UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2012
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11735
99¢ ONLY STORES
(Exact Name of Registrant as Specified in Its Charter)
California (State or Other Jurisdiction of Incorporation or Organization) |
|
95-2411605 (I.R.S. Employer Identification No.) |
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4000 Union Pacific Avenue, City of Commerce, California (Address of Principal Executive Offices) |
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90023 (Zip Code) |
Registrants Telephone Number, Including Area Code: (323) 980-8145
Former name, address and fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer x |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
Indicate the number of shares outstanding of each of the issuers classes of common stock as of the latest practicable date.
As of November 4, 2012, there were 100 shares of the registrants Class A Common Stock, par value $0.01 per share, outstanding and 100 shares of registrants Class B Common Stock, par value $0.01 per share, outstanding, none of which are publicly traded.
99¢ ONLY STORES
Form 10-Q
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Page |
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4 | ||
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Consolidated Balance Sheets as of September 29, 2012 (unaudited) and March 31, 2012 |
4 |
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5 | |
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6 | |
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7 | |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
34 | |
42 | ||
42 | ||
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43 | ||
43 | ||
43 | ||
43 | ||
43 | ||
43 | ||
43 | ||
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44 |
FORWARD-LOOKING INFORMATION
This Report on Form 10-Q 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, believe and similar expressions and variations thereof are intended to identify forward-looking statements. Such statements appear in a number of places in this filing and include statements regarding the intent, belief or current expectations of 99¢ Only Stores (the Company) and its directors or officers with respect to, among other things, (a) trends affecting the financial condition or results of operations of the Company, and (b) the business and growth strategies of the Company (including the Companys store opening growth rate). Readers are cautioned not to put undue reliance on such forward-looking statements. 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 Managements Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors sections. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission or posts on the Companys website, including the Companys Registration Statement on Form S-4 (File No. 333-182582) declared effective on October 9, 2012 containing the Companys most recent audited financial statements for the fiscal year ended March 31, 2012.
99¢ ONLY STORES
(In thousands, except share data)
|
|
September 29, |
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March 31, |
| ||
|
|
(Unaudited) |
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|
| ||
ASSETS |
|
|
|
|
| ||
Current Assets: |
|
|
|
|
| ||
Cash |
|
$ |
42,067 |
|
$ |
27,766 |
|
Short-term investments |
|
1,604 |
|
3,631 |
| ||
Accounts receivable, net of allowance for doubtful accounts of $425 and $280 at September 29, 2012 and March 31, 2012, respectively |
|
1,420 |
|
2,999 |
| ||
Income taxes receivable |
|
14,592 |
|
6,868 |
| ||
Deferred income taxes |
|
25,843 |
|
25,843 |
| ||
Inventories, net |
|
225,029 |
|
214,318 |
| ||
Assets held for sale |
|
2,621 |
|
6,849 |
| ||
Other |
|
14,674 |
|
11,297 |
| ||
Total current assets |
|
327,850 |
|
299,571 |
| ||
Property and equipment, net |
|
463,074 |
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476,525 |
| ||
Deferred financing costs, net |
|
39,234 |
|
30,400 |
| ||
Intangible assets, net |
|
474,397 |
|
477,434 |
| ||
Goodwill |
|
471,513 |
|
471,513 |
| ||
Deposits and other assets |
|
13,862 |
|
12,598 |
| ||
Total assets |
|
$ |
1,789,930 |
|
$ |
1,768,041 |
|
|
|
|
|
|
| ||
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
| ||
Current Liabilities: |
|
|
|
|
| ||
Accounts payable |
|
$ |
52,133 |
|
$ |
41,407 |
|
Payroll and payroll-related |
|
17,515 |
|
15,580 |
| ||
Sales tax |
|
5,780 |
|
6,128 |
| ||
Other accrued expenses |
|
35,322 |
|
30,569 |
| ||
Workers compensation |
|
37,838 |
|
39,024 |
| ||
Current portion of long-term debt |
|
5,237 |
|
5,250 |
| ||
Current portion of capital lease obligation |
|
80 |
|
77 |
| ||
Total current liabilities |
|
153,905 |
|
138,035 |
| ||
Long-term debt, net of current portion |
|
756,328 |
|
758,351 |
| ||
Unfavorable lease commitments, net |
|
16,896 |
|
18,959 |
| ||
Deferred rent |
|
3,160 |
|
798 |
| ||
Deferred compensation liability |
|
5,195 |
|
5,136 |
| ||
Capital lease obligation, net of current portion |
|
313 |
|
354 |
| ||
Long-term deferred income taxes |
|
214,195 |
|
214,874 |
| ||
Other liabilities |
|
3,473 |
|
767 |
| ||
Total liabilities |
|
1,153,465 |
|
1,137,274 |
| ||
|
|
|
|
|
| ||
Commitments and contingencies (Note 13) |
|
|
|
|
| ||
Shareholders Equity: |
|
|
|
|
| ||
Preferred stock, no par value authorized, 1,000 shares; no shares issued or outstanding |
|
|
|
|
| ||
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 September 29, 2012 and March 31, 2012, respectively |
|
|
|
|
| ||
Additional paid-in capital |
|
637,630 |
|
636,037 |
| ||
Accumulated deficit |
|
(170 |
) |
(5,293 |
) | ||
Other comprehensive (loss) income |
|
(995 |
) |
23 |
| ||
Total shareholders equity |
|
636,465 |
|
630,767 |
| ||
Total liabilities and shareholders equity |
|
$ |
1,789,930 |
|
$ |
1,768,041 |
|
The accompanying notes are an integral part of these consolidated financial statements.
99¢ ONLY STORES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
|
|
For the Second Quarter Ended |
|
For the First Half Ended |
| ||||||||||
|
|
September 29, |
|
|
October 1, |
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September 29, |
|
|
October 1, |
| ||||
|
|
(Successor) |
|
|
(Predecessor) |
|
(Successor) |
|
|
(Predecessor) |
| ||||
Net Sales: |
|
|
|
|
|
|
|
|
|
|
| ||||
99¢ Only Stores |
|
$ |
382,073 |
|
|
$ |
352,220 |
|
$ |
771,029 |
|
|
$ |
709,764 |
|
Bargain Wholesale |
|
11,290 |
|
|
10,818 |
|
23,284 |
|
|
21,614 |
| ||||
Total sales |
|
393,363 |
|
|
363,038 |
|
794,313 |
|
|
731,378 |
| ||||
Cost of sales (excluding depreciation and amortization expense shown separately below) |
|
242,699 |
|
|
217,264 |
|
486,601 |
|
|
436,784 |
| ||||
Gross profit |
|
150,664 |
|
|
145,774 |
|
307,712 |
|
|
294,594 |
| ||||
Selling, general and administrative expenses: |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating expenses |
|
120,362 |
|
|
114,367 |
|
239,133 |
|
|
227,933 |
| ||||
Depreciation |
|
13,931 |
|
|
6,985 |
|
27,683 |
|
|
13,694 |
| ||||
Amortization of intangible assets |
|
442 |
|
|
5 |
|
883 |
|
|
9 |
| ||||
Total selling, general and administrative expenses |
|
134,735 |
|
|
121,357 |
|
267,699 |
|
|
241,636 |
| ||||
Operating income |
|
15,929 |
|
|
24,417 |
|
40,013 |
|
|
52,958 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other (income) expense: |
|
|
|
|
|
|
|
|
|
|
| ||||
Interest income |
|
(35 |
) |
|
(60 |
) |
(259 |
) |
|
(202 |
) | ||||
Interest expense |
|
16,017 |
|
|
34 |
|
32,033 |
|
|
335 |
| ||||
Other-than-temporary investment impairment due to credit losses |
|
|
|
|
31 |
|
|
|
|
31 |
| ||||
Other |
|
3 |
|
|
(19 |
) |
67 |
|
|
(62 |
) | ||||
Total other expense (income), net |
|
15,985 |
|
|
(14 |
) |
31,841 |
|
|
102 |
| ||||
(Loss) income before provision for income taxes |
|
(56 |
) |
|
24,431 |
|
8,172 |
|
|
52,856 |
| ||||
(Benefit) provision for income taxes |
|
(77 |
) |
|
9,317 |
|
3,049 |
|
|
20,059 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
|
$ |
21 |
|
|
$ |
15,114 |
|
$ |
5,123 |
|
|
$ |
32,797 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other comprehensive (loss) income, net of tax: |
|
|
|
|
|
|
|
|
|
|
| ||||
Unrealized holding gains on securities arising during period |
|
4 |
|
|
(142 |
) |
4 |
|
|
(138 |
) | ||||
Unrealized losses on interest rate cash flow hedge |
|
(473 |
) |
|
|
|
(1,017 |
) |
|
|
| ||||
Less: reclassification adjustment included in net income |
|
|
|
|
7 |
|
(5 |
) |
|
(18 |
) | ||||
Other comprehensive loss, net of tax |
|
(469 |
) |
|
(135 |
) |
(1,018 |
) |
|
(156 |
) | ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Comprehensive (loss) income |
|
$ |
(448 |
) |
|
$ |
14,979 |
|
$ |
4,105 |
|
|
$ |
32,641 |
|
The accompanying notes are an integral part of these consolidated financial statements.
99¢ ONLY STORES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
First Half Ended |
| |||||
|
|
September 29, |
|
|
October 1, |
| ||
|
|
(Successor) |
|
|
(Predecessor) |
| ||
Cash flows from operating activities: |
|
|
|
|
|
| ||
Net income |
|
$ |
5,123 |
|
|
$ |
32,797 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
| ||
Depreciation |
|
27,683 |
|
|
13,694 |
| ||
Amortization of deferred financing costs and accretion of OID |
|
2,978 |
|
|
|
| ||
Amortization of intangible assets |
|
883 |
|
|
9 |
| ||
Amortization of favorable/unfavorable leases, net |
|
91 |
|
|
|
| ||
Loss on disposal of fixed assets |
|
403 |
|
|
80 |
| ||
Loss on interest rate hedge |
|
665 |
|
|
|
| ||
Investments impairment |
|
|
|
|
31 |
| ||
Excess tax benefit from share-based payment arrangements |
|
|
|
|
(584 |
) | ||
Deferred income taxes |
|
|
|
|
(105 |
) | ||
Stock-based compensation expense |
|
1,593 |
|
|
1,313 |
| ||
Changes in assets and liabilities associated with operating activities: |
|
|
|
|
|
| ||
Accounts receivable |
|
1,586 |
|
|
(836 |
) | ||
Inventories |
|
(11,437 |
) |
|
(42,641 |
) | ||
Deposits and other assets |
|
(3,874 |
) |
|
165 |
| ||
Accounts payable |
|
9,047 |
|
|
8,498 |
| ||
Accrued expenses |
|
6,358 |
|
|
7,600 |
| ||
Accrued workers compensation |
|
(1,186 |
) |
|
(2,169 |
) | ||
Income taxes |
|
(7,724 |
) |
|
12,495 |
| ||
Deferred rent |
|
2,362 |
|
|
1,114 |
| ||
Other long-term liabilities |
|
(73 |
) |
|
|
| ||
Net cash provided by operating activities |
|
34,478 |
|
|
31,461 |
| ||
|
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
|
| ||
Purchases of property and equipment |
|
(19,861 |
) |
|
(23,553 |
) | ||
Proceeds from sale of property and fixed assets |
|
11,549 |
|
|
2 |
| ||
Purchases of investments |
|
(449 |
) |
|
(50,389 |
) | ||
Proceeds from sale of investments |
|
2,470 |
|
|
48,174 |
| ||
Net cash used in investing activities |
|
(6,291 |
) |
|
(25,766 |
) | ||
|
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
|
| ||
Payment of debt |
|
(2,618 |
) |
|
|
| ||
Payment of debt issuance costs |
|
(11,230 |
) |
|
|
| ||
Payments of capital lease obligation |
|
(38 |
) |
|
(35 |
) | ||
Repurchases of common stock related to issuance of Performance Stock Units |
|
|
|
|
(753 |
) | ||
Proceeds from exercise of stock options |
|
|
|
|
2,470 |
| ||
Excess tax benefit from share-based payment arrangements |
|
|
|
|
584 |
| ||
Net cash (used in) provided by financing activities |
|
(13,886 |
) |
|
2,266 |
| ||
|
|
|
|
|
|
| ||
Net increase in cash |
|
14,301 |
|
|
7,961 |
| ||
Cash - beginning of period |
|
27,766 |
|
|
16,723 |
| ||
Cash - end of period |
|
$ |
42,067 |
|
|
$ |
24,684 |
|
Supplemental cash flow information: |
|
|
|
|
|
| ||
Income taxes paid |
|
$ |
10,772 |
|
|
$ |
5,679 |
|
Interest paid |
|
$ |
26,125 |
|
|
$ |
29 |
|
Non-cash investing activities for purchases of property and equipment |
|
$ |
(1,679 |
) |
|
$ |
837 |
|
The accompanying notes are an integral part of these consolidated financial statements.
99¢ ONLY STORES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies
Nature of Business
On January 13, 2012, pursuant to the Agreement and Plan of Merger (the Merger), dated as of October 11, 2011, by and among 99¢ Only Stores (the Company), Number Holdings, Inc., a Delaware corporation (Parent), and Number Merger Sub, Inc. (Merger Sub) a subsidiary of Parent, the Merger was consummated. Merger Sub merged 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 is controlled by affiliates of Ares Management LLC, Canada Pension Plan Investment Board (together, the Sponsors) and Eric Schiffer, the Companys Chief Executive Officer, Jeff Gold, the Companys President and Chief Administrative Officer, Howard Gold, the Companys Executive Vice President, Karen Schiffer and The Gold Revocable Trust dated October 26, 2005 (collectively, the Rollover Investors). As a result of the Merger, the Companys common stock was delisted from the New York Stock Exchange and the Company ceased to be a publicly held or traded corporation. See Note 2 for more information regarding the Merger.
The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). However, certain information and footnote disclosures normally included in financial statements prepared in conformity with GAAP have been omitted or condensed pursuant to the rules and regulations of the Securities and Exchange Commission. These statements should be read in conjunction with the Companys audited financial statements and notes thereto included in the Companys Registration Statement on Form S-4 (File No. 333-182582) declared effective on October 9, 2012 (the Registration Statement). In the opinion of the Companys management, these interim consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the consolidated financial position and results of operations for each of the periods presented. The results of operations and cash flows for such periods are not necessarily indicative of results to be expected for the full fiscal year ending March 30, 2013 (fiscal 2013).
The Company is incorporated in the State of California. The Company is an extreme value retailer of primarily consumable and general merchandise with an emphasis on name-brand products. As of September 29, 2012, the Company operated 303 retail stores with 222 in California, 37 in Texas, 29 in Arizona, and 15 in Nevada. The Company is also a wholesale distributor of various products.
Fiscal Periods
The Company follows a fiscal calendar consisting of four quarters with 91 days, each ending on the Saturday 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. On January 13, 2012, the Company completed the Merger. The accompanying consolidated financial statements are presented for the Predecessor and Successor relating to the periods preceding and succeeding the Merger, respectively. Fiscal 2013 began on April 1, 2012 and will end on March 30, 2013 and will consist of 52 weeks. The Companys fiscal year ending March 31, 2012 (fiscal 2012) consisted of the Successor period from January 15, 2012 to March 31, 2012 and the Predecessor period from April 3, 2011 to January 14, 2012, for a total of 52 weeks. The second quarter ended September 29, 2012 (second quarter of fiscal 2013) and second quarter ended October 1, 2011 (second quarter of fiscal 2012) were each comprised of 91 days. The period ended September 29, 2012 (first half of fiscal 2013) and the period ended October 1, 2012 (first half of fiscal 2012) were each comprised of 182 days.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates and assumptions.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Cash
For purposes of reporting cash flows, cash includes cash on hand and at the stores and cash in financial institutions. Cash balance held at financial institutions, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. All non-interest bearing cash balances were fully insured at September 29, 2012 due to a temporary federal program in effect from December 31, 2010 through December 31, 2012. Under the program, there is no limit to the amount of insurance for eligible accounts. Beginning in calendar 2013, insurance coverage will revert to $250,000 per depositor at each financial institution, and non-interest bearing cash balances may again exceed federally insured limits. The Companys interest-bearing amounts on deposit are not insured by the Federal Deposit Insurance Corporation. The Company places its temporary cash investments with what it believes to be high credit, quality financial institutions.
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 customers 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 Companys historical experiences.
Investments
The Companys investments in debt and equity securities are classified as available-for-sale and are comprised primarily of money market funds and auction rate securities.
Investment securities are recorded as required by Accounting Standard Codification (ASC) 320, Investments-Debt and Equity Securities. These investments 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 a separate component of shareholders equity in the Companys Consolidated Balance Sheets. Gains and losses are recognized when realized in the Companys Consolidated Statements of Comprehensive Income. 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 (first in, first out) or market. 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 inventories are taken at each of the Companys retail stores at least once a year by an independent inventory service company. Additional store-level physical inventories are taken by the service companies from time to time based on a particular stores performance and/or book inventory balance. 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 Companys policy is to analyze all items held in inventory that would not be sold through at current sales rates over a twenty-four month period to determine what merchandise should be reserved for as excess and obsolete. 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.
In order to obtain inventory at attractive prices, the Company takes advantage of large volume purchases, closeouts and other similar purchase opportunities. As such, the Companys inventory fluctuates from period to period and the inventory balances vary based on the timing and availability of such opportunities.
