UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 1, 2005
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____________ to _______________
Commission file number: 002-94984
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Roundy's, Inc.
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(Exact name of registrant as specified in its charter)
Wisconsin 39-0854535
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
875 E. Wisconsin Avenue
Milwaukee, Wisconsin 53202
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414)231-5000
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Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by checkmark whether the Registrant is an accelerated filer (as defined
in Exchange Act Rule 12b-2)
Yes No X
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As of March 25, 2005 there were 1,000 shares of the Registrant's common stock
outstanding, all of which were held by Roundy's Acquisition Corp. ("RAC"). RAC
is controlled by the Willis Stein Funds (as defined in Item 1. BUSINESS) and
certain associated investors, and approximately 100% of RAC's common stock may
be deemed to be beneficially owned by certain officers and directors of the
Registrant, all of whom may be deemed to be affiliates of the Registrant. There
is no established public trading market for such stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
Roundy's, Inc.
Form 10-K
For the fiscal year ended January 1, 2005
TABLE OF CONTENTS
PART I Page
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Item 1. Business 1
Item 2. Properties 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder 13
Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition 16
and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 25
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants on Accounting 54
and Financial Disclosure
Item 9A. Controls and Procedures 54
Item 9B. Other Information 55
PART III
Item 10. Directors and Executive Officers of the Registrant 55
Item 11. Executive Compensation 59
Item 12. Security Ownership of Certain Beneficial Owners and Management 62
and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions 63
Item 14. Principal Accounting Fees and Services 64
PART IV
Item 15. Exhibits and Financial Statement Schedules 64
SIGNATURES
EXHIBIT INDEX
PART I
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Exchange Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements,
other than statements of historical fact included herein or therein, are
forward-looking statements. In particular, without limitation, terms such as
"anticipate," "believe," "estimate," "expect," "goal," "indicate," "may be,"
"objective," "plan," "predict," "should," "will" or similar words are intended
to identify forward-looking statements. Forward-looking statements are subject
to certain risks, uncertainties and assumptions which could cause actual results
to differ materially from those predicted. Important factors that could cause
actual results to differ materially from such expectations ("Risk Factors") are
disclosed herein (see "Risk Factors" at the end of Item 1). Although Roundy's,
Inc. ("Roundy's', and together with its subsidiaries, the "Company") believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. All subsequent written or oral forward-looking statements
attributable to the Company or persons acting on behalf of the Company are
expressly qualified in their entirety by the Risk Factors. Additional
information concerning factors that could cause actual results to differ
materially from those in the forward-looking statements is contained from time
to time in the Company's SEC filings, including, but not limited to information
under the caption "Risk Factors" contained in the prospectus filed on February
6, 2003 forming a part of the Company's Registration Statement on Form S-4 under
the Securities Act of 1933 (Registration No. 333-102779).
ITEM 1. BUSINESS
Background
The Company's wholesale operations date back to 1872, when Roundy, Peckham &
Dexter, a privately owned wholesaling company, was formed. In 1952, Roundy,
Peckham & Dexter was sold to certain of its customers and the company was
incorporated as Roundy's, Inc. Through the 1970s, Roundy's continued to operate
as a retailer-owned cooperative, with food wholesaling operations largely
focused in Wisconsin. In the early 1980s, Roundy's initiated a strategic plan to
grow the wholesale operations by strategically acquiring food wholesalers both
within and around Wisconsin. Roundy's opened the first Pick 'n Save store in
1975 and built a base of Company-owned and operated retail stores throughout the
1980s and 1990s.
From 2000 through 2004, Roundy's embarked on a strategy of further expanding its
retail store base through selective acquisitions and organic growth. Today,
Roundy's is a leading food retailer in the state of Wisconsin. As of January 1,
2005, the Company owned and operated 125 retail grocery stores, of which 89 are
located in Wisconsin, 31 are located in Minnesota and five are located elsewhere
in the Midwest. The Company distributes a full line of food and non-food
products from five wholesale distribution centers in three Midwestern states,
and as of January 1, 2005, provided services to approximately 580 licensee and
independent retail locations in Wisconsin and throughout the Midwest. The
Company has agreed to sell a portion of its wholesale business; see "Recent
Developments" below.
On June 6, 2002, all of the issued and outstanding capital stock of Roundy's was
purchased by RAC from its former owners. This purchase is referred to throughout
this report as the "Transactions."
RAC is a corporation formed at the direction of Willis Stein & Partners III,
L.P. ("Willis Stein") for the purposes of acquiring Roundy's. 89% of RAC's
common and preferred stock is owned by investment funds controlled by Willis
Stein (the "Willis Stein Funds") and certain associated equity investors. The
remaining RAC common and preferred stock is owned by certain members of
management (see "ITEM 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters"), including Messrs. Mariano and
Karst (who purchased RAC stock in connection with the Transactions - see ITEM
13. Certain Relationships and Related Transactions - Equity Arrangements) and
Messrs. Fryda and Rosanova and Ms. Michel.
Retail Operations
As of January 1, 2005, the Company operated 125 Company-owned retail grocery
stores primarily under the Pick 'n Save, Copps and Rainbow Foods banners. Over
the past four years, the Company has grown its retail operations through several
selective retail store acquisitions in the Company's existing and contiguous
markets. As a result, the number of Company-owned stores has increased from 64
at the end of 2002 to 126 as of March 25, 2005.
Fiscal Year Ended
As of ---------------------
March 25, 2005 2004 2003 2002
-------------- ---- ---- ----
Pick 'n Save format stores 68 65 52 39
Copps format stores 26 29 32 25
Rainbow Foods format stores 32 31 31
--- --- --- --
Total Company-owned stores 126 125 115 64
=== === === ==
As of January 1, 2005, the Company's retail stores were located in Wisconsin
(89), Minnesota (31), Michigan (two), Ohio (two) and Illinois (one). The
Company's stores range in size from 25,900 to 130,000 square feet. The Company
has agreed to sell its two Pick 'n Save format stores located in Ohio; see
"Recent Developments" below.
Approximately half of the Pick 'n Save, Copps and Rainbow Foods stores are
combination food and drug stores, offering all of the products and services
typically found in a traditional supermarket as well as a pharmacy, a broad line
of health and beauty care products, in-store banks and a large selection of
seasonal merchandise. During fiscal years 2004, 2003 and 2002 the stores
(including stores operated while under previous ownership) experienced annual
same-store sales growth of 1.4%, 2.4% and 1.5%, respectively.
The Company has focused on leveraging its strong brand names, high level of
customer service, high quality perishables and strategically located stores, to
increase market share. The Company believes the Pick 'n Save banner maintains
the number one market share position in the Milwaukee metropolitan area.
Additionally, through the Pick 'n Save and Copps banners, the Company believes
it also maintains the number one market share position in several other large
Wisconsin markets, including Madison, Appleton, Racine, Fond du Lac, Oshkosh,
West Bend and Kenosha. The Company believes the Rainbow banner maintains the
number two market share position in the Minneapolis/St. Paul metropolitan area.
Pick 'n Save. In addition to the 65 Company-owned stores, the Company also
licenses the Pick 'n Save brand name to independent retailers operating 36
locations. The Company's Pick 'n Save format stores are located primarily in
Wisconsin (62) and are generally large, modern and situated in high traffic
areas. These stores are operated as high-volume, value-oriented retail grocery
stores that seek to provide customers with the lowest tape total in their
respective markets. This value-oriented strategy is uniquely complemented by a
broad assortment of high quality perishables and a focus on providing the same
level of customer service and variety found in traditional supermarkets. For
example, 27 Pick 'n Save stores have full-service pharmacies the majority of
which are operated by third-party pharmacies, 49 have in-store banks that are
leased and operated by third-party financial institutions, and substantially all
have full-service deli, meat and bakery departments. The Pick 'n Save format
stores also carry approximately 2,000 private label products primarily under the
"Roundy's" label.
Copps. The Company's 29 Copps format stores operate primarily in Wisconsin. The
majority of the Copps stores operate as combination food and drug stores, with
the remainder operated as traditional supermarkets. The Company believes that
the Copps stores have developed a reputation within their respective markets for
providing a high level of customer service and high quality perishables. In
addition, the Copps stores operate under a promotion-driven pricing strategy
through weekly advertising circulars. The Company's Copps stores provide an
extensive range of services in a modern and attractive store environment. In
addition, 17 of the Copps stores have full-service pharmacies operated by a
third-party pharmacy chain and most stores have ATM machines and/or in-store
banks.
Rainbow Foods. The Company acquired 31 Rainbow Foods stores in the greater
Minneapolis/St. Paul metropolitan area from Fleming Companies, Inc. ("Fleming")
in June 2003. The majority of the Rainbow Foods stores are operated as
combination food and drug stores, with the remainder operated as traditional
supermarkets. Rainbow Foods stores seek to provide strong perishable department
offerings and competitive prices across all departments. These stores also offer
a broad range of services, including full-service, Company-operated pharmacies
in 19 stores and ATM machines and/or in-store banks in the majority of the
stores.
Wholesale Operations
The Company's wholesale operations sell and distribute a broad range of food and
non-food products to (i) Company-owned retail stores; (ii) licensed Pick 'n Save
stores; and (iii) independent food retailers located principally in Wisconsin
and elsewhere in the Midwest.
From five strategically-located wholesale distribution centers in Wisconsin (3),
Indiana (1) and Ohio (1), the Company supplies over 30,000 products to
approximately 580 licensee and independent retail locations in addition to its
Company-owned stores. In September 2004, the Company closed its distribution
centers located in Eldorado, Illinois and Evansville, Indiana (the "Southern
Division") and consolidated a portion of this business into its Lima, Ohio
distribution center. The Company also recently agreed to sell its Westville,
Indiana and Lima, Ohio distribution centers and their related operations, which
currently serve approximately 500 of the Company's 580 independent retail
customers. See "Recent Developments" below.
The Company is a full-service distributor with a broad product line that
includes dry grocery, frozen food, fresh produce, meat, dairy products, bakery
goods and nonfood products offered under both national brands and private
labels, including the Company's "Roundy's" label. The five wholesale
distribution centers aggregate approximately 3.1 million square feet,
approximately 79% of which the Company owns. On average, the distribution
centers serve a geographic radius of approximately 250 miles and most customers
are within approximately 125 miles of the primary distribution center serving
them. The Company's distribution network is supported by a modern fleet of 223
tractors, 711 trailers and four delivery trucks. The average age of the tractors
and trailers is three years and five years, respectively.
Customers Served. The Company's wholesale segment distributes to (i) 125
Company-owned stores; (ii) 36 licensed Pick 'n Save stores; and (iii)
approximately 545 independent retail locations. Roundy's is the primary supplier
for all of the Company-owned stores and licensed Pick 'n Save stores and the
Company believes that the majority of its independent retail customers also use
the Company as their primary supplier. The following chart illustrates the
percentage of the Company's net wholesale sales sold to each customer group:
Customer Type Fiscal Year Ended
--------------------------------
2004 2003 2002
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Company-owned stores 47.9% 42.3% 32.4%
Licensed Pick 'n Save stores 14.1 16.1 22.3
Independent retailers 38.0 41.6 45.3
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Total 100.0% 100.0% 100.0%
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The Company believes it has a balanced wholesale customer base that ranges from
small, conventional grocery store operators to large, modern superstores. The
majority of its customers are independent, conventional food retailers operating
one or more stores. As of January 1, 2005, approximately 75 of the customers
operated more than one retail food store. However, the majority of the Company's
wholesale net sales are derived from sales to Company-owned stores and to
licensed Pick 'n Save stores. The Company believes that this diversification of
its wholesale customer base, including the concentration of sales in its
Company-owned stores, provides it with a wholesale revenue stream that is not
dependent upon any single customer or group of customers. In addition, the
Company believes it has been successful at building long-term relationships with
its broad base of customers. In Fiscal 2004 and Fiscal 2003, the Company's
largest independent customer accounted for approximately 5.2% and 5.0%,
respectively, of the Company's net wholesale sales.
The Company has long-term license and supply contracts in place with
approximately 134 of the retail locations that it serves, which corresponds to
approximately $0.8 billion, or 24.3%, of its total wholesale net sales for
Fiscal 2004. These license and supply contracts contain numerous provisions that
serve to strengthen customer relationships, including, in many cases, (i)
license of the Pick 'n Save banner; (ii) sublease of the real property and
associated buildings; (iii) long term duration (current remaining average
duration of over five years); (iv) minimum purchase amounts; (v) the supply of
the Company's private labels and (vi) the Company's right of first refusal to
purchase licensed Pick 'n Save locations. As a result of the license and supply
agreements in place with several of its customers, the Company believes that it
has created strong economic incentives for both its licensed customers and its
other independent customers under supply contracts to maintain their
relationship with and maximize their purchases from the Company.
Licensees. In addition to Company-owned stores, the Company also licenses the
Pick 'n Save brand name to 36 independent retail stores located primarily in
Wisconsin. Under the terms of each licensing agreement, the Company allows the
licensees to use the Pick 'n Save banner free of charge in exchange for entering
into license and supply agreements in which the licensees agree to purchase a
majority of their product requirements from the Company.
Products. The Company offers customers over 30,000 products across seven
different primary product categories, including dry grocery, frozen food, fresh
produce, meat, dairy products, bakery goods and non-food products. The Company
sells most nationally advertised brands as well as numerous products under its
private and controlled labels.
Private Labels. Private and controlled labels include Roundy's and IGA. The
Company developed the Roundy's brand private label in the late 1800s, and today,
the label consists of over 2,000 items. The Company attempts to position these
items as being of equal or better quality than the comparable branded product,
but offered at a lower price. Roundy's is the primary private label in the
Company-owned Pick 'n Save and Rainbow Foods stores and substantially all of the
Company's independent retail customers' stores. IGA is the primary private label
in the Copps format stores.
Procurement. The Company believes it has developed economies of scale and
substantial purchasing power with respect to its suppliers. The Company believes
that its ability to procure products at the best available prices provides it
with a competitive advantage by allowing it to sell its merchandise to customers
at competitive prices.
The Company conducts product procurement at both corporate and divisional levels
depending on the type of product. Products that are based on local market
demand/preferences are typically procured at the divisional level. Other
products such as milk, bread, spices, ice cream and certain meats, as well as
private label products, are purchased centrally. The Company intends to further
centralize the procurement functions at the corporate level which it believes
will enable it to be more efficient. The Company purchases products from
numerous vendors, with no vendor representing more than approximately 7% of
total purchases in Fiscal 2004 or Fiscal 2003.
Capital Investment in Customers. The Company occasionally leases equipment to
retailers, provides capital to qualified customers through secured loans and
becomes primarily or secondarily obligated under customer store leases. In
making credit and investment decisions, the Company considers many factors,
including estimated return on capital and assumed risks and benefits (including
its ability to secure long-term supply contracts with these customers).
o Secured Loans and Lease Guarantees. The Company selectively makes loans
to customers for store expansions or improvements. The Company has a
corporate finance committee that carefully analyzes each loan application
according to strict written standards. These loans are typically secured
by inventory and store fixtures, have personal guarantees, bear interest
at rates above the prime rate and are for terms of one to ten years. The
Company's portfolio of loans to its wholesale customers had an aggregate
balance of approximately $2.9 million at January 1, 2005 and
approximately $4.4 million at January 3, 2004. In addition, the Company
occasionally guarantees loans and lease obligations for certain of its
customers. As of January 1, 2005, the Company guaranteed approximately
$0.2 million of a lease obligation of one of its independent retail
customers.
o Store and Equipment Leases. On an individual basis, the Company
occasionally subleases store sites and equipment to qualified customers,
generally at a premium to its cost of the primary lease. This enables
these customers to be more economically competitive with larger grocery
store chains and allows them to bid on store sites at favorable rates.
In exchange, the Company receives tangible benefits from these activities
as it requires customers to direct a majority of its purchasing
activities to its wholesale operations during the term of the sublease,
and the Company gains a right of first refusal on the store in the event
it is sold. In Fiscal 2004, 2003 and 2002, the Company received
aggregate sublease rental income of $20.0 million, $17.4 million and
$21.7 million, respectively, from a diverse group of Pick 'n Save
licensees and independent customers.
Competition
The retail grocery and wholesale food distribution industries are highly
competitive. In order to compete effectively, the Company must have the ability
to meet fluctuating competitive market prices, provide a wide variety of
perishable and nonperishable products, deliver product promptly and efficiently
and provide the related services which are required by modern supermarket
operations.
The Company competes with companies having greater financial resources than it,
including regional and national grocery retailers and wholesalers as well as a
number of other businesses that market their products directly to retailers. The
Company's wholesale customers also compete at the retail level with several
chain store organizations that also have integrated wholesale and retail
operations. The Company's competitors range from small local businesses to large
national businesses. The Company's success is in large part dependent upon the
ability of its Company-owned retail stores and wholesale customers to compete
with larger grocery store chains.
In competing for retail customers, emphasis is placed on quality and assortment
of products, competitive prices and in-stock product positions. In addition, in
competing for wholesale customers, emphasis is placed on competitive product
cost and service fees, as well as reliable and timely deliveries. The Company's
success in the wholesale food industry is dependent upon the success of its
retail store customers who are also engaged in a competitive, low profit margin
industry.
Employees
As of January 1, 2005 the Company had 21,855 employees, including 10,123
full-time employees and 11,732 part-time employees. The following table
illustrates the approximate allocation of the Company's employees by functional
area as of January 1, 2005:
Number
of % of
Area Employees Total
- ---- --------- -----
Executive, administrative and clerical 1,829 8.4%
Warehouse, processing and drivers 1,433 6.5
Retail operations 6,861 31.4
Part-time employees in all areas 11,732 53.7
------ ------
Total 21,855 100.0%
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Approximately 9,000, or 41%, of the Company's employees are covered by 30
collective bargaining agreements (typically having three to four-year terms)
negotiated with several different local unions. Approximately 500 unionized
employees are working under contracts that will expire during 2005 and the
remaining employees are under contracts that will expire in 2006 through 2009.
The Company believes that its relationships with its employees are good;
therefore, the Company does not anticipate difficulty in renegotiating these
contracts. Some of these employees work at the Company's facilities in Indiana
and Ohio; see "Recent Developments," below.
Management Information Systems
The Company maintains what it believes to be state-of-the-art management
information systems in order to realize greater operating efficiencies and
customer service and to minimize its cost of operations. The Company believes
that the installation of buying, inventory tracking and receiving systems has
resulted in significant cost savings.
The Company has installed what it believes to be state-of-the-art inventory
tracking systems in each of its wholesale divisions. Through the use of these
systems, the Company can monitor and control the flow of inventory in its
warehouses from delivery to dispatch. While in the warehouse, the system can
identify both the location and quantity of inventory and can formulate the most
efficient route for the product to be pulled to fill a customer order. As a
result of the implementation of these systems, the Company has reduced warehouse
shrinkage, inventory spoilage and delivery scratch rates, all of which have
helped to increase overall profitability.
Trade Names, Service Marks and Trademarks
The Company uses a variety of trade names, service marks and trademarks. The
Company owns the Pick 'n Save name and licenses it to retailers operating 36
stores. These licensees pay no licensing fees and substantially all have
executed a license and supply agreement which requires them to purchase the
majority of their products from the Company. The Company also has several
trademarks, which include Roundy's, Pick 'n Save, Copps and Rainbow.
Government Regulation
The Company is subject to regulation by a variety of governmental agencies,
including, but not limited to the U.S. Food and Drug Administration, the U.S.
Department of Agriculture and state and local health departments and other
agencies. The Company's distribution and retail facilities are subject to
various federal, state and local workplace regulations including, but not
limited to, the laws, rules and regulations pertaining to liquor licensing.
Failure to comply with all applicable laws and regulations could subject the
Company to civil remedies, including fines, injunctions, recalls, seizures and
criminal sanctions, which could have a material adverse effect on the Company's
business, financial condition and results of operations. However, compliance
with current or future laws or regulations could require the Company to make
material expenditures or otherwise adversely affect the way the Company operates
its business and its results of operations and financial condition.
Environmental Regulation
The Company is subject to increasingly stringent federal, state and local laws,
regulations and ordinances that (i) govern activities or operations that may
have adverse environmental effects, such as discharges to air and water, as well
as handling and disposal practices for solid and hazardous wastes and (ii)
impose liability for the costs of cleaning up, and certain damages resulting
from, sites of past spills, disposals or other releases of hazardous materials.
These laws include the Federal Clean Air Act, the Clean Water Act, the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, and analogous state laws. In
particular, under applicable environmental laws, the Company may be responsible
for remediation of environmental conditions and may be subject to associated
liabilities (including liabilities resulting from lawsuits brought by private
litigants) relating to its facilities and the land on which the Company
facilities are situated, regardless of whether the Company leases or owns the
facilities or land in question and regardless of whether such environmental
conditions were created by it or by a prior owner or tenant. Although the
Company typically conducts a limited environmental review prior to acquiring or
leasing new facilities or undeveloped land, there can be no assurance that known
or unknown environmental conditions relating to prior, existing or future
facility sites or its activities or the activities of its predecessor in
interest will not have a material adverse effect on it. It is difficult to
predict future environmental costs as the costs of environmental compliance vary
significantly depending on the extent, source and location of the contamination,
geological and hydrological conditions, available reimbursement by state
agencies, the enforcement policies of regulatory agencies and other factors.
RECENT DEVELOPMENTS
In January 2005 the Company began shipping certain products from its new 1.1
million square foot distribution center in Oconomowoc, Wisconsin. This new
facility will replace the Company's owned and leased facilities in Wauwatosa,
Wisconsin, and will become the primary distribution center for Roundy's retail
operations in southeastern Wisconsin. This new facility will also supply certain
of the Company's independent retail customers in Wisconsin. The new facility was
necessitated by the growth of the Company's retail operations over the past
several years and positions Roundy's to continue to grow its retail operations
and independent distribution business in the Upper Midwest. The move to the
Oconomowoc distribution center will continue throughout the first quarter of
2005 and the facility is expected to become fully operational in April 2005 when
the Company completes the transition of perishable departments. See Note 8 to
the Notes to Consolidated Financial Statements appearing elsewhere in this
Report.
On February 24, 2005, the Company signed a definitive agreement to sell (i) two
distribution centers located in Lima, Ohio and Westville, Indiana and the
related operations of these distribution centers and (ii) two Pick 'n Save
format stores located in Ohio to Nash-Finch Company ("Nash Finch") for
approximately $226 million in cash, subject to certain post closing adjustments.
The closing of the transaction is subject to customary conditions, including
governmental approvals. The transaction is expected to close within thirty to
sixty days from the date of the asset purchase agreement. The assets to be sold
consist primarily of inventory, accounts receivable, land, buildings and
equipment. Upon consummation of the sale, the Company expects to recognize a
gain on the sale of discontinued operations, net of applicable taxes and will
report such operations as discontinued operations in the Company's statements of
income. As of January 1, 2005, the Lima, Ohio and Westville, Indiana
distribution centers served approximately 500 of the Company's 580 independent
retail customers. For the fiscal year ended January 1, 2005, the Lima, Ohio and
Westville, Indiana distribution centers had revenues from wholesale operations
of approximately $941.4 million. See Note 13 to the Consolidated Financial
Statements of the Company appearing under ITEM 7 of this Report. As of January
1, 2005, the Lima, Ohio and Westville, Indiana distribution centers and the two
Pick 'n Save format stores in Ohio had approximately 1,150 employees.
RISK FACTORS
This report and other documents or oral statements which have been and will be
prepared or made in the future contain or may contain forward-looking statements
by or on behalf of the Company (see "Forward-Looking Statements" on page one).
