UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
INGLES MARKETS, INCORPORATED
(828) 669-2941
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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o .
As of August 1, 2003, the Registrant had 10,500,748 shares of Class A Common Stock, $.05 par value per share, outstanding and 12,391,216 shares of Class B Common Stock, $.05 par value per share, outstanding.
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TABLE OF CONTENTS
INGLES MARKETS, INCORPORATEDINDEX
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Part I. Financial Information
Item 1. Financial Statements
INGLES MARKETS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
See notes to unaudited interim financial statements.
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CONDENSED CONSOLIDATED BALANCE SHEETS (CONCLUDED)
LIABILITIES AND STOCKHOLDERS’ EQUITY
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
*Certain amounts have been reclassified for the provisions of FAS 145. See Note J for further details.
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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTSNine Months Ended June 28, 2003 and June 29, 2002
A. BASIS OF PREPARATION
In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments necessary to present fairly the Company’s financial position as of June 28, 2003, and the results of operations, changes in stockholders’ equity and cash flows for the three-month and nine-month periods ended June 28, 2003 and June 29, 2002. The adjustments made are of a normal recurring nature. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q. It is suggested that these unaudited interim financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Annual Report on Form 10-K for the year ended September 28, 2002 filed by the Company under the Securities Exchange Act of 1934 on December 10, 2002.
The results of operations for the three-month and nine-month periods ended June 28, 2003 are not necessarily indicative of the results to be expected for the full fiscal year.
Certain amounts for the three-month and nine-month periods ended June 29, 2002 have been reclassified for comparative purposes. See note J below.
B. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Receivables are presented net of an allowance for doubtful accounts of $606,954 and $479,113 at June 28, 2003 and September 28, 2002, respectively.
C. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND CURRENT PORTION OF OTHER LONG-TERM LIABILITIES
Accounts payable, accrued expenses and current portion of other long-term liabilities consist of the following:
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Self-insurance reserves are established for workers’ compensation and employee group medical and dental benefits based on claims filed and estimates of claims incurred but not reported. The Company is insured for covered costs in excess of $350,000 per occurrence for workers’ compensation and $200,000 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 $3.8 million and $4.9 million for the three-month periods ended June 28, 2003 and June 29, 2002, respectively.
For the nine-month periods ended June 28, 2003 and June 29, 2002, employee insurance expense, net of employee contributions, totaled $13.5 million and $15.4 million, respectively.
D. LONG-TERM DEBT
On May 29, 2003 the Company closed an offering of an additional $100 million of the existing $250 million 8-7/8% Senior Unsecured Subordinated Notes (the “Notes”). A portion of the proceeds was used to repay $22.4 million of outstanding borrowings under existing lines of credit.
The Company has committed lines of credit totaling $145 million, all of which is unused. $120 million of the lines mature in October 2006 while the other $25 million matures from September 2003 through October 2004. The maturity of the lines was renegotiated in connection with the issuance of the additional Notes.
E. DIVIDENDS
The Company paid cash dividends of $.165 for each share of Class A Common Stock and $.15 for each share of Class B Common Stock on April 9, 2003, January 15, 2003 and October 9, 2002 to stockholders of record on March 31, 2003, January 6, 2003 and October 1, 2002, respectively.
F. SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for interest and taxes is as follows:
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G. EARNINGS PER COMMON SHARE
The following tables set forth the computation of basic and diluted earnings per share for the three-month periods indicated:
The following table sets forth the computation of basic and diluted earnings per share for the nine-month periods indicated:
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H. LINES OF BUSINESS
The Company operates three lines of business: retail grocery sales, shopping center rentals, and a fluid dairy processing plant. All of the Company’s operations are domestic. Information about the Company’s operations by lines of business (in thousands) is as follows:
Revenue from shopping center rentals is reported on the rental income, net line of the statements of income. The other revenues comprise the net sales reported.
For the three months ended June 28, 2003 and June 29, 2002, respectively, the fluid dairy segment had $10.5 and $11.0 million in sales to the grocery sales segment. The fluid dairy segment had $33.2 and $33.3 million in sales to the grocery sales segment in the nine-month periods ended June 28, 2003 and June 29, 2002, respectively. These sales have been eliminated in consolidation and are excluded from the amounts in the table above.
