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 May 30, 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 May 28, 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
May 30, 2004 and November 30, 2003 Page 3
Consolidated Statements of Operations for
the 13 weeks and the 26 weeks ended
May 30, 2004 and June 1, 2003 Page 4
Consolidated Statements of Stockholders'
Equity for the 52 weeks ended
November 30, 2003 and the
26 weeks ended May 30, 2004 Page 5
Consolidated Statements of Cash Flows for
the 26 weeks ended May 30, 2004
and June 1, 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 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk Page 17
Item 4. Controls and Procedures Page 17
PART II - OTHER INFORMATION Page 18
2
Item 1
Financial Statements
GRISTEDE'S FOODS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
May 30, November 30,
ASSETS 2004 2003
------------- -------------
CURRENT ASSETS:
Cash $ 787,494 $ 693,274
Accounts receivable - net of allowance for doubtful accounts 9,993,502 11,840,262
of $607,774 at May 30, 2004 and $572,190 at November 30, 2003
Inventories 47,050,807 44,545,385
Prepaid expenses and other current assets 1,759,083 3,645,321
------------- -------------
Total current assets 59,590,886 60,724,242
------------- -------------
PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment 22,079,701 21,594,508
Capitalized equipment leases 37,377,665 36,168,381
Leaseholds and leasehold improvements 65,899,454 63,986,788
------------- -------------
125,356,820 121,749,677
Less accumulated depreciation and amortization 60,624,556 56,268,219
------------- -------------
Net property and equipment 64,732,264 65,481,458
Deposits and other assets 899,635 897,430
Other assets 2,178,327 2,253,000
------------- -------------
TOTAL $ 127,401,112 $ 129,356,130
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade $ 44,213,502 $ 44,604,656
Accrued payroll, vacation and withholdings 2,504,756 3,666,344
Accrued expenses and other current liabilities 2,171,414 3,331,761
Due to affiliates - trade 1,022,556 469,175
Capitalized lease obligations - current portion 4,627,778 5,677,142
Current portion of long term debt 1,461,371 2,650,740
------------- -------------
Total current liabilities 56,001,377 60,399,817
Long-term debt - noncurrent portion 26,330,001 25,899,803
Due to affiliates 26,177,666 22,008,258
Capitalized lease obligations - noncurrent portion 10,997,607 12,084,252
Deferred rent 6,485,077 6,162,749
------------- -------------
Total liabilities 125,991,728 126,554,879
------------- -------------
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 May 30, 2004 and November 30, 2003 392,732 392,732
Additional paid-in capital 18,065,302 17,865,302
Retained earnings/ (deficit) (17,048,650) (15,456,783)
------------- -------------
Total stockholders' equity 1,409,384 2,801,251
------------- -------------
TOTAL $ 127,401,112 $ 129,356,130
============= =============
The accompanying notes are an integral part of these financial statements.
3
GRISTEDE'S FOODS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE 26 WEEKS ENDED MAY 30, 2004 AND JUNE 1, 2003
26 weeks 13 weeks 26 weeks 13 weeks
ended ended ended ended
May 30, May 30, June 1, June 1,
2004 2004 2003 2003
------------- ------------ ------------ -----------
Sales $ 134,995,099 $ 65,156,917 145,586,712 70,991,953
Cost of sales 79,165,696 38,596,504 87,492,327 42,047,905
------------- ------------ ------------ -----------
Gross profit 55,829,403 26,560,413 58,094,385 28,944,048
Store operating, general and administrative expenses 46,098,579 22,458,083 48,386,141 24,065,494
Pre-store opening startup costs 33,533 33,533 495,633 260,626
Depreciation and amortization 4,766,554 2,387,947 4,759,168 2,379,142
Insurance proceeds (80,005) (80,005) (500,000) (500,000)
Non-store operating expenses:
Administrative payroll and fringes 3,484,188 1,701,826 4,047,510 2,040,846
General office expense 1,403,990 641,172 1,176,879 590,436
Professional fees 283,635 178,942 296,191 190,673
Corporate expense 136,538 61,020 122,021 62,912
------------- ------------ ------------ -----------
Total non-store operating expenses 5,308,351 2,582,960 5,642,601 2,884,867
------------- ------------ ------------ -----------
Operating loss (297,609) (822,105) (689,158) (146,081)
------------- ------------ ------------ -----------
Other income (expense):
Other Income 129,172 129,172 -- --
Interest expense (1,424,919) (647,990) (1,610,435) (767,786)
Interest income 1,490 629 2,348 1,111
------------- ------------ ------------ -----------
Total other income (expense) - net (1,294,257) (518,189) (1,608,087) (766,675)
------------- ------------ ------------ -----------
Loss before income taxes (1,591,866) (1,340,294) (2,297,245) (912,756)
Provision for income taxes -- -- -- --
------------- ------------ ------------ -----------
Net loss $ (1,591,866) $ (1,340,294) (2,297,245) (912,756)
============= ============ ============ ===========
Net loss per share; basic and diluted ($ 0.08) ($ 0.07) ($ 0.12) ($ 0.05)
============= ============ ============ ===========
Weighted average number of shares and
equivalents outstanding 19,636,574 19,636,574 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 26 WEEKS ENDED MAY 30, 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 -- -- 200,000 -- 200,000
of funding of company costs
Net loss -- -- -- (1,591,866) (1,591,866)
---------- -------- ---------- ------------ ------------
Balance at May 30, 2004 19,636,574 $392,732 18,065,302 (17,048,650) 1,409,384
========== ======== ========== =========== =========
The accompanying notes are an integral part of these financial statements.
