VILLAGE SUPER MARKET, INC.
ANNUAL REPORT
Contents
Letter to Shareholders........................................................2
Selected Financial Data.......................................................3
Unaudited Quarterly Financial Data............................................3
Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................4
Consolidated Balance Sheets...................................................9
Consolidated Statements of Operations........................................10
Consolidated Statements of Shareholders' Equity
and Comprehensive Income............................................11
Consolidated Statements of Cash Flows........................................12
Notes to Consolidated Financial Statements...................................13
Independent Auditors' Report.................................................23
Stock Price and Dividend Information.........................................23
Corporate Directory...........................................Inside back cover
Dear Fellow Shareholders
The supermarket industry has faced significant challenges the last two years.
Consumer spending has remained constrained amid worries about a sluggish
economy, rising unemployment and war. Locally, a total of seven store openings
by competitors impacted our stores since the spring of 2002 and our market
areas continued to be highly promotional. Despite these challenging conditions,
we achieved solid results in fiscal 2003.
Net income in fiscal 2003 was $11,100,000, or $3.54 per diluted share, a
decline of 12% from the prior year. Sales increased 2.2% to $902,420,000. Same
store sales increased 1.6%. Approximately half of the increase in same store
sales resulted from substantial sales increases in the Garwood and Hammonton
stores, which opened in fiscal 2002. The strong customer response to these
stores has confirmed our store design emphasis on the Power Alley and to the
increased display space committed to more diverse produce, international foods,
and organic and natural foods.
During fiscal 2003 we completed substantial interior remodels of the Egg
Harbor, Hillsborough and Rio Grande stores. While each of these stores was
already in excess of 60,000 total sq. ft., we invested in these renovations to
freshen the appearance of the stores and to expand certain categories, such as
natural foods, to reflect our customers changing needs.
In September 2003, we began an 11,000 sq.ft. expansion and remodel of the
Bernardsville store. In October, construction began on an 80,000 sq.ft.
replacement store in Somers Point, which is scheduled to open in June 2004.
We continue to leverage our investment in technology to improve the shopping
experience of our customers through target marketing. We added a Continental
OnePass miles program for Price Plus loyalty card members this year. We also
initiated a Pet Bucks reward program and enhanced our Baby Bucks and Kid's Club
loyalty programs.
ShopRite was named the official supermarket of the New York Giants in October.
Customers who purchase the products of sponsoring vendors will be eligible to
win various prizes, including serving as honorary captain at a Giants home game.
On June 20, 2003, the Board of Directors declared the first cash dividend
since 1992. The Board of Directors decided to pay a dividend based on the
recent tax law, our cash flow generation, and our strong financial condition.
Class A shareholders received a semi-annual dividend of $.13 and Class B
shareholders received $.08.
In closing, we would like to thank all our associates for their diligent
effort and imagination in identifying and satisfying the needs of our customers.
We also would like to thank our fellow shareholders for their continued support
and our customers for their patronage.
James Sumas, Perry Sumas,
Chairman of the Board President
Selected Financial Data
(Dollars in thousands except per share and square feet data)
July 26, July 27, July 28, July 29, July 31,
For year 2003 2002 2001 2000 1999
Sales $ 902,420 $ 883,337 $ 820,627 $ 784,995 $ 750,680
Net income 11,100 12,558 9,443 8,426 4,722
Net income per share - basic 3.60 4.11 3.13 2.81 1.59
Net income per share - diluted 3.54 4.00 3.08 2.76 1.55
Cash dividends per share
Class A .13 -- -- -- --
Class B .08 -- -- -- --
At year end
Total assets 216,578 204,053 183,346 175,987 149,555
Long-term debt 37,241 43,634 43,363 43,998 27,204
Working capital (deficit) 28,245 20,212 17,087 10,690 (7,197)
Shareholders' equity 106,777 97,443 84,770 75,152 66,477
Book value per share 34.56 31.69 27.97 24.94 22.24
Other data
Same store sales increase 1.6% 4.3% 3.6% 2.9% 6.0%
Total square feet 1,252,000 1,252,000 1,184,000 1,182,000 1,182,000
Average total sq. ft. per store 54,000 54,000 54,000 51,000 51,000
Selling square feet 991,000 991,000 935,000 934,000 934,000
Sales per average square foot
of selling space 911 917 878 840 846
Number of stores 23 23 22 23 23
Sales per average number
of stores 39,236 38,406 37,301 34,130 33,364
Capital expenditures 10,851 20,767 15,070 13,312 7,084
Unaudited Quarterly Financial Data
(Dollars in thousands except per share amounts)
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
2003
Sales $216,538 $233,911 $221,450 $230,521 $902,420
Gross profit 54,033 57,891 55,169 58,271 225,364
Net income 2,450 4,040 1,897 2,713 11,100
Net income per share - diluted $ .78 $ 1.28 $ .60 $ .87 $ 3.54
2002
Sales $210,831 $230,636 $216,525 $225,345 $883,337
Gross profit 52,516 57,536 53,671 57,920 221,643
Net income 2,621 3,724 2,338 3,875 12,558
Net income per share - diluted $ .84 $ 1.19 $ .74 $ 1.23 $ 4.00
Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
The following table sets forth the major components of the Consolidated
Statements of Operations of the Company as a percentage of sales:
July 26, July 27, July 28,
2003 2002 2001
Sales 100.00% 100.00% 100.00%
Cost of sales 75.03 74.91 75.51
------ ------ ------
Gross profit 24.97 25.09 24.49
Operating and administrative expense 21.75 21.49 21.27
Depreciation and amortization .99 .91 .96
Non-cash impairment charge -- .07 .14
----- ----- -----
Operating income 2.23 2.62 2.12
Income from partnerships .18 -- --
Interest expense, net .33 .37 .33
----- ----- -----
Income before income taxes 2.08 2.26 1.79
Income taxes .85 .83 .64
----- ----- -----
Net income 1.23% 1.42% 1.15%
===== ===== =====
Sales were $902,420,000 in fiscal 2003, an increase of $19,083,000, or
2.2% from the prior year. Same store sales increased 1.6% in fiscal 2003. Same
store sales include sales in the Garwood store beginning with the second quarter
of fiscal 2003 and the Hammonton store beginning with the fourth quarter of
fiscal 2003. Approximately half of the increase in same store sales in fiscal
2003 was attributable to improved sales in the Garwood and Hammonton stores
after their inclusion in the same store sales calculation. Same store sales
increased less in fiscal 2003 than in recent fiscal years due to substantial
store openings by competitors near the Company's stores in fiscal 2003 and late
fiscal 2002, a soft local economy and increased promotional activity in our
marketplace. Sales were $883,337,000 in fiscal 2002, an increase of $62,710,000,
or 7.6% from the prior year. On September 26, 2001, the Company opened a 59,000
sq. ft. store in Garwood, NJ. On March 6, 2002, the Company opened a 64,000 sq.
ft. store in Hammonton, NJ. On February 5, 2002, the Company closed the 55,000
sq. ft. store in Ventnor, NJ. Same store sales increased 4.3% in fiscal 2002.
Approximately 60% of the same store sales increase was attributable to improved
sales in a replacement store opened two years ago and improved sales in the
second half of fiscal 2002 from three stores in the general area of the closed
Ventnor store. The opening of a competitor in the Ventnor location and four
other competitive openings, affecting a total of eight Company stores, occurred
in the fourth quarter of fiscal 2002.
Gross profit as a percentage of sales decreased .12% in fiscal 2003
due to higher promotional spending in the current year and incentives received
in fiscal 2002 in connection with the two store openings. These decreases were
partially offset by improved product mix in fiscal 2003. Gross profit as a
percentage of sales increased .60% in fiscal 2002 due to improved product mix,
incentives received in connection with the two store openings, reduced LIFO
charges and improved gross profit percentages in most departments. This
improvement was partially offset by increased promotional spending.
Operating and administrative expense increased .26% as a percentage of
sales in fiscal 2003 primarily due to increased fringe benefit costs, increased
debit/credit card processing fees and increased snow removal costs. Fringe
benefit costs increased primarily due to higher required contributions to
employee health and pension plans under union contracts. This trend of increased
contributions to employee benefit plans under union contracts is expected to
continue in fiscal 2004. In addition, rates charged by various utilities for
electricity and gas will increase by an estimated 6% to 15% in fiscal 2004.
