<PAGE> 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 29, 1996
[ ] 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 (Zip Code)
offices)
Registrant's telephone number,
including area code: (704) 669-2941
---------------------------
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 2, 1996 the registrant had 5,073,091 shares of Class A Common
Stock, $.05 par value per share, and 13,031,059 shares of Class B Common Stock,
$.05 par value per share, outstanding.
1
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INGLES MARKETS, INCORPORATED
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I - Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -
June 29, 1996 and
September 30, 1995 3
Consolidated Statements of Income -
Three Months Ended
June 29, 1996 and
June 24, 1995 5
Nine Months Ended
June 29, 1996 and
June 24, 1995 6
Consolidated Statements of Changes in
Stockholders' Equity -
Nine Months Ended
June 29, 1996 and
June 24, 1995 7
Consolidated Statements of Cash Flows -
Nine Months Ended
June 29, 1996 and
June 24, 1995 8
Notes to Unaudited Interim Financial Statements 9
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition 12
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibits
11 Computation of Earnings Per Common Share
Three Months Ended
June 29, 1996 and
June 24, 1995 21
Nine Months Ended
June 29, 1996 and
June 24, 1995 22
27 Financial Data Schedule
(For SEC Use Only)
</TABLE>
2
<PAGE> 3
Part I. Financial Information
Item 1. Financial Statements
INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 29, SEPTEMBER 30,
1996 1995
(UNAUDITED) (NOTE)
------------ -------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 22,927,644 $ 20,120,776
Receivables 18,150,361 15,176,746
Inventories 122,932,535 116,863,588
Other 4,302,956 3,667,010
------------- -------------
TOTAL CURRENT ASSETS 168,313,496 155,828,120
PROPERTY AND EQUIPMENT - Net 509,803,187 450,540,776
OTHER ASSETS 5,368,318 5,458,358
------------- -------------
TOTAL ASSETS $ 683,485,001 $ 611,827,254
============= =============
</TABLE>
NOTE: The balance sheet at September 30, 1995 has been derived from the
audited financial statements at that date.
See notes to unaudited interim financial statements.
3
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INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 29, SEPTEMBER 30,
1996 1995
(UNAUDITED) (NOTE)
------------ -------------
<S> <C> <C>
CURRENT LIABILITIES
Short-term loans and current
portion of long-term liabilities $ 58,338,308 $ 36,899,696
Accounts payable and accrued
expenses 106,377,874 98,119,632
------------ ------------
TOTAL CURRENT LIABILITIES 164,716,182 135,019,328
DEFERRED INCOME TAXES 21,034,578 20,226,161
LONG-TERM LIABILITIES 325,615,049 292,765,280
------------ -------------
TOTAL LIABILITIES 511,365,809 448,010,769
------------ ------------
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; 5,043,141
shares issued and outstanding
June 29, 1996; 4,577,541 shares
issued and outstanding
September 30, 1995 252,157 228,877
Class B, $.05 par value; 100,000,000
shares authorized; 13,061,009
shares issued and outstanding
June 29, 1996; 13,326,609 shares
issued and outstanding
September 30, 1995 653,051 666,331
Paid-in capital in excess of
par value 50,139,088 48,599,088
Retained earnings 121,074,896 114,322,189
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 172,119,192 163,816,485
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $683,485,001 $611,827,254
============ ============
</TABLE>
NOTE: The balance sheet at September 30, 1995 has been derived from the
audited financial statements at that date.
See notes to unaudited interim financial statements.
4
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INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------
JUNE 29, JUNE 24,
1996 1995
------------ ------------
<S> <C> <C>
NET SALES $370,352,342 $347,778,761
COST OF GOODS SOLD 282,834,547 268,442,625
------------ ------------
GROSS PROFIT 87,517,795 79,336,136
OPERATING AND ADMINISTRATIVE
EXPENSES 72,663,246 68,039,823
RENTAL INCOME, NET 1,600,288 1,189,904
------------ ------------
INCOME FROM OPERATIONS 16,454,837 12,486,217
OTHER INCOME, NET 437,567 1,033,680
------------ ------------
INCOME BEFORE INTEREST
AND INCOME TAXES 16,892,404 13,519,897
INTEREST EXPENSE 7,195,702 6,476,465
------------ ------------
INCOME BEFORE
INCOME TAXES 9,696,702 7,043,432
------------ ------------
INCOME TAXES:
Current 2,200,000 400,000
Deferred 1,600,000 2,100,000
------------ ------------
3,800,000 2,500,000
------------ ------------
NET INCOME $ 5,896,702 $ 4,543,432
============ ============
PER-SHARE AMOUNTS:
Earnings per common share:
Primary earnings per common
share $ .32 $ .25
============ ============
Fully diluted earnings per common
share $ .29 $ .23
============ ============
Cash dividends per common share:
Class A $ .165 $ .165
------------ ------------
Class B $ .150 $ .150
------------ ------------
</TABLE>
See notes to unaudited interim financial statements.
