1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 -------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . ---------------- ------------------ Commission file number 0-14706. INGLES MARKETS, INCORPORATED ------------------------------------------------ (Exact name of registrant as specified in its charter) North Carolina 56-0846267 ---------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 6676, Asheville, NC 28816 ------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (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 May 8, 2001, the Registrant had 9,942,401 shares of Class A Common Stock, $.05 par value per share, outstanding and 12,635,338 shares of Class B Common Stock, $.05 par value per share, outstanding. 1
2 INGLES MARKETS, INCORPORATED INDEX <TABLE> <S> <C> Part I - Financial Information Page No. Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets March 31, 2001 and September 30, 2000 ............................ 3 Condensed Consolidated Statements of Income Three Months Ended March 31, 2001 and March 25, 2000 ............. 5 Six Months Ended March 31, 2001 and March 25, 2000 ............... 6 Condensed Consolidated Statements of Changes in Stockholders' Equity Six Months Ended March 31, 2001 and March 25, 2000 ............... 7 Condensed Consolidated Statements of Cash Flows Six Months Ended March 31, 2001 and March 25, 2000 ............... 8 Notes to Unaudited Interim Financial Statements ....................... 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................... 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk .......... 20 Part II - Other Information Item 4. Submission of Matters to a Vote of Security Holders ................. 21 Item 6. Exhibits and Reports on Form 8-K .................................... 21 Signatures ..................................................................... 22 </TABLE> 2
3 Part I. Financial Information Item 1. FINANCIAL STATEMENTS INGLES MARKETS, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS <TABLE> <CAPTION> MARCH 31, SEPTEMBER 30, 2001 2000 (UNAUDITED) (NOTE) ------------- ------------- <S> <C> <C> CURRENT ASSETS: Cash $ 12,194,945 $ 11,176,013 Receivables 26,535,356 21,569,530 Inventories 176,038,402 179,396,630 Refundable income taxes 4,650,690 1,250,000 Other 1,337,841 6,188,703 ------------ ------------ Total Current Assets 220,757,234 219,580,876 PROPERTY AND EQUIPMENT - Net 713,655,774 702,472,344 OTHER ASSETS 4,087,599 5,712,592 ------------ ------------ TOTAL ASSETS $938,500,607 $927,765,812 ============ ============ </TABLE> NOTE: The balance sheet at September 30, 2000 has been derived from the audited financial statements at that date. See notes to unaudited interim financial statements. 3
4 INGLES MARKETS, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (CONCLUDED) LIABILITIES AND STOCKHOLDERS' EQUITY <TABLE> <CAPTION> MARCH 31, SEPTEMBER 30, 2001 2000 (UNAUDITED) (NOTE) ------------ -------------- <S> <C> <C> CURRENT LIABILITIES: Short-term loans and current portion of long-term debt $152,901,252 $ 59,776,013 Accounts payable, accrued expenses and current portion of other long-term liabilities 119,198,699 137,745,877 ------------ ------------ Total Current Liabilities 272,099,951 197,521,890 DEFERRED INCOME TAXES 35,114,578 35,514,578 LONG-TERM DEBT 392,884,442 455,861,173 OTHER LONG-TERM LIABILITIES 5,726,426 6,729,921 ------------ ------------ TOTAL LIABILITIES 705,825,397 695,627,562 ------------ ------------ 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; 9,941,951 shares issued and outstanding March 31, 2001; 9,932,614 shares issued and outstanding September 30, 2000 497,098 496,631 Class B, $.05 par value; 100,000,000 shares authorized; 12,635,788 shares issued and outstanding March 31, 2001; 12,645,125 shares issued and outstanding September 30, 2000 631,789 632,256 Paid-in capital in excess of par value 97,943,633 97,943,633 Retained earnings 133,602,690 133,065,730 ------------ ------------ Total Stockholders' Equity 232,675,210 232,138,250 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $938,500,607 $927,765,812 ============ ============ </TABLE> NOTE: The balance sheet at September 30, 2000 has been derived from the audited financial statements at that date. See notes to unaudited interim financial statements. 4
