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 JUNE 1, 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
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(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 July 15, 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
June 1, 2003 and December 1, 2002 Page 3
Consolidated Statements of Operations for
the 13 weeks and the 26 weeks ended
June 1, 2003 and June 2, 2002 Page 4
Consolidated Statements of Stockholders'
Equity for the 52 weeks ended
December 1, 2002 and the
26 weeks ended June 1, 2003 Page 5
Consolidated Statements of Cash Flows for
the 13 weeks and the 26 weeks ended
June 1, 2003 and June 2, 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 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK Page 18
ITEM 4. CONTROLS AND PROCEDURES Page 18
PART II - OTHER INFORMATION Page 20
2
ITEM 1
FINANCIAL STATEMENTS
GRISTEDE'S FOODS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 1, December 1,
ASSETS 2003 2002
------------- -------------
CURRENT ASSETS:
Cash $ 669,496 $ 576,358
Accounts receivable - net of allowance for doubtful accounts
of $516,000 at June 1, 2003 and $481,000 at December 1, 2002 6,923,036 7,659,552
Inventories 41,541,412 37,601,170
Due from related parties - trade 225,000 251,665
Prepaid expenses and other current assets 1,760,654 2,825,984
------------- -------------
Total current assets 51,119,598 48,914,729
------------- -------------
PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment 21,105,043 20,159,016
Capitalized equipment leases 36,243,911 34,300,805
Leaseholds and leasehold improvements 62,504,955 59,323,240
------------- -------------
119,853,909 113,783,061
Less accumulated depreciation and amortization 52,382,515 48,474,655
------------- -------------
Net property and equipment 67,471,394 65,308,406
------------- -------------
Deposits and other assets 1,110,488 1,120,028
Due from related party - trade 1,414,436 1,225,000
Other assets 3,990,860 4,043,978
------------- -------------
TOTAL $125,106,776 $120,612,141
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade $ 36,336,654 $ 33,438,962
Accrued payroll, vacation and withholdings 2,657,542 3,177,933
Accrued expenses and other current liabilities 2,135,234 2,343,654
Due to affiliates - trade 415,585 398,913
Capitalized lease obligations - current portion 5,628,372 4,892,101
Current portion of long term debt 2,650,740 2,500,740
------------- -------------
Total current liabilities 49,824,127 46,752,303
Long-term debt - noncurrent portion 27,049,803 28,349,802
Due to affiliates 19,948,931 14,842,437
Capitalized lease obligations - noncurrent portion 14,305,905 14,945,257
Deferred rent 5,609,161 5,056,248
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Total liabilities 116,737,927 109,946,047
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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 June 1, 2003 and December 1, 2002 392,732 392,732
Additional paid-in capital 14,136,674 14,136,674
Retained deficit (6,160,557) (3,863,312)
------------- -------------
Total stockholders' equity 8,368,849 10,666,094
------------- -------------
TOTAL $125,106,776 $120,612,141
============= =============
See notes to consolidated financial statements (unaudited).
3
GRISTEDE'S FOODS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE 26 WEEKS AND 13 WEEKS ENDED JUNE 1, 2003 AND JUNE 2, 2002
26 weeks 13 weeks 26 weeks 13 weeks
ended ended ended ended
June 1, June 1, June 2, June 2,
2003 2003 2002 2002
============= ============ ============= ============
Sales $145,586,712 $70,991,953 $121,669,727 $61,879,067
Cost of sales 87,492,327 42,047,905 73,000,752 36,971,207
------------- ------------ ------------- ------------
Gross profit 58,094,385 28,944,048 48,668,975 24,907,860
Store operating, general and administrative expenses 48,386,141 24,065,494 37,646,244 19,506,222
Pre-store opening startup costs and store closing costs 495,633 260,626 130,041 130,041
Depreciation and amortization 4,759,168 2,379,142 3,869,590 1,960,937
Insurance proceeds (500,000) (500,000) (100,000) --
Non-store operating expenses:
Administrative payroll and fringes 4,047,510 2,040,846 3,323,397 1,696,928
General office expense 1,176,879 590,436 1,033,734 522,645
Professional fees 296,191 190,673 266,536 141,729
Corporate expense 122,021 62,912 105,515 50,341
------------- ------------ ------------- ------------
Total non-store operating expenses 5,642,601 2,884,867 4,729,182 2,411,643
------------- ------------ ------------- ------------
Operating income (loss) (689,158) (146,081) 2,393,918 899,017
------------- ------------ ------------- ------------
Other income (expense):
Interest expense (1,610,435) (767,786) (1,406,154) (694,325)
Interest income 2,348 1,111 3,744 830
Other income -- -- -- --
