<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 26, 1998
-----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
----------------- -------------------
Commission File Number 0-14706.
-------
INGLES MARKETS, INCORPORATED
------------------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-0846267
-------------------------------- ---------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
P.O. Box 6676, Asheville, NC 28816
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(828) 669-2941
---------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO .
--- ---
As of February 1, 1999, the registrant had 9,604,441 shares of Class A Common
Stock, $.05 par value per share, and 12,773,298 shares of Class B Common Stock,
$.05 par value per share, outstanding.
1
<PAGE> 2
INGLES MARKETS, INCORPORATED
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I - Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
December 26, 1998 and September 26, 1998 3
Condensed Consolidated Statements of Income
Three Months Ended December 26, 1998 and December 27, 1997 5
Condensed Consolidated Statements of Changes in Stockholders' Equity
Three Months Ended December 26, 1998 and December 27, 1997 6
Condensed Consolidated Statements of Cash Flows
Three Months Ended December 26, 1998 and December 27, 1997 7
Notes to Unaudited Interim Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
2
<PAGE> 3
Part I. Financial Information
Item 1. Financial Statements
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 26, SEPTEMBER 26,
1998 1998
(UNAUDITED) (NOTE)
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 19,896,307 $ 19,121,409
Receivables 25,342,158 20,671,972
Inventories 154,746,943 151,222,136
Refundable income taxes -- 1,000,000
Other 5,323,027 4,023,916
------------ ------------
Total Current Assets 205,308,435 196,039,433
PROPERTY AND EQUIPMENT - Net 663,103,121 661,772,182
OTHER ASSETS 4,644,332 4,975,350
------------ ------------
TOTAL ASSETS $873,055,888 $862,786,965
============ ============
</TABLE>
NOTE: The balance sheet at September 26, 1998 has been derived from the
audited financial statements at that date.
See notes to unaudited interim financial statements.
3
<PAGE> 4
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONCLUDED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 26, SEPTEMBER 26,
1998 1998
(UNAUDITED) (NOTE)
------------ -------------
<S> <C> <C>
CURRENT LIABILITIES:
Short-term loans and current portion of $115,860,566 $ 55,759,283
long-term debt
Accounts payable, accrued expenses and
current portion of other long-term liabilities 119,227,923 121,209,027
------------ ------------
Total Current Liabilities 235,088,489 176,968,310
DEFERRED INCOME TAXES 24,434,578 24,934,578
LONG-TERM DEBT 379,776,489 427,414,169
OTHER LONG-TERM LIABILITIES 14,847,932 15,234,165
------------ ------------
TOTAL LIABILITIES 654,147,488 644,551,222
------------ ------------
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; 9,599,941 shares issued
and outstanding December 26, 1998;
9,581,641 shares issued and outstanding
September 26, 1998 479,997 479,082
Class B, $.05 par value; 100,000,000 shares
authorized; 12,777,798 shares issued
and outstanding December 26, 1998;
12,784,098 shares issued and outstanding
September 26, 1998 638,890 639,205
Paid-in capital in excess of par value 95,866,133 95,765,167
Retained earnings 121,923,380 121,352,289
------------ ------------
Total Stockholders' Equity 218,908,400 218,235,743
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $873,055,888 $862,786,965
============ ============
</TABLE>
NOTE: The balance sheet at September 26, 1998 has been derived from the
audited financial statements at that date.
See notes to unaudited interim financial statements.
4
<PAGE> 5
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------
DECEMBER 26, DECEMBER 27,
1998 1997
------------- ------------
<S> <C> <C>
Net sales $ 453,341,284 $403,048,256
Cost of goods sold 342,753,517 305,527,353
------------- ------------
Gross profit 110,587,767 97,520,903
Operating and administrative expenses 96,254,140 85,486,779
Rental income, net 2,171,088 1,429,209
------------- ------------
Income from operations 16,504,715 13,463,333
Other income, net 403,079 201,267
------------- ------------
Income before interest and income taxes 16,907,794 13,664,600
Interest expense 10,438,115 9,049,595
------------- ------------
Income before income taxes 6,469,679 4,615,005
------------- ------------
Income taxes:
Current 3,500,000 1,740,000
Deferred (1,100,000) 35,000
------------- ------------
2,400,000 1,775,000
------------- ------------
Net income $ 4,069,679 $ 2,840,005
============= ============
Per-share amounts:
Basic earnings per common share $ .18 $ .13
============= ============
Diluted earnings per common share $ .18 $ .13
============= ============
Cash dividends per common share:
Class A $ .165 $ .165
------------- ------------
Class B $ .150 $ .150
------------- ------------
</TABLE>
See notes to unaudited interim financial statements.
