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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 February 29, 2004
[ ] 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
------
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 February 27, 2004, registrant had issued and outstanding 19,636,574 shares of
common stock.
GRISTEDE'S FOODS, INC.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
February 29, 2004 and November 30, 2003 Page 3
Consolidated Statements of Operations for
the 13 weeks ended February 29, 2004
and March 2, 2003 Page 4
Consolidated Statements of Stockholders'
Equity for the 52 weeks ended
November 30, 2003 and the
13 weeks ended February 29, 2004 Page 5
Consolidated Statements of Cash Flows for
the 13 weeks ended February 29, 2004
and March 2, 2003 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 17
Item 4. Controls and Procedures Page 17
PART II - OTHER INFORMATION Page 19
2
Item 1
Financial Statements
GRISTEDE'S FOODS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
February 29, November 30, DIFF
2004 2003
------------- ------------
ASSETS
CURRENT ASSETS:
Cash $ 650,222 $ 693,274 (43,052)
Accounts receivable - net of allowance for doubtful accounts 10,312,560 11,840,262 (1,527,702)
of $589,892 at February 29, 2004 and $572,190 at November 30, 2003 0
Inventories 47,234,355 44,545,385 2,688,970
Prepaid expenses and other current assets 3,784,468 3,645,321 139,147
------------- -------------
Total current assets 61,981,605 60,724,242 1,257,363
------------- ------------- -------------
PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment 21,767,033 21,594,508 172,525
Capitalized equipment leases 36,168,383 36,168,381 2
Leaseholds and leasehold improvements 65,022,186 63,986,788 1,035,398
------------- ------------- -------------
122,957,602 121,749,677 1,207,925
Less accumulated depreciation and amortization 58,444,646 56,268,219 2,176,427
------------- ------------- -------------
Net property and equipment 64,512,956 65,481,458 (968,502)
Deposits and other assets 913,232 897,430 15,802
Other assets 2,236,678 2,253,000 (16,322)
------------- -------------
TOTAL $ 129,644,471 $ 129,356,130 288,341
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY 0
CURRENT LIABILITIES: 0
Accounts payable, trade $ 45,800,638 $ 44,604,656 1,195,982
Accrued payroll, vacation and withholdings 3,274,001 3,666,344 (392,343)
Accrued expenses and other current liabilities 2,775,574 3,331,761 (556,187)
Due to affiliates - trade 584,443 469,175 115,268
Capitalized lease obligations - current portion 5,143,430 5,677,142 (533,712)
Current portion of long term debt 8,650,542 2,650,740 5,999,802
------------- -------------
Total current liabilities 66,228,628 60,399,817 5,828,811
0
Long-term debt - noncurrent portion 19,275,001 25,899,803 (6,624,802)
Due to affiliates 24,018,521 22,008,258 2,010,263
Capitalized lease obligations - noncurrent portion 10,928,701 12,084,252 (1,155,551)
Deferred rent 6,443,941 6,162,749 281,192
------------- -------------
Total liabilities 126,894,792 126,554,879 339,913
------------- ------------- -------------
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 February 29, 2004 and November 30, 2003 392,732 392,732 0
Additional paid-in capital 18,065,302 17,865,302 200,000
Retained earnings/ (deficit) (15,708,355) (15,456,783) (251,572)
------------- ------------- -------------
Total stockholders' equity 2,749,679 2,801,251 (51,572)
------------- ------------- -------------
TOTAL $ 129,644,471 $ 129,356,130 288,341
============= ============= =============
(0)
The accompanying notes are an integral part of these financial statements
3
GRISTEDE'S FOODS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE 13 WEEKS ENDED FEBRUARY 29, 2004 AND MARCH 2, 2003
13 weeks 13 weeks
ended ended
February 29, March 2,
2004 2003
------------ ------------
Sales $ 69,838,182 $ 74,594,759
Cost of sales 40,569,192 45,435,373
------------ ------------
Gross profit 29,268,990 29,159,386
Store operating, general and administrative expenses 23,640,496 24,331,332
Pre-store opening startup costs -- 235,007
Depreciation and amortization 2,378,607 2,380,026
Non-store operating expenses:
Administrative payroll and fringes 1,782,362 2,006,665
General office expense 762,818 583,053
Professional fees 104,693 105,519
Corporate expense 75,518 59,108
------------ ------------
Total non-store operating expenses 2,725,391 2,754,345
------------ ------------
Operating income (loss) 524,496 (541,324)
------------ ------------
Other income (expense):
Interest expense (776,929) (842,649)
Interest income 861 1,237
------------ ------------
Total other income (expense) - net (776,068) (841,412)
------------ ------------
Loss before income taxes (251,572) (1,382,736)
Provision for income taxes -- --
------------ ------------
Net loss $ (251,572) $ (1,382,736)
============ ============
Net loss per share; basic and diluted ($ 0.01) ($ 0.07)
============ ============
Weighted average number of shares and
equivalents outstanding 19,636,574 19,636,574
============ ============
The accompanying notes are an integral part of these financial statements.
