Roundy's, Inc. - FORM 10-Q - November 12, 2015

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EX-31.1 - EX-31.1 - Roundy's, Inc.	d88165dex311.htm
EX-32.1 - EX-32.1 - Roundy's, Inc.	d88165dex321.htm
EX-31.2 - EX-31.2 - Roundy's, Inc.	d88165dex312.htm

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 October 3, 2015

¨	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.

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 November 2, 2015, there were 49,380,998 shares of the registrant’s common stock, par value $0.01 per share, issued and outstanding.

Roundy’s, Inc.

Quarterly Report on Form 10-Q

For the thirteen and thirty-nine week periods ended October 3, 2015

Table of Contents


Part I - Financial Information
Item 1.	Financial Statements (Unaudited)	3
	Consolidated Statements of Comprehensive Loss for the thirteen and thirty-nine weeks ended September 27, 2014 and October 3, 2015	3
	Consolidated Balance Sheets as of January 3, 2015 and October 3, 2015	4
	Consolidated Statements of Cash Flows for the thirty-nine weeks ended September 27, 2014 and October 3, 2015	5
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29
Part II – Other Information
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Mine Safety Disclosures	30
Item 5.	Other Information	30
Item 6.	Exhibits	30
	Signatures	31

Part I – Financial Information

Item 1.

FINANCIAL STATEMENTS

Roundy’s, Inc.

Consolidated Statements of Comprehensive Loss

(In thousands, except per share data)

(Unaudited)


	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	September 27, 2014			October 3, 2015			September 27, 2014			October 3, 2015
Net Sales	$	973,808		$	971,824		$	2,779,404		$	2,952,013

Costs and Expenses:
Cost of sales		715,582			714,646			2,041,721			2,169,538
Operating and administrative		248,418			256,189			705,667			757,114
Goodwill impairment charge		280,014			—			280,014			—
Asset impairment charge		—			—			5,050			—
Interest:
Interest expense, net		13,277			13,133			39,618			39,791
Amortization of deferred financing costs		555			554			1,687			1,662
Loss on debt extinguishment		—			—			8,576			—

		1,257,846			984,522			3,082,333			2,968,105

Loss from Continuing Operations before Income Taxes		(284,038	)		(12,698	)		(302,929	)		(16,092	)

Income Taxes		(34,130	)		(4,071	)		(42,570	)		(5,687	)

Net Loss from Continuing Operations		(249,908	)		(8,627	)		(260,359	)		(10,405	)

Loss from Discontinued Operations, Net of Tax		(33,913	)		(207	)		(55,644	)		(2,275	)

Net Loss	$	(283,821	)	$	(8,834	)	$	(316,003	)	$	(12,680	)

Basic and diluted net loss per common share:
Continuing operations	$	(5.19	)	$	(0.18	)	$	(5.47	)	$	(0.22	)
Discontinued operations	$	(0.70	)	$	(0.00	)	$	(1.17	)	$	(0.05	)
Weighted average number of common shares outstanding:
Basic and diluted		48,167			48,453			47,590			48,374

Comprehensive Loss	$	(283,294	)	$	(7,951	)	$	(314,879	)	$	(10,106	)

See notes to accompanying unaudited consolidated financial statements.

Roundy’s, Inc.

Consolidated Balance Sheets

(In thousands, except per share data)


	January 3, 2015			October 3, 2015
				(Unaudited)
Assets
Current Assets:
Cash and cash equivalents	$	58,576		$	32,648
Notes and accounts receivable, less allowance for losses		39,009			37,074
Merchandise inventories		275,457			290,396
Prepaid expenses		21,536			22,223
Income taxes receivable		14,818			3,793
Deferred income taxes		4,439			4,439
Current assets of discontinued operations		6,518			7,319

Total current assets		420,353			397,892

Property and Equipment, net		320,263			325,894

Other Assets:
Other assets, net of amortization of certain intangible assets		53,244			48,550
Long-term assets of discontinued operations		27,971			25,815
Goodwill		297,523			297,523

Total other assets		378,738			371,888

Total assets	$	1,119,354		$	1,095,674

Liabilities and Shareholders’ Deficit
Current Liabilities:
Accounts payable	$	234,572		$	217,943
Accrued wages and benefits		37,141			42,340
Other accrued expenses		51,861			61,894
Current maturities of long-term debt and capital lease obligations		1,459			1,554
Current liabilities of discontinued operations		20,135			14,494

Total current liabilities		345,168			338,225

Long-term Debt and Capital Lease Obligations		641,197			644,871
Deferred Income Taxes		40,444			43,435
Other Liabilities		106,940			107,258
Long-term Liabilities of Discontinued Operations		71,993			54,544

Total liabilities		1,205,742			1,188,333

Commitments and Contingencies

Shareholders’ Deficit:
Preferred Stock (5,000 shares authorized at 1/3/15 and 10/3/15, respectively, $0.01 par value, 0 shares at 1/3/15 and 10/3/15, respectively, issued and outstanding)		—			—
Common stock (150,000 shares authorized, $0.01 par value, 49,334 shares and 49,381 shares at 1/3/15 and 10/3/15, respectively, issued and outstanding)		493			494
Additional paid-in-capital		140,004			144,401
Accumulated deficit		(172,804	)		(186,047	)
Accumulated other comprehensive loss		(54,081	)		(51,507	)

Total shareholders’ deficit		(86,388	)		(92,659	)

Total liabilities and shareholders’ deficit	$	1,119,354		$	1,095,674

See notes to accompanying unaudited consolidated financial statements.

Roundy’s, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Thirty-nine Weeks Ended
	September 27, 2014			October 3, 2015
Cash Flows From Operating Activities:
Net loss	$	(316,003	)	$	(12,680	)

Adjustments to reconcile net loss to net cash flows provided by operating activities:

Goodwill impairment charge		280,014			—
Asset impairment charges		16,193			—
Multi-employer pension withdrawal charges		49,697			1,195
Depreciation of property and equipment and amortization of intangible assets		51,536			49,851
Amortization of deferred financing costs		1,738			1,662
Gain on sale of discontinued operations		(1,654	)		—
Gain on lease terminations related to discontinued operations		—			(2,739	)
Loss on sale of property and equipment and other assets		272			499
LIFO (benefit) charge		(4,073	)		245
Deferred income taxes		(61,483	)		2,434
Loss on debt extinguishment		9,048			—
Amortization of debt discount		1,788			1,851
Stock-based compensation expense		2,845			4,399

Changes in operating assets and liabilities:
Notes and accounts receivable		1,557			2,309
Merchandise inventories		(4,665	)		(15,184	)
Prepaid expenses		164			3,488
Other assets		(2,729	)		98
Accounts payable		(25,323	)		(21,665	)
Accrued expenses and other liabilities		23,646			10,822
Income taxes		(6,088	)		7,250

Net cash flows provided by operating activities ⁽¹⁾		16,480			33,835

Cash Flows From Investing Activities:
Capital expenditures		(71,460	)		(52,548	)
Proceeds from Rainbow Store Sale		76,907			—
Proceeds from sale of property and equipment		569			667

Net cash flows provided by (used in) investing activities ⁽¹⁾		6,016			(51,881	)

Cash Flows From Financing Activities:
Dividends paid to common shareholders		(150	)		(102	)
Payments of withholding taxes for vesting of restricted stock shares		(719	)		(631	)
Borrowings on revolving credit facility		423,250			301,500
Payments made on revolving credit facility		(423,250	)		(298,500	)
Proceeds from long-term borrowings		450,800			—
Payments of debt and capital lease obligations		(521,344	)		(2,266	)
Payments of lease obligation terminations		—			(7,883	)
Issuance of common stock, net of issuance costs		19,302			—
Debt issuance and refinancing fees and related expenses		(5,628	)		—

Net cash flows used in financing activities⁽¹⁾		(57,739	)		(7,882	)

Net decrease in Cash and Cash Equivalents		(35,243	)		(25,928	)

Cash and Cash Equivalents, Beginning of Period ⁽²⁾		82,178			58,576

Cash and Cash Equivalents, End of Period	$	46,935		$	32,648

Supplemental Cash Flow Information:
Cash paid for interest	$	36,175		$	34,006
Cash paid (refunded) for income taxes		2,459			(12,170	)

⁽¹⁾	Includes activities from continuing operations and discontinued operations.

