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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 27, 1997
-----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
----------------------- ----------------------
Commission File Number 0-14706
INGLES MARKETS, INCORPORATED
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
North Carolina 56-0846267
- --------------------------------- ------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
</TABLE>
P.O. Box 6676, Asheville, NC 28816
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(704) 669-2941
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(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 February 2, 1998, the registrant had 9,077,666 shares of Class A Common
Stock, $.05 par value per share, and 12,788,073 shares of Class B Common Stock,
$.05 par value per share, outstanding.
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INGLES MARKETS, INCORPORATED
INDEX
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Page No.
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Part I - Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -
December 27, 1997 and
September 27, 1997 3
Consolidated Statements of Income -
Three Months Ended
December 27, 1997 and
December 28, 1996 5
Consolidated Statements of Changes in
Stockholders' Equity
Three Months Ended
December 27, 1997 and
December 28, 1996 6
Consolidated Statements of Cash Flows -
Three Months Ended
December 27, 1997 and
December 28, 1996 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 17
Signatures 18
Exhibits
11 Computation of Earnings Per Common Share 19
</TABLE>
2
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Part I. Financial Information
Item 1. Financial Statements
INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
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<CAPTION>
DECEMBER 27, SEPTEMBER 27,
1997 1997
(UNAUDITED) (NOTE)
------------ --------------
CURRENT ASSETS
<S> <C> <C>
Cash $ 24,664,750 $ 25,389,386
Receivables 20,713,052 15,571,536
Inventories 141,758,248 141,259,929
Refundable income taxes 1,500,000 2,400,000
Other 4,497,033 3,786,873
------------ ------------
TOTAL CURRENT ASSETS 193,133,083 188,407,724
PROPERTY AND EQUIPMENT - Net 638,649,242 606,362,801
OTHER ASSETS 8,222,042 7,812,188
------------ ------------
TOTAL ASSETS $840,004,367 $802,582,713
============ ============
</TABLE>
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
CONSOLIDATED BALANCE SHEETS (CONCLUDED)
LIABILITIES AND STOCKHOLDERS' EQUITY
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<CAPTION>
DECEMBER 27, SEPTEMBER 27,
1997 1997
(UNAUDITED) (NOTE)
------------ -------------
<S> <C> <C>
CURRENT LIABILITIES
Short-term loans and current
portion of long-term liabilities $ 85,778,670 $ 58,776,976
Accounts payable and accrued
expenses 110,192,213 99,346,604
------------ ------------
TOTAL CURRENT LIABILITIES 195,970,883 158,123,580
DEFERRED INCOME TAXES 27,069,578 26,434,578
LONG-TERM LIABILITIES 394,410,225 395,042,113
------------ ------------
TOTAL LIABILITIES 617,450,686 579,600,271
------------ ------------
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; 9,075,666
shares issued and outstanding
December 27, 1997; 9,058,441 shares
issued and outstanding
September 27, 1997 453,783 452,922
Class B, $.05 par value; 100,000,000
shares authorized; 12,788,073
shares issued and outstanding
December 27, 1997; 12,788,298 shares
issued and outstanding
September 27, 1997 639,404 639,415
Paid-in capital in excess of
par value 91,068,017 90,924,742
Retained earnings 130,392,477 130,965,363
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 222,553,681 222,982,442
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $840,004,367 $802,582,713
============ ============
</TABLE>
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
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED
------------------------------
DECEMBER 27, DECEMBER 28,
1997 1996
------------ -----------
<S> <C> <C>
NET SALES $403,048,256 $381,115,510
COST OF GOODS SOLD 305,527,353 290,188,391
------------ ------------
GROSS PROFIT 97,520,903 90,927,119
OPERATING AND ADMINISTRATIVE
EXPENSES 85,486,779 75,864,708
RENTAL INCOME, NET 1,429,209 1,330,629
------------ ------------
INCOME FROM OPERATIONS 13,463,333 16,393,040
OTHER INCOME, NET 201,267 279,697
------------ ------------
INCOME BEFORE INTEREST
AND INCOME TAXES 13,664,600 16,672,737
INTEREST EXPENSE 9,049,595 8,116,084
------------ ------------
INCOME BEFORE INCOME TAXES 4,615,005 8,556,653
------------ ------------
INCOME TAXES:
Current 1,740,000 2,600,000
Deferred 35,000 700,000
------------ ------------
1,775,000 3,300,000
------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM 2,840,005 5,256,653
EXTRAORDINARY ITEM- EARLY EXTINGUISHMENT OF
DEBT (NET OF INCOME TAX BENEFIT) -- (211,159)
------------ ------------
NET INCOME $ 2,840,005 $ 5,045,494
============ ============
PER-SHARE AMOUNTS:
Earnings per common share:
Basic earnings per common share
before extraordinary item $ .13 $ .28
Extraordinary item - early extinguishment
of debt -- (.01)
------------ ------------
Basic earnings per common share $ .13 $ .27
============ ============
Diluted earnings per common share
before extraordinary item $ .13 $ .25
Extraordinary item-early extinguishment
of debt -- (.01)
------------ ------------
Diluted earnings per common share $ .13 $ .24
============ ============
Cash dividends per common share:
Class A $ .165 $ .165
------------ ------------
Class B $ .150 $ .150
------------ ------------
</TABLE>
See notes to unaudited interim financial statements.
