UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 2, 2002 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 or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $16,382,000. Computation is based on the closing
sales price of $47.25 per share of such stock on the American Stock Exchange on
May 4, 2002, the last business day of the Registrant's most recently completed
second quarter.
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes____ No __x__
As of January 10, 2003, the number of shares outstanding of Registrant's
Common Stock was 986,867
..
DOCUMENTS INCORPORATED BY REFERENCE
None
1
PART I
Disclosure Concerning Forward-Looking Statements
All statements, other than statements of historical fact, included in this
Form 10-K, 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. 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 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-three 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, nineteen 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
Nov. 2, Nov. 3, Oct 28, Oct 30, Oct 31,
2002 2001** 2000 1999 1998
Average annual sales per store
(in millions)* .................. $43.8 $43.0 $40.5 $37.1 $35.3
Same store sales increase
from prior year ................. 1.56% 3.77% 4.24% 6.28% 4.45%
Total store area in square feet
(in thousands) .................... 1,340 1,301 1,294 1,195 1,195
Total store selling area in square
feet (in thousands) ............... 1,001 973 966 895 895
Average total square feet per store
(in thousands) .................... 61 59 59 57 57
Average square feet of selling area
per store (in thousands) .......... 46 44 44 43 43
Annual sales per square foot of
selling area* ..................... $962 $973 $923 $870 $832
Number of stores:
Stores remodeled (over $500,000) 0 2 2 1 1
New stores opened .............. 0 0 1 0 1
Stores replaced/expanded ....... 1 1 1 0 2
Stores closed/divested ......... 1 0 1 0 1
Number of stores by size
(total store area):
30,000 to 39,999 sq.ft .......... 2 3 3 4 4
40,000 to 49,999 sq.ft .......... 3 3 3 3 3
Greater than 50,000 sq.ft ....... 17 16 16 14 14
Total stores open at period end*** 22 22 22 21 21
* 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.
*** The Company began operating a twenty-third supermarket on January 8, 2003.
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 2002, a replacement store in Middletown, New Jersey was
opened. Additionally, after fiscal year end, a replacement store in Woodbridge,
New Jersey was opened on December 4, 2002 and on January 8, 2003 a new location
was opened in Ewing, New Jersey. Over the next three years the Company plans to
open three replacement and four new stores and expand three existing locations
as well as build a new state of the art bakery commissary. Construction has
started on one replacement store, the expansion of two locations, a new store
and the bakery commissary. 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. During fiscal 2002
automated checkout systems were installed in two locations. These systems were
also installed in the new Woodbridge and Ewing, New Jersey stores in the first
quarter of fiscal 2003. 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. A frame relay
communications network is being used for high speed 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. During
fiscal 2002 the infrastructure for improved wireless communications was
installed in all of our stores and ISDN circuits were installed which serve as a
back up system for the frame relay. 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.
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. The Company has also installed computer based training systems in all
stores. The system is presently being used to train all new checkout and produce
department personnel. Modules for other departments are currently being
developed.
4
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.
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 11/02/02 11/03/01 10/28/00
Groceries 38.1% 39.1% 39.3%
Dairy & Frozen 16.4 16.5 16.5
Meats, Seafood & Poultry 10.1 10.2 10.5
Non-Foods 10.1 10.3 10.4
Produce 9.3 8.8 8.6
Appetizers & Prepared Foods 6.7 6.4 6.4
Pharmacy 5.4 4.9 4.5
Bakery 2.1 2.0 2.0
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 15.6% 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, Richard J. Saker and
Thomas A. 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 38
shareholder members operate approximately 203 supermarkets of which Wakefern
owns and operates 51 locations. Products bearing the ShopRite label accounted
for approximately 18% of the Company's total sales for the fiscal year ended
November 2, 2002. Wakefern maintains warehouses in Elizabeth, South Brunswick
and Woodbridge, New Jersey which handle 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. The Company's
5
participation percentage was 12.2% for fiscal 2002. 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 the 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
$11,805,000 as of November 2, 2002 and November 3, 2001. We also have an
investment in another company affiliated with Wakefern which was $953,000 as of
November 2, 2002 and November 3, 2001. 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 52 week period ended
November 2, 2002. 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.
6
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 July 12, 2002 Wakefern
reported that it had closed on its purchase of substantially all of the assets
of Big V for approximately $185 million in cash and assumed liabilities. It is
not possible to predict at this time what effect the operation of Big V stores
by Wakefern will have on the Company.
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
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, other
ShopRite members 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.
Over the last two years many changes took 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
7
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. Additionally, as a company with publicly
traded securities, we are subject to the requirements of the Sarbanes-Oxley Act
of 2002 signed into law on July 30, 2002. 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.
Employees
As of December 31, 2002, the Company employed approximately 6,400 persons,
of whom approximately 5,850 are covered by collective bargaining agreements. 76%
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 seven collective bargaining agreements expiring on various
dates from April 2003 to August 2006. The bargaining agreement with the United
Food and Commercial Workers Local 1360 expired in February 2002 and has been
renegotiated. The new contract expires February 2006.
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 Companys twenty-three 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 20 of the Company's 23 existing supermarkets expire on various
dates from 2003 through 2028. 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 expiring in 2003 and the one month to
month lease, all leases contain renewal options ranging from 5 to 25 years.
Eight 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 one of the eight locations in the last fiscal year.
