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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For fiscal year ended November 30, 2003
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________________ to___________________
Commission File No. 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 10019-3535
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(Address of Principal Executive Offices) (Zip Code)
(212) 956-5803
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $0.02 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13, or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes_X__ No____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Exchange Rule 12b-2) Yes___ No_X__
As of February 27, 2004, 19,636,574 shares of the registrant's common stock,
$0.02 par value, were outstanding.
The aggregate market value of the common stock held by nonaffiliates of the
registrant (i.e., excluding shares held by executive officers, directors, and
control persons as defined in Rule 405) on June 1, 2003 (the last business day
of the Company's second fiscal quarter) was $785,130, computed at the closing
price on that date.
Documents Incorporated by Reference: None
This annual report on Form 10-K contains 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.
ITEM 1. BUSINESS.
General
The Company is a Delaware corporation whose principal executive offices
are located at 823 Eleventh Avenue, New York, New York 10019-3535. Unless the
context otherwise requires, the terms "Company" or "Registrant" as used herein
refer to Gristede's Foods, Inc,. (which is a holding corporation) and its wholly
owned subsidiaries.
The Company operates 46 supermarkets (the "Supermarkets"), and three
free standing pharmacies offering health and beauty aids and general
merchandise. Forty Supermarkets and the three free standing pharmacies are
located in Manhattan, New York, three Supermarkets are located in Westchester
County, New York, one Supermarket is located in Brooklyn, New York, one
Supermarket is located in Bronx County, New York and one Supermarket is located
in Long Island, New York. All of the Supermarkets / pharmacies are operated
under the "Gristede's" banner. The Company leases all of its Supermarket
locations and its three pharmacies. During fiscal 1999 the Company embarked on a
plan to open in-store pharmacies in select Supermarket locations. The Company is
currently operating nine in-store pharmacies and three free standing pharmacies.
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.
The Company owns City Produce Operating Corp. ("City Produce"), a
corporation that operates a warehouse used as an internal distribution center,
on leased premises in Bronx County, New York. The warehouse operation supplies
the Company's Supermarkets with groceries and fresh produce. The warehouse also
sells wholesale fresh produce to third parties.
2
The Company competes on the basis of providing customer convenience,
service and a wide assortment of food products, including those that are
appealing to the clientele in the neighborhoods where its Supermarkets are
located. The Supermarkets, like most Manhattan supermarkets, are smaller than
their suburban counterparts, ranging in size from approximately 6,000 to 24,500
square feet of selling space and averaging approximately 10,300 square feet of
selling space.
The Supermarkets offer, at competitive prices, broad lines of
merchandise, including nationally and regionally advertised brands, private
label and generic brands. Merchandise sold includes food items such as fresh
meats, produce, dry groceries, dairy products, baked goods, poultry and fish,
fresh fruits and vegetables, frozen foods, and delicatessen and gourmet foods,
as well as many non-food items such as cigarettes, soaps, paper products, and
health and beauty aids. Check-cashing services are available to qualified
customers holding check-cashing cards and, for a small fee, the Company will
deliver groceries to a customer's residence. The Supermarkets accept payment by
Mastercard, Visa, American Express, IGT and Discover credit cards. Most of the
Supermarkets are open sixteen hours per day, seven days a week and on holidays,
including Christmas, New Year's and Thanksgiving. Most of the Supermarkets close
two hours earlier on Sundays.
The Company's predecessor was incorporated in 1956 in New York. In
1985, the Company's domicile was changed to Delaware by merging the predecessor
corporation into a newly formed Delaware corporation, incorporated for such
purpose. The Company became a public company in 1968 and listed its common stock
on the American Stock Exchange in 1972. Until 1992, the Company engaged in the
jewelry business, operating under the name Designcraft Industries, Inc. for most
of such time. The Company changed its name to Sloan's Supermarkets, Inc., in
September 1993 and to Gristede's Sloan's, 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.
Growth Strategy
On November 10, 1997, a Merger Agreement was consummated pursuant to
which 29 Supermarkets indirectly owned by Mr. John Catsimatidis, (the "majority
shareholder") merged into wholly owned subsidiaries of the Company (the
"Merger"). The Company believes that the Merger has allowed it to realize
synergies and increased operating leverage while providing management with the
necessary resources and focus to streamline operations, automate facilities and
capitalize on strategic opportunities. The Company also believes that the Merger
has enabled it to achieve the critical mass necessary to execute its future
growth strategy.
Subsequent to the Merger, the Company embarked on a capital expenditure
program for its Supermarkets that included extensive remodelings, the
introduction of a centralized point-of-sale information system and the opening
of in-store pharmacies in select Supermarket locations. The Company has a
$27,116,666 revolving credit and term loan facility from certain banks maturing
December 2006, and finance facilities from leasing companies to finance such
capital improvements. (see Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operation-Liquidity and Capital Resources").
3
The aggregate capital expenditures for fiscal 2003, including the store
remodeling and new store and free standing pharmacy openings, was approximately
$8.8 million. Subject to the availability of financing, during the fiscal year
ending November 28, 2004, the Company anticipates it will spend approximately
$2-3 million in aggregate capital expenditures. The Company anticipates that it
will continue opening new stores and in-store pharmacies in future years. The
modernized larger Supermarkets are being re-named "Gristede's Mega Stores".
Modernization has resulted in a more enjoyable shopping atmosphere with
more rapid check-out lines due to scanners and improved lighting facilities.
The Company may also expand its operations through the acquisition of
supermarkets and/or the acquisition of businesses that the Company believes
would complement its core supermarket business. However, pursuant to an order
embodying a Settlement Agreement between the Federal Trade Commission (the
"FTC"), Mr. John Catsimatidis, the Company and certain other companies
controlled by Mr. Catsimatidis (collectively, the "Companies"), for a period of
ten years from March 6, 1995, cannot, without prior FTC approval, acquire any
interest in any existing supermarket in certain designated areas in Manhattan.
The order does not restrict the Companies from acquiring an interest in a
supermarket (in such designated areas) by leasing or purchasing a new location
that at the time of acquisition (and for six months prior to the acquisition) is
not (or was not) being operated as a supermarket. There are no restrictions on
the Companies acquiring supermarkets that are located outside the designated
areas.
The Company attempted to acquire Kings Supermarkets, Inc., a chain of
29 stores, mainly located in northern New Jersey, but such attempt was not
successful.
Marketing
The Company advertises in local newspapers on a weekly basis. The
Company's advertising emphasizes competitive prices and a variety of
merchandise. Some of the Company's vendors offer cooperative advertising
allowances, which the Company receives for advertising particular products in
its newspaper advertisements.
Competition
The Company's retail business is subject to intense competition,
characterized by low profit margins and requiring regular advertising. All of
our Supermarkets are in direct competition with Food Emporium, D'Agostino's,
A&P, Pathmark and independent supermarket/grocery operators which do business
under the names "Pioneer", "Key Food" and "Associated", many of which are larger
and have substantially greater resources than the Company. The Supermarkets also
compete with on-line supermarket retailer FreshDirect.com and other outlets that
sell products sold by supermarkets in New York City. Those outlets include
gourmet food stores, health and beauty aid stores, drug stores, produce stores,
bodegas, delicatessens and other retail food establishments.
4
Sources of Supply; Inventory Policy
During fiscal 2003 the Company obtained approximately 35% of the
merchandise sold in its stores from one supplier, White Rose Foods, Inc. and the
balance from other vendors, none of which accounted for more than 10% of
merchandise purchased by the Company. The Company believes that its supplier
relationships are currently satisfactory. The Company is not dependent on these
supplier relationships since merchandise is readily available from numerous
sources under different brand names, subject to conditions affecting food
supplies generally.The Company's policy is to have its Supermarkets and
pharmacies fully stocked with merchandise at all times. This policy requires the
Company to carry significant amounts of inventory.
Tradenames
The Company owns the "Gristede's" tradename. Such name has an
established reputation in the areas served by the Supermarkets for convenience,
competitive prices, service and a wide variety of quality produce and
merchandise. "Gristede's" is a federally registered trademark.
Labor Contracts
All of the employees of the Company other than 156 full time
administrative employees and executives and 152 store managers and co-managers
are represented by unions. The table below sets forth the name of each union
with which the Company has a collective bargaining agreement and the expiration
date of such agreement.
