UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: January 28, 2006
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to _______________
Commission file number 1-5745-1
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 Highway 33, Freehold, New Jersey 07728
---------------------------------------------------------------
(Address of principal executive offices)
Telephone #732-462-4700
-----------------------
(Registrant's telephone number, including area code)
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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes____ No _X_
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No _X_
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
OUTSTANDING AT
CLASS March 10, 2006
------ --------------
Common Stock 988,117 shares
$1 par value
FOODARAMA SUPERMARKETS, INC.
----------------------------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Condensed Balance
Sheets January 28, 2006 and October 29, 2005
Unaudited Consolidated Condensed Statements
of Operations for the thirteen weeks ended
January 28, 2006 and January 29, 2005
Unaudited Consolidated Condensed Statements
of Cash Flows for the thirteen weeks ended
January 28, 2006 and January 29, 2005
Notes to the Unaudited Consolidated
Condensed Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 6. Exhibits
Disclosure Concerning Forward-Looking Statements
------------------------------------------------
All statements, other than statements of historical fact, included in this Form
10-Q, including without limitation the statements under "Management's Discussion
and Analysis of Financial Condition and Results of Operations," are, or may be
deemed to be, "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such
forward-looking statements involve assumptions, known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of Foodarama Supermarkets, Inc. (the "Company", which may be
referred to as we, us or our) to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements contained in this Form 10-Q. Such potential risks and
uncertainties, include without limitation, competitive pressures from other
supermarket operators, warehouse club stores and discount general merchandise
stores, economic conditions in the Company's primary markets, consumer spending
patterns, availability of capital, cost of labor, cost of goods sold including
increased costs from the Company's cooperative supplier, Wakefern Food
Corporation ("Wakefern"), and other risk factors detailed herein and in other of
the Company's Securities and Exchange Commission filings. The forward-looking
statements are made as of the date of this Form 10-Q 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.
2
PART I - Item 1. FINANCIAL INFORMATION
--------------------------------------
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
-------------------------------------
(In thousands)
January 28, October 29,
2006 2005
(Unaudited) (1)
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 8,415 $ 5,488
Merchandise inventories 56,093 55,889
Receivables and other current assets 7,635 7,597
Prepaid and refundable income taxes 61 797
Related party receivables - Wakefern 8,252 14,587
------- -------
80,456 84,358
------- -------
Property and equipment:
Land 308 308
Buildings and improvements 1,220 1,220
Leasehold improvements 60,397 61,360
Equipment 157,711 164,238
Property under capital leases 152,354 152,354
Construction in progress 275 199
------- -------
372,265 379,679
Less accumulated depreciation and
amortization 159,874 161,975
------- -------
212,391 217,704
------- -------
Other assets:
Investments in related parties 18,323 18,323
Goodwill 1,715 1,715
Intangible assets, net 1,257 1,304
Other 3,444 3,364
Related party receivables - Wakefern 2,165 2,237
Deferred income taxes 757 -
------- --------
27,661 26,943
------- --------
$320,508 $329,005
======= ========
(continued)
(1) Derived from the Audited Consolidated Financial Statements for the year
ended October 29, 2005.
See accompanying notes to the consolidated condensed financial statements.
3
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
-------------------------------------
(In thousands except share data)
January 28, October 29,
2006 2005
(Unaudited) (1)
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 9,028 $ 9,009
Current portion of long-term debt, related party 1,021 1,026
Current portion of obligations under capital leases 2,004 1,966
Current income taxes payable 567 -
Deferred income taxes 2,151 2,151
Accounts payable:
Related party-Wakefern 44,650 40,419
Others 9,464 9,671
Accrued expenses 14,618 13,479
------- -------
83,503 77,721
------- -------
Long-term debt 36,753 50,912
Long-term debt, related party 2,955 3,185
Obligations under capital leases 140,028 140,540
Deferred income taxes - 175
Other long-term liabilities 13,616 13,577
------- -------
193,352 208,389
------- -------
Commitments and Contingencies
Shareholders' equity:
Common stock, $1.00 par; authorized 2,500,000 shares;
issued 1,621,767 shares; outstanding 988,117 shares 1,622 1,622
Capital in excess of par 4,071 4,168
Deferred compensation - (242)
Retained earnings 52,928 52,315
Accumulated other comprehensive income:
Minimum pension liability (2,802) (2,802)
-------- ---------
55,819 55,061
Less 633,650 shares, held in treasury, at cost 12,166 12,166
-------- ---------
43,653 42,895
-------- ---------
$ 320,508 $ 329,005
========= ==========
(1) Derived from the Audited Consolidated Financial Statements for the year
ended October 29, 2005.