Such statements are based on management's expectations at the time they are
made. In addition to the assumptions and other factors referred to specifically
in connection with such statements, the following factors, among others, could
cause actual results to differ materially from those contemplated. These factors
are in addition to any other cautionary statements, written or oral, which may
be made or referred to in connection with any such forward-looking statement.
Factors that could cause actual results to differ materially from those
contemplated include:
Highly competitive industry
- ---------------------------
The retail grocery and wholesale food distribution industries are highly
competitive and characterized by relatively high inventory turnover at
relatively low profit margins. A significant portion of the Company's sales are
made at prices based on the cost of products it sells plus a percentage markup.
As a result, the Company's profit levels may be negatively impacted if it is
forced to respond to competitive pressure by reducing prices.
This level of competition has caused the retail and wholesale grocery industry
to undergo changes as participants seek to lower costs, further increasing
pressure on the industry's already low profit margins. In addition to price
competition, food retailers compete with regard to quality and assortment, store
location and format, sales promotions, advertising, availability of parking,
hours of operation and store appeal. Similarly, food wholesalers compete with
regard to quality, breadth and availability of products offered, strength of
private label brands offered, schedules and reliability of deliveries and the
range and quality of services provided. As a result of these pressures,
alternative format food stores such as warehouse stores and supercenters,
benefiting from concentrated buying power and low-cost distribution technology,
have increasingly gained market share at the expense of traditional supermarket
operators, including independent operators, some of whom are the Company's
customers. The market share of such alternative format stores is expected to
grow in the future. Another result of these pressures can be seen in vendors
increasingly directing their efforts to large retail supermarket chains that are
capable of purchasing directly from producers and distributing products to their
supermarkets for sale to consumers. The Company believes that these changes have
contributed to lower profitability levels for many of its customers.
Food wholesalers also compete based on willingness to invest capital in their
customers. Some of the Company's competitors have, and its new competitors may
have, substantially greater financial and other resources than the Company.
Further consolidation in the industry, heightened competition among the
Company's suppliers, new entrants and trends toward vertical integration could
create additional competitive pressures that reduce margins and adversely affect
the Company's business, financial condition and results of operations.
Growth management and integration of the Company's acquisitions
- ---------------------------------------------------------------
As part of the Company's long-term strategy, the Company intends to pursue
strategic acquisition opportunities in the retail grocery store industry in and
around its existing primary market of Wisconsin. The Company has engaged in and
continues to engage in evaluations and discussions with respect to potential
acquisitions.
The Company faces risks commonly encountered with a "growth through acquisition"
strategy. These risks include, but are not limited to, incurring significantly
higher than anticipated financing related risks and operating expenses; failing
to assimilate the operations and personnel of acquired businesses; failing to
adequately assess unknown environmental conditions; failing to install and
integrate all necessary systems and controls; losing customers; entering markets
in which the Company has no or limited experience; disrupting its ongoing
business; and dissipating its management resources.
The Company's acquisition strategy may place a significant strain on its
management, operational, financial and other resources. The success of the
Company's acquisition strategy will depend on many factors, including its
ability to: identify suitable acquisition opportunities; successfully close
acquisitions at valuations that will provide anticipated returns on invested
capital; quickly and effectively integrate acquired operations in order to
realize operating synergies; obtain necessary financing on satisfactory terms;
and make the payments on the substantial indebtedness that the Company might
incur as a result of these acquisitions. Realization of the anticipated benefits
of a strategic acquisition may take several years or may not occur at all. The
Company may not be able to successfully execute its acquisition strategy, and
any failure to do so could have a material adverse effect on the Company's
business, financial condition and results of operations.
Loss of the services of any member of senior management could adversely affect
- -------------------------------------------------------------------------------
the Company's business
- ----------------------
The Company depends on the services of its senior management team. The loss or
interruption of the continued full-time services of certain key personnel
including Robert A. Mariano, Chairman, President and Chief Executive Officer,
and Darren W. Karst, Executive Vice President and Chief Financial Officer, could
have a material adverse effect on the Company's business and there can be no
assurance that it will be able to find replacements with equivalent skills or
experience at acceptable salaries. The Company does not maintain key man life
insurance for any of the members of its senior management team other than Robert
A. Mariano and it does not have employment agreements with any members of its
senior management team other than Robert A. Mariano, Darren W. Karst, Gary L.
Fryda and Donald S. Rosanova.
Labor
- -----
Approximately 41% of the Company's employees in its retail and wholesale
operations are covered by collective bargaining agreements. The Company's
relations with the unionized portion of its workforce may not remain positive
and its workforce may initiate a strike, work stoppage or slowdown in the
future. In the event of such an action, the Company's business, financial
condition and results of operations could be negatively affected, and it may not
be able to adequately meet the needs of its customers utilizing its remaining
workforce. In addition, the Company may have similar actions with its
non-unionized workforce.
The Company's continued success depends on its ability to attract and retain
qualified personnel in all areas of its business. The Company competes with
other businesses in its markets with respect to attracting and retaining
qualified employees. A shortage of qualified employees may require the Company
to continue to enhance its wage and benefits package in order to compete
effectively in the hiring and retention of qualified employees or to hire more
expensive temporary employees. The Company's labor costs may continue to
increase and such increases may not be recoverable through increased prices
charged to customers. Any significant failure by the Company to attract and
retain qualified employees, to control its labor costs or to recover any
increased labor costs through increased prices charged to customers could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Lack of supplier long-term contracts
- ------------------------------------
Suppliers may not provide the food products and supplies the Company needs in
the quantities requested for a variety of reasons such as job actions or strikes
by their employees and transportation interruptions. Similarly, because the
Company does not control the actual production of the products it sells, it is
also subject to delays caused by interruptions in production based on conditions
outside of its control including weather, crop conditions and catastrophic
events. The Company's inability to obtain adequate supplies of its food products
as a result of any of the foregoing factors, or otherwise, could mean that the
Company might not be able to fulfill its obligations to its customers, and as a
result, the Company's customers may turn to other distributors.
Exposure to product liability claims and adverse publicity
- ----------------------------------------------------------
The packaging, marketing and distribution of food products purchased from others
entail an inherent risk of product liability, product recall and resultant
adverse publicity. Such products may contain contaminants that may be
inadvertently redistributed by the Company. These contaminants may, in certain
cases, result in illness, injury or death if the contaminants are not eliminated
by processing at the food service or consumer level. Even an inadvertent
shipment of adulterated products is a violation of law and may lead to an
increased risk of exposure to product liability claims. Such claims may be
asserted against the Company and it may be obligated to perform such a recall in
the future. If a product liability claim is successful, the Company's insurance
may not be adequate to cover all liabilities it may incur, and the Company may
not be able to continue to maintain such insurance, or obtain comparable
insurance at a reasonable cost, if at all. The Company generally seeks
contractual indemnification and insurance coverage from parties supplying its
products, but this indemnification or insurance coverage is limited by the
creditworthiness of the indemnifying party, and their insurance carriers, if
any, as well as the insured limits of any insurance provided by suppliers. If
the Company does not have adequate insurance or contractual indemnification
available, product liability claims relating to defective products could have a
material adverse effect on its ability to successfully market its products and
on the Company's business, financial condition and results of operations. In
addition, even if a product liability claim is not successful or is not fully
pursued, the negative publicity surrounding any assertion that the Company's
products caused illness or injury could have a material adverse effect on its
reputation with existing and potential customers and or the Company's business,
financial condition and results of operations.
Government regulation
- ---------------------
The Company is subject to various federal, state and local laws and regulations;
see the discussion above in Item 1. Business under the caption "Government
Regulation." The Company's failure to comply with such laws and regulations
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Environmental regulation
- ------------------------
The Company is subject to stringent federal, state and local laws, regulations
and ordinances; see the discussion above in Item 1. Business under the caption
"Environmental Regulation." The Company's failure to comply with such laws and
regulations could have a material adverse effect on the Company's business,
financial condition and results of operations.
Vulnerability to certain national and regional events, trends and conditions
- ----------------------------------------------------------------------------
The food industry is sensitive to national and economic conditions. The
Company's results of operations also are sensitive to, and may be materially
adversely impacted by, among other things, competitive pricing pressures, vendor
selling programs, increasing interest rates and food price deflation. One or
more of these factors may have a material adverse effect on the Company's
business, financial condition or results of operations. Moreover, as the
Company's operations are concentrated in Wisconsin and, to a lesser extent,
elsewhere in the Midwest, increased competition in this region from other
national and regional supermarket chains, warehouse club stores, discount stores
and other local retailers, changes in local consumer preferences, inclement
weather or a general economic downturn in the region could materially adversely
affect the Company's sales, lead to lower earnings or losses and materially
adversely affect the Company's future growth and operations.
Effect of Inflation
- -------------------
The Company's primary costs, inventory and labor, are affected by a number of
factors that are beyond its control, including the availability and price of
merchandise, the competitive climate and general and regional economic
conditions. As is typical of the food retail and distribution industry, the
Company has generally been able to maintain gross profits by adjusting its
retail prices, but competitive conditions may from time to time render it unable
to do so while maintaining market share. The Company does not believe that
inflation had a material affect on the results or operations during the periods
presented. However, there can be no assurance that the Company's business will
not be affected in the future.
Principal stockholders may have interests that conflict with the interests of
- ------------------------------------------------------------------------------
the Company's noteholders
- -------------------------
The Willis Stein Funds and associated investors own approximately 89% of the
equity of RAC, the Company's parent corporation. Under the terms of a security
holders agreement, all of the stockholders of RAC have agreed to vote in favor
of those individuals designated by the Willis Stein Funds to serve on the board
of directors of RAC and Roundy's, Inc. and the Willis Stein Funds have the right
to appoint a majority of the directors. As a result, the Willis Stein Funds have
the ability to control the policies and operations of the Company. Circumstances
may occur in which the interests of the Willis Stein Funds, as the principal
stockholders of the parent, could be in conflict with the interests of holders
of the Company's $300 million 8 7/8% Senior Subordinated Notes due 2012 (the
"Notes"). In addition, equity investors may have an interest in pursuing
acquisitions, divestitures and other transactions that, in their judgment, could
enhance their equity investment, even though such transactions might involve
risks to holders of the Notes.
AVAILABLE INFORMATION
---------------------
The Company is subject to the periodic reporting requirements of the Exchange
Act. The Company has agreed that, whether or not required to do so by the rules
and regulations of the SEC, as long as any of the Notes remain outstanding, the
Company will furnish to the holders of the Notes and file with the SEC, unless
the SEC will not accept the filing, (1) all quarterly and annual financial
information that would be required to be contained in a filing with the SEC on
Forms 10-Q and Form 10-K and (2) all current reports that would be required to
be filed with the SEC on Form 8-K if the Company was required to file such
reports. A copy of any of the reports filed with the SEC can be obtained from
the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. A copy may also be obtained by calling the SEC at 1-800-SEC-0330. All
reports filed with the SEC will be available on the SEC's web site at
http://www.sec.gov. As long as the Notes remain outstanding, the Company has
agreed to make available to any prospective purchaser or beneficial owner of the
Notes in connection with any sale of the Notes, the information required by Rule
144A(d)(4) under the Securities Act.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in leased facilities in
Milwaukee, Wisconsin. The Company's 15-year lease is for approximately 115,000
square feet of office space. The Company's former corporate headquarters
building, located in Pewaukee, Wisconsin and owned by the Company, was sold on
March 15, 2005 for approximately $4.3 million.
As of January 1, 2005, the Company conducted distribution activities in the
following warehouses:
Approximate
Square Type of
Location Footage Interest Products Distributed
- -------- ------------ -------- --------------------
Wauwatosa, Wisconsin 784,000 Owned All product lines,
310,000 Leased (1) except non-food products
Mazomanie, Wisconsin 225,000 Leased Dry groceries and
non-food products
Stevens Point, Wisconsin 446,000 Owned All product lines,
except non-food products
Westville, Indiana 656,000 Owned(2) All product lines,
except non-food products
Lima, Ohio 515,000 Owned(2) All product lines,
118,000 Leased(3) except produce and
non-food products
(1) Leases ending April 30, 2005 and September 30, 2005.
(2) The Company has agreed to sell its distribution centers located in
Westville, Indiana and Lima, Ohio. See the discussion above in Item 1.
Business under the caption "Recent Developments."
(3) Lease ending December 31, 2005. The Company may extend this lease, at
its option, for one, one-year period.
In January 2005 the Company began shipping certain products from its new 1.1
million square-foot distribution center in Oconomowoc, Wisconsin. This new
facility will replace the Company's facilities in Wauwatosa, Wisconsin. See the
discussion above in Item 1. Business under the caption "Recent Developments."
In addition to the above, as of January 1, 2005, the Company operated 125 retail
grocery stores, ranging from 25,900 to 130,000 square feet. These facilities are
primarily occupied by the Company under leases with primary terms ending from
2005 to 2024. Of these stores, only two have leases that expire prior to
December 31, 2005.
The Company believes its current properties are well maintained and, in general,
are adequately sized to house existing operations. All of the Company's owned
properties are subject to liens under its senior credit facility.
Transportation
- --------------
As of January 1, 2005, the Company's primarily owned transportation fleet for
distribution operations consisted of 223 tractors, 711 trailers and four
delivery trucks. In addition, the Company owns or leases 36 automobiles and 38
vans.
Computers
- ---------
The Company owns most of its computer and related peripheral equipment. The
computers are used for inventory control, billing and all other general
accounting purposes. The Company believes that its computer systems are adequate
for the Company's operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various litigation, claims and disputes, some of which
are for substantial amounts, arising in the ordinary course of business. While
the ultimate effect of such actions cannot be predicted with certainty, the
Company expects that the outcome of these matters will not result in a material
adverse effect on its business, financial condition or results of operations.
The litigation with a former Company employee was resolved in the fourth quarter
of 2004 without any liability on the part of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 28, 2005, RAC, Roundy's sole shareholder, acting by consent
resolution, elected J. Landis Martin as a director of Roundy's.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
All of the Company's common stock is held by RAC and there is no established
public trading market therefor. Prior to the consummation of the Transactions on
June 6, 2002, the Company was operated as a cooperative and had a history of
paying patronage dividends to its stockholders who were members of the
cooperative. On June 6, 2002, the Company entered into a Credit Agreement that
contains various restrictive covenants which prohibit it from declaring or
paying any dividends. The Company has paid no dividends since entering into the
Credit Agreement and its ability to pay dividends in the future is subject to
restrictions under the terms of its Credit Agreement and the indenture governing
its Notes.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical consolidated statements of
income, balance sheet, and other data for the Company for the periods presented
and should only be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the audited
consolidated financial statements of the Company and the related notes thereto.
For purposes of financial comparisons, the results of operations for the period
from June 7, 2002 to December 28, 2002 will be combined with the results of
operations of the Company for the period from December 30, 2001 to June 6, 2002.
For purposes of the financial statement presentation, the Predecessor Company
refers to the Company prior to the consummation of the Transactions and
Successor Company refers to the Company after the consummation of the
Transactions.
(Dollars in thousands) Successor Predecessor
------------------------------------------- ------------------------------------------------
Fiscal Year Fiscal Year
------------------------ June 7, 2002 to December 30, 2001 ------------------------
2004 2003 December 28, 2002 to June 6, 2002 2001 2000
---------- ---------- ----------------- ------------------ --------- ----------
Statement of Income Data(1):
Revenues:
Net sales and service fees(2) (4) $4,774,170 $4,348,220 $2,063,454 $1,549,867 $3,367,273 $2,913,703
Other-net(3) 3,154 2,188 1,207 694 2,057 7,174
---------- ---------- ---------- ---------- ---------- ----------
4,777,324 4,350,408 2,064,661 1,550,561 3,369,330 2,920,877
---------- ---------- ---------- ---------- ---------- ----------
Costs and Expenses:
Cost of sales(2) (4) 3,742,491 3,466,316 1,694,946 1,274,424 2,802,889 2,497,374
Operating and administrative(4) 885,415 746,569 314,897 236,631 497,337 367,041(5)
SARs and other termination costs(6) 7,400
Interest 44,100 45,573 21,015 13,765 18,784 15,864
---------- --------- ---------- ---------- ---------- ----------
4,672,006 4,258,458 2,030,858 1,532,220 3,319,010 2,880,279
--------- --------- ---------- ---------- ---------- ----------
Income before patronage dividends 105,318 91,950 33,803 18,341 50,320 40,598
Patronage dividends(7) 8,681 5,035
--------- --------- ---------- ---------- ---------- ----------
Income before income taxes 105,318 91,950 33,803 18,341 41,639 35,563
Provision for income taxes(8) 44,724 37,302 13,345 7,413 15,855(9) 14,458
---------- ---------- ---------- ---------- ---------- ----------
Net income $ 60,594 $ 54,648 $ 20,458 $ 10,928 $ 25,784 $ 21,105
========== ========== ========== ========== ========== ==========
Other Financial Data:
Cash provided by (used in):
Operating activities $ 164,015 $ 159,515 $ 76,538 $ 44,844 $ 76,271 $ 80,950
Investing activities (146,523) (203,983) (605,503) (9,285) (105,385) (151,778)
Financing activities (1,757) (5,304) 668,743 (48,674) 34,737 42,335
Depreciation and amortization 67,360 52,878 32,588 18,670 44,114 30,738
Capital expenditures 90,414 57,654 22,654 10,642 32,614 37,706
Balance Sheet Data (at end of period):
Working capital $ 28,352 $ 11,754 $ 94,622 $ 24,940 $ 38,771
Total assets 1,571,354 1,530,390 1,370,754 794,510 662,372
Total debt and capital lease
obligations 600,678 601,979 562,785 228,548 174,402
Shareholder's equity 450,200 389,606 334,958 170,492 150,521
Shareholder's equity including
redeemable stock 450,200 389,606 334,958 179,736 160,669
(1) The Company has acquired various retail locations since 2000 and applied
purchase accounting to the June 2002 acquisition of the Company in the
Transactions. As a result, period-to-period data may not be comparable due
to the effects of these acquisitions.
(2) Amounts for all periods have been restated to reflect the adoption by the
Company, effective December 30, 2001, of Emerging Issues Task Force (EITF)
Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a
Customer or a Reseller of the Vendor's Products." The effect of the
adoption of EITF 01-9 was to classify certain sales promotions offered to
retail customers as a reduction of sales (versus including them in cost of
sales as previously recorded), with a corresponding reduction in cost of
goods sold. As a result, the adoption of this accounting principle had no
effect on the Company's gross profit.
(3) Includes insurance settlement gains of $3.3 million in fiscal 2000.
(4) In fiscal 2003, the Company adopted Emerging Issues Task Force No. 02-16
("EITF 02-16"), "Accounting by a Customer (including a Reseller) for
Certain Consideration Received from a Vendor." Accordingly, certain
vendor-funded advertising and other allowances were reclassified in the
2003 consolidated statements of income and prior periods have been
consistently reclassified. Specifically, vendor reimbursements previously
classified as offsets to advertising and other expenses, have now been
reflected as reductions in cost of sales pursuant to EITF 02-16.
Accordingly $44.9 million, $18.3 million, $13.4 million, $29.2 million and
$26.4 million of such reimbursements for Fiscal 2003, the period from
June 7, 2002 to December 28, 2002, the period from December 30, 2001 to
June 6, 2002, Fiscal 2001 and Fiscal 2000, respectively, have been
classified as a reduction in cost of sales with a corresponding increase in
operating and administrative expenses.
The 2004 and prior financial statements, after the following
reclassification, reflect the distinction between manufacturer's paper
coupons and electronic coupon programs negotiated between the Company and
the manufacturer, based on the guidance of EITF 03-10, "Application of
Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by
Manufacturers" ("EITF 03-10"). Pursuant to EITF 03-10, reimbursements from
manufacturers for the Company's electronic coupon programs should be
reflected as a reduction of cost of sales. Accordingly, $46.4 million,
$32.9 million, $13.1 million, $9.6 million, $20.5 million and $16.3 million
have been reflected as reductions to net sales and service fees and cost of
sales for Fiscal 2004, Fiscal 2003, for the period from June 7, 2002 to
December 28, 2002, for the period from December 30, 2001 to June 6, 2002,
Fiscal 2001 and Fiscal 2000, respectively, to reflect such a presentation.
(5) Includes a compensation charge of $3.1 million related to a term extension
of previously granted stock options.
(6) Stock appreciation rights ("SARs") and other termination costs include the
costs associated with the termination of the predecessor Company's SARs
program and the termination of employment agreements with certain former
officers of the Predecessor Company, all of which was incurred in
connection with the Transactions.
(7) Prior to the Transactions, a significant portion of the Predecessor
Company's common stock was beneficially owned by the owners of 99 retail
grocery stores serviced by the Predecessor Company. These former
stockholders received patronage dividends from the Predecessor Company
based on the level of their wholesale purchases from the Predecessor
Company. The Predecessor Company was obligated by its by-laws to pay a
patronage dividend to its former stockholders out of and based on the net
earnings from wholesale business done by the Predecessor Company with such
former stockholders in any fiscal year.
(8) Prior to the Transactions, the Predecessor Company historically operated a
portion of its wholesale business on a cooperative basis, and therefore
determined its federal income tax liabilities under Subchapter T of the
Internal Revenue Code, which governs the taxation of corporations operating
on a cooperative basis. Under Subchapter T of the Internal Revenue Code,
patronage dividends were deducted by the Predecessor Company in determining
its taxable income, and were generally taxable to the Predecessor Company's
former stockholders for federal income tax purposes.
(9) Net of a $2.4 million income tax benefit from resolution of prior year tax
matters.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
2004 Overview
The increase in retail sales in Fiscal 2004 (the year ended January 1, 2005) was
primarily due to the effect of seven acquired store groups, consisting of 62
stores in total, which operated under the Company's ownership during all or part
of Fiscal 2004 but were operated by the Company for only part of the prior
fiscal year (collectively, the "62 Acquired Stores"). The 62 Acquired Stores
include: (i) 31 Rainbow Foods ("Rainbow") retail grocery stores in the
Minneapolis-St. Paul area acquired from Fleming in June 2003 and reopened
immediately by Roundy's under the Rainbow banner; (ii) 25 Pick 'n Save retail
grocery stores acquired in five separate transactions; and (iii) six Copps Foods
stores in Madison, Wisconsin acquired from the Great Atlantic & Pacific Tea
Company, Inc. ("A&P") in April 2003 and reopened in late May and early June 2003
(the "Copps Madison Acquisition").
Recent Developments
The following discussion should be read in conjunction with the description of
the Company's decision to sell a portion of its wholesale business; see "Recent
Developments" under Item 1, BUSINESS, in this report.
Results of Operations
The following table sets forth each category of Statement of Income data as a
percentage of net sales and service fees. The results of operations for the year
ended December 28, 2002 includes the results of the Company for the period from
December 30, 2001 through June 6, 2002 ("Predecessor Company") and the period
from June 7, 2002 through December 28, 2002 ("Successor Company").
On April 8, 2002, Roundy's and RAC entered into a share exchange agreement
pursuant to which RAC acquired all of the issued and outstanding capital stock
of Roundy's on June 6, 2002. As part of the Transactions, the Company entered
into various financing arrangements described herein, and as a result, the
Successor Company has a different capital structure and increased indebtedness
as compared to the Predecessor Company. In addition, as a result of the
Transactions, the Company's assets and liabilities were adjusted to reflect
their estimated fair market values, and the purchase price in excess of the fair
market value of identifiable tangible and intangible assets was recorded as
goodwill. Specific implications of the Transactions include: (i) net property
and equipment was written down by approximately $50.0 million and certain useful
lives were adjusted, which impacted successor period depreciation and
amortization; (ii) the Company allocated $33.7 million to supply contracts,
which is being amortized over approximately five years; (iii) the Company
incurred $22.0 million of debt issuance costs, which is being amortized over the
life of the related debt; and (iv) indebtedness was increased to finance the
Transactions, which will increase interest expense in the successor periods.
