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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended May 1, 2015

 

OR

 

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

 

Commission file number 1-11735

 

99 CENTS ONLY STORES LLC

(Exact Name of Registrant as Specified in Its Charter)

 

California
(State or Other Jurisdiction
of Incorporation or Organization)

 

95-2411605
(I.R.S. Employer Identification No.)

 

 

 

4000 Union Pacific Avenue,
City of Commerce, California
(Address of Principal Executive Offices)

 

90023
(Zip Code)

 

Registrant’s Telephone Number, Including Area Code: (323) 980-8145

 

 

(Former name, address and fiscal year, if changed since last report)

 

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 o  No x

 

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 x No o

 

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. (Check one):

 

Large accelerated filer o

Accelerated filer o

 

 

Non-accelerated filer x

Smaller reporting company o

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

 

As of June 10, 2015, there were 100 units outstanding of the registrant’s common units, none of which are publicly traded.

 

 

 



Table of Contents

 

99 CENTS ONLY STORES LLC

Form 10-Q

Table of Contents

 

 

 

Page

Part I - Financial Information

Item 1.

Financial Statements

4

 

Consolidated Balance Sheets as of May 1, 2015 (unaudited) and January 30, 2015

4

 

Consolidated Statements of Comprehensive Income (Loss) for the first quarter ended May 1, 2015 (unaudited) and May 2, 2014 (unaudited)

5

 

Consolidated Statements of Cash Flows for the first quarter ended May 1, 2015 (unaudited) and May 2, 2014 (unaudited)

6

 

Notes to Consolidated Financial Statements

7

Item 2.

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

29

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

Item 4.

Controls and Procedures

38

Part II – Other Information

Item 1.

Legal Proceedings

39

Item 1A.

Risk Factors

39

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

Item 3.

Defaults Upon Senior Securities

39

Item 4.

Mine Safety Disclosures

39

Item 5.

Other Information

39

Item 6.

Exhibits

40

 

Signatures

41

 

2



Table of Contents

 

FORWARD-LOOKING INFORMATION

 

This Quarterly Report on Form 10-Q (this “Report”) contains statements that constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended.  The words “expect,” “estimate,” “anticipate,” “predict,” “will,” “project,” “plan,” “believe” and other similar expressions and variations thereof are intended to identify forward-looking statements.  Such statements appear in a number of places in this Report and include statements regarding the intent, belief or current expectations of 99 Cents Only Stores LLC and its directors or officers with respect to, among other things, (a) trends affecting the financial condition or results of operations of the Company, and (b) the business and growth strategies of the Company (including the Company’s store opening growth rate) and (c) our investments in our existing stores, warehouse and distribution facilities and information systems, that are not historical in nature.  The term the “Company” refers to 99¢ Only Stores and its consolidated subsidiaries prior to the conversion to a California limited liability company effective October 18, 2013 and to 99 Cents Only Stores LLC and its consolidated subsidiaries on or after such conversion.  Readers are cautioned not to put undue reliance on such forward-looking statements.  Such forward-looking statements are and will be based on the Company’s then-current expectations, estimates and assumptions regarding future events and are applicable only as of the date of such statements.  The Company may not realize its expectations and its estimates and assumptions may not prove correct.  In addition, such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those projected in this Report, for the reasons, among others, discussed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” sections.  The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof.  Readers should carefully review the risk factors described in the Company’s Annual Report on Form 10-K containing the Company’s most recent audited financial statements for the fiscal year ended January 30, 2015 filed with the Securities and Exchange Commission.

 

3



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

99 CENTS ONLY STORES LLC

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

 

May 1,
2015

 

January 30,
2015

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash

 

$

2,383

 

$

12,463

 

Accounts receivable, net of allowance for doubtful accounts of $34 and $58 at May 1, 2015 and January 30, 2015, respectively

 

2,251

 

1,954

 

Income taxes receivable

 

22,316

 

10,911

 

Deferred income taxes

 

41,583

 

41,583

 

Inventories, net

 

301,928

 

296,040

 

Assets held for sale

 

1,680

 

3,094

 

Other

 

18,113

 

19,039

 

Total current assets

 

390,254

 

385,084

 

Property and equipment, net

 

584,409

 

581,020

 

Deferred financing costs, net

 

14,645

 

15,463

 

Intangible assets, net

 

458,812

 

460,311

 

Goodwill

 

479,745

 

479,745

 

Deposits and other assets

 

7,958

 

7,543

 

Total assets

 

$

1,935,823

 

$

1,929,166

 

 

 

 

 

 

 

LIABILITIES AND MEMBER’S EQUITY

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

145,960

 

$

139,287

 

Payroll and payroll-related

 

20,035

 

20,004

 

Sales tax

 

6,779

 

14,087

 

Other accrued expenses

 

50,825

 

40,168

 

Workers’ compensation

 

70,121

 

70,491

 

Current portion of long-term debt

 

6,138

 

6,138

 

Current portion of capital and financing lease obligation

 

599

 

380

 

Total current liabilities

 

300,457

 

290,555

 

Long-term debt, net of current portion

 

896,088

 

901,395

 

Unfavorable lease commitments, net

 

7,595

 

8,220

 

Deferred rent

 

24,512

 

23,293

 

Deferred compensation liability

 

764

 

724

 

Capital and financing lease obligation, net of current portion

 

24,841

 

24,681

 

Long-term deferred income taxes

 

170,789

 

170,678

 

Other liabilities

 

1,415

 

1,868

 

Total liabilities

 

1,426,461

 

1,421,414

 

 

 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 

Member’s Equity:

 

 

 

 

 

Member units — 100 units issued and outstanding at May 1, 2015 and January 30, 2015

 

549,407

 

549,135

 

Investment in Number Holdings, Inc. preferred stock

 

(19,200

)

(19,200

)

Accumulated deficit

 

(20,014

)

(21,185

)

Other comprehensive loss

 

(831

)

(998

)

Total equity

 

509,362

 

507,752

 

Total liabilities and equity

 

$

1,935,823

 

$

1,929,166

 

 

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

 

4



Table of Contents

 

99 CENTS ONLY STORES LLC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

 

 

For the First Quarter Ended

 

 

 

May 1,
2015

 

May 2,
2014

 

Net Sales:

 

 

 

 

 

99¢ Only Stores

 

$

494,808

 

$

465,269

 

Bargain Wholesale

 

11,361

 

12,628

 

Total sales

 

506,169

 

477,897

 

Cost of sales

 

349,546

 

320,771

 

Gross profit

 

156,623

 

157,126

 

Selling, general and administrative expenses

 

150,172

 

125,782

 

Operating income

 

6,451

 

31,344

 

Other (income) expense:

 

 

 

 

 

Interest income

 

(3

)

 

Interest expense

 

16,272

 

15,429

 

Total other expense, net

 

16,269

 

15,429

 

(Loss) income before provision for income taxes

 

(9,818

)

15,915

 

(Benefit) provision for income taxes

 

(10,989

)

6,340

 

Net income

 

$

1,171

 

$

9,575

 

Other comprehensive income, net of tax:

 

 

 

 

 

Unrealized losses on interest rate cash flow hedge

 

(76

)

(136

)

Less: reclassification adjustment included in net income

 

243

 

212

 

Other comprehensive income, net of tax

 

167

 

76

 

 

 

 

 

 

 

Comprehensive income

 

$

1,338

 

$

9,651

 

 

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

 

5



Table of Contents

 

99 CENTS ONLY STORES LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

For the First Quarter Ended

 

 

 

May 1,
2015

 

May 2,
2014

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

1,171

 

$

9,575

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

15,803

 

12,184

 

Amortization of deferred financing costs and accretion of OID

 

1,146

 

1,083

 

Amortization of intangible assets

 

444

 

447

 

Amortization of favorable/unfavorable leases, net

 

435

 

175

 

Gain on disposal of fixed assets

 

(32

)

(7

)

Loss on interest rate hedge

 

359

 

282

 

Stock-based compensation

 

634

 

663

 

Changes in assets and liabilities associated with operating activities:

 

 

 

 

 

Accounts receivable

 

(297

)

48

 

Inventories

 

(5,888

)

(18,021

)

Deposits and other assets

 

594

 

464

 

Accounts payable

 

13,054

 

7,397

 

Accrued expenses

 

3,380

 

3,871

 

Accrued workers’ compensation

 

(370

)

(1,235

)

Income taxes

 

(11,405

)

4,498

 

Deferred rent

 

1,219

 

1,296

 

Other long-term liabilities

 

(102

)

(2,535

)

Net cash provided by operating activities

 

20,145

 

20,185

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(25,642

)

(19,363

)

Proceeds from sale of property and fixed assets

 

1,437

 

16

 

Net cash used in investing activities

 

(24,205

)

(19,347

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Payment of long-term debt

 

(1,535

)

(1,534

)

Proceeds under revolving credit facility

 

126,300

 

 

Payments under revolving credit facility

 

(130,400

)

 

Payments of capital lease obligation

 

(23

)

(21

)

Payments to repurchase stock options of Number Holdings, Inc.