5
<PAGE> 6
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED DECEMBER 26, 1998 AND DECEMBER 27, 1997
<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 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)
Exercise of stock
options 17,000 850 -- -- 143,275 -- 144,125
Common stock
conversions 225 11 (225) (11) -- -- --
--------- -------- ----------- --------- ----------- ------------- -------------
Balance,
December 27, 1997 9,075,666 $453,783 12,788,073 $ 639,404 $91,068,017 $ 130,392,477 $ 222,553,681
========= ======== =========== ========= =========== ============= =============
Balance,
September 26, 1998 9,581,641 $479,082 12,784,098 $ 639,205 $95,765,167 $ 121,352,289 $ 218,235,743
Net income -- -- -- -- -- 4,069,679 4,069,679
Cash dividends -- -- -- -- -- (3,498,588) (3,498,588)
Exercise of stock
options 12,000 600 -- -- 100,966 -- 101,566
Common stock
conversions 6,300 315 (6,300) (315) -- -- --
--------- -------- ----------- --------- ----------- ------------- -------------
BALANCE,
DECEMBER 26, 1998 9,599,941 $479,997 12,777,798 $ 638,890 $95,866,133 $ 121,923,380 $ 218,908,400
========= ======== =========== ========= =========== ============= =============
</TABLE>
See notes to unaudited interim financial statements.
6
<PAGE> 7
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------
DECEMBER 26, DECEMBER 27,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,069,679 $ 2,840,005
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization expense 10,601,974 10,575,781
Deferred gain sale/leaseback (178,304) --
(Gain) loss on disposals of property
& equipment (204,638) 13,496
Receipt of advance payments on
purchase contracts 1,848,750 --
Recognition of advance payments on
purchase contracts (746,318) (879,187)
Deferred income taxes (1,100,000) 35,000
Increase in receivables (3,659,840) (4,231,951)
Increase in inventory (3,524,807) (498,319)
Increase in other assets (451,425) (596,489)
(Decrease) increase in accounts payable (805,664) 10,966,629
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,849,407 18,224,965
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and
equipment 221,825 599
Capital expenditures (14,362,915) (42,890,427)
------------ ------------
NET CASH (USED) BY INVESTING ACTIVITIES (14,141,090) (42,889,828)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 26,000,000 24,500,000
Proceeds from short-term borrowings, net -- 16,000,000
Principal payments of long-term debt (13,536,397) (13,251,007)
Proceeds from exercise of stock options 101,566 104,125
Dividends paid (3,498,588) (3,412,891)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,066,581 23,940,227
------------ ------------
NET INCREASE (DECREASE) IN CASH 774,898 (724,636)
Cash at Beginning of Period 19,121,409 25,389,386
------------ ------------
CASH AT END OF PERIOD $ 19,896,307 $ 24,664,750
============ ============
</TABLE>
See notes to unaudited interim financial statements.
7
<PAGE> 8
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
Three Months Ended December 26, 1998 and 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 26, 1998, and the results of operations,
changes in stockholders' equity and cash flows for the three month periods ended
December 26, 1998 and December 27, 1997. The adjustments made are of a normal
recurring nature. Certain information and footnote disclosures normally included
in the annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission for Form 10-Q.
It is suggested that these unaudited interim financial statements be read in
conjunction with the audited financial statements and the notes thereto included
in the 1998 Annual Report on Form 10-K filed by the Company under the Securities
Exchange Act of 1934 on December 21, 1998.
The results of operations for the three month period ended December 26, 1998 are
not necessarily indicative of the results to be expected for the full fiscal
year.
Certain amounts for the three month period ended December 27, 1997 have been
reclassified for comparative purposes.
B. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Receivables are presented net of an allowance for doubtful accounts of $182,637
and $158,643 at December 26, 1998 and September 26, 1998, respectively.
C. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND CURRENT PORTION OF OTHER
LONG-TERM LIABILITIES
Accounts payable, accrued expenses and current portion of other long-term
liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 26, September 26,
1998 1998
------------ ------------
<S> <C> <C>
Accounts payable-trade $ 80,181,141 $ 82,057,508
Property, payroll, and other taxes payable 10,625,900 11,304,982
Salaries, wages and bonuses payable 6,983,267 9,613,336
Self-insurance reserves 4,690,000 4,600,000
Other 16,747,615 13,633,201
------------ ------------
$119,227,923 $121,209,027
============ ============
</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
8
<PAGE> 9
covered person for medical care benefits for a policy year. Employee insurance
expense, including workers' compensation and medical care benefits, net of
employee contributions, totaled $3.4 million and $2.3 million for the three
month periods ended December 26, 1998 and December 27, 1997, respectively.
D. LONG-TERM DEBT
During the three month period ended December 26, 1998, the Company obtained $26
million in advances on long-term lines of credit at interest rates less than the
prime rate. The proceeds of the loans were used to fund capital expenditures and
for general corporate purposes.
E. DIVIDENDS
On October 12, 1998, 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 to
stockholders of record on October 2, 1998.
F. SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for interest and taxes is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------
DECEMBER 26, December 27,
1998 1997
----------- ------------
<S> <C> <C>
Interest (net of amount capitalized) $10,122,548 $8,895,960
Income taxes 1,098,613 566,000
</TABLE>
G. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
DECEMBER 26, December 27,
1998 1997
------------ -----------
<S> <C> <C>
BASIC:
Net income $ 4,069,679 $ 2,840,005
=========== ===========
Shares
Weighted average number of common shares
outstanding 22,371,453 21,854,003
=========== ===========
Basic earnings per common share $ .18 $ .13
=========== ===========
Diluted earnings $ 4,069,679 $ 2,840,005
=========== ===========
Shares
Weighted average number of common shares and
common stock equivalent shares outstanding 22,389,913 22,156,556
=========== ===========
Diluted earnings per common share $ .18 $ .13
=========== ===========
</TABLE>
9
<PAGE> 10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Ingles, a leading supermarket chain in the Southeast, operates 206 supermarkets
in Georgia (83), North Carolina (63), South Carolina (32), Tennessee (24),
Virginia (3) and Alabama (1). The Company locates its supermarkets primarily in
suburban areas, small towns and rural communities, where management believes the
market may be under-served by existing supermarkets. Ingles supermarkets offer
customers a wide variety of nationally advertised food products, including
grocery, meat and dairy products, produce, frozen foods and other perishables,
non-food products, including health and beauty care products and general
merchandise, as well as quality private label items. Within the markets it
serves, the Company has developed strong name recognition and a reputation for
combining low overall prices with high levels of customer service and
convenience. Real estate ownership is an important component of the Company's
operations, providing both operational and economic benefits.
RESULTS OF OPERATIONS
Ingles operates on a 52 or 53-week fiscal year ending on the last Saturday in
September. The unaudited condensed consolidated statements of income for the
three-month periods ended December 26, 1998 and December 27, 1997 both include
13 weeks of operations. Comparable store sales are defined as sales by grocery
stores in operation for the entire duration of the previous fiscal year.
Replacement stores and major and minor remodels are included in the comparable
store sales calculation. A replacement store is a new store that is opened to
replace an existing store that is closed nearby. A major remodel entails
substantial remodeling of an existing store and may include additional retail
square footage. A minor remodel includes repainting, remodeling and updating the
lighting and equipment throughout an existing store.
10
<PAGE> 11
The following table sets forth, for the periods indicated, selected financial
information as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------
DECEMBER 26, December 27,
1998 1997
-------------- --------------
<S> <C> <C>
Net sales 100.0% 100.0%
Gross profit 24.4% 24.2%
Operating and administrative
expenses 21.2% 21.2%
Rental income, net 0.4% 0.3%
Other income, net 0.1% 0.1%
Income before interest and
income taxes 3.7% 3.4%
Interest expense 2.3% 2.2%
Income before income taxes 1.4% 1.2%
Income taxes 0.5% 0.5%
Net income 0.9% 0.7%
EBITDA margin(1) 6.1% 6.0%
</TABLE>
--------------------------------------------
(1) EBITDA represents earnings before interest, income taxes, depreciation
and amortization, non-recurring charges and extraordinary items.
