Edgar Filing: INGLES MARKETS INC

For the quarterly period ended December 27, 2003

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

Amendment No. 1

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

For the quarterly period ended December 27, 2003

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

For the transition period from to .

Commission file number 0-14706.

INGLES MARKETS, INCORPORATED

(Exact name of registrant as specified in its charter)

North Carolina

56-0846267

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)


P.O. Box 6676, Asheville NC		28816
(Address of principal executive offices)		(Zip Code)

(828) 669-2941

Registrant’s telephone number, including area code

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 ¨.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ¨.

As of January 21, 2004, the Registrant had 10,764,514 shares of Class A Common Stock, $0.05 par value per share, outstanding and 12,383,641 shares of Class B Common Stock, $0.05 par value per share, outstanding.

EXPLANATORY NOTE

Ingles Markets, Incorporated (“Ingles” or the “Company”) is filing this Quarterly Report on Form 10-Q/A (the “Form 10-Q/A”) for the quarter ended December 27, 2003 to reflect the restatement of its consolidated financial statements, the notes thereto, and related disclosures.

During preparation for its annual audit and annual report on Form 10-K for fiscal 2004 and as a result of a previously announced internal investigation initiated after an informal Securities and Exchange Commission inquiry, the Company determined that certain vendor allowances and certain other revenue and expense items had been accounted for incorrectly. In addition, the Company identified accounting errors related to certain lease transactions. Ingles is filing this Form 10-Q/A for purposes of restating its consolidated financial statements for the periods ended December 27, 2003 and December 28, 2002 in order to correct these errors. The adjustments made to Ingles’ financial statements are further described in Note B to the consolidated financial statements.

This Form 10-Q/A has not been updated except as required to reflect the effects of the restatement. This amendment and restatement includes changes to Part I, Items 1, 2 and 4 and Part II, Item 6. Except as identified in the prior sentence, no other item included in the original Form 10-Q has been amended, and such items shall remain in effect as of the filing date of the original Form 10-Q. Additionally, this Form 10-Q/A does not purport to provide an update or discussion of any other developments at the Company subsequent to its original filing.

INGLES MARKETS, INCORPORATED

INDEX


			Page No.

Part I - Financial Information

	Item 1.	Financial Statements (Unaudited)

		Condensed Consolidated Balance Sheets (as restated) as of December 27, 2003 and September 27, 2003	4

		Condensed Consolidated Statements of Income (as restated) for the Three Months Ended December 27, 2003 and December 28, 2002	6

		Condensed Consolidated Statements of Changes in Stockholders’ Equity (as restated) for the Three Months Ended December 27, 2003 and December 28, 2002	7

		Condensed Consolidated Statements of Cash Flows (as restated) for the Three Months Ended December 27, 2003 and December 28, 2002	8

		Notes to Unaudited Interim Financial Statements	9

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20

	Item 4.	Controls and Procedures	20

Part II - Other Information

	Item 6.	Exhibits and Reports on Form 8-K	21

Signatures			23

Part I. Financial Information

Item 1. Financial Statements

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

ASSETS


	DECEMBER 27, 2003 (RESTATED)		SEPTEMBER 27, 2003 (RESTATED)
Current Assets:
Cash and Cash Equivalents	$	47,345,393	$	80,879,318
Receivables		36,286,367		34,220,658
Inventories		194,524,657		193,402,781
Other Current Assets		10,228,142		11,768,169

Total Current Assets		288,384,559		320,270,926
Property and Equipment – Net		748,412,847		739,023,467
Other Assets		16,137,382		16,155,680

Total Assets	$	1,052,934,788	$	1,075,450,073

See notes to unaudited interim financial statements.

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

LIABILITIES AND STOCKHOLDERS’ EQUITY


	DECEMBER 27, 2003 (RESTATED)		SEPTEMBER 27, 2003 (RESTATED)
Current Liabilities:
Short-term loans and current portion of long-term debt	$	34,867,694	$	38,032,125
Accounts payable, accrued expenses and current portion of other long-term liabilities		139,415,371		149,627,349

Total Current Liabilities		174,283,065		187,659,474
Deferred Income Taxes		38,343,578		39,663,578
Long-Term Debt		595,626,865		602,932,198
Other Long-Term Liabilities		8,435,309		8,599,709

Total Liabilities		816,688,817		838,854,959

Stockholders’ Equity
Preferred stock, $0.05 par value; 10,000,000 shares authorized; no shares issued
Common stocks:		—		—
Class A, $0.05 par value; 150,000,000 shares authorized; 10,730,614 shares issued and outstanding December 27, 2003; 10,635,419 shares issued and outstanding September 27, 2003		536,530		531,770
Class B, $0.05 par value; 100,000,000 shares authorized; 12,384,391 shares issued and outstanding December 27, 2003; 12,391,216 shares issued and outstanding September 27, 2003		619,220		619,561
Paid-in capital in excess of par value		103,321,242		102,465,443
Retained earnings		131,768,979		132,978,340

Total Stockholders’ Equity		236,245,971		236,595,114

Total Liabilities and Stockholders’ Equity	$	1,052,934,788	$	1,075,450,073

See notes to unaudited interim financial statements.