 

(362

)

 

Net cash used in financing activities

 

(6,020

)

(1,555

)

Net decrease in cash

 

(10,080

)

(717

)

Cash - beginning of period

 

12,463

 

34,842

 

Cash - end of period

 

$

2,383

 

$

34,125

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Income taxes paid

 

$

 

$

628

 

Interest paid

 

$

9,125

 

$

7,638

 

Non-cash investing activities for purchases of property and equipment

 

$

6,381

 

$

1,681

 

 

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

 

6



Table of Contents

 

99 CENTS ONLY STORES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.                                      Basis of Presentation and Summary of Significant Accounting Policies

 

Nature of Business

 

The Company is organized under the laws of the State of California.  Effective October 18, 2013, 99¢ Only Stores converted from a California corporation to a California limited liability company, 99 Cents Only Stores LLC, that is managed by its sole member, Number Holdings, Inc., a Delaware corporation (“Parent”).  The term “Company” refers to 99¢ Only Stores and its consolidated subsidiaries prior to the Conversion (as described in Note 1 to the Annual Report on Form 10-K for the fiscal year ended January 30, 2015) and to 99 Cents Only Stores LLC and its consolidated subsidiaries at the time of or after the Conversion.  The Company is an extreme value retailer of consumable and general merchandise and seasonal products. As of May 1, 2015, the Company operated 386 retail stores with 279 in California, 49 in Texas, 37 in Arizona, and 21 in Nevada.  The Company is also a wholesale distributor of various products.

 

Merger

 

On January 13, 2012, the Company was acquired through a merger (the “Merger”) with a subsidiary of Parent with the Company surviving.  In connection with the Merger, the Company became a subsidiary of Parent, which is controlled by affiliates of Ares Management, L.P. (“Ares”) and Canada Pension Plan Investment Board.  As a result of the Merger, the Company’s common stock was delisted from the New York Stock Exchange and ceased to be a publicly held and traded equity company.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”).  However, certain information and footnote disclosures normally included in financial statements prepared in conformity with GAAP have been omitted or condensed pursuant to the rules and regulations of the Securities and Exchange Commission.  These statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2015.  In the opinion of the Company’s management, these interim unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the consolidated financial position and results of operations for each of the periods presented.  The results of operations and cash flows for such periods are not necessarily indicative of results to be expected for the full fiscal year ending January 29, 2016 (“fiscal 2016”).

 

Fiscal Year

 

The Company follows a fiscal calendar consisting of four quarters with 91 days, each ending on the Friday closest to the last day of April, July, October or January, as applicable, and a 52-week fiscal year with 364 days, with a 53-week year every five to six years.  Unless otherwise stated, references to years in this Report relate to fiscal years rather than calendar years.  The Company’s fiscal year 2016 began on January 31, 2015, will end on January 29, 2016 and will consist of 52 weeks.  The Company’s fiscal year 2015 (“fiscal 2015”) began on February 1, 2014, ended on January 30, 2015 and consisted of 52 weeks.  The first quarter ended May 1, 2015 (“the first quarter of fiscal 2016”) was comprised of 91 days.  The first quarter ended May 2, 2014 (“the first quarter of fiscal 2015”) was comprised of 91 days.  References to the Company’s “transition fiscal 2014” are to the Company’s fiscal year ended January 31, 2014.

 

Use of Estimates

 

The preparation of the unaudited consolidated financial statements, in conformity with GAAP, requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Cash

 

For purposes of reporting cash flows, cash includes cash on hand, cash at the stores and cash in financial institutions.  The majority of payments due from financial institutions for the settlement of debit card and credit card transactions are processed within three business days and therefore are also classified as cash.  Cash balances held at financial institutions are generally in excess of

 

7



Table of Contents

 

federally insured limits.  These accounts are only insured by the Federal Deposit Insurance Corporation up to $250,000.  The Company historically has not experienced any losses in such accounts.  The Company places its temporary cash investments with what it believes to be high credit, quality financial institutions.  Under the Company’s cash management system, checks issued but not presented to the bank may result in book cash overdraft balances for accounting purposes.  The Company reclassifies book overdrafts to accounts payable, which are reflected as an operating activity in its unaudited consolidated statements of cash flows.  Book overdrafts included in accounts payable were $6.2 million and $16.5 million as of May 1, 2015 and January 30, 2015, respectively.

 

Allowance for Doubtful Accounts

 

In connection with its wholesale business, the Company evaluates the collectability of accounts receivable based on a combination of factors.  In cases where the Company is aware of circumstances that may impair a specific customer’s ability to meet its financial obligations subsequent to the original sale, the Company will record an allowance against amounts due and thereby reduce the net recognized receivable to the amount the Company reasonably believes will be collected.  For all other customers and tenants, the Company recognizes allowances for doubtful accounts based on the length of time the receivables are past due, industry and geographic concentrations, the current business environment and the Company’s historical experiences.

 

Inventories

 

Inventories are valued at the lower of cost or market. Inventory cost is established using a methodology that approximates first in, first out, which for store inventories is based on a retail inventory method.  Valuation allowances for shrinkage as well as excess and obsolete inventory are also recorded.  Shrinkage is estimated as a percentage of sales for the period from the last physical inventory date to the end of the applicable period.  Such estimates are based on experience and the most recent physical inventory results.  Physical inventory counts are completed at each of the Company’s retail stores at least once a year by an outside inventory service company.  The Company performs inventory cycle counts at its warehouses throughout the year.  The Company also performs inventory reviews and analysis on a quarterly basis for both warehouse and store inventory to determine inventory valuation allowances for excess and obsolete inventory.  The valuation allowances for excess and obsolete inventory are based on the age of the inventory, sales trends and future merchandising plans.  The valuation allowances for excess and obsolete inventory require management judgment and estimates that may impact the ending inventory valuation and valuation allowances that may affect the reported gross margin for the period.

 

In order to obtain inventory at attractive prices, the Company takes advantage of large volume purchases, closeouts and other similar purchases.  As such, the Company’s inventory fluctuates from period to period and the inventory balances vary based on the timing and availability of such opportunities.

 

Property and Equipment

 

Property and equipment are carried at cost and are depreciated or amortized on a straight-line basis over the following useful lives:

 

Owned buildings and improvements

Lesser of 30 years or the estimated useful life of the improvement

Leasehold improvements

Lesser of the estimated useful life of the improvement or remaining lease term

Fixtures and equipment

3-5 years

Transportation equipment

3-5 years

Information technology systems

For major corporate systems, estimated useful life up to 7 years; for functional standalone systems, estimated useful life up to 5 years

 

The Company’s policy is to capitalize expenditures that materially increase asset lives and expense ordinary repairs and maintenance as incurred.

 

Long-Lived Assets

 

The Company assesses the impairment of depreciable long-lived assets when events or changes in circumstances indicate that the carrying value may not be recoverable.  The Company groups and evaluates long-lived assets for impairment at the individual store level, which is the lowest level at which individual identifiable cash flows are available.  Recoverability is measured by comparing the carrying amount of an asset to expected future net cash flows generated by the asset.  If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, the carrying amount is compared to its fair value and an impairment charge is recognized to the extent of the difference.  Factors that the Company considers important that could individually or in combination trigger an impairment review include the following: (1) significant underperformance relative to expected historical or projected future operating results; (2) significant changes in the manner of the Company’s use of the acquired assets or the strategy for the Company’s

 

8



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overall business; and (3) significant changes in the Company’s business strategies and/or negative industry or economic trends.  On a quarterly basis, the Company assesses whether events or changes in circumstances occur that potentially indicate that the carrying value of long-lived assets may not be recoverable (Level 3 measurement, see Note 7, “Fair Value of Financial Instruments”).  Considerable management judgment is necessary to estimate projected future operating cash flows.  Accordingly, if actual results fall short of such estimates, significant future impairments could result.  During the first quarter of each of fiscal 2016 and fiscal 2015, the Company did not record any long-lived asset impairment charges.

 

Goodwill and Other Intangible Assets

 

In connection with the Merger purchase price allocation, the fair values of long-lived and intangible assets were determined based upon assumptions related to the future cash flows, discount rates and asset lives using then available information, and in some cases were obtained from independent professional valuation experts.  The Company amortizes intangible assets over their estimated useful lives unless such lives are deemed indefinite.

 

Goodwill and indefinite-lived intangible assets are not amortized but instead tested annually for impairment or more frequently when events or changes in circumstances indicate that the assets might be impaired.  Goodwill is tested for impairment by comparing the carrying amount of the reporting unit to the fair value of the reporting unit to which the goodwill is assigned.  The Company has the option of performing a qualitative assessment before calculating the fair value of the reporting unit (i.e., step one of the goodwill impairment test).  If the Company does not perform a qualitative assessment, or determines, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required.  The first step is to compare the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is considered not impaired; otherwise, goodwill is impaired and the loss is measured by performing step two.  Under step two, the impairment loss is measured by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of goodwill.  Management has determined that the Company has two reporting units, the wholesale reporting unit and the retail reporting unit.

 

The Company performs the annual test for impairment in January of the fiscal year and determines fair value based on a combination of the income approach and the market approach.  The income approach is based on discounted cash flows to determine fair value. The market approach uses a selection of comparable companies and transactions in determining fair value. The fair value of the trade name is also tested for impairment in the fourth quarter by comparing the carrying value to the fair value. Fair value of a trade name is determined using a relief from royalty method under the income approach, which uses projected revenue allocable to the trade name and an assumed royalty rate (Level 3 measurement, see Note 7, “Fair Value of Financial Instruments”).

 

Amortizable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable based on undiscounted cash flows, and, if impaired, written down to fair value based on either discounted cash flows or appraised values.  Significant judgment is required in determining whether a potential indicator of impairment of long-lived assets exists and in estimating future cash flows used in the impairment tests (Level 3 measurement, see Note 7, “Fair Value of Financial Instruments”).

 

During the first quarter of each of fiscal 2016 and fiscal 2015, the Company did not record any impairment charges related to goodwill or other intangible assets.

 

Derivatives

 

The Company accounts for derivative financial instruments in accordance with authoritative guidance for derivative instrument and hedging activities.  All financial instrument positions taken by the Company are intended to be used to manage risks associated with interest rate exposures.

