expenditures in total will
be approximately $150 million. Ingles expects to finance the remaining capital
expenditures with internally generated funds and through short and long-term
financing arrangements. Ingles' ability to execute its capital expenditure plans
will depend, in part, on its ability to generate these funds and obtain external
financing.
Ingles' expansion and renovation plans are continually reviewed and are
subject to change. Ingles' ability to continue to pursue these plans is subject
to several factors. Such factors include, among other things, Ingles' ability to
successfully implement its acquisition strategy and operating strategy, Ingles'
ability to manage rapid expansion, Ingles ability to secure any necessary
financing, changes in regional and national economic conditions, adverse
climatic conditions affecting food production and delivery, changing
demographics, changes in the laws and government regulations applicable to
Ingles and competition.
FINANCIAL RESOURCES
At March 28, 1998, Ingles had lines of credit with ten banks totaling
$151.0 million; of this amount $28.5 million was unused. Ingles monitors its
cash position daily and makes draws or repayments on its lines of credit. The
lines provide Ingles with various interest rate options generally at rates less
than prime. Ingles is not required to maintain compensating balances in
connection with these lines of credit. Ingles finances its expansion and
renovation program primarily with cash provided from operations and from short-
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term borrowings under its credit facilities. Ingles typically replaces such
short-term financing, as necessary, with long-term financing secured by
equipment and real estate. As of March 28, 1998, Ingles had unencumbered
property with a net book value of approximately $280 million which is available
to collateralize additional debt.
Ingles believes, based on its current results of operations and
financial condition, that the financial resources available, including bank
lines of credit, long-term financing and internally generated funds, will be
sufficient to meet planned capital expenditures and working capital requirements
for the foreseeable future, including any debt service requirements of
additional borrowings. However, Ingles can make no assurances that any such
source of financing will be available to Ingles in the future. A decline in
Ingles' sales, Ingles' failure to achieve expected financial results, or a
failure of Ingles' expansion and renovation program to live up to management's
expectations, or any combination of these or similar factors, may have a
material adverse impact on Ingles' financial resources and on its renovation and
expansion strategy.
LEGAL PROCEEDINGS
Ingles is a defendant in a lawsuit recently filed by four employees
claiming gender discrimination. The plaintiffs are seeking to have the lawsuit
certified as a class action so that the claims being asserted can be asserted on
behalf of other past, current and future female Ingles employees. This lawsuit
has not been certified as a class action as of May 11, 1998. The action seeks
injunctive and declaratory relief, along with unspecified monetary damages.
Management believes that this case is without merit and intends to vigorously
defend this case. While the ultimate results of this litigation cannot be
determined, management does not expect that the resolution of these proceedings
will have a material adverse effect on Ingles' consolidated financial position
or results of operations.
Various other legal proceedings and claims arising in the ordinary
course of business are pending against Ingles. In the opinion of management, the
ultimate liability, if any, from these other pending legal proceedings and
claims would not have a material adverse effect on Ingles' consolidated
financial position or results of operations.
INSURANCE
Ingles maintains general liability, automobile and excess liability
coverages. Ingles carries $10 million liability insurance coverage on one
aircraft and $5 million liability insurance coverage on four other aircraft used
in its business. Ingles carries casualty insurance only on those properties
where it is required to do so.
Because of the sharp escalation in the cost of insurance, Ingles has
elected to self-insure certain other costs representing approximately 75% of the
total cost of insurance. Risks and uncertainties are associated with
self-insurance; however, Ingles has limited its exposure by maintaining excess
liability coverages. Ingles 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 Ingles.
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. Ingles is insured for covered costs in
excess of these limits.
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IMPACT OF INFLATION
Inflation in food prices during fiscal years 1997, 1996 and 1995 and
thus far in fiscal 1998 continued to be lower than the overall increase in the
Consumer Price Index. One of Ingles' significant costs is labor, which increases
with inflation. Recovery of these costs has to come from improved operating
efficiencies and, to the extent possible, through improved gross margins.
SEASONALITY
Sales are slightly seasonal with higher volume in the summer months due
to increased sales by stores located in vacation and seasonal home areas.
YEAR 2000
Ingles has assessed key financial, informational and operational
systems and is modifying its computer software to address the year 2000 issues.
