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EX-32.1 - EX-32.1 - Fairway Group Holdings Corpfwm-20150628ex321c66473.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

 

 

 

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

 

For the quarterly period ended June 28, 2015

 

OR

 

 

 

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

 

For the transition period from to

 

Commission File Number 001-35880

 

Fairway Group Holdings Corp.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

74-1201087

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

2284 12th Avenue

New York, New York 10027

(646) 616-8000

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

 

 

 

Large accelerated filer 

 

Accelerated filer 

Non-accelerated filer 

 

Smaller reporting company 

 

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

 

As of July 24, 2015, the registrant had 29,805,986 shares of Class A common stock and 14,225,455 shares of Class B common stock outstanding.

 

 

 


 

Fairway Group Holdings Corp.

Quarterly Report on Form 10-Q

For the quarterly period ended June 28, 2015

Table of Contents

 

 

 

 

 

Part I—Financial Information 

 

 

 

Item 1. Financial Statements (Unaudited) 

 

 

Consolidated Balance Sheets as of June 28, 2015 and March 29, 2015

 

 

Consolidated Statements of Operations for the thirteen weeks ended June 28, 2015 and June 29, 2014

 

 

Consolidated Statements of Cash Flows for the thirteen weeks ended June 28, 2015 and June 29, 2014

 

 

Consolidated Statement of Changes in Stockholders’ Deficit for the thirteen weeks ended June 28, 2015 

 

 

Notes to Unaudited Consolidated Financial Statements

 

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

 

18 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

 

32 

Item 4. Controls and Procedures 

 

32 

 

 

 

Part II—Other Information 

 

 

 

Item 1. Legal Proceedings 

 

33 

Item 1A. Risk Factors 

 

34 

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

 

34 

Item 3. Defaults Upon Senior Securities 

 

34 

Item 4. Mine Safety Disclosures 

 

34 

Item 5. Other Information 

 

34 

Item 6. Exhibits 

 

34 

Signatures 

 

35 

 

 

2


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q 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, strategy 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;

3


 

·

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” in our Annual Report on Form 10-K for the fiscal year ended March 29, 2015.

 

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” of our Annual Report on Form 10-K for the fiscal year ended March 29, 2015 and “Part I—Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report. 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 Risk Factors and 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 Quarterly Report on Form 10-Q 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.

 

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.

 

 

4


 

Part I — Financial Information

Item 1. FINANCIAL STATEMENTS

 

FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

 

June 28,

 

March 29,

 

    

2015

    

2015

ASSETS

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

Cash and cash equivalents

 

$

32,197

 

$

36,362

Accounts receivable, net

 

 

2,365

 

 

3,404

Merchandise inventories

 

 

30,065

 

 

29,150

Income tax receivable

 

 

572

 

 

890

Prepaid rent

 

 

1,192

 

 

829

Deferred financing fees

 

 

1,743

 

 

1,745

Prepaid expenses and other current assets

 

 

2,823

 

 

3,036

Total current assets

 

 

70,957

 

 

75,416

PROPERTY AND EQUIPMENT, NET

 

 

144,047

 

 

148,293

GOODWILL

 

 

95,412

 

 

95,412

INTANGIBLE ASSETS, NET

 

 

27,115

 

 

27,161

OTHER ASSETS

 

 

12,136

 

 

12,854

Total assets

 

$

349,667

 

$

359,136

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

Current portion of long-term debt

 

$

2,750

 

$

2,750

Accounts payable

 

 

29,264

 

 

31,872

Accrued expenses and other

 

 

24,619

 

 

23,227

Total current liabilities

 

 

56,633

 

 

57,849

NONCURRENT LIABILITIES

 

 

 

 

 

 

Long-term debt, net of current maturities

 

 

254,497

 

 

254,336

Deferred income taxes

 

 

29,964

 

 

28,091

Other long-term liabilities

 

 

42,507

 

 

41,463

Total liabilities

 

 

383,601

 

 

381,739

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

Class A common stock, $0.00001 par value per share, 150,000 shares authorized, 29,781 and 29,366 shares issued at June 28, 2015 and March 29, 2015, respectively

 

 

 —

 

 

 —

Class B common stock, $0.001 par value per share, 31,000 shares authorized, 14,225 shares issued and outstanding at June 28, 2015 and March 29, 2015

 

 

14

 

 

14

Treasury stock at cost, 3 shares at June 28, 2015 and March 29, 2015

 

 

 —

 

 

 —

Additional paid-in capital

 

 

384,874

 

 

382,271

Accumulated deficit

 

 

(418,822)

 

 

(404,888)

Total stockholders’ deficit

 

 

(33,934)

 

 

(22,603)

Total liabilities and stockholders’ deficit

 

$

349,667

 

$

359,136

 

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

5


 

FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

June 28,

  

June 29,

 

2015

 

2014

 

 

 

    

 

 

Net sales

$

193,774

 

$

198,268

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

 

132,830

 

 

136,872

Gross profit

 

60,944

 

 

61,396

 

 

 

 

 

 

Direct store expenses

 

47,506

 

 

46,957

General and administrative expenses

 

18,000

 

 

15,295

Store opening costs

 

1,272

 

 

1,686

Production center start-up costs

 

1,087

 

 

1,429

Loss from operations

 

(6,921)

 

 

(3,971)

 

 

 

 

 

 

Interest expense, net

 

(4,855)

 

 

(4,778)

Loss before income taxes

 

(11,776)

 

 

(8,749)

 

 

 

 

 

 

Income tax provision

 

(2,158)

 

 

(945)

Net loss

$

(13,934)

 

$

(9,694)

 

 

 

 

 

 

Basic and diluted loss per common share

$

(0.32)

 

$

(0.22)

Weighted average common shares outstanding

 

43,787

 

 

43,357

 

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

 

 

6


 

FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

June 28,

  

June 29,

 