See accompanying notes to the consolidated condensed financial statements.
4
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Operations - Unaudited
-----------------------------------------------------------
(In thousands - except share data)
13 Weeks Ended
-----------------------
January 28, January 29,
2006 2005
---------- -----------
Sales $ 323,871 $ 317,589
Cost of goods sold 240,988 237,482
---------- ----------
Gross profit 82,883 80,107
Selling, general and administrative expenses 77,300 75,075
---------- ----------
Earnings from operations 5,583 5,032
---------- ----------
Other income (expense):
Interest expense (4,632) (4,660)
Interest income 40 36
---------- ----------
(4,592) (4,624)
---------- ----------
Earnings before income tax provision 991 408
Income tax provision (378) (155)
----------- ----------
Net income $ 613 $ 253
=========== ==========
Per share information:
Net income per common share:
Basic $ .62 $ .26
=========== ==========
Diluted $ .59 $ .24
=========== ==========
Weighted average shares outstanding:
Basic 988,117 987,617
----------- ----------
Diluted 1,040,875 1,035,753
=========== ==========
Dividends per common share -0- -0-
=========== ==========
See accompanying notes to the consolidated condensed financial statements.
5
FOODARAMA SUPERMARKETS, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows - Unaudited
-----------------------------------------------------------
(In thousands)
13 Weeks Ended
----------------------------
January 28, January 29,
2006 2005
----------- -----------
Cash flows from operating activities:
Net income $ 613 $ 253
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 5,311 5,494
Amortization, intangibles 47 47
Amortization, deferred financing costs 136 244
Amortization, deferred rent escalation (96) (80)
Provision to value inventory at LIFO 235 238
Deferred income taxes (932) (441)
Non cash compensation expense 145 86
(Increase) decrease in
Merchandise inventories (439) (252)
Receivables and other current assets (38) (335)
Prepaid and refundable income taxes 736 (357)
Other assets (32) (246)
Related party receivables-Wakefern 6,407 7,097
Increase (decrease) in
Accounts payable 4,024 2,768
Income taxes payable 567 586
Other liabilities 1,274 (1,907)
-------- ---------
17,958 13,195
-------- ---------
Cash flows from investing activities:
Decrease in construction advance due from landlords - 775
Cash paid for the purchase of property and equipment (426) (1,347)
Proceeds from sale of equipment 482 -
Cash paid for construction in progress (76) -
--------- ---------
(20) (572)
--------- ---------
Cash flows from financing activities:
Principal payments under long-term debt (14,140) (11,736)
Principal payments under capital lease obligations (474) (388)
Principal payments under long-term debt, related party (235) (214)
Deferred financing and other costs (162) -
--------- ---------
(15,011) (12,338)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,927 285
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,488 6,001
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,415 $ 6,286
========= =========
See accompanying notes to the consolidated condensed financial statements.
6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
----------------------------------------------------------------
Note 1 Basis of Presentation
-------------------------------
The unaudited Consolidated Condensed Financial Statements as of or for the
period ending January 28, 2006, have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and rule 10-01. The balance sheet at October 29, 2005
has been taken from the audited financial statements at that date. In the
opinion of the management of the Company, all adjustments (consisting only of
normal recurring accruals) which are considered necessary for a fair
presentation of the results of operations for the period have been made. Certain
financial information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The reader is referred to the consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended October 29, 2005.
At both January 28, 2006 and October 29, 2005, approximately 81% of merchandise
inventories are valued by the Last-In-First-Out ("LIFO") method of inventory
valuation while the balance of inventories is valued by the First-In-First-Out
("FIFO") method. If the FIFO method had been used for the entire inventory,
inventories would have been $4,955,000 and $4,720,000 higher than reported at
January 28, 2006 and October 29, 2005, respectively.
These results are not necessarily indicative of the results for the entire
fiscal year.
Note 2 Adoption of New Accounting Standards
---------------------------------------------
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
151, "Inventory Costs," in the first quarter of fiscal 2006. SFAS No. 151
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and spoilage. This statement requires that those items be
recognized as current period charges regardless of whether they meet the
criterion of "so abnormal" which was the criterion specified in ARB No. 43. The
adoption of this standard did not have any impact on our financial statements.
The Company adopted SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS
123(R)"), effective October 30, 2005. SFAS No. 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair value. Pro forma
disclosure is no longer an alternative. The adoption of this standard increased
earnings from operations by $127,000, increased net income by approximately
$79,000, net of tax, and increased basic and diluted earnings per share by $.08
for the 13 weeks ended January 28, 2006. This represents the difference in
expense recognition between SFAS 123(R) and the previous method for accounting
for stock options under APB 25 and is due to the difference in treatment of
recognition of forfeitures (See Note 3).