Operating and administrative expense increased .22% as a percentage of sales in
fiscal 2002 primarily due to increased fringe benefit costs. Fringe benefit
costs increased due to contractual contribution increases to employee health and
pension plans.
Depreciation and amortization expense was $8,929,000, $8,002,000 and
$7,875,000 in fiscal 2003, 2002 and 2001, respectively. Depreciation and
amortization expense increased in fiscal 2003 due to a full year of depreciation
on the substantial fixed asset additions placed in service in the prior fiscal
year, partially offset by the discontinuance of depreciation on the closed
Ventnor store. Depreciation expense increased in fiscal 2002 due to substantial
fixed asset additions from the two new stores, partially offset by the
discontinuance of depreciation on the closed Ventnor store and the
discontinuance of goodwill amortization in fiscal 2002 (see Note 1).
The Company recorded a non-cash impairment charge of $640,000 in fiscal
2002 to write off the book value of the equipment of the Ventnor store. Fiscal
2001 results include a non-cash impairment charge of $1,122,000 to write off the
book value of a favorable sublease on the Ventnor store. The sublessor of this
property rejected its lease in March 2001 pursuant to the U.S. Bankruptcy Code.
Although the Company negotiated with the property owner to remain in this
location under new lease terms, the Company's lease was terminated by the
property owner. Therefore, the Ventnor store was closed on February 5, 2002.
Fiscal 2003 income before income taxes includes $1,639,000 of
distributions received from two partnerships in which the Company is a limited
partner. The Company's ownership interests in these partnerships resulted from
its leasing of supermarkets in two shopping centers. The Company remains a
tenant in one of the shopping centers. The Company's accounting for these
partnerships under the equity method had previously resulted in a zero
investment balance in the consolidated financial statements.
Interest expense, net was $2,982,000, $3,234,000 and $2,725,000 in
fiscal 2003, 2002 and 2001, respectively. Interest expense, net decreased in
fiscal 2003 due to the benefit of lower interest rates and reduced borrowing
levels. Interest expense, net increased in fiscal 2002 due to lower interest
income earned on cash balances invested due to lower interest rates. Fiscal 2002
included $171,000 of interest cost capitalized related to new store construction
compared to $389,000 in fiscal 2001.
The Company's effective income tax rate was 41.0%, 37.0% and 35.9% in
fiscal 2003, 2002 and 2001, respectively. The effective income tax rate
increased in fiscal 2003 due to enacted changes in state tax laws. The state tax
law changes have resulted in the Company recording an additional current
liability of $1,054,000 because the benefit of a tax planning strategy has not
been recognized for financial reporting purposes. The effective income tax rate
increased in fiscal 2002 due to enacted changes in state tax laws, partially
offset by tax planning initiatives begun in the second half of fiscal 2002.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those accounting policies that
management believes are important to the portrayal of the Company's financial
condition and results of operations 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
The Company reviews the carrying values of its long-lived assets, such
as property, equipment and fixtures and intangibles subject to amortization, for
possible impairment whenever events or changes in circumstances indicate that
the carrying amount of assets may not be recoverable. Such review analyzes the
undiscounted estimated future cash flows from such assets to determine if the
carrying value of such assets are recoverable from their respective cash flows.
If an impairment is indicated, it is measured by comparing the discounted cash
flows for the long-lived asset held for use to its carrying value. Goodwill is
tested for impairment at the end of each fiscal year, or as circumstances
dictate, pursuant to the provisions of Financial Accounting Standards Board
("FASB") Statement 142. Since the Company's stock is not widely traded,
management utilizes valuation techniques such as earnings multiples to assess
goodwill for impairment. Calculating the fair value of a reporting unit requires
the use of estimates. Management believes the fair value of the Company's one
reporting unit exceeds its carrying value. Should the Company's carrying value
of goodwill exceed its fair value, the amount of any resulting goodwill
impairment may be material to the Company's financial position and results of
operations.
Patronage Dividends
As a stockholder of Wakefern Food Corporation ("Wakefern"), the Company
earns a share of Wakefern's earnings, which is distributed as a "patronage
dividend" (see Note 3). This dividend is based on a distribution of Wakefern's
operating profits for its fiscal year (which ends 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 sales. 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. The amount of patronage dividends receivable based on these estimates
were $3,633,602 and $2,196,219 at July 26, 2003 and July 27, 2002,
respectively.
Pension Plans
The determination of the Company's obligation and expense for pension
benefits is dependent, in part, on the Company's selection of assumptions used
by actuaries in calculating those amounts. These assumptions are described in
Note 8 and include, among others, the discount rate, the expected long-term rate
of return on plan assets and the rate of increase in compensation costs. In
accordance with generally accepted accounting principles, actual results that
differ from the Company's assumptions are accumulated and amortized over future
periods and, therefore, generally affect recognized expense and recorded
obligations in future periods. While management believes that its assumptions
are appropriate, significant differences in actual experience or significant
changes in the Company's assumptions may materially effect pension obligations
and future expense.
Based on the Company's review of market interest rates, the Company
lowered the discount rate to 6.75% for fiscal 2003 compared to 7.25% for fiscal
2002. The fifty basis point reduction in the discount rate increased the
projected benefit obligation as of July 26, 2003 by $1,139,000. Fiscal 2003
pension expense increased by $77,000 as a result of this change. Fiscal 2004
expense is expected to be approximately $1,300,000. The Company evaluated the
expected long-term rate of return on plan assets of 7.5% and the expected
increase in compensation costs of 4% and concluded no changes in these
assumptions were necessary in estimating pension plan obligations and expense.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $24,830,000 in fiscal
2003 compared to $22,876,000 in fiscal 2002. This increase is due to a decrease
in inventories in fiscal 2003 compared to an increase in inventories in fiscal
2002, the benefit of reduced quarterly income tax payments in fiscal 2003 from a
tax receivable generated in fiscal 2002 and increased deferred taxes. These
increased cash flows were partially offset by reduced net income in fiscal 2003,
a decrease in accounts payable and accrued expenses in fiscal 2003 compared to
an increase in fiscal 2002, and increased accrual for patronage dividends in
fiscal 2003.
During fiscal 2003, operating cash flow of $24,830,000 and proceeds
from asset disposals of $4,006,000 (see related party transactions) were used to
fund capital expenditures of $10,851,000, make debt payments of $3,080,000 and
to increase cash on hand by $14,730,000. Major capital expenditures in fiscal
2003 included remodels of the Egg Harbor, Hillsborough and Rio Grande stores.
Working capital was $28,245,000, $20,212,000 and $17,087,000 at July
26, 2003, July 27, 2002 and July 28, 2001, respectively. Working capital ratios
at the same dates were 1.46, 1.36 and 1.33 to one, respectively. The Company's
working capital needs are reduced since inventory is generally sold by the time
payments to Wakefern and other suppliers are due. The working capital ratio
increased in fiscal 2003 primarily due to the substantial increase in cash and
cash equivalents, partially offset by the increase in current payments due on
notes payable.
Net cash provided by operating activities was $22,876,000 in fiscal
2002 compared to $19,653,000 in fiscal 2001. This increase is due to an
improvement in net income and increased payables in fiscal 2002, offset by a
larger increase in inventories in fiscal 2002. Both inventories and payables
increased in fiscal 2002 due to two store openings, offset by one store closing.
In addition, inventories increased to accommodate the rise in same store sales.
During fiscal 2002, operating cash flow of $22,876,000 was used to fund
capital expenditures of $20,767,000 and to increase cash on hand by $2,615,000.
Major capital expenditures in fiscal 2002 included the construction and
equipment for the new stores in Garwood and Hammonton. The Company borrowed
$3,000,000 secured by equipment in fiscal 2002 and made principal payments on
debt of $2,945,000.
The Company has budgeted approximately $11,000,000 for capital
expenditures in fiscal 2004. Planned expenditures include the expansion and
remodel of the Bernardsville store and equipment for the Somers Point
replacement store. The Company's primary sources of liquidity in fiscal 2004 are
expected to be the cash on hand at July 26, 2003 and operating cash flow to be
generated in fiscal 2004. In addition, the Company has available a $15,000,000
(none outstanding at July 26, 2003) unsecured revolving credit line, which
expires September 16, 2004. The Company is currently negotiating a replacement
revolving credit facility and expects to do so during fiscal 2004.
