[SHOPRITE LOGO]
FOODARAMA SUPERMARKETS, INC.
Annual Report 2001
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, and Section 21E of 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 the Company 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 and warehouse club 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.
1
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
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THE COMPANY
The Company operates a chain of twenty-two 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, eighteen of the
Company's stores are "World Class," two are "Mini-World Class" and two are
conventional supermarkets.
STOCK PRICE AND DIVIDEND INFORMATION
The Common Stock of Foodarama Supermarkets, Inc., 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
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January 29, 2000 ..................................... 28.375 19.750
April 29, 2000 ....................................... 27.250 20.000
July 29, 2000 ........................................ 28.000 24.000
October 28, 2000 ..................................... 24.250 17.750
January 27, 2001 ..................................... 21.250 15.125
April 28, 2001 ....................................... 20.000 17.000
July 28, 2001 ........................................ 35.250 18.500
November 3, 2001 ..................................... 42.000 34.350
No dividends have been declared or paid on the Company's Common Stock since
October 1979. The Company has approximately 324 shareholders of record.
5 YEAR SUMMARY OF OPERATIONS
Fiscal Years Ended
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November 3, October 28, October 30, October 31, November 1,
2001(a) 2000 1999 1998 1997
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(000's omitted except per share data)
Sales ............................... $ 945,301 $ 866,363 $ 778,726 $ 687,974 $ 629,733
Cost of Sales ....................... 711,092 657,436 592,606 521,501 476,584
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Gross profit ........................ 234,209 208,927 186,120 166,473 153,149
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Operating expenses .................. 220,283 198,216 177,780 160,320 148,121
Interest, net ....................... 7,362 6,741 5,254 3,433 3,994
Gain on sale of store and
real estate transactions .......... -- -- -- -- (656)
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227,645 204,957 183,034 163,753 151,459
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Income before income
tax provision ..................... 6,564 3,970 3,086 2,720 1,690
Income tax provision ................ (2,626) (1,588) (1,141) (940) (626)
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Net income .......................... $ 3,938 $ 2,382 $ 1,945 $ 1,780 $ 1,064
========================================================================================
Income per common share:
Basic ............................. $ 3.54 $ 2.13 $ 1.74 $ 1.59 $ 0.90
========================================================================================
Diluted ........................... $ 3.50 $ 2.13 $ 1.74 $ 1.59 $ 0.90
========================================================================================
Weighted average number of
common shares
outstanding:
Basic ........................... 1,111,727 1,117,290 1,117,290 1,117,290 1,117,290
========================================================================================
Diluted ......................... 1,124,192 1,117,290 1,117,290 1,117,290 1,117,290
========================================================================================
(a) 53 weeks
2
ANNUAL REPORT 2001
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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 and Secretary
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 & Matia P.A.
2015 Lincoln Highway
P.O. Box 988
Edison, NJ 08818-0988
TRANSFER AGENT & REGISTRAR
American Stock Transfer Company
40 Wall Street
New York, NY 10005
CORPORATE OFFICES
922 Highway 33
Building 6, Suite 1
Howell, NJ 07731
(732) 462-4700
FORM 10-K REPORT
A copy of the Company's Form 10-K/A 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
3
LETTER TO SHAREHOLDERS
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Dear Shareholder:
The Company's results from operations and our financial condition in fiscal 2001
continued to improve for the fourth year in a row. Sales for fiscal 2001
increased 9.1% to a record $945,301,000 from $866,363,000 in the prior year.
This increase was the result of improved sales in existing locations and the
full year of operations of the two new World Class locations. The first new
World Class store opened in February 2000 in Branchburg, New Jersey. The second
new World Class store, which opened in April 2000 in Wall Township, New Jersey,
replaced an older, smaller facility in Brielle, New Jersey. Comparable stores
sales increased 3.8% in fiscal 2001.
Income from operations increased 30% to $13,926,000 in fiscal 2001 from
$10,711,000 in fiscal 2000. Net income grew 65% to $3,938,000 or $3.50 per
diluted share in fiscal 2001 compared to $2,382,000 or $2.13 per diluted share
in the prior year period.
Earnings before interest, taxes, depreciation and amortization ("EBITDA") for
fiscal 2001 were $27,342,000, an increase of 19% over the fiscal 2000 EBITDA of
$22,914,000.
The Company's working capital position declined by $5,692,000 in fiscal 2001 to
a ratio of .90 to 1.00 from .98 to 1.00 in fiscal 2000. We spent $17,047,000 on
numerous capital projects during fiscal 2001, including $7,447,000 for equipment
and leasehold improvements for the remodeling of three locations, and $5,329,000
for new and replacement stores under construction. The Company made principal
payments under long-term debt, excluding capitalized leases, of $6,224,000 and
additional long-term debt of $929,000 was incurred. The Company and its lenders
amended the Credit Agreement to provide for additional borrowing capacity under
the revolving credit facility and to realign the timing of additional borrowing
and spending for capital expenditures to more closely track the projected timing
of these events. Additionally, the Credit Agreement now allows the Company to
repurchase its common stock for an aggregate purchase price not to exceed
$5,000,000. Additional information regarding the amendments to the Credit
Agreement is presented in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
On June 8, 2001 the Company announced the commencement of a stock repurchase
program whereby we will seek to repurchase shares of our common stock having a
value of up to $3,000,000. The Company's Board of Directors approved the stock
repurchase program to enhance shareholder value by providing liquidity to its
shareholders. The Company is utilizing internally generated funds and borrowings
under its revolving credit facility to purchase shares of its common stock under
the program, both in the open market and through privately negotiated
transactions. As indicated above, the Company's Credit Agreement was amended to
permit it to purchase shares of its common stock having an aggregate purchase
price not to exceed $5,000,000; however, at this time, the Board has limited its
approval to the repurchase of stock having a value of up to $3,000,000. As of
February 28, 2002, 43,363 shares of common stock had been repurchased, 5,300
shares in open market transactions and 38,063 shares in privately negotiated
transactions. Of the 38,063 shares, 28,863 shares were purchased from related
parties. $1,650,624, or an average of $38.07 per share, was expended for the
purchase of the 43,363 shares. Additional information regarding purchases of
stock from related parties is presented in the Company's proxy statement which
accompanies this annual report under the caption "Certain Business Relationships
and Related Party Transactions."
The Branchburg and Wall Township, New Jersey World Class stores have been very
well received by our customers, and have shown continued improvement in
operating results since opening. On November 14, 2001 a new World Class store in
Middletown, New Jersey opened. This location has exceeded initial projections
and is a replacement for an older, smaller store in the same shopping center.
Construction has commenced on three World Class stores, two of which are
replacement locations for older, smaller stores. Additionally, the expansion and
remodeling of another location is underway. Leases have also been signed for one
replacement and one new location and negotiations are ongoing for the expansion
of one existing store and for leases for one new and one replacement location.
All of these projects will be World Class stores.
The Company owns a 12.3% interest in Wakefern Food Corporation, 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.
As previously reported, another member of Wakefern, Big V Supermarkets, Inc.
("Big V"), filed for reorganization under Chapter 11 and indicated its intent to
depart from Wakefern. Big V, which is similar in sales volume to the Company,
was unsuccessful in challenging provisions in its agreements with Wakefern which
require that withdrawing members make a payment to Wakefern to make up for the
resulting loss of volume to the cooperative. On November 16, 2001 Big V reported
that it had entered into a term sheet, and has subsequently entered into
definitive agreements, to sell substantially all of its assets to Wakefern. On
February 22, 2002 the Bankruptcy Court Judge ruled that a competing offer
submitted by a competitor, Stop & Shop, and supported by agreements with several
creditor groups, could also be presented to the Court. Following this approval,
Pathmark Stores, Inc. reported that it entered into an agreement with Stop &
Shop whereby Pathmark agreed to purchase nine Big V stores from Stop & Shop for
$71 million. These transactions are subject to Bankruptcy Court review and
approval. It is not possible to predict at this time what effect the reported
transactions will have on our Company or Wakefern. Additional information
regarding this subject is presented in "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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
and Chief Executive Officer Chief Operating Officer
4
ANNUAL REPORT 2001
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY
As of May 11 and August 7, 2001, the Company and its lenders amended the Second
Amended and Restated Revolving Credit and Term Loan Agreement (as amended, the
"Credit Agreement"). The Credit Agreement is secured by substantially all of the
Company's assets and provided for a total commitment of $58,000,000, including a
revolving credit facility (the "Revolving Note") of up to $28,000,000, a term
loan (the "Term Loan") in the amount of $10,000,000 and a capital expenditures
facility (the "Capex Facility") of up to $20,000,000.
