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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 25, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P.O. Box 6676, Asheville, NC 28816
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (828) 669-2941
-----------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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None None
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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
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(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 [ ].
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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 9, 1999, 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 9, 1999, was approximately $108.9 million.
As of December 9, 1999, the registrant has 9,903,239 shares of Class A
Common Stock outstanding and 12,674,500 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 15, 2000, 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"), a leading supermarket
chain in the Southeast, operates 206 supermarkets in Georgia (83), North
Carolina (63), South Carolina (32), Tennessee (24), Virginia (3) and Alabama
(1). The Company's strategy is to locate its supermarkets primarily in suburban
areas, small towns and rural communities, where management believes the market
may be under-served by existing supermarkets. Ingles supermarkets offer
customers a wide variety of nationally advertised food products, including
grocery, meat and dairy products, produce, frozen foods and other perishables
and non-food products, including health and beauty care products and general
merchandise, as well as quality private label items. Real estate ownership is
an important component of the Company's operations, providing both operational
and economic benefits.
The Company believes that customer service and convenience, modern stores and
competitive prices on a broad selection of quality merchandise are essential to
developing a loyal customer base. The Company's new and remodeled supermarkets
provide an enhanced level of customer convenience in order to accommodate the
active lifestyle of today's shoppers. Design features of the Company's modern
stores include expanded perishable departments featuring home meal replacement
items and an expanded selection of food and non-food items to provide a
"one-stop" shopping experience. Ingles has invested in excess of $500 million
over the past five years to update, expand and modernize its existing stores
and build new stores.
The Company's stores are located within 250 miles of the Company owned 760,000
square foot warehouse and distribution center from which the Company
distributes grocery, produce, meat and dairy products to all Ingles stores. The
close proximity of the Company's purchasing and distribution operations to its
stores facilitates the timely distribution of consistently high quality meat,
produce and other perishable items. To further ensure product quality, the
Company also owns and operates a milk processing and packaging plant that
supplies approximately 90% of the milk products sold by the Company's
supermarkets as well as a variety of orange and other fruit juices and bottled
water products. In addition, the milk processing and packaging plant sells
approximately 60% of its products to other retailers, food service distributors
and grocery warehouses in eight states.
Ingles believes that real estate ownership allows it to decrease its occupancy
costs, maintain flexibility for future store expansion, control the development
and management of each property and benefit from value created by developing
and operating free-standing supermarkets and shopping centers in smaller
markets. The Company owns and operates 79 shopping centers, 72 of which contain
an Ingles supermarket, and owns 58 additional properties that contain a
free-standing Ingles store. The Company also owns 11 undeveloped sites suitable
for a free-standing store or shopping center development. Ingles owns and holds
for future development or sale numerous outparcels and other acreage located
adjacent to the shopping centers and supermarkets it owns.
The Company was founded by Robert P. Ingle, the Company's Chairman of the Board
and Chief Executive Officer. As of September 25, 1999, Mr. Ingle retains
approximately 86% of the combined voting power and 53% of the total number of
shares of the Company's outstanding Class A and Class B Common Stock (in each
case including stock deemed to be beneficially owned by Mr. Ingle as one of the
trustees of the Company's Investment/Profit Sharing Plan and Trust). The
Company became a publicly traded company in September 1987. Its Class A Common
Stock is traded on The Nasdaq Stock Market's National Market under the symbol
IMKTA.
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The Company was incorporated in 1965 under the laws of the State of North
Carolina. Its principal executive offices are located at P. O. Box 6676,
Highway 70, Asheville, North Carolina 28816, and its telephone number is
828-669-2941.
Business
The Company operates three lines of business: retail grocery sales, shopping
center rentals, and a fluid dairy processing plant. Information about the
Company's operations by lines of business (in millions) is as follows (for
information regarding the Company's industry segments, see Note 11 to the
Consolidated Financial Statements of this report on Form 10-K):
Fiscal Year Ended September
--------------------------------------------------------------------------
1999 1998 1997
---------------------- -------------------- ----------------------
Revenues from unaffiliated customers:
Grocery sales $1,733.3 95.2% $1,586.3 95.6% $1,482.1 95.8%
Shopping center rentals 15.5 .8% 12.8 .8% 10.2 .7%
Fluid dairy 72.1 4.0% 60.8 3.6% 53.9 3.5%
-------- ----- -------- ----- -------- -----
$1,820.9 100.0% $1,659.9 100.0% $1,546.2 100.0%
======== ===== ======== ===== ======== =====
Income from operations:
Grocery sales(1) $ 51.0 75.4% $ 31.0 70.1% $ 52.2 84.1%
Shopping center rentals 9.1 13.5% 7.2 16.3% 5.3 8.5%
Fluid dairy 7.5 11.1% 6.0 13.6% 4.6 7.4%
-------- ----- -------- ----- -------- -----
67.6 100.0% 44.2 100.0% 62.1 100.0%
===== ===== =====
Other income, net 2.3 2.4 2.3
Interest expense 39.8 40.1 31.3
-------- -------- --------
Income before income
taxes and extraordinary
item $ 30.1 $ 6.5 $ 33.1
======== ======== ========
(1) Income from operations in the grocery sales segment for fiscal 1998
reflects a non-recurring charge relating to a litigation settlement of
$14.6 million.
Supermarket Operations
The Company follows the strategy of locating its supermarkets primarily in
suburban areas, small towns and rural communities where management believes the
market may be underserved by existing stores.
At September 25, 1999, the Company operated 203 supermarkets under the name
"Ingles", two supermarkets under the name "Best Food" and one supermarket under
the name "Sav-Mor" in western North Carolina, western South Carolina, northern
Georgia, eastern Tennessee, southwestern Virginia and northeastern Alabama. The
"Best Food" and "Sav-Mor" store concepts accommodate smaller shopping areas and
carry a full line of dry groceries, fresh meat and produce, all of which are
displayed in a modern, readily accessible environment. The stores are also
operated in accordance with Ingles' high standards of customer service and
quality products at a low price.
The following table sets forth certain information with respect to the
Company's supermarket operations.
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Number of Supermarkets Percentage of Total
at Fiscal Net Sales for Fiscal
Year Ended September Year Ended September
---------------------- ------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
North Carolina 63 63 63 34% 35% 36%
South Carolina 32 32 31 14% 14% 14%
Georgia 83 84 77 40% 38% 37%
Tennessee 24 24 23 10% 11% 12%
Virginia 3 3 3 1% 1% 1%
Alabama 1 1 1 1% 1% 0%
--- --- --- --- --- ---
206 207 198 100% 100% 100%
=== === === === === ===
The Company believes that today's supermarket customers are focused on
convenience and value. As a result, the Company's "one-stop" shopping experience
combines a high level of customer service, convenience-oriented product
offerings and low overall pricing. The Company's modern stores provide products
and services such as home meal replacement items, delicatessens, bakeries,
floral departments, video rental departments, greeting cards and broad
selections of health and beauty care items. The Company caters to the needs of
its customers by offering extended hours and 24-hour service in appropriate
markets. The Company trains its employees to provide friendly service and to
actively address the needs of customers. These employees reinforce the Company's
distinctive service oriented image.
Selected statistics on the Company's supermarket operations are presented below:
Fiscal Year Ended September
-----------------------------------------------------------
1999 1998 1997 1996 1995(1)
------- ------- ------- ------- -------
Weighted Average Sales
Per Store (000's) $ 8,424 $ 7,840 $ 7,716 $ 7,710 $ 7,445
Total Square Feet at
End of Year (000's) 8,400 8,287 7,506 6,746 6,217
Average Total Square
Feet per Store 40,776 40,038 37,912 35,886 34,160
Average Square Feet of
Selling Space per Store (2) 28,543 28,026 26,538 25,120 23,912
(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 designed to create a "one-stop" shopping
experience that blends value and customer service with variety, quality and
convenience. Management believes that this strategy fosters a loyal customer
base by establishing a reputation for providing high quality products and a
variety of specialty departments.
The Company's stores carry broad selections of quality meats, produce and other
perishables. The Company's full-service meat departments are generally designed
so that customers can see Ingles' employees at work and so that its butchers are
readily accessible to its customers. Many of the Company's stores offer a wide
selection of fresh fish and seafood. The Company emphasizes the freshness and
quality of its produce, bakery and deli offerings by designing its departments
with an open air market atmosphere.
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Ingles intends to continue to increase sales of its proprietary brands, which
typically carry higher margins than comparable branded products. The Company
currently carries two private label lines: "Laura Lynn," its primary line named
after the founder's daughter, and "Ingles Best." Ingles' private labels cover a
broad range of products throughout the store, such as milk, bread, soft drinks
and canned goods. The Company promotes its private label brands through print
and television advertising, by displaying comparison pricing with national
brands on store shelf tags and by reflecting savings on customers' cash
register receipts. In addition to increasing margins, Ingles believes that
private label sales help promote customer loyalty.
The Company seeks to maintain a reputation for providing friendly service,
quality merchandise and customer value and for its commitment to community
involvement. The Company employs various advertising and promotional strategies
to reinforce the quality and value of its products. The Company promotes these
attributes using all of the traditional advertising vehicles including radio,
television, direct mail and newspapers. The Company uses numerous visible and
subtle means to communicate its commitment to community involvement. The
Company sponsors numerous high profile events such as the Ingles Food Show and
the Baby Expo, as well as local and nationally recognized sporting events. The
Company raises funds for charity, provides equipment for education and works
closely with civic and government leaders on projects of local importance.
Purchasing and Distribution
The Company supplies approximately 67% of its supermarkets' inventory
requirements from its modern 760,000 square foot warehouse and distribution
center from which the Company distributes groceries, produce, meat and dairy
products to all Ingles stores. The Company believes that its warehouse and
distribution facility contains sufficient capacity for the continued expansion
of its store base for the foreseeable future.
The Company's centrally managed purchasing and distribution operations provide
several advantages, including the ability to negotiate and reduce the cost of
merchandise, decrease overhead costs and better manage its inventory at both
the warehouse and store level. From time to time, the Company engages in
forward purchasing arrangements on high turnover inventory items in order to
take advantage of special prices offered by manufacturers for limited periods.
The Company's ability to take advantage of forward purchasing is limited by
several factors including carrying costs and warehouse space.
Approximately 13% of the Company's other inventory requirements, primarily
frozen food and slower moving items that the Company prefers not to stock, are
purchased from Merchant Distributors, Inc. ("MDI"), a wholesale grocery
distributor with which the Company has had a continuing relationship for the
last thirty years. Purchases from MDI were approximately $184 million in 1999,
$181 million in 1998 and $159 million in 1997. MDI owned approximately 3% of
the Company's Class A Common Stock and approximately 1% of the Company's Class
B Common Stock at September 25, 1999. The Company believes that alternative
sources of supply are readily available from other third parties.
The remaining 20% of the Company's inventory requirements, primarily beverages,
bread and snack foods, are supplied directly to Ingles supermarkets by local
distributors and manufacturers.
Goods from the warehouse and distribution facility and the milk processing and
packaging plant are distributed to the Company's stores by a fleet of 110
tractors and 403 trailers that the Company operates and maintains. The Company
invests on an ongoing basis in the maintenance, upgrade and replacement of its
tractor and trailer fleet. The Company reduces its overall distribution costs
by
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capitalizing on back-haul opportunities (contracting to transport merchandise
on trucks that would otherwise be empty).
Store Development, Expansion and Remodeling
The Company believes that the appearance and design of its stores are integral
components of its customers' shopping experience and aims to develop one of the
most modern supermarket chains in the industry. The modernization of the
Company's store base involves (i) the construction of new prototype stores,
(ii) the replacement or complete remodeling and expansion of existing stores
and (iii) minor remodels of existing stores. The Company's goal is to maintain
clean, well-lit stores with attractive architectural features that enhance the
image of its stores as catering to the changing lifestyle needs of quality
conscious consumers.
