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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

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

For the fiscal year ended March 29, 2015

 

OR

 

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

 

For transition period from to

 

Commission file number 001-35880

 

Fairway Group Holdings Corp.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

74-1201087

(State of incorporation)

 

(I.R.S. Employer

 

 

Identification No.)

 

 

 

 

 

2284 12th Avenue

 

 

New York, New York

 

10027

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (646) 616-8000

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

 

 

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Class A Common Stock, $0.00001 par value per share

 

The NASDAQ Stock Market LLC

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

NONE

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes   No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes   No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

 

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

Smaller reporting company

 

 

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

 

The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of September 26, 2014, the last business day of the registrant’s most recently completed second quarter, was $78,046,913 based upon the closing price of $3.72 reported for such date on the NASDAQ Global Market.

 

As of May 15, 2015, the registrant had 29,596,880 shares of Class A common stock and 14,225,455 shares of Class B common stock outstanding.

 

Documents Incorporated by Reference

 

Portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on July 28, 2015 (hereinafter referred to as the Proxy Statement) are incorporated by reference into Part III of this report.

 

 

 

 

 

 

 

 


 

 

Fairway Group Holdings Corp.

FORM 10-K For the Fiscal Year Ended March 29, 2015

Table of Contents

 

 

 

 

 

Part I 

Item 1. 

Business

Item 1A. 

Risk Factors

13 

Item 1B. 

Unresolved Staff Comments

31 

Item 2. 

Properties

32 

Item 3. 

Legal Proceedings

32 

Item 4. 

Mine Safety Disclosures

33 

Part II 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

34 

Item 6. 

Selected Financial Data

36 

Item 7. 

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

43 

Item 7A. 

Quantitative and Qualitative Disclosures About Market Risk

64 

Item 8. 

Financial Statements and Supplementary Data

65 

Item 9. 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

102 

Item 9A. 

Controls and Procedures

102 

Item 9B. 

Other Information

102 

Part III 

Item 10. 

Directors, Executive Officers and Corporate Governance

103 

Item 11. 

Executive Compensation

103 

Item 12. 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

103 

Item 13. 

Certain Relationships and Related Transactions, and Director Independence

103 

Item 14. 

Principal Accounting Fees and Services

103 

Part IV 

Item 15. 

Exhibits, Financial Statement Schedules

104 

 

Signatures

105 

 

Index to Exhibits

106 

 

 

 

 

1

 


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this report are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “forecast,” “continue,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected store openings, costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:

 

·

our ability to increase sales and same store sales;

·

our ability to maintain or improve our operating margins;

·

our ability to compete effectively with other retailers;

·

our ability to maintain price competitiveness;

·

ongoing economic uncertainty;

·

negative effects to our reputation from real or perceived quality or health issues with our food products;

·

our ability to achieve the anticipated benefits of our centralized production facility;

·

rising costs of providing employee benefits, including increased healthcare costs and pension contributions due to unfunded pension liabilities;

·

ordering errors or product supply disruptions in the delivery of perishable products;

·

our ability to open new stores on a timely basis or at all;

·

our ability to achieve sustained sales and profitable operating margins at new stores;

·

our ability to satisfy our ongoing capital needs and unanticipated cash requirements;

·

the availability of financing to pursue our new store openings on satisfactory terms or at all;

·

the failure of our information technology or administrative systems to perform as anticipated;

·

data security breaches and the release of confidential customer or employee information;

·

our ability to retain and attract senior management, key employees and qualified store-level employees;

·

our ability to renegotiate expiring collective bargaining agreements and new collective bargaining agreements;

·

the geographic concentration of our stores;

·

our history of net losses;

·

additional indebtedness incurred in the future;

·

our high level of fixed lease obligations;

·

restrictions on our use of the Fairway name other than on the East Coast and in California and certain parts of Michigan and Ohio;

·

our ability to protect or maintain our intellectual property;

·

changes in law;

·

claims made against us resulting in litigation, and the costs of defending, and adverse developments in, such litigation;

·

our ability to defend the purported securities class action and derivative lawsuits filed against us and other similar complaints that may be brought in the future, in a timely manner and within the coverage, scope and limits of our insurance policies;

·

increases in commodity prices;

·

severe weather and other natural disasters in areas in which we have stores, warehouses and/or production facilities;

·

wartime activities, threats or acts of terror or a widespread regional, national or global health epidemic;

·

changes to financial accounting standards regarding store leases;

·

impairment of our goodwill; and

·

other factors discussed under “Item 1A—Risk Factors.”

 

We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. Although we believe that our assumptions are reasonable, we caution that it is difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the sections entitled “Item 1A—Risk Factors” and “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report.

2

 


 

All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements as well as other cautionary statements that are made from time to time in our other filings with the Securities and Exchange Commission (“SEC”) and public communications. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties, and you should not rely upon forward-looking statements as predictions of future events.

 

We caution you that the important factors described in the sections in this report entitled “Item 1A—Risk Factors” and “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” may not be all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially and adversely from those contained in any forward-looking statements we may make. The forward-looking statements included in this Annual Report on Form 10-K are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

 

 

 

3

 


 

PART I

 

ITEM 1—BUSINESS

 

Unless we state otherwise or the context otherwise requires, the terms “we,” “us,” “our,” “Fairway,” “Fairway Market,” “the Company,” “our business” and “our company” refer to Fairway Group Holdings Corp. and its consolidated subsidiaries as a combined entity.

 

Our fiscal year is the 52- or 53-week period ending on the Sunday closest to March 31. For ease of reference, we identify our fiscal years in this report by reference to the calendar year in which the fiscal year ends. Accordingly, “fiscal 2010” refers to our fiscal year ended March 28, 2010, “fiscal 2011” refers to our fiscal year ended April 3, 2011, “fiscal 2012” refers to our fiscal year ended April 1, 2012, “fiscal 2013” refers to our fiscal year ended March 31, 2013, “fiscal 2014” refers to our fiscal year ended March 30, 2014 and “fiscal 2015” refers to our fiscal year ended March 29, 2015.

 

As used in this Annual Report on Form 10-K, the term “Greater New York City metropolitan area” means New York City and the New York, New Jersey and Connecticut suburbs within a 50 mile radius of New York City. References to “stores in suburban areas” or similar expressions refer to stores located in the Greater New York City metropolitan area outside of New York City. We define “store contribution margin” as gross profit less direct store expenses (excluding depreciation and amortization included in direct store expenses). References to “Sterling Investment Partners” are to the investment funds managed by affiliates of Sterling Investment Partners that own shares of our common stock.

 

Our Company

 

Fairway Market is a growth-oriented food retailer offering customers a differentiated one-stop shopping experience “Like No Other Market”. Since beginning as a small neighborhood market in the 1930s, Fairway has established itself as a leading food retailing destination in the Greater New York City metropolitan area, which we estimate is the largest food retail market in the United States. Our stores emphasize an extensive selection of fresh, natural and organic products, prepared foods and hard-to-find specialty and gourmet offerings, along with a full assortment of conventional groceries. Our prices typically are lower than natural/ specialty stores and competitive with conventional supermarkets. We believe that the combination of our broad product selection, in-store experience and value pricing creates a premier food shopping experience that appeals to a broad demographic.

 

We operate 15 locations in the Greater New York City metropolitan area, four of which include Fairway Wines & Spirits locations. Fourteen of the stores were open prior to the beginning of fiscal 2015 and one store was opened during fiscal 2015.   Seven of our food stores, which we refer to as our “urban stores,” are located in New York City, and the remainder, which we refer to as our “suburban stores,” are located in New York (outside of New York City), New Jersey and Connecticut.

 

Our History

 

Fairway began in the 1930s as a fruit and vegetable stand located at our Broadway store’s current location on Broadway and 74th Street in Manhattan under the name “74th Street Market.” In 1954, we expanded the 74th Street location, adding groceries, meat, cheese, dairy products and frozen foods, and renamed the store “FAIRWAY” to convey the concept of “fair prices.”

 

In the mid-1970s, Fairway began expanding into gourmet and specialty categories, transforming its retail grocery operations into a full service food superstore known for high quality and value pricing. During this transformation, we also began hiring the team of ambitious, hardworking “foodies” who would eventually become our category experts and senior merchants. In the late 1970s, we adopted the slogan “Like No Other Market” in recognition of our distinctive format.

 

Fairway Group Holdings Corp. was incorporated as a Delaware corporation on September 29, 2006. Each of our stores is owned by a separate Delaware subsidiary.

 

In April 2013, we completed an initial public offering (“IPO”) of our Class A common stock.  As of May 15, 2015, Sterling Investment Partners, who acquired 80.1% of Fairway in 2007, owned approximately 48.5% of our outstanding common stock and approximately 80.9% of the voting power of our outstanding common stock.

 

4

 


 

Our Competitive Strengths

 

We believe the following strengths contribute to our success as a premier destination food retailer and position us for sustainable growth:

 

Iconic brand. We believe our Fairway brand has a well established reputation for delivering high-quality, value-priced fresh, specialty and conventional groceries. Fairway has served millions of passionate customers in the Greater New York City metropolitan area for more than 75 years. We recorded approximately 19.5 million customer transactions in fiscal 2015, compared to 19.0 million customer transactions in fiscal 2014, and believe the Fairway brand is widely recognized throughout the Greater New York City metropolitan area. We believe the strength of the Fairway brand enhances our ability to: (i) attract a broad demographic of customers from a wider geographic radius than a conventional supermarket; (ii) source hard-to-find, unique gourmet and specialty foods; (iii) build a trusted connection with our customers that results in a high degree of loyalty; (iv) attract and retain highly talented employees; and (v) secure attractive real estate locations.

 

Destination food shopping experience “Like No Other Market”. We provide our customers a differentiated one-stop shopping experience by offering a unique mix of product breadth, quality and value in a visually appealing in-store environment. Fairway creates a fun and engaging atmosphere in which customers select from an abundance of fresh foods and other high-quality products while interacting with our attentive and knowledgeable employees throughout the store. When customers enter a Fairway, they are immediately greeted by our signature displays of fresh produce. As they continue through the store, customers will find a “specialty shop” orientation designed to recreate the best features of local specialty markets, such as a gourmet cheese purveyor, full service butcher shop, seafood market and bakery, all in one location. Our stores provide a sensory experience, including aromas of freshly roasted coffee and freshly baked bread, an array of vibrant colors across our produce displays, cheese experts describing selections of our over 600 artisanal cheeses, samples of our approximately 150 varieties of olive oil and free tastings of our delicious prepared foods. Our stores feature whimsical and informative signs designed to educate customers about the quality, origin and characteristics of our products, and offer tips and suggestions on food preparation and pairings. We encourage a high level of interaction among our employees and customers, which results in a more informed, engaged and satisfied customer. We believe the distinctive Fairway food shopping experience drives loyalty, referrals and repeat business.

 

Distinctive merchandising strategy. Our merchandising strategy is the foundation of our highly differentiated, one-stop shopping experience. We offer a unique product assortment generally not found in either conventional grocery stores or natural / specialty stores, consisting of a large variety of high-quality produce, meats and seafood, as well as gourmet, specialty and prepared foods and a full selection of everyday conventional groceries. High-quality perishables and prepared foods account for approximately 65% of our sales, compared to the more typical one-quarter to one-third of a conventional grocer’s sales. Fairway stores also showcase hard-to-find specialty and gourmet items that expand our customers’ culinary interests, and we believe we are often one of the first retailers to carry or import a new product. Our Fairway-branded products represent a high-quality, value-oriented specialty alternative unlike the more typical generic, low-cost option presented by conventional food retailers. In product lines where we offer a Fairway-branded alternative, it is typically among the store’s top sellers in the category. Fairway’s prices typically are lower than natural / specialty food stores and competitive with conventional grocery stores. Our dedicated merchandising team focuses on continuously enhancing the Fairway experience for our loyal customers. We believe that our distinctive merchandising strategy has enabled us to build a trusted connection with our customers, who value the quality and fair prices of our food, our merchandising teams’ expertise and our one-stop shopping convenience.

 

Highly productive stores. We believe our stores are generally among the most productive in the industry in net sales per store and net sales per square foot. During fiscal 2015, for food stores open more than 14 full months, our net sales per store and net sales per selling square foot averaged $54.1 million and $1,604, respectively. Our highly productive stores have the following key characteristics:

 

High-volume one-stop shopping destination. Our distinctive merchandising strategy, differentiated shopping experience and iconic brand drive strong customer traffic to our stores. Our high volumes result in operating efficiencies that provide us with a greater ability to offer competitive prices while maintaining or improving our operating margins. In addition, our strong per store volumes generate high inventory turnover, which enables us to maintain a fresher selection of quality perishables than most of our competitors, in turn helping to drive customer traffic and sales.

 

Attractive product mix. Our broad assortment of high-quality fresh, natural and organic products and prepared foods, which account for approximately 65% of our sales, specialty items, which account for approximately 7% of our sales and Fairway-branded products, which account for approximately 10% of our sales, enhance gross margins and store productivity.

 

5

 


 

Direct-store delivery. We believe that our “farm-to-shelf” time is shorter than that of many of our competitors. Given our large store volumes, our ability to utilize direct-store delivery for a greater portion of our perishables than other food retailers helps us to ensure the highest quality and fastest delivery from our suppliers. Direct-store distribution eliminates multiple logistical layers, reducing supply chain costs while enhancing product freshness.

 

Strong vendor relationships. We have built valued, long-standing relationships with both large and small vendors that enable us to achieve attractive pricing on our broad merchandise offering. Fairway is viewed as an important strategic partner by many of our smaller suppliers, helping them to build scale. We source our perishable products locally whenever possible to ensure freshness. As we grow our sales, we expect that we and our vendors will benefit from increasing economies of scale.

 

Merchandising flexibility. We generally enable our merchandising teams to control our on-shelf product selection and positioning, rather than permitting vendors to do so through slotting fees. This permits us to offer the products customers want most and provides us with the flexibility to expand or contract our product offerings as demand warrants.

 

Proven ability to open new stores. Since March 2009, we have successfully opened 11 new food stores, four of which include Fairway Wines & Spirits locations, more than tripling our store base. We leverage our corporate infrastructure to open in desirable locations using a disciplined approach to new store site selection. We benefit from economies of scale and expect to enhance our operating efficiency as we expand our store footprint, further reinforcing our competitive position and ability to grow our sales profitably.

 

Our Strategy

 

Improve our operating margins. We intend to improve our operating margins by the following key initiatives:

 

Continue implementing our operating initiatives. We will continue to focus on: (i) price optimization, where we refine the pricing and balance of our promotional activities across our mix of higher-margin perishable items and everyday value oriented conventional grocery items; (ii) labor productivity; (iii) supply chain management; (iv) business process improvement; and (v) shrink reduction

 

Leverage our scalable infrastructure.  We have made significant investments in management, information technology systems, infrastructure, compliance and marketing to enable us to pursue our growth plans. We have upgraded our systems and enhanced our new store development and training processes. We have built a new centralized production facility which we believe will enable us to effectively manage our growing number of stores, improve labor productivity and reduce shrink throughout our operations. We believe we can leverage these investments to improve our operating margins as we grow our store base.

 

Capitalize on consumer trends. We believe that our differentiated format positions us to capitalize on evolving consumer preferences and other key trends currently shaping the food retail industry, which include:

 

Increasing consumer focus on fresh foods and healthy eating. Fairway’s merchandise mix, a combination of high-quality fresh and prepared foods and a  broad array of specialty items appeals to customers seeking fresher and healthier eating choices. We offer a large variety of high-quality natural and organic foods at prices that are typically lower than natural/specialty food stores.

 

Increasing focus on the customer shopping experience. Fairway’s merchandise breadth, quality and value, market-style store layout and personalized customer service cater to shoppers looking for a differentiated shopping experience.  Our “one-stop, full-shop” hybrid format provides our customers with the convenience to complete their shopping basket without making multiple trips.

 

Increasing consumer interest in private label product offerings. Fairway’s branded-products represent a high-quality, value-oriented specialty alternative unlike the more typical generic, low-cost option presented by conventional food retailers. In product lines where we offer a Fairway-branded alternative, it is typically the store’s top seller in the category. We will continue to expand our Fairway-branded product portfolio, selectively offering new high-quality specialty alternatives designed to strengthen our relationship with our customers.

 

6

 


 

Open stores in the Greater New York City metropolitan area. We operate in the Greater New York City metropolitan area, which we estimate is the largest food retail market in the United States. Although we have significantly grown our sales in the Greater New York City metropolitan area, we believe our existing market presents a significant opportunity for our near-term growth.

 

Beginning in calendar 2016, we intend to open one to two stores per year.  Our current outlook is based on our near-term focus on improving operations at our existing stores, as well as balancing our real estate pipeline with our desire to ensure that we have adequate capital resources to fund this expansion. 

 

As we open new stores in closer proximity to our customers who currently travel longer distances to shop at our stores, we expect some of these customers to take advantage of the convenience of our new locations. As a result, we have experienced in the past, and expect to experience in the future, some sales volume transfer from our existing stores to our new stores as some of our existing customers switch to these new, closer locations. Consequently, while we expect our new stores will impact sales at our existing stores, we believe that by making shopping at our stores for those customers who travel longer distances more convenient, our overall sales to these customers will increase as they increase the frequency and amount of purchases from our stores.

 

 

Our Products

 

We have a significant focus on perishable product categories, which include produce, natural and organic, deli, specialty, cheese, butcher, seafood, bakery, coffee and kosher foods. Our non-perishable product categories consist of conventional groceries as well as specialty foods. We emphasize fresh items that are of premium quality as compared to our conventional competitors.

 

Our in-house merchants are the “authority” on their respective departments and actively seek high-quality products from a wide range of vendors. Our stores are designed in a market-style “specialty shop” orientation with portions of each store allocated to specific specialty categories.

 

Produce. When customers walk into a Fairway, they are immediately greeted by our signature displays of fresh produce. We also offer our shoppers a wide assortment of organic fruits and vegetables. Fairway sources fruits and vegetables directly from the growers, who deliver their produce to our stores directly from the fields, groves, orchards and hothouses daily. We believe this makes Fairway’s fruits and vegetables days fresher than produce at other stores.

 

Natural and organic. Fairway offers a large variety of high-quality natural and organic foods at prices that are typically lower than natural / specialty food stores and that appeal to customers seeking healthier eating choices. Our extensive natural and organic product categories include: fruits and vegetables, natural and fresh juices, organic beef and organic chicken, fresh organic peanut butter and almond butter, fresh roasted coffees and loose teas, dried fruits and nuts, full assortment of natural and organic groceries, cold cuts and cheeses, breads, supplements (homeopathy, vitamins, herbs), nutritional bars and protein powders, health and beauty aids, dairy, including Fairway-branded organic milk, eggs, including Fairway-branded organic eggs, vegetarian dairy alternatives, frozen foods, extensive gluten-free selections, baby food and baby care items and environmentally friendly cleaning products.

 

Deli. We offer a classic New York deli counter. We carry smoked salmon prepared using our own recipe and hand-craft our own fresh mozzarella daily. Our employees are frequent contributors to our prepared foods recipes. We offer authentic tastes from many different cultures and backgrounds, and a variety that will please a range of appetites. Our stores offer full displays of many possibilities for delicious sandwiches, side dishes, toppings, platters, snacks and main dishes.

 

Specialty. Our specialty offerings provide shoppers with hard-to-find specialty and gourmet items sourced from around the world.  As an example, we carry over 100 varieties of specialty olive oil, including numerous imported unfiltered olive oils, and offer all-day, every day tasting of olive oils in each of our stores.

 

Cheese. At any of our locations, on any day of the week, consumers will find more than 600 artisanal cheeses at affordable prices. Our cheese experts can help customers design cheese platters to suit their needs.

 

Butcher. Our meat department team sources and selects each of our cuts of meat. We have meat delivered every day and it is cut and packaged at each of our stores within 24 hours of receipt. We also receive daily deliveries of fresh ice-packed chicken. This ensures peak freshness of the meat and chicken and proper packaging for discerning customers. We carry a full range of prime beef cuts at everyday low prices and grind our own beef. We also dry age our prime beef on the premises of many of our stores, which improves the flavor, texture and tenderness of the meat.

 

7

 


 

Seafood. We receive the majority of our fish whole and fillet them in our stores, reminiscent of the way fish was sold from an outdoor fresh market or an old-time fish market. We typically offer 50 to 70 different selections of fresh fish and seafood in each store every day. We employ high freshness, taste and safety standards in selecting our seafood.

 

Bakery. We utilize a combination of on-site and centralized bakeries to produce our baked goods. The presence of on-site baking enhances our customer’s shopping experience and reinforces the freshness of our hand-crafted products. When consumers walk through a Fairway, they will encounter aromas of fresh-baked bagels and baguettes, similar to a European marketplace. Our full-service bakery prepares our signature cookies, tarts, cupcakes, baguettes and bagels.

 

Coffee. All of our coffees are 100% Arabica beans, grown in the high mountains. We buy directly from farmers and from select specialty brokers and roast the coffee ourselves, or have it roasted on our behalf, in small batches six days a week. We offer over 100 types of artisanal coffee beans sold by the pound, as well as over a dozen varieties of Fair Trade certified and organic coffee. Our decaffeinated coffee is water-processed, not chemically processed, which protects the flavor.

 

Kosher. We offer an extensive array of kosher options, including Fairway’s branded products, our conventional and specialty groceries, our coffee, as well as our baked goods, dairy, organic, gluten-free, imported, and frozen items. We offer a variety of cuts of kosher poultry, red meat and seafood. 

 

Conventional grocery. We carry a full range of conventional grocery items. Our grocery aisles are stacked high with the most recognized national brand names—Tide, Bounty, Kleenex, Charmin, Lysol, Poland Spring, Oreo, Cheerios, Lipton, Hershey’s, Coke, Green Giant, and many more. In addition, we offer an extensive array of ethnic groceries that cater to each store’s local demographic.

 

Fairway-branded products

 

Fairway’s branded products represent a high-quality, value-oriented specialty alternative unlike the more typical generic, low-cost option presented by conventional food retailers. Our Fairway-branded products are designed to strengthen our relationship with our customers through high-quality gourmet offerings. We display our own brands prominently in our stores, and in product lines where we offer a Fairway-branded alternative it is typically among the store’s top sellers in the category. In fiscal 2015, our portfolio of Fairway-branded items, including prepared foods, represented approximately 10% of our net sales compared to approximately 8% in fiscal 2014. We maintain direct relationships with numerous producers with whom we work to develop and provide our Fairway-branded product offerings. These include rare barrel olive oils from Spain, Italy, and France that are exclusive to Fairway. At our stores you will also find, among other items, Fairway golden honey, organic maple syrup, organic jams, chocolates, a wide selection of spices, olive, artichoke and sundried tomato pastes, pasta and pizza sauces and coffees from exotic coffee-growing regions.

 

Pricing Strategy

 

Our original store was named “FAIRWAY” in 1954 to convey the concept of “fair prices.” Our strategy is to price our broad selection of fresh, natural and organic foods, hard-to-find specialty, and gourmet items and prepared foods at prices typically lower than those of natural / specialty stores. We price our full assortment of conventional groceries at prices competitive with those of conventional supermarkets. We believe that the unique combination of our extensive product selection, our in-store experience, and our value pricing creates a premier food shopping experience that appeals to a broad demographic.

 

Seasonality

 

The food retail industry and our sales are affected by seasonality. Our average weekly sales fluctuate during the year and are usually highest in our third fiscal quarter, from October through December, when customers make holiday purchases, and typically lower during the summer months in our second fiscal quarter.

 

Our Stores

 

Our stores are designed to recreate the best features of local specialty markets in one location. When customers enter a Fairway, they are immediately greeted by our signature displays of fresh produce. As they continue through the store, customers will find a market-style “specialty shop” orientation, with sections of each store devoted to categories such as our world class cheese department, full service butcher shop and seafood market that are designed to bring the best of traditional local merchants to our stores. Each individual department is run by an expert who can answer any customer questions and provide the level of service found in a specialty shop. Most stores also have an in-house production bakery, full kitchen and coffee roaster. Our stores typically include sit-down eating areas where food is prepared to order.

 

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Our stores provide a sensory experience, including aromas of freshly roasted coffee and freshly baked bread, an array of vibrant colors across our produce displays, cheese experts describing selections of our over 600 artisanal cheeses, samples of our approximately 150 varieties of olive oil and free tastings of our delicious prepared foods. Fairway creates a fun and engaging atmosphere in which customers select from an abundance of fresh foods and other high-quality products while interacting with our attentive and knowledgeable employees throughout the store.

 

Each of our stores is organized around distinct departments with engaging merchandise displays that reinforce our emphasis on freshness and service. We position our full-service departments around the perimeter of the store and adjacent to each other to provide a “market feel” and foster interaction between employees and customers. We generally enable our merchandising teams to control our on-shelf product selection and positioning, rather than permitting vendors to do so through slotting fees. This permits Fairway to offer the products customers want most and provides us with the flexibility to expand or contract our product offerings as demand warrants.

 

Our four Fairway Wines & Spirits locations offer a full assortment of wines and spirits at everyday low prices, and are designed with the same general themes of our food stores, emphasizing abundance, variety and hard to find products from around the world. We believe our Fairway Wines & Spirits locations complement our food stores and enhance the shopping experience we offer to consumers.

 

Store Growth and Site Selection

 

We employ a detailed, analytical process to identify new store locations. We target locations based on demographic characteristics, including income and education levels, drive times and population density, as well as other key characteristics including convenience for customers, visibility, access, signage, parking and availability of attractive lease terms. After we have identified a target site, our development group conducts a comprehensive site study and sales projection and develops construction and operating cost estimates. Although we have a prototypical layout we prefer, our first priority is the quality of the location, and we will creatively work to fit our departments into any potential layout and size.  We expect our new stores will be built with smaller footprints than our existing stores, which will reduce the capital requirements and enhance the customer experience by making the stores easier to shop.

 

We generally hire employees for our new stores several months in advance and provide them with extensive training at existing stores prior to the store opening. A new store is typically staffed by a combination of new employees and experienced employees from other Fairway locations being promoted into new store jobs. 

 

The required cash investment for new stores varies depending on the size of the store, geographic location, degree of work performed by the landlord and complexity of site development issues. As a result, the average cost per square foot may vary significantly from project to project and from year to year.

 

We may elect to opportunistically open stores in desirable locations that differ from our prototypical new store model in square footage and/or net sales but that we believe will provide similar contribution margins and returns on invested capital.

 

New store openings may negatively impact our financial results in the short-term due to the effect of store opening costs and lower sales and contribution margin during the initial period following opening. A new store builds its sales volume and customer base over time and, as a result, generally has lower margins and higher operating expenses, as a percentage of sales, than our more mature stores. A new store can take a year or more to achieve a level of operating performance comparable to our similarly existing stores. Stores that we have opened in higher density urban markets typically have generated higher sales volumes and margins than stores in suburban areas.

 

Marketing and Advertising

 

We employ various advertising and promotional strategies to reinforce the quality, value and appeal of our products and services. We promote these core values by connecting and engaging with our customers through social media websites, in addition to e-newsletters, and our company website.  We also use many of the traditional advertising vehicles including radio, newspaper and sponsorship.  Our stores spend most of their marketing budgets on in-store merchandising-related activities, including promotional signage and events such as taste fairs, classes, tours, cooking demonstrations and product samplings. We use in-store signage to highlight new products and any differentiated aspects of our products.

 

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Sourcing and Distribution

 

We source our products from approximately 1,000 vendors and suppliers. Our in-house merchants source only those products that meet our high specifications for quality, and we maintain strict control over the products that are sold in our stores. We have built longstanding vendor relationships that enable us to achieve attractive pricing on our broad offering of hard-to-find fresh, specialty and natural / organic offerings. Fairway is viewed as an important strategic partner to many of these small businesses.

 

Substantially all of our products are delivered directly to our stores by our suppliers and vendors. Direct-store-distribution eliminates multiple logistical layers, further compressing the supply chain and reducing costs. We use a refrigerated cross-docking facility that supports this flexible supply chain.

 

Our single largest third-party supplier in fiscal 2013, fiscal 2014 and fiscal 2015 (until it was replaced in December 2014 following its bankruptcy) was White Rose, Inc. (“White Rose”). Under our agreement with White Rose, we were obligated to purchase substantially all our requirements for specified products, principally conventional grocery, dairy, frozen food and ice cream products, which were available from White Rose, for our existing stores. In December 2014 we replaced White Rose with C&S Wholesale Grocery, Inc. (“C&S”) and C&S is now our largest supplier.  For fiscal 2013, fiscal 2014, and fiscal 2015, total purchases from White Rose and C&S accounted  for approximately 15%, 16% and 15% of our total purchases, respectivelyIn addition, United Natural Foods, Inc. (“UNFI”), which is our primary supplier of specified natural and organic products, principally dry grocery, frozen food, vitamins/supplements and health, beauty and wellness, accounted for approximately 10% of our total purchases in fiscal 2015 and approximately 9% of our total purchases in each of fiscal 2013 and 2014. The use of White Rose, C&S and UNFI gives us purchasing power through the volume discounts they receive from manufacturers. See “Item 1A—Risk Factors—Risks Relating to Our Business—Disruption of significant supplier relationships could negatively affect our business.”

 

Employees 

 

As of May 15, 2015, we had approximately 4,300 employees, of which approximately 900 are full-time employees and approximately 3,400 are part-time employees. Under our collective bargaining agreements, employees working 35 hours or less Monday through Friday are considered part-time employees, even if such employees also work during the weekend.

 

Approximately 16.7%  of our employees were not subject to a collective bargaining agreement as of May 15, 2015. With respect to our unionized employees, we have five collective bargaining agreements in effect.  Contracts covering 84.9%, 8.4%, 5.6% and 0.2% of our unionized employees expired  March 29, 2015, April 26, 2015, March 29, 2015 and February 28, 2015, respectivelyFairway and one of the union locals, which represents 12 of the 15 food stores, reached agreement on a new collective bargaining agreement which was approved on May 21, 2015 with immediate effectSimilar collective bargaining agreements are being finalized with the other union locals, which represent the remaining stores.  The parties have agreed to continue operating under the current contracts until new collective bargaining agreements are finalized.  All the new collective bargaining agreements are expected to have a three year term.    We have one collective bargaining agreement in effect covering 1.0% of our unionized employees which is scheduled to expire September 6, 2016.  We consider our employee relations to be good. We have never experienced a strike or significant work stoppage.

 

Information Technology

 

Our management information systems provide a full range of business process assistance and timely information to support our merchandising strategy, warehouse management, stores and operating and financial teams. We currently use a combination of off-the-shelf and custom software in our business.

 

We believe our current systems provide us with operational efficiencies, scalability, management control and timely reporting that allow us to identify and respond to merchandising, pricing, cost and operating trends in our business. We use a combination of internal and external resources and systems to support store point-of-sale, merchandise planning and buying, inventory management, financial reporting, customer contact and administrative functions.

 

Intellectual Property

 

We maintain registered trademarks such as FAIRWAY®, FAIRWAY “Like No Other Market”®, LIKE NO OTHER MARKET® and FAIRWAY WINES & SPIRITS®. Trademarks are generally renewable on a 10 year cycle. We consider our trademarks to be valuable assets that reinforce our customers’ favorable perception of our stores and an important way to establish and protect our brands in a competitive environment.

 

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From time to time, third parties have used names similar to ours, have applied to register trademarks similar to ours and, we believe, have infringed or misappropriated our intellectual property rights. We respond to these actions on a case-by-case basis, including, where appropriate, by sending cease and desist letters and commencing opposition actions and litigation. The outcomes of these actions have included both negotiated out-of-court settlements as well as litigation. We are currently party to an agreement with a midwestern company, Fareway, with respect to the use of the Fairway name and trademarks which prohibits us from using the Fairway name other than on the East Coast and in California and certain parts of Michigan and Ohio, and prohibits that company from using the Fareway name on the East Coast and in California and certain parts of Michigan and Ohio. Our inability to use the Fairway name in these prohibited areas could adversely affect our growth strategy. We are also party to a settlement agreement that prohibits us from opening any new stores under the Fairway name in the New Jersey counties of Bergen, Essex, Hudson and Passaic. We believe this agreement will preclude us from opening one store that we otherwise might have opened in this territory. See “Item 1A—Risk Factors—Risks Relating to Our Business—We may be unable to protect or maintain our intellectual property, which could result in customer confusion, a negative perception of our brand and adversely affect our business.” 

 

Competition

 

The food retail industry as a whole, particularly in the Greater New York City metropolitan area, is highly competitive. We compete with various types of retailers, including alternative food retailers, such as natural foods stores, smaller specialty stores and farmers’ markets, conventional supermarkets, supercenters and membership warehouse clubs. Our principal competitors include alternative food retailers such as Whole Foods and Trader Joe’s, traditional supermarkets such as Stop & Shop, ShopRite, Food Emporium and A&P, retailers with “big box” formats such as Target and Wal-Mart and warehouse clubs such as Costco and BJ’s Wholesale Club. These businesses compete with us for customers, products and locations. In addition, some are expanding aggressively in marketing a range of natural and organic foods, prepared foods and quality specialty grocery items. Some of these potential competitors have more experience operating multiple store locations or have greater financial or marketing resources than we do and are able to devote greater resources to sourcing, promoting and selling their products. As competition in certain areas intensifies, our operating results may be negatively impacted through a loss of sales, reduction in margin from competitive price changes, and/or greater operating costs such as marketing. We also face limited competition from restaurants and fast-food chains. In addition, other established food retailers could enter our markets, increasing competition for market share.

 

Regulation

 

We are subject to federal, state and local laws and regulations relating to zoning, land use, environmental protection, workplace safety, food safety, public health, community right-to-know and alcoholic beverage and tobacco sales. In particular, the states in which we operate and several local jurisdictions regulate the licensing of supermarkets and the sale of alcoholic beverages. Under current law we are only able to have one Fairway Wines & Spirits location in New York State, two locations in New Jersey and three locations in Connecticut, and accordingly will not be able to open another Fairway Wines & Spirits location in New York State or New Jersey and will only be able to open two additional Fairway Wines & Spirits locations in Connecticut. In addition, certain local regulations may limit our ability to sell alcoholic beverages at certain times. We are also subject to laws governing our relationship with employees, including minimum wage requirements, overtime, working conditions, immigration, disabled access and work permit requirements. Our stores are subject to regular but unscheduled inspections. Certain of our parking lots and warehouses and our bakery either have only temporary certificates of occupancy or are awaiting a certificate of occupancy. Additionally, a number of federal, state and local laws impose requirements or restrictions on business owners with respect to access by disabled persons. We believe that we are in material compliance with such laws and regulations. See “Item 1A—Risk Factors—Risks Relating to Our Business—Various aspects of our business are subject to federal, state and local laws and regulations. Our compliance with these regulations may require additional capital expenditures and could materially adversely affect our ability to conduct our business as planned.”

 

Corporate Information

 

Fairway Group Holdings Corp. was incorporated as a Delaware corporation on September 29, 2006. Our corporate headquarters is located at 2284 12th Avenue, New York, New York 10027. Our telephone number is (646) 616-8000. Our website address is http://www.fairwaymarket.com. The information on, or that can be accessed through, our website is not part of this report. This report includes our trademarks and service marks, FAIRWAY®, FAIRWAY “Like No Other Market”®, LIKE NO OTHER MARKET® and FAIRWAY WINES & SPIRITS®, which are protected under applicable intellectual property laws and are the property of Fairway. This report also contains trademarks, service marks, trade names and copyrights of other companies, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this report may appear without the ® or TM symbols. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

 

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Executive Officers of the Registrant

 

The disclosure regarding executive officers is set forth in our Proxy Statement under the caption “Directors and Executive Officers” and is incorporated herein by reference.

 

Available Information

 

We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information statements and amendments to reports filed or furnished pursuant to Sections 13(a), 14 and 15(d) of the Securities Exchange Act of 1934, as amended. The public may obtain these filings at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at http://www.sec.gov that contains reports, proxy and information statements and other information regarding Fairway and other companies that file materials with the SEC electronically. Copies of our reports on Form 10-K, Forms 10-Q and Forms 8-K, may be obtained, free of charge, electronically through our website, http://investors.fairwaymarket.com/sec.cfm.

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ITEM 1A—RISK FACTORS

 

Certain factors may have a material adverse effect on our business, financial condition and results of operations. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks actually occurs, our business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, the trading price of our Class A common stock could decline, and you could lose part or all of your investment.

 

Risks Relating to Our Business

 

Our continued growth depends on new store openings and increasing same store sales, and our failure to achieve these goals could negatively impact our results of operations and financial condition.

 

Our growth strategy depends, in large part, on opening new stores and operating those stores successfully. Successful implementation of this strategy is dependent on finding suitable locations and negotiating acceptable lease terms for store sites, and we face competition from other retailers for such sites, and having available capital to finance the build-out, opening and initial operations of such stores. There can be no assurance that we will continue to grow through new store openings. We may not be able to open new stores timely or within budget or operate them successfully, and there can be no assurance that store opening costs for, net sales of, contribution margin of and average payback period on initial investment for new stores will conform to our operating modelNew stores, particularly those we open outside the Greater New York City metropolitan area, may not achieve sustained sales and operating levels consistent with our mature store base on a timely basis or at all. Lower contribution margins from new stores, along with the impact of related store opening and store management relocation costs, may have an adverse effect on our financial condition and operating results. In addition, if we acquire stores in the future, we may not be able to successfully integrate those stores into our existing store base and those stores may not be as profitable as our existing stores.

 

Also, we may not be able to successfully hire, train and retain new store employees or integrate those employees into the programs, policies and culture of Fairway. We, or our third party vendors, may not be able to adapt our distribution, management information and other operating systems to adequately supply products to new stores at competitive prices so that we can operate the stores in a successful and profitable manner. We may not have the level of cash flow or financing necessary to support our growth strategy.

 

Additionally, our opening of new stores will place increased demands on our operational, managerial and administrative resources. These increased demands could cause us to operate our existing business less effectively, which in turn could cause a deterioration in the financial performance of our existing stores. If we experience a decline in performance, we may slow or discontinue store openings, or we may decide to close stores that we are unable to operate in a profitable manner.

 

Additionally, some of our new stores may be located in areas where we have little experience or a lack of brand recognition. Those markets may have different competitive conditions, market conditions, consumer tastes and discretionary spending patterns than our existing markets, which may cause these new stores to be less successful than stores in our existing markets. 

 

Our operating results may be materially impacted by fluctuations in our same store sales, which have fluctuated in the past and will likely fluctuate in the future. A variety of factors affect our same-store sales, including:

 

our openings of new stores that cannibalize sales in existing stores;

our competition, including competitor store openings or closings near our stores;

the number and dollar amount of customer transactions in our stores;

overall economic trends and conditions in our markets;

consumer preferences, buying trends and spending levels;

the pricing of our products, including the effects of competition, inflation or deflation and promotions;

our ability to provide product offerings that generate new and repeat visits to our stores;

the level of customer service that we provide in our stores;

our in-store merchandising-related activities;

our ability to source products efficiently;

·

whether a holiday falls in the same or a different fiscal period;

the number of stores we open in any period; and

the occurrence of severe weather conditions and other natural disasters during a fiscal period, which can cause store closures and/or consumer stocking of products.

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Adverse changes in these factors may cause our same-store sales results to be materially lower than in recent periods, which would harm our business and could result in a decline in the price of our Class A common stock. Further, we have experienced in the past, and expect to experience in the future, some sales volume transfer from our existing stores to our new stores as some of our existing customers switch to new, closer locations.

 

Our operating results and stock price will be adversely affected if we fail to implement our growth strategy or if we invest resources in a growth strategy that ultimately proves unsuccessful.

 

Our newly opened stores may negatively impact our financial results in the short-term and may not achieve sales and operating levels consistent with our mature store base on a timely basis or at all.

 

We have actively pursued new store growth and plan to continue doing so in the future. We cannot assure you that our new store openings will be successful or result in greater sales and profitability. New store openings generally negatively impact our financial results in the short-term due to the effect of store opening costs and lower sales and contribution margin during the initial period following opening. New stores build their sales volume and their customer base over time and, as a result, generally have lower margins and higher operating expenses, as a percentage of net sales, than our more mature stores. A new store can take more than a year to achieve a level of operating performance comparable to our similarly existing stores. Stores that we have opened in higher density urban markets typically have generated higher sales volumes and margins than stores in suburban areas. Further, we have experienced in the past, and expect to experience in the future, some sales volume transfer from our existing stores to our new stores as some of our existing customers switch to new, closer locations.

 

All of our existing stores are located in the Greater New York City metropolitan area and, as a result, new store openings can cannibalize sales in our stores in close proximity to the new store and our financial results can be effected by economic and competitive conditions in this area.

 

All of our existing stores are located in a concentrated market area in the Greater New York City metropolitan area and we expect that in the near term our new stores will also be located in this area. As we open new stores in closer proximity to our customers who currently travel longer distances to shop at our stores, we expect some of these customers to take advantage of the convenience of our new locations. As a result, we have experienced in the past, and expect to experience in the future, some sales volume transfer from our existing stores to our new stores as some of our existing customers switch to these new, closer locations. Consequently, our new stores will adversely impact sales at our existing stores in close proximity. 

 

In addition, since substantially all of our revenues are derived from stores in the Greater New York City metropolitan area, any material change in economic and competitive conditions in this area or in legislation or regulation in the States of New York, New Jersey or Connecticut and in the local jurisdictions in which we operate within those states could adversely affect our business or financial performance.

 

Part of our long-term growth strategy is to expand our stores into new markets outside the Greater New York City metropolitan area. We do not have experience opening and operating stores in other areas and there can be no assurance we can successfully open Fairway stores in other markets or that Fairway stores will be successful in other markets.

 

We operate in a highly competitive industry.

 

The food retail industry as a whole, particularly in the Greater New York City metropolitan area, is highly competitive. Because we offer a full assortment of fresh, natural and organic products, prepared foods and hard-to-find specialty and gourmet offerings, along with a full assortment of conventional groceries, we compete with various types of retailers, including alternative food retailers, such as natural foods stores, smaller specialty stores and farmers’ markets, conventional supermarkets, supercenters and membership warehouse clubs. Our principal competitors include alternative food retailers such as Whole Foods and Trader Joe’s, traditional supermarkets such as Stop & Shop, ShopRite, Food Emporium and A&P, retailers with “big box” formats such as Target and Wal-Mart and warehouse clubs such as Costco and BJ’s Wholesale Club. These businesses compete with us for customers, products and locations. In addition, some are expanding aggressively in marketing a range of natural and organic foods, prepared foods and quality specialty grocery items. Some of these potential competitors have more experience operating multiple store locations or have greater financial or marketing resources than we do and are able to devote greater resources to sourcing, promoting and selling their products. Due to the competitive environment in which we operate, our operating results may be negatively impacted through a loss of sales, reduction in margin from competitive price changes and/or greater operating costs such as marketing. We also face limited competition from restaurants and fast-food chains. In addition, other established food retailers could enter our markets, increasing competition for market share.

 

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We rely on a combination of product offerings, customer service, store format, location and pricing to compete.

 

We compete with other food retailers on a combination of factors, primarily product selection and quality, customer service, store format, location and price. Our success depends on our ability to offer products that appeal to our customers’ preferences. Failure to offer such products, or to accurately forecast changing customer preferences, could lead to a decrease in the number of customer transactions at our stores and in the amount customers spend at our stores. We also attempt to create a convenient and appealing shopping experience for our customers in terms of customer service, store format and location.

 

Pricing in particular is a significant driver of consumer choice in our industry and we expect competitors to continue to apply pricing and other competitive pressures. To the extent that our competitors lower prices, our ability to maintain gross profit margins and sales levels may be negatively impacted. Some of our competitors have greater resources than we do and do not have unionized work forces, which may result in lower labor and benefit costs. These competitors could use these advantages to take measures, including reducing prices, which could adversely affect our competitive position, financial condition and results of operations.

