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 December 1, 2002
( ) 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
(Address of Principal Executive Offices) (Zip Code)
(212) 956-5803
(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. [ ]
As of February 25, 2003, 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 May 31, 2002 (the last business day
of the second fiscal quarter) was $1,678,553 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 49 supermarkets (the "Supermarkets"), and two free
standing pharmacies offering health and beauty aids and general merchandise.
(Two supermarkets opened in December 2002, subsequent to year end). Forty-one
Supermarkets and the two 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 the Bronx, New York
and one Supermarket is located in Long Island, New York. All of the
supermarkets / pharmacies are operated under the "Gristede's" name. The Company
leases all of its Supermarket locations and its two 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 two free standing pharmacies.
During fiscal 2002 the Company opened one new in-store pharmacy and opened
two additional in-store pharmacies subsequent to the end of fiscal 2002.
The Company also 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 10,200 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. 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
$32,500,000 revolving credit and term loan facility from certain banks maturing
in November 2004 and December 2006, respectively, 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-
During the fiscal year ended December 1, 2002, three new stores were
opened, four stores were remodeled, and one new in-store pharmacy opened. Two
new stores were opened in December 2002 subsequent to the fiscal year-end. The
aggregate capital expenditures for fiscal 2002, including such remodelings and
new store openings, was approximately $19,000,000. Included in this amount is
$6.4 million for three stores purchased from A&P for $5.5 million. Subject to
the availability of financing, during the fiscal year ending November 30, 2003,
the Company anticipates it will spend approximately $8 to $10 million in
aggregate capital expenditures, including additional remodelings and new store
and pharmacy openings. The Company anticipates that it will continue opening
new stores and pharmacies in future years. The modernized larger Supermarkets
are being re-named "Gristede's Mega Stores".
Average sales increases at the remodeled stores have exceeded 50%.
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"), 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, the Company cannot, without prior FTC approval, acquire any
interest in any existing supermarket in certain designated areas in Manhattan.
The order does not restrict the Company 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 Company acquiring supermarkets that are located outside the designated
areas.
The Company has been attempting to acquire Kings Supermarkets, Inc., a chain of
29 stores, mainly located in Northern New Jersey. The Company intends to
continue such efforts. No assurance can be given that this acquisition will be
consummated.
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 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 2002 the Company obtained approximately 40% of the
merchandise sold in its stores from one supplier, White Rose Foods, 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 fully stocked with
merchandise at all times. This policy requires the Company to carry significant
amounts of inventory. As stated above, replenishment merchandise is readily
available from the Company's suppliers, and, on average, nearly 90% of the
Company's inventory is sold before the Company is required to pay its suppliers.
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 161 administrative employees
and executives and 95 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.
Name of Union Expiration Date
------------- -----------------
Retail, Wholesale & Chain Store Food Employees Union, Local 338 October 7, 2006
Amalgamated Meat Cutters and Retail Food Local 342 Store Employees
Union, Local 342-50 October 5, 2003
United Food and Commercial Workers Union ("UFCW"), Local 174 December 20, 2006
UFCW, Local 1500 June 25, 2006
UFCW, Local 464A May 1, 2003
International Brotherhood of Teamsters ("Teamsters"), Local 803 month-to-month
Teamsters, Local 202 December 31, 2003
GOVERNMENTAL APPROVALS
All of the Supermarkets have obtained all necessary governmental
approvals, licenses and operating permits to operate the stores.
-5-
EMPLOYEES
At February 1, 2003, the Company had approximately 2,288 employees, 2,086
of which are employed at the Supermarkets or the City Produce warehouse, and 202
of which are employed at the Company's executive offices. Approximately 717
employees were employed on a full-time basis, of which 460 employees work in
the Supermarkets.
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 49 supermarket locations, its two free standing
pharmacies and the warehouse and distribution center operated by City Produce
(two supermarkets opened in December 2002, subsequent to year end). Including
option renewals, two of such leases expire prior to 2004, 14 of such leases
expire on dates from 2004 through 2012 and 36 of such leases expire on dates
from 2013 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 10,200 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.
1) RMED International Inc. v. Sloan's Supermarkets Inc. and John A.
Catsimatidis.
On August 8, 1994, a lawsuit against the Company and Mr. Catsimatidis was
instituted in the United States District Court for the Southern District of New
York by RMED International, Inc. ("RMED"), a former stockholder of the Company.
The complaint alleged, among other things, that RMED and a purported class
consisting of persons who purchased the Company's common stock on or after March
19, 1993 were damaged by alleged nondisclosures in certain filings made by the
Company with the Securities and Exchange Commission between January 1993 and
June 1994 relating to an investigation by the FTC. The complaint alleged that
such nondisclosures constituted violations of Federal and New York State
securities laws, as well as common law fraud, and seeks damages (including
punitive damages) in an unspecified amount (although in discovery proceedings,
the named plaintiff has claimed that its damages were approximately $800,000) as
well as costs and disbursements of the action. On June 2, 1994, the Company
issued a press release that disclosed the FTC action.
On September 30, 1994, the defendants filed a motion to dismiss for failure to
state a cause of action and for lack of subject matter jurisdiction over the
state claims. The motion was denied. In June 1995, the plaintiff filed a
motion for class certification, which motion was granted in March 1996. Fact
discovery was completed by the end of June 1998. Expert discovery was completed
by the end of 1998. Plaintiff's expert prepared a report claiming that
plaintiffs have suffered damages in an amount in excess of $3,000,000. In
August 1999, defendants moved to exclude plaintiff's expert report, which motion
was denied. In June 2000, the Company filed a motion for summary judgment. In
February 2002, the court dismissed plaintiff's state law claim under Article
23-A of the General Business Law of New York, as well as plaintiff's claim for
breach of fiduciary duty, but denied the Company's motion with respect to the
plaintiff's claim under Section 10(b) of the Securities Exchange Act of 1934, as
amended and Rule 10(b)-5 promulgated thereunder, as well as plaintiff's claim of
fraud under state common law, finding that there were outstanding issues of fact
which needed to be determined at trial.
After a week of trial, in January 2003, the matter was settled. The full amount
of the settlement, together with a portion of the Company's legal fees, was paid
by the Company's D&O insurance carrier. Neither the Company, nor Mr.
Catsimatidis paid any portion of the settlement amount.
2.) 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 are claiming 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. To date, about 35 to 40 delivery workers have 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 are 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.
-7-
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. Great American's breach of contract action
commenced in Nassau County has been stayed pending a resolution of the Ansoumana
Action. 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 intends to recoup these monies from Great American.
A tentative settlement has been reached. The Company estimates that such a
possible settlement could result in potential payments of approximately
$2,600,000 plus plaintiffs' legal expenses, payable over a number of years,
without interest, which amount would be shared approximately 50-50 by the
Company with its predecessor private companies. Any amount paid on behalf of the
Company will be reflected as a capital contribution. Additionally, recoveries
from a $400,000 security bond posted by Great American / Baur shall be solely
for the Company's benefit. However, any final settlement must be approved by the
Company's banks, the state, the courts, and the plaintiffs. The Company and its
legal counsel are not presently able to predict whether the settlement will be
implemented. Accordingly, the Company has not recorded any contingent liability
in its consolidated financial statements related to this matter. The Company is
also pursuing an insurance contribution to the settlement under various
policies.
In the meantime, the Company's co-defendant Duane Reade who has continued to
aggressively defend itself in this case, without pursuing settlement, has been
found liable by summary judgment to be a joint employer with its delivery
service provider Weinstein.
3.) Red Apple Supermarkets, Inc., Gristede's Supermarkets, Inc., Supermarket
Acquisition Corp., and Gristede's Sloan's Inc., Plaintiffs, against Rite Aid
Corporation and Rite Aid of New York, Inc., Defendants
Pursuant to a settlement agreement dated February 22, 1999 (the Settlement
Agreement"), between the Company and Rite Aid Corporation ("Rite Aid"), Rite
Aid agreed to compromise a dispute between the parties arising out of a written
lease purchase agreement dated September 2, 1994 (the "Lease Purchase
Agreement). Pursuant to the Settlement Agreement, Rite Aid agreed to pay the sum
of $400,000 (the Settlement Sum") to the Company in full and final satisfaction
of certain claims and disputes regarding defendants' breaches of the Lease
Purchase Agreement. However, Rite Aid failed and refused to pay any portion of
the Settlement Sum as required by the Settlement Agreement. Consequently, on
June 5, 2000, plaintiffs filed a complaint in the Supreme Court of the State of
New York (New York County) which alleged: breach of Settlement Agreement,
Breach of Good Faith and Fair Dealing and Breach of Lease Purchase Agreement.
Such complaint seeks judgment against Rite Aid in the full amount of the
Settlement Sum, together with interest from February 22, 1999.
-8-
As alleged in the complaint, the Lease Purchase Agreement contemplated
defendants' purchase of certain commercial leasehold interests held by
plaintiffs, in two stores. Pursuant to the Lease Purchase Agreement, defendants
agreed to purchase plaintiffs' leasehold interest in the two stores for
$1,950,000. However, in violation of the Lease Purchase Agreement - as well as
their duty of good faith and fair dealing thereunder - defendants negotiated and
obtained their own leasehold interest for both stores directly from each
landlord, and failed to compensate plaintiffs as agreed.
The Company has recently settled this litigation where Rite Aid will be
returning a store to the Company at 113-119 Fourth Avenue, Manhattan, New York
City, which was previously operated by an affiliate of the Company, in
settlement of the litigation.
The Company will be purchasing Rite Aid's prescription records and inventory for
this location. In addition, the Company will pay a nominal fee for Rite Aid's
furniture and equipment and the Company will also have the benefit of Rite Aid's
leasehold improvements at the store at no additional cost. It is expected that
Rite Aid will surrender the store within 30 days of the finalization of the
settlement. The Company believes that the fair market value of the acquired
store lease and leasehold improvements to be in excess of the Settlement Sum
plus interest.
-9-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
An Annual Meeting of Stockholders of the Company was held on January 31, 2003.
The stockholders approved the re-election of the Company's existing seven
directors for another term expiring at the next Annual Meeting of Stockholders.
18,485,250 shares voted in favor of the election of each of the directors; 6,089
shares voted against the election of each of the directors; there were no
abstentions.
ITEM 5. 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 December 1, 2002 and December 2, 2001, the quarterly high and low
price range for such common stock is shown in the following tabulation.
Fiscal Year Ended Fiscal Year Ended
December 1, 2002 December 2, 2001
---------------------------------------------------------------------------
Quarter High Low High Low
------- ----- ----- ----- -----
First $1.92 $0.45 $1.63 $0.85
Second 1.33 0.90 1.47 0.85
Third 1.65 0.90 1.85 0.91
Fourth 1.00 0.65 1.45 0.78
---------------------------------------------------------------------------
The approximate number of holders of record of the Company's Common Stock
on February 24, 2003 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.
-10-
ITEM 6. SELECTED FINANCIAL DATA
------------------ ----------------- Year Ended -------------- --------------
December 3, November 28, November 29,
December 1, 2002 December 2, 2001 2000 1999 1998
------------------ ----------------- ------------- -------------- --------------
Sales $ 250,732,767 $ 229,988,315 $216,325,214 $ 181,980,204 $ 157,462,869
Cost of sales 151,435,010 139,180,967 131,259,228 112,565,940 94,282,306
Gross profit 99,297,757 90,807,349 85,065,986 69,414,264 63,180,563
Direct operating expenses 79,175,726 71,596,708 67,550,165 57,632,921 53,490,803
Corporate overhead 9,830,478 8,329,559 7,435,949 5,917,305 4,742,810
Depreciation and amortization 7,989,625 7,204,281 6,284,971 4,668,645 3,948,000
Bad debt expense (credits) 72,000 250,354 (350,000) 500,000 -
Interest expense 2,967,181 3,537,281 3,761,941 2,528,677 1,832,036
---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (926,407) $ 275,057 $ (190,908) $ (2,873,331) $ (288,339)
---------------------------------------------------------------------------------------------------------------------------
Net Income (loss) per share $ (0.05) $ 0.01 $ (0.01) $ (0.15) $ (0.01)
At End of Period
----------------
Total assets $ 120,612,141 $ 101,131,361 $ 96,446,057 $ 76,432,518 $ 60,706,509
Long-term debt * 58,137,496 46,682,929 42,378,525 41,800,050 25,681,336
Total liabilities 109,946,047 89,538,860 85,128,613 64,924,166 46,324,826
Certain reclassifications were made to fiscal 2001 consolidated financial
statements to conform to the fiscal 2002 presentation.