Most leases also require us to pay for insurance, common area maintenance and
real estate taxes. Five additional leases have been signed for supermarket
locations, two of which will be replacements for existing stores and three for
new locations. Additionally, two new leases have been signed for existing
locations which will be expanded and remodeled and a lease has been executed for
a new bakery commissary. The terms of the supermarket 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
existing bakery operations and storage in Howell, New Jersey, and 50,000 square
feet of space used for storage in Lakewood, New Jersey. Upon the completion of
8
the new bakery facility under construction, the Company anticipates that the
existing bakery facility will be used for storage. 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 three
leases for locations where we no longer conduct supermarket operations; two 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
On March 27, 2002, Melvin Jules Bukiet, on behalf of himself and acting as
trustee for the benefit of minors Madeline Bukiet, Miles Bukiet and Louisa
Bukiet (together, the "Plaintiffs"), commenced a shareholders derivative action
against the Company, as nominal defendant, and against all five members of the
Board of Directors, Joseph J. Saker, Richard J. Saker, Charles T. Parton, Albert
A. Zager and Robert H. Hutchins (together, the "Defendants"), in their
capacities as directors and/or officers of the Company. This lawsuit, which was
filed in the Superior Court of New Jersey, Middlesex County, Chancery Division
(the "Court"), alleges that the Defendants have breached their fiduciary duties
to the Company and its shareholders and sought to "enrich and entrench
themselves at the shareholders' expense" through their previous recommendation,
implementation and administration of the 2001 Stock Incentive Plan (the "2001
Plan"), which was approved by the Company's shareholders on April 4, 2001, and
by proposing an amendment to the 2001 Plan to increase the number of shares of
Common Stock available for issuance by 65,000 shares and an amendment to the
Company's amended and restated certificate of incorporation (the "Certificate of
Incorporation") to create a classified Board of Directors consisting of five
classes of directors, with only one class standing for election in any year for
a five-year term. The shareholders of the Company approved the amendments to the
2001 Plan and the Certificate of Incorporation on May 8, 2002.
The parties to the litigation have tentatively agreed on a settlement
proposal, subject to, among other things, approval by the Court and by the
Company's director and officer liability insurance carrier. Pursuant to the
terms of the proposed settlement, 1) the Company's five-year classified board
will be eliminated and the Defendants will agree not to submit any proposal to
the shareholders of the Company in connection with the implementation of a
classified board for five years from the date of final approval of the
settlement; 2) the 2001 Plan will be amended so that the maximum number of
shares that can be awarded to any individual thereunder shall be 50,000; and 3)
the 2001 Plan will be amended to require that the exercise price of any options
or other stock based compensation granted thereunder, following the date of
final approval of the settlement, shall be equal to the closing market price of
the Company's stock on the date of grant. In addition, Joseph J. Saker, Chairman
and Chief Executive Officer of the Company, will return to the Company 10,000
stock options previously awarded to him under the 2001 Plan. The Plaintiffs have
also informed the Defendants that they intend to seek an award of attorneys
fees, however, it is not possible to predict the amount of the fees that may be
awarded.
Additionally, 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.
9
Part II
Item 5. Market for Registrants Common Stock and Related 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 November 3, 2001 and November 2, 2002.
Fiscal Quarter Ended High Low
January 27, 2001 21.25 15.13
April 28, 2001 20.00 17.00
July 28, 2001 35.25 18.50
November 3, 2001 42.00 34.35
February 2, 2002 43.00 35.75
May 4, 2002 47.50 34.50
August 3, 2002 47.25 36.90
November 2, 2002 35.75 22.55
(b) The approximate number of record holders of the Companys Common
Stock was 320 as of January 10, 2003. In addition, the Company
believes that as of that date there were approximately 338
beneficial owners.
(c) No dividends have been declared or paid with respect to the Companys
Common Stock since October 1979. We are prohibited from paying
dividends on our Common Stock by the Third Amended and Restated
Revolving Credit and Term Loan Agreement between the Company and
four 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.
(d) On June 8, 2001 the Company announced the commencement of a stock
repurchase program whereby we would seek to repurchase shares of
our Common Stock having a value of up to $3 million. This program
was increased to $5.6 million in April 2002. For the year ended
November 2, 2002, the Company repurchased a total of 102,853 shares
of Common Stock. 101,553 of these shares were purchased in
privately negotiated transactions and the remaining 1,300 shares
were acquired in open market transactions. 6,377 of these shares
were owned by a member of the family of Joseph J. Saker, the
Company's Chairman, and were purchased for an average of $39.52 per
share. $4,523,670, or an average of $43.98 per share, was expended
for the purchase of the 102,853 shares. Since the announcement of
the stock repurchase program in June 2001, the Company has
repurchased 131,923 shares for $5,591,597 or an average of $42.39
per share. See Management's 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.
10
Year Ended
November 2, November 3, October 28, October 30, October 31,
2002 (1) 2001 (2) 2000 (3) 1999 1998 (4)
(Dollars in thousands, except per share amounts)
Income statement
data:
Sales $963,611 $945,301 $866,363 $778,726 $687,974
Net income $ 3,240 $ 3,938 $ 2,382 $ 1,945 1,780
Net income per
common share:
Basic $ 3.16 $ 3.54 $ 2.13 $ 1.74 $ 1.59
Diluted $ 3.01 $ 3.50 $ 2.13 $ 1.74 $ 1.59
Cash dividends
per common share - - - - -
Balance sheet data
(at year end):
Working capital
(deficit) $ (590) $ (6,907) $ (1,215) $ 2,507 (2,725)
Total assets $219,389 $194,526 $191,185 $156,186 $149,567
Long-term debt
(excluding current
portion) $100,037 $ 75,553 $ 82,241 $ 59,604 $ 50,656
Common share-
holders' equity (5) $ 36,625 $ 38,493 $ 37,422 $ 35,040 $ 33,014
Book value per
common share $ 37.13 $ 35.37 $ 33.49 $ 31.36 $ 29.55
Tangible book value
per common share $ 34.31 $ 32.49 $ 30.37 $ 27.93 $ 25.47
(1) The Company opened one replacement location in November 2001. See
Management's Discussion and Analysis - Results of Operations - Sales.
(2) 53 week period.
(3) 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.
(4) The Company opened one replacement and one new location in February and
August 1998, respectively.
(5) The Company repurchased shares of its Common Stock in fiscal 2001 and
2002. See Item 5. - Market for Registrant's Common Stock and Related
Security Holder Matters.
11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting policies are those accounting policies that management
believes are important to the portrayal of the Company's financial condition and
results and require management's most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Impairment of Goodwill
Goodwill is amortized on a straight-line basis over periods from 15 to 36
years. The carrying amount of goodwill is reviewed whenever events or changes in
circumstances indicate that it may not be recoverable. We use an estimate of the
future undiscounted net cash flows of the acquired business over the remaining
life of the asset in measuring whether the assets are recoverable. Where such
estimate of the future undiscounted cash flows is less than the carrying amount
of goodwill, a potential impairment exists.