 

The Company’s derivative financial instruments are recorded on the balance sheet at fair value, and are recorded in either current or noncurrent assets or liabilities based on their maturity.  Changes in the fair values of derivatives are recorded in net earnings or other comprehensive income (“OCI”), based on whether the instrument is designated and effective as a hedge transaction and, if so, the type of hedge transaction.  Gains or losses on derivative instruments reported in accumulated other comprehensive income (“AOCI”) are reclassified to earnings in the period the hedged item affects earnings.  Any ineffectiveness is recognized in earnings in the period incurred.

 

Income Taxes

 

The Company uses the liability method of accounting for income taxes.  Under the liability method, deferred tax assets and liabilities are recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities.  Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the net deferred tax assets will not be realized.  The Company’s ability to realize deferred tax assets is assessed throughout the year

 

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and a valuation allowance is established accordingly.  The Company recognizes the impact of a tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position.  The Company recognizes potential interest and penalties related to uncertain tax positions in income tax expense.  Refer to Note 10, “Income Taxes,” for further discussion of income taxes.

 

Stock-Based Compensation

 

The Company accounts for stock-based payment awards based on their fair value.  The value of the portion of the award that is ultimately expected to vest is recognized as an expense ratably over the requisite service periods.  For awards classified as equity, the Company estimates the fair value for each option award as of the date of grant using the Black-Scholes option pricing model or other appropriate valuation models.  The Black-Scholes model considers, among other factors, the expected life of the award and the expected volatility of the stock price.  Stock options are generally granted to employees at exercise prices equal to the fair market value of the stock at the dates of grant.  Former executive put rights were classified as equity awards and revalued using a binomial model at each reporting period with changes in the fair value recognized as stock-based compensation expense.  The fair value of the options that will vest based on the Company’s and Parent’s achievement of certain performance hurdles were valued using a Monte Carlo simulation method.  Refer to Note 8, “Stock-Based Compensation” for further discussion of stock-based compensation.

 

Revenue Recognition

 

The Company recognizes retail sales in its retail stores at the time the customer takes possession of merchandise.  All sales are net of discounts and returns and exclude sales tax.  Wholesale sales are recognized in accordance with the shipping terms agreed upon on the purchase order. Wholesale sales are typically recognized free on board origin, where title and risk of loss pass to the buyer when the merchandise leaves the Company’s distribution facility.

 

The Company has a gift card program.  The Company does not charge administrative fees on gift cards and the Company’s gift cards do not have expiration dates.  The Company records the sale of gift cards as a current liability and recognizes a sale when a customer redeems a gift card.  The liability for outstanding gift cards is recorded in accrued expenses.

 

Cost of Sales

 

Cost of sales includes the cost of inventory, freight in, obsolescence, spoilage, scrap and inventory shrinkage, and is net of discounts and allowances.  Cost of sales also includes receiving, warehouse costs and distribution costs (which include payroll and associated costs, occupancy, transportation to and from stores and depreciation expense).  Cash discounts for satisfying early payment terms are recognized when payment is made, and allowances and rebates based upon milestone achievements such as reaching a certain volume of purchases of a vendor’s products are included as a reduction of cost of sales when such contractual milestones are reached.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses include the costs of selling merchandise in stores (which include payroll and associated costs, occupancy and other store-level costs) and corporate costs (which include payroll and associated costs, occupancy, advertising, professional fees and other corporate administrative costs).  Selling, general and administrative expenses also include depreciation and amortization expense relating to these costs.

 

Leases

 

The Company follows the policy of capitalizing allowable expenditures that relate to the acquisition and signing of its retail store leases.  These costs are amortized on a straight-line basis over the applicable lease term.

 

The Company recognizes rent expense for operating leases on a straight-line basis (including the effect of reduced or free rent and rent escalations) over the applicable lease term.  The difference between the cash paid to the landlord and the amount recognized as rent expense on a straight-line basis is included in deferred rent.  Cash reimbursements received from landlords for leasehold improvements and other cash payments received from landlords as lease incentives are recorded as deferred rent.  Deferred rent related to landlord incentives is amortized as an offset to rent expense using the straight-line method over the applicable lease term.

 

In certain lease arrangements, the Company can be involved with the construction of the building. If it is determined that the Company has substantially all of the risks of ownership during construction of the leased property and therefore is deemed to be the owner of the construction project, the Company records an asset for the amount of the total project costs and an amount related to the value attributed to the pre-existing leased building in property and equipment, net and the related financing obligation as part of current and non-current liabilities.  Once construction is complete, if it is determined that the asset does not qualify for sale-leaseback accounting treatment, the Company amortizes the obligation over the lease term and depreciates the asset over the life of the

 

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lease. The Company does not report rent expense for the portion of the rent payment determined to be related to the assets which are owned for accounting purposes. Rather, this portion of the rent payment under the lease is recognized as a reduction of the financing obligation and interest expense.

 

For store closures where a lease obligation still exists, the Company records the estimated future liability associated with the rental obligation on the cease use date (when the store is closed).  Liabilities are established at the cease use date for the present value of any remaining operating lease obligations, net of estimated sublease income, and at the communication date for severance and other exit costs.  Key assumptions in calculating the liability include the timeframe expected to terminate lease agreements, estimates related to the sublease potential of closed locations, and estimates of other related exit costs.  If actual timing and potential termination costs or realization of sublease income differ from the Company’s estimates, the resulting liabilities could vary from recorded amounts. These liabilities are reviewed periodically and adjusted when necessary.

 

Self-Insured Workers’ Compensation Liability

 

The Company self-insures for workers’ compensation claims in California and Texas.  The Company establishes a liability for losses from both estimated known and incurred but not reported insurance claims based on reported claims and actuarial valuations of estimated future costs of known and incurred but not yet reported claims.  Should an amount of claims greater than anticipated occur, the liability recorded may not be sufficient and additional workers’ compensation costs, which may be significant, could be incurred.  The Company has not discounted the projected future cash outlays for the time value of money for claims and claim-related costs when establishing its workers’ compensation liability in its financial reports for each of May 1, 2015 and January 30, 2015.

 

Self-Insured Health Insurance Liability

 

The Company self-insures for a portion of its employee medical benefit claims.  The liability for the self-funded portion of the Company health insurance program is determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported.  The Company maintains stop loss insurance coverage to limit its exposure for the self-funded portion of its health insurance program.

 

Pre-Opening Costs

 

The Company expenses, as incurred, pre-opening costs such as payroll, rent and marketing related to the opening of new retail stores.

 

Advertising

 

The Company expenses advertising costs as incurred.

 

Fair Value of Financial Instruments

 

The Company’s financial instruments consist principally of cash, accounts receivable, interest rate derivatives, accounts payable, accruals, debt, and other liabilities.  Cash and interest rate derivatives are measured and recorded at fair value.  Accounts receivable and other receivables are financial assets with carrying values that approximate fair value.  Accounts payable and other accrued expenses are financial liabilities with carrying values that approximate fair value.  Refer to Note 7, “Fair Value of Financial Instruments” for further discussion of the fair value of debt.

 

The Company uses the authoritative guidance for fair value, which includes the definition of fair value, the framework for measuring fair value, and disclosures about fair value measurements.  Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants.  Fair value measurements reflect the assumptions market participants would use in pricing an asset or liability based on the best information available.  Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and/or the risks inherent in the inputs to the model.

 

Comprehensive Income

 

Other comprehensive income (“OCI”)  includes unrealized gains or losses on interest rate derivatives designated as cash flow hedges.

 

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2.                                      Goodwill and Other Intangibles

 

The following tables set forth the value of the goodwill and other intangible assets and liabilities, and unfavorable leases, respectively (in thousands):

 

 

 

May 1, 2015

 

January 30, 2015

 

 

 

Remaining
Amortization
Life
(Years)

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Remaining
Amortization
Life
(Years)

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Indefinite lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

 

$

479,745

 

$

 

$

479,745

 

 

 

$

479,745

 

$

 

$

479,745

 

Trade name

 

 

 

410,000

 

 

410,000

 

 

 

410,000

 

 

410,000

 

Total indefinite lived intangible assets

 

 

 

$

889,745

 

$

 

$

889,745

 

 

 

$

889,745

 

$

 

$

889,745

 

Finite lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

17

 

$

2,000

 

$

(331

)

$

1,669

 

17

 

$

2,000

 

$

(306

)

$

1,694

 

Bargain Wholesale customer relationships

 

9

 

20,000

 

(5,510

)

14,490

 

9

 

20,000

 

(5,096

)

14,904

 

Favorable leases

 

1 to 14

 

46,723

 

(14,070

)

32,653

 

1 to 14

 

46,723

 

(13,010

)

33,713

 

Total finite lived intangible assets

 

 

 

68,723

 

(19,911

)

48,812

 

 

 

68,723

 

(18,412

)

50,311

 

Total goodwill and other intangible assets

 

 

 

$

958,468

 

$

(19,911

)

$

938,557

 

 

 

$

958,468

 

$

(18,412

)

$

940,056

 

 

 

 

May 1, 2015

 

January 30, 2015

 

 

 

Remaining
Amortization
Life
(Years)

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Remaining
Amortization
Life
(Years)

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unfavorable leases

 

1 to 15

 

$

19,835

 

$

(12,240

)

$

7,595

 

1 to 15

 

$

19,835

 

$

(11,615

)

$

8,220

 

 

3.                                      Property and Equipment, net

 

The following table provides details of property and equipment (in thousands):

 

 

 

May 1,
2015

 

January 30,
2015

 

Land

 

$

176,506

 

$

176,506

 

Buildings

 

117,435

 

117,422

 

Buildings improvements

 

73,195

 

71,985

 

Leasehold improvements

 

181,290

 

176,895

 

Fixtures and equipment

 

175,567

 

148,851

 

Transportation equipment

 

12,747

 

12,685

 

Construction in progress

 

32,927

 

46,195

 

Total property and equipment

 

769,667

 

750,539

 

Less: accumulated depreciation and amortization

 

(185,258

)

(169,519

)

Property and equipment, net

 

$

584,409

 

$

581,020

 

 

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4.                                      Comprehensive Income

 

The following table sets forth the calculation of comprehensive income, net of tax effects (in thousands):

 

 

 

For the First Quarter Ended

 

 

 

May 1,
2015

 

May 2,
2014

 

 

 

 

 

 

 

Net income

 

$

1,171

 

$

9,575

 

Unrealized losses on interest rate cash flow hedge, net of tax effects of $(51) and $(91) for the first quarter of each of fiscal 2016 and fiscal 2015, respectively

 

(76

)

(136

)

Reclassification adjustment, net of tax effects of $162 and $142 for the first quarter of each of fiscal 2016 and fiscal 2015, respectively

 

243

 

212

 

Total unrealized gains, net

 

167

 

76

 

Total comprehensive income

 

$

1,338

 

$

9,651

 

 

Amounts in accumulated other comprehensive loss as of May 1, 2015 and January 30, 2015 consisted of unrealized losses on interest rate cash flow hedges.  Reclassifications out of AOCI in the first quarter of each of fiscal 2016 and fiscal 2015 are presented in Note 6, “Derivative Financial Instruments.”

