10-K/A 1 p10ka2001.txt 10KA 2001 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (Amendment No. 1 to Form 10-K) Annual Report pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the fiscal year ended Commission file number November 3, 2001 1-5745 ---------------------------------------------------------------------------- FOODARAMA SUPERMARKETS, INC. ---------------------------- (Exact name of Registrant as specified in its charter) New Jersey 21-0717108 ------------------------------------------------------ ------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Building 6, Suite 1, 922 Hwy. 33, Freehold, New Jersey 07728 ------------------------------------------------------------ (Address of principal executive offices) Registrant's telephone number, including area code: (732) 462-4700 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ---------------------------------------------------------------- Common Stock American Stock Exchange Par Value $1.00 per share Securities registered pursuant to Section 12(g) of the Act: NONE (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes x No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A or any amendment to this Form 10-K/A. [X] The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $14,665,000. Computation is based on the closing sales price of $35.25 per share of such stock on the American Stock Exchange on February 15, 2002. As of February 15, 2002, the number of shares outstanding of Registrant's Common Stock was 1,074,127. DOCUMENTS INCORPORATED BY REFERENCE None This Amendment No. 1 on Form 10-K/A is filed by Foodarama Supermarkets, Inc. as an amendment to its annual report on Form 10-K for the fiscal year ended November 3, 2001 to amend and restate in its entirety Part III. PART I Disclosure Concerning Forward-Looking Statements All statements, other than statements of historical fact, included in this Form 10-K/A, including without limitation the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business", are, or may be deemed to be, "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such forward-looking statements involve assumptions, known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Foodarama Supermarkets, Inc. (the "Company", which may be referred to as we, us or our) to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements contained in this Form 10-K/A. 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 Form 10-K/A 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. Item 1. Business General Foodarama Supermarkets, Inc., a New Jersey corporation formed in 1958, 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. We also operate a central food processing facility to supply our stores with meat, various prepared salads, prepared foods and other items, and a central baking facility which supplies our stores with bakery products. The Company is a member of Wakefern , the largest retailer owned food cooperative warehouse in the United States and owner of the ShopRite name. The Company operates in one industry segment, the retail sale of food and non-food products, primarily in the Central New Jersey region. 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, meals to go, salad bars, snack bars, bulk foods and pharmacies. We have also introduced many of these features into our conventionally sized supermarkets through extensive renovations; these stores are considered "Mini-World Class" supermarkets. Currently, eighteen of our stores are "World Class", two are "Mini-World Class" and two are conventional supermarkets. 2 The following table sets forth certain data relating to the Company's business for the periods indicated:
Fiscal Year Ended November 3, October 28, October 30, October 31, November 1, 2001** 2000 1999 1998 1997 Average annual sales per store (in millions)* .................... $43.0 $40.5 $37.1 $35.3 $31.5 Same store sales increase from prior year ................... 3.77% 4.24% 6.28% 4.45% 1.33% Total store area in square feet (in thousands) .................... 1,301 1,294 1,195 1,195 1,080 Total store selling area in square feet (in thousands) ............... 973 966 895 895 808 Average total square feet per store (in thousands) .................... 59 59 57 57 54 Average square feet of selling area per store (in thousands) .......... 44 44 43 43 40 Annual sales per square foot of selling area* ..................... $973 $923 $870 $832 $780 Number of stores: Stores remodeled (over $500,000) 2 2 1 1 0 New stores opened ............... 0 1 0 1 0 Stores replaced/expanded ........ 1 1 0 2 0 Stores closed/divested .......... 0 1 0 1 0 Number of stores by size (total store area): 30,000 to 39,999 sq.ft .......... 3 3 4 4 4 40,000 to 49,999 sq.ft .......... 3 3 3 3 4 Greater than 50,000 sq.ft ....... 16 16 14 14 12 Total stores open at period end ... 22 22 21 21 2
* Sales for stores open less than 52 weeks have been annualized. ** Calculated on a 53 week basis. A like 52 week comparison would be $42.1 million in average annual sales per store and $953 in annual sales per square foot of selling area. 3 Store Expansion and Remodeling We believe that significant capital investment is critical to our operating strategy and we are continuing our program to upgrade our existing stores, replace outdated locations and open new "World Class" supermarkets within our core market area of Central New Jersey. In fiscal year 2001, three major remodelings were completed in Freehold, Marlboro and Lakewood, New Jersey. The location in Lakewood, New Jersey was also expanded. Additionally, after fiscal year end, a replacement store in Middletown, New Jersey was opened on November 14, 2001. Over the next three years the Company plans to open three replacement and three new stores and expand two existing locations. Construction has started on two replacement stores. All of these stores are in Central New Jersey and will be World Class operations. Technology Automation and computerization are important to the Company's operations and competitive position. All stores utilize IBM 4690 software for the scanning checkout systems. The hardware for the point of sale ("POS") systems was replaced in our stores in fiscal 1999 and 2000. This POS upgrade brought all of our stores to a state of the art level with increased processing speed and enhanced marketing capabilities. These systems improve pricing accuracy, enhance productivity and reduce checkout time for customers. Automated checkout systems were installed for the first time in any of our stores in the Middletown New Jersey location which opened November 14, 2001. This system will provide improved customer service, especially during peak volume periods, and labor scheduling benefits to the Company. Additionally, all stores have IBM RS/6000 processors, which were replaced with the current version of this equipment in 1999, and satellite communications. The use of these systems allows the Company to offer its customers debit and credit card payment options as well as participation in Price Plus, ShopRite's preferred customer program, and the ShopRite co-branded credit card. By presenting the scannable Price Plus card or the ShopRite co-branded card, customers can be given electronic discounts, receive credit for the value of ShopRite in-ad Clip Less coupons and cash personal checks. Also, customers receive a 1% future rebate when paying with the ShopRite credit card. Additionally, Wakefern is presently testing an on-line shopping and pick up service. We are also using other in store computer systems. Computer generated ordering is installed in all stores. This system is designed to reduce inventory levels and out of stock positions, enhance shelf space utilization and reduce labor costs. In all stores, meat, seafood and delicatessen prices are maintained on department computers for automatic weighing and pricing. Additionally, all stores have computerized time and attendance systems which are used for, among other things, automated labor scheduling, and most stores have computerized energy management systems. We also utilize a direct store delivery receiving and pricing system for most items not purchased through Wakefern in order to provide cost and retail price control over these products, and computerized pharmacy systems which provide customer profiles, retail price control and third-party billing. A frame relay communications network is being used for high speed 4 transmission and collection of data. This system replaced slower telephone lines. The increased speed improves our ability to access, review for accuracy and analyze data. The Company has also installed computer based training systems in all stores. The system is presently being used to train all new checkout personnel. A module for the produce department is currently being tested and will be used in the future to train new employees in that department. In addition, all field merchandisers and operations supervisors are equipped with laptop personal computers. This provides field personnel with current labor and product information to facilitate making accurate and timely decisions. Communication among the Company's stores, our executive offices and Wakefern has been improved with the installation of Lotus Notes (R). Industry Segment and Principal Products The Company is engaged in one industry segment. For the last three fiscal years, our sales were divided among the categories listed below: Fiscal Year Ended Product Categories 11/03/01 10/28/00 10/30/99 Groceries 39.1% 39.3% 39.9% Dairy & Frozen 16.5 16.5 16.7 Meats, Seafood & Poultry 10.2 10.5 10.4 Non-Foods 10.3 10.4 10.6 Produce 8.8 8.6 8.3 Appetizers & Prepared Foods 6.4 6.4 6.2 Pharmacy 4.9 4.5 4.2 Bakery 2.0 2.0 1.9 Liquor, Floral & Garden Centers 1.8 1.8 1.8 ----------------------------- 100.0% 100.0% 100.0% Gross profit derived by the Company from each product category is not necessarily consistent with the percentage of total sales represented by such product category. Wakefern Food Corporation The Company owns a 12.3% interest in Wakefern, a New Jersey corporation organized in 1946, which provides purchasing, warehousing and distribution services on a cooperative basis to its shareholder members, including the Company, who are operators of ShopRite or alternate format supermarkets. As required by the Wakefern By-Laws, repayment of the Company's obligations to Wakefern is personally guaranteed by Joseph J. Saker and Richard J. Saker. These personal guarantees are required of any 5% shareholder of the Company who is active in the operation of the Company. Wakefern and its 41 shareholder members operate approximately 204 supermarkets of which Wakefern owns and operates 22 locations. Products bearing the ShopRite label accounted for approximately 18% of total sales for the fiscal year ended November 3, 2001. Wakefern maintains warehouses in Elizabeth, South Brunswick and Woodbridge, New Jersey which handle 5 a full line of groceries, meats, frozen foods, produce, bakery, dairy and delicatessen products and health and beauty aids, as well as a number of non-food items. Wakefern also operates a grocery and perishable products warehouse