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INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A CLASS B PAID-IN
COMMON STOCK COMMON STOCK CAPITAL IN
-------------------- ----------------------- EXCESS OF RETAINED
SHARES AMOUNT SHARES AMOUNT PAR VALUE EARNINGS TOTAL
--------- -------- ---------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
========= ======== ========== ======== =========== ============ ============
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............. -- -- -- -- -- 2,840,005 2,840,005
CASH DIVIDENDS......... -- -- -- -- -- (3,412,891) (3,412,891)
COMMON STOCK
CONVERSIONS........... 225 11 (225) (11) -- -- --
EXERCISE OF STOCK
OPTIONS............... 17,000 850 -- -- 143,275 -- 144,125
--------- -------- ---------- -------- ----------- ------------ ------------
BALANCE,
DECEMBER 27, 1997..... 9,075,666 $453,783 12,788,073 $639,404 $91,068,017 $130,392,477 $222,553,681
========= ======== ========== ======== =========== ============ ============
</TABLE>
See notes to unaudited interim financial statements.
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INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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<CAPTION>
THREE MONTHS ENDED
-------------------------------
DECEMBER 27, DECEMBER 28,
1997 1996
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 2,840,005 $ 5,045,494
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization expense 10,575,781 9,221,711
Recognition of advance payments on
purchases contracts (879,187) (1,523,037)
Losses (gains) on disposals of property
and equipment 13,496 (3,129)
Deferred income taxes 35,000 700,000
Extraordinary item-early extinguishment
of debt (net of income tax benefit) -- 211,159
Increase in receivables (4,231,951) (1,996,189)
(Increase) decrease in inventory (498,319) 1,385,361
Increase in other assets (596,489) (245,790)
Increase (decrease) in accounts payable
and accrued expenses 10,966,629 (2,538,990)
------------ ------------
Net Cash Provided by Operating Activities 18,224,965 10,256,590
------------ ------------
Cash Flows From Investing Activities:
Proceeds from sales of property and
equipment 599 90,007
Capital expenditures (42,890,427) (26,012,624)
------------ ------------
Net Cash (Used) by Investing Activities (42,889,828) (25,922,617)
------------ ------------
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt 24,500,000 35,029,934
Proceeds from short-term borrowings, net 16,000,000 --
Principal payments of long-term debt (13,251,007) (18,678,720)
Dividends paid (3,412,891) (2,792,361)
Proceeds from exercise of stock options 104,125 2,777,775
------------ ------------
Net Cash Provided By Financing Activities 23,940,227 16,336,628
------------ ------------
Net (Decrease) Increase in Cash (724,636) 670,601
Cash at Beginning of Period 25,389,386 22,418,003
------------ ------------
Cash at End of Period $ 24,664,750 $ 23,088,604
============ ============
</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 27, 1997
A. BASIS OF PREPARATION
In the opinion of management, the accompanying unaudited interim
financial statements contain all adjustments necessary to present
fairly the Company's financial position as of December 27, 1997, and
the results of operations, changes in stockholders' equity and cash
flows for the three months ended December 27, 1997 and December 28,
1996. The adjustments made are of a normal recurring nature. Certain
information and footnote disclosures normally included in the annual
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission for
Form 10-Q. It is suggested that these unaudited interim financial
statements be read in conjunction with the audited financial statements
and the notes thereto included in the 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 period ended December 27,
1997 are not necessarily indicative of the results to be expected for
the full fiscal year.
Certain amounts for the three month period ended December 28, 1996 have
been reclassified for comparative purposes.