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Name of Union Expiration Date
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Retail, Wholesale & Chain Store Food Employees Union, Local 338 October 7, 2006
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Amalgamated Meat Cutters and Retail Food Local 342 Store Employees
Union, Local 342-50 October 25, 2007
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United Food and Commercial Workers Union ("UFCW"), Local 174 December 20, 2006
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UFCW, Local 1500 June 25, 2006
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UFCW, Local 464A May 1, 2006
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International Brotherhood of Teamsters ("Teamsters"), Local 803 month-to-month
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Teamsters, Local 202 January 15, 2010
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Governmental Approvals
All of the Supermarkets have obtained all necessary governmental
approvals, licenses and operating permits to operate the stores.
5
Employees
At February 27, 2004, the Company had approximately 2,180 employees,
2,024 of which are employed at the Supermarkets, the pharmacies or the City
Produce warehouse, and 167 of which are employed at the Company's executive
offices. Approximately 707 employees were employed on a full-time basis, of
which 540 employees work in the Supermarkets or the pharmacies. The Company
believes that its relationships with its employees are satisfactory.
Seasonality
The Company's Supermarkets are predominantly located in the borough of
Manhattan in New York City and serve a more affluent clientele often referred to
as the "carriage trade." Owing to the significant exodus of such customers
during the summer months for vacation and holiday, together with an increased
propensity by resident customers for out of home dining during such period, the
Company traditionally incurs up to a 20% seasonal drop in sales during the
months of July and August each year. The seasonal decline in sales does not have
a material impact on the level of inventories carried by the Company.
Environmental Compliance
Compliance by the Company with Federal, State and local provisions that
have been enacted or adopted regarding the discharge of materials into the
environment, or otherwise relating to the protection of the environment, does
not have a material financial impact on the Company.
ITEM 2. PROPERTIES.
The Company leases all 46 Supermarket locations, its three free
standing pharmacies and the warehouse and distribution center operated by City
Produce. Including option renewals, one such lease expires prior to 2005, 15 of
such leases expire on dates from 2005 through 2013, and 33 of such leases expire
on dates from 2014 through 2040 (the warehouse is subject to three leases).
Several leases have optional renewal periods. It is generally the Company's
intention to exercise such options. The supermarkets range in size from
approximately 6,000 to 24,500 square feet of selling space, averaging
approximately 10,300 square feet of selling space. All of the stores are
air-conditioned, have all necessary fixtures and equipment and are suitable for
the retail operations conducted therein.
6
ITEM 3. LEGAL PROCEEDINGS.
Ansoumana v. Great Atlantic & Pacific Tea Company, Inc. d/b/a/ A&P,
Shopwell Inc. - d/b/a Food Emporium, Gristede's Operating Corp, Duane Reade,
Inc., Charlie Bauer, individually and d/b/a B&B Delivery Service a/k/a Citi
Express, Scott Weinstein and Steven Pilavan, ind. and d/b/a Hudson Delivery
Service Inc., Chelsea Trucking, Inc. a/k/a Hudson York.
On January 13, 2000, plaintiffs commenced a class action lawsuit in the U.S.
District Court for the Southern District of New York (hereinafter referred to as
the "Ansoumana Action"). Their complaint alleged violations of the Fair Labor
Standards Act and the New York Labor Law. Plaintiffs claimed damages for the
differential between the amount they were paid by the Great American Delivery
Service Company and what the minimum wage was in each specific year dating back
to 1994. Thirty-seven delivery workers opted into the class action.
Specifically, the Company was one of the parties sued in this litigation by
delivery workers claiming they were not being paid the minimum wage. The
delivery workers were employees of the Great American Delivery Company (formerly
known as B&B Delivery Service or Citi Express)("Great American"), not employees
of the Company. The Company was under contract with Great American to deliver
groceries to the Company's customers.
In its answer, the Company denied the allegations and cross-claimed against the
delivery service co-defendants Weinstein and Baur, based upon their own
negligence, theories of contribution and contractual indemnity.
When allegations of underpayment first emerged, the Company, on August 2, 2000,
entered into a new contract with Great American. This contract was entered into
in order to assure the Company that these delivery workers would be properly and
legally paid for their services. The legal hourly wages referred to in the
contract were discussed with the New York Attorney General's Office.
On July 23, 2001, the Company terminated its contract with Great American
because Great American breached the terms of the contract. Based upon that
termination, Great American commenced a breach of contract action in Supreme
Court, Nassau County, against the Company and obtained a preliminary injunction
compelling the Company to retain Great American as its delivery service
contractor.
Thereafter, Great American was found to be in contempt of several orders and
added as a party-defendant by motion to amend the complaint in the Ansoumana
Action. In response to those proceedings, Great American filed for bankruptcy.
Hence, the breach of contract action commenced by Great American against the
Company was stayed. The Company transferred the case to the United States
Bankruptcy Court in the Eastern District of New York. Great American's
bankruptcy petition was dismissed. Nevertheless, Great American posted a
$400,000 bond in the breach of contract action pending in Nassau County to
obtain a preliminary injunction and the Company is seeking to collect on the
bond on the grounds that the preliminary injunction was improvidently granted.
In August 2003 the Company entered into a stipulation and agreement of
settlement, pursuant to which the Company will be obligated to pay $2,600,000
plus up to $650,000 in legal fees, with any remaining amount to be added to the
class settlement. The full amount of the proposed settlement will be shared
approximately 50/50 by the Company and an affiliate controlled by John A.
Catsimatidis. Payment of the legal fees is due in the same percentage
installments as the settlement amount, commencing the later of (i) November 28,
2003, or (ii) 10 days after the court approves the payment of attorneys fees and
costs. In December 2003, the court approved the proposed settlement as fair, and
entered a final judgment in the matter.
7
An initial payment of $1.3 million (50%) was made on October 16, 2003, by an
affiliate, controlled by John A. Catsimatidis, on behalf of the Company. The
balance of the proposed settlement amount will be paid by the Company and is due
in equal installments of $650,000 on the first and second anniversary of the
initial payment, without interest. The plaintiffs have been conditionally
granted a subordinated security interest in certain of the Company's assets to
secure the payments of the settlement amount. Additionally, recoveries from a
$400,000 security bond posted by Great American / Baur shall be solely for the
Company's benefit, with any such recovery used to prepay the Company's remaining
obligations under the settlement.
The full amount of the $3,250,000 settlement, including legal fees, was
recorded as a litigation settlement expense of the Company. Payments received to
date from the affiliate were recorded as a capital contribution reflected as
additional paid-in capital; future affiliate reimbursements will be similarly
recorded.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information
The Company's Common Stock is listed and traded on the American Stock
Exchange. Since November 12, 1997 the Common Stock has been quoted under stock
symbol "GRI." Prior thereto it was quoted under the symbol "SLO." For the years
ended November 30, 2003, and December 1, 2002 the quarterly high and low price
range for such common stock is shown in the following tabulation.
8
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Fiscal Year Ended Fiscal Year Ended
November 30, 2003 December 1, 2002
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Quarter High Low High Low
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First $0.86 $0.57 $1.92 $0.45
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Second 0.86 0.52 1.33 0.90
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Third 1.40 0.50 1.65 0.90
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Fourth 1.43 0.90 1.00 0.65
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The approximate number of holders of record of the Company's Common
Stock on February 27, 2004 was 212. The Company believes that there are a
significant number of shares of the Company's Common Stock held in street name
and, consequently, the Company is unable to determine the actual number of
beneficial owners.
Dividends
The Company has never paid a cash dividend on its Common Stock and does
not expect to pay a cash dividend in the near future.
9
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for fiscal years 2003, 2002, 2001, 2000,
and 1999 have been derived from the audited consolidated financial statements of
the Company and should be read in conjunction with our Consolidated Financial
Statements.