The amended Credit Agreement (a) increases the total amount available to the
Company under the Revolving Note to $28,000,000 from $25,000,000, subject to the
borrowing base limitation of 65% of eligible inventory; (b) reallocates the
amount of permitted new indebtedness for fiscal year 2001 to fiscal year 2002 to
more closely meet the Company's projected borrowing needs; (c) reallocates the
limitations on indebtedness attributable to capitalized lease obligations over
the term of the Credit Agreement to more closely track new real estate lease
obligations; (d) permits capital expenditures relating to New/Replacement Store
Projects over the term of the Credit Agreement to more closely track the
projected timing of such expenditures; (e) permits capital expenditures relating
to Adjusted Capex over the term of the Credit Agreement to more closely track
the projected timing of such expenditures; (f) extends the expiration date of
the period during which the Company may borrow against the Capex Facility to
June 30, 2002; (g) allows the Company to repurchase its common stock for an
aggregate purchase price not to exceed $5,000,000 subject to certain conditions
and limitations; (h) allows for loans to employees not to exceed $50,000 in the
aggregate; and (i) amends certain definitions. Other terms and conditions of the
Credit Agreement previously reported upon by the Company have not been modified.
As of November 3, 2001 the Company owed $6,500,000 on the Term Loan and
$7,306,772 under the Capex Facility.
The Company's compliance with the major financial covenants under the Credit
Agreement was as follows as of November 3, 2001:
Actual
Financial Credit (As defined in the
Covenant Agreement Credit Agreement)
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Adjusted EBITDA(1) Greater than $16,000,000 $21,955,000
Leverage Ratio(1) Less than 3.50 to 1.00 1.23 to 1.00
Debt Service Coverage Ratio Greater than 1.20 to 1.00 1.77 to 1.00
Adjusted Capex(2) Less than $12,750,000(3) $12,040,000(4)
Store Project Capex Less than $13,000,000(3) $ 5,007,000(4)
(1) Excludes obligations under capitalized leases, interest expense and
depreciation expense attributable to capitalized leases and changes in the
LIFO reserve.
(2) Adjusted Capex is all capital expenditures other than New/Replacement
Store Project Capex.
(3) Represents limitations on capital expenditures for fiscal 2001.
(4) Represents capital expenditures for fiscal 2001.
On December 31, 1999 the Company financed the purchase of $1,527,000 of POS
hardware in 17 operating locations. The financing bears interest at 7.60% and is
payable in monthly installments over its three year term.
On March 30, 1999 the Company financed the purchase of $520,000 of computer
equipment for all operating locations. The financing bears interest at 5.79% and
is payable in monthly installments over its three year term.
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.
5
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
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Working Capital:
At November 3, 2001 and October 28, 2000, the Company had working capital
deficiencies of $6,907,000 and $1,215,000, respectively, compared to working
capital of $2,507,000 at October 30, 1999. 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. Accounts receivable
consist primarily of returned checks due the Company, coupon receivables, 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. 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 decreased in fiscal 2000 primarily as the result of the net
increase in accounts payable and accrued expenses of $3,035,000 over the
increase in inventory, which related primarily to cost of merchandise and
operating expenses for the new Branchburg and Wall Township, New Jersey stores.
Additionally, the current portion of long-term debt, primarily related to
equipment financing, increased.
Working capital in fiscal 1999 increased primarily due to increases in inventory
and receivables and decreases in the current portion of long-term debt partially
offset by increases in accounts payable. These increases were primarily due to
increased sales and the impact of double coupons.
Working capital ratios were as follows:
November 3, 2001........... .90 to 1.00
October 28, 2000........... .98 to 1.00
October 30, 1999........... 1.05 to 1.00
Cash flows (in millions) were as follows:
2001 2000 1999
----------------------------
From operations.............. $ 24.2 $ 15.5 $12.2
Investing activities......... (16.9) (15.2) (8.2)
Financing activities......... (7.1) (.4) (3.8)
----------------------------
Totals..................... $ .2 $ (.1) $ .2
============================
Fiscal 2001 capital expenditures totaled $17,047,000 with depreciation of
$12,840,000 compared to $16,750,000 and $11,524,000, respectively for fiscal
2000 and $8,781,000 and $10,838,000, respectively for fiscal 1999. 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. The
increase in depreciation in fiscal 2000 was the result of the purchase of
equipment and leasehold improvements for the two new locations as well as two
additional real estate capitalized leases. The increase in depreciation in
fiscal 1999 resulted from the opening of two locations in fiscal 1998, a
capitalized lease for one of the two locations and the modification of a
capitalized real estate lease in fiscal 1999 for the expansion of a location.
Capital expenditures increased in fiscal 2001 and fiscal 2000 as the result of
the purchase of equipment and leasehold improvements for the locations remodeled
in fiscal 2001 and the two locations opened in fiscal 2000 and the new
Middletown store opened November 14, 2001. Capital expenditures declined in
fiscal 1999 when no new stores were opened.
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.
In fiscal 2000 long-term debt increased $25,499,000 due to the capitalization of
real estate leases for the two locations opened in the year, the financing of
POS hardware and equipment for two new locations and the restructuring of
borrowings under the Credit Agreement. These increases were partially offset by
cash generated by operations used to pay down a portion of the balances
outstanding under the revolving credit facility and other existing debt.
6
ANNUAL REPORT 2001
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In fiscal 1999 long-term debt increased $3,858,000 due to the modification of a
capitalized real estate lease for the expansion of the West Long Branch, New
Jersey store, the financing of computer equipment purchased and financing
obtained under the revolving credit facility. These increases were partially
offset by cash generated by operations used to pay down existing debt.
During the year ended November 3, 2001, the Company repurchased a total of
29,070 shares of Common Stock under the stock repurchase program announced on
June 8, 2001. 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.
The Company had $18,691,000 of available credit, at November 3, 2001, under its
revolving credit facility. If Net Income and earnings before interest, taxes,
depreciation and amortization ("EBITDA") decrease, as discussed in the Net
Income section of Management's Discussion and Analysis--Results of Operations,
the Company will borrow additional funds under its revolving credit facility.
The Credit Agreement will adequately meet our operating needs, scheduled capital
expenditures and debt service for fiscal 2002.
RESULTS OF OPERATIONS
Sales:
The Company's sales were $945.3 million, $866.4 million and $778.7 million,
respectively in fiscal 2001, 2000 and 1999. This represents an increase of 9.1
percent in 2001 and an increase of 11.3 percent in 2000. These changes in sales
levels were the result of the full year of operations in fiscal 2001 of two
locations opened in February and April 2000 and the 53rd week in fiscal 2001.
The location opened in April 2000 replaced a smaller, older store. Comparable
store sales increased 3.8% in fiscal 2001 and 4.2% in fiscal 2000.
Gross Profit:
Gross profit totaled $234.2 million in fiscal 2001 compared to $208.9 million in
fiscal 2000 and $186.1 million in fiscal 1999. Gross profit as a percent of
sales was 24.8% in fiscal 2001, 24.1% in fiscal 2000 and 23.9% in fiscal 1999.
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.
The increase in fiscal 2000 of gross profit as a percentage of sales was
primarily due to improved product mix, reduced Wakefern assessment as a
percentage of sales and Wakefern incentive programs for the new locations opened
in fiscal 2000, partially offset by promotional programs for the new locations
opened in the current year period, the completion of Wakefern incentive programs
for the new locations opened in fiscal 1998 and the adoption of the
Last-In-First-Out ("LIFO") method of inventory valuation for grocery and nonfood
categories. See Note 1 of Notes to Consolidated Financial
Statements--Merchandise Inventories.
In fiscal 1999 gross profit declined as a percentage of sales as a result of
increased promotional programs partially offset by improved product mix, reduced
Wakefern assessment as a percentage of sales and the continuation of Wakefern
incentive programs for the two new locations opened in fiscal 1998.
Patronage dividends applied as a reduction of the cost of merchandise sold were
$6,515,000, $5,903,000 and $5,294,000 for the last three fiscal years. This
translates to .69%, .68% and .68% of sales for the respective periods.
7
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
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Gross profit dollars and percentage may be impacted by increased costs resulting
from the potential change in the relationship between Big V and Wakefern. These
increased costs to Wakefern could result in higher assessment charges to the
Company. See Item 1. Business Wakefern Food Corporation.