2015

 

2014

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net loss

$

(13,934)

 

$

(9,694)

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

 

 

 

 

 

Deferred income taxes

 

1,873

 

 

939

Deferred rent

 

1,260

 

 

1,524

Depreciation and amortization of property and equipment

 

6,964

 

 

6,903

Amortization of intangibles

 

46

 

 

74

Amortization of discount on term loans

 

849

 

 

838

Amortization of deferred financing fees

 

437

 

 

438

Amortization of prepaid rent

 

79

 

 

79

Stock compensation expense

 

2,417

 

 

2,857

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

1,039

 

 

(204)

Merchandise inventories

 

(915)

 

 

(1,309)

Prepaid expense and other

 

168

 

 

1,198

Other assets

 

204

 

 

480

Accounts payable

 

(2,608)

 

 

531

Accrued expenses and other

 

1,362

 

 

707

Other long-term liabilities

 

 —

 

 

144

Net cash (used in) provided by operating activities

 

(759)

 

 

5,505

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Capital expenditures

 

(2,718)

 

 

(14,332)

Net cash used in investing activities

 

(2,718)

 

 

(14,332)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Payments on long-term debt

 

(688)

 

 

(688)

Net cash used in financing activities

 

(688)

 

 

(688)

 

 

 

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

(4,165)

 

 

(9,515)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

36,362

 

 

58,800

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

32,197

 

 

49,285

Cash paid during the period for:

 

 

 

 

 

Interest, net of capitalized amounts

$

3,530

 

 

3,500

Income taxes

$

2

 

 

2

 

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

 

7


 

FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Consolidated Statement of Changes in Stockholders’ Deficit

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ DEFICIT

 

 

Class A

 

Class B

 

Additional 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Common Stock

 

Paid in

 

Treasury Stock

 

Accumulated

 

 

 

 

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Shares

    

Amount

    

Deficit

    

Total

Balance at March 30, 2015

 

29,366 

 

$

 —

 

14,225 

 

$

14

 

$

382,271 

 

3

 

$

 —

 

$

(404,888)

 

$

(22,603)

Non-cash stock compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

2,603

 

 —

 

 

 —

 

 

 —

 

 

2,603

Issuance of stock for vested RSUs

 

415

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(13,934)

 

 

(13,934)

Balance at June 28, 2015

 

29,781

 

$

 —

 

14,225

 

$

14

 

$

384,874

 

3

 

$

 —

 

$

(418,822)

 

$

(33,934)

 

The accompanying notes are an integral part of these financial statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8


 

FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

 

1.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 Sterling Investment Partners and affiliates (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.  Fourteen of the stores (including three Wine & Spirits locations) were in operation prior to the beginning of the fiscal year ended March 29, 2015 (“fiscal 2015”) and one store and the Company’s fourth Wine & Spirits location were opened during fiscal 2015, subsequent to June 29, 2014.  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. 

 

2.BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, these financial statements do not include all of the information and footnotes required for complete financial statements in accordance with US GAAP, pursuant to such rules and regulations. Therefore, these unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 29, 2015. 

 

The accompanying unaudited consolidated financial statements as of June 28, 2015, and for the thirteen weeks ended June 28, 2015 and June 29, 2014 reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and operating results of the Company. All material intercompany accounts and transactions have been eliminated in the unaudited consolidated financial statements. The results of operations for any interim period may not necessarily be indicative of the results that may be expected for the entire fiscal year or any interim period therein.

 

Certain amounts in the financial statements for prior periods have been reclassified to conform to the current year presentation and had no effect on previously reported consolidated net loss or stockholders’ deficit.

 

There have been no changes to the Company’s significant accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended March 29, 2015 that have had a material impact on the Company’s unaudited interim consolidated financial statements and related notes.

 

3.NET LOSS PER COMMON SHARE

 

Basic net loss per common share is calculated by dividing net loss by the weighted average common shares outstanding for the fiscal period.  Diluted net loss per common share is calculated by dividing net loss 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.

 

9


 

The following table is a summary of the share amounts (in thousands) used in computing basic and diluted earnings per share and anti-dilutive shares excluded from the computation:

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

June 28,

  

June 29,

 

2015

 

2014

Weighted average shares outstanding - basic and diluted

43,787

 

43,357

Anti-dilutive securities excluded from diluted loss per share computation:

 

 

 

Options

70

 

 —

Unvested restricted stock

7

 

41

Restricted stock units

1,191

 

56

Total anti-dilutive securities

1,269

 

97

 

As of June 28, 2015 and June 29, 2014 certain of the 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.

 

4.LONG-TERM DEBT

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 28,

 

March 29,

 

 

2015

 

2015

Credit facility, gross

 

$

268,125

 

$

268,813

Less unamortized discount

 

 

(10,878)

 

 

(11,727)

Credit facility, net

 

 

257,247

 

 

257,086

Less current maturities

 

 

(2,750)

 

 

(2,750)

Long-term debt, net of current maturities

 

$

254,497

 

$

254,336

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

June 28,

 

June 29,

 

2015

    

2014

 

 

 

 

 

 

Interest on senior credit facility

$

3,753

 

$

3,727

Amortization of original issue discount

 

849

 

 

838

Amortization of deferred financing fees

 

437

 

 

438

Other interest (income) expense, net

 

(184)

 

 

(225)

Total

$

4,855

 

$

4,778

 

 

 

 

 

 

Effective interest rate on senior credit facility

 

7.8%

 

 

7.8%

 

Other interest (income) expense, net includes approximately $228,000 and $221,000 of capitalized interest for the thirteen weeks ended June 28, 2015 and June 29, 2014, respectively.

 

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

10


 

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 its 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 covenant.

 

Borrowings under the 2013 Senior Credit Facility, as amended, bear interest, at the option of the Company, at (i) adjusted LIBOR (subject to a 1.0% 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 1.0% 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.

