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ShopRite(R)
FOODARAMA
SUPERMARKETS, INC.
A World Class Supermarket 2003 Annual Report
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ShopRite(R)
The Company operates a chain of twenty-four supermarkets located in Central New
Jersey, as well as two liquor stores and two garden centers, all licensed as
ShopRite. The Company also operates a central food processing facility to supply
its stores with meat, various prepared salads, prepared foods and other items,
and a central baking facility which supplies its stores with bakery products.
The Company is a member of Wakefern Food Corporation, the largest retailer-owned
food cooperative warehouse in the United States and owner of the ShopRite name.
The Company has incorporated the concept of "World Class" supermarkets into its
operations. "World Class" supermarkets are significantly larger than
conventional supermarkets and feature fresh fish-on-ice, prime meat service
butcher departments, in-store bakeries, international foods including Chinese,
sushi and kosher sections, salad bars, snack bars, meals to go, bulk foods and
pharmacies. The Company has also introduced many of these features into its
conventionally sized supermarkets through extensive renovations; these stores
are considered "Mini-World Class" supermarkets. Currently, twenty-one of the
Company's stores are "World Class," one is a "Mini-World Class" and two are
conventional supermarkets.
Average Annual Sales Per Store* Average Sales of Selling Area*
(in millions) (per square foot)
[BAR GRAPH OMITTED] [BAR GRAPH OMITTED]
* Sales for stores open less than 52 weeks have been annualized
except for the Hamilton, New Jersey store which opened October
29, 2003 and was excluded from the chart.
Dear Shareholder:
Fiscal 2003 was an exciting year for Foodarama. Sales exceeded one billion
dollars for the first time in our history and we opened four new locations, two
of which were replacements for older, smaller stores. Sales in fiscal 2003 were
$1,049,653,000 an increase of 8.9% from fiscal 2002 sales of $963,611,000. This
increase was the result of improved sales in existing locations and sales from
the four new locations opened in Woodbridge, Ewing, North Brunswick and
Hamilton, New Jersey in December 2002, January 2003, May 2003 and October 2003,
respectively. The locations opened in December 2002 and May 2003 replaced older,
smaller stores. Comparable stores sales increased 1.5% in fiscal 2003. This
increase in comparable store sales was less than in recent years as the result
of a softening in the economy, the effect of competitive store openings, the
impact of deflation in certain product categories and the impact of our
replacement stores on several of our existing locations.
Income from operations increased 19.5% to $16,065,000 in fiscal 2003 from
$13,438,000 in fiscal 2002. However, net income declined 29.5% to $2,283,000 or
$2.26 per diluted share in fiscal 2003 compared to $3,240,000 or $3.01 per
diluted share in the prior year period. Net income was impacted primarily by
pre-opening costs for the new stores, increases in labor and related fringe
benefits which resulted from increased sales in service intensive departments,
additional personnel for the new locations and contractual increases in fringe
benefits and increased interest expense which was the result of an increase in
average debt outstanding, including increased capitalized lease obligations, and
an increase in the average interest rate paid on debt.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
for fiscal 2003 were $33,636,000, an increase of 19.8% over the fiscal 2002
EBITDA of $28,076,000. EBITDA is presented because we believe that EBITDA is a
useful supplement to net income and other measurements under accounting
principles generally accepted in the United States since it is a meaningful
measure of a company's performance and ability to meet its future debt service
requirements, fund capital expenditures and meet working capital requirements.
EBITDA is not a measure of financial performance under accounting principles
generally accepted in the United States. Accordingly, we direct your attention
to a table reconciling reported net income to EBITDA included in Management's
Discussion and Analysis of Financial Condition and Results of Operations--Net
Income.
The Company's working capital position improved by $4,549,000 in fiscal
2003 to a ratio of 1.05 to 1.00 from .99 to 1.00 in fiscal 2002. We spent
$34,432,000 on numerous capital projects during fiscal 2003, including the
purchase of equipment and leasehold improvements for the four new locations
opened in fiscal 2003, the construction of and equipment for our new bakery
commissary, projects currently in process for two new stores and the expansion
and remodeling of an existing location. The expansion of the existing location
in East Brunswick, New Jersey was completed in December 2003 and the remodeling
of this location was completed in February 2004. The Company made principal
payments under long-term debt, excluding capitalized leases, of $8,260,000 and
additional long-term debt of $31,268,000 was incurred.
1
During fiscal 2003 we were required to make an additional investment in
Wakefern Food Corporation for two new stores. In addition, on June 19, 2003
Wakefern increased the amount that each shareholder is required to invest in
Wakefern's capital stock to a maximum of $650,000 for each store operated by
such shareholder member. Previously, the maximum was $550,000 per store. The
above changes in the amounts of required investment increased our investment in
Wakefern by $3,288,000, which will be paid weekly, without interest, over a four
year period ending in fiscal 2007.
The Company owns a 15.6% interest in Wakefern, which provides purchasing,
warehousing and distribution services on a cooperative basis to its shareholder
members, all of which are operators of ShopRite supermarkets. Wakefern requires
all of its shareholder members to enter into agreements with Wakefern providing
for certain commitments by, and restrictions on, its shareholder members. Among
the restrictions in the agreement is a general requirement that a shareholder
member must compensate Wakefern for lost warehouse volume if the member
withdraws from the cooperative. Similar withdrawal payments are due if Wakefern
loses volume by reason of a member selling its stores, merging with another
entity or transferring a controlling corporate interest.
The locations opened in Woodbridge, Ewing, North Brunswick and Hamilton,
New Jersey are all World Class stores and have been very well received by our
customers. All of these locations have exceeded their initial projections and
have shown continued improvement in operating results since opening.
Construction has commenced on two additional World Class stores, one of which is
a replacement location for an older, smaller store. Additionally, the remodeling
of two other locations is underway. Leases have also been signed for two new
locations and for the expansion and remodeling of an existing location.
Negotiations are also ongoing for a lease for one new location. All of these
projects will be World Class stores.
The Company and the other defendants have settled the shareholder
derivative litigation initiated by Melvin Jules Bukiet, on behalf of himself and
acting as trustee for the benefit of minors Madeline Bukiet, Miles Bukiet and
Louisa Bukiet against the Company, as nominal defendant, and the members of the
Foodarama Board of Directors. A description of the allegations made in the
lawsuit, the terms of the settlement and the plaintiffs' pending application for
an award of legal fees are set forth elsewhere in this report. Your attention is
directed to Management's Discussion and Analysis of Financial Condition and
Results of Operations and Note 14 to the Company's Consolidated Financial
Statements.
You will note that the plaintiffs have applied for an award of legal fees
of $975,000 in connection with the settlement of the derivative action. We
believe that the amount of the attorneys fees sought by the plaintiffs is
unreasonable and have vigorously contested the plaintiffs' fee application. The
Company's officers and directors liability insurance carrier has preliminarily
advised us that certain of the claims made in the derivative action and related
legal expense are not, in the insurance carrier's view, covered by the policy.
It is not possible, at this juncture, to predict the amount of fees that may be
awarded to plaintiffs or whether or to what extent any such fees and the
Company's expenses for defending the derivative action will be covered by its
directors and officers liability insurance policy. Accordingly, we have not
accrued for legal fees and expenses which may be incurred in connection with
this matter in the statement of operations for the fifty-two weeks ended
November 1, 2003. Net income and EBITDA in fiscal 2004 may be adversely affected
to the extent that the Company's defense costs and any legal fees that may be
awarded are not covered by directors and officers liability insurance.
We are pleased to report that effective November 2, 2003, your Board of
Directors elected Richard J. Saker to assume the position of Chief Executive
Officer of the Company. Joseph J. Saker relinquished the position of Chief
Executive Officer, but will continue to serve as an executive officer of the
Company, occupying the position of Chairman of the Board. The Company's Board of
Directors has approved the terms of a two year employment agreement with Joseph
J. Saker as described in the Proxy Statement. As we make this transition, we
pledge our commitment to the continued growth and development of Foodarama
Supermarkets, Inc.
At this time, we want to extend our appreciation to our employees,
shareholders and vendors for their continued loyalty and support. We also wish
to express our gratitude to our customers for their continued patronage of the
Foodarama ShopRite stores.
/s/ Joseph J. Saker /s/ Richard J. Saker
Joseph J. Saker Richard J. Saker
Chairman of the Board President and Chief Executive Officer
2
2003 ANNUAL REPORT
FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical fact, included in this
Annual Report, including without limitation the statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" are,
or may be deemed to be, "forward- looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Such forward-looking statements involve assumptions, known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of Foodarama Supermarkets, Inc. (the
"Company," which may be referred to as we, us or our) to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements contained in this Annual Report. Such potential
risks and uncertainties, include without limitation, competitive pressures from
other supermarket operators, warehouse club stores and discount general
merchandise stores, economic conditions in the Company's primary markets,
consumer spending patterns, availability of capital, cost of labor, cost of
goods sold including increased costs from the Company's cooperative supplier,
Wakefern Food Corporation ("Wakefern"), and other risk factors detailed herein
and in other of the Company's Securities and Exchange Commission filings. The
forward-looking statements are made as of the date of this Annual Report and the
Company assumes no obligation to update the forward-looking statements or to
update the reasons actual results could differ from those projected in such
forward-looking statements.
--------------------------------------------------------------------------------
Stock Price and Dividend Information
The Common Stock of the Company is traded on the American Stock Exchange under
the ticker symbol "FSM." High and low stock prices were as follows:
Fiscal Quarter Ended High Low
---------------------------------------------------
February 2, 2002 ........ $43.00 $35.75
May 4, 2002 ............. 47.50 34.50
August 3, 2002 .......... 47.25 36.90
November 2, 2002 ........ 35.75 22.55
February 1, 2003 ........ $29.20 $26.00
May 3, 2003 ............. 28.55 23.98
August 2, 2003 .......... 27.50 24.33
November 1, 2003 ........ 28.70 22.50
No dividends have been declared or paid on the Company's Common Stock since
October 1979. The Company has approximately 312 shareholders of record and
approximately 295 beneficial owners.
--------------------------------------------------------------------------------
5 Year Summary of Operations
Fiscal Years Ended
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November 1, November 2, November 3, October 28, October 30,
2003 2002 2001(a) 2000 1999
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(000's omitted except per share data)
Sales .............................................. $1,049,653 $ 963,611 $ 945,301 $ 866,363 $ 778,726
Cost of goods sold ................................. 776,656 718,520 711,092 657,436 592,606
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Gross profit ....................................... 272,997 245,091 234,209 208,927 186,120
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Operating expenses ................................. 256,932 231,653 220,283 198,216 177,780
Interest, net ...................................... 12,260 8,036 7,362 6,741 5,254
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269,192 239,689 227,645 204,957 183,034
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Income before income tax provision ................. 3,805 5,402 6,564 3,970 3,086
Income tax provision ............................... (1,522) (2,162) (2,626) (1,588) (1,141)
==========================================================================
Net income ......................................... $ 2,283 $ 3,240 $ 3,938 $ 2,382 $ 1,945
==========================================================================
Income per common share:
Basic ............................................ $ 2.31 $ 3.16 $ 3.54 $ 2.13 $ 1.74
==========================================================================
Diluted .......................................... $ 2.26 $ 3.01 $ 3.50 $ 2.13 $ 1.74
==========================================================================
Weighted average number of common
shares outstanding:
Basic .......................................... 986,789 1,024,235 1,111,727 1,117,290 1,117,290
==========================================================================
Diluted ........................................ 1,011,350 1,076,030 1,124,192 1,117,290 1,117,290
==========================================================================
(a) 53 weeks
3
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting policies are those accounting policies that management
believes are important to the portrayal of the Company's financial condition and
results. The application of those critical accounting policies requires
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Impairment of Goodwill:
Effective November 3, 2002, the Company implemented Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), "Accounting for Goodwill and Other
Intangible Assets." Goodwill and other intangibles that have indefinite useful
lives will not be amortized, but instead will be tested at least annually for
impairment at the reporting unit level. The Company has determined that it is
contained within one reporting unit and as such, impairment is tested at the
company level. During the first quarter of fiscal 2003, the Company completed
goodwill transition and annual impairment tests prescribed by SFAS 142 and
concluded that no impairment of goodwill existed.
Patronage Dividends:
As a stockholder of Wakefern, the Company earns a share of Wakefern's earnings,
which is distributed as a "patronage dividend." This dividend is based on a
distribution of Wakefern's operating profits for its fiscal year, which ends the
Saturday closest to September 30, in proportion to the dollar volume of business
transacted by each member of Wakefern during that fiscal year. Patronage
dividends are recorded as a reduction of cost of goods sold. The Company accrues
estimated patronage dividends due from Wakefern quarterly based on an estimate
of the annual Wakefern patronage dividend and an estimate of the Company's share
of this annual dividend based on the Company's estimated proportional share of
the dollar volume of business transacted with Wakefern that year. These
estimates are based on both historical patronage dividend percentages and
current volume merchandise purchased from Wakefern.
Pension Plans:
We sponsor two defined benefit pension plans covering administrative personnel
and members of a union. The plans' assets consist primarily of publicly traded
stocks and fixed income securities. The determination of the Company's
obligation and expense for pension benefits is dependent, in part, on the
Company's selection of assumptions used by actuaries in calculating those
amounts. These assumptions are described in Note 15 of Notes to Consolidated
Financial Statements and include, among others, the discount rate, the expected
long-term rate of return on plan assets and the rate of increase in compensation
costs. In accordance with generally accepted accounting principles, actual
results that differ from the Company's assumptions are accumulated and amortized
over future periods and, therefore, generally affect recognized expense and
recorded obligations in future periods. While management believes that its
assumptions are appropriate, significant differences in actual experience or
significant changes in the Company's assumptions may materially affect pension
obligations and future expense.