5
GRISTEDE'S FOODS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE 26 WEEKS ENDED MAY 30, 2004 AND JUNE 1, 2003
26 weeks 26 weeks
ended ended
May 30, June 1,
2004 2003
----------- -----------
Cash flows from operating activities:
Net loss $(1,591,866) $(2,297,245)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 4,766,554 4,759,168
Change in allowance for bad debts 35,584 35,168
Capital contribution in connection of 200,000 --
funding of company costs
Changes in operating assets and liabilities:
Accounts receivable 1,811,176 701,349
Inventories (2,505,422) (3,940,243)
Due to/from related parties - trade 647,808 (146,098)
Prepaid expenses and other current assets 1,886,238 1,065,330
Other assets (337,749) (505,192)
Accounts payable, trade (391,153) 2,897,692
Accrued payroll, vacation and withholdings (1,161,588) (520,392)
Accrued expenses and other current liabilities (1,254,774) (208,419)
Current and other assets acquired via capital leases -- 700,000
Deferred rent 322,327 552,914
----------- -----------
Net cash provided by operating activities 2,427,134 3,094,032
----------- -----------
Cash flows from investing activities:
Capital expenditures (2,397,860) (4,413,649)
----------- -----------
Net cash used in investing activities (2,397,860) (4,413,649)
----------- -----------
Cash flows from financing activities:
Repayments of bank loan (759,171) (1,149,999)
Repayments of capitalized lease obligations (3,345,291) (2,543,739)
Advances from affiliates 4,169,408 5,106,493
----------- -----------
Net cash provided by financing activities 64,946 1,412,755
----------- -----------
Net increase in cash 94,220 93,138
Cash, begining of period 693,274 576,358
----------- -----------
Cash, end of period $ 787,494 $ 669,496
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 1,368,510 $ 1,734,300
Cash paid for taxes $ 14,112 $ 23,590
Supplemental schedule of non cash financing activity:
Assets acquired under capitalized lease obligations $ 1,209,282 $ 2,640,659
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. One 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 and the 26 weeks ended May 30, 2004,
amounts payable by the Company to Red Apple Real Estate, Inc. for rent and real
estate taxes under such leases totaled $937,952 and $1,914,559 respectively. 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 May 30, 2004 were $2,307,383. 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 May 30, 2004 were $4,113,874. These leases require that monthly
payments of $113,482 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 May 30, 2004 was
$26,177,666 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 May 30, 2004 were $4,162,265 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 $4,172,122 at May 30, 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
9
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 $3
million against its insured claim, including $2 million received subsequent to
the quarter ended May 30, 2004. The Company is expecting final settlement of its
claim during fiscal 2004.
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.
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.
10
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 May 30, 2004
and June 1, 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.
26 Weeks Ended ($000s) 13 Weeks Ended ($000s)
---------------------- ----------------------
5/30/04 6/1/03 5/30/04 6/1/03
------- ------ ------- ------
Net loss: $ (1,592) $ (2,297) $ (1,340) $ (913)
Less: stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects -- 3 -- 3
--------- --------- --------- ---------
Pro forma net loss $ (1,592) $ (2,300) $ (1,340) $ (916)
Loss per share:
Basic, as reported $ (.08) $ (0.12) $ (.07) $ (0.05)
Basic, pro forma $ (.08) $ (0.12) $ (.07) $ (0.05)
Diluted, as reported $ (.08) $ (0.12) $ (.07) $ (0.05)
Diluted, pro forma $ (.08) $ (0.12) $ (.07) $ (0.05)
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.
6. Going Private Transaction
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.
The special committee has engaged a financial advisor to evaluate the fairness
of the offer and to deliver an opinion to the special committee as to the
fairness, from a financial point of view to the Company's public shareholders,
of the consideration to be received in connection with the proposed merger. The
financial advisor has completed its review and is in the process of finalizing
its evaluation and opinion.
