UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended MarchJanuary 30, 20132015
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o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number 1-11735
99¢ Only Stores99 CENTS ONLY STORES LLC
(Exact name of registrant as specified in its charter)
California | 95-2411605 | |
(State or other Jurisdiction of Incorporation or Organization) |
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(I.R.S. Employer Identification No.) |
4000 Union Pacific Avenue, | ||
City of Commerce, California | 90023 | |
(Address of Principal Executive Offices) |
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(zip code) |
Registrant’s telephone number, including area code: (323) 980-8145
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ox No xo
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 xo No ox
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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
The registrant is privately held. There is no trading in the registrant’s sharesmembership units and therefore an aggregate market value based on the registrant’s common stockmembership units is not determinable.
As of May 31, 2013,April 20, 2015, there were 100 sharesunits outstanding of the registrant’s Class A Common Stock, par value $0.01 per share, outstanding and 100 shares of registrant’s Class B Common Stock, par value $0.01 per share, outstanding,membership units, none of which are publicly traded.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Certain Relationships and Related Transactions, and Director Independence |
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As used in this annual reportAnnual Report on Form 10-K (this “Report”), unless the context suggests otherwise, the terms “Company,” “99¢ Only,“99 Cents,” “we,” “us,” and “our” refer to 99¢ Only Stores and its consolidated subsidiaries. We refersubsidiaries prior to our stores locatedthe Conversion (as defined and described below in California, NevadaItem 1 “Business-Conversion to LLC”) and Arizona as “Western States” stores.to 99 Cents Only Stores LLC and its consolidated subsidiaries at the time of or after the Conversion.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
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¢99 Cents Only Stores LLC and our directors or officers with respect to, among other things, (a) trends affecting our financial condition or results of operations, and (b) our business and growth strategies (including our new 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. Readers are cautioned not to put undue reliance on such forward-looking statements. Such forward-looking statements are and will be based on our then-current expectations, estimates and assumptions regarding future events and are applicable only as of the date of such statements. We may not realize our expectations and our 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. We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. You should carefully review the risk factors described in this Report and other documents we file from time to time with the Securities and Exchange Commission, including our quarterly reports on Form 10-Q and any current reports on Form 8-K.
EXPLANATORY NOTE
We are in the process of upgrading our systems for accounting for merchandise inventories. Among other things, we are preparing to implement an SAP system that will enable us, for the first time, to track inventory at each retail store on a perpetual basis by stock keeping unit (or SKU). The SAP implementation process will begin in fiscal 2014, with all stores expected to be included by the end of fiscal 2015. In anticipation of the implementation of this system, during the second half of fiscal 2013 we performed physical counts and established inventory cost and retail by SKU at 81 of our more than 300 retail stores. In prior periods, we had originally determined the value of store level inventory by performing physical counts for each price point category and then converted those retail values to cost basis by applying a year-to-date cost percentage per store. For the 81 stores where the counts were taken by SKU, we determined total retail values by merchandise category and applied each category’s cost percentage to determine the value of the inventory. As a result of this analysis, we determined that single average cost percentage by store was not consistent with the inventory on hand at the applicable balance sheet date based on the higher turnover of low margin product. As of March 30, 2013 and for all prior periods since Merger, we revised the calculation to include a year-to-date cost percentage per merchandise category applied to the estimated retail value for all stores by merchandise category. The result of the foregoing evaluation indicated an overstatement in total inventory of $13.3 million at the Merger date, and represents an amount that has accumulated over prior periods.
Management evaluated the materiality of this error quantitatively and qualitatively, and has concluded that it was not material, to any prior period annual and quarterly financial statements. However, because the adjustment to correct the error in fiscal 2013, would have had a material effect on the fiscal 2013 financial statements, the correction was reflected retroactively within the March 31, 2012 balance sheet, and the purchase price allocation as of the Merger date, which resulted in a $8.0 million increase to goodwill, a $5.3 million increase to deferred tax assets, and a $13.3 million decrease to inventories.
Fiscal Periods and Basis of Presentation
We followOn December 16, 2013, the board of directors of the Company’s sole member, Number Holdings, Inc., a Delaware corporation (“Parent”), approved a resolution changing the end of the Company’s fiscal calendar consistingyear. Prior to the change, the fiscal year of four quarters with 91 days, each endingthe Company ended on the Saturday closest to the calendar quarter-end, and a 52-weeklast day of March. The Company’s new fiscal year end is the Friday closest to the last day of January, with 364 days, with a 53-week year every fiveeach successive quarterly period ending the Friday closest to six years. Unless otherwise stated, references to years in this Report relate to fiscal years rather than calendar years. the last day of April, July, October or January, as applicable.
As described in more detail below, on January 13, 2012, we merged with Number Merger Sub, Inc. and became a subsidiary of Number Holdings, Inc.,Parent, an entity controlled by affiliates of Ares Management LLC (“Ares Management”) and Canada Pension Plan Investment Board (“CPPIB”) and certain rollover investors (the “Merger”). As a result of the Merger, the accompanying financial information is presented for the “Predecessor” and “Successor” periods relating to the periods preceding and succeeding the Merger, respectively. Our fiscal year 2015 (“fiscal 2015”) (Successor) began on February 1, 2014 and ended on January 30, 2015 and consisted of 52 weeks. Our fiscal year ended January 31, 2014 (“transition fiscal 2014” or the “ten months ended January 31, 2014”) (Successor) began on March 31, 2013 and ended on January 31, 2014 and consisted of 44 weeks. Our fiscal year 2013 (“fiscal 2013”) (Successor) began on April 1, 2012 and ended on March 30, 2013, consisting of 52 weeks. Our fiscal year 2012 (“fiscal 2012”) is presented as a Successor period from January 15, 2012 to March 31, 2012 consisting of 11 weeks (the “fiscal 2012 Successor period”) and a Predecessor period from April 3, 2011 to January 14, 2012 consisting of 41 weeks, (the “fiscal 2012 Predecessor period”), for a total of 52 weeks. Our fiscal year 2011 (“fiscal 2011”) (Predecessor) began on March 28, 2010 and ended on April 2, 2011, consisting of 53 weeks with one additional week included in the fourth quarter . Where meaningful, we have presented disclosures with respect to the combination of the Successor and Predecessor periods, on a pro forma basis, which we refer to as “pro forma fiscal year 2012”.2012.” Our fiscal year 20142016 (“fiscal 2014”2016”) will consist of 52 weeks beginning MarchJanuary 31, 20132015 and ending MarchJanuary 29, 2014.2016. Unless otherwise stated, references to years in this Report relate to fiscal years rather than calendar years.
With over 30 years of operating experience, we believe, based on our industry experience, that we are a leading operator of extreme value retail stores in the southwestern United States. As of MarchJanuary 30, 2013,2015, we operated 316383 stores located in the states of California (232(277 stores), Texas (39(49 stores), Arizona (29(36 stores) and Nevada (16(21 stores). Our stores offer everyday consumable products and other household items with an emphasis on name brands and ouras well as seasonal items that are primarily priced at 99.99¢ or less. We carry a wide assortment of regularly available products as well as a broad variety of first-quality closeout merchandise. In addition, we carry manydomestic and imported fresh produce, deli, dairy and frozen and refrigerated food products, found in traditional grocery stores, which we sell atbelieve are generally lower, sometimes significantly lower, prices. Our core philosophy is that every item in our store be a good to great value.of greater value than what consumers can find elsewhere. We believe that our differentiated merchandise mix, combined with outstanding value, enables us to appeal to a broad consumer demographic, increases our overall customer traffic and frequency of customer visits, as well as strengthens our customer loyalty. OurWe believe that our stores are significantly larger than those of other U.S. publicly reporting dollar store chains, enablingwhich enables us to offer a wider assortment of merchandise and provide our customers with a spacious, comfortablebetter shopping experience.
In fiscal 2013,As of January 30, 2015, on a comparabletrailing 52-week period, our stores open for the full year averaged net sales of $5.3$5.4 million per store and $321$328 per estimated saleable square foot, which we believe, based on our industry experience, is the highest among U.S. publicly reporting dollar store chains. We opened 1940 net new stores during fiscal 2013,2015, including 1432 stores in California, three in Nevada, and two in Arizona and three in Texas. We closed one store during fiscal 2013. In fiscal 2014,2016, we currently intend to increase our store count by approximately 10%,30 to 40 stores, all of which are expected to be opened in our existing markets.
We also sell merchandise through our Bargain Wholesale division at prices generally below normal wholesale levels to retailers, distributors and exporters. The Bargain Wholesale division complements our retail operations by exposing us to a broader selection of opportunistic buys and generating additional sales with relatively small incremental operating expenses. Bargain Wholesale represented 2.9%2.3% of our total sales in fiscal 2013.2015.
Merger and Repurchase Transaction with Rollover Investors
On January 13, 2012, pursuant to the Agreement and Plan ofCompany was acquired through the Merger dated as of October 11, 2011 (the “Merger Agreement”), by and among 99¢ Only Stores, Number Holdings, Inc., a Delaware corporation (“Parent”), and Numberwith Merger Sub, Inc. (“Merger Sub”) a subsidiary of Parent, Merger Sub merged with and into 99¢ Only Stores,the Company surviving. In connection with 99¢ Only Stores being the surviving corporation. As a result of the Merger, we became a subsidiary of Parent. Parent, which is controlled by affiliates of Ares Management (“Ares”), Canada Pension Plan Investment Board (“CPPIB” and togetherCPPIB (together with Ares, the “Sponsors”) and, prior to the Gold-Schiffer Purchase (as defined below), the Rollover Investors (as defined below).
Pursuant to the terms of the Merger Agreement, at the effective time of the Merger, each outstanding share of the Company’s common stock, no par value (“Company common stock”), was converted into the right to receive $22.00 in cash, without interest and less any applicable withholding taxes (the “Merger Consideration”), excluding (1) shares held by any shareholders who were entitled to and who have properly exercised dissenters’ rights under California law, and (2) shares held by Parent, Merger Sub or any other wholly owned subsidiary of Parent, which included the shares contributed to Parent prior to the completion of the Merger by Eric Schiffer, our former Chief Executive Officer, Jeff Gold, our former President and Chief Operating Officer, Howard Gold, our former Executive Vice President, Karen Schiffer and The Gold Revocable Trust dated October 26, 2005 (collectively, the “Rollover Investors”). In addition, each outstanding stock option was cancelled and converted into the right to receive an amount in cash equal to the excess, if any, of the Merger Consideration over the exercise price for each share subject to the applicable option. Each restricted stock unit (“RSU”) was cancelled and converted into the right to receive an amount in cash equal to the number of unforfeited shares of Company common stock then subject to the RSU multiplied by the Merger Consideration. Each performance stock unit (“PSU”) was cancelled and converted into the right to receive an amount in cash equal to the number of unforfeited shares of Company common stock then subject to the PSU multiplied by the Merger Consideration.
At the effective time of the Merger, each share of Company common stock was converted into the right to receive the Merger Consideration. As a result of the Merger, the Company common stock was delisted from the New York Stock Exchange and we ceased to be a publicly held and traded corporation.
The total cash merger consideration paid was approximately $1.6 billion, which was funded from equity contributions from the Sponsors and cash of the Company, as well as proceeds received by Merger Sub in connection with debt financing consisting of (i) $535 million of funded debt provided by Royal Bank of Canada, Bank of Montreal, Deutsche Bank Trust Company Americas, City National Bank, a National Banking Association, Siemens Financial Services, Inc. and HSBC Bank USA, N.A. under (a) a $525 million first lien term loan facility (as amended, the “First Lien Term Loan Facility”), and (b) $10 million of borrowings under a $175 million first lien based revolving credit facility (the(as amended, the “ABL Facility” and together with the First Lien Term Loan Facility, the “Credit Facilities”) and (ii) issuance of $250 million 11% senior unsecured notes due 2019 (the “Senior Notes”). In addition, Eric Schiffer, our former Chief Executive Officer, Jeff Gold, our former President and Chief Operating Officer, Howard Gold, our former Executive Vice President, Karen Schiffer and The Gold Revocable Trust dated October 26, 2005 (collectively, the Rollover Investors“Rollover Investors”) contributed approximately 4,545,451 shares of Company common stock, valued at the $22.00 per share merger consideration, to Parent, in exchange for approximately 15.73% of the outstanding common stock of Parent. As a result of the Merger, the Company common stock was delisted from the New York Stock Exchange and we ceased to be a publicly held and traded equity company.
On October 15, 2013, Parent and the Company entered into an agreement with the Rollover Investors, pursuant to which (a) Parent repurchased (i) all of the shares of Class A Common Stock of Parent, par value $0.001 per share (“Class A Common Stock”) and Class B Common Stock of Parent, par value $0.001 per share (“Class B Common Stock”) owned by each Rollover Investor and (ii) all of the options to purchase shares of Class A Common Stock and Class B Common Stock held by such Rollover Investor for aggregate consideration of approximately $129.7 million (the “Gold-Schiffer Purchase”) and (b) the Company agreed to certain amendments to the Non-Competition, Non-Solicitation and Confidentiality Agreements and the Separation and Release Agreements with the Rollover Investors who were former management of the Company. The Gold-Schiffer Purchase was completed on October 21, 2013 and funded through a combination of borrowings under the First Lien Term Loan Facility and cash on hand at the Company and Parent. In connection with the Gold-Schiffer Purchase, we made a distribution to Parent of $95.5 million and an investment in shares of preferred stock of Parent of $19.2 million. In addition, we made a payment of $7.8 million to the Rollover Investors to repurchase all options of Class A Common Stock and Class B Common Stock held by the Rollover Investors.
Conversion to LLC
On October 18, 2013, 99¢ Only Stores converted (the “Conversion”) from a California corporation to a California limited liability company, 99 Cents Only Stores LLC (“99 LLC”), that is managed by a single member, Parent. In connection with the Conversion, each outstanding share of Class A common stock of 99¢ Only Stores, par value $0.01 per share, was converted into one membership unit of 99 LLC, and each outstanding share of Class B common stock of 99¢ Only Stores, par value $0.01 per share, was cancelled and forfeited. Pursuant to the laws of the State of California, all rights and property of 99¢ Only Stores were vested in 99 LLC and all debts, liabilities and obligations of 99¢ Only Stores continued as debts, liabilities and obligations of 99 LLC. 99 LLC has elected to be treated as a disregarded entity for United States federal income tax purposes. The Conversion did not have any effect on deferred tax assets or liabilities, and we will continue to use the liability method of accounting for income taxes. The Company and its Parent will continue to file consolidated or combined income tax returns with its subsidiaries in all jurisdictions.
Our Competitive Strengths
Differentiated Retail Concept
We believe our stores offer consumers an extreme value shopping experience that is unique in our industry due to:
· Our current average store size of approximately 21,000 gross16,000 saleable square feet, and our target average store size of approximately 15,000 to 20,000 gross square feet, both of which we believe are significantly larger than stores of other U.S. publicly reporting dollar store chains, enabling us to carry a wide assortment of consumable, general merchandise and seasonal products in a clean, attractive and comfortable shopping environment;
· Our large selection of food and grocery items, which is approximately 55%57% of gross sales, and includes many of the fresh produce, deli, dairy and refrigerated and frozen food items found in traditional grocery storeswhich we believe generally at lower, sometimes significantly lower, prices.provide greater value than consumers can find elsewhere. We believe our extensive food and grocery offerings drive recurring traffic from customers who rely on us for their weekly household needs;
· Our wide assortment of closeout merchandise, which helps create an atmosphere of treasure-hunt excitement within our stores. We believe that our wide assortment of closeout merchandise is a competitive advantage as many of our competitors lack the suppliervendor relationships, management expertise or logistical capabilities to handle as large a percentage of sales as we do in closeout merchandise; and
· Our core philosophyWe are able to source a significant portion of our merchandise from abroad and we believe that every item inadditional opportunities exist to increase volume of private-label and direct source foreign merchandise, which would enable us to expand our store be a good to great value.product assortment and meet consumer demands.
We believe, based on our industry experience, that these competitive strengths enable us to be the most productive stores among U.S. publicly reporting dollar store chains when ranked by sales per store and average sales per square foot.
Attractive Industry Fundamentals
The U.S. dollar store industry is large and growing, and we believe benefits from a number of attractive industry fundamentals which will continue to support our growth, including:
· Historical and projected growth in dollar store revenues driven by the addition of new dollar stores and the increasing acceptance of dollar stores among consumers;
· Same store sales growth among U.S. publicly reporting dollar store chains, which are outperforming many other retail channels, particularly U.S. publicly reporting traditional grocery stores;
· Within the dollar store industry, the opportunity for larger chains, including 99¢ Only,99 Cents, to grow faster than the overall industry, the balance of which we believe consists primarily of independent store operators; and
· Strong historical performance by dollar stores throughout economic cycles.
We believe that these attractive industry fundamentals, when combined with the large population size and favorable income and demographic attributes within our existing markets, represent growth opportunities for 99¢ Only.99 Cents.
Attractive Store Footprint
We have over 30 years of experience operating our stores. We currently operate a large network of extreme value retail stores in California and have a strong presence in three other southwestern states.states, Texas, Nevada and Arizona. Our stores are typically clustered in and around densely populated areas. We believe that many of our stores are more convenient than traditional “big box” retailers that typically occupy larger buildings located in less urban areas as a result of their store size requirements. We have clustered many of our stores around major cities that we serve, which enables us to leverage our strong brand awareness as well as achieve significant economies of scale in the areas of advertising, distribution and store logistics. We believe that the density of our store geographic coverage is a competitive advantage and would be difficult to replicate.
We believe that our southwestern geographic markets have attractive attributes that support our business model. Our markets generally have large, growing and ethnically diverse populations. Many of the citiesmarkets we serve have high proportions of low-income consumers, as well as nearby middle and upper middle income consumers, who we believe are increasingly shopping dollar stores.
Strong SupplierVendor Relationships and Sourcing Expertise Both Domestically and Globally
We believe that our sourcing expertise and our long-standing, mutually beneficial suppliervendor relationships are competitive advantages. Many of our suppliersvendors have been supplying products to us for over 20 years. We are a trusted partner and a preferred buyer to our suppliers,vendors, many of whom we believe contact 99¢ Onlyus first when they are selling closeout inventory. We believe we are a preferred buyer due to our ability to, among other things:
· Make immediate buying decisions;
· Acquire large volumes of inventory and take possession of goods immediately;
· Pay cash or accept abbreviated credit terms; and
· Purchase goods that have a shorter than normal shelf life or are off-season or near the end of a selling season.
We believe our suppliervendor relationships are also strengthened by our ability to minimize channel conflict for the manufacturer as well as our ability to quickly and discreetly sell products through well-maintained, attractively merchandised stores, which protects the supplier’s brand image.stores.
Strong Financial Performance and Compelling Unit Economics
Our store base is profitable and growing. Our stores continue to demonstrate strong revenue growth, having posted positive same-stores sales growth in nine outeach of the past ten past years with same-store sales growth of 4.3%0.4% in fiscal 2013.2015.
With our strong store sales productivity metrics, our new store model generates attractive cash on cash returns. Our newly opened stores ramp up quickly and typically reach near full sales volumes within the first 12 months. Historically, our new stores have demonstrated relatively consistent profitability levels as a percentage of sales across fiscal years. Our stores have a low cost operating model with attractive margins, low maintenance capital expenditures and low ongoing working capital needs.
Our Business Strategy
Continue to Deliver Great Merchandise at Exceptional Value toAccelerate Our CustomersStore Growth
Our merchandising strategy is centered aroundWe opened 40 net new stores during fiscal 2015 and we currently intend to open approximately 30 to 40 stores in fiscal 2016. We plan to continue to pursue an accelerated store growth plan in our core philosophyexisting markets. We believe that every itemthis will strengthen our competitive advantage in the store be a goodour key geographic regions and enable us to great value. Our convenient retail format, differentiated product offering and strong value proposition appeal to a broad consumer demographic and have been the cornerstonestake advantage of our success. By continuing to leverage our sourcing expertise, vendor relationships, existing store network and economies of scale in purchasing, warehousingdistribution and distribution, we believe that we will be able to further strengthen our brand, increase our revenues and enhance our profitability.store logistics.
Further Strengthen Our Merchandising StrategyMaximize Profitable Sales
We expect to achieve sustainable increases in sales and product margin results through enhancing the customer shopping experience, optimizing our product mix and expanding our global sourcing, as follows:
Enhancing the Customer Shopping Experience
We plan to continue improvingimprove our merchandise assortmentcustomers’ shopping experience, which we believe will maximize profitable sales in our stores, through a multi-year three-step plan for our stores:
1.Raising the height of the shelving to create a dramatic canvas for visual merchandising,
2.Optimizing the store layout and in-store merchandising.space allocation to drive sales and margin, and
3.Remodeling our store interiors and exteriors to attract new customers.
During fiscal 2015, we implemented the first step by retrofitting our existing store base to raise our shelving to 78 inches from the previous 54 inches. We believe that this initiative has improved the customer experience by placing more products at eye level, which provides cleaner displays and creates a more appealing store appearance.
Optimizing Our Product Mix and Expanding Global Sourcing
We are increasing our focus on sourcing globally and directly, which we believe will help us to:
·Supplement our private-label consumable offerings, which will enhance the category margins,
·Become the “go-to destination” for general and seasonal merchandise, and
·Go directly to overseas factories to expand our product assortment, increase our close-out opportunities existand reduce our product costs.
We are enhancing our product offering to customers through an expanded assortment of everyday consumable products that we believe will drive traffic and increase the average sales transaction size by reducing the frequency of out of stock items, optimizing display size, improving cross merchandising of related products, implementing additional plan-o-gram sections and enhancing category management. value.
In addition, we believe that considerable opportunities exist to increase the sales of private label and directly sourced imported products which typically carry higher than average gross margins. We offer selected items priced above 99.99¢ and we believe that we have additional opportunities to expand our selection of these items. By improving our merchandising strategy we believe we can increase our sales and profitability and improve customer satisfaction.
Continue to Improve Store Operations and LogisticsDeliver Superior Key Metrics
We intend to become a more effective retailer with simplified business processes and organization. We are in the process of upgrading our IT and supply chain infrastructure as well as building and developing our management and field operations teams. We intend to continue to implement best practices to strengthen the operational performance of our stores. At the store level, we intend to optimize the flow of goods to and through the store, reduce stocking costs, improve product displaysstore. We are continuing to implement automated forecasting and better utilize our shelf space.replenishment systems. We also believe there are opportunities to further improve our operations through automated replenishment, automated labor scheduling and time and attendance tracking to better control our product flow and store level expenses.deliver superior key metrics over time. At our warehouses,warehouse and distribution facilities, we intend to continue to drive operating efficiencies through consolidating and improving our warehouse and distribution facilities, labor and logistics systems as well as drive integrated supply chain initiatives to reduce operating costs. Through our operationally focused strategies, we believe we can further improve our profitability and competitive position.
Pursue Measured Store Growth
We Over time, we believe that considerable opportunities existthis will allow us to open new stores within our existing markets. We currently intend to expand our store base by approximately 10% per annum over the next five years, primarilydeliver superior results in our existing marketskey metrics such as sales productivity, expense leverage and almost exclusively under leases. We believe that by continuing to open stores in our markets we can continue to grow our brand awareness, increase sales and leverage our existing infrastructure.overall profitability.
Retail Operations
Our stores offer customers a wide assortment of regularly available consumer goods, as well as a broad variety of quality, closeout merchandise, which we sell at generally significant discounts from standard retail prices.merchandise. Merchandise sold in our 99¢ Only stores is priced primarily at or below 99.99¢ per item.
The following table sets forth certain relevant information with respect to our retail operations (dollar amounts in thousands, except percentages and sales per square footage):
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| Years Ended |
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| Year Ended |
| Ten Months Ended |
| Years Ended |
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| March 30, |
| March 31, |
| April 2, |
| March 27, |
| March 28, |
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| January 30, |
| January 31, |
| March 30, |
| March 31, |
| April 2, |
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| (Successor) |
| (Pro Forma) |
| (Predecessor) |
| (Predecessor) |
| (Predecessor) |
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| (Successor) |
| (Successor) |
| (Successor) |
| (Pro Forma) |
| (Predecessor) |
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Net retail sales |
| $ | 1,620,683 |
| $ | 1,488,094 |
| $ | 1,380,357 | (e) | $ | 1,314,214 |
| $ | 1,262,119 |
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| $ | 1,881,865 | (a) | $ | 1,486,699 | (c) | $ | 1,620,683 |
| $ | 1,488,094 |
| $ | 1,380,357 | (f) |
Annual net retail sales growth rate |
| 8.9 | % | 7.8 | % | 5.0 | %(e) | 4.1 | % | 8.9 | % |
| 6.8 | %(a) | 10.7 | %(c) | 8.9 | % | 7.8 | % | 5.0 | %(f) | ||||||||||
Store count at beginning of year |
| 298 |
| 285 |
| 275 |
| 279 |
| 265 |
|
| 343 |
| 316 |
| 298 |
| 285 |
| 275 |
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New stores |
| 19 |
| 13 |
| 11 |
| 9 |
| 19 |
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| 41 |
| 28 |
| 19 |
| 13 |
| 11 |
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Stores closed |
| 1 | (a) | — |
| 1 | (f) | 13 | (h) | 5 | (j) |
| 1 |
| 1 |
| 1 |
| — |
| 1 |
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Total store count at year-end |
| 316 |
| 298 |
| 285 |
| 275 |
| 279 |
|
| 383 |
| 343 |
| 316 |
| 298 |
| 285 |
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Average net sales per store open the full years(l) |
| $ | 5,327 | (b) | $ | 5,152 | (d) | $ | 4,874 | (g) | $ | 4,848 | (i) | $ | 4,642 | (k) | ||||||||||||||||
Average net sales per store open the full years(g) |
| $ | 5,366 |
| $ | 5,446 | (i) | $ | 5,327 |
| $ | 5,152 |
| $ | 4,874 |
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Estimated store saleable square foot |
| 5,211,483 |
| 4,948,344 |
| 4,758,432 |
| 4,606,728 |
| 4,703,630 |
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| 6,189,669 |
| 5,607,991 |
| 5,211,483 |
| 4,948,344 |
| 4,758,432 |
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Average net sales per estimated saleable square foot(l) |
| $ | 321 | (b) | $ | 309 | (d) | $ | 291 | (g) | $ | 289 | (i) | $ | 273 | (k) | ||||||||||||||||
Change in comparable net sales(m) |
| 4.3 | % | 7.3 | % | 0.7 | % | 3.9 | % | 3.7 | % | |||||||||||||||||||||
Average net sales per estimated saleable square foot(g) |
| $ | 328 |
| $ | 330 | (i) | $ | 321 |
| $ | 309 |
| $ | 291 |
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Change in comparable same-store sales(h) |
| 0.4 | %(b) | 3.7 | %(d) | 4.3 | % | 7.3 | % | 0.7 | % | |||||||||||||||||||||
(a) One California storeFor fiscal 2015, each of annual net retail sales of $1,881.9 million and the annual net retail sales growth rate of 6.8% was closed duecalculated based on the net retail sales for the 52-week period ended January 31, 2014.
(b)Comparable same-store sales for fiscal 2015 are calculated based on the 52-week period ended January 30, 2015 as compared to the expiration of its lease and one new store was opened nearby.52-week period ended January 31, 2014.
(b) Includes 39 Texas stores open for(c)For transition fiscal 2014, net retail sales of $1,486.7 million were based on a full year. Texas stores open44-week period and the annual net retail sales growth rate of 10.7% was calculated based on the net retail sales for the full year on a comparable 52-week43-week period had average sales of $3.7 million per store and average sales per estimated saleable square foot of $203. All Western States stores openended January 26, 2013. See Note 2 to our Consolidated Financial Statements for the full year on a comparable 52-week period had average salescomparative Condensed Consolidated Statements of $5.6 million per storeOperations and $339 of average sales per estimated saleable square foot.Comprehensive Income (Loss) for the ten months ended January 31, 2014 (a 44-week period) and ten months ended January 26, 2013 (a 43-week period).
(c) The amount(d)Comparable same-store sales for transition fiscal 2014 are calculated based on the 43-week period ended January 25, 2014 as compared to the 43-week period ended January 26, 2013.
(e)Amounts in pro forma fiscal year ended March 31, 2012 column representsrepresent the mathematical combination of the Predecessor financial data from April 3, 2011 to January 14, 2012 and the Successor financial data from January 15, 2012 to March 31, 2012 included in our Consolidated Financial Statements.
(d) Includes 35 Texas stores open for a full year. Texas stores open for the full year on a comparable 52-week period had average sales of $3.6 million per store and average sales per estimated saleable square foot of $197. All Western States stores open for the full year on a comparable 52-week period had average sales of $5.4 million per store and $326 of average sales per estimated saleable square foot.
(e) (f)For fiscal 2011, net retail sales wereof $1,380.4 million andwere based on a 53-week period, compared to a 52-week period for the other periods presented.presented (except for transition fiscal 2014, which was based on a 44-week period).
(f) One California store was closed due to the expiration of its lease.(g)Stores open for 12 months.
(g) Includes 32 Texas(h)Change in comparable same-store sales for year ended January 30, 2015 is based on stores open for a full year. Texasat least 14 months. For other periods presented change in comparable same-store sales is based on stores open at least 15 months. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations for the full year on a comparable 52-week period had averageadditional discussion.
(i)Average net sales of $3.4 million per store and average net sales per estimated saleable square foot of $181. All Western States stores open for the full yearare based on a comparabletrailing 52-week period had average sales of $5.1 million per store and $307 of average sales per estimated saleable square foot.
(h) 12 underperforming stores in Texas were closed in fiscal 2010 and one California store was closed due to the expiration of its lease. See Note 12, “Texas Market” to our Consolidated Financial Statements for additional information regarding the Texas Market.
(i) Includes 31 Texas stores open for a full year. Texas stores open for the full year had average sales of $3.4 million per store and average sales per estimated saleable square foot of $180. All Western States stores open for the full year had average sales of $5.0 million per store and $305 of average sales per estimated saleable square foot.
(j) Four underperforming stores in Texas were closed in fiscal 2009 and one additional Texas store was closed due to a hurricane which was re-opened in May 2009. The leases had expired for two of the four stores that were closed in fiscal 2009.
(k) Includes 39 Texas stores open for a full year. Texas stores open for the full year had average sales of $2.7 million per store and average sales per estimated saleable square foot of $142. All Western States stores open for the full year had average sales of $5.0 million per store and $301 of average sales per estimated saleable square foot.
(l) For stores open for the entire fiscal year.
(m) Change in comparable store net sales compares net sales for all stores open at least 15 months. We normally do not relocate stores or close them if renovations are taking place. In a rare situation where a store is relocated, or closed and later re-opened at the same location, the relocated or re-opened store is considered a new store for any comparable store sales analysis, and would only be included in the comparable store sales analysis once it has been open, or re-opened, for 15 months.
Merchandising. All of our stores offer a broad variety of first-quality, name-brand and other closeout merchandise as well as a wide assortment of regularly available consumer goods. We also carry private-label consumer products made for us. Our merchandising strategy is centered on our philosophy that every item in our store be a good to great value. We believe that the success of our 99¢ Only stores concept arises in part from the value inherent in pricing consumable items primarily at 99.99¢ or less per item, many of which are name-brands, and most of which typically retail elsewhere at higher prices.generally provide greater value than consumers can find elsewhere. We offer selected items priced above 99.99¢ and we believe that we have additional opportunities to expand our selection of these items.
A significant amount of our gross sales are from products available for reorder, including many branded consumable items. The mix and the specific brands of merchandise frequently changes, depending primarily upon the availability of closeout and other special-situation merchandise at suitable prices. Approximately 45%A significant amount of our sales are from closeout merchandise, which we believe represents a significantly larger percentageshare of closeout merchandise than those of other U.S. publicly reporting dollars stores chains, some of whom carry few or no closeouts. We currently expect to be able to obtain sufficient name-brand closeouts, as well as re-orderable merchandise, at attractive prices. We believe that the frequent changes in specific name-brands and products found in our stores from one week to the next, encourage impulse and larger volume purchases, result in customers shopping more frequently, and help to create a sense of urgency, fun and treasure hunt excitement. Unlike many extreme value retailers, we rarely impose limitations on the quantity of specific value-priced items that may be purchased in a single transaction.
We believe that we differentiate ourselves from traditional dollar stores by offering a wider assortment of food and grocery items, including perishables,frozen, dairy, deli and produce, which collectively account for approximately 55%57% of our revenue. Substantially all of our stores have free-standing fresh and refrigerated produce displays as well as built-in refrigerated and frozen food wall units. We believe that many of our customers shop at our stores weekly for their groceries and frequently shop 99¢ Only stores first before supplementing these purchases at other food stores.
We estimate that approximately one-third of our sales are derived from products produced outside the United States, varying depending on the season and closeout activity. AllSubstantially all of our business is transacted in U.S. dollars and, accordingly, foreign exchange rate fluctuations have nevernot historically had a significant impact on us. In addition to our significant name-brand offerings, we offer secondary and generic brands, plus a smaller portion of domestically and internationally sourced private label merchandise. We believe that opportunities exist to increase the volume of private label and directly sourced foreign merchandise.
Our retail sales by product category for fiscal 2013, pro forma2015, the transition fiscal 20122014 and fiscal 20112013 are set forth below:
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Food and grocery |
| 55 | % | 56 | % | 55 | % |
| 57 | % | 56 | % | 55 | % |
Household and housewares |
| 14 | % | 14 | % | 14 | % |
| 13 | % | 14 | % | 14 | % |
Health and beauty care |
| 9 | % | 9 | % | 10 | % |
| 9 | % | 9 | % | 9 | % |
Hardware |
| 3 | % | 3 | % | 3 | % |
| 3 | % | 3 | % | 3 | % |
Stationery and party |
| 5 | % | 6 | % | 5 | % |
| 5 | % | 5 | % | 5 | % |
Seasonal |
| 5 | % | 4 | % | 4 | % |
| 5 | % | 4 | % | 5 | % |
Other |
| 9 | % | 8 | % | 9 | % |
| 8 | % | 9 | % | 9 | % |
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| 100 | % | 100 | % | 100 | % |
| 100 | % | 100 | % | 100 | % |
We target value-conscious consumers from a wide range of socio-economic backgrounds with diverse demographic characteristics. Purchases are by cash, credit card, debit card or EBT (electronic benefit transfers). Our stores currently do not accept checks or manufacturer’s coupons. Our stores are open every day except Christmas, withstores’ operating hours are designed to meet the needs of families.
Store Size, Layout and Locations. We strive to provide stores that are attractively merchandised, brightly lit, clean, well-maintained, “destination” locations. Our stores are typically clustered around densely populated areas where it is convenient for our customers to do their weekly household shopping. The layout of each of our stores is customized to the configuration of the individual location. The interior of each store is designed to reflect a generally uniform format, featuring consistent merchandise displays, bright lighting, low shelving height that allows visibility throughout the store, customized check-out counters and a distinctive color scheme on its interior and exterior signage, price tags, baskets and shopping bags. We emphasize a strong visual presentation in all key traffic areas of each store. Merchandising displays are maintained and updated throughout the day and often incorporate seasonal themes to improve our customers’ shopping experience. We believe that the frequently changing value priced name-brand products, our convenient and inviting layout, and the low shelving height help encourage the typical customer to shop more of the entire store.
Table of Contentssignage.
Marketing and Advertising. Advertising expenditures were $5.4 million, $5.5 million and $5.5 million or 0.3%, 0.4% and 0.4%Our marketing strategy is based on our network of net retail sales for fiscal 2013, pro forma fiscal 2012 and fiscal 2011, respectively. We allocate the majority of our advertising budget to print advertising. Our advertising strategy emphasizes the offering of nationally recognized, name-brand merchandise at significant savings. We manage our advertising expenditures by an efficient implementation of our advertising program combined with word-of-mouth publicity, locations with good visibility, effective and efficient signage. Because of our distinctivesignage, word-of-mouth publicity, a grand new store opening promotional campaign, which usually includes the pricing of nine televisionsprogram and other high value items at only 99¢ each, our grand openings often attract long lines of customers and receive media coverage.occasionally supplemental advertising.
Purchasing
We believe a primary factor contributing to our success is our ability to identify and take advantage of opportunities to purchase merchandise with high customer appeal at prices lower than regular wholesale. We purchase most merchandise directly from the manufacturer. Other sources of merchandise include wholesalers, manufacturers’ representatives, importers, barter companies, auctions, professional finders and other retailers, varying on the season and closeout activity.
We seldom have continuing contracts for the purchase of merchandise and must continuously seek out buying opportunities from both our existing suppliersvendors and new sources. No single suppliervendor accounted for more than 5% of our total purchases in fiscal 2013.2015. During fiscal 2013,2015, we purchased merchandise from more than 999 suppliers, including 3M, Colgate-Palmolive, Dole, Energizer Battery, Frito-Lay, General Mills, Georgia Pacific, Hasbro, Heinz, Hershey Foods, Johnson & Johnson, Kellogg’s, Kraft, Nestle, Procter & Gamble, Quaker and Unilever. Manyvendors, many of these companieswhich have been supplying products to us product for over twenty20 years.
A significant portion of the merchandise purchased by us in fiscal 20132015 was closeout or special-situation merchandise. We have developed strong relationships with many manufacturersvendors and distributors who recognize that our special-situation merchandise can be moved quickly through our retail and wholesale distribution channels. Our buyers continuously search for closeout opportunities.
Our experience and expertise in buying merchandise has enabled us to develop relationships with many manufacturers that often offer some or all of their closeout merchandise to us prior to attempting to sell it through other channels. The key elements to these suppliervendor relationships include our (i) ability to make immediate buying decisions; (ii) experienced buying staff; (iii) willingness to take on large volume purchases and take possession of merchandise immediately; (iv) ability to pay cash or accept abbreviated credit terms; (v) commitment to honor all issued purchase orders; and (vi) willingness to purchase goods close to a target season or out of season. We believe our relationships with our suppliersvendors are further enhanced by our ability to minimize channel conflict for a manufacturer.
Our strong relationships with many manufacturers and distributors, along with our ability to purchase in large volumes, also enable us to purchase re-orderable name-brand goods at discountedprices that we believe are below general wholesale prices.
We utilize and develop private label consumer products to broaden the assortment of merchandise that is consistently available and to maintain attractive margins. We also import merchandise in product categories such as kitchen items, housewares, toys, seasonal products, party, pet-care and hardware which we believe are not brand sensitive to consumers.hardware.
Warehousing and Distribution
An important aspect of our purchasing strategy involves our ability to warehouse and distribute merchandise quickly and with flexibility. Our warehousing and distribution centersfacilities are strategically located next to the Long Beach, CA and Los Angeles, CA port systems, the rail yards in the City of Commerce and the major California interstate arteries. This enables quick turnaround of time-sensitive products as well as provides long-term warehousing capabilities for one-time closeout purchases and seasonal or holiday items. Our distribution center in the Houston area has both dry and cold storage capacity, and services our Texas operations.
We utilize both our private fleet and outside carriers for our store deliveries / backhauls and vendor pick-ups. We have primarily used common carriers or owner-operators to deliver to stores outside of Southern California including our stores in Northern and Central California, Texas, Arizona and Nevada. We currently plan to add to our dry deep reserve capacity and coldIn December 2014, we began warehouse operations in a new distribution capacitycenter in the City of Commerce, California. We believe our Texas distribution center has the capacity to support our planned growth in that region for the next several years. However, there can be no assurance that our existing warehouses will provide adequate storage space for our long-term storage needs or to support sales levels at peak seasons for all products, that high levels of opportunistic or seasonal purchases may not temporarily exceed the warehouse capacity, or that we will not make changes, including capital expenditures, to expand or otherwise modify our warehousing and distribution operations.
We arrange with vendors of certain merchandise to ship directly to our store locations. Our primary distribution practice however, is to have the majority of the merchandise delivered from our vendors to our warehouses and then shipped to our store locations. We do, however, occasionally utilize direct store deliveries for select product categories.
Additional information pertaining to warehouse and distribution facilities is described under Item 2. Properties.
Table of Contents2, “Properties.”
Information Systems
We currently operate financial, accounting, human resources, and payroll data processing using Lawson Software’s Financial and Human Resource Suites. We also operate several proprietary supply chain systems that are tightly coupled with HighJumpHighJump’s warehouse solutions.management solutions (“WMS”). These proprietary systems include an IBM UNIX-based purchase order and inventory control system, a store ordering system, and a store back office personal computer system. The HighJump WMS was upgraded in fiscal 2015 and all distribution centers currently use a common system platform.
We have recently completed the process of converting toutilize SAP’s Master Data, Price Management, system and SAP’s Point-of-Sale barcode scanning, systemSales Audit and Reporting systems to record and process retail sales. In early fiscal 2015, we implemented an automated store replenishment and forecasting solution from JustEnough for our stores in California, Nevada and Arizona. In the beginning of fiscal 2016, we plan to migrate the majority of our procurement and financial systems to SAP, including Purchasing, Inventory Management, Sales Audit,Order Management, Accounts Payable, General Ledger and Financial Reporting. In conjunction with this SAP implementation project, weWe plan to re-platformcontinue our deployment of JustEnough’s store replenishment solution and refreshfurther implement its distribution center replenishment and allocation tools. We also will be reviewing and implementing new administrative systems including workforce management, human resources and payroll for both our store ordering system, order managementretail stores and business intelligence tools and infrastructure. Combined with the roll-outcorporate offices.
Competition
We face competition in both the acquisition of inventory and the sale of merchandise from other discount stores, single-price-point merchandisers, mass merchandisers, food markets, drug chains, club stores, wholesalers, and other retailers. Industry competition for acquiring closeout merchandise also includes a large number of retail and wholesale companies and individuals. In some instances, these competitors are also customers of our Bargain Wholesale division. There is increasing competition with other wholesalers and retailers, including other extreme value retailers, for the purchase of quality closeout and other special-situation merchandise. Some of these competitors have substantially greater financial resources and buying power than us. Our ability to compete will depend on many factors, including the success of our purchase and resale of such merchandise at lower prices than our competitors. In addition, we may face intense competition in the future from new entrants in the extreme value retail industry that could have an adverse effect on our business and results of operations.
We believe that we are able to compete effectively against other dollar stores as a result of our differentiated retail format, the larger size and more convenient location of our stores, our economies of scale in our operations and nearlymore than three decades of experience operating in the industry. For products where we compete with traditional grocery stores, such as fresh produce, deli, dairy and frozen food items, we believe that we have lower to significantly lower pricesoffer greater value than our grocery competitors and our stores are often more convenient. For products where we compete with warehouse clubs and mass merchandisers, we believe we compete effectively on the basis of generally lower prices,greater value, no membership fees, more convenient store locations and smaller, easier to navigate stores.
Employees
At MarchAs of January 30, 2013,2015, we had approximately 13,700 employees including approximately 12,200 in our retail operations, 1,000 in our warehousing and distribution operations and 500 in our corporate offices. We consider relations with our employees to be good. We offer certain benefits to eligible employees, including life, health and disability insurance, paid time off (vacation, holidays, and sick leave), a 401(k) plan (which we match) and a deferred compensation plan for certain of our key management18,200 employees.
None of our employees are party to a collective bargaining agreement and none are represented by a labor union.
Trademarks and Service Marks
“99¢ Only Stores,” “Rinso,”“Bargain Wholesale” and “Halsa” are among our service marks andmultiple other product trademarks and are listed on the United States Patent and Trademark Office Principal Register. “Bargain Wholesale” is among the fictitious business names we use. We believe that our trademarks service marks, and fictitious business names are an important but not critical element of our merchandising strategy. We routinely undertake enforcement efforts against certain parties whom we believe are infringing upon our “99¢” family of marks and our other intellectual property rights, although we believe that simultaneous litigation against all persons everywhere whom we believe to be infringing upon these marks is not feasible.
Seasonality
For information regarding the seasonality of our business, see Item 7. Management’s7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations. Operations—Seasonality and Quarterly Fluctuations,” which is incorporated by reference in this Item 1.
Environmental Matters
In the ordinary course of business, we handle or dispose of commonplace household products that are classified as hazardous materials under various environmental laws and regulations. Under various federal, state, and local environmental laws and regulations, current or previous owners or occupants of property may face liability associated with hazardous substances. These laws and regulations often impose liability without regard to fault. In the future we may be required to incur substantial costs for preventive or remedial measures associated with hazardous materials. We have several storage tanks at our distribution and warehouse facilities, including: an aboveground and an underground diesel storage tank at thetanks in our two City of Commerce, California warehouse;distribution centers, a compressed natural gas tank at one City of Commerce, California distribution center; ammonia storage at theour Southern California cold storage facility and theour Texas warehouse; aboveground diesel and propane storage tanks at theour Texas warehouse; an aboveground propane storage tank at our two main Southern California warehouses; and an aboveground propane storage tank at our leased Slauson distribution center in City of Commerce, California; and an aboveground propane tank located at the warehouse we owned in Eagan, Minnesota, which was sold in June 2012.California. Except as disclosed in Item 3. Legal Matters, we have not been notified of, and are not aware of, any potentially material current environmental liability, claim or non-compliance, concerning our owned or leased real estate.
Available Information
We make available free of charge our annual reportand transition reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports through a hyperlink from the “Investor Relations” portion of our website, www.99only.com, to the Securities and Exchange Commission’s website, www.sec.gov. Such reports are available on the same day that we electronically filed them with or furnished to the Securities and Exchange Commission. The reference to our website address does not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this document.
Copies of the reports and other information we file with the Securities and Exchange Commission may also be examined by the public without charge at 100 F Street, N.E., Room 1580, Washington D.C., 20549, or on the Internet at http://sec.gov. Copies of all or a portion of such materials can be obtained from the Securities and Exchange Commission upon payment of prescribed fees. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information.
Risks Related to Our Business
Inflation may affect our ability to keep pricing almost all of our merchandise at 99.99¢ or less
Our ability to provide quality merchandise for profitable resale primarily at a price point of 99.99¢ or less is subject to certain economic factors which are beyond our control. Inflation could have a material adverse effect on our business and results of operations, especially given the constraints on our ability to pass on incremental costs due to wholesale price increases or other factors. A sustained trend of significantly increased inflationary pressure could require us to abandon our customary practice of pricing our merchandise primarily at no more than 99.99¢, which could have a material adverse effect on our business and results of operations. In addition, the minimum wage has increased or is scheduled to increase in multiple states and local jurisdictions and there is a possibility that Congress will increase the federal minimum wage. We can pass price increases on to customers to a certain extent, such as by selling smaller units for the same price and increasing the price of merchandise presently sold at less than 99.99¢ (e.g., we currently price some items at 29.99¢, 59.99¢, and the like, and also sell other items at two at 99.99¢, three at 99.99¢, and so forth), but there are limits to the ability to effectively increase prices on a sufficiently wide range of merchandise in this manner while rarely exceeding a dollar. In certain circumstances, we have discontinued and may continue to discontinue some items from our offerings due to vendor wholesale price increases or availability, which may adversely affect sales. In September 2008, we increased our primary price point to 99.99¢ from 99¢, and also added 99/100¢ to our price points on almost all items. We offer selected items priced above 99.99¢ and we believe that we have additional opportunities to expand our selection of these items. However, an expanded offering of over 99.99¢ items may not gain customer acceptance, which could damage our brand name and harm our revenues and profitability.
We are dependent in part on new store openings for future growth
Our ability to generate growth in sales and operating income depends in part on our ability to successfully open and operate new stores both within and outside of our existing markets and to manage future growth profitably. Our strategy depends on many factors, including our ability to identify suitable markets and sites for new stores, negotiate leases or purchases with acceptable terms, refurbish stores, successfully compete against local competition and the increasing presence of large and successful companies entering or expanding into the markets in which we operate, gain brand recognition and acceptance in new markets, and manage operating expenses and product costs. In addition, we must be able to hire, train, motivate, and retain competent managers and store personnel to support our growth. Many of these factors are beyond our control or are difficult to manage. As a result, we cannot assure that we will be able to achieve our goals with respect to growth. Any failure by us to achieve these goals on a timely basis, differentiate ourselves and obtain acceptance in markets in which we currently have limited or no presence, attract and retain management and other qualified personnel, and effectively manage operating expenses could adversely affect our future operating results and our ability to execute our business strategy.
A variety of factors, including store location, store size, local demographics, rental terms, competition, the level of store sales, availability of locally sourced merchandise, locally prevailing wages and labor pools, distance and time from existing distribution centers, local regulations, and the level of initial advertising, influence if and when a store becomes profitable. Assuming that planned expansion occurs as anticipated, the store base will include a portion of stores with relatively short operating histories. New stores may not achieve the sales per estimated saleable square foot and store-level operating margins historically achieved at existing stores. If new stores on average fail to achieve these results, planned expansion could decrease overall sales per estimated saleable square foot and store-level operating margins. Increases in the level of advertising and pre-opening expenses associated with the opening of new stores could also contribute to a decrease in operating margins. New stores opened in existing and in new markets have in the past and may in the future be less profitable than existing stores and/or may reduce retail sales of existing stores, negatively affecting same-store sales. As we expand, differences in the available labor pool and potential customers could adversely impact us.
Additionally, our growth will place increased demands on our operational, managerial and administrative resources Also, new store openings in markets where we have existing stores may result in reduced sales volumes at those existing stores. This may lead to decline in profitability at our stores, and if we experience such a decline in financial condition and operating results as a result of such difficulties, we may slow store openings in our existing markets.
Some of our new stores may be located in areas where we have little experience or a lack of brand recognition. Those markets may have different competitive conditions, market conditions, consumer tastes and discretionary spending patterns than our existing markets, which may cause these new stores to be less successful than stores in our existing markets. If we fail to successfully execute our growth strategy, including by opening new stores, our financial condition and operating results may be adversely affected.
Current economic conditions and other economic factors may adversely affect our financial performance and other aspects of our business by negatively impacting our customer’s disposable income or discretionary spending, increasing our costs of goods sold and selling, general and administrative expenses, and adversely affecting our sales or profitability.
We believe many of our customers are on fixed or low incomes and generally have limited discretionary spending dollars. Any factor that could adversely affect that disposable income would decrease our customer’s spending and could cause our customers to shift their spending to products other than those sold by us or to products sold by us that are less profitable than other product choices, all of which could result in lower net sales, decreases in inventory turnover, greater markdowns on inventory, and a reduction in profitability due to lower margins. Factors that could reduce our customers’ disposable income include but are not limited to a further slowdown in the economy, a delayed economic recovery, or other economic conditions such as increased or sustained high unemployment or underemployment levels, reduction and/or cessation of unemployment benefit payments, inflation, increases in fuel or other energy costs and interest rates, lack of available credit, consumer debt levels, higher tax rates and other changes in tax laws.
Many of the factors identified above that affect disposable income, as well as commodity rates, transportation costs (including the costs of diesel fuel), costs of labor, insurance and healthcare, foreign exchange rate fluctuations, lease costs, measures that create barriers to or increase the costs associated with international trade, changes in other laws and regulations and other economic factors, also affect our cost of goods sold and our selling, general and administrative expenses, which may adversely affect our sales or profitability. We have limited or no ability to control many of these factors. We experienced escalation of product costs in 2011 as a result of increases in the costs of certain commodities (including cotton, sugar, coffee, groundnuts, resin), and increasing diesel fuel costs. These costs generally stabilized in 2012. We will be diligent in our efforts to keep product costs as low as possible in the face of these increases while still working to optimize gross profit and meet the needs of our customers.
In addition, many of the factors discussed above, along with current global economic conditions and uncertainties, the potential for additional failures or realignments of financial institutions, and the related impact on available credit may affect us and our suppliersvendors and other business partners, landlords and service providers in an adverse manner including, but not limited to, reducing access to liquid funds or credit, increasing the cost of credit, limiting our ability to manage interest rate risk, increasing the risk of bankruptcy of our suppliers,vendors, landlords or counterparties to, or other financial institutions involved in, our credit facilitiesthe Credit Facilities and our derivative and other contracts, increasing the cost of goods to us, and other adverse consequences which we are unable to fully anticipate or control.
Our operations are concentrated in California
As of MarchJanuary 30, 2013, 2322015, 277 of our 316383 stores were located in California (with 3949 stores in Texas, 2936 stores in Arizona and 1621 stores in Nevada). We expect that we will continue to open additional stores in as well as outside of California. For the foreseeable future, our results of operations will depend significantly on trends in the California economy and its legal/regulatory environment. Declines in retail spending on higher margin discretionary items and continuing trends of increasing demand for lower margin food products may negatively impact our profitability. California has also historically enacted minimum wages that exceed federal standards (and certain of our cities have enacted “living wage” laws that exceed State minimum wage laws) and California typically has other factors making compliance, litigation and workers’ compensation claims more prevalent and costly. Additional local regulation in certain California jurisdictions may further pressure margins.
The impact of our Texas stores on our profitability is uncertain
We have historically experienced, and currently continue to experience, lower sales per store and sales per estimated saleable square foot in our Texas stores compared to our Western States stores. In fiscal 2013, on a comparable 52-week period, our stores open for the full year averaged net sales of $5.3 million per store and average sales per estimated saleable square foot of $321. Our Texas
stores open for the full year on a comparable 52-week period had average sales of $3.7 million per store and average sales per estimated saleable square foot of $203. All of our Western States stores open for the full year on a comparable 52-week period had average sales of $5.6 million per store and $339 of average sales per estimated saleable square foot. There can be no assurance that our Texas operations will have any sustained positive contribution to our profitability.
We identified material weaknesses in internal control over financial reporting and can provide no assurance that additional material weaknesses will not be identified in the future. Our failure to implement and maintain effective internal control over financial reporting could result in material misstatements in our financial statements
During fiscal 2013 management identified three material weaknesses in our internal control over financial reporting, one of which affected our financial statements for the fiscal quarters ended June 30, 2012 and September 29, 2012. See “Item 9A. Controls and Procedures.” The material weakness in our internal control over financial reporting during these periods related to accounting for debt financing was such that controls were not adequately designed to properly account for the repricing transaction of the original First Lien Term Loan Facility in accordance with the requisite accounting guidance. We identified a second material weakness in our internal control over financial reporting relating to accounting for stock-based compensation. We did not correctly evaluate the accounting treatment for certain share repurchase rights with respect to shares underlying stock options granted to our executive officers and employees and for former executive put rights that became exercisable in the fourth quarter of fiscal 2013. In addition, we identified a third material weakness in our internal control over financial reporting related to inventory valuation. Specifically, we determined that the inventory valuation methodology that we applied in prior periods had resulted in an accumulated overstatement over prior periods in total inventory of $13.3 million at the Merger date, and that our related controls were not adequately designed to yield the correct cost complement for valuing inventory. Although we have remediated the first material weakness and have implemented certain measures that we believe will remediate the second and third material weaknesses, we can provide no assurance that our remediation efforts will be effective or that additional material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls or any difficulties that may be encountered in their implementation, could result in additional material weaknesses, cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations regarding the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated under Section 404. The existence of material weaknesses could result in errors in our financial statements that could result in a restatement of those financial statements.
Material damage to, or interruptions to, our information systems as a result of external factors, staffing shortages and difficulties in updating our existing software or developing or implementing new software could have a material adverse effect on our business or results of operations
We depend on information technology systems for the efficient functioning of our business. Such systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches and natural disasters. Any material interruptions or the cost of replacements may have a material adverse effect on our business or results of operations.
We also rely heavily on our information technology staff. If we cannot meet our staffing needs in this area, we may not be able to maintain or improve our systems in the future. Further, we still have certain legacy systems that are not generally supportable by outside vendors, and should those of our information technology team who are conversant with such systems leave, these legacy systems could be without effective support.
We rely on certain software vendors to maintain and periodically upgrade many of these systems. The software programs supporting many of our systems are maintained and supported by independent software companies. The inability of these companies to continue to maintain and upgrade these information systems and software programs might disrupt or reduce the efficiency of our operations if we were unable to convert to alternate systems in an efficient and timely manner. In addition, costs and potential interruptions associated with the implementation of new or upgraded systems and technology could also disrupt or reduce the efficiency of our operations.
We rely on proprietary systems and these systems may not support our growth plans. Our decision to implement a new Enterprise Resource Planning (“ERP”)SAP software platform may cost more than expected and could interrupt operational transactions during the implementation
We depend on a variety of information systems for our operations, many of which are proprietary, which have historically supported many of our business operations such as inventory and order management, shipping, receiving, and accounting. Because most of our information systems consist of a number of internally developed applications, it can be more difficult to upgrade or adapt them compared to commercially available software solutions. WeOur new SAP system became operational at the beginning of the first quarter of fiscal year 2016, but we are still currently in the process of migrating our operations from our legacy proprietary system to SAP’s enterprise resource planning software, which includes integrated financial and inventory management systems. There are inherent risks associated with replacing and changing these core systems, including accurately capturing data and possible encountering supply chain and vendor payment disruptions. In addition, this process is complex, time-consuming and expensive. Although we believe we are taking appropriate action to mitigate the risks through testing, training and staging implementation, we can make no assurances that we will not have disruptions, delays and/or negative business impacts from this forthcoming deployment. Any operational disruptions during the course of this process, delays or deficiencies in the design and implementation of the new ERPSAP system, or in the performance of our legacy systems could materially and adversely affect our ability to effectively run and manage our business. Our success depends, in large part, on our ability to manage our inventory, pay our vendors and record and report financial and management information on a timely and accurate basis, which could be impaired while we are making these enhancements. Even if the implementation proceeds as planned, the cost of the system could have a material adverse effect on our results of operation. Portions of our IT infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time consuming, disruptive and resource-intensive. Such disruptions could materially and adversely impact our ability to fulfill orders and interrupt other processes. If our information systems do not allow us to transmit accurate information, even for a short period of time, to key decision makers, the ability to manage our business could be disrupted and the results of operations and financial condition could be materially and adversely affected. Additionally, while we have spent considerable efforts to plan and budget for the implementation of the system, changes in scope, timeline or cost could have a material adverse effect on our results of operations. Failure to properly or adequately address these issues could impact our ability to perform necessary business operations, which could materially and adversely affect our reputation, competitive position, business, results of operations and financial condition.
Natural disasters, unusually adverse weather conditions, pandemic outbreaks, terrorist acts, and global political events could cause temporary or permanent distribution center or store closures, impair our ability to purchase, receive or replenish inventory, or decrease customer traffic, all of which could result in lost sales and otherwise adversely affect our financial performance
The occurrence of natural disasters, such as earthquakes, hurricanes, fires, floods and tsunamis, unusually adverse weather conditions, pandemic outbreaks, terrorist acts or disruptive global political events, such as civil unrest in countries in which our suppliersvendors are located, or similar disruptions could adversely affect our operations and financial performance. These events could result in the closure of one or more of our distribution centers or a significant number of stores, the temporary or long-term disruption in the supply of products from some local and overseas suppliers,vendors, the temporary disruption in the transport of goods from overseas, delay in the delivery of goods to our distribution centers or stores, the temporary reduction in the availability of products in our stores, and disruption to our information systems.
Our current insurance program may expose us to unexpected costs and negatively affect our financial performance
Our insurance coverage reflects deductibles, self-insured retentions, limits of liability and similar provisions that we believe are prudent. However, there are types of losses we may incur but against which we cannot be insured or which we believe are not economically reasonable to insure, such as losses due to employment practices, acts of war, employee, blackouts and certain other crime and some natural disasters, including earthquakes and tsunamis. If we incur these losses and they are material, our business could suffer. In addition, we self-insure a significant portion of expected losses under our workers’ compensation and general liability programs. Unanticipated changes in any applicable actuarial assumptions and management estimates underlying our recorded liabilities for these losses could result in materially different amounts of expense than expected under these programs, which could have a material adverse effect on our financial condition and results of operations. In the third quarter of transition fiscal 2014, we recorded an increase to our workers’ compensation accrual of $38.1 million, primarily as a result of an increase in severity of workers’ compensation claims. We have begun implementing action plans to reduce the frequency and severity of workers’ compensation claims against us, however there can be no assurance that such frequency or severity will decrease over time. Although we continue to maintain property insurance for catastrophic events, we are effectively self-insured for property losses up to the amount of our deductibles. If we experience a greater number of these losses than we anticipate, our financial performance could be adversely affected.
We self-insure a portion of our health insurance program that may expose us to unexpected costs and negatively affect our financial performance
We self-insure a portion of our employee medical benefit claims. The liability for the self-funded portion of our health insurance program is determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported. We maintain stop loss insurance coverage to limit our exposure for the self-funded portion of our health insurance program. Liabilities
associated with these losses include estimates of both claims filed and losses incurred but not yet reported. Unanticipated changes in any applicable actuarial assumptions and management estimates underlying our recorded liabilities for these losses could result in materially different amounts of expense than expected under these programs, which could have a material adverse effect on our financial condition and results of operations.
Failure to attract and retain qualified employees, particularly field, store and distribution center managers, while controlling labor costs, as well as other labor issues, could adversely affect our financial performance.performance
Our future growth and performance depends on our ability to attract, retain and motivate qualified employees, many of whom are in positions with historically high rates of turnover such as field managers and distribution center managers. Our ability to meet our labor needs, while controlling our labor costs, is subject to many external factors, including competition for and availability of qualified personnel in a given market, unemployment levels within those markets, prevailing wage rates, minimum wage laws, health and other insurance costs, and changes in employment and labor laws (including changes in the process for our employees to join a union) or other workplace regulation (including changes in “entitlement” programs such as health insurance and paid leave programs). To the extent a significant portion of our employee base unionizes, or attempts to unionize, our labor costs could increase. In addition, we are evaluating the potential future impact of recently enacted comprehensive healthcare reform legislation which will likely cause our healthcare costs to increase. While the significant costs of the healthcare reform legislation will not occur after 2013, if at all,until fiscal 2016, due to provisions of the legislation being phased in over time, changes to our healthcare costs structure could have a significant negative effect on our business. Our ability to pass along labor costs to our customers is constrained by our low price model.
We could experience disruptions in receiving and distribution or our transportation network
Our success depends upon whether receiving and shipments are processed timely, accurately and efficiently. As we continue to grow, we may face increased or unexpected demands on warehouse operations, as well as unexpected demands on our transportation network. We distribute our products primarily by truck and rail. In addition, we rely on a variety of private fleet and common carriers for our store deliveries/backhauls and vendor pick-ups, and we route our products through various world ports, with the greatest reliance on California ports. In addition, new store locations receiving shipments from distribution centers that are increasingly further away will increase transportation costs and may create transportation scheduling strains. The very nature of our closeout business makes it uniquely susceptible to periodic interruptions and difficult to foresee warehouse/distribution center overcrowding caused by spikes in inventory resulting from opportunistic closeout purchases. Such demands could cause delays in delivery of merchandise to and from warehouses and/or to stores. We periodically evaluate new warehouse distribution and merchandising systems and could experience interruptions during implementations of new facilities and systems. A fire, earthquake, or other disaster at our warehouses could also hurt our business, financial condition and results of operations, particularly because much of our merchandise consists of closeouts and other irreplaceable products. We also face the possibility of future labor unrest thatreduced availability of trucks or rail cars due to adverse weather conditions, allocation of assets to other industries or geographies or otherwise, which could disrupt our receiving, processing, and shipment of merchandise.
In addition, our reliance upon ocean freight transportation for the delivery of our inventory exposes us to various inherent risks, including port workers’ union disputes and associated strikes, work slow-downs and work stoppages, severe weather conditions, natural disasters and terrorism, any of which could result in delivery delays and inefficiencies, increase our costs and disrupt our business. A severe and prolonged disruption to ocean freight transportation, such as the disruption to California port operations which began in calendar year 2014 and is continuing into calendar year 2015 due to a port workers’ union dispute, has already caused, and may continue to cause delays in delivery of merchandise to our stores and in-stock inventory availability. Efficient and timely inventory deliveries and proper inventory management are important factors in our operations. Reduced product availability may diminish sales and brand loyalty. Severe and extended delays in the delivery of our inventory or our inability to effectively manage our inventory could have a material adverse effect on our business, financial condition, results of operations and liquidity.
We depend upon our relationships with suppliersvendors and the availability of closeout and other special-situation merchandise
Our success depends in large part on our ability to locate and purchase quality closeout and other special-situation merchandise at attractive prices. This supports a changing mix of name-brand and other merchandise primarily at or below 99.99¢ price point. We cannot be certain that such merchandise will continue to be available in the future at wholesale prices consistent with our business plan and/or historical costs. Further, we may not be able to find and purchase merchandise in necessary quantities, particularly as we grow, and therefore require a greater quantity of such merchandise at competitive prices. Additionally, suppliersvendors sometimes restrict the advertising, promotion and method of distribution of their merchandise. These restrictions in turn may make it more difficult for us to quickly sell these items from inventory. Although we believe our relationships with suppliersvendors are good, we typically do not have long-term agreements or pricing commitments with any suppliers.vendors. As a result, we must continuously seek out buying opportunities from existing suppliersvendors and from new sources. There is increasing competition for these opportunities with other wholesalers and retailers, discount and deep-discount stores, mass merchandisers, food markets, drug chains, club stores, and various other companies and individuals as the extreme value retail segment continues to expand outside and within existing retail channels. There is also a trend towards consolidation among vendors and suppliersvendors of merchandise targeted by us. A disruption in the availability of merchandise at attractive prices could impair our business.
We purchase in large volumes and our inventory is highly concentrated
To obtain inventory at attractive prices, we take advantage of large volume purchases closeouts and other special situations.closeouts. As a result, we carry high inventory levels relative to our sales and from time to time this can result in overcrowding in our warehouses and place stress on our distribution operations as well as the back rooms of our retail stores. This can also result in inventory shrinkage due to spoilage if merchandise cannot be sold in the anticipated timeframes. Our short-term and long-term store and warehouse inventory, net of allowance, approximated $201.6$296.0 million and $207.4$206.2 million at MarchJanuary 30, 20132015 and MarchJanuary 31, 2012,2014, respectively. We periodically review the net realizable value of our inventory and make adjustments to our carrying value when appropriate. The current carrying value of inventory reflects our belief that itwe will realize the net values recorded on the balance sheet. However, we may not do so, and if we do not, this may result in overcrowding and supply chain difficulties. If we sell large portions of inventory at amounts less than their carrying value or if we write down or otherwise dispose of a significant part of inventory, cost of sales, gross profit, operating income, and net income could decline significantly during the period in which such event or events occur. Margins could also be negatively affected should the grocery category sales become a larger percentage of total sales in the future, and by increases in shrinkage and spoilage from perishable products. In addition, we offer selected items priced above 99.99¢ and we believe that we have additional opportunities to expand our selection of these items. If we cannot sell these items above 99.99¢ in the volumes that we expect this could further exacerbate the foregoing risks.
If we fail to protect our brand name, competitors may adopt trade names that dilute the value of our brand name
We may be unable or unwilling to strictly enforce our trademark in each jurisdiction in which we do business. Also, we may not always be able to successfully enforce our trademarks against competitors or against challenges by others. Our failure to successfully protect our trademarks could diminish the value and efficacy of our brand recognition, and could cause customer confusion, which could, in turn, adversely affect our sales and profitability.
We face strong competition
We compete in both the acquisition of inventory and sale of merchandise with other wholesalers and retailers, discount and deep-discount stores, single price point merchandisers, mass merchandisers, food markets, drug chains, club stores and other retailers. We also compete for retail real estate sites. In the future, new companies may also enter the extreme value retail industry. It is also becoming more common for superstores to sell products competitive with our product offerings. Additionally, we currently face increasing competition for the purchase of quality closeout and other special-situation merchandise, and some of these competitors are entering or may enter our traditional markets. Also, as we expand, we willmay enter new markets where our own brand is weaker and established brands are stronger, and where our own brand value may have been diluted by other retailers with similar names, appearances and/or business models. Some of our competitors have substantially greater financial resources and buying power than we do, as well as nationwide name-recognition and organization. Our ability to compete will depend on many factors including the ability to successfully purchase and resell merchandise at lower prices than competitors and the ability to differentiate ourselves from competitors that do not share our price and merchandise attributes, yet may appear similar to prospective customers. We also face competition from other retailers with similar names and/or appearances. We cannot assure that we will be able to compete successfully against current and future competitors in both the acquisition of inventory and the sale of merchandise.
We are subject to governmental regulations, procedures and requirements. A significant change in, or noncompliance with, these regulations could have a material adverse effect on our financial performance
Our business is subject to numerous federal, state and local laws and regulations. We routinely incur costs in complying with these regulations. New laws or regulations, particularly those dealing with healthcare reform, hazardous waste, product safety, and labor and employment, among others, or changes in existing laws and regulations, especially those governing the sale of products, may result in significant added expenses or may require extensive system and operating changes that may be difficult to implement and/or could materially increase our cost of doing business. In addition, such changes or new laws may require the write off and disposal of existing product inventory, resulting in significant adverse financial impact to us. Untimely compliance or noncompliance with applicable regulations or untimely or incomplete execution of a required product recall can result in the imposition of penalties, including loss of licenses or significant fines or monetary penalties, in addition to reputational damage.