Note 3 Stock-Based Compensation
--------------------------------
The Company maintains a Stock option plan (the "2001 Plan") for the issuance of
up to 215,000 shares of common stock under non-qualified stock options.
Effective October 30, 2005, the Company adopted SFAS 123(R), "Share-Based
Payment." SFAS 123(R) replaces SFAS 123 "Accounting for Stock-Based
Compensation" and supersedes Accounting Principles Board Opinion No. 25 ("APB
25"), "Accounting for Stock Issued to Employees." SFAS 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair values. Under
SFAS 123(R), the pro forma disclosures previously permitted under SFAS 123 are
no longer an alternative to financial statement recognition.
The Company has selected the Black-Scholes method of valuation for share-based
7
compensation and has adopted the modified prospective transition method under
SFAS 123(R), which requires that compensation cost be recorded, as earned, for
all unvested stock options outstanding at the beginning of the first quarter of
adoption of SFAS 123(R). As permitted by SFAS 123(R), prior periods have not
been restated. The charge is generally recognized as non cash compensation on a
straight-line basis over the remaining service period after the adoption date
based on the options' original estimate of fair value. Due to the Going Private
Transaction (See Note 5), all unvested stock options vested immediately.
Therefore, the recognition of the remaining stock option expense was accelerated
and recognized in the 13 weeks ended January 28, 2006. The non cash compensation
expense for the 13 weeks ended January 28, 2006 was $115,000.
Prior to the adoption of SFAS 123(R), the Company applied the
intrinsic-value-based method of accounting prescribed by APB 25 and related
interpretations, to account for its fixed-plan stock options to employees. Under
this method, compensation cost was recorded only if the market price of the
underlying stock on the date of grant exceeded the exercise price. As permitted
by SFAS 123, the Company elected to continue to apply the intrinsic-value-based
method of accounting described above, and adopted only the disclosure
requirements of SFAS 123. The fair-value-based method used to determine
historical pro forma amounts under SFAS 123 was similar in most respects to the
method used to determine stock-based compensation expense under SFAS 123(R).
However, in its pro forma disclosures, the Company accounted for option
forfeitures as they occurred, rather than based on estimates of future
forfeitures.
In connection with the adoption and provisions of SFAS 123(R), the Company
reversed the deferred compensation balance of $242,000, resulting from the
application of the intrinsic-value-based method of accounting for stock options,
at October 30, 2005 against Capital In Excess of Par. This expense is now
superceded by the SFAS 123(R) expense, which was recorded over the vesting
period of the stock options.
The following table illustrates the pro forma effect on the Company's net income
and earnings per share as if the Company had adopted the fair-value-based method
of accounting for stock-based compensation under SFAS 123 for the 13 weeks ended
January 29, 2005:
Thirteen Weeks Ended
January 29, 2005
(In thousands, except
per share amounts)
-------------------------
Net income - as reported $ 253
Add:
Stock-based employee compensation
expense included in reported net
income, net of related tax effects 52
Deduct:
Adjustment to total stock-based
employee compensation expense
determined under the fair value
based method, net of related tax effects (71)
-------------------------
Pro forma net income $ 234
=========================
Earnings per share:
Basic, as reported $ .26
=========================
Basic, pro forma $ .24
=========================
Diluted, as reported $ .24
=========================
Diluted, pro forma $.23
=========================
8
There were no stock options granted during the 13 weeks ended January 28, 2006
or January 29, 2005. The fair value of each stock option is estimated on the
date of grant using the Black-Scholes option-pricing model. The following
assumptions were used for the grants made under the 2001 Plan:
Risk -free interest rate 5.00%
Expected option life 5 years
Dividend yield None
Volatility 40.2%
As of January 28, 2006, 94,750 options are exercisable. The weighted average
exercise price of all outstanding options is $19.60.
On January 23, 2006, the Company extended the term (the "Extension") of 40,000
options, which were set to expire on January 27, 2006, to December 27, 2006. The
Extension resulted in additional non-cash compensation expense of $30,000, which
was fully expensed in the 13 weeks ended January 28, 2006. This expense had an
effect, net of tax, on net income of $19,000 for the 13 weeks ended January 28,
2006.
