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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 29, 2014

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 001-35422

 

 

Roundy’s, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   27-2337996

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

875 East Wisconsin Avenue

Milwaukee, Wisconsin 53202

(414) 231-5000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ¨  Yes    x  No

As of April 30, 2014, there were 49,634,885 shares of the registrant’s common stock, par value $0.01 per share, issued and outstanding.

 

 

 


Table of Contents

Roundy’s, Inc.

Quarterly Report on Form 10-Q

For the thirteen week period ended March 29, 2014

Table of Contents

 

Part I – Financial Information   

Item 1.

  Financial Statements (Unaudited)      3   
 

Consolidated Statements of Comprehensive Income (Loss) for the thirteen weeks ended March 30, 2013 and
March 29, 2014

     3   
  Consolidated Balance Sheets as of December 28, 2013 and March 29, 2014      4   
  Consolidated Statements of Cash Flows for the thirteen weeks ended March 30, 2013 and March 29, 2014      5   
  Notes to Unaudited Consolidated Financial Statements      6   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      16   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      21   

Item 4.

  Controls and Procedures      21   
Part II – Other Information   

Item 1.

  Legal Proceedings      23   

Item 1A.

  Risk Factors      23   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      23   

Item 3.

  Defaults Upon Senior Securities      23   

Item 4.

  Mine Safety Disclosures      23   

Item 5.

  Other Information      23   

Item 6.

  Exhibits      24   
  Signatures      25   

 

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Table of Contents

Part I – Financial Information

Item 1. FINANCIAL STATEMENTS

Roundy’s, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(In thousands, except per share data)

(Unaudited)

 

     Thirteen Weeks Ended  
     March 30,
2013
     March 29,
2014
 

Net Sales

   $ 983,505       $ 1,002,217   

Costs and Expenses:

     

Cost of sales

     721,005         731,474   

Operating and administrative

     235,819         254,853   

Interest:

     

Interest expense, net

     11,584         14,294   

Amortization of deferred financing costs

     573         624   

Loss on debt extinguishment

     —           9,048   
  

 

 

    

 

 

 
     968,981         1,010,293   
  

 

 

    

 

 

 

Income (Loss) before Income Taxes

     14,524         (8,076

Provision (Benefit) for Income Taxes

     5,877         (3,559
  

 

 

    

 

 

 

Net Income (Loss)

   $ 8,647       $ (4,517
  

 

 

    

 

 

 

Net earnings (loss) per common share:

     

Basic

   $ 0.19       $ (0.10

Diluted

   $ 0.19       $ (0.10

Weighted average number of common shares outstanding:

     

Basic

     44,912         46,479   

Diluted

     44,951         46,479   

Dividends declared per share

   $ 0.12       $ —     

Comprehensive Income (Loss)

   $ 9,306       $ (4,177

See notes to accompanying unaudited consolidated financial statements.

 

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Table of Contents

Roundy’s, Inc.

Consolidated Balance Sheets

(In thousands, except per share data)

 

     December 28,
2013
    March 29,
2014
 
           (Unaudited)  
Assets     

Current Assets:

    

Cash and cash equivalents

   $ 82,178      $ 32,230   

Notes and accounts receivable, less allowance for losses

     38,838        43,938   

Merchandise inventories

     302,122        314,816   

Prepaid expenses

     9,867        18,563   

Income taxes receivable

     1,704        5,059   

Deferred income taxes

     13,838        13,838   
  

 

 

   

 

 

 

Total current assets

     448,547        428,444   
  

 

 

   

 

 

 

Property and Equipment, net

     342,974        343,344   

Other Assets:

    

Other assets—net

     59,846        59,647   

Goodwill

     610,186        610,186   
  

 

 

   

 

 

 

Total other assets

     670,032        669,833   
  

 

 

   

 

 

 

Total assets

   $ 1,461,553      $ 1,441,621   
  

 

 

   

 

 

 
Liabilities and Shareholders’ Equity     

Current Liabilities:

    

Accounts payable

   $ 251,586      $ 239,069   

Accrued wages and benefits

     38,652        39,753   

Other accrued expenses

     46,834        52,247   

Current maturities of long-term debt and capital lease obligations

     4,739        9,467   

Income taxes

     615        —     
  

 

 

   

 

 

 

Total current liabilities

     342,426        340,536   
  

 

 

   

 

 

 

Long-term Debt and Capital Lease Obligations

     737,724        703,634   

Deferred Income Taxes

     76,285        76,124   

Other Liabilities

     78,691        79,266   
  

 

 

   

 

 

 

Total liabilities

     1,235,126        1,199,560   
  

 

 

   

 

 

 

Commitments and Contingencies

    

Shareholders’ Equity:

    

Preferred Stock (5,000 shares authorized at 12/28/13 and 3/29/14, respectively, $0.01 par value, 0 shares at 12/28/13 and 3/29/14, respectively, issued and outstanding)

     —          —     

Common stock (150,000 shares authorized, $0.01 par value, 46,777 shares and 49,676 shares at 12/28/13 and 3/29/14, respectively, issued and outstanding)

     468        497   

Additional paid-in-capital

     116,874        137,007   

Retained earnings

     137,545        132,677   

Accumulated other comprehensive loss

     (28,460     (28,120
  

 

 

   

 

 

 

Total shareholders’ equity

     226,427        242,061   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,461,553      $ 1,441,621   
  

 

 

   

 

 

 

See notes to accompanying unaudited consolidated financial statements.

 

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Table of Contents

Roundy’s, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

     Thirteen Weeks Ended  
     March 30, 2013     March 29, 2014  

Cash Flows From Operating Activities:

    

Net income (loss)

   $ 8,647      $ (4,517

Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities:

    

Depreciation of property and equipment and amortization of intangible assets

     16,398        16,859   

Amortization of deferred financing costs

     573        624   

Loss (gain) on sale of property and equipment

     23        (12

LIFO charges

     500        491   

Deferred income taxes

     (201     (388

Loss on debt extinguishment

     —          9,048   

Amortization of debt discount

     372        530   

Stock-based compensation expense

     389        860   

Changes in operating assets and liabilities:

    

Notes and accounts receivable

     (1,412     (5,100

Merchandise inventories

     3,854        (13,185

Prepaid expenses

     (5,253     (2,878

Other assets

     (39     (896

Accounts payable

     (14,883     (18,335

Accrued expenses and other liabilities

     (1,087     7,120   

Income taxes

     6,013        (3,871
  

 

 

   

 

 

 

Net cash flows provided by (used in) operating activities

     13,894        (13,650
  

 

 

   

 

 

 

Cash Flows From Investing Activities:

    

Capital expenditures

     (11,467     (16,443

Proceeds from sale of property and equipment

     81        15   
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (11,386     (16,428
  

 

 

   

 

 

 

Cash Flows From Financing Activities:

    

Dividends paid to common shareholders

     (5,394     (95

Payments of withholding taxes for vesting of restricted stock shares

     —          (402

Borrowings on revolving credit facility

     25,000        84,500   

Payments made on revolving credit facility

     (25,000     (50,750

Proceeds from long-term borrowings

     —          450,800   

Payments of debt and capital lease obligations

     (4,688     (518,001

Issuance of common stock, net of issuance costs

     —          19,302   

Debt issuance and refinancing fees and related expenses

     —          (5,224
  

 

 

   

 

 

 

Net cash flows used in financing activities

     (10,082     (19,870
  

 

 

   

 

 

 

Net decrease in Cash and Cash Equivalents

     (7,574     (49,948

Cash and Cash Equivalents, Beginning of Period

     72,889        82,178   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ 65,315      $ 32,230   
  

 

 

   

 

 

 

Supplemental Cash Flow Information:

    

Cash paid for interest

   $ 11,899      $ 11,896   

Cash paid for income taxes

     65        700   

 

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Table of Contents

ROUNDY’S, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information, and do not include all of the information and footnotes required for complete, audited financial statements. For further information, refer to the consolidated financial statements and footnotes included in the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 28, 2013.

The accompanying unaudited consolidated financial statements as of March 29, 2014, and for the thirteen weeks ended March 30, 2013 and March 29, 2014 reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and operating results of Roundy’s, Inc. and its subsidiaries. All material intercompany accounts and transactions have been eliminated in the unaudited consolidated financial statements. The results of operations for the thirteen weeks ended March 29, 2014 may not necessarily be indicative of the results that may be expected for the entire fiscal year ending January 3, 2015.

