-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hj84S9sjiepq7Knkp0EPHoLgghPfg8m8DMCF7oe42lDQUrXlPCr2x8MHUwIqpwbf d1XleaFBZw0cRi75rcWVBA== 0000950144-02-012605.txt : 20021210 0000950144-02-012605.hdr.sgml : 20021210 20021210151916 ACCESSION NUMBER: 0000950144-02-012605 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020928 FILED AS OF DATE: 20021210 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INGLES MARKETS INC CENTRAL INDEX KEY: 0000050493 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 560846267 STATE OF INCORPORATION: NC FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-74459 FILM NUMBER: 02853530 BUSINESS ADDRESS: STREET 1: PO BOX 6676 CITY: ASHEVILLE STATE: NC ZIP: 28816 BUSINESS PHONE: 7046692941 MAIL ADDRESS: STREET 1: P O BOX 6676 CITY: ASHEVILLE STATE: NC ZIP: 28816 10-K 1 g79691e10vk.htm INGLES MARKETS INC. 10-K e10vk
 

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 28, 2002

o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________.

Commission File Number 0-14706

INGLES MARKETS, INCORPORATED


(Exact name of registrant as specified in its charter)
     
North Carolina
(State or other jurisdiction of incorporation or organization)
  56-0846267
(I.R.S. Employer Identification No.)
 
P.O. Box 6676, Asheville, NC
(Address of principal executive offices)
  28816
(Zip Code)
 
Registrant’s telephone number including area code:   (828) 669-2941

Securities registered pursuant to Section 12(b) of the Act:

     
Title of each class   Name of each exchange on
which registered

 
None   None

 

Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $0.05 par value
Class B Common Stock, $0.05 par value


(Title of Class)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES   x    NO   o.

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

     As of November 21, 2002, 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 November 21, 2002, was approximately $115.7 million. As of November 21, 2002, the registrant has 10,190,857 shares of Class A Common Stock outstanding and 12,596,882 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 11, 2003, 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 198 supermarkets in Georgia (83), North Carolina (60), South Carolina (31), Tennessee (21), Virginia (2) and Alabama (1). The Company’s strategy is to locate its supermarkets primarily in suburban areas, small towns and rural communities. Ingles supermarkets offer customers a wide variety of nationally advertised food products, including grocery, meat and dairy products, produce, frozen foods and other perishables and non-food products, including health and beauty care products and general merchandise, as well as quality private label items. In addition, the Company focuses on selling high-growth, high-margin products to its customers through the development of book sections, media centers, floral departments, bakery departments and prepared foods, including delicatessen sections. Real estate ownership is an important component of the Company’s operations, providing both operational and economic benefits.

The Company believes that customer service and convenience, modern stores and competitive prices on a broad selection of quality merchandise are essential to developing a loyal customer base. The Company’s new and remodeled supermarkets provide an enhanced level of customer convenience in order to accommodate the active lifestyle of today’s shoppers. Design features of the Company’s modern stores include expanded perishable departments featuring home meal replacement items and an expanded selection of food and non-food items to provide a “one-stop” shopping experience. The Company has an ongoing renovation and expansion plan to add stores in its target markets and to modernize the appearance and layout of its existing stores. Over the past five fiscal years, the Company has spent approximately $433 million to modernize and remodel its existing stores, relocate older stores to larger, more convenient locations and construct new stores in order to maintain the quality shopping experience that its customers expect. As part of the Company’s renovation and expansion plan, the Company has begun to operate full-service pharmacies and gas stations at some of its stores.

Substantially all of the Company’s stores are located within 250 miles of its 780,000 square foot warehouse and distribution center, near Asheville, North Carolina, from which the Company distributes grocery, produce, meat and dairy products to all Ingles stores. The warehouse supplies the stores with approximately 64% of the goods the Company sells and the remaining 36% is purchased from third parties. The close proximity of the Company’s purchasing and distribution operations to its stores facilitates the timely distribution of consistently high quality meat, produce and other perishable items.

To further ensure product quality, the Company also owns and operates a milk processing and packaging plant that supplies approximately 80% of the milk products sold by the Company’s supermarkets as well as a variety of orange and other fruit juices and bottled water products. In addition, the milk processing and packaging plant sells approximately 68% of its products to other retailers, food service distributors and grocery warehouses in seventeen states, which provides the Company with an additional source of revenue.

Ingles believes that real estate ownership allows it to decrease its occupancy costs, maintain flexibility for future store expansion, control the development and management of each property and benefit from value created by developing and operating free-standing supermarkets and shopping centers in smaller markets. The Company owns and operates 76 shopping centers, 59 of which contain an Ingles supermarket, and owns 73 additional properties that contain a free-standing Ingles store. The Company also owns five undeveloped sites suitable for a free-standing store. The majority of the land tracts that Ingles owns contain additional acreage which may either be sold or developed in the future.

The Company was founded by Robert P. Ingle, the Company’s Chairman of the Board and Chief Executive Officer. As of September 28, 2002, Mr. Ingle owns or controls approximately 86% of the combined voting power and 52% of the total number of shares of the Company’s outstanding Class A and Class B Common Stock (in each case including stock deemed to be beneficially owned by Mr. Ingle as one of the trustees of the Company’s Investment/Profit Sharing Plan and Trust). The Company became a publicly traded company in September 1987. Its Class A Common Stock is traded on The Nasdaq Stock Market’s National Market under the symbol IMKTA.

The Company was incorporated in 1965 under the laws of the State of North Carolina. Its principal executive offices are located at P. O. Box 6676, Highway 70, Asheville, North Carolina 28816, and its telephone number is 828-669-2941.

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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 (1)
   
    2002   2001   2000
   
 
 
Revenues from unaffiliated customers:
                                               
Grocery sales
  $ 1,867.9       94.4 %   $ 1,866.1       94.7 %   $ 1,842.1       95.3 %
Shopping center rentals
    16.9       .9 %     16.6       .8 %     15.9       .8 %
Fluid dairy
    92.6       4.7 %     87.3       4.5 %     74.1       3.9 %
 
   
     
     
     
     
     
 
 
  $ 1,977.4       100.0 %   $ 1,970.0       100.0 %   $ 1,932.1       100.0 %
 
   
     
     
     
     
     
 
Income from operations:
                                               
Grocery sales
  $ 48.6       68.9 %   $ 48.3       71.9 %   $ 51.1       74.7 %
Shopping center rentals
    10.3       14.6 %     10.3       15.3 %     10.1       14.8 %
Fluid dairy
    11.6       16.5 %     8.6       12.8 %     7.2       10.5 %
 
   
     
     
     
     
     
 
 
    70.5       100.0 %     67.2       100.0 %     68.4       100.0 %
 
           
             
             
 
Other income, net
    5.1               3.9               7.0          
Interest expense
    51.6               42.9               41.2          
 
   
             
             
         
Income before income taxes and extraordinary item
  $ 24.0             $ 28.2             $ 34.2          
 
   
             
             
         

(1)   Fiscal 2002 and 2001 were 52-week years and fiscal 2000 was a 53-week year.

Supermarket Operations

The Company follows the strategy of locating its supermarkets primarily in suburban areas, small towns and rural communities. At September 28, 2002, the Company operated 195 supermarkets under the name “Ingles”, two supermarkets under the name “Best Food” and one supermarket under the name “Sav-Mor” with locations in western North Carolina, western South Carolina, northern Georgia, eastern Tennessee, southwestern Virginia and northeastern Alabama. The “Best Food” and “Sav-Mor” store concepts accommodate smaller shopping areas and carry a full line of dry groceries, fresh meat and 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.

                                                 
    Number of Supermarkets   Percentage of Total
            at Fiscal           Net Sales for Fiscal
    Year Ended September   Year Ended September
   
 
    2002   2001   2000   2002   2001   2000
   
 
 
 
 
 
North Carolina
    60       61       63       35 %     34 %     33 %
South Carolina
    31       31       32       15 %     14 %     13 %
Georgia
    83       83       84       39 %     41 %     42 %
Tennessee
    21       24       25       10 %     10 %     10 %
Virginia
    2       3       3       1 %     1 %     1 %
Alabama
    1       1       1                   1 %
 
   
     
     
     
     
     
 
 
    198       203       208       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. During fiscal 2000, Ingles opened its first company-owned, in-store pharmacy and its first fuel station, “Ingles Gas Express”. At September 28, 2002, the Company operated 15 pharmacies and 11 fuel stations. The Company plans to continue to incorporate these new departments in select stores during fiscal 2003. The Company caters to the needs of its customers by offering extended hours and 24-hour

3


 

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
   
    2002   2001   2000(1)   1999   1998
   
 
 
 
 
Weighted Average Sales Per Store (000’s)
  $ 9,266     $ 9,004     $ 8,856     $ 8,424     $ 7,840  
Total Square Feet at End of Year (000’s)
    9,000       9,081       8,914       8,400       8,287  
Average Total Square Feet per Store
    45,454       44,736       42,855       40,776       40,038  
Average Square Feet of Selling Space per Store(2)
    31,817       31,315       29,999       28,543       28,026  

(1)   Fiscal 2000 was a 53-week year.
 
(2)   Selling space is estimated to be 70% of total store square footage.

Merchandising

The Company’s merchandising strategy is designed to create a “one-stop” shopping experience that blends value and customer service with variety, quality and convenience. Management believes that this strategy fosters a loyal customer base by establishing a reputation for providing high quality products and a variety of specialty departments.

The Company’s stores carry broad selections of quality meats, produce and other perishables. The Company’s full-service meat departments are generally designed so that customers can see Ingles’ employees at work and so that its butchers are readily accessible to its customers. Many of the Company’s stores offer a wide selection of fresh fish and seafood. The Company emphasizes the freshness and quality of its produce, bakery and deli offerings by designing its departments with an open air market atmosphere.

Management believes that supermarkets offering a broad array of products and time-saving services are perceived by customers as part of a solution to today’s lifestyle demands. Accordingly, a principal component of the Company’s merchandising strategy is to design stores that offer a “one-stop” shopping experience. In the Company’s prototype stores, in-store bakeries and delicatessens, prepared foods sections, gourmet coffee service and fresh-squeezed fruit juices are conveniently located near seating areas. In addition, book stores with reading areas and in-store pharmacies add to the one-stop shopping experience. Most Ingles stores also offer a wide selection of domestic, premium, micro brewery and imported beers and domestic and imported wines. The floral department offers balloons, flowers and plants. The media department features new movie releases, popularly priced computer software, rental VCRs and snack items all contained in an appealing display area decorated with a movie marquee and a monitor playing current videos. Customers can also purchase money orders and send or receive money wires from the customer service department or receive cash back at the check-out counter with a debit card.

A selection of prepared foods and home meal replacements are featured throughout Ingles’ specialty departments and in the meat department to provide customers with easy meal alternatives that they can eat at home, at work or in a sit-down café that is conveniently located near the front of newer Ingles stores. Many stores offer daily selections of home meal replacement items, such as rotisserie chicken, pizza, lasagna, meat loaf and other dinner entrees, sandwiches, pre-packaged salads and prepared fresh vegetables. The bakery offers an expanded selection of baked goods and self-service selections. Ingles offers bread baked daily, cakes made to order in various sizes, donuts and other pastries. The deli offers a salad bar, an expanded offering of cheeses and gourmet items and home meal replacement items. Ingles has introduced, at many of its locations, a fruit bar that offers fresh squeezed juices and assorted sliced fruits. The Company also provides its customers with an expanded selection of frozen food items to meet the increasing demands of its customers. The new prototype Ingles supermarket contains a “power aisle” that includes specialty departments, such as a bakery, a delicatessen, a produce department, a gourmet coffee service and a separate check-out.

Ingles intends to continue to increase sales of its proprietary brands, which typically carry higher margins than comparable branded products. The Company currently carries two private label lines: “Laura Lynn,” its primary line named after the founder’s daughter, and “Ingles Best”. Ingles’ private labels cover a broad range of products throughout the store, such as milk, bread, soft drinks and canned goods. The Company promotes its private label brands through print and television advertising, by displaying comparison pricing with national brands on store shelf

4


 

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 64% of its supermarkets’ inventory requirements from its modern 780,000 square foot warehouse and distribution center from which the Company distributes groceries, produce, meat and dairy products to all Ingles stores. The Company believes that its warehouse and distribution facility contains sufficient capacity for the continued expansion of its store base for the foreseeable future.

The Company’s centrally managed purchasing and distribution operations provide several advantages, including the ability to negotiate and reduce the cost of merchandise, decrease overhead costs and better manage its inventory at both the warehouse and store level. From time to time, the Company engages in advance purchasing on high-turnover inventory items to take advantage of special prices offered by manufacturers for limited periods. The Company’s ability to take advantage of advance purchasing is limited by several factors including carrying costs and warehouse space.

Approximately 14% of the Company’s other inventory requirements, primarily frozen food and slower moving items that the Company prefers not to stock, are purchased from Merchant Distributors, Inc. (“MDI”), a wholesale grocery distributor with which the Company has had a continuing relationship since its inception. Purchases from MDI were approximately $197 million in 2002, $203 million in 2001 and $188 million in 2000. Additionally, MDI purchases product from Milkco, the Company’s fluid dairy subsidiary, and these purchases totaled approximately $35 million in fiscal 2002, $32 million in 2001 and $30 million in fiscal 2000. 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 28, 2002 totaling 1.3% of the total voting power. The Company believes that alternative sources of supply are readily available from other third parties.

The remaining 22% of the Company’s inventory requirements, primarily beverages, bread and snack foods, are supplied directly to Ingles supermarkets by local distributors and manufacturers.

Goods from the warehouse and distribution facility and the milk processing and packaging plant are distributed to the Company’s stores by a fleet of 111 tractors and 393 trailers that the Company operates and maintains, including tractors and trailers that the Company leases. The Company invests on an ongoing basis in the maintenance, upgrade and replacement of its tractor and trailer fleet. The Company also operates truck servicing and fuel storage facilities at its warehouse and distribution center. The Company reduces its overall distribution costs by capitalizing on back-haul opportunities (contracting to transport merchandise on trucks that would otherwise be empty).

Store Development, Expansion and Remodeling

The Company believes that the appearance and design of its stores are integral components of its customers’ shopping experience and aims to develop one of the most modern supermarket chains in the industry. The ongoing modernization of the Company’s store base involves (i) the construction of new 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.

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The Company renovates and remodels stores in order to increase customer traffic and sales, respond to existing customer demand, compete effectively against new stores opened by competitors and support its “quality image” merchandising strategy. The Company decides to complete a major remodel of an existing store based on its evaluation of the competitive landscape of the local marketplace. A major remodel and expansion provides the quality of facilities and product offerings identical to that of a new prototype store, capitalizing upon the existing customer base. The Company retains the existing customer base by keeping the store in operation during the entire remodeling process. The Company may elect to relocate, rather than remodel, certain stores where relocation provides a more convenient location for its customers and is more economical.

The Company completes minor remodels in existing stores that management believes provide ample size and facilities to support the local customer base but require merchandising and operational improvements. In a minor remodel the Company will also make cosmetic changes to give the store a new look and feel. Minor remodels generally include repainting, remodeling and upgrading of the lighting throughout the store. Additionally, the Company refurbishes existing equipment and adds selected new equipment in the remodeling process. As part of a minor remodel, the Company remerchandises the store including the broadening of product and service offerings.

When the Company remodels, expands or relocates an existing store, it uses that opportunity to retrain the employees of that store and reemphasize customer service.

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.

                                           
      2002   2001   2000   1999   1998
     
 
 
 
 
Number of Stores:
                                       
 
Opened (1)
    0       2       4       3       11  
 
Closed stores (1)
    5       7       2       4       2  
 
Major remodels and replacements
    3       9       11       3       9  
 
Minor remodels
    10       6       8       16       10  
 
Stores open at end of period
    198       203       208       206       207  
Size of Stores:
                                       
 
Less than 30,000 sq. ft
    18       21       26       32       35  
 
30,000 up to 41,999 sq. ft
    58       60       67       71       74  
 
42,000 up to 51,999 sq. ft
    35       36       39       41       40  
 
At least 52,000 sq. ft
    87       86       76       62       58  
 
Average store size (sq. ft.)
    45,454       44,736       42,855       40,776       40,038  

(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 other national and regional supermarket chains, independent and specialty grocers, drug and convenience stores, and the newer “alternative format” food stores, including specialty food stores, retail drug stores, national general merchandisers and discount retailers, membership clubs, warehouse stores and supercenters (such as those operated by Wal-Mart Stores, Inc.). The Company also faces increasing competition from restaurants and fast food chains due to the increasing proportion of household food expenditures for food prepared outside the home.

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Supermarket chains generally compete on the basis of location, quality of products, service, price, convenience, product variety and store condition. The Company’s management monitors competitive activity and regularly reviews and periodically adjusts the Company’s marketing and business strategies as management deems appropriate in light of existing conditions in the Company’s region. The Company’s ability to remain competitive in its changing 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.

Employees and Labor Relations

At September 28, 2002, the Company had approximately 14,500 employees, of which 92% are supermarket personnel. Approximately 54% of these employees work on a part-time basis. None of the employees are represented by a labor union. Management considers employee relations to be good. The Company values its employees and believes that employee loyalty and enthusiasm are key elements of its operating performance.

Trademarks and Licenses

The Company employs various trademarks and service marks in its business, the most important of which are its own “Laura Lynn” private label trademark and the “Ingles” service mark. The “Ingles” service mark, “Laura Lynn” trademark and the service mark “You get a lot more. You pay a lot less.” are federally registered in the United States pursuant to applicable intellectual property laws and are the property of Ingles. In addition, the Company uses the “Sealtest,” “Pet” and “Light N’ Lively” trademarks pursuant to agreements entered into in connection with its milk, fruit juice and spring water processing and packaging operations. The Company believes it has all licenses and permits necessary to conduct its business.

Environmental Matters

Under applicable environmental laws, the Company may be responsible for remediation of environmental conditions and may be subject to associated liabilities relating to its stores and other buildings and the land on which such stores and other buildings are situated (including responsibility and liability related to its operation of its gas stations and the storage of gasoline in underground storage tanks), regardless of whether the Company leases or owns the stores, other buildings or land in question and regardless of whether such environmental conditions were created by the Company or by a prior owner or tenant. The Company’s liabilities may also include costs and judgments resulting from lawsuits brought by private litigants. The presence of contamination from hazardous or toxic substances, or the failure to properly remediate such contaminated property, may adversely affect the Company’s ability to sell or rent such real property or to borrow using such real property as collateral. Although the Company typically conducts a limited environmental review prior to acquiring or leasing new stores, other buildings or raw land, there can be no assurance that environmental conditions relating to prior, existing or future stores, other buildings or the real properties on which such stores or other buildings are situated will not have a material adverse effect on the Company’s business, financial condition and results of operations.

Federal, state and local governments could enact laws or regulations concerning environmental matters that affect the Company’s operations or facilities or increase the cost of producing or distributing the Company’s products. The Company believes that it currently conducts its operations, and in the past has conducted its operations, in substantial compliance with applicable environmental laws. The Company, however, cannot predict the environmental liabilities that may result from legislation or regulations adopted in the future, the effect of which could be retroactive. Nor can the Company predict how existing or future laws and regulations will be administered or interpreted or what environmental conditions may be found to exist at its facilities or at other properties where the Company or its predecessors have arranged for the disposal of hazardous substances. The enactment of more stringent laws or regulations or stricter interpretation of existing laws and regulations could require expenditures by the Company, some of which could have a material adverse effect on its business, financial condition and results of operations.

Government Regulation

The Company is subject to regulation by a variety of governmental agencies, including, but not limited to, the U.S. Food and Drug Administration, the U.S. Department of Agriculture, the Occupational Health and Safety Administration and other federal, state and local agencies. The Company’s stores are also subject to local laws regarding zoning, land use and the sale of alcoholic beverages. The Company believes that its locations are in material compliance with such laws and regulations.

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Item 2. PROPERTIES

Owned Properties

The Company owns and operates 76 shopping centers, 59 of which contain an Ingles supermarket, and owns 73 additional properties that contain a free-standing Ingles store. The Company also owns five undeveloped sites which are suitable for a free-standing store or shopping center development. Ingles owns numerous outparcels and other acreage located adjacent to the shopping centers and supermarkets it owns.

In order to maximize the utility of the Company’s real estate portfolio, the Company regularly purchases and sells real estate. During fiscal 2002, the Company spent $5.7 million for the purchase of land and received $7.1 million for the sale of properties owned by Ingles.

The shopping centers owned by the Company contain an aggregate of 6.3 million square feet of leasable space, of which 2.8 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
    26  
50,000 – 100,000 square feet
    31  
More than 100,000 square feet
    19  
 
   
 
 
Total
    76  
 
   
 

The Company owns an 810,000 square foot facility, which is strategically located between Interstate 40 and Highway 70 near Asheville, North Carolina, as well as the 73 acres of land on which it is situated. The facility includes the Company’s headquarters and its 780,000 square foot warehouse and distribution center. The property also includes truck servicing and fuel storage facilities.

The Company’s milk processing and packaging subsidiary, Milkco, Inc., owns an 101,000 square foot manufacturing and storage facility in Asheville, North Carolina. In addition to the plant, the 11.5 acre property includes truck servicing and fuel storage facilities.

Certain long-term debt of the Company is secured by the owned properties. See Note 6 to the Consolidated Financial Statements of this report on Form 10-K for further details.

Leased Properties

The Company operates supermarkets at 66 locations leased from various unaffiliated third parties. The Company also leases 25 supermarket facilities in which it is not currently operating, 10 of which are subleased to third parties. 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 1.5%) for sales in excess of a specified amount.

Rental rates generally range from $1.46 to $10.26 per square foot. During fiscal years 2002, 2001 and 2000, the Company paid a total of $17.8 million, $16.6 million and $15.2 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 28, 2002, with respect to the initial and any renewal option terms of leased supermarkets:

         
Year of Expiration   Number of
(Including Renewal Terms)   Leases Expiring

 
2003-2020
    7  
2021-2040
    16  
2041 or after
    68  

Management believes that the long-term rent stability provided by these leases is a valuable asset of the Company.

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Item 3. LEGAL PROCEEDINGS

Various legal proceedings and claims arising in the ordinary course of business are pending against the Company. In the opinion of management, the ultimate liability, if any, from all pending legal proceedings and claims would not materially affect the Company’s financial position or the results of its operations.

Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the security holders during the fourth quarter of the fiscal year covered by this report.

PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

The Company has two classes of Common Stock: Class A and Class B. Class A Common Stock is traded on The Nasdaq Stock Market’s National Market under the symbol IMKTA. There is no public market for the Company’s Class B Common Stock. However, under the terms of the Company’s Articles of Incorporation, any holder of Class B Common Stock may convert any portion or all of the holder’s shares of Class B Common Stock into an equal number of shares of Class A Common Stock at any time. As of November 21, 2002, there were approximately 942 holders of record of the Company’s Class A Common Stock (approximately 4,550 beneficial holders) and 208 holders of record of the Company’s Class B Common Stock. The following table sets forth the reported high and low closing sales price for the Class A Common Stock during the periods indicated as reported in the National Market System. The quotations reflect actual inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

                 
2002 Fiscal Year   High   Low

 
 
First Quarter (ended December 29, 2001)
  $ 12.90     $ 11.37  
Second Quarter (ended March 30, 2002)
  $ 12.25     $ 10.82  
Third Quarter (ended June 29, 2002)
  $ 12.76     $ 11.31  
Fourth Quarter (ended September 28, 2002)
  $ 12.50     $ 10.96  
                 
2001 Fiscal Year   High   Low

 
 
First Quarter (ended December 30, 2000)
  $ 10.75     $ 9.25  
Second Quarter (ended March 31, 2001)
  $ 12.25     $ 10.00  
Third Quarter (ended June 30, 2001)
  $ 12.80     $ 10.18  
Fourth Quarter (ended September 29, 2001)
  $ 13.40     $ 11.42  

On November 21, 2002, the closing sales price of the Company’s Class A Common Stock on The Nasdaq Stock Market’s National Market was $11.36 per share.

Dividends

The Company has paid cash dividends on its Common Stock in each of the past twenty-two fiscal years, except for the 1984 fiscal year when the Company paid a 3% stock dividend. During both fiscal 2002 and fiscal 2001 the Company paid annual dividends totaling $.66 per share of Class A Common Stock and $.60 per share of Class B Common Stock, paid in quarterly installments of $.165 and $.15 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. 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).

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Item 6. SELECTED FINANCIAL DATA

The selected financial data set forth below has been derived from the Company’s consolidated financial statements. The information should be read in conjunction with the information under the heading “MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION” and in the Company’s Consolidated Financial Statements and Notes thereto included elsewhere herein.

Selected Income Statement Data for the Year Ended September
(in thousands except per share amounts)

                                         
    2002   2001   2000   1999   1998(1)
   
 
 
 
 
Net Sales
  $ 1,960,462     $ 1,953,440     $ 1,916,200     $ 1,805,375     $ 1,647,152  
Income Before Extraordinary Item
    15,295       17,850       21,091       18,750       4,163  
Diluted Earnings per Common Share Before Extraordinary Item
    .66       .79       .93       .83       .19  
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)

                                         
    2002   2001   2000   1999   1998
   
 
 
 
 
Current Assets
  $ 277,829     $ 234,050     $ 219,581     $ 212,761     $ 196,039  
Property and Equipment, net
    723,220       724,443       702,472       656,707       661,772  
Total Assets
    1,014,391       962,801       927,766       873,171       862,787  
Current Liabilities, including Current Portion of Long-Term Debt
    186,430       196,598       197,522       203,645       176,968  
Long-Term Liabilities, net of Current Portion (2)
    552,487       492,638       462,591       417,389       442,648  
Stockholders’ Equity
    238,559       236,500       232,138       224,122       218,236  

(1)   During 1998, the Company recorded a non-recurring charge relating to a litigation settlement of $14.6 million, or ($.41) per share.
 
(2)   Excludes long-term deferred income tax liability.

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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 198 supermarkets in Georgia (83), North Carolina (60), South Carolina (31), Tennessee (21), Virginia (2) and Alabama (1). The Company locates its supermarkets primarily in suburban areas, small towns and rural communities. Ingles supermarkets offer customers a wide variety of nationally advertised food products, including grocery, meat and dairy products, produce, frozen foods and other perishables and non-food products, including health and beauty care products and general merchandise, as well as quality private label items. In addition, the Company focuses on selling high-growth, high-margin products to its customers through the development of book sections, media centers, floral departments, bakery departments and prepared foods including delicatessen sections. The Company recently began adding fuel centers and pharmacies at select store locations. As of September 28, 2002 the Company operates 15 in-store pharmacies and 11 fuel centers.

Ingles also operates two other lines of business, fluid dairy processing and shopping center rentals. The fluid dairy processing segment sells approximately 32% of its products to the retail grocery segment and approximately 68% of its products to third parties. Real estate ownership (including the shopping center rental segment) is an important component of the Company’s operations, providing both operational and economic benefit.

Critical Accounting Policies

Critical accounting policies are those accounting policies that management believes are important to the portrayal of Ingles’ financial condition and results of operations, and require management’s most difficult, subjective or complex judgements, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

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.

Asset Impairments

The Company has accounted for the impairment of long-lived assets in accordance with Statement of Financial Accounting Standards No. 121 and, beginning in fiscal 2003, will account for it in accordance with Statement of Financial Accounting Standards No. 144. For assets to be held and used, the Company tests for impairment using undiscounted cash flows and calculates the amount of impairment using discounted cash flows. For assets held for sale, impairment is recognized based on the excess of remaining book value over expected recovery value. The recovery value is the fair value as determined by independent quotes or expected sales prices developed by internal specialists. Estimates of future cash flows and expected sales prices are judgements based upon the Company’s experience and knowledge of local operations and cash flows that are projected for several years into the future. These estimates can fluctuate significantly due to changes in real estate market conditions, the economic environment, capital spending decisions and inflation.

Closed Store Accrual

For properties to be closed that are under long-term lease agreements, the present value of any remaining liability under the lease, discounted using risk-free rates and net of expected sublease recovery, is recognized as a liability and expensed. If the real estate and leasing markets change, sublease recovery could vary significantly from the recoveries originally assumed, resulting in a material change in the Company’s recorded liability.

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 28, 2002 and September 29, 2001 include 52 weeks of operations. The consolidated statement of income for the fiscal year ended September 30, 2000 includes 53 weeks of operations. Comparable store sales are defined as sales by grocery stores in operation for the entire duration of the

11


 

previous and current fiscal years. Replacement stores and major and minor remodels are included in the comparable store sales calculation. A replacement store is a new store that is opened to replace an existing nearby store that is closed. A major remodel entails substantial remodeling of an existing store and may include additional retail square footage. A minor remodel includes repainting, remodeling and updating the lighting and equipment throughout an existing store.

The following table sets forth, for the periods indicated, selected financial information as a percentage of net sales. For information regarding the various segments of the business, reference is made to Note 11 “Lines of Business” to the Consolidated Financial Statements.

                         
    Fiscal Years Ended
   
    2002   2001   2000
   
 
 
Net sales
    100.0 %     100.0 %     100.0 %
Gross profit
    26.6       26.2       25.6  
Operating and administrative expenses
    23.5       23.3       22.6  
Rental income, net
    0.5       0.5       0.5  
Income from operations
    3.6       3.4       3.5  
Other income, net
    0.3       0.2       0.4  
Income before interest, income taxes and extraordinary item
    3.9       3.6       3.9  
Interest expense
    2.7       2.2       2.1  
Income before income taxes and extraordinary item
    1.2       1.4       1.8  
Income taxes
    0.4       0.5       0.7  
Income before extraordinary item
    0.8       0.9       1.1  
Net income
    0.8       0.9       1.1  
EBITDA margin(1)
    6.3       6.0       6.2  
EBITDAR margin(1)
    8.5       7.9       7.8  


(1)   EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, non-recurring charges and extraordinary items. EBITDAR is defined as EBITDA plus rent expense. Management believes that EBITDA and EBITDAR are useful measures of operating performance. EBITDA and EBITDAR do not represent cash flow from operations as defined by accounting principles generally accepted in the United States (GAAP), are not necessarily indicative of cash available to fund all cash flow needs and should not be considered as alternatives to net income under GAAP for evaluating Ingles’ results of operations.

