UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 29, 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 Identification No.) incorporation or organization) P.O. Box 6676, Asheville, NC 28816 - ---------------------------------------- ------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (828) 669-2941 ------------------------------------ Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered - ----------------------------------- --------------------------------------- None None - ----------------------------------- --------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, $0.05 par value Class B Common Stock, $0.05 par value - ------------------------------------------------------------------------------- (Title of Class) 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 [ ]. Exhibit Index is Located on pages 55 - 56 --- -- 1
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of December 11, 2001, the aggregate market value of voting stock held by non-affiliates of the registrant, based on the closing sales price of the Class A Common Stock on the Nasdaq Stock Market's National Market on December 11, 2001, was approximately $125.2 million. As of December 11, 2001, the registrant has 10,005,182 shares of Class A Common Stock outstanding and 12,634,357 shares of Class B Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement to be used in connection with the solicitation of proxies to be voted at the registrant's annual meeting of stockholders to be held on February 12, 2002, to be filed with the Commission, are incorporated by reference into Part III of this Report on Form 10-K. 2
PART I Item 1. BUSINESS General Ingles Markets, Incorporated ("Ingles" or the "Company"), a leading supermarket chain in the Southeast, operates 203 supermarkets in Georgia (83), North Carolina (61), South Carolina (31), Tennessee (24), Virginia (3) and Alabama (1). The Company's strategy is to locate 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 and non-food products, including health and beauty care products and general merchandise, as well as quality private label items. In addition, the Company focuses on selling high-growth, high-margin products to our customers through the development of book sections, media centers, floral departments, bakery departments and prepared foods, including delicatessen sections. Real estate ownership is an important component of the Company's operations, providing both operational and economic benefits. The Company believes that customer service and convenience, modern stores and competitive prices on a broad selection of quality merchandise are essential to developing a loyal customer base. The Company's new and remodeled supermarkets provide an enhanced level of customer convenience in order to accommodate the active lifestyle of today's shoppers. Design features of the Company's modern stores include expanded perishable departments featuring home meal replacement items and an expanded selection of food and non-food items to provide a "one-stop" shopping experience. The Company has an ongoing renovation and expansion plan to add stores in its target market and to modernize the appearance and layout of its existing stores. Over the past five fiscal years, the Company has spent approximately $450 million to modernize and remodel its existing stores, relocate older stores to larger, more convenient locations and construct new stores in order to maintain the quality shopping experience that its customers expect from Ingles. As part of the Company's renovation and expansion plan, the Company has begun to operate full-service pharmacies and gas stations at some of its stores. Substantially all of the Company's stores are located within 250 miles of its 780,000 square foot warehouse and distribution center, near Asheville, North Carolina, from which the Company distributes grocery, produce, meat and dairy products to all Ingles stores. The warehouse supplies the stores with approximately 65% of the goods the Company sells and the remaining 35% is purchased from third parties. The close proximity of the Company's purchasing and distribution operations to its stores facilitates the timely distribution of consistently high quality meat, produce and other perishable items. To further ensure product quality, the Company also owns and operates a milk processing and packaging plant that supplies approximately 80% of the milk products sold by the Company's supermarkets as well as a variety of orange and other fruit juices and bottled water products. In addition, the milk processing and packaging plant sells approximately 66% of its products to other retailers, food service distributors and grocery warehouses in eight states, which provides the Company with an additional source of revenue. Ingles believes that real estate ownership allows it to decrease its occupancy costs, maintain flexibility for future store expansion, control the development and management of each property and benefit from value created by developing and operating free-standing supermarkets and shopping centers in smaller markets. The Company owns and operates 77 shopping centers, 63 of which contain an Ingles supermarket, and owns 72 additional properties that contain a free-standing Ingles store. The Company 3
also owns 7 undeveloped sites suitable for a free-standing store. The majority of the land tracts that Ingles owns contain additional acreage which may either be sold or developed in the future. The Company was founded by Robert P. Ingle, the Company's Chairman of the Board and Chief Executive Officer. As of September 29, 2001, Mr. Ingle owns or controls approximately 86% of the combined voting power and 52% of the total number of shares of the Company's outstanding Class A and Class B Common Stock (in each case including stock deemed to be beneficially owned by Mr. Ingle as one of the trustees of the Company's Investment/Profit Sharing Plan and Trust). The Company became a publicly traded company in September 1987. Its Class A Common Stock is traded on The Nasdaq Stock Market's National Market under the symbol IMKTA. The Company was incorporated in 1965 under the laws of the State of North Carolina. Its principal executive offices are located at P. O. Box 6676, Highway 70, Asheville, North Carolina 28816, and its telephone number is 828-669-2941. Business The Company operates three lines of business: retail grocery sales, shopping center rentals and a fluid dairy processing plant. Information about the Company's operations by lines of business (in millions) is as follows (for information regarding the Company's industry segments, see Note 11 to the Consolidated Financial Statements of this report on Form 10-K): <TABLE> <CAPTION> Fiscal Year Ended September --------------------------------------------------------------------------------- 2001 2000(1) 1999 --------------------- ------------------------ ------------------------ <S> <C> <C> <C> <C> <C> <C> Revenues from unaffiliated customers: Grocery sales $ 1,866.1 94.7% $ 1,842.1 95.3% $ 1,733.3 95.2% Shopping center rentals 16.6 .8% 15.9 .8% 15.5 .8% Fluid dairy 87.3 4.5% 74.1 3.9% 72.1 4.0% ----------- ------ ----------- ------ ---------- ------ $ 1,970.0 100.0% $ 1,932.1 100.0% $ 1,820.9 100.0% =========== ====== =========== ====== ========== ====== Income from operations: Grocery sales $ 48.3 71.9% $ 51.1 74.7% $ 51.0 75.4% Shopping center rentals 10.3 15.3% 10.1 14.8% 9.1 13.5% Fluid dairy 8.6 12.8% 7.2 10.5% 7.5 11.1% ----------- ------ ----------- ------ ---------- ------ 67.2 100.0% 68.4 100.0% 67.6 100.0% ====== ====== ====== Other income, net 3.9 7.0 2.3 Interest expense 42.9 41.2 39.8 ----------- ----------- ---------- Income before income taxes $ 28.2 $ 34.2 $ 30.1 =========== =========== ========== </TABLE> (1) Fiscal 2000 was a 53-week year. Supermarket Operations The Company follows the strategy of locating its supermarkets primarily in suburban areas, small towns and rural communities. At September 29, 2001, the Company operated 199 supermarkets under the name "Ingles", three supermarkets under the name "Best Food" and one supermarket under the name "Sav-Mor" with locations in western North Carolina, western South Carolina, northern Georgia, eastern Tennessee, southwestern Virginia and northeastern Alabama. The "Best Food" and "Sav-Mor" store concepts accommodate smaller shopping areas and carry a full line of dry groceries, fresh meat and 4
produce, all of which are displayed in a modern, readily accessible environment. The stores are also operated in accordance with Ingles' high standards of customer service and quality products at a low price. The following table sets forth certain information with respect to the Company's supermarket operations. <TABLE> <CAPTION> Number of Supermarkets Percentage of Total at Fiscal Net Sales for Fiscal Year Ended September Year Ended September -------------------------------- ---------------------------------- 2001 2000 1999 2001 2000 1999 ---- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> North Carolina 61 63 63 34% 33% 34% South Carolina 31 32 32 14% 13% 14% Georgia 83 84 83 41% 42% 40% Tennessee 24 25 24 10% 10% 10% Virginia 3 3 3 1% 1% 1% Alabama 1 1 1 -- 1% 1% ---- ---- ---- ---- ---- ---- 203 208 206 100% 100% 100% ==== ==== ==== ==== ==== ==== </TABLE> The Company believes that today's supermarket customers are focused on convenience and value. As a result, the Company's "one-stop" shopping experience combines a high level of customer service, convenience-oriented product offerings and low overall pricing. The Company's modern stores provide products and services such as home meal replacement items, delicatessens, bakeries, floral departments, video rental departments, greeting cards and broad selections of health and beauty care items. During fiscal 2000, Ingles opened its first company-owned, in-store pharmacy and its first fuel station, "Ingles Gas Express". During fiscal 2001, the Company opened an additional 13 pharmacies and six fuel stations. The Company plans to incorporate these new departments in select stores during fiscal 2002. The Company caters to the needs of its customers by offering extended hours and 24-hour service in appropriate markets. The Company trains its employees to provide friendly service and to actively address the needs of customers. These employees reinforce the Company's distinctive service oriented image. Selected statistics on the Company's supermarket operations are presented below: <TABLE> <CAPTION> Fiscal Year Ended September --------------------------------------------------------------------- 2001 2000(1) 1999 1998 1997 --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> Weighted Average Sales Per Store (000's) $ 9,004 $ 8,856 $ 8,424 $ 7,840 $ 7,716 Total Square Feet at End of Year (000's) 9,081 8,914 8,400 8,287 7,506 Average Total Square Feet per Store 44,736 42,855 40,776 40,038 37,912 Average Square Feet of Selling Space per Store (2) 31,315 29,999 28,543 28,026 26,538 </TABLE> (1) Fiscal 2000 was a 53-week year. (2) Selling space is estimated to be 70% of total store square footage. Merchandising The Company's merchandising strategy is designed to create a "one-stop" shopping experience that blends value and customer service with variety, quality and convenience. Management believes that this 5
strategy fosters a loyal customer base by establishing a reputation for providing high quality products and a variety of specialty departments. The Company's stores carry broad selections of quality meats, produce and other perishables. The Company's full-service meat departments are generally designed so that customers can see Ingles' employees at work and so that its butchers are readily accessible to its customers. Many of the Company's stores offer a wide selection of fresh fish and seafood. The Company emphasizes the freshness and quality of its produce, bakery and deli offerings by designing its departments with an open air market atmosphere. Management believes that supermarkets offering a broad array of products and time-saving services are perceived by customers as part of a solution to today's lifestyle demands. Accordingly, a principal component of the Company's merchandising strategy is to design stores that offer a "one-stop" shopping experience. In the Company's prototype stores, in-store bakeries and delicatessens, prepared foods sections, gourmet coffee service and fresh squeezed fruit juices are conveniently located near seating areas. In addition, book stores with reading areas and in-store pharmacies add to the one-stop shopping experience. Most Ingles stores also offer a wide selection of domestic, premium, micro brewery and imported beers and domestic and imported varietal wines. The floral department offers balloons, flowers and plants. The media department features new releases, popularly priced computer software, rental VCRs and snack items all contained in an appealing display area decorated with a movie marquee and a monitor playing current videos. Customers can also purchase money orders from the customer service department or receive cash back at the check-out counter with a debit card. The Company has also begun to operate gas stations at some of its stores and intends to expand this service to other stores. Ingles caters to the needs of its customers by offering extended hours and 24 hour service in appropriate markets. A selection of prepared foods and home meal replacements are featured throughout Ingles' specialty departments and in the meat department to provide customers with easy meal alternatives that they can eat at home, at work or in a sit-down cafe that is conveniently located near the front of newer Ingles stores. Many stores offer daily selections of home meal replacement items, such as rotisserie chicken, pizza, lasagna, meat loaf and other dinner entrees, sandwiches, pre-packaged salads and prepared fresh vegetables. The bakery offers an expanded selection of baked goods and self-service selection. Ingles offers bread baked daily, cakes made to order in various sizes, donuts and other pastries. The deli offers a salad bar, an expanded offering of cheeses and gourmet items and improved home meal replacement items. Ingles has introduced a fruit bar at many of its locations that offers fresh squeezed juices and assorted sliced fruits. The Company also provides its customers with an expanded selection of frozen food items to meet the increasing demands of its customers. The new prototype Ingles supermarkets contain a "power aisle" that includes specialty departments, such as a bakery, a delicatessen, a produce department, a gourmet coffee service and a separate check-out. Ingles intends to continue to increase sales of its proprietary brands, which typically carry higher margins than comparable branded products. The Company currently carries two private label lines: "Laura Lynn," its primary line named after the founder's daughter, and "Ingles Best". Ingles' private labels cover a broad range of products throughout the store, such as milk, bread, soft drinks and canned goods. The Company promotes its private label brands through print and television advertising, by displaying comparison pricing with national brands on store shelf tags and by reflecting savings on customers' cash register receipts. In addition to increasing margins, Ingles believes that private label sales help promote customer loyalty. The Company seeks to maintain a reputation for providing friendly service, quality merchandise and customer value and for its commitment to community involvement. The Company employs various 6