Fiscal Years Ended
------------------------------------
11/03/01 10/28/00 10/30/99
------------------------------------
(in millions)
Sales......................... $945.3 $866.4 $778.7
Gross profit.................. 234.2 208.9 186.1
Gross profit percentage....... 24.8% 24.1% 23.9%
====================================
Operating, General and Administrative Expenses:
Fiscal 2001 operating, general and administrative expenses totaled $220.3
million compared to $198.2 million in fiscal 2000 and $177.8 million in fiscal
1999.
Fiscal Years Ended
-----------------------------------
11/03/01 10/28/00 10/30/99
-----------------------------------
(in millions)
Sales ............................................ $ 945.3 $ 866.4 $ 778.7
Operating, General and Administrative Expenses ... 220.3 198.2 177.8
Percent of Sales ................................. 23.3% 22.9% 22.8%
===================================
Operating, general and administrative expenses increased as a percent of sales
when comparing fiscal 2001 to fiscal 2000. Increases in labor and related fringe
benefits, administrative expense, occupancy, depreciation, other store expenses,
which include Wakefern support services and debit/credit card fees, and a
decrease in miscellaneous income were partially offset by decreases in
advertising, pre-opening costs and reserve for closed store expense. The
increase in labor and related fringe benefits was the result of additional
personnel for all of fiscal 2001 for the two new stores opened during fiscal
2000 and increased sales in service intensive departments. Administrative
expense increased as the result of increases in employee incentive programs and
the charges related to the stock incentive plan. Occupancy increased due to
increased costs for CAM, real estate taxes and sanitation. Depreciation expense
increased due to a full year of depreciation for the equipment, leasehold
improvements and the capitalized leases for the two stores opened in fiscal 2000
and additional depreciation related to the three stores remodeled in fiscal
2001. Other store expenses increased due to increases in charges for certain
Wakefern programs. Miscellaneous income decreased due to a lack of income from
the sale of recycled cardboard. Selling expense increased in dollars but
declined as a percentage of sales. Pre-opening costs in fiscal 2001 related to
the new Middletown store which did not open until November 14, 2001 while two
stores were opened in fiscal 2000. The decrease in the reserve for closed store
expense relates primarily to the expensing in fiscal 2000 of anticipated
expenses for a location closed in April 2000 when the new Wall Township store
opened. As a percentage of sales, labor and related fringe benefits increased
..30%, administrative expense increased .21%, occupancy increased .06%,
depreciation increased .05%, other store expenses increased .05% and
miscellaneous income decreased .08%. These increases were partially offset by
decreases in selling expense of .05%, pre-opening costs of .09% and reserve for
closed store expense of .16%. Pre-opening costs were $114,000 in fiscal 2001.
Operating, general and administrative expenses increased as a percent of sales
when comparing fiscal 2000 to fiscal 1999. Increases in labor and related fringe
benefits, supplies, pre-opening costs and reserve for closed store expense were
partially offset by decreases in selling expense, occupancy, administration and
depreciation. Labor and related fringe benefits increased as the result of
additional personnel dedicated to the two new stores, increased sales in service
intensive departments and premium rates paid to existing employees to work
additional hours due to labor shortages in certain of our marketing areas.
Supplies increased due to increased sales in supply intensive departments and an
increase in plastic prices which is related to increases in the cost of
petroleum. Pre-opening costs were for the new stores opened in February and
April 2000. The reserve for closed store expense relates primarily to the
anticipated expenses to be incurred over the balance of the lease for the
location closed in April 2000 when the new Wall Township store opened. The
decrease in selling expense was the result of decreased promotional activity,
includ-
8
ANNUAL REPORT 2001
--------------------------------------------------------------------------------
ing the modification of a variety of incentive programs, in our marketing area.
Occupancy decreased as the result of an increase in rental income from
sub-tenants within our stores and the decrease in fixed occupancy costs as a
percentage of sales. Depreciation and administration increased in dollars but
declined as a percentage of sales. As a percentage of sales, labor and related
fringe benefits increased .29%, supplies increased .07%, pre-opening costs
increased .10% and reserve for closed store expense increased .13%. Pre-opening
costs were $895,000 in fiscal 2000. These increases were partially offset by
decreases in selling expense of .40%, occupancy of .28%, administration of .09%
and depreciation of .06%.
Amortization expense decreased in fiscal 2001 to $576,000 compared to $679,000
in fiscal 2000 and $973,000 in fiscal 1999. The decrease in fiscal 2001, as
compared to fiscal 2000, was the result of decreased amortization of deferred
escalation rents partially offset by increased amortization of deferred
financing costs. The decrease in fiscal 2000, as compared to fiscal 1999, was
the result of decreased amortization of deferred financing costs and bargain
leases, partially offset by increased amortization of deferred escalation rents,
which resulted from the modification of the amortization of one operating lease
in fiscal 1999. See Note 1 of Notes to Consolidated Financial
Statements--Intangibles and Deferred Financing Costs.
Interest Expense:
Interest expense totaled $7.6 million in fiscal 2001 compared to $7.1 million in
fiscal 2000 and $5.6 million in fiscal 1999. The increase in fiscal 2001, as
compared to fiscal 2000, 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. The increase in fiscal 2000, as compared to
fiscal 1999, was due to an increase in the average outstanding debt in fiscal
2000, including capitalized lease obligations and an increase in the average
interest rate paid on the debt.
If net income and EBITDA decrease, as discussed in the Net Income section of
Management's Discussion and Analysis--Results of Operations, the Company will
borrow additional funds under its revolving credit facility thereby increasing
interest expense.
Income Taxes:
The Company recorded a tax provision of $2.6 million in fiscal 2001, $1.6
million in fiscal 2000 and $1.1 million in fiscal 1999. See Note 13 of Notes to
Consolidated Financial Statements.
Net Income:
The Company had net income of $3,938,000 or $3.50 per diluted share in fiscal
2001 compared to net income of $2,382,000 or $2.13 per diluted share in fiscal
2000. EBITDA for fiscal 2001 were $27,342,000 as compared to $22,914,000 in
fiscal 2000.
Fiscal 1999 resulted in net income of $1,945,000 or $1.74 per diluted share.
EBITDA for fiscal 1999 were $20,151,000.
If gross profit decreases and interest expense increases as discussed in the
Gross Profit and Interest Expense sections of Management's Discussion and
Analysis--Results of Operations, net income and EBITDA will also decrease.
Weighted average diluted shares outstanding were 1,124,192 for fiscal 2001 and
1,117,290 for both fiscal 2000 and fiscal 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective October 29, 2000 the Company adopted Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities". This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS 133 requires the
recognition of all derivatives as either assets or liabilities on the balance
sheet and measures those instruments at fair value. The Company does not
currently engage in any hedging activity or hold any derivative instruments and
has no immediate plans to do so in the future. There has been no impact from
adopting the provisions of SFAS 133.
9
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Effective October 29, 2000 the Company adopted, the Securities and Exchange
Commission Staff Accounting Bulletin No. 101, ("SAB 101") "Revenue Recognition
in Financial Statements". SAB 101 provides additional guidance on revenue
recognition as well as criteria for when revenue is generally realized and
earned and also requires the deferral of incremental costs. There was no
significant impact from adopting the provisions of SAB 101 in fiscal 2001.
Effective October 29, 2000 the Company adopted the Emerging Issues Task Force
Issue No. 00-14 ("EITF 00-14") "Accounting for Certain Sales Incentives", which
provides guidance on the accounting for certain sales incentives offered by
companies to their customers, such as discounts, coupons, rebates and free
products or services. In accordance with the provisions of EITF 00-14 the
Company recorded those sales incentives covered by EITF 00-14 as a reduction of
sales, resulting in a corresponding reduction in operating, general and
administrative expenses, with no impact on the Company's net income. Prior year
amounts have been reclassified to conform with the current year presentation.
Sales incentives relating to this change in presentation amounted to
$19,331,000, $19,877,000 and $20,967,000 for the years ended November 3, 2001,
October 28, 2000 and October 30, 1999, respectively.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 ("SFAS 142"), "Accounting for Goodwill
and Other Intangible Assets" which is effective for fiscal years beginning after
December 15, 2001. SFAS 142 discontinues the practice of amortizing goodwill and
indefinite lived intangible assets and initiates an annual review for
impairment. Impairment would be examined more frequently if certain indicators
are encountered. Intangible assets with a determinable useful life will continue
to be amortized over that period. The Company is currently assessing, but has
not yet determined, the impact of SFAS 142 on its financial position and results
of operations. The Company plans to adopt SFAS 142 in the first quarter of
fiscal year 2003.