 

All of the borrower’s obligations under the 2013 Senior Credit Facility, as amended, 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, as amended, 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).

 

The 2013 Senior Credit Facility, as amended, 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 set forth under the 2013 Senior Credit Facility at June 28, 2015.  Because the Company’s recent operating performance has been below the Company’s expectations at the time that the financial covenants in its senior credit facility were established, if the Company’s financial performance does not 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.

 

At June 28, 2015, the Company had $29.6 million of outstanding letters of credit, and $10.4 million of availability under the 2013 Revolving Facility, all of which was available for letters of credit.  Subsequent to

11


 

June 28, 2015, the Company increased its outstanding letters of credit by $3.0 million in the aggregate, decreasing its availability under the 2013 Revolving Facility to $7.4 million.

 

5.STOCK-BASED COMPENSATION

 

The Company accounts for stock-based compensation awards in accordance with the provisions of FASB Accounting Standards Codification (“ASC”) Topic 718 — Compensation — Stock Compensation  which requires companies to estimate the fair value of share-based payment awards on the date of grant. The value of the portion of the awards ultimately expected to vest is recognized as expense over the requisite service period. The Company recognized total stock-based compensation of $2.4 million and $2.9 million for the thirteen weeks ended June 28, 2015 and June 29, 2014, respectively, as general and administrative expenses in the Company’s Consolidated Statements of Operations.

 

Included in the amounts recorded for the thirteen weeks ended June 29, 2014 are: (i) approximately  $96,000  representing the value of restricted stock units issued to certain directors during such period in payment of the directors’ fees for the calendar quarter ended June 30, 2014; (ii) approximately $41,000 representing the value of restricted stock units issued during such period to the Company’s chairman in payment of his fees for serving as executive chairman for the calendar quarter ended June 30, 2014; and (iii) approximately $187,500 representing the value of restricted stock units issued to a former executive officer in partial payment of his salary for the calendar quarter ended June 30, 2014.  All of these restricted stock units were vested upon issuance but will be settled in shares of Class A common stock in the future. No such items were included in stock-based compensation expense during the thirteen weeks ended June 28, 2015.

 

The Company’s 2007 Equity Compensation Plan (the “2007 Plan”), which provided for the grant of stock options and restricted shares, and the 2013 Long-Term Incentive Plan (the “2013 Plan”), which provides for the grant of stock options, restricted stock units, restricted stock, other stock-based awards and other cash-based awards, are more fully described in the Company’s Annual Proxy Statement for its 2015 annual meeting of stockholders filed with the Securities and Exchange Commission on June 23, 2015 under the caption “Executive Compensation—Equity Compensation Plans.”  Changes in equity awards outstanding under the 2007 Plan and 2013 Plan during the thirteen weeks ended June 28, 2015 are summarized as follows:

 

2007 Equity Compensation Plan

 

As of June 28, 2015, there was $47,000 of unrecognized compensation expense related to the restricted stock awards granted under the 2007 Plan.

 

The status of the Company’s unvested restricted stock grants for the thirteen weeks ended June 28, 2015  is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Restricted

 

Average Grant

 

    

Stock

 

Date Fair Value

Outstanding unvested awards at March 29, 2015

 

15,573

 

$

7.81

Granted

 

 —

 

 

Vested

 

(7,786)

 

 

7.81

Forfeited

 

 —

 

 

Outstanding unvested awards at June 28, 2015

 

7,787

 

$

7.81

 

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2013 Long-Term Incentive Plan

 

Restricted Stock Units

 

As of June 28, 2015, there was $10.7 million of unrecognized compensation expense related to the restricted stock unit awards (“RSU”s) granted under the 2013 Plan.

 

The status of the Company’s unvested restricted stock units for the thirteen weeks ended June 28, 2015  is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Restricted

 

Average Grant

 

 

Stock Units

 

Date Fair Value

Outstanding unvested awards at March 29, 2015

 

3,195,624

 

$

8.26

Granted

 

248,347

 

 

4.84

Forfeited

 

(28,668)

 

 

13.44

Vested

 

(258,593)

 

 

10.87

Outstanding unvested awards at June 28, 2015

 

3,156,710

 

$

7.73

 

Approximately 13,847 RSUs with a grant-date fair value of approximately $94,000 granted during the thirteen weeks ended June 28, 2015 related to executive separation agreements, which were charged to expense during fiscal 2015.  As of June 28, 2015, approximately $305,000 is included in accrued expenses related to separation payments to be made in RSUs in future periods.

 

Stock Options

 

As of June 28, 2015, there was $1.4 million of unrecognized compensation expense related to the stock option compensation awards granted under the 2013 Plan.

 

A summary of stock option activity for the thirteen weeks ended June 28, 2015 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

Weighted

 

Average

 

 

 

 

Average

 

Remaining

 

 

Stock

 

Exercise

 

Contractual

 

    

Options

    

Price

    

Life (years)

Balance at March 29, 2015

 

878,722

 

$

9.65

 

 

Granted

 

 —

 

 

 —

 

 

Forfeited

 

(36,955)

 

 

15.01

 

 

Exercised

 

 —

 

 

 —

 

 

Outstanding awards at June 28, 2015

 

841,767

 

 

9.42

 

8.6

 

 

 

 

 

 

 

 

Exercisable at June 28, 2015

 

237,128

 

$

13.18

 

8.0

 

Stock options outstanding as of June 28, 2015 had $264,000 of aggregate intrinsic value.  Aggregate intrinsic value represents the value of the Company’s stock based on the 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.  

 

6.RELATED PARTY TRANSACTIONS

 

Operating Leases and Utility Services 

 

A director who is a former executive officer of the Company:

·

owns one-third of certain entities from which the Company leases certain stores, a production bakery, and warehouses;

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·

owns one-sixth of an entity from which the Company leases its Red Hook, Brooklyn, NY (“Red Hook”) store; and

·

owns one-sixth of an entity from which the Company obtains utility services for its Red Hook store.