 

5.                                      Debt

 

Short and long-term debt consists of the following (in thousands):

 

 

 

May 1,
2015

 

January 30,
2015

 

 

 

 

 

 

 

ABL Facility agreement, maturing January 13, 2017

 

$

52,900

 

$

57,000

 

First Lien Term Loan Facility agreement, maturing on January 13, 2019, payable in quarterly installments of $1,535, plus interest through December 31, 2019, with unpaid principal and accrued interest due January 13, 2019, net of unamortized OID of $5,278 and $5,606 as of May 1, 2015 and January 30, 2015, respectively

 

599,326

 

600,533

 

Senior Notes (unsecured) maturing December 15, 2019, unpaid principal and accrued interest due on December 15, 2019

 

250,000

 

250,000

 

Total debt

 

902,226

 

907,533

 

Less: current portion

 

6,138

 

6,138

 

Long-term debt, net of current portion

 

$

896,088

 

$

901,395

 

 

As of May 1, 2015 and January 30, 2015, the net deferred financing costs are as follows (in thousands):

 

Deferred financing costs

 

May 1,
2015

 

January 30,
2015

 

 

 

 

 

 

 

ABL Facility

 

$

1,042

 

$

1,196

 

First Lien Term Loan Facility

 

5,418

 

5,754

 

Senior Notes

 

8,185

 

8,513

 

Total deferred financing costs, net

 

$

14,645

 

$

15,463

 

 

On January 13, 2012 (the “Original Closing Date”), in connection with the Merger, the Company obtained Credit Facilities (as defined below) provided by a syndicate of lenders arranged by Royal Bank of Canada as administrative agent, as well as other agents and lenders that are parties to the agreements governing these Credit Facilities.  The Credit Facilities include (a) a first lien based revolving credit facility (as amended, the “ABL Facility”), and (b) a first lien term loan facility (as amended, the “First Lien Term Loan Facility” and together with the ABL Facility, the “Credit Facilities”).

 

First Lien Term Loan Facility

 

Under the First Lien Term Loan Facility, (i) $525.0 million of term loans were incurred on the Original Closing Date and (ii) $100.0 million of additional term loans were incurred pursuant to an incremental facility effected through an amendment entered into on October 8, 2013 (the “Second Amendment”) (all such term loans, collectively, the “Term Loans”).  The First Lien Term Loan Facility has a term of seven years with a maturity date of January 13, 2019.  All obligations under the First Lien Term Loan Facility are guaranteed by Parent and the Company’s direct or indirect 100% owned subsidiaries, except for immaterial subsidiaries (collectively, the “Credit Facilities Guarantors”).  In addition, the First Lien Term Loan Facility is secured by pledges of certain of the Company’s equity interests and the equity interests of the Credit Facilities Guarantors.

 

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The Company is required to make scheduled quarterly payments each equal to 0.25% of the principal amount of the Term Loans, with the balance due on the maturity date.  Borrowings under the First Lien Term Loan Facility bear interest at an annual rate equal to an applicable margin plus, at the Company’s option, either (i) a base rate (the “Base Rate”) determined by reference to the highest of (a) the interest rate in effect determined by the administrative agent as the “Prime Rate” (3.25% as of May 1, 2015), (b) the federal funds effective rate plus 0.50% and (c) an adjusted Eurocurrency rate for one month (determined by reference to the greater of the Eurocurrency rate for the interest period subject to certain adjustments) plus 1.00%, or (ii) an Adjusted Eurocurrency Rate.

 

On April 4, 2012, the Company amended the terms of the First Lien Term Loan Facility (the “First Amendment”) and incurred related refinancing costs of $11.2 million.  The First Amendment, among other things, (i) decreased the applicable margin from London Interbank Offered Rate (“LIBOR”) plus 5.50% (or Base Rate plus 4.50%) to LIBOR plus 4.00% (or Base Rate plus 3.00%) and (ii) decreased the LIBOR floor from 1.50% to 1.25%.

 

On October 8, 2013, the Company entered into the Second Amendment, which among other things, (i) provided $100.0 million of additional term loans as described above, (ii) decreased the applicable margin from LIBOR plus 4.00% (or Base Rate plus 3.00%) to LIBOR plus 3.50% (or Base Rate plus 2.50%) and (iii) decreased the LIBOR floor from 1.25% to 1.00%.  The Company will continue to be required to make scheduled quarterly payments each equal to 0.25% of the amended principal amount of the Term Loans (approximately $1.5 million).

 

In connection with the Second Amendment and in the third quarter of transition fiscal 2014, the Company recognized a loss on debt extinguishment of approximately $4.4 million related to a portion of the unamortized debt issuance costs, unamortized original issue discount (“OID”) and other repricing costs.  The Company recorded $1.6 million as deferred debt issuance costs in connection with the Second Amendment in transition fiscal 2014.

 

In addition, the Second Amendment (i) amended certain restricted payment provisions, (ii) removed the maximum capital expenditures covenant from the agreement governing the First Lien Term Loan Facility, (iii) modified the existing provision restricting the Company’s ability to make dividend and other payments so that from and after March 31, 2013, the permitted payment amount represents the sum of (a) a calculation based on 50% of Consolidated Net Income (as defined in the First Lien Term Loan Facility agreement), if positive, or a deficit of 100% of Consolidated Net Income, if negative, and (b) $20.0 million, and (iv) permitted proceeds of any sale leasebacks of any assets acquired after January 13, 2012, to be reinvested in the Company’s business without restriction.

 

As of May 1, 2015, the interest rate charged on the First Lien Term Loan Facility was 4.50% (1.00% Eurocurrency rate, plus the Eurocurrency loan margin of 3.50%).  As of May 1, 2015, the amount outstanding under the First Lien Term Loan Facility was $599.3 million.

 

Following the end of each fiscal year, the Company is required to make prepayments on the First Lien Term Loan Facility in an amount equal to (i) 50% of Excess Cash Flow (as defined in the agreement governing the First Lien Term Loan Facility), with the ability to step down to 25% and 0% upon achievement of specified total leverage ratios, minus (ii) the amount of certain voluntary prepayments made on the First Lien Term Loan Facility and/or the ABL Facility during such fiscal year.  The Excess Cash Flow required payment for fiscal 2013 was $3.3 million and was made in July 2013.  There was no Excess Cash Flow payment required for fiscal 2015 and transition fiscal 2014.

 

The First Lien Term Loan Facility includes certain customary restrictions, among other things, on the Company’s ability and the ability of Parent, 99 Cents Texas and certain future subsidiaries of the Company to incur or guarantee additional indebtedness, make certain restricted payments, acquisitions or investments, materially change the Company’s business, incur or permit to exist certain liens, enter into transactions with affiliates, sell assets, make capital expenditures or merge or consolidate with or into, another company.  As of May 1, 2015, the Company was in compliance with the terms of the First Lien Term Loan Facility.

 

During the first quarter of fiscal 2013, the Company entered into an interest rate swap agreement to limit the variability of cash flows associated with interest payments on the First Lien Term Loan Facility that result from fluctuations in the LIBOR rate.  See Note 6, “Derivative Financial Instruments” for more information on this interest rate swap agreement.

 

ABL Facility

 

The ABL Facility provides for up to $175.0 million of borrowings, subject to certain borrowing base limitations.  Subject to certain conditions, the Company may increase the commitments under the ABL Facility by up to $50.0 million.  All obligations under the ABL Facility are guaranteed by Parent and the other Credit Facilities Guarantors.  The ABL Facility is secured by substantially all of the Company’s assets and the assets of the Credit Facilities Guarantors.

 

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Borrowings under the ABL Facility bear interest at a rate based, at the Company’s option, on (i) LIBOR plus an applicable margin to be determined (1.75% as of May 1, 2015) or (ii) the determined base rate (Prime Rate) plus an applicable margin to be determined (0.75% at May 1, 2015), in each case based on a pricing grid depending on average daily excess availability for the most recently ended quarter.

 

In addition to paying interest on outstanding principal under the Credit Facilities, the Company is required to pay a commitment fee to the lenders under the ABL Facility on unused commitments.  The commitment fee is adjusted at the beginning of each quarter based upon the average historical excess availability of the prior quarter (0.50% for the quarter ended May 1, 2015).  The Company must also pay customary letter of credit fees and agency fees.