* Includes amounts due to affiliates of $14,842,437, $14,525,904, 12,129,031,
$9,113,500 and $4,031,394, respectively, for the fiscal years 2002, 2001, 2000,
1999 and 1998, respectively. The affiliates have agreed not to demand payment of
these liabilities in the next fiscal year. There is no stated final maturity
date, and $14,200,000 of this amount has been subordinated to the banks as of
December 1, 2002.
-11-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COMPANY BACKGROUND
The fiscal year ended December 3, 2000 consisted of 53 weeks and the fiscal
years ended 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:
2002 2001 2000
------ ------ ------
Sales 100.0% 100.0% 100.0%
Cost of sales 60.4% 60.5% 60.7%
------ ------ ------
Gross profit 39.6% 39.5% 39.3%
Store operating, general and
administrative expense 31.6% 31.1% 31.2%
Pre-store opening startup costs 0.3% 0.1% 0.2%
Bad debt expense (credits) -- -- (0.2%)
Depreciation and amortization 3.2% 3.1% 2.9%
Insurance proceeds - terrorist attack (0.2)% (0.7%) --
Casualty loss - terrorist attack -- 0.5% --
Non-store operating expense 3.9% 3.6% 3.4%
------ ------ ------
Operating profit (loss) 0.8% 1.6% 1.7%
Other expense 1.2% 1.4% 1.7%
------ ------ ------
Profit (loss) from operations before
income taxes (0.4%) 0.2% (0.1%)
------ ------
Income taxes -- 0.1% --
------
Net income (loss) (0.4%) 0.1% (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
to100%.
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.
-12-
Store operating, general and administrative expenses were $79,175,726 or
31.58% of sales for the year 2002 as compared to $71,596,708 or 31.13% 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,
which 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.
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.
-13-
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.
RESULTS OF OPERATIONS (2001 COMPARED TO 2000)
Sales for the year 2001 were $229,988,315 as compared to sales for the year
2000 of $216,325,214. The sales increase in fiscal 2001 compared to the sales in
fiscal 2000, offset by the sales for the extra week in fiscal 2000 of
approximately $4.5 million, is mainly attributable to sales increases due to new
or remodeled stores opened in fiscal 2001 or full years sales for those new or
remodeled stores opened during 2000. Same store sales for the year 2001 were
5.5% ahead of 2000. Gross profit was $90,807,349 or 39.5% of sales as compared
with $85,065,986 or 39.3% of sales for 2000. The increase in gross profit
during 2001 period was primarily due to fewer promotional price reductions in
connection with the grand re-opening periods of the new and newly remodeled
stores.
Store operating, general and administrative expenses were $71,596,708 or
31.13% of sales for the year 2001 as compared to $67,550,165 or 31.23% of sales
for the year 2000. The virtually unchanged result in store operating, general
and administrative expenses as a percentage of sales in the 2001 period was
mainly due to effective cost controls in relation to the increased sales.
Advertising expenses included in store operating, general and administrative
expense were $1,572,963 and 1,555,707 for the years 2001 and 2000, respectively.
Pre-store opening startup costs were $165,000 or 0.1% of sales for the year
2001 as compared to $518,981 or 0.2% of sales for the year 2000. There were six
stores remodeled in 2001 compared to eight in 2000, leading to reduced pre-store
opening startup costs in 2001.
Non-store operating expenses were $8,329,559 or 3.6% of sales for the year
2001 as compared to $7,435,949 or 3.4% of sales for the year 2000.
Administrative payroll and fringes were 2.4% of sales for the 2001 period as
compared with 2.3% of sales for the 2000 period. The increase in the 2001 period
reflects the addition of department and divisional managers to handle the
additional business generated by the store remodeling program. General office
expenses as a percentage of sales were 0.9% for the 2001 period as compared to
0.8% for the 2000 period. The increase during the 2001 period was primarily due
to additional back office expenses in relation to the increased sales.
Professional fees were 0.3% of sales for both the 2001 period and the 2000
period. Corporate expenses as a percentage of sales were 0.1% for both the 2001
period and the 2000 period.
Depreciation expense was $7,204,281 or 3.1% of sales for the year 2001 as
compared to $6,284,971 or 2.9% of sales for the year 2000. The increase was
primarily a result of significant capital expenditures incurred in connection
with the Company's store renovation and remodeling program.
-14-
Management has filed claims with its insurance carriers as a result the
September 11 terrorist attacks for its losses, including business interruption,
and estimates net proceeds of approximately $1.5 million, along with costs
incurred of approximately $1.1 million. The Company has suffered property damage
losses, including inventory, costs to repair and clean fixtures and facilities
and loss of revenue. The Company received an advance of $300,000 against these
claims in October 2001.
Interest expense was $3,537,281 or 1.5% of sales for year 2001 as compared
to $3,761,941 or 1.7% of sales for year 2000. The decrease in the 2001 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 2001 was $9,016 as compared with $24,113 for
the year 2000. The decrease in the 2001 period was due to lower prevailing
interest rates in the 2001 period.
Other income (expenses) for the year 2001 was $173,112 as compared with
($27,000) for the year 2000. This mainly results from the sale of a store lease
resulting from a closed store.
Bad debt expense (credits) was $250,354 for the year 2001 as compared with
($350,000) for the year 2000. As a result of the increase in the amount of the
Company's receivables, in the 1999 period, management deemed it prudent to set
up an allowance for doubtful accounts in the amount of $500,000 in the 1999
period, and to reduce that amount by $350,000 in the 2000 period as a result of
progress in pursuing collection of a $400,000 receivable. Bad debt expense
increased 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 before provision for
income taxes for the year 2001 was $373,897 as compared to a loss of $138,908
for the year 2000.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity:
----------
The consolidated financial statements of the Company indicate that at December
1, 2002 current assets exceed current liabilities by $2,162,426 and
stockholders' equity was $10,666,094. Management believes that cash flows
generated from operations, supplemented by financing from its bank facility,
third party leasing companies and/or additional financing from the Company's
majority shareholder, will be sufficient to pay the Company's debts as they may
come due, provide for its capital expenditure program and meet its other cash
requirements.
Debt and Debt Service:
-------------------------
Effective October 2001, the Company's credit agreement with a group of banks was
amended and increased to an aggregate total of $32,500,000, consisting of a
$15,500,000 term loan and a $17,000,000 revolving line of credit. As of December
1, 2002, the credit facility as amended, provides for (i) a maturity date of
November 28, 2004 for the revolving line of credit, and December 3, 2006 for the
term loan, at which time all amounts outstanding thereunder are due, (ii)
certain financial covenants, and (iii) amortization of the term loan in monthly
-15-
amortizations totaling $2,000,000, $2,300,000, $2,600,000, $2,900,000 and
$3,200,000 respectively in each year during its term, and a $2,500,000 balloon
payment at maturity.
Borrowings under 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 the year 2002 was 5.09% 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 coverage ratios 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 December 1, 2002, and
is based on information appearing in the notes to consolidated financial
statements (amounts in thousands).
2003 2004 2005 2006 2007 THEREAFTER TOTAL
------- -------- ------- ------- ------- ----------- --------
Long-term debt $ 2,501 $19,675* $ 2,975 $ 3,200 $ 2,500 $ -- $ 30,851
Operating leases 17,972 18,235 17,854 17,569 15,975 116,522 204,127
Capital lease obligations 6,887 6,113 4,055 3,096 1,966 1,867 23,984
------- -------- ------- ------- ------- ----------- --------
Total contractual cash obligations $27,360 $ 44,023 $24,884 $23,865 $20,441 $ 118,389 $258,962
======= ======== ======= ======= ======= =========== ========
* Includes $17,000 revolving credit presently maturing in November 2004.
The Company is negotiating an extension of the maturity of the
revolving credit.
The Company's majority shareholder, through affiliates, has contributed
$14,842,437 through December 1, 2002, in the form of unsecured non-interest
bearing loans, of which $14,200,000 is subordinated to the Company's banks.
The liability presently does not bear interest. However, the Company's credit
agreement with its banks permits the Company to pay interest on such
subordinated debt provided the Company has a positive net income.
The Company has available affiliate leasing lines of credit sufficient to
lease finance equipment for its ongoing store remodeling and expansion program.
Capital Expenditures:
----------------------
Capital expenditures for fiscal 2002, including property acquired under
capital leases, were $18.8 million compared to $12.2 million for fiscal 2001 and
$14.3 million for fiscal 2000. During fiscal 2002, the Company opened three new
stores, remodeled six stores, added one new in-store pharmacy and funded much
of the cost of two additional new stores which opened in December 2002 after the
close of fiscal 2002.
The Company has not incurred any material commitments for capital
expenditures, although it anticipates spending approximately $8 million to $10
million on its store remodeling and expansion program in fiscal 2003. Such
amount is subject to adjustment based on the availability of funds.
-16-
Cash Flows:
------------
Cash provided by operating activities amounted to $6.7 million in fiscal
2002 compared to $7.1 million in fiscal 2001 (exclusive of change in due from
related parties - other). The change in cash flow from operating activities was
primarily due to cash provided by operating assets and liabilities and a net
loss compared to a profit. Cash used for investing activities was $8.5 million
in 2002 compared to $6.3 million in 2001, resulting from increased capital
expenditures. Cash provided by (used in) financing acitivities was $1.9 million
in 2002 compared with ($3.8) million in 2001 reflecting the bank financing drawn
upon, the additional proceeds provided by an affiliate, offset by repayments of
bank loans and capital leases.
Recent Accounting Pronouncements:
-----------------------------------
In June 2001, the Financial Accounting Standards Board finalized FASB Statements
No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method
of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if they meet certain criteria. SFAS 141 applies to all business
combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires, upon
adoption of SFAS 142 that the Company reclassify the carrying amounts of
intangible assets and goodwill based on the criteria in SFAS 141. The Company
adopted SFAS 141 in the first quarter of fiscal 2002 with no material effect on
the financial statements of the Company.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidelines in SFAS 142. SFAS 142 is required to be applied
in fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. It also requires the Company to complete a transitional
goodwill impairment test within six months from the date of adoption. The
Company is also required to reassess the useful lives of other intangible assets
within the first interim quarter after adoption of SFAS 142. The Company adopted
SFAS 142 in the first quarter of fiscal 2002 with no material effect on its
financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 develops an accounting model, based
upon the framework established in SFAS No. 121, for long-lived assets to be
disposed by sales. The accounting model applies to all long-lived assets,
including discontinued operations, and it replaces the provisions of ABP Opinion
No. 30, "Reporting Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for disposal of segments of a business. SFAS No. 144
requires long-lived assets held for disposal to be measured at the lower of
carrying amount or fair values less costs to sell, whether reported in
continuing operations or in discontinued operations. The statement is effective
for fiscal years beginning after December 15, 2001. The Company intends to adopt
this standard at the beginning of its fiscal 2003. The Company believes the
adoption of SFAS No. 144 will not have a material impact on its financial
position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and replaces
EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination
-17-
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. SFAS No. 146 also establishes that fair value is the objective for
initial measurement of the liability. The statement is effective for exit or
disposal activities initiated after December 31, 2002. The Company believes the
adoption of SFAS No. 146 will not have a material impact on its financial
position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS 148 amends FASB Statement No.