The Company is focused primarily on developing owned stores rather than leased
stores. Management believes that owning stores rather than leasing them
provides the Company with lower all-in occupancy costs and the flexibility over
the long-term to expand its stores further, if needed. The construction of new
stores is closely monitored and controlled by the Company. The Company hires
independent contractors to construct its supermarkets from its prototype
designs.
The Company renovates and remodels stores in order to increase customer traffic
and sales, respond to existing customer demand, compete effectively against new
stores opened by competitors and support its "quality image" merchandising
strategy. The Company decides to complete a major remodel of an existing store
based on its evaluation of the competitive landscape of the local marketplace.
A major remodel and expansion provides the quality of facilities and product
offerings identical to that of a new prototype store, capitalizing upon
existing customers. The Company retains the existing customer base by keeping
the store in operation during the entire remodeling process. The Company may
elect to relocate, rather than remodel, certain stores where relocation
provides a more convenient location and is more economical.
The Company completes minor remodels in existing stores that management
believes provide ample size and facilities to support the local customer base
but require merchandising and operational improvements while making cosmetic
changes to give the store a new look and feel. Minor remodels generally include
repainting, remodeling and upgrading of the lighting throughout the store.
Additionally, the Company refurbishes existing equipment and adds selected new
equipment in the remodeling process. As part of a minor remodel, the Company
remerchandises the store including the broadening of product and service
offerings.
When the Company remodels, expands or relocates an existing store, it uses that
opportunity to retrain the employees of that store and reemphasize customer
service.
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The following table sets forth, for the periods indicated, the Company's new
store development and store remodeling activities and the effect this program
has had on the average size of its stores.
------ ------- ------- ------- ------
1999 1998 1997 1996 1995
------ ------- ------- ------- ------
Number of Stores:
Opened 3 11 11 7 7
Closed stores (1) 4 2 1 1 --
Major remodels and
replacements 3 9 5 7 18
Minor remodels 16 10 16 12 --
Stores open at end of period 206 207 198 188 182
Size of Stores:
Less than 30,000 sq. ft 32 35 39 44 47
30,000 up to 42,000 sq. ft 71 74 80 82 87
42,001 up to 52,000 sq. ft 41 40 37 36 36
Greater than 52,000 sq. ft 62 58 42 26 12
Average store size (sq. ft.) 40,776 40,038 37,912 35,886 34,160
(1) Excludes new stores opened to replace existing stores.
The Company has historically expanded its store base by acquiring or leasing
supermarket sites and constructing stores to its specifications. From time to
time, however, the Company may consider the acquisition of existing
supermarkets as such opportunities become available.
The Company's ability to open new stores is subject to many factors, including
the acquisition of satisfactory sites and the successful negotiation of new
leases, and may be limited by zoning and other governmental regulation. In
addition, the Company's expansion, remodeling and replacement plans are
continually reviewed and are subject to change. See the "Liquidity and Capital
Resources" section included in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" regarding the Company's capital
expenditures.
Competition
The supermarket industry is highly competitive and characterized by narrow
profit margins. The Company's principal competitors (in alphabetical order) are
BI-LO, Inc., Food Lion, Inc., The Kroger Co., Publix Super Markets, Inc. and
Winn-Dixie Stores, Inc. The Company also competes with national and regional
supermarket chains, independent and specialty grocers, drug and convenience
stores, and the newer "alternative format" food stores, including specialty
food stores, retail drug stores, national general merchandisers and discount
retailers, membership clubs, warehouse stores and supercenters. Supermarket
chains generally compete on the basis of location, quality of products,
service, price, convenience, product variety and store condition. The Company's
management monitors competitive activity and regularly reviews the Company's
marketing and business strategies and periodically adjusts them as management
deems appropriate in light of existing conditions to adapt to changes in the
Company's region. The Company's ability to remain competitive in its markets
will depend in part on its ability to pursue its expansion and renovation
programs in response to remodelings and new store openings by its competitors.
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Employees and Labor Relations
At September 25, 1999, the Company had approximately 13,500 employees, of which
93% are supermarket personnel. Approximately 53% of these employees work on a
part-time basis. None of the employees are represented by a labor union.
Management considers employee relations to be good. The Company values its
employees and believes that employee loyalty and enthusiasm are key elements of
its operating performance.
Trademarks and Licenses
The Company employs various trademarks and service marks in its business, the
most important of which are its own "Laura Lynn" private label trademark and
the "Ingles" service mark. Each mark is federally registered and renewed when
required. In addition, the Company uses the "Sealtest" and "Pet" 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
Owned Properties.
The Company owns and operates 79 shopping centers, 72 of which contain an
Ingles supermarket, and owns 58 additional properties that contain a
free-standing Ingles store. The Company also owns 11 undeveloped sites which
are suitable for a free-standing store or shopping center development. Ingles
owns and holds for future development or sale numerous outparcels and other
acreage located adjacent to the shopping centers and supermarkets it owns.
The shopping centers owned by the Company contain an aggregate of 5.8 million
square feet of leasable space, of which 2.6 million square feet is used by the
Company's supermarkets. The remainder of the leasable space in these shopping
centers is leased or held for lease by the Company to third party tenants. A
breakdown by size of the shopping centers operated by the Company is as
follows:
Size Number
---- ------
Less than 50,000 square feet 27
50,000 - 100,000 square feet 35
More than 100,000 square feet 17
--
Total 79
==
The Company owns an 810,000 square foot facility which is strategically located
between Interstate 40 and Highway 70 near Asheville, North Carolina, as well as
the 78 acres of land on which it is situated. The facility includes the
Company's headquarters and its 760,000 square foot warehouse and distribution
center. The property also includes truck servicing and fuel storage facilities.
The Company's milk processing and packaging subsidiary, Milkco, Inc., owns an
83,800 square foot manufacturing and storage facility in Asheville, North
Carolina. In addition to the plant, the 10.8 acre property includes truck
servicing and fuel storage facilities.
Certain long-term debt of the Company is secured by owned properties. See Note
6 to the Consolidated Financial Statements of this report on Form 10-K for
further details.
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Leased Properties.
The Company operates supermarkets at 76 leased locations from various
unaffiliated third parties. The Company also holds ten leased supermarket
facilities in which it is not currently operating. Certain of the leases give
the Company the right of first refusal to purchase the entire shopping center
in which the supermarkets are located. The majority of these leases require the
Company to pay property taxes, utilities, insurance, repairs and certain other
expenses incidental to occupation of the premises. In addition to base rent,
most leases require the Company to pay additional percentage rent (ranging from
.75% to 1%) for sales in excess of a specified amount.
Rental rates generally range from $2.00 to $6.50 per square foot. During fiscal
years 1999, 1998 and 1997, the Company paid a total of $14.8 million, $14.7
million and $11.5 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 25, 1999, 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 17
2020-2039 10
2040 or after 59
Management believes that the long-term rent stability provided by these leases
is a valuable asset of the Company.
Item 3. LEGAL PROCEEDINGS
Various legal proceedings and claims arising in the ordinary course of business
are pending against the Company. In the opinion of management, the ultimate
liability, if any, from all pending legal proceedings and claims would not
materially affect the Company's financial position or the results of its
operations.
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
The Company has two classes of Common Stock: Class A and Class B. Class A
Common Stock is traded on The Nasdaq Stock Market's National Market under the
symbol IMKTA. There is no public market for the Company's Class B Common Stock.
However, under the terms of the Company's Articles of Incorporation, any holder
of Class B Common Stock may convert any portion or all of the holders' shares
of Class B Common Stock into an equal number of shares of Class A Common Stock
at any time. As of December 9, 1999, there were approximately 1,115 holders of
record of the Company's Class A
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Common Stock (approximately 6,700 beneficial holders) and 239 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.
1999 Fiscal Year High Low
---------------- ---- ---
First Quarter (ended December 26, 1998) $13-9/32 $10-3/8
Second Quarter (ended March 27, 1999) $12-1/4 $10-7/8
Third Quarter (ended June 26, 1999) $13-1/4 $10-3/4
Fourth Quarter (ended September 25, 1999) $15-1/2 $12-3/4
1998 Fiscal Year High Low
---------------- ---- ---
First Quarter (ended December 27, 1997) $14-3/4 $12-3/4
Second Quarter (ended March 28, 1998) $14-1/2 $12-5/16
Third Quarter (ended June 27, 1998) $13-5/8 $11-5/8
Fourth Quarter (ended September 26, 1998) $14-1/2 $10-3/4
On December 9, 1999, the closing sales price of the Company's Class A Common
Stock on The Nasdaq Stock Market's National Market was $11 per share.
Dividends
The Company has paid cash dividends on its Common Stock in each of the past
twenty fiscal years, except for the 1984 fiscal year when the Company paid a 3%
stock dividend. During both fiscal 1999 and fiscal 1998 the Company paid
quarterly dividends totaling $.66 per share of Class A Common Stock and $.60
per share of Class B Common Stock.
The Company expects to continue paying regular cash dividends on a quarterly
basis. However, the Board of Directors periodically reconsiders the declaration
of dividends. The Company pays these dividends at the discretion of the Board
of Directors. The continuation of these payments, the amount of such dividends,
and the form in which the dividends are paid (cash or stock) depends upon the
results of operations, the financial condition of the Company and other factors
which the Board of Directors deems relevant. The payment of dividends is also
subject to restrictions contained in certain financing arrangements. (See Note
6 to the Consolidated Financial Statements of this report on Form 10-K).
Item 6. SELECTED FINANCIAL DATA
The selected financial data set forth below has been derived from the Company's
consolidated financial statements. The information should be read in
conjunction with the information under the heading "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION" and in the Company's
Consolidated Financial Statements and Notes thereto included elsewhere herein.
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Selected Income Statement Data for the Year Ended September
(in thousands except per share amounts)
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
Net Sales $1,805,375 $1,647,152 $1,535,976 $1,472,578 $1,385,127
Gross Profit 450,445 408,681 376,790 345,648 317,239
Income Before
Extraordinary Item (1) 18,750 4,163 20,463 20,731 17,023
Diluted Earnings per Common Share Before
Extraordinary Item (1) .83 .19 .95 1.04 .88
Cash Dividends per
Common Share
Class A .66 .66 .66 .66 .66
Class B .60 .60 .60 .60 .60
Selected Balance Sheet Data at September
(in thousands)
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
Current Assets $ 212,761 $ 196,039 $ 188,408 $ 169,915 $ 155,828
Property and Equipment,
net 656,707 661,772 606,363 530,228 450,541
Total Assets 873,171 862,787 802,583 707,965 611,827
Current Liabilities,
including Current
Portion of Long-Term
Debt 203,645 176,968 158,124 161,409 135,019
Long-Term Liabilities,
net of Current Portion 417,389 442,648 395,042 349,511 292,765
Stockholders' Equity 224,122 218,236 222,982 175,010 163,816
(1) During fiscal 1998, the Company recorded a non-recurring charge relating to
a litigation settlement of $14.6 million, or ($.41) per share.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Ingles, a leading supermarket chain in the Southeast, operates 206
supermarkets in Georgia (83), North Carolina (63), South Carolina (32),
Tennessee (24), Virginia (3) and Alabama (1). The Company locates its
supermarkets primarily in suburban areas, small towns and rural communities,
where management believes the market may be under-served by existing
supermarkets. Ingles supermarkets offer customers a wide variety of nationally
advertised food products, including grocery, meat and dairy products, produce,
frozen foods and other perishables and non-food products, including health and
beauty care products and general merchandise, as well as quality private label
items. Within the markets it serves, the Company has developed strong name
recognition and a reputation for combining low overall prices with high levels
of customer service and convenience. Real estate ownership is an important
component of the Company's operations, providing both operational and economic
benefits.