⁽²⁾	Includes cash and cash equivalents included in assets of discontinued operations.

See notes to accompanying unaudited consolidated financial statements.

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 January 3, 2015.

The accompanying unaudited consolidated financial statements as of October 3, 2015, and for the thirteen and thirty-nine weeks ended September 27, 2014 and October 3, 2015 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 and thirty-nine weeks ended October 3, 2015 may not necessarily be indicative of the results that may be expected for the entire fiscal year ending January 2, 2016.

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. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU No. 2014-08”). ASU No. 2014-08 changed the criteria for reporting discontinued operations and requires additional disclosures about discontinued operations. ASU No. 2014-08 is effective on a prospective basis for all disposals of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. The Company chose not to adopt ASU 2014-08 early for the Rainbow Store Sale transaction and the closure of the remaining nine Rainbow stores, and as such, this standard did not have a material impact on its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU No. 2014-09”). ASU No. 2014-09 provides guidance for revenue recognition for companies that either enter into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principle of the new guidance is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The amendments in ASU No. 2015-14, “Revenue from Contracts with Customers” issued in August 2015 defer the effective date of the new guidance until annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently assessing the potential impact of ASU No. 2014-09 on its consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“ASU No. 2015-03”). ASU No. 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. Debt issuance costs are currently required to be capitalized and presented in the balance sheet as deferred charges or assets. The recognition and measurement for debt issuance costs are not affected by ASU No. 2015-03. The new guidance is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. As of October 3, 2015, the Company has recognized these types of costs on its balance sheet which are related to its 2014 Credit Facilities. The costs related to the New Term Facility will be reclassified from other assets to long-term debt liabilities when the Company adopts ASU No. 2015-03. In August 2015, the FASB issued ASU No. 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements” (“ASU No. 2015-15”). ASU No. 2015-15 codifies a Securities and Exchange Commission (“SEC”) announcement regarding the presentation of debt issuance costs associated with line-of-credit arrangements. The SEC announced that entities are permitted to defer and present debt issuance costs related to line-of-credit arrangements as assets. The Company expects that the costs related to the New Revolving Facility will continue to be presented as assets based on the guidance in ASU 2015-15.

In April 2015, the FASB issued ASU 2015-04, “Compensation – Retirement Benefits (“ASU No. 2015-04”). ASU No. 2015-04 permits companies with fiscal year ends that do not coincide with a calendar month to make an accounting policy election to measure defined benefit plan assets and obligations using the month-end date that is closest to the company’s fiscal year-end. The guidance is effective for annual reporting periods beginning after December 15, 2015 and early adoption is permitted. The Company expects to elect to measure its defined benefit plan assets and obligations using December 31, 2015 as the measurement date. The Company does not expect that this policy change will have a material effect on its consolidated financial statements.

3. 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 in the Chicago Stores Acquisition.

On May 22, 2015, the Company completed a secondary offering of 4,025,000 shares of its common stock at a price of $3.50 per share (the “Secondary Offering”). All shares offered during the Secondary Offering were sold by existing shareholders. The Company did not receive any proceeds from the Secondary Offering.

4. 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. The Company re-opened all of these stores under the Company’s Mariano’s banner during Fiscal 2014. The transaction enabled 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. 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.

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.

During the third quarter of Fiscal 2014, the Company recognized a net of tax loss of $0.3 million related to the write-off of certain Dominick’s equipment which the Company did not deploy.

5. DISCONTINUED OPERATIONS

During the second quarter of Fiscal 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 (“Buyers”), including SUPERVALU INC. (“Rainbow Store Sale”). The aggregate sale price for the 18 Rainbow stores was $65 million in cash plus the proceeds from inventory that was sold to the Buyers at the closing of the Rainbow Store Sale. In addition, as part of the transaction, the Buyers assumed the lease obligations and certain multi-employer pension liabilities related to the acquired stores. The total proceeds received from the Rainbow Store Sale were $76.9 million, resulting in a gain of $1.7 million, which was recognized in the third quarter of Fiscal 2014.

As a condition to the sale agreement, the Company entered into sublease agreements for four of the 18 Rainbow stores for a five year period. The amount of the sublease rent payments that will be received from the Buyers are less than the minimum lease payments for these stores. The sublease payments are not considered significant to the operations of these stores, and as such, the Company does not have significant continuing cash flows.

In addition, during the second quarter of Fiscal 2014, the Company announced its intention to exit the Minneapolis / St. Paul market entirely. The remaining nine Rainbow stores not included in the Rainbow Store Sale were closed during the third quarter of Fiscal 2014. The Company recorded a non-cash impairment charge of $11.1 million in the third quarter of Fiscal 2014 related to the assets of the nine Rainbow stores that were closed. The Company also recorded a $10.0 million closed facility charge during the third quarter of Fiscal 2014 related principally to the lease agreements for the nine closed store locations. During the first quarter of Fiscal 2015, the Company paid $7.9 million to terminate the obligations related to the capital leases of two Rainbow stores that were closed during the third quarter of Fiscal 2014, resulting in a pre-tax gain of $2.7 million.

The Company incurred severance expense of approximately $2.2 million to the employees of the Rainbow stores that were sold or closed during the third quarter of Fiscal 2014.

As a result of the Rainbow Store Sale and the exit from the Minneapolis / St. Paul market, the Company incurred a withdrawal liability related to the multi-employer pension plans in which the affected employees participate. During Fiscal 2014, the Company recorded a charge of $49.7 million for the estimated multi-employer pension withdrawal liability, which represented the Company’s best estimate absent withdrawal liability notices from the multi-employer plans. When withdrawal liability notices from the impacted multi-employer pension plans are received the ultimate withdrawal liability is updated. Charges are recorded in the period when the change in the final withdrawal liability is identified. The Company expects the liability will be paid out in quarterly installments, which vary by plan, over a period of up to 20 years. The net present value of the liability was determined using a risk free interest rate. During the fourth quarter of Fiscal 2014, the Company received a preliminary notice from one of the plans, which required the Company to make the first quarterly installment during the fourth quarter of 2014, and these quarterly installments will continue for 20 years. The amount of the payment was consistent with the Company’s estimates when the initial charge was recorded. During the second quarter of Fiscal 2015, the Company received a withdrawal liability notice from one of the plans, which required the Company to make the first quarterly installment during the second quarter of Fiscal 2015, and these quarterly installments will continue until the fourth quarter of Fiscal 2017. The withdrawal liability notice called for installment payments greater that the Company’s estimates when the initial charge was recorded which resulted in the Company increasing the multi-employer pension plan withdrawal liability by $1.2 million. The present value of the payments expected to be made within the next twelve months is included within current liabilities of discontinued operations, and the remainder of the liability for the estimated multi-employer pension withdrawal is included within long-term liabilities of discontinued operations as presented in the table below.

Also in connection with the sale of the 18 Rainbow stores, the Company has assigned leases and subleases for these stores which expire at various dates through 2026. A remaining potential obligation exists in the event of a default under the assigned leases and subleases by the assignee. The potential obligations would include rent, real estate taxes, common area costs and other sundry expenses. As of October 3, 2015, the future minimum lease payments are approximately $34.0 million. The Company believes the likelihood of a liability related to these assigned leases and subleases is remote.

