UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-K
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended May 31, 2008
OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from
to
1-37917
(Commission File
Number)
BURLINGTON
COAT FACTORY INVESTMENTS HOLDINGS, INC.
(Exact name of
registrant as specified in its charter)
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Delaware
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20-4663833
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(State
or other jurisdiction
of
incorporation or organization)
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(I.R.S.
Employer
Identification
No.)
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1830
Route 130 North
Burlington,
New Jersey
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08016
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(Address
of principal executive offices)
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(Zip
Code)
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(609)
387-7800
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the
Act: None
Securities
registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes ¨ No x
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes x No
¨
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ¨ No x
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated
filer ¨ Accelerated
filer ¨
Non-Accelerated
filer x Smaller reporting
company ¨
(Do not check if a smaller
reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
The
aggregate market value of the registrants voting and non-voting common equity
held by non-affiliates of the registrant is zero. The registrant is a
privately held corporation.
As of
August 29, 2008 the registrant has 1,000 shares of common stock outstanding (all
of which are owned by Burlington Coat Factory Holdings, Inc., registrant’s
parent holding company) and are not publicly traded.
Documents
Incorporated By Reference
None
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PAGE
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PART
I.
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Item
1.
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Business
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1
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Item
1A.
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Risk
Factors
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3
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Item
1B.
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Unresolved
Staff Comments
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9
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Item
2.
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Properties
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9
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Item
3.
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Legal
Proceedings
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10
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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10
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PART
II.
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||
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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11
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Item
6.
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Selected
Financial Data
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11
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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12
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Item
7 A.
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Quantitative
and Qualitative Disclosures About Market Risk
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29
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Item
8.
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Financial
Statements and Supplementary Data
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30
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Item
9.
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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75
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Item
9 A.
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Controls
and Procedures
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75
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Item
9 B.
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Other
Information
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76
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PART
III.
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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76
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Item
11.
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Executive
Compensation
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78
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management
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91
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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94
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Item
14.
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Principal
Accounting Fees and Services
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96
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PART
IV.
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Item
15.
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Exhibits
and Financial Statement Schedules
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98
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INDEX
TO EXHIBITS
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SIGNATURES
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Item
1. Business
Overview
Burlington
Coat Factory Investments Holdings, Inc. (the Company or Holdings) is a
nationally recognized retailer of high-quality, branded apparel at every day low
prices. We opened our first store in Burlington, New Jersey in 1972, selling
primarily coats and outerwear. Since then, and as of May 31, 2008, we have
expanded our store base to 397 stores in 44 states and diversified our product
categories by offering an extensive selection of in-season better and moderate
brands, fashion-focused merchandise, including: ladies sportswear, menswear,
coats, family footwear, baby furniture and accessories, as well as home décor
and gifts. We employ a hybrid business model, offering the low prices of
off-price retailers as well as the branded merchandise, product breadth and
product diversity traditionally associated with department stores. We
were acquired on April 13, 2006 by affiliates of Bain Capital in a
take-private transaction. The total transaction value was $2.1
billion.
As used
in this annual report, the terms “Company”, “we”, “us”, or “our” refers to
Holdings and all its subsidiaries. The Company has no operations and
its only asset is all of the stock of Burlington Coat Factory Warehouse
Corporation (BCFWC). All discussions of business operations relate to
BCFWC and its subsidiaries, its consolidated subsidiaries and predecessors. Our
fiscal year ends on the Saturday closest to May 31. Fiscal 2008 ended on
May 31, 2008 and was a 52 week year. Fiscal 2007 ended on June 2, 2007 and was a
52 week year. Fiscal 2006 ended on June 3, 2006 and was a 53 week
year.
The
Stores
As of May
31, 2008, we operated 397 stores under the names: “Burlington Coat Factory
Warehouse” (379 stores), “MJM Designer Shoes” (fifteen stores), “Cohoes
Fashions” (two stores), and “Super Baby Depot” (one store). Our store base is
geographically diversified with stores located in 44 states. We believe that our
customers are attracted to our stores principally by the availability of a large
assortment of first-quality current brand-name merchandise at every day low
prices.