I. ACCOUNTING FOR STOCK-BASED COMPENSATION
In December 2002, the FASB issued Statement No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (“FAS 148”). FAS 148 amends FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“FAS123”), to provide alternative methods of transition to the fair value method of accounting for stock-based employee compensation.
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In addition, FAS 148 amends the disclosure provisions of FAS 123 to require disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. FAS 148 does not amend FAS 123 to require companies to account for their employee stock-based awards using the fair value method. However, the disclosure provisions are required for all companies with stock-based employee compensation, regardless of whether they utilize the fair value method of accounting described in FAS 123 or the intrinsic value method described in Accounting Principals Board Opinion No. 25 (“APB Opinion No. 25”), Accounting for Stock Issued to Employees. FAS 148 is effective for fiscal years ending after December 15, 2002 and early application is permitted. Interim pro forma disclosures are required for interim periods beginning after December 15, 2002. The Company adopted FAS 148 beginning with the March 29, 2003 quarter.
The Company reports the value of stock-based employee compensation under the provisions of 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 APB Opinion No. 25. In accordance with FAS 123, the fair value of each option grant was determined using the Black-Scholes option-pricing model.
Had compensation cost for the Company’s plans been determined based on the fair value at the grant date for such awards 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:
No compensation expense has been recognized under APB Opinion No. 25 in the three and nine month periods ended June 28, 2003 and June 29, 2002. The pro forma impact of these options is not likely to be representative of the effects on reported net income for future years.
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J. NEW ACCOUNTING PRONOUNCEMENTS
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 requires 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 is 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 sale-leaseback transactions and modifies the accounting for sub-leases when the original lessee remains a secondary obligor (or guarantor). In the December 2002 quarter, the Company adopted FAS 145. Costs of $0.7 million incurred with the early retirement of $170.0 million in debt have been reclassified in the June 2002 nine-month period from an extraordinary item to interest expense. The reclassification has no effect on total basic or diluted earnings per share but eliminates the need to classify a $0.02 per share loss in the June 2002 nine-month period as an extraordinary item.
In Emerging Issues Task Force 02-16 “Accounting by a Customer (including a Reseller) for Cash Consideration Received from a Vendor” (“EITF 02-16”), the Task Force reached a consensus that the consideration received generally should be presumed to be a reduction of the prices of the vendor’s products or services and should therefore be shown as a reduction of cost of sales in the income statement of the customer. In the second quarter of fiscal 2003 the Company adopted EITF 02-16. The adoption did not have any impact on the Company’s financial statements.
In January 2003, the FASB released Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 requires that all primary beneficiaries of Variable Interest Entities (VIE) consolidate that entity. Fin 46 is effective immediately for VIEs created or acquired after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a VIE it acquired before February 1, 2003. The Company has determined that it has not created or modified any relationships or contracts since February 1, 2003 that could result in potential VIEs. The Company is in the process of identifying any relationships that existed prior to February 1, 2003 that could potentially be classified as a VIE. The impact on the Company’s financial statements is not known at this time.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Ingles, a leading supermarket chain in the Southeast, operates 199 supermarkets in Georgia (83), North Carolina (60), South Carolina (32), 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 June 28, 2003, the Company operated 23 in-store pharmacies and 16 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.
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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 judgments, 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
Beginning in fiscal 2003, the Company accounts for the impairment of long-lived assets 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 judgments 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. There are 13 and 39 weeks of operations included in the unaudited condensed consolidated statements of income for the three and nine-month periods ended June 28, 2003 and June 29, 2002. Comparable store sales are defined as sales by grocery stores in operation for the entire duration of the previous and current fiscal years. Replacement stores and major and minor remodels are included in the comparable store sales calculation.
A replacement store is a new store that is opened to replace an existing nearby store that is closed. A major remodel entails substantial remodeling of an existing store and may include additional retail square footage. A minor remodel includes repainting, remodeling and updating the lighting and equipment throughout an existing store.
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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, see Note H “Lines of Business” to the Unaudited Consolidated Financial Statements.
Non GAAP Financial Measures
EBITDA and EBITDAR are measures commonly used in the grocery industry. Management believes that EBITDA and EBITDAR and the adjusted measures referenced below are useful measures of Ingles’ operating performance. EBITDA represents earnings before interest, income taxes, depreciation and amortization. We calculate EBITDAR as EBITDA plus rent expense. In periods in which we have non-recurring charges or extraordinary items, we intend to present Adjusted EBITDA and Adjusted EBITDAR. Adjusted EBITDA will be calculated as earnings before interest, income taxes, depreciation, amortization, non-recurring charges and extraordinary items and Adjusted EBITDAR will be calculated as Adjusted EBITDA plus rent expense.
