UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 2, 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 1-7013
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GRISTEDE'S FOODS, INC.
----------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-1829183
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
823 Eleventh Avenue, New York, New York 10019
(Address of Principal Executive Offices)
(212) 956-5803
--------------
(Registrant's Telephone Number, Including Area Code)
N/A
---
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15 (d) of the Securities Exchange Act 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 Exchange Act).
Yes No X
--- ---
At April 18, 2003, registrant had issued and outstanding 19,636,574 shares of
common stock.
GRISTEDE'S FOODS, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
March 2, 2003 and December 1, 2002 Page 3
Consolidated Statements of Operations for
the 13 weeks ended March 2, 2003
and March 3, 2002 Page 4
Consolidated Statements of Stockholders'
Equity for the 52 weeks ended
December 1, 2002 and the
13 weeks ended March 2, 2003 Page 5
Consolidated Statements of Cash Flows for
the 13 weeks ended March 2, 2003
and March 3, 2002 Page 6
Notes to Consolidated Financial Statements Page 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS Page 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK Page 16
ITEM 4. CONTROLS AND PROCEDURES Page 16
PART II - OTHER INFORMATION Page 17
2
ITEM 1
FINANCIAL STATEMENTS
GRISTEDE'S FOODS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 2, December 1,
ASSETS 2003 2002
------------- -------------
CURRENT ASSETS:
Cash $ 616,428 $ 576,358
Accounts receivable - net of allowance for doubtful accounts
of $498,000 at March 2, 2003 and $481,000 at December 1, 2002 7,917,422 7,659,552
Inventories 39,414,400 37,601,170
Due from related parties - trade 225,000 251,665
Prepaid expenses and other current assets 2,073,035 2,825,984
------------- -------------
Total current assets 50,246,285 48,914,729
------------- -------------
PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment 20,668,176 20,159,016
Capitalized equipment leases 35,440,435 34,300,805
Leaseholds and leasehold improvements 61,037,241 59,323,240
------------- -------------
117,145,852 113,783,061
Less accumulated depreciation and amortization 50,564,903 48,474,655
------------- -------------
Net property and equipment 66,580,949 65,308,406
Deposits and other assets 1,133,813 1,120,028
Due from related party - trade 1,414,436 1,225,000
Other assets 3,796,900 4,043,978
------------- -------------
TOTAL $123,172,383 $120,612,141
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade $ 36,261,359 $ 33,438,962
Accrued payroll, vacation and withholdings 3,438,319 3,177,933
Accrued expenses and other current liabilities 2,391,214 2,343,654
Due to affiliates - trade 217,417 398,913
Capitalized lease obligations - current portion 5,589,569 4,892,101
Current portion of long term debt 2,575,740 2,500,740
------------- -------------
Total current liabilities 50,473,618 46,752,303
Long-term debt - noncurrent portion 27,699,802 28,349,802
Due to affiliates 16,188,447 14,842,437
Capitalized lease obligations - noncurrent portion 14,194,454 14,945,257
Deferred rent 5,332,704 5,056,248
------------- -------------
Total liabilities 113,889,025 109,946,047
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $50 Par, -shares authorized 500,000; none issued -- --
Common stock, $0.02 par value - shares authorized 25,000,000; outstanding
19,636,574 shares at March 2, 2003 and December 1, 2002 392,732 392,732
Additional paid-in capital 14,136,674 14,136,674
Retained earnings/ (deficit) (5,246,048) (3,863,312)
------------- -------------
Total stockholders' equity 9,283,358 10,666,094
------------- -------------
TOTAL $123,172,383 $120,612,141
============= =============
See notes to consolidated financial statements (unaudited).
3
GRISTEDE'S FOODS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE 13 WEEKS ENDED MARCH 2, 2003 AND MARCH 3, 2002
13 weeks 13 weeks
ended ended
March 2, March 3,
2003 2002
------------ ------------
Sales $74,594,759 $59,790,660
Cost of sales 45,435,373 36,029,545
------------ ------------
Gross profit 29,159,386 23,761,115
Store operating, general and administrative expenses 24,331,332 18,140,022
Pre-store opening startup costs 235,007 --
Depreciation and amortization 2,380,026 1,908,654
Insurance proceeds - terrorist attack -- (100,000)
Non-store operating expenses:
Administrative payroll and fringes 2,006,665 1,626,469
General office expense 583,053 511,089
Professional fees 105,519 124,807
Corporate expense 59,108 55,174
------------ ------------
Total non-store operating expenses 2,754,345 2,317,539
------------ ------------
Operating income (loss) (541,324) 1,494,900
------------ ------------
Other income (expense):
Interest expense (842,649) (711,829)
Interest income 1,237 2,914
Other income -- --
------------ ------------
Total other income (expense) - net (841,412) (708,915)
------------ ------------
Income (loss) before income taxes (1,382,736) 785,985
Provision for income taxes -- 25,000
------------ ------------
Net income (loss) $(1,382,736) $ 760,985
============ ============
Net income (loss) per share; basic and diluted ($0.07) $ 0.04
============ ============
Weighted average number of shares and
equivalents outstanding 19,636,574 19,636,574
============ ============
See notes to consolidated financial statements (unaudited).