Accordingly, the results of operations for periods subsequent to the
consummation of the Transactions and related financing transactions will not
necessarily be comparable to prior periods of the Predecessor Company.
Fiscal Year Ended
------------------------------------------------------------------
January 1, 2005 January 3, 2004 December 28, 2002
-------------------- -------------------- --------------------
(Unaudited)
Statements of Income Data
(Dollars in thousands):
Revenues:
Net sales and service fees $4,774,170 100.0% $4,348,220 100.0% $3,613,321 100.0%
Other-net 3,154 0.1 2,188 0.1 1,901 0.1
---------- ----- ---------- ----- ---------- ------
Total 4,777,324 100.1 4,350,408 100.1 3,615,222 100.1
Cost and Expenses:
Cost of sales 3,742,491 78.4 3,466,316 79.7 2,969,370 82.2
Operating and administrative 885,415 18.6 746,569 17.2 551,528 15.2
SARs and other termination costs 7,400 0.2
Interest 44,100 0.9 45,573 1.1 34,780 1.0
--------- ---- --------- ---- --------- -----
Income before income taxes 105,318 2.2 91,950 2.1 52,144 1.4
Provision for income taxes 44,724 0.9 37,302 0.9 20,758 0.6
---------- ----- --------- ----- ---------- -----
Net income $ 60,594 1.3% $ 54,648 1.2% $ 31,386 0.9%
========== ===== ========= ===== ========== ======
Net Sales and Service Fees
Net sales and service fees represent product sales less returns and allowances
and sales promotions. The Company derives its net sales and service fees from
the operation of retail grocery stores and the wholesale distribution of food
and non-food products. In addition, the Company provides specialized support
services for retail grocers, which include promotional merchandising and
advertising programs, inventory control, store development and financing and
assistance with other aspects of store management.
The table below indicates the portion of the Company's net sales and service
fees attributable to retail sales and wholesale distribution for the periods
indicated. Eliminations represent the intercompany activity between the
Company's wholesale operations and its Company-owned retail stores (in
thousands):
Fiscal Year Ended
-----------------------------------------------
January 1, January 3, December 28,
2005 2004 2002
---------- ---------- -----------
(Unaudited)
Net Sales and Service Fees
Retail $3,011,308 $ 2,424,488 $1,566,551
Wholesale 3,376,055 3,319,927 2,996,034
Eliminations (1,613,193) (1,396,195) (949,264)
---------- ----------- ----------
Total $4,774,170 $ 4,348,220 $3,613,321
========== =========== ==========
Costs and Expenses
Costs and expenses consist of cost of sales, operating and administrative
expenses, SARs and other termination costs and interest expense.
Cost of sales includes product costs and inbound freight.
Operating and administrative expenses consist primarily of personnel costs,
sales and marketing expenses, warehousing and distribution costs, the internal
costs of purchasing, receiving and inspecting products for resale, depreciation
and amortization expenses, expenses associated with the Company's facilities,
internal management expenses, business development expenses and expenses for
finance, legal, human resources and other administrative departments. Certain
retailers may include some of these costs (including warehousing and
distribution costs, and the internal costs of purchasing, receiving and
inspecting products for resale) in cost of sales, which may result in the
Company's presentation being incomparable to such retailers.
SAR's and other termination costs were $7.4 million for the year ended December
28, 2002 ($0 in all other periods) and included the costs associated with the
termination of the predecessor company's stock appreciation rights program and
the termination of employment agreements with certain former officers of the
Predecessor Company, all of which was incurred in connection with the
Transactions.
Interest expense includes interest on the Company's outstanding indebtedness and
amortization of deferred financing costs. Predecessor Company-interest expense
also includes interest rate swap termination costs and the write off of deferred
financing costs.
In the remainder of this section, "Fiscal 2004" or "2004" refers to the
Company's fiscal year ended January 1, 2005; "Fiscal 2003" or "2003" refers to
the Company's fiscal year ended January 3, 2004; and "Fiscal 2002" or "2002"
refers to the fiscal year ended December 28, 2002 (combined results of the
Predecessor Company and the Company as noted above).
Fiscal 2004 Compared With Fiscal 2003
Net Sales and Service Fees
Net sales and service fees totaled $4,774.2 million for the year ended January
1, 2005, an increase of $426.0 million, or 9.8%, from $4,348.2 million for the
year ended January 3, 2004. Fiscal 2003 was a 53-week year and the additional
week in 2003 (the week ending January 3, 2004) contributed $99.7 million to
Fiscal 2003 sales ($59.1 million in retail sales and $61.3 million of wholesale
sales, reduced by $20.7 million of eliminations). The following fiscal year
variance discussion compares the 52 weeks of 2004 to the 53 weeks of 2003.
Retail sales were $3,011.3 million for 2004, an increase of $586.8 million, or
24.2%, from $2,424.5 million for 2003. This increase in retail sales was
primarily due to the effect of the 62 Acquired Stores, which operated under the
Company's ownership during all or part of Fiscal 2004, but were not operated by
the Company for the entire prior fiscal year. The 62 Acquired Stores contributed
approximately $574.1 million to the Fiscal 2004 retail sales increase.
Same-store sales in 2004 at the Company's retail stores (including the results
of Pick 'n Save-licensed stores operated by their prior owners) improved 1.4%
over the comparable 52-week period of 2003.
Wholesale sales were $3,376.1 million for 2004, an increase of $56.1 million, or
1.7%, from $3,319.9 million for 2003. This increase was primarily due to
increased sales to Company-owned stores, partially offset by the closure of the
Company's Southern Division in September 2004 and the additional week in 2003.
The Company recognized combined revenues from the Southern Division of
approximately $141.2 million and $229.4 million for Fiscal 2004 (through its
close in September, 2004) and Fiscal 2003, respectively.
Gross Profit
Gross profit was $1,031.7 million for 2004, a $149.8 million, or 17.0% increase
from $881.9 million for 2003. The increase in gross profit in 2004 was primarily
due to the 62 Acquired Stores. Gross profit, as a percent of net sales and
service fees, for 2004 and 2003 was 21.6% and 20.3%, respectively. The increase
in gross profit percentage was primarily due to the increase in the sales mix
attributable to Company-owned retail stores, which have a higher gross profit
percentage than the wholesale segment. Retail sales in 2004 represented 63.1% of
net sales and service fees compared with 55.8% in 2003. The retail gross profit
percentage was 25.4% and 25.1% for 2004 and 2003, respectively. This increase in
retail gross profit percentage was primarily attributable to more effective
promotional activity and improved concentration of higher-margin perishable
sales. The wholesale gross profit percentage was 8.9% and 9.0% for 2004 and
2003, respectively.
Operating Expenses
Operating and administrative expenses were $885.4 million for 2004, a $138.8
million, or 18.6%, increase from $746.6 million for 2003. Operating and
administrative expenses, as a percentage of net sales and service fees,
increased to 18.6% for 2004 compared with 17.2% for 2003. The percentage
increase was attributable to the 62 Acquired Stores and the resulting increased
concentration of sales in the Company's retail segment in 2004, which has a
significantly higher ratio of operating costs to sales than its wholesale
segment. Retail operating and administrative expenses increased to 22.3% of
retail sales for 2004 compared with 21.7% for 2003. This increase was primarily
due to certain of the 62 Acquired Stores, which have higher operating costs as a
percent of sales than the Company's other stores. Wholesale operating and
administrative expenses decreased to 5.5% of wholesale sales for 2004 as
compared with 6.0% for 2003. This decrease was due to operational and
productivity improvements in the Company's wholesale operations. In addition,
corporate and other operating expenses (exclusive of depreciation and
amortization) were $42.4 million for 2004 compared with $30.9 million for 2003.
The increase was primarily attributable to higher unallocated corporate
procurement expenses and the full-year effect of the Company's leased office
space in downtown Milwaukee.
Interest Expense
Interest expense (excluding the amortization of deferred financing costs) was
$41.4 million for 2004, a $0.9 million decrease from $42.3 million for 2003. The
decrease was primarily due to a 50 basis point interest rate reduction effective
April, 2004 on the Company's term loan under its Credit Agreement.
Income Taxes
Provision for income taxes was $44.7 million for 2004, an increase of $7.4
million from $37.3 million for 2003. The effective income tax rates for 2004 and
2003 were 42.5% and 40.6%, respectively. The higher effective income tax rate
for 2004 is primarily attributable to the full-year effect of the 9.8% Minnesota
state income tax rate where the Company began operating following the
acquisition of 31 Rainbow stores in June 2003.
Net Income
Net income was $60.6 million for 2004, a $5.9 million increase from $54.6
million for 2003. This increase was primarily attributable to increased gross
profit, offset somewhat by increased operating and administrative expenses, as
discussed above. The net income margin improved to 1.27% for 2004 from 1.26% for
2003.
Fiscal 2003 Compared With Fiscal 2002
Net Sales and Service Fees
Net sales and service fees were $4,348.2 million for Fiscal 2003, a $734.9
million, or 20.3%, increase from $3,613.3 million for Fiscal 2002. Fiscal 2003
was a 53-week year and the extra week (the week ending January 3, 2004)
contributed $99.7 million of the sales increase ($59.1 million of retail sales,
$61.3 million of wholesale sales, and $20.7 million of eliminations). The
following fiscal year variance discussion compares the 53-week Fiscal 2003 to
the 52-week Fiscal 2002.
Retail sales were $2,424.5 million for 2003, an $857.9 million, or 54.8%,
increase from $1,566.6 million for 2002. This increase in retail sales in 2003
was primarily due to the effect of six acquired store groups, consisting of 53
stores in total, that were operated under the Company's ownership as of January
3, 2004 (collectively, the "53 Acquired Stores") but were operated by the
Company for only part of the prior fiscal year. The 53 Acquired Stores
contributed approximately $775.2 million of the increase. The 53 Acquired Stores
include: (i) 31 Rainbow stores in the Minneapolis-St. Paul area acquired from
Fleming in June 2003 and reopened immediately by Roundy's under the Rainbow
banner; (ii) 16 Pick `n Save retail grocery stores acquired in four separate
transactions; and (iii) six Copps Foods stores in Madison, Wisconsin acquired in
the Copps Madison Acquisition.
2003 same-store sales at the Company's retail stores (including acquired Pick 'n
Save licensed stores operated in 2002 by their prior owners) improved 2.4% over
2002. Because Fiscal 2003 was a 53-week year, sales for the week ending January
3, 2004 are excluded from the same-store sales comparison to Fiscal 2002.
Wholesale sales were $3,319.9 million for 2003, a $323.9 million, or 10.8%,
increase from $2,996.0 million for 2002. This increase was primarily due to
increased sales to Company-owned stores served by the Company's Wisconsin
wholesale divisions and new independent customers supplied by the Company's
wholesale divisions.
Gross Profit
Gross profit was $881.9 million for 2003, a $237.9 million, or 36.9% increase
from $644.0 million for 2002. The increase in gross profit in 2003 was primarily
due to the 53 Acquired Stores and increased wholesale sales. Gross profit, as a
percent of net sales and service fees, for 2003 and 2002 was 20.3% and 17.8%,
respectively. The increase in gross profit percentage was primarily due to the
increase in the sales mix attributable to Company-owned retail stores, which
have a higher gross profit percentage than the wholesale segment. Retail sales
in 2003 represented 55.8% of net sales and service fees compared with 43.4% in
2002. The retail gross profit percentage was 25.1% and 24.8% for 2003 and 2002,
respectively. This increase was primarily due to an increased concentration of
perishable department sales which have a higher gross profit percentage than
non-perishable department sales. The wholesale gross profit margin was 9.0% for
2003 and 2002.
Operating Expenses
Operating and administrative expenses were $746.6 million for 2003, a $195.0
million, or 35.4% increase from $551.5 million for 2002. Operating and
administrative expenses, as a percentage of net sales and service fees,
increased to 17.2% for 2003 compared with 15.3% for 2002. The percentage
increase was attributable to the 53 Acquired Stores and the resulting increased
concentration of sales in the Company's retail segment in 2003, which has a
significantly higher ratio of operating costs to sales than its wholesale
segment. Retail operating and administrative expenses increased to 21.7% of
retail sales for 2003 compared with 21.3% for 2002. This increase was primarily
due to pre-opening expenses and continuing store-level service investments
associated with certain of the 53 Acquired Stores. Wholesale operating and
administrative expenses decreased to 6.0% of wholesale sales for 2003 as
compared with 6.6% for 2002. This decrease was due to operational and
productivity improvements in the Company's wholesale operations as well as
increased leverage of fixed costs over a higher wholesale sales base. In
addition, corporate and other operating expenses (exclusive of depreciation and
amortization) were $30.9 million for 2003 compared with $16.2 million for 2002.
The increase was primarily attributable to increased unallocated corporate
marketing and administrative expenses and increased professional fees.
Interest Expense
Interest expense (excluding the amortization of deferred financing costs and
interest rate swap termination costs) was $42.3 million for 2003, a $16.7
million increase from $25.6 million for 2002. The increase was primarily due to
increased borrowings associated with the purchase of the Company's stock by RAC
in June 2002.
Income Taxes
Provision for income taxes was $37.3 million for 2003, an increase of $16.5
million from $20.8 million for 2002. The effective income tax rates for 2003 and
2002 were 40.6% and 39.8%, respectively. The higher effective income tax rate
for 2003 is primarily attributable to the 9.8% Minnesota state income tax rate
which the Company became subject to as a result of the acquisition of the
Rainbow stores.
Net Income
Net income was $54.6 million for 2003, a $23.2 million increase from $31.4
million for 2002. In 2002, the Company recorded pre-tax one-time charges of $6.7
million relating to the termination of an interest rate swap and $7.4 million
relating to the termination of the predecessor Company's SARs program and
employment agreements associated with certain former officers of the predecessor
company. The net income margin improved to 1.26% for 2003 from 0.87% for 2002.
Effect of Inflation
The Company's primary costs, inventory and labor, are affected by a number of
factors that are beyond its control, including the availability and price of
merchandise, the competitive climate and general and regional economic
conditions. As is typical of the food retail and distribution industry, the
Company has generally been able to maintain gross profits by adjusting its
retail prices, but competitive conditions may from time to time render it unable
to do so while maintaining market share. The Company does not believe that
inflation had a material affect on the results of operations during the periods
presented. However, there can be no assurance that the Company's business will
not be affected in the future.
Liquidity and Capital Resources
The Company's principal sources of cash are operating activities and borrowings.
The Company's cash and cash equivalents totaled $105.7 million at January 1,
2005, compared with $90.0 million at January 3, 2004. Cash flows provided by
operating activities were $164.0 million for the year ended January 1, 2005,
compared with $159.5 million for the year ended January 3, 2004. The increase
was primarily due to increased net income, as adjusted for non-cash charges
including depreciation, amortization and deferred taxes partially offset by a
smaller increase in cash provided by operating assets and liabilities.
The Company's principal historical uses of cash were to provide for working
capital, capital expenditures and acquisitions. Net cash used in investing
activities was $146.5 million in Fiscal 2004 compared with $204.0 million in
Fiscal 2003. Fiscal 2004 includes cash paid for business acquisitions of $61.8
million, consisting primarily of the acquisition of seven Pick 'n Save stores
from McAdams, Inc. Fiscal 2003 includes cash paid for business acquisitions of
$148.5 million, consisting primarily of (i) the acquisition of Rainbow for
approximately $64.5 million, (ii) the acquisition of Prescott's Supermarkets,
Inc. ("Prescott's") for approximately $47.8 million and (iii) the acquisition of
14 stores from A&P in two separate transactions for approximately $29.0 million.
Total capital expenditures were $90.4 million in 2004 compared with $57.7
million in 2003. These expenditures were related to Roundy's new store
locations, remodeling of newly acquired and existing stores, expenditures
related to the Company's new distribution center facility in Oconomowoc,
Wisconsin and the purchase of transportation equipment. Total capital
expenditures for Fiscal 2005, excluding any acquisitions, are estimated to be
approximately $100.0 million.
Net cash flows used in financing activities were $1.8 million compared with $5.3
million in 2003. The cash flows used in financing activities in both years were
primarily related to repayment of outstanding debt, net of new borrowings in
2004. The net cash flows provided by financing activities in 2004 were primarily
attributable to $3.0 million in borrowings from the Milwaukee Economic
Development Corp. ("MEDC") entered into on June 1, 2004. This 15-year loan,
(which bears interest at 3% annually) was provided by MEDC to assist in the
relocation of the Company's corporate headquarters to downtown Milwaukee.
Working capital was $28.4 million at January 1, 2005, compared with $11.8
million at January 3, 2004. The increase was primarily related to an increase in
cash of $15.7 million and a decrease in accrued expenses, offset somewhat by a
decrease in notes and accounts receivable. The decrease in accounts receivable
was due to improved collections and the closure of the Southern Division; the
decrease in accrued expenses was primarily due to increased pension
contributions in 2004.
As a result of the Transactions, the Company has significant debt service
obligations, including interest, in future years. On June 6, 2002, in connection
with the Transactions, the Company entered into a credit agreement with various
lenders, allowing it to borrow $250.0 million under a term loan, and up to
$125.0 million under a revolving line of credit. There are no outstanding
borrowings under the revolving line of credit, except for outstanding letters of
credit of $16.0 million. The term loan is repayable in quarterly installments of
$625,000 through June 30, 2008 followed by four quarterly payments of $58.8
million through June 30, 2009. The credit agreement was amended in March 2005 to
require that a $125 million principal payment be made on the term loan upon
completion of the Company's disposition of assets to Nash Finch as discussed
under the caption "RECENT DEVELOPMENTS" under ITEM 1. BUSINESS, of this Report.
In addition, the Company issued $300.0 million in aggregate principal amount of
Notes of which $225.0 million was issued as of the date of the Transactions and
$75.0 million was issued in December 2002.
The Company's senior credit facility contains various restrictive covenants
which: (i) prohibit it from prepaying other indebtedness, (ii) require it to
maintain specified financial ratios, such as (a) a minimum fixed charge coverage
ratio, (b) a maximum ratio of senior debt to EBITDA and (c) a maximum ratio of
total debt to EBITDA; and (iii) require it to satisfy financial condition tests
including limitations on capital expenditures. In addition, the senior credit
facility prohibits the Company from declaring or paying any dividends and
prohibits it from making any payments with respect to the Notes if the Company
fails to perform its obligations under or fails to meet the conditions of, the
senior credit facility or if payment creates a default under the senior credit
facility.
The indenture governing the Notes, among other things, (i) restricts the
Company's ability and the ability of its subsidiaries to incur additional
indebtedness, issue shares of preferred stock, incur liens, pay dividends or
make certain other restricted payments and enter into certain transactions with
affiliates; (ii) prohibits certain restrictions on the ability of certain of its
subsidiaries to pay dividends or make certain payments to it; and (iii) places
restrictions on the Company's ability and the ability of its subsidiaries to
merge or consolidate with any other person or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its assets.
The Company's principal source of liquidity is cash flow generated from
operations and borrowings under its revolving credit facility. The Company's
principal uses of cash are to meet debt service requirements, finance capital
expenditures, make acquisitions and provide for working capital. The Company
expects that current excess cash and cash available from operations, and funds
available under its $125.0 million revolving line of credit, will be sufficient
to fund its operations, debt service requirements and capital expenditures for
at least the next 12 months.
The Company's ability to make payments on and to refinance its debt, and to fund
planned capital expenditures depends on its ability to generate sufficient cash
in the future. This, to some extent, is subject to general economic, financial,
competitive and other factors that are beyond the Company's control. The Company
believes that, based upon current levels of operations, it will be able to meet
its debt service obligations when due. Significant assumptions underlie this
belief, including, among other things, that the Company will continue to be
successful in implementing its business strategy and that there will be no
material adverse developments in its business, liquidity or capital
requirements. If the Company's future cash flow from operations and other
capital resources are insufficient to pay its obligations as they mature or to
fund its liquidity needs, it may be forced to reduce or delay its business
activities and capital expenditures, sell assets, obtain additional debt or
equity capital or restructure or refinance all or a portion of its debt, on or
before maturity. There can be no assurance that the Company would be able to
accomplish any of these alternatives on a timely basis or on satisfactory terms,
if at all. In addition, the terms of the Company's existing and future
indebtedness may limit its ability to pursue any of these alternatives. Also see
"RISK FACTORS" following ITEM 1. BUSINESS.
Off-Balance Sheet Items The Company has no off-balance sheet items.
Contractual Obligations
The following table of material debt and lease commitments at January 1, 2005
summarizes the effect these obligations are expected to have on the Company's
cash flow in the future periods as set forth in the table below (in thousands):
2005 2006 2007 2008 2009 Thereafter Total
-------- ---------- ----------- ------------ ----------- ------------ ------------
Long-term debt, including current
maturities, and capital lease
obligations (1) $ 4,565 $ 4,725 $ 4,943 $ 121,519 $ 120,611 $ 344,609 $ 600,972
Interest on long-term debt and
capital lease obligations (1) 42,289 42,002 41,310 40,762 32,877 83,988 283,228
Operating leases 75,718 76,275 75,022 73,111 69,743 679,201 1,049,070
Sublease income (16,069) (15,356) (13,654) (11,593) (8,532) (35,932) (101,136)
-------- --------- --------- ----------- ----------- ----------- -----------
Total $106,503 $ 107,646 $ 107,621 $ 223,799 $ 214,699 $ 1,071,866 $ 1,832,134
========= ========= ========= =========== =========== =========== ===========
(1) Long-term debt and capital lease obligations relate to principal
payments for the Company's outstanding indebtedness (See Note 5 to
the consolidated financial statements). Interest payments have been
estimated based on the coupon rate for fixed rate obligations or the
rate in effect at January 1, 2005 for variable rate obligations.
Interest obligations exclude amounts which have been accrued through
January 1, 2005.
The Company's purchase obligations are cancelable and therefore not included in
the above table.
The Company has outstanding letters of credit that total approximately $16.0
million at January 1, 2005.
The Company is required to make contributions to its defined benefit plans.
These contributions are required under the minimum funding requirements of
Employee Retirement Pension Plan Income Security Act ("ERISA"). The Company's
estimated 2005 minimum required contributions to its defined benefit plans are
approximately $4.6 million. Due to uncertainties regarding significant
assumptions involved in estimating future required contributions to its defined
benefit plans, such as interest rate levels, the amount and timing of asset
returns and the impact of proposed legislation, the Company is not able to
reasonably estimate its future required contributions beyond 2005.
Critical Accounting Policies and Estimates
The preparation of the Company's financial statements in conformity with
accounting principals generally accepted in the United States require the
Company to make estimates, assumptions and judgments that affect amounts of
assets and liabilities reported in the consolidated financial statements, the
disclosure of contingent assets and liabilities as of the date of the financial
statements and reported amounts of revenues and expenses during the year. The
Company believes its estimates and assumptions are reasonable; however, future
results could differ from those estimates.
Critical accounting policies are policies that reflect material judgment and
uncertainty and may result in materially different results using different
assumptions or conditions. The Company identified the following critical
accounting policies and estimates: discounts and vendor allowances, allowance
for losses on receivables, closed facility commitments, reserves for
self-insurance and pension costs, and impairment of long-lived assets. For a
detailed discussion of accounting policies, please refer to the notes to the
consolidated financial statements.