5
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INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
JUNE 29, JUNE 24,
1996 1995
-------------- --------------
<S> <C> <C>
NET SALES $1,091,981,916 $1,005,934,657
COST OF GOODS SOLD 837,771,910 778,492,561
-------------- --------------
GROSS PROFIT 254,210,006 227,442,096
OPERATING AND ADMINISTRATIVE
EXPENSES 213,808,609 198,226,133
RENTAL INCOME, NET 3,834,888 3,511,305
-------------- --------------
INCOME FROM OPERATIONS 44,236,285 32,727,268
OTHER INCOME, NET 1,916,830 1,157,146
-------------- --------------
INCOME BEFORE INTEREST
AND INCOME TAXES 46,153,115 33,884,414
INTEREST EXPENSE 21,703,590 17,516,063
-------------- --------------
INCOME BEFORE
INCOME TAXES 24,449,525 16,368,351
-------------- --------------
INCOME TAXES:
Current 8,100,000 4,300,000
Deferred 1,300,000 1,500,000
-------------- -------------
9,400,000 5,800,000
-------------- -------------
NET INCOME $ 15,049,525 $ 10,568,351
============== ==============
PER-SHARE AMOUNTS:
Earnings per common share:
Primary earnings per common share $ .82 $ .58
============== ==============
Fully diluted earnings per common share $ .76 $ .56
============== ==============
Cash dividends per common share:
Class A $ .4950 $ .4950
-------------- --------------
Class B $ .4500 $ .4500
-------------- --------------
</TABLE>
See notes to unaudited interim financial statements.
6
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INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
________________________________________________
<TABLE>
<CAPTION>
PAID-IN
CLASS A CLASS B CAPITAL IN
...COMMON STOCK... ...COMMON STOCK... EXCESS OF RETAINED
SHARES AMOUNT SHARES AMOUNT PAR VALUE EARNINGS TOTAL
--------- -------- ---------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
SEPTEMBER 24, 1994. 4,412,167 $220,609 13,491,983 $674,599 $48,599,088 $108,478,050 $157,972,346
NET INCOME . . . . . - - - - - 10,568,351 10,568,351
CASH DIVIDENDS . . . - - - - - (8,255,939) (8,255,939)
COMMON STOCK
CONVERSIONS . . . . 62,899 3,145 (62,899) (3,145) - - -
--------- -------- ---------- -------- ----------- ------------ ------------
BALANCE,
JUNE 24, 1995 . . . 4,475,066 $223,754 13,429,084 $671,454 $48,599,088 $110,790,462 $160,284,758
========= ======== ========== ======== =========== ============ ============
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
========= ======== ========== ======== =========== ============ ============
</TABLE>
See notes to unaudited interim financial statements.
7
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INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
JUNE 29, JUNE 24,
1996 1995
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 15,049,525 $ 10,568,351
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization expense 24,096,235 19,658,767
Receipt of advance payments on purchases
contracts 2,409,955 -
Recognition of advance payments on purchases
contracts (2,046,237) (746,231)
Gains on disposals of property and
equipment (1,938,124) (289,090)
Deferred income taxes 1,300,000 1,500,000
(Increase) decrease in receivables (2,934,069) 1,246,814
Increase in inventory (6,068,947) (5,536,232)
(Increase) decrease in other assets (839,956) 77,924
Increase in accounts payable and accrued
expenses 8,156,659 5,777,430
------------ ------------
Net Cash Provided by Operating Activities 37,185,041 32,257,733
------------ ------------
Cash Flows From Investing Activities:
Proceeds from sales of property and
equipment 2,620,986 536,128
Capital expenditures (83,827,004) (90,287,673)
------------ ------------
Net Cash (Used) by Investing Activities (81,206,018) (89,751,545)
------------ ------------
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt 84,714,551 95,919,747
Principal payments on long-term debt (31,789,888) (26,588,635)
Proceeds (payments) from short-term
borrowings, net 1,000,000 (1,000,000)
Proceeds from exercise of stock options 1,200,000 -
Dividends paid (8,296,818) (8,255,939)
------------ ------------
Net Cash Provided By Financing Activities 46,827,845 60,075,173
------------ ------------
Net Increase in Cash 2,806,868 2,581,361
Cash at Beginning of Period 20,120,776 18,471,011
------------ ------------
Cash at End of Period $ 22,927,644 $ 21,052,372
============ ============
</TABLE>
See notes to unaudited interim financial statements.