EBITDA and EBITDAR are not intended to represent cash flow from operations as defined by accounting principles generally accepted in the United States (GAAP) and are not necessarily indicative of cash available to fund all cash flow needs. Furthermore, neither should be considered as an alternative to net income under GAAP for purposes of evaluating Ingles’ results of operations.
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A reconciliation of EBITDA and EBITDAR to net income is provided below. Because EBITDA and EBITDAR are not calculated identically by all companies, the presentation herein may not be comparable to other similarly titled measures of other companies.
Three Months Ended June 28, 2003 Compared to the Three Months Ended June 29, 2002
Net Sales. Sales comparisons for the three-month period were affected by the timing of the Easter holiday. In fiscal 2002, Easter fell on the day following the end of the second quarter, therefore Easter related sales were included in the second quarter of fiscal 2002. Easter related sales are included in the third quarter of fiscal 2003.
Net sales for the June 2003 quarter increased 4.3% to $503.6 million from $483.0 million for the same quarter last year. Comparable store sales for the same period increased 2.8%. Excluding the effect of Easter sales, comparable store sales increased 2.0% for the June 2003 quarter compared to the June 2002 quarter. Aggressive promotional activity during the third quarter of 2003 was a primary contributing factor to the sales increase. Ingles operated 199 stores at the end of the June 2003 quarter and 201 stores at the end of the June 2002 quarter.
Gross Profit. Gross profit for the three-month period ended June 28, 2003, increased 1.4% to $131.0 million, or 26.0% of sales, compared to $129.2 million, or 26.7% of sales, for the three-month period ended June 29, 2002. Although gross profit dollars increased, gross profit as a percentage of sales decreased primarily due to the cost of the aggressive promotional activity during the quarter. The majority of the decrease as a percentage of sales was in the grocery department.
Operating and Administrative Expenses. Operating and administrative expenses increased 3.3% to $116.2 million for the three months ended June 28, 2003, from $112.5 million for the three months ended June 29, 2002. As a percentage of sales, operating and administrative expenses decreased to 23.1% for the June 2003 three-month period compared to 23.3% for the June 2002 three-month period.
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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 increased due to the addition of labor hours at the store level to enhance customer service as part of the Company’s initiative to drive sales.
Both rent expense and depreciation and amortization expense increased due to four new stores opened during the year, three of which are leased and one of which is owned as well as two major remodel/expansions that were completed during the year.
Bank charges, as a percentage of sales, rose due to both increased usage of debit and credit cards and increased transaction fees.
Repairs and maintenance, as a percentage of sales, decreased primarily due to changes made in the refrigeration maintenance program and the addition of a field employee to oversee maintenance contractors at the store level.
The decline in insurance expense was due primarily to increased efforts by the risk management department and cooperation from store operations for the reporting, monitoring and disposition of both general liability and workers compensation claims. Also; changes made to the self-insured group insurance plan in both April 2003 and April 2002 contributed to the decrease.
Rental Income, Net. Rental income, net decreased $0.3 million to $2.0 million for the June 2003 quarter from $2.3 million for the June 2002 quarter. The decrease is due primarily to the loss of K-Mart as a tenant in one location and the relocation of several drug store tenants to free-standing sites.
Income from Operations. Income from operations decreased 11.8% to $16.8 million or 3.3% of sales in the June 2003 quarter compared to $19.0 million, or 3.9% of sales in the June 2002 quarter. The decrease is principally attributable to the increase in operating and administrative expense and the decline in net rental income, somewhat offset by increased gross profit.
Other Income, Net. Other income, net increased $1.2 million to $1.6 million for the three-month period ended June 28, 2003 from $0.4 million for the three-month period ended June 29, 2002. The increase is principally due to the inclusion in the June 2003 quarter of a gain of $0.9 million from a payment received due to a state condemnation for the construction of a highway on land adjacent to a former store location. Other income, net for the June 2002 three-month period was partially offset by a charge of $0.4 million for the write off of leasehold improvements due to a termination of a lease on a closed store.