Based on the Company's review of market interest rates, the Company lowered the
discount rate to a range from 6.25% to 7.00% for fiscal 2003 compared to a range
of 7.00% to 7.25% for fiscal 2002. The Company evaluated the expected long-term
rate of return on plan assets of 8.00% and concluded no change in this
assumption was necessary in estimating pension plan obligations and expense.
Workers' Compensation Insurance:
From June 1, 1991 to May 31, 1997 we maintained workers' compensation insurance
with various carriers on a retrospective basis. We have established reserve
amounts based upon our evaluation of the status of claims still open as of
November 1, 2003 and loss development factors used by the insurance industry. As
of November 1, 2003, the worker's compensation reserve totaled approximately
$713,000. Such reserve amount is only an estimate and there can be no assurance
that our eventual workers' compensation obligations will not exceed the amount
of the reserve. However, we believe that any difference between the amount
recorded for our estimated liability and the costs of settling the actual claims
would not be material to the results of operations.
FINANCIAL CONDITION AND LIQUIDITY
The Company is a party to a Third Amended and Restated Revolving Credit and Term
Loan Agreement (the "Credit Agreement") with four financial institutions. The
Credit Agreement serves as our primary funding source for working capital and
capital expenditures. The Credit Agreement is secured by substantially all of
the Company's assets and provided for a total commitment of up to $80,000,000,
including a revolving credit facility (the "Revolving Note") of up to
$35,000,000, a term loan (the "Term Loan") in the amount of $25,000,000 and a
capital expenditures facility (the "Capex Facility") of up to $20,000,000. The
Credit Agreement expires December 31, 2007. As of November 1, 2003 the Company
owed $20,000,000 on the Term Loan and $10,741,000 under the Capex Facility.
4
2003 ANNUAL REPORT
On July 16, 2003 the Credit Agreement was amended to allow the Company to borrow
under the revolving credit facility, on any Tuesday or Wednesday, up to
$3,000,000 in excess of the availability under the borrowing base limitation of
65% of eligible inventory as long as a like amount of cash and cash equivalents
are on hand at store level or in transit to the Company's banks. This provision
expired December 31, 2003. We will evaluate whether we will need to request an
excess availability provision in fiscal 2004. Additionally, the number of LIBOR
contracts allowed to be outstanding at any one time was increased from three to
five. For the year ended November 1, 2003, the value of the accrued benefits
under the Company's pension plans exceeded the aggregate fair value of the
assets of the plans by $3,126,000, $126,000 more than the amount permitted under
the Credit Agreement. This event of default was waived by our lenders.
The Credit Agreement contains a number of covenants with which the Company must
comply. Non-compliance with any of such covenants could affect the availability
of funds under the Credit Agreement and have a material adverse effect on the
Company's financial condition and liquidity. The Company is in compliance with
the major financial covenants under the Credit Agreement as of November 1, 2003,
as follows:
Actual (As defined in
Financial Covenant Credit Agreement the Credit Agreement)
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Adjusted EBITDA(1) ...................... Greater than $19,500,000 $23,460,000
Leverage Ratio(1)(2) .................... Less than 3.20 to 1.00 2.87 to 1.00
Debt Service Coverage Ratio(3) .......... Greater than 1.10 to 1.00 2.19 to 1.00
Adjusted Capex(4) ....................... Less than $8,329,000(5)(7) $ 7,834,000(6)
Store Project Capex ..................... Less than $31,366,000(5)(7) $26,598,000(6)
(1) Excludes obligations under capitalized leases, interest
expense and depreciation expense attributable to capitalized
leases and changes in the LIFO reserve.
(2) The Leverage Ratio is calculated by dividing the current and
non-current portions of Long-Term Debt and Long-Term Debt
Related Party by Adjusted EBITDA.
(3) The Debt Service Coverage Ratio is calculated by dividing
Operating Cash Flow by the sum of adjusted net interest
expense, which excludes interest on capitalized leases, the
current provision for income taxes and regularly scheduled
principal payments, which exclude principal payments on
capitalized leases. Operating Cash Flow is calculated by
subtracting amounts expended for property and equipment which
are not used for projects in excess of $500,000 ($1,077,000 in
fiscal 2003) from Adjusted EBITDA.
(4) Adjusted Capex is all capital expenditures other than
New/Replacement Store Project Capex.
(5) Represents limitations on capital expenditures for fiscal
2003.
(6) Represents capital expenditures for fiscal 2003.
(7) Includes amounts available but not used in the prior fiscal
year and available to be carried forward to fiscal 2003:
$2,589,000 for Adjusted Capex and $8,191,000 for Store Project
Capex.
On January 31, 2003 we financed the purchase of $4,000,000 of equipment for the
new store location in Woodbridge, New Jersey. The note bears interest at 6.45%
and is payable in monthly installments over its seven year term.
On October 15, 2003 we financed the purchase of $1,900,000 of equipment for the
expanded store location in East Brunswick, New Jersey. The note bears interest
at 6.20% and is payable in monthly installments over its five year term.
During the fifty two weeks ended November 1, 2003, the Company was required to
make an additional investment in Wakefern for two new stores. In addition, on
June 19, 2003 Wakefern increased the amount that each shareholder is required to
invest in Wakefern's capital stock to a maximum of $650,000 for each store
operated by such shareholder member. Previously, the maximum was $550,000 per
store. The above changes in the amounts of required investment increased our
investment in Wakefern by $3,288,000, which will be paid weekly, without
interest, over a four year period starting September 16, 2003.
No cash dividends have been paid on the Common Stock since 1979, and we have no
present intentions or ability to pay any dividends in the near future on our
Common Stock. The Credit Agreement does not permit the payment of any cash
dividends on the Company's Common Stock.
Working Capital:
At November 1, 2003 the Company had working capital of $3,959,000 as compared to
working capital deficiencies of $590,000 and $6,907,000 on November 2, 2002 and
November 3, 2001, respectively. The Company normally requires small amounts of
working capital since inventory is generally sold at approximately the same time
that payments to Wakefern and other suppliers are due and most sales are for
cash or cash equivalents. Working Capital improved in fiscal 2003 primarily as
the result of the increase in receivables from Wakefern. This increase relates
primarily to receivables for patronage dividends and other current amounts due
us. When collected, the proceeds from these receivables will be used to reduce
the Revolving Note which is classified as long-term borrowings. This will result
in a corresponding decrease in working capital. The balance of accounts
receivables consist primarily of returned checks due the Company, third party
pharmacy insurance claims and organization charge accounts. The terms of most
receivables are 30 days or less. The allowance for uncollectible accounts is
large in comparison to the amount of accounts receivable because the allowance
consists primarily of a reserve for returned checks which are not written off
until all collection efforts are exhausted.
5
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
Working capital improved in fiscal 2002 primarily as the result of the increase
in receivables due from landlords for construction allowances for the Woodbridge
and Ewing, New Jersey locations. When these receivables were collected, the
proceeds were used to reduce the Revolving Note which is classified as long-term
borrowings. This resulted in a corresponding decrease in working capital.
Working capital decreased in fiscal 2001 primarily as the result of the net
increase in accounts payable and accrued expenses of $5,050,000 over the
increase in inventory. This increase relates primarily to cost of merchandise
and capital expenditures for the new Middletown, New Jersey store, opened
November 14, 2001, as well as accrued occupancy costs related to the 53rd week
of fiscal 2001.
Working capital ratios were as follows:
November 1, 2003 ...................................... 1.05 to 1.00
November 2, 2002 ...................................... .99 to 1.00
November 3, 2001 ...................................... .90 to 1.00
Cash flows (in millions) were as follows:
2003 2002 2001
------------------------------
From operations ................... $ 17.9 $ 15.5 $ 24.2
Investing activities .............. (34.8) (26.0) (16.9)
Financing activities .............. 17.9 10.6 (7.1)
------------------------------
Totals .......................... $ 1.0 $ .1 $ .2
==============================
Fiscal 2003 capital expenditures totaled $34,432,000 with depreciation of
$17,096,000 compared to $21,019,000 and $14,175,000, respectively, for fiscal
2002 and $17,047,000 and $12,840,000, respectively, for fiscal 2001. The
increase in depreciation in fiscal 2003 was the result of the purchase of
equipment and leasehold improvements for the four new locations opened in
Woodbridge, Ewing, North Brunswick and Hamilton, New Jersey in December 2002,
January 2003, May 2003 and October 2003, respectively, and the new bakery
facility, as well as six additional capitalized real estate leases. The increase
in depreciation in fiscal 2002 was the result of the purchase of equipment and
leasehold improvements, as well as the capitalized real estate lease for the
Middletown store opened in November 2001 and a full year of depreciation for the
three locations remodeled in fiscal 2001. The increase in depreciation in fiscal
2001 was the result of the purchase of equipment and leasehold improvements for
the three locations remodeled during fiscal 2001 and a full year of depreciation
for the locations opened in fiscal 2000.
Capital expenditures increased in fiscal 2003, fiscal 2002 and fiscal 2001 as
the result of the purchase of equipment and leasehold improvements for the four
new locations opened in fiscal 2003, the construction of and equipment for our
new bakery commissary, projects currently in process for two new stores, the
expansion and remodeling of an existing location, the new store opened in fiscal
2002 and the locations remodeled in fiscal 2001.
In fiscal 2003 long-term debt increased $82,043,000 due to the capitalization of
six real estate leases, an increase in borrowings under the Credit Agreement,
financing outside of the Credit Agreement for the purchase of equipment for two
locations and notes for the additional investments required by Wakefern for two
of the new locations and the increase in the required Wakefern investment for
each location. Cash generated by operations was used to pay down a portion of
existing debt.
In fiscal 2002 long-term debt increased $26,220,000 due to the capitalization of
a real estate lease for the location opened in the year and an increase in
borrowings under the Credit Agreement. These increases were partially offset by
cash generated by operations used to pay down existing debt.
In fiscal 2001 net long-term debt decreased $5,959,000 as the result of payments
made to reduce the balances outstanding under existing debt. The source of these
payments was cash generated by operations and an increase in the revolving
credit facility of $929,000.
No shares of Common Stock were purchased in fiscal 2003.
For the year ended November 2, 2002, the Company repurchased a total of 102,853
shares of Common Stock. 101,553 of these shares were purchased in privately
negotiated transactions and the remaining 1,300 shares were acquired in open
market transactions. 6,377 of these shares were owned by a member of the family
of Joseph J. Saker, the Company's Chairman, and were purchased for an average of
$39.52 per share. $4,523,670, or an average of $43.98 per share, was expended
for the purchase of the 102,853 shares. Since the announcement of the stock
repurchase program in June 2001, the Company has repurchased 131,923 shares for
$5,591,597 or an average of $42.39 per share.
6
2003 ANNUAL REPORT
During the year ended November 3, 2001, the Company repurchased a total of
29,070 shares of Common Stock. 25,070 of these shares were purchased in
privately negotiated transactions. 7,000 of these shares were owned by the
Estate of Mary Saker, of which the Company's Chairman, Joseph J. Saker, is a
co-executor, and 18,000 shares were owned by certain members of Mr. Saker's
family. $1,067,927, or an average of $36.74 per share, was expended for the
purchase of the 29,070 shares.
At November 1, 2003, the Company had $3,382,000 of available credit under its
revolving credit facility. The Company has capital commitments (net of landlord
contributions of $11,018,000) of $5,981,000 for leasehold improvements and
$13,171,000 for equipment related to the three stores under construction as of
November 1, 2003. The Credit Agreement and permitted borrowings outside of the
Credit Agreement will adequately meet our operating needs, scheduled capital
expenditures and debt service for fiscal 2004.
During the fiscal year 2002, the Business Tax Reform Act was passed in the State
of New Jersey. This legislation is effective for tax years beginning on or after
January 1, 2002 (Fiscal 2003). Corporate taxpayers are subject to an Alternative
Minimum Assessment ("AMA"), which is based upon either New Jersey Gross Receipts
or New Jersey Gross Profits, if the AMA exceeds the tax based on net income. We
have included in our current tax provision the effect of the AMA. The AMA
increased our State current tax liability, net of Federal tax benefit, by
$1,303,000. Additionally, in March 2002 and May 2003 The Job Creation and Worker
Assistance Act of 2002 and The Jobs and Growth Tax Relief Reconciliation Act of
2003 ("Tax Acts") were passed by the United States Congress. The current Federal
tax benefit for accelerated depreciation resulting from the Tax Acts is
approximately $3,266,000 for fiscal 2003 and is reflected in our prepaid and
refundable income taxes.
The table below summarizes our contractual obligations at November 1, 2003, and
the effect such obligations are expected to have on liquidity and cash flow in
future periods.
Payments Due By Period
---------------------------------------------------------
Less Than 2-3 4-5 After 5
Contractual Obligations Total 1 Year Years Years Years
---------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Long-term debt ......................... $ 63,251 $ 7,916 $ 14,775 $ 39,708 $ 852
Related party debt ..................... 3,975 920 1,628 969 458
Capital lease obligations .............. 301,049 13,698 27,660 26,962 232,729
Operating leases ....................... 68,742 9,968 17,804 13,066 27,904
Purchase obligations--
leaseholds and equipment ............. 19,152 19,152 -- -- --
Lease commitments--
stores under construction(1) ......... 62,150 1,243 4,972 4,972 50,963
---------------------------------------------------------
Total .................................. $518,319 $ 52,897 $ 66,839 $ 85,677 $312,906
=========================================================
(1) Represents contractual obligations which we expect to perform in the
periods presented based upon the anticipated openings of stores in
fiscal 2004. It is not possible to determine precise dates for
anticipated store openings, and actual opening dates may vary from
the anticipated dates.