Litigation may adversely affect our business, financial condition and results of operations
Our business is subject to the risk of litigation by employees, consumers, suppliers,vendors, competitors, shareholders, government agencies and others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class action lawsuits, regulatory actions and intellectual property claims, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to these lawsuits may remain unknown for substantial periods of time. In addition, certain of these lawsuits, if
decided adversely to us or settled by us, may result in liability material to our financial statements as a whole or may negatively affect our operating results if changes to our business operation are required. The outcome of litigation is difficult to assess or quantify and the cost to defend future litigation may be significant. There also may be adverse publicity associated with litigation that could negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may adversely affect our business, financial condition and results of operations. See Item 3. Legal3, “Legal Proceedings.”
We face risks associated with international sales and purchases
International sales historically have not been important to our overall net sales. However, some of ourthe inventorywe purchase from domestic vendors is manufactured outside the United States, primarily China and there are many risks associated with doing business internationally.we expect to directly source an increasing portion of our products from outside of the United States. Because we expect a larger percentage of our merchandise to be manufactured or sourced abroad, we will be required to order these products further in advance than would be the case if these products were manufactured domestically. International transactions may be subject to risks such as:
· political instability;or financial instability or disputes;
· lack of knowledge by foreign manufacturers of or compliance with applicable federal and state product, content, packaging and other laws, rules and regulations;
· foreign currency exchange rate fluctuations;fluctuations and local economic conditions, including inflation;
· uncertainty in dealing with foreign vendors and countries where the rule of law is less established;
·disruptions in the global transportation network, such as raw material shortages, factory consolidations, work stoppages, strikes or shutdowns of major ports or airports, or other political or labor unrest;
· risk of loss due to overseas transportation;
· import and customs review can delay delivery of products as could labor disruptions at ports;
· changes in import and export regulations, including “trade wars” and retaliatory responses;
· changes in tariff, import duties and freight rates; and
· testing and compliance.
The United States and other countries have at times proposed various forms of protectionist trade legislation. We are subject to trade restrictions in the form of tariffs or quotas, or both, applicable to the products we sell as well as to raw material imported to manufacture those products. We may also be subjected to additional duties, significant monetary penalties, the seizure and forfeiture of the products we are attempting to import, or the loss of import privileges if we or our vendors are found to be in violation of U.S. laws and regulations applicable to the importation of our products. Our and our vendors’ compliance with the regulations is subject to interpretation and review by applicable authorities. Any resulting changes in current tariff structures or other trade policies or interpretations could result in increases in the cost of and/or store level reduction in the availability of certain merchandise and could adversely affect our ability to purchase such merchandise. merchandise and our operations. In addition, decreases in the value of the U.S. dollar against foreign currencies, particularly the Chinese renminbi, could increase the cost of products we purchase from overseas vendors. The pricing of our products in our stores may also be affected by changes in foreign currency rates and require us to make adjustments which would impact our revenue and profit.
Disruptions due to labor stoppages, strikes or slowdowns, shutdowns or major port or airport or other disruptions involving our vendors or the transportation and handling industries also may negatively affect our ability to receive merchandise and thus may negatively affect sales. Prolonged disruptions could also materially increase our labor costs both during and following the disruption. Significant increases in wages or wage taxes paid by contract facilities may increase the cost of goods manufactured, which could have a material adverse effect on our profit margins and profitability. For example, the costs of labor and wage taxes have increased in China, which means we are at risk of higher costs associated with goods manufactured in China.
These and other factors affecting our suppliersvendors and our access to products, including the supply of our imported merchandise or the imposition of additional costs of purchasing or shipping imported merchandise, could adversely affecthave a material adverse effect on our business, financial performance.condition and results of operations unless and until alternative supply arrangements are secured. Products from alternative sources may be of lesser quality or more expensive than those we currently purchase, resulting in a loss of sales or profit. As we increase our imports of merchandise from foreign vendors, the risks associated with foreign imports will increase.
We have potential risks regarding our store physical inventories and our inventory replenishment and forecasting systems
Although we haveWe maintain a perpetual inventory system in our warehouses, we currentlyand follow a cycle count program that is adhered to over the course of each year in order to ensure that inventories are accurately reported. We do not havemaintain a perpetual inventory system in our retail stores. Furthermore, physical inventories in all existingPhysical inventory counts are completed at each of the Company’s retail stores are not performed at least once a year by an outside inventory service company. Based on the endresults of each fiscal period, and there are additional processes and procedures surrounding store physical inventories that we believe need to be improved. In particular,annual inventory counts, we have identified that certain personnel managing or performing store physical inventories need additional training in ordermade adjustments to consistently follow our physical inventory processes and procedures, and properly document the physical inventory results.estimates, which at times have been significant. We are in the process of implementing an SAP system throughout the Company, including all retail stores, which we anticipate will allow for the first time tracking of inventory at each retail store on a perpetual basis by stock keeping unit (“SKU”). In anticipation of this implementation, we have initiated additional training for store employees and new physical inventory procedures.be completed during fiscal 2016. Our inability or failure to effectively implement these measures on our expected timeframe, or at all,adequately reserve for shrinkage and excess and obsolete inventory or otherwise to not continue to improve our physical inventory processes and procedures could have a materially adverse effect on our store physical inventory results, shrinkage and margins. This in turn could materially affect our ability to timely complete our financial reporting obligations and our financial condition and results or operations.
Also, our success depends in part on management’s ability to effectively anticipate and respond to changing consumer preferences, product trends and store inventory needs and its ability to translate these preferences, trends and needs into marketable product offerings in advance of the actual time of sale to the customer. Even if we are successful in anticipating consumer demands, we must continue to be able to develop and introduce innovative, high-quality products in order to sustain consumer demand.
There can be no assurance that we will be able to successfully anticipate changing consumer preferences, product trends, store inventory needs or economic conditions and, as a result, we may not successfully manage inventory levels to meet our future order requirements. If we fail to accurately forecast these needs, we may experience excess inventory levels or a shortage of product required to meet the demand. Inventory levels in excess of consumer demand may result in inventory write-downs and the sale of excess inventory at discounted prices, which could have an adverse effect on the image and reputation of our brands and negatively impact profitability.
We could encounter risks related to transactions with affiliates
Prior to the Merger, we leased 13 store locations and a parking lot associated with one of these stores from the Rollover Investors and their affiliates, of which 12 stores were leased on a month to month basis. In connection with the Merger, we entered into new lease agreements for these 13 stores and one parking lot. Although the terms negotiated were acceptable to us, we cannot be certain that terms negotiated are no less favorable than a negotiated arm’s length transaction with a third party.
We rely heavilyare dependent on key management individuals and the loss of any of these key individuals could curtail our executive management teamgrowth and changes in our management team could adversely affect our business strategy, performance and results of operationsbusiness.
We have historically relied heavilydepend on the continued servicea limited number of key management personnel, including our executive management team. Effective January 23, 2013, Eric Schiffer, Jeff Gold and Howard Gold separated from their positions as Chief Executive Officer, Chief Administrative Officer and Executive Vice PresidentLosing the services of Special Projects, respectively. Richard Anicetti and Michael Fung have been appointed Interim President and Chief Executive Officer and Interim Executive Vice President and Chief Administrative Officer, respectively; however, we have not yet identified permanent replacements for our former executives. Competition for skilled and experienced management personnel is intense, and we may be unable to identify, hire and effectively integrate new membersany or a significant number of management into senior positions on our anticipated timeframe or at all, which could disrupt our business. Moreover, these and any other changes in managementsuch individuals could result in changes to, or affect the executiona loss of our business strategy, which couldmanagement continuity and institutional knowledge and thus adversely affect our performancebusiness. Other personnel may not have the experience and resultsexpertise to readily replace these individuals. As a result, our board of operations.directors may have to search outside of the Company for qualified replacements. This search may be prolonged, and we cannot provide assurance that we would be able to locate and hire qualified replacements. We do not maintain key person insurance on any of our executives or key management personnel. Further, the market for qualified executive candidates, with the right talent and competencies, is highly competitive, and may subject us to increased labor costs during periods of low unemployment. The loss of the services of key employees may adversely affect our ability to conduct operations in accordance with the standards that we have set.
Our operating results may fluctuate and may be affected by seasonal buying patterns
Historically, our highestwe have experienced higher net sales and highesthigher operating income have occurred during the quarter ended on or near December 31, which includesquarters that have included the Halloween, Christmas and HalloweenEaster selling seasons. During fiscal 2013 and pro forma fiscal 2012, we generated approximately 26.3% and 26.4%, respectively, of our net sales during this quarter. If for any reason our net sales were to fall below norms during this quarter,the Halloween, Christmas and/or Easter selling seasons, it could have an adverse impact on profitability and impair the results of operations for the entire fiscal year. Transportation scheduling, warehouse capacity constraints, supply chain disruptions, adverse weather conditions, labor disruptions or other disruptions during the peak holiday seasonseasons could also affect net sales and profitability for the fiscal year.
In addition to seasonality, many other factors may cause the results of operations to vary significantly from quarter to quarter. These factors, some beyond our control, include the following:
· the number, size and location of new stores and timing of new store openings;
· the distance of new stores from existing stores and distribution sources;
· the level of advertising and pre-opening expenses associated with new stores;
· the integration of new stores into operations;
· changes in the mix of products sold;
· increases in fuel, shipping merchandise and energy costs;
· the ability to successfully manage inventory levels and product mix across our multiple distribution centers and our stores;
· changes in personnel;
· the expansion by competitors into geographic markets in which they have not historically had a strong presence;
· fluctuations in the amount of consumer spending; and
· the amount and timing of operating costs and capital expenditures relating to the growth of the business and our ability to uniformly capture such costs.costs; and
· the timing of certain holidays, such as Easter 4th of July and Labor Day.
DuringHalloween. For example, during fiscal 2013 there were two Easter selling seasons that occurred in early April 2012 and in late March 2013, compared to one Easter selling season in pro forma fiscal 2012. There will be no Easter selling season in transition fiscal 2014.
We could be exposed to product liability, food safety claims or packaging violation claims
We purchase many products on a closeout basis, some of which are manufactured or distributed by overseas entities, and some of which are purchased by us through brokers or other intermediaries as opposed to directly from their manufacturing or distribution sources. Many products are also sourced directly from manufacturers. The closeout nature of certain of these products and transactions may impact our opportunity to investigate all aspects of these products. We attempt to ensure compliance, and to test products when appropriate, as well as to procure product insurance from our vendors and to be listed as an additional insured for certain products and/or by certain product vendors, and we do not purchase merchandise when we are cognizant of or foresee a problem, but there can be no assurance that we will consistently succeed in these efforts. Despite our best efforts to ensure the quality and safety of the products we sell, we may be subject to product liability claims from customers or penalties from government agencies relating to products, including food products that are recalled, defective or otherwise alleged to be harmful. Even with adequate insurance and indemnification, such claims could significantly damage our reputation and consumer confidence in our products. We have or have had, and in the future could face, labeling, environmental, or other claims, from private litigants as well as from governmental agencies. Our litigation expenses could increase as well, which also could have a materially negative impact on our results of operations even if a product liability claim is unsuccessful or is not fully pursued.
We face risks related to protection of customers’ banking and merchant card data, as well as other data related to our employees, customers, vendors and other parties
In connection with merchant card sales and other transactions, including bank cards, debit cards, credit cards and other merchant cards, we transmit confidential banking and merchant card information. Additionally, asAs part of our normal business activities, we collect and store certainsensitive personal information, related to our employees, customers, vendors and other parties. We have certain procedures and technology in place to protect such data, but third parties may have the technology or know-how to breach the security of this information, and our security measures and those of our banks, merchant card processing and other technology vendors may not effectively prohibit others from obtaining improper access to this information. Any security breach could expose us to risks of data loss, litigation and liability and could seriously disrupt our operations and any resulting negative publicity could significantly harm our reputation.
We need to comply with credit and debit card security regulations
As a merchant who processes credit and debit card payments from customers, we are required to comply with the Payment Card Industry Data Security Standards and other requirements imposed on us for the protection and security of our customers’ credit and debit card information. If we are unable to remain compliant with these requirements, our business and operations could be adversely affected because we could incur significant fines or penalties from payment card companies or we could be prevented in the future from accepting customer payments by means of a credit or debit card. We also may need to expend significant management and financial resources to become or remain compliant with these requirements, which could divert these resources from other initiatives and adversely impact our results of operations, financial condition, business and prospects.
We may be adversely impacted if our security measures fail
Our relationships with our customers may be adversely affected if the security measures that we use to protect their personal information, such as credit card numbers, are ineffective or perceived by consumers to be inadequate. We primarily rely on security and authentication technology that we license from other parties. With this technology, we perform real-time credit card authorization and verification with our banks and we are subject to the customer privacy standards of credit card companies and various consumer protection laws. We cannot predict whether there will be a compromise or breach of the technology we use to protect our customers’ personal information. If there is a compromise or breach of this nature, there is the potential that parties could seek damages from us, and we could lose the confidence of customers or be subject to lawsuits or significant fines or penalties from credit card companies or regulatory agencies.
Furthermore, our servers may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. We may need to expend significant additional capital and other resources to protect against a security breach or to alleviate problems caused by any such breaches.
We are subject to environmental regulations
Under various federal, state and local environmental laws and regulations, current or previous owners or occupants of property may face liability associated with hazardous substances. These laws and regulations often impose liability without regard to fault. In the future, we may be required to incur substantial costs for preventive or remedial measures associated with hazardous materials. We have several storage tanks at our distribution and warehouse facilities, including: an aboveground and an underground diesel storage tank at thetanks in our two City of Commerce, California main warehouse;distribution centers, a compressed natural gas tank at one City of Commerce, California distribution center; ammonia storage tanks at theour Southern California cold storage facility and theour Texas warehouse; aboveground diesel and propane storage tanks at theour Texas warehouse; an aboveground propane storage tank at theour two main Southern California warehouse;warehouses; and an aboveground propane storage tank at our leased Slauson distribution center in the City of Commerce, California. Except as disclosed in Item 3. Legal Matters, we have not been notified of, and are not aware of, any potentially material current environmental liability, claim or non-compliance. We could incur costs in the future related to owned properties, leased properties, storage tanks, or other business properties and/or activities. In the ordinary course of business, we handle or dispose of commonplace household products that are classified as hazardous materials under various environmental laws and regulations. We have adopted policies regarding the handling and disposal of these products, but we cannot be assured that our policies and training are comprehensive and/or are consistently followed, and we are still potentially subject to liability under, or violations of, these environmental laws and regulations in the future even if our policies are consistently followed.
Changes to accounting rules or regulations may adversely affect our results of operations
New accounting rules or regulations and varying interpretations of existing accounting rules or regulations have occurred and may occur in the future. A change in accounting rules or regulations may even affect our reporting of transactions completed before the change is effective, and future changes to accounting rules or regulations or the questioning of current accounting practices may adversely affect our results of operations.
The Financial Accounting Standards Board (“FASB”) is focusing on several broad-based convergence projects, including accounting standards for financial instruments, revenue recognition and leases.projects. In August 2010, the FASB issued an exposure draft outlining proposed changes to current lease accounting under generally accepted accounting principles in the United States (“GAAP”) in FASB Accounting Standards Codification 840, “Leases.” In July 2011,May 2013, the FASB made the decision to issueissued a revisednew exposure draft, which is expected to occur in calendar 2013.draft. Currently, substantially all of our leased properties are accounted for as operating leases with limited related assets and liabilities recorded on our balance sheet. The proposed new accounting standard,pronouncement, if ultimately adopted in its proposed form, would treat each lease as creating an asset and a liability and requirecould result in significant changes to our current accounting, including the capitalization of such leases on the balance sheet.sheet that currently are recorded off balance sheet as operating leases. While this change would not impact the cash flow related to our store leases, we would expect our assets and liabilities to increase relative to the current presentation, which may impact our ability to raise additional financing from banks or other sources in the future. The guidance as proposed may also affect the future reporting of our results from operations as both income and expense on leases previously accounted for as operating leases would be front-end loaded as compared to the existing accounting requirements. However, even if the new guidance is adopted as proposed, certain incurrence ratios and other provisions under the indenture governing the notesIndenture (as defined below) and under the Credit Facilities permit us to account for leases in accordance with the existing accounting requirements. As a result, our ability to incur additional debt or otherwise comply with such covenants may not directly correlate to our financial condition or results from operations as each would be reported under GAAP as so amended.
Impairment of our goodwill or our intangible assets could negatively impact our net income and stockholders’ equity
A substantial portion of our total assets consists of goodwill and intangible assets. Goodwill and certain intangible assets are not amortized, but are tested for impairment at least annually and between annual tests if events or circumstances indicate that it is more likely than not that the fair value of our net assets is less than its carrying amount. Testing for impairment involves an estimation of the fair value of our net assets and other factors and involves a high degree of judgment and subjectivity. There are numerous risks that may cause the fair value of our net assets to fall below its carrying amount, including those described elsewhere in this Report. If we have an impairment of our goodwill or intangible assets, the amount of any impairment could be significant and could negatively impact our net income and stockholders’ equity for the period in which the impairment charge is recorded.
Risks Related to Our Substantial Indebtedness
We have substantial indebtedness and lease obligations, which could affect our ability to meet our obligations under our indebtedness and may otherwise restrict our activities
Our total indebtedness, as of MarchJanuary 30, 2013,2015, was $758.3$907.5 million, consisting of borrowings under our First Lien Term Facility of $508.3$600.5 million, $57.0 million under our ABL Facility and $250$250.0 million of Senior Notes. We have an additional $175 million of available borrowingsavailability under our ABL Facility subject to the borrowing base of $115.5 million and, subject to certain limitations and the satisfaction of certain conditions, we are also permitted to incur up to an aggregate of $200$100 million of additional borrowings under incremental facilities in our ABL Facility and First Lien Term Facility.
We also have, and will continue to have, significant lease obligations. As of MarchJanuary 30, 2013,2015, our minimum annual rental obligations under long-term operating leases for fiscal 20142016 are $51.7$70.6 million.
Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under the Senior Notes and our Credit Facilities. Our substantial indebtedness could have important consequences, including:
· increasing our vulnerability to adverse economic, industry or competitive developments;
· requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;
· exposing us to the risk of increased interest rates because certain of our borrowings, including borrowings under our Credit Facilities, are at variable rates of interest;
· making it more difficult for us to satisfy our obligations with respect to our indebtedness, including the Senior Notes, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the indenture governing the Senior NotesIndenture and the agreements governing such other indebtedness;
· restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
· imposing restrictions on the operation of our business that may hinder our ability to take advantage of strategic opportunities or to grow our business;
· limiting our ability to obtain additional financing for working capital, capital expenditures (including real estate acquisitions and store expansion), debt service requirements and general corporate or other purposes, which could be exacerbated by further volatility in the credit markets; and
· limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to any of our competitors who are less leveraged and who therefore, may be able to take advantage of opportunities that our leverage prevents us from exploiting.
We and our subsidiaries are still able to incur significant additional amounts of debt, which could further exacerbate the risks associated with our substantial indebtedness
We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The indenture governing the Senior NotesIndenture and our Credit Facilities each contain restrictions on the incurrence of additional indebtedness. However, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial. Accordingly, we and our subsidiaries may be able to incur substantial additional indebtedness in the future. We have an additional $175 million of available borrowingsavailability under our ABL Facility.Facility subject to the borrowing base of $115.5 million. Subject to certain limitations and the satisfaction of certain conditions, we are also permitted to incur up to an aggregate of $200$100 million of additional borrowings under incremental facilities in our ABL Facility and First Lien Term Facility. If new debt is added to our and our subsidiaries’ current debt levels, the risks that we now face as a result of our leverage would intensify and could have a negative impact on our credit rating.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful
Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal of, and premium, if any, and additional interest, if any, on, our indebtedness, including the Senior Notes.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness, including the Senior Notes. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of the indentures governing the Senior NotesIndenture and our Credit Facilities or any future debt instruments that we may enter into may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.
Our debt agreements contain restrictions that limit our flexibility in operating our business
Our Credit Facilities and the indenture governing the Senior NotesIndenture contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our Parent’s (solely with respect to our Credit Facilities) and our restricted subsidiaries’ ability to, among other things:
· incur additional indebtedness or issue certain preferred shares;
· pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;
· make certain investments;
· transfer or sell certain assets;
· create or incur liens;
· consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and
· enter into certain transactions with our affiliates.
A breach of any of these covenants could result in a default under one or more of these agreements, including as a result of cross default provisions, and, in the case of our Credit Facilities, permit the lenders to cease making loans to us. Upon the occurrence of an event of default under our Credit Facilities, the lenders could elect to declare all amounts outstanding under our Credit Facilities to be immediately due and payable and terminate all commitments to extend further credit under the ABL Facility. Such actions by those lenders could cause cross defaults under our other indebtedness. If we were unable to repay those amounts, the lenders under our Credit Facilities could proceed against the collateral granted to them to secure that indebtedness. We have pledged a significant portion of our assets as collateral under our Credit Facilities. If the lenders under our Credit Facilities accelerate the repayment of borrowings, we may not have sufficient assets to repay our Credit Facilities as well as our other indebtedness, including the Senior Notes.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly
Borrowings under our Credit Facilities are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on our variable rate indebtedness will increase even though the amount borrowed would remain the same, and our net income and cash flow, including cash available for servicing our indebtedness, will correspondingly decrease. Although during the quarter ended June 30, 2012 (the “first quarter of fiscal 2013”), we entered into interest rate cap and swap agreements to hedge the variability of cash flows related to our floating rate indebtedness, these measures may not fully mitigate our risk or may not be effective.
Item 1B. Unresolved Staff Comments
None.
As of MarchJanuary 30, 2013,2015, we owned 7273 stores and leased 244310 of our 316383 store locations. Additionally, as of MarchJanuary 30, 2013,2015, we owned sixfive parcels of land and one building for potential store sites.
Our leases generally provide for a fixed minimum rental, and some leases require additional rental based on a percentage of sales once a minimum sales level has been reached. Management believes that our stable operating history and ability to generate substantial customer traffic give us leverage when negotiating lease terms. Certain leases include cash reimbursements from landlords for leasehold improvements and other cash payments received from landlords as lease incentives. A large majority of our store leases were entered into with multiple renewal periods, which are typically five to ten years and occasionally longer. On January 13, 2012, we entered into new lease agreements (the “Leases”) with the Rollover Investors for 13 stores and one store parking lot, which replaced the existing month-to-month leases. The Leases had approximate initial terms of either five or ten years and the base rents could be adjusted to market value in an aggregate amount not to exceed $1.0 million per annum. In December 2012, we reached a final agreement with the Rollover Investors on the market value of the Leases for each of the 13 stores that will result in aggregate base rent increasing by approximately $0.7 million aggregate per annum.
The large majority of our store leases were entered into with multiple renewal options of typically five years per option. Historically, we have exercised the large majority of the lease renewal options as they arise, and anticipate continuing to do so for the majority of leases for the foreseeable future.
The following table sets forth, as of MarchJanuary 30, 2013,2015, information relating to the calendar year expiration dates for our current storesstore leases:
Calendar Years |
| Number of Leases Expiring |
| Number of Leases Expiring |
| |
| 2013 |
| 6 |
| 1 |
|
| 2014-2016 |
| 105 |
| 7 |
|
| 2017-2019 |
| 79 |
| 14 |
|
| 2020-2024 |
| 50 |
| 38 |
|
| 2025-thereafter |
| 4 |
| 184 |
|
Calendar Years |
| Number of Leases Expiring |
| Number of Leases Expiring |
|
2015 |
| 5 |
| 2 |
|
2016-2018 |
| 108 |
| 10 |
|
2019-2021 |
| 80 |
| 16 |
|
2022-2026 |
| 114 |
| 46 |
|
2027-thereafter |
| 3 |
| 236 |
|
We own our main distribution center and executive office facility, located in the City of Commerce, California. We also own an additional warehouse nearly adjacent to our main distribution facility.
We own a distribution center in the Houston area to service our Texas operations.
We also own a cold storage distribution center and lease additional warehouse facilities located near the City of Commerce, California. In April 2013, we entered into a 15-year lease (expiring in December 2028) for a cold warehouse facility located in Los Angeles, California to provide us with additional cold warehousing capacity. In May 2014, we entered into a lease agreement for corporate office and warehouse space in the City of Commerce, California that expires in February 2030.
We own a distribution center in the Houston area to service our Texas operations.
As our needs change, we may relocate, expand, and/or otherwise increase or decrease the size and/or costs of our distribution or warehouse facilities.
We also owned a warehouse in Eagan, Minnesota. We commenced marketing this warehouse for sale during the fourth quarter of fiscal 2008, and it is reflected in assets held for sale in our consolidated balance sheets as of March 31, 2012. We sold the Eagan, Minnesota warehouse in June 2012.
Information for this item is included in Note 10 “Commitments and Contingencies—Legal Matters” to our Consolidated Financial Statements included in this Report, and incorporated herein by reference.
Item 4. Mine Safety Disclosures
None.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Subsequent to the Merger, our common stock ismembership units are privately held and there is no established public trading market for such units.
Dividends
On October 21, 2013, in connection with the Gold-Schiffer Purchase, we made a distribution to Parent of $95.5 million. See Note 9 to our common stock.Consolidated Financial Statements for more information on the Gold-Schiffer Purchase. This amount was permitted through amendment of our First Lien Term Loan Facility. See Note 6 to our Consolidated Financial Statements for information on restrictions under the instruments governing our indebtedness on our ability to make dividends and other similar payments.
We do not expect to make any dividends, distributions or other similar payments to Parent in the foreseeable future.
Item 6. Selected Financial Data
The selected consolidated financial data presented below as of MarchJanuary 30, 20132015 (Successor) and MarchJanuary 31, 2012 (Predecessor)2014 (Successor) and for the year ended January 30, 2015 (Successor), ten months ended January 31, 2014 (Successor) and for the year ended March 30, 2013 (Successor), the periods January 15, 2012 to March 31, 2012 (Successor), April 3, 2011 to January 14, 2012 (Predecessor), and the year ended April 2, 2011 (Predecessor) have been derived from our Consolidated Financial Statements and notes thereto included in this Report. The selected consolidated financial data as of March 30, 2013 (Successor), March 31, 2012 (Successor) and April 2, 2011 March 27, 2010 (Predecessor) and March 28, 2009 (Predecessor), and for the years endedperiods January 15, 2012 to March 27, 201031, 2012 (Successor), and April 3, 2011 to January 14, 2012 (Predecessor) and March 28, 2009year ended April 2, 2011 (Predecessor) (as adjusted for the change in the presentation of financial statements discussed below) have been derived from our audited consolidated financial statements which are not included in this Report.
In the first quarter ended May 2, 2014 (the “first quarter of fiscal 2015”), we changed the presentation of our financial statements to include receiving, distribution, warehouse costs and transportation to and from stores in our cost of sales. Previously, these costs were included in selling, general and administrative expenses. Depreciation expense related to these costs, which was historically included in selling, general and administrative expense, is also now included in cost of sales. Also, depreciation and amortization expense previously included in selling, general and administrative expense is no longer presented separately. Reclassifications of $87.0 million, $88.8 million, $17.6 million, $58.6 million and $70.7 million from selling, general and administrative expense to cost of sales were made for the ten months ended January 31, 2014, for the year ended March 30, 2013, for the periods January 15, 2012 to March 31, 2012, and April 3, 2011 to January 14, 2012 and year ended April 2, 2011, respectively, to conform to current year presentation. This change does not change previously reported operating income or net income. This change in presentation of financial statements was made in order to be in line with our peers in the retail industry.
The Successor fiscal year ended January 30, 2015 is comprised of 52 weeks. The Successor period for the ten months ended January 31, 2014 is comprised of 44 weeks. The Successor fiscal year ended March 30, 2013 is comprised of 52 weeks. The Successor period January 15, 2012 to March 31, 2012 contains 11 weeks. The Predecessor period April 3, 2012 to January 14, 2012 contains 41 weeks. The Predecessor fiscal year ended on April 2, 2011 is comprised of 53 weeks while the earlier Predecessor periods presented are comprised of 52 weeks.
The Merger was accounted for as a business combination whereby the purchase price paid to effect the Merger was allocated to recognize the acquired assets and liabilities at fair value. In connection with the Merger, we incurred significant indebtedness. Subsequent to the Merger, interest expense and non-cash depreciation and amortization charges have significantly increased. The historical results presented below are not necessarily indicative of the results to be expected for any future period. The information should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and notes thereto included in this Report.
|
| Year Ended |
| For the Periods |
| Years Ended |
|
| Year Ended |
| Ten Months Ended |
| Year Ended |
| For the Periods |
| Year Ended |
| ||||||||||||||||||||||||
|
| March 30, |
| January 15, 2012 |
|
| April 3, 2011 |
| April 2, |
| March 27, |
| March 28, |
|
| January 30, |
| January 31, |
| March 30, |
| January 15, 2012 |
|
| April 3, 2011 |
| April 2, |
| ||||||||||||||
|
| (Successor) |
| (Successor) |
|
| (Predecessor) |
| (Predecessor) |
| (Predecessor) |
| (Predecessor) |
|
| (Successor) |
| (Successor) |
| (Successor) |
| (Successor) |
|
| (Predecessor) |
| (Predecessor) |
| ||||||||||||||
|
| (Amounts in thousands, except operating data) |
|
| (Amounts in thousands, except operating data) |
| ||||||||||||||||||||||||||||||||||||
Statements of Income Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
99¢ Only Stores |
| $ |
| 1,620,683 |
| $ |
| 329,361 |
|
| $ | 1,158,733 |
| $ | 1,380,357 |
| $ | 1,314,214 |
| $ | 1,262,119 |
|
| $ | 1,881,865 |
| $ | 1,486,699 |
| $ | 1,620,683 |
| $ | 329,361 |
|
| $ | 1,158,733 |
| $ | 1,380,357 |
|
Bargain Wholesale |
| 47,968 |
| 9,555 |
|
| 34,047 |
| 43,521 |
| 40,956 |
| 40,817 |
|
| 45,084 |
| 42,044 |
| 47,968 |
| 9,555 |
|
| 34,047 |
| 43,521 |
| ||||||||||||||
Total sales |
| 1,668,651 |
| 338,916 |
|
| 1,192,780 |
| 1,423,878 |
| 1,355,170 |
| 1,302,936 |
|
| 1,926,949 |
| 1,528,743 |
| 1,668,651 |
| 338,916 |
|
| 1,192,780 |
| 1,423,878 |
| ||||||||||||||
|
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|
|
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|
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|
|
|
|
|
|
|
|
|
| ||||||||||||||
Cost of sales (excluding depreciation and amortization expense as shown separately below) |
| 1,028,295 |
| 203,775 |
|
| 711,002 |
| 842,756 |
| 797,748 |
| 791,121 |
| ||||||||||||||||||||||||||||
Cost of sales |
| 1,308,849 |
| 1,033,077 |
| 1,117,051 |
| 221,727 |
|
| 769,555 |
| 913,500 |
| ||||||||||||||||||||||||||||
Gross profit |
| 640,356 |
| 135,141 |
|
| 481,778 |
| 581,122 |
| 557,422 |
| 511,815 |
|
| 618,100 |
| 495,666 |
| 551,600 |
| 117,189 |
|
| 423,225 |
| 510,378 |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Selling, general and administrative expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Operating expenses |
| 523,495 |
| 110,477 |
|
| 376,122 |
| 436,034 |
| 436,608 |
| 464,635 |
| ||||||||||||||||||||||||||||
Depreciation |
| 56,810 |
| 11,361 |
|
| 21,855 |
| 27,587 |
| 27,381 |
| 34,224 |
| ||||||||||||||||||||||||||||
Amortization of intangible assets |
| 1,767 |
| 374 |
|
| 14 |
| 18 |
| 17 |
| 42 |
| ||||||||||||||||||||||||||||
Total operating expenses |
| 582,072 |
| 122,212 |
|
| 397,991 |
| 463,639 |
| 464,006 |
| 498,901 |
| ||||||||||||||||||||||||||||
Selling, general and administrative expenses |
| 546,259 |
| 481,449 |
| 493,316 |
| 104,260 |
|
| 339,438 |
| 392,895 |
| ||||||||||||||||||||||||||||
Operating income |
| 58,284 |
| 12,929 |
|
| 83,787 |
| 117,483 |
| 93,416 |
| 12,914 |
|
| 71,841 |
| 14,217 |
| 58,284 |
| 12,929 |
|
| 83,787 |
| 117,483 |
| ||||||||||||||
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Other expense (income), net |
| 77,282 |
| 16,119 |
|
| 340 |
| (741 | ) | (135 | ) | (993 | ) |
| 62,734 |
| 55,195 |
| 77,282 |
| 16,119 |
|
| 340 |
| (741 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
(Loss) income before provision for income taxes and income attributed to noncontrolling interest |
| (18,998 | ) | (3,190 | ) |
| 83,447 |
| 118,224 |
| 93,551 |
| 13,907 |
| ||||||||||||||||||||||||||||
(Benefit) provision for income taxes |
| (10,089 | ) | 2,103 |
|
| 33,699 |
| 43,916 |
| 33,104 |
| 4,069 |
| ||||||||||||||||||||||||||||
Net (loss) income including noncontrolling interest |
| (8,909 | ) | (5,293 | ) |
| 49,748 |
| 74,308 |
| 60,447 |
| 9,838 |
| ||||||||||||||||||||||||||||
Net income attributable to noncontrolling interest |
| — |
| — |
|
| — |
| — |
| — |
| (1,357 | ) | ||||||||||||||||||||||||||||
Net (loss) income attributable to 99¢ Only Stores |
| $ |
| (8,909 | ) | $ |
| (5,293 | ) |
| $ | 49,748 |
| $ | 74,308 |
| $ | 60,447 |
| $ | 8,481 |
| ||||||||||||||||||||
Income (loss) before provision for income taxes |
| 9,107 |
| (40,978 | ) | (18,998 | ) | (3,190 | ) |
| 83,447 |
| 118,224 |
| ||||||||||||||||||||||||||||
Provision (benefit) for income taxes |
| 3,605 |
| (28,493 | ) | (10,089 | ) | 2,103 |
|
| 33,699 |
| 43,916 |
| ||||||||||||||||||||||||||||
Net income (loss) |
| $ | 5,502 |
| $ | (12,485 | ) | $ | (8,909 | ) | $ | (5,293 | ) |
| $ | 49,748 |
| $ | 74,308 |
| ||||||||||||||||||||||
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| ||||||||||||||
Company Operating Data: |
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Sales Growth: |
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| ||||||||||||||
99¢ Only Stores |
| 8.9 | % | N/A |
|
| N/A |
| 5.0 | % | 4.1 | % | 8.9 | % |
| N/A |
| N/A |
| 8.9 | % | N/A |
|
| N/A |
| 5.0 | % | ||||||||||||||
Bargain Wholesale |
| 10.0 | % | N/A |
|
| N/A |
| 6.3 | % | 0.3 | % | 0.7 | % |
| N/A |
| N/A |
| 10.0 | % | N/A |
|
| N/A |
| 6.3 | % | ||||||||||||||
Total sales |
| 8.9 | % | N/A |
|
| N/A |
| 5.1 | % | 4.0 | % | 8.6 | % |
| N/A |
| N/A |
| 8.9 | % | N/A |
|
| N/A |
| 5.1 | % | ||||||||||||||
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Gross margin |
| 38.4 | % | 39.9 | % |
| 40.4 | % | 40.8 | % | 41.1 | % | 39.3 | % |
| 32.1 | % | 32.4 | % | 33.1 | % | 34.6 | % |
| 35.5 | % | 35.8 | % | ||||||||||||||
Operating margin |
| 3.5 | % | 3.8 | % |
| 7.0 | % | 8.3 | % | 6.9 | % | 1.0 | % |
| 3.7 | % | 0.9 | % | 3.5 | % | 3.8 | % |
| 7.0 | % | 8.3 | % | ||||||||||||||
Net (loss) income |
| (0.5 | )% | (1.6 | )% |
| 4.2 | % | 5.2 | % | 4.5 | % | 0.7 | % | ||||||||||||||||||||||||||||
Net income (loss) |
| 0.3 | % | (0.8 | )% | (0.5 | )% | (1.6 | )% |
| 4.2 | % | 5.2 | % | ||||||||||||||||||||||||||||
|
| March 30, |
| March 31, |
|
| April 2, |
| March 27, |
| March 28, |
|
| January 30, |
| January 31, |
| March 30, |
| March 31, |
|
| April 2, |
| ||||||||||
|
| (Successor) |
| (Successor) |
|
| (Predecessor) |
| (Predecessor) |
| (Predecessor) |
|
| (Successor) |
| (Successor) |
| (Successor) |
| (Successor) |
|
| (Predecessor) |
| ||||||||||
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| (Amounts in thousands, except operating data) |
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| (Amounts in thousands, except operating data) |
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Retail Operating Data (a) : |
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99¢ Only Stores at end of period |
| 316 |
| 298 |
|
| 285 |
| 275 |
| 279 |
|
| 383 |
| 343 |
| 316 |
| 298 |
|
| 285 |
| ||||||||||
Change in comparable stores net sales (b) |
| 4.3 | % | N/A |
|
| 0.7 | % | 3.9 | % | 3.7 | % | ||||||||||||||||||||||
Change in comparable same-store sales |
| 0.4 | %(b) | 3.7 | %(c) | 4.3 | %(c) | N/A |
|
| 0.7 | %(c) | ||||||||||||||||||||||
Average net sales per store open the full year |
| $ | 5,327 |
| N/A |
|
| $ | 4,874 |
| $ | 4,848 |
| $ | 4,642 |
|
| $ | 5,366 |
| $ | 5,446 |
| $ | 5,327 |
| N/A |
|
| $ | 4,874 |
| ||
Average net sales per estimated saleable square foot |
| $ | 321 | (d) | N/A |
|
| $ | 291 | (e) | $ | 289 | (f) | $ | 273 | (g) |
| $ | 328 |
| $ | 330 |
| $ | 321 |
| N/A |
|
| $ | 291 |
| ||
Estimated saleable square footage at year end |
| 5,211,483 |
| 4,948,344 |
|
| 4,758,432 |
| 4,606,728 |
| 4,703,630 |
|
| 6,189,669 |
| 5,607,991 |
| 5,211,483 |
| 4,948,344 |
|
| 4,758,432 |
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Balance Sheet Data: |
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Working capital |
| $ | 152,362 |
| $ | 153,541 |
|
| $ | 323,314 |
| $ | 263,905 |
| $ | 192,365 |
|
| $ | 94,529 |
| $ | 96,326 |
| $ | 152,362 |
| $ | 153,541 |
|
| $ | 323,314 |
|
Total assets |
| $ | 1,757,237 |
| $ | 1,768,041 |
|
| $ | 824,215 |
| $ | 745,986 |
| $ | 662,873 |
|
| $ | 1,929,166 |
| $ | 1,770,234 |
| $ | 1,757,237 |
| $ | 1,768,041 |
|
| $ | 824,215 |
|
Capital lease obligation, including current portion |
| $ | 354 |
| $ | 431 |
|
| $ | 448 |
| $ | 519 |
| $ | 584 |
| |||||||||||||||||
Capital and financing lease obligation, including current portion |
| $ | 25,061 |
| $ | 285 |
| $ | 354 |
| $ | 431 |
|
| $ | 448 |
| |||||||||||||||||
Long-term debt, including current portion |
| $ | 758,325 |
| $ | 763,601 |
|
| $ | — |
| $ | — |
| $ | — |
|
| $ | 907,533 |
| $ | 855,390 |
| $ | 758,325 |
| $ | 763,601 |
|
| $ | — |
|
Total shareholders’ equity |
| $ | 638,970 |
| $ | 630,767 |
|
| $ | 681,549 |
| $ | 600,422 |
| $ | 523,857 |
| |||||||||||||||||
Total member’s/shareholders’ equity |
| $ | 507,752 |
| $ | 499,087 |
| $ | 638,970 |
| $ | 630,767 |
|
| $ | 681,549 |
| |||||||||||||||||
(a) Includes retail operating data solely for our 99¢ Only Stores.stores. For comparability purposes, comparable stores net sales, average net sales per store and average net sales per estimated saleable square foot are based on comparable 52 weeks,a trailing 52-week period for all periods presented. Comparable same-store sales is based on a comparable 52-week period for all periods presented, except for the ten months ended January 31, 2014, which is based on a comparable 43-week period of the prior year.
(b) Change in comparable same-store sales compares net sales for all stores netopen at least 14 months.
(c)Change in comparable same-store sales compares net sales for all stores open at least 15 months. We normally do not relocate stores or close them if renovations are taking place. In a rare situation where a store is relocated, or closed and later re-opened at the same location, the relocated or re-opened store is considered a new store for any comparable store sales analysis, and would only be included in the comparable store sales analysis once it has been open, or re-opened, for 15 months.
(c)(d) Computed based upon estimated total saleable square footage of stores open for the full year.
(d)Includes 39 Texas stores open for a full year. Texas stores open for the full year had average sales of $3.7 million per store and average sales per estimated saleable square foot of $203. All Western States stores open for the full year had average sales of $5.6 million per store and $339 of average sales per estimated saleable square foot.
(e)Includes 32 Texas stores open for a full year. Texas stores open for the full year had average sales of $3.4 million per store and average sales per estimated saleable square foot of $181. All Western States stores open for the full year had average sales of $5.1 million per store and $307 of average sales per estimated saleable square foot.
(f)Includes 31 Texas stores open for a full year. Texas stores open for the full year had average sales of $3.4 million per store and average sales per estimated saleable square foot of $180. All Western States stores open for the full year had average sales of $5.0 million per store and $305 of average sales per estimated saleable square foot.
(g)Includes 39 Texas stores open for a full year. Texas stores open for the full year had average sales of $2.7 million per store and average sales per estimated saleable square foot of $142. All Western States stores open for the full year had average sales of $5.0 million per store and $301 of average sales per estimated saleable square foot.at least 12 months.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in connection with “Item 6. Selected Financial Data” and “Item 8. Financial Statements and Supplementary Data” of this Report.
Overview
We followOn January 13, 2012, we merged with Number Merger Sub, Inc. and became a subsidiary of Parent. See Item 1, “Business—Merger” for more information about the Merger.
On December 16, 2013, the board of directors of our sole member, Parent, approved a resolution changing the end of our fiscal calendar consisting of four quarters with 91 days, each endingyear. Prior to the change, our fiscal year ended on the Saturday closest to the calendar quarter-end, and a 52-weeklast day of March. Our new 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. On January 13, 2012, we completedend is the Merger. As a result of the Merger, we have prepared separate discussion and analysis of our consolidated operating results, financial condition and liquidity for the “Predecessor” and “Successor” periods relatingFriday closest to the periods precedinglast day of January, with each successive quarterly period ending the Friday closest to the last day of April, July, October or January, as applicable. Fiscal 2015 thus consisted of 52 weeks beginning February 1, 2014 and succeeding the Merger, respectively.ending January 30, 2015. Our fiscal year 2013 (“2014 consisted of 44 weeks and transition fiscal 2013”)2014 and the fourth interim period of transition fiscal 2014 ended on January 31, 2014. Fiscal 2013 began on April 1, 2012 and ended on March 30, 2013 consistingand consisted of 52 weeks. Our fiscalFiscal year 2012 (“fiscal 2012”) is presented as a Successor period from January 15, 2012 to March 31, 2012 consisting of 11 weeks (the “fiscal 2012 Successor period”) and a Predecessor period from April 3, 2011 to January 14, 2012 consisting of 41 weeks (the “fiscal 2012 Predecessor period”), for a total2016 will consist of 52 weeks. Our fiscal year 2011 (“fiscal 2011”) began on March 28, 2010weeks beginning January 31, 2015 and ended on April 2, 2011, consisting of 53 weeks with one additional week included in the fourth quarter. ending January 29, 2016.
For comparability purposes, annual same-store sales for transition fiscal 2014 are based on the 43-week period ended January 25, 2014 as compared to the 43-week period ended January 26, 2013. Annual same-store sales for all other periods presented are based on the comparable 52-week period. For comparability purposes, average annual sales per store and annual sales per estimated saleable square foot calculations included in this Report are based on comparable 52 weeks,trailing 52-week period, ended January 30, 2015 for fiscal 2015, ended on January 25, 2014 for transition fiscal 2014 and ended on March 30, 2013 for fiscal 2013, ended on March 31, 2012 for fiscal 2012 and ended on March 26, 2011 for fiscal 2011. Our fiscal year 2014 (“fiscal 2014”) will consist of 52 weeks beginning March 31, 2013 and ending March 29, 2014.2013.
In accordancethe first quarter of fiscal 2015, we changed the presentation of our financial statements to include receiving, distribution, warehouse costs and transportation to and from stores in our cost of sales. Previously, these costs were included in selling, general, and administrative expenses. Depreciation expense related to these costs which was historically included in selling, general and administrative expense, is now also included in cost of sales. Also, depreciation and amortization expense previously included in selling, general and administrative expense is no longer presented separately on the income statement. Reclassifications of $87.0 million and $88.8 million from selling, general and administrative expense to cost of sales were made for the ten months ended January 31, 2014 and for the year ended March 30, 2013, respectively, to conform to current year presentation. This change does not change previously reported operating income or net income. This change in presentation of financials was made in order to be in line with generally accepted accounting principlesour peers in the United States (“GAAP”),retail industry.
In the first quarter of fiscal 2015, we modified our definition of same-store sales. Previously, we defined same-store sales as sales at stores that have been open at least 15 months. In situations in which the store was relocated, or closed and later reopened in the same location, the affected store was considered a new store for any same-store sales analysis. A store would only be included in the same-store sales analysis once it had been open, or reopened, for 15 months. Under the new definition, same-store sales are requiredsales at stores that have been open at least 14 months, including stores that have been remodeled, expanded or relocated during that period. Since we do not have e-commerce sales, such sales are not part of our same-store sales calculation. This change in definition of same-store sales was a prospective change and was made in order to separately present our results for the Predecessor and Successor periods. We have also prepared supplemental unaudited discussion and analysis of the combined Predecessor and Successor periods, on a pro forma basis (“pro forma fiscal year 2012”). Management believes that reviewing our results on a pro forma basis is importantbe in identifying trends or reaching conclusions regarding our overall performance. The unaudited pro forma fiscal year 2012 financial data is for informational purposes only and should be read in conjunctionline with our historical financial data appearing throughout this Report.peers in the retail industry.
During fiscal 2013,2015, we had net sales of $1,668.7$1,926.9 million, operating income of $58.3$71.8 million and net lossincome of $8.9$5.5 million. NetSame-store sales for fiscal 2013 increased 8.9% over pro forma fiscal 2012 primarily due to the 4.3% increase in same-store sales, the full year effect of 13 new stores opened in fiscal 2012, and the effect of 19 new stores opened in fiscal 2013.2015 increased by 0.4%. Average sales per store open the full year,at least 12 months, on a comparabletrailing 52-week period, increased to $5.3were $5.4 million in fiscal 2013 from $5.22015 compared to $5.4 million in pro formatransition fiscal 2012.2014. Average net sales per estimated saleable square foot (computed for stores open for the full year)at least 12 months) on a comparabletrailing 52-week period increased to $321were $328 per square foot for fiscal 2013 from $3092015 compared to $330 per square foot for pro formatransition fiscal 2012. This increase reflects higher same-store sales and our opening of smaller locations for our new stores.2014. Existing stores at MarchJanuary 30, 20132015 averaged approximately 21,000 gross square feet. We are currently targeting new store openings with a range of approximately 15,000 to 20,000 gross16,000 saleable square feet.
In fiscal 2013,2015, we continued to expand our store base by opening 1940 net new stores. Of these newly opened stores, 1432 stores are located in California, three in Nevada, and two in Arizona, and three in Texas. We closed one store during fiscal 2013 due to the expiration of its lease. In fiscal 2014,2016, we currently intend to increase our store count by approximately 10%,30 to 40 stores, all of which are expected to be opened in our existing markets. We believe that our near term growth in fiscal 20142016 will primarily result from new store openings in our existing territories and increases in same-store sales.
Critical Accounting Policies and Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect reported earnings. These estimates and assumptions are evaluated on an on-going basis and are based on historical experience and other factors that management believes are reasonable. Estimates and assumptions include, but are not limited to, the areas of inventories, long-lived asset impairment, goodwill and other intangibles, legal reserves, self-insurance reserves, leases, taxes and share-based compensation.
We believe that the following items represent the areas where more critical estimates and assumptions are used in the preparation of our financial statements:
Inventory valuation. Inventories are valued at the lower of cost or market. Inventory costs are 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 inventoriesinventory counts are taken at each of our retail stores at least once a year by an independentoutside inventory service company. Additional store level physical inventories are taken byWe perform inventory cycle counts at our warehouses throughout the service companies from time to time based on
a particular store’s performance and/or book inventory balance.year. We also perform inventory reviews and analysis on a quarterly basis for both warehouse and store inventory to determine inventory valuation allowances for excess and obsolete inventory. Our policy is to analyze all items held in inventory that are at least twelve months old and that would not be sold through at current sales rates over the next twelve months in order to determine what merchandise should be reserved for as excess or obsolete. The valuation allowances for excess and obsolete inventory in many locations (including various warehouses, store backrooms,are based on the age of the inventory, sales trends and sales floors of our stores)future merchandising plans. The valuation allowances for excess and obsolete inventory require management judgment and estimates that may impact the ending inventory valuation as well as gross margins.
We are in the process of upgrading our systems for accounting for merchandise inventories. Among other things, we are preparing to implement an SAP systemand valuation allowances that will enable us, for the first time, to track inventory at each retail store on a perpetual basis by stock keeping unit (or SKU). The SAP implementation process will begin in fiscal 2014, with all stores expected to be included by the end of fiscal 2015. In anticipation of the implementation of this system, during the second half of fiscal 2013 we performed physical counts and established inventory cost and retail by SKU at 81 of our more than 300 retail stores. In prior periods, we had originally determined the value of store level inventory by performing physical counts for each price point category and then converted those retail values to cost basis by applying a year-to-date cost percentage per store. For the 81 stores where the counts were taken by SKU, we determined total retail values by merchandise category and applied each category’s cost percentage to determine the value of the inventory. As a result of this analysis, we determined that single average cost percentage by store was not consistent with the inventory on hand at the applicable balance sheet date based on the higher turnover of low margin product. As of March 30, 2013 and for all prior periods since Merger, we revised the calculation to include a year-to-date cost percentage per merchandise category applied to the estimated retail value for all stores by merchandise category. The result of the foregoing evaluation indicated an overstatement in total inventory of $13.3 million at the Merger date, and represents an amount that has accumulated over prior periods.
Management evaluated the materiality of this error quantitatively and qualitatively, and has concluded that it was not material, to any prior period annual and quarterly financial statements. However, because the adjustment to correct the error in fiscal 2013, wouldmay have had a material effect on the fiscal 2013 financial statements,reported gross margin for the correction was reflected retroactively within the March 31, 2012 balance sheet, and the purchase price allocation as of the Merger date, which resulted in a $8.0 million increase to goodwill, a $5.3 million increase to deferred tax assets, and a $13.3 million decrease to inventories.period.
In the fourth quarter of fiscal 2013, we revised our inventory merchandising and liquidation philosophies to significantly reduce and liquidate slow moving inventories prospectively as directed by the current management team. Based on these changes, we adjusted excess and obsolescence reserve to include items that are at least twelve months old and that we do not expect to sell above cost within the next twelve months. As a result of this change, we recorded a charge to cost of sales and a corresponding reduction in inventory of approximately $9.1 million in the fourth quarter of fiscal 2013. This iswas a prospective change and did not have an effect on prior periods.
We doAt the end of the third quarter of transition fiscal 2014, based on new merchandising plans, we increased our valuation allowances for excess and obsolete inventory. The Company recorded a charge to cost of sales and a corresponding reduction in inventory of approximately $9.6 million. This was a prospective change and did not believe that therehave an effect on prior periods.
In the fourth quarter of fiscal 2015, we recorded a charge for additional inventory shrinkage based upon the results of annual physical inventory counts completed during the quarter. This resulted in a net charge to cost of sales and a corresponding reduction in inventory of approximately $10.0 million, which was primarily related to the implementation of certain strategic initiatives, including the “Go Taller” store remodeling program.
Considerable management judgment is a reasonable likelihood that there will be a material change in the future estimates or assumptions that we usenecessary to calculate estimate these inventory valuation reserves. As an indicator of the sensitivity of this estimate, a 10% increase in our estimates of expected losses from shrinkage and the excess and obsolete inventory provision at MarchJanuary 30, 2013,2015, would have increased these reserves by approximately $2.0$1.3 million and $1.3$0.4 million, respectively, and increaseddecreased pre-tax lossincome in fiscal 20132015 by the same amounts.
In order to obtain inventory at attractive prices, we take advantage of large volume purchases, closeouts and other similar purchase opportunities, but within the above stipulated policy.opportunities. Consequently, our inventory fluctuates from period to period and the inventory balances vary based on the timing and availability of such opportunities. Our inventory was $201.6$296.0 million as of MarchJanuary 30, 20132015 and $207.4$206.2 million as of MarchJanuary 31, 2012.2014.
Long-lived asset impairment. We assess the impairment of depreciable long-lived assets quarterly or when events or changes in circumstances indicate that the carrying value may not be recoverable. RecoverabilityWe group and evaluate long-lived assets for impairment at the individual store level, which is measured by comparing the carrying amount of an asset to expected future netlowest level at which individual identifiable cash flows generated by the asset.are available. 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 we consider important which could individually or in combination trigger an impairment review include the following.following: (1) significant underperformance relative to expected historical or projected future operating results; (2) significant changes in the manner we use of the acquired assets or the strategy for our overall business; and (3) significant changes in our business strategies and/or negative industry or economic trends. On a quarterly basis, we assess whether events or changes in circumstances occur that potentially indicate that the carrying value of long-lived assets may not be recoverable. 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 fiscal 2015, we wrote down the carrying value of a held for sale property to the estimated net realizable value, net of expected disposal costs, and accordingly recorded an asset impairment charge of $0.1 million. During transition fiscal 2014, we did not record any long-lived asset impairment charges. During fiscal 2013, we wrote down the carrying value of a held for sale property to estimated net realizable value, net of expected disposal costs, and accordingly recorded an asset impairment charge of $0.5 million. During the Successor and Predecessor periods of fiscal 2012 and fiscal 2011, we did not record any long-lived asset impairment charges. We have not made any material changes to our long-lived asset impairment methodology during fiscal 2013.
Table of Contents2015.
Goodwill and other intangible assets. The Merger was accounted for as a purchase business combination, whereby the purchase price paid was allocated to recognize the acquired assets and liabilities at their fair value. In connection with the purchase price allocation, certain intangible assets were established for the 99¢ trademark, and the Rinso and Halsa label brands wereor revalued. The purchase price in excess of the fair value of assets and liabilities was recorded as goodwill.
Indefinite-lived intangible assets, such as the 99¢ trademark and goodwill, are not subject to amortization. We assess the recoverability of indefinite-lived intangibles whenever there are indicators of impairment, or at least annually in the fourth quarter.January. If the recorded carrying value of an intangible asset exceeds our estimated fair value, we record a charge to write the intangible asset down to its fair value.
Intangible assets with a definite life including the Rinso and Halsa label brands, as well as the Bargain Wholesale customers, are amortized on a straight line basis over their useful lives. 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, the assets are 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.
During the fourth quarter of fiscal 2013,2015, we completed step one of our goodwill impairment test for the two reporting units and determined that there was no impairment of goodwill since the fair value of the reporting units exceeded the carrying amount. Additionally, during the fourth quarter of fiscal 2013,2015, we completed our annual indefinite-lived intangible asset impairment test and determined there was no impairment since the fair value of the 99¢ trademark exceeded the carrying amount of the trademark. Considerable management judgment is necessary in estimating future cash flows, market interest rates, discount rates and other factors affecting the valuation of goodwill and intangibles. We use historical financial information, internal plans and projections, and industry information in making such estimates. However, because the new basis of accounting established at the Merger date set the book values of goodwill and intangibles equal to fair value and impairment tests are highly sensitive to changes in assumptions, minor changes to assumptions, including assumptions regarding future performance (including sales growth, pricing and commodity costs) and discount rates, could result in impairment losses. In our fiscal 20132015 impairment test, both our retail reporting unit had excess fair value over the book value of net assets of approximately 16% and our wholesale reporting unit had excess fair value over the book value of net assets of approximately 46%.that was substantial. Our 99¢ trademark had excess fair value overalso exceeded the book value of approximately 15% in fiscal 2013.2015.
Legal reserves. We are subject to private lawsuits, administrative proceedings and claims that arise in the ordinary course of business. A number of these lawsuits, proceedings and claims may exist at any given time. While the resolution of a lawsuit, proceeding or claim may have an impact on our 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 are expected to have a material adverse effect on our financial position, results of operations, or overall liquidity. Material pending legal proceedings (other than ordinary routine litigation incidental to our business) and material proceedings known to be contemplated by governmental authorities are reported in our reports pursuant to the Securities Exchange Act of 1934, as amended. We record a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
There were no material changes in the estimates or assumptions used to determine legal reserves during fiscal 20132015 and a 10% change in legal reserves would not be material to our consolidated financial position or results of operations.
Self-insured workers’ compensation liability. We self-insure for workers’ compensation claims in California and Texas. We have established a reserveliability for losses offrom both estimated known claims and incurred but not reported claims. The estimates areinsurance claims based on reported claims and actuarial valuations of estimated future costs of reportedknown and incurred but not yet reported claims. Should the estimates fall shortan amount of the actual claims paid,greater than anticipated occur, the liability recorded wouldmay not be sufficient and additional workers’ compensation costs, which may be significant, wouldcould be incurred. We do not discount the projected future cash outlays for the time value of money for claims and claim related costs when establishing our workers’ compensation liability. As a result of the increase in severity of open claims, we significantly increased our workers’ compensation liability reserves in transition fiscal 2014. As an indicator of the sensitivity of this estimate, at MarchJanuary 30, 2013,2015, a 10% increase in our estimate of expected losses from workers compensation claims would have increased this reserve by approximately $3.9$7.0 million and increaseddecreased fiscal 20132015 pre-tax lossincome by the same amount.
Self-insured health insurance liability. During the second quarter of fiscal 2012, we began self-insuringWe self-insure for a portion of our employee medical benefit claims. The liability for the self-funded portion of our health insurance program is determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported. We maintain stop loss insurance coverage to limit our exposure for the self-funded portion of our health insurance program. At MarchJanuary 30, 2013,2015, a 10% change in self-insurance liability would not have been material to our consolidated financial position or results of operations.
Operating leases. We recognize 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 tenant improvements. 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, we can be involved with the construction of the building. If it is determined that we have substantially all of the risks of ownership during construction of the leased property and therefore are deemed to be the owner of the construction project, we record 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, we amortize the obligation over the lease term and depreciate the asset over the life of the lease. We do 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, we record 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 estimation of other related exit costs. If actual timing and potential termination costs or realization of sublease income differ from our estimates, the resulting liabilities could vary from recorded amounts. These liabilities are reviewed periodically and adjusted when necessary.
During fiscal 2013, we accrued $0.3 million in lease termination costs associated with the closing of Texas stores in prior periods. During the Successor period from January 15, 2012 to March 31, 2012, we accrued an additional $0.1 million in lease termination costs associated with the closing of Texas stores in prior periods. During the Predecessor period from April 3, 2011 to January 14, 2012, we accrued an additional $0.3 million in lease termination costs associated with the closing of Texas stores in prior periods. During fiscal 2011, we accrued $0.4 million in lease termination costs associated with the closing of Texas stores in prior periods. See Note 12, “Texas Markets” to our Consolidated Financial Statements for further information regarding the lease termination charges related to our Texas operations.
Tax Valuation Allowances and Contingencies. We recognize deferred tax assets and liabilities using the enacted tax rates for the effect of temporary differences between the financial reporting basis and tax basis 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. We had approximately $153.7$129.1 million of net deferred tax liabilities as of MarchJanuary 30, 2013,2015, which was comprised of approximately $83.7$95.4 million of net deferred tax assets and $237.4$224.5 million of deferred tax liabilities, net of tax valuation allowance of $11.6 million.liabilities. We had approximately $183.7$124.6 million of net deferred tax liabilities as of MarchJanuary 31, 2012,2014, which was comprised of approximately $64.3$102.4 million of net deferred tax assets and $227.0 million of deferred tax assets and $248.0 million of deferred tax liabilities, net of tax valuation allowance of $10.3 million.liabilities. Management evaluated the available evidence in assessing our ability to realize the benefits of our deferred tax assets at MarchJanuary 30, 2013 and March 31, 2012,2015 and concluded it is more likely than not that we will not realize a portionall of our deferred tax assets. Significant management judgment is required in accounting for income tax contingencies as the outcomes are often difficult to predict. There are no uncertain tax positions at MarchJanuary 30, 2013.2015.
Share-Based Compensation. Subsequent to the Merger, Parent issued options to acquire shares of common stock of our Parent to certain of our executive officers and employees. We account for stock-based payment awards based on their fair values. Stock options have a term of ten years. For awards classified as equity, we estimate 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. Assumptions utilized to value options in the Successor fiscal 2013 and fiscal 2012 period include estimating the fair value of Parent’s common stock (which is not publicly traded), the term that the options are expected to be outstanding, an estimate of the volatility of Parent’s stock price (which is based on a peer group of publicly traded companies), applicable interest rates and the expected dividend yield of Parent’s common stock. Other factors involving judgments that affect the expensing of share-based payments include estimated forfeiture rates of stock-based awards. All of the options that we have granted to our executive officers and employees (with the exception of options granted to Rollover Investors that containcontained no repurchase rights and options granted to our current chief executive officer and certain directors that contain less restrictive repurchase rights) give the Parent repurchase rights as described in more detail in Note 11 to the Consolidated Financial Statements. In accordance with accounting guidance, we have not recorded any stock-based compensation expense for these grants. For all other time-based options, 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, which is generally a vesting term of five years. As described in more detail in Note 11 to the Consolidated Financial Statements, certain former executive put rights arethat were previously outstanding were classified as equity awards and revalued using a binomial model at each reporting period with changes in fair value recognized as stock-based compensation expense.
Predecessor Periods
We recognized stock-based compensation expense ratably over As further described in Note 11 to the requisite service periods, which was generally a vesting termConsolidated Financial Statements, we have also granted options that will vest only upon achievement of three years. Such stockcertain performance hurdles. These options typically had a term of ten years and were valued using the Black-Scholes option pricing model. The fair value of the performance stock units (“PSUs”) and restricted stock units (“RSUs”) was based on the stock price on the grant date. The compensationa Monte Carlo simulation method. Compensation expense related to PSUs wasassociated with these options will not be recognized only whenuntil it wasis probable that the performance criteria wouldhurdles will be met. The compensation expense related to RSUs was recognized based on the number of shares expected to vest. Stock-based awards outstanding prior to the Merger vested in full in connection with the Merger and were converted into a right to receive Merger Consideration.
Table of Contentsachieved.
Results of Operations
The following discussion defines the components of the statement of income and should be read in conjunction with “Item 6. Selected Financial Data.”
Net Sales: Revenue is recognized at the point of sale in our 99¢ Only Storesstores (“retail sales”). Bargain Wholesale sales revenue is recognized in accordance with the shipping terms agreed upon on the purchase order. Bargain Wholesale sales are typically recognized free on board origin, where title and risk of loss pass to the buyer when the merchandise leaves our distribution facility.
Cost of Sales: Cost of sales includes the cost of inventory, freight in, inter-state warehouse transportation costsobsolescence, spoilage, scrap and inventory shrinkage, (obsolescence, spoilage, and shrink), 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. In addition, we analyze our inventory levels and related cash discounts received to arrive at a value for cash discounts to be included in the inventory balance. We do not include purchasing, receiving, distribution, warehouse costs and transportation to and from stores in our cost of sales, which totaled $77.5 million, $15.6 million, $56.0 million and $67.5 million for fiscal 2013, 2012 Successor period, 2012 Predecessor period and fiscal 2011, respectively. Due to this classification, our gross profit rates may not be comparable to those of other retailers that include costs related to their distribution network in cost of sales.
Selling, General, and Administrative Expenses: Selling, general and administrative expenses include purchasing, receiving, inspection and warehouse costs, the costs of selling merchandise in stores (payroll(which include payroll and associated costs, occupancy and other store-level costs), distribution costs (payroll and associated costs, occupancy, transportation to and from stores, and other distribution-related costs), and corporate costs (payroll(which include payroll and associated costs, occupancy, advertising, professional fees stock-based compensation expense and other corporate administrative costs). Selling, general and administrative expenses also include depreciation and amortization expense.expense relating to these costs.
Other Expense (Income): Other expense (income) relates primarily to loss on extinguishment of debt, interest expense on our debt, capitalized leases and the impairment charges related to our marketable securities, net of interest income on our marketable securities.
Table of Contentsfinancing leases.