4
GRISTEDE'S FOODS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE 52 WEEKS ENDED DECEMBER 1, 2002
AND FOR THE 13 WEEKS ENDED MARCH 2, 2003
Additional Retained Total
Common stock Paid-In earnings Stockholders'
Shares Amount Capital (deficit) Equity
----------- ------------ ----------- ------------ -----------
Balance at December 2, 2001 19,636,574 $ 392,732 $14,136,674 $(2,936,905) $11,592,501
Net loss for the 52 weeks ended
December 1, 2002 (926,407) (926,407)
----------- ------------ ----------- ------------ -----------
Balance at December 1, 2002 19,636,574 $ 392,732 $14,136,674 $(3,863,312) $10,666,094
Net loss for the 13 weeks
ended March 2, 2003 (1,382,736) (1,382,736)
----------- ------------ ----------- ------------ -----------
Balance at March 2, 2003 19,636,574 $ 392,732 $14,136,674 $(5,246,048) $ 9,283,358
=========== ============ =========== ============ ===========
See notes to consolidated financial statements (unaudited).
5
GRISTEDE'S FOODS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE 13 WEEKS ENDED MARCH 2, 2003 AND MARCH 3, 2002
13 weeks 13 weeks
ended ended
March 2, March 3,
2003 2002
------------ ------------
Cash flows from operating activities:
Net income (loss) $(1,382,736) $ 760,985
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,380,026 1,908,653
Change in allowance for bad debts 17,483 28,405
Changes in operating assets and liabilities:
Accounts receivable (275,353) (308,586)
Inventories (1,813,229) (192,227)
Due to/from related parties - trade (344,266) (152,790)
Prepaid expenses and other current assets 752,949 605,035
Other assets (56,486) (110,200)
Accounts payable, trade 2,822,397 (3,054,371)
Accrued payroll, vacation and withholdings 260,385 (112,182)
Accrued expenses and other current liabilities 47,560 (45,229)
Deferred rent 276,457 180,396
------------ ------------
Net cash provided by (used in) operating activities 2,685,187 (492,111)
------------ ------------
Cash flows from investing activities:
Capital expenditures (2,223,162) (1,308,697)
------------ ------------
Net cash used in investing activities (2,223,162) (1,308,697)
------------ ------------
Cash flows from financing activities:
Repayments of bank loan (575,000) (230,769)
Proceeds from bank loans -- 2,900,000
Repayment of capitalized lease obligations (1,192,965) (952,321)
Advances from affiliates 1,346,010 158,903
------------ ------------
Net cash provided by (used in) financing activities (421,955) 1,875,813
------------ ------------
Net increase in cash 40,070 75,005
Cash, begining of period 576,358 475,873
------------ ------------
Cash, end of period $ 616,428 $ 550,878
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 870,628 $ 916,782
Cash paid (refunded) for taxes $ 23,590 $ (46,481)
Supplemental schedule of non cash financing activity:
Assets acquired under capitalized lease obligations $ 1,139,630 $ --
See notes to consolidated financial statements (unaudited).
6
GRISTEDE'S FOODS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business -
--------
The Company's corporate predecessor was originally incorporated in 1956 in New
York under the name Designcraft Industries, Inc., and was engaged in the jewelry
business until 1992, when the Company commenced its supermarket operations. The
Company became a public company in 1968, listed its common stock on the American
Stock Exchange in 1972, and reincorporated in Delaware in 1985. The Company
changed its name to Sloan's Supermarkets, Inc. in September 1993 and to
Gristede's Sloans, Inc. in November 1997. The Company changed its name to
Gristede's Foods, Inc. in August 1999 to reflect its strategy of changing its
"Sloan's" banner locations to "Gristede's" subsequent to a store remodeling.
On November 10, 1997, 29 supermarkets and a wholesale warehouse / distribution
business (collectively the "Food Group") that were owned by John A.