4
GRISTEDE'S FOODS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE 52 WEEKS ENDED NOVEMBER 30, 2003
AND FOR THE 13 WEEKS ENDED FEBRUARY 29, 2004
Additional Retained Total
Common stock Paid-In earnings Stockholders'
Shares Amount Capital (deficit) Equity
------------ ------------ ------------ ------------ -------------
Balance at December 1, 2002 19,636,574 $ 392,732 $ 14,136,674 $ (3,863,312) $ 10,666,094
Capital contribution in connection of -- -- 3,728,628 -- 3,728,628
funding of company costs
Net loss -- -- -- (11,593,471) (11,593,471)
------------ ------------ ------------ ------------ ------------
Balance at November 30, 2003 19,636,574 392,732 17,865,302 (15,456,783) 2,801,251
------------ ------------ ------------ ------------ ------------
Capital contribution in connection of -- -- 200,000 -- 200,000
funding of company costs
Net loss -- -- -- (251,572) (251,572)
Balance at February 29, 2004 19,636,574 $ 392,732 18,065,302 (15,708,355) 2,749,679
============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
5
GRISTEDE'S FOODS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE 13 WEEKS ENDED FEBRUARY 29, 2004 AND MARCH 2, 2003
13 weeks 13 weeks
ended ended
February 29, March 2,
2004 2003
------------ ------------
Cash flows from operating activities:
Net loss $ (251,572) $(1,382,736)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 2,378,607 2,380,026
Change in allowance for bad debts 17,702 17,483
Capital contribution in connection of 200,000 --
funding of company costs
Changes in operating assets and liabilities:
Accounts receivable 1,510,000 (275,353)
Inventories (2,688,970) (1,813,229)
Due to/from related parties - trade 103,550 (344,266)
Prepaid expenses and other current assets (139,148) 752,949
Other assets 106,664 (56,486)
Accounts payable, trade 1,195,982 2,822,397
Accrued payroll, vacation and withholdings (392,342) 260,385
Accrued expenses and other current liabilities (852,794) 47,560
Deferred rent 281,192 276,457
----------- -----------
Net cash provided by operating activities 1,468,871 2,685,187
----------- -----------
Cash flows from investing activities:
Capital expenditures (1,207,923) (2,223,162)
----------- -----------
Net cash used in investing activities (1,207,923) (2,223,162)
----------- -----------
Cash flows from financing activities:
Repayments of bank loan (625,000) (575,000)
Repayment of capitalized lease obligations (1,689,262) (1,192,965)
Advances from affiliates 2,010,262 1,346,010
----------- -----------
Net cash used in financing activities (304,000) (421,955)
----------- -----------
Net increase (decrease) in cash (43,052) 40,070
Cash, begining of period 693,274 576,358
----------- -----------
Cash, end of period $ 650,222 $ 616,428
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 776,929 $ 870,628
Cash paid (refunded) for taxes $ (17,742) $ 23,590
Supplemental schedule of non cash financing activity:
Assets acquired under capitalized lease obligations $ -- $ 1,139,630
The accompanying notes are an integral part of these financial statements.