Management believes that EBITDA is a useful measure of operating
performance because it allows for a means of comparing Ingles with
other companies that operate supermarkets, many of which do not own
the real property on which the supermarkets are operated. EBITDA is
unaffected by the debt and equity structure of Ingles. EBITDA does not
represent cash flow from operations as defined by generally accepted
accounting principles (GAAP), is not necessarily indicative of cash
available to fund all cash flow needs and should not be considered as
an alternative to net income under GAAP for evaluating Ingles' results
of operations.
11
<PAGE> 12
THREE MONTHS ENDED DECEMBER 26, 1998 COMPARED TO THE THREE MONTHS ENDED DECEMBER
27, 1997
Net Sales
Net sales for the three months ended December 26, 1998 increased 12.5% to $453.3
million, compared to $403.0 million for the three months ended December 27,
1997. Comparable store sales increased 7.5%.
Sales increases were achieved through successful marketing efforts, as well as
from maturing new stores, remodeled stores and stores that have been replaced.
The 7.5% comparable store sales increase is the highest comparable store sales
increase the Company has experienced in eleven quarters.
Gross Profit
Gross profit for the three months ended December 26, 1998 increased 13.4% to
$110.6 million, or 24.4% of sales, compared to $97.5 million, or 24.2% of sales,
for the three months ended December 27, 1997. The improvement, as a percentage
of sales, results from increased sales in the expanded higher margin perishable
departments.
Operating and Administrative Expenses
Operating and administrative expenses increased 12.6% to $96.3 million for the
three months ended December 26, 1998, from $85.5 million, for the three months
ended December 27, 1997. However, operating and administrative expenses as a
percentage of sales remained constant at 21.2%. Decreases, as a percentage of
sales, in depreciation expense, salaries and wages and warehouse expense were
counterbalanced by increases, as a percentage of sales, in store equipment
rental and group insurance costs.
Depreciation expense, as a percentage of sales, decreased partially due to
increased sales. In addition, a $50 million sale/leaseback of store equipment in
September 1998 effectively reduced depreciation expense and interest expense and
increased store equipment rental expense. Salaries and wages, as a percentage of
sales, declined due to increased sales volumes and improved labor scheduling
efforts. Warehouse expenses, as a percentage of sales, declined due to economies
achieved from increased sales and lower diesel fuel costs.
Rental Income, Net
Rental income, net increased to $2.2 million for the December 1998 quarter from
$1.4 million for the December 1997 quarter. The improvement is a result of gross
rental income increases of $1.1 million, net of operating cost increases of $.3
million. The increase in gross rental income resulted primarily from the
purchase of seven shopping centers in fiscal 1998.
Other Income, Net
Other income, net increased $.2 million to $.4 million for the three months
ended December 26, 1998 from $.2 million for the three months ended December 27,
1997. The increase resulted primarily from income from an easement granted at
one of the Company's shopping centers.
12
<PAGE> 13
Interest Expense
Interest expense increased $1.4 million to $10.4 million for the three months
ended December 26, 1998 from $9.0 million for the three months ended December
27, 1997 mainly as a result of additional debt incurred to fund expansion and
renovation. Capital expenditures for the 1998 year totaled $155.9 million.
Capital expenditures for the December 1998 quarter were $14.4 million. The
Company has incurred additional costs in its ongoing efforts to open new stores
and modernize its existing store base. Retail square footage increased 10.4% to
8.3 million square feet at December 26, 1998 compared to 7.5 million square feet
at December 27, 1997.
Income Taxes
Income tax expense as a percentage of pre-tax income declined to 37.1% in the
December 1998 quarter compared to 38.5% in the December 1997 quarter, due
primarily to the Work Opportunity Tax Credit and lower state income taxes.
Net Income
Net income for the December 1998 quarter was $4.1 million, or .9% of sales,
compared to $2.8 million, or .7% of sales, for the December 1997 quarter. Basic
and diluted earnings per common share were $.18 for the December 1998 quarter
compared to $.13 for the December 1997 quarter.