RESULTS OF OPERATIONS
Ingles operates on a 52 or 53-week fiscal year ending on the last
Saturday in September. The consolidated statements of income for the fiscal
years ended September 25, 1999, September 26, 1998 and September 27, 1997 all
include 52 weeks of operations. Comparable store sales are defined as sales by
grocery stores in operation for the entire duration of the previous fiscal
year. Replacement stores and major and minor remodels are included in the
comparable store sales calculation. A replacement store is a new store that is
opened to replace an existing nearby store that is closed. A major remodel
entails substantial remodeling of an existing store and may include additional
retail square footage. A minor remodel includes repainting, remodeling and
updating the lighting and equipment throughout an existing store.
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The following table sets forth, for the periods indicated, selected
financial information as a percentage of net sales:
Fiscal Years Ended
-------------------------------------------------------------
SEPTEMBER 25, September 26, September 27,
1999 1998 1997
---------------- ---------------- ----------------
Net sales 100.0% 100.0% 100.0%
Gross profit 25.0 24.8 24.5
Operating and administrative
expenses 21.7 21.7 20.8
Rental income, net 0.5 0.4 0.3
Non-recurring charge -- 0.9 --
Other income, net 0.1 0.2 0.1
Income before interest, income
taxes and extraordinary item 3.9 2.8 4.1
Interest expense 2.2 2.4 2.0
Income before income taxes
and extraordinary item 1.7 0.4 2.1
Income taxes 0.7 0.1 0.8
Income before extraordinary item 1.0 0.3 1.3
EBITDA (1) 6.2 6.5 6.7
--------------------------------------------------
(1) EBITDA represents earnings before interest, income taxes, depreciation and
amortization, non-recurring charges and extraordinary items. Management
believes that EBITDA is a useful measure of operating performance because
it allows for a means of comparing Ingles with other companies that
operate supermarkets, many of which do not own the real property on which
the supermarkets are operated. EBITDA is unaffected by the debt and equity
structure of Ingles. EBITDA does not represent cash flow from operations
as defined by generally accepted accounting principles (GAAP), is not
necessarily indicative of cash available to fund all cash flow needs and
should not be considered as an alternative to net income under GAAP for
evaluating Ingles' results of operations.
FISCAL YEAR ENDED SEPTEMBER 25, 1999 COMPARED TO THE FISCAL YEAR ENDED
SEPTEMBER 26, 1998
Net Sales. Fiscal 1999 was the 35th consecutive year Ingles achieved
an increase in net sales. Comparable store sales grew 7.1%, the largest
comparable sales growth in five years. Net sales for the fiscal year ended
September 25, 1999 increased 9.6% to $1.805 billion compared with $1.647
billion for the fiscal year ended September 26, 1998.
During fiscal 1999, Ingles opened three stores, replaced two stores
and closed four older stores. In addition, Ingles completed a major remodel and
expansion of one store and minor remodels of 16 stores. Retail square footage
increased by 1.4% to 8.4 million square feet. A combination of successful
marketing and highly visible community involvement, as well as improving store
conditions and customer service fueled sales growth. Investments made in
maturing new stores, remodeled stores and stores that have been replaced also
were contributors to sales growth.
Gross Profit. Gross profit for the fiscal year ended September 25,
1999 increased 10.2% to $450.4 million, or 25.0% of sales, compared to $408.7
million, or 24.8% of sales, for the fiscal year ended September 26, 1998. A
focus on product management, economies achieved through purchasing and
increased sales in higher margin perishable departments all contributed to the
margin growth.
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Operating and Administrative Expenses. Operating and administrative
expenses increased 9.8% to $391.9 million for the year ended September 25,
1999, from $357.1 million for the year ended September 26, 1998. For the same
period, operating and administrative expenses, as a percentage of sales,
remained constant at 21.7%. Due to increased sales and cost controls, Ingles
achieved reductions in many operating and administrative expense categories,
when viewed as a percentage of sales. However, rent expense increased due to
several sale/leaseback transactions of newer store equipment. Because the
Company no longer owned the equipment, this increase was partially offset by
decreases in depreciation and interest expenses. Insurance expense increased
due to a combination of a larger volume of claims under both the Company's self
insured workers compensation and group medical coverages, as well as for
premiums on expanded liability insurance coverage in fiscal 1999. A breakdown
of the major increases (decreases) as a percentage of sales in operating and
administrative expense categories is as follows:
Equipment rent expense .68 %
Depreciation and amortization (.43)%
Salaries and wages (.15)%
Insurance .15 %
Utilities (.10)%
Taxes and licenses (.09)%
Rent-buildings and land (.08)%
Non-recurring Charge. The non-recurring charge of $14.6 million in
fiscal 1998 resulted from a settlement that was reached with the plaintiffs in
a lawsuit alleging gender discrimination, Weddington et. al. v. Ingles Markets,
Incorporated, filed in the United States District Court in Rome, Georgia in
March 1998. Four employees alleging gender discrimination on behalf of past,
current and future female Ingles employees filed the lawsuit. Ingles continues
to deny the material allegations contained in the complaint. As a result of the
agreement, which includes a stipulation that the case should be treated as a
class action for settlement purposes only, Ingles recorded a one-time pretax
charge of $14.6 million (after tax $9.1 million or $.41 per share) in the
fourth quarter of fiscal 1998. Payments to the named plaintiffs, other class
members and their attorneys are being made over a three-year period. In
addition, Ingles has agreed to establish or enhance certain human resource
programs.
Rental Income, Net. Rental income, net increased to $9.1 million for
the 1999 year from $7.2 million for the 1998 year. The improvement consists of
gross rental income increases of $2.8 million, net of operating cost increases
of $.9 million. The rise in gross rental income was due primarily to the full
year contribution of rental income from seven shopping centers purchased during
the first half of fiscal 1998.
Other Income, Net. Other income, net decreased $.1 million to $2.3
million for the year ended September 25, 1999 from $2.4 million for the year
ended September 26, 1998. Other income, net includes $.2 million in gains on
the sale of assets for the year ended September 25, 1999 and $1.2 million in
gains on the sale of assets for the year ended September 26, 1998. Other
income, net for fiscal 1999 also includes $.9 million in amortization of
deferred gains resulting from the above mentioned sale/leasebacks of store
equipment.
Income Before Interest, Income Taxes and Extraordinary Item. Income
before interest, income taxes and the extraordinary item increased $23.4
million to $69.9 million, or 3.9% of sales, during the 1999 year compared to
$46.6 million, or 2.8% of sales, during the 1998 year. The non-recurring charge
in 1998 accounted for $14.6 million of the increase.
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Interest Expense. Interest expense decreased $.3 million for the year
ended September 25, 1999 to $39.8 million from $40.1 million for the year ended
September 26, 1998. The decrease resulted from the previously mentioned
sale/leaseback of store equipment partially offset by interest on additional
debt incurred to fund expansion and renovation. Capital expenditures for the
1999 fiscal year totaled $52.2 million.
Income Taxes. Income tax expense as a percentage of pre-tax income
increased to 37.8% in the 1999 year compared to 35.6% in fiscal 1998, due
primarily to the substantially higher earnings achieved by the Company.
Net Income. Net income for the 1999 fiscal year was $18.7 million, or
1.0% of sales, compared to $4.2 million, or .3% of sales, for the 1998 fiscal
year. Basic and diluted earnings per common share were $.83 for the 1999 year
compared to $.19 for the 1998 year. Excluding the nonrecurring charge in fiscal
1998, net income increased 41.4% for the year ended September 25, 1999 over the
prior fiscal year.
Fiscal Year Ended September 26, 1998 Compared to Fiscal Year Ended September
27, 1997
Net Sales. Net sales for the fiscal year ended September 26, 1998 were
$1.647 billion compared to $1.536 billion for the fiscal year ended September
27, 1997. The 7.2% increase in net sales for the period was fueled by the
Company's opening of 11 new stores, replacement of six older stores and the
completion of three major remodels and ten minor remodels during fiscal year
1998. Comparable store sales for the year increased 1.1%. Improving comparable
store sales during the year were illustrated in the fourth quarter of fiscal
1998 by strong comparable store sales growth of 3.8% compared to the fourth
quarter of fiscal 1997.
Perishable department sales experienced the largest percentage growth
during fiscal year 1998 due to the increased perishable space available in the
newer larger stores. Effective merchandising and marketing techniques in all
departments improved sales overall. In fiscal 1998, Ingles began a marketing
campaign, "Register Tapes for Education", that rewarded schools with education
supplies and equipment for collecting Ingles register tapes. Customer response
to the program has been positive and the program was continued in fiscal 1999.
Gross Profit. Gross profit for the fiscal year ended September 26,
1998 increased 8.5% to $408.7 million, or 24.8% of sales, compared to $376.8
million, or 24.5% of sales, for the fiscal year ended September 27, 1997.
Increased sales in the higher margin perishable departments were the primary
reason for the increase. The expansion of perishable departments and a wider
selection in the grocery departments is part of the Company's ongoing
modernization strategy. Improved private label sales, as well as effective
product management initiatives also contributed to the gross profit
improvement.
Operating and Administrative Expenses. Operating and administrative
expenses increased 11.6% to $357.1 million for the year ended September 26,
1998, or 21.7% of sales, from $320.0 million, or 20.8% of sales, for the year
ended September 27, 1997. Higher payroll, depreciation and other operating
costs related to the new, larger store format and rent expense and other
associated costs for the portion of time that 13 supermarket facilities
purchased from Bruno's, Inc. were unoccupied contributed to the increase.
Warehousing and transportation expenses, as a percentage of sales, declined due
to efficiencies related to increased store sales, as well as decreases in
diesel fuel costs.
The cost of labor at the store level grew due to both the
restructuring of the store wage scale in April 1997 and the increase in the
minimum wage in September 1997. Low unemployment rates in many of the Company's
operating areas increased competition for employees. The Company adjusted its
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wage scale in order to attract and retain competent personnel. Labor intensive
perishable departments in the new larger stores also increased labor costs, as
a percentage of sales.
The Company's expansion and modernization of its store base resulted
in increases during fiscal 1998 in depreciation and amortization expense,
utilities and property taxes as larger, more capital intensive stores were
constructed.
Rental Income, Net. Rental income, net increased to $7.2 million for
the 1998 fiscal year from $5.3 million for the 1997 fiscal year. The
improvement consists of gross rental income increases of $2.6 million, net of
operating cost increases of $.7 million. The rise in gross rental income was
due primarily to the purchase of seven shopping centers in fiscal 1998.
Non-recurring Charge. The non-recurring charge of $14.6 million in
fiscal 1998 resulted from a settlement that was reached with the plaintiffs in
a lawsuit alleging gender discrimination, Weddington et. al. v. Ingles Markets,
Incorporated, filed in the United States District Court in Rome, Georgia in
March 1998. See previous discussion under the heading "Fiscal Year Ended
September 25, 1999 compared to Fiscal Year Ended September 26,1998" for further
details.
Other Income, Net. Other income, net increased $.1 million to $2.4
million for the year ended September 26, 1998 from $2.3 million for the year
ended September 27, 1997. Other income, net includes $1.2 million in gains on
the sale of assets for the year ended September 26, 1998 and $.8 million in
gains on the sale of assets for the year ended September 27, 1997.
Income Before Interest, Income Taxes and Extraordinary Item. Income
before interest, income taxes and the extraordinary item decreased $17.8
million to $46.6 million, or 2.8% of sales, during the 1998 fiscal year
compared to $64.4 million, or 4.1% of sales during the 1997 year. The
non-recurring charge in fiscal 1998 accounted for $14.6 million of the
decrease.