in Wallkill, New York. Wakefern's professional advertising staff and its advertising agency develop and place most of the Company's advertising on television, radio and in major newspapers. We are charged for these services based on various formulas which account for the estimated proportional benefits we receive. In addition, Wakefern charges us for, and provides the Company with, product and support services in numerous administrative functions. These include insurance, supplies, technical support for communications and electronic payment systems, equipment purchasing and the coordination of coupon processing. Additionally, we sublease two supermarkets from Wakefern. See Item 2. Properties. Wakefern distributes, as a patronage dividend to each of its members, a share of its net earnings in proportion to the dollar volume of business transacted by each member with Wakefern during each fiscal year. See Note 4 of Notes to Consolidated Financial Statements. Although Wakefern has a significant in house professional staff, it operates as a member cooperative and senior executives of the Company spend a substantial amount of their time working on Wakefern committees overseeing and directing Wakefern purchasing, merchandising and various other programs. Wakefern licenses the ShopRite name to its shareholder members and provides a substantial and extensive merchandising program for the ShopRite label. Except for the license to use the name "ShopRite", we do not believe that the ownership of or rights in patents, trademarks, licenses, franchises and concessions is material to our business. The locations at which we may open new supermarkets under the name ShopRite are subject to the approval of Wakefern's Site Development Committee. Under circumstances specified in its By-Laws, Wakefern may refuse to sell merchandise to, and may repurchase the Wakefern stock of, any shareholder member. Such circumstances include certain unapproved transfers by a shareholder member of its supermarket business or its capital stock in Wakefern, unapproved acquisition by a shareholder member of certain supermarket or grocery wholesale supply businesses, the conduct of a business in a manner contrary to the policies of Wakefern, the material breach of any provision of Wakefern By-Laws or any agreement with Wakefern or a determination by Wakefern that the continued supplying of merchandise or services to such shareholder member would adversely affect Wakefern. Wakefern requires each shareholder to invest in Wakefern's capital stock to a maximum of $550,000 for each store operated by such shareholder member. The precise amount of the investment is computed according to a formula based on the volume of each store's purchases from Wakefern. Under its By-Laws, all bills for merchandise and other indebtedness are due and payable to Wakefern weekly and, if these bills are not paid in full, an additional 1% service charge is due on the unpaid portion. Wakefern requires its shareholder members to pledge their Wakefern stock as collateral for payment of their obligations to Wakefern. The Company's investment in Wakefern was 6 $11,805,000 as of November 3, 2001 and October 28, 2000. We also have an investment in another company affiliated with Wakefern which was $953,000 as of November 3, 2001 and October 28, 2000. See Note 4 of Notes to Consolidated Financial Statements. Since September 18, 1987, the Company has had an agreement, amended in 1992, with Wakefern and all other shareholders of Wakefern, which provides for certain commitments by, and restrictions on, all shareholders of Wakefern. Under the agreement, each shareholder, including the Company, agreed to purchase at least 85% of its merchandise in certain defined product categories from Wakefern. The Company fulfilled this obligation during the 53 week period ended November 3, 2001. If any shareholder fails to meet these purchase requirements, it must make payments to Wakefern (the "Compensatory Payments") based on a formula designed to compensate Wakefern for the profit lost by it by virtue of its lost warehouse volume. Similar payments are due if Wakefern loses volume by reason of the sale of one or more of a shareholder's stores, any shareholder's merger with another entity or the transfer of a controlling interest in the shareholder. Subject to a right of first refusal granted to Wakefern, sales of certain under facilitated stores are permitted free of the restrictions of the agreement. Also, the restrictions of the agreement do not apply if volume lost by a shareholder by the sale of a store is made up by such shareholder by increased volume of new or existing stores and, in any event, the Compensatory Payments otherwise required to be made by the shareholder to Wakefern are not required if the sale is made to Wakefern, another shareholder of Wakefern or to a purchaser which is neither an owner or operator of a chain of 25 or more supermarkets in the United States, excluding any ShopRite supermarkets in any area in which Wakefern operates. The agreement extends for an indefinite term and is subject to termination ten years after the approval by a vote of 75% of the outstanding voting stock of Wakefern. The loss of, or material change in, our relationship with Wakefern (neither of which is considered likely) could have a significant adverse impact on the Company's business. The failure of Wakefern to fulfill its obligations or another member's insolvency or withdrawal from Wakefern could result in additional costs to the remaining members. On November 22, 2000 Big V Supermarkets, Inc. ("Big V"), a member of Wakefern, similar in sales volume to the Company, filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code and indicated its intent to depart from Wakefern. Big V was unsuccessful in its challenge to provisions in its agreements with Wakefern which require, among other things, withdrawing members to 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 to sell substantially all of its assets to Wakefern. The transaction is subject to completion of definitive agreements by the parties, and bankruptcy court approval. It is not possible to predict at this time what effect the reported term sheet will have on Foodarama or the effect on Foodarama if the proposed sale of assets to Wakefern does not occur. We also purchase products and items sold in our supermarkets from a variety of sources other than Wakefern. Neither the Company nor, to the best of our 7 knowledge, Wakefern has experienced or anticipates experiencing any unique material difficulties in procuring products and items in adequate quantities. Competition The supermarket business is highly competitive. The Company competes directly with a number of national and regional chains, including A&P, Pathmark, Wegmans, Acme, Stop & Shop and Foodtown, as well as various local chains and numerous single-unit stores. We also compete with warehouse club stores which charge a membership fee, are non-unionized and operate larger units. Additional competition comes from drug stores, discount general merchandise stores, fast food chains and convenience stores. Many of the Company's competitors have greater financial resources and sales. As most of our competitors offer substantially the same type of products, competition is based primarily upon price, and particularly in the case of meat, produce, bakery, delicatessen, and prepared foods, on quality. Competition is also based on service, location, appearance of stores and on promotion and advertising. The Company believes that its membership in Wakefern and the ShopRite brand name allow it to maintain a low-price image while providing quality products and the availability of a wide variety of merchandise including numerous private label products under the ShopRite brand name. We also provide clean, well maintained stores, courteous and quick service to the customer and flexibility in tailoring the products offered in each store to the demographics of the communities we service. The supermarket business is characterized by narrow profit margins, and accordingly, our viability depends primarily on our ability to maintain a relatively greater sales volume and more efficient operations than our competitors. Many changes are presently taking place in our marketplace. Pathmark, one of our principal competitors, completed a reorganization, exiting Chapter 11 in September 2000. This restructuring of Pathmark is reported to have eliminated almost one billion dollars of debt which was converted to common stock. Edwards, another formidable competitor, has changed its name and format to Stop & Shop, an affiliated company. Grand Union filed for bankruptcy under Chapter 11 and sold almost all of its stores. Many of the Grand Union locations in our trading area are now operating as Stop & Shop and Pathmark. The impact of these changes has strengthened competition in our already highly competitive marketplace. Regulatory and Environmental Matters Our stores and facilities, in common with those of the industry in general, are subject to numerous existing and proposed Federal, State and Local regulations which regulate the discharge of materials into the environment or otherwise protect the environment, establish occupational safety and health standards and cover other matters, including the licensing of the Company's pharmacies and two liquor stores. We believe our operations are in compliance with such existing regulations and are of the opinion that compliance with the regulations has not had and will not have any material adverse effect on our capital expenditures, earnings or competitive position. 8 Employees As of December 31, 2001, the Company employed approximately 5,700 persons, of whom approximately 5,200 are covered by collective bargaining agreements. 