<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 December 28, 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 February 3, 1997, the registrant had 8,845,868 shares of Class A Common
Stock, $.05 par value per share, and 12,989,871 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 -
December 28, 1996 and
September 28, 1996 3
Consolidated Statements of Income -
Three Months Ended
December 28, 1996 and
December 30, 1995 5
Consolidated Statements of Changes in
Stockholders' Equity
Three Months Ended
December 28, 1996 and
December 30, 1995 6
Consolidated Statements of Cash Flows -
Three Months Ended
December 28, 1996 and
December 30, 1995 7
Notes to Unaudited Interim Financial Statements 8
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition 11
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibits
11 Computation of Earnings Per Common Share 18
27 Financial Data Schedule (for SEC use only)
</TABLE>
2
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Part I. Financial Information
Item 1. Financial Statements
INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 28, SEPTEMBER 28,
1996 1996
(UNAUDITED) (NOTE)
------------ -------------
<S> <C> <C>
CURRENT ASSETS
--------------
Cash $ 23,088,604 $ 22,418,003
Receivables 17,197,344 15,197,129
Inventories 126,979,074 128,364,435
Other 4,021,083 3,935,825
------------- -------------
TOTAL CURRENT ASSETS 171,286,105 169,915,392
PROPERTY AND EQUIPMENT - Net 545,793,660 530,227,505
----------------------
OTHER ASSETS 7,769,040 7,821,820
------------ ------------- -------------
TOTAL ASSETS $ 724,848,805 $ 707,964,717
============= =============
</TABLE>
NOTE: The balance sheet at September 28, 1996 has been derived from the
audited financial statements at that date.
See notes to unaudited interim financial statements.
3
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INGLES MARKETS, INCORPORATED
----------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED BALANCE SHEETS (CONCLUDED)
---------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
DECEMBER 28, SEPTEMBER 28,
1996 1996
(UNAUDITED) (NOTE)
------------ -------------
<S> <C> <C>
CURRENT LIABILITIES
-------------------
Short-term loans and current
portion of long-term liabilities $ 58,366,168 $ 54,274,426
Accounts payable and accrued
expenses 102,079,360 107,134,357
------------ ------------
TOTAL CURRENT LIABILITIES 160,445,528 161,408,783
DEFERRED INCOME TAXES 22,934,578 22,034,578
---------------------
LONG-TERM LIABILITIES 346,171,497 349,511,494
--------------------- ------------ ------------
TOTAL LIABILITIES 529,551,603 532,954,855
------------ ------------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock, $.05 par value;
10,000,000 shares authorized;
no shares issued - -
Common stocks:
Class A, $.05 par value; 150,000,000
shares authorized; 6,784,888
shares issued and outstanding
December 28, 1996; 5,097,291 shares
issued and outstanding
September 28, 1996 339,244 254,864
Class B, $.05 par value; 100,000,000
shares authorized; 12,990,621
shares issued and outstanding
December 28, 1996; 13,006,859 shares
issued and outstanding
September 28, 1996 649,531 650,344
Paid-in capital in excess of
par value 68,089,728 50,139,088
Retained earnings 126,218,699 123,965,566
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 195,297,202 175,009,862
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $724,848,805 $707,964,717
============ ============
</TABLE>
NOTE: The balance sheet at September 28, 1996 has been derived from the
audited financial statements at that date.
See notes to unaudited interim financial statements.