Unless the context otherwise indicates, all references in these financial statements to the “Company,” or “Roundy’s,” or similar words are to Roundy’s, Inc.

2. OFFERING OF COMMON STOCK

On February 12, 2014, the Company completed a public offering of 10,170,989 shares of its common stock at a price of $7.00 per share, which included 2,948,113 shares sold by Roundy’s and 7,222,876 shares sold by existing shareholders. The Company received approximately $20.6 million in gross proceeds from the offering, or approximately $19.3 million in net proceeds after deducting the underwriting discount and expenses related to the offering. The net proceeds were used for general corporate purposes, including funding working capital and operating expenses as well as capital expenditures related to the eleven Dominick’s stores acquired from Safeway during the fourth quarter of 2013.

3. ACQUISITION

On December 20, 2013, the Company acquired eleven Dominick’s stores from Safeway in a $36 million cash transaction (the “Chicago Stores Acquisition”). As a result of the transaction, the Company assumed the operating leases for ten of the stores and a capital lease liability for one store. As of March 29, 2014, the Company has re-opened four of these stores under the Company’s Mariano’s banner and the Company expects that an additional seven stores will be converted to the Mariano’s banner and will open during the remainder of Fiscal 2014. The transaction enables the Company to expand its presence in the Chicago market and accelerate the number of Mariano’s locations, the Company’s growth banner. The Company paid an amount in excess of the fair value of the assets acquired and recorded goodwill of approximately $4.3 million. The amount of goodwill recorded in connection with the transaction is deductible for tax purposes over a 15-year period.

The transaction was accounted for as a business combination under Accounting Standards Codification 805 (“ASC 805”). As such, the purchase price was allocated based on a fair value appraisal by a third party valuation firm. The fair value calculations of property under capital lease and the favorable lease rights were based on estimated market rents for those leased properties, which the Company considers to be Level 2 within the fair value hierarchy. The fair value calculations of the customer lists were based on the estimated profitability of the sales associated with the acquired customers. The fair value calculations of the equipment and leasehold improvements were based on the estimated replacement cost. The Company considers the inputs used in the fair value calculations of the equipment, leasehold improvements and customer lists to be Level 3 within the fair value hierarchy.

 

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Table of Contents

The purchase price was allocated as follows (in thousands):

 

Consideration

  

Purchase price

   $ 36,000   

Capital lease liability assumed

     7,765   
  

 

 

 

Total Consideration

   $ 43,765   
  

 

 

 

Assets Acquired

  

Equipment

   $ 9,706   

Leasehold improvements

     6,859   

Property under capital lease

     8,608   

Intangible assets:

  

Favorable lease rights

     11,216   

Customer lists

     3,116   

Goodwill

     4,260   
  

 

 

 

Fair Value of Assets Acquired

   $ 43,765   
  

 

 

 

The favorable lease rights will be amortized over the lease term of the acquired stores. The customer lists will be amortized over an expected life of 5 years. Other than the capital lease liability assumed, there were no other liabilities assumed in the transaction.

4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In July 2013, the FASB issued ASU No. 2013-11, “Income Taxes” (“ASU No. 2013-11”). ASU No. 2013-11 requires companies to present unrecognized tax benefits as a reduction of the deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, if net settlement is required or expected. To the extent that net settlement is not required or expected, the unrecognized tax benefit must be presented as a liability. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. ASU No. 2013-11 was effective for reporting periods beginning after December 15, 2013, and are applied prospectively to all unrecognized tax benefits that exist at the effective date. Because this standard only affects the presentation of unrecognized tax benefits and not the measurement of an unrecognized tax benefit, this standard did not have a material impact on the Company’s consolidated financial statements.

5. FAIR VALUE

Fair value measurements are categorized into one of three levels as defined by US GAAP. The three levels are defined as follows:

Level 1 – Unadjusted quoted prices are available in active markets for identical assets or liabilities that can be accessed at the measurement date;

Level 2 – Inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability;

Level 3 – Unobservable inputs for which little or no market activity exists.

The Company has one item carried at (or adjusted to) fair value in the consolidated financial statements as of March 29, 2014, which is an interest rate derivative liability of $0.5 million, compared to a liability of $0.4 million as of December 28, 2013. Interest rate derivatives are valued using forward curves and volatility levels as determined on the basis of observable market inputs when available and on the basis of estimates when observable market inputs are not available. These forward curves are classified as Level 2 within the fair value hierarchy.

The carrying values of the Company’s cash and cash equivalents, notes and accounts receivable, accounts payable and revolving credit facility debt approximated fair value as of March 29, 2014. Based on estimated market rents for those leased properties which are recorded as capital leases, the fair value of capital lease obligations is approximately $28.2 million and $27.5 million, as of December 28, 2013 and March 29, 2014, respectively. Based on recent open market transactions of the Company’s term loan and the 10.250% Senior Secured Notes due in 2020 (the “2020 Notes”), the fair value of long-term debt, including current maturities, is approximately $732.7 million and $711.9 million as of December 28, 2013 and March 29, 2014, respectively. The Company considers the fair value of the capital leases, term loan and 2020 Notes to be Level 2 within the fair value hierarchy.

 

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Table of Contents

6. INVENTORIES

The Company uses the LIFO method of valuation for a portion of inventories. If the FIFO method had been used, inventories would have been approximately $24.4 million higher on December 28, 2013 and $24.9 million higher on March 29, 2014.

An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs. Because these estimates are subject to many factors beyond management’s control, interim results are subject to the final year-end LIFO inventory valuation.

7. LONG-TERM DEBT

Long-term debt consists of the following (in thousands):

 

     December 28,
2013
     March 29,
2014
 

Term Loan

   $ 516,875       $ 460,000   

Second Lien Notes

     200,000         200,000   

Revolving Credit Facility

     —           33,750   

Capital Lease Obligations, 7.6% to 10%, due 2014 to 2031

     36,102         35,029   

Other long-term debt

     1,255         1,202   
  

 

 

    

 

 

 
     754,232         729,981   

Less: Unamortized discount on Term Loan

     5,793         11,118   

Less: Unamortized discount on Second Lien Notes

     5,976         5,762   

Less: Current maturities

     4,739         9,467   
  

 

 

    

 

 

 

Long-term debt, net of current maturities

   $ 737,724       $ 703,634   
  

 

 

    

 

 

 

On March 3, 2014, Roundy’s Supermarkets, Inc. (“RSI”), the wholly owned operating subsidiary of the Company, refinanced its existing credit facilities (the “2014 Refinancing”), and entered into two new credit facilities, a $460 million term loan (the “New Term Facility”) and a $220 million asset-based revolving credit facility (the “New Revolving Facility”, together with the New Term Facility, the “2014 Credit Facilities”). The Company used the proceeds from the New Term Facility, together with existing cash, to repay the Company’s existing term loan, including all accrued interest thereon and related costs, fees and expenses. The New Term Facility was issued with a 2.0% discount, which will be amortized over the seven year term of the New Term Facility. The New Term Facility has a maturity date of March 3, 2021; provided that the maturity date will accelerate to September 15, 2020 if the 2020 Notes are not refinanced in full prior to September 15, 2020. The New Revolving Facility has a maturity date of March 3, 2019.

The New Term Facility bears interest, at the Company’s option, at (i) adjusted LIBOR (subject to a minimum floor of 1.00%) plus 4.75% or (ii) a base rate plus 3.75%.

Mandatory prepayments under the New Term Facility will be required with (i) 50% of adjusted excess cash flow (which percentage shall be reduced to 25% and to 0% upon achievement of certain leverage ratios); (ii) 100% of the net cash proceeds of assets sales or other non-ordinary course dispositions of certain property by the RSI and its restricted subsidiaries (subject to certain exceptions and reinvestment provisions); and (iii) 100% of the net cash proceeds of issuances, offerings or placements of certain indebtedness not otherwise permitted to be incurred under the New Term Facility credit agreement.

Borrowings under the New Term Facility are guaranteed, subject to certain exceptions, by the Company and certain of the Company’s direct and indirect, wholly owned domestic restricted subsidiaries and are secured by substantially all the RSI’s and such guarantors’ assets (subject to certain exceptions) on a first-priority basis, except that with respect to New Revolving Facility Priority Collateral (defined below) such assets are secured on a second-priority basis, in each case subject to certain exceptions and to the terms of the First Lien Intercreditor Agreement described below.