Discounts and Vendor Allowances
- -------------------------------
Purchases of product at discounted pricing are recorded in inventory at the
discounted price until sold. Volume and other program allowances are accrued as
a receivable when it is reasonably assured they will be earned and reduce the
cost of the related inventory for product on hand or cost of sales for product
already sold. Vendor monies received for new product slotting are initially
deferred and recognized as a reduction to cost of sales after completion of an
estimated new product slotting cycle of approximately nine months at which time
the Company has fully performed its obligations. Vendor allowances received to
fund advertising and certain other expenses are recorded as a reduction of the
Company's expense or expenditure for such related advertising or other expense,
if such vendor allowances reimburse the Company for specific, identifiable and
incremental costs incurred by the Company in selling the vendor's product. Any
excess reimbursement over the Company's cost is classified as a reduction to
cost of sales.
Allowances for Losses on Receivables
- ------------------------------------
Management makes estimates of the uncollectibility of its accounts and notes
receivable portfolios. In determining the adequacy of the allowances, management
analyzes the value of the collateral, customer financial statements, historical
collection experience, aging of receivables and other economic and industry
factors. It is possible that the accuracy of the estimation process could be
materially impacted by different judgments as to collectibility based on the
information considered and further deterioration of accounts.
Closed Facility Commitments
- ---------------------------
The Company has historically leased store sites which it has subleased to
qualified independent retailers at rates that are at least equal to the rent
paid by the Company. The Company also leases store sites for its retail segment.
Under the terms of the original lease agreements, the Company remains primarily
liable for any properties that are subleased as well as its own retail stores.
Should a retailer be unable to perform under the sublease or should the Company
close underperforming Company-owned stores, it would record a charge to earnings
for the discounted cost of the remaining term of the lease and related costs,
less any anticipated sublease income. Should the number of defaults by
sublessees or Company-owned store closures increase, or the actual sublease
income be less than estimated, the remaining lease commitments the Company must
record could have a material adverse effect on operating results and cash flows.
Early settlements of lease obligations with the landlord and the discount rate
used to calculate the estimated liability will also impact recorded balances or
future results.
Reserves for Self-Insurance
- ---------------------------
The Company is primarily self-insured for workers' compensation. It is the
Company's policy to record its workers' compensation liability based on claims
filed and an estimate of claims incurred but not yet reported. Any projection of
losses concerning workers' compensation is subject to a considerable degree of
variability. Among the causes of this variability are unpredictable external
factors affecting future inflation rates, litigation trends, legal
interpretations, benefit level changes and claim settlement patterns.
Pension Costs
- -------------
Many of the Company's employees are covered by noncontributory defined benefit
pension plans. The Company accounts for these costs in accordance with Statement
of Financial Accounting Standards ("SFAS") No.87, "Employer's Accounting for
Pensions" which requires it to calculate pension expense and liabilities using
actuarial assumptions, including a discount rate and long-term returns on
assets. Actual returns on plan assets and changes in the interest rates used to
determine the discount rate may significantly impact pension expense and cash
contributions in the future.
Impairment of Long-Lived Assets
- -------------------------------
The Company reviews long-lived assets for impairment annually or whenever an
event, indicates the carrying value of the asset may not be recoverable. The
Company uses judgment when applying the impairment rules to determine when an
impairment test is necessary. Factors the Company considers that could trigger
an impairment review include significant underperformance relative to historical
or forecasted operating results, a significant decrease in the market value of
an asset and significant negative industry or economic trends. The Company
historically has not experienced any significant impairment of long-lived assets
except for the asset write-downs recorded in conjunction with the Transactions.
Senior management of the Company has discussed the development and selection of
the above critical accounting policies with the audit committee of the Company's
board of directors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk sensitive instruments do not subject the Company to
material market risk exposures, except for risks related to interest rate
fluctuations. As of January 1, 2005, the Company had debt outstanding with a
carrying value of $600.7 million and an estimated fair value of approximately
$629.2 million.
Fixed interest rate debt outstanding as of January 1, 2005, which excludes
borrowings under the Company's credit agreement with various lenders ("Credit
Agreement") was $356.9 million, carried an average interest rate of
approximately 8.8%, and matures as follows (in thousands):
Fiscal Year Ended
-------------------------------------------
2005 2006 2007 2008 2009 Thereafter Total
------ ------ ----- ----- ------ ---------- --------
Subordinated notes $300,000 $300,000
Other long-term debt $2,065 $2,225 $2,443 $2,770 $3,111 44,608 57,222
------ ------ ------ ------ ------ -------- --------
$2,065 $2,225 $2,443 $2,770 $3,111 $344,608 $357,222
====== ====== ====== ====== ====== ========
Unamortized debt discount (294)
--------
$356,928
========
The amount of borrowings under the Credit Agreement as of January 1, 2005 was
$243.8 million. For purposes of calculating interest, borrowings under the
Credit Agreement are at the election of the Company, based upon LIBOR or base
rate options, or a combination thereof. Under the LIBOR option the applicable
rate is LIBOR plus 2.0%. Under the base rate option the applicable rate is the
prime rate plus 1.0%. All borrowings under the Credit Agreement at January 1,
2005 bear interest at the LIBOR option, which was effectively 4.6%.
Assuming interest rates and borrowing levels in place on January 1, 2005 do not
change, the Company's total annual interest expense would be approximately $42.3
million. A 10% increase in interest rates would increase total annual interest
expense, and decrease pretax income and cash flows by approximately $4.2
million.
For further information regarding the Company's indebtedness, see Part II, Item
7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 5 to the accompanying consolidated financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements
Page
----
26 Report of Independent Registered Public Accounting Firm
27 Consolidated Statements of Income
28 Consolidated Balance Sheets
29 Consolidated Statements of Cash Flows
30 Consolidated Statements of Shareholder's Equity and
Comprehensive Income
31 Notes to Consolidated Financial Statements
All schedules, for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted because
they are not applicable, not required or the information has been furnished
elsewhere.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholder and Directors of Roundy's, Inc.:
We have audited the accompanying consolidated balance sheets of Roundy's, Inc.
and its subsidiaries as of January 1, 2005 and January 3, 2004 and the related
consolidated statements of income, cash flows and shareholder's equity and
comprehensive income for the fiscal years ended January 1, 2005 and January 3,
2004 and the period from June 7, 2002 to December 28, 2002 (Successor) and the
period from December 30, 2001 to June 6, 2002 (Predecessor). 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management and
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 consolidated financial position of
Roundy's, Inc. and subsidiaries at January 1, 2005 and January 3, 2004 and the
consolidated results of their operations and their cash flows for the fiscal
years ended January 1, 2005 and January 3, 2004 and the period from June 7, 2002
to December 28, 2002 (Successor) and the period from December 30, 2001 to June
6, 2002 (Predecessor) in conformity with U.S. generally accepted accounting
principles.
Ernst & Young LLP
Milwaukee, Wisconsin
February 24, 2005,
except for Note 13
as to which the date
is March 10, 2005
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
Successor Predecessor
------------------------------------------------------ -----------------
Year Ended
--------------------------------- June 7, 2002 to December 30, 2001
January 1, 2005 January 3, 2004 December 28, 2002 to June 6, 2002
--------------- --------------- ----------------- -----------------
Revenues:
Net sales and service fees $4,774,170 $ 4,348,220 $ 2,063,454 $ 1,549,867
Other - net 3,154 2,188 1,207 694
---------- ----------- -------------- -------------
4,777,324 4,350,408 2,064,661 1,550,561
---------- ----------- -------------- -------------
Costs and Expenses:
Cost of sales 3,742,491 3,466,316 1,694,946 1,274,424
Operating and administration 885,415 746,569 314,897 236,631
SARs and other termination costs 7,400
Interest:
Interest expense 41,422 42,294 19,413 6,144
Amortization of deferred
financing costs 2,678 3,279 1,602 969
Interest rate swap
termination costs 6,652
----------- ---------- ------------ --------------
4,672,006 4,258,458 2,030,858 1,532,220
----------- ---------- ------------ --------------
Income Before Income Taxes 105,318 91,950 33,803 18,341
Provision for Income Taxes 44,724 37,302 13,345 7,413
---------- ----------- -------------- -------------
Net Income $ 60,594 $ 54,648 $ 20,458 $ 10,928
========== =========== ============== =============
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
January 1, January 3,
Assets 2005 2004
--------- ----------
Current Assets:
Cash and cash equivalents $ 105,741 $ 90,006
Notes and accounts receivable, less allowance for
losses of $3,406 and $5,012, respectively 58,121 81,929
Merchandise inventories 257,847 251,888
Prepaid expenses 14,029 12,429
Deferred income tax benefits 16,387 17,745
---------- ----------
Total current assets 452,125 453,997
---------- -----------
Property and Equipment - Net 343,226 320,149
Other Assets:
Deferred income tax benefits 4,523 28,161
Notes receivable 1,781 2,877
Other assets - net 77,092 85,211
Goodwill 692,607 639,995
--------- ----------
Total other assets 776,003 756,244
--------- ----------
Total assets $1,571,354 $1,530,390
========== ==========
Liabilities and Shareholder's Equity
Current Liabilities:
Accounts payable $ 297,197 $ 296,733
Accrued expenses 112,136 129,499
Current maturities of long-term debt and capital
lease obligations 4,565 4,229
Income taxes 9,875 11,782
---------- ----------
Total current liabilities 423,773 442,243
---------- ----------
Long-Term Debt and Capital Lease Obligations 596,113 597,750
Other Liabilities 101,268 100,791
---------- ----------
Total liabilities 1,121,154 1,140,784
---------- ----------
Commitments and Contingencies
Shareholder's Equity:
Common stock (1,500 shares authorized, 1,000
issued and outstanding at $.01 par value)
Additional paid-in capital 314,500 314,500
Retained earnings 135,700 75,106
---------- ----------
Total shareholder's equity 450,200 389,606
---------- ----------
Total liabilities and shareholder's equity $1,571,354 $1,530,390
========== ==========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Successor Predecessor
---------------------------------------------- -----------------
Year Ended
-----------------------
January 1, January 3, June 7, 2002 to December 30, 2001
2005 2004 December 28, 2002 to June 6, 2002
----------- ---------- ----------------- -----------------
Cash Flows From Operating Activities:
Net income $ 60,594 $ 54,648 $ 20,458 $ 10,928
Adjustments to reconcile net income to net cash
flows provided by operating activities:
Depreciation and amortization, including
deferred financing costs 67,360 52,878 32,588 18,670
Loss(gain) on sale of property, equipment
and other assets (1,179) 211 215 41
Deferred income taxes 15,625 8,249 (1,323) (2,268)
Changes in operating assets and liabilities
net of the effect of business
acquisitions:
Notes and accounts receivable 23,808 6,821 (5,615) (7,079)
Merchandise inventories 834 6,244 (12,349) 13,767
Prepaid expenses (1,470) (2,250) 252 1,743
Other assets 77 3,327 (992) (1,371)
Accounts payable 195 46,187 24,911 (27,541)
Accrued expenses (17,099) (3,414) 20,737 18,062
Income taxes 13,509 (9,204) (2,063) 19,731
Other liabilities 1,761 (4,182) (281) 161
---------- --------- ----------- -----------
Net cash flows provided by operating activities 164,015 159,515 76,538 44,844
---------- --------- ----------- -----------
Cash Flows From Investing Activities:
Capital expenditures (90,414) (57,654) (22,654) (10,642)
Proceeds from sale of property, equipment and
other assets 4,577 1,554 352 478
Acquisition of Roundy's, net of cash acquired (543,679)
Payment for business acquisitions, net of
cash acquired (61,782) (148,529) (40,631)
Decrease in notes receivable, net 1,096 646 1,109 879
---------- --------- ----------- -----------
Net cash flows used in investing activities (146,523) (203,983) (605,503) (9,285)
--------- ------------- ----------- -----------
Cash Flows From Financing Activities:
Proceeds from long-term borrowings 3,000 549,625
Interest rate swap termination payment (6,652)
Payments of debt (4,340) (4,203) (166,772) (48,618)
Debt issuance costs (417) (1,101) (21,958)
Contributed capital 314,500
Common stock purchased (56)
----------- -------- ----------- ----------
Net cash flows (used in) provided by
financing activities (1,757) (5,304) 668,743 (48,674)
----------- --------- ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 15,735 (49,772) 139,778 (13,115)
Cash And Cash Equivalents, Beginning Of Period 90,006 139,778 45,516
---------- --------- ----------- -----------
Cash And Cash Equivalents, End Of Period $ 105,741 $ 90,006 $ 139,778 $ 32,401
========== ========= =========== ===========
Supplemental Cash Flow Information:
Cash Paid During The Year For:
Interest $ 41,912 $ 44,910 $ 25,103 $ 6,351
Income taxes 15,588 38,302 8,596 1,872
Supplemental Noncash Financing Activities:
Interest rate swap, net of tax 374
Capital lease liabilities assumed as a result of
business acquisitions 43,355
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY AND COMPREHENSIVE INCOME
For the years ended January 1, 2005 and January 3, 2004, the period from June 7,
2002 to December 28, 2002 and the period from December 30, 2001 to June 6, 2002
(Dollars in thousands)
Common Stock
-------------------------------------- Patronage Accumulated
Class A Class B Dividends Additional Other
--------------- --------------------- Payable in Paid-in Comprehensive Retaine
Shares Amount Shares Amount Common Stock Capital Loss Earnings
------ ----- ---------- -------- ------------ ------- ------------- --------
Predecessor Company
Balance, December 29, 2001 10,100 $ 12 1,102,221 $ 1,378 $ 5,950 $45,754 $(8,667) $144,393
Net income 10,928
Interest rate swap (net of tax) (374)
Common stock issued 35,115 44 (5,950) 5,898
Common stock purchased (200) (285) (1) (14) (34)
Tax benefit of options 7,222
------ ---- --------- ------- ------- ------- --------- --------
Balance, June 6, 2002 9,900 $ 12 1,137,051 $ 1,421 $ $58,860 $(9,041) $155,287
====== ==== ========= ======= ======= ======= ======= ========
Treasury Stock
Balance, June 6, 2002 and December 29, 2001 145,615 $18,328
======= =======
Additional
Paid-in Retained
Capital Earnings
Successor Company ---------- --------
- -----------------
Balance, June 6, 2002
Capital contribution $314,500
Net income $20,458
--------- -------
Balance, December 28, 2002 314,500 20,458
--------- -------
Net income 54,648
--------- -------
Balance, January 3, 2004 314,500 75,106
--------- -------
Net income 60,594
--------- --------
Balance January 1, 2005 $314,500 $135,700
======== ========
Successor Predecessor
--------------------------------------------------------- -------------------
Year Ended Year Ended June 7, 2002 to December 30, 2001
January 1, 2005 January 3, 2004 December 28, 2002 to June 6, 2002
--------------- --------------- ----------------- ------------------
Comprehensive Income:
Net income $ 60,594 $ 54,648 $ 20,458 $ 10,928
Other comprehensive loss-
Interest rate swap (374)
-------- -------- -------- --------
Comprehensive Income $ 60,594 $ 54,648 $ 20,458 $ 10,554
======== ======== ======== ========
See notes to consolidated financial statements.
ROUNDY'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 1, 2005 AND JANUARY 3, 2004, THE PERIOD FROM
JUNE 7, 2002 TO DECEMBER 28, 2002 AND THE PERIOD FROM DECEMBER 30, 2001 TO
JUNE 6, 2002
1. TRANSACTIONS
Transactions - On June 6, 2002, all of the issued and outstanding capital stock
of Roundy's, Inc. ("Roundy's" or the "Company") was purchased by Roundy's
Acquisition Corp. ("RAC") from its former owners. This purchase is referred to
throughout these financial statements as the "Transactions."
RAC is a corporation formed at the direction of Willis Stein for the purposes of
acquiring Roundy's. 89% of RAC's common and preferred stock is owned by
investment funds controlled by Willis Stein (the "Willis Stein Funds") and
certain associated equity investors. The remaining RAC common and preferred
stock is owned by certain members of Roundy's management. The Transactions and
related financing transactions consisted of the following:
o the purchase by the equity investors of preferred and common stock of RAC for
approximately $314.5 million in cash;
o the borrowing by Roundy's of $250.0 million under a term loan;
o the rollover of approximately $13.9 million of capital leases;
o the offering of $225.0 million in aggregate principal amount of notes
described in Note 5;
o the acquisition of all of the issued and outstanding capital stock of Roundy's
by RAC, resulting in Roundy's becoming a wholly owned subsidiary of RAC, and
the payment of the acquisition consideration in connection therewith and the
payment of related fees and expenses.
Purchase Accounting - The acquisition of Roundy's was accounted for as a
purchase. As a result, all financial statements for periods subsequent to June
6, 2002, the date the Transactions were consummated, reflect the new reporting
entity after adjustment of the carrying value of assets and liabilities to their
fair values as of June 7, 2002.
Predecessor/Successor - For purposes of the financial statement presentation set
forth herein, the Predecessor Company refers to the Company prior to the
consummation of the Transactions and Successor Company refers to the Company
after the consummation of the Transactions.
Allocation of Purchase Price - The total purchase price was allocated to the
tangible and intangible assets and liabilities acquired in amounts equivalent to
their respective fair values as of the closing date of the Transactions based
upon third party valuations and Company analyses.
The allocation of the net purchase price to the fair value of net assets
acquired is as follows (in thousands):
Inventories $ 233,311
Other current assets 91,424
Property and equipment 209,818
Other assets 66,019
Goodwill 542,999
Deferred income tax benefits 54,289
---------
1,197,860
---------
Accounts payable and other current liabilities 369,866
Other liabilities 97,212
Long-term debt 187,103
---------
654,181
----------
Total consideration, net of cash acquired $ 543,679
==========
Exit Liabilities - Prior to June 6, 2002, new management began to formulate
plans to exit certain business operations which included the involuntary
termination of employees and the closing of certain facilities. In conjunction
with such plans, the Company recorded an estimated liability of approximately
$55 million, which was included in current and long-term liabilities. This
liability included approximately $38 million for future lease costs and
approximately $17 million for pension, employee termination and other related
costs. As of January 1, 2005, after the completion of the closure of the
Southern Division, the Company had substantially executed its closure plans and
its only remaining liabilities relate to future estimated lease costs. The
Company recognized combined revenues from the Southern Division of approximately
$141.2 million, $229.4 million, $135.2 million and $92.2 million for Fiscal
2004, Fiscal 2003, the period from June 7, 2002 to December 28, 2002 and the
period from December 30, 2001 to June 6, 2002, respectively.
The unaudited pro-forma results of operations reflect the Transactions as if it
had occurred at the beginning of the period presented: (in thousands)
For the Year Ended
December 28, 2002
------------------
Net sales and service fees $3,613,321
Net income 33,922
Pro-forma results are not necessarily indicative of what would have occurred had
the Transactions been consummated as of the beginning of the period. Pro forma
results include additional depreciation and the amortization of intangible
assets resulting from the Transactions and additional interest expense as if the
funds borrowed in connection with the Transactions had been outstanding from the
beginning of the period. The above pro-forma results also include an assumption
to exclude nonrecurring costs related to the Transactions totaling $9.1 million,
net of tax, consisting of expenses related to the SARs, other termination costs,
write-off of deferred financing costs and interest rate swap termination costs.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying financial statements include the
accounts of Roundy's and its subsidiaries, all of which are wholly owned. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Business Description - The Company and its subsidiaries sell and distribute food
and nonfood products that are typically found in supermarkets primarily located
in the Midwest. The Company has two segments - retail and wholesale. The
Company's retail segment sells directly to the consumer. Company-owned retail
grocery stores are operated primarily under the Pick xn Save, Copps and Rainbow
banners. The Company's wholesale operations sell and distribute a broad range of
food and non-food products to Company-owned retail stores; licensed Pick xn Save
locations; and independent food retailers located principally in Wisconsin and
elsewhere in the Midwest.
Fiscal Year - The Company's fiscal year is the 52 or 53 week period ending on
the Saturday nearest to December 31. The year ended January 1, 2005 ("Fiscal
2004") included 52 weeks, the year ended January 3, 2004 ("Fiscal 2003")
included 53 weeks and the year ended December 28, 2002, including the
Predecessor and Successor periods, ("Fiscal 2002") included 52 weeks.
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. On an ongoing basis, management reviews
its estimates, including those related to allowances for doubtful accounts and
notes receivable, valuation of inventories, self-insurance reserves, closed
facilities reserves, purchase accounting estimates, useful lives for
depreciation and amortization, valuation allowances for deferred income tax
assets and litigation based on currently available information. Changes in facts
and circumstances may result in revised estimates and actual results could
differ from those estimates.
Revenue Recognition - Retail revenues are recognized at the point of sale.
Wholesale revenues are recognized, net of any estimated returns and allowances,
when product is shipped.
Discounts and Promotional Allowances - Purchases of product at discounted
pricing are recorded in inventory at the discounted price
until sold. Volume and other program allowances are accrued as a receivable when
it is reasonably assured they will be earned and reduce the cost of the related
inventory for product on hand or cost of sales for product already sold. Vendor
monies received for new product slotting are initially deferred and recognized
as a reduction to cost of sales after completion of an estimated new product
slotting cycle of approximately nine months at which time the Company has fully
performed its obligation. Vendor allowances received to fund advertising and
certain other expenses are recorded as a reduction of the Company's expense or
expenditure for such related advertising or other expense if such vendor
allowances reimburse the Company for specific, identifiable and incremental
costs incurred by the Company in selling the vendor's product. Any excess
reimbursement over the Company's cost is classified as a reduction to cost of
sales.
Costs and Expenses - Cost of sales includes product costs and inbound freight.
Operating and administrative expenses consist primarily of personnel costs,
sales and marketing expenses, warehousing costs and distribution costs, the
internal costs of purchasing, receiving and inspecting products for resale,
depreciation and amortization expenses, expenses associated with the Company's
facilities, internal management expenses, business development expenses, and
expenses for finance, legal, human resources and other administrative
departments. Interest expense includes interest on the Company's outstanding
indebtedness, amortization of deferred financing costs and interest rate swap
costs. The Company classifies shipping and handling costs as an operating and
administrative expense which totaled $46.8 million, $45.3 million, $24.9 million
and $16.7 million, for Fiscal 2004, Fiscal 2003, the period from June 7, 2002 to
December 28, 2002 and the period from December 30, 2001 to June 6, 2002,
respectively.
Advertising Expense - The Company expenses advertising costs as
incurred. Advertising expenses totaled $34.3 million, $21.0 million, $7.4
million and $4.9 million, for Fiscal 2004, Fiscal 2003, the period from June 7,
2002 to December 28, 2002 and the period from December 30, 2001 to June 6, 2002,
respectively.
Pre-Opening Costs - The costs associated with opening new and remodeled stores
are expensed as incurred.
Income Taxes - The Company is included in the federal and state income tax
returns of RAC. The provision for federal and state income tax is computed as if
the Company filed separate tax returns. The Company provides for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes," which requires an asset and liability approach to
financial accounting and reporting for income taxes. Deferred income tax assets
and liabilities are computed for differences between the financial statement and
tax bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income.
Cash Equivalents - The Company considers all highly liquid investments with
maturities of three months or less when acquired to be cash equivalents. These
investments are carried at cost, which approximates market.
Fair Value of Financial Instruments - The Company's financial instruments
consist primarily of cash, cash equivalents, accounts and notes receivable,
accounts payable, accrued liabilities and long-term debt. The carrying amounts
for cash, cash equivalents, accounts and notes receivable, accounts payable and
accrued liabilities approximate their fair values. Based on the borrowing rates
currently available to the Company for long-term debt with similar terms and
maturities, the fair value of long-term debt, including current maturities, is
approximately $629.2 million and $620.3 million as of January 1, 2005 and
January 3, 2004, respectively.