Burlington
Coat Factory Warehouse stores (BCF) offer customers a complete line of
value-priced apparel, including: ladies sportswear, menswear, coats, family
footwear, baby furniture and accessories as well as home décor and gifts. BCF’s
broad selection provides a wide range of apparel, accessories and furnishing for
all ages. We purchase both pre-season and in-season merchandise, allowing us to
respond to changing market conditions and consumer fashion preferences.
Furthermore, we believe BCF’s substantial selection of staple, destination
products such as coats, Baby Depot products as well as men’s and boys’ suits
attracts customers from beyond our local trade area. These products drive
incremental store-traffic and differentiate us from our
competitors. Over 98% of our net sales are derived from the
Burlington Coat Factory Warehouse stores.
We opened
our first MJM Designer Shoes store in 2002. MJM Designer Shoe stores offer an
extensive collection of men’s, women’s and children’s moderate-to higher-priced
designer and fashion shoes, sandals, boots and sneakers. MJM Designer Shoes
stores also carry accessories such as handbags, wallets, belts, socks, hosiery
and novelty gifts. MJM Designer Shoes stores provide a superior shoe shopping
experience for the value conscious consumer by offering a broad selection of
quality goods at discounted prices in stores with a convenient self-service
layout.
Cohoes
Fashions offers a broad selection of designer label merchandise for men and
women similar to that carried in BCF stores. In addition, the stores
carry decorative gifts and home furnishings. Cohoes Fashions, Inc.
was acquired by us in 1989.
Baby
Depot departments can be found in most BCF stores. Baby Depot offers
customers "one stop shopping" for infants and toddlers with everyday low prices
on current, brand name merchandise. Customers can select from leading
manufacturers of infant and toddler apparel, furniture and accessories. Baby
Depot offers customers the convenience of special orders and a computerized baby
gift registry.
Our
stores are generally located in malls, strip shopping centers, regional power
centers or are free standing and are usually established near a major highway or
thoroughfare, making them easily accessible by automobile.
Some
stores contain departments licensed to unaffiliated parties for the sale of
items such as lingerie, fragrances, and jewelry. During Fiscal 2008, our rental
income from all of our licensed departments aggregated less than 1% of our total
revenues.
Store
Expansion
Since
1972 when our first store was opened in Burlington, New Jersey, we have expanded
to 379 BCF stores, two Cohoes Fashions stores, fifteen MJM Designer Shoes
stores, and one stand-alone Super Baby Depot store.
We
believe our real estate locations represent a competitive
advantage. Most of our stores are approximately 80,000 square feet,
occupying significantly more selling square footage than most off-price or
specialty store competitors. Major landlords frequently seek us as a tenant
because the appeal of our apparel merchandise profile attracts a
desired
1
customer
base and because we can take on larger facilities than most of our competitors.
In addition, we have built long-standing relationships with major shopping
center developers. As of May 31, 2008, we operated stores in 44 states, and we
are exploring expansion opportunities both within our current market areas and
in other regions.
We
believe that our ability to find satisfactory locations for our stores is
essential for the continued growth of our business. The opening of stores
generally is contingent upon a number of factors, including, but not limited to,
the availability of desirable locations with suitable structures and the
negotiation of acceptable lease terms. There can be no assurance, however, that
we will be able to find suitable locations for new stores or that even if such
locations are found and acceptable lease terms are obtained, we will be able to
open the number of new stores presently planned.
Real
Estate Strategy
As of May
31, 2008, we owned the land and/or buildings for 41 of our 397 stores.
Generally, however, our policy has been to lease our stores, with average rents
per square foot that are below the rents of our off-price competitors. Our large
average store size (generally twice that of our off-price competitors), ability
to attract foot traffic and our disciplined real estate strategy enable us to
secure these lower rents. Most of our stores are located in malls, strip
shopping centers, regional power centers or are freestanding.