 

Total amounts related to the foregoing included $1.5 million and $1.5 million in cost of sales and $0.4 million and $0.4 million in general and administrative expenses for the thirteen weeks ended June 28, 2015 and June 29, 2014, respectively.  At June 28, 2015 and March 29, 2015, amounts payable to related parties included in accrued expenses were $0 and $0.1 million, respectively, and receivables from related parties of $0.3 million and $0.2 million, respectively, were included in accounts receivable.  

 

Executive Separations

 

In connection with the separation of the Company’s then Chief Executive Officer in February 2014, its then Interim Chief Executive Officer in September 2014, and the retirement of an individual who served as an executive officer in November 2014 (although this individual remains a director), the Company entered into separation agreements with the departed individuals.  Under certain of these agreements, the Company entered into consulting arrangements with the departed individuals and was obligated to provide salary and benefit continuation, which required the payment of cash and the grant of restricted stock units.  Under these agreements, the Company paid cash of $1.0 million and $47,000 for the thirteen weeks ended June 28, 2015 and June 29, 2014, respectively.  During the thirteen weeks ended June 28, 2015, the Company granted approximately 13,847 restricted stock units with a grant date fair value of approximately $94,000 related to these agreements.  No restricted stock units related to these agreements were granted during the thirteen weeks ended June 29, 2014.

 

As June 28, 2015 and March 29, 2015, amounts related to executive separation included in accrued expenses were $1.4 million and $2.4 million, respectively.

 

7.INCOME TAXES

 

The reconciliation of the U.S. statutory rate with the Company’s effective tax rate for the thirteen weeks ended June 28, 2015 is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Thirteen Weeks Ended

 

 

June 28,

 

June 29,

 

 

2015

 

2014

Federal statutory rate

 

34.0

%

 

34.0

%

Effect of:

 

 

 

 

 

 

State income taxes (net of federal tax benefit)

 

6.8

 

 

8.7

 

Permanent differences

 

(2.0)

 

 

(0.4)

 

Stock compensation

 

(8.0)

 

 

 —

 

Valuation allowance

 

(49.1)

 

 

(53.1)

 

Effective rate

 

(18.3)

%

 

(10.8)

%

 

As a result of historical net operating losses (“NOLs”), the Company currently provides a full valuation allowance against its net deferred tax assets.  For the thirteen weeks ended June 28, 2015 and June 29, 2014, income tax expense was computed at the estimated annual effective rate based on the total estimated annual tax provision which included state income taxes and a deferred tax provision related to amortization of certain indefinite-lived intangible assets.  

 

Based on management’s assessment, the Company has placed a valuation reserve against its deferred tax assets, as it is more likely than not that the Company may not generate sufficient taxable income during the carryforward period to utilize the NOLs.  The Company regularly reviews the net deferred tax valuation allowance to determine if available evidence continues to support the position that it is more likely than not that a portion of or the entire deferred tax asset will not be realized in the future. As of June 28, 2015, management could not conclude that it is more likely than not that

14


 

the deferred tax assets will be realized. As a result, the Company continues to maintain a full valuation allowance against its deferred tax assets. The Company will continue to assess its position in future periods to determine if it is appropriate to reduce a portion of its valuation allowance in the future.

 

For more information regarding the Company’s valuation allowance against its deferred tax assets, please see Note 13 to the Company’s audited financial statements included in its Annual Report on Form 10-K for the fiscal year ended March 29, 2015.

 

The valuation allowance was $116.6 million and $110.8 million as of June 28, 2015 and March 29, 2015, respectively.

 

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 6, which expire at various times through 2039. Required rent payments under lease agreements with related parties increase 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.

 

The Company has signed certain leases for which the Company’s obligation is not yet established because the Company does not yet have possession of the site. The aggregate minimum rental commitments under all operating leases, for which the Company has possession, as of June 28, 2015 are as follows for the fiscal years ending (in thousands):

 

 

 

 

 

 

 

 

 

 

April 3, 2016

    

$

29,449

April 2, 2017

 

 

38,989

April 1, 2018

 

 

37,306

March 31, 2019

 

 

37,474

March 29, 2020

 

 

37,970

Thereafter

 

 

590,068

 

 

$

771,256

 

Rent expense for the thirteen weeks ended June 28, 2015 and June 29, 2014 was approximately $11.2 million and $10.2 million, respectively.

 

During the thirteen weeks ended June 28, 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 recorded a charge of $3.7 million during the thirteen weeks ended June 28, 2015, which has been included in general and administrative expenses. The amount recorded includes $3.5 million paid in cash to the landlord, of which $0.5 million was paid during the thirteen weeks ended June 28, 2015 and the remainder was paid in July 2015, and the impairment of $0.2 million of previously capitalized investments in the store site. The $3.0 million that was paid in July 2015 has been included in accrued expenses as of June 28, 2015.

 

15


 

Other Contingencies

 

The Company obtains its utility services for the Red Hook store from an entity which is one sixth  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 securities 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 have been filed with the court. 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 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. On June 18, 2015, the court denied the plaintiffs’ motion for reconsideration. The plaintiffs’ appeal brief is due by September 14, 2015. 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, the Company cannot predict the outcome of these lawsuits.

 

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.

16


 

 

9.RECENTLY ISSUED ACCOUNTING STANDARDS

 

The Company does 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, 2017.  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 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 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. 

 

 

 

 

17


 

 

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

 

You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended March 29, 2015, as filed with the Securities and Exchange Commission. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q.  See “Special Note on Forward Looking Statements” above. The results of operations for the thirteen weeks ended June 28, 2015 may not necessarily be indicative of the results that may be expected for the entire fiscal year ending April 3, 2016.