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	THREE MONTHS ENDED
	DECEMBER 27, 2003 (RESTATED)			DECEMBER 28, 2002 (RESTATED)
Net sales	$	534,306,437		$	495,116,191
Cost of goods sold		400,970,569			365,271,106

Gross profit		133,335,868			129,845,085
Operating and administrative expenses		118,531,853			115,817,828
Rental income, net		1,490,715			2,157,181

Income from operations		16,294,730			16,184,438
Other income, net		1,337,444			497,919
Interest expense		13,869,593			12,717,128

Income before income taxes		3,762,581			3,965,229

Income taxes:
Current		2,270,000			1,604,000
Deferred		(911,000	)		(223,000	)

		1,359,000			1,381,000

Net income	$	2,403,581		$	2,584,229

Per share amounts:
Basic earnings per common share	$	0.10		$	0.11

Diluted earnings per common share	$	0.10		$	0.11

Cash dividends per common share:
Class A Common Stock	$	0.165		$	0.165

Class B Common Stock	$	0.150		$	0.150

See notes to unaudited interim financial statements.

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

THREE MONTHS ENDED DECEMBER 27, 2003 AND DECEMBER 28, 2002


	CLASS A COMMON STOCK			CLASS B COMMON STOCK					PAID-IN CAPITAL IN EXCESS OF PAR VALUE		RETAINED EARNINGS (RESTATED)			TOTAL (RESTATED)
	SHARES	AMOUNT		SHARES		AMOUNT			PAID-IN CAPITAL IN EXCESS OF PAR VALUE		RETAINED EARNINGS (RESTATED)			TOTAL (RESTATED)
Balance, September 28, 2002 (as previously reported)	10,189,807	$	509,490	12,597,932		$	629,897		$	100,148,857	$	137,270,604		$	238,558,848
Restatement adjustments	—		—	—			—			—		(6,992,000	)		(6,992,000	)

Balance, September 28, 2002 (as restated)	10,189,807		509,490	12,597,932			629,897			100,148,857		130,278,604			231,566,848
Net income	—		—	—			—			—		2,584,229			2,584,229
Cash dividends	—		—	—			—			—		(3,571,008	)		(3,571,008	)
Common stock conversions	1,050		53	(1,050	)		(53	)		—		—			—

Balance, December 28, 2002	10,190,857	$	509,543	12,596,882		$	629,844		$	100,148,857	$	129,291,825		$	230,580,069

Balance, September 27, 2003 (as previously reported)	10,635,419	$	531,770	12,391,216		$	619,561		$	102,465,443	$	139,946,340		$	243,563,114
Restatement adjustments	—		—	—			—			—		(6,968,000	)		(6,968,000	)

Balance, September 27, 2003 (as restated)	10,635,419		531,770	12,391,216			619,561			102,465,443		132,978,340			236,595,114
Net income	—		—	—			—			—		2,403,581			2,403,581
Cash dividends	—		—	—			—			—		(3,612,942	)		(3,612,942	)
Exercise of stock options	88,370		4,419	—			—			855,799		—			860,218
Common stock conversions	6,825		341	(6,825	)		(341	)		—		—			—

Balance, December 27, 2003	10,730,614	$	536,530	12,384,391		$	619,220		$	103,321,242	$	131,768,979		$	236,245,971

See notes to unaudited interim financial statements.

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	THREE MONTHS ENDED
	DECEMBER 27, 2003 (RESTATED)			DECEMBER 28, 2002 (RESTATED)
Cash Flows from Operating Activities:
Net income	$	2,403,581		$	2,584,229
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		14,029,572			12,432,305
Amortization of deferred gain on sale/leasebacks		(129,545	)		(211,795	)
Gains on disposals of property and equipment		(1,042,618	)		(35,246	)
Receipt of advance payments on purchases contracts		835,000			750,000
Recognition of advance payments on purchases contracts		(2,027,415	)		(1,405,458	)
Deferred income taxes		(911,000	)		(223,000	)
(Increase) decrease in receivables		(2,065,709	)		542,896
Increase in inventory		(1,121,876	)		(1,620,162	)
Decrease (increase) in other assets		912,704			(1,218,725	)
Decrease in accounts payable and accrued expenses		(4,988,349	)		(17,120,507	)

Net Cash Provided/(Used) by/(in) Operating Activities		5,894,345			(5,525,463	)

Cash Flows from Investing Activities:
Proceeds from sales of property and equipment		1,196,948			42,977
Capital expenditures		(27,307,141	)		(19,971,748	)

Net Cash Used in Investing Activities		(26,110,193	)		(19,928,771	)

Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt and advances on lines of credit		—			9,313,000
Debt issuance costs		(95,589	)		(24,937	)
Principal payments on long-term debt		(10,469,764	)		(12,434,372	)
Proceeds from exercise of stock options		860,218			—
Dividends paid		(3,612,942	)		(3,571,008	)

Net Cash Used in Financing Activities		(13,318,077	)		(6,717,317	)

Net Decrease in Cash and Cash Equivalents		(33,533,925	)		(32,171,551	)
Cash and cash equivalents at beginning of period		80,879,318			46,914,305

Cash and Cash Equivalents at End of Period	$	47,345,393		$	14,742,754

See notes to unaudited interim financial statements.

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS

Three Months Ended December 27, 2003 and December 28, 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 December 27, 2003, and the results of operations, changes in stockholders’ equity and cash flows for the three months ended December 27, 2003 and December 28, 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 25, 2004 filed by the Company under the Securities Exchange Act of 1934 on February 10, 2005 which includes restated audited financial statements for the year ended September 27, 2003.

The results of operations for the three-month period ended December 27, 2003 are not necessarily indicative of the results to be expected for the full fiscal year.

Certain amounts for the three-month period ended December 28, 2002 have been reclassified for comparative purposes.