Interest Expense. Interest expense increased $8.8 million to $40.1
million for the year ended September 26, 1998 from $31.3 million for the year
ended September 27, 1997 mainly as a result of additional debt incurred to fund
expansion and renovation. Capital expenditures for the 1998 fiscal year totaled
$155.9 million. The Company has incurred additional costs in its ongoing effort
to open new stores and modernize its existing store base. Retail square footage
increased 10.4% to 8.3 million square feet in fiscal 1998 from 7.5 million
square feet in fiscal 1997.
Income Taxes. Income tax expense as a percentage of pre-tax income
declined to 35.6% in the 1998 fiscal year compared to 38.1% in the 1997 fiscal
year, due primarily to the Work Opportunity Tax Credit and lower state income
taxes.
Net Income. Net income for the 1998 fiscal year was $4.2 million, or
.3% of sales, compared to $19.9 million, or 1.3% of sales, for the 1997 fiscal
year. Basic earnings per common share were $.19 for the 1998 fiscal year ($.60
per share excluding the non-recurring charge) compared to $.95 for the 1997
fiscal year. Diluted earnings per common share were $.19 per share for the 1998
fiscal year ($.60 per share excluding the non-recurring charge) compared to
$.92 per share for the 1997 fiscal year.
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18
LIQUIDITY AND CAPITAL RESOURCES
Capital Expenditures
The Company believes that a key to its ability to continue to develop
a loyal customer base is providing conveniently located, clean and modern
stores which provide customers with good service and a broad selection of
competitively priced products. As such, the Company has invested and will
continue to invest significant amounts of capital toward the modernization of
its store base. The Company's modernization program includes the opening of new
stores, the completion of major remodels and expansion of selected existing
stores, the relocation of selected existing stores to larger, more convenient
locations and the completion of minor remodeling of its remaining existing
stores.
Capital expenditures totaled $52.2 million for the fiscal year ended
September 25, 1999, including the development and opening of three stores, the
replacement of two older stores, major remodel and expansion of one store and
minor remodels at 16 stores. Capital expenditures also included the costs of
upgrading and replacing store equipment, technology investments, the purchase
of future store sites, and capital expenditures related to the Company's
distribution operation and its milk processing plant.
Ingles capital expenditure plans for fiscal 2000 include investments
of approximately $75 million. The Company plans to open four new stores,
replace eight existing stores and perform two major remodel/expansions and 14
minor remodels. Expenditures will also include investments in stores expected
to open in fiscal 2001 as well as technology improvements, upgrading and
replacing existing store equipment and warehouse and transportation equipment
and improvements to the Company's milk processing plant.
Liquidity
The Company generated $59.4 million of cash from operations in 1999.
The Company received $8.3 million in advance payments on purchases contracts.
Increases in receivables of $5.5 million are the product of vendor rebates
resulting from higher sales volume. Inventory increased $15.8 million and
accounts payable increased $13.9 million to support the higher sales volume.
Cash used by investing activities totaled $51.9 million. The primary
use of this cash was the $52.2 million of capital expenditures during the
period, which were partially offset by $.3 million of proceeds from the sale of
assets.
During 1999, the Company's financing activities used $12.7 million in
cash, the net result of long and short-term borrowings, sale/leaseback
transactions and dividend payments. Proceeds from long-term debt totaled $85.3
million, while payments on long-term debt were $83.5 million. Proceeds from the
sale/leaseback transactions totaled $18.4 million, payments on short-term
borrowings were $20.0 million and dividend payments were $14.0 million.
At September 25, 1999, the Company had lines of credit with seven
banks totaling $125.0 million; of this amount $56.5 million was unused. The
$68.5 million outstanding under lines of credit at September 25, 1999 mature in
fiscal years 2000 and 2001, however, the Company expects that it will be able
to renew those commitments upon maturity. The Company monitors its cash
position daily and makes draws or repayments on its lines of credit. The lines
provide the Company with various interest rate options generally at rates less
than prime. The Company is not required to maintain compensating balances in
connection with these lines of credit. The Company was in compliance with all
financial covenants related to these lines of credit at September 25, 1999.
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The Company finances its expansion and renovation program primarily
with cash provided from operations and from borrowings under its credit
facilities. The Company typically replaces such financing, as necessary, with
long-term financing secured by equipment and real estate. As of September 25,
1999, the Company had unencumbered real property and equipment with a net book
value of approximately $230 million.
The Company's principal sources of liquidity are expected to be cash
flow from operations, borrowings under its lines of credit and long-term
financing. The Company believes, based on its current results of operations and
financial condition, that its financial resources, including existing bank
lines of credit, short- and long-term financing expected to be available to it
and internally generated funds, will be sufficient to meet planned capital
expenditures and working capital requirements for the foreseeable future,
including any debt service requirements of additional borrowings. However,
there can be no assurance that any such source of financing will be available
to the Company on acceptable terms, or at all.
In addition, it is possible that, in the future, the Company's results
of operations and financial condition will be different from that described in
this report based on a number of intangible factors, many of which are outside
the Company's control. Factors that may affect results include changes in
business and economic conditions generally in Ingles' operating area, increased
competition, changing regional and national economic conditions, adverse
climatic conditions affecting food production and delivery and changing
demographics. It is also possible, for such reasons, that the results of
operations from the new, expanded, remodeled and/or replacement stores will not
meet or exceed the results of operations from existing stores that are
described in this report.
Quarterly Cash Dividends
Since December 27, 1993, the Company has paid regular quarterly cash
dividends of $.165 (sixteen and one-half cents) per share on its Class A Common
Stock and $.15 (fifteen cents) per share on its Class B Common Stock for an
annual rate of $.66 and $.60 per share, respectively.
The Company expects to continue paying regular cash dividends on a
quarterly basis. However, the Board of Directors periodically reconsiders the
declaration of dividends. The Company pays these dividends at the discretion of
the Board of Directors and the continuation of these payments, the amount of
such dividends, and the form in which the dividends are paid (cash or stock)
depends upon the results of operations, the financial condition of the Company
and other factors which the Board of Directors deems relevant. In addition,
certain loan agreements containing provisions outlining minimum tangible net
worth requirements, restrict the ability of the Company to pay additional
dividends to approximately $22.5 million, based on tangible net worth at
September 25, 1999.
Self-Insurance
The Company is self-insured for workers compensation and group medical
and dental benefits. Risks and uncertainties are associated with
self-insurance; however, the Company has limited its exposure by maintaining
excess liability coverages. Self-insurance reserves are established based on
claims filed and estimates of claims incurred but not reported. The estimates
are based on data provided by the respective claims administrators. The
majority of the Company's properties are self-insured for casualty losses and
business interruption, however liability coverage is maintained. The Company
believes that its mix between insurance and self-insurance is prudent, is in
accordance with general industry practice and is in the best interest of the
Company.
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Impact of Inflation
Inflation in food prices during fiscal 1999, 1998 and 1997 continued
to be lower than the overall increase in the Consumer Price Index. One of the
Company's significant costs is labor, which increases with inflation.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. The
Company intends to adopt SFAS 133 in the first quarter of fiscal 2001. The
Company is still determining how SFAS 133 will impact the financial statements.
Year 2000
In 1996, Ingles began evaluating both its information technology
systems and other systems and equipment in order to identify and correct date
sensitive systems for Year 2000 compliance. As part of this undertaking, the
Company appointed a Year 2000 Project Manager from the Information Systems
department to address and manage the issues related to Year 2000 compliance.
The Company identified certain proprietary programs that would have to
be updated, and certain hardware and third party software both at the corporate
level and in the stores that would have to be upgraded or replaced. The Company
began making changes to corporate proprietary programs in 1996, completing and
testing the changes in 1998.
The Company upgraded and replaced equipment and software in our stores
during 1999, both for year 2000 compliance and as part of an unrelated project
to replace our current in-store systems with an expanded suite of back office
products. The capitalized costs of the new technology was approximately $5.3
million of which $1.4 million was paid in fiscal 1999. The additional $3.9
million has been or will be paid in fiscal 2000. In addition to replacing store
technology, other expenditures required to make remaining hardware and software
Year 2000 compliant totaled approximately $.8 million. These expenditures were
expensed as incurred. The Company believes itself to be compliant as of the
date of this report.
As part of the Year 2000 Project, the Company has identified
relationships with third parties, including vendors, suppliers, and service
providers, whom the Company believes are critical to its business operations.
Although the Company considered several factors in identifying these critical
relationships, the Company concentrated its communication efforts with
suppliers and vendors from whom the company makes annual purchases in excess of
$500 thousand. The Company has communicated with these third parties through
letters and interviews in an effort to determine the extent to which they have
addressed their Year 2000 compliance issues. The Company has received responses
from its critical suppliers, the majority of which have indicated they
anticipate being Year 2000 compliant.
The Company cannot assure that there will not be an adverse impact on
the Company if third parties have not appropriately addressed their Year 2000
issues. Possible consequences in such event include, but are not limited to,
loss of communications with stores, loss of electric power, the inability of
vendors to supply timely delivery of inventory and an inability to process
customer transactions or otherwise engage in similar normal business
activities.
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Although the Company does not believe the actual impact of any system
failures related to the century change will be material, the Company has
developed various contingency plans with its critical suppliers and certain
other vendors in order to assure the timely delivery of inventory and
continuance of normal business activities following the year change. The
Company has also developed contingency plans to respond to unexpected system
failures in the stores.
The above assessment is based on management's best estimates and may
be updated from time to time as additional information becomes available.
Forward Looking Statements
This Annual Report contains certain forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, relating to,
among other things, capital expenditures, cost reduction, operating
improvements and expected results. The words "expect", "anticipate", "intend",
"plan", "believe", "seek" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to inherent risks and
uncertainties including, among others: business and economic conditions
generally in the Company's operating area; pricing pressures and other
competitive factors; results of the Company's programs to reduce costs and
achieve improvements in operating results; and the availability and terms of
financing. Consequently, actual events affecting the Company and the impact of
such events on the Company's operations may vary significantly from those
described in this report or contemplated or implied by statements in this
report.
Item 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to changes in financial market conditions in
the normal course of its business as a result of its use of bank debt to
finance its retail grocery and real estate lines of business.
The Company is exposed to changes in interest rates primarily as a
result of its borrowing activities, which includes borrowings under lines of
credit. These lines, along with cash flow from operations, are used to maintain
liquidity and fund business operations. The Company typically replaces
borrowings under its lines of credit as necessary, with long-term fixed rate
financing secured by equipment and real estate. The nature and amount of the
Company's debt may vary as a result of future business requirements, market
conditions and other factors. The definitive extent of the Company's interest
rate risk is not quantifiable or predictable because of the variability of
future interest rates and business financing requirements, but the Company does
not believe such risk is material. The Company does not customarily use
derivative instruments to adjust the Company's interest rate risk profile.
The table below presents principal amounts and related weighted average
rates by year of maturity for the Company's debt obligations at September 25,
1999 and September 26, 1998 (in thousands):
September 25, 1999
----------------- Fair
2000 2001 2002 2003 2004 Thereafter Total Value
----------------------------------------------------------------------------------------------------------------------------
Lines of credit 10,000 58,500 -- -- -- -- 68,500 68,500
Average interest
rate (variable) 6.62% 6.64% -- -- -- -- 6.64%
Long-term debt 52,002 54,945 43,905 33,408 24,829 187,405 396,494 397,114
Average interest
rate (fixed) 8.11% 8.11% 8.02% 8.11% 8.29% 8.91% 8.49%
----------------------------------------------------------------------------------------------------------------------------
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September 26, 1998
----------------- Fair
1999 2000 2001 2002 2003 Thereafter Total Value
----------------------------------------------------------------------------------------------------------------------------
Lines of credit -- 80,000 -- -- -- -- 80,000 80,000
Average interest
rate (variable) -- 6.79% -- -- -- -- 6.79%
Long-term debt 55,759 49,845 41,775 32,540 21,127 202,127 403,173 423,917
Average interest
rate (fixed) 8.28% 8.25% 8.20% 8.11% 8.30% 8.89% 8.56% --
The Company does not utilize financial instruments for trading or
other speculative purposes, nor does it utilize leveraged financial
instruments. On the basis of the fair value of the Company's market sensitive
instruments at September 25, 1999, the Company does not consider the potential
near-term losses in future earnings, fair values and cash flows from reasonable
possible near-term changes in interest rates and exchange rates to be material.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company are included on
pages 26 through 50 of this report on Form 10-K:
Report of Ernst & Young LLP, Independent Auditors;
Consolidated Balance Sheets as of September 25, 1999 and September 26,
1998;
Consolidated Statements of Income for the years ended September 25,
1999, September 26, 1998, and September 27,1997;
Consolidated Statements of Changes in Stockholders' Equity for the
years ended September 25, 1999, September 26, 1998, and September
27,1997;
Consolidated Statements of Cash Flows for the years ended September
25, 1999, September 26, 1998, and September 27,1997;
Notes to Consolidated Financial Statements;
Selected quarterly financial data required by this Item is included in
Note 12 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 15, 2000, to be filed with the
Commission.