5 INGLES MARKETS, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED ----------------------------------- MARCH 31, MARCH 25, 2001 2000 ------------ ------------- <S> <C> <C> Net sales $475,166,870 $ 465,139,031 Cost of goods sold 349,808,108 346,458,172 ------------ ------------- Gross profit 125,358,762 118,680,859 Operating and administrative expenses 112,014,649 104,600,052 Rental income, net 2,742,601 2,380,761 ------------ ------------- Income from operations 16,086,714 16,461,568 Other income, net 662,000 4,044,775 ------------ ------------- Income before interest and income taxes 16,748,714 20,506,343 Interest expense 11,638,408 10,113,136 ------------ ------------- Income before income taxes 5,110,306 10,393,207 ------------ ------------- Income taxes: Current 1,760,000 4,550,000 Deferred 200,000 (550,000) ------------ ------------- 1,960,000 4,000,000 ------------ ------------- Net income $ 3,150,306 $ 6,393,207 ============ ============= Per share amounts: Basic earnings per common share $ 0.14 $ 0.28 ============ ============= Diluted earnings per common share $ 0.14 $ 0.28 ============ ============= Cash dividends per common share: Class A Common Stock $ 0.165 $ 0.165 ------------ ------------- Class B Common Stock $ 0.150 $ 0.150 ------------ ------------- </TABLE> See notes to unaudited interim financial statements. 5
6 INGLES MARKETS, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> SIX MONTHS ENDED ----------------------------------- MARCH 31, MARCH 25, 2001 2000 ------------ ------------- <S> <C> <C> Net sales $979,861,664 $ 933,539,232 Cost of goods sold 725,938,409 697,512,433 ------------ ------------- Gross profit 253,923,255 236,026,799 Operating and administrative expenses 225,113,328 207,511,619 Rental income, net 5,298,359 4,612,614 ------------ ------------- Income from operations 34,108,286 33,127,794 Other income, net 804,447 4,987,965 ------------ ------------- Income before interest and income taxes 34,912,733 38,115,759 Interest expense 22,704,435 19,816,085 ------------ ------------- Income before income taxes 12,208,298 18,299,674 ------------ ------------- Income taxes: Current 3,400,000 7,700,000 Deferred 1,200,000 (700,000) ------------ ------------- 4,600,000 7,000,000 ------------ ------------- Net income $ 7,608,298 $ 11,299,674 ============ ============= Per share amounts: Basic earnings per common share $ 0.34 $ 0.50 ============ ============= Diluted earnings per common share $ 0.34 $ 0.50 ============ ============= Cash dividends per common share: Class A Common Stock $ 0.33 $ 0.33 ------------ ------------- Class B Common Stock $ 0.30 $ 0.30 ------------ ------------- </TABLE> See notes to unaudited interim financial statements. 6
7 INGLES MARKETS, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) SIX MONTHS ENDED MARCH 31, 2001 AND MARCH 25, 2000 <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 25, 1999 9,786,491 $489,324 12,691,248 $ 634,563 $96,898,633 $ 126,099,336 $ 224,121,856 Net income -- -- -- -- -- 11,299,674 11,299,674 Cash dividends -- -- -- -- -- (7,053,670) (7,053,670) Exercise of stock options 100,000 5,000 -- -- 1,045,000 -- 1,050,000 Common stock conversions 42,048 2,103 (42,048) (2,103) -- -- -- --------- -------- ----------- --------- ----------- ------------- ------------- Balance, March 25, 2000 9,928,539 $496,427 12,649,200 $ 632,460 $97,943,633 $ 130,345,340 $ 229,417,860 ========= ======== =========== ========= =========== ============= ============= Balance, September 30, 2000 9,932,614 $496,631 12,645,125 $ 632,256 $97,943,633 $ 133,065,730 $ 232,138,250 Net income -- -- -- -- -- 7,608,298 7,608,298 Cash dividends -- -- -- -- -- (7,071,338) (7,071,338) Common stock conversions 9,337 467 (9,337) (467) -- -- -- --------- -------- ----------- --------- ----------- ------------- ------------- BALANCE, MARCH 31, 2001 9,941,951 $497,098 12,635,788 $ 631,789 $97,943,633 $ 133,602,690 $ 232,675,210 ========= ======== =========== ========= =========== ============= ============= </TABLE> See notes to unaudited interim financial statements. 7