------------------------------- Fiscal year ended -----------------------------
November 30, December 1, December 2, December 3, November 28,
2003 2002 2001 2000 1999
------------- ------------- ------------- ------------- -------------
Sales $ 279,686,646 $ 250,732,767 $ 229,988,315 $ 216,325,214 $ 181,980,204
Cost of sales 167,391,201 151,435,010 139,180,967 131,259,228 112,565,940
Gross profit 112,295,445 99,297,757 90,807,349 85,065,986 69,414,264
Store operating,
general and
administrative
expenses 94,469,217 79,175,726 71,596,708 67,550,165 57,632,921
Corporate overhead 11,473,438 9,830,478 8,329,559 7,435,949 5,917,305
Depreciation and
amortization 9,618,491 7,989,625 7,204,281 6,284,971 4,668,645
Bad debt expense *
(credits) 1,731,436 72,000 250,354 (350,000) 500,000
Interest expense 3,103,891 2,967,181 3,537,281 3,761,941 2,528,677
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Net income (loss) ($ 11,593,471) $ (926,407) $ 275,057 $ (190,908) $ (2,873,331)
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Net income (loss)
per share $ (0.59) $ (0.05) $ 0.01 $ (0.01) $ (0.15)
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At End of Period
- ----------------
Total assets $ 129,356,130 $ 120,612,141 $ 101,131,361 $ 96,446,057 $ 76,432,518
Long-term debt ** 59,992,313 58,137,496 46,682,929 42,378,525 41,800,050
Total liabilities 126,554,879 109,946,047 89,538,860 85,128,613 64,924,166
Certain reclassifications were made to fiscal 2002 consolidated financial
statements to conform to the fiscal 2003 presentation.
* Includes $1,639,436 due from an affiliate, and received in full from the
affiliate's ultimate parent in accordance with its guarantee in fiscal year
2003. As the payment was made by another affiliate, and not by an unrelated
third party, it was required to be accounted for as a bad debt expense of the
Company, offset by an equal contribution to paid-in-capital (see Management's
Discussion and Analysis of Financial Condition and Results of Operations).
** Includes amounts due to affiliates of $22,008,258, $14,842,437, $14,525,904,
12,129,031, and $9,113,500 respectively, for the fiscal years 2003, 2002, 2001,
2000, and 1999 respectively. The affiliates have agreed not to demand payment of
these liabilities in the next fiscal year. There is no stated final maturity
date; the entire amount due affiliates as of November 30, 2003 has been
subordinated to the 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.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Company Background
The fiscal years ended November 30, 2003, December 1, 2002 and
December 2, 2001 consisted of 52 weeks each.
The following table sets forth, as a percentage of sales,
components of the Results of Operations:
2003 2002 2001
---- ---- ----
Sales 100.0% 100.0% 100.0%
Cost of sales 59.8% 60.4% 60.5%
----- ----- -----
Gross profit 40.2% 39.6% 39.5%
Store operating, general and
administrative expense 33.8% 31.6% 31.1%
Pre-store opening startup costs 0.2% 0.3% 0.1%
Bad debt expense (credits) 0.6% -- --
Depreciation and amortization 3.4% 3.2% 3.1%
Non-store operating expense 4.1% 3.9% 3.6%
Net Insurance Proceeds - (0.7%) -- --
"Northeast blackout"
Insurance Proceeds-terrorist attack -- (0.2%) (0.7%)
Casualty Loss-Terrorist attack -- -- 0.5%
Write Off Kings Acquisition Costs 0.5% -- --
Litigation Settlement 1.2% -- --
Operating income (loss) (2.9%) 0.8% 1.6%
Other expense 1.2% 1.2% 1.4%
----- ----- -----
Income (loss) from operations
before income taxes (4.1%) (0.4%) 0.2%
Income taxes -- -- 0.1%
----- ----- -----
Net income (loss) (4.1%) (0.4%) 0.1%
----- ----- -----
Percentages 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%.
Results of Operations (2003 Compared to 2002)
Sales for the fiscal year 2003 were $279,686,646, an 11.5% increase
over sales of $250,732,767 for fiscal 2002. The Company engaged in a major new
store expansion commencing in the fourth quarter of 2002 through the second
quarter of 2003. During this period, the Company opened 7 new stores, and closed
2 stores. The sales increase in fiscal 2003 versus fiscal 2002 is mainly
attributable to this new store expansion and the one store remodeled in fiscal
2003, and to full years sales for those new or remodeled stores opened during
fiscal 2002. Same store sales for fiscal 2003 were approximately 3.5% lower
than fiscal 2002. The decline in same store sales during the 2003 period was
attributable to promotional pricing by a competitor, decrease in sales of
certain product categories due to the unseasonably cool and wet summer of 2003,
and the August 14, 2003 "Northeast blackout". Same store sales are calculated
using stores that were open for business both in the current quarter and in the
same period last year.
11
During fiscal 2003, the Company recorded certain non-recurring charges
to its statement of operations totaling $6,174,618. The majority of these
charges ($3,728,538 or 60%) were the result of the accounting treatment required
to be used by the Company in recording cash receipts from its affiliates, or
cash payments made by its affiliates to third parties on behalf of the Company,
pursuant to prior written agreements. These cash receipts were financially
favorable to the Company, but because payments were made by affiliates of the
Company, instead of unrelated third parties, they were required to be accounted
for as non-recurring charges to the Company's statement of operations, offset by
equal contributions to additional paid-in-capital. The agreements entered into
between the Company and its affiliates were:
(1) The Company's trade and other accounts receivable from one
affiliate were guaranteed by the affiliate's ultimate parent. During
fiscal 2003, $1,639,436 from the affiliate was paid in full by the
affiliate's ultimate parent, in accordance with its guarantee. This was
accounted for as a bad debt expense of the Company, offset by an equal
contribution to additional paid-in-capital. Primarily because of this
non-recurring charge, bad debt expense for fiscal 2003 was $1,731,436,
compared to $72,000 for fiscal 2002.
(2) In connection with the settlement of litigation with certain
delivery workers ("Ansoumana v. et. al."), the Company entered into a
stipulation and agreement of settlement, pursuant to which the Company
is obligated to pay $2,600,000, plus up to $650,000 in legal fees, with
any remaining amount added to the settlement. The settlement amount and
legal fees will be shared approximately 50/50 by the Company and an
affiliate controlled by John A. Catsimatidis. Nonetheless, the full
amount of the settlement, including legal fees, totaling $3,250,000 was
recorded as a litigation settlement expense of the Company. Payments to
date received from the affiliate ($1,300,000 was paid into escrow in
October, 2003, as an initial payment under the settlement) were
recorded as a capital contribution reflected as additional
paid-in-capital; future affiliate reimbursements will be similarly
recorded. The Company is also attempting to recover from a $400,000
security bond posted by one of the defendants in the litigation. Any
recoveries from the bond shall be solely for the Company's benefit,
with any such recovery used to prepay the Company's remaining
obligations under the settlement.
(3) In connection with the Company's previous efforts to acquire Kings
Super Markets, Inc., a supermarket chain, mainly located in northern
New Jersey, the Company entered into an arrangement for the funding of
acquisition costs with an affiliate. During fiscal 2003, acquisition
costs previously capitalized by the Company totaling $ 1,285,182, were
charged to operations. The affiliate reimbursed the Company $ 789,102
in accordance with the agreement. This was accounted for as a
contribution to additional paid-in-capital.
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 claims. The Company is
expecting final settlement of its claim prior to August 1, 2004.
12
Gross profit was $112,295,445 or 40.2% of sales for fiscal 2003 as
compared with $99,297,757 or 39.6% of sales for 2002. The increase in gross
profit during the 2003 period was primarily due to the ability of the Company to
increase and maintain gross margins on the sale of its products, including
having a higher proportion of perishable sales which have higher margins, offset
by promotional pricing on new store openings and major remodel re-openings.
Store operating, general and administrative expenses were $94,469,217
or 33.8% of sales for fiscal 2003 as compared to $79,175,726 or 31.6% of sales
for fiscal 2002. The increase in store operating, general and administrative
expenses as a percentage of sales in the 2003 period was mainly due to the
Company's new store expansion. Advertising expenses, net of cooperative
advertising of $629,045 included in store operating, general and administrative
expense in fiscal 2003 were $1,394,169 and $2,180,285 for fiscal 2003 and 2002,
respectively. In prior years such reimbursements were included as a reduction in
cost of sales.