Note 4 Employee Benefit Plans
------------------------------
The following tables summarize the components of the net periodic pension
expense for the Company sponsored defined benefit pension plans (both funded and
unfunded postretirement plans) for the 13 weeks ended January 28, 2006 and
January 29, 2005 (in thousands):
Components of Net Periodic Benefit Cost:
Pension Plans 13 Weeks Ended
------------- --------------
January 28, 2006 January 29, 2005
---------------- ----------------
Service cost $ 166 $123
Interest cost 135 132
Expected return on plan assets (145) (134)
Settlement (gain) loss recognized - -
Amortization of prior service cost 16 11
Recognized net actuarial loss 81 95
----- -----
Net periodic benefit cost $ 253 $ 227
====== ======
Other Postretirement Plan 13 Weeks Ended
------------------------- --------------
January 28, 2006 January 29, 2005
---------------- ----------------
Service cost $ 46 $ 46
Interest cost 83 83
Amortization of prior service cost 7 21
Recognized net actuarial loss 23 46
---- -----
Net periodic benefit cost $ 159 $ 196
===== =====
As previously disclosed in the Notes to the Consolidated Financial Statements in
the Company's 2005 Annual Report on Form 10-K filed with the SEC on January 27,
2006, the Company's current funding policy for its qualified pension plans is to
contribute annually the amount required by regulatory authorities to meet
minimum funding requirements. The Company presently anticipates contributing
9
approximately $1,500,000 to its pension plans during fiscal 2006. This amount is
based on preliminary information and the actual amount contributed will be
determined based on the final actuarial calculations, plan asset performance,
possible changes in law and other factors. The Company has contributed $277,000
during the 13 weeks ended January 28, 2006, and anticipates contributing
approximately $1,223,000 more for expected future benefit payments during the
remainder of fiscal 2006.
Since the Company's Other Post Retirement Plan is unfunded, the contributions to
this plan are equal to the benefit payments made during the year. Benefit
payments made during the 13 weeks ended January 28, 2006 were $40,000.
Note 5 Going Private Transaction
---------------------------------
As reported in the Company's current report on Form 8-K filed on March 3, 2006
with the Securities and Exchange Commission ("SEC"), the Company has entered
into a definitive agreement with respect to the going private transaction
previously proposed by Saker Holdings Corp. Under the terms of the definitive
agreement, Saker Holdings Corp. has agreed to make a cash tender offer for the
Company's outstanding common stock at a price of $53 per share and the Special
Committee of the Company's Board of Directors appointed to review the proposed
transaction has recommended that the Company's shareholders accept the offer and
tender their shares to Saker Holdings Corp. The Company is still in the initial
stages of this transaction. For the thirteen weeks ended January 28, 2006, the
Company incurred approximately $370,000 of transaction costs related to the
going private transaction, which is included in selling, general and
administrative expenses. The Company is required to pay Saker Holdings Corp. a
termination fee of $1,500,000 if the Special Committee withdraws its
recommendation that the shareholders accept the offer or the Company's Board of
Directors approves or recommends another takeover proposal, or if the Company
breaches or terminates the agreement for any reason other than Saker Holdings
Corp.'s breach. In addition, the Company will be required to reimburse Saker
Holdings Corp. for certain out of pocket expenses if the agreement is terminated
under certain other circumstances.
The tender offer for outstanding shares of the Company's common stock described
in this Quarterly Report on Form 10-Q has not commenced. The description of the
tender offer set forth in this report is for informational purposes only and is
neither an offer to purchase nor a solicitation of an offer to sell securities.
At the time the tender offer is commenced, Saker Holdings Corp. will file a
tender offer statement with the SEC, and the Company will file a solicitation
and recommendation statement with respect to the tender offer. The tender offer
statement (including an offer to purchase, a related letter of transmittal and
other offer documents) and the solicitation/recommendation statement will
contain important information that should be read carefully before any decision
is made with respect to the tender offer. Those materials will be made available
to the Company's shareholders at no expense to them. In addition, all of those
materials (and all other offer documents filed with the SEC) will be available
at no charge on the SEC's web site (www.sec.gov) and from the Company.
Part I - Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------
OVERVIEW
--------
We operate a chain of 26 ShopRite supermarkets in Central New Jersey. In the
first quarter of fiscal 2006 we closed one location in Edison, New Jersey. We
believe it is important to maintain a modern, one stop competitive shopping
environment for our customers and therefore have invested heavily in new,
expanded and remodeled facilities. We have incorporated upscale service
departments in our World Class supermarket concept. We are the largest member of
Wakefern, the largest retailer owned food cooperative warehouse in the United
States. Since we purchase from Wakefern most of the product we sell, participate
10
in advertising, supply, insurance, payroll administration and technology
programs with Wakefern, and receive 13.6% of Wakefern's patronage dividend, our
success is integrally tied to the success of Wakefern.