We have
revised our lease model to provide for a ten year initial term with a number of
five year options thereafter. Typically, our new lease strategy
includes landlord allowances for leasehold improvements and tenant
fixtures. We believe our new lease model makes us more competitive
with other retailers for desirable locations.
We have a
proven track record of new store expansion. Our store base has grown from
thirteen stores in 1980 to 397 stores as of May 31,
2008. Assuming that appropriate locations are identified, we
believe that we will be able to execute our growth strategy without
significantly impacting our current stores.
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Fiscal
Year
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2003
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2004
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2005
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2006
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2007
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2008
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||||||||||||||||||
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Stores
(Beginning of Period)
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319 | 335 | 349 | 362 | 368 | 379 | ||||||||||||||||||
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Stores
Opened
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22 | 24 | 16 | 12 | 19 | 20 | ||||||||||||||||||
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Stores
Closed
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(6 | ) | (10 | ) | (3 | ) | (6 | ) | (8 | ) | (2 | ) | ||||||||||||
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Stores
(End of Period)
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335 | 349 | 362 | 368 | * | 379 | 397 | |||||||||||||||||
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* Inclusive
of three stores that closed because of hurricane damage, which reopened in
2007.
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Distribution
We have
four distribution centers that occupy an aggregate of 1,790,000 square feet,
each of which includes processing and storage capacity. Our
distribution centers are currently located in Burlington, New Jersey, Edgewater
Park, New Jersey, Bristol, Pennsylvania, and San Bernardino,
California. Our newest distribution center, in San Bernardino, opened
in May 2006, and is fully operational. The facility is 440,000 square
feet and has allowed us to increase our percentage of centrally received
merchandise. Prior to Fiscal 2007, we received approximately 50% of
merchandise through our distribution centers while drop-shipping 50% direct to
our stores. During Fiscal 2008, we were able to transition our mix to
approximately 82% of merchandise units through our distribution centers,
reducing our direct to store drop-shipments to 18%.
Our
distribution center network leverages automated sorting units to process and
ship product to stores. We believe that the use of automated sorting
units provides cost efficiencies, improves accuracy, and improves our overall
turn of product within our distribution network.
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Location
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Calendar
Year Operational
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Size
(sq. feet)
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Leased
or Owned
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Burlington,
NJ
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1987
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402,000 |
Owned
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|||
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Bristol,
PA
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2001
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300,000 |
Leased
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Edgewater
Park, NJ
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2004
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648,000 |
Owned
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|||
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San
Bernardino, CA
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2006
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440,000 |
Leased
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2
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Customer
Demographic
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Our core
customer is the 18–49 year-old woman. The core customer is educated, resides in
mid- to large-sized metropolitan areas and has an annual household income of
$35,000 to $100,000. This customer shops for herself, her family and her home.
We appeal to value seeking and fashion conscious customers who are price-driven
but enjoy the style and fit of high-quality, branded merchandise. These core
customers are drawn to us not only by our value proposition, but also by our
broad selection of styles, our brands and our highly appealing product selection
for families.
Customer
Service
We are
committed to providing our customers with an enjoyable shopping experience and
strive to make continuous efforts to improve customer service. In training our
employees, our goal is to emphasize knowledgeable, friendly customer service and
a sense of professional pride. We train employees designated for specialized
departments where customers can benefit from more hands-on assistance, including
men's suits and Baby Depot. Additionally, we offer our customers special
services to enhance the convenience of their shopping experience, such as
professional tailors, a baby gift registry, special orders and
layaways.
Employees
As of May
31, 2008, we employed 26,580 people, including part-time and seasonal employees.
Our staffing requirements fluctuate during the year as a result of the
seasonality of the apparel industry. We hire additional employees and increase
the hours of part-time employees during seasonal peak selling periods. As of May
31, 2008, employees at two of our stores are subject to collective bargaining
agreements.
Competition
The
retail business is highly competitive. Competitors include off-price retailers,
department stores, mass merchants and specialty apparel stores. At various times
throughout the year, traditional full-price department store chains and
specialty shops offer brand-name merchandise at substantial markdowns, which can
result in prices approximating those offered by us at our BCF
stores.