B. EARNINGS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which has been adopted by the
Company and is reflected in its financial statements for the period
ended December 27, 1997. Statement No. 128 changed the method used to
compute 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. As a consequence of this change in the method of
calculation, primary earnings per share and fully diluted earnings per
share are now called basic and diluted earnings per share,
respectively. All per share amounts in the accompanying income
statements for all prior periods have been restated to conform to the
requirements of Statement No. 128.
Basic earnings per common share is computed by dividing consolidated
net income by the weighted average number of shares of common stock
outstanding during the period (21,854,003 and 18,885,719 for the three
month periods ended December 27, 1997 and December 28, 1996,
respectively).
Diluted earnings per common share gives effect to the dilutive common
stock equivalent shares outstanding during the period and 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 diluted earnings per common share were 22,156,556 and
22,141,295 for the three month periods ended December 27, 1997 and
December 28, 1996, respectively.
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C. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Receivables are presented net of an allowance for doubtful accounts of
$112,431 and $113,726 at December 27, 1997 and September 27, 1997,
respectively.
D. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 27, September 27,
1997 1997
------------ --------------
<S> <C> <C>
Accounts payable-trade $ 81,631,702 $ 67,219,567
Property, payroll, and
other taxes payable 8,628,223 9,678,603
Salaries, wages and
bonuses payable 6,269,880 9,700,404
Self-insurance reserves 4,480,000 4,400,000
Other 9,182,408 8,348,030
------------ -------------
$110,192,213 $ 99,346,604
============ =============
</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
$2,253,569 and $2,017,982 for the three months ended December 27,1997
and December 28, 1996, respectively.
E. LONG-TERM LIABILITIES
During the three month period ended December 27, 1997, the Company
obtained advances totalling $24.5 million under two long-term bank
lines of credit maturing in 1999 at an interest rate less than prime
rate. The proceeds of the loans were used to reduce short-term debt, to
fund capital expenditures and for general corporate purposes.
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 month period 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) relating
to the converted Debentures are included as an extraordinary item in
the accompanying statement of income for the three month period 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
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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) was included as an extraordinary item
in the statement of income for the three month period that ended on
March 29, 1997.
F. DIVIDENDS
The Company paid cash dividends of $.165 for each share of Class A
Common Stock and $.15 for each share of Class B Common Stock on October
13, 1997 to stockholders of record on October 3, 1997.
G. SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for interest and taxes is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
December 27, December 28,
1997 1996
------------ -------------
<S> <C> <C>
Interest (net of
amount capitalized) $ 8,895,960 $ 9,192,257
Income taxes 566,000 1,888,448
</TABLE>
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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 27, 1997 COMPARED
WITH THE THREE MONTHS ENDED DECEMBER 28, 1996
NET SALES
Net sales for the 13 week period ended December 27, 1997 increased $21.9
million, to $403.0 million, up 5.8% over sales of $381.1 million for the similar
13 week period last year. Approximately 56.1% of the dollar increase in sales
resulted from an increase in grocery sales - 37.2% from increased sales in the
perishable departments. The balance of the dollar increase in sales resulted
from increases in video department sales and sales of the Company's wholly-owned
subsidiary, Milkco, Inc. Identical store sales (grocery stores open for the
entire duration of the previous fiscal year) increased .12%. The solid increase
in identical store sales the Company experienced during the first few weeks of
the period softened during the latter two thirds. Sales growth overall was
impacted by competition, low food price inflation (estimated to be less than
1%), and the absence of any new store openings or major remodels. During the
period, the Company replaced one existing store.
The Company plans to continue to focus on ways to grow its business.
Programs are in place to accomplish this objective such as: providing top-notch
customer service every day, aggressive competitive pricing and advertising
programs, expanded variety and opening exciting new and remodeled stores.
GROSS PROFIT
Gross profit for the period was $97.5 million, or 24.2% of sales, compared
with $90.9 million, or 23.9% of sales, last year - an increase of 7.3%.
A larger percentage of sales came from higher margin perishable
departments, increasing gross profit overall. Grocery gross profit, as a
percentage of sales, improved because of aggressive purchasing, pricing and
merchandising programs, good promotional strategy, better product mix and strong
private label sales. Meat and produce gross profit, as a percentage of sales,
improved due to good merchandising and aggressive purchasing and pricing
programs.
By increasing its business in areas that produce higher profit margins,
namely food service sales, the Company's wholly-owned subsidiary, Milkco, Inc.,
was able to increase its gross margin substantially.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses, as a percentage of sales, increased
from 19.9% last year to 21.2% this year. The cost of labor at store level,
depreciation and amortization expense, repairs and maintenance, advertising and
promotional expenditures, taxes and licenses and utilities, as a percentage of
sales, increased.