B. RESTATEMENT

Summary of Restatement Impact on Net Income and Retained Earnings

The restatement resulted in an increase to income before income taxes of $986,000 ($607,000 net of income taxes) for the quarter ended December 27, 2003 and a decrease to income before income taxes of $960,000 ($591,000 net of income taxes) for the quarter ended December 28, 2002.

The total of the cumulative adjustments to retained earnings for this restatement, before the effect of income taxes, as detailed below is approximately $10.3 million and $11.3 million through December 27, 2003 and September 27, 2003, respectively. The income tax benefit of these adjustments totals approximately $3.9 million and $4.3 million through December 27, 2003 and September 27, 2003, respectively, resulting in a net cumulative adjustment to retained earnings of approximately $6.4 million and $7.0 million through December 27, 2003 and September 27, 2003, respectively.

Details of the errors corrected in the restatement are as follows.

Vendor Allowance Errors

Vendor allowance errors were due primarily to certain allowances related to agreements entered into prior to fiscal 2004, which were recognized in the results of operations when billed. These allowances should have been deferred and recognized over certain measurable criteria, such as purchase volumes or passage of time. Other errors included the recording of erroneous charges to vendors and the omission of the recording of receivables which were recognized in a later period than when they were earned. These errors were corrected in the period in which the error was identified, but resulted in income and expense being recorded in the incorrect periods.

The correction of the vendor allowance errors increased income before income taxes by approximately $618,000 for the quarter ended December 27, 2003 and decreased income before income taxes by approximately $368,000 for the quarter ended December 28, 2002. The cumulative decrease to retained earnings for correction of these errors, before giving effect to income taxes, was approximately $5.5 million and $6.1 million at December 27, 2003 and September 27, 2003, respectively.

Closing Process Errors

Closing process errors included incorrect assumptions used in calculating property tax accruals due to erroneous estimates of receivables due from tenants for the reimbursements of property taxes and inaccurate or omitted accruals of certain other revenue and expense items.

The correction of these errors increased income before income taxes by approximately $418,000 for the quarter ended December 27, 2003, and decreased income before income taxes by approximately $540,000 for the quarter ended December 28, 2002. The cumulative decrease to retained earnings for these errors, before giving effect to income taxes, through December 27, 2003 and September 27, 2003 was approximately $2.2 million and $2.6 million, respectively.

Lease Transaction Errors

During a review of the Company’s lease transactions, the Company identified errors in the accounting for certain lease transactions. These errors included the amortization of leasehold improvements over a period that exceeded the lease term and the erroneous classification of certain leasehold improvements as land, resulting in amortization expense not being recorded. In addition, the Company identified errors in accounting for certain ground leases that contained escalating rent provisions. The Company was recognizing the rent expense as it was paid instead of using the straight line method over the term of the lease.

The correction of these errors decreased income before income taxes by approximately $50,000 and $52,000, for the quarters ended December 27, 2003 and December 28, 2002, respectively. The cumulative decrease to retained earnings, before giving effect to income taxes, due to errors in these lease transactions totaled approximately $2.6 million through both December 27, 2003 and September 27, 2003.

The effect of these restatements had no impact on cash flows, however the impact on the unaudited condensed consolidated balance sheets and the unaudited condensed consolidated statements of income and earnings per common share are included in the table below.


	(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
	AS PREVIOUSLY REPORTED		AS RESTATED
Condensed Consolidated Balance Sheet (unaudited)
As of December 27, 2003
Cash and Cash Equivalents	$	47,331	$	47,345
Receivables		35,895		36,286
Inventories		195,367		194,525
Other Current Assets		7,681		10,228
Total Current Assets		286,274		288,385
Property and Equipment - Net		750,273		748,413
Other Assets		15,764		16,137
Total Assets		1,052,311		1,052,935
Accounts payable, accrued expenses and current portion of other long-term liabilities		137,475		139,415
Total Current Liabilities		172,343		174,283
Deferred Income Taxes Payable		39,380		38,344
Other Long-Term Liabilities		2,353		8,435
Total Liabilities		809,703		816,689
Retained Earnings		138,131		131,769
Total Stockholders’ Equity		242,608		236,246
Total Liabilities and Stockholders’ Equity	$	1,052,311	$	1,052,935


	(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
	AS PREVIOUSLY REPORTED		AS RESTATED
Condensed Consolidated Statements of Income (unaudited)
For the three months ended December 27, 2003
Net sales	$	534,334	$	534,306
Cost of goods sold		402,425		400,970
Gross profit		131,909		133,336
Operating and administrative expenses		118,126		118,532
Rental income, net		1,514		1,491
Income from operations		15,297		16,295
Interest expense		13,858		13,870
Income before income taxes		2,776		3,762
Income taxes		980		1,359
Net income	$	1,796	$	2,403
Basic earnings per common share	$	0.08	$	0.10
Diluted earnings per common share	$	0.08	$	0.10

Condensed Consolidated Balance Sheet (unaudited)
As of September 27, 2003
Cash and Cash Equivalents	$	80,865	$	80,879
Receivables		31,014		34,221
Inventories		194,835		193,403
Other Current Assets		8,351		11,768
Total Current Assets		315,065		320,271
Property and Equipment - Net		740,834		739,023
Other Assets		15,760		16,156
Total Assets		1,071,659		1,075,450
Accounts payable, accrued expenses and current portion of other long-term liabilities		144,588		149,627
Total Current Liabilities		182,620		187,659
Deferred Income Taxes Payable		40,615		39,664
Other Long-Term Liabilities		1,930		8,600
Total Liabilities		828,096		838,855
Retained Earnings		139,946		132,978
Total Stockholders’ Equity		243,563		236,595
Total Liabilities and Stockholders’ Equity	$	1,071,659	$	1,075,450

Condensed Consolidated Statements of Income (unaudited)
For the three months ended December 28, 2002
Cost of goods sold	$	364,771	$	365,271
Gross profit		130,345		129,845
Operating and administrative expenses		115,337		115,818
Rental income, net		2,151		2,157
Income from operations		17,159		16,184
Interest expense		12,732		12,717
Income before income taxes		4,925		3,965
Income taxes		1,750		1,381
Net income	$	3,175	$	2,584
Basic earnings per common share	$	0.14	$	0.11
Diluted earnings per common share	$	0.14	$	0.11

Certain amounts in Notes C, D, E, H and I have been restated to reflect the adjustments described above.