Merchandise
Vendors
We
purchase merchandise from many suppliers, none of which accounted for more than
3% of our net purchases during Fiscal 2008. We have no long-term purchase
commitments or arrangements with any of our suppliers, and believe that we are
not dependent on any one supplier. We continue to have good working
relationships with our suppliers.
Seasonality
Our
business, like that of most retailers, is subject to seasonal influences, with
the major portion of sales and income typically realized during the
back-to-school and holiday seasons (September through January). Weather,
however, continues to be an important contributing factor to the sale of
clothing in the Fall, Winter and Spring seasons. Generally, our sales are higher
if the weather is cold during the Fall and warm during the early
Spring.
Tradenames
We have
tradename assets such as Burlington Coat Factory, Baby Depot, Luxury Linens and
MJM Designs. We consider these tradenames and the accompanying name
recognition to be valuable to our business. We believe that our rights to these
properties are adequately protected. Our rights in these tradenames endure for
as long as they are used.
AVAILABLE
INFORMATION
Our
website address is www.burlingtoncoatfactory.com. We
will make available our Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, and amendments to those
reports free of charge through our Internet website at
www.burlingtoncoatfactory.com under the heading “Investor Relations” as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission (SEC).
Item
1A. Risk Factors
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
This
report contains forward-looking statements that are based on current
expectations, estimates, forecasts and projections about us, the industry in
which we operate and other matters, as well as management’s beliefs and
assumptions and other statements regarding matters that are not historical
facts. These statements include, in particular, statements about our plans,
strategies and prospects. For example, when we use words such as “projects,”
“expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,”
“should,” “would,” “could,” “will,” “opportunity,” “potential” or “may,”
variations of such words or other words that convey uncertainty of future events
or outcomes, we are making forward-looking statements within
the
3
meaning
of Section 27A of the Securities Act of 1933 (Securities Act) and
Section 21E of the Securities Exchange Act of 1934 (Exchange Act). Our
forward-looking statements are subject to risks and uncertainties. Actual events
or results may differ materially from the results anticipated in these
forward-looking statements as a result of a variety of factors. While it is
impossible to identify all such factors, factors that could cause actual results
to differ materially from those estimated by us include: competition in the
retail industry, seasonality of our business, adverse weather conditions,
changes in consumer preferences and consumer spending patterns, import risks,
general economic conditions in the United States and in states where we conduct
our business, our ability to implement our strategy, our substantial level of
indebtedness and related debt-service obligations, restrictions imposed by
covenants in our debt agreements, availability of adequate financing, our
dependence on vendors for our merchandise, domestic events affecting the
delivery of merchandise to our stores, existence of adverse litigation and
risks, and each of the factors discussed in this Item 1A, Risk Factors as
well as risks discussed elsewhere in this report.
Many
of these factors are beyond our ability to predict or control. In addition, as a
result of these and other factors, our past financial performance should not be
relied on as an indication of future performance. The cautionary statements
referred to in this section also should be considered in connection with any
subsequent written or oral forward-looking statements that may be issued by us
or persons acting on our behalf. We undertake no obligation to publicly update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by law. In light of
these risks and uncertainties, the forward-looking events and circumstances
discussed in this report might not occur. Furthermore, we cannot guarantee
future results, events, levels of activity, performance or
achievements.
Set
forth below are certain important risks and uncertainties that could adversely
affect our results of operations or financial condition and cause our actual
results to differ materially from those expressed in forward-looking statements
made by us. Although we believe that we have identified and discussed below the
key risk factors affecting our business, there may be additional risks and
uncertainties that are not presently known or that are not currently believed to
be significant that may adversely affect our performance or financial condition.
More detailed information regarding certain risk factors described below is
contained in other sections of this report.
Our
growth strategy includes the addition of a significant number of new stores each
year. We may not be able to implement this strategy successfully, on a timely
basis, or at all.
Our
growth will largely depend on our ability to successfully open and operate new
stores. We intend to continue to open a significant number of new stores in
future years, while remodeling a portion of our existing store base annually.