At July 26, 2003, the Company was in compliance with all terms and
covenants of both its unsecured revolving loan agreement and its unsecured
senior note agreement. These agreements contain covenants which, among other
matters, specify limitations on total debt levels, total liens, payments of
dividends, stock repurchases, and capital expenditures. In addition, these
agreements specify required levels of net worth and fixed charge coverage.
The table below presents significant contractual obligations of the Company at
July 26, 2003:
Payments Due By Period
2004 2005 2006 2007 2008 Thereafter Total
Long-term debt $ 6,233,903 $ 6,229,065 $ 5,506,588 $ 5,388,074 $ 4,860,338 $ 8,571,430 $ 36,789,398
Capital leases $ 1,263,384 $ 1,274,804 $ 1,290,792 $ 1,107,740 $ 741,636 $ 4,063,654 $ 9,742,010
Operating leases $ 6,666,696 $ 6,670,636 $ 6,232,363 $ 5,568,410 $ 5,238,589 $ 67,569,717 $ 97,946,411
Notes payable to
related party $ 832,796 $ 711,901 $ 680,940 $ 680,750 $ 91,000 $ 150,868 $ 3,148,255
----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 14,996,779 $ 14,886,406 $ 13,710,683 $ 12,744,974 $ 10,931,563 $ 80,355,669 $147,626,074
=========== =========== =========== =========== =========== =========== ===========
In addition, the Company is obligated to purchase 85% of its primary merchandise
requirements from Wakefern (see Note 3) and to make contingent lease payments
(see Note 6).
ADOPTION OF NEW ACCOUNTING STANDARDS
The Company has one stock-based employee compensation plan, which is
described in Notes 1 and 7. During fiscal 2003, the Company adopted the fair
value recognition provisions of FASB Statement 123, "Accounting for Stock-Based
Compensation", prospectively in accordance with FASB Statement 148 to all
employee awards granted, modified or settled after July 28, 2002. Prior to
fiscal 2003, the Company accounted for its employee stock option plan under the
recognition and measurement provisions of APB Opinion 25, "Accounting for Stock
Issued to Employees". In accordance with the intrinsic value method of
accounting for stock options under APB 25, no stock-based employee compensation
cost is reflected in fiscal 2002 and 2001 net income, as all options granted had
an exercise price equal to the fair value of the Company's stock at the date of
grant. The following table illustrates the effect on net income and net income
per share if the fair value based method had been applied to all awards in each
period.
July 26, July 27, July 28,
2003 2002 2001
Net income, as reported $11,099,708 $12,557,639 $9,443,302
Add: Stock-based employee
compensation expense
included in reported net
income, net of related
tax effects 41,847 -- --
Deduct: Total stock-based
employee compensation
expense determined under
fair value method for all
awards, net of related
tax effects (41,847) (70,840) --
---------- ---------- ---------
Pro forma net income $11,099,708 $12,486,799 $9,443,302
========== ========== =========
Net income per share:
Basic - as reported $ 3.60 $ 4.11 $ 3.13
Basic - pro forma $ 3.60 $ 4.08 $ 3.13
Diluted - as reported $ 3.54 $ 4.00 $ 3.08
Diluted - pro forma $ 3.54 $ 3.98 $ 3.08
Effective July 28, 2002, the Company adopted the provisions of FASB
Statement 143, "Accounting for Asset Retirement Obligations." This statement
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The implementation of this statement had an immaterial effect on the
consolidated financial statements of the Company.
Effective July 28, 2002, the Company adopted the provisions of FASB
Statement 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
This statement requires that one accounting model be used for long-lived assets
to be disposed of, whether previously held and used or newly acquired. This
statement also broadens the presentation of discontinued operations to include
more disposal transactions. The implementation of this statement did not have
any impact on the consolidated financial statements of the Company.
In June 2002, the FASB issued Statement 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan and
applies to any exit or disposal activities initiated after December 31, 2002.
The implementation of this statement did not have any impact on the consolidated
financial statements of the Company.
In November 2002, the FASB Emerging Issues Task Force (EITF) reached a
consensus with respect to EITF Issue 02-16, "Accounting for Consideration Given
by a Vendor to a Customer." This consensus includes a presumption that cash
consideration received by a customer from a vendor is to be treated as a
reduction of cost of sales in the customer's income statement. As the Company
already accounted for such consideration as a reduction of cost of sales, this
EITF had no impact on the Company's consolidated financial statements.
In May 2003, the FASB issued Statement 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement requires issuers to classify certain financial instruments within its
scope as a liability because that financial instrument embodies an obligation of
the issuer. The statement is effective for financial instruments entered into or
modified after May 31, 2003, and for interim periods beginning after June 15,
2003. As the Company had no financial instruments within the scope of Statement
150 at July 26, 2003, the implementation of this statement did not have any
impact on the consolidated financial statements of the Company.
FASB Interpretation 45 ("FIN 45"), "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," was issued by the FASB in November of 2002. FIN 45
addresses a guarantor's accounting for, and disclosure of, the issuance of some
guarantees. The provisions of FIN 45 relating to initial recognition and
measurement are effective on a prospective basis for guarantees issued or
modified after December 31, 2002. These provisions did not have any impact on
the consolidated financial statements in fiscal 2003.
OTHER MATTERS
On November 22, 2000, Big V Supermarkets, Inc., then the largest member
of the Wakefern Food Cooperative, filed for reorganization under Chapter 11 of
the U.S. Bankruptcy Code. In addition, Big V announced its intention to depart
from the Wakefern Cooperative. The Company's Form 10-K includes a comprehensive
description of the Company's relationship with Wakefern and the rights and
obligations of the Company and other members under the Wakefern Stockholder's
Agreement. A decision by the U.S. Bankruptcy Court upheld that Big V would be
required to pay substantial withdrawal fees to Wakefern to make up for the loss
of volume to the cooperative in the event Big V departed from the Wakefern
Cooperative. This matter was resolved on July 12, 2002, when Wakefern purchased
substantially all of Big V's assets for $185 million in cash and assumed
liabilities. The future performance of this Wakefern acquisition could
materially impact the patronage dividends paid by Wakefern to the Company.
RELATED PARTY TRANSACTIONS
The Company holds an investment in Wakefern, its principal supplier.
The Company purchases substantially all of its merchandise from Wakefern in
accordance with the Wakefern Stockholder Agreement. As part of this agreement,
the Company is required to purchase certain amounts of Wakefern common stock. At
July 26, 2003, the Company's indebtedness to Wakefern for the outstanding amount
of this stock subscription was $3,148,225. Wakefern distributes as a "patronage
dividend" to each member a share of earnings of Wakefern in proportion to the
dollar volume of business done by the member with Wakefern during the year.
Additional information is provided in Note 3.
At July 26, 2003 the Company had demand deposits invested at Wakefern
in the amount of $30,918,000. These deposits earn the prime rate of interest
less 2.5% or overnight money market rates.
The Company leases the Vineland store from Wakefern at an annual rent
of $700,000.
On April 2, 2003, the Company sold the land and building currently
occupied by the Somers Point, NJ store to an unrelated real estate investment
trust (the "REIT") for $3,500,000 plus the reimbursement of certain costs. The
Company's purpose in entering into this transaction was to provide for the
development of an 80,000 sq. ft. replacement store in Somers Point with minimal
cash outlay by the Company, and to ensure continued occupancy of the
Springfield, NJ store and the Company's headquarters.
The Company executed leases with the REIT for the replacement store in
Somers Point and to continue occupancy of the current Somers Point store until
the replacement store is constructed by the REIT. In addition, the Company
executed long-term leases with the REIT for the Springfield store and the
Company's headquarters, which were previously leased from a realty Company owned
by certain officers of the Company (the "Realty Company"). The Company canceled
its current leases with the Realty Company. The combined annual rents of these
two new leases are approximately the same as the annual rents of the leases
cancelled.
As part of this transaction, the shareholders of the Realty Company
sold their shares in the Realty Company to the REIT. The Realty Company's assets
consist substantially of the Springfield store, the Company headquarters and
undeveloped land in Somers Point upon which a 130,000 sq. ft. retail center is
to be developed by the REIT. This transaction resulted in no net gain or loss to
the Company. Although the transactions with the unrelated, publicly traded REIT
were negotiated at arms-length, the Company's independent directors evaluated
and approved these transactions for fairness due to the concurrent sale by the
Realty Company, which was a related party.