8
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INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
June 29, 1996
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 29, 1996, and the results of
operations for the three month and nine month periods ended June 29, 1996
and June 24, 1995 and changes in stockholders' equity and cash flows for the
nine month period ended June 29, 1996 and June 24, 1995. 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 1995
Annual Report on Form 10-K filed by the Company under the Securities
Exchange Act of 1934 on December 15, 1995.
The results of operations for the three month and nine month periods ended
June 29, 1996 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
24, 1995 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
(18,589,972 and 18,466,117 for the three month and nine month periods ended
June 29, 1996, respectively and 18,301,028 and 18,313,789 for the three
month and nine month periods ended June 24, 1995, 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 21,964,657 and 21,847,132 for the three month
and nine month periods ended June 29, 1996, respectively, and 21,731,033 for
the three month and nine month periods ended June 24, 1995.
C. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Receivables are presented net of an allowance for doubtful accounts of
$79,058 and $85,490 at June 29, 1996 and September 30, 1995, respectively.
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D. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
June 29, September 30,
1996 1995
------------ -------------
<S> <C> <C>
Accounts payable-trade $ 75,223,314 $ 66,815,027
Property, payroll, and
other taxes payable 9,480,383 9,363,814
Salaries, wages and
bonuses payable 8,239,452 7,970,396
Self-insurance reserves 4,440,000 4,350,000
Other 8,994,725 9,620,395
------------ -------------
$106,377,874 $ 98,119,632
============ =============
</TABLE>
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 $1,807,343 and $2,008,115
for the three month periods ended June 29, 1996 and June 24, 1995,
respectively. For the nine month periods ended June 29, 1996 and June 24,
1995, employee insurance expense totaled $5,956,373 and $6,160,091,
respectively.
E. LONG-TERM LIABILITIES
During the nine month period ended June 29, 1996, the Company obtained
$84.7 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:
<TABLE>
<S> <C>
Interest rate at 7.58%, maturing 2002,
secured by real estate and equipment $28,357,403
Interest rate at 8.28%, maturing 2001,
secured by equipment 10,000,000
Interest rate at 7.61%, maturing 2000,
secured by equipment 5,000,000
Interest at LIBOR rate plus a specified
margin, maturing February 1998, unsecured 20,000,000
Interest rate at 9.25%, maturing 2005,
secured by real estate 2,092,893
Interest at LIBOR rate plus a specified
margin, maturing May 1998, unsecured 19,000,000
Other 264,255
------------
$ 84,714,551
============
</TABLE>
On August 7, 1996, the Company obtained a $15.0 million loan from a
bank under a long-term line of credit expiring in February 1998 with a
rate of interest at LIBOR plus a specified margin. The proceeds of
this loan were used to reduce short-term borrowings outstanding at
June 29, 1996. Short-term borrowings have been reclassified to
long-term liabilities at June 29, 1996 pursuant to this refinancing.
10
<PAGE> 11
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 15, 1996, January 16, 1996 and October 16, 1995 to stockholders of
record on April 5, 1996, January 5, 1996 and October 6, 1995,
respectively.
G. SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for interest and taxes is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
June 29, June 24,
1996 1995
------------ ------------
<S> <C> <C>
Interest (net of
amount capitalized) $ 22,213,981 $ 17,824,904
Income taxes 9,598,245 5,053,950
</TABLE>
H. EXERCISE OF STOCK OPTION AGREEMENTS WITH EXECUTIVE OFFICERS
During the nine month period ended June 29, 1996, Robert P. Ingle,
Chairman of the Board of Directors and Chief Executive Officer of the
Company, and Landy B. Laney, President and Chief Operating Officer of the
Company, each exercised their options to purchase 100,000 shares of the
Company's Class A Common Stock at an option price of $6.00 per share. The
difference between the fair market value of the Class A Common Stock at the
date of the grant of the options ($7.75 per share) and the option price
($6.00 per share) was previously expensed on the Company's books.