At times, the Company also makes large block purchases of inventory that it plans to sell over a period of longer than twelve months. As of September 29, 2012 and March 31, 2012, the Company held inventory of specific products identified as expected to sell over a period that exceeds twelve months in the amounts of approximately $7.2 million and $6.4 million, respectively, 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 |
|
5 years |
Transportation equipment |
|
3-5 years |
Information technology systems |
|
For major corporate systems, estimated useful life up to 7 years; for functional stand alone systems, estimated useful life up to 5 years |
The Companys policy is to capitalize expenditures that materially increase asset lives and expense ordinary repairs and maintenance as incurred.
Long-Lived Assets
In accordance with ASC 360, Property, Plant and Equipment, the Company assesses the impairment of long-lived assets quarterly or when events or changes in circumstances indicate that the carrying value may not be recoverable. 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 Companys use of the acquired assets or the strategy for the Companys overall business; and (3) significant changes in the Companys 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. 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 each of second quarter and first half of fiscal 2013 and fiscal 2012, the Company did not record any asset impairment charges. During the second quarter and first half of fiscal 2012, the Company did not record any asset impairment charges.
Goodwill and Other Intangible Assets
In connection with the Merger purchase price allocation, the fair values of long-lived and intangible assets have been determined based upon assumptions related to the future cash flows, discount rates and asset lives utilizing currently available information, and in some cases were obtained from independent professional valuation experts. Under ASC 350, Intangibles Goodwill and Other 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. Under Accounting Standards Update (ASU) 2011-8 (effective December 15, 2011), which amends the guidance in ASC 350-20 on testing goodwill for impairment, entities testing goodwill for impairment have 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 entities determine, 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 ASU does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test goodwill annually for impairment. In addition, the ASU does not amend the requirement to test goodwill for impairment between annual tests if events or circumstances warrant; however, it does revise the examples of events and circumstances that an entity should consider.
The Company will perform the qualitative assessment for impairment in January 2013, during the fourth quarter of fiscal 2013, and annually thereafter. In the event that the qualitative assessment indicates that goodwill has been impaired, then the two-step test is used to identify the potential impairment and to measure the amount of impairment, if any. 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 units goodwill with the carrying amount of goodwill. Management has determined that the Companys has two reporting units, the wholesale reporting unit and the retail reporting unit.
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.
Derivatives
The Company accounts for derivative financial instruments in accordance with accounting ASC 815, Derivatives and Hedging. All financial instrument positions taken by the Company are intended to be used to manage risks associated with interest rate exposures.
The Companys 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, 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 are reclassified to earnings in the period the hedged item affects earnings. Any ineffectiveness is recognized in earnings in the current period.
Purchase Accounting
Under ASC 805, Business Combinations (ASC 805) the Companys assets and liabilities have been accounted for 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 utilizes the liability method of accounting for income taxes as set forth in ASC 740, Income Taxes (ASC 740). 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. ASC 740 also requires that deferred tax assets be 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 Companys ability to realize deferred tax assets is assessed throughout the year and a valuation allowance is established accordingly. ASC 740 requires the Company to recognize in the consolidated financial statements 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.
Stock-Based Compensation
The Company accounts for stock-based compensation expense under the fair value recognition provisions of ASC 718, Compensation-Stock Compensation (ASC 718). ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. 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. The Company estimates the fair value for each option award as of the date of grant using the Black-Scholes option pricing model. 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.
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 Companys distribution facility.
The Company has a gift card program. The Company does not charge administrative fees on gift cards and the Companys 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. 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 vendors products are included as a reduction of cost of sales when such contractual milestones are reached in accordance with ASC 605-50-25, Revenue Recognition-Customer Payments and Incentives-Recognition. 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 and distribution warehouse costs in its cost of sales. Due to this classification, the Companys gross profit rates may not be comparable to those of other retailers that include costs related to their distribution network in cost of sales.
Operating Expenses
Selling, general and administrative expenses include purchasing, receiving, inspection and warehouse costs, the costs of selling merchandise in stores (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 and associated costs, occupancy, advertising, professional fees and other corporate administrative 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.
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) in accordance with ASC 420, Exit or Disposal Cost Obligations (ASC 420). 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, as prescribed by ASC 420. Key assumptions in calculating the liability include the timeframe expected to terminate lease agreements, estimates related to the sublease potential of closed locations and estimates of other related exit costs. If actual timing and potential termination costs or realization of sublease income differ from the Companys estimates, the resulting liabilities could vary from recorded amounts. These liabilities are reviewed periodically and adjusted when necessary.
During the first half of 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 lease terms (12-15 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 of both estimated known and incurred but not reported insurance claims based on reported claims and actuarial valuations of estimated future costs of known and incurred but not yet reported claims. Should an amount of claims greater than anticipated occur, the liability recorded may not be sufficient and additional workers compensation costs, which may be significant, could be incurred. The Company has not discounted the projected future cash outlays for the time value of money for claims and claim-related costs when establishing its workers compensation liability in its financial reports for September 29, 2012 and March 31, 2012.
Self-Insured Health Insurance Liability
During the second quarter of fiscal 2012, the Company began self-insuring 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 related to the opening of new retail stores.
Advertising
The Company expenses advertising costs as incurred except the costs associated with television advertising, which are expensed the first time the advertising takes place. Advertising expenses were $1.3 million and $1.4 million for the second quarter of fiscal 2013 and 2012, respectively. Advertising expenses were $2.6 million and $2.7 million for the first half of fiscal 2013 and 2012, respectively.
Fair Value of Financial Instruments
The Companys 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. See Note 9 for further discussion of the fair value of debt.
The Company complies with the provisions of ASC 820, Fair Value Measurements and Disclosures (ASC 820). ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements required under other accounting pronouncements. ASC 820-10-35, Subsequent Measurement (ASC 820-10-35), clarifies that 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. ASC 820-10-35 also requires that a fair value measurement 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. The Company also follows ASC 825, Financial Instruments, to expand required disclosures.
Comprehensive Income
ASC 220, Comprehensive Income establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. Accumulated other comprehensive income includes unrealized gains or losses on investments and interest rate derivatives designated as cash flow hedges.
2. The Merger
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 contributions of $635.9 million from the Sponsors and the Rollover Investors.
The Merger was accounted for as a business combination in accordance with ASC 805 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 Facility |
|
$ |
525,000 |
|
Proceeds from Senior Notes |
|
250,000 |
| |
Proceeds from ABL Facility |
|
10,000 |
| |
Proceeds from equity contributions |
|
535,900 |
| |
Rollover equity from the Rollover Investors |
|
100,000 |
| |
Cash on hand |
|
212,575 |
| |
Total sources |
|
$ |
1,633,475 |
|
Uses:
Equity purchase price |
|
$ |
1,577,563 |
|
OID and other debt issuance costs |
|
41,911 |
| |
Cash to balance sheet |
|
14,001 |
| |
Total uses |
|
$ |
1,633,475 |
|
Acquisition Accounting
In connection with the purchase price allocation, estimates of the fair values of long-lived and intangible assets have been determined based upon assumptions related to the future cash flows, discount rates and asset lives utilizing currently available information, and in some cases, preliminary valuation results from independent valuation specialists. Purchase accounting adjustments have been 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.
The allocation of purchase price was as follows (in thousands):
Purchase price |
|
$ |
1,577,563 |
|
Less: net assets acquired |
|
741,254 |
| |
Preliminary excess of purchase price over book value of net assets acquired |
|
$ |
836,309 |
|
|
|
|
| |
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 |
) | |
|
|
|
| |
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 tax asset |
|
$ |
(249,485 |
) |
|
|
|
| |
Residual goodwill (1) |
|
$ |
471,513 |
|
|
|
|
| |
Total allocated excess purchase price |
|
$ |
836,309 |
|
(1) The Company does not expect any of the residual goodwill to be tax deductible. 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 one-time legal, financial advisory, accounting, and other merger related costs of $10.6 million for the period January 15, 2012 to March 31, 2012 and $15.2 million for the period April 3, 2011 to January 14, 2012.
3. Goodwill and Other Intangibles
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 as of September 29, 2012 and March 31, 2012 (in thousands):
|
|
As of September 29, 2012 |
|
As of March 31, 2012 |
| ||||||||||||||||||
|
|
Amortization |
|
Gross |
|
Accumulated |
|
Net |
|
Amortization |
|
Gross |
|
Accumulated |
|
Net |
| ||||||
Indefinite lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Goodwill |
|
|
|
$ |
471,513 |
|
$ |
|
|
$ |
471,513 |
|
|
|
$ |
471,513 |
|
$ |
|
|
$ |
471,513 |
|
Trade name |
|
|
|
410,000 |
|
|
|
410,000 |
|
|
|
410,000 |
|
|
|
410,000 |
| ||||||
Total indefinite lived intangible assets |
|
|
|
$ |
881,513 |
|
$ |
|
|
$ |
881,513 |
|
|
|
$ |
881,513 |
|
$ |
|
|
$ |
881,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Finite lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Trademarks |
|
20 |
|
$ |
2,000 |
|
$ |
(71 |
) |
$ |
1,929 |
|
20 |
|
$ |
2,000 |
|
$ |
(21 |
) |
$ |
1,979 |
|
Bargain Wholesale customer relationships |
|
12 |
|
20,000 |
|
(1,186 |
) |
18,814 |
|
12 |
|
20,000 |
|
(353 |
) |
19,647 |
| ||||||
Favorable leases |
|
2 to 17 |
|
46,723 |
|
(3,069 |
) |
43,654 |
|
2 to 17 |
|
46,723 |
|
(915 |
) |
45,808 |
| ||||||
Total finite lived intangible assets |
|
|
|
68,723 |
|
(4,326 |
) |
64,397 |
|
|
|
68,723 |
|
(1,289 |
) |
67,434 |
| ||||||
Total goodwill and other intangible assets |
|
|
|
$ |
950,236 |
|
$ |
(4,326 |
) |
$ |
945,910 |
|
|
|
$ |
950,236 |
|
$ |
(1,289 |
) |
$ |
948,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Trade name |
|
|
|
$ |
410,000 |
|
$ |
|
|
$ |
410,000 |
|
|
|
$ |
410,000 |
|
$ |
|
|
$ |
410,000 |
|
Trademarks |
|
|
|
2,000 |
|
(71 |
) |
1,929 |
|
|
|
2,000 |
|
(21 |
) |
1,979 |
| ||||||
Bargain Wholesale customer relationships |
|
|
|
20,000 |
|
(1,186 |
) |
18,814 |
|
|
|
20,000 |
|
(353 |
) |
19,647 |
| ||||||
Favorable leases |
|
|
|
46,723 |
|
(3,069 |
) |
43,654 |
|
|
|
46,723 |
|
(915 |
) |
45,808 |
| ||||||
Total intangible assets |
|
|
|
$ |
478,723 |
|
$ |
(4,326 |
) |
$ |
474,397 |
|
|
|
$ |
478,723 |
|
$ |
(1,289 |
) |
$ |
477,434 |
|
|
|
As of September 29, 2012 |
|
As of March 31, 2012 |
| ||||||||||||||||||
|
|
Amortization |
|
Gross |
|
Accumulated |
|
Net |
|
Amortization |
|
Gross |
|
Accumulated |
|
Net |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Unfavorable leases |
|
2 to 18 |
|
$ |
19,835 |
|
$ |
(2,939 |
) |
$ |
16,896 |
|
2 to 18 |
|
$ |
19,835 |
|
$ |
(876 |
) |
$ |
18,959 |
|
4. Property and Equipment, net
The following table provides details of property and equipment (in thousands):
|
|
September 29, 2012 |
|
March 31, 2012 |
| ||
Land |
|
$ |
157,353 |
|
$ |
156,137 |
|
Buildings |
|
88,881 |
|
89,110 |
| ||
Buildings improvements |
|
61,698 |
|
59,375 |
| ||
Leasehold improvements |
|
97,815 |
|
92,909 |
| ||
Fixtures and equipment |
|
65,662 |
|
54,659 |
| ||
Transportation equipment |
|
6,998 |
|
6,489 |
| ||
Construction in progress |
|
23,695 |
|
29,271 |
| ||
|
|
|
|
|
| ||
Total property and equipment |
|
502,102 |
|
487,950 |
| ||
Less: accumulated depreciation and amortization |
|
(39,028 |
) |
(11,425 |
) | ||
Property and equipment, net |
|
$ |
463,074 |
|
$ |
476,525 |
|
5. Investments
The following tables summarize the investments in marketable securities (in thousands):
|
|
September 29, 2012 |
| ||||||||||
|
|
Cost or |
|
Gross |
|
Gross |
|
Estimated |
| ||||
Available for sale: |
|
|
|
|
|
|
|
|
| ||||
Money market funds |
|
$ |
1 |
|
$ |
|
|
$ |
|
|
$ |
1 |
|
Auction rate securities |
|
1,566 |
|
37 |
|
|
|
1,603 |
| ||||
Total |
|
$ |
1,567 |
|
$ |
37 |
|
$ |
|
|
$ |
1,604 |
|
|
|
|
|
|
|
|
|
|
| ||||
Reported as: |
|
|
|
|
|
|
|
|
| ||||
Short-term investments |
|
|
|
|
|
|
|
$ |
1,604 |
| |||
Long-term investments in marketable securities |
|
|
|
|
|
|
|
|
| ||||
Total |
|
|
|
|
|
|
|
$ |
1,604 |
|
|
|
March 31, 2012 |
| ||||||||||
|
|
Cost or |
|
Gross |
|
Gross |
|
Estimated |
| ||||
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 the Company holds have historically been considered short-term debt instruments that provided liquidity through a Dutch auction process in which interest rates reset every 7 to 35 days. Beginning in February 2008, auctions of the Companys auction rate securities failed to sell all securities offered for sale. Consequently, the principal associated with these failed auctions will not be accessible until a successful auction occurs, a buyer is found outside of the auction process, the issuers redeem the securities, the issuers establish a different form of financing to replace these securities or final payments come due to long-term contractual maturities. For each unsuccessful auction, the interest rate moves to a rate defined for each security. Currently, the Company intends to liquidate its remaining auction rate securities within one year. Accordingly, the Company has included $1.6 million and $2.0 million of its auction rate securities in current assets on the Companys balance sheets as of September 29, 2012 and March 31, 2012, respectively.
The following table summarizes the maturities of marketable fixed-income securities classified as available for sale as of September 29, 2012 (in thousands):
|
|
September 29, 2012 |
| ||||
|
|
Amortized |
|
Estimated Fair |
| ||
Due within one year |
|
$ |
1,566 |
|
$ |
1,603 |
|
|
|
$ |
1,566 |
|
$ |
1,603 |
|
There was no realized gain or losses from the sale of marketable securities for the second quarter of fiscal 2013 and there were less than $0.1 million realized losses from the sale of marketable securities for the first half of fiscal 2013. Realized gains from the sale of marketable securities for the second quarter and the first half of fiscal 2012 were less than $0.1 million. There were no impairment charges related to credit losses in the second quarter and the first half of fiscal 2013. The Company recorded an impairment charge related to credit losses on its auction rate securities of less than $0.1 million during the second quarter and first half of fiscal 2012.
Proceeds from the sales of marketable securities were $1.1 million and $2.5 million for the second quarter and first half of fiscal 2013, respectively. Proceeds from the sales of marketable securities were $2.3 million and $48.2 million for the second quarter and first half of fiscal 2012, respectively.
The Company did not have any available-for-sale securities with unrealized losses as of September 29, 2012 and March 31, 2012.
During the second quarter and first half of fiscal 2013, the Company did not have any non-credit related other-than-temporary losses on any of its securities. Accordingly, the Companys other comprehensive income does not include any charges related to the other-than-temporary non-credit portion of its securities.
6. Comprehensive Income
The following table sets forth the calculation of comprehensive income, net of tax effects for the periods indicated (in thousands):
|
|
For the Second Quarter Ended |
|
For the First Half Ended |
| ||||||||||
|
|
September 29, |
|
|
October 1, |
|
September 29, |
|
|
October 1, |
| ||||
|
|
(Successor) |
|
|
(Predecessor) |
|
(Successor) |
|
|
(Predecessor) |
| ||||
Net income |
|
$ |
21 |
|
|
$ |
15,114 |
|
$ |
5,123 |
|
|
$ |
32,797 |
|
Unrealized holding gains (losses) on marketable securities, net of tax effects of $3, $(94), $3 and $(92)for the second quarter and first half of fiscal 2013 and 2012, respectively |
|
4 |
|
|
(142 |
) |
4 |
|
|
(138 |
) | ||||
Unrealized losses on interest rate cash flow hedge, net of tax effects of $(315), $0, $(678) and $0 for the second quarter and first half of fiscal 2013 and 2012, respectively |
|
(473 |
) |
|
|
|
(1,017 |
) |
|
|
| ||||
Reclassification adjustment, net of tax effects of $0, $5, $(3) and $(12) for the second quarter and first half of fiscal 2013 and 2012, respectively |
|
|
|
|
7 |
|
(5 |
) |
|
(18 |
) | ||||
Total unrealized losses, net |
|
(469 |
) |
|
(135 |
) |
(1,018 |
) |
|
(156 |
) | ||||
Total comprehensive (loss) income |
|
$ |
(448 |
) |
|
$ |
14,979 |
|
$ |
4,105 |
|
|
$ |
32,641 |
|
7. Debt
Short and long-term debt consists of the following (in thousands):
|
|
September 29, |
|
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 $9,504 and $10,086 as of September 29, 2012 and March 31, 2012, respectively |
|
511,565 |
|
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 |
|
761,565 |
|
763,601 |
| ||
Less: current portion of long-term debt |
|
5,237 |
|
5,250 |
| ||
Long-term debt, net of current portion |
|
$ |
756,328 |
|
$ |
758,351 |
|
As of September 29, 2012 and March 31, 2012, the deferred financing costs are as follows (in thousands):
|
|
September 29, 2012 |
|
March 31, 2012 |
| ||||||||||||||
Deferred financing costs |
|
Gross Carrying |
|
Accumulated |
|
Net |
|
Gross Carrying |
|
Accumulated |
|
Net |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
ABL Facility |
|
$ |
3,078 |
|
$ |
(438 |
) |
$ |
2,640 |
|
$ |
3,078 |
|
$ |
(130 |
) |
$ |
2,948 |
|
First Lien Term Loan Facility |
|
27,802 |
|
(2,272 |
) |
25,530 |
|
16,572 |
|
(653 |
) |
15,919 |
| ||||||
Senior Notes |
|
11,761 |
|
(697 |
) |
11,064 |
|
11,761 |
|
(228 |
) |
11,533 |
| ||||||
Total deferred financing costs |
|
$ |
42,641 |
|
$ |
(3,407 |
) |
$ |
39,234 |
|
$ |
31,411 |
|
$ |
(1,011 |
) |
$ |
30,400 |
|
On January 13, 2012, in connection with the Merger, the Company 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 the ABL Facility, and (b) an aggregate principal amount under the First Lien Term Loan Facility of $525 million.