In October 2001, the Financial Accounting Standards Board issued Statement Of
Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets", which is required to be applied in
fiscal years beginning after December 15, 2001. SFAS 144 requires, among other
things, the application of one accounting model for long-lived assets that are
impaired or to be disposed of by sale. The Company believes that the adoption of
SFAS 144 will not have a significant impact on its financial position or results
of operation.
10
ANNUAL REPORT 2001
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
November 3, 2001 and October 28, 2000
(In thousands)
2001 2000
---------------------
ASSETS
Current assets
Cash and cash equivalents ............................. $ 4,219 $ 3,977
Merchandise inventories ............................... 42,827 42,765
Receivables and other current assets .................. 5,466 4,959
Prepaid income taxes .................................. -- 398
Related party receivables--Wakefern ................... 8,970 8,557
Related party receivables--other ...................... 7 15
---------------------
61,489 60,671
---------------------
Property and equipment
Land .................................................. 308 308
Buildings and improvements ............................ 1,220 1,220
Leasehold improvements ................................ 39,589 36,931
Equipment ............................................. 103,394 96,452
Property under capital leases ......................... 59,909 59,909
Construction in progress .............................. 6,787 1,513
---------------------
211,207 196,333
Less accumulated depreciation and amortization ........ 98,218 87,487
---------------------
112,989 108,846
---------------------
Other assets
Investments in related parties ........................ 12,758 12,758
Intangibles ........................................... 3,136 3,487
Other ................................................. 2,550 3,469
Related party receivables--Wakefern ................... 1,593 1,782
Related party receivables--other ...................... 11 172
---------------------
20,048 21,668
---------------------
$ 194,526 $191,185
=====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt ..................... $ 5,390 $ 4,918
Current portion of long-term debt, related party ...... 902 880
Current portion of obligations under capital leases ... 899 664
Current income taxes payable .......................... 704 --
Deferred income taxes ................................. 1,079 1,114
Accounts payable
Related party--Wakefern ............................. 35,988 34,051
Others .............................................. 8,780 7,781
Accrued expenses ...................................... 14,654 12,478
---------------------
68,396 61,886
---------------------
Long-term debt .......................................... 19,294 24,181
Long-term debt, related party ........................... 1,310 2,212
Obligations under capital leases ........................ 54,949 55,848
Deferred income taxes ................................... 1,201 2,585
Other long-term liabilities ............................. 10,883 7,051
---------------------
87,637 91,877
---------------------
Shareholders' equity
Common stock, $1.00 par; authorized 2,500,000 shares;
issued 1,621,767 shares; outstanding 1,088,220 shares
November 3, 2001; 1,117,290 shares October 28, 2000 . 1,622 1,622
Capital in excess of par .............................. 4,168 2,351
Deferred compensation ................................. (1,696) --
Retained earnings ..................................... 44,016 40,078
Accumulated other comprehensive income
Minimum pension liability ........................... (1,920) --
---------------------
46,190 44,051
Less 533,547 shares November 3, 2001; 504,477 shares
October 28, 2000, held in treasury, at cost ......... 7,697 6,629
---------------------
38,493 37,422
---------------------
$ 194,526 $191,185
=====================
See notes to consolidated financial statements.
11
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended November 3, 2001, October 28, 2000 and October 30, 1999
(In thousands, except per share data)
2001 2000 1999
-----------------------------------------
Sales ...................................... $ 945,301 $ 866,363 $ 778,726
Cost of goods sold ......................... 711,092 657,436 592,606
-----------------------------------------
Gross profit ............................... 234,209 208,927 186,120
Selling, general and administrative expenses 220,283 198,216 177,780
-----------------------------------------
Earnings from operations ................... 13,926 10,711 8,340
-----------------------------------------
Other income (expense)
Interest expense ......................... (7,627) (7,059) (5,569)
Interest income .......................... 265 318 315
-----------------------------------------
(7,362) (6,741) (5,254)
Earnings before income tax provision ....... 6,564 3,970 3,086
Income tax provision ....................... (2,626) (1,588) (1,141)
-----------------------------------------
Net income ................................. $ 3,938 $ 2,382 $ 1,945
=========================================
Per share information:
Net income per common share
Basic .................................... $ 3.54 $ 2.13 $ 1.74
=========================================
Diluted .................................. $ 3.50 $ 2.13 $ 1.74
=========================================
Weighted average shares outstanding
Basic .................................... 1,111,727 1,117,290 1,117,290
=========================================
Diluted .................................. 1,124,192 1,117,290 1,117,290
=========================================
See notes to consolidated financial statements.
12
ANNUAL REPORT 2001
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Fiscal Years Ended November 3, 2001, October 28, 2000 and October 30, 1999
(In thousands, except per share data)
Accumulated
Common Stock Other
--------------------- Capital Deferred Compre- Compre-
Shares in Excess Compen- hensive hensive
Issued Amount of Par sation Income Income
----------------------------------------------------------------------------------------------------------
Balance
October 31, 1998 ......... 1,621,767 $1,622 $2,351 $ -- $ (81) --
Comprehensive income
Net income 1999 .......... -- -- -- -- -- $ 1,945
Other comprehensive income
Minimum pension
liability ............ -- -- -- -- 81 81
---------------------------------------------------------------------------
Comprehensive income ....... -- -- -- -- -- $ 2,026
========
Balance
October 30, 1999 ......... 1,621,767 1,622 2,351 -- -- --
Comprehensive income
Net income 2000 .......... -- -- -- -- -- $ 2,382
---------------------------------------------------------------------------
Comprehensive income ..... -- -- -- -- -- $ 2,382
========
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 .......... -- -- -- -- -- 3,938
Other comprehensive income
Minimum pension
liability ............ -- -- -- -- (1,920) (1,920)
---------------------------------------------------------------------------
Comprehensive income ....... -- -- -- -- -- $ 2,018
========
Balance
November 3, 2001 ......... 1,621,767 $1,622 $4,168 $(1,696) $(1,920) --
============================================================
Treasury Stock
Retained ----------------------- Total
Earnings Shares Amount Equity
-------------------------------------------------------------------------------------
Balance
October 31, 1998 ......... $ 35,751 (504,477) $ (6,629) $ 33,014
Comprehensive income
Net income 1999 .......... 1,945 -- -- 1,945
Other comprehensive income
Minimum pension
liability ............ -- -- -- 81
------------------------------------------------------
Comprehensive income ....... -- -- -- --
Balance
October 30, 1999 ......... 37,696 (504,477) (6,629) 35,040
Comprehensive income
Net income 2000 .......... 2,382 -- -- 2,382
------------------------------------------------------
Comprehensive income ..... -- -- -- --
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
Other comprehensive income
Minimum pension
liability ............ -- -- -- (1,920)
------------------------------------------------------
Comprehensive income ....... -- -- -- --
Balance
November 3, 2001 ......... $ 44,016 (533,547) $ (7,697) $ 38,493
======================================================
See notes to consolidated financial statements.