The Company has accounted for the 27 Rainbow stores that were either included in the Rainbow Store Sale or closed during the third quarter of Fiscal 2014 as discontinued operations

The Company has included all direct costs and an amount of allocated interest expense (including amortization of deferred financing costs and loss on debt extinguishment charges) for the 27 Rainbow stores within net loss from discontinued operations. Interest was allocated based on the ratio of the net assets of the 27 Rainbow stores as of the end of the period to the net assets of the total Company. The Company recorded $0.6 million and $3.2 million of interest in discontinued operations for the thirteen and thirty-nine weeks ended September 27, 2014, respectively. The Company recorded $0.3 million and $1.2 million of interest in discontinued operations for the thirteen and thirty-nine weeks ended October 3, 2015, respectively.

Loss from discontinued operations, net of tax, as presented in the Consolidated Statements of Comprehensive Loss for the thirteen and thirty-nine weeks ending September 27, 2014 and October 3, 2015 is as follows (in thousands):


	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	September 27, 2014			October 3, 2015			September 27, 2014			October 3, 2015
Net Sales	$	18,611		$	—		$	290,986		$	—

(Loss) income from discontinued operations, before income taxes:	$	(45,751	)	$	(346	)	$	(79,840	)	$	926
Gain on disposal of operations, before income taxes:		3,010			—			1,654			—

Total (loss) income from discontinued operations before income taxes		(42,741	)		(346	)		(78,186	)		926
Income taxes on discontinued operations		(8,828	)		(139	)		(22,542	)		3,201

Loss from discontinued operations, net of tax	$	(33,913	)	$	(207	)	$	(55,644	)	$	(2,275	)

The assets and liabilities of discontinued operations as of January 3, 2015 and October 3, 2015 include the following:


	January 3, 2015		October 3, 2015
Assets of discontinued operations:
Notes and accounts receivable	$	374	$	—
Prepaid expenses		914		784
Income taxes receivable		—		1,785
Deferred income taxes, current		4,750		4,750
Deferred income taxes, non-current		27,971		25,815
Property and equipment, net		480		—

Total assets of discontinued operations	$	34,489	$	33,134

Current assets of discontinued operations	$	6,518	$	7,319

Long-term assets of discontinued operations	$	27,971	$	25,815

Liabilities of discontinued operations:
Accounts payable	$	1,060	$	—
Estimated multi-employer liability, current		4,554		6,088
Other accrued expenses		9,036		6,932
Current maturities of capital lease obligations		2,500		1,474
Income taxes payable		2,985		—
Long-term capital lease obligations		13,807		3,496
Estimated multi-employer liability, non-current		45,078		42,167
Other long-term liabilities		13,108		8,881

Total liabilities of discontinued operations	$	92,128	$	69,038

Current liabilities of discontinued operations	$	20,135	$	14,494

Long-term liabilities of discontinued operations	$	71,993	$	54,544

6. STEVENS POINT

On July 1, 2014, the Company announced the closure of its Stevens Point distribution facility (“Stevens Point Warehouse”). As a result of these actions, the Company evaluated the recoverability of this long-lived asset group and recorded a non-cash impairment charge of $5.1 million for the assets at the Stevens Point Warehouse during the second quarter of Fiscal 2014. The fair value of the long-lived asset group was calculated using level 2 market data inputs.

The Company consolidated its supply chain operations previously performed at the Stevens Point Warehouse into its Oconomowoc distribution facility and closed the Stevens Point Warehouse during the third quarter of Fiscal 2014. During the fourth quarter of Fiscal 2014, the Company sold the Stevens Point Warehouse, which resulted in a gain of approximately $10.1 million ($6.5 million, net of income taxes).

The Company recorded severance and other one-time charges of $2.0 million related to the closure of the Stevens Point Warehouse during the Fiscal 2014. Other one-time charges included costs to transfer inventory and equipment from the Stevens Point Warehouse to the Oconomowoc warehouse, as well as miscellaneous expenses required to prepare the Stevens Point Warehouse for sale.

7. 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 October 3, 2015, which is an interest rate swap liability of $0.4 million, compared to a liability of $0.6 million as of January 3, 2015. 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 October 3, 2015.

Based on estimated market rents for those leased properties which are recorded as capital leases, the fair value of capital lease obligations is approximately $24.3 million and $15.1 million, as of January 3, 2015 and October 3, 2015, respectively. Included in the fair value of capital lease obligations are $11.3 million and $3.4 million as of January 3, 2015 and October 3, 2015, respectively, related to the capital lease obligations for the nine Rainbow stores that were closed during the third quarter of Fiscal 2014 and are included in liabilities of discontinued operations on the Consolidated Balance Sheet. The Company considers the fair value of the capital leases to be Level 2 within the fair value hierarchy.

Based on recent open market transactions of the Company’s 2014 Credit Facilities and the 10.25% Senior Secured Notes due in 2020 (the “2020 Notes”), the fair value of long-term debt, including current maturities, is approximately $600.9 million and $529.0 million as of January 3, 2015 and October 3, 2015, respectively. The Company considers the fair value of the New Term Facility and 2020 Notes to be Level 2 within the fair value hierarchy.

8. INVENTORIES

The Company uses the LIFO method of valuation for a portion of its inventories. If the FIFO method had been used, inventories would have been approximately $21.2 million higher on January 3, 2015 and $21.4 million higher on October 3, 2015.

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.

9. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

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


	January 3, 2015		October 3, 2015
Term loan	$	444,700	$	444,700
2020 Notes		200,000		200,000
Revolving credit facility		—		3,000
Capital lease obligations, 7.6% to 10%, due 2015 to 2031		11,849		10,931
Other long-term debt		1,042		877

		657,591		659,508
Less: Unamortized discount on term loan		9,815		8,609
Less: Unamortized discount on 2020 Notes		5,120		4,474
Less: Current maturities		1,459		1,554

Long-term debt and capital lease obligations, net of current maturities	$	641,197	$	644,871

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 that will accelerate to September 15, 2020 if the 10.25% Senior Secured Notes due in 2020 (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 an interest rate, 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 are 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 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.

During the fourth quarter of Fiscal 2014, the Company made a $13.0 million prepayment of the New Term Facility with the net cash proceeds of the sale of its Stevens Point Warehouse.

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 of 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 an interest rate, at the Company’s option, of (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 0.25% or 0.375% 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.

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 of 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 (of which $8.6 million is related to continuing operations), 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 $4.1 million and $0.9 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 October 3, 2015, the Company was in compliance with all covenants relating to its indebtedness.

On October 3, 2015, there were outstanding letters of credit, totaling $33.6 million, which reduce borrowing availability under the New Revolving Facility. As of October 3, 2015, the total unused availability under the New Revolving Facility was $168.9 million.

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 20, 2013, RSI completed the private placement of $200 million of the 2020 Notes that mature on December 15, 2020. The Company pays 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 is being 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 is also being amortized over the seven year term of the 2020 Notes.

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 RSI’s 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 the 2014 Credit Facilities (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.

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 110.25% of the principal amount of the 2020 Notes, plus accrued and unpaid interest.

At any time prior to December 15, 2016, the Company may redeem some or all of the 2020 Notes at a price of 100% of the principal amount of the 2020 Notes being redeemed plus the applicable premium, which is the greater of (1) 1% of the principal amount of the 2020 Notes being redeemed or (2) the excess of (a) the present value at the redemption date of (i) the redemption price of the 2020 Notes on December 15, 2016 as shown in the table below, plus (ii) all interest payments due on such 2020 Notes through December 15, 2016, compiled using a discount rate equal to the Treasury Rate (as defined in the indenture) as of such redemption date, plus 50 basis points; over (b) the principal amount of such 2020 Notes.

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	%

10. 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 two one-year forward starting interest rate swaps, which will mature on August 27, 2016, to hedge cash flows related to interest payments on $75 million notional amount related to its 2012 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 October 3, 2015, the Company has recorded $0.4 million in other accrued expenses in the Company’s Consolidated Balance Sheet, which represents the fair value of the Swap on that date. As of October 3, 2015, the Company has $0.2 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. The Company reclassifies interest payments on the Swap to earnings as the interest payments are made. The Company does not expect the amount of losses that will be reclassified into earnings over the next twelve months to be material. During the thirteen and thirty-nine weeks ended September 27, 2014 and October 3, 2015, amounts reclassified into current period earnings were not material. The fair value of the Swap as of January 3, 2015 was a liability of $0.6 million.