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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 15, 2000, 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 15, 2000, to be filed with the Commission.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference from
the data under the headings "ELECTION OF DIRECTORS Additional Information with
Respect to Compensation Committee Interlocks and Insider Participation in
Compensation Decisions" and "CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS" in the Proxy Statement to be used in connection with the
solicitation of proxies for the Company's annual meeting of stockholders to be
held February 15, 2000, to be filed with the Commission.
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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 25, 1999 and
September 26, 1998;
Consolidated Statements of Income for the years ended
September 25, 1999, September 26, 1998, and September
27,1997;
Consolidated Statements of Changes in Stockholders' Equity
for the years ended September 25, 1999, September 26, 1998,
and September 27,1997;
Consolidated Statements of Cash Flows for the years ended
September 25, 1999, September 26, 1998, and September 27,
1997;
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 51 of this report:
Schedule II - Supplemental schedule of valuation and
qualifying accounts.
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable and, therefore, have been
omitted.
3. The following exhibits required by Item 601 of Regulation
S-K and Item 14(c) of Form 10-K are filed herewith or
incorporated by reference as indicated.
EXHIBIT NUMBER AND DESCRIPTION
3.1 Articles of Incorporation of Ingles Markets, Incorporated, as amended.
(Included as Exhibit 3.1 to Registrant's S-1 Registration Statement,
File No. 33-23919, previously filed with the Commission and
incorporated herein by this reference.)
3.2 By-laws of Ingles Markets, Incorporated. (Included as Exhibit 3.2 to
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 24, 1988, File No. 0-14706, previously filed with the
Commission and incorporated herein by this reference.)
4.1 See Exhibits 3.1 and 3.2 for provisions of Articles of Incorporation,
as amended and By-laws of Registrant defining rights of holders of
capital stock of Registrant.
4.2 Loan Agreement between the Registrant and Metropolitan Life Insurance
Company dated March 21, 1990. (Included as Exhibit 19 to Registrant's
Quarterly Report on Form 10-Q for the quarter
24
25
ended March 31, 1990, File 0-14706, previously filed with the
Commission and incorporated herein by this reference.)
10.1 Amended and Restated Ingles Markets, Incorporated 1987 Employee
Incentive Stock Option Plan. (Included as Exhibit 10.1 to Registrant's
Annual Report on Form 10-K for the fiscal year ended September 30,
1995, File No. 0-14706, previously filed with the Commission and
incorporated herein by this reference.)
(MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT
REQUIRED TO BE FILED AS AN EXHIBIT TO THIS REPORT ON FORM
10-K PURSUANT TO ITEM 14(C) OF FORM 10-K.)
10.2 Ingles Markets, Incorporated Investment/Profit Sharing Plan and Trust
as amended through June 30, 1995, along with first, second and third
amendments thereto. (Included as Exhibit 4.3 to Registrant's
Registration Statement on Form S-8 filed on March 16, 1999, File No.
333-74459, previously filed with the Commission and incorporated
herein by this reference.)
(MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT
REQUIRED TO BE FILED AS AN EXHIBIT TO THIS REPORT ON FORM
10-K PURSUANT TO ITEM 14(C) OF FORM 10-K.)
10.3 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.)
10.4 1997 Nonqualified Stock Option Plan. (Included as Appendix A to
Registrant's Proxy Statement for the Annual Meeting of Stockholders
held on February 17, 1998, File No. 0-14706, previously filed with the
Commission and incorporated herein by this reference.)
(MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT
REQUIRED TO BE FILED AS AN EXHIBIT TO THIS REPORT ON FORM
10-K PURSUANT TO ITEM 14(C) OF FORM 10-K.)
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP, Independent Auditors.
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
25, 1999.
(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.
25
26
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 25, 1999 and
September 26, 1998, 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 25, 1999. Our audits also include
the financial statement schedule listed in the Index at Item 14(a).
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements 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 25, 1999 and September 26, 1998, and the consolidated
results of their operations and their cash flows for each of the three
years in the period ended September 25, 1999 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 12, 1999
26
27
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 25, 1999 AND SEPTEMBER 26, 1998
ASSETS 1999 1998
- -------------------------------------------------- ------------ ------------
CURRENT ASSETS:
Cash $ 13,959,751 $ 19,121,409
Receivables (less allowance for doubtful accounts
of $185,070 - 1999 and $158,643 - 1998) 25,798,505 20,671,972
Inventories 167,011,044 151,222,136
Refundable income taxes 1,500,000 1,000,000
Other 4,491,490 4,023,916
------------ ------------
Total current assets 212,760,790 196,039,433
PROPERTY AND EQUIPMENT:
Land 169,976,435 161,977,102
Construction in progress 11,562,748 10,040,063
Buildings 442,847,083 427,634,593
Store, office and warehouse equipment 285,331,792 275,824,767
Transportation equipment 17,168,399 20,211,308
Property under capital leases 540,554 151,264
Leasehold improvements 36,365,578 35,571,367
------------ ------------
Total 963,792,589 931,410,464
Less accumulated depreciation and amortization 307,085,895 269,638,282
------------ ------------
Property and equipment - net 656,706,694 661,772,182
OTHER ASSETS 3,703,590 4,975,350
------------ ------------
TOTAL ASSETS $873,171,074 $862,786,965
============ ============
See notes to consolidated financial statements.
27
28
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 25, 1999 AND SEPTEMBER 26, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
- ------------------------------------------------- ------------ ------------
CURRENT LIABILITIES:
Short-term loans and current portion of
long-term debt $ 62,002,254 $ 55,759,283
Accounts payable, accrued expenses and
current portion of other long-term liabilities 141,643,477 121,209,027
------------ ------------
Total current liabilities 203,645,731 176,968,310
DEFERRED INCOME TAXES 28,014,578 24,934,578
LONG-TERM DEBT 402,992,151 427,414,169
OTHER LONG-TERM LIABILITIES 14,396,758 15,234,165
------------ ------------
Total liabilities 649,049,218 644,551,222
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.05 par value;
10,000,000 shares authorized; no shares issued -- --
Common stocks:
Class A, $.05 par value; 150,000,000 shares
authorized; issued and outstanding, 9,786,491
shares in 1999, 9,581,641 shares in 1998 489,324 479,082
Class B, $.05 par value; 100,000,000 shares
authorized; issued and outstanding, 12,691,248
shares in 1999, 12,784,098 shares in 1998 634,563 639,205
Paid-in capital in excess of par value 96,898,633 95,765,167
Retained earnings 126,099,336 121,352,289
------------ ------------
Total stockholders' equity 224,121,856 218,235,743
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $873,171,074 $862,786,965
============ ============
28
29
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEARS ENDED SEPTEMBER 25, 1999,
SEPTEMBER 26, 1998 AND SEPTEMBER 27, 1997
1999 1998 1997
-------------- --------------- ---------------
Net sales $1,805,375,478 $ 1,647,151,548 $ 1,535,976,275
Cost of goods sold 1,354,930,433 1,238,470,676 1,159,186,408
-------------- --------------- ---------------
Gross profit 450,445,045 408,680,872 376,789,867
Operating and administrative expenses 391,910,419 357,067,958 319,979,774
Rental income, net 9,077,582 7,176,437 5,276,493
Non-recurring charge -- 14,636,764 --
-------------- --------------- ---------------
Income from operations 67,612,208 44,152,587 62,086,586
Other income, net 2,323,016 2,428,139 2,282,794
-------------- --------------- ---------------
Income before interest, income
taxes and extraordinary item 69,935,224 46,580,726 64,369,380
Interest expense 39,785,283 40,117,302 31,305,766
-------------- --------------- ---------------
Income before income taxes and
extraordinary item 30,149,941 6,463,424 33,063,614
-------------- --------------- ---------------
Income taxes:
Current 8,150,000 4,300,000 8,200,000
Deferred 3,250,000 (2,000,000) 4,400,000
-------------- --------------- ---------------
11,400,000 2,300,000 12,600,000
-------------- --------------- ---------------
Income before extraordinary item 18,749,941 4,163,424 20,463,614
Extraordinary item-early extinguishment
of debt (net of income tax benefit) -- -- (565,275)
-------------- --------------- ---------------
Net income $ 18,749,941 $ 4,163,424 $ 19,898,339
============== =============== ===============
Per-share amounts:
Earnings per common share:
Basic earnings per common share before
extraordinary item $ .83 $ .19 $ .98
Extraordinary item-early
extinguishment of debt -- -- (.03)
-------------- --------------- ---------------
Basic earnings per common share $ .83 $ .19 $ .95
============== =============== ===============
Diluted earnings per common share
before extraordinary item $ .83 $ .19 $ .95
Extraordinary item-early
extinguishment of debt -- -- (.03)
-------------- --------------- ---------------
Diluted earnings per common share $ .83 $ .19 $ .92
============== =============== ===============
Cash dividends per common share:
Class A $ .66 $ .66 $ .66
-------------- --------------- ---------------
Class B $ .60 $ .60 $ .60
-------------- --------------- ---------------
See notes to consolidated financial statements.
29
30
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FISCAL YEARS ENDED SEPTEMBER 25, 1999, SEPTEMBER 26, 1998
AND SEPTEMBER 27, 1997
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 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
Net income -- -- -- -- -- 4,163,424 4,163,424
Cash dividends -- -- -- -- -- (13,776,498) (13,776,498)
Exercise of stock options 519,000 25,950 -- -- 4,840,425 -- 4,866,375
Common stock conversions 4,200 210 (4,200) (210) -- -- --
--------- -------- ----------- ----------- ------------ ------------- -------------
Balance,
September 26, 1998 9,581,641 479,082 12,784,098 639,205 95,765,167 121,352,289 218,235,743
Net income -- -- -- -- -- 18,749,941 18,749,941
Cash dividends -- -- -- -- -- (14,002,894) (14,002,894)
Exercise of stock options 112,000 5,600 -- -- 1,133,466 -- 1,139,066
Common stock conversions 92,850 4,642 (92,850) (4,642) -- -- --
--------- -------- ----------- ----------- ------------ ------------- -------------
BALANCE,
SEPTEMBER 25, 1999 9,786,491 $489,324 12,691,248 $ 634,563 $ 96,898,633 $ 126,099,336 $ 224,121,856
========= ======== =========== =========== ============ ============= =============
See notes to consolidated financial statements
30
31
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED SEPTEMBER 25, 1999, SEPTEMBER 26, 1998
AND SEPTEMBER 27, 1997
1999 1998 1997
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 18,749,941 $ 4,163,424 $ 19,898,339
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization expense 41,923,239 45,615,701 38,513,154
Extraordinary item-early extinguishment of debt (net of
income tax benefit) -- -- 565,275
Non-recurring charge -- 14,636,764 --
Amortization of deferred gain on sale/leaseback of
equipment (874,887) -- --
Gains on disposals of property and equipment (199,534) (1,174,006) (630,970)
Receipt of advance payments on purchases contracts 8,251,750 800,000 1,474,000
Recognition of advance payments on purchases contracts (3,791,439) (2,494,074) (3,512,413)
Deferred income taxes 3,250,000 (2,000,000) 4,400,000
Increase in receivables (5,488,536) (1,142,281) (2,741,091)
Increase in inventory (15,788,908) (9,962,207) (12,895,494)
(Increase) decrease in other assets (527,780) 359,957 (1,016,722)
Increase (decrease) in accounts payable and accrued
expenses 13,933,370 22,615,532 (7,080,934)
------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 59,437,216 71,418,810 36,973,144
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and equipment 294,371 3,915,246 1,237,513
Capital expenditures (52,221,452) (155,941,246) (114,105,097)
------------- ------------- -------------
NET CASH (USED) BY INVESTING ACTIVITIES (51,927,081) (152,026,000) (112,867,584)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 85,343,729 141,116,215 157,240,495
Proceeds from sale/leaseback transactions 18,371,082 50,725,607 --
Payments on short-term borrowings, net (20,000,000) (10,000,000) --
Principal payments on long-term debt (83,522,776) (97,592,486) (68,501,655)
Proceeds from exercise of stock options 1,139,066 3,866,375 3,025,525
Dividends paid (14,002,894) (13,776,498) (12,898,542)
------------- ------------- -------------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (12,671,793) 74,339,213 78,865,823
------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH (5,161,658) (6,267,977) 2,971,383
Cash at Beginning of Year 19,121,409 25,389,386 22,418,003
------------- ------------- -------------
CASH AT END OF YEAR $ 13,959,751 $ 19,121,409 $ 25,389,386
============= ============= =============
See notes to consolidated financial statements.