First Lien Term Loan Facility
The First Lien Term Loan Facility provides for $525 million of borrowings (which may be increased by up to $150.0 million in certain circumstances). All obligations under the First Lien Term Loan Facility are guaranteed by Parent and the Companys direct wholly owned subsidiary (together, the Credit Facilities Guarantors). In addition, the First Lien Term Loan Facility is secured by pledges of certain of the Companys 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), with the balance due on the maturity date, January 13, 2019. Borrowings under the First Lien Term Loan Facility bear interest at an annual rate equal to an applicable margin plus, at the Companys option, (A) a Base Rate determined by reference to the highest of (a) the interest rate in effect determined by the administrative agent as Prime Rate (3.25% as of September 29, 2012), (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) plus 1.00%, or (B) 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, net of refinancing costs of $11.2 million. The amendment, among other things, decreased the applicable margin from the London Interbank Offered Rate (LIBOR) plus 5.50% (or base rate plus 4.50%) to LIBOR plus 4.00% (or base rate plus 3.00%) and decreased the LIBOR floor from 1.50% to 1.25%. The maximum capital expenditures covenant in the First Lien Term Loan Facility was also amended to permit an additional $5 million in capital expenditures each year throughout the term of the First Lien Term Loan Facility.
As of September 29, 2012, the interest rate charged on the First Lien Term Loan Facility was 5.25% (1.25% Eurocurrency rate, plus the Eurocurrency loan margin of 4.00%). As of September 29, 2012, the principal amount outstanding under the First Lien Term Loan Facility was $511.6 million.
The First Lien Term Loan Facility includes restrictions on the Companys ability and the ability of the Parent and certain of the Companys subsidiaries to, incur or guarantee additional indebtedness, pay dividends on, or redeem or repurchase, the Companys capital stock, make certain acquisitions or investments, materially change the Companys 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 September 29, 2012, the Company was in compliance with the 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 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 Companys 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 September 29, 2012 was a liability of $2.3 million. See Note 8 for more information on the Companys interest rate cap and interest rate swap agreements.
In addition, during the first quarter of fiscal 2013, the Company entered into an interest rate cap agreement. The interest rate cap agreement limits the Companys 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.
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. All obligations under the ABL Facility are guaranteed by the Company, its immediate Parent and the Companys direct wholly owned subsidiary (together, the ABL Guarantors). The ABL Facility is secured by substantially all of the Companys assets and the assets of the ABL Guarantors.
Borrowings under the ABL Facility bear interest for an initial period until June 30, 2012 at an applicable margin plus, at the Companys 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 the Companys option, on (a) LIBOR plus an applicable margin to be determined (1.75% as of September 29, 2012) or (b) the determined base rate (prime rate) plus an applicable margin to be determined (0.75% at September 29, 2012), in each case based on a pricing grid depending on average daily excess availability for the most recently ended quarter.
In addition to paying interest on outstanding principal under the Credit Facilities, the Company was required to pay a commitment fee to the lenders under the ABL Facility on unutilized commitments at a rate of 0.375% for the period from the date of the Merger until June 30, 2012. Thereafter, the commitment fee will be adjusted at the beginning of each quarter based upon the average historical excess availability of the prior quarter (0.50% for the quarter ended September 29, 2012). The Company must also pay customary letter of credit fees and agency fees.
As of September 29, 2012 and March 31, 2012, the Company had no outstanding borrowings under the ABL Facility, and availability under the ABL Facility, subject to the borrowing base was $159.7 million at September 29, 2012.
The ABL Facility includes restrictions on the Companys ability, and the ability of the Parent and certain of the Companys subsidiaries to, incur or guarantee additional indebtedness, pay dividends on, or redeem or repurchase, our capital stock, make certain 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. The ABL Facility was amended on April 4, 2012 to permit an additional $5 million in capital expenditures for each year during the term of the ABL Facility. As of September 29, 2012, the Company was in compliance with the terms of the ABL Facility.
Senior Notes
On December 29, 2011, the Company issued $250 million of Senior Notes. At March 31, 2012, the Senior Notes were guaranteed by each of the Companys direct wholly owned subsidiaries, 99 Cents Only Stores Texas, Inc. and 99 Cents Only Stores (Nevada). In September 2012, 99 Cents Only Stores (Nevada) corporation, an inactive wholly owned subsidiary of the Company, was dissolved. As of September 29, 2012, the Senior Notes are guaranteed by, 99 Cents Only Stores Texas, Inc. (the Senior Notes Guarantor).
In connection with the issuance of the Senior Notes, the Company entered into a registration rights agreement that requires the Companys 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 commenced on October 9, 2012 and 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 applicable based on the date of redemption.
The Senior Notes are (i) junior in right of payment to all of the Companys existing and future indebtedness and that of the Senior Notes Guarantor; (ii) unconditionally guaranteed on a senior unsecured unsubordinated basis by the Senior Notes Guarantor; and (iii) junior to the liabilities of its 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 Companys 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, 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.
As of September 29, 2012, the Company was in compliance with the terms of the Indenture.
Interest paid for the second quarter of fiscal 2013 and 2012, was $6.6 million and less than $0.1 million, respectively. Interest paid for the first half of fiscal 2013 and 2012, was $26.1 million and less than $0.1 million, respectively.
The significant components of interest expense are as follows (in thousands):
|
|
For the Second Quarter Ended |
|
For the First Half Ended |
| ||||||||||
|
|
September 29, |
|
|
October 1, |
|
September 29, |
|
|
October 1, |
| ||||
|
|
(Successor) |
|
|
(Predecessor) |
|
(Successor) |
|
|
(Predecessor) |
| ||||
First Lien Term Loan Facility |
|
$ |
6,932 |
|
|
$ |
|
|
$ |
14,111 |
|
|
$ |
|
|
ABL Facility |
|
221 |
|
|
|
|
383 |
|
|
|
| ||||
Senior Notes |
|
6,951 |
|
|
|
|
13,903 |
|
|
|
| ||||
Amortization of deferred financing costs and OID |
|
1,539 |
|
|
|
|
2,978 |
|
|
|
| ||||
Other interest expense |
|
374 |
|
|
34 |
|
658 |
|
|
335 |
| ||||
Interest expense |
|
$ |
16,017 |
|
|
$ |
34 |
|
$ |
32,033 |
|
|
$ |
335 |
|
8. 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 Companys floating rate indebtedness. The cap agreement, effective in May 2012, hedges a portion of contractual floating rate interest commitments through the expiration of the agreement in November 2013. Pursuant to the agreement, the Company has 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 exceeds 3.00% the Company will pay interest at the capped rate. In the event LIBOR is less than 3.00%, the Company will pay interest at the prevailing LIBOR rate. In the first half of fiscal 2013, the Company paid interest at the prevailing LIBOR rate.
The interest rate cap agreement has not been designated as a hedge for financial reporting purposes. Gains and losses on derivative instruments not designated as hedges are 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 Companys floating rate indebtedness once the Companys interest rate cap agreements expires. The swap agreement, effective November 2013, will hedge a portion of contractual floating rate interest commitments through the expiration of the agreements in May 2016. As a result of the agreement, the Companys effective fixed interest rate on the notional amount of floating rate indebtedness will be 1.36% plus an applicable margin of 4.00%.
The Company designated the interest rate swap agreement as a cash flow hedge. The interest 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 income 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 income or loss to interest expense.
Fair Value
The fair values of the interest rate cap and swap agreements are estimated using industry standard valuation models using market-based observable inputs, including interest rate curves (level 2). A summary of the recorded amounts included in the consolidated balance sheet is as follows (in thousands):
|
|
September 29, |
|
March 31, |
| ||
|
|
|
|
|
| ||
Derivatives designated as cash flow hedging instruments |
|
|
|
|
| ||
Interest rate swap (included in other liabilities) |
|
$ |
2,337 |
|
$ |
|
|
Accumulated other comprehensive loss, net of tax (included in stockholders equity) |
|
$ |
1,017 |
|
$ |
|
|
Derivatives not designated as hedging instruments |
|
|
|
|
| ||
Interest rate cap (included in other current assets) |
|
$ |
27 |
|
$ |
|
|
A summary of recorded amounts included in the consolidated statements of comprehensive income is as follows (in thousands):
|
|
For the Second Quarter Ended |
|
For the First Half Ended |
| ||||||||||
|
|
September 29, |
|
|
October 1, |
|
September 29, |
|
|
October 1, |
| ||||
|
|
(Successor) |
|
|
(Predecessor) |
|
(Successor) |
|
|
(Predecessor) |
| ||||
Derivatives designated as cash flow hedging instruments: |
|
|
|
|
|
|
|
|
|
|
| ||||
Loss related to effective portion of derivative recognized in OCI |
|
$ |
473 |
|
|
$ |
|
|
$ |
1,017 |
|
|
$ |
|
|
Loss related to ineffective portion of derivative recognized in interest expense |
|
$ |
366 |
|
|
$ |
|
|
$ |
642 |
|
|
$ |
|
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
| ||||
Loss recognized in other expense |
|
$ |
3 |
|
|
$ |
|
|
$ |
23 |
|
|
$ |
|
|
9. Fair Value of Financial Instruments
The Company complies with ASC 820-10-35, Fair Value Measurement and Disclosures, which establishes 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 under ASC 820-10-35 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 utilizes 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 as of September 29, 2012 (in thousands):
|
|
September 29, 2012 |
| ||||||||||
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
| ||||
ASSETS |
|
|
|
|
|
|
|
|
| ||||
Money market funds |
|
$ |
1 |
|
$ |
1 |
|
$ |
|
|
$ |
|
|
Auction rate securities |
|
1,603 |
|
|
|
|
|
1,603 |
| ||||
Total available-for-sale securities |
|
$ |
1,604 |
|
$ |
1 |
|
$ |
|
|
$ |
1,603 |
|
Other current assets interest rate cap |
|
$ |
27 |
|
$ |
|
|
$ |
27 |
|
$ |
|
|
Other assets assets that fund deferred compensation |
|
$ |
5,195 |
|
$ |
5,195 |
|
$ |
|
|
$ |
|
|
LIABILITES |
|
|
|
|
|
|
|
|
| ||||
Other long-term liabilities interest rate swap |
|
$ |
2,337 |
|
$ |
|
|
$ |
2,337 |
|
$ |
|
|
Other long-term liabilities deferred compensation |
|
$ |
5,195 |
|
$ |
5,195 |
|
$ |
|
|
$ |
|
|
Level 1 investments include money market funds. 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 $5.2 million of deferred compensation assets that fund the liabilities related to the Companys 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 cap and swap agreements that are estimated using industry standard valuation models using market-based observable inputs, including interest rate curves.
Level 3 investments include auction rate securities of $1.6 million. The valuation of the auction rate securities is based on Level 3 unobservable inputs which consist of recommended fair values provided by Houlihan Capital Advisors, LLC, an independent securities valuation firm.
The Company did not have any transfers of investments in and out of Levels 1 and 2 during the second quarter and the first half of fiscal 2013.
The following table summarizes, by level within the fair value hierarchy, the financial assets and liabilities recorded at fair value on a recurring basis as of March 31, 2012 (in thousands):
|
|
March 31, 2012 |
| ||||||||||
|
|
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 |
|
$ |
|
|
$ |
|
|
LIABILITES |
|
|
|
|
|
|
|
|
| ||||
Other long-term liabilities deferred compensation |
|
$ |
5,136 |
|
$ |
5,136 |
|
$ |
|
|
$ |
|
|
Level 1 investments 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 million of deferred compensation assets that fund the liabilities related to the Companys deferred compensation, including investments in trust funds. The fair values of these funds are based on quoted market prices in an active market.
There were no Level 2 investments as of March 31, 2012.
Level 3 investments include auction rate securities of $2.0 million. The valuation of the auction rate securities is based on Level 3 unobservable inputs which consist of recommended fair values provided by Houlihan Capital Advisors, LLC, an independent securities valuation firm.
The following table summarizes the activity for the period of changes in fair value of the Companys Level 3 investments (in thousands):
|
|
Fair Value Measurements Using Significant Unobservable Inputs |
| ||||||||||||
|
|
For the Second Quarter Ended |
|
For the First Half Ended |
| ||||||||||
Auction Rate Securities |
|
September 29, 2012 |
|
|
October 1, 2011 |
|
September 29, 2012 |
|
|
October 1, 2011 |
| ||||
|
|
(Successor) |
|
|
(Predecessor) |
|
(Successor) |
|
|
(Predecessor) |
| ||||
Description |
|
|
|
|
|
|
|
|
|
|
| ||||
Beginning balance |
|
$ |
1,622 |
|
|
$ |
8,057 |
|
$ |
2,004 |
|
|
$ |
8,409 |
|
Transfers into Level 3 |
|
|
|
|
|
|
|
|
|
|
| ||||
Total realized/unrealized gains (loss): |
|
|
|
|
|
|
|
|
|
|
| ||||
Included in earnings |
|
|
|
|
(12 |
) |
(44 |
) |
|
3 |
| ||||
Included in other comprehensive loss |
|
7 |
|
|
39 |
|
(1 |
) |
|
24 |
| ||||
Purchases, redemptions and settlements: |
|
|
|
|
|
|
|
|
|
|
| ||||
Purchases |
|
|
|
|
|
|
|
|
|
|
| ||||
Redemptions |
|
(26 |
) |
|
(399 |
) |
(356 |
) |
|
(751 |
) | ||||
Ending balance |
|
$ |
1,603 |
|
|
$ |
7,685 |
|
$ |
1,603 |
|
|
$ |
7,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount of unrealized gains (losses) for the period included in other comprehensive loss attributable to the change in fair market value relating to assets still held at the reporting date |
|
$ |
7 |
|
|
$ |
39 |
|
$ |
7 |
|
|
$ |
24 |
|
In connection with the Merger, the Company entered into the Credit Facilities, including the ABL Facility of $175 million and the First Lien Term Loan Facility of $525 million, and also issued $250 million of the Senior Notes with a coupon rate of 11% in a private placement. The outstanding debt under the Credit Facilities and the Senior Notes is recorded in the financial statements at historical cost, net of applicable unamortized discounts.
The Credit Facilities are tied directly to market rates and fluctuate as market rates change; as a result, the carrying value of the Credit Facilities approximates fair value as of September 29, 2012.
The Senior Notes are not tied to market rates and were sold in a private placement. Since there are no quoted prices in active markets, the fair value of the Senior Notes was estimated using a discounted cash flow analysis with Level 3 inputs. The fair value of the Senior Notes was estimated at $256.6 million, or $6.6 million greater than the carrying value, as of September 29, 2012. The fair value of the Senior Notes was estimated at $259.3 million, or $9.3 million greater than the carrying value, as of March 31, 2012.
See Note 7 for more information on the Companys debt.
10. Stock-Based Compensation
Successor stock-based compensation
Number Holdings, Inc. 2012 Equity Incentive Plan
On February 27, 2012, the board of directors of Parent adopted the Number Holdings, Inc. 2012 Stock Incentive Plan (the 2012 Plan), which authorizes equity awards to be granted for up to 74,603 shares of Class A common stock, par value $0.001 per share, of Parent (the Class A Common Stock) and 74,603 shares of Class B common stock, par value $0.001 per share, of Parent (the Class B Common Stock), of which, as of September 29, 2012, options for 52,680 shares of each Class 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. 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.
Accounting for stock-based compensation
The fair value of the option awards is recognized as compensation expense on a straight line basis over the requisite service period of the award, and is included in operating expense. 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 the second quarter and the first half of fiscal 2013, the Company incurred stock-based compensation expense of $0.8 million and $1.6 million, respectively.
The fair value of stock options was estimated at the date of grant using the Black-Scholes pricing model with the following assumptions:
|
|
For the First Half Ended |
| |
|
|
|
| |
Weighted-average fair value of options granted |
|
$ |
374.29 |
|
Risk free interest rate |
|
0.72 |
% | |
Expected life (in years) |
|
6.32 |
| |
Expected stock price volatility |
|
37.9 |
% | |
Expected dividend yield |
|
None |
| |
The risk-free interest rate is based on the U.S. treasury yield curve in effect at the time of grant with an equivalent remaining term. Expected life represents the estimated period of time until exercise and is calculated by using simplified method. Expected stock price volatility is based on average 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 Companys historical experience and future expectations.
As of September 29, 2012, there was $14.7 million of total unrecognized compensation cost related to non-vested options that is expected to be recognized over the remaining weighted-average vesting period of 4.3 years. No options were vested or exercised during the Successor period.