123, "Accounting for Stock-Based Compensation." Although it does not require use
of fair value method of accounting for stock-based employee compensation, it
does provide alternative methods of transition. It also amends the disclosure
provisions of Statement 123 and APB Opinion No. 28, "Interim Financial
Reporting," to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. SFAS No. 148's amendment of the
transition and annual disclosure requirements are effective for fiscal years
ending after December 15, 2002. The amendment of disclosure requirements of
Opinion No. 28 are effective for interim periods beginning after December 15,
2002. The Company will continue to use the intrinsic value method of accounting
as allowed under SFAS No. 148 for stock-based compensation for its first quarter
of fiscal year 2003.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 2 of the Notes to the Consolidated Financial
Statements includes a summary of the significant accounting policies and methods
used in the preparation of our Consolidated Financial Statements. The following
is a brief discussion of the more significant accounting policies and methods
used by us.
General
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. The
most significant estimates and assumptions relate to the recoverability of
internally developed software costs, fixed assets and other intangibles,
inventories, realization of deferred income taxes and the adequacy of allowances
for doubtful accounts. Actual amounts could differ significantly from these
estimates.
Accounts Receivable
We continuously monitor collections and payments from our customers, third party
and vendor receivables and maintain a provision for estimated credit losses
based upon our historical experience and any specific collection issues that we
have identified. While such credit losses have historically been within our
expectations and the provisions established, we cannot guarantee that we will
continue to experience the same credit loss rates that we have in the past.
-18-
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.
-19-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page No.
---------
Independent auditors' report F-1
Consolidated Balance Sheets as of December 1, 2002 and F-2
December 2, 2001
Consolidated Statements of Operations F-4
for the years ended December 1, 2002,
December 2, 2001 and December 3, 2000
Consolidated Statements of Stockholders' Equity F-5
for the years ended December 1, 2002,
December 2, 2001 and December 3, 2000
Consolidated Statements of Cash Flows F-6
for the years ended December 1, 2002,
December 2, 2001 and December 3, 2000
Notes to Financial Statements F-7
-20-
ITEM 9 CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below is certain information as of February 24, 2003 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. 1988(5) Chairman of the Board, President and Chief Executive
Catsimatidis Officer of the Company since July 28, 1988; Treasurer of
(54) 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
1988 is traded over-the-counter, since December 4, 1991.
Martin R. Bring 1988 Stockholder in the law firm of Anderson Kill & Olick, PC.,
(60) 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.
Frederick Selby 1978 Chairman of Selby Capital Partners (acquisition and sale of
(64) 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.
------------------------------
(5) Mr. Catsimatidis also served as a director of the Company from November 4,
1986 to November 27, 1987.
-21-
Kishore Lall 1997 Executive Vice President - Finance and Administration and
(55) 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 Steinberg 1998 Independent consultant. Mr. Steinberg also served as a
(69) director of the Company from May 1974 to January 1991.
Edward P. Salzano 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 (70) 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.
Gary Pokrassa -- Chief Financial Officer of the Company since August 14,
2000; Chief Financial Officer of Syndata Technologies,
Inc., from February 1997 to July 2000; Vice President -
Finance of Innovir Laboratories, Inc. from March 1993 to
February 1997.
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 2001, all Section 16(a) filings applicable to its
directors, officers and more than 10 percent beneficial owners were timely
filed.
-22-
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth for the fiscal years ended December 1, 2002,
December 2, 2001 and December 3, 2000, 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) $50,000. Thus, such amounts are not
reflected in the following table.
SUMMARY COMPENSATION TABLE
Long-term compensation
Annual Compensation Awards Payouts
-------------------------------------------------------------------------- All
Other annual Restricted other
Name and compen- stock Options LTIP compensa-
principal Bonus sation award(s) /Sar's payouts tion
position Year Salary ($) ($) ($) ($) (#) ($) ($)
-------------------------------------------------------------------------------------------------------------------
John Catsimatidis, Fiscal 2002 $ 100,000 $ - $ - $ - - $ - $ -
Chairman of the Fiscal 2001 100,000 - - - - - -
Board, President Fiscal 2000 101,923 - - - - - -
and Chief
Executive Officer
Gary Pokrassa Fiscal 2002 $ 150,000 - - - - - -
Chief Financial Fiscal 2001 150,000 - - - - - -
Officer * Fiscal 2000 46,154 - - - - - -
*Mr. Pokrassa's joined the Company on August 14, 2000 as Chief Financial
Officer.
OPTIONS GRANTED IN LAST FISCAL YEAR
The following table sets forth certain information concerning options
granted during fiscal 2002 to the Named Executive Officers.
Market
Number of Price of Potential Realizable Value
Securities Percentage of Common At Assumed Annual Rates
Underlying Total Options Stock on of Stock Price Appreciation
Options Granted to Date of for
Name Granted (#) Employees in Exercise Price Grant Expiration Option Term
2002 (($/Share) ($/Share) Date 5% ($) 10%($)
--------------------------------------------------------------------------------------------------------------------------
John Catsimatidis 0 -- -- -- -- -- --
Gary Pokrassa 0 -- -- -- -- -- --
-23-
AGGREGATE OPTIONS EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
During fiscal 2002, 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 December 1, 2002 held by the Named Executive Officers:
Number of Unexercised Value of Unexercised
Options Held on in-the-Money Options on
December 1, 2002 December 1, 2002
------------------------- -------------------------
Name Exercisable/Unexercisable Exercisable/Unexercisable
------------------------- -------------------------
John Catsimatidis 525,000/0 0/0
Gary Pokrassa 0/0 0/0
The closing sales price of the Common Stock on the American Stock Exchange on
November 29, 2002 (the last trading day before December 1, 2002) was $0.78. On
December 1, 2002 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. Mr. Pokrassa held no options.
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 Board of Directors has a Compensation Committee consisting of Frederick
Selby and Martin Steinberg. During fiscal 2002, none of the Directors on the
Compensation Committee were employees or officers of the Company nor had a
relationship with the Company requiring disclosure under applicable Commission
disclosure rules.
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, which is composed entirely of non-employee directors. 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.
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
-24-
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 2002, the Compensation Committee did not meet. Compensation of
the Company's executive officers for fiscal 2002 was determined by the Company's
Board of Directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information regarding ownership of
Common Stock on February 24, 2003 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, Esq. 0 *
Gary Pokrassa 0 *
All officers and directors as a group (8 persons) 18,914,902 (1)(6) 93.3%
* Less than 1%.
(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
-25-
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.
-26-
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth additional information as of December 1, 2002,
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 Weighted-average Number of Securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance under
warrants and rights warrants and rights equity compensation
plans (excluding
securities reflected in
column (a)).
Equity compensation 1,253,000 $ 3.14 247,000
plans approved by
security holders
Equity compensation -- -- --
plans not approved by
security holders
Total 1,253,000 $ 3.14 247,000
-27-
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.
Certain stores have entered into capital and operating leases with an
affiliate, Red Apple Lease Corporation, a company wholly owned by John
Catsimatidis). Such leases are primarily for store operating equipment.
Obligations under capital leases at December 1, 2002 and December 2, 2001 were
$3,435,385 and $1,409,251, respectively and require monthly payments of $76,790
through March 2007.
The Company leases ten locations: a 25,000 square foot warehouse, its
office facilities and eight store locations from Red Apple Real Estate, Inc., a
corporation wholly owned by John Catsimatidis. During fiscal 2002 the Company
paid to Red Apple Real Estate, Inc.$2,469,000 for rent and real estate taxes
under such leases. The lease terms provide for an aggregate of $2,734,800 per
year in lease payments for fiscal 2003. The leases are triple net whereby the
tenant pays all real estate taxes, insurance and maintenance.
Certain stores have entered into capital leases with an affiliate, United
Acquisition Leasing Corp. (a company wholly owned by the majority shareholder).
Such leases are primarily for store equipment. Obligations under capital leases
at December 1, 2002 were $4,030,094 and require monthly payments of $92,443
through December 2007.
In October 2002, the Company and an affiliate of the Company acquired the
fixtures, leasehold improvements and store leases of three stores from the Great
Atlantic & Pacific Tea Company for a total purchase price of $5,500,000. The
affiliate has leased the acquired assets to the Company. Such stores had been
closed for more than six months prior to the transaction. Obligations under
these capital leases at December 1, 2002 were $5,000,214 and require monthly
payments of $79,156 through February 2008 and a balloon payment of $1,629,156 at
such time.
Amounts due to affiliates, primarily United Acquisition Corp., a
corporation indirectly wholly owned by the majority shareholder, represent
liabilities in connection with the consummation of the merger as discussed in
Note 1 of the financial statements and additional advances made by the affiliate
since the merger. The 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 Food Group acquisition, approximately $3,600,000 in due from certain
other affiliates has been offset against the amounts due to United Acquisition
Corp. The net amount due to affiliates at December 1, 2002 and December 2, 2001
was $14,842,437 and $14,525,904, respectively. Of these amounts $14,200,000 and
$12,800,000, respectively, was subordinated to the Company's banks. The
liability presently does not bear interest. However, the Company's credit
agreement with its banks permits the Company to pay interest on such
subordinated debt provided the Company has a positive net income.
MCV Advertising Associates Inc., a company owned by the majority
shareholder, had provided advertising services to the Company. During 2000,
costs incurred were $1,306,218. The Company no longer uses MCV and buys
advertising directly instead.
Due from related parties - trade, represents amounts due from affiliated
companies for merchandise shipped from the Company's subsidiary City Produce
Operating Corp. in the ordinary course of business and for which payments are
-28-
made to such subsidiary on a continuous basis under extended terms, as well as
management fees receivable for administrative and managerial services performed
for the affiliated companies by the Company. During 2002, 2001 and 2000,
merchandise sales to affiliates were $1,053,662, $1,792,174 and $636,562,
respectively. Of the total trade receivable due from an affiliate, $1,225,000
has been classified as non-current on the balance sheet due to the extended
payment terms granted.
On February 6, 1998, the Company agreed to purchase substantially all of
the assets and assumed certain of the liabilities of a supermarket located at
1644 York Avenue, New York City, that was owned by a corporation controlled by
John Catsimatidis. On March 1, 2000 the Company and the affiliate determined to
restructure the transaction by rescinding the purchase effective as of February
6, 1998, and entering into an operating agreement which gives the Company full
control of the supermarket and the right to operate the supermarket for the
account of the Company. The operating agreement presently terminates on
December 1, 2003, but the term shall be extended for additional one year periods
unless either party gives notice of termination not later than 90 days prior to
the end of the then current term of the agreement. Under the operating
agreement, the Company shall pay to the affiliate $1.00 per annum, plus such
other consideration as may be approved by the Company's directors (excluding
John Catsimatidis). Pursuant to the operating agreement the Company or any
designee of the Company, also has the option until December 31, 2005 to purchase
the supermarket for $2,778,000, which price is the fair market price of the
supermarket established on October 11, 1999 by the Company's directors
(excluding John Catsimatidis).