8 INGLES MARKETS, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> SIX MONTHS ENDED --------------------------------- MARCH 31, MARCH 25, 2001 2000 ------------ ------------ <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 7,608,298 $ 11,299,674 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense 22,280,261 21,505,148 Amortization of deferred gain on sale/leasebacks (597,929) (531,629) Loss (gains) on disposals of property and equipment 161,466 (2,487,662) Receipt of advance payments on purchases contracts 575,000 2,977,224 Recognition of advance payments on purchases contracts (1,938,751) (2,465,680) Deferred income taxes 1,200,000 (700,000) (Increase) decrease in receivables (3,715,826) 2,879,430 Decrease in inventory 3,358,228 335,407 (Increase) decrease in other assets (1,816,950) 105,479 Decrease in accounts payable and accrued expenses (18,198,158) (8,295,128) ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 8,915,639 24,622,263 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of property and equipment 1,851,282 6,547,033 Capital expenditures (34,369,375) (59,413,449) ------------ ------------ NET CASH (USED) BY INVESTING ACTIVITIES (32,518,093) (52,866,416) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 34,343,287 50,053,573 Proceeds from short-term borrowings, net 35,000,000 30,000,000 Proceeds from sale/leaseback transactions 1,544,217 -- Principal payments on long-term debt (39,194,780) (42,866,188) Proceeds from exercise of stock options -- 1,050,000 Dividends paid (7,071,338) (7,053,670) ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 24,621,386 31,183,715 ------------ ------------ NET INCREASE IN CASH 1,018,932 2,939,562 Cash at beginning of period 11,176,013 13,959,751 ------------ ------------ CASH AT END OF PERIOD $ 12,194,945 $ 16,899,313 ============ ============ </TABLE> See notes to unaudited interim financial statements. 8
9 INGLES MARKETS, INCORPORATED AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS Six Months Ended March 31, 2001 and March 25, 2000 A. BASIS OF PREPARATION In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments necessary to present fairly the Company's financial position as of March 31, 2001, and the results of operations, changes in stockholders' equity and cash flows for the three month and six month periods ended March 31, 2001 and March 25, 2000. 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 2000 Annual Report on Form 10-K filed by the Company under the Securities Exchange Act of 1934 on December 20, 2000. The results of operations for the three month and six month periods ended March 31, 2001 are not necessarily indicative of the results to be expected for the full fiscal year. Certain amounts for the three month and six month periods ended March 25, 2000 have been reclassified for comparative purposes. B. ALLOWANCE FOR DOUBTFUL ACCOUNTS Receivables are presented net of an allowance for doubtful accounts of $335,945 and $256,630 at March 31, 2001 and September 30, 2000, 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> MARCH 31, September 30, 2001 2000 ------------ ------------ <S> <C> <C> Accounts payable-trade $ 71,127,162 $ 87,359,538 Property, payroll, and other taxes payable 9,147,093 12,557,199 Salaries, wages and bonuses payable 9,743,113 10,328,643 Self-insurance reserves 6,509,622 6,296,217 Accrued litigation settlement 6,083,480 7,049,407 Other 16,588,229 14,154,873 ------------ ------------ $119,198,699 $137,745,877 ============ ============ </TABLE> Self-insurance reserves are established for workers' compensation and employee group medical and dental benefits based on claims filed and estimates of 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 9
10 year. Employee insurance expense, including workers' compensation and medical care benefits, net of employee contributions, totaled $4.2 million and $4.4 million for the three month periods ended March 31, 2001 and March 25, 2000, respectively. For the six month periods ended March 31, 2001 and March 25, 2000, employee insurance expense totaled $7.9 million and $8.3 million, respectively. D. LONG-TERM DEBT During the six month period ended March 31, 2001, the Company obtained $34.3 million in long-term funding secured by real estate and equipment. In addition, the Company obtained $35.0 million in net advances on 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 The Company paid cash dividends of $.165 for each share of Class A Common Stock and $.15 for each share of Class B Common Stock on January 17, 2001 and on October 11, 2000 to stockholders of record on January 8, 2001, and October 2, 2000, respectively. F. SUPPLEMENTARY CASH FLOW INFORMATION Cash paid for interest and taxes is as follows: <TABLE> <CAPTION> SIX MONTHS ENDED ------------------------------ MARCH 31, March 25, 2001 2000 ----------- ----------- <S> <C> <C> Interest (net of amount capitalized) $22,798,649 $19,668,798 Income taxes 741,250 4,432,728 </TABLE> 10