The following summarizes stock option activity in the first half of fiscal 2013:
|
|
Number of |
|
Weighted Average |
|
Weighted Average |
| |
Options outstanding at the beginning of the period |
|
50,905 |
|
$ |
1,000 |
|
|
|
Granted |
|
2,295 |
|
$ |
1,000 |
|
|
|
Exercised |
|
|
|
$ |
|
|
|
|
Cancelled |
|
(520 |
) |
$ |
1,000 |
|
|
|
Outstanding at the end of the period |
|
52,680 |
|
$ |
1,000 |
|
9.50 |
|
The following table summarizes the stock awards available for grant under the 2012 Plan:
|
|
Number of Shares |
|
Available for grant as of March 31, 2012 |
|
23,698 |
|
Authorized |
|
|
|
Granted |
|
(2,295 |
) |
Cancelled |
|
520 |
|
Available for grant at September 29, 2012 |
|
21,923 |
|
Predecessor Stock-Based Compensation
Prior to the Merger, the Company maintained the 99¢ Only Stores 2010 Equity Incentive Plan and the 1996 Equity Incentive Plan, as amended, which provided for the grant of options, performance stock units (PSUs) and other stock-based awards. All outstanding stock-based awards outstanding prior to the Merger became fully vested in connection with the Merger. For the second quarter and the first half of fiscal 2012, the Company incurred non-cash stock-based compensation expense related to Predecessor stock options, PSUs and restricted stock units of $0.6 million and $1.3 million, respectively.
11. Related-Party Transactions
See Note 8 to the Companys audited financial statements included in the Registration Statement for a description of the Companys related-party transactions.
12. Income Taxes
The effective income tax rate for the first half of 2013 was 37.3% compared to a rate of 38.0% for the first half of fiscal 2012. The decrease in the effective tax rate is primarily due to lower pretax income.
The Company files income tax returns in the U.S. federal jurisdiction and in various states. The Company is subject to examinations by the major tax jurisdictions in which it files for the tax years 2007 through 2010. The tax return for the period ended March 27, 2010 was chosen for examination by Internal Revenue Service. The Internal Revenue Service has completed its examination and has made no changes to the reported tax.
13. Commitments and Contingencies
Credit Facilities
The Companys credit facilities and commitments are discussed in detail in Note 7.
As of September 29, 2012, the Company also had a standby letter of credit for $0.4 million related to one of its leased properties, where the lessor is a named beneficiary in the event of a default by the Company, and potentially is entitled to draw on the letter of credit in the event of a specified default. The letter of credit expired in October 2012. The Company is in compliance with its lease terms and scheduled payments.
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.
At September 29, 2012 and March 31, 2012, the Company had recorded a liability $37.8 million and $39.0 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 September 29, 2012 and March 31, 2012 for workers compensation claims in Texas. The Company purchases workers compensation insurance coverage in Arizona and Nevada.
Self-Insured Health Insurance Liability
During the second quarter of fiscal 2012, the Company began self-insuring for a portion of its employee medical benefit claims. At September 29, 2012 and March 31, 2012, the Company had recorded a liability of $0.7 million and $0.9 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.
Legal Matters
Pricing Policy Matters
In July 2010, two actions captioned Phillip Kavis v. 99¢ Only Stores, et al. and Leonard Morales v. 99¢ Only Stores were filed in the Superior Court of California, Los Angeles County. In these now consolidated actions, Plaintiffs filed putative class action complaints against the Company claiming violations of Californias Unfair Competition Law (California Business & Professions Code Section 17200), False Advertising Law (California Business & Professions Code Section 17500), and Consumer Legal Remedies Act (California Civil Code Section 1770), as well as alleged intentional misrepresentation, negligent misrepresentation, breach of the implied covenant of good faith and fair dealing, and unjust enrichment, arising out of the Companys September 2008 change in pricing policy. Plaintiffs sought actual damages, restitution, including disgorgement of all profits and unjust enrichment allegedly obtained by the Company, statutory damages and civil penalties, equitable and injunctive relief, exemplary damages, prejudgment and post-judgment interest, and their attorneys fees and costs.
On May 11, 2012, the Court granted final approval of a settlement between the plaintiffs in these actions and the Company and entered judgment in accordance with the terms of the settlement. The settlement requires the Company to make certain postings in its stores and pay a total of $100,000 in attorneys fees, costs and plaintiff enhancements in exchange for a judgment extinguishing the claims relating to the revised pricing structure by all its customers in all states of operation from September 8, 2008 through the date of judgment. The settlement has become effective with no appeal, and the Company has made the required payments and implemented the required measures.
Wage and Hour Matters
Luis Palencia v. 99¢ Only Stores, Superior Court of the State of California, County of Sacramento. Plaintiff, a former assistant manager, who the Company employed from June 12, 2009 through September 9, 2009, filed this action in June 2010, asserting claims on behalf of himself and all others allegedly similarly situated under the California Labor Code for alleged unpaid overtime due to off the clock work, failure to pay minimum wage, failure to provide meal and rest periods, failure to provide proper wage statements, failure to pay wages timely during employment and upon termination and failure to reimburse business expenses. Mr. Palencia also asserted a derivative claim for unfair competition under the California Business and Professions Code. Mr. Palencia sought to represent three sub-classes: (i) an unpaid wages subclass of all non-exempt or hourly paid employees who worked for the Company in California within four years prior to the filing of the complaint until the date of certification, (ii) a non-compliant wage statement subclass of all non-exempt or hourly paid employees of the Company who worked in California and received a wage statement within one year prior to the filing of the complaint until the date of certification, and (iii) an unreimbursed business expenses subclass of all employees of the Company who paid for business-related expenses, including expenses for travel, mileage or cell phones in California within four years prior to the filing of the complaint until the date of certification. Plaintiff sought to recover alleged unpaid wages, interest, attorneys fees and costs, declaratory relief, restitution, statutory penalties and liquidated damages. He also sought to recover civil penalties as an aggrieved employee under the Private Attorneys General Act of 2004. Following a mediation of this matter, the parties entered into a settlement agreement on November 2, 2011. The Court granted preliminary approval of the settlement on April 20, 2012, and a final fairness hearing was set for September 14, 2012. The Company accrued $2.2 million in the period from April 3, 2011 to January 14, 2012 for expected payments in connection with the settlement. The settlement agreement was granted final approval by the court on September 14, 2012, and judgment was entered on October 11, 2012.
Sheridan Reed 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 in April 2010. He originally asserted claims on behalf of himself and all others allegedly similarly situated under the California Labor Code for alleged failure to pay overtime at the proper rate, failure to pay vested vacation wages, failure to pay wages timely upon termination of employment and failure to provide accurate wage statements. Mr. Reed also asserted a derivative claim for unfair competition under the California Business and Professions Code. In September 2010, Mr. Reed amended his complaint to seek civil penalties under the Private Attorneys General Act of 2004. Mr. Reed sought to represent four sub-classes: (i) all non-exempt or hourly current or former employees who worked for the Company in California within four years prior to the filing of the complaint until the date of certification who were paid bonuses, commissions or incentive wages, who worked overtime, and for whom the bonuses, commissions or incentive wages were not included as part of the regular rate of pay for overtime purposes, (ii) all non-exempt or hourly current or former employees who worked for the Company in California within four years prior to the filing of the complaint until the date of certification who earned vacation wages and were not paid their vested vacation
wages at the time of termination; (iii) all non-exempt or hourly current or former employees who worked for the Company in California within four years prior to the filing of the complaint until the date of certification who were not furnished a proper itemized wage statement; and (iv) all non-exempt or hourly current or former employees who worked for the Company in California within four years prior to the filing of the complaint until the date of certification who were not paid all wages due upon termination. Plaintiff sought to recover alleged unpaid wages, statutory penalties, interest, attorneys fees and costs, declaratory relief, injunctive relief and restitution. He also sought to recover civil penalties as an aggrieved employee under the Private Attorneys General Act of 2004. The parties executed a formal settlement agreement on April 5, 2012, which, if approved by the Court, will resolve the remainder of the lawsuit by settling the class-wide claims for failure to pay overtime at the proper rate, failure to pay wages timely upon termination of employment and failure to provide accurate wage statements. In addition, the settlement will resolve Plaintiffs individual claim for failure to pay vested vacation wages and includes a general release by Plaintiff in the Companys favor. The Company has accrued approximately $0.6 million for expected payments in connection with this settlement. The Court granted preliminary approval of the settlement on July 16, 2012, and a final fairness hearing was held on October 25, 2012. If the settlement agreement is not finally approved by the court, the Company cannot predict the outcome of this lawsuit.
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, attorneys fees and costs, declaratory relief, injunctive relief and restitution. On October 17, 2011, the Court heard the Companys 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. Allens motion and his First Amended Complaint was filed. On February 27, 2012, the Court denied the Companys 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 a minimal amount, which is subject to court approval. 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. Plaintiff Shelley Pickett filed a representative action complaint against the Company on November 4, 2011, 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. She seeks civil penalties of $100 to $200 per violation, per each pay period for each affected employee, and attorneys 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 Picketts 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 Picketts 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 Picketts petition and oral argument took place on February 1, 2012. On February 22, 2012, the Court of Appeal ruled in Plaintiff Picketts 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 Court denied the Companys 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 Picketts individual claims or, in the alternative, to strike the representative action allegations in the Complaint. The motion is expected to be heard on November 15, 2012, and a case management conference has been set for that date. The Company cannot predict the outcome of this lawsuit or the amount of potential loss, if any, the Company could face as a result of such lawsuit.
Regulatory Matters
The Company recently received Notices to Comply with hazardous waste and/or hazardous materials storage requirements 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. The Notices concern alleged non-compliance with a variety of hazardous waste and hazardous material regulatory requirements imposed under California law identified during recent compliance inspections and require corrective actions to be taken by certain dates set forth in the Notices. The Company is working 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 any of the alleged non-compliance. If penalties are demanded by these agencies in the future, the Company cannot predict the amount of penalties that may be sought.
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 Companys financial results for the period in which it is resolved, and litigation is inherently unpredictable, in managements opinion, none of these matters arising in the ordinary course of business is expected to have a material adverse effect on the Companys financial position, results of operations or overall liquidity.
14. Texas Market
As a result of the Companys 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. As described in prior Company filings, the Company had recorded impairment charges as well as lease termination costs related to closing some of these stores. As of March 31, 2012, the Company had an estimated lease termination costs accrual of approximately $1.1 million. During the first half of fiscal 2013, the Company increased the estimated lease termination costs accrual by approximately $0.2 million and paid approximately $0.3 million related to these costs. As of September 30, 2012, the remaining balance of the Companys estimated lease termination costs accrual was $1.0 million and is expected to be paid by the end of fiscal 2013. As of September 29, 2012, the Company operates 37 stores in Texas.
The following table summarizes the Texas store closures remaining obligations as of September 29, 2012 (in thousands):
|
|
Lease Termination |
| |
Remaining obligations as of March 31, 2012 |
|
$ |
1,079 |
|
Accretion expenses |
|
209 |
| |
Cash payments |
|
(283 |
) | |
Remaining obligations as of September 29, 2012 |
|
$ |
1,005 |
|
15. Assets Held for Sale
Assets held for sale during the quarter ended September 29, 2012 consisted of the vacant land in La Quinta, California and the vacant land in Rancho Mirage, California. The carrying value as of September 29, 2012 for the La Quinta land was $0.4 million and the Rancho Mirage land was $2.2 million.
In June 2012, the Company completed the sale of its Eagan, Minnesota warehouse that had been classified as held for sale. The warehouse had 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.
16. Other Current Liabilities
Other current liabilities as of September 29, 2012 and March 31, 2012 are as follows (in thousands):
|
|
September 29, |
|
March 31, |
| ||
Accrued interest |
|
$ |
9,903 |
|
$ |
7,898 |
|
Accrued legal reserves and fees |
|
5,400 |
|
4,866 |
| ||
Accrued utilities |
|
3,799 |
|
2,709 |
| ||
Accrued property taxes |
|
3,503 |
|
2,974 |
| ||
Accrued rent and related expenses |
|
3,186 |
|
2,830 |
| ||
Accrued outside services |
|
1,470 |
|
945 |
| ||
Accrued professional fees |
|
989 |
|
1,220 |
| ||
Accrued advertising |
|
470 |
|
577 |
| ||
Other |
|
6,602 |
|
6,550 |
| ||
Total other current liabilities |
|
$ |
35,322 |
|
$ |
30,569 |
|
17. New Authoritative Standards
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 income 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 Companys 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 Companys consolidated financial position or results of operations, other than presentation.
On July 27, 2012, the FASB issued ASU 2012-02, Testing Indefinite-Lived 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 Companys consolidated financial position or results of operation.
18. 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 Issuers existing and future restricted subsidiaries that are guarantors under the Issuers credit facilities and certain other indebtedness.
At March 31, 2012, the Senior Notes were guaranteed by each of the Companys 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) corporation was dissolved. As of September 29, 2012, the Senior Notes are guaranteed by 99 Cents Only Stores Texas, Inc. (the Subsidiary Guarantor).
The tables in the following pages present the condensed consolidating financial information for the Issuer and the Subsidiary Guarantors together with consolidating entries, as of and for the periods indicated. The consolidating financial information may not necessarily be indicative of the financial position, results of operations or cash flows had the Issuer, and the Subsidiary Guarantors operated as independent entities.