74% of the employees are part time and almost all of these employees are covered by the collective bargaining agreements. Although the Company has historically maintained favorable relations with its unionized employees, it could be affected by labor disputes. Most of our competitors are similarly unionized. The Company is a party to six collective bargaining agreements expiring on various dates from February 2002 to April 2005. The bargaining agreement with the United Food and Commercial Workers Local 1262 expired in April 2001 and has been renegotiated. The new contract expires April 2005. By virtue of the nature of the Company's supermarket operations, information concerning backlog, seasonality, major customers, government contracts, research and development activities and foreign operations and export sales is not relevant. Item 2. Properties The Company's twenty-two supermarkets, all of which are leased, range in size from 31,000 to 101,000 square feet with sales area averaging 75 percent of the total area. All stores are air-conditioned, have modern fixtures and equipment, have their own ample parking facilities and are located in suburban areas. Leases for 19 of the Company's 22 existing supermarkets expire on various dates from 2002 through 2025. We are leasing one location, which will be replaced, on a month to month basis. Two of our supermarkets are subleased from Wakefern and these subleases expire in 2006 and 2008, respectively. Upon expiration of these subleases, the underlying leases for these supermarkets will be assigned to and assumed by us if certain conditions, which include the absence of defaults by the Company in its obligations to Wakefern and our lenders, and the maintenance of a specified level of net worth, are satisfied. The terms of these leases expire in 2021 and 2018, respectively. Except for the two subleases with Wakefern, one lease which expires in 2003 and the one month to month lease, all leases contain renewal options ranging from 5 to 25 years. Seven leases require, in addition to a fixed rental, a further rental payment based on a percentage of the annual sales in excess of a stipulated minimum. The minimum has been exceeded in two of the seven locations in the last fiscal year. Most leases also require us to pay for insurance, common area maintenance and real estate taxes. Six additional leases have been signed for supermarket locations, four of which will be replacements for existing stores and two for new locations. The terms of these leases are substantially similar to the terms of the leases for our existing supermarkets. The Company has experienced delays in the opening of certain new stores because of extensive governmental approvals required to develop new retail properties in New Jersey. Also, we are subject to a lease covering our executive and principal administrative offices containing approximately 18,000 square feet in Howell, New Jersey. The Company also leases 57,000 square feet of space used for its bakery operations and storage in Howell, New Jersey, and 50,000 square feet of 9 space used for storage in Lakewood, New Jersey. The Company owns meat and prepared foods processing facilities in Linden, New Jersey, which is the only real property owned by us. In addition, we are a party to an additional eight leases for locations where we no longer conduct supermarket operations; seven of these locations have been sublet to non-affiliated persons. In most instances these stores have been sublet at terms at least substantially equivalent to the Company's obligations under its prime lease. See Notes 10 and 14 of Notes to Consolidated Financial Statements. Item 3. Legal Proceedings In the ordinary course of our business, we are party to various legal actions not covered by insurance. Although a possible range of loss cannot be estimated, it is the opinion of management, that settlement or resolution of these proceedings will not, in the aggregate, have a material adverse impact on the financial condition or results of operations of the Company. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Part II Item 5. Market for Registrant's Common Stock and Security Holder Matters (a) The Company's Common Stock is traded on the American Stock Exchange. The following table sets forth the high and low sales prices for the Common Stock as reported on the American Stock Exchange for the fiscal years ended October 28, 2000 and November 3, 2001. Fiscal Quarter Ended High Low ------------------------- --------------------------- January 29, 2000 28 3/8 19 3/4 April 29, 2000 27 1/4 20 July 29, 2000 28 24 October 28, 2000 24 1/4 17 3/4 January 27, 2001 21 1/4 15 1/8 April 28, 2001 20 17 July 28, 2001 35 1/4 18 1/2 November 3, 2001 42 34.35 (b) The approximate number of record holders of the Company's Common Stock was 324 as of January 18, 2002. (c) No dividends have been declared or paid with respect to the Company's Common Stock since October 1979. We are prohibited from paying dividends on our Common Stock by the Second Amended and Restated Revolving Credit and Term Loan Agreement between the Company and three financial institutions. See Management's Discussion and Analysis-Financial Condition and Liquidity. The Company has no intention of paying dividends on its Common Stock in the foreseeable future. 10 (d) 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 million. As of November 3, 2001 29,070 shares of Common Stock had been repurchased. Of these shares, 25,070 were purchased in privately negotiated transactions, including 7,000 shares owned by the Estate of Mary Saker, of which the Company's Chairman, Joseph J. Saker, is a co-executor, and 18,000 shares owned by certain members of Mr. Saker's family. As of January 18, 2002 an additional 10,310 shares had been repurchased. See Managements Discussion and Analysis-Financial Condition and Liquidity. Item 6. Selected Financial Data The selected financial data set forth below is derived from the Company's consolidated financial statements and should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report. See Management's Discussion and Analysis-Financial Condition and Liquidity and Results of Operations. 11 Year Ended 1212 November 3, October 28, October 30, October 31, November 1, 2001 (1) 2000 (2) 1999 1998 (3) 1997 ------------------------------------------------------------- (Dollars in thousands, except per share amounts) Income statement data: Sales $945,301 $866,363 $778,726 $687,974 $629,733 Net income $ 3,938 $ 2,382 $ 1,945 $ 1,780 $ 1,064 Net income per common share: Basic $ 3.54 $ 2.13 $ 1.74 $ 1.59 $ .90 Diluted $ 3.50 $ 2.13 $ 1.74 $ 1.59 $ .90 Cash dividends per common share - - - - - Balance sheet data (at year end): Working capital (deficit) $ (6,907) $ (1,215) $ 2,507 $ (2,725) $ 3,532 Total assets $194,526 $191,185 $156,186 $149,567 $121,500 Long-term debt (excluding current portion) $ 75,553 $ 82,241 $ 59,604 $ 50,656 $ 35,918 Common share- holders' equity $ 38,493 $ 37,422 $ 35,040 $ 33,014 $ 31,315 Book value per common share $ 35.37 $ 33.49 $ 31.36 $ 29.55 $ 28.03 Tangible book value per common share $ 32.49 $ 30.37 $ 27.93 $ 25.47 $ 23.47 (1) 53 week period. (2) The Company opened one new and one replacement location in February and April 2000, respectively. See Management's Discussion and Analysis - Results of Operations - Sales. (3) The Company opened one replacement and one new location in February and August 1998, respectively. 12 Item 7. 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) 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. 13 (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. 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 14 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. 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. 15 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. 16 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 17 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, including 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. 18 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. 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. 19 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. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Except for indebtedness under the Credit Agreement which is variable rate financing, the balance of our indebtedness is fixed rate financing. We believe that our exposure to market risk relating to interest rate risk is not material. The Company believes that its business operations are not exposed to market risk relating to foreign currency exchange risk, commodity price risk or equity price risk. Item 8. Financial Statements and Supplementary Data See Consolidated Financial Statements and Schedules included in Part IV, Item 14. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 20 Part III Item 10. Directors and Executive Officers of the Registrant Directors of the Company The directors of the Company are as set forth below: Year First Elected a Name and Age Principal Occupation Director Joseph J. Saker (73) Chairman of the Board of the Company 1958 Richard J. Saker (50) President and Secretary of the 1987 Company Charles T. Parton (60) Chairman of the Board - Two River 1995 Community Bank, a commercial bank Albert A. Zager (53) Member - Carton, Arvanitis, 1995 McGreevy, Argeris, Zager & Aikins, L.L.C., Attorneys Robert H. Hutchins (50) President and Managing Director - 2001 Hutchins, Farrell, Meyer & Allison, P.A., Certified Public Accountants Mr. Joseph J. Saker has served as President of the Company since its incorporation in 1958 until October 3, 2000 and as Chairman since 1971. In addition to his responsibilities with the Company, he is active in other community affairs. Mr. Richard J. Saker, a graduate of St. Joseph's University, has been employed by the Company since 1969 and served as Senior Vice President--Operations from 1984 until 1995, at which time he assumed the position of Executive Vice President--Operations. On October 3, 2000, he was elected President of the Company. He is a member of the Board of Directors of Wakefern Food Corporation and a member of its Finance Committee. Richard J. Saker is the son of Joseph J. Saker. 21 Mr. Parton is Chairman of the Board of Two River Community Bank (the "Bank") and has served in that position since May 1, 2000. Prior to assuming that position, he served as President and Chief Executive Officer of the Bank from February 1, 2000 to April 30, 2000. In addition, on March 1, 1999, Mr. Parton began serving and continues to serve as a managing member of TRB, LLC, a financial holding company formed in connection with the incorporation of the Bank. He formerly served as the President of Concord Science and Technology Co., Inc. from May 1997 until February 1999. He has been a financial executive, consultant and Certified Financial Planner for the last eight years and is Executive Vice President and Treasurer of The Parton Corporation. He is also a Director of Kuehne Chemical Co., Inc. (chlorine and caustic soda products). Mr. Zager has been a member of Carton, Arvanitis, McGreevy, Argeris, Zager & Aikins, L.L.C. Attorneys at Law and its predecessors since 1977. He is the Chairman of its Executive and Management Committees. He is President of the Board of Directors of the Center for Holocaust Studies of Brookdale Community College, a founding member of the Board of Directors of the Eastern Monmouth Area Chamber of Commerce Educational Foundation, Inc., and outside General Counsel for Meridian Health System, Inc. Mr. Hutchins, CPA, has been the President and Managing Director of Hutchins, Farrell, Meyer & Allison, P.A., a certified public accounting firm, since he founded the firm in 1984. In addition, Mr. Hutchins has been active in community affairs. He is a founder and Chairman of the Board of Trustees of Ocean Housing Alliance, Inc., and has served as an elected Board Member of the Toms River Regional School District and as an appointed member of the Ocean County Mental Health Advisory Board. He is past Chairman of the American Cancer Society-Ocean Unit, Co-chairperson of the American Cancer Society Eastern Region Excalibur and a member of the National American Cancer Society Excalibur Advisory Committee. 