4
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INGLES MARKETS, INCORPORATED
----------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------
DECEMBER 28, DECEMBER 30,
1996 1995
------------ ------------
<S> <C> <C>
NET SALES $381,115,510 $357,406,265
COST OF GOODS SOLD 290,188,391 275,038,436
------------ ------------
GROSS PROFIT 90,927,119 82,367,829
OPERATING AND ADMINISTRATIVE
EXPENSES 75,864,708 69,072,617
RENTAL INCOME, NET 1,330,629 995,347
------------ ------------
INCOME FROM OPERATIONS 16,393,040 14,290,559
OTHER INCOME, NET 279,697 569,784
------------ ------------
INCOME BEFORE INTEREST
AND INCOME TAXES 16,672,737 14,860,343
INTEREST EXPENSE 8,116,084 7,238,227
------------ ------------
INCOME BEFORE INCOME TAXES 8,556,653 7,622,116
------------ ------------
INCOME TAXES:
Current 2,600,000 3,000,000
Deferred 700,000 (100,000)
------------ ------------
3,300,000 2,900,000
------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM 5,256,653 4,722,116
EXTRAORDINARY ITEM- EARLY EXTINGUISHMENT OF
DEBT (NET OF INCOME TAX BENEFIT) (211,159) -
------------ ------------
NET INCOME $ 5,045,494 $ 4,722,116
============ ============
PER-SHARE AMOUNTS:
Earnings per common share:
Primary earnings per common share
before extraordinary item $ .27 $ .26
Extraordinary item - early extinguishment
of debt (.01) -
------------ ------------
Primary earnings per common share $ .26 $ .26
============ ============
Fully diluted earnings per common share
before extraordinary item $ .25 $ .24
Extraordinary item-early extinguishment
of debt (.01) -
------------ ------------
Fully diluted earnings per common share $ .24 $ .24
============ ============
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 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 30, 1995. 4,577,541 $228,877 13,326,609 $666,331 $48,599,088 $114,322,189 $163,816,485
NET INCOME . . . . . - - - - - 4,722,116 4,722,116
CASH DIVIDENDS . . . - - - - - (2,754,286) (2,754,286)
COMMON STOCK
CONVERSIONS . . . . 1,200 60 (1,200) (60) - - -
--------- -------- ---------- -------- ----------- ------------ ------------
BALANCE,
DECEMBER 30,1995. . 4,578,741 $228,937 13,325,409 $666,271 $48,599,088 $116,290,019 $165,784,315
========= ======== ========== ======== =========== ============ ============
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 . . . . . - - - - - 5,045,494 5,045,494
CASH DIVIDENDS . . . - - - - - (2,792,361) (2,792,361)
EXERCISE OF STOCK
OPTIONS . . . . . . 403,200 20,160 - - 3,937,615 - 3,957,775
CONVERSION OF
CONVERTIBLE
SUBORDINATED
DEBENTURES. . . . . 1,268,159 63,407 - - 14,013,025 - 14,076,432
COMMON STOCK
CONVERSIONS . . . . 16,238 813 (16,238) (813) - - -
--------- -------- ---------- -------- ----------- ------------ ------------
BALANCE,
DECEMBER 28,1996. . 6,784,888 $339,244 12,990,621 $649,531 $68,089,728 $126,218,699 $195,297,202
========= ======== ========== ======== =========== ============ ============
</TABLE>
See notes to unaudited interim financial statements.
6
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INGLES MARKETS, INCORPORATED
----------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
-------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
DECEMBER 28, DECEMBER 30,
1996 1995
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 5,045,494 $ 4,722,116
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization expense 9,221,711 7,769,984
Receipt of advance payment on purchases
contract - 800,000
Recognition of advance payments on
purchases contracts (1,523,037) (581,250)
Gains on disposals of property and
equipment (3,129) (572,988)
Deferred income taxes 700,000 (100,000)
Extraordinary item-early extinguishment
of debt (net of income tax benefit) 211,159 -
Increase in receivables (1,996,189) (3,362,894)
Decrease (increase) in inventory 1,385,361 (1,224,838)
Increase in other assets (245,790) (1,089,496)
Decrease in accounts payable and
accrued expenses (2,538,990) (791,465)
------------ ------------
Net Cash Provided by Operating Activities 10,256,590 5,569,169
------------ ------------
Cash Flows From Investing Activities:
Proceeds from sales of property and
equipment 90,007 904,661
Capital expenditures (26,012,624) (28,410,095)
------------ ------------
Net Cash (Used) by Investing Activities (25,922,617) (27,505,434)
------------ ------------
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt 35,029,934 39,857,403
Payments on short-term borrowings, net - (5,000,000)
Principal payments of long-term debt (18,678,720) (7,877,818)
Dividends paid (2,792,361) (2,754,286)
Proceeds from exercise of stock options 2,777,775 -
------------ ------------
Net Cash Provided By Financing Activities 16,336,628 24,225,299
------------ ------------
Net Increase in Cash 670,601 2,289,034
Cash at Beginning of Period 22,418,003 20,120,776
------------ ------------
Cash at End of Period $ 23,088,604 $ 22,409,810
============ ============
</TABLE>
See notes to unaudited interim financial statements.
7
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INGLES MARKETS, INCORPORATED
----------------------------
AND SUBSIDIARIES
----------------
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
-----------------------------------------------
December 28, 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 December 28, 1996, and
the results of operations, changes in stockholders' equity and cash
flows for the three months ended December 28, 1996 and December 30,
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 1996 Annual Report on Form 10-K
filed by the Company under the Securities Exchange Act of 1934 on
December 23, 1996.