11
<PAGE> 12
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 29, 1996 COMPARED
WITH THE THREE MONTHS ENDED JUNE 24, 1995
NET SALES
Net sales for the three month period ended June 29, 1996 increased $22.6
million, to $370.4 million, up 6.5% over sales of $347.8 million last year.
Approximately 64% of the dollar increase in sales resulted from an increase in
grocery sales, while the balance resulted substantially from increased sales in
the perishable departments. The Company continued to merchandise exceptionally
well, purchase and price aggressively and advertise effectively. The Company
is always exploring ways to better serve its customers and build sales through
the addition of new products, by delivering superior customer service and
offering a wide selection of quality products, at competitive prices, at all of
its conveniently located stores.
GROSS PROFIT
Gross profit for the period was $87.5 million, or 23.6% of sales, compared with
$79.3 million, or 22.8% of sales, last year - an increase of 10.3%. Grocery
gross profit, as a percentage of sales, increased primarily because of an
aggressive purchasing program. Meat, produce, frozen food and deli gross
profit, as a percentage of sales, improved due to aggressive purchasing,
aggressive pricing and effective merchandising and advertising programs.
Shrinkage of inventory also improved.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses, as a percentage of sales, were 19.6% in
both fiscal 1996 and fiscal 1995. The cost of labor at store level,
depreciation and amortization expense and repairs and maintenance, as a
percentage of sales, increased. The increase in depreciation and amortization
expense results from the Company's aggressive capital expenditure program last
year and so far this year. The cost of supplies at store level, advertising
and promotional expenditures and the cost of insurance, as a percentage of
sales, decreased.
RENTAL INCOME, NET
Rental income, net increased from $1.2 million last year to $1.6 million this
year. The increase is due to an increase in gross rental income, $.6 million,
net of increased expense, $.2 million, associated with the remodeling of
shopping centers.
INCOME FROM OPERATIONS
Income from operations increased 31.8% to $16.5 million, or 4.4% of sales,
compared to $12.5 million, or 3.6% of sales, a year ago. The increase in
12
<PAGE> 13
operating income in fiscal 1996 is due to the increase in sales, the related
increase in gross profit and the increase in net rental income.
OTHER INCOME, NET
Other income, net decreased $.6 million. Fiscal 1996 includes a gain of $.5
million on the sale of an outparcel of land located adjacent to a shopping
center owned by the Company - fiscal 1995 includes a gain of $.4 million.
Other miscellaneous income, primarily accounts payable audit, decreased $.7
million.
INCOME BEFORE INTEREST AND INCOME TAXES
Income before interest and income taxes increased 24.9% to $16.9 million, or
4.6% of sales, this year compared with $13.5 million or 3.9% of sales, last
year.
INTEREST EXPENSE
Interest expense was $7.2 million in fiscal 1996 - $6.5 million in fiscal 1995.
The increase in interest expense 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 $9.7 million, or 2.6% of sales this year,
compared with $7.0 million, or 2.0% of sales last year.
INCOME TAXES
Income tax expense, as a percentage of pre-tax income, was 39.2% this year
compared with 35.5% last year due to the elimination of the targeted jobs tax
credit and higher state income taxes.
NET INCOME
Net income for the three month period ended June 29, 1996 increased 29.8% to
$5.9 million, or 1.6% of sales, compared to $4.5 million, or 1.3% of sales, the
prior year. Primary earnings per common share rose from $.25 last year to $.32
this year.
NINE MONTHS ENDED JUNE 29, 1996 COMPARED
WITH THE NINE MONTHS ENDED JUNE 24, 1995
NET SALES
Net sales for the nine month period ended June 29, 1996 increased $86.0
million, to $1.092 billion, up 8.6% over sales of $1.006 billion last year.
The strong gain in sales was driven by the opening of new stores, the
expansion, remodel and/or replacement of existing stores and an increase in
identical store sales (grocery stores open for the entire duration of the
previous fiscal year) of 5.8%. The Company's continuing commitment to superior
customer service, its broad selection of quality food and non-food products,
including private label items, at competitive prices, and its effective
marketing and merchandising efforts helped boost sales.