In addition, the Company leases a supermarket from a different realty
firm partly-owned by officers of the Company. The Company paid aggregate rents
to related parties under all the above leases, including minimum and contingent
rent, of approximately $926,000, $1,096,000 and $1,152,000 in fiscal years 2003,
2002 and 2001, respectively.
IMPACT OF INFLATION AND CHANGING PRICES
Although the Company cannot accurately determine the precise effect of
inflation or deflation on its operations, it estimates that product prices
overall experienced very little inflation or deflation in fiscal 2003.
FORWARD-LOOKING STATEMENTS
This Annual Report contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual events and results may vary
significantly from those contemplated or implied by such forward-looking
statements. The Company undertakes no obligation to update forward-looking
statements to reflect developments or information obtained after the date
hereof. The following are among the principal factors that could cause actual
results to differ materially from the forward-looking statements: local economic
conditions; competitive pressures from the Company's operating environment; the
ability of the Company to maintain and improve its sales and margins; the
ability to attract and retain qualified associates; the availability of new
store locations; the availability of capital; the liquidity of the Company on a
cash flow basis; the success of operating initiatives; consumer spending
patterns; increased cost of goods sold, including increased costs from the
Company's principal supplier, Wakefern; the results of union contract
negotiations; competitive store openings; the rate of return on pension assets;
and other factors detailed herein and in other filings of the Company.
Consolidated Balance Sheets
July 26, July 27,
2003 2002
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 48,500,180 $ 33,770,136
Merchandise inventories 32,304,243 33,780,335
Patronage dividend receivable 3,633,602 2,196,219
Other current assets 5,206,849 6,861,678
------------- ------------
Total current assets 89,644,874 76,608,368
------------- ------------
PROPERTY, EQUIPMENT AND FIXTURES, net 96,320,477 98,673,591
OTHER ASSETS
Investment in related party, at cost 15,875,332 13,663,449
Goodwill 10,605,021 10,605,021
Other assets 4,132,238 4,502,559
------------- -------------
Total other assets 30,612,591 28,771,029
------------- -------------
$ 216,577,942 $ 204,052,988
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 6,233,903 $ 2,094,816
Capitalized lease obligations 663,458 543,724
Notes payable to related party 832,796 422,760
Accounts payable to related party 32,347,599 30,630,704
Accounts payable and accrued expenses 21,322,584 22,704,503
------------- -------------
Total current liabilities 61,400,340 56,396,507
------------- -------------
LONG-TERM DEBT
Notes payable 30,903,033 36,769,449
Capitalized lease obligations 4,022,802 5,899,360
Notes payable to related party 2,315,459 965,333
------------- -------------
Total long-term debt 37,241,294 43,634,142
------------- -------------
Other Liabilities 11,159,054 6,579,476
------------- -------------
COMMITMENTS AND CONTINGENCIES (notes 3, 4, 6, and 9)
SHAREHOLDERS' EQUITY
Preferred stock, no par value:
Authorized 10,000,000 shares, none issued -- --
Class A common stock, no par value:
Authorized 10,000,000 shares, issued 1,762,800 shares 18,535,275 18,411,012
Class B common stock, no par value:
Authorized 10,000,000 shares, issued and outstanding
1,594,076 shares 1,034,679 1,034,679
Retained earnings 93,239,313 82,517,249
Accumulated other comprehensive loss (2,329,906) (615,907)
Less treasury stock, Class A, at cost (267,600 shares
at July 26, 2003 and 282,200 shares at July 27, 2002) (3,702,107) (3,904,170)
------------- -------------
Total shareholders' equity 106,777,254 97,442,863
------------- -------------
$ 216,577,942 $ 204,052,988
============= =============
Consolidated Statements of Operations
Years Ended
July 26, July 27, July 28,
2003 2002 2001
SALES $902,420,334 $883,337,175 $820,627,178
COST OF SALES 677,056,650 661,694,232 619,654,196
------------ ------------ ------------
GROSS PROFIT 225,363,684 221,642,943 200,972,982
OPERATING AND ADMINISTRATIVE EXPENSE 196,273,348 189,835,338 174,525,488
DEPRECIATION AND AMORTIZATION 8,928,839 8,001,659 7,875,059
NON-CASH IMPAIRMENT CHARGE -- 640,000 1,122,000
----------- ----------- -----------
OPERATING INCOME 20,161,497 23,165,946 17,450,435
INCOME FROM PARTNERSHIPS 1,639,176 -- --
INTEREST EXPENSE, net of interest income of
$423,360, $573,879 and $1,007,511 2,982,002 3,233,737 2,725,021
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 18,818,671 19,932,209 14,725,414
INCOME TAXES 7,718,963 7,374,570 5,282,112
------------ ------------ ------------
NET INCOME $ 11,099,708 $ 12,557,639 $ 9,443,302
============ ============ ============
NET INCOME PER SHARE:
BASIC $ 3.60 $ 4.11 $ 3.13
DILUTED $ 3.54 $ 4.00 $ 3.08
=========== =========== ===========
Consolidated Statements of Shareholders' Equity
and Comprehensive Income
Years Ended July 26, 2003, July 27, 2002 and July 28, 2001
Accumulated
Class A Class B other Total
common stock common stock Retained comprehensive Treasury shareholders'
Shares Amount Shares Amount earnings loss Stock equity
Balance, July 29, 2000 1,762,800 $18,129,472 1,594,076 $ 1,034,679 $60,739,316 -- $(4,751,178) $75,152,289
Net income -- -- -- -- 9,443,302 -- -- 9,443,302
Exercise of stock options -- -- -- -- (66,816) -- 240,816 174,000
--------- ---------- --------- --------- ---------- -------- --------- ----------
Balance, July 28, 2001 1,762,800 18,129,472 1,594,076 1,034,679 70,115,802 -- (4,510,362) 84,769,591
Net income -- -- -- -- 12,557,639 -- -- 12,557,639
Other comprehensive loss -
additional minimum pension
liability, net of deferred
tax benefit of $410,605 -- -- -- -- -- (615,907) -- (615,907)
----------
Comprehensive income 11,941,732
----------
Exercise of stock options
and related tax benefits -- 281,540 -- -- (156,192) -- 606,192 731,540
--------- ---------- -------- ---------- ---------- -------- --------- ----------
Balance, July 27, 2002 1,762,800 18,411,012 1,594,076 1,034,679 82,517,249 (615,907) (3,904,170) 97,442,863
Net income -- -- -- -- 11,099,708 -- -- 11,099,708
Other comprehensive loss -
additional minimum pension
liability, net of deferred
tax benefit of $1,142,666 -- -- -- -- -- (1,713,999) -- (1,713,999)
----------
Comprehensive income 9,385,709
----------
Dividends -- -- -- -- (321,644) -- -- (321,644)
Exercise of stock options
and related tax benefits -- 82,416 -- -- (56,000) -- 202,063 228,479
Stock compensation expense -- 41,847 -- -- -- -- -- 41,847
--------- ---------- --------- ---------- ---------- ---------- ---------- -----------
Balance, July 26, 2003 1,762,800 $18,535,275 1,594,076 $ 1,034,679 $93,239,313 $(2,329,906) $(3,702,107) $106,777,254
========= ========== ========= ========== ========== ========== ========== ===========
Consolidated Statements of Cash Flows
Years Ended
July 26, 2003 July 27, 2002 July 28, 2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 11,099,708 $ 12,557,639 $ 9,443,302
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,928,839 8,001,659 7,875,059
Non-cash impairment charge -- 640,000 1,122,000
Tax benefit from exercise of stock options 82,416 281,540 --
Non-cash stock compensation 41,847 -- --
Deferred taxes 3,094,448 2,028,270 308,664
Provision to value inventories at LIFO 349,962 53,345 806,993
Changes in assets and liabilities:
(Increase) decrease in
merchandise inventories 1,126,130 (3,365,303) (242,633)
(Increase) decrease in patronage
dividend receivable (1,437,383) (51,226) 55,653
(Increase) decrease in other
current assets 1,654,829 (1,587,480) 631,411
(Increase) in other assets (267,764) (286,774) (454,049)
Increase (decrease) in accounts
payable to related party 1,716,895 2,266,436 (269,202)
Increase (decrease) in accounts payable
and accrued expenses (2,052,961) 1,918,912 (39,377)
Increase in other liabilities 493,295 419,009 415,363
---------- ---------- ----------
Net cash provided by operating activities 24,830,261 22,876,027 19,653,184
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (10,850,560) (20,766,878) (15,069,721)
Proceeds from disposal of assets 4,005,805 -- --
---------- ---------- ----------
Net cash used in investing activities (6,844,755) (20,766,878) (15,069,721)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt -- 3,000,000 3,000,000
Proceeds from exercise of stock options 146,063 450,000 174,000
Principal payments of long-term debt (3,079,881) (2,944,577) (2,322,932)
Dividends (321,644) -- --
--------- --------- ---------
Net cash provided by (used in)
financing activities (3,255,462) 505,423 851,068
--------- --------- ---------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 14,730,044 2,614,572 5,434,531
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 33,770,136 31,155,564 25,721,033
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 48,500,180 $ 33,770,136 $ 31,155,564
=========== =========== ===========
Supplemental disclosures of cash payments made for:
Interest (net of amounts capitalized) $ 3,462,064 $ 3,903,585 $ 3,748,819
Income taxes $ 3,005,000 $ 7,101,000 $ 5,233,766
Noncash Supplemental disclosures:
Investment in related party $ 2,211,883 $ 550,000 --
Notes to Consolidated Financial Statements
NOTE 1-- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations
Village Super Market, Inc. (the "Company") operates a chain of 23
ShopRite supermarkets in New Jersey and eastern Pennsylvania. The Company is a
member of Wakefern Food Corporation ("Wakefern"), the largest retailer-owned
food cooperative in the United States.