advertising and promotional strategies to reinforce the quality and value of its products. The Company promotes these attributes using all of the traditional advertising vehicles including radio, television, direct mail and newspapers. The Company uses numerous visible and subtle means to communicate its commitment to community involvement. The Company sponsors numerous high profile events such as the Ingles Food Show and the Baby Expo, as well as local and nationally recognized sporting events. The Company raises funds for charity, provides equipment for education and works closely with civic and government leaders on projects of local importance. Purchasing and Distribution The Company supplies approximately 65% of its supermarkets' inventory requirements from its modern 780,000 square foot warehouse and distribution center from which the Company distributes groceries, produce, meat and dairy products to all Ingles stores. The Company believes that its warehouse and distribution facility contains sufficient capacity for the continued expansion of its store base for the foreseeable future. The Company's centrally managed purchasing and distribution operations provide several advantages, including the ability to negotiate and reduce the cost of merchandise, decrease overhead costs and better manage its inventory at both the warehouse and store level. From time to time, the Company engages in forward purchasing arrangements on high turnover inventory items in order to take advantage of special prices offered by manufacturers for limited periods. The Company's ability to take advantage of forward purchasing is limited by several factors including carrying costs and warehouse space. Approximately 14% of the Company's other inventory requirements, primarily frozen food and slower moving items that the Company prefers not to stock, are purchased from Merchant Distributors, Inc. ("MDI"), a wholesale grocery distributor with which the Company has had a continuing relationship since its inception. Purchases from MDI were approximately $203 million in 2001, $188 million in 2000 and $184 million in 1999. Additionally, MDI purchases product from Milkco, the Company's fluid dairy subsidiary, and these purchases totaled approximately $32.5 million in fiscal 2001, $29.6 million in 2000 and $28.4 million in fiscal 1999. MDI owned approximately 3% of the Company's Class A Common Stock and approximately 1% of the Company's Class B Common Stock at September 29, 2001 totaling 1.3% of the total voting power. The Company believes that alternative sources of supply are readily available from other third parties. The remaining 21% of the Company's inventory requirements, primarily beverages, bread and snack foods, are supplied directly to Ingles supermarkets by local distributors and manufacturers. Goods from the warehouse and distribution facility and the milk processing and packaging plant are distributed to the Company's stores by a fleet of 111 tractors and 408 trailers that the Company operates and maintains, including tractors and trailers that the Company leases. The Company invests on an ongoing basis in the maintenance, upgrade and replacement of its tractor and trailer fleet. The Company also operates truck servicing and fuel storage facilities at its facilities. The Company reduces its overall distribution costs by capitalizing on back-haul opportunities (contracting to transport merchandise on trucks that would otherwise be empty). Store Development, Expansion and Remodeling The Company believes that the appearance and design of its stores are integral components of its customers' shopping experience and aims to develop one of the most modern supermarket chains in the industry. The ongoing modernization of the Company's store base involves (i) the construction of new 7
prototype stores, (ii) the replacement or complete remodeling and expansion of existing stores and (iii) minor remodels of existing stores. The Company's goal is to maintain clean, well-lit stores with attractive architectural features that enhance the image of its stores as catering to the changing lifestyle needs of quality conscious consumers. The Company is focused primarily on developing owned stores rather than leased stores. Management believes that owning stores rather than leasing them provides the Company with lower all-in occupancy costs and the flexibility over the long-term to expand its stores further, if needed. The construction of new stores is closely monitored and controlled by the Company. The Company hires independent contractors to construct its supermarkets from its prototype designs. The Company renovates and remodels stores in order to increase customer traffic and sales, respond to existing customer demand, compete effectively against new stores opened by competitors and support its "quality image" merchandising strategy. The Company decides to complete a major remodel of an existing store based on its evaluation of the competitive landscape of the local marketplace. A major remodel and expansion provides the quality of facilities and product offerings identical to that of a new prototype store, capitalizing upon the existing customer base. The Company retains the existing customer base by keeping the store in operation during the entire remodeling process. The Company may elect to relocate, rather than remodel, certain stores where relocation provides a more convenient location and is more economical. The Company completes minor remodels in existing stores that management believes provide ample size and facilities to support the local customer base but require merchandising and operational improvements. In a minor remodel the company will also make cosmetic changes to give the store a new look and feel. Minor remodels generally include repainting, remodeling and upgrading of the lighting throughout the store. Additionally, the Company refurbishes existing equipment and adds selected new equipment in the remodeling process. As part of a minor remodel, the Company remerchandises the store including the broadening of product and service offerings. When the Company remodels, expands or relocates an existing store, it uses that opportunity to retrain the employees of that store and reemphasize customer service. 8
The following table sets forth, for the periods indicated, the Company's new store development and store remodeling activities and the effect this program has had on the average size of its stores. <TABLE> <CAPTION> 2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ <S> <C> <C> <C> <C> <C> Number of Stores: Opened (1) 2 4 3 11 11 Closed stores (1) 7 2 4 2 1 Major remodels and replacements 9 11 3 9 5 Minor remodels 6 8 16 10 16 Stores open at end of period 203 208 206 207 198 Size of Stores: Less than 30,000 sq. ft. 23 27 32 35 39 30,000 up to 41,999 sq. ft. 59 67 71 74 80 42,000 up to 51,999 sq. ft. 39 39 41 40 37 At least 52,000 sq. ft. 82 75 62 58 42 Average store size (sq. ft.) 44,736 42,855 40,776 40,038 37,912 </TABLE> (1) Excludes new stores opened to replace existing stores. The Company has historically expanded its store base by acquiring or leasing supermarket sites and constructing stores to its specifications. From time to time, however, the Company may consider the acquisition of existing supermarkets as such opportunities become available. The Company's ability to open new stores is subject to many factors, including the acquisition of satisfactory sites and the successful negotiation of new leases, and may be limited by zoning and other governmental regulation. In addition, the Company's expansion, remodeling and replacement plans are continually reviewed and are subject to change. See the "Liquidity and Capital Resources" section included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the Company's capital expenditures. Competition The supermarket industry is highly competitive and characterized by narrow profit margins. The Company's principal competitors (in alphabetical order) are BI-LO, Inc., Food Lion, Inc., The Kroger Co., Publix Super Markets, Inc. and Winn-Dixie Stores, Inc. The Company also competes with national and regional supermarket chains, independent and specialty grocers, drug and convenience stores, and the newer "alternative format" food stores, including specialty food stores, retail drug stores, national general merchandisers and discount retailers, membership clubs, warehouse stores and supercenters (such as those operated by Wal-Mart Stores, Inc.). The Company also faces increasing competition from restaurants and fast food chains due to the increasing proportion of household food expenditures for food prepared outside the home. Supermarket chains generally compete on the basis of location, quality of products, service, price, convenience, product variety and store condition. The Company's management monitors competitive activity and regularly reviews and periodically adjusts the Company's marketing and business strategies as management deems appropriate in light of existing conditions to adapt to changes in the Company's region. The Company's ability to remain competitive in its markets will depend in part on its ability to pursue its expansion and renovation programs in response to remodelings and new store openings by its competitors. 9
Employees and Labor Relations At September 29, 2001, the Company had approximately 14,600 employees, of which 91% are supermarket personnel. Approximately 52% of these employees work on a part-time basis. None of the employees are represented by a labor union. Management considers employee relations to be good. The Company values its employees and believes that employee loyalty and enthusiasm are key elements of its operating performance. Trademarks and Licenses The Company employs various trademarks and service marks in its business, the most important of which are its own "Laura Lynn" private label trademark and the "Ingles" service mark. The "Ingles" service mark, "Laura Lynn" trademark and the service mark "You get a lot more. You pay a lot less." are federally registered in the United States pursuant to applicable intellectual property laws and are the property of Ingles. In addition, the Company uses the "Sealtest," "Pet" and "Light N' Lively" trademarks pursuant to agreements entered into in connection with its milk, fruit juice and spring water processing and packaging operations. The Company believes it has all licenses and permits necessary to conduct its business. Environmental Matters Under applicable environmental laws, the Company may be responsible for remediation of environmental conditions and may be subject to associated liabilities relating to its stores and other buildings and the land on which such stores and other buildings are situated (including responsibility and liability related to its operation of its new gas stations and the storage of gasoline in underground storage tanks), regardless of whether the Company leases or owns the stores, other buildings or land in question and regardless of whether such environmental conditions were created by the Company or by a prior owner or tenant. The Company's liabilities may also include costs and judgments resulting from lawsuits brought by private litigants. The presence of contamination from hazardous or toxic substances, or the failure to properly remediate such contaminated property, may adversely affect its ability to sell or rent such real property or to borrow using such real property as collateral. Although the Company typically conducts a limited environmental review prior to acquiring or leasing new stores, other buildings or raw land, there can be no assurance that environmental conditions relating to prior, existing or future stores, other buildings or the real properties on which such stores or other buildings are situated will not have a material adverse effect on the Company's business, financial condition and results of operations. Federal, state and local governments could enact laws or regulations concerning environmental matters that affect the Company's operations or facilities or increase the cost of producing or distributing the Company's products. The Company believes that it currently conducts its operations, and in the past has conducted its operations, in substantial compliance with applicable environmental laws. The Company, however, cannot predict the environmental liabilities that may result from legislation or regulations adopted in the future, the effect of which could be retroactive. Nor can the Company predict how existing or future laws and regulations will be administered or interpreted or what environmental conditions may be found to exist at its facilities or at other properties where the Company or its predecessors have arranged for the disposal of hazardous substances. The enactment of more stringent laws or regulations or stricter interpretation of existing laws and regulations could require expenditures by the Company, some of which could have a material adverse effect on its business, financial condition and results of operations. 10