 

As of May 1, 2015, borrowings under the ABL Facility were $52.9 million, outstanding letters of credit were $2.5 million and availability under the ABL Facility subject to the borrowing base, was $119.6 million. As of January 30, 2015, borrowings under the ABL Facility were $57.0 million, outstanding letters of credit were $2.5 million and availability under the ABL Facility subject to the borrowing base, was $115.5 million.

 

The ABL Facility includes restrictions on the Company’s ability and the ability of Parent and certain of the Company’s restricted subsidiaries to incur or guarantee additional indebtedness, pay dividends on, or redeem or repurchase, its capital stock, make certain acquisitions or investments, materially change its business, incur or permit to exist certain liens, enter into transactions with affiliates, sell assets or merge or consolidate with or into another company.

 

On October 8, 2013, the ABL Facility was amended to among other things, modify the provision restricting the Company’s ability to make dividend and other payments.  Such payments are subject to achievement of Excess Availability (as defined in the agreement governing the ABL Facility) and a ratio of EBITDA (as defined in the agreement governing the ABL Facility) to fixed charges.  As of May 1, 2015, the Company was in compliance with the terms of the ABL Facility.

 

Senior Notes

 

On December 29, 2011, the Company issued $250.0 million aggregate principal amount of 11% Senior Notes that mature on December 15, 2019 (the “Senior Notes”).  The Senior Notes are guaranteed by the same subsidiaries that guarantee the Credit Facilities.

 

Pursuant to the terms of the indenture governing the Senior Notes (the “Indenture”), the Company may redeem all or a part of the Senior Notes at certain redemption prices that vary based on the date of redemption.  The Company is not required to make any mandatory redemptions or sinking fund payments, and may at any time or from time to time purchase notes in the open market.

 

The Indenture contains covenants that, among other things, limit the Company’s ability and the ability of certain of its subsidiaries to incur or guarantee additional indebtedness, create or incur certain liens, pay dividends or make other restricted payments and investments, incur restrictions on the payment of dividends or other distributions from restricted subsidiaries, sell assets, engage in transactions with affiliates, or merge or consolidate with other companies.  As of May 1, 2015, the Company was in compliance with the terms of the Indenture.

 

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Table of Contents

 

The significant components of interest expense are as follows (in thousands):

 

 

 

For the First Quarter Ended

 

 

 

May 1,
2015

 

May 2,
2014

 

 

 

 

 

 

 

First Lien Term Loan Facility

 

$

7,248

 

$

7,242

 

ABL Facility

 

521

 

224

 

Senior Notes

 

6,951

 

6,875

 

Amortization of deferred financing costs and OID

 

1,146

 

1,083

 

Other interest expense

 

406

 

5

 

Interest expense

 

$

16,272

 

$

15,429

 

 

6.                                      Derivative Financial Instruments

 

The Company entered into derivative instruments for risk management purposes and uses these derivatives to manage exposure to fluctuation in interest rates.

 

Interest Rate Swap

 

In May 2012, the Company entered into a floating-to-fixed interest rate swap agreement for an initial aggregate notional amount of $261.8 million to limit exposure to interest rate increases related to a portion of the Company’s floating rate indebtedness once the Company’s interest rate cap agreement expires.  The swap agreement, effective November 2013, hedges a portion of contractual floating rate interest commitments through the expiration of the swap agreement in May 2016.  As a result of the agreement, the Company’s effective fixed interest rate on the notional amount of floating rate indebtedness will be 1.36% plus an applicable margin of 3.50%.

 

The Company designated the interest rate swap agreement as a cash flow hedge.  The interest rate swap agreement is highly correlated to the changes in interest rates to which the Company is exposed.  Unrealized gains and losses on the interest rate swap are designated as effective or ineffective.  The effective portion of such gains or losses is recorded as a component of AOCI or loss, while the ineffective portion of such gains or losses is recorded as a component of interest expense.  Future realized gains and losses in connection with each required interest payment will be reclassified from AOCI or loss to interest expense.

 

Fair Value

 

The fair value of the interest rate swap agreement is estimated using industry standard valuation models using market-based observable inputs, including interest rate curves (Level 2, as defined in Note 7, “Fair Value of Financial Instruments”).

 

A summary of the recorded amounts included in the consolidated balance sheets is as follows (in thousands):

 

 

 

May 1,
2015

 

January 30,
2015

 

 

 

 

 

 

 

Derivatives designated as cash flow hedging instruments

 

 

 

 

 

Interest rate swap (included in other current liabilities)

 

$

1,552

 

$

596

 

Interest rate swap (included in other liabilities)

 

$

312

 

$

1,591

 

Accumulated other comprehensive loss, net of tax (included in member’s equity)

 

$

831

 

$

998

 

 

A summary of recorded amounts included in the unaudited consolidated statements of comprehensive income (loss) is as follows (in thousands):

 

 

 

For the First Quarter Ended

 

 

 

May 1,
2015

 

May 2,
2014

 

 

 

 

 

 

 

Derivatives designated as cash flow hedging instruments:

 

 

 

 

 

Loss related to effective portion of derivative recognized in OCI

 

$

76

 

$

136

 

Loss related to effective portion of derivatives reclassified from AOCI to interest expense

 

$

243

 

$

212

 

Gain related to ineffective portion of derivative recognized in interest expense

 

$

(46

)

$

(72

)

 

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Table of Contents

 

7.                                      Fair Value of Financial Instruments

 

The Company complies with authoritative guidance for fair value measurement and disclosures which establish a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy are described below:

 

Level 1: Defined as observable inputs such as quoted prices in active markets for identical assets or liabilities.

 

Level 2: Defined as observable inputs other than Level 1 prices.  These include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3: Defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

The Company uses the best available information in measuring fair value.  The following table summarizes, by level within the fair value hierarchy, the financial assets and liabilities recorded at fair value on a recurring basis (in thousands):

 

 

 

May 1, 2015

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

ASSETS

 

 

 

 

 

 

 

 

 

Other assets — assets that fund deferred compensation

 

$

764

 

$

764

 

$

 

$

 

LIABILITIES

 

 

 

 

 

 

 

 

 

Other current liabilities — interest rate swap

 

$

1,552

 

$

 

$

1,552

 

$

 

Other long-term liabilities — interest rate swap

 

$

312

 

$

 

$

312

 

$

 

Other long-term liabilities — deferred compensation

 

$

764

 

$

764

 

$

 

$

 

 

Level 1 measurements include $0.7 million of deferred compensation assets that fund the liabilities related to the Company’s deferred compensation, including investments in trust funds.  The fair values of these funds are based on quoted market prices in an active market.

 

Level 2 measurements include interest rate swap agreement estimated using industry standard valuation models using market-based observable inputs, including interest rate curves.

 

There were no Level 3 assets or liabilities as of May 1, 2015.

 

The Company did not have any transfers in and out of Levels 1 and 2 during the first quarter of fiscal 2016.

 

The following table summarizes, by level within the fair value hierarchy, the financial assets and liabilities recorded at fair value on a recurring basis as of January 30, 2015 (in thousands):

 

 

 

January 30, 2015

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

ASSETS

 

 

 

 

 

 

 

 

 

Other assets — assets that fund deferred compensation

 

$

724

 

$

724

 

$

 

$

 

LIABILITES

 

 

 

 

 

 

 

 

 

Other current liabilities — interest rate swap

 

$

1,591

 

$

 

$

1,591

 

$

 

Other long-term liabilities — interest rate swap

 

$

596

 

$

 

$

596

 

$

 

Other long-term liabilities — deferred compensation

 

$

724

 

$

724

 

$

 

$

 

 

Level 1 measurements include $0.7 million of deferred compensation assets that fund the liabilities related to the Company’s deferred compensation, including investments in trust funds.  The fair values of these funds are based on quoted market prices in an active market.

 

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Level 2 measurements include interest rate swap agreement estimated using industry standard valuation models using market-based observable inputs, including interest rate curves.

 

There were no Level 3 assets or liabilities as of January 30, 2015.

 

The outstanding debt under the Credit Facilities and the Senior Notes is recorded in the financial statements at historical cost, net of applicable unamortized discounts.

 

The Credit Facilities are tied directly to market rates and fluctuate as market rates change; as a result, the carrying value of the Credit Facilities approximates fair value as of May 1, 2015 and January 30, 2015.

 

The fair value of the Senior Notes was estimated at $264.1 million, or $14.1 million greater than the carrying value, as of May 1, 2015, based on quoted market prices of the debt (Level 1 inputs).  The fair value of the Senior Notes was estimated at $264.7 million, or $14.7 million greater than the carrying value, as of January 30, 2015, based on quoted market prices of the debt (Level 1 inputs).

 

See Note 5, “Debt” for more information on the Company’s debt.

 

8.                                      Stock-Based Compensation

 

Number Holdings, Inc. 2012 Equity Incentive Plan

 

On February 27, 2012, the board of directors of Parent adopted the Number Holdings, Inc. 2012 Stock Incentive Plan (the “2012 Plan”).  The 2012 Plan authorizes equity awards to be granted for up to 85,000 shares of Class A Common Stock of Parent and 85,000 shares of Class B Common Stock of Parent.  As of May 1, 2015, options for 51,986 shares of each of Class A Common Stock and Class B Common Stock were issued to certain members of management and directors.  Options upon vesting may be exercised only for units consisting of an equal number of Class A Common Stock and Class B Common Stock.  Class B Common Stock has de minimis economic rights and the right to vote solely for election of directors.

 

Employee Option Grants

 

Options granted to employees generally become exercisable over a five year service period and have terms of ten years from date of the grant.