CONDENSED CONSOLIDATING BALANCE SHEETS
As of September 29, 2012
(Successor)
(In thousands)
(Unaudited)
|
|
Issuer |
|
Subsidiary |
|
Consolidating |
|
Consolidated |
| ||||
ASSETS |
|
|
|
|
|
|
|
|
| ||||
Current Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash |
|
$ |
34,636 |
|
$ |
7,431 |
|
$ |
|
|
$ |
42,067 |
|
Short-term investments |
|
1,604 |
|
|
|
|
|
1,604 |
| ||||
Accounts receivable, net |
|
1,298 |
|
122 |
|
|
|
1,420 |
| ||||
Income taxes receivable |
|
14,592 |
|
|
|
|
|
14,592 |
| ||||
Deferred income taxes |
|
25,843 |
|
|
|
|
|
25,843 |
| ||||
Inventories, net |
|
196,929 |
|
28,100 |
|
|
|
225,029 |
| ||||
Assets held for sale |
|
2,621 |
|
|
|
|
|
2,621 |
| ||||
Other |
|
13,704 |
|
970 |
|
|
|
14,674 |
| ||||
Total current assets |
|
291,227 |
|
36,623 |
|
|
|
327,850 |
| ||||
Property and equipment, net |
|
398,222 |
|
64,852 |
|
|
|
463,074 |
| ||||
Deferred financing costs, net |
|
39,234 |
|
|
|
|
|
39,234 |
| ||||
Equity investments in subsidiaries |
|
96,077 |
|
|
|
(96,077 |
) |
|
| ||||
Intangible assets, net |
|
471,495 |
|
2,902 |
|
|
|
474,397 |
| ||||
Goodwill |
|
471,513 |
|
|
|
|
|
471,513 |
| ||||
Deposits and other assets |
|
10,401 |
|
3,461 |
|
|
|
13,862 |
| ||||
Total assets |
|
$ |
1,778,169 |
|
$ |
107,838 |
|
$ |
(96,077 |
) |
$ |
1,789,930 |
|
|
|
|
|
|
|
|
|
|
| ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
| ||||
Current Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Accounts payable |
|
$ |
48,112 |
|
$ |
4,021 |
|
$ |
|
|
$ |
52,133 |
|
Payroll and payroll-related |
|
15,883 |
|
1,632 |
|
|
|
17,515 |
| ||||
Sales tax |
|
5,338 |
|
442 |
|
|
|
5,780 |
| ||||
Other accrued expenses |
|
30,806 |
|
4,516 |
|
|
|
35,322 |
| ||||
Workers compensation |
|
37,763 |
|
75 |
|
|
|
37,838 |
| ||||
Current portion of long-term debt |
|
5,237 |
|
|
|
|
|
5,237 |
| ||||
Current portion of capital lease obligation |
|
80 |
|
|
|
|
|
80 |
| ||||
Total current liabilities |
|
143,219 |
|
10,686 |
|
|
|
153,905 |
| ||||
Long-term debt |
|
756,328 |
|
|
|
|
|
756,328 |
| ||||
Unfavorable lease commitments, net |
|
16,084 |
|
812 |
|
|
|
16,896 |
| ||||
Deferred rent |
|
2,897 |
|
263 |
|
|
|
3,160 |
| ||||
Deferred compensation liability |
|
5,195 |
|
|
|
|
|
5,195 |
| ||||
Capital lease obligation, net of current portion |
|
313 |
|
|
|
|
|
313 |
| ||||
Long-term deferred income taxes |
|
214,195 |
|
|
|
|
|
214,195 |
| ||||
Other liabilities |
|
3,473 |
|
|
|
|
|
3,473 |
| ||||
Total liabilities |
|
1,141,704 |
|
11,761 |
|
|
|
1,153,465 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Shareholders Equity: |
|
|
|
|
|
|
|
|
| ||||
Preferred stock |
|
|
|
|
|
|
|
|
| ||||
Common stock |
|
|
|
|
|
|
|
|
| ||||
Additional paid-in capital |
|
637,630 |
|
99,942 |
|
(99,942 |
) |
637,630 |
| ||||
Accumulated deficit |
|
(170 |
) |
(3,865 |
) |
3,865 |
|
(170 |
) | ||||
Other comprehensive loss |
|
(995 |
) |
|
|
|
|
(995 |
) | ||||
Total shareholders equity |
|
636,465 |
|
96,077 |
|
(96,077 |
) |
636,465 |
| ||||
Total liabilities and shareholders equity |
|
$ |
1,778,169 |
|
$ |
107,838 |
|
$ |
(96,077 |
) |
$ |
1,789,930 |
|
CONDENSED CONSOLIDATING BALANCE SHEETS
As of March 31, 2012
(Successor)
(In thousands)
(Unaudited)
|
|
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 |
|
25,843 |
|
|
|
|
|
25,843 |
| ||||
Inventories, net |
|
187,234 |
|
27,084 |
|
|
|
214,318 |
| ||||
Assets held for sale |
|
6,849 |
|
|
|
|
|
6,849 |
| ||||
Other |
|
10,515 |
|
782 |
|
|
|
11,297 |
| ||||
Total current assets |
|
267,091 |
|
32,480 |
|
|
|
299,571 |
| ||||
Property and equipment, net |
|
408,456 |
|
68,069 |
|
|
|
476,525 |
| ||||
Deferred financing costs, net |
|
30,400 |
|
|
|
|
|
30,400 |
| ||||
Equity investments and advances to subsidiaries |
|
472,360 |
|
373,224 |
|
(845,584 |
) |
|
| ||||
Intangible assets, net |
|
477,492 |
|
(58 |
) |
|
|
477,434 |
| ||||
Goodwill |
|
471,513 |
|
|
|
|
|
471,513 |
| ||||
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 |
|
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 |
|
99¢ Only Stores
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Second Quarter Ended September 29, 2012
(Successor)
(In thousands)
(Unaudited)
|
|
Issuer |
|
Subsidiary |
|
Consolidating |
|
Consolidated |
| ||||
Net Sales: |
|
|
|
|
|
|
|
|
| ||||
Total sales |
|
$ |
359,352 |
|
$ |
34,011 |
|
$ |
|
|
$ |
393,363 |
|
Cost of sales (excluding depreciation and amortization expense shown separately below) |
|
220,996 |
|
21,703 |
|
|
|
242,699 |
| ||||
Gross profit |
|
138,356 |
|
12,308 |
|
|
|
150,664 |
| ||||
Selling, general and administrative expenses: |
|
|
|
|
|
|
|
|
| ||||
Operating expenses |
|
108,694 |
|
11,668 |
|
|
|
120,362 |
| ||||
Depreciation and amortization |
|
12,001 |
|
2,372 |
|
|
|
14,373 |
| ||||
Total selling, general and administrative expenses |
|
120,695 |
|
14,040 |
|
|
|
134,735 |
| ||||
Operating income (loss) |
|
17,661 |
|
(1,732 |
) |
|
|
15,929 |
| ||||
Other (income) expense: |
|
|
|
|
|
|
|
|
| ||||
Interest income |
|
(35 |
) |
|
|
|
|
(35 |
) | ||||
Interest expense |
|
16,017 |
|
|
|
|
|
16,017 |
| ||||
Equity in (earnings) loss of subsidiaries |
|
1,732 |
|
|
|
(1,732 |
) |
|
| ||||
Other |
|
3 |
|
|
|
|
|
3 |
| ||||
Total other expense, net |
|
17,717 |
|
|
|
(1,732 |
) |
15,985 |
| ||||
Loss before provision for income taxes |
|
(56 |
) |
(1,732 |
) |
1,732 |
|
(56 |
) | ||||
Benefit for income taxes |
|
(77 |
) |
|
|
|
|
(77 |
) | ||||
Net income (loss) |
|
$ |
21 |
|
$ |
(1,732 |
) |
$ |
1,732 |
|
$ |
21 |
|
Comprehensive loss |
|
$ |
(448 |
) |
$ |
|
|
$ |
|
|
$ |
(448 |
) |
99¢ Only Stores
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
First Half Ended September 29, 2012
(Successor)
(In thousands)
(Unaudited)
|
|
Issuer |
|
Subsidiary |
|
Consolidating |
|
Consolidated |
| ||||
Net Sales: |
|
|
|
|
|
|
|
|
| ||||
Total sales |
|
$ |
724,627 |
|
$ |
69,686 |
|
$ |
|
|
$ |
794,313 |
|
Cost of sales (excluding depreciation and amortization expense shown separately below) |
|
442,579 |
|
44,022 |
|
|
|
486,601 |
| ||||
Gross profit |
|
282,048 |
|
25,664 |
|
|
|
307,712 |
| ||||
Selling, general and administrative expenses: |
|
|
|
|
|
|
|
|
| ||||
Operating expenses |
|
215,724 |
|
23,409 |
|
|
|
239,133 |
| ||||
Depreciation and amortization |
|
23,537 |
|
5,029 |
|
|
|
28,566 |
| ||||
Total selling, general and administrative expenses |
|
239,261 |
|
28,438 |
|
|
|
267,699 |
| ||||
Operating income (loss) |
|
42,787 |
|
(2,774 |
) |
|
|
40,013 |
| ||||
Other (income) expense: |
|
|
|
|
|
|
|
|
| ||||
Interest income |
|
(215 |
) |
(44 |
) |
|
|
(259 |
) | ||||
Interest expense |
|
32,033 |
|
|
|
|
|
32,033 |
| ||||
Equity in (earnings) loss of subsidiaries |
|
2,730 |
|
|
|
(2,730 |
) |
|
| ||||
Other |
|
67 |
|
|
|
|
|
67 |
| ||||
Total other expense (income), net |
|
34,615 |
|
(44 |
) |
(2,730 |
) |
31,841 |
| ||||
Income (loss) before provision for income taxes |
|
8,172 |
|
(2,730 |
) |
2,730 |
|
8,172 |
| ||||
Provision for income taxes |
|
3,049 |
|
|
|
|
|
3,049 |
| ||||
Net income (loss) |
|
$ |
5,123 |
|
$ |
(2,730 |
) |
$ |
2,730 |
|
$ |
5,123 |
|
Comprehensive income |
|
$ |
4,105 |
|
$ |
|
|
$ |
|
|
$ |
4,105 |
|
99¢ Only Stores
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Second Quarter Ended October 1, 2011
(Predecessor)
(In thousands)
(Unaudited)
|
|
Issuer |
|
Subsidiary |
|
Consolidating |
|
Consolidated |
| ||||
Net Sales: |
|
|
|
|
|
|
|
|
| ||||
Total sales |
|
$ |
331,428 |
|
$ |
31,610 |
|
$ |
|
|
$ |
363,038 |
|
Cost of sales (excluding depreciation and amortization expense shown separately below) |
|
197,556 |
|
19,708 |
|
|
|
217,264 |
| ||||
Gross profit |
|
133,872 |
|
11,902 |
|
|
|
145,774 |
| ||||
Selling, general and administrative expenses: |
|
|
|
|
|
|
|
|
| ||||
Operating expenses |
|
103,022 |
|
11,345 |
|
|
|
114,367 |
| ||||
Depreciation and amortization |
|
6,212 |
|
778 |
|
|
|
6,990 |
| ||||
Total selling, general and administrative expenses |
|
109,234 |
|
12,123 |
|
|
|
121,357 |
| ||||
Operating income (loss) |
|
24,638 |
|
(221 |
) |
|
|
24,417 |
| ||||
Other (income) expense: |
|
|
|
|
|
|
|
|
| ||||
Interest income |
|
(60 |
) |
|
|
|
|
(60 |
) | ||||
Interest expense |
|
32 |
|
2 |
|
|
|
34 |
| ||||
Equity in (earnings) loss of subsidiaries |
|
223 |
|
|
|
(223 |
) |
|
| ||||
Other-than-temporary investment impairment due to credit losses |
|
31 |
|
|
|
|
|
31 |
| ||||
Other |
|
(19 |
) |
|
|
|
|
(19 |
) | ||||
Total other expense, net |
|
207 |
|
2 |
|
(223 |
) |
(14 |
) | ||||
Income (loss) before provision for income taxes |
|
24,431 |
|
(223 |
) |
223 |
|
24,431 |
| ||||
Provision for income taxes |
|
9,317 |
|
|
|
|
|
9,317 |
| ||||
Net income (loss) |
|
$ |
15,114 |
|
$ |
(223 |
) |
$ |
223 |
|
$ |
15,114 |
|
Comprehensive income |
|
$ |
14,979 |
|
$ |
|
|
$ |
|
|
$ |
14,979 |
|
99¢ Only Stores
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
First Half Ended October 1, 2011
(Predecessor)
(In thousands)
(Unaudited)
|
|
Issuer |
|
Subsidiary |
|
Consolidating |
|
Consolidated |
| ||||
Net Sales: |
|
|
|
|
|
|
|
|
| ||||
Total sales |
|
$ |
667,382 |
|
$ |
63,996 |
|
$ |
|
|
$ |
731,378 |
|
Cost of sales (excluding depreciation and amortization expense shown separately below) |
|
397,252 |
|
39,532 |
|
|
|
436,784 |
| ||||
Gross profit |
|
270,130 |
|
24,464 |
|
|
|
294,594 |
| ||||
Selling, general and administrative expenses: |
|
|
|
|
|
|
|
|
| ||||
Operating expenses |
|
205,832 |
|
22,101 |
|
|
|
227,933 |
| ||||
Depreciation and amortization |
|
12,150 |
|
1,553 |
|
|
|
13,703 |
| ||||
Total selling, general and administrative expenses |
|
217,982 |
|
23,654 |
|
|
|
241,636 |
| ||||
Operating income |
|
52,148 |
|
810 |
|
|
|
52,958 |
| ||||
Other (income) expense: |
|
|
|
|
|
|
|
|
| ||||
Interest income |
|
(202 |
) |
|
|
|
|
(202 |
) | ||||
Interest expense |
|
330 |
|
5 |
|
|
|
335 |
| ||||
Equity in (earnings) loss of subsidiaries |
|
(805 |
) |
|
|
805 |
|
|
| ||||
Other-than-temporary investment impairment due to credit losses |
|
31 |
|
|
|
|
|
31 |
| ||||
Other |
|
(62 |
) |
|
|
|
|
(62 |
) | ||||
Total other (income) expense, net |
|
(708 |
) |
5 |
|
805 |
|
102 |
| ||||
Income before provision for income taxes |
|
52,856 |
|
805 |
|
(805 |
) |
52,856 |
| ||||
Provision for income taxes |
|
20,059 |
|
|
|
|
|
20,059 |
| ||||
Net income |
|
$ |
32,797 |
|
$ |
805 |
|
$ |
(805 |
) |
$ |
32,797 |
|
Comprehensive income |
|
$ |
32,641 |
|
$ |
|
|
$ |
|
|
$ |
32,641 |
|
99¢ Only Stores
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
First Half Ended September 29, 2012
(Successor)
(In thousands)
(Unaudited)
|
|
Issuer |
|
Subsidiary |
|
Consolidating |
|
Consolidated |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
| ||||
Net cash provided by operating activities |
|
$ |
33,925 |
|
$ |
553 |
|
$ |
|
|
$ |
34,478 |
|
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| ||||
Purchases of property and equipment |
|
(18,553 |
) |
(1,308 |
) |
|
|
(19,861 |
) | ||||
Proceeds from sales of fixed assets |
|
11,549 |
|
|
|
|
|
11,549 |
| ||||
Purchases of investments |
|
(449 |
) |
|
|
|
|
(449 |
) | ||||
Proceeds from sale of investments |
|
2,470 |
|
|
|
|
|
2,470 |
| ||||
Investment in subsidiaries |
|
(4,213 |
) |
|
|
4,213 |
|
|
| ||||
Net cash provided by (used in) investing activities |
|
(9,196 |
) |
(1,308 |
) |
4,213 |
|
(6,291 |
) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| ||||
Payment of debt |
|
(2,618 |
) |
|
|
|
|
(2,618 |
) | ||||
Payment of debt issuance costs |
|
(11,230 |
) |
|
|
|
|
(11,230 |
) | ||||
Payments of capital lease obligation |
|
(38 |
) |
|
|
|
|
(38 |
) | ||||
Capital contributions |
|
|
|
4,213 |
|
(4,213 |
) |
|
| ||||
Net cash (used in) provided by financing activities |
|
(13,886 |
) |
4,213 |
|
(4,213 |
) |
(13,886 |
) | ||||
Net increase in cash |
|
10,843 |
|
3,458 |
|
|
|
14,301 |
| ||||
Cash beginning of period |
|
23,793 |
|
3,973 |
|
|
|
27,766 |
| ||||
Cash end of period |
|
$ |
34,636 |
|
$ |
7,431 |
|
$ |
|
|
$ |
42,067 |
|
99¢ Only Stores
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
First Half Ended October 1, 2011
(Predecessor)
(In thousands)
(Unaudited)
|
|
Issuer |
|
Subsidiary |
|
Consolidating |
|
Consolidated |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
| ||||
Net cash provided by operating activities |
|
$ |
27,431 |
|
$ |
4,030 |
|
$ |
|
|
$ |
31,461 |
|
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| ||||
Purchases of property and equipment |
|
(22,740 |
) |
(813 |
) |
|
|
(23,553 |
) | ||||
Proceeds from sale of fixed assets |
|
2 |
|
|
|
|
|
2 |
| ||||
Purchases of investments |
|
(50,389 |
) |
|
|
|
|
(50,389 |
) | ||||
Proceeds from sale of investments |
|
48,174 |
|
|
|
|
|
48,174 |
| ||||
Net cash used in investing activities |
|
(24,953 |
) |
(813 |
) |
|
|
(25,766 |
) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| ||||
Payments of capital lease obligation |
|
(35 |
) |
|
|
|
|
(35 |
) | ||||
Repurchases of common stock related to issuance of Performance Stock Units |
|
(753 |
) |
|
|
|
|
(753 |
) | ||||
Proceeds from exercise of stock options |
|
2,470 |
|
|
|
|
|
2,470 |
| ||||
Excess tax benefit from share-based payment arrangements |
|
584 |
|
|
|
|
|
584 |
| ||||
Net cash provided by financing activities |
|
2,266 |
|
|
|
|
|
2,266 |
| ||||
Net increase in cash |
|
4,744 |
|
3,217 |
|
|
|
7,961 |
| ||||
Cash beginning of period |
|
15,505 |
|
1,218 |
|
|
|
16,723 |
| ||||
Cash end of period |
|
$ |
20,249 |
|
$ |
4,435 |
|
$ |
|
|
$ |
24,684 |
|
19. Subsequent Events
In connection with the issuance of the Senior Notes, the Company entered into a registration rights agreement, that required it 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 launched on October 9, 2012 and closed on November 7, 2012.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
As used in this quarterly report (this Report), unless the context suggests otherwise, the terms Company, we, us, and our refer to 99¢ Only Stores and its consolidated subsidiaries.
General
We are an extreme value retailer of primarily consumable and general merchandise with an emphasis on name-brand products. Our stores offer a wide assortment of regularly available consumer goods as well as a broad variety of first-quality closeout merchandise.
On January 13, 2012, pursuant to the Agreement and Plan of Merger (the Merger), dated as of October 11, 2011, by and among 99¢ Only Stores, Number Holdings, Inc., a Delaware corporation (Parent), and Number Merger Sub, Inc. (Merger Sub) a subsidiary of Parent, the Merger was consummated. Merger Sub merged with and into 99¢ Only Stores, with 99¢ Only Stores being the surviving corporation. As a result of the Merger, we became a subsidiary of Parent. Parent is controlled by affiliates of Ares Management LLC, Canada Pension Plan Investment Board (together, the Sponsors) and Eric Schiffer, the Companys Chief Executive Officer, Jeff Gold, the Companys President and Chief Administrative Officer, Howard Gold, the Companys Executive Vice President, Karen Schiffer and The Gold Revocable Trust dated October 26, 2005 (collectively, the Rollover Investors).
The Merger was accounted for as a business combination in accordance with Accounting Standard Codification (ASC) 805, Business Combinations, 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 accompanying discussion and analysis of results of operations and cash flows are presented for the Predecessor and Successor periods preceding and succeeding the Merger, respectively. The Companys fiscal year 2013 (fiscal 2013) began on April 1, 2012 and will end on March 30, 2013 and will consist of 52 weeks. The Companys fiscal year 2012 (fiscal 2012) consisted of the Successor period from January 15, 2012 to March 31, 2012 and the Predecessor period from April 3, 2011 to January 14, 2012, for a total of 52 weeks. The second quarter ended September 29, 2012 (second quarter of fiscal 2013) and second quarter ended October 1, 2011 (second quarter of fiscal 2012) were each comprised of 91 days. The first half ended September 29, 2012 (first half of fiscal 2013) and first half ended October 1, 2011 (first half of fiscal 2012) were each comprised of 182 days.
For the second quarter of fiscal 2013, we had net sales of $393.4 million, operating income of $15.9 million and net income of $21,000. Sales increased during the second quarter of fiscal 2013 primarily due to a 4.0% increase in same-store sales, the full quarter effect of 13 new stores opened in fiscal 2012, and the effect of five new stores opened in fiscal 2013. For the first half of fiscal 2013, we had net sales of $794.3 million, operating income of $40.0 million and net income of $5.1 million. Sales increased during the first half of fiscal 2013 primarily due to a 4.2% increase in same-store sales, the full year effect of 13 new stores opened in fiscal 2012, and the effect of five new stores opened in fiscal 2013.
During the second quarter of fiscal 2013, we opened two stores in Southern California and one in Nevada. The Company plans to open approximately 21 additional stores during the second half of fiscal 2013 with majority of new stores expected to be opened in California. We believe that our near term growth in the remainder of fiscal 2013 will primarily result from new store openings in our existing territories and increases in same-store sales.
Critical Accounting Policies and Estimates
Our critical accounting policies reflecting managements estimates and judgments are described in Managements Discussion and Analysis of Financial Condition and Results of Operations of our Registration Statement on Form S-4 (File No. 333-182582 declared effective on October 9, 2012 (the Registration Statement).