 

If we do not succeed in offering attractively priced products that consumers want to buy or are unable to provide a convenient and appealing shopping experience, our sales, operating margins and market share may decrease, resulting in reduced profitability.

 

Economic conditions that impact consumer spending could materially affect our business.

 

Economic uncertainty could negatively affect consumer confidence and discretionary spending. Our operating results may be materially affected by changes in economic conditions nationwide or in the regions in which we operate that impact consumer confidence and spending, including discretionary spending. This risk may be exacerbated if customers choose lower-cost alternatives to our product offerings in response to economic conditions. In particular, a decrease in discretionary spending could adversely impact sales of certain of our higher margin product offerings. Future economic conditions affecting disposable consumer income, such as employment levels, business conditions, changes in housing market conditions, the availability of consumer credit, interest rates, tax rates and fuel and energy costs, could reduce overall consumer spending or cause consumers to shift their spending to lower-priced competitors. In addition, inflation or deflation can impact our business. Food deflation could reduce sales growth and earnings, while food inflation, combined with reduced consumer spending, could reduce gross profit margins. As a result, our results of operations could be materially adversely affected.

 

The geographic concentration of our stores creates an exposure to the Greater New York City metropolitan area economy and any downturn in this region could materially adversely affect our financial condition and results of operations.

 

We reported net losses in fiscal 2013, fiscal 2014 and fiscal 2015, and we expect to incur net losses through at least fiscal 2020.

 

We reported a net loss of $62.9 million in fiscal 2013, $80.3 million in fiscal 2014 and $46.5 million in fiscal 2015, and we expect to incur net losses through at least fiscal 2020. Our net losses are primarily attributable to the costs associated with new store openings, increased production and corporate overhead and associated costs of capital, as well as in fiscal 2013 re-financing and pre-IPO related costs and a partial valuation allowance against our deferred tax asset, in fiscal 2014 expenses related to our IPO, compensation related charges due to equity incentive grants, the commencement of an organizational realignment to remove redundant costs and streamline parts of our business model to enhance overall productivity and a full valuation allowance against the remainder of our deferred tax asset, and in fiscal 2015 expenses related to our organizational realignment and declines in same store sales and gross margin.   For example, we typically incur higher than normal employee costs at the time of a new store opening associated with set-up and other opening costs. Operating margins are also affected by promotional discounts and other marketing costs and strategies associated with new store openings, as well as higher shrink, primarily due to overstocking, and costs related to hiring and training new employees. Additionally, a new store builds its sales volume and its customer base over time and, as a result, generally has lower margins and higher operating expenses, as a percentage of sales, than our more mature stores. A new store can take more than a year to achieve a level of operating performance comparable to our similarly existing stores. Our growth strategy depends, in large part, on opening new stores and, as a result, our results of operations will continue to be materially affected by the timing and number of new store openings and the amount of new store opening costs.  Other factors that have affected and may in the future affect our results of operations include general economic conditions and changes in consumer behavior that can affect our sales, inflation and deflation trends, the extent of our infrastructure investments in the applicable period, the effectiveness of our price optimization and productivity initiatives, competitive developments and the extent of our debt service obligations. Although we believe that we will generate future taxable income sufficient to utilize all prior years’ net operating losses, we cannot assure you that we will not continue to incur net losses or if and when we will report net income. See Note 13 to our financial statements included elsewhere in this report for information about our net operating losses.

 

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We will incur compensation related charges against our earnings due to equity incentive grants to our employees under our 2013 Long-Term Incentive Plan and our organizational realignment that we began in the fourth quarter of fiscal 2014.

 

During fiscal 2014 and 2015, we granted to our directors and employees an aggregate of 4,530,934 restricted stock units in respect of Class A common stock, or RSUs, and options to purchase 1,724,691 shares of Class A common stock. These RSUs and options will vest over specified periods of time, with accelerated vesting in certain circumstances. We recorded compensation expense for these grants of $10.8 million in fiscal 2014 and $12.8 million in fiscal 2015, and we estimate that we will record compensation expense associated with these grants, resulting in a reduction in net earnings, of approximately $10.0 million for fiscal 2016, approximately $3.5 million for fiscal 2017 and approximately $1.0 million for fiscal 2018, in each case net of tax, based on the stock price on the date of grant as it relates to RSUs and based on the fair value at the date of grant as it relates to options. We will from time to time in the future make additional restricted stock unit awards, option grants and restricted stock awards under our 2013 Long-Term Incentive Plan, which will result in additional compensation expense in future periods. See “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information.

 

In connection with our organizational realignment to remove redundant costs and streamline part of our business model to enhance overall productivity, we incurred charges, primarily severance costs, of approximately $3.3 million during the fourth quarter of fiscal 2014 and approximately  $6.5 million during fiscal 2015.

 

We may be unable to improve our operating margins, which could adversely affect our financial condition and ability to grow.

 

We intend to improve our operating margins in an environment of increased competition through various initiatives, including increased sales of perishables and prepared foods, continued cost discipline focused on improving labor productivity and reducing shrink, and our centralized production facility to serve our current and future stores in the Greater New York City metropolitan area. Some of our competitors do not have unionized work forces, which may result in lower labor and benefit costs. If competitive pressures cause us to lower our prices, our operating margins may decrease. If the percentage of our net sales represented by perishables decreases, our operating margins may be adversely affected. Any failure to achieve gains in labor productivity, particularly the reduction of overtime, or to reduce inventory shrink may adversely impact our operating margins. In addition, changes in federal and state minimum wage and overtime laws could cause us to incur additional wage costs, which could adversely affect our operating margin. There can be no assurance that our centralized production facility will result in labor efficiencies or improve product quality and consistency. If we encounter operational problems at our centralized production facility, the delivery of products to, and sales at, our stores, could be adversely affected. If our operating margins stagnate or decline, our financial condition and ability to generate cash to fund our growth could be adversely affected.

 

Perishable products make up a significant portion of our sales, and ordering errors or product supply disruptions may have an adverse effect on our profitability and operating results.

 

We have a significant focus on perishable products. Sales of perishable products accounted for approximately 65% of our net sales in fiscal 2015. We rely on various suppliers and vendors to provide and deliver our product inventory on a continuous basis. We could suffer significant perishable product inventory losses in the event of the loss of a major supplier or vendor, disruption of our supply chain, extended power outages, natural disasters or other catastrophic occurrences. While we have implemented certain systems to ensure our ordering is in line with demand, we cannot assure you that our ordering systems will always work efficiently, in particular in connection with the opening of new stores, which have no, or a limited, ordering history. If we were to over-order, we could suffer inventory losses, which would negatively impact our operating results.

 

Disruption of significant supplier relationships could negatively affect our business.

 

Our single largest third-party supplier in fiscal 2013, fiscal 2014 and fiscal 2015 (until it was replaced in December 2014 following its bankruptcy) was White Rose.  Under our agreement with White Rose, we were obligated to purchase substantially all our requirements for specified products, principally conventional grocery, dairy, frozen food and ice cream products, which were available from White Rose, for our existing stores.  In December 2014, we replaced White Rose with C&S, and C&S is now our largest supplier, and under our agreement with C&S we are obligated to purchase substantially all our requirements for specified products, principally conventional grocery, dairy, frozen food and ice cream products that are available from C&S, for our existing stores.  Total purchases from White Rose and C&S during fiscal 2013, fiscal 2014, and fiscal 2015 accounted for approximately 15%, 16%, and 15% of our total purchasesrespectively.  In addition, United Natural Foods, Inc. (“UNFI”), which is our primary supplier of specified natural and organic products, principally dry grocery, frozen food, vitamins/supplements and health, beauty and wellness, accounted for approximately 9% of our total purchases in each of fiscal 2013 and fiscal 2014 and 10% of our total purchases in fiscal 2015.   Due to this concentration of purchases from C&S and UNFI, the cancellation of our supply arrangement with either C&S or UNFI or the disruption, delay or inability of C&S or UNFI to deliver product to our stores may materially and adversely affect our operating results

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while we establish alternative distribution channels. We also depend on third-party suppliers for our private label products, and the cancellation of our supply arrangement with any of these suppliers or the disruption, delay or inability of these suppliers to provide our private label products, particularly private label organic products, could adversely affect our private label sales. If our suppliers fail to comply with food safety or other laws and regulations, or face allegations of non-compliance, their operations may be disrupted. We cannot assure you that we would be able to find replacement suppliers on commercially reasonable terms. 

 

Our success depends upon our ability to source and market new products that meet our high standards and customer preferences and our ability to offer our customers an aesthetically pleasing shopping environment.

 

Our success depends on our ability to source and market new products that meet our standards for quality and appeal to our customers’ preferences. Failure to source and market such products, or to accurately forecast changing customer preferences, could lead to a decrease in the number of customer transactions at our stores and in the amount customers spend at our stores. In addition, the sourcing of our products is dependent, in part, on our relationships with our vendors. We rely on a large number of small vendors in order to offer a broad array of products, and as we expand it may become more difficult to manage and maintain these relationships. If we are unable to maintain these relationships we may not be able to continue to source products at competitive prices that both meet our standards and appeal to our customers. We also attempt to create a pleasant and appealing shopping experience. If we are not successful in creating a pleasant and appealing shopping experience, we may lose customers to our competitors. If we do not succeed in maintaining good relationships with our vendors, introducing and sourcing new products that consumers want to buy or are unable to provide a pleasant and appealing shopping environment or maintain our level of customer service, our sales, operating margins and market share may decrease, resulting in reduced profitability.

 

We may experience negative effects to our brand and reputation from real or perceived quality or health issues with our food products, which could lead to product liability claims or have an adverse effect on our operating results.

 

We believe that our reputation for providing our customers with fresh, high-quality food products is an important component of our customer value proposition and that maintaining our brand is critical to our success. Brand value is based in large part on perceptions of subjective qualities, and even isolated incidents can erode trust and confidence, particularly if they result in adverse publicity, especially in social media outlets, governmental investigations or litigation, which can have an adverse impact on these perceptions and lead to adverse effects on our business. Concerns regarding the safety or quality of our food products or of our food supply chain could cause consumers to avoid purchasing certain products from us, or to seek alternative sources of food, even if the basis for the concern is unfounded, has been addressed or is outside of our control. Food products containing contaminants or allergens could be inadvertently manufactured, prepared or distributed by us and, if processing at the consumer level does not eliminate them, these contaminants could result in illness or death. Adverse publicity about these concerns, whether or not ultimately based on fact, and whether or not involving products sold at our stores, could discourage consumers from buying our products, which could have an adverse effect on our brand, reputation and operating results. In addition, our stores are subject to unscheduled inspections on a regular basis, which, if violations are found, could result in the assessment of fines, suspension of one or more needed licenses and, in the case of repeated “critical” violations, closure of the store until a re-inspection demonstrates that we have remediated the problem.

 

Furthermore, the sale of food products entails an inherent risk of product liability claims, product recall and the resulting negative publicity. Any such claims, recalls or adverse publicity with respect to our private-label products may have an even greater negative effect on our sales and operating results, in addition to generating adverse publicity for our brand. Moreover, product liability claims of this sort may not be covered by insurance or any rights to indemnity or contribution we have against others.

 

Any lost confidence in us on the part of our customers would be difficult and costly to re-establish. Any such adverse effect could significantly reduce our brand value. Issues regarding the safety of any food items sold by us, regardless of the cause, could have a substantial and adverse effect on our sales and operating results. 

 

We may be unable to protect or maintain our intellectual property, which could result in customer confusion, a negative perception of our brand and adversely affect our business.

 

We believe that our intellectual property has substantial value and has contributed significantly to the success of our business. In particular, our trademarks and servicemarks, including our FAIRWAY®, FAIRWAY “Like No Other Market”®, LIKE NO OTHER MARKET® and FAIRWAY WINES & SPIRITS® trademarks, are valuable assets that reinforce our customers’ favorable perception of our stores.

 

From time to time, third parties have used names similar to ours, have applied to register trademarks similar to ours and, we believe, have infringed or misappropriated our intellectual property rights. We respond to these actions on a case-by-case basis, including, where appropriate, by sending cease and desist letters and commencing opposition actions and litigation. The outcomes of

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these actions have included both negotiated out-of-court settlements as well as litigation. We are currently party to a settlement with a midwestern grocery company, “Fareway,” with respect to the use of the Fairway name and trademarks which prohibits us from using the Fairway name other than on the East Coast and in California and certain parts of Michigan and Ohio, and prohibits that company from using the Fareway name on the East Coast and in California and certain parts of Michigan and Ohio. Our inability to use the Fairway name in these prohibited areas could adversely affect our growth strategy. We are also party to a settlement agreement that prohibits us from opening any new stores under the Fairway name in certain parts of the New Jersey counties of Bergen, Essex, Hudson and Passaic. We believe this agreement will preclude us from opening one store that we otherwise might have opened in this territory.

 

We cannot assure you that the steps we have taken to protect our intellectual property rights are adequate, that our intellectual property rights can be successfully defended and asserted in the future or that third parties will not infringe upon or misappropriate any such rights. In addition, our trademark rights and related registrations may be challenged in the future and could be canceled or narrowed. Failure to protect our trademark rights could prevent us in the future from challenging third parties who use names and logos similar to our trademarks, which may in turn cause consumer confusion or negatively affect consumers’ perception of our brand and products, which could, in turn, adversely affect our sales and profitability. Moreover, intellectual property disputes and proceedings and infringement claims may result in a significant distraction for management and significant expense, which may not be recoverable regardless of whether we are successful. Such proceedings may be protracted with no certainty of success, and an adverse outcome could subject us to liabilities, force us to cease use of certain trademarks or other intellectual property or force us to enter into licenses with others. Any one of these occurrences may have a material adverse effect on our business, results of operations and financial condition.

 

We rely on information technology and administrative systems and any inadequacy, failure, interruption or security breach of those systems may harm our ability to effectively operate our business.

 

We rely extensively on our information technology and administrative systems to effectively manage our business data, communications, supply chain, order entry and fulfillment and other business processes. The failure of our information technology or administrative systems to perform as we anticipate could disrupt our business and result in transaction errors, processing inefficiencies and the loss of sales and customers, causing our business to suffer. In addition, our information technology and administrative systems may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, systems failures, cyber-attacks, viruses and security breaches, including breaches of our transaction processing or other systems that could result in the compromise of confidential customer data. Any such damage or interruption could have a material adverse effect on our business, cause us to face significant fines, customer notice obligations or costly litigation, harm our reputation with our customers, require us to expend significant time and expense developing, maintaining or upgrading our information technology or administrative systems, or prevent us from paying our suppliers or employees, receiving payments from our customers or performing other information technology or administrative services on a timely basis. Any material interruption in our information systems may have a material adverse effect on our operating results.

 

If we experience a data security breach and confidential customer or employee information is disclosed, we may be subject to penalties and experience negative publicity, which could affect our customer relationships and have a material adverse effect on our business.

 

We and our customers could suffer harm if customer or employee information were accessed by third parties due to a security failure in our systems. The collection of data and processing of transactions require us to receive, transmit and store a large amount of personally identifiable and transaction related data. This type of data is subject to legislation and regulation in various jurisdictions. Recently, data security breaches suffered by well-known companies and institutions have attracted a substantial amount of media attention, prompting state and federal legislative proposals addressing data privacy and security. If some of the current proposals are adopted, we may be subject to more extensive requirements to protect the customer information that we process in connection with the purchases of our products. We may become exposed to potential liabilities with respect to the data that we collect, manage and process, and may incur legal costs if our information security policies and procedures are not effective or if we are required to defend our methods of collection, processing and storage of personal data. Future investigations, lawsuits or adverse publicity relating to our methods of handling personal data could adversely affect our business, results of operations, financial condition and cash flows due to the costs and negative market reaction relating to such developments. Additionally, if we suffer data breaches one or more of the credit card processing companies that we rely on may refuse to allow us to continue to participate in their network, which would limit our ability to accept credit cards at our stores and could adversely affect our business, results of operations, financial condition and cash flows.

 

Data theft, information espionage or other criminal activity directed at the retail industry or computer or communications systems may materially adversely affect our business by causing us to implement costly security measures in recognition of actual or potential threats, by requiring us to expend significant time and expense developing, maintaining or upgrading our information

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technology systems and by causing us to incur significant costs to reimburse third parties for damages. Such activities may also materially adversely affect our financial condition, results of operations and cash flows by reducing consumer confidence in the marketplace and by modifying consumer spending habits. Over the past 12 months several retailers have been subject to data theft, which has adversely affected their business.

 

We lease certain of our stores and related properties from a related party.

 

Howard Glickberg, one of our directors and a former executive officer, owns a one-third interest in entities which lease to us the premises where a portion of our Broadway store is located, the premises where our Harlem store, Harlem bakery and Harlem warehouse are located and the premises where the parking lot for our Harlem store is located. The remainder of these entities is owned by Mr. Glickberg’s former business partnersMr. Glickberg also owns a one-sixth interest in the landlord for the premises where our Red Hook store is located. During fiscal 2013, fiscal 2014 and fiscal 2015, rental payments (excluding maintenance and taxes that we are obligated to pay) under the leases for the Harlem properties and portion of the Broadway store aggregated $4,433,500, $4,455,087 and $4,527,816 respectively, of which, based on his ownership and before giving effect to any expenses, Mr. Glickberg is entitled to $1,477,833, $1,485,029 and $1,509,272, respectively. During fiscal 2013, fiscal 2014 and fiscal 2015, rental payments (excluding maintenance and taxes that we are obligated to pay) under the lease for the Red Hook store aggregated $1,386,180, $1,421,151 and $2,833,727, respectively, of which, based on his ownership and before giving effect to any expenses, Mr. Glickberg is entitled to $231,030, $236,859 and $472,288, respectively.

 

In addition, our Red Hook store is required to obtain its electricity, heated/chilled water, hot and cold potable water and sewer services from an entity owned by the owners of the premises where our Red Hook store is located. We believe that the owner of the co-generation plant has overcharged us for utilities since our initial occupancy of the premises in December 2005. Since November 2008, with the exception of the post-Hurricane Sandy period through fiscal 2014, when we received utilities from the local utility provider because the co-generation plant was not operational, we have not fully paid the utility invoices, but instead remitted lesser amounts based on the methodology that we believe represents the parties’ original intentions with respect to the utility charge calculations. There can be no assurance that we will not be required to pay the amounts we withheld.

 

Failure to retain our senior management and other key personnel may adversely affect our operations.

 

Our success is substantially dependent on the continued service of our senior management and other key personnel. These executives are primarily responsible for determining the strategic direction of our business and for executing our growth strategy and are integral to our brand and culture, and the reputation we enjoy with suppliers and consumers. The loss of the services of any of these executives and other key personnel could have a material adverse effect on our business and prospects, as we may not be able to find suitable individuals to replace them on a timely basis, if at all. In addition, any such departure could be viewed in a negative light by investors and analysts, which may cause our stock price to decline. The loss of key employees could negatively affect our business.

 

If we are unable to attract, train and retain employees, we may not be able to grow or successfully operate our business.

 

The food retail industry is labor intensive, and our success depends in part upon our ability to attract, train and retain a sufficient number of employees who understand and appreciate our culture and are able to represent our brand effectively and establish credibility with our business partners and consumers. Our ability to meet our labor needs, while controlling wage and labor-related costs, is subject to numerous external factors, including the availability of a sufficient number of qualified persons in the work force in the markets in which we are located, unemployment levels within those markets, unionization of the available work force, prevailing wage rates, changing demographics, health and other insurance costs and changes in employment legislation. In the event of increasing wage rates, if we fail to increase our wages competitively, the quality of our workforce could decline, causing our customer service to suffer, while increasing our wages could cause our earnings to decrease. If we are unable to hire and retain employees capable of meeting our business needs and expectations, our business and brand image may be impaired. Any failure to meet our staffing needs or any material increase in turnover rates of our employees may adversely affect our business, results of operations and financial condition.

 

Changes in and enforcement of immigration laws could increase our costs and adversely affect our ability to attract and retain qualified store-level employees.

 

Federal and state governments from time to time implement laws, regulations or programs that regulate our ability to attract or retain qualified employees. Some of these changes may increase our obligations for compliance and oversight, which could subject us to additional costs and make our hiring process more cumbersome, or reduce the availability of potential employees. Although we have implemented, and are in the process of enhancing, procedures to ensure our compliance with the employment eligibility verification requirements, there can be no assurance that these procedures are adequate and some of our employees may, without our knowledge, be unauthorized workers. The employment of unauthorized workers may subject us to fines or civil or criminal penalties,

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and if any of our workers are found to be unauthorized we could experience adverse publicity that negatively impacts our brand and makes it more difficult to hire and keep qualified employees. We have from time to time been required to terminate the employment of certain of our employees who were determined to be unauthorized workers. There can be no assurance that any future audit will not require us to terminate employees and pay fines or other penalties. The termination of a significant number of employees may disrupt our operations, cause temporary increases in our labor costs as we train new employees and result in additional adverse publicity. Our financial performance could be materially harmed as a result of any of these factors.

 

Prolonged labor disputes with unionized employees and increases in labor costs could adversely affect our business.

 

Our largest operating costs are attributable to labor costs and, therefore, our financial performance is greatly influenced by increases in wage and benefit costs, including pension and health care costs. As a result, we are exposed to risks associated with a competitive labor market and, more specifically, to any disruption of our unionized work force. As of May 15, 2015, approximately 83.3% of our employees were represented by unions and covered by collective bargaining agreements that are subject to periodic renegotiation. One of our current collective bargaining agreements expired in February 2015, two expired in March 2015 and one expired in April 2015.    Fairway and one of the union locals, which represents 12 of the 15 food stores, reached agreement on a new collective bargaining agreement which was approved on May 21, 2015 with immediate effectSimilar collective bargaining agreements are being finalized with the other union locals, which represent the remaining stores.  The parties have agreed to continue operating under the current contracts until new collective bargaining agreements are finalized.  All the new collective bargaining agreements are expected to have a three year term.  One collective bargaining agreement expires in September 2016. We consider our employee relations to be good. We have never experienced a strike or significant work stoppage.

 

In the renegotiation of our current contracts and the negotiation of our new contracts, rising health care and pension costs and the nature and structure of work rules were and will be important issues. The terms of any renegotiated collective bargaining agreements could create either a financial advantage or disadvantage for us as compared to our major competitors and could have a material adverse effect on our results of operations and financial condition. Our labor negotiations may not conclude successfully or may result in a significant increase in labor costs, and work stoppages or labor disturbances could occur. A prolonged work stoppage could have a material adverse effect on our financial condition, results of operations and cash flows. We also expect that in the event of a work stoppage or labor disturbance, we could incur additional costs and face increased competition.

 

There have recently been a number of proposals both at the Federal level and in the states we operate to increase the minimum wage and increase the number of employees eligible for overtime wages. Any such increase in wages and overtime costs may adversely affect our business, results of operations and financial condition.

 

In May 2014, a purported wage and hour class action lawsuit was filed in the United States District Court for the Southern District of New York against us and certain of our current and former officers and employees.  This suit alleges, among other things, that certain of our past and current employees were not properly compensated in accordance with the overtime provisions of the Fair Labor Standards Act.  In May 2015, the Company and plaintiffs agreed in principle to settle the matter without material financial consequence.

 

The cost of providing employee benefits continues to increase and is subject to factors outside of our control.

 

We provide health benefits to substantially all of our full-time employees and, under our collective bargaining agreements, contribute to the cost of health benefits provided through multi-employer plans. Even though employees generally pay a portion of the cost, our cost of providing these benefits has increased steadily over the last several years. We anticipate future increases in the cost of health benefits due to health care inflation and continued implementation of the federal healthcare reform legislation. We currently pay most of the healthcare insurance premiums for our unionized employeesOn March 29, 2015, we had approximately 3,700 unionized employees. We cannot at this time predict with certainty the continued financial impact of the Patient Protection and Affordable Care Act (PPACA), on our financial condition and results of operations.  If we are unable to control healthcare costs, we will experience increased operating costs, which may adversely affect our financial condition and results of operations.

 

We participate in one underfunded multiemployer pension plan on behalf of most of our union-affiliated employees, and we are required to make contributions to this plan under our collective bargaining agreement. This multiemployer pension plan is currently underfunded in part due to increases in the costs of benefits provided or paid under the plan as well as lower returns on plan assets. The unfunded liabilities of this plan may require increased future payments by us and other participating employers. As of December 31, 2014, this multiemployer plan was deemed by its plan actuary to be “endangered” because the plan is less than 80% funded. As a result, the plan has adopted a funding improvement plan to increase the plan’s funding percentage. In the future, our required contributions to this multiemployer plan could increase as a result of many factors, including the outcome of collective bargaining with the union, actions taken by trustees who manage the plan, government regulations, the actual return on assets held in the plan and the payment of a withdrawal liability if we choose to exit the plan. Our risk of future increased payments may be greater

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if other participating employers withdraw from the plan and are not able to pay the total liability assessed as a result of such withdrawal, or if the pension plan adopts surcharges and/or increased pension contributions as part of a rehabilitation plan. Increased pension costs may adversely affect our financial condition and results of operations. See Note 11 to our consolidated financial statements included elsewhere in this report.

 

Various aspects of our business are subject to federal, state and local laws and regulations. Our compliance with these regulations may require additional capital expenditures and could materially adversely affect our ability to conduct our business as planned.

 

We are subject to federal, state and local laws and regulations relating to zoning, land use, environmental protection, workplace safety, food safety, public health, community right-to-know and alcoholic beverage and tobacco sales. In particular, the states in which we operate and several local jurisdictions regulate the licensing of supermarkets and the sale of alcoholic beverages. In addition, certain local regulations may limit our ability to sell alcoholic beverages at certain times. We are also subject to laws governing our relationship with employees, including minimum wage requirements, overtime, working conditions, immigration, disabled access and work permit requirements. Compliance with new laws in these areas, or with new or stricter interpretations of existing requirements, could reduce the revenue and profitability of our stores and could otherwise materially adversely affect our business, financial condition or results of operations. Our new store openings could be delayed or prevented or our existing stores could be impacted by difficulties or failures in our ability to obtain or maintain required approvals or licenses. Our stores are subject to unscheduled inspections on a regular basis, which, if violations are found, could result in the assessment of fines, suspension of one or more needed licenses and, in the case of repeated “critical” violations, closure of the store until a re-inspection demonstrates that we have remediated the problem. Certain of our parking lots and warehouses either have only temporary certificates of occupancy or are awaiting a certificate of occupancy which, if not granted, would require us to stop using such property. Our central bakery does not have a certificate of occupancy and, due to the age and structure of the building, we do not believe we would be able to obtain one without substantial modifications to the building. We are in the process of relocating the central bakery; however, until we do so, if we are not permitted to continue our central bakery operations at our current facility, our results of operations could be adversely affected. The buildings in which our Broadway and Harlem stores are located are old and therefore require greater maintenance expenditures by us in order to maintain them in compliance with applicable building codes. If we are unable to maintain these stores in compliance with applicable building codes, we could be required by the building department to close them. Additionally, a number of federal, state and local laws impose requirements or restrictions on business owners with respect to access by disabled persons. Our compliance with these laws may result in modifications to our properties, or prevent us from performing certain further renovations. We cannot predict the nature of future laws, regulations, interpretations or applications, or determine what effect either additional government regulations or administrative orders, when and if promulgated, or disparate federal, state and local regulatory schemes would have on our business in the future.

 

The terms of our senior credit facility may restrict our current and future operations, which could adversely affect our ability to respond to changes in our business and to manage our operations.

 

Our senior credit facility includes a number of customary restrictive covenants that could impair our financing and operational flexibility and make it difficult for us to react to market conditions and satisfy our ongoing capital needs and unanticipated cash requirements. Specifically, such covenants may restrict our ability and, if applicable, the ability of our subsidiaries to, among other things:

 

incur additional debt;

make certain investments;

enter into certain types of transactions with affiliates;

limit dividends or other payments by our restricted subsidiaries to us;

use assets as security in other transactions;

pay dividends on our common stock or repurchase our equity interests;

sell certain assets or merge with or into other companies;

guarantee the debts of others;

enter into new lines of business;

make capital expenditures;

prepay, redeem or exchange our other debt; and

form any joint ventures or subsidiary investments.

 

In addition, our senior credit facility requires us to comply with a maximum total leverage ratio financial covenant.

 

Our ability to comply with the covenants and other terms of our senior credit facility will depend on our future operating performance and, in addition, may be affected by events beyond our control, and we cannot assure you that we will meet them. If we

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fail to comply with such covenants and terms, we would be required to obtain waivers from our lenders or agree with our lenders to an amendment of the facility’s terms to maintain compliance under such facility. If we are unable to obtain any necessary waivers and the debt under our senior credit facility is accelerated, it would have a material adverse effect on our financial condition and future operating performance.

 

Our senior credit facility requires us to use 50% of our annual adjusted excess cash flow (which percentage will decrease upon achievement and maintenance of specified leverage ratios) to prepay our outstanding term loans. This requirement will reduce the funds available to us for new store growth and working capital.

 

Our senior credit facility limits the amount of capital expenditures that we can make in any fiscal year that are not financed with proceeds from the sale of our equity securities. This limitation may adversely affect our ability to open new stores or result in additional dilution if we issue additional equity securities.

 

Our senior credit facility provides that if any person other than Sterling Investment Partners owns, directly or indirectly, beneficially or of record, shares representing more than 35% of the voting power of our outstanding common stock, the lenders can declare all borrowings under the senior credit facility to be immediately due and payable.

 

We have significant debt service obligations and may incur additional indebtedness in the future which could adversely affect our financial health and our ability to react to changes to our business.

 

As of March 29, 2015, we had gross total debt obligations of approximately $268.8 million  (not reduced by unamortized original issue discount of approximately $11.7 million on our senior debt). Our indebtedness, or any additional indebtedness we may incur, could require us to divert funds identified for other purposes for debt service and impair our liquidity position. If we cannot generate sufficient cash flow from operations to service our debt, we may need to refinance our debt, dispose of assets or issue equity to obtain necessary funds. We do not know whether we will be able to take any of such actions on a timely basis, on terms satisfactory to us or at all.

 

Our level of indebtedness has important consequences. For example, our level of indebtedness may:

 

require us to use a substantial portion of our cash flow from operations to pay interest and principal on our debt, which would reduce the funds available to us for working capital, new store growth and other general corporate purposes;

limit our ability to pay future dividends;

limit our ability to obtain additional financing for working capital, new store growth, capital expenditures and other investments, which may limit our ability to implement our business strategy;

heighten our vulnerability to downturns in our business, the food retail industry or the general economy and limit our flexibility in planning for, or reacting to, changes in our business and the food retail industry;

expose us to the risk of increased interest rates as our borrowings under our senior credit facility are at variable rates; or

prevent us from taking advantage of business opportunities as they arise or successfully carrying out our plans to expand our store base and product offerings.

 

We may incur substantial additional indebtedness in the future, subject to the restrictions contained in our senior credit facility. If new indebtedness is added to our current debt levels, the related risks that we now face could intensify.

 

We cannot assure you that our business will generate sufficient cash flow from operations or that future financing will be available to us in amounts sufficient to enable us to make payments on our indebtedness or to fund our operations.

 

Our plans to open new stores require us to spend capital, which must be allocated among various projects. Failure to use our capital efficiently could have an adverse effect on our profitability.

 

Our growth strategy depends on the opening of new stores, which will require us to use cash generated by our operations and borrowings under our senior credit facility. However, we have limited availability under our existing senior credit facility and our ability to obtain additional indebtedness will depend on market conditions and continued improvement in our financial performance.  We cannot assure you that cash generated by our operations will be sufficient to allow us to open new stores.  If this cash is not allocated efficiently among our various projects, or if any of these initiatives prove to be unsuccessful, we may experience reduced cash flow and we could be required to delay, significantly curtail or eliminate planned store openings, which could have a material adverse effect on our financial condition and future operating performance and the price of our Class A common stock.

 

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Litigation may materially adversely affect our business, financial condition and results of operations.

 

Our operations are characterized by a high volume of customer traffic and by transactions involving a wide variety of product selections. These operations carry a higher exposure to consumer litigation risk when compared to the operations of companies operating in many other industries. Consequently, we may be a party to individual personal injury, product liability and other legal actions in the ordinary course of our business, including litigation arising from food-related illness. The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time. The cost to defend future litigation may be significant. There may also be adverse publicity associated with litigation that may decrease consumer confidence in our businesses, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may materially adversely affect our businesses, financial condition, results of operations and cash flows.

 

In February and March 2014, three purported class action lawsuits alleging the violation of the federal securities laws were filed in the United States District Court for the Southern District of New York against us and certain of our current and former officers and directors and the underwriters for our initial public offering. The actions were consolidated on June 3, 2014 under the caption In re Fairway Group Holdings Corp. Securities Litigation, No. 14-cv-0950. On July 18, 2014, an amended class action complaint was filed, adding affiliates of Sterling Investment Partners as defendants. The complaint seeks unspecified damages and alleges misleading statements in the registration statement and prospectus for our initial public offering and in subsequent communications regarding our business and financial results. On September 5, 2014, we and the other defendants moved to dismiss the amended class action complaint.  On January 20, 2015, the Magistrate appointed by the district judge to whom the case was assigned to review the motions and make a recommendation to the judge recommended that our and the other defendants’ motion to dismiss be granted in part and denied in part.  We filed an objection to the Magistrate’s recommendation.  In March 2015, the district judge to whom the case was assigned notified the plaintiffs and defendants to refile the complaint and motion to dismiss in light of a recent decision of the Supreme Court.  All revised filings are required to be made by June 30, 2015.  Although we believe the claims are without merit and intend to defend this lawsuit vigorously, we cannot predict the outcome of this lawsuit. See “Item 3. Legal Proceedings.”

  

In April 2014, a purported stockholder derivative action was filed against certain of our current and former directors in New York state court, asserting claims for breach of fiduciary duties and gross mismanagement based on substantially similar allegations as in the securities class action. In June 2014, we and the other defendants moved to dismiss the derivative complaint. On July 30, 2014, plaintiffs filed an amended complaint, adding affiliates of Sterling Investment Partners as defendants and asserting claims against them for breach of fiduciary duty and unjust enrichment. On September 29, 2014, we and the other defendants moved to dismiss the amended derivative complaint.  On November 10, 2014, the court granted our and the other defendants’ motion to dismiss on the grounds that under the Company’s certificate of incorporation the derivative action must be brought in the State of Delaware.  The plaintiffs have appealed this decision.   A similar case was filed in the Delaware Chancery Court in February 2015, and we and the other defendants have moved to dismiss this case as well.  Although we believe the claims are without merit and intend to defend these lawsuits vigorously, we cannot predict the outcome of these lawsuits.

 

In May 2014, a purported wage and hour class action lawsuit was filed in the United States District Court for the Southern District of New York against us and certain of our current and former officers and employees.  This suit alleged, among other things, that certain of our past and current employees were not properly compensated in accordance with the overtime provisions of the Fair Labor Standards Act.  In May 2015, we agreed in principle with the plaintiffs to settle the matter without material financial consequence. 

 

Monitoring and defending against legal actions, whether or not meritorious, is time-consuming for our management and detracts from our ability to fully focus our internal resources on our business activities and we cannot predict how long it may take to resolve these matters. In addition, legal fees and costs incurred in connection with such activities may be significant and we could, in the future, be subject to judgments or enter into settlements of claims for significant monetary damages. A decision adverse to our interests on these actions or resulting from these matters could result in the payment of substantial damages and could have a material adverse effect on our cash flow, results of operations and financial position.

 

With respect to any litigation, our insurance may not reimburse us or may not be sufficient to reimburse us for the expenses or losses we may suffer in contesting and concluding such lawsuits. Substantial litigation costs or an adverse result in any litigation may adversely impact our business, operating results or financial condition.

 

Increased commodity prices and availability may impact profitability.

 

Many of our products include ingredients such as wheat, corn, oils, milk, sugar, cocoa and other commodities. Although commodity price inputs do not typically represent the substantial majority of our product costs, any increase in commodity prices may cause our vendors to seek price increases from us. Although we typically are able to mitigate vendor efforts to increase our costs, we

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may be unable to continue to do so, either in whole or in part. In the event we are unable to continue mitigating potential vendor price increases, we may in turn consider raising our prices, and our customers may be deterred by any such price increases. Our profitability may be impacted through increased costs to us which may impact gross margins, or through reduced revenue as a result of a decline in the number and average size of customer transactions.

 

Severe weather, natural disasters and adverse climate changes may materially adversely affect our financial condition and results of operations.

 

Severe weather conditions and other natural disasters in areas where we have stores or from which we obtain the products we sell may materially adversely affect our retail operations or our product offerings and, therefore, our results of operations. Such conditions may result in physical damage to, or temporary or permanent closure of, one or more of our stores, an insufficient work force in our markets and/or temporary disruption in the supply of products, including delays in the delivery of goods to our stores or a reduction in the availability of products in our stores. In addition, adverse climate conditions and adverse weather patterns, such as drought or flood, that impact growing conditions and the quantity and quality of crops may materially adversely affect the availability or cost of certain products within our supply chain. Any of these factors may disrupt our businesses and materially adversely affect our financial condition, results of operations and cash flows.

 

For example, we temporarily closed all of our stores as a result of Hurricane Sandy, which struck the Greater New York City metropolitan area on October 29, 2012. While all but one of our stores were able to reopen within a day or two following the storm, we experienced business disruptions due to inventory delays as a result of transportation issues, loss of electricity at certain of our locations and the inability of some of our employees to travel to work due to transportation issues. In addition, our Red Hook store suffered substantial damage, including the loss of all inventory and a substantial portion of its equipment, and it was not reopened until March 1, 2013. The closure of this store impacted our operating results in fiscal 2013 due to lost revenue, pre and post-storm stock up and absorbed market share from competitors who were not immediately operational subsequent to the storm, and the fact that we retained substantially all of the employees of that store.

 

The occurrence of a widespread health epidemic may materially adversely affect our financial condition and results of operations.

 

Our business may be severely impacted by wartime activities, threats or acts of terror or a widespread regional, national or global health epidemic, such as pandemic flu. Such activities, threats or epidemics may materially adversely impact our business by disrupting production and delivery of products to our stores, by affecting our ability to appropriately staff our stores and by causing customers to avoid public gathering places or otherwise change their shopping behaviors.

 

Proposed changes to financial accounting standards could require our store leases to be recognized on the balance sheet.

 

In addition to our significant level of indebtedness, we have significant obligations relating to our current operating leases. Proposed changes to financial accounting standards could require such leases to be recognized on the balance sheet. All of our existing stores are subject to leases, which have remaining terms of up to 25 years, and as of March 29, 2015, we had undiscounted operating lease commitments of approximately $780.7 million, scheduled through 2039, related primarily to our stores and our production center, which is in our possession but not yet open. These commitments represent the minimum lease payments due under our operating leases, excluding common area maintenance, insurance and taxes related to our operating lease obligations, and do not reflect fair market value rent reset provisions in the leases. These leases are classified as operating leases and disclosed in Note 8 to our consolidated financial statements included elsewhere in this report, but are not reflected as liabilities on our consolidated balance sheets. During fiscal 2015, our cash operating lease expense was approximately $34.6 million.

 

In May 2013, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) issued a revised joint discussion paper highlighting proposed changes to financial accounting standards for leases. Currently, Accounting Standards Codification 840 (“ASC 840”), Leases (formerly Statement of Financial Accounting Standards 13, Accounting for Leases) requires that operating leases are classified as an off-balance sheet transaction and only the current year operating lease expense is accounted for in the income statement. In order to determine the proper classification of our stores as either operating leases or capital leases, we must make certain estimates at the inception of the lease relating to the economic useful life and the fair value of an asset as well as select an appropriate discount rate to be used in discounting future lease payments. These estimates are utilized by management in making computations as required by existing accounting standards that determine whether the lease is classified as an operating lease or a capital lease. All of our store leases have been classified as operating leases, which results in rental payments being charged to expense over the terms of the related leases. Additionally, operating leases are not reflected in our consolidated balance sheets, which means that neither a leased asset nor an obligation for future lease payments is reflected in our consolidated balance sheets. The proposed changes to ASC 840 would require that substantially all operating leases be recognized as assets and liabilities on our balance sheet. The right to use the leased property would be capitalized as an asset and the expected lease payments

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over the life of the lease would be accounted for as a liability. The effective date, which has not been determined, could be as early as 2016 and may require retrospective adoption. While we have not quantified the impact this proposed standard would have on our financial statements, if our current operating leases are instead recognized on the balance sheet, it will result in a significant increase in the liabilities reflected on our balance sheet and in the interest expense and depreciation and amortization expense reflected in our income statement, while reducing the amount of rent expense. This could potentially decrease our net income.

 

Our high level of fixed lease obligations could adversely affect our financial performance.

 

Our high level of fixed lease obligations will require us to use a significant portion of cash generated by our operations to satisfy these obligations, and could adversely impact our ability to obtain future financing to support our growth or other operational investments. We will require substantial cash flows from operations to make our payments under our operating leases, all of which provide for periodic increases in rent. If we are not able to make the required payments under the leases, the lenders or owners of the stores may, among other things, repossess those assets, which could adversely affect our ability to conduct our operations. In addition, our failure to make payments under our operating leases could trigger defaults under other leases or under agreements governing our indebtedness, which could cause the counterparties under those agreements to accelerate the obligations due thereunder. Certain of our leases are with entities affiliated with one of our directors who formerly also was an executive officer.  See “—We lease certain of our stores and other properties from a related party”.

 

If our goodwill becomes impaired, we may be required to record a significant charge to earnings.

 

We have a significant amount of goodwill. As of March 29, 2015, we had goodwill of approximately $95.4 million, which represented approximately 26.6% of our total assets as of such date. Goodwill is reviewed for impairment on an annual basis, on the first day of our fiscal fourth quarter (at the end of each fiscal year prior to fiscal 2014) or between annual tests if an event occurs or circumstances change that would  reduce the fair value of our reporting unit below its carrying amount. To the extent the carrying amount of a reporting unit exceeds the fair value of the reporting unit, we are required to perform a second step, as this is an indication that the reporting unit goodwill may be impaired. In this step, we compare the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Based on this annual impairment analysis, there was no impairment of non-amortizable intangible assets, including goodwill, as of March 31, 2013, March 30, 2014 and March 29, 2015. See “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Goodwill and Other Intangible Assets.”

 

Our detailed impairment analysis involves the use of discounted cash flow models.  Significant management judgment is necessary to evaluate the impact of operating and macroeconomic changes on existing and forecasted results.  Determining market values using a discounted cash flow method requires that we make significant estimates and assumptions, including long-term projections of cash flows, market conditions and appropriate market rates.  Our judgments are based on historical experience, current market trends and other information.  In estimating future cash flows, we rely on internally generated forecasts for operating profits and cash flows, including capital expenditures.  Critical assumptions include projected comparable store sales growth, timing and number of new store openings, gross profit rates, general and administrative expenses, direct store expenses, capital expenditures, discount rates and terminal growth rates.  We determine discount rates based on the weighted average cost of capital of a market participant.  Such estimates are derived from our analysis of peer companies and considers the industry weighted average return on debt and equity from a market participant perspective.  We also use comparable market earnings multiple data and our market capitalization in performing our reporting unit valuation.  Factors that could cause us to change our estimates of future cash flows include a prolonged economic crisis, successful efforts by our competitors to gain market share in our core markets, our inability to compete effectively with other retailers or our inability to maintain price competitiveness.  We believe our assumptions are consistent with the plans and estimates used to manage the business; however, if actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be material.  See Note 1 to our financial statements appearing elsewhere in this report.

 

Risks Relating to Ownership of Our Class A Common Stock

 

We are controlled by investment funds managed by affiliates of Sterling Investment Partners, whose interests in our business may be different from yours.