We are required to adopt the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets"
beginning November 3, 2002. This statement requires that goodwill no longer be
amortized, and it requires instead that goodwill be tested at least annually for
impairment. If the carrying value of goodwill were determined to be greater than
its estimated fair value under the impairment test, then it would be written
down to its estimated fair value.
The discontinuance of goodwill amortization is not expected to have a
significant effect on our future results of operations. We have not completed a
transitional impairment test, as required by SFAS No. 142.
Patronage Dividends
As a stockholder of Wakefern, the Company earns a share of Wakefern's
earnings, which is distributed as a "patronage dividend". This dividend is based
on a distribution of Wakefern's operating profits for its fiscal year, which
ends the Saturday closest to September 30, in proportion to the dollar volume of
business done by each member of Wakefern during that fiscal year. Patronage
dividends are recorded as a reduction of cost of goods sold. The Company accrues
estimated patronage dividends due from Wakefern quarterly based on an estimate
of the annual Wakefern patronage dividend and an estimate of the Company's share
of this annual dividend based on the Company's estimated proportional share of
the dollar volume of business transacted with Wakefern that year. These
estimates are based on both historical patronage dividend percentages and
the current volume of merchandise purchased from Wakefern.
Workers' Compensation Insurance
From June 1, 1991 to May 31, 1997 we maintained workers' compensation
insurance with various carriers on a retrospective basis where claims within
certain limits remain the responsibility of the Company. We have established
reserve amounts based upon our evaluation of the status of claims still open as
of November 2, 2002 and loss development factors used by the insurance industry.
As of November 2, 2002, the worker's compensation reserve totaled approximately
$663,000. Such reserve amount is only an estimate and there can be no assurance
that our eventual workers' compensation obligations will not exceed the amount
of the reserve. However, we believe that any difference between the amount
recorded for our estimated liability and the costs of settling the actual claims
would not be material to the results of operations.
12
FINANCIAL CONDITION AND LIQUIDITY
As of September 26, 2002 the Company and its lenders entered into The Third
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 increased the total lending commitment to $80,000,000,
including a revolving credit facility (the "Revolving Note") of up to
$35,000,000, a term loan (the "Term Loan") in the amount of $25,000,000 and a
capital expenditures facility (the "Capex Facility") of up to $20,000,000. The
outstanding balances on the prior term loan ($5,000,000) and capital
expenditures facility ($10,652,662) were incorporated into the Term Loan. The
Credit Agreement will mature December 31, 2007. The Term Loan is to be paid in
quarterly principal payments of $1,250,000 commencing January 1, 2003. The Capex
Facility provides for the payment of interest only on its outstanding balance,
an unused facility fee of .75% until December 31, 2004 and fixed quarterly
principal payments thereafter based on a seven year amortization schedule with a
balloon payment due December 31, 2007. Interest rates float on the revolving
credit facility, Term Loan and Capex Facility at the Base Rate (defined below)
plus 1.50%, 2.00% and 2.00%, respectfully. The Base Rate is the rate which is
the greater of (i) the bank prime loan rate as published by the Board of
Governors of the Federal Reserve System, or (ii) the Federal Funds rate, plus
..50%. Additionally, the Company has the ability to use the London Interbank
Offered Rate ("LIBOR") plus 3.25% to determine the interest rate on the
revolving credit facility and LIBOR plus 3.75% to determine the interest rate on
the Term Loan and Capex Facility. Other terms and conditions under the Credit
Agreement, including (a) the amount of permitted additional new indebtedness;
(b) the amount of permitted capitalized lease obligations; (c) the amount of
capital expenditures; (d) covenant requirements and (e) certain definitions,
have been modified to reflect the additional term of the Credit Agreement and
the Company's financial and operational plan. Additionally, the Company is
allowed to repurchase its Common Stock for an aggregate purchase price not to
exceed $1,000,000, subject to certain conditions and limitations, under the
Credit Agreement. For the year ended November 2, 2002, the value of the accrued
benefits under the Company's pension plans exceeded the aggregate fair market
value of the assets of such plans by $3,020,000, $20,000 more than the amount
permitted under the Credit Agreement. This event of default was waived by the
Company's lenders.
As of November 2, 2002 the Company owed $25,000,000 on the Term Loan and had
not borrowed under the Capex Facility.
The Company's compliance with the major financial covenants under the Credit
Agreement was as follows as of November 2, 2002:
Actual
Financial Credit (As defined in the
Covenant Agreement Credit Agreement)
- --------- --------- -------------------
Adjusted EBITDA (1) Greater than $16,500,000 $ 20,890,000
Leverage Ratio (1) Less than 3.20 to 1.00 2.12 to 1.00
Debt Service Coverage
Ratio Greater than 1.10 to 1.00 1.94 to 1.00
Adjusted Capex (2) Less than $7,800,000 (3) $ 5,210,000 (4)
Store Project Capex Less than $24,000,000 (3) $ 15,809,000 (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 2002.
(4) Represents capital expenditures for fiscal 2002.
13
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.
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 2, 2002, November 3, 2001 and October 28, 2000, the Company had
working capital deficiencies of $590,000, $6,907,000 and $1,215,000,
respectively. The Company normally requires small amounts of working capital
since inventory is generally sold at approximately the same time that payments
to Wakefern and other suppliers are due and most sales are for cash or cash
equivalents. Working Capital improved in fiscal 2002 primarily as the result of
the increase in receivables and other current assets. This increase relates
primarily to receivables due from landlords for construction allowances for the
Woodbridge and Ewing, New Jersey locations. A portion of these receivables is
currently in dispute as a result of litigation with the landlord over the
correct commencement date of the lease for the new Woodbridge location. The
Company denies the landlord's allegations, and the amount and timing of
collection of the construction allowances will depend upon the outcome of the
litigation. When collected, the proceeds from these receivables will be used to
reduce the Revolving Note which is classified as long-term borrowings. This will
result in a corresponding decrease in working capital. The balance of accounts
receivables consist primarily of returned checks due the Company, 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.