The New Revolving Facility bears interest, at the Company’s option, at (i) adjusted LIBOR plus a margin of 1.50%-2.00% per annum or (ii) base rate plus a margin of 0.50%—1.00% per annum. In either case, the margin is based on RSI’s utilization of the New Revolving Facility. In addition, there is a quarterly fee payable in an amount equal to either 0.375% or 0.25% per annum of the undrawn portion of the New Revolving Facility. The Company may use borrowings under the New Revolving Facility for ongoing working capital and general corporate purposes and any other use not prohibited by the Revolving Credit Agreement. Borrowing availability under the New Revolving Facility at any time is based on the value of certain eligible inventory, accounts receivable and pharmacy prescription files and is subject to additional reserves and other adjustments.

 

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Borrowings under the New Revolving Facility are guaranteed, subject to certain exceptions, by the Company and certain of the Company’s direct and indirect, wholly owned domestic restricted subsidiaries and are secured by substantially all the RSI’s and such guarantors’ assets (subject to certain exceptions), in the case of certain assets designated as New Revolving Facility priority collateral including accounts, inventory, cash, deposit accounts, certain payment intangibles and other related assets (“New Revolving Facility Priority Collateral”) on a first-priority basis, and on a second-priority basis with respect to other assets, in each case subject to certain exceptions and to the terms of the First Lien Intercreditor Agreement described below.

On March 3, 2014, RSI and the Company entered into a First Lien Intercreditor Agreement (the “First Lien Intercreditor Agreement”), which establishes the relative lien priorities and rights of the secured parties under the New Revolving Facility and the New Term Facility. Pursuant to the First Lien Intercreditor Agreement, the obligations under the New Revolving Facility are secured with a first priority lien on the New Revolving Facility Priority Collateral and a second priority lien on the other assets constituting collateral, and the obligations under the New Term Facility are secured with a second priority lien on the New Revolving Facility Priority Collateral and a first priority lien on all other collateral (in each case, subject to certain exceptions and limitations).

In connection with the 2014 Refinancing, the Company recognized a loss on debt extinguishment of $9.0 million, which consisted primarily of the write-off of $4.8 million of previously capitalized financing costs, the $3.6 million write-off of a portion of the unamortized discount on the 2012 Term Loan, and certain fees and expenses of $0.6 million related to the New Term Facility. The Company capitalized $3.9 million and $0.6 million of financing costs related to the New Revolving Facility and New Term Facility, respectively, both of which will be amortized over the term of the respective term of each credit facility.

The terms of the 2014 Credit Facilities contain customary affirmative covenants and are also secured by substantially all of RSI’s tangible and intangible assets. The terms of the 2014 Credit Facilities also contain customary negative covenants, including restrictions on (i) dividends on, and redemptions of, equity interest and other restricted payment; (ii) liens and sale-leaseback transactions; (iii) loans and investments; (iv) guarantees and hedging agreements; (v) the sale, transfer or disposition of assets and businesses; (vi) transactions with affiliates; (vii) negative pledges and restrictions on subsidiary distributions; and (viii) optional payments and modifications of certain debt instruments.

At March 29, 2014, the Company was in compliance with all covenants relating to its indebtedness.

As of March 29, 2014, there were outstanding letters of credit, totaling $29.6 million under the New Revolving Facility, which reduce borrowing availability.

Prior to the 2014 Refinancing, the Company’s long-term debt included a senior credit facility consisting of a $675 million term loan (the ‘‘2012 Term Loan’’) and a $125 million revolving credit facility (the ‘‘2012 Revolving Facility’’ and together with the 2012 Term Loan, the ‘‘2012 Credit Facilities”). Borrowings under the 2012 Credit Facilities bore interest, at the Company’s option, at (i) adjusted LIBOR (subject to a 1.25% floor) plus 4.5% or (ii) an alternate base rate plus 3.5%.

On December 9, 2013, RSI amended its credit agreement governing the 2012 Credit Facilities to, among other things, permit the occurrence of the issuance of the 2020 Notes and the second-priority liens securing the 2020 Notes and related obligations and to revise certain financial maintenance and other covenants.

On December 20, 2013, RSI completed the private placement of $200 million of the 2020 Notes that mature on December 15, 2020. The Company will pay interest at a rate of 10.25% on the 2020 Notes semiannually, commencing on June 15, 2014. The 2020 Notes were issued with a 3.01% discount, which will be amortized over the seven year term of the 2020 Notes. The Company capitalized $4.6 million of financing costs related to the issuance of the 2020 Notes which will be also amortized over the seven year term of the 2020 Notes.

The Company used the net proceeds from the issuance of the 2020 Notes to prepay approximately $148 million in principal amount of the Company’s 2012 Term Loan and to fund the Chicago Stores Acquisition. The Company capitalized $0.6 million related to an amendment fee paid to lenders of the 2012 Credit Facilities. In addition, the Company expensed $3.5 of unamortized loan costs, including $2.0 million of previously capitalized financing costs and $1.5 million of the unamortized discount on the 2012 Term Loan.

The 2020 Notes are unconditionally guaranteed, jointly and severally, on a senior basis, by (i) RSI’s indirect parent company Roundy’s, Inc., (ii) RSI’s direct parent company Roundy’s Acquisition Corp. and (iii) each of RSI’s domestic restricted subsidiaries owned on the date of original issuance of the 2020 Notes, and are secured by a second priority security interest in substantially all of our and the Guarantors’ assets, which security interests rank junior to the security interests in such assets that secure our 2014 Credit Facilities. The 2020 Notes and the guarantees thereof are secured by a second priority lien on substantially all the assets owned by RSI and the guarantors, subject to permitted liens and certain exceptions. These liens are junior in priority to the first-priority liens on the same collateral securing our existing Credit Facility (as well as certain hedging and cash management obligations owed to lenders thereunder or their affiliates) and to certain other permitted liens under the indenture.

 

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At any time prior to December 15, 2016, the Company may redeem up to 35% of the 2020 Notes with the net cash proceeds received by the Company from any equity offering at a price of 110.250% of the principal amount of the 2020 Notes, plus accrued and unpaid interest.

At any time and from time to time on or after December 15, 2016, the Company may redeem the 2020 Notes, in whole or in part, at the following redemption prices (expressed as percentages of the principal amount) plus accrued and unpaid interest:

 

12-month period commencing on December 15 in year

  

2016

     107.688

2017

     105.125

2018

     102.563

2019 and thereafter

     100

8. DERIVATIVE FINANCIAL INSTRUMENTS

The Company accounts for derivatives in accordance with the provisions of FASB ASC Topic 815 “Derivatives and Hedging” (“ASC 815”). ASC 815 requires companies to recognize all of its derivative instruments as either an asset or liability in the balance sheet at fair value. Changes in the fair value of derivative instruments designated as cash flow hedges, to the extent the hedges are highly effective, are recorded in other comprehensive income, net of tax effects, and are reclassified into earnings in the period in which the hedged transaction affects earnings. Ineffective portions of cash flow hedges, if any, are recognized in current period earnings.

The Company is exposed to market risk from interest rate fluctuations. In order to manage this risk from interest rate fluctuations, on August 27, 2013, the Company entered into a one-year forward starting interest rate swap, which will mature on August 27, 2016, to hedge cash flows related to interest payments on $75 million of its term loan (the “Swap”). The Swap involves the receipt of floating interest rate amounts in exchange for fixed rate interest payments over the duration of the Swap without an exchange of the underlying principal amount. In accordance with ASC 815, the Company has designated the Swap as a cash flow hedge. The Company has not entered into any other hedging instruments.

As of March 29, 2014, the Company has recorded $0.5 million in other liabilities in the Company’s Consolidated Balance Sheet, which represents the fair value of the Swap on that date. As of March 29, 2014, the Company has $0.3 million in accumulated other comprehensive loss recorded on the Company’s Consolidated Balance Sheet, which represents a loss on the effective portion of the Swap, net of tax, on that date. The Company does not expect the amount of losses that will be reclassified into earnings over the next twelve months to be material. The fair value of the Swap as of December 28, 2013 was a liability of $0.4 million.