The following table sets forth, for the periods indicated, certain selected income statement data, including such data as a percentage of net sales. The periodyear ended January 30, 2015 consists of 52 weeks. The ten months ended January 31, 2014 consists of 44 weeks. The year ended March 30, 2013 consists of 52 weeks. The Successor period from January 15, 2012 to March 31, 2012 consists of 11 weeks while the Predecessor period from April 3, 2011 to January 14, 2012 consists of 41 weeks. The period ended on April 2, 2011 is comprised of 53 weeks (the percentages may not add up due to rounding):
|
| Year Ended |
| For the Periods |
| Year Ended |
| ||||||||||||||||||||||||||||||||
|
| March 30, |
| % of |
| January 15, 2012 |
| % of |
|
| April 3, 2011 |
| % of |
| April 2, |
| % of |
|
| Year Ended |
| Ten Months Ended |
| Year Ended |
| ||||||||||||||
|
| (Successor) |
|
|
| (Predecessor) |
|
|
|
| (Predecessor) |
|
|
| (Predecessor) |
|
|
|
| January 30, |
| % of |
| January 31, |
| % of |
| March 30, |
| % of |
| ||||||||
|
| (Amounts in thousands, except percentages) |
|
| (Amounts in thousands, except percentages) |
| |||||||||||||||||||||||||||||||||
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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| ||||||||
99¢ Only Stores |
| $ | 1,620,683 |
| 97.1 | % | $ | 329,361 |
| 97.2 | % |
| $ | 1,158,733 |
| 97.1 | % | $ | 1,380,357 |
| 96.9 | % |
| $ | 1,881,865 |
| 97.7 | % | $ | 1,486,699 |
| 97.2 | % | $ | 1,620,683 |
| 97.1 | % | |
Bargain Wholesale |
| 47,968 |
| 2.9 |
| 9,555 |
| 2.8 |
|
| 34,047 |
| 2.9 |
| 43,521 |
| 3.1 |
|
| 45,084 |
| 2.3 |
| 42,044 |
| 2.8 |
| 47,968 |
| 2.9 |
| ||||||||
Total sales |
| 1,668,651 |
| 100.0 |
| 338,916 |
| 100.0 |
|
| 1,192,780 |
| 100.0 |
| 1,423,878 |
| 100.0 |
|
| 1,926,949 |
| 100.0 |
| 1,528,743 |
| 100.0 |
| 1,668,651 |
| 100.0 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Cost of sales |
| 1,028,295 |
| 61.6 |
| 203,775 |
| 60.1 |
|
| 711,002 |
| 59.6 |
| 842,756 |
| 59.2 |
|
| 1,308,849 |
| 67.9 |
| 1,033,077 |
| 67.6 |
| 1,117,051 |
| 66.9 |
| ||||||||
Gross profit |
| 640,356 |
| 38.4 |
| 135,141 |
| 39.9 |
|
| 481,778 |
| 40.4 |
| 581,122 |
| 40.8 |
|
| 618,100 |
| 32.1 |
| 495,666 |
| 32.4 |
| 551,600 |
| 33.1 |
| ||||||||
Selling, general and administrative expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Operating expenses |
| 523,495 |
| 31.4 |
| 110,477 |
| 32.6 |
|
| 376,122 |
| 31.5 |
| 436,034 |
| 30.6 |
| |||||||||||||||||||||
Depreciation |
| 56,810 |
| 3.4 |
| 11,361 |
| 3.4 |
|
| 21,855 |
| 1.8 |
| 27,587 |
| 1.9 |
| |||||||||||||||||||||
Amortization of intangible assets |
| 1,767 |
| 0.1 |
| 374 |
| 0.1 |
|
| 14 |
| 0.0 |
| 18 |
| 0.0 |
| |||||||||||||||||||||
Total operating expenses |
| 582,072 |
| 34.9 |
| 122,212 |
| 36.1 |
|
| 397,991 |
| 33.4 |
| 463,639 |
| 32.6 |
| |||||||||||||||||||||
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|
|
|
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|
|
|
| ||||||||||||||||||||||||||
Selling, general and administrative expenses |
| 546,259 |
| 28.3 |
| 481,449 |
| 31.5 |
| 493,316 |
| 29.6 |
| ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Operating income |
| 58,284 |
| 3.5 |
| 12,929 |
| 3.8 |
|
| 83,787 |
| 7.0 |
| 117,483 |
| 8.3 |
|
| 71,841 |
| 3.7 |
| 14,217 |
| 0.9 |
| 58,284 |
| 3.5 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Other (income) expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Interest income |
| (342 | ) | 0.0 |
| (29 | ) | 0.0 |
|
| (291 | ) | 0.0 |
| (865 | ) | (0.1 | ) |
| — |
| 0.0 |
| (16 | ) | 0.0 |
| (342 | ) | 0.0 |
| ||||||||
Interest expense |
| 60,898 |
| 3.6 |
| 16,223 |
| 4.8 |
|
| 381 |
| 0.0 |
| 77 |
| 0.0 |
|
| 62,734 |
| 3.3 |
| 50,820 |
| 3.3 |
| 60,898 |
| 3.6 |
| ||||||||
Other-than-temporary investment impairment due to credit loss |
| — |
| 0.0 |
| — |
| 0.0 |
|
| 357 |
| 0.0 |
| 129 |
| 0.0 |
| |||||||||||||||||||||
Loss on extinguishment |
| 16,346 |
| 1.0 |
| — |
| 0.0 |
|
| — |
| 0.0 |
| — |
| 0.0 |
| |||||||||||||||||||||
Loss on extinguishment of debt |
| — |
| 0.0 |
| 4,391 |
| 0.3 |
| 16,346 |
| 1.0 |
| ||||||||||||||||||||||||||
Other |
| 380 |
| 0.0 |
| (75 | ) | 0.0 |
|
| (107 | ) | 0.0 |
| (82 | ) | 0.0 |
|
| — |
| 0.0 |
| — |
| 0.0 |
| 380 |
| 0.0 |
| ||||||||
Other expenses/(income), net |
| 77,282 |
| 4.6 |
| 16,119 |
| 4.8 |
|
| 340 |
| 0.0 |
| (741 | ) | (0.1 | ) | |||||||||||||||||||||
(Loss) income before provision for income taxes |
| (18,998 | ) | (1.1 | ) | (3,190 | ) | (0.9 | ) |
| 83,447 |
| 7.0 |
| 118,224 |
| 8.3 |
| |||||||||||||||||||||
(Benefit) provision for income taxes |
| (10,089 | ) | (0.6 | ) | 2,103 |
| 0.6 |
|
| 33,699 |
| 2.8 |
| 43,916 |
| 3.1 |
| |||||||||||||||||||||
Net (loss) income attributable to 99¢ Only Stores |
| $ | (8,909 | ) | (0.5 | )% | $ | (5,293 | ) | (1.6 | )% |
| $ | 49,748 |
| 4.2 | % | $ | 74,308 |
| 5.2 | % | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Other expenses, net |
| 62,734 |
| 3.3 |
| 55,195 |
| 3.6 |
| 77,282 |
| 4.6 |
| ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Income (loss) before provision for income taxes |
| 9,107 |
| 0.5 |
| (40,978 | ) | (2.7 | ) | (18,998 | ) | (1.1 | ) | ||||||||||||||||||||||||||
Provision (benefit) for income taxes |
| 3,605 |
| 0.2 |
| (28,493 | ) | (1.9 | ) | (10,089 | ) | (0.6 | ) | ||||||||||||||||||||||||||
Net income (loss) |
| $ | 5,502 |
| 0.3 |
| $ | (12,485 | ) | (0.8 | ) | $ | (8,909 | ) | (0.5 | )% | |||||||||||||||||||||||
The following discussion of our financial performance also includes supplemental unaudited pro forma consolidated financial information for fiscal years 2012 and 2011. Because the Merger occurred during the fourth fiscal quarter of fiscal 2012, we believe this information aids in the comparison between the years presented. The pro forma information does not purport to represent what our results of operations would have been had the Merger and related transactions actually occurred at the beginning of the years indicated, and they do not purport to project our results of operations or financial condition for any future period. The following table contains selected pro forma income statement data for 2012 compared to selected pro forma income statement data for fiscal year 2011, including such data as a percentage of net sales. See “Unaudited Pro Forma Consolidated Financial Information” below.
|
| Unaudited Pro Forma Fiscal Years Ended |
| |||||||||
|
| March 31, |
| % of |
|
| April 2, |
| % of |
| ||
|
| (Amounts in thousands, except percentages) |
| |||||||||
Net Sales: |
|
|
|
|
|
|
|
|
|
| ||
99¢ Only Stores |
| $ | 1,488,094 |
| 97.2 | % |
| $ | 1,380,357 |
| 96.9 | % |
Bargain Wholesale |
| 43,602 |
| 2.8 |
|
| 43,521 |
| 3.1 |
| ||
Total sales |
| 1,531,696 |
| 100.0 |
|
| 1,423,878 |
| 100.0 |
| ||
|
|
|
|
|
|
|
|
|
|
| ||
Cost of sales (excluding depreciation and amortization expense shown separately below) |
| 914,777 |
| 59.7 |
|
| 842,756 |
| 59.2 |
| ||
|
|
|
|
|
|
|
|
|
|
| ||
Gross profit |
| 616,919 |
| 40.3 |
|
| 581,122 |
| 40.8 |
| ||
Selling, general and administrative expenses: |
|
|
|
|
|
|
|
|
|
| ||
Operating expenses |
| 461,530 |
| 30.1 |
|
| 438,170 |
| 30.8 |
| ||
Depreciation |
| 42,488 |
| 2.8 |
|
| 39,338 |
| 2.8 |
| ||
Amortization of intangible assets |
| 1,764 |
| 0.1 |
|
| 1,766 |
| 0.1 |
| ||
Total selling, general and administrative expenses |
| 505,782 |
| 33.0 |
|
| 479,274 |
| 33.7 |
| ||
Operating income |
| 111,137 |
| 7.3 |
|
| 101,848 |
| 7.2 |
| ||
|
|
|
|
|
|
|
|
|
|
| ||
Other (income) expenses: |
|
|
|
|
|
|
|
|
|
| ||
Interest income |
| (320 | ) | (0.0 | ) |
| (865 | ) | (0.1 | ) | ||
Interest expense |
| 69,629 |
| 4.5 |
|
| 70,476 |
| 4.9 |
| ||
Other-than-temporary investment impairment due to credit loss |
| 357 |
| 0.0 |
|
| 129 |
| 0.0 |
| ||
Other |
| (182 | ) | (0.0 | ) |
| (82 | ) | (0.0 | ) | ||
Total other expense, net |
| 69,484 |
| 4.5 |
|
| 69,658 |
| 4.9 |
| ||
Income before provision for income taxes |
| 41,653 |
| 2.7 |
|
| 32,190 |
| 2.3 |
| ||
Provision for income taxes |
| 19,624 |
| 1.3 |
|
| 14,203 |
| 1.0 |
| ||
Net income |
| $ | 22,029 |
| 1.4 | % |
| $ | 17,987 |
| 1.3 | % |
For Year Ended March 30, 2013 (Successor)
Net sales. Total net sales for fiscal 2013 were $1,668.7 million, a 52-week period. Net retail sales for fiscal 2013 were $1,620.7 million. Bargain Wholesale net sales were $48.0 million. Net retail sales for stores that were open at least 15 months in fiscal 2013 were $1,530.5 million, representing 4.3% increase in same-store sales over prior year. The full year effect of new stores opened in the Successor and Predecessor periods of fiscal 2012 was $53.4 million and effect of 19 new stores opened in fiscal 2013 was $34.5 million. We closed one store in fiscal 2013 which contributed $2.3 million in sales.
During fiscal 2013, we added 19 new stores: 14 in California, three in Nevada and two in Texas. We closed one store during fiscal 2013. On March 30, 2013, we had 316 stores. Gross retail square footage as of March 30, 2013 was approximately 6.63 million. For 99¢ Only Stores open all of fiscal 2013, the average net sales per estimated saleable square foot was $321 and the average annual net sales per store were $5.3 million, including the Texas stores open for the full year.
Gross profit. During fiscal 2013, gross profit was $640.4 million. As a percentage of net sales, overall gross margin was 38.4% during fiscal 2013. Among gross profit components, cost of products sold was negatively impacted by a shift in product mix toward lower margin products, and to a lesser extent by merchandise price increases. Gross profit was also negatively impacted by a revision to our excess and obsolescence methodology due to a change in our inventory purchasing philosophy. As a result of this change, we increased our excess and obsolescence reserve by $9.1 million in the fourth quarter of fiscal 2013. Furthermore, inventory shrinkage as a percent of net sales was negatively impacted by higher inventory shrinkage based on store physical inventories taken during fiscal 2013 and the resulting increase in our shrinkage reserves.
Operating expenses. During fiscal 2013, operating expenses were $523.5 million. As a percentage of net sales, operating expenses were 31.4% for fiscal 2013. Retail operating expenses for fiscal 2013 were 21.5% of net sales. Distribution and transportation expenses were 4.6% of net sales for fiscal 2013. Corporate operating expenses for fiscal 2013 were 4.0% of net sales. The remaining operating expenses for fiscal 2013 were 1.3% of net sales. On January 23, 2013, Eric Schiffer, Jeff Gold and Howard Gold separated from their positions as Chief Executive Officer, Chief Administrative Officer and Executive Vice President of Special Projects, respectively. We recorded severance charges of $10.2 million and accelerated vesting of their stock options that resulted in additional $9.3 million of stock-based compensation expense in the fourth quarter of fiscal 2013. In addition, during the fourth quarter of fiscal 2013, we recorded $6.5 million in additional stock-based compensation associated with the valuation of the former executive put rights (see Note 11, “Stock-Based Compensation Plans” to our Consolidated Financial Statements).
Depreciation and amortization. During fiscal 2013, depreciation and amortization of intangibles were $56.8 million and $1.8 million, respectively. Depreciation was 3.4% of net sales and amortization was 0.1% of net sales. Depreciation and amortization expense in fiscal 2013 includes the increase in the net book value (“step-up”) in basis to fair value of our property and equipment and revaluation of intangible assets as a result of the Merger.
Operating income. Operating income was $58.3 million for fiscal 2013. Operating income was 3.5% of net sales.
Interest expense and loss on extinguishment of debt. Interest expense was $60.9 million, primarily reflecting debt service on borrowings used to finance the Merger. Loss on extinguishment of debt was $16.3 million relating to amendment of the First Lien Term Loan Facility in April 2012. The interest income for fiscal 2013 was not significant due to liquidation of our previously-held investment portfolio.
Interest income and other expense. Other expense of $0.4 million in fiscal 2013, primarily reflects realized losses on sale of investments. Interest income for fiscal 2013 was not significant due to liquidation of our previously-held investment portfolio.
(Benefit) provision for income taxes. The provision for income taxes was a benefit of $10.1 million in fiscal 2013. The effective tax rate for the fiscal 2013 was (53.1%). The effective combined federal and state income tax rates differ from the statutory rates due to the release of valuation allowance on the Texas margin tax credit carry-forward and benefit of federal hiring credits.
Net loss. As a result of the items discussed above, we recorded a net loss of $8.9 million. Net loss as a percentage of net sales was (0.5%) during fiscal 2013.
For the Period from January 15, 2012 to March 31, 2012 (Successor)
Net sales. Total net sales for the Successor period were $338.9 million, an 11-week period. Net retail sales for the Successor period were $329.4 million. Bargain Wholesale net sales were $9.5 million in the Successor period.
During the Successor period, we added six new stores: five in California and one in Texas. We did not close any stores during the Successor period. On March 31, 2012, we had 298 stores. Gross retail square footage as of March 31, 2012 was approximately 6.29 million.
Gross profit. During the Successor period, gross profit was $135.1 million. As a percentage of net sales, overall gross margin was 39.9% during the Successor period.
Operating expenses. During the Successor period, operating expenses were $110.5 million. As a percentage of net sales, operating expenses were 32.6% for the Successor period. Retail operating expenses for the Successor period were 21.5% of net sales. Distribution and transportation expenses were 4.6% of net sales for the Successor period. Corporate operating expenses for the Successor period were 3.2% of net sales. The remaining operating expenses for the Successor period were 3.3% of net sales. The Successor period included legal and professional fees of $10.6 million related to the Merger.
Depreciation and amortization. During the Successor period, depreciation and amortization of intangibles were $11.4 million and $0.4 million, respectively. Depreciation was 3.4% of net sales and amortization was 0.1% of net sales. Depreciation and amortization expense in the Successor period includes the step-up in basis to fair value of our property and equipment and revaluation of intangible assets as a result of the Merger.
Operating income. Operating income was $12.9 million for the Successor period. Operating income was 3.8% of net sales.
Other expense, net. Other expense was $16.1 million for the Successor period, which included $16.2 million of interest expense, reflecting debt service on borrowings used to finance the Merger. The interest income for the Successor period was not significant due to liquidation of a substantial part of our previously-held investment portfolio.
Provision for income taxes. The income tax provision in the Successor period was $2.1 million. The effective tax rate for the Successor period was (65.9%). The effective combined federal and state income tax rates are higher than the statutory rates due to non-deductibility of certain transaction costs associated with the Merger.
Net loss. As a result of the items discussed above, we recorded a net loss of $5.3 million. Net loss as a percentage of net sales was (1.6%) during the Successor period.
For the Period from April 3, 2011 to January 14, 2012 (Predecessor)
Net sales. Total net sales for the 2012 Predecessor period were $1,192.8 million, a 41-week period. Net retail sales for the 2012 Predecessor period were $1,158.7 million. Bargain Wholesale net sales were $34.1 million in the 2012 Predecessor period.
During the 2012 Predecessor period, we added seven new stores: three in California, two in Arizona, one in Nevada, and one in Texas. We did not close any stores in California during the Predecessor period.
Gross profit. During the 2012 Predecessor period, gross profit was $481.8 million. As a percentage of net sales, overall gross margin was 40.4% during the Predecessor period. Among gross profit components, cost of products sold was negatively impacted due to merchandise price increases and a shift in product mix.
Operating expenses. During the 2012 Predecessor period, operating expenses were $376.1 million. As a percentage of net sales, operating expenses were 31.5%. Retail operating expenses for the 2012 Predecessor period were 21.8% of net sales. Distribution and transportation expenses were 4.7% of net sales. Corporate operating expenses were 3.4% of net sales. Other operating expenses for the period were 1.7% of net sales. The 2012 Predecessor period included legal and professional fees of $15.2 million related to the Merger.
Depreciation and amortization. During the 2012 Predecessor period, depreciation and amortization was $21.9 million. Depreciation and amortization was 1.8% of net sales.
Operating income. Operating income was $83.8 million for the 2012 Predecessor period. Operating income as a percentage of net sales was 7.0%.
Other income/expense, net. Other expense was $0.3 million for the 2012 Predecessor period, of which $0.4 million was investment impairment charges related to credit losses on our auction rate securities and $0.4 million related to interest expense. The interest income for the 2012 Predecessor period was $0.3 million.
Provision for income taxes. The income tax provision in the 2012 Predecessor period was $33.7 million. The effective tax rate for the 2012 Predecessor period was 40.4%. The effective combined federal and state income tax rates are higher than the statutory rates due to non-deductibility of certain transaction costs associated the Merger, partially offset by tax credits and the effect of certain revenues and/or expenses that are not subject to taxation.
Net income. As a result of the items discussed above, we recorded a net income of $49.8 million. Net income as a percentage of net sales was 4.2%.
Fiscal Year Ended April 2, 2011 (Predecessor)January 30, 2015 (52 Weeks) Compared to Ten Months Ended January 31, 2014 (44 Weeks)
Net sales. Total net sales forincreased $398.2 million, or 26.0%, to $1,926.9 million in fiscal 20112015, a 52-week period, from $1,528.7 million in transition fiscal 2014, a 44-week period. The increase in total net sales was primarily due to the fact that there were $1,423.9eight more weeks in fiscal 2015 as compared to transition fiscal 2014. Net retail sales increased $395.2 million, a 53-week period.or 26.6%, to $1,881.9 million in fiscal 2015 from $1,486.7 million in transition fiscal 2014. Bargain Wholesale net sales increased by approximately $3.0 million, or 7.2%, to $45.1 million in fiscal 2015 from $42.0 million in transition fiscal 2014. Net retail sales for stores that were open at least 14 months in fiscal 20112015 were $1,380.4$1,737.3 million, representing a 0.4% increase in same-store sales over a comparable 52-week period of the prior year. The 0.4% increase in same-store sales was from higher average ticket. The full year effect of new stores opened in transition fiscal 2014 was $94.8 million and included the benefiteffect of one additional week includednew stores opened in the fourth quarter of fiscal 2011, which contributed an additional $26.9 million of retail sales. Bargain Wholesale net sales were $43.5 million, and included the benefit of one additional week, which contributed and an additional $1.0 million of retail sales.2015 was $43.4 million.
During fiscal 2011,2015, we added eleven40 net new stores: six32 in California, two in Arizona, three in Nevada and three in Texas. We closed one store duringAt the end of fiscal 2011. On April 2, 2011,2015, we had 285 stores.383 stores compared to 343 stores at the end of transition fiscal 2014. Gross retail square footage as of April 2, 2011January 30, 2015 and January 31, 2014 was approximately 6.05 million.7.89 million and 7.14 million, respectively. For 99¢ Only Storesstores open all of fiscal 2011,2015, the average net sales per estimated saleable square foot based on a 52-week period, was $291 and the average annual net sales per store were $4.9 million, including the Texas stores open for the full year. Western States stores net sales averaged $5.1$5.4 million per store and $307$328 per square foot. Texas stores open for a full year averaged net sales of $3.4 million per store and $181 perestimated saleable square foot.
Gross profit. During fiscal 2011, grossGross profit was $581.1 million.$618.1 million in fiscal 2015 compared to $495.7 million in transition fiscal 2014. As a percentage of net sales, overall gross margin was 40.8% duringdecreased to 32.1% in fiscal 2011.2015, from 32.4% in transition fiscal 2014. Among the gross profit components, cost of products sold decreased by 10 basis points compared to transition fiscal 2014. Inventory shrinkage increased 60 basis points compared to transition fiscal 2014 (as described in Note 1 to the Consolidated Financial Statements). Gross profit in transition fiscal 2014 was negatively impacted by merchandise price increasesan excess and shiftobsolete inventory reserve charge of $9.6 million representing 60 basis points in product mix. Freightthe third quarter of transition fiscal 2014 (also as described in Note 1 to the Consolidated Financial Statements). Gross profit in fiscal 2015 was negatively impacted by an increase in distribution and transportation expenses of 40 basis points primarily due to higher labor costs were higher but were partially offset by improved shrinkage as a percentwell as the addition of netan incremental warehouse facility for part of fiscal 2015. The remaining change was due to other less significant items included in cost of sales.
Operating expenses. Selling, general and administrative expenses.During fiscal 2011, operating Selling, general and administrative expenses were $436.0 million.$546.3 million in fiscal 2015 compared to $481.4 million in transition fiscal 2014. As a percentage of net sales, operatingselling, general and administrative expenses were 30.6%decreased to 28.3% for fiscal 2011. Retail operating2015 from 31.5% for transition fiscal 2014. The 320 basis point decrease in selling, general and administrative expenses for fiscal 2011 were 22.5% of net sales. Distribution and transportation expenses were 4.7%as a percentage of net sales forwas primarily due to an increase in workers’ compensation accrual of $38.4 million, representing 250 basis points in transition fiscal 2011. Corporate operating2014 (as described in Note 10 to the Consolidated Financial Statements) and to lower payroll-related and legal expenses forin fiscal 20112015. These improvements were 3.2% of net sales. The remaining operating expenses for fiscal 2011 were 0.3% of net sales. Operating expenses were positively impactedpartially offset by improvements in labor productivity, lowerhigher stock-based compensation expense of $2.8 million in fiscal 2015 compared to negative stock-based compensation expense of $4.8 million in transition fiscal 2014 (attributable to a decrease in the fair value of former executive put rights, as described in Note 11 to the Consolidated Financial Statements) and proceeds fromhigher rent as percentage of net sales in fiscal 2015. Selling, general and administrative expenses were also favorably impacted by lower depreciation expense as a legal settlement from a third party administrator related to workers’ compensation.
Depreciation and amortization. During fiscal 2011, depreciation and amortization was $27.6 million. Depreciation was 1.9%percentage of net sales.
Operating income. Operating income was $117.5$71.8 million for fiscal 2011.2015 compared to operating income of $14.2 million for transition fiscal 2014. Operating income as a percentage of net sales was 8.3%.
Other income, net. Other income was $0.7 million for fiscal 2011, which included $0.1 million investment impairment charge related to credit losses on our available for sale securities. The interest income was $0.9 million and interest expense was $0.1 million for fiscal 2011.
Provision for income taxes. The income tax provision for fiscal 2011 was $43.9 million. The effective tax rate was 37.1% for fiscal 2011. The effective combined federal and state income tax rates are less than the statutory rate due to tax credits and the effect of certain revenues and/or expenses that not subject to taxation.
Net income. As a result of the items discussed above, we recorded a net income of $74.3 million3.7% in fiscal 2011. Net income as a percentage of net sales was 5.2% during fiscal 2011.
Supplemental Management’s Discussion and Analysis - Fiscal Year Ended March 30, 2013 Compared to Pro Forma Fiscal Year Ended March 31, 2012
Net sales. Total net sales increased $137.0 million, or 8.9%, to $1,668.7 million in fiscal 2013, a 52-week period, from $1,531.7 million in pro forma fiscal 2012, a 52-week period. Net retail sales increased $132.6 million, or 8.9%, to $1,620.7 million in fiscal 2013 from $1,488.1 million in pro forma fiscal 2012. Bargain Wholesale net sales increased by approximately $4.4 million, or 10.0%, to $48.0 million in fiscal 2013 from $43.6 million in pro forma fiscal 2012. Of the $132.6 million increase in net retail sales, $63.1 million was due to a 4.3% increase in same-store sales for all stores open at least 15 months in fiscal 2013 and 2012, which includes an approximately 50 basis point benefit of two Easter selling seasons that occurred in early April 2012 and late March 2013,2015 compared to one Easter selling season0.9% in pro formatransition fiscal 2012.2014. The same-store sales increase was attributable to an approximately 2.1% increase in transaction counts and an increase in average ticket size by approximately 2.1%. The full year effect of stores opened in pro forma fiscal 2012 increased sales by $38.2 million and the effect of new stores opened during fiscal 2013 increased net retail sales by $34.5 million. The increase in sales was partially offset by a decrease in sales of approximately $3.2 million due to the effect of closing one store in California upon expiration of its lease during fiscal 2013.
During fiscal 2013, we added 19 new stores: 14 in California, three in Nevada and two in Texas. We closed one store in California during fiscal 2013. At the end of fiscal 2013, we had 316 stores compared to 298 as of the end of fiscal 2012. Gross retail square footage as of March 30, 2013 and March 31, 2012 was 6.63 million and 6.29 million, respectively. For 99¢ Only Stores open all of fiscal 2013, the average net sales per estimated saleable square foot, on a comparable 52-week period, was $321 and the average annual net sales per store were $5.3 million, including the Texas stores open for the full year.
Gross profit. Gross profit increased $23.5 million, or 3.8%, to $640.4 million in fiscal 2013 from $616.9 million in pro forma fiscal 2012. As a percentage of net sales, overall gross margin decreased to 38.4% in fiscal 2013 from 40.3% in pro forma fiscal 2012. Among gross profit components, cost of products sold increased by 50 basis points compared to pro forma fiscal 2012, primarily due to a shift in product mix and, to a lesser extent, merchandise price increases. Gross profit was also negatively impacted by a revision to our excess and obsolescence methodology due to a change in our inventory purchasing philosophy. As a result of this change, we increased our excess and obsolescence reserves by $9.1 million in the fourth quarter of fiscal 2013 representing 60 basis points. Furthermore, inventory shrinkage increased by 70 basis points compared to pro forma fiscal 2012, primarily due to higher inventory shrinkage based on the store physical inventories taken during fiscal 2013 and the resulting increase in our inventory shrinkage reserves. The remaining change was made up of increases in other less significant items included in cost of sales.
Operating expenses. Operating expenses increased by $62.0 million, or 13.4%, to $523.5 million in fiscal 2013 from $461.5 million in pro forma fiscal 2012. As a percentage of net sales, operating expenses increased to 31.4% for fiscal 2013 from 30.1% for pro forma fiscal 2012. Of the 130 basis point increase in operating expenses as a percentage of net sales, retail operating expenses decreased by 30 basis points, distribution and transportation costs decreased by ten basis points, corporate expenses increased by 60 basis points, and other items increased by 110 basis points as described below.
Retail operating expenses for fiscal 2013 decreased as a percentage of net sales by 30 basis points to 21.5% of net sales, compared to 21.8% of net sales for pro forma fiscal 2012. The decrease was primarily due to both lower utilities expenses, as well as lower payroll-related expenses (primarily due to improved store labor productivity and leveraging positive same-store sales.)
Distribution and transportation expenses for fiscal 2013 decreased as a percentage of net sales by ten basis points to 4.6% of net sales, compared to 4.7% as a percentage of net sales for pro forma fiscal 2012.
Corporate operating expenses for fiscal 2013 increased as a percentage of net sales by 60 basis points to 4.0% of net sales, compared to 3.4% of net sales for pro forma fiscal 2012. The increase as a percentage of net sales was primarily due to payroll-related severance charges of $10.2 million incurred in the fourth quarter of fiscal 2013 in connection with changes in management.
The remaining operating expenses for fiscal 2013 increased as percentage of net sales by 110 basis points to 1.3% of net sales, compared to 0.2% of net sales for pro forma fiscal 2012. In fiscal 2013, we recorded stock-based compensation expense of $18.4 million (including $9.9 million of accelerated vesting expense for four officers who separated from their positions in the fourth quarter of fiscal 2013 and $6.5 million related to former executive officer put rights) compared to stock-based compensation of $2.0 million in pro forma fiscal 2012 (see Note 11, “Stock-Based Compensation Plans” to our Consolidated Financial Statements).
Depreciation and amortization. Depreciation increased $14.3 million, or 33.7%, to $56.8 million in fiscal 2013 from $42.5 million in pro forma fiscal 2012. The increase was primarily a result of adding new depreciable assets from new store openings, full year depreciation impact of stores opened in pro forma fiscal 2012 and adding new depreciable assets for completed information technology projects. Depreciation as a percentage of net sales was 3.4% in fiscal 2013 and 2.8% for the pro forma fiscal 2012. Amortization was $1.8 million in both fiscal 2013 and pro forma fiscal 2012.
Operating income. Operating income was $58.3 million for fiscal 2013 compared to operating income of $111.1 million for pro forma fiscal 2012. Operating income as a percentage of net sales was 3.5% in fiscal 2013 compared to 7.3% in pro forma fiscal 2012. The decrease in operating income as a percentage of net sales was primarily due to changes in gross margin depreciation and operating expenses, as discussed above.
Interest expense and loss on extinguishment of debt. Interest expense was $60.9$62.7 million in fiscal 2013,2015 compared to $50.8 million in transition fiscal 2014, primarily reflecting debt service on borrowings useddue to finance the Merger. Lossfact that there were eight more weeks in fiscal 2015. Transition fiscal 2014 reflects a loss on extinguishment of debt was $16.3$4.4 million, relating to amendment ofamendments to the First Lien Term Loan Facility in April 2012. October 2013.
Provision (benefit) for income taxes. The provision for income taxes was $3.6 million in fiscal 2015 compared to a benefit of $28.5 million in in transition fiscal 2014, primarily due to pre-tax income in fiscal 2015 compared to a pre-tax loss in transition fiscal 2014. The effective tax rate for fiscal 2015 was 39.6% compared to an effective tax rate of (69.5)% for transition fiscal 2014. The effective combined federal and state income tax rates for fiscal 2015 differ from the statutory rates primarily due to the non-deductibility of certain costs. The effective combined federal and state income tax rates for transition fiscal 2014 differ from the statutory rates due to the benefit of federal hiring credits, the release of valuation allowance on the California enterprise zone credit carry-forward and other discrete items recognized during transition fiscal 2014 (as described in Note 5 to the Consolidated Financial Statements).
Net income. As a result of the items discussed above, net income for fiscal 2015 was $5.5 million compared to a net loss of $12.5 million for transition fiscal 2014. Net income as a percentage of net sales was 0.3% in fiscal 2015 compared to net loss as a percentage of sales of (0.8)% in transition fiscal 2014.
Ten Months Ended January 31, 2014 (44 Weeks) Compared Fiscal Year Ended March 30, 2013 (52 Weeks)
Net sales. Total net sales decreased $140.0 million, or 8.4%, to $1,528.7 million in transition fiscal 2014, a 44-week period, from $1,668.7 million in fiscal 2013, a 52-week period. The decrease in total net sales was primarily due to the fact that there were eight fewer weeks in transition fiscal 2014 as compared to fiscal 2013. Net retail sales decreased $134.0 million, or 8.3%, to $1,486.7 million in transition fiscal 2014 from $1,620.7 million in fiscal 2013. Bargain Wholesale net sales decreased by approximately $6.0 million, or 12.3%, to $42.0 million in transition fiscal 2014 from $48.0 million in fiscal 2013. Net retail sales for stores that were open at least 15 months in transition fiscal 2014 were $1,343.1 million, representing 3.7% increase in same-store sales over a comparable 43-week period of the prior year. The 3.7% increase in same-store sales was from increased transactions and higher average ticket. The full year effect of new stores opened in fiscal 2013 was $68.0 million and effect of new stores opened in transition fiscal 2014 was $47.0 million. We closed one store in transition fiscal 2014 which contributed $0.7 million in sales.
During transition fiscal 2014, we added 27 net new stores: 13 in California, five in Arizona, two in Nevada and seven in Texas. At the end of transition fiscal 2014, we had 343 stores compared to 316 stores at the end of fiscal 2013. Gross retail square footage as of January 31, 2014 and March 30, 2013 was 7.14 million and 6.63 million, respectively. As of January 25, 2014, on a trailing 52-week period basis, our stores open for the full year averaged net sales of $5.4 million per store and $330 per estimated saleable square foot.
Gross profit. Gross profit was $495.7 million in transition fiscal 2014 compared to $551.6 million in fiscal 2013. As a percentage of net sales, overall gross margin decreased to 32.4% in transition fiscal 2014, from 33.1% in fiscal 2013. Among the gross profit components, cost of products sold decreased by 10 basis points compared to fiscal 2013, primarily attributable to a shift in the product mix toward lower margin merchandise. Gross profit was negatively impacted by an excess and obsolete inventory reserve charge of $9.6 million in the third quarter of transition fiscal 2014, representing 60 basis points (as described in Note 1 to our Consolidated Financial Statements), compared to a $9.1 million inventory reserve in fiscal 2013, representing 60 basis points. Gross profit in transition fiscal 2014 was negatively impacted by an increase in distribution and transportation expenses of 40 basis points primarily due to higher labor costs and increases in rent expense for additional warehouse space. The remaining change was due to other less significant items included in cost of sales.
Selling, general and administrative expenses. Selling, general and administrative expenses were $481.4 million in transition fiscal 2014 compared to $493.3 million in fiscal 2013. As a percentage of net sales, selling, general and administrative expenses increased to 31.5% for transition fiscal 2014 from 29.6% for fiscal 2013. The 190 basis point increase in selling, general and administrative expenses as a percentage of net sales was primarily due to an increase in workers’ compensation accrual of $38.4 million, representing 250 basis points in transition fiscal 2014 (as described in Note 10 to the Consolidated Financial Statements) and to higher legal and outside service fees in transition fiscal 2014. This increase in selling, general and administrative expenses as a percentage of sales was partially offset by lower stock-based compensation expense attributable to a decrease in the fair value of former executive put rights, that resulted in a negative stock-based compensation expense of $4.8 million in transition fiscal 2014, compared to an expense of $18.4 million for fiscal 2013. In fiscal 2013, we recorded stock-based compensation expense of $18.4 million (including $9.9 million of accelerated vesting expense for three executive officers and one employee who separated from their positions in the fourth quarter of fiscal 2013 and $6.5 million related to former executive officers’ put rights) (see Note 11 to the Consolidated Financial Statements). Additionally, the increase as a percentage of sales was partially offset by higher payroll-related severance charges of $10.2 million in fiscal 2013 compared to restructuring charges of $4.4 million in transition fiscal 2014 related to a third quarter of transition fiscal 2014 reduction in force.
Operating income. Operating income was $14.2 million for transition fiscal 2014 compared to operating income of $58.3 million for fiscal 2013. Operating income as a percentage of net sales was 0.9% in transition fiscal 2014 compared to 3.5% in fiscal 2013. The decrease in operating income as a percentage of net sales was primarily due to changes in gross margin and selling, general and administrative expenses, as discussed above.
Interest expense and loss on extinguishment of debt. Interest expense was $69.6$50.8 million in pro formatransition fiscal 2014 compared to $60.9 million in fiscal 2013, primarily due to the fact that there were eight fewer weeks in transition fiscal 2014. Loss on extinguishment of debt was $4.4 million for transition fiscal 2014 and $16.3 million for fiscal 2013, relating to amendments to the First Lien Term Loan Facility (as defined below) in October 2013 and April 2012, reflecting debt service on borrowings used to finance the Merger.respectively.
Interest income and other expenses. Interest income for transition fiscal 2014 was not significant due to liquidation of our previously-held investment portfolio. Interest income was $0.3 million for both fiscal 2013 and pro forma fiscal 2012.2013. Other expense of $0.4 million in fiscal 2013, primarily reflects realized losses on sale of investments. In pro forma fiscal 2012 we recorded $0.4 million of investment impairment charges on our auction rate securities.
(Benefit) provision for income taxes. The provision for income taxes was a benefit of $28.5 million in transition fiscal 2014 compared to a benefit of $10.1 million in fiscal 2013, compared to a provision of $19.6 million in pro forma fiscal 2012, due to a pre-tax losslosses in fiscal 2013.both periods. The effective tax rate for transition fiscal 20132014 was (53.1%)(69.5)% compared to an effective tax rate of 47.1%(53.1)% for pro forma fiscal 2012.2013. The effective combined federal and state income tax rates for transition fiscal 2014 differ from the statutory rates due to the benefit of federal hiring credits, the release of valuation
allowance on the California enterprise zone credit carry-forward and other discrete items recognized during the transition fiscal 2014 (as described in Note 5 to the Consolidated Financial Statements). The effective combined federal and state income tax rates for fiscal 2013 differ from the statutory rates due to the release of valuation allowance on the Texas margin tax credit carry-forward and benefit of federal hiring credits. The pro forma fiscal 2012 effective combined federal and state income tax rates are higher than the statutory rates due to non-deductibility of certain transaction costs associated with the Merger.
Net income/loss. As a result of the items discussed above, net income decreased $30.9loss for transition fiscal 2014 was $12.5 million compared to a net loss of $8.9 million in fiscal 2013 from $22.0 million in pro forma fiscal 2012.2013. Net loss as a percentage of net sales was (0.5%)(0.8)% in transition fiscal 2013 and2014 compared to net incomeloss as a percentage of sales of 1.4%(0.5)% in pro forma fiscal 2012.2013.
Supplemental Management’s Discussion and Analysis - Pro Forma Fiscal Year Ended March 31, 2012 Compared to Pro Forma Fiscal Year Ended April 2, 2011
Net sales. Total net sales increased $107.8 million, or 7.6%, to $1,531.7 million in pro forma fiscal 2012, a 52-week period, from $1,423.9 million in pro forma fiscal 2011, a 53-week period. Net retail sales increased $107.7 million, or 7.8%, to $1,488.1 million in pro forma fiscal 2012 from $1,380.4 million in pro forma fiscal 2011. Bargain Wholesale net sales increased approximately by $0.1 million, or 0.2%, to $43.6 million in pro forma fiscal 2012 from $43.5 million in pro forma fiscal 2011. Of the $107.7 million increase in net retail sales, $97.9 million was due to a 7.3% increase in same-store sales. The same-store sales increase was attributable to approximately 4.9% increase in transaction counts and increase in average ticket size by approximately 2.3% to $9.81 from $9.58. The full year pro forma fiscal 2012 effect of stores opened in fiscal 2011 increased sales by $24.9 million and the effect of 13 new stores opened during pro forma fiscal 2012 increased net retail sales by $19.9 million, based on a 52-week period. The increase in retail sales was partially offset by the impact of one additional week included in the fourth quarter of fiscal 2011, resulting in $26.9 million of additional retail sales, and by a decrease in sales of approximately $2.0 million due to the effect of the closing of one store in California upon expiration of its lease during pro forma fiscal 2011. The increase in Bargain Wholesale net sales was partially offset by the extra week of $1.0 million in pro forma fiscal 2011.
During pro forma fiscal 2012, we added 13 new stores: eight in California, two in Arizona, one in Nevada, and two in Texas. We did not close any stores in California during pro forma fiscal 2012. As of March 31, 2012, we had 298 stores compared to 285 as of the end of fiscal 2011. Gross retail square footage March 31, 2012 and April 2, 2011 was approximately 6.29 million and 6.05 million, respectively. For 99¢ Only Stores open during all of pro forma fiscal 2012, the average net sales per estimated saleable square foot, on a comparable 52-week period, was approximately $309 and the average annual net sales per store were approximately $5.2 million, including the Texas stores open for the full year.
Gross profit. Gross profit increased $35.8 million, or 6.2%, to $616.9 million in pro forma fiscal 2012 from $581.1 million in pro forma fiscal 2011. As a percentage of net sales, overall gross margin decreased to 40.3% in pro forma fiscal 2012 from 40.8% in pro forma fiscal 2011. Among gross profit components, cost of products sold increased by 50 basis points due to merchandise price increases and a shift in product mix. Freight costs for pro forma fiscal 2012 increased by 20 basis points compared to pro forma fiscal 2011. For pro forma fiscal 2012 and pro forma fiscal 2011, shrinkage was flat. The remaining change was made up of decreases in other less significant items included in cost of sales.
Operating expenses. Operating expenses increased by $23.3 million, or 5.3%, to $461.5 million in pro forma fiscal 2012 from $438.2 million in fiscal pro forma 2011. As a percentage of net sales, operating expenses decreased to 30.1% for fiscal pro forma 2012 from 30.8% for fiscal pro forma 2011. Of the 70 basis point decrease in operating expenses as a percentage of net sales, retail operating expenses decreased by 80 basis points, distribution and transportation costs were flat, corporate expenses increased by ten basis points, and other items were flat as described below.
Retail operating expenses for pro forma fiscal 2012 decreased as a percentage of net sales by 70 basis points to 21.8% of net sales, compared to 22.5% of net sales for pro forma fiscal 2011. The majority of the decrease was due to payroll-related expenses and occupancy expenses, primarily resulting from increases in same-store sales. These decreases were partially offset by a slight increase in repairs and maintenance expenses as a percentage of net sales.
Distribution and transportation expenses were flat at 4.7% as a percentage of net sales for both pro forma fiscal 2012 and pro forma fiscal 2011.
Corporate operating expenses for fiscal pro forma 2012 increased as a percentage of net sales by ten basis points to 3.4% of net sales, compared to 3.3% of net sales for pro forma fiscal 2011. The increase as a percentage of net sales was primarily due to legal costs which were partially offset by decreases in payroll and payroll-related expenses.
The remaining operating expenses for pro forma fiscal 2012 were flat as a percentage of net sales at 0.2% of net sales compared to pro forma fiscal 2011 due to lower stock-based compensation costs in pro forma fiscal 2012, offset by the proceeds from a legal settlement from a third party administrator related to workers’ compensation of approximately $2.2 million which was received in pro forma fiscal 2011.
Depreciation and amortization. Depreciation increased $3.2 million, or 8.0%, to $42.5 million in pro forma fiscal 2012 from $39.3 million in pro forma fiscal 2011. The increase was primarily the result of adding new depreciable assets from new store openings. Depreciation as a percentage of net sales was 2.8% for both pro forma fiscal 2012 and pro forma fiscal 2011. Amortization was $1.8 million in both pro forma fiscal 2012 and pro forma fiscal 2011.
Operating income. Operating income was $111.1 million for pro forma fiscal 2012 compared to operating income of $101.9 million for pro forma fiscal 2011. Operating income as a percentage of net sales was 7.3% in pro forma fiscal 2012 compared to 7.2% in pro forma fiscal 2011. This was primarily due to the changes in operating expenses partially offset changes in gross margin discussed above.
Interest expense. Interest expense in pro forma fiscal years 2012 and 2011 was $69.6 million and $70.5 million, respectively, reflecting debt service on borrowings used to finance the Merger.
Interest income and other expenses. Interest income for pro forma fiscal 2012 was $0.3 million compared to the interest income of $0.9 million for the pro forma fiscal 2011. Investment impairment charges for pro forma fiscal 2012 were $0.4 million compared to $0.1 million for pro forma fiscal 2011.
Provision for income taxes. The income tax provision in pro forma fiscal 2012 was $19.6 million compared to $14.2 million in pro forma fiscal 2011, due to the increase in pre-tax income. The effective tax rate for pro forma fiscal 2012 was 47.1% compared to an effective tax rate of 44.1% for pro forma fiscal 2011. The effective combined federal and state income tax rates for pro forma fiscal 2012 and 2011 are higher than the statutory rates in each period due to non-deductible tax differences arising out of the Merger.
Net income. As a result of the items discussed above, pro forma net income increased $4.0 million, or 22.5%, to $22.0 million in pro forma fiscal 2012 from $18.0 million in pro forma fiscal 2011. Net income as a percentage of net sales was 1.4% in pro forma fiscal 2012 and 1.3% in pro forma fiscal 2011.
Unaudited Pro Forma Condensed Consolidated Financial Information
The following unaudited pro forma condensed consolidated statements of operations have been developed by applying pro forma adjustments to our audited statement of operations for the fiscal year ended April 2, 2011 and our Consolidated Financial Statements for the Predecessor period from April 3, 2011 through January 14, 2012, and for the Successor period from January 15, 2012 to March 31, 2012. The unaudited pro forma condensed consolidated statements of operations for the fiscal year ended April 2, 2011 and fiscal year ended March 31, 2012 gives effect to the Merger as if it had occurred on March 29, 2010.
The unaudited pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable under the circumstances. The unaudited pro forma condensed consolidated financial data is presented for informational purposes only. The unaudited pro forma condensed consolidated financial data does not purport to represent what our results of operations would have been had the Merger actually occurred on the dates indicated and does not purport to project our results of operations for any future period. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the information contained in other sections of this Report including “Item 6. Selected Financial Data,” in our historical audited consolidated financial statements and related notes thereto, and other sections of this “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Report. All pro forma adjustments and their underlying assumptions are described more fully in the notes to our unaudited pro forma condensed consolidated statements of operations.
The unaudited pro forma condensed consolidated financial information has been prepared to give effect to the Merger including the accounting for the acquisition of our business as a purchase business combination, in accordance with ASC 805, “Business Combinations.”
The unaudited pro forma condensed consolidated statements of operations do not reflect non-recurring charges that have been incurred in connection with the Merger, including (i) certain non-recurring expenses related to the Merger of approximately $25.8 million, and (ii) the stock-based compensation expense of approximately $1.0 million relating to the accelerated vesting of stock based awards to management and associates that vested as a result of the Merger.
|
| For the Fiscal Year Ended March 31, 2012 |
| ||||||||||
|
| Historical |
| Historical |
| Pro Forma |
| Pro Forma |
| ||||
|
| (Amounts in thousands) |
| ||||||||||
Net Sales: |
|
|
|
|
|
|
|
|
| ||||
99¢ Only Stores |
| $ | 329,361 |
| $ | 1,158,733 |
| $ | — |
| $ | 1,488,094 |
|
Bargain Wholesale |
| 9,555 |
| 34,047 |
| — |
| 43,602 |
| ||||
Total sales |
| 338,916 |
| 1,192,780 |
| — |
| 1,531,696 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cost of sales (excluding depreciation and amortization expense shown separately below) |
| 203,775 |
| 711,002 |
| — |
| 914,777 |
| ||||
Gross profit |
| 135,141 |
| 481,778 |
| — |
| 616,919 |
| ||||
Selling, general and administrative expenses: |
|
|
|
|
|
|
|
|
| ||||
Operating expenses |
| 110,477 |
| 376,122 |
| (25,069 | )(a) | 461,530 |
| ||||
Depreciation |
| 11,361 |
| 21,855 |
| 9,272 | (b) | 42,488 |
| ||||
Amortization of intangible assets |
| 374 |
| 14 |
| 1,376 | (c) | 1,764 |
| ||||
Total selling, general and administrative expenses |
| 122,212 |
| 397,991 |
| (14,421 | ) | 505,782 |
| ||||
Operating income |
| 12,929 |
| 83,787 |
| 14,421 |
| 111,137 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Other (income) expenses: |
|
|
|
|
|
|
|
|
| ||||
Interest income |
| (29 | ) | (291 | ) | — |
| (320 | ) | ||||
Interest expense |
| 16,223 |
| 381 |
| 53,025 | (d) | 69,629 |
| ||||
Other-than-temporary investment impairment due to credit loss |
| — |
| 357 |
| — |
| 357 |
| ||||
Other |
| (75 | ) | (107 | ) | — |
| (182 | ) | ||||
Total other expense, net |
| 16,119 |
| 340 |
| 53,025 |
| 69,484 |
| ||||
(Loss) income before provision for income taxes |
| (3,190 | ) | 83,447 |
| (38,604 | ) | 41,653 |
| ||||
Provision for income taxes |
| 2,103 |
| 33,699 |
| (16,178 | )(e) | 19,624 |
| ||||
Net (loss) income |
| $ | (5,293 | ) | $ | 49,748 |
| $ | (22,426 | ) | $ | 22,029 |
|
|
| For the Fiscal Year Ended April 2, 2011 | ||||||||
|
| Historical |
| Pro Forma |
| Pro Forma |
| |||
|
| (Amounts in thousands) | ||||||||
Net Sales: |
|
|
|
|
|
|
| |||
99¢ Only Stores |
| $ | 1,380,357 |
| $ | — |
| $ | 1,380,357 |
|
Bargain Wholesale |
| 43,521 |
| — |
| 43,521 |
| |||
Total sales |
| 1,423,878 |
| — |
| 1,423,878 |
| |||
|
|
|
|
|
|
|
| |||
Cost of sales (excluding depreciation and amortization expense shown separately below) |
| 842,756 |
| — |
| 842,756 |
| |||
Gross profit |
| 581,122 |
| — |
| 581,122 |
| |||
Selling, general and administrative expenses: |
|
|
|
|
|
|
| |||
Operating expenses |
| 436,034 |
| 2,136 | (a) | 438,170 |
| |||
Depreciation |
| 27,587 |
| 11,751 | (b) | 39,338 |
| |||
Amortization of intangible assets |
| 18 |
| 1,748 | (c) | 1,766 |
| |||
Total selling, general and administrative expenses |
| 463,639 |
| 15,635 |
| 479,274 |
| |||
Operating income |
| 117,483 |
| (15,635 | ) | 101,848 |
| |||
|
|
|
|
|
|
|
| |||
Other (income) expenses: |
|
|
|
|
|
|
| |||
Interest income |
| (865 | ) | — |
| (865 | ) | |||
Interest expense |
| 77 |
| 70,399 | (d) | 70,476 |
| |||
Other-than-temporary investment impairment due to credit loss |
| 129 |
| — |
| 129 |
| |||
Other |
| (82 | ) | — |
| (82 | ) | |||
Total other (income) expense, net |
| (741 | ) | 70,399 |
| 69,658 |
| |||
Income before provision for income taxes |
| 118,224 |
| (86,034 | ) | 32,190 |
| |||
Provision for income taxes |
| 43,916 |
| (29,713 | )(e) | 14,203 |
| |||
Net income (loss) |
| $ | 74,308 |
| $ | (56,321 | ) | $ | 17,987 |
|
(a)Represents adjustments to increase historical expenses for ongoing expenses incurred in connection with the Merger and adjustments to eliminate one-time historical expenses incurred in connection with the Merger (in thousands):
|
| Fiscal Year Ended |
| Fiscal Year Ended |
| ||
|
|
|
|
|
| ||
Credit facility annual administration fee (i) |
| $ | 158 |
| $ | 200 |
|
Favorable/unfavorable lease amortization, net (ii) |
| 155 |
| 182 |
| ||
Executive compensation (iii) |
| 583 |
| 754 |
| ||
Rent expenses (renegotiated leases) (iv) |
| 788 |
| 1,000 |
| ||
Subtotal — ongoing expenses |
| 1,684 |
| 2,136 |
| ||
One-time merger costs (v) |
| (26,753 | ) | — |
| ||
Total operating expenses |
| $ | (25,069 | ) | $ | 2,136 |
|
(1)Represents adjustments to the predecessor period from April 3, 2011 to January 14, 2012, as the successor period from January 15, 2012 to March 31, 2012 already includes these adjustments.
(i)Represents adjustments to administrative fees associated with the First Lien Term Facility and the ABL Facility in connection with the Merger.
(ii)Represents adjustments resulting from the amortization of favorable lease assets and unfavorable lease liability recorded in connection with the Merger, amortized on a straight-line basis over the remaining lease terms of each lease.
(iii)Represents adjustments to compensation expense resulting from new executive salaries of certain named executives based on new employment arrangements in connection with the Merger.
(iv)Represents adjustments resulting from the renegotiation of certain leases with the Rollover Investors and their affiliates in connection with the Merger.
(v)Represents adjustments to eliminate one-time historical expenses incurred in connection with the Merger, principally legal and financial advisory fees.
(b)Represents adjustments resulting from the step-up of depreciable property and equipment of approximately $150 million depreciated on a straight-line basis over their respective remaining useful lives.
(c)Represents adjustments resulting from the increase in the estimated fair market values of finite-lived intangible assets. Finite-lived intangibles assets include the Rinso and Halsa private label brands which will be amortized over a remaining useful life of 20 years and the Bargain Wholesale customer relationships which will be amortized over a remaining useful life of 12 years. The useful lives of these finite-lived intangible assets were based on the expected future cash flows associated with these assets. We based the remaining useful lives for these finite-lived intangible assets at the point in time we expected to realize substantially all of the benefit of projected future cash flows.
(d)Represents the following adjustments to interest expense, net (in thousands):
|
| Fiscal Year Ended |
| Fiscal Year Ended |
| ||
|
|
|
|
|
| ||
Pro forma cash interest expense (i) |
| $ | 48,160 |
| $ | 65,864 |
|
Pro forma deferred financing costs amortization expense (i) |
| 4,865 |
| 4,535 |
| ||
Less: interest expense, historical (ii) |
| — |
| — |
| ||
Additional expense |
| $ | 53,025 |
| $ | 70,399 |
|
(1)Represents adjustments to the predecessor period from April 3, 2011 to January 14, 2012, as the successor period from January 15, 2012 to March 31, 2012 already includes these adjustments.
(i)Reflects the adjustments to interest expense as a result of the increase in annual interest expense associated with borrowings under the First Lien Term Facility and the issuance of Senior Notes, including the amortization of deferred financing costs associated with Senior Notes, the First Lien Term Facility and the ABL Facility and accretion of the original issue discount (“OID”) associated with the First Lien Term Facility. The deferred financing costs and OID is being recognized over the respective terms of the debt agreements using the effective interest method.
(ii)Historical interest expense has not been adjusted for interest income as amounts are not material and has not been adjusted for interest related to tax matters.
(e)To reflect the tax effect of the pro forma adjustments, using a combined federal and state statutory tax rate of approximately 40%, and excludes pro forma adjustments that result in no tax benefit, including non-deductible depreciation expenses and one-time historical expenses incurred in connection with the Merger.
Effects of Inflation
During fiscal 2015, transition fiscal 2014 and fiscal 2013, inflation did not have a material impact on our overall operations. We experienced increases in health care costs, fuel costs and some vendor prices during the Predecessor and Successor periods of fiscal 2012. Increases in various costs due to future inflation may impact our operating results to the extent that such increases cannot be passed along to our customers. See Item 1A, “Risk Factors—Risks Related to Our Business—Inflation may affect our ability to keep pricing almost all of our merchandise at 99.99¢ or less.”
Liquidity and Capital Resources
We historically funded our operations principally from cash provided by operations, short-term investments and cash on hand, and until the Merger, did not generally rely upon external sources of financing. After the Merger, ourOur capital requirements consist primarily of purchases of inventory, expenditures related to new store openings, investments in information technology and supply chain infrastructure, working capital requirements for new and existing stores, including lease obligations, and debt service requirements. Our primary sources of liquidity are the net cash flow from operations, which we believe will be sufficient to fund our regular operating needs and principal and interest payments on our indebtedness, together with availability under our ABL Facility (as defined below) for at least the next 12 months. We currently do not intend to use the availability under our ABL Facility to fund our capital needs in fiscal 2014; however, depending on the exact timing of budgeted capital expenditures, we may borrow under our ABL Facility for short-term capital requirements in future periods. We do not expect to fund basic working capital needs with our ABL Facility; as such, availabilityAvailability under our ABL Facility is not expected to materially affect our ability to make immediate buying decisions, willingness to take on large volume purchases or ability to pay cash or accept abbreviated credit terms.
As of MarchJanuary 30, 2013,2015, we held $45.5$12.5 million in cash, and our total indebtedness was $758.3$907.5 million, consisting of borrowings under our First Lien Term Loan Facility of $508.3$600.5 million, borrowings under the ABL Facility of $57.0 million and $250$250.0 million of our Senior Notes. We have an additional $175 million of available borrowingsAvailability under ourthe ABL Facility (subject to the borrowing base) was $115.5 million and, subject to certain limitations and the satisfaction of certain conditions, we arewere also permitted to incur up to an aggregate of $200$100 million of additional borrowings under incremental facilities in our ABL Facility and First Lien Term Loan Facility. As of March 30, 2013, availability under the ABL Facility is subject to the borrowing base of $134.0 million. We also have, and will continue to have, significant lease obligations. As of March 30, 2013,January 31, 2014, our minimum annual rental obligations under long-term operating leases for fiscal 20142015 are $51.7$70.6 million. These obligations are significant and could affect our ability to pursue significant growth initiatives, such as strategic acquisitions, in the future. However, we expect to be able to service these obligations from our net cash flow from operations, and we do not expect these obligations to negatively affect our expansion plans for the foreseeable future, including our plans to increase our store count, planned upgrades to our information technology systems and other planned capital expenditures.
Credit Facilities and Senior Notes
On January 13, 2012, in connection with the Merger, we obtained Credit Facilities 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 these Credit Facilities. The Credit Facilities include (a) $175 million in commitments under theour ABL Facility and (b) an aggregate principal amount under theour First Lien Term Loan Facility amounting to $525 million.Facility.
First Lien Term Loan Facility
Under the First Lien Term Loan Facility, (i) $525.0 million of term loans were incurred on January 13, 2012 (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 provides for $525 millionhas a term of borrowings (which may be increased by up to $150.0 million in certain circumstances). At March 31, 2012, all obligations under the First Lien Term Loan Facility were guaranteed by Parent and eachseven years with a maturity date of our direct or indirect wholly owned subsidiaries, 99 Cents Only Stores Texas, Inc., a Delaware corporation, and 99 Cents Only Stores, a Nevada corporation (“99 Cents Only Stores (Nevada)”). In September 2012, 99 Cents Only Stores (Nevada), our inactive wholly owned subsidiary, was dissolved. As of March 30, 2013, allJanuary 13, 2019. All obligations under the First Lien Term Loan Facility are guaranteed by Parent and 99 Cents Only Stores Texas, Inc. (together,our 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 our equity interests and the equity interests of the Credit Facilities Guarantors.
We are required to make scheduled quarterly payments each equal to 0.25% of the original principal amount of the term loan (approximately $1.3 million),Term Loans, with the balance due on the maturity date, January 13, 2019.date. Borrowings under the First Lien Term Loan Facility bear interest at an annual rate equal to an applicable margin plus, at ourthe Company’s option, (A)either (i) a Base Ratebase 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 MarchJanuary 30, 2013)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 multiplied by the Statutory Reserve Rate or 1.50% per annum)subject to certain adjustments) plus 1.00%, or (B)(ii) an Adjusted Eurocurrency Rate. The applicable margin used is 5.50% for Eurocurrency loans and 4.50% for base rate loans.
On April 4, 2012, we amended the terms of our existing seven-year $525 millionthe First Lien Term Loan Facility (the “First Amendment”) and incurred related refinancing costs of $11.2 million. The amendment,First Amendment, among other things, (i) decreased the applicable margin from London Interbank Offered Rate (“LIBOR”) plus 5.50% (or base rateBase Rate plus 4.50%) to LIBOR plus 4.00% (or base rateBase Rate plus 3.00%) and (ii) decreased the LIBOR floor from 1.50% to 1.25%. The maximum capital expenditures covenant
In connection with the First Amendment and in the First Lien Term Loan Facility was also amended to permit an additional $5 million in capital expenditures each year throughout the termfirst quarter of the First Lien Term Loan Facility.
We evaluated the proper accounting treatment for the amendment. Specifically, we evaluated the position of each lender under both the original First Lien Term Loan Facility and the amended First Lien Term Loan Facility. We determined that a portion of the refinancing transaction was to be accounted for as debt extinguishment, representing the outstanding principal amount of loans held by lenders under the original First Lien Term Loan Facility that were not lenders under the amended First Lien Term Loan Facility. In accordance with applicable guidance for debt modification and extinguishment,fiscal 2013 ended June 30, 2012, we recognized a $16.3 million loss on debt extinguishment related to a portion of the unamortized debt issuance costs, unamortized OIDoriginal issue discount (“OID”) and other related refinancing costs. We recorded $0.3 million of deferred debt issuance costs incurredand $5.9 million of OID in connection with the amendment forFirst Amendment in fiscal 2013.
On October 8, 2013, we 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%. We 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, we recognized a loss on debt extinguishment of approximately $4.4 million related to a portion of the unamortized debt issuance costs, unamortized OID and other repricing costs. We 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 our ability to make dividend and other payments so that was extinguished.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 million, and (iv) permitted proceeds of any sale leasebacks of any assets acquired after January 13, 2012, to be reinvested in our business without restriction.
As of MarchJanuary 30, 2013,2015 and January 31, 2014, the interest rate charged on the First Lien Term Loan Facility was 5.25% (1.25%4.50% (1.00% Eurocurrency rate, plus the Eurocurrency loan margin of 4.00%3.50%). As of MarchJanuary 30, 2013,2015 and January 31, 2014, the amount outstanding under the First Lien Term Loan Facility was $508.3 million.$600.5 million and $605.4 million, respectively.
Following the end of each fiscal year, we are required to prepaymake 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 agreement andFacility), with stepdownsthe ability to step down to 25% and 0% based onupon achievement of specified total leverage ratios),ratios, minus (ii) the amount of certain voluntary prepayments ofmade on the First Lien Term Loan Facility and/or the ABL Facility during such fiscal year. The required 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 our ability and the ability of the Parent, our subsidiary 99 Cents Only Stores Texas Inc. (“99 Cents Texas”) and certain future subsidiaries of our subsidiariesours to incur or guarantee additional indebtedness, pay dividends on, or redeem or repurchase, our capital stock, make certain restricted payments, acquisitions or investments, materially change our business, incur or permit to exist certain liens, enter into transactions with affiliates, or sell our assets, to, make capital expenditures or merge or consolidate with or into, another company. As of MarchJanuary 30, 2013,2015, we were in compliance with the terms of the First Lien Term Loan Facility. In June 2013, we failed to comply with the covenant that required delivery of audited financial statements for the fiscal year ended March 30, 2013 within 90 days of the completion of fiscal 2013 as required under the First Lien Term Loan Facility. On the date hereof and prior to the expiration of the applicable 30-day grace period under the First Lien Term Loan Facility, we delivered the required financial statements. As of the date hereof, we are in compliance with the applicable reporting obligations and other terms of the First Lien Term Loan Facility.
During the first quarter of fiscal 2013, we entered into an interest rate cap agreement. The interest rate cap agreement limits our interest exposure on a notional value of $261.8 million to 3.00% plus an applicable margin of 4.00%. The term of the interest rate cap is from May 29, 2012 to November 29, 2013. We paid fees of $0.05 million to enter into the interest rate cap agreement.
During the first quarter of fiscal 2013, we entered into an interest rate swap agreement to limit the variability of cash flows associated with interest payments on ourthe First Lien Term Loan Facility that result from fluctuations in the LIBOR rate. The swap limitsSee Note 7 to our Consolidated Financial Statements for more information on our interest exposure on a notional value of $261.8 million to 1.36% plus an applicable margin of 4.00%. The term of therate swap is from November 29, 2013 through May 31, 2016. The fair value of the swap on the trade date was zero as we neither paid nor received any value to enter into the swap, which was entered into at market rates. The fair value of the swap at March 30, 2013 was a liability of $2.6 million.agreement.
ABL Facility
The ABL Facility provides for up to $175.0 million of borrowings, (which may be increased by up to $50.0 million in certain circumstances), subject to certain borrowing base limitations. Subject to certain conditions, we may increase the commitments under the ABL Facility by up to $50.0 million. All obligations under the ABL Facility are guaranteed by us, Parent and our direct wholly owned subsidiary (together, the “ABL Guarantors”).other Credit Facilities Guarantors. The ABL Facility is secured by substantially all of our assets and the assets of the ABLCredit Facilities Guarantors.
Borrowings under the ABL Facility bear interest for an initial period until June 30, 2012 at an applicable margin plus, at our option, a fluctuating rate equal to (A) the highest of (a) the Federal Funds Rate plus 0.50%, (b) the interest rate in effect determined by the administrative agent as “Prime Rate” (3.25% at the date of the Merger), and (c) Adjusted Eurocurrency Rate (determined to be the LIBOR rate multiplied by the Statutory Reserve Rate) for an Interest Period of one (1) month plus 1.00% or (B) the Adjusted Eurocurrency Rate. The interest rate charged on borrowings under the ABL Facility from the date of the Merger until June 30, 2012 was 4.25% (the base rate (prime rate at 3.25%) plus the applicable margin of 1.00%). Thereafter, borrowings under the ABL Facility will have variable pricing and will be based, at our option, on (a)(i) LIBOR plus an applicable margin to be determined (1.75% as of MarchJanuary 30, 2013)2015) or (b)(ii) the determined base rate (prime rate)(Prime Rate) plus an applicable margin to be determined (0.75% at MarchJanuary 30, 2013)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, we wereare required to pay a commitment fee to the lenders under the ABL Facility on unused commitments at a rate of 0.375% for the period from the date of the Merger until June 30, 2012. Thereafter, thecommitments. The commitment fee will beis adjusted at the beginning of each quarter based upon the average historical excess availability of the prior quarter (0.50% for the quarter ended MarchJanuary 30, 2013)2015 and January 31, 2014). We must also pay customary letter of credit fees and agency fees.
As of March 30, 2013 and March 31, 2012, we had no outstanding The weighted average interest rate for borrowings under the ABL Facility was 1.99% as of January 30, 2015.
As of January 30, 2015, borrowings under the ABL Facility were $57.0 million, outstanding letters of credit were $1.0$2.5 million and availability under the ABL Facility subject to the borrowing base, was $134.0 million as$115.5 million. As of March 30, 2013.January 31, 2014, we had no outstanding borrowings under the ABL Facility and outstanding letters of credit of were $1.0 million.
The ABL Facility includes restrictions on our ability and the ability of the Parent and certain of our subsidiaries to incur or guarantee additional indebtedness, pay dividends on, or redeem or repurchase, ourits capital stock, make certain acquisitions or investments, materially change ourits business, incur or permit to exist certain liens, enter into transactions with affiliates, or sell our assets to, make capital expenditures or merge or consolidate with or into another company. The
On October 8, 2013, we amended the ABL Facility was amended on April 4, 2012 to, permit an additional $5 millionamong other things, modify the provision restricting our ability to make dividend and other payments. Such payments are subject to achievement of Excess Availability (as defined in capital expenditures for each year during the term ofagreement governing the ABL Facility.Facility) and a ratio of EBITDA (as defined in the agreement governing the ABL Facility) to fixed charges. As of MarchJanuary 30, 2013,2015, we were in compliance with the terms of the ABL Facility. In June 2013, we failed to comply with the covenant that required delivery of audited financial statements for the fiscal year ended March 30, 2013 within 90 days of the completion of fiscal 2013 as required under the ABL Facility. On the date hereof and prior to the expiration of the applicable 30-day grace period under the ABL Facility, we delivered the required financial statements. As of the date hereof, we are in compliance with the applicable reporting obligations and other terms of the ABL Facility.
Senior Notes due 2019
On December 29, 2011, we issued $250 million aggregate principal amount of the “Senior Notes.Senior Notes that mature on December 15, 2019. The Senior Notes are guaranteed by our direct wholly owned subsidiary, 99 Cents Only Stores Texas, Inc.the same subsidiaries that guarantee the Credit Facilities (the “Senior Notes Guarantor”Guarantors”).
In connection with the issuance of the Senior Notes, we entered into a registration rights agreement that required us to conduct an exchange offer enabling holders to exchange the Senior Notes for registered notes with terms identical in all material respects to the terms of the Senior Notes, except the registered notes would be freely tradable. The exchange offer closed on November 7, 2012.
Pursuant to the terms of the indenture governing the Senior Notes (the “Indenture”),Indenture, we may redeem all or a part of the Senior Notes at certain redemption prices applicablethat vary based on the date of redemption.
The Senior Notes are (i) equal in right of payment with all of our and the Senior Notes Guarantor’s existing and future senior indebtedness; (ii) effectively junior to our and the Senior Notes Guarantor’s existing and future secured indebtedness, to the extent of the value of the interest of the holders of that secured indebtedness in the assets securing such indebtedness; (iii) unconditionally guaranteed on a senior unsecured unsubordinated basis by the Senior Notes Guarantor; and (iv) junior to the indebtedness or other liabilities of our subsidiaries that are not guarantors. We are 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 our ability and the ability of certain of our 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 our restricted subsidiaries, make certain investments, transfer or sell assets, engage in transactions with affiliates, or merge or consolidate with other companies or transfer all or substantially all of our assets.
companies. As of MarchJanuary 30, 2013,2015, we were in compliance with the terms of the Indenture.
Former Executive Put Rights
Pursuant to the employment agreements between us and Messrs. Eric Schiffer, Jeff Gold and Howard Gold, in connection with their separation from the Company, for a period of one year following such separation, each executive has a right to require Parent to repurchase the shares of Class A and Class B Common Stock owned by executive (a “put right”) at the greater of (i) $1,000 per combined share of Class A and Class B Common Stock less the any distributions made with respect to such shares and (ii) the fair market value of such shares as of the date the executive exercises the put right. The put right applies to the lesser of (i) 20,000 shares of each of Class A and Class B Common Stock and (ii) $12.5 million in value (unless Parent agrees to purchase a higher value). If exercising the put right is prohibited (e.g., under the First Lien Credit facility, the ABL Facility and the indenture governing the senior notes), then the put right is extended up to three additional years until Parent is no longer prohibited from repurchasing the shares. If, during the four years following termination, Parent is at no time able to make the required payments, the put right expires and is deemed unexercised. For payout after the first year, the put right is only at the fair market value as of the date the exercising the put right.
On January 23, 2013, Eric Schiffer, Jeff Gold and Howard Gold separated from their positions as Chief Executive Officer, Chief Administrative Officer and Executive Vice President of Special Projects, respectively, of the Company and Parent, and as directors of the Company and Parent. As such, for a period of one year from January 23, 2013, each executive may exercise the put right as described above. The fair value of these put rights was estimated using a binomial model to be $6.5 million as of March 30, 2013 and has been recorded as part of other accrued expenses.