Catsimatidis, the Company's majority stockholder, Chairman of the Board and CEO
were merged into the Company's existing 15 supermarkets. The transaction was
accounted for as an acquisition of the Company by the Food Group pursuant to
Emerging Issues Task Force 90-13 as a result of the Food Group obtaining control
of the Company after the transaction. The assets and liabilities of the Food
Group were recorded at their historical cost. The Company's assets and
liabilities were recorded at their fair value to the extent acquired.
Consideration for the transaction was based on an aggregate of $36,000,000 in
market value of the Company's common stock and the assumption of $4,000,000 of
liabilities. 16,504,298 shares of common stock were issued on the date of the
acquisition based on a market price of $2.18 per share.
The Company operates 41 supermarkets and three free-standing pharmacies in
Manhattan, New York, three supermarkets in Westchester County, New York, one
supermarket in each of Brooklyn, New York, Bronx, New York and Long Island, New
York. All of the supermarkets and pharmacies are leased and operated under the
"Gristede's" banner.
The Company also owns City Produce Operating Corp., a company which operates a
warehouse and distribution facility primarily for fresh produce on leased
premises in the Bronx, New York.
Basis of presentation - The unaudited consolidated financial statements included
---------------------
herein have been prepared in accordance with accounting principles generally
accepted in the United States ("GAAP") for interim financial information and in
accordance with the rules and regulations of the Securities and Exchange
Commission ("SEC"). Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. The consolidated
financial statements included herein should be read in conjunction with the
consolidated financial statements and footnotes thereto included within the
Annual Report on Form 10-K for the fiscal year ended December 1, 2002.
In the opinion of management, the information furnished reflects all adjustments
(consisting of normal recurring adjustments), which are necessary for a fair
statement of the results of operations and financial position of the Company for
the interim period. The interim figures are not necessarily indicative of the
results to be expected for the fiscal year.
Principles of Consolidation - The consolidated financial statements include the
----------------------------
accounts of the Company and its wholly owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in consolidation.
Quarter End - The Company operates using the conventional retail 52/53-week
------------
fiscal year. The fiscal quarter ends on the Sunday closest to the end of the
quarter. The Company's fiscal year ends on the Sunday closest to November 30.
Inventories - Store inventories are valued principally at the lower of cost or
-----------
market with cost determined under the retail first in, first out (FIFO) method.
7
Property and Equipment and Depreciation - Property and equipment is stated at
------------------------------------------
cost. Depreciation of furniture, fixtures and equipment is computed by the
straight-line method over the estimated useful lives of the assets.
Leases and Amortization - The Company charges the cost of noncancelable
-------------------------
operating lease payments and beneficial leaseholds to operations on a
straight-line basis over the lives of the leases.
Accrued Self-Insurance - Insurance expense for employee-related health care
-----------------------
benefits are estimated using historical experience.
Deferred Income - Rebates received from vendors that are based on future
----------------
purchases are initially deferred and are recognized as a reduction of cost of
goods sold when the related inventory is purchased. Rebates not tied directly
to purchases are recognized as a reduction of cost of goods sold on a
straight-line basis over the related contract term.
Provision for income taxes - Income taxes reflect Federal and State alternative
---------------------------
minimum tax only, as all regular income taxes have been offset by utilization of
the Company's net operating loss carry forward.
Income per share - Per share data are based on the weighted average number of
------------------
shares of common stock and equivalents outstanding during each quarter. Income
per share is computed by the treasury stock method; basic and diluted income per
share are the same.
2. RELATED PARTY TRANSACTIONS
Under a management agreement dated November 10, 1997, Namdor Inc., one of the
Company's subsidiaries, performs consulting and managerial services for a
supermarket owned by a corporation controlled by John A. Catsimatidis. In
consideration of such services, Namdor Inc. is entitled to receive, on a
quarterly basis, a cash payment of one and one-quarter percent (1.25%) of all
sales of inventory and merchandise made by the managed supermarket.
The Company leases the following locations from affiliates: a portion of its
warehouse and distribution facility comprising 25,000 square feet, its office
facilities and nine store locations (one of which commenced operations in the
second fiscal quarter). During the 13 weeks ended March 2, 2003 the Company
paid $761,895 to these affiliates for rent and real estate taxes under such
leases. The leases are triple net whereby the tenant pays all real estate taxes,
insurance and maintenance.
Certain of the Company's supermarkets have entered into capital and operating
leases with Red Apple Lease Corp. (formerly Red Apple Leasing, Inc.). These
leases are primarily for store operating equipment. Obligations under these
leases at March 2, 2003 were $3,257,934. These leases require that monthly
payments of $76,790 be made to Red Apple Lease Corp. through March 2007.