31
32
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 25, 1999, September 26, 1998 and September 27,
1997
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 1999, 1998 and 1997 each consisted of 52 weeks.
CASH EQUIVALENTS - All highly liquid investments with a maturity of three
months or less when purchased are considered cash.
FINANCIAL INSTRUMENTS - The Company has overnight investments and short-term
certificates of deposit included in cash. The Company's policy is to invest its
excess cash either in reverse repurchase agreements or in commercial paper.
Commercial paper is not secured; reverse repurchase agreements are secured by
government obligations. At September 25, 1999, there were no investments in
commercial paper or reverse repurchase agreements. Demand deposits of
approximately $7.7 million in 21 banks exceed the $100,000 insurance limit per
bank.
INVENTORIES - Warehouse inventories are valued at the lower of average cost or
market. Store inventories are valued at FIFO using the retail method.
PROPERTY, EQUIPMENT AND DEPRECIATION - Property and equipment are stated at
cost and depreciated over the estimated useful lives (principally 5 to 30
years) of the various classes of assets by the straight-line method.
SELF-INSURANCE - The Company is self-insured for workers compensation and group
medical and dental benefits. Self-insurance reserves are established based on
claims filed and estimates of claims incurred but not reported. The estimates
are based on data provided by the respective claims administrators. The Company
is required in certain cases to obtain letters of credit to support its
self-insured status. At fiscal year end 1999, the Company's self-insured
liabilities were supported by $5.7 million of undrawn letters of credit. The
Company carries casualty insurance only on those properties where it is
required to do so. The Company has elected to self-insure its other properties.
INCOME TAXES - The Company accounts for income taxes under FASB Statement No.
109, "Accounting for Income Taxes". Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the currently
enacted tax rates.
PRE-OPENING COSTS - Costs associated with the opening of new stores are
expensed when incurred.
32
33
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 25, 1999, September 26, 1998 and September 27,
1997
RECLASSIFICATIONS - Certain amounts for 1998 and 1997 have been reclassified
for comparative purposes.
PER-SHARE AMOUNTS - Basic earnings per common share is computed by dividing
consolidated net income by the weighted average number of shares of common
stock outstanding during the period.
Diluted earnings per common share gives effect to dilutive stock options and
the assumed conversion in 1997, 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.
Advertising and promotion expenses totaled $22.3 million, $20.2 million and
$19.1 million for fiscal years 1999, 1998 and 1997, respectively.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Although these estimates are based on management's
knowledge of current events and actions it may undertake in the future, they
may ultimately differ from actual results.
NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. The Company intends to adopt SFAS 133 in the first quarter
of fiscal 2001. The Company is still determining how SFAS 133 will impact the
financial statements.
2. INCOME TAXES
DEFERRED INCOME TAX LIABILITIES AND ASSETS - Significant components of the
Company's deferred tax liabilities and assets are as follows:
33
34
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 25, 1999, September 26, 1998 and September 27,
1997
SEPTEMBER 25, September 26,
1999 1998
------------- -------------
Deferred tax liabilities:
Fixed asset tax/book differences $ 36,164,000 $ 31,557,000
Property tax method 746,000 523,000
Inventory 598,000 --
------------- -------------
Total deferred tax liabilities 37,508,000 32,080,000
------------- -------------
Deferred tax assets:
Insurance reserves 3,078,000 2,421,000
Advance payments on purchases contracts 638,000 569,000
Litigation settlement 5,470,000 5,444,000
Vacation accrual 567,000 448,000
Deferred gain on sale/leaseback 1,144,000 744,000
Closed store accrual 1,054,000 879,000
Other 993,000 261,000
------------- -------------
Total deferred tax assets 12,944,000 10,766,000
------------- -------------
Net deferred tax liabilities $ 24,564,000 $ 21,314,000
============= =============
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:
1999 1998 1997
------------ ------------ ------------
Federal tax at statutory rate $ 10,552,000 $ 2,262,000 $ 11,572,000
State income tax, net of federal tax benefits 980,000 (98,000) 1,005,000
Other (132,000) 136,000 23,000
------------ ------------ ------------
Total $ 11,400,000 $ 2,300,000 $ 12,600,000
============ ============ ============
Income taxes payable of $.8 million at September 25, 1999 and $1.4 million at
September 26, 1998 are included in the accompanying balance sheets in accounts
payable and accrued expenses.
Current and deferred income tax expense is as follows:
34
35
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 25, 1999, September 26, 1998 and September 27,
1996
1999 1998 1997
------------ ------------ ------------
Current:
Federal $ 7,350,000 $ 4,200,000 $ 7,500,000
State 800,000 100,000 700,000
------------ ------------ ------------
Total current 8,150,000 4,300,000 8,200,000
------------ ------------ ------------
Deferred:
Depreciation 6,486,000 4,505,000 3,703,000
Sale/leaseback (2,989,000) -- --
Self-insurance reserves (656,000) (226,000) 97,000
Property taxes 222,000 186,000 95,000
Litigation settlement (25,000) (6,028,000) --
Other 212,000 (437,000) 505,000
------------ ------------ ------------
Total deferred 3,250,000 (2,000,000) 4,400,000
------------ ------------ ------------
Total expense $ 11,400,000 $ 2,300,000 $ 12,600,000
============ ============ ============
Current deferred income tax benefits of $3.5 million and $3.6 million at
September 25, 1999 and September 26, 1998, respectively, included in other
current assets, result from timing differences arising from vacation pay, bad
debts and self-insurance reserves, litigation settlement reserves and from
capitalization of certain overhead costs in inventory for tax purposes.
3. PROPERTY HELD FOR LEASE AND RENTAL INCOME
At September 25, 1999, the Company owned and operated 79 shopping centers in
conjunction with its supermarket operations. The Company leases to others a
portion of its shopping center properties. The leases are non-cancelable
operating lease agreements for periods ranging up to 20 years. Substantially
all leases covering retail properties provide for one or more renewal periods
and for percentage rent based on gross sales of the lessee.
Rental income, net included in the accompanying consolidated statements of
income consists of the following:
1999 1998 1997
------------ ------------ ------------
Rents earned on owned and subleased properties:
Base rentals including lease
termination payments $ 14,550,975 $ 12,092,462 $ 9,651,897
Contingent rentals 977,876 677,577 525,887
------------ ------------ ------------
Total 15,528,851 12,770,039 10,177,784
Depreciation on owned
properties leased to others (4,736,314) (4,069,810) (3,613,744)
Other shopping center expenses (1,714,955) (1,523,792) (1,287,547)
------------ ------------ ------------
Total $ 9,077,582 $ 7,176,437 $ 5,276,493
============ ============ ============
35
36
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 25, 1999, September 26, 1998 and September 27,
1997
Owned properties leased to others under operating leases by major classes are
summarized as follows:
SEPTEMBER 25,
1999
------------
Land $ 35,481,203
Buildings 120,655,570
------------
Total 156,136,773
Less accumulated depreciation 34,859,906
------------
Property leased to others, net $121,276,867
============
The above amounts are included in the respective captions on the balance sheet
under the heading Property and Equipment.
The following is a schedule of minimum future rental income on non-cancelable
operating leases as of September 25, 1999:
Fiscal Year
-----------------------------------------
2000 $11,702,032
2001 10,144,200
2002 8,121,229
2003 6,195,882
2004 5,121,413
Thereafter 31,416,045
-----------
Total minimum future rental income $72,700,801
===========
4. LEASES AND RENTAL EXPENSE
The Company conducts part of its retail operations from leased facilities. The
initial terms of the leases expire at various times over the next 20 years. The
majority of the leases include one or more renewal options and provide that the
Company pay property taxes, utilities, repairs and certain other costs
incidental to occupation of the premises. Several leases contain clauses
calling for percentage rentals based upon gross sales of the supermarket
occupying the leased space. The Company also leases a portion of its equipment
under operating leases with initial terms of three to five years.
OPERATING LEASES - Rent expense for all operating leases of $27.6 million,
$14.7 million and $11.5 million for fiscal years 1999, 1998 and 1997,
respectively is included in operating and administrative expenses.
The aggregate minimum rental commitments under non-cancelable operating leases
as of September 25, 1999 are as follows:
36
37
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 25, 1999, September 26, 1998 and September 27,
1997
Fiscal Year
------------------------------------------------
2000 $ 28,817,074
2001 29,213,037
2002 18,271,250
2003 17,034,865
2004 14,722,373
Thereafter 96,576,882
------------
Total minimum future rental commitments $204,635,481
============
The Company's minimum future rental commitments were increased substantially
during fiscal 1999 after various equipment sale/leaseback transactions in 1999.
5. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND CURRENT PORTION OF OTHER LONG-TERM
LIABILITIES
Accounts payable, accrued expenses and current portion of other long-term
liabilities consist of the following:
SEPTEMBER 25, September 26,
1999 1998
------------- -------------
Accounts payable-trade $ 91,748,064 $ 82,057,508
Property, payroll, and other taxes payable 11,358,575 11,304,982
Salaries, wages, and bonuses payable 10,812,107 9,613,336
Self-insurance reserves 5,719,000 4,600,000
Accrued litigation settlement 7,819,063 842,447
Other 14,186,668 12,790,754
------------- -------------
Total $ 141,643,477 $ 121,209,027
============= =============
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, totaled $15.2 million, $9.6 million and
$9.7 million for the years ended September 25, 1999, September 26, 1998 and
September 27, 1997, respectively. Of the $5.6 million increase from year-end
1998 to year-end 1999, $2.5 million is due to increased reserves and claims
related to insourcing the warehouse and distribution functions beginning on
September 27, 1998.