Cash Flows
Operating Activities
|
| Year Ended |
| For the Periods |
| Year Ended |
| |||||||||||||||||
|
| March 30, |
| January 15, 2012 |
|
| April 3, 2011 |
| April 2, |
| ||||||||||||||
|
| (Successor) |
| (Successor) |
|
| (Predecessor) |
| (Predecessor) |
|
| Year Ended |
| Ten Months Ended |
| Year Ended |
| |||||||
|
| (52 Weeks) |
| (11 Weeks) |
|
| (41 Weeks) |
| (53 Weeks) |
|
| January 30, |
| January 31, |
| March 30, |
| |||||||
|
| (amounts in thousands) |
|
| (52 Weeks) |
| (44 Weeks) |
| (52 Weeks) |
| ||||||||||||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net (loss) income |
| $ | (8,909 | ) | $ | (5,293 | ) |
| $ | 49,748 |
| $ | 74,308 |
| ||||||||||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Net income (loss) |
| $ | 5,502 |
| $ | (12,485 | ) | $ | (8,909 | ) | ||||||||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
| |||||||||||||||||
Depreciation |
| 56,810 |
| 11,361 |
|
| 21,855 |
| 27,587 |
|
| 53,911 |
| 52,467 |
| 56,810 |
| |||||||
Amortization of deferred financing costs and accretion of OID |
| 4,229 |
| 1,425 |
|
| — |
| — |
|
| 4,344 |
| 3,681 |
| 4,229 |
| |||||||
Amortization of intangible assets |
| 1,767 |
| 374 |
|
| 14 |
| 18 |
|
| 1,787 |
| 1,500 |
| 1,767 |
| |||||||
Amortization of favorable/unfavorable leases, net |
| 182 |
| 38 |
|
| — |
| — |
|
| 735 |
| 438 |
| 182 |
| |||||||
Loss on extinguishment of debt |
| 16,346 |
| — |
|
| — |
| — |
|
| — |
| 4,391 |
| 16,346 |
| |||||||
Loss on disposal of fixed assets |
| 895 |
| 130 |
|
| 8 |
| 101 |
| ||||||||||||||
Loss on interest rate hedge |
| 592 |
| — |
|
| — |
| — |
| ||||||||||||||
(Gain) loss on disposal of fixed assets |
| (84 | ) | (357 | ) | 895 |
| |||||||||||||||||
(Gain) loss on interest rate hedge |
| 1,504 |
| (92 | ) | 592 |
| |||||||||||||||||
Long-lived assets impairment |
| 515 |
| — |
|
| — |
| — |
|
| 149 |
| — |
| 515 |
| |||||||
Investments impairment |
| — |
| — |
|
| 357 |
| 129 |
| ||||||||||||||
Excess tax benefit from share-based payment arrangements |
| — |
| — |
|
| (5,401 | ) | (1,020 | ) |
| — |
| (138 | ) | — |
| |||||||
Deferred income taxes |
| (32,800 | ) | (1,411 | ) |
| (10,492 | ) | 13,321 |
|
| 4,212 |
| (28,999 | ) | (32,800 | ) | |||||||
Stock-based compensation expense |
| 18,387 |
| 137 |
|
| 2,745 |
| 2,887 |
| ||||||||||||||
Stock-based compensation |
| 2,846 |
| (4,766 | ) | 18,387 |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Changes in assets and liabilities associated with operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Accounts receivable |
| 1,321 |
| (182 | ) |
| (1,162 | ) | 952 |
|
| (161 | ) | 58 |
| 1,321 |
| |||||||
Inventories |
| 5,811 |
| 17,850 |
|
| (42,538 | ) | (20,026 | ) |
| (89,796 | ) | (4,643 | ) | 5,811 |
| |||||||
Deposits and other assets |
| (7,163 | ) | (210 | ) |
| (920 | ) | (6,222 | ) |
| (2,258 | ) | (3,049 | ) | (7,163 | ) | |||||||
Accounts payable |
| 6,458 |
| (8,761 | ) |
| 5,533 |
| 844 |
|
| 52,530 |
| 20,653 |
| 6,458 |
| |||||||
Accrued expenses |
| 1,700 |
| 8,025 |
|
| 15,599 |
| 2,749 |
|
| 7,586 |
| 12,682 |
| 1,700 |
| |||||||
Accrued workers’ compensation |
| 474 |
| (356 | ) |
| (3,050 | ) | (4,593 | ) |
| (3,427 | ) | 34,420 |
| 474 |
| |||||||
Income taxes |
| 6,339 |
| (1,736 | ) |
| 10,769 |
| (10,916 | ) |
| (6,413 | ) | (529 | ) | 6,339 |
| |||||||
Deferred rent |
| 4,025 |
| 714 |
|
| 1,191 |
| (166 | ) |
| 10,105 |
| 8,365 |
| 4,025 |
| |||||||
Other long-term liabilities |
| 4,445 |
| (70 | ) |
| — |
| (181 | ) |
| (4,801 | ) | (2,673 | ) | 4,445 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net cash provided by operating activities |
| $ | 81,424 |
| $ | 22,035 |
|
| $ | 44,256 |
| $ | 79,772 |
|
| 38,271 |
| 80,924 |
| 81,424 |
| |||
Cash provided by operating activities in fiscal 2015 was $38.3 million and consisted of (i) net income of $5.5 million; (ii) net income adjustments for depreciation and other non-cash items of $69.4 million; (iii) a decrease in working capital activities of $40.5 million; and (iv) an increase in other activities of $3.9 million, primarily due to increase in deferred rent, partially offset by a decrease in other long-term liabilities, and an increase in other long-term assets. The decrease in working capital activities was primarily due to an increase in inventories and income taxes receivable, partially offset by increases in accounts payable and accrued expenses. Inventory increased as a result of several factors, including the opening of new stores, an expansion of our seasonal merchandise programs, higher volume of purchases sourced directly from international vendors, and the “Go Taller” store remodeling program which increased shelf height (and consequently, merchandising space) across our stores.
Cash provided by operating activities in transition fiscal 2014 was $80.9 million and consisted of (i) net loss of $12.5 million; (ii) net loss adjustments for depreciation and other non-cash items of $28.1 million; (iii) an increase in working capital activities of $60.8 million; and (iv) an increase in other activities of $4.5 million, primarily due to an increase in deferred rent partially offset by a decrease other long-term liabilities, and an increase in other long-term assets. The increase in working capital activities was primarily due to increases in accrued workers’ compensation, accrued expenses and accounts payable, which were partially offset by an increase in inventories.
Cash provided by operating activities in fiscal 2013 was $81.4 million and consisted of (i) net loss of $8.9 million; (ii) net loss adjustments for depreciation and other non-cash items of $66.9 million; (iii) an increase in working capital activities of $16.5 million; and (iv) an increase in other activities of $6.9 million, primarily due to an increase in deferred rent and other long-term liabilities and a decrease in other long-term assets. IncreaseThe increase in working capital activities was primarily due to decreases in inventories and income taxes receivable as well as increases in accountaccounts payable and accrued expenses, which were partially offset by an increase in other current assets.
Cash provided by operating activities from January 15, 2012 to March 31, 2012 (Successor) was $22.0 million and consisted of (i) net loss of $5.3 million; (ii) net loss adjustments for depreciation and other non-cash items of $12.1 million; (iii) increase in working capital activities of $15.2 million; and (iv) decrease in other activities of $0.2 million. Increase in working capital activities was primarily due to decreases in inventories and deposits and other assets and an increase in accrued expenses, which were partially offset by a decrease in accounts payable. Inventories decreased by approximately $17.9 million, primarily due to purchase of seasonal (primarily Easter) inventory.
Cash provided by operating activities from April 3, 2011 to January 14, 2012 (Predecessor) was $44.3 million and consisted of (i) net income of $49.7 million; (ii) net income adjustments for depreciation and other non-cash items of $9.1 million; (iii) decrease in working capital activities of $15.4 million; and (iv) increase in other activities of $0.7 million. Decrease in working capital activities was primarily due to increases in inventories and a decrease workers’ compensation liability, which were partially offset by the increase in accounts payable, accrued expenses and a decrease in income tax receivable. Inventories increased by approximately $42.5 million, primarily due to purchase of seasonal (primarily Easter) items and opportunistic purchases.
Cash provided by operating activities in fiscal 2011 was $79.8 million and consisted of (i) net income of $74.3 million; (ii) net income adjustments for depreciation and other non-cash items of $43.0 million; (iii) a decrease in working capital activities of $37.2 million; and (iv) a decrease in other activities of $0.4 million. Decrease in working capital activities was primarily due to increases in inventories, deposits and other assets, and income taxes receivable and a decrease in workers’ compensation liability, which were partially offset by the increase in accounts payable and a decrease in accounts receivable. Inventories increased by approximately $20.0 million, primarily due to growth in the number of stores and increased in-stock levels at the stores.
Investing Activities
|
| Year Ended |
| For the Periods |
| Year Ended |
| |||||||||||||||||
|
| March 30, |
| January 15, 2012 |
|
| April 3, 2011 |
| April 2, |
|
| Year Ended |
| Ten Months Ended |
| Year Ended |
| |||||||
|
| (Successor) |
| (Successor) |
|
| (Predecessor) |
| (Predecessor) |
|
| January 30, |
| January 31, |
| March 30, |
| |||||||
|
| (52 Weeks) |
| (11 Weeks) |
|
| (41 Weeks) |
| (53 Weeks) |
|
| (52 weeks) |
| (44 Weeks) |
| (52 Weeks) |
| |||||||
|
| (amounts in thousands) |
|
|
|
|
|
|
|
| ||||||||||||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Acquisition of 99¢ Only Stores |
| $ | — |
| $ | (1,477,563 | ) |
| $ | — |
| $ | — |
| ||||||||||
Deposit — Merger consideration |
| — |
| 177,322 |
|
| (177,322 | ) | — |
| ||||||||||||||
Purchases of property and equipment |
| (62,494 | ) | (13,170 | ) |
| (33,570 | ) | (61,121 | ) |
| $ | (111,387 | ) | $ | (62,090 | ) | $ | (62,494 | ) | ||||
Proceeds from sale of fixed assets |
| 12,064 |
| 1,910 |
|
| 98 |
| 164 |
|
| 39 |
| 1,473 |
| 12,064 |
| |||||||
Purchases of investments |
| (1,996 | ) | (6,277 | ) |
| (52,623 | ) | (69,317 | ) |
| — |
| — |
| (1,996 | ) | |||||||
Proceeds from sale of investments |
| 5,256 |
| 24,519 |
|
| 226,805 |
| 43,621 |
|
| — |
| — |
| 5,256 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net cash used in investing activities |
| $ | (47,170 | ) | $ | (1,293,259 | ) |
| $ | (36,612 | ) | $ | (86,653 | ) |
| $ | (111,348 | ) | $ | (60,617 | ) | $ | (47,170 | ) |
Capital expenditures in fiscal 2015 consisted of property acquisitions, leasehold improvements, fixtures and equipment for new store openings, information technology projects and other capital projects, totaling $111.4 million.
Capital expenditures in transition fiscal 2014 consisted of property acquisitions, leasehold improvements, fixtures and equipment for new store openings, information technology projects and other capital projects, totaling $62.1 million.
Capital expenditures in fiscal 2013 consisted of property acquisitions, leasehold improvements, fixtures and equipment for new store openings, information technology projects and other capital projects, oftotaling $62.5 million. Property purchases in fiscal 2013 included the acquisition for $13.5 million of a 1.6 acre site with two adjacent buildings and parking lots. The site is in a high visibility commercial area of west Los Angeles, California that we plan to develop into one of our stores. Proceeds from sale of fixed assets primarily relate to sale-leaseback transactions and the sale of a held for sale warehouse. In fiscal 2013, we also completed the liquidation of our investment portfolio.
Net cash used in investing activities from January 15, 2012 to March 31, 2012 (Successor) was $1,293.3 million, primarily as a result of the Merger that required cash payments of $1,477.6 million. Capital expenditures from January 15, 2012 to March 31, 2012 (Successor) consisted of property acquisitions, leasehold improvements, fixtures and equipment for new store openings, information technology projects and other capital projects of $13.2 million.
Net cash used in investing activities from April 3, 2011 to January 14, 2012 (Predecessor) was $36.6 million. Capital expenditures from April 3, 2011 to January 14, 2012 (Predecessor) consisted of property acquisitions, leasehold improvements, fixtures and equipment for new store openings, information technology projects and other capital projects of $33.6 million.
Capital expenditures in fiscal 2011 consisted of property acquisitions, leasehold improvements, fixtures and equipment for new store openings, information technology projects and other capital projects of $61.1 million.
We estimate that total capital expenditures in fiscal year 2014over the next twelve months will be approximately $69$85 million, and relate primarily tocomprised of approximately $44$70 million for leasehold improvements and fixtures and equipment for new and existing stores, approximately $14$15 million forprimarily related to information technology projectsupgrades and approximately $11 million for other capital projects.supply chain infrastructure maintenance. We intendexpect to fund a portion of the capital expenditures through divestitures of surplus assets and sale-leaseback transactions. We are also finalizing our liquidity requirementslong-term plans regarding our supply chain, which could increase our capital spend in fiscal 2013 from net cash provided by operations, cash on hand, andthis area over the ABL Facility, if necessary.next 12 to 24 months.
Financing Activities
|
| Year Ended |
| For the Periods |
| Year Ended |
| |||||||
|
| March 30, |
| January 15, 2012 |
|
| April 3, 2011 |
| April 2, |
| ||||
|
| (Successor) |
| (Successor) |
|
| (Predecessor) |
| (Predecessor) |
| ||||
|
| (52 Weeks) |
| (11 Weeks) |
|
| (41 Weeks) |
| (53 Weeks) |
| ||||
|
| (amounts in thousands) |
| |||||||||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
| ||||
Proceeds from debt |
| $ | — |
| $ | 774,500 |
|
| $ | — |
| $ | — |
|
Payments of debt |
| (5,237 | ) | (11,313 | ) |
| — |
| — |
| ||||
Payments of debt issuance costs |
| (11,230 | ) | (31,411 | ) |
| — |
| — |
| ||||
Payments of capital lease obligation |
| (77 | ) | (13 | ) |
| (56 | ) | (72 | ) | ||||
Proceeds from equity contribution |
| — |
| 535,900 |
|
| — |
| — |
| ||||
Repurchases of common stock related to issuance of Performance Stock Units |
| — |
| — |
|
| (1,744 | ) | (2,260 | ) | ||||
Proceeds from exercise of stock options |
| — |
| — |
|
| 3,359 |
| 5,039 |
| ||||
Excess tax benefit from share-based payment arrangements |
| — |
| — |
|
| 5,401 |
| 1,020 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Net cash (used in) provided by financing activities |
| $ | (16,544 | ) | $ | 1,267,663 |
|
| $ | 6,960 |
| $ | 3,727 |
|
|
| Year Ended |
| Ten Months Ended |
| Year Ended |
|
|
| January 30, |
| January 31, |
| March 30, |
|
|
| (52 Weeks) |
| (44 Weeks) |
| (52 Weeks) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
Investment in Number Holdings, Inc. preferred stock |
| — |
| (19,200 | ) | — |
|
Dividend paid |
| — |
| (95,512 | ) | — |
|
Proceeds from long-term debt |
| — |
| 100,000 |
| — |
|
Payments of long-term debt |
| (6,138 | ) | (6,174 | ) | (5,237 | ) |
Proceeds under revolving credit facility |
| 305,500 |
| — |
| — |
|
Payments under revolving credit facility |
| (248,500 | ) | — |
| — |
|
Payments of debt issuance costs |
| — |
| (2,343 | ) | (11,230 | ) |
Payments of capital lease obligation |
| (88 | ) | (69 | ) | (77 | ) |
Payments to repurchase stock options of Number Holdings, Inc. |
| (76 | ) | (7,781 | ) | — |
|
Excess tax benefit from share-based payment arrangements |
| — |
| 138 |
| — |
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
| 50,698 |
| (30,941 | ) | (16,544 | ) |
Net cash provided by financing activities in fiscal 2015 was comprised primarily of net borrowings under the ABL Facility, partially offset by repayments of borrowings on the First Lien Term Loan facility.
Net cash used in financing activities in transition fiscal 2014 was comprised primarily of payments made in connection with the Gold-Schiffer Purchase, partially offset by additional borrowings under the First Lien Term Loan Facility used to fund part of the Gold-Schiffer Purchase.
Net cash used in financing activities in fiscal 2013 is comprised primarily of payment of debt issuance costs and repayments of debt.
Net cash provided by financing activities from January 15, 2012 to March 31, 2012 (Successor) was $1,267.7 million, consisting primarily of proceeds from debt issuances and equity contributions, partially offset by payment of debt issuance costs and repayments of debt.
Net cash provided by financing activities from April 3, 2011 to January 14, 2012 (Predecessor) was $7.0 million, consisting primarily of proceeds from the exercise of stock options partially offset by payments to satisfy employee tax obligations related to the issuance of performance stock units as part of our Predecessor equity incentive plan.
Net cash provided by financing activities during fiscal 2011 was $3.7 million, consisting primarily of proceeds from the exercise of stock options partially offset by payments to satisfy employee tax obligations related to the issuance of performance stock units as part of our Predecessor equity incentive plan.
Off-Balance Sheet Arrangements
As of MarchJanuary 30, 2013,2015, we had no off-balance sheet arrangements.
Contractual Obligations
The following table summarizes our consolidated contractual obligations (in thousands) as of MarchJanuary 30, 2013.2015.
|
| Payment due by period |
|
| Payment due by period |
| ||||||||||||||||||||||||||
|
| Total |
| Less than 1 year |
| 1-3 years |
| 3-5 years |
| More than 5 years |
|
| Total |
| Less than 1 year |
| 1-3 years |
| 3-5 years |
| More than 5 years |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Debt obligations |
| $ | 768,451 |
| $ | 8,567 |
| $ | 10,474 |
| $ | 10,474 |
| $ | 738,936 |
| ||||||||||||||||
Long-term debt obligations |
| $ | 913,139 |
| $ | 6,138 |
| $ | 69,276 |
| $ | 837,725 |
| $ | — |
| ||||||||||||||||
Interest payments (a) |
| 341,226 |
| 55,609 |
| 110,210 |
| 108,106 |
| 67,301 |
|
| 251,881 |
| 58,212 |
| 111,146 |
| 82,523 |
| — |
| ||||||||||
Capital lease obligations |
| 354 |
| 83 |
| 185 |
| 86 |
| — |
|
| 213 |
| 106 |
| 107 |
| — |
| — |
| ||||||||||
Financing lease obligations (b) |
| 42,306 |
| 91 |
| 4,194 |
| 4,511 |
| 33,510 |
| |||||||||||||||||||||
Operating lease obligations |
| 261,914 |
| 51,657 |
| 86,037 |
| 51,264 |
| 72,956 |
|
| 459,830 |
| 70,554 |
| 119,075 |
| 93,630 |
| 176,571 |
| ||||||||||
Purchase obligations (b) |
| 6,440 |
| 5,971 |
| 469 |
| — |
| — |
| |||||||||||||||||||||
Purchase obligations (c) |
| 6,483 |
| 3,163 |
| 2,040 |
| 1,280 |
| — |
| |||||||||||||||||||||
Deferred compensation liability |
| 1,153 |
| — |
| — |
| — |
| 1,153 |
|
| 724 |
| — |
| — |
| — |
| 724 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Total |
| $ | 1,379,538 |
| $ | 121,887 |
| $ | 207,375 |
| $ | 169,930 |
| $ | 880,346 |
|
| $ | 1,674,576 |
| $ | 138,264 |
| $ | 305,838 |
| $ | 1,019,669 |
| $ | 210,805 |
|
(a) Includes interest expense on fixed and variable debt. Variable debt interest expense based on amended First Lien Term Loan Facility Agreement; see Note 6 “Debt” to our Consolidated Financial Statements.
(b)Includes capital and financing lease obligations and related interest.
(c) Purchase obligations include legally binding agreements that primarily consist of construction contracts of new stores, and purchases and service commitment for logistics and store operations. Amounts committed under open purchase orders for merchandise are not included if cancelable without penalty prior to a date that precedes the vendors’ scheduled shipment date.
We do not have any liabilities related to uncertain tax positions as of MarchJanuary 30, 2013.2015. See Note 5 “Income Tax Provision” to our Consolidated Financial Statements.
Lease Commitments
We lease various facilities under operating leases (except for one location that is classified as a capital lease and one location classified as a financing lease), which will expire at various dates through fiscal year 2031.2035. Most of the lease agreements contain renewal options and/or provide for fixed rent escalations or increases based on the Consumer Price Index. Total minimum lease payments under each of these lease agreements, including scheduled increases, are charged to operationsexpenses on a straight-line basis over the term of each respective lease. Most leases require us to pay property taxes, maintenance and insurance. Rental expenses (including property taxes, maintenance and insurance) charged to operationsexpenses in fiscal 2015 were approximately $85.5 million. Rental expenses (including property taxes, maintenance and insurance) charged to expenses in transition fiscal 2014 were approximately $60.8 million. Rental expenses (including property taxes, maintenance and insurance) charged to expenses in fiscal 2013 were approximately $63.0 million. Rental expense charged to operating expenses for the periods of January 15, 2012 to March 31, 2012 and April 3, 2011 to January 14, 2012 was $13.1 million and $44.0 million, respectively. Rental expenses charged to operations in fiscal 2011 were approximately $56.7 million. We typically seek leases with a five-year to ten-year term and with multiple five-year renewal options. See “Item 2. Properties.” The large majority of our store leases were entered into with multiple renewal periods, which are typically five years and occasionally longer.
In April 2013, we entered into a 15-year lease for a cold warehouse facility located in Los Angeles, California. The lease expires in December 2028 and total minimum lease payments under this lease agreement will be approximately $29 million.
Variable Interest Entities
At MarchAs of January 30, 20132015 and MarchJanuary 31, 2012,2014, we dodid not have any variable interest entities.
Seasonality and Quarterly Fluctuations
We have historically experienced and expect to continue to experience some seasonal fluctuations in our net sales, operating income, and net income. The highest sales periods for us areDuring the quarters that have included the Halloween, Christmas Halloween and Easter seasons. A proportionately greater amount of ourselling seasons, we have historically experienced higher net sales and higher operating and net income is generally realized during the quarter ended on or near December 31.income. Our quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the timing of certain these holidays, such as Easter, the timing of new store openings and the merchandise mix.
During fiscal 2013 there were two Easter selling seasons that occurred in early April 2012 and in late March 2013, compared to one2013. There was no Easter selling season in pro forma fiscal 2012. There will be no Easter selling season intransition fiscal 2014.
New Authoritative Standards
Information regarding new authoritative standards is contained in Note 1, “Basis of Presentation and Summary of Significant Accounting Policies” to our Consolidated Financial Statements which is incorporated herein by this reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to interest rate risk for our debt borrowings.
Our primary interest rate exposure relates to outstanding amounts under our Credit Facilities. As of MarchJanuary 30, 2013,2015, we had variable rate borrowings of $508.3$600.5 million under our First Lien Term Loan Facility and no borrowings$57.0 million under our ABL Facility. The maximum commitment under our ABL Facility was $175 million on March 30, 2013. The Credit Facilities provide interest rate options based on certain indices as described in Note 6 “Debt” to our Consolidated Financial Statements.
We may manage interest rate risk through the use of interest swap agreements or interest cap agreements to limit the effect of interest rate fluctuations from time to time. During the first quarter of fiscal 2013, we 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. The swap limits our interest exposure on a notional value of $261.8 million to 1.36% plus an applicable margin of 4.00%3.50%. The term of the swap is from November 29, 2013 through May 31, 2016. The fair value of the swap on the trade date was zero as we neither paid nor received any value to enter into the swap, which was entered into at market rates. As of MarchJanuary 30, 2013,2015, the fair value of the interest rate swap was a liability of $2.6$2.2 million.
In addition, during the first quarter of fiscal 2013, we entered into an interest rate cap agreement. The interest rate cap agreement limits our interest exposure on a notional value of $261.8 million to 3.00% plus an applicable margin of 4.00%. The term of the interest rate cap is from May 29, 2012 to November 29, 2013. We paid $0.05 million to enter into the interest rate cap agreement.
A change in interest rates on our variable rate debt impacts our pre-tax earnings and cash flows. Based on our variable rate borrowing levels and interest rate derivatives outstanding as of January 30, 2015 and January 31, 2014, respectively, the annualized effect of a 1% increase in applicable interest rates would have resulted in an increase of our pre-tax loss and a decrease in cash flows of approximately $2.5$0.8 million for fiscal 2015 and $0.2 million for the transition fiscal year ended March 30, 2013.
We liquidated all of our marketable investment securities during fiscal 2013 and do not have any investments as of March 30, 2013.January 31, 2014.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
99¢99 Cents Only Stores LLC
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Report of Independent Registered Public Accounting Firm |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and ShareholdersMember of 99¢99 Cents Only Stores LLC
We have audited the accompanying consolidated balance sheetsheets of 99¢99 Cents Only Stores LLC and subsidiaries as of MarchJanuary 30, 2013,2015 and January 31, 2014, and the related consolidated statements of comprehensive income (loss), member’s/shareholders’ equity and cash flows for the year ended January 30, 2015, ten months ended January 31, 2014 and year ended March 30, 2013. Our auditaudits also included the financial statement schedule listed in the Index at Item 15(b) for the year ended January 30, 2015, ten months ended January 31, 2014 and year ended March 30, 2013. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.audits.
We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit providesaudits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at MarchJanuary 30, 2013,2015 and January 31, 2014, and the consolidated results of its operations and its cash flows for the year ended January 30, 2015, ten months ended January 31, 2014 and year ended March 30, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Los Angeles, California
July 12, 2013April 22, 2015
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
99¢99 Cents Only Stores
City of Commerce, California
We have audited the accompanying consolidated balance sheet of the 99¢ Only Stores and consolidated entities (the “Company”) as of March 31, 2012 (Successor) and the related consolidated statements of income, shareholders’ equity, and cash flows for the periods January 15, 2012 to March 31, 2012 (Successor) and April 3, 2011 to January 14, 2012 (Predecessor) and for the year ended April 2, 2011 (Predecessor). In connection with our audits of the financial statements, we have also audited the financial statement schedule listed in the accompanying index under Item 15(b) for the periods referenced above. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at March 31, 2012 (Successor) and the results of its operations and its cash flows for the periods January 15, 2012 to March 31, 2012 (Successor) and April 3, 2011 to January 14, 2012 (Predecessor) and for the year ended April 2, 2011 (Predecessor) in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein for the periods January 15, 2012 to March 31, 2012 (Successor) and April 3, 2011 to January 14, 2012 (Predecessor) and for the year ended April 2, 2011 (Predecessor).
/s/ BDO USA, LLP
Los Angeles, California
July 9, 2012
99¢ Only Stores LLC
(Amounts in thousands, except share data)
|
| March 30, |
| March 31, |
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| January 30, |
| January 31, |
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| (Successor) |
| (Successor) |
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ASSETS |
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Current Assets: |
|
|
|
|
|
|
|
|
|
| ||||
Cash |
| $ | 45,476 |
| $ | 27,766 |
|
| $ | 12,463 |
| $ | 34,842 |
|
Short-term investments |
| — |
| 3,631 |
| |||||||||
Accounts receivable, net of allowance for doubtful accounts of $84 and $280 as of March 30, 2013 and March 31, 2012, respectively |
| 1,851 |
| 2,999 |
| |||||||||
Accounts receivable, net of allowance for doubtful accounts of $58 and $107 as of January 30, 2015 and January 31, 2014, respectively |
| 1,954 |
| 1,793 |
| |||||||||
Income taxes receivable |
| 3,969 |
| 6,868 |
|
| 10,911 |
| 4,498 |
| ||||
Deferred income taxes |
| 33,139 |
| 31,188 |
|
| 41,583 |
| 46,953 |
| ||||
Inventories, net |
| 201,601 |
| 200,978 |
|
| 296,040 |
| 206,244 |
| ||||
Assets held for sale |
| 2,106 |
| 6,849 |
|
| 3,094 |
| 1,680 |
| ||||
Other |
| 16,370 |
| 11,297 |
|
| 19,039 |
| 18,190 |
| ||||
Total current assets |
| 304,512 |
| 291,576 |
|
| 385,084 |
| 314,200 |
| ||||
Property and equipment, net |
| 476,051 |
| 476,525 |
|
| 581,020 |
| 485,046 |
| ||||
Deferred financing costs, net |
| 21,016 |
| 30,400 |
|
| 15,463 |
| 18,526 |
| ||||
Intangible assets, net |
| 471,359 |
| 477,434 |
|
| 460,311 |
| 466,311 |
| ||||
Goodwill |
| 479,745 |
| 479,508 |
|
| 479,745 |
| 479,745 |
| ||||
Deposits and other assets |
| 4,554 |
| 12,598 |
|
| 7,543 |
| 6,406 |
| ||||
Total assets |
| $ | 1,757,237 |
| $ | 1,768,041 |
|
| $ | 1,929,166 |
| $ | 1,770,234 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
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LIABILITIES AND MEMBER’S EQUITY |
|
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Current Liabilities: |
|
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|
|
| ||||
Accounts payable |
| $ | 50,011 |
| $ | 41,407 |
|
| $ | 139,287 |
| $ | 71,057 |
|
Payroll and payroll-related |
| 17,096 |
| 15,580 |
|
| 20,004 |
| 24,461 |
| ||||
Sales tax |
| 7,200 |
| 6,128 |
|
| 14,087 |
| 5,522 |
| ||||
Other accrued expenses |
| 29,695 |
| 30,569 |
|
| 40,168 |
| 36,690 |
| ||||
Workers’ compensation |
| 39,498 |
| 39,024 |
|
| 70,491 |
| 73,918 |
| ||||
Current portion of long-term debt |
| 8,567 |
| 5,250 |
|
| 6,138 |
| 6,138 |
| ||||
Current portion of capital lease obligation |
| 83 |
| 77 |
| |||||||||
Current portion of capital and financing lease obligation |
| 380 |
| 88 |
| |||||||||
Total current liabilities |
| 152,150 |
| 138,035 |
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| 290,555 |
| 217,874 |
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Long-term debt, net of current portion |
| 749,758 |
| 758,351 |
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| 901,395 |
| 849,252 |
| ||||
Unfavorable lease commitments, net |
| 14,833 |
| 18,959 |
|
| 8,220 |
| 11,718 |
| ||||
Deferred rent |
| 4,823 |
| 798 |
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| 23,293 |
| 13,188 |
| ||||
Deferred compensation liability |
| 1,153 |
| 5,136 |
|
| 724 |
| 1,142 |
| ||||
Capital lease obligation, net of current portion |
| 271 |
| 354 |
| |||||||||
Capital and financing lease obligation, net of current portion |
| 24,681 |
| 197 |
| |||||||||
Long-term deferred income taxes |
| 186,851 |
| 214,874 |
|
| 170,678 |
| 171,573 |
| ||||
Other liabilities |
| 8,428 |
| 767 |
|
| 1,868 |
| 6,203 |
| ||||
Total liabilities |
| 1,118,267 |
| 1,137,274 |
|
| 1,421,414 |
| 1,271,147 |
| ||||
Commitments and contingencies (Notes 9 and 10) |
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Shareholders’ Equity: |
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Preferred stock, no par value — authorized, 1,000 shares; no shares issued or outstanding |
| — |
| — |
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Common stock $0.01 par value — Class A authorized, 1,000 shares; issued and outstanding, 100 shares and Class B authorized, 1,000 shares; issued and outstanding, 100 shares at March 30, 2013 and March 31, 2012, respectively |
| — |
| — |
| |||||||||
Additional paid-in capital |
| 654,424 |
| 636,037 |
| |||||||||
Commitments and contingencies (Note 10) |
|
|
|
|
| |||||||||
Member’s Equity: |
|
|
|
|
| |||||||||
Member units — 100 units issued and outstanding at January 30, 2015 and January 31, 2014 |
| 549,135 |
| 546,365 |
| |||||||||
Investment in Number Holdings, Inc. preferred stock |
| (19,200 | ) | (19,200 | ) | |||||||||
Accumulated deficit |
| (14,202 | ) | (5,293 | ) |
| (21,185 | ) | (26,687 | ) | ||||
Other comprehensive (loss) income |
| (1,252 | ) | 23 |
| |||||||||
Total shareholders’ equity |
| 638,970 |
| 630,767 |
| |||||||||
Total liabilities and shareholders’ equity |
| $ | 1,757,237 |
| $ | 1,768,041 |
| |||||||
Other comprehensive loss |
| (998 | ) | (1,391 | ) | |||||||||
Total equity |
| 507,752 |
| 499,087 |
| |||||||||
Total liabilities and equity |
| $ | 1,929,166 |
| $ | 1,770,234 |
| |||||||
The accompanying notes are an integral part of these financial statements.
99¢99 Cents Only Stores LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands)
|
| Year Ended |
| For the Periods |
| Year Ended |
| |||||||
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|
| January 15, 2012 |
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| April 3, 2011 |
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| March 30, |
| to |
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| to |
| April 2, |
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| (Successor) |
| (Successor) |
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| (Predecessor) |
| (Predecessor) |
| ||||
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| (52 Weeks) |
| (11 Weeks) |
|
| (41 Weeks) |
| (53 Weeks) |
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Net Sales: |
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| ||||
99¢ Only Stores |
| $ | 1,620,683 |
| $ | 329,361 |
|
| $ | 1,158,733 |
| $ | 1,380,357 |
|
Bargain Wholesale |
| 47,968 |
| 9,555 |
|
| 34,047 |
| 43,521 |
| ||||
Total sales Total sales |
| 1,668,651 |
| 338,916 |
|
| 1,192,780 |
| 1,423,878 |
| ||||
Cost of sales (excluding depreciation and amortization expense shown separately below) |
| 1,028,295 |
| 203,775 |
|
| 711,002 |
| 842,756 |
| ||||
Gross profit |
| 640,356 |
| 135,141 |
|
| 481,778 |
| 581,122 |
| ||||
|
|
|
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|
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Selling, general and administrative expenses: |
|
|
|
|
|
|
|
|
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| ||||
Operating expenses (includes asset impairment of $515 for the year ended March 30, 2013) |
| 523,495 |
| 110,477 |
|
| 376,122 |
| 436,034 |
| ||||
Depreciation |
| 56,810 |
| 11,361 |
|
| 21,855 |
| 27,587 |
| ||||
Amortization of intangible assets |
| 1,767 |
| 374 |
|
| 14 |
| 18 |
| ||||
Total selling, general and administrative expenses |
| 582,072 |
| 122,212 |
|
| 397,991 |
| 463,639 |
| ||||
Operating income |
| 58,284 |
| 12,929 |
|
| 83,787 |
| 117,483 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Other (income) expense: |
|
|
|
|
|
|
|
|
|
| ||||
Interest income |
| (342 | ) | (29 | ) |
| (291 | ) | (865 | ) | ||||
Interest expense |
| 60,898 |
| 16,223 |
|
| 381 |
| 77 |
| ||||
Other-than-temporary investment impairment due to credit loss |
| — |
| — |
|
| 357 |
| 129 |
| ||||
Loss on extinguishment of debt |
| 16,346 |
| — |
|
| — |
| — |
| ||||
Other |
| 380 |
| (75 | ) |
| (107 | ) | (82 | ) | ||||
Total other expense (income), net |
| 77,282 |
| 16,119 |
|
| 340 |
| (741 | ) | ||||
(Loss) income before provision for income taxes |
| (18,998 | ) | (3,190 | ) |
| 83,447 |
| 118,224 |
| ||||
(Benefit) provision for income taxes |
| (10,089 | ) | 2,103 |
|
| 33,699 |
| 43,916 |
| ||||
Net (loss) income |
| (8,909 | ) | (5,293 | ) |
| 49,748 |
| 74,308 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Other comprehensive (loss) income, net of tax: |
|
|
|
|
|
|
|
|
|
| ||||
Unrealized holding gains on securities arising during period |
| 4 |
| 68 |
|
| 46 |
| 105 |
| ||||
Unrealized losses on interest rate cash flow hedge |
| (1,252 | ) | — |
|
| — |
| — |
| ||||
Less: reclassification adjustment included in net income |
| (27 | ) | (45 | ) |
| 150 |
| 28 |
| ||||
Other comprehensive (loss) income, net of tax |
| (1,275 | ) | 23 |
|
| 196 |
| 133 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Comprehensive (loss) income |
| $ | (10,184 | ) | $ | (5,270 | ) |
| $ | 49,944 |
| $ | 74,441 |
|
|
| Year ended |
| Ten Months Ended |
| Year Ended |
| |||
|
| January 30, |
| January 31, |
| March 30, |
| |||
|
| (52 Weeks) |
| (44 Weeks) |
| (52 Weeks) |
| |||
Net Sales: |
|
|
|
|
|
|
| |||
99¢ Only Stores |
| $ | 1,881,865 |
| $ | 1,486,699 |
| $ | 1,620,683 |
|
Bargain Wholesale |
| 45,084 |
| 42,044 |
| 47,968 |
| |||
Total sales |
| 1,926,949 |
| 1,528,743 |
| 1,668,651 |
| |||
Cost of sales |
| 1,308,849 |
| 1,033,077 |
| 1,117,051 |
| |||
Gross profit |
| 618,100 |
| 495,666 |
| 551,600 |
| |||
Selling, general and administrative expenses (includes asset impairment of $149, $0 and $515 for the years ended January 30, 2015, January 31, 2014 and March 30, 2013, respectively) |
| 546,259 |
| 481,449 |
| 493,316 |
| |||
Operating income |
| 71,841 |
| 14,217 |
| 58,284 |
| |||
Other (income) expense: |
|
|
|
|
|
|
| |||
Interest income |
| — |
| (16 | ) | (342 | ) | |||
Interest expense |
| 62,734 |
| 50,820 |
| 60,898 |
| |||
Loss on extinguishment of debt |
| — |
| 4,391 |
| 16,346 |
| |||
Other |
| — |
| — |
| 380 |
| |||
Total other expense, net |
| 62,734 |
| 55,195 |
| 77,282 |
| |||
Income (loss) before provision for income taxes |
| 9,107 |
| (40,978 | ) | (18,998 | ) | |||
Provision (benefit) for income taxes |
| 3,605 |
| (28,493 | ) | (10,089 | ) | |||
Net income (loss) |
| 5,502 |
| (12,485 | ) | (8,909 | ) | |||
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
| |||
Unrealized holding gains on securities arising during period |
| — |
| — |
| 4 |
| |||
Unrealized losses on interest rate cash flow hedge |
| (576 | ) | (284 | ) | (1,252 | ) | |||
Less: reclassification adjustment included in net income (loss) |
| 969 |
| 145 |
| (27 | ) | |||
Other comprehensive income (loss), net of tax |
| 393 |
| (139 | ) | (1,275 | ) | |||
|
|
|
|
|
|
|
| |||
Comprehensive income (loss) |
| $ | 5,895 |
| $ | (12,624 | ) | $ | (10,184 | ) |
The accompanying notes are an integral part of these financial statements.
99¢99 Cents Only Stores LLC
CONSOLIDATED STATEMENTS OF MEMBER’S/SHAREHOLDERS’ EQUITY
(Amounts in thousands)
|
| Common Stock |
| Additional |
| Accumulated |
| Retained |
| Shareholders’ |
| |||||||
|
| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Deficit) |
| Equity |
| |||||
(Predecessor) |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
BALANCE, March 27, 2010 |
| 69,556 |
| $ | 246,353 |
| $ | — |
| $ | (459 | ) | $ | 354,528 |
| $ | 600,422 |
|
Net income |
| — |
| — |
| — |
| — |
| 74,308 |
| 74,308 |
| |||||
Net unrealized investment gains |
| — |
| — |
| — |
| 133 |
| — |
| 133 |
| |||||
Tax benefit from exercise of stock options and Performance Stock Units |
| — |
| 1,020 |
| — |
| — |
| — |
| 1,020 |
| |||||
Exercise of stock options and issuance of Performance Stock Units, net |
| 771 |
| 2,779 |
| — |
| — |
| — |
| 2,779 |
| |||||
Stock-based compensation expense |
| — |
| 2,887 |
| — |
| — |
| — |
| 2,887 |
| |||||
BALANCE, April 2, 2011 |
| 70,327 |
| 253,039 |
| — |
| (326 | ) | 428,836 |
| 681,549 |
| |||||
Net income |
| — |
| — |
| — |
| — |
| 49,748 |
| 49,748 |
| |||||
Net unrealized investment gains |
| — |
| — |
| — |
| 196 |
| — |
| 196 |
| |||||
Tax benefit from exercise of stock options and Performance Stock Units |
| — |
| 5,401 |
| — |
| — |
| — |
| 5,401 |
| |||||
Exercise of stock options and issuance of Performance Stock Units, net |
| 404 |
| 1,615 |
| — |
| — |
| — |
| 1,615 |
| |||||
Stock-based compensation expense |
| — |
| 2,745 |
| — |
| — |
| — |
| 2,745 |
| |||||
BALANCE, January 14, 2012 |
| 70,731 |
| $ | 262,800 |
| $ | — |
| $ | (130 | ) | $ | 478,584 |
| $ | 741,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
(Successor) |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Issuance of common stock — Class A and B |
| — |
| $ | — |
| $ | 635,900 |
| $ | — |
| $ | — |
| $ | 635,900 |
|
Net loss |
| — |
| — |
| — |
| — |
| (5,293 | ) | (5,293 | ) | |||||
Net unrealized investment gains |
| — |
| — |
| — |
| 23 |
| — |
| 23 |
| |||||
Stock-based compensation expense |
| — |
| — |
| 137 |
| — |
| — |
| 137 |
| |||||
BALANCE, March 31, 2012 |
| — |
| — |
| 636,037 |
| 23 |
| (5,293 | ) | 630,767 |
| |||||
Net loss |
| — |
| — |
| — |
| — |
| (8,909 | ) | (8,909 | ) | |||||
Net unrealized investment losses |
| — |
| — |
| — |
| (23 | ) | — |
| (23 | ) | |||||
Net unrealized losses on interest rate cash flow hedge |
| — |
| — |
| — |
| (1,252 | ) | — |
| (1,252 | ) | |||||
Stock-based compensation expense |
| — |
| — |
| 18,387 |
| — |
| — |
| 18,387 |
| |||||
BALANCE, March 30, 2013 |
| — |
| $ | — |
| $ | 654,424 |
| $ | (1,252 | ) | $ | (14,202 | ) | $ | 638,970 |
|
|
| Common Stock |
| Member Units |
| Additional |
| Investment |
| Retained |
| Accumulated |
| Member’s/ |
| |||||||||||
|
| Shares |
| Amount |
| Units |
| Amount |
| Capital |
| Stock |
| Deficit) |
| Income (Loss) |
| Equity |
| |||||||
BALANCE, March 31, 2012 |
| — |
| $ | — |
| — |
| $ | — |
| $ | 636,037 |
| — |
| $ | (5,293 | ) | $ | 23 |
| $ | 630,767 |
| |
Net loss |
| — |
| — |
| — |
| — |
| — |
| — |
| (8,909 | ) | — |
| (8,909 | ) | |||||||
Net unrealized investment losses |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (23 | ) | (23 | ) | |||||||
Net unrealized losses on interest rate cash flow hedge |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (1,252 | ) | (1,252 | ) | |||||||
Stock-based compensation expense |
| — |
| — |
| — |
| — |
| 18,387 |
| — |
| — |
| — |
| 18,387 |
| |||||||
BALANCE, March 30, 2013 |
| — |
| $ | — |
| — |
| $ | — |
| $ | 654,424 |
| $ | — |
| $ | (14,202 | ) | $ | (1,252 | ) | $ | 638,970 |
|
Conversion from corporation to limited liability company |
| — |
| — |
| — |
| 654,424 |
| (654,424 | ) | — |
| — |
| — |
| — |
| |||||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| — |
| (12,485 | ) | — |
| (12,485 | ) | |||||||
Investment in Number Holdings, Inc. preferred stock |
| — |
| — |
| — |
| — |
| — |
| (19,200 | ) | — |
| — |
| (19,200 | ) | |||||||
Unrealized net losses on interest rate cash flow hedge, net of tax |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (139 | ) | (139 | ) | |||||||
Stock-based compensation |
| — |
| — |
| — |
| (4,766 | ) | — |
| — |
| — |
| — |
| (4,766 | ) | |||||||
Dividend paid to Number Holdings, Inc. |
| — |
| — |
| — |
| (95,512 | ) | — |
| — |
| — |
| — |
| (95,512 | ) | |||||||
Payments to repurchase stock options of Number Holdings, Inc. |
| — |
| — |
| — |
| (7,781 | ) | — |
| — |
| — |
| — |
| (7,781 | ) | |||||||
BALANCE, January 31, 2014 |
| — |
| $ | — |
| — |
| $ | 546,365 |
| $ | — |
| $ | (19,200 | ) | $ | (26,687 | ) | $ | (1,391 | ) | $ | 499,087 |
|
Net income |
| — |
| — |
| — |
| — |
| — |
| — |
| 5,502 |
| — |
| 5,502 |
| |||||||
Unrealized net gains on interest rate cash flow hedge, net of tax |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 393 |
| 393 |
| |||||||
Stock-based compensation |
| — |
| — |
| — |
| 2,846 |
| — |
| — |
| — |
| — |
| 2,846 |
| |||||||
Payments to repurchase stock options of Number Holdings, Inc. |
| — |
| — |
| — |
| (76 | ) | — |
| — |
| — |
| — |
| (76 | ) | |||||||
BALANCE, January 30, 2015 |
| — |
| $ | — |
| — |
| $ | 549,135 |
| $ | — |
| $ | (19,200 | ) | $ | (21,185 | ) | $ | (998 | ) | $ | 507,752 |
|
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
|
| Year Ended |
| For the Periods |
| Year Ended |
| |||||||||||||||||
|
|
|
| January 15, 2012 |
|
| April 3, 2011 |
|
|
| ||||||||||||||
|
| March 30, |
| to |
|
| to |
| April 2, |
|
| Year Ended |
| Ten Months Ended |
| Year Ended |
| |||||||
|
| (Successor) |
| (Successor) |
|
| (Predecessor) |
| (Predecessor) |
|
| January 30, |
| January 31, |
| March 30, |
| |||||||
|
| (52 Weeks) |
| (11 Weeks) |
|
| (41 Weeks) |
| (53 Weeks) |
|
| (52 Weeks) |
| (44 Weeks) |
| (52 Weeks) |
| |||||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net (loss) income |
| $ | (8,909 | ) | $ | (5,293 | ) |
| $ | 49,748 |
| $ | 74,308 |
| ||||||||||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Net income (loss) |
| $ | 5,502 |
| $ | (12,485 | ) | $ | (8,909 | ) | ||||||||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
| |||||||||||||||||
Depreciation |
| 56,810 |
| 11,361 |
|
| 21,855 |
| 27,587 |
|
| 53,911 |
| 52,467 |
| 56,810 |
| |||||||
Amortization of deferred financing costs and accretion of OID |
| 4,229 |
| 1,425 |
|
| — |
| — |
|
| 4,344 |
| 3,681 |
| 4,229 |
| |||||||
Amortization of intangible assets |
| 1,767 |
| 374 |
|
| 14 |
| 18 |
|
| 1,787 |
| 1,500 |
| 1,767 |
| |||||||
Amortization of favorable/unfavorable leases, net |
| 182 |
| 38 |
|
| — |
| — |
|
| 735 |
| 438 |
| 182 |
| |||||||
Loss on extinguishment of debt |
| 16,346 |
| — |
|
| — |
| — |
|
| — |
| 4,391 |
| 16,346 |
| |||||||
Loss on disposal of fixed assets |
| 895 |
| 130 |
|
| 8 |
| 101 |
| ||||||||||||||
Loss on interest rate hedge |
| 592 |
| — |
|
| — |
| — |
| ||||||||||||||
(Gain) loss on disposal of fixed assets |
| (84 | ) | (357 | ) | 895 |
| |||||||||||||||||
Loss (gain) on interest rate hedge |
| 1,504 |
| (92 | ) | 592 |
| |||||||||||||||||
Long-lived assets impairment |
| 515 |
| — |
|
| — |
| — |
|
| 149 |
| — |
| 515 |
| |||||||
Investments impairment |
| — |
| — |
|
| 357 |
| 129 |
| ||||||||||||||
Excess tax benefit from share-based payment arrangements |
| — |
| — |
|
| (5,401 | ) | (1,020 | ) |
| — |
| (138 | ) | — |
| |||||||
Deferred income taxes |
| (32,800 | ) | (1,411 | ) |
| (10,492 | ) | 13,321 |
|
| 4,212 |
| (28,999 | ) | (32,800 | ) | |||||||
Stock-based compensation expense |
| 18,387 |
| 137 |
|
| 2,745 |
| 2,887 |
| ||||||||||||||
Stock-based compensation |
| 2,846 |
| (4,766 | ) | 18,387 |
| |||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Changes in assets and liabilities associated with operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Accounts receivable |
| 1,321 |
| (182 | ) |
| (1,162 | ) | 952 |
|
| (161 | ) | 58 |
| 1,321 |
| |||||||
Inventories |
| 5,811 |
| 17,850 |
|
| (42,538 | ) | (20,026 | ) |
| (89,796 | ) | (4,643 | ) | 5,811 |
| |||||||
Deposits and other assets |
| (7,163 | ) | (210 | ) |
| (920 | ) | (6,222 | ) |
| (2,258 | ) | (3,049 | ) | (7,163 | ) | |||||||
Accounts payable |
| 6,458 |
| (8,761 | ) |
| 5,533 |
| 844 |
|
| 52,530 |
| 20,653 |
| 6,458 |
| |||||||
Accrued expenses |
| 1,700 |
| 8,025 |
|
| 15,599 |
| 2,749 |
|
| 7,586 |
| 12,682 |
| 1,700 |
| |||||||
Accrued workers’ compensation |
| 474 |
| (356 | ) |
| (3,050 | ) | (4,593 | ) |
| (3,427 | ) | 34,420 |
| 474 |
| |||||||
Income taxes |
| 6,339 |
| (1,736 | ) |
| 10,769 |
| (10,916 | ) |
| (6,413 | ) | (529 | ) | 6,339 |
| |||||||
Deferred rent |
| 4,025 |
| 714 |
|
| 1,191 |
| (166 | ) |
| 10,105 |
| 8,365 |
| 4,025 |
| |||||||
Other long-term liabilities |
| 4,445 |
| (70 | ) |
| — |
| (181 | ) |
| (4,801 | ) | (2,673 | ) | 4,445 |
| |||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Net cash provided by operating activities |
| 81,424 |
| 22,035 |
|
| 44,256 |
| 79,772 |
|
| 38,271 |
| 80,924 |
| 81,424 |
| |||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Acquisition of 99¢ Only Stores |
| — |
| (1,477,563 | ) |
| — |
| — |
| ||||||||||||||
Deposit — Merger consideration |
| — |
| 177,322 |
|
| (177,322 | ) | — |
| ||||||||||||||
Purchases of property and equipment |
| (62,494 | ) | (13,170 | ) |
| (33,570 | ) | (61,121 | ) |
| (111,387 | ) | (62,090 | ) | (62,494 | ) | |||||||
Proceeds from sale of fixed assets |
| 12,064 |
| 1,910 |
|
| 98 |
| 164 |
| ||||||||||||||
Proceeds from sale of property and fixed assets |
| 39 |
| 1,473 |
| 12,064 |
| |||||||||||||||||
Purchases of investments |
| (1,996 | ) | (6,277 | ) |
| (52,623 | ) | (69,317 | ) |
| — |
| — |
| (1,996 | ) | |||||||
Proceeds from sale of investments |
| 5,256 |
| 24,519 |
|
| 226,805 |
| 43,621 |
|
| — |
| — |
| 5,256 |
| |||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Net cash used in investing activities |
| (47,170 | ) | (1,293,259 | ) |
| (36,612 | ) | (86,653 | ) |
| (111,348 | ) | (60,617 | ) | (47,170 | ) | |||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Proceeds from debt |
| — |
| 774,500 |
|
| — |
| — |
| ||||||||||||||
Payments of debt |
| (5,237 | ) | (11,313 | ) |
| — |
| — |
| ||||||||||||||
Investment in Number Holdings, Inc. preferred stock |
| — |
| (19,200 | ) | — |
| |||||||||||||||||
Dividend paid |
| — |
| (95,512 | ) | — |
| |||||||||||||||||
Proceeds from long-term debt |
| — |
| 100,000 |
| — |
| |||||||||||||||||
Payments of long-term debt |
| (6,138 | ) | (6,174 | ) | (5,237 | ) | |||||||||||||||||
Proceeds under revolving credit facility |
| 305,500 |
| — |
| — |
| |||||||||||||||||
Payments under revolving credit facility |
| (248,500 | ) | — |
| — |
| |||||||||||||||||
Payments of debt issuance costs |
| (11,230 | ) | (31,411 | ) |
| — |
| — |
|
| — |
| (2,343 | ) | (11,230 | ) | |||||||
Payments of capital lease obligation |
| (77 | ) | (13 | ) |
| (56 | ) | (72 | ) |
| (88 | ) | (69 | ) | (77 | ) | |||||||
Proceeds from equity contribution |
| — |
| 535,900 |
|
| — |
| — |
| ||||||||||||||
Repurchases of common stock related to issuance of Performance Stock Units |
| — |
| — |
|
| (1,744 | ) | (2,260 | ) | ||||||||||||||
Proceeds from exercise of stock options |
| — |
| — |
|
| 3,359 |
| 5,039 |
| ||||||||||||||
Payments to repurchase stock options of Number Holdings, Inc. |
| (76 | ) | (7,781 | ) | — |
| |||||||||||||||||
Excess tax benefit from share-based payment arrangements |
| — |
| — |
|
| 5,401 |
| 1,020 |
|
| — |
| 138 |
| — |
| |||||||
Net cash (used in) provided by financing activities |
| (16,544 | ) | 1,267,663 |
|
| 6,960 |
| 3,727 |
| ||||||||||||||
Net increase (decrease) in cash |
| 17,710 |
| (3,561 | ) |
| 14,604 |
| (3,154 | ) | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Net cash provided by (used in) financing activities |
| 50,698 |
| (30,941 | ) | (16,544 | ) | |||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Net (decrease) increase in cash |
| (22,379 | ) | (10,634 | ) | 17,710 |
| |||||||||||||||||
Cash - beginning of period |
| 27,766 |
| 31,327 |
|
| 16,723 |
| 19,877 |
|
| 34,842 |
| 45,476 |
| 27,766 |
| |||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Cash - end of period |
| $ | 45,476 |
| $ | 27,766 |
|
| $ | 31,327 |
| $ | 16,723 |
|
| $ | 12,463 |
| $ | 34,842 |
| $ | 45,476 |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Income taxes paid |
| $ | 16,372 |
| $ | 5,250 |
|
| $ | 22,059 |
| $ | 37,657 |
|
| $ | 6,358 |
| $ | 485 |
| $ | 16,372 |
|
Interest paid |
| $ | 54,074 |
| $ | 7,372 |
|
| $ | 287 |
| $ | 39 |
|
| $ | 58,222 |
| $ | 48,105 |
| $ | 54,074 |
|
Non-cash investing activities for purchases of property and equipment |
| $ | (2,146 | ) | $ | (958 | ) |
| $ | (431 | ) | $ | 1,726 |
|
| $ | (15,700 | ) | $ | (393 | ) | $ | (2,146 | ) |
Non-cash equity contribution from Rollover Investors |
| $ | — |
| $ | 100,000 |
|
| $ | — |
| $ | — |
| ||||||||||
Non-cash investment for building —leased facility |
| $ | 24,600 |
| $ | — |
| $ | — |
| ||||||||||||||
The accompanying notes are an integral part of these financial statements.
99 Cents Only Stores LLC
99¢ Only Stores
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended January 30, 2015, Ten Months Ended January 31, 2014 and Year Ended March 30, 2013 (Successor), Periods January 15, 2012 to March 31, 2012 (Successor), April 3, 2011 to January 14, 2012 (Predecessor) and Fiscal Year Ended April 2, 2011 (Predecessor)
1.Basis of Presentation and Summary of Significant Accounting Policies
Nature of Business
On January 13, 2012, pursuant toThe Company is organized under the Agreement and Planlaws of Merger (“the Merger”), dated asState of California. Effective October 11, 2011 (the “Merger Agreement”), by and among18, 2013, 99¢ Only Stores (“the Company”),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 Number its consolidated subsidiaries prior to the Conversion (as defined below) 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 January 30, 2015, the Company operated 383 retail stores with 277 in California, 49 in Texas, 36 in Arizona, and 21 in Nevada. The Company is also a wholesale distributor of various products.
Merger Sub, Inc. (“Merger Sub”
On January 13, 2012, the Company was acquired through a merger (the “Merger”) with a subsidiary of Parent,Number Holdings, Inc., a Delaware corporation with the Merger was consummated. Merger Sub mergedCompany surviving. In connection with and into 99¢ Only Stores, with 99¢ Only Stores being the surviving corporation. As a result of the Merger, the Company became a subsidiary of Parent. Parent, which is controlled by affiliates of Ares Management, LLC,L.P. (“Ares”), Canada Pension Plan Investment Board (“CPPIB”) (together, the “Sponsors”) and, prior to the Gold-Schiffer Purchase (as described in Note 9, “Related-Party Transactions”), the Rollover Investors (as defined below).
Pursuant to the terms of the Merger Agreement, at the effective time of the Merger, each outstanding share of the Company’s common stock, no par value (“Company common stock”), was converted into the right to receive $22.00described in cash, without interest and less any applicable withholding taxes (the “Merger Consideration”), excluding (1) shares held by any shareholders who were entitled to and who have properly exercised dissenters’ rights under California law, and (2) shares held by Parent, Merger Sub or any other wholly-owned subsidiary of Parent, which included the shares contributed to Parent prior to the completion of the Merger by Eric Schiffer, the Company’s former Chief Executive Officer, Jeff Gold, the Company’s former President and Chief Operating Officer, Howard Gold, the Company’s former Executive Vice President, Karen Schiffer and The Gold Revocable Trust dated October 26, 2005 (collectively, the “Rollover Investors”Note 9, “Related-Party Transactions”). In addition, each outstanding stock option was cancelled and converted into the right to receive an amount in cash equal to the excess, if any, of the Merger Consideration over the exercise price for each share subject to the applicable option. Each restricted stock unit (“RSU”) was cancelled and converted into the right to receive an amount in cash equal to the number of unforfeited shares of Company common stock then subject to the RSU multiplied by the Merger Consideration. Each performance stock unit (“PSU”) was cancelled and converted into the right to receive an amount in cash equal to the number of unforfeited shares of Company common stock then subject to the PSU multiplied by the Merger Consideration.
At the effective time of the Merger, each share of Company common stock was converted into the right to receive the Merger Consideration. As a result of the Merger, the Company’s common stock was delisted from the New York Stock Exchange and the Company ceased to be a publicly held and traded corporation. See Note 2, “The Merger.”equity company.
The CompanyConversion to LLC
On October 18, 2013, 99¢ Only Stores converted (the “Conversion”) from a California corporation to a California limited liability company, 99 Cents Only Stores LLC (“99 LLC”), that is incorporated inmanaged by its sole member, Parent. In connection with the Conversion, each outstanding share of Class A common stock of 99¢ Only Stores, par value $0.01 per share, was converted into one membership unit of 99 LLC, and each outstanding share of Class B common stock of 99¢ Only Stores, par value $0.01 per share, was cancelled and forfeited. Pursuant to the laws of the State of California.California, all rights and property of 99¢ Only Stores were vested in 99 LLC and all debts, liabilities and obligations of 99¢ Only Stores continued as debts, liabilities and obligations of 99 LLC. 99 LLC has elected to be treated as a disregarded entity for United States federal income tax purposes. The Conversion did not have any effect on deferred tax assets or liabilities, and the Company will continue to use the liability method of accounting for income taxes. The Company is an extreme value retailer of primarily consumable and general merchandiseParent will continue to file consolidated or combined income tax returns with an emphasis on name-brand products. As of March 30, 2013, the Company operated 316 retail stores with 232its subsidiaries in California, 39 in Texas, 29 in Arizona, and 16 in Nevada. The Company is also a wholesale distributor of various consumer products.all jurisdictions.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries required to be consolidated in accordance with accounting principles generally accepted in the United States (“GAAP”). Intercompany accounts and transactions between the consolidated companies have been eliminated in consolidation.
Change in Fiscal PeriodsYear
On December 16, 2013, the board of directors of the Company’s sole member, Parent, approved a resolution changing the end of the Company’s fiscal year. Prior to the change, the fiscal year of the Company ended on the Saturday closest to the last day of March. The Company’s new fiscal year end is the Friday closest to the last day of January, with each successive quarterly period ending the Friday closest to the last day of April, July, October or January, as applicable.
The Company follows a fiscal calendar consisting of four quarters with 91 days, each ending on the SaturdayFriday closest to the calendar quarter-end, 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. OnThe Company’s fiscal year 2015 (“fiscal 2015”) began on February 1, 2014, and ended January 13, 2012,30, 2015 and consisted of 52 weeks. The Company’s fiscal year 2014 (“transition fiscal 2014” or the Company completed the Merger. The accompanying audited consolidated financial statements are presented for the “Predecessor”“ten months ended January 31, 2014”) began on March 31, 2013 and “Successor” relating to the periods precedingended on January 31, 2014 and succeeding the Merger, respectively.consisted of 44 weeks. The Company’s fiscal year 2013 (“fiscal 2013”) (Successor) began on April 1, 2012 and ended on March 30, 2013 consistingand consisted of 52 weeks. The Successor period from January 15, 2012 to March 31, 2012 consisted of 11 weeks and the Predecessor period from April 3, 2011 to January 14, 2012 consisted of 41 weeks, for a total of 52 weeks. The Company’s fiscal year 2011 (“fiscal 2011”) (Predecessor) began on March 28, 2010 and ended on April 2, 2011, consisting of 53 weeks with one additional week included in the fourth quarter.
See Note 2, “Change in Fiscal Year” to the Company’s consolidated financial statements for the comparative Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the ten months ended January 31, 2014 (a 44-week period) and ten months ended January 26, 2013 (a 43-week period).
Change in Presentation of Financial Statements
In the first quarter ended May 2, 2014 (the “first quarter of fiscal 2015”), the Company changed the presentation of its financial statements to include receiving, distribution, warehouse costs and transportation to and from stores in its cost of sales. Previously, these costs were included in selling, general and administrative expenses. Depreciation expense related to these costs, which was historically included in selling, general and administrative expense, is now also included in cost of sales. Also, depreciation and amortization expense previously included in selling, general and administrative expense is no longer presented separately. Reclassifications of $87.0 million and $88.8 million from selling, general and administrative expense to cost of sales were made for transition fiscal 2014 and fiscal 2013, respectively, to conform to current year presentation. This change does not change previously reported operating income or net income.
This change in presentation of financial statements was made in order to be in line with the Company’s peers in the retail industry.
Use of Estimates
The preparation of the 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Immaterial Error Correction
The Company is in the process of upgrading its systems for accounting for merchandise inventories. Among other things, the Company is preparing to implement an SAP system that will enable the Company, for the first time, to track inventory at each of its retail stores on a perpetual basis by stock keeping unit (or SKU). The SAP implementation process will begin in fiscal 2014, with all stores expected to be included by the end of fiscal 2015. In anticipation of the implementation of this system, during the second half of fiscal 2013 the Company performed physical counts and established inventory cost and retail by SKU at 81 of its more than 300 retail stores. In prior periods, the Company had originally determined the value of store level inventory by performing physical counts for each price point category and then converted those retail values to cost basis by applying a year-to-date cost percentage per store. For the 81 stores where the counts were taken by SKU, the Company determined total retail values by merchandise category and applied each category’s cost percentage to determine the value of the inventory. As a result of this analysis, the Company determined that single average cost percentage by store was not consistent with the inventory on hand at the applicable balance sheet date based on the higher turnover of low margin product. As of March 30, 2013 and for all prior periods since Merger, the Company revised the calculation to include a year-to-date cost percentage per merchandise category applied to the estimated retail value for all stores by merchandise category. The result of the foregoing evaluation indicated an overstatement in total inventory of $13.3 million at the Merger date, and represents an amount that has accumulated over prior periods.
Management evaluated the materiality of this error quantitatively and qualitatively, and concluded that it was not material, to any prior period annual and quarterly financial statements. However, because the adjustment to correct the error in fiscal 2013, would have had a material effect on the fiscal 2013 financial statements, the correction was reflected retroactively within the March 31, 2012 balance sheet, and the purchase price allocation as of the Merger date, which resulted in a $8.0 million increase to goodwill, a $5.3 million increase to deferred tax assets, and a $13.3 million decrease to inventories.
The following table sets forth the effect this correction had on the Company’s prior period reported financial statements (in thousands):
|
| March 31, 2012 |
| |||||||
|
| As Reported |
| Adjustments |
| As Adjusted |
| |||
|
|
|
|
|
|
|
| |||
Deferred income taxes |
| $ | 25,843 |
| $ | 5,345 |
| $ | 31,188 |
|
Inventory |
| 214,318 |
| (13,340 | ) | 200,978 |
| |||
Total current assets |
| 299,571 |
| (7,995 | ) | 291,576 |
| |||
Goodwill |
| 471,513 |
| 7,995 |
| 479,508 |
| |||
Total assets |
| $ | 1,768,041 |
| $ | — |
| $ | 1,768,041 |
|
The adjustments had no effect on the Company’s prior statements of cash flows or statements of comprehensive income (loss). Certain amounts disclosed in Notes 1, 2, 5 and 17 have been revised to reflect the correction.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current year presentation.
Cash
For purposes of reporting cash flows, cash includes cash on hand, andcash 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 processare processed within three business days and therefore are also classified as cash. Cash balances held at financial institutions are generally in excess of federally insured limits. These accounts are only insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. The Company’s cash balances held at financial institutions and exceeding FDIC insurance totaled $61.4$2.1 million and $42.6$35.0 million respectively, as of MarchJanuary 30, 20132015 and MarchJanuary 31, 2012.2014, respectively. 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 consolidated statements of cash flows. Book overdrafts included in accounts payable were $16.5 million and $9.3 million as of January 30, 2015 and January 31, 2014, 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.
Investments
The Company’s investments in debt and equity securities are classified as available-for-sale and are comprised primarily of money market funds and auction rate securities. See Note 4, “Investments.”
Investment securities are carried at fair value, based on quoted market prices or other readily available market information. Investments are adjusted for the amortization of premiums or discounts to maturity and such amortization is included in interest income. Unrealized gains and losses, net of taxes, are included in accumulated other comprehensive income, which is reflected as a separate component of shareholders’ equity in the Company’s Consolidated Balance Sheets. Gains and losses are recognized when realized in the Company’s Consolidated Statements of Comprehensive Income (Loss). When it is determined that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit loss is recognized in earnings.
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 inventoriesinventory counts are takencompleted at each of the Company’s retail stores at least once a year by an independentoutside inventory service company. Additional store-level physical inventories are taken byThe Company performs inventory cycle counts at its warehouses throughout the service companies from time to time based on a particular store’s performance and/or book inventory balance.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 Company’s policy is to analyze all items held invaluation allowances for excess and obsolete inventory that are at least twelve months oldbased on the age of the inventory, sales trends and that are not expected to be sold through at the current sales rates over the next twelve months in order to determine what merchandise should be reserved for as excess or obsolete.future merchandising plans. The valuation allowances for excess and obsolete inventory in many locations (including various warehouses, store backrooms, and sales floors of its stores), 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.
The Company is in the process49
Management evaluated the materiality of this error quantitatively and qualitatively, and has concluded that it was not material, to any prior period annual and quarterly financial statements. However, because the adjustment to correct the error in fiscal 2013, would have had a material effect on the fiscal 2013 financial statements, the correction was reflected retroactively within the March 31, 2012 balance sheet, and the purchase price allocation as of the Merger date, which resulted in a $8.0 million increase to goodwill, a $5.3 million increase to deferred tax assets, and a $13.3 million decrease to inventories.Contents
In the fourth quarter of fiscal 2013, the Company revised its inventory merchandising and liquidation philosophies to significantly reduce and liquidate slow moving inventories prospectively as directed by the then current management team. Based on these changes, the Company adjusted its excess and obsolescence reserve to include items that are at least twelve months old and that the Company does not expect to sell above cost within the next twelve months. As a result of this change, the Company recorded a charge to cost of sales and a corresponding reduction in inventory of approximately $9.1 million in the fourth quarter of fiscal 2013. This iswas a prospective change and did not have an effect on prior periods.
TableAt the end of Contentsthe third quarter of transition fiscal 2014, based on new merchandising plans, the Company increased its valuation allowances for excess and obsolete inventory. The Company recorded a charge to cost of sales and a corresponding reduction in inventory of approximately $9.6 million. This was a prospective change and did not have an effect on prior periods.
In the fourth quarter of fiscal 2015, the Company recorded a charge for additional inventory shrinkage based upon the results of annual physical inventory counts completed during the quarter. This resulted in a net charge to cost of sales and a corresponding reduction in inventory of approximately $10.0 million, which was primarily related to the implementation of certain strategic initiatives, including the “Go Taller” store remodeling program.
In order to obtain inventory at attractive prices, the Company takes advantage of large volume purchases, closeouts and other similar purchase opportunities but within the above stipulated policy.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. The Company’s inventory was $201.6 million for the fiscal year ended March 30, 2013 and $207.4 million for the period ended March 31, 2012.
At times, historically, the Company also made large block purchases of inventory that it planned to sell over a period of longer than twelve months. There are no such inventories as of March 30, 2013. As of March 31, 2012, the Company held inventory of specific products identified as expected to sell over a period that exceeds twelve months of approximately $6.4 million, which is included in deposits and other assets in the consolidated financial statements.