On March 3, 2014, the Company completed the 2014 Refinancing. Due to changes 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 September 27, 2014 and October 3, 2015. The amount of ineffectiveness is considered immaterial.

11. EMPLOYEE BENEFIT PLANS

Net pension income from continuing operations in the thirteen and thirty-nine weeks ended September 27, 2014 and October 3, 2015 included the following components (in thousands):


	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	September 27, 2014			October 3, 2015			September 27, 2014			October 3, 2015
Service cost	$	—		$	—		$	—		$	—
Interest cost on projected benefit obligation		2,234			1,986			6,315			6,021
Expected return on plan assets		(3,563	)		(3,548	)		(10,690	)		(10,644	)
Amortization of net actuarial loss		870			1,385			2,084			4,107

Net pension income from continuing operations	$	(459	)	$	(177	)	$	(2,291	)	$	(516	)

As of October 3, 2015, 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 fiscal year ending January 2, 2016 to be approximately $0.3 million.

12. INCOME TAXES

The Company’s effective tax rate for continuing operations for the thirteen and thirty-nine weeks ended September 27, 2014 was a tax benefit of (12.0%) and (14.1%), respectively. The provision for income taxes and effective tax rate for the thirteen and thirty-nine weeks ended September 27, 2014 reflects the impact of the goodwill impairment charge recorded during the third quarter of Fiscal 2014, the majority of which is nondeductible for tax purposes.

The Company’s effective tax rate for continuing operations for the thirteen and thirty-nine weeks ended October 3, 2015 is a tax benefit of (32.1%) and (35.3%), respectively. The provision for income taxes and effective tax rate for the thirteen weeks ended October 3, 2015 reflects the impact of the valuation allowance recorded during the third quarter of Fiscal 2015, partially offset by additional income tax benefit as a result of the filing of the Company’s 2014 state income tax returns. The provision for income taxes and effective tax rate for the thirty-nine weeks ended October 3, 2015 reflects the reduction of amounts due for federal income taxes as a result of the filing of the Company’s 2014 federal income tax return, as well as the valuation allowance recorded during the third quarter of Fiscal 2015.

During the third quarter of Fiscal 2015, the Company recorded a $1.4 million valuation allowance related to certain federal income tax credits that are no longer considered probable of being fully utilized prior to expiration. This amount is included in the provision for income taxes from continuing operations. This allowance could be adjusted if estimates of future taxable income during the credit carryforward period differ from the estimates utilized in the analysis performed during the third quarter of Fiscal 2015.

13. 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 one multi-employer pension plan based on obligations arising from its collective bargaining agreement covering certain supply chain employees. This plan is underfunded as of October 3, 2015. This plan provides 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 plan.

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

As discussed in Note 5, during Fiscal 2014, the Company exited three multi-employer plans as a result of the Rainbow Store Sale and the exit from the Minneapolis / St. Paul market.

In connection with the exit or sale of its independent distribution business in prior years, the Company has assigned leases and subleases for retail stores which expire at various dates through 2037. 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 for continuing operations are approximately $22.3 million. The Company believes the likelihood of a liability related to these assigned leases and subleases is remote.

14. 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 and thirty-nine weeks ended September 27, 2014 and October 3, 2015, amounts reclassified from accumulated other comprehensive loss to net pension income are included within operating and administrative expenses and amounts reclassified from accumulated other comprehensive loss related to derivatives are included within interest expense in the Company’s Consolidated Statements of Comprehensive Loss.

The change in accumulated other comprehensive loss by component for the thirteen weeks ended September 27, 2014 consisted of the following (in thousands):


	Derivatives			Defined Benefit Pension Plans			Total
Balance at June 28, 2014	$	(395	)	$	(27,468	)	$	(27,863	)

Other comprehensive loss before reclassifications		8			—			8
Income taxes		(3	)		—			(3	)

Net other comprehensive loss before reclassifications		5			—			5

Amounts reclassified from accumulated other comprehensive loss		—			870			870
Income taxes		—			(348	)		(348	)

Net amounts reclassified from accumulated comprehensive loss		—			522			522

Other comprehensive income		5			522			527

Balance at September 27, 2014	$	(390	)	$	(26,946	)	$	(27,336	)

The change in accumulated other comprehensive loss by component for the thirty-nine weeks ended September 27, 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		(211	)		—			(211	)
Income taxes		85			—			85

Net other comprehensive loss before reclassifications		(126	)		—			(126	)

Amounts reclassified from accumulated other comprehensive loss		—			2,084			2,084
Income taxes		—			(834	)		(834	)

Net amounts reclassified from accumulated comprehensive loss		—			1,250			1,250

Other comprehensive income (loss)		(126	)		1,250			1,124

Balance at September 27, 2014	$	(390	)	$	(26,946	)	$	(27,336	)

The change in accumulated other comprehensive loss by component for the thirteen weeks ended October 3, 2015 consisted of the following (in thousands):


	Derivatives			Defined Benefit Pension Plans			Total
Balance at July 4, 2015	$	(285	)	$	(52,104	)	$	(52,389	)

Other comprehensive loss before reclassifications		(21	)		—			(21	)
Income taxes		8			—			8

Net other comprehensive loss before reclassifications		(13	)		—			(13	)

Amounts reclassified from accumulated other comprehensive loss		107			1,385			1,492
Income taxes		(43	)		(554	)		(597	)

Net amounts reclassified from accumulated comprehensive loss		64			831			895

Other comprehensive income		51			831			882

Balance at October 3, 2015	$	(234	)	$	(51,273	)	$	(51,507	)

The change in accumulated other comprehensive loss by component for the thirty-nine weeks ended October 3, 2015 consisted of the following (in thousands):


	Derivatives			Defined Benefit Pension Plans			Total
Balance at January 3, 2015	$	(344	)	$	(53,737	)	$	(54,081	)

Other comprehensive loss before reclassifications		(138	)		—			(138	)
Income taxes		55			—			55

Net other comprehensive loss before reclassifications		(83	)		—			(83	)

Amounts reclassified from accumulated other comprehensive loss		322			4,107			4,429
Income taxes		(129	)		(1,643	)		(1,772	)

Net amounts reclassified from accumulated comprehensive loss		193			2,464			2,657

Other comprehensive income		110			2,464			2,574

Balance at October 3, 2015	$	(234	)	$	(51,273	)	$	(51,507	)

15. EARNINGS PER SHARE

The Company had one class of common stock as of October 3, 2015.

For the thirteen and thirty-nine weeks ended September 27, 2014, there were 268,335 and 305,102 restricted shares outstanding, respectively, that were excluded from the calculation of diluted earnings per share because their inclusion would have had an anti-dilutive effect on earnings per share. For the thirteen and thirty-nine weeks ended October 3, 2015, there were 678,542 and 769,187 restricted shares outstanding, respectively, that were excluded from the calculation of diluted earnings per share because their inclusion would have had an anti-dilutive effect on earnings per share.

