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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 27, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to __________________ .
Commission File Number 0-14706
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INGLES MARKETS, INCORPORATED
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(Exact name of registrant as specified in its charter)
North Carolina 56-0846267
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 6676, Asheville, NC 28816
- ------------------------------- -------------------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number,
including area code: (704) 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
Convertible Subordinated Debentures due October 2008
----------------------------------------------------
(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 49 - 50
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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. ( )
As of December 11, 1997, 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, 1997, was approximately $126.8 million.
As of December 11, 1997, the registrant had 9,071,666 shares of Class A
Common Stock outstanding and 12,788,073 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 17, 1998, to be filed with the Commission,
are incorporated by reference into Part III of this Report on Form 10-K.
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PART I
Item 1. BUSINESS
General
Ingles Markets, Incorporated ("Ingles" or the "Company") is a leading
supermarket chain with operations in six southeastern states. At September 27,
1997, the Company, headquartered in Asheville, North Carolina, operated 198
supermarkets in North Carolina, South Carolina, Georgia, Tennessee, Virginia
and Alabama. Ingles' strategy is to locate its supermarkets primarily in
suburban areas, small towns and rural communities, where management believes
the market may be underserved by existing supermarkets. The Company's existing
stores average approximately 38,000 square feet.
The Company resumed its new store opening, expansion, remodel and/or
replacement program in fiscal 1994 and continued this program in fiscal 1995,
1996 and 1997. During fiscal 1997, eleven new stores were opened, five older
stores were remodeled and/or replaced and one store was closed. All of the
stores which were remodeled or replaced were enlarged, the results of which
have been excellent, as evidenced by increased sales and market share. Fiscal
1997 capital expenditures aggregated $114.1 million. The Company believes that
its new store opening, expansion, remodel and/or replacement program
contributes to the continuing success of the Company and should improve
monetary returns and build stockholder value over the long-term. It is the
Company's aim to make Ingles among the most modern supermarket chains in the
industry.
During the past five years, the number of supermarkets operated by the Company
increased from 170 to 198. The aggregate sales area in all stores increased
from approximately 3.7 million square feet to approximately 5.3 million square
feet. In addition, weighted average annual sales per store increased from $6.0
million to $7.7 million.
Substantially all stores are located within 250 miles of the Company's 760,000
square foot, state-of-the-art warehouse and distribution center located outside
of Asheville, North Carolina. This facility supplies approximately 67% of the
inventory requirements of the Company's stores. A 310,000 square foot addition
to the existing warehouse facility was completed in October and November 1995.
The addition accommodates an expanded inventory of perishable goods and
increased dry grocery space. The new addition enabled the Company to warehouse
and distribute produce for the first time in its 33-year history during fiscal
year 1996.
The Company's supermarkets, featuring brightly lit and spacious aisles, offer
the customer a broad selection of nationally advertised food and non-food
products as well as quality private label items, all at competitive prices with
an emphasis on convenient locations and superior customer service. Each store
is staffed with helpful, friendly employees who provide customers with fast
check-out and carry-out service. Ingles was one of the first supermarket
chains in its region to introduce higher margin specialty departments, such as
delicatessens and bakeries, as well as offering extended operating hours. All
stores are open seven days a week; many are open 24 hours a day.
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In conjunction with its supermarket operations, the Company owns and operates
75 neighborhood shopping centers, all but three of which contain an Ingles
supermarket. The Company also owns and holds for future development or sale
numerous outparcels and other acreage located adjacent to the shopping centers
and store properties it owns.
Ingles also owns and operates, as a wholly-owned subsidiary, a milk processing
and packaging plant which sells approximately 58% of its milk and related dairy
products to unaffiliated customers.
The Company was founded by Robert P. Ingle, the Company's Chairman of the Board
and Chief Executive Officer. As of September 27, 1997, Mr. Ingle retains
approximately 87% of the combined voting power and 54% of the total number of
shares of the Company's outstanding Class A Common Stock 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
704-669-2941.
Business
The Company operates in two lines of business: retail grocery and food sales
(principally retail sales) and shopping center rentals. 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 on pages 44- 45 of this report on Form 10-K):
Fiscal Year Ended September
-------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
Revenues from
unaffiliated customers:
Grocery and food sales $1,536.0 99.3% $1,472.6 99.4% $1,385.1 99.4%
Shopping center rentals 10.2 .7% 9.6 .6% 8.3 .6%
-------- ------ -------- ------ -------- ------
$1,546.2 100.0% $1,482.2 100.0% $1,393.4 100.0%
======== ====== ======== ====== ======== ======
Income from operations:
Grocery and food sales $ 56.8 91.5% $ 54.4 91.4% $ 45.3 91.7%
Shopping center rentals 5.3 8.5% 5.1 8.6% 4.1 8.3%
-------- ------ -------- ------ -------- ------
62.1 100.0% 59.5 100.0% 49.4 100.0%
====== ====== ======
Other income, net 2.3 3.1 1.9
Interest expense 31.3 29.0 24.7
-------- -------- --------
Income before income
taxes and extraordinary
item $ 33.1 $ 33.6 $ 26.6
======== ======== ========
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Supermarket Operations
The Company follows the strategy of locating its supermarkets primarily in
small towns, rural communities and, in particular with respect to new stores,
suburban areas where management believes the market may be underserved by
existing stores.
At September 27, 1997, the Company operated 196 supermarkets under the name
"Ingles" and 2 supermarkets under the name "Best Food" in western North
Carolina, western South Carolina, northern Georgia, eastern Tennessee,
southwestern Virginia and northeastern Alabama. The "Best Food" store concept,
developed in 1994, accommodates a smaller shopping area in a 22,500 square foot
building. The store carries a full line of dry groceries, fresh meat and
produce, all of which are displayed in a modern readily accessible environment.
The store is 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.
Number of Supermarkets Percentage of Total
at Fiscal Net Sales for Fiscal
Year Ended September Year Ended September
---------------------- --------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
North Carolina 63 59 57 36% 35% 35%
South Carolina 31 28 28 14% 14% 14%
Georgia 77 76 72 37% 38% 38%
Tennessee 23 21 21 12% 11% 11%
Virginia 3 3 3 1% 2% 2%
Alabama 1 1 1 0% 0% 0%
---- ---- ---- --- --- ---
198 188 182 100% 100% 100%
==== ==== ==== === === ===
The Company's supermarkets, featuring brightly lit and spacious aisles, offer
the customer a full line of food items, including grocery, meat and dairy
products, produce and frozen foods, as well as a number of non-food items, such
as health and beauty care products, all at competitive prices with an emphasis
on convenient locations and superior customer service. All stores are open 7
days a week and many are open 24 hours a day. Most of the Company's stores
also contain specialty departments such as delicatessens and bakeries.
Management believes that specialty departments result in higher inventory
turnover than other departments and improve overall profit margins. As an
additional convenience to its customers, the Company leases space to local
banks who independently operate branches in 23 stores.
The Company sells a broad selection of nationally advertised brands of
merchandise and carries a wide variety of products under its "Laura Lynn"
private label. The private label products are packed to the Company's
specifications and are generally sold at prices lower than those of national
brands.
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Selected statistics on the Company's supermarket operations are presented
below:
Fiscal Year Ended September
-------------------------------------------
1997 1996 1995(1) 1994 1993
------- ------- ------- ------- -------
Weighted Average Sales
Per Store (000's) $ 7,716 $ 7,710 $ 7,445 $ 6,930 $ 6,495
Total Square Feet at
End of Year (000's) 7,506 6,746 6,217 5,575 5,299
Average Total Square
Feet per Store 37,912 35,886 34,160 31,859 31,170
Average Square Feet of
Selling Space per Store (2) 26,538 25,120 23,912 22,301 21,819
Average Sales Per Square
Foot of Selling Space (2) $ 298 $ 315 $ 321 $ 314 $ 299
Stores:
Opened 16 14 25 9 3
Replaced and/or closed 6 8 18 4 3
Size of Stores:
Less than 29,999 Sq Ft. 39 44 47 58 60
30,000 - 41,999 Sq. Ft. 80 82 87 92 93
42,000 - 51,999 Sq. Ft. 37 36 36 24 16
Greater than 52,000 Sq Ft. 42 26 12 1 1
------- ------- ------- ------- -------
Total Stores Open at
End of Year 198 188 182 175 170
======= ======= ======= ======= =======
(1) Fiscal 1995 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 to provide convenient supermarket
locations which offer the customer a broad selection of quality products at
competitive prices with an emphasis on superior customer service. Customer
service includes, among other things, maintaining an awareness of customer
tastes and preferences and offering cut-to-order meat, carry-out service to the
customer's automobiles and Sunday hours.
The Company attempts to reinforce its quality and superior service image
through advertising, which is conducted primarily in newspapers, through the
distribution of circulars, and on radio and television. During fiscal 1997,
1996, and 1995 advertising and promotion expenditures, net were approximately
$19.1 million, $17.8 million, and $18.7 million, or 1.2% of net sales in 1997,
1.2% of net sales in 1996 and 1.4% of net sales in 1995. The Company stresses
its American ownership as a contrast to the foreign ownership of several of its
principal competitors. From time to time, the Company uses special promotions
at many of its store locations as part of its promotional strategy. The
Company sponsors an annual "food show" in Asheville, North Carolina where food
vendors operate booths and provide
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information about and samples of products that are offered for sale in the
Company's stores. The net proceeds from the food show are donated to
charitable organizations.
Purchasing and Distribution
The Company supplies approximately 67% of its supermarkets' inventory
requirements from a 760,000 square foot, "state- of-the-art" warehouse and
distribution center located near Asheville, North Carolina. A 310,000 square
foot addition to the facility was completed in October and November 1995. The
new addition enabled the Company to warehouse and distribute produce for the
first time in its 33-year history beginning in fiscal year 1996, as well as
store more dry goods, meat and dairy products. The warehouse services all of
the Company's stores and receives merchandise, principally by truck, from
sources located throughout the country. Goods from the facility are
distributed to the Company's stores by its fleet of 103 tractors and 410
trailers.
Approximately 13% of the Company's inventory requirements in fiscal 1997,
primarily frozen food and slower moving items which the Company preferred not
to stock, were purchased from a wholesale grocery distributor with which the
Company has had a continuing relationship since 1963. Purchases from the
distributor were approximately $159 million in 1997, $168 million in 1996 and
$236 million in 1995. The Company believes that alternative sources of supply
are readily available. This distributor owned approximately 3% of the
Company's Class A Common Stock and approximately 1% of the Company's Class B
Common Stock at September 27, 1997.
The remaining 20% of the Company's inventory requirements, primarily beverages,
bread and snack foods, are supplied directly to the Company's supermarkets by
local distributors and manufacturers.