 

Our Class B common stock has ten votes per share, and our Class A common stock, which is publicly traded, has one vote per share. At May 15, 2015 Sterling Investment Partners owned 8,182,679 shares of Class A common stock and 13,080,655 shares of Class B common stock representing approximately 48.5% of our outstanding common stock and approximately 80.9% of the voting power of our outstanding common stock. As such, Sterling Investment Partners has significant influence over our reporting and

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corporate management and affairs, and, because of the ten-to-one voting ratio between our Class B and Class A common stock, Sterling Investment Partners controls a majority of the combined voting power of our common stock and therefore is able to control all matters submitted to our stockholders. Sterling Investment Partners will, for so long as the shares of Class B common stock owned by it and its permitted transferees represent at least 5% of all outstanding shares of our Class A and Class B common stock, effectively control actions to be taken by us and our board of directors, including the election of directors, amendments to our certificate of incorporation and bylaws and approval of significant corporate transactions, including mergers and sales of substantially all of our assets. These actions may be taken even if other stockholders oppose them. Sterling Investment Partners’ control may have the effect of delaying or preventing a change in control of our company or discouraging others from making tender offers for our shares, which could prevent stockholders from receiving a premium for their shares. This concentrated control will limit or preclude your ability to influence corporate matters for the foreseeable future.

 

Our amended and restated certificate of incorporation provides that the doctrine of “corporate opportunity” will not apply to Sterling Investment Partners, or any of our directors who are associates of, or affiliated with, Sterling Investment Partners, in a manner that would prohibit them from investing in competing businesses. It is possible that the interests of Sterling Investment Partners and their affiliates may in some circumstances conflict with our interests and the interests of our other stockholders, including you, and Sterling Investment Partners may act in a manner that advances its best interests and not necessarily those of our other stockholders.

 

Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning purposes and transfers to members of Sterling Investment Partners. The conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term. All outstanding shares of Class A common stock and Class B common stock will automatically convert into a single class of common stock when Sterling Investment Partners and its permitted transferees no longer own any shares of Class B common stock. 

 

Sterling Investment Partners is not subject to any contractual obligation to retain its controlling interest. There can be no assurance as to the period of time during which Sterling Investment Partners will in fact maintain its ownership of our common stock.

 

We have elected to take advantage of the “controlled company” exemption to the corporate governance rules for publicly-listed companies, which could make our Class A common stock less attractive to some investors or otherwise harm our stock price.

 

Because we qualify as a “controlled company” under the corporate governance rules for NASDAQ-listed companies, we are not required to have a majority of our board of directors be independent, nor are we required to have a compensation committee or an independent nominating function. In light of our status as a controlled company, our board of directors has determined not to have an independent nominating function and has chosen to have the full board of directors be directly responsible for nominating members of our board. Accordingly, should the interests of Sterling Investment Partners, as our controlling stockholder, differ from those of other stockholders, the other stockholders may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance rules for publicly-listed companies. Our status as a controlled company could make our Class A common stock less attractive to some investors or otherwise harm our stock price.

 

Conflicts of interest may arise because some of our directors are representatives of our controlling stockholders.

 

Messrs. Santoro and Barr, who are representatives of Sterling Investment Partners, serve on our board of directors, and Mr. Santoro serves as our Chairman. Sterling Investment Partners and affiliated funds may hold equity interests in entities that directly or indirectly compete with us, and companies in which they currently invest may begin competing with us. As a result of these relationships, when conflicts between the interests of Sterling Investment Partners and its affiliates, on the one hand, and the interests of our other stockholders, on the other hand, arise, these directors may not be disinterested. Although our directors and officers have a duty of loyalty to us under Delaware law and our certificate of incorporation, transactions that we enter into in which a director or officer has a conflict of interest are generally permissible so long as (i) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our board of directors and a majority of our disinterested directors, or a committee consisting solely of disinterested directors, approves the transaction, (ii) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our stockholders and a majority of our disinterested stockholders approves the transaction or (iii) the transaction is otherwise fair to us. Under our amended and restated certificate of incorporation, representatives of Sterling Investment Partners are not required to offer to us any transaction opportunity of which they become aware and could take any such opportunity for themselves or offer it to other companies in which they have an investment, unless such opportunity is offered to them solely in their capacity as a director of ours. 

 

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Our stock price may be volatile or may decline regardless of our operating performance, and you may lose part or all of your investment.

 

The market price of our Class A common stock may fluctuate significantly in response to a number of factors, most of which we cannot predict or control, including:

 

·

variations in our operating results, or the operating results of our competitors;

·

actual or anticipated growth rates relative to our competitors;

·

changes in our financial guidance to investors and analysts or our failure to achieve such expectations;

·

delays in, or our failure to provide, financial guidance;

·

changes in securities analysts’ estimates of our financial performance or our failure to achieve such estimates;

·

announcements of new store openings or initiatives, commercial relationships, acquisitions or other events by us or our competitors;

·

failure of any of our initiatives to achieve commercial success;

·

fluctuations in stock market prices and trading volumes of securities of similar companies;

·

general market conditions and overall fluctuations in U.S. equity markets;

·

sales of large blocks of our Class A common stock, including sales by Sterling Investment Partners or by our executive officers or directors;

·

additions or departures of any of our key personnel;

·

changes in accounting principles or methodologies;

·

economic, legal and regulatory factors unrelated to our performance;

·

changing legal or regulatory developments in the U.S.;

·

discussion of us or our stock price by the financial press and in online investor forums;

·

market rumors;

·

developments in the securities class action and stockholder derivative litigation pending against us; and

·

negative publicity about us in the media and online.

 

In addition, the stock market in general has experienced substantial price and volume volatility that is often seemingly unrelated to the operating performance of particular companies. These broad market fluctuations may cause the trading price of our Class A common stock to decline. In the past, securities class action litigation has often been brought against a company after a period of volatility in the market price of its common stock. We are currently, and may in the future become, involved in this type of litigation. Any securities litigation claims brought against us could result in substantial expenses and the diversion of our management’s attention from our business. See “-Risks Relating to Our Business – Litigation May Materially Adversely Affect Our Business, Financial Condition and Results of Operations.”

 

Because we have no current plans to pay cash dividends on our Class A common stock for the foreseeable future, you may not receive any return on investment unless you sell your Class A common stock for a price greater than you paid.

 

We have never declared or paid cash dividends on our common stock. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. As a result, you may only receive a return on your investment in our Class A common stock if the market price of our Class A common stock increases. In addition, our senior credit facility contains restrictions on our ability to pay dividends.

 

Future sales of our Class A common stock, or the perception in the public markets that these sales may occur, may depress our stock price.

 

The price of our Class A common stock could decline if there are substantial sales of our Class A common stock, particularly sales by our directors, executive officers, employees and significant stockholders, or when there is a large number of shares of our Class A common stock available for sale. These sales, or the perception that these sales might occur, could depress the market price of our Class A common stock and might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

 

At May 15, 2015, 43,822,335 shares of our common stock were outstanding, substantially all of which are freely tradable. A large portion of our shares are held by Sterling Investment Partners, which has rights, subject to some conditions, to require us to file registration statements covering the shares they and certain of our other existing stockholders currently hold, or to include these shares in registration statements that we may file for ourselves or other stockholders.

 

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 Also, in the future, we may issue shares of our Class A common stock in connection with investments or acquisitions or to finance our growth. The amount of shares of our Class A common stock issued for such purposes could constitute a material portion of our then-outstanding shares of common stock.

 

The market price of the shares of our Class A common stock could decline as a result of the sale of a substantial number of our shares of Class A common stock in the public market or the perception in the market that the holders of a large number of shares intend to sell their shares.

 

Our future operating results may fluctuate significantly and our current operating results may not be a good indication of our future performance. Fluctuations in our quarterly financial results could affect our stock price in the future.

 

Our operating results have historically varied from period-to-period, and we expect that they will continue to do so as a result of a number of factors, many of which are outside of our control. If our quarterly financial results or our forecasts of future financial results fail to meet the expectations of securities analysts and investors, our Class A common stock price could be negatively affected. Any volatility in our quarterly financial results may make it more difficult for us to raise capital in the future or pursue acquisitions that involve issuances of our stock. Our operating results for prior periods may not be effective predictors of our future performance.

 

Factors associated with our industry, the operation of our business and the markets for our products may cause our quarterly financial results to fluctuate, including:

 

·

our ability to increase sales and same store sales;

·

our ability to maintain or improve our operating margins;

·

our ability to compete effectively with other retailers;

·

our ability to maintain price competitiveness;

·

ongoing economic uncertainty;

·

negative effects to our reputation from real or perceived quality or health issues with our food products;

·

our ability to achieve the anticipated benefits of our centralized production facility;

·

our ability to satisfy our ongoing capital needs and unanticipated cash requirements;

·

rising costs of providing employee benefits, including increased healthcare costs and pension contributions due to unfunded pension liabilities;

·

ordering errors or product supply disruptions in the delivery of perishable products;

·

our ability to open new stores on a timely basis or at all;

·

our ability to achieve sustained sales and profitable operating margins at new stores;

·

the availability of financing to pursue our new store openings on satisfactory terms or at all;

·

the failure of our information technology or administrative systems to perform as anticipated;

·

data security breaches and the release of confidential customer or employee information;

·

our ability to retain and attract senior management, key employees and qualified store-level employees;

·

our ability to renegotiate expiring collective bargaining agreements and new collective bargaining agreements;

·

the geographic concentration of our stores;

·

our history of net losses;

·

additional indebtedness incurred in the future;

·

our high level of fixed lease obligations;

·

restrictions on our use of the Fairway name other than on the East Coast and in California and certain parts of Michigan and Ohio;

·

our ability to protect or maintain our intellectual property;

·

changes in law;

·

claims made against us resulting in litigation, and the costs of defending, and adverse developments in, such litigation;

·

our ability to defend the purported securities class action and derivative lawsuits filed against us and other similar complaints that may be brought in the future, in a timely manner and within the coverage, scope and limits of our insurance policies;

·

increases in commodity prices;

·

severe weather and other natural disasters in areas in which we have stores, warehouses and/or production facilities;

·

wartime activities, threats or acts of terror or a widespread regional, national or global health epidemic;

·

changes to financial accounting standards regarding store leases;

·

impairment of our goodwill; and

·

other factors discussed under “Item 1A—Risk Factors.”

 

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Any one of the factors above or the cumulative effect of some of the factors referred to above may result in significant fluctuations in our quarterly financial and other operating results, including fluctuations in our key metrics. This variability and unpredictability could result in our failing to meet our internal operating plan or the expectations of securities analysts or investors for any period. If we fail to meet or exceed such expectations for these or any other reasons, the market price of our shares could fall substantially and we could face costly lawsuits, including securities class action suits. In addition, a significant percentage of our operating expenses are fixed in nature and based on forecasted revenue trends. Accordingly, in the event of revenue shortfalls, we are generally unable to mitigate the negative impact on margins in the short term.

 

The supervoting rights of our Class B common stock and other anti-takeover provisions in our organizational documents and Delaware law might discourage or delay attempts to acquire us that you might consider favorable.

 

Our amended and restated certificate of incorporation and bylaws contain provisions that may make the acquisition of our company more difficult, including the following:

 

·

any transaction that would result in a change in control of our company requires the approval of a majority of our outstanding Class B common stock voting as a separate class;

·

we have a dual class common stock structure, which provides Sterling Investment Partners with the ability to control the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the shares of our outstanding Class A and Class B common stock;

·

when we no longer have outstanding shares of our Class B common stock, certain amendments to our amended and restated certificate of incorporation or bylaws will require the approval of two-thirds of the combined vote of our then-outstanding shares of common stock;

·

when we no longer have outstanding shares of our Class B common stock, vacancies on our board of directors will be able to be filled only by our board of directors and not by stockholders;

·

our board of directors is classified into three classes of directors with staggered three-year terms so that not all members of our board of directors are elected at one time and directors will only be able to be removed from office for cause;

·

when we no longer have outstanding shares of our Class B common stock, our stockholders will only be able to take action at a meeting of stockholders and not by written consent;

·

only our chairman or a majority of our board of directors is authorized to call a special meeting of stockholders;

·

advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders;

·

our board of directors is expressly authorized to make, alter or repeal our amended and restated bylaws;

·

our amended and restated certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established, and shares of which may be issued, without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of common stock; and

·

certain litigation against us can only be brought in Delaware.

 

In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of certain stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. Although we believe these provisions collectively provide for an opportunity to obtain greater value for stockholders by requiring potential acquirers to negotiate with our board of directors, they would apply even if an offer rejected by our board were considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. 

 

These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire.

 

Failure to establish and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.

 

Prior to our initial public offering in April 2013, we were not required to comply with the SEC rules implementing Section 404 of the Sarbanes-Oxley Act and were therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Although we are now required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which requires management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting, as an “emerging growth company,” as defined in the JOBS Act, our independent registered public accounting firm will not be required to

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formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until  the date we are no longer an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating.

 

To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring additional accounting or internal audit staff. Testing and maintaining internal control can divert our management’s attention from other matters that are important to the operation of our business. In addition, when evaluating our internal control over financial reporting, we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404. If we identify material weaknesses in our internal control over financial reporting or are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.

 

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors.

 

We qualify as an “emerging growth company” under the JOBS Act. As a result, we are relying on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. Accordingly, we have included detailed compensation information for only our three most highly compensated executive officers and have not included a compensation discussion and analysis (CD&A) of our executive compensation programs in this report. For so long as we are an emerging growth company, we will not be required to:

 

·

have an auditor report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;

·

comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);

·

submit certain executive compensation matters to shareholder advisory votes, such as “say-on-pay,” “say-on-frequency” and “say-on-golden parachutes”; and

·

disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the CEO’s compensation to median employee compensation.

 

In addition, while we are an emerging growth company the JOBS Act will permit us to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to delay the adoption of new or revised accounting pronouncements applicable to public and private companies until such pronouncements become mandatory for private companies. As a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public and private companies.

 

We will remain an emerging growth company until the earliest to occur of: (i) our reporting $1 billion or more in annual gross revenues; (ii) the end of fiscal 2019; (iii) our issuance, in a three year period, of more than $1 billion in non-convertible debt; and (iv) the end of the fiscal year in which the market value of our common stock held by non-affiliates exceeds $700 million on the last business day of our second fiscal quarter.

 

We cannot predict if investors will find our Class A common stock less attractive because we may rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

 

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business.  If one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

 

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Operating as a public company has increased our general and administrative costs, and our management will be required to divert attention from operational and other business matters to devote substantial time to public company requirements.

 

Until April 2013, we operated as a private company. As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. For example, we are required to comply with the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the rules and regulations of the NASDAQ Global Market and the requirements of the Sarbanes-Oxley Act, as well as rules and regulations subsequently implemented by the SEC and the NASDAQ Global Market, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Compliance with these requirements has increased our legal and financial compliance costs and made some activities more time-consuming and costly. In addition, we expect that our management and other personnel will need to divert attention from operational and other business matters to devote substantial time to these public company requirements. In particular, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act. In that regard, we plan to support the internal audit function with a combination of in-house and outside resources to ensure that we deploy resources with the appropriate public company experience and technical accounting knowledge. We may not be successful in implementing these requirements, and implementing them could materially adversely affect our business, results of operations and financial condition. If we do not implement or comply with such requirements in a timely manner, we might be subject to sanctions or investigation by regulatory authorities. Any such action could harm our reputation and the confidence of investors and customers in our company, and could materially adversely affect our business and cause our Class A common stock price to decline. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors or as executive officers.

 

 

ITEM 1B—UNRESOLVED STAFF COMMENTS

 

None.

 

31

 


 

ITEM 2—PROPERTIES

 

We currently operate 15 locations in New York, New Jersey and Connecticut, four of which include Fairway Wines & Spirits locations. We lease all of our locations, most of them pursuant to long-term leases with initial terms of at least 15 years and several five to 10 year renewal options. We believe our portfolio of long-term leases is a valuable asset supporting our retail operations. Information regarding our stores for which we have possession is as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling

 

Gross

 

Location 

 

Date Opened

 

Square Footage (1)

 

Square Footage

 

Broadway (Manhattan), New York(2)

 

1933

 

21,731 

 

59,468 

 

Harlem (Manhattan), New York(3)

 

December 1995

 

25,853 

 

52,005 

 

Plainview, New York

 

May 2001

 

36,579 

 

55,180 

 

Red Hook (Brooklyn), New York(3)(4)

 

May 2006

 

38,977 

 

75,814 

 

Paramus, New Jersey

 

March 2009

 

32,643 

(5)

50,307 

 

Pelham Manor, New York

 

April 2010

 

49,963 

(5)

75,310 

 

Stamford, Connecticut

 

November 2010

 

48,691 

(5)

86,062 

 

Upper East Side (Manhattan), New York

 

July 2011

 

22,109 

 

41,394 

 

Douglaston, New York

 

November 2011

 

38,239 

 

57,360 

 

Woodland Park, New Jersey

 

June 2012

 

41,452 

(5)

63,491 

 

Westbury, New York

 

August 2012

 

44,640 

 

68,357 

 

Kips Bay (Manhattan), New York

 

December 2012

 

24,129 

 

56,627 

 

Chelsea (Manhattan), New York

 

July 2013

 

15,390 

 

26,469 

 

Nanuet, New York

 

October 2013

 

45,360 

 

72,940 

 

Lake Grove, New York

 

July 2014

 

39,920 

 

54,324 

 

TriBeCa (Manhattan), New York

 

TBD

 

 

(6)

 

(6)


(1)

Includes any outdoor produce areas, café and bakery areas, but excludes the square footage of the kitchen, bakery, meat department and produce coolers in our stores.

(2)

We lease a portion of this property from an entity in which Howard Glickberg, a director and former executive officer, owns an interest. See “Item 1A—Risk Factors—Risks Relating to Our Business—We lease certain of our stores and related properties from a related party.”

(3)

We lease this property from entities in which Howard Glickberg, a director and former executive officer, owns an interest. See “Item 1A—Risk Factors—Risks Relating to Our Business—We lease certain of our stores and related properties from a related party.”

(4)

This store was temporarily closed from October 29, 2012 through February 28, 2013 due to damage sustained during Hurricane Sandy.

(5)

Selling square footage includes adjacent (Pelham Manor, 4,808 sq. ft.; Stamford, 5,736 sq. ft.) or integrated (Woodland Park, 2,755 sq. ft.) Fairway Wines & Spirits location. There is no dedicated Wine & Spirits space in our Paramus location.

(6)

Not yet determined.

 

We lease our corporate headquarters, parking lots near certain of our stores, warehouse space and the facility where we are opening a centralized production facility.

 

In May 2015 we entered into a lease for a new store in the Georgetown section of Brooklyn, New York.  Our current plans are to open this store during calendar 2016, subject to the timing of delivery of the property to us by the landlord

 

In May 2015 we entered into an agreement terminating our lease of a site in the new Hudson Yards development in west midtown Manhattan where we had expected to open a store in late calendar 2015 or early calendar 2016.  In connection with the lease termination, we have negotiated a limited, conditional right of first negotiation if the developer determines to include a supermarket in the second phase of the Hudson Yards development.  We will pay the landlord a total of $3.5 million in connection with the lease termination.

 

ITEM 3—LEGAL PROCEEDINGS

 

We are subject to various legal claims and proceedings which arise in the ordinary course of our business, including employment related claims, involving routine claims incidental to our business. Although the outcome of these routine claims cannot be predicted with certainty, we do not believe that the ultimate resolution of these claims will have a material adverse effect on our results of operations, financial condition or cash flows.

 

32

 


 

In February and March 2014, three purported class action lawsuits alleging the violation of the federal securities laws were filed in the United States District Court for the Southern District of New York against us and certain of our current and former officers and directors and the underwriters for our initial public offering. The actions were consolidated on June 3, 2014 under the caption In re Fairway Group Holdings Corp. Securities Litigation, No. 14-cv-0950. On July 18, 2014, an amended class action complaint was filed, adding affiliates of Sterling Investment Partners as defendants. The complaint seeks unspecified damages and alleges misleading statements in the registration statement and prospectus for our initial public offering and in subsequent communications regarding our business and financial results. On September 5, 2014, we and the other defendants moved to dismiss the amended class action complaint.  On January 20, 2015, the Magistrate appointed by the district judge to whom the case was assigned to review the motions and make a recommendation to the judge recommended that our and the other defendants’ motion to dismiss be granted in part and denied in part.  We filed an objection to the Magistrate’s recommendation.  In March 2015, the district judge to whom the case was assigned notified the plaintiffs and defendants to refile the complaint and motion to dismiss in light of a recent decision of the Supreme Court.  All revised filings are required to be made by June 30, 2015.  Although we believe the claims are without merit and intend to defend this lawsuit vigorously, we cannot predict the outcome of this lawsuit. See “Item 3. Legal Proceedings.”

  

In April 2014, a purported stockholder derivative action was filed against certain of our current and former directors in New York state court, asserting claims for breach of fiduciary duties and gross mismanagement based on substantially similar allegations as in the securities class action. In June 2014, we and the other defendants moved to dismiss the derivative complaint. On July 30, 2014, plaintiffs filed an amended complaint, adding affiliates of Sterling Investment Partners as defendants and asserting claims against them for breach of fiduciary duty and unjust enrichment. On September 29, 2014, we and the other defendants moved to dismiss the amended derivative complaint.  On November 10, 2014, the court granted our and the other defendants’ motion to dismiss on the grounds that under the Company’s certificate of incorporation the derivative action must be brought in the State of Delaware.  The plaintiffs have appealed this decision A similar case was filed in the Delaware Chancery Court in February 2015, and we and the other defendants have moved to dismiss this case as well.  Although we believe the claims are without merit and intend to defend these lawsuits vigorously, we cannot predict the outcome of these lawsuits.

 

 In May 2014, a purported wage and hour class action lawsuit was filed in the United States District Court for the Southern District of New York against us and certain of our current and former officers and employees.  This suit alleges, among other things, that certain of our past and current employees were not properly compensated in accordance with the overtime provisions of the Fair Labor Standards Act.  In May 2015, we agreed in principle with the plaintiffs to settle the matter without material financial consequence.

Monitoring and defending against legal actions, whether or not meritorious, is time-consuming for our management and detracts from our ability to fully focus our internal resources on our business activities and we cannot predict how long it may take to resolve these matters. In addition, legal fees and costs incurred in connection with such activities may be significant and we could, in the future, be subject to judgments or enter into settlements of claims for significant monetary damages. A decision adverse to our interests on these actions or resulting from these matters could result in the payment of substantial damages and could have a material adverse effect on our cash flow, results of operations and financial position.

 

With respect to any litigation, our insurance may not reimburse us or may not be sufficient to reimburse us for the expenses or losses we may suffer in contesting and concluding such lawsuits. Substantial litigation costs or an adverse result in any litigation may adversely impact our business, operating results or financial condition.

 

ITEM 4—MINE SAFETY DISCLOSURES

 

Not applicable.

33

 


 

 

PART II

 

 ITEM 5—MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our Class A common stock has been listed on the NASDAQ Global Market under the symbol “FWM” since April 16, 2013. Prior to that time, there was no public market for our stock.

 

As of May 15, 2015, there were approximately 41 holders of record of our Class A common stock, and the closing price of our common stock was $4.95 per share as reported on the NASDAQ Global Market. Because many of our shares of Class A common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. As of May 15, 2015, there were 6 holders of record of our Class B common stock. For additional information related to ownership of our stock by certain beneficial owners and management, refer to “Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

 

Common Stock Price

 

The following table sets forth for the periods indicated the high and low intra-day sale prices per share of our Class A common stock as reported on the NASDAQ Global Market:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal 2014

 

High

 

Low

First Quarter (April 16 - June 30, 2013)

 

$

25.98 

 

$

13.00 

Second Quarter (July 1 - September 29, 2013)

 

$

28.87 

 

$

22.00 

Third Quarter (September 30 - December 29, 2013)

 

$

26.09 

 

$

15.37 

Fourth Quarter (December 30, 2013 - March 30, 2014)

 

$

18.87 

 

$

7.21 

 

 

 

 

 

 

 

Fiscal 2015

 

 

 

 

 

 

First Quarter (March 31 - June 29, 2014)

 

$

8.40 

 

$

5.51 

Second Quarter (June 30 - September 28, 2014)

 

$

6.91 

 

$

3.70 

Third Quarter (September 29 - December 28, 2014)

 

$

4.24 

 

$

2.12 

Fourth Quarter (December 29, 2014 - March 29, 2015)

 

$

6.16 

 

$

2.63 

 

Dividend Policy

 

We have never declared or paid any cash dividend on our common stock. We intend to retain any future earnings and do not expect to pay dividends in the foreseeable future. In addition, our senior credit facility contains restrictions on our ability to pay dividends.

 

Sales of Unregistered Securities 

 

During fiscal 2014, we issued 1,930,820 shares of Class A common stock upon the exercise of all outstanding warrants.   

 

During fiscal 2014 and fiscal 2015 we granted to our officers, directors, employees and consultants an aggregate of 2,620,163 and 1,910,771 restricted stock units to be settled in shares of our Class A common stock and options to purchase 1,424,691 and 300,000 shares of our Class A common stock, respectively, under our 2013 Long-Term Incentive Plan.

 

Issuer Purchases of Equity Securities

 

During the fourth fiscal quarter ended March 29, 2015 there were no issuer purchases of equity securities.

Performance Graph

This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, as amended,, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Fairway Group Holdings Corp. under the Securities Act of 1933, as amended, or the Exchange Act.

34

 


 

The following graph compares the cumulative total return to stockholders on our common stock relative to the cumulative total returns of the NASDAQ Composite Index and the S&P Food Retail Index.  An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our Class A common stock and in each index on April 16, 2013, the date our common stock began trading on the NASDAQ Global Market, and its relative performance is tracked through March 29, 2015. The returns shown are based on historical results and are not intended to suggest future performance.

 

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The information required by this item with respect to our equity compensation plans is incorporated by reference to our Proxy Statement for the 2015 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended March 29, 2015.

35

 


 

ITEM 6—SELECTED FINANCIAL DATA

 

The following tables present selected historical consolidated statement of operations, balance sheet and other data for the periods presented and should only be read in conjunction with “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and the related notes thereto.  Information presented in these tables are prepared in accordance with accounting principles generally accepted in the United States (“GAAP” or “US GAAP”), except for measures not specifically defined by GAAP (“non-GAAP measures”), as described below.    Each of our fiscal years ended April 1, 2012 (“fiscal 2012”), March 31, 2013 (“fiscal 2013”), March 30, 2014 (“fiscal 2014”) and March 29, 2015 (“fiscal 2015”) consists of 52 weeks; our fiscal year ended April 3, 2011 (“fiscal 2011”) consists of 53 weeks. The effects of Hurricane Sandy (including the temporary closure of all of our stores for one or two days and our Red Hook store for four months and the receipt of insurance proceeds related to Hurricane Sandy), and the opening of ten stores during these years, may affect the comparability of certain data for certain of these years. Our historical results are not necessarily indicative of our results in any future period. 

 

Statement of Operations Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Years Ended

 

 

 

March 29,

 

 

March 30,

 

 

March 31,

 

 

April 1,

 

 

April 3,

 

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands, except per share data)

 

Net sales(1)

 

$

797,555 

 

 

$

775,986 

 

 

$

661,244 

 

 

$

554,858 

 

 

$

485,712 

 

Cost of sales and occupancy costs (exclusive of depreciation and amortization)

 

 

547,869 

 

 

 

524,659 

 

 

 

445,379 

 

 

 

368,728 

 

 

 

326,207 

 

Gross profit(2)

 

 

249,686 

 

 

 

251,327 

 

 

 

215,865 

 

 

 

186,130 

 

 

 

159,505 

 

Direct store expenses

 

 

191,313 

 

 

 

186,537 

 

 

 

154,753 

 

 

 

132,446 

 

 

 

109,867 

 

General and administrative expenses(3)

 

 

69,604 

 

 

 

84,094 

 

 

 

60,192 

 

 

 

44,331 

 

 

 

40,038 

 

Store opening costs(4)

 

 

7,043 

 

 

 

10,187 

 

 

 

19,015 

 

 

 

12,688 

 

 

 

10,006 

 

Production center start-up costs

 

 

5,448 

 

 

 

4,519 

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

Loss from operations

 

 

(23,722)

 

 

 

(34,010)

 

 

 

(18,095)

 

 

 

(3,335)

 

 

 

(406)

 

Business interruption and gain on storm-related insurance recoveries(5)

 

 

 —

 

 

 

3,089 

 

 

 

5,000 

 

 

 

 —

 

 

 

 —

 

Interest expense, net

 

 

(19,289)

 

 

 

(20,205)

 

 

 

(23,964)

 

 

 

(16,918)

 

 

 

(19,111)

 

Loss on early extinguishment of debt(6)

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

(13,931)

 

Loss before income taxes

 

 

(43,011)

 

 

 

(51,126)

 

 

 

(37,059)

 

 

 

(20,253)

 

 

 

(33,448)

 

Income tax (provision) benefit(7)

 

 

(3,523)

 

 

 

(29,154)

 

 

 

(25,809)

 

 

 

8,304 

 

 

 

14,860 

 

Net loss

 

$

(46,534)

 

 

$

(80,280)

 

 

$

(62,868)

 

 

$

(11,949)

 

 

$

(18,588)

 

Net loss attributable to common stockholders(8)

 

$

(46,534)

 

 

$

(124,410)

 

 

$

(92,689)

 

 

$

(36,677)

 

 

$

(39,021)

 

Net loss per share attributable to common stockholders (basic and diluted)(8)

 

$

(1.07)

 

 

$

(3.10)

 

 

$

(7.52)

 

 

$

(3.01)

 

 

$

(3.22)

 

Net loss per share (pro forma basic and diluted) (8)

 

$

(1.07)

 

 

$

(2.00)

 

 

$

(2.52)

 

 

$

(0.52)

 

 

$

(0.84)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding (in 000s)(8):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

43,440 

 

 

 

40,166 

 

 

 

12,326 

 

 

 

12,189 

 

 

 

12,122 

 

Pro forma basic and diluted

 

 

43,440 

 

 

 

40,166 

 

 

 

24,959 

 

 

 

23,137 

 

 

 

22,151 

 

 

36

 


 

Other Financial Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Years Ended

 

 

March 29,

 

March 30,

 

March 31,

 

April 1,

 

April 3,

 

 

2015

 

2014

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

Adjusted EBITDA(9)

 

$

41,799 

 

 

$

48,797 

 

 

$

47,364 

 

 

$

35,775 

 

 

$

29,309 

 

Depreciation and amortization

 

$

28,721 

 

 

$

27,056 

 

 

$

22,093 

 

 

$

19,202 

 

 

$

14,588 

 

Capital expenditures

 

$

31,890 

 

 

$

43,906 

 

 

$

57,916 

 

 

$

44,528 

 

 

$

27,797 

 

Gross margin(10)

 

 

31.3 

%

 

 

32.4 

 

%

 

32.6 

%

 

 

33.5 

%

 

 

32.8 

%

Adjusted EBITDA margin(11)

 

 

5.2 

%

 

 

6.3 

 

%

 

7.2 

%

 

 

6.4 

%

 

 

6.0 

%

Pro forma Adjusted EBITDA margin(11)(12)

 

 

5.2 

%

 

 

6.3 

 

%

 

6.9 

%

 

 

6.4 

%

 

 

6.0 

%

 

Selected Operating Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Years Ended

 

 

March 29,

 

March 30,

 

March 31,

 

April 1,

 

April 3,

 

 

2015

 

2014

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Locations at end of period(13)

 

 

15 

 

 

 

14 

 

 

 

12 

 

 

 

 

 

 

 

Total gross square feet at end of period

 

 

895,108 

 

 

 

840,784 

 

 

 

741,375 

 

 

 

552,900 

 

 

 

454,146 

 

Change in square footage for period

 

 

6.5 

%

 

 

13.4 

%

 

 

34.1 

%

 

 

21.7 

%

 

 

55.1 

%

Average store size:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross square feet

 

 

59,674 

 

 

 

60,056 

 

 

 

61,781 

 

 

 

61,433 

 

 

 

64,878 

 

Selling square feet(14)

 

 

35,045 

 

 

 

34,697 

 

 

 

35,417 

 

 

 

34,976 

 

 

 

36,348 

 

Average net sales per square foot:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross square foot(15)

 

$

919 

 

 

$

996 

 

 

$

1,123 

 

 

$

1,029 

 

 

$

1,308 

 

Selling square foot(15)

 

$

1,604 

 

 

$

1,754 

 

 

$

1,963 

 

 

$

1,859 

 

 

$

2,459 

 

Average net sales per store per week ($000)(16)

 

$

1,041 

 

 

$

1,149 

 

 

$

1,252 

 

 

$

1,246 

 

 

$

1,473 

 

Comparable store sales decline per period(17)

 

 

(2.9)

%

 

 

(0.4)

%

 

 

(1.7)

%

 

 

(7.5)

%

 

 

(4.4)

%

New stores opened in period (location/date)

 

Lake Grove, NY

 

Chelsea, NY

 

Woodland Park, NJ

 

Upper East Side, NY

 

Pelham Manor, NY

 

 

 

(7/2014)

 

 

 

(7/2013)

 

 

 

(6/2012)

 

 

 

(7/2011)

 

 

 

(4/2010)

 

 

 

 

 

Nanuet, NY

 

Westbury, NY

 

Douglaston, NY

 

Stamford, CT

 

 

 

 

 

 

 

(10/2013)

 

 

 

(8/2012)

 

 

 

(11/2011)

 

 

 

(11/2010)

 

 

 

 

 

 

 

Kips Bay, NY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12/2012)

 

 

 

 

 

 

 

 

 

 

37

 


 

 

Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Years Ended

 

 

March 29,

 

 

March 30,

 

 

March 31,

 

 

April 1,

 

 

April 3,

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

Cash and cash equivalents

 

$

36,362 

 

 

$

58,800 

 

 

$

21,723 

 

 

$

30,172 

 

 

$

58,067 

Total assets

 

 

359,136 

 

 

 

380,344 

 

 

 

338,501 

 

 

 

321,590 

 

 

 

313,665 

Total debt(18)

 

 

257,086 

 

 

 

256,467 

 

 

 

259,313 

 

 

 

203,552 

 

 

 

194,297 

Redeemable preferred stock(19)

 

 

 —

 

 

 

 —

 

 

 

234,244 

 

 

 

204,423 

 

 

 

179,695 

Total stockholders’ (deficit) / equity

 

 

(22,603)

 

 

 

11,543 

 

 

 

(235,444)

 

 

 

(141,364)

 

 

 

(104,562)

 


(1)

Our Red Hook store was temporarily closed beginning October 29, 2012 due to damage sustained in Hurricane Sandy and reopened on March 1, 2013. During the period in fiscal 2012 corresponding to the period in fiscal 2013 that this store was closed, net sales at the Red Hook store were approximately $25.0 million.

 

(2)

Our Red Hook store was temporarily closed beginning October 29, 2012 due to damage sustained in Hurricane Sandy and reopened on March 1, 2013. Management estimates that during the period in fiscal 2012 corresponding to the period in fiscal 2013 that this store was closed, the Red Hook store generated approximately $8.0 million of gross profit.

 

(3)

In fiscal 2013 and fiscal 2014 we recognized approximately $5.2 million and $0.1 million, respectively, for reimbursable ongoing business expenses and remediation costs incurred in connection with our Red Hook store and recorded this amount as a reduction in general and administrative expense, a direct offset to the associated expenses. Fiscal 2013 includes $3.2 million of pre-opening advertising costs that, beginning in fiscal 2013, are being recorded as General and Administrative expense.  In prior years, these costs were recorded in store opening costs; reclassification has not been made as such amounts were not considered material.

 

(4)

Costs (principally payroll and rent expense) incurred in opening new stores are expensed as incurred. During fiscal 2011, we incurred approximately $6.8 million, of store opening costs related to the two stores we opened during fiscal 2011. During fiscal 2011 and fiscal 2012, we incurred $3.2 million and $11.9 million, respectively, of store opening costs related to the two stores we opened during fiscal 2012. During fiscal 2012 and fiscal 2013, we incurred $0.7 million and $16.7 million, respectively, of store opening costs related to the three stores we opened in that period, and in addition in fiscal 2013 we incurred $2.0 million of store opening costs related to the reopening of our Red Hook store and approximately $0.3 million of store opening costs related to one of the two stores we opened in fiscal 2014. During fiscal 2013 and fiscal 2014, we incurred $0.3 million and $8.7 million, respectively, of store opening costs related to the two stores we opened during fiscal 2014.  In fiscal 2014 and fiscal 2015 we incurred approximately $1.5 million and $3.1 million, respectively, of store opening costs related to the store we opened in fiscal 2015.  In addition, during fiscal 2015 we incurred approximately $3.9 million of store opening costs in connection with the TriBeCa store, which has not yet been opened.

 

(5)

In fiscal 2013, this amount represents non-refundable reimbursement from our insurance carriers for business interruption losses sustained due to the temporary closure of our Red `Hook store as a result of damage sustained during Hurricane Sandy. In fiscal 2014, we and our insurers settled the remaining insurance claims related to Hurricane Sandy and we received final payments totaling $4.4 million, bringing total insurance payments received to $18.7 million. At the time of claim settlement we had an insurance receivable of $1.3 million. The settlement resulted in a $3.1 million gain, which represents the difference between the replacement cost and carrying value of the assets lost to Hurricane Sandy.

 

(6)

In fiscal 2011, we incurred a loss on early extinguishment of debt in connection with the refinancing of our then existing credit agreement with our 2011 senior credit facility that we subsequently refinanced in August 2012.

 

(7)

During fiscal 2013 we recorded a partial valuation allowance against our deferred tax asset. In fiscal 2014, we recorded a valuation allowance against the remainder of our deferred tax asset. See Note 13 to our financial statements appearing elsewhere in this report.

 

(8)

Net loss attributable to common stockholders represents our net loss plus dividends accrued on our preferred stock.  Prior to the consummation of our IPO and the exchange of our outstanding preferred stock for Class B common stock in April 2013, common stockholders did not share in net income unless earnings exceeded the unpaid dividends on our preferred stock.

38

 


 

Accordingly, in fiscal 2011, fiscal 2012, fiscal 2013, fiscal 2014 and fiscal 2015 there were no earnings available for common stockholders because we reported a net loss in each of those periods, and the loss was attributed only to the common stockholders. Net loss per common share (pro forma basic and diluted) and the pro forma weighted average number of shares gives effect to the exchange of our then outstanding preferred stock (including accrued but unpaid dividends thereon that exceed the $76.8 million of accrued dividends paid with a portion of the proceeds of our IPO) for shares of our Class B common stock, based on a price of $11.00 per share, as if such exchange had occurred on the last day of each period (the “Exchange”). All of our outstanding preferred stock and accrued but unpaid dividends was exchanged for 15,504,296 shares of our Class B common stock, of which 33,576 shares automatically converted into 33,576 shares of Class A common stock at the closing of our IPO.

 

A reconciliation of the denominator used in the calculation of pro forma basic and diluted net income (loss) per common share is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Years Ended

 

 

March 29,

 

 

March 30,

 

 

March 31,

 

 

April 1,

 

 

April 3,

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

Weighted average number of common shares outstanding, basic and diluted

 

 

43,440 

 

 

 

40,166 

 

 

 

12,326 

 

 

 

12,189 

 

 

 

12,122 

Issuance of shares in the Exchange

 

 

 —

 

 

 

 —

 

 

 

12,633 

 

 

 

10,948 

 

 

 

10,029 

Weighted average number of common shares outstanding, pro forma basic and diluted

 

 

43,440 

 

 

 

40,166 

 

 

 

24,959 

 

 

 

23,137 

 

 

 

22,151 

 

Our Class A common stock and Class B common stock share equally on a per share basis in our net income or net loss.

 

(9)

We present Adjusted EBITDA, a non-GAAP measure, in this report to provide investors with a supplemental measure of our operating performance. We believe that Adjusted EBITDA is a useful performance measure to evaluate our core on-going operations and is used by us to facilitate a comparison of our core on-going operating performance on a consistent basis from period-to-period and to provide for a more complete understanding of factors and trends affecting our business than GAAP measures can provide alone. Our board of directors and management also use Adjusted EBITDA as one of the primary methods for planning and forecasting overall expected performance and for evaluating on a quarterly and annual basis actual results against such expectations, and as a performance evaluation metric in determining achievement of certain compensation programs and plans for employees, including our senior executives. Management and our board also use Adjusted EBITDA as one of the key measures in determining the value of any strategic, investing or financing opportunity. In addition, the financial covenant in our senior credit facility is based on Consolidated EBITDA, as defined in our existing senior credit agreement, which is calculated as Adjusted EBITDA, subject to dollar limitations on certain adjustments.

 

We define Adjusted EBITDA as earnings before interest expense, income taxes, depreciation and amortization expense, amortization of deferred financing costs, equity compensation charges, store opening costs (including pre-opening advertising costs), production center start-up costs, gain on insurance recovery, severance related expenses, foundation funding, loss on early extinguishment of debt, organizational realignment costs, IPO related expenses, transaction expenses and bonuses, management fees, and other one-time charges and non-operating expenses which we believe may distort period-to-period comparison. 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 and tax structures 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 ceased paying management fees upon consummation of our IPO. Items such as production center start-up costs, gain on insurance recovery, severance-related expenses, foundation funding, loss on early extinguishment of debt, non-recurring charges, organizational realignment costs, IPO-related expenses and transaction expenses and bonuses were incurred and associated with discrete and different events not relating to our core on-going operations, including our initial public offering, which was consummated just after the end of fiscal 2013, an organizational realignment to remove redundant costs and streamline parts of our business model to enhance overall productivity that we began in the fourth quarter of fiscal 2014 and the refinancings of our senior credit facility and Hurricane Sandy. We also believe that investors, analysts and other interested parties view our ability to generate Adjusted EBITDA as an important measure of our operating performance and that of other companies in our

39

 


 

industry. Adjusted EBITDA should not be considered as an alternative to net income for the periods indicated 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. 

 

The use of Adjusted EBITDA has limitations as an analytical tool and you should not consider this performance measure in isolation from, or as an alternative to, GAAP measures such as net income (loss). Adjusted EBITDA is not a measure of liquidity under GAAP or otherwise, and is not an alternative to cash flow from continuing operating activities. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by the expenses that are excluded from that term or by unusual or non-recurring items. 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; (iv) it does not reflect the cash requirements necessary to service interest or principal payments associated with indebtedness; and (v) 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 consolidated financial statements included elsewhere in this report and the reconciliation to Adjusted EBITDA from net income (loss), the most directly comparable financial measure presented in accordance with GAAP, set forth in the table below. All of the items included in the reconciliation from net income to Adjusted EBITDA are either (i) certain 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.