As of September 27, 2014 and October 3, 2015, there were 1,041,337 and 796,740 contingently issuable shares, respectively, 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						Thirty-nine Weeks Ended
	September 27, 2014			October 3, 2015			September 27, 2014			October 3, 2015
Net loss per common share - basic:
Net loss from continuing operations	$	(249,908	)	$	(8,627	)	$	(260,359	)	$	(10,405	)
Net loss from discontinued operations		(33,913	)		(207	)		(55,644	)		(2,275	)

Net Loss	$	(283,821	)	$	(8,834	)	$	(316,003	)	$	(12,680	)

Basic and diluted weighted average common shares outstanding		48,167			48,453			47,590			48,374
Net loss per common share from continuing operations- basic and diluted	$	(5.19	)	$	(0.18	)	$	(5.47	)	$	(0.22	)

Net loss per common share from discontinued operations- basic and diluted	$	(0.70	)	$	(0.00	)	$	(1.17	)	$	(0.05	)

16. SHARE-BASED COMPENSATION

The Company’s 2012 Incentive Compensation Plan (“2012 Plan”) and 2015 Incentive Compensation Plan (“2015 Plan”) provide for grants of stock options, stock appreciation rights, restricted stock, other stock-based awards and other cash-based awards. The 2015 Plan was approved on May 15, 2015 at the Company’s 2015 Annual Meeting of Stockholders. An aggregate 5,470,000 shares of common stock were registered for issuance under the 2015 Plan. The remaining shares under the 2012 Plan are no longer available for issuance except those shares that are forfeited due to employee terminations or failure to meet performance metrics. As of October 3, 2015 there were 3,969,515 remaining shares available for issuance under the 2015 Plan, which assumes that all of the 2015 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 $0.8 million and $2.8 million for the thirteen and thirty-nine weeks ended September 27, 2014, respectively, compared to $1.6 million and $4.4 million for the thirteen and thirty-nine weeks ended October 3, 2015, as operating and administrative expenses in the Company’s Consolidated Statements of Comprehensive Loss. The Company paid no dividends on restricted stock shares during the thirteen weeks ended September 27, 2014 and $0.2 million of dividends on restricted stock shares that vested during the thirty-nine weeks ended September 27, 2014, compared to no dividends and $0.1 million of dividends on restricted stock during the thirteen and thirty-nine weeks ended October 3, 2015, respectively.

The Company has granted restricted stock to certain employees, as well as to non-employee directors, under the 2012 Plan and the 2015 Plan. The time-based restricted stock that was granted to employees in 2012 vests over five years. The time-based restricted stock granted to non-employee directors in 2014 and 2015 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 452,725 shares of stock (the “2013 Time-Based Awards”) that will vest based upon the passage of time, in each case to certain employees under the 2012 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.

The unvested restricted shares granted under the 2012 Plan generally have all the rights of a shareholder, including the right to receive dividends and the right to vote the shares. All of the unvested time-based restricted stock and 50% of the 2013 Market Awards granted under the 2012 Plan vest 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, January 3, 2015		1,165		$	5.36

Granted		—			—
Vested		(217	)		7.74
Cancelled or Expired		(21	)		5.03

Outstanding, October 3, 2015		927			4.81

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 and one year for non-employee directors. 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 number of 2014 Performance Awards that will ultimately convert from units to shares is 75.5% of the number of units originally granted based on the operating income performance metrics during Fiscal 2014 and will vest at the conclusion of the third year. 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.

During the first quarter of Fiscal 2015, the Company granted 1,665,642 restricted stock units that will convert to common stock upon vesting. All the units granted during the first quarter of 2015 will vest based on the passage of time. The Company granted 891,705 units that will vest over three years for employees and one year for non-employee directors. The Company also granted 773,937 additional units to certain executive level employees, which will vest over four years. The fair value of these awards was determined based on the stock price as of the date of the grant.

During the first quarter of 2015, the Compensation Committee of the Company’s Board of Directors awarded 760,281 performance-based restricted stock units to certain employees and executive officers that will vest in the first quarter of Fiscal 2018 based on operating income performance metrics (“2015 Performance Awards”). The number of these awards that will ultimately convert from

units to shares will be based on the operating income metrics during Fiscal 2015, Fiscal 2016 and Fiscal 2017 and will vest at the conclusion of the third year and could be up to 200% of the number of units originally awarded. The 2015 Performance Awards were granted under the 2015 Plan that was approved by the Company’s shareholders during the second quarter of Fiscal 2015. The 2015 Performance Awards that are based on Fiscal 2015 operating income were granted during the second quarter of Fiscal 2015 and are therefore included in the table below. The 2015 Performance Awards that are based on Fiscal 2016 and Fiscal 2017 operating income will be granted when the operating income metrics are determined and therefore are not included in the table below.

The unvested restricted stock units granted under the 2012 Plan and the 2015 Plan have the right to receive dividends, but not the right to vote. All of the unvested restricted stock units granted under the 2012 Plan vest upon certain changes of control of the Company. All of the unvested restricted stock units granted under the 2015 Plan vest upon the termination of participants in certain situations following certain changes of control of the Company.

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


	Restricted Units Outstanding (in thousands) ⁽¹⁾			Weighted-average grant-date fair value per unit
Outstanding, January 3, 2015		808		$	6.44

Granted		1,919			4.52
Vested		(189	)		6.33
Cancelled or Expired		(62	)		6.18

Outstanding, October 3, 2015		2,476			4.96

(1)	Represents the number of restricted stock units granted. For the 2014 Market Awards, the 2014 Performance Awards and the 2015 Performance Awards, actual shares issued could be up to 200% of the units granted.

17. 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 from continuing operations of non-perishable, perishable, and non-food items for the thirteen and thirty-nine weeks ended September 27, 2014 and October 3, 2015:


	Thirteen Weeks Ended		Thirty-nine Weeks Ended
	September 27, 2014	October 3, 2015	September 27, 2014	October 3, 2015
Non-Perishable Food	43.5%	42.8%	44.4%	43.1%
Perishable Food	38.8%	39.4%	38.2%	39.5%
Non-Food	17.7%	17.8%	17.4%	17.4%

18. SUBSEQUENT EVENT

On November 10, 2015, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with The Kroger Co., an Ohio corporation (“Parent”), and KS Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Acquisition Sub”), pursuant to which, among other things, Parent has agreed to make a cash tender offer (the “Offer”) to purchase any and all of the outstanding shares of the Company’s common stock, par value $0.01 per share (the “Shares”), at a purchase price of $3.60 per Share in cash (the “Offer Price”).

The Offer is to commence as promptly as practicable (but in no event earlier than five (5) business days, nor later than seven (7) business days, after the date following the date of the Merger Agreement). Unless the Offer is extended in accordance with the Merger Agreement, the Offer will expire at 11:59 p.m., New York Time, on the date that is twenty (20) business days after the date the Offer is first commenced.

Completion of the Offer is subject to several conditions, including (i) that at least majority of the Shares outstanding (determined on a fully diluted basis) be validly tendered and not validly withdrawn prior to the expiration of the Offer; (ii) the expiration or termination of any applicable waiting period relating to the Offer under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”); (iii) the absence of a material adverse effect on the Company; and (iv) certain other customary conditions. There is no financing condition to the obligations to consummate the Offer.

Following the consummation of the Offer and subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement and in accordance with the relevant provisions of the Delaware General Corporation Law (the “DGCL”) and other applicable laws, Acquisition Sub will be merged with and into the Company (the “Merger”), with the Company continuing as the surviving corporation and a wholly owned subsidiary of Parent, at which time each outstanding Share (other than Shares owned by Parent, Acquisition Sub or the Company, or any of their respective wholly owned subsidiaries, or Shares with respect to which appraisal rights are properly exercised under Delaware law) will be converted into the right to receive an amount in cash equal to the Offer Price, without interest.

The Merger Agreement contemplates that the Merger will be effected pursuant to Section 251(h) of the DGCL, which permits completion of the Merger upon the collective ownership by Parent and Acquisition Sub of one share more than 50% of the number of Shares that are then issued and outstanding, and if the Merger is so effected pursuant to Section 251(h) of the DGCL, no stockholder vote will be required to consummate the Merger.