During the thirteen weeks ended March 29, 2014, the Company completed the 2014 Refinancing. Due to a change in certain of the critical terms of the New Term Facility, specifically the change in the interest rate floor, a certain portion of the Swap was deemed ineffective for the thirteen weeks ended March 29, 2014. The amount is considered immaterial.

During the thirteen weeks ended March 29, 2014 there were no amounts reclassified into current period earnings.

 

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9. EMPLOYEE BENEFIT PLANS

Net pension income in the thirteen weeks ended March 30, 2013 and March 29, 2014 included the following components (in thousands):

 

     Thirteen Weeks Ended  
     March 30, 2013     March 29, 2014  

Service cost

   $ —        $ —     

Interest cost on projected benefit obligation

     1,839        2,039   

Expected return on plan assets

     (3,287     (3,563

Amortization of net actuarial loss

     1,099        607   
  

 

 

   

 

 

 

Net pension income

   $ (349   $ (917
  

 

 

   

 

 

 

As of March 29, 2014, the Company had a letter of credit posted in favor of the Pension Benefit Guaranty Corporation in the amount of $10 million.

The Company expects its pension plan contributions for the year ending January 3, 2015 to be approximately $0.9 million.

10. INCOME TAXES

The Company’s effective tax rate for the thirteen weeks ended March 29, 2014 is approximately (44.9%) before discrete items.

11. COMMITMENTS AND CONTINGENCIES

Various lawsuits and claims, arising in the ordinary course of business, are pending or have been asserted against the Company. While the ultimate effect of such actions cannot be predicted with certainty, management believes that their outcome will not result in a material adverse effect on the consolidated financial position, operating results or liquidity of the Company.

The Company contributes to four multi-employer pension plans based on obligations arising from its collective bargaining agreements covering supply chain and certain store union employees. Three of these plans are underfunded as of March 29, 2014. These plans provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Trustees are appointed by employers and unions. The trustees are responsible for determining the level of benefits to be provided to participants as well as for such matters as the investment of the assets and the administration of the plans.

Because the Company is one of a number of employers contributing to these plans, it is difficult to ascertain what its share of the underfunding would be, although the Company anticipates that its contributions to these plans may increase. If the Company chooses to exit a plan, any adjustment for a withdrawal liability will be recorded when it is probable that a liability exists and can be reasonably determined.

In connection with the exit or sale of its independent distribution business, the Company has assigned leases and subleases for retail stores which expire at various dates through 2033. A remaining potential obligation exists in the event of a default under the assigned leases and subleases by the assignee. The potential obligations include rent, real estate taxes, common area costs and other sundry expenses. The future minimum lease payments are approximately $15.3 million. The Company believes the likelihood of a liability related to these assigned leases and subleases is remote.

 

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12. ACCUMULATED OTHER COMPREHENSIVE LOSS

The Company’s accumulated other comprehensive loss is comprised of the adjustments for employee benefit plans and derivatives. During the thirteen weeks ended March 30, 2013, the entire amount reclassified from accumulated other comprehensive loss was comprised of the net amortization of actuarial losses on employee benefit plans. During the thirteen weeks ended March 29, 2014, the amount reclassified from accumulated other comprehensive loss was comprised of the net amortization of actuarial losses on employee benefit plans and the net fair value of derivatives. During the thirteen weeks ended March 30, 2013 and March 29, 2014, pension income is included within operating and administrative expenses in the Company’s Consolidated Statements of Comprehensive Income (Loss). During the thirteen weeks ended March 29, 2014, there was no impact on net income (loss) from the Company’s derivatives.

The change in accumulated other comprehensive loss by component for the thirteen weeks ended March 30, 2013 consisted of the following (in thousands):

 

     Derivatives      Defined Benefit
Pension Plans
    Total  

Balance at December 29, 2012

   $ —         $ (46,960   $ (46,960
  

 

 

    

 

 

   

 

 

 

Other comprehensive loss before reclassifications

     —           —          —     

Income tax benefit

     —           —          —     
  

 

 

    

 

 

   

 

 

 

Net other comprehensive loss before reclassifications

     —           —          —     

Reclassifications:

       

Actuarial gains

        1,099        1,099   
  

 

 

    

 

 

   

 

 

 

Total reclassifications before taxes

     —           1,099        1,099   

Income tax expense

        (440     (440
  

 

 

    

 

 

   

 

 

 

Net amounts reclassified from accumulated comprehensive income

     —           659        659   
  

 

 

    

 

 

   

 

 

 

Other comprehensive income

     —           659        659   
  

 

 

    

 

 

   

 

 

 

Balance at March 30, 2013

   $ —         $ (46,301   $ (46,301
  

 

 

    

 

 

   

 

 

 

The change in accumulated other comprehensive loss by component for the thirteen weeks ended March 29, 2014 consisted of the following (in thousands):

 

     Derivatives     Defined Benefit
Pension Plans
    Total  

Balance at December 28, 2013

   $ (264   $ (28,196   $ (28,460
  

 

 

   

 

 

   

 

 

 

Other comprehensive loss before reclassifications

     (40     —          (40

Income tax benefit

     16        —          16   
  

 

 

   

 

 

   

 

 

 

Net other comprehensive loss before reclassifications

     (24     —          (24

Reclassifications:

      

Actuarial gains

       607        607   
  

 

 

   

 

 

   

 

 

 

Total reclassifications before taxes

     —          607        607   

Income tax expense

       (243     (243
  

 

 

   

 

 

   

 

 

 

Net amounts reclassified from accumulated comprehensive income

     —          364        364   
  

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (24     364        340   
  

 

 

   

 

 

   

 

 

 

Balance at March 29, 2014

   $ (288   $ (27,832   $ (28,120
  

 

 

   

 

 

   

 

 

 

 

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13. EARNINGS PER SHARE

The Company had one class of common stock as of March 29, 2014.

For the thirteen weeks ended March 30, 2013 and March 29, 2014, respectively, there were restricted shares outstanding of approximately 93,410 and 497,753 shares, respectively, that were excluded because their inclusion would have had an anti-dilutive effect on earnings per share.

As of March 29, 2014, there were 602,229 contingently issuable shares excluded because their issuance was not considered probable.

The following table reflects the calculation of basic and diluted earnings per share (in thousands, except per share data):

 

    Thirteen Weeks Ended  
    March 30, 2013     March 29, 2014  

Net earnings (loss) per common share—basic:

   

Net Income (Loss)

  $ 8,647      $ (4,517
 

 

 

   

 

 

 

Basic weighted average common shares outstanding

    44,912        46,479   

Net earnings (loss) per common share—basic

  $ 0.19      $ (0.10
 

 

 

   

 

 

 

Net earnings (loss) per common share—diluted:

   

Weighted-average shares outstanding

    44,912        46,479   

Effect of dilutive securities—nonvested restricted stock shares and restricted stock units

    39        —     
 

 

 

   

 

 

 

Weighted-average shares and potential dilutive shares outstanding

    44,951        46,479   
 

 

 

   

 

 

 

Net earnings (loss) per common share—diluted

  $ 0.19      $ (0.10
 

 

 

   

 

 

 

14. SHARE-BASED COMPENSATION

The Company’s 2012 Incentive Compensation Plan (the “Plan”) provides for grants of stock options, stock appreciation rights, restricted stock, other stock-based awards and other cash-based awards. An aggregate of 5,656,563 shares of common stock was registered for issuance under the Plan. As of March 29, 2014 there were 2,314,412 remaining shares available for issuance, which assumes that all of the 2014 restricted stock unit grants discussed below vest at the maximum amount.

The Company accounts for share-based compensation awards in accordance with the provisions of FASB ASC Topic 718, “Compensation – Stock Compensation” which requires companies to estimate the fair value of share-based payment awards on the date of grant. The value of the portion of the awards ultimately expected to vest is recognized as expense over the requisite service period. The Company recognized total stock-based compensation of $0.9 million for the thirteen weeks ended March 29, 2014, compared to $0.4 million for the thirteen weeks ended March 30, 2013, as operating and administrative expenses in the Company’s Consolidated Statements of Comprehensive Income (Loss). The Company paid dividends on restricted stock shares that vested during the thirteen weeks ended March 29, 2014 of $0.1 million, compared to no dividends on restricted stock during the thirteen weeks ended March 30, 2013.