22 Executive Officers of the Company The executive officers of the Company are as set forth below: Name Age Capacities in Which Served Joseph J. Saker (1) 73 Chairman of the Board Richard J. Saker (1) 50 President and Secretary Michael Shapiro (2) 60 Senior Vice President, Chief Financial Officer and Treasurer Emory A. Altobelli (3) 61 Senior Vice President - Corporate Subsidiaries and Services Carl L. Montanaro (4) 60 Senior Vice President - Sales and Merchandising Robert V. Spires (5) 48 Senior Vice President - Human Resources and Labor Relations Joseph C. Troilo (6) 68 Senior Vice President - Financial Administration, Assistant Secretary and Assistant Treasurer (1) See "Directors of the Company" above. (2) Mr. Shapiro joined the Company on August 15, 1994 as Senior Vice President, Chief Financial Officer and Treasurer. (3) Mr. Altobelli has served as Senior Vice President, Corporate Subsidiaries and Services, since June 21, 1995. Prior to that date he served as Senior Vice President, Administration, commencing in June 1990. (4) Mr. Montanaro has served as Senior Vice President, Sales and Merchandising, since June 21, 1995. From March 1988 to June 1995 he served as Vice President of Sales and Merchandising. (5) Mr. Spires has served as Senior Vice President, Human Resources and Labor Relations, since June 21, 1995. From August 1991 to June 1995, he served as Vice President of Human Resources and Labor Relations. 23 (6) Mr. Troilo has served as Senior Vice President, Financial Administration, since August 1994. From 1974 to August 1994, he served as Senior Vice President, Finance. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires the Company's executive officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes of ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission ("SEC"). Executive officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish the Company with copies of all Forms 3, 4 and 5 they file. Based solely on the Company's review of the copies of such forms it has received, the Company believes that, during the fiscal year ended November 3, 2001, all of its executive officers, directors and greater than ten percent beneficial owners complied with all filing requirements applicable to them with respect to reports required to be filed by Section 16(a) of the Exchange Act. Item 11.Executive Compensation The aggregate compensation paid or accrued by the Company during the last three fiscal years ended October 30, 1999, October 28, 2000 and November 3, 2001 to the Chief Executive Officer of the Company and to the four most highly compensated executive officers (other than the Chief Executive Officer) whose compensation in salary and bonus exceeded $100,000 in the last fiscal year (the "Named Officers") is set forth in the following table: 24 Summary Compensation Table Annual Compensation All Other Compensation Shares Underlying Name and Principal Options/ Position Year Salary Bonus SERP(2) 401(k)(3) SARS Joseph J. Saker 2001 $395,553 $122,176 (1) $128,500 $3,400 50,000(4) Chairman and 2000 361,201 69,893 (1) 134,400 3,400 Chief Executive Officer 1999 334,000 63,941 (1) 120,300 3,200 Richard J. Saker 2001 $437,118 $132,188 (1) $345,000 $3,400 50,000(4) President, Chief 2000 374,475 76,742 (1) 298,000 3,400 Operating Officer 1999 341,025 62,826 (1) 270,000 3,200 and Secretary Michael Shapiro 2001 $189,351 $39,430 (1) $ 88,400 $5,421 1,000(4) Senior Vice President, 2000 185,827 25,934 (1) 91,700 6,023 Chief Financial 1999 168,670 25,731 (1) 60,000 5,600 Officer and Treasurer Carl L. Montanaro 2001 $169,367 $31,769 (1) $ 53,200 $5,321 1,000(4) Senior Vice President, 2000 153,106 20,896 (1) 27,400 5,608 Sales and Merchandising 1999 149,266 19,726 (1) 27,500 5,284 Emory A. Altobelli (5) 2001 $147,890 $30,105 (1) $ 41,800 $4,745 1,000(5) Senior Vice President, 2000 140,796 14,852 (1) 32,800 5,455 Corporate Subsidiaries 1999 135,888 14,736 (1) 32,400 4,857 and Services (1) Company's Incentive Compensation Plans (the "Incentive Plans"). The Incentive Plans were adopted by the Company's Board of Directors ("Board of Directors" or "Board") for each of the fiscal years presented in the table to attract, retain and motivate non-union salaried employees by providing incentive compensation awards in cash. The Board administers the Incentive Plans, which includes designating non-union salaried employees eligible to participate in the Incentive Plans and awarding incentive compensation to the eligible employees, subject to the Company achieving certain specified levels of pre-tax profit. In administering the Incentive Plans, the Board took into account the recommendations of the Company's executive officers, except that determinations made with respect to the Company's Chief Executive Officer and Chief Operating Officer were made solely by the Company's independent directors. (2) These amounts represent the projected annual benefit at retirement as of the end of each fiscal year for the applicable named executive officer under the Company's Supplemental Executive Retirement Plan (the "SERP"), which was approved by the Board on January 17, 1989. Amounts payable at retirement under the SERP range from 40% to 50% of the employee's highest average compensation 25 over a five-year period less primary Social Security, pension plan benefits and 401(k) benefits and are payable until death, but for a minimum of 120 months. This Plan covers seven executive officers and other key employees and is intended to supplement the Company's retirement benefits. Such amounts are not payable until the earlier of the death, disability or retirement of the covered employee. The Company anticipates paying for benefits as they become due out of current operating income. The SERP provides for a pre-retirement death benefit of one-half the amount payable upon retirement, actuarially computed, payable to the employee's beneficiary over 120 months. If the employee dies after retirement, such employee's beneficiary will receive the same benefit the employee would have received if the employee had lived for 120 months. During fiscal 2001, the Company recorded $432,000 of deferred compensation expense with respect to the SERP. (3) Represents amounts contributed by the Company under its 401(k) Plan (the "401(k) Plan"). The Company maintains a 401(k) Plan for all qualified non-union employees. Employees are eligible to participate in the 401(k) 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 but may not exceed $10,500 per year. The Company has elected to match 25% of the employee's contributions up to 6% of employee eligible compensation not exceeding $170,000. The Company may make additional discretionary contributions. These discretionary contributions amounted to 2% of eligible compensation for the three calendar years ending December 31, 2001. (4) Represents options to purchase shares of the Company's Common Stock, granted pursuant to the Company's 2001 Stock Incentive Plan. (5) Includes options to purchase 750 shares of the Company's Common Stock granted pursuant to the Company's 2001 Stock Incentive Plan, and 250 Stock Performance Units issued pursuant to that plan, described more particularly in Note (4) to the table below captioned "Option Grants and Exercises During Fiscal Year Ended November 3, 2001." 26 Option Grants and Exercises During Fiscal Year Ended November 3, 2001 ----------------------------------------------------------------------- % Total Stock Options/ Stock SARs Options/ Granted Hypothetical SARs in Exercise Value at Granted Fiscal / Base Expiration Grant Date Shares Shares (1) (2) Year Price Date (3) Vested Exercised Joseph J. 50,000 42.19% $19.60 08/08/11 $1,146,500 5,000 None Saker Richard J. 50,000 42.19% $19.60 08/08/11 $1,146,500 5,000 None Saker Michael 1,000 0.84% $19.60 08/08/11 $22,930 250 None Shapiro Carl L. 1,000 0.84% $19.60 08/08/11 $22,930 250 None Montanaro Emory A. 1,000 0.84% $19.60 08/08/11 $22,930 250 None Altobelli (4) (1) All stock options were granted on August 8, 2001 (the"Grant Date") in accordance with the Company's 2001 Stock Incentive Plan ("2001 Plan"). The stock options granted to Messrs. Joseph J. Saker and Richard J. Saker are assignable to any of their respective children or grandchildren who are employed by the Company at the store manager or higher level. The options granted to Messrs. Joseph J. Saker and Richard J. Saker, which include 5,000 shares subject to currently exercisable options or options exercisable within sixty days of February 28, 2002, vest quarterly from the Grant Date over a five year period. All other stock options granted vest, per individual, 250 shares on the Grant Date and 250 shares on each anniversary of the Grant Date thereafter for the next three years, except in the case of Mr. Altobelli, whose options vest 250 shares on each of the Grant Date and the first and second anniversaries of the Grant Date, and whose 250 Stock Performance Units then vest on the third anniversary of the Grant Date. See Note (4) below. (2) Under the 2001 Plan, the Company may, subject to certain specified limitations, make loans to grantees of stock options granted under the 2001 27 Plan. With respect to options granted to the executive officers named in the table above, the Company has agreed, subject to the required approval of any lender to the Company, to lend to the optionee funds requested by the optionee for the purpose of exercising the option and paying any tax liabilities associated with the exercise. Any such indebtedness will be evidenced by a full-recourse, interest-bearing promissory note, the repayment of which will be secured by a pledge of the stock purchased. Any loan made to Messrs. Joseph Saker and Richard Saker shall provide for repayment over a ten-year period, with interest only payable quarterly during the first five years of the term of the note and interest and principal payable on a quarterly basis in the sixth through the tenth years of the term of the note. Other executive officers of the Company holding the options described in the above-table will be obliged to repay any loan made to them over a two-year period, with quarterly payments of principal and interest. (3) The estimated present value at grant date of options granted during fiscal year 2001 has been calculated using the Black-Scholes option pricing model, based upon the following assumptions: estimated time until exercise of five years; a risk-free interest rate of 5.00%, representing the interest rate on a U.S. Government zero-coupon bond on the date of grant with a maturity corresponding to the estimated time until exercise; a volatility rate of 40.2%; and no dividend yield. The approach used in developing the assumptions upon which the Black-Scholes valuations were calculated is consistent with the requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." (4) Includes 250 Stock Performance Units granted to Mr. Altobelli in accordance with the 2001 Plan. Mr. Altobelli's Stock Performance Units vest in Fiscal 2004 and have a base price of $19.60 and are redeemable in cash only. Generally, stock performance units ("Units") represent a form of long-term incentive compensation issuable as "phantom stock" under the Company's 2001 Plan. The base price of a Unit reflects the price of the Company's Common Stock as of a particular date determined by the 2001 Plan Administrator. The value of the Unit increases as the price of the Company's Common Stock increases over the base price of the Unit. Units may vest over time and vested Units are redeemable in cash only upon redemption by the grantee. 