The Company's centrally managed purchasing and distribution operations provide
several advantages. The Company: (1) is able to negotiate and reduce the cost
of merchandise it purchases, (2) is able to decrease overhead costs, (3) is
able to better manage its inventory at both warehouse and store level, (4) is
able to decrease in-store stock room space by making frequent deliveries, which
increases the square footage available for retail selling space and (5) is able
to turn inventory rapidly which enables the Company to offer consistently high
quality meat and produce items in its stores.
Stores order merchandise electronically. Shipments from the warehouse to the
stores are wrapped which reduces damage during shipment.
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 ability to take advantage of forward
purchasing is limited by several factors including carrying costs and warehouse
space.
In 1982, the Company purchased Milkco, Inc., an integrated milk processing and
packaging plant located in Asheville, North Carolina. The plant processes and
packages milk, fruit juices and spring water under the Sealtest, Pet and
Biltmore labels, as well as under the Company's own "Laura Lynn" private label.
The plant supplies 90% of the fluid milk needs
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of Ingles. Production from the plant has increased from a rate of 5 million
gallons per year at the time of acquisition to over 46 million gallons per year
and is currently the second largest milk processing and packaging plant in
North Carolina. Sales to nonaffiliates in fiscal 1997 were approximately $53.9
million or 58% of its business.
Expansion and Store Development
From the beginning of fiscal 1993 through the end of fiscal 1997, the number of
supermarkets operated by the Company increased from 170 to 198. During this
period, total supermarket square footage increased from 5.3 to 7.5 million
square feet and average square feet per store increased from approximately
31,000 to 38,000.
The Company uses independent contractors to construct its supermarkets from
prototype designs. The current prototype designs are for "MegaStores" which
contain at least 54,000 square feet. These larger stores, 16 of which were
opened in fiscal 1997, offer customers a wider range of convenience and
services, including a deli-bakery, sit-down cafe, floral department and a video
store. The "MegaStores" also provide greater selection in both food and
non-food categories. The construction of stores is closely monitored and
controlled by the Company.
The Company remodels older stores on a regular basis, including minor remodels
("face-lifts"), in order to increase customer traffic, compete effectively
against new store openings by competitors and support its "quality image"
merchandising strategy. The Company has elected to relocate, rather than
remodel, certain stores where relocation was more economical, and in some
instances, provided a more convenient location. Most stores over ten years old
have been or are currently being remodeled. Inclusion of specialty departments
typically found in new stores is frequently a part of remodeling.
The Company spent an aggregate of approximately $339.6 million in capital
expenditures during the past three fiscal years, primarily on new stores, store
expansions and remodeling, including equipment.
The Company plans to open 10 new stores, remodel and expand 10 stores, replace
13 stores and perform minor remodels ("face-lifts") at 9 existing store
locations in fiscal 1998. 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.
Competition
The supermarket industry is highly competitive. The number and type of
competitors vary by location. Principal competitive factors include store
location, price, service, convenience, cleanliness, product quality and
variety.
The Company's principal competitors are Winn Dixie Stores, Inc., Kroger
Company, Food Lion, Inc. and BI-LO, Inc. The Company also competes with other
food store chains as well as local supermarkets, specialty and convenience food
stores and small chains that have significant market share
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in limited areas. The Company believes that its principal competitive
advantages are its clean stores, which feature brightly lit and spacious
aisles, their convenient locations, the Company's quality image, superior level
of customer service, including fast check-out and carry-out service, and broad
selection of nationally advertised food and non-food products as well as
quality private label items, all at competitive prices.
Employees
At September 27, 1997, the Company had 11,888 employees, including 198
administrative and management personnel, 11,463 supermarket personnel, and 227
employees engaged in the milk processing and packaging operations.
Approximately 57% of these employees work on a part-time basis, substantially
all of whom are supermarket personnel. None of the employees are represented
by a labor union. Management considers employee relations to be excellent.
The Company pays monthly bonuses to certain managerial personnel based on their
store's performance. Annual bonuses based on pre-tax, pre-bonus income, as
defined, are paid to all eligible personnel. The Company believes that its
employee incentive compensation program is unique in its industry, provides a
competitive advantage by encouraging employees to respond to consumer
preferences and needs and results in improved employee morale and loyalty, thus
enhancing the Company's ability to retain experienced personnel.
Insurance
The Company maintains general liability, automobile insurance and excess
liability coverages. The Company carries $10 million liability insurance
coverage on one aircraft and $5 million liability insurance coverage on three
other aircraft used in its business. The Company carries casualty insurance
only on those properties where it is required to do so. The Company has
elected to self-insure its other properties.
The Company is self-insured for workers' compensation and employee group
medical and dental benefits up to a maximum per occurrence of $350,000 for
workers' compensation and up to a maximum of $150,000 per covered person for
medical care benefits for a policy year. The Company is insured for covered
costs in excess of these limits.
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. Each mark is federally registered and renewed when
required. In addition, the Company uses the "Sealtest", "Pet", and "Biltmore"
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.
Item 2. PROPERTIES
At September 27, 1997, the Company owned and operated 75 shopping centers, all
but three of which contained an Ingles supermarket. The shopping centers
contain an aggregate of 5.5 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 each center is leased by the Company
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to third party tenants. The Company also owns and holds for future development
or sale numerous outparcels and other acreage located adjacent to the shopping
centers and store properties it owns.
A breakdown by size of the shopping centers operated by the Company is as
follows:
Less than 50,000 square feet 26
50,000-100,000 square feet 33
Over 100,000 square feet 16
----
75
====
In addition to an Ingles supermarket, many shopping centers include a national
drug store chain as a tenant. Several shopping centers include space leased to
a regional or national discount department store. In some instances, space is
also leased to local tenants such as cleaners, restaurants and other service
businesses or specialty retailers. The Company believes that the businesses
operated by its tenants, combined with an Ingles supermarket, offer one-stop
shopping convenience and increase traffic in its stores.
Typically, Ingles offers a drug store tenant a 20 year lease with renewal
options for an average 40 year term. A department store tenant is typically
offered a 15 to 20 year lease with renewal options for an average 30 to 40 year
term. Leases to local tenants have a maximum five year term. Most tenant
leases contain percentage rent provisions based on sales volume and are triple
net leases. None of the tenant leases provide an option to purchase.
The Company manages the leasing of the shopping centers. It employs
maintenance workers and also engages local contractors to maintain the
properties. The vacancy rate for shopping centers operated by the Company was
approximately 15.9%, 18.0% and 20.1% at fiscal year-end 1997, 1996 and 1995,
respectively. The total annual rental income from third party tenants,
including payments in connection with the early termination of leases, was
approximately $10.2 million, $9.6 million and $8.3 million in fiscal 1997, 1996
and 1995, respectively.
Of the 126 supermarket locations not included in shopping centers owned by the
Company, 44 are free-standing stores owned by the Company and 82 are leased from
various unaffiliated third parties. Most of the leases give the Company the
right of first refusal to purchase the entire shopping center in which the
supermarkets are located and have exclusivity clauses prohibiting the developer
from renting to another supermarket within a designated radius. The majority of
leases require that the Company 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 range from $1.00 to $5.50 per square foot. During fiscal year
1997, 1996 and 1995, the Company paid a total of $11.5 million, $11.7 million
and $11.8 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 27, 1997,
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with respect to the initial and any renewal option terms of leases of
supermarkets not located in shopping centers operated by the Company.
Year of Expiration Number of Stores
(including renewal terms) With Leases Expiring
--------------------------- ----------------------
2000-2019 9
2020-2039 4
2040 or after 69
Management believes that the long-term rent stability provided by these leases
is a valuable asset of the Company.
The Company owns a 810,000 square foot facility which is strategically located
between Interstate 40 and Highway 70 near Asheville, North Carolina. The
facility includes the Company's principal executive offices and its 760,000
square foot "state-of-the-art" warehouse and distribution center, as well as
the 78 acres of land on which it is situated. The property also includes truck
servicing and fuel storage facilities.
The Company's milk processing and packaging subsidiary, Milkco, Inc., owns a
83,800 square foot manufacturing and storage facility in Asheville, North
Carolina. In addition to the plant itself, the property includes truck
servicing and fuel storage facilities.
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 the vote of the security holders during the fourth
quarter of the fiscal year covered by this report.
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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 his shares
of Class B Common Stock into an equal number of shares of Class A Common Stock
at any time. As of December 11, 1997, there were approximately 1,299 holders
of record of the Company's Class A Common Stock (approximately 6,600 beneficial
holders) and 259 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 period 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.
1997 Fiscal Year High Low
- ----------------- ---- ---
First Quarter (ended December 28, 1996) $17-1/4 $12-5/8
Second Quarter (ended March 29, 1997) $15 $12-1/2
Third Quarter (ended June 28, 1997) $16-1/4 $13-1/2
Fourth Quarter (ended September 27, 1997) $16-7/8 $12-5/8
1996 Fiscal Year High Low
- ---------------- ---- ---
First Quarter (ended December 30, 1995) $11-7/8 $ 9-5/8
Second Quarter (ended March 30, 1996) $12-3/4 $10-3/4
Third Quarter (ended June 29, 1996) $13-3/4 $11-3/4
Fourth Quarter (ended September 28, 1996) $16-1/8 $11-3/8
On December 11, 1997, the closing sales price of the Company's Class A Common
Stock on The Nasdaq Stock Market's National Market was $13-3/8 per share.
Dividends
The Company has paid cash dividends on its Common Stock in each of the past
eighteen fiscal years, except for the 1984 fiscal year when the Company paid a
3% stock dividend. During both fiscal 1997 and fiscal 1996 the Company paid
quarterly dividends totalling $.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 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. The payment of
dividends is also subject to restrictions contained in certain financing
arrangements. (See Note 6 to the Consolidated Financial Statements on pages
38 - 40 of this report on Form 10-K).
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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.
Selected Income Statement
Data for the Year Ended
September
(in thousands except
per share amounts) 1997 1996 1995 1994 1993
- -------------------- ---------- ---------- ---------- ---------- ----------
Net Sales $1,535,976 $1,472,578 $1,385,127 $1,233,497 $1,141,800
Gross Profit 376,790 345,648 317,239 275,062 250,592
Income Before
Cumulative Effect of
Change in Accounting
Principle and
Extraordinary Item 20,463 20,731 17,023 16,572 11,701
Primary Earnings per
Common Share Before
Cumulative Effect of
Change in Accounting
Principle and
Extraordinary Item .96 1.12 .93 .90 .65
Cash Dividends per
Common Share
Class A .66 .66 .66 .5775 .2475
Class B .60 .60 .60 .5250 .2250
Selected Balance Sheet
Data at September
(in thousands) 1997 1996 1995 1994 1993
- --------------------- -------- -------- -------- -------- --------
Current Assets $188,408 $169,915 $155,828 $141,500 $136,316
Property and Equipment,
net 606,363 530,228 450,541 359,670 312,516
Total Assets 802,583 707,965 611,827 506,593 456,549
Current Liabilities,
including Current
Portion of Long-Term
Liabilities 158,124 161,409 135,019 115,938 123,882
Long-Term Liabilities,
net of Current Portion 395,042 349,511 292,765 214,057 163,013
Stockholders' Equity 222,982 175,010 163,816 157,972 147,689
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
The Company's fiscal year ends on the last Saturday in September.