Fiscal Year Ended September 28, 2002 Compared to the Fiscal Year Ended September 29, 2001

Net Sales. Fiscal 2002 was the 38th consecutive year Ingles achieved an increase in net sales. Net sales increased 0.4% to $1.960 billion for the fiscal year ended September 28, 2002 from $1.953 billion for the fiscal year ended September 29, 2001, despite a decrease in store count from 203 stores at September 29, 2001 to 198 stores at September 28, 2002. During fiscal 2002, Ingles opened one replacement store, closed five older stores and completed two major remodel/expansions and ten minor remodels. Retail square footage decreased 0.9% to 9.0 million square feet. Comparable store sales for the same period grew 0.9%. The Company’s milk processing subsidiary reported an increase in sales to outside parties of 6.1% for fiscal year 2002 compared to fiscal year 2001.

Gross Profit. Gross profit for the fiscal year ended September 28, 2002, increased 1.8% to $520.7 million, or 26.6% of sales, compared to $511.6 million, or 26.2% of sales, for the fiscal year ended September 29, 2001. Increased sales in the higher margin produce and frozen food departments, enhanced security measures and effective purchasing and product management all contributed to the increase. Gross profit for the Company’s milk processing subsidiary increased 19.5% for fiscal year 2002 compared to fiscal year 2001 due primarily to sales increases in the higher margin food service sector of the business.

Operating and Administrative Expenses. Operating and administrative expenses increased 1.3% to $460.6 million for the year ended September 28, 2002, from $454.6 million for the year ended September 29, 2001. As a percentage of sales, operating and administrative expenses were 23.5% and 23.3% for the years ended September 28, 2002 and September 29, 2001, respectively. A variety of factors contributed to the increase.

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A breakdown of the major increases (decreases) in operating and administrative expenses, expressed as a percentage of sales, is as follows:

         
Salaries and wages
    (0.2 )%
Depreciation
    0.2 %
Equipment rent
    0.1 %
Warehouse expense
    (0.1 )%
Insurance
    0.1 %

Salaries and wages, as a percentage of sales, decreased due to the revision of the Company’s labor standards during fiscal 2002 to reflect changes made in the merchandising and operations of the stores. A new electronic program for front-end labor scheduling was implemented between April 2002 and August 2002.

Depreciation expense and equipment rent expense increased due to the remodeling and replacement of certain store locations during the prior and current fiscal years.

Warehouse expense decreased as a percentage of sales primarily due to lower diesel fuel prices.

The increase in insurance expense is attributable to rising health care costs and increased premiums for liability coverages. Changes made to the Company’s health insurance plan in April 2002 helped to curb the cost of health insurance in the latter half of the year, however the medical component of workers compensation continued to negatively impact insurance expense.

Rental Income, Net. Rental income, net increased $0.1 million to $10.4 million for the 2002 year from $10.3 million for the 2001 year. The improvement consists of gross rental income increases of $0.4 million net of operating cost increases of $0.3 million.

Other Income, Net. Other income, net increased $1.2 million to $5.1 million for the year ended September 28, 2002 from $3.9 million for the year ended September 29, 2001. Interest income, included in other income, net, increased $1.0 million due to the investment of the proceeds of the Company’s 8-7/8% Senior Subordinated Notes issued in December 2001. Other income also includes gains on the sale of assets of $1.5 million and $1.4 million for fiscal years 2002 and 2001, respectively.

Income Before Interest, Income Taxes and Extraordinary Item. Income before interest, income taxes and extraordinary item increased $4.4 million to $75.5 million, during the 2002 fiscal year compared to $71.1 million during the 2001 fiscal year. Income before interest, income taxes and extraordinary item, as a percentage of sales, was 3.9% and 3.6% for the 2002 and 2001 fiscal years, respectively.

Interest Expense. Interest expense increased $8.6 million for the year ended September 28, 2002 to $51.5 million from $42.9 million for the year ended September 29, 2001 due to the issuance in December 2001 of the Company’s $250 million 8-7/8% Senior Subordinated Notes, due December 2011 (the “Notes”). A portion of the proceeds of the Notes was used to repay $170.0 million of existing debt. Debt retired with the proceeds from the Notes generally had lower interest rates and shorter maturity than the Notes. In addition, interest capitalized on the construction of assets declined $1.6 million in fiscal 2002 compared to fiscal 2001 due to a reduction in capital expenditures.

Income Taxes. Income tax expense as a percentage of pre-tax income decreased to 36.3% in the 2002 year compared to 36.7% in fiscal 2001.

Income Before Extraordinary Item. Income before the extraordinary item (discussed below) for the 2002 fiscal year was $15.3 million, or 0.8% of sales, compared to $17.9 million, or 0.9% of sales, for the 2001 fiscal year. Diluted earnings per common share before the extraordinary item were $.66 for the 2002 year compared to $.79 for the 2001 year. Increased interest expense was the primary factor contributing to the decrease.

Extraordinary Item-Early Extinguishment of Debt. The Company incurred $0.6 million in costs, net of income tax benefits of $0.4 million, in connection with the early retirement of $170.0 million of debt with a portion of the proceeds from the Notes offering in December 2001.

Net Income. Net income for the year ended September 28, 2002 was $14.7 million compared to $17.9 million for the year ended September 29, 2001. Net income, as a percentage of sales, was 0.8% for the fiscal 2002 period compared to 0.9% for the fiscal 2001 period. Basic earnings per share were $.65 and $.79 for 2002 and 2001, respectively. Diluted earnings per share were $.64 and $.79 per share for 2002 and 2001, respectively.

13


 

Fiscal Year Ended September 29, 2001 Compared to the Fiscal Year Ended September 30, 2000

Net Sales. Net sales increased 1.9% to $1.953 billion for the fiscal year ended September 29, 2001 from $1.916 billion for the fiscal year ended September 30, 2000. Fiscal year 2001 contained 52 weeks compared to 53 weeks in fiscal 2000. Net sales increased 3.9%, adjusted for the difference in weeks. Comparable store sales grew 3.6%.

During fiscal 2001, Ingles opened two new stores and six replacement stores, closed seven older stores and completed three major remodel/expansions and six minor remodels. Retail square footage increased by 1.9% to 9.1 million square feet. Investments made in maturing new stores, remodeled stores and stores that have been replaced were contributors to sales growth. Successful marketing campaigns such as the “Safari Challenge” game and sponsorship of various community events and sports teams also contributed to sales growth.

Gross Profit. Gross profit for the fiscal year ended September 29, 2001, increased 4.2% to $511.6 million, or 26.2% of sales, compared to $490.9 million, or 25.6% of sales, for the fiscal year ended September 30, 2000. Expansion of the higher margin perishable departments, effective purchasing and reduced product loss due to security measures all contributed to the gross margin growth.

Operating and Administrative Expenses. Operating and administrative expenses increased 5.1% to $454.6 million for the year ended September 29, 2001, from $432.6 million for the year ended September 30, 2000. As a percentage of sales, operating and administrative expenses were 23.3% and 22.6% for the years ended September 29, 2001 and September 30, 2000, respectively. A variety of factors contributed to the increase. Higher payroll costs resulted primarily from increased wage rates in a competitive labor market. Equipment rent expense increases resulted from the leasing of store equipment for new and replacement stores. Utility expense increases resulted primarily from increases in fuel costs at the store level. Insurance expense increased primarily due to a larger volume of claims under the Company’s self-insured group medical program. A breakdown of the major increases (decreases) in operating and administrative expenses, expressed as a percentage of sales, is as follows:

         
Payroll
    0.3 %
Equipment rent expense
    0.2 %
Utilities
    0.2 %
Insurance
    0.1 %
Advertising
    (0.1 )%

Rental Income, Net. Rental income, net increased $0.2 million to $10.3 million for the 2001 year from $10.1 million for the 2000 year. The improvement consists of gross rental income increases of $0.7 million and operating cost increases of $0.5 million.

Other Income, Net. Other income, net decreased $3.1 million to $3.9 million for the year ended September 29, 2001 from $7.0 million for the year ended September 30, 2000. Other income includes gains on the sale of assets of $1.4 million and $2.7 million for fiscal years 2001 and 2000, respectively. The balance of the decrease resulted primarily from a reduction in proceeds from vendor accounts payable audits.

Income Before Interest and Income Taxes. Income before interest and income taxes decreased $4.3 million to $71.1 million, during the 2001 fiscal year compared to $75.4 million during the 2000 fiscal year. Income before interest and income taxes, as a percentage of sales, was 3.6% and 3.9% for the 2001 and 2000 fiscal years, respectively.

Interest Expense. Interest expense increased $1.7 million for the year ended September 29, 2001 to $42.9 million from $41.2 million for the year ended September 30, 2000. The increase resulted from interest on additional debt incurred to fund expansion and renovation, offset somewhat by lower interest rates.

Income Taxes. Income tax expense as a percentage of pre-tax income decreased to 36.7% in the 2001 year compared to 38.3% in fiscal 2000, due primarily to increased tax credits related to training and employment.

Net Income. Net income for the 2001 fiscal year was $17.9 million, or 0.9% of sales, compared to $21.1 million, or 1.1% of sales, for the 2000 fiscal year. Basic and diluted earnings per common share were $.79 for the 2001 year compared to $.93 for the 2000 year.

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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 $49.7 million for the fiscal year ended September 28, 2002, including the replacement of one store, major remodel and expansion of two stores and minor remodels at ten stores. Capital expenditures also included the costs of upgrading and replacing store equipment, technology investments, the purchase of future store sites, capital expenditures related to the Company’s distribution operation and its milk processing plant, and expenditures for stores to open in fiscal 2003.

Ingles’ capital expenditure plans for fiscal 2003 include investments of approximately $70 million. The Company plans to open four new stores, replace one existing store and complete three remodel/expansions and three minor remodels. Expenditures will also include investments in stores expected to open in fiscal 2004 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 $52.0 million of cash from operations in fiscal 2002.

Cash used by investing activities totaled $43.6 million comprised primarily of $49.7 million of capital expenditures during the period, partially offset by $6.1 million of proceeds from the sale of assets.

The Company has generally funded its capital expenditures with cash provided from operations and borrowings under lines of credit. The lines of credit are later refinanced with secured long-term debt. During fiscal year 2002, the Company’s financing activities provided $26.0 million in cash. Proceeds from long-term debt totaled $272.3 million, including the issuance of the Notes, while payments on long-term and short-term debt were $225.2 million, including the $170.0 million of early debt retirement with a portion of the proceeds from the Notes. Debt issuance costs of $9.7 million associated with the issuance of the Notes reduced cash from financing activities.

At September 28, 2002, the Company had lines of credit with seven banks totaling $150 million, all of which were unused. Of the $150 million of committed lines of credit, $130 million matures in October 2004 and $20 million matured in October 2002. 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 28, 2002.

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. As of September 28, 2002, the Company had unencumbered real property and equipment with a net book value of approximately $286 million. 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 sources of financing will be available to the Company on acceptable terms, or at all.

In addition, it is possible that, in the future, the Company’s results of operations and financial condition will be different from that described in this report based on a number of intangible factors. These factors may include, among others, increased competition, changing regional and national economic conditions, adverse climatic conditions affecting food production and delivery and changing demographics as well as the additional factors discussed below under “Forward Looking Statements”. 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.

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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 $29.8 million based on tangible net worth at September 28, 2002. Further, the Company is prevented from paying dividends at any time that it is in default under the indenture governing the Notes. In addition, the terms of the indenture may restrict the ability of the Company to pay additional dividends based on certain financial parameters.

Impact of Inflation

Inflation in food prices during fiscal 2002 and 2001 was slightly higher than the overall increase in the Consumer Price Index. During fiscal 2000, inflation in food prices was lower than the overall increase in the Consumer Price Index. One of the Company’s significant costs is labor, which increases with inflation.

New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statements No. 141, “Business Combinations” (“FAS 141”) and No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”). Under the new rules, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The amortization provisions of FAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company applied the new accounting rules on September 30, 2001. The adoption of FAS 141 and FAS 142 did not have any impact on the Company’s financial statements.

In August 2001, the FASB issued Statement No. 143 “Accounting for Asset Retirement Obligations” that provides accounting guidance for the costs of retiring long-lived assets and is effective for fiscal years beginning after June 15, 2002. The Company does not believe the adoption of this statement will have any impact on its financial statements.

In October 2001, the FASB issued Statement No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS 144”). FAS 144 provides accounting guidance for financial accounting and reporting for the impairment or disposal of long-lived assets. The statement supercedes FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” (“FAS 121”). It also supercedes the accounting and reporting provisions of APB Opinion No. 30 “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” related to the disposal of a segment of a business. FAS 144 is effective for fiscal years beginning after December 15, 2001. The Company is currently assessing the impact adopting this statement will have on its financial statements.

In April 2002, the FASB issued Statement No. 145, “Modifications to Reporting of Extinguishments of Debt and Accounting for Certain Capital Lease Modifications and Technical Corrections” (“FAS 145”). FAS 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under FASB Statement No. 4. Extraordinary treatment will be required for certain extinguishments as provided in APB Opinion No. 30. FAS 145 also amends FASB Statement No. 13 to require certain modifications to capital leases be treated as a sale-leaseback and modifies the accounting for sub-leases when the original lessee remains a secondary obligor (or guarantor). In addition, the FASB rescinded Statement No. 44 which addressed the accounting for intangible assets of motor carriers and made numerous technical corrections. In fiscal 2003, the Company will reclassify the losses on extinguishment of debt incurred during 2002 from an extraordinary item to a reduction in income from continuing operations.

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Forward Looking Statements

This Annual Report contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. The words “expect”, “anticipate”, “intend”, “plan”, “believe”, “seek” and similar expressions are intended to identify forward-looking statements. While these forward-looking statements and the related assumptions are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. Such statements are based upon a number of assumptions and estimates which are inherently subject to significant risks and uncertainties many of which are beyond our control. Some of these assumptions inevitably will not materialize, and unanticipated events will occur which will affect our results. Some important factors (but not necessarily all factors) that affect our revenues, growth strategies, future profitability and operating results, or that otherwise could cause actual results to differ materially from those expressed in or implied by any forward-looking statement, including business and economic conditions generally in the Company’s operating area; the Company’s ability to successfully implement its expansion and operating strategies and to manage rapid expansion; pricing pressures and other competitive factors; the Company’s ability to reduce costs and achieve improvements in operating results; the availability and terms of financing; increases in labor and utility costs; success or failure in the ownership and development of real estate; and changes in the laws and government regulations applicable to the Company.

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 include borrowings under lines of credit, real estate and equipment financing and the Notes. The lines of credit, along with cash flow from operations, are used to maintain liquidity and fund business operations. The Company typically replaces borrowings under its lines of credit, as necessary, with both long-term secured and unsecured fixed rate financing. The nature and amount of the Company’s debt may vary as a result of future business requirements, market conditions and other factors. The definitive extent of the Company’s interest rate risk is not quantifiable or predictable because of the variability of future interest rates and business financing requirements, but the Company does not believe such risk is material. The Company does not customarily use derivative instruments to adjust the Company’s interest rate risk profile.

The table below presents principal amounts and related weighted average rates by year of maturity for the Company’s debt obligations at September 28, 2002 and September 29, 2001 (in thousands):

                                                                 
September 28, 2002   2003   2004   2005   2006   2007   Thereafter   Total   Fair Value

 
 
 
 
 
 
 
 
Lines of credit
                                               
Average interest rate (variable)
                                               
Long-term debt
  $ 47,307     $ 37,742     $ 40,908     $ 16,364     $ 31,353     $ 422,956     $ 596,632     $ 581,950  
Average interest rate (fixed)
    8.13 %     8.84 %     7.82 %     8.24 %     8.64 %     8.88 %     8.71 %        
                                                                 
September 29, 2001   2002   2003   2004   2005   2006   Thereafter   Total   Fair Value

 
 
 
 
 
 
 
 
Lines of credit
        $ 61,024                             $ 61,024     $ 61,024  
Average interest rate (variable)
          4.88 %                             4.88 %      
Long-term debt
  $ 60,852     $ 102,258     $ 48,854     $ 42,681     $ 17,852     $ 216,024     $ 488,521     $ 495,868  
Average interest rate (fixed)
    7.95 %     7.72 %     8.32 %     7.88 %     8.45 %     8.53 %     8.21 %        

The Company does not typically utilize financial instruments for trading or other speculative purposes, nor does it typically utilize leveraged financial instruments. On the basis of the fair value of the Company’s market sensitive

17


 

instruments at September 28, 2002, 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 23 through 41 of this report on Form 10-K:

Report of Ernst & Young LLP, Independent Auditors;

Consolidated Balance Sheets as of September 28, 2002 and September 29, 2001;

Consolidated Statements of Income for the years ended September 28, 2002, September 29, 2001, and September 30, 2000;

Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 28, 2002, September 29, 2001, and September 30, 2000;

Consolidated Statements of Cash Flows for the years ended September 28, 2002, September 29, 2001, and September 30, 2000;

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.

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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 11, 2003, to be filed with the Securities and Exchange Commission (“the “Commission”).

Item 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated herein by reference from the data under the heading “EXECUTIVE COMPENSATION” in the Proxy Statement to be used in connection with the solicitation of proxies for the Company’s annual meeting of stockholders to be held February 11, 2003, 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 11, 2003, 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 11, 2003, to be filed with the Commission.

Item 14. CONTROLS AND PROCEDURES

As of September 28, 2002, an evaluation was performed under the supervision and with the participation of Ingles’ management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Ingles’ disclosure controls and procedures, as such term is defined under Rule 13a – 14(c) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, Ingles’ management, including the Chief Executive Officer and Chief Financial Officer, concluded that Ingles’ disclosure controls and procedures were effective as of September 28, 2002 at insuring that required information will be disclosed on a timely basis in Ingles’ reports filed under the Exchange Act. No significant changes in Ingles’ internal controls or in other factors have occurred that could significantly affect controls subsequent to September 28, 2002.

PART IV

Item 15. 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 28, 2002 and September 29, 2001;
         
    Consolidated Statements of Income for the years ended September 28, 2002, September 29, 2001, and September 30, 2000;
         
    Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 28, 2002, September 29, 2001, and September 30, 2000;
         
    Consolidated Statements of Cash Flows for the years ended September 28, 2002, September 29, 2001, and September 30, 2000;

19


 

         
    Notes to Consolidated Financial Statements.
         
    2.      The following financial statement schedule of the Registrant required by Item 8 and Item 15(d) of Form 10-K is included as page 42 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 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 15(c) of Form 10-K are filed herewith or incorporated by reference as indicated.

EXHIBIT NUMBER AND DESCRIPTION

     
3.1   Articles of Incorporation of Ingles Markets, Incorporated, as amended. (Included as Exhibit 3.1 to Registrant’s S-1 Registration Statement, File No. 33-23919, previously filed with the Commission and incorporated herein by this reference.)
     
3.2   By-laws of Ingles Markets, Incorporated. (Included as Exhibit 3.2 to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 24, 1988, File No. 0-14706, previously filed with the Commission and incorporated herein by this reference.)
     
4.1   See Exhibits 3.1 and 3.2 for provisions of Articles of Incorporation, as amended and By-laws of Registrant defining rights of holders of capital stock of Registrant.
     
4.2   Loan Agreement between the Registrant and Metropolitan Life Insurance Company dated March 21, 1990. (Included as Exhibit 19 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1990, File No. 0-14706, previously filed with the Commission and incorporated herein by this reference.)
     
4.3   Indenture dated December 11, 2001 between the Registrant and U.S. Bank, N.A., as trustee, relating to the Registrant’s 8-7/8% Senior Subordinated Notes due 2011. (Included as Exhibit 4.3 to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 29, 2001, File No. 0-14706, previously filed with the Commission and incorporated herein by this reference.)
     
4.4   Form of the Registrant’s 8-7/8% Senior Subordinated Note due 2011. (Included as Exhibit 4.4 to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 29, 2001, File No. 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 15(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 15(c) of Form 10-K.)
     
10.3   Fourth Amendment to the Ingles Markets, Incorporated Investment/Profit Sharing Plan effective September 14, 1999. (Included as Exhibit 10.3 to Registrant’s Annual Report on form 10-K for the fiscal year ended September 30, 2000, File No. 0-14706 previously filed with the Commission and incorporated herein by this reference.)
     
    (Management contract or compensatory plan or arrangement required to be filed as an exhibit to this report on Form 10-K pursuant to Item 15(c) of Form 10-K.)

20


 

     
10.4   Fifth Amendment to the Ingles Markets, Incorporated Investment/Profit Sharing Plan effective March 6, 2000. (Included as Exhibit 10.4 to Registrant’s Annual Report on form 10-K for the fiscal year ended September 30, 2000, File No. 0-14706 previously filed with the Commission and incorporated herein by this reference.)
     
    (Management contract or compensatory plan or arrangement required to be filed as an exhibit to this report on Form 10-K pursuant to Item 15(c) of Form 10-K.)
     
10.5   Sixth Amendment to the Ingles Markets, Incorporated Investment/Profit Sharing Plan effective August 29, 2000. (Included as Exhibit 10.5 to Registrant’s Annual Report on form 10-K for the fiscal year ended September 30, 2000, File No. 0-14706 previously filed with the Commission and incorporated herein by this reference.)
     
    (Management contract or compensatory plan or arrangement required to be filed as an exhibit to this report on Form 10-K pursuant to Item 15(c) of Form 10-K.)
     
10.6   Seventh Amendment to the Ingles Markets, Incorporated Investment/Profit Sharing Plan effective January 1, 2001. (Included as Exhibit 10.6 to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 29, 2001, 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 15(c) of Form 10-K)
     
10.7   Eighth Amendment to the Ingles Markets, Incorporated Investment/Profit Sharing Plan effective May 21, 2001. (Included as Exhibit 10.7 to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 29, 2001, 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 15(c) of Form 10-K)
     
10.8   Ninth Amendment to the Ingles Markets, Incorporated Investment/Profit Sharing Plan effective October 1, 2001. (Included as Exhibit 10.8 to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 29, 2001, 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 15(c) of Form 10-K)
     
10.9   Amended and Restated Ingles Markets, Incorporated 1991 Nonqualified Stock Option Plan. (Included as Exhibit 10.4 to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 1995, File No. 0-14706, previously filed with the Commission and incorporated herein by this reference.)
     
    (Management contract or compensatory plan or arrangement required to be filed as an exhibit to this report on Form 10-K pursuant to Item 15(c) of Form 10-K.)
     
10.10   Amended and Restated 1997 Nonqualified Stock Option Plan. (Included as Appendix A to Registrant’s Proxy Statement for the Annual Meeting of Stockholders held on February 12, 2002, 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 15(c) of Form 10-K.)

21


 

     
10.11   Amended and Restated Ingles Markets, Incorporated Investment/Profit Sharing Plan effective September 29, 2002.
     
    (Management contract or compensatory plan or arrangement required to be filed as an exhibit to this report on Form 10-K pursuant to Item 15(c) of Form 10-K.)
     
21   Subsidiaries of the Registrant.
     
23   Consent of Ernst & Young LLP, Independent Auditors.
     
99.1   Certification Pursuant to 18 U.S.C. Section 1350
     
99.2   Certification Pursuant to 18 U.S.C. Section 1350


(b)   Reports on Form 8-K. The Company filed a Form 8-K on August 13, 2002 in which it submitted to the Securities and Exchange Commission the Statements under Oath of Principal Executive Officer and Principal Financial Officer in accordance with the Commission’s June 27, 2002 Order requiring the filing of sworn statements pursuant to Section 21(a)(1) of the Securities and Exchange Act of 1934.
 
(c)   Exhibits — The response to this portion of Item 15 is submitted in the response to Item 15(a)(3) of this report.
 
(d)   Financial Statement Schedules — The response to this portion of Item 15 is submitted in the response to Item 15(a)(2) of this report.

22


 

Report of Ernst & Young LLP, Independent Auditor

Stockholders and Board of Directors
Ingles Markets, Incorporated

We have audited the accompanying consolidated balance sheets of Ingles Markets, Incorporated and subsidiaries as of September 28, 2002 and September 29, 2001, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended September 28, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ingles Markets, Incorporated and subsidiaries at September 28, 2002 and September 29, 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 28, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

     
    /s/ ERNST & YOUNG LLP
Greenville, South Carolina
November 18, 2002

23


 

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
     SEPTEMBER 28, 2002 AND SEPTEMBER 29, 2001

                   
ASSETS   2002   2001

 
 
CURRENT ASSETS:
               
 
Cash
  $ 46,900,305     $ 12,434,897  
 
Receivables (less allowance for doubtful accounts of $479,113 - 2002 and $339,938 - 2001)
    34,822,934       32,466,072  
 
Inventories
    190,399,350       185,359,164  
 
Other
    5,706,754       3,790,109  
 
   
     
 
 
Total current assets
    277,829,343       234,050,242  
 
PROPERTY AND EQUIPMENT:
               
 
Land
    183,793,068       182,405,593  
 
Construction in progress
    13,579,844       9,066,370  
 
Buildings
    527,463,561       518,095,679  
 
Store, office and warehouse equipment
    371,500,649       344,699,338  
 
Transportation equipment
    16,477,978       15,070,624  
 
Property under capital leases
    731,084       731,084  
 
Leasehold improvements
    42,607,772       42,555,331  
 
   
     
 
 
Total
    1,156,153,956       1,112,624,019  
 
Less accumulated depreciation and amortization
    432,934,408       388,180,605  
 
   
     
 
 
Property and equipment — net
    723,219,548       724,443,414  
 
OTHER ASSETS
    13,342,315       4,307,374  
 
   
     
 
TOTAL ASSETS
  $ 1,014,391,206     $ 962,801,030  
 
   
     
 

See notes to consolidated financial statements.

24


 

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
     SEPTEMBER 28, 2002 AND SEPTEMBER 29, 2001

                     
LIABILITIES AND STOCKHOLDERS' EQUITY   2002   2001

 
 
CURRENT LIABILITIES:
               
 
Short-term loans and current portion of long-term debt
  $ 47,307,046     $ 60,851,887  
 
Accounts payable, accrued expenses and current portion of other long-term liabilities
    139,123,085       135,745,897  
 
   
     
 
 
Total current liabilities
    186,430,131       196,597,784  
 
DEFERRED INCOME TAXES
    36,914,578       37,064,578  
 
LONG-TERM DEBT
    549,324,487       488,693,496  
 
OTHER LONG-TERM LIABILITIES
    3,163,162       3,944,960  
 
   
     
 
Total liabilities
    775,832,358       726,300,818  
 
   
     
 
STOCKHOLDERS’ EQUITY:
               
 
Preferred stock, $.05 par value; 10,000,000 shares authorized; no shares issued
           
 
Common stocks:
               
   
Class A, $.05 par value; 150,000,000 shares authorized; issued and outstanding, 10,189,807 shares in 2002, 10,005,107 shares in 2001
    509,490       500,255  
   
Class B, $.05 par value; 100,000,000 shares authorized; issued and outstanding, 12,597,932 shares in 2002, 12,634,432 shares in 2001
    629,897       631,722  
 
Paid-in capital in excess of par value
    100,148,857       98,595,411  
 
Retained earnings
    137,270,604       136,772,824  
 
   
     
 
 
Total stockholders’ equity
    238,558,848       236,500,212  
 
   
     
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 1,014,391,206     $ 962,801,030  
 
   
     
 

See notes to consolidated financial statements.

25


 

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
     FISCAL YEARS ENDED SEPTEMBER 28, 2002,
          SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000

                           
      2002   2001   2000
     
 
 
Net sales
  $ 1,960,461,855     $ 1,953,440,173     $ 1,916,200,153  
Cost of goods sold
    1,439,736,374       1,441,883,795       1,425,286,574  
 
   
     
     
 
Gross profit
    520,725,481       511,556,378       490,913,579  
Operating and administrative expenses
    460,599,333       454,646,606       432,630,797  
Rental income, net
    10,354,582       10,302,158       10,149,373  
 
   
     
     
 
Income from operations
    70,480,730       67,211,930       68,432,155  
Other income, net
    5,054,156       3,890,721       6,985,223  
 
   
     
     
 
Income before interest, income taxes and extraordinary item
    75,534,886       71,102,651       75,417,378  
Interest expense
    51,540,327       42,902,630       41,226,092  
 
   
     
     
 
Income before income taxes and extraordinary item
    23,994,559       28,200,021       34,191,286  
 
   
     
     
 
Income taxes:
                       
Current
    9,600,000       4,950,000       8,400,000  
Deferred
    (900,000 )     5,400,000       4,700,000  
 
   
     
     
 
 
    8,700,000       10,350,000       13,100,000  
 
   
     
     
 
Income before extraordinary item
    15,294,559       17,850,021       21,091,286  
Extraordinary item-early extinguishment of debt (net of tax benefit of $350,000)
    (561,660 )            
 
   
     
     
 
Net income
  $ 14,732,899     $ 17,850,021     $ 21,091,286  
 
   
     
     
 
Per-share amounts:
                       
 
Basic earnings per common share before extraordinary item
  $ .67     $ .79     $ .93  
 
Extraordinary item-early extinguishment of debt
    (.02 )            
 
   
     
     
 
 
Basic earnings per common share
  $ .65     $ .79     $ .93  
 
   
     
     
 
 
Diluted earnings per common share before extraordinary item
  $ .66     $ .79     $ .93  
 
Extraordinary item-early extinguishment of debt
    (.02 )            
 
   
     
     
 
 
Diluted earnings per common share
  $ .64     $ .79     $ .93  
 
   
     
     
 
Cash dividends per common share:
                       
 
Class A
  $ .66     $ .66     $ .66  
 
   
     
     
 
 
Class B
  $ .60     $ .60     $ .60  
 
   
     
     
 

See notes to consolidated financial statements.