RESULTS OF OPERATIONS
Sales:
The Company's sales were $1,049.7 million, $963.6 million and $945.3 million,
respectively in fiscal 2003, 2002 and 2001. This represents an increase of 8.9%
in 2003 and an increase of 1.9% in 2002. These changes in sales levels were the
result of the opening of two new and two replacement stores in fiscal 2003 and
the opening of a replacement store in November 2001. The locations opened in May
2003, December 2002 and November 2001 replaced smaller, older stores.
Comparable store sales increased 1.5% in fiscal 2003 and 1.6% in fiscal 2002.
Comparable store sales increases in fiscal 2003 and fiscal 2002 were partially
offset by decreased sales in certain of the Company's stores affected by
competitive store openings and the impact of several of our replacement
locations. Additionally, the increases in comparable store sales for 2003 and
2002 were partially offset by a softening in the economy and the impact of
deflation in certain product categories.
Gross Profit:
Gross profit totaled $273.0 million in fiscal 2003 compared to $245.1 million in
fiscal 2002 and $234.2 million in fiscal 2001. Gross profit as a percent of
sales was 26.0% in fiscal 2003, 25.4% in fiscal 2002 and 24.8% in fiscal 2001.
7
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
Gross profit as a percentage of sales increased in fiscal 2003 primarily as a
result of improved product mix, the contribution of the two new and two
replacement stores opened in fiscal 2003, including Wakefern incentive programs
for new locations, reduced Wakefern assessment as a percentage of sales, an
increase in the Wakefern patronage dividend and a reduction in product loss
through improved shrink control. These increases were offset in part by programs
implemented in certain of the Company's stores to address competitive store
openings and by promotional programs for the new locations opened in the current
year period.
The increase in fiscal 2002 of gross profit as a percentage of sales was
primarily due to improved product mix, the contribution of the new location in
Middletown, New Jersey, more efficient commissary operations, an increase in
patronage dividends from Wakefern and a reduction in product loss through
improved shrink control. These increases were offset in part by programs
implemented in certain of the Company's stores to address competitive store
openings.
In fiscal 2001 gross profit as a percentage of sales increased primarily as a
result of improved product mix, the contribution of the new locations, the
completion of promotional programs initiated by the Company for the locations
opened in fiscal 2000, a reduction in product loss through improved shrink
control and more efficient commissary operations, partially offset by the
completion of Wakefern incentive programs for the new locations opened in the
prior fiscal year.
Patronage dividends applied as a reduction of the cost of merchandise sold were
$9,119,000, $7,124,000 and $6,515,000, respectively, for the last three fiscal
years. This translates to .87%, .74% and .69% of sales for the respective
periods.
Fiscal Years Ended
-----------------------------------
11/01/03 11/02/02 11/03/01
-----------------------------------
(In millions)
Sales ............................................ $1,049.7 $ 963.6 $ 945.3
Gross profit ..................................... 273.0 245.1 234.2
Gross profit percentage .......................... 26.0% 25.4% 24.8%
===================================
Selling, General and Administrative Expenses:
Fiscal 2003 selling, general and administrative expenses totaled $256.9 million
compared to $231.7 million in fiscal 2002 and $220.3 million in fiscal 2001.
Fiscal Years Ended
-----------------------------------
11/01/03 11/02/02 11/03/01
-----------------------------------
(In millions)
Sales ............................................ $1,049.7 $ 963.6 $ 945.3
Selling, general and administrative expenses ..... 256.9 231.7 220.3
Percent of sales ................................. 24.5% 24.0% 23.3%
===================================
Selling, general and administrative expenses increased as a percent of sales
when comparing fiscal 2003 to fiscal 2002. Increases in labor and related fringe
benefits, depreciation and pre-opening costs were partially offset by decreases
in occupancy and administration. The increase in labor and related fringe
benefits was the result of additional personnel for the new Woodbridge, Ewing,
North Brunswick and Hamilton stores, increased sales in service intensive
departments and contractual increases in fringe benefits. Depreciation increased
as the result of the purchase of equipment and leasehold improvements for the
four new locations and the new bakery facility, as well as six additional
capitalized real estate leases. Pre-opening costs were for the new Woodbridge,
Ewing, North Brunswick and Hamilton stores opened in December 2002, January
2003, May 2003 and October 2003, respectively. The decrease in occupancy was
primarily the result of several leases which were accounted for as operating
leases being replaced by capitalized leases and the decrease in certain fixed
costs as a percentage of sales. Administration decreased as several components
increased at a slower rate than the increase in sales. As a percentage of sales,
labor and related fringe benefits increased .32%, depreciation increased .16%
and pre-opening costs increased .14%. These increases were partially offset by
decreases in occupancy of .13% and administrative expense of .09%. Pre-opening
costs were $1,796,000 in fiscal 2003.
Selling, general and administrative expenses increased as a percent of sales
when comparing fiscal 2002 to fiscal 2001. Increases in labor and related fringe
benefits, depreciation, other store expenses, which include Wakefern support
services and debit/credit card and bank service fees, administration expense and
pre-opening costs were partially offset by decreases in occupancy and selling
expense. The increase in labor and related fringe benefits was the result of
additional personnel for the new Middletown store, increased sales in service
intensive departments and contractual increases in fringe benefit costs.
Depreciation expense increased as the result of the purchase of equipment and
leasehold improvements, as well as the capitalized real estate lease, for the
Middletown store opened in November 2001
8
2003 ANNUAL REPORT
and a full year of depreciation for the three locations remodeled in fiscal
2001. Other store expenses increased as the result of increases in debit/credit
card fees and the increased utilization of the cards by our customers.
Administration expense increased primarily due to increases in fringe benefit
costs. Pre-opening costs are related to the new Middletown store opened in
November 2001. Occupancy decreased due to the accounting for the new Middletown
store's lease as a capitalized lease. Under this method the costs of the lease
are expensed as depreciation and interest. Formerly, the old Middletown store's
lease was an operating lease and the costs of the lease were expensed as rent.
Selling expense declined as the result of changes in certain promotional
programs. As a percentage of sales, labor and related fringe benefits increased
..67%, depreciation increased .09%, other store expenses increased .05%,
administration increased .09% and pre-opening costs increased .02%. These
increases were partially offset by decreases in occupancy of .09% and selling
expense of .04%. Pre-opening costs were $246,000 in fiscal 2002.
Amortization expense increased in fiscal 2003 to $475,000 compared to $463,000
in fiscal 2002 and $576,000 in fiscal 2001. The increase in fiscal 2003, as
compared to fiscal 2002, was the result of increased amortization of deferred
financing costs partially offset by decreased amortization of deferred
escalation rents and the discontinuance of the amortization of goodwill as
required by SFAS No. 142. The decrease in fiscal 2002, as compared to fiscal
2001, was the result of decreased amortization of deferred escalation rents
partially offset by increased amortization of deferred financing costs. See Note
1 of Notes to Consolidated Financial Statements.
Interest Expense:
Interest expense totaled $12.4 million in fiscal 2003 compared to $8.2 million
in fiscal 2002 and $7.6 million in fiscal 2001. The increase in interest expense
for fiscal 2003 was due to an increase in average outstanding debt, including
increased capitalized lease obligations, and an increase in the average interest
rate paid on debt. The increase in fiscal 2002, as compared to fiscal 2001, was
due to an increase in average outstanding debt, including capitalized lease
obligations partially offset by a decrease in the average interest rate paid on
debt.
Income Taxes:
The Company recorded a tax provision of $1.5 million in fiscal 2003, $2.2
million in fiscal 2002 and $2.6 million in fiscal 2001. See Note 13 of Notes to
Consolidated Financial Statements.
Net Income:
The Company had net income of $2,283,000 or $2.26 per diluted share in fiscal
2003 compared to net income of $3,240,000 or $3.01 per diluted share in fiscal
2002. EBITDA for fiscal 2003 were $33,636,000 as compared to $28,076,000 in
fiscal 2002. The Company has not accrued for legal fees and expenses which may
be incurred in connection with the legal proceeding described in Note 14 of
Notes to Consolidated Financial Statements. Net income and EBITDA in fiscal 2004
may be adversely affected to the extent that the Company's defense costs and any
legal fees that may be awarded are not covered by directors and officers
liability insurance. See Note 14 of Notes to Consolidated Financial Statements.
Fiscal 2001 resulted in net income of $3,938,000 or $3.50 per diluted share.
EBITDA for fiscal 2001 were $27,342,000.
Weighted average diluted shares outstanding were 1,011,350 for fiscal 2003,
1,076,030 for fiscal 2002 and 1,124,192 for fiscal 2001.
EBITDA is presented because management believes that EBITDA is a useful
supplement to net income and other measurements under accounting principles
generally accepted in the United States since it is a meaningful measure of a
company's performance and ability to meet its future debt service requirements,
fund capital expenditures and meet working capital requirements. EBITDA is not a
measure of financial performance under accounting principles generally accepted
in the United States and should not be considered as an alternative to (i) net
income (or any other measure of performance under generally accepted accounting
principles) as a measure of performance or (ii) cash flows from operating,
investing or financing activities as an indicator of cash flows or as a measure
of liquidity. The following table reconciles reported net income to EBITDA:
Fiscal Years Ended
----------------------------------------
11/01/03 11/02/02 11/03/01
----------------------------------------
Net income .................................. $ 2,283,000 $ 3,240,000 $ 3,938,000
Add:
Interest expense, net ..................... 12,260,000 8,036,000 7,362,000
Income tax provision ...................... 1,522,000 2,162,000 2,626,000
Depreciation .............................. 17,096,000 14,175,000 12,840,000
Amortization .............................. 475,000 463,000 576,000
----------------------------------------
EBITDA ...................................... $33,636,000 $28,076,000 $27,342,000
========================================
9
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus
with respect to EITF Issue No. 02-16, "Accounting by a Customer (Including a
Reseller) for Consideration Received from a Vendor." EITF No. 02-16 provides
guidance for accounting for cash consideration given to a reseller from a
vendor. The Company already accounted for such consideration in accordance with
this EITF, and therefore adoption had no impact on the Company's consolidated
financial statements.
In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 requires recognition of a
liability for the costs associated with an exit or disposal activity when the
liability is incurred, as opposed to when the entity commits to an exit plan.
There was no impact from the adoption of this statement.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of SFAS No. 123," which
amends SFAS 123 to provide alternative methods of transition for an entity that
voluntarily changes to the fair value method of accounting for stock-based
compensation. It also amends the disclosure provisions of SFAS 123 to require
prominent disclosure about the effects on reported net income of an entity's
accounting policy decisions with respect to stock-based employee compensation.
Finally, SFAS 148 amends APB Opinion No. 28, "Interim Financial Reporting," to
require disclosure of those effects in interim financial statements.
Accordingly, the Company has adopted the applicable disclosure requirements of
this statement within this report. The Company continues to account for
stock-based compensation to its employees and directors using the intrinsic
value method prescribed by APB Opinion No. 25, and related interpretations. The
adoption of SFAS 148 had no impact on our financial position or results of
operations.
In November 2002, the FASB issued Financial Interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires initial
recognition and measurement of guarantees and is effective on a prospective
basis for guarantees issued or modified after December 31, 2002. Disclosures
required by FIN 45 are included within this report. This statement did not have
a material effect on the Company's financial statement in fiscal 2003.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." FIN 46 provides guidance relating to the identification of, and
financial reporting for, variable interest entities, as defined in the
Interpretation. There was no impact from the adoption of this statement.
On April 30, 2003, the FASB issued SFAS 149, "Amendment of SFAS 133 on
Derivative Instruments and Hedging Activities." SFAS 149 is intended to result
in more consistent reporting of contracts as either freestanding derivative
instruments subject to SFAS 133 in its entirety, or as hybrid instruments with
debt host contracts and embedded derivative features. In addition, SFAS 149
clarifies the definition of a derivative by providing guidance on the meaning of
initial net investments related to derivatives. SFAS 149 is effective for
contracts entered into or modified after June 30, 2003. Management does not
expect that the adoption of SFAS 149 will have an impact on its financial
position, results of operations or cash flows.
On May 15, 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS 150
provides guidance on classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. There was no
impact from the adoption of this statement.
10
2003 ANNUAL REPORT
Consolidated Balance Sheets
November 1, 2003 and November 2, 2002
2003 2002
------------------------
(In thousands)
ASSETS
Current assets
Cash and cash equivalents .......................................................................... $ 5,252 $ 4,280
Merchandise inventories ............................................................................ 49,224 43,707
Receivables and other current assets ............................................................... 12,043 11,214
Prepaid and refundable income taxes ................................................................ 3,404 257
Related party receivables--Wakefern ................................................................ 13,684 8,903
------------------------
83,607 68,361
------------------------
Property and equipment
Land ............................................................................................... 308 308
Buildings and improvements ......................................................................... 1,220 1,220
Leasehold improvements ............................................................................. 49,039 41,311
Equipment .......................................................................................... 142,021 114,077
Property under capital leases ...................................................................... 130,420 69,867
Construction in progress ........................................................................... 6,846 15,364
------------------------
329,854 242,147
Less accumulated depreciation and amortization ..................................................... 122,339 112,360
------------------------
207,515 129,787
------------------------
Other assets
Investments in related parties ..................................................................... 16,173 12,758
Goodwill ........................................................................................... 1,715 1,715
Intangibles assets, net ............................................................................ 1,098 1,290
Other .............................................................................................. 3,264 3,743
Related party receivables--Wakefern ................................................................ 1,874 1,735
------------------------
24,124 21,241
------------------------
$ 315,246 $ 219,389
========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt .................................................................. $ 7,916 $ 7,158
Current portion of long-term debt, related party ................................................... 920 629
Current portion of obligations under capital leases ................................................ 1,622 1,140
Current income taxes payable ....................................................................... 1,415 --
Deferred income taxes .............................................................................. 2,162 1,433
Accounts payable
Related party--Wakefern .......................................................................... 37,506 31,935
Others ........................................................................................... 14,622 14,078
Accrued expenses ................................................................................... 13,485 12,578
------------------------
79,648 68,951
------------------------
Long-term debt ....................................................................................... 55,335 35,745
Long-term debt, related party ........................................................................ 3,055 686
Obligations under capital leases ..................................................................... 122,159 63,606
Deferred income taxes ................................................................................ 2,749 1,142
Other long-term liabilities .......................................................................... 13,278 12,634
------------------------
196,576 113,813
------------------------
Commitments and Contingencies (Note 14)
Shareholders' equity
Common stock, $1.00 par; authorized 2,500,000 shares; issued 1,621,767 shares;
outstanding 986,867 shares November 1, 2003; 986,367 shares November 2, 2002 ....................... 1,622 1,622
Capital in excess of par ........................................................................... 4,168 4,168
Deferred compensation .............................................................................. (952) (1,324)
Retained earnings .................................................................................. 49,539 47,256
Accumulated other comprehensive income
Minimum pension liability ........................................................................ (3,164) (2,896)
------------------------
51,213 48,826
Less 634,900 shares November 1, 2003; 635,400 shares November 2, 2002, held in treasury, at cost ... 12,191 12,201
------------------------
39,022 36,625
------------------------
$ 315,246 $ 219,389
========================
See notes to consolidated financial statements.