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To ensure the Company remained competitive and in order to attract and
retain good qualified personnel, the wage structure at store level was revamped
in April 1997. In addition, the Federal minimum wage increased from $4.75 to
$5.15 per hour on September 1, 1997. Depreciation and amortization expense was
more because of the Company's aggressive capital expenditure program this year
and last year. Increases in refrigeration repairs, sanitation, lighting and
refrigerant caused repairs and maintenance to go up.
A Company goal for the balance of fiscal 1998 is to reduce operating and
administrative expenses, as a percentage of sales. The Company believes that
increased sales volume combined with a renewed emphasis on decreasing and/or
controlling critical expense items and improving productivity will help achieve
this goal.
RENTAL INCOME, NET
Rental income, net increased from $1.3 million last year to $1.4 million
this year. The increase is due to an increase in gross rental income, $.2
million, net of increased expense, $.1 million, associated with the remodeling
and operation of shopping centers.
INCOME FROM OPERATIONS
Income from operations was $13.5 million, or 3.3% of sales, compared to
$16.4 million, or 4.3% of sales, a year ago. The decrease in operating income is
mainly due to the increase in operating and administrative expenses, net of the
improvement in gross profit.
OTHER INCOME, NET
Other income, net was $.2 million this year - $.3 million last year.
INCOME BEFORE INTEREST AND INCOME TAXES
Income before interest and income taxes was $13.7 million, or 3.4% of
sales, this year compared to $16.7 million, or 4.4% of sales, last year.
INTEREST EXPENSE
Interest expense increased from $8.1 million in 1997 to $9.0 million in
1998 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 $4.6 million, or 1.1% of sales this year
compared with $8.6 million, or 2.2% of sales, last year.
INCOME TAXES
The provision for income taxes yielded an effective tax rate of 38.5% this
year - 38.6% last year.
INCOME BEFORE EXTRAORDINARY ITEM
Income before the extraordinary item (discussed below) was $2.8 million
in fiscal 1998 - $5.3 million the prior year. Diluted earnings per
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common share before the extraordinary item decreased from $.25 last year to
$.13 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 period 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.
NET INCOME
Net income for the period was $2.8 million, or .7% of sales, compared to
$5.0 million, or 1.3% of sales, last year. Basic earnings per common share were
$.27 last year - $.13 this year; diluted earnings per common share were $.24
last year versus $.13 this year.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Net cash provided by operating activities for the three month period ended
December 27, 1997 totalled $18.2 million. Net income for the period was $2.8
million and depreciation and amortization expense was $10.6 million. Receivables
increased $4.2 million. Accounts payable and accrued expenses increased $11.0
million. The recognition of advance payments on purchases contracts was $.9
million.
The increase in receivables is principally the result of an increase in
rebates and allowances due from suppliers.
Accounts payable - trade, excluding non-cash additions of property and
equipment of $6.8 million and $6.9 million at December 27, 1997 and September
27, 1997, respectively, increased $14.5 million. The increase in accounts
payable - trade was principally due to delayed payments resulting from the
Christmas holiday period. Certain other payable categories also increased.
Property, payroll and other taxes payable decreased $1.1 million. Salaries,
wages and bonuses payable were $3.4 million less due to the payment of annual
bonuses accrued September 27, 1997.
INVESTING ACTIVITIES
Net cash used by investing activities - primarily expenditures for capital
assets - was $42.9 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 18 stores. The
Company now has 176 scanning stores.
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Since January 1995, the Company has installed debit/credit card payment
systems in 173 stores providing the customer more ways to pay for their
groceries. Scanning and debit/credit card payment systems are installed in every
new and remodeled store. In addition, electronic benefit cards for government
entitlement programs are now accepted in several stores where the state has such
a program replacing traditional food stamps.
Most of the capital expenditures incurred during the first quarter of
fiscal 1998 were for new stores, store expansions, remodels and/or replacements
expected to become operational later in this fiscal year or in fiscal 1999.
FINANCING ACTIVITIES
Net cash provided by financing activities totalled $23.9 million. Proceeds
from the issuance of long-term debt aggregated $24.5 million. The proceeds of
this debt were used to reduce short-term borrowings outstanding under existing
bank lines of credit. Additional short-term debt was subsequently incurred to
pay for capital expenditures and for general corporate purposes. Proceeds from
short-term borrowings, net were $16.0 million. Principal payments on long-term
debt were $13.3 million. The Company paid cash dividends of $3.4 million.