The Merger Agreement contains a thirty (30) day go-shop period, which commences on the date of the Merger Agreement (the “Go-Shop Period”). Following the Go-Shop Period, the Company is subject to standard exclusivity and non-solicitation covenants, subject to customary exceptions that would permit the Company to respond to a bona fide, written and unsolicited offer that either constitutes or is reasonably expected to constitute a proposal that is more favorable, from a financial point of view, to the holders of Shares than the Offer and the Merger (a “Superior Proposal”), if the Board determines in good faith (after consultation with the Company’s financial advisor and outside legal counsel) that a failure to do so would reasonably be expected to be inconsistent with the Board’s fiduciary duties. The Board may change its recommendation in favor of the Offer and the Merger and terminate the Merger Agreement in order to enter into a definitive agreement for such Superior Proposal if the Board determines in good faith (after consultation with the Company’s financial advisor and outside legal counsel) that a failure to do so would reasonably be expected to be inconsistent with the Board’s fiduciary duties; provided, that prior to such change in recommendation or termination, Parent has the right to propose adjustments to the terms and conditions of the Merger Agreement so that such Superior Proposal ceases to constitute a Superior Proposal. If the Company terminates the Merger Agreement to enter into an agreement for a Superior Proposal that was submitted during the Go-Shop Period, the Company would be required to pay to a designee of Parent an $8.0 million termination fee, or a $20.0 million termination fee for certain other terminations.

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 October 3, 2015, we operated 150 grocery stores in Wisconsin and Illinois under the Pick ’n Save, Mariano’s, Copps and Metro Market retail banners, which are served by our two distribution facilities and our food processing and preparation commissary. The following table represents our store network as of the end of each of the periods below:


	9/27/2014		1/3/2015		4/4/2015		7/4/2015		10/3/2015
Pick ’n Save		93		90		90		89		88
Mariano’s		27		29		30		32		33
Copps		25		25		25		25		25
Metro Market		4		4		4		4		4

Total Company-owned stores		149		148		149		150		150

In this section, we refer to the thirteen weeks ended October 3, 2015 as the “third quarter 2015” and we refer to the thirteen weeks ended September 27, 2014 as the “third quarter 2014.”

For the third quarter 2015, net sales from continuing operations were $971.8 million, compared to net sales from continuing operations of $973.8 million for the third quarter 2014. The decrease in net sales was primarily due to a decrease in same-store sales and the impact of closed stores, partially offset by the impact of new and acquired stores.

Net loss per basic and diluted share from continuing operations was $0.18 for the third quarter 2015, compared to net loss per basic and diluted share of $5.19 in the third quarter 2014. Results for the third quarter of Fiscal 2015 include a charge of $1.7 million ($1.0 million, net of income tax) for a Wisconsin store closed during the quarter and a $1.4 million valuation allowance for deferred income taxes. Results for the third quarter 2014 included a goodwill impairment charge of approximately $280.0 million ($247.1 million, net of income tax), severance and other one-time costs related to the closure of the Stevens Point Warehouse of approximately $1.8 million ($1.1 million, net of income tax), a $1.0 million valuation allowance for deferred income taxes, losses on the disposition of obsolete assets acquired in the acquisition of the Dominick’s stores of $0.5 million ($0.3 million, net of income tax), other employee severance costs of $0.1 million ($0.1 million, net of income tax) and a benefit of $5.2 million ($3.1 million, net of income tax) related to the reduction in the LIFO reserve due to the dispositions of inventory as a result of the closure of the Stevens Point Warehouse.

For the thirty-nine weeks ended October 3, 2015, net loss per basic and diluted share from continuing operations was $0.22, compared to net loss per basic and diluted share of $5.47 for the thirty-nine weeks ended September 27, 2014. Results for the thirty-nine weeks ended October 3, 2015 include charges of $2.3 million ($1.4 million, net of income tax) for two Wisconsin stores closed during the year and a $1.4 million valuation allowance for deferred income taxes. Results for the thirty-nine weeks ended September 27, 2014 included a goodwill impairment charge of approximately $280.0 million ($247.1 million, net of tax), an asset impairment charge of approximately $5.1 million ($3.0 million, net of income tax), severance and other one-time costs of approximately $1.8 million ($1.1 million, net of income tax) related to the closure of the Stevens Point Warehouse during the third quarter of Fiscal 2014, a $1.0 million valuation allowance for deferred income taxes, losses on the disposition of obsolete assets acquired in the acquisition of the Dominick’s stores of $0.5 million ($0.3 million, net of income tax), employee severance costs of $1.3 million ($0.8 million, net of income tax), a loss on debt extinguishment of approximately $8.6 million ($4.7 million, net of income tax) incurred in connection with the debt refinancing in the first quarter 2014 and a benefit of $5.2 million ($3.1 million, net of income tax) related to the reduction in the LIFO reserve due to the disposition of inventory as a result of the closure of the Stevens Point Warehouse.

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, as well as improving the customer shopping experience through excellent customer service and better in-stock positions. In addition, we intend to continue our expansion into the Chicago market. During the third quarter of Fiscal 2015, we opened one additional Mariano’s store in the Chicago market. As of October 3, 2015, we had 33 stores open in the Chicago market.

Unless otherwise noted, the disclosures in this Management’s Discussion and Analysis of Financial Condition and Results of Operations relate to our continuing operations.

RESULTS OF CONTINUING OPERATIONS


(Dollars in thousands)	Thirteen Weeks Ended										Thirty-nine Weeks Ended
	September 27, 2014					October 3, 2015					September 27, 2014					October 3, 2015
Net Sales	$	973,808		100.0	%	$	971,824		100.0	%	$	2,779,404		100.0	%	$	2,952,013		100.0	%

Costs and Expenses:
Cost of sales		715,582		73.5			714,646		73.5			2,041,721		73.5			2,169,538		73.5
Operating and administrative		248,418		25.5			256,189		26.4			705,667		25.4			757,114		25.6
Goodwill impairment charge		280,014		28.8			—		—			280,014		10.1			—		—
Asset impairment charge		—		—			—		—			5,050		0.2			—		—
Interest expense (including amortization of deferred financing costs)		13,832		1.4			13,687		1.4			41,305		1.5			41,453		1.4
Loss on debt extinguishment		—		—			—		—			8,576		0.3			—		—

		1,257,846		129.2			984,522		101.3			3,082,333		110.9			2,968,105		100.5

Loss from Continuing Operations before Income Taxes		(284,038	)	(29.2	)		(12,698	)	(1.3	)		(302,929	)	(10.9	)		(16,092	)	(0.5	)

Income Taxes		(34,130	)	(3.5	)		(4,071	)	(0.4	)		(42,570	)	(1.5	)		(5,687	)	(0.2	)

Net Loss from Continuing Operations	$	(249,908	)	(25.7	%)	$	(8,627	)	(0.9	%)	$	(260,359	)	(9.4	%)	$	(10,405	)	(0.4	%)

Thirteen Weeks Ended October 3, 2015 Compared With Thirteen Weeks Ended September 27, 2014

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 $971.8 million for the third quarter 2015, a decrease of $2.0 million, or 0.2%, from $973.8 million for the third quarter 2014. Same-store sales decreased 3.4% due to a 4.2% decrease in the number of customer transactions, partially offset by a 0.8% increase in the average transaction size.

Net sales for the Wisconsin markets were $619.0 million for the third quarter 2015, a decrease of $50.4 million, or 7.5%, from $669.4 million for the third quarter 2014. The decrease primarily reflects the closure of three stores during the fourth quarter of 2014 and one store during the second quarter of 2015 and a decrease in same-store sales. Same-store sales decreased 3.7% due to a 4.1% decrease in the number of customer transactions, partially offset by a 0.4% increase in the average transaction size. Same-store sales in our Wisconsin markets continue to be negatively impacted by competitive store openings.

Net sales for the Illinois market were $352.8 million for the third quarter 2015, an increase of $48.4 million, or 15.9%, from $304.4 million for the third quarter 2014. The increase primarily reflects the benefit of new stores in Illinois, partially offset by a 2.6% decrease in same-store sales. The decrease in same-store sales was due to a 4.2% decrease in the number of customer transactions, partially offset by a 1.6% increase in the average transaction size. Same-store sales were negatively impacted by the cannibalization effect of new and acquired store openings in the Illinois market. In addition, same-store sales have been negatively impacted by the reopening of a significant number of Dominick’s stores that were initially closed in early 2014 and are now operated by other competitors.