We operate in a highly competitive geographic area. Certain of our competitors
are non-union and therefore may have lower labor and related fringe benefit
costs. In the past six years a non-union competitor, Wegmans, has opened five
stores in our trading area. We expect Wegmans to continue to open additional
locations in our marketing area in the future. Additionally, another non-union
operator, Wal-Mart, is expected to open Super Centers, which include extensive
food operations, in our trading area.
Certain categories of selling, general and administrative expenses have
increased disproportionately in comparison to our sales growth and to inflation
in the last three years. We have experienced substantial increases in employee
health and pension costs under union contracts and for non-union associates.
Additionally, the cost of utilities to operate our stores increased dramatically
in the last two years. These trends have continued in fiscal 2006.
We look at a variety of indicators to evaluate our performance, such as same
store sales; sales per store; sales per selling square foot; percentage of total
sales by department; shrink by department and store; departmental gross profit
margins; sales per man hour; hourly labor rates; and percent of overtime.
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. The Company's critical accounting policies relating to the impairment
of goodwill, inventory valuation, patronage dividends earned as a stockholder
of Wakefern, pension plans and other postretirement benefits, workers'
compensation insurance and long-lived assets are described in the
Company's Annual Report on Form 10-K for the year ended October 29, 2005. As of
January 28, 2006 there have been no material changes to any of the critical
accounting policies contained therein.
Financial Condition and Liquidity
---------------------------------
The Company is a party to a Third Amended and Restated Revolving Credit and Term
Loan Agreement (the "Credit Agreement") with four financial institutions. The
Credit Agreement serves as our primary funding source for working capital and
capital expenditures. The Credit Agreement is secured by substantially all of
the Company's assets and provided for a total commitment of up to $80,000,000,
including a revolving credit facility (the "Revolving Note") of up to
$35,000,000, a term loan ("the Term Loan") in the amount of $25,000,000 and a
capital expenditures facility (the "Capex Facility") of up to $20,000,000. As of
January 28, 2006 the Company owed $16,032,884 on the Revolving Note, $8,750,000
on the Term Loan and $16,677,857 under the Capex Facility.
The Company's compliance with the major financial covenants under the Credit
Agreement was as follows as of January 28, 2006:
11
--------------------------------------------------------------------------------
Actual
(As defined in the
Financial Covenant Credit Agreement Credit Agreement)
--------------------------------------------------------------------------------
Adjusted EBITDA (1) Greater than $26,000,000 $ 27,700,000
--------------------------------------------------------------------------------
Leverage Ratio (1)(2) Less than 2.5 to 1.00 1.80 to 1.00
--------------------------------------------------------------------------------
Debt Service Coverage
Ratio (3) Greater than 1.10 to 1.00 1.42 to 1.00
--------------------------------------------------------------------------------
Adjusted Capex (4) Less than $7,299,000 (5) (7) $ 426,000 (6)
--------------------------------------------------------------------------------
Store Project Capex Less than $40,018,000 (5) (7) $ 76,000 (6)
--------------------------------------------------------------------------------
(1) Excludes obligations under capitalized leases, interest expense and
depreciation expense attributable to capitalized leases, non-cash write
downs and changes in the LIFO reserve.
(2) The Leverage Ratio is calculated by dividing the current and non-current
portions of Long-Term Debt and Long-Term Debt Related Party by Adjusted
EBITDA.
(3) The Debt Service Coverage Ratio is calculated by dividing Operating Cash
Flow by the sum of adjusted net interest expense, which excludes interest
on capitalized leases, the current provision for income taxes and
regularly scheduled principal payments, which exclude principal payments
on capitalized leases. Operating Cash Flow is calculated by subtracting
amounts expended for property and equipment for projects involving the
expenditure of less than $500,000 ($426,000 in the first quarter of fiscal
2006) from Adjusted EBITDA.
(4) Adjusted Capex is all capital expenditures other than New/Replacement
Store Project Capex.
(5) Represents limitations on capital expenditures for fiscal 2006. For fiscal
2006 the Company has budgeted $8,649,000 for capital expenditures. Any
unused amounts available under the Credit Agreement will be carried
forward to future periods.
(6) Represents capital expenditures for fiscal 2006.
(7) Includes amounts available but not used in the prior fiscal year and
available to be carried forward to fiscal 2006: $399,000 for Adjusted
Capex and $26,018,000 for Store Project Capex.