The success of this strategy is dependent upon, among other things, the
identification of suitable markets and sites for store locations, the
negotiation of acceptable lease terms, the hiring, training and retention of
competent sales personnel, and the effective management of inventory to meet the
needs of new and existing stores on a timely basis. Our proposed expansion also
will place increased demands on our operational, managerial and administrative
resources. These increased demands could cause us to operate our business less
effectively, which in turn could cause deterioration in the financial
performance of our existing stores. In addition, to the extent that our new
store openings are in existing markets, we may experience reduced net sales
volumes in existing stores in those markets. We expect to fund our expansion
through cash flow from operations and, if necessary, by borrowings under our
Available Business Line Senior Secured Revolving Facility (ABL Line of Credit);
however, if we experience a decline in performance, we may slow or discontinue
store openings. We may not be able to execute any of these strategies
successfully, on a timely basis, or at all. If we fail to implement these
strategies successfully, our financial condition and results of operations would
be adversely affected.
If
we are unable to renew or replace our store leases or enter into leases for new
stores on favorable terms, or if one or more of our current leases are
terminated prior to the expiration of their stated term and we cannot find
suitable alternate locations, our growth and profitability could be negatively
impacted.
We
currently lease approximately 90% of our store locations. Most of our current
leases expire at various dates after five-year terms, or ten-year terms in the
case of our newer leases, the majority of which are subject to our option to
renew such leases for several additional five-year periods. Our
ability to renew any expiring lease or, if such lease cannot be renewed, our
ability to lease a suitable alternate location, and our ability to enter into
leases for new stores on favorable terms will depend on many factors which are
not within our control, such as conditions in the local real estate market,
competition for desirable properties and our relationships with current and
prospective landlords. If we are unable to renew existing leases or lease
suitable alternate locations, or enter into leases for new stores on favorable
terms, our growth and our profitability may be negatively impacted.
Our net
sales, operating income and inventory levels fluctuate on a seasonal basis and
decreases in sales or margins during our peak seasons could have a
disproportionate effect on our overall financial condition and results of
operations.
Our net
sales and operating income fluctuate seasonally, with a significant portion of
our operating income typically realized during our second and third quarters.
Any decrease in sales or margins during this period could have a
disproportionate effect on our financial condition and results of operations.
Seasonal fluctuations also affect our inventory levels. We must carry a
significant amount of inventory, especially before the holiday season selling
period. If we are not successful in selling our inventory, we may have to write
down our inventory or sell it at significantly reduced prices or we may not be
able to sell such inventory at all, which could have a material adverse effect
on our financial condition and results of operations.
4
Our
results of operations for our individual stores have fluctuated in the past and
can be expected to continue to fluctuate in the future. Since the beginning of
the fiscal year ended May 29, 2004, our quarterly comparative store sales rates
have ranged from 8.9% to negative 8.0%.
Our
comparative store sales and results of operations are affected by a variety of
factors, including:
|
|
•
|
fashion
trends;
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|
|
•
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calendar
shifts of holiday or seasonal
periods;
|
|
|
•
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the
effectiveness of our inventory
management;
|
|
|
•
|
changes
in our merchandise mix;
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|
|
•
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weather
conditions;
|
|
|
•
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availability
of suitable real estate locations at desirable prices and our ability to
locate them;
|
|
|
•
|
the
timing of promotional events;
|
|
|
•
|
changes
in general economic conditions and consumer spending
patterns;
|
|
|
•
|
our
ability to anticipate, understand and meet consumer trends and
preferences; and
|
|
|
•
|
actions
of competitors.
|
If our
future comparative store sales fail to meet expectations, then our cash flow and
profitability could decline substantially. For further information, please refer
to Item 7, Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
Because
inventory is both fashion and season sensitive, extreme and/or unseasonable
weather conditions could have a disproportionately large effect on our business,
financial condition and results of operations because we would be forced to mark
down inventory.