Fiscal years 1997 and 1996 consisted of 52 weeks, while fiscal year 1995 was a
53-week year.
During the past five years, the Company's sales grew at an average
annual compound rate of 7.6%. This growth is attributable to both the opening
of new stores and increased sales in existing stores. During the period, the
number of stores increased from 170 to 198 and weighted average sales per store
increased from $6.0 million to $7.7 million. Sales also benefited from modest
population growth in the Company's geographic markets and increased market
share resulting from the expansion, remodel and/or replacement of existing
stores and the addition of new stores. Sales are slightly seasonal with higher
volume in the summer months due to increased sales by stores located in
vacation and seasonal home areas.
The following table sets forth for the years indicated the percentage
which selected items in the consolidated statements of income bear to net sales
and the percentage changes in dollar amounts of such items as compared to the
indicated prior year.
PERCENTAGE CHANGE
PERCENTAGE OF NET SALES -----------------
FISCAL YEAR
FISCAL YEAR -----------------
ENDED SEPTEMBER 1997 1996
----------------------- VS. vs.
1997 1996 1995 1996 1995
---- ---- ---- ---- ----
Net sales . . . . . . . . . . 100.0% 100.0% 100.0% 4.3% 6.3%
Cost of goods sold . . . . . 75.5 76.5 77.1 2.9 5.5
----- ----- -----
Gross profit . . . . . . . . 24.5 23.5 22.9 9.0 9.0
Operating and administrative
expenses . . . . . . . . . 20.8 19.8 19.6 9.9 7.1
Rental income, net. . . . . . .3 .3 .3 3.2 24.1
----- ----- -----
Income from operations. . . . 4.0 4.0 3.6 4.4 20.3
Other income, net . . . . . . .1 .2 .1 (26.4) 62.0
----- ----- -----
Income before interest,
income taxes and
extraordinary item. . . . . 4.1 4.2 3.7 2.8 21.9
Interest expense . . . . . . 2.0 1.9 1.8 8.1 17.1
----- ----- -----
Income before income taxes and
extraordinary item. . . . . 2.1 2.3 1.9 (1.7) 26.3
Income taxes . . . . . . . . .8 .9 .7 (2.3) 34.4
----- ----- -----
Income before extraordinary
item. . . . . . . . . . . . 1.3% 1.4% 1.2% (1.3) 21.8
===== ===== =====
FISCAL 1997 COMPARED WITH FISCAL 1996
NET SALES
Net sales for the year ended September 27, 1997 increased $63.4 million, to
$1.536 billion, up 4.3% over sales of $1.473 billion last year. Approximately
51.7% of the dollar increase in sales resulted from an increase in grocery
sales - the balance substantially from increased sales in the perishable
departments. Identical store sales (grocery stores open
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for the entire duration of the previous fiscal year) decreased 1.5%. Sales were
impacted by increased competition, low food price inflation (estimated to be
less than 1%) and generally soft economic conditions.
The Company is commited to maintaining its market share (and increasing it
where possible) throughout its area of operations by: maintaining clean
easy-to-shop, conveniently located stores; providing a superior level of
customer service; pricing aggressively; expanding its square footage by opening
new stores, remodeling and/or replacing existing stores; by improving
productivity at its other store locations and investing in other programs and
technologies that will help improve and generate sales.
In fiscal 1997, the Company opened 11 new stores, replaced 5 existing stores,
closed one older store and performed minor remodels ("face-lifts") at 16
existing store locations. During the prior and current fiscal years, 18 new
stores were opened, 12 were expanded, remodeled and/or replaced, 2 older stores
were closed and face-lifts were performed at 28 existing store locations. All
new stores and all expansions, remodels and/or replacements in fiscal 1996 and
fiscal 1997 were "MegaStores". This new larger concept store offers the
customer a wider range of convenience and services, including a deli, bakery,
sit-down cafe, floral department and video store. The new "MegaStore" also
provides greater selection in both food and non-food products.
The Company believes that sales increases are the foundation upon which
improved earnings are built. Encouraging thus far in fiscal 1998 are the solid
increases the Company has seen in its sales - in particular, identical store
sales. The Company plans to continue to focus on ways to grow its business.
Fiscal 1997 was the 33rd consecutive year Ingles achieved an increase in net
sales.
GROSS PROFIT
Gross profit for the year was $376.8 million, or 24.5% of sales, compared with
$345.6 million, or 23.5% of sales, last year - an increase of 9.0%.
A larger percentage of sales came from higher margin perishable departments,
increasing gross profit overall. Grocery gross profit, as a percentage of
sales, improved because of aggressive purchasing, pricing and merchandising
programs, good promotional strategy, better product mix and strong private
label sales. Meat, produce, frozen food and bakery gross profit, as a
percentage of sales, improved due to good merchandising and aggressive
purchasing and pricing programs.
By increasing its business in areas that produce higher profit margins, namely
food service sales, the Company's wholly-owned subsidiary, Milkco, Inc., was
able to increase its gross margin substantially.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses, as a percentage of sales, increased from
19.8% last year to 20.8% this year. The cost of labor at store level,
depreciation and amortization expense, taxes and licenses and repairs and
maintenance, as a percentage of sales, increased.
To ensure the Company remained competitive and in order to attract and retain
good qualified personnel, the wage structure at store level was
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revamped in April 1997. Depreciation and amortization expense was more because
of the Company's aggressive capital expenditure program this year and last
year. Increases in refrigeration repairs, sanitation and common area
maintenance caused repairs and maintenance to go up.
A Company goal in fiscal 1998 will be to reduce operating and administrative
expenses, as a percentage of sales. The Company believes that increased sales
volume combined with a renewed emphasis on decreasing and/or controlling
critical expense items and improving productivity will help achieve this goal.
RENTAL INCOME, NET
Rental income, net increased from $5.1 million last year to $5.3 million this
year. The increase is due to an increase in gross rental income, $.6 million,
net of increased expense, $.4 million, associated with the remodeling and
operation of shopping centers.
INCOME FROM OPERATIONS
Income from operations was $62.1 million, or 4.0% of sales, compared to $59.5
million, or 4.0% of sales, a year ago - an increase of 4.4%. The increase in
operating income is due to the increases in sales, gross profit and net rental
income.
OTHER INCOME, NET
Other income, net decreased $.8 million. Fiscal 1996 includes gains of $2.4
million on the sale of seven outparcels of land located adjacent to shopping
centers owned by the Company; fiscal 1997 includes gains of $.8 million on the
sale of three outparcels. Other miscellaneous income increased $.8 million.
INCOME BEFORE INTEREST, INCOME TAXES AND EXTRAORDINARY ITEM
Income before interest, income taxes and the extraordinary item was $64.4
million, or 4.2% of sales, this year compared to $62.6 million, or 4.3% of
sales, last year.
INTEREST EXPENSE
Interest expense was $29.0 million in fiscal 1996 - $31.3 million this year.
The increase was principally due to an increase in debt to fund the Company's
aggressive capital expenditure program, net of a reduction in expense ($.6
million) resulting from the conversion of the Company's Convertible
Subordinated Debentures.
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM
Income before income taxes and the extraordinary item was $33.1 million, or
2.2% of sales, this year compared with $33.6 million, or 2.3% of sales, last
year.
INCOME TAXES
The provision for income taxes yielded an effective tax rate of 38.1% this year
- - 38.4% last year.
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INCOME BEFORE EXTRAORDINARY ITEM
Income before the extraordinary item (discussed below) was down only slightly,
from $20.7 million in fiscal 1996 (which was "The Best Year Ever" in the
history of the Company) to $20.5 million this year. Fully diluted earnings per
common share before the extraordinary item decreased from $1.03 last year to
$.95 this year.
EXTRAORDINARY ITEM - EARLY EXTINGUISHMENT OF DEBT (NET OF INCOME TAX BENEFIT)
On December 6, 1996, the Company announced its intention to redeem all its
outstanding Convertible Subordinated Debentures (the "Debentures") on January
20, 1997. The holders of the Debentures had the right to convert their
Debentures into shares of the Company's Class A Common Stock at $11.10 per
share before the close of business on January 16, 1997. Approximately $36.7
million of the Debentures were converted into approximately 3.3 million shares
of Class A Common Stock. The remaining outstanding Debentures ($.8 million)
were redeemed at 101.8% of face value plus accrued interest on January 20,
1997. The unamortized loan costs and redemption premium associated with the
early extinguishment of this debt (net of the income tax benefit) was $.6
million.
NET INCOME
Net income for fiscal 1997 was $19.9 million, or 1.3% of sales, compared to
$20.7 million, or 1.4% of sales, last year. Primary earnings per common share
were $1.12 last year - $.93 this year; fully diluted earnings per common share
were $1.03 last year versus $.92 this year. Both primary and fully diluted
earnings per common share decreased due, in part, to the conversion of the
Debentures.
FISCAL 1996 COMPARED WITH FISCAL 1995
NET SALES
Net sales for the year ended September 28, 1996 increased $87.5 million, to
$1.473 billion, up 6.3% over sales of $1.385 billion the prior year, which was
a 53-week year. Excluding the 53rd week of 1995, 1996 sales increased 8.3%.
Growth in identical store sales (grocery stores open for the entire duration of
the previous fiscal year), on a comparable 52-week basis, was 5.0%.
The strong gain in sales was driven by the opening of new stores, the
expansion, remodel and/or replacement of existing stores and the increase in
identical store sales. The Company's continuing commitment to superior
customer service, its broad selection of quality food and non-food products,
including private label items, at competitive prices, and its effective
marketing and merchandising efforts also helped boost sales.
In fiscal 1996, the Company opened seven new stores; expanded, remodeled and/or
replaced seven existing stores; and closed one older store.
During fiscal 1996 and fiscal 1995, 14 new stores were opened, 25 older stores
were expanded, remodeled and/or replaced and minor remodels ("face-lifts") were
performed at 12 existing store locations.
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GROSS PROFIT
Gross profit for fiscal 1996 was $345.7 million, or 23.5% of sales, compared
with $317.2 million, or 22.9% of sales, the prior year - an increase of 9.0%.