28 Pension Plan The Company maintains a defined benefit pension plan for eligible employees. Full vesting occurs after five years of service. Benefits upon retirement prior to age 65 are reduced actuarially. Benefits under the plan are determined by a formula equal to .6% times the highest five consecutive year average of a participant's compensation from the commencement of employment through September 30, 1997, times the total years of service at September 30, 1997. The plan also provides for lump sum payments. The table set forth below specifies the estimated annual benefits payable upon normal retirement at age 65. Pursuant to a resolution adopted by the Board on September 24, 1997, years of service and benefit accruals for participants in the plan were frozen effective September 30, 1997. In lieu of contributions to the defined benefit pension plan for the three calendar years ended December 31, 2001, the Board has approved contributions to the 401(k) Plan in an amount equal to the sum of (a) two percent (2%) of the eligible compensation of 401(k) Plan participants; and (b) $.25 for every $1.00 contributed to the 401(k) Plan by the participants for up to 6% of the participant's eligible compensation. The Company did not make any contributions to the 401(k) Plan prior to freezing benefit accruals under the defined benefit pension plan. Years of Service at September 30, 1997 Remuneration 15 20 25 30 35 ------------------ -------- -------- ---------- ---------- --------- $100,000 $ 7,500 $10,000 $12,500 $15,000 $17,500 125,000 9,375 12,500 15,625 18,750 21,875 150,000 11,250 15,000 18,750 22,500 26,250 175,000 13,125 17,500 21,875 26,250 30,625 200,000 15,000 20,000 25,000 30,000 35,000 225,000 16,875 22,500 28,125 33,750 39,375 250,000 18,750 25,000 31,250 37,500 43,750 275,000 20,625 27,500 34,375 41,250 48,125 300,000 22,500 30,000 37,500 45,000 52,500 For purposes of vesting benefits under the Pension Plan, the Company has credited Richard J. Saker with 23 years of service; Michael Shapiro with 3 years 29 of service; Emory A. Altobelli with 14 years of service; and Carl L. Montanaro with 35 years of service. The highest five consecutive year average of compensation through September 30, 1997 for each of the Company's Named Officers, after giving effect to applicable limitations under the Internal Revenue Code of 1986, as amended, is as follows: Richard J. Saker - $150,000; Michael Shapiro - $150,000, Carl Montanaro - $119,000, and Emory Altobelli - $119,000. Mr. Joseph J. Saker received a lump sum distribution of $403,878 in January 1995, representing the amount of his vested interest in the Pension Plan. Mr. Joseph C. Troilo received a lump sum distribution of $257,437 on April 1, 1999, representing the amount of his vested interest in the Pension Plan. Directors' Compensation All non-employee directors receive, in addition to reimbursement for their reasonable expenses associated with attendance at meetings of the Board, an annual retainer fee of $12,000 payable quarterly in advance, and a participation fee of $1,000 for each meeting of the Board attended. All non-employee members of the Audit Committee receive, in addition to reimbursement for their reasonable expenses associated with attendance at Audit Committee meetings, a fee of $1,000 for each Audit Committee meeting attended if held on a day other than a day on which a Board meeting is held, and a fee of $500 for each Audit Committee meeting attended if held on the same day as a meeting of the Board. All non-employee members of the Stock Option Committee receive, in addition to reimbursement for their reasonable expenses associated with attendance at Stock Option Committee meetings, a fee of $500 for each Stock Option Committee meeting attended if held on a day other than a day on which a Board meeting is held. The Company paid a total of $56,500 during the fiscal year ended November 3, 2001 to directors who are not employees of the Company. 30 Compensation Committee Interlocks and Insider Participation in Compensation Decisions For the fiscal year ended November 3, 2001, the full Board of Directors performed the functions of a board compensation committee. Executive officers who served on the Board were Mr. Joseph J. Saker, Chairman of the Board and Chief Executive Officer, and Mr. Richard J. Saker, President, Chief Operating Officer, and Secretary. The Board acted on matters of compensation for the Chief Executive Officer and the Chief Operating Officer, with each of such officers abstaining from any compensation decisions relating specifically to them. Compensation Report of the Board of Directors The Company's independent directors are responsible for determining the compensation of the Company's Chief Executive Officer and its Chief Operating Officer. These two officers do not limit their functions to the distinct parameters typically associated with their respective titles. Instead, they actively share the responsibilities attendant to both of these offices in their management of the business. Accordingly, a comparative assessment of the compensation paid for their respective positions is impracticable, because a comparison of compensation based on mutually-exclusive job titles would not yield results commensurate with the combined contributions of these officers. Thus, in order to arrive at appropriate levels of compensation, the Company's independent directors not only reviewed market compensation levels for chief executive officers and chief operating officers of similarly-sized grocery retailing organizations throughout the country, but they also considered a "management service fee" approach to this determination. The management service fee concept uses competitive data to evaluate appropriate relative compensation levels between a corporation's chief executive officer and chief operating officer in circumstances where the duties of these offices overlap. This concept more accurately recognizes the value to the Company of the shared efforts of its senior management and the importance of such efforts in achieving seamless management succession. The independent directors considered these factors in determining the compensation of the Company's Chief Executive Officer and Chief Operating Officer for the fiscal year ended November 3, 2001. 31 The Company's Chief Executive Officer and Chief Operating Officer make determinations with respect to cash compensation paid to other executive officers of the Company. In addition to considering market comparisons, salaries paid to executive officers are based on the executive's level of responsibility, experience in his role, and overall performance and the condition of the Company and the economy at large. The Company's Board is responsible for administration of the Company's 2001 Incentive Compensation Plan. Pursuant to the 2001 Incentive Compensation Plan, the Company has undertaken to pay incentive compensation to designated employees if it achieved certain adjusted pre-tax profit levels. The terms of the Company's 2001 Incentive Compensation Plan are generally consistent with the terms of incentive compensation plans adopted and approved by the Company for prior fiscal years. Pursuant to the Company's 2001 Incentive Plan, the Board awarded cash incentive compensation to certain non-union salaried employees of the Company, including Mr. Joseph J. Saker and Mr. Richard J. Saker. See "Executive Compensation - Summary Compensation Table." The Stock Option Committee of the Board of Directors, which consists of its outside directors, administers the Company's 2001 Plan. The 2001 Plan enables the Company to grant stock-based and other forms of incentives, including stock options, stock appreciation rights, phantom stock, and restricted stock, among others. The Stock Option Committee may select from among these types of awards, and may combine different types of awards within individual grants, to establish individual grants affording long-term incentives, for the purpose of better aligning the interests of the Company's management with those of its shareholders. Based on its assessment of organizational roles and past and current contributions of key executive employees of the Company, the absence over a significant period of time of any equity incentive plan for such executive employees, and to provide a means of retaining and affording incentives to key executive employees, the Stock Option Committee granted awards to the Company's key executives and directors, whose types, terms, conditions, and quantities are set forth under "Option Grants and Exercises During Fiscal Year Ended November 3, 2001." The Stock Option Committee intends to continue this process in the future in order to further satisfy its objectives. Section 162(m) of the Internal Revenue Code places a limit of $1,000,000 (per person) on the amount of compensation that may be deducted by a public company 32 in any year for compensation paid to each of a corporation's Named Officers. Qualifying performance based compensation is not subject to the deduction limit if certain requirements are satisfied. The grant of options to the Named Officers in 2001 under the 2001 Plan does not qualify as performance based compensation. The exercise of these options could result in deductible compensation in excess of the limit imposed by Section 162(m). The Board of Directors may award compensation that may be non-deductible under Section 162(m) when, in the exercise of its business judgment, such award would be in the best interests of the Company. The Section 162(m) limitation has not yet had any effect upon the Company and its ability to deduct, for tax purposes, compensation paid to its Named Officers. The Company's independent directors believe that the best interests of the Company and its shareholders are served by the Company's current compensation programs. The Board members will continue to review the Company's compensation plans periodically to determine what changes, if any, should be implemented to their structure, taking into account the Company's financial condition and performance. Submitted by: Charles T. Parton Albert A. Zager Robert H. Hutchins Performance Analysis Set forth below is a line graph comparing the cumulative total return of the Company, the AMEX Wholesale & Retail Trade Index, the Standard & Poor's 500 Composite Stock Price Index and the AMEX Composite Index for the five years commencing November 2, 1996 and ended November 3, 2001. 