In May 2000, another affiliate and the Company entered into a similar
operating agreement for a store owned by the affiliate. As consideration, the
affiliate receives the nominal amount of $1 per annum, plus such other
consideration as may be approved by the Company's directors (excluding John
Catsimatidis). The operating agreement presently terminates on May 10, 2004, but
the term shall be extended for additional one year periods unless either party
gives notice of termination not later than 90 days prior to the end of the then
current term of the agreement. Pursuant to the operating agreement, the Company,
or any designee of the Company, also has the option until December 31, 2005 to
purchase the supermarket for the fair market price of the supermarket as
established by the Company's directors (excluding John Catsimatidis) using a
valuation criterion similar to that issued for valuing the store at 1644 York
Avenue, New York City. It is management's opinion that the fair market value of
this store is approximately $3 million.
The affiliates' intention in entering into these two operating agreements
where the Company enjoys full benefits of ownership for the nominal
consideration of $1 per annum per store was to effect post closing adjustments
in connection with the Food Group acquisition. If the option to purchase the
supermarkets is exercised, the excess of the purchase price over the net book
value of the assets will be shown as a charge to equity.
Under a management agreement dated November 10, 1997 (the "Management
Agreement"), Namdor Inc., a subsidiary of the Company, performs consulting and
managerial services for one supermarket (three supermarkets in prior years)
owned by a corporation controlled by John Catsimatidis. In consideration of
such services, Namdor Inc. is entitled to receive, on a quarterly basis, a cash
payment of one and one-quarter (1.25%) percent of all sales of inventory and
merchandise made at or from the managed supermarkets. During fiscal 2002, 2001
and 2000, management fee income was $0, $47,222 and $66,244, respectively.
The Company uses the services of an affiliate Red Apple Medical, a
corporation wholly-owned by John Catsimatidis, as an agent for self-insurance
purposes. All employee medical claims are submitted to a third party
administrator who processes claims to be remitted through a controlled account.
Such amounts are reimbursed by the Company to the agent. No fees have been paid
to this entity for the fiscal years 2002, 2001 and 2000.
-29-
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chairman and Chief Executive Officer and its
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's "disclosure controls and procedures," which are defined under SEC
rules as controls and other procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports that it
files under the Exchange Act is recorded, processed, summarized and reported
within required time periods. Based upon that evaluation, the Company's Chairman
and Chief Executive Officer and its Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls or other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
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.
-30-
GRISTEDE'S FOODS, INC. AND SUBSIDIARIES
INDEX TO S-X SCHEDULE
Page
----
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . . . . 31
Schedule II -- -Valuation & Qualifying Accounts . . . . . . . . . . . . . . 32
================================================================================
--------------------------------------------------------------------------------
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 December 1, 2002 and December
2, 2001, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
1, 2002. 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 December 1, 2002 and December 2, 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended December 1, 2002, in conformity with accounting principles
generally accepted in the United States of America.
New York, NY /s/ BDO Seidman, LLP
-----------------------
March 3, 2003 BDO Seidman, LLP
-----------------------
===========================================================================================
-------------------------------------------------------------------------------------------
GRISTEDE'S FOODS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 1, 2002 December 2, 2001
-------------------------------------------------------------------------------------------
ASSETS
CURRENT:
Cash $ 576,358 $ 475,873
Accounts receivable - net of allowance for doubtful
accounts of $481,000 and $413,000, respectively 7,659,552 6,702,715
Inventories 37,601,170 32,378,606
Due from related parties - trade 251,665 1,092,571
Prepaid expenses and other current assets 2,825,984 2,233,876
-------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 48,914,729 42,883,641
-------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Furniture, fixtures and equipment 20,159,016 18,067,058
Capitalized equipment leases 34,300,805 23,970,127
Leasehold interests and improvements 59,323,240 52,901,265
-------------------------------------------------------------------------------------------
113,783,061 94,938,450
Less: Accumulated depreciation and amortization 48,474,655 41,193,533
-------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 65,308,406 53,744,917
DEPOSITS AND OTHER ASSETS 1,120,028 1,044,141
DUE FROM RELATED PARTIES - TRADE 1,225,000 --
OTHER ASSETS 4,043,978 3,458,662
===========================================================================================
$ 120,612,141 $ 101,131,361
===========================================================================================
See accompanying notes to consolidated financial statements.
F-2
=============================================================================================
---------------------------------------------------------------------------------------------
GRISTEDE'S FOODS, INC
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 1, 2002 December 2, 2001
---------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable, trade $ 33,438,962 $ 26,978,700
Accrued payroll, vacation and withholdings 3,177,933 2,435,312
Accrued expenses and other current liabilities 2,343,654 2,067,031
Capitalized lease obligation - current portion 4,892,101 3,950,221
Current portion of long-term debt 2,500,740 2,378,262
Due to affiliates - trade 398,913 792,939
---------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 46,752,303 38,602,465
Long-term debt-noncurrent portion 28,349,802 23,108,333
Due to affiliates 14,842,437 14,525,904
Capitalized lease obligation - noncurrent portion 14,945,257 9,048,692
Deferred rent 5,056,248 4,253,466
---------------------------------------------------------------------------------------------
TOTAL LIABILITIES 109,946,047 89,538,860
---------------------------------------------------------------------------------------------
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 14,136,674 14,136,674
Retained earnings (deficit) (3,863,312) (2,936,905)
---------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 10,666,094 11,592,501
---------------------------------------------------------------------------------------------
$ 120,612,141 $ 101,131,361
=============================================================================================
See accompanying notes to consolidated financial statements.
F-3
=========================================================================================================
---------------------------------------------------------------------------------------------------------
GRISTEDE'S FOODS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED
DECEMBER 1, 2002 DECEMBER 2, 2001 DECEMBER 3, 2000
---------------------------------------------------------------------------------------------------------
SALES $ 250,732,767 $ 229,988,315 $216,325,214
COST OF SALES 151,435,010 139,180,967 131,259,228
---------------------------------------------------------------------------------------------------------
GROSS PROFIT 99,297,757 90,807,349 85,065,986
Store operating, general and administrative
expenses 79,175,726 71,596,708 67,550,165
Pre-store opening startup costs 741,570 165,000 518,981
Bad debt expense (credit) 72,000 250,354 (350,000)
Depreciation and amortization 7,989,625 7,204,281 6,284,971
Insurance proceeds and grants - terrorist attack
and theft (587,300) (1,536,510) --
Casualty loss - terrorist attack -- 1,068,908 --
Nonstore operating expenses:
Administrative payroll and fringes 7,125,070 5,445,675 4,930,755
General office expense 1,993,196 1,998,374 1,679,382
Professional fees 477,749 709,448 649,983
Corporate expense 234,463 176,062 175,829
---------------------------------------------------------------------------------------------------------
OPERATING INCOME 2,075,658 3,729,050 3,625,920
---------------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense (2,967,181) (3,537,281) (3,761,941)
Interest income 5,116 9,016 24,113
Other income (expense) -- 173,112 (27,000)
---------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSE (2,962,065) (3,355,153) (3,764,828)
---------------------------------------------------------------------------------------------------------
Income (loss) before provision
for income taxes (886,407) 373,897 (138,908)
Provision for income taxes 40,000 98,840 52,000
=========================================================================================================
NET INCOME (LOSS) $ (926,407) $ 275,057 $ (190,908)
Net income (loss) per share of common
stock - basic and diluted:
NET INCOME (LOSS) $ (0.05) $ 0.01 $ (0.01)
=========================================================================================================
Weighted average common shares
outstanding 19,636,574 19,636,574 19,636,574
=========================================================================================================
See accompanying notes to consolidated financial statements.
F-4
=================================================================================================
-------------------------------------------------------------------------------------------------
GRISTEDE'S FOODS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
Common stock
-------------------- Retained Total Stock-
Number of Amount Additional Earnings holders'
Shares paid- in capital (deficit) equity
=================================================================================================
BALANCE, NOVEMBER 29, 1999 19,636,574 $392,732 $ 14,136,674 $(3,021,054) $ 11,508,352
Net loss - - - (190,908) (190,908)
BALANCE, DECEMBER 3, 2000 19,636,574 392,732 14,136,674 (3,211,962) 11,317,444
Net income - - - 275,057 275,057
BALANCE, DECEMBER 2, 2001 19,636,574 392,732 14,136,674 (2,936,905) 11,592,501
Net loss - - - (926,407) (926,407)
=================================================================================================
BALANCE, DECEMBER 1, 2002 19,636,574 $392,732 $ 14,136,674 $(3,863,312) $ 10,666,094
=================================================================================================
See accompanying notes to consolidated financial statements.
F-5
============================================================================================================================
----------------------------------------------------------------------------------------------------------------------------
GRISTEDE'S FOODS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
52 Weeks Ended 52 Weeks Ended 53 Weeks Ended
December 1, 2002 December 2, 2001 December 3, 2000
----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (926,407) $ 275,057 $ (190,908)
Adjustments to reconcile loss to net cash provided by operating
activities:
Depreciation and amortization 7,989,625 7,204,281 6,284,971
Allowance for doubtful accounts 68,245 262,807 (350,000)
Gain on sale of store -- (192,177) --
Changes in operating assets and liabilities:
Accounts receivable (1,025,081) (101,193) (1,314,582)
Due from related parties - trade (384,094) (213,571) (879,000)
Due from related parties - other -- 3,072,000 (3,072,000)
Inventories (5,222,564) (2,273,651) (4,863,279)
Prepaid expenses and other current assets (592,108) 254,461 (726,959)
Notes receivable -- -- 562,826
Other assets (1,099,707) (677,252) (1,205,321)
Accounts payable, trade 6,460,262 22,302 12,531,049
Accrued payroll, vacation and withholdings 742,622 37,719 970,442
Accrued expenses and other current liabilities 309,716 723,610 (167,269)
Due to affiliates - trade (394,026) 792,939 --
Deferred rent 802,781 951,673 909,040
----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,729,264 10,139,005 8,489,010
----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of store -- 225,000 --
Capital expenditures (8,513,933) (6,475,969) (8,583,643)
----------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (8,513,933) (6,250,969) (8,583,643)
----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of bank loans (1,910,757) (3,429,483) (1,366,667)
Repayments of capitalized lease obligations (3,945,327) (3,291,959) (2,390,405)
Proceeds from bank loans 7,424,704 500,000 950,000
Net proceeds from affiliates 316,534 2,396,873 3,015,531
----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,885,154 (3,824,569) 208,459
----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 100,485 (63,465) 113,826
Cash, beginning of period 475,873 412,408 298,582
============================================================================================================================
Cash, end of period $ 576,358 $ 475,873 $ 412,408
============================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Cash paid for interest $ 2,901,513 $ 3,764,726 $ 3,814,882
Cash paid for (received from) income taxes (77,002) 97,135 84,930
============================================================================================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
Capital leases - property and equipment and other assets $ 10,783,771 $ 5,706,573 $ 5,752,726
----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
F-6
================================================================================
--------------------------------------------------------------------------------
GRISTEDE'S FOODS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND BASIS OF PRESENTATION
Gristede's Foods, Inc. and subsidiaries (the "Company") operates 49
supermarkets, two pharmacies and a distribution facility in the New York
Metropolitan area. (Two supermarkets opened in December 2002, subsequent to year
end). On August 12, 1999, the Company changed its name from Gristede's Sloan's
Inc., ("Sloan's") to Gristede's Foods, Inc. to reflect its strategy of changing
its "Sloan's" banner locations to "Gristede's" subsequent to a store remodeling.
On November 10, 1997, the Company acquired certain assets, net of
liabilities, of 29 selected supermarkets and a wholesale distribution business
("The Food Group") controlled by John Catsimatidis (the "majority shareholder")
of the Company. The transaction was accounted for as the acquisition of Sloan's
by The Food Group pursuant to Emerging Issues Task Force 90-13 as a result of
The Food Group obtaining control of Sloan's after the transaction. The assets
and liabilities of The Food Group (the "Acquiror") are recorded at their
historical cost. The assets and liabilities of Sloan's were recorded at their
fair value to the extent acquired. Consideration for the transaction was based
on an aggregate of $36,000,000 in market value of the Company's common stock and
the assumption of $4,000,000 of liabilities. The Company issued 16,504,298
shares of common stock on the date of the acquisition based on a market price of
$2.18 per share.