11
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.
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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:
26 weeks 26 weeks 13 weeks 13 weeks
ended ended ended ended
5/30/04 6/1/03 5/30/04 6/1/03
------- ------ ------- ------
Sales 100.0 100.0 100.0 100.0
Cost of sales 58.6 60.1 59.2 59.2
----------------------------------------------------------------------
Gross profit 41.4 39.9 40.8 40.8
Store operating, general and
administrative expenses 34.1 33.2 34.5 33.9
Pre-store opening startup costs 0.0 0.3 0.1 0.4
Depreciation and amortization 3.5 3.3 3.7 3.4
Insurance and grant proceeds -0.1 -0.3 -0.1 -0.7
Non-store operating expense 3.9 3.9 4.0 4.1
----------------------------------------------------------------------
Operating loss -0.2 -0.5 -1.3 -0.2
Other income (expense) -1.0 -1.1 -0.8 -1.1
----------------------------------------------------------------------
Loss from operations before
income taxes -1.2 -1.6 -2.1 -1.3
Provisions for income taxes -- -- -- --
----------------------------------------------------------------------
Net loss -1.2 -1.6 -2.1 -1.3
----------------------------------------------------------------------
Percentage of individual line items (as a percent of sales) have been
rounded to the nearest tenth of a percent, and therefore, the totals may not add
to 100%.
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Sales were $134,995,099 and $65,156,917 for the 26 weeks and for the 13 weeks
ended May 30, 2004, respectively, as compared to sales of $145,586,712 and
$70,991,953 for the 26 weeks and for the 13 weeks ended June 1, 2003,
respectively. Same store sales declined 7.2% and 7.4% for the 26 weeks and 13
weeks ended May 30, 2004, compared to the 26 weeks and 13 weeks ended June 1,
2003. The decline in sales for the 2004 periods primarily resulted from a
reduction in promotional pricing at the Company's recently opened seven new
stores, and promotional pricing by an e-commerce supermarket competitor. 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 $55,829,403 or 41.4% and $26,560,413 or 40.8% of sales for the
26 weeks and 13 weeks ended May 30, 2004, respectively, as compared to
$58,094,385 or 39.9% of sales and $28,944,048 or 40.8% of sales for the 26 weeks
and 13 weeks ended June 1, 2003, respectively. The increase in gross profit
percentage during the 26 week period ended May 30, 2004 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 $46,098,579 or 34.1%
of sales and $22,458,083 or 34.5% of sales for the 26 weeks and 13 weeks ended
May 30, 2004, respectively, as compared to $48,386,141 or 33.2% of sales and
$24,065,494 or 33.9% of sales for the 26 weeks and 13 weeks ended June 1, 2003,
respectively. Store operating, general and administrative expenses increased as
a percentage of sales during the 2004 periods mainly due to occupancy costs of
the newly opened stores, and higher real estate taxes.
Pre-store opening startup costs were $33,533 for the 26 weeks and 13 weeks ended
May 30, 2004, respectively, as compared to $495,633 and $260,626 for the 26
weeks and 13 weeks ended June 1, 2003, respectively. There were no store
remodelings or new stores opened during the 2004 periods versus 2 new store
openings in each of the first two fiscal quarters of 2003. New stores have
higher pre-store openings costs than remodeled stores.
Non-store operating expenses were $5,308,351 or 3.9% and $2,582,960 or 4.0% of
sales for the 26 weeks and 13 weeks ended May 30, 2004, respectively, as
compared to $5,642,601 or 3.9% of sales, and $2,884,867 or 4.1% of sales for the
26 weeks and 13 weeks ended June 1, 2003, respectively. Administrative payroll
and fringes were 2.6% of sales for both the 26 weeks and 13 weeks ended May 30,
2004, respectively, as compared to 2.8% of sales and 2.9% of sales for the
corresponding 2003 periods respectively. General office expenses were 1.0% of
sales for both the 26 weeks and 13 weeks ended May 30, 2004, respectively, as
compared to 0.8% for both the corresponding 2003 periods. Professional fees were
0.2% and 0.3% of sales for the 26 weeks and 13 weeks ended May 30, 2004,
respectively, as compared to 0.2% for both the corresponding 2003 periods.
Corporate expenses were 0.1% of sales for both the 2004 and 2003 periods.
Depreciation and amortization expense was $4,766,554 or 3.5% of sales and
$2,387,947 or 4.0% of sales for the 26 weeks and 13 weeks ended May 30, 2004,
respectively, as compared to $4,759,168 or 3.3% of sales and $2,379,142 or 3.4%
of sales for the corresponding 2003 periods respectively. The increase in the
2004 periods was primarily a result of capital expenditures incurred in
connection with recent new store openings and store renovations.