Principles of consolidation
The consolidated financial statements include the accounts of Village
Super Market, Inc. and its subsidiaries, which are wholly owned. Intercompany
balances and transactions have been eliminated.
Fiscal year
The Company and its subsidiaries utilize a 52-53 week fiscal year
ending on the last Saturday in the month of July. Fiscal 2003, 2002 and 2001
contain 52 weeks.
Reclassifications
Certain amounts have been reclassified in the fiscal 2002 and 2001
consolidated financial statements to conform to the fiscal 2003 presentation.
Industry segment
The Company consists of one operating segment, the retail sale of food
and non-food products.
Revenue recognition
Merchandise sales are recognized at the point of sale to the customer.
Discounts provided to customers through ShopRite coupons at the point of sale
are recognized as a reduction of sales as the products are sold.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. Included in cash and
cash equivalents at July 26, 2003 and July 27, 2002 are $30,918,000 and
$22,737,000, respectively, of demand deposits invested at Wakefern at the prime
rate less 2.5% or at overnight money market rates.
Merchandise inventories
Approximately 70% of merchandise inventories are stated at the lower of
LIFO (last-in, first-out) cost or market. If the FIFO (first-in, first-out)
method had been used, inventories would have been $9,712,000 and $9,362,000
higher than reported in fiscal 2003 and 2002, respectively. All other
inventories are stated at the lower of FIFO cost or market.
Vendor allowances and rebates
The Company receives vendor allowances and rebates, including amounts
received as a pass through from Wakefern, related to the Company's buying and
merchandising activities. Vendor allowances and rebates are recognized as a
reduction in cost of sales when the related merchandise is sold or when the
required contractual terms are completed.
Property, equipment and fixtures
Property, equipment and fixtures are recorded at cost. Interest cost
incurred to finance construction is capitalized as part of the cost of the
asset. Maintenance and repairs are expensed as incurred.
Depreciation is provided on a straight-line basis over estimated useful
lives of thirty years for buildings, ten years for store fixtures and equipment,
and three years for vehicles. Leasehold improvements are amortized over the
shorter of the related lease terms or the economic lives of the related assets.
When assets are sold or retired, their cost and accumulated
depreciation are removed from the accounts, and any gain or loss is reflected in
the consolidated financial statements.
Investment in related party
The Company's investment in its principal supplier, Wakefern, is stated
at cost (see Note 3).
Store opening and closing costs
All store opening costs are expensed as incurred. Prior to the adoption
of FASB Statement 146, provisions were made for losses resulting from store
closings at the time a decision to close a store was made. This includes items
such as future lease payments, net of expected sublease recovery, and charges to
reduce assets to net realizable value. Effective July 28, 2002, FASB Statement
146 requires the recognition of costs associated with store closings as those
costs are incurred.
Leases
Leases which meet certain criteria are classified as capital leases,
and assets and liabilities are recorded at amounts equal to the lesser of the
present value of the minimum lease payments or the fair value of the leased
properties at the inception of the respective leases. Such assets are amortized
on a straight-line basis over the shorter of the related lease terms or the
economic lives of the related assets. Amounts representing interest expense
relating to the lease obligations are recorded to effect constant rates of
interest over the terms of the leases. Leases which do not qualify as capital
leases are classified as operating leases, and related rentals are charged to
expense as incurred.
Advertising
Advertising costs are expensed as incurred. Advertising expense was
$7,161,000, $6,952,000 and $6,402,000 in fiscal 2003, 2002 and 2001,
respectively.
Income taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in operations in
the period that includes the enactment date.
Comprehensive income
FASB Statement 130, "Reporting Comprehensive Income," establishes
standards for reporting and presentation of comprehensive income (loss) and its
components in a full set of financial statements. For fiscal 2003 and 2002,
comprehensive income consists of net income and the additional minimum pension
liability adjustment, net of income tax benefit.
Use of estimates
In conformity with accounting principles generally accepted in the
United States of America, management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of expenses during
the reporting period. Some of the more significant estimates are patronage
dividends, pension accounting assumptions and the impairment of long-lived
assets. Actual results could differ from those estimates.
Fair value of financial instruments
Cash and cash equivalents, patronage dividends receivable, accounts
payable and accrued expenses are reflected in the consolidated financial
statements at carrying value which approximates fair value because of the
short-term maturity of these instruments. The carrying value of the Company's
short and long-term notes payable approximates their fair value based on the
current rates available to the Company for similar instruments. As the Company's
investments in Wakefern can only be sold to Wakefern at amounts that approximate
the Company's cost, it is not practicable to estimate the fair value of such
investment.
Derivative instruments and hedging activities
The Company accounts for its derivative and hedging transactions in
accordance with FASB Statement 133, "Accounting for Derivative Instruments and
Hedging Activities," and Statement 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities." These statements establish
accounting and reporting standards for derivative instruments and for hedging
activities and require an entity to recognize all derivative instruments either
as an asset or a liability in the balance sheet and to measure such instruments
at fair value. These fair value adjustments are included either in the
determination of net income or as a component of accumulated other comprehensive
income depending on the nature of the transaction.
The Company has one derivative instrument, an interest rate swap
agreement, which it entered into in October 2001, to manage its exposure to
interest rate fluctuations (see Note 4). The Company has structured this swap
agreement to be an effective, fair value hedge of the underlying fixed rate
obligation. The fair value of this interest rate swap agreement is recorded in
other assets with a corresponding increase in notes payable. The changes in the
fair value of the interest rate swap agreement and the underlying fixed rate
obligation are recorded as equal and offsetting unrealized gains and losses in
interest expense in the consolidated statement of operations. As a result, there
is no impact to earnings resulting from hedge ineffectiveness.The Company is
exposed to credit risk in the event of the inability of the counter party to
perform under its outstanding derivatives contract. Management believes it has
minimized such risk by entering into a transaction with a counter party that is
a major financial institution with a high credit rating.
Long-lived assets
The Company reviews long-lived assets, such as property, equipment and
fixtures and intangibles subject to amortization, on an individual store basis
for impairment when circumstances indicate the carrying amount of an asset may
not be recoverable. Such review analyzes the undiscounted estimated future cash
flows from such assets to determine if the carrying value of such assets are
recoverable from their respective cash flows. If an impairment is indicated, it
is measured by comparing the discounted cash flows for the long-lived asset to
its carrying value.
The Company recorded a non-cash impairment charge of $640,000 in fiscal
2002 to write off the book value of the equipment of the Ventnor store, which
was closed on February 5, 2002. Fiscal 2001 results included a non-cash
impairment charge of $1,122,000 to write off the book value of a favorable
sublease on the Ventnor store due to the bankruptcy of the sublessor, and its
rejection of the sublease in bankruptcy court.