LIQUIDITY AND CAPITAL RESOURCES
Capital Expenditures
The Company believes that a key to its ability to continue to develop a loyal
customer base is providing conveniently located, clean and modern stores which
provide customers with good service and a broad selection of competitively
priced products. As such, the Company has invested and will continue to invest
significant amounts of capital toward the modernization of its store base. The
Company's modernization program includes the opening of new stores, the
completion of major remodels and expansion of selected existing stores, the
relocation of selected existing stores to larger, more convenient locations and
the completion of minor remodeling of its remaining existing stores.
Capital expenditures totaled $14.4 million for the three months ended December
26, 1998, including expenditures related to the replacement of two older stores
and minor remodeling of six stores that were completed during the quarter.
Capital expenditures also included costs related to new stores to be opened and
remodels to be completed during the balance of fiscal 1999, as well as costs of
upgrading and replacing store equipment, technology investments, the purchase of
future store sites, and capital expenditures related to the Company's
distribution operation and its milk processing plant.
The Company plans to moderate its growth somewhat in 1999 and concentrate on
improving existing operations through modernized facilities and technology.
Ingles capital expenditure plans for fiscal year 1999 include investments of
approximately $75 million. The Company plans to open two new stores, complete
one major remodel and expansion of an existing store and perform minor remodels
of ten stores for the balance of fiscal 1999. Expenditures will also include
investments in stores to open in fiscal 2000 as well as technology improvements,
upgrading and replacing existing store
13
<PAGE> 14
equipment and warehouse and transportation equipment and improvements to the
Company's milk processing plant.
Liquidity
The Company generated $5.8 million of cash from operations for the three months
ended December 26, 1998. Increases of $3.6 million in receivables are the
product of vendor rebates resulting from higher sales volume.
Inventory increased $3.5 million to support the higher sales volume.
Cash used by investing activities totaled $14.1 million. The primary use of this
cash was the $14.4 million of capital expenditures during the period, which were
partially offset by $.2 million of proceeds from the sale of assets.
The Company generally funds its capital expenditures with cash provided from
operations and borrowings under lines of credit. The lines of credit are later
refinanced with secured long-term debt. During the December 1998 quarter, the
Company's financing activities provided $9.1 million in cash. Proceeds from
long-term debt totaled $26.0 million, while payments on long-term debt were
$13.5 million.
At December 26, 1998, the Company had lines of credit with eight banks totaling
$135.0 million; of this amount $29.0 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 finances its
expansion and renovation program primarily with cash provided from operations
and from borrowings under its credit facilities. The Company typically replaces
such financing, as necessary, with long-term financing secured by equipment and
real estate. As of September 26, 1998, the Company had unencumbered real
property and equipment with a net book value of approximately $229 million.
The Company's principal sources of liquidity are expected to be cash flow from
operations, borrowings under its lines of credit and long-term financing. The
Company believes, based on its current results of operations and financial
condition, that its financial resources, including existing bank lines of
credit, short- and long-term financing expected to be available to it and
internally generated funds, will be sufficient to meet planned capital
expenditures and working capital requirements for the foreseeable future,
including any debt service requirements of additional borrowings. However, there
can be no assurance that any such source of financing will be available to the
Company on acceptable terms, or at all.
In addition, 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 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.
14
<PAGE> 15
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. In addition, certain loan
agreements contain provisions restricting the ability of the Company to pay
dividends to approximately $17.3 million at December 26, 1998.
Self-Insurance
The Company is self-insured for workers' compensation and group medical and
dental benefits. Risks and uncertainties are associated with self-insurance;
however, the Company has limited its exposure by maintaining excess liability
coverages. Self-insurance reserves are established based on claims filed and
estimates of claims incurred but not reported. The estimates are based on data
provided by the respective claims administrators. The Company carries casualty
insurance only on those properties where it is required to do so. 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.
Impact of Inflation
Inflation in food prices during the first quarter of fiscal 1999 and during
fiscal 1998 continued to be lower than the overall increase in the Consumer
Price Index. One of the Company's significant costs is labor, which increases
with inflation.