The results of operations for the three month period ended
December 28, 1996 are not necessarily indicative of the results to be
expected for the full fiscal year.
Certain amounts for the three month period ended December 30,
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 (19,378,023 and 18,353,052 for the three months ended
December 28, 1996 and December 30, 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 22,141,295
and 21,783,919 for the three months ended December 28, 1996 and
December 30, 1995, respectively.
C. ALLOWANCE FOR DOUBTFUL ACCOUNTS
-------------------------------
Receivables are presented net of an allowance for doubtful
accounts of $116,761 and $106,073 at December 28, 1996 and September
28, 1996, respectively.
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D. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
-------------------------------------
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 28, September 28,
1996 1996
------------ -------------
<S> <C> <C>
Accounts payable-trade $ 73,657,499 $ 74,850,388
Property, payroll, and
other taxes payable 8,389,759 8,694,621
Salaries, wages and
bonuses payable 6,448,427 9,696,321
Self-insurance reserves 4,545,000 4,515,000
Other 9,038,675 9,378,027
------------ -------------
$102,079,360 $ 107,134,357
============ =============
</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
$2,017,982 and $1,964,104 for the three months ended December 28,1996
and December 30, 1995, respectively.
E. LONG-TERM LIABILITIES
---------------------
During the three months ended December 28, 1996, the Company obtained
$35,029,934 in long-term loans. The proceeds were used to reduce
short-term debt, to fund capital expenditures and for general
corporate purposes. Details are as follows:
<TABLE>
<S> <C>
Interest rate at 6.75%, maturing 1998,
unsecured $ 25,000,000
Interest rate at 8.15%, maturing 2003,
secured by real estate and equipment 4,529,934
Interest rate at 7.43%, maturing 2001,
secured by equipment 5,500,000
------------
$ 35,029,934
============
</TABLE>
During January 1997, the Company obtained three long-term bank lines
of credit totalling $21.0 million at interest rates below prime rate.
The proceeds of the loans were used to reduce short-term borrowings of
$18.0 million and other long-term borrowings of $3.0 million.
Short-term borrowings of $18.0 million have been reclassified to
long-term liabilities at December 28, 1996 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.
During the three months ended December 28, 1996, approximately $14.1
million of the Debentures were converted into approximately 1.3
million shares of Class A Common Stock. The write-off of unamortized
loan costs of $211,159 (net of income tax benefit of $130,000)
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relating to the converted Debentures are included as an extraordinary
item in the accompanying statement of income for the three months
ended December 28, 1996.
Additional Debentures totalling approximately $22.6 million were
converted into approximately 2.0 million shares of Class A Common
Stock from December 29, 1996 through January 16, 1997. The
remaining outstanding Debentures ($.8 million) were redeemed at 101.8%
of face value plus accrued interest on January 20, 1997.
Approximately $.4 million of additional unamortized loan costs and
redemption premium (net of the income tax benefit) will be included as
an extraordinary item in the statement of income for the three month
period that will end on March 29, 1997.
Had the conversion of the additional $22.6 million of the Debentures
that were converted after December 28, 1996 occurred at the beginning
of the three month period ended December 28, 1996, primary earnings
per common share would have decreased from $.26 to $.25.
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
October 14, 1996 to stockholders of record on October 4, 1996.
G. SUPPLEMENTARY CASH FLOW INFORMATION
-----------------------------------
Cash paid for interest and taxes is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
December 28, December 30,
1996 1995
------------ ------------
<S> <C> <C>
Interest (net of
amount capitalized) $ 9,192,257 $ 7,983,527
Income taxes 1,888,448 3,047,300
</TABLE>
10
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Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED DECEMBER 28, 1996 COMPARED
WITH THE THREE MONTHS ENDED DECEMBER 30, 1995
---------------------------------------------
NET SALES
- ---------
Net sales for the three month period ended December 28, 1996 increased $23.7
million, to $381.1 million, up 6.6% over sales of $357.4 million a year ago.
Growth in identical store sales (grocery stores open for the entire duration of
the previous fiscal year) was 1.5%.
The strong gain in sales was driven by the opening of new stores this year and
last year and the expansion, remodel and/or replacement of existing stores
during the prior and current fiscal years. During the period from October 1,
1995 through December 28, 1996, nine new stores were opened, nine older stores
were expanded, remodeled and/or replaced and one older store was closed. Sales
also benefited from 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 techniques.