Accounts Receivable - The Company is exposed to credit risk with respect to
accounts receivable, although it is generally limited. The Company continually
monitors its receivables with customers by reviewing, among other things, credit
terms, collateral and guarantees. The Company evaluates the collectibility of
accounts receivable based on a combination of factors, namely aging and
historical trends. An allowance for doubtful accounts is recorded based on the
customer's ability and likelihood to pay based on management's review of the
facts.
Inventories - Inventories are recorded at the lower of cost or market. Cost is
calculated on a first-in-first-out and last-in-first-out basis (LIFO) for
approximately 67.4% and 32.6%; and 73.2% and 26.8% of the Company's inventories
at January 1, 2005 and January 3, 2004, respectively. The LIFO reserve was $3.9
million and $2.1 million at January 1, 2005 and January 3, 2004,
respectively.
Property and Equipment - Property and equipment are stated at cost
and are depreciated on the straight-line method for financial reporting purposes
and by use of accelerated methods for income tax purposes. Depreciation and
amortization of property and equipment are expensed over their estimated useful
lives, which are generally 39 years for buildings and three to ten years for
equipment. Leasehold improvements and property under capital leases are
amortized over the lesser of the useful life of the asset or the term of the
lease.
Leases - The Company assesses leases as either operating leases or capital
leases at the inception of each lease. Operating leases with increasing rate
rents are accounted for in accordance with Financial Accounting Standards Board
Technical Bulletin 85-3 and the lease expense is recognized on a straight-line
basis over the term of the lease. Leasehold improvements are amortized over the
lesser of the useful life of the asset or over periods that coincide with the
terms over which lease expense is recognized.
Long Lived Assets - The Company annually considers whether indicators of
impairment of long-lived assets held for use (including favorable lease rights)
are present and determines if such indicators are present whether the sum of the
estimated undiscounted future cash flow attributed to such assets is less than
their carrying amounts. The Company evaluated the ongoing value of its property
and equipment and other long-lived assets on January 1, 2005 and January 3, 2004
and concluded there were no significant indicators of impairment.
Supply Contracts - Supply contracts are being amortized over the life of the
related contracts of approximately five years.
Deferred Financing Costs - Deferred financing costs are being amortized over the
life of the related debt.
Goodwill - Goodwill represents the excess of cost over the fair value of net
assets of businesses acquired. In June 2001, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 142, "Goodwill and Other Intangible Assets,"
which the Company adopted on December 30, 2001. Pursuant to SFAS No. 142, the
carrying value of goodwill and intangible assets with indefinite useful lives
are evaluated for impairment on an annual basis. The Company completed the
transitional impairment test as of the adoption date and the annual impairment
review for 2004 and 2003 as of June 30 of each year and concluded there was no
impairment of goodwill.
Trademarks - Trademarks, which have indefinite lives, are not amortized but are
evaluated annually for impairment in accordance with SFAS No. 142.
Closed Facilities Reserve - When a facility is closed, the remaining net book
value of the property, net of expected salvage value, is charged to operations.
For properties under lease agreements, the present value of any remaining future
liability under the lease, net of expected sublease recovery, is also expensed
at the time use of the property is discontinued. The amounts charged to
operating and administrative expenses for the period from December 30, 2001 to
June 6, 2002 for the present value of these remaining future liabilities
approximated $1.0 million. The closed facility reserve was $57.4 million and
$62.6 million at January 1, 2005 and January 3, 2004, respectively.
Related Parties - During the period from December 30, 2001 to June 6, 2002 the
Company had wholesale sales to retailers who were stockholders of the Company
prior to the Transactions in the amounts of $283.2 million. In addition, the
Company received sublease payments from retailers who were stockholders of the
Company prior to the Transactions of $3.0 million for the period from
December 30, 2001 to June 6, 2002.
Concentrations of Risk - Certain of the Company's employees are covered by
collective bargaining agreements. The Company currently participates in 30 union
contracts covering approximately 41% of its employees. Of these contracts, one
contract expires in August 2005. The remaining 29 contracts expire in 2006
through 2009. The Company believes that its relationships with its employees are
good; therefore, the Company does not anticipate difficulty in renegotiating
these contracts.
Reclassifications - Certain amounts previously reported have been reclassified
to conform to the current presentation.
The 2004 and prior financial statements, after the following reclassification,
reflect the distinction between manufacturer's paper coupons and electronic
coupon programs negotiated between the Company and the manufacturer, based on
the guidance of EITF 03-10, "Application of Issue No. 02-16 by Resellers to
Sales Incentives Offered to Consumers by Manufacturers" ("EITF 03-10"). Pursuant
to EITF 03-10, reimbursements from manufacturers for the Company's electronic
coupon programs should be reflected as a reduction of cost of sales.
Accordingly, $46.4 million, $32.9 million, $13.1 million and $9.6 million have
been reflected as reductions to net sales and service fees and cost of sales for
Fiscal 2004, Fiscal 2003, for the period from June 7, 2002 to December 28, 2002,
and the period from December 30, 2001 to June 6, 2002, respectively, to reflect
such a presentation.
3. ACQUISITIONS
On October 23, 2002, the Company acquired the assets of four licensed Pick 'n
Save stores located in and around the greater Milwaukee, Wisconsin metropolitan
area from entities owned by Robert S. Gold ("Gold's") for $26.0 million in cash
plus the value of certain acquired inventory. The operating results of Gold's
are included in the consolidated statements of income after the acquisition
date. Goodwill of approximately $21.0 million resulted from the acquisition
which was accounted for as a purchase.
On December 18, 2002, the Company acquired three Rainbow stores from the Fleming
Companies, Inc. for $10.0 million plus the value of certain acquired inventory.
All of the stores are located in southeastern Wisconsin. The stores were closed
for remodeling upon acquisition and reopened in Fiscal 2003. Goodwill of $1.5
million resulted from the acquisition which was accounted for as a purchase.
In November 2002, the Company entered into a definitive agreement to acquire the
capital stock of Prescott's Supermarkets, Inc. ("Prescott's") for approximately
$47.8 million (the "Prescott's Acquisition"). Prescott's primarily owned and
operated seven licensed Pick 'n Save stores located in the Wisconsin cities of
Fond du Lac (three stores), Oshkosh (two stores) and West Bend (two stores).
Goodwill of approximately $44.6 million resulted from the acquisition, which was
accounted for as a purchase. The transaction closed on January 21, 2003 and the
operating results of the Prescott's Acquisition are included in the consolidated
statements of income after this date.
In April 2003, the Company acquired seven Kohl's grocery stores in the Madison,
Wisconsin area from A&P for approximately $20.0 million in cash (the "Copps
Madison Acquisition"). Goodwill of approximately $16.0 million resulted from the
acquisition, which was accounted for as a purchase. In May 2003, the Company
converted six stores to Copps stores and consolidated the volume of the seventh
store into an existing Company-owned Copps store. The Company established a
closed store reserve of $9.9 million for such store in connection with the
purchase. These six new Copps stores opened in late May and early June 2003.
In June 2003, the Company acquired 32 Rainbow stores from Fleming. The Company
paid approximately $107.9 million, net of the sale transaction discussed below,
consisting of (i) $64.5 million in cash and (ii) the assumption of $43.4 million
of capitalized leases. The Company sold one store located outside the
Minneapolis-St. Paul metropolitan area (located near Wausau, Wisconsin) to an
independent licensed Pick 'n Save operator in the area. Collectively these
transactions are referred to throughout these financial statements as the
"Rainbow Minneapolis Acquisition." Goodwill of approximately $15.3 million
resulted from the acquisition, which was accounted for as a purchase. The
Rainbow Minneapolis Acquisition closed on a rolling schedule from June 7 to June
27, 2003 and the operating results of each acquired store are included in the
consolidated statements of income after each store's respective opening date.
On October 17, 2003, the Company completed the acquisition of the equipment,
fixtures and leasehold interests of seven former Kohl's grocery stores from A&P
for approximately $9.0 million plus the assumption of an estimated $3.7 million
closed store liability (the "Kohl's Acquisition"). Six of these stores are
located in the Milwaukee area while the seventh store is located in the Racine,
Wisconsin area. The Company reopened two of these stores in 2003 and five of the
stores in 2004. All seven of these stores reopened under the Pick 'n Save
banner. Goodwill of approximately $3.1 million resulted from the acquisition
which was accounted for as a purchase.
On September 27, 2004, the Company acquired the inventory, equipment, fixtures
and leasehold improvements of seven licensed Pick 'n Save stores from McAdams,
Inc. for approximately $61.8 million (the "McAdams Acquisition"). All of these
stores were located in the Milwaukee area. Goodwill of approximately $54.5
million resulted from the acquisition, which was accounted for as a purchase.
The operating results of these stores are included in the consolidated
statements of income after the acquisition date. The consolidated financial
statements reflect the preliminary allocation of the purchase price to the
assets acquired and liabilities assumed based on their fair values.
The pro forma effect of the October 2002 and subsequent acquisitions was not
material.
4. PROPERTY AND EQUIPMENT AND OTHER ASSETS
Property, equipment and other assets, which are recorded at cost, consisted of
the following (in thousands):
January 1, January 3,
Property and Equipment 2005 2004
- ---------------------- ---------- ----------
Land $ 11,563 $ 14,258
Buildings 68,160 73,804
Equipment 269,320 205,833
Property under capital leases 46,930 42,060
Leasehold improvements 68,708 52,985
-------- --------
464,681 388,940
Less accumulated depreciation and
amortization 121,455 68,791
-------- --------
Property and equipment, net $343,226 $320,149
======== ========
Depreciation expense for property and equipment, including amortization of
property under capital leases, was $58.9 million, $42.8 million, $26.9 million
and $17.6 million for Fiscal 2004, Fiscal 2003, the period from June 7, 2002 to
December 28, 2002 and the period from December 30, 2001 to June 6, 2002,
respectively.
January 1, 2005 January 3, 2004
Other Assets ----------------------------- ------------------------------
- ------------ Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
-------- ------------ ------ ------- ----------- --------
Supply contracts $ 26,167 $ 15,047 $11,120 $ 33,716 $ 9,866 $23,850
Trademarks 23,760 23,760 23,760 23,760
Deferred financing costs 23,485 7,559 15,926 23,068 4,881 18,187
Favorable lease rights 5,000 631 4,369 5,000 279 4,721
Assets held for sale 17,749 17,749 10,237 10,237
Other assets 5,203 1,035 4,168 5,195 739 4,456
-------- -------- ------- -------- ------- -------
Total other assets 101,364 $ 24,272 $77,092 $100,976 $15,765 $85,211
======== ======== ======= ======== ======= =======
Amortization expense (including deferred financing costs) was $8.5 million,
$10.1 million, $5.7 million and $1.1 million for Fiscal 2004, Fiscal 2003, the
period from June 7, 2002 to December 28, 2002 and the period from December 30,
2001 to June 6, 2002, respectively.
Amortization of other assets, excluding trademarks which have indefinite lives,
will be approximately, $7.3 million in 2005, $7.2 million in 2006, $6.0 million
in 2007, $3.1 million in 2008 and $2.3 million in 2009.
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
January 1, January 3,
2005 2004
--------- -----------
Bank term loan $243,750 $246,250
Subordinated notes, net of unamortized discount of $294 and
$333, respectively 299,706 299,667
Capital lease obligations, 7.55% to 11.0%, due 2005 to 2020 54,251 55,939
Other long-term debt 2,971 123
-------- ---------
600,678 601,979
Current maturities 4,565 4,229
-------- ---------
Total long-term debt, less current maturities $596,113 $ 597,750
======== =========
On June 6, 2002, the Company entered into a credit agreement with various
lenders (the "Credit Agreement") which provides the Company with an aggregate
credit facility of $375 million. The Credit Agreement provides for a $125
million revolving loan commitment, $20 million of which is available for letters
of credit, and a $250 million term loan. The revolving loan commitment and the
term loan bear interest based upon LIBOR and prime rate options. Under the LIBOR
option the applicable rate is LIBOR plus 2.0% for the term loan and LIBOR plus
2.25% for the revolving loan. Under the base rate option the applicable rate is
prime plus 1.0% for the term loan and prime plus 1.25% for the revolving loan.
All borrowings under the term loan at January 1, 2005, bear interest at the
LIBOR option which was effectively 4.6%. There were no outstanding borrowings on
the revolving loan at January 1, 2005. Commitment fees of 0.65% accrue on the
unutilized portion of the revolving loan when 50% or less of the revolving loan
is utilized (0.40% at any other time).
The revolving loan matures June 2007. The term loan is repayable in installments
of $625,000 through June 30, 2008 followed by four quarterly payments of
$58,750,000 through June 30, 2009.
Voluntary prepayments of principal outstanding under the term and revolving
loans are permitted at any time without premium or penalty, upon proper notice
as defined. In addition, the Company is required to prepay amounts outstanding
under the Credit Agreement in the event of certain issuances of equity, issuance
of additional indebtedness, asset dispositions or in the event of excess levels
of cash flow, all as defined in the Credit Agreement.
The loans and obligations under the Credit Agreement are guaranteed by RAC and
each of the Company's direct and indirect present and future domestic
subsidiaries. The Credit Agreement is also secured by substantially all tangible
and intangible assets of the Company as well as a pledge of its stock and that
of all its domestic subsidiaries.
The Credit Agreement contains various restrictive covenants which: (i) prohibit
the Company from prepaying other indebtedness, (ii) require it to maintain
specified financial ratios, such as (a) a minimum fixed charge coverage ratio,
(b) a maximum ratio of senior debt to EBITDA, and (c) a maximum ratio of total
debt to EBITDA; and (iii) requires it to satisfy financial condition tests
including limitations on capital expenditures. In addition, the Credit Agreement
prohibits the Company from declaring or paying any dividends and prohibits it
from making any payments with respect to the Notes as defined below, if the
Company fails to perform its obligations under or fails to meet the conditions
of the Credit Agreement or if payment creates a default under the Credit
Agreement.
On January 1, 2005, the Company had approximately $109.0 million of unused
borrowing capacity under the revolving loan commitment after the issuance of
$16.0 million of letters of credit.
The Company also has $300 million of 8 7/8% Senior Subordinated Notes
outstanding at January 1, 2005 which mature June 15, 2012 (the "Notes"). The
Notes are general unsecured obligations of the Company and are subordinated in
right of payment to all existing and future senior debt of the Company. Interest
is payable semi-annually in arrears on June 15 and December 15. The Notes are
guaranteed on a joint and several basis by all of the Company's domestic
subsidiaries.
At any time prior to June 15, 2005, the Company may, on any one or more
occasions, redeem up to 35% of the aggregate principal amount of Notes at a
redemption price of 108.875% of the principal amount, plus accrued and unpaid
interest and liquidated damages, if any, to the redemption date, with the net
cash proceeds of one or more equity offerings. After June 15, 2007, the Company
may redeem all or a part of the Notes at redemption prices of 104.438% in 2007,
102.958% in 2008, 101.479% in 2009, and at 100% of the principal amount
thereafter.
Upon a change in control, as defined, the Notes holders may require the Company
to repurchase all of the Notes in cash at 101% of aggregate principal amounts
plus accrued and unpaid interest and liquidated damages.
The indenture governing the Notes, among other things, (i) restricts the
Company's ability and the ability of its subsidiaries to incur additional
indebtedness, issue shares of preferred stock, incur liens, pay dividends or
make certain other restricted payments and enter into certain transactions with
affiliates; (ii) prohibits certain restrictions on the ability of certain of its
subsidiaries to pay dividends or make certain payments to it; and (iii) places
restrictions on the Company's ability and the ability of its subsidiaries to
merge or consolidate with any other person or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its assets.
At January 1, 2005, the Company and its subsidiaries were in compliance with the
financial covenants of all of its indebtedness, including obligations under the
Credit Agreement and the Notes.
Prior to June 6, 2002, the Company had a swap agreement which fixed the rate on
$60.0 million of borrowings under the old revolving loan commitment. The fair
value of the Company's interest rate swap, based on the net cost to settle the
transaction at December 29, 2001, was approximately $3.4 million, net of tax of
$2.6 million and was recorded as a liability and accumulated other comprehensive
loss in the Company's consolidated balance sheet. The fair value of the interest
rate swap was $3.8 million, net of tax of $2.9 million, at June 6, 2002.
Accordingly the increase in the fair value of the interest rate swap (the net
cost to settle the transaction) was reflected as an additional other
comprehensive loss during the period December 30, 2001 to June 6, 2002.
Concurrent with the Transactions, the interest rate swap was terminated and the
related debt and the interest rate swap were paid off. As a result, the Company
expensed the interest rate swap termination cost of $6.7 million during the
period from December 30, 2001 to June 6, 2002.
Repayment of principal on long-term debt outstanding is as follows (in
thousands):
2005 $ 4,565
2006 4,725
2007 4,943
2008 121,519
2009 120,611
Thereafter 344,609
--------
600,972
Less unamortized discount (294)
--------
$600,678
========
6. EMPLOYEE BENEFIT PLANS
Substantially all non-union employees of the Company and employees of its
subsidiaries are covered by defined benefit pension plans. Prior to January 1,
2005, benefits are based on either years of service and the employee's highest
compensation during five of the most recent ten years of employment or on stated
amounts for each year of service. Effective January 1, 2005, the Company amended
the benefit formula in its retirement plans to provide a pension benefit equal
to 1% of a participant's annual compensation for each year of service after
January 1, 2005. For all service prior to January 1, 2005 the pension benefit
will be calculated based on the old formula. The Company intends to annually
contribute only the minimum contributions required by applicable regulations.
The benefit obligation and related assets under all plans have been measured as
of December 31, 2004 and 2003, the plans' measurement dates. The following
tables set forth pension obligations and plan assets information (in thousands):
Year Ended
---------------------------------
January 1, 2005 January 3, 2004
--------------- ---------------
Change in projected benefit obligation:
Projected Benefit Obligation-Beginning of Period $ 124,360 $ 111,545
Service cost 7,014 6,549
Interest cost 7,828 7,068
Actuarial loss 8,256 2,335
Benefits paid (3,639) (3,137)
--------- --------
Projected Benefit Obligation-End of Period $ 143,819 $ 124,360
========== ==========
Change in plan assets:
Fair Value-Beginning of Period $ 69,526 $ 54,933
Actual return on plan assets 6,577 12,186
Company contribution 16,956 5,544
Benefits paid (3,639) (3,137)
---------- ----------
Fair Value-End of Period $ 89,420 $ 69,526
=========== ==========
Funded status:
As of period-end $ (54,399) $ (54,834)
Unrecognized cost - actuarial and investment
losses, net 12,089 4,016
---------- ----------
Accrued benefit cost $ (42,310) $ (50,818)
========== ==========
Year Ended
---------------------------------- June 7, 2002 to December 30, 2001
January 1, 2005 January 3, 2004 December 28, 2002 to June 6, 2002
--------------- -------------- ---------------- ----------------
The components of pension cost are as follows:
Service cost $ 7,014 $ 6,549 $ 3,778 $ 2,306
Interest cost on projected benefit
obligation 7,828 7,068 3,851 2,719
Expected return on plan assets (6,351) (5,039) (3,007) (2,286)
Net amortization and deferral:
Unrecognized net (gain) loss (42) (45) 341
Unrecognized prior service cost 100
Unrecognized net asset (5)
-------- -------- -------- --------
Net pension cost $ 8,449 $ 8,533 $ 4,622 $ 3,175
======== ======== ======== ========
Year Ended
----------------------------------- June 7, 2002 to December 30, 2001
January 1, 2005 January 3, 2004 December 28, 2002 to June 6, 2002
--------------- --------------- ---------------- -----------------
The weighted-average assumptions used
to determine net periodic benefit
costs were as follows:
Discount rate 6.25% 6.50% 6.50% 7.25%
Rate of increase in compensation
levels 4.00% 4.00% 4.00% 4.00%
Expected long-term rate of
return on plan assets 8.50% 9.00% 9.00% 9.00%
January 1, 2005 January 3, 2004
-------------- ---------------
The weighted-average assumptions used to
determine the benefit obligation at
year-end were as follows:
Discount rate 6.00% 6.25%
Rate of increase in compensation levels 4.00% 4.00%
For future periods, the expected long-term rate of return on plan assets is
8.5%.
The return on plan assets reflects the weighted-average of the expected
long-term rates of return for the broad categories of investments held in the
plan. The expected long-term rate of return is adjusted when there are
fundamental changes in expected returns on the plan investments.
The asset allocation for the Company's pension plans as of January 1, 2005,
January 3, 2004 and the target allocation for 2005, by asset category, follow.
Target Allocation
for 2005 January 1, 2005 January 3, 2004
----------------- -------------- --------------
Equity securities 70% 73% 74%
Fixed income securities 30% 27% 26%
---- ---- ----
Total 100% 100% 100%
==== ==== ====
The Company has an administrative committee that oversees the investment of the
assets of the plans and has created a target allocation investment policy for
the assets as noted above.
The reduction in the discount rate in 2004 resulted in an increase of $5.6
million in the projected benefit obligation and is expected to result in an
increase in pension expense for 2005 of approximately $0.4 million. The
reduction in the discount rate in 2003 resulted in an increase of $5.1 million
in the projected benefit obligation.
The plans' accumulated benefit obligation as of January 1, 2005 and January 3,
2004 was $121.2 million and $104.1 million, respectively.
The following benefit payments, which reflect expected future costs, are
expected to be paid during the years ended December 31: (in thousands)
Estimated future
benefit payments
----------------
2005 $ 3,738
2006 3,926
2007 4,367
2008 4,835
2009 5,350
2010 - 2014 38,673
-------
$60,889
=======
The Company's estimated 2005 minimum required contributions to its defined
benefit pension plans are approximately $4.6 million. Due to uncertainties
regarding significant assumptions involved in estimating future required
contributions to its defined benefit pension plans, such as interest rate
levels, the amount and timing of asset returns and the impact of proposed
legislation, the Company is not able to reasonably estimate its future required
contributions beyond 2005.
The Company and its subsidiaries also participate in various multi-employer
plans which provide defined benefits to employees under collective bargaining
agreements. Amounts charged to pension expense for such plans were $11.1
million, $8.0 million, $3.8 million and $2.8 million for Fiscal 2004, Fiscal
2003, the period from June 7, 2002 to December 28, 2002 and the period from
December 30, 2001 to June 6, 2002, respectively. The Company has a defined
contribution plan covering substantially all salaried and hourly employees not
covered by collective bargaining agreements. Also, the Company has a defined
contribution plan covering certain hourly employees covered by a number of
collective bargaining agreements. Total expense for the Company's defined
contribution plans was $4.4 million, $4.0 million, $1.9 million and $1.3 million
for Fiscal 2004, Fiscal 2003, the period from June 7, 2002 to December 28, 2002
and the period from December 30, 2001 to June 6, 2002, respectively.