40

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 29,

 

 

March 30,

 

 

March 31,

 

 

April 1,

 

 

April 3,

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

Net loss (a)

 

$

(46,534)

 

 

$

(80,280)

 

 

$

(62,868)

 

 

$

(11,949)

 

 

$

(18,588)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management agreement termination (b)

 

 

 —

 

 

 

9,200 

 

 

 

 —

 

 

 

 —

 

 

 

 —

Contractual IPO bonuses (c)

 

 

 —

 

 

 

8,105 

 

 

 

 —

 

 

 

 —

 

 

 

 —

Other IPO-related expenses

 

 

 —

 

 

 

795 

 

 

 

3,058 

 

 

 

 —

 

 

 

 —

Sub-total IPO transaction expenses

 

 

 —

 

 

 

18,100 

 

 

 

3,058 

 

 

 

 —

 

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing transaction expenses (d)

 

 

 —

 

 

 

330 

 

 

 

6,196 

 

 

 

 —

 

 

 

1,269 

Professional services (e)

 

 

2,995 

 

 

 

2,278 

 

 

 

1,080 

 

 

 

1,608 

 

 

 

870 

Severance (f)

 

 

6,541 

 

 

 

3,544 

 

 

 

958 

 

 

 

1,074 

 

 

 

466 

Non-operating expenses (g)

 

 

382 

 

 

 

715 

 

 

 

1,215 

 

 

 

1,454 

 

 

 

936 

Management fees (h)

 

 

 —

 

 

 

877 

 

 

 

3,509 

 

 

 

2,647 

 

 

 

1,580 

Interest expense, net (i)

 

 

19,289 

 

 

 

20,205 

 

 

 

23,964 

 

 

 

16,918 

 

 

 

19,111 

Income tax provision (benefit) (j)

 

 

3,523 

 

 

 

29,154 

 

 

 

25,809 

 

 

 

(8,304)

 

 

 

(14,860)

Store depreciation and amortization

 

 

24,832 

 

 

 

22,787 

 

 

 

17,642 

 

 

 

13,511 

 

 

 

10,330 

Corporate depreciation and amortization

 

 

3,889 

 

 

 

4,269 

 

 

 

4,451 

 

 

 

5,691 

 

 

 

4,258 

Equity compensation charge

 

 

13,130 

 

 

 

11,020 

 

 

 

109 

 

 

 

437 

 

 

 

 —

Store opening costs (k)

 

 

7,043 

 

 

 

10,187 

 

 

 

19,015 

 

 

 

12,688 

 

 

 

10,006 

Production center start-up costs

 

 

5,448 

 

 

 

4,519 

 

 

 

 —

 

 

 

 —

 

 

 

 —

Pre-opening advertising costs (l)

 

 

1,261 

 

 

 

2,681 

 

 

 

3,226 

 

 

 

 —

 

 

 

 —

Gain on insurance recovery (m)

 

 

 —

 

 

 

(3,089)

 

 

 

 —

 

 

 

 —

 

 

 

 —

Foundation funding (n)

 

 

 —

 

 

 

1,500 

 

 

 

 —

 

 

 

 —

 

 

 

 —

Loss on early extinguishment of debt (o)

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

13,931 

Adjusted EBITDA

 

$

41,799 

 

 

$

48,797 

 

 

$

47,364 

 

 

$

35,775 

 

 

$

29,309 

 


(a)

See notes 1, 2, 5 and 7 above.

(b)

Represents the fee paid to an affiliate of Sterling Investment Partners to terminate our management agreement with such affiliate in connection with our IPO.

(c)

Represents contractual bonuses paid to certain members of management upon consummation of our IPO.

(d)

Represents fees and expenses and bonuses paid in connection with the refinancing of our 2009 senior credit facility in fiscal 2011, the refinancing of our 2011 senior credit facility in fiscal 2013 and expenses related to the rating agency review of us required by our 2013 senior credit facility in fiscal 2014.

(e)

Consists of charges that were incurred and associated with discrete events that do not relate to and are not indicative of our core on-going operations, including litigation and recruitment fees, among others.

(f)

In fiscal 2012 consists primarily of severance required to be paid under an employment agreement in connection with the termination of employment of a senior officer and severance paid in connection with the elimination of a department.  In fiscal 2013, consists primarily of severance required to be paid under an employment agreement in connection with the termination of employment of a senior officer.  In fiscal 2014 and fiscal 2015 consists primarily of severance paid in connection with our organizational realignment program, including payments required to be paid under separation agreements in connection with the retirement of certain of our former executive officers.

(g)

Consists of charges that were incurred and associated with discrete events that do not relate to and are not indicative of our core on-going operations, including amounts paid in respect of prior periods and bank fees.

(h)

Represents management fees paid to an affiliate of Sterling Investment Partners pursuant to an agreement that was terminated upon the consummation of our IPO in exchange for a payment of $9.2 million. For fiscal 2014 represents prepaid management fees expensed at the IPO date.

(i)

Includes amortization of deferred financing costs and original issue discount.

(j)

See note 7 above.

(k)

See note 4 above.

(l)

For fiscal 2011 and 2012, pre-opening advertising costs are included in store opening costs; reclassification has not been made as such amounts were not considered material.  For fiscal 2013, fiscal 2014 and fiscal 2015, they are included in general and administrative expense.

(m)

See note 5 above.

(n)

During fiscal 2014, we established and provided $1.5 million of initial funding for a charitable foundation to provide charitable grants in and around the communities we serve. 

(o)

See note 6 above.

 

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The adjustments and related amounts included in Adjusted EBITDA as shown above are in substantial accordance with Consolidated EBITDA as defined in our existing senior credit agreement, subject to dollar limitations on certain adjustments. Consolidated EBITDA as computed under our existing senior credit agreement for fiscal 2011, fiscal 2012, fiscal 2013, fiscal 2014 and fiscal 2015 was $30.4 million, $37.9 million, $47.6 million, $52.1 million and $45.3 million, respectively, compared to Adjusted EBITDA of $29.3 million, $35.8 million, $47.4 million, $48.8 million and $41.8 million, respectively, during the same periods.

 

(10)

We calculate gross margin by subtracting cost of sales and occupancy costs from net sales and dividing by our net sales for each of the applicable periods.

 

(11)

We calculated Adjusted EBITDA margin by dividing our Adjusted EBITDA by our net sales for each of the applicable periods. We present Adjusted EBITDA margin because it is used by management as a performance measure of Adjusted EBITDA generated from net sales. See note 9 above for further information regarding how we calculate Adjusted EBITDA, which is a non-GAAP measure. In calculating Adjusted EBITDA margin for fiscal 2013, Adjusted EBITDA includes the $5.0 million of business interruption insurance recoveries we received, approximating the lost EBITDA of the Red Hook location during the period it was closed, but net sales does not include any net sales for the period the store was closed. See Note 12 below. Sales at certain of our stores may have benefitted from customers of our Red Hook store shopping at our other stores while the Red Hook store was temporarily closed. See Note 1 above.

(12)

We calculated pro forma Adjusted EBITDA margin as described in note 11 above, except that for fiscal 2013 we added to net sales $25.0 million, representing our net sales at Red Hook during the period in fiscal 2012 corresponding to the same period in fiscal 2013 that the store was temporarily closed.

 

(13)

The food stores and adjacent Fairway Wines & Spirits locations in Pelham Manor, Stamford, Woodland Park and Paramus, respectively, are considered as one store location in the number of stores and square footage.

 

(14)

Excludes the square footage of the kitchen, bakery, meat department, produce coolers and storage in our stores.

 

(15)

The amount for fiscal 2011 has been decreased (by subtracting one week of average weekly net sales) to reflect a 52-week year so as to be comparable to fiscal 2012, 2013, 2014 and 2015. Stores not open for the entire fiscal period have been excluded. Does not include net sales from our Fairway Wines & Spirits locations. For fiscal 2013, excludes our Red Hook store due to its temporary closure as a result of damages suffered during Hurricane Sandy.

 

(16)

We calculated average net sales per store per week by dividing net sales by the number of stores open during the entire fiscal period and then dividing by the number of weeks in the fiscal period. Does not include net sales from our Fairway Wines & Spirits locations. For fiscal 2013, excludes our Red Hook store due to its temporary closure as a result of damages suffered during Hurricane Sandy. 

 

(17)

Represents the percentage change in our same-store sales as compared to the prior comparable period. Our practice is to include sales from a store in same-store sales beginning on the first day of the fifteenth full month following the store’s opening. This practice may differ from the methods that other food retailers use to calculate comparable or “same-store” sales. As a result, data regarding our same-store sales may not be comparable to similar data made available by other food retailers. Comparable same store sales for fiscal 2011 has been adjusted (by subtracting one week of average weekly net sales) to reflect a 52-week year so as to be comparable to fiscal 2010, 2012, 2013, 2014 and 2015. For fiscal 2013 and fiscal 2014, comparable store sales excludes our Red Hook store beginning in October through the end of the applicable fiscal year due to its temporary closure in fiscal 2013 as a result of damages suffered during Hurricane Sandy.

 

(18)

Net of (i) unamortized original issue discount on our senior debt of $2.7 million, $1.9 million, $15.0 million, $15.1 million and $11.7 million at April 3, 2011, April 1, 2012, March 31, 2013, March 30, 2014 and March 29, 2015, respectively, and (ii) accrued deferred interest on our subordinated note of $443,617 and $130,595 at April 3, 2011 and April 1, 2012, and $0 at March 31, 2013, March 30, 2014 and March 29, 2015, respectively. The accrued deferred interest is due at maturity and is classified as other long-term liabilities in our financial statements. See Note 6 to our financial statements included elsewhere in this report for more information regarding our original issue discount.

 

(19)

All of our outstanding preferred stock and accrued but unpaid dividends was exchanged for 15,504,296 shares of our Class B common stock, of which 33,576 shares automatically converted into 33,576 shares of Class A common stock at the closing of our IPO.

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ITEM 7—MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis in conjunction with the information set forth under “Selected Financial Data” and our consolidated financial statements and the notes to those statements included within Item 8 of this Annual Report on Form 10-K. The statements in this discussion regarding our expectations of future performance, liquidity and capital resources and other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under “Special Note Regarding Forward-Looking Statements” and “Item 1A—Risk Factors”. Our actual results may differ materially from those contained in or implied by any forward-looking statements.

 

Overview

 

Fairway Market is a growth-oriented food retailer offering customers a differentiated one-stop shopping experience “Like No Other Market”. Since beginning as a small neighborhood market in the 1930s, Fairway has established itself as a leading food retailing destination in the Greater New York City metropolitan area, which we estimate is the largest food retail market in the United States. Our stores emphasize an extensive selection of fresh, natural and organic products, prepared foods and hard-to-find specialty and gourmet offerings, along with a full assortment of conventional groceries. Our prices typically are lower than natural/specialty stores and competitive with conventional supermarkets. We believe that the combination of our broad product selection, in-store experience and value pricing creates a premier food shopping experience that appeals to a broad demographic.

 

We operate 15 locations in New York, New Jersey and Connecticut, four of which include Fairway Wines & Spirits locations.  Fourteen of the stores were open prior to the beginning of fiscal 2015 and one store was opened during fiscal 2015. Seven of our food stores, which we refer to as “urban stores,” are located in New York City, and the remainder, which we refer to as “suburban stores,” are located in New York (outside of New York City), New Jersey and Connecticut.

 

We believe our stores are among the most productive in the industry in net sales per store and net sales per square foot as a result of our distinctive merchandising strategies and value positioning.

 

We intend to continue our growth by increasing sales at existing stores, expanding our store base in the Greater New York City metropolitan area and improving our operating margins.    For the next several years, we intend to grow our store base in the Greater New York City metropolitan area and, over time, we also plan to expand Fairway’s presence into new, high-density metropolitan markets.

 

We believe that we are well positioned to capitalize on evolving consumer preferences and other key trends currently shaping the food retail industry.  These trends include an increasing consumer focus on fresh, quality offerings, including locally sourced products, the shopping experience and the growing interest in high-quality, value-oriented private label product offerings.

 

We intend to improve our operating margins through improved business processes, continued cost discipline and enhancements to our merchandise offerings. We expect store growth will also permit us to benefit from economies of scale in sourcing products and will enable us to continue to better leverage our existing infrastructure.

 

Factors Affecting Our Operating Results

 

Various factors affect our operating results during each period, including:

 

Store Openings

 

We expect new stores will be a key driver of the growth in our sales and operating profit in the future. Our results of operations have been and will continue to be materially affected by the timing and number of new store openings and the amount of new store opening costs. For example, we typically incur higher than normal employee costs at the time of a new store opening associated with set-up and other opening costs. Operating margins are also affected by promotional discounts and other marketing costs and strategies associated with new store openings, as well as higher shrink, primarily due to overstocking, and costs related to hiring and training new employees. Additionally, promotional activities may result in higher than normal net sales in the first several weeks following a new store opening. A new store builds its sales volume and its customer base over time and, as a result, generally has lower margins and higher operating expenses, as a percentage of sales, than our more mature stores. A new store can take more than a year to achieve a level of operating performance comparable to our similarly existing stores. Stores that we have opened in higher density urban markets typically have generated higher sales volumes and margins than stores in suburban areas.

 

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We believe our differentiated format and destination one-stop shopping appeal attracts customers from as far as 25 miles away. As we open new stores in closer proximity to our customers who currently travel longer distances to shop at our stores, we expect some of these customers to take advantage of the convenience of our new locations. As a result, we have experienced in the past, and expect to experience in the future, some sales volume transfer from our existing stores to our new stores as some of our existing customers switch to these new, closer locations. Consequently, while we expect our new stores will impact sales at our existing stores in close proximity, we believe that by making shopping at our stores for those customers who travel longer distances more convenient, our overall sales to these customers will increase as they increase the frequency and amount of purchases from our stores.

 

General Economic Conditions and Changes in Consumer Behavior

 

The overall economic environment in the Greater New York City metropolitan area and related changes in consumer behavior have a significant impact on our business. In general, positive conditions in the broader economy promote customer spending in our stores, while economic weakness results in a reduction in customer spending. Macroeconomic factors that can affect customer spending patterns, and thereby our results of operations, include employment rates, business conditions, changes in the housing market, the availability of consumer credit, interest rates, tax rates and fuel and energy costs.

 

Inflation and Deflation Trends

 

Inflation and deflation can impact our financial performance. During inflationary periods, our financial results can be positively impacted in the short term as we sell lower-priced inventory in a higher price environment. Over the longer term, the impact of inflation is largely dependent on our ability to pass through inventory price increases to our customers, which is subject to competitive market conditions.

 

Infrastructure Investment

 

Our historical operating results reflect the impact of our ongoing investments to support our growth. We have made significant investments in management, information technology systems, compliance and marketing. These investments include additions to our company’s personnel, including experienced industry executives and the next generation management and merchandising teams to support our long-term growth objectives.

 

Pricing Strategy

 

Our strategy is to price our broad selection of fresh, natural and organic foods, hard-to-find specialty and gourmet items and prepared foods at prices typically lower than those of natural/specialty stores. We price our full assortment of conventional groceries at prices competitive with those of conventional supermarkets.  

 

Productivity Initiatives

 

We have undertaken a number of initiatives to improve our gross margin and operating costs, including (i) business process improvements, (ii) labor productivity, (iii) supply chain management and (iv) shrink reduction.

 

Developments in Competitive Landscape

 

The food retail industry as a whole, particularly in the Greater New York City metropolitan area, is highly competitive. Because we offer a full assortment of fresh, natural and organic products, prepared foods and hard-to-find specialty and gourmet offerings, along with a full assortment of conventional groceries, we compete with various types of retailers, including alternative food retailers such as natural foods stores, smaller specialty stores and farmers’ markets, conventional supermarkets, supercenters and membership warehouse clubs. Our principal competitors include alternative food retailers such as Whole Foods and Trader Joe’s, traditional supermarkets such as Stop & Shop, ShopRite, Food Emporium and A&P, retailers with “big box” formats such as Target and Wal-Mart and warehouse clubs such as Costco and BJ’s Wholesale Club. These businesses compete with us for customers, products and locations. In addition, some are expanding aggressively in marketing a range of natural and organic foods, prepared foods and quality specialty grocery items. Some of these potential competitors have more experience operating multiple store locations or have greater financial or marketing resources than we do and are able to devote greater resources to sourcing, promoting and selling their products. Due to the increasingly competitive environment in which we operate, our operating results in fiscal 2014 and fiscal 2015 were, and in the future may be, negatively impacted through a loss of sales, reduction in margin from competitive price changes, and/or greater operating costs such as marketing. In addition, other established food retailers could enter our markets, increasing competition for market share.

 

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Changes in Interest Expense

 

Our interest expense in any particular period is impacted by our overall level of indebtedness during that period and changes in the interest rates payable on such indebtedness. In fiscal 2012, we used a portion of the proceeds from the borrowings under our 2011 senior credit facility to repay $22.0 million aggregate principal amount of subordinated debt, together with all accrued interest, and issued $7.3 million of subordinated debt, which we repaid in March 2013. In August 2012, we refinanced our 2011 $235 million credit facility with a new senior credit facility, consisting of $260 million of term debt and a revolving credit facility of $40 million. In February 2013, we refinanced our $300 million credit facility with a new senior credit facility, consisting of $275 million of term debt and a revolving credit facility of $40 million, principally to lower the interest rate we pay. In May 2013 we amended our senior credit facility to lower the interest rate we pay, which reduced our annualized cash interest payments by approximately $4.8 million.  

 

Effect of Hurricane Sandy

 

We temporarily closed all of our stores as a result of Hurricane Sandy, which struck the Greater New York City metropolitan area on October 29, 2012. While all but one of our stores were able to reopen within a day or two following the storm, we experienced business disruptions due to inventory delays as a result of transportation issues, loss of electricity at certain of our locations and the inability of some of our employees to travel to work. Our Red Hook store sustained substantial damage from the effects of Hurricane Sandy, and did not reopen until March 1, 2013. We also sustained property and equipment damage and losses on merchandise inventories at certain other stores resulting from this storm. As a result of these damages, we wrote-off approximately $2.1 million of unsalable merchandise inventories and approximately $3.4 million of impaired property and equipment in fiscal 2013.

 

In fiscal 2013, we received advances totaling $10.5 million in partial settlement of our insurance claims. The insurance carriers designated $5.0 million of these advances as non-refundable reimbursement for business interruption losses sustained at Red Hook, which was recorded as business interruption insurance recoveries in our consolidated statement of operations for fiscal 2013.  The remaining $5.5 million, which represented the carrying values of the damaged inventory and property and equipment, was recorded as a reduction of general and administrative expenses, a direct offset to the associated carrying values written off, in the consolidated statements of operations for fiscal 2013.  Additionally, we recognized approximately $5.2 million for reimbursable ongoing business expenses and remediation costs incurred in connection with Red Hook as a reduction in general and administrative expenses, a direct offset to the associated expenses, in our consolidated statement of operations for fiscal 2013 as the realization of the claim for loss recovery had been deemed to be probable.

 

We received an additional advance of $3.8 million in the first quarter of fiscal 2014 in partial settlement of our insurance claims.  In the third quarter of fiscal 2014, we and our insurers settled the remaining insurance claims related to Hurricane Sandy and we received final payments totaling $4.4 million, bringing total insurance payments to $18.7 million. At the time of claim settlement we had an insurance receivable of $1.3 million. The settlement resulted in a $3.1 million gain, which represents the difference between the replacement cost and carrying value of the assets lost to Hurricane Sandy. The gain is recorded in Business interruption and gain on storm-related insurance recoveries in our consolidated statements of operations.

 

Following Hurricane Sandy we have seen increases in the market rate for insurance and our insurance premiums increased.

 

Establishment of Charitable Foundation

 

During fiscal 2014, we established a charitable foundation (the “Foundation”) to provide charitable grants in and around the communities we serve.  We provided $1.5 million of initial funding for the Foundation, which is recorded as general and administrative expenses.  The Foundation applied for and received tax-exempt status in December 2014.

 

Organizational Realignment

 

In the fourth quarter of fiscal 2014, we initiated an organizational realignment to remove redundant costs and streamline parts of the business model to enhance overall productivity.  In connection with the plan, we incurred charges, primarily severance of $3.3 million and $6.5 million and accelerated stock-based compensation expense of $0.6 million and $3.0 million in fiscal 2014 and fiscal 2015, respectively.

 

How We Assess the Performance of Our Business

 

In assessing performance, we consider a variety of performance and financial measures, principally growth in net sales, gross profit and Adjusted EBITDA and Central Services as a percentage of net sales. The key measures that we use to evaluate the performance of our business are set forth below:

 

45

 


 

Net Sales

 

We evaluate sales because it helps us measure the impact of economic trends and inflation or deflation, the effectiveness of our merchandising, marketing and promotional activities, the impact of new store openings and the effect of competition over a given period. Our net sales comprise gross sales net of coupons and discounts. 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.

 

We evaluate same store sales as one measure of our performance; however, we do not consider same store sales to be as meaningful a measure for us as it may be for other retailers because as a destination food retailer with a small number of stores in a concentrated market area we have in the past experienced, and in the future expect to experience, sales transfer from our existing stores to our newly opened stores that are in closer proximity to some of our customers.  Our practice is to include sales from a store in same-store sales beginning on the first day of the fifteenth full month following the store’s opening. This practice may differ from the methods that our competitors use to calculate same-store or “comparable” sales. As a result, data in this report regarding our same-store sales may not be comparable to similar data made available by our competitors. 

 

Various factors may affect our same-store sales, including:

 

·

our competition, including competitor store openings or closings near our stores;

·

our opening of new stores in the vicinity of our existing stores;

·

our price optimization initiative;

·

the number and dollar amount of customer transactions in our stores;

·

overall economic trends and conditions in our markets;

·

consumer preferences, buying trends and spending levels;

·

the pricing of our products, including the effects of inflation or deflation and promotions; 

·

our ability to provide product offerings that generate new and repeat visits to our stores; 

·

the level of customer service that we provide in our stores; 

·

our in-store merchandising-related activities; 

·

our ability to source products efficiently;

·

whether a holiday falls in the same or a different fiscal period; and

·

the occurrence of severe weather conditions and other natural disasters during a fiscal period, which can cause store closures and/or consumer stocking of products.

 

As we continue to pursue our growth strategy, we expect that a significant percentage of our increase in net sales will continue to come from the opening of new stores rather than increased sales at existing stores.

 

The food retail industry and our sales are affected by general economic conditions and seasonality, as well as the other factors discussed below, that affect store sales performance. Consumer purchases of high-quality perishables and specialty food products are particularly sensitive to a number of factors that influence the levels of consumer spending, including economic conditions, the level of disposable consumer income, consumer debt, interest rates and consumer confidence. In addition, our business is seasonal and, as a result, our average weekly sales fluctuate during the year and are usually highest in our third fiscal quarter, from October through December, when customers make holiday purchases, and typically lower during the summer months in our second fiscal quarter.

 

Gross Profit

 

We use gross profit to measure the effectiveness of our pricing and procurement strategies as well as initiatives to increase sales of higher margin items and to reduce shrink. We calculate gross profit as net sales less cost of sales and occupancy costs. Gross margin measures gross profit as a percentage of our net sales. Cost of sales includes the cost of merchandise inventory sold during the period (net of discounts and allowances), distribution costs, food preparation costs (primarily labor) and shipping and handling costs. Occupancy costs include store rental costs and property taxes. The components of our cost of sales and occupancy costs may not be identical to those of our competitors. As a result, data in this report regarding our gross profit and gross margin may not be comparable to similar data made available by our competitors.

 

Changes in the mix of products sold may impact our gross margin. Unlike natural / specialty stores, we also carry a full assortment of conventional groceries, which generally have lower margins than fresh, natural and organic foods, prepared foods and specialty and gourmet items. We expect to enhance our gross margins through:

 

·

purchasing benefits and economies of scale resulting from expanding the store base;

·

our price optimization initiative;

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·

productivity gains through process and program improvements including the benefits we expect to derive over time from our production center; and 

·

reduced shrink  as a percentage of net sales

 

Stores that we operate in higher density urban markets typically have generated higher sales volumes and margins than stores that we operate in suburban areas. As the percentage of our sales volumes provided by our suburban stores increases, our overall gross margins may decline.

 

Direct Store Expenses

 

Direct store expenses consist of store-level expenses such as salaries and benefits for our store work force, supplies, store depreciation and store-specific advertising and marketing costs. Store-level labor costs are generally the largest component of our direct store expenses. Direct store expenses, as a percentage of net sales, at our new stores are typically higher than at our more established stores during the first few quarters of operations. The components of our direct store expenses may not be identical to those of our competitors. As a result, data in this report regarding our direct store expenses may not be comparable to similar data made available by our competitors.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of personnel costs that are not store specific, advertising and marketing expenses (including pre-opening advertising and marketing costs beginning in fiscal 2013), depreciation and amortization expense as well as other expenses associated with our corporate headquarters, management expenses and expenses for accounting, information systems, legal, business development, human resources, purchasing and other administrative departments. Our general and administrative expenses include management fees paid to an affiliate of Sterling Investment Partners, which ceased upon consummation of our IPO in April 2013.

 

The components of our general and administrative expenses may not be identical to those of our competitors. As a result, data regarding our general and administrative expenses may not be comparable to similar data made available by our competitors.

 

Store Opening Costs

 

Store opening costs include rent expense incurred during construction of new stores and costs related to new location openings, including costs associated with hiring and training personnel, supplies, the costs associated with our dedicated store opening team and other miscellaneous costs. Rent expense is recognized upon receiving possession of a store site, which generally ranges from three to six months before the opening of a store, although in some situations the possession period can exceed twelve months. Store opening costs vary among locations due to several key factors, including the length of time between possession date and the date on which the location opens for business along with the time designated as the training period for new staff for the store. Accordingly, we expect store opening costs to vary from period to period depending on the number of new stores opened in the period, whether such stores opened early or late in the period and whether new stores will open early in the following period. Store opening costs are expensed as incurred.

 

Production Center Start-up Costs

 

Production center start-up costs include rent expense incurred during construction of a new facility and costs related to the location opening, including costs associated with hiring and training personnel, supplies and other miscellaneous costs. Rent expense is recognized upon receiving possession of the site. Production center start-up costs are expensed as incurred.

 

Income from Operations

 

Income from operations consists of gross profit minus direct store expenses, general and administrative expenses, store opening costs and production center start-up costs. Income from operations will vary from period to period based on a number of factors, including the number of stores open and the number of stores in the process of being opened in each period. 

 

Adjusted EBITDA 

 

We believe that Adjusted EBITDA is a useful performance measure to evaluate our core on-going operations and we use it to facilitate a comparison of our core on-going operating performance on a consistent basis from period-to-period and to provide for a more complete understanding of factors and trends affecting our business than GAAP measures alone can provide. We also use Adjusted EBITDA as one of the primary methods for planning and forecasting overall expected performance and for evaluating on a

47

 


 

quarterly and annual basis actual results against such expectations, and as a performance evaluation metric in determining achievement of certain compensation programs and plans for employees, including our senior executives. Management and our board also use Adjusted EBITDA as one of the key measures in determining the value of any strategic, investing or financing opportunity. In addition, the financial covenant in our senior credit facility is based on Adjusted EBITDA, subject to dollar limitations on certain adjustments. The adjustments and related amounts included in Adjusted EBITDA are in substantial accordance with Consolidated EBITDA as defined in our existing senior credit agreement, subject to dollar limitations on certain adjustments. Consolidated EBITDA as computed under our existing senior credit agreement for fiscal 2011, fiscal 2012, fiscal 2013, fiscal 2014 and fiscal 2015 was $30.4 million, $37.9 million, $47.6 million, $52.1 million and $45.3 million, respectively, compared to Adjusted EBITDA of $29.3 million, $35.8 million, $47.4 million, $48.8 million and $41.8 million, respectively, during the same periods.  Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

 

We define Adjusted EBITDA as earnings before interest expense, income taxes, depreciation and amortization expense, amortization of deferred financing costs, equity compensation charges, store opening costs (including pre-opening advertising costs), production center start-up costs, gain on insurance recovery, severance related expenses, foundation funding, loss on early extinguishment of debt, organizational realignment costs, IPO related expenses, transaction expenses and bonuses, management fees, and other one-time charges and non-operating expenses which we believe may distort period-to-period comparison. 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 and tax structures 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 ceased paying management fees upon consummation of our IPO. Items such as production center start-up costs, gain on insurance recovery, severance-related expenses, foundation funding, loss on early extinguishment of debt, non-recurring charges, organizational realignment costs, IPO-related expenses and transaction expenses and bonuses were incurred and associated with discrete and different events not relating to our core on-going operations, including our initial public offering, which was consummated just after the end of fiscal 2013, an organizational realignment to remove redundant costs and streamline parts of our business model to enhance overall productivity that we began in the fourth quarter of fiscal 2014 and the refinancings of our senior credit facility and Hurricane Sandy. We also believe that investors, analysts and other interested parties view our ability to generate Adjusted EBITDA as an important measure of our operating performance and that of other companies in our industry. Adjusted EBITDA should not be considered as an alternative to net income for the periods indicated as a measure of our performance.

 

The use of Adjusted EBITDA has limitations as an analytical tool and you should not consider this performance measure in isolation from, or as an alternative to, US GAAP measures such as net income (loss). Adjusted EBITDA is not a measure of liquidity under US GAAP or otherwise, and is not an alternative to cash flow from continuing operating activities. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by the expenses that are excluded from that term or by unusual or non-recurring items. 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; (iv) it does not reflect the cash requirements necessary to service interest or principal payments associated with indebtedness; and (v) 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 consolidated financial statements included elsewhere in this report and the reconciliation to Adjusted EBITDA from net loss, the most directly comparable financial measure presented in accordance with US GAAP, set forth in note 9 to the tables under the heading “Item 6.  Selected Financial Data”.

 

Central Services

 

We define Central Services as general and administrative expenses less: depreciation and amortization related to general and administrative activities, management fees, transaction expenses, equity compensation charges and other non-operating expenses. We have made significant investments in Central Services to support our long-term growth objectives.  We believe that Central Services as a percentage of net sales is a useful performance measure and we use it to facilitate an evaluation of our infrastructure investment without distortions that may result from general and administrative expenses that do not directly relate to the operation of our business.  To properly and prudently evaluate our business, we encourage you to review our consolidated financial statements included elsewhere in this report and the reconciliation to Central Services from general and administrative expenses, the most directly comparable financial measure presented in accordance with US GAAP.

 

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Basis of Presentation

 

Our fiscal year is the 52- or 53-week period ending on the Sunday closest to March 31. The three completed fiscal years discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” ended on March 31, 2013, March 30, 2014 and March 29, 2015. For ease of reference, we identify our fiscal years by reference to the calendar year in which the fiscal year ends. Accordingly, “fiscal 2013” refers to our fiscal year ended March 31, 2013, “fiscal 2014” refers to our fiscal year ended March 30, 2014 and “fiscal 2015” refers to our fiscal year ended March 29, 2015.   Fiscal 2013, fiscal 2014 and fiscal 2015 consist of 52 weeks. The effects of Hurricane Sandy (including the temporary closure of all of our stores for one or two days and our Red Hook store for four months and the receipt of insurance proceeds related to Hurricane Sandy), and the opening of six new stores during these years, may affect the comparability of certain data for the periods presented.

 

Results of Operations

 

The following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage of net sales and have been derived from our consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Years Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 29,

 

March 30,

 

March 31,

 

 

2015

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales (a)

    

$

797,555 

 

100.0 

%

 

$

775,986 

 

100.0 

%

 

$

661,244 

 

100.0 

%

Cost of sales and occupancy costs (exclusive of depreciation and amortization)

 

 

547,869 

 

68.7 

 

 

 

524,659 

 

67.6 

 

 

 

445,379 

 

67.4 

 

Gross profit (b)

 

 

249,686 

 

31.3 

 

 

 

251,327 

 

32.4 

 

 

 

215,865 

 

32.6 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct store expenses

 

 

191,313 

 

24.0 

 

 

 

186,537 

 

24.0 

 

 

 

154,753 

 

23.4 

 

General and administrative expenses (c)

 

 

69,604 

 

8.7 

 

 

 

84,094 

 

10.8 

 

 

 

60,192 

 

9.1 

 

Store opening costs

 

 

7,043 

 

0.9 

 

 

 

10,187 

 

1.3 

 

 

 

19,015 

 

2.9 

 

Production center start-up costs

 

 

5,448 

 

0.7 

 

 

 

4,519 

 

0.6 

 

 

 

 —

 

 —

 

Loss from operations

 

 

(23,722)

 

(3.0)

 

 

 

(34,010)

 

(4.4)

 

 

 

(18,095)

 

(2.7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Business interruption and gain on storm-related insurance recoveries (d)

 

 

 —

 

 —

 

 

 

3,089 

 

0.4 

 

 

 

5,000 

 

0.8 

 

Interest expense, net

 

 

(19,289)

 

(2.4)

 

 

 

(20,205)

 

(2.6)

 

 

 

(23,964)

 

(3.6)

 

Loss before income taxes

 

 

(43,011)

 

(5.4)

 

 

 

(51,126)

 

(6.6)

 

 

 

(37,059)

 

(5.6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

 

(3,523)

 

(0.4)

 

 

 

(29,154)

 

(3.8)

 

 

 

(25,809)

 

(3.9)

 

Net loss

 

$

(46,534)

 

(5.8)

%

 

$

(80,280)

 

(10.3)

%

 

$

(62,868)

 

(9.5)

%

 

(a)

Our Red Hook store was temporarily closed beginning October 29, 2012 due to damage sustained in Hurricane Sandy. During the period in fiscal 2012 corresponding to the period in fiscal 2013 that this store was closed, net sales at the Red Hook store were approximately $25.0 million.

 

(b)

Our Red Hook store was temporarily closed beginning October 29, 2012 due to damage sustained in Hurricane Sandy. Management estimates that during the period in fiscal 2012 corresponding to the period in fiscal 2013 that this store was closed, the Red Hook store generated approximately $8.0 million of gross profit.

 

(c)

In fiscal 2013 and fiscal 2014, we recognized approximately $5.2 million and $0.1 million, respectively, for reimbursable ongoing business expenses and remediation costs incurred in connection with Red Hook and recorded this amount as a reduction in general and administrative expense, a direct offset to the associated expenses.

 

(d)

In fiscal 2013, we recognized $5.0 million of non-refundable reimbursement from our insurance carriers for business interruption losses sustained due to the temporary closure of our Red Hook store as a result of damage sustained during Hurricane Sandy. In fiscal 2014, we and our insurers settled the remaining insurance claims related to Hurricane Sandy and received final payments totaling $4.4 million, bringing total insurance payments to $18.7 million.  At the time of claim settlement we had an insurance receivable of $1.3 million.  The settlement resulted in a $3.1 million gain, which represents the difference between the replacement cost and carrying value of the assets lost to Hurricane Sandy.

 

Fiscal year ended March 29, 2015 compared to fiscal year ended March 30, 2014

 

The comparability of the financial data for fiscal 2015 and fiscal 2014 may be affected by the opening of two new stores in fiscal 2014 and one new store in fiscal 2015 and the fact that the Easter and Passover holidays occurred during fiscal 2015 but not during fiscal 2014 as well as the overlap of Thanksgiving and Hanukah during fiscal 2014.

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Net Sales

 

We had net sales of $797.6 million in fiscal 2015, an increase of $21.6 million, or 2.8%, from $776.0 million in fiscal 2014.  The increase was primarily due to the one new food store and one new wine and spirits location that opened during fiscal 2015 and the full year sales contribution from the two new stores that opened during fiscal 2014, partially offset by a decrease in comparable store sales. 

 

Comparable store sales decreased 2.9% in fiscal 2015 compared to fiscal 2014, in large part due to competitive openings, sales transfer from existing to new Fairway locations and higher than normal sales at our Red Hook store in fiscal 2014 following its re-opening on March 1, 2013, partially offset by the Easter/ Passover holidays, which occurred during fiscal 2015 but not during fiscal 2014.  Customer transactions in our comparable stores decreased 4.0% although the average transaction size increased by 1.2%.  We believe poor weather conditions also negatively impacted traffic patterns during the fourth quarter of fiscal 2015 which skews our destination customers towards convenience shopping. Excluding Red Hook from both periods, comparable store sales decreased 2.2%. 

 

Gross Profit

 

Gross profit was $249.7 million in fiscal 2015 compared to $251.3 million in fiscal 2014.  Our gross margin decreased approximately 110 basis points in fiscal 2015 to 31.3% from 32.4% in fiscal 2014.  The decrease in gross margin was primarily due to an approximate 60 basis point decrease in merchandise margin and an approximate 50 basis point increase in occupancy costs as a percentage of sales.  The drop in merchandise margin is primarily due to higher shrink and targeted price reductions, primarily during the first half of the year.  In addition, merchandise margin was adversely impacted by increased cost inflation across several of our perishable departments and a shift in store mix as a result of the two suburban stores we opened subsequent to March 31, 2013This increase in occupancy costs was due to higher rent, as a percentage of sales, at new locations as well as increased occupancy costs at several locations open in both periods.

 

Direct Store Expenses

 

Direct store expenses were $191.3 million in fiscal 2015, an increase of $4.8 million, or 2.6%, from $186.5 million in fiscal 2014.  The increase in direct store expenses was attributable to an increase in the number of stores open in the period, including the two stores which opened during fiscal 2014, partially offset by lower direct store expenses at stores open for both periods.  With more stores in operation during fiscal 2015 our store labor expenses increased $0.8 million in fiscal 2015 to $84.0 million from $83.1 million in fiscal 2014The portion of our depreciation and amortization expense included in direct store expenses, which includes amortization of prepaid rent, increased $2.0 million to $24.8 million in fiscal 2015 from $22.8 million in fiscal 2014The increase in direct store depreciation and amortization expense is attributable to an increase in the number of stores.

 

Direct store expenses, as a percentage of net sales, were 24.0% in fiscal 2015 and flat to the prior yearThe direct store expense rate was lower, as a percentage of net sales, at our locations open during both periods, including the two stores that were opened during fiscal 2014, partially offset by higher direct store expenses, as a percentage of sales, at the store opened during the current yearThe improvement in direct store expenses, as a percentage of net sales, at existing stores reflects increased labor productivity and enhanced cost discipline.  Excluding depreciation and amortization, store expenses, as a percentage of net sales, decreased 20 basis points to 20.9% in fiscal 2015 compared to 21.1% in fiscal 2014. 

 

General and Administrative Expenses

 

General and administrative expenses were $69.6 million in fiscal 2015, a decrease of $14.5 million from $84.1 million in fiscal 2014.  The decrease in general and administrative expenses is primarily attributable to the expenses incurred during fiscal 2014 related to our IPO of $18.1 million, including $9.2 million to terminate the management agreement upon consummation of our IPO, $8.1 million of contractual bonuses paid to certain members of management upon consummation of our IPO and $0.8 million of other IPO related expenses.  Pre-opening advertising expenses decreased $1.4 million in fiscal 2015 due to a decrease in the number of stores opened during the period.  During fiscal 2014, we also incurred charges of $1.5 million related to the funding of our charitable foundation, $0.9 million related to the elimination of management fees paid to an affiliate of Sterling Investment Partners and $0.3 million of debt transaction fees.  These expenses did not occur in fiscal 2015. 

 

These cost reductions were partially offset by increases in severance-related expenses, equity compensation expenses and professional services of $3.0 million, $2.1 million and $0.7 million, respectively, in fiscal 2015 compared to fiscal 2014.  The Central Service component of general and administrative expenses increased $2.6 million in fiscal 2015 compared to fiscal 2014.  The portion of depreciation and amortization included in general and administrative expenses was $3.9 million in fiscal 2015, a decrease of $0.4 million from $4.3 million in fiscal 2014.  Excluding fees and expenses related to the IPO and management fees, which terminated

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in connection with the IPO, general and administrative expenses increased $4.5 million, or 6.9%, to $69.6 million in fiscal 2015 from $65.1 million in fiscal 2014.

 

General and administrative expenses, as a percentage of net sales, were 8.7% in fiscal 2015, an approximate 210 basis point decrease from 10.8% in fiscal 2014.  Excluding fees and expenses related to the IPO and management fees, which terminated in connection with the IPO, general and administrative expenses, as a percentage of net sales, increased approximately 30 basis points to 8.7% in fiscal 2015 from 8.4% in fiscal 2014.  Central Services, as a percentage of net sales, increased approximately 20 basis points to 5.2% in fiscal 2015 from 5.0% in fiscal 2014. 

 

The following table sets forth a reconciliation to Central Services from general and administrative expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Years Ended

 

 

March 29,

 

March 30,

 

 

2015

 

2014

 

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

Net Sales

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

General and administrative expenses

    

$

69,604 

    

8.7 

%

    

$

84,094 

    

10.8 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Management agreement termination

 

 

 —

 

 —

 

 

 

(9,200)

 

(1.2)

 

Contractual IPO bonuses

 

 

 —

 

 —

 

 

 

(8,105)

 

(1.0)

 

Other IPO-related expenses

 

 

 —

 

 —

 

 

 

(795)

 

(0.1)

 

Sub-total IPO transaction expenses

 

 

 —

 

 —

 

 

 

(18,100)

 

(2.3)

 

Management fees

 

 

 —

 

 —

 

 

 

(877)

 

(0.1)

 

Financing transaction expenses

 

 

 —

 

 —

 

 

 

(330)

 

 —

 

Professional services

 

 

(2,995)

 

(0.4)

 

 

 

(2,278)

 

(0.3)

 

Severance

 

 

(6,541)

 

(0.8)

 

 

 

(3,544)

 

(0.5)

 

Non-operating expenses

 

 

(382)

 

 —

 

 

 

(715)

 

(0.1)

 

Corporate depreciation and amortization

 

 

(3,889)

 

(0.5)

 

 

 

(4,269)

 

(0.6)

 

Equity compensation charge

 

 

(13,130)

 

(1.6)

 

 

 

(11,020)

 

(1.4)

 

Pre-opening advertising costs

 

 

(1,261)

 

(0.2)

 

 

 

(2,681)

 

(0.3)

 

Foundation funding

 

 

 —

 

 —

 

 

 

(1,500)

 

(0.2)

 

Central services

 

$

41,406 

 

5.2 

%

 

$

38,780 

 

5.0 

%

 

Store Opening Costs

 

Store opening costs were $7.0 million in fiscal 2015, a decrease of $3.1 million from $10.2 million in fiscal 2014.  Store opening costs in fiscal 2015 consisted of $3.9 million in connection with the store in TriBeCa that has not opened and $3.1 million in connection with the store that opened in Lake Grove, New York in July 2014Store opening costs in fiscal 2014 primarily consisted of $5.0 million in connection with the store that opened in the Chelsea neighborhood of Manhattan in July 2013, $3.7 million in connection with the store that opened in Nanuet, New York in October 2013, and $1.5 million in connection with the store that opened in Lake Grove, New York in July 2014Approximately $3.8 million and $2.7 million of store opening costs in fiscal 2015 and fiscal 2014, respectively, did not require the expenditure of cash in the period due to deferred rent.

 

Production Center Start-up Costs

 

Start-up costs for the new production center in the Hunts Point area of the Bronx were $5.4 million in fiscal 2015, an increase of $0.9 million from $4.5 million in fiscal 2014Approximately $0.5 million and $1.3 million of production center start-up costs in fiscal 2015 and fiscal 2014, respectively, did not require the expenditure of cash in the period due to deferred rent.

 

Loss from Operations

 

During 2015 our loss from operations was $23.7 million, a decrease of $10.3 million from a loss from operations of $34.0 million in fiscal 2014The decrease in loss from operations was primarily attributable to a decrease in general and administrative expenses and store opening costs, partially offset by an increase in direct store expenses and production center start-up costs and a decrease in gross profit.  Excluding fees and expenses related to the IPO and management fees, which terminated upon consummation of the IPO, our loss from operations increased $8.7 million to $23.7 million in fiscal 2015 from $15.0 million in fiscal 2014.

 

51

 


 

Interest Expense

 

Interest expense was $19.3 million in fiscal 2015, a decrease of $0.9 million from $20.2 million in fiscal 2014.  The decrease was primarily due to the May 2013 amendment of our existing senior credit facility that lowered our interest rates, partially offset by an increase in the amortization of deferred financing fees and original issue discountThe cash portion of interest expense in fiscal 2015 and fiscal 2014 was $14.2 million and $15.2 million, respectively.

 

Income Tax

 

During fiscal 2015 we recorded an income tax provision of $3.5 million compared to $29.2 million in fiscal 2014.  Included in the income tax provision in fiscal 2014 was a charge related to increasing from a partial to a full valuation allowance against deferred tax assets in the amount of $49.7 million.   In addition, we record an income tax provision although we incur pretax losses in both periods because we do not record any income tax benefit related to the operating losses and we recognize income tax expense related to the indefinite-lived intangible assets. At March 29, 2015, the valuation allowance was $110.8 million against our deferred tax assets.  See Note 13 to our financial statements found within “Item 8 – Financial Statements and Supplementary Data” for details on our deferred tax valuation allowance.