11 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 ----------------------------- MARCH 31, March 25, 2001 2000 ----------- ----------- <S> <C> <C> BASIC: Net income $ 3,150,306 $ 6,393,207 =========== =========== Weighted average number of common shares outstanding 22,577,739 22,577,739 =========== =========== Basic earnings per common share $ .14 $ .28 =========== =========== DILUTED: Net income $ 3,150,306 $ 6,393,207 =========== =========== Weighted average number of common shares and common stock equivalent shares outstanding 22,893,544 22,614,803 =========== =========== Diluted earnings per common share $ .14 $ .28 =========== =========== </TABLE> The following table sets forth the computation of basic and diluted earnings per share for the six month period indicated: <TABLE> <CAPTION> SIX MONTHS ENDED ----------------------------- MARCH 31, March 25, 2001 2000 ----------- ----------- <S> <C> <C> BASIC: Net income $ 7,608,298 $11,299,674 =========== =========== Weighted average number of common shares outstanding 22,577,739 22,548,618 =========== =========== Basic earnings per common share $ .34 $ .50 =========== =========== DILUTED: Net income $ 7,608,298 $11,299,674 =========== =========== Weighted average number of common shares and common stock equivalent shares outstanding 22,759,212 22,559,599 =========== =========== Diluted earnings per common share $ .34 $ .50 =========== =========== </TABLE> 11
12 H. LINES OF BUSINESS The Company operates three lines of business: retail grocery sales, shopping center rentals, and a fluid dairy processing plant. All of the company's operations are domestic. Information about the Company's operations by lines of business (in thousands) is as follows: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED ---------------------- ---------------------- MARCH 31, March 25, MARCH 31, March 25, 2001 2000 2001 2000 --------- --------- --------- --------- <S> <C> <C> <C> <C> Revenues from unaffiliated customers: Grocery sales $ 453,827 $ 447,818 $ 939,068 $ 898,096 Shopping center rentals 4,132 3,976 8,075 7,816 Fluid dairy 21,340 17,321 40,794 35,443 --------- --------- --------- --------- Total revenues from unaffiliated customers $ 479,299 $ 469,115 $ 987,937 $ 941,355 ========= ========= ========= ========= Income from operations: Grocery sales $ 11,170 $ 12,235 $ 24,583 $ 25,336 Shopping center rentals 2,742 2,381 5,298 4,613 Fluid dairy 2,174 1,846 4,227 3,179 --------- --------- --------- --------- Total income from operations $ 16,086 $ 16,462 $ 34,108 $ 33,128 ========= ========= ========= ========= </TABLE> <TABLE> <CAPTION> MARCH 31, September 30, 2001 2000 ----------- ------------ <S> <C> <C> Assets: Grocery sales $ 783,983 $ 777,431 Shopping center rentals 126,211 123,672 Fluid dairy 28,307 26,663 ----------- ------------ Total assets $ 938,501 $ 927,766 =========== ============ </TABLE> Revenue from shopping center rentals is reported on the rental income, net line of the income statements. The other revenues comprise the net sales reported. For the three months ended March 31, 2001 and March 25, 2000, respectively, the fluid dairy segment has $10.9 and $11.1 million in sales to the grocery sales segment. The fluid dairy segment has $22.5 and $22.9 million in sales to the grocery sales segment in the six months ended March 31, 2001 and March 25, 2000, respectively. These sales have been eliminated in consolidation. 12
13 I. NEW ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board issued "Statement No. 133" Accounting for Derivative Instruments and Hedging Activities, which was amended by "Statement No. 138" Accounting for Certain Derivative Instruments and Hedging Activities issued in June 2000. The Statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company does not typically utilize derivative financial instruments. The adoption of "Statement No. 133," as amended by "Statement No. 138," on October 1, 2000 resulted in no effect on the Company's earnings or financial position. 13
14 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Ingles, a leading supermarket chain in the Southeast, operates 207 supermarkets in Georgia (84), North Carolina (63), South Carolina (31), Tennessee (25), Virginia (3) and Alabama (1). The Company locates its supermarkets primarily in suburban areas, small towns and rural communities. 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. There are 13 and 26 weeks of operations included in the unaudited condensed consolidated statements of income for the three and six-month periods ended March 31, 2001 and March 25, 2000. Comparable store sales are defined as sales by grocery stores in operation for the entire 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. 14