 

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 by reference to the calendar year in which the fiscal year ends. Accordingly, “fiscal 2015” refers to our fiscal year ended on March 29, 2015 and “fiscal 2016” refers to our fiscal year ending April 3, 2016.  The thirteen week periods ended June 29, 2014 and June 28, 2015 are the first fiscal quarter of fiscal 2015 and fiscal 2016, respectively.

 

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 fifteen locations in New York, New Jersey and Connecticut, four of which include Fairway Wines & Spirits locations.  Fourteen of the stores were in operation prior to the beginning of fiscal 2015; one store and one Wine & Spirits location were opened during fiscal 2015, subsequent to June 29, 2014.  

 

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 expanding our store base in the Greater New York City metropolitan area, improving our operating margins and increasing sales at existing stores.  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.

18


 

 

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.

 

We believe our differentiated format and destination one-stop shopping appeal attracts customers from as far as twenty-five 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 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 management and merchandising teams to support our long-term growth objectives.

19


 

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 have been, 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.

 

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.

 

Effect of Weather-related and Other Emergencies

 

During any fiscal period, events of extreme weather and other emergencies such as mass utility outages can cause changes in consumer behavior, labor availability, suppliers’ ability to meet our demand and in some cases our ability to keep our stores open immediately before, during, and immediately following such events, which can have a  significant impact on our operating results.  

 

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:

 

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.

20


 

 

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

·

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;

·

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.

 

21


 

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;

·

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, 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.

 

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.

 

22


 

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 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 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 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 the four fiscal quarter period ended June 28, 2015 and June 29, 2014 was $41.5 million and $51.4 million, respectively, compared to Adjusted EBITDA for the four fiscal quarter period ended June 28, 2015 and June 29, 2014 of $39.8 million and $47.2 million, respectively. 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, severance related expenses, organizational realignment costs, transaction expenses and bonuses, 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. Items such as production center start-up costs, severance-related expenses, non-recurring charges, organizational realignment costs and transaction expenses and bonuses were incurred and associated with discrete and different events not relating to our core on-going operations, including 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 completed in fiscal 2015. 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.

 

23


 

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 the table below. All of the items included in the reconciliation from net loss to Adjusted EBITDA are either (i) non-cash items or (ii) items that management does not consider in assessing our on-going operating performance. In the case of the non-cash items, management believes that investors may find it useful to assess our comparative operating performance because the measures without such items are less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and more reflective of other factors that affect operating performance. In the case of the other items that management does not consider in assessing our on-going operating performance, management believes that investors may find it useful to assess our operating performance if the measures are presented without these items because their financial impact may not reflect on-going operating performance.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

 

June 28,

 

June 29,

 

 

2015

 

2014

 

    

 

 

    

% of

 

 

 

    

% of

 

 

 

 

 

Net Sales

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(13,934)

 

(7.2)

%

 

$

(9,694)

 

(4.9)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net (a)

 

 

4,855

 

2.5

 

 

 

4,778

 

2.4

 

Income tax provision

 

 

2,158

 

1.1

 

 

 

945

 

0.5

 

Store depreciation and amortization

 

 

6,248

 

3.2

 

 

 

6,020

 

3.0

 

Corporate depreciation and amortization

 

 

841

 

0.4

 

 

 

1,036

 

0.5

 

Non-operating expenses (b)

 

 

3,761

 

1.9

 

 

 

 —

 

 —

 

Equity compensation charge

 

 

2,417

 

1.2

 

 

 

2,857

 

1.4

 

Store opening costs

 

 

1,272

 

0.7

 

 

 

1,686

 

0.9

 

Production center start-up costs

 

 

1,087

 

0.6

 

 

 

1,429

 

0.7

 

Professional services (c)

 

 

295

 

0.2

 

 

 

704

 

0.4

 

Severance (d)

 

 

108

 

0.1

 

 

 

767

 

0.4

 

Pre-opening advertising costs

 

 

 —

 

 —

 

 

 

604

 

0.3

 

Adjusted EBITDA

 

$

9,108

 

4.7

%

 

$

11,132

 

5.6

%

 


(a)

Includes amortization of deferred financing costs and original issue discount.

 

(b)

Consists of charges that were incurred and associated with discrete and different events that do not relate to and are not indicative of our core on-going operations not related to professional services.  Includes approximately $3.7 million for the thirteen weeks ended June 28, 2015 related to the termination of the lease for our former Hudson Yards location.

 

(c)

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.  

 

(d)

Represents severance charges related to our organizational realignment, including payments required to be paid under agreements in connection with the separation of certain of our former executive officers.

 

24


 

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.

 

Goodwill 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 we determine that events or changes in circumstances exist that would more likely than not reduce the fair value of our goodwill below its carrying value.  There were no goodwill or intangible asset impairments recorded in the thirteen weeks ended June 28, 2015 and June 29, 2014.  As of June 28, 2015, the carrying value of goodwill was $95.4 million.

 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 28,

 

June 29,

 

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

Net sales

    

$

193,774

 

100.0

%

 

$

198,268

 

100.0

%

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

 

 

132,830

 

68.5

 

 

 

136,872

 

69.0

 

Gross profit

 

 

60,944

 

31.5

 

 

 

61,396

 

31.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct store expenses

 

 

47,506

 

24.5

 

 

 

46,957

 

23.7

 

General and administrative expenses

 

 

18,000

 

9.3

 

 

 

15,295

 

7.7

 

Store opening costs

 

 

1,272

 

0.7

 

 

 

1,686

 

0.9

 

Production center start-up costs

 

 

1,087

 

0.6

 

 

 

1,429

 

0.7

 

Loss from operations

 

 

(6,921)

 

(3.6)

 

 

 

(3,971)

 

(2.0)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(4,855)

 

(2.5)

 

 

 

(4,778)

 

(2.4)

 

Loss before income taxes

 

 

(11,776)