13
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended November 3, 2001, October 28, 2000 and October 30, 1999
(In thousands)
2001 2000 1999
--------------------------------
Cash flows from operating activities
Net income ........................................... $ 3,938 $ 2,382 $ 1,945
Adjustments to reconcile net income to net
cash from operating activities
Depreciation ..................................... 12,840 11,524 10,838
Amortization, intangibles ........................ 351 352 723
Amortization, deferred financing costs ........... 285 243 297
Amortization, deferred rent escalation ........... (60) 84 (47)
Provision to value inventory at LIFO ............. 900 723 --
Deferred income taxes ............................ (139) (574) (753)
Amortization of deferred compensation ............ 256 -- --
(Increase) decrease in
Merchandise inventories ........................ (962) (5,375) (309)
Receivables and other current assets ........... (507) (463) (1,114)
Prepaid income taxes ........................... 398 (398) 1,005
Other assets ................................... 963 207 (721)
Related party receivables--Wakefern ............ (224) (784) (1,325)
Increase (decrease) in
Accounts payable ............................... 2,936 5,018 (157)
Income taxes payable ........................... 704 (457) 457
Other liabilities .............................. 2,534 3,047 1,316
--------------------------------
24,213 15,529 12,155
--------------------------------
Cash flows from investing activities
Cash paid for the purchase of property and equipment . (11,718) (14,280) (5,780)
Cash paid for construction in progress ............... (5,329) (943) (2,481)
Decrease in related party receivables--other ......... 169 15 108
--------------------------------
(16,878) (15,208) (8,153)
--------------------------------
Cash flows from financing activities
Proceeds from issuance of debt ....................... 929 20,595 5,014
Principal payments under long-term debt .............. (5,344) (18,754) (7,904)
Principal payments under capital lease obligations ... (664) (699) (463)
Principal payments under long-term debt, related party (880) (627) (460)
Deferred financing costs ............................. (66) (953) --
Repurchase of common stock ........................... (1,068) -- --
--------------------------------
(7,093) (438) (3,813)
--------------------------------
Net change in cash and cash equivalents ................ 242 (117) 189
Cash and cash equivalents, beginning of year ........... 3,977 4,094 3,905
--------------------------------
Cash and cash equivalents, end of year ................. $ 4,219 $ 3,977 $ 4,094
================================
Supplemental disclosures of cash paid
Interest ............................................. $ 8,046 $ 6,683 $ 5,590
Income taxes ......................................... 1,674 2,869 27
See notes to consolidated financial statements.
14
ANNUAL REPORT 2001
--------------------------------------------------------------------------------
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 22
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
2001 consists of the 53 weeks ended November 3, 2001, fiscal 2000 consists of
the 52 weeks ended October 28, 2000, and fiscal 1999 consists of the 52 weeks
ended October 30, 1999.
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
Revenues from the sale of products are recognized at the point of sale to the
Company's customers. Vendor rebates and credits that relate to the Company's
buying and merchandising activities are recognized as earned.
Industry Segment
The Company operates in one industry segment, the retail sale of food and
nonfood products, primarily in the Central New Jersey region.
Reclassifications
Certain reclassifications have been made to prior year financial statements in
order to conform to the current year presentation.
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 (first-in, first-out) or
market with cost being determined under the retail method. Effective October 31,
1999, the Company adopted the last-in, first-out (LIFO) method of inventory
valuation for its grocery and nonfood inventory items. The Company believes that
the LIFO method, as applied to these inventory items, results in a better
matching of revenues and expenses. Because the October 30, 1999 inventory, which
is valued at the first-in, first-out (FIFO) method, is the opening LIFO
inventory, there is neither a cumulative effect to October 31, 1999, nor pro
forma amounts of retroactive application of changing to the LIFO method. The
decision to change to LIFO was made in the third quarter of fiscal year 2000.
15
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
If the FIFO method had been used, inventory at November 3, 2001 and October 28,
2000 would have been $1,623,000 and $723,000 higher, respectively.
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 investment in its principal supplier, Wakefern, is stated at cost
(see Note 4).
Intangibles
Intangibles consist of goodwill and favorable operating lease costs. Goodwill is
being amortized on a straight-line basis over periods from 15 to 36 years. 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.
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 $8.8, $8.5
and $7.5 million for the fiscal years 2001, 2000 and 1999, 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 in
the near term. 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.
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.
16
ANNUAL REPORT 2001
--------------------------------------------------------------------------------
Recent Accounting Pronouncements
Effective October 29, 2000, the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS 133
requires the recognition of all derivatives as either assets or liabilities on
the balance sheet and measures those instruments at fair value. The Company does
not currently engage in any hedging activity or hold any derivative instruments.
Therefore, there has been no impact from adopting the provisions of SFAS 133.
Effective October 29, 2000, the Company adopted the Securities and Exchange
Commission Staff Accounting Bulletin No. 101, ("SAB 101"), "Revenue Recognition
in Financial Statements." This Bulletin provides additional guidance on revenue
recognition as well as criteria for when revenue is generally realized and
earned and also requires the deferral of incremental costs. There was no
significant impact from adopting the provisions of SAB 101 in fiscal 2001.
Effective October 29, 2000, the Company adopted the Emerging Issues Task Force
Issue No. 00-14 ("EITF 00-14"), "Accounting for Certain Sales Incentives." EITF
00-14 provides guidance on the accounting for certain sales incentives offered
by companies to their customers, such as discounts, coupons, rebates and free
products or services. In accordance with the provisions of EITF 00-14, the
Company recorded those sales incentives covered by EITF 00-14 as a reduction of
sales, resulting in a corresponding reduction in selling, general and
administrative expenses, with no impact on the Company's net income. Prior year
amounts have been reclassified to conform to the current year presentation.
Sales incentives relating to this change in presentation amounted to
$19,331,000, $19,877,000 and $20,967,000 for the years ended November 3, 2001,
October 28, 2000 and October 30, 1999, respectively.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Accounting for Goodwill and Other
Intangible Assets" ("SFAS 142") which is effective for fiscal years beginning
after December 15, 2001. SFAS 142 discontinues the practice of amortizing
goodwill and indefinite lived intangible assets and initiates an annual review
for impairment. Impairment would be examined more frequently if certain
indicators were encountered. Intangible assets with a determinable useful life
will continue to be amortized over that period. The Company is currently
assessing but has not yet determined the impact of SFAS 142 on its financial
position and results of operations. The Company plans to adopt SFAS 142 in the
first quarter of fiscal year 2003.
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"), which is required to be applied in
fiscal years beginning after December 15, 2001. SFAS 144 requires, among other
things, the application of one accounting model for long-lived assets that are
impaired or to be disposed of by sale. The Company believes that the adoption of
SFAS 144 will not have a significant impact on its financial position or results
of operations.
Note 2 -- Concentration of Cash Balance
As of November 3, 2001 and October 28, 2000, cash balances of approximately
$1,179,000 and $1,173,000, 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 3, October 28,
2001 2000
----------------------------
Accounts receivable............................. $3,980 $3,350
Prepaids........................................ 2,260 2,121
Rents receivable................................ 99 31
Less allowance for uncollectible accounts....... (873) (543)
----------------------------
$5,466 $4,959
============================
17
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
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 $550,000 at November 3,
2001 and October 28, 2000, and $500,000 at October 30, 1999. During fiscal 2000
and 1999, the required investment in Wakefern increased. This resulted in a
total increase in the investment in Wakefern by $1,039,000 in 2000 and
$1,286,000 in 1999, and a related increase in the obligations due Wakefern for
the same amount, respectively. This increase in the obligation is non-interest
bearing and is payable over four years, with three years currently remaining.
The Company has a 12.3% investment in Wakefern of $11,805,000 at November 3,
2001 and October 28, 2000. 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, the obligations to
Wakefern are personally guaranteed by principal officers/shareholders of the
Company. As of November 3, 2001 and October 28, 2000, the Company was obligated
to Wakefern for $2,212,000 and $3,092,000, respectively, for the increase in its
required investment (see Note 8 Long-term Debt, Related Party).
The Company also has an investment of approximately 10.0% in Insure-Rite, Ltd.,
a company affiliated with Wakefern, which was $953,000 at November 3, 2001 and
October 28, 2000. During the year ended October 28, 2000, the Company was
required to invest an additional $124,000 relating to the opening of two new
stores. Insure-Rite, Ltd. provides the Company with a portion of its liability
insurance coverage. Insurance premiums paid to Insure-Rite, Ltd. for fiscal
years 2001, 2000 and 1999 were $3,819,000, $3,528,000 and $3,275,000,
respectively.
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 merchandise in the consolidated statements of operations. In addition, the
Company also receives from Wakefern other product incentives and rebates. For
fiscal 2001, 2000 and 1999, total patronage dividends and other product
incentives and rebates were $9,909,000, $9,273,000 and $8,202,000, respectively.
At November 3, 2001 and October 28, 2000, the Company has current receivables
due from Wakefern of approximately $8,970,000 and $8,557,000, 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 $1,593,000 and $1,782,000, 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 $647, $588 and $536 million for the
fiscal years 2001, 2000 and 1999, 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.
18
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
The Company has receivables from related parties that include shareholders,
directors, officers, and real estate partnerships. At October 28, 2000,
approximately $180,000 of these receivables consisted of notes bearing interest
at 9%. These receivables had been classified based upon the scheduled payment
terms. The remaining amounts were non-interest bearing, had no repayment terms
and were classified based on expected payment dates. As of November 3, 2001,
these receivables had been fully repaid.