Seasonality
Sales are slightly seasonal with higher volume in the summer months due to
increased sales by stores located in vacation and seasonal home areas.
Year 2000
The Company began assessing key financial, informational and operational systems
in 1996 to address the Year 2000 issue created because of date comparisons on
some computers and computer programs. Ingles is modifying its existing computer
software applications and installing new software and hardware to address this
issue. Ingles has made assessments at both the corporate level and the store
level and has appointed a project leader at both levels.
Changes to non-compliant corporate programs were begun in 1996 and have been
completed and tested. Costs of testing and upgrading at the corporate level have
been immaterial and have been expensed as incurred. As a part of an overall
technological upgrade at the store level to provide new and expanded
functionality, Ingles will be replacing equipment and software in its stores,
throughout the year 1999. The estimated costs of the new technology of
approximately $8 million will be capitalized as incurred and is included in the
capital budget for fiscal 1999. In addition to replacing store technology, other
expenditures will be required to make remaining hardware and software Year 2000
compliant. These expenditures, which the Company estimates will be approximately
$1 million, will be expensed as incurred. Ingles anticipates that the store
level technology upgrades will be completed by October 31, 1999.
15
<PAGE> 16
The Company is in the process of investigating the potential impact of the Year
2000 Issue on suppliers of goods and services to the Company and any related
impact on the Company and expects to be completed with this process by June 30,
1999.
The Company does not anticipate that it will encounter significant operational
issues related to the year 2000, however minimal disruptions may occur. If
system failures do occur, the most significant impact anticipated could be the
inability of the stores to process customer transactions, the inability of
vendors to supply timely delivery of inventory or loss of electric power. The
Company cannot assure that there will be no material adverse impact on the
Company if third parties do not appropriately address the Year 2000 issues. The
Company currently has no contingency plans in place in the event it does not
complete all phases of the Year 2000 plan. The Company plans to evaluate the
status of completion in March 1999 and determine whether such a plan is
necessary.
The above assessment is based on management's best estimates and may be updated
from time to time as additional information becomes available.
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 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have no material changes regarding the Company's market risk position from
the information provided in Form 10-K for the fiscal year ended September 26,
1998.
16
<PAGE> 17
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 27.1 - Financial Data Schedule for the period ended
December 26, 1998 (for SEC purposes only).
(b) Reports on Form 8-K. The Company filed a Form 8-K on November
13, 1998, in which it reported the settlement in principle of
pending litigation under Item 5, Other Events.
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 8, 1999 /s/ Robert P. Ingle
------------------------------------
Robert P. Ingle
Chairman of the Board and
Chief Executive Officer
Date: February 8, 1999 /s/ Brenda S. Tudor
------------------------------------
Brenda S. Tudor
Vice President-Finance and
Chief Financial Officer
18
<PAGE> 19
EXHIBIT INDEX
27.1 Financial Data Schedule (for SEC use only). (page 20)
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INGLES MARKETS, INCORPORATED FOR THE THREE MONTHS ENDED
DECEMBER 26, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-25-1999
<PERIOD-START> SEP-27-1998
<PERIOD-END> DEC-26-1998
<CASH> 19,896,307
<SECURITIES> 0
<RECEIVABLES> 25,524,795
<ALLOWANCES> 182,637
<INVENTORY> 154,746,943
<CURRENT-ASSETS> 205,308,435
<PP&E> 943,653,795
<DEPRECIATION> 280,550,674
<TOTAL-ASSETS> 873,055,888
<CURRENT-LIABILITIES> 235,088,489
<BONDS> 379,776,489
0
0
<COMMON> 1,118,887
<OTHER-SE> 217,789,513
<TOTAL-LIABILITY-AND-EQUITY> 873,055,888
<SALES> 453,341,284
<TOTAL-REVENUES> 457,070,513
<CGS> 342,753,517
<TOTAL-COSTS> 344,311,658
<OTHER-EXPENSES> (403,079)
<LOSS-PROVISION> 24,000
<INTEREST-EXPENSE> 10,438,115
<INCOME-PRETAX> 6,469,679
<INCOME-TAX> 2,400,000
<INCOME-CONTINUING> 4,069,679
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,069,679
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