6
GRISTEDE'S FOODS, INC.
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 "1997 merger"). 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.
During the period commencing the fourth quarter of fiscal 2002 through the
second quarter of fiscal 2003, the Company opened a total of seven new stores
(consisting of six supermarkets and one free standing pharmacy), and closed two
stores. During fiscal 2003, the Company also commenced operating
XpressGrocer.com, an on-line supermarket providing groceries, household items,
fresh foods and other supermarket items in the borough of Manhattan, New York
City. A store was closed in fiscal 2004.
The Company presently operates a total of 48 stores; 39 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 County, 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 on leased premises in Bronx County, 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.
7
Inventory - 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.
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 November
30, 2003, contains information which should be read in conjunction herewith.
2. RELATED PARTY TRANSACTIONS
The Company leases the following locations from an affiliate, Red Apple Real
Estate, Inc., a company wholly owned by John A. Catsimatidis, the majority
stockholder of the Company: a portion of its warehouse and distribution facility
comprising 25,000 square feet, its office facilities and all or a portion of ten
store locations. During the 13 weeks ended February 29, 2004 and March 2, 2003,
the Company paid $976,607 and $761,895 respectively to Red Apple Real Estate,
Inc., 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 February 29, 2004 were $2,503,675.
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 an
affiliate, United Acquisition Leasing Corp., a company wholly owned by John A.
Catsimatidis. These leases are primarily for store equipment. Obligations under
these leases at February 29, 2004 were $4,220,409. These leases require that
monthly payments of $119,365 be made to United Acquisition Leasing Corp. with
various expirations through May 31, 2008.
Amounts due to affiliates, primarily United Acquisition Corp., a corporation
indirectly 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 1997 merger. These affiliates have 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 February 29, 2004
was $24,018,521 of which $23,500,000 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. The liability
has no stated maturity date.
8
In October 2002, the Company and Gristede's NY, LLC, 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 February 29, 2004 were $4,317,073 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, Gristede's NY, LLC, received a
term loan of $5,000,000 from a bank, which loan is guaranteed by Gristede's
Foods NY, Inc. (a wholly-owned subsidiary of Namdor, Inc.), and the Company's
subsidiaries Namdor Inc. and City Produce Operating Corp., and secured by a
pledge of all of the capital stock of Gristede's Foods NY, Inc. The loan had a
balance of $4,333,701 at February 29, 2004.
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 entered into an operating agreement which gives the Company full
control of th.e supermarket and the right to operate the supermarket for the
account of the Company. The operating agreement presently terminates on December
1, 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. 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, 2005, 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 was
approximately $3 million as of May, 2000.
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 reflected 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 fiscal year 2004 to date.
3. IMPACT OF NORTHEAST BLACKOUT OF AUGUST 14-15, 2003
The Company suffered significant losses of perishable inventory during
the "Northeast blackout" of August 14-15, 2003. To a lesser extent, there were
also property repair and damage losses, and related expenses. The Company's
inventory is insured for its retail selling price, and property is insured for
its new replacement cost. The Company has filed claims for these losses and
related expenses with its insurance carriers and expects to recover at least
approximately $5.8 million. The minimum claim for associated inventory costs and
related expenses is approximately $4 million, resulting in a minimum expected
net insurance gain of approximately $1.9 million, which is in lieu of filing
separately for business interruption insurance and other expenses related to
stocking, restocking and other costs associated with the "blackout". Machinery
and other property are insured for their replacement cost. The insurance gain
was recorded in the third quarter ended August 31, 2003, without separately
accounting for the costs that go against such gain. The insurance carriers have
acknowledged that the Company's losses are covered under its policy and have
advanced the Company $1 million against its insured claim. The Company is
expecting final settlement of its claim during the 3rd quarter ending August 29,
2004.