------------- ------------ ------------- ------------
Total other income (expense) - net (1,608,087) (766,675) (1,402,410) (693,495)
------------- ------------ ------------- ------------
Income (loss) before income taxes (2,297,245) (912,756) 991,508 205,522
Provision for income taxes -- -- 25,000 --
------------- ------------ ------------- ------------
Net income (loss) $ (2,297,245) $ (912,756) $ 966,508 $ 205,522
============= ============ ============= ============
Income (loss) per share, basic and diluted ($0.12) ($0.05) $ 0.05 $ 0.01
============= ============ ============= ============
Weighted average number of shares and
equivalents outstanding 19,636,574 19,636,574 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 26 WEEKS ENDED JUNE 1, 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 26 weeks
ended June 1, 2003 -- -- -- (2,297,245) (2,297,245)
---------- -------- ----------- ------------ ------------
Balance at June 1, 2003 19,636,574 $392,732 $14,136,674 $(6,160,557) $ 8,368,849
========== ======== =========== ============ ============
See notes to consolidated financial statements (unaudited).
5
GRISTEDE'S FOODS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWENTY SIX WEEKS ENDED JUNE 1, 2003 AND JUNE 2, 2002
26 weeks 26 weeks
ended ended
June 1, June 2,
2003 2002
============ ============
Cash flows from operating activities:
Net income (loss) $(2,297,245) $ 966,508
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 4,759,168 3,869,590
Change in allowance for bad debts 35,168 36,000
Changes in operating assets and liabilities:
Accounts receivable 701,349 (196,515)
Inventory (3,940,243) (1,576,885)
Due from related parties - trade (162,771) (256,225)
Prepaid expenses and other current assets 1,065,330 786,381
Other assets (505,192) (295,530)
Accounts payable, trade 2,897,692 (326,484)
Accrued payroll, vacation and withholdings (520,392) 77,460
Accrued expenses and other current liabilities (208,419) (805,285)
Due to related parties - trade 16,673 297,599
Deferred rent 552,914 360,791
Current and other assets acquired via capital lease 700,000 -
------------ ------------
Net cash provided by operating activities 3,094,032 2,937,405
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Cash flows from investing activities:
Capital expenditures (4,413,649) (2,562,528)
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Net cash used in investing activities (4,413,649) (2,562,528)
------------ ------------
Cash flows from financing activities:
Repayments of bank loan (1,149,999) (461,538)
Proceeds from bank loans -- 2,900,000
Repayment of capitalized lease obligations (2,543,739) (1,934,735)
Advances from (repayments to) affiliates 5,106,493 (816,963)
------------ ------------
Net cash provided by (used in) financing activities 1,412,755 (313,236)
------------ ------------
Net increase in cash 93,138 61,641
Cash, begining of period 576,358 475,873
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Cash, end of period $ 669,496 $ 537,514
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 1,734,300 $ 1,613,271
Cash paid (refunded) for taxes $ 23,590 $ (83,198)
Supplemental schedule of non cash financing activity:
Assets acquired under capitalized lease obligations $ 2,640,659 $ 3,598,845
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 that were owned by John A. Catsimatidis,
the Company's majority stockholder, Chairman of the Board and CEO (such 29
supermarkets hereinafter referred to as the "Food Group") 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 a total of 49 stores; 40 supermarkets and three
free-standing pharmacies in Manhattan, New York, three supermarkets in
Westchester County, New York, and 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 by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission ("SEC"). 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.
Inventory - Store inventories are valued principally at the lower of cost or
- ---------
market with cost determined under the retail first in, first out (FIFO) method.
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.
7
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.
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(loss)per share - Per share data are based on the weighted average number
- ----------------------
of shares of common stock and equivalents outstanding during each quarter.
Income (loss) per share is computed by the treasury stock method; basic and
diluted income per share are the same.
The Company's Annual Report on Form 10-K for the 52 week period ended December
1, 2002 contains information which should be read in conjunction herewith.
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 at, in or from the managed supermarket.
For the 13 weeks and the 26 weeks ended June 1, 2003, there were no amounts for
such services included in income.