Certain stores have entered into capital and operating leases with an affiliate,
United Acquisition Leasing Corp., a company wholly owned by John Catsimatidis.
Such leases are primarily for store operating equipment. Obligations under
these leases at March 2, 2003 were $5,019,965. These leases require that
monthly payments of $116,078 be made to United Acquisition Leasing Corp. with
various expirations through February 2008.
Amounts due to affiliates, primarily United Acquisition Corp., a corporation
wholly owned by John A. Catsimatidis, represent liabilities in connection with
the 1997 merger and additional advances made to the Company by United
Acquisition Corp. since the merger. United Acquisition Corp. has agreed not to
demand payment of these liabilities in fiscal 2003. Accordingly, the liability
8
has been classified as noncurrent. As part of post-closing adjustments in
connection with the 1997 merger, approximately $3,600,000 that is due from
certain of the Company's affiliates has been offset against the amounts due to
United Acquisition Corp. The net amount due to affiliates at March 2, 2003 was
$16,188,447, $15,600,000 of which was subordinated to the Company's banks. The
liability presently does not bear interest. However, the Company's credit
agreement with its banks permits the Company to pay interest on such
subordinated debt provided the Company has a positive net income.
In October 2002, an affiliate of the Company acquired the fixtures, leasehold
improvements and store leases of three stores from the Great Atlantic & Pacific
Tea Company for a total purchase price of $5,500,000. The affiliate has leased
the acquired assets to the Company. Such stores had been closed for more than
six months prior to the transaction. Obligations under these capital leases at
March 2, 2003 were $4,907,255 and require monthly payments of $79,156 through
February 2008 and a balloon payment of $1,629,156 at such time.
Due from related parties - trade, represents amounts due from affiliated
companies for merchandise shipped from the Company's subsidiary City Produce
Operating Corp. in the ordinary course of business and for which payments are
made to such subsidiary on a continuous basis under extended terms, as well as
management fees receivable for administrative and managerial services performed
for the affiliated companies by the Company. During the 13 weeks ended March 2,
2003 and March 3, 2002, merchandise sales to affiliates were approximately
$163,000 and $314,000, respectively. Of the total trade receivable due from an
affiliate, $1,414,436 has been classified as non-current on the balance sheet
due to the extended payment terms granted.
On February 6, 1998, the Company agreed to purchase substantially all of the
assets and assumed certain of the liabilities of a supermarket located at 1644
York Avenue, New York City, that was owned by a corporation controlled by John
Catsimatidis. On March 1, 2000 the Company and the affiliate determined to
restructure the transaction by rescinding the purchase effective as of February
6, 1998, and entering into an operating agreement which gives the Company full
control of the supermarket and the right to operate the supermarket for the
account of the Company. The operating agreement presently terminates on
December 1, 2003, but the term shall be extended for additional one year periods
unless either party gives notice of termination not later than 90 days prior to
the end of the then current term of the agreement. Under the operating
agreement, the Company shall pay to the affiliate $1.00 per annum, plus such
other consideration as may be approved by the Company's directors (excluding
John Catsimatidis). Pursuant to the operating agreement the Company or any
designee of the Company, also has the option until December 31, 2005 to purchase
the supermarket for $2,778,000, which price is the fair market price of the
supermarket established on October 11, 1999 by the Company's directors
(excluding John Catsimatidis).
In May 2000, another affiliate and the Company entered into a similar operating
agreement for a store owned by the affiliate. As consideration, the affiliate
receives the nominal amount of $1 per annum, plus such other consideration as
may be approved by the Company's directors (excluding John Catsimatidis). The
operating agreement presently terminates on May 10, 2004, but the term shall be
extended for additional one year periods unless either party gives notice of
termination not later than 90 days prior to the end of the then current term of
the agreement. Pursuant to the operating agreement, the Company, or any designee
of the Company, also has the option until December 31, 2005 to purchase the
supermarket for the fair market price of the supermarket as established by the
Company's directors (excluding John Catsimatidis) using a valuation criterion
similar to that issued for valuing the store at 1644 York Avenue, New York City.
It is management's opinion that the fair market value of this store is
approximately $3 million.
The affiliates' intention in entering into these two operating agreements where
the Company enjoys full benefits of ownership for the nominal consideration of
$1 per annum per store was to effect post closing adjustments in connection with
the Food Group acquisition. If the option to purchase the supermarkets is
exercised, the excess of the purchase price over the net book value of the
assets will be shown as a charge to equity.
The Company uses the services of an affiliate Red Apple Medical, a corporation
wholly-owned by John Catsimatidis, as an agent for self-insurance purposes. All
employee medical claims are submitted to a third party administrator who
9
processes claims to be remitted through a controlled account. Such amounts are
reimbursed by the Company to the agent. No fees have been paid to this entity
for the fiscal years 2002 or 2003 to date.