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 |
|
|
Transportation equipment |
| 3-5 years |
Information technology systems |
| For major corporate systems, estimated useful life up to 7 years; for functional |
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 quarterly or 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 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 8, “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 fiscal 2015, the Company wrote down the carrying value of a held for sale property to the estimated net realizable value, net of expected disposal costs, and accordingly recorded an asset impairment charge of $0.1 million. During transition fiscal 2014, the Company did not record any long-lived asset impairment charges. During fiscal 2013, the Company wrote down the carrying value of landa held for sale property to the estimated net realizable value, net of expected disposal costs, and accordingly recorded an asset impairment charge of $0.5 million. During the period from January 15, 2012 to March 31, 2012, the period from April 3, 2011 to January 14, 2012, and fiscal 2011, the Company did not record any long-lived asset impairment charges. See Note 12, “Texas Markets” to the Company’s Consolidated Financial Statements for information regarding the charges related to the Company’s Texas operations. The Company has not made any material changes to its long-lived asset impairment methodology during fiscal 2013.
Goodwill and Other Intangible assetsAssets
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 utilizingusing 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 wholesaleretail reporting unit and the retailwholesale reporting unit. The amount of goodwill allocated to the wholesale reporting and the retail reporting unit and wholesale reporting unit was $12.5 million$467.2 and $467.2$12.5 million, respectively, as of MarchJanuary 30, 2013.2015.
The Company performs the annual test for impairment in the fourth quarterJanuary 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.rate (Level 3 measurement, see Note 8, “Fair Value of Financial Instruments”).
During the fourth quarter of fiscal 2013,2015, the Company completed step one of its goodwill impairment test for the two reporting units and determined that there was no impairment of goodwill since the fair value of the reporting units exceeded the carrying amount. During the fourth quarter of fiscal 2013,2015, the Company completed its annual indefinite-lived intangible asset impairment test and determined there was no impairment since the fair value of the trade name exceeded the carrying amount.
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.tests (Level 3 measurement, see Note 8, “Fair Value of Financial Instruments”).
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.
Purchase Accounting
The Company’s assets and liabilities have been recorded at their estimated fair values as of the date of the Merger. The aggregate purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed, based upon an assessment of their relative fair value as of the Merger date. These estimates of fair values, the allocation of the purchase price and other factors related to the accounting for the Merger are subject to significant judgments and the use of estimates.
Income Taxes
The Company utilizesuses 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 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 5, “Income Tax Provision” 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 arewere 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 11, “Stock-Based Compensation Plans” 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. The Company has not recorded any breakage income related to its gift card program.
Cost of Sales
Cost of sales includes the cost of inventory, freight in, inter-state warehouse transportation costs, 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. In addition, the Company analyzes its inventory levels and the related cash discounts received to arrive at a value for cash discounts to be included in the inventory balance. The Company does not include purchasing, receiving, distribution warehouse costs and occupancy costs in its cost of sales. Due to this classification, the Company’s gross profit rates may not be comparable to those of other retailers that include costs related to their distribution network and occupancy in cost of sales.
OperatingSelling, General and Administrative Expenses
Selling, general and administrative expenses include purchasing, receiving, inspection and warehouse costs, the costs of selling merchandise in stores (payroll(which include payroll and associated costs, occupancy and other store-level costs), distribution costs (payroll and associated costs, occupancy, transportation to and from stores and other distribution-related costs) and corporate costs (payroll(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 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 estimationestimates 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.
See Note 12, “Texas Markets” to the Company’s Consolidated Financial Statements for information regarding the lease termination charges related to Company’s Texas operations.
During fiscal 2013, the Company sold and leased back three stores and the resulting leases qualify and are accounted for as operating leases. The net proceeds from the sale-leaseback transactions amounted to $5.3 million. Gains of $0.4 million were deferred and are being amortized over the term of lease (12-15 years). In March 2012, the Company sold and leased back a store and the resulting lease qualifies and is accounted for as an operating lease. The net proceeds from the sale-leaseback transaction amounted to $1.9 million. The gain of $0.8 million was deferred and is being amortized over the term of lease (13 years).
Self-Insured Workers’ Compensation Liability
The Company self-insures for workers’ compensation claims in California and Texas. The Company establishes a liability for losses offrom both estimated known and incurred but not reported insurance claims based on reported claims and actuarial valuations of estimated future costs of reportedknown 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 MarchJanuary 30, 20132015 and MarchJanuary 31, 2012.2014.
Self-Insured Health Insurance Liability
During the second quarter of fiscal 2012 ended October 1, 2011 (the “second quarter of fiscal 2012”), theThe Company began self-insuringself-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, all 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, exceptincurred. Advertising expenses were $6.2 million for the costs associated with television advertising, which are charged to expensefiscal year ended January 30, 2015. Advertising expenses were $4.4 million for the first time the advertising takes place.ten months ended January 31, 2014. Advertising expenses were $5.4 million for the fiscal year ended March 30, 2013. Advertising expenses were $1.2 million and $4.3 million for the periods of January 15, 2012 to March 31, 2012 and April 3, 2011 to January 14, 2012, respectively. Advertising expenses were $5.5 million for the fiscal year ended April 2, 2011.
Fair Value of Financial Instruments
The Company’s financial instruments consist principally of cash, short-term marketable securities, accounts receivable, interest rate derivatives, accounts payable, accruals, debt, and other liabilities. Cash short-term marketable securities 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 8, “Fair Value of Financial Instruments” for further discussion of the fair value of debt.
The Company utilizesuses 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 investments and interest rate derivatives designated as cash flow hedges. The following table sets forth the calculation of comprehensive income, net of tax effects, for the periods indicated (in thousands):
|
| Year Ended |
| For the Periods |
| Year Ended |
| |||||||
|
| March 30, |
| January 15, 2012 |
|
| April 3, 2011 |
| April 2, |
| ||||
|
| (Successor) |
| (Successor) |
|
| (Predecessor) |
| (Predecessor) |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Net (loss) income |
| $ | (8,909 | ) | $ | (5,293 | ) |
| $ | 49,748 |
| $ | 74,308 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Unrealized holding gains on marketable securities, net of tax effects of $3 in fiscal 2013, $45 for January 15, 2012 to March 31, 2012, $30 for April 3, 2011 to January 14, 2012, and $70 in fiscal 2011 |
| 4 |
| 68 |
|
| 46 |
| 105 |
| ||||
Unrealized losses on interest rate cash flow hedge, net of tax effects of $(835) in fiscal 2013, $0 for January 15, 2012 to March 31, 2012, $0 for April 3, 2011 to January 14, 2012, and $0 in fiscal 2011 |
| (1,252 | ) | — |
|
| — |
| — |
| ||||
Reclassification adjustment, net of tax effects of $(18) in fiscal 2013, $(30) for January 15, 2012 to March 31, 2012, $100 for April 3, 2011 to January 14, 2012, and $19 in fiscal 2011 |
| (27 | ) | (45 | ) |
| 150 |
| 28 |
| ||||
Total unrealized holding (losses) gains, net |
| (1,275 | ) | 23 |
|
| 196 |
| 133 |
| ||||
Total comprehensive (loss) income |
| $ | (10,184 | ) | $ | (5,270 | ) |
| $ | 49,944 |
| $ | 74,441 |
|
|
| Year Ended |
| Ten Months |
| Year Ended |
| |||
|
| January 30, |
| January 31, |
| March 30, 2013 |
| |||
Net income (loss) |
| $ | 5,502 |
| $ | (12,485 | ) | $ | (8,909 | ) |
|
|
|
|
|
|
|
| |||
Unrealized holding gains on marketable securities, net of tax effects of $0 in fiscal 2015, $0 in transition fiscal 2014 and $3 in fiscal 2013 |
| — |
| — |
| 4 |
| |||
Unrealized losses on interest rate cash flow hedge, net of tax effects of $(384) in fiscal 2015, $(190) in transition fiscal 2014 and $(835) in fiscal 2013 |
| (576 | ) | (284 | ) | (1,252 | ) | |||
Reclassification adjustment, net of tax effects of $647 in fiscal 2015, $97 in transition fiscal 2014 and $(18) in fiscal 2013 |
| 969 |
| 145 |
| (27 | ) | |||
|
|
|
|
|
|
|
| |||
Total unrealized holding gains (losses), net |
| 393 |
| (139 | ) | (1,275 | ) | |||
|
|
|
|
|
|
|
| |||
Total comprehensive income (loss) |
| $ | 5,895 |
| $ | (12,624 | ) | $ | (10,184 | ) |
Amounts in accumulated other comprehensive loss as January 30, 2015 and January 31, 2014 consisted of unrealized losses on interest rate cash flow hedges. Reclassifications out of AOCI in fiscal 2015 and transition fiscal 2014 are presented in Note 7, “Derivative Financial Instruments.”
New Authoritative Standards
In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”), which is effective for fiscal years and interim periods within those years, beginning after December 15, 2013. ASU 2013-11 provides guidance regarding the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar loss or a tax credit carryforward exists. Under certain circumstances, unrecognized tax benefits should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or tax credit carryforward. The Company adopted ASU 2013-11 in the first quarter of fiscal 2015. There is no material impact on the Company or its consolidated financial statements.
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 will adopt this standard in the first quarter of fiscal 2016 and such adoption is not expected to have a 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.
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 this standard during the first quarter of fiscal 2016. The Company is currently evaluating this guidance and the impact it will have on 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 November 2014, the FASB issued ASU No. 2014-17, “Business Combinations: Pushdown Accounting.” This ASU provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. If pushdown accounting is applied to an individual change-in-control event, that election is irrevocable. ASU 2014-17 was effective on November 18, 2014. The adoption of this ASU had no 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 2016 and such adoption is not expected to have a material impact on the Company or its consolidated financial statements.
2.Change in Fiscal Year
On December 16, 2013, the board of directors of Parent, approved a resolution changing the end of the Company’s fiscal year. Prior to the change, the fiscal year of the Company ended on the Saturday closest to the last day of March. The Company’s new fiscal year end is the Friday closest to the last day of January, with each successive quarterly period ending the Friday closest to the last day of April, July, October or January, as applicable. As a result, the year and the fourth interim period of the Company’s 2014 fiscal year ended on January 31, 2014. The 44-week period from March 31, 2013 through January 31, 2014 and comparative 43-week period from April 1, 2012 to January 26, 2013 is presented in this Annual Report on Form 10-K.
For comparative purposes, condensed consolidated statements of comprehensive income (loss) for the ten months ended January 31, 2014 (a 44-week period) and ten months ended January 26, 2013 (a 43-week period) are presented below (in thousands):
|
| Ten Months Ended |
| Ten Months Ended |
| ||
|
| January 31, |
| January 26, |
| ||
|
| (44 Weeks) |
| (43Weeks) |
| ||
|
|
|
| (Unaudited) |
| ||
Net Sales: |
|
|
|
|
| ||
Total sales |
| $ | 1,528,743 |
| $ | 1,357,745 |
|
Cost of sales |
| 1,033,077 |
| 900,056 |
| ||
|
|
|
|
|
| ||
Gross profit |
| 495,666 |
| 457,689 |
| ||
Selling, general and administrative expenses |
| 481,449 |
| 408,397 |
| ||
|
|
|
|
|
| ||
Operating income |
| 14,217 |
| 49,292 |
| ||
Other (income) expense: |
|
|
|
|
| ||
Interest income |
| (16 | ) | (293 | ) | ||
Interest expense |
| 50,820 |
| 50,448 |
| ||
Loss on extinguishment of debt |
| 4,391 |
| 16,346 |
| ||
Other |
| — |
| 376 |
| ||
|
|
|
|
|
| ||
Total other expense, net |
| 55,195 |
| 66,877 |
| ||
|
|
|
|
|
| ||
Loss before provision for income taxes |
| (40,978 | ) | (17,585 | ) | ||
Benefit for income taxes |
| (28,493 | ) | (7,131 | ) | ||
|
|
|
|
|
| ||
Net loss |
| $ | (12,485 | ) | $ | (10,454 | ) |
|
|
|
|
|
| ||
Comprehensive loss |
| $ | (12,624 | ) | $ | (11,586 | ) |
New Authoritative Standards3.
In June 2011, FASB issued ASU 2011-05, “Presentation of Comprehensive Income,” (ASU 2011-05). ASU 2011-05 allows an entity to present components of net incomeGoodwill and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. While ASU 2011-05 changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. The new guidance is effective for fiscal year and interim periods beginning after December 15, 2011. The adoption of ASU 2011-05 did not have any impact on the Company’s consolidated financial position or results of operations, other than presentation.
On December 23, 2011, the FASB issued ASU 2011-12, which indefinitely defers the provision of ASU 2011-5 related to the requirement that entities present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. The adoption of ASU 2011-12 did have any impact on the Company’s consolidated financial position or results of operations, other than presentation.
On July 27, 2012, the FASB issued ASU 2012-02, “Testing Indefinite-LivedOther Intangible Assets for Impairment,” (“ASU 2012-02”). The ASU 2012-02 provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If an entity concludes that it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required. However, if an entity concludes otherwise, it would be required to determine the fair value of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under GAAP. The new guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of ASU 2012-02 is not expected to have a material impact on the Company’s consolidated financial position or results of operations.
In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”), which is effective for reporting periods beginning after December 15, 2012. ASU 2013-02 was issued to improve the reporting of reclassifications out of accumulated other comprehensive income (“AOCI”). ASU 2013-02 requires companies to provide information about the amounts reclassified out of AOCI either in a single note or on the face of the financial statements. Significant amounts reclassified out of AOCI should be presented by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified in its entirety to net income in the same reporting period. For amounts not required to be reclassified in their entirety to net income, a cross-reference to other disclosures provided for in accordance with GAAP is required. The Company has evaluated this updated authoritative guidance, and it does not expect the adoption of this guidance to have a material impact on its consolidated financial statement disclosures. The Company will adopt this guidance in the first quarter of fiscal 2014.
2. The MergerLiabilities
As discussed in Note 1, the Merger was completed on January 13, 2012 and was financed by:
·Borrowings consisting of (i) a $175 million, 5-year asset-based revolving credit facility (as amended, the “ABL Facility”), of which $10 million was drawn at closing of the Merger and was fully repaid in February 2012 and (ii) a $525 million, 7-year term loan credit facility (as amended, the “First Lien Term Loan Facility” and, together with the ABL Facility, the “Credit Facilities”);
·Issuance of $250 million principal amount of 11% senior notes due 2019 (the “Senior Notes”); and
·Equity investments of $635.9 million from the Sponsors and the Rollover Investors.
The Merger was accounted for as a business combination whereby the purchase price paid to effect the Merger was allocated to recognize the acquired assets and liabilities at fair value. The Merger and the allocation of the purchase price of $1.6 billion have been recorded as of January 14, 2012. The sources and uses of funds in connection with the Merger are summarized in the following table (in thousands):
Sources: |
|
|
| |
Proceeds from First Lien Term Loan |
| $ | 525,000 |
|
Proceeds from Senior Notes |
| 250,000 |
| |
Proceeds from ABL Facility |
| 10,000 |
| |
Proceeds from equity contributions |
| 535,900 |
| |
Rollover equity from Rollover Investors |
| 100,000 |
| |
Cash on hand |
| 212,575 |
| |
Total sources |
| $ | 1,633,475 |
|
|
|
|
| |
Uses: |
|
|
| |
Equity purchase price |
| $ | 1,577,563 |
|
Original issue discount and other debt issuance costs |
| 41,911 |
| |
Cash to balance sheet |
| 14,001 |
| |
Total uses |
| $ | 1,633,475 |
|
Purchase Accounting
In connection with the purchase price allocation, estimates of 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 information available at the acquisition date, and in some cases, valuation results from independent valuation specialists. Purchase accounting adjustments were recorded to: (i) increase the carrying value of property and equipment, (ii) establish intangible assets for trade names, vendor relations and favorable lease commitments and (iii) revalue lease-related liabilities. Also, as disclosed in Note 1, inventory has also been adjusted to record an error that was identified in fiscal 2013 but related to prior periods.
The allocation of purchase price is as follows (in thousands):
Purchase price |
| $ | 1,577,563 |
|
Less: net assets acquired |
| 741,017 |
| |
Excess of purchase price over book value of net assets acquired |
| $ | 836,546 |
|
|
|
|
| |
Write up (down) of tangible assets: |
|
|
| |
Property and equipment |
| $ | 87,863 |
|
Land and buildings |
| 63,549 |
| |
Assets held for sale |
| (933 | ) | |
Deferred rent |
| (425 | ) | |
Leasing commission |
| (5,224 | ) | |
Inventory error correction |
| (13,340 | ) | |
|
|
|
| |
Acquisition-related intangible assets: |
|
|
| |
Trade name (indefinite life) |
| $ | 410,000 |
|
Trademarks (20 year life) |
| 1,822 |
| |
Bargain Wholesale customer relationships |
| 20,000 |
| |
Fair market value of favorable leases |
| 46,723 |
| |
Acquisition-related intangibles |
| 478,545 |
| |
|
|
|
| |
Write down/(up) of liabilities: |
|
|
| |
Deferred rent and lease incentive revaluation |
| 10,742 |
| |
Fair market value of unfavorable leases |
| (19,836 | ) | |
|
|
|
| |
Deferred income taxes: |
|
|
| |
Long-term deferred taxes |
| $ | (244,140 | ) |
|
|
|
| |
Residual goodwill (1) |
| $ | 479,745 |
|
Total allocated excess purchase price |
| $ | 836,546 |
|
(1)The Company does not expect any of the residual goodwill to be tax deductible because the Merger was a nontaxable transaction. Goodwill is considered to have an indefinite life and is not amortized, but rather reviewed annually for impairment or more frequently if indicators of impairment exist.
As a result of the Merger, the Company recognized, in the Consolidated Statements of Comprehensive Income (Loss), legal, financial advisory, accounting, and other merger related costs of $10.6 million for the period January 15, 2012 to March 31, 2011 and $15.2 million for the period April 3, 2011 to January 14, 2012.
Pro forma financial information (unaudited)
The following unaudited pro forma results of operations give effect to the Merger as if it had occurred on March 28, 2010. The pro forma results of operations reflect adjustments (i) to record amortization and depreciation resulting from purchase accounting, (ii) to record interest expense, including amortization of deferred financing fees and original issue discount (“OID”), and (iii) to eliminate certain non-recurring charges that were incurred in connection with the Merger, including acquisition-related share-based compensation, legal and advisory fees, and other miscellaneous transaction related costs. This unaudited pro forma financial information should not be relied upon as necessarily being indicative of the historical results that would have been obtained if the Merger had actually occurred on that date, nor the results of operations in the future (in thousands):
|
| January 15, 2012 to March 31, 2012 |
|
| April 3, 2011 to January 14, 2012 |
| For the Fiscal Year Ended |
| ||||||||||||
|
| (Successor) |
|
| (Predecessor) |
| ||||||||||||||
|
| Historical |
| Pro Forma |
|
| Historical |
| Pro Forma |
| Historical |
| Pro Forma |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net sales |
| $ | 338,916 |
| $ | 338,916 |
|
| $ | 1,192,780 |
| $ | 1,192,780 |
| $ | 1,423,878 |
| $ | 1,423,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net (loss) income |
| $ | (5,293 | ) | $ | (29,739 | ) |
| $ | 49,748 |
| $ | 51,768 |
| $ | 74,308 |
| $ | 17,987 |
|
Goodwill and other intangible assets and liabilities
As a result of the Merger, the Company recognized goodwill, and other intangible assets and liabilities. The following table sets forth the value of the goodwill and other intangible assets and liabilities, and the amortization of finite lived intangible assets and liabilities recognized by the “Successor” (in thousands):
|
| As of March 30, 2013 |
| As of March 31, 2012 |
|
| As of January 30, 2015 |
| As of January 31, 2014 |
| ||||||||||||||||||||||||||||||||||||
|
| Remaining |
| Gross |
| Accumulated |
| Net |
| Remaining |
| Gross |
| Accumulated |
| Net |
|
| Remaining |
| Gross |
| Accumulated |
| Net |
| Remaining |
| Gross |
| Accumulated |
| Net |
| ||||||||||||
Indefinite lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Goodwill |
|
|
| $ | 479,745 |
| $ | — |
| $ | 479,745 |
|
|
| $ | 479,508 |
| $ | — |
| $ | 479,508 |
|
|
|
| $ | 479,745 |
| $ | — |
| $ | 479,745 |
|
|
| $ | 479,745 |
| $ | — |
| $ | 479,745 |
|
Trade name |
|
|
| 410,000 |
| — |
| 410,000 |
|
|
| 410,000 |
| — |
| 410,000 |
|
|
|
| 410,000 |
| — |
| 410,000 |
|
|
| 410,000 |
| — |
| 410,000 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||
Total indefinite lived intangible assets |
|
|
| $ | 889,745 |
| $ | — |
| $ | 889,745 |
|
|
| $ | 889,508 |
| $ | — |
| $ | 889,508 |
|
|
|
| $ | 889,745 |
| $ | — |
| $ | 889,745 |
|
|
| $ | 889,745 |
| $ | — |
| $ | 889,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||
Finite lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Trademarks |
| 19 |
| $ | 2,000 |
| $ | (121 | ) | $ | 1,879 |
| 20 |
| $ | 2,000 |
| $ | (21 | ) | $ | 1,979 |
|
| 17 |
| $ | 2,000 |
| $ | (306 | ) | $ | 1,694 |
| 18 |
| $ | 2,000 |
| $ | (206 | ) | $ | 1,794 |
|
Bargain Wholesale customer relationships |
| 11 |
| 20,000 |
| (2,019 | ) | 17,981 |
| 12 |
| 20,000 |
| (353 | ) | 19,647 |
|
| 9 |
| 20,000 |
| (5,096 | ) | 14,904 |
| 10 |
| 20,000 |
| (3,429 | ) | 16,571 |
| ||||||||||||
Favorable leases |
| 1 to 16 |
| 46,723 |
| (5,224 | ) | 41,499 |
| 2 to 17 |
| 46,723 |
| (915 | ) | 45,808 |
|
| 1 to 14 |
| 46,723 |
| (13,010 | ) | 33,713 |
| 1 to 15 |
| 46,723 |
| (8,777 | ) | 37,946 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||
Total finite lived intangible assets |
|
|
| 68,723 |
| (7,364 | ) | 61,359 |
|
|
| 68,723 |
| (1,289 | ) | 67,434 |
|
|
|
| 68,723 |
| (18,412 | ) | 50,311 |
|
|
| 68,723 |
| (12,412 | ) | 56,311 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||
Total goodwill and other intangible assets |
|
|
| $ | 958,468 |
| $ | (7,364 | ) | $ | 951,104 |
|
|
| $ | 958,231 |
| $ | (1,289 | ) | $ | 956,942 |
|
|
|
| $ | 958,468 |
| $ | (18,412 | ) | $ | 940,056 |
|
|
| $ | 958,468 |
| $ | (12,412 | ) | $ | 946,056 |
|
|
| As of March 30, 2013 |
|
| As of January 30, 2015 |
| ||||||||||||||
|
| Trademarks |
| Bargain |
| Favorable |
|
| Trademarks |
| Bargain |
| Favorable |
| ||||||
Estimated amortization of finite lived intangible assets (a) (b): |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
FY 2014 |
| $ | 100 |
| $ | 1,667 |
| $ | 4,279 |
| ||||||||||
FY 2015 |
| 100 |
| 1,667 |
| 4,250 |
| |||||||||||||
FY 2016 |
| 100 |
| 1,667 |
| 4,231 |
|
| $ | 100 |
| $ | 1,667 |
| $ | 4,236 |
| |||
FY 2017 |
| 100 |
| 1,667 |
| 4,186 |
|
| 100 |
| 1,667 |
| 4,224 |
| ||||||
FY 2018 |
| 100 |
| 1,667 |
| 4,031 |
|
| 100 |
| 1,667 |
| 4,035 |
| ||||||
FY 2019 |
| 100 |
| 1,667 |
| 4,042 |
| |||||||||||||
FY 2020 |
| 100 |
| 1,667 |
| 3,726 |
| |||||||||||||
Thereafter |
| 1,379 |
| 9,646 |
| 20,522 |
|
| 1,194 |
| 6,569 |
| 13,450 |
| ||||||
|
| $ | 1,879 |
| $ | 17,981 |
| $ | 41,499 |
|
|
|
|
|
|
|
| |||
|
| $ | 1,694 |
| $ | 14,904 |
| $ | 33,713 |
| ||||||||||
|
| As of March 30, 2013 |
| As of March 31, 2012 |
|
| As of January 30, 2015 |
|
|
| As of January 31, 2014 |
| ||||||||||||||||||||||||||||||
|
| Remaining |
| Gross |
| Accumulated |
| Net |
| Remaining |
| Gross |
| Accumulated |
| Net |
|
| Remaining |
| Gross |
| Accumulated |
| Net |
|
|
| Remaining |
| Gross |
| Accumulated |
| Net |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Unfavorable leases |
| 1 to 17 |
| $ | 19,835 |
| $ | (5,002 | ) | $ | 14,833 |
| 2 to 18 |
| $ | 19,835 |
| $ | (876 | ) | $ | 18,959 |
|
| 1 to 15 |
| $19,835 |
| $(11,615 | ) | $8,220 |
| Unfavorable leases |
| 1 to 16 |
| $19,835 |
| $(8,117 | ) | $11,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Estimated amortization of unfavorable leases (b): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
FY 2014 |
|
|
| $ | 4,005 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
FY 2015 |
|
|
| 3,500 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
FY 2016 |
|
|
| 2,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $2,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
FY 2017 |
|
|
| 1,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
FY 2018 |
|
|
| 1,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
FY 2019 |
|
|
| 836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
FY 2020 |
|
|
| 533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Thereafter |
|
|
| 2,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
| $ | 14,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
| $8,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
(a) Amortization of trademarks and Bargain Wholesale customer relationships is recognized in amortization expenseselling, general and administrative expenses on the Consolidated Statement of Comprehensive Income (Loss).
(b) Amortization of favorable and unfavorable leases is recognized in rent expense, as a component of operatingselling, general and administrative expenses on the Consolidated Statement of Comprehensive Income (Loss).
The change to goodwill from March 31, 2012 to March 30, 2013 was due to the adjustment56
Table of the purchase price fair values assigned.Contents
3.4. Property and Equipment, net
The following table provides details of property and equipment (in thousands):
|
| March 30, |
| March 31, |
|
| January 30, |
| January 31, |
| ||||
Property and equipment |
|
|
|
|
|
|
|
|
|
| ||||
Land |
| $ | 160,446 |
| $ | 156,137 |
|
| $ | 176,506 |
| $ | 160,446 |
|
Buildings |
| 90,466 |
| 89,110 |
|
| 117,422 |
| 90,466 |
| ||||
Buildings improvements |
| 64,429 |
| 59,375 |
|
| 71,985 |
| 66,911 |
| ||||
Leasehold improvements |
| 112,779 |
| 92,909 |
|
| 176,895 |
| 138,392 |
| ||||
Fixtures and equipment |
| 76,831 |
| 54,659 |
|
| 148,851 |
| 93,840 |
| ||||
Transportation equipment |
| 7,497 |
| 6,489 |
|
| 12,685 |
| 11,469 |
| ||||
Construction in progress |
| 30,949 |
| 29,271 |
|
| 46,195 |
| 42,053 |
| ||||
|
|
|
|
|
| |||||||||
Total property and equipment |
| 543,397 |
| 487,950 |
|
| 750,539 |
| 603,577 |
| ||||
Less: accumulated depreciation and amortization |
| (67,346 | ) | (11,425 | ) |
| (169,519 | ) | (118,531 | ) | ||||
|
|
|
|
|
| |||||||||
Property and equipment, net |
| $ | 476,051 |
| $ | 476,525 |
|
| $ | 581,020 |
| $ | 485,046 |
|
4.Investments
The Company liquidated allAs of its marketable investment securities during fiscal 2013 and did not have any investments asJanuary 30, 2015, buildings includes $24.6 million that represents the estimated fair market value of March 30, 2013.
The following table summarizes the investmentsa building under a build-to-suit lease in marketable securities as of March 31, 2012 (in thousands):
|
| March 31, 2012 |
| ||||||||||
|
| Cost or |
| Gross |
| Gross |
| Fair Value |
| ||||
Available-for-sale: |
|
|
|
|
|
|
|
|
| ||||
Money market funds |
| $ | 1,627 |
| $ | — |
| $ | — |
| $ | 1,627 |
|
Auction rate securities |
| 1,965 |
| 39 |
| — |
| 2,004 |
| ||||
Total |
| $ | 3,592 |
| $ | 39 |
| $ | — |
| $ | 3,631 |
|
|
|
|
|
|
|
|
|
|
| ||||
Reported as: |
|
|
|
|
|
|
|
|
| ||||
Short-term investments |
|
|
|
|
|
|
| $ | 3,631 |
| |||
Long-term investments in marketable securities |
|
|
|
|
|
|
| — |
| ||||
Total |
|
|
|
|
|
|
| $ | 3,631 |
| |||
The auction rate securities thatwhich the Company held generally were short-term debt instruments that provided liquidity through a Dutch auction process in which interest rates reset every 7 to 35 days. There are no auction rate securities remaining as of March 30, 2013. As of March 31, 2012,is the Company had included $2.0 million of its auction rate securities in current assets on the Company’s consolidated balance sheet.
Realized losses from sale of marketable securities in fiscal 2013 were $0.3 million. Realized gains from the sale of marketable securities were less than $0.1 million, $0.1 million,deemed owner for accounting purposes. See Note 10, “Commitments and less than $0.1 million for the periods from January 15, 2012 to March 31, 2012 and April 3, 2011 to January 14, 2012, and fiscal year ended April 2, 2011, respectively.
There were no impairment charges related to other-than-temporary impairments during fiscal 2013 and during the period January 15, 2012 to March 31, 2012. The Company recognized an investment impairment charge related to credit losses of $0.4 million on its auction rate securities for the period from April 3, 2011 to January 14, 2012. The Company recognized an investment impairment charge related to credit losses of $0.1 million on its auction rate securities for fiscal 2011.
The Company did not have any available-for-sale securities with unrealized losses as of March 31, 2012.Contingencies.”
5.Income Tax Provision
The provision (benefit) for income taxes consists of the following (in thousands):
|
| Year Ended |
| For the Periods |
| Year Ended |
| |||||||||||||||||
|
| March 30, |
| January 15, 2012 |
|
| April 3, 2011 |
| April 2, |
|
| Year Ended |
| Ten Months Ended |
| Year Ended |
| |||||||
|
| (Successor) |
| (Successor) |
|
| (Predecessor) |
| (Predecessor) |
|
| January 30, |
| January 31, |
| March 30, |
| |||||||
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Federal |
| $ | 16,042 |
| $ | 2,727 |
|
| $ | 32,843 |
| $ | 22,379 |
|
| $ | (1,289 | ) | $ | (843 | ) | $ | 16,042 |
|
State |
| 3,401 |
| 772 |
|
| 5,388 |
| 6,237 |
|
| 676 |
| 1,349 |
| 3,401 |
| |||||||
Foreign |
| 6 |
| — |
| — |
| |||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
|
| 19,443 |
| 3,499 |
|
| 38,231 |
| 28,616 |
|
| (607 | ) | 506 |
| 19,443 |
| |||||||
Deferred - federal and state |
| (29,532 | ) | (1,396 | ) |
| (4,532 | ) | 15,300 |
|
| 4,212 |
| (28,999 | ) | (29,532 | ) | |||||||
(Benefit) provision for income taxes |
| $ | (10,089 | ) | $ | 2,103 |
|
| $ | 33,699 |
| $ | 43,916 |
| ||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Provision (benefit) for income taxes |
| $ | 3,605 |
| $ | (28,493 | ) | $ | (10,089 | ) | ||||||||||||||
Differences between the provision (benefit) for income taxes and income taxes at the statutory federal income tax rate are as follows (in thousands):
|
| Year Ended |
| For the Periods |
| Year Ended |
| |||||||||||||||||||||||||||||||
|
| March 30, |
| January 15, 2012 |
|
| April 3, 2011 |
| April 2, |
|
| Year Ended |
| Ten Months Ended |
| Year Ended |
| |||||||||||||||||||||
|
| (Successor) |
| (Successor) |
|
| (Predecessor) |
| (Predecessor) |
|
| January 30, |
| January 31, |
| March 30, |
| |||||||||||||||||||||
|
| Amount |
| Percent |
| Amount |
| Percent |
|
| Amount |
| Percent |
| Amount |
| Percent |
|
| Amount |
| Percent |
| Amount |
| Percent |
| Amount |
| Percent |
| |||||||
Income taxes at statutory federal rate |
| $ | (6,649 | ) | (35.0 | )% | $ | (1,116 | ) | 35.0 | % |
| $ | 29,206 |
| 35.0 | % | $ | 41,378 |
| 35.0 | % |
| $ | 3,187 |
| 35.0 | % | $ | (14,342 | ) | (35.0 | )% | $ | (6,649 | ) | (35.0 | )% |
State income taxes, net of federal income tax effect |
| (2,548 | ) | (13.4 | ) | 96 |
| (3.0 | ) |
| 3,138 |
| 3.7 |
| 4,225 |
| 3.5 |
|
| 790 |
| 8.7 |
| (14,479 | ) | (35.3 | ) | (2,548 | ) | (13.4 | ) | |||||||
Effect of permanent differences |
| (163 | ) | (0.8 | ) | 3,137 |
| (98.4 | ) |
| 2,165 |
| 2.6 |
| 3 |
| 0.0 |
|
| 816 |
| 9.0 |
| 2,137 |
| 5.3 |
| (163 | ) | (0.8 | ) | |||||||
Welfare to work, and other job credits |
| (811 | ) | (4.3 | ) | — |
| 0.0 |
|
| (1,027 | ) | (1.2 | ) | (1,473 | ) | (1.2 | ) |
| (1,192 | ) | (13.1 | ) | (1,863 | ) | (4.6 | ) | (811 | ) | (4.3 | ) | |||||||
Other |
| 82 |
| 0.4 |
| (14 | ) | 0.5 |
|
| 217 |
| 0.3 |
| (217 | ) | (0.2 | ) |
| 4 |
| 0.0 |
| 54 |
| 0.1 |
| 82 |
| 0.4 |
| |||||||
|
| $ | (10,089 | ) | (53.1 | )% | $ | 2,103 |
| (65.9 | )% |
| $ | 33,699 |
| 40.4 | % | $ | 43,916 |
| 37.1 | % |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
| $ | 3,605 |
| 39.6 | % | $ | (28,493 | ) | (69.5 | )% | $ | (10,089 | ) | (53.1 | )% | ||||||||||||||||||||||
The difference between the statutory rate of 35% and the effective tax rate for fiscal 20132015 was driven primarily by the impact of state income taxes and the non-deductibility of certain costs.
The difference between the statutory rate of 35% and the effective tax rate for transition fiscal 2014 was driven primarily by the release of valuation allowance on the Texas margin taxCalifornia Enterprise Zone (“EZ”) credit carry-forward, and deductibility of federal hiring credits.credits and other discrete items recognized during transition fiscal 2014.
The components of deferred tax assets and liabilities were as follows (in thousands):
|
| Years Ended |
| |||||||||||
|
| March 30, |
| March 31, |
|
| January 30, |
| January 31, |
| ||||
DEFERRED TAX ASSETS |
|
|
|
|
|
|
|
|
|
| ||||
Workers’ compensation |
| $ | 16,904 |
| $ | 16,701 |
|
| $ | 30,168 |
| $ | 31,634 |
|
Uniform inventory capitalization |
| 5,520 |
| 7,448 |
|
| 7,584 |
| 5,730 |
| ||||
Leases |
| 8,075 |
| 10,200 |
|
| 4,710 |
| 6,464 |
| ||||
Share-based compensation |
| 7,927 |
| 59 |
|
| 1,651 |
| 469 |
| ||||
Net operating loss carry-forwards |
| 135 |
| 169 |
|
| 101 |
| 101 |
| ||||
Inventory |
| 12,057 |
| 7,057 |
|
| 1,818 |
| 8,740 |
| ||||
Accrued liabilities |
| 10,687 |
| 7,836 |
|
| 13,274 |
| 14,939 |
| ||||
Amortization |
| 46 |
| — |
|
| 27 |
| 37 |
| ||||
Debt extinguishment |
| 6,188 |
| — |
|
| 5,995 |
| 7,237 |
| ||||
State taxes |
| 10,712 |
| 12,505 |
|
| 1,507 |
| 1,490 |
| ||||
Credits |
| 13,615 |
| 10,560 |
|
| 24,746 |
| 21,856 |
| ||||
Other |
| 3,463 |
| 2,171 |
|
| 3,851 |
| 3,699 |
| ||||
|
|
|
|
|
| |||||||||
Total Gross Deferred Tax Assets |
| 95,329 |
| 74,706 |
|
| 95,432 |
| 102,396 |
| ||||
Less: Valuation Allowances |
| 11,610 |
| 10,346 |
|
| — |
| — |
| ||||
|
|
|
|
|
| |||||||||
Total Net Deferred Tax Assets |
| 83,719 |
| 64,360 |
|
| 95,432 |
| 102,396 |
| ||||
|
|
|
|
|
| |||||||||
DEFERRED TAX LIABILITIES |
|
|
|
|
|
|
|
|
|
| ||||
Depreciation |
| (32,192 | ) | (41,376 | ) |
| (24,192 | ) | (24,684 | ) | ||||
Intangibles |
| (201,727 | ) | (204,281 | ) |
| (197,016 | ) | (199,567 | ) | ||||
Prepaid expenses |
| (3,454 | ) | (2,389 | ) |
| (2,690 | ) | (2,540 | ) | ||||
Other |
| (58 | ) | — |
|
| (629 | ) | (225 | ) | ||||
|
|
|
|
|
| |||||||||
Total Deferred Tax Liabilities |
| (237,431 | ) | (248,046 | ) |
| (224,527 | ) | (227,016 | ) | ||||
Net Deferred Tax Assets (Liabilities) |
| $ | (153,712 | ) | $ | (183,686 | ) | |||||||
|
|
|
|
|
| |||||||||
Net Deferred Tax Liabilities |
| $ | (129,095 | ) | $ | (124,620 | ) | |||||||
The Company maintainspreviously maintained a valuation allowance to reduce certain deferred tax assets to amounts that are,were, in management’s estimation, more likely than not to be realized. The valuation allowance asDuring the second quarter of March 30,transition fiscal 2014, the legislation that eliminated the EZ hiring credits after December 31, 2013 relates to the deferred tax assets for the California Enterprise Zone Credit carry-forward of approximately $11.6 million at year-end that, beginning on January 1, 2014, can be carried forward only for 10 years. Utilization of these credits is limited to the taxable income ascribed to the enterprise zones inwas signed into law. As a given tax year. The Company has engaged a third party provider to compute the credit each year and for the last several years, the credit carry-forward has grown. Prospectively,result, the Company will incur significant interest expense which should further reduceno longer be adding to its taxable income and abilityexisting EZ credit carryforwards after transition fiscal 2014. Rather, the Company will be able to useutilize its EZ credit carryforwards over the credits. Duenext ten years. As a result of the law change, the Company released the valuation allowance associated with its $11.6 million of California EZ credit carryforwards as a discrete item in the second quarter of transition fiscal 2014. Additionally, in transition fiscal 2014, a $1.7 million discrete charge was recognized relating to the aforementioned negative evidence, it is more likely than not thatpayment made as part of the California Enterprise Zone Credits carryover will not be realizable.
PursuantGold-Schiffer Purchase to repurchase all options held by the Company’s decision in August 2009 to continue operations in Texas, the Company recorded a deferred tax asset related to Texas net operating loss credits in fiscal 2010. Based on the then estimate of future utilization of these credits, the Company had also recorded a related valuation allowance of $1.9 million. The Company maintains a valuation allowance to reduce certain deferred tax assets to amounts that are, in management’s estimation, more likely than not to be realized. As of March 31, 2012, the Company had maintained the related valuation allowance of $1.9 million. In fiscal 2013, due to the Company’s decision to expand operations in Texas and the expected continued profitability, it is more likely than not that the Texas margin tax credit carry-forwards will be utilized. Due to this positive evidence, the recorded valuation allowance of $1.9 million has been released.
The Company recorded significant deferred taxes in connection with its Merger on January 13, 2012.Sellers. See Note 2, “The Merger”9, “Related-Party Transactions” for more information regarding allocation of the purchase price.Gold-Schiffer Purchase.
As of January 30, 2015 and January 31, 2014, the Company had not accrued any liabilities related to unrecognized tax benefits, and had also not accrued any interest and penalties related to uncertain tax positions for the relevant periods. The Company files income tax returns in the U.S. federal jurisdiction and in various states and does not have any unrecognized tax benefits.states. The Company is subject to examinations by the major tax jurisdictions in which it files for the tax years 20082009 forward. The federal tax returnreturns for the period ended March 27, 2010 wasand period ended March 31, 2012 were examined by the Internal Revenue Service resulting in no changes to the reported tax.
6. Debt
Short and long-term debt consists of the following (in thousands):
|
| March 30, |
| March 31, |
| ||
ABL Facility agreement, maturing January 13, 2017, with available borrowing up to $175,000, interest due quarterly, with unpaid principal and accrued interest due January 13, 2017 |
| $ | — |
| $ | — |
|
First Lien Term Loan Facility agreement, maturing on January 13, 2019, payable in quarterly installments of $1,309, plus interest, commencing March 31, 2012 through December 31, 2019, with unpaid principal and accrued interest due January 13, 2019, net of unamortized OID of $10,126 and $10,086 as of March 30, 2013 and March 31, 2012, respectively |
| 508,325 |
| 513,601 |
| ||
Senior Notes (unsecured) maturing December 15, 2019, unpaid principal and accrued interest due on December 15, 2019 |
| 250,000 |
| 250,000 |
| ||
Total long-term debt |
| 758,325 |
| 763,601 |
| ||
Less: current portion of long-term debt |
| 8,567 |
| 5,250 |
| ||
Long-term debt, net of current portion |
| $ | 749,758 |
| $ | 758,351 |
|
|
| January 30, |
| January 31, |
| ||
ABL Facility agreement, maturing January 13, 2017, with available borrowing up to $175,000 |
| $ | 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 $5,606 and $6,886 as of January 30, 2015 and January 31, 2014, respectively |
| 600,533 |
| 605,390 |
| ||
Senior Notes (unsecured) maturing December 15, 2019, unpaid principal and accrued interest due on December 15, 2019 |
| 250,000 |
| 250,000 |
| ||
|
|
|
|
|
| ||
Total debt |
| 907,533 |
| 855,390 |
| ||
Less: current portion |
| 6,138 |
| 6,138 |
| ||
|
|
|
|
|
| ||
Long-term debt, net of current portion |
| $ | 901,395 |
| $ | 849,252 |
|
As of MarchJanuary 30, 20132015 the scheduled maturities of debt for each of the five succeeding fiscal years are as follows (in thousands):
January 30, 2015 |
Future maturities |
| Maturities of |
|
| Maturities of |
| ||
|
|
|
|
|
|
| ||
FY 2014 |
| $ | 8,567 |
| ||||
FY 2015 |
| 5,237 |
| |||||
FY 2016 |
| 5,237 |
|
| $ | 6,138 |
| |
FY 2017 |
| 5,237 |
|
| 63,138 |
| ||
FY 2018 |
| 5,237 |
|
| 6,138 |
| ||
FY 2019 |
| 587,725 |
| |||||
FY 2020 |
| 250,000 |
| |||||
Thereafter |
| 738,936 |
|
| — |
| ||
Long-term debt, current and non-current |
| $ | 768,451 |
|
| $ | 913,139 |
|
As of MarchJanuary 30, 20132015 and MarchJanuary 31, 2012,2014, the net deferred financing costs are as follows (in thousands):
|
| March 30, 2013 |
| March 31, 2012 |
| ||||||||||||||
Deferred financing costs |
| Gross |
| Accumulated |
| Net Amount |
| Gross |
| Accumulated |
| Net Amount |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
ABL facility |
| $ | 3,078 |
| $ | (746 | ) | $ | 2,332 |
| $ | 3,078 |
| $ | (130 | ) | $ | 2,948 |
|
First lien term loan facility |
| 9,308 |
| (1,179 | ) | 8,129 |
| 16,572 |
| (653 | ) | 15,919 |
| ||||||
Senior notes |
| 11,761 |
| (1,206 | ) | 10,555 |
| 11,761 |
| (228 | ) | 11,533 |
| ||||||
Total deferred financing costs |
| $ | 24,147 |
| $ | (3,131 | ) | $ | 21,016 |
| $ | 31,411 |
| $ | (1,011 | ) | $ | 30,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Estimated interest expense from deferred financing fees: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
FY 2014 |
| $ | 3,244 |
|
|
|
|
|
|
|
|
|
|
| |||||
FY 2015 |
| 3,101 |
|
|
|
|
|
|
|
|
|
|
| ||||||
FY 2016 |
| 3,312 |
|
|
|
|
|
|
|
|
|
|
| ||||||
FY 2017 |
| 3,426 |
|
|
|
|
|
|
|
|
|
|
| ||||||
FY 2018 |
| 3,208 |
|
|
|
|
|
|
|
|
|
|
| ||||||
Thereafter |
| 4,725 |
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| $ | 21,016 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
| January 30, |
| January 31, |
| ||
Deferred financing costs |
| Net Amount |
| Net Amount |
| ||
|
|
|
|
|
| ||
ABL Facility |
| $ | 1,196 |
| $ | 1,812 |
|
First Lien Term Loan Facility |
| 5,754 |
| 7,069 |
| ||
Senior Notes |
| 8,513 |
| 9,645 |
| ||
Total deferred financing costs |
| $ | 15,463 |
| $ | 18,526 |
|
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) $175 million in commitments undera 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, and (b) an aggregate principal amount under the First Lien Term Loan Facility amounting to $525 million. At the closing, $10 million of the ABL Facility was drawn on January 13, 2012 to finance a portion of the Merger Consideration and transaction expenses, and in February 2012, the Company repaid the entire $10 million.
Table of Contents“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 provides for $525 millionhas a term of borrowings (which may be increased by up to $150.0 million in certain circumstances). Asseven years with a maturity date of March 31, 2012, allJanuary 13, 2019. All obligations under the First Lien Term Loan Facility are guaranteed by Parent and the Company’s direct whollyor indirect 100% owned subsidiaries, 99 Cents Only Stores Texas, Inc., a Delaware corporation, and 99 Cents Only Stores, a Nevada corporation (“99 Cents Only Stores (Nevada)”). In September 2012, 99 Cents Only Stores (Nevada), an inactive wholly owned subsidiary of the Company, was dissolved. As of March 30, 2013, all obligations under the First Lien Term Loan Facility are guaranteed by Parent and the Company’s direct wholly owned subsidiary, 99 Cents Only Stores Texas, Inc. (together,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.
The Company is required to make scheduled quarterly payments each equal to 0.25% of the original principal amount of the term loan (approximately $1.3 million),Term Loans, with the balance due on the maturity date, January 13, 2019.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, (A)either (i) a Base Ratebase 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 MarchJanuary 30, 2013)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 multiplied by the Statutory Reserve Rate or 1.50% per annum)subject to certain adjustments) plus 1.00%, or (B)(ii) an Adjusted Eurocurrency Rate. The applicable margin used is 5.50% for Eurocurrency loans and 4.50% for base rate loans.
On April 4, 2012, the Company amended the terms of the existing seven-year $525 million First Lien Term Loan Facility (the “First Amendment”) and incurred related refinancing costs of $11.2 million. The amendment,First Amendment, among other things, (i) decreased the applicable margin from the London Interbank Offered Rate (“LIBOR”) plus 5.50% (or base rateBase Rate plus 4.50%) to LIBOR plus 4.00% (or base rateBase Rate plus 3.00%) and (ii) decreased the LIBOR floor from 1.50% to 1.25%. The maximum capital expenditures covenant
In connection with the First Amendment and in the First Lien Term Loan Facility was also amended to permit an additional $5 million in capital expenditures each year throughout the termfirst quarter of the First Lien Term Facility.
The Company evaluated the accounting treatment for the amendment. Specifically, the Company evaluated the position of each lender under both the original First Lien Term Loan Facility and the amended First Lien Term Loan Facility. The Company determined that a portion of the refinancing transaction should be accounted for as debt extinguishment, representing the outstanding principal amount of loans held by lenders under the original First Lien Term Loan Facility that were not lenders under the amended First Lien Term Loan Facility. In accordance with applicable guidance for debt modification and extinguishment,fiscal 2013 ended June 30, 2012, the Company recognized a $16.3 million loss on debt extinguishment related to a portion of the unamortized debt issuance costs, unamortized original issue discount (“OID”) and other related refinancing costs incurred in connection with the amendment for the portion of the First Lien Term Loan Facility that was extinguished.costs. The Company recorded $0.3 million asof deferred debt issuance costs and $5.9 million asof OID in connection with the amendment.First Amendment in fiscal 2013.
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 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 MarchJanuary 30, 2013,2015 and January 31, 2014, the interest rate charged on the First Lien Term Loan Facility was 5.25% (1.25%4.50% (1.00% Eurocurrency rate, plus the Eurocurrency loan margin of 4.00%3.50%). As of MarchJanuary 30, 2013,2015 and January 31, 2014 amount outstanding under the First Lien Term Loan Facility was $508.3 million.$600.5 million and $605.4 million, respectively.
Following the end of each fiscal year, the Company is required to prepaymake 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 agreement andFacility), with stepdownsthe ability to step down to 25% and 0% based onupon achievement of specified total leverage ratios),ratios, minus (ii) the amount of certain voluntary prepayments ofmade 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’s subsidiariesCompany to incur or guarantee additional indebtedness, pay dividends on, or redeem or repurchase, the Company’s capital stock, 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, or sell its assets, to and make capital expenditures or merge or consolidate with or into, another company. As of MarchJanuary 30, 2013,2015, the Company was in compliance with the terms of the First Lien Term Loan Facility. In June 2013, the Company failed to comply with the covenant that required delivery of audited financial statements for the fiscal year ended March 30, 2013 within 90 days of the completion of fiscal 2013 as required under the First Lien Term Loan Facility. Prior to the expiration of the applicable 30-day grace period under the First Lien Term Loan Facility, the Company delivered the required financial statements. Accordingly, the Company is in compliance with the applicable reporting obligations and other terms of the First Lien Term Loan Facility.
During the first quarter ended June 30, 2012 (the “first quarter of fiscal 2013”), the Company entered into an interest rate cap agreement. The interest rate cap agreement limits the Company’s interest exposure on a notional value of $261.8 million to 3.00% plus an applicable margin of 4.00%. The term of the interest rate cap is from May 29, 2012 to November 29, 2013. The Company paid fees of $0.05 million to enter into the interest rate cap agreement.
In addition, 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. The swap limits the Company’s interest exposure on a notional value of $261.8 million to 1.36% plus an applicable margin of 4.00%. The term of the swap is from November 29, 2013 through May 31, 2016. The fair value of the swap on the trade date was zero as the Company neither paid nor received any value to enter into the swap, which was entered into at market rates. The fair value of the swap at March 30, 2013 was a liability of $2.6 million. See Note 7, “Derivative Financial Instruments” for more information on the Company’s interest rate cap and interest rate swap agreements.agreement.
ABL Facility
The ABL Facility provides for up to $175.0 million of borrowings, (which may be increased by up to $50.0 million in certain circumstances), 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 the Company, Parent and the Company’s direct wholly owned subsidiary, 99 Cents Only Stores Texas, Inc. (together, the “ABL Guarantors”).other Credit Facilities Guarantors. The ABL Facility is secured by substantially all of the Company’s assets and the assets of the ABLCredit Facilities Guarantors.
Borrowings under the ABL Facility bear interest for an initial period until June 30, 2012 at an applicable margin plus, at the Company’s option, a fluctuating rate equal to (A) the highest of (a) Federal Funds Rate plus 0.50%, (b) rate of interest in effect determined by the administrative agent as “Prime Rate” (3.25% at the date of the Merger), and (c) Adjusted Eurocurrency Rate (determined to be the LIBOR rate multiplied by the Statutory Reserve Rate) for an Interest Period of one (1) month plus 1.00% or (B) the Adjusted Eurocurrency Rate. The interest rate charged on borrowings under the ABL Facility from the date of the Merger until June 30, 2012 was 4.25% (the base rate (prime rate at 3.25%) plus the applicable margin of 1.00%). Thereafter, borrowings under the ABL Facility will have variable pricing and will be based, at the Company’s option, on (a)(i) LIBOR plus an applicable margin to be determined (1.75% as of MarchJanuary 30, 2013)2015) or (b)(ii) the determined base rate (prime rate)(Prime Rate) plus an applicable margin to be determined (0.75% at MarchJanuary 30, 2013)2015), in each case based on a pricing grid depending on average daily excess availability for the most recently ended quarter. The weighted average interest rate for borrowings under the ABL Facility was 1.99% as of January 30, 2015.
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 at a rate of 0.375% for the period from the date of the Merger until June 30, 2012. Thereafter, thecommitments. The commitment fee will beis adjusted at the beginning of each quarter based upon the average historical excess availability of the prior quarter (0.50% for the quarter ended MarchJanuary 30, 2013)2015 and January 31, 2014). The Company must also pay customary letter of credit fees and agency fees.
As of MarchJanuary 30, 2013 and March 31, 2012, the Company had no outstanding2015, borrowings under the ABL Facility. OutstandingFacility were $57.0 million, outstanding letters of credit were $1.0$2.5 million and availability under the ABL Facility subject to the borrowing base, was $134.0 million at March 30, 2013.$115.5 million. As of January 31, 2014, the Company had no outstanding borrowings under the ABL Facility and outstanding letters of credit were $1.0 million.
The ABL Facility includes restrictions on the Company’s ability, and the ability of the 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 ourits business, incur or permit to exist certain liens, enter into transactions with affiliates, or sell our assets to, make capital expenditures or merge or consolidate with or into another company. The
On October 8, 2013, the ABL Facility was amended on April 4, 2012 to permit an additional $5 millionamong 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 capital expenditures for each year during the term ofagreement governing the ABL Facility.Facility) and a ratio of EBITDA (as defined in the agreement governing the ABL Facility) to fixed charges. As of MarchJanuary 30, 2013,2015, the Company was in compliance with the terms of the ABL Facility. In June 2013, the Company failed to comply with the covenant that required delivery of audited financial statements for the fiscal year ended March 30, 2013 within 90 days of the completion of fiscal 2013 as required under the in the ABL Facility. Prior to the expiration of the applicable 30-day grace period under the ABL Facility, the Company delivered the required financial statements. Accordingly, the Company is in compliance with the applicable reporting obligations and other terms of the ABL Facility.
Senior Notes due 2019
On December 29, 2011, the Company issued $250$250.0 million aggregate principal amount of 11% Senior Notes that mature on December 15, 2019.2019 (the “Senior Notes”). The Senior Notes are guaranteed by the Company’s direct wholly owned subsidiary, 99 Cents Only Stores Texas, Inc.same subsidiaries that guarantee the Credit Facilities (the “Senior Notes Guarantor”Guarantors”).
In connection with the issuance of the Senior Notes, the Company entered into a registration rights agreement that required the Company to file an exchange offer registration statement, enabling holders to exchange the Senior Notes for registered notes with terms identical in all material respects to the terms of the Senior Notes, except the registered notes would be freely tradable. The exchange offer was closed on November 7, 2012.
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 applicablethat vary based on the date of redemption.
The Senior Notes are (i) equal in right of payment with all of the Company’s and the Senior Notes Guarantor’s existing and future senior indebtedness; (ii) effectively junior to the Company’s and the Senior Notes Guarantor’s existing and future secured indebtedness, to the extent of the value of the interest of the holders of that secured indebtedness in the assets securing such
indebtedness; (iii) unconditionally guaranteed on a senior unsecured unsubordinated basis by the Senior Notes Guarantor; and (iv) junior to the indebtedness or other liabilities of the Company’s subsidiaries that are not guarantors. 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 its restricted subsidiaries, make certain investments, transfer or sell assets, engage in transactions with affiliates, or merge or consolidate with other companies or transfer all or substantially all of its assets.
companies. As of MarchJanuary 30, 2013,2015, the Company was in compliance with the terms of the Indenture.
The significant components of interest expense are as follows (in thousands):
|
| March 30, |
| January 15, 2012 |
|
| April 3, 2011 |
| April 2, |
|
| Year Ended |
| Ten Months |
| Year Ended |
| |||||||
|
| (Successor) |
| (Successor) |
|
| (Predecessor) |
| (Predecessor) |
|
|
|
|
|
|
|
| |||||||
First lien term loan facility |
| $ | 28,466 |
| $ | 7,475 |
|
| $ | — |
| $ | — |
|
| $ | 29,233 |
| $ | 23,367 |
| $ | 28,466 |
|
ABL facility |
| 826 |
| 44 |
|
| — |
| — |
|
| 1,360 |
| 759 |
| 826 |
| |||||||
Senior notes |
| 27,347 |
| 7,104 |
|
| — |
| — |
|
| 27,500 |
| 22,993 |
| 27,347 |
| |||||||
Amortization of deferred financing costs and OID |
| 4,229 |
| 1,567 |
|
| — |
| — |
|
| 4,344 |
| 3,681 |
| 4,229 |
| |||||||
Other interest expense |
| 30 |
| 33 |
|
| 381 |
| 77 |
|
| 297 |
| 20 |
| 30 |
| |||||||
Interest expense |
| $ | 60,898 |
| $ | 16,223 |
|
| $ | 381 |
| $ | 77 |
|
| $ | 62,734 |
| $ | 50,820 |
| $ | 60,898 |
|
7. 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 Cap
In May 2012, the Company entered into an interest rate cap agreement for an aggregate notional amount of $261.8 million in order to hedge the variability of cash flows related to a portion of the Company’s floating rate indebtedness. The cap agreement, effective in May 2012, hedgeshedged a portion of contractual floating rate interest commitments through the expiration of the agreement in November 2013. Pursuant to the agreement, the Company hashad capped LIBOR at 3.00% plus an applicable margin of 4.00% with respect to the aggregate notional amount of $261.8 million. In the event LIBOR exceedsexceeded 3.00%, the Company will paywould have paid interest at the capped rate. In the event LIBOR iswas less than 3.00%, the Company will paywould have paid interest at the prevailing LIBOR rate. In transition fiscal 2014 and fiscal 2013, the Company paid interest at the prevailing LIBOR rate.
The interest rate cap agreement haswas not been designated as a hedge for financial reporting purposes. Gains and losses on derivative instruments not designated as hedges arewere recorded directly in earnings.
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, will hedgehedges a portion of contractual floating rate interest commitments through the expiration of the agreementsswap 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 4.00%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 accumulated other comprehensive incomeAOCI 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 accumulated other comprehensive incomeAOCI or loss to interest expense.
Fair Value
The fair valuesvalue of the interest rate cap and swap agreements areagreement is estimated using industry standard valuation models using market-based observable inputs, including interest rate curves (level 2)(Level 2, as defined in Note 8, “Fair Value of Financial Instruments”). A summary of the recorded amounts included in the consolidated balance sheet is as follows (in thousands):
|
| March 30, |
| March 31, |
|
| January 30, |
| January 31, |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Derivatives designated as cash flow hedging instruments |
|
|
|
|
|
|
|
|
|
| ||||
Interest rate swap (included in other current liabilities) |
| $ | 381 |
| $ | — |
|
| $ | 596 |
| $ | 1,607 |
|
Interest rate swap (included in other long-term liabilities) |
| $ | 2,249 |
| $ | — |
| |||||||
Accumulated other comprehensive loss, net of tax (included in shareholders’ equity) |
| $ | 1,252 |
| $ | — |
| |||||||
Interest rate swap (included in other liabilities) |
| $ | 1,591 |
| $ | 1,346 |
| |||||||
Accumulated other comprehensive loss, net of tax (included in member’s/shareholders’ equity) |
| $ | 998 |
| $ | 1,391 |
| |||||||
A summary of recorded amounts included in the consolidated statements of comprehensive income (loss) is as follows (in thousands):
|
| Year Ended |
| Ten Months Ended |
| Year Ended |
| |||||||
|
| Year Ended |
|
| January 30, |
| January 31, |
| March 30, |
| ||||
|
| March 30, |
|
|
|
|
|
|
|
| ||||
Derivatives designated as cash flow hedging instruments: |
|
|
|
|
|
|
|
|
|
| ||||
Loss related to effective portion of derivative recognized in OCI |
| $ | 1,252 |
|
| $ | 576 |
| $ | 284 |
| $ | 1,252 |
|
Loss related to ineffective portion of derivative recognized in interest expense |
| $ | 543 |
| ||||||||||
Loss related to effective portion of derivatives reclassified from AOCI to interest expense |
| $ | 969 |
| $ | 145 |
| $ | — |
| ||||
(Gain) loss related to ineffective portion of derivative recognized in interest expense |
| $ | (112 | ) | $ | (150 | ) | $ | 543 |
| ||||
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
| ||||
Loss recognized in other expense |
| $ | 49 |
|
| $ | — |
| $ | — |
| $ | 49 |
|
8. 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 utilizesuses 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):
|
| March 30, 2013 |
|
| January 30, 2015 |
| ||||||||||||||||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Other assets — assets that fund deferred compensation |
| $ | 1,153 |
| $ | 1,153 |
| $ | — |
| $ | — |
|
| $ | 724 |
| $ | 724 |
| $ | — |
| $ | — |
|
LIABILITES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Other current liabilities — interest rate swap |
| $ | 381 |
| $ | — |
| $ | 381 |
| $ | — |
|
| $ | 1,591 |
| $ | — |
| $ | 1,591 |
| $ | — |
|
Other long-term liabilities — interest rate swap |
| $ | 2,249 |
| $ | — |
| $ | 2,249 |
| $ | — |
|
| $ | 596 |
| $ | — |
| $ | 596 |
| $ | — |
|
Other long-term liabilities — deferred compensation |
| $ | 1,153 |
| $ | 1,153 |
| $ | — |
| $ | — |
|
| $ | 724 |
| $ | 724 |
| $ | — |
| $ | — |
|
Level 1 measurements include $1.2$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 MarchJanuary 30, 2013.
Table of Contents2015.
The Company did not have any transfers of investments in and out of Levels 1 and 2 during the fiscal 2013.2015.
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):
|
| March 31, 2012 |
|
| January 31, 2014 |
| ||||||||||||||||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Money market funds |
| $ | 1,627 |
| $ | 1,627 |
| $ | — |
| $ | — |
| |||||||||||||
Auction rate securities |
| 2,004 |
| — |
| — |
| 2,004 |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total available-for-sale securities |
| $ | 3,631 |
| $ | 1,627 |
| $ | — |
| $ | 2,004 |
| |||||||||||||
Other assets — assets that fund deferred compensation |
| $ | 5,136 |
| $ | 5,136 |
| $ | — |
| $ | — |
|
| $ | 1,142 |
| $ | 1,142 |
| $ | — |
| $ | — |
|
LIABILITES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Other current liabilities — interest rate swap |
| $ | 1,607 |
| $ | — |
| $ | 1,607 |
| $ | — |
| |||||||||||||
Other long-term liabilities — interest rate swap |
| $ | 1,346 |
| $ | — |
| $ | 1,346 |
| $ | — |
| |||||||||||||
Other long-term liabilities — deferred compensation |
| $ | 5,136 |
| $ | 5,136 |
| $ | — |
| $ | — |
|
| $ | 1,142 |
| $ | 1,142 |
| $ | — |
| $ | — |
|
Level 1 investmentsmeasurements include money market funds of $1.6 million. The fair value of money market funds is based on quoted market prices in an active market and there are no restrictions on the redemption of money market funds. Level 1 also includes $5.1$1.1 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 2 investments3 assets or liabilities as of MarchJanuary 31, 2012.
Level 3 investments include auction rate securities of $2.0 million. The fair value of auction rate securities is based on the valuation from an independent securities valuation firm by using applicable methods and techniques for this class of security.2014.
The Company did not have any transfers of investments in and out of Levels 1 and 2 during the periods of January 15, 2012 to March 31, 2012 and April 3, 2011 to January 14, 2012.transition fiscal 2014.
The following table summarizes the activity for the period of changes in fair value of the Company’s Level 3 investments (in thousands):
|
| Fair Value Measurements Using Significant Unobservable Inputs |
| ||||||||
|
| Year Ended |
| Period Ended |
|
| Period Ended |
| |||
|
| March 30, 2013 |
| January 15, 2012 |
|
| April 3, 2011 |
| |||
|
| (Successor) |
| (Successor) |
|
| (Predecessor) |
| |||
Description |
|
|
|
|
|
|
|
| |||
Beginning balance |
| $ | 2,004 |
| $ | 7,669 |
|
| $ | 8,409 |
|
Transfers into Level 3 |
| — |
| — |
|
| — |
| |||
Total realized/unrealized gains (losses): |
|
|
|
|
|
|
|
| |||
Included in earnings |
| (331 | ) | (1 | ) |
| (312 | ) | |||
Included in other comprehensive income |
| (38 | ) | 40 |
|
| 494 |
| |||
Purchases, redemptions and settlements: |
|
|
|
|
|
|
|
| |||
Purchases |
| — |
| — |
|
| — |
| |||
Redemptions |
| (1,635 | ) | (5,704 | ) |
| (922 | ) | |||
Ending balance |
| $ | — |
| $ | 2,004 |
|
| $ | 7,669 |
|
|
|
|
|
|
|
|
|
| |||
Total amount of unrealized gains for the period included in other comprehensive income attributable to the change in fair market value relating to assets still held at the reporting date |
| $ | — |
| $ | 40 |
|
| $ | 494 |
|
In connection with the Merger, the Company entered into a credit facility including an ABL Facility of $175 million and a First Lien Term Loan Facility of $525 million, and sold $250 million of Senior Notes with a coupon rate of 11% in a private placement. The outstanding debt under the credit facilityCredit Facilities and senior notes arethe Senior Notes is recorded in the financial statements at historical cost, net of applicable unamortized discounts.
The Company’s Credit Facilities are tied directly to market rates and fluctuate as market rates change; as a result, the carrying value of the Credit Facilities approximatesapproximated fair value as of MarchJanuary 30, 2013.
Table of Contents2015 and January 31, 2014.
The fair value of the Senior Notes was estimated at $288.1$264.7 million, or $38.1$14.7 million greater than the carrying value, as of MarchJanuary 30, 2013,2015, based on quoted market prices of the debt (Level 1 inputs). The fair value of the Senior Notes was estimated at $259.3$282.5 million, or $9.3$32.5 million greater than the carrying value, as of MarchJanuary 31, 2012, using a discounted cash flow analysis2014, based on quoted market prices of the debt (Level 31 inputs).
See Note 6, “Debt” for more information on the Company’s debt.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
During fiscal 2015, the Company wrote down the carrying value of property held for sale to its fair value of $1.4 million from $1.5 million, resulting in an asset impairment charge of $0.1 million. Fair value was determined on the basis of a purchase agreement, less estimated cost to sell. During fiscal 2013, the Company wrote down the carrying value of land held for sale to its fair value of $1.7 million from $2.2 million, resulting in an asset impairment charge of $0.5 million. Fair value was determined on the basis of an independent broker opinion based on geographic area market comparable, less estimated cost to sell.
9. Related-Party Transactions
Stockholders Agreement
Upon completion of the Merger, the Parent entered into a stockholders agreement with each of its stockholders, which includesincluded certain of the Company’s former directors, employees and members of management and the Company’s principal stockholders. The stockholders agreement gives (i) Ares Corporate Opportunities Fund III, L.P., an affiliate of Ares (“ACOF”), the right to designate four members of the board of directors of Parent (the “Parent Board”), (ii) ACOFAres the right to designate twoup to three independent members of the Parent Board, which directors shall be approved by CPPIB, and (iii) CPPIB the right to designate two members of the Parent Board, in each case for so long as they or their respective affiliates beneficially own at least 15% of the then outstanding shares of class A common stock, par value $0.001 per share, of Parent (the “ClassClass A Common Stock”).Stock. The stockholders agreement provides for the election of Eric Schiffer, Jeff Gold and Howard Goldthe current chief executive officer of Parent to the Parent Board, for so long as they hold the position of Chief Executive Officer, President and Chief Operating Officer, and Executive Vice President, respectively, and if those individuals do not hold such positions, the Rollover Investors have the right to designate one member of the Parent Board for so long as the Rollover Investors, in the aggregate continue to own at least 50% of the outstanding shares of Class A Common Stock that they held on the date of the Merger (the “Rollover Director”).Board. Under the terms of the stockholders agreement, certain significant corporate actions require the approval of a majority of directors on the board of directors, including at least one director designated by ACOFAres and one director designated by CPPIB, and certain other corporate actions require the approval of the Rollover Director.CPPIB. These actions include the incurrence of additional indebtedness over $20 million in the aggregate outstanding at any time, the issuance or sale of any of our capital stock over $20 million in the aggregate, the sale, transfer or acquisition of any assets with a fair market value of over $20 million, the declaration or payment of any dividends, entering into any merger, reorganization or recapitalization, amendments to our charter or bylaws, approval of our annual budget and other similar actions.