 

Under the standard form of option award agreement for the 2012 Plan, Parent has a right to repurchase from the participant all or a portion of (i) Class A and Class B Common Stock of Parent issued upon the exercise of the options awarded to a participant and (ii) fully vested but unexercised options.  The repurchase price for the shares of Class A and Class B Common Stock of Parent is the fair market value of such shares as of the date of such termination, and, for the fully vested but unexercised options, the repurchase price is the difference between the fair market value of the Class A and Class B Common Stock of Parent as of the date of termination of employment and the exercise price of the option.  However, upon (i) a termination of employment for cause, (ii) a voluntary resignation without good reason, or (iii) upon discovery that the participant engaged in detrimental activity, the repurchase price is the lesser of the exercise price paid by the participant to exercise the option or the fair market value of the Class A and Class B Common Stock of Parent.  If Parent elects to exercise its repurchase right for any shares acquired pursuant to the exercise of an option, it must do so no later than (i)180 days after the date of participant’s termination of employment, or (ii) for any unexercised option no later than 90 days from the latest date that such option can be exercised.  The options also contain transfer restrictions that lapse upon registration of an offering of Parent common stock under the Securities Act of 1933(a “liquidity event”).

 

The Company defers recognition of substantially all of the stock-based compensation expense related to these stock options. The nature of repurchase rights and transfer restrictions create a performance condition that is not considered probable of being achieved until a liquidity event or certain employment termination events are probable of occurrence. These options are accounted for as equity-based awards. The fair value of these stock options was estimated at the date of grant using the Black-Scholes pricing model. There were 27,731 time-based employee options outstanding as of May 1, 2015.

 

In the second quarter of fiscal 2015, 750 options were granted that will vest subject to the Company’s and Parent’s achievement of performance hurdles.  In the first quarter of fiscal 2016, 1,250 options were granted that will vest subject to the Company’s and Parent’s achievement of performance hurdles.  The Company has deferred recognition of these performance-based options until it is probable that that the performance hurdles will be achieved.  The fair value of these performance-based options was estimated at the date of grant using a Monte Carlo simulation method.

 

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Executive and Director Option Grants

 

Options granted to certain executives and board members generally become exercisable over a five year service period and have terms of ten years from date of the grant.  Options granted to these executives and board members do not contain repurchase rights that would allow the Parent to repurchase these options at less than fair value. The Company recognizes stock-based compensation expense for these option grants over the service period. These options are accounted for as equity awards.  The fair value of these stock options was estimated at the date of grant using the Black-Scholes pricing model.

 

Chief Executive Officer Equity Awards

 

On October 9, 2013, in connection with Stéphane Gonthier’s employment as President and Chief Executive Officer of the Company and Parent, the Compensation Committee of Parent’s Board of Directors granted to Mr. Gonthier stock options to purchase an aggregate of 21,505 shares of each of the Class A and Class B Common Stock.  Subject to the continued employment of Mr. Gonthier, (a) 75% of the options will vest according to a timetable of 30% on the first anniversary of the grant date, 20% on the second anniversary of the grant date and 25% on each of the third and fourth anniversaries of the grant date and (b) 25% of these options will vest subject to the Company’s and Parent’s achievement of performance hurdles.  These options are subject to the terms of the 2012 Plan and the award agreement under which they were granted.

 

The Company records stock-based compensation for the time-based options in accordance with the four year vesting period.  The Company has deferred recognition of performance-based options until it is probable that the performance hurdles will be achieved.  The time-based and performance-based options are accounted for as equity awards.  The fair value of these time-based options was estimated at the date of grant using the Black-Scholes pricing model.  The fair value of performance-based options was estimated at the date of grant using a Monte Carlo simulation method.

 

Accounting for stock-based compensation

 

Determining the fair value of options at the grant date requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise and the associated volatility.  At the grant date, the Company estimates an amount of forfeitures that will occur prior to vesting.  During first quarter of each of fiscal 2016 and fiscal 2015, the Company recorded stock-based compensation expense of $0.6 million and $0.7 million, respectively.

 

There were no stock option grants in the first quarter of fiscal 2015. The fair value of stock options granted in the first quarter of fiscal 2016 was estimated at the date of grant using the Black-Scholes pricing model with the following assumptions:

 

 

 

For the First
Quarter Ended

 

 

 

May 1, 2015

 

Weighted-average fair value of options granted

 

$

558.36

 

Risk free interest rate

 

1.61

%

Expected life (in years)

 

6.50

 

Expected stock price volatility

 

40.00

%

Expected dividend yield

 

None

 

 

The risk-free interest rate is based on the U.S. treasury yield curve in effect at the time of grant with an equivalent remaining term.  Expected life represents the estimated period of time until exercise and is calculated by using “simplified method.”  Expected stock price volatility is based on average historical volatility of stock prices of companies in a peer group analysis.  The Company currently does not anticipate the payment of any cash dividends.  Compensation expense is recognized only for those options expected to vest, with forfeitures estimated based on the Company’s historical experience and future expectations.

 

The fair value of performance-based options was estimated at the date of grant using a Monte Carlo simulation method.  Key assumptions used include those described above for determining the fair value of options with service-based conditions only and in addition the simulation utilizes a range of possible future stock values to construct a distribution of where future stock prices might be. The simulations and resulting distributions will give a statistically acceptable range of future stock prices. The Company also has to assume a time horizon to when the performance conditions of the options will be met.

 

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The following summarizes stock option activity in the first quarter of fiscal 2016:

 

 

 

Number of
Shares

 

Weighted Average
Exercise Price

 

Weighted Average
Remaining
Contractual Life
(Years)

 

Options outstanding at the beginning of the period

 

48,130

 

$

1,171

 

 

 

Granted

 

5,800

 

$

1,323

 

 

 

Exercised

 

 

$

 

 

 

Cancelled

 

(1,944

)

$

1,073

 

 

 

 

 

 

 

 

 

 

 

Outstanding at the end of the period

 

51,986

 

$

1,193

 

8.40

 

 

 

 

 

 

 

 

 

Exercisable at the end of the period

 

12,660

 

$

1,090

 

7.60

 

 

The following table summarizes the stock awards available for grant under the 2012 Plan as of May 1, 2015:

 

 

 

Number of Shares

 

Available for grant as of January 30, 2015

 

36,840

 

Authorized

 

 

Granted

 

(5,800

)

Cancelled

 

1,944

 

Available for grant at May 1, 2015

 

32,984

 

 

9.                                      Related-Party

 

Parent Stock Repurchase Agreement

 

In March 2015, in connection with Mr. Michael Kvitko’s resignation as Executive Vice President and Chief Merchandising Officer of the Company and all positions with Parent, Parent purchased all of the vested options to purchase shares of Class A Common Stock and Class B Common Stock held by Mr. Kvitko, for an aggregate consideration of $0.4 million.

 

Credit Facility

 

In connection with the Merger, the Company entered into the First Lien Term Loan Facility, under which various funds affiliated with Ares are lenders.  As of May 1, 2015 and January 30, 2015 these affiliates held approximately $1.4 million and $1.4 million, respectively, of term loans under the First Lien Term Loan Facility.  The terms of the term loans are the same as those held by unaffiliated third party lenders under the First Lien Term Loan Facility.

 

10.                               Income Taxes

 

The effective income tax rate for the first quarter of fiscal 2016 was a benefit rate of 111.9% compared to a provision rate of 39.8% for the first quarter of fiscal 2015.  Income tax expense for the interim periods was computed using the effective tax rate estimated to be applicable for the full fiscal year.

 

The Company’s policy is to recognize interest and penalties related to uncertain tax positions as a component of income tax expense.  As of May 1, 2015 and January 31, 2015, the Company has not accrued any interest and penalties related to uncertain tax positions.

 

The Company files income tax returns in the U.S. federal jurisdiction and in various states.  The Company is subject to examinations by the major tax jurisdictions in which it files for the tax years 2009 forward.  The federal tax returns for the period ended March 27, 2010 and period ended March 31, 2012 were examined by the Internal Revenue Service resulting in no changes to the reported tax.

 

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11.                               Commitments and Contingencies

 

Credit Facilities

 

The Credit Facilities and commitments are discussed in detail in Note 5, “Debt.”

 

Workers’ Compensation

 

The Company self-insures its workers’ compensation claims in California and Texas and provides for losses of estimated known and incurred but not reported insurance claims.  The Company does not discount the projected future cash outlays for the time value of money for claims and claim related costs when establishing its workers’ compensation liability.

 

As of May 1, 2015 and January 30, 2015, the Company had recorded a liability of $70.0 million and $70.4 million, respectively, for estimated workers’ compensation claims in California.  The Company has limited self-insurance exposure in Texas and had recorded a liability of less than $0.1 million as of each of May 1, 2015 and January 30, 2015 for workers’ compensation claims in Texas.  The Company purchases workers’ compensation insurance coverage in Arizona and Nevada and is not self-insured in those states.

 

Self-Insured Health Insurance Liability

 

The Company self-insures for a portion of its employee medical benefit claims.  As of each of May 1, 2015 and January 30, 2015, the Company had recorded a liability of $0.5 million for estimated health insurance claims.  The Company maintains stop loss insurance coverage to limit its exposure for the self-funded portion of its health insurance program.