26


 

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FISCAL YEARS ENDED SEPTEMBER 28, 2002,
     SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000

                                                         
    CLASS A   CLASS B   PAID-IN                
    COMMON STOCK   COMMON STOCK   CAPITAL IN                
   
 
  EXCESS OF   RETAINED        
    SHARES   AMOUNT   SHARES   AMOUNT   PAR VALUE   EARNINGS   TOTAL
   
 
 
 
 
 
 
Balance, September 25, 1999
    9,786,491     $ 489,324       12,691,248     $ 634,563     $ 96,898,633     $ 126,099,336     $ 224,121,856  
Net income
                                  21,091,286       21,091,286  
Cash dividends
                                  (14,124,892 )     (14,124,892 )
Exercise of stock options
    100,000       5,000                   1,045,000             1,050,000  
Common stock conversions
    46,123       2,307       (46,123 )     (2,307 )                  
 
   
     
     
     
     
     
     
 
Balance, September 30, 2000
    9,932,614       496,631       12,645,125       632,256       97,943,633       133,065,730       232,138,250  
Net income
                                  17,850,021       17,850,021  
Cash dividends
                                  (14,142,927 )     (14,142,927 )
Exercise of stock options
    61,800       3,090                   651,778             654,868  
Common stock conversions
    10,693       534       (10,693 )     (534 )                  
 
   
     
     
     
     
     
     
 
Balance, September 29, 2001
    10,005,107       500,255       12,634,432       631,722       98,595,411       136,772,824       236,500,212  
Net income
                                  14,732,899       14,732,899  
Cash dividends
                                  (14,235,119 )     (14,235,119 )
Exercise of stock options
    148,200       7,410                   1,553,446             1,560,856  
Common stock conversions
    36,500       1,825       (36,500 )     (1,825 )                  
 
   
     
     
     
     
     
     
 
Balance, September 28, 2002
    10,189,807     $ 509,490       12,597,932     $ 629,897     $ 100,148,857     $ 137,270,604     $ 238,558,848  
 
   
     
     
     
     
     
     
 

See notes to consolidated financial statements.

27


 

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED SEPTEMBER 28, 2002,
     SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000

                             
        2002   2001   2000
       
 
 
Cash Flows From Operating Activities:
                       
Net income
  $ 14,732,899     $ 17,850,021     $ 21,091,286  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
   
Depreciation and amortization expense
    48,311,990       45,266,368       43,532,429  
   
Extraordinary item-early extinguishment of debt (net of tax benefit of $350,000)
    561,660              
   
Amortization of deferred gain on sale/leaseback
    (847,182 )     (1,212,236 )     (1,017,227 )
   
Gains on disposals of property and equipment
    (1,457,505 )     (1,410,593 )     (2,682,262 )
   
Receipt of advance payments on purchases contracts
    3,556,871       1,375,000       3,644,282  
   
Recognition of advance payments on purchases contracts
    (3,515,093 )     (3,675,000 )     (4,578,947 )
   
Deferred income taxes
    (900,000 )     5,400,000       4,700,000  
 
(Increase) decrease in receivables
    (3,898,862 )     (9,646,542 )     5,728,975  
   
Increase in inventory
    (5,040,186 )     (5,962,534 )     (12,385,586 )
   
Increase in other assets
    (998,108 )     (2,139,797 )     (2,424,544 )
   
Increase (decrease) in accounts payable and accrued expenses
    1,505,266       1,814,849       (13,329,158 )
 
   
     
     
 
Net Cash Provided By Operating Activities
    52,011,750       47,659,536       42,279,248  
 
   
     
     
 
Cash Flows From Investing Activities:
                       
Proceeds from sales of property and equipment
    6,143,595       5,052,264       6,898,629  
Capital expenditures
    (49,713,386 )     (73,193,907 )     (102,534,798 )
 
   
     
     
 
Net Cash Used By Investing Activities
    (43,569,791 )     (68,141,643 )     (95,636,169 )
 
   
     
     
 
Cash Flows From Financing Activities:
                       
Proceeds from issuance of long-term debt
    272,280,684       88,511,287       138,380,068  
Debt issuance costs
    (9,706,696 )     (233,271 )      
Proceeds from sale/leaseback transactions
    1,318,257       1,554,124       13,005,294  
Payments on short-term borrowings, net
    (10,229,000 )           (10,000,000 )
Principal payments on long-term debt
    (214,965,533 )     (54,603,090 )     (77,737,287 )
Proceeds from exercise of stock options
    1,560,856       654,868       1,050,000  
Dividends paid
    (14,235,119 )     (14,142,927 )     (14,124,892 )
 
   
     
     
 
Net Cash Provided By Financing Activities
    26,023,449       21,740,991       50,573,183  
 
   
     
     
 
Net Increase (Decrease) in Cash
    34,465,408       1,258,884       (2,783,738 )
Cash at Beginning of Year
    12,434,897       11,176,013       13,959,751  
 
   
     
     
 
Cash at End of Year
  $ 46,900,305     $ 12,434,897     $ 11,176,013  
 
   
     
     
 

See notes to consolidated financial statements.

28


 

Ingles Markets, Incorporated and Subsidiaries
Notes To Consolidated Financial Statements
Fiscal years ended September 28, 2002, September 29, 2001
     and September 30, 2000

1. Summary of Significant Accounting Policies

Principles of Consolidation — The consolidated financial statements include the accounts of Ingles Markets, Incorporated and its wholly-owned subsidiaries, Sky King, Inc., Ingles Markets Investments, Inc., Milkco, Inc., Shopping Center Financing, LLC, Shopping Center Financing II, LLC and IMI Holdings, LLC (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.

Fiscal Year — The Company’s fiscal year ends on the last Saturday in September. Fiscal years 2002 and 2001 consisted of 52 weeks and fiscal year 2000 consisted of 53 weeks.

Cash Equivalents — All highly liquid investments with a maturity of three months or less when purchased are considered cash.

Financial Instruments — The Company has short term investments and certificates of deposit included in cash. The Company’s policy is to invest its excess cash either in money market accounts, reverse repurchase agreements or in commercial paper. Money market accounts and commercial paper are not secured; reverse repurchase agreements are secured by government obligations. At September 28, 2002, the Company had $34.4 million invested in a money market account and no investments in commercial paper or reverse repurchase agreements. Demand deposits, including the money market account, of approximately $44.6 million in 23 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. Depreciation expense totaled $47.2 million, $44.8 million and $43.3 million for fiscal years 2002, 2001 and 2000, respectively.

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 2002, the Company’s self-insured liabilities were supported by $3.6 million of undrawn letters of credit which expire between January 2003 and October 2003. 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.

Reclassifications — Certain amounts for 2001 and 2000 have been reclassified for comparative purposes.

Per-Share Amounts — Basic earnings per common share is computed by dividing consolidated net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share gives effect to dilutive stock options.

Advertising — The Company expenses the costs of advertising as incurred. Advertising and promotion expenses totaled $22.5 million, $23.1 million and $23.9 million for fiscal years 2002, 2001 and 2000, 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.

29


 

Ingles Markets, Incorporated and Subsidiaries
Notes To Consolidated Financial Statements
Fiscal years ended September 28, 2002, September 29, 2001
     and September 30, 2000

Shipping and Handling Costs — The cost of shipping and handling is charged to expense as incurred and is included in operating and administrative expenses in the Consolidated Statements of Income. The Company incurred approximately $29.7 million, $31.5 million and $31.2 million of shipping and handling costs during 2002, 2001 and 2000, respectively.

Revenue Recognition — The Company recognizes revenues from grocery sales at the point of sale to its customers and from fluid dairy at the point of shipment to its customers.

New Accounting Pronouncements — In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statements No. 141, “Business Combinations” (“FAS 141”) and No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”). Under the new rules, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The amortization provisions of FAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company applied the new accounting rules on September 30, 2001. The adoption of FAS 141 and FAS 142 did not have any impact on the Company’s financial statements.

In August 2001, the FASB issued Statement No. 143 “Accounting for Asset Retirement Obligations” that provides accounting guidance for the costs of retiring long-lived assets and is effective for fiscal years beginning after June 15, 2002. The Company does not believe the adoption of this statement will have any impact on its financial statements.

In October 2001, the FASB issued Statement No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS 144”). FAS 144 provides accounting guidance for financial accounting and reporting for the impairment or disposal of long-lived assets. The statement supercedes FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” (“FAS 121”). It also supercedes the accounting and reporting provisions of APB Opinion No. 30 “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” related to the disposal of a segment of a business. FAS 144 is effective for fiscal years beginning after December 15, 2001. The Company is currently assessing the impact adopting this statement will have on its financial statements.

In April 2002, the FASB issued Statement No. 145, “Modifications to Reporting of Extinguishments of Debt and Accounting for Certain Capital Lease Modifications and Technical Corrections” (“FAS 145”). FAS 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under FASB Statement No. 4. Extraordinary treatment will be required for certain extinguishments as provided in APB Opinion No. 30. FAS 145 also amends FASB Statement No. 13 to require certain modifications to capital leases be treated as a sale-leaseback and modifies the accounting for sub-leases when the original lessee remains a secondary obligor (or guarantor). In addition, the FASB rescinded Statement No. 44 that addressed the accounting for intangible assets of motor carriers and made numerous technical corrections. In fiscal 2003, the Company will reclassify the losses on extinguishment of debt incurred during 2002 from an extraordinary item to a reduction in income from operations.

30


 

Ingles Markets, Incorporated and Subsidiaries
Notes To Consolidated Financial Statements
Fiscal years ended September 28, 2002, September 29, 2001
     and September 30, 2000

2. Income Taxes

Deferred Income Tax Liabilities and Assets — Significant components of the Company’s deferred tax liabilities and assets are as follows:

                       
          2002   2001
         
 
Deferred tax liabilities:
               
 
Fixed asset tax/book differences
  $ 40,363,000     $ 40,640,000  
 
Property tax method
    895,000       826,000  
 
Inventory
    598,000       598,000  
 
   
     
 
     
Total deferred tax liabilities
    41,856,000       42,064,000  
 
   
     
 
Deferred tax assets:
               
 
Insurance reserves
    2,176,000       2,468,000  
 
Advance payments on purchases contracts
    1,467,000       442,000  
 
Vacation accrual
    779,000       691,000  
 
Deferred gain on sale/leasebacks
    431,000       755,000  
 
Closed store accrual
    1,477,000       1,183,000  
 
Other
    1,784,000       1,861,000  
 
   
     
 
     
Total deferred tax assets
    8,114,000       7,400,000  
 
   
     
 
Net deferred tax liabilities
  $ 33,742,000     $ 34,664,000  
 
   
     
 

Income Tax Expense — Income tax expense differs from the amounts computed by applying the statutory federal rates to income before income taxes. The reasons for the differences are as follows:

                         
    2002   2001   2000
   
 
 
Federal tax at statutory rate
  $ 8,202,000     $ 9,870,000     $ 11,967,000  
State income tax, net of federal tax benefits
    914,000       1,100,000       1,111,000  
Other
    (416,000 )     (620,000 )     22,000  
 
   
     
     
 
Total
  $ 8,700,000     $ 10,350,000     $ 13,100,000  
 
   
     
     
 

Current and deferred income tax expense is as follows:

                               
          2002   2001   2000
         
 
 
Current:
                       
 
Federal
  $ 8,600,000     $ 4,700,000     $ 7,700,000  
 
State
    1,000,000       250,000       700,000  
 
   
     
     
 
     
Total current
    9,600,000       4,950,000       8,400,000  
 
   
     
     
 
Deferred:
                       
 
Federal
    (887,000 )     4,630,000       4,030,000  
 
State
    (13,000 )     770,000       670,000  
 
   
     
     
 
     
Total deferred
    (900,000 )     5,400,000       4,700,000  
 
   
     
     
 
Total expense
  $ 8,700,000     $ 10,350,000     $ 13,100,000  
 
   
     
     
 

Current deferred income tax benefits of $3.2 million and $2.4 million at September 28, 2002 and September 29, 2001, respectively, included in other current assets, result from timing differences arising from vacation pay, bad debt and self-insurance reserves, and from capitalization of certain overhead costs in inventory for tax purposes.

31


 

Ingles Markets, Incorporated and Subsidiaries
Notes To Consolidated Financial Statements
Fiscal years ended September 28, 2002, September 29, 2001
     and September 30, 2000

3. Property Held For Lease and Rental Income

At September 28, 2002, the Company owned and operated 76 shopping centers in conjunction with its supermarket operations. The Company leases to others a portion of its shopping center properties. The leases are non-cancelable operating lease agreements for periods ranging up to 20 years. Substantially all leases covering retail properties provide for one or more renewal periods and for percentage rent based on gross sales of the lessee.

Rental income, net consists of the following:

                             
        2002   2001   2000
       
 
 
Rents earned on owned and subleased properties:
                       
Base rentals including lease termination payments
  $ 16,377,963     $ 15,187,616     $ 14,852,342  
Contingent rentals
    548,692       1,348,902       1,034,630  
 
   
     
     
 
   
Total
    16,926,655       16,536,518       15,886,972  
Depreciation on owned properties leased to others
    (5,026,679 )     (4,687,209 )     (4,117,337 )
Other shopping center expenses
    (1,545,394 )     (1,547,151 )     (1,620,262 )
 
   
     
     
 
   
Total
  $ 10,354,582     $ 10,302,158     $ 10,149,373  
 
   
     
     
 

Owned properties leased to others under operating leases by major classes are summarized as follows:

           
      September 28,
      2002
     
Land
  $ 37,786,431  
Buildings
    139,022,778  
 
   
 
 
Total
    176,809,209  
Less accumulated depreciation
    51,844,553  
 
   
 
Property leased to others, net
  $ 124,964,656  
 
   
 

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 28, 2002:

         
Fiscal Year        

2003
  $ 13,132,023  
2004
    10,697,387  
2005
    8,567,859  
2006
    6,819,664  
2007
    5,291,782  
Thereafter
    29,926,435  
 
   
 
Total minimum future rental income
  $ 74,435,150  
 
   
 

4. Leases and Rental Expense

The Company conducts part of its retail operations from leased facilities. The initial terms of the leases expire at various times over the next 20 years. The majority of the leases include one or more renewal options and provide that the Company pay property taxes, utilities, repairs and certain other costs incidental to occupation of the premises. Several leases contain clauses calling for percentage rentals based upon gross sales of the supermarket occupying the leased space. The Company also leases a portion of its equipment under operating leases, including leases derived from sale/leaseback transactions, with initial terms of three to five years.

Operating Leases — Rent expense for all operating leases of $42.1 million, $38.2 million and $31.4 million for fiscal years 2002, 2001 and 2000, respectively, is included in operating and administrative expenses. Sub-leased rental income of $1.6 million, $1.3 million and $0.9 million for fiscal years 2002, 2001 and 2000, respectively is included in rental income, net.

32


 

Ingles Markets, Incorporated and Subsidiaries
Notes To Consolidated Financial Statements
Fiscal years ended September 28, 2002, September 29, 2001
      and September 30, 2000

The components of aggregate minimum rental commitments under non-cancelable operating leases as of September 28, 2002 are as follows:

                         
    Minimum           Net
    Rental   Sub-Lease   Rental
Fiscal Year   Commitment   Income   Commitment

 
 
 
2003
  $ 40,068,253     $ 1,597,679     $ 38,470,574  
2004
    25,766,813       1,487,891       24,278,922  
2005
    22,909,448       981,600       21,927,848  
2006
    17,147,325       660,000       16,487,325  
2007
    14,923,288       620,000       14,303,288  
Thereafter
    93,264,509       1,695,000       91,569,509  
 
   
     
     
 
Total minimum future rental commitments
  $ 214,079,636     $ 7,042,170     $ 207,037,466  
 
   
     
     
 

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:

                 
    2002   2001
   
 
Accounts payable-trade
  $ 82,651,435     $ 85,468,997  
Property, payroll, and other taxes payable
    12,362,475       13,035,074  
Salaries, wages, and bonuses payable
    11,985,095       11,994,229  
Self-insurance reserves
    6,565,623       7,041,585  
Interest
    9,569,420       2,332,336  
Other
    15,989,037       15,873,676  
 
   
     
 
Total
  $ 139,123,085     $ 135,745,897  
 
   
     
 

Self-insurance reserves are established for workers’ compensation and employee group medical and dental benefits based on claims filed and claims incurred but not reported. The Company is insured for covered costs in excess of $350,000 per occurrence for workers’ compensation and $175,000 per covered person for medical care benefits for a policy year.

Employee insurance expense, including workers’ compensation and medical care benefits, net of employee contributions, totaled $20.3 million, $19.0 million and $16.5 million for 2002, 2001 and 2000, respectively.

6. Long-Term Debt and Short-Term Loans

Long-term debt and short-term loans are summarized as follows:

                     
        2002   2001
       
 
Bonds payable:
               
   
Senior subordinated debt, interest rate of 8.875%, maturing 2011
  $ 249,750,000     $  
   
Unamortized original issue discount on senior subordinated debt
    (1,865,417 )      
Notes payable:
               
   
Real estate and equipment maturing 2003-2017:
               
   
Due to banks, weighted average interest rate of 7.90% for 2002 and 7.75% for 2001
    151,135,177       263,300,020  
   
Due to other financial institutions, weighted average interest rate of 8.90% for 2002 and 8.75% for 2001
    197,611,773       220,085,363  
   
Other:
               
   
Weighted average interest rate of 4.88% for 2001
          61,024,000  
   
Weighted average interest rate of 8.15% for 2001, secured by stock of Milkco, Inc.
          5,136,000  
 
   
     
 
Total long-term debt and short-term loans
    596,631,533       549,545,383  
Less current portion
    47,307,046       60,851,887  
 
   
     
 
Long-term debt, net of current portion
  $ 549,324,487     $ 488,693,496  
 
   
     
 

33


 

Ingles Markets, Incorporated and Subsidiaries
Notes To Consolidated Financial Statements
Fiscal years ended September 28, 2002, September 29, 2001
     and September 30, 2000

On December 11, 2001 the Company closed an offering of $250 million principal amount of senior subordinated notes to mature in 2011. The notes bear an annual interest rate of 8-7/8% and were issued at a discount to yield 9%. After December 1, 2006 until December 1, 2009, the Company may redeem all or a portion of the Notes at a declining premium rate of 104.438% to 101.369%. After December 1, 2009 the Company may redeem the notes at 100% of the principal amount. The Company incurred $0.6 million in costs, net of income tax benefits of $0.4 million, in connection with the early retirement of $170.0 million of debt with a portion of the proceeds from the Notes.

In conjunction with the issuance of the notes, the Company renegotiated its lines of credit, extending the maturity dates and increasing available lines of credit from $130 million to $150 million. Of the $150 million of committed lines of credit, $130 million matures in October 2004 and $20 million matured in October 2002. At September 28, 2002, the Company had no balance drawn under its lines of credit. The lines provide the Company with various interest rate options, generally at rates less than prime.

At September 28, 2002, property and equipment with an undepreciated cost of approximately $427 million was pledged as collateral for long-term debt. Long-term debt and lines of credit agreements contain various restrictive covenants requiring, among other things, minimum levels of net worth and maintenance of certain financial ratios. One of the covenants has the effect of restricting funds available for dividends to approximately $29.8 million, based on tangible net worth at September 28 2002. As of September 28, 2002, the Company is in compliance with these covenants.

Components of interest costs are as follows:

                         
    2002   2001   2000
   
 
 
Total interest costs
  $ 51,858,993     $ 44,838,488     $ 43,340,190  
Interest capitalized
    (318,666 )     (1,935,858 )     (2,114,098 )
 
   
     
     
 
Interest expense
  $ 51,540,327     $ 42,902,630     $ 41,226,092  
 
   
     
     
 

Maturities of long-term debt at September 28, 2002 are as follows:

                         
Fiscal Year        

       
2003
  $ 47,307,046  
2004
    37,742,338  
2005
    40,908,328  
2006
    16,364,111  
2007
    31,352,741  
Thereafter
    422,956,969  
 
   
 
Total
  $ 596,631,533  
 
   
 

7. Other Long-Term Liabilities

Other long-term liabilities are summarized as follows:

                 
    2002   2001
   
 
Advance payments on purchases contracts
  $ 4,175667     $ 3,638,708  
Deferred gain-sale/leasebacks
    1,118,366       1,965,548  
Other
    1,084,554       1,834,977  
 
   
     
 
Total other long-term liabilities
    6,378,587       7,439,233  
Less current portion
    3,215,425       3,494,273  
 
   
     
 
 
  $ 3,163,162     $ 3,944,960  
 
   
     
 

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.

34


 

Ingles Markets, Incorporated and Subsidiaries
Notes To Consolidated Financial Statements
Fiscal years ended September 28, 2002, September 29, 2001
     and September 30, 2000

8. Stockholders’ Equity

The Company has two classes of Common Stock: Class A and Class B. Class A Common Stock is traded on The Nasdaq Stock Market’s National Market under the symbol IMKTA. There is no public market for the Company’s Class B Common Stock. However, each share of Class B Common Stock is convertible at any time, at the option of the holder, into one share of Class A Common Stock. Upon any transfers of Class B Common Stock (other than to immediate family members and the Investment/Profit Sharing Plan), such stock is automatically converted into Class A Common Stock.

The holders of the Class A Common Stock and Class B Common Stock are entitled to dividends and other distributions as and when declared out of assets legally available therefore, subject to the dividend rights of any preferred stock that may be issued in the future. Each share of Class A Common Stock is entitled to receive a cash dividend and liquidation payment in an amount equal to 110% of any cash dividend or liquidation payment on Class B Common Stock. Any stock dividend must be paid in shares of Class A Common Stock with respect to Class A Common Stock and in shares of Class B Common Stock with respect to Class B Common Stock.

The voting powers, preferences and relative rights of Class A Common Stock and Class B Common Stock are identical in all respects, except that the holders of Class A Common Stock have one vote per share and the holders of Class B Common Stock have ten votes per share. In addition, holders of Class A Common Stock, as a separate class, are entitled to elect 25% of all directors constituting the Board of Directors (rounded to the nearest whole number). As long as the Class B Common Stock represents at least 12.5% of the total outstanding Common Stock of both classes, holders of Class B Common Stock, as a separate class, are entitled to elect the remaining directors. The Company’s Articles of Incorporation and Bylaws provide that the Board of Directors can set the number of directors between five and eleven.

9. Earnings Per Common Share

The following table sets forth the computation of basic and diluted earnings per share:

                             
        2002   2001   2000
       
 
 
BASIC:
                       
   
Income before extraordinary item
  $ 15,294,559     $ 17,850,021     $ 21,091,286  
   
Extraordinary item-early extinguishment of debt (net of income tax benefit)
    (561,660 )            
 
   
     
     
 
   
Net income
  $ 14,732,899     $ 17,850,021     $ 21,091,286  
 
   
     
     
 
   
Weighted average number of common shares outstanding
    22,726,030       22,592,626       22,558,325  
 
   
     
     
 
   
Basic earnings per common share before extraordinary item
  $ .67     $ .79     $ .93  
   
Extraordinary item-early extinguishment of debt
    (.02 )            
 
   
     
     
 
   
Basic earnings per common share
  $ .65     $ .79     $ .93  
 
   
     
     
 
DILUTED:
                       
   
Income before extraordinary item
  $ 15,294,559     $ 17,850,021     $ 21,091,286  
   
Extraordinary item-early extinguishment of debt (net of income tax benefit)
    (561,660 )            
 
   
     
     
 
   
Diluted earnings
  $ 14,732,899     $ 17,850,021     $ 21,091,286  
 
   
     
     
 
   
Weighted average number of common shares outstanding
    23,133,825       22,738,880       22,666,174  
 
   
     
     
 
   
Diluted earnings per common share before extraordinary item
  $ .66     $ .79     $ .93  
   
Extraordinary item-early extinguishment of debt
    (.02 )            
 
   
     
     
 
   
Diluted earnings per common share
  $ .64     $ .79     $ .93  
 
   
     
     
 

35


 

Ingles Markets, Incorporated and Subsidiaries
Notes To Consolidated Financial Statements
Fiscal years ended September 28, 2002, September 29, 2001
     and September 30, 2000

The difference in the weighted average number of common shares outstanding for the basic and diluted computations relates to outstanding stock options calculated using the treasury method for the diluted computation.

Options to purchase 1,070,000, 855,000 and 1,414,000 shares of common stock at prices ranging from $12.25 to $14.00 per share were outstanding during fiscal 2002, 2001 and 2000, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive.

10. Employee Benefit Plans

Investment/Profit Sharing Plan — The purpose of the qualified investment/profit sharing plan is to provide retirement benefits to eligible employees. Assets of the plan, including the Company’s Class B Common Stock, are held in trust for employees and distributed upon retirement, death, disability or other termination of employment. Company contributions are discretionary and are determined quarterly by the Board of Directors. The Plan includes a 401(k) feature. Company contributions to the plan, included in operating and administrative expenses, were $784,000, $832,000 and $714,000 for fiscal years 2002, 2001 and 2000, respectively.

Cash Bonus Plan — The Company pays monthly bonuses to various managerial personnel based on performance of the operating units managed 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 $5.0 million, $5.1 million and $5.8 million for fiscal years 2002, 2001 and 2000, 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 28, 2002, no options were outstanding under this plan. Information with respect to options granted, exercised, canceled and outstanding follows:

                           
                      Weighted
      Shares           Average
      Under   Option Price   Exercise
      Option   Per Share   Price
     
 
 
Outstanding, September 25, 1999
    76,000     $10.00 - $14.00     $ 12.36  
 
Canceled
    (22,000 )       10.00 -   14.00       11.78  
 
   
                 
Outstanding, September 30, 2000
    54,000         10.00 -   14.00       12.59  
 
Canceled
    (24,000 )       10.00 -   14.00       10.83  
 
   
                 
Outstanding, September 29, 2001
    30,000       14.00       14.00  
 
Canceled
    (30,000 )     14.00       14.00  
 
   
                 
Outstanding, September 28, 2002
    -                  
 
   
                 

1997 Nonqualified Stock Option Plan — The Company has a nonqualified stock option plan under which an aggregate of 8,000,000 shares of the Company’s Class A Common Stock may be issued to officers and other key employees until January 1, 2007.

Options currently outstanding under the plan may be exercised within a one-year period following the grant exercise date or after death, disability or retirement. All options automatically terminate with termination of the optionee’s employment

36


 

Ingles Markets, Incorporated and Subsidiaries
Notes To Consolidated Financial Statements
Fiscal years ended September 28, 2002, September 29, 2001
     and September 30, 2000

for any other reason. The grant exercise date may vary from one year to five years from the date the options were granted. As of September 28, 2002, there were 699,000 options exercisable under this plan.

Information with respect to options granted, canceled and outstanding follows:

                           
                      Weighted
      Shares           Average
      Under   Option Price   Exercise
      Option   Per Share   Price
     
 
 
Outstanding, September 25, 1999
    1,901,000       $10.50 - $14.00     $ 12.51  
 
Granted
    2,054,700       9.56       9.56  
 
Exercised
    (100,000 )     10.50       10.50  
 
Canceled
    (29,100 )     9.56 - 14.00       12.22  
 
   
                 
Outstanding, September 30, 2000
    3,826,600       9.56 - 14.00       10.98  
 
Granted
    16,000       11.00       11.00  
 
Exercised
    (61,800 )     9.56       9.56  
 
Canceled
    (160,250 )     9.56 - 14.00       12.87  
 
   
                 
Outstanding, September 29, 2001
    3,620,550       9.56 - 14.00       10.92  
 
Granted
    34,000       12.00       12.00  
 
Exercised
    (148,200 )     9.56       9.56  
 
Canceled
    (232,550 )     9.56 - 14.00       11.37  
 
   
                 
Outstanding, September 28, 2002
    3,273,800       $9.56 - $14.00     $ 12.58  
 
   
                 

The weighted average remaining contractual life of the options outstanding at September 28, 2002 is 0.9 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 2002, 2001 and 2000, respectively; risk-free interest rates of 3.00, 4.25, and 6.10 percent; dividend yield of 5.3, 5.3 and 4.8 percent; expected volatility of 25.7, 30.0 and 28.8 percent; and expected lives of 5, 5 and 3 years.

37


 

Ingles Markets, Incorporated and Subsidiaries
Notes To Consolidated Financial Statements
Fiscal years ended September 28, 2002, September 29, 2001
     and September 30, 2000

Had compensation cost for the Company’s plans been determined based on the fair value at the grant date for such awards in 2002, 2001 and 2000 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:

                           
      2002   2001   2000
     
 
 
BASIC
                       
 
Net income
  $ 14,732,899     $ 17,850,021     $ 21,091,286  
 
Net income, pro forma
    13,772,457       16,888,893       20,256,487  
 
Basic earnings per common share
  $ 0.65     $ 0.79     $ 0.93  
 
Basic earnings per common share, pro forma
  $ 0.61     $ 0.75     $ 0.90  
DILUTED
                       
 
Diluted earnings
  $ 14,732,899     $ 17,850,021     $ 21,091,286  
 
Diluted earnings, pro forma
    13,772,457       16,888,893       20,256,487  
 
Diluted earnings per common share
  $ 0.64     $ 0.79     $ 0.93  
 
Diluted earnings per common share, pro forma
  $ 0.60     $ 0.74     $ 0.89  
Weighted average fair value of options granted
  $ 1.54     $ 1.63     $ 1.79  

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.

38


 

Ingles Markets, Incorporated and Subsidiaries
Notes To Consolidated Financial Statements
Fiscal years ended September 28, 2002, September 29, 2001
     and September 30, 2000

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:

                           
      2002   2001   2000
     
 
 
Revenues from unaffiliated customers:
                       
 
Grocery sales
  $ 1,867,866     $ 1,866,124     $ 1,842,105  
 
Shopping center rentals
    16,927       16,537       15,887  
 
Fluid dairy
    92,596       87,316       74,095  
 
   
     
     
 
Total revenues from unaffiliated customers
  $ 1,977,389     $ 1,969,977     $ 1,932,087  
 
   
     
     
 
Income from operations:
                       
 
Grocery sales
  $ 48,560     $ 48,310     $ 51,089  
 
Shopping center rentals
    10,355       10,302       10,149  
 
Fluid dairy
    11,566       8,600       7,194  
 
   
     
     
 
Total income from operations
  $ 70,481     $ 67,212     $ 68,432  
 
   
     
     
 
Assets:
                       
 
Grocery sales
  $ 860,583     $ 805,627     $ 777,431  
 
Shopping center rentals
    124,965       128,363       123,672  
 
Fluid dairy
    28,843       28,811       26,663  
 
   
     
     
 
Total assets
  $ 1,014,391     $ 962,801     $ 927,766  
 
   
     
     
 
Capital expenditures:
                       
 
Grocery sales
  $ 46,569     $ 65,836     $ 92,761  
 
Shopping center rentals
    695       4,461       6,756  
 
Fluid dairy
    2,449       2,897       3,018  
 
   
     
     
 
Total capital expenditures
  $ 49,713     $ 73,194     $ 102,535  
 
   
     
     
 
Depreciation and amortization:
                       
 
Grocery sales
  $ 40,898     $ 38,320     $ 37,319  
 
Shopping center rentals
    5,027       4,687       4,117  
 
Fluid dairy
    2,387       2,259       2,096  
 
   
     
     
 
Total depreciation and amortization
  $ 48,312     $ 45,266     $ 43,532  
 
   
     
     
 

Revenue from shopping center rentals is included in rental income, net in the statements of income. The other revenues comprise the net sales reported in the statements of income.