37
38
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 25, 1999, September 26, 1998 and September 27,
1997
6. LONG-TERM DEBT AND SHORT-TERM LOANS
Long-term debt and short-term loans are summarized as follows:
SEPTEMBER 25, September 26,
1999 1998
------------- -------------
Long-term debt:
Notes payable:
Real estate and equipment:
Weighted average interest rate of
8.49%, maturing 2000-2018 $ 380,657,061 $ 380,722,734
Other:
Weighted average interest rate of
6.64%, maturing 2000-2001 68,500,000 80,000,000
Weighted average interest rate of
8.46%, secured by stock of
Milkco, Inc., maturing 2002-2004 15,425,585 19,998,725
Other 411,759 2,451,993
------------- -------------
Total long-term debt and short-term loans 464,994,405 483,173,452
Less current portion 62,002,254 55,759,283
------------- -------------
Long-term debt, net of current portion $ 402,992,151 $ 427,414,169
============= =============
On January 20, 1997, the Company redeemed $.8 million of its outstanding
Convertible Subordinated Debentures (the "Debentures") at 101.8% of face value.
In connection with the redemption, the holders of the remaining $36.7 million
of the Debentures converted their Debentures into approximately 3.3 million
shares of Class A Common Stock at $11.10 per share. 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 converted 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 secured term loan agreement
for $12 million. The loan and related agreements contain interest rate swap
provisions which convert the variable rate to a fixed rate of 8.15%. The
interest differential received or paid is recognized as an adjustment to
interest expense. The Company is not exposed to credit risk in the event of
default by others under the agreement.
At September 25, 1999, property and equipment with an undepreciated cost of
approximately $394 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 25, 1999, has the effect of restricting funds
available for dividends to approximately $22.5 million, based on tangible net
worth at September 25, 1999.
38
39
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 25, 1999, September 26, 1998 and September 27,
1997
At September 25, 1999, the Company had unused lines of credit of $56.5 million.
The lines provide the Company with various interest rate options, generally at
rates less than prime.
Components of interest costs are as follows:
1999 1998 1997
------------ ------------ ------------
Total interest costs $ 40,466,568 $ 41,836,901 $ 33,283,276
Interest capitalized (681,285) (1,719,599) (1,977,510)
------------ ------------ ------------
Interest expense $ 39,785,283 $ 40,117,302 $ 31,305,766
============ ============ ============
Maturities of long-term debt at September 25, 1999 are as follows:
Fiscal Year
------------------------------------
2000 $ 62,002,254
2001 113,445,228
2002 43,904,587
2003 33,408,259
2004 24,828,553
Thereafter 187,405,524
------------
Total $464,994,405
============
7. OTHER LONG-TERM LIABILITIES
Other long-term liabilities are summarized as follows:
SEPTEMBER 25, September 26,
1999 1998
------------- -------------
Advance payments on purchases contracts $ 6,823,374 $ 2,298,082
Litigation settlement 14,243,776 14,177,633
Deferred gain-sale/leaseback 2,979,408 1,936,826
Other 517,947 177,209
------------- -------------
Total other long-term liabilities 24,564,505 18,589,750
Less current portion 10,167,747 3,355,585
------------- -------------
$ 14,396,758 $ 15,234,165
============= =============
ADVANCE PAYMENTS ON PURCHASES CONTRACTS - The Company has entered into
agreements with suppliers whereby payment is received in advance for
commitments to purchase product from these suppliers in the future. The
unearned portion, included in other long-term liabilities, will be recognized
in accordance with the terms of the contract.
LITIGATION SETTLEMENT - The Company reached a settlement in a lawsuit alleging
gender discrimination in 1998, resulting in recognition of the liability listed
above. Additional information is provided in Note 13.
39
40
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 25, 1999, September 26, 1998 and September 27,
1997
8. STOCKHOLDERS' EQUITY
The Company has two classes of Common Stock: Class A and Class B. Class A
Common Stock is traded on The Nasdaq Stock Market's National Market under the
symbol IMKTA. There is no public market for the Company's Class B Common Stock.
However, each share of Class B Common Stock is convertible at any time, at the
option of the holder, into one share of Class A Common Stock. Upon any
transfers of Class B Common Stock (other than to immediate family members and
the Investment/Profit Sharing Plan), such stock is automatically converted into
Class A Common Stock.
The holders of the Class A Common Stock and Class B Common Stock are entitled
to dividends and other distributions as and when declared out of assets legally
available 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.
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.
9. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings
per share for fiscal years 1999, 1998 and 1997:
40
41
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 25, 1999, September 26, 1998 and September 27,
1997
1999 1998 1997
------------ ------------ ------------
BASIC
Income before extraordinary item $ 18,749,941 $ 4,163,424 $ 20,463,614
Extraordinary item-early extinguishment of debt
(net of income tax benefit) -- -- (565,275)
------------ ------------ ------------
Net income $ 18,749,941 $ 4,163,424 $ 19,898,339
============ ============ ============
Shares
Weighted average number of common shares
outstanding 22,390,997 22,092,470 21,052,124
============ ============ ============
Basic earnings per common share before
extraordinary item $ .83 $ .19 $ .98
Extraordinary item-early extinguishment of debt -- -- (.03)
------------ ------------ ------------
Basic earnings per common share $ .83 $ .19 $ .95
============ ============ ============
DILUTED
Income before extraordinary item $ 18,749,941 $ 4,163,424 $ 20,463,614
Add after tax and bonus effect of interest
expense applicable to Convertible Subordinated
Debentures -- -- 89,509
------------ ------------ ------------
Diluted earnings before extraordinary item 18,749,941 4,163,424 20,553,123
Extraordinary item-early extinguishment of debt
(net of income tax benefit) -- -- (565,275)
------------ ------------ ------------
Diluted earnings $ 18,749,941 $ 4,163,424 $ 19,987,848
============ ============ ============
Shares
Weighted average number of common shares
and common stock equivalent shares
outstanding 22,506,958 22,251,311 21,459,394
Additional shares assuming conversion of
Convertible Subordinated Debentures -- -- 157,609
------------ ------------ ------------
Weighted average number of common shares
outstanding as adjusted 22,506,958 22,251,311 21,617,003
============ ============ ============
Diluted earnings per common share before
extraordinary item $ .83 $ .19 $ .95
Extraordinary item-early extinguishment of debt -- -- (.03)
------------ ------------ ------------
Diluted earnings per common share $ . 83 $ .19 $ .92
============ ============ ============
Options to purchase 978,000 and 1,014,000 shares of common stock at prices
ranging from $13.063 to $14.00 per share were outstanding during fiscal 1999
and 1998, respectively, but were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common shares and, therefore, the effect would be
antidilutive.
41
42
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 25, 1999, September 26, 1998 and September 27,
1997
10. EMPLOYEE BENEFIT PLANS
INVESTMENT/PROFIT SHARING PLAN - The purpose of the qualified investment/profit
sharing plan is to provide retirement benefits to eligible employees. Assets of
the plan, including the Company's Class B Common Stock, are held in trust for
employees and distributed upon retirement, death, disability or other
termination of employment. Company contributions are discretionary and are
determined quarterly by the Board of Directors. The Plan includes a 401(k)
feature.
Company contributions to the plan, included in operating and administrative
expenses, were $645,000, $815,000 and $700,000 for fiscal years 1999, 1998 and
1997, respectively.
CASH BONUS PLAN - The Company pays monthly bonuses to various managerial
personnel based on performance of the operating units controlled by these
personnel. Except for certain employees who receive monthly bonuses, annual
bonuses based on pre-tax, pre-bonus income are paid to all employees who worked
the entire fiscal year. The Company has a discretionary bonus plan for certain
executive officers providing for bonuses upon attainment of certain operating
goals. Operating and administrative expenses include bonuses of approximately
$5.4 million, $4.8 million and $5.4 million for fiscal years 1999, 1998 and
1997, respectively.
1987 EMPLOYEE INCENTIVE STOCK OPTION PLAN - The Company has an incentive stock
option plan under which an aggregate of 250,000 shares of the Company's Class A
Common Stock were issuable to qualified employees until September 8, 1997. The
options may be exercised within a period of three months after five years from
the date of issue or upon death, disability or retirement. As of September 25,
1999, no options were 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 25, 1999, September 26, 1998 and September 27,
1997
WEIGHTED
SHARES AVERAGE
UNDER OPTION PRICE EXERCISE
OPTION PER SHARE PRICE
--------------------------------------------
Outstanding,
September 28, 1996 161,500 $6.13 - $11.38 $ 8.25
Granted 66,000 14.00 14.00
Exercised (48,200) 7.00 7.00
Canceled (32,300) 6.13 - 14.00 9.22
-------
Outstanding,
September 27, 1997 147,000 6.13 - 14.00 11.03
Exercised (19,000) 6.13 6.13
Canceled (29,000) 6.13 - 14.00 11.27
-------
Outstanding,
September 26, 1998 99,000 8.63 - 14.00 11.90
Exercised (12,000) 8.63 8.93
Canceled (11,000) 10.00 - 14.00 12.31
-------
OUTSTANDING,
SEPTEMBER 25, 1999 76,000 $10.00 - $14.00 $ 12.36
=======
The weighted average remaining contractual life of the options outstanding at
September 25, 1999 is 1.9 years.
1991 NONQUALIFIED STOCK OPTION PLAN - The Company had a nonqualified stock
option plan under which an aggregate of 1,000,000 shares of the Company's Class
A Common Stock were issuable to qualified employees until August 6, 1996. As of
September 25, 1999, no options were outstanding under this plan. Information
with respect to options granted, exercised, canceled and outstanding follows:
43
44
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 25, 1999, September 26, 1998 and September 27,
1997
WEIGHTED
SHARES AVERAGE
UNDER OPTION PRICE EXERCISE
OPTION PER SHARE PRICE
---------------------------------------------
Outstanding,
September 28, 1996 991,000 $5.75 - $11.50 $ 7.29
Exercised (391,000) 6.88 6.88
Canceled (100,000) 11.50 11.50
--------
Outstanding,
September 27, 1997 500,000 5.75 - 10.38 6.78
Canceled (400,000) 5.75 - 6.00 5.88
--------
Outstanding,
September 26, 1998 100,000 10.38 10.38
Exercised (100,000) 10.38 10.38
-------
OUTSTANDING,
SEPTEMBER 25, 1999 -- $ -- $ --
=======
1997 NONQUALIFIED STOCK OPTION PLAN - The Company has a nonqualified stock
option plan under which an aggregate of 5,000,000 shares of the Company's Class
A Common Stock may be issued to officers and other key employees until January
1, 2007.
Options currently outstanding under the plan may be exercised within a one-year
period beginning five years after the date of grant or within three months
after death, disability or retirement with the consent of the Company.
Exceptions are a grant of 100,000 option shares to Robert P. Ingle, Chairman
and Chief Executive Officer, and a grant of 200,000 option shares to Vaughn C.
Fisher, President and Chief Operating Officer of the Company, both of which may
be exercised within a one-year period beginning one year 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 25, 1999, no
options were currently exercisable under this plan.
44
45
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 25, 1999, September 26, 1998 and September 27,
1997
Information with respect to options granted, canceled and outstanding follows:
WEIGHTED
SHARES AVERAGE
UNDER OPTION PRICE EXERCISE
OPTION PER SHARE PRICE
--------------------------------------------
Outstanding,
September 28, 1996 -- -- --
Granted 1,137,000 $14.00 $14.00
---------
Outstanding,
September 27, 1997 1,137,000 14.00 14.00
Granted 61,000 11.63 - 13.06 12.83
Exercised (100,000) 14.00 14.00
Canceled (134,000) 13.06 - 14.00 13.91
---------
Outstanding,
September 26, 1998 964,000 11.63 - 14.00 13.94
Granted 1,057,000 10.50 - 13.69 11.36
Canceled (120,000) 11.63 - 14.00 13.92
---------
OUTSTANDING,
SEPTEMBER 25, 1999 1,901,000 $10.50 - $14.00 $12.51
=========
The weighted average remaining contractual life of the options outstanding at
September 25, 1999 is 3.8 years.
ACCOUNTING FOR STOCK-BASED COMPENSATION - In 1997, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (FAS 123). FAS 123 establishes financial
accounting and reporting standards for stock-based compensation plans. As
permitted by FAS 123, the Company elected to account for stock-based
compensation awards in accordance with Accounting Principles Board Opinion No.