The Company did not recognize any gain or loss as a result of the above
acquisition. The Company underwent an "Ownership Change" within the meaning of
Section 382 of the Internal Revenue Code of 1986, as amended, as a consequence
of the transaction. As a result, the Company's ability to offset its net
operating loss carryforwards against income earned after the transaction is
limited.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Gristede's Foods,
Inc. and its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.
FISCAL YEAR
The Company's fiscal year ends on the Sunday closest to November 30. The fiscal
years ended December 1, 2002, December 2, 2001 and December 3, 2000 include 52,
52 and 53 weeks respectively.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand, and highly liquid investments
which are readily convertible to known amounts of cash and which have maturities
of three months or less.
REVENUE RECOGNITION
The Company recognizes revenues from the sale of merchandise at the time
merchandise is sold.
DEFERRED INCOME
Rebates received from vendors that are based on future purchases are initially
deferred and are recognized as a reduction of cost of goods sold when the
related inventory is purchased. Rebates not tied directly to purchases are
recognized as a reduction of cost of goods sold on a straight-line basis over
the related contract term.
STORE PRE-OPENING EXPENSES AND CLOSING COSTS
Costs incurred prior to the opening of a new store, associated with a remodeled
store, or related to the opening of a distribution facility are charged against
earnings as pre-store opening start-up costs when incurred. When a store is
closed, the Company expenses unrecoverable costs and accrues a liability equal
to the present value of the remaining lease obligations, net of expected
sublease income.
SIGNIFICANT CONCENTRATIONS
During fiscal 2002, 2001 and 2000, the Company purchased approximately 40%, 39%
and 38%, respectively, of its merchandise from a single supplier. If the
Company's relationship with this supplier were disrupted, the Company could
purchase from other suppliers without negative impact on its business.
F-7
================================================================================
--------------------------------------------------------------------------------
GRISTEDE'S FOODS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVENTORIES
Store inventories are valued principally at the lower of cost or market with
cost determined under the retail method.
PROPERTY, EQUIPMENT, DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Depreciation of furniture, fixtures
and equipment is computed by the straight-line method over the estimated useful
lives of the assets, with lives ranging from seven to ten years. Leasehold
interest and improvements are amortized over the shorter of their estimated
useful lives or the lease term, on a straight-line basis, including optional
periods where the Company intends to exercise its option. The Company maintains
its own internal construction crew. Amounts capitalized for these employees
related to store renovations and new store construction were $2,493,677 and
$2,678,833 for fiscal 2002 and 2001, respectively.
SOFTWARE COSTS
The Company follows the provisions of Statement of Position 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP
98-1"). SOP 98-1 requires the capitalization of certain internally generated
software costs. In fiscal 2002 and 2001 the Company capitalized $1,175,000 and
$500,000 of such software costs, respectively. In previous years the amounts
were not material. Such software is amortized over three years and for fiscal
2002 and 2001 the Company recorded amortization expense of $210,000 and $18,000,
respectively.
LEASES
The Company charges the cost of operating lease payments and beneficial
leaseholds to operations on a straight-line basis over the lives of the leases.
ADVERTISING EXPENSE
The Company expenses advertisement costs when the advertisement is first shown.
During 2002, 2001 and 2000, $2,180,285, $1,572,963 and $1,555,707 of advertising
costs were expensed, respectively.
OTHER ASSETS
Other assets consist mainly of acquisition, prescription lists and financing
costs and are amortized on a straight-line basis over five to ten years.
Non-compete agreements generally are amortized over the life of the agreement up
to ten years.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in operations in
the period that includes the enactment date.
ACCRUED SELF-INSURANCE
Insurance expense for employee-related health care benefits are estimated using
historical experience.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts of assets, liabilities, income and expenses and
disclosures of contingencies. Actual results could differ from those estimated.
STOCK-BASED COMPENSATION PLANS
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" allows either adoption of a fair value method of
accounting for stock-based compensation plans or continuation of accounting
under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations with supplemental disclosures.
F-8
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--------------------------------------------------------------------------------
GRISTEDE'S FOODS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has chosen to account for all stock-based compensation arrangements
under APB Opinion No. 25 with related disclosures under SFAS No. 123. Pro forma
net earnings (loss) per common share amounts as if the fair value method had
been adopted are presented in Note 10.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure About Instruments" requires companies to disclose the
fair value of financial instruments. The carrying values of cash and cash
equivalents, accounts receivable and accounts payable reported in the
accompanying consolidated balance sheets approximate fair value due to the
short-term maturities of these assets.
The fair value of long-term debt, consisting of the term loans and revolving
loan payable as of December 1, 2002 and December 2, 2001, approximates the
recorded book value because of the fluctuating interest rates. It was not
practical to determine the fair value of the amount due to affiliate, because of
the uncertain repayment terms.
LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable assets related to
those assets for impairment whenever circumstances and situations change such
that there is an indication that the carrying amounts may not be recoverable.
If the undiscounted future cash flows of the enterprise are less than their
carrying amounts, their carrying amounts are reduced to fair value and an
impairment loss is recognized. No impairment losses have been necessary through
December 1, 2002.
EARNINGS (LOSS) PER SHARE
The Company follows SFAS No. 128, "Earnings Per Share," ("EPS") which requires a
presentation of basic EPS and diluted EPS. Basic EPS excludes dilution and is
computed by dividing earnings available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS assumes
conversion of convertible debt and the issuance of common stock for all other
potentially dilutive equivalent shares outstanding. Diluted EPS is the same as
basic EPS since the options which could potentially dilute basic EPS were
anti-dilutive for the periods presented.
RECLASSIFICATION
Certain reclassifications were made to the fiscal 2001 and 2000 consolidated
financial statements to conform to the fiscal 2002 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, SFAS No. 141, Business Combinations (SFAS 141), and No. 142,
Goodwill and Other Intangible Assets (SFAS 142) were finalized. SFAS 141
requires the use of the purchase method of accounting and prohibits the use of
the pooling-of-interests method of accounting for business combinations
initiated after June 30, 2001. SFAS 141 also requires that the Company
recognize acquired intangible assets apart from goodwill if they meet certain
criteria. SFAS 141 applies to all business combinations initiated after June
30, 2001 and for purchase business combinations completed on or after July 1,
2001. It also requires, upon adoption of SFAS 142, that the Company reclassify
the carrying amounts of intangible assets and goodwill based on the criteria in
SFAS 141. The Company adopted SFAS 141 in the first quarter of fiscal 2002 with
no material effect on its financial statements.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidelines in SFAS 142. SFAS 142 is required to be applied
in fiscal years
F-9
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--------------------------------------------------------------------------------
GRISTEDE'S FOODS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
beginning after December 15, 2001 to all goodwill and other intangible assets
recognized at that date, regardless of when those assets were initially
recognized. It also requires the Company to complete a transitional goodwill
impairment test within six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142. The Company adopted SFAS 142
in the first quarter of fiscal 2002 with no material effect on its financial
statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 develops an accounting model, based
upon the framework established in SFAS No. 121, for long-lived assets to be
disposed by sales. The accounting model applies to all long-lived assets,
including discontinued operations, and it replaces the provisions of ABP Opinion
No. 30, "Reporting Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for disposal of segments of a business. SFAS No. 144
requires long-lived assets held for disposal to be measured at the lower of
carrying amount or fair values less costs to sell, whether reported in
continuing operations or in discontinued operations. The statement is effective
for fiscal years beginning after December 15, 2001. The Company intends to adopt
this standard at the beginning of its fiscal 2003. The Company believes the
adoption of SFAS No. 144 will not have a material impact on its financial
position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and replaces
EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. SFAS No. 146 also establishes that fair value is the objective for
initial measurement of the liability. The statement is effective for exit or
disposal activities initiated after December 31, 2002. The Company believes the
adoption of SFAS No. 146 will not have a material impact on its financial
position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS No. 148 amends FASB Statement
No. 123, "Accounting for Stock-Based Compensation." Although it does not require
use of fair value method of accounting for stock-based employee compensation, it
does provide alternative methods of transition. It also amends the disclosure
provisions of Statement 123 and APB Opinion No. 28, "Interim Financial
Reporting," to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. SFAS No. 148's amendment of the
transition and annual disclosure requirements are effective for fiscal years
ending after December 15, 2002. The amendment of disclosure requirements of
Opinion No. 28 are effective for interim periods beginning after December 15,
2002. The Company will continue to use the intrinsic value method of accounting
as allowed under SFAS No. 148 for stock-based compensation for its first quarter
of fiscal year 2003.
F-10
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--------------------------------------------------------------------------------
GRISTEDE'S FOODS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. RELATED PARTY TRANSACTIONS
(a)On February 6, 1998, the Company agreed to purchase substantially all of the
assets and assumed certain of the liabilities of a supermarket located at 1644
York Avenue, New York City, that was owned by a corporation controlled by John
Catsimatidis. On March 1, 2000 the Company and the affiliate determined to
restructure the transaction by rescinding the purchase effective as of February
6, 1998, and entering into an operating agreement which gives the Company full
control of the supermarket and the right to operate the supermarket for the
account of the Company. The operating agreement presently terminates on
December 1, 2003, but the term shall be extended for additional one year periods
unless either party gives notice of termination not later than 90 days prior to
the end of the then current term of the agreement. Under the operating
agreement, the Company shall pay to the affiliate $1.00 per annum, plus such
other consideration as may be approved by the Company's directors (excluding
John Catsimatidis). Pursuant to the operating agreement the Company or any
designee of the Company, also has the option until December 31, 2005 to purchase
the supermarket for $2,778,000, which price is the fair market price of the
supermarket established on October 11, 1999 by the Company's directors
(excluding John Catsimatidis).
In May 2000, another affiliate and the Company entered into a similar
operating agreement for a store owned by the affiliate. As consideration, the
affiliate receives the nominal amount of $1 per annum, plus such other
consideration as may be approved by the Company's directors (excluding John
Catsimatidis). The operating agreement presently terminates on May 10, 2004,
but the term shall be extended for additional one year periods unless either
party gives notice of termination not later than 90 days prior to the end of the
then current term of the agreement. Pursuant to the operating agreement, the
Company, or any designee of the Company, also has the option until December 31,
2005 to purchase the supermarket for the fair market price of the supermarket as
established by the Company's directors (excluding John Catsimatidis) using a
valuation criterion similar to that issued for valuing the store at 1644 York
Avenue, New York City. It is management's opinion that the fair market value of
this store is approximately $3 million.
The affiliates' intention in entering into these two operating agreements
where the Company enjoys full benefits of ownership for the nominal
consideration of $1 per annum per store was to effect post closing adjustments
in connection with the Food Group Acquisition. If the option to purchase the
supermarkets is exercised, the excess of the purchase price over the net book
value of the assets will be shown as a charge to equity.
In connection with the restructure of the transaction relating to the
supermarket located at 1644 York Avenue, $3,072,000 was included in "Due from
related parties - other" on the balance sheet as of December 3, 2000. Such
amount has been paid or offset against amounts due from affiliates during fiscal
2001.
(b) Under a management agreement dated November 10, 1997 (the "Management
Agreement"), Namdor Inc., a subsidiary of the Company, performs consulting and
managerial services for one supermarket (three supermarkets in prior years)
owned by a corporation controlled by John Catsimatidis. In consideration of
such services, Namdor Inc. is entitled to receive, on a quarterly basis, a cash
payment of one and one-quarter (1.25%) percent of all sales of inventory and
merchandise made at, in or from the managed supermarkets. During 2002, 2001 and
2000, management fee income was $0, $47,222 and $66,244, respectively.