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 ten store locations (two of which commenced operations in the
second fiscal quarter). During the 13 weeks and the 26 weeks ended June 1, 2003
the Company paid $786,895 and $1,548,790 respectively, 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 an affiliate, Red Apple Lease Corporation, a corporation wholly
owned by John A. Catsimatidis. These leases are primarily for store operating
equipment. Obligations under these leases at June 1, 2003 were $3,075,564. These
leases require that monthly payments of $76,790 be made to Red Apple Lease
Corporation through March 2007.
Certain of the Company's supermarkets have entered into capital leases with
United Acquisition Leasing Corp., a company wholly owned by John A.
Catsimatidis. These leases are primarily for store equipment. Obligations under
these leases at June 1, 2003 were $6,287,030. These leases require that monthly
payments of $130,389 be made to United Acquisition Leasing Corp. with various
expirations through February 2008.
Amounts due to 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 the next year. Accordingly, the liability 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 June 1, 2003 was $19,948,931, $16,800,000 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.
8
In October 2002, the Company and 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. The affiliate has
leased the assets acquired by it to the Company. Such stores had been closed for
more than six months prior to the transaction. Obligations under these capital
leases at June 1, 2003 were $4,763,956 and require monthly payments of $79,156
through February 2008 and a balloon payment of $1,629,156 at such time.
In addition, in connection with the foregoing, Gristedes NY LLC received a term
loan of $5,000,000 from Commerce Bank, N.A., which loan is guaranteed by
Gristedes Foods NY Inc., Namdor Inc. and City Produce Operating Corp. and
secured by a pledge of all of the capital stock of Gristedes Foods NY, Inc.
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 26 weeks ended June 1,
2003, merchandise sales to affiliates were approximately $163,000. There were no
sales to affiliates in the 13 weeks ended June 1, 2003. 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
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.
9
3. LITIGATION
No substantive changes from the preceding quarter.
4. COSTS RELATING TO THE KINGS ACQUISITION
The Company has incurred costs in an effort to acquire Kings Super Markets,
Inc., a chain of 27 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 $1,218,380 (included in other
assets on the accompanying balance sheet). Approximately $750,000 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.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141, "Business Combinations" ("SFAS 141") and Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141
eliminates the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001 and modifies the application of the
purchase accounting method effective for transactions that are completed after
June 30, 2001. SFAS 142 eliminates the requirement to amortize goodwill and
intangible assets having indefinite useful lives but requires that they be
assessed at least annually for impairment. Intangible assets that have finite
lives will continue to be amortized over their useful lives. The adoption of
SFAS 141 and 142 did not have a material effect on the Company's financial
position or operations.
In October 2001, the FASB issued Statement of Financial Accounting Standards
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS No. 144 addresses the accounting and reporting for the impairment or
disposal of long-lived assets. The statement provides a single accounting model
for long-lived assets to be disposed of. New criteria must be met to classify
the asset as an asset held-for-sale. This statement also focuses on reporting
the effects of a disposal of a segment of business. This statement is effective
for fiscal years beginning after December 15, 2001. The Company adopted SFAS 144
as of December 2, 2002, and the adoption did not have a material impact on the
Company's financial position or results of operations.
In April 2002, Statement of Financial Accounting Standards, No. 145, "Rescission
of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" ("SFAS 145") was issued. SFAS 145 rescinds SFAS 4 and 64,
which required gains and losses from extinguishment of debt to be classified as
extraordinary items. SFAS also rescinds SFAS 44 since the provisions of the
Motor Carrier Act of 1980 are complete. SFAS 145 also amends SFAS 13 eliminating
inconsistencies in certain sale-leaseback transactions. The provisions of SFAS
145 are effective for fiscal years beginning after May 15, 2002. Any gain or
loss on extinguishment of debt that was classified as an extraordinary item in
prior periods presented shall be reclassified to interest expense. The adoption
of SFAS 145 did not have a material effect on the Company's financial position
or results of operations.
Statement of Financial Accounting Standards, No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), was issued in July
2002. SFAS 146 requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS 146 supercedes EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (Including Certain
10
Costs Incurred in a Restructuring)." SFAS 146 is to be applied prospectively to
exit or disposal activities initiated after December 31, 2002. This
pronouncement did not have a material effect on the Company's financial position
or results of operations.