At December 28, 1996, the Company operated 190 supermarkets in six states:
North Carolina (59), South Carolina (28), Georgia (76), Tennessee (23),
Virginia (3) and Alabama (1).
GROSS PROFIT
Gross profit for the period was $90.9 million, or 23.9% of sales, compared with
$82.4 million, or 23.0% of sales, last year - an increase of 10.4%. 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. Produce
and frozen food gross profit, as a percentage of sales, improved due to better
merchandising and effective purchasing and pricing programs.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses, as a percentage of sales, increased from
19.3% last year to 19.9% this year. The cost of labor at store level,
depreciation and amortization expense, taxes and licenses and repairs and
maintenance, as a percentage of sales, increased. The increase in depreciation
and amortization expense results from the Company's aggressive new store
opening, expansion, remodel and/or replacement program last year and this year.
RENTAL INCOME, NET
Rental income, net was $1.0 million last year - $1.3 million this year. The
increase is due to an increase in gross rental income, $.4 million, net of
increased expenses, $.1 million, associated with the operation of shopping
centers.
11
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INCOME FROM OPERATIONS
Income from operations for the period was $16.4 million, or 4.3% of sales,
compared to $14.3 million, or 4.0% of sales, a year ago - an increase of 14.7%.
The increase in operating income is due to the increase in sales, the related
increase in gross profit and the increase in net rental income.
OTHER INCOME, NET
Other income, net decreased $.3 million. Fiscal 1996 includes gains of $.5
million on the sale of two outparcels of land located adjacent to shopping
centers owned by the Company. Other miscellaneous income in fiscal 1997
increased $.2 million.
INCOME BEFORE INTEREST AND INCOME TAXES
Income before interest and income taxes rose 12.2% - from $14.9 million last
year to $16.7 million this year.
INTEREST EXPENSE
Interest expense increased from $7.2 million last year to $8.1 million this
year due to an overall increase in debt levels to fund the Company's aggressive
capital expenditure program.
INCOME BEFORE INCOME TAXES
Income before income taxes was $8.6 million, or 2.2% of sales, this year
compared with $7.6 million, or 2.1% of sales, the prior year.
INCOME TAXES
Income tax expense, as a percentage of pre-tax income, was 38.6% this
year - 38.0% last year.
INCOME BEFORE EXTRAORDINARY ITEM
Income before the extraordinary item increased 11.3%, to $5.3 million, or 1.4%
of sales this year, compared with $4.7 million, or 1.3% of sales, the prior
year. Primary earnings per common share before the extraordinary item
increased from $.26 last year to $.27 this year.
EXTRAORDINARY ITEM - EARLY EXTINGUISHMENT OF DEBT
(NET OF INCOME TAX BENEFIT)
On December 6, 1996, the Company announced its intention to redeem all its
outstanding Convertible Subordinated Debentures (the "Debentures") on January
20, 1997. The holders of the Debentures had the right to convert their
debentures into shares of the Company's Class A Common Stock at $11.10 per
share before the close of business on January 16, 1997. During the quarter
ended December 28, 1996, approximately $14.1 million of the Debentures were
converted into approximately 1.3 million shares of Class A Common Stock. The
unamortized loan cost associated with the early extinguishment of this debt
(net of the income tax benefit) was $.2 million.
12
<PAGE> 13
NET INCOME
Net income for the period ended December 28, 1996 was $5.0 million compared
with $4.7 million last year while primary earnings per common share was $.26 in
both fiscal years.
FINANCIAL CONDITION
- -------------------
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Net cash provided by operating activities for the three month period ended
December 28, 1996 totalled $10.3 million. Net income for the period was $5.0
million and depreciation and amortization expense was $9.2 million. Accounts
payable and accrued expenses decreased $2.5 million, receivables increased $2.0
million and inventory decreased $1.4 million. The recognition of advance
payments on purchases contracts was $1.5 million.
Accounts payable-trade, excluding non-cash additions of property and equipment
of $4.8 million and $6.0 million at December 28, 1996 and September 28, 1996,
respectively, remained basically unchanged. Salaries, wages and bonuses
payable were $3.2 million less, the income tax benefit from the exercise of
stock options was $1.2 million and other accrued expenses decreased $.5
million. Salaries, wages and bonuses payable were less due to the payment of
annual bonuses accrued at September 28, 1996. The increase in receivables is
primarily due to an increase in rebates and allowances due from suppliers.