The stockholders agreement contains significant transfer restrictions and certain rights of first offer, tag-along, and drag-along rights. In addition, the stockholders agreement contains registration rights that, among other things, require Parent to register common stock held by the stockholders who are parties to the stockholders agreement in the event Parent registers for sale, either for its own account or for the account of others, shares of its common stock.
Under the stockholders agreement, certain affiliate transactions, require the approval of a majority of disinterested directors, andincluding certain affiliate transactions between the Parent, on the one hand, and Ares, CPPIB or any of their respective affiliates, on the other hand, require the approval of a majority of disinterested directors, including the Rollover Director.
Voting Agreement
The Canada Pension Plan Investment Board Act 1997 (Canada) imposes certain share ownership limitations on CPPIB. These limitations include restrictions on CPPIB’s indirect ownership levels (through Parent) of the Company’s Class B Common Stock, par value $0.01 per share, which has de minimis economic rights and the right to vote solely with respect to the election of directors. An affiliate of Ares holds 10% of the Company’s Class B Common Stock. The Company has entered into a voting agreement with Parent and the affiliate of Ares pursuant to which such Class B Common Stock held by the affiliate of Ares is subject to a call right that allows Parent to repurchase such stock at any time for de minimis consideration. The voting agreement also provides, among other things, for the affiliate of Ares to take certain actions requested by Parent to elect or remove the Company’s directors.
Management Services Agreements
Upon completion of the Merger, the Company and Parent entered into management services agreements with affiliates of the Sponsors (the “Management Services Agreements”). Under each of the Management Services Agreements, the Company and Parent agreed to, among other things, retain and reimburse affiliates of the Sponsors for certain management and financial services and certain expenses and provide customary indemnification to the Sponsors and their affiliates. In addition, upon completion of the Merger, the Company and Parent reimbursed affiliates of the Sponsors for their expenses incurred in connection with the Merger in an aggregate amount of $4.2 million in fiscal 2012. In fiscal 2013, the Company reimbursed affiliates of the Sponsors their expenses in the amount of $0.7 million. In transition fiscal 2014, the Company reimbursed affiliates of the Sponsors their expenses in the amount of less than $0.1 million. The Sponsors provided no services to us during fiscal 2013.2015 or transition fiscal 2014.
Parent Stock Purchase Agreements Regarding Lease Arrangements
On January 13, 2012,In July 2014, in connection with Mr. Frank School’s resignation as Senior Vice President, Chief Financial Officer and Treasurer of the Company entered into new lease agreements (the “Leases”) with Eric Schiffer, Howard Gold and Karen Schiffer,Parent, Parent purchased all of the spouseshares of Class A Common Stock and Class B Common Stock held by the Frank Schools Living Trust (of which Mr. SchifferSchools is the Trustee) and sisterall of Messrs. Howardthe vested options to purchase shares of Class A Common Stock and Jeff Gold,Class B Common Stock held by Mr. Schools, for an aggregate consideration of $0.2 million. Mr. Schools, through the Trust, initially purchased (i) these shares of Class A Common Stock and certain of their affiliates for 13 stores and one store parking lot, which replaced the existing month-to-month leases. The Leases have approximate initial terms of either five or ten yearsClass B Common Stock in October 2013 pursuant to a Stock Purchase Agreement between Parent and the base rents could be adjustedTrust and (ii) these options to market valuepurchase shares of Class A Common Stock and Class B Common Stock in an aggregate amount notSeptember and November 2012 pursuant to exceed $1.0 million per annum. In December 2012, as previously contemplated,certain Non-Qualified Stock Option Agreements between Parent and the Company reached a final agreement with the Rollover Investors on the market value of the Leases for each of the 13 stores that will result in aggregate base rent increasing by approximately $0.7 million aggregate per annum. Rental expense for these Leases was $2.9 million for the fiscal year 2013. Rental expense for these Leases was $0.7 million for the period of January 15, 2012 to March 31, 2012 and $1.7 million for the period of April 3, 2011 to January 14, 2012. Rental expense for these Leases was $2.1 million for the fiscal year 2011.Trust.
In April 2014, in connection with Mr. Rick Anicetti’s service as Interim Chief Executive Officer of the Company and Parent, Parent entered into a Stock Purchase Agreement with From One to Many Leadership Consulting, LLC. From One to Many Leadership Consulting, LLC is wholly owned by, and employs, Mr. Anicetti. Pursuant to the terms of this agreement, Mr. Anicetti purchased an aggregate 354 shares of Class A Common Stock and 354 shares of Class B Common Stock for an aggregate purchase price of $0.5 million.
In April 2014, in connection with Mr. Michael Fung’s service as Interim Executive Vice President and Chief Administrative Officer of the Company and Parent, Parent entered into a Stock Purchase Agreement with Mr. Fung. Pursuant to the terms of this agreement, Mr. Fung purchased an aggregate 310 shares of Class A Common Stock and 310 shares of Class B Common Stock of for an aggregate purchase price of $0.4 million.
In October 2013, Parent entered into a Stock Purchase Agreement with Andrew Giancamilli, a director of Parent. Pursuant to the terms of this agreement, Mr. Giancamilli purchased an aggregate 410 shares of Class A Common Stock and 410 shares of Class B Common Stock for an aggregate purchase price of $0.5 million.
In September 2013, in connection with Mr. Gonthier’s employment as President and Chief Executive Officer of the Company and Parent, Parent entered into a Stock Purchase Agreement with Avenue of the Stars Investments LLC, a Delaware limited liability company (“Avenue of the Stars Investments”). Mr. Gonthier is the manager of Avenue of the Stars Investments and the trustee of a member of Avenue of the Stars Investments. Pursuant to the terms of this agreement, Mr. Gonthier purchased an aggregate 4,922 shares of Class A Common Stock and 4,922 shares of Class B Common Stock for an aggregate purchase price of $6.0 million.
In June 2012, Parent entered into a Stock Purchase Agreement with Norman Axelrod, a director of Parent, and of the Company, and AS SKIP, LLC, a Delaware limited liability company of which Mr. Axelrod is the managing member (together with Norman Axelrod, the “Purchasers”). Pursuant to the terms of the Stock Purchase Agreement, the Purchasers purchased 750 shares of Class A Common Stock and 750 shares of class B common stock, par value $0.001 per share, of Parent (the “ClassClass B Common Stock”)Stock, of Parent for an aggregate purchase price of $750,000.
Repurchase Transaction with Rollover Investors
On October 15, 2013, Parent and the Company entered into an agreement with Eric Schiffer, the Company’s former Chief Executive Officer, Jeff Gold, the Company’s former President and Chief Operating Officer, Howard Gold, the Company’s former Executive Vice President, Karen Schiffer and The Gold Revocable Trust dated October 26, 2005 (collectively, the “Rollover Investors”), pursuant to which (a)(i) Parent purchased from each Rollover Investor all of the shares of Class A Common Stock and Class B Common Stock, owned by such Rollover Investor and (ii) all of the options to purchase shares of Class A Common Stock and Class B Common Stock held by such Rollover Investor were repurchased, for aggregate consideration of approximately $129.7 million (the “Gold-Schiffer Purchase”) and (b) the Company agreed to certain amendments to the Non-Competition, Non-Solicitation and Confidentiality Agreements and the Separation and Release Agreements with the Rollover Investors who were former management of the Company. The Gold-Schiffer Purchase was completed on October 21, 2013. Prior to completion of the transaction, Howard Gold resigned from the board of directors of each of Parent and the Company. The Gold-Schiffer Purchase was funded through a combination of borrowings of $100 million of incremental term loans under the First Lien Term Loan Facility and cash on hand of Parent. In connection with the Gold-Schiffer Purchase, the Company made a distribution to Parent of $95.5 million and an investment in shares of preferred stock of Parent of $19.2 million. In addition, the Company made a payment of $7.8 million to the Rollover Investors for repurchase of all options to purchase Class A Common Stock and Class B Common Stock held by the Rollover Investors.
Credit Facility
In connection with the Merger, the Company entered into the First Lien Term Loan Facility, under which various funds affiliated with one of Parent’s sponsors, an affiliate of Ares, are lenders. As of January 30, 2015 and January 31, 2014, certain affiliates of Ares held approximately $1.4 million and $3.4 million of term loans under the First Lien Term Loan Facility, respectively. 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. Commitments and Contingencies
Credit Facilities
The Company’s credit facilities and commitments are discussed in detail in Note 6.
As of March 31, 2012, the Company also had a standby letter of credit for $0.4 million, related to one of its leased properties, where the lessor was a named beneficiary in the event of a default by the Company, and potentially was entitled to draw on the letter of credit in the event of a specified default. The letter of credit expired in October 2012.
Lease Commitments
The Company leases various facilities under operating leases (except for one location which is classified as a capital lease and one location classified as a financing lease) expiring at various dates through fiscal year 2031.2035. Most of the lease agreements contain renewal options and/or provide for fixed rent escalations or increases based on the Consumer Price Index. Total minimum lease payments under each of these lease agreements, including scheduled increases, are charged to operating expenses on a straight-line basis over the term of each respective lease. Certain leases require the payment of property taxes, maintenance and insurance. Rental expenseexpenses (including property taxes, maintenance and insurance) charged to operatingexpenses in fiscal 2015 were $85.5 million of which $0.3 million was paid as percentage rent, based on sales volume for fiscal 2015. Rental expenses (including property taxes, maintenance and insurance) charged to expenses in transition fiscal 2014 were $60.8 million of which $0.2 million was paid as percentage rent, based on sales volume for transition fiscal 2014. Rental expenses (including property taxes, maintenance and insurance) charged to expenses in fiscal 2013 was $63.0 million of which $0.3 million was paid as percentage rent, based on sales volume for the year ended. Rental expense charged to operating expenses for the periods of January 15, 2012 to March 31, 2012 and April 3, 2011 to January 14, 2012 was $13.1 million and $44.0 million respectively, of which less than $0.1 million and $0.2 million were paid as percentage rent, based on sales volume for each of the periods then ended, respectively. Rental expense charged to operating expenses in fiscal 2011 was $56.7 million of which $0.3 million was paid as percentage rent, based on sales volume for the year ended.2013. Sub-lease income earned in fiscal 2015, transition fiscal 2014 and fiscal 2013 was $0.6 million. Sub-lease income earned for the periods January 15, 2012 to March 31, 2012 and April 3, 2011 to January 14, 2012 was $0.1$0.5 million, $0.4 million and $0.6 million, respectively. Sub-lease income earned in fiscal 2011 was $0.9 million.
As of MarchJanuary 30, 2013,2015, the minimum annual rentals payable and future minimum sub-lease income under all non-cancelable operating leases was as follows (amounts in thousands):
Fiscal Year: |
| Operating leases |
| Capital leases |
| Future Minimum |
|
| Operating leases |
| Financing lease |
| Capital lease |
| Future Minimum |
| |||||||
2014 |
| $ | 51,657 |
| $ | 106 |
| $ | 401 |
| |||||||||||||
2015 |
| 46,904 |
| 106 |
| 305 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||
2016 |
| 39,133 |
| 106 |
| 256 |
|
| $ | 70,554 |
| $ | 91 |
| $ | 106 |
| $ | 370 |
| |||
2017 |
| 29,418 |
| 90 |
| 74 |
|
| 64,144 |
| 2,020 |
| 107 |
| 235 |
| |||||||
2018 |
| 21,846 |
| — |
| — |
|
| 54,931 |
| 2,174 |
| — |
| 121 |
| |||||||
2019 |
| 50,097 |
| 2,174 |
| — |
| 125 |
| ||||||||||||||
2020 |
| 43,533 |
| 2,337 |
| — |
| — |
| ||||||||||||||
Thereafter |
| 72,956 |
| — |
| — |
|
| 176,571 |
| 33,510 |
| — |
| — |
| |||||||
Future minimum lease payments |
| $ | 261,914 |
| $ | 408 |
| $ | 1,036 |
|
| $ | 459,830 |
| $ | 42,306 |
| $ | 213 |
| $ | 851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Less amount representing interest |
|
|
| (54 | ) |
|
|
|
|
| (17,442 | ) | (16 | ) |
|
| |||||||
Present value of future lease payments |
|
|
| $ | 354 |
|
|
|
|
|
| $ | 24,864 |
| $ | 197 |
|
|
| ||||
The capital lease relates to a building for one of the Company’s retail stores. The gross asset amount recorded under the capital lease was $0.3 million as of Marcheach of January 30, 20132015 and MarchJanuary 31, 2012.2014. Accumulated depreciation was $0.2 million as of January 30, 2015 and less than $0.1 million as January 31, 2014.
In May 2014, the Company entered into a lease agreement for corporate office and warehouse space in the City of MarchCommerce, California that expires in February 2030. In order for the leased space to meet the Company’s operating specifications, both the landlord and the Company would make structural changes to the property, and as a result, the Company concluded that it was the “deemed owner” of the construction project (for accounting purposes) during the construction period. Accordingly, the Company recorded an asset representing the estimated fair market value of the building (a Level 2 measurement) and a corresponding construction financing obligation. Upon completion of construction, the Company evaluated the de-recognition of the asset and liability under sale-leaseback accounting guidance. The Company was deemed to have “continuing involvement,” which precluded the de-recognition of the asset from the consolidated balance sheet when construction was complete (a “failed sale-leaseback”).
Accordingly, as of January 30, 20132015, the Company has recorded an asset of $24.6 million, representing the estimated fair market value of the building, and March 31, 2012.a financing lease obligation of $24.9 million (including accrued interest), recorded as a component of current and non-current liabilities.
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.
In transition fiscal 2014, the Company experienced a significant increase in the severity of its open claims, the majority of which are litigated. As a result of the increase in severity of open claims, the Company significantly increased its workers’ compensation liability reserves in the third quarter of transition fiscal 2014. As of MarchJanuary 30, 20132015 and MarchJanuary 31, 2012,2014, the Company had recorded a liability $39.4of $70.4 million and $39.0$73.8 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 Marcheach of January 30, 20132015 and MarchJanuary 31, 20122014 for workers’ compensation claims in Texas. The Company purchases workers’ compensation insurance coverage in Arizona and Nevada.Nevada and is not self-insured in those states.
Self-Insured Health Insurance Liability
During the second quarter of fiscal 2012, theThe Company began self-insuringself-insures for a portion of its employee medical benefit claims. At MarchJanuary 30, 20132015 and MarchJanuary 31, 2012,2014, the Company had recorded a liability of $0.5 million and $0.9$0.6 million, respectively, 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.
The following table summarizes the changes in the reserves for self-insurance for the periods indicated (in thousands):
|
| Workers’ |
| Health |
| ||
(Predecessor) |
|
|
|
|
| ||
Balance as of 3/27/10 |
| $ | 47,023 |
| $ | — |
|
Claims Payments |
| (15,555 | ) | — |
| ||
Reserve Accruals |
| 10,962 |
| — |
| ||
Balance as of 4/2/11 |
| $ | 42,430 |
| $ | — |
|
|
|
|
|
|
| ||
Claims Payments |
| (12,938 | ) | (2,280 | ) | ||
Reserve Accruals |
| 9,888 |
| 3,124 |
| ||
Balance as of 1/14/12 |
| $ | 39,380 |
| $ | 844 |
|
|
|
|
|
|
| ||
(Successor) |
|
|
|
|
| ||
Claims Payments |
| $ | (3,855 | ) | $ | (1,502 | ) |
Reserve Accruals |
| 3,499 |
| 1,509 |
| ||
Balance as of 3/31/12 |
| $ | 39,024 |
| $ | 851 |
|
|
|
|
|
|
| ||
Claims Payments |
| $ | (18,655 | ) | $ | (7,050 | ) |
Reserve Accruals |
| 19,129 |
| 6,715 |
| ||
Balance as of 3/30/13 |
| $ | 39,498 |
| $ | 516 |
|
|
| Workers’ |
| Health |
| ||
Balance as of 3/31/12 |
| $ | 39,024 |
| $ | 851 |
|
|
|
|
|
|
| ||
Claims Payments |
| $ | (18,655 | ) | $ | (7,050 | ) |
Reserve Accruals |
| 19,129 |
| 6,715 |
| ||
Balance as of 3/30/13 |
| $ | 39,498 |
| $ | 516 |
|
|
|
|
|
|
| ||
Claims Payments |
| $ | (19,850 | ) | $ | (5,624 | ) |
Reserve Accruals |
| 54,270 |
| 5,708 |
| ||
Balance as of 1/31/14 |
| $ | 73,918 |
| $ | 600 |
|
|
|
|
|
|
| ||
Claims Payments |
| $ | (29,105 | ) | $ | (6,664 | ) |
Reserve Accruals |
| 25,678 |
| 6,521 |
| ||
Balance as of 1/30/15 |
| $ | 70,491 |
| $ | 457 |
|
Legal Matters
Wage and Hour Matters
Thomas Allen v. 99¢ Only Stores, Superior Court of the State of California, County of Los Angeles. Plaintiff, a former store manager for the Company, filed this action on March 18, 2011. He asserted claims on behalf of himself and all others allegedly similarly situated under the California Labor Code for alleged failure to pay overtime, failure to provide meal and rest periods, failure to pay wages timely upon termination, and failure to provide accurate wage statements. Mr. Allen also asserted a derivative claim for unfair competition under the California Business and Professions Code. Mr. Allen seeks to represent a class of all employees who were employed by the Company as salaried managers in 99¢ Only retail stores from March 18, 2007 through the date of trial or settlement. Plaintiff seeks to recover alleged unpaid wages, statutory penalties, interest, attorney’s fees and costs, declaratory relief, injunctive relief and restitution. On October 17, 2011, the Court heard the Company’s motion to compel Plaintiff Allen to arbitrate his claims on an individual basis, and following the hearing, the Court ordered the parties to submit further briefing and argument. Following this supplemental briefing and while the motion was under advisement, Mr. Allen sought leave to amend his complaint to add a cause of action pursuant to the Private Attorneys General Act of 2004 (“PAGA”). The Company did not oppose this motion and on January 5, 2012, the Court granted Mr. Allen’s motion and his First Amended Complaint was filed. On February 27, 2012, the Court denied the Company’s motion to compel arbitration. The Company filed a notice of its intention to appeal that ruling on April 12, 2012. Following a mediation of this matter on August 30, 2012, the parties entered into a ‘‘term sheet’’ settlement agreement for an immaterial amount, which is subject to court approval. As of April 11, 2013, all parties had executed a Stipulation Re: Settlement of Class Action. On April 17, 2013, Mr. Allen filed his motion for preliminary approval of the settlement. The Company filed a notice of non-opposition to this motion on April 25, 2013. On May 9, 2013, the Court granted preliminary approval of the settlement. A hearing regarding final approval of the settlement was set for August 23, 2013. If the settlement agreement is not approved by the court, the Company cannot predict the outcome of this lawsuit.
Shelley Pickett v. 99¢ Only Stores, Superior Court of the State of California, County of Los Angeles.Stores. Plaintiff, Shelley Picketta 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 virtually identical that of another matter which was dismissed with prejudice in December 2011, Bright v. 99¢ Only Stores. Like the plaintiff in the Bright case, Plaintiff Pickett asserts that the Company violated section 14 of Wage Order 7-2001 by failing to provide seats for its cashiers behind checkout counters. SheThe plaintiff seeks civil penalties of $100 to $200 per violation, per each pay period for each affected employee, and attorney’s fees. On November 8, 2011, Plaintiff Pickett filed a Notice of Related Case, stating that her case and the Bright case assert “identical claims.” After hearing arguments from the parties on December 1, 2011, the Court determined that the cases were related and assigned Pickett’s case to Judge William Fahey, the judge who presided over the Bright case. Plaintiff Pickett then attempted to exercise a 170.6 challenge to Judge Fahey, which the Company opposed. The Court struck Plaintiff Pickett’s 170.6 challenge on December 16, 2011. Plaintiff Pickett appealed this ruling, filing a petition for writ of mandate on December 30, 2011. The Company filed an opposition to Plaintiff Pickett’s petition and oral argument took place on February 1, 2012. On February 22, 2012, the Court of Appeal ruled in Plaintiff Pickett’s favor and issued the writ of mandate. On April 2, 2012, the Company filed a petition for review of that ruling with the California Supreme Court, which Pickett answered on April 23, 2012. The California Supreme Courtcourt denied the Company’s petition for review on May 9, 2012 and the Court of Appeals has remanded the case to Los Angeles Superior Court. On October 2, 2012, the Company filed a motion to compel arbitration of Pickett’s individual claims or, in the alternative, to strike the representative action allegations in the Complaint. The Court denied that motion on November 15, 2012Complaint, and on January 11, 2013, the Company filed a Notice of Appeal. The Court of Appeal has given this matter priority as provided by Civil Procedure Code section 1291.2, resulting in an expedited briefing schedule. The Company filed its Opening Brief on July 3, 2013. The Respondent’s Brief is due on August 2, 2013, and per the Court of Appeal’s scheduling order, ifAppeals affirmed the brieftrial 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 not timelythat 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 15-day notice undercross-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 8.220(a)(2)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 Rules ofSupreme Court will be deemed issuedproceeding, with the next calendar day. The Company’s Reply Brief will be due within 10 daysexception of the filing date of Respondent’s Brief.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 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.
Regulatory MattersDistrict Attorney Investigation
TheIn August 2013, the Company recently received a pre-litigation subpoena from the San Joaquin County and Alameda County District Attorney offices. This subpoena was part of an investigation of the Company’s hazardous materials, hazardous substances and hazardous waste practices at its California retail stores and distribution centers conducted jointly by the District Attorney of San Joaquin County along with other environmental prosecutorial offices in the state of California (the “Prosecutors”). That investigation arose out of the Notices to Comply with hazardous waste and/or hazardous materials storage requirements(“Notices”) received by the Company for certain of its stores and its distribution centers in Southern California. The agencies that have delivered such notices to the Company include the Los Angeles County Fire Department, Health Hazardous Materials Division, the Ventura County Environmental Health Division, the Santa Barbara County Fire Department and the City of Oxnard. centers.
The Notices concern alleged non-compliance with a variety of hazardous waste, hazardous substances and hazardous material regulatory requirements imposed under California law identified during recent compliance inspections and requirerequired corrective actions to be taken by certain dates set forth in the Notices. The Company believed that it properly implemented the corrective actions required by the Notices. The Company cooperated with the Prosecutors in their investigation and ultimately reached a settlement with them of all of their claims.
The parties agreed to a settlement amount of approximately $2.4 million, which was embodied in a stipulated judgment that was approved by the San Joaquin County Superior Court in December 2014. The Company had previously recorded an estimated expense in an amount that is workingnot materially different than the ultimate settlement amount. The settlement required the Company to pay civil penalties, costs, and contributions to various state environmental funds. The settlement also requires the Company to implement the required corrective actions. Although the agencies can also seek civil penalties for the alleged instances of past non-compliance, even after corrective action is taken, no penalties have been demanded for anyadditional hazardous waste compliance measures. The Company has made all of the alleged non-compliance. Givenpayments required under the passage of time, it now appears that there will be no further action by the government agencies regarding these matters. If penalties are demanded by these agenciesstipulated judgment and is in the future,process of implementing the Company cannot predict the amount of penalties that may be sought.
Table of Contentsadditional hazardous waste compliance measures.
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.
11. Stock-Based Compensation Plans
Successor stock-based compensation
Number Holdings, Inc. 2012 Equity Incentive Plan
On February 27, 2012, the Parent Board adopted the Number Holdings, Inc. 2012 Stock Incentive Plan (the “2012 Plan”), which. The 2012 Plan authorizes equity awards to be granted for up to 74,60385,000 shares of Class A Common Stock of Parent and 74,60385,000 shares of Class B Common Stock of which asParent. As of MarchJanuary 30, 2013,2015, options for 55,27948,130 shares of each classof Class A Common Stock and Class B Common Stock were issued to certain members of management with an aggregate exercise price of $1,000 for one share of Class A Common Stock and for one share of Class B Common Stock, together. Options become exercisable over the five year service period and have terms of ten years from date of the grant.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.
Share repurchase rightsEmployee Option Grants
Options granted to employees generally become exercisable over the five year service period and have terms of ten years from date of the grant.
Under the 2012 Plan, 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.Stock. 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 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 ansuch option can be exercised. AllThe 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 options that the Company has grantedstock-based compensation expense related to its executive officers and employees (with the exceptionthese stock options. The nature of options granted to Rollover Investors that contain no repurchase rights and transfer restrictions create a performance condition that is not considered probable of being achieved until a liquidity event or certain directors that contain less restrictive repurchase rights) contain such repurchase rights.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 20,84525,125 of time-based employee options outstanding as of March 31, 2013January 30, 2015.
In the second quarter of fiscal 2015, 750 options were granted that will vest subject to such repurchase rights. In accordance with accounting guidance, 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.
Executive and Director Option Grants
Options granted to certain executives and board members generally become exercisable over the 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 recorded anycontain 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 grants. For all otheroption grants over the service period. These options are accounted for as equity awards. The fair value of these stock options was estimated at the option awards is recognizeddate of grant using the Black-Scholes pricing model.
On January 23, 2013, Eric Schiffer, Jeff Gold and Howard Gold separated from their positions as Chief Executive Officer, Chief Administrative Officer and Executive Vice President of Special Projects, respectively, of the Company and Parent, and as directors of the Company and Parent. In accordance with their employment agreements, the Company accelerated vesting of 29,604 stock options and recorded an additional $9.3 million stock-based compensation expense on a straight line basis overin the requisite service periodfourth quarter of fiscal 2013. These options were to expire upon the later of July 23, 2014 and 42 months from the date of the Merger. There were no Parent repurchase rights associated with these stock options. Additionally, effective upon Karen Schiffer’s departure from the Company, on February 15, 2013, the Company modified the existing option grant related to her to fully vest her 5,921 stock options and the Company recorded additional $0.6 million stock-based compensation expense in the fourth quarter of fiscal 2013. These options were to expire upon the later of August 15, 2014 and 42 months from the date of the Merger. There were no Parent repurchase rights associated with these stock options. In October 2013, the Company made a payment of $7.8 million as part of the Gold-Schiffer Purchase for the repurchase of the above mentioned options. See Note 9, “Related-Party Transactions” for more information regarding the Gold-Schiffer Purchase.
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 that the performance hurdles will be achieved. The time-based and is included in operating expenses.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.
Former Executive Put Rights
Pursuant to the employment agreements between the Company and Messrs. Eric Schiffer, Jeff Gold and Howard Gold, in connection with their separation from the Company, for a period of one year following such separation, each executive hashad a right to require Parent to repurchase the shares of Class A and Class B Common Stock owned by such executive (a “put right”) at the greater of (i) $1,000 per combined share of Class A and Class B Common Stock less the any distributions made with respect to such shares and (ii) the fair market value of such shares as of the date the executive exercisesexercised the put right. The put right appliesapplied to the lesser of (i) 20,000 shares of each of Class A and Class B Common Stock and (ii) $12.5 million in value (unless Parent agreesagreed to purchase a higher value). If exercising the put right iswas prohibited (e.g., under the First Lien Term Loan Credit facility,Facility, the ABL Facility and the indenture governing the senior notes)Indenture), then the put right iswould have been extended up to three additional years until Parent iswas no longer prohibited from repurchasing the shares. If, during the four years following termination, Parent iswas at no time able to make the required payments, the put right expireswould have expired and is deemed unexercised. For payout after the first year, the put right iswas only at the fair market value as of the date the exercising the put right.
The Company did not record stock-based compensation expense for the put rights until it became probable that the put rights would become exercisable. On January 23, 2013, EricMessrs. Schiffer, JeffJ. Gold and HowardH. Gold separated from their positions as Chief Executive Officer, Chief Administrative Officer and Executive Vice President of Special Projects, respectively, of the Company and Parent, and as directors of the Company and Parent. As such, for a period of one year from January 23, 2013, each executive maycould exercise the put right as described above. The fair value of these put rights was estimated using a binomial model to be $1.2 million and $6.5 million as of September 28, 2013 and March 30, 2013, respectively. In the third quarter of transition fiscal 2014, these put rights were repurchased and hasall claims under the employment agreements were released as a result of the Gold-Schiffer Purchase, and there was no fair value associated with these put rights as of January 31, 2014. Changes in the fair value for these put rights have been included in operatingselling, general and administrative expenses.
Table of Contents See Note 9, “Related-Party Transactions” for more information regarding the Gold-Schiffer Purchase.
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 fiscal 2015, the Company recorded stock-based compensation expense of $2.8 million. The income tax benefit was $1.1 million for fiscal 2015. During transition fiscal 2014, as result of a decrease in the fair value of former executive put rights, the Company recorded negative stock-based compensation expense of $(4.8) million. The income tax charge was $3.9 million for transition fiscal 2014. During fiscal 2013, the Company recorded stock-based compensation expense of $18.4 million (including $9.9 million of accelerated vesting expense for four officers who separated from their positions in the fourth quarter of fiscal 2013 and $6.5 million related to former executive put rights). The income tax benefit was $7.4 million for fiscal 2013. During the period from January 15, 2012 to March 31, 2012, the Company incurred stock-based compensation expense of $0.1 million.
The fair value of stock options was estimated at the date of grant using the Black-Scholes pricing model with the following assumptions:
|
| Year Ended |
| For the Period |
|
| Year Ended |
| Ten Months Ended |
| Year Ended |
| |||||
|
| March 30, 2013 |
| January 15, 2012 to |
|
| January 30, 2015 |
| January 31, 2014 |
| March 30, 2013 |
| |||||
Weighted-average fair value of options granted |
| $ | 350.84 |
| $ | 387.20 |
|
| $ | 506.47 |
| $ | 486.95 |
| $ | 350.84 |
|
Risk free interest rate |
| 1.12 | % | 0.98 | % |
| 2.12 | % | 1.78 | % | 1.12 | % | |||||
Expected life (in years) |
| 6.50 |
| 6.32 |
|
| 6.48 |
| 6.28 |
| 6.50 |
| |||||
Expected stock price volatility |
| 34.2 | % | 37.9 | % |
| 35.0 | % | 39.2 | % | 34.2 | % | |||||
Expected dividend yield |
| None |
| None |
|
| None |
| None |
| 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.
As of MarchJanuary 30, 2013,2015, there were $6.1$15.5 million of total unrecognized compensation costs related to non-vested options and options subject to repurchase rights for which no compensation has been recorded. During fiscal 2015, 8,226 options vested and the fair value of these vested options was $3.8 million. During transition fiscal 2014, 1,139 options vested and the fair value of these vested options was $0.4 million. During fiscal 2013, 38,290 options vested and the fair value of these vested options was $12.0 million. The aggregate pre-tax intrinsic value of options exercised in fiscal 2015 was less than $0.1 million. No options were exercised during fiscal transition fiscal 2014 and 2013. No options were vested or exercised during the period from January 15, 2012 to March 31, 2012.
The following summarizes stock option activity forduring the year ended MarchJanuary 30, 2013:2015:
|
| Number of |
| Weighted |
| Weighted Average |
| Aggregate |
|
| Number of |
| Weighted |
| Weighted Average |
| Aggregate |
| ||||
Options outstanding at the beginning of the period |
| 50,905 |
| $ | 1,000 |
|
|
|
|
|
| 42,910 |
| $ | 1,119 |
|
|
|
|
| ||
Granted |
| 5,965 |
| $ | 1,000 |
|
|
|
|
|
| 11,210 |
| $ | 1,299 |
|
|
|
|
| ||
Exercised |
| — |
| $ | — |
|
|
|
|
|
| (30 | ) | $ | 1,000 |
|
|
|
|
| ||
Cancelled |
| (1,591 | ) | $ | 1,000 |
|
|
|
|
|
| (5,960 | ) | $ | 1,034 |
|
|
|
|
| ||
Outstanding at the end of the period |
| 55,279 |
| $ | 1,000 |
| 4.60 |
| $ | — |
|
| 48,130 |
| $ | 1,171 |
| 8.40 |
| $ | 7,314,975 |
|
Exercisable at the end of the period |
| 38,290 |
| $ | 1,000 |
| 2.80 |
| $ | — |
|
| 11,396 |
| $ | 1,101 |
| 8.00 |
| $ | 2,539,037 |
|
Exercisable and expected to vest at the end of the period |
| 52,531 |
| $ | 1,000 |
| 4.50 |
| $ | — |
|
| 41,487 |
| $ | 1,153 |
| 8.40 |
| $ | 7,050,187 |
|
The following table summarizes the stock awards available for grant under the 2012 Plan as of MarchJanuary 30, 2013:2015:
|
| Number of Shares |
|
Available for grant as of |
|
| |
Authorized | — |
| |
Granted |
| ( | ) |
Cancelled |
|
|
|
Available for grant at |
|
|
|
On January 23, 2013, Eric Schiffer, Jeff Gold and Howard Gold separated from their positions as Chief Executive Officer, Chief Administrative Officer and Executive Vice President of Special Projects, respectively, of the Company and Parent, and as directors of the Company and Parent. In accordance with their employment agreements, the Company accelerated vesting of 29,604 stock options and recorded an additional $9.3 million stock-based compensation expense in the fourth quarter of fiscal 2013. These options expire upon the later of July 23, 2014 and 42 months from the date of the Merger. There are no Parent repurchase rights associated with these stock options.
On February 15, 2013, the Company modified an existing option grant related to an employee who separated from the Company on that day. Consequently, 5,921 stock options became fully vested and the Company recorded additional $0.6 million stock-based compensation expense in the fourth quarter of fiscal 2013. These options expire upon the later of August 15, 2014 and 42 months from the date of the Merger. There are no Parent repurchase rights associated with these stock options.
Predecessor Stock-Based Compensation
Prior to the Merger, the Company maintained the 99¢ Only Stores 2010 Equity Incentive Plan (the “2010 Plan”) and the 1996 Equity Incentive Plan, as amended (the “1996 Plan”), which provided for the grant of options, PSU’s and other stock-based awards. In connection with the Merger, on January 13, 2012, all of the Company stock-based awards became fully vested. Restricted stock units and performance stock units were converted to a right to receive $22.00 per share, and stock option awards were converted to a right to receive $22.00 less the share price of the awards. The Predecessor recognized $1.0 million of stock-based compensation expense due to the vesting and payout of all stock-based awards. In total, the Company paid cash of $21.5 million to settle all of the Predecessor’s stock based awards outstanding on January 13, 2012. Equity incentive plans of the Predecessor no longer exist.
The Company recognized compensation expense on a straight-line basis over the requisite service period of the award, taking into consideration the applicable estimated forfeiture rates. Compensation expense associated with PSUs was subject to adjustments for changes in estimates relating to whether the performance objectives were achieved (see Performance Stock Units below). Total pre-tax compensation expense recorded as operating expense, was $2.7 million and $2.9 million for the period from April 3, 2011 through January 14, 2012 and the fiscal 2011, respectively. The income tax benefit was $1.1 million and $1.2 million for the period from April 3, 2011 through January 14, 2012 and fiscal 2011, respectively.
Stock Options
Under the Predecessor’s 2010 Plan, stock options typically vested over a three-year period, one-third one year from the date of grant and one-third per year thereafter. Stock options typically expired ten years from the date of grant.
The weighted average fair values per share of stock options granted was estimated using the Black-Scholes pricing model with the following assumptions:
|
| For the Period |
| Year Ended |
| ||
|
| April 3, 2012 to |
| April 2, 2011 |
| ||
|
|
|
|
|
| ||
Weighted-average fair value of options granted |
| $ | 7.27 |
| $ | 6.70 |
|
Risk free interest rate |
| 0.92 | % | 1.42 | % | ||
Expected life (in years) |
| 5.0 |
| 5.0 |
| ||
Expected stock price volatility |
| 43.3 | % | 40.8 | % | ||
Expected dividend yield |
| None |
| None |
| ||
The risk-free interest rate was 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 based on historical experience of similar options, giving consideration to the contractual terms and expectations of future employee behavior. Expected stock price volatility was based on a combination of the historical volatility of the Company’s stock and the implied volatility of actively traded options of the Company’s stock. The Company did not pay dividends in the past and did not anticipate the payment of any future cash dividends. Compensation expense was recognized only for those options expected to vest, with forfeitures estimated based on the Company’s historical experience and future expectations.
Due to the Merger and termination of the equity incentive plans, there were no stock options outstanding as of January 14, 2012. The aggregate pre-tax intrinsic value of options exercised was $17.2 million and $3.5 million for the period from April 3, 2011 to January 14, 2012 and fiscal 2011, respectively. The aggregate pre-tax intrinsic value of options exercised represents the difference between the fair market value of the Company’s common stock on the date of exercise and the exercise price of each option. The total fair value of shares vested during the period from April 3, 2011 to January 14, 2012 and fiscal 2011 was $0.9 million and $1.0 million, respectively.
Performance Stock Units
During the fourth quarter of fiscal 2008, the Compensation Committee of the Company’s Board of Directors granted PSUs to certain officers and other key personnel of the Company as a long-term, stock-based performance incentive award. Pursuant to the term of the PSUs, they were eligible for conversion, on a one-for-one basis, to shares of the Company’s common stock based on (1) attainment of one or more of eight specific performance goals during the performance period (consisting of fiscal 2008 through 2012), (2) continuous employment with the Company, and (3) certain vesting requirements. Due to the Merger on January 13, 2012, the Company accelerated the vesting of 249,193 outstanding PSU shares.
The fair value of the PSUs was based on the stock price on the grant date. The compensation expense related to PSUs was recognized only when it was probable that the performance criteria will be met. Based on the Company’s financial results, the Company started to recognize compensation expense related to PSUs during the first quarter of fiscal 2010, as this was the first quarter that it appeared probable that certain performance conditions would be met. The Company incurred non-cash stock-based compensation expense related to PSUs of $1.8 million (including $0.3 million resulting from the Merger) and $2.1 million for period from April 3, 2011 through January 14, 2012 and for fiscal 2011, respectively, which was recorded as operating expenses. As a result of the Merger on January 13, 2012, all outstanding PSU’s fully vested and were converted to a right to receive $22.00 per share. There are no outstanding PSU’S as of January 13, 2012.
Restricted Stock Units
According to the Company’s 2010 Plan, the Compensation Committee of the Company’s Board of Directors granted time-based restricted stock units in fiscal 2011 to certain non-officer employees of the Company as a long-term, incentive award. RSUs cliff vest three years after being granted if the employees are still employed by the Company at such time.
The stock based compensation expense for RSUs was measured at fair value on the date of grant based on the number of shares expected to vest and the quoted market price of the Company’s common stock. The Company started to recognize compensation expense related to RSUs during the third quarter of fiscal 2011. For the period from April 3, 2011 through January 13, 2012 and for fiscal 2011, the Company incurred non-cash stock-based compensation expense related to RSUs of $0.3 million (including $0.2 million resulted from the Merger) and less than $0.1 million, respectively, which was recorded as operating expense. As result of the Merger on January 13, 2012 all outstanding RSU’s fully vested and were converted to a right to receive $22.00 per share. There were no outstanding RSU’s as of January 14, 2012.
12. Texas Market
As a result of the Company’s decision in September 2008 to close its Texas operations, which was later suspended and, in August 2009, reversed, the Company closed 16 of its Texas stores starting from the fourth quarter of fiscal 2009 through the second quarter of fiscal 2010. The initial impairment charges, severance pay accrual, lease termination cost and the additional accretion expenses were included within selling, general and administrative expenses in the consolidated statement of operations in fiscal 2009. As of March 30, 2013, the remaining balance of the Company’s estimated lease termination costs accrual was $0.7 million. As of March 30, 2013, the Company operated 39 stores in Texas.
The following table summarizes the Texas store closures remaining obligations as of March 30, 2013 (in thousands):
|
| Lease Termination |
| |
(Predecessor) |
|
|
| |
Remaining Obligations as of 03/27/10 |
| $ | 2,943 |
|
|
|
|
| |
Accretion Expenses |
| 437 |
| |
Cash Payments |
| (1,889 | ) | |
Remaining Obligations as of 04/02/11 |
| $ | 1,491 |
|
|
|
|
| |
Accretion Expenses |
| 321 |
| |
Cash Payments |
| (718 | ) | |
Remaining Obligations as of 01/14/12 |
| $ | 1,094 |
|
|
|
|
| |
(Successor) |
|
|
| |
Accretion Expenses |
| 105 |
| |
Cash Payments |
| (120 | ) | |
Remaining Obligations as of 03/31/12 |
| $ | 1,079 |
|
|
|
|
| |
Accretion Expenses |
| 333 |
| |
Cash Payments |
| (759 | ) | |
Remaining Obligations as of 03/30/13 |
| $ | 653 |
|
13.Operating Segments
The Company manages its business on the basis of one reportable segment. The Company’s sales through Bargain Wholesale are not material to the Company’s consolidated financial statements; therefore, Bargain Wholesale is not presented as a separate segment.
The Company had no customers representing more than ten percent of net sales. Substantially all of the Company’s net sales were to customers located in the United States. All of the Company’s operations are located in the United States with the exception of certain sourcing entities located in Asia. The foreign operations solely support domestic operations and are not material.
14.13. Employee Benefit Plans
401(k) Plan
In 1998, the Company adopted a 401(k) Plan (the “Plan”). All full-time employees are eligible to participate in the Plan after 30 days of service and are eligible to receive matching contributions from the Company after one year of service. The Company contributed $1.9 million, $1.6 million and $1.8 million forduring fiscal year 2013. The Company contributed $0.4 million2015, transition fiscal 2014 and $1.4 million during the periods of January 15, 2012 to March 31, 2012 and April 3, 2011 to January 14, 2012,fiscal 2013, respectively. The Company contributed $1.6 million for fiscal year 2011 in matching cash contributions to the Plan. The Company matches 100% of the first 3% of compensation that an employee contributes and 50% of the next 2% of compensation that the employee contributes with immediate vesting.
Deferred Compensation Plan
The Company has a deferred compensation plan to provide certain key management employees the ability to defer a portion of their base compensation and/or bonuses. The plan is an unfunded nonqualified plan. The deferred amounts and earnings thereon are payable to participants, or designated beneficiaries, at specified future dates, upon retirement or death. The Company does not make contributions to this plan or guarantee earnings. The assets and liabilities of a rabbi trust are accounted for as if they are assets and liabilities of the Company. The assets held in the rabbi trust are not available for general corporate purposes. The rabbi trust is subject to creditor claims in the event of insolvency. The deferred compensation liability and related long-term assets were $1.2$0.7 million and $5.1$1.1 million as of MarchJanuary 30, 20132015 and MarchJanuary 31, 2012,2014, respectively.
15.14.Assets Held for Sale
Assets held for sale as of MarchJanuary 30, 20132015 consisted of the vacant land in La Quinta,Rancho Mirage, California and the vacantproperty containing land and a building in Rancho Mirage, California.Pasadena-Shaver, Texas. The carrying value as of MarchJanuary 30, 20132015 for the La QuintaRancho Mirage land was $0.4$1.7 million. In the fourth quarter of fiscal 2013,2015, the carrying value of Rancho Mirage landproperty in Pasadena-Shaver was written down to $1.7$1.4 million from $2.2$1.5 million, resulting in an asset impairment charge of $0.5$0.1 million.
In June 2012, the Company completed the sale of its Eagan, Minnesota warehouse that had been classified asAssets held for sale. The warehouse hadsale as of January 31, 2014 consisted of the vacant land in Rancho Mirage, California with a carrying value of $6.4 million and the Company recorded a loss on sale of $0.2 million in the first quarter of fiscal 2013.$1.7 million.
16.15.Other Current Assets and Other Accrued Expenses
Other current assets as of MarchJanuary 30, 20132015 and MarchJanuary 31, 20122014 are as follows (in thousands):
|
| March 30, |
| March 31, |
|
| January 30, |
| January 31, |
| ||||
Prepaid expenses |
| $ | 13,884 |
| $ | 10,360 |
|
| $ | 13,231 |
| $ | 12,046 |
|
Other |
| 2,486 |
| 937 |
|
| 5,808 |
| 6,144 |
| ||||
Total other current assets |
| $ | 16,370 |
| $ | 11,297 |
|
| $ | 19,039 |
| $ | 18,190 |
|
Other accrued expenses as of MarchJanuary 30, 20132015 and MarchJanuary 31, 20122014 are as follows (in thousands):
|
| March 30, |
| March 31, |
| ||
Accrued interest |
| $ | 9,243 |
| $ | 7,898 |
|
Accrued legal reserves and fees |
| 3,367 |
| 4,866 |
| ||
Accrued utilities |
| 2,682 |
| 2,709 |
| ||
Accrued rent and related expenses |
| 2,436 |
| 2,830 |
| ||
Accrued property taxes |
| 2,396 |
| 2,974 |
| ||
Accrued outside services |
| 1,546 |
| 945 |
| ||
Accrued professional fees |
| 1,164 |
| 1,220 |
| ||
Accrued advertising |
| 561 |
| 577 |
| ||
Other |
| 6,300 |
| 6,550 |
| ||
Total other accrued expenses |
| $ | 29,695 |
| $ | 30,569 |
|
|
| January 30, |
| January 31, |
| ||
Accrued interest |
| $ | 8,363 |
| $ | 8,322 |
|
Accrued occupancy costs |
| 11,766 |
| 7,500 |
| ||
Accrued legal reserves and fees |
| 6,006 |
| 7,472 |
| ||
Accrued professional fees, outside services and advertising |
| 4,236 |
| 3,853 |
| ||
Other |
| 9,797 |
| 9,543 |
| ||
Total other accrued expenses |
| $ | 40,168 |
| $ | 36,690 |
|
17.16. Financial Guarantees
On December 29, 2011, the Company (the “Issuer”) issued $250 million principal amount of the Senior Notes. The Senior Notes are irrevocably and unconditionally guaranteed, jointly and severally, by each of the Issuer’sCompany’s existing and future restricted subsidiaries that are guarantors under the Issuer’s credit facilitiesCredit Facilities and certain other indebtedness.
At March 31, 2012, the Senior Notes were guaranteed by each of the Company’s direct wholly owned subsidiaries, 99 Cents Only Stores Texas, Inc. and 99 Cents Only Stores (Nevada) (together, the “Subsidiary Guarantors”). In September 2012, 99 Cents Only Stores (Nevada) was dissolved. As of MarchJanuary 30, 2013,2015, the Senior Notes are fully and unconditionally guaranteed by the Company’s 100% owned subsidiaries (the “Subsidiary Guarantors”), except for immaterial subsidiaries. As of January 31, 2014, the Senior Notes are fully and unconditionally guaranteed by the Company’s 100% owned subsidiary, 99 Cents Only Stores Texas, Inc. (the “Subsidiary Guarantor”).
The tables in the following pages present the condensed consolidating financial information for the IssuerCompany 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 Issuer,Company, and the Subsidiary Guarantors operated as independent entities.
CONDENSED CONSOLIDATING BALANCE SHEETS
As of January 30, 2015
(Amounts in thousands)
|
| Issuer |
| Subsidiary |
| Non- |
| Consolidating |
| 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 |
| |||||
Short-term debt and 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 |
|
CONDENSED CONSOLIDATING BALANCE SHEETS
As of March 30, 2013
(Successor)January 31, 2014
(Amounts in thousands)
|
| Issuer |
| Subsidiary |
| Consolidating |
| Consolidated |
|
| Issuer |
| Subsidiary |
| Consolidating |
| Consolidated |
| ||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Cash |
| $ | 45,841 |
| $ | 113 |
| $ | (478 | ) | $ | 45,476 |
|
| $ | 33,723 |
| $ | 1,119 |
| $ | — |
| $ | 34,842 |
|
Short-term investments |
| — |
| — |
| — |
| — |
| |||||||||||||||||
Accounts receivable, net |
| 1,672 |
| 179 |
| — |
| 1,851 |
|
| 1,561 |
| 232 |
| — |
| 1,793 |
| ||||||||
Income taxes receivable |
| 3,969 |
| — |
| — |
| 3,969 |
|
| 4,498 |
| — |
| — |
| 4,498 |
| ||||||||
Deferred income taxes |
| 33,139 |
| — |
| — |
| 33,139 |
|
| 46,953 |
| — |
| — |
| 46,953 |
| ||||||||
Inventories, net |
| 172,068 |
| 29,533 |
| — |
| 201,601 |
|
| 177,461 |
| 28,783 |
| — |
| 206,244 |
| ||||||||
Assets held for sale |
| 2,106 |
| — |
| — |
| 2,106 |
|
| 1,680 |
| — |
| — |
| 1,680 |
| ||||||||
Other |
| 15,300 |
| 1,070 |
| — |
| 16,370 |
|
| 16,646 |
| 1,544 |
| — |
| 18,190 |
| ||||||||
Total current assets |
| 274,095 |
| 30,895 |
| (478 | ) | 304,512 |
|
| 282,522 |
| 31,678 |
| — |
| 314,200 |
| ||||||||
Property and equipment, net |
| 413,543 |
| 62,508 |
| — |
| 476,051 |
|
| 421,130 |
| 63,916 |
| — |
| 485,046 |
| ||||||||
Deferred financing costs, net |
| 21,016 |
| — |
| — |
| 21,016 |
|
| 18,526 |
| — |
| — |
| 18,526 |
| ||||||||
Equity investments and advances to subsidiaries |
| 119,642 |
| 34,631 |
| (154,273 | ) | — |
|
| 246,594 |
| 161,810 |
| (408,404 | ) | — |
| ||||||||
Intangible assets, net |
| 468,593 |
| 2,766 |
| — |
| 471,359 |
|
| 463,771 |
| 2,540 |
| — |
| 466,311 |
| ||||||||
Goodwill |
| 479,745 |
| — |
| — |
| 479,745 |
|
| 479,745 |
| — |
| — |
| 479,745 |
| ||||||||
Deposits and other assets |
| 4,191 |
| 363 |
| — |
| 4,554 |
|
| 5,894 |
| 512 |
| — |
| 6,406 |
| ||||||||
Total assets |
| $ | 1,780,825 |
| $ | 131,163 |
| $ | (154,751 | ) | $ | 1,757,237 |
|
| $ | 1,918,182 |
| $ | 260,456 |
| $ | (408,404 | ) | $ | 1,770,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
| |||||||||||||||||
LIABILITIES AND MEMBER’S EQUITY |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Accounts payable |
| $ | 46,595 |
| $ | 3,894 |
| $ | (478 | ) | $ | 50,011 |
|
| $ | 63,620 |
| $ | 7,437 |
| $ | — |
| $ | 71,057 |
|
Intercompany payable |
| 32,991 |
| 28,075 |
| (61,066 | ) | — |
|
| 161,811 |
| 162,054 |
| (323,865 | ) | — |
| ||||||||
Payroll and payroll-related |
| 15,798 |
| 1,298 |
| — |
| 17,096 |
|
| 22,718 |
| 1,743 |
| — |
| 24,461 |
| ||||||||
Sales tax |
| 6,628 |
| 572 |
| — |
| 7,200 |
|
| 4,992 |
| 530 |
| — |
| 5,522 |
| ||||||||
Other accrued expenses |
| 26,892 |
| 2,803 |
| — |
| 29,695 |
|
| 34,506 |
| 2,184 |
| — |
| 36,690 |
| ||||||||
Workers’ compensation |
| 39,423 |
| 75 |
| — |
| 39,498 |
|
| 73,822 |
| 96 |
| — |
| 73,918 |
| ||||||||
Current portion of long-term debt |
| 8,567 |
| — |
| — |
| 8,567 |
|
| 6,138 |
| — |
| — |
| 6,138 |
| ||||||||
Current portion of capital lease obligation |
| 83 |
| — |
| — |
| 83 |
|
| 88 |
| — |
| — |
| 88 |
| ||||||||
Total current liabilities |
| 176,977 |
| 36,717 |
| (61,544 | ) | 152,150 |
|
| 367,695 |
| 174,044 |
| (323,865 | ) | 217,874 |
| ||||||||
Long-term debt, net of current portion |
| 749,758 |
| — |
| — |
| 749,758 |
|
| 849,252 |
| — |
| — |
| 849,252 |
| ||||||||
Unfavorable lease commitments, net |
| 14,200 |
| 633 |
| — |
| 14,833 |
|
| 11,335 |
| 383 |
| — |
| 11,718 |
| ||||||||
Deferred rent |
| 4,217 |
| 606 |
| — |
| 4,823 |
|
| 11,698 |
| 1,490 |
| — |
| 13,188 |
| ||||||||
Deferred compensation liability |
| 1,153 |
| — |
| — |
| 1,153 |
|
| 1,142 |
| — |
| — |
| 1,142 |
| ||||||||
Capital lease obligation, net of current portion |
| 271 |
| — |
| — |
| 271 |
|
| 197 |
| — |
| — |
| 197 |
| ||||||||
Long-term deferred income taxes |
| 186,851 |
| — |
| — |
| 186,851 |
|
| 171,573 |
| — |
| — |
| 171,573 |
| ||||||||
Other liabilities |
| 8,428 |
| — |
| — |
| 8,428 |
|
| 6,203 |
| — |
| — |
| 6,203 |
| ||||||||
Total liabilities |
| 1,141,855 |
| 37,956 |
| (61,544 | ) | 1,118,267 |
|
| 1,419,095 |
| 175,917 |
| (323,865 | ) | 1,271,147 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Shareholders’ Equity: |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Preferred stock |
| — |
| — |
| — |
| — |
| |||||||||||||||||
Common stock |
| — |
| — |
| — |
| — |
| |||||||||||||||||
Member’s Equity: |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Member units |
| 546,365 |
| — |
| — |
| 546,365 |
| |||||||||||||||||
Additional paid-in capital |
| 654,424 |
| 99,943 |
| (99,943 | ) | 654,424 |
|
| — |
| 99,943 |
| (99,943 | ) | — |
| ||||||||
Investment in Number Holdings, Inc. preferred stock |
| (19,200 | ) | — |
| — |
| (19,200 | ) | |||||||||||||||||
Accumulated deficit |
| (14,202 | ) | (6,736 | ) | 6,736 |
| (14,202 | ) |
| (26,687 | ) | (15,404 | ) | 15,404 |
| (26,687 | ) | ||||||||
Other comprehensive loss |
| (1,252 | ) | — |
| — |
| (1,252 | ) |
| (1,391 | ) | — |
| — |
| (1,391 | ) | ||||||||
Total shareholders’ equity |
| 638,970 |
| 93,207 |
| (93,207 | ) | 638,970 |
| |||||||||||||||||
Total liabilities and shareholders’ equity |
| $ | 1,780,825 |
| $ | 131,163 |
| $ | (154,751 | ) | $ | 1,757,237 |
| |||||||||||||
Total equity |
| 499,087 |
| 84,539 |
| (84,539 | ) | 499,087 |
| |||||||||||||||||
Total liabilities and equity |
| $ | 1,918,182 |
| $ | 260,456 |
| $ | (408,404 | ) | $ | 1,770,234 |
| |||||||||||||
CONDENSED CONSOLIDATING BALANCE SHEETS
As of March 31, 2012
(Successor)CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended January 30, 2015
(Amounts in thousands)
|
| Issuer |
| Subsidiary |
| Consolidating |
| Consolidated |
| ||||
ASSETS |
|
|
|
|
|
|
|
|
| ||||
Current Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash |
| $ | 23,793 |
| $ | 3,973 |
| $ | — |
| $ | 27,766 |
|
Short-term investments |
| 3,631 |
| — |
| — |
| 3,631 |
| ||||
Accounts receivable, net |
| 2,592 |
| 407 |
| — |
| 2,999 |
| ||||
Income taxes receivable |
| 6,634 |
| 234 |
| — |
| 6,868 |
| ||||
Deferred income taxes |
| 31,188 |
| — |
| — |
| 31,188 |
| ||||
Inventories, net |
| 175,534 |
| 25,444 |
| — |
| 200,978 |
| ||||
Assets held for sale |
| 6,849 |
| — |
| — |
| 6,849 |
| ||||
Other |
| 10,515 |
| 782 |
| — |
| 11,297 |
| ||||
Total current assets |
| 260,736 |
| 30,840 |
| — |
| 291,576 |
| ||||
Property and equipment, net |
| 408,456 |
| 68,069 |
| — |
| 476,525 |
| ||||
Deferred financing costs, net |
| 30,400 |
| — |
| — |
| 30,400 |
| ||||
Equity investments and advances to subsidiaries |
| 470,720 |
| 374,864 |
| (845,584 | ) | — |
| ||||
Intangible assets, net |
| 477,492 |
| (58 | ) | — |
| 477,434 |
| ||||
Goodwill |
| 479,508 |
| — |
| — |
| 479,508 |
| ||||
Deposits and other assets |
| 9,689 |
| 2,909 |
| — |
| 12,598 |
| ||||
Total assets |
| $ | 2,137,001 |
| $ | 476,624 |
| $ | (845,584 | ) | $ | 1,768,041 |
|
|
|
|
|
|
|
|
|
|
| ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
| ||||
Current Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Accounts payable |
| $ | 38,271 |
| $ | 3,136 |
| $ | — |
| $ | 41,407 |
|
Intercompany payable |
| 377,766 |
| 453,952 |
| (831,718 | ) | — |
| ||||
Payroll and payroll-related |
| 13,986 |
| 1,594 |
| — |
| 15,580 |
| ||||
Sales tax |
| 5,630 |
| 498 |
| — |
| 6,128 |
| ||||
Other accrued expenses |
| 27,207 |
| 3,362 |
| — |
| 30,569 |
| ||||
Workers’ compensation |
| 38,949 |
| 75 |
| — |
| 39,024 |
| ||||
Current portion of long-term debt |
| 5,250 |
| — |
| — |
| 5,250 |
| ||||
Current portion of capital lease obligation |
| 77 |
| — |
| — |
| 77 |
| ||||
Total current liabilities |
| 507,136 |
| 462,617 |
| (831,718 | ) | 138,035 |
| ||||
Long-term debt, net of current portion |
| 758,351 |
| — |
| — |
| 758,351 |
| ||||
Unfavorable lease commitments, net |
| 19,035 |
| (76 | ) | — |
| 18,959 |
| ||||
Deferred rent |
| 581 |
| 217 |
| — |
| 798 |
| ||||
Deferred compensation liability |
| 5,136 |
| — |
| — |
| 5,136 |
| ||||
Capital lease obligation, net of current portion |
| 354 |
| — |
| — |
| 354 |
| ||||
Long-term deferred income taxes |
| 214,874 |
| — |
| — |
| 214,874 |
| ||||
Other liabilities |
| 767 |
| — |
| — |
| 767 |
| ||||
Total liabilities |
| 1,506,234 |
| 462,758 |
| (831,718 | ) | 1,137,274 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Shareholders’ Equity: |
|
|
|
|
|
|
|
|
| ||||
Preferred stock |
| — |
| — |
| — |
| — |
| ||||
Common stock |
| — |
| 1 |
| (1 | ) | — |
| ||||
Additional paid-in capital |
| 636,037 |
| 15,000 |
| (15,000 | ) | 636,037 |
| ||||
Accumulated deficit |
| (5,293 | ) | (1,135 | ) | 1,135 |
| (5,293 | ) | ||||
Other comprehensive income |
| 23 |
| — |
| — |
| 23 |
| ||||
Total shareholders’ equity |
| 630,767 |
| 13,866 |
| (13,866 | ) | 630,767 |
| ||||
Total liabilities and shareholders’ equity |
| $ | 2,137,001 |
| $ | 476,624 |
| $ | (845,584 | ) | $ | 1,768,041 |
|
|
| Issuer |
| Subsidiary |
| Non- |
| Consolidating |
| Consolidated |
| |||||
Net Sales: |
|
|
|
|
|
|
|
|
|
|
| |||||
Total sales |
| $ | 1,746,916 |
| $ | 180,033 |
| $ | — |
| $ | — |
| $ | 1,926,949 |
|
Cost of sales |
| 1,169,431 |
| 139,418 |
| — |
| — |
| 1,308,849 |
| |||||
Gross profit |
| 577,485 |
| 40,615 |
| — |
| — |
| 618,100 |
| |||||
Selling, general and administrative expenses |
| 494,147 |
| 51,587 |
| 525 |
| — |
| 546,259 |
| |||||
Operating income (loss) |
| 83,338 |
| (10,972 | ) | (525 | ) | — |
| 71,841 |
| |||||
Other (income) expense: |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest expense |
| 62,734 |
| — |
| — |
| — |
| 62,734 |
| |||||
Equity in loss of subsidiaries |
| 11,503 |
| — |
| — |
| (11,503 | ) | — |
| |||||
Total other expense, net |
| 74,237 |
| — |
| — |
| (11,503 | ) | 62,734 |
| |||||
Income (loss) before provision for income taxes |
| 9,101 |
| (10,972 | ) | (525 | ) | 11,503 |
| 9,107 |
| |||||
Provision for income taxes |
| 3,599 |
| — |
| 6 |
| — |
| 3,605 |
| |||||
Net income (loss) |
| $ | 5,502 |
| $ | (10,972 | ) | $ | (531 | ) | $ | 11,503 |
| $ | 5,502 |
|
Comprehensive income (loss) |
| $ | 5,895 |
| $ | (10,972 | ) | $ | (531 | ) | $ | 11,503 |
| $ | 5,895 |
|
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Ten Months Ended January 31, 2014
(Amounts in thousands)
|
| Issuer |
| Subsidiary |
| Consolidating |
| Consolidated |
| ||||
Net Sales: |
|
|
|
|
|
|
|
|
| ||||
Total sales |
| $ | 1,394,131 |
| $ | 134,612 |
| $ | — |
| $ | 1,528,743 |
|
Cost of sales |
| 932,841 |
| 100,236 |
| — |
| 1,033,077 |
| ||||
Gross profit |
| 461,290 |
| 34,376 |
| — |
| 495,666 |
| ||||
Selling, general and administrative expenses |
| 438,405 |
| 43,044 |
| — |
| 481,449 |
| ||||
Operating income (loss) |
| 22,885 |
| (8,668 | ) | — |
| 14,217 |
| ||||
Other (income) expense: |
|
|
|
|
|
|
|
|
| ||||
Interest income |
| (16 | ) | — |
| — |
| (16 | ) | ||||
Interest expense |
| 50,820 |
| — |
| — |
| 50,820 |
| ||||
Equity in loss of subsidiaries |
| 8,668 |
| — |
| (8,668 | ) | — |
| ||||
Loss on extinguishment of debt |
| 4,391 |
| — |
| — |
| 4,391 |
| ||||
Total other expense, net |
| 63,863 |
| — |
| (8,668 | ) | 55,195 |
| ||||
Loss before provision for income taxes |
| (40,978 | ) | (8,668 | ) | 8,668 |
| (40,978 | ) | ||||
Benefit for income taxes |
| (28,493 | ) | — |
| — |
| (28,493 | ) | ||||
Net loss |
| $ | (12,485 | ) | $ | (8,668 | ) | $ | 8,668 |
| $ | (12,485 | ) |
Comprehensive loss |
| $ | (12,624 | ) | $ | (8,668 | ) | $ | 8,668 |
| $ | (12,624 | ) |
99¢ Only Stores
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended March 30, 2013
(Successor)
(Amounts in thousands)
|
| Issuer |
| Subsidiary |
| Consolidating |
| Consolidated |
|
| Issuer |
| Subsidiary |
| Consolidating |
| Consolidated |
| ||||||||
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total sales |
| $ | 1,522,535 |
| $ | 146,116 |
| $ | — |
| $ | 1,668,651 |
|
| $ | 1,522,535 |
| $ | 146,116 |
| $ | — |
| $ | 1,668,651 |
|
Cost of sales (excluding depreciation and amortization expense shown separately below) |
| 934,405 |
| 93,890 |
| — |
| 1,028,295 |
| |||||||||||||||||
Cost of sales |
| 1,011,222 |
| 105,829 |
| — |
| 1,117,051 |
| |||||||||||||||||
Gross profit |
| 588,130 |
| 52,226 |
| — |
| 640,356 |
|
| 511,313 |
| 40,287 |
| — |
| 551,600 |
| ||||||||
Selling, general and administrative expenses: |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Operating expenses |
| 475,594 |
| 47,901 |
| — |
| 523,495 |
| |||||||||||||||||
Depreciation and amortization |
| 48,605 |
| 9,972 |
| — |
| 58,577 |
| |||||||||||||||||
Total selling, general and administrative expenses |
| 524,199 |
| 57,873 |
| — |
| 582,072 |
| |||||||||||||||||
Selling, general and administrative expenses |
| 447,382 |
| 45,934 |
| — |
| 493,316 |
| |||||||||||||||||
Operating income (loss) |
| 63,931 |
| (5,647 | ) | — |
| 58,284 |
|
| 63,931 |
| (5,647 | ) | — |
| 58,284 |
| ||||||||
Other (income) expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Interest income |
| (296 | ) | (46 | ) | — |
| (342 | ) |
| (296 | ) | (46 | ) | — |
| (342 | ) | ||||||||
Interest expense |
| 60,898 |
| — |
| — |
| 60,898 |
|
| 60,898 |
| — |
| — |
| 60,898 |
| ||||||||
Equity in (earnings) loss of subsidiaries |
| 5,601 |
| — |
| (5,601 | ) | — |
| |||||||||||||||||
Equity in loss of subsidiaries |
| 5,601 |
| — |
| (5,601 | ) | — |
| |||||||||||||||||
Loss on extinguishment of debt |
| 16,346 |
| — |
| — |
| 16,346 |
|
| 16,346 |
| — |
| — |
| 16,346 |
| ||||||||
Other |
| 380 |
| — |
| — |
| 380 |
|
| 380 |
| — |
| — |
| 380 |
| ||||||||
Total other expense (income), net |
| 82,929 |
| (46 | ) | (5,601 | ) | 77,282 |
|
| 82,929 |
| (46 | ) | (5,601 | ) | 77,282 |
| ||||||||
Loss before provision for income taxes |
| (18,998 | ) | (5,601 | ) | 5,601 |
| (18,998 | ) |
| (18,998 | ) | (5,601 | ) | 5,601 |
| (18,998 | ) | ||||||||
(Benefit) provision for income taxes |
| (10,089 | ) | — |
| — |
| (10,089 | ) | |||||||||||||||||
Benefit for income taxes |
| (10,089 | ) | — |
| — |
| (10,089 | ) | |||||||||||||||||
Net loss |
| $ | (8,909 | ) | $ | (5,601 | ) | $ | 5,601 |
| $ | (8,909 | ) |
| $ | (8,909 | ) | $ | (5,601 | ) | $ | 5,601 |
| $ | (8,909 | ) |
Comprehensive loss |
| $ | (10,184 | ) | $ | — |
| $ | — |
| $ | (10,184 | ) |
| $ | (10,184 | ) | $ | (5,601 | ) | $ | 5,601 |
| $ | (10,184 | ) |
99¢ Only StoresCONDENSED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)CASH FLOWSPeriodYear Ended January 15, 2012 to March 31, 2012
(Successor)30, 2015
(Amounts in thousands)
|
| Issuer |
| Subsidiary |
| Consolidating |
| Consolidated |
| ||||
Net Sales: |
|
|
|
|
|
|
|
|
| ||||
Total sales |
| $ | 309,437 |
| $ | 29,479 |
| $ | — |
| $ | 338,916 |
|
Cost of sales (excluding depreciation and amortization expense shown separately below) |
| 185,215 |
| 18,560 |
| — |
| 203,775 |
| ||||
Gross profit |
| 124,222 |
| 10,919 |
| — |
| 135,141 |
| ||||
Selling, general and administrative expenses: |
|
|
|
|
|
|
|
|
| ||||
Operating expenses |
| 100,694 |
| 9,783 |
| — |
| 110,477 |
| ||||
Depreciation and amortization |
| 9,468 |
| 2,267 |
| — |
| 11,735 |
| ||||
Total selling, general and administrative expenses |
| 110,162 |
| 12,050 |
| — |
| 122,212 |
| ||||
Operating income (loss) |
| 14,060 |
| (1,131 | ) | — |
| 12,929 |
| ||||
Other (income) expense: |
|
|
|
|
|
|
|
|
| ||||
Interest income |
| (29 | ) | — |
| — |
| (29 | ) | ||||
Interest expense |
| 16,219 |
| 4 |
| — |
| 16,223 |
| ||||
Equity in (earnings) loss of subsidiaries |
| 1,135 |
| — |
| (1,135 | ) | — |
| ||||
Other |
| (75 | ) | — |
| — |
| (75 | ) | ||||
Total other expense, net |
| 17,250 |
| 4 |
| (1,135 | ) | 16,119 |
| ||||
Loss before provision for income taxes |
| (3,190 | ) | (1,135 | ) | 1,135 |
| (3,190 | ) | ||||
Provision for income taxes |
| 2,103 |
| — |
| — |
| 2,103 |
| ||||
Net (loss) income |
| $ | (5,293 | ) | $ | (1,135 | ) | $ | 1,135 |
| $ | (5,293 | ) |
Comprehensive loss |
| $ | (5,270 | ) | $ | — |
| $ | — |
| $ | (5,270 | ) |
|
| Issuer |
| Subsidiary |
| Non- |
| Consolidating |
| Consolidated |
| |||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net cash provided by operating activities |
| $ | 28,239 |
| $ | 9,970 |
| $ | 62 |
| $ | — |
| $ | 38,271 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Purchases of property and equipment |
| (101,357 | ) | (10,000 | ) | (30 | ) | — |
| (111,387 | ) | |||||
Proceeds from sale of fixed assets |
| 31 |
| 8 |
| — |
| — |
| 39 |
| |||||
Investment in subsidiary |
| (1 | ) | — |
| — |
| 1 |
| — |
| |||||
Net cash used in investing activities |
| (101,327 | ) | (9,992 | ) | (30 | ) | 1 |
| (111,348 | ) | |||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Payments of long-term debt |
| (6,138 | ) | — |
| — |
| — |
| (6,138 | ) | |||||
Proceeds under revolving credit facility |
| 305,500 |
| — |
| — |
| — |
| 305,500 |
| |||||
Payments under revolving credit facility |
| (248,500 | ) | — |
| — |
| — |
| (248,500 | ) | |||||
Payments of capital lease obligation |
| (88 | ) | — |
| — |
| — |
| (88 | ) | |||||
Payments to repurchase stock options of Number Holdings, Inc. |
| (76 | ) | — |
| — |
| — |
| (76 | ) | |||||
Capital contributions |
| — |
| — |
| 1 |
| (1 | ) | — |
| |||||
Net cash provided by financing activities |
| 50,698 |
| — |
| 1 |
| (1 | ) | 50,698 |
| |||||
Net (decrease) increase in cash |
| (22,390 | ) | (22 | ) | 33 |
| — |
| (22,379 | ) | |||||
Cash — beginning of period |
| 33,723 |
| 1,119 |
| — |
| — |
| 34,842 |
| |||||
Cash - end of period |
| $ | 11,333 |
| $ | 1,097 |
| $ | 33 |
| $ | — |
| $ | 12,463 |
|
99¢ Only StoresCONDENSED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)CASH FLOWSPeriod April 3, 2011 toTen Months Ended January 14, 2012
(Predecessor)31, 2014
(Amounts in thousands)
|
| Issuer |
| Subsidiary |
| Consolidating |
| Consolidated |
| ||||
Net Sales: |
|
|
|
|
|
|
|
|
| ||||
Total sales |
| $ | 1,087,684 |
| $ | 105,096 |
| $ | — |
| $ | 1,192,780 |
|
Cost of sales (excluding depreciation and amortization expense shown separately below) |
| 645,864 |
| 65,138 |
| — |
| 711,002 |
| ||||
Gross profit |
| 441,820 |
| 39,958 |
| — |
| 481,778 |
| ||||
Selling, general and administrative expenses: |
|
|
|
|
|
|
|
|
| ||||
Operating expenses |
| 340,764 |
| 35,358 |
| — |
| 376,122 |
| ||||
Depreciation and amortization |
| 19,386 |
| 2,483 |
| — |
| 21,869 |
| ||||
Total selling, general and administrative expenses |
| 360,150 |
| 37,841 |
| — |
| 397,991 |
| ||||
Operating income |
| 81,670 |
| 2,117 |
| — |
| 83,787 |
| ||||
Other (income) expense: |
|
|
|
|
|
|
|
|
| ||||
Interest income |
| (291 | ) | — |
| — |
| (291 | ) | ||||
Interest expense |
| 368 |
| 13 |
| — |
| 381 |
| ||||
Other-than-temporary investment impairment due to credit loss |
| 357 |
| — |
| — |
| 357 |
| ||||
Equity in (earnings) loss of subsidiaries |
| (2,104 | ) | — |
| 2,104 |
| — |
| ||||
Other |
| (107 | ) | — |
| — |
| (107 | ) | ||||
Total other (income) expense, net |
| (1,777 | ) | 13 |
| 2,104 |
| 340 |
| ||||
Income before provision for income taxes |
| 83,447 |
| 2,104 |
| (2,104 | ) | 83,447 |
| ||||
Provision for income taxes |
| 33,699 |
| — |
| — |
| 33,699 |
| ||||
Net income |
| $ | 49,748 |
| $ | 2,104 |
| $ | (2,104 | ) | $ | 49,748 |
|
Comprehensive income |
| $ | 49,944 |
| $ | — |
| $ | — |
| $ | 49,944 |
|
|
| Issuer |
| Subsidiary |
| Consolidating |
| Consolidated |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
| ||||
Net cash provided by operating activities |
| $ | 69,651 |
| $ | 10,795 |
| $ | 478 |
| $ | 80,924 |
|
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| ||||
Purchases of property and equipment |
| (52,280 | ) | (9,810 | ) | — |
| (62,090 | ) | ||||
Proceeds from sale of fixed assets |
| 1,452 |
| 21 |
| — |
| 1,473 |
| ||||
Net cash used in investing activities |
| (50,828 | ) | (9,789 | ) | — |
| (60,617 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| ||||
Investment in Number Holdings, Inc. preferred stock |
| (19,200 | ) | — |
| — |
| (19,200 | ) | ||||
Dividend paid |
| (95,512 | ) | — |
| — |
| (95,512 | ) | ||||
Payments of debt |
| (6,174 | ) | — |
| — |
| (6,174 | ) | ||||
Payments of debt issuance costs |
| (2,343 | ) | — |
| — |
| (2,343 | ) | ||||
Payments of capital lease obligation |
| (69 | ) | — |
| — |
| (69 | ) | ||||
Payments to repurchase stock options of Number Holdings, Inc. |
| (7,781 | ) | — |
| — |
| (7,781 | ) | ||||
Proceeds from debt |
| 100,000 |
| — |
| — |
| 100,000 |
| ||||
Excess tax benefit from share-based payment arrangements |
| 138 |
| — |
| — |
| 138 |
| ||||
Net cash used in financing activities |
| (30,941 | ) | — |
| — |
| (30,941 | ) | ||||
Net (decrease) increase in cash |
| (12,118 | ) | 1,006 |
| 478 |
| (10,634 | ) | ||||
Cash — beginning of period |
| 45,841 |
| 113 |
| (478 | ) | 45,476 |
| ||||
Cash - end of period |
| $ | 33,723 |
| $ | 1,119 |
| $ | — |
| $ | 34,842 |
|
99¢ Only Stores
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)Year Ended April 2, 2011
(Predecessor)
(Amounts in thousands)
|
| Issuer |
| Subsidiary |
| Consolidating |
| Consolidated |
| ||||
Net Sales: |
|
|
|
|
|
|
|
|
| ||||
Total sales |
| $ | 1,302,745 |
| $ | 121,133 |
| $ | — |
| $ | 1,423,878 |
|
Cost of sales (excluding depreciation and amortization expense shown separately below) |
| 767,218 |
| 75,538 |
| — |
| 842,756 |
| ||||
Gross profit |
| 535,527 |
| 45,595 |
| — |
| 581,122 |
| ||||
Selling, general and administrative expenses: |
|
|
|
|
|
|
|
|
| ||||
Operating expenses |
| 392,687 |
| 43,347 |
| — |
| 436,034 |
| ||||
Depreciation and amortization |
| 24,263 |
| 3,342 |
| — |
| 27,605 |
| ||||
Total selling, general and administrative expenses |
| 416,950 |
| 46,689 |
| — |
| 463,639 |
| ||||
Operating income (loss) |
| 118,577 |
| (1,094 | ) | — |
| 117,483 |
| ||||
Other (income) expense: |
|
|
|
|
|
|
|
|
| ||||
Interest income |
| (865 | ) | — |
| — |
| (865 | ) | ||||
Interest expense |
| 71 |
| 6 |
| — |
| 77 |
| ||||
Other-than-temporary investment impairment due to credit loss |
| 129 |
| — |
| — |
| 129 |
| ||||
Equity in loss of subsidiaries |
| 1,100 |
| — |
| (1,100 | ) | — |
| ||||
Other |
| (82 | ) | — |
| — |
| (82 | ) | ||||
Total other expense (income), net |
| 353 |
| 6 |
| (1,100 | ) | (741 | ) | ||||
Income (loss) before provision for income taxes |
| 118,224 |
| (1,100 | ) | 1,100 |
| 118,224 |
| ||||
Provision for income taxes |
| 43,916 |
| — |
| — |
| 43,916 |
| ||||
Net income (loss) |
| $ | 74,308 |
| $ | (1,100 | ) | $ | 1,100 |
| $ | 74,308 |
|
Comprehensive income |
| $ | 74,441 |
| $ | — |
| $ | — |
| $ | 74,441 |
|
99¢ Only Stores
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 30, 2013
(Successor)
(Amounts in thousands)
|
| Issuer |
| Subsidiary |
| Consolidating |
| Consolidated |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
| ||||
Net cash provided by (used in) operating activities |
| $ | 85,330 |
| $ | (3,428 | ) | $ | (478 | ) | $ | 81,424 |
|
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| ||||
Purchases of property and equipment |
| (57,849 | ) | (4,645 | ) | — |
| (62,494 | ) | ||||
Proceeds from sale of fixed assets |
| 12,064 |
| — |
| — |
| 12,064 |
| ||||
Purchases of investments |
| (1,996 | ) | — |
| — |
| (1,996 | ) | ||||
Proceeds from sale of investments |
| 5,256 |
| — |
| — |
| 5,256 |
| ||||
Investment in subsidiary |
| (4,213 | ) | — |
| 4,213 |
| — |
| ||||
Net cash used in investing activities |
| (46,738 | ) | (4,645 | ) | 4,213 |
| (47,170 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| ||||
Payments of debt |
| (5,237 | ) | — |
| — |
| (5,237 | ) | ||||
Payments of debt issuance costs |
| (11,230 | ) | — |
| — |
| (11,230 | ) | ||||
Payments of capital lease obligation |
| (77 | ) | — |
| — |
| (77 | ) | ||||
Capital contributions |
| — |
| 4,213 |
| (4,213 | ) | — |
| ||||
Net cash (used in) provided by financing activities |
| (16,544 | ) | 4,213 |
| (4,213 | ) | (16,544 | ) | ||||
Net increase (decrease) in cash |
| 22,048 |
| (3,860 | ) | (478 | ) | 17,710 |
| ||||
Cash — beginning of period |
| 23,793 |
| 3,973 |
| — |
| 27,766 |
| ||||
Cash - end of period |
| $ | 45,841 |
| $ | 113 |
| $ | (478 | ) | $ | 45,476 |
|
99¢ Only Stores17.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSPeriod January 15, 2012 to March 31, 2012
(Successor)
(Amounts in thousands)
|
| Issuer |
| Subsidiary |
| Consolidating |
| Consolidated |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
| ||||
Net cash provided by operating activities |
| $ | 20,482 |
| $ | 1,553 |
| $ | — |
| $ | 22,035 |
|
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| ||||
Acquisition of 99¢ Only Stores |
| (1,477,563 | ) | — |
| — |
| (1,477,563 | ) | ||||
Deposit — Merger consideration |
| 177,322 |
| — |
| — |
| 177,322 |
| ||||
Purchases of property and equipment |
| (12,252 | ) | (918 | ) | — |
| (13,170 | ) | ||||
Proceeds from sale of fixed assets |
| 1,910 |
| — |
| — |
| 1,910 |
| ||||
Purchases of investments |
| (6,277 | ) | — |
| — |
| (6,277 | ) | ||||
Proceeds from sale of investments |
| 24,519 |
| — |
| — |
| 24,519 |
| ||||
Net cash used in investing activities |
| (1,292,341 | ) | (918 | ) | — |
| (1,293,259 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| ||||
Proceeds from debt |
| 774,500 |
| — |
| — |
| 774,500 |
| ||||
Payments of debt |
| (11,313 | ) | — |
| — |
| (11,313 | ) | ||||
Payments of debt issuance costs |
| (31,411 | ) | — |
| — |
| (31,411 | ) | ||||
Payments of capital lease obligation |
| (13 | ) | — |
| — |
| (13 | ) | ||||
Proceeds from equity contribution |
| 535,900 |
| — |
| — |
| 535,900 |
| ||||
Net cash provided by financing activities |
| 1,267,663 |
| — |
| — |
| 1,267,663 |
| ||||
Net (decrease) increase in cash |
| (4,196 | ) | 635 |
| — |
| (3,561 | ) | ||||
Cash — beginning of period |
| 27,989 |
| 3,338 |
| — |
| 31,327 |
| ||||
Cash - end of period |
| $ | 23,793 |
| $ | 3,973 |
| $ | — |
| $ | 27,766 |
|
99¢ Only Stores
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSPeriod April 3, 2011 to January 14, 2012
(Predecessor)
(Amounts in thousands)Subsequent Events
|
| Issuer |
| Subsidiary |
| Consolidating |
| Consolidated |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
| ||||
Net cash provided by operating activities |
| $ | 40,263 |
| $ | 3,993 |
| $ | — |
| $ | 44,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| ||||
Deposit — Merger consideration |
| (177,322 | ) | — |
| — |
| (177,322 | ) | ||||
Purchases of property and equipment |
| (31,606 | ) | (1,964 | ) | — |
| (33,570 | ) | ||||
Proceeds from sale of fixed assets |
| 7 |
| 91 |
| — |
| 98 |
| ||||
Purchases of investments |
| (52,623 | ) | — |
| — |
| (52,623 | ) | ||||
Proceeds from sale of investments |
| 226,805 |
| — |
| — |
| 226,805 |
| ||||
Net cash used in investing activities |
| (34,739 | ) | (1,873 | ) | — |
| (36,612 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Payments of capital lease obligation |
| (56 | ) | — |
| — |
| (56 | ) | ||||
Repurchases of common stock related to issuance of Performance Stock Units |
| (1,744 | ) | — |
| — |
| (1,744 | ) | ||||
Proceeds from exercise of stock options |
| 3,359 |
| — |
| — |
| 3,359 |
| ||||
Excess tax benefit from share-based payment arrangements |
| 5,401 |
| — |
| — |
| 5,401 |
| ||||
Net cash provided by financing activities |
| 6,960 |
| — |
| — |
| 6,960 |
| ||||
Net increase in cash |
| 12,484 |
| 2,120 |
| — |
| 14,604 |
| ||||
Cash - beginning of period |
| 15,505 |
| 1,218 |
| — |
| 16,723 |
| ||||
Cash - end of period |
| $ | 27,989 |
| $ | 3,338 |
| $ | — |
| $ | 31,327 |
|
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.