Working capital decreased in fiscal 2001 primarily as the result of the net
increase in accounts payable and accrued expenses of $5,050,000 over the
increase in inventory. This increase relates primarily to cost of merchandise
and capital expenditures for the new Middletown, New Jersey store, opened
November 14, 2001, as well as accrued occupancy costs related to the 53rd week
of fiscal 2001.
Working capital 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 ratios were as follows:
November 2, 2002 .99 to 1.00
November 3, 2001 .90 to 1.00
October 28, 2000 .98 to 1.00
Cash flows (in millions) were as follows:
2002 2001 2000
From operations..................... $15.5 $24.2 $15.5
Investing activities................ (26.0) (16.9) (15.2)
Financing activities................ 10.6 ( 7.1) ( .4)
------ ------ ------
Totals $ .1 $ .2 $( .1)
====== ====== ======
Fiscal 2002 capital expenditures totaled $21,019,000 with depreciation of
$14,175,000 compared to $17,047,000 and $12,840,000, respectively for fiscal
2001 and $16,750,000 and $11,524,000, respectively for fiscal 2000. The increase
14
in depreciation in fiscal 2002 was the result of the purchase of equipment and
leasehold improvements, as well as the capitalized real estate lease, for the
Middletown store opened in November 2001 and a full year of depreciation for the
three locations remodeled in fiscal 2001. The increase in depreciation in fiscal
2001 was the result of the purchase of equipment and leasehold improvements for
the three locations remodeled during fiscal 2001 and a full year of depreciation
for the locations opened in fiscal 2000. 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.
Capital expenditures increased in fiscal 2002, fiscal 2001 and fiscal 2000 as
the result of the purchase of equipment and leasehold improvements for the
locations opened in December 2002 and January 2003, projects currently in
process for a new store, the expansion and remodeling of an existing location
and the new bakery commissary, the new store opened in fiscal 2001, locations
remodeled in fiscal 2001 and the two locations opened in fiscal 2000.
In fiscal 2002 long-term debt increased $26,220,000 due to the
capitalization of a real estate lease for the location opened in the year and an
increase in borrowings under the Credit Agreement. These increases were
partially offset by cash generated by operations used to pay down existing debt.
In fiscal 2001 net long-term debt decreased $5,959,000 as the result of
payments made to reduce the balances outstanding under existing debt. The source
of these payments was cash generated by operations and an increase in the
revolving credit facility of $929,000.
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 then 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.
For the year ended November 2, 2002, the Company repurchased a total of
102,853 shares of Common Stock. 101,553 of these shares were purchased in
privately negotiated transactions and the remaining 1,300 shares were acquired
in open market transactions. 6,377 of these shares were owned by a member of the
family of Joseph J. Saker, the Company's Chairman, and were purchased for an
average of $39.52 per share. $4,523,670, or an average of $43.98 per share, was
expended for the purchase of the 102,853 shares. Since the announcement of the
stock repurchase program in June 2001, the Company has repurchased 131,923
shares for $5,591,597 or an average of $42.39 per share.
During the year ended November 3, 2001, the Company repurchased a total of
29,070 shares of Common Stock. 25,070 of these shares were purchased in
privately negotiated transactions. 7,000 of these shares were owned by the
Estate of Mary Saker, of which the Company's Chairman, Joseph J. Saker, is a
co-executor, and 18,000 shares were owned by certain members of Mr. Saker's
family. $1,067,927, or an average of $36.74 per share, was expended for the
purchase of the 29,070 shares.
At November 2, 2002, the Company had $10,000,000 of available credit, under
its revolving credit facility. The Company has capital commitments (net of
landlord contributions) of $15,443,000 for equipment and $5,268,000 for
leasehold improvements related to the four stores (two of which have
subsequently opened) under construction as of November 2, 2002. The Credit
Agreement will adequately meet our operating needs, scheduled capital
expenditures and debt service for fiscal 2003.
During the fiscal year 2002, the Business Tax Reform Act was passed in the
State of New Jersey. This legislation is effective for tax years beginning on or
after January 1, 2002 (fiscal 2003). Taxpayers would pay an Alternative Minimum
Assessment ("AMA"), which would be based upon either New Jersey gross receipts
or New Jersey gross profits, if the AMA exceeds the tax based on net income. The
Company is evaluating the impact that this legislation will have on its results
of operation, financial position and cash flow for fiscal 2003.
15
RESULTS OF OPERATIONS
Sales:
The Company's sales were $963.6 million, $945.3 million and $866.4 million,
respectively in fiscal 2002, 2001 and 2000. This represents an increase of 1.9
percent in 2002 and an increase of 9.1 percent in 2001. These changes in sales
levels were the result of the opening of a replacement store in November 2001,
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 locations opened in
November 2001 and April 2000 replaced smaller, older stores. Comparable store
sales increased 1.6% in fiscal 2002 and 3.8% in fiscal 2001. Comparable store
sales in fiscal 2002 were partially offset by decreased sales in certain of the
Company's stores affected by competitive store openings.
Comparable store sales in the fourth quarter of fiscal 2002 decreased 1.3%
when compared to the fourth quarter of fiscal 2001 on a comparable 13 week
basis. This decrease was primarily due to a softening in the economy, the effect
of competitive store openings and the impact of deflation in certain product
categories.
Gross Profit:
Gross profit totaled $245.1 million in fiscal 2002 compared to $234.2
million in fiscal 2001 and $208.9 million in fiscal 2000. Gross profit as a
percent of sales was 25.4% in fiscal 2002, 24.8% in fiscal 2001 and 24.1% in
fiscal 2000.
The increase in fiscal 2002 of gross profit as a percentage of sales was
primarily due to improved product mix, the contribution of the new location in
Middletown, New Jersey, more efficient commissary operations, an increase in
patronage dividends from Wakefern and a reduction in product loss through
improved shrink control. These increases were offset in part by programs
implemented in certain of the Company's stores to address competitive store
openings.