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 $257.2 million for the third quarter 2015, a decrease of $1.0 million, or 0.4%, from $258.2 million for the third quarter 2014. Gross profit, as a percentage of net sales, was flat at 26.5% for the third quarter 2015 and 2014, respectively.

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 $256.2 million for the third quarter 2015, an increase of $7.8 million, or 3.1%, from $248.4 million for the third quarter 2014. The increase was primarily due to increased occupancy and labor costs in new or acquired Illinois stores, a $1.7 million charge for a Wisconsin store closed during the quarter and higher than anticipated operating costs related to marketing and repair and maintenance expenses. Operating and administrative expenses, as a percentage of net sales were 26.4% and 25.5% for the third quarter 2015 and 2014, respectively.

Goodwill Impairment Charge. During the third quarter of Fiscal 2014, the Company’s market capitalization experienced a significant decline. As a result, management updated its annual review of goodwill for impairment and concluded that the carrying amount of goodwill exceeded its estimated fair value, resulting in a pre-tax, non-cash goodwill impairment charge of $280.0 million ($247.1 million after-tax) during the third quarter of Fiscal 2014.

Interest Expense. Interest expense (including the amortization of deferred financing costs) was $13.7 million for the third quarter 2015, compared to $13.8 million for the third quarter 2014.

Income Taxes. Income tax benefit was $4.1 million for the third quarter 2015, a decrease of $30.1 million from a benefit of $34.1 million for the third quarter 2014. The effective income tax rate was a benefit of (32.1%) for the third quarter 2015 and a benefit of (12.0%) for the third quarter 2014. The provision for income taxes and effective tax rate for the third quarter of Fiscal 2015 reflects the impact of the valuation allowance recorded during the third quarter 2015. The provision for income taxes and effective tax rate for the third quarter 2014 reflects the impact of the goodwill impairment charge recorded during the third quarter 2014, the majority of which is non-deductible for tax purposes, as well as the valuation allowance recorded during the third quarter 2014.

Thirty-nine Weeks Ended October 3, 2015 Compared With Thirty-nine Weeks Ended September 27, 2014

Net Sales. Net sales were $2,952.0 million for the thirty-nine weeks ended October 3, 2015, an increase of $172.6 million, or 6.2%, from $2,779.4 million for the thirty-nine weeks ended September 27, 2014. Same-store sales decreased 3.0%, due to a 3.7% decrease in the number of customer transactions, partially offset by a 0.7% increase in the average transaction size.

Net sales for the Wisconsin markets were $1,913.9 million for the thirty-nine weeks ended October 3, 2015, a decrease of $90.7 million, or 4.5%, from $2,004.6 million for the thirty-nine weeks ended September 27, 2014. The decrease primarily reflects the closure of three stores during the fourth quarter of 2014 and one store during the second quarter of 2015 and a decrease in same-store sales, partially offset by the benefit of a new store. Same-store sales decreased 2.3%, due to a 3.0% decrease in the number of customer transactions, partially offset by a 0.7% increase in the average transaction size. Same-store sales in our Wisconsin markets continue to be negatively impacted by competitive store openings.

Net sales for the Illinois market were $1,038.1 million for the thirty-nine weeks ended October 3, 2015, an increase of $263.3 million, or 34.0%, from $774.8 million for the thirty-nine weeks ended September 27, 2014. The increase primarily reflects the benefit of new and acquired stores in Illinois, partially offset by a 4.9% decrease in same-store sales. The decrease in same-store sales was due to a 5.6% decrease in the number of customer transactions, partially offset by a 0.7% increase in the average transaction size. Same-store sales were negatively impacted by the cannibalization effect of new and acquired store openings in the Illinois market. In addition, same-store sales have been negatively impacted by the reopening of a significant number of Dominick’s stores that were initially closed in early 2014 and are now operated by other competitors.

Gross Profit. Gross profit was $782.5 million for the thirty-nine weeks ended October 3, 2015, an increase of $44.8 million, or 6.1%, from $737.7 million for the thirty-nine weeks ended September 27, 2014. Gross profit, as a percentage of net sales, was flat at 26.5% for the thirty-nine weeks ended October 3, 2015 and September 27, 2014, respectively.

Operating and Administrative Expenses. Operating and administrative expenses were $757.1 million for the thirty-nine weeks ended October 3, 2015, an increase of $51.4 million, or 7.3%, from $705.7 million for the thirty-nine weeks ended September 27, 2014. The increase was primarily due to increased occupancy and labor costs in new or acquired Illinois stores, higher than anticipated marketing costs and a $2.3 million charge for two Wisconsin stores closed during the year. Operating and administrative expenses, as a percentage of net sales were 25.6% and 25.4% for the thirty-nine weeks ended October 3, 2015 and September 27, 2014, respectively.

Asset Impairment Charge. During the thirty-nine weeks ended September 27, 2014, the Company recognized a non-cash asset impairment charge of $5.1 million related to adjustments to the carrying value of the property and equipment at the Stevens Point distribution facility which closed during the thirty-nine weeks ended September 27, 2014.

Interest Expense. Interest expense (including the amortization of deferred financing costs) was $41.5 million for the thirty-nine weeks ended October 3, 2015, compared to $41.3 million for the thirty-nine weeks ended September 27, 2014.

Loss on Debt Extinguishment. In connection with our debt refinancing in the first quarter of Fiscal 2014, we recognized a loss on debt extinguishment of $9.0 million, of which $8.6 million is related to continuing operations.

Income Taxes. Income tax benefit was $5.7 million for the thirty-nine weeks ended October 3, 2015, a decrease of $36.9 million from a benefit of $42.6 million for the thirty-nine weeks ended September 27, 2014. The effective income tax rate was a benefit of (35.3%) for the thirty-nine weeks ended October 3, 2015 and a benefit of (14.1%) for the thirty-nine weeks ended September 27, 2014. The provision for income taxes and effective tax rate for the thirty-nine weeks ended October 3, 2015 reflects the reduction of amounts due for federal income taxes as a result of the filing of our 2014 federal income tax return, as well as the valuation allowance recorded during the third quarter 2015. The provision for income taxes and effective tax rate for the thirty-nine weeks ended September 27, 2014 reflects the impact of the goodwill impairment charge recorded during the third quarter 2014, the majority of which is non-deductible for tax purposes, as well as the valuation allowance recorded during the third quarter 2014.

DISCONTINUED OPERATIONS

We have accounted for the 27 Rainbow stores that were either sold or closed during the third quarter of Fiscal 2014 as discontinued operations. See Note 5 to our unaudited consolidated financial statements for further discussion of our discontinued operations.

We have included all direct costs and an amount of allocated interest expense (including amortization of deferred financing costs and loss on debt extinguishment charges) for the 27 Rainbow stores within net loss from discontinued operations. Interest was allocated based on the ratio of the net assets of the 27 Rainbow stores as of the end of the period to the net assets of the total Company. We recorded $0.6 million and $3.2 million of interest in discontinued operations for the thirteen and thirty-nine weeks ended September 27, 2014, respectively. We recorded $0.3 million and $1.2 million of interest in discontinued operations for the thirteen and thirty-nine weeks ended October 3, 2015, respectively. During the first quarter of Fiscal 2015, we paid $7.9 million to terminate the obligations related to the capital leases of two Rainbow stores that were closed during the third quarter of Fiscal 2014, resulting in a gain of $2.7 million. During the second quarter of Fiscal 2015, we recorded an increase to our estimated multi-employer pension withdrawal liability of $1.2 million as a result of receiving a withdrawal liability notice from one of the affected plans.