The fluid dairy segment had $44.2, $44.6 and $44.8 million in sales to the grocery sales segment in fiscal 2002, 2001 and 2000, respectively. These sales have been eliminated in consolidation.

39


 

Ingles Markets, Incorporated and Subsidiaries
Notes To Consolidated Financial Statements
Fiscal years ended September 28, 2002, September 29, 2001
     and September 30, 2000

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        
2002   Quarter   Quarter   Quarter   Quarter   Total

 
 
 
 
 
Net sales
  $ 499,444     $ 493,156     $ 482,952     $ 484,910     $ 1,960,462  
Gross profit
    128,035       132,476       129,172       131,042       520,725  
Income before extraordinary item
    4,566       3,296       3,692       3,741       15,295  
Net income
    4,117       3,296       3,568       3,752       14,733  
Basic earnings per common share
    .18       .15       .16       .16       .65  
Diluted earnings per common share
    .18       .14       .16       .16       .64  
                                         
2001                                        

                                       
Net sales
  $ 504,695     $ 475,167     $ 484,735     $ 488,843     $ 1,953,440  
Gross profit
    128,564       125,359       128,634       128,999       511,556  
Net income
    4,458       3,150       5,922       4,320       17,850  
Basic earnings per common share
    .20       .14       .26       .19       .79  
Diluted earnings per common share
    .20       .14       .26       .19       .79  

13. Litigation

Various legal proceedings and claims arising in the ordinary course of business are pending against the Company. In the opinion of management, the ultimate liability, if any, from all pending legal proceedings and claims would not materially affect the Company’s financial position or the results of its operations.

14. Fair Values of Financial Instruments

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

Cash and cash equivalents: The carrying amounts reported in the balance sheets for cash and cash equivalents approximate their fair values.

Receivables: The carrying amounts reported in the balance sheets for receivables approximate their fair values.

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.

40


 

Ingles Markets, Incorporated and Subsidiaries
Notes To Consolidated Financial Statements
Fiscal years ended September 28, 2002, September 29, 2001
     and September 30, 2000

The carrying amounts and fair values of the Company’s financial instruments at September 28, 2002 and September 29, 2001 are as follows (amounts in thousands):

                                   
      2002   2001
     
 
      Carrying   Fair   Carrying   Fair
      Amount   Value   Amount   Value
     
 
 
 
Cash and cash equivalents
  $ 46,900     $ 46,900     $ 12,435     $ 12,435  
Receivables
    34,823       34,823       32,466       32,466  
Long-term and short-term debt:
                               
 
Real estate and equipment
    348,747       356,543       488,521       495,868  
 
Other
    247,885       225,407       61,024       61,024  

15. Cash Flow Information

Supplemental disclosure of cash flow information is as follows:

                           
      2002   2001   2000
     
 
 
Cash paid during the year for:
                       
 
Interest (net of amounts capitalized)
  $ 44,303,243     $ 43,485,020     $ 40,898,804  
 
Income taxes
    10,262,495       623,867       8,966,329  
Non cash items:
                       
 
Property and equipment additions included in accounts payable
    4,066,787       2,366,442       5,746,770  

16. Major Supplier

A large portion of inventory is purchased from a wholesale grocery distributor. Purchases from the distributor were approximately $197 million in 2002, $203 million in 2001 and $188 million in 2000. 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 28, 2002. Amounts owed to this distributor, included in accounts payable-trade and accrued expenses, were $4.1 million and $3.8 million at September 28, 2002 and September 29, 2001, respectively.

In addition, the Company sells dairy and juice products to this wholesale grocery distributor. Sales to this distributor were $35.4 million in fiscal 2002, $32.5 million in fiscal 2001 and $29.6 million in fiscal 2000. Amounts due from this distributor, included in receivables, were $1.5 million and $1.3 at September 28, 2002 and September 29, 2001, respectively.

41


 

     
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES   SCHEDULE II

SUPPLEMENTAL SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS

                                 
    BALANCE AT                   BALANCE AT
    BEGINNING OF   CHARGED TO           END OF
DESCRIPTION   YEAR   COSTS & EXPENSES   DEDUCTIONS   YEAR

 
 
 
 
Fiscal year ended September 28, 2002:
                               
Deducted from asset accounts:
                               
Allowance for doubtful accounts
  $ 339,938     $ 216,000     $ 76,825 (1)   $ 479,113  
 
                               
Fiscal year ended September 29, 2001:
                               
Deducted from asset accounts:
                               
Allowance for doubtful accounts
  $ 256,630     $ 176,000     $ 92,692 (1)   $ 339,938  
 
                               
Fiscal year ended September 30, 2000:
                               
Deducted from asset accounts:
                               
Allowance for doubtful accounts
  $ 185,070     $ 146,000     $ 74,440 (1)   $ 256,630  

(1)   Uncollectible accounts written off, net of recoveries.

42


 

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 9, 2002

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 9, 2002

   
Robert P. Ingle, Chairman of the Board, Chief Executive Officer and Director    
     
/s/ Vaughn C. Fisher   December 9, 2002

   
Vaughn C. Fisher, President, Chief Operating Officer and Director    
     
/s/ Brenda S. Tudor   December 9, 2002

   
Brenda S. Tudor, CPA, Vice President-Finance, Chief Financial Officer and Director    
     
/s/ Charles E. Russell   December 9, 2002

   
Charles E. Russell, Director    
     
/s/ Robert P. Ingle, II   December 9, 2002

   
Robert P. Ingle, II, Vice President- Operations and Director    
     
/s/ Florence S. Dimenna   December 9, 2002

   
Florence S. Dimenna, Secretary and Controller    

43


 

CERTIFICATION PURSUANT TO 17 CFR 240.13a-14
PROMULGATED UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Robert P. Ingle, Chief Executive Officer of Ingles Markets, Incorporated, certify that:

1.   I have reviewed this annual report on Form 10-K of Ingles Markets, Incorporated;
 
2.   Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

          (a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

          (b)  evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

          (c)  presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors:

          (a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

          (b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.   The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

     
Date: December 9, 2002    
 
/s/ Robert P. Ingle    

   
Robert P. Ingle
Chief Executive Officer
   

44


 

CERTIFICATION PURSUANT TO 17 CFR 240.13a-14
PROMULGATED UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Brenda S. Tudor, Chief Financial Officer of Ingles Markets, Incorporated, certify that:

1.   I have reviewed this annual report on Form 10-K of Ingles Markets, Incorporated;
 
2.   Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

          (a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

          (b)  evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

          (c)  presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors:

          (a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

          (b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.   The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

     
Date: December 9, 2002    
 
/s/ Brenda S. Tudor    

   
Brenda S. Tudor
Chief Financial Officer
   

45


 

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 No. 0-14706, previously filed with the Commission and incorporated herein by this reference.)
     
4.3   Indenture dated December 11, 2001 between the Registrant and U.S. Bank, N.A., as trustee, relating to the Registrant’s 8-7/8% Senior Subordinated Notes due 2011. (Included as Exhibit 4.3 to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 29, 2001, File No. 0-14706, previously filed with the Commission and incorporated herein by this reference.)
     
4.4   Form of the Registrant’s 8-7/8% Senior Subordinated Note due 2011. (Included as Exhibit 4.4 to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 29, 2001, File No. 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 15(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 15(c) of Form 10-K.)
     
10.3   Fourth Amendment to the Ingles Markets, Incorporated Investment/Profit Sharing Plan effective September 4, 1999. (Included as Exhibit 10.3 to Registrant’s Annual Report on form 10-K for the fiscal year ended September 30, 2000, File No. 0-14706 previously filed with the Commission and incorporated herein by this reference.)
     
    (Management contract or compensatory plan or arrangement required to be filed as an exhibit to this report on Form 10-K pursuant to Item 15(c) of Form 10-K.)
     
10.4   Fifth Amendment to the Ingles Markets, Incorporated Investment/Profit Sharing Plan effective March 6, 2000. (Included as Exhibit 10.4 to Registrant’s Annual Report on form 10-K for the fiscal year ended September 30, 2000, File No. 0-14706 previously filed with the Commission and incorporated herein by this reference.)
     
    (Management contract or compensatory plan or arrangement required to be filed as an exhibit to this report on Form 10-K pursuant to Item 15(c) of Form 10-K.)
     
10.5   Sixth Amendment to the Ingles Markets, Incorporated Investment/Profit Sharing Plan effective August 29, 2000. (Included as Exhibit 10.5 to Registrant’s Annual Report on form 10-K for the fiscal year ended September 30, 2000, File No. 0-14706 previously filed with the Commission and incorporated herein by this reference.)
     
    (Management contract or compensatory plan or arrangement required to be filed as an exhibit to this report on Form 10-K pursuant to Item 15(c) of Form 10-K.)

46


 

     
10.6   Seventh Amendment to the Ingles Markets, Incorporated Investment/Profit Sharing Plan effective January 1, 2001. (Included as Exhibit 10.6 to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 29, 2001, 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 15(c) of Form 10-K)
     
10.7   Eighth Amendment to the Ingles Markets, Incorporated Investment/Profit Sharing Plan effective May 21, 2001. (Included as Exhibit 10.7 to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 29, 2001, 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 15(c) of Form 10-K)
     
10.8   Ninth Amendment to the Ingles Markets, Incorporated Investment/Profit Sharing Plan effective October 1, 2001. (Included as Exhibit 10.8 to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 29, 2001, 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 15(c) of Form 10-K)
     
10.9   Amended and Restated Ingles Markets, Incorporated 1991 Nonqualified Stock Option Plan. (Included as Exhibit 10.4 to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 1995, File No. 0-14706, previously filed with the Commission and incorporated herein by this reference.)
     
    (Management contract or compensatory plan or arrangement required to be filed as an exhibit to this report on Form 10-K pursuant to Item 15(c) of Form 10-K.)
     
10.10   Amended and Restated 1997 Nonqualified Stock Option Plan. (Included as Appendix A to Registrant’s Proxy Statement for the Annual Meeting of Stockholders held on February 12, 2002, 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 15(c) of Form 10-K.)
     
10.11   Amended and Restated Ingles Markets, Incorporated Investment/Profit Sharing Plan effective September 29, 2002.
     
    (Management contract or compensatory plan or arrangement required to be filed as an exhibit to this report on Form 10-K pursuant to Item 15(c) of Form 10-K.)
     