9
4. RECENT ACCOUNTING PRONOUNCEMENTS
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 March 15,
2004.
In December 2003, the FASB issued a revision to Interpretation No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51"("FIN 46R" or the "Interpretation"). FIN 46R clarifies the application of ARB
No. 51, "Consolidated Financial Statements," to certain entities in which equity
investors 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. FIN 46R requires the
consolidation of these entities, known as variable interest entities ("VIEs"),
by the primary beneficiary of the entity. The primary beneficiary is the entity,
if any, that will absorb a majority of the entity's expected losses, receives a
majority of the entity's expected residual returns, or both
Among other changes, the revisions of FIN 46R: (1) clarified some requirements
of the original FIN 46, which had been issued in January 2003, (2) eased some
implementation problems, and (3) added new scope exceptions. FIN 46R deferred
the effective date of the Interpretation for public companies, to the end of the
first reporting period ending after March 15, 2004, except that all public
companies must at a minimum apply the provisions of the Interpretation to
entities that were previously considered "special-purpose entities" under the
FASB literature prior to the issuance of FIN 46R by the end of the first
reporting period ending after December 15, 2003. The adoption of FIN 46R did not
have a material effect on the Company's financial position, cash flows or
results of operations.
Emerging Issues Task Force ("EITF") No. 02-16, "Accounting by a Reseller for
Cash Consideration Received from a Vendor," provides that cash consideration
received from a vendor is presumed to be a reduction in the prices of the
vendor's products or services and should, therefore, be characterized as a
reduction in cost of sales unless it is a payment for assets or services
delivered to the vendor, in which case the cash consideration should be
characterized as revenue, or it is a reimbursement of costs incurred to sell the
vendor's products, in which case the cash consideration should be characterized
as a reduction of that cost. EITF No. 02-16 became effective for the Company in
the first quarter of 2003.
Slotting allowances are a small portion of total allowances. With slotting
allowances, the vendor reimburses the Company for the cost of placing new
product on the shelf. The Company has no obligation or commitment to keep the
product on the shelf for a minimum period.
Prior to the adoption of EITF No. 02-16, slotting allowances were considered
reimbursement of the Company's costs and recognized when a product was first
stocked, which is generally the point at which all related store operating,
general and administrative expenses have been incurred. Promotional allowances
were recognized when the promotion ran. Beginning with the adoption of EITF No.
02-16 in the first quarter of 2003, slotting and promotional allowances are
accounted for as a reduction in the cost of purchased inventory and recognized
when the related inventory is sold.
10
In November 2003, the EITF reached a consensus on EITF No. 03-10, "Application
of Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by
Manufacturers." EITF No. 03-10 addresses the accounting for manufacturer sales
incentives offered directly to consumers, including manufacturer coupons. The
consensus applies to new arrangements, including modifications to existing
arrangements, entered into in fiscal periods beginning after November 25, 2003.
The adoption of EITF No. 03-10 did not have any effect on the Company's
financial statements, as reimbursements received from manufacturers for sales
incentives are shown as a reduction in cost of sales.
..
5. 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 the 13 weeks ended
February 29, 2004 and March 2, 2003, respectively. 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.
13 Weeks Ended
--------------
($000s)
-------
2/29/04 3/2/03
------- ------
Net loss: $(252) $(1,383)
Less: stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects _ _
Pro forma net loss $(252) $(1,383)
====== ========
Loss per share: $(0.01) $(0.07)
Basic, as reported $(0.01) $(0.07)
Basic, pro forma $(0.01) $(0.07)
Diluted, as reported $(0.01) $(0.07)
Diluted, pro forma $(0.01) $(0.07)
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.