INVESTING ACTIVITIES
Net cash used by investing activities - primarily expenditures for capital
assets - was $25.9 million. The Company's capital expenditure program was
devoted primarily to obtaining land for new store locations, the construction
of new facilities, the renovation, modernization and/or expansion of existing
stores and the installation of electronic scanning systems in seven stores. A
portion of these expenditures were for new stores, store expansions, remodels
and/or replacements expected to become operational in fiscal 1998.
FINANCING ACTIVITIES
Net cash provided by financing activities totalled $16.3 million. Proceeds
from the issuance of long-term debt aggregated $35.0 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 of long-term debt were $18.7 million. The Company paid cash dividends
of $2.8 million. Proceeds from the exercise of stock options were $2.8
million.
FINANCIAL STRENGTH
At December 28, 1996, the Company remained in sound financial condition. Total
assets were $724.8 million and stockholders' equity was $195.3 million compared
with $708.0 million and $175.0 million, respectively, at year-end, September
28, 1996. Favorable inventory turnover rates (cost of
13
<PAGE> 14
sales/inventory on an annualized basis) in 1997 of 9.1 helped generate cash
flow from operations; return on assets (income before the extraordinary
item/total assets annualized) was 2.9% and return on investment (income before
the extraordinary item/average stockholders' equity annualized) was 11.4%.
CAPITAL REQUIREMENTS
The Company's new store opening, expansion, remodeling and/or replacement plans
are continually reviewed and are subject to change. The Company's ability to
open new stores and expand, remodel and/or replace existing stores is subject
to several factors, including the acquisition of satisfactory sites and the
successful negotiation of new leases, and may be effected by zoning and other
governmental regulation.
During the period ended December 28, 1996, two new stores were opened and two
older stores were replaced. During the balance of fiscal 1997, the Company
expects to open seven new stores, perform minor remodels ("face-lifts") at seven
existing store locations and remodel and/or replace four older stores.
Additional capital expenditures will be made to: (1) upgrade and replace
existing store equipment, (2) install electronic scanning systems in new and
existing stores and (3) secure sites for future store expansion. Fiscal 1997
capital expenditures, in the aggregate, are expected to be approximately $100
million. Some of the expenditures that will be incurred during the fiscal year
will relate to assets that will be placed in service in fiscal 1998.
FINANCIAL RESOURCES
At December 28, 1996, the Company had lines of credit with seven banks
totalling $121 million; of this amount $27 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 $230 million
which is available to collateralize additional debt.
On December 6, 1996, the Company announced its intention to redeem all its
outstanding Debentures on January 20, 1997. The holders of the Debentures had
the right to convert their Debentures into shares of the Company's Class A
Common Stock at $11.10 per share before the close of business on January 16,
1997.
During the quarter ended December 28, 1996, approximately $14.1 million of the
Debentures were converted into approximately 1.3 million shares of Class A
Common Stock. The unamortized loan cost associated with the early
extinguishment of this debt (net of the income tax benefit) was $.2 million.
Additional Debentures totalling approximately $22.6 million were converted into
approximately 2.0 million shares of Class A Common Stock from December 29, 1996
through January 16, 1997. The remaining outstanding Debentures ($.8 million)
were redeemed at 101.8% of the face value plus accrued interest on January 20,
1997. Approximately $.4 million of additional unamortized loan costs and
redemption premium (net of the income tax
14
<PAGE> 15
benefit) will be included as an extraordinary item in the statement of income
for the three month period that will end on March 29, 1997.
The Company believes, based on its current results of operations and financial
condition, that the financial resources available, including amounts available
under long-term financing arrangements, existing bank lines of credit and
internally generated funds, will be sufficient to meet planned capital
expenditures and working capital requirements for the foreseeable future,
including any debt servicing required by additional borrowings. The Company
believes that its current new store opening, expansion, remodel and/or
replacement program will not have a material adverse effect on the availability
of these financial resources or on the sufficiency of these resources for the
purpose described. There can be no assurance, however, that the Company's
results of operations and financial condition will not change in the future
based on a number of intangible factors. These factors may include, among
others, increased competition, changing regional and national economic
conditions, adverse climatic conditions affecting food production and delivery
and changing demographics. In addition, for such reasons, there can be no
assurance that the results of operations from the new, expanded, remodeled
and/or replacement stores will meet or exceed the results of operations of
existing stores.