Extreme
weather conditions in the areas in which our stores are located could have a
material adverse effect on our business, financial condition and results of
operations. For example, heavy snowfall or other extreme weather conditions over
a prolonged period might make it difficult for our customers to travel to our
stores. In addition, natural disasters such as hurricanes, tornados and
earthquakes, or a combination of these or other factors, could severly damage or
destroy one or more of our stores or facilities located in the affected areas,
thereby disrupting our business operatons. Our business is also susceptible to
unseasonable weather conditions. For example, extended periods of unseasonably
warm temperatures during the winter season or cool weather during the summer
season could render a portion of our inventory incompatible with those
unseasonable conditions. These prolonged unseasonable weather conditions could
adversely affect our business, financial condition and results of operations.
Historically, a majority of our net sales have occurred during the five-month
period from September through January. Unseasonably warm weather during these
months could adversely affect our business.
We
do not have long-term contracts with any of our vendors and if we are unable to
purchase suitable merchandise in sufficient quantities at competitive prices, we
may be unable to offer a merchandise mix that is attractive to our customers and
our sales may be harmed.
Substantially
all of the products that we offer are manufactured by third party vendors. Many
of our key vendors limit the number of retail channels they use to sell their
merchandise and competition among retailers to obtain and sell these goods is
intense. In addition, nearly all of the brands of our top vendors are sold by
competing retailers and some of our top vendors also have their own dedicated
retail stores. Moreover, we typically buy products from our vendors on a
purchase order basis. We have no long term purchase contracts with any of our
vendors and, therefore, have no contractual assurances of continued supply,
pricing or access to products, and any vendor could change the terms upon which
they sell to us or discontinue selling to us at any time. If our
relationships with our vendors are disrupted, we may not be able to acquire the
merchandise we require in sufficient quantities or on terms acceptable to us.
Any inability to acquire suitable merchandise would have a negative effect on
our business and operating results because we would be missing products from our
merchandise mix unless and until alternative supply arrangements were made,
resulting in deferred or lost sales.
Our
results may be adversely affected by fluctuations in energy prices
Energy
costs have risen dramatically in the past year, resulting in an increase in our
transportation costs for distribution, utility costs for our stores and costs to
purchase our products from suppliers. A continued rise in energy costs could
adversely affect consumer spending and demand for our products and increase our
operating costs, both of which could have an adverse effect on our
performance.
5
General
economic conditions affect our business.
Consumer
spending habits, including spending for the merchandise that we sell, are
affected by, among other things, prevailing economic conditions, inflation,
levels of employment, salaries and wage rates, prevailing interest rates,
housing costs, energy costs, income tax rates and policies, consumer confidence
and consumer perception of economic conditions. In addition, consumer
purchasing patterns may be influenced by consumers’ disposable income, credit
availability and debt levels. A continued or incremental slowdown in the U.S.
economy, an uncertain economic outlook or an expanded credit crisis could
continue to adversely affect consumer spending habits resulting in lower net
sales and profits than expected on a quarterly or annual basis.
Consumer
confidence is also affected by the domestic and international political
situation. The outbreak or escalation of war, or the occurrence of terrorist
acts or other hostilities in or affecting the United States, could lead to a
decrease in spending by consumers.
Within
the recent past the cost of apparel merchandise has benefited from deflationary
pressures in the Far East, but recently inflationary pressures from that region
due to rising consumer demand has started to reverse this trend. In addition,
during the latter half of Fiscal 2008, the increased cost of oil has resulted in
increased transportation costs for merchandise, both internationally and
domestically. The combination of these factors will put pressure on the
costs of our merchandise. Furthermore, weak economic conditions in
the domestic market due to the rise in the cost of oil and other utilities
combined with the rising costs of food and deterioration of the mortgage lending
market have limited consumer discretionary spending and in turn, limited our
ability to pass on increased costs to the consumer. To date, we have been
able to combat these increased costs through improved negotiating and buying
efforts to maintain solid margins. Additionally, we have sought
to combat these factors by reducing our other costs of operations. If we
are unable to control costs effectively or increase sales volume, our
profitability would be adversely affected.