11
6. Subsequent Event
On April 13, 2004, the Company announced that it had received a letter from John
Catsimatidis, the holder with certain of his affiliates, of in excess of 90% of
the outstanding shares of common stock of the Company, stating his intention to
cash out the public stockholders of the Company, at $0.87 per share, via a short
form merger pursuant to Section 253 of the General Corporation Law of the State
of Delaware.
On April 14, 2003, the Board of Directors of the Company (John Catsimatidis
abstaining), at a telephonic meeting, appointed a special committee of
independent directors to (i) evaluate the offer, and (ii) determine its fairness
from a financial point of view to the public shareholders of the Company.
12
GRISTEDE'S FOODS, INC. AND SUBSIDIARIES
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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 November 30, 2003.
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 the Company.
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 adequacy of allowances
for doubtful accounts, fixed assets and other intangibles, inventories,
realization of deferred income taxes and the recoverability of internally
developed software costs. 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.
13
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.
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
2/29/04 3/2/03
------- ------
Sales 100.0 100.0
Cost of sales 58.1 60.9
-------- --------
Gross profit 41.9 39.1
Store operating, general and
administrative expenses 33.9 32.6
Pre-store opening startup costs 0.0 0.3
Depreciation and amortization 3.4 3.2
Non-store operating expense 3.9 3.7
Operating income (loss) 0.8 -0.7
Other income (expense) -1.1 -1.1
-------- --------
Loss from operations before
income taxes -0.4 -1.9
Provisions for income taxes 0.0 0.0
-------- --------
Net loss -0.4 -1.9
-------- --------
Sales were $69,838,182 for the 13 weeks ended February 29, 2004, compared to
sales of $74,594,759 for the 13 weeks ended March 2, 2003. Same store sales
declined 7.0% for the 13 weeks ended February 29, 2004, compared to the 13 weeks
ended March 2, 2003. The decline in sales for the 2004 period primarily resulted
from a reduction in promotional pricing at the Company's recently opened seven
new stores, promotional pricing by an e-commerce supermarket competitor, and the
2 stores closed in fiscal 2003. Same store sales are calculated using stores
that were open for business both in the current period and in the same period
last year.
14
Gross profit was $29,268,990 or 41.9% of sales for the 13 weeks ended February
29, 2004, as compared to $29,159,386 or 39.1% of sales for the 13 weeks ended
March 2, 2003. The increase in gross profit during the 2004 period was due to
the ability of the Company to increase and maintain gross margins on the sale of
its products, and reduced promotional pricing on the recently opened new stores.
Store operating, general and administrative expenses were $23,640,496 or 33.9%
of sales for the 13 weeks ended February 29, 2004, as compared to $24,331,332 or
32.6% of for the 13 weeks ended March 2, 2003. Store operating, general and
administrative expenses increased as a percentage of sales during the 2004
period mainly due to occupancy costs of the newly opened stores, and higher real
estate taxes.
Pre-store opening startup costs were $0 for the 13 weeks ended February 29,
2004, as compared to $253,007 or 0.3% of sales for the 13 weeks ended March 2,
2003. There were no store remodelings or new stores opened during the 2004
period versus 2 new store openings during the 2003 period. New stores have
higher pre-store openings costs than remodeled stores.
Non-store operating expenses were $2,725,391 or 3.9% of sales for the 13 weeks
ended February 29, 2004, as compared with $2,754,345 or 3.7% of sales for the 13
weeks ended March 2, 2003. Administrative payroll and fringes were 2.6% of sales
for the 2004 period, as compared to 2.7% of sales for the 2003 period. General
office expenses were 1.1% of sales for the 2004 period, as compared to 0.8% of
sales for the 2003 period. Professional fees were 0.1% of sales for both the
2004 and 2003 periods. Corporate expenses were also 0.1% of sales for both the
2004 and 2003 periods.