FINANCIAL STRENGTH
At December 27, 1997, the Company remained in sound financial condition.
Total assets were $840.0 million and stockholders' equity was $222.6 million,
compared with $802.6 million and $223.0 million, respectively, at year-end,
September 27, 1997. Favorable inventory turnover rates (costs of sales/inventory
on an annualized basis) in 1998 of 8.6 helped generate cash flow from
operations.
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 affected by zoning and other
governmental regulation.
During the period ended December 27, 1997, one older store was replaced.
During the balance of fiscal 1998, the Company plans to open 7 new stores, and
expand, remodel and/or replace 7 existing stores.
Additional expenditures will be made to: (1) upgrade and replace existing
store equipment, (2) install electronic scanning systems and debit/credit card
payment systems in new and existing stores and (3) secure sites for future store
expansion. Fiscal 1998 capital expenditures, in total, 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 1999.
In January 1998, the Company entered into an Agreement (the "Agreement")
with Bruno's, Inc. an Alabama corporation ("Bruno's"), pursuant to which the
Company has the right to (a) acquire two shopping centers, (b) assume 11 leases,
including one ground lease, and (c) acquire all furniture,
14
<PAGE> 15
fixtures and equipment at each location. All locations are within the Company's
current market in the state of Georgia. Consummation of the transaction is
subject to certain conditions, including receipt of required regulatory and
other approvals. Plans for specific locations are being carefully evaluated and
developed but are not yet final. The 1998 new store opening and capital
expenditure plan, discussed above, does not encompass any expenditures which may
be incurred or any new stores which may be opened as a result of this
transaction.
Bruno's announced on February 2, 1998, that it and 11 subsidiaries had
filed for financial reorganization under Chapter 11 of the Federal Bankruptcy
Code in the U.S. Bankruptcy Court for the District of Delaware. Bruno's and its
subsidiaries continue to operate their businesses as debtors in possession.
Subject to Bankruptcy Court approval, Bruno's has the right to assume or reject
any contract that it entered into before Chapter 11 filing if Bruno's has not
yet performed its obligations under the contract. On February 2, 1998, Bruno's
filed a motion with the Bankruptcy Court requesting that Bruno's, as a debtor in
possession, be allowed to assume the Agreement and dispose of the assets which
are the subject of the Agreement. The Bankruptcy Court must approve, after
notice and a hearing, the assumption of the Agreement by Bruno's and its
disposition of assets to the Company.
FINANCIAL RESOURCES
At December 27, 1997, the Company had lines of credit with nine banks
totalling $137 million; of this amount $40.5 million was unused. The Company
monitors its cash position daily and makes draws or repayments on its lines of
credit. The lines provide the Company with various interest rate options
generally at rates less than prime. The Company is not required to maintain
compensating balances in connection with these lines of credit. The Company had
unencumbered property with a net book value of approximately $230 million which
is available to collateralize additional debt.
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 neither its current new store opening, expansion, remodel and/or
replacement program nor its proposed acquisition of properties from Bruno's Inc.
will have a material adverse effect on the availability of these financial
resources or on the sufficiency of these resources for the purposes described in
this report. However, it is possible that, in the future, the Company's results
of operations and financial condition will be different from that described in
this report 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. It is also possible for such reasons, that the
results of operations from the new, expanded, remodeled and/or replacement
stores will not meet or exceed the results of operations from existing stores
that are described in this report.
QUARTERLY CASH DIVIDENDS
Since December 27, 1993, the Company has paid regular quarterly cash
dividends of $.165 (sixteen and one-half cents) per share on its Class A Common
Stock and $.15 (fifteen cents) per share on its Class B Common Stock for an
annual rate of $.66 and $.60 per share, respectively.
15
<PAGE> 16
The Company expects to continue paying regular cash dividends on a
quarterly basis. However, the Board of Directors periodically reconsiders the
declaration of dividends. The Company pays these dividends at the discretion of
the Board of Directors and the continuation of these 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 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 one aircraft and $5 million liability insurance coverage on three
other 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 74% 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, was the same in fiscal
1998 and fiscal 1997.
IMPACT OF INFLATION
Inflation in food prices during calendar years 1997, 1996 and 1995
continued to be lower than the overall increase in the Consumer Price Index.