 

Legal Matters

 

Wage and Hour Matters

 

Shelley Pickett v. 99¢ Only Stores.  Plaintiff, a former cashier for the Company, filed a representative action complaint against the Company on November 4, 2011 in the Superior Court of the State of California, County of Los Angeles alleging a PAGA claim that the Company violated section 14 of Wage Order 7-2001 by failing to provide seats for its cashiers behind checkout counters.  The plaintiff seeks civil penalties of $100 to $200 per violation, per each pay period for each affected employee, and attorney’s fees.  The court denied the Company’s motion to compel arbitration of Pickett’s individual claims or, in the alternative, to strike the representative action allegations in the Complaint, and the Court of Appeals affirmed the trial court’s ruling.  The Company’s petition for review of the decision in the California Supreme Court was denied on January 15, 2014, and remittitur issued on January 27, 2014.  On June 27, 2013, the plaintiff entered into a settlement agreement and release with the Company in another matter.  Payment has been made to the plaintiff under that agreement and the other action has been dismissed.  The Company’s position is that the release the plaintiff executed in that matter waives the claims she asserts in this action, waives her right to proceed on a class or representative basis or as a private attorney general and requires her to dismiss this action with prejudice as to her individual claims.  The Company notified the plaintiff of its position by a letter dated as of July 30, 2013, but she has yet to dismiss the lawsuit.  On February 11, 2014, the Company answered the complaint, denying all material allegations, and filed a cross-complaint against Pickett seeking to enforce her agreement to dismiss this action.  Through the cross-complaint, the Company seeks declaratory relief, specific performance and damages.  Pickett has answered the cross-complaint, asserting a general denial of all material allegations and various affirmative defenses.  On March 12, 2014, in an unrelated matter involving similar claims against a different employer, the California Supreme Court agreed to rule on several questions that will provide guidance to lower courts as to California’s employee seating requirement, which is a largely untested area of law.  Accordingly, on May 20, 2014, the parties stipulated to stay this matter pending the final resolution of the California Supreme Court proceeding, with the exception of the Company’s motion for judgment on the pleadings on the cross-complaint and Ms. Pickett’s motion for leave to substitute in a new representative plaintiff.  On September 30, 2014, the court denied the motion for judgment on the pleadings and granted the motion for leave to amend.  Plaintiffs filed their amended complaint on October 8, 2014, and the Company answered on October 10, 2014, denying all material allegations.  The Company cannot predict the outcome of this lawsuit or the amount of potential loss, if any, that it could face as a result of such lawsuit.

 

Sofia Wilton Barriga v. 99¢ Only Stores.   Plaintiff, a former store associate, filed an action against the Company on August 5, 2013, in the Superior Court of the State of California, County of Riverside alleging on behalf of plaintiff and all others allegedly similarly situated under the California Labor Code that the Company failed to pay wages for all hours worked, provide meal periods, pay wages timely upon termination, and provide accurate wage statements.  The plaintiff also asserted a derivative claim for unfair competition under the California Business and Professions Code.  The plaintiff seeks to represent a class of all non-exempt employees who were employed in California in the Company’s retail stores who worked the graveyard shift at any time from January 1, 2012, through the date of trial or settlement.  Although the class period as originally pled would extend back to August 5, 2009, the parties

 

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have agreed that any class period would run beginning January 1, 2012,  because of the preclusive effect of a judgment in a previous matter.  The plaintiff seeks to recover alleged unpaid wages, statutory penalties, interest, attorney’s fees and costs, and restitution.  On September 23, 2013, the Company filed an answer denying all material allegations.  A case management conference was held on October 4, 2013, at which the court ordered that discovery may proceed as to class certification issues only.  Discovery commenced, and a further status conference was set for March 27, 2015.  The Court indicated that, by that time, the parties were expected to have mediated the case and, if no settlement was reached, to be prepared for motion practice regarding class certification shortly thereafter. A mediation was held on March 12, 2015, resulting in a confidential mediator’s proposal, which the parties have verbally accepted.  The parties will now attempt to negotiate and finalize a written settlement, which will be subject to Court approval.  The Court has set a further status conference regarding settlement for July 27, 2015.  If the proposed settlement is not finalized or is not approved by the Court, the Company cannot predict the outcome of this lawsuit or the amount of potential loss, if any, that it could face as a result of such lawsuit.

 

Other Matters

 

The Company is also subject to other private lawsuits, administrative proceedings and claims that arise in its ordinary course of business.  A number of these lawsuits, proceedings and claims may exist at any given time.  While the resolution of such a lawsuit, proceeding or claim may have an impact on the Company’s financial results for the period in which it is resolved, and litigation is inherently unpredictable, in management’s opinion, none of these matters arising in the ordinary course of business is expected to have a material adverse effect on the Company’s financial position, results of operations or overall liquidity.

 

12.                               Assets Held for Sale

 

Assets held for sale as of May 1, 2015 consisted of the vacant land in Rancho Mirage, California with a carrying value of $1.7 million.  Assets held for sale as of January 30, 2015 consisted of the vacant land in Rancho Mirage, California and property containing land and a building in Pasadena-Shaver, Texas with a carrying value of $3.1 million.

 

In April 2015, the Company completed the sale of property in Pasadena-Shaver, Texas and received net proceeds of $1.4 million.  The carrying value of the Pasadena-Shaver property was $1.4 million.

 

13.                               Other Accrued Expenses

 

Other accrued expenses as of May 1, 2015 and January 30, 2015 are as follows (in thousands):

 

 

 

May 1,
2015

 

January 30,
2015

 

Accrued interest

 

$

14,053

 

$

8,363

 

Accrued occupancy costs

 

11,906

 

11,766

 

Accrued legal reserves and fees

 

6,147

 

6,006

 

Accrued interest swap

 

1,552

 

1,591

 

Accrued California Redemption Value

 

2,622

 

951

 

Other

 

14,545

 

11,491

 

Total other accrued expenses

 

$

50,825

 

$

40,168

 

 

14.                               New Authoritative Standards

 

In April 2014, the FASB issued ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”).  ASU 2014-08 changes the requirements for reporting discontinued operations.  Under ASU 2014-08, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on an entity’s operations and financial results.  ASU 2014-08 is effective for all disposals or classifications as held for sale of components of an entity that occur within fiscal years beginning after December 15, 2014, and early adoption is permitted.  The Company adopted ASU 2014-08 in the first quarter of fiscal 2016.  There is no material impact on the Company or its consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”).  ASU 2014-09 is a comprehensive new revenue recognition model that requires a company 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. The ASU also requires expanded disclosures about revenue recognition. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach.  ASU 2014-09 was to be effective for the first interim period within annual reporting periods beginning after December 15, 2016, and early adoption is not permitted.  In April 2015, the FASB proposed a one-year deferral of the effective date of this ASU. The Company is currently evaluating this guidance and the impact it will have on its consolidated financial statements.

 

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In June 2014, the FASB issued ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” This ASU requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, and early adoption is permitted. The Company will adopt ASU 2014-12 in the first quarter of fiscal 2017 and such adoption is not expected to have a material impact on the Company or its consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This ASU requires management to assess whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued.  If substantial doubt exists, additional disclosures are required. This ASU is effective for annual periods ending after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted.  The Company will adopt this standard in the first quarter of fiscal 2018 and such adoption is not expected to have a material impact on the Company or its consolidated financial statements.

 

In January 2015, the FASB issued ASU No. 2015-01, “Income Statement - Extraordinary and Unusual Items: Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” This ASU eliminates the concept of extraordinary items under GAAP, which, among other things, required an entity to segregate extraordinary items considered to be unusual and infrequent from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations.  This ASU is effective for annual periods ending after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. The Company will adopt this standard in the first quarter of fiscal 2017 and such adoption is not expected to have a material impact on the Company or its consolidated financial statements.

 

In February 2015, the FASB issued ASU No. 2015-02, “Amendments to the Consolidation Analysis.”  This ASU amended the process that a reporting entity must perform to determine whether it should consolidate certain types of legal entities.  The amendment modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, among other provisions.  This ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, and early adoption permitted.  The Company will adopt this standard in the first quarter of fiscal 2017 and such adoption is not expected to have a material impact on the Company or its consolidated financial statements

 

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” This ASU requires companies to present debt issuance costs related to a recognized debt liability on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. Debt issuance costs will continue to be amortized to interest expense using the effective interest method. The guidance is effective for public companies for annual periods beginning after December 15, 2015 as well as interim periods within those annual periods using the retrospective approach. The Company is currently evaluating the impacts of the new guidance on its consolidated financial statements.

 

15.                               Financial Guarantees

 

On December 29, 2011, the Company issued $250 million principal amount of the Senior Notes.  The Senior Notes are irrevocably and unconditionally guaranteed, jointly and severally, by each of the Company’s existing and future restricted subsidiaries that are guarantors under the Credit Facilities and certain other indebtedness.

 

As of May 1, 2015 and January 30, 2015, the Senior Notes are fully and unconditionally guaranteed by the Company’s 100% owned subsidiaries (the “Subsidiary Guarantors”), except for immaterial subsidiaries.

 

The tables in the following pages present the condensed consolidating financial information for the Company and the Subsidiary Guarantors together with consolidating entries, as of and for the periods indicated.  The subsidiaries that are not Subsidiary Guarantors are minor.  The condensed consolidating financial information may not necessarily be indicative of the financial position, results of operations or cash flows had the Company, and the Subsidiary Guarantors operated as independent entities.