Government Regulation The Company is subject to regulation by a variety of governmental agencies, including, but not limited to, U.S. Food and Drug Administration, the U.S. Department of Agriculture, OSHA and other federal, state and local agencies. The Company's stores are also subject to local laws regarding zoning, land use and the sale of alcoholic beverages. The Company believes that its locations are in material compliance with such laws and regulations. Item 2. PROPERTIES Owned Properties. The Company owns and operates 77 shopping centers, 63 of which contain an Ingles supermarket, and owns 72 additional properties that contain a free-standing Ingles store. The Company also owns 7 undeveloped sites which are suitable for a free-standing store or shopping center development. Ingles owns numerous outparcels and other acreage located adjacent to the shopping centers and supermarkets it owns. In order to maximize the utility of the Company's real estate portfolio, the Company regularly purchases and sells real estate. During fiscal 2001, the Company spent $6.7 million for the purchase of land and received $4.8 million for the sale of properties owned by Ingles. The shopping centers owned by the Company contain an aggregate of 6.0 million square feet of leasable space, of which 2.7 million square feet is used by the Company's supermarkets. The remainder of the leasable space in these shopping centers is leased or held for lease by the Company to third party tenants. A breakdown by size of the shopping centers operated by the Company is as follows: <TABLE> <CAPTION> Size Number <S> <C> Less than 50,000 square feet 25 50,000 - 100,000 square feet 31 More than 100,000 square feet 21 --- Total 77 === </TABLE> The Company owns an 810,000 square foot facility which is strategically located between Interstate 40 and Highway 70 near Asheville, North Carolina, as well as the 73 acres of land on which it is situated. The facility includes the Company's headquarters and its 780,000 square foot warehouse and distribution center. The property also includes truck servicing and fuel storage facilities. The Company's milk processing and packaging subsidiary, Milkco, Inc., owns an 101,000 square foot manufacturing and storage facility in Asheville, North Carolina. In addition to the plant, the 11.5 acre property includes truck servicing and fuel storage facilities. Certain long-term debt of the Company is secured by the owned properties. See Note 6 to the Consolidated Financial Statements of this report on Form 10-K for further details. Leased Properties. The Company operates supermarkets at 68 locations leased from various unaffiliated third parties. The Company also leases 20 supermarket facilities in which it is not currently operating, 8 of which are subleased to third parties. Certain of the leases give the Company the right of first refusal to purchase 11
the entire shopping center in which the supermarkets are located. The majority of these leases require the Company to pay property taxes, utilities, insurance, repairs and certain other expenses incidental to occupation of the premises. In addition to base rent, most leases require the Company to pay additional percentage rent (ranging from .75% to 1%) for sales in excess of a specified amount. Rental rates generally range from $1.67 to $8.00 per square foot. During fiscal years 2001, 2000 and 1999, the Company paid a total of $16.6 million, $15.2 million and $14.8 million, respectively, in supermarket rent, exclusive of property taxes, utilities, insurance, repairs and other expenses. The following table summarizes lease expiration dates as of September 29, 2001, with respect to the initial and any renewal option terms of leased supermarkets: <TABLE> <CAPTION> Year of Expiration Number of Stores (Including Renewal Terms) With Leases Expiring ------------------------- -------------------- <S> <C> 2002-2019 8 2020-2039 12 2040 or after 68 </TABLE> Management believes that the long-term rent stability provided by these leases is a valuable asset of the Company. Item 3. LEGAL PROCEEDINGS Various legal proceedings and claims arising in the ordinary course of business are pending against the Company. In the opinion of management, the ultimate liability, if any, from all pending legal proceedings and claims would not materially affect the Company's financial position or the results of its operations. Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the security holders during the fourth quarter of the fiscal year covered by this report. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information The Company has two classes of Common Stock: Class A and Class B. Class A Common Stock is traded on The Nasdaq Stock Market's National Market under the symbol IMKTA. There is no public market for the Company's Class B Common Stock. However, under the terms of the Company's Articles of Incorporation, any holder of Class B Common Stock may convert any portion or all of the holder's shares of Class B Common Stock into an equal number of shares of Class A Common Stock at any time. As of December 11, 2001, there were approximately 992 holders of record of the Company's Class A Common Stock (approximately 4,500 beneficial holders) and 216 holders of record of the Company's Class B Common Stock. The following table sets forth the reported high and low closing sales price for the Class A Common Stock during the periods indicated as reported in the National Market System. The quotations reflect actual inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. 12
<TABLE> <CAPTION> 2001 Fiscal Year High Low ---------------- -------- -------- <S> <C> <C> First Quarter (ended December 30, 2000) $ 10.75 $ 9.25 Second Quarter (ended March 31, 2001) $ 12.25 $ 10.00 Third Quarter (ended June 30, 2001) $ 12.80 $ 10.18 Fourth Quarter (ended September 29, 2001) $ 13.40 $ 11.42 </TABLE> <TABLE> <CAPTION> 2000 Fiscal Year High Low ---------------- -------- -------- <S> <C> <C> First Quarter (ended December 25, 1999) $ 13.50 $ 10.875 Second Quarter (ended March 25, 2000) $ 11.875 $ 9.625 Third Quarter (ended June 24, 2000) $ 10.75 $ 8.44 Fourth Quarter (ended September 30, 2000) $ 11.00 $ 9.00 </TABLE> On December 11, 2001, the closing sales price of the Company's Class A Common Stock on The Nasdaq Stock Market's National Market was $12.53 per share. Dividends The Company has paid cash dividends on its Common Stock in each of the past twenty-one fiscal years, except for the 1984 fiscal year when the Company paid a 3% stock dividend. During both fiscal 2001 and fiscal 2000 the Company paid quarterly dividends totaling $.66 per share of Class A Common Stock and $.60 per share of Class B Common Stock. 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. 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. The payment of dividends is also subject to restrictions contained in certain financing arrangements. (See Note 6 to the Consolidated Financial Statements of this report on Form 10-K). Item 6. SELECTED FINANCIAL DATA The selected financial data set forth below has been derived from the Company's consolidated financial statements. The information should be read in conjunction with the information under the heading "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION" and in the Company's Consolidated Financial Statements and Notes thereto included elsewhere herein. 13
Selected Income Statement Data for the Year Ended September (in thousands except per share amounts) <TABLE> <CAPTION> 2001 2000 1999 1998 1997 ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Net Sales $ 1,953,440 $ 1,916,200 $ 1,805,375 $ 1,647,152 $ 1,535,976 Gross Profit 511,556 490,914 450,445 408,681 376,790 Income Before Extraordinary Item (1) 17,850 21,091 18,750 4,163 20,463 Diluted Earnings per Common Share Before Extraordinary Item (1) .79 .93 .83 .19 .95 Cash Dividends per Common Share Class A .66 .66 .66 .66 .66 Class B .60 .60 .60 .60 .60 </TABLE> Selected Balance Sheet Data at September (in thousands) <TABLE> <CAPTION> 2001 2000 1999 1998 1997 ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Current Assets $ 234,050 $ 219,581 $ 212,761 $ 196,039 $ 188,408 Property and Equipment, net 724,443 702,472 656,707 661,772 606,363 Total Assets 962,801 927,766 873,171 862,787 802,583 Current Liabilities, including Current Portion of Long-Term Debt 196,598 197,522 203,645 176,968 158,124 Long-Term Liabilities, net of Current Portion (2) 492,638 462,591 417,389 442,648 395,042 Stockholders' Equity 236,500 232,138 224,122 218,236 222,982 </TABLE> (1) During fiscal 1998, the Company recorded a non-recurring charge relating to a litigation settlement of $14.6 million, or ($.41) per share. (2) Excludes long-term deferred income tax liability. 14
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Ingles, a leading supermarket chain in the Southeast, operates 203 supermarkets in Georgia (83), North Carolina (61), South Carolina (31), Tennessee (24), Virginia (3) and Alabama (1). The Company locates its supermarkets primarily in suburban areas, small towns and rural communities which are either currently experiencing or the Company believes will experience significant growth or in which the Company feels its superior store offerings present competitive advantages over the existing store offerings. Ingles supermarkets offer customers a wide variety of nationally advertised food products, including grocery, meat and dairy products, produce, frozen foods and other perishables and 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. Ingles operates three lines of business: retail grocery sales, fluid dairy processing and shopping center rentals. The fluid dairy processing segment sells approximately 34% of its products to the retail grocery segment and 66% of its products to other third parties. Real estate ownership (including the shopping center rental segment) 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 consolidated statements of income for the fiscal years ended September 29, 2001 and September 25, 1999 include 52 weeks of operation. The consolidated statement of income for the fiscal year ended September 30, 2000 includes 53 weeks of operations. Comparable store sales are defined as sales by grocery stores in operation for the entire duration of the previous and current fiscal years. 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 nearby store that is closed. 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. 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 11 "Lines of Business" to the Consolidated Financial Statements. <TABLE> <CAPTION> Fiscal Years Ended ------------------------------------------------------------ 2001 2000 1999 ------------- ------------- ------------- <S> <C> <C> <C> Net sales 100.0% 100.0% 100.0% Gross profit 26.2 25.6 25.0 Operating and administrative expenses 23.3 22.6 21.7 Rental income, net 0.5 0.5 0.5 Other income, net 0.2 0.4 0.1 Income before interest and income taxes 3.6 3.9 3.9 Interest expense 2.2 2.1 2.2 Income before income taxes 1.4 1.8 1.7 Income taxes 0.5 0.7 0.7 Net income 0.9 1.1 1.0 EBITDA (1) 6.0 6.2 6.2 EBITDAR (1) 7.9 7.8 7.7 </TABLE> - --------------- (1) EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, non-recurring charges and extraordinary items. EBITDAR is defined as EBITDA plus rent expense. Management believes that EBITDA and EBITDAR are useful measures of operating performance. EBITDA and EBITDAR do not represent cash flow from operations as defined by generally accepted accounting principles (GAAP), are not necessarily indicative of cash available to fund all cash flow needs and should not be considered as alternatives to net income under GAAP for evaluating Ingles' results of operations. FISCAL YEAR ENDED SEPTEMBER 29, 2001 COMPARED TO THE FISCAL YEAR ENDED SEPTEMBER 30, 2000 Net Sales. Fiscal 2001 was the 37th consecutive year Ingles achieved an increase in net sales. Net sales increased 1.9% to $1.953 billion for the fiscal year ended September 29, 2001 from $1.916 billion for the fiscal year ended September 30, 2000. Fiscal year 2001 contained 52 weeks compared to 53 weeks in fiscal 2000. Net sales increased 3.9%, adjusted for the difference in weeks. Comparable store sales grew 3.6%. During fiscal 2001, Ingles opened two new stores and six replacement stores, closed seven older stores and completed three major remodel/expansions and six minor remodels. Retail square footage increased by 1.9% to 9.1 million square feet. Investments made in maturing new stores, remodeled stores and stores that have been replaced were contributors to sales growth. Successful marketing campaigns such as the "Safari Challenge" game and sponsorship of various community events and sports teams also contributed to sales growth. Gross Profit. Gross profit for the fiscal year ended September 29, 2001, increased 4.2% to $511.6 million, or 26.2% of sales, compared to $490.9 million, or 25.6% of sales, for the fiscal year ended September 30, 2000. Expansion of the higher margin perishable departments, effective purchasing and reduced product loss due to security measures all contributed to the gross margin growth. 16
Operating and Administrative Expenses. Operating and administrative expenses increased 5.1% to $454.6 million for the year ended September 29, 2001, from $432.6 million for the year ended September 30, 2000. As a percentage of sales, operating and administrative expenses were 23.3% and 22.6% for the years ended September 29, 2001 and September 30, 2000, respectively. A variety of factors contributed to the increase. Higher payroll costs resulted primarily from increased wage rates in a competitive labor market. Equipment rent expense increases resulted from the leasing of store equipment for new and replacement stores. Utility expense increases resulted primarily from increases in fuel costs at the store level. Insurance expense increased primarily due to a larger volume of claims under the Company's self-insured group medical program. A breakdown of the major increases (decreases) in operating and administrative expenses, expressed as a percentage of sales, is as follows: <TABLE> <S> <C> Payroll 0.3% Equipment rent expense 0.2% Utilities 0.2% Insurance 0.1% Advertising (0.1)% </TABLE> Rental Income, Net. Rental income, net increased $0.2 million to $10.3 million for the 2001 year from $10.1 million for the 2000 year. The improvement consists of gross rental income increases of $0.7 million and operating cost increases of $0.5 million. Other Income, Net. Other income, net decreased $3.1 million to $3.9 million for the year ended September 29, 2001 from $7.0 million for the year ended September 30, 2000. Other income includes gains on the sale of assets of $1.4 million and $2.7 million for fiscal years 2001 and 2000, respectively. The balance of the decrease resulted primarily from a reduction in proceeds from vendor accounts payable audits. Income Before Interest and Income Taxes. Income before interest and income taxes decreased $4.3 million to $71.1 million, during the 2001 fiscal year compared to $75.4 million during the 2000 fiscal year. Income before interest and income taxes, as a percentage of sales, was 3.6% and 3.9% for the 2001 and 2000 fiscal years, respectively. Interest Expense. Interest expense increased $1.7 million for the year ended September 29, 2001 to $42.9 million from $41.2 million for the year ended September 30, 2000. The increase resulted from interest on additional debt incurred to fund expansion and renovation, offset somewhat by lower interest rates. Income Taxes. Income tax expense as a percentage of pre-tax income decreased to 36.7% in the 2001 year compared to 38.3% in fiscal 2000, due primarily to increased tax credits related to training and employment. Net Income. Net income for the 2001 fiscal year was $17.9 million, or 0.9% of sales, compared to $21.1 million, or 1.1% of sales, for the 2000 fiscal year. Basic and diluted earnings per common share were $.79 for the 2001 year compared to $.93 for the 2000 year. 17