A larger percentage of sales came from higher margin perishable departments,
increasing gross profit overall. Grocery gross profit, as a percentage of
sales, was positively impacted by effective buying, an aggressive merchandising
and pricing program, good promotional strategy and improved product mix. Meat,
produce and deli gross profit, as a percentage of sales, improved due to better
merchandising, effective purchasing and pricing programs and reduced shrinkage
of inventory.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses, as a percentage of sales, increased from
19.6% in fiscal 1995 to 19.8% in fiscal 1996. The cost of labor at store
level, depreciation and amortization expense and repairs and maintenance, as a
percentage of sales, increased. The increase in depreciation and amortization
expense resulted from the Company's aggressive capital expenditure program in
1996 and 1995. The cost of supplies at store level, advertising and
promotional expenses, rent expense and the cost of insurance, as a percentage
of sales, decreased.
RENTAL INCOME, NET
Rental income, net was $4.1 million in 1995 - $5.1 million in 1996. The
increase is due to an increase in gross rental income, $1.3 million, net of
increased expenses, $.3 million, associated with the remodeling of shopping
centers.
INCOME FROM OPERATIONS
Income from operations in fiscal 1996 increased 20.3% to $59.5 million, or 4.0%
of sales, compared with $49.4 million, or 3.6% of sales, the prior year. The
increase in operating income was due to the increase in sales, the related
increase in gross profit and the increase in net rental income.
OTHER INCOME, NET
Other income, net was $3.1 million in 1996 - $1.9 million in 1995. Fiscal 1996
includes gains of $2.4 million on the sale of seven outparcels of land located
adjacent to shopping centers owned by the Company; fiscal 1995 includes gains
of $.6 million on the sale of two outparcels. Other miscellaneous income
decreased $.6 million.
INCOME BEFORE INTEREST AND INCOME TAXES
Income before interest and income taxes increased 21.9% to $62.6 million, or
4.3% of sales, in 1996 compared with $51.4 million, or 3.7% of sales the prior
year.
INTEREST EXPENSE
Interest expense increased from $24.7 million in 1995 to $29.0 million in 1996
due to an overall increase in debt levels to fund the Company's aggressive
capital expenditure program.
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INCOME BEFORE INCOME TAXES
Income before income taxes in 1996 was $33.6 million, or 2.3% of sales,
compared with $26.6 million, or 1.9% of sales, the prior year.
INCOME TAXES
The elimination of the targeted jobs tax credit and higher state income taxes
resulted in a higher effective income tax rate in fiscal 1996 of 38.4% compared
to an effective rate of 36.1% in fiscal 1995.
NET INCOME
Net income for fiscal 1996 was $20.7 million, or 1.4% of sales, compared with
$17.0 million, or 1.2% of sales, the prior year - an increase of 21.8%.
Primary earnings per common share rose from $.93 in fiscal 1995 to $1.12 in
fiscal 1996.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
FISCAL 1997
OPERATING ACTIVITIES
Net cash provided by operating activities for the year ended September 27, 1997
totalled $37.0 million. Net income for the period was $19.9 million and
depreciation and amortization expense was $38.5 million. Inventory increased
$12.9 million; receivables $2.7 million. Accounts payable and accrued expenses
decreased $7.1 million. Deferred income taxes were $4.4 million and the
recognition of advance payments on purchases contracts was $3.5 million.
The increase in inventory occurred at both store and warehouse levels and is
the result of 11 new store openings, 5 store expansions, remodels and/or
replacements, increased variety and the Company's desire to maintain inventory
levels to support increased sales volume. The increase in receivables is
principally the result of an increase in rebates and allowances due from
suppliers and refundable income taxes.
Accounts payable - trade, excluding non-cash additions of property and
equipment of $6.9 million and $6.0 million at September 27, 1997 and September
28, 1996, respectively, decreased $8.6 million. The decrease in accounts
payable - trade is due to decreases in accounts payable - expense and payables
relating to merchandise delivered by vendors directly to stores, partially
offset by increases in certain other payable categories. The income tax
benefit from the exercise of stock options was $1.3 million; property, payroll
and other taxes payable increased $1.0 million and other accrued expenses
increased $.3 million.
INVESTING ACTIVITIES
Net cash used by investing activities - primarily expenditures for capital
assets - was $112.9 million. The Company's capital expenditure program was
devoted primarily to obtaining land for new store locations, the construction
of new facilities, the renovation, modernization and/or expansion of existing
stores and the installation of electronic scanning systems in 23 stores. The
Company now has 158 scanning stores.
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Since January 1995, the Company has installed debit/credit card payment systems
in 154 stores providing the customer more ways to pay for their groceries.
Scanning and debit/credit card payment systems are installed in every new and
remodeled store. In addition, electronic benefit cards for government
entitlement programs are now accepted in several stores where the state has
such a program replacing traditional food stamps.
Some of the capital expenditures incurred during fiscal 1997 were for new
stores, store expansions, remodels and/or replacements expected to become
operational in fiscal 1998.
FINANCING ACTIVITIES
Net cash provided by financing activities totalled $78.9 million. Proceeds
from the issuance of long-term debt aggregated $157.2 million. The proceeds of
this debt were used to reduce short-term borrowings outstanding under existing
bank lines of credit. Additional short-term debt was subsequently incurred to
pay for capital expenditures and for general corporate purposes. Principal
payments on long-term debt were $68.5 million. The Company paid cash dividends
of $12.9 million. Proceeds from the exercise of stock options were $3.0
million.
FINANCIAL STRENGTH
At September 27, 1997, the Company remained in sound financial condition.
Total assets were $802.6 million and stockholders' equity was $223.0 million,
compared with $708.0 million and $175.0 million, respectively, at year-end,
September 28, 1996. Working capital was $30.3 million and the current ratio
(current assets/current liabilities) was 1.19 to 1. Favorable inventory
turnover rates (cost of sales/inventory) in 1997 of 8.2 helped generate cash
flow from operations. Return on assets (income before the extraordinary
item/total assets) was 2.5%. Return on investment (income before the
extraordinary item/average stockholders' equity) was 10.3% in fiscal 1997.
CAPITAL REQUIREMENTS
The Company's new store opening, expansion, remodeling and/or replacement plans
are continually reviewed and are subject to change. The Company's ability to
open new stores and expand, remodel and/or replace existing stores is subject
to several factors, including the acquisition of satisfactory sites and the
successful negotiation of new leases, and may be affected by zoning and other
governmental regulation.
The 1998 capital expenditures budget includes plans to open 10 new stores,
remodel and expand 10 stores, replace 13 stores and perform minor remodels
("face-lifts") at 9 existing store locations. Certain expenditures in
connection with some of these projects were paid for in fiscal 1997 and are
included in the 1997 capital expenditure total.
Additional expenditures will be made to: (1) upgrade and replace existing store
equipment, (2) install electronic scanning systems and debit/credit card
payment systems in new and existing stores and (3) secure sites for future
store expansion. Fiscal 1998 capital expenditures, in total, are expected to
be approximately $100 million. Some of the expenditures that will be incurred
during the fiscal year will relate to assets that will be placed in service in
fiscal 1999.
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FINANCIAL RESOURCES
At September 27, 1997, the Company had lines of credit with ten banks totalling
$151 million; of this amount $95 million was unused. The Company monitors its
cash position daily and makes draws or repayments on its lines of credit. The
lines provide the Company with various interest rate options generally at rates
less than prime. The Company is not required to maintain compensating balances
in connection with these lines of credit. The Company had unencumbered
property with a net book value of approximately $200 million which is available
to collateralize additional debt.
On December 6, 1996, the Company announced its intention to redeem all its
outstanding Convertible Subordinated Debentures (the "Debentures") on January
20, 1997. The holders of the Debentures had the right to convert their
Debentures into shares of the Company's Class A Common Stock at $11.10 per
share before the close of business on January 16, 1997. Approximately $36.7
million of the Debentures were converted into approximately 3.3 million shares
of Class A Common Stock. The remaining outstanding Debentures ($.8 million)
were redeemed at 101.8% of face value plus accrued interest on January 20,
1997. The unamortized loan costs and redemption premium associated with the
early extinguishment of this debt (net of the income tax benefit) was $.6
million.
The Company believes, based on its current results of operations, and financial
condition, that the financial resources available, including amounts available
under long-term financing arrangements, existing bank lines of credit and
internally generated funds, will be sufficient to meet planned capital
expenditures and working capital requirements for the foreseeable future,
including any debt servicing required by additional borrowings. The Company
believes that its current new store opening, expansion, remodel and/or
replacement program will not have a material adverse effect on the availability
of these financial resources or on the sufficiency of these resources for the
purposes described in this report. However, it is possible that, in the
future, the Company's results of operations and financial condition will be
different from that described in this report based on a number of intangible
factors. These factors may include, among others, increased competition,
changing regional and national economic conditions, adverse climatic conditions
affecting food production and delivery and changing demographics. It is also
possible, for such reasons, that the results of operations from the new,
expanded, remodeled and/or replacement stores will not meet or exceed the
results of operations from existing stores that are described in this report.
QUARTERLY CASH DIVIDENDS
Since December 27, 1993, the Company has paid regular quarterly cash dividends
of $.165 (sixteen and one-half cents) per share on its Class A Common Stock and
$.15 (fifteen cents) per share on its Class B Common Stock for an annual rate
of $.66 and $.60 per share, respectively.
The Company expects to continue paying regular cash dividends on a quarterly
basis. However, the Board of Directors periodically reconsiders the
declaration of dividends. The Company pays these dividends at the discretion
of the Board of Directors and the continuation of these payments, the amount of
such dividends and the form in which the dividends are paid (cash or stock)
depends upon the results of operations, the financial condition of the Company
and other factors which the Board of Directors deems relevant.
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INSURANCE
The Company maintains general liability, automobile and excess liability
coverages. The Company carries $10 million liability insurance coverage on one
aircraft and $5 million liability insurance coverage on three other aircraft
used in its business. The Company carries casualty insurance only on those
properties where it is required to do so.
Because of the sharp escalation in the cost of insurance, the Company has
elected to self-insure certain other costs representing approximately 75% of
the total cost of insurance. Risks and uncertainties are associated with self-
insurance; however, the Company has limited its exposure by maintaining excess
liability coverages. The Company believes that its mix between insurance and
self-insurance is prudent, is in accordance with general industry practice and
is in the best interest of the Company.
Self-insurance reserves are established for workers' compensation and employee
group medical and dental benefits based on claims filed and claims incurred but
not reported, with a maximum per occurrence of $350,000 for workers'
compensation and up to a maximum of $150,000 per covered person for medical
care benefits for a policy year. The Company is insured for covered costs in
excess of these limits.
Insurance expense, as a percentage of sales, for the year ended September 27,
1997, increased .03%.
IMPACT OF INFLATION
Inflation in food prices during fiscal years 1997, 1996 and 1995 continued to
be lower than the overall increase in the Consumer Price Index. Ingles primary
costs, inventory and labor, increase with inflation. Recovery of these costs
has to come from improved operating efficiencies and, to the extent possible,
through improved gross margins.