C. ACCOUNTING FOR STOCK-BASED COMPENSATION

granted under those plans had an exercise price equal to the fair market value of the underlying common stock on the date of grant. During the fourth quarter of fiscal 2003, effective as of the beginning of the 2003 fiscal year, the Company adopted the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” (“FAS 123”). Under the fair value recognition provisions of FAS 123, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Under the transition method selected by the Company as allowed by FASB Statement No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (“FAS 148”), the Company elected to apply the change in accounting principle using the prospective method. As no options were granted, modified or settled during the fiscal year ended September 27, 2003, or in the first quarter of fiscal 2004 there was no stock-based employee compensation expense included in net income for the three months ended December 27, 2003 or December 28, 2002.

Had compensation cost for the Company’s plans been determined based on the fair market value at the grant date for awards granted prior to the adoption 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. In accordance with FAS 123, the fair value of each option grant was determined using the Black- Scholes option-pricing model.


	Three Months Ended
	December 27, 2003		December 28, 2002
BASIC
Net income	$	2,403,581	$	2,584,229
Net income, pro forma	$	2,390,304	$	2,382,213
Basic earnings per common share	$	0.10	$	0.11
Basic earnings per common share, pro forma	$	0.10	$	0.10
DILUTED
Diluted earnings	$	2,403,581	$	2,584,229
Diluted earnings, pro forma	$	2,390,304	$	2,382,213
Diluted earnings per common share	$	0.10	$	0.11
Diluted earnings per common share, pro forma	$	0.10	$	0.10

D. ALLOWANCE FOR DOUBTFUL ACCOUNTS

Receivables are presented net of an allowance for doubtful accounts of $468,611 and $438,509 at December 27, 2003 and September 27, 2003, respectively.

E. 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:


	December 27, 2003		September 27, 2003
Accounts payable-trade	$	95,064,051	$	88,163,336
Property, payroll, and other taxes payable		10,104,492		14,750,386
Salaries, wages and bonuses payable		10,948,979		13,352,858
Self-insurance reserves		6,011,625		6,465,843
Interest		4,381,778		12,144,729
Other		12,904,446		14,750,197

	$	139,415,371	$	149,627,349

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 $3.9 million and $4.7 million for the three-month periods ended December 27, 2003 and December 28, 2002, respectively.

F. LONG-TERM DEBT

On May 29, 2003, the Company closed an offering of an additional $100.0 million of the existing 8⁷/8% Senior Subordinated Notes (the “Notes”) due December 11, 2011, at a premium to yield 8.67%. A portion of the proceeds was used to repay $30.5 million of outstanding debt. The additional Notes bear the same terms and maturity date as the original issuance.

At December 27, 2003, the Company had lines of credit with five banks totaling $135.0 million, all of which were unused. Of the $135.0 million of committed lines of credit, $120.0 million of the commitment expires in October 2006, and $15.0 million of the commitment expires in October 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 December 27, 2003.

G. DIVIDENDS

The Company paid cash dividends of 0.165 for each share of Class A Common Stock and 0.15 for each share of Class B Common Stock on October 8, 2003 to stockholders of record on September 30, 2003.

H. EARNINGS PER COMMON SHARE

The following tables set forth the computation of basic and diluted earnings per share for the three-month periods indicated:


	Three Months Ended
	December 27, 2003		December 28, 2002
BASIC:
Net income	$	2,403,581	$	2,584,229

Weighted average number of common shares outstanding		23,034,675		22,787,739

Basic earnings per common share	$	0.10	$	0.11

DILUTED:
Diluted earnings	$	2,403,581	$	2,584,229

Weighted average number of common shares and common stock equivalent shares outstanding		23,090,800		23,107,505

Diluted earnings per common share	$	0.10	$	0.11

I. 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:


	Three Months Ended
	December 27, 2003		December 28, 2002
Revenues from unaffiliated customers:
Grocery sales	$	509,310	$	472,570
Shopping center rentals		3,352		3,839
Fluid dairy		24,996		22,546

Total revenues from unaffiliated customers	$	537,658	$	498,955

Income from operations:
Grocery sales	$	12,805	$	11,237
Shopping center rentals		1,491		2,157
Fluid dairy		1,999		2,790

Total income from operations	$	16,295	$	16,184


	December 27, 2003		September 27, 2003
Assets:
Grocery sales	$	911,674	$	932,860
Shopping center rentals		111,051		112,264
Fluid dairy		30,210		30,326

Total assets	$	1,052,935	$	1,075,450

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

For the three months ended December 27, 2003 and December 28, 2002, the fluid dairy segment had $12.0 million and $11.4 million, respectively, in sales to the grocery sales segment. These sales have been eliminated in consolidation and are excluded from the amounts in the table above.

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.