No cash dividends have been paid on the Common Stock since 1979, and the Company
has no present intentions or ability to pay any dividends in the near future on
its Common Stock. The Credit Agreement does not permit the payment of any cash
dividends on our Common Stock.
Working Capital
---------------
At January 28, 2006, the Company had a working capital deficiency of $3,047,000
as compared to working capital of $6,637,000 at October 29, 2005 and a working
capital deficiency of $4,606,000 at January 29, 2005. Since the end of fiscal
2005, working capital declined and a deficiency was created as a result of the
collection of related party receivables from Wakefern related to the fiscal 2005
patronage dividend receivable and the increase in related party accounts payable
to Wakefern resulting from increased sales and the deferral of payment for
Wakefern promotional programs. Funds used to pay these accounts payable will
come from the revolving credit facility thereby increasing the Revolving Note
which is classified as long-term borrowings. This will result in a corresponding
increase in working capital.
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.
12
Working capital ratios were as follows:
January 28, 2006 .96 to 1.0
October 29, 2005 1.09 to 1.0
January 29, 2005 .95 to 1.0
Cash flows (in millions) were as follows:
Thirteen Weeks Ended
----------------------------
1/28/06 1/29/05
------- -------
Operating activities $ 17.9 $ 13.2
Investing activities - (.6)
Financing activities (15.0) (12.3)
-------- ------
Totals $ 2.9 $ .3
======== =======
Cash increased primarily as the result of timing differences related to the
funding of payroll. These timing differences were due to the conversion to the
Wakefern administered payroll system.
The Company had $17,326,000 of available credit, at January 28, 2006, under its
revolving credit facility. The availability does not include the additional
$622,000 provided by the August 22, 2005 amendment to the Credit Agreement which
allows the inclusion of cash in transit as additional collateral. The Company
has no capital commitments for leasehold improvements or equipment as of January
28, 2006. The amounts available under the Credit Agreement will adequately meet
our operating needs, scheduled capital expenditures and debt service for fiscal
2006.
For the 13 weeks ended January 28, 2006 depreciation was $5,311,000 while
capital expenditures totaled $502,000, compared to $5,494,000 and $1,347,000,
respectively, in the prior year period. The decrease in depreciation was the
result of the completion of depreciation for some older equipment and leasehold
improvements. Capital expenditures decreased in the first quarter of fiscal 2006
when no major projects were in process as compared to capital expenditures in
the first quarter of fiscal 2005 when the store in West Long Branch, New Jersey
was remodeled and the remodeling of the Neptune, New Jersey location was
substantially completed.
The following table summarizes our contractual obligations at January 28, 2006,
and the effect such obligations are expected to have on liquidity and cash flow
in future periods.
--------------------------------------------------------------------------------
Payments Due By Period
--------------------------------------------------------------------------------
Less Than 2-3 4-5 After 5
Contractual Obligations Total 1 Year Years Years Years
(Dollars In Thousands)
--------------------------------------------------------------------------------
Long-term debt $ 45,781 $ 9,028 $36,182 $ 571 $ -
--------------------------------------------------------------------------------
Interest on long-term debt (1) 6,979 3,606 3,349 24 -
--------------------------------------------------------------------------------
Related party debt,
non interest bearing 3,976 1,021 1,512 1,052 391
--------------------------------------------------------------------------------
Capital lease obligations (2) 334,463 15,895 31,297 32,335 254,936
--------------------------------------------------------------------------------
Operating leases (2) 52,575 8,421 14,067 9,186 20,901
--------------------------------------------------------------------------------
Other liabilities (3) 5,034 1,550 762 1,182 1,540
--------------------------------------------------------------------------------
Purchase obligations -
leaseholds and equipment - - - - -
--------------------------------------------------------------------------------
Lease commitments - stores
under construction - - - - -
--------------------------------------------------------------------------------
Total $ 448,808 $39,521 $87,169 $ 44,350 $277,768
========= ======= ======= ======== ========
--------------------------------------------------------------------------------
13
(1) Includes interest expense at estimated interest rates of 8.50% to 9.50% on
variable rate debt of $41,461 and interest expense at interest rates of
6.20% to 6.44% on fixed rate debt of $4,320.
(2) Lease obligation figures do not include insurance, common area maintenance
charges and real estate taxes for which the Company is obligated.
(3) Other liabilities include estimated unfunded pension liabilities, and
estimated post-retirement and post-employment obligations based on
available actuarial data.