In fiscal 2001 gross profit as a percentage of sales increased primarily as
a result of improved product mix, the contribution of the new locations, the
completion of promotional programs initiated by the Company for the locations
opened in fiscal 2000, a reduction in product loss through improved shrink
control and more efficient commissary operations, partially offset by the
completion of Wakefern incentive programs for the new locations opened in the
prior fiscal year.
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.
Patronage dividends applied as a reduction of the cost of merchandise sold
were $7,124,000, $6,515,000 and $5,903,000 for the last three fiscal years. This
translates to .74%, .69% and .68% of sales for the respective periods.
Fiscal Years Ended
11/02/02 11/03/01 10/28/00
(in millions)
Sales........................ $963.6 $945.3 $866.4
Gross profit................. 245.1 234.2 208.9
Gross profit percentage...... 25.4% 24.8% 24.1%
Selling, General and Administrative Expenses:
16
Fiscal 2002 selling, general and administrative expenses totaled $231.7 million
compared to $220.3 million in fiscal 2001 and $198.2 million in fiscal 2000.
Fiscal Years Ended
11/02/02 11/03/01 10/28/00
(in millions)
Sales........................ $963.6 $945.3 $866.4
Selling, General and
Administrative Expenses...... 231.7 220.3 198.2
Percent of Sales............. 24.0% 23.3% 22.9%
Selling, general and administrative expenses increased as a percent of
sales when comparing fiscal 2002 to fiscal 2001. Increases in labor and related
fringe benefits, depreciation, other store expenses, which include Wakefern
support services and debit/credit card and bank service fees, administration
expense and pre-opening costs were partially offset by decreases in occupancy
and selling expense. The increase in labor and related fringe benefits was the
result of additional personnel for the new Middletown store, increased sales in
service intensive departments and contractual increases in fringe benefit costs.
Depreciation expense increased as the result of the purchase of equipment and
leasehold improvements, as well as the capitalized real estate lease, for the
Middletown store opened in November 2001 and a full year of depreciation for the
three locations remodeled in fiscal 2001. Other store expenses increased as the
result of increases in debit/credit card fees and the increased utilization of
the cards by our customers. Administration expense increased primarily due to
increases in fringe benefit costs. Pre-opening costs are related to the new
Middletown store opened in November 2001. Occupancy decreased due to the
accounting for the new Middletown store's lease as a capitalized lease. Under
this method the costs of the lease are expensed as depreciation and interest.
Formally, the old Middletown store's lease was an operating lease and the costs
of the lease were expensed as rent. Selling expense declined as the result of
changes in certain promotional programs. As a percentage of sales, labor and
related fringe benefits increased .67%, depreciation increased .09%, other store
expenses increased .05%, administration increased .09% and pre-opening costs
increased .02%. These increases were partially offset by decreases in occupancy
of .09% and selling expense of .04%. Pre-opening costs were $246,000 in fiscal
2002.
Selling, 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
17
decreases in selling expense of .05%, pre-opening costs of .09% and reserve for
closed store expense of .16%. Pre-opening costs were $114,000 in fiscal 2001.
Amortization expense decreased in fiscal 2002 to $463,000 compared to
$576,000 in fiscal 2001 and $679,000 in fiscal 2000. The decrease in fiscal
2002, as compared to fiscal 2001, was the result of decreased amortization of
deferred escalation rents partially offset by increased amortization of deferred
financing costs. The decrease in fiscal 2001, as compared to fiscal 2000, was
also the result of decreased amortization of deferred escalation rents partially
offset by increased amortization of deferred financing costs. See Note 1 of
Notes to Consolidated Financial Statements -Intangibles and Deferred Financing
Costs.
Interest Expense:
Interest expense totaled $8.2 million in fiscal 2002 compared to $7.6
million in fiscal 2001 and $7.1 million in fiscal 2000. The increase in fiscal
2002, as compared to fiscal 2001, was due to an increase in average outstanding
debt, including capitalized lease obligations partially offset by a decrease in
the average interest rate paid on debt. The increase in fiscal 2001, as compared
to fiscal 2000, was due to an increase in the average outstanding debt in fiscal
2001, including capitalized lease obligations, partially offset by a decrease in
the average interest rate paid on the debt.
Income Taxes:
The Company recorded a tax provision of $2.2 million in fiscal 2002, $2.6
million in fiscal 2001 and $1.6 million in fiscal 2000. See Note 13 of Notes to
Consolidated Financial Statements.
Net Income:
The Company had net income of $3,240,000 or $3.01 per diluted share in
fiscal 2002 compared to net income of $3,938,000 or $3.50 per diluted share in
fiscal 2001. EBITDA for fiscal 2002 were $28,076,000 as compared to $27,342,000
in fiscal 2001.
Fiscal 2000 resulted in net income of $2,382,000 or $2.13 per diluted share.
EBITDA for fiscal 2000 were $22,914,000.
Weighted average diluted shares outstanding were 1,076,030 for fiscal 2002,
1,124,192 for fiscal 2001 and 1,117,290 for fiscal 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 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 June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143 ("SFAS 143"), "Accounting for Asset
Retirement Obligations," which is effective for fiscal years beginning after
June 15, 2002, with early application encouraged. SFAS 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
Company plans to adopt SFAS 143 in the first quarter of fiscal year 2003 and
believes that it will have no impact on its financial position or results of
operations.
18
Effective November 4, 2001 the Company adopted Statement Of Financial
Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or
Disposal of Long-Lived Assets". 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. There was no significant impact from the adoption of
SFAS 144 in fiscal year 2002.
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145 ("SFAS 145"), "Recission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," which is effective for fiscal years beginning after May 15, 2002,
with earlier application encouraged. Under SFAS 145, gains and losses from
extinguishment of debt will no longer be aggregated and classified as an
extraordinary item, net of related income tax effect, on the statement of
earnings. The Company plans to adopt SFAS 145 in the first quarter of fiscal
year 2003 and believes that it will have no impact on its financial position or
results of operations.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146 ("SFAS 146"), "Accounting for Costs
Associated with Exit or Disposal Activities," which is effective for exit or
disposal activities that are initiated after December 31, 2002, with early
application encouraged. SFAS No. 146 requires recognition of a liability for the
costs associated with an exit or disposal activity when the liability is
incurred, as opposed to when the entity commits to an exit plan as required
under EITF Issue No. 94-3. SFAS 146 will primarily impact the timing of the
recognition of costs associated with any future exit or disposal activities. The
Company plans to adopt SFAS 146 in the first quarter of fiscal year 2003 and is
in the process of evaluating the impact of the adoption on our financial
statements.