EITF (Emerging Issues Task Force) Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor,” became effective for the Company on December 29, 2002. This issue addresses the appropriate accounting for consideration received from a vendor. Due to system constraints and the nature of certain allowances, it is sometimes not practicable to apply allowances to the item cost of inventory. As a result of this new guidance and these constraints, the Company adopted a new policy for recognizing vendor allowances, including slotting fees. The Company now recognizes these allowances as a reduction to inventory and ultimately to cost of goods sold when the related products are sold, for agreements entered into or modified subsequent to December 29, 2002. Under the Company’s previous accounting policy for vendor allowances, including slotting fees, these credits were recognized as a reduction to cost of goods sold as soon as the amount was contractually established and collection was deemed probable.

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 ending after March 15, 2004, to VIEs in which an enterprise holds an interest it acquired before February 1, 2003. The Company has determined that it does not have any relationships or contracts that constitute VIEs.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Restatement

During preparation for its annual audit and annual report on Form 10-K for fiscal 2004 and as a result of a previously announced internal investigation initiated after an informal Securities and Exchange Commission inquiry, the Company determined that certain vendor allowances and certain other revenue and expense items had been accounted for incorrectly. In addition, the Company identified accounting errors related to certain lease transactions. Ingles is filing this Form 10-Q/A for purposes of restating its consolidated financial statements for the periods ended December 27, 2003 and December 28, 2002 in order to correct the errors identified above. The adjustments made to Ingles’ financial statements are further described in Note B to the consolidated financial statements. All discussion in this Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to the restatement.

Overview

Ingles, a leading supermarket chain in the Southeast, operates 198 supermarkets in Georgia (81), North Carolina (60), South Carolina (33), 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. During fiscal 2000, the Company began adding fuel centers and pharmacies at select store locations. As of December 27, 2003 the Company operated 27 in-store pharmacies and 18 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 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 coverage. 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 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 closed prior to December 31, 2002 that were 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. For all store closures subsequent to the adoption of Statement of Financial Accounting Standards No. 146, effective December 31, 2002, the liability is recognized and expensed based on the difference between the present value of any remaining liability under the lease and the present value of the estimated market rate at which the Company expects to be able to sublease the properties. The Company’s estimates of market rates are based on its experience, knowledge and third-party advice or market data. 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.

Vendor Allowances

The Company receives funds for a variety of merchandising activities from the many vendors whose products the Company buys for resale in its stores. These incentives and allowances include volume or purchase based incentives, advertising allowances, slotting fees, and promotional discounts. The purpose of these incentives and allowances is generally to help defray the costs incurred by the Company for stocking, advertising, promoting and selling the vendor’s products. Whenever possible, vendor discounts and allowances that relate to buying and merchandising activities are recorded as a component of item cost in inventory and recognized in merchandise costs when the item is sold. Due to system constraints and the nature of certain allowances, it is sometimes not practicable to apply allowances to the item cost of inventory. In those instances, the allowances are applied as a reduction of merchandise costs using a rational and systematic methodology, which results in the recognition of these incentives when the inventory related to the initial purchase is sold. Amounts that represent a reimbursement of specific identifiable incremental costs, such as advertising, are recorded as a reduction to the related expense in the period that the related expense is incurred.

Results of Operations

Ingles operates on a 52 or 53-week fiscal year ending on the last Saturday in September. The unaudited condensed consolidated statements of income for the three-month periods ended December 27, 2003 and December 28, 2002 both include 13 weeks of operations. Comparable store sales are defined as sales by grocery stores in operation for the entire duration of the previous and current fiscal periods. 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. For the three-month periods ended December 27, 2003 and December 28, 2002 comparable store sales includes 194 and 198 stores, respectively.

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 I “Lines of Business” to the Unaudited Consolidated Financial Statements.


	Three Months Ended
	December 27, 2003 (RESTATED)		December 28, 2002 (RESTATED)
Net sales	100.0	%	100.0	%
Gross profit	25.0	%	26.2	%
Operating and administrative expenses	22.2	%	23.4	%
Rental income, net	0.3	%	0.4	%
Income from operations	3.1	%	3.2	%
Other income, net	0.2	%	0.1	%
Interest expense	2.6	%	2.5	%
Income before income taxes	0.7	%	0.8	%
Income taxes	0.2	%	0.3	%
Net income	0.5	%	0.5	%

Three Months Ended December 27, 2003 Compared to the Three Months Ended December 28, 2002

Net Sales. Net sales increased 7.9% to $534.3 million for the three months ended December 27, 2003 from $495.1 million for the three months ended December 28, 2002. Ingles operated 198 stores at December 27, 2003, compared to 199 stores at December 28, 2002. Retail square footage increased 0.2 million square feet or 2.7% from December 2002 to December 2003. Comparable store sales for the same period grew $29.5 million or 6.3%. Ingles introduced its Ingles Advantage Savings and Rewards Card (“the Card”) the first day of the quarter ended December 27, 2003. The increase in net sales and comparable store sales is primarily attributable to the promotional activity surrounding the Card introduction. Sales improved in each department; however the largest percentage increase in sales was in the meat department, which was partially attributable to inflation in beef prices during the quarter.

Net sales to outside parties for the Company’s milk processing subsidiary increased $2.5 million or 10.9% in the December 2003 quarter compared to the December 2002 quarter. The sales increase is primarily attributable to an increase in raw milk costs in the December 2003 quarter compared to the December 2002 quarter, which is passed on to the subsidiary’s customers in the pricing of milk products. This was partially offset by the loss of two major food service cream accounts.