The Company has granted restricted stock to certain employees, as well as to non-employee directors, under the Plan. The service-based restricted stock that was granted to employees in 2012 vests over five years. The service-based restricted stock granted to non-employee directors in 2012, 2013 and 2014 vests over one year.

During the second quarter of 2013, the Company granted 770,366 shares of restricted stock that will vest upon the achievement of certain market performance metrics (the “2013 Market Awards”) and 460,717 shares of stock (the “2013 Time-Based Awards”) that will vest based upon the passage of time, in each case to certain employees and non-employee directors under the Plan. The 2013 Time-Based restricted stock vests ratably over three years for employees from the date of the grant. The 2013 Market Awards will vest after three years if certain specified market conditions are met. The market-based condition is a comparison of the total shareholder return (“TSR”) of the Company’s stock with the TSR of its peer group over the corresponding three year period as determined by the Compensation Committee of the Company’s Board of Directors. These 2013 Market Awards also include a modifier based on the performance of the Company’s operating income as compared to its peer group. The number of shares ultimately vesting will be determined based on the TSR metric and operating income results at the conclusion of the third year. The fair value of the 2013 Market Awards was determined to be $3.02, which was determined using a Monte Carlo simulation model, which utilizes multiple input variables to determine the probability of the Company meeting the market based condition. These inputs include a stock price volatility assumption that is the weighted average between the Company’s volatility since the IPO and the peer group average volatility for the 1.5 year period prior to the Company’s IPO and a 2.7 year risk-free interest rate of 0.33%. The fair value of the 2013 Time-Based Awards was determined based on the stock price as of the date of the grant.

 

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The unvested restricted shares granted under the Plan generally have all the rights of a stockholder, including the right to receive dividends and the right to vote the shares. All of the unvested restricted stock vests upon certain changes of control of the Company.

The change in the number of restricted stock shares outstanding consisted of the following:

 

     Restricted Shares
Outstanding
(in thousands)
    Weighted-average
grant-date fair value  per
share
 

Outstanding, December 28, 2013

     1,800      $ 5.78   

Granted

     —          —     

Vested

     (139     8.46   

Cancelled or Expired

     —          —     
  

 

 

   

Outstanding, March 29, 2014

     1,661      $ 5.55   
  

 

 

   

During the first quarter of 2014, the Company granted 990,540 restricted stock units that will convert to common stock upon vesting. Of the total units granted, 543,180 units will vest based upon the passage of time (the “2014 Time-Based Awards”), 212,175 units (with a maximum of 424,350 shares of common stock issuable) will vest based upon certain market performance metrics related to TSR (the “2014 Market Awards”) and 235,185 units (with a maximum of 470,370 shares of common stock issuable) will vest based upon certain operating income performance metrics (the “2014 Performance Awards”). The 2014 Time-Based Awards vest over three years for employees. The 2014 Market Awards will vest after three years if certain specified market conditions are met based on the TSR performance of the Company as compared to a peer group. The number of 2014 Market Awards that will ultimately convert from units to shares will be determined based on the TSR metric at the conclusion of the third year and could be up to 200% of the number of units originally granted. The 2014 Performance Awards will vest after three years if certain operating income performance metrics of the Company are met during Fiscal 2014. The number of 2014 Performance Awards that will ultimately convert from units to shares will be determined based on the operating income performance metrics during Fiscal 2014 and vest at the conclusion of the third year and could be up to 200% of the number of units originally granted. The fair value of the 2014 Market Awards was determined to be $6.85 per unit (or $3.43 per share for the maximum 424,350 shares of common stock issuable), which was determined using a Monte Carlo simulation model, which utilizes multiple input variables to determine the probability of the Company meeting the market based condition. These inputs include a stock price volatility assumption that is the weighted average between the Company’s volatility over the 2.1 years following the IPO and the peer group average volatility for the 0.7 year period prior to the IPO and a 2.8 year risk-free interest rate of 0.82%. The fair value of the 2014 Time-Based and 2014 Performance Awards was determined based on the stock price as of the date of the grant.

The change in the number of restricted stock units outstanding consisted of the following:

 

     Restricted Units
Outstanding
(in thousands)
     Weighted-average
grant-date fair
value per unit
 

Outstanding, December 28, 2013

     —           —     

Granted (1)

     991         6.44   

Vested

     —           —     

Cancelled or Expired

     —           —     
  

 

 

    

Outstanding, March 29, 2014

     991       $ 6.44   
  

 

 

    

 

(1) Represents the number of resricted units granted. For the 2014 Market Awards and the 2014 Performance Awards, actual shares issued could be up to 200% of the units granted.

 

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15. BUSINESS SEGMENTS

The Company has determined that it has one reportable segment. The Company’s revenues are derived predominantly from the sale of food and non-food products at its stores. Non-perishable categories consist of traditional grocery, frozen and dairy products. Perishable food categories include meat, seafood, produce, deli, bakery and floral. Non-food categories include general merchandise, health and beauty supplies, pharmacy, alcohol and tobacco. The following is a summary of the percentage of sales of non-perishable, perishable, and non-food items for the thirteen weeks ended March 30, 2013 and March 29, 2014:

 

     Thirteen Weeks Ended  
     March 30, 2013     March 29, 2014  

Non-Perishable Food

     49.4     47.6

Perishable Food

     34.6     36.1

Non-Food

     16.0     16.3

16. SUBSEQUENT EVENT

On May 6, 2014, the Company entered into definitive agreements to sell 18 Rainbow stores in the Minneapolis / St. Paul market to a group of local grocery retailers (the “Buyers”), including SUPERVALU INC. (“the Rainbow Store Sale”). The aggregate sale price for the 18 Rainbow stores is approximately $65 million in cash plus the proceeds from inventory that will be sold at the closing of the Rainbow Store Sale. In addition, as part of the transaction, the Buyers will assume the lease obligations and certain multi-employer pension liabilities related to the acquired stores.

The Company is actively seeking additional buyers for its remaining nine Rainbow stores, and at the conclusion of that process expects to either sell or close the remaining nine Rainbow stores and fully exit from the Minneapolis / St. Paul market.

The Rainbow Store Sale is subject to satisfaction or waiver of closing conditions in the definitive agreements, including with regard to third-party consents and regulatory review. Due to the uncertainty related to the timing of the Rainbow Store Sale and the disposition of the remaining nine Rainbow stores, the Company is not able to estimate the financial impact of this divesture.

The consolidated statements of comprehensive income (loss), consolidated balance sheets and consolidated statements of cash flows and related notes in this Form 10-Q include all Rainbow stores in continuing operations. The Company expects to present the results from the Rainbow stores as discontinued operations beginning in the second quarter of 2014.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

We are a leading Midwest supermarket chain founded in 1872. As of March 29, 2014, we operated 166 grocery stores in Wisconsin, Minnesota and Illinois under the Pick ’n Save, Rainbow, Copps, Metro Market and Mariano’s retail banners, which are served by our three strategically located distribution centers and our food processing and preparation commissary. As of March 29, 2014, these stores included 93 Pick ’n Save stores, 27 Rainbow stores, 25 Copps stores, 3 Metro Market stores and 18 Mariano’s stores.

In this section, we refer to the thirteen weeks ended March 29, 2014 as the “first quarter 2014” and we refer to the thirteen weeks ended March 30, 2013 as the “first quarter 2013.”

For the first quarter 2014, net sales were $1,002.2 million, compared to net sales of $983.5 million for the first quarter 2013. The increase in net sales was primarily due to the impact of new stores, partially offset by a decrease in same stores sales and the effect of four store closures during the twelve month period ending March 29, 2014.

Net loss per basic and diluted share was $0.10 for the first quarter 2014, compared to earnings per basic and diluted share of $0.19 in the first quarter 2013. Results for the first quarter 2014 included a loss on debt extinguishment of approximately $9.0 million ($5.0 million, net of income tax expense) incurred in connection with the debt refinancing in March 2014.

Going forward, we plan to continue to maintain our market leadership and focus on growing same-store sales, opening new stores and increasing our cash flow. We intend to pursue same-store sales growth by continuing to focus on price competitiveness, improving our marketing efforts, selectively remodeling and relocating existing stores and enhancing and expanding our own brand, perishable and prepared food offerings. In addition, we intend to continue our expansion into the Chicago market. In the fourth quarter of 2013, we completed a transaction with Safeway, Inc. (“Safeway”) to acquire 11 Dominick’s stores in the Chicago area (the “Chicago Stores Acquisition”). During the first quarter of 2014, we opened four of those stores as Mariano’s, and opened one additional Mariano’s store in the Chicago market. As of March 29, 2014, we had 18 stores open in the Chicago market.