IMPACT OF SFAS 128
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which must be adopted by the Company and reflected in
its financial statements for the periods ending on or after December 27, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded.
The impact of Statement 128 is expected to result in an increase of $.02 in
primary earnings per common share for fiscal years 1997 and 1995 and an
increase of $.03 in primary earnings per common share for fiscal year 1996.
Statement 128 would not impact the calculation of fully diluted earnings per
common share for fiscal 1997 and 1995, however, fully diluted earnings per
common share for fiscal 1996 would increase by $.01 per share.
YEAR 2000
The Company has assessed key financial, informational and operational systems.
Management does not anticipate that the Company will encounter significant
operational issues related to Year 2000. Furthermore, the financial impact of
making required systems changes is not expected to be material to the Company's
consolidated financial position, results of operations or cash flows.
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FORWARD LOOKING STATEMENTS
This Annual Report contains certain forward-looking statements relating to,
among other things, capital expenditures, cost reduction, operating
improvements and expected results. Such statements are subject to inherent
risks and uncertainties including among others: business and economic
conditions generally in the Company's operating area; pricing pressures and
other competitive factors; results of the Company's programs to reduce costs
and achieve improvements in operating results; and the availability and terms
of financing. Consequently, actual events affecting the Company and the impact
of such events on the Company's operations may vary significantly from those
described in this report or contemplated or implied by statements in this
report.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company are included on
pages 28 through 47 of this report on Form 10-K:
Report of Ernst & Young LLP, Independent Auditors;
Consolidated Balance Sheets as of September 27, 1997, and September
28, 1996;
Consolidated Statements of Income for the years ended September 27,
1997, September 28, 1996, and September 30, 1995;
Consolidated Statements of Changes in Stockholders' Equity for the
years ended September 27, 1997, September 28, 1996, and September 30,
1995;
Consolidated Statements of Cash Flows for the years ended September
27, 1997, September 28, 1996, and September 30, 1995;
Notes to Consolidated Financial Statements;
Selected quarterly financial data required by this Item is included in
Note 12 on page 45 of the Consolidated Financial Statements.
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 17, 1998, 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 17, 1998, 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 17, 1998, to be filed with the Commission.
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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 17, 1998, to be filed with the Commission.
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 27, 1997,
and September 28, 1996;
Consolidated Statements of Income for the years ended
September 27, 1997, September 28, 1996, and September
30, 1995;
Consolidated Statements of Changes in Stockholders'
Equity for the years ended September 27, 1997,
September 28, 1996, and September 30,1995;
Consolidated Statements of Cash Flows for the years
ended September 27, 1997, September 28, 1996, and
September 30, 1995;
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 47 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.)
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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 Indenture between Registrant and Connecticut National Bank (including
specimen Debenture as Exhibit A). (Included as Exhibit 4.1 to the
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.)
4.2 Letters dated October 11, 1990 to the Registrant's Board of Directors
from Kidder, Peabody & Co. Incorporated and Wheat First Butcher &
Singer relating to interest rate reset under Debentures. (Included as
Exhibit 4.2 to Registrant's Annual Report on Form 10-K for the fiscal
year ended September 29, 1990, File No. 0-14706, previously filed with
the Commission and incorporated herein by this reference.)
4.3 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.
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 Restatement and Amendment by the Entirety of the Ingles Markets,
Incorporated Investment/Profit Sharing Plan and Trust effective
September 26, 1993 (as amended through June 30, 1995). (Included as
Exhibit 10.2 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.)
10.3 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.)
10.4 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.)
26
27
10.5 Stock Option Agreement Between the Company and Edward J. Kolodzieski,
Vice President-Strategic Planning of the Company, dated as of August
2, 1995. (Included as Exhibit 10.9 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.)
10.6 1997 Nonqualified Stock Option Plan. (Included as Appendix A to
Registrant's Proxy Statement for the Annual Meeting of Stockholders
held on February 18, 1997, 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.)
11 Statement Regarding Computation of Earnings Per Common Share.
12 Statement Regarding Computation of Ratio of Earnings to Fixed Charges.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule (for SEC use only).
- --------------
(b) The Registrant did not file any current reports on Form 8-K
during the fourth quarter of its fiscal year ending September
27, 1997.
(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
28
Report of Ernst & Young LLP, Independent Auditors
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 27, 1997 and September 28,
1996, 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 27, 1997. 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 generally accepted auditing
standards. 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 27, 1997 and September 28,
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended September 27, 1997, in conformity
with generally accepted accounting principles. 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 7, 1997
28
29
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
_____________________________________________
------------- -------------
ASSETS
1997 1996
------------- -------------
CURRENT ASSETS:
Cash . . . . . . . . . . . . . . . . . . $ 25,389,386 $ 22,418,003
Receivables (less allowance for doubtful
accounts of $113,726 - 1997 and
$106,073 - 1996). . . . . . . . . . . . 15,571,536 15,197,129
Inventories. . . . . . . . . . . . . . . 141,259,929 128,364,435
Refundable income taxes. . . . . . . . . 2,400,000 -
Other. . . . . . . . . . . . . . . . . . 3,786,873 3,935,825
------------ ------------
Total current assets . . . . . . . . . . 188,407,724 169,915,392
------------ ------------
PROPERTY AND EQUIPMENT:
Land . . . . . . . . . . . . . . . . . . 124,733,868 107,965,769
Construction in progress . . . . . . . . 19,779,492 23,621,825
Buildings. . . . . . . . . . . . . . . . 359,139,083 301,822,944
Store, office and warehouse
equipment . . . . . . . . . . . . . . 288,634,574 249,294,101
Transportation equipment . . . . . . . . 18,537,822 16,453,550
Property under capital leases. . . . . . 151,264 151,264
Leasehold improvements . . . . . . . . . 36,265,514 35,573,043
------------- -------------
Total. . . . . . . . . . . . . . . . . . 847,241,617 734,882,496
Less accumulated depreciation and
amortization. . . . . . . . . . . . . . 240,878,816 204,654,991
------------- -------------
Property and equipment - net . . . . . . 606,362,801 530,227,505
------------- -------------
OTHER ASSETS . . . . . . . . . . . . . . . 7,812,188 7,821,820
------------- -------------
TOTAL ASSETS . . . . . . . . . . . . . . . $ 802,582,713 $ 707,964,717
============= =============
See notes to consolidated financial statements.
29
30
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
- ---------------------------------------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
------------ ------------
CURRENT LIABILITIES:
Short-term loans and current
portion of long-term liabilities. . . . . $ 58,776,976 $ 54,274,426
Accounts payable and accrued expenses. . . 99,346,604 107,134,357
------------ ------------
Total current liabilities. . . . . . . . . 158,123,580 161,408,783
DEFERRED INCOME TAXES . . . . . . . . . . . 26,434,578 22,034,578
LONG-TERM LIABILITIES. . . . . . . . . . . . 395,042,113 349,511,494
------------ ------------
Total liabilities . . . . . . . . . . . . 579,600,271 532,954,855
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.05 par value;
10,000,000 shares authorized;
no shares issued - -
Common stocks:
Class A, $.05 par value; 150,000,000
shares authorized;
issued and outstanding,
9,058,441 shares in 1997,
5,097,291 shares in 1996. . . . . . . . 452,922 254,864
Class B, $.05 par value; 100,000,000
shares authorized;
issued and outstanding,
12,788,298 shares in 1997,
13,006,859 shares in 1996 . . . . . . . 639,415 650,344
Paid-in capital in excess of par value . . 90,924,742 50,139,088
Retained earnings. . . . . . . . . . . . . 130,965,363 123,965,566
------------ ------------
Total stockholders' equity . . . . . . . . 222,982,442 175,009,862
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY . . . . . . . . . . . . . . . . . . $802,582,713 $707,964,717
============ ============
See notes to consolidated financial statements.
30
31
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEARS ENDED SEPTEMBER 27, 1997,
SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
- ---------------------------------------------
-------------- -------------- --------------
1997 1996 1995
-------------- -------------- --------------
Net sales $1,535,976,275 $1,472,577,792 $1,385,127,130
Cost of goods sold 1,159,186,408 1,126,929,804 1,067,888,239
-------------- -------------- --------------
Gross profit 376,789,867 345,647,988 317,238,891
Operating and administrative
expenses 319,979,774 291,266,074 271,912,200
Rental income, net 5,276,493 5,114,840 4,119,979
-------------- -------------- --------------
Income from operations 62,086,586 59,496,754 49,446,670
Other income, net 2,282,794 3,103,633 1,915,630
-------------- -------------- --------------
Income before interest, income taxes
and extraordinary item 64,369,380 62,600,387 51,362,300
Interest expense 31,305,766 28,968,921 24,739,770
-------------- -------------- --------------
Income before income taxes and
extraordinary item 33,063,614 33,631,466 26,622,530
-------------- -------------- --------------
Income taxes:
Current 8,200,000 10,800,000 9,000,000
Deferred 4,400,000 2,100,000 600,000
-------------- -------------- --------------
12,600,000 12,900,000 9,600,000
-------------- -------------- --------------
Income before extraordinary item 20,463,614 20,731,466 17,022,530
Extraordinary item-early extinguishment
of debt (net of income tax benefit) (565,275) - -
-------------- ------------- -------------
Net income $ 19,898,339 $ 20,731,466 $ 17,022,530
============== ============== ==============
Per-share amounts:
Earnings per common share:
Primary earnings per common
share before extraordinary item $ .96 $ 1.12 $ .93
Extraordinary item-early
extinguishment of debt (.03) - -
-------------- -------------- --------------
Primary earnings per common share $ .93 $ 1.12 $ .93
============== ============== ==============
Fully diluted earnings per common
share before extraordinary item $ .95 $ 1.03 $ .88
Extraordinary item-early
extinguishment of debt (.03) - -
-------------- -------------- --------------
Fully diluted earnings per common share $ .92 $ 1.03 $ .88
============== ============== ==============
Cash dividends per common share:
Class A $ .66 $ .66 $ .66
-------------- -------------- --------------
Class B $ .60 $ .60 $ .60
-------------- -------------- --------------
See notes to consolidated financial statements.