Pre-store opening startup costs were $530,894 or 0.2% of sales for
fiscal 2003 as compared to $741,570 or 0.3% of sales for fiscal 2002. During
fiscal 2003, three new stores and one new free standing pharmacy were opened,
and 1 store was remodeled, compared to three new stores and six remodeled stores
in fiscal 2002. Pre-store opening startup costs were lower in fiscal 2003 owing
to the lower total number of stores opened or remodeled.
Non-store operating expenses were $11,473,438 or 4.1% of sales for
fiscal 2003 as compared to $9,830,478 or 3.9% of sales for fiscal 2002.
Administrative payroll and fringes were 2.9% of sales for the 2003 period as
compared with 2.8% of sales for the 2002 period. The increase in the 2003 period
primarily reflects the addition of department and divisional managers to handle
the additional business generated by the store expansion program General office
expenses as a percentage of sales were 0.9% for the 2003 period as compared to
0.8% for the 2002 period. Professional fees were 0.1% of sales for the 2003
period as compared to 0.2% for the 2002 period. Corporate expenses as a
percentage of sales were 0.1 % for both the 2003 and 2002 periods.
Depreciation and amortization expense was $9,618,491 or 3.4% of sales
for fiscal 2003 as compared to $7,989,625 or 3.2% of sales for fiscal 2002. The
increase in the 2003 period was primarily a result of significant capital
expenditures incurred in connection with the Company's new store expansion and
store remodeling program.
Interest expense was $3,103,891 or 1.1% of sales for fiscal 2003 as
compared to $2,967,181 or 1.2% of sales for fiscal 2002. The decrease in expense
as a percentage of sales in the 2003 period was primarily attributable to lower
bank borrowings and lower prevailing interest rates under the Company's bank
credit facility, partially offset by increased capitalized equipment leasing
interest expense.
13
As a result of the items discussed above, the net loss for fiscal year
2003 was ($11,593,471) as compared to a net loss of ($926,407) for fiscal 2002.
The new store expansion program significantly lowered earnings and
EBITDA for fiscal 2003 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).
New stores incur significantly higher promotional pricing (than
remodeled stores) in their initial start-up phase. The negative EBITDA impact of
the seven new stores during fiscal 2003 was approximately $3,500,000.
Additionally, the two stores closed in fiscal 2003 had a negative EBITDA impact
of approximately $200,000. As a result of the new and closed stores, the Company
reported a lower EBITDA of $8,459,000 in fiscal 2003, versus EBITDA of
$10,873,000 in fiscal 2002.
Reconciliation of EBITDA to net income:
Fiscal 2003 Fiscal 2002
------------------------------------
Net (loss) $(11,593,471) $ (926,407)
Interest expense 3,103,891 2,967,181
Income tax expense 48,508 40,000
Depreciation, amortization &
changes in deferred rent 10,724,993 8,792,406
Other non-cash charges (detailed herein):
Affiliate bad debt expense 1,639,436 -
Litigation settlement 3,250,000 -
Write-off Kings acquisition costs 1,285,182 -
---------- -----------
EBITDA $8,458,539 $10,873,180
- ----------------------------------------------------------------------------------
Results of Operations (2002 Compared to 2001)
Sales for the year 2002 were $250,732,767 as compared to sales for the
year 2001 of $229,988,315. The sales increase in fiscal 2002 compared to the
sales in fiscal 2001 is mainly attributable to sales increases due to new or
remodeled stores opened in fiscal 2002 or full years sales for those new or
remodeled stores opened during 2001. Same store sales for the year 2002 were
7.1% ahead of 2001. Gross profit was $99,297,757 or 39.6% of sales as compared
with $90,807,349 or 39.5% of sales for 2001. The increase in gross profit during
2002 period was primarily due to higher proportion of perishable sales with
higher margins, offset by promotional pricing on new store openings and major
remodel re-openings.
14
Store operating, general and administrative expenses were $79,175,726
or 31.6% of sales for the year 2002 as compared to $71,596,708 or 31.1% of sales
for the year 2001. The increase in store operating, general and administrative
expenses as a percentage of sales in the 2002 period was mainly due to new and
remodeled stores opening in the latter part of the year. Advertising expenses
included in store operating, general and administrative expense were $2,180,285
and $1,572,963 for the years 2002 and 2001, respectively.
Pre-store opening startup costs were $741,570 or 0.3% of sales for the
year 2002 as compared to $165,000 or 0.1% of sales for the year 2001. There were
three new stores and six remodeled stores in 2002 compared to no new stores and
six remodeled stores in 2001, leading to increased pre-store opening startup
costs in 2002. Furthermore, costs incurred for the year 2002 also included some
costs for two stores which opened in December 2002, following the fiscal year
end. New stores generally are given heavier promotion than remodeled stores.
Non-store operating expenses were $9,830,478 or 3.9% of sales for the
year 2002 as compared to $8,329,559 or 3.6% of sales for the year 2001.
Administrative payroll and fringes were 2.8% of sales for the 2002 period as
compared with 2.4% of sales for the 2001 period. The increase in the 2002 period
reflects the addition of department and divisional managers to handle the
additional business generated by the store remodeling program and higher health
costs. General office expenses as a percentage of sales were 0.8% for the 2002
period as compared to 0.9% for the 2001 period. The decrease during the 2002
period was primarily due to effective control of back office expenses in
relation to the increased sales. Professional fees were 0.2% of sales for the
2001 period as compared to 0.3% for the 2001 period. Corporate expenses as a
percentage of sales were 0.1% for both the 2002 period and the 2001 period.
Depreciation expense was $7,989,625 or 3.2% of sales for the year 2002
as compared to $7,204,281 or 3.1% of sales for the year 2001. The increase in
the 2002 period was primarily a result of significant capital expenditures
incurred in connection with the Company's store renovation and remodeling
program.
Management has filed claims with its insurance carriers as a result the
September 11 terrorist attacks for its losses, including business interruption.
The Company settled these claims with the insurance company in October 2002 for
approximate net proceeds of $1.5 million, and incurred costs of approximately
$1.1 million which amounts were reflected in fiscal 2001. The Company further
has applied for various government grants amounting to approximately $400,000
net of fees and expects to receive these in full during fiscal 2003. The grants,
along with an insurance claim for a theft loss from its warehouse, were recorded
in fiscal 2002.
Interest expense was $2,967,181 or 1.2% of sales for year 2002 as
compared to $3,537,281 or 1.5% of sales for year 2001. The decrease in the 2002
period was primarily attributable to lower prevailing interest rates under the
Company's bank credit facility, partially offset by increased capitalized
equipment leasing.
Interest income for the year 2002 was $5,116 as compared with $9,016
for the year 2001. The decrease in the 2002 period was due to lower prevailing
interest rates in the 2002 period.
15
Other income for the year 2002 was $0 as compared with $173,112 for the
year 2001. This mainly results from the sale of a store lease resulting from a
closed store in 2001.
Bad debt expense was $72,000 for the year 2002 as compared with
$250,354 for the year 2001. Bad debt expense was higher in the year 2001
primarily as a result of the Company's expansion of its pharmacy business and
systems relating thereto and the resulting increase in third party receivables.
As a result of the items discussed above, the income (loss) before
provision for income taxes for the year 2002 was ($886,407) as compared to
$373,897 for the year 2001.
Liquidity and Capital Resources
The consolidated financial statements of the Company indicate that at November
30, 2003, current assets exceed current liabilities by $324,425 and
stockholders' equity was $2,801,251. Significant working capital changes during
fiscal 2003 included a $4,180,710 increase in accounts receivable owing to
insurance claims receivable from the August, 2003 "Northeast blackout", a
$6,944,215 increase in inventories owing to the recently opened new stores, and
a $11,165,693 increase in accounts payable owing to increased vendor payables
and litigation settlement expense.
As further discussed in footnote 12 to the Notes to Consolidated Financial
Statements herein ("Impact of August 14-15, 2003 Northeast blackout), 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., a corporation indirectly wholly owned by the majority
shareholder, agreed to provide the Company with an interim $ 5 million liquidity
credit facility available during fiscal 2004. 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 April 2004, the Company's credit agreement with a group of banks was amended
to provide for a total facility of $27,116,666, consisting of a $17,000,000
revolving line of credit, and a $10,116,666 term loan. The amendment was
effective as of November 29, 2003, and the credit facility as amended provides
for: (i) a maturity date of March 31, 2005 for the revolving line of credit, and
December 3, 2006 for the term loan, at which time all amounts outstanding
thereunder are due, (ii) amortization of the term loan totaling $2,600,000,
$2,900,000 and $3,200,000 during fiscal 2004, 2005 and 2006, respectively, and a
$2,500,000 balloon payment at maturity on December 3, 2006, and (iii) certain
financial covenants.