11
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Fiscal Years Ended November 1, 2003, November 2, 2002 and November 3, 2001
2003 2002 2001
---------------------------------------
(In thousands, except per share data)
Sales ........................................................................ $1,049,653 $ 963,611 $ 945,301
Cost of goods sold ........................................................... 776,656 718,520 711,092
---------------------------------------
Gross profit ................................................................. 272,997 245,091 234,209
Selling, general and administrative expenses ................................. 256,932 231,653 220,283
---------------------------------------
Earnings from operations ..................................................... 16,065 13,438 13,926
---------------------------------------
Other income (expense)
Interest expense ........................................................... (12,399) (8,184) (7,627)
Interest income ............................................................ 139 148 265
---------------------------------------
(12,260) (8,036) (7,362)
---------------------------------------
Earnings before income tax provision ......................................... 3,805 5,402 6,564
Income tax provision ......................................................... (1,522) (2,162) (2,626)
---------------------------------------
Net income ................................................................... $ 2,283 $ 3,240 $ 3,938
=======================================
Per share information:
Net income per common share
Basic .................................................................... $ 2.31 $ 3.16 $ 3.54
=======================================
Diluted .................................................................. $ 2.26 $ 3.01 $ 3.50
=======================================
Weighted average shares outstanding
Basic .................................................................... 986,789 1,024,235 1,111,727
=======================================
Diluted .................................................................. 1,011,350 1,076,030 1,124,192
=======================================
See notes to consolidated financial statements.
12
2003 ANNUAL REPORT
Consolidated Statements of Shareholders' Equity
Fiscal Years Ended November 1, 2003, November 2, 2002 and November 3, 2001
Common Stock Accumulated
---------------------- Capital Other
Shares in Excess Deferred Comprehensive
Issued Amount of Par Compensation Income
------------------------------------------------------------------------
(In thousands, except per share data)
Balance--October 28, 2000 ............. 1,621,767 $ 1,622 $ 2,351 $ -- $ --
Grant of stock options ................ -- -- 1,817 (1,817) --
Amortization of deferred
compensation ........................ -- -- -- 121 --
Repurchase of common stock ............ -- -- -- -- --
Comprehensive income
Net income 2001 ..................... -- -- -- -- --
Other comprehensive income
Minimum pension liability,
net of deferred tax ................. -- -- -- -- (1,920)
------------------------------------------------------------------------
Comprehensive income ..................
Balance--November 3, 2001 ............. 1,621,767 1,622 4,168 (1,696) (1,920)
Amortization of deferred
compensation ........................ -- -- -- 372 --
Issuance of common stock .............. -- -- -- -- --
Repurchase of common stock ............ -- -- -- -- --
Comprehensive income
Net income 2002 ..................... -- -- -- -- --
Other comprehensive income
Minimum pension liability,
net of deferred tax ................. -- -- -- -- (976)
------------------------------------------------------------------------
Comprehensive income ..................
Balance--November 2, 2002 ............. 1,621,767 1,622 4,168 (1,324) (2,896)
Amortization of deferred
compensation ........................ -- -- -- 372 --
Issuance of common stock .............. -- -- -- -- --
Comprehensive income
Net income 2003 ..................... -- -- -- -- --
Other comprehensive income
Minimum pension liability,
net of deferred tax ................. -- -- -- -- (268)
------------------------------------------------------------------------
Comprehensive income ..................
Balance--November 1, 2003 ............. 1,621,767 $ 1,622 $ 4,168 $ (952) $ (3,164)
========================================================================
Treasury Stock
Comprehensive Retained ---------------------- Total
Income Earnings Shares Amount Equity
------------------------------------------------------------------------
(In thousands, except per share data)
Balance--October 28, 2000 ............. $ 40,078 (504,477) $ (6,629) $ 37,422
Grant of stock options ................ -- -- -- --
Amortization of deferred
compensation ........................ -- -- -- 121
Repurchase of common stock ............ -- (29,070) (1,068) (1,068)
Comprehensive income
Net income 2001 ..................... $ 3,938 3,938 -- -- 3,938
Other comprehensive income
Minimum pension liability,
net of deferred tax ................. (1,920) -- -- -- (1,920)
----------------------------------------------------------------------
Comprehensive income .................. $ 2,018
=========
Balance--November 3, 2001 ............. 44,016 (533,547) (7,697) 38,493
Amortization of deferred
compensation ........................ -- -- -- 372
Issuance of common stock .............. -- 1,000 20 20
Repurchase of common stock ............ -- (102,853) (4,524) (4,524)
Comprehensive income
Net income 2002 ..................... 3,240 3,240 -- -- 3,240
Other comprehensive income
Minimum pension liability,
net of deferred tax ................. (976) -- -- -- (976)
----------------------------------------------------------------------
Comprehensive income .................. $ 2,264
=========
Balance--November 2, 2002 ............. 47,256 (635,400) (12,201) 36,625
Amortization of deferred
compensation ........................ -- -- -- 372
Issuance of common stock .............. -- 500 10 10
Comprehensive income
Net income 2003 ..................... 2,283 2,283 -- -- 2,283
Other comprehensive income
Minimum pension liability,
net of deferred tax ................. (268) -- -- -- (268)
----------------------------------------------------------------------
Comprehensive income .................. $ 2,015
=========
Balance--November 1, 2003 ............. $ 49,539 (634,900) $ (12,191) $ 39,022
=====================================================
See notes to consolidated financial statements.
13
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Fiscal Years Ended November 1, 2003, November 2, 2002 and November 3, 2001
2003 2002 2001
----------------------------------
(In thousands)
Cash flows from operating activities
Net income ....................................................................... $ 2,283 $ 3,240 $ 3,938
Adjustments to reconcile net income to net cash from operating activities
Depreciation ................................................................... 17,096 14,175 12,840
Amortization, goodwill ......................................................... -- 140 140
Amortization, intangibles ...................................................... 192 211 211
Amortization, deferred financing costs ......................................... 577 342 285
Amortization, deferred rent escalation ......................................... (294) (230) (60)
Provision to value inventory at LIFO ........................................... 715 397 900
Deferred income taxes .......................................................... 2,515 946 (139)
Amortization of deferred compensation .......................................... 357 270 256
(Increase) decrease in
Merchandise inventories ...................................................... (6,232) (1,277) (962)
Receivables and other current assets ......................................... (505) (781) (507)
Prepaid and refundable income taxes .......................................... (3,147) (257) 398
Other assets ................................................................. 227 (453) 963
Related party receivables--Wakefern .......................................... (4,920) (75) (224)
Increase (decrease) in
Accounts payable ............................................................. 6,115 1,245 2,936
Income taxes payable ......................................................... 1,415 (704) 704
Other liabilities ............................................................ 1,463 (1,713) 2,534
----------------------------------
17,857 15,476 24,213
----------------------------------
Cash flows from investing activities
Cash paid for the purchase of property and equipment ............................. (29,267) (7,858) (11,718)
Cash paid for construction in progress ........................................... (4,336) (13,161) (5,329)
Decrease in construction advance due from landlords .............................. 4,975 1,932 --
Increase in construction advance due from landlords .............................. (6,128) (6,070) --
Deposits on equipment ............................................................ -- (829) --
Decrease in related party receivables--other ..................................... -- 18 169
----------------------------------
(34,756) (25,968) (16,878)
----------------------------------
Cash flows from financing activities
Proceeds from issuance of debt ................................................... 27,853 22,961 929
Principal payments under long-term debt .......................................... (7,505) (4,742) (5,344)
Principal payments under capital lease obligations ............................... (1,518) (1,060) (664)
Principal payments under long-term debt, related party ........................... (755) (897) (880)
Deferred financing and other costs ............................................... (214) (1,205) (66)
Proceeds from exercise of stock options .......................................... 10 20 --
Repurchase of common stock ....................................................... -- (4,524) (1,068)
----------------------------------
17,871 10,553 (7,093)
----------------------------------
Net change in cash and cash equivalents ............................................ 972 61 242
Cash and cash equivalents, beginning of year ....................................... 4,280 4,219 3,977
----------------------------------
Cash and cash equivalents, end of year ............................................. $ 5,252 $ 4,280 $ 4,219
==================================
Supplemental disclosures of cash paid
Interest ......................................................................... $ 12,374 $ 8,125 $ 8,046
Income taxes ..................................................................... 751 2,188 1,674
See notes to consolidated financial statements.
14
2003 ANNUAL REPORT
Notes to Consolidated Financial Statements
(Tabular dollars in thousands, except per share amounts)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Foodarama Supermarkets, Inc. and Subsidiaries (the "Company"), operate 24
ShopRite supermarkets, primarily in Central New Jersey. The Company is a member
of Wakefern Food Corporation ("Wakefern"), the largest retailer-owned food
cooperative in the United States.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to October 31. Fiscal
2003 consists of the 52 weeks ended November 1, 2003, fiscal 2002 consists of
the 52 weeks ended November 2, 2002 and fiscal 2001 consists of the 53 weeks
ended November 3, 2001.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Revenue Recognition
Revenue from the sales of products are recognized at the point of sale to the
customer. Discounts provided to customers through ShopRite coupons at the point
of sale are recognized as a reduction of sales as the products are sold.
Industry Segment
The Company operates in one industry segment, the retail sale of food and
nonfood products, primarily in the Central New Jersey region.
Use of Estimates
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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
Cash and cash equivalents, receivables and accounts payable are reflected in the
consolidated financial statements at carrying value which approximates fair
value because of the short-term maturity of these instruments. The fair value of
long-term debt was approximately equivalent to its carrying value, due to the
fact that the interest rates currently available to the Company for debt with
similar terms are approximately equal to the interest rates for its existing
debt. As the Company's investments in Wakefern can only be sold to Wakefern for
approximately the amount invested, it is not practicable to estimate the fair
value of such stock. Determination of the fair value of related party
receivables and long-term debt--related party is not practicable due to their
related party nature.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Merchandise Inventories
Merchandise inventories are stated at the lower of cost or market. At November
1, 2003 and November 2, 2002 approximately 81% and 82%, respectively, of
merchandise inventories, consisting primarily of grocery and nonfood items, are
valued by the LIFO (last-in, first-out) method of inventory valuation while the
remaining inventory items are valued by the FIFO (first-in, first-out) method
with cost being determined under the retail method.
Effective November 3, 2002, the Company changed from the 80% LIFO method to the
100% LIFO method. The effect of this change for the fiscal year ended November
1, 2003 was to decrease net income $54,000 ($.05 per diluted share). If the FIFO
method had been used for the entire inventory, inventory at November 1, 2003 and
November 2, 2002 would have been $2,735,000 and $2,020,000 higher, respectively.
Vendor Allowances and Rebates
The Company receives vendor allowances and rebates, including amounts received
as a pass through from Wakefern, related to the Company's buying and
merchandising activities. Vendor allowances and rebates are recognized as a
reduction in cost of sales when the related merchandise is sold or when the
contractual requirements have been satisfied.
15
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Tabular dollars in thousands, except per share amounts)
Property and Equipment
Property and equipment is stated at cost and is depreciated on a straight-line
basis over the estimated useful lives ranging between three and ten years for
equipment, the shorter of the useful life or lease term for leasehold
improvements, and twenty years for buildings. Repairs and maintenance are
expensed as incurred.
Property and equipment under capital leases are recorded at the lower of fair
market value or the net present value of the minimum lease payments. They are
depreciated on a straight-line basis over the shorter of the related lease terms
or its useful life.
Investments
The Company's investments in its principal supplier, Wakefern, and in
Insure-Rite, are stated at cost (see Note 4).
Goodwill
Effective November 3, 2002, the Company implemented Statement of Financial
Accounting Standards ("SFAS") No. 142, "Accounting for Goodwill and Other
Intangible Assets." Under SFAS 142, the Company ceased amortization of goodwill
and tests at least annually for impairment at the reporting unit level. The
Company has determined that it is contained within one reporting unit, and as
such, impairment is tested at the company level. During fiscal 2003, the Company
completed goodwill transition and impairment tests prescribed by SFAS 142 and
concluded that no impairment of goodwill existed.
Prior to the adoption of SFAS 142, the Company amortized goodwill over its
estimated useful life and evaluated goodwill for impairment in conjunction with
its other long-lived assets.
Intangible Assets
Other intangible assets consist of favorable operating lease costs and liquor
licenses. The favorable operating lease costs are being amortized on a
straight-line basis over the terms of the related leases, which range from 12 to
24 years. The liquor licenses are not amortized since they have been determined
to have an indefinite useful life. The Company reviews the value of its
intangible assets for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully
recoverable or that the useful lives of these assets are no longer appropriate.