Results of Operations (13 weeks ended January 28, 2006 compared to 13 weeks
--------------------- ended January 29, 2005)
Sales:
------
Sales for the current period totaled $323.9 million as compared to $317.6
million in the prior year period. This represents an increase of 2.0%. Sales for
the current quarter included the operations of the location in Pennington, New
Jersey purchased from Wakefern in September 2005. In November 2005, a location
in Edison, New Jersey was closed at the end of its lease term.
Same store sales from the twenty-five stores in operation in both periods
increased 2.3%. Comparable store sales increases were partially offset by
decreased sales in certain of the Company's stores affected by competitive store
openings.
Gross Profit:
-------------
Gross profit as a percent of sales increased to 25.6% in the first quarter of
fiscal 2006 compared to 25.2% for the comparable period in fiscal 2005. Cost of
goods sold includes the costs of inventory sold and the related purchase,
inbound freight and distribution costs including those costs charged by Wakefern
for operation of warehouses, distribution and delivery of product to our stores.
Vendor allowances and rebates and Wakefern patronage dividends are reflected as
a reduction of cost of goods sold. Any costs to us related to other services
which Wakefern provides are not included in cost of goods sold.
Patronage dividends, applied as a reduction of the cost of goods sold, were $2.7
million in the current year period compared to $2.5 million in the prior year
period.
The increase in gross profit was the result of a reduction in the cost of
programs implemented in certain of the Company's stores to address competitive
store openings (.06%), the contribution of the new location purchased from
Wakefern in September 2005, including Wakefern incentive programs for new
locations (.04%), reduced Wakefern assessment as a percentage of sales (.04%),
an increase in the projected Wakefern patronage dividend (.03%) and a decrease
in shrink (.20%). Shrink is the difference between expected gross profit, based
on the difference between the cost and expected selling price of merchandise
purchased, and actual gross profit. Shrink results from theft, spoilage,
breakage, mark ups and mark downs.
Operating Expenses:
-------------------
Selling, general and administrative expenses totaled $77.3 million in the first
quarter of fiscal 2006 compared to $75.1 million for the comparable period in
fiscal 2005. Selling, general and administrative expenses as a percent of sales
were 23.9% versus 23.6% in the prior year period. Increases in fringe benefits,
14
occupancy costs, miscellaneous expense, administration and a decrease in
miscellaneous income were partially offset by decreases in labor and
depreciation. The increase in fringe benefits was the result of contractual
increases. Fringe benefits increased from $13,733,000 to $14,446,000. The
increase in occupancy costs was primarily the result of an increase in utility
costs partially offset by a decrease in repairs and maintenance. Occupancy
increased from $10,070,000 to $10,387,000. Miscellaneous expense increased as
the result of increases in Wakefern support services and debit/credit card and
bank service fees. Miscellaneous expense increased from $4,944,000 to
$5,430,000. The increase in administration was the result of the incurrence of
costs related to the going private transaction, an increase in idle facilities
expense and an increase in the incentive compensation accrual for administrative
personnel based upon operating results for the current quarter. Administration
costs increased from $4,769,000 to $5,244,000.The decrease in miscellaneous
income was due to decreased baling income. Miscellaneous income decreased from
$778,000 to $660,000. Although labor decreased as a percent of sales, labor
expense increased from $30,867,000 to $30,977,000. The decrease in labor as a
percent of sales was due to improved efficiency in the operations of several of
our stores and the increase in labor expense was due to an increase in labor
rates. Depreciation decreased due to the completion of depreciation for some
older equipment and leasehold improvements. Depreciation expense decreased from
$5,494,000 to $5,311,000.
As a percentage of sales, fringe benefits increased .14%, occupancy increased
..04%, miscellaneous expense increased .13%, administration increased .12% and
miscellaneous income decreased .04%. These increases were partially offset by a
decrease in labor of .16% and a decrease in depreciation, including depreciation
on capitalized leases, of .09%.
Interest Expense:
-----------------
Interest expense decreased to $4,632,000 from $4,660,000, while interest income
was $40,000 compared to $36,000 for the prior year period. The decrease in
interest expense for the current year period was due to a net decrease in
average outstanding debt, including capitalized lease obligations, partially
offset by an increase in the average interest rate paid on debt.
Income Taxes:
-------------
An income tax rate of 38% has been used in both the current and the prior year
periods. The tax rate used is based on the expected effective tax rates.
Net Income:
-----------
Net income was $613,000 in the current year period compared to $253,000 in the
prior year period. Earnings before interest, taxes, depreciation and
amortization ("EBITDA") for the current period were $10,981,000 as compared to
$10,737,000 in the prior year period. Net income per common share on a diluted
basis was $.59 in the current year period compared to $.24 in the prior year
period. Per share calculations are based on 1,040,875 weighted average shares
outstanding in the current year period and 1,035,753 weighted average shares
outstanding in the prior year period.