Effective November 4, 2001, the Company adopted the Emerging Issues Task
Force Issue No. 01-09 ("EITF 01-09"), "Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor's Products)." EITF
01-09 codifies and reconciles the consensuses on all or specific issues of EITF
00-14, "Accounting for Certain Sales Incentives," EITF 00-22, "Accounting for
'Points' and Certain Other Time-Based or Volume-Based Sales Incentives Offers,
and Offers for Free Products or Services to be Delivered in the Future," and
EITF 00-25, "Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor's Products," which address various aspects of the
accounting for consideration given by a vendor to a customer or a reseller of
the vendor's products. The adoption of EITF 01-09 did not have an impact on the
Company's financial position or results of operations.
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 15
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
19
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 Diector
- --------------------------------------------------------------------------------
Joseph J. Saker (73) Chairman of the Board of the Company 1958
Richard J. Saker (51) President and Secretary of the Company 1987
Charles T. Parton (61) Chairman of the Board - Two River 1995
Community Bank, a commercial bank
Albert A. Zager (54) Member - Carton, Arvanitis, McGreevy, 1995
Argeris, Zager & Aikins, L.L.C.,
Attorneys at Law
Robert H. Hutchins (51) 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.
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 nine 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
20
Excalibur and a member of the National American Cancer Society Excalibur
Advisory Committee.
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) 51 President and Secretary
Michael Shapiro (2) 60 Senior Vice President, Chief Financial
Officer and Treasurer
Emory A. Altobelli (3) 62 Senior Vice President - Corporate
Subsidiaries and Services
Carl L. Montanaro (4) 61 Senior Vice President - Sales and
Merchandising
Robert V. Spires (5) 49 Senior Vice President - Human Resources and
Labor Relations
Joseph J. Saker, Jr. (6) 42 Senior Vice President - Marketing and
Advertising
Joseph C. Troilo (7) 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.
(6) Mr. Joseph J. Saker, Jr. has served as Senior Vice President, Marketing
and Advertising since March 1, 2002. From October 2001 to February 28,
2002 he served as a Vice President of Operations. From May 1990 to
September 2001, he served as a Director of Operations. Joseph J. Saker,
Jr. is the son of Joseph J. Saker.
(7) 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.
21
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 2,
2002, 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 28, 2000, November 3, 2001 and November 2, 2002
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:
Summary Compensation Table
Annual Compensation All Other Compensation
------------------- --------------------------
Shares
Underlying
Options/
Name and Principal Position Year Salary Bonus (1) SERP(2) 401(k)(3) SARS
- --------------------------- ---- ------ -------- ------ --------- -----
Joseph J. Saker 2002 $413,200 $74,732 $150,100 $3,400
Chairman and 2001 395,553 122,176 128,500 3,400 50,000(4)
Chief Executive Officer 2000 361,201 69,893 134,400 3,400
Richard J. Saker 2002 $504,250 $90,611 $523,000 $3,400
President, Chief Operating 2001 437,118 132,188 345,000 3,400 50,000(4)
Officer and Secretary 2000 374,475 76,742 298,000 3,400
Michael Shapiro 2002 $203,857 $28,164 $102,400 $6,150
Senior Vice President, Chief 2001 189,351 39,430 88,400 5,421 1,000(4)
Financial Officer and 2000 185,827 25,934 91,700 6,023
Treasurer
Carl L. Montanaro 2002 $173,758 $22,692 $ 60,200 $6,006
Senior Vice President, 2001 169,367 31,769 53,200 5,321 1,000(4)
Sales and Merchandising 2000 153,106 20,896 27,400 5,608
Joseph J. Saker, Jr. 2002 $161,561 $21,920 - $5,856
Senior Vice President, 2001 146,555 23,700 - 5,180
Marketing and Advertising 2000 121,713 12,178 - 4,260
(1) Incentive compensation paid or accrued pursuant to the 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
22
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 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 ofcurrent 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 2002, the Company recorded $475,000 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 30% of
compensation but may not exceed $11,000 per year. The Company has elected
to match 25% of the employee's contributions up to 6% of employee
eligible compensation not exceeding $200,000. The Company may make
additional discretionary contributions. These discretionary contributions
amounted to 2% of eligible compensation for the three calendar years
ending December 31, 2002.
(4) Represents options to purchase shares of the Company's Common Stock,
granted pursuant to the Company's 2001 Stock Incentive Plan, described
more particularly in Notes (1) and (2) in the table below captioned
"Aggregated Option Exercises in the Fiscal Year Ended November 2, 2002 and
Year-End Option Values." See Item 3. "Legal Proceedings."
23
Option Grants and Exercises During Fiscal Year Ended November 2, 2002.
No options were granted in the Fiscal Year Ended November 2, 2002.
Aggregated Option Exercises in the Fiscal Year Ended November 2, 2002 and
Year-End Option Values:
Total Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at November 2, 2002 at November 2, 2002(1)
- --------------------------------------------------------------------------------
Shares
Acquired
on Value Unexer-
Name (2) Exercise Realized Exercisable Unexercisable Exercisable cisable
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Joseph J.
Saker - - 10,000 40,000 $74,000 $296,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Richard J.
Saker - - 10,000 40,000 $74,000 $296,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Michael
Shapiro 500 $6,575 - 500 - $3,700
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Carl L.
Montanaro 250 $5,213 250 500 $1,850 $3,700
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Joseph J.
Saker, Jr. - - - - - -
- --------------------------------------------------------------------------------
(1) This represents the difference between the closing price of the Company's
Common stock on November 1, 2002, the last trading day in Fiscal 2002
($27.00), and the exercise price of the options.