(c) Certain stores have entered into capital and operating leases with an
affiliate, Red Apple Lease Corporation, a company wholly owned by John
Catsimatidis. Such leases are primarily for store operating equipment.
Obligations under capital leases at December 1, 2002 and December 2, 2001 were
F-11
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--------------------------------------------------------------------------------
GRISTEDE'S FOODS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$3,435,385 and $1,409,251, respectively and require monthly payments of $76,790
through March 2007.
The Company leases ten locations: a 25,000 square foot warehouse, its
office facilities and eight store locations from Red Apple Real Estate, Inc., a
corporation wholly owned by John Catsimatidis. During fiscal 2002, 2001 and
2000, respectively, the Company paid to Red Apple Real Estate, Inc. $2,469,000,
$1,610,000 and $1,236,420, respectively for rent and real estate taxes under
such leases. The lease terms provide for an aggregate of $2,734,800 per year in
lease payments for fiscal 2003. The leases are triple net whereby the tenant
pays all real estate taxes, insurance and maintenance. (See Note 6.)
(d) Certain stores have entered into capital leases with an affiliate, United
Acquisition Leasing Corp. (a company wholly owned by the majority shareholder).
Such leases are primarily for store equipment. Obligations under capital leases
at December 1, 2002 were $4,030,094 and require monthly payments of $92,443
through December 2007.
In October 2002, the Company and an affiliate of the Company acquired the
fixtures, leasehold improvements and store leases of three stores from the Great
Atlantic & Pacific Tea Company for a total purchase price of $5,500,000. The
affiliate has leased the acquired assets to the Company. Such stores had been
closed for more than six months prior to the transaction. Obligations under
these capital leases at December 1, 2002 were $5,000,214 and require monthly
payments of $79,156 through February 2008 and a balloon payment of $1,629,156 at
such time.
(e) MCV Advertising Associates Inc., a company owned by the majority
shareholder, had provided advertising services to the Company. During 2000,
costs incurred were $1,306,218. The Company no longer uses MCV and buys
advertising directly instead.
(f) Due from related parties - trade, represents amounts due from affiliated
companies for merchandise shipped from the Company's subsidiary City Produce
Operating Corp. in the ordinary course of business and for which payments are
made to such subsidiary on a continuous basis under extended terms, as well as
management fees receivable for administrative and managerial services performed
for the affiliated companies by the Company. During 2002, 2001 and 2000,
merchandise sales to affiliates were $1,053,662, $1,792,174 and $636,562,
respectively. Of the total trade receivable due from an affiliate, $1,225,000
has been classified as non-current on the balance sheet due to the extended
payment terms granted.
(g) The Company uses the services of an affiliate Red Apple Medical, a
corporation wholly-owned by John Catsimatidis, as an agent for self-insurance
purposes. All employee medical claims are submitted to a third party
administrator who processes claims to be remitted through a controlled account.
Such amounts are reimbursed by the Company to the agent. No fees have been paid
to this entity for the fiscal years 2002, 2001 and 2000.
F-12
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--------------------------------------------------------------------------------
GRISTEDE'S FOODS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. OTHER ASSETS
Additions in 2002 totaling $1,781,188 consist of $102,808 in debt costs, a
$50,000 covenant not to compete, $475,000 in customer lists and $1,153,380 of
deferred acquisition and financing costs. None of these items have residual
value and all except deferred acquisition costs have a weighted average life of
five years.
Amortization
Accumulated ------------
AT DECEMBER 1, 2002: Cost amortization Net book value expense
----------------------------- ---------- ------------- --------------- -------------
ACQUISITION COSTS, CONSISTING
MAINLY OF PROFESSIONAL FEES $1,471,848 $ 1,205,381 $ 266,467 $ 192,161
NON-COMPETE COVENANTS 1,565,316 1,017,133 548,183 182,493
DEBT COSTS 1,222,722 812,036 410,686 222,265
COSTS RELATING TO KINGS
ACQUISITION 1,153,380 -- 1,153,380 --
PRESCRIPTION LISTS 2,175,582 528,146 1,647,436 269,427
OTHER 114,204 96,378 17,826 17,873
----------------------------------------------------------------------------------------
TOTALS $7,703,052 $ 3,659,074 $ 4,043,978 $ 884,219
----------------------------------------------------------------------------------------
Amortization
Accumulated ------------
AT DECEMBER 1, 2001: Cost amortization Net book value expense
----------------------------- ---------- ------------- --------------- -------------
ACQUISITION COSTS, CONSISTING
MAINLY OF PROFESSIONAL FEES $1,471,848 $ 1,056,434 $ 415,414 $ 251,092
NON-COMPETE COVENANTS 1,515,316 834,640 680,676 169,031
DEBT COSTS 1,119,914 546,558 573,356 156,191
PRESCRIPTION LISTS 1,700,582 258,719 1,441,863 201,174
OTHER 601,572 254,219 347,353 186,641
----------------------------------------------------------------------------------------
TOTALS $6,409,232 $ 2,950,570 $ 3,458,662 $ 964,129
----------------------------------------------------------------------------------------
Estimated total amortization expense for the next five years is as follows:
2003 $882,973
2004 878,023
2005 716,585
2006 716,585
2007 716,585
COSTS RELATING TO KINGS ACQUISITION - The Company has incurred costs in an
effort to acquire Kings Supermarkets, Inc., a chain of 29 stores, mainly located
in Northern New Jersey. The Company intends to continue such efforts to acquire
this company. No assurance can be given that this acquisition will be
consummated. In connection with the proposed acquisition and required financing,
the Company incurred certain costs (principally professional fees) in the amount
of $1,153,380 (included in other assets on the accompanying balance sheet).
$708,175 of such costs are reimbursable to the Company by its affiliate United
Acquisition Corp. The deferred costs will be allocated to the purchase price and
financing upon completion of the transaction.
F-13
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--------------------------------------------------------------------------------
GRISTEDE'S FOODS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Should the transaction be unsuccessful, the deferred costs will be charged to
operations. Any costs reimbursed by the affiliate will be reflected as a capital
contribution.
PRESCRIPTION LISTS - Prescription lists consist of customer lists purchased from
other pharmacies. There was one additional pharmacy purchased in fiscal 2002.
5. DUE TO AFFILIATES
Amounts due to affiliates, primarily United Acquisition Corp., a corporation
indirectly wholly owned by the majority shareholder, represent liabilities in
connection with the consummation of the merger as discussed in Note 1 and
additional advances made by the affiliate since the merger. The 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 Food Group Acquisition,
approximately $3,600,000 in due from certain other affiliates has been offset
against the amounts due to United Acquisition Corp. The net amount due to
affiliates at December 1, 2002 and December 2, 2001 was $14,842,437 and
$14,525,904, respectively. Of these amounts $14,200,000 and $12,800,000,
respectively, was subordinated to the Company's banks. (See Note 8.) 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.
6. COMMITMENTS AND CONTINGENCIES
The Company operates primarily in leased facilities under non-cancellable
operating leases expiring at various dates through 2022. Certain leases provide
for contingent rents (based upon store sales exceeding stipulated amounts or on
the Consumer Price Index), escalation clauses and renewal options ranging from
five to twenty years. The Company is obligated under all leases to pay for
taxes, insurance and common area maintenance expenses.
The Company also leases operating equipment. The Company is obligated under all
equipment leases to pay for taxes, insurance and maintenance costs incurred in
the operation of such equipment.
Rent expense, including taxes, insurance and maintenance costs, under
non-cancelable operating leases, (including leases with related parties), for
the fiscal years ended December 1, 2002, December 2, 2001 and December 3, 2000,
respectively, is as follows:
2002 2001 2000
----------------------------------------------------------------
Facilities: Base rents $16,979,121 $15,805,048 $13,245,918
Contingent rent 48,000 48,000 76,671
----------------------------------------------------------------
Rent expense - facilities $17,027,121 $15,853,048 $13,322,589
================================================================
Equipment rental $ 246,294 $ 644,961 $ 1,159,178
================================================================
F-14
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--------------------------------------------------------------------------------
GRISTEDE'S FOODS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Related party rent expense for facilities was $2,418,054, $1,610,022 and
$1,236,420 for the years ended December 1, 2002, December 2, 2001 and December
3, 2000, respectively.
Related party rent expense for equipment leases was $484,856 for the year
ended December 3, 2000. By the terms of amendments to these leases, they became
capital leases in the year ended December 2, 2001.
Future minimum lease commitments under noncancellable leases as of December 1,
2002 are:
EQUIPMENT OPERATING FACILITIES-MINIMUM
FISCAL YEAR ENDING LEASES COMMITMENT
-------------------------------------------------------------
2003 $ 182,694 $ 17,788,870
2004 161,822 18,073,295
2005 57,338 17,796,868
2006 2,217 17,566,696
2007 -- 15,975,328
THEREAFTER -- 116,521,920
-------------------------------------------------------------
$ 404,071 $ 203,722,977
=============================================================
The above table includes renewal periods where used to determine depreciable
asset life.
The net book value of all assets under capital leases including related party
capital leases at December 1, 2002 is approximately $23.2 million.
The future net minimum lease payments under capital leases are as follows:
---------------------------------------------------------------------
FISCAL YEAR ENDING
---------------------------------------------------------------------
2003 $6,887,446
2004 6,112,945
2005 4,055,551
2006 3,095,925
2007 1,965,682
THEREAFTER 1,866,623
---------------------------------------------------------------------
23,984,172
LESS: AMOUNT REPRESENTING INTEREST 4,146,814
---------------------------------------------------------------------
PRESENT VALUE OF NET MINIMUM LEASE PAYMENTS 19,837,358
LESS CURRENT OBLIGATION 4,892,101
=====================================================================
LONG TERM LEASE OBLIGATIONS $14,945,257
=====================================================================
F-15
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--------------------------------------------------------------------------------
GRISTEDE'S FOODS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES
The Company reports the effects of income taxes under SFAS No. 109, "Accounting
for Income Taxes". The objective of income tax reporting is to recognize (a)
the amount of taxes payable or refundable for the current year and (b) deferred
tax liabilities and assets for the future tax consequences of events that have
been recognized in the financial statements or tax returns. Under SFAS No. 109,
the measurement of deferred tax assets is reduced, if necessary, by the amount
of any tax benefits that, based on available evidence, are not expected to be
realized. Realization of deferred tax assets is determined on a
more-likely-than-not basis.
The Company has net operating loss carryforwards for tax purposes and other
deferred tax benefits that are available to offset future taxable income. The
net operating loss carryforwards are attributable only to operating activities.
As of December 1, 2002, the Company had net operating loss carryforwards of
approximately $6.8 million, which expire through fiscal 2020.
Internal Revenue Code Section 382 provides for the limitation on the use of net
operating loss carryforwards in years subsequent to a more than 50% cumulative
change in ownership. The Company believes that a more than 50% cumulative change
in ownership occurred in November 1997. (See Note 1) As a future consequence of
the transaction, the Company's ability to offset its net operating loss carry
forwards of approximately $5.7 million at the merger against income earned after
the transaction may be limited. If any of the Federal net operating loss
carryforwards are realized, any tax benefit will be credited to additional
paid-in capital.
The Company had net deferred tax assets of approximately $8.2 million and $9.4
million at December 1, 2002 and December 2, 2001, respectively. At December 1,
2002 and December 2, 2001, a valuation allowance has been provided against the
deferred tax assets since management cannot predict, based on the weight of
available evidence, that it is more likely than not that such assets will be
ultimately realized. Accordingly no deferred income taxes were recognized in any
of the periods.
The provision for income taxes for fiscal 2002, 2001 and 2000 consisted of
state and local income taxes only which amounted to approximately $40,000,
$99,000 and $52,000, respectively.