Income Before Interest & Income Taxes. Income before interest and income taxes decreased $1.0 million to $18.4 million, during the June 2003 quarter compared to $19.4 million during the June 2002 quarter. Income before interest and income taxes, as a percentage of sales, was 3.7% and 4.0% for the June 2003 quarter and the June 2002 quarter, respectively.
Interest Expense. Interest expense decreased $0.9 million for the June 2003 quarter compared to the June 2002 quarter due to a reduction in debt from June 2002, prior to the issuance on May 29, 2003 of an additional $100 million of the existing 8-7/8% Senior Unsecured Subordinated Notes, due December 2011. A portion of the proceeds from the additional Notes was used to reduce outstanding borrowings of $22.4 million under existing lines of credit.
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Income Taxes. Income tax expense as a percentage of pre-tax income decreased to 35.9% in the June 2003 quarter compared to 37.3% in the June 2002 quarter, due primarily to reduced state income taxes.
Net Income. Net income remained stable at $3.6 million, or $.16 per basic and diluted share, for both the three-month period ended June 28, 2003 and the three-month period ended June 29, 2002. Net income, as a percentage of sales, was 0.7% for both the June 2003 and June 2002 three-month periods.
Nine Months Ended June 28, 2003 Compared to the Nine Months Ended June 29, 2002
Net Sales. Net sales for the nine months ended June 28, 2003 increased 0.9% to $1.488 billion, compared to $1.476 billion for the nine months ended June 29, 2002. Comparable store sales increased 0.4% for such period. Declines in comparable store sales in the previous two quarters, were more than offset with comparable store sales increases in the June 2003 quarter.
Gross Profit. Gross profit for the nine months ended June 28, 2003 increased 0.3% to $391.0 million, compared to $389.7 million, for the nine months ended June 29, 2002. As a percentage of sales, gross profit decreased slightly to 26.3% for the nine months ended June 28, 2003 from 26.4% for the nine months ended June 29, 2002.
Operating and Administrative Expenses. Operating and administrative expenses increased 1.2% to $347.4 million for the nine months ended June 28, 2003, from $343.3 million for the nine months ended June 29, 2002. Operating and administrative expenses, as a percentage of sales, were 23.3% for both the June 2003 nine-month period and the June 2002 nine-month period.
As discussed in the three-month comparison, rent expense and depreciation and amortization expense increased due to new store construction and major remodel/expansions of existing stores. Insurance expense decreased due to the factors discussed in the three-month comparison above.
Rental Income, Net. Rental income, net decreased $0.6 million to $6.5 million in the June 2003 nine-month period from $7.1 million in the June 2002 comparable period. Gross rental income decreased $0.3 million, while shopping center expenses (primarily depreciation) increased $0.3 million.
Income from Operations. Income from operations decreased 6.2% to $50.1 million or 3.4% of sales in the June 2003 nine-month period compared to $53.4 million, or 3.6% of sales in the June 2002 nine-month period.
Other Income, Net. Other income, net increased $0.4 million for the June 2003 nine-month period over the comparable period in fiscal 2002. The June 2003 nine-month period included a gain of $1.1 million from the sale of a shopping center in which the company no longer operated a store and the $0.9 million gain from the proceeds of a state condemnation for highway construction on land adjacent to a former Ingles store. The June 2002 nine-month period included $1.8 million in gains from the sale of three tracts of land, partially offset by the write-off of leasehold improvements of $0.4 million on a lease termination for a closed store.
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Interest Expense. Interest expense decreased $1.4 million to $38.1 million for the nine months ended June 28, 2003 from $39.5 million for the nine months ended June 29, 2002, due primarily to the decrease in debt prior to the issuance of the additional Notes on May 29, 2003.
Costs of $0.7 million associated with the early retirement of debt incurred during the June 2002 nine-month period have been reclassified in the June 2002 nine-month period from an extraordinary item to interest expense in compliance with FASB Statement No. 145.
Income Taxes. Income tax expense as a percentage of pre-tax income decreased to 36.2% in the June 2003 nine-month period compared to 37.4% in the June 2002 nine-month period due primarily to a reduction in state income tax expense.