 

(6.1)

 

 

 

(8,749)

 

(4.4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

 

(2,158)

 

(1.1)

 

 

 

(945)

 

(0.5)

 

Net loss

 

$

(13,934)

 

(7.2)

%

 

$

(9,694)

 

(4.9)

%

 

 

 

Thirteen Weeks Ended June 28, 2015 Compared With Thirteen Weeks Ended June 29, 2014

 

Net Sales

 

We had net sales of  $193.8 million in the thirteen weeks ended June 28, 2015,  a decrease of $4.5 million, or 2.3%, from $198.3 million in the thirteen weeks ended June 29, 2014.  This decrease was primarily attributable to lower same store sales, in part due to lower net sales contribution from our Upper Eastside store as a result of a recent competitive opening and higher promotional activity during the quarter, partially offset by the sales contribution from our store opened subsequent to the thirteen weeks ended June 29, 2014.  During the thirteen weeks ended June 28, 2015

25


 

we invested approximately $2.8 million in promotional activity, in large part due to the continued development of our digital customer engagement strategy, an increase of $2.7 million over the same period in the prior year.

 

Comparable store sales decreased 5.3% in the thirteen weeks ended June 28, 2015 compared to the thirteen weeks ended June 29, 2014, primarily due to a decrease in sales at our Upper Eastside location as a result of a competitive opening and an increase in coupon activity. Customer transactions in our comparable stores decreased by 7.4%, although the average transaction size at our comparable stores increased by 2.3%. We estimate that comparable store sales were impacted by approximately 170 basis points from the competitive opening on the Upper Eastside and 130 basis points from increased promotional activity. Excluding the impacts of the Upper Eastside and the promotional activity from both periods, we estimate comparable store sales decreased 2.3% in the thirteen weeks ended June 28, 2015 compared to the thirteen weeks ended June 29, 2014.  

 

Gross Profit

 

Gross profit was  $60.9 million for the thirteen weeks ended June 28, 2015 compared to $61.4 million for the thirteen weeks ended June 29, 2014.  Our gross margin increased approximately 50 basis points to 31.5% for the thirteen weeks ended June 28, 2015 from 31.0% for the thirteen weeks ended June 29, 2014.  The increase in gross margin was due to improved merchandise margins, partially offset by an increase in occupancy costs. Despite increased promotional activity during the thirteen weeks ended June 28, 2015, our merchandise margin improved approximately 100 basis points due to price optimization and enhanced procurement disciplines.

 

Direct Store Expenses

 

Direct store expenses were $47.5 million in the thirteen weeks ended June 28, 2015,  an increase of $0.5 million, or 1.2%, from $47.0 million for the thirteen weeks ended June 29, 2014.  The increase in direct store expenses was primarily attributable to the increase in the number of stores in operation during the period.  Despite having one additional store in operation during the thirteen weeks ended June 28, 2015, our store labor expenses decreased $0.1 million.  Other store operating expenses increased $0.4 million in the thirteen weeks ended June 28, 2015, compared to the thirteen weeks ended June 29, 2014.  The portion of our depreciation expense included in direct store expenses, which includes amortization of prepaid rent, increased $0.2 million to $6.2 million for the thirteen weeks ended June 28, 2015, compared to direct store depreciation expense for the thirteen weeks ended June 29, 2014 of $6.0 million.  The increase in direct store depreciation expense for the thirteen weeks ended June 28, 2015 compared with the thirteen weeks ended June 29, 2014 is attributable to the increase in the number of stores in operation during the period.

 

Direct store expenses, as a percentage of net sales, increased approximately 80 basis points to 24.5% in the thirteen weeks ended June 28, 2015 from 23.7% in the thirteen weeks ended June 29, 2014.  Excluding depreciation and amortization, store expenses as a percentage of sales were 21.3% in the thirteen weeks ended June 28, 2015 compared to 20.6% in the thirteen weeks ended June 29, 2014.  The increase in store expenses as a percentage of sales was primarily attributable to higher fringe expenses, in part due to higher costs associated with the Affordable Care Act and an increase in advertising.

 

General and Administrative Expenses

 

General and administrative expenses were $18.0 million for the thirteen weeks ended June 28, 2015,  an increase of $2.7 million, or 17.7%, from $15.3 million for the thirteen weeks ended June 29, 2014. The increase in general and administrative expenses was due to $3.8 million in non-operating expenses, primarily attributable to costs related to the lease termination at our former Hudson Yards location. The increase in general and administrative expenses was partially offset by lower severance, professional services, equity compensation and pre-opening advertising expenses.  Excluding the impact of the expense related to Hudson Yards, general and administrative expenses decreased approximately $1.0 million, or 6.5%. The portion of depreciation and amortization included in general and administrative expense was $0.8 million for the thirteen weeks ended June 28, 2015, a decrease of $0.2 million from $1.0 million for the thirteen weeks ended June 29, 2014. The Central Services component of general and administrative expenses increased $1.3 million in the thirteen weeks ended June 28, 2015 compared to the same period in the prior year.