Although
we purchase most of our inventory from vendors domestically, apparel production
is located primarily overseas.
Factors
which affect overseas production could affect our suppliers and vendors and, in
turn, our ability to obtain inventory and the price levels at which they may be
obtained. Although such factors apply equally to our competitors, factors that
cause an increase in merchandise costs or a decrease in supply could lead to
generally lower sales in the retail industry.
Such
factors include:
|
|
•
|
political
or labor instability in countries where suppliers are located or at
foreign and domestic ports which could result in lengthy shipment delays,
which if timed ahead of the fall and winter peak selling periods could
materially and adversely affect our ability to stock inventory on a timely
basis;
|
|
|
•
|
political
or military conflict involving the apparel producing countries, which
could cause a delay in the transportation of our products to us and an
increase in transportation costs;
|
|
|
•
|
heightened
terrorism security concerns, which could subject imported goods to
additional, more frequent or more thorough inspections, leading to delays
in deliveries or impoundment of goods for extended
periods;
|
|
|
•
|
disease
epidemics and health related concerns, such as the outbreaks of SARS, bird
flu and other diseases, which could result in closed factories, reduced
workforces, scarcity of raw materials and scrutiny or embargoing of goods
produced in infected areas;
|
|
|
•
|
the
migration and development of manufacturers, which can affect where our
products are or will be produced;
|
|
|
•
|
fluctuation
in our suppliers’ local currency against the dollar, which may increase
our cost of goods sold; and
|
|
|
•
|
changes
in import duties, taxes, charges, quotas, loss of “most favored nation”
trading status with the United States for a particular foreign country and
trade restrictions (including the United States imposing antidumping or
countervailing duty orders, safeguards, remedies or compensation and
retaliation due to illegal foreign trade
practices).
|
Any of
the foregoing factors, or a combination thereof could have a material adverse
effect on our business.
During
Fiscal 2008, central distribution and warehousing services were extended to
approximately 82% of our merchandise units through our warehouse/distribution
facilities in Burlington, New Jersey, Edgewater, New Jersey, Bristol,
Pennsylvania, and San Bernardino, California. Most of the merchandise we
purchase is shipped directly to our distribution centers, where it is prepared
for shipment to the appropriate stores. If any distribution center were to shut
down or lose significant capacity for any reason, our operations would likely be
disrupted. Although in such circumstances our stores are capable of receiving
inventory directly from the supplier via drop shipment, we would incur
significantly higher costs and a reduced control of inventory levels during the
time it takes for us to reopen or replace any of the distribution
centers. Additionally, the Company is planning to implement a new
warehouse management system during the fiscal year ending on May 30, 2009
(Fiscal 2009).
6
Any
unforeseen issues with this implementation may result in a disruption to our
distribution processes, ultimately costing the company time and money to rectify
the situation.
Software
used for our management information systems may become obsolete or conflict with
the requirements of newer hardware and may cause disruptions in our
business.
We rely
on our existing management information systems, including some software programs
that were developed in-house by our employees, in operating and monitoring all
major aspects of our business, including sales, warehousing, distribution,
purchasing, inventory control, merchandising planning and replenishment, as well
as various financial systems. If we fail to update such software to meet the
demands of changing business requirements or if we decide to modify or change
our hardware and/or operating systems and the software programs that were
developed in-house are not compatible with the new hardware or operating
systems, disruption to our business may result.
Unauthorized
disclosure of sensitive or confidential customer information, whether through a
breach of our computer system or otherwise, could severely hurt our
business.
As part
of our normal course of business we collect, process and retain sensitive and
confidential customer information in accordance with industry
standards. Despite the security measures we have in place, our
facilities and systems, and those of our third party service providers may be
vulnerable to security breaches, acts of vandalism and theft, computer viruses,
misplaced or lost data, programming and, or human errors, or other similar
events. Any security breach involving misappropriation, loss or other
unauthorized disclosure of confidential information, whether by us or our
vendors, could severely damage our reputation, expose us to litigation and
liability risks, disrupt our operations and harm our business.