31
32
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FISCAL YEARS ENDED SEPTEMBER 27, 1997, SEPTEMBER 28, 1996
AND SEPTEMBER 30, 1995
PAID-IN
CLASS A CLASS B CAPITAL IN
...COMMON STOCK... ...COMMON STOCK... EXCESS OF RETAINED
SHARES AMOUNT SHARES AMOUNT PAR VALUE EARNINGS TOTAL
--------- -------- ---------- -------- ----------- ------------ ------------
Balance,
September 24, 1994. 4,412,167 $220,609 13,491,983 $674,599 $48,599,088 $108,478,050 $157,972,346
Net Income . . . . . - - - - - 17,022,530 17,022,530
Cash Dividends . . . - - - - - (11,178,391) (11,178,391)
Common Stock
Conversions . . . . 165,374 8,268 (165,374) (8,268) - - -
--------- -------- ---------- -------- ----------- ------------ ------------
Balance,
September 30, 1995. 4,577,541 228,877 13,326,609 666,331 48,599,088 114,322,189 163,816,485
Net Income . . . . . - - - - - 20,731,466 20,731,466
Cash Dividends . . . - - - - - (11,088,089) (11,088,089)
Exercise of Stock
Options . . . . . . 200,000 10,000 - - 1,540,000 - 1,550,000
Common Stock
Conversions . . . . 319,750 15,987 (319,750) (15,987) - - -
--------- -------- ---------- -------- ----------- ------------ ------------
Balance,
September 28, 1996. 5,097,291 254,864 13,006,859 650,344 50,139,088 123,965,566 175,009,862
Net Income . . . . . - - - - - 19,898,339 19,898,339
Cash Dividends . . . - - - - - (12,898,542) (12,898,542)
Exercise of Stock
Options . . . . . . 439,200 21,960 - - 4,283,565 - 4,305,525
Conversion of
Convertible
Subordinated
Debentures. . . . . 3,303,389 165,169 - - 36,502,089 - 36,667,258
Common Stock
Conversions . . . . 218,561 10,929 (218,561) (10,929) - - -
--------- ------- ---------- -------- ----------- ----------- -----------
BALANCE,
SEPTEMBER 27, 1997. 9,058,441 $452,922 12,788,298 $639,415 $90,924,742 $130,965,363 $222,982,442
========= ======== ========== ======== =========== ============ ============
See notes to consolidated financial statements.
32
33
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED SEPTEMBER 27, 1997, SEPTEMBER 28, 1996
AND SEPTEMBER 30, 1995
- ------------------------------------
------------ ------------ ------------
1997 1996 1995
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,898,339 $ 20,731,466 $ 17,022,530
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization expense 38,513,154 32,880,525 26,852,645
Extraordinary item-early extinguishment
of debt (net of income tax benefit) 565,275 - -
Gains on disposals of property and
equipment (630,970) (2,407,736) (181,070)
Receipt of advance payments on
purchases contracts 1,474,000 3,209,955 2,000,000
Recognition of advance payments on
purchases contracts (3,512,413) (2,828,760) (943,106)
Deferred income taxes 4,400,000 2,100,000 600,000
(Increase) decrease in receivables (2,741,091) (2,473,628) 1,531,021
Increase in inventory (12,895,494) (11,500,847) (12,926,138)
Increase in other assets (1,016,722) (304,583) (548,301)
(Decrease) increase in accounts
payable and accrued expenses (7,080,934) 2,938,639 11,860,053
------------ ------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 36,973,144 42,345,031 45,267,634
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and
equipment 1,237,513 3,425,913 869,520
Capital expenditures (114,105,097) (107,325,377) (118,182,079)
------------ ----------- -----------
NET CASH (USED) BY
INVESTING ACTIVITIES (112,867,584) (103,899,464) (117,312,559)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term
debt 157,240,495 130,160,690 124,846,585
(Payments) proceeds on short-term
borrowings, net - (20,000,000) 15,000,000
Principal payments on long-term debt (68,501,655) (36,420,941) (54,973,504)
Proceeds from exercise of stock options 3,025,525 1,200,000 -
Dividends paid (12,898,542) (11,088,089) (11,178,391)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 78,865,823 63,851,660 73,694,690
------------ ------------ ------------
NET INCREASE IN CASH 2,971,383 2,297,227 1,649,765
Cash at Beginning of Year 22,418,003 20,120,776 18,471,011
------------ ------------ ------------
CASH AT END OF YEAR $ 25,389,386 $ 22,418,003 $ 20,120,776
============ ============ ============
See notes to consolidated financial statements.
33
34
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 27, 1997, September 28, 1996
and September 30, 1995
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. and Milkco, Inc. (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 1997 and 1996 each consisted of 52 weeks, while fiscal year 1995
was a 53-week year.
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 nightly either in reverse repurchase agreements or in
commercial paper. Commercial paper is not secured; reverse repurchase
agreements are secured by government obligations. At September 27, 1997,
investments in certificates of deposit totalled $5.5 million and investments in
commercial paper totalled $5.6 million. Certificates of deposit, commercial
paper and demand deposits of approximately $18.7 million in 26 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 - 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 certain limits.
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 the stores are opened.
RECLASSIFICATIONS - Certain amounts for 1996 and 1995 have been reclassified
for comparative purposes.
PER-SHARE AMOUNTS - Primary earnings per common share is computed by dividing
consolidated net income by the weighted average number of shares of common
stock and dilutive common stock equivalent shares outstanding during the
34
35
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 27, 1997, September 28, 1996
and September 30, 1995
period. Fully diluted earnings per common share gives effect to the assumed
conversion, if dilutive, of the Convertible Subordinated Debentures, after
elimination of related interest expense, net of the bonus and income tax
effect.
ADVERTISING - The Company expenses the costs of advertising as incurred.
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.
2. INCOME TAXES
DEFERRED INCOME TAX LIABILITIES AND ASSETS - Significant components of the
Company's deferred tax liabilities and assets are as follows:
-------------- -------------
SEPTEMBER 27, September 28,
1997 1996
-------------- -------------
Deferred tax liabilities:
Tax over book depreciation . . . . . . . . $ 31,211,000 $ 27,181,000
Property tax method. . . . . . . . . . . . 355,000 261,000
-------------- -------------
Total deferred tax liabilities. . . . . . 31,566,000 27,442,000
-------------- -------------
Deferred tax assets:
Excess of tax basis over financial
reporting basis of property and equipment 4,013,000 3,971,000
Insurance reserves . . . . . . . . . . . . 2,217,000 2,287,000
Advance payments on purchases contracts. . 779,000 1,125,000
Other. . . . . . . . . . . . . . . . . . . 1,243,000 1,145,000
-------------- -------------
Total deferred tax assets . . . . . . . . 8,252,000 8,528,000
-------------- -------------
Net deferred tax liabilities. . . . . . . . $ 23,314,000 $ 18,914,000
============== =============
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:
----------- ---------- ----------
1997 1996 1995
----------- ----------- ----------
Federal tax at statutory rate . .$11,572,000 $11,771,000 $9,318,000
State income tax, net of
federal tax benefits . . . . . . 1,005,000 1,015,000 715,000
Other . . . . . . . . . . . . . . 23,000 114,000 (433,000)
----------- ----------- ----------
Total . . . . . . . . . . . . . .$12,600,000 $12,900,000 $9,600,000
=========== =========== ==========
Income taxes payable of $1,165,335 at September 27, 1997 and $1,175,131 at
September 28, 1996 are included in the accompanying balance sheets in accounts
payable and accrued expenses.
35
36
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 27, 1997, September 28, 1996
and September 30, 1995
Current and deferred income tax expense are as follows:
----------- ----------- ----------
1997 1996 1995
----------- ----------- ----------
Current:
Federal . . . . . . . . . . . . $ 7,500,000 $ 9,600,000 $8,000,000
State . . . . . . . . . . . . . 700,000 1,200,000 1,000,000
----------- ----------- ----------
Total current . . . . . . 8,200,000 10,800,000 9,000,000
----------- ----------- ----------
Deferred:
Depreciation . . . . . . . . . 3,703,000 2,965,000 1,184,000
Self-insurance reserves . . . . 97,000 (102,000) (213,000)
Property taxes. . . . . . . . . 95,000 62,000 (37,000)
Advance payments on purchases
contracts . . . . . . . . . . 369,000 (390,000) -
Other . . . . . . . . . . . . . 136,000 (435,000) (334,000)
----------- ----------- ----------
Total deferred . . . . . 4,400,000 2,100,000 600,000
----------- ----------- ----------
Total expense . . . . . . . . . . $12,600,000 $12,900,000 $9,600,000
=========== =========== ==========
Current deferred income tax benefits of $3,120,690 at both September 27, 1997
and September 28, 1996, included in other current assets, result from timing
differences arising from vacation pay, bad debts and self-insurance reserves
and from capitalization of certain overhead costs in inventory for tax
purposes.
3. PROPERTY HELD FOR LEASE AND RENTAL INCOME
At September 27, 1997, the Company owned and operated 75 shopping centers in
conjunction with its supermarket operations. The Company leases to others a
portion of its shopping center properties. The leases are noncancelable
operating lease agreements for periods ranging up to twenty-five 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 included in the accompanying consolidated statements of
income consists of the following:
----------- ----------- -----------
1997 1996 1995
----------- ----------- -----------
Rents earned on owned and
subleased properties:
Base rentals including lease
termination payments . . . . . $ 9,651,897 $ 9,002,824 $ 7,705,645
Contingent rentals. . . . . . . 525,887 577,379 596,154
----------- ----------- -----------
Total. . . . . . . . . . . 10,177,784 9,580,203 8,301,799
Depreciation on owned
properties leased to others . . (3,613,744) (3,236,144) (3,027,886)
Other shopping center expenses . . (1,287,547) (1,229,219) (1,153,934)
----------- ----------- -----------
Total. . . . . . . . . . . . . . . $ 5,276,493 $ 5,114,840 $ 4,119,979
=========== =========== ===========
36
37
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 27, 1997, September 28, 1996
and September 30, 1995
Owned properties leased to others under operating leases by major classes are
summarized as follows:
------------
SEPTEMBER 27,
1997
------------
Land . . . . . . . . . . . . . . . . . . . . . . . $ 28,457,000
Buildings . . . . . . . . . . . . . . . . . . . . . 97,697,000
------------
Total . . . . . . . . . . . . . . . . . . . . . . 126,154,000
Less accumulated depreciation . . . . . . . . . . . 26,376,000
------------
Property leased to others, net . . . . . . . . . . $ 99,778,000
============
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 noncancelable
operating leases as of September 27, 1997:
FISCAL YEAR
-----------
1998 . . . . . . . . . . . . . . . . . . . . . . . $ 8,220,862
1999 . . . . . . . . . . . . . . . . . . . . . . . 6,891,355
2000 . . . . . . . . . . . . . . . . . . . . . . . 5,585,862
2001 . . . . . . . . . . . . . . . . . . . . . . . 4,311,800
2002 . . . . . . . . . . . . . . . . . . . . . . . 3,583,423
Thereafter . . . . . . . . . . . . . . . . . . . . 15,498,836
-----------
Total minimum future rental income . . . . . . . . . $44,092,138
===========
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 twenty 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.