F-16
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--------------------------------------------------------------------------------
GRISTEDE'S FOODS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax (assets) liabilities at December 1, 2002 and December 2, 2001 are
comprised of the following elements:
2002 2001
--------------------------
Net operating loss carryforwards $(3,409,000) $(4,294,000)
Deferred revenue taxable currently (55,000) (384,000)
Allowance for uncollectable accounts (241,000) (207,000)
Depreciation and amortization (1,969,000) (2,595,000)
Deferred rent not currently deductible (2,528,000) (1,963,000)
------------ ------------
Deferred tax (assets) liabilities, net (8,202,000) (9,443,000)
Less valuation allowance 8,202,000 9,443,000
------------ ------------
Net deferred tax $ -- $ --
============ ============
F-17
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--------------------------------------------------------------------------------
GRISTEDE'S FOODS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. DEBT
Effective October 2001, the Company's credit agreement with a group of banks was
amended and increased to an aggregate total of $32,500,000, consisting of a
$15,500,000 term loan and a $17,000,000 revolving line of credit. As of December
1, 2002, the credit facility as amended, provides for (i) a maturity date of
November 28, 2004 for the revolving line of credit, and December 3, 2006 for the
term loan, at which time all amounts outstanding thereunder are due, (ii)
certain financial covenants, and (iii) amortization of the term loan in monthly
amortizations totaling $2,000,000, $2,300,000, $2,600,000, $2,900,000 and
$3,200,000 respectively in each year during its term, and a $2,500,000 balloon
payment at maturity.
Long-term debt at December 1, 2002 and December 2, 2001 consists of the
following:
2002 2001
----------------------------------------------------------------------------
Note payable in annual installments of $66,666 $ 66,666 $ 36,595
plus accrued interest commencing September 30,
2000 at an interest rate of 9%
Note payable $75,000 that was due on January 29, -- 150,000
2001; $75,000 that was due June 14, 2001, plus
accrued interest commencing September 14, 2000
at an interest rate of 9%
Note payable $224,704 in three equal annual 224,704 --
installments plus interest at 7.5%; final payment
due September 2005
Term loan payable to banks due December 3, 2006 13,559,172 15,500,000
Revolving loans payable to banks due November 17,000,000 9,800,000
28, 2004
----------------------------------------------------------------------------
30,850,542 25,486,595
----------------------------------------------------------------------------
LESS: CURRENT PORTION 2,500,740 2,378,262
----------------------------------------------------------------------------
$28,349,802 $23,108,333
----------------------------------------------------------------------------
F-18
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--------------------------------------------------------------------------------
GRISTEDE'S FOODS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest on prime-based loans under the credit facility is payable monthly in
arrears; interest on LIBOR-based loans under the credit facility is payable at
the end of the applicable interest period.
During the year ended December 1, 2002 the interest rates ranged from 4.38% to
5.19% on the LIBOR-based loans (total principal balance of $30,200,000 at
December 1, 2002) and from 5.5% to 6.25% on the prime-based loans (total
principal balance of $359,172 at December 1, 2002). The overall weighted
average interest rate paid to the banks during the year ended December 1, 2002
was 5.09%.
The loans are collateralized by certain assets of the Company, including
receivables, inventory and store equipment.
Principal maturities of long-term debt as of December 1, 2002 are as follows:
FISCAL YEAR ENDING
-------------------------------------------------
2003 $ 2,500,740
2004 19,674,900
2005 2,974,902
2006 3,200,000
2007 2,500,000
-------------------------------------------------
TOTAL MATURITIES $30,850,542
=================================================
9. RETIREMENT PLAN
The Company participates in various defined contribution multi-employer union
pension plans, which are administered jointly by management and union
representatives, and which sponsor most full-time and certain part-time union
employees. The pension expense for these plans approximated $1,161,000,
$1,052,000 and $999,000 for 2002, 2001 and 2000, respectively. The Company
could, under certain circumstances, be liable for unfunded vested benefits or
other expenses of jointly administered union- management plans.
10. STOCK OPTION PLANS
On October 7, 1994, the Company granted the Chairman a non-qualified stock
option to purchase an aggregate of 275,000 shares of common stock at a price of
$3.75 per share (the fair market value at that date).
On August 12, 1996, the Company granted the Chairman a non-qualified stock
option to purchase an aggregate of 250,000 shares of common stock at a price of
$2.875 per share.
The Company currently has one incentive grant and five nonqualified grants under
which stock options may be granted to officers, directors and key employees of
the Company. The options to purchase shares of common stock generally are issued
at fair market value on the date of the grant, begin vesting over three to five
years, and expire ten years from issuance and are conditioned upon continual
employment during the vesting period.
In addition to the one incentive grant, the Company has granted stock options to
certain key executives and directors. The options vest over three to five years
and contractual lives of these grants are similar to that of the incentive plan.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations for its stock option grants. Generally,
compensation expense is not recognized for stock option grants.
In accordance with SFAS No. 123, "Accounting for Stock-based Compensation", the
Company discloses the pro forma impact of recording compensation expense
F-19
================================================================================
--------------------------------------------------------------------------------
GRISTEDE'S FOODS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
utilizing the Black-Scholes model. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options, which have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the Black-Scholes model does not necessarily provide a
reliable measure of the fair value of its stock options.
SFAS No. 123 requires the Company to provide pro forma information regarding net
loss and earnings per share as if compensation cost of the Company's stock
option plans had been determined in accordance with the fair value based method
prescribed in SFAS No. 123. The Company estimates the fair value of each stock
option at the grant date by using the Black Scholes option-pricing model with
the following weighted average assumptions used for grants. During 2002, 2001
and 2000 there were no options granted.
Under the accounting provisions of SFAS No. 123, the Company's loss and earnings
per share would have been adjusted to the pro forma amounts indicated below:
2002 2001 2000
---------------------------------------------------------------------------
Income (loss) before cumulative effect of
change in accounting principle
As reported $(926,407) $275,057 $(190,908)
Pro forma $(929,307) 240,487 (310,861)
Net earnings (loss) per share - basic and
diluted:
As reported $ (0.05) $ .01 $ (.01)
Pro forma $ (0.05) $ .01 $ (.02)
F-20
================================================================================
--------------------------------------------------------------------------------
GRISTEDE'S FOODS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's stock option plans is presented below:
Weighted Average
Shares Exercise Price
===================================================================
Balance, November 28, 1999 1,422,500 $ 3.21
Granted: - -
Exercised: - -
Forfeited: (22,000) 2.90
-------------------------------------------------------------------
Balance, December 3, 2000 1,400,500 3.21
Granted: - -
Exercised: - -
Forfeited: (45,000) 3.33
-------------------------------------------------------------------
Balance, December 2, 2001 1,355,500 3.21
Granted: - -
Exercised: - -
Forfeited: (102,500) 4.25
-------------------------------------------------------------------
Balance, December 1, 2002 1,253,000 $ 3.14
-------------------------------------------------------------------
Options exercisable as of December 1, 2002 and December 2, 2001 were 1,253,000
and 1,322,167, respectively.
All options prior to November 10, 1997 were assumed from Sloan's by the Company.
The following table summarizes information as of December 1, 2002 concerning
outstanding and exercisable options:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
======================== ============================
Weighted
Average
Range of Remaining Weighted Weighted
exercise Number Contractual Average Number Average
prices Outstanding Life Exercise Price Exercisable Exercise Price
-----------------------------------------------------------------------------------
$ 3.75 275,000 1.9 $ 3.75 275,000 $ 3.75
5.63 101,000 2.0 5.63 101,000 5.63
3.81 22,000 2.0 3.81 22,000 3.81
2.87 250,000 3.7 2.87 250,000 2.87
2.63 520,000 5.3 2.63 520,000 2.63
$ 1.88 85,000 6.3 1.88 85,000 1.88
-----------------------------------------------------------------------------------
$ 1.88-5.63 1,253,000 4.0 $ 3.14 1,253,000 $ 3.14
-----------------------------------------------------------------------------------
F-21
================================================================================
--------------------------------------------------------------------------------
GRISTEDE'S FOODS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. LITIGATION
1) RMED International Inc. v. Sloan's Supermarkets Inc. and John A.
Catsimatidis.
On August 8, 1994, a lawsuit against the Company and Mr. Catsimatidis was
instituted in the United States District Court for the Southern District of New
York by RMED International, Inc. ("RMED"), a former stockholder of the Company.
The complaint alleged, among other things, that RMED and a purported class
consisting of persons who purchased the Company's common stock on or after March
19, 1993 were damaged by alleged nondisclosures in certain filings made by the
Company with the Securities and Exchange Commission between January 1993 and
June 1994 relating to an investigation by the FTC. The complaint alleged that
such nondisclosures constituted violations of Federal and New York State
securities laws, as well as common law fraud, and seeks damages (including
punitive damages) in an unspecified amount (although in discovery proceedings,
the named plaintiff has claimed that its damages were approximately $800,000) as
well as costs and disbursements of the action. On June 2, 1994, the Company
issued a press release that disclosed the FTC action.
On September 30, 1994, the defendants filed a motion to dismiss for failure to
state a cause of action and for lack of subject matter jurisdiction over the
state claims. The motion was denied. In June 1995, the plaintiff filed a
motion for class certification, which motion was granted in March 1996. Fact
discovery was completed by the end of June 1998. Expert discovery was completed
by the end of 1998. Plaintiff's expert prepared a report claiming that
plaintiffs have suffered damages in an amount in excess of $3,000,000. In
August 1999, defendants moved to exclude plaintiff's expert report, which motion
was denied. In June 2000, the Company filed a motion for summary judgment. In
February 2002, the court dismissed plaintiff's state law claim under Article
23-A of the General Business Law of New York, as well as plaintiff's claim for
breach of fiduciary duty, but denied the Company's motion with respect to the
plaintiff's claim under Section 10(b) of the Securities Exchange Act of 1934, as
amended and Rule 10(b)-5 promulgated thereunder, as well as plaintiff's claim of
fraud under state common law, finding that there were outstanding issues of fact
which needed to be determined at trial.
After a week of trial, in January 2003, the matter was settled. The full amount
of the settlement, together with a portion of the Company's legal fees, was paid
by the Company's D&O insurance carrier. Neither the Company, nor Mr.
Catsimatidis paid any portion of the settlement amount.
2.) 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 are claiming 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. To date, about 35 to 40 delivery workers have 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 are 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.
F-22
================================================================================
--------------------------------------------------------------------------------
GRISTEDE'S FOODS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Great American's breach of contract action
commenced in Nassau County has been stayed pending a resolution of the Ansoumana
Action. 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 intends to recoup these monies from Great American.
A tentative settlement has been reached. The Company estimates that such a
possible settlement could result in potential payments of approximately
$2,600,000 plus plaintiffs' legal expenses, payable over a number of years,
without interest, which amount would be shared approximately 50-50 by the
Company with its predecessor private companies. Any amount paid on behalf of the
Company will be reflected as a capital contribution. Additionally, recoveries
from a $400,000 security bond posted by Great American / Baur shall be solely
for the Company's benefit. However, any final settlement must be approved by the
Company's banks, the state, the courts, and the plaintiffs. The Company and its
legal counsel are not presently able to predict whether the settlement will be
implemented. Accordingly, the Company has not recorded any contingent liability
in its consolidated financial statements related to this matter. The Company is
also pursuing an insurance contribution to the settlement under various
policies.
In the meantime, the Company's co-defendant Duane Reade who has continued to
aggressively defend itself in this case, without pursuing settlement, has been
found liable by summary judgment to be a joint employer with its delivery
service provider Weinstein.