EBITDA is presented because management believes that EBITDA is a useful
supplement to net income and other measurements under accounting principles
generally accepted in the United States since it is a meaningful measure of a
company's performance and ability to meet its future debt service requirements,
fund capital expenditures and meet working capital requirements. EBITDA is not a
measure of financial performance under accounting principles generally accepted
in the United States and should not be considered as an alternative to (i) net
income (or any other measure of performance under generally accepted accounting
principles) as a measure of performance or (ii) cash flows from operating,
investing or financing activities as an indicator of cash flows or as a measure
of liquidity. The following table reconciles reported net income to EBITDA:
15
Thirteen Weeks Ended
----------------------------------------
January 28, 2006 January 29, 2005
---------------- ----------------
Net income $ 613,000 $ 253,000
Add:
Interest expense, net 4,592,000 4,624,000
Income tax provision 378,000 155,000
Depreciation 5,311,000 5,494,000
Amortization 87,000 211,000
------------ ------------
EBITDA $10,981,000 $10,737,000
============ ============
Item 3. 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 4. Controls and Procedures
---------------------------------
As required by Rule 13a-15 under the Exchange Act, as of the end of the period
covered by this quarterly report, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation was carried out under the supervision and with
the participation of the Company's management, including the Company's President
and Chief Executive Officer along with the Company's Chief Financial Officer,
who concluded that the Company's disclosure controls and procedures are
effective. The Company's Director of Internal Audit and Principal Accounting
Officer also participated in this evaluation. During the Company's last fiscal
quarter, there has been no significant change in the Company's internal control
over financial reporting that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial reporting.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer as appropriate, to allow timely
decisions regarding required disclosure.
16
PART II OTHER INFORMATION
-----------------------------
Item 6. Exhibits
-----------------
Exhibit 31.1 Section 302 Certification of Chief Executive
Officer
Exhibit 31.2 Section 302 Certification of Chief Financial
Officer
Exhibit 32.1 Certification of Chief Executive Officer pursuant
to 18 U.S.C. Section 1350
Exhibit 32.2 Certification of Chief Financial Officer pursuant
to 18 U.S.C. Section 1350
17
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
FOODARAMA SUPERMARKETS, INC.
-----------------------------
(Registrant)
Date: March 14, 2006 /S/ MICHAEL SHAPIRO
--------------------------
(Signature)
Michael Shapiro
Senior Vice President,
Chief Financial Officer
Date: March 14, 2006
/S/ THOMAS H. FLYNN
---------------------------
(Signature)
Thomas H. Flynn
Vice President,
Principal Accounting Officer
18
EXHIBIT 31.1
CERTIFICATION
I, Richard J. Saker, certify that:
1. I have reviewed this report on Form 10-Q of Foodarama Supermarkets, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: March 13, 2006 /s/ RICHARD J. SAKER
---------------------
(Signature)
Richard J. Saker
Chief Executive Officer
19
EXHIBIT 31.2
CERTIFICATION
I, Michael Shapiro, certify that:
1. I have reviewed this report on Form 10-Q of Foodarama Supermarkets, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: March 13, 2006 /s/ MICHAEL SHAPIRO
------------------------------
(Signature)
Michael Shapiro
Chief Financial Officer
20
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Foodarama Supermarkets, Inc.
(the "Company") on Form 10-Q for the period ended January 28, 2006 (the
"Report"), I, Richard J. Saker, Chief Executive Officer of the Company, do
hereby certify, pursuant to 18 U.S.C.ss. 1350, as adopted pursuant to ss. 906 of
the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) the Report fully complies with the requirements of ss. 13(a) or 15(d) of
the Securities Exchange Act of 1934, 15 U.S.C. ss. 78m(a) or 78o(d), and,
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
Date: March 13, 2006 /s/ RICHARD J. SAKER
------------------------------
(Signature)
Richard J. Saker
Chief Executive Officer
21
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Foodarama Supermarkets, Inc.
(the "Company") on Form 10-Q for the period ended January 28, 2006 (the
"Report"), I, Michael Shapiro, Chief Financial Officer of the Company, do hereby
certify, pursuant to 18 U.S.C.ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) the Report fully complies with the requirements of ss. 13(a) or 15(d) of
the Securities Exchange Act of 1934, 15 U.S.C. ss. 78m(a) or 78o(d), and,
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
Date: March 13, 2006 /s/ MICHAEL SHAPIRO
------------------------------
(Signature)
Michael Shapiro
Chief Financial Officer
22