 

Net Loss

 

The net loss was $46.5 million in fiscal 2015, a decrease of $33.7 million from $80.3 million in fiscal 2014.  The decrease in net loss was primarily attributable to a decrease in general and administrative expenses, income tax provision, store opening costs, gross profit and interest expense, partially offset by a gain on storm-related insurance recovery and an increase in direct store expenses and production center start-up costs.

 

The adjusted net loss was $14.8 million in fiscal 2015, an increase of $4.0 million from $10.8 million in fiscal 2014.  We define adjusted net loss as net loss plus any transaction expenses, expenses that did not continue after the IPO, and certain non-cash charges, one-time charges and non-operating expenses which we believe may distort period to period comparisons.

 

The following table sets forth a reconciliation to adjusted net loss from net loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Years Ended

 

 

March 29,

 

March 30,

 

 

2015

 

2014

 

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

Net Sales

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

Net loss

    

$

(46,534)

    

(5.8)

%

 

$

(80,280)

    

(10.3)

%

Management agreement termination

 

 

 —

 

 —

 

 

 

9,200 

 

1.2 

 

Contractual IPO bonuses

 

 

 —

 

 —

 

 

 

8,105 

 

1.0 

 

Other IPO-related expenses

 

 

 —

 

 —

 

 

 

795 

 

0.1 

 

Sub-total IPO transaction expenses

 

 

 —

 

 —

 

 

 

18,100 

 

2.3 

 

Management fees

 

 

 —

 

 —

 

 

 

877 

 

0.1 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing transaction expenses

 

 

 —

 

 —

 

 

 

330 

 

 —

 

Professional services

 

 

2,995 

 

0.4 

 

 

 

2,278 

 

0.3 

 

Severance

 

 

6,541 

 

0.8 

 

 

 

3,544 

 

0.5 

 

Non-operating expenses

 

 

382 

 

 —

 

 

 

715 

 

0.1 

 

Non-cash interest

 

 

5,120 

 

0.6 

 

 

 

5,017 

 

0.6 

 

Equity compensation charge

 

 

13,130 

 

1.6 

 

 

 

11,020 

 

1.4 

 

Income tax provision

 

 

3,523 

 

0.4 

 

 

 

29,154 

 

3.8 

 

Gain on storm-related insurance recovery

 

 

 —

 

 —

 

 

 

(3,089)

 

(0.4)

 

Foundation funding

 

 

 —

 

 —

 

 

 

1,500 

 

0.2 

 

Adjusted net loss

 

$

(14,843)

 

(1.9)

%

 

$

(10,834)

 

(1.4)

%

 

Fiscal year ended March 30, 2014 compared to fiscal year ended March 31, 2013

 

The effects of Hurricane Sandy (including the temporary closure of all of our stores for one or two days and our Red Hook store for 18 weeks and the receipt of insurance proceeds related to Hurricane Sandy) and our IPO, as well as the opening of three new stores in fiscal 2013 and two new stores in fiscal 2014 and the fact that the Easter and Passover holidays occurred during fiscal 2013 but not during fiscal 2014, may affect the comparability of certain data for the periods presented.

52

 


 

 

Net Sales

 

We had net sales of $776.0 million in fiscal 2014, an increase of $114.7 million, or 17.4%, from $661.2 million in fiscal 2013.  Approximately 85.0% of the increase, or $97.2 million, was attributable to the net sales at our new stores not included in the comparable store base, with the remaining growth driven by the net sales from our Red Hook store, which was closed for 18 weeks during fiscal 2013 beginning on October 29, 2012, due to damage sustained from Hurricane Sandy, partially offset by a decrease in net sales at our comparable stores of $2.4 million. Excluding net sales of the Red Hook store in both periods as a result of its temporary closure, net sales increased $94.8 million, or 15.4%, to $709.3 million in fiscal 2014 from $614.5 million in fiscal 2013.

 

Comparable store sales decreased 0.4% in fiscal 2014 compared to fiscal 2013,  customer transactions in our comparable stores decreased by 1.4% and average transaction size at our comparable stores increased by 1.0%. Comparable store sales were negatively impacted by the holiday overlap of Thanksgiving and Hanukah and the compressed timeframe between Thanksgiving and Christmas in fiscal 2014, as well as the effects of Hurricane Sandy, which led to a combination of pre- and post- storm pantry stocking, sales transfer and absorbed market share from competitors that were not fully operational for some period subsequent to the storm, including our own in Red Hook.  Poor weather conditions also negatively impacted traffic patterns during the fourth fiscal quarter as heavy snowfall skews our destination customers towards convenience shopping.  Comparable store sales in fiscal 2013 also include an approximate 50 basis points sales benefit related to the Easter and Passover holidays; however, due to calendar shifts, these holidays did not fall within fiscal 2014.

 

Gross Profit

 

Gross profit was $251.3 million for fiscal 2014, an increase of $35.5 million, or 16.4%, from $215.9 million for fiscal 2013.  Our gross margin decreased approximately 20 basis points to 32.4% in fiscal 2014 from 32.6% in fiscal 2013 primarily due to higher occupancy costs, as a percentage of net sales, partially offset by improved merchandise gross margin. Excluding gross profit of the Red Hook store in both periods as a result of its temporary closure, gross profit increased $28.7 million, or 14.3%, to $229.1 million in fiscal 2014 from $200.4 million in fiscal 2013 and gross margin decreased approximately 30 basis points.

 

Direct Store Expenses

 

Direct store expenses were $186.5 million in fiscal 2014, an increase of $31.8 million, or 20.5%, from $154.8 million in fiscal 2013. The increase in direct store expenses was primarily due to the five new stores we opened subsequent to April 1, 2012 and the re-opening of our Red Hook store, which was closed for 18 weeks during fiscal 2013, beginning October 29, 2012, due to damage sustained from Hurricane Sandy. With more stores in operation during fiscal 2014, our store labor expenses increased $13.1 million and our other store operating expenses increased $13.6 million compared to fiscal 2013. The portion of our depreciation expense included in direct store expenses, which include amortization of prepaid rent, increased $5.1 million, or 29.2%, to $22.8 million for fiscal 2014, compared to direct store depreciation expense for fiscal 2013 of $17.6 million. The increase in direct store depreciation expense for fiscal 2014 compared with fiscal 2013 is primarily attributable to the increase in the number of stores. Excluding Red Hook’s direct store expenses in both periods as a result of its temporary closure, direct store expenses increased $27.1 million, or 18.7%, to $172.1 million in fiscal 2014 from $145.0 million in fiscal 2013.

 

Direct store expenses, as a percentage of net sales, increased 60 basis points to 24.0% in fiscal 2014 from 23.4% for fiscal 2013,  primarily due to higher store operating expenses, as a percentage of sales, at our two new locations that opened subsequent to March 31, 2013, which is typical for new stores during the first few quarters of operations, and an increase in store depreciation and amortization costs, as a percentage of sales. Excluding Red Hook’s direct store expenses in both periods as a result of its temporary closure, direct store expenses as a percentage of net sales increased 70 basis points to 24.3% for fiscal 2014 from 23.6% for fiscal 2013.

 

General and Administrative Expenses

 

General and administrative expenses were $84.1 million for fiscal 2014, an increase of $23.9 million, or 39.7%, from $60.2 million for fiscal 2013. The increase in our general and administrative expenses was primarily attributable to expenses related to our IPO of $18.1 million, including $9.2 million to terminate the management agreement with an affiliate of Sterling Investment Partners upon consummation of our IPO, $8.1 million of contractual bonuses paid to certain members of management upon consummation of our IPO and $0.8 million of other IPO related expenses, an increase of $15.0 million over the prior year.  We also recorded $11.0 million of stock compensation expense in fiscal 2014, an increase of $10.9 million from fiscal 2013 and $3.5 million of severance costs, including a $3.3 million charge in the fourth quarter in connection with the management realignment, an increase of $2.6 million over the prior year.  The Central Services component of general and administrative expenses increased $2.4 million, or 6.6%, to $38.8 million in fiscal 2014 from $36.4 million in fiscal 2013. The remaining increase in general and administrative expenses

53

 


 

was primarily due to a $1.5 million charge related to the funding of our Foundation and a $1.2 million increase in professional services partially offset by a reduction in transaction expenses related to the refinancing of our 2011 senior credit facility of $5.9 million, a reduction in management fees of $2.6 million and a reduction in non-operating expenses and pre-opening advertising of $1.0 million, collectively. The portion of our depreciation and amortization expense included in general and administrative expenses decreased by $0.2 million to $4.3 million for fiscal 2014 from $4.5 million in fiscal 2013.

 

As a percentage of net sales, general and administrative expenses increased approximately 170 basis points to 10.8% for fiscal 2014 from 9.1% for fiscal 2013. Excluding net sales from our Red Hook store in both periods, as a result of its temporary closure, general and administrative expenses, as a percentage of net sales, increased 210 basis points in fiscal 2014 to 11.9% from 9.8% in fiscal 2013. Central Services, as a percentage of net sales, decreased 50 basis points in fiscal 2014 to 5.0% from 5.5% in fiscal 2013. Excluding net sales from our Red Hook store in both periods as a result of its temporary closure, Central Services, as a percentage of net sales, decreased 40 basis points in fiscal 2014 to 5.5% from 5.9% in fiscal 2013.

 

The following table sets forth a reconciliation to Central Services from general and administrative expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Years Ended

 

 

March 30,

 

March 31,

 

 

2014

 

2013

 

 

 

 

 

% of

 

 

 

 

 

% of

 

 

 

 

 

Net Sales

 

 

 

 

Net Sales

 

 

 

(dollars in thousands)

General and administrative expenses

 

$

84,094 

 

10.8 

%

 

$

60,192 

 

9.1 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Management agreement termination

 

 

(9,200)

 

(1.2)

 

 

 

 —

 

 —

 

Contractual IPO bonuses

 

 

(8,105)

 

(1.0)

 

 

 

 —

 

 —

 

Other IPO-related expenses

 

 

(795)

 

(0.1)

 

 

 

(3,058)

 

(0.5)

 

IPO transaction expenses

 

 

(18,100)

 

(2.3)

 

 

 

(3,058)

 

(0.5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management fees

 

 

(877)

 

(0.1)

 

 

 

(3,509)

 

(0.5)

 

Financing transaction expenses

 

 

(330)

 

 —

 

 

 

(6,196)

 

(0.9)

 

Professional services

 

 

(2,278)

 

(0.3)

 

 

 

(1,080)

 

(0.2)

 

Severance

 

 

(3,544)

 

(0.5)

 

 

 

(958)

 

(0.1)

 

Non-operating expenses

 

 

(715)

 

(0.1)

 

 

 

(1,215)

 

(0.2)

 

Corporate depreciation and amortization

 

 

(4,269)

 

(0.6)

 

 

 

(4,451)

 

(0.7)

 

Equity compensation charge

 

 

(11,020)

 

(1.4)

 

 

 

(109)

 

 —

 

Pre-opening advertising costs

 

 

(2,681)

 

(0.3)

 

 

 

(3,226)

 

(0.5)

 

Foundation funding

 

 

(1,500)

 

(0.2)

 

 

 

 —

 

 —

 

Central services

 

$

38,780 

 

5.0 

%

 

$

36,390 

 

5.5 

%

 

Store Opening Costs

 

Store opening costs were $10.2 million for fiscal 2014, a decrease of $8.8 million from $19.0 million for fiscal 2013. Store opening costs for fiscal 2014 include approximately $5.0 million for the store we opened in the Chelsea neighborhood of Manhattan in July 2013, $3.7 million for the store we opened in Nanuet, NY in October 2013 and $1.5 million for the store we opened in Lake Grove, NY in July 2014.  Store opening costs for fiscal 2013 include approximately $4.2 million related to the Woodland Park, New Jersey store and integrated Fairway Wines & Spirits location that opened in June 2012, $4.9 million for our new Westbury, Long Island store that opened in August 2012, $7.6 million for the Fairway Market opened in Manhattan’s Kips Bay neighborhood in December 2012, $2.0 million related to the re-opening of the Red Hook store that was temporarily closed due to damage sustained during Hurricane Sandy, and $0.3 million related to our new store that we opened in July 2013 in Manhattan’s Chelsea neighborhood. Store opening costs for fiscal 2013 were adversely affected by an approximately two month delay in opening our Kips Bay store due to construction delays resulting from bedrock issues and the impact of Hurricane Sandy.  Approximately $2.8 million and $1.4 million of store opening costs in fiscal 2014 and fiscal 2013, respectively, did not require the expenditure of cash in the period, primarily due to deferred rent and other landlord allowances.

 

Production Center Start-up Costs

 

Start-up costs for our new production center in the Hunts Point area of the Bronx were $4.5 million in fiscal 2014.  Approximately $1.3 million of these costs did not require the expenditure of cash in the period, primarily due to deferred rent.

 

54

 


 

Loss from Operations

 

For fiscal 2014, our operating loss was $34.0 million, an increase of $15.9 million from $18.1 million for fiscal 2013. The increase in the loss from operations in fiscal 2014 over the same period in the prior year was primarily due to fees and expenses related to our IPO, an increase in stock compensation expense and production center start-up costs, partially offset by lower store opening costs. Excluding the income from operations of the Red Hook store in both periods as a result of its temporary closure our operating loss was $41.8 million in fiscal 2014 compared to $23.8 million in fiscal 2013.

 

Business Interruption and Gain on Storm-Related Insurance Recoveries

 

In fiscal 2014, we and our insurers settled the insurance claims related to Hurricane Sandy and we received final payments totaling $4.4 million, bringing total insurance payments to $18.7 million.  At the time of claim settlement we had an insurance receivable of $1.3 million.  The settlement resulted in a $3.1 million gain, which represents the difference between the replacement cost and carrying value of the assets lost to Hurricane Sandy.

Business interruption insurance recoveries for fiscal 2013 represents non-refundable reimbursement from our insurance carriers for business interruption losses sustained due to the temporary closure of our Red Hook store due to damage sustained during Hurricane Sandy.

 

Interest Expense

 

Interest expense decreased 15.7%, or $3.8 million, to $20.2 million for fiscal 2014, from $24.0 million for fiscal 2013,  primarily due to lower interest rates resulting from the refinancing of our 2012 senior credit facility in February 2013, the repayment of a subordinated promissory note of approximately $7.3 million in March 2013, and the subsequent May 2013 amendment to our February 2013 senior credit facility to further lower interest rates, partially offset by an increase in the amortization of deferred financing fees and original issue discount of approximately $2.1 million and an increase in average borrowings under our senior credit facility entered into in February 2013, as amended in May 2013.  The cash portion of interest expense in fiscal 2014 and fiscal 2013 was $15.2 million and $21.5 million (net of $0.5 million related to timing of payment), respectively, and the non-cash portion of interest expense, which represents amortization of deferred financing fees and original issue discount, increased $2.1 million to $5.0 million in fiscal 2014 from $2.9 million in fiscal 2013.

 

Income Tax

 

We recorded an income tax provision of $29.2 million in fiscal 2014 compared to a provision of $25.8 million in fiscal 2013. We recorded an income tax provision although we incurred pretax losses in both periods because we have provided valuation allowances against deferred tax assets in both periods, we do not record any income tax benefit related to the operating losses and we recognize income tax expense related to indefinite-lived intangible assets. In fiscal 2013 we recorded a partial valuation allowance of $41.0 million against our deferred tax assets and in fiscal 2014 we recorded a full valuation allowance of $49.7 million against our remaining deferred tax assets.  At March 30, 2014, the valuation allowance was $90.7 million against our deferred tax assets.  See Note 13 to our financial statements found under “Item 8—Financial Statements” below for additional information about our partial deferred tax valuation allowance.

 

Net Loss

 

Our net loss was $80.3 million for fiscal 2014, an increase of $17.4 million, or 27.7%, from a net loss of  $62.9 million for fiscal 2013. The increase in net loss was primarily attributable to fees and expenses related to our IPO, increased direct store expenses, stock compensation expense, production center start-up costs and income tax provision, partially offset by increased gross profit, lower store opening costs, lower interest expense and the gain on storm-related insurance recovery. Excluding the operations of the Red Hook store in both periods as a result of its temporary closure and business interruption and gain on storm-related insurance recovery our net loss increased $14.2 million to $62.0 million in fiscal 2014 from a net loss of $47.8 million in fiscal 2013.

 

Our adjusted net loss was $10.8 million in fiscal 2014, a decrease of $7.2 million, or 39.9%, from an adjusted net loss of $18.0 million in fiscal 2013.  Excluding Red Hook in both periods as a result of its temporary closure and business interruption and gain on storm-related insurance recovery, our adjusted net loss was $18.6 million in fiscal 2014, a decrease of $10.2 million, or 35.3%, from an adjusted net loss of $28.8 million in fiscal 2013.  We define adjusted net loss as net loss plus transaction expenses, expenses that did not continue after the IPO, and non-cash charges, one-time charges and non-operating expenses which we believe may distort period to period comparisons.

 

 

 

 

55

 


 

 

The following table sets forth a reconciliation to adjusted net loss from net loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Years Ended

 

 

March 30,

 

March 31,

 

 

2014

 

2013

 

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

Net Sales

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

Net loss

 

$

(80,280)

 

(10.3)

%

 

$

(62,868)

 

(9.5)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Management agreement termination

 

 

9,200 

 

1.2 

 

 

 

 —

 

 —

 

Contractual IPO bonuses

 

 

8,105 

 

1.0 

 

 

 

 —

 

 —

 

Other IPO-related expenses

 

 

795 

 

0.1 

 

 

 

3,058 

 

0.4 

 

IPO transaction expenses

 

 

18,100 

 

2.3 

 

 

 

3,058 

 

0.4 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management fees

 

 

877 

 

0.1 

 

 

 

3,509 

 

0.5 

 

Financing transaction expenses

 

 

330 

 

 —

 

 

 

6,196 

 

0.8 

 

Professional services

 

 

2,278 

 

0.3 

 

 

 

1,080 

 

0.1 

 

Severance

 

 

3,544 

 

0.5 

 

 

 

958 

 

0.1 

 

Non-operating expenses

 

 

715 

 

0.1 

 

 

 

1,215 

 

0.2 

 

Non-cash interest

 

 

5,017 

 

0.6 

 

 

 

2,915 

 

0.4 

 

Equity compensation charge

 

 

11,020 

 

1.4 

 

 

 

109 

 

 —

 

Income tax provision

 

 

29,154 

 

3.8 

 

 

 

25,809 

 

3.3 

 

Gain on storm-related insurance recovery

 

 

(3,089)

 

(0.4)

 

 

 

 —

 

 —

 

Foundation funding

 

 

1,500 

 

0.2 

 

 

 

 —

 

 —

 

Adjusted net loss

 

$

(10,834)

 

(1.4)

%

 

$

(18,019)

 

(3.7)

%

 

Liquidity and Capital Resources

 

Overview

 

Our primary sources of liquidity are cash generated from operations, proceeds from our IPO and borrowings under our senior credit facility. Our primary uses of cash are purchases of merchandise inventories, operating expenses, capital expenditures, primarily for opening new stores and infrastructure, and debt service. We believe that the cash generated from operations, together with the borrowing availability under our senior credit facility, will be sufficient to meet our normal working capital needs for at least the next twelve months, including investments made, and expenses incurred, in connection with opening new stores. Our ability to continue to fund these items may be affected by general economic, competitive and other factors, many of which are outside of our control. If our future cash flow from operations and other capital resources are insufficient to fund our liquidity needs, we may be forced to reduce or delay our expected new store openings, sell assets, obtain additional debt or equity capital or refinance all or a portion of our debt. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or debit card transactions, within a few business days of the related sale.

 

At March 29, 2015, we had $36.3 million in cash and cash equivalents and $8.0 million in borrowing availability pursuant to our senior credit facility; however, we are obligated to issue a $6.0 million letter of credit to the landlord under our new Brooklyn lease by no later than August 1, 2015.  We were in compliance with all applicable affirmative, negative and financial covenants under the 2013 Senior Credit Facility as of March 29, 2015. Our senior credit facility is discussed below under “—Senior Credit Facility”.  

 

In February 2013, we entered into a new $315 million senior credit facility and in connection with the new senior credit facility we established new levels for our maximum total leverage ratio financial covenant.  Although our recent operating performance has improved, our profitability has been below our expectations at the time that the financial covenant levels were established, and if our financial performance does not continue to improve, it is possible that we will not meet the maximum total leverage ratio financial covenant at some point within the next twelve months. In the event of a covenant violation that remains uncured, the lenders have the right to declare all outstanding debt under the 2013 Senior Credit Facility immediately due and payable.  We have the ability to exercise equity cure rights, which allows for the issuance of additional equity and for the proceeds to be treated as EBITDA for purposes of the covenant, subject to certain restrictions, including that the amount of equity that can be used as EBITDA cannot exceed the EBITDA shortfall, the proceeds must be used to repay debt, and the equity cure can only be used twice within a four quarter period and only four times during the term of the loan.

 

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Although we believe we have sufficient liquidity and capital resources to meet our current operating requirements and expansion plans, we may elect to pursue additional expansion opportunities within the next year that could require additional debt or equity financing. If we are unable to secure additional financing at favorable terms in order to pursue such additional expansion opportunities, our ability to pursue such opportunities could be materially adversely affected.

 

A summary of our operating, investing and financing activities is shown in the following table: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Years Ended

 

 

March 29,

 

 

March 30,

 

 

March 31,

 

    

2015

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

Net cash provided by (used in) operating activities

 

$

14,039 

 

$

1,244 

 

$

(2,766)

Net cash used in investing activities

 

 

(33,467)

 

 

(39,503)

 

 

(54,945)

Net cash (used in) provided by financing activities

 

 

(3,010)

 

 

75,336 

 

 

49,262 

Net (decrease) increase in cash and cash equivalents

 

$

(22,438)

 

$

37,077 

 

$

(8,449)

 

Operating Activities

 

Net cash provided by operating activities consists primarily of net loss adjusted for non-cash items, including depreciation and amortization, stock compensation and changes in deferred income taxes and the effect of working capital changes.

 

We had cash provided by operating activities of $14.0 million during fiscal 2015 compared to cash provided by operating activities of $1.2 million during fiscal 2014 while our operating activities used cash of $2.8 million in fiscal 2013. The increase in cash provided by operating activities is primarily due to expenses incurred during fiscal 2014 related to our IPO of $18.1 million, partially offset in fiscal 2014 by decreased working capital needs. Net cash used in operations in fiscal 2013 was primarily due to the one-time costs associated with the refinancing of our debt in August 2012 and February 2013, increased working capital needs, primarily related to new store openings and losses associated with damage resulting from Hurricane Sandy for which we had a receivable, and an increase in our net loss.

 

Investing Activities

 

Net cash used in investing activities consists primarily of capital expenditures for opening new stores and infrastructure, as well as investments in information technology and merchandising enhancements.

 

We made capital investments of $33.5 million in fiscal 2015, of which $10.9 million was in connection with the one new store we opened during the period, $14.6 million was in connection with the new production facility and $1.4 million was in connection with the store in the TriBeCa neighborhood of New York City, which has not yet opened, and approximately $1.6 million for the acquisition of a liquor license which allowed us to open our fourth Wine & Spirits location in Paramus, New Jersey.  The remaining approximate $5.0 million of capital investments was for merchandising initiatives, equipment upgrades and enhancements to existing stores. 

 

We made capital investments of $43.9 million in fiscal 2014, of which $24.8 million was in connection with the two stores we opened in the period, $2.3 million was in connection with the Lake Grove store we opened in July 2014 and $7.7 million was in connection with our new centralized production facility. The remaining approximately $9.1 million of capital investments in this period was for merchandising initiatives and equipment upgrades and enhancements to existing stores.  Capital investments in fiscal 2014 were partially offset by insurance proceeds related to property losses of $4.4 million.

 

We made capital investments of $58.3 million in fiscal 2013, of which $41.9 million was in connection with the three stores (one of which included an integrated Fairway Wines & Spirits location) we opened in the period, $8.1 million related to re-opening Red Hook, $1.3 million was in connection with the two stores we opened in fiscal 2013 and approximately $0.4 million for the acquisition of a liquor license which allowed us to open our third Wine & Spirits location in Woodland Park, New Jersey.  The remaining approximately $6.6 million of capital investments in this period was for merchandising initiatives and equipment upgrades and enhancements to existing stores.  Capital investments in fiscal 2013 were partially offset by insurance proceeds related to property losses of $3.4 million.

 

We plan to spend approximately $20 million to $25 million on capital investments during the fiscal year ending April 3, 2016, primarily related to the new store we plan to open in fiscal 2016 and equipment upgrades and enhancements at existing stores.

 

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Financing Activities

 

Cash flows from financing activities consists principally of borrowings and payments under our senior credit facility, and proceeds from the issuance of capital stock, net of equity issuance costs. We currently do not intend to pay cash dividends on our common stock.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Years Ended

 

March 29,

 

March 30,

 

March 31,

 

2015

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

(in thousands)

Payments on long-term debt

$

(2,750)

 

$

(2,750)

 

$

(476,146)

Cash settlement of vested equity awards

 

(260)

 

 

 —

 

 

 —

Proceeds from long-term debt, net of issuance costs

 

 —

 

 

 —

 

 

526,908 

Repurchase of treasury stock

 

 —

 

 

 —

 

 

(1,500)

Proceeds from issuance of common stock

 

 —

 

 

158,821 

 

 

 —

Cash dividends on preferred stock

 

 —

 

 

(76,818)

 

 

 —

Issuance costs for debt repricing

 

 —

 

 

(3,917)

 

 

 —

Net cash (used in) provided by financing activities

$

(3,010)

 

$

75,336 

 

$

49,262 

 

Financing activities used $3.0 million of cash during fiscal 2015 and provided $75.3 million and $49.3 million during fiscal 2014 and fiscal 2013, respectively. 

 

In February 2013, we entered into a new $315 million senior credit facility, which was treated as a debt modification for accounting purposes, that reduced the interest rate we were paying under our August 2012 senior credit facility. In March 2013, we repaid our outstanding subordinated promissory note in the aggregate principal amount of $7.3 million, together with all accrued deferred interest aggregating $440,000, in full.  In May 2013, we amended the February 2013 senior credit facility to further reduce the interest rate we pay under that facility, which reduced our annualized cash interest payments by approximately $4.8 million. The fees and expenses incurred in connection with the amendment were recovered through reduced interest payments by the end of fiscal 2014.

 

On April 22, 2013, we completed our IPO of 15,697,500 shares of our common stock at a price of $13.00 per share, which included 13,407,632 new shares sold by Fairway and the sale of 2,289,868 shares by existing stockholders (including 2,047,500 sold pursuant to the underwriters’ exercise of their over-allotment option). We received approximately $158.8 million in net proceeds from the IPO after deducting the underwriting discount and expenses related to our IPO. We used the net proceeds that we received from the IPO to (i) pay accrued but unpaid dividends on our Series A preferred stock totaling approximately $19.1 million, (ii) pay accrued but unpaid dividends on our Series B preferred stock totaling approximately $57.7 million, (iii) pay $9.2 million to an affiliate of Sterling Investment Partners in connection with the termination of our management agreement with such affiliate and (iv) pay contractual initial public offering bonuses to certain members of our management totaling approximately $8.1 million. During fiscal 2014 and the thirteen weeks ended June 29, 2014, we used the remaining $64.7 million of the net proceeds as follows: $15.4 million for capital expenditures and pre-opening costs in connection with our new store in the Chelsea neighborhood of Manhattan, which opened in July 2013, approximately $17.9 million for capital expenditures and pre-opening costs in connection with the store we opened in October 2013 in Nanuet, NY, approximately $6.1 million for capital expenditures in connection with the store we opened in Lake Grove, NY in July 2014, approximately $8.8 million in connection with capital expenditures in our other stores and approximately $16.5 million in connection with capital expenditures and start-up costs at our new production facility.  We did not receive any of the proceeds from the sale of shares by the selling stockholders. 

 

Senior Credit Facility

 

In February 2013, we and our wholly-owned subsidiary Fairway Group Acquisition Company, as the borrower, entered into a senior secured credit facility consisting of a $275 million term loan (the “Term Facility”) and a $40 million revolving credit facility, which includes a $40 million letter of credit subfacility (the “Revolving Facility” and together with the Term Facility, the “Credit Facility”), with the Term Facility maturing in August 2018 and the Revolving Facility maturing in August 2017. We used the proceeds from the Term Facility to repay the $264.5 million of outstanding borrowings (including accrued interest) under our prior senior credit facility, pay fees and expenses and provide us with $3.5 million to repay our outstanding subordinated note, which we repaid in March 2013. In May 2013, we amended the February 2013 senior credit facility to further reduce the interest rate we pay under the Credit Facility.

 

Borrowings under the Credit Facility bear interest, at our option, at (i) adjusted LIBOR (subject to a 1.0% floor) plus 4.0% or (ii) an alternate base rate plus 3.0%. The 4.0% and 3.0% margins will each be reduced by 50 basis points at any time when our public

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corporate family rating from Moody’s Investor Services Inc. is B2 or higher and our public corporate rating from Standard & Poors rating service is B or higher, in each case with a stable outlook, and as long as certain events of default have not occurred. In addition, there is a fee payable quarterly in an amount equal to 1% per annum of the undrawn portion of the Revolving Facility, calculated based on a 360-day year. Interest is payable quarterly in the case of base rate loans and on maturity dates or every three months, whichever is shorter, in the case of adjusted LIBOR loans.

 

All of the borrower’s obligations under the Credit Facility are unconditionally guaranteed (the “Guarantees”) by us and each of our direct and indirect subsidiaries (other than the borrower and any future unrestricted subsidiaries as we may designate, at our discretion, from time to time) (the “Guarantors”). Additionally, the Credit Facility and the Guarantees are secured by a first-priority perfected security interest in substantially all present and future assets of the borrower and each Guarantor, including accounts receivable, equipment, inventory, general intangibles, leases, intellectual property, investment property and intercompany notes among Guarantors.

 

Mandatory prepayments under the Credit Facility are required with (i) 50% of adjusted excess cash flow (which percentage will decrease to 25% upon achievement and maintenance of a leverage ratio of less than 5.0:1.0, and to 0% upon achievement and maintenance of a leverage ratio of less than 4.0:1.0); (ii) 100% of the net cash proceeds of assets sales or other dispositions of property by us and our restricted subsidiaries (subject to certain exceptions and reinvestment provisions); and (iii) 100% of the net cash proceeds of issuances, offerings or placements of debt obligations (subject to certain exceptions). In addition, the Credit Facility required that by May 15, 2013, we either fully repay our outstanding subordinated note or make a $7.7 million repayment of the outstanding term loan.  On March 7, 2013, we repaid in full our outstanding subordinated promissory note in the aggregate principal amount of $7.3 million, together with all accrued interest aggregating $440,000.

 

The Credit Facility contains customary affirmative covenants, including (i) maintenance of legal existence and compliance with laws and regulations; (ii) delivery of consolidated financial statements and other information; (iii) maintenance of properties in good working order; (iv) payment of taxes; (v) delivery of notices of defaults, litigation, ERISA events and material adverse changes; (vi) maintenance of adequate insurance; and (vii) inspection of books and records.

 

The Credit Facility also contains customary negative covenants, including restrictions on (i) the incurrence of additional debt; (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) dividends on, and redemptions of, equity interests and other restricted payments, including dividends and distributions to the issuer by its subsidiaries; (vii) transactions with affiliates; (viii) changes in the business conducted by us; (ix) payment or amendment of subordinated debt and organizational documents; and (x) maximum capital expenditures. We are also required to comply with a maximum total leverage ratio financial covenant.

 

Events of default under the Credit Facility include:

 

·

failure to pay principal, interest, fees or other amounts under the Credit Facility when due, taking into account any applicable grace period;

·

any representation or warranty proving to have been incorrect in any material respect when made;

·

failure to perform or observe covenants or other terms of the Credit Facility subject to certain grace periods;

·

a cross-default and cross-acceleration with certain other debt;

·

bankruptcy events;

·

a change in control, which includes any person other than Sterling Investment Partners owning, directly or indirectly, beneficially or of record, shares representing more than 35% of the voting power of our outstanding common stock or a majority of our directors being persons who were not nominated by the board or appointed by directors so nominated;

·

certain defaults under ERISA; and

·

the invalidity or impairment of any security interest.

 

The foregoing is a brief summary of the material terms of the Credit Facility, and is qualified in its entirety by reference to the Credit Facility filed as an exhibit to this Annual Report on Form 10-K.

 

See Note 6 to our financial statements found under “Item 8—Financial Statements” below for information regarding our prior senior credit facilities.

 

Subordinated Note

 

In May 2011, we sold to Mr. Howard Glickberg, a Company director and then-executive officer, a subordinated promissory note in the aggregate principal amount of $7.3 million. This note bore interest at a rate of 12% per annum, of which 10% was paid in

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cash quarterly and 2% was deferred until maturity. The maturity date of the note was March 3, 2018. In March 2013, we repaid this note, including all accrued deferred interest, in full with a portion of the proceeds from our 2013 senior credit facility.

 

Contractual Obligations

 

The following table summarizes our contractual obligations as of March 29, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment by period

 

 

 

 

Less than 1

 

1 - 3

 

3 - 5

 

More than 5

 

 

Total

 

year

 

years

 

years

 

years

 

 

(dollars in thousands)

Long-term debt obligations (1)

 

$

268,813 

 

$

2,750 

 

$

5,500 

 

$

260,563 

 

$

 —

Estimated interest on long-term debt obligations (2)

 

 

49,006 

 

 

15,277 

 

 

28,667 

 

 

5,062 

 

 

 —

Operating lease obligations (3)

 

 

780,724 

 

 

38,917 

 

 

76,295 

 

 

75,444 

 

 

590,068 

Employment agreements

 

 

4,349 

 

 

3,702 

 

 

647 

 

 

 —

 

 

 —

Total

 

$

1,102,892 

 

$

60,646 

 

$

111,109 

 

$

341,069 

 

$

590,068 

 


(1)

Reflects the gross outstanding balance of our $315.0 million 2013 senior credit facility (including our $40 million letter of credit sub-facility), not reduced by the unamortized discount of $11.7 million. Does not include $32.0 million of outstanding letters of credit at March 29, 2015 under our senior credit facility. For a more detailed description of our senior credit facility, see “—Senior Credit Facility” and Note 6 to our financial statements found under “Item 8—Financial Statements” below.

 

(2)

For the purposes of this table, we have estimated interest expense to be paid during the remaining term of our senior credit facility using the interest rate as of March 29, 2015. Our actual cash payments for interest on the senior credit facility will fluctuate as the outstanding balance changes with our cash needs and the LIBOR rate fluctuates. For a more detailed description of the interest requirement for our long-term debt, see “—Senior Credit Facility” and Note 6 to our financial statements found under “Item 8—Financial Statements” below. A one percentage point increase in LIBOR above the 1.0% floor would cause an increase to interest expense of $2.8 million for the “less than 1 year” period, $5.3 million for the “1 - 3 years” period and $1.0 million for the “3 - 5 years”.

 

(3)

Represents the minimum lease payments due under our operating leases, excluding maintenance, insurance and taxes related to our operating lease obligations, which combined represented approximately 21.9% of our minimum lease obligations for fiscal 2015.  The minimum lease payments do not reflect the fair market value reset provisions in the leases for certain of our stores. For purposes of this table, we have assumed that we begin to pay rent on our TriBeCa store in May 2015.  Does not include leases for two stores for which we do not yet have possession.  For a more detailed description of our operating leases, see Note 9 to our financial statements found under “Item 8—Financial Statements” below.

 

In May 2015 we entered into an agreement terminating our lease of a site in the new Hudson Yards development in west midtown Manhattan where we had expected to open a store in late calendar 2015 or early calendar 2016.  In connection with the lease termination, we has negotiated a limited, conditional right of first negotiation if the developer determines to include a supermarket in the second phase of the Hudson Yards development.  We will pay the landlord a total of $3.5 million in connection with the lease termination.

 

We periodically make other commitments and become subject to other contractual obligations that we believe to be routine in nature and incidental to the operation of our business. We believe that such routine commitments and contractual obligations do not have a material impact on our business, financial condition or results of operations.

 

Off-Balance Sheet Arrangements

 

We are not party to any off-balance sheet arrangements.

 

Multiemployer Plan

 

We are a party to one underfunded multiemployer pension plan on behalf of our union-affiliated employees. This underfunding has decreased in part due to higher returns on plan assets. The unfunded liabilities of this plan may result in increased future payments by us and other participating employers. Going forward, our required contributions to this multiemployer plan could increase as a result of many factors, including the outcome of collective bargaining with the unions, actions taken by trustees who manage the plan, government regulations, the actual return on assets held in the plan and the payment of a withdrawal liability if we

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choose to exit a plan. The cost per plan member is scheduled to increase by 3.5% on January 1, 2016; we do not expect an increase in cost per participant in calendar 2017.  Our risk of future increased payments may be greater if other participating employers withdraw from the plan and are not able to pay the total liability assessed as a result of such withdrawal, or if the pension plan adopts surcharges and/or increased pension contributions as part of a rehabilitation plan. For a more detailed description of this underfunded plan, see Note 11 to our financial statements found under “Item 8—Financial Statements” below.

 

Critical Accounting Policies and Estimates

 

The preparation of our financial statements in conformity with US 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 consolidated 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.

 

Critical accounting policies reflect material judgment and assumptions and may result in materially different results using different assumptions or conditions.  The following critical accounting polices require us to make estimates, assumptions and judgments: merchandise inventories, goodwill and other intangible assets, impairment of other long-lived assets, income taxes and stock-based compensation.  For a detailed discussion of accounting policies, please refer to the notes to our consolidated financial statements found under “Item 8 – Financial Statements” below.

 

Merchandise Inventories

 

Perishable inventories are stated at the lower of cost (first in, first out) or market.  Non-perishable inventories are stated principally at the lower of cost or market, with cost determined under the retail method, which approximates average cost.  Under the retail method, the valuation of inventories at cost and the resulting gross margins are determined by applying a cost-to-retail ratio for various groupings of similar items to the retail value of inventories.  Inherent in the retail inventory method calculations are certain management judgments and estimates which could impact the ending inventory valuation at cost as well as the resulting gross margins.

 

Goodwill and Other Intangible Assets

 

We account for goodwill and other intangible assets in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 350 — Intangibles — Goodwill and Other.  Accordingly, goodwill and identifiable intangible assets with indefinite lives are not amortized, but instead are subject to annual testing for impairment.

 

Our annual goodwill impairment test is conducted on the first day of the fourth quarter of each fiscal year and interim evaluations are performed when it is determined that events or changes in circumstances exist that would more likely than not reduce the fair value of its goodwill below its carrying value.  During the second quarter of fiscal 2015, due to a continued decline in the market price of the Company’s stock and revisions in expected operating performance, it was determined that such events and circumstances existed, which would require an interim evaluation of goodwill for impairment.  As a result of these developments, the Company performed an interim goodwill impairment test as of September 28, 2014.

 

Our  annual goodwill impairment tests performed as of December 30, 2013 and December 29, 2014 were performed using the two-step goodwill impairment analysis.  Step 1 involves a comparison of the fair value of the Company’s single reporting unit to its carrying value.  If the fair value of the reporting unit is greater than its carrying amount, there is no requirement to perform Step 2 of the impairment test, and there is no impairment charge recorded.  If the reporting unit’s carrying value exceeds its fair value, the second step must be performed to measure the amount of impairment, if any.  Step 2 calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, from the fair value of the reporting unit as determined in Step 1.  The implied fair value of goodwill is then compared to the carrying value of goodwill.  If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized equal to the difference

 

Our detailed impairment analysis involves the use of discounted cash flow models and other significant estimates used in determining fair value.  Significant management judgment is necessary to evaluate the impact of operating and macroeconomic changes on existing and forecasted results.  Determining market values using a discounted cash flow method requires that we make significant estimates and assumptions, including long-term projections of cash flows, market conditions and appropriate market rates.  Our judgments are based on historical experience, current market trends and other information.  In estimating future cash flows, we rely on internally generated forecasts for operating profits and cash flows, including capital expenditures.  Critical assumptions include projected comparable store sales growth, timing and number of new store openings, gross profit rates, general and administrative expenses, direct store expenses, capital expenditures, discount rates and terminal growth rates.  We determine discount rates based on the weighted average cost of capital of a market participant.  Such estimates are derived from our analysis of peer

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companies and considers the industry weighted average return on debt and equity from a market participant perspective.  We also use comparable market earnings multiple data and our Company’s market capitalization in performing our reporting unit valuation.  Factors that could cause us to change our estimates of future cash flows include a prolonged economic crisis, successful efforts by our competitors to gain market share in our core markets, our inability to compete effectively with other retailers or our inability to maintain price competitiveness.  We believe our assumptions are consistent with the plans and estimates used to manage the business; however, if actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be material.

 

For the interim impairment test performed as of September 28, 2014, the recorded value of the Company’s consolidated equity was less than zero and therefore the Company was required to perform a Step 2 analysis to test goodwill for impairment.  Based upon the results of the interim impairment test, it was determined that the implied fair value of our goodwill exceeded its carrying value, and as a result, no impairment was necessary.  Likewise, based upon the results of the annual impairment review, it was determined that the fair value of our indefinite-lived intangible assets and reporting unit substantially exceeded the carrying value of the assets, and no impairment was necessary. 

 

No goodwill or indefinite-lived intangible asset impairment existed as of March 29, 2015 and March 30, 2014.

 

Impairment of Long-Lived Assets

 

ASC 360, “Impairment of Long-Lived-Assets” requires that long-lived assets other than goodwill and other non-amortizable intangibles be reviewed for impairment whenever events such as adjustments to lease terms or other adverse changes in circumstances indicate that the carrying amount of the asset may not be recoverable.  Additionally, on an annual basis, the recoverability of the carrying values of individual stores is evaluated, and during fiscal 2015, at the time of our interim goodwill impairment analysis, described above, a review of long-lived assets for impairment was conducted in connection with that analysis.  In reviewing for impairment, we compare the carrying value of such assets with finite lives to the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition. When the estimated undiscounted future cash flows are less than their carrying amount, an impairment loss is recognized equal to the difference between the assets’ fair value and their carrying value.

 

When reviewing long-lived assets for impairment, we group long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.  For long-lived assets used at store locations, we review for impairment at the individual store level.  These reviews involve comparing the carrying value of all leasehold improvements, machinery and equipment, computer equipment and furniture and fixtures located at each store to the net cash flow projections for each store.  In addition, we conduct separate impairment reviews at other levels as appropriate.  For example, a shared asset, such as a centralized production center, would be evaluated by reference to the aggregate assets, liabilities and projected cash flows of all areas of the business using that shared asset. 

 

Our impairment loss calculations include uncertainty because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including estimating the useful lives of assets and estimating the discount rate inherent in future cash flows, as discussed above under “—Goodwill and Other Intangible Assets”.  If actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we could be exposed to losses that could be material.

 

Based upon our analysis, the estimated future cash flows substantially exceeded the carrying value of the assets, and no impairment existed as of March 29, 2015 and March 30, 2014.

 

Income Taxes

 

We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities for a change in tax rates is recognized in income in the period that includes the enactment date.

 

We record a valuation allowance to reduce the carrying value of our deferred tax assets when it is more likely than not that some or all of the deferred tax assets will expire before the realization of the benefit or that the future deductibility is not probable.  The ultimate realization of the deferred tax assets depends upon our ability to generate sufficient taxable income of the appropriate character in the future.  In forecasting future taxable income, management uses estimates and makes assumptions regarding significant future events, including the timing and number of new store openings, same store sales growth, suburban and urban mix of stores, corporate operating leverage, industry trends and competition.  In evaluating our ability to recover our deferred tax assets, we consider

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and weigh all available positive and negative evidence, including our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income.  When the likelihood of the realization of existing deferred tax assets changes, adjustments to the valuation allowance are charged in the period in which the determination is made.  If our estimates and assumptions change in the future, the Company may be required to record additional valuation allowances against its deferred tax assets, resulting in additional income tax expense in the Company’s Consolidated Statements of Operations, or conversely to reduce the existing valuation allowance resulting in less income tax expense.