21   Subsidiaries of the Registrant.
     
23   Consent of Ernst & Young LLP, Independent Auditors.
     
99.1   Certification Pursuant to 18 U.S.C. Section 1350
     
99.2   Certification Pursuant to 18 U.S.C. Section 1350

47 EX-10.11 3 g79691exv10w11.txt AMENDED & RESTATED INGLES MARKETS, INCORPORATED EXHIBIT 10.11 INGLES MARKETS, INCORPORATED INVESTMENT/PROFIT SHARING PLAN THIS INDENTURE is made on the 25th day of September, 2002, by INGLES MARKETS, INCORPORATED (hereinafter called the "Primary Sponsor") and MILKCO, INC., an Affiliate of the Primary Sponsor, corporations duly organized and existing under the laws of the State of North Carolina. INTRODUCTION The Primary Sponsor established the Ingles Markets, Incorporated Investment/Profit Sharing Plan (the "Plan") by indenture dated September 25, 1972, and the Plan was last restated in its entirety by indenture dated February 2, 1994. The Primary Sponsor now wishes to amend and restate the Plan primarily to comply with and make changes permitted by the provisions of the Uniformed Service Employees Employment and Reemployment Rights Act of 1994, the Small Business Job Protection Act of 1996, the Taxpayer Relief Act of 1997, and the Community Renewal Tax Relief Act of 2000, to amend the Plan to the extent currently possible to comply with the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, and to incorporate into the Plan the provisions relating to the merger into the Plan of the Ingles Distribution Division Savings and Retirement Plan (the "Distribution Division Plan") that was effective as of September 1, 2000. The Plan is intended to be a profit sharing plan within the meaning of Treasury Regulations Section 1.401-1(b)(1)(ii) and also contains a cash or deferred arrangement as described in Section 401(k) of the Internal Revenue Code of 1986. The provisions of the Plan, as amended and restated herein, shall apply to Plan Years beginning after September 27, 1997, except to the extent the provisions are required to apply at an earlier date to comply with applicable law. NOW, THEREFORE, the Primary Sponsor does hereby amend and restate the Plan in its entirety, generally effective as of September 28, 1997, except as otherwise provided herein, to read as follows: INGLES MARKETS, INCORPORATED INVESTMENT/PROFIT SHARING PLAN
PAGE ---- ARTICLE 1 DEFINITIONS....................................................................1 ARTICLE 2 ELIGIBILITY...................................................................13 ARTICLE 3 CONTRIBUTIONS.................................................................13 ARTICLE 4 INDIVIDUAL FUNDS AND INVESTMENT OF TRUST ASSETS...............................17 ARTICLE 5 PLAN LOANS....................................................................19 ARTICLE 6 WITHDRAWALS DURING EMPLOYMENT.................................................24 ARTICLE 7 PAYMENT OF BENEFITS ON TERMINATION OF EMPLOYMENT..............................25 ARTICLE 8 PAYMENT OF BENEFITS ON RETIREMENT OR DISABILITY...............................28 ARTICLE 9 DEATH BENEFITS................................................................28 ARTICLE 10 GENERAL RULES ON DISTRIBUTIONS................................................28 ARTICLE 11 ADMINISTRATION OF THE PLAN....................................................35 ARTICLE 12 CLAIM REVIEW PROCEDURE........................................................37 ARTICLE 13 ANTI-ALIENATION, INCOMPETENT DISTRIBUTEE & UNCLAIMED PAYMENTS.................40 ARTICLE 14 PROHIBITION AGAINST DIVERSION.................................................41 ARTICLE 15 LIMITATION OF RIGHTS..........................................................41 ARTICLE 16 AMENDMENT TO OR TERMINATION OF THE PLAN AND THE TRUST.........................41 ARTICLE 17 ADOPTION OF PLAN BY AFFILIATES................................................43 ARTICLE 18 QUALIFICATION AND RETURN OF CONTRIBUTIONS.....................................43 ARTICLE 19 INCORPORATION OF SPECIAL LIMITATIONS..........................................44 APPENDIX A LIMITATION ON ALLOCATIONS....................................................1 APPENDIX B TOP-HEAVY PROVISIONS.........................................................1 APPENDIX C SPECIAL NONDISCRIMINATION RULES..............................................1
ARTICLE 1 DEFINITIONS Wherever used herein, the masculine pronoun shall be deemed to include the feminine, and the singular to include the plural, unless the context clearly indicates otherwise and the following words and phrases shall, when used herein, have the meanings set forth below: 1.1 "Account" means a Participant's aggregate balance in the following accounts, as adjusted pursuant to the Plan as of any given date: (a) "Employee 401(k) Contribution Account," which shall reflect a Participant's interest in contributions made by a Plan Sponsor under Section 3.1. (b) "Employer Match Account," which shall reflect a Participant's interest in Matching Contributions made by a Plan Sponsor under Section 3.2. (c) "Employer Profit Sharing Account," which shall reflect a Participant's interest in Profit Sharing Contributions made by a Plan Sponsor under Section 3.3 and forfeitures of Profit Sharing Contributions allocated under Section 3.5. (d) "Rollover Account," which shall reflect a Participant's interest in Rollover Amounts contributed to the Plan by the Participant. (e) "qmac/qnec Account," which shall reflect a Participant's interest in Qualified Matching Contributions and/or Qualified Nonelective Contributions made by a Plan Sponsor pursuant to Appendix C. (f) "Prior Plan Account," which shall reflect a Participant's interest in amounts transferred into the Plan from the Distribution Division Plan. The "Prior Plan Account" shall consist of the following sub-accounts: the "Prior Plan Employee Contribution Subaccount," the "Prior Rollover Subaccount," the "Prior Plan Company Match Subaccount," the "Prior Plan Profit Sharing Subaccount," and the "Prior Plan QMAC/QNEC Subaccount." In addition, the Plan Administrator shall allocate the interest of a Participant in any amounts transferred to the Plan in a trust-to-trust transfer (other than Rollover Amounts) or pursuant to the merger of another tax-qualified retirement plan with the Plan among the above accounts as the Plan Administrator determines best reflects the interest of the Participant. 1.2 "Affiliate" means: (a) any corporation which is a member of the same controlled group of corporations (within the meaning of Code Section 414(b)) as is a Plan Sponsor, (b) any other trade or business (whether or not incorporated) under common control (within the meaning of Code Section 414(c)) with a Plan Sponsor, (c) any other corporation, partnership or other organization which is a member of an affiliated service group (within the meaning of Code Section 414(m)) with a Plan Sponsor, and (d) any other entity required to be aggregated with a Plan Sponsor pursuant to regulations under Code Section 414(o). 1.3 "Alternate Payee" means any spouse, former spouse, child or other dependent of a Participant who is recognized by a domestic relations order as having a right to receive all, or a portion of, the benefits payable under the Plan with respect to such Participant. 1.4 "Annual Compensation Limit" means $150,000, which amount shall be adjusted in subsequent Plan Years based on changes in the cost of living as announced by the Secretary of the Treasury. For the short Plan Year beginning September 29, 2002 and ending on December 31, 2002, the "Annual Compensation Limit" shall be an amount equal to $50,556 ($200,000 multiplied by a fraction, the numerator of which is the number of months in such Plan Year (3.0333) and the denominator of which is 12). For the Plan Year beginning on January 1, 2003, the "Annual Compensation Limit" means $200,000, which amount may be adjusted for each subsequent Plan Year based on changes in the cost of living as announced by the Secretary of Treasury. 1.5 "Beneficiary" (a) A Participant's Beneficiary is the person or trust that a Participant designated most recently in writing to the Plan Administrator on such form and in such manner as is reasonably required by the Plan Administrator. Except as outlined in Subsection (c) below, a Participant may change his Beneficiary at any time by providing a new written election to the Plan Administrator on such form and in such manner as is reasonably required by the Plan Administrator. (b) If the Participant has failed to make a designation, no person designated is alive, no trust has been established, or no Beneficiary or successor Beneficiary has been designated who is alive, the term "Beneficiary" means: (1) the Participant's spouse; or (2) if no spouse is alive, the deceased Participant's estate. (c) Nonspouse Beneficiaries (1) Notwithstanding the foregoing, the spouse of a married Participant shall be his Beneficiary unless that spouse has consented in writing to the designation by the Participant of some other person or trust and the spouse's consent acknowledges the effect of the designation and is witnessed by a notary public or a Plan representative. 2 (2) A Participant may change his designation of a nonspouse beneficiary at any time. However, a Participant may not change his designation without further consent of his spouse unless the spouse's consent permits designation of another person or trust without further spousal consent and acknowledges that the spouse has the right to limit consent to a specific beneficiary and that the spouse voluntarily relinquishes this right. (3) The spouse's consent shall not be required if the Participant establishes to the satisfaction of the Plan Administrator that (A) the spouse cannot be located, (B) the Participant has a court order indicating that he is legally separated or has been abandoned (within the meaning of local law) unless a "qualified domestic relations order" (as defined in Code Section 414(p)) provides otherwise, or (C) there are other circumstances as the Secretary of the Treasury prescribes. If the spouse is legally incompetent to give consent, consent by the spouse's legal guardian shall be deemed to be consent by the spouse. (d) If, subsequent to the death of a Participant, the Participant's Beneficiary dies while entitled to receive benefits under the Plan, the successor Beneficiary, if any, or the Beneficiary listed under Subsection (b)(1) or, if no spouse is alive, Subsection (b)(2) shall be the Beneficiary. 1.6 "Board of Directors" means the Board of Directors of the Primary Sponsor. 1.7 "Break in Service" means the failure of an Employee, in connection with a Termination of Employment other than by reason of death, Disability, or reaching a Retirement Date, to complete more than 500 Hours of Service in any Plan Year. For the short Plan Year beginning September 29, 2002 and ending December 31, 2002, a Break in Service means the failure of an Employee, in connection with a Termination of Employment other than by reason of death, Disability or reaching a Retirement Date, to complete more than 500 Hours of Service in the fifty-two week period beginning on September 29, 2002, and ending on September 27, 2003. 1.8 "Catch-Up Contribution" means a contribution on behalf of a Participant pursuant to Section 3.1(c). 1.9 "Code" means the Internal Revenue Code of 1986, as amended. 1.10 "Company Stock" means the class A and class B common stock of the Primary Sponsor. 3 1.11 "Company Stock Fund" means the Ingles Class A Fund and the Ingles Class B Fund. 1.12 "Compensation" means W-2 Compensation, to the extent not in excess of the Annual Compensation Limit for all purposes under the Plan except for purposes of determining who are Highly Compensated Employees. Notwithstanding the above, Compensation shall be determined as follows: (a) for purposes of determining, with respect to each Plan Sponsor, the amount of contributions and allocations made by or on behalf of an Employee under Section 3 and for purposes of applying the provisions of Appendix C hereto for such Plan Years as the Secretary of the Treasury may allow, Compensation shall only include amounts received for the portion of the Plan Year during which the Employee was a Participant; (b) for purposes of determining, with respect to each Plan Sponsor, for purposes of Appendix B hereto, Compensation shall include amounts received by the Employee for the entire Plan Year; (c) for purposes of determining, with respect to each Plan Sponsor, the amount of contributions and allocations made by or on behalf of an Employee under Article 3, Compensation shall not include amounts paid by any Affiliate that is not a Plan Sponsor or amounts realized from the exercise of non-qualified stock options; (d) for all purposes under the Plan, except as provided in Subsection (e) of this Section, Compensation shall include any amount which would have been paid during a Plan Year, but was contributed by a Plan Sponsor on behalf of an Employee pursuant to a salary reduction agreement which is not includable in the gross income of the Employee under Code Section 125 [cafeteria plans], 402(g)(3) [salary deferrals to 401(k), 403(b), and simple IRA plans] or 457 [certain plans of state and local governments and tax-exempt organizations], and effective September 30, 2001, Code Section 132(f)(4) [pre-tax parking plans]; and (e) effective until September 26, 1998, for purposes of applying the annual addition limits in Appendix A, Compensation shall not include the amounts described in Subsection (d). 1.13 "Deferral Amount" means a contribution of a Plan Sponsor on behalf of a Participant pursuant to Section 3.1(a). 1.14 "Direct Rollover" means a payment by the Plan to the Eligible Retirement Plan specified by the Distributee. 1.15 "Disability" means a disability of a Participant within the meaning of Code Section 72(m)(7), to the extent that the Participant is entitled to disability retirement benefits under the federal Social Security Act as determined by the Social Security Administration. 4 1.16 "Distributee" means an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order (as defined in Code Section 414(p)), are Distributees with regard to the interest of the spouse or former spouse. 1.17 "Early Retirement Date" means the date on which the Participant terminates employment on or after the later of (a) reaching age 60; or (b) completing ten (10) years of Vesting Service with the Plan Sponsor. 1.18 "Elective Deferrals" means, with respect to any taxable year of the Participant, the sum of: (a) any Deferral Amounts; (b) any contributions made by or on behalf of a Participant under any other qualified cash or deferred arrangement as defined in Code Section 401(k), whether or not maintained by a Plan Sponsor, to the extent such contributions are not or would not, but for Code Section 402(g)(1) be included in the Participant's gross income for the taxable year; and (c) any other contributions made by or on behalf of a Participant pursuant to Code Section 402(g)(3). 1.19 "Eligibility Service" means: (a) Effective for Plan Years beginning before September 29, 2002, a twelve-consecutive-month period during which the Employee completes no less than 1,000 Hours of Service beginning on the date on which the Employee first performs an Hour of Service upon his employment or reemployment with a Plan Sponsor or, in the event the Employee fails to complete 1,000 Hours of Service in that twelve-consecutive-month period, any Plan Year thereafter during which the Employee completes no less than 1,000 Hours of Service, including the Plan Year which includes the first anniversary of the date the Employee first performed an Hour of Service upon his employment or reemployment. (b) Effective for Plan Years beginning on September 29, 2002 and thereafter, means a twelve-consecutive-month period during which the Employee completes no less than 1,000 Hours of Service beginning on the date on which the Employee first performs an Hour of Service upon his employment or reemployment with a Plan Sponsor or, in the event the Employee fails to complete 1,000 Hours of Service in that twelve-consecutive-month period, any twelve-consecutive-month period thereafter that begins on the first day of a month during which the Employee completes no less than 1,000 Hours of Service, including all such periods that occur during the Employee's first year of employment or reemployment. 5 1.20 "Eligible Employee" means any Employee of a Plan Sponsor other than an Employee who is: (a) covered by a collective bargaining agreement between a union and a Plan Sponsor, provided that retirement benefits were the subject of good faith bargaining, unless the collective bargaining agreement provides for participation in the Plan; (b) a Leased Employee with respect to a Plan Sponsor; (c) deemed to be an Employee of a Plan Sponsor pursuant to regulations under Code Section 414(o); (d) a nonresident alien (within the meaning of Code Section 7701(b)(1)(B)) who received no earned income (within the meaning of Code Section 911(d)(2)) from a Plan Sponsor which constitutes income from sources within the United States (within the meaning of Code Section 861(a)(3)); or (e) any person who is initially classified by a Plan Sponsor as an independent contractor for federal income tax purposes regardless of any subsequent determination that any such person should have been characterized as a common law employee of the Plan Sponsor for the period in question. 1.21 "Eligible Retirement Plan" means an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a) or a qualified trust described in Code Section 401(a) that accepts the Distributee's Eligible Rollover Distribution. For Plan Years beginning on or after September 29, 2002, Eligible Retirement Plan shall also include an annuity contract described in Code Section 403(b) and an eligible plan under Code Section 457(b) which is maintained by a state or political subdivision of a state, or any agency or instrumentality of a state or political subdivision and which agrees to separately account for amounts transferred into such Plan from this Plan. 1.22 "Eligible Rollover Distribution" means any distribution of all or any portion of the Distributee's Account, except that an Eligible Rollover Distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee's designated Beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Code Section 401(a)(9); the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities); and, effective for distributions made after December 31, 2000, any hardship distributions of Deferral Amounts or Catch-Up Contributions pursuant to Section 7.1. 1.23 "Employee" means any person who is: (a) a common law employee of a Plan Sponsor or an Affiliate; 6 (b) a Leased Employee with respect to a Plan Sponsor; or (c) deemed to be an employee of a Plan Sponsor pursuant to regulations under Code Section 414(o). 1.24 "Entry Date" means: (a) prior to September 29, 2002, the first (1st) and the one hundred eighty-second (182nd) day of the Plan Year; and (b) beginning September 29, 2002, the first day of the third month following a Participant's satisfaction of the requirements of Article 2 hereof. 1.25 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.26 "Fiduciary" means each Named Fiduciary and any other person who exercises or has any discretionary authority or control regarding management or administration of the Plan, any other person who renders investment advice for a fee or has any authority or responsibility to do so with respect to any assets of the Plan, or any other person who exercises or has any authority or control respecting management or disposition of assets of the Plan. 1.27 "Fund" means the amount at any given time of cash and other property held by the Trustee pursuant to the Plan. 1.28 "Highly Compensated Employee" means, with respect to a Plan Year, each Employee who: (a) was at any time during the Plan Year or the immediately preceding Plan Year an owner of more than five percent (5%) of the outstanding stock of a Plan Sponsor or Affiliate or more than five percent (5%) of the total combined voting power of all stock of a Plan Sponsor or Affiliate; or (b) received Compensation in excess of $80,000 during the immediately preceding Plan Year ($85,000 during the preceding Plan Year for determining Highly Compensated Employees for the Plan Years beginning after September 30, 2000), which amount shall be adjusted for changes in the cost of living as provided in regulations issued by the Secretary of the Treasury and was in the top-paid group of employees for such preceding year. (c) is a former Employee who met the requirements of Subsection (a) or (b) at the time the former Employee separated from service with the Plan Sponsor or an Affiliate or at any time after the former Employee reached age 55. For purposes of determining who is a Highly Compensated Employee for the Plan Year beginning on January 1, 2003, the calendar year beginning on January 1, 2002 and ending December 31, 2002 shall be considered to be the "preceding Plan Year." 7 1.29 "Hour of Service" means: (a) Each hour for which an Employee is paid, or entitled to payment, for the performance of duties for a Plan Sponsor or any Affiliate during the applicable computation period, and such hours shall be credited to the computation period in which the duties are performed; (b) Each hour for which an Employee is paid, or entitled to payment, by a Plan Sponsor or any Affiliate on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, bereavement, jury duty, military duty or leave of absence; (c) Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by a Plan Sponsor or any Affiliate, and such hours shall be credited to the computation period or periods to which the award or agreement for back pay pertains rather than to the computation period in which the award, agreement or payment is made; provided, that the crediting of Hours of Service for back pay awarded or agreed to with respect to periods described in Subsection (b) of this Section shall be subject to the limitations set forth in Subsection (f); (d) Solely for purposes of determining whether a Break in Service has occurred, each hour during any period that the Employee is absent from work (1) by reason of the pregnancy of the Employee, (2) by reason of the birth of a child of the Employee, (3) by reason of the placement of a child with the Employee in connection with the adoption of the child by the Employee, or (4) for purposes of caring for such child for a period immediately following its birth or placement shall be credited (A) only in the computation period in which the absence from work begins, if the Employee would be prevented from incurring a Break in Service in that year solely because of that credit, or (B), in any other case, in the next following computation period; (e) Without duplication of the Hours of Service counted pursuant to Subsection (d) hereof and solely for such purposes as required pursuant to the Family and Medical Leave Act of 1993 and the regulations thereunder (the "FMLA"), each hour (as determined pursuant to the FMLA) for which an Employee is granted leave under the FMLA (1) for the birth of a child, (2) for placement with the Employee of a child for adoption or foster care, (3) to care for the Employee's spouse, child or parent with a serious health condition, or (4) for a serious health condition that makes the Employee unable to perform the functions of the Employee's job; (f) The Plan Administrator shall credit Hours of Service in accordance with the provisions of Section 2530.200b-2(b) and (c) of the U.S. Department of Labor Regulations or such other federal regulations as may from time to time be applicable and determine Hours of Service from the employment records of a Plan Sponsor or in any other manner consistent with regulations promulgated by the Secretary of Labor, and shall construe any ambiguities in favor of crediting Employees with Hours of Service. 8 Notwithstanding any other provision of this Section, in no event shall an Employee be credited with more than 501 Hours of Service during any single continuous period during which he performs no duties for the Plan Sponsor or Affiliate; and (g) In the event that a Plan Sponsor or an Affiliate acquires substantially all of the assets of another corporation or entity or a controlling interest of the stock of another corporation or merges with another corporation or entity and is the surviving entity, or if an Employee of a Plan Sponsor was previously employed by an entity that is under common control or ownership with the Plan Sponsor, as determined by the Board of Directors of the Plan Sponsor, then service of an Employee who was employed by the prior corporation or entity shall be counted in the manner provided, with the consent of the Primary Sponsor, in resolutions adopted by the Plan Sponsor which authorizes the counting of such service. 1.30 "Individual Fund" means individual subfunds of the Fund as may be established by the Plan Administrator from time to time for the investment of the Fund, other than the Company Stock Funds. 1.31 "Ingles Class A Fund" means the individual subfund of the Fund which is invested primarily in the class A common stock of the Primary Sponsor. 1.32 "Ingles Class B Fund" means the individual subfund of the Fund which is invested primarily in the class B common stock of the Primary Sponsor. 1.33 "Investment Committee" means a committee, which may be established to direct the Trustee with respect to investments of the Fund. 1.34 "Investment Manager" means a Fiduciary, other than the Trustee, the Plan Administrator, or a Plan Sponsor, who may be appointed by the Primary Sponsor: (a) who has the power to manage, acquire, or dispose of any assets of the Fund or a portion thereof; and (b) who (1) is registered as an investment adviser under the Investment Advisers Act of 1940; (2) is a bank as defined in the Investment Advisers Act of 1940; or (3) is an insurance company qualified to perform services described in Subsection (a) above under the laws of more than one state; and (c) who has acknowledged in writing that he is a Fiduciary with respect to the Plan. 9 1.35 "Leased Employee" means an Employee (other than a common law employee of the Plan Sponsor or an Affiliate) who, pursuant to an agreement between the Plan Sponsor or an Affiliate and any other person, has performed services for the Plan Sponsor or an Affiliate (or for the Plan Sponsor and related persons determined in accordance with Code Section 414(n)(6)), on a substantially full-time basis for a period of at least one year, and such services are performed under the primary direction or control of the Plan Sponsor or an Affiliate. 1.36 "Matching Contribution" means a contribution made by a Plan Sponsor pursuant to Section 3.2. 1.37 "Named Fiduciary" means only the following: (a) the Plan Administrator; (b) the Trustee; (c) the Investment Committee; and (d) the Investment Manager. 1.38 "Normal Retirement Age" means age 65. 1.39 "Normal Retirement Date" means the date on which the Participant terminates employment on or after reaching Normal Retirement Age. 1.40 "Participant" means any Employee or former Employee who has become a participant in the Plan for so long as his vested Account has not been fully distributed pursuant to the Plan. 1.41 "Plan Administrator" means the organization or person designated to administer the Plan by the Primary Sponsor and, in lieu of any such designation, means the Primary Sponsor. 1.42 "Plan Sponsor" means individually the Primary Sponsor and any Affiliate or other entity which has adopted the Plan and Trust. 1.43 "Plan Quarter" means: (a) prior to September 29, 2002, the approximate three (3) month period beginning on the day after the last day of the immediately prior Plan Quarter and ending on the last Saturday in March, June, September and December; and (b) the period beginning September 29, 2002 and ending December 31, 2002; and (c) effective January 1, 2003, each three (3) month period ending March 31, June 30, September 30 and December 31 of each year. 10 1.44 "Plan Year" means: (a) prior to September 29, 2002, the fifty-two/fifty-three week period beginning on the day after the last day of the immediately preceding Plan Year and ending on the last Saturday in September of each year; (b) the period beginning on September 29, 2002 and ending on December 31, 2002; and (c) the calendar year beginning January 1, 2003 and each calendar year that begins thereafter. 1.45 "Profit Sharing Contribution" means a contribution made by a Plan Sponsor pursuant to Section 3.3. 1.46 "Qualified Joint and Survivor Annuity" means an immediate annuity for the life of the Participant with a survivor annuity for the life of his spouse which is equal to fifty percent (50%) of the annuity payable during the joint lives of the Participant and his spouse. A Qualified Joint and Survivor Annuity for an unmarried Participant means an annuity for the life of the Participant. 1.47 "Qualified Preretirement Survivor Annuity" means an immediate annuity for the life of a Participant's spouse, the present value of which is equal to fifty percent (50%) of the Participant's vested Account as of the earlier of (a) the Participant's date of death, or (b) the Participant's Termination of Employment. 1.48 "Retirement Date" means the Early Retirement Date or the Normal Retirement Date. 1.49 "Rollover Amount" means any amount transferred to the Fund by a Participant, which amount qualifies as an Eligible Rollover Distribution under Code Section 402(c)(4), or for rollover treatment under Code Sections 403(a)(4), 403(b)(8), 408(d)(3)(A)(ii), or 457(e)(16) and any regulations issued thereunder. 1.50 "Termination Completion Date" means the last day of the fifth consecutive Break in Service computation period, determined under the Section which defines Break in Service, in which a Participant completes a Break in Service. 1.51 "Termination of Employment" means the termination of employment of an Employee from all Plan Sponsors and Affiliates for any reason other than death, Disability, or attainment of a Retirement Date. Any absence from active employment of the Plan Sponsor and Affiliates by reason of an approved leave of absence shall not be deemed for any purpose under the Plan to be a Termination of Employment. Transfer of an Employee from one Plan Sponsor to another Plan Sponsor or to an Affiliate shall not be deemed for any purpose under the Plan to be a Termination of Employment. In addition, transfer of an Employee to another employer (other than a Plan Sponsor or an Affiliate) in connection with a corporate transaction involving a sale of assets, merger, or sale of stock, shall not be deemed to be a Termination of Employment, 11 for purposes of the timing of distributions under Section 7.1, if the employer to which such Employee is transferred agrees with the Plan Sponsor to accept a transfer of assets from the Plan to its tax-qualified plan in a trust-to-trust transfer meeting the requirements of Code Section 414(l). If the employer to which such Employee is transferred does not agree to accept a transfer of assets from the Plan to its tax-qualified Plan, Section 7.6 is applicable in the event that such Termination of Employment is not a distributable event under Code Section 401(k)(10). 1.52 "Trust" means the trusts (collectively or individually) established under agreements between the Primary Sponsor and the respective Trustees to hold the Fund or any successor agreement. The Fund shall be held in three (3) separate trusts, which shall be referred to as "Trust A," which shall hold the Individual Funds; "Trust B," which shall hold the Ingles Class B Fund; and "Trust C," which shall hold the Ingles Class A Fund. 1.53 "Trustee" means the trustee under each Trust established pursuant to the Plan. 1.54 "Valuation Date" means each regular business day or any other day which the Plan Administrator declares to be a Valuation Date, provided, however, that the last business day of each Plan Year will always be a Valuation Date and the selection of other Valuation Dates may not result in discrimination prohibited by Code Section 401(a)(4). 1.55 "Vesting Service" means each Plan Year during which an Employee has completed no less than 1,000 Hours of Service. Notwithstanding anything contained herein to the contrary, Vesting Service shall not include: (a) In the case of an Employee who completes five consecutive Breaks in Service for purposes of determining the vested portion of his Account derived from Plan Sponsor contributions which accrued before his Termination Completion Date, all service in Plan Years after his Termination Completion Date. (b) In the case of an Employee who completes five consecutive Breaks in Service and at that time does not have any vested right in Plan Sponsor contributions, all service before those Breaks in Service commenced. For the short Plan Year beginning on September 29, 2002 and ending on December 31, 2002, a Participant will receive one year of Vesting Service if he completes at least 1,000 Hours of Service for the fifty-two/fifty-three week period beginning on September 29, 2002 and ending on September 27, 2003. In addition, a Participant will receive one year of Vesting Service if he completes at least 1,000 Hours of Service for the Plan Year beginning January 1, 2003 and ending December 31, 2003. 1.56 "W-2 Compensation" means wages within the meaning of Code Section 3401(a) (for purposes of income tax withholding at the source) and all other amounts paid to an Employee by a Plan Sponsor and Affiliates during a Plan Year (but without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed, such as the exception for agricultural labor in Code Section 3401(a)(2)) for which the Plan Sponsor is required to furnish the employee a written statement under Code Sections 6041(d); 6051(a)(3) and 6052. 12 ARTICLE 2 ELIGIBILITY 2.1 New Hires. Each Eligible Employee shall become a Participant as of the Entry Date coinciding with or next following the date on which he has both: (a) completed his Eligibility Service, and (b) attained age 18. 2.2 Existing Participants. Each individual who was a Participant on September 27, 1997 shall continue to be a Participant as of September 28, 1997. Each individual who was a participant in the Distribution Division Plan on August 31, 2000 shall be a Participant in the Plan as of September 1, 2000. Each individual who is a Participant on the adoption date of this amended and restated Plan as reflected in the first paragraph on page one of this Plan shall continue to be a Participant as of such date. 2.3 Former Participants Rehired. Each former Participant who is reemployed by a Plan Sponsor shall become a Participant as of the date of his reemployment as an Eligible Employee. 2.4 Former Employees Rehired. Each former Employee who completes his Eligibility Service but terminates employment with a Plan Sponsor before becoming a Participant shall become a Participant as of the latest of the date he: (a) is reemployed; (b) would have become a Participant if he had not incurred a Termination of Employment; or (c) becomes an Eligible Employee. ARTICLE 3 CONTRIBUTIONS 3.1 401(k) Contributions (a) Deferral Amounts. (1) Each Participant who is an Eligible Employee may elect to defer a portion of the Compensation otherwise payable to him for a payroll period and to have such portion contributed by the Plan Sponsor to the Fund. A Participant may elect to defer any whole percent of his Compensation between one percent (1%) and fifty percent (50%) for a payroll period. The election must be made 13 before the Compensation is payable to the Participant. The election must be made in such manner and subject to such rules and limitations as the Plan Administrator may prescribe, and shall specify the percentage of Compensation that the Participant desires to defer and to have contributed to the Fund. Notwithstanding the foregoing, the Plan Administrator may restrict the amount which Highly Compensated Employees may elect to defer under this Section. (2) Each payroll period, the Plan Sponsor shall deduct the portion of the Compensation that the Participant elected to defer in Subparagraph (1) above from the Participant's payroll for such period and will contribute such amount to the Fund. Amounts contributed pursuant to this Section 3.1 shall be allocated to the Employee 401(k) Contribution Account of the Participant on whose behalf such contributions were made as soon as reasonably practicable following the date of withholding by the Plan Sponsor and receipt by the Trustee. (3) Once a Participant has made a deferral election for a Plan Year, the Participant may revoke or modify his election to increase or reduce the rate of future deferrals, as provided in the administrative procedures established by the Plan Administrator. (b) Limitation on Elective Deferrals. (1) In no event may the total Elective Deferrals for a Participant exceed the Section 402(g) Limitation in any one taxable year of the Participant, except to the extent permitted under Subsection (c) of this Section 3.1. (2) The "Section 402(g) Limitation" is the amount designated in Code Section 402(g)(1), which is $11,000 for 2002, and which shall be adjusted for changes in the cost of living as provided by the Secretary of the Treasury. (3) If the amount of Elective Deferrals contributed on behalf of a Participant to the Plan or to any other plan exceeds the Section 402(g) Limitation in any one taxable year then, not later than the March 1 following such taxable year, the Participant may notify the Plan Administrator that a portion of the Participant's Deferral Amounts consists of excess Elective Deferrals. If such notification is made, the Trustee shall distribute to the Participant the amount of such excess Elective Deferrals, as adjusted to reflect income, gain, or loss attributable to such amount through the end of the Plan Year on or before the following April 15th. (4) The amount to be distributed under subparagraph (1) above shall be reduced by any "Excess Deferral Amounts," as defined in Appendix C hereto, previously distributed or recharacterized with respect to the Participant for the Plan Year beginning with or within that taxable year. 14 (5) The payment of the excess Elective Deferrals, as adjusted and reduced, from the Plan shall be made to the Participant without regard to any other provision in the Plan. (6) If a Participant's total Elective Deferrals under the Plan and other plans of the Plan Sponsor and its Affiliates exceed the Section 402(g) Limitation in any taxable year, the Participant shall be deemed to have designated for distribution under the Plan the lesser of (A) the amount of such excess Elective Deferrals or (B) the amount of Elective Deferrals under this Plan, as adjusted and reduced pursuant to subparagraphs (1) and (2) above. (c) Catch-Up Contributions. (1) Effective as of January 1, 2003, a Participant who has reached age fifty (50) prior to or during a Plan Year shall be eligible to defer a portion of Compensation otherwise payable to him for the Plan Year and to have such portion contributed to the Fund on his behalf as Catch-Up Contributions in accordance with, and subject to the limitations of, Code Section 414(v). Such Catch-Up Contributions shall not be taken into account for purposes of implementing the Section 402(g) Limitation and the annual addition limitations in Appendix A hereto. The Plan shall not be treated as failing to satisfy the provisions of Appendix B of the Plan, Appendix C of the Plan or the requirements of Code Section 410(b), as applicable, by reason of the making of such Catch-Up Contributions. (2) Any election under this Subsection (c) must be made before the Compensation that the Participant desires to defer is payable and may only be made in such manner and subject to such rules and limitations as the Plan Administrator may prescribe and shall specify the amount of Compensation that the Participant desires to defer and to have contributed to the Fund. (3) Once a Participant has made an election for a Plan Year, the Participant may revoke or modify his election to increase or reduce the rate of future deferrals under this Subsection (c), in accordance with the administrative procedures provided by the Plan Administrator. 3.2 Matching Contributions. (a) For Plan Years beginning prior to September 29, 2002. (1) The Plan Sponsor shall, in its discretion, determine the amount of Matching Contributions to be contributed to the Fund for a given Plan Quarter. (2) The Matching Contribution for a Plan Quarter shall be allocated to Participants' Accounts within a reasonable time after the amount is deposited to the Plan by the Plan Sponsor, in the same proportion that the Deferral Amounts contributed on behalf of each eligible Participant under Section 3.1 for the Plan 15 Quarter to which the Matching Contribution relates (not to exceed five percent (5%) of the Participant's Compensation payable for such Plan Quarter) bear to the total Deferral Amounts contributed for all eligible Participants during the Plan Quarter to which the Matching Contribution relates. Such amount shall be allocated to each eligible Participant who is employed by a Plan Sponsor on the last day of a Plan Quarter. (b) For Plan Years beginning on or after September 29, 2002. (1) The Plan Sponsor shall, in its discretion, determine the amount of Matching Contributions to be contributed to the Fund for each payroll period. (2) The Matching Contributions for a payroll period shall be allocated to each eligible Participant's Employer Match Account within a reasonable time after such amount is deposited to the Plan by the Plan Sponsor in the same proportion that the total of all Deferral Amounts and Catch-Up Contributions contributed on behalf of each eligible Participant under Section 3.1 for the payroll period to which such Matching Contribution relates (not to exceed five percent (5%) of the Participant's Compensation payable during such payroll period) bears to the Deferral Amounts and Catch-Up Contributions contributed for all eligible Participants for the payroll period to which the Matching Contribution relates. 3.3 Profit Sharing Contribution. The Plan Sponsor shall, in its discretion, determine the amount of the Profit Sharing Contribution to be contributed to the Fund for a given Plan Year. Such amount shall be allocated as of the last day of the Plan Year to the Employer Profit Sharing Account of each Participant who: (a) is an Eligible Employee during the Plan Year; (b) is employed by a Plan Sponsor on the last day of the Plan Year; and (c) has completed at least 1,000 Hours of Service with a Plan Sponsor during the Plan Year. The Profit Sharing Contribution for such Plan Year shall be allocated to each eligible Participant's Employer Profit Sharing Account in the same proportion that each eligible Participant's Compensation for the Plan Year bears to the Compensation of all eligible Participants for such Plan Year. 3.4 Rollover Contributions. Any Participant may, with the consent of the Plan Administrator and subject to such rules and conditions as the Plan Administrator may prescribe, transfer a Rollover Amount to the Fund; provided, however, that the Plan Administrator shall not administer this provision in a manner which is discriminatory in favor of Highly Compensated Employees. 