Goodwill
Goodwill is tested at the end of each fiscal year, or as circumstances
dictate, for impairment pursuant to the provisions of FASB Statement 142. An
impairment loss is recognized to the extent that the carrying amount exceeds
fair value. The Company operates as a single reporting unit for purposes of
evaluating goodwill for impairment and primarily considers earnings multiples
and other valuation techniques to measure fair value.
Prior to the adoption of FASB Statement 142 on July 29,2001, goodwill
was amortized over twenty to forty years. Amortization expense related to
goodwill was $341,000 for the fiscal year ended July 28, 2001. The Company's net
income for the year ended July 28, 2001 would have been $9,739,302 had this
amortization expense not been reported in that period. The Company's basic and
diluted earnings per share for the year ended July 28, 2001 would have been
$3.23 and $3.17, respectively, had the amortization expense not been reported in
that year. The Company assessed the recoverability of unamortized goodwill
utilizing relevant cash flow and profitability information.
Net income per share
The number of common shares outstanding for calculation of net income
per share is as follows:
2003 2002 2001
Weighted average shares
outstanding - basic 3,083,041 3,057,513 3,017,862
Dilutive effect of employee
stock options 48,449 81,136 50,056
--------- --------- ---------
Weighted average
shares outstanding - diluted 3,131,490 3,138,649 3,067,918
========= ========= =========
Adoption of New Accounting Standards
The Company has one stock-based employee compensation plan, which is
described in Note 7. During fiscal 2003, the Company adopted the fair value
recognition provisions of FASB Statement 123, "Accounting for Stock-Based
Compensation", prospectively in accordance with FASB Statement 148 to all
employee awards granted, modified or settled after July 28, 2002. Prior to
fiscal 2003, the Company accounted for its employee stock option plan under the
recognition and measurement provisions of APB Opinion 25, "Accounting for Stock
Issued to Employees". In accordance with the intrinsic value method of
accounting for stock options under APB 25, no stock-based employee compensation
cost is reflected in fiscal 2002 and 2001 net income, as all options granted had
an exercise price equal to the fair value of the Company's stock at the date of
grant. The following table illustrates the effect on net income and net income
per share if the fair value based method had been applied to all awards in each
period.
July 26, July 27, July 28,
2003 2002 2001
Net income, as reported $11,099,708 $12,557,639 $ 9,443,302
Add: Stock-based employee
compensation expense
included in reported net
income, net of related
tax effects
41,847 -- --
Deduct: Total stock-based
employee compensation
expense determined under
fair value method for all
awards, net of related
tax effects (41,847) (70,840) --
---------- ---------- ----------
Pro forma net income $11,099,708 $12,486,799 $ 9,443,302
========== ========== ==========
Net income per share:
Basic - as reported $ 3.60 $ 4.11 $ 3.13
Basic - pro forma $ 3.60 $ 4.08 $ 3.13
Diluted - as reported $ 3.54 $ 4.00 $ 3.08
Diluted - pro forma $ 3.54 $ 3.98 $ 3.08
Effective July 28, 2002, the Company adopted the provisions of FASB
Statement 143, "Accounting for Asset Retirement Obligations." This statement
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The implementation of this statement had an immaterial effect on the
consolidated financial statements of the Company.
Effective July 28, 2002, the Company adopted the provisions of FASB
Statement 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
This statement requires that one accounting model be used for long-lived assets
to be disposed of, whether previously held and used or newly acquired. This
statement also broadens the presentation of discontinued operations to include
more disposal transactions. The implementation of this statement did not have
any impact on the consolidated financial statements of the Company.
In June 2002, the FASB issued Statement 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan and
applies to any exit or disposal activities initiated after December 31, 2002.
The implementation of this statement did not have any impact on the consolidated
financial statements of the Company.
In November 2002, the FASB Emerging Issues Task Force (EITF) reached a
consensus with respect to EITF Issue 02-16, "Accounting for Consideration Given
by a Vendor to a Customer." This consensus includes a presumption that cash
consideration received by a customer from a vendor is to be treated as a
reduction of cost of sales in the customer's income statement. As the Company
already accounted for such consideration as a reduction of cost of sales, this
EITF had no impact on the Company's consolidated financial statements.
In May 2003, the FASB issued Statement 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement requires issuers to classify certain financial instruments within its
scope as a liability because that financial instrument embodies an obligation of
the issuer. The statement is effective for financial instruments entered into or
modified after May 31, 2003, and for interim periods beginning after June 15,
2003. As the Company had no financial instruments within the scope of Statement
150 at July 26, 2003, the implementation of this statement did not have any
impact on the consolidated financial statements of the Company.
FASB Interpretation 45 ("FIN 45"), "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," was issued by the FASB in November of 2002. FIN 45
addresses a guarantor's accounting for, and disclosure of, the issuance of some
guarantees. The provisions of FIN 45 relating to initial recognition and
measurement are effective on a prospective basis for guarantees issued or
modified after December 31, 2002. These provisions did not have any impact on
the consolidated financial statements in fiscal 2003.
NOTE 2--PROPERTY, EQUIPMENT AND FIXTURES
Property, equipment and fixtures are comprised as follows:
July 26, July 27,
2003 2002
Land and buildings $ 53,551,921 $ 60,106,320
Store fixtures and equipment 77,941,833 70,149,558
Leasehold improvements 39,199,519 36,628,394
Leased property under capital leases 7,797,869 8,597,869
Vehicles 1,511,095 1,584,823
----------- -----------
180,002,237 177,066,964
Less accumulated depreciation and amortization 83,681,760 78,393,373
----------- -----------
Property, equipment and fixtures--net $ 96,320,477 $ 98,673,591
=========== ===========
Interest cost capitalized amounted to $171,000 in fiscal 2002 and
$389,000 in fiscal 2001 (none in fiscal 2003). Amortization of leased property
under capital leases is included in depreciation and amortization expense.
NOTE 3--RELATED PARTY INFORMATION - WAKEFERN
The Company's ownership interest in its principal supplier, Wakefern,
which is operated on a cooperative basis for its stockholder members, is 16.9%
of the outstanding shares of Wakefern. The investment is pledged as collateral
for any obligations to Wakefern. In addition, all obligations to Wakefern are
personally guaranteed by the principal shareholders of the Company.
The Company is obligated to purchase 85% of its primary merchandise
requirements from Wakefern until ten years from the date that stockholders
representing 75% of Wakefern sales notify Wakefern that those stockholders
request that the Wakefern Stockholder Agreement be terminated. If this purchase
obligation is not met, the Company is required to pay Wakefern's profit
contribution shortfall attributable to this failure. Similar payments are due if
Wakefern loses volume by reason of the sale of Company stores or a merger with
another entity. The Company also has an investment of approximately 10% in
Insure-Rite, Ltd., a Wakefern affiliated company, that provides the Company with
liability and property insurance coverage.
Wakefern has increased from time to time the required investment in its
common stock for each supermarket owned by a member, with the exact amount per
store computed in accordance with a formula based on the volume of each store's
purchases from Wakefern up to a maximum of $650,000. As a result of an increase
in the required investment of $100,000 per store during fiscal 2003, the Company
increased both its investment and obligation by $2,119,000. At July 26, 2003,
the Company's indebtedness to Wakefern for the outstanding amount of this stock
subscription was $3,148,255. Installment payments are due as follows: 2004 -
$832,796; 2005 - $711,901; 2006 - $680,940; 2007 - $680,750; 2008 - $91,000; and
thereafter - $150,868. The Company will receive additional shares of common
stock to the extent paid for at the end of each fiscal year (September 30) of
Wakefern calculated at the then book value of such shares. The payments,
together with any stock issued thereunder, at the option of Wakefern, may be
null and void and all payments on this subscription shall become the property of
Wakefern in the event the Company does not complete the payment of this
subscription in a timely manner.
The Company purchases substantially all of its merchandise from
Wakefern. Wakefern distributes as a "patronage dividend" to each member a share
of earnings of Wakefern in proportion to the dollar volume of business done by
the member with Wakefern during the year. Patronage dividends and other product
incentives and rebates, which are recorded as a reduction of cost of sales,
amounted to $10,651,000, $9,610,000 and $8,551,000 in fiscal 2003, 2002 and
2001, respectively.