(2) 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 10,000 shares subject to currently exercisable options, 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. See Item 3. "Legal Proceedings."
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, which are payable under
certain circumstances. 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, 2002, 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
24
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
of service; Joseph J. Saker, Jr. with 21 years of service; and Carl L. Montanaro
with 35 years of service. The highest five consecutive year average, or
pro-rated portion thereof, 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
Joseph J. Saker, Jr. - $99,000.
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.
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 $15,000 payable quarterly in advance (prior to June of
2002 the annual retainer fee was $12,000), 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 $68,250 during the fiscal year ended November 2,
2002 to directors who are not employees of the Company.
25
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
For the fiscal year ended November 2, 2002, 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.
In order to arrive at an appropriate level of compensation for the
Company's Chief Executive Officer and Chief Operating Officer for the fiscal
year ended November 2, 2002, the independent directors considered a variety of
factors presented in this report. 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 Company's financial performance and other achievements during the
fiscal year ended November 3, 2001 were considered by the Company's independent
directors in determining compensation levels for the Company's Chief Executive
Officer and Chief Operating Officer for fiscal 2002. Sales, income from
operations, EBITDA and net income increased substantially in fiscal 2001 despite
difficult market conditions. In addition, Foodarama stock proved to be one of
the top performing securities listed on the American Stock Exchange in 2001.
In addition, during the fiscal year ended November 2, 2002, the Company's
Chief Operating Officer assumed the duties and responsibilities associated with
representing the Company with Wakefern, including serving as a member of the
Wakefern Board of Directors. These responsibilities had previously been
undertaken by the Company's Chief Executive Officer. The independent directors
took this shift of responsibility into consideration when making compensation
decisions. In addition, the independent directors considered the fact that both
the Chief Executive Officer and Chief Operating Officer of the Company have
personally guaranteed significant amounts of indebtedness owed by the Company to
Wakefern.
After careful consideration of the various factors, including, among
others, the facts referenced above, the independent directors determined that
the base salaries for both the Chief Executive Officer and Chief Operating
Officer should be increased for the fiscal year ended November 2, 2002. See
"Executive Compensation - Summary Compensation Table."
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.
26
The Company's Board is responsible for administration of the Company's 2002
Incentive Compensation Plan. Pursuant to the 2002 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 2002 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 2002 Incentive Compensation 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. The Stock Option Committee did not grant any awards to the
Company's key executives and directors during the fiscal year ended November 2,
2002.
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 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 1, 1997 and ended November 2, 2002.
27
FOODARAMA SUPERMARKETS, INC.
PRICE PERFORMANCE GRAPH
[THE FOLLOWING TABLES ARE REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL]
AMEX COMPOSITE
1997 1998 1999 2000 2001 2002
--- --- --- --- --- ---
675.75 645.41 800.80 909.30 824.20 828.99
1.00 0.96 1.19 1.35 1.22 1.23
100.00 95.51 118.51 134.56 121.97 122.68
INDUSTRY (AMEX)
1997 1998 1999 2000 2001 2002
--- --- --- --- --- ---
245.86 233.07 247.94 165.20 127.19 132.11
1.00 0.95 1.01 0.67 0.52 0.54
100.00 94.80 100.85 67.19 51.73 53.73
FSM
1997 1998 1999 2000 2001 2002
--- --- --- --- --- ---
18.50 32.00 28.63 18.38 40.75 27.00
1.00 1.73 1.55 0.99 2.20 1.46
100.00 172.97 154.73 99.32 220.27 145.95
S&P 500
1997 1998 1999 2000 2001 2002
--- --- --- --- --- ---
914.62 1098.67 1362.93 1429.40 1059.78 900.96
1.00 1.20 1.49 1.56 1.16 0.99
100.00 120.12 149.02 156.28 115.87 98.51
28
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Principal Shareholders
The following table shows, as of December 31, 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 of
Name of Beneficial Owner Owned Class
- ------------------------ ----- -----
Joseph J. Saker (1)(2)(3)(7) 184,576 18.4
Saker Family Corporation (1) (4) 85,000 8.6
Estate of Mary Saker (1)(3) 55,798 5.7
Richard J. Saker (1)(4)(5)(7) 194,303 19.4
Joseph J. Saker, Jr. (1)(4)(6) 107,695 10.9
Thomas A. Saker (1)(4) 114,641 11.6
Dimensional Fund Advisors, Inc.(8) 81,400 8.2
Arthur N. Abbey (9) 116,400 11.8
Trellus Management Company, LLC (10) 51,300 5.2
(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.,
a Delaware limited partnership (the "Partnership"). The Saker Family
Corporation is the sole general partner (the "General Partner") of the
Partnership. Richard J. Saker owns 40% of the outstanding capital stock of
the General Partner, and each of Joseph J. Saker, Jr. and Thomas A. Saker
owns 30% of the outstanding capital stock of the General Partner. The
General Partner owns a 1% interest in the Partnership and has the sole
power to sell, transfer or otherwise dispose of the shares of Foodarama
Common Stock only upon the unanimous consent of all shareholders of the
General Partner. On other matters not involving the sale, transfer or
other disposition of such shares, the shares of Foodarama Common Stock
held by the Partnership are voted as directed by the individual
shareholders of the General Partner in accordance with their respective
ownership interests in the General Partner. Accordingly, the General
Partner votes 34,000 shares as directed by Richard J. Saker, 25,500 shares
as directed by Joseph J. Saker, Jr. and 25,500 shares as directed by
Thomas A. Saker on such other matters.
In addition to their ownership interests in the General Partner, Richard
J. Saker, Joseph J. Saker, Jr. and Thomas A. Saker are the beneficiaries
of the trust which owns a 99% interest in the Partnership (the "Limited
Partner"). Thus, each of Richard J. Saker, Joseph J. Saker, Jr. and Thomas
A. Saker also has an indirect interest in the Company's Common Stock held
29
by the Partnership by reason of their respective beneficial interests in
the Limited Partner. Their beneficial interests in the Limited Partner are
in identical proportion to their ownership interests in the General
Partner. Richard J. Saker, Joseph J. Saker, Jr. and Thomas A. Saker each
disclaim beneficial ownership of shares held by the Partnership in excess
of their pecuniary interests.