Depreciation and amortization expense was $2,378,607 or 3.4% of sales for the 13
weeks ended February 29, 2004, as compared to $2,380,026 or 3.2% of sales for
the 13 weeks ended March 2, 2003.
Interest expense was $776,929 or 1.1% of sales for the 13 weeks ended February
29, 2004, as compared to $842,649 or 1.1% of sales for the 13 weeks ended March
2, 2003.
As a result of the items reviewed above, net loss was ($251,572) for the 13
weeks ended February 29, 2004, as compared to a net loss of ($1,382,736) for the
13 weeks ended March 2, 2003.
Owing to a reduction in promotional pricing at the Company's recently opened
stores (seven stores were opened during the 4th quarter of fiscal 2002 through
the 2nd quarter of fiscal 2003), such stores had a smaller aggregate negative
impact on earnings and EBITDA for the quarter ended February 29, 2004. Newly
opened stores negatively impact earnings and EBITDA in their initial start-up
phase through a combination of higher labor costs, promotional pricing
reductions of gross margins, and higher advertising, depreciation, interest and
rent expense.
The Company uses the term "EBITDA" to mean net income before income taxes,
interest expense, depreciation, amortization, and changes in deferred rent and
other non-cash charges. EBITDA is a term not defined under United States
generally accepted accounting principles. The Company's management considers
EBITDA to be an important measure in evaluating the Company's financial
performance and uses this measure in managing its ongoing operations. The
Company's method of computation of EBITDA may or may not be comparable to other
similarly titled measures used by other companies. (See reconciliation of EBITDA
to net income in the table set forth below).
During the quarter ended February 29, 2004, the aggregate negative EBITDA impact
of the recently opened seven new stores was approximately $300,000. This
comparable aggregate negative EBITDA impact of these seven new stores for the
entire fiscal year 2003 was approximately $3,600,000.
15
For the quarter ended February 29, 2004, the Company's EBITDA was $3,185,156, a
50.5% increase over EBITDA of $2,116,396 for the comparable quarter last year.
Reconciliation of EBITDA to net income:
1st quarter ended 1st quarter ended
February 29, 2004 March 2, 2003
----------------- -----------------
Net (loss) $ (251,572) $(1,382,736)
Interest expense 776,929 842,649
Income tax expense 0 0
Depreciation, amortization &
changes in deferred rent 2,659,799 2,656,483
----------- -----------
EBITDA $ 3,185,156 $ 2,116,396
----------- -----------
Liquidity and Capital Resources
Liquidity:
The consolidated financial statements of the Company indicate that at February
29, 2004, current liabilities exceeded current assets by $4,247,023 and
stockholders' equity was $2,749,677. Significant working capital changes during
the 13 weeks ended February 29, 2004 included a $2.7 million increase in
inventories, a $1.5 million decrease in accounts receivable, a $0.6 million
increase in trade payables, and a $6 million increase in the current portion of
long term debt.
As further discussed in footnote 3 to the Notes to Consolidated Financial
Statements herein ("Impact of Northeast Blackout of August 14-15, 2003), the
Company has filed claims for losses incurred during the "blackout" and expects
to recover a total amount of at least $ 5.8 million, against which it has
already received $ 1 million. Pending final settlement of its insurance claim,
United Acquisition Corp. ("UAC") , a corporation indirectly owned by John
Catsimatidis, the majority shareholder, agreed to provide the Company with an
interim $5 million liquidity credit facility available during fiscal 2004. As of
February 29, 2004, UAC had advanced approximately $2.25 million to the Company
under this credit facility. The credit facility has no stated maturity date and
does not presently bear interest.