Long-Lived Assets
The Company reviews the carrying values of its long-lived assets for possible
impairment whenever circumstances indicate the carrying amount of an asset may
not be recoverable. An impairment is recognized to the extent the sum of the
undiscounted estimated future cash flow expected to result from the use of the
asset is less than the carrying value.
Deferred Financing Costs
Deferred financing costs are being amortized over the life of the related debt
using the effective interest method.
Postretirement Benefits other than Pensions
The Company accrues for the cost of providing postretirement benefits,
principally supplemental income payments and limited medical benefits, over the
working careers of the officers in the plan.
Postemployment Benefits
The Company accrues for the expected cost of providing postemployment benefits,
primarily short-term disability payments, over the working careers of its
employees.
Advertising
Advertising costs are expensed as incurred. Advertising expense was $9.0, $8.6
and $8.8 million for the fiscal years 2003, 2002 and 2001, respectively.
Store Closing Costs
The costs, net of amounts expected to be recovered, are expensed upon the
closing of a store. It is reasonably possible that these estimates may change
from time to time. Operating results continue to be reported until a store is
closed.
Stock Option Plan
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations in accounting for its employee stock options. Under this method,
compensation cost is measured as the amount by which the market price of the
underlying stock exceeds the exercise price of the stock option at the date at
which both the number of options granted and the exercise price are known.
16
2003 ANNUAL REPORT
Notes to Consolidated Financial Statements
(Tabular dollars in thousands, except per share amounts)
In accordance with SFAS 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure," the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
SFAS 123, "Accounting for Stock-Based Compensation," to stock-based employee
compensation is as follows:
Fiscal Year Ending
------------------------------------------
November 1, November 2, November 3,
2003 2002 2001
------------------------------------------
Net income--as reported ............................................. $2,283 $3,240 $3,938
Add:
Stock-based employee compensation expense included
in reported net income, net of related tax effects .............. 223 223 73
Deduct:
Adjustment to total stock-based employee compensation
expense determined under the intrinsic value method
for expense determined under the fair value based
method, net of related tax effects .............................. (303) (302) (96)
------------------------------------
Pro forma net income ................................................ $2,203 $3,161 $3,915
====================================
Earnings per share:
Basic, as reported ................................................ $ 2.31 $ 3.16 $ 3.54
====================================
Basic, pro forma .................................................. $ 2.23 $ 3.09 $ 3.52
====================================
Diluted, as reported .............................................. $ 2.26 $ 3.01 $ 3.50
====================================
Diluted, pro forma ................................................ $ 2.18 $ 2.94 $ 3.48
====================================
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that statement. The fair
value for these options was estimated at $22.93 on the date of grant using the
Black-Scholes option-pricing 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 employee 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 existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The following weighted average assumptions were used for the year ended November
3, 2001:
Risk-free interest rate .................................. 5.0%
Expected volatility ...................................... 40.2%
Dividend yield ........................................... 0%
Expected life ............................................ 5 years
Earnings Per Share
Earnings per common share are based on the weighted average number of common
shares outstanding. Diluted earnings per share amounts are based on the weighted
average number of common shares outstanding, plus the incremental shares that
would have been outstanding upon the assumed exercise of all diluted stock
options, subject to antidilution limitations.
Recent Accounting Pronouncements
In November 2002, the Emerging Issues Task Force (EITF) reached a consensus with
respect to EITF Issue No. 02-16, "Accounting by a Customer (Including a
Reseller) for Consideration Received from a Vendor." EITF No. 02-16 provides
guidance for accounting for cash consideration given to a reseller from a
vendor. The Company already accounted for such consideration in accordance with
this EITF, and therefore adoption had no impact on the Company's consolidated
financial statements.
In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 requires recognition of a
liability for the costs associated with an exit or disposal activity when the
liability is incurred, as opposed to when the entity commits to an exit plan.
There was no impact from the adoption of this statement.
17
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Tabular dollars in thousands, except per share amounts)
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of SFAS No. 123," which
amends SFAS 123 to provide alternative methods of transition for an entity that
voluntarily changes to the fair value method of accounting for stock-based
compensation. It also amends the disclosure provisions of SFAS 123 to require
prominent disclosure about the effects on reported net income of an entity's
accounting policy decisions with respect to stock-based employee compensation.
Finally, SFAS 148 amends APB Opinion No. 28, "Interim Financial Reporting," to
require disclosure of those effects in interim financial statements.
Accordingly, the Company has adopted the applicable disclosure requirements of
this statement within this report. The Company continues to account for
stock-based compensation to its employees and directors using the intrinsic
value method prescribed by APB Opinion No. 25, and related interpretations. The
adoption of SFAS 148 had no impact on our financial position or results of
operations.
In November 2002, the FASB issued financial interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires initial
recognition and measurement of guarantees and is effective on a prospective
basis for guarantees issued or modified after December 31, 2002. Disclosures
required by FIN 45 are included within this report. This statement did not have
a material effect on the Company's financial statement in fiscal 2003.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." FIN 46 provides guidance relating to the identification of, and
financial reporting for, variable interest entities, as defined in the
Interpretation. There was no impact from the adoption of this statement.
On April 30, 2003, the FASB issued SFAS 149, "Amendment of SFAS 133 on
Derivative Instruments and Hedging Activities." SFAS 149 is intended to result
in more consistent reporting of contracts as either freestanding derivative
instruments subject to SFAS 133 in its entirety, or as hybrid instruments with
debt host contracts and embedded derivative features. In addition, SFAS 149
clarifies the definition of a derivative by providing guidance on the meaning of
initial net investments related to derivatives. SFAS 149 is effective for
contracts entered into or modified after June 30, 2003. Management does not
expect that the adoption of SFAS 149 will have an impact on its financial
position, results of operations or cash flows.
On May 15, 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS 150
provides guidance on classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. There was no
impact from the adoption of this statement.
Reclassifications
Certain reclassifications have been made to prior year financial statements in
order to conform to the current year presentation.
NOTE 2--CONCENTRATION OF CASH BALANCE
As of November 1, 2003 and November 2, 2002, cash balances of approximately
$2,547,000 and $1,241,000, respectively, were maintained in bank accounts
insured by the Federal Deposit Insurance Corporation (FDIC). These balances
exceed the insured amount of $100,000.
NOTE 3--RECEIVABLES AND OTHER CURRENT ASSETS
November 1, November 2,
2003 2002
--------------------------
Accounts receivable .............................................. $ 4,198 $ 4,247
Construction advance due from landlords .......................... 5,291 4,138
Prepaids ......................................................... 2,720 2,304
Deposits on equipment ............................................ -- 829
Rents receivable ................................................. 817 380
Less allowance for uncollectible accounts ........................ (983) (684)
------------------------
$ 12,043 $ 11,214
========================
NOTE 4--RELATED PARTY TRANSACTIONS
Wakefern Food Corporation
As required by Wakefern's By-Laws, all members of the cooperative are required
to make an investment in the common stock of Wakefern for each supermarket
operated ("Store Investment Program"), with the exact amount per store computed
in accordance with a formula based on the volume of each store's purchases from
Wakefern. The maximum required investment per store was $650,000 at
18
2003 ANNUAL REPORT
Notes to Consolidated Financial Statements
(Tabular dollars in thousands, except per share amounts)
November 1, 2003 and $550,000 at November 2, 2002 and November 3, 2001. During
fiscal 2003, the required investment in Wakefern increased, resulting in a total
increase in the investment by $2,088,000 and a related increase in the
obligations due Wakefern for the same amount. This increase in the obligation is
non-interest bearing and is payable over three years. The remaining increase in
the investment in fiscal 2003, and obligation due Wakefern for the same amount,
was due to the opening of two new stores. The obligations related to the two new
stores are non-interest bearing and are payable over seven years. The current
obligations due to Wakefern also include the last payment year relating to the
last increase in the required investment in Wakefern from fiscal 2000. The
Company has an investment in Wakefern of $15,093,000 at November 1, 2003 and
$11,805,000 at November 2, 2002, representing a 15.6% interest in Wakefern.
Wakefern is operated on a cooperative basis for its members. The shares of stock
in Wakefern are assigned to and held by Wakefern as collateral for any
obligations due Wakefern. In addition, any obligations to Wakefern are
personally guaranteed by certain of the Company's shareholders who also serve as
officers.
The Company also has an investment of approximately 8.4% in Insure-Rite, Ltd., a
company affiliated with Wakefern, which was $1,080,000 at November 1, 2003 and
$953,000 at November 2, 2002. During fiscal 2003, the Company's obligation to
invest in Insure-Rite, Ltd. increased $127,000, as a result of the opening of
two new stores. This obligation is payable over three years and is non-interest
bearing. Insure-Rite, Ltd. provides the Company with a portion of its liability
insurance coverage with the balance paid through Wakefern to private insurers.
Insurance premiums paid to Wakefern, including amounts due to Insure-Rite, Ltd.,
were $4,599,000, $4,364,000 and $3,819,000 for fiscal years 2003, 2002 and 2001,
respectively.
As of November 1, 2003 and November 2, 2002, the Company was obligated to
Wakefern for $3,975,000 and $1,315,000, respectively, for increases in its
required investments (see Note 8).
As a stockholder member of Wakefern, the Company earns a share of an annual
Wakefern patronage dividend. The dividend is based on the distribution of
operating profits on a pro rata basis in proportion to the dollar volume of
business transacted by each member with Wakefern during each fiscal year. It is
the Company's policy to accrue quarterly an estimate of the annual patronage
dividend. The Company reflects the patronage dividend as a reduction of the cost
of goods sold in the consolidated statements of operations. In addition, the
Company also receives from Wakefern other product incentives and rebates. For
fiscal 2003, 2002 and 2001, total patronage dividends and other product
incentives and rebates were $12,404,000, $10,706,000 and $9,909,000,
respectively.
At November 1, 2003 and November 2, 2002, the Company has current receivables
due from Wakefern of approximately $13,684,000 and $8,903,000, respectively,
representing patronage dividends, vendor rebates, coupons and other receivables
due in the ordinary course of business and a noncurrent receivable representing
a deposit of approximately $1,874,000 and $1,735,000, respectively.
In September 1987, the Company and all other stockholder members of Wakefern
entered into an agreement with Wakefern, as amended in 1992, which provides for
certain commitments and restrictions on all stockholder members of Wakefern. The
agreement contains an evergreen provision providing for an indefinite term and
is subject to termination ten years after the approval of 75% of the outstanding
voting stock of Wakefern. Under the agreement, each stockholder, including the
Company, agreed to purchase at least 85% of its merchandise in certain defined
product categories from Wakefern and, if it fails to meet such requirements, to
make payments to Wakefern based on a formula designed to compensate Wakefern for
its lost profit. Similar payments are due if Wakefern loses volume by reason of
the sale of one or more of a stockholder's stores, merger with another entity or
on the transfer of a controlling interest in the stockholder.
The Company fulfilled its obligation to purchase a minimum of 85% in certain
defined product categories from Wakefern for all periods presented. The
Company's merchandise purchases from Wakefern, including direct store delivery
vendors processed by Wakefern, approximated $715, $641 and $647 million for the
fiscal years 2003, 2002 and 2001, respectively.
Wakefern charges the Company for, and provides the Company with support services
in numerous administrative functions. These services include advertising,
insurance, supplies, technical support for communications and in-store computer
systems, equipment purchasing, and the coordination of coupon processing.
In addition to its investment in Wakefern, which carries only voting rights, the
Company's President serves as a member of Wakefern's Board of Directors and its
finance committee. Several of the Company's officers and employees also hold
positions on various Wakefern committees.
NOTE 5--GOODWILL AND OTHER INTANGIBLE ASSETS
As a result of the adoption of SFAS No. 142, the Company discontinued the
amortization of goodwill effective November 3, 2002. During fiscal 2003, the
Company completed goodwill transition and annual impairment tests prescribed by
SFAS 142 and concluded that no impairment of goodwill existed.