7. INCOME TAXES
The provision (benefit) for income taxes consisted of the following (in
thousands):
Successor Predecessor
--------------------------------------------------- -----------------
Year Ended
--------------------------
January 1, January 3, June 7, 2002 to December 30, 2001
Current income tax provision: 2005 2004 December 28, 2002 to June 6, 2002
---------- --------- ----------------- ----------------
Federal $ 18,723 $ 21,298 $ 11,990 $ 7,670
State 10,376 7,755 2,678 2,011
--------- -------- --------- --------
Total Current 29,099 29,053 14,668 9,681
Deferred income tax provision:
Federal 14,578 8,062 (1,158) (1,959)
State 1,047 187 (165) (309)
--------- -------- --------- --------
Total Deferred 15,625 8,249 (1,323) (2,268)
--------- -------- --------- --------
Total $ 44,724 $ 37,302 $ 13,345 $ 7,413
========= ======== ========= ========
Federal income tax at the statutory rate of 35% for Fiscal 2004, Fiscal 2003,
the period from June 7, 2002 to December 28, 2002 and the period from December
30, 2001 to June 6, 2002 and income tax expense as reported are reconciled as
follows (in thousands):
Successor Predecessor
--------------------------------------------- ---------------
Year Ended
-------------------------
January 1, January 3, June 7, 2002 to December 30, 2001
2005 2004 December 28, 2002 to June 6, 2002
---------- ---------- ----------------- ----------------
Federal income tax at statutory rate $ 36,862 $ 32,183 $ 11,831 $ 6,419
State income taxes, net of federal tax benefits 7,273 4,848 1,576 998
Other-net 589 271 (62) (4)
-------- -------- --------- --------
Income tax expense $ 44,724 $ 37,302 $ 13,345 $ 7,413
======== ======== ========= ========
The approximated tax effects of temporary differences as of January 1, 2005 and
January 3, 2004 are as follows (in thousands):
January 1, 2005 January 3, 2004
------------------------------------------- --------------------------------------------
Assets Liabilities Total Assets Liabilities Total
-------- ----------- -------- --------- ----------- ---------
Allowance for
doubtful accounts $ 1,377 $ 1,377 $ 2,003 $ 2,003
Inventories 2,903 $ (6,540) (3,637) 2,809 $ (2,397) 412
Employee benefits 14,863 14,863 13,845 13,845
Accrued expenses
not currently
deductible 4,162 (378) 3,784 3,231 (1,746) 1,485
-------- -------- -------- -------- --------- ---------
Total current 23,305 (6,918) 16,387 21,888 (4,143) 17,745
-------- -------- -------- -------- --------- ---------
Depreciation and
amortization 636 (39,138) (38,502) (31,683) (31,683)
Employee benefit 16,933 16,933 21,325 21,325
Accrued expenses
not currently
deductible 24,086 24,086 36,745 (53) 36,692
Net operating loss
carryforwards 2,006 2,006 1,827 1,827
-------- -------- -------- -------- --------- ---------
Total noncurrent 43,661 (39,138) 4,523 59,897 (31,736) 28,161
-------- -------- -------- -------- --------- ---------
Total $ 66,966 $(46,056) $ 20,910 $ 81,785 $ (35,879) $ 45,906
======== ======== ======== ======== ========= =========
Management believes that it is more likely than not that the net current and
long-term deferred tax assets will be realized through the reduction of future
taxable income. Significant factors considered by management in its
determination include the historical operating results of the Company and
expectations of future earnings. As of January 1, 2005, the Company has state
net operating loss carryforwards of approximately $42 million which are due to
expire beginning 2015. Of the state net operating losses, $22 million is subject
to an annual limitation of approximately $5 million under state regulations
similar to Section 382 of the Internal Revenue Code of 1986, as amended.
8. LEASE OBLIGATIONS AND CONTINGENT LIABILITIES
Rent expense and related subleasing income under operating leases are as follows
(in thousands):
Rent Expense
----------------------------- Subleasing
Period Minimum Contingent Income
- ------ ----------- ---------- --------
Fiscal 2004 $64,827 $1,040 $20,017
Fiscal 2003 49,540 271 17,418
June 7, 2002 to December 28, 2002 24,606 108 12,058
December 30, 2001 to June 6, 2002 17,974 592 9,625
In addition, many of the store leases obligate the Company to pay real estate
taxes, insurance and maintenance costs, and contain multiple renewal options,
exercisable at the Company's option, that generally range from one additional
five-year period to four additional five-year periods. Those items are not
included in the rent expense listed above.
Contingent rentals may be paid under certain store leases on the basis of the
store's sales in excess of stipulated amounts.
Future minimum rental payments under long-term leases, assuming the exercise of
certain lease extension options, are as follows at January 1, 2005
(in thousands):
Operating Capitalized Sublease
Leases Leases Income
--------- ----------- --------
2005 $ 75,718 $ 6,399 $ 16,069
2006 76,275 6,430 15,356
2007 75,022 6,486 13,654
2008 73,111 6,605 11,593
2009 69,743 6,709 8,532
Thereafter 679,201 61,495 35,932
---------- -------- --------
Total $1,049,070 94,124 $101,136
========== ========
Amount representing interest 39,873
--------
Present value of net minimum lease payments 54,251
Current portion 1,844
--------
Long-term portion $ 52,407
========
Of the operating lease commitments disclosed above, approximately $39.4 million
has been accrued for in the closed facility reserve at January 1, 2005.
Sublease income to be received relates primarily to subletting of retail store
locations, for which the Company is the primary obligor, to third party retail
operators typically supplied by the Company's wholesale operations.
Assets under capital leases, consisting of retail store sites, had a net book
value of $41.8 million, net of accumulated amortization of $5.1 million, at
January 1, 2005 and $39.9 million, net of accumulated amortization of $2.2
million, at January 3, 2004. The January 1, 2005 balance reflects the final
purchase price allocation to assets under capital leases acquired as part of the
Rainbow Minneapolis Acquisition.
The Company is involved in various claims and litigation arising in the normal
course of business. In the opinion of management, the ultimate resolution of
these actions will not materially affect the consolidated financial position,
results of operations or cash flows of the Company.
The Company has guaranteed a customer lease amounting to $0.2 million at January
1, 2005. As the Company does not expect to pay such amount, nothing was accrued
at January 1, 2005.
9. SHAREHOLDER'S EQUITY
The Predecessor Company adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," but applied Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its plans. If
the Predecessor Company had elected to recognize compensation cost for the plan
based on the fair value of the options at the grant dates, consistent with the
method prescribed by SFAS No. 123, pro-forma net income for the period from
December 30, 2001 to June 6, 2002 would have decreased by less than $100,000.
SAR holders of the Predecessor Company were entitled, upon exercise of a SAR, to
receive cash in an amount equal to the excess of the fair market value per share
of the Company's common stock as of the date on which the SAR is exercised over
the base price of the SAR. With the change in control of the Company, SARs
previously granted and not exercised became exercisable, and were exercised on
June 6, 2002 and resulted in $5.2 million of expense recorded in the period from
December 30, 2001 to June 6, 2002.
10. SEGMENT REPORTING
The Company and its subsidiaries sell and distribute food and nonfood products
that are typically found in supermarkets primarily located in the Midwest. The
Company has two reportable segments - wholesale and retail. The Company's retail
segment sells directly to the consumer while the wholesale distribution segment
sells to both Company-owned and independent retail food stores. The accounting
policies of the reportable segments are the same as those described in Note 2.
In 2004, 2003 and 2002, no customer accounted for over 10% of net sales and
service fees.
Eliminations represent the activity between wholesale and Company-owned retail
stores. Inter-segment revenues are recorded at amounts consistent with those
charged to independent retail stores.
Identifiable assets are those used exclusively by that reportable segment.
Corporate assets are principally cash and cash equivalents, supply contracts,
trademarks, deferred financing costs, and certain property and equipment.
Reportable segments, as defined by SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information," are components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision-maker in deciding resource allocation and assessing
performance.
(In thousands)
Successor Predecessor
--------------------------------------------------------- --------------
Year Ended
--------------------------------------- June 7, 2002 to December 30, 2001
January 1, 2005 January 3, 2004 December 28, 2002 to June 6, 2002
--------------- --------------- ----------------- -----------------
NET SALES AND SERVICE FEES
Retail $ 3,011,308 $2,424,488 $ 929,745 $ 636,806
Wholesale 3,376,055 3,319,927 1,692,699 1,303,335
Eliminations (1,613,193) (1,396,195) (558,990) (390,274)
----------- ---------- ----------- -----------
Consolidated $ 4,774,170 $4,348,220 $ 2,063,454 $ 1,549,867
=========== ========== =========== ===========
INCOME BEFORE INCOME TAXES
Retail $ 74,275 $ 64,479 $ 26,125 $ 16,168
Wholesale 110,066 99,215 39,814 28,959
Corporate (79,023) (71,744) (32,136) (26,786)
----------- ---------- ----------- -----------
Consolidated $ 105,318 $ 91,950 $ 33,803 $ 18,341
=========== ========== =========== ===========
DEPRECIATION AND AMORTIZATION
Retail $ 42,945 $ 27,534 $ 12,980 $ 9,105
Wholesa 5,607 6,121 5,505 4,405
Corpora 18,808 19,223 14,103 5,160
----------- ---------- ----------- -----------
Consoli $ 67,360 $ 52,878 $ 32,588 $ 18,670
=========== ========== =========== ===========
INTEREST (excluding amortization
of deferred financing costs)
Retail $ 19,897 $ 18,529 $ 6,543 $ 6,132
Wholesale 3,660 2,171 1,342 2,146
Corporate 17,865 21,594 11,528 4,518
----------- ---------- ----------- -----------
Consolidated $ 41,422 $ 42,294 $ 19,413 $ 12,796
=========== ========== =========== ===========
CAPITAL EXPENDITURES
Retail $ 61,284 $ 37,420 $ 13,031 $ 5,273
Wholesale 6,830 5,494 4,581 1,426
Corporate 22,300 14,740 5,042 3,943
----------- ---------- ----------- -----------
Consolidated $ 90,414 $ 57,654 $ 22,654 $ 10,642
=========== ========== =========== ===========
IDENTIFIABLE ASSETS (at year-end)
Retail $ 747,972 $ 711,933
Wholesale 595,455 613,335
Corporate 227,927 205,152
----------- ----------
Consolidated $ 1,571,354 $1,530,390
=========== ==========
GOODWILL (at year-end)
Retail $ 345,618 $ 319,052
Wholesale 346,989 320,943
----------- ----------
Consolidated $ 692,607 $ 639,995
=========== ==========
11. ASSET VALUATION ALLOWANCES
Allowance for losses consists of the following (in thousands):
Additions
Charged Recoveries
Balance at (Credited) to Balance
Beginning to (Deductions at End
Description of Period Expenses From) Reserve of Period
- ---------------------------------- ---------- --------- ------------- ---------
January 1, 2005:
Current receivables $5,012 (1,023) (583) $3,406
January 3, 2004:
Current receivables $5,577 (428) (137) $5,012
Notes receivable, long-term $1,475 (1,475)
June 7, 2002 to December 28, 2002:
Current receivables $6,292 (1,193) 478 $ 5,577
Notes receivable, long-term $1,300 175 $ 1,475
December 30, 2001 to June 6, 2002:
Current receivables $7,021 (701) (28) $ 6,292
Notes receivable, long-term $1,300 $ 1,300
Deductions from the reserve represent accounts written off, less recoveries.
12. CONDENSED CONSOLIDATING INFORMATION
The following presents condensed consolidating financial statements of Roundy's
and its subsidiaries. All subsidiaries are 100% owned by Roundy's. All of the
domestic subsidiaries are guarantors of the Notes. The accounting policies for
all entities are consistent with those previously described herein.
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the Year Ended January 1, 2005 (Successor)
(In thousands)
Combined
Roundy's Subsidiaries Eliminations Total
---------- ------------ ------------ ----------
Revenues:
Net sales and service fees $1,653,173 $4,132,804 $(1,011,807) $4,774,170
Other-net 1,653 1,501 3,154
---------- ---------- ----------- ----------
1,654,826 4,134,305 (1,011,807) 4,777,324
---------- ---------- ----------- ----------
Costs and Expenses:
Cost of sales 1,507,206 3,228,215 (992,930) 3,742,491
Operating and administrativ 144,265 760,027 (18,877) 885,415
Interest expense 19,029 25,071 44,100
---------- ---------- ----------- ----------
1,670,500 4,013,313 (1,011,807) 4,672,006
---------- ---------- ----------- ----------
Income Before Income Taxes (15,674) 120,992 105,318
Provision for Income Taxes 13,089 31,635 44,724
Equity in earnings of subsidiaries 89,357 (89,357)
---------- ---------- ----------- ----------
Net Income $ 60,594 $ 89,357 $ (89,357) $ 60,594
========== ========== =========== ==========
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the Year Ended January 3, 2004 (Successor)
(In thousands)
Combined
Roundy's Subsidiaries Eliminations Total
---------- ------------ ------------ ----------
Revenues:
Net sales and service fees $1,665,138 $3,596,852 $(913,770) $4,348,220
Other-net 942 1,246 2,188
---------- ---------- --------- ----------
1,666,080 3,598,098 (913,770) 4,350,408
---------- ---------- --------- ----------
Costs and Expenses:
Cost of sales 1,494,713 2,866,832 (895,229) 3,466,316
Operating and administrative 138,357 626,753 (18,541) 746,569
Interest expense 22,290 23,283 45,573
---------- ---------- --------- ----------
1,655,360 3,516,868 (913,770) 4,258,458
---------- ---------- -------- ----------
Income Before Income Taxes 10,720 81,230 91,950
Provision for Income Taxes 8,565 28,737 37,302
Equity in earnings of subsidiarie 52,493 (52,493)
---------- ---------- --------- ----------
Net Income $ 54,648 $ 52,493 $ (52,493) $ 54,648
========== ========== ========= ==========
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
June 7, 2002 to December 28, 2002 (Successor)
(In thousands)
Combined
Roundy's Subsidiaries Eliminations Total
--------- ------------ ------------ -----------
Revenues:
Net sales and service fees $ 867,590 $1,572,084 $(376,220) $2,063,454
Other-net 327 880 1,207
--------- ---------- -------- ----------
867,917 1,572,964 (376,220) 2,064,661
--------- ---------- --------- ----------
Costs and Expenses:
Cost of sales 787,902 1,275,864 (368,820) 1,694,946
Operating and administrative 56,630 265,667 (7,400) 314,897
Interest 11,011 10,004 21,015
--------- ---------- -------- ----------
855,543 1,551,535 (376,220) 2,030,858
--------- ---------- --------- ----------
Income Before Income Taxes 12,374 21,429 33,803
Provision for Income Taxes 4,885 8,460 13,345
Equity in earnings of subsidiaries 12,969 (12,969)
--------- ---------- --------- ----------
Net Income $ 20,458 $ 12,969 $ (12,969) $ 20,458
========= ========== ========= ==========
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
December 30, 2001 to June 6, 2002 (Predecessor)
(In thousands)
Combined
Roundy's Subsidiaries Eliminations Total
---------- ------------ ------------ ----------
Revenues:
Net sales and service fees $ 642,969 $1,183,843 $(276,945) $1,549,867
Other-net (51) 745 694
---------- ---------- --------- ----------
642,918 1,184,588 (276,945) 1,550,561
---------- ---------- --------- ----------
Costs and Expenses:
Cost of sales 583,559 962,442 (271,577) 1,274,424
Operating and administrative 49,874 192,125 (5,368) 236,631
SARs and other termination costs 7,400 7,400
Interest 6,498 7,267 13,765
---------- ---------- --------- ----------
647,331 1,161,834 (276,945) 1,532,220
---------- ---------- --------- ----------
Income (Loss) Before Income Taxes (4,413) 22,754 18,341
Provision (Benefit) for Income Taxes (1,783) 9,196 7,413
Equity in earnings of subsidiaries 13,558 (13,558)
---------- ---------- --------- ----------
Net Income $ 10,928 $ 13,558 $ (13,558) $ 10,928
========== ========== ========= ==========
CONDENSED CONSOLIDATING BALANCE SHEETS
As of January 1, 2005 (Successor)
(In thousands)
Combined
Assets Roundy's Subsidiaries Eliminations Total
------------ ------------ ------------ -----
Current Assets:
Cash and cash equivalents $ 70,941 $ 34,800 $ 105,741
Notes and accounts receivable-ne 19,253 42,217 $ (3,349) 58,121
Merchandise inventories 61,960 195,887 257,847
Prepaid expenses 5,642 8,387 14,029
Deferred income tax benefits 1,773 14,614 16,387
----------- ----------- ----------- -----------
Total current assets 159,569 295,905 (3,349) 452,125
----------- ----------- ----------- -----------
Property and Equipment-Net 35,227 307,999 343,226
Other Assets:
Investment in subsidiaries 397,943 (397,943)
Intercompany receivables 395,532 (395,532)
Deferred income tax benefi 4,523 4,523
Notes receivable 341 1,440 1,781
Goodwill and other assets 248,871 520,828 769,699
----------- ----------- ----------- -----------
Total other assets 1,047,210 522,268 (793,475) 776,003
----------- ----------- ----------- -----------
Total assets $ 1,242,006 $ 1,126,172 $ (796,824) $ 1,571,354
=========== =========== =========== ===========
Liabilities and Shareholder's Equity
Current Liabilities:
Accounts payable $ 150,012 $ 148,112 $ (927) $ 297,197
Accrued expenses 63,945 50,613 (2,422) 112,136
Current maturities of long-term debt
and capital lease obligations 2,665 1,900 4,565
Intercompany payable 395,532 (395,532)
Income taxes 9,875 9,875
----------- ----------- ----------- -----------
Total current liabilities 226,497 596,157 (398,881) 423,773
----------- ----------- ----------- -----------
Long-Term Debt and Capital Lease Obligations 543,686 52,427 596,113
Other Liabilities 21,623 79,645 101,268
----------- ----------- ----------- -----------
Total liabilities 791,806 728,229 (398,881) 1,121,154
Shareholder's Equity 450,200 397,943 (397,943) 450,200
----------- ----------- ----------- -----------
Total liabilities and shareholder's equity $ 1,242,006 $ 1,126,172 $ (796,824) $ 1,571,354
=========== =========== =========== ===========
CONDENSED CONSOLIDATING BALANCE SHEETS
As of January 3, 2004 (Successor)
(In thousands)
Combined
Assets Roundy's Subsidiaries Eliminations Total
------------ ------------ ------------ -----
Current Assets:
Cash and cash equivalents $ 49,059 $ 40,947 $ 90,006
Notes and accounts receivable-net 33,129 59,004 $ (10,204) 81,929
Merchandise inventories 53,363 198,525 251,888
Prepaid expenses 4,532 7,897 12,429
Deferred income tax benefits (3,160) 20,905 17,745
---------- ---------- --------- ----------
Total current assets 136,923 327,278 (10,204) 453,997
---------- ---------- --------- ----------
Property and Equipment-Net 19,784 300,365 320,149
Other Assets:
Investment in subsidiaries 249,422 (249,422)
Intercompany receivables 476,528 (476,528)
Deferred income tax benefits 28,161 28,161
Notes receivable 615 2,262 2,877
Goodwill and other assets 266,722 458,484 725,206
---------- ---------- --------- ---------
Total other assets 1,021,448 460,746 (725,950) 756,244
---------- ---------- --------- ----------
Total assets $1,178,155 $1,088,389 $(736,154) $1,530,390
========== ========== ========= ==========
Liabilities and Shareholder's Equity
Current Liabilities:
Accounts payable $ 150,376 $ 154,087 $ (7,730) $ 296,733
Accrued expenses 60,387 71,586 (2,474) 129,499
Current maturities of long-term debt and
capital lease obligations 2,500 1,729 4,229
Intercompany payable 476,528 (476,528)
Income taxes 12,221 (439) 11,782
---------- ---------- ---------- ----------
Total current liabilities 225,484 703,491 (486,732) 442,243
---------- ---------- ---------- ----------
Long-Term Debt and Capital Lease Obligations 543,417 54,333 597,750
Other Liabilities 19,648 81,143 100,791
---------- ---------- ---------- ----------
Total liabilities 788,549 838,967 (486,732) 1,140,784
Shareholder's Equity 389,606 249,422 (249,422) 389,606
---------- ---------- ---------- ----------
Total liabilities and shareholder's equity $1,178,155 $1,088,389 $ (736,154) $1,530,390
========== ========== ========== ==========
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Year Ended January 1, 2005 (Successor)
(In thousands)
Combined
Roundy's Subsidiaries Total
--------- ------------ ---------
Net Cash Flows Provided by (Used in) Operating Activities $(27,154) $ 191,169 $ 164,015
-------- --------- ---------
Cash Flows From Investing Activities:
Capital expenditures-net of proceeds (20,534) (65,303) (85,837)
Payment for business acquisitions net of cash acquired (61,782) (61,782)
Other 146 950 1,096
-------- --------- ---------
Net cash flows used in investing activities (20,388) (126,135) (146,523)
-------- --------- ---------
Cash Flows From Financing Activities:
Proceeds from long-term borrowings 3,000 3,000
Payments of debt (2,605) (1,735) (4,340)
Common stock purchased, sold and debt issuance costs (417) (417)
Intercompany receivables-net 69,446 (69,446)
-------- --------- ----------
Net cash flows (used in) provided by financing activities 69,424 (71,181) (1,757)
-------- --------- ---------
Net Increase in Cash and Cash Equivalents 21,882 (6,147) 15,735
Cash And Cash Equivalents, Beginning Of Year 49,059 40,947 90,006
-------- --------- ---------
Cash And Cash Equivalents, End Of Year $ 70,941 $ 34,800 $ 105,741
======== ========= =========
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the year ended January 3, 2004 (Successor)
(In thousands)
Combined
Roundy's Subsidiaries Total
---------- ------------ ---------
Net Cash Flows Provided by Operating Activities $ 30,479 $ 129,036 $ 159,515
Cash Flows From Investing Activities: ---------- --------- ---------
Capital expenditures-net of proceeds (12,764) (43,336) (56,100)
Payment for business acquisitions net of cash acquired (148,529) (148,529)
Notes receivable 25 621 646
--------- --------- ---------
Net cash flows used in investing activities (161,268) (42,715) (203,983)
--------- --------- ---------
Cash Flows From Financing Activities:
Payments of debt (3,125) (1,078) (4,203)
Debt issuance costs (1,101) (1,101)
Contributed capital
Intercompany receivables-net 66,767 (66,767)
--------- --------- ----------
Net cash flows (used in) provided by financing activities 62,541 (67,845) (5,304)
--------- --------- ---------
Net Decrease in Cash and Cash Equivalents (68,248) 18,476 (49,772)
Cash And Cash Equivalents, Beginning Of Period 117,307 22,471 139,778
--------- --------- ---------
Cash And Cash Equivalents, End Of Period $ 49,059 $ 40,947 $ 90,006
========= ========= =========
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the period from June 7, 2002 to December 28, 2002 (Successor)
(In thousands)
Combined
Roundy's Subsidiaries Total
---------- ------------ ---------
Net Cash Flows Provided by (used in) Operating Activities $ (34,276) $ 110,814 $ 76,538
Cash Flows From Investing Activities: --------- --------- ---------
Capital expenditures-net of proceeds (6,256) (16,046) (22,302)
Acquisition of Roundy's (323,307) (220,372) (543,679)
Payment for business acquisitions net of cash acquired (40,631) (40,631)
Notes receivable 103 1,006 1,109
--------- --------- --------
Net cash flows used in investing activities (370,091) (235,412) (605,503)
--------- --------- ---------
Cash Flows From Financing Activities:
Proceeds from long-term borrowings 549,625 549,625
Interest rate swap termination paymen (6,652) (6,652)
Payments of debt (166,524) (248) (166,772)
Debt issuance costs (21,958) (21,958)
Contributed capital 314,500 314,500
Intercompany receivables-net (147,317) 147,317
--------- --------- ---------
Net cash flows provided by financing activities 521,674 147,069 668,743
--------- --------- ---------
Net Increase in Cash and Cash Equivalents 117,307 22,471 139,778
Cash And Cash Equivalents, Beginning Of Period
--------- --------- ---------
Cash And Cash Equivalents, End Of Period $ 117,307 $ 22,471 $ 139,778
========= ========= =========
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the period from December 30, 2001 to June 6, 2002 (Predecessor)
(In thousands)
Combined
Roundy's Subsidiaries Total
-------- ------------ --------
Net Cash Flows Provided by (Used in) Operating Activities $ (5,495) $ 50,339 $ 44,844
Cash Flows From Investing Activities: -------- -------- --------
Capital expenditures-net of proceeds (4,008) (6,156) (10,164)
Notes receivable 318 561 879
-------- -------- --------
Net cash flows used in investing activities (3,690) (5,595) (9,285)
-------- -------- --------
Cash Flows From Financing Activities:
Payments of debt (48,450) (168) (48,618)
Debt issuance costs (56) (56)
Intercompany receivables-net 39,916 (39,916)
-------- -------- ---------
Net cash flows used in financing activities (8,590) (40,084) (48,674)
-------- -------- --------
Net (Decrease)Increase in Cash and Cash Equivalents (17,775) 4,660 (13,115)
Cash And Cash Equivalents, Beginning Of Period 23,137 22,379 45,516
-------- -------- --------
Cash And Cash Equivalents, End Of Period $ 5,362 $ 27,039 $ 32,401
======== ======== ========
13. SUBSEQUENT EVENTS
On February 24, 2005, the Company signed a definitive agreement to sell (i) two
distribution centers located in Lima, Ohio and Westville, Indiana and the
related operations of these distribution centers and (ii) two retail stores
located in Ohio to Nash Finch for approximately $226 million in cash, subject to
certain post closing adjustments. The closing of the transaction is subject to
customary conditions, including governmental approvals. The transaction is
expected to close within thirty to sixty days from the date of the asset
purchase agreement. The Company recognized combined revenues from these two
distribution centers of approximately $941.4 million, $918.2 million, $534.1
million and $362.1 million in Fiscal 2004, Fiscal 2003, the period from June 7,
2002 to December 28, 2002 and the period from December 30, 2001 to June 6, 2002,
respectively. The assets to be sold consist primarily of inventory, accounts
receivable, land, buildings and equipment. Upon consummation of the sale, the
Company expects to recognize a gain on the sale of discontinued operations, net
of applicable taxes, and will report such operations as discontinued operations
in the Company's consolidated statements of income.