RESULTS OF OPERATIONS

 

     Thirteen Weeks Ended  
(Dollars in thousands)    March 30, 2013     March 29, 2014  

Net Sales

   $ 983,505         100.0   $ 1,002,217        100.0

Costs and Expenses:

         

Cost of sales

     721,005         73.3        731,474        73.0   

Operating and administrative

     235,819         24.0        254,853        25.4   

Interest expense (including amortization of deferred financing costs)

     12,157         1.2        14,918        1.5   

Loss on debt extinguishment

     —           0.0        9,048        0.9   
  

 

 

    

 

 

   

 

 

   

 

 

 
     968,981         98.5        1,010,293        100.8   
  

 

 

    

 

 

   

 

 

   

 

 

 

Income (Loss) before Income Taxes

     14,524         1.5        (8,076     -0.8   

Provision (Benefit) for Income Taxes

     5,877         0.6        (3,559     -0.4   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net Income (Loss)

   $ 8,647         0.9   $ (4,517     -0.5
  

 

 

    

 

 

   

 

 

   

 

 

 

Thirteen Weeks Ended March 29, 2014 Compared With Thirteen Weeks Ended March 30, 2013

Net Sales. Net sales represent product sales less returns and allowances and sales promotions. We derive our net sales primarily from the operation of retail grocery stores and to a much lesser extent from the independent distribution of food and non-food products to an independently-owned grocery store. We recognize retail sales at the point of sale. We do not record sales taxes as a component of retail revenues as we consider ourselves a pass-through conduit for collecting and remitting sales taxes.

Net sales were $1,002.2 million for the first quarter 2014, an increase of $18.7 million, or 1.9% from $983.5 million for the first quarter 2013. The increase primarily reflects the benefit of new stores, partially offset by a 5.2% decrease in same-store sales and the effect of four store closures during the trailing four quarters. The decline in same-store sales was due to a 8.0% decrease in the number of customer transactions, partially offset by a 3.0% increase in average transaction size. Same-store sales comparisons were negatively impacted by the Easter holiday calendar shift from the first quarter of 2013 into the second quarter of 2014. Same-store sales continue to be negatively impacted by competitive store openings and the weak economic environment in the Company’s core markets. Adjusted for the effect of the 2014 Easter holiday calendar shift, same-store sales declined 3.7%.

 

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Gross Profit. We calculate gross profit as net sales less cost of sales. Cost of sales includes product costs, inbound freight, warehousing costs, receiving and inspection costs, distribution costs, and depreciation and amortization expenses associated with our supply chain operations.

Gross profit was $270.7 million for the first quarter 2014, an increase of $8.2 million, or 3.1%, from $262.5 million for the first quarter 2013. Gross profit, as a percentage of net sales, was 27.0% and 26.7% for the first quarter 2014 and 2013, respectively. The increase in gross profit as a percentage of net sales primarily reflects reduced promotional spend and an increased perishable sales mix, partially offset by increased shrink during the first quarter of 2014.

Operating and Administrative Expenses. Operating and administrative expenses consist primarily of personnel costs, sales and marketing expenses, depreciation and amortization expenses as well as other expenses associated with facilities unrelated to our supply chain network, internal management expenses and expenses for accounting, information systems, legal, business development, human resources, purchasing and other administrative departments.

Operating and administrative expenses were $254.9 million for the first quarter 2014, an increase of $19.0 million, or 8.1%, from $235.8 million for the first quarter 2013. Operating and administrative expenses, as a percentage of net sales, increased to 25.4% for the first quarter 2014 compared with 24.0% for the first quarter 2013. The increase in the rate as a percentage of net sales was primarily due increased occupancy and labor costs related to new stores, start-up costs associated with acquired stores, increased snow removal and utility costs due to challenging weather conditions, as well as reduced fixed cost leverage in the Company’s core business resulting from lower sales.

Interest Expense. Interest expense (including the amortization of deferred financing costs) was $14.9 million for the first quarter 2014, compared to $12.2 million for the first quarter 2013. The increase was due primarily to interest expense on the 2020 Notes, offset by reduced interest expense on our term loan.

Loss on Debt Extinguishment. In connection with our debt refinancing in March 2014, we recognized a loss on debt extinguishment of $9.0 million.

Income Taxes. Income tax benefit was $3.6 million for the first quarter 2014, a decrease of $9.4 million from a provision for income taxes of $5.9 million for the first quarter 2013. The effective income tax rate was (44.1%) for the first quarter 2014 and 40.5% for the first quarter 2013.

 

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Liquidity and Capital Resources

Cash Flows

The following table presents a summary of our net cash provided by (used in) operating, investing and financing activities (in thousands):

 

     Thirteen Weeks Ended  
     March 30, 2013     March 29, 2014  

Net cash provided by (used in) operating activities

   $ 13,894      $ (13,650

Net cash used in investing activities

     (11,386     (16,428

Net cash used in financing activities

     (10,082     (19,870
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

   $ (7,574   $ (49,948
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 65,315      $ 32,230   
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Operating Activities. Net cash used in operating activities was $13.7 million for the thirteen weeks ended March 29, 2014 compared to $13.9 million provided by operating activities for the thirteen weeks ended March 30, 2013. The decrease in cash provided by operating activities was due primarily to lower operating income and higher payments for inventory, primarily related to the increased inventory requirements for the Mariano’s store openings and the required inventory buildup related to the later timing of the Easter holiday compared to 2013.

Net Cash Used in Investing Activities. Net cash used in investing activities for the thirteen weeks ended March 29, 2014 was $16.4 million compared to $11.4 million for the thirteen weeks ended March 30, 2013. The increase is primarily due to higher capital expenditures from the remodeling of the Dominick’s stores acquired from Safeway during the fourth quarter of 2013. Total capital expenditures for Fiscal 2014, excluding acquisitions, are estimated to be approximately $95 million.

Net Cash Used in Financing Activities. Net cash used in financing activities for the thirteen weeks ended March 29, 2014 was $19.9 million compared to $10.1 million for the thirteen weeks ended March 30, 2013. Net cash used in the thirteen weeks ended March 29, 2014 primarily consisted of payments of debt and capital lease obligations of $518.0 million primarily to refinance our existing indebtedness and related financing costs of $5.2 million, offset somewhat by the net proceeds from our term loan of $450.8 million, net proceeds from our common stock offering of $19.3 million and net borrowings on our revolving credit facility of $33.8 million. Net cash used in the thirteen weeks ended March 30, 2013 consisted of dividends paid to shareholders in the amount of $5.4 million and payments of debt and capital lease obligations of $4.7 million.

Offering of Common Stock

On February 12, 2014, we completed a public offering of 10,170,989 shares of our common stock at a price of $7.00 per share, which included 2,948,113 shares sold by Roundy’s and 7,222,876 shares sold by existing shareholders. The Company received approximately $20.6 million in gross proceeds from the offering, or approximately $19.3 million in net proceeds after deducting the underwriting discount and expenses related to the offering. The net proceeds were used for general corporate purposes, including funding working capital and operating expenses as well as capital expenditures related to the eleven Dominick’s stores acquired from Safeway in the Chicago Stores Acquisition.

2014 Credit Facilities

On March 3, 2014, Roundy’s Supermarkets, Inc. (“RSI”), the wholly owned operating subsidiary of the Company, refinanced its existing credit facilities (the “2014 Refinancing”), and entered into two new credit facilities, a $460 million term loan (the “New Term Facility”) and a $220 million asset-based revolving credit facility (the “New Revolving Facility”, together with the New Term Facility, the “2014 Credit Facilities”). We used the proceeds from the New Term Facility, together with existing cash, to repay our existing term loan, including all accrued interest thereon and related costs, fees and expenses. The New Term Facility has a maturity date of March 3, 2021; provided that the maturity date will accelerate to September 15, 2020 if our 10.250% Senior Secured Notes due in 2020 (the “2020 Notes”) are not refinanced in full prior to such date. The New Revolving Facility has a maturity date of March 3, 2019.