QUARTERLY CASH DIVIDENDS
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.
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 71% 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.
15
<PAGE> 16
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 period ended December 28,
1996, decreased .04%.
IMPACT OF INFLATION
Inflation in food prices during calendar years 1996, 1995 and 1994 continued to
be lower than the overall increase in the Consumer Price Index. Ingles primary
costs, inventory and labor, increase with inflation. Recovery of these costs
has to come from improved operating efficiencies and, to the extent possible,
through improved gross margins.
Part II. Other Information.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are 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. The Company filed a Form 8-K on December
6, 1996 concerning the Company's intent to redeem its
Convertible Subordinated Debentures on January 20, 1997.
16
<PAGE> 17
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: February 10, 1997 /s/ Robert P. Ingle
----------------------------
Robert P. Ingle
Chairman of the Board and
Chief Executive Officer
Date: February 10, 1997 /s/ Jack R. Ferguson
----------------------------
Jack R. Ferguson
Vice President-Finance and
Chief Financial Officer
17
<PAGE> 1
EXHIBIT 11
INGLES MARKETS, INCORPORATED
----------------------------
AND SUBSIDIARIES
----------------
COMPUTATION OF EARNINGS PER COMMON SHARE *
------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
DECEMBER 28, DECEMBER 30,
1996 1995
------------ ------------
<S> <C> <C>
PRIMARY:
Income before extraordinary item $ 5,256,653 $ 4,722,116
Extraordinary item-early extinguishment
of debt (net of income tax benefit) (211,159) -
------------ ------------
Net income $ 5,045,494 $ 4,722,116
============ ============
Shares
Weighted average number of common shares
and common stock equivalent shares
outstanding 19,378,023 18,353,052
============ ============
Primary earnings per common share before
extraordinary item $ .27 $ .26
Extraordinary item-early extinguishment
of debt (.01) -
------------ ------------
Primary earnings per common share $ .26 $ .26
============ ============
FULLY DILUTED:
Income before extraordinary item $ 5,256,653 $ 4,722,116
Add after tax and bonus effect of interest
expense applicable to Convertible
Subordinated Debentures 354,815 514,739
------------ ------------
Fully diluted earnings before extraordinary
item 5,611,468 5,236,855
Extraordinary item-early extinguishment
of debt (net of income tax benefit) (211,159) -
------------ ------------
Fully diluted earnings $ 5,400,309 $ 5,236,855
============ ============
Shares
Weighted average number of common
shares and common stock equivalent
shares outstanding 19,378,023 18,409,234
Additional shares assuming conversion
of Convertible Subordinated Debentures 2,763,272 3,374,685
------------ ------------
Weighted average number of common
shares outstanding as adjusted 22,141,295 21,783,919
============ ============
Fully diluted earnings per common share
before extraordinary item $ .25 $ .24
Extraordinary item-early extinguishment
of debt (.01) -
------------ ------------
Fully diluted earnings per common share $ .24 $ .24
============ ============
</TABLE>
* See note B of the notes to unaudited interim financial statements.
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED DECEMBER 28, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-START> SEP-29-1996
<PERIOD-END> DEC-28-1996
<CASH> 23,088,604
<SECURITIES> 0
<RECEIVABLES> 17,314,105
<ALLOWANCES> 116,761
<INVENTORY> 126,979,074
<CURRENT-ASSETS> 171,286,105
<PP&E> 759,419,655
<DEPRECIATION> 213,625,995
<TOTAL-ASSETS> 724,848,805
<CURRENT-LIABILITIES> 160,445,528
<BONDS> 346,171,497
0
0
<COMMON> 988,775
<OTHER-SE> 194,308,427
<TOTAL-LIABILITY-AND-EQUITY> 724,848,805
<SALES> 381,115,510
<TOTAL-REVENUES> 383,599,400
<CGS> 290,188,391
<TOTAL-COSTS> 291,341,652
<OTHER-EXPENSES> (279,697)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,116,084
<INCOME-PRETAX> 8,556,653
<INCOME-TAX> 3,300,000
<INCOME-CONTINUING> 5,256,653
<DISCONTINUED> 0
<EXTRAORDINARY> (211,159)
<CHANGES> 0
<NET-INCOME> 5,045,494
<EPS-PRIMARY> .26
<EPS-DILUTED> .24
</TABLE>