 

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CONDENSED CONSOLIDATING BALANCE SHEETS

As of May 1, 2015

(In thousands)

(Unaudited)

 

 

 

Issuer

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Consolidating
Adjustments

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

1,367

 

$

945

 

$

71

 

$

 

$

2,383

 

Accounts receivable, net

 

2,139

 

112

 

 

 

2,251

 

Income taxes receivable

 

22,316

 

 

 

 

22,316

 

Deferred income taxes

 

41,583

 

 

 

 

41,583

 

Inventories, net

 

270,553

 

31,375

 

 

 

301,928

 

Assets held for sale

 

1,680

 

 

 

 

1,680

 

Other

 

16,726

 

1,364

 

23

 

 

18,113

 

Total current assets

 

356,364

 

33,796

 

94

 

 

390,254

 

Property and equipment, net

 

521,944

 

62,433

 

32

 

 

584,409

 

Deferred financing costs, net

 

14,645

 

 

 

 

14,645

 

Equity investments and advances to subsidiaries

 

483,118

 

399,874

 

529

 

(883,521

)

 

Intangible assets, net

 

456,612

 

2,200

 

 

 

458,812

 

Goodwill

 

479,745

 

 

 

 

479,745

 

Deposits and other assets

 

7,463

 

487

 

8

 

 

7,958

 

Total assets

 

$

2,319,891

 

$

498,790

 

$

663

 

$

(883,521

)

$

1,935,823

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND MEMBER’S EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

137,785

 

$

8,175

 

$

 

$

 

$

145,960

 

Intercompany payable

 

400,077

 

410,947

 

1,152

 

(812,176

)

 

Payroll and payroll-related

 

18,336

 

1,699

 

 

 

20,035

 

Sales tax

 

6,128

 

651

 

 

 

6,779

 

Other accrued expenses

 

47,750

 

3,049

 

26

 

 

50,825

 

Workers’ compensation

 

70,046

 

75

 

 

 

70,121

 

Current portion of long-term debt

 

6,138

 

 

 

 

6,138

 

Current portion of capital and financing lease obligation

 

599

 

 

 

 

599

 

Total current liabilities

 

686,859

 

424,596

 

1,178

 

(812,176

)

300,457

 

Long-term debt, net of current portion

 

896,088

 

 

 

 

896,088

 

Unfavorable lease commitments, net

 

7,497

 

98

 

 

 

7,595

 

Deferred rent

 

22,276

 

2,226

 

10

 

 

24,512

 

Deferred compensation liability

 

764

 

 

 

 

764

 

Capital and financing lease obligation, net of current portion

 

24,841

 

 

 

 

24,841

 

Long-term deferred income taxes

 

170,789

 

 

 

 

170,789

 

Other liabilities

 

1,415

 

 

 

 

1,415

 

Total liabilities

 

1,810,529

 

426,920

 

1,188

 

(812,176

)

1,426,461

 

 

 

 

 

 

 

 

 

 

 

 

 

Member’s Equity:

 

 

 

 

 

 

 

 

 

 

 

Member units

 

549,407

 

 

1

 

(1

)

549,407

 

Additional paid-in capital

 

 

99,943

 

 

(99,943

)

 

Investment in Number Holdings, Inc. preferred stock

 

(19,200

)

 

 

 

(19,200

)

Accumulated deficit

 

(20,014

)

(28,073

)

(526

)

28,599

 

(20,014

)

Other comprehensive loss

 

(831

)

 

 

 

(831

)

Total equity

 

509,362

 

71,870

 

(525

)

(71,345

)

509,362

 

Total liabilities and equity

 

$

2,319,891

 

$

498,790

 

$

663

 

$

(883,521

)

$

1,935,823

 

 

24



Table of Contents

 

CONDENSED CONSOLIDATING BALANCE SHEETS

As of January 30, 2015

(In thousands)

(Unaudited)

 

 

 

Issuer

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Consolidating
Adjustments

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

11,333

 

$

1,097

 

$

33

 

$

 

$

12,463

 

Accounts receivable, net

 

1,844

 

110

 

 

 

1,954

 

Income taxes receivable

 

10,911

 

 

 

 

10,911

 

Deferred income taxes

 

41,583

 

 

 

 

41,583

 

Inventories, net

 

263,284

 

32,756

 

 

 

296,040

 

Assets held for sale

 

1,680

 

1,414

 

 

 

3,094

 

Other

 

18,023

 

1,005

 

11

 

 

19,039

 

Total current assets

 

348,658

 

36,382

 

44

 

 

385,084

 

Property and equipment, net

 

517,739

 

63,251

 

30

 

 

581,020

 

Deferred financing costs, net

 

15,463

 

 

 

 

15,463

 

Equity investments and advances to subsidiaries

 

451,053

 

357,842

 

 

(808,895

)

 

Intangible assets, net

 

458,043

 

2,268

 

 

 

460,311

 

Goodwill

 

479,745

 

 

 

 

479,745

 

Deposits and other assets

 

7,040

 

503

 

 

 

7,543

 

Total assets

 

$

2,277,741

 

$

460,246

 

$

74

 

$

(808,895

)

$

1,929,166

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND MEMBER’S EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

136,884

 

$

2,403

 

$

 

$

 

$

139,287

 

Intercompany payable

 

357,909

 

377,382

 

567

 

(735,858

)

 

Payroll and payroll-related

 

18,489

 

1,515

 

 

 

20,004

 

Sales tax

 

13,562

 

525

 

 

 

14,087

 

Other accrued expenses

 

37,756

 

2,375

 

37

 

 

40,168

 

Workers’ compensation

 

70,416

 

75

 

 

 

70,491

 

Current portion of long-term debt

 

6,138

 

 

 

 

6,138

 

Current portion of capital and financing lease obligation

 

380

 

 

 

 

380

 

Total current liabilities

 

641,534

 

384,275

 

604

 

(735,858

)

290,555

 

Long-term debt, net of current portion

 

901,395

 

 

 

 

901,395

 

Unfavorable lease commitments, net

 

8,103

 

117

 

 

 

8,220

 

Deferred rent

 

21,006

 

2,287

 

 

 

23,293

 

Deferred compensation liability

 

724

 

 

 

 

724

 

Capital and financing lease obligation, net of current portion

 

24,681

 

 

 

 

24,681

 

Long-term deferred income taxes

 

170,678

 

 

 

 

170,678

 

Other liabilities

 

1,868

 

 

 

 

1,868

 

Total liabilities

 

1,769,989

 

386,679

 

604

 

(735,858

)

1,421,414

 

 

 

 

 

 

 

 

 

 

 

 

 

Member’s Equity:

 

 

 

 

 

 

 

 

 

 

 

Member units

 

549,135

 

 

1

 

(1

)

549,135

 

Additional paid-in capital

 

 

99,943

 

 

(99,943

)

 

Investment in Number Holdings, Inc. preferred stock

 

(19,200

)

 

 

 

(19,200

)

Accumulated deficit

 

(21,185

)

(26,376

)

(531

)

26,907

 

(21,185

)

Other comprehensive loss

 

(998

)

 

 

 

(998

)

Total equity

 

507,752

 

73,567

 

(530

)

(73,037

)

507,752

 

Total liabilities and equity

 

$

2,277,741

 

$

460,246

 

$

74

 

$

(808,895

)

$

1,929,166

 

 

25



Table of Contents

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the First Quarter Ended May 1, 2015

(In thousands)

(Unaudited)

 

 

 

Issuer

 

Subsidiary
Guarantor

 

Non-
Guarantor
Subsidiaries

 

Consolidating
Adjustments

 

Consolidated

 

Net Sales:

 

 

 

 

 

 

 

 

 

 

 

Total sales

 

$

462,042

 

$

44,127

 

$

109

 

$

(109

)

$

506,169

 

Cost of sales

 

316,767

 

32,779

 

 

 

349,546

 

Gross profit

 

145,275

 

11,348

 

109

 

(109

)

156,623

 

Selling, general and administrative expenses

 

137,132

 

13,045

 

104

 

(109

)

150,172

 

Operating income (loss)

 

8,143

 

(1,697

)

5

 

 

6,451

 

Other (income) expense:

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

(3

)

 

 

 

(3

)

Interest expense

 

16,272

 

 

 

 

16,272

 

Equity in (earnings) loss of subsidiaries

 

1,692

 

 

 

(1,692

)

 

Total other expense, net

 

17,961

 

 

 

(1,692

)

16,269

 

(Loss) income before provision for income taxes

 

(9,818

)

(1,697

)

5

 

1,692

 

(9,818

)

Benefit for income taxes

 

(10,989

)

 

 

 

(10,989

)

Net income (loss)

 

$

1,171

 

$

(1,697

)

$

5

 

$

1,692

 

$

1,171

 

Comprehensive income (loss)

 

$

1,338

 

$

(1,697

)

$

5

 

$

1,692

 

$

1,338

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the First Quarter Ended May 2, 2014

(In thousands)

(Unaudited)

 

 

 

Issuer

 

Subsidiary
Guarantor

 

Consolidating
Adjustments

 

Consolidated

 

Net Sales:

 

 

 

 

 

 

 

 

 

Total sales

 

$

433,033

 

$

44,864

 

$

 

$

477,897

 

Cost of sales

 

287,184

 

33,587

 

 

320,771

 

Gross profit

 

145,849

 

11,277

 

 

157,126

 

Selling, general and administrative expenses

 

113,696

 

12,086

 

 

125,782

 

Operating income (loss)

 

32,153

 

(809

)

 

31,344

 

Other (income) expense:

 

 

 

 

 

 

 

 

 

Interest expense

 

15,429

 

 

 

15,429

 

Equity in (earnings) loss of subsidiaries

 

809

 

 

(809

)

 

Total other expense, net

 

16,238

 

 

(809

)

15,429

 

Income (loss) before provision for income taxes

 

15,915

 

(809

)

809

 

15,915

 

Provision for income taxes

 

6,340

 

 

 

6,340

 

Net income (loss)

 

$

9,575

 

$

(809

)

$

809

 

$

9,575

 

Comprehensive income (loss)

 

$

9,651

 

$

(809

)

$

809

 

$

9,651

 

 

26



Table of Contents

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the First Quarter Ended May 1, 2015

(In thousands)

(Unaudited)

 

 

 

Issuer

 

Subsidiary
Guarantor

 

Non-
Guarantor
Subsidiaries

 

Consolidating
Adjustments

 

Consolidated

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

21,245

 

$

(1,140

)

$

40

 

$

 

$

20,145