On December 31, 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation -Transition and
Disclosure" ("SFAS 148"). This standard amends SFAS No. 123, to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require more frequent and
prominent disclosures in financial statements of the effects of stock-based
compensation. The transition guidance and annual disclosure provisions of SFAS
148 are effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. SFAS 148 did
not have a material impact on the Company's results of operations, financial
position or cash flows, and the Company has adopted the disclosure provisions of
SFAS 148 as of March 3, 2003, as required.
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN 45").
FIN 45 requires the recognition of a liability for certain guarantee obligations
issued or modified after December 31, 2002. It also clarifies disclosure
requirements to be made by a guarantor for certain guarantees. The disclosure
provisions of FIN 45 are effective for fiscal years ending after December 15,
2002. FIN 45 did not have a material impact on the Company's results of
operations, financial position or cash flows, and the Company has adopted the
disclosure provisions of FIN 45 as of December 2, 2002.
On January 17, 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective for all new variable interest
entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied for the first interim or annual period beginning after June 15,
2003. The Company has not yet evaluated whether FIN 46 will have an impact on
the Company's results of operations, financial position or cash flows.
In February 2003, the Emerging Issues Task Force ("EITF") addressed EITF
Statement No. 02-16 ("EITF 02-16"), "Accounting by a Reseller for Cash
Consideration Received From a Vendor." EITF 02-16 provides accounting guidance
on how a reseller should characterize consideration given by a vendor and when
to recognize and how to measure that consideration in its income statement. EITF
02-16 is effective for all agreements entered into after December 31, 2002. The
Company has evaluated the provisions of EITF 02-16 and determined that this
statement did not have a material effect on its consolidated financial
statements.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133. The new guidance amends SFAS 133 for decisions made: (a) as part of the
Derivatives Implementation Group process that effectively required amendments to
SFAS 133, (b) in connection with other Board projects dealing with financial
instruments, and (c) regarding implementation issues raised in relation to the
application of the definition of a derivative, particularly regarding the
meaning of an "underlying" and the characteristics of a derivative that contains
financing components. The amendments set forth in SFAS 149 improve financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. SFAS 149 is generally effective for contracts entered
into or modified after June 30, 2003 (with a few exceptions) and for hedging
relationships designated after June 30, 2003. The guidance is to be applied
prospectively. The Company does not expect the provisions of SFAS 149 to have a
material impact on its financial position or results of operations.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). SFAS 150 improves the accounting for certain financial instruments
that, under previous guidance, issuers could account for as equity. The new
Statement requires that those instruments be classified as liabilities in
statements of financial position. The Company does not expect the provisions of
SFAS 150 to have a material impact on its financial position or results of
operations.
11
6. ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company complies with Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("SFAS No. 123"). This statement
defines a fair value based method whereby compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. Under SFAS No. 123,
companies are encouraged, but are not required, to adopt the fair value method
of accounting for employee stock-based transactions. The Company accounts for
such transactions under Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, but discloses pro forma net income (loss) as if
the Company had applied the SFAS No. 123 method of accounting.
Pro forma information, assuming the Company had accounted for its employee stock
options granted under the fair value method prescribed by SFAS No. 123, as
amended by Financial Accounting Standards Board Statement No. 148, "Accounting
for Stock Based Compensation - Transition and Disclosure, an Amendment of FASB
Statement No. 123" is presented below. The fair value of each option grant is
estimated on the date of each grant using the Black-Scholes option-pricing
model. There were no stock options granted in fiscal 2003 or in fiscal 2002. The
fair value generated by the Black-Scholes model may not be indicative of the
future benefit, if any, that may be received by the option holder.
26 WEEKS ENDED 13 WEEKS ENDED
----------------- -----------------
($000S) ($000S)
------- -------
6/1/03 6/2/02 6/1/03 6/2/02
-------- ------- -------- -------
Net income/(loss): $(2,297) $ 967 $ (912) $ 206
Less: stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects 3 3 3 3
-------- ------- -------- -------
Pro forma net income/(loss) $(2,300) $ 964 $ (915) $ 203
======== ======= ======== =======
Earnings (loss) per share:
Basic, as reported $ (0.12) $ 0.05 $ (0.05) $ 0.01
Basic, pro forma $ (0.12) $ 0.05 $ (0.05) $ 0.01
Diluted, as reported $ (0.12) $ 0.05 $ (0.05) $ 0.01
Diluted, pro forma $ (0.12) $ 0.05 $ (0.05) $ 0.01
This pro forma information may not be representative of the amounts to expected
in future years as the fair value method of accounting prescribed by SFAS No.