13
<PAGE> 14
During the prior and current fiscal years, nine new stores have been opened,
twenty-two older stores have been remodeled and/or replaced and one store was
closed. All the stores that were remodeled and/or replaced were enlarged, the
results of which have been excellent, as evidenced by increased sales and
market share. The Company has also performed minor remodels ("face-lifts") at
twelve existing store locations this year positively impacting their sales
volume.
At June 29, 1996, the Company operated 183 supermarkets in six states: North
Carolina (58), South Carolina (28), Georgia (72), Tennessee (21), Virginia (3),
and Alabama (1).
GROSS PROFIT
Gross profit for the 1996 nine month period increased 11.8% to $254.2 million,
or 23.3% of sales, compared with $227.4 million, or 22.6% of sales, the prior
year. 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 effective buying, an aggressive
merchandising and pricing program, good promotional strategy and improved
product mix. Meat, produce, frozen food and deli gross profit, as a percentage
of sales, improved due to better merchandising, effective purchasing and
pricing programs and reduced shrinkage of inventory.
OPERATING AND ADMINISTRATIVE EXPENSES
Improved sales and better overall expense control helped lower operating and
administrative expenses as a percentage of sales - from 19.7% in fiscal 1995 to
19.6% in fiscal 1996. Increases in depreciation and amortization expense, as a
result of the Company's aggressive capital expenditure program last year and so
far this year, and repairs and maintenance were more than offset by decreases
in rent expense, the cost of supplies at store level, advertising and
promotional expenditures and the cost of insurance, as a percentage of sales.
The Company continued to focus on controlling critical expense items and
improving productivity while maintaining superior levels of customer service
and high product quality and selection in its well-maintained stores.
RENTAL INCOME, NET
Rental income, net increased from $3.5 million last year to $3.8 million this
year. The increase is due to an increase in gross rental income, $.9 million,
net of increased expenses, $.6 million, associated with the remodeling of
shopping centers.
INCOME FROM OPERATIONS
Income from operations increased 35.2% to $44.2 million, or 4.1% of sales,
compared to $32.7 million, or 3.3% of sales, last year. The increase in
operating income is principally due to the increase in sales, the related
increase in gross profit and the decrease, as a percentage of sales, in
operating and administrative expenses.
OTHER INCOME, NET
Other income, net increased $.8 million. Fiscal 1996 includes gains of $1.9
million on the sale of five outparcels of land located adjacent to
14
<PAGE> 15
shopping centers owned by the Company; fiscal 1995 includes a gain of $.4
million on the sale of one outparcel. Other miscellaneous income decreased $.7
million.
INCOME BEFORE INTEREST AND INCOME TAXES
Income before interest and income taxes increased 36.2% to $46.2 million, or
4.2% of sales, this year compared to $33.9 million, or 3.4% of sales, last
year.
INTEREST EXPENSE
Interest expense was $21.7 million in fiscal 1996 - $17.5 million in fiscal
1995. The increased expense is primarily due to an increase in debt to fund
the Company's aggressive capital expenditure program.
INCOME BEFORE INCOME TAXES
Income before income taxes was $24.4 million, or 2.2% of sales, this year
compared with $16.4 million, or 1.6% of sales, the prior year.
INCOME TAXES
The elimination of the targeted jobs tax credit and higher state income taxes
resulted in a higher effective income tax rate in fiscal 1996 of 38.4% compared
to an effective rate of 35.4% in fiscal 1995.
NET INCOME
Net income for the nine month period ended June 29, 1996 increased 42.4% to
$15.0 million, or 1.4% of sales, compared to $10.6 million, or 1.1% of sales,
last year. Primary earnings per common share rose from $.58 last year to $.82
this year.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Net cash provided by operating activities for the nine month period ended June
29, 1996 totalled $37.2 million. Net income for the period was $15.0 million
and depreciation and amortization expense was $24.1 million. Inventory
increased $6.1 million, receivables increased $2.9 million, accounts payable
and accrued expenses increased $8.2 million, the receipt of advanced payments
on purchases contracts was $2.4 million, recognition of advance payments on
purchases contracts was $2.0 million and gains on the disposals of property and
equipment were $1.9 million.