16
Borrowings under the facility bear interest at a spread over either the
prime rate of the bank acting as agent for the group of banks or a LIBOR rate,
with the spread dependent on the ratio of the Company's funded debt to EBITDA
ratio, as defined in the credit agreement. The average interest rate on amounts
outstanding under the facility during fiscal year 2003 was 4.40 % per annum.
The credit facility contains covenants, representations and events of
default typical of credit facility agreements, including financial covenants
which require the Company to meet, among other things, a minimum tangible net
worth, debt service and fixed charge coverage ratios, and which limit
transactions with affiliates. The facility is secured by equipment, inventories
and accounts receivable.
The following is a summary of the Company's significant contractual cash
obligations for the periods indicated that existed as of November 30, 2003, and
is based on information appearing in the notes to consolidated financial
statements (amounts in thousands).
2004 2005* 2006 2007 2008 Thereafter Total
-------- -------- -------- -------- -------- ----------- --------
Long-term debt $ 2,651 $ 19,975 $ 5,925 $ -- $ -- $ -- $ 28,551
Operating leases $ 18,873 $ 18,597 $ 18,367 $ 16,775 $ 16,606 $ 102,241 $191,459
Capital lease obligations $ 5,677 $ 4,661 $ 3,507 $ 2,324 $ 1,592 $ -- $ 17,761
-------- -------- -------- -------- -------- ----------- --------
Total contractual cash
obligations $ 27,201 $ 43,233 $ 27,799 $ 19,099 $ 18,198 $ 102,241 $237,771
-------- -------- -------- -------- -------- ----------- --------
* Includes $17,000,000 indebtedness under a revolving credit agreement
maturing in March 2005.
Not included in the above table are net advances from the Company's
majority shareholder, through affiliates, totaling $22,008,258 through November
30, 2003 in the form of non-interest bearing loans, which are subordinated to
the Company's banks. The liability presently does not bear interest and has no
stated maturity date. However, the Company's credit agreement with its banks
permits the Company to pay interest on such subordinated debt provided the
Company has a positive net income.
The Company has available affiliate leasing lines of credit sufficient
to lease finance equipment for its ongoing store remodeling and expansion
program.
Capital Expenditures:
Capital expenditures for fiscal 2003, including property acquired under
capital leases, were $8.8 million compared to $19.3 million for fiscal 2002 and
$12.2 million for fiscal 2001. During fiscal 2003, the Company opened three new
stores and one free standing pharmacy, remodeled one store (and closed 2
stores).
The Company has not incurred any material commitments for capital
expenditures, although it anticipates spending approximately $2-3 million on
store remodeling in fiscal 2004. Such amount is subject to adjustment based on
the availability of funds.
17
Cash Flows:
Cash provided by operating activities amounted to $3.9 million in
fiscal 2003 compared to $6.7 million in fiscal 2002. The change in cash flow
from operating activities was primarily due to cash provided by operating assets
and liabilities and a larger net loss in fiscal 2003 compared to fiscal 2002.
Cash used for investing activities was $6.0 million in 2003 compared to $8.5
million in 2002, resulting from decreased capital expenditures. Cash provided by
(used in) financing activities was $2.3 million in fiscal 2003, compared to $1.9
million in 2002 reflecting the additional proceeds provided by an affiliate, and
capital contribution in connection of funding of Company costs, offset by
repayments of bank loans and capital leases.
Recent Accounting Pronouncements:
In April 2002, Statement of Financial Accounting Standards, No. 145, "Rescission
of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" ("SFAS 145") was issued. SFAS 145 rescinds SFAS 4 and 64,
which required gains and losses from extinguishment of debt to be classified as
extraordinary items. SFAS also rescinds SFAS 44 since the provisions of the
Motor Carrier Act of 1980 are complete. SFAS 145 also amends SFAS 13 eliminating
inconsistencies in certain sale-leaseback transactions. The provisions of SFAS
145 are effective for fiscal years beginning after May 15, 2002. Any gain or
loss on extinguishment of debt that was classified as an extraordinary item in
prior periods presented shall be reclassified to interest expense. The adoption
of SFAS 145 did not have a material effect on the Company's financial position
or results of operations.
Statement of Financial Accounting Standards, No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), was issued in July
2002. SFAS 146 requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS 146 supercedes EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." SFAS
146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. This pronouncement did not have a material effect on
the Company's financial position or results of operations.
On December 31, 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation -Transition and
Disclosure" ("SFAS 148"). This standard amends SFAS No. 123, to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require more frequent and
prominent disclosures in financial statements of the effects of stock-based
compensation. The transition guidance and annual disclosure provisions of SFAS
148 are effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. SFAS 148 did
not have a material impact on the Company's results of operations, financial
position or cash flows, and the Company adopted the disclosure provisions of
SFAS 148 as of March 3, 2003, as required.
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN 45").
FIN 45 requires the recognition of a liability for certain guarantee obligations
issued or modified after December 31, 2002. It also clarifies disclosure
requirements to be made by a guarantor for certain guarantees. The disclosure
provisions of FIN 45 are effective for fiscal years ending after December 15,
2002. FIN 45 did not have a material impact on the Company's results of
operations, financial position or cash flows, and the Company has adopted the
disclosure provisions of FIN 45 as of December 2, 2002.
18
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 Company is currently
evaluating the effect that the adoption of FIN 46 will have on its financial
position, cash flows and 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.
19
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.
Adoption of EITF No. 03-10 is not expected to have a material effect on the
Company's financial statements.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133. The new guidance amends SFAS 133 for decisions made: (a) as part of the
Derivatives Implementation Group process that effectively required amendments to
SFAS 133, (b) in connection with other Board projects dealing with financial
instruments, and (c) regarding implementation issues raised in relation to the
application of the definition of a derivative, particularly regarding the
meaning of an "underlying" and the characteristics of a derivative that contains
financing components. The amendments set forth in SFAS 149 improve financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. SFAS 149 is generally effective for contracts entered
into or modified after June 30, 2003 (with a few exceptions) and for hedging
relationships designated after June 30, 2003. The guidance is to be applied
prospectively. The adoption of SFAS 149 did not have a material impact on the
Company's financial position or results of operations.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). SFAS 150 improves the accounting for certain financial instruments
that, under previous guidance, issuers could account for as equity. The new
Statement requires that those instruments be classified as liabilities in
statements of financial position. The adoption of SFAS 150 did not have a
material impact on the Company's financial position or results of operations.
Critical Accounting Policies
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 2 of the Notes to the Consolidated Financial
Statements includes a summary of the significant accounting policies and methods
used in the preparation of our consolidated financial statements. The following
is a brief discussion of the more significant accounting policies and methods
used by 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.
20
Accounts Receivable
We continuously monitor collections and payments from our customers, third party
and vendor receivables and maintain a provision for estimated credit losses
based upon our historical experience and any specific collection issues that we
have identified. While such credit losses have historically been within our
expectations and the provisions established, we cannot guarantee that we will
continue to experience the same credit loss rates that we have in the past.
Inventories
We value our inventory at the lower of cost or market with cost determined under
the retail method. We regularly review inventory quantities on hand and record a
provision for excess and obsolete inventory where appropriate based primarily on
our historical shrink and spoilage rates.
Intangibles and Other Long-Lived Assets
Property, plant and equipment, intangible and certain other long-lived assets
are amortized over their useful lives. Useful lives are based on management's
estimates of the period that the assets will generate revenue. Intangible assets
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Accrued Self-Insurance
Insurance expense for employee-related health care benefits are estimated using
historical experience.
ITEM 7A. 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.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page No.