 

The Company recorded a partial valuation allowance of $41.0 million against its deferred tax assets in fiscal 2013 and recorded a full valuation allowance of $49.7 against the remainder of its deferred tax assets in fiscal 2014.  In fiscal 2015, the Company recorded additional deferred tax assets and a corresponding valuation allowance of $20.1 million.  The Company does not believe that there is a reasonable likelihood that any portion of the full valuation allowance will be reversed in the Company’s five year planning horizon ending in fiscal 2020 and therefore no sensitivity analysis was deemed necessary.

 

Stock-Based Compensation

 

We measure and recognize stock-based compensation expense for all equity-based payment awards made to employees, including grants of employee stock options and restricted stock units, using estimated fair values. The fair value of the award that is ultimately expected to vest is recognized as compensation expense over the requisite service period. For awards with a change of control condition, an evaluation is made at the grant date and future periods as to the likelihood of the condition being met. Compensation expense is adjusted in future periods for subsequent changes in the expected outcome of the change of control conditions until the vesting date. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

To determine the fair value of equity-based payment awards, valuation methods are used which require management to make assumptions and apply judgments. These assumptions and judgments include estimating the future volatility of our stock price, the expected term of the share-based award, dividend yield, risk-free interest rates, future employee turnover rates and future employee stock option exercise behaviors.  Since there is limited trading history of our common stock, the volatility is estimated based on historical price data of publicly traded companies within our peer group having similar characteristics.  Changes in these assumptions can materially affect the fair value estimate and the amount of compensation expense recognized within individual periods.  To the extent actual results or updated estimates differ from our current estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. Estimates and assumptions are based upon information currently available, including historical experience and current business and economic conditions. However, if actual forfeitures are not consistent with our estimates or assumptions, we may be exposed to changes in stock-based compensation expense that could be material.

 

Stock-based compensation awards that provide for accelerated vesting in the event of a change in control, which we believe in the near future is unlikely, could have a material effect on our results of operations. To date, stock-based compensation awards covering approximately 2.8 million shares of our Class A common stock provide for accelerated vesting in the event of a change in control. Additionally, while our forfeiture assumption represents a particularly sensitive estimate that could affect stock-based compensation expense, we do not believe that it is likely to significantly change in the foreseeable future.

 

Recent Accounting Pronouncements

 

We do not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying consolidated financial statements

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers.  ASU 2014-09 amends existing revenue recognition requirements and provides a new comprehensive revenue recognition model requiring entities to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2016We do not expect this adoption to have a material impact on its financial statements.

 

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.  ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. ASU 2014-15 is effective for the fiscal years ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.  We do not expect this adoption to have a material impact on our financial statements.

 

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs.  ASU 2015-03 amends existing requirements for debt issuance costs, requiring entities to present debt issuance costs related to a recognized debt liability as a

63

 


 

direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  ASU 2015-03 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015, and requires retrospective application.  Early adoption is permitted for financial statements that have not been previously issued.  We do not expect this adoption to have a material impact on our financial statements.

 

In April 2015, the FASB issued ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.  ASU 2015-05 provides clarification about a customer’s accounting for fees paid in a cloud computing arrangement, and provides guidance to customers about whether a cloud computing arrangement includes a software license, and the portion of the arrangement that should be accounted for as a service contract. ASU 2015-05 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015 and may be applied either prospectively or retrospectively, and early adoption is permitted. We do not expect this adoption to have a material impact on our financial statements.

 

JOBS Act

 

The JOBS Act provides that an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to delay the adoption of new or revised accounting pronouncements applicable to public and private companies until such pronouncements become mandatory for private companies. As a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public and private companies.

 

Additionally, as an “emerging growth company”, we are not required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 or (ii) comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis).

 

ITEM 7A—Quantitative and Qualitative Disclosures about Market Risk

 

The Company is exposed to financial market risks associated with interest rates and commodity prices.

 

Interest Rate Risk

 

We have a market risk exposure to changes in interest rates. Borrowings under our existing senior credit facility bear floating interest rates that are tied to LIBOR or alternate base rates and, therefore, our statements of income and our cash flows will be exposed to changes in interest rates. Our senior credit facility provides a floor in the rates under which we are charged interest expense. Currently, the LIBOR rate is below the interest rate floor included in the senior credit facility. Should the LIBOR rate exceed the floor provided in our senior credit facility, we would be required to make higher interest payments than planned. A one percentage point increase in LIBOR above the 1.0% minimum floor would cause an annual increase to the interest expense on our borrowings under our senior credit facility of approximately $2.7 million.

 

Commodity Risk

 

We are subject to volatility in food costs as a result of market risk associated with commodity prices. Although we typically are able to mitigate these cost increases, our ability to continue to do so, either in whole or in part, and may be limited by the competitive environment we operate in. 

 

 

 

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ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Consolidated Financial Statements and Report
of Independent Registered Public Accounting Firm

 

FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

 

March 29, 2015, March 30, 2014 and March 31, 2013

 

TABLE OF CONTENTS

 

 

 

 

 

 

65

 


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Stockholders

Fairway Group Holdings Corp.

 

We have audited the accompanying consolidated balance sheets of Fairway Group Holdings Corp. (a Delaware corporation) and subsidiaries (the “Company”) as of March 29, 2015 and March 30, 2014, and the related consolidated statements of operations, changes in redeemable preferred stock and stockholders’ (deficit) equity, and cash flows for each of the three fiscal years in the period ended March 29, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fairway Group Holdings Corp. and subsidiaries as of March 29, 2015 and March 30, 2014, and the results of their operations and their cash flows for each of the three fiscal years in the period ended March 29, 2015 in conformity with accounting principles generally accepted in the United States of America.

 

 

 

/s/ GRANT THORNTON LLP

 

 

 

Melville, New York

 

May 26, 2015

 

 

 

 

 

 

66

 


 

FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except per share amounts)

March 29, 2015 and March 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 29,

 

March 30,

 

    

2015

    

2014

ASSETS

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

Cash and cash equivalents

 

$

36,362 

 

$

58,800 

Accounts receivable, net

 

 

3,404 

 

 

5,536 

Merchandise inventories

 

 

29,150 

 

 

28,061 

Income tax receivable

 

 

890 

 

 

894 

Prepaid rent

 

 

829 

 

 

892 

Deferred financing fees

 

 

1,745 

 

 

1,751 

Prepaid expenses and other current assets

 

 

3,036 

 

 

2,701 

Total current assets

 

 

75,416 

 

 

98,635 

PROPERTY AND EQUIPMENT, NET

 

 

148,293 

 

 

144,529 

GOODWILL

 

 

95,412 

 

 

95,412 

INTANGIBLE ASSETS, NET

 

 

27,161 

 

 

25,862 

OTHER ASSETS

 

 

12,854 

 

 

15,906 

Total assets

 

$

359,136 

 

$

380,344 

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

Current portion of long-term debt

 

$

2,750 

 

$

2,750 

Accounts payable

 

 

31,872 

 

 

33,971 

Accrued expenses and other

 

 

23,227 

 

 

20,455 

Total current liabilities

 

 

57,849 

 

 

57,176 

NONCURRENT LIABILITIES

 

 

 

 

 

 

Long-term debt, net of current maturities

 

 

254,336 

 

 

253,717 

Deferred income taxes

 

 

28,091 

 

 

24,574 

Other long-term liabilities

 

 

41,463 

 

 

33,334 

Total liabilities

 

 

381,739 

 

 

368,801 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

STOCKHOLDERS’ (DEFICIT) EQUITY

 

 

 

 

 

 

Class A common stock, $0.00001 par value per share, 150,000 shares authorized, 29,366 and 29,108 shares issued at March 29, 2015 and March 30, 2014, respectively

 

 

 —

 

 

 —

Class B common stock, $0.001 par value per share, 31,000 shares authorized, 14,225 shares issued and outstanding at March 29, 2015 and March 30, 2014

 

 

14 

 

 

14 

Treasury stock at cost, 3 shares at March 29, 2015 and March 30, 2014

 

 

 —

 

 

 —

Additional paid-in capital

 

 

382,271 

 

 

369,883 

Accumulated deficit

 

 

(404,888)

 

 

(358,354)

Total stockholders’ (deficit) equity

 

 

(22,603)

 

 

11,543 

Total liabilities and stockholders’ (deficit) equity

 

$

359,136 

 

$

380,344 

 

The accompanying notes are an integral part of these financial statements.

67

 


 

FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except per share amounts)

March 29, 2015,  March 30, 2014 and March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Years Ended

 

  

March 29,

  

March 30,

 

March 31,

 

 

2015

 

2014

 

2013

 

    

 

 

    

 

 

 

 

 

Net sales

 

$

797,555 

 

$

775,986 

 

$

661,244 

Cost of sales and occupancy costs (exclusive of depreciation and amortization)

 

 

547,869 

 

 

524,659 

 

 

445,379 

Gross profit

 

 

249,686 

 

 

251,327 

 

 

215,865 

 

 

 

 

 

 

 

 

 

 

Direct store expenses

 

 

191,313 

 

 

186,537 

 

 

154,753 

General and administrative expenses

 

 

69,604 

 

 

84,094 

 

 

60,192 

Store opening costs

 

 

7,043 

 

 

10,187 

 

 

19,015 

Production center start-up costs

 

 

5,448 

 

 

4,519 

 

 

 —

Loss from operations

 

 

(23,722)

 

 

(34,010)

 

 

(18,095)

 

 

 

 

 

 

 

 

 

 

Business interruption and gain on storm-related insurance recoveries

 

 

 —

 

 

3,089 

 

 

5,000 

Interest expense, net

 

 

(19,289)

 

 

(20,205)

 

 

(23,964)

Loss before income taxes

 

 

(43,011)

 

 

(51,126)

 

 

(37,059)

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

 

(3,523)

 

 

(29,154)

 

 

(25,809)

Net loss

 

 

(46,534)

 

 

(80,280)

 

 

(62,868)

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

 

 —

 

 

(44,130)

 

 

(29,821)

Net loss attributable to common stockholders

 

$

(46,534)

 

$

(124,410)

 

$

(92,689)

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per common share

 

$

(1.07)

 

$

(3.10)

 

$

(7.52)

Weighted average common shares outstanding

 

 

43,440 

 

 

40,166 

 

 

12,326 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

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FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Consolidated Statements of Changes in Redeemable Preferred Stock and Stockholders’ (Deficit) Equity

(In thousands)

Fiscal years ended March 29, 2015,  March 30, 2014 and March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REDEEMABLE PREFERRED STOCK

 

STOCKHOLDERS’ DEFICIT

 

 

Series A

 

Series B

 

 

 

 

Class A

 

Class B

 

Additional 

 

 

 

 

 

 

 

 

 

 

Preferred Stock

 

Preferred Stock

 

 

 

 

Common Stock

 

Common Stock

 

Paid in

 

Treasury Stock

 

Accumulated

 

 

 

 

    

Shares

    

Amount

    

Shares

    

Amount

    

Total

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Shares

    

Amount

    

Deficit

    

Total

Balance at April 2, 2012

 

43 

 

$

73,780 

 

64 

 

$

130,643 

 

$

204,423 

 

12,507 

 

$

 —

 

 —

 

$

 —

 

$

 —

 

 —

 

$

 —

 

$

(141,364)

 

$

(141,364)

Non-cash stock compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

109 

 

 —

 

 

 —

 

 

 —

 

 

109 

Deemed dividends on preferred stock

 

 —

 

 

10,548 

 

 —

 

 

19,273 

 

 

29,821 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(109)

 

 —

 

 

 —

 

 

(29,712)

 

 

(29,821)

Purchase of treasury stock

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

136 

 

 

(1,500)

 

 

 —

 

 

(1,500)

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(62,868)

 

 

(62,868)

Balance at March 31, 2013

 

43 

 

 

84,328 

 

64 

 

 

149,916 

 

 

234,244 

 

12,507 

 

 

 —

 

 —

 

 

 —

 

 

 —

 

136 

 

 

(1,500)

 

 

(233,944)

 

 

(235,444)

Non-cash stock compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

11,020 

 

 —

 

 

 —

 

 

 —

 

 

11,020 

Deemed dividends on preferred stock

 

 —

 

 

440 

 

 —

 

 

863 

 

 

1,303 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(1,303)

 

 

(1,303)

Exchange of preferred stock for common stock upon consummation of IPO

 

(43)

 

 

(68,572)

 

(64)

 

 

(101,975)

 

 

(170,547)

 

 —

 

 

 —

 

15,504 

 

 

16 

 

 

170,531 

 

 —

 

 

 —

 

 

 —

 

 

170,547 

Incremental dividend (paid in cash)

 

 —

 

 

2,945 

 

 —

 

 

8,873 

 

 

11,818 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(11,818)

 

 

(11,818)

Incremental dividend (at IPO share value)

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

31,009 

 

 —

 

 

 —

 

 

(31,009)

 

 

 —

Preferred stock dividend

 

 —

 

 

(19,141)

 

 —

 

 

(57,677)

 

 

(76,818)

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

New shares issued upon consummation of IPO, net of issuance costs

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

13,408 

 

 

 —

 

 —

 

 

 —

 

 

158,821 

 

 —

 

 

 —

 

 

 —

 

 

158,821 

Conversion of Class B common stock to Class A common stock

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

1,279 

 

 

 —

 

(1,279)

 

 

(2)

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Exercise of warrants to purchase shares of common stock

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

1,794 

 

 

 —

 

 —

 

 

 —

 

 

(1,500)

 

(136)

 

 

1,500 

 

 

 —

 

 

 —

Issuance of stock to directors in lieu of cash compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

Issuance of stock for vested RSUs

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

115 

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

Cash settlement of unvested restricted shares

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(80,280)

 

 

(80,280)

Balance at March 30, 2014

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

29,108 

 

 

 —

 

14,225 

 

 

14 

 

 

369,883 

 

 

 

 —

 

 

(358,354)

 

 

11,543 

Stock compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

12,648 

 

 —

 

 

 —

 

 

 —

 

 

12,648 

Cash settlement of vested equity awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(260)

 

 —

 

 

 —

 

 

 —

 

 

(260)

Issuance of stock for vested RSUs

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

257 

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(46,534)

 

 

(46,534)

Balance at March 29, 2015

 

 —

 

$

 —

 

 —

 

$

 —

 

$

 —

 

29,366 

 

$

 —

 

14,225 

 

$

14 

 

$

382,271 

 

 

$

 —

 

$

(404,888)

 

$

(22,603)

 

The accompanying notes are an integral part of these financial statements.

 

69

 


 

FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

Fiscal years ended March 29, 2015,  March 30, 2014 and March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Years Ended

 

March 29,

  

March 30,

 

March 31,

 

2015

 

2014

 

2013

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net loss

$

(46,534)

 

$

(80,280)

 

$

(62,868)

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

 

 

 

 

 

 

 

 

Deferred income taxes

 

3,512 

 

 

29,270 

 

 

25,798 

Deferred rent

 

8,531 

 

 

9,575 

 

 

9,364 

Depreciation and amortization of property and equipment

 

28,126 

 

 

26,444 

 

 

21,497 

Amortization of intangibles

 

278 

 

 

294 

 

 

279 

Amortization of discount on term loans

 

3,369 

 

 

3,275 

 

 

1,553 

Amortization of deferred financing fees

 

1,751 

 

 

1,742 

 

 

1,362 

Amortization of prepaid rent

 

317 

 

 

318 

 

 

317 

Stock compensation expense

 

13,130 

 

 

11,020 

 

 

109 

Gain on storm-related insurance recoveries

 

 —

 

 

(3,089)

 

 

 —

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

2,132 

 

 

(2,983)

 

 

(270)

Merchandise inventories

 

(1,089)

 

 

(3,302)

 

 

(4,799)

Insurance claims receivable

 

 —

 

 

3,761 

 

 

(5,184)

Prepaid expense and other

 

(260)

 

 

4,919 

 

 

(4,661)

Other assets

 

1,245 

 

 

2,483 

 

 

(1,308)

Accounts payable

 

(2,099)

 

 

(5,428)

 

 

13,383 

Accrued expenses and other

 

2,467 

 

 

2,505 

 

 

2,656 

Other long-term liabilities

 

(837)

 

 

720 

 

 

Net cash provided by (used in) operating activities

 

14,039 

 

 

1,244 

 

 

(2,766)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Capital expenditures

 

(31,890)

 

 

(43,906)

 

 

(57,916)

Acquisition of intangible assets

 

(1,577)

 

 

 —

 

 

(427)

Insurance proceeds

 

 —

 

 

4,403 

 

 

3,398 

Net cash used in investing activities

 

(33,467)

 

 

(39,503)

 

 

(54,945)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from long-term debt, net

 

 —

 

 

 —

 

 

526,908 

Payments on long-term debt

 

(2,750)

 

 

(2,750)

 

 

(476,146)

Repurchase of treasury stock

 

 —

 

 

 —

 

 

(1,500)

Cash settlement of vested equity awards

 

(260)

 

 

 —

 

 

 —

Proceeds from shares issued in initial public offering, net

 

 —

 

 

158,821 

 

 

 —

Cash dividends paid on preferred stock

 

 —

 

 

(76,818)

 

 

 —

Issuance costs from debt re-pricing

 

 —

 

 

(3,917)

 

 

 —

Net cash (used in) provided by financing activities

 

(3,010)

 

 

75,336 

 

 

49,262 

 

 

 

 

 

 

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

(22,438)

 

 

37,077 

 

 

(8,449)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

58,800 

 

 

21,723 

 

 

30,172 

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

36,362 

 

$

58,800 

 

$

21,723 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest, net of capitalized amounts

$

13,984 

 

$

14,954 

 

$

21,514 

Income taxes

$

 

$

 

$

175 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

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FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

1.DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Description of Business and Organization

 

Fairway Group Holdings Corp. was incorporated in the State of Delaware on September 29, 2006 and is controlled by investment funds managed by affiliates of Sterling Investment Partners (collectively, “Sterling”).

 

Fairway Group Holdings Corp. and subsidiaries (the “Company” or “Fairway”) operates in the retail food industry, selling fresh, natural and organic products, prepared foods and hard-to-find specialty and gourmet offerings along with a full assortment of conventional groceries.  The Company operates fifteen stores in the Greater New York metropolitan area, four of which include Fairway Wine & Spirits locations. The Company opened three stores in fiscal 2013: the store in Woodland Park, New Jersey, which opened in June 2012, the store in Westbury, New York, which opened in August 2012 and the store in Kips Bay Manhattan, New York, which opened in December 2012; the Company opened two stores in fiscal 2014: the store in the Chelsea neighborhood of Manhattan, NY, which opened in July 2013, and the store in Nanuet, NY, which opened in October 2013; and the Company opened one store in fiscal 2015 in Lake Grove, New York which opened in July 2014. Seven of the Company’s food stores, which the Company refers to as “urban stores,” are located in New York City and the remainder, which the Company refers to as “suburban stores” are located in New York (outside of New York City), New Jersey and Connecticut. The Company has determined that it has one reportable segment.  Substantially all of the Company’s revenue comes from the sale of items at its retail food stores.

 

On April 12, 2013, the Company amended and restated its certificate of incorporation to increase the number of shares the Company is authorized to issue to 150,000,000 shares of Class A common stock, 31,000,000 shares of Class B common stock and 5,000,000 shares of preferred stock. The amendment and restatement of the certificate of incorporation effected an internal recapitalization pursuant to which the Company effected a 118.58-for-one stock split on its outstanding common stock and reclassified its outstanding common stock into shares of Class A common stock. Accordingly, all common share and per share amounts in these financial statements and the notes thereto have been adjusted to reflect the 118.58-for-one stock split as though it had occurred at the beginning of the initial period presented.

 

On April 22, 2013, the Company completed its initial public offering (“IPO”) of 15,697,500 shares of its Class A common stock at a price of $13.00 per share, which included 13,407,632 new shares sold by Fairway and the sale of 2,289,868 shares by existing stockholders (including 2,047,500 sold pursuant to the underwriters exercise of their over-allotment option). The Company received approximately $158.8 million in net proceeds from the IPO after deducting the underwriting discount and expenses related to the IPO. The Company used the net proceeds that it received from the IPO to (i) pay accrued but unpaid dividends on its Series A preferred stock totaling approximately $19.1 million, (ii) pay accrued but unpaid dividends on its Series B preferred stock totaling approximately $57.7 million, (iii) pay $9.2 million to an affiliate of Sterling in connection with the termination of the Company’s management agreement with such affiliate and (iv) pay contractual initial public offering bonuses to certain members of the Company’s management totaling approximately $8.1 million.  During fiscal 2014 and the first quarter of fiscal 2015, the Company used the remaining approximately $64.7 million of the net proceeds in connection with the opening of three new stores, its centralized production facility and capital expenditures on its other stores.    The Company did not receive any of the proceeds from the sale of shares by the selling stockholders. In connection with the IPO, the Company issued 15,504,296 shares of Class B common stock (of which 33,576 shares automatically converted into 33,576 shares of Class A common stock) in exchange for all outstanding preferred stock and all accrued dividends not paid in cash with the proceeds of the IPO. 

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Fairway Group Holdings Corp. and its wholly-owned subsidiaries.  All material intercompany accounts and transactions have been eliminated in consolidation.

 

Fiscal Year

 

The Company has selected a fiscal year ending on the Sunday closest to March 31.  These financial statements are presented for the fiscal years ended March 29, 2015  (52 weeks) (“fiscal 2015”) March 30, 2014 (52 weeks) (“fiscal 2014”) and March 31, 2013 (52 weeks) (“fiscal 2013”).

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.  Cash and cash equivalents include cash on hand, cash on deposit with banks and receipts from credit and debit card sales

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FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

transactions which settle within a few days.  The amount of credit and debit card sales transactions included within cash and cash equivalents as of March 29, 2015 and March 30, 2014 was approximately $9.1 million.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are composed primarily of vendor rebates from the purchase of goods and are stated at historical cost. Included in accounts receivable are amounts due from employees totaling approximately $56,000 and $112,000 at March 29, 2015 and March 30, 2014, respectively.  Management evaluates accounts receivable to estimate the amount that will not be collected in the future and records the appropriate provision.  The provision for doubtful accounts is recorded as a charge to cost of sales and reduces accounts receivable. 

 

Allowance for doubtful accounts is calculated based on historical experience, vendor credit risk and application of the specific identification method and totaled approximately $1,303,000 and $444,000 at March 29, 2015 and March 30, 2014, respectively.  When a specific account is determined uncollectible, the net recognized receivable is written off.  During fiscal 2015 and fiscal 2014, the Company wrote off $800,000 and $247,000 of accounts receivable balances, respectively.

 

Merchandise Inventories

 

Perishable inventories are stated at the lower of cost (first in, first out) or market. Non-perishable inventories are stated principally at the lower of cost or market, with cost determined under the retail method, which approximates average cost. Under the retail method, the valuation of inventories at cost and resulting gross margins are determined by applying a cost-to-retail ratio for various groupings of similar items to the retail value of inventories.  Inherent in the retail inventory method calculations are certain management judgments and estimates which could impact the ending inventory valuation at cost as well as the resulting gross margins. 

 

Vendor Allowances

 

The Company recognizes vendor allowances including merchandise cost adjustments and merchandise volume related rebate allowances as a reduction of the cost of inventory when earned and as a reduction of cost of sales when the related inventory is sold.

 

Property and Equipment

 

Additions to property and equipment are stated at cost, net of accumulated depreciation.

 

Renewals and improvements that extend the useful lives of property and equipment are capitalized.  Expenditures for maintenance and repairs are expensed as incurred.

 

Depreciation is computed under the straight-line method over the estimated useful lives of the assets.

 

Upon retirement or disposition of property and equipment, the applicable cost and accumulated depreciation are removed from the accounts and any resulting gains or losses are included in the results of operations.  The estimated useful lives of property and equipment are as follows:

 

 

 

 

 

 

 

 

 

Equipment

 

3 — 7 years

Furniture and fixtures

 

5 years

Leasehold improvements

 

The shorter of 10 years or the remaining term of the lease

 

The Company capitalizes interest on borrowings used to fund construction in progress during the period in which expenditures have been made, activities are in progress to prepare the asset for its intended use and actual interest costs are being incurred.

 

Asset Retirement Obligations

 

Asset retirement obligations (“ARO”) are related to the Company’s commitment, if any, to return leased facilities to the landlord in an agreed upon condition. This may require actions ranging from cleaning to removal or reversal of certain leasehold improvements. At such time that an ARO is identified, usually at lease inception or if circumstances change that impact the Company’s estimated future costs, the obligation is recorded as a liability with an offsetting capital asset based upon the estimated fair market value of costs to meet the commitment.  Over the life of the lease term, the liability is accreted to meet the actual amount of the

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FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

obligation, and the recorded asset is depreciated; accretion and depreciation related to ARO for store leases, when recorded, are included in occupancy costs.

 

The Company has evaluated the provisions of its leases and has determined that there is no ARO as of March 29, 2015 and March 30, 2014.

 

Goodwill and Other Intangibles Assets

 

The Company accounts for goodwill and other intangible assets in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 350, Intangibles — Goodwill and Other.  Accordingly, goodwill and identifiable intangible assets with indefinite lives are not amortized, but instead are subject to annual testing for impairment.

 

The Company’s annual goodwill impairment test is conducted on the first day of the fourth quarter of each fiscal year and interim evaluations are performed when it is determined that events or changes in circumstances exist that would more likely than not reduce the fair value of its goodwill below its carrying value.  During the second quarter of fiscal 2015, due to a continued decline in the market price of the Company’s stock and revisions in expected operating performance, it was determined that such events and circumstances existed, which would require an interim evaluation of goodwill for impairment.  As a result of these developments, the Company performed an interim goodwill impairment test as of September 28, 2014.

 

The Company’s annual goodwill impairment tests performed as of December 30, 2013 and December 29, 2014 were performed using the two-step goodwill impairment analysis.  Step 1 involves a comparison of the fair value of the Company’s single reporting unit to its carrying value.  If the fair value of the reporting unit is greater than its carrying amount, there is no requirement to perform Step 2 of the impairment test, and there is no impairment charge recorded.  If the reporting unit’s carrying value exceeds its fair value, the second step must be performed to measure the amount of impairment, if any.  Step 2 calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, from the fair value of the reporting unit as determined in Step 1.  The implied fair value of goodwill is then compared to the carrying value of goodwill.  If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized equal to the difference. 

 

For the annual impairment test performed as of December 30, 2013, the carrying value was based on the recorded value of the Company’s consolidated equity, and fair value was determined by using a weighted combination of a market approach (weighted 20%) and income approach (weighted 80%), as this combination was deemed to be the most indicative of the Company’s fair value due to the fact that there was significant information known to the Company in performing the analysis that was not known to the public. 

 

For the interim impairment test performed as of September 28, 2014, the recorded value of the Company’s consolidated equity was less than zero and therefore the Company was required to perform a Step 2 analysis to test goodwill for impairment.  Under Step 2, the Company determined the implied fair value of its goodwill by deducting the fair value of its tangible and intangible assets, excluding goodwill, from the fair value of its reporting unitThe fair value of the Company’s tangible and intangible assets was based on market participant assumptions including estimates of expected replacement value, quoted market prices of comparable assets and obligations, and expected future cash flows, among other things, which require significant judgment.  Although management believes these estimates and assumptions are reasonable, they are inherently subject to a high degree of uncertainty.  Based on the interim impairment test, the Company concluded that the estimated implied fair value of the Company’s goodwill exceeded its recorded value; as such, no impairment was required to be recorded as of September 28, 2014.

 

For the annual impairment test performed as of December 29, 2014, the reporting unit carrying and fair values used to perform Step 1 of the impairment analysis were based on the value of the Company’s total invested capital, which considers the value of the Company’s debt as well as its equity.  In determining fair value of the reporting unit for both impairment tests performed during fiscal 2015, management used a weighted combination of several market approaches (weighted 60%, collectively) and an income approach (weighted 40%).  This combination was considered to be most representative of an orderly transaction between market participants in consideration of management’s assessment of the information available to the public at the time the analysis was performed.  Management believes the changes in the methodologies applied in performing the calculations, as described above, are preferable in the circumstances because they provide a better economic indicator of whether a potential impairment of goodwill exists and whether the second step of the goodwill impairment test should be performed.  Such changes were not intended to, nor did they in fact, alter the conclusions of the interim or annual impairment test or their impact on the Company’s financial position.  Based on the results of the annual impairment test, the fair value of the Company’s single reporting unit significantly exceeded the recorded value of its total invested capital as of December 29, 2014. 

 

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FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

Under the market-based approaches utilized in the analyses, the Company utilized the market capitalization of its publicly traded stock, as well as Company-specific metrics and others derived from publicly available industry information to determine earnings multiples and sales multiples that represent an estimate of the fair value of the enterprise.  Under the income approach, the Company determined the fair value based on estimated future cash flows of its reporting unit, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk and the rate of return an investor would expect to earn.  For the purposes of establishing inputs for the fair value calculations described above, the Company made additional key assumptions including the development of long-range financial forecasts (five years) that assume a mixture of organic growth from the existing store base as well as growth from the opening of new stores based on management’s estimate of future market conditions and discount rates ranging from 15.5% to 17.0% that the Company believes adequately represent the estimation risk inherent in the calculation.    Determining the fair value of a reporting unit requires significant judgment and the use of significant estimates and assumptions, including revenue growth rates and expected future operating margins, discount rates, and future market conditions, among others.  The Company believes its assumptions are reasonable; however, there can be no assurance that the Company’s estimates and assumptions made for the purposes of the Company’s goodwill impairment testing will prove to be accurate predictions of the future.  If the Company’s assumptions regarding forecasted revenue or margin growth rates are not achieved, the Company may be required to record goodwill impairment charges in future periods, whether in connection to the Company’s next annual impairment test as of December 28, 2015 or prior to that, if any such change requires testing be performed at an interim date.  It is not possible at this time to determine if any such future impairment charge would result from any testing performed at a future date. 

 

The Company also performed impairment testing on its other indefinite-lived intangible assets as of the date of each of its interim and annual goodwill impairment tests performed during fiscal 2015 and fiscal 2014.  The Company estimates the fair value of these intangible assets using an income approach, based on the relief from royalty method. The forecasted cash flows used in the model contain inherent uncertainties, including significant estimates and assumptions related to growth rates, royalty rates and cost of capital.  Changes in any of the assumptions utilized could affect the fair value of the intangible assets and result in an impairment triggering event.

 

No impairment of goodwill or indefinite-lived intangible assets was identified during fiscal 2015, fiscal 2014, or fiscal 2013As of March 29, 2015, the carrying value of goodwill and other indefinite-lived intangible assets were $95.4 million and $25.6 million, respectively.

 

Impairment of Long-Lived Assets

 

ASC 360, Impairment of Long-Lived Assets requires that long-lived assets other than goodwill and other non-amortizable intangibles be reviewed for impairment whenever events such as adjustments to lease terms or other adverse changes in circumstances indicate that the carrying amount of the asset may not be recoverable.  Additionally, on an annual basis, the recoverability of the carrying values of individual stores is evaluated, and during fiscal 2015, at the time of the Company’s interim goodwill impairment analysis, described above, a review of long-lived assets for impairment was conducted in connection with that analysis.  In reviewing for impairment, the Company compares the carrying value of such assets with finite lives to the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition. When the estimated undiscounted future cash flows are less than their carrying amount, an impairment loss is recognized equal to the difference between the assets’ fair value and their carrying value.

 

When reviewing long-lived assets for impairment, the Company groups long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.  For long-lived assets used at store locations, the review for impairment is done at the individual store level.  These reviews involve comparing the carrying value of all leasehold improvements, machinery and equipment, computer equipment and furniture and fixtures located at each store to the net cash flow projections for each store.  In addition, the Company conducts separate impairment reviews at other levels as appropriate.  For example, a shared asset, such as a centralized production center, would be evaluated by reference to the aggregate assets, liabilities and projected cash flows of all areas of the business using that shared asset. 

 

The Company’s impairment loss calculations include uncertainty because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including estimating the useful lives of assets and estimating the discount rate inherent in future cash flows, as discussed above under “—Goodwill and Other Intangible Assets”.  If actual results are not consistent with the Company’s estimates and assumptions used in estimating future cash flows and asset fair values, the Company could be exposed to losses that could be material.

 

Based upon the Company’s analysis, the estimated future cash flows substantially exceeded the Company’s value of the assets, and no impairment existed as of March 29, 2015 and March 30, 2014.

 

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FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

Deferred Rent

 

The Company leases stores, storage and production facilities and an administrative office under operating leases.  These lease agreements generally include rent escalation clauses, renewal options, rent holidays and incentives.  The Company recognizes scheduled rent increases, incentives and rent holidays on a straight-line basis over the term of the respective leases.

 

Revenue Recognition

 

Revenue is recognized at point of sale which is the time of sale.  All discounts provided to customers by the Company are recorded as reductions of sales at the time of sale.  Net sales exclude sales taxes.  Proceeds from the sale of gift cards are recorded as a liability at the time of sale, and recognized as sales when they are redeemed by the customer. The Company has not applied a gift card breakage rate.

 

Cost of Sales and Occupancy Costs

 

Cost of sales includes the cost of merchandise inventories sold during the period (net of discounts and allowances), distribution and food preparation costs and shipping and handling costs.  The Company receives various rebates from third party vendors in the form of purchase or sales volume discounts.  Purchase volume discounts are calculated based on actual purchase volumes and are recognized as a reduction of cost of sales when the related merchandise is sold.  Occupancy costs include store rental costs and property taxes, exclusive of depreciation or amortization expense.

 

Concentrations of Supplier Risks

 

The Company’s single largest third-party supplier in fiscal 2015,  2014 and 2013 was White Rose, Inc. (“White Rose”) until White Rose was replaced in December 2014, following its bankruptcy.  Under the Company’s agreement with White Rose, the Company was obligated to purchase substantially all of its requirements for specified products, principally conventional grocery, dairy, frozen food and ice cream products that were available from White Rose, for its existing stores.  In December 2014, the Company replaced White Rose with C&S Wholesale Grocers, Inc. (“C&S”), and C&S is now the Company’s largest supplier.  Under the Company’s agreement with C&S, it is obligated to purchase substantially all of its requirements for specified products, principally conventional grocery, dairy, frozen food and ice cream products that are available from C&S, for its existing stores.  Total purchases from White Rose and C&S during fiscal 2015, fiscal 2014 and fiscal 2013 accounted for 15%,  16% and 15%, respectively, of total purchases.  In addition, United Natural Foods, Inc. (“UNFI”), which is the Company’s primary supplier of specified natural and organic products, principally dry grocery, frozen food, vitamins/supplements and health, beauty and wellness, accounted for approximately 10% of its total purchases in fiscal 2015 and approximately 9% of its total purchases in each of fiscal 2014 and 2013. The use of C&S and UNFI gives the Company purchasing power through the volume discounts they receive from manufacturers.

 

Direct Store Expenses

 

Direct store expenses consist of store-level expenses such as salaries and benefit costs for the store work force, supplies, store depreciation and store-specific marketing costs.  Store-level labor costs are generally the largest component of direct store expenses.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of non-store specific employee costs, corporate and marketing expenses (including pre-opening advertising costs), management fees (ending in early fiscal 2014), depreciation and amortization expense as well as other expenses associated with corporate headquarters, and expenses for accounting, information systems, legal, business development, human resources, purchasing and other administrative departments.

 

Advertising

 

Advertising and display costs are expensed as incurred as a component of general and administrative expenses and approximated $4.1 million, $6.6 million and $9.5 million, for fiscal 2015, 2014, and 2013, respectively.  Marketing costs are expensed as incurred as a component of general and administrative expenses and approximated $1.3 million, $1.5 million and $1.2 million for fiscal 2015, 2014 and 2013, respectively

 

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FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

Store Opening Costs

 

Store opening costs include rent expense incurred during construction of new stores and costs related to new location openings, including costs associated with hiring and training personnel, supplies and other miscellaneous costs.  Rent expense is recognized upon taking possession of a store site, which generally ranges from three to six months before the opening of a store, although in some situations, the possession period can exceed twelve months.  Store opening costs are expensed as incurred.

 

Production Center Start-up Costs

 

Production center start-up costs include rent expense incurred during construction of a new facility and costs related to the location opening, including costs associated with hiring and training personnel, supplies and other miscellaneous costs. Rent expense is recognized upon receiving possession of the site. Production center start-up costs are expensed as incurred.

 

Concentrations of Credit Risks

 

The Company’s customers are consumers located primarily in the New York metropolitan area who purchase products at the Company’s stores.  Financial instruments which potentially subject the Company to concentrations of credit risk consist of accounts receivable.  As of March 29, 2015 and March 30, 2014, there were no significant concentrations of accounts receivable or related credit risk.

 

The Company maintains cash balances at financial institutions.  Accounts at U.S. financial institutions are insured by the Federal Deposit Insurance Corporation up to $250,000.  At March 29, 2015 and March 30, 2014, the balances exceeding this insurable limit approximated $35.0 million and $54.1 million, respectively. 

 

Approximately 16% and 15% of accounts payable at March 29, 2015 and March 30, 2014, respectively, is due to one supplier.

 

Fair Value of Financial Instruments

 

The Company applies the FASB guidance for “Fair Value Measurements.”  Under this standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. 

 

In determining fair value, the Company uses various valuation approaches.  The hierarchy of those valuation approaches is broken down into three levels based on the reliability of inputs as follows:

 

Level 1 -

Inputs that are quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.  An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.  The valuation under this approach does not entail a significant degree of judgment.

 

 

Level 2 -

Inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly.  Level 2 inputs include: quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves observable at commonly quoted intervals or current market) and contractual prices for the underlying financial instrument, as well as other relevant economic measures.

 

 

Level 3 -

Inputs that are unobservable for the asset or liability.  Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

 

The Company’s non-financial assets measured at fair value on a non-recurring basis include goodwill and intangible assets.  To estimate fair value for such assets, the Company uses techniques including discounted expected future cash flows (“DCF”) (Level 3 input).  A discounted cash flow analysis calculates the fair value by estimating the after-tax cash flows attributable to a reporting unit or asset and then discounting the after-tax cash flows to a present value using a risk-adjusted discount rate.  Assumptions used in the DCF require the exercise of significant judgment, including judgment about appropriate discount rates and terminal values, growth rates and the amount and timing of expected future cash flows.

 

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FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair value due to short term maturities as of March 29, 2015 and March 30, 2014.  The long-term debt (Note 6 - Long-Term Debt) approximated fair value as of March 29, 2015 and March 30, 2014, because it has variable interest rates which reflect market changes to interest rates and contain variable risk premiums based on current market conditions.

 

Deferred Financing Fees

 

The Company incurred approximately $0.5 million and $3.4 million of financing fees in fiscal 2014 and 2013, respectively, in conjunction with the debt refinancing discussed in Note 6.  There were no deferred financing fees incurred in fiscal 2015.  These costs are being deferred and amortized using the effective interest method over the life of the related debt instrument.

 

Stock-Based Compensation

 

The Company measures and recognizes stock-based compensation expense for all equity-based payment awards made to employees, including grants of employee stock options and restricted stock units, using estimated fair values.  The fair value of the award that is ultimately expected to vest is recognized as compensation expense over the requisite service period.  For awards with a change of control condition, an evaluation is made at the grant date and future periods as to the likelihood of the condition being met.  Compensation expense is adjusted in future periods for subsequent changes in the expected outcome of the change of control conditions until the vesting date.  Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

To determine the fair value of equity-based payment awards, valuation methods are used which require management to make assumptions and apply judgments. These assumptions and judgments include estimating the future volatility of the Company’s stock price, the expected term of the share-based award, dividend yield, risk-free interest rates, future employee turnover rates and future employee stock option exercise behaviors.  Since there is limited trading history of the Company’s common stock, the volatility is estimated based on historical price data of publicly traded companies within the Company’s peer group having similar characteristics.  Changes in these assumptions can materially affect the fair value estimate and the amount of compensation expense recognized within individual periods.  To the extent actual results or updated estimates differ from the Company’s current estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. Estimates and assumptions are based upon information currently available, including historical experience and current business and economic conditions. However, if actual results are not consistent with the Company’s estimates or assumptions, the Company may be exposed to changes in stock-based compensation expense that could be material.

 

Stock-based compensation awards that provide for accelerated vesting in the event of a change in control, which the Company believes in the near future is unlikely, could have a material effect on the Company’s results of operations. To date, stock-based compensation awards covering approximately 2.8 million shares of our Class A common stock provide for accelerated vesting in the event of a change in control. Additionally, while the Company’s forfeiture assumption represents a particularly sensitive estimate that could affect stock-based compensation expense, the Company does not believe that it is likely to significantly change in the foreseeable future. 

 

Insurance Recoveries

 

Insurance recoveries related to impairment losses recorded and other recoverable expenses are recognized up to the amount of the related loss or expense in the period that recoveries are deemed probable.  Insurance recoveries under business interruption coverage and insurance gains in excess of amounts written off related to impaired merchandise inventories and property and equipment are recognized when they are realizable and all contingencies have been resolved.  Refer to Note 12 to these financial statements for additional discussion.

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities for a change in tax rates is recognized in income in the period that includes the enactment date.

 

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FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

A valuation allowance is recorded to reduce the carrying value of deferred tax assets when it is more likely than not that some or all of the deferred tax assets will expire before the realization of the benefit or that the future deductibility is not probable.  The ultimate realization of the deferred tax assets depends upon the Company’s ability to generate sufficient taxable income of the appropriate character in the future.  In forecasting future taxable income, management uses estimates and makes assumptions regarding significant future events, including the timing and number of new store openings, same store sales growth, suburban and urban mix of stores, corporate operating leverage, industry trends and competition.  In evaluating the recoverability of deferred tax assets, the Company considers and weighs all available positive and negative evidence, including past operating results, the existence of cumulative losses in the most recent years and the forecast of future taxable income.  When the likelihood of the realization of existing deferred tax assets changes, adjustments to the valuation allowance are charged in the period in which the determination is made.  If estimates and assumptions change in the future, the Company may be required to record additional valuation allowances against its deferred tax assets, resulting in additional income tax expense in the Company’s Consolidated Statements of Operations, or conversely to reduce the existing valuation allowance resulting in less income tax expense.

 

The Company may recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained by the taxing authorities based on technical merits of the position.  The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement.  Significant accounting judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities.  The Company believes that its tax positions are consistent with applicable tax law, but certain positions may be challenged by taxing authorities.  In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain.  In addition, the Company is subject to periodic audits and examinations by the Internal Revenue Service (“IRS”) and other state and local taxing authorities.  Although management believes that the estimates are reasonable, actual results could differ from these estimates.

 

The Company does not have any material uncertain tax positions for fiscal 2015, 2014 and 2013.

 

The Company recorded a partial valuation allowance of $41.0 million against its deferred tax assets in fiscal 2013 and recorded a full valuation allowance against the remainder of its deferred tax assets in fiscal 2014.  The Company does not believe that there is a reasonable likelihood that any portion of the valuation allowance will be reversed in the Company’s five year planning horizon ending in fiscal 2020 and therefore no sensitivity analysis was deemed necessary. 

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenue and expenses during the reporting period.  Actual results could differ from those estimates.  Significant estimates include net realizable value of merchandise inventories and accounts receivable balances, valuation of long-lived assets (including goodwill and intangible assets), useful lives associated with amortization and depreciation of intangible assets, property and equipment, asset retirement obligations, stock compensation and valuation of deferred tax assets.

 

Derivative Instruments

 

The Company does not currently utilize derivative financial instruments to hedge its exposure to changes in interest rates, although it has done so in prior years and will be required to do so under its senior credit facility if requested by the administrative agent at any time after the one month LIBO Rate (as defined in the senior credit facility) exceeds 1.50%.  The Company does not use financial instruments or derivatives for any trading or other speculative purposes. 