15 The following table sets forth, for the periods indicated, selected financial information as a percentage of net sales. For information regarding the various segments of the business, reference is made to Note H "Lines of Business" to the Unaudited Consolidated Financial Statements. <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED -------------------------------------------------- MARCH 31, March 25, MARCH 31, March 25, 2001 2000 2001 2000 -------------------------------------------------- <S> <C> <C> <C> <C> Net sales 100.0% 100.0% 100.0% 100.0% Gross profit 26.4% 25.5% 25.9% 25.3% Operating and administrative expenses 23.6% 22.5% 23.0% 22.2% Rental income, net 0.6% 0.5% 0.6% 0.5% Other income, net 0.1% 0.9% 0.1% 0.5% Income before interest and income taxes 3.5% 4.4% 3.6% 4.1% Interest expense 2.4% 2.2% 2.3% 2.1% Income before income taxes 1.1% 2.2% 1.3% 2.0% Income taxes 0.4% 0.8% 0.5% 0.8% Net income 0.7% 1.4% 0.8% 1.2% EBITDA margin(1) 5.9% 6.8% 5.8% 6.4% </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. 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. THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE THREE MONTHS ENDED MARCH 25, 2000 Net Sales Net sales for the three months ended March 31, 2001 increased 2.2% to $475.2 million, compared to $465.1 million for the three months ended March 25, 2000. In the second quarter of fiscal 2000, Ingles experienced an unusually heavy sales week during the first week of the quarter as a result of the Y2K scare. Excluding that week, sales growth was 3.2% for the second quarter of fiscal 2001. Comparable store sales growth was 2.6% for the three month 2001 period. Gross Profit Gross profit for the quarter ended March 31, 2001 increased 5.6% to 26.4% of sales compared to 25.5% of sales for the second quarter last year. The improvement, as a percentage of sales, results from a combination of increased sales in the expanded higher margin perishable departments, and effective product management. 15
16 Operating and Administrative Expenses Operating and administrative expenses for the quarter ended March 31, 2001 increased 7.1% to 23.6% of sales compared to 22.5% of sales for the second quarter last year. Payroll costs in the current tight labor market, rental of new store equipment and increased utility costs were the primary factors in the increase. A breakdown of the major increases in operating and administrative expenses, expressed as a percentage of sales, is as follows: <TABLE> <S> <C> Payroll 0.5% Equipment rent expense 0.3% Utilities 0.2% </TABLE> Rental Income, Net Rental income, net increased $0.4 million for the March 2001 quarter over the comparable period in fiscal 2000. Gross rental income increased $0.2 million, while shopping center expenses (primarily depreciation) decreased $0.2 million. Other Income, Net Other income, net declined $3.4 million for the March 2001 quarter over the comparable period in fiscal 2000. Other income for the March 2000 quarter includes gains on the sale of assets of $2.5 million. The sale of assets includes a shopping center in which the land, building and equipment were sold. Ingles is no longer operating a supermarket at that location. The balance of the decrease resulted primarily from a decline in the proceeds of vendor accounts payable audits. Interest Expense Interest expense increased $1.5 million to $11.6 million for the three months ended March 31, 2001 from $10.1 million for the three months ended March 25, 2000. Interest expense rose primarily due to the cost of capital expansion. Income Taxes Income tax expense, as a percentage of pre-tax income, remained fairly constant at 38.4% in the March 2001 quarter compared to 38.5% in the March 2000 quarter. Net Income Net income for the March 2001 quarter was $3.2 million, or 0.7% of sales, compared to $6.4 million, or 1.4% of sales, for the March 2000 quarter. The decrease, as a percentage of sales, is due primarily to the rise in operating expenses and decline in other income. Basic and diluted earnings per common share were $.14 for the March 2001 quarter compared to $.28 for the March 2000 quarter. 16