Results of Operations
The following discussion defines the components of the statement of income.
Net Sales: Revenue is recognized at the point of sale in our 99¢ Only Stores (retail sales). Bargain Wholesale sales revenue is recognized on the date merchandise is shipped. Bargain Wholesale sales are primarily shipped free on board shipping point.
Cost of Sales: Cost of sales includes the cost of inventory, freight in, inter-state warehouse transportation costs and inventory shrinkage (obsolescence, spoilage, and shrink), and is net of discounts and allowances. 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 vendors products are included as a reduction of cost of sales when such contractual milestones are reached in accordance with ASC 605-50-25, Revenue Recognition-Customer Payments and Incentives-Recognition. 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 $19.0 million and $17.5 million for the second quarter of fiscal 2013 and the second quarter of fiscal 2012, respectively and totaled $37.1 million and $34.6 million for the first half of fiscal 2013 and 2012, 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 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 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.
Other Expense (Income): Other expense (income) relates primarily to interest expense on our debt, capitalized leases and the impairment charges related to our marketable securities, net of interest income on our marketable securities.
The following table sets forth selected income statement data, including such data as percentage of net sales for the periods indicated (percentages may not add up due to rounding):
|
|
For the Second Quarter Ended |
|
For the First Half Ended |
| ||||||||||||||||||
|
|
September 29, |
|
% of |
|
|
October 1, |
|
% of |
|
September 29, |
|
% of |
|
|
October 1, |
|
% of |
| ||||
|
|
(Successor) |
|
|
(Predecessor) |
|
(Successor) |
|
|
(Predecessor) |
| ||||||||||||
|
|
|
|
|
|
|
(Amounts in thousands, except percentages) |
|
|
|
|
|
| ||||||||||
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
99¢ Only Stores |
|
$ |
382,073 |
|
97.1 |
% |
|
$ |
352,220 |
|
97.0 |
% |
$ |
771,029 |
|
97.1 |
% |
|
$ |
709,764 |
|
97.0 |
% |
Bargain Wholesale |
|
11,290 |
|
2.9 |
|
|
10,818 |
|
3.0 |
|
23,284 |
|
2.9 |
|
|
21,614 |
|
3.0 |
| ||||
Total sales |
|
393,363 |
|
100.0 |
|
|
363,038 |
|
100.0 |
|
794,313 |
|
100.0 |
|
|
731,378 |
|
100.0 |
| ||||
Cost of sales (excluding depreciation and amortization expense shown separately below) |
|
242,699 |
|
61.7 |
|
|
217,264 |
|
59.8 |
|
486,601 |
|
61.3 |
|
|
436,784 |
|
59.7 |
| ||||
Gross profit |
|
150,664 |
|
38.3 |
|
|
145,774 |
|
40.2 |
|
307,712 |
|
38.7 |
|
|
294,594 |
|
40.3 |
| ||||
Selling, general and administrative expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating expenses |
|
120,362 |
|
30.6 |
|
|
114,367 |
|
31.5 |
|
239,133 |
|
30.1 |
|
|
227,933 |
|
31.2 |
| ||||
Depreciation |
|
13,931 |
|
3.5 |
|
|
6,985 |
|
1.9 |
|
27,683 |
|
3.5 |
|
|
13,694 |
|
1.9 |
| ||||
Amortization of intangible assets |
|
442 |
|
0.1 |
|
|
5 |
|
0.0 |
|
883 |
|
0.1 |
|
|
9 |
|
0.0 |
| ||||
Total selling, general and administrative expenses |
|
134,735 |
|
34.3 |
|
|
121,357 |
|
33.4 |
|
267,699 |
|
33.7 |
|
|
241,636 |
|
33.0 |
| ||||
Operating income |
|
15,929 |
|
4.0 |
|
|
24,417 |
|
6.7 |
|
40,013 |
|
5.0 |
|
|
52,958 |
|
7.2 |
| ||||
Other (income) expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest income |
|
(35 |
) |
0.0 |
|
|
(60 |
) |
0.0 |
|
(259 |
) |
0.0 |
|
|
(202 |
) |
0.0 |
| ||||
Interest expense |
|
16,017 |
|
4.1 |
|
|
34 |
|
0.0 |
|
32,033 |
|
4.0 |
|
|
335 |
|
0.0 |
| ||||
Other-than-temporary investment impairment due to credit losses |
|
|
|
0.0 |
|
|
31 |
|
0.0 |
|
|
|
0.0 |
|
|
31 |
|
0.0 |
| ||||
Other |
|
3 |
|
0.0 |
|
|
(19 |
) |
0.0 |
|
67 |
|
0.0 |
|
|
(62 |
) |
0.0 |
| ||||
Total other expense (income), net |
|
15,985 |
|
4.1 |
|
|
(14 |
) |
0.0 |
|
31,841 |
|
4.0 |
|
|
102 |
|
0.0 |
| ||||
(Loss) income before provision for income taxes |
|
(56 |
) |
0.0 |
|
|
24,431 |
|
6.7 |
|
8,172 |
|
1.0 |
|
|
52,856 |
|
7.2 |
| ||||
(Benefit) provision for income taxes |
|
(77 |
) |
0.0 |
|
|
9,317 |
|
2.6 |
|
3,049 |
|
0.4 |
|
|
20,059 |
|
2.7 |
| ||||
Net income |
|
$ |
21 |
|
0.0 |
% |
|
$ |
15,114 |
|
4.2 |
% |
5,123 |
|
0.6 |
|
|
32,797 |
|
4.5 |
% | ||
Second Quarter Ended September 29, 2012 (Successor) Compared to Second Quarter Ended October 1, 2011 (Predecessor)
Net sales. Total net sales increased $30.4 million, or 8.4%, to $393.4 million in the second quarter of fiscal 2013, from $363.0 million in the second quarter of fiscal 2012. Net retail sales increased $29.9 million, or 8.5%, to $382.1 million in the second quarter of fiscal 2013, from $352.2 million in the second quarter of fiscal 2012. Bargain Wholesale net sales increased approximately by $0.5 million, or 4.4%, to $11.3 million in the second quarter of fiscal 2013, from $10.8 million in the second fiscal quarter of last year. Of the $29.9 million increase in net retail sales, $13.9 million was due to a 4.0% increase in comparable stores net sales. The comparable stores net sales increase was attributable to an approximately 1.5% increase in transaction counts and increase in an average ticket size by approximately 2.5%. The full quarter effect of stores opened in fiscal 2012 increased net retail sales by $11.5 million and the effect of new stores opened during fiscal 2013 increased net retail sales by $4.5 million.
Gross profit. Gross profit increased $4.9 million, or 3.4%, to $150.7 million in the second quarter of fiscal 2013, from $145.8 million in the second fiscal quarter of 2012. As a percentage of net sales, overall gross margin decreased to 38.3% in the second quarter of fiscal 2013, from 40.2% in the second quarter of fiscal 2012. Among the gross profit components, cost of products sold increased by 100 basis points compared to second quarter of fiscal 2012, primarily due shift in product mix. Inventory shrinkage increased by 90 basis points compared to second quarter of fiscal 2012, primarily due to higher inventory shrinkage based on the store physical inventories taken during the second quarter of 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 $6.0 million, or 5.2%, to $120.4 million in the second quarter of fiscal 2013, from $114.4 million in the second quarter of fiscal 2012. As a percentage of net sales, operating expenses decreased to 30.6% for the second quarter of fiscal 2013, from 31.5% for the second quarter of fiscal 2012. Of the 90 basis point decrease in operating expenses as a percentage of net sales, retail operating expenses decreased by 60 basis points, distribution and transportation costs were flat, corporate expenses decreased by 20 basis points, and other items decreased by 10 basis points.
Retail operating expenses for the second quarter of fiscal 2013 decreased as a percentage of net sales by 60 basis points to 21.9% of net sales, compared to 22.4% of net sales for first quarter of fiscal 2012. The majority of the decrease as a percentage of net sales was due to lower utilities expenses. The improvement was also due to lower payroll-related expenses as a percentage of net sales, primarily due to improved store labor productivity and leveraging positive same-store sales.
Distribution and transportation expenses were flat at 4.8% as a percentage of net sales for the second quarter of fiscal 2013 and the second quarter of fiscal 2012.
Corporate operating expenses for the second quarter of fiscal 2013 decreased as a percentage of net sales by 20 basis points to 3.4% of net sales compared to 3.6% of net sales for second quarter of fiscal 2012. The majority of the decrease as a percentage of net sales was due to lower legal costs, which were partially offset by an increase in outside service fees and payroll-related expenses.
The remaining operating expenses for the second quarter of fiscal 2013 decreased as a percentage of net sales by 10 basis points to 0.6% compared to 0.7% of net sales for second quarter of fiscal 2012. The decrease in other operating expenses compared to second quarter of fiscal 2012, was primarily due to legal and professional fees of approximately $1.1 million relating to the Merger incurred in the second quarter of fiscal 2012.
Depreciation and amortization. Depreciation increased $6.9 million to $13.9 million in the second quarter of fiscal 2013 from $7.0 million in second quarter of fiscal 2012. Depreciation as a percentage of net sales was 3.5% for the second quarter of fiscal 2013 and 1.9% for the second quarter of fiscal 2012. Amortization of intangibles was $0.4 million in the second quarter of fiscal 2013. Depreciation and amortization expense in the second quarter of fiscal 2013 were higher than in the second quarter of fiscal 2012 due to 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 $15.9 million for the second quarter of fiscal 2013 compared to operating income of $24.4 million for the second quarter of fiscal 2012. Operating income as a percentage of net sales was 4.0% in the second quarter of fiscal 2013 compared to 6.7% in the second quarter of fiscal 2012. The decrease in operating income as a percentage of net sales was primarily related to the changes in gross margin and depreciation and amortization as discussed above, partially offset by changes in operating expenses as described above.
Other income/expense, net. Other expense, net was $16.0 million for the second quarter of fiscal 2013 compared to other income, net of less than $0.1 million for the second quarter of fiscal 2012. Other expense, net in the second quarter of fiscal 2013 primarily included $16.0 million of interest expense, reflecting debt service on borrowings used to finance the Merger. Interest income was less than $0.1 million for the second quarter of fiscal 2013 and fiscal 2012.
(Benefit) provision for income taxes. The provision for income taxes was a benefit of $77,000 for the second quarter of fiscal 2013 compared to an expense of $9.3 million for the second quarter of fiscal 2012, due to the decrease in pre-tax income. There was no material change in the net amount of unrecognized tax benefits in the second quarter of fiscal 2013.
Net income. As a result of the items discussed above, net income for the second quarter of fiscal 2013 was $21,000 compared to net income of $15.1 million for the second quarter of fiscal 2012.
For the First Half Ended September 29, 2012 Compared to the First Half Ended October 1, 2011
Net sales: Total net sales increased $62.9 million, or 8.6%, to $794.3 million for the first half of fiscal 2013, from $731.4 million for the first half of fiscal 2012. Net retail sales increased $61.2 million, or 8.6%, to $771.0 million for the first half of fiscal 2013, from $709.8 million for the first half of fiscal 2012. Bargain Wholesale net sales increased approximately by $1.7 million, or
7.7%, to $23.3 million for the first half of fiscal 2013, from $21.6 million for the first half of last year. Of the $61.2 million increase in net retail sales, $29.8 million was due to a 4.2% increase in comparable stores net sales. The comparable stores net sales increase was attributable to an approximately 2.1% increase in transaction counts and increase in an average ticket size by approximately 2.1%. The full year effect of stores opened in fiscal 2012 increased net retail sales by $25.9 million and the effect of new stores opened during fiscal 2013 increased net retail sales by $5.5 million.
Gross profit: Gross profit increased $13.1 million, or 4.5%, to $307.7 million for the first half of fiscal 2013, from $294.6 million for the first half of fiscal 2012. As a percentage of net sales, overall gross margin decreased to 38.7% for the first half of fiscal 2013, from 40.3% for the first half of fiscal 2012. Among the gross profit components, cost of products sold increased by 80 basis points compared to the first half of fiscal 2012, primarily due to a shift in product mix and merchandise price increases. Inventory shrinkage increased 70 basis points compared to the first half of fiscal 2012, primarily due to higher inventory shrinkage based on the store physical inventories taken during the first half of fiscal 2013 and the resulting increase in our inventory shrinkage reserves. The remaining change was made up of increases and decreases in other less significant items included in cost of sales.
Operating expenses: Operating expenses increased by $11.2 million, or 4.9%, to $239.1 million for the first half of fiscal 2013 compared to $227.9 million for the first half of fiscal 2012. As a percentage of net sales, operating expenses decreased to 30.1% for the first half of fiscal 2013, from 31.2% for the first half of fiscal 2012. Of the 110 basis points decrease in operating expenses as a percentage of net sales, retail operating expenses decreased by 70 basis points, distribution and transportation expenses were flat, corporate expenses decreased by 10 basis points and other items decreased by 30 basis points.
Retail operating expenses for the first half of fiscal 2013 decreased as a percentage of net sales by 70 basis points to 21.6% of net sales, compared to 22.3% of net sales for the first half of fiscal 2012. The majority of the decrease as a percentage of net sales was due to both lower payroll-related expenses (primarily due to improved store labor productivity and leveraging positive same-store sales), as well as lower utilities expenses.
Distribution and transportation expenses were flat at 4.7% as a percentage of net sales for the first half of fiscal 2013 and the first half of fiscal 2012.
Corporate operating expenses for the first half of fiscal 2013 decreased as a percentage of net sales by 10 basis points to 3.4%, compared to 3.5% of net sales for the first half of fiscal 2012. The majority of the decrease as a percentage of net sales was due to legal costs, which were partially offset by an increase in payroll-related expenses.
The remaining operating expenses for the first half of fiscal 2013 decreased as a percentage of net sales by 30 basis points to 0.4% compared to 0.7% of net sales for the first half of fiscal 2012. The decrease in other operating expenses compared to the first half of fiscal 2012 was primarily related to legal and professional fees of approximately $2.5 million relating to the Merger incurred in the first half of fiscal 2012.
Depreciation and amortization: Depreciation increased $14.0 million to $27.7 million for the first half of fiscal 2013 from $13.7 million for the first half of fiscal 2012. Depreciation as a percentage of net sales was 3.5% for the first half of fiscal 2013 and 1.9% for the first half of fiscal 2012. Amortization of intangibles was $0.9 million for the first half of fiscal 2013. Depreciation and amortization expense for the first half of fiscal 2013 were higher than for the first half of fiscal 2012 due 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 $40.0 million for the first half of fiscal 2013 compared to operating income of $53.0 million for the first half of fiscal 2012. Operating income as a percentage of net sales was 5.0% for the first half of fiscal 2013 compared to 7.2% for the first half of fiscal 2012. The decrease in operating income as a percentage of net sales was primarily due to changes in gross margin and depreciation and amortization as discussed above, partially offset by changes in operating expenses as described above.
Other income/expense, net: Other expense, net was $31.8 million for the first half of fiscal 2013 compared to $0.1 million for the first half of fiscal 2012. Other expense, net for the first half of fiscal 2013 primarily included $32.0 million of interest expense, reflecting debt service on borrowings used to finance the Merger. Interest income was $0.3 million for the first half of fiscal 2013 and $0.2 million for the first half fiscal 2012.
Provision for income taxes: The provision for income taxes was $3.0 million for the first half of fiscal 2013 compared to $20.1 million for the first half of fiscal 2011, due to the decrease in pre-tax income. The effective tax rate of the provision for income taxes was approximately 37.3% for the first half of fiscal 2013 and 38.0% for the first half of fiscal 2012. There was no material change in the net amount of unrecognized tax benefits in the first half of fiscal 2013.
Net Income: As a result of the items discussed above, net income for the first half of fiscal 2013 was $5.1 million, compared to net income of $32.8 million for the first half of fiscal 2012. Net income as a percentage of net sales was 0.6% for the first half of fiscal 2013 compared to net income of 4.5% for the first half quarter of fiscal 2012.
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, our capital requirements consist primarily of purchases of inventory, expenditures related to new store openings, 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 2013; 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, availability under our ABL Facility is not expected to 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 the end of the second quarter of fiscal 2013, we held $43.7 million in cash and short-term investments, and had debt of $761.6 million consisting of borrowings under our First Lien Term Loan Facility (as defined below) of $511.6 million and $250 million of our Senior Notes (as defined below). We have up to an additional $175 million of available borrowings under our ABL Facility and, subject to certain limitations and the satisfaction of certain conditions, we are also permitted to incur up to an aggregate of $200 million of additional borrowings under incremental facilities in our ABL Facility and First Lien Term Loan Facility. As of September 29, 2012, availability under the ABL Facility subject to the borrowing base, was $159.7 million. We also have, and will continue to have, significant lease obligations. As of September 29, 2012, our minimum annual rental obligations under long-term operating leases for the remainder of fiscal 2013 are $24.3 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 the first lien based revolving credit facility (as amended, ABL Facility), and (b) $525 million in aggregate principal amount under the first lien term loan facility (as amended, First Lien Term Loan Facility and together with the ABL Facility, the Credit Facilities).