 

Reclassifications

 

Certain amounts in the financial statements for prior periods have been reclassified to conform to the current year presentation, as described in the notes to the financial statements.  These reclassifications had no effect on previously reported consolidated net income or stockholders’ equity.

 

The Company has adjusted its consolidated balance sheet as of March 30, 2014 and its consolidated statement of cash flows for fiscal 2013 to revise the classification of its acquired liquor licenses from other assets to intangible assets and to reclassify the associated cash flows from operating cash flows to investing cash flows.  As compared to previously reported amounts, intangible assets, net has increased, and other assets have decreased by $427,000 as of March 30, 2014, with a corresponding increase in net cash used in investing activities and decrease in cash flows used in operating activities for fiscal 2013.

 

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FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

Recently Issued Accounting Pronouncements

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers.  ASU 2014-09 amends existing revenue recognition requirements and provides a new comprehensive revenue recognition model requiring entities to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those reporting periods.  This guidance will be effective for the Company in the first quarter of its fiscal year ending April 1, 2018.  The Company does not expect this adoption to have a material impact on its financial statements.

 

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.  ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. ASU 2014-15 is effective for the fiscal years ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.  The Company does not expect this adoption to have a material impact on its financial statements.

 

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance CostsASU 2015-03 amends existing requirements for debt issuance costs, requiring entities to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  ASU 2015-03 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015, and requires retrospective application.  Early adoption is permitted for financial statements that have not been previously issued.  The Company does not expect this adoption to have a material impact on its financial statements.

 

In April 2015, the FASB issued ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.  ASU 2015-05 provides clarification about a customer’s accounting for fees paid in a cloud computing arrangement, and provides guidance to customers about whether a cloud computing arrangement includes a software license, and the portion of the arrangement that should be accounted for as a service contract. ASU 2015-05 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015 and may be applied either prospectively or retrospectively, and early adoption is permitted. The Company does not expect this adoption to have a material impact on its financial statements.

 

Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on its accompanying consolidated financial statements.

 

Treasury Stock

 

Treasury shares repurchased are recorded at cost. 

 

2.PROPERTY AND EQUIPMENT, NET

 

Property and equipment consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 29,

 

March 30,

 

 

2015

 

2014

Leasehold improvements

 

$

133,013 

 

$

123,929 

Machinery and equipment

 

 

50,680 

 

 

47,190 

Computer equipment

 

 

41,709 

 

 

38,947 

Furniture and fixtures

 

 

16,591 

 

 

15,069 

Transportation equipment

 

 

346 

 

 

346 

Construction in progress

 

 

25,761 

 

 

10,748 

Total property and equipment

 

 

268,100 

 

 

236,229 

 

 

 

 

 

 

 

Less accumulated depreciation

 

 

(119,807)

 

 

(91,700)

Property and equipment, net

 

$

148,293 

 

$

144,529 

 

Depreciation expense for property and equipment included in direct store expenses for fiscal 2015, 2014 and 2013 was approximately $24.5 million,  $22.4 million and $17.3 million, respectively.

 

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FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

Depreciation expense for property and equipment included in general and administrative expenses for fiscal 2015, 2014 and 2013 was approximately $3.6 million,  $4.0 million and $4.2 million, respectively.

 

3.INTANGIBLE ASSETS, NET

 

The Company’s intangible assets, net consist of the following (in thousands):

 

h

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 29, 2015

 

 

 

March 30, 2014

 

Gross Carrying Amount

 

Accumulated Amortization

 

Average Useful Life (Years)

 

Gross Carrying Amount (a)

 

Accumulated Amortization

Favorable leases

$

3,018 

 

$

1,461 

 

19.0 

 

$

3,018 

 

$

1,275 

Non-compete agreement

 

890 

 

 

890 

 

8.0 

 

 

890 

 

 

798 

Total intangible assets subject to amortization

 

3,908 

 

 

2,351 

 

 

 

 

3,908 

 

 

2,073 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tradenames

 

23,600 

 

 

 —

 

 

 

 

23,600 

 

 

 —

Acquired liquor licenses

 

2,004 

 

 

 —

 

 

 

 

427 

 

 

 —

Total intangible assets

$

29,512 

 

$

2,351 

 

 

 

$

27,935 

 

$

2,073 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   (a) as adjusted, see Note 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of intangible assets with finite lives amounted to approximately $278,000,  $294,000 and $279,000 during fiscal 2015, 2014 and 2013, respectively.

 

The following is a schedule of the future amortization of the finite lived intangible assets as of March 29, 2015 for the fiscal years ending (in thousands):

 

 

 

 

 

 

 

 

 

 

April 3, 2016

 

$

186 

April 2, 2017

 

 

186 

April 1, 2018

 

 

186 

March 31, 2019

 

 

150 

March 29, 2020

 

 

43 

Thereafter

 

 

806 

 

 

$

1,557 

 

 

 

 

4.OTHER ASSETS

 

Other assets consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 29,

 

March 30,

 

 

2015

 

2014

Prepaid rent, net

 

$

7,250 

 

$

8,443 

Deferred financing fees, net

 

 

2,780 

 

 

4,526 

Long-term deposits

 

 

2,774 

 

 

2,887 

Other

 

 

50 

 

 

50 

 

 

$

12,854 

 

$

15,906 

 

Prepaid rent, net represents the unamortized noncurrent portion of payments made to lessors of the Company’s leased properties for lease extensions and other renegotiations, including a payment of $10.2 million made in January 2007 which is being amortized on a straight-line basis over the remaining term of the associated lease.  Amortization of prepaid rent of $317,000, $318,000 and $317,000  was recorded in fiscal 2015, 2014, and 2013, respectively.

 

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FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

5.ACCRUED EXPENSES AND OTHER

 

Accrued expenses and other consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 29,

 

March 30,

 

 

2015

 

2014

Accrued compensation and employee-related benefits

 

$

14,399 

 

$

10,013 

Accrued utilities

 

 

1,933 

 

 

1,395 

Accrued occupancy expenses

 

 

1,890 

 

 

2,697 

Sales tax accrual

 

 

1,006 

 

 

921 

Gift card liability

 

 

950 

 

 

938 

Accrued interest

 

 

482 

 

 

414 

Accrued credit card/bank fees

 

 

405 

 

 

457 

Accrued advertising

 

 

117 

 

 

361 

Deferred vendor incentives

 

 

70 

 

 

1,647 

Other accrued expenses

 

 

1,975 

 

 

1,612 

 

 

$

23,227 

 

$

20,455 

 

 

 

 

6.LONG-TERM DEBT

 

A summary of long-term debt is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 29,

 

March 30,

 

 

2015

 

2014

Credit facility, gross

 

$

268,813 

 

$

271,563 

Less unamortized discount

 

 

(11,727)

 

 

(15,096)

Credit facility, net

 

 

257,086 

 

 

256,467 

Less current maturities

 

 

(2,750)

 

 

(2,750)

Long-term debt, net of current maturities

 

$

254,336 

 

$

253,717 

 

A summary of interest expense is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Years Ended

 

March 29,

 

March 30,

 

March 31,

 

2015

 

2014

 

2013

Interest on senior credit facility

$

14,997 

 

$

15,352 

 

$

20,014 

Interest on subordinated promissory notes payable to related party

 

 —

 

 

 —

 

 

820 

Amortization of original issue discount

 

3,369 

 

 

3,275 

 

 

1,553 

Amortization of deferred financing fees

 

1,751 

 

 

1,742 

 

 

1,362 

Other interest (income) expense, net

 

(828)

 

 

(164)

 

 

215 

Total

$

19,289 

 

$

20,205 

 

$

23,964 

 

 

 

 

 

 

 

 

 

Effective interest rate on senior credit facility

 

7.8% 

 

 

7.9% 

 

 

11.7% 

 

Other interest (income) expense, net includes approximately $976,000 and $263,000 of capitalized interest for fiscal 2015 and 2014, respectively.

 

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FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

The following is the summary of the aggregate principal annual maturities of the Company’s debt as of March 29, 2015 for the fiscal years ending (in thousands):

 

 

 

 

 

 

 

 

 

 

April 3, 2016

 

$

2,750 

April 2, 2017

 

 

2,750 

April 1, 2018

 

 

2,750 

March 31, 2019

 

 

260,563 

 

 

$

268,813 

 

2013 Senior Credit Facility

 

In February 2013, Fairway Group Holdings Corp. and its wholly-owned subsidiary, Fairway Group Acquisition Company, as the borrower, entered into a senior secured credit facility consisting of a $275 million term loan (the “2013 Term Facility”) and a $40 million revolving credit facility, which includes a $40 million letter of credit sub-facility (the “2013 Revolving Facility” and together with the 2013 Term Facility, the “2013 Senior Credit Facility”) with the 2013 Term Facility maturing in August 2018 and the 2013 Revolving Facility maturing in August 2017. The Company used the proceeds from the 2013 Term Facility to repay the $264.5 million of outstanding borrowings (including accrued interest) under the 2012 Senior Credit Facility and pay fees and expenses. On May 3, 2013, the 2013 Senior Credit Facility was amended to, among other things, lower the interest rate margins and eliminate the interest coverage ratio financial covenants.

 

Borrowings under the 2013 Senior Credit Facility, as amended, bear interest, at the option of the Company, at (i) adjusted LIBOR (subject to a 1.00% floor) plus 4.0% or (ii) an alternate base rate plus 3.0%. In addition, there is a fee payable quarterly in an amount equal to 1% per annum of the undrawn portion of the 2013 Revolving Facility, calculated based on a 360-day year. Interest is payable quarterly in the case of base rate loans and on the maturity dates or every three months, whichever is shorter, in the case of adjusted LIBOR loans. The 4.0% and 3.0% margins will each be reduced by 50 basis points at any time when the Company’s corporate family rating from Moody’s Investor Services Inc. is B2 or higher and the Company’s corporate rating from Standard & Poors Rating Service is B or higher, in each case with a stable outlook, and as long as certain events of default have not occurred. Prior to the May 2013 amendment, borrowings under the 2013 Senior Credit Facility bore interest, at the option of the Company, at (i) adjusted LIBOR (subject to a 1.25% floor) plus 5.50% or (ii) an alternate base rate plus 4.50%.

 

All of the borrower’s obligations under the 2013 Senior Credit Facility are unconditionally guaranteed (the “Guarantees”) by Fairway Group Holdings Corp. and subsidiaries (other than the borrower and any future unrestricted subsidiaries as the Company may designate, at its discretion, from time to time) (the “Guarantors”). Additionally, the 2013 Senior Credit Facility and the Guarantees are secured by a first-priority perfected security interest in substantially all present and future assets of the borrower and each Guarantor, including accounts receivable, property and equipment, merchandise inventories, general intangibles, leases, intellectual property, investment property and intercompany notes among Guarantors.

 

Mandatory prepayments under the 2013 Senior Credit Facility are required with: (i) 50% of adjusted excess cash flow (which percentage shall be reduced to 25% upon achievement and maintenance of a leverage ratio of less than 5.0:1.0, and to 0% upon achievement and maintenance of a leverage ratio of less than 4.0:1.0); (ii) 100% of the net cash proceeds of asset sales or other dispositions of property by the Company and certain of its subsidiaries (subject to certain exceptions and reinvestment provisions); and (iii) 100% of the net cash proceeds of issuances, offerings or placements of debt obligations (subject to certain exceptions).  In addition, the 2013 Senior Credit Facility required that by May 15, 2013, the Company either fully repay its outstanding subordinated note or make a $7.7 million repayment of the outstanding term loan.  On March 7, 2013, the Company repaid in full its then outstanding subordinated promissory note in the aggregate principal amount of $7.3 million, together with all accrued interest aggregating $440,000.

 

The 2013 Senior Credit Facility contains negative covenants, including restrictions on: (i) the incurrence of additional debt; (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) dividends on, and redemptions of, equity interests and other restricted payments, including dividends and distributions to the Company by its subsidiaries; (vii) transactions with affiliates; (viii) changes in the business conducted by the Company; (ix) payment or amendment of subordinated debt and organizational documents; and (x) maximum capital expenditures. The Company is also required to comply with a maximum total leverage ratio financial covenant.

 

The Company was in compliance with all applicable affirmative, negative and financial covenants of the 2013 Senior Credit Facility at March 29, 2015.  At the time the Company entered into the 2013 Senior Credit Facility new levels for the maximum total

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FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

leverage ratio financial covenant were established.  Although the Company’s recent operating performance has improved, its profitability has been below expectations at the time that the financial covenant levels were established, and if the Company’s financial performance does not continue to improve, it is possible that the Company will not meet the maximum total leverage ratio financial covenant at some point within the next twelve months. In the event of a covenant violation that remains uncured, the lenders have the right to declare all outstanding debt under the 2013 Senior Credit Facility immediately due and payable.  The Company has the ability to exercise equity cure rights, which allows for the issuance of additional equity and for the proceeds to be treated as EBITDA for purposes of the covenant, subject to certain restrictions, including that the amount of equity that can be used as EBITDA cannot exceed the EBITDA shortfall, the proceeds must be used to repay debt, and the equity cure can only be used twice within a four quarter period and only four times during the term of the loan.

 

The 2013 Senior Credit Facility resulted in the Company capitalizing new deferred financing fees of approximately $800,000 in fiscal 2013, to be amortized over the life of the loan on the effective interest method. These costs included administrative fees, advisory fees, title fees, and legal and accounting fees.

 

The Company reviewed the terms of the 2013 Senior Credit Facility and ascertained that the conditions had been met, pursuant to the FASB’s guidance, to treat the transaction as a debt modification of the 2012 Senior Credit Facility described below.  In connection with the modification of the 2012 Senior Credit Facility, (i) the unamortized original issue discount of approximately $11.8 million relating to the 2012 Senior Credit Facility and (ii) debt placement fees of approximately $3.6 million in connection with the 2013 Senior Credit Facility are collectively reflected as original issue discount, to be amortized over the life of the loan on the effective interest method. In addition, approximately $2.1 million of debt related expenses to third parties, pertaining to the 2013 Senior Credit Facility, were expensed as incurred in “General and administrative expenses” during fiscal 2013.

 

The amendment of the 2013 Senior Credit Facility in May 2013 resulted in the Company capitalizing new deferred financing fees of approximately $500,000 in fiscal 2014, to be amortized over the remaining life of the loan using the effective interest method. Additionally, as a result of the accounting treatment applied to this amendment of debt modification, (i) the unamortized original issue discount of approximately $14.7 million relating to the 2013 Senior Credit Facility and (ii) debt placement fees of approximately $3.4 million in connection with the amendment, are collectively reflected as original issue discount, to be amortized over the life of the loan using the effective interest method.

 

At March 29, 2015, the Company had $8.0 million of availability under the 2013 Revolving Facility, all of which was available for letters of credit.  At March 29, 2015, the Company had $32.0 million of letters of credit outstanding.

 

2012 Senior Credit Facility

 

In August 2012, Fairway Group Holdings Corp. and its wholly-owned subsidiary, Fairway Group Acquisition Company, as the borrower, entered into a senior secured credit facility consisting of a $260 million term loan (the “2012 Term Facility”) and a $40 million revolving credit facility, which included a $40 million letter of credit sub-facility (the “2012 Revolving Facility” and together with the 2012 Term Facility, the “2012 Senior Credit Facility”) with the 2012 Term Facility maturing in August 2018 and the 2012 Revolving Facility maturing in August 2017. The Company used the net proceeds from the 2012 Term Facility to finance growth.

 

Borrowings under the 2012 Senior Credit Facility bore interest, at the option of the Company, at (i) adjusted LIBOR (subject to a 1.5% floor) plus 6.75% or (ii) an alternate base rate plus 5.75%. In addition, there was a fee payable quarterly in an amount equal to 1% per annum of the undrawn portion of the 2012 Revolving Facility, calculated based on a 360-day year. Interest was payable quarterly in the case of base rate loans and on the maturity dates or every three months, whichever was shorter, in the case of adjusted LIBOR loans. The 6.75% and 5.75% margins would each have been reduced by 50 basis points at any time following completion of the Company’s initial public offering when the Company’s corporate family rating from Moody’s Investor Services Inc. was B2 or higher and the Company’s corporate rating from Standard & Poor’s Rating Service is B or higher, in each case with a stable outlook, and as long as certain events of default had not occurred.

 

All of the borrower’s obligations under the 2012 Senior Credit Facility were unconditionally guaranteed (the “Guarantees”) by Fairway Group Holdings Corp. and subsidiaries (other than the borrower ) (the “Guarantors”). Additionally, the 2012 Senior Credit Facility and the Guarantees were secured by a first-priority perfected security interest in substantially all present and future assets of the borrower and each Guarantor, including accounts receivable, property and equipment, merchandise inventories, general intangibles, leases, intellectual property, investment property and intercompany notes among Guarantors.

 

Mandatory prepayments under the 2012 Senior Credit Facility were required with: (i) 50% of adjusted excess cash flow (which percentage would have been reduced to 25% upon achievement and maintenance of a leverage ratio of less than 5.0:1.0, and to 0% 

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FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

upon achievement and maintenance of a leverage ratio of less than 4.0:1.0); (ii) 100% of the net cash proceeds of asset sales or other dispositions of property by the Company and certain of its subsidiaries (subject to certain exceptions and reinvestment provisions); and (iii) 100% of the net cash proceeds of issuances, offerings or placements of debt obligations (subject to certain exceptions).

 

The 2012 Senior Credit Facility contained negative covenants, including restrictions on: (i) the incurrence of additional debt; (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) dividends on, and redemptions of, equity interests and other restricted payments, including dividends and distributions to the Company by its subsidiaries; (vii) transactions with affiliates; (viii) changes in the business conducted by the Company; (ix) payment or amendment of subordinated debt and organizational documents; and (x) maximum capital expenditures. The Company was also required to comply with the following financial covenants: (i) a maximum total leverage ratio and (ii) a minimum cash interest coverage ratio.

 

The 2012 Senior Credit Facility resulted in the Company capitalizing new deferred financing fees of approximately $2.1 million in fiscal 2013, to be amortized over the life of the loan on the effective interest method. These costs included administrative fees, advisory fees, title fees, and legal and accounting fees.

 

The Company reviewed the terms of the 2012 Senior Credit Facility and ascertained that the conditions had been met, pursuant to the FASB’s guidance, to treat the transaction as a debt modification of the 2011 Senior Credit Facility described below.  In connection with the modification of the 2011 Senior Credit Facility, (i) the unamortized original issue discount of approximately $1.8 million relating to the 2011 Senior Credit Facility and (ii) debt placement fees of approximately $7.2 million and new original issue discount of approximately $3.9 million in connection with the 2012 Senior Credit Facility were collectively reflected as original issue discount, to be amortized over the life of the loan on the effective interest method. In addition, approximately $2.8 million of debt related expenses to third parties, pertaining to the 2012 Senior Credit Facility, were expensed as incurred in “General and administrative expenses” during fiscal 2013.

 

All outstanding balances of the 2012 Senior Credit Facility were fully paid at the closing of the 2013 Senior Credit Facility on February 14, 2013.

 

2011 Senior Credit Facility

 

In March 2011, Fairway Group Holdings Corp. and its wholly-owned subsidiary, Fairway Group Acquisition Company, as the borrower, entered into a senior secured credit facility consisting of a $175 million term loan, which was increased to $200 million in December 2011 (the “2011 Term Facility”) and a $25 million revolving credit facility which was increased to $35 million in July 2012.  The Revolving Credit Facility included a $15 million letter of credit sub-facility (the “2011 Revolving Facility” and together with the Term Facility, the “2011 Senior Credit Facility”) with the 2011 Term Facility maturing in March 2017 and the 2011 Revolving Facility maturing in March 2016.  The Company used the proceeds from the 2011 Term Facility to repay its existing senior debt, the subordinated notes issued in connection with the acquisition of the four Fairway stores in 2007 and to finance growth.  Borrowings under the 2011 Senior Credit Facility bore interest, at the option of the Company, at (i) adjusted LIBOR (subject to a 1.5% floor) plus 6% or (ii) an alternate base rate plus 5%.  In addition, there was a fee payable quarterly in an amount equal to 1% per annum of the undrawn portion of the 2011 Revolving Facility, calculated based on a 360-day year.  Interest was payable quarterly in the case of base rate loans and on the maturity dates or every three months, whichever was shorter, in the case of adjusted LIBOR loans.

 

All of the borrower’s obligations under the 2011 Senior Credit Facility were unconditionally guaranteed (the “Guarantees”) by Fairway Group Holdings Corp. and subsidiaries (other than the borrower) (the “Guarantors”).  Additionally, the 2011 Senior Credit Facility and the Guarantees were secured by a first-priority perfected security interest in substantially all present and future assets of the borrower and each Guarantor, including accounts receivable, property and equipment, merchandise inventories, general intangibles, leases, intellectual property, investment property and intercompany notes among Guarantors.

 

Mandatory prepayments under the 2011 Senior Credit Facility were required with:  (i) 50% of adjusted excess cash flow (which percentage would have been reduced to 25% upon achievement and maintenance of a leverage ratio of less than 2.5:1.0, and to 0% upon achievement and maintenance of a leverage ratio of less than 2.0:1.0); (ii) 100% of the net cash proceeds of asset sales or other dispositions of property by the Company and certain of its subsidiaries (subject to certain exceptions and reinvestment provisions); and (iii) 100% of the net cash proceeds of issuances, offerings or placements of debt obligations (subject to certain exceptions).

 

The 2011 Senior Credit Facility contained negative covenants, including restrictions on:  (i) the incurrence of additional debt; (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) dividends on, and redemptions of, equity interests and other restricted payments;

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FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

(vii) transactions with affiliates; (viii) changes in the business conducted by the Company; (ix) payment or amendment of subordinated debt and organizational documents; and (x) maximum capital expenditures.  The Company was also required to comply with the following financial covenants:  (i) a maximum total leverage ratio and (ii) a minimum cash interest coverage ratio.

 

The 2011 Senior Credit Facility resulted in the Company capitalizing deferred financing fees of approximately $6.0 million and $563,000 during the fiscal years ended April 3, 2011 and April 1, 2012, respectively, to be amortized over the life of the loan on the effective interest method.  These costs included administrative fees, advisory fees, title fees, and legal and accounting fees.

 

All outstanding balances of the 2011 Senior Credit Facility were fully paid at the closing of the 2012 Senior Credit Facility on August 17, 2012.

 

Subordinated Promissory Note Payable to Related Parties

 

On May 13, 2011, for consideration received of approximately $7.3 million, the Company issued a subordinated promissory note to its then chief executive officer.  The note was subordinated to the 2011 Senior Credit Facility and bore 12% interest per annum.  The interest equal to 10% of the principal amount was payable in cash on the last day of each quarter commencing June 30, 2011.  The interest equal to 2% of the principal amount was payable on the note’s maturity date, March 3, 2018.  On March 7, 2013, the Company fully repaid the subordinated promissory note in the amount of $7.3 million and accrued interest in the amount of $133,000 and deferred interest due in the amount of $267,000.

 

Interest Rate Cap Agreement

 

In accordance with the terms of the 2011 Senior Credit Facility, the Company was required to enter into agreements reasonably acceptable to the administrative agent that resulted in at least 50% of the aggregate principal amount of its funded long-term indebtedness being effectively subject to a fixed or maximum interest rate acceptable to the administrative agent.

 

On June 14, 2010, the Company entered into an agreement with the administrative agent to cap the LIBOR interest on $50.1 million of its then outstanding term loan.  The LIBOR interest rate was capped at 5% for the period June 4, 2010 through June 14, 2011, and was capped at 4% from June 14, 2011 through June 14, 2012.  The Company paid a fee of $118,000 for this agreement. This agreement expired and has not been renewed.

 

On July 19, 2011, the Company entered into an agreement with the administrative agent to cap the LIBOR interest rate at 4% on a portion of the outstanding term loan under the 2011 Senior Credit Facility.  The notional amount of the agreement was $70 million for the period July 19, 2011 through June 14, 2012, and $120 million from June 14, 2012 through July 19, 2013.  The Company paid a fee of $98,000 for this agreement. This agreement expired and has not been renewed.

 

7.OTHER LONG-TERM LIABILITIES

 

Other long-term liabilities consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 29,

 

March 30,

 

 

2015

 

2014

Deferred rent

 

$

40,961 

 

$

32,607 

Accrued severance

 

 

332 

 

 

557 

Other long-term liabilities

 

 

170 

 

 

170 

 

 

$

41,463 

 

$

33,334 

 

 

 

8.COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

The Company occupies premises pursuant to non-cancelable lease agreements, including the lease agreements with related parties as described in Note 15, which expire at various times through 2039.  Rent under related-party lease agreements increases annually by either 50% of the percentage increase in the consumer price index or by the percentage increase in the consumer price index of up to 5%, except for certain lease years when the rent is determined by arbitration.  Lease agreements with non-related parties include various escalation clauses.

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FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

 

We have signed certain leases for which our obligation is not yet established because we do not yet have possession of the site.  The aggregate minimum rental commitments under all operating leases, for which we have possession, as of March 29, 2015 are as follows for the fiscal years ending (in thousands):

 

 

 

 

 

 

 

 

 

 

April 3, 2016

 

$

38,917 

April 2, 2017

 

 

38,989 

April 1, 2018

 

 

37,306 

March 31, 2019

 

 

37,474 

March 29, 2020

 

 

37,970 

Thereafter

 

 

590,068 

 

 

$

780,724 

 

Rent expense for fiscal 2015, 2014 and 2013 approximated $44.1 million,  $38.0 million and $30.5 million, respectively.

 

Employment Agreements

 

The employment agreements with certain of the Company’s management employees include, among others, various noncompetition provisions, salary and benefits continuation and severance payments.

 

The future minimum cash payments under the terms of those agreements as of March 29, 2015 are as follows for the fiscal years ending (in thousands):

 

 

 

 

 

 

 

 

 

 

April 3, 2016

 

$

3,702 

April 2, 2017

 

 

647 

 

 

$

4,349 

 

Other Contingencies

 

The Company obtains its utility services for the Red Hook store from an entity which is 16.67% owned by an individual who is a Company director and former executive officer.  The Company believes that the entity has overcharged for utilities since its initial occupancy of the premises.  Since November 2008, with the exception of the post-Hurricane Sandy period through fiscal 2014, when the Company received utilities from the local utility provider because the co-generation plant was not operational, the Company has taken deductions from the utility invoices based on the methodology that the Company believes represents the parties’ original intentions with respect to the utility calculations.  The Company believes that it will be successful in negotiating an amicable resolution of this matter between the parties.  The Company also believes that the resolution of this matter will not have a material adverse effect on its financial condition and results of operations.

 

In February and March 2014, three purported class action lawsuits alleging the violation of the federal securities laws were filed in the United States District Court for the Southern District of New York against the Company and certain of the Company’s current and former officers and directors and the underwriters for the Company’s initial public offering. The actions were consolidated on June 3, 2014 under the caption In re Fairway Group Holdings Corp. Securities Litigation, No. 14-cv-0950. On July 18, 2014, an amended class action complaint was filed, adding affiliates of Sterling as defendants. The complaint seeks unspecified damages and alleges misleading statements in the registration statement and prospectus for the Company’s initial public offering and in subsequent communications regarding the Company’s business and financial results. On September 5, 2014, the Company and the other defendants moved to dismiss the amended class action complaint.  On January 20, 2015, the Magistrate appointed by the district judge to whom the case was assigned to review the motions and make a recommendation to the judge recommended that the Company’s and the other defendants’ motion to dismiss be granted in part and denied in part.  The Company filed an objection to the Magistrate’s recommendation.  In March, 2015, the district judge to whom the case was assigned notified the plaintiffs and defendants to refile the complaint and motion to dismiss in light of a recent decision of the Supreme Court.  All revised filings are required to be made by June 30, 2015.  Although the Company believes the claims are without merit and intends to defend this lawsuit vigorously, the Company cannot predict the outcome of this lawsuit.

  

In April 2014, a purported stockholder derivative action was filed against certain of the Company’s directors in New York state court, asserting claims for breach of fiduciary duties and gross mismanagement based on substantially similar allegations as in the securities class action. In June 2014, the Company and the other defendants moved to dismiss the derivative complaint. On July 30, 2014, plaintiffs filed an amended complaint, adding affiliates of Sterling as defendants and asserting claims against them for

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Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

breach of fiduciary duty and unjust enrichment. On September 29, 2014, the Company and the other defendants moved to dismiss the amended derivative complaint.  On November 10, 2014, the court granted the Company’s and the other defendants’ motion to dismiss on the grounds that under the Company’s certificate of incorporation the derivative action must be brought in the State of Delaware.  The plaintiffs have appealed this decision.  A similar case was filed in the Delaware Chancery Court in February 2015, and the Company and the other defendants have moved to dismiss this case as well.  Although the Company believes the claims are without merit and intends to defend these lawsuits vigorously, we cannot predict the outcome of these lawsuits.

 

In May 2014, a purported wage and hour class action lawsuit was filed in the United States District Court for the Southern District of New York against the Company and certain of its current and former officers and employees.  This suit alleges, among other things, that certain of the Company’s past and current employees were not properly compensated in accordance with the overtime provisions of the Fair Labor Standards Act.  In May 2015, the Company agreed in principle with the plaintiffs to settle the matter without material financial consequence.

 

The Company, from time to time, is and may be subject to legal proceedings and claims which arise in the ordinary course of its business.  The Company has not accrued any amounts in connection with these uncertainties, including those discussed above as the Company has determined that losses from these uncertainties are not probable. For all matters, including unasserted claims, where a loss is reasonably possible, the aggregate range of estimated losses is not material to the financial position, results of operations, liquidity or cash flows of the Company.

 

Regardless of the outcome, these matters or future litigation may require significant attention from management and could result in significant legal expenses, settlement costs or damage awards that could have a material impact on the Company’s financial position, results of operations and cash flows.

 

 

9.REDEEMABLE PREFERRED STOCK

 

Redeemable Preferred Stock

 

The Series A and B Preferred Stock was classified as redeemable preferred stock at March 31, 2013 because the shares were redeemable at the option of the Board of Directors (the “Board”) which was controlled by the holders of the preferred stock.

 

In connection with the Company’s IPO, the Company issued 15,504,296 shares of Class B common stock (of which 33,576 shares automatically converted into 33,576 shares of Class A common stock) in exchange for all outstanding preferred stock and in satisfaction of all accrued dividends not paid in cash with the proceeds of the IPO. The Company used a portion of the net proceeds from its IPO to repay approximately $19.1 million of accrued but unpaid dividends on its Series A preferred stock and approximately $57.7 million of accrued but unpaid dividends on its Series B preferred stock. Because the Company and the preferred stockholders had entered into an agreement to exchange the preferred stock for a fixed number of shares of Class B common stock based on (i) an assumed IPO price of $11.00 per share, (ii) an assumption that $65.0 million of accrued dividends would be paid in cash with the proceeds of the IPO and (iii) the fact that the number of shares of Class B common stock to be issued in the exchange would not change if the Company decreased or increased the amount of accrued dividends that it paid in cash with the net proceeds of the offering, and because the IPO price was greater than $11.00 per share and the amount of dividends paid in cash with the proceeds of the offering increased, the Company recognized an incremental dividend of approximately $42.8 million, consisting of $11.8 million, representing the additional cash proceeds used to pay dividends, and $31.0 million, representing an amount equal to the number of shares of Class B common stock the Company issued multiplied by $2.00, the difference between the $13.00 IPO price and the $11.00 price the Company used to calculate the number of shares of Class B common stock to be issued by the Company in exchange for the preferred stock and accrued but unpaid dividends.

 

Series B Preferred Stock

 

In January 2007, the Company issued 64,016.98 shares of Series B Preferred Stock and received net proceeds of approximately $51.2 million net of issuance costs.  In addition, approximately $12.7 million was considered the fair value of the preferred stock issued to the sellers as part of the consideration paid for the four retail food store operations acquired by the Company in January 2007.

 

The Series B Preferred Stock was nonvoting and was entitled to receive dividends payable in cash at an annual rate of $140 per share from the date of issuance (January 18, 2007) of such shares.  All dividends with respect to Series B Preferred Stock (i) accrued on a daily basis, (ii) were cumulative, whether or not earned or declared, (iii) were compounded quarterly from the date of issuance of such shares and (iv) were payable when declared by the Board.  In addition, the Series B Preferred Stock was redeemable at the option

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Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

of a majority of the Board at a price of $1,000 per share plus all accrued and unpaid dividends (the “Series B Liquidation Value”), whether or not declared.  Upon a liquidation event, each share of Series B Preferred Stock was entitled to receive an amount equal to the Series B Liquidation Value before any payments could be made in respect of the Common Stock.  At March 29, 2015 and March 30, 2014, the Series B Preferred Stock cumulative deemed dividends were $0, and the total liquidation preference, including dividends, was $0.

 

Series A Preferred Stock

 

On March 26, 2009, the Company issued 20,620 shares of Series A Preferred Stock, par value $0.001 per share, together with 2,162,881 detachable warrants to purchase up to 2,162,881 shares of the Company’s Class A common stock at an exercise price of $0.00008 per share, in consideration for cash proceeds of $16.6 million, net of issuance costs of approximately $4.0 million.

 

On October 29, 2009, the Company issued 9,650 shares of Series A Preferred Stock to existing stockholders in consideration for cash proceeds of approximately $9.4 million, net of issuance costs of $241,000.

 

In October and December 2010, the Company issued a total of 12,788 shares of Series A Preferred Stock in consideration for cash proceeds of approximately $12.5 million, net of issuance costs of $321,000.

 

The Series A Preferred Stockholders were entitled to receive dividends at an annual rate of $150 per share from the date of issuance of such shares.  All dividends with respect to Series A Preferred Stock (i) accrued on a daily basis until paid, (ii) were cumulative, whether or not earned or declared, (iii) were compounded quarterly from the date of issuance of such shares and (iv) were payable when declared by the Board.  In addition, the Series A Preferred Stock was redeemable at the option of a majority of the Board at a price of $1,300 per share plus all accrued and unpaid dividends (the “Series A Liquidation Value”), whether or not declared.  Upon a liquidation event, each share of Series A Preferred Stock was entitled to receive an amount equal to the Series A Liquidation Value before any payments can be made with respect to the Series B Preferred Stock or the Common Stock.  At March 29, 2015 and March 30, 2014, the Series A Preferred Stock cumulative deemed dividends were $0, and the total liquidation preference, including dividends, was $0.

 

Warrants

 

The warrants were exercisable at any time on or before March 26, 2016, or the consummation of a liquidation event, as defined.  Any warrants that were not exercised in full before the last day of the exercise period would have been automatically exercised, without further action on the part of the holder, on and as of that date.  There were no warrants issued during fiscal 2015, 2014 or 2013.  There were no warrants exercised during fiscal 2013, and during fiscal 2014, 1,930,822 warrants were exercised, which represented all outstanding warrants. 

 

As of March 29, 2015 and March 30, 2014, there were no warrants outstanding.

 

 

10.EQUITY COMPENSATION PLAN AND COMMON STOCK

 

During fiscal 2015, 2014 and 2013, the Company charged to operations approximately $13.1 million,  $11.0 million and $0.1 million, respectively, for non-cash stock based compensation expense.

 

2007 Equity Compensation Plan

 

Effective January 2007, the Board adopted an Equity Compensation Plan (the “2007 Plan”) to provide the Company’s employees, certain consultants and advisors who perform services for the Company and non-employee members of the Board with an opportunity to receive grants of options to purchase shares of the Company’s Common Stock and grant restricted shares of the Company’s Common Stock.

 

The 2007 Plan is administered by the Board or a committee appointed by the Board.  The Board may grant incentive stock options, non-qualified stock options or any combination of these two and make restricted stock awards.  Incentive stock options may be granted only to employees of the Company and non-qualified stock options and restricted stock shares may be granted to employees, non-employee directors and advisors.

 

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Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

The term of any option shall not exceed ten years from the date of grant.  However, an incentive stock option that is granted to an employee who, at the time of grant, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, may not have a term that exceeds five years from the date of grant.

 

As of March 29, 2015 and March 30, 2014, 1,825,289 restricted shares had been issued pursuant to the 2007 Plan.  The shares vest over a period of four to five years. The Company reserves the right to refuse the transfer of such shares until certain conditions have been fulfilled with respect to certain transfers of ownership. During fiscal 2015 and 2014, the Company did not grant any restricted shares.  During fiscal 2013, the Company did not grant any restricted shares and repurchased 6,522 restricted shares for $0.01 per share.    

 

As of March 29, 2015, there was approximately $63,000 of unrecognized compensation expense related to the unvested stock-based compensation awards granted under the 2007 Plan.  The compensation expense is expected to be recognized over a weighted average period of 0.8 years.

 

A summary of unvested restricted share activity during fiscal 2015 is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Restricted

 

Average Grant

 

    

Stock

    

Date Fair Value

Balance at March 30, 2014

 

109,920 

 

$

3.55 

Granted

 

 —

 

 

Vested

 

(94,347)

 

 

2.85 

Forfeited

 

 —

 

 

Outstanding unvested awards at March 29, 2015

 

15,573 

 

$

7.81 

 

As of March 29, 2015,  no options have been granted under the Plan.

 

The 2007 Plan terminated in connection with the Company’s IPO and the adoption of the Company’s 2013 Long-Term Incentive Plan, and no further awards will be granted under the 2007 Plan. However, all outstanding awards will continue to be governed by their existing terms.

 

2013 Long-Term Incentive Plan

 

Effective April 2013 the Company adopted a 2013 Long-Term Incentive Plan (the "2013 Plan"). The purpose of the 2013 Plan is to enable the Company to grant equity-based incentive awards intended to attract, motivate and retain qualified employees, directors and other eligible service providers, and to align their financial interests with those of the Company's stockholders. The 2013 Plan permits the grant of incentive stock options, within the meaning of Section 422 of the Code, to the Company's employees, and the grant of non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares and other forms of equity-based awards to the Company's employees, directors, consultants and advisors.

 

The Company has reserved 5,472,136 shares of Class A common stock for issuance under its 2013 Plan, of which 608,015 shares may only be issued in the form of options having an exercise price per share that is at least 120% of the fair market value of the common stock on the date of grant. The following unissued shares covered by awards granted under our 2013 Plan will remain available for issuance under new awards: (a) shares covered by an option or stock appreciation right that is forfeited or otherwise terminated or canceled for any reason other than exercise; (b) shares covered by an award that is forfeited or that are repurchased by the Company at the original purchase price; (c) shares covered by an award that is settled in cash or that otherwise terminates without shares being issued; and (d) shares covered by an award that are used to pay the exercise price or satisfy the tax withholding obligations under the award. No more than 1,000,000 shares may be issued pursuant to awards granted in any calendar year to any person.

 

In general, the 2013 Plan will be administered by the compensation committee of the Board. In the case of awards intended to qualify for the "performance-based compensation" exemption from Section 162(m) of the Code, the committee will consist of at least two "outside directors" within the meaning of Section 162(m) of the Code. Subject to the terms of the 2013 Plan, the committee (or its designee) may select the persons who will receive awards, the types of awards to be granted, the purchase price (if any) to be paid for shares covered by the awards, and the vesting, forfeiture and other terms and conditions of the awards, and will have the authority to make all other determinations necessary or advisable for the administration of the 2013 Plan.

 

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Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

Restricted Stock Units

 

A summary of unvested restricted stock unit activity during fiscal 2015 is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Restricted

 

Average Grant

 

    

Stock Units

    

Date Fair Value

Outstanding unvested awards at March 30, 2014

 

2,367,659 

 

$

13.44 

Granted

 

1,910,771 

 

 

3.75 

Forfeited

 

(396,366)

 

 

13.64 

Vested

 

(686,440)

 

 

10.46 

Outstanding unvested awards at March 29, 2015

 

3,195,624 

 

$

8.26 

 

During fiscal 2015 and 2014, 331,000 and 122,000 restricted stock units, respectively, vested in connection with certain executives leaving the Company.  The acceleration of the vesting resulted in incremental non-cash stock based compensation expense of approximately $1,177,000 and $987,000, respectively

 

During fiscal 2015, the Company settled approximately 57,000 outstanding restricted stock units upon their vesting in cash of $260,000, which approximated the fair value of the shares at the vesting date.  The amount of cash paid was recorded as a reduction of the stock-based compensation charge as a component of additional paid-in capital.

 

As of March 29, 2015, approximately $485,000 related to severance payments was included in accrued expenses, which represents the fixed fair value of liabilities to be settled in stock-based awards that have been included in stock-based compensation expense for fiscal 2015, for which requisite service has been completed. 

 

As of March 29, 2015, there was $13.7 million of unrecognized compensation expense related to the restricted stock unit compensation awards granted under the 2013 Plan.  The compensation expense is expected to be recognized over a weighted average period of 1.5 years.

 

Stock Options

 

A summary of stock option activity during fiscal 2015 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

Weighted

 

Average

 

 

 

 

Average

 

Remaining

 

 

Stock

 

Exercise

 

Contractual

 

    

Options

    

Price

    

Life (years)

Balance at March 30, 2014

 

1,096,362 

 

$

13.68 

 

 

Granted

 

300,000 

 

 

3.22 

 

 

Forfeited

 

(517,640)

 

 

14.45 

 

 

Exercised

 

 —

 

 

 —

 

 

Outstanding awards at March 29, 2015

 

878,722 

 

 

9.65 

 

8.8 

 

 

 

 

 

 

 

 

Exercisable at March 29, 2015

 

155,522 

 

$

13.35 

 

8.3 

 

During fiscal 2015, approximately 187,000 options vested in connection with certain executives leaving the Company.  The acceleration of the vesting resulted in incremental non-cash stock based compensation expense of approximately $383,000No stock options were exercised during fiscal 2015 and 2014.

 

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Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

The fair value of each option award is estimated on the date of grant using a Black-Scholes option-pricing model based on the weighted average assumptions noted in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FY 2015

 

FY 2014

Expected volatility

 

 

32.0 

%

 

 

35.6 

%

Expected dividend yield

 

 

0.0 

%

 

 

0.0 

%

Expected term (in years)

 

 

6.17 

 

 

 

6.25 

 

Risk-free interest rate

 

 

1.9 

%

 

 

1.2 

%

Weighted-average grant-date fair value of options granted during the period

 

$

0.77 

 

 

$

4.46 

 

Weighted-average grant-date fair value of options forfeited during the period

 

$

4.42 

 

 

$

4.76 

 

 

The Company estimates the expected volatility of its common stock on the dates of grant based on the average historical stock price volatility of a group of publicly-traded companies within the Company’s peer group having similar characteristicsExpected dividend yield is zero percent as the Company has not paid and does not anticipate paying dividends on the common stock.  The Company estimates the expected term of stock options granted based on the simplified method.  The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grantForfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company assumed an annualized forfeiture rate of 5% for both stock options and restricted stock units. The assumptions used to calculate the fair value of options granted are evaluated and revised for new awards, as necessary, to reflect market conditions and experience.

 

As of March 29, 2015, there was $1.6 million of unrecognized compensation expense related to the stock option compensation awards granted under the 2013 Plan.  The compensation expense is expected to be recognized over a weighted average period of 1.7 years. 

 

Stock options outstanding as of March 29, 2015 had aggregate intrinsic value of $825,000. Aggregate intrinsic value represents the value of the Company's closing stock price on the last trading day of the fiscal period in excess of the weighted average exercise price multiplied by the number of options outstanding or exercisable.

 

11.MULTIEMPLOYER PLAN AND EMPLOYEE BENEFIT PLAN

 

The Company contributes to a multiemployer defined benefit pension plan under the terms of a collective-bargaining agreement that covers certain of its union-represented employees.  The risks of participating in this multiemployer plan are different from single-employer plans.  Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers.  If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.  Additionally, if the Company chooses to stop participating in its multiemployer plan, it will be required to pay this plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.