19
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Tabular dollars in thousands, except per share amounts)
The gross carrying amount and accumulated amortization of the Company's other
intangible assets as of November 1, 2003 and November 2, 2002 are as follows:
November 1, 2003 November 2, 2002
------------------------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------------------------------------------------------
Amortized intangible assets bargain leases ........... $3,918 $3,040 $3,918 $2,848
Unamortized intangible assets liquor licenses ........ 220 -- 220 --
---------------------------------------------------
Total ................................................ $4,138 $3,040 $4,138 $2,848
===================================================
Amortization expense recorded on the intangible assets for the years ended
November 1, 2003, November 2, 2002 and November 3, 2001 was $192,000, $211,000
and $211,000, respectively. As a result of the adoption of SFAS 142, there were
no changes to amortizable lives or amortization methods. The estimated
amortization expense for the Company's other intangible assets for the five
succeeding fiscal years is as follows:
Fiscal Year (In thousands)
----------------------------------------------------------------------------------------
2004 ...................................................................... $106
2005 ...................................................................... 106
2006 ...................................................................... 106
2007 ...................................................................... 106
2008 ...................................................................... 106
Thereafter ................................................................ 348
The following tables illustrate net income available to common shareholders and
earnings per share, exclusive of goodwill amortization expense in the prior
periods:
For the Years Ended
-------------------------------------------
November 1, November 2, November 3,
2003 2002 2001
-------------------------------------------
Reported net income ........................................ $ 2,283 $ 3,240 $ 3,938
Add: Goodwill amortization ................................. -- 211 211
---------------------------------------
Adjusted net income ........................................ $ 2,283 $ 3,451 $ 4,149
=======================================
Basic earnings per share:
Reported net income ...................................... $ 2.31 $ 3.16 $ 3.54
Add: Goodwill amortization ................................. -- .21 .19
---------------------------------------
Adjusted net income ........................................ $ 2.31 $ 3.37 $ 3.73
=======================================
Diluted earnings per share:
Reported net income ...................................... $ 2.26 $ 3.01 $ 3.50
Add: Goodwill amortization ................................. -- .20 .19
---------------------------------------
Adjusted net income ........................................ $ 2.26 $ 3.21 $ 3.69
=======================================
NOTE 6--ACCRUED EXPENSES
November 1, November 2,
2003 2002
--------------------------
Payroll and payroll related expenses ............................. $ 7,462 $ 6,848
Insurance ........................................................ 713 663
Sales, use and other taxes ....................................... 1,371 1,243
Interest ......................................................... 147 122
Employee benefits ................................................ 1,445 1,168
Occupancy costs .................................................. 1,205 1,445
Real estate taxes ................................................ 618 544
Other ............................................................ 524 545
----------------------
$13,485 $12,578
======================
20
2003 ANNUAL REPORT
Notes to Consolidated Financial Statements
(Tabular dollars in thousands, except per share amounts)
NOTE 7--LONG-TERM DEBT
Long-term debt consists of the following:
November 1, November 2,
2003 2002
----------------------------
Revolving note ...................... $24,592 $13,380
Term loan ........................... 20,000 25,000
Capital expenditure facility ........ 10,741 --
Other notes payable ................. 7,918 4,523
------------------------
63,251 42,903
Less current portion ................ 7,916 7,158
------------------------
$55,335 $35,745
========================
The Company has a revolving credit and term loan agreement, which was amended
and assigned to three financial institutions on January 7, 2000. On September
26, 2002 the Credit Agreement was further amended and restated (as amended, the
"Credit Agreement") and was last amended July 16, 2003. The Credit Agreement is
collateralized by substantially all of the Company's assets, provides for a
total commitment of $80,000,000 and matures December 31, 2007. The Credit
Agreement provides the Company with the option to convert portions of the debt
to Eurodollar loans, as defined in the Credit Agreement, which have interest
rates indexed to LIBOR. The Credit Agreement consists of a Revolving Note, a
Term Loan and a Capital Expenditure Facility.
The Revolving Note has an overall availability of $35,000,000, not to exceed 65%
of eligible inventory, and provides for availability of up to $4,500,000 for
letters of credit. On July 21, 2003 this provision of the Credit Agreement was
amended to allow the Company the ability to borrow $3,000,000 in excess of the
borrowing base limitation, subject to available in transit cash, as defined.
This provision expires December 31, 2003. The Revolving Note bears interest at
prime plus 1.50% or LIBOR plus 3.25%. At November 1, 2003, $14,000,000 of the
Revolving Note was under a one-month Eurodollar rate of 4.37% maturing November
2003, which was renewed through January 2004.
The Company had letters of credit outstanding of $726,004 and $497,004 at
November 1, 2003 and November 2, 2002, respectively. Subsequently, on November
24, 2003 the Company entered into another letter of credit for $667,000. A
commitment fee of .5% is charged on the unused portion of the Revolving Note.
Available credit under the Revolving Note was $3,382,000 and $10,000,000 at
November 1, 2003 and November 2, 2002. As of November 1, 2003 and November 2,
2002, $9,435,000 and $7,264,000 of cash receipts on hand or in transit were
restricted for application against the Revolving Note balance.
The Term Loan is $25,000,000 and is payable in quarterly principal installments
of $1,250,000 commencing January 1, 2003 through October 1, 2007. Interest is
payable monthly at prime plus 2.00% or LIBOR plus 3.75%. At November 1, 2003,
$17,500,000 was under a six month Eurodollar rate of 4.91% maturing April 2004
and $2,500,000 was under a one month Eurodollar rate of 4.87% maturing November
2003, which was renewed through December 2003 at 4.87%. At November 2, 2002,
$22,500,000 of the Term Loan balance was under a six month Eurodollar rate of
5.41% and $2,500,000 was under a one month Eurodollar rate of 5.55%.
The $20,000,000 Capital Expenditure Facility provides for a non-restoring
commitment to fund equipment purchases for five new stores through December 31,
2004, with a maximum of $4,000,000 per store. Interest only is due monthly at
prime plus 2.00% or LIBOR plus 3.75% for any amount utilized through December
31, 2004. Amounts borrowed through December 31, 2004 will be converted to a term
loan with interest payable monthly at rates described above and fixed quarterly
principal payments, commencing April 1, 2005, calculated on a seven year
amortization schedule. A balloon payment is due at December 31, 2007 for amounts
outstanding on the term loans. A commitment fee of .75% is charged on the unused
portion of the Capital Expenditure Facility. At November 1, 2003, the Company
had $10,741,000 outstanding and no amount was outstanding at November 2, 2002.
At November 1, 2003, $9,000,000 was under a three month Eurodollar rate of 4.90%
maturing January 2004 and $1,741,000 was at prime plus 2%. Subsequent to
November 1, 2003, the entire Capital Expenditure Facility was converted to a six
month Eurodollar rate of 4.98% maturing July 2004. At November 1, 2003 and
November 2, 2002 the Company had $9,259,000 and $20,000,000 available,
respectively, under this facility.
Subsequently, on December 23, 2003 the Company drew down an additional
$1,259,000 on the Capital Expenditure Facility.
The Agreement places restrictions on dividend payments and requires the
maintenance of debt service coverage and leverage ratios, as well as limitations
on capital expenditures and new debt. For the years ended November 1, 2003 and
November 2, 2002, the Company exceeded the limit by which pension plan
liabilities may exceed plan assets of its defined benefit plans (see Note 15),
which was waived by the financial institutions.
The prime rate at November 1, 2003 and November 2, 2002 was 4.00% and 4.75%,
respectively.
21
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Tabular dollars in thousands, except per share amounts)
Other Notes Payable
Included in other notes payable are the following:
November 1, November 2,
2003 2002
-------------------------
Note payable to a financing institution, maturing October
2004, payable at $56,000 per month plus interest at 7.26%,
collateralized by related equipment .............................. $ 663 $1,330
Note payable to a financing institution, maturing April 2005,
payable at $46,000 per month including interest at 7.44%,
collateralized by related equipment .............................. 742 1,204
Note payable to a financing institution, maturing January 2010
payable at $59,000 per month including interest at 6.45%,
collateralized by related equipment .............................. 3,652 --
Note payable to a financing institution, maturing October 2008
payable at $37,000 per month including interest at 6.20%,
collateralized by related equipment .............................. 1,900 --
Various equipment loans maturing through November 2004,
payable at an aggregate monthly payment of $152,000
including interest at rates ranging from 5.79% to 9.02%,
collateralized by various equipment .............................. 961 1,989
--------------------
Total other notes payable .......................................... $7,918 $4,523
====================
Aggregate maturities of long-term debt are as follows:
Fiscal Year
-----------------------------------------------------------------------
2004 .................................................... $ 7,916
2005 .................................................... 7,304
2006 .................................................... 7,471
2007 .................................................... 7,532
2008 .................................................... 32,176
Thereafter .............................................. 852
NOTE 8--LONG-TERM DEBT, RELATED PARTY
As of November 1, 2003 and November 2, 2002, the Company was indebted for
investments in Wakefern in the amount of $3,975,000 and $1,315,000,
respectively. The debt is non-interest bearing and payable in scheduled
installments as follows:
Fiscal Year
-----------------------------------------------------------------------
2004 .................................................... $920
2005 .................................................... 783
2006 .................................................... 845
2007 .................................................... 686
2008 .................................................... 283
Thereafter .............................................. 458
NOTE 9--OTHER LONG-TERM LIABILITIES
November 1, November 2,
2003 2002
------------------------
Deferred escalation rent ................... $ 4,128 $ 4,422
Minimum pension liability (Note 15) ........ 5,516 5,119
Postretirement benefit cost ................ 2,929 2,393
Other ...................................... 705 700
-------------------
$13,278 $12,634
===================
22
2003 ANNUAL REPORT
Notes to Consolidated Financial Statements
(Tabular dollars in thousands, except per share amounts)
NOTE 10--LONG-TERM LEASES
Capital Leases
November 1, November 2,
2003 2002
------------------------
Real estate ............................... $130,420 $ 69,867
Less accumulated amortization ............. 20,594 16,029
----------------------
$109,826 $ 53,838
======================
The following is a schedule by year of future minimum lease payments under
capital leases, together with the present value of the net minimum lease
payments, as of November 1, 2003:
Fiscal Year
-----------------------------------------------------------------------
2004 .................................................... $ 13,698
2005 .................................................... 13,803
2006 .................................................... 13,857
2007 .................................................... 13,453
2008 .................................................... 13,509
Thereafter .............................................. 232,729
--------
Total minimum lease payments ............................ 301,049
Less amount representing interest ....................... 177,268
--------
Present value of net minimum lease payments ............. 123,781
Less current maturities ................................. 1,622
--------
Long-term maturities .................................... $122,159
========
The Company is also committed to leases for two new stores currently under
construction. The minimum annual rental commitment for these two leases is
approximately $2,486,000 for twenty-five years. These leases are anticipated to
commence in fiscal 2004 and be recorded as capital leases.
Operating Leases
The Company is obligated under operating leases for rent payments expiring at
various dates through 2028. Certain leases provide for the payment of additional
rentals based on certain escalation clauses and seven leases require a further
rental payment based on a percentage of the stores' annual sales in excess of a
stipulated minimum. Percentage rent expense was $95,000, $156,000 and $268,000
for the fiscal years 2003, 2002 and 2001, respectively. Under the majority of
the leases, the Company has the option to renew for additional terms at
specified rentals.
Total rental expense for all operating leases consists of:
Fiscal 2003 Fiscal 2002 Fiscal 2001
---------------------------------------
Land and buildings ........... $ 10,183 $ 10,690 $ 11,020
Less subleases ............... (3,586) (3,147) (3,089)
------------------------------------
$ 6,597 $ 7,543 $ 7,931
====================================
The minimum rental commitments under all noncancellable operating leases reduced
by income from noncancellable subleases at November 1, 2003, are as follows:
Income from
Land and Noncancellable Net Rental
Fiscal Year Buildings Subleases Commitment
-----------------------------------------------------------------------
2004 ...................... $ 9,968 $ 2,405 $ 7,563
2005 ...................... 9,839 2,056 7,783
2006 ...................... 7,965 1,719 6,246
2007 ...................... 6,897 1,317 5,580
2008 ...................... 6,169 916 5,253
Thereafter ................ 27,904 826 27,078
-------------------------------------
$68,742 $ 9,239 $59,503
=====================================
23
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Tabular dollars in thousands, except per share amounts)
The Company is presently leasing one of its supermarkets, a garden center and
liquor store from a partnership in which the Chairman of the Board has a
controlling interest, at an annual aggregate rental of $753,000, $744,000 and
$736,000 for the fiscal years 2003, 2002 and 2001, respectively.
NOTE 11--STOCK OPTION PLAN
On April 4, 2001, the Company's shareholders approved the Foodarama
Supermarkets, Inc. 2001 Stock Incentive Plan (the "2001 Plan"). The 2001 Plan
replaces the Foodarama Supermarkets, Inc. 1995 Stock Option Plan under which no
options were granted.
The 2001 Plan originally provided for the issuance of up to 150,000 shares of
Foodarama Supermarkets, Inc. Common Stock (subject to anti-dilution adjustment).
On May 8, 2002 the Company's shareholders approved an amendment increasing the
number of shares reserved for issuance under the 2001 Plan to 215,000 shares. No
more than 50,000 shares of stock may be awarded to any one participant under the
2001 plan (see Note 14).
The types of awards that the Administrator may grant under the 2001 Plan are
stock options, stock appreciation rights, restricted and non-restricted stock
awards, phantom stock, performance awards, other stock grants or any combination
of these awards.
On August 8, 2001 (the "2001 Grant Date"), the Company granted 107,500 shares as
stock options and 11,000 shares in the form of Stock Performance Units (the
"Units"). On September 12, 2002 (the "2002 Grant Date"), the Company granted an
additional 3,800 shares in the form of Stock Performance Units. The Units
represent deferred compensation based upon the increase or decrease in the
market value of the Company's common stock during the grantee's employment.
The stock options consist of 50,000 shares granted to each of the Chairman of
the Board and the President of the Company and vest quarterly from the grant
date over a five-year period. The remaining 7,500 shares were granted to certain
officers and elected board members of the Company and vest, per individual, 250
shares at the Grant Date and 250 shares each year thereafter for the next two to
three years. During fiscal 2003, the Company's Chairman of the Board returned
10,000 stock options to the Company as part of a settlement of a derivative
shareholder lawsuit (see Note 14).
The Units are payable in cash only. The Units granted on the 2001 Grant Date
were granted to certain officers and senior management of the Company and vest,
per individual, 250 units at the Grant Date and 250 units thereafter, for the
next one to three years. Units granted at the 2002 Grant Date were granted to
certain management personnel and vest, per individual, between 200 and 250 units
at the 2002 Grant Date with the remaining units vesting over the next year.
The term of the stock options and Units granted expire ten years after the grant
date. The exercise price of the options and the market price of the Company's
Common Stock at the date of grant were $19.60 and $36.50, respectively, for the
options and Units granted on August 8, 2001. The exercise price and market price
for the Units granted September 12, 2002 was $25.00. At the 2001 Grant Date, the
Company recorded deferred compensation expense and a related adjustment to
capital in excess of par of $1,817,000 relating to the stock options granted.