123 has not been applied to options granted prior to fiscal 1996.
7. PROCEEDS FROM INSURANCE COMPANY
The Company has received $500,000 from its insurance carrier as reimbursement
against legal fees incurred in the case referred to in the Company's annual
report on Form 10-K as "Ansoumana v. various defendants". This amount has been
included as a reduction of expenses in the 13 weeks ended June 1, 2003.
12
GRISTEDE'S FOODS, INC. AND SUBSIDIARIES
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE 26 WEEKS AND THE 13 WEEKS ENDED JUNE 1,
2003 AND JUNE 2, 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 1 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.
13
RESULTS OF OPERATIONS
- -----------------------
The following table sets forth, as a percentage of sales, components of our
Results of Operations:
26 weeks 26 weeks 13 weeks 13 weeks
ended ended ended ended
6/1/03 6/2/02 6/1/03 6/2/02
-------- -------- -------- --------
Sales 100.0 100.0 100.0 100.0
Cost of sales 60.1 60.0 59.2 59.7
-------- -------- -------- --------
Gross profit 39.9 40.0 40.8 40.3
Store operating, general and
administrative expenses 33.2 30.9 33.9 31.5
Pre-store opening startup costs 0.3 0.1 0.4 0.2
Depreciation and amortization 3.3 3.2 3.4 3.2
Insurance and grant proceeds -0.3 -- -0.7 --
Non-store operating expense 3.9 3.8 4.1 3.9
-------- -------- -------- --------
Operating income (loss) -0.5 2.0 -0.2 1.5
Other income (expense) -1.1 -1.2 -1.1 -1.1
-------- -------- -------- --------
Income (loss) from operations before
income taxes -1.6 0.8 -1.3 0.4
Provisions for income taxes -- -- -- --
-------- -------- -------- --------
Net income (loss) -1.6 0.8 -1.3 0.4
-------- -------- -------- --------
Sales were $145,586,712 and $70,991,953 for the 26 weeks and for the 13 weeks
ended June 1, 2003, respectively, as compared to $121,669,727 and $61,879,067
for the 26 weeks and for the 13 weeks ended June 2, 2002, respectively. During
the 13 weeks ended June 1, 2003, we re-opened one store that was closed for
remodeling; opened two new stores and closed two stores. The increases in sales
for the 2003 periods primarily resulted from new stores opened during the latter
part of fiscal 2002 and in fiscal 2003.
Same store sales decreased 0.2% and 3.2% for the 26 weeks and for the 13 weeks
ended June 1, 2003, respectively, as compared to the 26 weeks and 13 weeks ended
June 2, 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 $58,094,385 or 39.9% of sales and $28,944,048 or 40.8% of sales
for the 26 weeks and for the 13 weeks ended June 1, 2003, respectively, as
compared to $48,668,975 or 40.0% of sales and $24,907,860 or 40.3% of sales for
the 26 weeks and for the 13 weeks ended June 2, 2002, respectively. The increase
in gross profit as a percentage of sales during the 13 weeks ended June 1, 2003
was primarily due to increased sales of perishables, which have higher gross
margins and an overall improvement in margins.
Store operating, general and administrative expenses were $48,386,141 or 33.2%
of sales and $24,065,494 or 33.9% of sales for the 26 weeks and for the 13 weeks
ended June 1, 2003, respectively, as compared $37,646,244 or 30.9% of sales and
$19,506,222 or 31.5% of sales for the 26 weeks and for the 13 weeks ended June
2, 2002, respectively. Store
14
operating, general and administrative expenses increased as a percentage of
sales during the 2003 periods mainly due to higher labor costs resulting from
the new and remodeled stores which opened or re-opened since the 2002 period.
Pre-store opening startup costs and store closing costs were $495,633 and
$260,626 for the 26 weeks and for the 13 weeks ended June 1, 2003 as compared to
$130,041 for both the 26 weeks and for the 13 weeks ended June 2, 2002,
respectively. Two new stores were opened, one store was re-opened and two stores
were closed during the 13 weeks ended June 1, 2003, compared to no new and two
remodeled stores which re-opened during the 13 weeks ended June 2, 2002.