OPERATING LEASES - Rent expense for all operating leases of $11,493,170,
$11,741,462 and $11,796,628 for fiscal years 1997, 1996 and 1995, respectively
is included in operating and administrative expenses.
The aggregate minimum rental commitments under noncancelable operating leases
as of September 27, 1997 are as follows:
FISCAL YEAR
-----------
1998 . . . . . . . . . . . . . . . . . . . . . . . . $ 11,728,025
1999 . . . . . . . . . . . . . . . . . . . . . . . . 11,567,281
2000 . . . . . . . . . . . . . . . . . . . . . . . . 11,311,869
2001 . . . . . . . . . . . . . . . . . . . . . . . . 11,235,405
2002 . . . . . . . . . . . . . . . . . . . . . . . . 11,085,367
Thereafter . . . . . . . . . . . . . . . . . . . . . 63,652,124
------------
Total minimum future rental commitments. . . . . . . . $120,580,071
============
37
38
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 27, 1997, September 28, 1996
and September 30, 1995
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
------------- -------------
SEPTEMBER 27, September 28,
1997 1996
------------- -------------
Accounts payable-trade . . . . . . . . . $ 67,219,567 $ 74,850,388
Property, payroll, and
other taxes payable . . . . . . . . . 9,678,603 8,694,621
Salaries, wages, and bonuses payable . . 9,700,404 9,696,321
Other . . . . . . . . . . . . . . . . . . 8,348,030 9,378,027
Self-insurance reserves . . . . . . . . . 4,400,000 4,515,000
------------- -------------
Total . . . . . . . . . . . . . . . . . . $ 99,346,604 $ 107,134,357
============= =============
Self-insurance reserves are established for workers' compensation and employee
group medical and dental benefits based on claims filed and claims incurred but
not reported. The Company is insured for covered costs in excess of $350,000
per occurrence for workers' compensation and $150,000 per covered person for
medical care benefits for a policy year. Employee insurance expense, including
workers' compensation and medical care benefits, net of employee contributions,
totalled $9,732,836, $8,362,306 and $8,627,447 for the year ended September 27,
1997, September 28, 1996 and September 30, 1995, respectively.
6. LONG-TERM LIABILITIES AND SHORT-TERM LOANS
Long-term liabilities and short-term loans are summarized as follows:
------------- -------------
SEPTEMBER 27, September 28,
1997 1996
------------- -------------
Long-term debt:
Notes payable:
Real estate and equipment:
Weighted average interest rate of 8.82%,
maturing 1998-2017 . . . . . . . . . . $ 331,331,206 $ 231,056,171
Interest rate at the average weekly yield
of one month commercial paper plus 1.9%,
maturing 1999-2002 . . . . . . . . . . 33,652,263 29,552,394
Other:
Weighted average interest rate of 6.84%,
maturing 1999-2000 . . . . . . . . . . 46,000,000 68,000,000
Weighted average interest rate of 8.53%,
secured by stock of Milkco, Inc.,
maturing 2002-2004 . . . . . . . . . . 24,142,865 15,000,005
Other. . . . . . . . . . . . . . . . . . 4,333,356 6,166,682
10% Convertible Subordinated
Debentures, maturing 2008. . . . . . . . - 37,459,000
------------- -------------
Total. . . . . . . . . . . . . . . . . . . 439,459,690 387,234,252
------------- -------------
38
39
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 27, 1997, September 28, 1996
and September 30, 1995
------------- -------------
SEPTEMBER 27, September 28,
1997 1996
------------- -------------
Short-term loans, interest rates at less
than the prime rate. . . . . . . . . . . . 10,000,000 10,000,000
------------- -------------
Other long-term liabilities:
Advance payments on purchases contracts. . 3,992,156 6,030,570
Other. . . . . . . . . . . . . . . . . . . 367,243 521,098
------------- -------------
Total . . . . . . . . . . . . . . . . . . 4,359,399 6,551,668
------------- -------------
Total long-term liabilities and short-term
loans . . . . . . . . . . . . . . . . . . 453,819,089 403,785,920
Less current portion . . . . . . . . . . . . 58,776,976 54,274,426
------------- -------------
Long-term liabilities, net of current
portion . . . . . . . . . . . . . . . . . $ 395,042,113 $ 349,511,494
============= =============
On December 6, 1996, the Company announced its intention to redeem all its
outstanding Convertible Subordinated Debentures ("the Debentures") on January
20, 1997. The holders of the Debentures had the right to convert their
Debentures into shares of the Company's Class A Common Stock at $11.10 per
share before the close of business on January 16, 1997.
Approximately $36.7 million of the Debentures were converted into approximately
3.3 million shares of Class A Common Stock. The remaining outstanding
Debentures ($.8 million) were redeemed at 101.8% of face value plus accrued
interest on January 20, 1997.
The write-off of unamortized loan costs and redemption premium of $565,275 (net
of the income tax benefit of $350,000) relating to the Debentures is included
as an extraordinary item in the accompanying statement of income for the year
ended September 27, 1997.
During September 1997, the Company entered into a loan agreement for
$12,000,000. 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.
During October 1997, the Company obtained a loan under a line of credit at an
interest rate less than the prime rate maturing in May 1999. The proceeds from
the loan were used to reduce short-term borrowings outstanding at September 27,
1997. Short-term borrowings of $10 million have been reclassified to long-term
liabilities at September 27, 1997 pursuant to this refinancing.
At September 27, 1997, property and equipment with an undepreciated cost of
approximately $397 million was pledged as collateral for long-term debt. Loan
agreements relating to certain debt contain various provisions which, among
other things, set minimum stockholders' equity balances. The most
restrictive of these provisions at September 27, 1997, has the effect of
restricting funds available for dividends to approximately $23.0 million.
39
40
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 27, 1997, September 28, 1996
and September 30, 1995
At September 27, 1997, the Company had unused lines of credit of $95 million.
The lines provide the Company with various interest rate options, generally at
rates less than prime.
Components of interest costs are as follows:
----------- ----------- -----------
1997 1996 1995
----------- ----------- -----------
Total interest costs . . . . $33,283,276 $31,338,464 $26,501,706
Interest capitalized . . . . (1,977,510) (2,369,543) (1,761,936)
----------- ----------- -----------
Interest expense . . . . . . $31,305,766 $28,968,921 $24,739,770
=========== =========== ===========
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.
Maturities of long-term liabilities at September 27, 1997 are as follows:
FISCAL YEAR
-----------
1998 . . . . . . . . . . . . . . . . . . . . . . . $ 58,776,976
1999 . . . . . . . . . . . . . . . . . . . . . . . 96,495,034
2000 . . . . . . . . . . . . . . . . . . . . . . . 69,457,112
2001 . . . . . . . . . . . . . . . . . . . . . . . 38,885,387
2002 . . . . . . . . . . . . . . . . . . . . . . . 25,733,584
Thereafter . . . . . . . . . . . . . . . . . . . . 164,470,996
------------
Total $453,819,089
============
7. 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 therefor, 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.
40
41
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 27, 1997, September 28, 1996
and September 30, 1995
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.
EARNINGS PER COMMON SHARE - Weighted average number of common shares used to
compute earnings per share is as follows:
---------- ---------- ----------
1997 1996 1995
---------- ---------- ----------
Primary . . . . . . . . . . 21,437,104 18,520,459 18,316,672
Fully diluted . . . . . . . 21,617,003 22,098,790 21,691,357
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which must be adopted by the Company and reflected in
its financial statements for the periods ending on or after December 27, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded.
The impact of Statement 128 is expected to result in an increase of $.02 in
primary earnings per common share for fiscal years 1997 and 1995 and an
increase of $.03 in primary earnings per common share for fiscal 1996.
Statement 128 would not impact the calculation of fully diluted earnings per
common share for fiscal 1997 and 1995, however, fully diluted earnings per
common share for fiscal 1996 would increase by $.01 per share.
8. 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 annually by the Board of Directors. The Plan includes a 401(k)
feature.
Company contributions to the plan, included in operating and administrative
expenses, were $700,000 annually for fiscal years 1997, 1996 and 1995.
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
41
42
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 27, 1997, September 28, 1996
and September 30, 1995
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 $5,414,045,
$5,398,478 and $4,241,183 for 1997, 1996 and 1995, respectively.
STOCK OPTIONS - The Company accounts for and will continue to account for stock
options under Accounting Principles Board Opinion 25, "Accounting for Stock
Issued to Employees." Applying Financial Accounting Standards Board Statement
No. 123, "Accounting for Stock-Based Compensation," which was adopted in 1997,
would not materially affect net income and earnings per share for 1997 and
1996.
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 27,
1997, no options were exercisable under this plan. Information with respect to
options granted, exercised, canceled and outstanding follows:
SHARES
UNDER OPTION PRICE
OPTION PER SHARE TOTAL
-------- ------------- ----------
Outstanding,
September 24, 1994 . . . 155,000 $6.13-$10.00 $1,177,125
Granted . . . . . . . . 27,000 11.38 307,125
Canceled . . . . . . . . (46,500) 6.13-11.38 (425,375)
-------- ----------
Outstanding,
September 30, 1995 . . . 135,500 6.13-11.38 1,058,875
Granted . . . . . . . . 53,000 10.00 530,000
Canceled . . . . . . . . (27,000) 6.13-11.38 (256,500)
-------- ----------
Outstanding,
September 28, 1996 . . . 161,500 6.13-11.38 1,332,375
Granted . . . . . . . . 66,000 14.00 924,000
Exercised. . . . . . . . (48,200) 7.00 (337,400)
Canceled . . . . . . . . (32,300) 6.13-14.00 (297,850)
-------- ----------
OUTSTANDING,
SEPTEMBER 27, 1997 . . . 147,000 $6.13-$14.00 $1,621,125
======== ==========
1991 NONQUALIFIED STOCK OPTION PLAN - The Company has 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. 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 27,
1997, no options were currently exercisable under this plan. Information with
respect to options granted, exercised, canceled and outstanding follows:
42
43
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 27, 1997, September 28, 1996
and September 30, 1995
SHARES
UNDER OPTION PRICE
OPTION PER SHARE TOTAL
-------- ------------- ----------
Outstanding,
September 24, 1994 . . . 996,000 $5.75-$11.50 $7,260,000
Granted . . . . . . . . - - -
Canceled . . . . . . . . - - -
-------- -----------
Outstanding,
September 30, 1995 . . . 996,000 5.75-11.50 7,260,000
Granted . . . . . . . . - - -
Canceled . . . . . . . . (5,000) 6.88 (34,375)
-------- ----------
Outstanding,
September 28, 1996 . . . 991,000 5.75-11.50 7,225,625
Granted . . . . . . . . - - -
Exercised. . . . . . . . (391,000) 6.88 (2,688,125)
Canceled . . . . . . . . (100,000) 11.50 (1,150,000)
-------- ----------
OUTSTANDING,
SEPTEMBER 27, 1997. . 500,000 $5.75-$10.38 $3,387,500
======== ==========
STOCK OPTION AGREEMENTS WITH EXECUTIVE OFFICERS - During the year ended
September 28, 1996, Robert P. Ingle, Chairman of the Board of Directors and
Chief Executive Officer of the Company, and Landy B. Laney, who at the time was
President and Chief Operating Officer of the Company, each exercised their
options to purchase 100,000 shares of the Company's Class A Common Stock at an
option price of $6.00 per share. The difference between the fair market value
of the Class A Common Stock at the date of the grant of the options ($7.75 per
share) and the option price ($6.00 per share) was previously expensed on the
Company's books.