3. LITIGATION
In re: Red Apple Supermarkets, Inc., Gristede's Supermarkets, Inc., Supermarket
Acquisition Corp., and Gristede's Sloan's Inc., Plaintiffs, against Rite Aid
Corporation and Rite Aid of New York, Inc., Defendants
The Company settled this litigation in March 2003, whereby Rite Aid returned a
store to the Company at 113-119 Fourth Avenue, Manhattan, New York City, which
was previously operated by an affiliate of the Company, in settlement of the
litigation.
The Company purchased Rite Aid's prescription records and inventory for this
location. In addition, the Company paid a nominal fee for Rite Aid's furniture
and equipment and the Company has the benefit of Rite Aid's leasehold
improvements at the store at no additional cost. The Company believes that the
fair market value of the acquired store lease and leasehold improvements to be
in excess of the settlement sum due from Rite Aid recorded on the Company's
books.
4. COSTS RELATING TO THE KINGS ACQUISITION
The Company has incurred costs in an effort to acquire Kings Supermarkets, Inc.,
a chain of 29 stores, mainly located in Northern New Jersey. The Company
intends to continue such efforts to acquire this company. No assurance can be
given that this acquisition will be consummated. In connection with the
proposed acquisition and related financing, the Company incurred certain costs
(principally professional fees) in the amount of $1,153,380 (included in other
assets on the accompanying balance sheet). $708,175 of such costs are
reimbursable to the Company by its affiliate United Acquisition Corp. The
deferred costs will be allocated to the purchase price and financing upon
completion of the transaction. Should the transaction be unsuccessful, the
deferred costs will be charged to operations. Any costs reimbursed by the
affiliate will be reflected as a capital contribution.
10
GRISTEDE'S FOODS, INC. AND SUBSIDIARIES
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE QUARTERS ENDED MARCH 2, 2003 AND MARCH
3, 2002
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 2 of the Notes to the Consolidated Financial
Statements includes a summary of the significant accounting policies and methods
used in the preparation of our Consolidated Financial Statements. The following
is a brief discussion of the more significant accounting policies and methods
used by us.
General
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. The
most significant estimates and assumptions relate to the recoverability of
internally developed software costs, fixed assets and other intangibles,
inventories, realization of deferred income taxes and the adequacy of allowances
for doubtful accounts. Actual amounts could differ significantly from these
estimates.
Accounts Receivable
We continuously monitor collections and payments from our customers, third party
and vendor receivables and maintain a provision for estimated credit losses
based upon our historical experience and any specific collection issues that we
have identified. While such credit losses have historically been within our
expectations and the provisions established, we cannot guarantee that we will
continue to experience the same credit loss rates that we have in the past.
Inventories
We value our inventory at the lower of cost or market with cost determined under
the retail method. We regularly review inventory quantities on hand and record a
provision for excess and obsolete inventory where appropriate based primarily on
our historical shrink and spoilage rates.
Intangibles and Other Long-Lived Assets
Property, plant and equipment, intangible and certain other long-lived assets
are amortized over their useful lives. Useful lives are based on management's
estimates of the period that the assets will generate revenue. Intangible assets
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Accrued Self-Insurance
Insurance expense for employee-related health care benefits are estimated using
historical experience.
11
Deferred Income
----------------
Rebates received from vendors that are based on future purchases are initially
deferred and are recognized as a reduction of cost of goods sold when the
related inventory is purchased. Rebates not tied directly to purchases are
recognized as a reduction of cost of goods sold on a straight-line basis over
the related contract term.
RESULTS OF OPERATIONS
-----------------------
The following table sets forth, as a percentage of sales, components of our
Results of Operations:
13 weeks 13 weeks
ended ended
3/2/03 3/3/02
-------- --------
Sales 100.0 100.0
Cost of sales 60.9 60.3
-------- --------
Gross profit 39.1 39.7
Store operating, general and
administrative expenses 32.6 30.3
Pre-store opening startup costs 0.3 0.0
Depreciation and amortization 3.2 3.2
Insurance and grant proceeds 0.0 -0.2
Non-store operating expense 3.7 3.9
-------- --------
Operating income (loss) -0.7 2.5
Other income (expense) -1.2 -1.2
-------- --------
Income (loss) from operations before
income taxes -1.9 1.3
Provisions for income taxes 0.0 0.0
-------- --------
Net income (loss) -1.9 1.3
-------- --------
Sales were $74,594,759 for the 13 weeks ended March 2, 2003, a 24.8% increase
over sales of $59,790,660 for the 13 weeks ended March 3, 2002.