Ingles is in the process of investigating the potential impact of year 2000
issues on suppliers of goods and services to Ingles and any related impact on
Ingles. Management does not anticipate that Ingles will encounter significant
operational issues related to the year 2000. Furthermore, the financial impact
of making required systems changes is not expected to be material to Ingles'
consolidated financial position, results of operations or cash flows in future
periods.
FORWARD LOOKING STATEMENTS
Certain statements under the heading "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION" constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such forward-looking statements concern Ingles' operations, economic
performances and financial condition, including, in particular, future
operations; expectations relating to Ingles' success in implementing its
expansion and renovation program; capital expenditures; Ingles' ability to
secure any necessary financing; expense reduction; improvements in sales and
increases in earnings per share and stockholder value. These statements are
based upon a number of assumptions and estimates which are inherently subject to
significant uncertainties and contingencies, many of which are beyond the
control of Ingles, and reflect future business decisions which are subject to
change. Some of these assumptions inevitably will not materialize, and
unanticipated events will occur which will affect Ingles' results. Ingles'
actual results may differ materially from those projected in forward-looking
statements made by, or on behalf of, Ingles. Such factors include, among other
things, the following: Ingles' ability to successfully implement its acquisition
and operating strategies; Ingles' ability to manage rapid expansion;
acquisitions and other opportunities that Ingles may pursue; changes in the
availability of debt or equity capital and increases in borrowing costs or
interest rates, especially since a portion of Ingles' borrowings bear interest
at floating rates; increased labor costs; issues arising from addressing year
2000 computer issues; changes in regional and national business and economic
conditions, including the rate of inflation; adverse climatic conditions
affecting food production and delivery; changing demographics; changes in the
laws and government regulations applicable to Ingles; and increased competition.
Factors that could cause actual results to differ are discussed throughout this
Form 10-Q, Ingles' 1997 Annual Report on Form 10-K, and Ingles' Quarterly Report
on Form 10-Q for the period ended December 27, 1997. Ingles undertakes no
obligation to publicly release any revisions to any forward-looking statements
contained herein to reflect events or circumstances occurring after the date
hereof or to reflect the occurrence of unanticipated events.
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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 17, 1998. Matters submitted to a vote of the stockholders
at this meeting were as follows: 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: 7,986,401 votes for,
55,094 votes withheld, 0 abstentions and 0 broker nonvotes and (b) Mr. Wingate:
7,991,601 votes for, 49,894 votes withheld, 0 abstentions and 0 broker nonvotes.
Robert P. Ingle, Vaughn C. Fisher, Anthony S. Federico, Ralph H. Gardner, Robert
P. Ingle, II, Laura Ingle Sharp and Brenda S. Tudor were elected by the holders
of Class B Common Stock by the following vote: (a) Mr. Robert P. Ingle:
12,531,589 votes for, 225 votes withheld, 0 abstentions and 0 broker nonvotes;
(b) Mr. Fisher: 12,531,589 votes for, 225 votes withheld, 0 abstentions and 0
broker nonvotes; (c) Mr. Federico: 12,531,589 votes for, 225 votes withheld, 0
abstentions and 0 broker nonvotes; (d) Mr. Gardner: 12,531,589 votes for, 225
votes withheld, 0 abstentions and 0 broker nonvotes; (e) Mr. Robert P. Ingle,
II: 12,531,589 votes for, 225 votes withheld, 0 abstentions and 0 broker
nonvotes; (f) Ms. Sharp: 12,531,589 votes for, 225 votes withheld, 0 abstentions
and 0 broker nonvotes and (g) Ms. Tudor: 12,531,589 votes for, 225 votes
withheld, 0 abstentions 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 27.1 - Financial Data Schedule for the period ended March 28,
1998 (for SEC purposes only)
Exhibit 27.2 - Financial Data Schedule for the period ended March 29,
1997 (for SEC purposes only)
(b) Reports on Form 8-K. There were no reports on Form 8-K filed by the
Company for the quarter ended March 28, 1998.
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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 11, 1998 /s/ Robert P. Ingle
-------------------
Robert P. Ingle
Chairman of the Board and
Chief Executive Officer
Date: May 11, 1998 /s/ Brenda S. Tudor
-------------------
Brenda S. Tudor
Vice President-Finance and
Chief Financial Officer
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