 

26


 

General and administrative expenses, as a percentage of net sales, increased to 9.3% for the thirteen weeks ended June 28, 2015, from 7.7% for the thirteen weeks ended June 29, 2014.  Excluding the impact of the $3.7 million of costs related to the lease termination at our former Hudson Yards location, general and administrative expenses, as a percentage of sales decreased approximately 20 basis points to 7.5% in the thirteen weeks ended June 28, 2015 compared to the same period in the prior year. The following table sets forth a reconciliation to Central Services from general and administrative expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

 

June 28,

 

June 29,

 

 

2015

 

2014

 

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

Net Sales

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

General and administrative expenses

    

$

18,000

    

9.3

%

    

$

15,295

    

7.7

%

Non-operating expenses

 

 

(3,761)

 

(1.9)

 

 

 

 —

 

 —

 

 

 

 

14,239

 

7.3

 

 

 

15,295

 

7.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity compensation charge

 

 

(2,417)

 

(1.2)

 

 

 

(2,857)

 

(1.4)

 

Corporate depreciation and amortization

 

 

(841)

 

(0.4)

 

 

 

(1,036)

 

(0.5)

 

Professional services

 

 

(295)

 

(0.2)

 

 

 

(704)

 

(0.4)

 

Severance

 

 

(108)

 

(0.1)

 

 

 

(767)

 

(0.4)

 

Pre-opening advertising costs

 

 

 —

 

 —

 

 

 

(604)

 

(0.3)

 

Central services

 

$

10,578

 

5.5

%

 

$

9,327

 

4.7

%

 

Store Opening Costs

 

Store opening costs were $1.3 million for the thirteen weeks ended June 28, 2015,  a decrease of approximately $0.4 million, or 24.6%, from $1.7 million for the thirteen weeks ended June 29, 2014.  Store opening costs for the thirteen weeks ended June 28, 2015 were incurred in connection with the store in TriBeCa which has not yet opened.  Store opening costs for the thirteen weeks ended June 29, 2014 related to the store we opened in Lake Grove, New York in July 2014. Approximately $0.5 million and $0.4 million of store opening costs for the thirteen weeks ended June 28, 2015 and June 29, 2014, respectively, did not require the expenditure of cash in the period, primarily 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 $1.1 million for the thirteen weeks ended June 28, 2015,  a decrease of $0.3 million from $1.4 million for the thirteen weeks ended June 29, 2014.  Approximately $0.4 million of these costs for the thirteen weeks ended June 29, 2014 did not require the expenditure of cash in the period, primarily due to deferred rent.

 

Loss from Operations

 

For the thirteen weeks ended June 28, 2015, our operating loss was $6.9 million,  an increase of $3.0 million from a loss of $4.0 million for the thirteen weeks ended June 29, 2014.  The increase in the loss from operations was due to an increase in general and administrative expenses, primarily due to the costs related to the lease termination at our former Hudson Yards location, lower gross profit, in part due to increased promotional activity and higher direct store expenses, partially offset by a reduction in store opening costs and production center start-up costs.

 

Interest Expense

 

Interest expense increased  $0.1 million, to $4.9 million for the thirteen weeks ended June 28, 2015, from $4.8 million for the thirteen weeks ended June 29, 2014,  primarily due to an increase in letters of credit outstanding.  The cash

27


 

portion of interest expense for the thirteen weeks ended June 28, 2015 and the thirteen weeks ended June 29, 2014 was $3.8 million and $3.7 million, respectively.

 

Income Taxes

 

We recorded an income tax provision of $2.2 million for the thirteen weeks ended June 28, 2015  compared to a provision of $0.9 million for the thirteen weeks ended June 29, 2014. 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 recognize income tax expense related to indefinite-lived intangible assets. Our current expectation of the income tax provision for the full year is in the range of approximately $3.5 million to $4.0 million, which is expected to be primarily non-cash.

 

Net Loss

 

Our net loss was $13.9 million for the thirteen weeks ended June 28, 2015,  an increase of $4.2 million, from a net loss of $9.7 million for the thirteen weeks ended June 29, 2014. The increase in net loss was primarily attributable to an increase in general and administrative expenses, primarily due to the costs related to the lease termination at our former Hudson Yards location, an increase in the income tax provision, lower gross profit, in part due to increased promotional activity and higher direct store expenses, partially offset by a reduction in store opening costs and production center start-up costs.

 

Our adjusted net loss was $3.9 million for the thirteen weeks ended June 28, 2015,  an increase of $0.8 million compared to an adjusted net loss of $3.1 million for the thirteen weeks ended June 29, 2014.  We define adjusted net loss as net loss plus any transaction expenses, non-cash charges, one-time charges and non-operating expenses which we believe may distort period-to-period comparison.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

 

June 28,

 

June 29,

 

 

2015

 

2014

 

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

Net Sales

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

Net loss

    

$

(13,934)

    

(7.2)

%

 

$

(9,694)

    

(4.9)

%

Non-operating expenses

 

 

3,761

 

1.9

 

 

 

 —

 

 —

 

Equity compensation charge

 

 

2,417

 

1.2

 

 

 

2,857

 

1.4

 

Income tax provision

 

 

2,158

 

1.1

 

 

 

945

 

0.5

 

Non-cash interest

 

 

1,286

 

0.7

 

 

 

1,276

 

0.6

 

Professional services

 

 

295

 

0.2

 

 

 

704

 

0.4

 

Severance

 

 

108

 

0.1

 

 

 

767

 

0.4

 

Adjusted net loss

 

$

(3,909)

 

(2.0)

%

 

$

(3,145)

 

(1.6)

%

 

 

Liquidity and Capital Resources

 

Overview

 

Our primary sources of liquidity are cash generated from operations and borrowings under our 2013 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 our cash on hand and the cash generated from operations, together with the borrowing availability under our 2013 Senior Credit Facility, will be sufficient to meet our normal working capital needs for at least the next twelve months, including investments

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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 June 28, 2015, we had $32.2 million in cash and cash equivalents and $10.4 million in borrowing availability pursuant to our 2013 Senior Credit Facility.  Subsequent to June 28, 2015,  outstanding letters of credit were increased by  $3.0 million in aggregate,  decreasing our borrowing availability under the 2013 Senior Credit Facility to $7.4 million.

 

We were in compliance with all applicable affirmative, negative and financial covenants of the 2013 Senior Credit Facility at June 28, 2015.  At the time we entered into the 2013 Senior Credit Facility new levels for the maximum total leverage ratio financial covenant were established.  Our profitability has been below expectations at the time that the financial covenant levels were established, and if our financial performance does not 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. 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.