	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	September 27, 2014			October 3, 2015			September 27, 2014			October 3, 2015
Net Sales	$	18,611		$	—		$	290,986		$	—

(Loss) income from discontinued operations, before income taxes	$	(45,751	)	$	(346	)	$	(79,840	)	$	926
Gain on disposal of operations, before income taxes		3,010			—			1,654			—

Total (loss) income from discontinued operations before income taxes		(42,741	)		(346	)		(78,186	)		926
Income taxes on discontinued operations		(8,828	)		(139	)		(22,542	)		3,201

Loss from discontinued operations, net of tax	$	(33,913	)	$	(207	)	$	(55,644	)	$	(2,275	)

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):


	Thirty-nine Weeks Ended
	September 27, 2014			October 3, 2015
Net cash provided by operating activities⁽¹⁾	$	16,480		$	33,835
Net cash provided by (used in) investing activities⁽¹⁾		6,016			(51,881	)
Net cash used in financing activities ⁽¹⁾		(57,739	)		(7,882	)

Net decrease in cash and cash equivalents	$	(35,243	)	$	(25,928	)

Cash and cash equivalents at end of period	$	46,935		$	32,648

⁽¹⁾	Includes activities from continuing operations and discontinued operations.

Net Cash Provided By Operating Activities. Net cash provided by operating activities was $33.8 million for the thirty-nine weeks ended October 3, 2015 compared to $16.5 million for the thirty-nine weeks ended September 27, 2014. The increase in cash provided by operating activities was due primarily to higher income tax refunds.

Net Cash Used in Investing Activities. Net cash used in investing activities for the thirty-nine weeks ended October 3, 2015 was $51.9 million compared to cash provided by investing activities of $6.0 million for the thirty-nine weeks ended September 27, 2014. The decrease is primarily due to the receipt of the proceeds of the Rainbow Store Sale in Fiscal 2014, partially offset by lower capital expenditures in Fiscal 2015 related to our acquired Dominick’s stores. Total capital expenditures for Fiscal 2015, excluding acquisitions, are estimated to be approximately $69.5-$74.5 million.

Net Cash Used in Financing Activities. Net cash used in financing activities for the thirty-nine weeks ended October 3, 2015 was $7.9 million compared to $57.7 million for the thirty-nine weeks ended September 27, 2014. Net cash used in the thirty-nine weeks ended October 3, 2015 primarily consisted of payments of $7.9 million to terminate two leases associated with discontinued operations and scheduled capital lease payments, partially offset by net borrowings on our revolving credit facility of $3.0 million. Net cash used in the thirty-nine weeks ended September 27, 2014 primarily consisted of payments of debt and capital lease obligations of $521.3 million primarily to refinance our existing indebtedness and related financing costs of $5.6 million, offset somewhat by the net proceeds from our term loan of $450.8 million and net proceeds from our common stock offering of $19.3 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 during the fourth quarter of 2013 in the Chicago Stores Acquisition.

On May 22, 2015, we completed a secondary offering of 4,025,000 shares of our common stock at a price of $3.50 per share (the “Secondary Offering”). All shares offered during the Secondary Offering were sold by existing shareholders. We did not receive any of the proceeds from the Secondary Offering.

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 10.25% 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.

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

The New Revolving Facility bears an interest rate, at our option, of (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 0.25% or 0.375% 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.

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 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 the 2014 Credit Facilities (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 an interest rate, at our option, of (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, costs related to acquisitions, costs related to debt financing activities, goodwill and asset impairment charges, gain or loss on the disposition of assets, one-time costs due to the closing of stores or a distribution facility, nonrecurring gains or losses on lease terminations and Adjusted EBITDA from discontinued operations. 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 January 3, 2015 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 from continuing operations 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.

The following is a summary of the calculation of Adjusted EBITDA for the thirteen and thirty-nine weeks ended September 27, 2014 and October 3, 2015 (in thousands):


	Thirteen Weeks Ended (Unaudited)
	September 27, 2014									October 3, 2015
	Continuing Operations			Discontinued Operations			Total			Continuing Operations			Discontinued Operations			Total
Net loss	$	(249,908	)	$	(33,913	)	$	(283,821	)	$	(8,627	)	$	(207	)	$	(8,834	)
Interest expense		13,277			586			13,863			13,133			342			13,475
Income taxes		(34,130	)		(8,828	)		(42,958	)		(4,071	)		(139	)		(4,210	)
Depreciation and amortization expense		17,271			—			17,271			17,284			—			17,284
LIFO (benefit) charge		(4,517	)		—			(4,517	)		234			—			234
Amortization of deferred financing costs		555			—			555			554			—			554
Non-cash stock compensation expense		772			—			772			1,578			—			1,578
Goodwill impairment charge		280,014			—			280,014			—			—			—
Closed facility charges		—			9,950			9,950			1,721			621			2,342
Employee severance costs		84			2,196			2,280			—			—			—
Loss (gain) on disposition of assets		464			(3,010	)		(2,546	)		—			—			—
Stevens Point severance and one-time costs		1,763			—			1,763			—			—			—
Multi-employer pension withdrawal charge		—			23,901			23,901			—			—			—

Adjusted EBITDA	$	25,645		$	(9,118	)	$	16,527		$	21,806		$	617		$	22,423


	Thirty-nine Weeks Ended (Unaudited)
	September 27, 2014									October 3, 2015
	Continuing Operations			Discontinued Operations			Total			Continuing Operations			Discontinued Operations			Total
Net loss	$	(260,359	)	$	(55,644	)	$	(316,003	)	$	(10,405	)	$	(2,275	)	$	(12,680	)
Interest expense		39,618			2,632			42,250			39,791			1,242			41,033
Income taxes		(42,570	)		(22,542	)		(65,112	)		(5,687	)		3,201			(2,486	)
Depreciation and amortization expense		48,065			3,471			51,536			49,851			—			49,851
LIFO (benefit) charge		(4,073	)		—			(4,073	)		245			—			245
Amortization of deferred financing costs		1,687			51			1,738			1,662			—			1,662
Non-cash stock compensation expense		2,845			—			2,845			4,399			—			4,399
Goodwill impairment charge		280,014			—			280,014			—			—			—
Asset impairment charges		5,050			11,142			16,192			—			—			—
Gain on lease terminations		—			—			—			—			(2,739	)		(2,739	)
Closed facility charges		—			9,950			9,950			2,271			621			2,892
Employee severance costs		1,251			2,196			3,447			—			—			—
Loss (gain) on disposition of assets		464			(1,654	)		(1,190	)		—			—			—
Stevens Point severance and one-time costs		1,763			—			1,763			—			—			—
Multi-employer pension withdrawal charges		—			49,697			49,697			—			1,195			1,195
Loss on debt extinguishment		8,576			472			9,048			—			—			—

Adjusted EBITDA	$	82,331		$	(229	)	$	82,102		$	82,127		$	1,245		$	83,372

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, 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 January 3, 2015. In accordance with our critical accounting policy related to goodwill, we completed our annual impairment test during the third quarter of Fiscal 2015 and we have included discussion of the result of the test below.

Goodwill

During the third quarter of Fiscal 2015, with the assistance of a third party valuation firm, we completed the first step of the impairment evaluation process in comparing the fair value of our reporting units to their carrying value. Based upon the results of that test, we determined that the fair value of both of our reporting units exceeded their carrying values and therefore the second step of the impairment evaluation was not required. Based on the fair values of our reporting units as calculated in the annual goodwill impairment test, a 10% reduction in fair value of our reporting units would not indicate a potential impairment of our goodwill.

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 January 3, 2015.

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 October 3, 2015, 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 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 October 3, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II – Other Information

Item 1.

Legal Proceedings

None.

Item 1A.

Risk Factors

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 January 3, 2015.

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

None.

Item 6.

Exhibits

Reference is made to the separate exhibit index contained on page 32 filed herewith.

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: November 12, 2015

By:		/s/ MICHAEL P. TURZENSKI
		Michael P. Turzenski
		Group Vice President and Chief Financial Officer

Date: November 12, 2015

Exhibit Index


Exhibit Number		Description

10.1		Roundy’s, Inc. Severance Pay Plan (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K dated August 20, 2015 in Commission File No. 001-35422)

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company