For the years ended November 1, 2003, November 2, 2002 and November 3, 2001, the
Company realized compensation expense relating to the stock option plan of
$372,000, $372,000 and $121,000, respectively. For the years ended November 1,
2003, November 2, 2002 and November 3, 2001, the Company realized compensation
income of $15,000 and compensation expense of $72,000 and $135,000,
respectively, related to the Units granted, based on the market price of the
Company's common stock of $25.25 at November 1, 2003, $27.00 at November 2, 2002
and $40.75 at November 3, 2001.
24
2003 ANNUAL REPORT
Notes to Consolidated Financial Statements
(Tabular dollars in thousands, except per share amounts)
The following table summarizes Stock Option and Units activity:
Options Outstanding
----------------------------------------------------------------------------
Stock Options Stock Performance Units
----------------------------------------------------------------------------
Weighted Weighted
Exercise Average Exercise Average Stock Options and
Price Exercise Price Exercise Units Available
Shares Per Share Price Units Per Share Price for Grant
-------------------------------------------------------------------------------------------------
Balance October 28, 2000 ...... -- -- -- -- -- -- --
Reserved .................... 150,000
Granted ..................... 107,500 $19.60 $19.60 11,000 $19.60 $19.60 (118,500)
Exercised ................... -- -- -- -- -- --
------------------------------------------------------------------------------------------------
Outstanding November 3, 2001 .. 107,500 19.60 19.60 11,000 19.60 19.60 31,500
------------------------------------------------------------------------------------------------
Additional shares reserved .. 65,000
Granted ..................... -- -- -- 3,800 25.00 25.00 (3,800)
Exercised ................... (1,000) 19.60 19.60 (8,000) 19.60 19.60
------------------------------------------------------------------------------------------------
Outstanding November 2, 2002 .. 106,500 $19.60 $19.60 6,800 $19.60 to $25.00 $22.62 92,700
------------------------------------------------------------------------------------------------
Reserved .................... --
Granted ..................... -- -- -- -- -- -- --
Returned .................... (10,000) -- -- -- -- -- 10,000
Exercised ................... (500) 19.60 19.60 -- -- -- --
------------------------------------------------------------------------------------------------
Outstanding November 1, 2003 .. 96,000 $19.60 $19.60 6,800 $19.60 to $25.00 $22.62 102,700
================================================================================================
Options exercisable at:
November 3, 2001 ............ 2,000 $19.60 $19.60 4,750 $19.60 $19.60
November 2, 2002 ............ 23,000 $19.60 $19.60 2,900 $19.60 to $25.00 $22.62
November 1, 2003 ............ 44,500 $19.60 $19.60 6,550 $19.60 to $25.00 $22.62
Following is a summary of the status of stock options outstanding at November 1,
2003:
Outstanding Options Exercisable Options
------------------------------------------------ ------------------------------
Weighted Average
Remaining Weighted Average Weighted Average
Exercise Price Number Contractual Life Exercise Price Number Exercise Price
----------------------------------------------------------------------------------------------------------------------------
$19.60 ............................ 96,000 7.75 years $19.60 44,500 $19.60
NOTE 12--SHAREHOLDERS' EQUITY
On May 11, 2001, the Board of Directors authorized the Company to repurchase, in
either open market or private transactions, up to $3,000,000 of its common
stock. During the fiscal year ended November 2, 2002 the Board of Directors
increased the authorized amount of common stock the Company could repurchase to
$5,600,000. There were no shares repurchased during the fiscal year ended
November 1, 2003. During the fiscal year ended November 2, 2002 the Company
repurchased 102,853 shares of its common stock at an aggregate cost of
$4,523,670. During the fiscal years ended November 1, 2003 and November 2, 2002
the Company issued 500 and 1,000 shares, respectively, of common stock due to
the exercise of stock options, in accordance with the provisions of its 2001
Stock Incentive Plan (see Note 11).
NOTE 13--INCOME TAXES
The income tax provisions consist of the following:
Fiscal 2003 Fiscal 2002 Fiscal 2001
-----------------------------------------
Federal
Current ................................. $(3,000) $ 1,035 $ 2,247
Deferred ................................ 3,562 688 (212)
State and local
Current ................................. 2,007 181 518
Deferred ................................ (1,047) 258 73
------------------------------------
$ 1,522 $ 2,162 $ 2,626
====================================
25
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Tabular dollars in thousands, except per share amounts)
The following tabulations reconcile the federal statutory tax rate to the
effective rate:
Fiscal 2003 Fiscal 2002 Fiscal 2001
--------------------------------------
Tax provision at the statutory rate ................................... 34.0% 34.0% 34.0%
State and local income tax provision, net of federal income tax ....... 5.9% 5.9% 5.9%
Goodwill amortization not deductible for tax purposes ................. -- .9% 1.0%
Tax credits ........................................................... (1.7)% (.3)% (.2)%
Other ................................................................. 1.8% (.5)% (.7)%
------------------------------
Actual tax provision .................................................. 40.0% 40.0% 40.0%
==============================
Net deferred tax assets and liabilities consist of the following:
November 1, November 2,
2003 2002
------------------------------
Current deferred tax assets
Deferred revenue and gains on sale/leaseback ......................... $ 94 $ 144
Allowances for uncollectible receivables ............................. 409 293
Inventory capitalization ............................................. 134 11
Closed store reserves ................................................ 255 279
Vacation accrual ..................................................... 606 669
Accrued post-employment .............................................. 184 162
Accrued post-retirement .............................................. 1,186 969
Other ................................................................ 37 37
---------------------------
2,905 2,564
---------------------------
Current deferred tax liabilities
Prepaids ............................................................. (417) (326)
Patronage dividend receivable ........................................ (3,476) (2,603)
Accelerated real estate taxes ........................................ (206) (217)
Prepaid pension ...................................................... (968) (851)
---------------------------
(5,067) (3,997)
---------------------------
Current deferred tax liability ......................................... $ (2,162) $ (1,433)
===========================
Noncurrent deferred tax assets
Lease obligations .................................................... $ 5,581 $ 4,348
State tax credits .................................................... 1,368 --
Minimum pension liability ............................................ 2,110 1,931
Stock options and deferred compensation .............................. 350 207
State loss carryforwards ............................................. 115 85
---------------------------
9,524 6,571
Valuation allowance .................................................. (85) (85)
---------------------------
9,439 6,486
---------------------------
Noncurrent deferred tax liabilities
Depreciation ......................................................... (10,845) (6,529)
Pension obligations .................................................. (994) (750)
Other ................................................................ (349) (349)
---------------------------
(12,188) (7,628)
---------------------------
Noncurrent deferred tax liability ...................................... $ (2,749) $ (1,142)
===========================
At November 1, 2003 and November 2, 2002, minimum pension liability of
$2,110,000 and $1,931,000, respectively, was charged against accumulated other
comprehensive income (see Note 15).
At November 1, 2003, the Company had State net operating loss carryforwards of
approximately $1,326,000 expiring through October 2012, of which $466,000 may
not be utilized until fiscal 2005. A valuation allowance has been provided for
net operating losses that are not expected to be utilized.
26
2003 ANNUAL REPORT
Notes to Consolidated Financial Statements
(Tabular dollars in thousands, except per share amounts)
Effective beginning in fiscal year 2003, the Company is subject to the New
Jersey Alternative Minimum Assessment ("AMA") that was part of the Business Tax
Reform Act passed in the State of New Jersey. Taxpayers are required to pay the
AMA, which is based upon either New Jersey Gross Receipts or New Jersey Gross
Profits, if the AMA exceeds the tax based on taxable net income. An election
must be made in the first year to use either the Gross Profits or Gross Receipts
method and must be kept in place for five years, at which time the election may
be changed.
At November 1, 2003, the Company had a New Jersey AMA tax credit carryforward of
$1,976,000. The utilization of this credit may commence in fiscal 2007 and at
that time the amount of credit may be limited based on taxable net income. In
addition, the Company has other state tax credit carryforwards of $98,000.
NOTE 14--COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is involved in various legal actions and claims arising in the
ordinary course of business. Management believes that the outcome of any such
litigation and claims will not have a material effect on the Company's financial
position or results of operations.
Shareholder Lawsuit
On March 27, 2002, certain shareholders (the "Plaintiffs") filed a derivative
action against the Company, as nominal defendant, and against all five members
of the Board of Directors (together, the "Defendants"), in their capacities as
directors and/or officers of the Company. The lawsuit alleges that the
Defendants breached their fiduciary duties to the Company and its shareholders
and sought to "enrich and entrench themselves at the shareholders' expense"
through their previous recommendation, implementation and administration of the
2001 Stock Incentive Plan (the "2001 Plan"), which was approved by the Company's
shareholders on April 4, 2001, and by proposing an amendment to the 2001 Plan to
increase the number of shares of Common Stock available for issuance by 65,000
shares and an amendment to the Company's amended and restated certificate of
incorporation (the "Certificate of Incorporation") to create a classified Board
of Directors consisting of five classes of directors, with only one class
standing for election in any year for a five-year term. The shareholders of the
Company approved the amendments to the 2001 Plan and the Certificate of
Incorporation on May 8, 2002 (see Note 11).
On July 23, 2003, the Superior Court of New Jersey, Middlesex County (the
"Court"), approved the settlement of the shareholder derivative action filed by
the Plaintiffs. Pursuant to the terms of the settlement, 1) the Company's
five-year classified board has been eliminated and the Defendants have agreed
not to submit any proposal to the shareholders of the Company in connection with
the implementation of a classified board for a five-year period ending on July
22, 2008; 2) the 2001 Plan was amended so that the maximum number of shares of
the Company's common stock that can be awarded to any individual thereunder
shall be 50,000; and 3) the 2001 Plan was amended to require that the exercise
price of any options or other stock-based compensation granted thereunder shall
be equal to the closing market price of the Company's common stock on the date
of grant. In addition, the Company's Chairman of the Board returned to the
Company 10,000 stock options previously awarded to him under the 2001 Plan.
The Plaintiffs have applied to the Court for an award of attorneys' fees in the
amount of $975,000. The Company believes that the amount of the award of
attorneys' fees sought by the Plaintiffs is unreasonable based upon the outcome
of the litigation, and the Company will vigorously contest the Plaintiffs' fee
application. The Company's directors and officers liability insurance carrier
has reserved its rights under the Company's directors and officers liability
insurance policy with respect to the claims made in the derivative action,
including claims for the Plaintiffs' attorneys' fees and costs of defense, and
has preliminarily advised the Company that certain of the claims made in the
derivative action and related legal expenses are not, in the insurance carrier's
view, covered by the policy. It is not possible, at this juncture, to predict
the amount of fees that may be awarded to Plaintiffs or whether or to what
extent any such fees and the Company's legal expenses for defending the
derivative action will be covered by its directors and officers liability
insurance policy. Accordingly, the Company has not accrued for legal fees and
expenses which may be incurred in connection with this matter in the statements
of operations for the fiscal year ended November 1, 2003.
Commitments
Purchase Commitments
At November 1, 2003, the Company had capital commitments (net of landlord
contributions of $11,018,000) of $5,981,000 for leasehold improvements and
$13,171,000 for equipment.
Employment Agreement
On November 2, 2003, the Company entered into a two-year employment agreement
(the "Agreement") with its Chairman of the Board. The Agreement provides for an
annual salary of $325,000 in fiscal 2004 and $275,000 in fiscal 2005. The
Agreement also provides for participation in the Company's incentive
compensation plan and 401(k) plan through the term of the Agreement. In
addition, health and life insurance and postretirement benefits will be provided
during the lifetime of both the Chairman of the Board or his spouse.
27
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Tabular dollars in thousands, except per share amounts)
Guarantees
The Company remains contingently liable under leases assumed by third parties.
As of November 1, 2003, the minimum annual rental under these leases amounted to
approximately $1,633,000 expiring at various dates through 2011. The Company has
not experienced and does not anticipate any material nonperformance by such
third parties.
NOTE 15--RETIREMENT AND BENEFIT PLANS
Defined Benefit Plans
The Company sponsors two defined benefit pension plans covering administrative
personnel and members of a union. Employees covered under the administrative
pension plan earned benefits based upon a percentage of annual compensation and
could make voluntary contributions to the plan. Employees covered under the
union pension benefit plan earn benefits based on a fixed amount each year of
service. The Company's funding policy is to pay at least the minimum
contribution required by the Employee Retirement Income Security Act of 1974.
The plans' assets consist primarily of publicly traded stocks and fixed income
securities. As of November 1, 2003 and November 2, 2002, the plans' assets
included common stock of the Company with a fair value of $939,000 and
$1,004,000, respectively.
A summary of the plans' funded status and the amounts recognized in the
consolidated balance sheets as of November 1, 2003 and November 2, 2002 follows:
November 1, November 2,
2003 2002
-----------------------------
Change in benefit obligation
Benefit obligation--beginning of year ............................................ $(7,807) $(7,178)
Service cost ..................................................................... (117) (94)
Interest cost .................................................................... (529) (511)
Actuarial gain (loss) ............................................................ (1,070) (625)
Benefits paid .................................................................... 637 601
-------------------------
Benefit obligation--end of year .................................................. (8,886) (7,807)
-------------------------
Change in plan assets
Fair value of plan assets--beginning of year ..................................... 4,788 5,913
Actual return (loss) on plan assets .............................................. 303 (995)
Employer contributions ........................................................... 1,307 675
Benefits paid .................................................................... (637) (601)
Administrative expense ........................................................... -- (204)
-------------------------
Fair value of plan assets--end of year ........................................... 5,761 4,788
-------------------------
Funded status ...................................................................... (3,125) (3,019)
Unrecognized prior service cost .................................................... 242 292
Unrecognized net loss from past experience different from that assumed ............. 5,274 4,827
Unrecognized transition asset ...................................................... -- --
Adjustment required to recognize minimum liability ................................. (5,516) (5,119)
-------------------------
Accrued pension cost ............................................................... $(3,125) $(3,019)
=========================
Pension expense consists of the following:
Fiscal 2003 Fiscal 2002 Fiscal 2001
--------------------------------------------
Service cost--benefits earned during the period ........................ $ 117 $ 94 $ 63
Interest expense on benefit obligation ................................. 529 511 454
Expected return on plan assets ......................................... (388) (475) (488)
Settlement (gain) loss recognized ...................................... 318 350 --
Amortization of prior service costs .................................... 49 37 37
Amortization of unrecognized net loss (gain) ........................... 391 197 67
Amortization of unrecognized transition obligation (asset) ............. -- (5) (5)
---------------------------------------
Total pension expense .................................................. $ 1,016 $ 709 $ 128
=======================================
The discount rate used in determining the actuarial present value of the
projected benefit obligation ranged from 6.25% to 7.00% at November 1, 2003, and
7.00% to 7.25% at November 2, 2002. The expected long-term rate of return on
plan assets was 8.00% at November 1, 2003 and November 2, 2002.