99¢ Only Stores
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSYear Ended April 2, 2011
(Predecessor)
(Amounts in thousands)
|
| Issuer |
| Subsidiary |
| Consolidating |
| Consolidated |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
| ||||
Net cash provided by operating activities |
| $ | 76,977 |
| $ | 2,795 |
| $ | — |
| $ | 79,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| ||||
Purchases of property and equipment |
| (57,977 | ) | (3,144 | ) | — |
| (61,121 | ) | ||||
Proceeds from sale of fixed assets |
| 145 |
| 19 |
| — |
| 164 |
| ||||
Purchases of investments |
| (69,317 | ) | — |
| — |
| (69,317 | ) | ||||
Proceeds from sale of investments |
| 43,621 |
| — |
| — |
| 43,621 |
| ||||
Net cash used in investing activities |
| (83,528 | ) | (3,125 | ) | — |
| (86,653 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| ||||
Payments of capital lease obligation |
| (72 | ) | — |
| — |
| (72 | ) | ||||
Repurchases of common stock related to issuance of Performance Stock Units |
| (2,260 | ) | — |
| — |
| (2,260 | ) | ||||
Acquisition of non-controlling interest of a partnership |
| — |
| — |
| — |
| — |
| ||||
Proceeds from exercise of stock options |
| 5,039 |
| — |
| — |
| 5,039 |
| ||||
Excess tax benefit from share-based payment arrangements |
| 1,020 |
| — |
| — |
| 1,020 |
| ||||
Net cash provided by financing activities |
| 3,727 |
| — |
| — |
| 3,727 |
| ||||
Net decrease in cash |
| (2,824 | ) | (330 | ) | — |
| (3,154 | ) | ||||
Cash - beginning of period |
| 18,329 |
| 1,548 |
| — |
| 19,877 |
| ||||
Cash - end of period |
| $ | 15,505 |
| $ | 1,218 |
| $ | — |
| $ | 16,723 |
|
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
As disclosed in the Company’s current report on Form 8-K filed with the SEC on November 8, 2012, the Company changed its independent registered public accountants effective November 7, 2012.None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Interim Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Report. Disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, has been appropriately recorded, processed, summarized and reported on a timely basis and are effective in ensuring that such information is accumulated and communicated to our management, including our Interim Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our Interim Chief Executive Officer and Chief Financial Officer have concluded that as of MarchJanuary 30, 2013,2015, the Company’s controls and procedures were not effective due to the material weaknesses related to the accounting for inventory valuation and stock-based compensation.
Remediated Material Weakness in Internal Control Over Financial Reporting
Debt Extinguishment
As more fully described in Note 19 to our Consolidated Financial Statements on Form 10-Q/A for the quarter ended September 29, 2012 (as filed with the Securities and Exchange Commission on February 12, 2013), we previously identified a material weakness that resulted in an underreporting of a $16.3 million loss on debt extinguishment related to the portion of the unamortized debt issuance costs, unamortized OID and refinancing costs incurred with the repricing for the portion of the original First Lien Term Loan Facility that was extinguished, in our interim unaudited financial statements for the periods ended June 30, 2012 and September 29, 2012.
In an effort to remediate the identified material weakness, we initiated and implemented the following series of measures:
·education and training of personnel on the accounting treatment for debt modification and extinguishment;
·detailed review of the debt modification and extinguishment;
·review of debt modification and extinguishment transactions by a qualified person; and
·improvement of our communication with the administrative agent under the First Lien Term Loan Facility, including notification of the composition of the lenders party to the First Lien Term Loan Facility.
Based on the implementation of the above measures, the above mentioned material weakness has been remediated during the fourth quarter of fiscal 2013.
Material Weaknesses in Internal Control Over Financial Reporting In Process of Being Remediated
Stock-based Compensation
During the fourth quarter of fiscal 2013, we identified a material weakness in our internal controls over financial reporting related to accounting for stock-based compensation. We did not correctly evaluate the accounting treatment for certain share repurchase rights for Parent options granted to our executive officers and employees that resulted in no stock-based compensation expense for these grants. In addition, we did not correctly evaluate the accounting treatment for former executive put rights that became exercisable by the former executives in the fourth quarter of fiscal 2013. We believe that the material weakness was due to the complex and non-routine nature of these equity arrangements.
In an effort to remediate the identified material weakness, we initiated and implemented the following series of measures:
·education and training of personnel on the accounting treatment for stock-based complex financial instruments;
·redesign of procedures to enhance identification, capture and recording of contractual terms included in complex equity arrangements, including consideration for the need of consultation with third party subject matter and valuation experts.
Based on the implementation of the above measures, the above mentioned material weakness management believes that the above mentioned material weakness will be remediated during the second quarter of fiscal 2014.
Retail Store Level Inventory Valuation
During the fourth quarter of fiscal 2013, we identified a material weakness in our internal controls over financial reporting related to our inventory valuation methodology. As more fully described in Note 1 to our Consolidated Financial Statements included in this annual report on Form 10-K, we are in the process of upgrading our systems for accounting for merchandise inventories. Among other things, we are preparing to implement an SAP system that will enable us, for the first time, to track inventory at each of our retail stores on a perpetual basis by stock keeping unit (or SKU). The SAP implementation process will begin in fiscal 2014, with all stores expected to be included by the end of fiscal 2015. In anticipation of the implementation of this system, during the second half of fiscal 2013 we performed physical counts and established inventory cost and retail by SKU at 81 of our more than 300 retail stores. In prior periods, we determined the value of store level inventory by performing physical counts for each price point category and then converted those retail values to cost basis by applying a year-to-date cost percentage per store. For the 81 stores where the counts were taken by SKU, we determined total retail values by merchandise category and applied each category’s cost percentage to determine the value of the inventory. As a result of this analysis, we determined that single average cost percentage by store was not consistent with the inventory on hand at the applicable balance sheet date based on the higher turnover of low margin product. As of March 30, 2013 and for all prior periods since Merger, we have revised the calculation to include a year-to-date cost percentage per merchandise category applied to the estimated retail value for all stores by merchandise category.
We determined that the methodology used in prior periods has resulted in an accounting error that was immaterial to prior periods. In connection with correcting this prior period error, we identified an overstatement in total inventory of $13.3 million at the Merger date, which amount has accumulated over prior periods and we determined that our related controls were not adequately designed to yield the correct cost complement for valuing inventory. We have determined that this overstatement constituted a material weakness in our internal controls over financial reporting.
In an effort to remediate the identified material weakness, we initiated and implemented the following series of measures:
·documentation of the new retail store level physical inventory preparation and counting procedures, including individual product bar code scanning
·education and training of appropriate Company and third party personnel on retail store level physical inventory by SKU including:
·preparation and counting procedures
·valuation and accounting procedures
·development, review and approval of calculations specific to costing inventory by applying estimated cost compliment by merchandise category
Moreover, in addition to the foregoing remediation measures, the process of taking physical inventories by SKU for our retail stores during the second half of fiscal 2013 enabled us to more precisely value specific products during physical inventory counts and estimate cost complement by merchandise category, which in turn enabled a more accurate estimate of cost of store physical inventories.
Based on the foregoing processes and remediation measures, management believes that the above mentioned material weakness will be remediated during the third quarter of fiscal 2014.
We are committed to a strong internal control environment and will continue to review the effectiveness of its internal controls over financial reporting and other disclosure controls and procedures.
Table of Contentseffective.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, (as defined in Rules 13a15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended), pursuant to Rule 13a-15(c) of the Securities Exchange Act of 1934, as amended. This system is intended to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
A company’s internal control over financial reporting includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Our management, with the participation of our Interim Chief Executive Officer and Chief Financial Officer, uses the framework and criteria established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework), for evaluating the effectiveness of our internal control over financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements, and projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may deteriorate.
Based on its assessment, our management concluded that our internal control over financial reporting were not effective as of MarchJanuary 30, 2013 due to the material weaknesses related to the accounting for inventory valuation and stock-based compensation.2015.
Changes in Internal Control Over Financial Reporting
Except as described above,During the fourth quarter of fiscal 2015, we did not make any changes that materially affected or are reasonably likely to materially affect our internal control over financial reporting.
None.
Item 10. Directors, Executive Officers and Corporate Governance
Directors and Executive Officers of the Company
Below is a list ofThe following table sets forth certain information regarding the names, ages as of May 15, 2013 and positions, and a brief account of the business experience, of certain of the individuals who serve as ourCompany’s executive officers and members of ourthe board of directors (the “99¢“Parent Board”). Each of Number Holdings, Inc., the Company’s sole member, as of our Board also serves as members of Parent’s Board of Directors (the “Parent Board” and together with the 99¢ Board, the “Board”). The Board consists of nine members, eight of whom were designated by the Sponsors.April 20, 2015:
Name |
| Age |
| Position |
|
|
|
|
|
|
|
|
|
|
| 57 | Director | ||
Norman Axelrod |
| 62 |
|
|
Michael |
|
|
| |
|
|
| ||
|
|
| Director | |
Andrew Giancamilli |
|
|
|
|
Dennis Gies |
|
|
| |
|
|
| Director | |
David Kaplan |
|
|
|
|
Scott Nishi |
|
|
| Director |
Adam Stein |
|
|
| Director |
Stéphane Gonthier joined the Company as President and Chief Executive Officer and as a director in September 2013. Mr. Gonthier brings more than 15 years of experience in value-oriented retail, having most recently served from September 2007 to August 2013 as Chief Operating Officer at Dollarama Inc. (TSX:DOL) (“DOL”), the leading dollar store chain in Canada that operates more than 800 stores across the country. Prior to that, he served in various executive positions with Alimentation Couche-Tard Inc. (TSX:ATD.B), a global convenience store chain best known as the operator of the Circle K stores in the United States, from 1998 until 2007. His final position at that company was as Senior Vice President, Eastern North America, where he was responsible for four divisions consisting of approximately 2,600 convenience stores in Canada and the United States. Mr. Gonthier has a Bachelor of Civil Law from Université de Montréal and a Master of Business Administration from Université de Sherbrooke. Mr. Gonthier was called to the Québec Bar in 1989. Mr. Gonthier also serves as a member of the board of directors of Investissements Trévi Inc., Spectra Premium Industries Inc. and Colabor Group Inc. (TSX:GCL). With his extensive experience, Mr. Gonthier brings valuable knowledge of and expertise in the retail industry to the Parent Board.
Bradley Lukow joined the Company in January 2015 as Chief Financial Officer, Treasurer and Secretary. Mr. Lukow joined the Company following a 20-year career at Shoppers Drug Mart Corporation, Canada’s leading national retail pharmacy chain, where he served most recently as Executive Vice President and Chief Financial Officer since 2009, having responsibility for all finance, strategy, real estate development, information technology and business development functions. Mr. Lukow was a key member of the management team as the company grew its store network to 1,253 Shoppers Drug Mart/Pharmaprix stores across Canada. Mr. Lukow also served as the finance lead in the initial public offering of Shoppers Drug Mart Corporation in 2001 and the most recent sale of the company in 2013 to Loblaw Companies Limited, Canada’s largest food retailer. Prior to Shoppers, Mr. Lukow served in various roles at Loblaw, including financial reporting, budgeting and planning, taxation and internal audit from 1990 until 1994. Mr. Lukow began his career at Ernst & Young after graduating from the University of Western Ontario’s School of Business. He holds a Chartered Accountancy designation in Canada.
Richard Anicettijoined the Company as a director in May 2012 and was appointedserved as Interim President and Chief Executive Officer infrom January 2013 until September 2013. Mr. Anicetti is also currently the President and Founder of From One To Many Leadership Consulting LLC focusing on leadership, strategic planning, process redesign and organizational change management consulting. Mr. Anicetti served as an Executive Vice President of Delhaize Group from September 2002 to May 2010. Mr. Anicetti also served as the Chief Executive Officer of Delhaize America Shared Services from January 2010 to May 2010. He served as the President and COO of Food Lion, LLC, a subsidiary of Delhaize America Inc., from September 2001 to October 2002 and Chief Executive Officer of Food Lion from October 2002 to December 2010. Mr. Anicetti joined Food Lion in August 2000. He also is also a former member of athe Board of Directors of A&P Supermarkets and the US Advisory Board for Brambles Ltd, a logistics company based in Sydney, Australia, and previously served on the Board of Directors of A&P Supermarkets from May 2012 to February 2013.Australia. Mr. Anicetti is also a member of the Board of Trustees for Bennett College for Women, and is a member of the National Advisory Board for Duke Children’s Hospital.Hospital and a member of the Board of Directors for NC/VA Easter Seals UCP. With his more than 30 years experience and strong record of performance in the food retail industry, Mr. Anicetti will bringbrings to the Parent Board extensive knowledge and expertise in the industries in which the Company operates.
Frank Schools Norman Axelrodjoined the Company as a director in January 2012. Beginning in 1988, he served as Chief Executive Officer and a member of the board of directors of Linens ‘n Things, Inc., a retailer of home textiles, housewares and decorative home accessories, was appointed as Chairman of its board of directors in 1997, and served in such capacities until its acquisition in February 2012 as Interim Chief Financial Officer and was appointed Senior Vice President, Chief Financial Officer and Treasurer in November 2012.2006. He is responsible for overseeing finance, accountingalso the Chairman of the boards of directors of Guitar Center Holdings, Inc. and treasury. Since 2006, Mr. Schoolsthe parent entity of Floor and Decor Outlets of America, Inc., a specialty retailer of hard surface flooring and related accessories, and serves on the boards of directors of
Smart & Final Stores, Inc. and the parent entities of The Neiman Marcus Group LLC and Jaclyn, Inc., a handbags and apparel company. He has been a partner with Tatum, a national professional services firm. In addition to servingalso previously served as the Company’s Interim Vice PresidentChairman of the board of directors of GNC Holdings, Inc., National Bedding Company LLC and ControllerSimmons Company and as a member of the board of directors of Reebok International Ltd. and Maidenform Brands, Inc. Mr. Axelrod, through his consulting entity, NAX 18, LLC, has provided consulting services to certain entities related to Ares Management. Mr. Axelrod earned a B.S. in Management and Marketing from 2007 to 2008, Mr. Schools has heldLehigh University and an M.B.A. from New York University. With his experience on the board of directors of a variety of key finance positions with various other public companies including servingand as Vice Presidentthe Chief Executive Officer of Finance for Pacific Sunwear from 1994Linens ‘n Things, Inc., Mr. Axelrod brings to 2006. Mr. Schools is a Certified Public Accountant in the StateParent Board leadership skills and extensive knowledge of California.complex operational and management issues.
Michael Fung joined the Company as a director in JanuaryDecember 2013 and served as the Company’s Interim Executive Vice President and Chief Administrative Officer.Officer from January 2013 until September 2013. Mr. Fung served as Senior Vice President and Chief Financial Officer at Walmart U.S. from 2006 until his retirement in February 2012. At Walmart U.S., Michael also served as Senior Vice President, Internal Audit Services between 2003 and 2006, and as Vice President, Finance and Administration for Global Procurement between 2001 and 2003. Before joining Walmart, Mr. Fung spent five years as Vice President and Chief Financial Officer for Sensient Technologies Corporation, three years as Senior Vice President and Chief Financial Officer for Vanstar Corporation and four years as Vice President and Chief Financial Officer for Bass Pro Shops, Inc. Mr. Fung is currently a member of the Board of Directors of Franklin Covey Co. Mr. Fung is a Certified Public Accountant (Inactive) in the State of Illinois.
Michael Kvitko joined He received his MBA from the Company in November 2012 as Executive Vice PresidentUniversity of Chicago and Chief Merchandising Officer. From March 2010 to November 2012, Mr. Kvitko served as Executive Vice President and Chief Merchandising Officer of Variety Wholesalers. Prior to joining Variety Wholesalers, Mr. Kvitko served as Senior Vice President of Merchandising for Family Dollar between 2006 and 2010. Mr. Kvitko also served as Corporate Vice President of Juniors and Tweens for May Department Stores from 2004 to 2006, as Senior Vice President of Merchandising for Mervyn’s California from 1994 to 1999 and as Director of Merchandise Planning and Senior Buyer for Ladies Knits at Target Corporation from 1988 to 1994.
Norman Axelrod has served as a director of the Company since January 2012. He has served as the Chairman of the board of directors of GNC Holdings, Inc. from March 2007 to July 2012. Mr. Axelrod was Chief Executive Officer and Chairman of the board of directors of Linens ‘n Things, Inc., a retailer of home textiles, housewares and decorative home accessories, until its acquisition in February 2006. Mr. Axelrod joined Linens ‘n Things as Chief Executive Officer in 1988 and was elected to the additional position of Chairman of the board in 1997. From 1976 to 1988, Mr. Axelrod held various management positions at Bloomingdale’s, ending with Senior Vice President, General Merchandise Manager. Mr. Axelrod is the Chairman of the boards of directors of National Bedding Company LLC and Simmons Company and also serves on the boards of directors of Smart & Final Holdings, Inc., Maidenform Brands, Inc., FDO Holdings, Inc., the indirect parent of Floor and Decor Outlets of America, Inc., and Jaclyn, Inc. Mr. Axelrod was also a member of the board of directors of Reebok International Ltd. from 2001 to 2006. Since 2007, Mr. Axelrod, through his consulting entity, NAX 18, LLC, has provided consulting services to certain entities related to Ares Management. Mr. Axelrod earned a BS in ManagementAccounting from the University of Illinois at Chicago. Mr. Fung brings valuable financial knowledge and Marketing from Lehigh University and an MBA from New York University. With his experience on the board of directors of a variety of companies and as the Chief Executive Officer of Linens ‘n Things, Inc., Mr. Axelrod will bring to the Parent Board leadership skills and extensive knowledge of complex operational and management issues.
Shane Feeney has served as a director of the Company since January 2012. He is Vice President and Head of Direct Private Equity at CPPIB Equity Investments, Inc. (“CPPIB Equity”), a wholly owned subsidiary of CPPIB. In 2010, Mr. Feeney joined CPPIB Equity from Bridgepoint Capital Limited in London, UK. Prior to joining Bridgepoint Capital Limited, Mr. Feeney was a partner and founding member of Hermes Private Equity Limited’s direct investing business where he was involved in several UK private equity investments between 2003 and 2009. From 1998 through 2003, Mr. Feeney was an Associate Director with Morgan Grenfell Private Equity Limited in London where he worked on numerous European private equity transactions from origination to exit across multiple industry sectors. Mr. Feeney currently serves on the board of directors of Air Distribution Technologies, Inc., The Gates Corporation and Livingston International, Inc. Mr. Feeney has also served on the board of directors of Tomkins Building Products, Inc. Mr. Feeney received a BA in Economics from Dartmouth College and an MBA from INSEAD. Mr. Feeney will bring to the Parent Board financial expertise, as well as experience as a private equity investor evaluating and managing investments in companies across various industries and as a member of the boards of directors of other private companies.Board.
Andrew Giancamillihas served joined the Company as a director of the Company sincein May 2012. He has served as President and Chief Executive Officer of Katz Group Canada Ltd., the Canadian subsidiary of The Katz Group of Companies, from October 2003 to February 2012. Prior to joining Katz Group Canada, Mr. Giancamilli was with Canadian Tire Corporation Ltd. from 2001 to 2003. Mr. Giancamilli also held several positions, including President and Chief Operating Officer, at Kmart Corporation from 1995 to 2001 and served as President and Chief Operating Officer of Perry Drug Stores, Inc., a U.S.-based drug store chain, from 1993 to 1995. Mr. Giancamilli serves as a Directordirector of Smart & Final Holdings,Stores, Inc. and the National Association of Chain Drugs Stores (NACDS), is on the GS1 Canada Board, and has served as a Director of the Canadian Association of Chain Drug Stores (CACDS). He also has served as a member of the Board of Directors of the Canadian Opera Company, Sacred Heart Rehabilitation Center and has served as a Trustee of the Detroit Opera House. With his more than 30 years experience and strong record of performance in the retail industry, Mr. Giancamilli will bringbrings to the Parent Board extensive knowledge and expertise in the industries in which the Company operates.
Dennis Gieshas served joined the Company as a director of the Company sincein January 2012. He is a Principal in the Private Equity Group of Ares Management. Mr. Gies joined Ares Management in 2006 from UBS Investment Bank where he participated in the execution of a variety of transactions including leveraged buyouts, mergers and acquisitions, dividend recapitalizations and debt and equity financings. He currently serves on the boardboards of directors of Smart & Final Holdings,Stores, Inc. and its subsidiary entities.the parent entity of Sotera Defense Solutions, Inc. Mr. Gies graduated with a MS in Electrical Engineering from University of California, Los Angeles and magna cum laude with a BS in Electrical Engineering from Virginia Tech. Mr. Gies will bringbrings to the Parent Board financial expertise, as well as experience as a private equity investor evaluating and managing investments in companies across various industries.
Marvin Holen David Kaplanhas served joined the Company as a director of the Company since February 2013 and he previously served on the board of directors of the Company from 1991 to January 2012. A practicing attorney specializing in corporate law and finance, Mr. Holen founded the law firm of Van Petten & Holen in 1960. He has previously served as Chairman of the board of directors of the Southern California Rapid Transit District, and as a member of the board of each of California Blue Shield, United California Savings Bank, Opinion Research of California, California Construction Control Corporation and Los Angeles Theater Center, among others. He currently serves on the board of trustees of the California Science Center Foundation (formerly as Chairman) and as Chairman of the board of directors of United Pacific Bank. Mr. Holen received his undergraduate degree from the University of California, Los Angeles, and his law degree from the UCLA School of Law. The Parent Board will benefit from Mr. Holen’s expertise in business, finance and corporate law and his experience serving on the boards of several companies across a variety of industries.
David Kaplan has served as a director and Chairman of the Company since January 2012. He is a founding memberCo-Founder of Ares Management and a Director and Senior Partner of Ares Management where he sitsGP LLC, the general partner of Ares Management, L.P. He is a Senior Partner of Ares Management, Co-Head of its Private Equity Group and a member of its Management Committee. He additionally serves on several of the firm’s Executive Committee and co-headsInvestment Committees for the Ares Private Equity Group.Management private equity funds. Mr. Kaplan joined Ares Management in 2003 from Shelter Capital Partners, LLC, where he was a Senior Principal from June 2000 to April 2003. From 1991 through 2000, Mr. Kaplan was affiliated with, and a Senior Partner of, Apollo Management, L.P. and its affiliates, during which time he completed multiple private equity investments from origination through exit. Prior to Apollo Management, L.P., Mr. Kaplan was a member of the Investment Banking Department at Donaldson, Lufkin & Jenrette Securities Corp. Mr. Kaplan currently serves as Chairman of the boardboards of directors of Smart & Final Holdings,Stores, Inc. and its subsidiary entitiesthe parent entity of The Neiman Marcus Group LLC, and as a member of
the boards of directors of GNC Holdings, Inc.,ATD Corporation, the parent entities of Floor and Decor Outlets of America, Inc. and Stream Global Services,Guitar Center, Inc. Mr. Kaplan’s previous public company board of directors experience includes Maidenform Brands, Inc., where he served as the company’s Chairman, GNC Holdings, Inc., Dominick’s Supermarkets, Inc., Stream Global Services, Inc., Orchard Supply Hardware Stores Corporation Dominick’s Supermarkets, Inc. and Allied Waste Industries Inc. Mr. Kaplan also serves on the Boardboard of Governorsdirectors of Cedars-SinaiCedars-Sinai Medical Center, is a Trustee of the Center for Early Education, is a Trustee of the Marlborough School and serves on the Los AngelesPresident’s Advisory Council toGroup of the University of Michigan. Mr. Kaplan graduated with High Distinction, Beta Gamma Sigma, from the University of Michigan, School of Business Administration with a BBAB.B.A. concentrating in Finance. Mr. Kaplan will bringbrings to the Parent Board over 20 years of experience managing investments in, and serving on the boards of directors of, companies operating in various industries, including in the retail and consumer products industries.
Scott Nishihas served joined the Company as a director of the Company sincein January 2012. He is a Principal in the Principal Investing Group of CPPIB Equity. Mr. Nishi joined CPPIB Equity in 2007 from Oliver Wyman, a management consultancy where he advised consumer, healthcare and technology companies. Previously, Mr. Nishi was at Launchworks, a venture capital firm that invested in early stage technology companies. Mr. Nishi also serves on the board of directors of the parent entity of The Neiman Marcus Group LLC. Mr. Nishi holds an MBA from the Richard Ivey School of Business at the University of Western Ontario and a B.Sc. from the University of British Columbia. Mr. Nishi will bringbrings to the Parent Board financial expertise, as well as experience as a private equity investor evaluating and managing investments in companies across various industries.
Adam Steinhas served joined the Company as a director of the Company sincein January 2012. He is a Partner in the Private Equity Group of Ares Management. Prior to joining Ares Management in 2000, Mr. Stein was a member of the Global Leveraged Finance Group at Merrill Lynch & Co. where he participated in the execution of leveraged loan, high yield bond and mezzanine financing transactions across various industries. Mr. Stein serves on the boards of directors of FDO Holdings,Marietta Corporation and Smart & Final Stores, Inc., and the indirect parent entities of Floor and Decor Outlets of America, Inc., Smart & Final Holdings,The Neiman Marcus Group LLC and Guitar Center, Inc. and its subsidiary entities and Marietta Corporation. Mr. Stein previously served on the board of directors of Maidenform Brands, Inc. Mr. Stein also serves on the Advisory Board of the Los Angeles Food Bank. Mr. Stein graduated with distinction from Emory University’s Goizueta Business School, where he received a BAB.A. in Business Administration with a concentration in Finance. Mr. Stein will bringbrings to the Parent Board financial expertise, as well as over ten10 years of experience as a private equity investor evaluating and managing investments in companies across various industries and as a member of the boards of directors of other retail and consumer products companies.
Conversion
Effective upon and following the Conversion, we are managed by our sole member, Parent, rather than directly by a board of directors. The Parent Board serves in the capacity of the board of directors for us.
Board Composition and Terms
As of May 15, 2013, the 99¢ Board andApril 20, 2015, the Parent Board werewas composed of the same nine directors. Each director serves for annual terms or until his or her successor is elected and qualified. Pursuant to the stockholders agreement of our Parent, one of our Parent’s two principal stockholders has the right to designate four members of the Parent Board and two independent members of the Parent Board, which independent directors shall be approved by the other principal stockholder, and the other principal stockholder has the right to designate two members of the Parent Board, in each case for so long as they or their respective affiliates beneficially own at least 15% of the then outstanding shares of Class A Common Stock. The stockholders agreement provides for the election of Eric Schiffer, Jeff Gold and Howard Goldthe current chief executive officer of Parent to the Parent Board, for so long as they hold the position of Chief Executive Officer, President and Chief Operating Officer, and Executive Vice President, respectively, and if those individuals do not hold such positions, the Rollover Investors have the right to designate one member of the Parent Board for so long as the Rollover Investors in the aggregate continue to own at least 50% of the outstanding shares of Class A Common Stock that they held on the date of the Merger.Board. For more details of the stockholders agreement of our Parent, see “Certain Relationships and Related Transactions, and Director Independence—Stockholders Agreement” in this Report.
Board Committees
We do not have any committees of the Board. The Parent Board has established an audit committee (the “Audit Committee”) and a compensation committee (the “Compensation Committee”).
Audit Committee
The Audit Committee has the authority to supervise the auditing of us and Parent and to act as liaison between us and our independent registered public accounting firm. The members of the Audit Committee are Adam SteinMichael Fung (Chair), Dennis Gies, Scott Nishi and Scott Nishi.Adam Stein. The Parent Board has determined that Mr.each of Messrs. Fung and Stein is an “audit committee financial expert” as defined by Item 407(d)(5)(ii) of Regulation S-K and has the attributes set forth in such section.
Compensation Committee
The Compensation Committee has the authority to review and approve the compensation of the officers of us and Parent and all of our other officers, key employees and directors, as well as our compensation philosophy, strategy, program design, and administrative practices. The members of the Compensation Committee are David Kaplan (Chair), Norman Axelrod, Shane Feeney, Marvin HolenScott Nishi and Adam Stein.
Code of Ethics
The 99¢ BoardCompany has adopted a Code of Business Conduct and Ethics applicable to all of our directors, officers and employees. A copy of the Code of Business Conduct and Ethics is available on our website at www.99only.com.
Section 16(a) Beneficial Ownership Reporting Compliance
In light of our status as a privately held company, Section 16(a) of the Securities Exchange Act of 1934, as amended, does not apply to our directors, executive officers and significant stockholders.
Item 11. Executive Compensation
Change in Fiscal Year
As discussed Note 1 to the Consolidated Financial Statements, in December 2013, the Parent Board approved a change in fiscal year. Due to this change, transition fiscal 2014 was a 10-month fiscal year (March 31, 2013 — January 31, 2014). Therefore, compensation amounts disclosed below with respect to transition fiscal 2014 reflect compensation during the shortened fiscal 2014 period.
Compensation of Directors
The Parent Board sets the compensation for each director who is not an officer of or otherwise employed by us (a “non-executive director”) based on recommendations from the Compensation Committee. Non-executive directors who are employed by Ares or CPPIB or appointed by the Rollover Investors, do not receive compensation for their services as directors. Of the non-executive directors, Messrs. Anicetti, Axelrod, Fung and Giancamilli are not employed by Ares or CPPIB, or appointed by the Gold family, and accordingly, they are the only non-executive directors who earned compensation for services as a director for fiscal 2013.2015. Mr. Axelrod earned $62,500$50,000 in cash fees in fiscal 2013 and2015, Mr. Giancamilli earned $35,000 in cash fees and was granted 250 options to purchase the common stock of Parent as compensation for his services in fiscal 2013, pursuant to a negotiated arrangement.2015, Mr. Richard Anicetti serves as a member of the Board and has served as the Company’s Interim Chief Executive Officer since January 2013. In connection with his service on the Board, he receivedearned $35,000 in cash fees in fiscal 2015 and a grant of 250 stock options, which are reportedMr. Fung earned $45,000 in the Summary Compensation Table below.cash fees in fiscal 2015.
Director Compensation for Fiscal 20132015
The following table provides information regarding the compensation earned by or awarded to our non-executive directors during fiscal 2013:2015:
Name |
| Fees Earned or |
| Option Awards |
| All Other |
| Total ($) |
| ||||
Norman Axelrod |
| $ | 62,500 |
| $ | — |
| $ | — |
| $ | 62,500 |
|
Andrew Giancamilli |
| $ | 35,000 |
| $ | 89,803 |
| $ | — |
| $ | 124,803 |
|
(a)In accordance with regulations of the Securities and Exchange Commission, this column represents the aggregate grant date fair value of the options granted to each director in fiscal 2013, computed in accordance with Financial Accounting Standard Board Accounting Standard Codification Topic 718, “Stock Compensation” (“ASC 718”). Amounts shown in this column may not correspond to the actual value that will be realized by the non-executive directors. See Note 11 to the Consolidated Financial Statements in this Report for the assumptions used to calculate grant date fair value.
Name |
| Fees Earned or Paid in |
| Total ($) |
| ||
Norman Axelrod |
| $ | 50,000 |
| $ | 50,000 |
|
Andrew Giancamilli |
| $ | 35,000 |
| $ | 35,000 |
|
Rick Anicetti |
| $ | 35,000 |
| $ | 35,000 |
|
Michael Fung |
| $ | 45,000 |
| $ | 45,000 |
|
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consists of Messrs. Axelrod, Feeney, Holen, Kaplan, Nishi and Stein. To our knowledge, there were no interrelationships involving members of the Compensation Committee or other directors requiring disclosure.
Executive Compensation
Fiscal 20132015 was a transition year within the ranks of change for our named executive officers (“Named Executive Officers,” “NEOs” or “executives”). Mr. Frank Schools resigned on May 30, 2014, and Mr. Chris Laurence served as the senior leadership re-aligned following the Merger. On November 26, 2012,Interim Chief Financial Officer, Treasurer and Secretary while we conducted a search for a permanent Chief Financial Officer and remained with us after resigning his titles to transition his position and complete special projects. Mr. Bradley Lukow was appointed Chief Financial Officer, Treasurer and Secretary on January 12, 2015. Mr. Michael Kvitko, was hired as our Executive Vice President and Chief Merchandising Officer. Onother executive officer, resigned on January 23, 2013, Eric Schiffer, Jeff Gold and Howard Gold departed the Company, Richard Anicetti, who had been a member of the Board, was appointed interim Chief Executive Officer and Michael Fung was appointed Interim Executive Vice President and Chief Administrative Officer.26, 2015. Our NEOs for fiscal 20132015 are, therefore (i) the two individualsindividual who served as our principal executive officer during fiscal 2013,2015 (Mr. Gonthier), (ii) the individualthree individuals who, at different points, served as our principal financial officer during fiscal 2013,2015 (Mr. Lukow, Mr. Laurence and Mr. Schools), and (iii) our two executive officers during fiscal 2013, and (iv) two individualsthe individual who would have been among our three mostly highly compensatedother executive officersofficer during fiscal 20132015 but for the fact that they werehe was no longer serving as an executive officersofficer at the end of the fiscal year:year (Mr. Kvitko):
· Richard Anicetti — InterimStéphane Gonthier – President and Chief Executive Officer
·Bradley Lukow – Chief Financial Officer, Treasurer and Secretary
· Frank Schools —– Former Senior Vice President, Chief Financial Officer and Treasurer
· Michael Fung — Interim Executive Vice PresidentChristopher A. Laurence – Former Chief Financial Officer, Treasurer and Chief Administrative OfficerSecretary
· Michael Kvitko —– Former Executive Vice President and Chief Merchandising Officer
·Eric Schiffer — Former Chief Executive Officer
·Jeff Gold — Former President and Chief Administrative Officer
·Howard Gold — Former Executive Vice President of Special Projects
Compensation Objectives
Our compensation program with respect to our executives is designed to:
· attract, motivate and retain individuals of outstanding abilities and experience capable of achieving our strategic business goals,
· align total compensation with the short and long-term performance of our Company,
· recognize outstanding individual contributions, and
· provide competitive compensation opportunities.
We provide ongoing income and security in the form of salary and benefits to our executives that are intended to be both attractive and competitive. We also provide our executives with short term incentives in the form of an annual cash bonus to build accountability and reward the achievement of annual goals that support our business objectives. Executives also receive long-term incentive compensation, which promotes retention and provides a link between executive compensation and value creation for the Company’s shareholders over a multi-year period. Our long-term incentive compensation consists of stock options. The stock options provide compensation tied to the fair market value of Parent’s common stock and provide no compensation if the fair market value of Parent’s common stock decreases below the fair market value on the grant date.
Assessment of Risk
We have reviewed our compensation policies and practices for all employees and concluded that such policies and practices are not reasonably likely to have a material adverse effect on our Company.
Elements of Compensation
Our executive compensation program consists of three main elements:
· base salary;
· annual cash bonus; and
· long-term incentives consisting of stock options.
We have chosen these primary elements because each supports achievement of one or more of our compensation objectives, and each has an integral role in our total compensation program. In addition, the Compensation Committee determined that the transitions in the senior management teamto attract and retain certain Named Executive Officers during fiscal 2013 and the hiring of Messrs. Kvitko and Fung and the retention of Mr. Anicetti’s services necessitatedcertain transition periods, special compensation arrangements were required, as described under “Discretionary IncentiveBonuses,” “Interim Bonus,” “Retention Bonuses,”Bonus” and “Signing Bonus,” and “Consulting Fee Premium”Bonuses” below.
Our Compensation Committee reviews the executive compensation program and specific individual compensation arrangements of executives at least annually.
Our CEO historically has evaluated each executive and makes recommendations about compensation to the Compensation Committee. The Compensation Committee considers these recommendations but ultimately is responsible for the approval of all executive compensation arrangements. Our CEO is not present during the Compensation Committee’s deliberations about his own compensation.
Mr. Anicetti was appointed Interim President and Chief Executive Officer on January 23, 2013. In connection with his appointment, we entered into an interim services agreement with From One To Many Leadership Consulting, LLC on January 23, 2013, providing for the services of Mr. Anicetti. This agreement provides for consulting fees in the amount of $62,500 per month and the potential to earn a fee premium of up to 100% of the monthly consulting fee for each month of service, contingent upon Mr. Anicetti attaining performance goals set by the Board. Since May 22, 2012, Mr. Anicetti has also served as a member of the Board. In connection with his service as a Board member, he received $35,000 in director’s fees and a grant of 250 options to purchase the stock of Parent (“stock options”) with an exercise price of $1,000 per share, and which vest at a rate of 20% per year on each of the first five anniversaries of the grant date.
Base Salary. The base salaries of our executives are intended to reflect the position, duties and responsibilities of each executive, the cost of living in Southern California, and the market for base salaries of similarly situated executives at other companies of similar size and in similar industries. Accordingly, Mr. Schools,Gonthier, as Senior Vice President and Chief FinancialExecutive Officer, and Treasurer, receives an annual base salary of $357,175$900,000, (which will be increased to $1,000,000 if the Company’s EBITDA performance over a twelve month period exceeds specified targets) and Mr. Lukow, as Chief Financial Officer, Treasurer and Secretary, receives an annual base salary of $550,000. Mr. Laurence, as Interim Chief Financial Officer, Treasurer and Secretary received a base salary of $37,500 per month, and maintained his base salary during his transition and work on special projects. Prior to their resignations, Mr. Kvitko, as Executive Vice President and Chief Merchandising Officer, receives a base salary of $512,167. Mr. Schools’ base salary was $275,000 when he served as Interim Chief Financial Officer and Treasurer, and was increased to $350,000 upon his transition to permanent Chief Financial Officer and Treasurer and subsequently increased to his current rate in connection with the Compensation Committee’s annual review of executive compensation. Mr. Fung, as Interim Executive Vice President and Chief Administrative Officer receives a base salary of $50,000 per month. Prior to their termination of employment, Mr. Schiffer, as Chief Executive Officer, received an annual base salary of $500,000,$512,166 and Mr. Jeff Gold,Schools, as PresidentChief Financial Officer and Chief Administrative Officer,Treasurer, received an annual base salary of $400,000 and Mr. Howard Gold, as Executive Vice President$357,175.
Annual Cash Bonuses. Messrs. Schools and Kvitko areMr. Gonthier was eligible for an annual cash bonus in fiscal 2015 with a target bonus of 125% of his base salary. Mr. Lukow was eligible for an annual cash bonus in fiscal 2015 with a target bonus of 75% of his base salary. For fiscal 2015 and fiscal 2016 only, Mr. Lukow has a guaranteed minimum annual cash bonus of the target bonus, with the annual cash bonus for fiscal 2015 prorated for the period during which he was employed by the Company. Messrs. Schools and Kvitko were eligible to receive annual cash bonuses for fiscal 2015 with a target bonus of 50% of their respective base salary.salaries had they remained employed on the date bonuses were paid. For fiscal 2013, Mr. Kvitko’s bonus was prorated, with a guaranteed minimum of $75,000. He does not have a guaranteed minimum annual cash bonus for any other fiscal year. For fiscal 2013, the Company’s target2015, our Budgeted EBITDA (as defined under theour annual cash bonus plan) under its annual cash bonus plan was $163$188 million at target. The Company’s actual performance was $162.9 million, which was 99.9% ofWe did not achieve the target. Accordingly,minimum threshold required to pay bonuses pursuant to the executives received the followingplan. Pursuant to Mr. Lukow’s guaranteed minimum annual cash bonuses:bonus, he is entitled to a minimum bonus payment equal to 75% of his base salary, which is $23,798.
Name |
| Target Bonus |
| Actual Bonus |
| Bonus Payout Percentage |
| ||
Frank Schools |
| $ | 153,400 |
| $ | 147,231 |
| 96 | % |
Michael Kvitko |
| $ | 86,500 |
| $ | 83,077 |
| 96 | % |
Discretionary IncentiveBonuses. In transition fiscal 2014 we did not achieve the threshold target to pay annual cash bonuses. However, the Compensation Committee determined that to motivate and retain executives, including the Named Executive Officers, we would make a discretionary bonus to certain individuals with respect the period that would have been fiscal 2014 if the fiscal year was not shortened (March 31, 2013 through March 29, 2014). As a result, with respect to transition fiscal 2014 (March 31, 2013 through January 31, 2014), Mr. Gonthier received a bonus of $372,653; Mr. Schools received a bonus of $74,412; and Mr. Kvitko received a bonus of $106,702. With respect to the start of fiscal 2015 that would have been the remainder of fiscal 2014 had it not been shortened (February 1, 2014 through March 29, 2014), Mr. Gonthier received a bonus of $146,578; Mr. Schools received a bonus of $14,882; and Mr. Kvitko received a bonus of $21,340.
Interim Bonus. While serving as Interim Chief Financial Officer, Treasurer and Secretary, Mr. Laurence was eligible to earn an interim cash incentive bonus equal to 50% of his annual base salary, for successful performance of his duties, payable upon the earlier of his separation from service from the Company or the date on which he is retained full-time in 2015. For fiscal 2015, this equaled $151,442. Following the transition of his duties, Mr. Laurence is eligible to earn an interim bonus, with a target of 50% of his base salary, for the period of January 12, 2015 through April 12, 2015, based on our achievement of certain EBITDA goals in the first quarter of fiscal 2016.
Retention Bonus. Mr. FungLaurence was also entitled to receive a retention bonus of $8,333 per month while serving as Interim Chief Financial Officer, Treasurer and Secretary, payable upon the earlier of his separation from service from the Company or the date on which he is retained full-time in 2015. Following the transition of his duties, Mr. Laurence is eligible to earn a discretionary incentive bonus equal to (i) 100% of his base salary multiplied by (ii) the number of full and partial months for which he provides services, payable for meeting the applicable goals, as determined by the Parent Board (or a committee thereof) in its sole discretion. The actual amount of the bonus payable to Mr. Fung will be contingent upon his level of achievement of the performance goals. If Mr. Fung earns a bonus at or above his target bonus, he will have the option to purchase shares of Parent common stock at fair market value with an aggregate value not to exceed the amount of the bonus.
Retention Bonuses. In January and February 2013 we entered into one-time retention bonus agreements with Messrs. Schools and Kvitko whereby we granted them bonuses of $175,000 and $250,000, respectively. The retention bonuses are$100,000, subject to repayment in the event of termination oftransitioning his position as Chief Financial Officer, completing certain special projects as assigned by our Chief Executive Officer and President, and his continued employment for any reason other than by the Company without Cause (as such term is defined under Parent’s 2012 Stock Incentive Plan) or on account of death or disability prior to January 23,through April 12, 2015.
Signing BonusBonuses. In connection with his hiring, Mr. Kvitko was granted a one-time signing bonus of $250,000, with 50% of the bonus payable upon accepting employment with the Company and 50% payable upon the earlier of (i) the 18 month anniversary of Mr. Kvitko joining the Company (such 18 month anniversary was May 25, 2014) and (ii) Mr. Kvitko and his family permanently relocating to California. If Mr. Kvitko’s employment with the Company iswas terminated for any reason other than by the Company without Cause within the first two years of Mr. Kvitko’s employment, then the signing bonus was subject to repayment. Mr. Kvitko received the second installment of his signing bonus during fiscal 2015.
In connection with his hiring, Mr. Lukow was granted a one-time signing bonus of $550,000. If Mr. Lukows’s employment is terminated for “cause” or he resigns without “good reason” (as each is defined below under “Potential Payments Upon Termination or Change in Control — Bradley Lukow”) prior to the first anniversary of his joining the Company (January 12, 2016), his entire signing bonus is subject to repayment.
Consulting Fee Premium. The consulting agreement with From One to Many pursuant to which we receive If Mr. Lukows’s employment is terminated for cause or he resigns without good reason after the servicesfirst anniversary of Mr. Anicetti provides forhis joining the opportunity to earn a fee premium for performance during the engagement for achieving benchmarks established by Parent’s board of directors. The fee premium, at target, is equal to $62,500 (the same as the monthly consulting fee payable under the consulting agreement) multiplied by the number of full and partial months during which Mr. Anicetti renders servicesCompany but prior to the Company. The fee premium (if any)second anniversary of his joining the Company, then 50% of his signing bonus is payable upon the expiration of the engagement. In addition, if the fee premium is earned at the target level or higher, Mr. Anicetti will have the optionsubject to purchase shares of Parent’s common stock at their then-fair market value, equal in value to the amount of the fee premium earned.repayment.
Long-Term Incentives. We providedprovide our executives with long-term incentive compensation through stock option awards granted under Parent’s 2012 Stock Incentive Plan. In connection with his hiring, Mr. Kvitko was granted 2,800We did not grant any stock options. Mr. Schools was granted 600 stock options when he began providing servicesoption awards in fiscal 2015 to the Company as an employee, and an additional 500 stock optionsour Named Executive Officers. However, in connection with his transition from Interim Chief Financial Officerhiring Mr. Lukow, we agreed to grant, and Treasurer, to permanent Chief Financial Officer and Treasurer. Mr. Anicetti received 250subsequently granted in fiscal 2016, stock options in connection with his election as a memberto purchase an aggregate of 5,000 shares of each of the Board. Subject to the continuing employmentClass A and Class B Common Stock. A portion of the executives, each stock optionoptions are subject to time-based vesting requirements and a portion of the options are subject to performance-based vesting requirements. Provided Mr. Lukow continues to remain employed by the Company, 3,750 of the options will vest in equal annual installments overon each of the first five yearsanniversaries of the date Mr. Lukow joined the Company. The remaining 1,250 of the options are subject to performance requirements and has an exercise price equalwill vest upon, and subject to, $1,000 per share,the Company’s and Parent’s achievement of performance hurdles. All of the foregoing options are subject to the terms of the 2012 Plan and the award agreement under which wasthey were granted. Pursuant to Mr. Lukow’s award agreement, if Mr. Lukow’s employment is terminated by the fair market value per shareCompany without “cause” or by Mr. Lukow for “good reason” (as each is defined below under “Potential Payments Upon Termination or Change in Control — Bradley Lukow”) within six months following a Change in Control (i) prior to the second anniversary of Parent’s common stock on the grant date, the time-vested portion of his option will accelerate by two years or (ii) after the second anniversary of the options. Undergrant date, the standard form of option award agreement, Parent has a right to repurchase from the participant all or atime-vested portion of (i) Class Ahis option will accelerate by one year.
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. The repurchase price with respect to Mr. Anicetti’s stock options does not adjust in connection with a voluntary resignation without good reason. 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 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 an option can be exercised.
401(k) Plan. All full-time employees are eligible to participate in our 401(k) plan after 30 days of service and are eligible to receive matching contributions from the Company after one year of service. The Company matches employee contributions in cash at a rate of 100% of the first 3% of base compensation that an employee contributes, and 50% of the next 2% of base compensation that an employee contributes, with immediate vesting. Our executives are also eligible for these Company matches, subject to regulatory limits on contributions to 401(k) plans.
Severance. In connection with their resignations, Mr. Schools and Mr. Kvitko each received severance amounts in exchange for their execution of a release of claims in favor of the Company and continued compliance with certain restrictive covenants. Mr. Schools received (i) continuation of his base salary for six months, (ii) an amount equal to his COBRA premiums for six months, and (iii) career transition services. Mr. Kvitko is entitled to receive (i) continuation of his base salary for 18 months, (ii) an amount equal to 18 months of the employer portion of his health care premiums, (iii) reimbursement of shipping his household goods back to Raleigh, North Carolina, and (iv) reimbursement for the early termination of his lease in Los Angeles, California.
Post-Termination Arrangements. The consulting agreement pursuant to which we receive the services of Mr. Anicetti, a severanceemployment agreement with Mr. Schools, the term sheetGonthier and our agreement with Mr. Fung and our offer letter with Mr. KvitkoLukow contain severance provisions. The terms of these agreements related to post-termination compensation are described in detail under “Potential Payments Upon Termination or Change in Control.”
Severance Agreements. In connection with their departure from the Company, we entered into severance agreements with Messrs. Schiffer, Jeff Gold and Howard Gold. The terms of these agreements are described in detail under “Potential Payments Upon Termination or Change in Control.”
COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed and discussed with management the above Compensation Discussion and Analysis. Based on our review and discussions with management, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Report.
| COMPENSATION COMMITTEE |
|
|
| Norman Axelrod |
|
|
|
|
| |
| Adam Stein |
COMPENSATION TABLES
Summary Compensation Table for Fiscal 20132015
The following table sets forth information concerning all compensation paid to or earned by our NEOs for services to the Company in all capacities during fiscal 2013:2015:
Name and Principal |
| Fiscal |
| Salary ($) |
| Bonus ($)(a) |
| Option |
| Non-Equity |
| All Other |
| Total ($) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard Anicetti |
| 2013 |
| 179,022 |
| 150,000 |
| 89,803 |
| — |
| — |
| 418,825 |
|
Interim President and Chief Executive Officer (d) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frank Schools (e) |
| 2013 |
| 350,096 |
| 175,000 |
| — |
| 147,231 |
| 1,296 |
| 673,623 |
|
Senior Vice President, Chief Financial Officer and Treasurer |
| 2012 |
| 70,000 |
| — |
| — |
| — |
| — |
| 70,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Fung |
| 2013 |
| 115,217 |
| 120,000 |
| — |
| — |
| — |
| 235,217 |
|
Interim Executive Vice President and Chief Administrative Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Kvitko |
| 2013 |
| 165,385 |
| 375,000 |
| — |
| 83,077 |
| 285 |
| 623,747 |
|
Executive Vice President, Chief Merchandising Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eric Schiffer |
| 2013 |
| 499,373 |
| — |
| — |
| — |
| 797,649 |
| 1,297,022 |
|
Former Chief Executive Officer |
| 2012 |
| 193,077 |
| — |
| 4,605,354 |
| — |
| 8,265 |
| 4,806,696 |
|
| 2011 |
| 122,308 |
| — |
| — |
| — |
| 5,302 |
| 127,610 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeff Gold |
| 2013 |
| 393,237 |
| — |
| — |
| — |
| 640,357 |
| 1,033,594 |
|
Former President and Chief Administrative Officer |
| 2012 |
| 173,846 |
| — |
| 4,029,393 |
| — |
| 7,216 |
| 4,210,455 |
|
| 2011 |
| 122,307 |
| — |
| — |
| — |
| 5,045 |
| 127,352 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Howard Gold |
| 2013 |
| 201,692 |
| — |
| — |
| — |
| 317,812 |
| 519,504 |
|
Former Executive Vice President of Special Projects |
| 2012 |
| 135,384 |
| — |
| 2,878,249 |
| — |
| 5,957 |
| 3,019,590 |
|
| 2011 |
| 122,307 |
| — |
| — |
| — |
| 5,455 |
| 127,762 |
|
Name and Principal |
| Fiscal |
| Salary ($) |
| Bonus ($)(a) |
| Option |
| Non-Equity |
| All Other |
| Total ($) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stéphane Gonthier |
| 2015 |
| 910,385 |
| 146,578 |
| — |
| — |
| 84,155 |
| 1,141,118 |
|
President and Chief Executive Officer |
| 2014 |
| 349,615 |
| 1,272,653 |
| 8,983,752 |
| — |
| 101,833 |
| 10,707,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bradley Lukow |
| 2015 |
| 21,154 |
| 573,798 |
| — |
| — |
| — |
| 594,952 |
|
Chief Financial Officer, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frank Schools |
| 2015 |
| 133,192 |
| 14,882 |
| — |
| — |
| 190,354 |
| 338,428 |
|
Former Senior Vice President, Chief Financial Officer and Treasurer |
| 2014 |
| 296,141 |
| 74,412 |
| — |
| — |
| 6,691 |
| 377,244 |
|
|
| 2013 |
| 350,096 |
| 175,000 |
| — |
| 147,231 |
| 1,296 |
| 673,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher A Laurence |
| 2015 |
| 295,962 |
| 218,106 |
| — |
| — |
| 8,430 |
| 522,498 |
|
Former Interim Chief Financial Officer, Treasurer and Secretary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Kvitko |
| 2015 |
| 531,209 |
| 146,340 |
| — |
| — |
| 39,554 |
| 717,103 |
|
Former Executive Vice President, Chief Merchandising Officer |
| 2014 |
| 425,828 |
| 106,702 |
| — |
| — |
| 44,469 |
| 576,999 |
|
|
| 2013 |
| 165,385 |
| 375,000 |
| 0 |
| 83,077 |
| 285 |
| 623,747 |
|
(a) For Mr. Gonthier, the amount reported in the Bonus column for 2014 reflects a one-time signing bonus of $900,000 and a discretionary cash bonus of $146,578. For Mr. Lukow the amount reported in the Bonus column for 2015 reflects a one-time signing bonus of $550,000 and a guaranteed minimum bonus payment of $23,798 for fiscal 2015. For Mr. Schools, the amount reported in the Bonus column for 2013 reflects a one-time retention bonus.bonus; the amount reported in the Bonus column for 2014 reflects a discretionary cash bonus of $74,412; and the amount reported in the Bonus column for 2015 reflects a discretionary cash bonus of $14,882. For Mr. Laurence, the amount reported in the Bonus column for 2015 represents a monthly retention bonus of $8,333 for each month worked as Interim Chief Financial Officer, Treasurer and Secretary, and a monthly interim bonus equal to 50% of his base salary for each month worked as Interim Chief Financial Officer, Treasurer and Secretary, in each case, paid upon completion of his interim employment. For Mr. Kvitko, the amount reported in the Bonus column for 2013 reflects a one-time retention bonus and first half of the signing bonus; the amount reported in the Bonus column in 2014 reflects a discretionary cash bonus of $106,702; and the amount reported in the Bonus column for 2015 reflects the second half of the signing bonus.bonus and a discretionary cash bonus of $21,340.
(b) In accordance with SEC regulations, this column sets forth the aggregate grant date fair value of stock options computed in accordance with ASC 718. Amounts shown in this column may not correspond to the actual value that will be realized by the Named Executive Officers. The options granted are options to purchase the common stock of Parent. See Note 11 to the Consolidated Financial Statements for the assumptions used to calculate grant date fair value.
(c)Messrs. Schools and Kvitko were granted 1,100 and 2,800 stock options, respectively, in fiscal 2013. If either of Messrs. Schools’ or Kvitko’s employment with the Company is terminated for cause, or heeither voluntarily resigns his employment with the Company without good reason, Parent may repurchase his options for the lesser of the exercise price of the option or the fair market value of the option on the date of termination of employment. Accordingly, we have not recorded any stock-based compensation expense on the options for Messrs. Schools and Kvitko pursuant to ASC 718. If not for this repurchase feature, the grant date fair value of the options granted to Mr. Schoolsin fiscal 2013 would have been $381,240 for Mr. Schools and the grant date fair value of options granted to$975,240 for Mr. Kvitko would have been $975,240. See Note 11 to the Consolidated Financial Statements in this Report for the assumptions used to calculate grant date fair value..