--------
Independent auditors' report F-1
Consolidated Balance Sheets as of November 30, 2003, and F-2
December 1, 2002
Consolidated Statements of Operations F-4
for the years ended November 30, 2003,
December 1, 2002 and December 2, 2001
Consolidated Statements of Stockholders' Equity F-5
for the years ended November 30, 2003,
December 1, 2002 and December 2, 2001
Consolidated Statements of Cash Flows F-6
for the years ended November 30, 2003,
December 1, 2002 and December 2, 2001
Notes to Financial Statements F-7
22
ITEM 9 CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
ITEM 9A 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 year ended
November 30, 2003 (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.
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 November 30, 2003, that has materially affected, or is reasonably
likely to materially affect, the Company's internal controls over financial
reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below is certain information as of February 27, 2004 with respect to
all directors and executive officers of the Company.
- ----------------------------------------------------------------------------------------------------------------------------
Position with the Company or
Director Other Principal Occupation
Name and Age Since for the Past Five Years
- ----------------------------------------------------------------------------------------------------------------------------
John A. Catsimatidis (55) 1988(5) Chairman of the Board, President and Chief Executive Officer of the
Company since July 28, 1988; Treasurer of the Company from July 28,
1988 to March 17, 1998 and since November 15, 1999; President and
Chief Executive Officer of Red Apple Group, Inc. (holding company)
and Chairman of the Board and Chief Executive Officer and Director
of United Refining Company (a refiner and retailer of petroleum
products) for more than five years; Director of News Communications
Inc., a public company whose stock is traded over-the-counter, since
December 4, 1991.
- ----------------------------------------------------------------------------------------------------------------------------
- --------
(5) Mr. Catsimatidis also served as a director of the Company from November
4, 1986 to November 27, 1987.
23
- ----------------------------------------------------------------------------------------------------------------------------
Position with the Company or
Director Other Principal Occupation
Name and Age Since for the Past Five Years
- ----------------------------------------------------------------------------------------------------------------------------
Kishore Lall (56) 1997 Chief Financial Officer since August, 2003, and Executive Vice
President - Finance and Administration and Secretary of the Company
since May 2002; Director of the Company since October, 1997;
consultant to Red Apple Group, Inc. from January 1997 to October
1997; Director of United Refining Company since 1997; private
investor from June 1994 to December 1996; Senior Vice President and
Head of Commercial Banking of ABN AMRO Bank, New York branch from
January 1991 until May 1994.
- ----------------------------------------------------------------------------------------------------------------------------
Martin R. Bring (61) 1988 Stockholder in the law firm of Anderson Kill & Olick, PC., since
February 1, 2002; Partner in the law firm of Wolf, Block, Schorr and
Solis-Cohen LLP and predecessor firm for more than five years prior
thereto; Director of United Refining Company since 1988.
- ----------------------------------------------------------------------------------------------------------------------------
Edward P. Salzano (56) 1999 Executive Vice President and Director of Cantisano Foods, Inc., a
privately held sauce and salsa manufacturing company, for more than
15 years.
- ----------------------------------------------------------------------------------------------------------------------------
Andrew Maloney (71) 2002 Counsel to DeFeiss O'Connell & Rose since January 2003; Counsel
to Kramer Levin Naftalis & Frankel LLP from April 1998 to December
2002, and a partner of Brown & Wood, LLP from December 1992 until
April 1998; United States Attorney for the Eastern District of New
York from June 1986 until December 1992; Director of United Refining
Company since 1997.
- ----------------------------------------------------------------------------------------------------------------------------
Frederick Selby (65) 1978 Chairman of Selby Capital Partners (acquisition and sale of
privately owned firms and divisions of public companies) for more
than five years; Managing Director and senior officer of mergers and
acquisitions division of Bankers Trust Company; Senior Vice
President of Corporate Finance of B.A.I.I. Banking (Paris) and
Director of Corporate Finance of Legg Mason Wood Walker prior
thereto.
- ----------------------------------------------------------------------------------------------------------------------------
Martin Steinberg (70) 1998 Independent consultant. Mr. Steinberg also served as a director of
the Company from May 1974 to January 1991.
- ----------------------------------------------------------------------------------------------------------------------------
24
Audit Committee
The Audit Committee of the Board of Directors is comprised of three directors:
Frederick Selby, Martin Steinberg and Edward Salzano. All of the Audit Committee
members are independent as that term is defined in Section 121(A) of the listing
standards of the American Stock Exchange. Mr. Selby has been designated as the
Audit Committee financial expert (as defined in item 401(h) of Regulation S-K of
the Securities Exchange Act of 1934, as amended). The Audit Committee met three
times during fiscal year 2003.
Code of Ethics
The Company has adopted a Code of Ethics pursuant to Section 406 of the
Sarbanes-Oxley Act of 2002. A copy of the Code of Ethics is being filed herewith
as Exhibit 14.1
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires directors and officers of the Company and persons who
own more than 10 percent of the Company's common stock to file with the
Securities and Exchange Commission (the "Commission") initial reports of
ownership and reports of changes in ownership of the common stock. Directors,
officers and more than 10 percent stockholders are required by the Exchange Act
to furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no reports
were required during fiscal 2003, all Section 16(a) filings applicable to its
directors, officers and more than 10 percent beneficial owners were timely
filed.
25
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth for the fiscal years ended November 30, 2003,
December 1, 2002, and December 2, 2001 certain information concerning the
compensation paid or accrued to certain executive officers of the Company
(collectively, the "Named Executive Officers"). The Company believes that the
aggregate amount of perquisites and other personal benefits paid to each of the
Named Executive Officers did not exceed the lesser of (i) 10% of such officer's
total annual salary and bonus or (ii) $50,000. Thus, such amounts are not
reflected in the following table.
SUMMARY COMPENSATION TABLE
- --------------------- -------------------- ---------------------------------- ----------------------------------- ------------
Long-term compensation
Annual Compensation Awards Payouts
---------------------------------- ----------------------- -----------
Other All
annual Restricted other
Name and compen- stock Options LTIP compensa-
principal Bonus sation award(s) /Sar's payouts tion
position * Year Salary ($) ($) ($) ($) (#) ($) ($)
- --------------------- -------------------- ----------- -------- ------------- ----------- ----------- ----------- ------------
John Catsimatidis, Fiscal 2003 $100,000 $ - $ - $ - - $ - $ -
Chairman of the Fiscal 2002 100,000 - - - - - -
Board, President Fiscal 2001 100,000 - - - - - -
and Chief
Executive Officer
Gary Pokrassa * Fiscal 2003 $150,000 $ - $ - $ - - $ - $ -
Chief Financial Fiscal 2002 150,000 - - - - - -
Officer Fiscal 2001 150,000 - - - - - -
- --------------------- -------------------- ----------- -------- ------------- ----------- ----------- ----------- ------------
*Mr. Gary Pokrassa, left the Company in August, 2003; Mr. Kishore Lall succeeded
him as Chief Financial Officer.
Options Granted in Last Fiscal Year
The following table sets forth certain information concerning options
granted during fiscal 2003 to the Named Executive Officers.
Market Potential Realizable Value
Price of At Assumed Annual Rates of
Number of Percentage of Common Stock Price Appreciation
Securities Total Options Stock on for Option Term
Underlying Granted to Exercise Date of Option Term
Options Employees in Price Grant Expiration ----------------------------
Name Granted (#) 2002 ($/Share) ($/Share) Date 5% ($) 10%($)
- -------------------- -------------- ---------------- ----------- ------------ ------------ ----------------------------
John Catsimatidis 0 -- -- -- -- -- --
26
Aggregate Options Exercised in Last Fiscal Year and Fiscal Year End Option
Values
During fiscal 2003, no stock options were exercised by any of the Named
Executive Officers. The following table sets forth the number and value of
options outstanding at November 30, 2003 held by the Named Executive Officers:
- --------------------------------------------------------------------------------------------------------
Number of Unexercised Value of Unexercised
Options Held on in-the-Money Options on November
November 30, 2003 30, 2003
- --------------------------------------------------------------------------------------------------------
Name Exercisable/Unexercisable Exercisable/Unexercisable
----------------------------------------------------------------------
John Catsimatidis 525,000/0 0/0
The closing sales price of the Common Stock on the American Stock Exchange on
November 28, 2003 (the last trading day before November 30, 2003) was $ 1.05. On
November 30, 2003, Mr. Catsimatidis held options to purchase 275,000 shares of
Common Stock at $3.75 per share and options to purchase 250,000 shares at $2.875
per share.