The Company expects sales growth to temper somewhat from the initial sales growth achieved with the introduction of the Card; however it does expect moderate sales growth in the remainder of fiscal year 2004 as marketing programs with the Card are successful and new and expanded stores mature.

Gross Profit. Gross profit for the three-month period ended December 27, 2003, increased $3.5 million or 2.7% to $133.3 million, or 25.0% of sales, compared to $129.8 million, or 26.2% of sales, for the three-month period ended December 28, 2002. Gross profit dollars increased due to the increased sales volume; however promotional activity surrounding the introduction of the Card resulted in a decrease in the gross profit percentage.

Gross profit for the Company’s milk processing subsidiary decreased $0.9 million or 18.5% for the December 2003 quarter compared to the December 2002 quarter due primarily to the loss of the two high margin food service cream accounts mentioned above.

In addition to the direct product cost, the cost of goods sold line item for the grocery segment includes inbound freight charges. Purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs, and other costs of the Company’s distribution network are included in operating and administrative expenses. The milk processing segment is a manufacturing process. Therefore, all of the costs mentioned above incurred by the milk processing segment are included in the cost of sales line item.

The Company’s gross margins may not be comparable to those of other retailers, since some retailers include all of the costs related to their distribution network in cost of goods sold and others, like the Company, exclude a portion of the costs from gross profit, including the costs instead in a line item such as operating and administrative expenses.

Operating and Administrative Expenses. Operating and administrative expenses increased $2.7 million or 2.3% to $118.5 million for the three months ended December 27, 2003, from $115.8 million for the three months ended December 28, 2002. As a percentage of sales, operating and administrative expenses were 22.2% and 23.4% for the three months ended December 27, 2003 and December 28, 2002, respectively. A variety of factors contributed to the dollar increase.

A breakdown of the major increases (decreases) in operating and administrative expenses is as follows:


	(RESTATED) In millions			Increase (decrease) as a % of sales
Salaries and wages	$	3.6		—
Depreciation and amortization	$	1.4		0.1	%
Store supplies	$	0.7		0.1	%
Warehouse expense	$	0.6		—
Equipment rent	$	(3.0	)	(0.6	)%
Advertising and promotions	$	(1.4	)	(0.4	)%

Salaries and wages increased in dollars due to labor hours necessary to handle the increased sales volume for the quarter and due to labor incurred with the introduction of the Card. As a percentage of sales, salaries and wages remained constant at 9.2%. The Company estimates that $0.5 million of the $3.6 million increase in salaries and wages is attributable to the retagging of stores and the sign up of customers in connection with the introduction of the Card.

Depreciation and amortization expense increased due both to new stores and stores remodeled and expanded in fiscal 2003 and the first quarter of fiscal 2004, as well as to the purchase of $7.6 million in existing store equipment previously under an operating lease. The increase in depreciation expense for the repurchase of the store equipment was approximately $0.4 million for the December 2003 quarter.

The increase in store supplies expense is primarily attributable to the use of supplies to support the increased sales volume for the quarter and costs incurred with the introduction of the Card. The Company estimates that $0.4 million of supply costs were incurred with the introduction of the Card including the cost of cards, applications, signage and tags.

Warehouse expense increased primarily due to labor costs incurred in supplying the stores with inventory to support the increased sales volume for the quarter.

Equipment rent declined due to the purchase of existing store equipment previously under an operating lease during the December 2003 quarter as mentioned above in the discussion of depreciation and amortization expense.

Advertising and promotion expense decreased due to the revamping of the Company’s advertising program and the elimination of less effective promotions, and due to the renegotiation of agreements with major advertising vendors resulting in the reduction of ongoing charges. Partially offsetting the decrease in advertising and promotion expense was an approximate $0.5 million in expenses incurred in connection with the introduction of the Card. These expenses include data entry of card information; design for advertising and signage and incremental advertising associated with the introduction of the Card.

Rental Income, Net. Rental income, net decreased $0.7 million to $1.5 million for the December 2003 quarter from $2.2 million for the December 2002 quarter. The decrease consists of gross rental income decreases of $0.5 million and operating cost increases of $0.2 million. The sale of a major shopping center in September 2003 in which Ingles was not a tenant, the rejection of certain leases in bankruptcy proceedings of K-Mart and Price Cutters and the relocation of several drug stores from shopping centers to stand alone sites all decreased gross rental income. Partially offsetting these decreases was rent from a tenant in a stand alone retail store purchased by the Company during the December 2003 quarter.

Other Income, Net. Other income, net increased $0.8 million to $1.3 million for the three-month period ended December 27, 2003 from $0.5 million for the three-month period ended December 28, 2002. The increase is principally due to the inclusion in the December 2003 quarter of a gain of $1.0 million for the sale of an out parcel adjacent to an existing Ingles shopping center.

Interest Expense. Interest expense increased $1.1 million for the three-month period ended December 27, 2003 to $13.8 million from $12.7 million for the three-month period ended December 28, 2002. In May 2003, the Company issued an additional $100.0 million of its existing 8⁷/8% Senior Subordinated Notes, due December 2011 (the “Notes”) for a total of $349.8 million. A portion of the proceeds of the Notes was used to repay $30.5 million of existing debt. Debt retired with the proceeds from the Notes generally had lower interest rates and shorter maturity than the Notes. Although total debt at December 2003 was $630.5 million compared to $593.5 million at December 2002, net debt (total debt less total cash) increased only $4.4 million due to the higher cash balance at December 2003 from invested proceeds from the Notes.

Income Taxes. Income tax expense as a percentage of pre-tax income increased to 36.1% in the December 2003 quarter compared to 34.8% in the December 2002 three-month period.