3.5 Forfeitures. (a) For Plan Years beginning on or after September 28, 1997 and ending prior to September 26, 1999. Forfeitures of Matching Contributions and Profit Sharing Contributions shall be used first to restore Participant's Accounts in accordance with Section 7.3 hereof. Any remaining forfeitures shall be used to reduce Plan Sponsor contributions made for the Plan Year in which the forfeitures arose or for the following Plan Year and not to increase benefits. 16 (b) For Plan Years beginning on or after September 26, 1999 and ending prior to September 29, 2002. Forfeitures of Matching Contributions and Profit Sharing Contributions shall first be used to restore Participant's Accounts in accordance with Section 7.3 hereof. Any remaining forfeitures of Matching Contributions shall be used to reduce Plan Sponsor contributions made for the Plan Year in which the forfeitures arose or for the following Plan Year and not to increase benefits. Any remaining forfeitures of Profit Sharing Contributions shall be reallocated among the Employer Profit Sharing Accounts of Participants who are eligible to receive an allocation pursuant to Section 3.3. Profit Sharing Contributions to be reallocated under this Section 3.5 shall be allocated to each eligible Participant's Employer Profit Sharing Account in the same proportion that each eligible Participant's Compensation for the Plan Year bears to the Compensation of all eligible Participants for such Plan Year. (c) For Plan Years beginning on or after September 29, 2002. Forfeitures of Matching Contributions and Profit Sharing Contributions shall be used first to restore Participant's Accounts in accordance with Section 7.3 hereof and then, at the discretion of the Plan Administrator, to pay Plan expenses. Any remaining forfeitures will be used to reduce Plan Sponsor contributions made for the Plan year in which the forfeitures arose or for the following Plan Year and not to increase benefits. 3.6 Form of Contributions. Contributions may be made only in cash or other property which is acceptable to the Trustee. 3.7 Military Service. Effective December 12, 1994, notwithstanding any provision of the Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with Section 414(u) of the Code. 3.8 Corrective Actions. Notwithstanding any provision of the Plan to the contrary, the Plan Sponsor may make corrective distributions, contributions, allocations, or other remedial action as required or permitted to comply with any remedial or fiduciary correction program promulgated by the Internal Revenue Service, U.S. Treasury Department, or U.S. Department of Labor. ARTICLE 4 INDIVIDUAL FUNDS AND INVESTMENT OF TRUST ASSETS 4.1 Participant Direction of Investment of Contributions. (a) Until such time as the Plan Administrator may direct otherwise, each Participant and each Beneficiary of a deceased Participant may direct the Plan Administrator to invest contributions to his Account, other than Profit Sharing Account (except as provided in Section 4.2), in one or more Individual Funds and, effective as of April 1, 1999, the Ingles Class A Fund. (b) All investment directions, or changes in investment directions, of contributions shall be made in accordance with the procedures established by the Plan 17 Administrator. New investment directions shall be effective as of the date that such directions are processed by the Plan Administrator in accordance with the procedures established for such purpose. (c) An investment direction, once given, shall be deemed to be a continuing direction until changed as otherwise provided herein. If no direction is effective for the date on which a contribution is to be made, all contributions which are to be made for such date shall be invested in such Individual Funds as the Plan Administrator, the Investment Manager, the Investment Committee, or the Trustee, as applicable, may determine. To the extent permissible by law, no Fiduciary shall be liable for any loss, which results from a Participant's exercise or failure to exercise his investment election with respect to that portion of the Fund which is held in Trust A and Trust C. (d) Notwithstanding the foregoing, the Plan Administrator may limit the availability of investments in Trust C by Participants who are executive officers of the Plan Sponsor. 4.2 Investment of Profit Sharing Contributions. Profit Sharing Contributions made to a Participant's Employer Profit Sharing Account pursuant to Section 3.3 shall be invested solely in the Ingles Class B Fund. Effective until September 25, 1999, a Participant who is an Employee of a Plan Sponsor may elect, according to the procedures established by the Plan Administrator, to transfer up to ten percent (10%) of the balance in his Employer Profit Sharing Account to one or more Individual Funds and, effective as of April 1, 1999, the Ingles Class A Fund. 4.3 Participant Directions to Transfer Among Individual Funds. Subject to the limitations in Section 4.2, a Participant may elect, according to the procedures established by the Plan Administrator, to transfer the investment of his Account among Individual Funds, and, effective April 1, 1999, the Ingles Class A Fund. An election under this Section 4.3 shall be effective as of the date that such election is processed by the Plan Administrator in accordance with the procedures established for such purpose. 4.4 Application of Investment Directions. A Participant who makes an election pursuant to Section 4.1 or 4.3 may apply the new investment direction to his current Account, all future contributions (except as limited under Sections 4.1 and 4.2), or both his current Account and all future contributions. 4.5 Allocation of Net Income and Loss. As of each Valuation Date, the Trustee of the Trust shall allocate the net income or net loss of each Individual Fund or the Company Stock Fund to each Account in the proportion that the value of the Account as of the Valuation Date bears to the value of all Accounts invested in that Individual Fund or the Company Stock Fund as of the Valuation Date. 4.6 Loan Fund. A Loan Fund shall be established by the Trustee on behalf of each Participant for whom a loan is made pursuant to Article 5. The Loan Fund shall be credited with the amount of any loan made by the Plan to the Participant and shall be debited with all principal and interest repayments of any such loans. Under rules established by the Plan Administrator, a 18 Participant's interest in the Individual Funds shall be debited by the amount credited to the Participant's Loan Fund. All principal and interest repayments debited to the Loan Fund shall be invested as contributions to the Participant's Account pursuant to Section 4.1. Each Loan Fund shall be invested in a note or notes made by the Participant evidencing the promised repayment of monies loaned to the Participant from the Fund. 4.7 Employer Securities. The Trustee for Trust B and Trust C may acquire and hold shares of Company Stock that are "qualifying employer securities" (within the meaning of ERISA Section 407(d)(5)). ARTICLE 5 PLAN LOANS 5.1 Eligible Individuals. (a) Subject to the provisions of the Plan and the Trust, each Participant who is an Employee shall have the right, subject to prior approval by the Plan Administrator, to borrow from his Account as provided in this Section. (b) (1) Beginning September 28, 1997 and ending December 31, 1999, a loan shall be withdrawn on a pro rata basis from a borrower's Employee 401(k) Contribution Account. (2) Beginning January 1, 2000 and ending December 31, 2000, a loan shall be withdrawn on a pro rata basis from a borrower's Employee 401(k) Contribution Account, Rollover Account and Employer Match Account. (3) Beginning January 1, 2001 and ending September 28, 2002, a loan shall be withdrawn from the borrower's Account in the following order: (i) Prior Plan Employee Contribution Subaccount, (ii) Prior Rollover Subaccount, (iii) Prior Plan Company Match Subaccount, (iv) Prior Plan Profit Sharing Subaccount, (v) Employee 401(k) Contribution Account, (vi) Rollover Account, and (vii) Employer Match Account. (4) Beginning September 29, 2002, a loan shall be withdrawn on a pro rata basis from each portion of a borrower's Account listed in Subsection (3). 19 5.2 Application. In order to apply for a loan, a borrower must complete and submit to the Plan Administrator documents or information required by the Plan Administrator for this purpose in whatever form or manner the Plan Administrator may prescribe. Furthermore, the borrower must consent to have the loan repaid through payroll deduction, and a borrower's failure or refusal to provide such consent shall constitute grounds for the Plan Administrator's denial of the application for a loan. A borrower must wait at least twelve (12) months between loan applications. 5.3 Equivalent Basis. Loans shall be available to all eligible borrowers on a reasonably equivalent basis which may take into account the borrower's creditworthiness, ability to repay, and ability to provide adequate security. Loans shall not be made available to Highly Compensated Employees, officers or shareholders of a Plan Sponsor in an amount greater than the amount made available to other borrowers. This provision shall be deemed to be satisfied if all borrowers have the right to borrow the same percentage of their interest in the Participant's vested Account, notwithstanding that the dollar amount of such loans may differ as a result of differing values of Participants' vested Accounts. 5.4 Interest Rate. Each loan shall bear a "reasonable rate of interest" and provide that the loan be amortized in substantially level payments, made no less frequently than quarterly, over a specified period of time. A "reasonable rate of interest" shall be that rate that provides the Plan with a return commensurate with the interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances. Notwithstanding the foregoing, to the extent that any loan interest rate is subject to the provisions of the Soldiers and Sailors Relief Act of 1940, it shall not exceed six percent (6%) per annum. 5.5 Security. Each loan shall be adequately secured at the time taken, with the security for the outstanding balance of all loans to the borrower to consist of one-half (1/2) of the borrower's interest in the Participant's vested Account. Furthermore, the total loan taken shall not exceed the value of the Participant's Account exclusive of the Participant's Employer Profit Sharing Account. 5.6 Loan Limit. Subject to Section 5.5 above, each loan, when added to the outstanding balance of all other loans to the borrower from all retirement plans of the Plan Sponsor and its Affiliates which are qualified under Section 401 of the Code, shall not exceed the lesser of: (a) $50,000, reduced by the excess, if any, of (1) the highest outstanding balance of loans made to the borrower from all retirement plans qualified under Code Section 401 of the Plan Sponsor and its Affiliates during the one (1) year period immediately preceding the day prior to the date on which such loan was made, over (2) the outstanding balance of loans made to the borrower from all retirement plans qualified under Code Section 401 of the Plan Sponsor and its Affiliates on the date on which such loan was made, or 20 (b) one-half (1/2) of the value of the borrower's interest in the vested Account attributable to the Participant's Account. For purposes of this Section, the value of the vested Account attributable to a Participant's Account shall be established as of the latest preceding Valuation Date, or any later date on which an available valuation was made, and shall be adjusted for any distributions or contributions made through the date of the origination of the loan. 5.7 Loan Term. Each loan, by its terms, shall be repaid within five (5) years, except that, if allowed pursuant to loan procedures established by the Plan Administrator, any loan which is used to acquire any dwelling unit which within a reasonable time is to be used (determined at the time the loan is made) as the principal residence of the borrower may, by its terms, be repaid within ten (10) years. Notwithstanding the provisions of this Section 5.7, each loan which previously existed under the Distribution Division Plan that was merged into the Plan on September 1, 2000 shall continue to be repaid according to each loan's original repayment schedule, even if the original repayment schedule exceeds ten (10) years. 5.8 Minimum Amount. Except as may otherwise be provided pursuant to loan procedures established by the Plan Administrator, each loan shall be made in an amount of no less than $500. 5.9 Limit on Number of Loans. Except as may otherwise be provided pursuant to loan procedures established by the Plan Administrator, a borrower is permitted to have only two (2) loans existing under the Plan at any one time. 5.10 Repayment by Payroll Deduction. All loans hereunder shall be repaid by the borrower through automatic deduction from the borrower's payroll with the Plan Sponsor. 5.11 Default. (a) A loan shall be in default if: (1) a borrower fails to make any loan payment when due; (2) a Participant ceases to be an Employee and is not otherwise a "party in interest" as defined in ERISA Section 3(14); (3) the vested Account held as security under the Plan for the borrower will, as a result of an impending distribution or withdrawal, be reduced to an amount less than the amount of all unpaid principal and accrued interest then outstanding under the loan; (4) a borrower makes any untrue representations or warranties in connection with the obtaining of the loan; 21 (5) a tax lien is filed against a borrower or an attachment or garnishment should be issued against any of the collateral securing the note evidencing the loan, including, without limitation, the starting of an action or proceeding to seize any of the borrower's interest in the Plan; or (6) if the borrower revokes his or her payroll deduction authorization for repayment of the note evidencing the loan without the consent of the Plan Administrator. (b) If a default occurs, the Plan Administrator may take such steps as it deems necessary to preserve the assets of the Plan, including, but not limited to, directing the Trustee to make any permissible distribution to the borrower of an offset amount (i.e., a deduction of the unpaid principal sum, accrued interest, and any other applicable charge under the note evidencing the loan from the Participant's Account). (c) If a distribution of an offset amount would violate the requirements of Section 401(a) or 401(k) (because for example, the deduction would have to be made from the Participant's Employee 401(k) Contribution Account while the Participant is an Employee), the entire outstanding balance of the loan (including accrued interest) shall be a deemed distribution as provided in Treasury Regulations under Code Section 72(p). Thereafter, a distribution of an offset amount may be made at the earliest date legally permissible or deferred, at the Plan Administrator's discretion applied on a basis not discriminatory in favor of Highly Compensated Employees, until the borrower receives another distribution from the Plan. (d) Notwithstanding the foregoing, a loan may be satisfied upon a Participant's Termination of Employment (including a Termination of Employment arising from the Participant's transfer to another employer (other than a Plan Sponsor or an Affiliate) in connection with a corporate transaction involving a sale of assets, merger, or sale of stock) by distributing the note evidencing the debt as part of an Eligible Rollover Distribution. The distribution of the note is permitted only if the trustee, custodian, or administrator for the Eligible Retirement Plan indicates its willingness to accept such property. Any distribution of such note must be accomplished prior to the end of the maximum permissible grace period under subparagraph (e) below. (e) If an event occurs under subparagraph (a) above that would constitute a default, the Plan Administrator may, in its sole discretion and on a nondiscriminatory basis, provide a grace period for an employee to cure the default. Such grace period may not extend past the date that is the last day of the calendar quarter following the calendar quarter in which the default event occurred. (f) If any part of the indebtedness under the note evidencing the loan is collected by law or through an attorney, the borrower shall be liable for attorneys' fees in an amount equal to ten percent (10%) of the amount then due and all costs of collection. 22 5.12 Certain Leaves of Absence. (a) Except as may otherwise be established pursuant to loan procedures established by the Plan Administrator, if an Employee is on an approved bona fide leave of absence (not longer than one year), either without pay from the Plan Sponsor or an Affiliate or at a rate of pay (after income and employment tax withholding) that is less than the amount of the installment payments required under the terms of the loan, the requirement of loan repayment shall be suspended during the leave of absence. (b) The suspension of the requirement of loan repayment may not extend beyond the later of: (1) the last day of the loan's original term; or (2) the latest day on which the loan would have been required to be repaid under Section 5.7 for the type of loan taken. (c) Upon the return of the Participant to service, the payments under such loan shall resume at the rate necessary to repay the remaining balance of the loan (plus interest accrued during the leave of absence) in equal installments for a period not extending beyond the latest day on which the loan would have been required to be repaid under Section 5.7 for the type of loan taken. Notwithstanding the foregoing, the loan payment shall not be less than the payment at the time the leave began. (d) If a Participant is absent from employment due to his performing service in the uniformed service, the requirement of loan repayment will be suspended for the period of such service in the uniformed services. When the Participant resumes employment, loan payments will resume and must be completed by the end of the period equal to the original term of the loan plus the period of such military service. 5.13 Regulations. Each loan shall be made only in accordance with regulations and rulings of the Internal Revenue Service and the Department of Labor and any supplemental loan procedures established by the Plan Administrator. The Plan Administrator shall be authorized to administer the loan program of this Section and shall act in his sole discretion to ascertain whether the requirements of such regulations and rulings and this Section have been met. 5.14 Spousal Consent. Prior to January 1, 2003, if a Participant's vested Account is payable in the form of an annuity and the Participant wishes to obtain a loan from the Plan in accordance with Article 5, the Participant's spouse must, within the ninety (90) day period preceding the date the loan is made, consent to the loan and the possibility of a reduction in the Participant's vested Account resulting in its non-payment. 23 ARTICLE 6 WITHDRAWALS DURING EMPLOYMENT 6.1 Hardship Withdrawals. (a) The Trustee shall, upon the direction of the Plan Administrator, withdraw all or a portion of a Participant's Employee 401(k) Contribution Account consisting of Deferral Amounts and Catch-Up Contributions (but not earnings thereon) prior to the time such account is otherwise distributable. A hardship withdrawal shall only be made only if the Participant is an Employee and demonstrates that he is suffering from "hardship." For purposes of this Section, a withdrawal will be deemed to be an account of hardship only if the withdrawal is on account of: (1) unreimbursed expenses for medical care described in Code Section 213(d) incurred by the Participant, his spouse, or any dependents of the Participant (as defined in Section 152 of the Code) or necessary for these persons to obtain medical care described in Code Section 213(d); (2) purchase (excluding mortgage payments) of a principal residence for the Participant; (3) payment of tuition and related educational fees for the next twelve (12) months of post-secondary education for the Participant, his spouse, children, or dependents; (4) the need to prevent the eviction of the Participant from his principal residence or foreclosure on the mortgage of the Participant's principal residence; or (5) any other contingency determined by the Internal Revenue Service to constitute an "immediate and heavy financial need" within the meaning of Treasury Regulations Section 1.401(k)-l(d). (b) Additional Hardship Withdrawal Requirements. In addition to the requirements set forth in Section 6.1, any withdrawal pursuant to Section 6.1 shall not be in excess of the amount necessary to satisfy the need determined under Section 6.1 and shall also be subject to the following requirements: (1) The Participant shall first obtain all withdrawals, other than hardship withdrawals, and all nontaxable loans currently available under all plans maintained by the Plan Sponsor; (2) the Plan Sponsor shall not permit Elective Deferrals or Catch-Up Contributions to be made to the Plan or any other plan maintained by the Plan Sponsor, for a period of twelve (12) months (effective September 29, 2002, six (6) months) after the Participant receives the withdrawal pursuant to this Section. (3) Effective until September 29, 2002, the Plan Sponsor shall not permit Elective Deferrals to be made to the Plan or any other plan maintained by the Plan 24 Sponsor for the Participant's taxable year immediately following the taxable year of the hardship withdrawal in excess of the limit under Section 3.1(b) for the taxable year, less the amount of the Elective Deferrals made to the Plan or any other plan maintained by the Plan Sponsor for the taxable year in which the withdrawal under this Section occurs. (c) Hardship withdrawals shall be made only in accordance with such other rules, policies, procedures, restrictions, and conditions as the Plan Administrator may from time to time adopt. Any determination of the existence of hardship and the amount to be withdrawn on account thereof shall be made by the Plan Administrator (or such other person as may be required to make such decisions) in accordance with the foregoing rules as applied in a uniform and nondiscriminatory manner. (d) Unless the Participant requests otherwise, a hardship withdrawal shall include the amount necessary to pay any federal, state and local income taxes and penalties reasonably anticipated to result from the withdrawal. (e) A hardship withdrawal shall be made in a lump sum to the Participant. 6.2 Age 59 1/2 Withdrawals. A Participant who has attained at least age 59 1/2 may elect to receive a distribution of all or a portion of his vested Employee 401(k) Contribution Account, Employer Match Account, Rollover Account, QMAC/QNEC Account and Prior Plan Account. 6.3 Age 70 1/2 Withdrawals. A Participant who has attained at least age 70 1/2 may elect to receive a distribution of all or a portion of his Account. ARTICLE 7 PAYMENT OF BENEFITS ON TERMINATION OF EMPLOYMENT 7.1 Eligibility for Payment. A Participant who has a Termination of Employment shall be eligible to receive payment of his vested Account as outlined in Article 10. 7.2 Vesting. That portion of a Participant's Account in which he is vested at any given time shall be: (a) his Employee 401(k) Contribution Account, Rollover Account, and QMAC/QNEC Account, all of which shall be fully vested and nonforfeitable at all times; and (b) effective for Plan Years beginning on or after September 29, 2002, for all Participants who complete an Hour of Service after such date, his Employer Match Account, Employer Profit Sharing Account, and Prior Plan Account computed according to the following vesting schedule: 25
Full Years of Percentage Vesting Service Vested ----------------- -------- Less than 2 0% 2 20% 3 40% 4 60% 5 80% 6 or more 100%
(c) for Participants who do not complete at least one Hour of Service after September 28, 2002 and became a Participant in the Plan prior to October 1, 1989, his Employer Match Account, Employer Profit Sharing Account, and Prior Plan Account computed according to the following vesting schedule:
Full Years of Percentage Vesting Service Vested ----------------- -------- Less than 1 0% 1 10% 2 20% 3 30% 4 40% 5 60% 6 80% 7 or more 100%
(d) for Participants who do not complete at least one Hour of Service after September 28, 2002 and become a Participant in the Plan on or after October 1, 1989, his Employer Match Account, Employer Profit Sharing Account, and Prior Plan Account computed according to the following vesting schedule:
Full Years of Percentage Vesting Service Vested ----------------- -------- Less than 3 0% 3 20% 4 40% 5 60% 6 80% 7 or more 100%
(e) If a Participant receives a distribution from these accounts at any time when the Participant is less than one hundred percent (100%) vested, then until the earlier of the date the Participant forfeits his nonvested Account or the Participant's Termination Completion Date, the vested portion of these accounts of the Participant at any time shall be equal to "X" computed according to the formula X=P(AB+D)-D. For purposes of the formula, "P" is the vested percentage at the relevant time, "AB" is the Account balance at the relevant time, and D is the amount of the distribution(s). 26 7.3 Forfeiture Timing and Cash-out/Buyback. (a) The nonvested portion of the Account of a Participant who has had a Termination of Employment shall be forfeited as of the earlier of the date the Participant receives a distribution of the vested portion of his Account or the first day of the Plan Year following the Participant's Termination Completion Date. For such purposes, a Participant who has had a Termination of Employment and who is not vested in any portion of his Account, the Participant shall be deemed to have received a distribution of his Account as of the date of such Termination of Employment. (b) (1) If a Participant who has received a distribution of the vested portion of his Account is reemployed by a Plan Sponsor or an Affiliate prior to his Termination Completion Date, any portion of his Account that was forfeited shall be restored if the Participant repays to the Fund all of that portion of his vested Account which was paid to him no later than the fifth anniversary of the Participant's reemployment by the Plan Sponsor or an Affiliate. (2) If a Participant who was not vested in any portion of his Account had a Termination of Employment and is reemployed by a Plan Sponsor or an Affiliate prior to his Termination Completion Date, any portion of his Account which was forfeited shall be restored. (3) Any restoration made pursuant to Subsection (b)(1) or (2) above shall be effective on the Valuation Date coinciding with or next following the repayment or the Participant's reemployment, as applicable. (4) The restoration on any Valuation Date of the forfeited portion of the Account of a Participant pursuant to this Subsection (b) shall be made first from forfeitures available for allocation on that Valuation Date, to the extent available, and secondly from contributions by the Plan Sponsor. Only after restorations have been made shall the remaining forfeitures be available under Section 3.5. 7.4 Changes to Vesting Schedule. If a Plan amendment directly or indirectly changes the vesting schedule, the vesting percentage for each Participant in his Account accumulated to the date when the amendment is adopted shall not be reduced as a result of the amendment. In addition, any Participant with at least three (3) years of Vesting Service may irrevocably elect to remain under the pre-amendment vesting schedule with respect to all of his benefits accrued both before and after the amendment. If the pre-amendment vesting schedule provides a Participant with a vested percentage, at each time prior to the Participant becoming one hundred percent (100%) vested, that is more favorable to a Participant than the amended vesting schedule, all affected Participants with at least three (3) years of Vesting Service shall be deemed to have elected to remain under the preamendment vesting schedule. 7.5 Suspension for Rehires. If a Participant has a Termination of Employment and is subsequently reemployed by a Plan Sponsor or an Affiliate prior to receiving a distribution of his 27 Account under the Plan, such Participant shall not be entitled to a distribution under this Article 7 while he is an Employee. 7.6 Suspension for Nondistributable Events. If a Participant has a Termination of Employment which is not a distributable event as provided under Code Section 401(k)(10), the Plan Sponsor is not required to distribute such Participant's Account to the Participant prior to the time for distribution as otherwise provided under the Plan. ARTICLE 8 PAYMENT OF BENEFITS ON RETIREMENT OR DISABILITY 8.1 Eligibility for Payment. A Participant who has reached a Retirement Date or incurs a Disability while an Employee shall be eligible to receive payment of his Account as outlined in Article 10. 8.2 Vesting. The Account of a Participant who has reached a Retirement Date, has attained Normal Retirement Age while employed, or has incurred a Disability while an Employee shall be fully vested and nonforfeitable. ARTICLE 9 DEATH BENEFITS 9.1 Eligibility for Payment. If a Participant dies before receiving a full distribution of his vested Account, his Beneficiary shall be eligible to receive payment of the Participant's vested Account as outlined in Article 10 below. If a Participant dies after beginning to receive a distribution of his vested Account that is payable in a form other than a lump sum (for Plan years during which such alternate form is available), his Beneficiary shall continue to receive the undistributed portion of his vested Account in the form selected by the Participant before his death. 9.2 Vesting. Accounts of deceased Participants shall be vested to the extent provided pursuant to Article 7 or 8, as applicable. In addition, the Account of a Participant who dies while an Employee shall be fully vested and nonforfeitable. ARTICLE 10 GENERAL RULES ON DISTRIBUTIONS 10.1 Form and Timing of Distributions On or After January 1, 2003 (a) If the vested Account balance of a Participant or a Beneficiary of a deceased Participant (not including any balance in the Participant's Rollover Account) is $5,000 or less, it shall be distributed in one lump sum not earlier than the Plan Quarter following the Plan Quarter in which the Participant or Beneficiary becomes eligible for a distribution pursuant to Article 7, 8 or 9, as applicable. 28 (b) If the vested Account balance of a Participant or a Beneficiary of a deceased Participant (not including any balance in the Participant's Rollover Account) exceeds $5,000 and the Participant or Beneficiary is eligible for a distribution pursuant to Article 7, 8 or 9, as applicable, the Participant or Beneficiary will receive payment of his Account in the form of one lump sum payment during the Plan Quarter following the Plan Quarter in which the Participant or Beneficiary is eligible for a distribution or, if later, the date on which the Participant or Beneficiary consents to receive such distribution. (c) Notwithstanding the foregoing, a Participant or a Beneficiary of a deceased Participant may elect to receive a distribution of the Prior Plan Account in one lump sum as soon as administratively feasible following eligibility to receive a distribution pursuant to Article 7, 8, or 9, as applicable. (d) In lieu of distributions under Paragraphs (a), (b), and (c), a Participant (or a Beneficiary that is the spouse of the Participant) may elect to have the vested Account balance paid in the form of a Direct Rollover pursuant to Section 10.5 below. 10.2 Form and Timing of Distributions Prior to January 1, 2003 (a) If the vested Account balance of a Participant or a Beneficiary of a deceased Participant (in the case of a deceased Participant who did not begin to receive payment of his vested Account balance before his death) is $3,500 ($5,000, effective September 27, 1998) or less, it shall be distributed in one lump sum not earlier than the Plan Quarter following the date on which the Participant or Beneficiary becomes eligible for a distribution pursuant to Article 7, 8 or 9, as applicable. Effective for Plan Years beginning on or after September 29, 2002, the determination of whether the Participant's Account exceeds $5,000 shall be made without taking into account any balance in the Participant's Rollover Account. (b) If the vested Account balance of a Participant or a Beneficiary of a deceased Participant (in the case of a deceased Participant who did not begin to receive payment of his vested Account balance before his death) exceeds $3,500 ($5,000, effective September 27, 1998) and the Participant or Beneficiary is eligible for a distribution pursuant to Article 7, 8 or 9, as applicable, the Participant or Beneficiary will receive payment of his Account as follows: (1) A married Participant will receive payment of his Account in the form of a Qualified Joint and Survivor Annuity, unless the Participant elects during the Applicable Election Period (as hereinafter defined) not to receive payments in this form and any required spousal consent is obtained. An unmarried Participant will receive payment of his Account in the form of a life annuity, unless the Participant elects during the Applicable Election Period not to receive payments in this form. 29 (2) A Participant who makes a valid election not to receive payment in the form described in Subparagraph (1) above may elect to receive payment of his Account in one of the forms listed below: (A) a lump-sum payment in cash; (B) payment in annual installments over a period to be determined by the Participant or his Beneficiary but not to exceed the life expectancy of the Participant or the joint lives of the Participant and his Beneficiary; (C) a single life annuity; or (D) a joint and survivor annuity with or without a term certain; provided, however, that a joint and survivor annuity optional form of benefit shall not be available as a method of distribution with respect to the Alternate Payee and his or her subsequent spouse or to a Beneficiary and his or her spouse. (3) For Plan Years beginning on or after September 29, 2002, the determination of whether the Participant's Account exceeds $5,000 shall be made without taking into account any balance in the Participant's Rollover Account. (c) If the Participant's Account is payable in the form of a life annuity, and the Participant dies before he begins to receive payments from the Fund, the Participant's spouse shall receive a "Qualified Preretirement Survivor Annuity." Notwithstanding the foregoing, the surviving spouse of a Participant who is entitled to receive a Qualified Preretirement Survivor Annuity may elect a lump sum payment prior to the date the annuity is purchased or distributions begin, unless the Participant makes an election during the Applicable Election Period not to receive the applicable annuity and his spouse consents to such election. (d) If an annuity is to be paid from the Plan, such annuity may be purchased with the Participant's Account from an insurance company designated by the Committee or its designee in writing to the insurance company and may be distributed to the Participant or his Beneficiary in full satisfaction of the benefits to which the Participant or his Beneficiary is entitled under the Plan. The amount of the annuity shall be the actuarial equivalent of the Participant's Account (reduced by any commissions or other costs charged by the insurance company) based on factors used by the insurance company from which the annuity is purchased. (e) Annuity Rules. The provisions of this Section shall apply only in the event the Participant receives payment of his Account in the form of an annuity described in Section 10.2(b). (1) The Plan Administrator shall furnish to the Participant a written explanation of: 30 (A) the terms and conditions of the Qualified Joint and Survivor Annuity and the Qualified Preretirement Survivor Annuity; (B) the Participant's right to make, and the effect of, an election not to receive the Qualified Joint and Survivor Annuity or the Qualified Preretirement Survivor Annuity; (C) the rights of the Participant's spouse as described below; and (D) the right to make and the effect of an election pursuant to this paragraph. (2) In the case of a Qualified Joint and Survivor Annuity, the written explanation shall be provided to the Participant no less than thirty (30) days and no more than ninety (90) days prior to the first date on which he is entitled to commencement of payments from the Fund. Notwithstanding the foregoing, a Participant may elect to waive the requirement that the written explanation be provided at least thirty (30) days prior to commencement of payments, provided that the first payment from the Fund occurs more than seven (7) days from the date the explanation is received by the Participant. In the case of the Qualified Preretirement Survivor Annuity, the written explanation shall be provided to the Participant in whichever of the following periods ends last: (A) the period beginning with the first day of the Plan Year in which the Participant attains age 32 and ending with the close of the Plan Year preceding the Plan Year in which the Participant attains age 35; (B) the period beginning one year before and ending one year after the Employee first becomes a Participant; (C) the period beginning one year before and ending one year after the provisions of this Subsection apply to the Participant; or (D) a reasonable period of time after separation from service in the case of a Participant who separates from service before attaining age 35. (3) The Participant may elect during the Applicable Election Period not to receive the Qualified Joint and Survivor Annuity or Qualified Preretirement Survivor Annuity by execution and delivery to the Plan Administrator of a form provided for that purpose by the Plan Administrator. "Applicable Election Period" means, with respect to a Qualified Joint and Survivor Annuity, the 90-day period ending on the first date on which the Participant is entitled to commencement of payment from the Fund. In the event the Participant waives the minimum 30-day requirement for the written explanation, the Applicable Election Period shall not end before the period ending thirty (30) days after the Participant receives the written explanation. Notwithstanding the foregoing, if the Participant receives the written 31 explanation of the Qualified Joint and Survivor Annuity and affirmatively elects a form of distribution, the payments from the Fund may commence less than thirty (30) days after the Participant receives the written explanation provided that the Participant may revoke the affirmative distribution election until the later of the time payments from the Fund are to begin or the expiration of the 7-day period which begins on the day after the Participant receives the written explanation. With respect to a Qualified Preretirement Survivor Annuity, the Applicable Election Period means the period which begins on the first day of the Plan Year in which the Participant attains age 35 and ends on the date of the Participant's death. (4) In the case of a married Participant, no election shall be effective unless: (A) the spouse of the Participant consents in writing to the election and the consent acknowledges the effect of the election (including, if applicable, the identity of any Beneficiary other than the Participant's spouse and the alternate form of payment) and is witnessed by a notary public, or (B) it is established to the satisfaction of the Plan Administrator that the consent required pursuant to Subsection (A) of this Section (4) may not be obtained because there is no spouse, the spouse cannot be located, the Participant has a court order indicating that he is legally separated or has been abandoned (within the meaning of local law) unless a qualified domestic relations order provides otherwise, or of any other circumstances as permitted by regulations promulgated by the Department of the Treasury. If the spouse is legally incompetent to give consent, consent by the spouse's legal guardian shall be deemed to be consent by the spouse. (5) Any consent by a spouse (or establishment that the consent of a spouse may not be obtained) shall be effective only with respect to that spouse. If an election is made, the Participant's vested Account shall be paid in the alternate form of payment set forth in Section 10.2(b) chosen by the Participant by written instrument delivered to the Plan Administrator. Any waiver of a Qualified Preretirement Survivor Annuity made prior to the first day of the Plan Year in which the Participant attains age 35 shall become invalid as of the first day of the Plan Year in which the member attains age 35 and a Qualified Preretirement Annuity shall be provided, unless a new waiver is obtained. The Participant may revoke any election not to receive payment in the form of a Qualified Joint and Survivor Annuity at any time prior to commencement of payments from the Fund, and may make a new election at any time prior to the commencement of payments from the Fund. 32 10.3 Additional Distribution Rules (a) Except as specified in Subsections 10.1(a) and 10.2(a) above, no distribution of the vested Account balance of a Participant will be made without his consent (and, where required, the consent of his spouse) before he reaches Normal Retirement Age. (b) Payment of a Participant's vested Account to the Participant will commence not later than sixty (60) days after the last day of the Plan Year in which falls the later of (1) the Participant reaching Normal Retirement Age, or (2) the Participant reaching a Retirement Date or becoming subject to a Disability while an Employee. However, a Participant may elect to delay his distribution to a later date (subject to Section 10.6). If the amount of the payment required to commence on the date determined under this Subsection cannot be ascertained by such date, or if it is not possible to make such payment on such date because the Plan Administrator has been unable to locate the Participant after making reasonable efforts to do so, a payment retroactive to such date may be made no later than sixty (60) days after the earliest date in which the amount of such payment can be ascertained for the date on which the Participant is located. (c) Payment of a Participant's Account will be made in cash. However, if the value of a Participant's Account exceeds the fair market value of one hundred (100) shares of class A common stock of the Primary Sponsor as of the date on which the distribution is made, a Participant or his designated Beneficiary may elect to receive payment of his Account in the form of such class A shares. (d) Payment of any portion of a Participant's Account (other than amounts attributable to the Participant's Employer Profit Sharing Account) to an Alternate Payee under Section 13.1 after the Alternative Payee is entitled to a distribution under Section 13.1 will be paid in the form of one lump sum payment during the Plan Quarter following the Plan Quarter in which the Alternate Payee becomes entitled to a distribution under Section 13.1 or, if later, the date on which the Alternate Payee consents to receive such distribution 10.4 Adjustments for Income. Except for installment distributions, Accounts shall not be adjusted for earnings or losses incurred after the Valuation Date with respect to which the Account is valued for imminent payout purposes coinciding with or preceding the date of distribution of the Account. Except for those situations in which a Participant has elected, pursuant to Section 5.9(d), to effect a transfer or Direct Rollover of a loan to another plan, prior to distribution of an Account, the Account shall be reduced by the amount necessary to satisfy the unpaid principal, accrued interest, and penalties on any loan made to the Participant. 