 

The Company’s participation in this plan for the plan years ended December 31, 2014, 2013, and 2012 is outlined in the table below.  The “EIN/Pension Plan Number” column provides the Employer Identification Number (“EIN”) and the three-digit plan number, if applicable.  The most recent Pension Protection Act (“PPA”) zone status available as of December 31, 2014 and December 31, 2013 is indicated below.  The zone status is based on information that the Company received from the plan and is certified by the plan’s actuary.  Among other factors, plans in the red zone are generally less than 65 percent funded, plans in the yellow zone are less than 80 percent funded, and plans in the green zone are at least 80 percent funded.  The “FIP/RP Status Pending/Implemented” column indicates plans for which a financial improvement plan (“FIP”) or a rehabilitation plan (“RP”) is either pending or has been implemented.  In addition to regular plan contributions, the Company may be subject to a surcharge if the plan is in the red zone.  The “Surcharge Imposed” column indicates whether a surcharge has been imposed on contributions to the plan.  The last column lists the expiration date of the collective-bargaining agreement to which the plan is subject and any minimum funding requirements.  There have been no significant changes that affect the comparability of total employer contributions of fiscal 2015, 2014 and 2013.

 

Under federal pension law, a plan is considered “endangered” if, at the beginning of the plan year, the funding percentage is less than 80% or in “critical” status if the funding is less than 65 percent (other factors may apply).  If a pension plan enters the “endangered” status, the trustees of the plan are required to adopt a funding improvement plan.  The Plan was in an “endangered” status in the Plan Year ending December 31, 2014 because the Plan’s funded percentage was less than 80% on the first day of the Plan Year but was not projected to experience a funding deficiency within the next seven years.  In an effort to improve the Plan’s funding situation, the trustees adopted a Funding Improvement Plan which is reviewed and updated annually as required.

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FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension

 

 

 

Company Contributions

 

 

 

Expiration Date

Pension

 

EIN/Pension

 

Protection Act

 

FIP/RP Status

 

(in thousands)

 

Surcharge

 

Of Collective

Fund

 

Plan Number

 

Zone Status

 

Pending

 

Fiscal 2015

 

Fiscal 2014

 

Fiscal 2013

 

Imposed

 

Bargaining Agreement

Local 1500 Fund

 

23-7176372/ 001

 

Yellow

 

Implemented

 

$
3,900 

 

$
3,600 

 

$
2,900 

 

No

 

See Note Below

 

At the date the Company’s audited financial statements were issued, the Form 5500 for the plan year ended December 31, 2014 was not available.  For each of the plan years ended December 31, 2013 and 2012, the Company contributed more than 5% of the total contributions to the pension plan.

 

The Company also offers a noncontributory, defined contribution 401(k) profit sharing plan to all of its nonunion employees.  Employees become eligible when they attain both age 18 and complete one half year of service.  Employee contributions are based on annual salary with a contribution rate ranging up to 15%.  Employer contributions can range up to 3% of an employee’s annual salary, as determined by management, on a discretionary basis.  The Company did not make employer contributions to the plan for fiscal 2015, 2014 and 2013.

 

As of March 29, 2015, approximately 83.7% of the Company’s employees were covered by four collective bargaining agreements.  Contracts covering 83.8%,  9.4%,  5.5%, and 0.2% of our unionized employees expired March 29, 2015, April 26, 2015, March 29, 2015 and February 28, 2015, respectively.  Fairway and one of the union locals which represents 12 of the 15 food stores, reached agreement on a collective bargaining agreement, which was approved on May 21, 2015 with immediate effectSimilar collective bargaining agreements are being finalized with the other union locals, which represent the remaining stores.  The parties have agreed to continue operating under the current contracts until the new collective bargaining agreements are finalized.    All the new collective bargaining agreements are expected to have a three year term.

 

12.INSURANCE CLAIMS AND RECOVERIES RELATED TO HURRICANE SANDY

 

The Company’s Red Hook store sustained substantial damages from the effects of Hurricane Sandy on October 29, 2012, which resulted in its temporary closing.  Red Hook reopened for business during the fourth quarter of fiscal 2013. The Company also sustained property and equipment damages and losses on merchandise inventories at certain other stores resulting from this storm. As a result of these damages, during fiscal 2013 the Company wrote off approximately $2.1 million of unsalable merchandise inventories and approximately $3.4 million of impaired property and equipment.

 

In fiscal 2013, the Company received advances totaling $10.5 million in partial settlement of its insurance claims.  The insurance carriers designated $5.0 million of these advances as non-refundable reimbursement for business interruption losses sustained at Red Hook, which has been recorded as business interruption insurance recoveries in the Consolidated Statements of Operations for fiscal 2013.  The remaining $5.5 million, which represents the carrying values of the damaged inventory and property and equipment, was recorded as a reduction of general and administrative expenses, a direct offset to the associated carrying values written off, in the Consolidated Statements of Operations for fiscal 2013.  Additionally, the Company has recorded approximately $5.2 million for reimbursable ongoing business expenses and remediation costs incurred in connection with Red Hook as a reduction in general and administrative expenses in the Consolidated Statements of Operations for fiscal 2013 as the realization of the claim for loss recovery has been deemed to be probable. 

 

The Company received an additional advance of $3.8 million in the first quarter of fiscal 2014 in partial settlement of its insurance claims. In the third quarter of fiscal 2014, the Company and its insurers settled the remaining insurance claims related to Hurricane Sandy and the Company received final payments totaling $4.4 million, bringing total insurance receipts to $18.7 million. At the time of claim settlement the Company had an insurance receivable of $1.3 million. The settlement resulted in a $3.1 million gain, which represents the difference between the replacement cost and carrying value of the assets lost to Hurricane Sandy. The gain is recorded in business interruption and gain on storm-related insurance recoveries in our consolidated statements of operations.

 

13.INCOME TAXES

 

The Company accounts for income taxes regarding uncertain tax positions, and recognizes interest and penalties related to uncertain tax positions in income tax provision in the Consolidated Statements of Operations.

 

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FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

The components of the income tax provision for fiscal 2015, 2014 and 2013 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Years Ended

 

 

March 29,

 

March 30,

 

March 31,

 

 

2015

 

2014

 

2013

Current income tax (provision) benefit:

 

 

 

 

 

 

 

 

 

Federal

 

$

 —

 

$

 —

 

$

 —

State and city

 

 

(11)

 

 

116 

 

 

(11)

Total current income tax (provision) benefit

 

 

(11)

 

 

116 

 

 

(11)

 

 

 

 

 

 

 

 

 

 

Deferred income tax provision:

 

 

 

 

 

 

 

 

 

Federal

 

 

(2,286)

 

 

(20,214)

 

 

(17,803)

State and city

 

 

(1,226)

 

 

(9,056)

 

 

(7,995)

Total deferred income tax provision

 

 

(3,512)

 

 

(29,270)

 

 

(25,798)

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

$

(3,523)

 

$

(29,154)

 

$

(25,809)

 

The reconciliation of the U.S. statutory rate with the Company’s effective tax rate for fiscal 2015, 2014 and 2013 is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Years Ended

 

March 29,

 

March 30,

 

March 31,

 

2015

 

2014

 

2013

Federal statutory rate

34.0 

%

 

34.0 

%

 

34.0 

%

Effect of:

 

 

 

 

 

 

 

 

State income taxes (net of federal tax benefit)

7.4 

 

 

8.3 

 

 

8.9 

 

Permanent differences

(2.6)

 

 

(2.2)

 

 

(0.4)

 

Valuation Allowance

(46.8)

 

 

(97.1)

 

 

(110.6)

 

Other

(0.2)

 

 

 —

 

 

(1.5)

 

Effective rate

(8.2)

%

 

(57.0)

%

 

(69.6)

%

 

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FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

The tax effects of the temporary differences which give rise to the deferred tax assets and liabilities are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 29,

 

March 30,

 

 

2015

 

2014

DEFERRED TAX ASSETS

 

 

 

 

Provision for bad debts

 

$

557 

 

$

190 

Accrued compensation

 

 

3,365 

 

 

1,231 

Inventory capitalization

 

 

2,001 

 

 

1,786 

Favorable leases

 

 

751 

 

 

855 

Non-compete agreements

 

 

171 

 

 

184 

Sales tax reserve

 

 

258 

 

 

217 

Interest - discount

 

 

382 

 

 

439 

Deferred rent

 

 

17,285 

 

 

13,644 

Tax credits

 

 

394 

 

 

661 

Charitable contributions

 

 

1,777 

 

 

1,767 

Depreciation

 

 

6,885 

 

 

3,040 

Stock compensation

 

 

8,443 

 

 

4,351 

Net operating losses

 

 

70,471 

 

 

64,333 

Gross deferred tax assets

 

 

112,740 

 

 

92,698 

Less valuation allowance

 

 

(110,795)

 

 

(90,670)

Deferred tax assets

 

 

1,945 

 

 

2,028 

DEFERRED TAX LIABILITIES

 

 

 

 

 

 

Goodwill

 

 

(22,493)

 

 

(19,701)

Indefinite lived intangible assets

 

 

(5,593)

 

 

(4,873)

Prepaid rent

 

 

(1,252)

 

 

(974)

Debt issuance costs

 

 

(698)

 

 

(1,054)

Deferred tax liabilities

 

 

(30,036)

 

 

(26,602)

Net deferred tax liabilities

 

$

(28,091)

 

$

(24,574)

 

The following table details the composition of net deferred income tax balances (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 29,

 

March 30,

 

 

2015

 

2014

Current deferred income tax assets

 

$

5,923 

 

$

3,207 

Less valuation allowance

 

 

(5,923)

 

 

(3,207)

Net current deferred income tax assets

 

 

 —

 

 

 —

 

 

 

 

 

 

 

Noncurrent deferred tax assets

 

 

106,817 

 

 

89,491 

Less valuation allowance

 

 

(104,872)

 

 

(87,463)

Net non-current deferred tax assets

 

 

1,945 

 

 

2,028 

Noncurrent deferred tax liabilities

 

 

(30,036)

 

 

(26,602)

Net noncurrent deferred income tax liabilities

 

 

(28,091)

 

 

(24,574)

 

 

 

 

 

 

 

Net deferred tax liabilities

 

$

(28,091)

 

$

(24,574)

 

At March 29, 2015, the Company had available U.S. federal net operating losses of approximately $165 million.  These federal net operating loss carry forwards expire at various times beginning in calendar year 2027 through fiscal 2035.  In addition, the Company had various state net operating losses that expire in varying amounts through fiscal 2034.  The Company expects to incur additional pre-tax losses through fiscal 2020 before generating future taxable income.  These cumulative net operating losses were primarily attributable to the Company’s expansion including the building of new stores, increased production and corporate overhead and associated costs of capital.

 

The Company had total deferred tax assets of approximately $112.7 million as of March 29, 2015, the most significant of which was the deferred tax asset for net operating losses of $70.5 million.  In assessing the realizability of the deferred tax assets, management considered whether it is “more likely than not” that some portion or the entire deferred tax asset would be realized.  Ultimately, the realization of the deferred tax asset is dependent upon the generation of sufficient taxable income in those periods in which temporary differences become deductible and net operating loss carry forwards can be utilized.

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FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

 

The Company evaluated both positive and negative evidence, including the historical levels of taxable income, scheduled reversals of temporary differences, tax planning strategies, the targeted number of new store openings and forecasts of the Company’s future operating performance and taxable income, adjusted by varying probability factors, in making a determination as to whether it is “more likely than not” that all or some portion of the deferred tax assets will be realized. The Company also considered cumulative losses as well as the impact of its expansion in assessing its core pretax earnings.

 

Assumptions regarding future taxable income require significant analysis and judgment. This analysis includes financial forecasts based on the historical performance of the business, the targeted number of new store openings and measurement of the year in which taxable income from existing stores exceeds the future costs and losses incurred from new store openings. The Company’s projections are updated on a quarterly basis and cover a five year period. Our analyses as of April 1, 2012, July 1, 2012 and September 30, 2012 included factors such as consideration of the Company’s predecessor’s historical pre-tax income through December 2006, the Company’s core operating earnings that remained strong through April 1, 2012, and the Company’s projections that it would generate future taxable income beginning in fiscal 2015, which would utilize all prior years’ net operating losses by no later than fiscal 2018. The Company also considered how the losses the Company had sustained in recent years were attributed to its initial acquisition in 2007 of the four stores operated by its predecessor and continued expansion. Based on the above factors, with a heavier weighting towards the Company’s forecast of future taxable income, the Company concluded that no valuation allowance was required as of April 1, 2012, July 1, 2012 and September 30, 2012.

 

During the thirteen week period ended December 30, 2012, the Company revised its forecast of taxable income through 2018 to take into account its results of operations during the quarter, as this quarter is traditionally the strongest sales quarter for the business because of the number of holidays, which provides management with the most insight needed to forecast future profitability.  Additionally, the forecast was revised for changes in the Company’s expansion plans, in order to give appropriate weight to future uncertainties involving economic conditions, the competitive environment, Company-specific issues and other risk factors. The revised forecast reflected the Company’s consideration of this new evidence, both positive and negative, giving appropriate weight to future uncertainties involving economic conditions, the competitive environment, Company-specific issues and other risk factors.  As a result of such new evidence and uncertainties, the Company believed it prudent to reduce the projected sales and taxable income growth in the latter years of its projection. The primary negative factor evaluated as of December 30, 2012 was an overall decrease in projected future operating income.  As a result, the Company concluded it was not “more likely than not” that all of its deferred tax assets would be realized by the end of fiscal year 2018. Accordingly, the Company recorded a partial valuation allowance of approximately $39 million against deferred tax assets during the thirty-nine weeks ended December 30, 2012. The partial valuation allowance was determined based on the Company’s estimate of being able to utilize approximately $60 million of its net operating losses by the end of fiscal 2018.

 

Between December 30, 2012 and September 29, 2013 there were no significant circumstances or developments in the Company’s operating results which impacted its projections through fiscal 2018.  Accordingly, the Company determined that, other than providing a valuation allowance of $2 million, $12.9 million and $5.9 million for the deferred tax asset for the loss incurred in the quarters ended March 31, 2013, June 30, 2013 and September 29, 2013, respectively, no additional valuation allowance was required for the remaining deferred tax assets as of March 31, 2013, June 30, 2013 or September 29, 2013.

 

During the thirteen week period ended December 29, 2013, the Company revised its forecast of taxable income to take into account the results of operations during the quarter, as this quarter is traditionally the strongest sales quarter for the business because of the number of holidays, which provides the Company with the insight needed to forecast future profitability. Additionally, the forecast was revised to account for the timing of new stores that opened in fiscal 2014 and their operating trends, and changes in stores planned to be opened in future years, as well as equity compensation charges and initial public offering costs that occurred earlier in the fiscal year and changes in the competitive environment. The revised forecast reflected the Company’s consideration of this new evidence, both positive and negative, giving appropriate weight to future uncertainties involving economic conditions, the competitive environment, Company-specific issues and other risk factors. As a result of such new evidence and uncertainties, the Company believed it prudent to reduce its taxable income projections. The Company concluded it was not “more likely than not” that its deferred tax assets will be realized by fiscal 2019. Accordingly, the Company has recorded a charge of approximately $25.9 million to reflect a full valuation allowance against deferred tax assets at December 29, 2013. Although net operating losses can be carried forward for tax purposes through at least calendar 2027, the Company’s ability to reliably forecast taxable income is generally limited to its five year planning horizon.

 

Between December 29, 2013 and March 30, 2014 there were no significant circumstances or developments in the Company’s operating results which impacted its projections through fiscal 2019.  Accordingly, the Company determined that, other than providing a valuation allowance of $3.8 million for the deferred tax assets for the loss incurred in the quarter ended March 30, 2014, no additional valuation allowance was required for the remaining deferred tax assets as of March 30, 2014.

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FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

 

For fiscal 2015 and 2014, the Company recorded an increase to its valuation allowance of $20.1 million and $49.7 million, respectively. This increase was attributable to  $25.9 million in fiscal 2014 to reflect a full valuation allowance against its deferred tax assets at December 29, 2013 and $20.1 million in fiscal 2015 and $23.8 million in fiscal 2014 against deferred tax assets attributable to losses incurred during fiscal 2015 and 2014, respectively.

 

14. NET LOSS PER COMMON SHARE

 

Basic net loss per common share is calculated by dividing net loss attributable to common stockholders by the weighted average common shares outstanding for the fiscal period.  Diluted net loss per common share is calculated by dividing net loss attributable to common stockholders by the weighted average common shares outstanding for the fiscal period plus the effect of any potential common shares that have been issued if these additional shares are dilutive.  For all periods presented, basic and diluted net loss per common share are the same, as any additional common stock equivalents would be anti-dilutive.

 

The following table is a summary of the share amounts (in thousands) used in computing basic and diluted earnings per share and potentially dilutive shares excluded from the computation:

 

 

 

 

 

 

 

 

 

 

 

Fiscal Years Ended

 

March 29,

  

March 30,

  

March 31,

 

2015

 

2014

 

2013

Weighted average shares outstanding - basic and diluted

43,440 

 

40,166 

 

12,326 

Anti-dilutive securities excluded from diluted loss per share computation:

 

 

 

 

 

Options

15 

 

81 

 

 —

Warrants

 —

 

 —

 

1,931 

Unvested restricted stock

16 

 

110 

 

146 

Restricted stock units

382 

 

925 

 

 —

Total anti-dilutive securities

412 

 

1,115 

 

2,077 

 

As of March 29, 2015, certain outstanding options to purchase shares of Class A common stock have exercise prices in excess of the Company’s publicly quoted stock price and therefore are not considered potentially dilutive.

 

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FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

15. RELATED PARTY TRANSACTIONS

 

Operating Leases and Utility Services

 

The Company leases several of its facilities and obtains utility services for a single location from entities which are partially owned by Mr. Howard Glickberg, a Company director and former executive officer.  The following table shows the amounts related to such transactions (in thousands) for each of the fiscal years ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Years Ended

 

 

March 29,

 

March 30,

 

March 31,

 

 

2015

 

2014

 

2013

Rent expense:

 

 

 

 

 

 

 

 

 

Broadway

 

$

2,038 

 

$

2,006 

 

$

2,000 

Red Hook

 

 

2,149 

 

 

1,840 

 

 

1,805 

Harlem

 

 

1,789 

 

 

1,760 

 

 

1,746 

Production Bakery

 

 

701 

 

 

689 

 

 

688 

 

 

 

 

 

 

 

 

 

 

Utility services:

 

 

 

 

 

 

 

 

 

Red Hook

 

 

1,239 

 

 

1,321 

 

 

623 

Related party rent and utility services expense, total

 

$

7,916 

 

$

7,617 

 

$

6,862 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

Cost of sales

 

$

6,167 

 

$

5,794 

 

$

5,739 

General and administrative expenses

 

 

1,749 

 

 

1,823 

 

 

1,123 

Total

 

$

7,916 

 

$

7,617 

 

$

6,862 

 

The facility leases referenced are as follows:

 

·

Broadway –The Company leases part of its Broadway/West Side of Manhattan store facility from an entity which is 33.3% owned by Mr. Glickberg.  This lease terminates on January 31, 2032, subject to two 5-year renewal options.

 

·

Red Hook – The Company leases its Red Hook store facility from an entity which is 16.67% owned by Mr. Glickberg.  This lease will terminate on October 31, 2016, subject to three 5-year renewal options in favor of the Company. 

 

·

Harlem - The Company leases its Harlem/West Side of Manhattan store facility from an entity which is 33.3% owned by Mr. Glickberg.  This lease will terminate on January 31, 2032, subject to two 5-year renewal options. 

 

·

Production Bakery - The Company leases the property that houses the production bakery from an entity which is 33.3% owned by Mr. Glickberg, which holds real estate adjacent to the Harlem/West Side of Manhattan store facility.  This lease will terminate on January 31, 2032, and is subject to two 5-year renewal options.  The Company also rents the space used as the store’s parking lot from this entity. 

 

The utility services relationship referenced above is as follows:

 

·

Red Hook – The Company obtains utility services for its Red Hook store facility from an entity which is 16.67% owned by Mr. Glickberg.  During the post-Hurricane Sandy period through fiscal 2014, we obtained utility services from the local utility provider because the co-generation plant was not operational, and the co-generation plant passed on our payments to the local utility provider.

 

Beginning in fiscal 2012, the Company has been in negotiations with the landlord of the Red Hook store for a reset of the annual base rent for this property.  The Company previously estimated that the reset would increase the Company’s annual base rent for this property by approximately $419,000.  As a result of this increase, the Company estimated that it would owe the landlord an aggregate of $1.4 million, representing additional rent due from November 1, 2011 through February 28, 2015, a forty month period, as a result of such reset, of which $1.0 million was included within accrued expenses and other at March 30, 2014 and the remaining $400,000 was included as part of occupancy costs for fiscal 2015.  In March 2015, the outstanding amount was settled for a cash payment of approximately $1.4 million.

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FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

 

At March 29, 2015 and March 30, 2014, amounts related to operating leases and utility service agreements due to related parties included in accrued expenses were approximately $0.1 million and $0.9 million, respectively, and amounts due from related parties included in accounts receivable were approximately $0.2 million and $0, respectively.

 

Management Agreement

 

Prior to the Company’s IPO, pursuant to a management agreement, the Company paid Sterling Investment Partners Advisers, LLC (“Sterling Advisers”), an affiliate of the Company’s controlling stockholders, an annual management fee (the “management fee”), fees in connection with certain debt and equity financings (other than the IPO) and certain amounts in connection with the termination of the management relationship upon the Company’s IPO.  These amounts, except for those debt financing costs which have been capitalized (See Note 6), have been included as general and administrative expenses in the periods in which they have been incurred. 

 

A summary of amounts incurred related to the management agreement is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Years Ended

 

 

March 29,

 

March 30,

 

March 31,

 

 

2015

 

2014

 

2013

Management fee

 

$

 —

 

$

877 

 

$

3,500 

Debt financing costs

 

 

 —

 

 

 —

 

 

4,200 

Management agreement termination fee

 

 

 —

 

 

9,200 

 

 

 —

Total

 

$

 —

 

$

10,077 

 

$

7,700 

 

The management agreement terminated upon the Company’s IPO, at which time all outstanding amounts were settled in cash.  No amounts were payable as of March 29, 2015 and March 30, 2014.

 

Executive Separations

 

Effective November 2014, the Company and an executive serving as a director and executive officer entered into a separation agreement in connection with the executive’s retirement from his role as an executive officer.  Pursuant to the separation agreement, the Company will continue to pay the executive’s annual salary for a period of 16 months, an aggregate of approximately $1.7 million, which was included as general and administrative expense for fiscal 2015.  Approximately $439,000 of these payments is expected to be paid in the form of restricted stock unit grants, and has been included as stock-based compensation for fiscal 2015 (See Note 10).  In addition, restricted stock units for an aggregate of 145,924 shares and stock options for an aggregate of 36,481 shares became immediately vested.  All vested stock options expired unexercised 90 days from the date of their vesting. Under the separation agreement, the executive will be entitled to substantially all of the same benefits afforded to him as an employee of the Company, and will continue to serve in his capacity as a company director until the completion of his current term.

 

In September 2014, the Company’s interim Chief Executive Officer stepped down in connection with his retirement and the hiring of the Company’s new Chief Executive Officer.  Pursuant to the terms of the executive’s employment agreement, as amended, the Company will continue to pay the executive’s annual salary through February 2016, an aggregate of approximately $749,000, which was included as general and administrative expense for fiscal 2015.  In addition, restricted stock units for an aggregate of 127,282 shares and stock options for an aggregate of 117,962 shares became immediately vested.  All vested stock options expired unexercised 90 days from the date of their vesting.  Under the separation agreement, the executive provided assistance and advisory services to the Company’s Chairman, Chief Executive Officer and Co-Presidents for a period of four months for which the executive received a total consulting fee of $112,000

 

In February 2014, the Company and its then Chief Executive Officer entered into a separation agreement in connection with that individual’s retirement as Chief Executive Officer.  The separation agreement contains substantially the same rights and obligations as are provided for under his employment agreement. Pursuant to the separation agreement, the Company will continue to pay his annual salary for a period of 18 months, an aggregate of $675,000, which was included as general and administrative expense for fiscal 2014.  In addition, restricted stock units for an aggregate of 115,000 shares of Class A common stock became immediately vested, although he agreed to certain limitations on the number of shares he can sell in any period.  He remains subject to his confidentiality, non-solicitation and non-competition obligations contained in his employment agreement. Pursuant to the separation agreement, he will provide assistance and advisory services to the Company’s Chairman, Chief Executive Officer and Co-Presidents for a period of two years for which he will receive an annual consulting fee of $125,000.

98

 


 

Table of Contents

 

FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

 

In March 2013, the Company entered into a separation agreement in connection with an executive stepping down as a director and officer to pursue other opportunities; this executive was, prior to the IPO, a 5% stockholder of the Company.  Pursuant to the separation agreement, the Company agreed, among other things, to pay him severance through January 2015 of $325,000, pay him a bonus of $145,000 upon consummation of the IPO, pay him a bonus of between $60,000 and $75,000 for fiscal 2013 and continue certain of his benefits for a specified period of time. The Company also repurchased 129,963 shares of his Class A common stock for a purchase price of $1.5 million and agreed to allow him to sell $1.5 million of shares of Class A common stock in the Company’s IPO. This individual agreed that he would not compete with the Company for a period of five years anywhere on the East Coast.  The Company paid this individual a bonus of $67,500 in May 2013.

 

A summary of cash payments related to executive separation is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Years Ended

 

 

March 29,

 

March 30,

 

March 31,

 

 

2015

 

2014

 

2013

Separation payments

 

$

801 

 

$

409 

 

$

 —

Consulting fees

 

 

237 

 

 

 —

 

 

 —

Total

 

$

1,038 

 

$

409 

 

$

 —

 

As of March 29, 2015 and March 30, 2014, amounts related to executive separation included in accrued expenses were $2.4 million and $0.7 million, respectively, and amounts included in other long-term liabilities were $0 and $0.2 million, respectively.

 

 

99

 


 

Table of Contents

 

FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013

 

16.SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

 

The following table sets forth certain quarterly financial data for the periods indicated (in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter

 

Second Quarter

 

Third Quarter

 

Fourth Quarter

Fiscal 2015

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

198,268 

 

$

193,979 

 

$

206,219 

 

$

199,089 

Cost of sales and occupancy costs (exclusive of depreciation and amortization)

 

 

136,872 

 

 

134,676 

 

 

141,357 

 

 

134,964 

Gross profit

 

 

61,396 

 

 

59,303 

 

 

64,862 

 

 

64,125 

Direct store expenses

 

 

46,957 

 

 

48,621 

 

 

48,516 

 

 

47,219 

General and administrative expenses

 

 

15,295 

 

 

17,727 

 

 

19,503 

 

 

17,079 

Store opening costs

 

 

1,686 

 

 

2,676 

 

 

1,380 

 

 

1,301 

Production center start-up costs

 

 

1,429 

 

 

1,741 

 

 

1,316 

 

 

962 

Loss from operations

 

 

(3,971)

 

 

(11,462)

 

 

(5,853)

 

 

(2,436)

Interest expense, net

 

 

(4,778)

 

 

(4,833)

 

 

(4,807)

 

 

(4,871)

Loss before income taxes

 

 

(8,749)

 

 

(16,295)

 

 

(10,660)

 

 

(7,307)

Income tax provision

 

 

(945)

 

 

(940)

 

 

(400)

 

 

(1,238)

Net loss

 

$

(9,694)

 

$

(17,235)

 

$

(11,060)

 

$

(8,545)

Basic and diluted loss per common share

 

$

(0.22)

 

$

(0.40)

 

$

(0.25)

 

$

(0.20)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter

 

Second Quarter

 

Third Quarter

 

Fourth Quarter

Fiscal 2014

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

186,778 

 

$

183,215 

 

$

205,731 

 

$

200,262 

Cost of sales and occupancy costs (exclusive of depreciation and amortization)

 

 

125,378 

 

 

123,845 

 

 

140,103 

 

 

135,333 

Gross profit

 

 

61,400 

 

 

59,370 

 

 

65,628 

 

 

64,929 

Direct store expenses

 

 

44,132 

 

 

45,470 

 

 

49,449 

 

 

47,486 

General and administrative expenses

 

 

33,942 

 

 

15,067 

 

 

16,582 

 

 

18,503 

Store opening costs

 

 

2,986 

 

 

3,911 

 

 

2,140 

 

 

1,150 

Production center start-up costs

 

 

498 

 

 

1,343 

 

 

1,367 

 

 

1,311 

Loss from operations

 

 

(20,158)

 

 

(6,421)

 

 

(3,910)

 

 

(3,521)

Business interruption and gain on storm-related insurance recoveries

 

 

 —

 

 

 —

 

 

3,089 

 

 

 —

Interest expense, net

 

 

(5,385)

 

 

(4,999)

 

 

(5,061)

 

 

(4,760)

Loss before income taxes

 

 

(25,543)

 

 

(11,420)

 

 

(5,882)

 

 

(8,281)

Income tax provision(1)

 

 

(2,403)

 

 

(804)

 

 

(25,386)

 

 

(561)

Net loss

 

 

(27,946)

 

 

(12,224)

 

 

(31,268)

 

 

(8,842)

Preferred stock dividends

 

 

(44,130)

 

 

 —

 

 

 —

 

 

 —

Net loss attributable to common shareholders

 

 

(72,076)

 

 

(12,224)

 

 

(31,268)

 

 

(8,842)

Basic and diluted loss per common share

 

$

(2.11)

 

$

(0.30)

 

$

(0.74)

 

$

(0.21)

 

*Quarterly earnings per share information is computed separately for each period.  Therefore, the sum of such quarterly per share amounts may differ from the total year.


(1)

Includes increases in the valuation allowance for deferred taxes of $12.9 million in Q1 2014, $5.9 million in Q2 2014, $27.1 million in Q3 2014 and $3.8 million in Q4 2014. 

 

 

100

 


 

17. SUBSEQUENT EVENTS

 

In May 2015 the Company entered into an agreement terminating its lease of a site in the new Hudson Yards development in west midtown Manhattan where the Company had expected to open a store in late calendar 2015 or early calendar 2016.  In connection with the lease termination, the Company has negotiated a limited, conditional right of first negotiation if the developer determines to include a supermarket in the second phase of the Hudson Yards development.  The Company will pay the landlord a total of $3.5 million in connection with the lease termination.

 

In May 2015 the Company entered into a lease for a new store in the Georgetown section of Brooklyn, New York.  The Company’s current plans are to open this store during calendar 2016, subject to the timing of delivery of the property to the Company by the landlord.  The Company is obligated to issue a $6.0 million letter of credit to the landlord under this lease by no later than August 1, 2015.

 

 

 

101

 


 

ITEM 9—CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A—CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this Annual Report on Form 10-K. The evaluation included certain internal control areas in which we have made and are continuing to make changes to improve and enhance controls. In designing and evaluating the disclosure controls and procedures, management recognized that controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Management’s Annual Report on Internal Controls Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act, as amended. Under the supervision of management and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 29, 2015 based on the framework in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework). Based on our evaluation, we concluded that our internal control over financial reporting was effective as of March 29, 2015.  

 

Attestation Report of the Registered Public Accounting Firm

 

Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal controls over financial reporting for as long as we are an “emerging growth company” pursuant to the provisions of the JOBS Act.

 

Changes in Internal Control Over Financial Reporting

 

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recently completed fiscal quarter. Based on that evaluation, our chief executive officer and chief financial officer concluded that there has not been any material change in our internal control over financial reporting during the quarter covered by this report that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B—OTHER INFORMATION

 

None.

102

 


 

PART III

 

ITEM 10—DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The information required by this item is incorporated by reference to our Proxy Statement for the 2015 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended March 29, 2015.

 

Our board of directors has adopted a Code of Conduct applicable to all officers, directors and employees, which is available on our website http://investors.fairwaymarket.com/governance.cfm.  We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision of our Code of Conduct and by posting such information on our website at the address and location specified above

 

ITEM 11. EXECUTIVE COMPENSATION

 

The information required by this item is incorporated by reference to our Proxy Statement for the 2015 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended March 29, 2015.

   

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The information required by this item is incorporated by reference to our Proxy Statement for the 2015 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended March 29, 2015.

   

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The information required by this item is incorporated by reference to our Proxy Statement for the 2015 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended March 29, 2015.  

   

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The information required by this item is incorporated by reference to our Proxy Statement for the 2015 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended March 29, 2015.

 

103

 


 

PART IV

 

ITEM 15—EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

1.The following financial statements are included under the caption “Financial Statements and Supplementary Data” in Part II, Item 8 and are incorporated herein by reference:

 

Consolidated Balance Sheets, March 29, 2015 and March 30, 2014

 

For the Fiscal Years Ended March 29, 2015, March 30, 2014 and March 31, 2013:

 

Consolidated Statements of Income

 

Consolidated Statements of Changes in Redeemable Preferred Stock and Stockholders’ Deficit

 

Consolidated Statements of Cash Flows

 

2.Financial Statement Schedules:

 

All schedules are omitted since the required information is not present.

 

3.Exhibits

 

Refer to the Exhibit Index incorporated herein by reference. Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this report is identified in the Exhibit Index by an asterisk following the Exhibit Number.

 

 

 

 

 

104

 


 

 

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.

 

 

 

 

 

 

Fairway Group Holdings Corp.

 

 

 

 

 

By:

/s/ John E. Murphy

 

 

Name:

John E. Murphy

 

 

Title:

Chief Executive Officer

 

 

 

Date:

May 26, 2015

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on May 26, 2015.

 

 

 

 

Name

 

 

 

 

 

/s/ John E. Murphy

 

Chief Executive Officer

John E. Murphy

 

(Principal Executive Officer)

 

 

 

/s/ Edward C. Arditte

 

Co-President and Chief Financial Officer

Edward C. Arditte

 

(Principal Financial Officer)

 

 

 

/s/ Linda M. Siluk

 

Vice President, Finance and

Linda M. Siluk

 

Chief Accounting Officer

 

 

(Principal Accounting Officer)

 

 

 

/s/ Charles W. Santoro

 

Chairman of the Board

Charles W. Santoro

 

 

 

 

 

/s/ Michael Barr

 

Director

Michael Barr

 

 

 

 

 

/s/ Howard Glickberg

 

Director

Howard Glickberg

 

 

 

 

 

/s/ Stephen L. Key

 

Director

Stephen L. Key

 

 

 

 

 

/s/ Robert Magnus

 

Director

Robert Magnus

 

 

 

 

 

/s/ Farid Suleman

 

Director

Farid Suleman

 

 

 

 

 

 

105

 


 

EXHIBIT INDEX 

 

Exhibit
No.

 

Description

3.1 

 

Second Amended and Restated Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.3 to the registrant’s Registration Statement on Form S-1 dated April 12, 2013 in Commission File No. 333-184063).

3.2 

 

Amended and Restated Bylaws of Registrant (incorporated by reference to Exhibit 3.4 to the registrant’s Registration Statement on Form S-1 dated April 12, 2013 in Commission File No. 333-184063).

4.1 

 

Specimen common stock certificate (incorporated by reference to Exhibit 4.1 to the registrant’s Registration Statement on Form S-1 dated April 4, 2013 in Commission File No. 333-184063).

10.1 

 

Credit Agreement, dated as of August 17, 2012, among Fairway Group Acquisition Company, as Borrower, Fairway Group Holdings Corp., the Lenders party thereto, and Credit Suisse AG, as Administrative Agent and as Collateral Agent (incorporated by reference to Exhibit 10.1 to the registrant’s Registration Statement on Form S-1 dated September 24, 2012 in Commission File No. 333-184063).

10.2 

 

Subordinated Promissory Note, dated as of May 13, 2011, made by Fairway Group Acquisition Company in favor of Howard Glickberg (incorporated by reference to Exhibit 10.2 to the registrant’s Registration Statement on Form S-1 dated September 24, 2012 in Commission File No. 333-184063).

10.3 

 

Subordination Agreement, dated as of May 13, 2011, among Howard Glickberg, Fairway Group Acquisition Company, all other Obligors (as defined therein); and Credit Suisse AG, as administrative agent and collateral agent for the lenders from time to time parties to the Credit Agreement (incorporated by reference to Exhibit 10.3 to the registrant’s Registration Statement on Form S-1 dated September 24, 2012 in Commission File No. 333-184063).

10.4*

 

Fairway Group Holdings Corp. 2007 Equity Compensation Plan, as amended (incorporated by reference to Exhibit 10.4 to the registrant’s Registration Statement on Form S-1 dated September 24, 2012 in Commission File No. 333-184063).

10.5*

 

Amended and Restated Employment Agreement, made as of December 29, 2011, by and between Fairway Group Holdings Corp. and Howard Glickberg (incorporated by reference to Exhibit 10.5 to the registrant’s Registration Statement on Form S-1 dated September 24, 2012 in Commission File No. 333-184063).

10.6*

 

Letter Agreement, dated as of January 8, 2014, by and between Fairway Group Holdings Corp. and Howard Glickberg (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed January 13, 2014).

10.7*

 

Separation Agreement, dated as of December 8, 2014, between Fairway Group Holdings Corp. and Howard Glickberg (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed December 10, 2014).

10.8*

 

Separation Agreement, made as of February 5, 2014, by and between Fairway Group Holdings Corp. and Herb Ruetsch (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed February 6, 2014).

10.9*

 

Amended and Restated Employment Agreement, made as of September 15, 2011, by and between Fairway Group Holdings Corp. and Aaron J. Fleishaker (incorporated by reference to Exhibit 10.8 to the registrant’s Registration Statement on Form S-1 dated September 24, 2012 in Commission File No. 333-184063).

10.10*

 

Amended and Restated Junior Partner Employment Agreement, made as of January 1, 2011, by and between Fairway Group Holdings Corp. and Peter Romano (incorporated by reference to Exhibit 10.9 to the registrant’s Registration Statement on Form S-1 dated September 24, 2012 in Commission File No. 333-184063).

10.11*

 

Amended and Restated Employment Agreement, made as of March 28, 2013, by and between Fairway Group Holdings Corp. and Nathalie Augustin (incorporated by reference to Exhibit 10.10 to the registrant’s Registration Statement on Form S-1 dated April 12, 2013 in Commission File No. 333-184063).

10.12*

 

Amended and Restated Employment Agreement, dated as of February 5, 2014, by and between Fairway Group Holdings Corp. and Kevin McDonnell (incorporated by reference to Exhibit 10.4 to the registrant’s Current Report on Form 8-K filed September 19, 2014).

 

 

 

10.13*

 

Amended and Restated Employment Agreement, dated as of February 5, 2014, by and between Fairway Group Holdings Corp. and William E. Sanford (incorporated by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed September 19, 2014).

10.14*

 

Employment Agreement, made as of January 18, 2007, by and between Fairway Group Holdings Corp. and Daniel Glickberg (incorporated by reference to Exhibit 10.13 to the registrant’s Registration Statement on Form S-1 dated September 24, 2012 in Commission File No. 333-184063).

10.15*

 

Employment Agreement, made as of March 28, 2013, by and between Fairway Group Holdings Corp. and Larry Santoro (incorporated by reference to Exhibit 10.14 to the registrant’s Registration Statement on Form S-1 dated April 4, 2013 in Commission File No. 333-184063).

10.16*

 

Employment Agreement, made as of March 28, 2013, by and between Fairway Group Holdings Corp. and Linda Siluk (incorporated by reference to Exhibit 10.15 to the registrant’s Registration Statement on Form S-1 dated April 4, 2013 in Commission File No. 333-184063).

10.17 

 

Stockholders’ Agreement, dated as of January 18, 2007, by and among Fairway Group Holdings Corp. and the stockholders party thereto(incorporated by reference to Exhibit 10.16 to the registrant’s Registration Statement on Form S-1 dated February 26, 2013 in Commission File No. 333-184063) .

10.18 

 

Registration Rights Agreement, dated as of January 18, 2007, by and among Fairway Group Holdings Corp. and the stockholders party thereto (incorporated by reference to Exhibit 10.17 to the registrant’s Registration Statement on Form S-1 dated September 24, 2012 in Commission File No. 333-184063).

10.19†

 

Amended and Restated Management Agreement, dated as of October 25, 2010, by and among Sterling Investment Partners Advisers, LLC, Fairway Group Holdings Corp. and Fairway Group Acquisition Company (incorporated by reference to Exhibit 10.18 to the registrant’s Registration Statement on Form S-1 dated April 4, 2013 in Commission File No. 333-184063).

10.20 

 

Form of Indemnification Agreement (incorporated by reference to Exhibit 10.19 to the registrant’s Registration Statement on Form S-1 dated September 24, 2012 in Commission File No. 333-184063) .

106

 


 

10.21*

 

Fairway Group Holdings Corp. 2013 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.20 to the registrant’s Registration Statement on Form S-1 dated April 4, 2013 in Commission File No. 333-184063).

10.22*

 

Amended and Restated Employment Agreement, dated as of February 5, 2014, by and between Fairway Group Holdings Corp. and Edward C. Arditte (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed September 19, 2014).

10.23 

 

Credit Agreement, dated as of February 14, 2013, among Fairway Group Acquisition Company, as Borrower, Fairway Group Holdings Corp., the Lenders party thereto, and Credit Suisse AG, as Administrative Agent and Collateral Agent (incorporated by reference to Exhibit 10.22 to the registrant’s Registration Statement on Form S-1 dated February 26, 2013 in Commission File No. 333-184063).

10.24 

 

AMENDMENT NO. 1 dated as of May 3, 2013 (a) to the CREDIT AGREEMENT dated as of February 14, 2013 (the “Credit Agreement”), among FAIRWAY GROUP ACQUISITION COMPANY, a Delaware corporation (the “Borrower”), FAIRWAY GROUP HOLDINGS CORP., a Delaware corporation (“Holdings”), each lender from time to time party thereto (collectively, the “Lenders” and, individually, a “Lender”), and CREDIT SUISSE AG, as administrative agent and collateral agent (in such capacity, the “Administrative Agent”) and (b) to the GUARANTEE AND COLLATERAL AGREEMENT dated as of February 14, 2013 (the “Collateral Agreement”), among the Borrower, Holdings, certain of the Borrower’s subsidiaries party thereto and the Administrative Agent (incorporated by reference to Exhibit 4.1 to the registrant’s Current Report on Form 8-K filed May 6, 2013).

10.25 

 

Preferred Stock Exchange Agreement, dated as of April 1, 2013, by and between Fairway Group Holdings Corp. and each of the holders of preferred stock listed on the signature pages thereto (incorporated by reference to Exhibit 10.24 to the registrant’s Registration Statement on Form S-1 dated April 12, 2013 in Commission File No. 333-184063).

10.26*

 

Separation Agreement, dated as of March 28, 2013, between Fairway Group Holdings Corp. and Daniel Glickberg (incorporated by reference to Exhibit 10.25 to the registrant’s Registration Statement on Form S-1 dated April 12, 2013 in Commission File No. 333-184063).

10.27*

 

Employment Agreement dated as of September 18, 2014, by and between Fairway Group Holdings Corp. and John E. Murphy (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed September 19, 2014).

10.28*

 

Employment Agreement dated as of November 2, 2014, by and between Fairway Group Holdings Corp. and Dorothy M. Carlow (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed October 21, 2014).

10.29*

 

Employment Agreement dated as of April 20, 2015 by and between Fairway Group Holdings Corp. and Maureen Minard.

18.1 

 

Preferability Letter of Independent Registered Public Accounting Firm

21.1 

 

Subsidiaries of Fairway Group Holdings Corp.

23.1 

 

Consent of Grant Thornton LLP, independent registered public accounting firm

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#

 

Certification Statement of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2#

 

Certification Statement of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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


*Denotes a management contract or compensatory plan.

Confidential treatment was granted for omitted portions.

#This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended or the Exchange Act.

 

 

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