Non-store operating expenses were $5,642,601 or 3.9% of sales and $2,884,867 or
4.1% of sales for the 26 weeks and for the 13 weeks ended June 1, 2003,
respectively, as compared with $4,729,182 or 3.8% of sales and $2,411,643 or
3.9% of sales for the 26 weeks and for the 13 weeks ended June 2, 2002,
respectively. Administrative payroll and fringes were 2.8% of sales for the 26
weeks and 2.9% of sales for the 13 weeks ended June 1, 2003 as compared to 2.7%
of sales for both the 26 weeks and for the 13 weeks ended June 2, 2002,
respectively. The increase in the 2003 periods primarily reflects the addition
of supervisory personnel as a result of additional business generated by the
store remodeling and new store program. General office expenses were 0.8% of
sales for the 26 weeks and the 13 weeks ended June 1, 2003 and also for the 26
weeks and the 13 weeks ended June 2, 2002, respectively. Professional fees were
0.2% of sales for the 26 weeks and 0.2% for the 13 weeks ended June 1, 2003 as
compared to 0.2% of sales for both the 13 weeks and for the 26 weeks ended June
2, 2002. Corporate expenses were 0.1% of sales for each of the 26 weeks and 13
weeks ended June 1, 2003 and for the 26 weeks and the 13 weeks ended June 2,
2002.
Depreciation and amortization expense was $4,759,168 or 3.3% of sales and
$2,379,142 or 3.4% of sales for the 26 weeks and the 13 weeks ended June 1, 2003
as compared to $3,869,590 or 3.2% of sales and $1,960,937 or 3.2% of sales for
the 26 weeks and for the 13 weeks ended June 2, 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 $1,610,435 and $767,786 or 1.1% of sales for both the 26
weeks and for the 13 weeks ended June 1, 2003 as compared to $1,406,154 and
$694,325 or 1.2% of sales for both the 26 weeks and for the 13 weeks ended June
2, 2002. The increases in the 2003 periods 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, income (loss) before provision for
income taxes were ($2,297,245) and ($912,756) for the 26 weeks and for 13 weeks
ended June 1, 2003 as compared to $991,508 and $205,522 for the 26 weeks and for
the 13 weeks ended June 2, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity:
- ----------
Our consolidated financial statements indicate that at June 1, 2003 current
assets exceed current liabilities by $1,295,471 and stockholders' equity was
$8,368,849. Management believes that cash flows generated from operations,
supplemented by financing from our bank facility, third party leasing companies
and/or additional financing from the Company's majority shareholder, will be
sufficient to pay our debts as they may come due, provide for our capital
expenditure program and meet our 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 June 1,
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,
15
$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,
as defined in our credit facility. The average interest rate on amounts
outstanding under our credit facility during the quarter ended June 1, 2003 was
4.53% 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
$19,948,931 through June 1, 2003, in the form of unsecured non-interest bearing
loans, of which $16,800,000 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 $6.4 million for the 26 weeks ended June 1, 2003,
including property acquired under capital leases, as compared to $6.2 million
for the 26 weeks ended June 2, 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 operating activities amounted to $3,094,032 for the 26
weeks ended June 1, 2003 as compared to $2,937,405 for the 26 weeks ended June
2, 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 period. Net cash used for investing activities was
$4,413,649 in 2003 as compared to $2,562,528 in 2002. Cash provided by (used in)
financing activities was $1,412,755 for the 26 weeks ended June 1, 2003 as
compared to $(313,236) for the 26 weeks ended June 2, 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 July 2001, the FASB issued Statement of Financial Accounting Standards No.
141, "Business Combinations" ("SFAS 141") and Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141
eliminates the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001 and modifies the application of the
purchase accounting method effective for transactions that are completed after
June 30, 2001. SFAS 142 eliminates the requirement to amortize goodwill and
intangible assets having indefinite useful lives but requires that they be
assessed at least annually for impairment. Intangible assets that have finite
lives will continue to be amortized over their useful lives. The adoption of
SFAS 141 and 142 did not have a material effect on the Company's financial
position or operations.
16
In October 2001, the FASB issued Statement of Financial Accounting Standards
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS No. 144 addresses the accounting and reporting for the impairment or
disposal of long-lived assets. The statement provides a single accounting model
for long-lived assets to be disposed of. New criteria must be met to classify
the asset as an asset held-for-sale. This statement also focuses on reporting
the effects of a disposal of a segment of business. This statement is effective
for fiscal years beginning after December 15, 2001. The Company adopted SFAS 144
as of December 2, 2002, and the adoption did not have a material impact on the
Company's financial position or results of operations.