Compensation of Directors
Non-officer directors receive a quarterly stipend of $1,500 and $500 for each
meeting attended. Directors who serve on committees receive $500 for each
meeting attended.
Compensation Committee Interlocks and Insider Participation
The entire Board of Directors acted as the Company's Compensation Committee
during fiscal 2003. Two of the seven Directors, John A. Catsimatidis and Kishore
Lall, were executive officers of the Company during that fiscal year. None of
the other Directors had a relationship with the Company requiring disclosure
under applicable SEC disclosure rules. This arrangement is permissible under the
listing standards of the American Stock Exchange, because the Company is a
"controlled company" as defined in Section 801(a) of the corporate governance
requirements of the American Stock Exchange.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Philosophy. The Company's executive compensation philosophy is to provide
competitive levels of compensation, integrate management's pay with the
achievement of the Company's long-term performance goals, recognize individual
initiative and achievement, and assist the Company in attracting and retaining
qualified management. Executive compensation consists of base salary and long
term incentive compensation in the form of stock options. The compensation of
the Company's executive officers is reviewed and approved by the Compensation
Committee. Management compensation is intended to be set at levels that the
Compensation Committee believes is consistent with others in the Company's
industry.
In reviewing compensation levels of the Company's key executives, the
Compensation Committee considers, among other items, corporate profitability;
previous years' and competitors' profitability; revenues; and the quality of the
Company's services. No specific weight is accorded to any single factor.
Relative weights differ from executive to executive and change from time to time
as circumstances warrant.
27
Base Salaries. Base salaries for new management employees are determined
initially by evaluating the responsibilities of the position held and the
experience of the individual, and by reference to the competitive market place
for managerial talent. Salary adjustments are determined by evaluating the
performance of the executive and any increased responsibility assumed by the
executive, the competitive marketplace and the performance of the Company.
Equity Ownership. The Company established a stock option plan for its key
employees in October 1994 and in March 1998 the Board of Directors approved the
1998 Option Plan for key employees, directors and consultants. In April 1999 the
Board of Directors approved an amendment to the 1998 Option Plan to increase the
number of shares of stock reserved under the plan from 500,000 to 1,500,000,
which amendment was approved by the stockholders of the Company in August 1999.
The Compensation Committee believes that equity ownership by management is a
means of aligning management's and stockholders' interests in the enhancement of
stockholder value.
Compensation of Chief Executive Officer. Mr. Catsimatidis is the principal
stockholder of the Company and from August 1991 to November 10, 1997 served the
Company without receiving a salary. Since November 10, 1997 Mr. Catsimatidis has
been earning a salary at the rate of $100,000 per year.
During fiscal 2003, the Compensation Committee met once. Compensation of the
Company's executive officers for fiscal 2003 was determined by the Compensation
Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding ownership of
Common Stock on February 27, 2004 by: (i) each stockholder known to the Company
to own beneficially more than 5% of the outstanding shares of Common Stock; (ii)
each of the Company's directors; (iii) each of the Named Executive Officers; and
(iv) all executive officers and directors of the Company as a group. The address
of each person is c/o Gristede's Foods, Inc., 823 Eleventh Avenue, New York,
N.Y. 10019. The Company believes that ownership of the shares by the persons
named below is both of record and beneficial and such persons have sole voting
and investment power with respect to the shares indicated.
Name and Address of
Beneficial Owner Number of Shares Percent of Class
- ---------------- ---------------- ----------------
John Catsimatidis 18,675,150 (1) 92.1%
Martin Steinberg 127,642 (2) *
Kishore Lall 70,000 (3) *
Martin Bring 26,000 (4) *
Frederick Selby 13,110 (5) *
Edward P. Salzano 3,000 *
Andrew J. Maloney 0 *
Gary Pokrassa 0 *
All officers and directors as a group (8 persons) 18,914,902 (1)(6) 93.3%
* Less than 1%.
28
(1) Includes an aggregate of 12,573,974 shares held by corporations controlled
by Mr. Catsimatidis, 81,900 shares held by Mr. Catsimatidis as custodian,
2,057 shares held by a profit sharing plan of which Mr. Catsimatidis is a
trustee, 605 shares held by Mr. Catsimatidis as a trustee of individual
retirement accounts and currently exercisable options to purchase an
aggregate of 525,000 shares of Common Stock.
(2) Includes an aggregate of 15,000 shares of Common Stock which may be
purchased upon the exercise of currently exercisable stock options.
(3) Includes an aggregate of 55,000 shares of Common Stock which may be
purchased upon the exercise of currently exercisable options.
(4) Includes an aggregate of 26,000 shares of Common Stock which may be
purchased upon the exercise of currently exercisable stock options.
(5) Includes an aggregate of 11,000 shares of Common Stock which may be
purchased upon the exercise of currently exercisable options.
(6) Includes an aggregate of 632,000 shares of Common Stock which may be
purchased upon the exercise of currently exercisable stock options.
29
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth additional information as of November 30, 2003,
about shares of our Common Stock that may be issued upon the exercise of options
and other rights under our existing equity compensation plans and arrangements,
divided between plans approved by our stockholders and plans or arrangements not
submitted to the stockholders for approval.
- ----------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- ----------------------------------------------------------------------------------------------------------------
Plan Category Number of Securities to be Weighted-average exercise Number of Securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and future issuance under
warrants and rights rights equity compensation plans
(excluding securities
reflected in column (a)).
- ----------------------------------------------------------------------------------------------------------------
Equity compensation plans 1,170,500 $3.14 329,500
approved by security
holders
- ----------------------------------------------------------------------------------------------------------------
Equity compensation plans -- -- --
not approved by security
holders
- ----------------------------------------------------------------------------------------------------------------
Total 1,170,500 $3.14 329,500
- ----------------------------------------------------------------------------------------------------------------
30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has entered into indemnification agreements with each of its
directors and officers. These indemnification agreements supplement the
indemnification provisions of the Company's By-laws and the Delaware General
Corporation Law. The stockholders of the Company authorized the Company to enter
into such agreements with each of its directors at the Annual Meeting of
Stockholders held on August 21, 1987. The Board of Directors has authorized the
Company to enter into such agreements with each of its officers
By virtue of his ownership of Common Stock (see Item 12. "Security
Ownership of Certain Beneficial Owners and Management") and his position as
Chairman of the Board of the Company, John Catsimatidis may be deemed to be a
"parent" of the Company under rules promulgated by the Commission.
The Company leases the following locations from an affiliate, Red Apple Real
Estate, Inc., a company wholly owned by John A. Catsimatidis: 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 fiscal 2003, the
Company incurred expenses totaling $3,876,165 for rent and real estate taxes
under such leases. The lease terms provide for aggregate rent and real estate
taxes of $5,098,927 for fiscal 2004. 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 November 30, 2003 and December 1,
2002 were $2,697,250 and $3,435,385 respectively. 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 November 30, 2003 and December 1, 2002 were $3,899,970 and
$4,030,094 respectively. These leases require that monthly payments of $100,525
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 Merger. These affiliates have agreed not to
demand payment of these liabilities in the next fiscal 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 November 30, 2003
and December 1, 2002 was $22,008,258 and $14,842,437 respectively, of which
$22,008,258 and $14,200,000 respectively were 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. There is no
stated maturity date.
31
In October 2002, the Company and Gristede's NY LLC, a company wholly owned by
John Catsimatidis and an affiliate of the Company, acquired the fixtures,
leasehold improvements and store leases of three stores from the Great Atlantic
& Pacific Tea Company for a total purchase price of $5,500,000. The affiliate
has leased those assets acquired by it to the Company. Such stores had been
closed for more than six months prior to the transaction. Obligations under
these capital leases at November 30, 2003 were $4,468,920 and require monthly
payments of $79,156 through February 2008 and a balloon payment of $1,629,156 at
such time.
In October 2002, in connection with the foregoing, Gristede's NY LLC, received
a term loan of $5,000,000 from Commerce Bank, N.A. The 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 $ 4,646,939 at November 30, 2003.