(d) The amounts reported in the All Other Compensation column reflect, for each executive, as applicable (i) post-termination payments, (ii) the amount of our matching contribution under our 401(k) plan, (iii) dollar value of life insurance premiums we paid for each executive, (iv) relocation expenses, (v) auto allowance and (iv)(vi) other company-paid insurance premiums. Specifically, the All Other Compensation column above includes:
Name |
| Year |
| Post-Termination |
| Matching 401(k) |
| Value of Life |
| Value of Other |
| Total ($) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard Anicetti |
| 2013 |
| — |
| — |
| — |
| — |
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frank Schools |
| 2013 |
| — |
| — |
| 1,296 |
| — |
| 1,296 |
|
|
| 2012 |
| — |
| — |
| — |
| — |
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Fung |
| 2013 |
| — |
| — |
| — |
| — |
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Kvitko |
| 2013 |
| — |
| — |
| 285 |
| — |
| 285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eric Schiffer |
| 2013 |
| 778,846 |
| 4,662 |
| 458 |
| 13,683 |
| 797,649 |
|
|
| 2012 |
| — |
| 7,723 |
| 542 |
| — |
| 8,265 |
|
|
| 2011 |
| — |
| 4,892 |
| 410 |
| — |
| 5,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeff Gold |
| 2013 |
| 623,077 |
| 3,298 |
| 299 |
| 13,683 |
| 640,357 |
|
|
| 2012 |
| — |
| 6,954 |
| 262 |
| — |
| 7,216 |
|
|
| 2011 |
| — |
| 4,800 |
| 245 |
| — |
| 5,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Howard Gold |
| 2013 |
| 311,538 |
| 5,816 |
| 458 |
| — |
| 317,812 |
|
|
| 2012 |
| — |
| 5,416 |
| 541 |
| — |
| 5,957 |
|
|
| 2011 |
| — |
| 4,892 |
| 563 |
| — |
| 5,455 |
|
Name |
| Year |
| Post-Termination |
| Matching |
| Value of Life |
| Relocation |
| Auto |
| Value of Other |
| Total ($) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stéphane Gonthier |
| 2015 |
| — |
| 12,462 |
| 795 |
| 41,189 |
| 16,923 |
| 12,786 |
| 84,155 |
|
|
| 2014 |
| — |
| — |
| 179 |
| 92,954 |
| 6,923 |
| 1,777 |
| 101,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bradley Lukow |
| 2015 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frank Schools |
| 2015 |
| 183,150 |
| 4,613 |
| 789 |
| — |
| — |
| 1,802 |
| 190,354 |
|
|
| 2014 |
| — |
| — |
| 1,884 |
| — |
| — |
| 4,807 |
| 6,691 |
|
|
| 2013 |
| — |
| — |
| 1,296 |
| — |
| — |
| — |
| 1,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher A. Laurence |
| 2015 |
| — |
| — |
| 443 |
| — |
| — |
| 7,987 |
| 8,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Kvitko |
| 2015 |
| — |
| — |
| 1,344 |
| 24,853 |
| — |
| 13,357 |
| 39,554 |
|
|
| 2014 |
| — |
| — |
| 1,008 |
| 31,320 |
| — |
| 12,141 |
| 44,469 |
|
|
| 2013 |
| — |
| — |
| 285 |
| — |
| — |
| — |
| 285 |
|
(d)Mr. Anicetti has served as Interim President and Chief Executive Officer of the Company since January 23, 2013 under a consulting agreement with From One To Many Leadership Consulting, LLC, which provides for consulting fees of $62,500 per month. In addition, Mr. Anicetti received $35,000 and 250 stock options in connection with his service prior to January 23, 2013 as a member of the Board, which amounts are included in this Summary Compensation Table.
(e)Prior to August 2012, Mr. Schools was a partner at Tatum, and worked for the Company pursuant to an interim services agreement with Tatum. The amount reported in the “Salary” column for Mr. Schools for fiscal 2013 includes $140,000 we paid to Tatum for Mr. Schools’ services prior to the Company employing Mr. Schools directly in August 2012.
Grants of Plan-Based Awards for Fiscal 20132015
The following table sets forth information concerning the annual bonus plan and options granted to the Named Executive Officers under Parent’s 2012 Stock Incentive Plan during fiscal 2013:2015:
|
|
|
| Estimated Possible Payouts Under |
| All Other Option |
|
|
|
|
| |||||
|
|
|
| Non-Equity Incentive Plan Awards |
| Awards: Number of |
| Exercise or |
| Grant Date |
| |||||
|
|
|
| (a) |
| Securities |
| Base Price of |
| Fair Value of |
| |||||
|
|
|
| Threshold |
| Target |
| Maximum |
| Underlying Options |
| Option Awards |
| Option Awards |
| |
Name |
| Grant Date |
| ($) |
| ($) |
| ($)(e) |
| (#)(b) |
| ($/Sh)(c) |
| ($)(d) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard Anicetti |
| 6/19/12 |
|
| — |
| — |
| — |
| 250 |
| 1,000.00 |
| 89,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frank Schools |
| 9/27/12 |
|
| — |
| — |
| — |
| 600 |
| 1,000.00 |
| — |
|
|
| 11/7/12 |
|
| — |
| — |
| — |
| 500 |
| 1,000.00 |
| — |
|
|
| — |
|
| 30,680 |
| 153,400 |
| 306,800 |
| — |
| — |
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Fung |
| — |
|
| — |
| — |
| — |
| — |
| — |
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Kvitko |
| 11/28/12 |
|
| — |
| — |
| — |
| 2,800 |
| 1,000.00 |
| — |
|
|
| — |
|
| 17,300 |
| 86,500 |
| 173,000 |
| — |
| — |
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eric Schiffer |
| — |
|
| — |
| — |
| — |
| — |
| — |
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeff Gold |
| — |
|
| — |
| — |
| — |
| — |
| — |
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Howard Gold |
| — |
|
| — |
| — |
| — |
| — |
| — |
| — |
|
|
|
|
| Estimated Possible Payouts Under |
| All Other Option |
| Exercise or |
| Grant Date |
| ||||
Name |
| Grant |
| Threshold |
| Target |
| Maximum |
| Underlying Options |
| Option Awards |
| Option Awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stéphane Gonthier |
| — |
| 562,500 |
| 1,125,000 |
| — |
| — |
| — |
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bradley Lukow |
| — |
| 23,798 |
| 23,798 |
| — |
| — |
| — |
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frank Schools |
| — |
| 37,206 |
| 74,411 |
| — |
| — |
| — |
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher A. Laurence |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Kvitko |
| — |
| 128,042 |
| 256,084 |
| — |
| — |
| — |
| — |
|
(a) The amounts represent the threshold, target and maximum payout amounts under the Company’s annual cash bonus plan. See “Components of Executive Compensation — Annual Cash Bonuses” above for more information regarding the annual cash bonuses. The actual amounts earned are reported in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.
(b) Options vest subjectThe threshold amount provided for Mr. Lukow is his minimum guaranteed bonus for the most recently completed fiscal year, provided pursuant to continuing employmenthis compensation arrangement with the Company in five equal annual installments commencing on the first anniversary of the grant date.Company. For years after fiscal 2016, Mr. Lukow will not have a minimum guaranteed bonus.
(c) The per share exercise price approximated the fair market value per share of Parent’s stock as of the grant date of the stock options as determined by the Compensation Committee.
(d)Reflects aggregate grant date fair value of the awards computed in accordance with ASC Topic 718. If either of Messrs. Schools’ or Kvitko’s employment with the Company is terminated for cause, or he voluntarily resigns his employment with the Company without good reason, Parent may repurchase his options for the lesser of the exercise price of the option or the fair market value of the option on the date of termination of employment. Accordingly, we have not recorded any stock-based compensation expense on the options for Messrs. Schools and Kvitko pursuant to ASC 718. If not for this repurchase feature, the grant date fair value of options granted to Mr. Schools on 9/27/2012 would have been $207,090 and the grant date fair value of options granted to Mr. Schools on 11/7/2012 would have been $174,150. If not for the repurchase feature, the grant date fair value of options granted to Mr. Kvitko would have been $975,240. See Note 11 to the Consolidated Financial Statements in this Report for the assumptions used to calculate grant date fair value.
(e)Maximum payout represents 200% of the target payout. Under the annual cash bonus plan, participants may achieve in excess of 200% of target, however, thedo not have a maximum total payouts to all bonus plan participants is capped at 5.0% of Budgeted EBITDA, and payouts will be ratably reduced to the extent necessary to remain within the cap.payout.
Outstanding Equity Awards at Fiscal Year End 20132015
The following table sets forth information on stock options held by the Named Executive Officers as of MarchJanuary 30, 2013:2015:
Name |
| Securities Underlying |
| Securities Underlying |
| Option |
| Option |
| |
|
| Exercisable |
| Unexercisable |
|
|
|
|
| |
Richard Anicetti |
| — |
| 250 |
| 1,000.00 |
| 6/19/22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Frank Schools |
| — |
| 600 |
| 1,000.00 |
| 9/27/22 |
|
|
|
| — |
| 500 |
| 1,000.00 |
| 11/7/22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Fung |
| — |
| — |
| — |
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Kvitko |
| — |
| 2,800 |
| 1,000.00 |
| 11/28/22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Eric Schiffer (b) |
| 11,842 |
| — |
| 1,000.00 |
| 7/13/15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeff Gold (b) |
| 10,361 |
| — |
| 1,000.00 |
| 7/13/15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Howard Gold (b) |
| 7,401 |
| — |
| 1,000.00 |
| 7/13/15 |
|
|
Name |
| Grant Date |
| Securities Underlying |
| Securities Underlying |
| Option |
| Option |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stéphane Gonthier (a) |
| 10/9/2013 |
| 4,839 |
| 16,666 |
| 1,219.00 |
| 10/09/23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Bradley Lukow |
| — |
| — |
| — |
| — |
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
Frank Schools |
| — |
| — |
| — |
| — |
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher A. Laurence |
| — |
| — |
| — |
| — |
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Kvitko (b) |
| 11/28/2012 |
| 1,120 |
| — |
| 1,000.00 |
| 4/26/15 |
|
(a) Options vest subject to continuing employmentFor Mr. Gonthier, 16,129 of outstanding options are time-based stock options with the Company in five equal annual installments commencinga vesting schedule of four years (30% on the first anniversary of the grant date. The termdate, 20% on the second anniversary of the options is ten years fromgrant date and 25% on the third and fourth anniversary of the grant date.date). For Mr. Gonthier, 5,376 of outstanding options are performance-based and vest upon the Company’s and Parent’s achievement of certain performance hurdles. His options are all subject to a ten year term.
(b) InMr. Kvitko’s unexercisable options were forfeited in connection with their separation fromhis termination of employment. and his exercisable options were repurchased by Parent after the Company, the vestingend of Messrs. Schiffer’s, Jeff Gold’s and Howard Gold’s outstanding options accelerated. They will remain outstanding and exercisable until July 13, 2015, unless sooner exercised.fiscal 2015.
Options Exercised in Fiscal 2015
The following table sets forth for the Named Executive Officers, the number of shares acquired on the exercise of options and the value realized on exercise of options during fiscal 2015:
|
| Option awards |
| ||
Name |
| Number of shares |
| Value |
|
|
|
|
|
|
|
Stéphane Gonthier |
| — |
| — |
|
|
|
|
|
|
|
Bradley Lukow |
| — |
| — |
|
|
|
|
|
|
|
Frank Schools |
| 220 |
| 62,920 | (a) |
|
|
|
|
|
|
Christopher A. Laurence |
| — |
| — |
|
|
|
|
|
|
|
Michael Kvitko (b) |
| — |
| — |
|
(a)The Company repurchased Mr. Schools’ vested stock options in connection with his termination of employment for the difference between the fair market value of the underlying shares and the exercise price times the number of options repurchased.
(b)Parent repurchased Mr. Kvitko’s options after the end of fiscal 2015 in connection with his termination of employment for the difference between the fair market value of the underlying shares and the exercise price times the number of options repurchased.
Potential Payments Upon Termination or Change in Control
This section describes the benefits that may become payable to our Named Executive Officers in connection with certain terminations of their employment with the Company and/or a change in control of the Company.
Richard AnicettiStéphane Gonthier
If the consulting agreement with From One to Many, pursuant to which we obtain the services of Mr. Anicetti, is terminated prior to the expiration date of the consulting agreement without cause, From One to Many is entitled to receive the monthly consulting fee through the expiration date plus the fee premium earned with respect to the period during which Mr. Anicetti provided services. The expiration date of the consulting agreement is the earlier of (i) 30 days following the start of a permanent CEO and (ii) 180 days after the effective date of the consulting agreement (subject to 30 day extensions).
Frank Schools
Effective March 18, 2013, weWe entered in to a severanceinto an employment agreement with Mr. Schools.Gonthier effective September 3, 2013. The severance agreement provides that if Mr. SchoolsGonthier’s employment is terminated without “cause” (as defined below) or if Mr. Gonthier resigns for “good reason” (as defined below), Mr. Gonthier will be entitled to receive the following severance, in all cases contingent upon Mr. Gonthier executing a general release in favor of the Company:
(i) a payment equal to two times his base salary; one-half of which is paid in a lump sum within 30 days following his termination and the other half of which is paid over 24 months following the date of termination;
(ii) a bonus amount equal to (a) two times (b) his average bonuses earned over the three years prior to his termination (or, if he has been employed for less than three years, the average of all prior bonuses). If transition fiscal 2014’s bonus is used to calculate the average bonus, the amount used to calculate the average will be the amount he would have received based on Company performance for a full fiscal 2014 (disregarding pro ration), and not the guaranteed minimum. One-half of this bonus amount is payable in a lump sum 30 days after his termination of employment and the other half is paid over 24 months following the date of termination;
(iii) any earned but unpaid bonus for the year prior to the date of termination;
(iv) if the termination is after the second fiscal quarter of the applicable year, a pro-rated portion of the bonus for the year of termination, payable when bonuses are paid to similarly situated employees;
(v) reimbursement of COBRA premiums for Mr. Gonthier and his family, at the rate the Company was previously contributing toward such insurance coverage, until the earlier of 18 months after the date of his termination or such time as he becomes eligible for substantially similar benefits from another employer; and
(vi) if (a) the termination is on or prior to September 3, 2016, acceleration of time-based options such that 50% of the total number of time-based options are vested or (b) the termination is after September 3, 2016, an additional 12 months of vesting on such options. Additionally, upon a change in control (as defined in Parent’s 2012 Stock Incentive Plan), Mr. Gonthier’s time-based options immediately accelerate and vest.
If Mr. Gonthier’s employment is terminated as a result of his death or “total disability” (as defined in the Company’s Long Term Disability Plan, or if none is in effect, as disability is defined in Section 409A of the Internal Revenue Code of 1986, as amended), Mr. Schools resignsGonthier (or his estate) is entitled to receive (i) continuation of base salary for “good reason” (as defined below), in each casethe shorter of (a) 12 months or (b) the then-current term, and (ii) a pro-rated bonus for the year of his termination of employment. In addition, if the termination for death or disability is on or prior to April 30, 2017, heSeptember 3, 2016, Mr. Gonthier will be entitledreceive acceleration of time-based options such that 50% of the total number of time-based options are vested or, if such termination is after September 3, 2016, an additional 12 months of vesting on such options.
For the purposes of the employment agreement, “cause” means (i) Mr. Gonthier’s (a) being indicted for, or charged with, a felony under Federal or state law (or Canadian law equivalent) or (b) conviction of, or plea of guilty or nolo contendere to, continuationa misdemeanor under Federal law or state law (or Canadian law equivalent) where imprisonment is imposed (other than traffic-related offenses and DUIs); (ii) perpetration of then-current base salaryan illegal act, dishonesty, or fraud that that could cause economic injury to Parent, the Company or any affiliate of either of them, (iii) insubordination, or refusal to perform duties or responsibilities for any reason other than illness or mental incapacity; (iv) failure to perform material duties; (v) willful misconduct or gross negligence with regard to Parent, the Company or any subsidiary of either of them; (vi) appropriation of a periodmaterial corporate opportunity of six monthsParent, the Company or any subsidiary of either of them; or (vii) material breach of the employment agreement or any other agreement with Parent, the Company or any of their respective affiliates, including any confidentiality or other restrictive covenant. In each instance, in order to constitute cause under prongs (iii) through (vii), the Company must provide Mr. Gonthier with written notice within 90 days following the date of termination, contingent upon Mr. Schools executing a general release in favoron which the occurrence of the Company.event constituting cause was presented to the Parent Board, Mr. Gonthier must fail to cure the event within 20 days following the notice, and the Company must then terminate Mr. Gonthier’s employment within 60 days following the date on which the Company provided him with notice.
For the purposes of the severance agreement, “good reason” means the occurrence of any of the following without Mr. Schools’sGonthier’s consent: (i) a reduction in annual base salary, other than a one-time reduction not exceeding ten percent that is imposed simultaneously on all executive officers of the Company; or (ii) a material diminution of Mr. Schools’sjob title, authority, duties or responsibilities.responsibilities or a change in reporting relationship to anyone other than the Parent Board, (iii) the Company relocates its headquarters more than 5 miles,
(iv) Mr. Gonthier is removed from the Parent Board or, not re-appointed to the Parent Board (or, following an initial public offering of the Company, not re-nominated), or (v) failure to renew the employment agreement. In each instance, in order to constitute good reason, Mr. SchoolsGonthier must provide the Company with written notice within 90 days following the occurrence of the event constituting good reason, the Company must fail to cure the event within 30 days following the notice, and Mr. SchoolsGonthier must then resign within 60 days following the date on which he provided the Company with notice.
Michael FungBradley Lukow
Per the term sheet governing the terms ofIf Mr. Fung’sLukow’s employment with the Company, if Mr. Fung’s employment with the Company is terminated without Cause“cause” (as defined in Parent’s 2012 Stock Incentive Plan) prioror by Mr. Lukow with “good reason” (as defined below), Mr. Lukow will receive continuation of his base salary for 12 months following such termination and an amount equal to the expirationemployer contribution to medical insurance premiums for 12 months following such termination, subject in each case to Mr. Lukow executing and not revoking a valid release of his term sheetclaims in favor of the Corporation.
For the purposes of the agreement, with“good reason” means the occurrence of any material reduction of Mr. Lukow’s title, responsibilities or reporting relationships, assignment of duties that are material and adverse to a position of the nature of Chief Financial Officers. In each instance, in order to constitute good reason, Mr. Lukow must provide the Company he is entitled to receive his monthly base salary throughwith written notice within 90 days following the expiration date plusoccurrence of the discretionary incentive bonus earned with respect to the period during which Mr. Fung was employed.
The expiration date of Mr. Fung’s agreement withevent constituting good reason, the Company ismust fail to cure the earlier of (i)event within 30 days following the start of a permanent CEOnotice, and (ii) the six-month anniversaryMr. Lukow must then resign within 15 days following expiration of the effective date of the term sheet (subject to 30 day extensions).
Michael Kvitko
Pursuant to his offer letter, in the event Mr. Kvitko is terminated without Cause (as defined in Parent’s 2012 Stock Incentive Plan), he is entitled to receive 18 months of base salary continuation, subject to continued compliance with applicable post-termination restrictive covenants and the execution of a release of claims against the Company and its affiliates.
Severance Agreements
In connection with their separation from the Company we entered into severance agreements with Messrs. Schiffer, Jeff Gold and Howard Gold, effective January 23, 2013 that provided for Messrs. Schiffer, Jeff Gold and Howard Gold to receive the benefits to which they would have been entitled under the terms of their employment agreements in respect of a termination of employment without cause or resignation for good reason. Specifically, Messrs. Schiffer, Jeff Gold and Howard Gold are entitled to the following benefits, which were contingent upon their executing a general release in favor of the Company: (a) severance payments equal to (i) three times base salary plus (ii) three times target annual incentive bonus for fiscal 2013, (b) full vesting of all outstanding and unvested stock options, and (c) payment of any unpaid incentive bonus earned for the prior fiscal year, and (d) COBRA coverage for one year at the Company’s sole expense or, if earlier, until the executive becomes eligible for comparable coverage under health plans of another employer. The payments began on or about the 60th day following the termination of employment, with 50% of the severance payments listed in (a) above to be paid in equal payments over the course of three years in accordance with the Company’s regular payroll schedule and the other 50% to be paid in three, equal annual lump sum installments. They also received a distribution of all deferred amounts and earnings thereon held on their behalf pursuant to a deferred compensation plan we maintain, but which does not have any participants who are active executives and are entitled to exercise a “put right” for a portion of their Class A and Class B Common Stock. See “Certain Relationships and Related Transactions, and Director Independence” for a description of the material terms of the put right.cure period.
The following table sets forth information on the potential payments to the Named Executive Officers (or in the case of Messrs. Schiffer, Jeff GoldSchools and Howard Gold,Kvitko the actual payments made or to be made in connection with their separation) upon a termination or change in control, assuming a termination or change in control occurred on MarchJanuary 30, 20132015 (or, in the case of Messrs. Schiffer, Jeff GoldSchools and Howard Gold on January 23, 2013,Kvitko, the date of their separation), at which time Parent’s common stock was valued at $1,000.00 per share::
Name |
| Cash Payments |
| Continuation of |
| Acceleration of |
|
| Cash Payments |
| Continuation of |
| Acceleration of |
|
Richard Anicetti |
|
|
|
|
|
|
| |||||||
Termination Without Cause |
| 394,000 | (a) | — |
| — |
| |||||||
Termination for Cause |
| — |
| — |
| — |
| |||||||
Stéphane Gonthier |
|
|
|
|
|
|
| |||||||
Termination Without Cause or With Good Reason |
| 1,800,000 | (a) | 16,433 |
| 336,483 | (g) | |||||||
Death/Total and Permanent Disability |
| — |
| — |
| — |
|
| 900,000 | (b) | — |
| 336,483 | (g) |
Change in Control |
| — |
| — |
| 1,177,691 | (h) | |||||||
|
|
|
|
|
|
|
| |||||||
Bradley Lukow |
|
|
|
|
|
|
| |||||||
Termination Without Cause or With Good Reason |
| 550,000 | (c) | 10,995 |
| — |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frank Schools |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination Without Cause or With Good Reason |
| 175,000 | (b) | — |
| — |
|
| 178,588 | (d) | 4,562 |
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Fung |
|
|
|
|
|
|
| |||||||
Termination Without Cause |
| 315,200 | (c) | — |
| — |
| |||||||
Christopher A. Laurence |
|
|
|
|
|
|
| |||||||
Termination Without Cause or With Good Reason |
| 218,106 | (e) | — |
| — |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Kvitko |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination Without Cause or With Good Reason |
| 750,000 | (d) | — |
| — |
|
| 776,945 | (f) | 16,433 |
| — |
|
|
|
|
|
|
|
|
| |||||||
Eric Schiffer |
|
|
|
|
|
|
| |||||||
Termination Without Cause or With Good Reason |
| 5,741,842 | (e) | 19,849 |
| 0 | (f) | |||||||
|
|
|
|
|
|
|
| |||||||
Jeff Gold |
|
|
|
|
|
|
| |||||||
Termination Without Cause or With Good Reason |
| 4,830,002 | (e) | 19,849 |
| 0 | (f) | |||||||
|
|
|
|
|
|
|
| |||||||
Howard Gold |
|
|
|
|
|
|
| |||||||
Termination Without Cause or With Good Reason |
| 3,036,249 | (e) | 7,574 |
| 0 | (f) | |||||||
(a) Cash payment for Mr. AnicettiGonthier represents (i) four months of the consulting fee payable to From One to Many for the period of March 30, 2013 through the remainder of the term (assuming the term expired on July 23, 2013) of the consulting agreementtwo times base salary ($1,800,000) and (ii) a fee premium representing the period from January 23, 2013 to March 30, 2013, which would be due to From One to Many if the consulting agreement were to be terminatedtwo times average annual cash bonus, without cause.taking into account any minimum bonus amounts ($0).
(b) Cash payment for Mr. Gonthier represents one year of base salary ($900,000).
(c)Cash payment for Mr. Lukow represents one year of base salary ($550,000).
(d)Cash payment for Mr. Schools represents six months of base salary continuation ($175,000)178,588).
111(e)Cash payment for Mr. Laurence represents the retention bonus and the interim bonus, each covering the period from May 30, 2014 to January 30, 2015, which would be due to Mr. Laurence upon completion of his interim assignment.
(f)Cash payment for Mr. Kvikto represents 18 months of base salary continuation ($768,250), reimbursement for moving household goods ($6,000) and reimbursement of an early termination fee on a lease ($2,695).
(g)Acceleration of 20% of time-based options granted to Mr. Gonthier upon termination without cause, with good reason, death or total and permanent disability.
(h)Acceleration of 100% of time-based options granted to Mr. Gonthier upon change in control.
(c)Cash payment for Mr. Fung represents (i) four months of base salary for the period of March 30, 2013 through the remainder of the term (assuming the term expired on July 23, 2013) of Mr. Fung’s employment and (ii) a discretionary incentive bonus representing the period from January 23, 2013 to March 30, 2013, which would be due to Mr. Fung if his employment were to be terminated without cause.
(d)Cash payment represents 18 months of base salary continuation ($750,000).
(e)Cash payments include the following:
·Mr. Schiffer — (i) three times his base salary ($1,500,000), (ii) three times his target annual bonus ($3,000,000), and (iii) distribution of amounts held under deferred compensation plan ($1,241,842).
·Mr. Jeff Gold — (i) three times his base salary ($1,200,000), (ii) three times his target annual bonus ($2,400,000), and (iii) distribution of amounts held under deferred compensation plan ($1,230,002).
·Mr. Howard Gold — (i) three times his base salary ($600,000), (ii) three times his target annual bonus ($1,200,000), and (iii) distribution of amounts held under deferred compensation plan ($1,236,249).
(f)The fair market value of Parent’s common stock underlying the options held by Messrs. Schiffer, Jeff Gold and Howard Gold on January 23, 2013, the date of their separation, was lower than the exercise price of such options.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners and Management
All of the outstanding membership units of 99 Cents Only Stores LLC are held directly by Parent.
The following table sets forth, as of May 15, 2013, certain information relating to the ownership of our common stock by each person known to be the beneficial owner of more than five percent of the outstanding shares of our common stock. None of our directors or Named Executive Officers is the beneficial owner of any of our common stock.
Beneficial ownership is determined in accordance with Securities and Exchange Commission rules that deem shares to be beneficially owned by any person who has or shares voting or investment power with respect to such shares. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options and call rights held by that person that currently are exercisable or exercisable within 60 days after May 15, 2013 are deemed to be outstanding and beneficially owned by such person.
Name and Addresses |
| Number of Shares of |
| Percent of Class A |
| Number of Shares of |
| Percent of Class B |
|
Number Holdings, Inc. |
| 100 |
| 100 | % | 100 | (1) | 100 | %(1) |
ACOF III Number Holdings, LLC |
| 0 |
| 0 | % | 10 | (1) | 10 | %(1) |
(1) Parent owns 100% of our Class A Common Stock, which carries substantially all of the economic rights in us, and 90% of our Class B Common Stock, which carries de minimis economic rights and the right to vote solely with respect to the election of directors. ACOF III Number Holdings, LLC (“ACOF III LLC”) holds the remaining 10% of our Class B Common Stock, subject to a call right that allows Parent to repurchase such stock without the consent of ACOF III LLC at any time for de minimis consideration. For additional detail regarding rights with respect our Class A and Class B Common Stock, see “Item 13. Certain Relationships and Related Transactions, and Director Independence—Voting Agreement” in this Report.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of May 15, 2013,March 31, 2015, certain information relating to the ownership of the common stock of Parent by (i) each person or group known by us to own beneficially more than 5% of the outstanding shares of our Parent’s common stock, (ii) each of our directors, (iii) each of our Named Executive Officers, and (iv) all of our executive officers and directors as a group. Shares issuable upon the exercise of options exercisable on May 15, 2013March 31, 2015 or within 60 days thereafter are considered outstanding and to be beneficially owned by the person holding such options for the purpose of computing such person’s percentage beneficial ownership, but are not deemed outstanding for the purposes of computing the percentage of beneficial ownership of any other person. Except as may be indicated in the footnotes to the table and subject to applicable community property laws, each such person has the sole voting and investment power with respect to the shares owned. The percentages of shares outstanding provided in the table below are based upon 636,725542,646 shares of Class A Common Stock and 636,725542,646 shares of Class B Common Stock outstanding as of May 15, 2013.March 31, 2015.
Name of Beneficial Owner (1) |
| Number of Shares |
| Percent of |
| Number of Shares |
| Percent of |
|
Directors and Named Executive Officers (2) |
|
|
|
|
|
|
|
|
|
Richard Anicetti (3) |
| 50 |
| * |
| 50 |
| * |
|
Frank Schools (4) |
| 75 |
| * |
| 75 |
| * |
|
Michael Fung |
| — |
| — |
| — |
| — |
|
Michael Kvitko |
| — |
| — |
| — |
| — |
|
Norman Axelrod (5) |
| 850 |
| * |
| 850 |
| * |
|
Shane Feeney (6) |
| — |
| — |
| — |
| — |
|
Andrew Giancamilli (7) |
| 50 |
| * |
| 50 |
| * |
|
Dennis Gies (8) |
| — |
| — |
| — |
| — |
|
Marvin Holen |
| — |
| — |
| — |
| — |
|
Scott Nishi (6) |
| — |
| — |
| — |
| — |
|
David Kaplan (9) |
| — |
| — |
| — |
| — |
|
Adam Stein (10) |
| — |
| — |
| — |
| — |
|
All of our current executive officers and directors as a group, 12 persons |
| 1,025 |
| * |
| 1,025 |
| * |
|
Beneficial Owners of 5% or More of Parent’s Outstanding Common Stock |
|
|
|
|
|
|
|
|
|
Karen and Eric Schiffer (11) |
| 37,763 |
| 5.93 | % | 37,763 |
| 5.93 | % |
The Gold Revocable Trust dated 10/26/2005 (12) |
| 40,000 |
| 6.28 | % | 40,000 |
| 6.28 | % |
Ares Corporate Opportunities Fund III, L.P. (13) |
| 335,900 |
| 52.75 | % | 345,130 | (15) | 54.20 | % |
CPP Investment Board (USRE II) Inc. (14) |
| 200,000 |
| 31.41 | % | 190,770 |
| 29.96 | % |
Name of Beneficial Owner (1) |
| Number of Shares |
| Percent of |
| Number of Shares |
| Percent of |
|
Directors and Named Executive Officers (2) |
|
|
|
|
|
|
|
|
|
Stéphane Gonthier (3) |
| 15,137 |
| 2.74 | % | 15,137 |
| 2.74 | % |
Bradley Lukow(4) |
| 1,250 |
| * |
| 1,250 |
| * |
|
Frank Schools |
| — |
| — |
| — |
| — |
|
Christopher Laurence |
| — |
| — |
| — |
| — |
|
Michael Kvitko (5) |
| — |
| — |
| — |
| — |
|
Richard Anicetti (6) |
| 454 |
| * |
| 454 |
| * |
|
Norman Axelrod (7) |
| 1,050 |
| * |
| 1,050 |
| * |
|
Michael Fung (8) |
| 360 |
| * |
| 360 |
| * |
|
Andrew Giancamilli (9) |
| 510 |
| * |
| 510 |
| * |
|
Dennis Gies (10) |
| — |
| — |
| — |
| — |
|
David Kaplan (11) |
| — |
| — |
| — |
| — |
|
Scott Nishi (12) |
| — |
| — |
| — |
| — |
|
Adam Stein (13) |
| — |
| — |
| — |
| — |
|
All of our current executive officers and directors as a group, 10 persons |
| 18,761 |
| 3.38 | % | 18,761 |
| 3.38 | % |
Beneficial Owners of 5% or More of Parent’s Outstanding Common Stock |
|
|
|
|
|
|
|
|
|
Ares Corporate Opportunities Fund III, L.P. (14) |
| 335,900 |
| 61.90 | % | 373,900 | (16) | 68.90 | % |
CPP Investment Board (USRE II) Inc. (15) |
| 200,000 |
| 36.86 | % | 162,000 |
| 29.85 | % |
* Less than 1% of the outstanding shares.
(1) Except as otherwise noted, the address of each beneficial owner is c/o 99¢99 Cents Only Stores LLC, 4000 Union Pacific Avenue, City of Commerce, CA 90023.
(2) Through a voting agreement within the stockholders agreement, (i) Ares has the right to designate four members of the Parent Board and, subject to the approval of CPPIB, two independent members of the Parent Board, and (ii) CPPIB has the right to designate two members of the Parent Board, in each case, for so long as such Sponsor and its affiliates and permitted transferees own at least 15% of outstanding shares of Class A Common Stock. Under the terms of the stockholders agreement, each of the Sponsors has agreed to vote in favor of the other’s director designees. See “Item 13. Certain Relationships and Related Transactions, and Director Independence—Stockholders Agreement” in this Report.Agreement.” As a result, each of the Sponsors may be deemed to be the beneficial owner of the shares of Class A Common Stock of Parent owned by the other. Each of Ares and CPPIB expressly disclaims beneficial ownership of the shares of Class A Common Stock of Parent not directly held by it, and such shares have not been included in the table above for purposes of calculating the number of shares beneficially owned by Ares or CPPIB.
(3) Consists of 50(i) 5,376 shares of each of Class A Common Stock and Class B Common Stock issuable to Mr. Gonthier upon the exercise of performance-based options which may become exercisable within 60 days of March 31, 2015 and 4,839 shares of each of Class A Common Stock and Class B Common stock issuable to Mr. Gonthier upon the exercise of options which are currently exercisable or which will become exercisable within 60 days of March 31, 2015 and (ii) 4,922 shares of each of
Class A Common Stock and Class B Common Stock directly held by Avenue of the Stars Investments LLC, a Delaware limited liability company (“Avenue of the Stars Investments”). Mr. Gonthier is the manager of Avenue of the Stars Investments and the trustee of a member of Avenue of the Stars Investments. Such shares were purchased in connection with a Stock Purchase Agreement, dated as of September 30, 2013, for an aggregate purchase price of $5,999,918.
(4)Consists of 1,250 shares of each of Class A Common Stock and Class B Common Stock issuable to Mr. Lukow upon the exercise of performance-based options which may become exercisable within 60 days of March 31, 2015.
(5)Mr. Kvitko resigned as Executive Vice President and Chief Merchandising Officer of the Company and all positions with Parent and each of its subsidiaries effective January 26, 2015. In March 2015, Parent repurchased all of the vested options to purchase shares of Class A Common Stock and Class B Common Stock held by Mr. Kvitko. See footnote (b) to the “Options Exercised in Fiscal 2015” table and Note 17 to our Consolidated Financial Statements for more information.
(6)Consists (i) 354 shares of each of Class A Common Stock and Class B Common Stock directly held by From One to Many Leadership Consulting LLC, of which Mr. Anicetti is the sole member; such shares were purchased in connection with a Stock Purchase Agreement, dated as of April 11, 2014, for an aggregate purchase price of $455,598, and (ii) 100 shares of each of Class A Common Stock and Class B Common Stock issuable to Mr. Anicetti upon the exercise of options which are currently exercisable or which will become exercisable within 60 days of May 15, 2013.March 31, 2015.
(4)Consists of 75 shares of each of Class A Common Stock and Class B Common Stock directly held by the Frank Schools Living Trust, of which Mr. Schools is the trustee. These shares were purchased in connection with a Stock Purchase Agreement, dated as of October 3, 2012, for an aggregate purchase price of $75,000.
(5)(7) Consists of (i) (a) 500 shares of each of Class A Common Stock and Class B Common Stock directly held by Mr. Axelrod and (b) 250 shares of each of Class A Common Stock and Class B Common Stock directly held by AS Skip, LLC, a Delaware limited liability company of which Mr. Axelrod is the managing member; such shares were purchased in connection with a Stock Purchase Agreement, dated as of June 11, 2012, for an aggregate purchase price of $750,000, and (ii) 100300 shares of each of Class A Common Stock and Class B Common Stock issuable to Mr. Axelrod upon the exercise of options which are currently exercisable or which will become exercisable within 60 days of May 15, 2013.March 31, 2015.
TableConsists of Contents(i) 310 shares of each of Class A Common Stock and Class B Common Stock directly held by Mr. Fung; such shares were purchased in connection with a Stock Purchase Agreement, dated as of April 11, 2014, for an aggregate purchase price of $398,970 and (ii) 50 shares of each of Class A Common Stock and Class B Common Stock issuable to Mr. Fung upon the exercise of options which are currently exercisable or which will become exercisable within 60 days of March 31, 2015.
(6)(9) �� The addressConsists of (i) 410 shares of each of Messrs. FeeneyClass A Common Stock and Nishi is c/o Canada Pension Plan Investment Board, One Queen Street East, Suite 2600, Toronto, ON, M5C 2W5.
(7)ConsistsClass B Common Stock directly held by Mr. Giancamilli; such shares were purchased in connection with a Stock Purchase Agreement, dated as of 50October 8, 2013, for an aggregate purchase price of $499,790, and (ii) 100 shares of each of Class A Common Stock and Class B Common Stock issuable to Mr. Giancamilli upon the exercise of options which are currently exercisable or which will become exercisable within 60 days of May 15, 2013.March 31, 2015.
(8)(10) The address of Mr. Gies is c/o Ares Management LLC, 2000 Avenue of the Stars, 12th Floor, Los Angeles, California 90067. Mr. Gies is a Principal in the Private Equity Group of Ares Management. Mr. Gies expressly disclaims beneficial ownership of the shares owned by Ares.
(9)(11) The address of Mr. Kaplan is c/o Ares Management LLC, 2000 Avenue of the Stars, 12th Floor, Los Angeles, California 90067. Mr. Kaplan is a Senior Partner in the Private Equity Group of Ares Management and memberSenior Partner of Ares Partners Management CompanyGP LLC, the general partner of Ares Management, L.P. (“APMC”Ares L.P.”), both of which indirectly control Ares. Mr. Kaplan expressly disclaims beneficial ownership of the shares owned by Ares.
(10)(12)The address of Mr. Nishi is c/o Canada Pension Plan Investment Board, One Queen Street East, Suite 2500, Toronto, ON, M5C 2W5. Mr. Nishi is a Principal in the Direct Private Equity Group of CPPIB. Mr. Nishi expressly disclaims beneficial ownership of the shares owned by CPPIB.
(13) The address of Mr. Stein is c/o Ares Management LLC, 2000 Avenue of the Stars, 12th Floor, Los Angeles, California 90067. Mr. Stein is a Partner in the Private Equity Group of Ares Management. Mr. Stein expressly disclaims beneficial ownership of the shares owned by Ares.
(11)Consists of (i) 20,000 shares of each of Class A Common Stock and Class B Common Stock directly owned by Karen Schiffer and Eric Schiffer as community property, (ii) 11,842 shares of each of Class A Common Stock and Class B Common Stock issuable to Mr. Schiffer upon the exercise of options which are currently exercisable or which will become exercisable within 60 days of May 15, 2013 and (iii) 5,921 shares of each of Class A Common Stock and Class B Common Stock issuable to Mrs. Schiffer upon the exercise of options which are currently exercisable or which will become exercisable within 60 days of May 15, 2013. Karen and Eric Schiffer are husband and wife.
(12)Consists of 40,000 shares of each of Class A Common Stock and Class B Common Stock directly held by The Gold Revocable Trust dated 10/26/2005, of which Sherry Gold is the trustee.
(13)(14) Refers to shares owned by Ares acquired in connection with the Merger. The general partnermanager of Ares is ACOF Management III, L.P. (“ACOF Management III”), and the general partner of ACOF Management III is ACOF Operating Manager III, LLC (“ACOF Operating Manager III”)., and the sole member of ACOF Operating Manager III is owned byAres Management. The sole member of Ares Management which, in turn, is owned by Ares Management Holdings LLCL.P. (“Ares Management Holdings”). and the general partner of Ares Management Holdings is controlled by Ares Holdings LLCInc. (“Ares Holdings”), which, in turn,whose sole stockholder is controlled by APMC (togetherAres L.P. The general partner of Ares L.P. is Ares Management GP LLC (“Ares Management GP”) and the sole member of Ares Management GP is Ares Partners Holdco LLC (“Ares Partners” and, together with Ares, ACOF Management III, ACOF Operating Manager III, Ares
Management, Ares Management Holdings, Ares Holdings, Ares L.P., and Ares Holdings,Management GP, the “Ares Entities”). APMCAres Partners is managed by an executive committee compriseda board of managers, which is composed of Michael Arougheti, Mr. Kaplan, and Michael Arougheti, Gregory Margolies,John Kissick, Antony Ressler and Bennett Rosenthal. Because the executive committee actsDecisions by consensus/Ares Partners’ board of managers generally are made by a majority approval, none of the members, of the executive committee has sole voting or dispositive power with respectwhich majority, subject to any shares of stock of Parent owned by Ares.certain conditions, must include Antony Ressler. Each of the members of the executive committee, the Ares Entities (other than AresACOF III with respect to the shares it holds directly)held directly by it) and the members of Ares Partners’ board of managers and the other directors, officers, partners, stockholders, members and managers of the Ares Entities expressly disclaims beneficial ownership of anythe shares of common stock of Parent owned by Ares. The address of each Ares Entity is c/o Ares Management LLC, 2000 Avenue of the Stars, 12th Floor, Los Angeles, California 90067.
(14)(15) Refers to shares owned by CPP Investment Board (USRE II) Inc. (“CPP”) acquired in connection with the Merger. CPP is a wholly owned subsidiary of CPPIB. CPPIB is managed by a board of directors. Because the board of directors acts by consensus/majority approval, none of the directors of the board of directors has sole voting or dispositive power with respect to the shares of stock of Parent owned by CPP. Each of Messrs. Feeney andMr. Nishi each expressly disclaims beneficial of such shares. The address of each of CPP and CPPIB is c/o Canada Pension Plan Investment Board, One Queen Street East, Suite 2600,2500, Toronto, ON, M5C 2W5.
(15)(16) 9,23038,000 of these shares of Class B SharesCommon Stock are subject to (i) a call right that allows CPP to repurchase such stock at any time for de minimis consideration and (ii) a proxy by which Ares is to take certain actions requested by CPP to elect or remove the directors of Parent or certain other matters.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Stockholders Agreement
Upon completion of the Merger, the Parent entered into a stockholders agreement with each of its stockholders, which includesincluded certain of our former directors, employees and members of management and our principal stockholders. The stockholders agreement, as amended, gives (i) Ares the right to designate four members of the Parent Board, (ii) Ares the right to designate twoup to three independent members of the Parent Board, which directors shall be approved by CPPIB, and (iii) CPPIB the right to designate two members of the Parent Board, in each case for so long as they or their respective affiliates beneficially own at least 15% of the then outstanding shares of Class A Common Stock. The stockholders agreement provides for the election of Eric Schiffer, Jeff Gold and Howard Goldthe current chief executive officer of Parent to the Parent Board, for so long as they hold the position of Chief Executive Officer, President and Chief Operating Officer, and Executive Vice President, respectively, and if those individuals do not hold such positions, the Rollover Investors have the right to designate one member of the Parent Board for so long as the Rollover Investors in the aggregate continue to own at least 50% of the outstanding shares of Class A Common Stock that they held on the date of the Merger (the “Rollover Director”).Board. Under the terms of the stockholders agreement, certain significant corporate actions require the approval of a majority of directors on the board of directors, including at least one director designated by Ares and one director designated by CPPIB, and certain other corporate actions require the approval of the Rollover Director.CPPIB. These actions include the incurrence of additional indebtedness over $20 million in the aggregate outstanding at any time, the issuance or sale of any of our capital stock over $20 million in the aggregate, the sale, transfer or acquisition of any assets with a fair market value of over $20 million, the declaration or payment of any dividends, entering into any merger, reorganization or recapitalization, amendments to our charter or bylaws, approval of our annual budget and other similar actions.
The stockholders agreement contains significant transfer restrictions and certain rights of first offer, tag-along, and drag-along rights. In addition, the stockholders agreement contains registration rights that, among other things, require Parent to register common stock held by the stockholders who are parties to the stockholders agreement in the event Parent registers for sale, either for its own account or for the account of others, shares of its common stock.
Under the stockholders agreement, certain affiliate transactions, require the approval of a majority of disinterested directors, andincluding certain affiliate transactions between Parent, on the one hand, and Ares, CPPIB or any of their respective affiliates, on the other hand, require the approval of a majority of disinterested directors, including the Rollover Director.
Voting Agreement
The Canada Pension Plan Investment Board Act 1997 (Canada) imposes certain share ownership limitations on CPPIB. These limitations include restrictions on CPPIB’s indirect ownership levels (through Parent) of our Class B Common Stock, which has de minimis economic rights and the right to vote solely with respect to the election of directors. An affiliate of Ares holds 10% of our Class B Common Stock. We have entered into a voting agreement with Parent and the affiliate of Ares pursuant to which such Class B Common Stock held by the affiliate of Ares is subject to a call right that allows Parent to repurchase such stock at any time for de minimis consideration. The voting agreement also provides, among other things, for the affiliate of Ares to take certain actions requested by Parent to elect or remove our directors.
Management Services Agreements
Upon completion of the Merger, we and Parent entered into management services agreements with affiliates of the Sponsors (the “Management Services Agreements”). Under each of the Management Services Agreements, we and Parent agreed to, among other things, retain and reimburse affiliates of the Sponsors for certain management and financial services and certain expenses and provide customary indemnification to the Sponsors and their affiliates. In addition, upon completion of the Merger, we and Parent reimbursed affiliates of the Sponsors for their expenses incurred in connection with the Merger in an aggregate amount of $4.2 million in fiscal 2012. In fiscal 2013, wethe Company reimbursed affiliates of the Sponsors their expenses in the amount of $0.7 million. In transition fiscal 2014, we reimbursed affiliates of the Sponsors for their expenses in the amount of less than $0.1 million. The Sponsors provided no services to us during fiscal 2013.2015 or transition fiscal 2014.
Parent Stock Purchase Agreements Regarding Lease Arrangements
On January 13,In March 2015, in connection with Mr. 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 approximately $0.4 million.
In May 2014, in connection with Mr. School’s resignation as Senior Vice President, Chief Financial Officer and Treasurer of the Company and Parent, Parent purchased all of the shares of Class A Common Stock and Class B Common Stock held by the Frank Schools Living Trust (of which Mr. Schools is the Trustee) and all of the vested options to purchase shares of Class A Common Stock and Class B Common Stock held by Mr. Schools, for an aggregate consideration of approximately $0.2 million. Mr. Schools, through the Trust, initially purchased (i) these shares of Class A Common Stock and Class B Common Stock in October 2013 pursuant to a Stock Purchase Agreement between Parent and the Trust and (ii) these options to purchase shares of Class A Common Stock and Class B Common Stock in September and November 2012 wepursuant to certain Non-Qualified Stock Option Agreements between Parent and the Trust.
In April 2014, in connection with Mr. Anicetti’s service as Interim Chief Executive Officer of the Company and Parent, Parent entered into new lease agreements (the “Leases”)a Stock Purchase Agreement with Eric Schiffer, Howard Gold, Jeff GoldFrom One to Many Leadership Consulting, LLC. From One to Many Leadership Consulting, LLC is wholly owned by, and Karen Schiffer,employs, Mr. Anicetti. Pursuant to the spouse of Mr. Schiffer and sister of Messrs. Howard and Jeff Gold, and certain of their affiliates for 13 stores and one store parking lot, which replaced the existing month-to-month leases. The Leases have approximate initial terms of either five or ten yearsthis agreement, Mr. Anicetti purchased an aggregate 354 shares of Class A Common Stock and 354 shares of Class B Common Stock for an aggregate purchase price of approximately $0.5 million.
In April 2014, in connection with Mr. Fung’s service as Interim Executive Vice President and Chief Administrative Officer of the Company and Parent, Parent entered into a Stock Purchase Agreement with Mr. Fung. Pursuant to the terms of this agreement, Mr. Fung purchased an aggregate 310 shares of Class A Common Stock and 310 shares of Class B Common Stock for an aggregate purchase price of approximately $0.4 million.
In October 2013, Parent entered into a Stock Purchase Agreement with Andrew Giancamilli, a director of Parent. Pursuant to the terms of this agreement, Mr. Giancamilli purchased an aggregate 410 shares of Class A Common Stock and 410 shares of Class B Common Stock for an aggregate purchase price of approximately $0.5 million.
In September 2013, in connection with Mr. Gonthier’s employment as President and Chief Executive Officer of the Company and Parent, Parent entered into a Stock Purchase Agreement with Avenue of the Stars Investments. Mr. Gonthier is the manager of Avenue of the Stars Investments and the base rents could be adjustedtrustee of a member of Avenue of the Stars Investments. Pursuant to market value inthe terms of this agreement, Mr. Gonthier purchased an aggregate amount not to exceed $1.0 million per annum. In December 2012, as previously contemplated, we reached a final agreement with the Rollover Investors on the market value4,922 shares of the LeasesClass A Common Stock and 4,922 shares of Class B Common Stock for eachan aggregate purchase price of the 13 stores that will result in aggregate base rent increasing by approximately $0.7 million aggregate per annum. Rental expense for these Leases was $2.9 million for the fiscal year 2013. Rental expense for these Leases was $0.7 million for the period of January 15, 2012 to March 31, 2012 and $1.7 million for the period of April 3, 2011 to January 14, 2012. Rental expense for these Leases was $2.1 million for the fiscal year 2011.
Stock Purchase Agreement$6.0 million.
In June 2012, Parent entered into a Stock Purchase Agreement with Norman Axelrod, a director of Parent, and us, and AS SKIP, LLC, a Delaware limited liability company of which Mr. Axelrod is the managing member (together with Norman Axelrod, the “Purchasers”). Pursuant to the terms of this agreement, Mr. Axelrod and AS SKIP, LLCthe Stock Purchase Agreement, the Purchasers purchased an aggregate 750 shares of Class A Common Stock and 750 shares of Class B Common Stock, of Parent for an aggregate purchase price of $750,000.
Former Executive Put RightsCredit Facility
Pursuant toIn connection with the employment agreements betweenMerger, the Company entered into the First Lien Term Loan Facility, under which various funds affiliated with one of Parent’s sponsors, an affiliate of Ares, are lenders. As of January 30, 2015 and Messrs. Eric Schiffer, Jeff GoldJanuary 31, 2014, certain affiliates of Ares held approximately $1.4 million and Howard Gold, in connection with their separation from the Company, for a period$3.4 million of one year following such separation, each executive has a right to require Parent to repurchase the shares of Class A and Class B Common Stock owned by executive (a “put right”) at the greater of (i) $1,000 per combined share of Class A and Class B Common Stock less the any distributions made with respect to such shares and (ii) the fair market value of such shares as of the date the executive exercises the put right. The put right applies to the lesser of (i) 20,000 shares of each of Class A and Class B Common Stock and (ii) $12.5 million in value (unless Parent agrees to purchase a higher value). If exercising the put right is prohibited (e.g.,term loans under the First Lien Credit facility, the ABLTerm Loan Facility, and the indenture governing the
senior notes), then the put right is extended up to three additional years until Parent is no longer prohibited from repurchasing the shares. If, during the four years following termination, Parent is at no time able to make the required payments, the put right expires and is deemed unexercised. For payout after the first year, the put right is only at the fair market value asrespectively. The terms of the dateterm loans are the exercisingsame as those held by unaffiliated third party lenders under the put right.First Lien Term Loan Facility.
Director Independence
As of May 31, 2013,April 20, 2015, the Board was comprised of Richard Anicetti, Norman Axelrod, Shane Feeney,Michael Fung, Andrew Giancamilli, Dennis Gies, Marvin Holen,Stéphane Gonthier, David Kaplan, Scott Nishi and Adam Stein. Pursuant to the stockholders agreement of Parent, Messrs. Axelrod, Gies, Kaplan and Stein were designated by Ares and Messrs. Feeney andMr. Nishi werewas designated by CPPIB. Messrs. Anicetti, Fung and Giancamilli were designated and approved by the Sponsors. Mr. HolenGonthier, as chief executive officer, was designated by the Rollover Investorselected pursuant to the stockholders agreement of Parent. We have no securities listed for trading on a national securities exchange or in an automated inter-dealer quotation system of a national securities association which has requirements that a majority of the Boardour board of directors or other governing body be independent.
Review, Approval or Ratification of Transactions with Related Persons
Although we have not adopted formal procedures for the review, approval or ratification of transactions with related persons, the Parent Board reviews potential transactions with those parties we have identified as related parties prior to the consummation of the transaction, and we adhere to the general policy that such transactions should only be entered into if they are approved by the Parent Board, in accordance with applicable law, and on terms that, on the whole, are no more or less favorable than those available from unaffiliated third parties.
Item 14. Principal Accountant Fees and Services
Ernst & Young LLP (“EY”) served as our independent registered public accounting firm since November 7, 2012 and reported on our Consolidated Financial Statements for fiscal 2013.2015 and transition fiscal 2014.
Services provided by EY and related fees for fiscal year 20132015 and transition fiscal 2014 were as follows:
|
| Year Ended |
|
| Year Ended |
| Ten Months Ended |
| |||
|
|
|
|
|
|
|
|
| |||
Audit Fees (a) |
| $ | 709,000 |
|
| $ | 1,003,871 |
| $ | 1,217,942 |
|
Audit Related Fees |
| — |
|
| — |
| — |
| |||
Tax Fees |
| 11,300 |
|
| 159,199 |
| 43,495 |
| |||
All Other Fees |
| — |
|
| — |
| — |
| |||
(a) Includes fees necessary to perform an audit or quarterly review in accordance with generally accepted auditing standards and services that generally only the independent registered public accounting firm can reasonably provide, such as attest services, consents and assistance with, and review of, documents filed with the Securities and Exchange Commission.
BDO USA, LLP (“BDO”) served as our independent registered public accounting firm and reported on our Consolidated Financial Statements for fiscal 2012 and for part of fiscal 2013 (April 1 through November 7, 2012).
Services provided by BDO and related fees for fiscal years 2013 and 2012 were as follows:
|
| Year Ended |
| Year Ended |
| ||
|
|
|
|
|
| ||
Audit Fees (a) |
| $ | 380,000 |
| $ | 1,330,000 |
|
Audit Related Fees |
| — |
| 293,000 |
| ||
Tax Fees |
| — |
| — |
| ||
All Other Fees |
| — |
| — |
| ||
(a)(b) Includes fees necessary to perform an audit or quarterly review in accordance with generally accepted auditing standardsfor tax compliance services and services that generally only the independent registered public accounting firm can reasonably provide, such as attest services, consents and assistance with, and review of, documents filed with the Securities and Exchange Commission. The amounts also include fees related to BDO’s attestation of our internal control over financial reporting.other on-call tax advisory services.
On November 5, 2012, the Audit Committee approved the dismissal of BDO and the engagement EY as our independent registered public accounting firm, in each case effective November 7, 2012.
BDO’s reports on our Consolidated Financial Statements for the years ended March 31, 2012 and April 2, 2011 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.
During our two most recent fiscal years and the subsequent interim period preceding BDO’s dismissal, there were:
(i)no “disagreements” (within the meaning of Item 304(a) of Regulation S-K) with BDO on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of BDO, would have caused it to make reference to the subject matter of the disagreements in connection with its reports on our consolidated financial statements; and
(ii)no “reportable events” (as such term is defined in Item 304(a)(1)(v) of Regulation S-K).
We provided BDO with a copy of the above disclosures and requested BDO to furnish to us a letter addressed to the Securities and Exchange Commission stating that it agrees with such statements. A copy of BDO’s letter dated November 7, 2012 is attached as Exhibit 16.1 to the current report on Form 8-K that we filed with the Securities and Exchange Commission on November 7, 2012.
During our two most recent fiscal years and the subsequent interim period preceding EY’s engagement, neither we nor anyone on our behalf consulted EY regarding either:
(i)the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our consolidated financial statements, and no written report or oral advice was provided to us that EY concluded was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue; or
(ii)any matter that was the subject of a “disagreement” or “reportable event” (within the meaning of Item 304(a) of Regulation S-K and Item 304(a)(1)(v) of Regulation S-K, respectively).
In approving the selection of EY as our independent registered public accounting firm, the Audit Committee considered all relevant factors, including any non-audit services previously provided by EY to us.
The Audit Committee has considered whether the provision of non-audit services by our principal registered public accounting firm is compatible with maintaining auditor independence and determined that it is. Pursuant to the rules of the Securities and Exchange Commission, before our independent registered accounting firm is engaged to render audit or non-audit services, the engagement must be approved by the Audit Committee or entered into pursuant to the Audit Committee’s pre-approval policies and procedures. The Audit Committee has adopted a policy granting pre-approval to certain specific audit and audit-related services and specifying the procedures for pre-approving other services. The Audit Committee pre-approved 100% of the tax services provided by EY during fiscal 2015 and transition fiscal 2014.
Item 15. Exhibits, Financial Statement Schedule
a)Financial Statements. Reference is made to the Index to the Financial Statements set forth in Item 8 on page 5042 of this Report.
Financial Statement Schedules. All Schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are included herein.
b)Exhibits. The exhibits listed on the accompanying Index to Exhibits are filed as part of, or incorporated by reference into, this Report.
99¢99 Cents Only Stores LLC
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Amounts(Amounts in thousands)
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| End of Period |
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| Beginning of |
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| End of Period |
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(Successor) |
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For the year ended January 30, 2015 |
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Allowance for doubtful accounts |
| $ | 107 |
| 67 |
| 116 |
| $ | 58 |
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Tax valuation allowance |
| $ | — |
| — |
| — |
| $ | — |
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For the ten months ended January 31, 2014 |
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Allowance for doubtful accounts |
| $ | 84 |
| 136 |
| 113 |
| $ | 107 |
| |||||||||||
Tax valuation allowance |
| $ | 11,610 |
| — |
| 11,610 |
| $ | — |
| |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
For the year ended March 30, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Allowance for doubtful accounts |
| $ | 280 |
| 192 |
| 388 |
| $ | 84 |
|
| $ | 280 |
| 192 |
| 388 |
| $ | 84 |
|
Inventory reserve |
| $ | 4,000 |
| 11,226 |
| 1,917 |
| $ | 13,309 |
| |||||||||||
Tax valuation allowance |
| $ | 10,346 |
| 3,162 |
| 1,898 |
| $ | 11,610 |
|
| $ | 10,346 |
| 3,162 |
| 1,898 |
| $ | 11,610 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
For the period ended January 15, 2012 to March 31, 2012 |
|
|
|
|
|
|
|
|
| |||||||||||||
Allowance for doubtful accounts |
| $ | 267 |
| 38 |
| 25 |
| $ | 280 |
| |||||||||||
Inventory reserve |
| $ | 4,026 |
| 125 |
| 151 |
| $ | 4,000 |
| |||||||||||
Tax valuation allowance |
| $ | 5,745 |
| 8,501 |
| 3,900 |
| $ | 10,346 |
| |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
(Predecessor) |
|
|
|
|
|
|
|
|
| |||||||||||||
For the period ended April 3, 2011 to January 14, 2012 |
|
|
|
|
|
|
|
|
| |||||||||||||
Allowance for doubtful accounts |
| $ | 258 |
| 19 |
| 10 |
| $ | 267 |
| |||||||||||
Inventory reserve |
| $ | 4,051 |
| 244 |
| 269 |
| $ | 4,026 |
| |||||||||||
Tax valuation allowance |
| $ | 5,800 |
| — |
| 55 |
| $ | 5,745 |
| |||||||||||
For the year ended April 2, 2011 |
|
|
|
|
|
|
|
|
| |||||||||||||
Allowance for doubtful accounts |
| $ | 501 |
| 198 |
| 441 |
| $ | 258 |
| |||||||||||
Inventory reserve |
| $ | 3,726 |
| 924 |
| 599 |
| $ | 4,051 |
| |||||||||||
Tax valuation allowance |
| $ | 5,800 |
| — |
| — |
| $ | 5,800 |
| |||||||||||
INDEX TO EXHIBITS
Exhibit No. |
| Exhibit Description |
2.1 |
| Agreement and Plan of Merger among Number Holdings, Inc., Number Merger Sub, Inc. and Registrant, dated October 11, 2011.(1) |
3.1 |
|
|
3.2 |
|
|
3.5 |
| Certificate of Incorporation of 99 Cents Only Stores Texas, Inc. |
3.6 |
| Bylaws of 99 Cents Only Stores Texas, Inc. |
4.1 |
| |
|
| Indenture, dated as of December 29, 2011, between Number Merger Sub, Inc. and Wilmington Trust, National Association, as trustee.(3) |
|
| Supplemental Indenture, dated as of January 13, 2012, among the Registrant, 99 Cents Only Stores Texas, Inc. 99 Cents Only Stores and Wilmington Trust, National Association, as trustee.(3) |
|
| Registration Rights Agreement, dated as of December 29, 2011, between Number Merger Sub, Inc. and RBC Capital Markets, LLC, as representative of the Initial Purchasers (as defined therein).(3) |
10.1 |
| Form of Amended and Restated Indemnification Agreement and Schedule of Indemnified Parties.(4) |
10.2 |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
|
| |
|
| $175,000,000 Credit Agreement, dated as of January 13, 2012, among the Registrant, Number Holdings, Inc., the lenders party thereto, Royal Bank of Canada, as administrative agent and Issuer (as defined therein), BMO Harris Bank N.A. and Deutsche Bank Securities Inc., as co-syndication agents, and the other agents named therein (the ‘‘ABL Credit Agreement’’).(3) |
|
| $525,000,000 Credit Agreement, dated as of January 13, 2012, among the Registrant, Number Holdings, Inc., the lenders party thereto, Royal Bank of Canada, as administrative agent, BMO Capital Markets and Deutsche Bank Securities Inc., as co-syndication agents, and the other agents named therein (the ‘‘Term Credit Agreement’’).(3) |
|
| Security Agreement, dated as of January 13, 2012, among Number Holdings, Inc., the Registrant, the Subsidiary Guarantors (as defined therein), and Royal Bank of Canada, as collateral agent for the Secured Parties (as defined therein).(3) |
|
| Security Agreement, dated as of January 13, 2012, among Number Holdings, Inc., the Registrant, the Subsidiary Guarantors (as defined therein), and Royal Bank of Canada, as collateral agent for the Secured Parties (as defined therein).(3) |
|
| Guaranty, dated as of January 13, 2012, among Number Holdings, Inc, the other Guarantors (as defined therein) and the Royal Bank of Canada, as administrative agent and collateral agent.(3) |
|
| Guaranty, dated as of January 13, 2012, among Number Holdings, Inc, the other Guarantors (as defined therein) and the Royal Bank of Canada, as administrative agent and collateral agent.(3) |
|
| Intercreditor Agreement, dated as of January 13, 2012, between the Royal Bank of Canada, as administrative agent under the ABL Facility (as defined herein), and the Royal Bank of Canada, as administrative agent under the Term Loan Facility (as defined herein).(3) |
|
| |
|
| |
|
| |
|
| 2012 Stock Incentive Plan of Number Holdings, Inc. |
|
| Form of Non-Qualified Stock Option Agreement pursuant to the 2012 Stock Incentive Plan. |
|
| Management Services Agreement, dated as of January 13, 2012, by and among Number Holdings, Inc., the Registrant and ACOF Operating Manager III, LLC. |
|
| Management Services Agreement, dated as of January 13, 2012, by and among Number Holdings, Inc., the Registrant and CPPIB Equity Investments Inc. |
|
| Amendment No. 1 to the ABL Credit Agreement, dated as of April 4, 2012, among the Registrant, Number Holdings, Inc., each other Loan Party thereto and Royal Bank of Canada, as administrative agent. |
|
| Amendment No. 1 to the Term Credit Agreement, dated as of April 4, 2012, among the Registrant, Number Holdings, Inc., each other Loan Party thereto, each Participating Lender Party thereto and Royal Bank of Canada, as administrative agent. |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
|
| |
|
| Severance Agreement, dated as of April 17, 2013, among the Registrant and Frank Schools.(10) |
10.16 | Employment Agreement, dated September 3, 2013, among the Registrant and Stéphane Gonthier. (2) | |
10.17 | Stock Purchase Agreement, dated September 30, 2013, among Number Holdings, Inc., Avenue of the Stars Investments LLC and Stéphane Gonthier.(2) | |
10.18 | Non-Qualified Stock Option Agreement pursuant to the Number Holdings, Inc. 2012 Stock Incentive Plan, dated as of October 9, 2013, between Number Holdings, Inc. and Stéphane Gonthier.(2) |
10.19 | First Amendment to the 2012 Stock Incentive Plan of Number Holdings, Inc., dated as of September 27, 2013.(2) | |
10.20 | Amendment No. 2 to the ABL Credit Agreement, dated as of October 8, 2013, among the Registrant, Number Holdings, Inc., each other Loan Party party thereto, each Lender party thereto and Royal Bank of Canada, as administrative agent.(2) | |
10.21 | Amendment No. 2 to the Term Credit Agreement, dated as of October 8, 2013, among the Registrant, Number Holdings, Inc., each other Loan Party party thereto, each Lender party thereto and Royal Bank of Canada, as administrative agent.(2) | |
10.22 | Purchase Agreement, dated as of October 15, 2013, by and among Number Holdings, Inc., Sherry Gold, individually and in her capacity as Trustee of The Gold Revocable Trust dated 10/26/2005, Jeff Gold, Howard Gold, Karen Schiffer and Eric Schiffer.(11) | |
10.23 | Stockholders Agreement, dated as of January 13, 2012, among Number Holdings, Inc., Ares Corporate Opportunities Fund III, L.P., Canada Pension Plan Investment Board and the Other Stockholders party thereto.(6) | |
10.24 | First Amendment to Stockholders Agreement, dated as of December 16, 2013, by and between Ares Corporate Opportunities Fund III, L.P. and CPP Investment Board (USRE II) Inc.(5) | |
10.25 | Severance Agreement, dated as of April 17, 2013, among the Registrant and Mike Kvitko.* | |
10.26 | Non-Qualified Stock Option Agreement pursuant to the Number Holdings, Inc. 2012 Stock Incentive Plan, dated as of February 5, 2015, among Number Holdings, Inc. and Bradley Lukow.* | |
21.0 |
| Subsidiaries * |
31(a) |
| Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.* |
31(b) |
| Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.* |
32(a) |
| Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.** |
32(b) |
| Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.** |
101.INS |
| XBRL Instance Document* |
101.SCH |
| XBRL Taxonomy Extension Schema* |
101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase* |
101.DEF |
| XBRL Taxonomy Extension Definition Linkbase* |
101.LAB |
| XBRL Taxonomy Extension Label Linkbase* |
101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase* |
* |
| Filed herewith |
** |
| Furnished herewith. |
|
Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under those sections.
|
| (1) Incorporated by reference from the Registrant’s Current Report on Form 8-K as filed with Securities and Exchange Commission on October 11, 2011. |
|
| |
(2) Incorporated by reference from the Registrant’s | ||
|
| (3) Incorporated by reference from the Registrant’s Current Report on Form 8-K as filed with Securities and Exchange Commission on January 13, 2012. |
|
| |
(4) Incorporated by reference from the Registrant’s 2008 Annual Report on Form 10-K as filed with Securities and Exchange Commission on June 11, 2008. |
|
| (5) Incorporated by reference from the Registrant’s |
|
| (6) |
| ||
| ||
|
|
|
(7) Incorporated by reference from the Registrant’s Amendment No. 1 to Registration Statement on Form S-4/A as filed with the Securities and Exchange Commission on August 29, 2012. | ||
|
|
|
(8) Incorporated by reference from the Registrant’s Amendment No. 2 to Registration Statement on Form S-4/A as filed with the Securities and Exchange Commission on September 21, 2012. | ||
|
|
|
(9) Incorporated by reference from the Registrant’s 2013 Annual Report on Form | ||
(10) Incorporated by reference from the Registrant’s Current Report on Form 8-K as filed with Securities and Exchange Commission on October 16, 2013. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this annual report Form 10-KReport to be signed on its behalf by the undersigned, thereunto duly authorized.
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| |
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| |
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| |
/s/ | ||
Date: April 22, 2015 | By: | Stéphane Gonthier |
|
| |
|
| |
Pursuant to the requirements of the Securities Exchange Act of 1934 this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature |
| Title |
| Date |
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/s/ |
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/s/ |
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|
|
/s/ Richard Anicetti | ||||
Richard Anicetti | Director | April 22, 2015 |
/s/ Norman Axelrod | ||||
Norman Axelrod | Director | April 22, 2015 | ||
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|
/s/ Michael Fung |
|
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|
Michael Fung |
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| |
| ||||
| ||||
| Director |
|
| |
| ||||
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| ||
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|
|
/s/ Andrew Giancamilli |
|
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|
Andrew Giancamilli |
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|
/s/ Dennis Gies |
|
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|
Dennis Gies |
| Director |
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|
|
/s/ Scott Nishi |
|
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|
|
Scott Nishi |
| Director |
|
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| ||||
|
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| ||
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|
|
/s/ Adam Stein |
|
|
|
|
Adam Stein |
| Director |
|
|
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|
|
/s/ David Kaplan |
|
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|
David Kaplan |
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|