 

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The New Term Facility bears interest, at our option, at (i) adjusted LIBOR (subject to a minimum floor of 1.00%) plus 4.75% or (ii) a base rate plus 3.75%. The New Term Facility is repayable in quarterly installments of approximately 0.25% or $1.2 million with a one-time payment of the remaining balance due at maturity.

The New Revolving Facility bears interest, at our option, at (i) adjusted LIBOR plus a margin of 1.50%-2.00% per annum or (ii) a base rate plus a margin of 0.50%—1.00% per annum. In either case, the margin is based on RSI’s utilization of the New Revolving Facility. In addition, there is a quarterly fee payable in an amount equal to either 0.375% or 0.25% per annum of the undrawn portion of the New Revolving Facility. We may use borrowings under the New Revolving Facility for ongoing working capital and general corporate purposes and any other use not prohibited by the credit agreement governing the New Revolving Facility. Borrowing availability under the New Revolving Facility at any time is based on the value of certain eligible inventory, accounts receivable and pharmacy prescription files and is subject to additional reserves and other adjustments.

Borrowings under the New Term Facility are guaranteed, subject to certain exceptions, by the Company and certain of the Company’s direct and indirect, wholly owned domestic restricted subsidiaries and are secured by substantially all the RSI’s and such guarantors’ assets (subject to certain exceptions) on a first-priority basis, except that with respect to New Revolving Facility Priority Collateral (defined below) such assets are secured on a second-priority basis, in each case subject to certain exceptions and to the terms of the First Lien Intercreditor Agreement described below.

Borrowings under the New Revolving Facility are guaranteed, subject to certain exceptions, by the Company and certain of the Company’s direct and indirect, wholly owned domestic restricted subsidiaries and are secured by substantially all the RSI’s and such guarantors’ assets (subject to certain exceptions), in the case of certain assets designated as New Revolving Facility priority collateral including accounts, inventory, cash, deposit accounts, certain payment intangibles and other related assets (“New Revolving Facility Priority Collateral”) on a first-priority basis, and on a second-priority basis with respect to other assets, in each case subject to certain exceptions and to the terms of the First Lien Intercreditor Agreement described below.

On March 3, 2014, RSI and the Company entered into a First Lien Intercreditor Agreement (the “First Lien Intercreditor Agreement”), which establishes the relative lien priorities and rights of the secured parties under the New Revolving Facility and the New Term Facility. Pursuant to the First Lien Intercreditor Agreement, the obligations under the New Revolving Facility are secured with a first priority lien on the New Revolving Facility Priority Collateral and a second priority lien on the other assets constituting collateral, and the obligations under the New Term Facility are secured with a second priority lien on the New Revolving Facility Priority Collateral and a first priority lien on all other collateral (in each case, subject to certain exceptions and limitations).

Mandatory prepayments under the New Term Facility will be required with (i) 50% of adjusted excess cash flow (which percentage shall be reduced to 25% and to 0% upon achievement of certain leverage ratios); (ii) 100% of the net cash proceeds of assets sales or other non-ordinary course dispositions of certain property by the RSI and its restricted subsidiaries (subject to certain exceptions and reinvestment provisions); and (iii) 100% of the net cash proceeds of issuances, offerings or placements of certain indebtedness not otherwise permitted to be incurred under the New Term Facility credit agreement.

The terms of the 2014 Credit Facilities contain customary affirmative covenants. The terms of the 2014 Credit Facilities also contain customary negative covenants, including restrictions on (i) dividends on, and redemptions of, equity interest and other restricted payment; (ii) liens and sale-leaseback transactions; (iii) loans and investments; (iv) guarantees and hedging agreements; (v) the sale, transfer or disposition of assets and businesses; (vi) transactions with affiliates; (vii) negative pledges and restrictions on subsidiary distributions; and (viii) optional payments and modifications of certain debt instruments.

2020 Notes

On December 20, 2013, RSI completed the private placement of $200 million of 2020 Notes that mature on December 15, 2020. The Company will pay interest at a rate of 10.25% on the 2020 Notes semiannually, commencing on June 15, 2014. The 2020 Notes were issued with a 3.01% discount, which will be amortized over the seven year term of the 2020 Notes. The Company capitalized $4.6 million of financing costs related to the issuance of the 2020 Notes which will be also amortized over the seven year term of the 2020 Notes.

The Company used the net proceeds from the issuance of the 2020 Notes to prepay approximately $148 million in principal amount of the Company’s outstanding term loan and to fund the Chicago Stores Acquisition. The Company capitalized $0.6 million related to an amendment fee paid to lenders of the Credit Facilities. In addition, the Company expensed $3.5 of unamortized loan costs, including $2.0 million of previously capitalized financing costs and $1.5 million of the unamortized discount on the Term Loan.

 

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The 2020 Notes are unconditionally guaranteed, jointly and severally, on a senior basis, by (i) RSI’s indirect parent company Roundy’s, Inc., (ii) RSI’s direct parent company Roundy’s Acquisition Corp. and (iii) each of RSI’s domestic restricted subsidiaries owned on the date of original issuance of the 2020 Notes, and are secured by a second priority security interest in substantially all of our and the Guarantors’ assets, which security interests rank junior to the security interests in such assets that secure our2014 Credit Facilities. The 2020 Notes and the guarantees thereof are secured by a second priority lien on substantially all the assets owned by RSI and the guarantors, subject to permitted liens and certain exceptions. These liens are junior in priority to the first-priority liens on the same collateral securing our existing Credit Facility (as well as certain hedging and cash management obligations owed to lenders thereunder or their affiliates) and to certain other permitted liens under the indenture.

The indenture governing the 2020 Notes generally provides that RSI can pay dividends and make other distributions to its parent companies in an amount not to exceed (i) 50% of RSI’s consolidated net income for the period beginning September 29, 2013 and ending as of the end of the last fiscal quarter before the proposed payment for which financial statements are available, plus (ii) 100% of the aggregate amount of cash and the fair market value of any assets or property received by RSI after December 20, 2013 from the issuance and sale of equity interests of RSI (subject to certain exceptions), plus (iii) 100% of the aggregate amount of cash and the fair market value of any assets or property contributed to the capital of RSI after December 20, 2013, plus (iv) 100% of the aggregate amount received in cash and the fair market value of assets or property received after December 20, 2013 from the sale of certain investments or the sale of certain subsidiaries, provided that certain conditions are satisfied, including that RSI has a consolidated interest coverage ratio of greater than 2.0 to 1.0. The restrictions on dividends and other distributions contained in the indenture are subject to certain exceptions, including (i) the payment of dividends to permit any of its parent companies to pay taxes, general corporate and operating expenses, customary compensation of officers and employees of such parent companies and costs related to an offering of such parent company’s equity and (ii) dividends and other distributions in an aggregate amount not to exceed $10.0 million in any calendar year, with unused amounts being carried forward to future periods.

Prior Credit Facilities

Prior to the 2014 Refinancing, our long-term debt included a senior credit facility consisting of a $675 million term loan (the ‘‘2012 Term Loan’’) and a $125 million revolving credit facility (the ‘‘2012 Revolving Facility’’ and together with the 2012 Term Loan, the ‘‘2012 Credit Facilities”). Borrowings under the 2012 Credit Facilities bore interest, at the Company’s option, at (i) adjusted LIBOR (subject to a 1.25% floor) plus 4.5% or (ii) an alternate base rate plus 3.5%.

Non-GAAP Measures

We present Adjusted EBITDA, a non-GAAP measure, to provide investors with a supplemental measure of our operating performance. We define Adjusted EBITDA as earnings before interest expense, provision for income taxes, depreciation and amortization, LIFO charges, amortization of deferred financing costs, non-cash compensation expenses arising from the issuance of stock, costs incurred in connection with our IPO (or subsequent offerings of our Roundy’s common stock), loss on debt extinguishment, certain non-recurring or unusual employee and pension related costs and goodwill impairment charges. Omitting interest, taxes and the other items provides a financial measure that facilitates comparisons of our results of operations with those of companies having different capital structures. Since the levels of indebtedness, tax structures, and methodologies in calculating LIFO expense that other companies have are different from ours, we omit these amounts to facilitate investors’ ability to make these comparisons. Similarly, we omit depreciation and amortization because other companies may employ a greater or lesser amount of owned property, and because in our experience, whether a store is new or one that is fully or mostly depreciated does not necessarily correlate to the contribution that such store makes to operating performance. We believe that investors, analysts and other interested parties consider Adjusted EBITDA an important measure of our operating performance. Adjusted EBITDA should not be considered as an alternative to net income as a measure of our performance. Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. The limitations of Adjusted EBITDA include: (i) it does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; (ii) it does not reflect changes in, or cash requirements for, our working capital needs; (iii) it does not reflect income tax payments we may be required to make; and (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements.