FISCAL YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO THE FISCAL YEAR ENDED SEPTEMBER 25, 1999 Net Sales. Net sales increased 6.1% to $1.916 billion for the fiscal year ended September 30, 2000 from $1.805 billion for the fiscal year ended September 25, 1999. Fiscal year 2000 contained 53 weeks compared to 52 weeks in fiscal 1999. Net sales increased 4.1%, adjusted for the difference in weeks. Comparable store sales grew 3.2%. During fiscal 2000, Ingles opened four new stores and eight replacement stores, closed two stores and completed three major remodel/expansions and eight minor remodels. Retail square footage increased by 6.2% to 8.9 million square feet. Successful marketing campaigns such as the "Millennium Money" game and sponsorship of various community events and sports teams contributed to sales growth. Investments made in maturing new stores, remodeled stores and stores that have been replaced also were contributors to sales growth. Gross Profit. Gross profit for the fiscal year ended September 30, 2000, increased 9.0% to $490.9 million, or 25.6% of sales, compared to $450.4 million, or 25.0% of sales, for the fiscal year ended September 25, 1999. Effective purchasing and an expanded array of higher margin product offerings contributed to increased gross profit. Operating and Administrative Expenses. Operating and administrative expenses increased 10.4% to $432.6 million for the year ended September 30, 2000, from $391.9 million for the year ended September 25, 1999. As a percentage of sales, operating and administrative expenses were 22.6% and 21.7% for the years ended September 30, 2000 and September 25, 1999, respectively. A variety of factors contributed to the increase. Higher payroll costs resulted primarily from rising wage rates in a highly competitive labor market. Warehouse expenses increased primarily due to higher labor costs and increased diesel fuel prices. Equipment rent expense increases resulted from the leasing of store equipment for new and replacement stores. Insurance expense increased primarily due to a larger volume of claims under the Company's self insured group medical program. Higher taxes and license fees were due primarily to property taxes and store level taxes and licenses. 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% Warehouse expense 0.1% Equipment rent expense 0.1% Insurance 0.1% Taxes and licenses 0.1% </TABLE> Rental Income, Net. Rental income, net increased to $10.1 million for the 2000 year from $9.1 million for the 1999 year. The improvement consists of gross rental income increases of $0.4 million and operating cost decreases of $0.6 million. Other Income, Net. Other income, net increased $4.7 million to $7.0 million for the year ended September 30, 2000 from $2.3 million for the year ended September 25, 1999. Other income for fiscal 2000 includes gains on the sale of assets of $2.7 million. The sale of assets includes a shopping center in which the land, building and equipment were sold in February 2000. The balance of the increase resulted primarily from the proceeds of vendor accounts payable audits. Income Before Interest and Income Taxes. Income before interest and income taxes increased $5.5 million to $75.4 million during the 2000 year compared to $69.9 million during the 1999 year. 18
Income before interest and income taxes as a percentage of sales remained constant at 3.9% for both fiscal years. Interest Expense. Interest expense increased $1.4 million for the year ended September 30, 2000 to $41.2 million from $39.8 million for the year ended September 25, 1999. The extra week in fiscal 2000 resulted in approximately $0.9 million of the increase. The balance of the increase resulted from interest on additional debt incurred to fund expansion and renovation, as well as higher interest rates. Income Taxes. Income tax expense as a percentage of pre-tax income increased to 38.3% in the 2000 year compared to 37.8% in fiscal 1999, due primarily to the higher earnings achieved by the Company. Net Income. Net income for the 2000 fiscal year was $ 21.1 million, or 1.1% of sales, compared to $18.7 million, or 1.0% of sales, for the 1999 fiscal year. Basic and diluted earnings per common share were $.93 for the 2000 year compared to $.83 for the 1999 year. Net income increased 12.5% for the year ended September 30, 2000 over the prior fiscal year. 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 $73.2 million for the fiscal year ended September 29, 2001, including the development and opening of two new stores, the replacement of six older stores, major remodel and expansion of three stores and minor remodels at six stores. Capital expenditures also included the 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. Ingles' capital expenditure plans for fiscal 2002 include investments of approximately $75 million. The Company plans to open two new stores, replace one existing store and perform two remodel/expansions and 10 minor remodels. Expenditures will also include investments in stores expected to open in fiscal 2003 as well as technology improvements, upgrading and replacing existing store equipment and warehouse and transportation equipment and improvements to the Company's milk processing plant. Liquidity The Company generated $47.4 million of cash from operations in fiscal 2001. Inventory increased $6.0 million and accounts receivable increased $9.6 million. Cash used by investing activities totaled $68.1 million. The primary use of this cash was the $73.2 million of capital expenditures during the period, which were partially offset by $5.1 million of proceeds from the sale of assets. 19
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 2001, the Company's financing activities provided $22.0 million in cash, the net result of long and short-term borrowings, sale/leaseback transactions and dividend payments. Proceeds from long-term debt totaled $88.5 million, while payments on long-term debt were $54.6 million. Proceeds from sale/leaseback transactions totaled $1.6 million and dividend payments were $14.1 million. As of September 29, 2001, the Company had unencumbered real property and equipment with a net book value of approximately $193 million. At September 29, 2001, the Company had lines of credit with seven banks totaling $130.0 million; of this amount $69.0 million was unused. Subsequent to year-end, Ingles closed a $250 million senior subordinated debt offering to mature in 2011. The notes were priced at 8 7/8% and issued at a discount to yield 9%. The proceeds will be used to repay $140 million in existing indebtedness and to fund 2002 capital expenditures and 2002 current maturities of long-term debt. In conjunction with the issuance of the notes, the Company renegotiated its lines of credit. The Company currently has $150 million in committed lines of credit, of which $130 million matures in October 2004 and $20 million matures in October 2002. 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 September 29, 2001 or has obtained appropriate amendments. 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, many of which are outside the Company's control. Factors that may affect results include changes in business and economic conditions generally in Ingles' operating area, 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. 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 20
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 outlining minimum tangible net worth requirements, restrict the ability of the Company to pay additional dividends to approximately $34.2 million, based on tangible net worth at September 29, 2001. Further, the terms of the 8-7/8% Senior Subordinated Notes due 2011 described above, restrict the ability of the Company to pay dividends in an amount exceeding that paid by the Company in prior years and in any amount, at any time the Company is in default of the terms of the Notes. 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. Impact of Inflation Inflation in food prices during fiscal 2001 was slightly higher than the overall increase in the Consumer Price Index. During fiscal 2000 and 1999, inflation in food prices was lower than the overall increase in the Consumer Price Index. One of the Company's significant costs is labor, which increases with inflation. New Accounting Pronouncements 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 its earnings or financial position, and the Company currently believes that it will not have a material impact on its financial statements. In June 2001, the Financial Accounting Standards Board issued Statements No. 141, "Business Combinations" ("FAS 141") and No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). Under the new rules, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The amortization provisions of FAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company will apply the new accounting rules beginning September 30, 2001. The Company is currently evaluating its intangible assets in relation to FAS 141 and FAS 142 to determine the impact, if any, on its financial statements. 21
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations" that provides accounting guidance for the costs of retiring long-lived assets and is effective for fiscal years beginning after June 15, 2002. The Company is currently assessing the impact adoption of this statement will have on its financial statements. In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 provides accounting guidance for financial accounting and reporting for the impairment or disposal of long-lived assets. The statement supercedes FASB No. 121, "Accounting for the Impairment of Long-Lived Assets and for the Long-Lived Assets to be Disposed Of." It also supercedes the accounting and reporting provisions of APB Opinion No. 30 "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" related to the disposal of a segment of a business. The statement is effective for fiscal years beginning after December 15, 2001, with early adoption encouraged. The Company is currently assessing the impact adopting this statement will have on its financial statements. Forward Looking Statements This Annual 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 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company is exposed to changes in financial market conditions in the normal course of its business as a result of its use of bank debt to finance its retail grocery and real estate lines of business. The Company is exposed to changes in interest rates primarily as a result of its borrowing activities, which includes borrowings under lines of credit, real estate and equipment financing and senior subordinated notes (see Note 17-Subsequent Event). The lines of credit, along with cash flow from operations, are used to maintain liquidity and fund business operations. The Company typically replaces borrowings under its lines of credit, as necessary, with both long-term secured and unsecured fixed rate financing. The nature and amount of the Company's debt may vary as a result of future business requirements, market conditions and other factors. The definitive extent of the Company's interest rate risk is not quantifiable or predictable because of the variability of future interest rates and business financing requirements, but the Company does not believe such risk is material. The Company does not customarily use derivative instruments to adjust the Company's interest rate risk profile. 22
The table below presents principal amounts and related weighted average rates by year of maturity for the Company's debt obligations at September 29, 2001 and September 30, 2000 (in thousands): <TABLE> <CAPTION> Fair September 29, 2001 2002 2003 2004 2005 2006 Thereafter Total Value ------- -------- ------- ------- ------- ---------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Lines of credit -- $ 61,024 -- -- -- -- $ 61,024 $ 61,024 Average interest rate (variable) -- 4.88% -- -- -- -- 4.88% Long-term debt $60,852 $102,258 $48,854 $42,681 $17,852 $216,024 $488,521 $495,868 Average interest rate (fixed) 7.95% 7.72% 8.32% 7.88% 8.45% 8.53% 8.21% Fair September 30, 2000 2001 2002 2003 2004 2005 Thereafter Total Value ------- -------- ------- ------- ------- ---------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Lines of credit -- $ 52,759 -- -- -- -- $ 52,759 $ 52,759 Average interest rate (variable) -- 7.68% -- -- -- -- 7.68% Long-term debt $59,776 $ 58,559 $97,960 $40,966 $32,368 $173,249 $462,878 $457,866 Average interest rate (fixed) 8.32% 8.28% 8.63% 8.53% 8.68% 8.96% 8.66% </TABLE> The Company does not typically utilize financial instruments for trading or other speculative purposes, nor does it typically utilize leveraged financial instruments. On the basis of the fair value of the Company's market sensitive instruments at September 29, 2001, the Company does not consider the potential near-term losses in future earnings, fair values and cash flows from reasonable possible near-term changes in interest rates and exchange rates to be material. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of the Company are included on pages 28 through 52 of this report on Form 10-K: Report of Ernst & Young LLP, Independent Auditors; Consolidated Balance Sheets as of September 29, 2001 and September 30, 2000; Consolidated Statements of Income for the years ended September 29, 2001, September 30, 2000, and September 25, 1999; Consolidated Statements of Changes in Stockholders' Equity for the years ended September 29, 2001, September 30, 2000, and September 25, 1999; Consolidated Statements of Cash Flows for the years ended September 29, 2001, September 30, 2000, and September 25, 1999; Notes to Consolidated Financial Statements; Selected quarterly financial data required by this Item is included in Note 12 of the Consolidated Financial Statements. 23