On March 10, 2005, the Company executed the fourth amendment to its Credit
Agreement. The fourth amendment makes changes to the Credit Agreement necessary
to permit the Company's disposition of assets to Nash Finch, requires the
Company to use $125 million of the proceeds from such asset disposition to repay
a portion of the term loan and allows the Company to reinvest the remaining net
proceeds, increases the annual limitation on capital expenditures to $100
million and clarifies certain provisions regarding the Company's ability to
consummate future acquisitions.
In January 2005 the Company began shipping certain products from its new 1.1
million square foot distribution center in Oconomowoc, Wisconsin. This new
facility will replace the Company's owned and leased facilities in Wauwatosa,
Wisconsin, and will become the primary distribution center for Roundy's retail
operations in southeastern Wisconsin. This new facility will also supply certain
of the Company's independent retailers throughout Wisconsin. The new facility
was necessitated by the growth of the Company's retail operations over the past
several years and positions Roundy's to continue to grow its retail operations
and independent distribution business in the Upper Midwest. The move to the
Oconomowoc distribution center will continue throughout the first quarter of
2005 and the facility will become fully operational in April 2005 when the
Company completes the transition of perishable departments.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer performed an
evaluation of the Company's disclosure controls and procedures, which have been
designed to permit the Company to effectively identify and disclose important
information timely. The Company concluded that the controls and procedures were
effective as of January 1, 2005 to ensure material information was accumulated
and communicated to the Company's management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. During the fourth quarter ended January 1, 2005,
the Company made no change in its internal controls over financial reporting
that materially affected, or is reasonably likely to materially affect, internal
controls over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors and Executive Officers of Roundy's are as follows:
Name Age Position(s) Held with Roundy's
- ---- --- ------------------------------
Robert A. Mariano 54 Chairman of the Board, Chief Executive
Officer and President; Director
Darren W. Karst 45 Executive Vice President and Chief Financial
Officer
John W. Boyle 47 Group Vice President, Information Technology
and Business Process
Ronald Cooper 54 Group Vice President, Sales and Marketing
Gary L. Fryda 52 Group Vice President, Retail Operations,
Customer Satisfaction
Edward G. Kitz 51 Group Vice President, Legal, Risk and
Treasury, Corporate Secretary
Robin S. Michel 50 Group Vice President, Merchandising and
Procurement
Donald S. Rosanova 55 Group Vice President, Supply Chain
Michael J. Schmitt 56 Group Vice President, Wholesale Development
and Real Estate
Colleen J. Stenholt 54 Group Vice President, Human Resources
Jeffrey D. Beyer 37 Director
Ralph W. Drayer 60 Director
J. Landis Martin 59 Director
Avy H. Stein 50 Director
John R. Willis 55 Director
Robert A. Mariano has been the Chairman of the Board, Chief Executive Officer,
President and a director of RAC and Roundy's since June 2002. Mr. Mariano was
self-employed as a consultant from November 1998 through June 2002. Prior to
this, Mr. Mariano served as the President and a Director of Dominick's
Supermarkets, Inc. from March 1995 and Chief Executive Officer from January 1996
until Dominick's sale to Safeway Inc. in 1998. Mr. Mariano also served as Chief
Operating Officer of Dominick's from March 1995 until January 1996. Mr. Mariano
joined Dominick's in 1972.
Darren W. Karst has been the Executive Vice President and Chief Financial
Officer of RAC and Roundy's since June 2002. From 2000 until May 2002, Mr. Karst
served as Executive Vice President and Chief Financial Officer of Alliance
Entertainment Corp., a distributor of music and video products. Mr. Karst served
as Executive Vice President, Finance and Administration of Dominick's from March
1996, and Senior Vice President, Chief Financial Officer, Secretary and a
Director from March 1995 until its sale in 1998. From 1991 to 2002, Mr. Karst
was a partner at The Yucaipa Companies, a private equity investment firm.
John W. Boyle has served as Group Vice President, Information Technology and
Business Process since October 2003. From May 2003 until October 2003 Mr. Boyle
served as Vice President, Business Process Excellence. From May 2002 until May
2003 Mr. Boyle performed independent consulting including seven months at
Roundy's. From 1999 until February 2002 Mr. Boyle held various management
positions at Storage Networks, Inc. Mr. Boyle served as Vice President,
Administration from January 1995 and as Group Vice President, Information
Technology and Store Planning at Dominick's from March 1996 until its sale in
1998. From 1992 until 1995 Mr. Boyle served as Vice President, Information
Technology at Food 4 Less Supermarkets, Inc.
Ronald Cooper has served as Group Vice President Sales and Marketing since
December 2004. Mr. Cooper joined Roundy's in March 2004 and served as Vice
President of Sales Planning and Retail Pricing until December 2004. From 1998
through February 2004, Mr. Cooper served as Vice President of General
Merchandise and Health and Beauty Care for Dominick's. Mr. Cooper served as
Director of Sales and Marketing, Special Promotions and Retail Pricing for
Dominick's from 1992 through 1998. Mr. Cooper had various positions with
Dominick's from 1986 to 1992.
Gary L. Fryda has served as Group Vice President, Retail Operations and Customer
Satisfaction since October 2002. From 2000 to October 2002, Mr. Fryda served as
Vice President of Corporate Retail. From 1987 to 2000, Mr. Fryda served as the
President and Chief Executive Officer of Mega Marts, Inc., which was acquired by
Roundy's in March 2000. From 1986 to 1987, Mr. Fryda worked for Cardinal Foods,
a grocery wholesale and retail company, initially as Vice President and Chief
Operating Officer of Cardinal's retail division and later as President of the
retail division.
Edward G. Kitz has served as Corporate Secretary and Group Vice President Legal,
Risk and Treasury since September 2003 and served as Vice President, Secretary
and Treasurer of Roundy's from 1995 to September 2003. Mr. Kitz joined Roundy's
in 1980 as the Corporate Controller and was promoted to Vice President in 1985.
In 1989, Mr. Kitz assumed the additional responsibilities of Treasurer. Prior to
joining Roundy's, Mr. Kitz was with Deloitte & Touche LLP.
Robin S. Michel has served as Group Vice President, Merchandising and
Procurement since September 2003. From 2002 to September 2003, Ms. Michel served
as Vice President-Merchandising for 7-Eleven, Inc. From 1990 to 2002 Ms. Michel
held various positions at H.E. Butt Grocery Company, most recently as Group Vice
President-Drug Store Procurement & Merchandising. Ms. Michel held various
merchandising positions with The Kroger Company from 1978 to 1990.
Donald S. Rosanova has served as Group Vice President, Supply Chain since
October 2002. Prior to this position, Mr. Rosanova was Vice President of
Operations from 1999 to 2002 with Edward Don & Company, a provider of food
service supplies and equipment. Prior to that, Mr. Rosanova served as Group Vice
President of Operations at Dominick's from 1996 to November 1998 and held
various management positions within Dominick's from 1971 to 1996.
Michael J. Schmitt has served as Group Vice President Wholesale Development and
Real Estate since October 2002. From 1994 to October 2002, Mr. Schmitt served as
Vice President of Sales and Development. Prior to this position, Mr. Schmitt was
the Vice President, North Central Region from 1992 to 1994 and General Manager,
Milwaukee Division from 1990 to 1991. Mr. Schmitt joined Roundy's in 1977.
Colleen J. Stenholt has served as Group Vice President of Human Resources since
October 2002. Prior to this position, Ms. Stenholt was Senior Vice President of
Human Resources from 1996 to 2002 with Metavante, Inc. a subsidiary of M&I
Corporation, a technology solutions company. From 1983 to 1996 she served in
various human resource management roles with Northwestern Mutual and GE Medical
Systems.
Jeffrey D. Beyer has been a director of Roundy's since October 2002. Mr. Beyer
is a Principal at Willis Stein & Partners. Prior to joining Willis Stein in May
2002, Mr. Beyer was a management consultant at the Boston Consulting Group from
1998 to 2002. Prior to joining Boston Consulting Group, Mr. Beyer attended
Stanford University's Graduate School of Business from September 1996 to June
1998, where he received an M.B.A. degree. Mr. Beyer served as Vice President in
the mergers and acquisitions group of Bear Stearns from July 1989 to August
1996.
Ralph W. Drayer has been a director of Roundy's since October 2002. Mr. Drayer
is Founder and Chairman of Supply Chain Insights, LLC, a supply chain strategy
consultancy. Prior to founding Supply Chain Insights, LLC in 2001, Mr. Drayer
was with Procter and Gamble for 32 years from 1962 to 2001. Mr. Drayer held a
number of distribution, logistics, customer service and customer business
development positions with Procter and Gamble, both domestically and
internationally most recently as Vice President-Efficient Customer
Response-Worldwide.
J. Landis Martin has been a director of Roundy's since January 2005. Mr. Martin
has been Chairman and Chief Executive Officer of Titanium Metals Corporation, an
integrated producer of titanium metals since January 1994. Mr. Martin served as
President and Chief Executive Officer of NL Industries, Inc. ("NL") from 1987 to
2003 and as a director from 1986 to 2003. He also serves as director of
Apartment Investment Management Company, Crown Castle International Corporation
(non-executive chairman) and Halliburton Company.
Avy H. Stein has been a director of RAC and Roundy's since June 6, 2002. Mr.
Stein is a Managing Director of Willis Stein & Partners L.P. Prior to the
formation of Willis Stein in 1994, Mr. Stein served as a Managing Director of
CIVC Partners from 1989 to 1994. From 1984 to 1985, Mr. Stein was President of
Cook Energy Corporation and Vice President of Corporate Planning and Legal
Affairs at Cook International, Inc. From 1980 through 1983, Mr. Stein was an
attorney with Kirkland & Ellis. Mr. Stein has also served as a special
consultant for mergers and acquisitions to the Chief Executive Officer of NL and
as the Chief Executive Officer of Regent Corporation. He currently serves as a
director of several companies, including Ziff Davis Media, Inc. and other Willis
Stein portfolio companies.
John R. Willis has been the Vice President and Secretary and a director of RAC
and a director of Roundy's since October, 2002. Mr. Willis is a Managing
Director of Willis Stein Partners L.P. Prior to the formation of Willis Stein in
1994, Mr. Willis served as President and a director of CIVC Partners from 1989
to 1994. In 1988, he founded the Continental Mezzanine Investment Group and was
its manager through 1990. Mr. Willis currently serves as a director of several
companies, including Aavid Thermal Technologies, Inc., Ziff Davis Media, Inc.
and other Willis Stein portfolio companies.
Code of Ethics
The Company has adopted a Code of Business Conduct (the "Code") within the
meaning of the term "Code of Ethics" under Item 406(b) of Regulation S-K. The
Code applies to the Company's principal executive officer, principal financial
officer, principal accounting officer or controller, persons performing similar
functions and all employees. The Code is publicly available on the Company's
website at http://www.roundys.com.
Audit Committee
The Company's Board of Directors has an Audit Committee comprised of Messrs.
Beyer, Drayer and Martin. Mr. Beyer is the Chairman of the Committee. The
Company has identified Messrs. Beyer and Martin as the "financial experts" as
defined by applicable SEC rules. Roundy's has determined that Mr. Beyer is not
"independent" as defined for purposes of the SEC rules because he is a principal
of Willis Stein, the majority owner of RAC, Roundy's parent company. Roundy's
has determined that Messrs. Martin and Drayer are "independent."
ITEM 11. Executive Compensation
The following table shows the compensation for the past three years of the
Company's Chief Executive Officer and the next four most highly compensated
executive officers performing policy-making functions for Roundy's, Inc. The
five individuals named in the table below are collectively referred to as the
"named executive officers":
Annual
Compensation
Salary All Other
Name and Principal Position Year (1) (2) Bonus Compensation(3)
- --------------------------- ---- --------- -------- ---------------
Robert A. Mariano(4) 2004 $650,000 $520,000 $13,437
Chairman, President and 2003 611,539 600,000 9,399
Chief Executive Officer 2002 339,230 348,000 6,862
Darren W. Karst(4) 2004 475,000 380,000 11,562
Executive Vice President and 2003 458,654 450,000 10,134
Chief Financial Officer 2002 254,423 261,000 5,048
Gary L. Fryda 2004 354,757 143,540 13,128
Group Vice President, Retail 2003 348,773 171,238 11,363
Operations and Customer Satisfaction 2002 332,500 79,967 10,449
Robin S. Michel(5) 2004 311,250 126,000 4,483
Group Vice President, Merchandising 2003 92,308 62,500 124
and Procurement 2002
Donald S. Rosanova(6) 2004 308,865 128,000 16,884
Group Vice President, Supply Chain 2003 295,577 145,000 6,427
2002 55,769 36,250
(1) Includes amounts (if any) deferred pursuant to the Company's Deferred
Compensation Plan.
(2) Pursuant to applicable SEC regulations, perquisites and other personal
benefits are omitted because they did not exceed the lesser of either
$50,000 or 10% of the total of salary and bonus.
(3) "All Other Compensation" includes the following:
Company
Life Contributions Deferred
Insurance to Compensation
Name Year Benefit(a) 401(k)Plans Plan (b)
- ------------------- ---- ---------- ------------ ------------
Robert A. Mariano 2004 $13,437
2003 9,399
2002 6,862
Darren W. Karst 2004 5,062 $6,500
2003 4,134 6,000
2002 4,069 979
Gary L. Fryda 2004 5,861 6,500 $767
2003 4,501 6,000 862
2002 4,390 5,500 559
Robin S. Michel 2004 4,483
2003 123
2002
Donald S. Rosanova 2004 11,311 5,573
2003 1,279 5,148
2002
(a) Life Insurance Benefit consists of premiums on term life insurance.
(b) Estimated above-market portion of interest accrued on amounts
deferred under the Company's Deferred Compensation Plan. See
"Deferred Compensation Plan" below. Only Mr. Fryda participated in
the Deferred Compensation Plan during the periods indicated.
(4) Messrs. Mariano and Karst were employed by the Company beginning June 7,
2002.
(5) Ms. Michel's employment by the Company began September 15, 2003.
(6) Mr. Rosanova's employment by the Company began October 21, 2002.
Executive Agreements
- --------------------
Robert A. Mariano. In connection with the Transactions, the Company entered into
an Executive Agreement with Mr. Mariano, which governs the terms of Mr.
Mariano's employment with it. In his Executive Agreement, Mr. Mariano agreed to
serve as the Chairman of the Board, Chief Executive Officer and President until
he resigns or until the Company terminates his employment. While employed by the
Company, Mr. Mariano will receive an annual base salary of $600,000, subject to
increase by the Company's Board of Directors. Mr. Mariano is also eligible for a
bonus of up to 100% of his base salary based upon the achievement of certain
financial goals. In addition, he is entitled to customary benefits for which
senior executives of the Company are generally eligible. Mr. Mariano's
employment will continue until his death or incapacity, termination by the
Company, with or without cause, or his resignation for any reason. His Executive
Agreement provides for an initial term of employment of five years. If Mr.
Mariano's employment is terminated by the Company prior to that time without
cause, or if he resigns with good reason (each as defined in the Executive
Agreement), he will be entitled to one year of his base salary and employee
benefits through the first anniversary of his termination. Mr. Mariano's
Executive Agreement also contains customary noncompetition provisions. Mr.
Mariano's Executive Agreement also provides for the purchase by him of shares of
RAC common stock in exchange for a promissory note. The RAC common stock he
purchased under the Executive Agreement is subject to time vesting provisions,
which will vest ratably over a five year period.
Darren W. Karst. Mr. Karst entered into an Executive Agreement on substantially
similar terms to those contained in Mr. Mariano's Executive Agreement, except
that his base salary is $450,000, subject to increase by the Company's Board of
Directors.
Donald S. Rosanova. The Company has an employment agreement with Mr. Rosanova
which provides for an initial term of three years. The agreement requires Mr.
Rosanova to perform certain services for the Company and provides an annual base
salary of $290,000, subject to increase by the Company's Chief Executive
Officer. If Mr. Rosanova's employment is terminated by the Company prior to that
time without cause, or if he resigns with good reason (each as defined in the
agreement), he will be entitled to one year of his base salary and employee
benefits through the first anniversary of his termination. Mr. Rosanova's
agreement also contains customary noncompetition provisions.
Gary L. Fryda. The Company has an employment agreement with Mr. Fryda, which
expires on April 1, 2005. The agreement requires Mr. Fryda to perform certain
services for the Company and provides Mr. Fryda with an initial base annual
salary of $332,500. Mr. Fryda is also entitled to participate in certain
employee benefit programs, which the Company makes generally available to its
executives from time to time. During the employment period and for a period of
two years after termination of employment (under certain circumstances), Mr.
Fryda agrees not to compete with the Company based on certain terms described in
the agreement.
Life Insurance
- --------------
Each of the executive officers of the Company is covered by $250,000 of
executive equity life insurance. In addition, executives are covered by a group
life carve-out plan in the amount of three times salary, which is in lieu of the
group term life insurance provided to substantially all nonunion employees under
a Company-sponsored plan. In addition, the executive officers of the Company are
covered by an executive disability income insurance wrap-around plan which is in
addition to the disability income insurance provided to substantially all
nonunion employees under a Company-sponsored plan.
Deferred Compensation Plan
- --------------------------
Prior to January 1, 2005 the Company maintained a deferred compensation plan,
applicable to certain officers, to assist those officers in deferring income
until their retirement, death or other termination of employment. Of the named
executive officers, only Mr. Fryda participates in the Deferred Compensation
Plan. Monthly interest is credited to each participant's account based on the
Moody's Long Term Bond Rate in effect on January 1 of each year plus 2%. Upon
death of a participant prior to termination of employment and before any
periodic payments have started, the Company will pay to the participant's
designated beneficiary a pre-retirement death benefit equal to five times the
total aggregate deferral commitment of the participant payable in equal annual
installments over a 10 year period. The Company has purchased life insurance
policies on the lives of the participants to fund its liabilities under the
plan. The Company established a trust to hold assets to be used to pay benefits
under the deferred compensation plan; however, the rights of any particular
beneficiary or estate to benefits under the deferred compensation plan are
solely those of an unsecured creditor of the Company.
Effective January 1, 2005, the Company amended the plan to discontinue future
compensation deferrals by the participants.
Board of Directors Compensation
- -------------------------------
A formal Board compensation policy was adopted on March 18, 2003. Directors who
are employees or principals of Roundy's or Willis Stein will receive no fees for
serving as directors, and other Directors (Messrs. Drayer and Martin) will
receive $30,000 per year, prorated on an annual basis.
Retirement Plan
- ---------------
Prior to January 1, 2005 benefits under the Company's retirement plan are, in
general, an amount equal to 50% of average compensation minus 50% of the
participant's primary Social Security benefit; provided, however, that if the
employee has fewer than 25 years of credited service, the monthly amount so
determined is multiplied by a fraction, the numerator of which is the years of
credited service and the denominator of which is 25. In addition, if credited
service is greater than 25 years, the benefit is increased by one percent of
average compensation for each year of credited service in excess of 25 years to
a maximum of 10 additional years. The following table shows the estimated annual
pensions (before deduction of the Social Security offset described above) that
persons in specified categories would have received if they had retired on
January 1, 2005, at the age of 65:
Average Annual
Compensation Annual Pension After Specified Years of Credited Service
During Last Five --------------------------------------------------------
Completed Calendar Years 10 Years 15 Years 20 Years 25 Years 30 Years 35 Years
- ------------------------ -------- -------- -------- -------- -------- --------
$100,000 $20,000 $30,000 $40,000 $ 50,000 $ 55,000 $ 60,000
125,000 25,000 37,500 50,000 62,500 68,750 75,000
150,000 30,000 45,000 60,000 75,000 82,500 90,000
175,000 35,000 52,500 70,000 87,500 96,250 105,000
200,000 40,000 60,000 80,000 100,000 110,000 120,000
225,000 40,200 60,300 80,400 100,500 110,550 120,600
All of the named executive officers are covered by the Company's retirement
plan. Their average annual compensation would be the combined amount listed
under salary and bonus shown in the Summary Compensation Table. The current
executive officers are subject to a $205,000 annual limit on covered
compensation. The estimated credited years of service for each of the named
executive officers are as follows: Mr. Mariano-3 years; Mr. Karst-3 years;
Mr. Fryda-15 years; Ms. Michel-1 year and Mr. Rosanova-2 years.
Effective January 1, 2005, the Company amended the benefit formula in its
retirement plan to provide a pension benefit equal to 1% of a participant's
annual compensation for each year of service after January 1, 2005. For all
service prior to January 1, 2005, the pension benefit will be calculated based
on the old formula.
Compensation Committee Interlocks and Insider Participation
- ------------------------------------------------------------
The members of the Compensation Committee of the Board of Directors of the
Company are Mssrs. Beyer, Drayer and Stein, all of whom are non-employee
directors of Roundy's. There were no Compensation Committee interlocks or other
relationships during 2004 between the Company's Board of Directors or
Compensation Committee and the board of directors or compensation committee of
any other company.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
All of the common stock of Roundy's is owned by RAC. Set forth below is
information concerning the ownership of RAC common and preferred stock, and the
combined voting power of such stock represented thereby, by (i) each Roundy's
director; (ii) each "named executive officer"; and (iii) all of Roundy's
directors and executive officers as a group.