33 FOODARAMA SUPERMARKETS, INC. PRICE PERFORMANCE GRAPH [THE FOLLOWING TABLES ARE REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL] AMEX COMPOSITE 1996 1997 1998 1999 2000 2001 --- --- --- --- --- --- 568.72 675.75 645.41 800.80 909.30 824.20 1.09 1.30 1.24 1.54 1.74 1.45 109 130 124 154 174 144.92 INDUSTRY (AMEX) 1996 1997 1998 1999 2000 2001 --- --- --- --- --- --- 199.49 245.86 233.07 247.94 165.20 127.19 1.10 1.36 1.29 1.37 0.91 .64 110 136 129 137 91 63.76 FSM 1996 1997 1998 1999 2000 2001 --- --- --- --- --- --- 14.25 18.50 32.00 28.63 18.38 40.75 1.18 1.53 2.64 2.36 1.52 2.86 118 153 264 236 152 285.96 S&P 500 1996 1997 1998 1999 2000 2001 --- --- --- --- --- --- 705.27 914.62 1098.67 1362.03 1429.40 1059.78 1.21 1.57 1.89 2.34 2.46 1.50 121 157 189 234 246 150.27 Item 12. Security Ownership of Certain Beneficial Owners and Management Principal Shareholders The following table shows, as of February 28, 2002, the persons known to the Company who owned directly or beneficially more than 5% of the outstanding Common Stock of the Company: Amount Beneficially Percent Name of Beneficial Owner Owned of Class -------------------------------------------------------- ------------- -------- Joseph J. Saker (1)(2)(3)(4)(7) 259,576 24.0 Estate of Mary Saker (1)(3) 55,798 5.1 Richard J. Saker (1)(5)(6)(7) 99,303 9.2 Dimensional Fund Advisors, Inc.(8) 82,700 7.7 Arthur N. Abbey (9) 114,400 10.6 The Dinger Group (10) 72,766 6.8 (1) The address of the foregoing person is c/o Foodarama Supermarkets, Inc., 922 Highway 33, Building 6, Suite 1, Freehold, New Jersey 07728. (2) Includes 13,378 shares held by Joseph J. Saker's wife and 31,399 shares willed to him by Mary Saker. (3) Mary Saker, deceased, was the mother of Joseph J. Saker. 31,399 of her shares have been willed to Joseph J. Saker. (4) Includes 85,000 shares held by the Joseph Saker Family Partnership, L.P. (the "Partnership"), of which the Joseph J. Saker Corp. (the "General Partner") is the sole general partner. The General Partner is owned solely by Joseph J. Saker, has a 1% interest in the Partnership and has the sole power to vote and dispose of these shares. Except for his interest in the General Partner, Joseph J. Saker does not own any other interest in the Partnership. The limited partner has a 99% interest in the Partnership. Joseph J. Saker disclaims beneficial ownership of shares held by the Partnership in excess of his pecuniary interest therein. (5) Includes 1,760 shares held by Richard J. Saker's wife and 1,377 shares which are held in a trust for Mr. Saker's son, of which Mr. Saker is the trustee. Mr. Saker disclaims beneficial ownership of the shares described in the preceding sentence. 34 (6) Does not include 85,000 shares held by the Joseph Saker Family Partnership, L.P. The General Partner of the Partnership, which is owned solely by Joseph J. Saker, has the sole power to vote and dispose of these shares. Richard J. Saker has an indirect interest in these shares by reason of his interest in the limited partnership interests of the Partnership. Richard J. Saker disclaims beneficial ownership of shares held by the Partnership in excess of his pecuniary interest. (7) Includes 5,000 shares subject to currently exercisable options or options exercisable within sixty days of February 28, 2002 granted pursuant to the 2001 Plan. (8) The address of Dimensional Fund Advisors, Inc. ("Dimensional") is 1299 Ocean Avenue, 11th Floor, Santa Monica, California 90401. Dimensional, an investment advisor registered under Section 203 of the Investment Advisors Act of 1940, furnishes investment advice to four investment companies registered under the Investment Company Act of 1940, and serves as investment manager for certain other investment vehicles, including commingled group trusts. These investment companies and investment vehicles are referred to collectively herein as the "Portfolios." In its role as investment advisor and investment manager, Dimensional possesses both voting and investment power over 82,700 shares of Foodarama Supermarkets, Inc. Common Stock based upon a copy of Schedule 13G dated January 30, 2002. The Portfolios own all securities reported in the table, and Dimensional disclaims beneficial ownership of such securities. (9) The address of Arthur N. Abbey is 212 East 39th Street, New York, New York 10016. Based upon a copy of Schedule 13D dated April 15, 1999, Mr. Abbey has sole voting power with respect to the shares. (10) On the basis of a copy of Schedule 13D dated February 7, 2001, the Dinger Group is comprised of Carl W. Dinger III (51,800 shares), Jeffrey E. Dinger (10,900 shares), Carl W. Dinger, Jr. (5,500 shares), Carousel World LP (1,500 shares), Ashley E. Dinger Trust (407 shares), Caleigh N. Dinger Trust (759 shares), Shelby C. Dinger Trust (100 shares) and Dinger Marital Trust (1,800 shares). As of February 7, 2001, the reporting persons comprising the Dinger Group beneficially owned a total of 72,766 shares of the Company's Common Stock. Except for the trusts, each member of the Dinger Group owns shares individually and retains voting control over his, 35 her or its respective holdings. Shares in the trusts are held for the benefit of the children of Carl W. Dinger III and are voted by the trustees, Carl W. Dinger III, Jeffrey E. Dinger and Brenda L. Dinger. Carousel World LP is a partnership of which Carl W. Dinger III and Jeffrey E. Dinger are the general partners. The member of the Dinger Group specified in the Schedule 13D as being authorized to receive notices and communications is Carl W. Dinger III, whose address is 7 Lake Trail West, Morristown, New Jersey 07960. Securities Owned By Management The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of February 28, 2002 by each director and nominee for director of the Company, the executive officers of the Company on such date and the executive officers, nominees for director and directors as a Group. Except as set forth in the footnotes to this table, the shareholders have sole voting and investment power over such shares. Amount Beneficially Percent Name of Beneficial Owner Owned of Class ---------------------------------------------- ------------------ ----------- Joseph J. Saker (1)(2)(3)(4) 259,576 24.0 Richard J. Saker (1)(2)(5)(6) 99,303 9.2 Albert A. Zager (1)(7) 1,750 * Charles T. Parton (1)(7) 2,750 * Robert H. Hutchins (1)(7) 250 * Michael Shapiro (1) (7)(8) 2,250 * Emory A. Altobelli (1)(7) 275 * Carl L. Montanaro (1)(7) 265 * Robert V. Spires (1)(7) 250 * Joseph C. Troilo (1)(7) 250 * Directors, Nominees for Director and Executive Officers as a Group (10 persons) (2)(3)(4)(5)(6)(7)(8)(9) 366,919 33.6 (*) Less than one percent. (1) The address of the foregoing person is c/o Foodarama Supermarkets, Inc., 922 Highway 33, Building 6, Suite 1, Freehold, New Jersey 07728. 36 (2) Includes 5,000 shares subject to currently exercisable options or options exercisable within 60 days of February 28, 2002 granted pursuant to the 2001 Plan. (3) Includes 13,378 shares held by Joseph J. Saker's wife and 31,399 shares willed to him by Mary Saker. (4) Includes 85,000 shares held by the Joseph Saker Family Partnership, L.P. (the "Partnership"), of which the Joseph J. Saker Corp. (the "General Partner") is the sole general partner. The General Partner is owned solely by Joseph J. Saker, has a 1% interest in the Partnership and has the sole power to vote and dispose of these shares. Except for his interest in the General Partner, Joseph J. Saker does not own any other interest in the Partnership. The limited partner has a 99% interest in the Partnership. Joseph J. Saker disclaims beneficial ownership of shares held by the Partnership in excess of his pecuniary interest therein. (5) Includes 1,760 shares held by Richard J. Saker's wife and 1,377 shares which are held in a trust for the benefit of Mr. Saker's son, of which Mr. Saker is the trustee. Mr. Saker disclaims beneficial ownership of the shares described in the preceding sentence. (6) Does not include 85,000 shares held by the Joseph Saker Family Partnership, L.P. The General Partner of the Partnership, which is owned solely by Joseph J. Saker, has the sole power to vote and dispose of these shares. Richard J. Saker has an indirect interest in these shares by reason of his interest in the limited partnership interests of the Partnership. Richard J. Saker disclaims beneficial ownership of shares held by the Partnership in excess of his pecuniary interest. (7) Includes 250 shares subject to currently exercisable options granted pursuant to the 2001 Plan. (8) Owned jointly with Mr. Shapiro's wife. (9) Of the 366,919 shares, directors of the Company own or have rights to acquire 363,629 shares. Previously, Joseph J. Saker had pledged shares of Common Stock owned by him to secure certain loans obtained in connection with personal investments and other obligations. The loans secured by these shares have been repaid. 37 The Company's Second Amended and Restated Revolving Credit and Term Loan Agreement provides that an event of default shall occur if Messrs. Joseph J. Saker and Richard J. Saker together, do not own, beneficially, all voting rights with respect to at least 28% of all of the issued and outstanding Common Stock of the Company. Item 13. Certain Relationships and Related Transactions Certain Transactions (a) Certain Business Relationships and Related Party Transactions As required by the By-Laws of Wakefern Food Corporation ("Wakefern"), a retailer-owned food distribution corporation which provides purchasing, warehousing and distribution services to the Company as well as other retail supermarket chains, the obligations owed by the Company to Wakefern are personally guaranteed by Joseph J. Saker and Richard J. Saker. As of November 3, 2001 the Company was indebted to Wakefern in the amount of approximately $35,988,000 for current charges in the ordinary course of business. Wakefern presently requires each of its shareholders to invest up to $550,000 in Wakefern's non-voting capital stock for each store operated by it, computed in accordance with a formula based on the volume of such store's purchases from Wakefern. As of November 3, 2001, the Company had a 12.3% investment in Wakefern of $11,805,000. As a shareholder member of Wakefern, the Company earns a share of any 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. As of November 3, 2001, the Company was indebted in connection with an investment in Wakefern. The debt of $2,212,000 was non-interest bearing and payable in scheduled installments over a period of up to six years. The Company also has an investment in Insure-Rite, Ltd., another company affiliated with Wakefern, of $953,000 as of November 3, 2001. Insure-Rite, Ltd. provides the Company with a portion of its liability insurance coverage. The Company paid $3,819,000 for such insurance coverage in fiscal 2001 and believes that such amount is comparable to the amount that would be charged by a similarly situated unaffiliated general liability and property insurer. 