Net Income. Net income for the June 2003 nine-month period was $10.2 million, or 0.7% of sales, compared to $11.0 million, or 0.7% of sales, for the June 2002 nine-month period. Basic earnings per common share were $.45 and $.49 for the June 2003 and June 2002 nine-month period, respectively. Diluted earnings per common share were $.44 for the June 2003 nine-month period compared to $.48 for the June 2002 nine-month period.
Liquidity and Capital Resources
Capital Expenditures
The Company believes that a key to its ability to continue to develop a loyal customer base is providing conveniently located, clean and modern stores which provide customers with good service and a broad selection of competitively priced products. As such, the Company has invested and will continue to invest significant amounts of capital toward the modernization of its store base. The Company’s modernization program includes the opening of new stores, the completion of major remodels and expansion of selected existing stores, the relocation of selected existing stores to larger, more convenient locations and the completion of minor remodeling of its remaining existing stores.
Capital expenditures totaled $58.1 million for the nine-month period ended June 28, 2003, including the opening of four new stores, the completion of two major remodel/expansions and three minor remodels and the purchase of one shopping center in which the Company was a tenant. 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 later in fiscal 2003 and in fiscal 2004.
Total capital expenditure plans for fiscal 2003 are projected to be approximately $70 million. For the balance of fiscal 2003, the Company plans to replace one existing store and complete one major remodel/expansion. 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 had net cash from operations of $29.0 million in the June 2003 nine-month period compared to $37.0 million in the June 2002 period. The primary factors contributing to the fluctuation were increases in inventory and decreases in accounts payable and accrued expenses, partially offset by a decrease in receivables. Although trade accounts payable increased in conjunction with the increase in inventory, interest payable decreased due to two semi-annual payments of interest on the Notes in the June 2003 nine-month period.
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Cash used by investing activities totaled $54.7 million comprised primarily of $58.1 million of capital expenditures during the period, partially offset by $3.4 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 the June 2003 nine-month period, the Company’s financing activities provided $50.1 million in cash. Proceeds from long-term debt totaled $120.0 million, comprised of $100.0 million from the issuance of additional Notes and $20.0 net advances under long-term lines of credit, while repayments of long-term debt were $59.1 million. Dividends paid totaled $10.7 million.
At June 28, 2003, the Company had lines of credit with five banks totaling $145.0 million, all of which was unused. Of the $145.0 million of committed lines of credit, $120.0 million matures in October 2006 and $25.0 million matures between September 2003 and November 2004. 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 June 28, 2003.
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 June 28, 2003, the Company had unencumbered real property and equipment with a net depreciated value of approximately $324.0 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.
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 $29.0 million based on tangible net worth at June 28, 2003. 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.
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Impact of Inflation
Inflation in food prices during the first nine months of fiscal 2003 and in fiscal 2002 was slightly higher 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 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 requires 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 is 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 sale-leaseback transactions and modifies the accounting for sub-leases when the original lessee remains a secondary obligor (or guarantor). In the December 2002 quarter, the Company adopted FAS 145. Costs of $0.7 million incurred with the early retirement of $170.0 million in debt have been reclassified in the June 2002 nine-month period from an extraordinary item to interest expense. The reclassification had no effect on total basic or diluted earnings per share but eliminates the need to classify a $0.02 per share loss in the June 2002 nine-month period as an extraordinary item.
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, include business and
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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, the opening of competitors stores in the Company’s markets 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On December 11, 2001 the Company closed the offering of the Notes. On May 29, 2003, the Company closed an issuance of an additional $100 million of the Notes. The Notes bear interest at a rate of 8 7/8%. The $250 million of Notes issued in 2001 were issued at a discount to yield 9%. The $100 million of Notes issued in 2003 were issued at a premium to yield 8.67%. There have been no material changes in the market interest rates subsequent to September 28, 2002.
Item 4. CONTROLS AND PROCEDURES
As of June 28, 2003, 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 – 15(e) 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 at ensuring 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 June 28, 2003.
Part II. Other Information
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused the report to be signed on its behalf by the undersigned thereunto duly authorized.
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CERTIFICATION PURSUANT TO 17 CFR 240.13a-14PROMULGATED UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert P. Ingle, Chief Executive Officer of Ingles Markets, Incorporated, certify that:
(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 quarterly 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 quarterly report (the “Evaluation Date”); and
(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
(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
Date: August 8, 2003
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I, Brenda S. Tudor, Chief Financial Officer of Ingles Markets, Incorporated, certify that:
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