During the fiscal year ended November 3, 2001, the Company utilized an entity,
which is wholly-owned by the daughter of the Company's Chairman of the Board, to
provide construction management services on several store renovations. The
Company incurred $214,000 of construction management fees relating to this
entity and these amounts have been included in property and equipment.
Note 5 -- Intangibles
November 3, October 28,
2001 2000
---------------------------
Goodwill........................................ $ 3,493 $ 3,493
Favorable operating lease costs................. 4,685 4,685
--------------------------
8,178 8,178
Less accumulated amortization................... 5,042 4,691
--------------------------
$ 3,136 $ 3,487
==========================
Note 6 -- Accrued Expenses
November 3, October 28,
2001 2000
---------------------------
Payroll and payroll related expenses............ $ 7,211 $ 5,871
Insurance....................................... 1,405 909
Sales, use and other taxes...................... 1,294 1,214
Interest........................................ 63 483
Employee benefits............................... 1,346 801
Occupancy costs................................. 2,179 2,033
Real estate taxes............................... 537 434
Other........................................... 619 733
--------------------------
$14,654 $12,478
==========================
Note 7 -- Long-term Debt
Long-term debt consists of the following:
November 3, October 28,
2001 2000
---------------------------
Revolving note.................................. $ 3,766 $ 2,837
Term loan....................................... 6,500 8,500
Capital expenditure facility.................... 7,306 7,758
Other notes payable............................. 7,112 10,004
--------------------------
24,684 29,099
Less current portion............................ 5,390 4,918
--------------------------
$19,294 $24,181
==========================
19
ANNUAL REPORT 2001
--------------------------------------------------------------------------------
The Company has a Revolving Credit and Term Loan Agreement which was amended and
assigned to three financial institutions on January 7, 2000, and was further
amended May 11 and August 7, 2001 (as amended, the "Credit Agreement"). The
Credit Agreement is collateralized by substantially all of the Company's assets,
provided for a total commitment of $58,000,000 and matures December 31, 2004.
The amended Credit Agreement (a) increases the total amount available to the
Company under the Revolving Note to $28,000,000 from $25,000,000, subject to the
borrowing base limitation of 65% of eligible inventory; (b) reallocates the
amount of permitted new indebtedness for fiscal year 2001 to fiscal year 2002 to
more closely meet the Company's projected borrowing needs; (c) reallocates the
limitations on indebtedness attributable to capitalized lease obligations over
the term of the Credit Agreement to more closely track new real estate lease
obligations; (d) permits capital expenditures ("Capex") relating to
New/Replacement Store Projects over the term of the Credit Agreement to more
closely track the projected timing of such expenditures; (e) permits capital
expenditures relating to Adjusted Capex over the term of the Credit Agreement to
more closely track the projected timing of such expenditures; (f) extends the
expiration date of the period during which the Company may borrow against the
Capex Facility to June 30, 2002; (g) allows the Company to repurchase its common
stock for an aggregate purchase price not to exceed $5,000,000 subject to
certain conditions and limitations (see Note 12); (h) allows for loans to
employees not to exceed $50,000 in the aggregate; and (i) amends certain
definitions. Other terms and conditions of the Credit Agreement previously
reported upon by the Company have not been modified.
The Agreement provides the Company with the option to convert portions of the
debt to Eurodollar loans, as defined in the Agreement, which have interest rates
indexed to LIBOR. The Agreement consists of a Revolving Note, a Term Loan and a
Capital Expenditure Facility. The previous outstanding balances under the Stock
Redemption Note and Expansion Loan were fully satisfied and replaced by this
Agreement. These previous loans had fixed interest rates of 8.38% and 9.18%,
respectively.
The Revolving Note has an overall availability of $28,000,000, not to exceed 65%
of eligible inventory, and provides for availability of up to $4,500,000 for
letters of credit. The Revolving Note bears interest at prime plus .50% or LIBOR
plus 2.50%.
The Company had a letter of credit outstanding of $1,012,004 and $2,000,000 at
November 3, 2001 and October 28, 2000, respectively. A commitment fee of .5% is
charged on the unused portion of the Revolving Note. Available credit under the
Revolving Note was $18,691,000 and $18,863,000 at November 3, 2001 and October
28, 2000. As of November 3, 2001 and October 28, 2000, $7,475,000 and $7,001,000
of cash receipts on hand or in transit were restricted for application against
the Revolving Note balance.
The Term Loan is $10,000,000 and is payable in quarterly principal installments
of $500,000 commencing April 1, 2000 through December 31, 2004. Interest is
payable monthly at prime plus .75% or LIBOR plus 2.75%. At November 3, 2001,
$6,000,000 of the Term Loan balance was under a one month Eurodollar rate of
5.39%, maturing November 2001, which was renewed through February 2002 at a rate
of 4.67%.
The $20,000,000 Capital Expenditure Facility provides for a two-year
non-restoring commitment to fund equipment purchases for five new stores, with a
maximum of $4,000,000 per store. Interest only is due monthly at prime plus .75%
or LIBOR plus 2.75% for any amount utilized during the first two years of the
commitment. Amounts borrowed through December 31, 2001 will be converted to a
term loan with interest payable monthly at rates described above and fixed
quarterly principal payments, commencing April 1, 2002, calculated on a
seven-year amortization schedule. Additional amounts borrowed after December 31,
2001 through June 30, 2002 will be converted to a term loan with interest
payable monthly at rates described above and fixed quarterly principal payments,
commencing October 1, 2002, calculated on a six and a half-year amortization
schedule. A balloon payment is due at December 31, 2004 for amounts outstanding
on the term loans. A commitment fee of .5% is charged on the unused portion of
the Capital Expenditure Facility. The Company had $7,306,000 and $7,758,000
outstanding as of November 3, 2001 and October 28, 2000, respectively and had
$12,000,000 available under this facility. At November 3, 2001, $7,000,000 of
the Capital Expenditure facility was under a one month Eurodollar rate of 5.31%,
maturing November 2001, which was renewed through February 2002 at a rate of
4.60%.
The Agreement places restrictions on dividend payments and requires the
maintenance of debt service coverage and leverage ratios and other financial
ratios, as well as limitations on capital expenditures and new debt. For the
year ended October 28, 2000, the Company exceeded its capital expenditure and
adjusted indebtedness limits, which were waived.
The prime rate at November 3, 2001 and October 28, 2000 was 5.50% and 9.50%,
respectively.
20
ANNUAL REPORT 2001
--------------------------------------------------------------------------------
Other Notes Payable
Included in other notes payable are the following:
November 3, October 28,
2001 2000
----------------------------
Note payable to a financing institution, maturing
October 2004, payable at $56,000 per month
plus interest at 7.26%, collateralized by
related equipment................................... $ 1,996 $ 2,663
Note payable to a financing institution,
maturing April 2005, payable at $46,000 per month
including interest at 7.44%, collateralized by
related equipment................................... 1,642 2,057
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................................ 3,474 5,284
----------------------------
Total other notes payable............................. $ 7,112 $10,004
============================
Aggregate maturities of long-term debt are as follows:
Fiscal Year
2002.................................................................. $5,390
2003.................................................................. 5,183
2004.................................................................. 5,135
2005.................................................................. 8,976
Note 8 -- Long-term Debt, Related Party
As of November 3, 2001 and October 28, 2000, the Company was indebted for an
investment in Wakefern in the amount of $2,212,000 and $3,092,000, respectively.