The increase in inventory occurred at both store and warehouse levels and is
the result of two new store openings, four store expansions, remodels and/or
replacements, an expanded warehouse facility, increased variety and the
Company's desire to maintain inventory levels to support increased sales
volume. The increase in receivables is primarily the result of an increase in
rebates and allowances due from suppliers. The increase in accounts payable
and accrued expenses was principally due to an increase in
15
<PAGE> 16
accounts payable trade ($8.4 million). The increase in accounts payable trade
was primarily the result of an increase in inventory and in payables relating
to the Company's expansion program.
INVESTING ACTIVITIES
Net cash used by investing activities - primarily expenditures for capital
assets - during the period was $81.2 million. The Company's capital
expenditure program was devoted primarily to obtaining land for new store
locations, the construction of new facilities, including the expansion of the
existing warehouse facility, the renovation, modernization and/or expansion of
existing stores and the installation of electronic scanning systems in
twenty-nine stores. A portion of these expenditures were for new stores, store
expansions, remodels and/or replacements expected to become operational in
fiscal 1997.
FINANCING ACTIVITIES
Net cash provided by financing activities totalled $46.8 million. Proceeds
from the issuance of long-term debt aggregated $84.7 million. The proceeds of
this debt were used to reduce short-term borrowings outstanding under existing
bank lines of credit. Additional short-term debt was subsequently incurred to
pay for capital expenditures and for general corporate purposes. Principal
payments on long-term debt were $31.8 million. The Company paid cash dividends
of $8.3 million.
FINANCIAL STRENGTH
At June 29, 1996, the Company remained in sound financial condition. Total
assets were $683.5 million and stockholders' equity was $172.1 million,
compared with $611.8 million and $163.8 million, respectively, at year-end,
September 30, 1995. Favorable inventory turnover rates (cost of
sales/inventory on an annualized basis) in 1996 of 9.1 helped generate cash
flow from operations. Return on assets (net income/total assets annualized)
increased from 2.4% in 1995 to 2.9% in 1996. Return on investment (net
income/average stockholders' equity annualized) improved from 8.9% in fiscal
1995 to 11.9% in fiscal 1996.
CAPITAL REQUIREMENTS
The Company's store expansion, remodeling and/or replacement plans are
continually reviewed and are subject to change. The Company's ability to open
new stores is subject to several factors, including the acquisition of
satisfactory sites and the successful negotiation of new leases, and may be
limited by zoning and other governmental regulation.
During the period ended June 29, 1996, two new stores were opened and four
older stores were expanded, remodeled and/or replaced. During the balance of
fiscal 1996, the Company expects to open five new stores and expand, remodel
and/or replace three existing stores. In addition, the Company plans a minor
remodel ("face-lift") at one existing store location. Additional capital
expenditures will be made to : (1) upgrade and replace existing store
equipment, (2) install electronic scanning systems in new and existing stores
and (3) secure sites for future store expansion. Fiscal 1996 capital
expenditures, in the aggregate, are expected to be approximately $95 million to
$100 million. Some of the expenditures that
16
<PAGE> 17
will be incurred toward fiscal year-end will relate to assets that will be
placed in service in fiscal 1997.
FINANCIAL RESOURCES
At June 29, 1996, the Company had lines of credit with seven banks totalling
$116 million; of this amount $46 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. The Company had unencumbered
property with a net book value of approximately $250 million which is available
to collateralize additional debt.
On August 7, 1996, the Company obtained a $15.0 million loan from a bank under
a long-term line of credit expiring February 1998 with a rate of interest at
LIBOR plus a specified margin. The proceeds of this loan were used to reduce
short-term borrowings outstanding at June 29, 1996.
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 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 expanded, remodeled and/or replacement
stores will meet or exceed the results of operations from existing stores.
QUARTERLY CASH DIVIDENDS
At their quarterly meeting on December 3, 1993, the Company's Board of
Directors voted to increase the Company's regular quarterly cash dividends
100%. Effective with dividends paid December 27, 1993, the dividends were
increased from $.0825 (eight and one-quarter cents) per share on Class A Common
Stock to $.165 (sixteen and one-half cents) per share and from $.075 (seven and
one-half cents) per share on Class B Common Stock to $.15 (fifteen cents) per
share 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 at the rates approved December 3, 1993. 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.
17
<PAGE> 18
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 69% 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 29, 1996, decreased .09%.