Combined Voting
RAC Common Stock RAC Preferred Stock Power (1)
------------------------ ----------------------- --------------------------
Amount and Amount and Amount and
Nature of Nature of Nature of
Name of Beneficial Percent of Beneficial Percent of Beneficial Percent of
Beneficial Owner Ownership Class Ownership Class Ownership Class
- --------------------- --------- --------- --------- --------- --------- -------
Willis Stein Entities (2) 95,488.7 100.00% 10,483.3 100.00% 105,972.0 100.00%
Robert A. Mariano 4,460.0 4.67 33.3 0.32 4,493.3 4.24
Darren W. Karst 2,203.3 2.31 13.3 0.13 2,216.7 2.09
Gary L. Fryda 524.2 0.55 524.2 0.49
Robin S. Michel 524.2 0.55 524.2 0.49
Donald S. Rosanova 524.2 0.55 524.2 0.49
Jeffrey D. Beyer
Ralph W. Drayer 150.0 0.16 150.0 0.14
J. Landis Martin 150.0 0.16 150.0 0.14
Avy H. Stein (2) 95,488.7 100.00 10,483.3 100.00 105,972.0 100.00
John R. Willis (2) 95,488.7 100.00 10,483.3 100.00 105,972.0 100.00
All Directors and
Executive Officers
(including two non-
executive officers) of
Roundy's, Inc., (as a
group 17 persons) 95,488.7 100.00 10,483.3 100.00 105,972.0 100.00
(1) Each share of RAC Common Stock and each share of RAC Preferred Stock
has one vote. See "Item 13 Certain Relationships and Related
Transactions - Equity Arrangements." Under the terms of an investor
rights agreement, all of the stockholders of RAC agreed to vote in
favor of those individuals designated by Willis Stein Funds to serve on
the board of directors of RAC and Roundy's, Inc. and the Willis Stein
Funds have the right to appoint a majority of the directors. See "Item
1. BUSINESS - Risk Factors - Principal stockholders may have interests
in conflict with interest of noteholders."
(2) Includes 60,000 shares of common stock (62.83%) and 7,500 shares of
preferred stock (71.54%) held by Willis Stein & Partners III, L.P.,
Willis Stein & Partners Dutch III-A, L.P., Willis Stein & Partners
Dutch III-B, L.P., and Willis Stein & Partners III-C, L.P.
(collectively, the "Willis Stein Entities"). Also includes 35,488.7
shares of common stock and 2,983.3 shares of preferred stock held by
the stockholders executing the investor rights agreement. Such
stockholders have agreed pursuant to the terms of the investor rights
agreement to vote their shares as directed by the Willis Stein Entities
in certain matters. As a result of the foregoing, the Willis Stein
Entities may be deemed to have beneficial ownership with respect to the
shares held by the stockholders executing the investor rights
agreement. The Willis Stein Entities disclaim beneficial ownership of
such shares held by such stockholders. Messrs. John R. Willis and Avy
H. Stein are Managing Directors of each of the ultimate general
partners of the Willis Stein Entities, and, as a result, may be deemed
to have beneficial ownership with respect to the shares held by and
deemed to be beneficially owned by the Willis Stein Entities. Each
disclaims beneficial ownership of such shares held by and deemed to be
beneficially owned by such funds. The address for Willis Stein and
Messrs. Willis and Stein is One North Wacker Drive, Suite 4800,
Chicago, Illinois 60606.
ITEM 13. Certain Relationships and Related Transactions
Equity Arrangements
- -------------------
In connection with the Transactions, Willis Stein, Messrs. Mariano and Karst and
certain other investors purchased shares of common stock and preferred stock of
RAC.
Common Stock - The holders of common stock are entitled to receive dividends out
of legally available funds, payable when, as and if declared by RAC's board of
directors and are entitled to one vote per share held.
Preferred Stock - The holders of preferred stock are entitled to receive
cumulative dividends, accruing on a daily basis at the rate of 12% per annum,
out of legally available funds, payable when, as and if declared by the Board of
Directors. Dividends compound to the extent not paid on any quarterly dividend
payment date. The holders of preferred stock also participate with the holders
of common stock with respect to any other yields or distributions.
In the event of any liquidation, dissolution or winding up of RAC, the holders
of preferred stock will be entitled to receive, in preference to the holders of
common stock, an amount payable in cash equal to the original purchase price for
the preferred stock plus declared and unpaid dividends. Thereafter, holders of
the common stock and the preferred stock will share the remaining net assets of
RAC.
RAC must redeem the preferred stock on September 30, 2012.
In addition, in connection with a change in control transaction or a sale of all
or substantially all of RAC's assets on a consolidated basis upon the request of
the majority of the holders of the preferred stock, the holders of preferred
stock will be entitled to receive an amount payable in cash equal to the
original purchase price for the preferred stock plus declared and unpaid
dividends.
Prior to an initial public offering, upon the request of the holders of a
majority of the preferred stock, the preferred stock will either be redeemed for
cash or converted into shares of common stock.
The holders of preferred stock are entitled to one vote per share held.
Item 14. Principal Accounting Fees and Services
Audit Fees. Fees for professional services provided for Fiscal 2004 and 2003,
were $709,300 and $665,200, respectively. Audit fees consist primarily of the
annual audit and quarterly reviews of the consolidated financial statements,
assistance with and review of documents filed with the SEC, work performed by
tax professionals in connection with the annual audit and quarterly reviews, and
accounting and financial reporting consultation and research work necessary to
comply with generally accepted auditing standards.
Audit-Related Fees. Fees for audit-related professional services provided during
Fiscal 2004 and 2003 were $45,900 and $65,300, respectively. Audit-related fees
consist primarily of audits of the Company's benefit plans (2003) and assistance
with the design and evaluation of controls required by Section 404 of
Sarbanes-Oxley (2004).
Tax Fees. Fees for tax-related professional services provided during Fiscal 2004
and 2003, were $38,200 and $316,600, respectively. Tax fees include professional
services provided for review of tax returns prepared by the Company, deferred
tax analysis, tax provision review, purchase accounting, acquisition matters and
tax advice, exclusive of tax services rendered in connection with the audit.
There were no other fees incurred by the Company during Fiscal 2004 and 2003 for
services provided by the principal accountant. The Company's Board of Directors
appoints the independent auditors and pre-approves the fee arrangements with
respect to the annual audit, quarterly reviews of the Company's Form 10-Q
filings, tax compliance services and other services as required. All of the
services described under audit, audit-related and tax fees have been approved by
the Audit Committee.
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
Included in Item 8 of Part II of this Form 10-K are the following: Report of
Independent Registered Public Accounting Firm, Consolidated Statements of
Income, Consolidated Balance Sheets, Consolidated Statements of Cash Flows,
Consolidated Statements of Shareholder's Equity and Comprehensive Income and
Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules:
Schedules not included have been omitted because they are not applicable, not
required or because the information required is included in the financial
statements or notes thereto.
(b) Exhibits:
The Exhibits filed or incorporated by reference herein are as specified in the
Exhibit Index following the signature page (and accompanying certificates) to
this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf of the undersigned, thereunto duly authorized.
ROUNDY'S, INC.
--------------------------
Registrant
March 25, 2005 By: /s/ROBERT A. MARIANO
- -------------- ----------------------
Robert A. Mariano
Chairman of the Board,
Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 29, 2004.
/s/ROBERT A. MARIANO
- -------------------- Chairman of the Board of
Robert A. Mariano Directors, Chief Executive
Officer and President
(Principal Executive Officer)
/s/DARREN W. KARST
- ------------------ Executive Vice President and
Darren W. Karst Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/JEFFREY D. BEYER Director
- -------------------
Jeffrey /D. Beyer
/s/RALPH W. DRAYER Director
- ------------------
Ralph W. Drayer
/s/J. LANDIS MARTIN Director
- -------------------
J. Landis Martin
/s/AVY H. STEIN Director
- ---------------
Avy H. Stein
/s/JOHN R. WILLIS Director
- -----------------
John R. Willis
SUPPLEMENTAL INFORMATION TO BE
FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d)
OF THE ACT BY REGISTRANTS
WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT
Registrant does not furnish an annual report or proxy-soliciting material to its
security holders.
Roundy's, Inc.
Annual Report on Form 10-K under the Securities
Exchange Act of 1934 for the year ended January 1, 2005
EXHIBIT INDEX
The following exhibits to the Annual Report are filed herewith or, where noted,
are incorporated by reference herein:
Exhibit
No. Description
- ------- -----------
2.1 Stock Purchase Agreement by and among Roundy's, Inc. and the
Shareholders of Prescott's Supermarkets, Inc. dated as of December
10, 2002. (1)
2.2 Asset Purchase Agreement dated October 18, 2002, by and among B&H
Gold Corporation, Gold's, Inc., Gold's Market, Inc., Gold's of
Mequon, LLC, Mega Marts, Inc. and Roundy's, Inc. (2)
2.3 Share Exchange Agreement dated April 8, 2002 by and between
Roundy's Acquisition Corp. and Roundy's, Inc. (3)
2.4 Asset Purchase Agreement dated February 21, 2003 among Roundy's,
Inc., The Copps Corporation, Kohl's Food Stores, Inc. and The
Great Atlantic & Pacific Tea Company, Inc. (4)
2.5 Asset Purchase Agreement dated May 2, 2003, by and between Fleming
Companies, Inc., Rainbow Foods Group, Inc., RBF Corp., and
Roundy's, Inc. (5)
2.6 First Amendment dated June 4, 2003 to Asset Purchase Agreement
dated May 2, 2003 by and between Fleming Companies, Inc., Rainbow
Foods Group, Inc., RBF Corp., and Roundy's, Inc. (6)
2.7 Asset Purchase Agreement dated July 9, 2004 by and between
McAdams, Inc., certain shareholders of McAdams, Inc., Ultra Mart
Foods, Inc. and Roundy's, Inc. (7)
2.8 Asset Purchase Agreement dated as of February 24, 2005 between
Roundy's, Inc. and Nash-Finch Company. Exhibits and schedules are
omitted pursuant to Item 601(b)(2) of Regulation S-K. The exhibits
consist of form ancillary agreements and conveyance documents,
while the schedules contain information relating to the
representations and warranties in the Asset Purchase Agreement.
The Registrant agrees to furnish supplementally any omitted
exhibit or schedule to the United States Securities and Exchange
Commission upon request. [FILED HEREWITH]
3.1 Roundy's, Inc. Amended and Restated Articles of Incorporation. (8)
3.2 Amended and Restated By-Laws of Roundy's, Inc. (9)
4.1 Indenture of Trust dated June 6, 2002 between Roundy's, Inc. and
BNY Midwest Trust Company, as Trustee. (10)
4.2 Form of $225,000,000 Roundy's, Inc. 8 7/8% Senior Subordinated
Notes due 2012. (11)
4.3 Form of $75,000,000 Roundy's, Inc. 8 7/8% Senior Subordinated
Notes due 2012. (11)
4.4 Form of Guaranty issued by Cardinal Foods, Inc., Holt Public
Storage, Inc., Insurance Planners, Inc., I.T.A., Inc., Jondex
Corp., Kee Trans, Inc., Mega Marts, Inc., Midland Grocery of
Michigan, Inc., Pick 'n Save Warehouse Foods, Inc., Ropak, Inc.,
Rindt Enterprises, Inc., Scot Lad Foods, Inc., Scot Lad-Lima,
Inc., Shop-Rite, Inc., Spring Lake Merchandise, Inc., The Copps
Corporation, The Midland Grocery Company, Ultra Mart Foods,
Inc., and Village Market, LLC as Guarantors of the Registrant's
$225,000,000 Roundy's, Inc. 8 7/8% Senior Subordinated Notes due
2012 and $75,000,000 Roundy's, Inc. 8 7/8% Senior
Subordinated Notes due 2012. (12)
10.1 A/B Exchange Registration Rights Agreement dated as of June 6,
2002 by and among Roundy's, Inc. as Issuer, the subsidiary
guarantors of Roundy's, Inc. listed on Schedule A thereto, and
Bear, Stearns & Co. Inc., CIBC World Markets Corp. as Initial
Purchasers. (13)
10.2 A/B Exchange Registration Rights Agreement dated as of
December 17, 2002 by and among Roundy's, Inc. as Issuer, the
subsidiary guarantors of Roundy's, Inc. listed on Schedule A
thereto, and Bear, Stearns & Co. Inc., CIBC World Markets Corp. as
Initial Purchasers. (14)
10.3 $375,000,000 Credit Agreement among Roundy's Acquisition Corp.,
Roundy's, Inc., as Borrower, The Several Lenders from Time to Time
Parties Hereto, Bear Stearns Corporate Lending Inc., as
Administrative Agent, Canadian Imperial Bank of Commerce, as
Syndication Agent Bank One, Wisconsin, Cooperatieve Centrale
Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland", New
York Branch, LaSalle Bank National Association, Associated Bank,
N.A., Harris Trust and Savings Bank, M&I Marshall & Ilsley Bank,
U.S. Bank, National Association, as Documentation
Agents Dated as of June 6, 2002. (15)(16)
10.4 First Amendment to the Credit Agreement, dated as of December 10,
2002, among Roundy's Acquisition Corp., Roundy's Inc., as
Borrower, the several banks, financial institutions and
other entities from time to time parties thereto, Bear Stearns &
Co. Inc., as sole lead arranger and sole bookrunner, Bear Stearns
Corporate Lending Inc., as administrative agent,
Canadian Imperial Bank of Commerce, as syndication agent, and the
institutions listed in the Credit Agreement as documentation
agents. (17)
10.5 Guarantee and Collateral Agreement made by Roundy's Acquisition
Corp., Roundy's, Inc. and certain of its Subsidiaries in favor of
Bear Stearns Corporate Lending Inc., as Administrative Agent Dated
as of June 6, 2002. (18)
10.6 Form of Deferred Compensation Agreement between the Registrant and
certain executive officers including Messrs. Schmitt and Kitz.(19)
10.7 Amendment dated March 31, 1998 to Form of Deferred Compensation
Agreement between the Registrant and certain executive officers
including Messrs. Schmitt and Kitz. (20)
10.8 Second Amendment dated June 3, 1998 to Form of Deferred
Compensation Agreement for certain executive officers including
Messrs. Kitz and Schmitt. (21)
10.9 Directors and Officers Liability and Corporation Reimbursement
Policy issued by American Casualty Company of Reading,
Pennsylvania (CNA Insurance Companies) as of June 13, 1986. (22)
10.10 Employment Agreement dated June 6, 2002 between Registrant and
Robert F. Mariano. (23)
10.11 Employment Agreement dated June 6, 2002 between Registrant and
Darren W. Karst. (24)
10.12 Employment Contract between the Registrant and Gary L. Fryda
dated March 31, 2000. (25)
10.13 Employment Agreement dated December 27, 2002 between Registrant
and Donald S. Rosanova. (26)
10.14 Excerpts from Roundy's, Inc. Board of Directors resolution adopted
March 19, 2002 relating to group term carve-out, executive
extension on COBRA continuation rights and professional
outplacement services for Company Officers, including Messrs.
Fryda, Schmitt and Kitz. (27)
10.15 Confidentiality and Noncompete Agreement dated June 6, 2002
between the Registrant and Gerald F. Lestina. (28)
10.16 Roundy's, Inc. Deferred Compensation Plan Amended and Restated
August 13, 2002. (29)
10.17 Investor Rights Agreement dated June 6, 2002 by and among Roundy's
Acquisition Corp., Willis Stein & Partners III, L.P., Willis Stein
& Partners III-C, L.P., Willis Stein & Partners Dutch III-A, L.P.,
and Willis Stein & Partners Dutch III-B, L.P., the investors
listed on the Schedule of Co-investors, and certain executive
employees of Roundy's, Inc. (30)
10.18 First Amendment dated October 28, 2002 to Investor Rights
Agreement dated June 6, 2002, including form of Transfer Notice
and Joinder Agreement. (31)
10.19 Second Amendment dated May 12, 2003 to $375,000,000 Credit
Agreement dated as of June 6, 2002 among Roundy's Acquisition
Corp., Roundy's Inc., as Borrower, The Several Lenders from Time
to Time Parties Hereto, Bear Stearns Corporate Lending Inc., as
Administrative Agent, Canadian Imperial Bank of Commerce, as
Syndication Agent, Bank One, Wisconsin, Cooperatieve
Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland", New
York Branch, LaSalle Bank National Association, Associated Bank,
N.A., Harris Trust and Savings Bank, M&I Marshall & Ilsley Bank,
U.S. Bank, National Association, as Documentation Agents dated as
of June 6, 2002. (32)
10.20 Third Amendment dated as of March 29, 2004, to $375,000,000 Credit
Agreement dated as of June 6, 2002 and amended as of December 10,
2002 and May 12, 2003 among Roundy's Acquisition Corp., Roundy's,
Inc., as Borrower, the several banks, financial institutions and
other entities from time to time parties thereto, Bear Stearns &
Co., Inc., as sole lead arranger and sole bookrunner, Bear Stearns
Corporate Lending, Inc., as administrative agent, Canadian
Imperial Bank of Commerce, as syndication agent, and the
institutions listed in the Credit Agreement as documentation
agents. (33)
10.21 Fourth Amendment dated as of March 10, 2005, to $375,000,000
Credit Agreement dated as of June 6, 2002 and amended as of
December 10, 2002, May 12, 2003 and March 29, 2004 among
Roundy's Acquisition Corp., Roundy's, Inc., as Borrower, the
several banks, financial institutions and other entities from time
to time parties thereto, Bear Stearns & Co., Inc., as sole lead
arranger and sole bookrunner, Bear Stearns Corporate Lending,
Inc., as administrative agent, Canadian Imperial Bank of Commerce,
as syndication agent, and the institutions listed in the Credit
Agreement as documentation agents. (FILED HEREWITH)
10.22 Net Lease Agreement dated May 19, 2004 between Registrant and
Pabst Farms-RDC, LLC. (34)
21.1 Subsidiaries of the Registrant. [FILED HEREWITH]
31.1 Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. [FILED HEREWITH]
31.2 Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. [FILED HEREWITH]
32.1 Certification of Principal Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. [FILED HEREWITH]
32.2 Certification of Principal Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. [FILED HEREWITH]
- ------
(1) Incorporated by reference to Exhibit 2.1 to Registrant's
Registration Statement on Form S-4 filed on
January 28, 2003 (Commission File No. 333-102779)
(2) Incorporated by reference to Exhibit 2.2 to Registrant's
Registration Statement on Form S-4 filed on
January 28, 2003 (Commission File No. 333-102779)
(3) Incorporated by reference to Exhibit 2.1 to Registrant's
Registration Statement on Form S-4 filed on
August 2, 2002 (Commission File No. 333-97623)
(4) Incorporated by reference to Exhibit 2.5 to Registrant's Quarterly
Report on Form 10-Q for the period ended March 29, 2003 filed with
the Commission on May 9, 2003 (Commission File No. 002-94984)
(5) Incorporated by reference to Exhibit 2.9 to Registrant's Current
Report on Form 8-K filed with the Commission on June 23, 2003
(File No. 002-94984)
(6) Incorporated by reference to Exhibit 2.10 to Registrant's Current
Report on Form 8-K filed with the Commission on June 23, 2003
(File No. 002-94984)
(7) Incorporated by reference to Exhibit 2.7 to Registrant's Quarterly
Report on Form 10-Q for the period ended July 3, 2004, filed with
the Commission on August 13, 2004 (Commission File No. 002-94984)
(8) Incorporated by reference to Exhibit 3.1 to Registrant's
Registration Statement on Form S-4 filed with
the Commission on August 2, 2002 (File No. 333-97623)
(9) Incorporated by reference to Exhibit 3.2 to Registrant's
Registration Statement on Form S-4 filed with
the Commission on August 2, 2002 (File No. 333-97623)
(10) Incorporated by reference to Exhibit 4.1 to Registrant's
Registration Statement on Form S-4 filed with the Commission on
August 2, 2002 (File No. 333-97623)
(11) Incorporated by reference to Exhibits A-1 and A-2 to the Indenture
of Trust, Exhibit 4.1 to Registrant's Registration Statement on
Form S-4 filed with the Commission on August 2, 2002 (File No.
333-97623)
(12) Incorporated by reference to Exhibit E to the Indenture of Trust,
Exhibit 4.1 to Registrant's Registration Statement on Form S-4
filed with the Commission on August 2, 2002 (File No. 333-97623)
(13) Incorporated by reference to Exhibit 10.1 to Registrant's
Registration Statement on Form S-4 filed with the Commission on
August 2, 2002 (File No. 333-97623)
(14) Incorporated by reference to Exhibit 10.1 to Registrant's
Registration Statement on Form S-4 filed with the Commission on
January 28, 2003 (Commission File No. 333-102779)
(15) Incorporated by reference to Exhibit 10.2 to Registrant's
Registration Statement on Form S-4 filed with the Commission on
August 2, 2002 (File No. 333-97623)
(16) The Exhibits listed on page v of the Credit Agreement, Exhibit
10.2, consist of the form of Guarantee and Collateral Agreement and
the exhibits thereto which are included as part of Exhibit 10.5.
(17) Incorporated by reference to Exhibit 10.3 to Registrant's
Registration Statement on Form S-4 filed with the Commission on
January 28, 2003 (File No. 333-102779)
(18) Incorporated by reference to Exhibit 10.3 to Registrant's
Registration Statement on Form S-4 filed with the Commission on
August 2, 2002 (File No. 333-97623)
(19) Incorporated by reference to Exhibit 10.1 of Registrant's
Registration Statement on Form S-2 (File No.
33-57505) dated April 24, 1997
(20) Incorporated by reference to Exhibit 10.1(a) to Registrant's
Registration Statement on Form S-2 filed with the Commission on
April 28, 1998 (Commission File No. 33-57505)
(21) Incorporated by reference to Exhibit 10.9 to Registrant's Quarterly
Report on Form 10-Q for the period ended October 3, 1998, filed
with the Commission on November 10, 1998 (Commission File No.
002-94984)
(22) Incorporated by reference to Exhibit 10.3 to Registrant's Annual
Report on Form 10-K for the fiscal year ended January 3, 1987,
filed with the Commission on April 3, 1987 (Commission File Nos.
002-66296 and 002-94984)
(23) Incorporated by reference to Exhibit 10.18 to Registrant's
Registration Statement on Form S-4 filed with the Commission on
August 2, 2002 (File No. 333-97623)
(24) Incorporated by reference to Exhibit 10.19 to Registrant's
Registration Statement on Form S-4 filed with the Commission on
August 2, 2002 (File No. 333-97623)
(25) Incorporated by reference to Exhibit 10.11 to Registrant's Form 8-K
dated April 14, 2000, filed with the Commission on April 14, 2000
(Commission File No. 002-94984)
(26) Incorporated by reference to Exhibit 10.30 to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 28, 2002
filed with the Commission on March 27, 2003 (Commission File No.
002-94984)
(27) Incorporated by reference to Exhibit 10.23 to Registrant's
Registration Statement on Form S-4 filed with the Commission on
August 2, 2002 (File No. 333-97623)
(28) Incorporated by reference to Exhibit 10.25 to Registrant's
Registration Statement on Form S-4 filed with the Commission on
August 2, 2002 (File No. 333-97623)
(29) Incorporated by reference to Exhibit 10.27 to Amendment No. 1 to
Registrant's Registration Statement on Form S-4 filed with the
Commission on October 18, 2002 (File No. 333-97623)
(30) Incorporated by reference to Exhibit 10.31 to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 28, 2002
filed with the Commission on March 27, 2003 (Commission File No.
002-94984)
(31) Incorporated by reference to Exhibit 10.32 to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 28, 2002
filed with the Commission on March 27, 2003 (Commission File No.
002-94984)
(32) Incorporated by reference to Exhibit 10.24 to Registrant's Current
Report on Form 8-K filed with the Commission on June 23, 2003 (File
No. 002-94984)
(33) Incorporated by reference to Exhibit 10.22 to Registrant's Annual
Report on Form 10-K for the fiscal year ended January 3, 2004 filed
with the Commission on March 29, 2004 (Commission File No.
002-94984)
(34) Incorporated by reference to Exhibit 10.23 to Registrant's
Quarterly Report on Form 10-Q for the period ended July 3, 2004,
filed with the Commission on August 13, 2004 (Commission File No.
002-94984)