First Lien Term Loan Facility
The First Lien Term Loan Facility provides for $525 million of borrowings (which may be increased by up to $150.0 million in certain circumstances). All obligations under the First Lien Term Loan Facility are guaranteed by Parent and our direct wholly owned subsidiary (together, the Credit Facilities Guarantors). In addition, the First Lien Term Loan Facility is secured by pledges of certain of our equity interests and 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), with the balance due on the maturity date, January 13, 2019. Borrowings under the First Lien Term Loan Facility bear interest at an annual rate equal to an applicable margin plus, at our option, (A) a Base Rate determined by reference to the highest of (a) the interest rate in effect determined by the administrative agent as Prime Rate (3.25% as of September 29, 2012), (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) plus 1.00%, or (B) 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 million First Lien Term Loan Facility, net of refinancing costs of $11.2 million. The amendment, among other things, decreased the applicable margin from London Interbank Offered Rate (LIBOR) plus 5.50% (or base rate plus 4.50%) to LIBOR plus 4.00% (or base rate plus 3.00%) and decreased the LIBOR floor from 1.50% to 1.25%. The maximum capital expenditures covenant in the First Lien Term Loan Facility was also amended to permit an additional $5 million in capital expenditures each year throughout the term of the First Lien Term Loan Facility.
As of September 29, 2012, the interest rate charged on the First Lien Term Loan Facility was 5.25% (1.25% Eurocurrency rate, plus the Eurocurrency loan margin of 4.00%). As of September 29, 2012, the principal amount outstanding under the First Lien Term Loan Facility was $511.6 million.
The First Lien Term Loan 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, our capital stock, make certain 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 September 29, 2012, we were in compliance with the terms of the First Lien Term Loan Facility.
During the first quarter ended June 30, 2012 (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 our 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%. 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. The fair value of the swap at September 29, 2012 was a liability of $2.3 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 fees of $0.05 million to enter into the interest rate cap 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. All obligations under the ABL Facility are guaranteed by the Company, our immediate Parent and our direct wholly owned subsidiary (together, the ABL Guarantors). The ABL Facility is secured by substantially all of our assets and the assets of the ABL 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) LIBOR plus an applicable margin to be determined (1.75% as of September 29, 2012) or (b) the determined base rate (prime rate) plus an applicable margin to be determined (0.75% at September 29, 2012) 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 were required to pay a commitment fee to the lenders under the ABL Facility on unutilized commitments at a rate of 0.375% for the period from the date of the Merger until June 30, 2012. Thereafter, the commitment fee will be adjusted at the beginning of each quarter based upon the average historical excess availability of the prior quarter (0.50% for the quarter ended September 29, 2012). We must also pay customary letter of credit fees and agency fees.
As of September 29, 2012 and March 31, 2012, we had no outstanding borrowings under the ABL Facility, and availability under the ABL Facility, subject to the borrowing base was $159.7 million as of September 29, 2012.
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, our capital stock, make certain 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. The ABL Facility was amended on April 4, 2012 to permit an additional $5 million in capital expenditures for each year during the term of the ABL Facility. As of September 29, 2012, we were in compliance with the terms of the ABL Facility.
Senior Notes
On December 29, 2011, we issued $250 million aggregate principal amount of 11% Senior Notes that mature on December 15, 2019 (the Senior Notes). At March 31, 2012, the Senior Notes were guaranteed by each of our subsidiaries, 99 Cents Only Stores Texas, Inc. and 99 Cents Only Stores (Nevada). In September 2012, 99 Cents Only Stores (Nevada) corporation, our inactive wholly owned subsidiary, was dissolved. As of September 29, 2012, the Senior Notes are guaranteed by, 99 Cents Only Stores Texas, Inc. (the Senior Notes Guarantor).
In connection with the issuance of the Senior Notes, we entered into a registration rights agreement that requires 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 was commenced on October 9, 2012 and closed on November 7, 2012.
Pursuant to the terms of the indenture governing the Senior Notes (the Indenture), we may redeem all or a part of the Senior Notes at certain redemption prices applicable based on the date of redemption.
The Senior Notes are (i) junior in right of payment to all of our existing and future indebtedness and that of the Senior Notes Guarantor; (ii) unconditionally guaranteed on a senior unsecured unsubordinated basis by the Senior Notes Guarantor; and (iii) junior to the 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, 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.
As of September 29, 2012, we were in compliance with the terms of the Indenture.
Cash Flows
Net cash provided by operations during the first half of fiscal 2013 and 2012 was $34.5 million and $31.5 million, respectively, consisting primarily of $39.4 million and $47.2 million, respectively, of net income adjusted for non-cash items. During the first half of fiscal 2013, we used cash of $6.8 million from working capital and provided cash of $1.8 million for other activities. During the first half of fiscal 2012, we used cash of $16.8 million for working capital and provided cash of $0.9 million of other activities. Net cash used by working capital activities for the first half of fiscal 2013 primarily reflects an increase in inventories and income taxes receivable and decreases in workers compensation liability and account receivable, partially offset by decreases in accounts payable and accrued expenses. Net cash used by working capital activities for the first half of fiscal 2012 primarily reflects an increase in inventories and decrease in workers compensation liability.
Net cash used by investing activities during the first half of fiscal 2013 was $6.3 million. Net cash used in investing activities during the first half of fiscal 2012 was $25.8 million. In the first half of fiscal 2013 and fiscal 2012, we used $19.9 million and $23.6 million, respectively, for the purchase of property and equipment. We purchased $0.4 million of investments and received proceeds of $2.5 million from the sales and maturities of investments during the first half of fiscal 2013. We received proceeds of $11.5 million from the disposal and sale of fixed assets during the first half of fiscal 2013. We purchased $50.4 million of investments and received proceeds of $48.2 million from the sales and maturities of investments during the first half of fiscal 2012. We received proceeds of less than $0.1 million from the disposal properties and fixed assets during the first half of fiscal 2012.
Net cash used by financing activities during the first half of fiscal 2013 was $13.9 million, which is comprised primarily of payment of debt issuance costs of $11.2 million and repayments of debt of $2.6 million. Net cash provided by financing activities during the first half of fiscal 2012 was $2.3 million, which is comprised primarily of $2.5 million in proceeds received from the exercise of stock options, partially offset by payments of $0.8 million used to satisfy the employee tax obligations related to the issuance of performance stock units as part of the our equity incentive plan.
We estimate that total capital expenditures in fiscal year 2013 will be approximately $55 million and relate principally to $37 million for leasehold improvements, fixtures and equipment for new and existing store, $14 million for information technology projects and $4 million for other capital projects. We intend to fund our liquidity requirements in fiscal 2013 from net cash provided by operations, short-term investments and cash on hand, and the ABL Facility, if necessary.
Off-Balance Sheet Arrangements
As of September 29, 2012, we had no off-balance sheet arrangements.
Contractual Obligations
A summary of our contractual obligations as of March 31, 2012 is provided in the Registration Statement. During the first half of fiscal 2013, there was no material change in our contractual obligations previously disclosed.
Lease Commitments
We lease various facilities under operating leases (except for one location that is classified as a capital lease), which will expire at various dates through fiscal year 2031. 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 operations on a straight-line basis over the term of each respective lease. Most leases require us to pay property taxes, maintenance and insurance. Rental expense charged to operations for the second quarter of fiscal 2013 and 2012 was $15.1 million and $13.9 million, respectively. Rental expense charged to operations for the first half of fiscal 2013 and 2012 was $30.3 million and $27.7 million, respectively. We typically seek leases with a five-year to ten-year term and with multiple five-year renewal options. A large majority of our store leases were entered into with multiple renewal periods, which are typically five years and occasionally longer.
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 are the Christmas, Halloween and Easter seasons. A proportionately greater amount of our net sales and operating and net income is generally realized during the quarter ended on or near December 31. Our quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the timing of certain holidays such as Easter, the timing of new store openings and the merchandise mix.
New Authoritative Pronouncements
Information regarding new authoritative pronouncements is contained in Note 17 to our Consolidated Financial Statements for the quarter ended September 29, 2012, which is incorporated herein by this reference.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to interest rate risk for our debt borrowings and short-term investments.
Our primary interest rate exposure relates to outstanding principal amounts under the Credit Facilities. As of September 29, 2012, we had variable rate borrowings of $511.6 million under the First Lien Term Loan Facility and no borrowings under the ABL Facility. The maximum commitment under the ABL Facility was $175 million on September 29, 2012. The Credit Facilities provide interest rate options based on certain indices as described in Note 7 to our Consolidated Financial Statements for the quarter ended September 29, 2012, which is incorporated herein by this reference.
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%. 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 September 29, 2012, the fair value of the interest rate swap was recorded as a non-current liability of $2.3 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, the annualized effect of a 1% increase in applicable interest rates would have resulted in a reduction of our pre-tax earnings and cash flows of approximately $0.2 million for the three months ended September 29, 2012.
At September 29, 2012, we had $1.6 million in securities maturing at various dates through April 2042. We intend to liquidate all available for sale securities within one year. At September 29, 2012, our investment portfolio contains money market funds and auction rate securities, and therefore, should not bear any interest risk due to early disposition. At September 29, 2012, the fair value of our investments approximated the carrying value.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company evaluated the effectiveness of its disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as of the end of the period covered by this Report, under the supervision and with the participation of the Companys management, including our Chief Executive Officer and Chief Financial Officer. Based on this evaluation, the Companys Chief Executive Officer and Chief Financial Officer each concluded that the Companys disclosure controls and procedures were effective as of September 29, 2012.
Changes in Internal Control Over Financial Reporting
During the first half of fiscal 2013, the Company did not make any changes that materially affected or are reasonably likely to materially affect its internal control over financial reporting.
Information regarding legal proceedings is contained in Note 13 to our Consolidated Financial Statements for the quarter ended September 29, 2012 under the heading Legal Matters, which is incorporated herein by reference.
Reference is made to Item 1A. Risk Factors, in the Registration Statement for information regarding the most significant factors affecting the Companys operations. As of September 29, 2012, there have been no material changes to the Risk Factors disclosed in the Registration Statement.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
None
None
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3.1 |
Amended and Restated Articles of Incorporation of 99¢ Only Stores. (1) |
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3.2 |
Amended and Restated Bylaws of 99¢ Only Stores. (1) |
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23.1 |
Consent of Independent Valuation Firm.* |
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31.1 |
Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.* |
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31.2 |
Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.* |
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32.1 |
Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.** |
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32.2 |
Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.** |
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101.INS |
XBRL Instance Document*** |
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101.SCH |
XBRL Taxonomy Extension Schema*** |
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101.CAL |
XBRL Taxonomy Extension Calculation Linkbase*** |
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101.DEF |
XBRL Taxonomy Extension Definition Linkbase*** |
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101.LAB |
XBRL Taxonomy Extension Label Linkbase*** |
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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 registrants Current Report on Form 8-K as filed with Securities and Exchange Commission on January 13, 2012.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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99¢ ONLY STORES | |
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Date: November 13, 2012 |
By: |
/s/ Frank Schools |
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Frank Schools | |
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Senior Vice President, Chief Financial Officer |
EXHIBIT 23.1
CONSENT OF INDEPENDENT VALUATION FIRM
We consent to the inclusion in Form 10-Q of 99¢ Only Stores for the quarter ended September 29, 2012 of references to our Valuation Report relating to the estimation of fair value of certain auction rate securities held by the Company as of September 29, 2012 and to references to our firms name therein.
/s/ Houlihan Capital Advisors, LLC |
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Chicago, Illinois |
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November 1, 2012 |
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EXHIBIT 31.1
Certification of
Chief Executive Officer
of 99¢ Only Stores
I, Eric Schiffer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of 99¢ Only Stores;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: November 13, 2012 |
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By: |
/s/ Eric Schiffer |
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Eric Schiffer |
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Chief Executive Officer |
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Exhibit 31.2
Certification of
Chief Financial Officer
of 99¢ Only Stores
I, Frank Schools, certify that:
1. I have reviewed this quarterly report on Form 10-Q of 99¢ Only Stores;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: November 13, 2012 |
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By: |
/s/ Frank Schools |
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Frank Schools |
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Senior Vice President, Chief Financial Officer |
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Exhibit 32.1
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
OF 99¢ ONLY STORES
This certification is provided pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and accompanies the quarterly report on Form 10-Q (the Report) for the period ended September 29, 2012 of 99¢ Only Stores (the Issuer).
I, Eric Schiffer, the Chief Executive Officer of the Issuer certify that to the best of my knowledge:
(i) the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer.
Date: November 13, 2012
By: |
/s/ Eric Schiffer |
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Eric Schiffer, Chief Executive Officer |
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The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C 1350) and is not being filed as part of the Report or as a separate disclosure document.
Exhibit 32.2
CERTIFICATION OF
CHIEF FINANCIAL OFFICER
OF 99¢ ONLY STORES
This certification is provided pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and accompanies the quarterly report on Form 10-Q (the Report) for the period ended September 29, 2012 of 99¢ Only Stores (the Issuer).
I, Frank Schools, the Chief Financial Officer of the Issuer certify that to the best of my knowledge:
(i) the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer.
Date: November 13, 2012
By: |
/s/ Frank Schools |
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Frank Schools, Senior Vice President, Chief Financial Officer |
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The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C 1350) and is not being filed as part of the Report or as a separate disclosure document.