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated herein by reference from the data under the heading "ELECTION OF DIRECTORS" in the Proxy Statement to be used in connection with the solicitation of proxies for the Company's annual meeting of stockholders to be held February 12, 2002, to be filed with the Commission. Item 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference from the data under the heading "EXECUTIVE COMPENSATION" in the Proxy Statement to be used in connection with the solicitation of proxies for the Company's annual meeting of stockholders to be held February 12, 2002, to be filed with the Commission. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference from the data under the heading "SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS" in the Proxy Statement to be used in connection with the solicitation of proxies for the Company's annual meeting of stockholders to be held February 12, 2002, to be filed with the Commission. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference from the data under the headings "ELECTION OF DIRECTORS - Additional Information with Respect to Compensation Committee Interlocks and Insider Participation in Compensation Decisions" and "CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS" in the Proxy Statement to be used in connection with the solicitation of proxies for the Company's annual meeting of stockholders to be held February 12, 2002, to be filed with the Commission. 24
PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this report: 1. The following financial statements of the Registrant are included in response to Item 8 of this 10-K: Consolidated Balance Sheets as of September 29, 2001 and September 30, 2000; Consolidated Statements of Income for the years ended September 29, 2001, September 30, 2000, and September 25, 1999; Consolidated Statements of Changes in Stockholders' Equity for the years ended September 29, 2001, September 30, 2000, and September 25, 1999; Consolidated Statements of Cash Flows for the years ended September 29, 2001, September 30, 2000, and September 25, 1999; Notes to Consolidated Financial Statements. 2. The following financial statement schedule of the Registrant required by Item 8 and Item 14(d) of Form 10-K is included as page 53 of this report: Schedule II - Supplemental schedule of valuation and qualifying accounts. All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. 3. The following exhibits required by Item 601 of Regulation S-K and Item 14(c) of Form 10-K are filed herewith or incorporated by reference as indicated. EXHIBIT NUMBER AND DESCRIPTION 3.1 Articles of Incorporation of Ingles Markets, Incorporated, as amended. (Included as Exhibit 3.1 to Registrant's S-1 Registration Statement, File No. 33-23919, previously filed with the Commission and incorporated herein by this reference.) 3.2 By-laws of Ingles Markets, Incorporated. (Included as Exhibit 3.2 to Registrant's Annual Report on Form 10-K for the fiscal year ended September 24, 1988, File No. 0-14706, previously filed with the Commission and incorporated herein by this reference.) 4.1 See Exhibits 3.1 and 3.2 for provisions of Articles of Incorporation, as amended and By-laws of Registrant defining rights of holders of capital stock of Registrant. 4.2 Loan Agreement between the Registrant and Metropolitan Life Insurance Company dated March 21, 1990. (Included as Exhibit 19 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990, File 0-14706, previously filed with the Commission and incorporated herein by this reference.) 25
4.3 Indenture dated December 11, 2001 between the Registrant and U.S. Bank, N.A., as trustee, relating to the Registrant's 8-7/8% Senior Subordinated Notes due 2011. 4.4 Form of the Registrant's 8-7/8% Senior Subordinated Note due 2011 10.1 Amended and Restated Ingles Markets, Incorporated 1987 Employee Incentive Stock Option Plan. (Included as Exhibit 10.1 to Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1995, File No. 0-14706, previously filed with the Commission and incorporated herein by this reference.) (MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED AS AN EXHIBIT TO THIS REPORT ON FORM 10-K PURSUANT TO ITEM 14(C) OF FORM 10-K.) 10.2 Ingles Markets, Incorporated Investment/Profit Sharing Plan and Trust as amended through June 30, 1995, along with first, second and third amendments thereto. (Included as Exhibit 4.3 to Registrant's Registration Statement on Form S-8 filed on March 16, 1999, File No. 333-74459, previously filed with the Commission and incorporated herein by this reference.) (MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED AS AN EXHIBIT TO THIS REPORT ON FORM 10-K PURSUANT TO ITEM 14(C) OF FORM 10-K.) 10.3 Fourth Amendment to the Ingles Markets, Incorporated Investment/Profit Sharing Plan effective September 14, 1999. (Included as Exhibit 10.3 to Registrant's Annual Report on form 10-K for the fiscal year ended September 30, 2000, File No. 0-14706 previously filed with the Commission and incorporated herein by this reference.) (MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED AS AN EXHIBIT TO THIS REPORT ON FORM 10-K PURSUANT TO ITEM 14(C) OF FORM 10-K.) 10.4 Fifth Amendment to the Ingles Markets, Incorporated Investment/Profit Sharing Plan effective March 6, 2000. (Included as Exhibit 10.4 to Registrant's Annual Report on form 10-K for the fiscal year ended September 30, 2000, File No. 0-14706 previously filed with the Commission and incorporated herein by this reference.) (MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED AS AN EXHIBIT TO THIS REPORT ON FORM 10-K PURSUANT TO ITEM 14(C) OF FORM 10-K.) 10.5 Sixth Amendment to the Ingles Markets, Incorporated Investment/Profit Sharing Plan effective August 29, 2000. (Included as Exhibit 10.5 to Registrant's Annual Report on form 10-K for the fiscal year ended September 30, 2000, File No. 0-14706 previously filed with the Commission and incorporated herein by this reference.) (MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED AS AN EXHIBIT TO THIS REPORT ON FORM 10-K PURSUANT TO ITEM 14(C) OF FORM 10-K.) 10.6 Seventh Amendment to the Ingles Markets, Incorporated Investment/Profit Sharing Plan effective January 1, 2001. (MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED AS AN EXHIBIT TO THIS REPORT ON FORM 10-K PURSUANT TO ITEM 14(C) OF FORM 10-K) 26
10.7 Eighth Amendment to the Ingles Markets, Incorporated Investment/Profit Sharing Plan effective May 21, 2001. (MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED AS AN EXHIBIT TO THIS REPORT ON FORM 10-K PURSUANT TO ITEM 14(C) OF FORM 10-K) 10.8 Ninth Amendment to the Ingles Markets, Incorporated Investment/Profit Sharing Plan effective October 1, 2001. (MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED AS AN EXHIBIT TO THIS REPORT ON FORM 10-K PURSUANT TO ITEM 14(C) OF FORM 10-K) 10.9 Amended and Restated Ingles Markets, Incorporated 1991 Nonqualified Stock Option Plan. (Included as Exhibit 10.4 to Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1995, File No. 0-14706, previously filed with the Commission and incorporated herein by this reference.) (MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED AS AN EXHIBIT TO THIS REPORT ON FORM 10-K PURSUANT TO ITEM 14(C) OF FORM 10-K.) 10.10 1997 Nonqualified Stock Option Plan. (Included as Appendix A to Registrant's Proxy Statement for the Annual Meeting of Stockholders held on February 17, 1998, File No. 0-14706, previously filed with the Commission and incorporated herein by this reference.) (MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED AS AN EXHIBIT TO THIS REPORT ON FORM 10-K PURSUANT TO ITEM 14(C) OF FORM 10-K.) 21 Subsidiaries of the Registrant. 23 Consent of Ernst & Young LLP, Independent Auditors. - --------------- (b) The Registrant did not file any current reports on Form 8-K during the fourth quarter of its fiscal year ending September 29, 2001. (c) Exhibits - The response to this portion of Item 14 is submitted in the response to Item 14(a)(3) of this report. (d) Financial Statement Schedules - The response to this portion of Item 14 is submitted in the response to Item 14(a)(2) of this report. 27
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITOR Stockholders and Board of Directors Ingles Markets, Incorporated We have audited the accompanying consolidated balance sheets of Ingles Markets, Incorporated and subsidiaries as of September 29, 2001 and September 30, 2000, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended September 29, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ingles Markets, Incorporated and subsidiaries at September 29, 2001 and September 30, 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 29, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Greenville, South Carolina November 16, 2001 except for Note 17, as to which the date is December 5, 2001 28
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000 <TABLE> <CAPTION> ASSETS 2001 2000 - ------ --------------- --------------- <S> <C> <C> CURRENT ASSETS: Cash $ 12,434,897 $ 11,176,013 Receivables (less allowance for doubtful accounts of $339,938 - 2001 and $256,630 - 2000) 32,466,072 21,569,530 Inventories 185,359,164 179,396,630 Refundable income taxes -- 1,250,000 Other 3,790,109 6,188,703 --------------- --------------- Total current assets 234,050,242 219,580,876 PROPERTY AND EQUIPMENT: Land 182,405,593 176,673,319 Construction in progress 9,066,370 19,063,282 Buildings 518,095,679 482,052,121 Store, office and warehouse equipment 344,699,338 317,904,794 Transportation equipment 15,070,624 16,104,664 Property under capital leases 731,084 540,284 Leasehold improvements 42,555,331 38,159,174 --------------- --------------- Total 1,112,624,019 1,050,497,638 Less accumulated depreciation and amortization 388,180,605 348,025,294 --------------- --------------- Property and equipment - net 724,443,414 702,472,344 OTHER ASSETS 4,307,374 5,712,592 --------------- --------------- TOTAL ASSETS $ 962,801,030 $ 927,765,812 =============== =============== </TABLE> See notes to consolidated financial statements. 29
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000 <TABLE> <CAPTION> LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000 - ------------------------------------ -------------- -------------- <S> <C> <C> CURRENT LIABILITIES: Short-term loans and current portion of long-term debt $ 60,851,887 $ 59,776,013 Accounts payable, accrued expenses and current portion of other long-term liabilities 135,745,897 137,745,877 -------------- -------------- Total current liabilities 196,597,784 197,521,890 DEFERRED INCOME TAXES 37,064,578 35,514,578 LONG-TERM DEBT 488,693,496 455,861,173 OTHER LONG-TERM LIABILITIES 3,944,960 6,729,921 -------------- -------------- Total liabilities 726,300,818 695,627,562 -------------- -------------- 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; issued and outstanding, 10,005,107 shares in 2001, 9,932,614 shares in 2000 500,255 496,631 Class B, $.05 par value; 100,000,000 shares authorized; issued and outstanding, 12,634,432 shares in 2001, 12,645,125 shares in 2000 631,722 632,256 Paid-in capital in excess of par value 98,595,411 97,943,633 Retained earnings 136,772,824 133,065,730 -------------- -------------- Total stockholders' equity 236,500,212 232,138,250 -------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 962,801,030 $ 927,765,812 ============== ============== </TABLE> 30
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FISCAL YEARS ENDED SEPTEMBER 29, 2001, SEPTEMBER 30, 2000 AND SEPTEMBER 25, 1999 <TABLE> <CAPTION> 2001 2000 1999 --------------- --------------- --------------- <S> <C> <C> <C> Net sales $ 1,953,440,173 $ 1,916,200,153 $ 1,805,375,478 Cost of goods sold 1,441,883,795 1,425,286,574 1,354,930,433 --------------- --------------- --------------- Gross profit 511,556,378 490,913,579 450,445,045 Operating and administrative expenses 454,646,606 432,630,797 391,910,419 Rental income, net 10,302,158 10,149,373 9,077,582 --------------- --------------- --------------- Income from operations 67,211,930 68,432,155 67,612,208 Other income, net 3,890,721 6,985,223 2,323,016 --------------- --------------- --------------- Income before interest and income taxes 71,102,651 75,417,378 69,935,224 Interest expense 42,902,630 41,226,092 39,785,283 --------------- --------------- --------------- Income before income taxes 28,200,021 34,191,286 30,149,941 --------------- --------------- --------------- Income taxes: Current 4,950,000 8,400,000 8,150,000 Deferred 5,400,000 4,700,000 3,250,000 --------------- --------------- --------------- 10,350,000 13,100,000 11,400,000 --------------- --------------- --------------- Net income $ 17,850,021 $ 21,091,286 $ 18,749,941 =============== =============== =============== Per-share amounts: Basic earnings per common share $ .79 $ .93 $ .83 =============== =============== =============== Diluted earnings per common share $ .79 $ .93 $ .83 =============== =============== =============== Cash dividends per common share: Class A $ .66 $ .66 $ .66 =============== =============== =============== Class B $ .60 $ .60 $ .60 =============== =============== =============== </TABLE> See notes to consolidated financial statements. 31
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FISCAL YEARS ENDED SEPTEMBER 29, 2001, SEPTEMBER 30, 2000 AND SEPTEMBER 25, 1999 <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 26, 1998 9,581,641 $479,082 12,784,098 $639,205 $95,765,167 $ 121,352,289 $ 218,235,743 Net income -- -- -- -- -- 18,749,941 18,749,941 Cash dividends -- -- -- -- -- (14,002,894) (14,002,894) Exercise of stock options 112,000 5,600 -- -- 1,133,466 -- 1,139,066 Common stock conversions 92,850 4,642 (92,850) (4,642) -- -- -- ---------- -------- ---------- -------- ------------ ------------- ------------- 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 -- -- -- -- -- 21,091,286 21,091,286 Cash dividends -- -- -- -- -- (14,124,892) (14,124,892) Exercise of stock options 100,000 5,000 -- -- 1,045,000 -- 1,050,000 Common stock conversions 46,123 2,307 (46,123) (2,307) -- -- -- ---------- -------- ---------- -------- ------------ ------------- ------------- 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 -- -- -- -- -- 17,850,021 17,850,021 Cash dividends -- -- -- -- -- (14,142,927) (14,142,927) Exercise of stock options 61,800 3,090 -- -- 651,778 -- 654,868 Common stock conversions 10,693 534 (10,693) (534) -- -- -- ---------- -------- ---------- -------- ------------ ------------- ------------- BALANCE, SEPTEMBER 29, 2001 10,005,107 $500,255 12,634,432 $631,722 $98,595,411 $ 136,772,824 $ 236,500,212 ========== ======== ========== ======== =========== ============= ============= </TABLE> See notes to consolidated financial statements 32