Interest expense was $1,424,919 or 1.1% of sales and $647,990 or 1.0% of sales
for the 26 weeks and 13 weeks ended May 30, 2004, respectively, as compared to
$1,610,435 and $767,786, in both cases 1.1% of sales for the corresponding 2003
periods respectively. The primary reason for the lower interest expense in the
2004 periods was owing to lower average levels of bank debt and capitalized
leases.
As a result of the items reviewed above, the net loss was ($1,591,866) and
($1,340,294) for the 26 weeks and 13 weeks ended May 30, 2004, respectively, as
compared to a net loss of ($2,297,245) and ($912,756) for the 26 weeks and 13
weeks ended June 1, 2003, respectively.
Owing to a reduction in promotional pricing at the Company's recently opened
stores (seven stores were opened during the period commencing 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 six months (26 weeks)
ended May 30, 2004. Newly opened
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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 six months (26 weeks) ended May 30, 2004, the aggregate negative
EBITDA impact of the recently opened seven new stores was approximately
$700,000. The comparable aggregate negative EBITDA impact of these seven new
stores for the entire fiscal year 2003 was approximately $3,600,000.
For the 26 weeks ended May 30, 2004, the Company's EBITDA was $4,921,934,
representing a 6.4% increase over EBITDA of $4,625,272 for the comparable period
last year.
Reconciliation of EBITDA to net loss:
26 weeks ended 26 weeks ended
-------------- --------------
May 30, 2004 June 1, 2003
------------ ------------
Net (loss) ($1,591,866) ($2,297,245)
Interest expense 1,424,919 1,610,435
Income tax expense 0 0
Depreciation, amortization &
changes in deferred rent 5,088,881 5,312,082
----------- -----------
EBITDA $ 4,921,934 $ 4,625,272
----------- -----------
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Liquidity and Capital Resources
Liquidity:
The consolidated financial statements of the Company indicate that at May 30,
2004, current assets exceeded current liabilities by $3,589,509 and
stockholders' equity was $1,409,384.
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 at least approximately $5.8 million, against which claim it has
already received $3 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 a $5
million liquidity credit facility available during fiscal 2004. As of May 30,
2004, UAC had advanced approximately $ 3.25 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 final proceeds from its insurance
claim 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.
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 13 weeks ended May 30, 2004 was 4.34% 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
$26,177,666 through May 30, 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 $3.6 million for the 26 weeks ended May 30, 2004, as compared to $7.1
million for the 26 weeks ended June 1, 2003.
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We have not incurred any material commitments for capital expenditures,
although we anticipate spending approximately $4 - 5 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 $2.4 million for the 26
weeks ended May 30, 2004 as compared to $3.1 million for the 26 weeks ended June
1, 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 $2.4 million in the 2004 period as compared to $4.4
million in the 2003 period, as there were no new stores opened in the 2004
period. Net cash provided by financing activities was $0.1 million for the 2004
period as compared to $1.4 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 May
30, 2004 (the "Evaluation Date"), each of John Catsimatidis, Chairman and Chief
Executive Officer of the Company, Kishore Lall, Executive Vice President and
Chief Financial Officer of the Company and Mark S. Kassner, Senior Vice
President of Finance and Chief Accounting Officer of the Company, have concluded
that the Company's disclosure controls and procedures were effective as of the
Evaluation Date.
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 May 30, 2004 that has materially affected, or is reasonably likely
to materially affect, the Company's internal controls over financial reporting.
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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
* Exhibit 10.14 Amended and Restated Loan Agreement dated as of May 5,
2004, between the Company and Citibank, N.A., Israel
Discount Bank of New York, and Bank Leumi USA.
* 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 31.3 Certification of the Chief Accounting Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
* Exhibit 32.1 Certifications of Chief Executive Officer, Chief
Financial Officer and Chief Accounting 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 July 19,
2004, announcing delay in filing this Form 10-Q.
* Exhibit 99.2 Press Release of Gristede's Foods, Inc., dated August
18, 2004, announcing the appointment of new Senior Vice
President of Finance and Chief Accounting Officer.
18
* Exhibit 99.3 Press Release of Gristede's Foods, Inc., dated August
27, 2004, reporting results of operations for the period
ended May 30, 2004.
* Filed herewith
(a) Reports on Form 8-K
None
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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: August 27, 2004
By: /s/ Kishore Lall
----------------
Kishore Lall
Executive Vice President and
Chief Financial Officer
Dated: August 27, 2004
By: /s/ Mark S. Kassner
-------------------
Mark S. Kassner
Senior Vice President of Finance and
Chief Accounting Officer
Dated: August 27, 2004
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