Same store sales were slightly ahead for the 13 weeks ended March 2, 2003, as
compared to the 13 weeks ended March 3, 2002. Same store sales are calculated
using stores that were open for business both in the current period and in the
same period last year.
Gross profit was $29,159,386 or 39.1% of sales for the 13 weeks ended March 2,
2003 as compared to $23,761,115 or 39.7% of sales for the 13 weeks ended March
3, 2002. The decrease in gross profit as a percentage of sales during the 2003
year to date period was primarily due to new stores opened during the latter
part of 2002 and in 2003, which have promotional pricing.
The Company expects its recent store expansion, and the remodeled store opened
in the current second quarter to also impact results for the remaining quarters
of fiscal 2003.
Store operating, general and administrative expenses were $24,331,332 or 32.6%
of sales for the 13 weeks ended March 2, 2003 as compared to $18,140,022 or
30.3% of sales for the 13 weeks ended March 3, 2002. Store operating, general
and administrative expenses increased as a percentage of sales during the 2003
period mainly due to higher labor costs resulting from the new and remodeled
stores which opened or re-opened since the 2002 period.
12
Pre-store opening startup costs were $235,007 for the 13 weeks ended March 2,
2003 as compared to $0 for the 13 weeks ended March 3, 2002. Two new stores
were opened during the 13 weeks ended March 2, 2003 and the Company prepared for
a new store which opened after the end of the first quarter, compared to no new
or remodeled stores opened or re-opened during the 13 weeks ended March 3, 2002.
Non-store operating expenses were $2,754,345 or 3.7% of sales for the 13 weeks
ended March 2, 2003 as compared with $2,317,539 or 3.9% of sales for the 13
weeks ended March 3, 2002. Administrative payroll and fringes were 2.7% of sales
for both the 13 weeks ended March 2, 2003 and the 13 weeks ended March 3, 2002,
respectively. General office expenses were 0.8% of sales for both the 13 weeks
ended March 2, 2003 and the 13 weeks ended March 3, 2002, respectively.
Professional fees were 0.1% of sales for the 13 weeks ended March 2, 2003 as
compared to 0.2% of sales for the 13 weeks ended March 3, 2002. Corporate
expenses were 0.1% of sales for each of the 13 weeks ended March 2, 2003 and
for the 13 weeks ended March 3, 2002.
Depreciation and amortization expense was $2,380,026 or 3.2% of sales for the 13
weeks ended March 2, 2003 as compared to $1,908,654 or 3.2% of sales for the 13
weeks ended March 3, 2002. The increase in depreciation and amortization expense
was primarily the result of significant capital expenditures incurred in
connection with our store remodeling and expansion program.
Interest expense was $842,649 or 1.1% of sales for the 13 weeks ended March 2,
2003 as compared to $711,829 or 1.2% of sales for the 13 weeks ended March 3,
2002. The increases in the 2003 period was primarily attributable to increased
borrowings under the bank line and capital leases for equipment financing,
partially offset by lower interest rates.
As a result of the items reviewed above, net income (loss) before provision for
income taxes were ($1,382,736) and for the 13 weeks ended March 2, 2003 as
compared to $760,985 for the 13 weeks ended March 3, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity:
----------
Our consolidated financial statements indicate that at March 2, 2003
current liabilities exceed current assets by $227,333 and stockholders' equity
was $9,283,358. Management believes that cash flows generated from operations,
supplemented by financing from its bank facility, third party leasing companies
and/or additional financing from the Company's majority shareholder, will be
sufficient to pay the Company's debts as they may come due, provide for its
capital expenditure program and meet its other cash requirements.
Debt and Debt Service:
-------------------------
Effective October 2001, our credit agreement with a group of banks was
amended and increased to an aggregate total of $32,500,000, consisting of a
$15,500,000 term loan and a $17,000,000 revolving line of credit. As of March 2,
2003, our credit facility, as amended, provides for (i) a maturity date of
November 28, 2004 for the revolving line of credit, and December 3, 2006 for the
term loan, at which time all amounts outstanding thereunder are due, (ii)
certain financial covenants, and (iii) amortization of the term loan in monthly
amortizations totaling $2,000,000, $2,300,000, $2,600,000, $2,900,000 and
$3,200,000, respectively, in each year during its term, and a $2,500,000 balloon
payment at maturity.