17 SIX MONTHS ENDED MARCH 31, 2001 COMPARED TO THE SIX MONTHS ENDED MARCH 25, 2000 Net Sales Net sales for the six months ended March 31, 2001 increased 5.0% to $979.9 million, compared to $933.5 million for the six months ended March 25, 2000. Comparable store sales increased 4.1% for such period. Marketing efforts in all media, community involvement and the improvement of store conditions all had a positive effect on sales. Also the maturation of new stores and increased sales from remodeled and replacement stores contributed to the increase. Gross Profit Gross profit for the six months ended March 31, 2001 increased 7.6% to $253.9 million, or 25.9% of sales, compared to $236.0 million, or 25.3% of sales, for the six months ended March 25, 2000. Increased sales distribution in the higher margin perishable departments, as well as effective purchasing and promotional strategies, accounted for the increase. Operating and Administrative Expenses Operating and administrative expenses increased 8.5% to $225.1 million for the six months ended March 31, 2001, from $207.5 million for the six months ended March 25, 2000. As a percentage of sales, operating and administrative expenses increased to 23.0% for the March 2001 six-month period from 22.2% for the same period last year. A breakdown of the major increases in operating and administrative expenses, expressed as a percentage of sales, is as follows: <TABLE> <S> <C> Payroll 0.4% Equipment rent expense 0.2% Utilities 0.2% </TABLE> Rental Income, Net Rental income, net increased $0.7 million for the March 2001 six month period over the comparable period in fiscal 2000. Gross rental income increased $0.3 million, while shopping center expenses (primarily depreciation) decreased $0.4 million. Other Income, Net Other income, net declined $4.2 million for the March 2001 six month period over the comparable period in fiscal 2000. Other income for the March 2000 six month period includes gains on the sale of assets of $2.5 million. The sale of assets in fiscal 2000 included a shopping center in which the land, building and equipment were sold. Ingles is no longer operating a supermarket at that location. The balance of the decrease resulted primarily from a decline in the proceeds of vendor accounts payable audits. 17
18 Interest Expense Interest expense increased $2.9 million to $22.7 million for the six months ended March 31, 2001 from $19.8 million for the six months ended March 25, 2000. Interest expense rose primarily due to the cost of capital expansion. Capital expenditures for the six month period ended March 31, 2001 were $34.4 million, including costs for stores that will become operational during the balance of fiscal 2001. Ingles completed the opening of one new store, replacement of one older store, the major remodel/expansion of one store and minor remodeling of two stores, during the March 2001 six month period. During the balance of this fiscal year Ingles plans to open four replacement stores, two new stores, complete two more major remodel/expansions and four minor remodels. Income Taxes Income tax expense as a percentage of pre-tax income decreased to 37.7% in the March 2001 six-month period compared to 38.3% in the March 2000 six month period. The decrease is primarily attributable to higher state income taxes in the March 2000 six-month period. Net Income Net income for the March 2001 six-month period was $7.6 million, or 0.8% of sales, compared to $11.3 million, or 1.2% of sales, for the March 2000 six-month period. Basic and diluted earnings per common share were $.34 for the March 2001 six-month period compared to $.50 for the March 2000 six-month period. 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 $34.4 million for the six months ended March 25, 2001, including expenditures related to the opening of one new store, replacement of one older store, the major remodel/expansion of one store and minor remodeling of two stores - all of which were completed during the six-month period. Capital expenditures also included costs related to new stores to be opened and remodels to be completed during the balance of fiscal 2001 and in fiscal 2002, 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. During the balance of this fiscal year Ingles plans to open four replacement stores, two new stores, complete two more major remodel/expansions and four minor remodels. Ingles capital expenditure plans for the balance of fiscal year 2001 include investments of approximately $40 million. 18