3.) Red Apple Supermarkets, Inc., Gristede's Supermarkets, Inc., Supermarket
Acquisition Corp., and Gristede's Sloan's Inc., Plaintiffs, against Rite Aid
Corporation and Rite Aid of New York, Inc., Defendants
Pursuant to a settlement agreement dated February 22, 1999 (the Settlement
Agreement"), between the Company and Rite Aid Corporation ("Rite Aid"), Rite
Aid agreed to compromise a dispute between the parties arising out of a written
lease purchase agreement dated September 2, 1994 (the "Lease Purchase
Agreement). Pursuant to the Settlement Agreement, Rite Aid agreed to pay the sum
of $400,000 (the Settlement Sum") to the Company in full and final satisfaction
of certain claims and disputes regarding defendants' breaches of the Lease
Purchase Agreement. However, Rite Aid failed and refused to pay any portion of
the Settlement Sum as required by the Settlement Agreement. Consequently, on
June 5, 2000, plaintiffs filed a complaint in the Supreme Court of the State of
New York (New York County) which alleged: breach of Settlement Agreement,
Breach of Good Faith and Fair Dealing and Breach of Lease Purchase Agreement.
Such complaint seeks judgment against Rite Aid in the full amount of the
Settlement Sum, together with interest from February 22, 1999.
As alleged in the complaint, the Lease Purchase Agreement contemplated
defendants' purchase of certain commercial leasehold interests held by
plaintiffs, in two stores. Pursuant to the Lease Purchase Agreement, defendants
agreed to purchase plaintiffs' leasehold interest in the two stores for
$1,950,000. However, in violation of the Lease Purchase Agreement - as well as
their duty of good faith and fair dealing thereunder - defendants negotiated and
obtained their own leasehold interest for both stores directly from each
landlord, and failed to compensate plaintiffs as agreed.
F-23
================================================================================
--------------------------------------------------------------------------------
GRISTEDE'S FOODS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has recently settled this litigation where Rite Aid will be
returning a store to the Company at 113-119 Fourth Avenue, Manhattan, New York
City, which was previously operated by an affiliate of the Company, in
settlement of the litigation.
The Company will be purchasing Rite Aid's prescription records and inventory for
this location. In addition, the Company will pay a nominal fee for Rite Aid's
furniture and equipment and the Company will also have the benefit of Rite Aid's
leasehold improvements at the store at no additional cost. It is expected that
Rite Aid will surrender the store within 30 days of the finalization of the
settlement. The Company believes that the fair market value of the acquired
store lease and leasehold improvements to be in excess of the Settlement Sum
plus interest.
12. IMPACT OF THE TERRORIST ATTACKS OF SEPTEMBER 11, 2001
The Company has two stores in the World Trade Center area of Manhattan, which
were forced to close as a result of the terrorist attacks of September 11, 2001.
One store reopened for business on October 1, 2001, the other was renovated and
reopened in May 2002. The Company has suffered property damage losses, including
inventory, costs to repair and clean fixtures and facilities and loss of
revenue. Management has filed claims for the above losses with its insurance
carriers, 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, which along with an insurance
claim for a theft loss from its warehouse, were recorded in fiscal 2002.
F-24
13. QUARTERLY FINANCIAL DATA
(UNAUDITED) ($000S)
Financial data for the interim periods of Fiscal 2002 and Fiscal 2001 is as
follows:
13 weeks 13 weeks 13 weeks 13 weeks
ended ended ended ended Fiscal
September 2, December 2,
March 4, 2001 June 3, 2001 2001 2001 2001
-----------------------------------------------------------------------------------------------------
Sales $ 59,586 $ 56,949 $ 53,570 $ 59,883 $229,988
Gross Profit 23,098 22,731 21,539 23,439 90,807
Net Income (loss) $ 461 $ 330 $ (473) $ (43) $ 275
Net Income (loss) per share $ 0.02 $ 0.02 $ (0.02) $ (0.00) $ .01
13 weeks 13 weeks 13 weeks 13 weeks
ended ended ended ended Fiscal
September 1, December 1,
March 3, 2002 June 2, 2002 2002 2002 2002
-----------------------------------------------------------------------------------------------------
Sales $ 59,791 $ 61,879 $ 60,506 $ 68,557 $250,733
Gross Profit 23,761 24,908 24,221 26,408 99,298
Net Income (loss) $ 761 $ 206 $ (777) $ (1,116) $ (926)
Net Income (loss) per share $ 0.04 $ 0.01 $ (0.04) $ (0.06) $ (0.05)
The fourth quarter included significant adjustments of the following: an
inventory adjustment of $304,000 to reflect the lower of cost or market and an
accrual of $213,000 relating to self-insurance health care costs.
F-25
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Stockholders of Gristedes's Foods, Inc.
The audits referred to in our report dated March 3, 2003, 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 December 1, 2002. 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.
BDO Seidman, LLP
New York, NY
March 3, 2003
-31-
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance At Additions Additions
Beginning of Charged to Costs For Balance At End
DESCRIPTION OF DEDUCTIONS Period and Expenses Write-Offs of Period
-----------------------------------------------------------------------------------------------------------
YEAR ENDED Dec. 3, 2000:
Reserve and allowances deducted
from asset accounts:
Allowance for uncollectible accounts $ 500,000 $ 50,000 $ (400,000) $ 150,000
YEAR ENDED Dec. 2, 2001:
Reserve and allowances deducted
from asset accounts:
Allowance for uncollectible accounts $ 150,000 $ 250,354 $ 12,646 $ 413,000
YEAR ENDED Dec. 1, 2002:
Reserve and allowances deducted
from asset accounts:
Allowance for uncollectible accounts $ 413,000 $ 72,000 $ (4,000) $ 481,000
-32-
Exhibits
--------
Number Description
------ -----------
3.1 Amended and Restated Certificate of Incorporation of the Registrant. Incorporated by
reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K of the fiscal
year ended February 28, 1990 (the "1990 10-K").
3.2 Certificate of Amendment to Amended and Restated Certificate of Incorporation of the
Registrant. Incorporated by reference to Exhibit 3.2 to the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended February 27, 1994 (the
"1994 10-KSB").
3.3 Certificate of Amendment of Certificate of Incorporation of the Company, dated November 4,
1997. Incorporated by reference to Exhibit 3.4 to the Registrant's
Annual Report on Form 10-K for the transition period ended November 30, 1997
(the "Transition Period 10-K").
3.4 Certificate of Amendment of Certificate of Incorporation of the Company, dated August
13, 1999.
3.5 Certificate of Amendment of Certificate of Incorporation of the Company dated
November 10, 2000.
3.6 Amended and Restated Bylaws of the Registrant. Incorporated by reference to Exhibit
3.2 to the 1990 10-K.
10.1 Form of Indemnification Agreement dated as of January 1, 1994 between the Registrant
and each director of the Registrant. Incorporated by reference to Exhibit 10.11 to the
1994 10-KSB.
10.2 Form of Indemnification Agreement dated as of January 1, 1994 between the Registrant
and each officer of the Registrant. Incorporated by reference to Exhibit 10.12 to the
1994 10-KSB.
10.3 1994 Stock Option Plan. Incorporated by reference to Exhibit 10.12 of the Company's
Annual Report on Form 10-KSB for the fiscal year ended
February 26, 1995 ("1995 10-KSB").
10.4 Director Stock Option Plan. Incorporated by reference to Exhibit 10.13 of the
Company's 1995 10-KSB.
10.5 Merger Agreement. Incorporated by reference to Exhibit A to the Company's definitive
Proxy Statement for the Special and Annual Meeting of Stockholders of the Company
held on October 31, 1997.
10.6 Management Agreement dated November 10, 1997 between Namdor Inc., G Remainder
Corp. and S Remainder Corp. Incorporated by reference to Exhibit 10.7 to the Transition
Period 10-K.
10.7 Agreement dated as of March 1, 2000 between G Remainder Corp. and Gristede's Operating
Corp. Incorporated by reference to Exhibit 10.8 to the Company's annual report in
Form 10-K for the fiscal year ended November 28, 1999 (the "1999 10-K").
10.8 1998 Stock Option Plan. Incorporated by reference to Exhibit 10.10 to the
Transition Period 10.K.
-33-
10.9 Agreement dated March 1, 2000 between John Catsimatidis and the Company.
Incorporated by reference to Exhibit 10.11 to the 1999 10-K.
10.10 Agreement dated May 10, 2000 between S Remainder Corp and Namdor Inc. Incorporated
by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 3, 2000.
10.11 Agreement dated December 3, 2000 between John Catsimatidis and the
Company. Incorporated by reference to Exhibit 10.18 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 3, 2000.
10.12 Amended and Restated Loan Agreement dated as of October 31, 2001 among the Company,
Citibank, Israel Discount Bank of New York, and Bank Leumi USA. Incorporated by
reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 2, 2001.
11. Statement re: computation of per share income (loss). Not required.
21. Listing of the Company's subsidiaries all of which are wholly owned by the Company.
Subsidiaries State of Incorporation
------------ ----------------------
Namdor Inc. New York
City Produce Operating Corp. New York
Gristede's Foods NY Inc New York
Gristede's Delivery Service, Inc New York
*Filed herewith.
b) The Company did not file any Current Reports on Form 8-K
during the last quarter of the period covered by this report.
-34-
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GRISTEDE'S FOODS, INC.
Dated: March 4, 2003 By: /s/ John A. Catsimatidis
---------------------------------
John A. Catsimatidis
Chairman of the Board
Signature Title Date
-------------------------------- ----------------------------------------- -------------
/s/ John A. Catsimatidis Chairman of Board, President and March 4, 2003
-------------------------------- Chief Executive Officer (Chief Executive
JOHN A. CATSIMATIDIS Officer and Chief Operating Officer)
/s/ Martin Bring Director March 4, 2003
--------------------------------
MARTIN BRING
Director
--------------------------------
FREDERICK SELBY
/s/ Kishore Lall Director March 4, 2003
--------------------------------
KISHORE LALL
/s/ Gary Pokrassa Chief Financial Officer March 4, 2003
-------------------------------- (Chief Financial Officer
GARY POKRASSA and Chief Accounting Officer)
/s/ Martin Steinberg Director March 4, 2003
--------------------------------
MARTIN STEINBERG
/s/ Edward P. Salzano Director March 4, 2003
--------------------------------
EDWARD P. SALZANO
/s/ Andrew J. Maloney, Esq. Director March 4, 2003
--------------------------------
ANDREW J. MALONEY, ESQ.
-35-
ANNUAL AND QUARTERLY CERTIFICATIONS
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John A. Catsimatidis, certify that:
1. I have reviewed this annual report on Form 10-K of Gristede's Foods,
Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ John A. Catsimatidis
Date: March 4 2003
Title: Chief Executive Officer
================================================================================
-36-
ANNUAL AND QUARTERLY CERTIFICATIONS
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gary Pokrassa, certify that:
1. I have reviewed this annual report on Form 10-K of Gristede's Foods,
Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Gary Pokrassa
Date: March 4 2003
Title: Chief Financial Officer
================================================================================
-37-
================================================================================
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States
Code)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the
undersigned officers of Gristede's Foods, Inc., a Delaware corporation (the
"Company"), does hereby certify, to such officer's knowledge, that:
The Annual Report of Form 10-K for the year ended December 1, 2002 (the "Form
10-K") of the Company fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained
in the Form 10-K fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Dated: March 4 2003
/s/ John A. Catsimatidis
Name: John A. Catsimatidis
Chief Executive Officer
Dated: March 4 2003
/s/ Gary Pokrassa
Name: Gary Pokrassa
Chief Financial Officer
The foregoing certification is being furnished solely pursuant to section 906 of
the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter
63 of Title 18, United States Code) and is not being furnished as part of Form
10-K or as a separate disclosure document.
-38-