IMPACT OF INFLATION
Inflation in food prices continues 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 121 AND SFAS 123
The Financial Accounting Standards Board issued new standards (SFAS 121),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" and (SFAS 123), "Accounting for Stock-based Compensation"
effective for the fiscal year ending September 1997. The effect of adopting
the standards has not been determined.
18
<PAGE> 19
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 29, 1996.
19
<PAGE> 20
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 12, 1996 /s/ Robert P. Ingle
----------------------------
Robert P. Ingle
Chairman of the Board and
Chief Executive Officer
Date: August 12, 1996 /s/ Jack R. Ferguson
----------------------------
Jack R. Ferguson
Vice President-Finance and
Chief Financial Officer
20
<PAGE> 1
EXHIBIT 11
Page 1 of 2
INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE *
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
JUNE 29, JUNE 24,
1996 1995
---------- -----------
<S> <C> <C>
PRIMARY
Net income $ 5,896,702 $ 4,543,432
=========== ===========
Shares
Weighted average number of common shares
and common stock equivalent shares
outstanding 18,589,972 18,301,028
=========== ===========
Primary earnings per common share $ .32 $ .25
=========== ===========
FULLY DILUTED:
Net income $ 5,896,702 $ 4,543,432
Add after tax and bonus effect of interest
expense applicable to Convertible
Subordinated Debentures 511,994 532,391
----------- -----------
Fully diluted earnings $ 6,408,696 $ 5,075,823
=========== ===========
Shares
Weighted average number of common
shares and common stock equivalent
shares outstanding 18,589,972 18,356,348
Additional shares assuming conversion
of Convertible Subordinated Debentures 3,374,685 3,374,685
----------- -----------
Weighted average number of common
shares outstanding as adjusted 21,964,657 21,731,033
=========== ===========
Fully diluted earnings per common share $ .29 $ .23
=========== ===========
</TABLE>
* See Note B of the notes to unaudited interim financial statements.
21
<PAGE> 2
EXHIBIT 11
Page 2 of 2
INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE *
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------
JUNE 29, JUNE 24,
1996 1995
----------- ------------
<S> <C> <C>
PRIMARY:
Net income $15,049,525 $10,568,351
=========== ===========
Shares
Weighted average number of common shares
and common stock equivalent shares
outstanding 18,466,117 18,313,789
=========== ===========
Primary earnings per common share $ .82 $ .58
=========== ===========
FULLY DILUTED:
Net income $15,049,525 $10,568,351
Add after tax and bonus effect of interest
expense applicable to Convertible
Subordinated Debentures 1,535,982 1,597,175
----------- -----------
Fully diluted earnings $16,585,507 $12,165,526
=========== ===========
Shares
Weighted average number of common
shares and common stock equivalent
shares outstanding 18,472,447 18,356,348
Additional shares assuming conversion
of Convertible Subordinated Debentures 3,374,685 3,374,685
----------- -----------
Weighted average number of common
shares outstanding as adjusted 21,847,132 21,731,033
=========== ===========
Fully diluted earnings per common share $ .76 $ .56
=========== ===========
</TABLE>
* See Note B of the notes to unaudited interim financial statements.
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE NINE MONTH PERIOD ENDED JUNE 29, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-28-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-29-1996
<CASH> 22,927,644
<SECURITIES> 0
<RECEIVABLES> 18,229,419
<ALLOWANCES> 79,058
<INVENTORY> 122,932,535
<CURRENT-ASSETS> 168,313,496
<PP&E> 706,909,196
<DEPRECIATION> 197,106,009
<TOTAL-ASSETS> 683,485,001
<CURRENT-LIABILITIES> 164,716,182
<BONDS> 325,615,049
905,208
0
<COMMON> 0
<OTHER-SE> 171,213,984
<TOTAL-LIABILITY-AND-EQUITY> 683,485,001
<SALES> 1,091,981,916
<TOTAL-REVENUES> 1,099,093,220
<CGS> 837,771,910
<TOTAL-COSTS> 841,048,326
<OTHER-EXPENSES> (1,916,830)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,703,590
<INCOME-PRETAX> 24,449,525
<INCOME-TAX> 9,400,000
<INCOME-CONTINUING> 15,049,525
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,049,525
<EPS-PRIMARY> .82
<EPS-DILUTED> .76
</TABLE>