19 Liquidity The Company generated $8.9 million of cash from operations for the six months ended March 31, 2001. Cash used by investing activities totaled $32.5 million. The primary use of this cash was the $34.4 million of capital expenditures during the period, which were partially offset by $1.9 million of net 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 March 2001 six-month period, the Company's financing activities provided $24.6 million in cash, the net result of dividend payments and long- and short-term borrowings. Proceeds from long-term debt totaled $34.3 million, while payments on long-term debt were $39.2 million. Proceeds from short-term borrowings, net were $35.0 million. As of March 31, 2001 the Company had unencumbered real property and equipment with a net book value of approximately $220 million. At March 31, 2001, the Company had lines of credit with seven banks totaling $130.0 million; of this amount $47.8 million was unused. The $82.2 million outstanding under lines of credit at March 31, 2001 mature in fiscal years 2001 and 2002, however, the Company expects that it will be able to renew those commitments upon maturity. 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 was in compliance with all financial covenants related to these lines of credit at March 31, 2001. 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 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) 19
20 per share on its Class B Common Stock for an annual rate of $.66 and $.60 per share, respectively. 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 containing provisions providing minimum tangible net worth requirements restrict the ability of the Company to pay additional dividends to approximately $9.3 million, based on tangible net worth at March 31, 2001. 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 majority of the Company's properties are self-insured for casualty losses and business interruption, however liability coverage is maintained. 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 six months of fiscal 2001 and during fiscal 2000 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. Forward Looking Statements This Quarterly Report contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, relating to, among other things, capital expenditures, cost reduction, operating improvements and expected results. The words "expect", "anticipate", "intend", "plan", "believe", "seek" and similar expressions are intended to identify forward-looking statements. 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 been no material changes regarding the Company's market risk position from the information provided in Form 10-K for the fiscal year ended September 30, 2000. 20
21 Part II. Other Information. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders of Ingles Markets, Incorporated was held Tuesday, February 13, 2001. The only matter submitted to a vote of the stockholders at this meeting was the election of nine directors for the ensuing year. John O. Pollard and J. Alton Wingate were elected by the holders of Class A Common Stock by the following vote: (a) Mr. Pollard: 8,940,252 votes for, 140,087 votes withheld, 0 abstentions and 0 broker nonvotes and (b) Mr. Wingate: 8,939,031 votes for, 141,308 votes withheld, 0 abstentions and 0 broker nonvotes. Robert P. Ingle, Vaughn C. Fisher, Anthony S. Federico, Ralph H. Gardner, Robert P. Ingle, II, Laura Ingle Sharp and Brenda S. Tudor were elected by the holders of Class B Common Stock by the following vote: (a) Mr. Robert P. Ingle: 10,310,069 votes for, 0 votes withheld, 0 abstentions and 0 broker nonvotes; (b) Mr. Fisher: 10,310,069 votes for, 0 votes withheld, 0 abstentions and 0 broker nonvotes; (c) Mr. Federico: 10,309,319 votes for, 750 votes withheld, 0 abstentions and 0 broker nonvotes; (d) Mr. Gardner: 10,310,069 votes for, 0 votes withheld, 0 abstentions and 0 broker nonvotes; (e) Mr. Robert P. Ingle, II: 10,309,319 votes for, 750 votes withheld, 0 abstentions and 0 broker nonvotes; (f) Ms. Sharp: 10,310,069 votes for, 0 votes withheld, 0 abstentions and 0 broker nonvotes; (g) Ms. Tudor: 10,310,069 votes for, 0 votes withheld, 0 abstentions and 0 broker nonvotes. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. None. (b) Reports on Form 8-K. There were no reports on Form 8-K filed by the Company for the quarter ended March 31, 2001. 21
22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused the report to be signed on its behalf by the undersigned thereunto duly authorized. INGLES MARKETS, INCORPORATED Date: May 14, 2001 /s/ Robert P. Ingle -------------------------------------- Robert P. Ingle Chairman of the Board and Chief Executive Officer Date: May 14, 2001 /s/ Brenda S. Tudor -------------------------------------- Brenda S. Tudor Vice President-Finance and Chief Financial Officer 22