(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
trustee. Mr. Saker disclaims beneficial ownership of the shares
described in the preceding sentence.
(6) Includes 2,754 shares which are held in two trusts for the benefit of Mr.
Saker's sons, of which trusts Mr. Saker is the trustee. Mr. Saker
disclaims beneficial ownership of the shares described in the preceding
sentence.
(7) Includes 15,000 shares subject to currently exercisable options or
options exercisable within sixty days of December 31, 2002
granted pursuant to the 2001 Plan. See Item 3. "Legal Proceedings"
(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 81,400 shares of the Company's
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 October 9, 2002
Mr. Abbey has sole voting power with respect to the shares.
(10) The address of Trellus Management Company, LLC ("Trellus") is 350 Madison
Avenue, Ninth Floor, New York, New York 10017. Trellus is a Delaware
limited liability company and is a Delaware registered investment advisor
to domestic and offshore hedge funds. Adam Usdan is President of Trellus.
Based upon a copy of a Schedule 13G dated August 12, 2002, Adam Usdan and
Trellus have shared voting power with respect to these shares.
Securities Owned By Management
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of December 31, 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.
30
Amount Beneficially Percent of
Name of Beneficial Owner Owned Class
- ------------------------ ------------------- ----------
Joseph J. Saker (1)(2)(3) 184,576 18.4
Richard J. Saker (1)(2)(4)(5) 194,303 19.4
Joseph J. Saker, Jr. (1)(4)(6) 107,695 10.9
Albert A. Zager (1)(7) 2,000 *
Charles T. Parton (1)(7) 2,900 *
Robert H. Hutchins (1) 500 *
Michael Shapiro (1) (9) 500 *
Emory A. Altobelli (1)(7) 525 *
Carl L. Montanaro (1)(8) 515 *
Robert V. Spires (1)(7) 500 *
Joseph C. Troilo (1)(8) 250 *
Directors, Nominees for Director and 409,264 40.1
Executive Officers as a Group (11 persons)
(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)
(*) 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.
(2) Includes 15,000 shares subject to currently exercisable options or options
exercisable within 60 days of December 31, 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.,
a Delaware limited partnership (the "Partnership"). The Saker Family
Corporation is the sole general partner (the "General Partner") of the
Partnership. Richard J. Saker owns 40% of the outstanding capital stock of
the General Partner, and each of Joseph J. Saker, Jr. and Thomas A. Saker
owns 30% of the outstanding capital stock of the General Partner. The
General Partner owns a 1% interest in the Partnership and has the sole
power to sell, transfer or otherwise dispose of the shares of Foodarama
Common Stock only upon the unanimous consent of all shareholders of the
General Partner. On other matters not involving the sale, transfer or
other disposition of such shares, the shares of Foodarama Common Stock
held by the Partnership are voted as directed by the individual
shareholders of the General Partner in accordance with their respective
ownership interests in the General Partner. Accordingly, the General
Partner votes 34,000 shares as directed by Richard J. Saker, 25,500 shares
as directed by Joseph J. Saker, Jr. and 25,500 shares as directed by
Thomas A. Saker on such other matters.
In addition to their ownership interests in the General Partner, Richard
J. Saker, Joseph J. Saker, Jr. and Thomas A. Saker are the beneficiaries
of the trust which owns a 99% interest in the Partnership (the "Limited
Partner"). Thus, each of Richard J. Saker, Joseph J. Saker, Jr. and Thomas
A. Saker also has an indirect interest in the Company's Common Stock held
by the Partnership by reason of their respective beneficial interests in
the Limited Partner. Their beneficial interests in the Limited Partner are
in identical proportion to their ownership interests in the General
Partner. Richard J. Saker, Joseph J. Saker, Jr. and Thomas A. Saker each
disclaim beneficial ownership of shares held by the Partnership in excess
of their pecuniary interests.
31
(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) Includes 2,754 shares which are held in two trusts for the benefit of Mr.
Saker's sons, of which trusts Mr. Saker is the trustee. Mr. Saker
disclaims beneficial ownership of the shares described in the preceding
sentence.
(7) Includes 500 shares subject to currently exercisable options granted
pursuant to the 2001 Plan.
(8) Includes 250 shares subject to currently exercisable options granted
pursuant to the 2001 plan.
(9) Owned jointly with Mr. Shapiro's wife.
(10) Of the 409,264 shares, directors of the Company own or have rights to
acquire 384,279 shares.
(11) Includes 85,000 shares held by the Joseph Saker Family Partnership, L.P.,
the total number of which shares is also included both in the total number
of shares attributed to ownership by Richard J. Saker, and the total
number of shares attributed to ownership by Joseph J. Saker, Jr.
The Company's Third 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 27% of all of the issued and outstanding Common Stock
of the Company.
Securities Authorized for Issuance under Equity Compensation Plans
The number of stock options outstanding under our equity compensation
plans, the weighted average exercise price of outstanding options, and the
number of securities remaining available for issuance, as of November 2, 2002,
were as follows:
- -------------------------------------------------------------------------------
Number of
securities
remaining
Number of available for
securities to be future issuance
issued upon Weighted-average under equity
exercise of exercise price of compensation
outstanding outstanding plans (excluding
options, warrants options, warrants securities
and rights and rights reflected in
Plan Category (a) (b) column (a))
(c)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders
113,300 $19.78 92,700
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Equity compensation
plans not approved
by securityholders
None None None
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Total 113,300 $19.78 92,700
- -------------------------------------------------------------------------------
The Company has one equity incentive plan, the 2001 Plan. The 2001 Plan
provides for the issuance of incentive awards to officers, directors, employees
and consultants in the form of stock options, stock appreciation rights and
restricted stock.
32
Item 13. Certain Relationships and Related Transactions
(a)Transactions with Management and Certain Business Relationships
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, Richard J. Saker and Thomas A. Saker.
As of November 2, 2002 the Company was indebted to Wakefern in the amount of
approximately $31,935,000 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 2, 2002, the Company had a 15.6%
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 proport