Borrowings under our credit facility bear interest at a spread over either
the prime rate of the bank acting as agent for the group of banks or a LIBOR
rate, with the spread dependent on the ratio of our funded debt to EBITDA ratio,
13
as defined in our credit facility. The average interest rate on amounts
outstanding under our credit facility during the quarter ended March 2, 2003 was
4.98% per annum.
Our credit facility contains covenants, representations and events of
default typical of credit agreements, including financial covenants which
require us to meet, among other things, a minimum tangible net worth, debt
service coverage ratios and fixed charge coverage ratios, and which limit
transactions with affiliates. Our credit facility is secured by equipment,
inventories and accounts receivable.
The Company's majority shareholder, through affiliates, has contributed
$16,188,447 through March 2, 2003, in the form of unsecured non-interest bearing
loans, of which $15,600,000 is subordinated to the Company's banks. The
liability presently does not bear interest. However, the Company's credit
agreement with its banks permits the Company to pay interest on such
subordinated debt provided the Company has a positive net income.
The Company has available affiliate leasing lines of credit sufficient to
lease finance equipment for its ongoing store remodeling and expansion program.
Capital Expenditures:
----------------------
Capital expenditures were $3.4 million for the 13 weeks ended March 2,
2003, including property acquired under capital leases, as compared to $1.3
million for the 13 weeks ended March 3, 2002.
We have not incurred any material commitments for capital expenditures,
although we anticipate spending approximately $8 million to $10 million
inclusive of new capital leases on our store remodeling and expansion program
in fiscal 2003. Such amount is subject to adjustment based on the availability
of funds.
Cash Flow:
-----------
Cash provided by (used in) operating activities amounted to $2,685,187 for
the 13 weeks ended March 2, 2003 as compared to $(492,111) for the 13 weeks
ended March 3, 2002. The change in cash flow from operating activities was
primarily due to increasing accounts payable to support an increase of
inventory, primariliy due to new stores opened in the quarter. Net cash used for
investing activities was $2,223,162 in 2003 as compared to $1,308,697 in 2002.
Cash provided by (used in) financing activities was $(421,956) for the 13 weeks
ended March 2, 2003 as compared to $1,875,813 for the 13 weeks ended March 3,
2002 reflecting the bank financing drawn upon in 2002 and the additional
proceeds provided by an affiliate of the Company, offset by repayments of bank
loans and capital leases.
Recent Accounting Pronouncements:
-----------------------------------
In June 2001, the Financial Accounting Standards Board finalized FASB Statements
No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method
of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if they meet certain criteria. SFAS 141 applies to all business
combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires, upon
adoption of SFAS 142 that the Company reclassify the carrying amounts of
intangible assets and goodwill based on the criteria in SFAS 141. The Company
adopted SFAS 141 in the first quarter of fiscal 2002 with no material effect on
the financial statements of the Company.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
14
asset with an indefinite useful life should be tested for impairment in
accordance with the guidelines in SFAS 142. SFAS 142 is required to be applied
in fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. It also requires the Company to complete a transitional
goodwill impairment test within six months from the date of adoption. The
Company is also required to reassess the useful lives of other intangible assets
within the first interim quarter after adoption of SFAS 142. The Company adopted
SFAS 142 in the first quarter of fiscal 2002 with no material effect on its
financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 develops an accounting model, based
upon the framework established in SFAS No. 121, for long-lived assets to be
disposed by sales. The accounting model applies to all long-lived assets,
including discontinued operations, and it replaces the provisions of ABP Opinion
No. 30, "Reporting Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for disposal of segments of a business. SFAS No. 144
requires long-lived assets held for disposal to be measured at the lower of
carrying amount or fair values less costs to sell, whether reported in
continuing operations or in discontinued operations. The statement is effective
for fiscal years beginning after December 15, 2001. The Company adopted this
standard in the first quarter of fiscal 2003 with no material effect on the
financial statements of the Company.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and replaces
EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. SFAS No. 146 also establishes that fair value is the objective for
initial measurement of the liability. The statement is effective for exit or
disposal activities initiated after December 31, 2002. The Company adopted this
standard in the first quarter of fiscal 2003 with no material effect on the
financial statements of the Company.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS 148 amends FASB Statement No.
123, "Accounting for Stock-Based Compensation." Although it does not require use
of fair value method of accounting for stock-based employee compensation, it
does provide alternative methods of transition. It also amends the disclosure
provisions of Statement 123 and APB Opinion No. 28, "Interim Financial
Reporting," to require disclosure in the summary of significant accounting
policies 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. SFAS No. 148's amendment of the
transition and annual disclosure requirements are effective for fiscal years
ending after December 15, 2002. The amendment of disclosure requirements of
Opinion No. 28 are effective for interim periods beginning after December 15,
2002. The Company will continue to use the intrinsic value method of accounting
as allowed under SFAS No. 148 for stock-based compensation for its first quarter
of fiscal year 2003.