38 The Company leases from Joseph J. Saker, the Chairman of the Company, and his wife, doing business as Saker Enterprises, a 57,000 square foot supermarket in Freehold, New Jersey, under a lease expiring December 31, 2018. During the fiscal year ended November 3, 2001, the Company exercised options to extend the term of this lease to 2018 and received four new five-year extension options. The Company also leases from Saker Enterprises a 5,200 square foot garden center building and 5,000 square feet of yard area under a lease expiring December 31, 2003 and 9,000 square feet of space for its liquor store under a lease expiring December 31, 2003, both of which are located in the same shopping center as the supermarket. During the fiscal year ended November 3, 2001, an aggregate amount for rent (including taxes and insurance) of $919,000 was paid by the Company to Saker Enterprises for the supermarket, garden center and liquor store. The Company subleases from Wakefern a supermarket in East Windsor, New Jersey under a sublease expiring in 2008. The Company also subleases from Wakefern a supermarket in Marlboro, New Jersey under a sublease expiring in 2006. During the fiscal year ended November 3, 2001, aggregate amounts for rent of $1,090,000 and $797,000 were paid by the Company to Wakefern for the East Windsor supermarket and the Marlboro supermarket, respectively. Upon expiration of these subleases, the underlying leases will be assigned to and assumed by the Company provided that certain conditions, which include the absence of defaults by the Company in its obligations to Wakefern and the Company's lenders, and the maintenance of a specified level of net worth, are satisfied. The term of the leases for the East Windsor and Marlboro supermarkets expire in 2018 and 2021, respectively. During the fiscal year ended November 3, 2001, in connection with the stock repurchase program announced by the Company on June 8, 2001, the Company repurchased a total of 25,000 shares in privately negotiated sales by related parties. 7,000 of these shares, which were repurchased at an average price per share of $33.26, 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 Mr. Saker's three daughters, one of whom sold 3,000 shares to the Company at an average per share price of $34.50; the second of whom sold 5,000 shares to the Company at an average per share price of $35.50; and the third of whom sold 10,000 shares to the Company at an average per share price of $39.50. 39 During the fiscal year ended November 3, 2001, the Company utilized an entity, which is wholly-owned by a 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 services provided by this entity during the fiscal year ended November 3, 2001. The Company believes that the terms of the foregoing transactions are comparable to those available from non-affiliated persons under similar circumstances. (b) Indebtedness of Management During the fiscal year ended November 3, 2001 Joseph J. Saker, Chairman of the Company, prepaid indebtedness owed by him to the Company of $177,000. This amount, which was originally due in quarterly installments over a five-year period ending July 1, 2006, bore interest at 9% per annum. 21 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K a.1. Audited financial statements and Page No. supplementary data Independent Auditors' Report F-1 Foodarama Supermarkets, Inc. and Subsidiaries Consolidated Financial Statements: Balance Sheets as of November 3, 2001 F-2 to F-3 and October 28, 2000. Statements of Operations for each of the F-4 fiscal years ended November 3, 2001, October 28, 2000 and October 30, 1999. Statements of Shareholders' Equity F-5 for each of the fiscal years ended November 3, 2001, October 28, 2000 and October 30, 1999. Statements of Cash Flows for each of the F-6 fiscal years ended November 3, 2001, October 28, 2000 and October 30, 1999. Notes to Consolidated Financial Statements F-7 to F-28 a.2. Financial Statement Schedules Schedule II S-1 Schedules other than Schedule II have been omitted because they are not applicable. a.3. Exhibits E-1 to E-5 b. Reports on Form 8-K No reports on Form 8-K were required to be filed during the fourth quarter of fiscal 2001. * * * * * * 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. FOODARAMA SUPERMARKETS, INC. (Registrant) /S/ Michael Shapiro -------------------------- Michael Shapiro Senior Vice President, Chief Financial Officer /S/ Thomas H. Flynn -------------------------- Thomas H. Flynn Principal Accounting Officer Date: February 28, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Name Title Date /S/ Joseph J. Saker -------------------------------------------------- Joseph J. Saker Chairman of the Board February 27, 2002 of Directors, Chief Executive Officer /S/ Richard Saker --------------------------------------------------- Richard Saker President, Secretary February 27, 2002 and Director, Chief Operating Officer /S/ Charles T. Parton --------------------------------------------------- Charles T. Parton Director February 27, 2002 /S/ Albert A. Zager ---------------------------------------------------- Albert A. Zager Director February 27, 2002 /S/ Robert H. Hutchins ---------------------------------------------------- Robert H. Hutchins Director February 27, 2002 23 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. In connection with our audits of the financial statements referred to above, we audited the financial schedule listed under Item 14. In our opinion, the financial schedule, when considered in relation to the financial statements taken as a whole, presents fairly, in all material respects, the information stated therein. AMPER, POLITZINER & MATTIA P.A. January 18, 2002 Edison, New Jersey FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES Consolidated Balance Sheets November 3, 2001 and October 28, 2000 (In thousands) Assets 2001 2000 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 ========== ========= See notes to consolidated financial statements. F-2 FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES Consolidated Balance Sheets - (continued) November 3, 2001 and October 28, 2000 (In thousands) Liabilities and Shareholders' Equity 2001 2000 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. F-3 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. F-4 FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES 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 Capital Other Comprehensive Shares in Excess Deferred Comprehensive Retained Treasury Stock Total Issued Amount of Par Compensation Income Income Earnings Shares Amount Equity ----------------------------------------------------------------------------------------------------------------------------- Balance - October 31, 1998 1,621,767 $ 1,622 $ 2,351 $ - $ (81) $ 35,751 (504,477) $(6,629)$ 33,014 Comprehensive income Net income 1999 - - - - - $ 1,945 1,945 - - 1,945 Other comprehensive income Minimum pension liability - - - - 81 81 - - - 81 --------- ------ ------- ------- --------- -------- ----- -------- ------- ----- Comprehensive income - $2,026 Balance - October 30, 1999 1,621,767 1,622 2,351 - - 37,696 (504,477) (6,629) 35,040 Comprehensive income Net income 2000 - - - - - $ 2,382 2,382 - - 2,382 ---------- ------ ------- ------- --------- -------- ------ -------- ------- ------ Comprehensive income $ 2,382 Balance - October 28, 2000 1,621,767 1,622 2,351 - - 40,078 (504,477) (6,629) 37,422 Grant of stock options - - 1,817 (1,817) - - - - - Amortization of deferred compensation - - - 121 - - - - - 121 Repurchase of common stock - - - - - - (29,070) (1,068) (1,068) Comprehensive income Net income 2001 - - - - - 3,938 3,938 - - 3,938 Other comprehensive income Minimum pension liability - - - - (1,920) (1,920) - - - (1,920) --------- ----- ------ ------ ---------- --------- ------ -------- ------- ------- Comprehensive income $ 2,018 Balance - November 3, 2001 1,621,767 $1,622 $4,168 $(1,696) $ (1,920) $44,016 (533,547) $(7,697) $38,493
See notes to consolidated financial statements. F-5 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 F-6 FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES 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. F-7 FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tabular dollars in thousands, except per share amounts) Note 1 - Summary of Significant Accounting Policies - (continued) 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. 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. F-8 FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tabular dollars in thousands, except per share amounts) Note 1 - Summary of Significant Accounting Policies - (continued) 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. 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. F-9 FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tabular dollars in thousands, except per share amounts) Note 1 - Summary of Significant Accounting Policies - (continued) Recent Accounting Pronouncements - (continued) 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. F-10 FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tabular dollars in thousands, except per share amounts) 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 ============ =========== 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. F-11 FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tabular dollars in thousands, except per share amounts) Note 4 - Related Party Transactions - (continued) Wakefern Food Corporation - (continued) 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. 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. F-12 FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tabular dollars in thousands, except per share amounts) 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 ========= ======== F-13 FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tabular dollars in thousands, except per share amounts) Note 7 - Long-term Debt - (continued) 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%. F-14 FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tabular dollars in thousands, except per share amounts) Note 7 - Long-term Debt - (continued) 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. 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 ============ ========== F-15 FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tabular dollars in thousands, except per share amounts) Note 7 - Long-term Debt - (continued) Other Notes Payable - (continued) 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 ========== ======= F-16 FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tabular dollars in thousands, except per share amounts) Note 10 -Long-term Leases - (continued) Capital Leases - (continued) 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 ===================================== F-17 FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tabular dollars in thousands, except per share amounts) Note 10- Long-term Leases - (continued) Operating Leases - (continued) 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. 