In April 2002, Statement of Financial Accounting Standards, No. 145, "Rescission
of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" ("SFAS 145") was issued. SFAS 145 rescinds SFAS 4 and 64,
which required gains and losses from extinguishment of debt to be classified as
extraordinary items. SFAS also rescinds SFAS 44 since the provisions of the
Motor Carrier Act of 1980 are complete. SFAS 145 also amends SFAS 13 eliminating
inconsistencies in certain sale-leaseback transactions. The provisions of SFAS
145 are effective for fiscal years beginning after May 15, 2002. Any gain or
loss on extinguishment of debt that was classified as an extraordinary item in
prior periods presented shall be reclassified to interest expense. The adoption
of SFAS 145 did not have a material effect on the Company's financial position
or results of operations.
Statement of Financial Accounting Standards, No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), was issued in July
2002. SFAS 146 requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS 146 supercedes 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
146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. This pronouncement did not have a material effect on
the Company's financial position or results of operations.
On December 31, 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation -Transition and
Disclosure" ("SFAS 148"). This standard amends SFAS No. 123, to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require more frequent and
prominent disclosures in financial statements of the effects of stock-based
compensation. The transition guidance and annual disclosure provisions of SFAS
148 are effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. SFAS 148 did
not have a material impact on the Company's results of operations, financial
position or cash flows, and the Company has adopted the disclosure provisions of
SFAS 148 as of March 3, 2003, as required.
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN 45").
FIN 45 requires the recognition of a liability for certain guarantee obligations
issued or modified after December 31, 2002. It also clarifies disclosure
requirements to be made by a guarantor for certain guarantees. The disclosure
provisions of FIN 45 are effective for fiscal years ending after December 15,
2002. FIN 45 did not have a material impact on the Company's results of
operations, financial position or cash flows, and the Company has adopted the
disclosure provisions of FIN 45 as of December 2, 2002.
On January 17, 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective for all new variable interest
entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied for the first interim or annual period beginning after June 15,
2003. The Company has not yet evaluated whether FIN 46 will have an impact on
the Company's results of operations, financial position or cash flows.
In February 2003, the Emerging Issues Task Force ("EITF") addressed EITF
Statement No. 02-16 ("EITF 02-16"), "Accounting by a Reseller for Cash
Consideration Received From a Vendor." EITF 02-16 provides accounting guidance
on how a reseller should characterize consideration given by a vendor and when
to recognize and how to measure that consideration in its income
17
statement. EITF 02-16 is effective for all agreements entered into after
December 31, 2002. The Company evaluated the provisions of EITF 02-16 and
determined that this statement did not have a material effect on its
consolidated financial statements.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133. The new guidance amends SFAS 133 for decisions made: (a) as part of the
Derivatives Implementation Group process that effectively required amendments to
SFAS 133, (b) in connection with other Board projects dealing with financial
instruments, and (c) regarding implementation issues raised in relation to the
application of the definition of a derivative, particularly regarding the
meaning of an "underlying" and the characteristics of a derivative that contains
financing components. The amendments set forth in SFAS 149 improve financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. SFAS 149 is generally effective for contracts entered
into or modified after June 30, 2003 (with a few exceptions) and for hedging
relationships designated after June 30, 2003. The guidance is to be applied
prospectively. The Company does not expect the provisions of SFAS 149 to have a
material impact on its financial position or results of operations.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). SFAS 150 improves the accounting for certain financial instruments
that, under previous guidance, issuers could account for as equity. The new
Statement requires that those instruments be classified as liabilities in
statements of financial position. The Company does not expect the provisions of
SFAS 150 to have a material impact on its financial position or results of
operations.
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 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.
18
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.
19
GRISTEDE'S FOODS INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
------------------
None.
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
-----------------------------------------------------------
None.
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 adopted 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 June 1, 2003.
20
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: July 16, 2003
By: /s/ Gary Pokrassa
------------------
Gary Pokrassa
Chief Financial Officer
Dated: July 16, 2003
21
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: July 16, 2003
Title: Chief Executive Officer
22
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: July 16, 2003
Title: Chief Financial Officer
23