Ingles primary costs, inventory and labor, increase with inflation. Recovery of
these costs has to come from improved operating efficiencies and, to the extent
possible, through improved gross margins.
YEAR 2000
The Company has assessed key financial, informational and operational
systems. Management does not anticipate that the Company will encounter
significant operational issues related to Year 2000. Furthermore, the financial
impact of making required systems changes is not expected to be material to the
Company's consolidated financial position, results of operations or cash flows.
FORWARD LOOKING STATEMENTS
This Quarterly Report contains certain forward-looking statements relating
to, among other things, capital expenditures, cost reduction, operating
improvements and expected results. Such statements are subject to inherent risks
and uncertainties including among others: business and
16
<PAGE> 17
economic conditions generally in the Company's operating area; pricing pressures
and other competitive factors; results of the Company's programs to reduce costs
and achieve improvements in operating results; and the availability and terms of
financing. Consequently, actual events affecting the Company and the impact of
such events on the Company's operations may vary significantly from those
described in this report or contemplated or implied by statements in this
report.
Part II. Other Information.
<TABLE>
<CAPTION>
Item 6. Exhibits and Reports on Form 8-K
<S> <C>
(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 December 27, 1997.
</TABLE>
17
<PAGE> 18
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 9, 1998 /s/ Robert P. Ingle
------------------------------
Robert P. Ingle
Chairman of the Board and
Chief Executive Officer
Date: February 9, 1998 /s/ Jack R. Ferguson
------------------------------
Jack R. Ferguson
Vice President-Finance and
Chief Financial Officer
18
<PAGE> 1
EXHIBIT 11
INGLES MARKETS, INCORPORATED
AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE *
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
DECEMBER 27, DECEMBER 28,
1997 1996
------------ ------------
<S> <C> <C>
BASIC:
Income before extraordinary item $ 2,840,005 $ 5,256,653
Extraordinary item-early extinguishment
of debt (net of income tax benefit) - (211,159)
------------ ------------
Net income $ 2,840,005 $ 5,045,494
============ ============
Shares
Weighted average number common shares
outstanding 21,854,003 18,885,719
============ ============
Basic earnings per common share before
extraordinary item $ .13 $ .28
Extraordinary item-early extinguishment
of debt - (.01)
------------ ------------
Basic earnings per common share $ .13 $ .27
============ ============
DILUTED:
Income before extraordinary item $ 2,840,005 $ 5,256,653
Add after tax and bonus effect of interest
expense applicable to Convertible
Subordinated Debentures - 354,815
------------ ------------
Diluted earnings before extraordinary
item 2,840,005 5,611,468
Extraordinary item-early extinguishment
of debt (net of income tax benefit) - (211,159)
------------ ------------
Diluted earnings $ 2,840,005 $ 5,400,309
============ ============
Shares
Weighted average number of common
shares and common stock equivalent
shares outstanding 22,156,556 19,378,023
Additional shares assuming conversion
of Convertible Subordinated Debentures - 2,763,272
------------ ------------
Weighted average number of common
shares outstanding as adjusted 22,156,556 22,141,295
============ ============
Diluted earnings per common share
before extraordinary item $ .13 $ .25
Extraordinary item-early extinguishment
of debt - (.01)
------------ ------------
Diluted earnings per common share $ .13 $ .24
============ ============
</TABLE>
* See note B of the notes to unaudited interim financial statements.
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INGLES
MARKETS, INCORPORATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED DECEMBER
27, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-26-1998
<PERIOD-START> SEP-28-1997
<PERIOD-END> DEC-27-1997
<CASH> 24,664,750
<SECURITIES> 0
<RECEIVABLES> 22,325,483
<ALLOWANCES> 112,431
<INVENTORY> 141,758,248
<CURRENT-ASSETS> 193,133,083
<PP&E> 889,270,514
<DEPRECIATION> 250,621,272
<TOTAL-ASSETS> 840,004,367
<CURRENT-LIABILITIES> 195,970,883
<BONDS> 394,410,225
0
0
<COMMON> 1,093,187
<OTHER-SE> 221,460,494
<TOTAL-LIABILITY-AND-EQUITY> 840,004,367
<SALES> 403,048,256
<TOTAL-REVENUES> 405,700,431
<CGS> 305,527,353
<TOTAL-COSTS> 306,750,319
<OTHER-EXPENSES> (201,267)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,049,595
<INCOME-PRETAX> 4,615,005
<INCOME-TAX> 1,775,000
<INCOME-CONTINUING> 2,840,005
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,840,005
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