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. F-18 FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tabular dollars in thousands, except per share amounts) Note 11- Stock Option Plan - (continued) 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 Exercise Price Number Exercise Price Life $19.60 107,500 9.75 years $19.60 2,000 $19.60 F-19 FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tabular dollars in thousands, except per share amounts) Note 11 -Stock Option Plan - (continued) Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at $22.93 on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The following weighted-average assumptions were used for the year ended November 3, 2001: Risk-free interest rate 5.0% Expected volatility 40.2% Dividend yield 0% Expected life 5 years 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). F-20 FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tabular dollars in thousands, except per share amounts) 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 ----- ------- F-21 FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tabular dollars in thousands, except per share amounts) Note 13 - Income Taxes - (continued) 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. F-22 FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tabular dollars in thousands, except per share amounts) 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. 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 ======== ======== F-23 FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tabular dollars in thousands, except per share amounts) Note 15 -Retirement and Benefit Plans - (continued) Defined Benefit Plans - (continued) 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. 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. F-24 FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tabular dollars in thousands, except per share amounts) Note 15 -Retirement and Benefit Plans - (continued) 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) ------- ------- F-25 FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tabular dollars in thousands, except per share amounts) Note 16 -Other Postretirement and Postemployment Benefits - (continued) Postretirement Benefits - (continued) November 3, October 28, 2001 2000 ----------- ----------- 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) ======= ======= 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. F-26 FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tabular dollars in thousands, except per share amounts) 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. 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. F-27 FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Tabular dollars in thousands, except per share amounts) 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. F-28 Schedule II FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts Fiscal Years Ended November 3, 2001, October 28, 2000 and October 30, 1999 (In thousands) Additions Balance Charge to Charge to Balance at beginning costs and other at end Description of year expenses accounts Deductions of year ----------- -------- --------- -------- ---------- -------- Fiscal year ended November 3, 2001: Allowance for doubtful accounts (deducted from receivables and other current assets) $ 543 $ 400 $ - 70 (1) $ 873 ---------- -------- ------- ----- ------- Fiscal year ended October 28, 2000: Allowance for doubtful accounts (deducted from receivables and other current assets) $ 506 $ 143 $ - $ 106 (1) $ 543 ---------- -------- ------- ----- ------ Fiscal year ended October 30, 1999: Allowance for doubtful accounts (deducted from receivables and other current assets) $ 402 $ 199 $ - $ 95 (1) $ 506 ---------- -------- ------- ----- ------ (1) Accounts deemed to be uncollectible. S-1 Schedule X c. Exhibits 3. Articles of Incorporation and By-Laws *i. Restated Certificate of Incorporation of Registrant filed with the Secretary of State of the State of New Jersey on May 15, 1970. *ii. Certificate of Merger filed with the Secretary of State of the State of New Jersey on May 15, 1970. *iii. Certificate of Merger filed with the Secretary of State of the State of New Jersey on March 14, 1977. *iv. Certificate of Merger filed with the Secretary of State of the State of New Jersey on June 23, 1978. *v. Certificate of Amendment to Restated Certificate of Incorporation filed with the Secretary of State of the state of New Jersey on May 12, 1987. **vi. Certificate of Amendment to Restated Certificate of Incorporation filed with the Secretary of State of the State of New Jersey on February 16, 1993. ****vii. Amendment to the Certificate of Incorporation of the Registrant dated April 4, 1996. *viii. By-Laws of Registrant. *ix. Amendments to By-Laws of Registrant adopted September 14,1983. x. Amendment to By-Laws of Registrant adopted March 15, 1991 is incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the year ended November 2, 1991 filed with the Securities and Exchange Commission on February 18, 1992. * Each of these Exhibits is incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the year ended October 29, 1988 filed with the Securities and Exchange Commission on February 13, 1989. ** Each of these Exhibits is incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the year ended October 31, 1992 filed with the Securities and Exchange Commission on February 19, 1993. E-1 10. Material Contracts. i. The Agreement dated September 18, 1987 entered into by Wakefern Food Corporation and the Registrant is incorporated herein by reference to Exhibit A to the Registrant's Form 8-K filed with the Securities and Exchange Commission on November 19, 1987. ***ii. Certificate of Incorporation of Wakefern Food Corporation together with amendments thereto and certificates of merger. ***iii. By-Laws of Wakefern Food Corporation. ***iv. Form of Deferred Compensation Agreement, between the Registrant and certain of its key employees. v. Registrant's 1987 Incentive Stock Option Plan is incorporated herein by reference to Exhibit 4 (a) to the Registrant's Form S-8 filed with the Securities and Exchange Commission on May 26, 1989. vi. Agreement, dated September 20, 1993, between the Registrant, ShopRite of Malverne, Inc. and The Grand Union Company is incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the year ended October 30, 1993, filed with the Securities and Exchange Commission on February 24, 1994. vii. Revolving Credit and Term Loan Agreement, dated as of February 15, 1995 between the Registrant and NatWest Bank as agent for a group of banks is incorporated herein by reference to the Registrant's Form 8-K filed with the Securities and Exchange Commission on July 10, 1995. viii. Asset Purchase Agreement dated April 20, 1995 and Amendment No. 1 to the Agreement dated May 24, 1995 between the Registrant and Wakefern Food Corporation is incorporated herein by reference to the Registrant's Form 8-K filed with the Securities and Exchange Commission on July 27, 1995. ix. Amendment of Revolving Credit and Term Loan Agreement, dated as of January 25, 1996, between the Registrant and each of the banks which are signatory thereto is incorporated herein by reference to the Registrant's Form 10-Q for the quarterly period ended January 27, 1996, filed with the Securities and Exchange Commission on March 12, 1996. ****x. Agreement, dated as of March 29, 1996, between the Registrant and Wakefern Food Corporation. ------------------------------------------------------------------------------ *** Each of these Exhibits is incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the year ended October 28, 1989 filed with the Securities and Exchange Commission on February 9, 1990. E-2 ****xi. Amendment of Revolving Credit and Term Loan Agreement, dated as of May 10, 1996, between the Registrant and each of the Banks which are signatory thereto. xii. Waiver and Amendment of Revolving Credit and Term Loan Agreement, dated as of July 26, 1996, between the Registrant and each of the Banks which are signatory thereto is incorporated herein by reference to the Registrant's Form 10-Q for the quarterly period ended July 27, 1996, filed with the Securities and Exchange Commission on September 10, 1996. xiii. Amended and Restated Revolving Credit and Term Loan Agreement, dated as of May 2, 1997, between the Registrant and the Financial Institution which are signatory thereto is incorporated herein by reference to the Registrant's Form 10-Q for the quarterly period ended May 3, 1997, filed with the Securities and Exchange Commission on June 16, 1997. *****xiv. First Amendment to Amended and Restated Revolving Credit and Term Loan Agreement, dated October 28, 1997, between the Registrant and the Financial Institution which are signatory thereto. *****xv. Consent and Second Amendment to Amended and Restated Revolving Credit and Term Loan Agreement and other loan documents, dated November 14, 1997, between the Registrant and the Financial Institution which are signatory thereto. *****xvi. Third Amendment to Amended and Restated Revolving Credit and Term Loan Agreement, dated January 15, 1998, between the Registrant and the Financial Institution which are signatory thereto. xvii. Amendment to the Amended and Restated Revolving Credit and Term Loan Agreement, dated March 11, 1999, between the Registrant and the Financial Institution which are signatory thereto, is incorporated herein by reference the Registrant's Form 10-Q for the quarterly period ended May 1, 1999, filed with the Securities and Exchange Commission on June 11, 1999. **** Incorporated herein by reference to the Registrant's Form 10-Q for the quarterly period ended April 27, 1996, filed with the Securities and Exchange Commission on June 10, 1996. ***** Incorporated herein by reference to the Registrant's Form 10-K for the year ended November 1, 1997 filed with the Securities and Exchange Commission on January 29, 1998. E-3 xviii. Second Amended and Restated Revolving Credit and Term Loan Agreement, dated as of January 7, 2000 between the Registrant and each of the Financial Institutions which are signatory thereto, is incorporated herein by reference to the Registrant's Form 10-K for the year ended October 30, 1999 filed with the Securities and Exchange Commission on January 27, 2000. xix. Restatement of Supplemental Executive Retirement Plan, dated as of January 1, 1998, is incorporated herein by reference to the Registrant's Form 10-Q for the quarterly period ended January 24, 2000, filed with the Securities and Exchange Commission on March 9, 2000. xx. Registrant's 2001 Stock Incentive Plan is incorporated herein by reference to Appendix B to the Registrant's Proxy Statement filed with the Securities and Exchange Commission on February 26, 2001. xxi. Amendment No. 1 to Second Amended and Restated Revolving Credit and Term Loan Agreement, dated as of May 11, 2001, between the Registrant and each of the Financial Institutions which are signatory thereto is incorporated herein by reference to the Registrant's Form 10-Q for the quarterly period ended April 28, 2001, filed with the Securities and Exchange Commission on June 8, 2001. xxii. Amendment No. 2 to Second Amended and Restated Revolving Credit and Term Loan Agreement, dated as of August 7, 2001 between the Registrant and each of the Financial Institutions which are signatory thereto is incorporated herein by reference to the Registrant's Form 10-Q for the quarterly period ended July 28, 2001, filed with the Securities and Exchange Commission on September 10, 2001. E-4 Exhibit 21 LIST OF SUBSIDIARIES OF FOODARAMA SUPERMARKETS, INC. Name of Subsidiary State of Incorporation ShopRite of Malverne, Inc. New York New Linden Price Rite, Inc. New Jersey ShopRite of Reading, Inc. Pennsylvania E-5