Wakefern provides the Company with support services in numerous
administrative functions. These services include advertising, insurance,
supplies, technology support, equipment purchasing and coupon processing.
Additionally, the Company has certain related party leases (see Note 6) and
demand deposits invested at Wakefern (see Note 1).
NOTE 4--NOTES PAYABLE
July 26, July 27,
2003 2002
Senior notes payable (a) (b) $ 30,000,000 $ 30,000,000
Notes payable, interest at 4.39% to 6.68%, payable in
monthly installments through December 2008,
collateralized by certain equipment 6,789,398 8,864,265
Fair value of hedging adjustment (b) 347,538 --
---------- ----------
37,136,936 38,864,265
Less current portion 6,233.903 2,094,816
---------- ----------
$ 30,903,033 $ 36,769,449
========== ==========
Aggregate principal maturities of notes payable as of July 26, 2003 are as
follows:
Year ending July:
2004 $6,233,903
2005 6,229,065
2006 5,506,588
2007 5,388,074
2008 4,860,338
Thereafter 8,571,430
(a) On September 16, 1999, the Company issued $30,000,000 of 8.12% unsecured
Senior Notes. Interest on these notes is due semi-annually. The principal is due
in seven equal annual installments beginning September 16, 2003 and ending
September 16, 2009.
On September 16, 1999, the Company also entered into an unsecured
revolving loan agreement in the amount of $15,000,000. This agreement expires
September 16, 2004. The revolving credit line can be used for any purpose except
new store construction. Indebtedness under this agreement bears interest at the
prime rate or at the Eurodollar rate, at the Company's option, plus applicable
margins based on the Company's fixed charge coverage ratio. There were no
amounts outstanding at July 26, 2003 and July 27, 2002.
At July 26, 2003, the Company was in compliance with all terms and
covenants of all debt agreements. These agreements contain restrictive covenants
which, among other matters, specify total debt levels, maintenance of net worth,
fixed charge coverage ratios, lien limitations, limitation on payment of
dividends or stock repurchases and limitation of capital expenditures.
The revolving loan agreement provides a maximum commitment for letters
of credit of $3,000,000 ($1,000,000 outstanding at July 26, 2003) to secure
obligations for the Company's self-insured workers' compensation claims and
construction performance guarantees to municipalities.
(b) On October 18, 2001, the Company entered into an interest rate swap
agreement with a major financial institution pursuant to which the Company pays
a variable rate of six-month LIBOR plus 3.36% (4.54% at July 26, 2003) on a
notional amount of $10,000,000 expiring in September 2009 in exchange for a
fixed rate of 8.12%. This interest rate swap agreement reduced interest expense
by $370,000 and $201,000 in fiscal 2003 and 2002,respectively.
The Company has structured this interest rate swap agreement to be an
effective, fair value hedge. The fair value of this swap agreement is recorded
in other assets with a corresponding increase in notes payable.
NOTE 5--INCOME TAXES
The components of the provision for income taxes are:
2003 2002 2001
Federal:
Current $ 3,344,748 $ 4,886,824 $ 4,844,006
Deferred 2,594,567 1,660,341 241,443
State:
Current 1,279,767 459,476 129,442
Deferred 499,881 367,929 67,221
---------- ---------- ----------
$ 7,718,963 $ 7,374,570 $ 5,282,112
========== ========== ==========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
July 26, July 27,
2003 2002
Deferred tax liabilities:
Tax over book depreciation $ 8,209,933 $ 6,917,875
Patronage dividend receivable 1,458,865 867,239
Other 1,253,702 634,136
---------- ----------
Total deferred tax liabilities 10,922,500 8,419,250
---------- ----------
Deferred tax assets:
Amortization of capital leases 1,145,215 1,559,438
Compensation related costs 712,615 789,509
Minimum pension liability 1,553,271 410,605
Accrual for special charges 667,083 783,505
Other 305,776 289,436
---------- ----------
Total deferred tax assets 4,383,960 3,832,493
---------- ----------
Net deferred tax liability $ 6,538,540 $ 4,586,757
========== ==========
Net long-term deferred taxes of $5,817,764 and $4,537,022 are included
in other long-term liabilities at July 26, 2003 and July 27, 2002, respectively.
Net current deferred taxes of $720,776 and $49,735 are included in accrued
expenses at July 26, 2003 and July 27, 2002, respectively.
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. In management's
opinion, in view of the Company's previous, current and projected taxable
income, such tax assets will more likely than not be fully realized.
Accordingly, no valuation allowance was deemed to be required at July 26, 2003
and July 27, 2002.
The effective income tax rate differs from the statutory federal income tax rate
as follows:
2003 2002 2001
Statutory federal income tax rate 35.0% 35.0% 35.0%
Amortization of intangibles -- -- .6
State income taxes, net of federal tax benefit 6.2 2.7 .9
Other (.2) (.7) (.6)
----- ----- -----
Effective income tax rate 41.0% 37.0% 35.9%
===== ===== =====
NOTE 6--LEASES
Description of leasing arrangements
The Company conducts a major part of its operations from leased
facilities, with the majority of initial lease terms ranging from 20 to 30
years. All of the Company's leases expire through fiscal 2059.
Most of the Company's leases contain renewal options of five years
each. These options enable the Company to retain the use of facilities in
desirable operating areas. Management expects that in the normal course of
business, most leases will be renewed or replaced by other leases. The Company
is obligated under all leases to pay for real estate taxes, utilities and
liability insurance, and under certain leases to pay additional amounts based on
maintenance, insurance and a percentage of sales in excess of stipulated
amounts.
Future minimum lease payments by year and in the aggregate for all
non-cancelable leases with initial terms of one year or more consist of the
following at July 26, 2003:
Capital Operating
Leases Leases
2004 $ 1,263,384 $ 6,666,696
2005 1,274,804 6,670,636
2006 1,290,792 6,232,363
2007 1,107,740 5,568,410
2008 741,636 5,238,589
Thereafter 4,063,654 67,569,717
---------- ----------
Minimum lease payments 9,742,010 $97,946,411
Less amount representing interest 5,055,750 ==========
---------
Present value of minimum lease payments 4,686,260
Less current portion 663,458
----------
$ 4,022,802
==========
The following schedule shows the composition of total rental expense under
operating leases for the following periods:
2003 2002 2001
Minimum rentals $6,316,284 $5,939,763 $5,602,486
Contingent rentals 878,242 907,250 934,970
--------- --------- ---------
$7,194,526 $6,847,013 $6,537,456
========= ========= =========
Related party leases
On April 2, 2003, the Company sold the land and building currently
occupied by the Somers Point, NJ store to an unrelated real estate investment
trust (the "REIT") for $3,500,000 plus the reimbursement of certain costs. The
Company's purpose in entering into this transaction was to provide for the
development of an 80,000 sq. ft. replacement store in Somers Point with minimal
cash outlay by the Company, and to ensure continued occupancy of the
Springfield, NJ store and the Company's headquarters.
The Company executed leases with the REIT for the replacement store in
Somers Point and to continue occupancy of the current Somers Point store until
the replacement store is constructed by the REIT. In addition, the Company
executed long-term leases with the REIT for the Springfield store and the
Company's headquarters, which were previously leased from a realty Company owned
by certain officers of the Company (the "Realty Company"). The Company canceled
its current leases with the Realty Company. The combined annual rents of these
two new leases are approximately the same as the annual rents of the leases
cancelled.
As part of this transaction, the shareholders of the Realty Company
sold their shares in the Realty Company to the REIT. The Realty Company's assets
consist substantially of the Springfield store, the Company headquarters and
undeveloped land in Somers Point upon which a 130,000 sq. ft. retail center is
to be developed by the REIT. This transaction resulted in no net gain or loss to
the Company. Although the transactions with the unrelated, publicly traded REIT
were negotiated at arms-length, the Company's independent directors evaluated
and approved these transactions for fairness due to the concurrent sale by the
Realty Company, which was a related party.
In addition, the Company leases a supermarket from a different realty
firm partly-owned by officers of the Company. The Company paid aggregate rents
to related parties under all the above leases, including minimum and contingent
rent, of approximately $926,000, $1,096,000 and $1,152,000 in fiscal years 2003,
2002 and 2001, respectively.