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FISCAL YEARS ENDED SEPTEMBER 29, 2001, SEPTEMBER 30, 2000 AND SEPTEMBER 25, 1999 <TABLE> <CAPTION> 2001 2000 1999 -------------- -------------- -------------- <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 17,850,021 $ 21,091,286 $ 18,749,941 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense 45,266,368 43,532,429 41,923,239 Amortization of deferred gain on sale/leaseback of equipment (1,212,236) (1,017,227) (874,887) Gains on disposals of property and equipment (1,410,593) (2,682,262) (199,534) Receipt of advance payments on purchases contracts 1,375,000 3,644,282 8,251,750 Recognition of advance payments on purchases contracts (3,675,000) (4,578,947) (3,791,439) Deferred income taxes 5,400,000 4,700,000 3,250,000 (Increase) decrease in receivables (9,646,542) 5,728,975 (5,488,536) Increase in inventory (5,962,534) (12,385,586) (15,788,908) Increase in other assets (2,373,068) (2,424,544) (527,780) Increase (decrease) in accounts payable and accrued expenses 1,814,849 (13,329,158) 13,933,370 -------------- -------------- -------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 47,426,265 42,279,248 59,437,216 -------------- -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of property and equipment 5,052,264 6,898,629 294,371 Capital expenditures (73,193,907) (102,534,798) (52,221,452) -------------- -------------- -------------- NET CASH USED BY INVESTING ACTIVITIES (68,141,643) (95,636,169) (51,927,081) -------------- -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 88,511,287 138,380,068 85,343,729 Proceeds from sale/leaseback transactions 1,554,124 13,005,294 18,371,082 Payments on short-term borrowings, net -- (10,000,000) (20,000,000) Principal payments on long-term debt (54,603,090) (77,737,287) (83,522,776) Proceeds from exercise of stock options 654,868 1,050,000 1,139,066 Dividends paid (14,142,927) (14,124,892) (14,002,894) -------------- -------------- -------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 21,974,262 50,573,183 (12,671,793) -------------- -------------- -------------- NET INCREASE (DECREASE) IN CASH 1,258,884 (2,783,738) (5,161,658) Cash at Beginning of Year 11,176,013 13,959,751 19,121,409 -------------- -------------- -------------- CASH AT END OF YEAR $ 12,434,897 $ 11,176,013 $ 13,959,751 ============== ============== ============== </TABLE> See notes to consolidated financial statements. 33
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal years ended September 29, 2001, September 30, 2000 and September 25, 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of Ingles Markets, Incorporated and its wholly-owned subsidiaries, Sky King, Inc., Ingles Markets Investments, Inc., Milkco, Inc., Shopping Center Financing, LLC and Shopping Center Financing II, LLC (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. FISCAL YEAR - The Company's fiscal year ends on the last Saturday in September. Fiscal years 2001 and 1999 consisted of 52 weeks and fiscal year 2000 consisted of 53 weeks. CASH EQUIVALENTS - All highly liquid investments with a maturity of three months or less when purchased are considered cash. FINANCIAL INSTRUMENTS - The Company has overnight investments and short-term certificates of deposit included in cash. The Company's policy is to invest its excess cash either in reverse repurchase agreements or in commercial paper. Commercial paper is not secured; reverse repurchase agreements are secured by government obligations. At September 29, 2001, there were no investments in commercial paper or reverse repurchase agreements. Demand deposits of approximately $9.4 million in 24 banks exceed the $100,000 insurance limit per bank. INVENTORIES - Warehouse inventories are valued at the lower of average cost or market. Store inventories are valued at FIFO using the retail method. PROPERTY, EQUIPMENT AND DEPRECIATION - Property and equipment are stated at cost and depreciated over the estimated useful lives (principally 5 to 30 years) of the various classes of assets by the straight-line method. SELF-INSURANCE - The Company is self-insured for workers compensation and group medical and dental benefits. 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 is required in certain cases to obtain letters of credit to support its self-insured status. At fiscal year end 2001, the Company's self-insured liabilities were supported by $3.4 million of undrawn letters of credit. The Company carries casualty insurance only on those properties where it is required to do so. The Company has elected to self-insure its other properties. INCOME TAXES - The Company accounts for income taxes under FASB Statement No. 109, "Accounting for Income Taxes". Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates. PRE-OPENING COSTS - Costs associated with the opening of new stores are expensed when incurred. 34
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal years ended September 29, 2001, September 30, 2000 and September 25, 1999 RECLASSIFICATIONS - Certain amounts for 2000 and 1999 have been reclassified for comparative purposes. PER-SHARE AMOUNTS - 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. Diluted earnings per common share gives effect to dilutive stock options. ADVERTISING - The Company expenses the costs of advertising as incurred. Advertising and promotion expenses totaled $23.1 million, $23.9 million and $22.3 million for fiscal years 2001, 2000 and 1999, respectively. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management's knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results. SHIPPING AND HANDLING COSTS- The cost of shipping and handling is charged to expense as incurred and is included in operating and administrative expenses in the Consolidated Statements of Income. The Company incurred approximately $31.5 million, $31.2 million and $26.9 million of shipping and handling costs during 2001, 2000 and 1999, respectively. REVENUE RECOGNITION- The Company recognizes revenues from grocery sales at the point of sale to its customers and from fluid dairy at the point of shipment to its customers. NEW ACCOUNTING PRONOUNCEMENTS - 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, and the Company currently believes that it will not have a material impact on its financial statements. In June 2001, the Financial Accounting Standards Board issued Statements No. 141, "Business Combinations" ("FAS 141") and No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). Under the new rules, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The amortization provisions of FAS 142 apply to 35
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal years ended September 29, 2001, September 30, 2000 and September 25, 1999 goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company will apply the new accounting rules beginning September 30, 2001. The Company is currently evaluating its intangible assets in relation to FAS 141 and FAS 142 to determine the impact, if any, on its financial statements. In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations" that provides accounting guidance for the costs of retiring long-lived assets and is effective for fiscal years beginning after June 15, 2002. The Company is currently assessing the impact adoption of this statement will have on its financial statements. In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 provides accounting guidance for financial accounting and reporting for the impairment or disposal of long-lived assets. The statement supercedes FASB No. 121, "Accounting for the Impairment of Long-Lived Assets and for the Long-Lived Assets to be Disposed Of." It also supercedes the accounting and reporting provisions of APB Opinion No. 30 "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" related to the disposal of a segment of a business. The statement is effective for fiscal years beginning after December 15, 2001, with early adoption encouraged. The Company is currently assessing the impact adopting this statement will have on its financial statements. 36
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal years ended September 29, 2001, September 30, 2000 and September 25, 1999 2. INCOME TAXES DEFERRED INCOME TAX LIABILITIES AND ASSETS - Significant components of the Company's deferred tax liabilities and assets are as follows: <TABLE> <CAPTION> 2001 2000 ------------- ------------- <S> <C> <C> Deferred tax liabilities: Fixed asset tax/book differences $ 40,640,000 $ 39,252,000 Property tax method 826,000 768,000 Inventory 598,000 598,000 ------------- ------------- Total deferred tax liabilities 42,064,000 40,618,000 ------------- ------------- Deferred tax assets: Insurance reserves 2,468,000 3,368,000 Advance payments on purchases contracts 442,000 772,000 Litigation settlement 111,000 2,707,000 Vacation accrual 691,000 634,000 Deferred gain on sale/leasebacks 755,000 1,108,000 Closed store accrual 1,183,000 1,022,000 Other 1,750,000 1,743,000 ------------- ------------- Total deferred tax assets 7,400,000 11,354,000 ------------- ------------- Net deferred tax liabilities $ 34,664,000 $ 29,264,000 ============= ============= </TABLE> INCOME TAX EXPENSE - Income tax expense is different from the amounts computed by applying the statutory federal rates to income before income taxes. The reasons for the differences are as follows: <TABLE> <CAPTION> 2001 2000 1999 ------------- ------------- ------------- <S> <C> <C> <C> Federal tax at statutory rate $ 9,870,000 $ 11,967,000 $ 10,552,000 State income tax, net of federal tax benefits 1,100,000 1,111,000 980,000 Other (620,000) 22,000 (132,000) ------------- ------------- ------------- Total $ 10,350,000 $ 13,100,000 $ 11,400,000 ============= ============= ============= </TABLE> 37
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal years ended September 29, 2001, September 30, 2000 and September 25, 1999 Current and deferred income tax expense is as follows: <TABLE> <CAPTION> 2001 2000 1999 ------------- ------------- ------------- <S> <C> <C> <C> Current: Federal $ 4,700,000 $ 7,700,000 $ 7,350,000 State 250,000 700,000 800,000 ------------- ------------- ------------- Total current 4,950,000 8,400,000 8,150,000 ------------- ------------- ------------- Deferred: Federal 4,630,000 4,030,000 2,787,000 State 770,000 670,000 463,000 ------------- ------------- ------------- Total deferred 5,400,000 4,700,000 3,250,000 ------------- ------------- ------------- Total expense $ 10,350,000 $ 13,100,000 $ 11,400,000 ============= ============= ============= </TABLE> Current deferred income tax benefits of $2.4 million and $6.3 million at September 29, 2001 and September 30, 2000, respectively, included in other current assets, result from timing differences arising from vacation pay, bad debt and self-insurance reserves, litigation settlement reserves and from capitalization of certain overhead costs in inventory for tax purposes. 3. PROPERTY HELD FOR LEASE AND RENTAL INCOME At September 29, 2001, the Company owned and operated 77 shopping centers in conjunction with its supermarket operations. The Company leases to others a portion of its shopping center properties. The leases are non-cancelable operating lease agreements for periods ranging up to 20 years. Substantially all leases covering retail properties provide for one or more renewal periods and for percentage rent based on gross sales of the lessee. Rental income, net consists of the following: <TABLE> <CAPTION> 2001 2000 1999 ------------- ------------- ------------- <S> <C> <C> <C> Rents earned on owned and subleased properties: Base rentals including lease termination payments $ 15,187,616 $ 14,852,342 $ 14,550,975 Contingent rentals 1,348,902 1,034,630 977,876 ------------- ------------- ------------- Total 16,536,518 15,886,972 15,528,851 Depreciation on owned properties leased to others (4,687,209) (4,117,337) (4,736,314) Other shopping center expenses (1,547,151) (1,620,262) (1,714,955) ------------- ------------- ------------- Total $ 10,302,158 $ 10,149,373 $ 9,077,582 ============= ============= ============= </TABLE> 38
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal years ended September 29, 2001, September 30, 2000 and September 25, 1999 Owned properties leased to others under operating leases by major classes are summarized as follows: <TABLE> <CAPTION> SEPTEMBER 29, 2001 -------------- <S> <C> Land $ 39,001,420 Buildings 137,308,014 -------------- Total 176,309,434 Less accumulated depreciation 47,946,790 -------------- Property leased to others, net $ 128,362,644 ============== </TABLE> The above amounts are included in the respective captions on the balance sheet under the heading Property and Equipment. The following is a schedule of minimum future rental income on non-cancelable operating leases as of September 29, 2001: <TABLE> <CAPTION> Fiscal Year ----------- <S> <C> 2002 $ 12,261,619 2003 10,306,574 2004 8,091,579 2005 6,282,025 2006 4,948,967 Thereafter 25,526,107 ------------- Total minimum future rental income $ 67,416,871 ============= </TABLE> 4. LEASES AND RENTAL EXPENSE The Company conducts part of its retail operations from leased facilities. The initial terms of the leases expire at various times over the next 20 years. The majority of the leases include one or more renewal options and provide that the Company pay property taxes, utilities, repairs and certain other costs incidental to occupation of the premises. Several leases contain clauses calling for percentage rentals based upon gross sales of the supermarket occupying the leased space. The Company also leases a portion of its equipment under operating leases, including leases derived from sale/leaseback transactions, with initial terms of three to five years. OPERATING LEASES - Rent expense for all operating leases of $38.2 million, $31.4 million and $27.6 million for fiscal years 2001, 2000 and 1999, respectively is included in operating and administrative expenses. 39
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal years ended September 29, 2001, September 30, 2000 and September 25, 1999 The aggregate minimum rental commitments under non-cancelable operating leases as of September 29, 2001 are as follows: <TABLE> <CAPTION> Fiscal Year ----------- <S> <C> 2002 $ 41,262,735 2003 29,631,483 2004 23,139,032 2005 20,695,448 2006 14,816,790 Thereafter 85,950,451 -------------- Total minimum future rental commitments $ 215,495,939 ============== </TABLE> 5. 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> 2001 2000 -------------- --------------- <S> <C> <C> Accounts payable-trade $ 85,468,997 $ 87,359,538 Property, payroll, and other taxes payable 13,035,074 12,557,199 Salaries, wages, and bonuses payable 11,994,229 10,328,643 Self-insurance reserves 7,041,585 6,296,217 Accrued litigation settlement 288,604 7,049,407 Other 17,917,408 14,154,873 -------------- --------------- Total $ 135,745,897 $ 137,745,877 ============== =============== </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 $175,000 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, totaled $19.0 million, $16.5 million and $15.2 million for 2001, 2000 and 1999, respectively. 40