25. In accordance with FAS 123, the fair value of each option grant was
determined by using the Black-Scholes option-pricing model with the following
weighted average assumptions used for 1999, 1998 and 1997, respectively;
risk-free interest rates of 6.0, 4.2, and 6.0 percent; dividend yield of 5.9,
5.2 and 4.7 percent; expected volatility of 30.9, 29.3, and 28.7 percent; and
expected lives of 4, 5 and 4 years. Had compensation cost for the Company's
plans been determined based on the fair value at the grant date for such
awards in 1999, 1998 and 1997 consistent with the provisions of FAS 123, the
Company's earnings and earnings per share--basic and diluted--would have been
reduced to the pro forma amounts indicated below:
45
46
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 29, 1999, September 26, 1998 and September 27,
1997
1999 1998 1997
-------------- ------------- --------------
BASIC
Net income $ 18,749,941 $ 4,163,424 $ 19,898,339
Net income, pro forma 18,201,914 3,678,364 19,528,114
Basic earnings per common share $ 0.83 $ .19 $ .95
Basic earnings per common share,
pro forma 0.81 .17 .93
DILUTED
Diluted earnings $ 18,749,941 $ 4,163,424 $ 19,987,848
Diluted earnings, pro forma 18,201,914 3,678,364 19,617,623
Diluted earnings per common share $ 0.83 $ .19 $ .92
Diluted earnings per common share,
pro forma 0.81 .17 .91
Weighted average fair value of options
granted $ 1.95 $ 2.32 $ 2.77
The pro forma impact of these options is not likely to be representative of the
effects on reported net income for future years.
MEDICAL CARE PLAN - Medical and dental benefits are provided to qualified
employees under a self-insured plan. Expenses under the plan include claims
paid, administrative expenses and an estimated liability for claims incurred
but not yet paid.
11. LINES OF BUSINESS
The Company operates three lines of business: retail grocery sales,
shopping center rentals, and a fluid dairy processing plant. All of the
Company's operations are domestic. Information about the Company's
operations by lines of business (in thousands) is as follows:
46
47
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 25, 1999, September 26, 1998 and September 27,
1997
1999 1998 1997
---------- ---------- ----------
Revenues from unaffiliated customers:
Grocery sales $1,733,297 $1,586,308 $1,482,065
Shopping center rentals 15,529 12,770 10,178
Fluid dairy 72,078 60,844 53,911
---------- ---------- ----------
Total revenues from unaffiliated customers $1,820,904 $1,659,922 $1,546,154
========== ========== ==========
Income from operations:
Grocery sales $ 50,979 $ 30,966 $ 52,192
Shopping center rentals 9,078 7,176 5,276
Fluid dairy 7,555 6,011 4,618
---------- ---------- ----------
Total income from operations $ 67,612 $ 44,153 $ 62,086
========== ========== ==========
Assets:
Grocery sales $ 725,990 $ 706,829 $ 675,791
Shopping center rentals 121,277 124,957 99,778
Fluid dairy 25,904 31,001 27,014
---------- ---------- ----------
Total assets $ 873,171 $ 862,787 $ 802,583
========== ========== ==========
Capital expenditures:
Grocery sales $ 46,791 $ 127,290 $ 100,264
Shopping center rentals 2,750 25,251 9,290
Fluid dairy 2,680 3,400 4,551
---------- ---------- ----------
Total capital expenditures $ 52,221 $ 155,941 $ 114,105
========== ========== ==========
Depreciation and Amortization:
Grocery sales $ 35,166 $ 39,623 $ 33,214
Shopping center rentals 4,736 4,070 3,614
Fluid dairy 2,021 1,923 1,685
---------- ---------- ----------
Total depreciation and amortization $ 41,923 $ 45,616 $ 38,513
========== ========== ==========
Revenue from shopping center rentals is reported on the rental income, net line
of the income statements. The other revenues comprise the net sales reported.
The fluid dairy segment has $43.4, $38.8 and $38.2 million in sales to the
grocery sales segment in fiscal 1999, 1998 and 1997, respectively. These sales
have been eliminated in consolidation.
Income from operations in the grocery sales segment for fiscal 1998 reflects a
non-recurring charge relating to a litigation settlement of $14.6 million.
47
48
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 25, 1999, September 26, 1998 and September 27,
1997
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited financial data regarding the Company's
quarterly results of operations. Each of the quarters in the two fiscal years
presented contains thirteen weeks.
(in thousands except earnings per common share)
1ST 2ND 3RD 4TH
1999 QUARTER QUARTER QUARTER QUARTER TOTAL
- ---------------------------------------------------------------------------------------------------
NET SALES $453,341 $442,177 $452,878 $ 456,979 $1,805,375
GROSS PROFIT 110,588 109,248 113,601 117,008 450,445
NET INCOME 4,070 4,115 5,146 5,419 18,750
BASIC EARNINGS PER
COMMON SHARE .18 .18 .23 .24 .83
DILUTED EARNINGS PER
COMMON SHARE .18 .18 .23 .24 .83
1998
- ---------------------------------------------------------------------------------------------------
Net sales $403,048 $393,513 $417,661 $ 432,930 $1,647,152
Gross profit 97,521 97,054 104,214 109,892 408,681
Net income 2,840 3,331 3,150 (5,158) 4,163
Basic earnings per
common share .13 .15 .14 (.23) .19
Diluted earnings per
common share .13 .15 .14 (.23) .19
The fourth quarter of fiscal 1998 reflects a non-recurring charge relating to a
litigation settlement of $14.6 million, or ($.41) per share.
13. LITIGATION
The Company settled a lawsuit alleging gender discrimination, Weddington et.
al. v. Ingles Markets, Incorporated, filed in the United States District Court
in Rome, Georgia in March 1998 by four employees alleging gender discrimination
on behalf of past, present and future female Ingles employees. Ingles continues
to deny the material allegations contained in the complaint. The agreement,
includes a stipulation that the case should be treated as a class action for
settlement purposes only. Ingles recorded a one-time pretax charge of $14.6
million (after tax $9.1 million or $.41 per share) in the fourth quarter of
fiscal 1998. Payments to the named plaintiffs, other class members and their
attorneys are being made over a three-year period. In addition, Ingles has
agreed to establish or enhance certain human resource programs.
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.
48
49
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 25, 1999, September 26, 1998 and September 27,
1997
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
balance sheets for cash and cash equivalents approximate their fair
values.
Receivables: The carrying amounts reported in the balance sheets for
receivables approximate their fair values.
Long and short-term debt: The carrying amounts of the Company's
short-term borrowings approximate their fair values. The fair values
of the Company's long-term debt are based on quoted market prices,
where available, or discounted cash flow analyses, based on the
Company's current incremental borrowing rates for similar types of
borrowing arrangements.
The carrying amounts and fair values of the Company's financial instruments at
September 25, 1999 and September 26, 1998 are as follows (amounts in
thousands):
1999 1998
---------------------- -----------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
---------------------- ----------------------
Cash and cash equivalents $ 13,960 $ 13,960 $ 19,121 $ 19,121
Receivables 27,299 27,299 21,672 21,672
Long-term debt:
Real estate and equipment 380,657 381,277 380,723 401,466
Other 84,337 84,337 102,451 102,451
15. CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows:
1999 1998 1997
----------- ----------- -----------
Cash paid during the year for:
Interest (net of amounts capitalized) $39,961,635 $39,822,359 $32,783,950
Income taxes 9,206,644 2,700,922 8,979,797
Non cash items:
Property and equipment additions
included in accounts payable 4,356,069 4,196,728 6,897,684
Conversion of Convertible
Subordinated Debentures -- -- 36,667,258
49
50
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended September 25, 1999, September 26, 1998 and September 27,
1997
16. MAJOR SUPPLIER
A large portion of inventory is purchased from a wholesale grocery distributor.
Purchases from the distributor were approximately $184 million in 1999, $181
million in 1998 and $159 million in 1997. 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 25, 1999. Amounts owed to this distributor,
included in accounts payable-trade and accrued expenses, were $4.3 million and
$4.5 million at September 25, 1999 and September 26, 1998, respectively.
50
51
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 25, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts $ 158,643 $ 96,000 $ 69,573 (1) $ 185,070
Fiscal year ended September 26, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $ 141,852 $ 87,000 $ 70,209 (1) $ 158,643
Fiscal year ended September 27, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $ 106,444 $ 106,000 $ 70,592 (1) $ 141,852
(1) Uncollectible accounts written off, net of recoveries.
51
52
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, 1999
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, 1999
- --------------------------------------------
Robert P. Ingle, Chairman of the
Board, Chief Executive Officer
and Director
/s/ Vaughn C. Fisher December 22, 1999
- --------------------------------------------
Vaughn C. Fisher, President, Chief
Operating Officer and Director
/s/ Brenda S. Tudor December 22, 1999
- --------------------------------------------
Brenda S. Tudor, CPA, Vice
President-Finance, Chief Financial
Officer and Director
/s/ Ralph H. Gardner December 22, 1999
- --------------------------------------------
Ralph H. Gardner, Director
/s/ Anthony S. Federico December 22, 1999
- --------------------------------------------
Anthony S. Federico, Vice President-
Non-Foods and Director
/s/ David L. Keathley December 22, 1999
- --------------------------------------------
David L. Keathley, CPA
Secretary and Controller
52
53
EXHIBIT INDEX
3.1 Articles of Incorporation of Ingles Markets, Incorporated, as amended.
(Included as Exhibit 3.1 to Registrant's S-1 Registration Statement,
File No. 33-23919, previously filed with the Commission and
incorporated herein by this reference.)
3.2 By-laws of Ingles Markets, Incorporated. (Included as Exhibit 3.2 to
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 24, 1988, File No. 0-14706, previously filed with the
Commission and incorporated herein by this reference.)
4.1 See Exhibits 3.1 and 3.2 for provisions of Articles of Incorporation,
as amended and By-laws of Registrant defining rights of holders of
capital stock of Registrant.
4.2 Loan Agreement between the Registrant and Metropolitan Life Insurance
Company dated March 21, 1990. (Included as Exhibit 19 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1990,
File 0-14706, previously filed with the Commission and incorporated
herein by this reference.)
10.1 Amended and Restated Ingles Markets, Incorporated 1987 Employee
Incentive Stock Option Plan. (Included as Exhibit 10.1 to Registrant's
Annual Report on Form 10-K for the fiscal year ended September 30,
1995, File No. 0-14706, previously filed with the Commission and
incorporated herein by this reference.)
(MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT
REQUIRED TO BE FILED AS AN EXHIBIT TO THIS REPORT ON FORM
10-K PURSUANT TO ITEM 14(C) OF FORM 10-K.)
10.2 Ingles Markets, Incorporated Investment/Profit Sharing Plan and Trust
as amended through June 30, 1995, along with first, second and third
amendments thereto. (Included as Exhibit 4.3 to Registrant's
Registration Statement on Form S-8 filed on March 16, 1999, File No.
333-74459, previously filed with the Commission and incorporated
herein by this reference.)
(MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT
REQUIRED TO BE FILED AS AN EXHIBIT TO THIS REPORT ON FORM
10-K PURSUANT TO ITEM 14(C) OF FORM 10-K.)
10.3 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.)
10.4 1997 Nonqualified Stock Option Plan. (Included as Appendix A to
Registrant's Proxy Statement for the Annual Meeting of Stockholders
held on February 17, 1998, File No. 0-14706, previously filed with the
Commission and incorporated herein by this reference.)
(MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT
REQUIRED TO BE FILED AS AN EXHIBIT TO THIS REPORT ON FORM
10-K PURSUANT TO ITEM 14(C) OF FORM 10-K.)
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule (for SEC use only).
53