On August 2, 1995, the Company entered into a nonqualified stock option
agreement with one of its executive officers under which 100,000 shares of the
Company's Class A Common Stock may be issued to him at $10.625 per share (the
fair market value of the stock at the date the option was granted). The option
is exercisable within a period of three months after five years from the date
of issue or upon death, disability, or retirement.
1997 NONQUALIFIED STOCK OPTION PLAN - On February 18, 1997, the Company adopted
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 of the Company until January 1, 2007.
During February 1997, options to purchase 1,150,000 shares of Ingles Markets,
Incorporated Class A Common Stock were granted to employees under this plan.
The option price per share was the fair market value at the date of grant.
Included in the options granted under the Plan are options for 100,000 shares
each granted to Robert P. Ingle, Chairman of the Board of Directors and Chief
Executive Officer of the Company, and Vaughn C. Fisher, President and Chief
Operating Officer of the Company. These options may be exercised within a one
year period beginning one year after the date of grant or within three months
after death, disability or retirement with the consent of the Company. The
remaining options to purchase 950,000 shares may be exercised within a one year
43
44
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 27, 1997, September 28, 1996
and September 30, 1995
period beginning five years after the grant date or within three months after
death, disability or retirement with the consent of the Company. All options
automatically terminate with termination of the optionee's employment for any
other reason.
As of September 27, 1997, no options were currently exercisable under this
plan. Information with respect to options granted, canceled and outstanding
follows:
SHARES
UNDER OPTION PRICE
OPTION PER SHARE TOTAL
-------- ------------- ----------
Outstanding,
September 28, 1996 . . . 0 $ 0
Granted. . . . . . . . . 1,150,000 $14.00 16,100,000
Canceled . . . . . . . . (13,000) 14.00 (182,000)
--------- -----------
OUTSTANDING,
SEPTEMBER 27, 1997. . 1,137,000 $14.00 $15,918,000
========= ===========
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.
9. MAJOR SUPPLIER
A large portion of inventory is purchased from a wholesale grocery distributor.
Purchases from the distributor were approximately $159 million in 1997, $168
million in 1996 and $236 million in 1995. 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 27, 1997. Amounts owed to this distributor,
included in accounts payable-trade, were $3.0 million and $3.8 million at
September 27, 1997 and September 28, 1996, respectively.
10. SUPPLEMENTARY INCOME STATEMENT DATA
Operating and administrative expenses include the following:
----------- ----------- -----------
1997 1996 1995
----------- ----------- -----------
Advertising and promotion expense. . $19,090,374 $17,849,164 $18,656,718
=========== =========== ===========
11. LINES OF BUSINESS
The Company operates in two lines of business: retail grocery and food sales
(principally retail sales) and shopping center rentals. Information about the
Company's operations by lines of business (in thousands) is as follows:
44
45
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 27, 1997, September 28, 1996
and September 30, 1995
----------- ----------- -----------
1997 1996 1995
----------- ----------- -----------
Revenues from unaffiliated
customers:
Grocery and food sales . . . $ 1,535,976 $ 1,472,578 $ 1,385,127
Shopping center rentals. . . 10,178 9,580 8,302
Income from operations:
Grocery and food sales . . . 56,810 54,382 45,327
Shopping center rentals. . . 5,276 5,115 4,120
Assets:
Grocery and food sales . . . 702,805 611,258 517,142
Shopping center rentals. . . 99,778 96,707 94,685
Capital expenditures:
Grocery and food sales . . . 104,815 104,212 104,527
Shopping center rentals. . . 9,290 9,087 13,655
Depreciation and amortization:
Grocery and food sales . . . 34,899 29,645 23,825
Shopping center rentals. . . 3,614 3,236 3,028
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 contain thirteen weeks.
(in thousands except earnings per common share)
-----------------------------------------------
1ST 2ND 3RD 4TH
1997 QUARTER QUARTER QUARTER QUARTER TOTAL
- ---- ------- ------- ------- ------- ----------
NET SALES . . . . . . . $381,116 $376,142 $386,392 $392,326 $1,535,976
GROSS PROFIT. . . . . . 90,927 92,034 95,317 98,512 376,790
INCOME BEFORE
EXTRAORDINARY ITEM . . 5,256 5,664 4,944 4,599 20,463
EXTRAORDINARY ITEM. . . (211) (354) - - (565)
NET INCOME. . . . . . . 5,045 5,310 4,944 4,599 19,898
PRIMARY EARNINGS PER
COMMON SHARE BEFORE
EXTRAORDINARY ITEM . . .27 .26 .22 .21 .96
PRIMARY EARNINGS
PER COMMON SHARE . . . .26 .24 .22 .21 .93
1996
- ----
Net sales . . . . . . . $357,406 $364,223 $370,352 $380,597 $1,472,578
Gross profit. . . . . . 82,368 84,324 87,518 91,438 345,648
Net income. . . . . . . 4,722 4,431 5,897 5,681 20,731
Primary earnings per
common share . . . . . .26 .24 .32 .30 1.12
13. CONTINGENT LIABILITIES
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.
45
46
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 27, 1997, September 28, 1996
and September 30, 1995
The Company currently maintains general liability, automobile insurance and
excess liability coverages. The Company maintains $10 million liability
insurance coverage on one aircraft and $5 million liability insurance coverage
on three other aircraft used in its business. The Company maintains casualty
insurance only on those properties where it is required to do so. The Company
has elected to self-insure its other properties.
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Receivables: The carrying amount reported in the balance sheet for
receivables approximates its fair value.
Long and short-term liabilities: The carrying amounts of the Company's
short-term borrowings approximate their fair value. The fair values of the
Company's long-term liabilities are based on quoted market prices, where
available, or discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
The carrying amounts and fair values of the Company's financial instruments at
September 27, 1997 and September 28, 1996 are as follows (amounts in thousands)
---------------- -----------------
1997 1996
----------------- -----------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
-------- -------- -------- --------
Cash and cash equivalents. . . . . . . . . .$ 25,389 $ 25,389 $ 22,418 $ 22,418
Receivables. . . . . . . . . . . . . . . . . 17,972 17,972 15,197 15,197
Short-term liabilities . . . . . . . . . . . 10,000 10,000 10,000 10,000
Long-term liabilities:
10% Convertible Subordinated Debentures . - - 37,459 53,513
Real estate and equipment . . . . . . . . 364,983 377,777 260,609 262,084
Other . . . . . . . . . . . . . . . . . . 78,836 78,836 95,718 95,718
15. CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows:
----------- ----------- -----------
1997 1996 1995
----------- ----------- -----------
Cash paid during the year for:
Interest (net of amounts capitalized) . . $32,783,950 $28,570,394 $23,914,428
Income taxes. . . . . . . . . . . . . . . 8,979,797 12,948,545 7,186,997
Non cash items:
Property and equipment additions
included in accounts payable . . . . . 6,897,684 5,974,503 -
Conversion of Convertible
Subordinated Debentures . . . . . . . 36,667,258 - -
46
47
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
SEC SCHEDULE II
SUPPLEMENTAL SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT
BEGINNING OF CHARGED TO BALANCE AT
DESCRIPTION YEAR COSTS & EXPENSES DEDUCTIONS END OF YEAR
- ------------------------------------- ------------ ---------------- ---------- -----------
Fiscal year ended September 27, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $ 106,073 $ 10,000 $ 2,347 (1) $ 113,726
Fiscal year ended September 28, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $ 85,490 $ 30,000 $ 9,417 (1) $ 106,073
Fiscal year ended September 30, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts $ 95,953 $10,463 (1) $ 85,490
(1) Uncollectible accounts written off, net of recoveries.
47
48
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 22, 1997
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:
/s/ Robert P. Ingle December 22, 1997
- ---------------------------------
Robert P. Ingle, Chairman of the
Board, Chief Executive Officer
and Director
/s/ Vaughn C. Fisher December 22, 1997
- ---------------------------------
Vaughn C. Fisher, President, Chief
Operating Officer and Director
/s/ Jack R. Ferguson December 22, 1997
- ---------------------------------
Jack R. Ferguson, Vice President-
Finance, Chief Financial Officer
and Director
/s/ Ralph H. Gardner December 22, 1997
- ---------------------------------
Ralph H. Gardner, President-
Milkco, Inc. and Director
/s/ Anthony S. Federico December 22, 1997
- ---------------------------------
Anthony S. Federico, Vice President-
Non-Foods and Director
/s/ Brenda S. Tudor December 22, 1997
- ---------------------------------
Brenda S. Tudor, CPA
Secretary and Controller
48
49
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 Indenture between Registrant and Connecticut National Bank (including
specimen Debenture as Exhibit A). (Included as Exhibit 4.1 to the
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.)
4.2 Letters dated October 11, 1990 to the Registrant's Board of Directors
from Kidder, Peabody & Co. Incorporated and Wheat First Butcher &
Singer relating to interest rate reset under Debentures. (Included as
Exhibit 4.2 to Registrant's Annual Report on Form 10-K for the fiscal
year ended September 29, 1990, File No. 0-14706, previously filed with
the Commission and incorporated herein by this reference.)
4.3 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.
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 Restatement and Amendment by the Entirety of the Ingles Markets,
Incorporated Investment/Profit Sharing Plan and Trust effective
September 26, 1993 (as amended through June 30, 1995). (Included as
Exhibit 10.2 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.)
10.3 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.)
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50
10.4 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.)
10.5 Stock Option Agreement Between the Company and Edward J. Kolodzieski,
Vice President-Strategic Planning of the Company, dated as of August
2, 1995. (Included as Exhibit 10.9 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.)
10.6 1997 Nonqualified Stock Option Plan. (Included as Appendix A to
Registrant's Proxy Statement for the Annual Meeting of Stockholders
held on February 18, 1997, 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.)
11 Statement Regarding Computation of Earnings Per Common Share. (page
51)
12 Statement Regarding Computation of Ratio of Earnings to Fixed Charges.
(page 52)
21 Subsidiaries of the Registrant. (page 53)
23 Consent of Ernst & Young LLP, Independent Auditors. (page 54)
27 Financial Data Schedule (for SEC use only).
50