The Company leases the Vineland store from Wakefern under a sublease
agreement which provides for annual rent of $700,000. This sublease expires May
10, 2014 and contains renewal options.
NOTE 7-- COMMON STOCK AND OPTIONS
Class A common stock has one vote per share and is entitled to cash
dividends as declared 54% greater than those paid on the Class B common stock.
Class B common stock has ten votes per share. Class B common stock is not
transferable except to another holder of Class B common stock or by will or
under the laws of intestacy or pursuant to a resolution of the Board of
Directors of the Company approving the transfer. Shares of Class B common stock
are convertible on a share-for-share basis for Class A common stock.
The 1997 Incentive and Non-Statutory Stock Option Plan provides for the
granting of options or stock appreciation rights to purchase up to 250,000
shares of the Company's Class A common stock by officers, employees and
directors of the Company as designated by the Board of Directors. The Plan
requires incentive stock options to be granted at exercise prices equal to the
fair value of the Company's stock at the date of grant (110% if the optionee
holds more than 10% of the voting stock of the Company), while non-statutory
options may be granted at an exercise price less than fair value. All options
granted to date were at fair value and are exercisable up to 10 years from the
date of the grant.
The following table summarizes option activity for the following periods:
2003 2002 2001
Weighted average Weighted average Weighted average
Shares exercise price Shares exercise price Shares exercise price
Outstanding at beginning of year 131,200 $ 10.93 167,000 $ 10.13 184,400 $ 10.14
Granted 8,000 25.24 8,000 23.50 -- --
Exercised (14,600) 10.00 (43,800) (10.18) (17,400) 10.00
------- ------- ------- -------- ------- --------
Outstanding at end of year 124,600 $ 11.96 131,200 $ 10.93 167,000 $ 10.13
------- ------- ------- -------- ------- --------
Options exercisable at end of year 116,600 $ 11.05 123,200 $ 10.12 167,000 $ 10.13
------- ------- ------- -------- ------- --------
The following table summarizes options outstanding at July 26, 2003:
Remaining Weighted
Options Life Average Exercise Options
Range of exercise prices Outstanding in Years Price Exercisable
$10.00 to $12.85 108,600 4.4 $10.13 108,600
$23.50 to $25.64 16,000 9.0 $24.37 8,000
---------------- ------- --- ----- -------
$10.00 to $25.64 124,600 5.0 $11.96 116,600
================ ======= === ===== =======
The fair value of options granted was estimated at $9.43 in fiscal
2003 and $8.81 in fiscal 2002. The fair value of each option grant is estimated
using the Black-Scholes Option Pricing Model with the following assumptions used
for fiscal 2003 and 2002 grants:
2003 2002
Expected life (years) 6.0 6.0
Expected volatility 36.0% 30.0%
Expected dividend yield 1.0% --
Risk-free interest rate 4.0% 4.0%
NOTE 8--PENSION PLANS
The Company sponsors three defined benefit pension plans covering
administrative personnel and members of two unions. Employees covered under the
administrative pension benefit plan earn benefits based upon percentages of
annual compensation. Employees covered under the union pension benefit plans
earn benefits based on a fixed amount for each year of service. The Company's
funding policy is to pay at least the minimum contribution required by the
Employee Retirement Income Security Act of 1974. Plan assets are invested
principally in government securities, common stocks and mutual funds.
Net periodic pension cost for the three plans include the following components:
2003 2002 2001
Service cost $ 785,415 $ 685,123 $ 624,916
Interest cost on projected benefit obligation 932,772 781,815 690,064
Expected return on plan assets (724,042) (703,705) (855,794)
Net amortization and deferral (190,021) 10,078 (8,662)
-------- -------- --------
Net periodic pension cost $ 804,124 $ 773,311 $ 450,524
======== ======== ========
The changes in benefit obligations and the reconciliation of the funded status
of the Company's plans to the consolidated balance sheets were as follows:
2003 2002
Change in Benefit Obligation:
Benefit obligation at beginning of year $ 12,139,279 $ 10,726,263
Service cost 785,415 685,123
Interest cost 932,772 781,815
Benefits paid (1,388,039) (474,904)
Actuarial loss 2,901,138 420,982
----------- -----------
Benefit obligation at end of year $ 15,370,565 $ 12,139,279
=========== ===========
Change in Plan Assets:
Fair value of plan assets at beginning of year $ 8,041,953 $ 9,438,298
Actual return on plan assets 267,241 (1,051,284)
Employer contributions 1,059,811 129,843
Benefits paid (1,388,039) (474,904)
----------- -----------
Fair value of plan assets at end of year $ 7,980,966 $ 8,041,953
=========== ===========
Fair value of plan assets (less) than benefit obligation $ (7,389,599) $ (4,097,326)
Unrecognized prior service cost 128,821 179,943
Unrecognized net actuarial loss 6,721,275 3,122,193
Adjustment required to recognize minimum liability (4,011,998) (1,206,455)
----------- -----------
Accrued pension cost $ (4,551,501) $ (2,001,645)
=========== ===========
Amounts recognized in the consolidated balance sheets:
Accrued pension cost $ (4,551,501) $ (2,001,645)
Intangible asset 128,821 179,943
Accumulated other comprehensive loss 2,329,906 615,907
=========== ===========
At July 26, 2003, the accumulated benefit obligation exceeded the fair
value of the plan's assets in each of the above three plans. The provisions of
FASB Statement 87, "Employer's Accounting for Pensions," require recognition in
the consolidated balance sheet of additional minimum liability and a related
intangible asset for pension plans with accumulated benefit obligations in
excess of plan assets. Any portion of such additional liability which is in
excess of the plan's prior service costs is a component of other comprehensive
income and is reflected in shareholder's equity, net of related tax benefit.
Assumptions used for the Company's defined benefit plans were as follows:
2003 2002 2001
Assumed discount rate 6.75% 7.25% 7.25%
Assumed rate of increase in compensation levels 4% 4% 4%
Expected rate of return on plan assets 7.5% 7.5% 8.0 to 8.5%
The Company also participates in several multi-employer pension plans
for which the fiscal 2003, 2002 and 2001 contributions were $3,706,000,
$3,006,000 and $2,520,000, respectively. The Company sponsors a 401(k) savings
plan for certain eligible associates. Company contributions under that plan,
which are based on specified percentages of associate contributions, were
$202,000, $198,000 and $189,000 in fiscal 2003, 2002 and 2001, respectively.
NOTE 9--COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation incidental to the normal course
of business. Company management is of the opinion that the ultimate resolution
of these legal proceedings should not have a material adverse effect on the
consolidated financial position, results of operations or liquidity of the
Company.
Independent Auditors' Report
The Board of Directors and Shareholders
Village Super Market, Inc.:
We have audited the accompanying consolidated balance sheets of Village
Super Market, Inc. and subsidiaries as of July 26, 2003 and July 27, 2002, and
the related consolidated statements of operations, shareholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended July 26, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Village
Super Market, Inc. and subsidiaries as of July 26, 2003 and July 27, 2002, and
the results of their operations and their cash flows for each of the years in
the three-year period ended July 26, 2003, in conformity with accounting
principles generally accepted in the United States of America.
Short Hills, New Jersey
October 1, 2003
Stock Price and Dividend Information
The Class A common stock of Village Super Market, Inc. is traded on the
NASDAQ National Market tier of the NASDAQ Stock Market under the symbol "VLGEA."
The table below sets forth the high and low last reported sales price for the
fiscal year indicated.
Class A Stock
High Low
2003
4th Quarter 26.40 22.30
3rd Quarter 27.14 21.40
2nd Quarter 27.50 23.00
1st Quarter 27.89 23.40
2002
4th Quarter 38.75 26.50
3rd Quarter 36.80 26.20
2nd Quarter 27.50 19.85
1st Quarter 20.98 17.75
As of October 1, 2003, there were 414 holders of record of the
Company's Class A common stock; however 1,165,455 shares of the Company's Class
A common stock are held in "Street Name" by depositories or nominees on behalf
of beneficial owners.
On June 20, 2003 the Board of Directors declared a semi-annual cash
dividend of $.13 per Class A common share and $.08 per Class B common share.
These dividends were paid August 22, 2003. No other dividends were declared or
paid in fiscal 2003 and 2002.