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:
In May, 2004, the Company's credit agreement with a group of banks was
amended and increased to a total $27,500,000 facility, and certain covenants
were amended. The amendment was effective as of February 28, 2004. The revolving
line of credit was increased from $17,000,000 to $19,500,000, and its maturity
extended from March 31, 2005 to March 31, 2007. The term loan in the aggregate
principal amount of $8,000,000 had its maturity extended from December 3, 2006
to March 1, 2007, and its amortization amended as follows: (i) monthly payments
of $97,500 due June 1, 2004 - September 1, 2004, (ii) $5,000,000 due October 1,
2004, and (iii) monthly payments of $90,000 due November 1, 2004 - March 1,
2007. Additionally, if the Company receives proceeds from its insurance claims
related to the August 14, 2003 Northeast "blackout" prior to October 1, 2004,
50% of such proceeds must be applied to reduce the October 1, 2004 scheduled
term loan amortization, and the remaining 50% must be applied to reduce
outstandings under the revolving line of credit.
16
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 our leverage ratio, as defined in our
credit facility. The average interest rate on amounts outstanding under our
credit facility during the quarter ended February 29, 2004 was 4.37% 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 and fixed
charge coverage ratio, 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
$24,018,521 through February 29, 2004, in the form of unsecured non-interest
bearing loans, of which $23,500,000 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.
Capital Expenditures:
Capital expenditures (including property acquired under capital leases)
were $1.2 million for the 13 weeks ended February 29, 2004, as compared to $3.4
million for the 13 weeks ended March 2, 2003.
We have not incurred any material commitments for capital expenditures,
although we anticipate spending approximately $2 - 3 million, inclusive of new
capital leases, on store remodeling in fiscal 2004. Such amount is subject to
adjustment based on the availability of funds.
Cash Flow:
Cash provided by operating activities amounted to $1.5 million for the
13 weeks ended February 29, 2004 as compared to $2.7 million for the 13 weeks
ended March 2, 2003. The change in cash flow from operating activities was
primarily due to the changes in inventories, receivables, and vendor trade
payable. Net cash used for investing activities was $1.2 million in the 2004
period as compared to $2.2 million in the 2003 period, as there were no new
store opened in the 2004 period. Cash used in financing activities was $0.3
million for the 2004 period as compared to $0.4 million for the 2003 period,
reflecting the additional proceeds provided by an affiliate, offset by
repayments of bank loans and capital leases.
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) Based on an evaluation by management of the Company's disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended) as of the end of the fiscal quarter ended
February 29, 2004 (the "Evaluation Date"), each of John Catsimatidis, Chairman
and Chief Executive Officer of the Company, and Kishore Lall, Executive Vice
President and Chief Financial Officer of the Company, have concluded that the
Company's disclosure controls and procedures were effective as of the Evaluation
Date.
17
Notwithstanding the foregoing, a control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that it will
detect or uncover failures within the Company to disclose material information
otherwise required to be set forth in the Company's periodic reports.
(b) There have not been any significant changes in the Company's internal
controls over financial reporting that occurred during the Company's fiscal
quarter ended February 29, 2004 that has materially affected, or is reasonably
likely to materially affect, the Company's internal controls over financial
reporting.
18
GRISTEDE'S FOODS INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Change in Securities And Use of Proceeds and Issuer Purchase of
Equity Securities
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 filed with this Form 10-Q
Exhibit 31.1 Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of the Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
Exhibit 32.1 Certifications of Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
Exhibit 99.1 Press Release of Gristede's Foods, Inc.,
dated May 14, 2004, announcing first quarter
2004 results
(b) Reports on Form 8-K
No Reports were filed during the quarter ended February 29, 2004.
Subsequent to such date, Reports on Form 8-K were filed (i) on
March 22, 2004 attaching as an exhibit the Company's press release
dated March 18, 2004, and (ii) on April 20, 2004 relating to the
intention of John Catsimatidis, the holder with certain of his
affiliates, of more than 90% of the outstanding shares of common
stock of the Company, to take the Company private.
19
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: May 14, 2004
By: /s/ Kishore Lall
---------------------------------------
Kishore Lall
Executive Vice President and
Chief Financial Officer
Dated: May 14, 2004
20