Basis of Presentation and Summary of Significant Accounting Policies (Details 2)
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6 Months Ended |
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Sep. 29, 2012
item
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Owned buildings and improvements
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Property and equipment | |
Property, Plant and Equipment, Useful Life, Maximum | 30 |
Fixtures and equipment
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Property and equipment | |
Property, Plant and Equipment, Useful Life, Maximum | 5 |
Transportation equipment
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Property and equipment | |
Property, Plant and Equipment, Useful Life, Minimum | 3 |
Property, Plant and Equipment, Useful Life, Maximum | 5 |
Information and technology major corporate systems
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Property and equipment | |
Property, Plant and Equipment, Useful Life, Maximum | 7 |
Information and technology stand alone systems
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Property and equipment | |
Property, Plant and Equipment, Useful Life, Maximum | 5 |
Income Taxes (Details)
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6 Months Ended | |
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Sep. 29, 2012
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Oct. 01, 2011
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Income Taxes | ||
Effective income tax rate (as a percent) | 37.30% | 38.00% |
Debt (Details) (USD $)
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3 Months Ended | 6 Months Ended | 3 Months Ended | 6 Months Ended | 3 Months Ended | 6 Months Ended | 3 Months Ended | 6 Months Ended | 1 Months Ended | 6 Months Ended | 3 Months Ended | 6 Months Ended | 3 Months Ended | 0 Months Ended | 1 Months Ended | 3 Months Ended | 6 Months Ended | 6 Months Ended | 1 Months Ended | 6 Months Ended | 0 Months Ended | 6 Months Ended | 0 Months Ended | 1 Months Ended | 3 Months Ended | 0 Months Ended | 1 Months Ended | 3 Months Ended | 6 Months Ended | 0 Months Ended | 0 Months Ended | ||||||||||||||||||
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Sep. 29, 2012
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Sep. 29, 2012
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Mar. 31, 2012
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Oct. 01, 2011
Predecessor
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Oct. 01, 2011
Predecessor
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Oct. 01, 2011
Maximum
Predecessor
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Oct. 01, 2011
Maximum
Predecessor
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Sep. 29, 2012
Prime rate
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Sep. 29, 2012
ABL Facility
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Sep. 29, 2012
ABL Facility
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Jun. 30, 2012
ABL Facility
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Mar. 31, 2012
ABL Facility
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Jan. 28, 2012
ABL Facility
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Jan. 13, 2012
ABL Facility
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Jan. 28, 2012
ABL Facility
Prime rate
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Jun. 30, 2012
ABL Facility
Prime rate
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Sep. 29, 2012
ABL Facility
Base rate
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Jun. 30, 2012
ABL Facility
Base rate
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Jun. 30, 2012
ABL Facility
Federal funds rate
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Jun. 30, 2012
ABL Facility
One month adjusted Eurocurrency rate
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Sep. 29, 2012
ABL Facility
LIBOR
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Apr. 04, 2012
First Lien Term Loan Facility
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Jan. 28, 2012
First Lien Term Loan Facility
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Sep. 29, 2012
First Lien Term Loan Facility
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Sep. 29, 2012
First Lien Term Loan Facility
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Mar. 31, 2012
First Lien Term Loan Facility
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Sep. 29, 2012
First Lien Term Loan Facility
Prime rate
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Jan. 28, 2012
First Lien Term Loan Facility
Base rate
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Jan. 13, 2012
First Lien Term Loan Facility
Base rate
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Sep. 29, 2012
First Lien Term Loan Facility
Federal funds rate
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Apr. 04, 2012
First Lien Term Loan Facility
One month adjusted Eurocurrency rate
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Sep. 29, 2012
First Lien Term Loan Facility
One month adjusted Eurocurrency rate
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Sep. 29, 2012
First Lien Term Loan Facility
Eurocurrency loan
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Apr. 04, 2012
First Lien Term Loan Facility
Eurocurrency loan
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Jan. 13, 2012
First Lien Term Loan Facility
LIBOR
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Jan. 28, 2012
First Lien Term Loan Facility
LIBOR
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Sep. 29, 2012
First Lien Term Loan Facility
Interest Rate Swap
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Jun. 30, 2012
First Lien Term Loan Facility
Interest Rate Swap
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May 26, 2012
First Lien Term Loan Facility
Interest Rate Swap
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Jun. 30, 2012
First Lien Term Loan Facility
Interest Rate Cap
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Dec. 29, 2011
Senior Notes
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Jan. 28, 2012
Senior Notes
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Sep. 29, 2012
Senior Notes
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Sep. 29, 2012
Senior Notes
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Mar. 31, 2012
Senior Notes
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Apr. 04, 2012
Amended First Lien Term Loan Facility
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Apr. 04, 2012
Amended First Lien Term Loan Facility
Base rate
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Apr. 04, 2012
Amended First Lien Term Loan Facility
LIBOR
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Apr. 04, 2012
Amended ABL Facility
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Debt | |||||||||||||||||||||||||||||||||||||||||||||||||
Total long-term debt | $ 761,565,000 | $ 761,565,000 | $ 763,601,000 | $ 511,565,000 | $ 511,565,000 | $ 513,601,000 | $ 250,000,000 | $ 250,000,000 | $ 250,000,000 | ||||||||||||||||||||||||||||||||||||||||
Less: current portion of long-term debt | 5,237,000 | 5,237,000 | 5,250,000 | ||||||||||||||||||||||||||||||||||||||||||||||
Long-term debt, net of current portion | 756,328,000 | 756,328,000 | 758,351,000 | ||||||||||||||||||||||||||||||||||||||||||||||
Quarterly installments excluding interest | 1,309,000 | 1,309,000 | 1,309,000 | ||||||||||||||||||||||||||||||||||||||||||||||
Unamortized OID | 9,504,000 | 9,504,000 | 10,086,000 | ||||||||||||||||||||||||||||||||||||||||||||||
Amount borrowed | 525,000,000 | 250,000,000 | 250,000,000 | ||||||||||||||||||||||||||||||||||||||||||||||
Increase in borrowing capacity available under certain circumstances | 50,000,000 | 50,000,000 | 150,000,000 | 150,000,000 | |||||||||||||||||||||||||||||||||||||||||||||
Scheduled quarterly payments as percentage of original principal amount | 0.25% | ||||||||||||||||||||||||||||||||||||||||||||||||
Variable rate (as a percent) | 3.25% | 3.25% | 1.25% | ||||||||||||||||||||||||||||||||||||||||||||||
Variable rate (as a percent) | 1.50% | ||||||||||||||||||||||||||||||||||||||||||||||||
Applicable margin (as a percent) | 0.75% | 0.50% | 1.00% | 1.75% | 4.50% | 0.50% | 1.00% | 5.50% | 5.50% | 3.00% | 4.00% | ||||||||||||||||||||||||||||||||||||||
Description of basis rate use for variable rate | Prime rate | PRIME | Prime rate | Prime rate | Federal Funds Rate | One month adjusted Eurocurrency rate | LIBOR | Base rate | federal funds | One month adjusted Eurocurrency rate | Adjusted eurocurrency rate | LIBOR | |||||||||||||||||||||||||||||||||||||
Term of loan | 7 years | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate, variable interest rate floor (as a percent) | 1.50% | 1.25% | |||||||||||||||||||||||||||||||||||||||||||||||
Refinancing costs | 11,200,000 | ||||||||||||||||||||||||||||||||||||||||||||||||
Capital expenditures | 5,000,000 | 5,000,000 | |||||||||||||||||||||||||||||||||||||||||||||||
Interest rate at the end of the period (as a percent) | 4.25% | 5.25% | 5.25% | ||||||||||||||||||||||||||||||||||||||||||||||
Variable rate at the end of the period (as a percent) | 3.25% | ||||||||||||||||||||||||||||||||||||||||||||||||
Applicable margin at the end of the period (as a percent) | 4.00% | ||||||||||||||||||||||||||||||||||||||||||||||||
Aggregate notional amount | 261,800,000 | 261,800,000 | |||||||||||||||||||||||||||||||||||||||||||||||
Effective fixed interest rate (as a percent) | 1.36% | 3.00% | |||||||||||||||||||||||||||||||||||||||||||||||
Applicable margin (as a percent) | 1.00% | 4.00% | 4.00% | ||||||||||||||||||||||||||||||||||||||||||||||
Fair value | 2,300,000 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||
Fees paid to enter into agreement | 50,000 | ||||||||||||||||||||||||||||||||||||||||||||||||
Commitment fee on unutilized commitments (as a percent) | 0.50% | 0.375% | |||||||||||||||||||||||||||||||||||||||||||||||
Amount available | 159,700,000 | 159,700,000 | |||||||||||||||||||||||||||||||||||||||||||||||
Interest rate (as a percent) | 11.00% | 11.00% | |||||||||||||||||||||||||||||||||||||||||||||||
Scheduled quarterly payments | 1,300,000 | ||||||||||||||||||||||||||||||||||||||||||||||||
Maximum borrowing capacity | 175,000,000 | 175,000,000 | 175,000,000 | 175,000,000 | 175,000,000 | 525,000,000 | 525,000,000 | ||||||||||||||||||||||||||||||||||||||||||
Interest paid | |||||||||||||||||||||||||||||||||||||||||||||||||
Interest paid | 6,600,000 | 26,100,000 | 100,000 | 100,000 | |||||||||||||||||||||||||||||||||||||||||||||
Deferred financing costs | |||||||||||||||||||||||||||||||||||||||||||||||||
Gross Carrying Amount | 42,641,000 | 42,641,000 | 31,411,000 | 3,078,000 | 3,078,000 | 3,078,000 | 27,802,000 | 27,802,000 | 16,572,000 | 11,761,000 | 11,761,000 | 11,761,000 | |||||||||||||||||||||||||||||||||||||
Accumulated Amortization | (3,407,000) | (3,407,000) | (1,011,000) | (438,000) | (438,000) | (130,000) | (2,272,000) | (2,272,000) | (653,000) | (697,000) | (697,000) | (228,000) | |||||||||||||||||||||||||||||||||||||
Net Amount | 39,234,000 | 39,234,000 | 30,400,000 | 2,640,000 | 2,640,000 | 2,948,000 | 25,530,000 | 25,530,000 | 15,919,000 | 11,064,000 | 11,064,000 | 11,533,000 | |||||||||||||||||||||||||||||||||||||
Significant components of interest expense | |||||||||||||||||||||||||||||||||||||||||||||||||
Interest debt expense | 221,000 | 383,000 | 6,932,000 | 14,111,000 | 6,951,000 | 13,903,000 | |||||||||||||||||||||||||||||||||||||||||||
Amortization of deferred financing costs and OID | 1,539,000 | 2,978,000 | |||||||||||||||||||||||||||||||||||||||||||||||
Other interest expense | 374,000 | 658,000 | 34,000 | 335,000 | |||||||||||||||||||||||||||||||||||||||||||||
Interest expense | $ 16,017,000 | $ 32,033,000 | $ 34,000 | $ 335,000 |
Commitments and Contingencies (Details) (USD $)
|
0 Months Ended | 1 Months Ended | 0 Months Ended | 0 Months Ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 29, 2012
|
Mar. 31, 2012
|
May 11, 2012
Pricing Policy Matters
|
Jul. 30, 2010
Pricing Policy Matters
item
|
May 26, 2010
Wage and Hour Matters
Luis Palencia v. 99¢ Only Stores
item
|
Sep. 29, 2012
Wage and Hour Matters
Luis Palencia v. 99¢ Only Stores
|
Apr. 30, 2010
Wage and Hour Matters
Sheridan Reed v. 99¢ Only Stores
item
|
Sep. 29, 2012
Wage and Hour Matters
Sheridan Reed v. 99¢ Only Stores
|
Sep. 29, 2012
Wage and Hour Matters
Shelley Pickett v. 99¢ Only Stores
Minimum
|
Sep. 29, 2012
Wage and Hour Matters
Shelley Pickett v. 99¢ Only Stores
Maximum
|
Sep. 29, 2012
Texas
Maximum
|
Mar. 31, 2012
Texas
Maximum
|
Sep. 29, 2012
California
|
Mar. 31, 2012
California
|
Sep. 29, 2012
Letter of Credit
|
|
Commitments and Contingencies. | |||||||||||||||
Standby letter of credit related to leased property | $ 400,000 | ||||||||||||||
Estimated workers' compensation claims | 37,838,000 | 39,024,000 | 100,000 | 100,000 | 37,800,000 | 39,000,000 | |||||||||
Self Insured Health Insurance Liability | 700,000 | 900,000 | |||||||||||||
Number of complaints filed | 2 | ||||||||||||||
Legal fees and costs | 100,000 | ||||||||||||||
Number of sub-classes | 3 | 4 | |||||||||||||
Bonuses, commissions or incentive wages subclass, period of employment during which employees received bonuses, commissions or incentive wages | 4 years | ||||||||||||||
Unpaid vacation wages subclass, period of employment | 4 years | ||||||||||||||
Non-compliant wage statement subclass, period of employment | 4 years | ||||||||||||||
Unpaid wages subclass, period of employment | 4 years | 4 years | |||||||||||||
Non-compliant wage statement subclass, period of employment during which employees received wage statement | 1 year | ||||||||||||||
Unreimbursed business expenses subclass, period during which employee paid business-related expenses | 4 years | ||||||||||||||
Amount acrrued for expected payments in connection with the settlement | 2,200,000 | 600,000 | |||||||||||||
Civil penalties per violation, per each pay period for each affected employee | $ 100 | $ 200 |
Fair Value of Financial Instruments (Tables)
|
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 29, 2012
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Fair Value of Financial Instruments | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of financial assets and liabilities recorded at fair value on a recurring basis, by level within the fair value hierarchy |
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Summary of activity for the period of changes in fair value of the Company's Level 3 investments |
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Assets Held for Sale (Details) (USD $)
|
Sep. 29, 2012
|
Mar. 31, 2012
|
Sep. 29, 2012
La Quinta land
|
Sep. 29, 2012
Rancho Mirage land
|
Jun. 30, 2012
Eagan, Minnesota warehouse
|
---|---|---|---|---|---|
Assets held for sale | |||||
Assets held for sale, current | $ 2,621,000 | $ 6,849,000 | $ 400,000 | $ 2,200,000 | $ 6,400,000 |
Loss on sale of asset | $ 200,000 |
Basis of Presentation and Summary of Significant Accounting Policies (Policies)
|
6 Months Ended | ||||||||||||||||
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Sep. 29, 2012
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Basis of Presentation and Summary of Significant Accounting Policies | |||||||||||||||||
Fiscal Periods |
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Use of Estimates |
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Reclassifications |
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Cash |
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Allowance For Doubtful Accounts |
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Investments |
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Inventories |
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Property and Equipment |
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Long-Lived Assets |
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Goodwill and Other Intangible Assets |
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Derivatives |
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Purchase Accounting |
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Income Taxes |
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Stock-Based Compensation |
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Revenue Recognition |
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Cost of Sales |
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Operating Expenses |
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Leases |
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Self-insured Workers' Compensation Liability |
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Self-Insured Health Insurance Liability |
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Pre-Opening Costs |
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Advertising |
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Fair Value of Financial Instruments |
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Comprehensive Income |
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Fair Value of Financial Instruments (Details) (USD $)
|
Sep. 29, 2012
|
Mar. 31, 2012
|
---|---|---|
ASSETS | ||
Total available-for-sale securities | $ 1,604,000 | $ 3,631,000 |
Fair value measurements on a recurring basis | Total
|
||
ASSETS | ||
Total available-for-sale securities | 1,604,000 | 3,631,000 |
Other assets - assets that fund deferred compensation | 5,195,000 | 5,136,000 |
LIABILITES | ||
Other long-term liabilities - deferred compensation | 5,195,000 | 5,136,000 |
Fair value measurements on a recurring basis | Total | Interest Rate Cap
|
||
ASSETS | ||
Other current assets - interest rate cap | 27,000 | |
Fair value measurements on a recurring basis | Total | Interest Rate Swap
|
||
LIABILITES | ||
Other long-term liabilities - interest rate swap | 2,337,000 | |
Fair value measurements on a recurring basis | Total | Money market funds
|
||
ASSETS | ||
Total available-for-sale securities | 1,000 | 1,627,000 |
Fair value measurements on a recurring basis | Total | Auction rate securities
|
||
ASSETS | ||
Total available-for-sale securities | 1,603,000 | 2,004,000 |
Fair value measurements on a recurring basis | Level 1
|
||
ASSETS | ||
Total available-for-sale securities | 1,000 | 1,627,000 |
Other assets - assets that fund deferred compensation | 5,195,000 | 5,136,000 |
LIABILITES | ||
Other long-term liabilities - deferred compensation | 5,195,000 | 5,136,000 |
Fair value measurements on a recurring basis | Level 1 | Money market funds
|
||
ASSETS | ||
Total available-for-sale securities | 1,000 | 1,627,000 |
Fair value measurements on a recurring basis | Level 2
|
||
ASSETS | ||
Other current assets - interest rate cap | 27,000 | |
LIABILITES | ||
Other long-term liabilities - interest rate swap | 2,337,000 | |
Fair value measurements on a recurring basis | Level 3
|
||
ASSETS | ||
Total available-for-sale securities | 1,603,000 | 2,004,000 |
Fair value measurements on a recurring basis | Level 3 | Auction rate securities
|
||
ASSETS | ||
Total available-for-sale securities | $ 1,603,000 | $ 2,004,000 |
Financial Guarantees (Tables)
|
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 29, 2012
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Financial Guarantees | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
CONDENSED CONSOLIDATING BALANCE SHEETS |
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
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Predecessor
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Financial Guarantees | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
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Fair Value of Financial Instruments (Details 3) (USD $)
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1 Months Ended | 0 Months Ended | 1 Months Ended | |||||||
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Sep. 29, 2012
ABL Facility
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Mar. 31, 2012
ABL Facility
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Jan. 28, 2012
ABL Facility
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Jan. 13, 2012
ABL Facility
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Jan. 28, 2012
First Lien Term Loan Facility
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Sep. 29, 2012
First Lien Term Loan Facility
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Dec. 29, 2011
Senior Notes
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Jan. 28, 2012
Senior Notes
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Sep. 29, 2012
Senior Notes
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Mar. 31, 2012
Senior Notes
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Fair value of financial instruments | ||||||||||
Maximum borrowing capacity | $ 175,000,000 | $ 175,000,000 | $ 175,000,000 | $ 175,000,000 | $ 525,000,000 | |||||
Additional amount borrowed | 525,000,000 | 250,000,000 | 250,000,000 | |||||||
Coupon rate (as a percent) | 11.00% | |||||||||
Estimated fair value of debt instrument | 256,600,000 | 259,300,000 | ||||||||
Estimated fair value greater than the carrying value | $ 6,600,000 | $ 9,300,000 |
Financial Guarantees (Details 3) (USD $)
In Thousands, unless otherwise specified |
6 Months Ended | 6 Months Ended | 6 Months Ended | 6 Months Ended | ||||||
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Sep. 29, 2012
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Apr. 02, 2011
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Oct. 01, 2011
Predecessor
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Sep. 29, 2012
Issuer
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Apr. 02, 2011
Issuer
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Oct. 01, 2011
Issuer
Predecessor
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Sep. 29, 2012
Subsidiary Guarantors
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Apr. 02, 2011
Subsidiary Guarantors
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Oct. 01, 2011
Subsidiary Guarantors
Predecessor
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Sep. 29, 2012
Consolidating Adjustments
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Cash flows from operating activities: | ||||||||||
Net cash provided by operating activities | $ 34,478 | $ 31,461 | $ 33,925 | $ 27,431 | $ 553 | $ 4,030 | ||||
Cash flows from investing activities: | ||||||||||
Purchases of property and equipment | (19,861) | (23,553) | (18,553) | (22,740) | (1,308) | (813) | ||||
Proceeds from sales of fixed assets | 11,549 | 2 | 11,549 | 2 | ||||||
Purchases of investments | (449) | (50,389) | (449) | (50,389) | ||||||
Proceeds from sale of investments | 2,470 | 48,174 | 2,470 | 48,174 | ||||||
Investment in subsidiaries | (4,213) | 4,213 | ||||||||
Net cash used in investing activities | (6,291) | (25,766) | (9,196) | (24,953) | (1,308) | (813) | 4,213 | |||
Cash flows from financing activities: | ||||||||||
Payment of debt | (2,618) | (2,618) | ||||||||
Payment of debt issuance costs | (11,230) | (11,230) | ||||||||
Payments of capital lease obligation | (38) | (35) | (38) | (35) | ||||||
Capital contributions | 4,213 | (4,213) | ||||||||
Repurchases of common stock related to issuance of Performance Stock Units | (753) | (753) | ||||||||
Proceeds from exercise of stock options | 2,470 | 2,470 | ||||||||
Excess tax benefit from share-based payment arrangements | 584 | 584 | ||||||||
Net cash (used in) provided by financing activities | (13,886) | 2,266 | (13,886) | 2,266 | 4,213 | (4,213) | ||||
Net increase in cash | 14,301 | 7,961 | 10,843 | 4,744 | 3,458 | 3,217 | ||||
Cash - beginning of period | 27,766 | 16,723 | 16,723 | 23,793 | 15,505 | 15,505 | 3,973 | 1,218 | 1,218 | |
Cash - end of period | $ 42,067 | $ 16,723 | $ 24,684 | $ 34,636 | $ 15,505 | $ 20,249 | $ 7,431 | $ 1,218 | $ 4,435 |
Comprehensive Income (Details) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 6 Months Ended | 3 Months Ended | 6 Months Ended |
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Sep. 29, 2012
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Sep. 29, 2012
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Oct. 01, 2011
Predecessor
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Oct. 01, 2011
Predecessor
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Net income | $ 21 | $ 5,123 | $ 15,114 | $ 32,797 |
Unrealized holding gains on securities arising during period | 4 | 4 | (142) | (138) |
Unrealized losses on interest rate cash flow hedge | (473) | (1,017) | ||
Reclassification adjustments, net of tax effects | (5) | 7 | (18) | |
Other comprehensive loss, net of tax | (469) | (1,018) | (135) | (156) |
Comprehensive (loss) income | (448) | 4,105 | 14,979 | 32,641 |
Tax effect of unrealized holding gains (losses) on marketable securities | 3 | 3 | (94) | (92) |
Tax effect of unrealized losses on interest rate cash flow hedge | (315) | (678) | 0 | 0 |
Tax effect of reclassification adjustment | $ 0 | $ (3) | $ 5 | $ (12) |
Property and Equipment, net
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6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 29, 2012
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Property and Equipment, net | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Property and Equipment, net |
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