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal years ended September 29, 2001, September 30, 2000 and September 25, 1999 6. LONG-TERM DEBT AND SHORT-TERM LOANS Long-term debt and short-term loans are summarized as follows: <TABLE> <CAPTION> 2001 2000 -------------- -------------- <S> <C> <C> Notes payable: Real estate and equipment maturing 2002-2017: Due to banks, weighted average interest rate of 7.75% for 2001 and 7.88% for 2000 $ 263,300,020 $ 258,829,077 Due to other financial institutions, weighted average interest rate of 8.75% for 2001 and 9.13% for 2000 220,085,363 193,589,141 Other: Weighted average interest rate of 4.88% for 2001 and 7.68% for 2000, maturing 2003 61,024,000 52,759,000 Weighted average interest rate of 8.15% for 2001 and 8.41% for 2000, secured by stock of Milkco, Inc., maturing 2004 5,136,000 10,423,445 Other -- 36,523 -------------- -------------- Total long-term debt and short-term loans 549,545,383 515,637,186 Less current portion 60,851,887 59,776,013 -------------- -------------- Long-term debt, net of current portion $ 488,693,496 $ 455,861,173 ============== ============== </TABLE> During September 1997, the Company entered into a secured term loan agreement for $12 million. The loan and related agreements contain interest rate swap provisions which convert the variable rate to a fixed rate of 8.15%. The interest differential received or paid is recognized as an adjustment to interest expense. The Company is not exposed to credit risk in the event of default by others under the agreement. At September 29, 2001, property and equipment with an undepreciated cost of approximately $484 million was pledged as collateral for long-term debt. Long-term debt and line of credit agreements contain various restrictive covenants requiring, among other things, minimum levels of net worth and maintenance of certain financial ratios. One of these covenants has the effect of restricting funds available for dividends to approximately $34.2 million, based on tangible net worth at September 29, 2001. As of September 29, 2001, the Company is in compliance with these covenants or has obtained appropriate amendments. 41
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal years ended September 29, 2001, September 30, 2000 and September 25, 1999 At September 29, 2001, the Company had unused lines of credit of $69.0 million. The lines provide the Company with various interest rate options, generally at rates less than prime. Components of interest costs are as follows: <TABLE> <CAPTION> 2001 2000 1999 ------------- ------------- ------------- <S> <C> <C> <C> Total interest costs $ 44,838,488 $ 43,340,190 $ 40,466,568 Interest capitalized (1,935,858) (2,114,098) (681,285) ------------- ------------- ------------- Interest expense $ 42,902,630 $ 41,226,092 $ 39,785,283 ============= ============= ============= </TABLE> Maturities of long-term debt at September 29, 2001 are as follows: <TABLE> <CAPTION> Fiscal Year ----------- <S> <C> 2002 $ 60,851,887 2003 163,282,559 2004 48,853,836 2005 42,680,768 2006 17,852,145 Thereafter 216,024,188 -------------- Total $ 549,545,383 ============== </TABLE> 7. OTHER LONG-TERM LIABILITIES Other long-term liabilities are summarized as follows: <TABLE> <CAPTION> 2001 2000 ------------ ------------- <S> <C> <C> Advance payments on purchases contracts $ 3,638,708 $ 5,888,708 Litigation settlement 288,604 7,049,407 Deferred gain-sale/leasebacks 1,965,548 2,885,008 Other 1,546,373 1,855,432 ------------ ------------- Total other long-term liabilities 7,439,233 17,678,555 Less current portion 3,494,273 10,948,634 ------------ ------------- $ 3,944,960 $ 6,729,921 ============ ============= </TABLE> ADVANCE PAYMENTS ON PURCHASES CONTRACTS - The Company has entered into agreements with suppliers whereby payment is received in advance for commitments to purchase product from these suppliers in the future. The unearned portion, included in other long-term liabilities, will be recognized in accordance with the terms of the contract. LITIGATION SETTLEMENT - The Company reached a settlement in 1998 of a lawsuit alleging gender discrimination, resulting in recognition of the liability listed above. 42
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal years ended September 29, 2001, September 30, 2000 and September 25, 1999 8. STOCKHOLDERS' EQUITY The Company has two classes of Common Stock: Class A and Class B. Class A Common Stock is traded on The Nasdaq Stock Market's National Market under the symbol IMKTA. There is no public market for the Company's Class B Common Stock. However, each share of Class B Common Stock is convertible at any time, at the option of the holder, into one share of Class A Common Stock. Upon any transfers of Class B Common Stock (other than to immediate family members and the Investment/Profit Sharing Plan), such stock is automatically converted into Class A Common Stock. The holders of the Class A Common Stock and Class B Common Stock are entitled to dividends and other distributions as and when declared out of assets legally available therefore, subject to the dividend rights of any Preferred Stock that may be issued in the future. Each share of Class A Common Stock is entitled to receive a cash dividend and liquidation payment in an amount equal to 110% of any cash dividend or liquidation payment on Class B Common Stock. Any stock dividend must be paid in shares of Class A Common Stock with respect to Class A Common Stock and in shares of Class B Common Stock with respect to Class B Common Stock. The voting powers, preferences and relative rights of Class A Common Stock and Class B Common Stock are identical in all respects, except that the holders of Class A Common Stock have one vote per share and the holders of Class B Common Stock have ten votes per share. In addition, holders of Class A Common Stock, as a separate class, are entitled to elect 25% of all directors constituting the Board of Directors (rounded to the nearest whole number). As long as the Class B Common Stock represents at least 12.5% of the total outstanding Common Stock of both classes, holders of Class B Common Stock, as a separate class, are entitled to elect the remaining directors. The Company's Articles of Incorporation and Bylaws provide that the Board of Directors can set the number of directors between five and eleven. 43
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal years ended September 29, 2001, September 30, 2000 and September 25, 1999 9. EARNINGS PER COMMON SHARE The following table sets forth the computation of basic and diluted earnings per share: <TABLE> <CAPTION> 2001 2000 1999 ------------- ------------- ------------- <S> <C> <C> <C> BASIC Net income $ 17,850,021 $ 21,091,286 $ 18,749,941 ============= ============= ============= Shares Weighted average number of common shares outstanding 22,592,626 22,558,325 22,390,997 ============= ============= ============= Basic earnings per common share $ .79 $ .93 $ .83 ============= ============= ============= DILUTED Diluted earnings $ 17,850,021 $ 21,091,286 $ 18,749,941 ============= ============= ============= Shares Weighted average number of common shares outstanding 22,738,880 22,666,174 22,506,958 ============= ============= ============= Diluted earnings per common share $ .79 $ .93 $ . 83 ============= ============= ============= </TABLE> The difference in the weighted average number of common shares outstanding for the basic and diluted computations relates to outstanding stock options calculated using the treasury method for the dilutive computation. Options to purchase 855,000, 1,414,000 and 978,000 shares of common stock at prices ranging from $11.00 to $14.00 per share were outstanding during fiscal 2001, 2000 and 1999, respectively, but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. 10. EMPLOYEE BENEFIT PLANS INVESTMENT/PROFIT SHARING PLAN - The purpose of the qualified investment/profit sharing plan is to provide retirement benefits to eligible employees. Assets of the plan, including the Company's Class B Common Stock, are held in trust for employees and distributed upon retirement, death, disability or other termination of employment. Company contributions are discretionary and are determined quarterly by the Board of Directors. The Plan includes a 401(k) feature. Company contributions to the plan, included in operating and administrative expenses, were $715,000, $714,000 and $645,000 for fiscal years 2001, 2000 and 1999, respectively. 44
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal years ended September 29, 2001, September 30, 2000 and September 25, 1999 CASH BONUS PLAN - The Company pays monthly bonuses to various managerial personnel based on performance of the operating units controlled by these personnel. Except for certain employees who receive monthly bonuses, annual bonuses based on pre-tax, pre-bonus income are paid to all employees who worked the entire fiscal year. The Company has a discretionary bonus plan for certain executive officers providing for bonuses upon attainment of certain operating goals. Operating and administrative expenses include bonuses of approximately $5.1 million, $5.8 million and $5.4 million for fiscal years 2001, 2000 and 1999, respectively. 1987 EMPLOYEE INCENTIVE STOCK OPTION PLAN - The Company has an incentive stock option plan under which an aggregate of 250,000 shares of the Company's Class A Common Stock were issuable to qualified employees until September 8, 1997. The options may be exercised within a period of three months after five years from the date of issue or upon death, disability or retirement. As of September 29, 2001, no options were exercisable under this plan. Information with respect to options granted, exercised, canceled and outstanding follows: <TABLE> <CAPTION> WEIGHTED SHARES AVERAGE UNDER OPTION PRICE EXERCISE OPTION PER SHARE PRICE ------------------------------------------------------------ <S> <C> <C> <C> Outstanding, September 26, 1998 99,000 $8.63 -$14.00 $ 11.90 Exercised (12,000) 8.63 8.93 Canceled (11,000) 10.00 - 14.00 12.31 -------- Outstanding, September 25, 1999 76,000 10.00 - 14.00 12.36 Canceled (22,000) 10.00 - 14.00 11.78 -------- Outstanding, September 30, 2000 54,000 10.00 - 14.00 12.59 Canceled (24,000) 10.00 - 14.00 10.83 -------- OUTSTANDING, SEPTEMBER 29, 2001 30,000 $14.00 $ 14.00 ======== </TABLE> The weighted average remaining contractual life of the options outstanding at September 29, 2001 is 0.62 years. 1991 NONQUALIFIED STOCK OPTION PLAN - The Company had a nonqualified stock option plan under which an aggregate of 1,000,000 shares of the Company's Class A Common Stock were issuable to qualified employees until August 6, 1996. As of September 29, 2001, no options were outstanding under this plan. Information with respect to options granted, exercised, canceled and outstanding follows: 45
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal years ended September 29, 2001, September 30, 2000 and September 25, 1999 <TABLE> <CAPTION> WEIGHTED SHARES AVERAGE UNDER OPTION PRICE EXERCISE OPTION PER SHARE PRICE ------------------------------------------------------------- <S> <C> <C> <C> Outstanding, September 26, 1998 100,000 $ 10.38 $ 10.38 Exercised (100,000) 10.38 10.38 --------- OUTSTANDING, SEPTEMBER 25, 1999 -- $ -- $ -- ========= </TABLE> 1997 NONQUALIFIED STOCK OPTION PLAN - The Company has a nonqualified stock option plan under which an aggregate of 5,000,000 shares of the Company's Class A Common Stock may be issued to officers and other key employees until January 1, 2007. Options currently outstanding under the plan may be exercised within a one-year period following the grant exercise date or after death, disability or retirement. The grant exercise date may vary from one year to five years from the date the option shares were granted. All options automatically terminate with termination of the optionee's employment for any other reason. As of September 29, 2001, there were 148,200 option shares exercisable under this plan. 46
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal years ended September 29, 2001, September 30, 2000 and September 25, 1999 Information with respect to options granted, canceled and outstanding follows: <TABLE> <CAPTION> WEIGHTED SHARES AVERAGE UNDER OPTION PRICE EXERCISE OPTION PER SHARE PRICE ----------- ----------------- -------- <S> <C> <C> <C> Outstanding, September 26, 1998 964,000 $ 11.63 - $14.00 $ 13.94 Granted 1,057,000 10.50 - 13.69 11.36 Canceled (120,000) 11.63 - 14.00 13.92 ---------- Outstanding, September 25, 1999 1,901,000 10.50 - 14.00 12.51 Granted 2,054,700 9.56 9.56 Exercised (100,000) 10.50 10.50 Canceled (29,100) 9.56 - 14.00 12.22 ---------- Outstanding, September 30, 2000 3,826,600 9.56 - 14.00 10.98 Granted 16,000 11.00 11.00 Exercised (61,800) 9.56 9.56 Canceled (160,250) 9.56 - 14.00 12.87 ---------- OUTSTANDING, SEPTEMBER 29, 2001 3,620,550 $ 9.56 - $14.00 $ 10.92 ========== </TABLE> The weighted average remaining contractual life of the options outstanding at September 29, 2001 is 2.12 years. ACCOUNTING FOR STOCK-BASED COMPENSATION - In 1997, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123). FAS 123 establishes financial accounting and reporting standards for stock-based compensation plans. As permitted by FAS 123, the Company elected to account for stock-based compensation awards in accordance with Accounting Principles Board Opinion No. 25. In accordance with FAS 123, the fair value of each option grant was determined by using the Black-Scholes option-pricing model with the following weighted average assumptions used for 2001, 2000 and 1999, respectively; risk-free interest rates of 4.25, 6.10, and 6.02 percent; dividend yield of 5.3, 4.8 and 5.9 percent; expected volatility of 30.0, 28.8 and 30.9 percent; and expected lives of 5, 3 and 4 years. Had compensation cost for the Company's plans been determined based on the fair value at the grant date for such awards in 2001, 2000 and 1999 consistent with the provisions of FAS 123, the Company's earnings and earnings per share, basic and diluted, would have been reduced to the pro forma amounts indicated below: 47
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal years ended September 29, 2001, September 30, 2000 and September 25, 1999 <TABLE> <CAPTION> 2001 2000 1999 ------------- ------------- ------------- <S> <C> <C> <C> BASIC Net income $ 17,850,021 $ 21,091,286 $ 18,749,941 Net income, pro forma 16,888,893 20,256,487 18,201,914 Basic earnings per common share $ 0.79 $ 0.93 $ 0.83 Basic earnings per common share, pro forma 0.75 0.90 0.81 DILUTED Diluted earnings $ 17,850,021 $ 21,091,286 $ 18,749,941 Diluted earnings, pro forma 16,888,893 20,256,487 18,201,914 Diluted earnings per common share $ 0.79 $ 0.93 $ 0.83 Diluted earnings per common share, pro forma 0.74 0.89 0.81 Weighted average fair value of options granted $ 1.63 $ 1.79 $ 1.95 </TABLE> The pro forma impact of these options is not likely to be representative of the effects on reported net income for future years. MEDICAL CARE PLAN - Medical and dental benefits are provided to qualified employees under a self-insured plan. Expenses under the plan include claims paid, administrative expenses and an estimated liability for claims incurred but not yet paid. 11. 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: 48