Due from related parties - trade, represents amounts due from an affiliated
company for merchandise shipped from the Company's subsidiary City Produce
Operating Corp., in the ordinary course of business, as well as management fees
receivable for administrative and managerial services performed for the
affiliated company by the Company. Amounts receivable from the affiliate were
guaranteed by a company controlled by John A. Catsimatidis. During fiscal years
2003, 2002 and 2001, merchandise sales to the affiliate were approximately
$973,714, $1,054,000 and $1,792,000 respectively. During fiscal 2003, the
affiliate ceased operations, and all outstanding amounts due the Company from
the affiliate were repaid by another affiliate pursuant to its guarantee. The
full collection of all amounts due from the affiliate totaling $1,639,000, was
accounted for as a non-cash bad debt expense of the Company, offset by an equal
capital contribution reflected as additional paid-in capital.
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 the 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.
32
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 1997 Merger. 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, Inc., a
corporation wholly-owned by John Catsimatidis, as an agent for self-insurance
purposes. All employee medical claims are submitted to a third party
administrator who processes claims to be remitted through a controlled account.
Such amounts are reimbursed by the Company to the agent. No fees have been paid
to this entity for the fiscal years 2003, 2002 or 2001.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Fees Incurred by the Company for BDO Seidman, LLP
The following table shows the fees paid or accrued by the Company for audit
and other services provided by BDO Seidman, LLP for fiscal 2003 and 2002.
2003 2002
---- ----
Audit Fees (1) $219,000 $ 140,250
Audit-Related Fees (2) 150,750 110,875
Tax Fees (3) 0 7,500
All Other Fees (4) 0 0
Total $369,750 $258,625
The Audit Committee has delegated to the Chair of the Audit Committee the
authority to pre-approve audit-related and non-audit services not prohibited by
law to be performed by the Company's independent auditors. All of the
Audit-Related Fees, Tax Fees, and All Other Fees were approved by the Audit
Committee, and were performed by full time permanent employees of BDO Seidman,
LLP.
- -----------
(1) Audit fees represent fees for professional services provided in connection
with the audit of our financial statements and review of our quarterly
financial statements and audit services provided in connection with other
statutory or regulatory filings.
(2) Audit-related fees consist primarily of accounting consultations, employee
benefit plan audits, services related to potential business acquisitions
specifically related to the acquisition of King's Supermarkets, Inc.
(3) For fiscal 2003 and 2002, respectively, tax fees principally included tax
advice and tax planning fees of $ 0, and $ 7,500 respectively.
(4) All other fees principally include information system security services.
There were no such fees in fiscal 2003 and fiscal 2002.
33
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Annual Report on
Form 10-K.
1. Consolidated Financial Statements:
The Consolidated Financial Statements filed as part of this Form 10-K
are listed in the "Index to Consolidated Financial Statements" in Item 8.
2. Consolidated Financial Statement Schedule:
The Consolidated Financial Statement Schedule filed as part of this
report is listed in the "Index to S-X Schedule".
Schedules other than those listed in the accompanying Index to S-X
Schedule are omitted for the reason that they are either not required, not
applicable or the required information is included in the Consolidated Financial
Statements or notes thereto.
34
GRISTEDE'S FOODS, INC. AND SUBSIDIARIES
INDEX TO S-X SCHEDULE
Page
----
Independent Auditors' Report............................ 35
Schedule II -- -Valuation & Qualifying Accounts......... 36
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Stockholders of Gristedes's Foods, Inc.
The audits referred to in our report dated April 2, 2004, relating to
the consolidated financial statements of Gristede's Foods, Inc. and
subsidiaries, which is contained in Item 8 of this Form 10-K, included the
audits of the financial statement schedule listed in the accompanying index for
each of the three fiscal years in the period ended November 30, 2003. This
financial statement schedule is the responsibility of management. Our
responsibility is to express an opinion on this schedule based on our audits.
In our opinion, the financial statement Schedule II - Valuation and
Qualifying Accounts, presents fairly, in all material respects, the information
set forth therein.
New York, NY /s/ BDO Seidman, LLP
April 2, 2004 BDO Seidman, LLP
35
Independent Auditors' Report
Board of Directors of
Gristede's Foods, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Gristede's
Foods, Inc. and subsidiaries (the "Company") as of November 30, 2003, and
December 1, 2002, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended November 30, 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Gristede's Foods,
Inc. and subsidiaries as of November 30, 2003, and December 1, 2002, and the
results of their operations and their cash flows for each of the three years in
the period ended November 30, 2003, in conformity with accounting principles
generally accepted in the United States of America.
New York, NY /s/ BDO Seidman, LLP
April 2, 2004 -------------------------
BDO Seidman, LLP
Gristede's Foods, Inc.
and Subsidiaries
Consolidated Balance Sheets
November 30, 2003 December 1, 2002
Assets
Current:
Cash $ 693,274 $ 576,358
Accounts receivable - net of allowance for doubtful
accounts of $572,190 and $481,000 respectively 11,840,262 7,659,552
Inventories 44,545,385 37,601,170
Due from related parties - trade -- 251,665
Prepaid expenses and other current assets 3,645,321 2,825,984
- -----------------------------------------------------------------------------------------------------
Total current assets 60,724,242 48,914,729
- -----------------------------------------------------------------------------------------------------
Property and equipment
Furniture, fixtures and equipment 21,594,508 20,159,016
Capitalized equipment leases 36,168,381 34,300,805
Leasehold interests and improvements 63,986,788 59,323,240
- -----------------------------------------------------------------------------------------------------
121,749,677 113,783,061
Less: Accumulated depreciation and amortization 56,268,219 48,474,655
- -----------------------------------------------------------------------------------------------------
Net property and equipment 65,481,458 65,308,406
Deposits and other assets 897,430 1,120,028
Due from related parties - trade -- 1,225,000
Other assets 2,253,000 4,043,978
- -----------------------------------------------------------------------------------------------------
$129,356,130 $120,612,141
- -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
F-2
Gristede's Foods, Inc
and Subsidiaries
Consolidated Balance Sheets
November 30, 2003 December 1, 2002
- -------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current:
Accounts payable, trade $ 44,604,655 $ 33,438,962
Accrued payroll, vacation and withholdings 3,666,344 3,177,933
Accrued expenses and other current liabilities 3,331,761 2,343,654
Capitalized lease obligation - current portion 5,677,142 4,892,101
Current portion of long-term debt 2,650,740 2,500,740
Due to affiliates - trade 469,175 398,913
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 60,399,817 46,752,303
Long-term debt-noncurrent portion 25,899,803 28,349,802
Due to affiliates 22,008,258 14,842,437
Capitalized lease obligation - noncurrent portion 12,084,252 14,945,257
Deferred rent 6,162,749 5,056,248
- -------------------------------------------------------------------------------------------------------------
Total liabilities 126,554,879 109,946,047
- -------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.02 par value - shares authorized
25,000,000; issued and outstanding 19,636,574 392,732 392,732
Additional paid-in capital 17,865,302 14,136,674
Retained earnings (deficit) (15,456,783) (3,863,312)
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,801,251 10,666,094
- -------------------------------------------------------------------------------------------------------------
$ 129,356,130 $ 120,612,141
- -------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
F-3
Gristede's Foods, Inc.
and Subsidiaries
Consolidated Statements of Operations
52 Weeks Ended 52 Weeks Ended 52 Weeks Ended
November 30, 2003 December 1, 2002 December 2, 2001
- --------------------------------------------------------------------------------------------------------------------------
Sales $ 279,686,646 $ 250,732,767 $ 229,988,315
Cost of sales 167,391,201 151,435,010 139,180,966
- --------------------------------------------------------------------------------------------------------------------------
Gross profit 112,295,445 99,297,757 90,807,349
Store operating, general and administrative
expenses 94,469,217 79,175,726 71,596,708
Pre-store opening startup costs 530,894 741,570 165,000
Bad debt expense 1,731,436 72,000 250,354
Depreciation and amortization 9,618,491 7,989,625 7,204,281
Non-store operating expenses:
Administrative payroll and fringes 8,195,782 7,125,070 5,445,675
General office expense 2,613,791 1,993,196 1,998,374
Professional fees 402,392 477,749 709,448