10.5 Direct Rollovers. Notwithstanding any provisions of the Plan to the contrary that would otherwise limit a Distributee's election under this Article 10, a Distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of a distribution pursuant to this Section which is an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan specified by the Distributee in a Direct Rollover so long as all Eligible 33 Rollover Distributions to a Distributee for a calendar year total or are expected to total at least $200 and, in the case of a Distributee who elects to directly receive a portion of an Eligible Rollover Distribution and directly roll the balance over to an Eligible Retirement Plan, the portion that is to be directly rolled over totals at least $500. If the Eligible Rollover Distribution is one to which Code Sections 401(a)(11) and 417 do not apply, such Eligible Rollover Distribution may commence less than thirty (30) days after the notice required under Treasury Regulations Section 1.411(a)-11(c) is given, provided that: (a) the Plan Administrator clearly informs the Distributee that the Distributee has a right to a period of at least thirty (30) days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (b) the Distributee, after receiving the notice, affirmatively elects a distribution. 10.6 Required Minimum Distributions. Subject to Subsection (d) below, and notwithstanding any other provisions of the Plan, (a) Prior to the death of a Participant, all retirement payments hereunder shall: (1) be distributed to the Participant not later than the Required Beginning Date (as defined below), or (2) be distributed, commencing not later than the Required Beginning Date - (A) in accordance with regulations prescribed by the Secretary of the Treasury, over the life of the Participant or over the lives of the Participant and his designated individual Beneficiary, if any, or (B) in accordance with regulations prescribed by the Secretary of the Treasury, over a period not extending beyond the life expectancy of the Participant or the joint life and last survivor expectancy of the Participant and his designated individual Beneficiary, if any. (b) Death distributions. (1) If the distribution of a Participant's retirement payments have begun in accordance with Subsection (a)(2) of this Section, and the Participant dies before his entire vested Account has been distributed to him, then the remaining portion of his vested Account shall be distributed in a lump sum at least as rapidly as under the method of distribution being used under Subsection (a)(2) of this Section as of the date of his death. 34 (2) If a Participant dies before the commencement of retirement payments hereunder, the entire interest of the Participant shall be distributed in a lump sum within five (5) years after his death. (3) If any portion of a Participant's vested Account is payable to or for the benefit of the Participant's designated individual Beneficiary and if such designated individual Beneficiary is the Participant's surviving spouse, then - (A) the date on which the lump sum distribution is required to made shall not be earlier than the date on which the Participant would have attained age 70 1/2, and (B) if the surviving spouse dies before the distribution to such spouse is made, this Subsection (3) shall be applied as if the surviving spouse were the Participant. (c) For purposes of this Section, the term Required Beginning Date means April 1 of the calendar year following the calendar year in which the Participant attains age 70 1/2. (d) With respect to determining the amount of the minimum required distributions under the Plan made in the 2002 calendar year, the Plan will apply the minimum distribution requirements of Code Section 401(a)(9) in accordance with the regulations under Code Section 401(a)(9) that were proposed in January 2001, notwithstanding any provision of the Plan to the contrary. With respect to distributions under the Plan made in calendar years beginning on or after January 1, 2003, the Plan will apply the minimum distribution requirements of Code Section 401(a)(9) in accordance with the final and proposed regulations under Code Section 401(a)(9) that were issued in April, 2002 ("2002 Regulations"), notwithstanding anything in the Plan to the contrary. The use of the proposed portion of the 2002 Regulations shall continue in effect until the end of the last calendar year beginning before the effective date of final regulations under Code Section 401(a)(9) that supersede such proposed regulations or such other date as may be specified in guidance published by the Internal Revenue Service. ARTICLE 11 ADMINISTRATION OF THE PLAN 11.1 Trust Agreement. The Primary Sponsor shall enter into one or more Trust Agreements to establish one or more Trusts with the Trustee designated by the Board of Directors for the management of the Fund, which Trust Agreement(s) shall form a part of the Plan and is incorporated herein by reference. 11.2 Operation of the Plan Administrator. The Primary Sponsor shall appoint a Plan Administrator. If an organization is appointed to serve as the Plan Administrator, then the Plan Administrator may designate in writing one or more persons who may act on behalf of the Plan 35 Administrator. If more than one person is so designated with respect to the same administrative function, a majority of such persons shall constitute a quorum for the transaction of business and shall have the full power to act on behalf of the Plan Administrator. The Primary Sponsor shall have the right to remove the Plan Administrator at any time by notice in writing. The Plan Administrator may resign at any time by written notice of resignation to the Trustee and the Primary Sponsor. Upon removal or resignation of the Plan Administrator, or in the event of the dissolution of the Plan Administrator, the Primary Sponsor shall appoint a successor. 11.3 Fiduciary Responsibility. (a) The Plan Administrator, as a Named Fiduciary, may allocate its fiduciary responsibilities among Fiduciaries other than the Trustee, designated in writing by the Plan Administrator and may designate in writing persons other than the Trustee to carry out its fiduciary responsibilities under the Plan. The Plan Administrator may remove any person designated to carry out its fiduciary responsibilities under the Plan by notice in writing to such person. (b) The Plan Administrator and each other Fiduciary may employ persons to perform services and to render advice with regard to any of the Fiduciary's responsibilities under the Plan. Charges for all such services performed and advice rendered may be paid from the Fund to the extent permitted by ERISA. (c) Each Plan Sponsor shall indemnify and hold harmless each person constituting the Plan Administrator or the Investment Committee, except those individuals who are not a Plan Sponsor or an employee of a Plan Sponsor, if any, from and against any and all claims, losses, costs, expenses (including, without limitation, attorney's fees and court costs), damages, actions or causes of action arising from, on account of or in connection with the performance by such person of his duties in such capacity, other than such of the foregoing arising from, on account of or in connection with the willful neglect or willful misconduct of such person. 11.4 Duties of the Plan Administrator. (a) The Plan Administrator shall advise the Trustee with respect to all payments under the terms of the Plan and shall direct the Trustee in writing to make such payments from the Fund; provided, however, in no event shall the Trustee make such payments if the Trustee has actual knowledge that such payments are contrary to the terms of the Plan and the Trust. (b) The Plan Administrator shall from time to time establish rules, not contrary to the provisions of the Plan and the Trust, for the administration of the Plan and the transaction of its business. All elections and designations under the Plan by a Participant or Beneficiary shall be made on forms prescribed by the Plan Administrator. The Plan Administrator shall have discretionary authority to construe the terms of the Plan and shall determine all questions arising in the administration, interpretation and application of the Plan, including, but not limited to, those concerning eligibility for benefits and it shall not act so as to discriminate in favor of any person. All 36 determinations of the Plan Administrator shall be conclusive and binding on all Employees, Participants, Beneficiaries and Fiduciaries, subject to the provisions of the Plan and the Trust and subject to applicable law. (c) The Plan Administrator shall furnish Participants and Beneficiaries with all disclosures now or hereafter required by ERISA or the Code. The Plan Administrator shall file, as required, the various reports and disclosures concerning the Plan and its operations as required by ERISA and by the Code, and shall be solely responsible for establishing and maintaining all records of the Plan and the Trust. (d) The statement of specific duties for a Plan Administrator in this Section is not in derogation of any other duties which a Plan Administrator has under the provisions of the Plan or the Trust or under applicable law. 11.5 Investment Manager. The Primary Sponsor may, by action in writing provided to the Trustee, appoint an Investment Manager. Any Investment Manager may be removed in the same manner in which appointed, and in the event of any removal, the Investment Manager shall, as soon as possible, but in no event more than thirty (30) days after notice of removal, turn over all assets managed by it to the Trustee or to any successor Investment Manager appointed, and shall make a full accounting to the Primary Sponsor with respect to all assets managed by it since its appointment as an Investment Manager. 11.6 Investment Committee. The Primary Sponsor may, by action in writing certified by notice to the Trustee, appoint an Investment Committee. The Primary Sponsor shall have the right to remove any person on the Investment Committee at any time by notice in writing to such person. A person on the Investment Committee may resign at any time by written notice of resignation to the Primary Sponsor. Upon such removal or resignation, or in the event of the death of a person on the Investment Committee, the Primary Sponsor may appoint a successor. Until a successor has been appointed, the remaining persons on the Investment Committee may continue to act as the Investment Committee. 11.7 Action by a Plan Sponsor. Any action to be taken by a Plan Sponsor shall be taken by persons duly authorized by the Plan Sponsor, except, subject to Section 16.1, amendments to, termination of, or termination of a Plan Sponsor participation in, the Plan or the Trust, or the determination of the basis of any Plan Sponsor contributions, may be made only to the extent authorized by written resolution or written direction of the board of directors or appropriate governing body. Nothing herein shall be construed to prohibit the board of directors or appropriate governing body from delegating to any officer or other appropriate person of a Plan Sponsor the authority to take any such actions as may be specified in such resolution or written direction. ARTICLE 12 CLAIM REVIEW PROCEDURE 12.1 Notice of Denial. If a Participant or Beneficiary is denied a claim for benefits under a Plan, the Plan Administrator shall provide to the claimant written notice of the denial 37 within ninety (90) days after the Plan Administrator receives the claim, unless special circumstances require an extension of time for processing the claim. If such an extension of time for processing is required, written notice of the extension shall be furnished to the claimant prior to the termination of the initial 90-day period. In no event shall the extension exceed a period of ninety (90) days from the end of such initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan Administrator expects to render the final decision. 12.2 Contents of Notice of Denial. If a Participant or Beneficiary is denied a claim for benefits under a Plan, the Plan Administrator shall provide to such claimant written notice of the denial which shall set forth: (a) the specific reasons for the denial; (b) specific references to the pertinent provisions of the Plan on which the denial is based; (c) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (d) an explanation of the Plan's claim review procedures, and the time limits applicable to such procedures, including a statement of the claimant's right to bring a civil action under Sections 502(a) of ERISA following an adverse benefit determination on review. 12.3 Right to Review. After receiving written notice of the denial of a claim or that a domestic relations order is a qualified domestic relations order, a claimant or his representative shall be entitled to: (a) request a full and fair review of the denial of the claim or determination that a domestic relations order is a qualified domestic relations order by written application to the Plan Administrator; (b) request, free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claim; (c) submit written comments, documents, records, and other information relating to the denied claim to the Plan Administrator; and (d) a review that takes into account all comments, documents, records, and other information submitted by the claimant relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination. 12.4 Application for Review. If the claimant wishes such a review of the decision denying his claim to benefits under the Plan or if a claimant wishes to appeal a decision that a 38 domestic relations order is a qualified domestic relations order, the claimant must deliver such written application to the Plan Administrator within sixty (60) days after receiving written notice of the denial or notice that the domestic relations order is a qualified domestic relations order. Delivery shall be considered effective only upon actual receipt by the Plan Administrator. 12.5 Hearing. Upon receiving such written application for review, the Plan Administrator may schedule a hearing for purposes of reviewing the claimant's claim, which hearing shall take place not more than thirty (30) days from the date on which the Plan Administrator received such written application for review. 12.6 Notice of Hearing. At least ten (10) days prior to the scheduled hearing, the claimant and his representative designated in writing by him, if any, shall receive written notice of the date, time, and place of such scheduled hearing. The claimant or his representative, if any, may request that the hearing be rescheduled, for his convenience, on another reasonable date or at another reasonable time or place. 12.7 Counsel. All claimants requesting a review of the decision denying their claim for benefits may employ counsel for purposes of the hearing. 12.8 Decision on Review. No later than sixty (60) days following the receipt of the written application for review, the Plan Administrator shall submit its decision on the review in writing to the claimant and to his representative, if any, unless the Plan Administrator determines that special circumstances (such as the need to hold a hearing) require an extension of time, to a day no later than one-hundred twenty (120) days after the date of receipt of the written application for review. If the Plan Administrator determines that the extension of time is required, the Plan Administrator shall furnish to the claimant written notice of the extension before the expiration of the initial sixty (60) day period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan Administrator expects to render its decision on the review. In the case of a decision adverse to the claimant, the decision shall include: (a) specific reasons for the decision; (b) specific references to the pertinent provisions of the Plan on which the decision is based; (c) a statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claimant's claim for benefits; and (d) a statement of the claimant's right to bring an action under Section 502(a) of ERISA. 39 ARTICLE 13 ANTI-ALIENATION, INCOMPETENT DISTRIBUTEE & UNCLAIMED PAYMENTS 13.1 Anti-Alienation. No benefit which shall be payable under the Plan to any person shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge the same shall be void; and no such benefit shall in any manner be liable for, or subject to, the debts, contracts, liabilities, engagements or torts of any person, nor shall it be subject to attachment or legal process for, or against, such person, and the same shall not be recognized under the Plan, except to such extent as may be required by law. Notwithstanding the above, this Section shall not apply to a "qualified domestic relations order" (as defined in Code Section 414(p)), and benefits may be paid pursuant to the provisions of such an order. The Plan Administrator shall develop procedures (in accordance with applicable federal regulations) to determine whether a domestic relations order is qualified, and, if so, the method and the procedures for complying therewith. In addition, a distribution to an Alternate Payee shall be permitted if such distribution is authorized by a qualified domestic relations order, but no earlier than the date the affected Participant separates from service or reaches the "earliest retirement age" (as defined in Code Section 414(p)), or upon the death or Disability of the Alternate Payee. Any distribution made to an Alternate Payee shall be made in accordance with the provisions of Article 10. 13.2 Exception to Anti-Alienation. Notwithstanding any other provision of the Plan, effective August 5, 1997, the benefit of a Participant shall be subject to legal process and may be assigned, alienated or attached pursuant to a court judgment or settlement provided: (a) such Participant is ordered or required to pay the Plan in accordance with the following: (1) a judgment or conviction for a crime involving the Plan; (2) a civil judgment entered by a court in an action brought in connection with a violation of part 4 of subtitle B of Title I of ERISA; or (3) a settlement agreement between such Participant and the Secretary of Labor, in connection with a violation (or alleged violation) of part 4 of subtitle B of Title I of ERISA by a fiduciary or any other person; and (b) the judgment, order, decree, or settlement agreement shall expressly provide for the offset of all or part of the amount ordered or required to be paid to the Plan against such Participant's benefits under the Plan. 13.3 Minors and Incompetents. Whenever any benefit which shall be payable under the Plan is to be paid to or for the benefit of any person who is then a minor or determined to be incompetent by qualified medical advice, the Plan Administrator need not require the appointment of a guardian or custodian, but shall be authorized to cause the same to be paid over to the person having custody of such minor or incompetent, or to cause the same to be paid to such minor or incompetent without the intervention of a guardian or custodian, or to cause the 40 same to be paid to a legal guardian or custodian of such minor or incompetent if one has been appointed or to cause the same to be used for the benefit of such minor or incompetent. 13.4 Missing Participants. If the Plan Administrator cannot ascertain the whereabouts of any Participant to whom a payment is due under the Plan, the Plan Administrator may direct that the payment and all remaining payments otherwise due to the Participant be cancelled on the records of the Plan and the amount thereof applied as a forfeiture in accordance with Plan provisions except that, in the event the Participant later notifies the Plan Administrator of his whereabouts and requests the payments due to him under the Plan, the forfeited amount shall be restored either from Trust income or by a special contribution by the Plan Sponsor to the Plan, as determined by the Plan Administrator, in an amount equal to the payment to be paid to the Participants. ARTICLE 14 PROHIBITION AGAINST DIVERSION At no time shall any part of the Fund be used for or diverted to purposes other than the exclusive benefit of the Participants or their Beneficiaries, subject, however, to the payment of all taxes and administrative expenses and subject to the provisions of the Plan with respect to returns of contributions. Expenses incurred in the administration of the Plan shall be paid from the Trust, to the extent permitted by ERISA, unless such expenses are paid by the Plan Sponsor; provided, further, that the Plan Sponsor may be reimbursed by the Fund, to the extent permitted by ERISA, for Plan expenses originally paid by the Plan Sponsor. ARTICLE 15 LIMITATION OF RIGHTS Participation in the Plan shall not give any Employee any right or claim except to the extent that such right is specifically fixed under the terms of the Plan. The adoption of the Plan and the Trust by any Plan Sponsor shall not be construed to give any Employee a right to be continued in the employ of a Plan Sponsor or as interfering with the right of a Plan Sponsor to terminate the employment of any Employee at any time. ARTICLE 16 AMENDMENT TO OR TERMINATION OF THE PLAN AND THE TRUST 16.1 Right of Primary Sponsor to Amend or Terminate. The Primary Sponsor reserves the right at any time to modify or amend or terminate the Plan or the Trust in whole or in part; provided, however, that the Primary Sponsor shall have no power to modify or amend the Plan in such manner as would cause or permit any portion of the funds held under a Plan to be used for, or diverted to, purposes other than for the exclusive benefit of Participants or their Beneficiaries, or as would cause or permit any portion of a fund held under the Plan to become the property of a Plan Sponsor; and provided further, that the duties or liabilities of the Trustee shall not be 41 increased without its written consent. No such modifications or amendments shall have the effect of retroactively changing or depriving Participants or Beneficiaries of rights already accrued under the Plan. No Plan Sponsor other than the Primary Sponsor shall have the right to so modify, amend or terminate the Plan or the Trust. Notwithstanding the foregoing, each Plan Sponsor may terminate its own participation in the Plan and Trust pursuant to the Plan. 16.2 Right of Plan Sponsor to Terminate Participation. Each Plan Sponsor other than the Primary Sponsor shall have the right to terminate its participation in the Plan and Trust by resolution of its board of directors or other appropriate governing body and notice in writing to the Primary Sponsor and the Trustee unless such termination would result in the disqualification of the Plan or the Trust or would adversely affect the exempt status of the Plan or the Trust as to any other Plan Sponsor. If contributions by or on behalf of a Plan Sponsor are completely terminated, the Plan and Trust shall be deemed terminated as to such Plan Sponsor. Any termination by a Plan Sponsor, shall not be a termination as to any other Plan Sponsor. 16.3 Plan Termination. (a) If the Plan is terminated by the Primary Sponsor or if contributions to the Trust should be permanently discontinued, it shall terminate as to all Plan Sponsors and the Fund shall be used, subject to the payment of expenses and taxes, for the benefit of Participants and Beneficiaries, and for no other purposes, and the Account of each affected Participant shall be fully vested and nonforfeitable, notwithstanding the provisions of the Section of the Plan which sets forth the vesting schedule. (b) In the event of the partial termination of the Plan, each affected Participant's Account shall be fully vested and nonforfeitable, notwithstanding the provisions of the Section of the Plan which sets forth the vesting schedule. 16.4 Payments Upon Plan Termination. In the event of the termination of the Plan or the Trust with respect to a Plan Sponsor, the Accounts of the Participants with respect to the Plan as adopted by such Plan Sponsor shall be distributed in accordance with the applicable distribution provisions of the Plan pursuant to the instructions of the Plan Administrator; provided that the Trustee shall not be required to make any distribution until it receives a copy of an Internal Revenue Service determination letter to the effect that the termination does not affect the qualified status of the Plan or the exempt status of the Trust or, in the event that such letter is applied for and is not issued, until the Trustee is reasonably satisfied that adequate provision has been made for the payment of all taxes which may be due and owing by the Trust. 16.5 Plan Merger. In the case of any merger or consolidation of the Plan with, or any transfer of the assets or liabilities of the Plan to, any other plan qualified under Code Section 401, the terms of the merger, consolidation or transfer shall be such that each Participant would receive (in the event of termination of the Plan or its successor immediately thereafter) a benefit which is no less than the benefit which the Participant would have received in the event of termination of the Plan immediately before the merger, consolidation or transfer. 16.6 Optional Benefits. Notwithstanding any other provision of the Plan, an amendment to the Plan - 42 (a) which eliminates or reduces an early retirement benefit, if any, or which eliminates or reduces a retirement-type subsidy (as defined in regulations issued by the Department of the Treasury), if any, or (b) which eliminates an optional form of benefit (except to the extent otherwise provided in Treasury Regulations) shall not be effective with respect to benefits attributable to service before the amendment is adopted. In the case of a retirement-type subsidy described in Subsection (a) above, this Section shall be applicable only to a Participant who satisfies, either before or after the amendment, the preamendment conditions for the subsidy. This prohibition on the elimination of optional benefits shall not apply to the elimination of optional forms of benefit which is permitted under Code Section 411(d)(6) and Treasury Regulations Section 1.411(d)(6)-4. ARTICLE 17 ADOPTION OF PLAN BY AFFILIATES Any corporation or other business entity related to the Primary Sponsor by function or operation and any Affiliate, if the corporation, business entity or Affiliate is authorized to do so by written direction adopted by the Board of Directors, may adopt the Plan and the related Trust by action of the board of directors or other appropriate governing body of such corporation, business entity or Affiliate. Any adoption shall be evidenced by certified copies of the resolutions of the foregoing board of directors or governing body indicating the adoption and by the execution of the Trust by the adopting corporation, or business entity or Affiliate. The resolution shall state and define the effective date of the adoption of the Plan by the Plan Sponsor and, for the purpose of Code Section 415, the "limitation year" as to such Plan Sponsor. Notwithstanding the foregoing, however, if the Plan and Trust as adopted by an Affiliate or other corporation or business entity under the foregoing provisions shall fail to receive the initial approval of the Internal Revenue Service as a qualified Plan and Trust under Code Sections 401(a) and 501(a), any contributions by the Affiliate or other corporation or business entity after payment of all expenses will be returned to such Plan Sponsor free of any trust, and the Plan and Trust shall terminate, as to the adopting Affiliate or other corporation or business entity. ARTICLE 18 QUALIFICATION AND RETURN OF CONTRIBUTIONS 18.1 Initial Qualification Failure. If the Plan and the related Trust fail to receive the initial approval of the Internal Revenue Service as a qualified plan and trust, within one (1) year after the date of denial of qualification (a) the contribution of a Plan Sponsor after payment of all expenses will be returned to a Plan Sponsor free of the Plan and Trust, 43 (b) contributions made by a Participant shall be returned to the Participant who made the contributions, and (c) the Plan and Trust shall thereupon terminate. 18.2 Deductibility. All Plan Sponsor contributions to the Plan are contingent upon deductibility. To the extent permitted by the Code and other applicable laws and regulations thereunder, upon a Plan Sponsor's request, a contribution which was made by reason of a mistake of fact or which was nondeductible under Code Section 404, shall be returned to a Plan Sponsor within one (1) year after the payment of the contribution, or the disallowance of the deduction (to the extent disallowed), whichever is applicable. In the event of a contribution which was made by reason of a mistake of fact or which was nondeductible, the amount to be returned to the Plan Sponsor shall be the excess of the contribution above the amount that would have been contributed had the mistake of fact or the mistake in determining the deduction not occurred, less any net loss attributable to the excess. Any net income attributable to the excess shall not be returned to the Plan Sponsor. No return of any portion of the excess shall be made to the Plan Sponsor if the return would cause the balance in a Participant's Account to be less than the balance would have been had the mistaken contribution not been made. ARTICLE 19 INCORPORATION OF SPECIAL LIMITATIONS Appendices A, B, and C to the Plan, attached hereto, are incorporated by reference and the provisions of the same shall apply notwithstanding anything to the contrary contained herein. IN WITNESS WHEREOF, the Primary Sponsor and the participating Plan Sponsor have caused this indenture to be executed as of the date first above written. INGLES MARKETS, INCORPORATED By: /s/ Brenda S. Tudor ----------------------------------------- Title: Vice President-Finance --------------------------------------- MILKCO, INC. By: /s/ Charles L. Gaither ------------------------------------------- Title: President --------------------------------------- 44 APPENDIX A LIMITATION ON ALLOCATIONS SECTION 1 LIMIT ON ANNUAL ADDITION (a) For Plan Years beginning before September 29, 2002, the Annual Addition for any Participant for any one Limitation Year may not exceed the lesser of: (i) $30,000, as adjusted under Code Section 415(d); or (ii) twenty-five percent (25%) of the Participant's Compensation. (b) For Plan Years beginning on or after September 29, 2002, except to the extent permitted under Section 3.1(c) and Code Section 414(v), the Annual Addition for any Participant for any one Limitation Year may not exceed the lesser of: (i) $40,000, as adjusted for changes in the cost of living as provided in regulations issued by the Secretary of the Treasury; or (ii) one hundred percent (100%) of the Participant's Compensation. (iii) In the event a change in the Limitation Year results in a short limitation period, the amount in subsection (b)(i) of this Section shall be multiplied by a fraction, the numerator of which is the number of months (including fractions thereof) in the short limitation period and the denominator of which is twelve (12), for the short limitation period. For the Plan Year beginning September 29, 2002 and ending December 31, 2002, the amount in Subsection (a) shall be equal to $10,111 ($40,000 multiplied by the fraction 3.0333/12). SECTION 2 DEFINITIONS For the purposes of this Appendix A, the following definitions shall apply: (a) The term "Annual Addition" for any Participant means for any Limitation Year, the sum of certain Plan Sponsor, Affiliate, and Participant contributions, forfeitures, as determined in Code Section 415(c)(2) in effect for that Limitation Year. Participant contributions shall be determined without regard to Rollover Amounts, employee contributions to a simplified employee pension which are excludable from gross income under Code Section 408(k)(6), and catch-up contributions as described in Code Section 414(v). A-1 (b) The term "Affiliate" shall have the same meaning as such term is given in Section 1.2 except that the definition of Affiliate (within the meaning of Code Sections 414(b) and (c)) shall be as modified by Code Section 415(h). (c) For purposes of determining the Participant's Compensation under this Appendix A, the definition in Section 1.12 shall apply, except that the definition of Affiliate (within the meaning of Code Sections 414(b) and (c)) shall be modified by Code Section 415(h). (d) For purposes of this Appendix A, the term "Limitation Year" shall mean a Plan Year unless a Plan Sponsor elects, by adoption of a written resolution, to use any other twelve month period adopted in accordance with regulations issued by the Secretary of the Treasury. For the short Plan Year beginning September 29, 2002 and ending December 31, 2002, the Limitation Year shall be this short Plan Year. SECTION 3 COMBINED PLAN LIMITATION Effective until September 30, 2000, in the event that a Plan Sponsor or an Affiliate maintains a defined benefit plan under which a Participant also participates, the sum of the Defined Benefit Plan Fraction and the Defined Contribution Plan Fraction for any Limitation Year for any Participant may not exceed 1.0. (a) The Defined Benefit Plan Fraction for any Limitation Year is a fraction: (i) the numerator of which is the projected annual benefit of the Participant under the defined benefit plan (determined as of the close of such year); and (ii) the denominator of which is the lesser of (A) the product of 1.25, multiplied by the maximum annual benefit allowable under Code Section 415(b)(1)(A), or (B) the product of (I) 1.4, multiplied by (II) the maximum amount which may be taken into account under Section 415(b)(1)(B) of the Code with respect to the Participant under the defined benefit plan for the Limitation Year (determined as of the close of the Limitation Year). (b) The Defined Contribution Plan Fraction for any Limitation Year is a fraction: A-2 (i) the numerator of which is the sum of a Participant's Annual Additions as of the close of the Limitation Year; and (ii) the denominator of which is the sum of the lesser of the following amounts determined for the Limitation Year and for all prior Limitation Years during which the Participant was employed by a Plan Sponsor or an Affiliate: (A) the product of 1.25, multiplied by the dollar limitation in effect under Code Section 415(c)(1)(A) for the Limitation Year (determined without regard to Section 415(c)(6) of the Code); or (B) the product of (I) 1.4, multiplied by (II) the amount which may be taken into account under Code Section 415(c)(1)(B) (or Code Section 415(c)(7), if applicable) with respect to the Participant for the Limitation Year. SECTION 4 AGGREGATION OF PLANS For purposes of applying the limitations of this Appendix A, all defined contribution plans maintained or deemed to be maintained by a Plan Sponsor shall be treated as one defined contribution plan, and all defined benefit plans now or previously maintained or deemed to be maintained by a Plan Sponsor shall be treated as one defined benefit plan. In the event any of the actions to be taken pursuant to Section 6 of this Appendix A or pursuant to any language of similar import in another defined contribution plan are required to be taken as a result of the annual additions of a Participant exceeding the limitations set forth in Section 1 of this Appendix A, because of the Participant's participation in more than one defined contribution plan, the actions shall be taken first with regard to this Plan. SECTION 5 CORRECTION OF EXCESS ANNUAL ADDITIONS (a) An "Excess Annual Addition" shall be: (i) that amount allocated to a Participant's Account in excess of the limitations set forth in Section 1 above, as a result of the allocation of forfeitures to the Account of a Participant, a reasonable error in estimating the Participant's Compensation, a reasonable error in determining the amount of Elective Deferrals, or other similar circumstances; (ii) that amount allocated to a Participant's Account in excess of the limitations set forth in Section 3 above (after any reductions in the benefits or A-3 Annual Additions in any other plan required to be aggregated with this Plan under Section 5). (b) A Participant's Annual Addition shall be reduced by distributing to the Participant the lesser of : (i) the amount of the Excess Annual Addition, or (ii) the contributions made by the Plan Sponsor on behalf of the Participant pursuant to Section 3.1 with respect to which no contribution is made under Section 3.2; (c) If further reduction is necessary, the Participant's Annual Addition shall be further reduced by distributing to the Participant an amount equal to contributions made by the Plan Sponsor on behalf of the Participant pursuant to Section 3.1 and contributions of the Plan Sponsor thereon pursuant to Section 3.2 (including forfeitures) shall be reduced in the amount of the remaining excess. The amount of the reduction under Section 3.1 shall be distributed to the Participant. The amount of the reduction under Section 3.2 shall be reallocated to the Employer Match Accounts of Participants who are not affected by the limitation in the same proportion as the contribution of the Plan Sponsor for the year is allocated under Section 3.2 to the Accounts of such Participants; (d) If further reduction is necessary, contributions made by the Plan Sponsor on behalf of the Participant pursuant to Section 3.3 shall be reduced in the amount of the remaining excess. The amount of the reduction shall be reallocated to the Accounts of Participants who are not affected by the limitations in the same proportion as the contribution of the Plan Sponsor for the year is allocated under Section 3.3 to the Accounts of such Participants; and (e) If further reduction is necessary, forfeitures allocated to the Participant's Account shall be reduced by the amount of the remaining excess. The amount of the reduction shall be reallocated to the Employer Profit Sharing Accounts of Participants who are not affected by the limitations in the same proportions as the contributions of the Plan Sponsor for the Plan Year are allocated to the Employer Profit Sharing Accounts of such Participants; (f) If the contribution of the Plan Sponsor and forfeitures would cause the annual additions to exceed the limitations set forth herein with respect to all Participants under the Plan, the portion of such contribution and forfeitures in excess of the limitations shall be segregated in a suspense account. While the suspense account is maintained, (i) no Plan Sponsor contributions under the Plan shall be made which would be precluded by this Appendix A, (ii) income, gains and loses of the Fund shall not be allocated to such suspense account and (iii) amounts in the suspense account shall be allocated in subsequent Limitation Years as Plan Sponsor contributions and forfeitures under the Plan as of each Valuation Date on which Plan Sponsor contributions may be allocated for each such Limitation Year until the suspense account is exhausted. In the A-4 event of the termination of the Plan, the amounts in the suspense account shall be returned to the Plan Sponsor to the extent that such amounts may not then be allocated to Participants' Accounts. (g) Notwithstanding anything contained in the Plan to the contrary, the Plan Administrator may modify the provisions of this Section 6 with respect to reduction of the Participant's accounts in accordance with such procedures as the Plan Administrator may establish with respect to catch-up contributions described in Code Section 414(v). A-5 APPENDIX B TOP-HEAVY PROVISIONS SECTION 1 DEFINITIONS As used in this Appendix B, the following words shall have the following meanings: (a) "Determination Date" means, with respect to any Plan Year, the last day of the preceding Plan Year, or, in the case of the first Plan Year, means the last day of the first Plan Year. (b) "Key Employee" means an Employee or former Employee (including a Beneficiary of a Key Employee or former Key Employee) who at any time during the Plan Year containing the Determination Date or, for Plan Years beginning before September 29, 2002, any of the four (4) preceding Plan Years: (i) Was at any time an includible officer of the Plan Sponsor or of any Affiliate. Includible officers include: (A) For Plan Years beginning before September 29, 2002, any officer whose Compensation was greater than fifty percent (50%) of the amount in effect under Code Section 415(b)(1)(A) for the calendar year in which the Plan Year ends. (B) For Plan Years beginning on or after September 29, 2002, any officer whose Compensation was greater than $130,000 (adjusted for changes in the cost of living as provided in regulations issued by the Secretary of the Treasury for Plan Years beginning after December 31, 2002).. (C) For all Plan Years under this Appendix B, the term "officer" means an administrative executive in regular and continual service to the Plan Sponsor or Affiliate; provided, however, that in no event shall the number of officers exceed the lesser of: (I) fifty (50) Employees; or (II) the greater of three (3) Employees or ten percent (10%) of the number of Employees during the Plan Year, with any non-integer being increased to the next integer. If for any year no officer of the Plan Sponsor is an includible officer, the highest paid officer of the Plan Sponsor for the Plan Year shall be considered an officer for purposes of this Subparagraph (b)(i); B-1 (ii) For Plan Years beginning before September 29, 2002, one of the ten (10) Employees owning both (A) more than one-half percent (1/2%) of the outstanding stock of the Plan Sponsor or an Affiliate, more than one-half percent (1/2%) of the total combined voting power of all stock of the Plan Sponsor or an Affiliate, or more than one-half percent (1/2%) of the capital or profits interest in the Plan Sponsor or an Affiliate, and (B) the largest percentage ownership interests in the Plan Sponsor or any of its Affiliates, and whose Compensation is equal to or greater than the amount in effect under Section l(a) of Appendix A to the Plan for the calendar year in which the Determination Date falls; or (iii) An owner of more than five percent (5%) of the