Forward-looking information:
-----------------------------
This report and documents incorporated by reference contain both historical
and "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Words such as "anticipates", "believes",
"expects", "intends", "future", and similar expressions identify
forward-looking statements. Any such "forward-looking" statements in this
report reflect the Company's current views with respect to future events and
financial performance, and are subject to a variety of factors that could
cause the actual results or performance to differ materially from historical
results or from the anticipated results or performance expressed or implied by
such forward-looking statements. Because of such factors, there can be no
assurance that the actual results or developments anticipated by the Company
will be realized or, even if substantially realized, that they will have the
anticipated results. The risks and uncertainties that may affect the Company's
business include, but are not limited to: economic conditions, governmental
regulations, technological advances, pricing and competition, acceptance by
the marketplace of new products, retention of key personnel, the sufficiency
of financial resources to sustain and expand the Company's operations, and
other factors described in this report and in prior filings with the
15
Securities and Exchange Commission. Readers should not place undue reliance on
such forward-looking statements, which speak only as of the date hereof, and
should be aware that except as may be otherwise legally required of the
Company, the Company undertakes no obligation to publicly revise any such
forward-looking statements to reflect events or circumstances that may arise
after the date hereof. A more detailed description of some of the risk factors
is set forth in the Company's Annual Report on Form 10-K, dated December 1,
2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flow of the Company due to
adverse changes in financing rates. The Company is exposed to market risk in
the area of interest rates. This exposure is directly related to its term loan
and borrowing activities under the working capital facility. The Company does
not currently maintain any interest rate hedging arrangements due to the
reasonable risk that near-term interest rates will not rise significantly. The
Company is continuously evaluating this risk and will consider implementing
interest rate hedging arrangements when deemed appropriate.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chairman and Chief Executive Officer and its
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's "disclosure controls and procedures," which are defined under SEC
rules as controls and other procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports that it
files under the Exchange Act is recorded, processed, summarized and reported
within required time periods. Based upon that evaluation, the Company's Chairman
and Chief Executive Officer and its Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls or other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
16
GRISTEDE'S FOODS INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
------------------
In re: Red Apple Supermarkets, Inc., Gristede's Supermarkets, Inc.,
Supermarket Acquisition Corp., and Gristede's Sloan's Inc., Plaintiffs, against
Rite Aid Corporation and Rite Aid of New York, Inc., Defendants
The Company settled this litigation in March 2003, whereby Rite Aid returned a
store to the Company at 113-119 Fourth Avenue, Manhattan, New York City, which
was previously operated by an affiliate of the Company, in settlement of the
litigation.
The Company purchased Rite Aid's prescription records and inventory for this
location. In addition, the Company paid a nominal fee for Rite Aid's furniture
and equipment and the Company has the benefit of Rite Aid's leasehold
improvements at the store at no additional cost. The Company believes that the
fair market value of the acquired store lease and leasehold improvements to be
in excess of the settlement sum due from Rite Aid recorded on the Company's
books.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
----------------------------------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
----------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
An Annual Meeting of Stockholders of the Company was held on January 31,
2003. The stockholders approved the re-election of the Company's existing seven
directors for another term expiring at the next Annual Meeting of Stockholders.
18,485,250 shares voted in favor of the election of each of the directors; 6,089
shares voted against the election of each of the directors; there were no
abstentions.
ITEM 5. OTHER INFORMATION
------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-------------------------------------
(a) Exhibits
Number Description
------ -----------
*99.1 Certification pursuant to 18 U.S.C. Section 1350, as adapted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed herewith.
(b) There were no Current Reports on Form 8-K filed during the 13 weeks
ended March 2, 2003.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Gristede's Foods, Inc.
By: /s/ John A. Catsimatidis
---------------------------
John A. Catsimatidis
Chairman of the Board and
Chief Executive Officer
Dated: April 21, 2003
By: /s/ Gary Pokrassa
-------------------
Gary Pokrassa
Chief Financial Officer
Dated: April 21, 2003
18
ANNUAL AND QUARTERLY CERTIFICATIONS
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John A. Catsimatidis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Gristede's
Foods, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this 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;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ John A. Catsimatidis
Date: April 21, 2003
Title: Chief Executive Officer
19
ANNUAL AND QUARTERLY CERTIFICATIONS
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gary Pokrassa, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Gristede's
Foods, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this 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;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Gary Pokrassa
Date: April 21, 2003
Title: Chief Financial Officer
20