Net Income. Net income for the three-month period ended December 27, 2003 was $2.4 million compared to $2.6 million for the three-month period ended December 28, 2002. Net income, as a percentage of sales, was 0.5% for both the December 2003 quarter and the December 2002 quarter. The decrease in net income is primarily attributable to the after tax effects of the $1.4 million in

introductory costs of the Card and the $0.7 million decrease in rental income, and partially offset by the increased sales and resulting gross profit dollars. Basic and diluted earnings per share were $0.10 for the December 2003 quarter compared to $0.11 for the December 2002 quarter.

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 $27.3 million for the three-month period ended December 27, 2003, including the completion of major remodel/expansions at two stores and minor remodels at two stores, the purchase of one future store site and the purchase of one retail site leased to another retailer. Also included in the three-month capital expenditure amount is the purchase of $7.6 million of existing store equipment previously under an operating lease. Capital expenditures also included the costs of upgrading and replacing store equipment, technology investments, capital expenditures related to the Company’s distribution operation and its milk processing plant, and expenditures for stores to open later in fiscal 2004 and in fiscal 2005.

Ingles’ capital expenditure plans for all of fiscal 2004 include investments of approximately $70.0 million. For the balance of fiscal 2004, the Company plans to open two new stores, one of which will be leased and one owned, complete one major remodel/expansion, add approximately eight new fuel stations on existing store sites and purchase six store sites for future expansion. Expenditures will also include investments in stores expected to open in fiscal 2005 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.

The Company expects that its net annual capital expenditures will remain in the range of approximately $60.0 to $70.0 million going forward in order to maintain a modern store base. The number of projects pursued during each fiscal year could decline to some degree as the Company increases the average size of stores being built. The number of projects may also fluctuate due to the varying costs of the types of projects pursued including new stores, major remodel/expansions or minor remodels. The Company makes decisions on the allocation of capital expenditure dollars based on many factors including the competitive environment, other Company capital initiatives and its financial condition.

The Company does not generally enter into commitments for capital expenditures other than on a store-by-store basis at the time it begins construction on a new store or begins a major or minor remodeling project. The Company generally engages in major remodeling and new store development on not more than three or four locations at a time. Construction commitments at December 27, 2003 totaled $8.5 million.

Liquidity

The Company generated net cash from operations of $5.9 million in the December 2003 quarter.

Cash used by investing activities for the December 2003 quarter totaled $26.1 million comprised primarily of $27.3 million of capital expenditures during the period, partially offset by $1.2 million of proceeds from the sale of assets.

Cash used by financing activities during the December 2003 quarter totaled $13.3 million. Principal payments on long-term debt were $10.5 million, dividend payments were $3.6 million and cash received from the exercise of stock options was $0.9 million.

At December 27, 2003, the Company had lines of credit with five banks totaling $135.0 million, all of which were unused. Of the $135.0 million of committed lines of credit, $120.0 million of the commitment expires in October 2006 and $15.0 million of the commitment expires in October 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 December 27, 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 December 27, 2003, the Company had unencumbered real property and equipment with a net book value of approximately $328.4 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.

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.

Contractual Obligations and Commercial Commitments

There have been no material changes in contractual obligations and commercial commitments subsequent to September 27, 2003.

Off Balance Sheet Arrangements

The Company is not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the Company’s financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.

Quarterly Cash Dividends

Since December 27, 1993, the Company has paid regular quarterly cash dividends of $0.165 (sixteen and one-half cents) per share on its Class A Common Stock and $0.15 (fifteen cents) per share on its Class B Common Stock for an annual rate of $0.66 and $0.60 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 $26.6 million based on tangible net worth at December 27, 2003. Further, the Company is prevented from declaring 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.

Seasonality

Sales in the grocery segment of the Company’s business are subject to a slight seasonal variance due to holiday related sales. Sales are traditionally higher in the Company’s first fiscal quarter due to the inclusion of sales related to Thanksgiving and Christmas. The Company’s second fiscal quarter traditionally has the lowest sales of the year, unless Easter falls in that quarter. The fluid dairy segment of the Company’s business has slight seasonal variation to the extent of its sales into the grocery industry. The Company’s real estate segment is not subject to seasonal variations.

Impact of Inflation

Inflation in food prices during the December 2003 quarter and during fiscal 2003 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

EITF (Emerging Issues Task Force) Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor,” became effective for the Company on December 29, 2002. This issue addresses the appropriate accounting for consideration received from a vendor. Due to system constraints and the nature of certain allowances, it is sometimes not practicable to apply allowances to the item cost of inventory. As a result of this new guidance and these constraints, the Company adopted a new policy for recognizing vendor allowances, including slotting fees. The Company recognizes these allowances as a reduction to inventory and ultimately to cost of goods sold when the related products are sold, for agreements entered into or modified subsequent to December 29, 2002. Under the Company’s previous accounting policy for vendor allowances, including slotting fees, these credits were recognized as a reduction to cost of goods sold as soon as the amount was contractually established and collection was deemed probable.

Prior to fiscal 2003, the Company accounted for its stock-based compensation plans under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. No stock-based employee compensation expense for stock options was reflected in net income for years prior to fiscal 2003, as all stock options granted under those plans had an exercise price equal to the fair market value of the underlying common stock on the date of grant. During the fourth quarter of fiscal 2003, effective as of the beginning of the 2003 fiscal year, the Company adopted the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” (“FAS 123”). Under the fair value recognition provisions of FAS 123, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Under the transition method selected by the Company as allowed by FASB Statement No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (“FAS 148”), the Company elected to apply the change in accounting principle using the prospective method. As no options were granted, modified or settled during the fiscal year ended September 27, 2003, or in the first quarter of fiscal 2004, there was no stock-based employee compensation included in net income for the December 2003 or December 2002 quarters.