The debt is non-interest bearing and payable in scheduled installments as
follows:
Fiscal Year
2002.................................................................. $ 902
2003.................................................................. 779
2004.................................................................. 186
2005.................................................................. 182
2006.................................................................. 107
Thereafter............................................................ 56
Note 9 -- Other Long-term Liabilities
November 3, October 28,
2001 2000
---------------------------
Deferred escalation rent.............................. $ 4,652 $ 4,712
Minimum pension liability (Note 15)................... 3,399 --
Postretirement benefit cost........................... 1,965 1,580
Other................................................. 867 759
---------------------------
$10,883 $ 7,051
===========================
Note 10 -- Long-term Leases
Capital Leases
November 3, October 28,
2001 2000
---------------------------
Real estate........................................... $59,909 $59,909
Less accumulated amortization......................... 12,922 10,313
---------------------------
$46,987 $49,596
===========================
21
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
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 3, 2001:
Fiscal Year
2002.................................................. $ 6,102
2003.................................................. 6,158
2004.................................................. 6,230
2005.................................................. 6,343
2006.................................................. 6,412
Thereafter............................................ 93,793
--------
Total minimum lease payments.......................... 125,038
Less amount representing interest..................... 69,190
--------
Present value of net minimum lease payments........... 55,848
Less current maturities............................... 899
--------
Long-term maturities.................................. $ 54,949
========
Operating Leases
The Company is obligated under operating leases for rent payments expiring at
various dates through 2021. 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 $268,000, $264,000 and $248,000
for the fiscal years 2001, 2000 and 1999, 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 2001 Fiscal 2000 Fiscal 1999
-----------------------------------------
Land and buildings........................ $11,020 $10,828 $10,611
Less subleases............................ (3,089) (2,641) (2,152)
-----------------------------------------
$ 7,931 $ 8,187 $ 8,459
=========================================
The minimum rental commitments under all noncancellable operating leases reduced
by income from noncancellable subleases at November 3, 2001, are as follows:
Income from
Land and Noncancellable Net Rental
Fiscal Year Buildings Subleases Commitment
--------------------------------------------------------------------------------------------------
2002............................... $10,169 $ 2,560 $ 7,609
2003............................... 9,708 2,433 7,275
2004............................... 8,194 1,906 6,288
2005............................... 7,796 1,287 6,509
2006............................... 6,403 852 5,551
Thereafter........................ 31,783 1,612 30,171
---------------------------------------------
$74,053 $10,650 $63,403
=============================================
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 $736,000, $719,000 and
$668,000 for the fiscal years 2001, 2000 and 1999, 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 provides for the issuance of up to 150,000 shares of Foodarama
Supermarkets, Inc. Common Stock (subject to anti-dilution adjustment). The
maximum number of shares of stock that may be covered by the Awards granted to
any one Participant for the life of the 2001 Plan shall be equal to one-third of
the shares reserved for issuance under the 2001 Plan.
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.
22
ANNUAL REPORT 2001
--------------------------------------------------------------------------------
On August 8, 2001 (the "Grant Date"), the Company granted 107,500 shares as
stock options and 11,000 shares in the form of Stock Performance Units (the
"Units"), which represent deferred compensation based upon the increase 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 three
years.
The Units are payable in cash only, 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.
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. At the
date of grant, 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 year ended November 3, 2001, the Company realized
compensation expense relating to the stock option plan of $121,000. For the year
ended November 3, 2001, the Company realized compensation expense of $135,000
related to the Units granted, based on the market price of the Company's common
stock of $40.75 at November 3, 2001.
As of November 3, 2001, none of the vested stock options or Units were
exercised. The following table summarizes stock option and Units activity:
Date of Grant
-------------------
Stock Market
Stock Performance Price
Options Units Exercise Common
Granted Granted Total Price Stock
---------------------------------------------------------
Outstanding,
October 28, 2000..... -- -- -- -- --
Granted............ 107,500 11,000 118,500 $19.60 $36.50
======
Exercised.......... -- -- -- -- --
--------------------------------------------
Outstanding,
November 3, 2001..... 107,500 11,000 118,500 $19.60 --
============================================
Exercisable,
November 3, 2001..... 2,000 4,750 6,750 -- --
============================================
Following is a summary of the status of stock options outstanding at November 3,
2001:
Outstanding Options Exercisable Options
--------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Exercise Remaining Average Average
Price Number Contractual Life Exercise Price Number Exercise Price
----------------------------------------------------------------------------------------------------
$19.60..... 107,500 9.75 years $19.60 2,000 $19.60
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.
23
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
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
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
Fiscal 2001 Fiscal 2000 Fiscal 1999
-----------------------------------------
Pro forma net income..................... $3,915 $2,382 $1,945
Pro forma earnings per share.............
Basic.................................. $ 3.52 $ 2.13 $ 1.74
Diluted................................ $ 3.48 $ 2.13 $ 1.74
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. The Company repurchased 29,070 shares of its common stock at an aggregate
cost of $1,067,927 for the year ended November 3, 2001 (see Note 20).
Note 13 -- Income Taxes
The income tax provisions consist of the following:
Fiscal 2001 Fiscal 2000 Fiscal 1999
-----------------------------------------
Federal
Current............................... $2,247 $1,621 $1,857
Deferred.............................. (212) (411) (506)
State and local
Current............................... 518 541 37
Deferred.............................. 73 (163) (247)
-----------------------------------------
$2,626 $1,588 $1,141
=========================================
The following tabulations reconcile the federal statutory tax rate to the
effective rate:
Fiscal 2001 Fiscal 2000 Fiscal 1999
------------------------------------------
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........................ 1.0% 1.3% 1.8%
Tax credits............................... (.2)% (.7)% (1.0)%
Adjustment to prior years tax provision... .5% (1.0)% (5.1)%
Other..................................... (1.2)% .5% 1.4%
------------------------------------------
Actual tax provision 40.0% 40.0% 37.0%
==========================================
Net deferred tax assets and liabilities consist of the following:
November 3, October 28,
2001 2000
--------------------------
Current deferred tax assets
Deferred revenue and gains on sale/leaseback........ $ 230 $ 138
Allowances for uncollectible receivables............ 461 301
Inventory capitalization............................ 9 8
Closed store reserves............................... 430 570
Vacation accrual.................................... 433 365
Accrued post-employment............................. 159 162
Accrued post-retirement............................. 796 640
Other............................................... 37 37
--------------------------
$2,555 $2,221
==========================
24
ANNUAL REPORT 2001
--------------------------------------------------------------------------------
November 3, October 28,
2001 2000
--------------------------
Current deferred tax liabilities
Prepaids .................................. $ (280) $ (335)
Patronage dividend receivable ............. (2,278) (2,073)
Accelerated real estate taxes ............. (212) (174)
Prepaid pension ........................... (864) (753)
--------------------------
(3,634) (3,335)
--------------------------
Current deferred tax liability .............. $(1,079) $(1,114)
==========================
Noncurrent deferred tax assets
Lease obligations ......................... $ 3,558 $ 2,811
Minimum pension liability ................. 1,280 --
Stock options and deferred compensation ... 104 --
State loss carryforward ................... 72 53
--------------------------
5,014 2,864
Valuation allowance ......................... (72) (53)
--------------------------
4,942 2,811
--------------------------
Noncurrent deferred tax liabilities
Depreciation .............................. (5,453) (4,524)
Pension obligations ....................... (341) (523)
Other ..................................... (349) (349)
--------------------------
(6,143) (5,396)
--------------------------
Noncurrent deferred tax liability ........... $(1,201) $(2,585)
==========================
Minimum pension liability of $1,280,000 was charged against accumulated other
comprehensive income (see Note 15).
State loss carryforwards of approximately $731,000 expire through October 2010.
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.
Guarantees
The Company remains contingently liable under leases assumed by third parties.
As of November 3, 2001, the minimum annual rental under these leases amounted to
approximately $1,646,000 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 for 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 3, 2001 and October 28, 2000, the plans' assets
included common stock of the Company with a fair value of $1,516,000 and
$702,000, respectively.
25
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
A summary of the plans' funded status and the amounts recognized in the
consolidated balance sheets as of November 3, 2001 and October 28, 2000 follows:
November 3, October 28,
2001 2000
----------------------------
Change in benefit obligation
Benefit obligation--beginning of year ................ $(5,772) $(5,936)
Service cost ......................................... (63) (63)
Interest cost ........................................ (454) (449)
Actuarial gain (loss) ................................ (1,517) 200
Benefits paid ........................................ 628 476
----------------------------
Benefit obligation--end of year ...................... (7,178) (5,772)
----------------------------
Change in plan assets
Fair value of plan assets--beginning of year ......... 6,174 6,433
Actual return (loss) on plan assets .................. 145 (342)
Employer contributions ............................... 402 559
Benefits paid ........................................ (628) (476)
Administrative expense ............................... (180) --
----------------------------
Fair value of plan assets--end of year ............... 5,913 6,174
----------------------------
Funded status .......................................... (1,265) 402
Unrecognized prior service cost ........................ 198 236
Unrecognized net loss from past
experience different from that assumed ............... 3,206 1,233
Unrecognized transition asset .......................... (5) (11)
Adjustment required to recognize minimum liability ..... (3,399) --
----------------------------
Prepaid (accrued) pension cost ......................... $(1,265) $ 1,860
============================
Pension expense consists of the following:
Fiscal 2001 Fiscal 2000 Fiscal 1999
-----------------------------------------
Service cost--benefits earned
during the period ................ $ 63 $ 63 $ 71
Interest expense on benefit obligation 454 449 447
Expected return on plan assets ..... (488) (506) (522)
Amortization of prior service costs 37 37 37
Amortization of unrecognized
net loss (gain) .................. 67 8 35
Amortization of unrecognized transition
obligation (asset) ............... (5) (5) (5)
-------------------------------------
Total pension expense $ 128 $ 46 $ 63
=====================================
The discount rate used in determining the actuarial present value of the
projected benefit obligation ranged from 7.25% to 8.00% at November 3, 2001 and
7.75% to 8.00% at October 28, 2000. The expected long-term rate of return on
plan assets was 8% at November 3, 2001 and October 28, 2000.