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal years ended September 29, 2001, September 30, 2000 and September 25, 1999 <TABLE> <CAPTION> 2001 2000 1999 ------------ ------------ ------------ <S> <C> <C> <C> Revenues from unaffiliated customers: Grocery sales $ 1,866,124 $ 1,842,105 $ 1,733,297 Shopping center rentals 16,537 15,887 15,529 Fluid dairy 87,316 74,095 72,078 ------------ ------------ ------------ Total revenues from unaffiliated customers $ 1,969,977 $ 1,932,087 $ 1,820,904 ============ ============ ============ Income from operations: Grocery sales $ 48,310 $ 51,089 $ 50,979 Shopping center rentals 10,302 10,149 9,078 Fluid dairy 8,600 7,194 7,555 ------------ ------------ ------------ Total income from operations $ 67,212 $ 68,432 $ 67,612 ============ ============ ============ Assets: Grocery sales $ 805,627 $ 777,431 $ 725,990 Shopping center rentals 128,363 123,672 121,277 Fluid dairy 28,811 26,663 25,904 ------------ ------------ ------------ Total assets $ 962,801 $ 927,766 $ 873,171 ============ ============ ============ Capital expenditures: Grocery sales $ 65,836 $ 92,761 $ 46,791 Shopping center rentals 4,461 6,756 2,750 Fluid dairy 2,897 3,018 2,680 ------------ ------------ ------------ Total capital expenditures $ 73,194 $ 102,535 $ 52,221 ============ ============ ============ Depreciation and amortization: Grocery sales $ 38,320 $ 37,319 $ 35,166 Shopping center rentals 4,687 4,117 4,736 Fluid dairy 2,259 2,096 2,021 ------------ ------------ ------------ Total depreciation and amortization $ 45,266 $ 43,532 $ 41,923 ============ ============ ============ </TABLE> Revenue from shopping center rentals is included in rental income, net in the statements of income. The other revenues comprise the net sales reported in the statements of income. The fluid dairy segment has $44.6, $44.8 and $43.4 million in sales to the grocery sales segment in fiscal 2001, 2000 and 1999, respectively. These sales have been eliminated in consolidation. 49
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal years ended September 29, 2001, September 30, 2000 and September 25, 1999 12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of unaudited financial data regarding the Company's quarterly results of operations. Each of the quarters in the two fiscal years presented contains thirteen weeks with the exception of the 4th quarter of fiscal 2000 which contains 14 weeks. <TABLE> <CAPTION> (in thousands except earnings per common share) 1ST 2ND 3RD 4TH 2001 QUARTER QUARTER QUARTER QUARTER TOTAL - ---- ---------- ---------- ---------- ---------- ------------ <S> <C> <C> <C> <C> <C> NET SALES $ 504,695 $ 475,167 $ 484,735 $ 488,843 $ 1,953,440 GROSS PROFIT 128,564 125,359 128,634 128,999 511,556 NET INCOME 4,458 3,150 5,922 4,320 17,850 BASIC EARNINGS PER COMMON SHARE .20 .14 .26 .19 .79 DILUTED EARNINGS PER COMMON SHARE .20 .14 .26 .19 .79 2000 Net sales $ 468,400 $ 465,139 $ 469,364 $ 513,297 $ 1,916,200 Gross profit 117,346 118,681 122,579 132,308 490,914 Net income 4,906 6,394 5,604 4,187 21,091 Basic earnings per common share .22 .28 .25 .18 .93 Diluted earnings per common share .22 .28 .25 .18 .93 </TABLE> 13. LITIGATION Various legal proceedings and claims arising in the ordinary course of business are pending against the Company. In the opinion of management, the ultimate liability, if any, from all pending legal proceedings and claims would not materially affect the Company's financial position or the results of its operations. 14. FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts reported in the balance sheets for cash and cash equivalents approximate their fair values. Receivables: The carrying amounts reported in the balance sheets for receivables approximate their fair values. 50
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal years ended September 29, 2001, September 30, 2000 and September 25, 1999 Long and short-term debt: The carrying amounts of the Company's short-term borrowings approximate their fair values. The fair values of the Company's long-term debt are based on quoted market prices, where available, or discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The carrying amounts and fair values of the Company's financial instruments at September 29, 2001 and September 30, 2000 are as follows (amounts in thousands): <TABLE> <CAPTION> 2001 2000 ------------------------------ ------------------------------ CARRYING FAIR Carrying Fair AMOUNT VALUE Amount Value ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Cash and cash equivalents $ 12,435 $ 12,435 $ 11,176 $ 11,176 Receivables 32,466 32,466 21,570 21,570 Long-term and short-term debt: Real estate and equipment 488,521 495,868 452,418 447,406 Other 61,024 61,024 63,219 63,219 </TABLE> 15. CASH FLOW INFORMATION Supplemental disclosure of cash flow information is as follows: <TABLE> <CAPTION> 2001 2000 1999 ------------- ------------- ------------- <S> <C> <C> <C> Cash paid during the year for: Interest (net of amounts capitalized) $ 43,485,020 $ 40,898,804 $ 39,961,635 Income taxes 623,867 8,966,329 9,206,644 Non cash items: Property and equipment additions included in accounts payable 2,366,442 5,746,770 4,356,069 </TABLE> 16. MAJOR SUPPLIER A large portion of inventory is purchased from a wholesale grocery distributor. Purchases from the distributor were approximately $203 million in 2001, $188 million in 2000 and $184 million in 1999. This distributor owns approximately 3% of the Company's Class A Common Stock and approximately 1% of the Company's Class B Common Stock at September 29, 2001. Amounts owed to this distributor, included in accounts payable-trade and accrued expenses, were $3.8 million and $3.9 million at September 29, 2001 and September 30, 2000, respectively. In addition, the Company sells dairy and juice products to this wholesale grocery distributor. Sales to this distributor were $32.5 million in fiscal 2001, $29.6 million in fiscal 2000 and $28.4 million in fiscal 1999. Amounts due from this distributor, included in receivables, were $1.3 million and $1.7 at September 29, 2001 and September 30, 2000, respectively. 51
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal years ended September 29, 2001, September 30, 2000 and September 25, 1999 17. SUBSEQUENT EVENT On December 4, 2001 the Company closed a $250 million senior subordinated debt offering to mature in 2011. The notes were priced at 8-7/8% and issued at a discount to yield 9%. The proceeds will be used to repay $140 million in existing indebtedness and to fund 2002 capital expenditures and 2002 current maturities of long-term debt. In conjunction with the issuance of the notes, the Company renegotiated its lines of credit, extending the maturity dates and increasing available lines of credit from $130 million to $150 million. These lines, which are classified as long-term debt on the Consolidated Balance Sheet at September 29, 2001 mature between 2002 and 2004. Loan costs, related to the repayment of debt, of approximately $450,000 will be expensed in the first quarter of fiscal 2002. 52
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES SCHEDULE II SUPPLEMENTAL SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS <TABLE> <CAPTION> BALANCE AT BEGINNING OF CHARGED TO BALANCE AT DESCRIPTION YEAR COSTS & EXPENSES DEDUCTIONS END OF YEAR ------------ ---------------- ---------- ----------- <S> <C> <C> <C> <C> Fiscal year ended September 29, 2001: Deducted from asset accounts: Allowance for doubtful accounts $ 256,630 $ 176,000 $ 92,692(1) $ 339,938 Fiscal year ended September 30, 2000: Deducted from asset accounts: Allowance for doubtful accounts $ 185,070 $ 146,000 $ 74,440(1) $ 256,630 Fiscal year ended September 25, 1999: Deducted from asset accounts: Allowance for doubtful accounts $ 158,643 $ 96,000 $ 69,573(1) $ 185,070 </TABLE> (1) Uncollectible accounts written off, net of recoveries. 53
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INGLES MARKETS, INCORPORATED By: /s/ Robert P. Ingle ------------------------------------- Robert P. Ingle Chairman of the Board and Chief Executive Officer Date: December 20, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: <TABLE> <S> <C> /s/ Robert P. Ingle December 20, 2001 - -------------------------------------------- Robert P. Ingle, Chairman of the Board, Chief Executive Officer and Director /s/ Vaughn C. Fisher December 20, 2001 - -------------------------------------------- Vaughn C. Fisher, President, Chief Operating Officer and Director /s/ Brenda S. Tudor December 20, 2001 - -------------------------------------------- Brenda S. Tudor, CPA, Vice President-Finance, Chief Financial Officer and Director /s/ Charles E. Russell December 20, 2001 - -------------------------------------------- Charles E. Russell, Director /s/ Robert P. Ingle, II December 20, 2001 - -------------------------------------------- Robert P. Ingle, II, Vice President- Operations and Director /s/ Florence S. Dimenna December 20, 2001 - -------------------------------------------- Florence S. Dimenna Secretary and Controller </TABLE> 54
EXHIBIT INDEX 3.1 Articles of Incorporation of Ingles Markets, Incorporated, as amended. (Included as Exhibit 3.1 to Registrant's S-1 Registration Statement, File No. 33-23919, previously filed with the Commission and incorporated herein by this reference.) 3.2 By-laws of Ingles Markets, Incorporated. (Included as Exhibit 3.2 to Registrant's Annual Report on Form 10-K for the fiscal year ended September 24, 1988, File No. 0-14706, previously filed with the Commission and incorporated herein by this reference.) 4.1 See Exhibits 3.1 and 3.2 for provisions of Articles of Incorporation, as amended and By-laws of Registrant defining rights of holders of capital stock of Registrant. 4.2 Loan Agreement between the Registrant and Metropolitan Life Insurance Company dated March 21, 1990. (Included as Exhibit 19 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990, File 0-14706, previously filed with the Commission and incorporated herein by this reference.) 4.3 Indenture dated December 11, 2001 between the Registrant and U.S. Bank, N.A., as trustee, relating to the Registrant's 8-7/8% Senior Subordinated Notes due 2011. 4.4 Form of the Registrant's 8-7/8% Senior Subordinated Note due 2011 10.1 Amended and Restated Ingles Markets, Incorporated 1987 Employee Incentive Stock Option Plan. (Included as Exhibit 10.1 to Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1995, File No. 0-14706, previously filed with the Commission and incorporated herein by this reference.) (MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED AS AN EXHIBIT TO THIS REPORT ON FORM 10-K PURSUANT TO ITEM 14(C) OF FORM 10-K.) 10.2 Ingles Markets, Incorporated Investment/Profit Sharing Plan and Trust as amended through June 30, 1995, along with first, second and third amendments thereto. (Included as Exhibit 4.3 to Registrant's Registration Statement on Form S-8 filed on March 16, 1999, File No. 333-74459, previously filed with the Commission and incorporated herein by this reference.) (MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED AS AN EXHIBIT TO THIS REPORT ON FORM 10-K PURSUANT TO ITEM 14(C) OF FORM 10-K.) 10.3 Fourth Amendment to the Ingles Markets, Incorporated Investment/Profit Sharing Plan effective September 14, 1999. (Included as Exhibit 10.3 to Registrant's Annual Report on form 10-K for the fiscal year ended September 30, 2000, File No. 0-14706 previously filed with the Commission and incorporated herein by this reference.) (MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED AS AN EXHIBIT TO THIS REPORT ON FORM 10-K PURSUANT TO ITEM 14(C) OF FORM 10-K.) 10.4 Fifth Amendment to the Ingles Markets, Incorporated Investment/Profit Sharing Plan effective March 6, 2000. (Included as Exhibit 10.4 to Registrant's Annual Report on form 10-K for the 55
fiscal year ended September 30, 2000, File No. 0-14706 previously filed with the Commission and incorporated herein by this reference.) (MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED AS AN EXHIBIT TO THIS REPORT ON FORM 10-K PURSUANT TO ITEM 14(C) OF FORM 10-K.) 10.5 Sixth Amendment to the Ingles Markets, Incorporated Investment/Profit Sharing Plan effective August 29, 2000. (Included as Exhibit 10.5 to Registrant's Annual Report on form 10-K for the fiscal year ended September 30, 2000, File No. 0-14706 previously filed with the Commission and incorporated herein by this reference.) (MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED AS AN EXHIBIT TO THIS REPORT ON FORM 10-K PURSUANT TO ITEM 14(C) OF FORM 10-K.) 10.6 Seventh Amendment to the Ingles Markets, Incorporated Investment/Profit Sharing Plan effective January 1, 2001. (MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED AS AN EXHIBIT TO THIS REPORT ON FORM 10-K PURSUANT TO ITEM 14(C) OF FORM 10-K.) 10.7 Eighth Amendment to the Ingles Markets, Incorporated Investment/Profit Sharing Plan effective May 21, 2001. (MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED AS AN EXHIBIT TO THIS REPORT ON FORM 10-K PURSUANT TO ITEM 14(C) OF FORM 10-K) 10.8 Ninth Amendment to the Ingles Markets, Incorporated Investment/Profit Sharing Plan effective October 1, 2001. (MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED AS AN EXHIBIT TO THIS REPORT ON FORM 10-K PURSUANT TO ITEM 14(C) OF FORM 10-K) 10.9 Amended and Restated Ingles Markets, Incorporated 1991 Nonqualified Stock Option Plan. (Included as Exhibit 10.4 to Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1995, File No. 0-14706, previously filed with the Commission and incorporated herein by this reference.) (MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED AS AN EXHIBIT TO THIS REPORT ON FORM 10-K PURSUANT TO ITEM 14(C) OF FORM 10-K.) 10.10 1997 Nonqualified Stock Option Plan. (Included as Appendix A to Registrant's Proxy Statement for the Annual Meeting of Stockholders held on February 17, 1998, File No. 0-14706, previously filed with the Commission and incorporated herein by this reference.) (MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED AS AN EXHIBIT TO THIS REPORT ON FORM 10-K PURSUANT TO ITEM 14(C) OF FORM 10-K.) 21 Subsidiaries of the Registrant. 23 Consent of Ernst & Young LLP, Independent Auditors. 56