To properly and prudently evaluate our business, we encourage you to review our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013 and the reconciliation to Adjusted EBITDA from net income, the most directly comparable financial measure presented in accordance with GAAP, set forth in the table below. All of the items included in the reconciliation from net income to Adjusted EBITDA are either (i) non-cash items or (ii) items that management does not consider in assessing our on-going operating performance. In the case of the non-cash items, management believes that

investors may find it useful to assess our comparative operating performance because the measures without such items are less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and more reflective of other factors that affect operating performance. In the case of the other items that management does not consider in assessing our on-going operating performance, management believes that investors may find it useful to assess our operating performance if the measures are presented without these items because their financial impact may not reflect on-going operating performance.

 

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The following is a summary of the calculation of Adjusted EBITDA for the thirteen weeks ended March 30, 2013 and March 29, 2014 (in thousands):

 

     Thirteen Weeks Ended  
     March 30, 2013      March 29, 2014  

Net Income (loss)

   $ 8,647       $ (4,517

Interest expense

     11,584         14,294   

Provision (benefit) for income taxes

     5,877         (3,559

Depreciation and amortization expense

     16,398         16,859   

LIFO charge

     500         491   

Amortization of deferred financing costs

     573         624   

Non-cash stock compensation expense

     389         860   

Loss on debt extinguishment

     —           9,048   
  

 

 

    

 

 

 

Adjusted EBITDA

   $ 43,968       $ 34,100   
  

 

 

    

 

 

 

Our principal sources of liquidity are cash flows generated from operations and borrowings under our revolving credit facility. Our principal uses of cash are to meet debt service requirements, finance capital expenditures, make acquisitions and provide for working capital. We expect that current excess cash, cash available from operations and funds available under our revolving credit facility will be sufficient to fund our operations, debt service requirements and capital expenditures for at least the next 12 months.

Our ability to make payments on and to refinance our debt, and to fund planned capital expenditures depends on our 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 our control. We believe that, based upon current levels of operations, we will be able to meet our debt service obligations when due. Significant assumptions underlie this belief, including, among other things, that we will continue to be successful in implementing our business strategy and that there will be no material adverse developments in our business, liquidity or capital requirements. If our future cash flow from operations and other capital resources are insufficient to pay our obligations as they mature or to fund our liquidity needs, we may be forced to reduce or delay our business activities and capital expenditures, sell assets, obtain additional debt or equity capital or restructure or refinance all or a portion of our debt, on or before maturity. There can be no assurance that we 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 our existing and future indebtedness may limit our ability to pursue any of these alternatives.

Critical Accounting Policies and Estimates

The preparation of our financial statements in conformity with U.S. GAAP requires us 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. We believe our estimates and assumptions are reasonable; however, future results could differ from those estimates under different assumptions or conditions.

Critical accounting policies are policies that reflect material judgment and uncertainty and may result in materially different results using different assumptions or conditions. We identified the following critical accounting policies and estimates: inventories, income taxes, discounts and vendor allowances, allowance for losses on receivables, closed facility lease commitments, reserves for self-insurance, employee benefit plans, goodwill, and impairment of long-lived assets. For a detailed discussion of accounting policies, refer to our Annual Report on Form 10-K for the fiscal year ended December 28, 2013.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes in our exposure to market risk from the information provided in Item 7A. Quantitative and Qualitative Disclosures About Market Risk of our Annual Report on Form 10-K for the fiscal year ended December 28, 2013.

Item 4. Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934 (“Exchange Act”), the Chief Executive Officer and the Chief Financial Officer, together with a disclosure review committee appointed by the Chief Executive Officer, evaluated Roundy’s disclosure controls and procedures as of March 29, 2014, the end of the period covered by this report. Based on that evaluation, Roundy’s Chief Executive Officer and Chief Financial Officer concluded that Roundy’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) were effective as of the end of the period covered by this report to provide reasonable

 

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assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In connection with the evaluation described above, there were no changes in our internal control over financial reporting during the quarter ended March 29, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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Part II – Other Information

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

Except as set forth below, there were no material changes in risk factors for the Company in the period covered by this report. See the discussion of risk factors in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 28, 2013.

If we are not able to complete the Rainbow Store Sale, our results of operations could be materially adversely affected.

On May 6, 2014, the Company entered into purchase and sale agreements (the “Asset Purchase Agreements”) to sell 18 Rainbow stores in the Minneapolis / St. Paul market to a group of local grocery retailers (the “Buyers”), including SUPERVALU INC. (“the Rainbow Store Sale”). The completion of the Rainbow Store Sale is subject to satisfaction or waiver of certain closing conditions in the definitive agreements, including with regard to third-party consents and regulatory review, and there can be no assurance that the Rainbow Store Sale will be completed according to its current terms, or at all. If we are not able to meet the conditions to the Asset Purchase Agreements, or if the Rainbow Store Sale cannot otherwise be completed, we may not be able to sell the Rainbow stores to the Buyers or to some other group of buyers on terms as favorable to those provided in the Asset Purchase Agreements.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

Results of Operations and Financial Condition.

On May 7, 2014, the Company issued a press release announcing financial information for its first quarter ended March 29, 2014. A copy of the press release is furnished herewith as Exhibit 99.1. This information shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933.

Entry into a Material Definitive Agreement.

On May 6, 2014, the Company entered into the Asset Purchase Agreements to sell 18 Rainbow stores in the Minneapolis / St. Paul market to a group of local grocery retailers, including SUPERVALU INC. The aggregate sale price for the 18 Rainbow stores is approximately $65 million in cash plus the proceeds from inventory that will be sold at the closing of the Rainbow Store Sale. In addition, as part of the transaction, the Buyers will assume the lease obligations and certain multi-employer pension liabilities related to the acquired stores.

The Company is actively seeking additional buyers for its remaining nine Rainbow stores, and at the conclusion of that process expects to either sell or close the remaining nine Rainbow stores and fully exit from the Minneapolis / St. Paul market.

The Rainbow Store Sale is expected to close during the third quarter of 2014, subject to satisfaction or waiver of certain closing conditions in the definitive agreements, including with regard to third-party consents and regulatory review, while the sale or closure of the remaining nine Rainbow stores is expected to be completed during either the third or fourth quarter of 2014. The Company expects to use the sale proceeds to pay down borrowings under its term loan and asset-based revolving credit facility.

 

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For further information about the Rainbow Store Sale, see the Company’s press release which is filed herewith as Exhibit 99.2 and incorporated by reference herein. The proceeding summary of the Asset Purchase Agreements is qualified in its entirety by reference to the Asset Purchase Agreement with SUPERVALU INC. (which governs the majority of the Rainbow Store Sale), which is filed herewith as Exhibit 2.1 and incorporated by reference herein. The remaining Asset Purchase Agreements were in substantially similar form to the main agreement with SUPERVALU INC.

Item 6. Exhibits

Reference is made to the separate exhibit index contained on page 26 filed herewith.

 

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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 by the undersigned, thereunto duly authorized.

 

Roundy’s, Inc.
By:  

/s/ ROBERT A. MARIANO

  Robert A. Mariano
 

Chairman, President and Chief Executive

Officer and Director

Date: May 7, 2014
By:  

/s/ DARREN W. KARST

  Darren W. Karst
  Executive Vice President, Chief Financial Officer and Assistant Secretary
Date: May 7, 2014

 

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Exhibit Index

 

Exhibit

Number

  

Description

    2.1*    Asset Purchase Agreement, dated May 6, 2014, between RBF, LLC, Roundy’s Supermarket’s, Inc. and SUPERVALU INC.
  31.1    Certification Statement of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2    Certification Statement of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1    Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
  99.1    Press Release dated May 7, 2014
  99.2    Press Release dated May 7, 2014
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

* The exhibits and schedules to the Asset Purchase Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Registrant will furnish a supplemental copy of the schedule to the Securities and Exchange Commission upon request.

 

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