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.
At November 3, 2001, 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 plan's prior service cost is reflected as a direct
charge to equity, net of related tax benefit. Accordingly, at November 3, 2001,
a liability of $3,399,000 was included in other long-term liabilities, an
intangible asset equal to the prior service cost of $199,000 is included in
other assets, and a charge of $1,920,000 net of deferred taxes of $1,280,000 is
reflected as a minimum pension liability in shareholders' equity in the
Consolidated Balance Sheet.
26
ANNUAL REPORT 2001
--------------------------------------------------------------------------------
At October 31, 1998, the accumulated benefit obligation exceeded the fair value
of the plan's assets in the plan covering members of one union. Accordingly, at
October 31, 1998, a liability of $188,000 was included in other long-term
liabilities, an intangible asset equal to the prior service cost of $53,000 was
included in other assets, and a charge of $81,000 net of deferred taxes of
$54,000 was reflected as a minimum pension liability in shareholders' equity in
the Consolidated Balance Sheet. These amounts were reversed during fiscal 1999.
Multi-Employer Plans
Health, welfare, and retirement expense was approximately $10,440,000 in fiscal
2001, $9,155,000 in fiscal 2000 and $8,276,000 in fiscal 1999 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 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 15% of compensation. 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% for fiscal years 2001, 2000 and 1999. 401(k) expense
for the fiscal years 2001, 2000 and 1999 was approximately $607,000, $507,000
and $480,000, 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 3, 2001 and
October 28, 2000, respectively. The participants have agreed to certain
non-compete arrangements and to provide continued service availability for
consulting services after retirement.
A summary of the plan's funded status and the amounts recognized in the balance
sheets as of November 3, 2001 and October 28, 2000, follows:
November 3, October 28,
2001 2000
--------------------------
Change in benefit obligation
Benefit obligation--beginning of year $(2,630) $(2,062)
Service cost (103) (89)
Interest cost (214) (174)
Actuarial gain (loss) (480) (352)
Benefits paid 47 47
--------------------------
Benefit obligation--end of year (3,380) (2,630)
--------------------------
Change in plan assets
Fair value of plan assets--beginning of year -- --
Actual return on plan assets -- --
Employer contributions 47 47
Benefits paid (47) (47)
--------------------------
Fair value of plan assets--end of year -- --
Funded status (3,380) (2,630)
Unrecognized prior service cost 137 11
Unrecognized net loss from past experience
different from that assumed 1,278 1,039
--------------------------
Accrued postretirement benefit cost $(1,965) $(1,580)
==========================
27
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Net postretirement benefit expense consists of the following:
Fiscal 2001 Fiscal 2000 Fiscal 1999
-----------------------------------------
Service cost--benefits earned
during the period $103 $ 89 $ 73
Interest expense on benefit obligation 214 174 123
Expected return on plan assets -- -- --
Amortization of prior service costs 23 2 2
Amortization of unrecognized net
loss (gain) 92 149 81
Amortization of unrecognized
transition obligation (asset) -- -- --
-----------------------------------------
Postretirement benefit expense $432 $414 $279
=========================================
The assumed discount rate used in determining the postretirement benefit
obligation was 8.0% and 7.75% as of November 3, 2001 and October 28, 2000,
respectively. The weighted average rate of compensation increase as of November
3, 2001 and October 28, 2000 was 4%.
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 3, 2001 and October 28,
2000, was $393,000 and $401,000, respectively.
Note 17 -- Earnings Per Share
Fiscal 2001 Fiscal 2000 Fiscal 1999
-----------------------------------------
Basic EPS
Net income available to common
shareholders $ 3,938 $ 2,382 $ 1,945
=========================================
Weighted average shares outstanding 1,111,727 1,117,290 1,117,290
-----------------------------------------
Per share amount $ 3.54 $ 2.13 $ 1.74
=========================================
Effect of Dilutive Securities
Stock Options--Weighted Shares 12,465 -- --
=========================================
Dilutive EPS
Weighted average shares outstanding
including incremental shares 1,124,192 1,117,290 1,117,290
-----------------------------------------
Per share amount $ 3.50 $ 2.13 $ 1.74
=========================================
Note 18 -- Noncash Investing and Financing Activities
During fiscal 2001, the Company retired property and equipment with an original
cost of $2,173,000 and accumulated depreciation of $2,109,000.
At November 3, 2001, the Company had an additional minimum pension liability of
$3,399,000, a related intangible of $199,000 and a direct charge to equity of
$1,920,000, net of deferred taxes of $1,280,000.
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.
During fiscal 2000, capital lease obligations of $21,691,000 were incurred when
the Company entered into leases for two new stores. During fiscal 1999, the
Company modified one of its capitalized leases, resulting in an increase of
$5,865,000 in property under capitalized leases and capitalized lease
obligations.
During fiscal 2000, the required investment in Wakefern increased from a maximum
per store of $500,000 to $550,000. This resulted in an increase of $1,039,000 in
the investment and obligations due Wakefern. During fiscal 1999, the required
investment in Wakefern increased from a maximum per store of $450,000 to
$500,000. This resulted in an increase of $1,286,000 in the investment and
obligations due Wakefern.
28
ANNUAL REPORT 2001
--------------------------------------------------------------------------------
The Company was required to make an additional investment in Wakefern of
$500,000 and $103,000 for a new store and a replacement store, respectively,
which opened during fiscal 2000. In conjunction with the investment, liabilities
were assumed for the same amount.
During fiscal 2000, the Company was required to invest an additional $124,000 in
Insure-Rite, Ltd. In conjunction with the investment, liabilities were assumed
for the same amount.
During fiscal 2000 and 1999, the Company financed equipment purchased for
$1,527,000, and $520,000, respectively.
Note 19 -- Unaudited Summarized Consolidated Quarterly Information
Summarized quarterly information for the years ended November 3, 2001 and
October 28, 2000 was as follows:
Fourteen
Weeks
Thirteen Weeks Ended Ended
---------------------------------- -----------
January 27, April 28, July 28, November 3,
2001 2001 2001 2001
--------------------------------------------------
Sales $238,594 $223,926 $233,052 $249,729
Gross profit 57,829 55,625 58,356 62,399
Net income 1,168 963 1,044 763
Earnings available per share:
Basic 1.05 .86 .94 .69
Diluted 1.05 .86 .94 .66
Thirteen Weeks Ended
--------------------------------------------------
January 29, April 29, July 29, October 28,
2000 2000 2000 2000
--------------------------------------------------
Sales $211,541 $211,638 $223,662 $219,522
Gross profit 50,211 51,092 54,389 53,235
Net income 784 335 636 627
Earnings available per share:
Basic .70 .30 .57 .56
Diluted .70 .30 .57 .56
Dilutive earnings per share amounts by quarter do not equal dilutive earnings
per share amounts for the year ended November 3, 2001 due to the stock option
plan being adopted in the fourth quarter.
Note 20 -- Subsequent Events
On November 14, 2001, the Company opened a new store in Middletown, New Jersey.
This store replaced an existing store at the same location. A capital lease
obligation of $9,958,000 was incurred relating to this new store, as well as an
increase in property under capitalized leases in the same amount.
The Company repurchased 10,310 shares of its Common stock at an aggregate cost
of $437,773 from November 4, 2001 through January 18, 2002.
29
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 3, 2001 and October 28, 2000,
and the related consolidated statements of operations, shareholders' equity and
cash flows for the fiscal years ended November 3, 2001, October 28, 2000 and
October 30, 1999. 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 3, 2001 and October 28, 2000, and the results of
their operations and their cash flows for the fiscal years ended November 3,
2001, October 28, 2000 and October 30, 1999 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Amper, Politzina & Mattia, P.A.
-----------------------------------
January 18, 2002
Edison, New Jersey
30
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