outstanding stock of the Plan Sponsor or an Affiliate or more than five percent (5%) of the total combined voting power of all stock of the Plan Sponsor or an Affiliate; or (iv) An owner of more than one percent (1%) of the outstanding stock of the Plan Sponsor or an Affiliate or more than one percent (1%) of the total combined voting power of all stock of the Plan Sponsor or an Affiliate, and who in such Plan Year had Compensation from the Plan Sponsor and all of its Affiliates of more than $150,000. Employees other than Key Employees are sometimes referred to in this Appendix B, as "non-key employees." (c) "Required Aggregation Group" means: (i) each plan of the Plan Sponsor and its Affiliates which qualifies under Code Section 401 (a) in which a Key Employee is a participant, and (ii) each other plan of the Plan Sponsor and its Affiliates which qualifies under Code Section 401 (a) and which enables any plan described in Subsection (a) of this Section to meet the requirements of Section 401(a)(4) or 410 of the Code. (d) (i) "Top-Heavy" means: (A) if the Plan is not included in a Required Aggregation Group, the Plan's condition in a Plan Year for which, as of the Determination Date: (I) the present value of the cumulative Accounts (excluding Catch-Up Contributions for the current Plan Year) under the Plan for all Key Employees exceeds sixty percent (60%) of the present value of the cumulative Accounts (excluding Catch-Up Contributions for the current Plan Year) under the Plan for all Participants; and B-2 (II) the Plan, when included in every potential combination, if any, with any or all of: (aa) any Required Aggregation Group, and (bb) any plan of the Plan Sponsor which is not part of any Required Aggregation Group and which qualifies under Code Section 401 (a) is part of a Top-Heavy Group (as defined in Paragraph (ii) of this Subsection); and (B) if the Plan is included in a Required Aggregation Group, the Plan's condition in a Plan Year for which, as of the Determination Date: (I) the Required Aggregation Group is a Top-Heavy Group (as defined in Paragraph (2) of this Subsection); and (II) the Required Aggregation Group, when included in every potential combination, if any, with any or all of the plans of the Plan Sponsor and its Affiliates which are not part of the Required Aggregation Group and which qualify under Code Section 401(a), is part of a Top-Heavy Group (as defined in Paragraph (2) of this Subsection). (C) For purposes of Subparagraphs (A) (II) and (B)(II) of this Paragraph (i), any combination of plans must satisfy the requirements of Sections 401(a)(4) and 410 of the Code. (ii) A group shall be deemed to be a Top-Heavy Group if: (A) the sum, as of the Determination Date, of the present value of the cumulative accrued benefits for all Key Employees under all plans included in such group exceeds (B) sixty percent (60%) of a similar sum determined for all participants in such plans. (iii) (A) For purposes of this Section, the present value of the accrued benefit for any participant in a defined contribution plan as of any Determination Date or last day of a plan year shall be the sum of: (I) as to any defined contribution plan other than a simplified employee pension, the account balance as of the most recent valuation date occurring within the plan year ending on the Determination Date or last day of a plan year, and B-3 (II) as to any simplified employee pension, the aggregate employer contributions, and (III) an adjustment for contributions due as of the Determination Date or last day of a plan year. In the case of a plan that is not subject to the minimum funding requirements of Code Section 412, the adjustment in Clause (III) of this Subparagraph (A) shall be the amount of any contributions actually made after the valuation date but on or before the Determination Date or last day of the plan year to the extent not included under Clause (I) or (II) of this Subparagraph (A); provided, however, that in the first plan year of the plan, the adjustment in Clause (III) of this Subparagraph (A) shall also reflect the amount of any contributions made thereafter that are allocated as of a date in such first plan year. In the case of a plan that is subject to the minimum funding requirements, the account balance in Clause (I) and the aggregate contributions in Clause (II) of this Subparagraph (A) shall include contributions that would be allocated as of a date not later than the Determination Date or last day of a plan year, even though those amounts are not yet required to be contributed, and the adjustment in Clause (III) of this Subparagraph (A) shall be the amount of any contribution actually made (or due to be made) after the valuation date but before the expiration of the extended payment period in Code Section 412(c)(10) to the extent not included under Clause (I) or (II) of this Subparagraph (A). (B) For purposes of this Subsection, the present value of the accrued benefit for any participant in a defined benefit plan as of any Determination Date or last day of a plan year must be determined as of the most recent valuation date which is within a 12-month period ending on the Determination Date or last day of a plan year as if such participant terminated as of such valuation date; provided, however, that in the first plan year of a plan, the present value of the accrued benefit for a current participant must be determined either (I) as if the participant terminated service as of the Determination Date or last day of a plan year or (II) as if the participant terminated service as of such valuation date, but taking into account the estimated accrued benefit as of the Determination Date or last day of a plan year. For purposes of this Subparagraph (B), the valuation date must be the same valuation date used for computing plan costs for minimum funding, regardless of whether a valuation is performed that year. The actuarial assumptions utilized in calculating the present value of the accrued benefit for any participant in a defined benefit plan for purposes of this Subparagraph (B) shall be established by the Plan Administrator after consultation with the actuary for the plan, and shall be reasonable in the aggregate and shall comport with the requirements set forth by the Internal Revenue Service in Q&A T-26 and T-27 of Regulation Section 1.416-1. B-4 (C) For purposes of determining the present value of the cumulative accrued benefit under a plan for any participant in accordance with this Subsection, the present value shall be increased by the aggregate distributions made with respect to the participant (including distributions paid on account of death to the extent they do not exceed the present value of the cumulative accrued benefit existing immediately prior to death) under each plan being considered, and under any terminated plan which if it had not been terminated would have been in a Required Aggregation Group with the Plan, during the 5-year period (or, for Plan Years beginning on or after September 29, 2002, one-year period) ending on the Determination Date or last day of the plan year that falls within the calendar year in which the Determination Date falls. For Plan Years beginning after September 29, 2002, in the case of a distribution made with respect to a Participant for a reason other than separation from service, death, or disability, this provision shall be applied by substituting a 5-year period for the one-year period. (D) For purposes of this Paragraph (iii), participant contributions which are deductible as "qualified retirement contributions" within the meaning of Code Section 219 or any successor, as adjusted to reflect income, gains, losses, and other credits or charges attributable thereto, shall not be considered to be part of the accrued benefits under any plan. (E) For purposes of this Paragraph (iii), if any employee is not a Key Employee with respect to any plan for any plan year, but such employee was a Key Employee with respect to such plan for any prior plan year, any accrued benefit for such employee shall not be taken into account. (F) For purposes of this Paragraph (iii), if any employee has not performed any service for any Plan Sponsor or Affiliate maintaining the plan during the five-year period (or, for Plan Years beginning on or after September 29, 2002, the one-year period) ending on the Determination Date, any accrued benefit for that employee shall not be taken into account. (G) (I) In the case of an "unrelated rollover" (as defined below) between plans which qualify under Code Section 401(a), (a) the plan providing the distribution shall count the distribution as a distribution under Subparagraph (C) of this Paragraph (iii), and (b) the plan accepting the distribution shall not consider the distribution part of the accrued benefit under this Section; and (II) in the case of a "related rollover" (as defined below) between plans which qualify under Code Section 401(a), the plan B-5 providing the distribution shall not count the distribution as a distribution under Subparagraph (C) of this Paragraph (iii), and the plan accepting the distribution shall consider the distribution part of the accrued benefit under this Section. For purposes of this Subparagraph (G), an "unrelated rollover" is a rollover as defined in Code Section 402(c)(4) or 408(d)(3) or a plan-to-plan transfer which is both initiated by the participant and made from a plan maintained by one employer to a plan maintained by another employer where the employers are not Affiliates. For purposes of this Subparagraph (G), a "related rollover" is a rollover as defined in Code Section 402(c)(4) or 408(d)(3) or a plan-to-plan transfer which is either not initiated by the participant or made to a plan maintained by the employer or an Affiliate. SECTION 2 TOP-HEAVY CONTRIBUTION (a) Notwithstanding anything contained in the Plan to the contrary, except as otherwise provided in Subsection (b) of this Section, in any Plan Year during which the Plan is Top-Heavy, allocations of Plan Sponsor contributions and forfeitures for the Plan Year for the Account of each Participant who is not a Key Employee and who has not separated from service with the Plan Sponsor prior to the end of the Plan Year shall not be less than three percent (3%) of the Participant's Compensation. For purposes of this Subsection, an allocation to a Participant's Account resulting from any Plan Sponsor contribution attributable to a salary reduction or similar arrangement shall not be taken into account. (b) (i) The percentage referred to in Subsection (a) of this Section for any Plan Year shall not exceed the percentage at which allocations are made or required to be made under the Plan for the Plan Year for the Key Employee for whom the percentage is highest for the Plan Year. For purposes of this Paragraph, an allocation to the Account of a Key Employee resulting from any Plan Sponsor contribution attributable to a salary reduction or similar agreement shall be taken into account, but an allocation that constitutes a Catch-Up Contribution shall not be taken into account. (ii) For purposes of this Subsection (b), all defined contribution plans which are members of a Required Aggregation Group shall be treated as part of the Plan. (iii) This Subsection (b) shall not apply to any plan which is a member of a Required Aggregation Group if the plan enables a defined benefit plan which is a member of the Required Aggregation Group to meet the requirements of Code Section 401(a)(4) or 410. B-6 (iv) If the Plan Sponsor maintains a defined benefit plan which is qualified under Code Section 401(a) and which would be Top-Heavy within the meaning of the Plan for its plan year ending within or coincident with the Plan Year, no allocation shall be made pursuant to Subsection (a) of this Section on behalf of any Participant who participates in the defined benefit plan and acquires a year of service within the meaning of paragraphs (4), (5) and (6) of Code Section 411(a) under the defined benefit plan for the plan year, if the defined benefit plan provides generally that the accrued benefit of the Participant when expressed as an annual retirement benefit shall not, when expressed as a percentage of the Participant's Compensation, be less than the lesser of (A) two percent (2%) multiplied by the number of such years of service in plan years during which such plan was Top-Heavy, or (B) twenty percent (20%). SECTION 3 COMBINED PLAN LIMITATION Effective until September 30, 2000, in any limitation year (as defined in Section 4 of Appendix A to the Plan) which contains any portion of a Plan Year in which the Plan is Top-Heavy, the number "1.0" shall be substituted for the number "1.25" in Section 3 of Appendix A to the Plan. SECTION 4 TOP-HEAVY VESTING SCHEDULE Notwithstanding anything contained in the Plan to the contrary, in any Plan Year during which the Plan is Top-Heavy, a Participant's interest in his Account shall not vest at any rate which is slower than the following schedule, effective as of the first day of that Plan Year:
Full Years of Percentage Vesting Service Vested --------------- ------ Less than 2 0% 2 20% 3 40% 4 60% 5 80% 6 or more 100%
The Schedule set forth above in this Section 4 shall be inapplicable to a Participant who has failed to perform an Hour of Service after the Determination Date on which the Plan has become Top-Heavy. When the Plan ceases to be Top-Heavy, the Schedule set forth above in this Section 4 shall cease to apply; provided however, that the provisions of the Section dealing with changes in the vesting schedule shall apply. B-7 APPENDIX C SPECIAL NONDISCRIMINATION RULES SECTION 1 DEFINITIONS As used in this Appendix, the following words shall have the following meanings: (a) "Actual Deferral Percentage" shall mean the percentage as determined in Section 2(b) below. (b) "Actual Contribution Percentage" shall mean the percentage as determined in Section 5(b) below. (c) "Eligible Participant" means a Participant who is an Employee during the Plan Year. (d) "Highly Compensated Eligible Participant" means any Eligible Participant who is a Highly Compensated Employee. (e) "Matching Contribution" means any contribution made by a Plan Sponsor to the Employer Matching Contribution Account and any other contributions made to a plan by a Plan Sponsor or an Affiliate on behalf of an Employee on account of a contribution made by the Employee or on account of an Elective Deferral. (f) "Qualified Matching Contributions" means Matching Contributions of the Plan Sponsor or an Affiliate that are immediately nonforfeitable when made, and which may not be distributed, except upon one of the events described under Code Section 401(k)(2)(B) and the regulations thereunder. Such contributions, if made to the Plan, shall be allocated as described in this Appendix C to the QMAC/QNEC Account for each affected Participant. (g) "Qualified Nonelective Contributions" means contributions of the Plan Sponsor or an Affiliate, other than Matching Contributions or Elective Deferrals that are immediately nonforfeitable when made, and which may not be distributed, except upon one of the events described under Code Section 401(k)(2)(B) and the regulations thereunder. Such contributions, if made to the Plan, shall be allocated as described in this Appendix C to the QMAC/QNEC Account for each affected Participant. SECTION 2 ACTUAL DEFERRAL PERCENTAGE TEST (a) In addition to any other limitations set forth in the Plan, for each Plan Year, one of the following tests must be satisfied: (i) The 125 Percent Test. The Actual Deferral Percentage for the Highly Compensated Eligible Participants for the Plan Year must not be more than the Actual Deferral Percentage for all other Eligible Participants for the Plan Year, multiplied by 1.25. (ii) The Two Times Test. The Actual Deferral Percentage for the Highly Compensated Eligible Participants for the Plan Year must not be more than the lesser of: (A) the Actual Deferral Percentage for all other Eligible Participants for the Plan Year plus two (2) percentage points; or (B) the Actual Deferral Percentage for all other Eligible Participants for the Plan Year, multiplied by two (2). (b) The "Actual Deferral Percentage" for a group of Eligible Participants is equal to the average of the ratios, calculated separately for each Eligible Participant in such group, of the Deferral Amounts contributed by the Plan Sponsor on behalf of the Eligible Participant for the Plan Year to the Compensation of the Eligible Participant for the Plan Year. For purposes of this calculation: (i) the Deferral Amounts for Eligible Participants who are not Highly Compensated Eligible Participants that are in excess of the maximum amount permitted under Code Section 401(a)(30) (e.g., $11,000 for the 2002 calendar year) shall not be taken into account; and (ii) at the election of the Plan Administrator, all or part of the Qualified Matching Contributions and Qualified Nonelective Contributions made under the Plan may be treated as Deferral Amounts, subject to the limitations of Treasury Regulation Section 1.401(k)-1(b)(5) and any other applicable regulations promulgated by the Secretary of the Treasury. SECTION 3 DETERMINATION AND CORRECTION OF EXCESS CONTRIBUTIONS (a) If the Deferral Amounts contributed on behalf of the Highly Compensated Eligible Participants exceed the amount permitted under the Actual Deferral Percentage test for any Plan Year, such excess amounts shall be considered to be "Excess Contributions." The Plan Sponsor will determine the amount of Excess Contributions under Subparagraph (b) below and will determine what share of the Excess Contributions is attributable to each Highly Compensated Eligible Participant under Subparagraph (c) below. The Plan Sponsor may then implement one or more of the corrective actions discussed in Subparagraphs (d) and (e) below to resolve the failure of the Actual Deferral Percentage test so that it is considered to be passed for the Plan Year. (b) Determination of Total Excess Contributions. For purposes of this Section 3, "Total Excess Contributions" means, with respect to a Plan Year, the excess of: (i) the aggregate amount of Deferral Amounts contributed by a Plan Sponsor on behalf of Highly Compensated Eligible Participants for the Plan Year, over (ii) the maximum amount of Deferral Amounts permitted under Section 2 of this Appendix C for the Plan Year, which shall be determined by reducing the Deferral Amounts contributed on behalf of Highly Compensated Eligible Participants in order of the actual deferral percentages beginning with the highest of such percentages. (c) Allocation of Total Excess Contributions Among Highly Compensated Eligible Participants. The Excess Contribution for any Plan Year attributable to a given Highly Compensated Eligible Participant (for purposes of distribution under Subsection (d) below) shall be determined by the Plan Sponsor as follows: (i) The Deferral Amounts allocated to the Highly Compensated Eligible Participant with the highest dollar amount of Deferral Amounts for the Plan Year shall be reduced by the amount required to cause that Highly Compensated Eligible Participant's remaining Deferral Amounts for the Plan Year to be equal to the dollar amount of the Deferral Amounts allocated to the Highly Compensated Eligible Participant with the next highest dollar amount of Deferral Amounts for the Plan Year. This amount is then the Excess Contribution attributable to such Highly Compensated Eligible Participant with the highest dollar amount of Deferral Amounts which shall be distributed under subparagraph (d) below, unless a smaller reduction equals the total Excess Contributions. (ii) If the total amount determined under Paragraph (i) of this Section 3(c) is less than the total Excess Contributions, the procedure in Paragraph (i) shall be successively repeated with the Highly Compensated Eligible Participant who has the next highest dollar amount of Deferral Amounts for the Plan Year, and continuing as required until the total dollar amount allocated to the Highly Compensated Eligible Participants is equal to the total Excess Contributions attributable to Highly Compensated Eligible Participants. (d) Distribution of Excess Contributions. (i) To the extent permitted by regulations issued by the Secretary of the Treasury, the Plan Sponsor may distribute the Total Excess Contributions determined in Subparagraphs (b) and (c) above, plus the income or loss thereon, to the Highly Compensated Eligible Participants to whom such Excess Contributions were allocated. The income or loss attributable to the Excess Contributions shall be determined in a manner similar to that described in Section 4.2 of the Plan. (ii) The Excess Contributions to be distributed under subparagraph (i) above shall be reduced by Deferral Amounts previously distributed for the taxable year ending in the same Plan Year, and shall also be reduced by Deferral Amounts previously distributed for the Plan Year beginning in such taxable year, and by any excess Elective Deferrals as determined pursuant to Plan Section 3.1 previously distributed to the Participant for the Participant's taxable year ending with or within the Plan Year. (iii) Effective for Plan Years beginning on or before September 29, 2002, if the multiple use of the Two Times Test of Sections 2(a)(ii) and 5(a)(ii) of this Appendix C, pursuant to Treasury Regulations section 1.401(m)-2, as promulgated by the Secretary of the Treasury, requires a corrective distribution such distribution shall be made pursuant to this Section 3, and not Section 6, of this Appendix C. (iv) Any Matching Contribution that was based on the portion of the Deferral Amount that is distributed under this Section as an Excess Contribution shall be forfeited upon such distribution. If a distribution of the Excess Deferral Amounts attributable to the Highly Compensated Eligible Participants is made in accordance with this Subsection (d), the limitations in Section 2 of this Appendix C shall be treated as being met regardless of whether the Actual Deferral Percentage, if recalculated after such distributions, would have satisfied the requirements of Section 2. (e) Contribution of Qualified Nonelective Contributions or Qualified Matching Contributions. Not later than twelve (12) months after the end of the Plan Year, the Plan Sponsor may make a special Qualified Nonelective Contribution or Qualified Matching Contribution on behalf of all or certain Eligible Participants who are not Highly Compensated Eligible Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) the Actual Deferral Percentage test. Such contribution shall be allocated to the Participant's QMAC/QNEC Account in one of the following manners, as elected by the Plan Sponsor the time the Qualified Nonelective Contribution or Qualified Matching Contribution is made, until Actual Deferral Percentage test is satisfied, or until such Eligible Participant who is not a Highly Compensated Eligible Participant has received his maximum Annual Addition as described in Section 1 of Appendix A: (i) Per Capita: under this method, the Qualified Nonelective Contribution is allocated to the QMAC/QNEC Account of each Eligible Participant who is not a Highly Compensated Eligible Participant who is employed with the Plan Sponsor or an Affiliate on the last day of the Plan Year in an equal amount. (ii) Pro-Rata to Compensation: under this method, the Qualified Nonelective Contribution is allocated to the QMAC/QNEC Account of each Eligible Participant who is not a Highly Compensated Eligible Participant who is employed with the Plan Sponsor or an Affiliate on the last day of the Plan Year in the same ratio that such Eligible Participant's Compensation for such Plan Year bears to the total Compensation of all such Eligible Participants for such Plan Year. (iii) Pro-Rata to Deferrals: This method is used for Qualified Matching Contributions. Under this method, the Qualified Matching Contribution is allocated to the QMAC/QNEC Account of each Eligible Participant who is not a Highly Compensated Eligible Participant who is employed with the Plan Sponsor or an Affiliate on the last day of the Plan Year in the same ratio that such Eligible Participant's Deferral Amounts for such Plan Year bears to the total Deferral Amounts of all such Eligible Participants for such Plan Year. (iv) Bottom-Up: under this method, the Qualified Nonelective Contribution is allocated first to the QMAC/QNEC Account of the Eligible Participant who is not a Highly Compensated Eligible Participant, whose Compensation for such Plan Year is the least of all such Participants, and who is employed on the last day of the Plan Year, in an amount equal to the lesser of: (A) the maximum amount which will allow the Annual Additions to the Eligible Participant's Account to remain within the limits of Section 1 of Appendix A; or (B) such percentage of Compensation as the Employer shall designate. Once such maximum allocation has been made to the QMAC/QNEC Account of such Participant, this process shall be repeated with regard to the QMAC/QNEC Account of successive Eligible Participants who are not Highly Compensated Eligible Participants who are employed with a Plan Sponsor or an Affiliate on the last day of the Plan Year, in the order of increasing Compensation, until the entire Qualified Nonelective Contribution has been allocated. If more than one such Eligible Participant has Compensation for the Plan Year of a given amount, the Qualified Nonelective Contribution shall be allocated among all such Eligible Participants with equal Compensation in alphabetical order (last name first, then first name, then middle name) until either all such Eligible Participants with equal Compensation have received the appropriate Qualified Nonelective Contribution or the entire Qualified Nonelective Contribution has been allocated. Notwithstanding the foregoing, nothing in this Section shall be deemed to prevent a Plan Sponsor, in the event of an uncorrected failure of the Actual Deferral Percentage test, from taking any corrective measures available pursuant to Plan Section 3.8 above. SECTION 4 PLAN ADMINISTRATOR TO MONITOR AND MAINTAIN COMPLIANCE The Plan Administrator shall have the responsibility of monitoring the Plan's compliance with the limitations of this Appendix C and shall have the power to take all steps it deems necessary or appropriate to ensure compliance, including, without limitation, restricting the amount which Highly Compensated Eligible Participants can elect to have contributed pursuant to Plan Section 3.1(a). Any actions taken by the Plan Administrator pursuant to this Section 4 shall be pursuant to non-discriminatory procedures consistently applied. SECTION 5 ACTUAL CONTRIBUTION PERCENTAGE TEST (a) In addition to any other limitations set forth in the Plan, Matching Contributions under the Plan and the amount of nondeductible employee contributions under the Plan, for each Plan Year must satisfy one of the following tests: (i) The 125 Percent Test. The Actual Contribution Percentage for Highly Compensated Eligible Participants for the Plan Year must not exceed one hundred twenty-five percent (125%) of the Actual Contribution Percentage for all other Eligible Participants for the Plan Year; or (ii) The Two Times Test. The Actual Contribution Percentage for Highly Compensated Eligible Participants for the Plan Year must not exceed the lesser of: (A) two hundred percent (200%) of the Actual Contribution Percentage for all other Eligible Participants for the Plan Year, and (B) the Actual Contribution Percentage for all other Eligible Participants for the Plan Year plus two (2) percentage points. (b) Notwithstanding the foregoing, for purposes of this Section 5, the terms Highly Compensated Eligible Participant and Eligible Participant shall not include any Participant who is not eligible to receive a Matching Contribution under the provisions of the Plan, other than as a result of the Participant failing to contribute to the Plan or failing to have an Elective Deferral contributed to the Plan on the Participant's behalf. (c) Notwithstanding the foregoing, if Qualified Matching Contributions are taken into account for purposes of applying the Actual Deferral Percentage test, they shall not be taken into account under this Section 5. (d) In applying the above tests, the Plan Administrator shall comply with any regulations promulgated by the Secretary of the Treasury which prevent or restrict the use of the Two Times Test for purposes of passing both the Actual Deferral Percentage test and the Actual Contribution Percentage test. (e) The "Actual Contribution Percentage" for a group of Eligible Participants is equal to the average of the ratios, calculated separately for each Participant, of (A) to (B), where (A) is the amount of Matching Contributions under the Plan (excluding Qualified Matching Contributions which are used to apply the test set forth in Section 2 of this Appendix C or Matching Contributions which are used to satisfy the minimum required contributions to the Accounts of Eligible Participants who are not Key Employees pursuant to Section 1 of Appendix B to the Plan) and nondeductible employee contributions made under the Plan for the Eligible Participant for the Plan Year, and where (B) is the Compensation of the Eligible Participant for the Plan Year. Except to the extent limited by Treasury Regulation Section 1.401(m)-l(b)(5) and any other applicable regulations promulgated by the Secretary of the Treasury, a Plan Sponsor may elect to treat Deferral Amounts and Qualified Nonelective Contributions as Matching Contributions for purpose of determining the Actual Contribution Percentage, provided the Deferral Amounts, excluding those treated as Matching Contributions, satisfy the test set forth in Section 2 of Appendix C. SECTION 6 DETERMINATION AND CORRECTION OF EXCESS AGGREGATE CONTRIBUTION AMOUNTS (a) If either: (i) the Matching Contributions and, if taken into account under Section 5 of this Appendix C, the Deferral Amounts, Qualified Nonelective Contributions, and/or Qualified Matching Contributions made on behalf of Highly Compensated Eligible Participants, or (ii) the nondeductible employee contributions made by Highly Compensated Eligible Participants exceed the amount permitted under the Actual Contribution Percentage test for any Plan Year, such excess amounts shall be considered to be "Excess Aggregate Contributions." The Plan Sponsor will determine the amount of Excess Aggregate Contributions under subparagraph (b) below, and will determine what share of the Excess Aggregate Contributions is attributable to each Highly Compensated Eligible Participant under Subparagraph (c) below. The Plan Sponsor may then implement one or more of the corrective actions discussed in Subparagraphs (d) and (e) below to resolve the failure of the Actual Contribution Percentage test so that it is considered to be passed for the Plan Year. (b) Determination of Total Excess Aggregate Contributions. For purposes of this Section 6, with respect to any Plan Year, "Total Excess Aggregate Contributions" means the excess of: (i) the aggregate amount of the Matching Contributions, nondeductible employee contributions, any Qualified Nonelective Contributions or Qualified Matching Contributions, and, if taken into account under Section 5 of this Appendix C, the Deferral Amounts (excluding Catch-Up Contributions) actually made on behalf of Highly Compensated Eligible Participants for the Plan Year, over (ii) the maximum amount of contributions permitted under the limitations of Section 5 of this Appendix C, determined by reducing contributions made on behalf of Highly Compensated Eligible Participants in order of their contribution percentages, beginning with the highest of such percentages. The determination of the Total Excess Aggregate Contributions under this Section 6 shall be made after first determining the excess Elective Deferrals under Section 3.1(b) of the Plan and then determining the Excess Contributions under Section 3 of this Appendix C. (c) Allocation of Total Excess Aggregate Contributions Among Highly Compensated Eligible Participants. The Excess Aggregate Contributions for any Plan Year allocable to a given Highly Compensated Eligible Participant (for purposes of distribution under Subsection (d) below) shall be determined by the Plan Sponsor as follows: (i) The Matching Contributions and nondeductible employee contributions allocated to the Highly Compensated Eligible Participant with the highest dollar amount of such contributions for the Plan Year shall be reduced by the amount required to cause that Highly Compensated Eligible Participant's remaining Matching Contributions and nondeductible employee contributions for the Plan Year to be equal to the dollar amount of such contributions allocated to the Highly Compensated Eligible Participant with the next highest dollar amount of Matching Contributions and nondeductible employee contributions for the Plan Year. This amount is then the Excess Aggregate Contributions attributable to such Highly Compensated Eligible Participant with the highest dollar amount of Matching Contributions and nondeductible employee contributions that shall be distributed or forfeited, unless a smaller reduction equals the total Excess Aggregate Contributions. (ii) If the total amount distributed under Paragraph (i) is less than the total Excess Aggregate Contributions, the procedure in Paragraph (i) shall be successively repeated with the Highly Compensated Eligible Participant who has the next highest dollar amount of Matching Contributions and nondeductible employee contributions for the Plan Year, and continuing as required until the total dollar amount of Matching Contributions and nondeductible employee contributions allocated to the Highly Compensated Eligible Participants is equal to the total Excess Aggregate Contributions attributable to Highly Compensated Eligible Participants. (d) Distribution or Forfeiture of Excess Aggregate Contributions (i) Before the end of the Plan Year following the Plan Year for which the Total Excess Aggregate Contributions were made, the amount of the Total Excess Aggregate Contributions attributable to the Plan for the Plan Year, as adjusted to reflect any income, gain, or loss attributable to such contributions shall be distributed or, if the Excess Aggregate Contributions are forfeitable, forfeited. (ii) The distribution or forfeiture for any given Highly Compensated Eligible Participant shall be equal to the amount of the Excess Aggregate Contribution that was allocated to such Participant under Subsection (c) above. Such amount shall first be attributed to nondeductible employee contributions made by the Participant during the Plan Year for which no corresponding Plan Sponsor contribution is made, second to any remaining nondeductible employee contributions made by the Participant during the Plan Year, and third to any Matching Contributions thereon. (iii) The income allocable to an Excess Aggregate Contribution shall be determined in a manner similar to that described in Section 4.2 of the Plan. (iv) If a Participant who is to receive a distribution or forfeiture of his nondeductible employee contributions or Matching Contributions for the year is a participant in another plan or plans maintained by the Plan Sponsor in which Excess Aggregate Contributions for a Plan Year are held, each such plan shall distribute or forfeit a pro-rata share of each class of contribution based on the respective amounts of a class of contributions made to each plan during the Plan Year. (v) The distribution of Excess Aggregate Contributions shall be made without regard to any other provision in the Plan. (vi) Effective for Plan Years beginning before September 29, 2002, if the multiple use of the Two Times Test requires a corrective distribution pursuant to Treasury Regulation Section 1.401(m)-2, such distribution shall be made pursuant to Section 3 of this Appendix C and not this Section 6. (vii) Excess Aggregate Contributions, including forfeited Matching Contributions, shall be treated as Plan Sponsor contributions for purposes of Code sections 404 and 415, even if they are distributed from the Plan. Forfeited Matching Contributions that are reallocated to Participants' Accounts shall be treated as Annual Additions under Appendix A for the Participants to whose Accounts they are allocated, and for the Participants from whose Accounts they are forfeited. If a distribution or forfeiture of the total Excess Aggregate Contributions is made in accordance with this Section 6(d), the limitations in Section 5 of this Appendix C shall be treated as being met regardless of whether the Actual Contribution Percentage, if recalculated after such distributions, would have satisfied the requirements of Section 5. (e) Contribution of Qualified Nonelective Contributions or Qualified Matching Contributions. Not later than twelve (12) months after the end of the Plan Year, the Plan Sponsor may make a special Qualified Nonelective Contribution or a Qualified Matching Contribution on behalf of Eligible Participants who are not Highly Compensated Eligible Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Subsection 5 above. Such contribution shall be allocated to the QMAC/QNEC Account of one or more Eligible Participants who are not Highly Compensated Eligible Participants in one of the methods described in Subsection 3(e) above, as elected by the Plan Sponsor at the time the Qualified Nonelective Contribution or Qualified Matching Contribution is made. Notwithstanding the foregoing, nothing in this Section shall be deemed to prevent a Plan Sponsor, in the event of an uncorrected failure of the Actual Contribution Percentage Test, from taking any corrective measures available pursuant to Plan Section 3.8 above. SECTION 7 MULTIPLE PLANS Except to the extent limited by rules promulgated by the Secretary of the Treasury, if a Highly Compensated Eligible Participant is a participant in any other plan of the Plan Sponsor or any Affiliate which includes Matching Contributions, deferrals under a cash or deferred arrangement pursuant to Code Section 401(k), or nondeductible employee contributions, any contributions made by or on behalf of the Participant to the other plan shall be allocated with the same class of contributions under the Plan for purposes of determining the Actual Deferral Percentage and Actual Contribution Percentage under the Plan; provided, however, contributions that are made under an "employee stock ownership plan" (within the meaning of Code Section 4975(e)(7)) shall not be combined with contributions under any plan which is not an employee stock ownership plan (within the meaning of Code Section 4975(e)(7)). Except to the extent limited by rules promulgated by the Secretary of the Treasury, if the Plan and any other plans which include Matching Contributions, deferrals under a cash or deferred arrangement pursuant to Code Section 401(k), or nondeductible employee contributions are considered as one plan for purposes of Code Section 401(a)(4) and 410(b)(1), any contributions under the other plans shall be allocated with the same class of contributions under the Plan for purposes of determining the Actual Contribution Percentage and Actual Deferral Percentage under the Plan; provided, however, contributions that are made under an "employee stock ownership plan" (within the meaning of Code Section 4975(e)(7)) shall not be combined with contributions under any plan which is not an employee stock ownership plan (within the meaning of Code Section 4975(e)(7)). SECTION 8 ALTERNATIVE METHOD FOR NONDISCRIMINATION TESTING Effective January 1, 1999, notwithstanding any other provision in this Appendix C to the contrary, to the extent otherwise applicable, the limitations expressed in this Appendix C shall not apply with respect to those Plan Years in which the Plan satisfies the requirements of Code Sections 401(k)(11) and/or 401(k)(12).
EX-21 4 g79691exv21.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 INGLES MARKETS, INCORPORATED AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT Milkco, Inc., a North Carolina corporation. Sky King, Inc., a North Carolina corporation. Ingles Markets Investments, Inc., a Nevada corporation. Shopping Center Financing, LLC, a Georgia corporation. Shopping Center Financing II, LLC, a Georgia corporation. IMI Holdings, LLC, a Georgia limited liability company. EX-23 5 g79691exv23.txt CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in Post Effective Amendment No. 2 to the Registration Statement (Form S-8 No. 33-24187) pertaining to the Ingles Markets, Incorporated 1983 Stock Option Plan and in the related Prospectus, in the Registration Statement (Form S-8 No. 33-52103) pertaining to the Ingles Markets, Incorporated Investment/Profit Sharing Plan and in the related Prospectus, in the Registration Statement (Form S-8 No. 333-13067) pertaining to Ingles Markets, Incorporated 1987 Employee Incentive Stock Option Plan and in the related Prospectus, in the Registration Statement (Form S-8 No. 33-63167) pertaining to the Ingles Markets, Incorporated 1991 Nonqualified Stock Option Plan and in the related Prospectus, in the Registration Statement (Form S-8 No. 33-63165) pertaining to the Option Agreement dated July 21, 1993 entered into by Ingles Markets, Incorporated with Robert P. Ingle and in the related Prospectus, in the Registration Statement (Form S-8 No. 33-63163) pertaining to the Option Agreement dated July 21, 1993 entered into by Ingles Markets, Incorporated with Landy B. Laney and in the related Prospectus, in the Registration Statement (Form S-8 No. 333-88310) pertaining to the Ingles Markets, Incorporated Amended and Restated 1997 Nonqualified Stock Option Plan and in the related Prospectus, and in the Registration Statement (Form S-8 No. 333-74459) pertaining to the Ingles Markets, Incorporated Investment/Profit Sharing Plan and in the related Prospectus, of our report dated November 18, 2002 with respect to the consolidated financial statements and schedule of Ingles Markets, Incorporated and subsidiaries included in the Annual Report (Form 10-K) for the year ended September 28, 2002. /s/ Ernst & Young LLP Greenville, South Carolina December 9, 2002 EX-99.1 6 g79691exv99w1.txt SECTION 906 CERTIFICATION FOR CEO EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Ingles Markets, Incorporated (the "Company") on Form 10-K for the period ending September 28, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert P. Ingle, Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Robert P. Ingle - -------------------------------------------- Robert P. Ingle Chairman of the Board and Chief Executive Officer December 9, 2002 EX-99.2 7 g79691exv99w2.txt SECTION 906 CERTIFICATION FOR CFO EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Ingles Markets, Incorporated (the "Company") on Form 10-K for the period ending September 28, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Brenda S. Tudor, Vice President-Finance and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Brenda S. Tudor - ---------------------------------------------- Brenda S. Tudor Vice President-Finance and Chief Financial Officer December 9, 2002 -----END PRIVACY-ENHANCED MESSAGE-----