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 the Company’s current judgment regarding the direction of its 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 the Company’s control. Some of these assumptions inevitably will not materialize, and unanticipated events will occur which will affect the Company’s results. Some important factors (but not necessarily all factors) that affect the Company’s 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 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; changes in the laws and government regulations applicable to the Company; and changes in accounting policies, standards, guidelines or principles as may be adopted by regulatory agencies as well as the Financial Accounting Standards Board.

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

There have been no material changes in market interest rates subsequent to September 27, 2003.

Item 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures designed to provide reasonable assurance of achieving the objective that information in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified and pursuant to the regulations of the Securities and Exchange Commission. Disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act, include controls and procedures designed to ensure the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. It should be noted that the Company’s system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met.

On December 6, 2004, the Company announced that it was delaying the filing of its Form 10-K for the fiscal year ended September 25, 2004 due to its internal investigation of certain vendor allowances and related accounting in prior periods. The Company filed a Form 12b-25 with respect to that delayed filing on December 9, 2004. The Company is filing this amendment on Form 10-Q/A for the fiscal quarter ended December 27, 2003 to reflect the restatement of its unaudited consolidated financial statements, the notes

thereto, and the related disclosures for such quarter to reflect the proper recognition of vendor allowances in the appropriate accounting period and to correct the improper accounting for certain revenue and expense items. In addition, the Company identified accounting errors related to certain lease transactions which have been corrected as a part of this restatement. The Company has also filed Forms 10-Q/A for the fiscal quarters ended March 27, 2004 and June 26, 2004 to reflect the restatement of its consolidated financial statements included therein, the notes thereto, and related disclosures for such fiscal periods. The Company is also filing its Form 10-K for its fiscal year ended September 25, 2004 reflecting restatements of its financial statements for the fiscal years 2002 and 2003 for the same reasons as mentioned above.

As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with participation of its management including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of December 27, 2003, the end of the period covered by this report. In making this evaluation, it considered matters relating to the restatement of its consolidated financial statements, including the related weaknesses in its internal control over financial reporting identified during the internal investigation. After consideration of the matters discussed above, the Company has concluded that its controls and procedures were not effective in all respects as of the end of the period covered by this report.

The errors giving rise to the restatement relate to the recognition of certain vendor allowances in the Company’s financial statements, the recording of certain other revenue and expense items in the proper accounting period principally due to errors in the financial statement closing process and errors in the accounting for certain lease transactions.

The errors related to the recognition of vendor allowances occurred because of a variety of factors including incomplete or inaccurate information concerning vendor allowances provided internally by certain company associates dealing with vendors, due in certain circumstances to inappropriate actions of certain former officers of the Company, and the complexity of guidance relating to the accounting for vendor allowances. Prior to the quarter covered by this report, the Company had implemented additional controls and procedures designed to ensure that information regarding vendor allowances provided internally was complete and accurate, including new requirements regarding the signing of vendor invoices and new approvals for vendor invoices and contracts with vendors, however such controls did not address the reporting or disclosure of previously recorded transactions. The Company believes that these additional controls and procedures substantially corrected any material weakness in existence prior to the December 2003 quarter relating to the recognition of vendor allowances.

In reviewing its controls following the internal investigation, the Company has determined that additional training regarding controls over the accounting for vendor allowances is necessary for its accounting and other staff dealing with vendor allowances. Further, the Company has concluded that there were material weaknesses in its internal controls for financial reporting relating to its period closing process and particularly related to its systems and processes between the Company’s accounting department and its real estate department regarding the recognition of tenant reimbursements of expenses paid by the Company. In addition, in a review of its lease transactions, the Company identified accounting errors related to certain lease transactions. These errors resulted from a lack of understanding and communication of the Company’s accounting policies related to accounting for leasehold improvements, incomplete reviews of such transactions and the complexity of guidance for lease accounting.

In order to remediate the remaining weaknesses in internal controls, the Company has reviewed the staffing functions in its accounting and real estate departments, including monitoring of compliance with accounting policies and procedures. The Company is considering the hiring of additional staff to supplement existing resources. Further, it intends to provide additional training to associates of the Company. These changes, among others, will allow the accounting department to more closely monitor vendor allowance transactions, its real estate billing processes and lease transactions, and to achieve a more accurate financial statement close and reconciliation process.

In connection with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, the Company will document and test its systems of internal controls for financial reporting in order to provide the basis for evaluation and report on these systems as of the end of its 2005 fiscal year. This documentation is in its early stages and will be effected as to scope and timing by the additional controls described above.

Part II. Other Information.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits.

Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification

Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification

Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350

Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350

(b)

The Company filed a Form 8-K on December 8, 2003, furnishing a press release announcing earnings for the fourth quarter and fiscal year ended September 27, 2003.

The Company filed a Form 8-K on November 21, 2003, filing a press release announcing the amendment of its quarterly reports on Form 10-Q for its second and third quarters of fiscal 2003.

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.


		INGLES MARKETS, INCORPORATED

Date: February 10, 2005		/s/ Robert P. Ingle
		Robert P. Ingle Chief Executive Officer

Date: February 10, 2005		/s/ Brenda S. Tudor
		Brenda S. Tudor Vice President-Finance and Chief Financial Officer

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