On September 30, 1997, the Company adopted an amendment to freeze all future
benefit accruals relating to the plan covering administrative personnel. A
curtailment gain of $55,000 was recorded related to this amendment.
28
2003 ANNUAL REPORT
Notes to Consolidated Financial Statements
(Tabular dollars in thousands, except per share amounts)
At November 1, 2003 and November 2, 2002, the accumulated benefit obligation
exceeded the fair value of the plans' assets in both defined benefit plans. The
provisions of Statement of Financial Accounting Standards No. 87 ("SFAS 87"),
"Employers' Accounting for Pensions," require recognition in the balance sheet
of an additional minimum liability and related intangible asset for pension
plans with accumulated benefits in excess of plan assets; any portion of such
additional liability which is in excess of the plans' prior service cost is
reflected as a direct charge to equity, net of related tax benefit. Accordingly,
at November 1, 2003 and November 2, 2002, a liability of $5,516,000 and
$5,119,000, respectively, was included in other long-term liabilities, an
intangible asset equal to the prior service cost of $242,000 and $292,000,
respectively, is included in other assets, and a charge of $3,164,000 and
$2,896,000, net of deferred taxes of $2,110,000 and $1,931,000, respectively, is
reflected as a minimum pension liability in shareholders' equity in the
Consolidated Balance Sheet.
Multi-Employer Plans
Health, welfare, and retirement expense was approximately $17,230,000 in fiscal
2003, $13,240,000 in fiscal 2002 and $10,440,000 in fiscal 2001, under plans
covering union employees. Such plans are administered through the unions
involved. Under Federal legislation regarding such pension plans, a company is
required to continue funding its proportionate share of a plan's unfunded vested
benefits in the event of withdrawal (as defined by the legislation) from a plan
or plan termination. The Company participates in a number of these pension plans
and may have a potential obligation as a participant. The information required
to determine the total amount of this contingent obligation as well as the total
amount of accumulated benefits and net assets of such plans, is not readily
available. However, the Company has no present intention of withdrawing from any
of these plans, nor has the Company been informed that there is any intention to
terminate such plans.
401(k)/Profit Sharing Plan
The Company maintains an employee 401(k) Savings Plan (the "Plan") for all
qualified non-union employees. Employees are eligible to participate in the Plan
after completing one year of service (1,000 hours) and attaining age 21.
Employee contributions are discretionary to a maximum of 30% of eligible
compensation, to a maximum of $12,000. The Company matches 25% of the employees'
contributions up to 6% of employee compensation. The Company has the right to
make additional discretionary contributions, which are allocated to each
eligible employee in proportion to their eligible compensation, which was 2.00%
for fiscal years 2003, 2002 and 2001. 401(k) expense for the fiscal years 2003,
2002 and 2001 was approximately $715,000, $630,000 and $607,000, respectively.
NOTE 16--OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
Postretirement Benefits
The Company will provide certain current officers and provides former officers
with supplemental income payments and limited medical benefits during
retirement. The Company recorded an estimate of deferred compensation payments
to be made to the officers based on their anticipated period of active
employment and the relevant actuarial assumptions at November 1, 2003 and
November 2, 2002, respectively.
A summary of the plan's funded status and the amounts recognized in the balance
sheets as of November 1, 2003 and November 2, 2002, follows:
November 1, November 2,
2003 2002
-----------------------------
Change in benefit obligation
Benefit obligation--beginning of year ............................................ $(4,656) $(3,380)
Service cost ..................................................................... (125) (106)
Interest cost .................................................................... (271) (238)
Actuarial gain (loss) ............................................................ 13 (979)
Benefits paid .................................................................... 20 47
-------------------------
Benefit obligation--end of year .................................................. (5,019) (4,656)
-------------------------
Change in plan assets
Fair value of plan assets--beginning of year ..................................... -- --
Actual return on plan assets ..................................................... -- --
Employer contributions ........................................................... 20 47
Benefits paid .................................................................... (20) (47)
-------------------------
Fair value of plan assets--end of year ........................................... -- --
-------------------------
Funded status ...................................................................... (5,019) (4,656)
Unrecognized prior service cost .................................................... 200 113
Unrecognized net loss from past experience different from that assumed ............. 1,890 2,150
-------------------------
Accrued postretirement benefit cost ................................................ $(2,929) $(2,393)
=========================
29
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Tabular dollars in thousands, except per share amounts)
Net postretirement benefit expense consists of the following:
Fiscal 2003 Fiscal 2002 Fiscal 2001
-------------------------------------------
Service cost--benefits earned during the period ................. $125 $106 $103
Interest expense on benefit obligation .......................... 271 238 214
Expected return on plan assets .................................. -- -- --
Amortization of prior service costs ............................. 23 23 23
Amortization of unrecognized net loss (gain) .................... 137 108 92
Amortization of unrecognized transition obligation (asset) ...... -- -- --
----------------------------------
Postretirement benefit expense .................................. $556 $475 $432
==================================
The assumed discount rate used in determining the postretirement benefit
obligation was 7.00% and 7.25% as of November 1, 2003 and November 2, 2002,
respectively. The weighted average rate of compensation increase was 4.00% at
November 1, 2003 and 5.50% at November 2, 2002.
Postemployment Benefits
Under SFAS No. 112, the Company is required to accrue the expected cost of
providing postemployment benefits, primarily short-term disability payments,
over the working careers of its employees.
The accrued liability under SFAS No. 112 as of November 1, 2003 and November 2,
2002 was $454,000 and $399,000, respectively.
NOTE 17--EARNINGS PER SHARE
Fiscal 2003 Fiscal 2002 Fiscal 2001
------------------------------------------
Basic EPS
Net income available to common shareholders .............. $ 2,283 $ 3,240 $ 3,938
========================================
Weighted average shares outstanding ...................... 986,789 1,024,235 1,111,727
----------------------------------------
Per share amount ......................................... $ 2.31 $ 3.16 $ 3.54
========================================
Effect of Dilutive Securities
Stock Options--Incremental Shares ........................ 24,561 51,795 12,465
========================================
Dilutive EPS
Weighted average shares outstanding including
incremental shares ....................................... 1,011,350 1,076,030 1,124,192
----------------------------------------
Per share amount ......................................... $ 2.26 $ 3.01 $ 3.50
========================================
NOTE 18--NONCASH INVESTING AND FINANCING ACTIVITIES
During fiscal 2003, 2002 and 2001, the Company retired property and equipment
with an original cost of $7,280,000, $37,000 and $2,173,000 and accumulated
depreciation of $7,117,000, $33,000 and $2,109,000, respectively.
During fiscal 2003 and 2002, the Company reclassed $12,854,000 and $4,584,000,
respectively, of construction in progress to leasehold improvements and
equipment. In addition, during fiscal 2003, the Company reclassed $829,000 of
deposits on equipment to equipment.
At November 1, 2003, the Company had an additional minimum pension liability of
$5,516,000, a related intangible asset of $242,000 and a direct charge to equity
of $3,164,000, net of deferred taxes of $2,110,000. At November 2, 2002, the
Company had an additional minimum pension liability of $5,119,000, a related
intangible asset of $292,000 and a direct charge to equity of $2,896,000, net of
deferred taxes of $1,931,000. At November 3, 2001, the Company had an additional
minimum pension liability of $3,399,000, a related intangible asset of $199,000
and a direct charge to equity of $1,920,000, net of deferred taxes of
$1,280,000.
30
2003 ANNUAL REPORT
Notes to Consolidated Financial Statements
(Tabular dollars in thousands, except per share amounts)
During fiscal 2003, capital lease obligations of $60,553,000 were incurred when
the Company entered into leases for four new stores and two existing stores.
During fiscal 2002, capital lease obligations of $9,958,000 were incurred when
the Company entered into a lease for one new store.
During fiscal 2003, the required investment in Wakefern increased from a maximum
per store of $550,000 to $650,000. This resulted in an increase of $2,088,000 in
the investment and obligations due Wakefern.
During fiscal 2003, the Company was required to make additional investments in
Wakefern of $1,200,000 and Insure-Rite, Ltd. of $127,000, respectively, for two
new stores, which opened during fiscal 2003. In conjunction with these
investments, liabilities were assumed for the same amount.
During fiscal 2002, $10,653,000 of outstanding Capital Expenditure loans were
combined into the Company's Term Loan.
During fiscal 2001, the Company recorded an increase in capital in excess of par
and deferred compensation expense of $1,817,000 in accordance with its stock
option plan.
NOTE 19--UNAUDITED SUMMARIZED CONSOLIDATED QUARTERLY INFORMATION
Summarized quarterly information for the years ended November 1, 2003 and
November 2, 2002 was as follows:
Thirteen Weeks Ended
------------------------------------------------------
February 1, May 3, August 2, November 1,
2003 2003 2003 2003
------------------------------------------------------
Sales .......................................... $257,091 $254,578 $271,333 $266,651
Gross profit ................................... 64,757 66,583 70,022 71,635
Net income ..................................... 349 128 576 1,230
Earnings available per share:
Basic ........................................ .35 .13 .58 1.25
Diluted ...................................... .34 .13 .57 1.22
Thirteen Weeks Ended
-----------------------------------------------------
February 2, May 4, August 3, November 2,
2002 2002 2002 2002
-----------------------------------------------------
Sales .......................................... $252,027 $235,236 $241,544 $234,804
Gross profit ................................... 63,392 58,883 62,289 60,527
Net income ..................................... 1,267 183 1,203 587
Earnings available per share:
Basic ........................................ 1.17 .18 1.22 .59
Diluted ...................................... 1.12 .17 1.15 .57
31
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Foodarama Supermarkets, Inc.
Howell, New Jersey
We have audited the accompanying consolidated balance sheets of Foodarama
Supermarkets, Inc. and Subsidiaries as of November 1, 2003 and November 2, 2002
and the related consolidated statements of operations, shareholders' equity and
cash flows for the fiscal years ended November 1, 2003, November 2, 2002 and
November 3, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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, such consolidated financial statements present fairly, in all
material respects, the financial position of Foodarama Supermarkets, Inc. and
Subsidiaries as of November 1, 2003 and November 2, 2002, and the results of
their operations and their cash flows for the fiscal years ended November 1,
2003, November 2, 2002 and November 3, 2001 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, during the year
ended November 1, 2003 the Company changed its method of accounting for goodwill
in accordance with the adoption of SFAS No. 142 "Goodwill and Other Intangible
Assets."
/s/ Amper, Politziner & Mattia, P.C.
AMPER, POLITZINER & MATTIA, P.C.
January 13, 2004
Edison, New Jersey
32
Officers and Directors
Directors
Joseph J. Saker+
Chairman of the Board,
Foodarama Supermarkets, Inc.
Richard J. Saker+
President and Secretary,
Foodarama Supermarkets, Inc.
Albert A. Zager*
Member, Carton, Arvanitis, McGreevy,
Argeris, Zager & Aikins, L.L.C.,
Attorneys at Law
Charles T. Parton*
Chairman of the Board,
Two River Community Bank
Robert H. Hutchins*
President and Managing Director,
Hutchins, Farrell, Meyer & Allison, P.A.,
Certified Public Accountants
*Member, Audit & Stock Option Committees
+Member, Executive Committee
Executive Officers
Joseph J. Saker
Chairman of the Board
Richard J. Saker
President, Secretary and
Chief Executive Officer
Michael Shapiro
Senior Vice President,
Chief Financial Officer and Treasurer
Emory A. Altobelli
Senior Vice President,
Corporate Subsidiaries and Services
Carl L. Montanaro
Senior Vice President,
Sales and Merchandising
Joseph J. Saker, Jr.
Senior Vice President,
Marketing and Advertising
Robert V. Spires
Senior Vice President,
Human Resources and Labor Relations
Joseph C. Troilo
Senior Vice President,
Financial Administration,
Assistant Secretary
and Assistant Treasurer
General Counsel
Giordano, Halleran & Ciesla, P.C.
125 Half Mile Road
Middletown, NJ 07748
Auditors
Amper, Politziner & Mattia, P.C.
2015 Lincoln Highway
P.O. Box 988
Edison, NJ 08818-0988
Transfer Agent & Registrar
American Stock Transfer Company
59 Maiden Lane
New York, NY 10038
Corporate Offices
922 Highway 33
Building 6, Suite 1
Howell, NJ 07731
(732) 462-4700
Form 10-K Report
A copy including the financial statements and the financial statement schedules,
of the Company's Form 10-K Annual Report, as filed with the Securities and
Exchange Commission, is available to shareholders without charge upon written
request to:
Mr. Joseph C. Troilo
Senior Vice President
Foodarama Supermarkets, Inc.
922 Highway 33
Building 6, Suite 1
Freehold, NJ 07728
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FOODARAMA SUPERMARKETS, INC.
922 Highway 33, Building 6, Suite 1, Howell, New Jersey (732) 462-4700