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

 

June 28,

 

 

June 29,

 

    

2015

 

 

2014

 

 

 

 

 

 

 

 

 

(in thousands)

Net cash (used in) provided by operating activities

 

$

(759)

 

$

5,505

Net cash used in investing activities

 

 

(2,718)

 

 

(14,332)

Net cash used in financing activities

 

 

(688)

 

 

(688)

Net decrease in cash and cash equivalents

 

$

(4,165)

 

$

(9,515)

 

Operating Activities

 

Net cash used in 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 used cash in operating activities of $0.8 million during the thirteen weeks ended June 28, 2015, while operating activities provided $5.5 million of cash during the thirteen weeks ended June 29, 2014. The decrease in cash provided by operating activities is primarily related to the timing of payments to our vendors and the higher net loss in the current quarter.

 

29


 

Investing Activities

 

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 expenditures of $2.7 million in the thirteen weeks ended June 28, 2015, of which $1.0 million was in connection with our new production facility, and $0.1 million was in connection with the store in the TriBeCa neighborhood of New York City, which has not yet opened.  The remaining approximately $1.6 million of capital expenditures was for merchandising initiatives and equipment upgrades and enhancements to existing stores. 

 

We made capital expenditures of $14.3 million in the thirteen weeks ended June 29, 2014, of which $6.9 million was in connection with the store we opened in Lake Grove, New York in July 2014 and $5.8 million was in connection with our new production facility.  The remaining approximately $1.6 million of capital expenditures was for merchandising initiatives and equipment upgrades and enhancements to existing stores.  

 

We plan to spend approximately $15 million to $17 million on capital expenditures during the remainder of fiscal 2016, primarily related to new stores expected to open during calendar year 2016 and equipment upgrades and enhancements at existing stores.

 

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.

 

Net cash used in financing activities during the thirteen weeks ended June 28, 2015 and June 29, 2014 was  $0.7 million consisting of principal payments on our outstanding debt.

 

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, as amended by the May 2013 amendment referred to below, 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 Credit Facility to, among other things, further reduce the interest rate we pay under the Credit Facility and eliminate the interest coverage ratio financial covenant.

 

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 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

30


 

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, however, we have the ability to exercise equity cure rights, which allows us to issue additional equity and treat the proceeds 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.

 

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.

 

In the event of a covenant violation or other default that remains uncured, the lenders have the right to declare all outstanding debt under the Senior Credit Facility immediately due and payable.

 

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 by reference as an exhibit to our Annual Report on Form 10-K for the fiscal year ended March 29, 2015. 

 

31


 

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 financial statements and reported amounts of revenues and expenses during the year. We believe our estimates and assumptions are reasonable; however, future results could differ from those estimates under different assumptions or conditions.

 

Critical accounting policies are policies that reflect material judgment and uncertainty and may result in materially different results using different assumptions or conditions. We identified the following critical accounting policies and estimates: merchandise inventories, goodwill and other intangible assets, impairment of long-lived assets, income taxes and stock-based compensation.  For a detailed discussion of accounting policies, refer to our Annual Report on Form 10-K for the fiscal year ended March 29, 2015.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

There have been no material changes in our exposure to market risk from the information provided in Item 7A. Quantitative and Qualitative Disclosures About Market Risk of our Annual Report on Form 10-K for the fiscal year ended March 29, 2015.

 

Item 4. Controls and Procedures

 

As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), our chief executive officer and chief financial officer, together with our management, evaluated Fairway’s disclosure controls and procedures as of June 28, 2015, the end of the period covered by this report. Based on that evaluation, our chief executive officer and chief financial officer concluded that Fairway’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) were effective as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

In connection with the evaluation described above, there were no changes in our internal control over financial reporting during the quarter ended June 28, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

In designing and evaluating the disclosure controls and procedures, management recognizes that any 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 judgment in evaluating the benefits of possible controls and procedures relative to their costs.

32


 

 

Part II — Other Information

 

Item 1. 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.

 

In February and March 2014, three purported securities 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 have been filed with the court.  Although we believe the claims are without merit and intend to defend this lawsuit vigorously, we cannot predict the outcome of this lawsuit.

 

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.  On June 18, 2015, the court denied the plaintiffs’ motion for reconsideration. The plaintiffs’ appeal brief is due by September 14, 2015.  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.

 

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.

 

33


 

Item 1A. Risk Factors

 

There were no material changes in risk factors for the Company in the period covered by this report. See the discussion of risk factors in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 29, 2015.

 

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

 

Sales of Unregistered Securities

 

From March 30, 2015 through June 28, 2015, we issued to one of our non-employee directors who is a former executive officer 13,847 restricted stock units in accordance with the individual’s separation agreement and granted to our officers and employees an aggregate of 234,500 restricted stock units to be settled in shares of our Class A common stock under our 2013 Long-Term Incentive Plan.

 

Use of Proceeds

 

Not applicable.

 

Issuer Purchases of Equity Securities

 

Not applicable.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

None.

 

Item 5. Other Information 

 

None.

 

Item 6. Exhibits

 

Reference is made to the separate exhibit index contained on page 36 filed herewith.

 

 

 

34


 

 

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

 

 

John E. Murphy

 

 

Chief Executive Officer

 

 

 

 

Date: August 4, 2015

 

 

 

 

By:

/s/ Edward C. Arditte

 

 

Edward C. Arditte

 

 

Co-President and Chief Financial Officer

 

 

 

 

Date: August 4, 2015

 

 

 

 

By:

/s/ Linda M. Siluk

 

 

Linda M. Siluk

 

 

Senior Vice President - Finance & Chief Accounting Officer

 

 

 

Date: August 4, 2015

 

 

 

 

 

 

35


 

 

Exhibit Index

 

 

 

 

Exhibit
Number

      

Description

 

 

 

 

 

 

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

 


#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 (the “Securities Act”) or the Exchange Act.

 

36