Disruptions
in our information systems could adversely affect our operating
results.
The
efficient operation of our business is dependent on our information systems. If
an act of God or other event caused our information systems to not function
properly, major business disruptions could occur. In particular, we rely
on our information systems to effectively manage sales, distribution,
merchandise planning and allocation functions. Our disaster recovery site is
located within 15 miles of our headquarters. If a disaster impacts
either location, while it would not fully incapacitate the Company, our
operations could be significantly effected. The failure of our information
systems to perform as designed could disrupt our business and harm sales and
profitability.
Our
future growth and profitability could be adversely affected if our advertising
and marketing programs are not effective in generating sufficient levels of
customer awareness and traffic.
We rely
heavily on print and television advertising to increase consumer awareness of
our product offerings and pricing to drive store traffic. In addition, we rely
and will increasingly rely on other forms of media advertising. Our future
growth and profitability will depend in large part upon the effectiveness and
efficiency of our advertising and marketing programs. In order for our
advertising and marketing programs to be successful, we must:
|
|
•
|
manage
advertising and marketing costs effectively in order to maintain
acceptable operating margins and return on our marketing investment;
and
|
|
|
•
|
convert
customer awareness into actual store visits and product
purchases.
|
Our
planned advertising and marketing expenditures may not result in increased total
or comparative net sales or generate sufficient levels of product awareness.
Further, we may not be able to manage our advertising and marketing expenditures
on a cost-effective basis.
The
loss of key personnel may disrupt our business and adversely affect our
financial results.
We
depend on the contributions of key personnel for our future
success. Although we have entered into employment agreements with
certain executives, we may not be able to retain all of our executive and key
employees. These executives and other key employees may be hired by
our competitors, some of which have considerably more financial resources than
we do. The loss of key personnel, or the inability to hire and retain qualified
employees, could adversely affect our business, financial condition and results
of operations.
The
interests of our controlling stockholders may conflict with the interests of our
noteholders or us.
Funds
associated with Bain Capital own approximately 98.6% of the common stock of
Burlington Coat Factory Holdings, Inc. (Parent), with the remainder held by
existing members of management. Additionally, management holds options to
purchase 7.6% of the outstanding shares of Parent’s common stock should all
options be exercised. Our controlling stockholders may have an
incentive to increase the value of their investment or cause us to distribute
funds at the expense of our financial condition and impact our ability to make
payments on our outstanding notes. In addition, funds associated with Bain
Capital have the power to elect a majority of our board of directors and appoint
new officers
7
and
management and, therefore, effectively control many major decisions regarding
our operations.
For
further information regarding the ownership interest of, and related party
transactions involving, Bain Capital and its associated funds, please see Item
12, Security Ownership of Certain Beneficial Owners and Management, and Item 13,
Certain Relationships and Related Transactions, and Director
Independence.
Our substantial indebtedness will
require a significant amount of cash. Our ability to generate sufficient
cash depends on numerous factors beyond our control, and we may be unable to
generate sufficient cash flow to service our debt obligations, including making
payments on our outstanding notes.
We are
highly leveraged. As of May 31, 2008, our total indebtedness was $1.5
billion, including $300.2 million of 11.13% senior notes due 2014,
$99.3 million of 14.5% senior discount notes due 2014, $872.8 million under our
Senior Secured Term Loan Facility (Term Loan Facility), and $181.6 million under
the ABL Line of Credit. Estimated cash required to make minimum debt
service payments (including principal and interest) for these debt obligations
amounts to $95.2 million for the fiscal year ending May 30, 2009, exclusive of
the ABL Line of Credit. The ABL Line of Credit has no annual minimum principal
payment requirement.
Our
ability to make payments on and to refinance our debt and to fund planned
capital expenditures will depend on our ability to generate cash in the future.
To some extent, this is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control. If we are
unable to generate sufficient cash flow to service our debt and meet our other
commitments, we will be required to adopt one or more alternatives, such as
refinancing all or a portion of our debt, including the notes, selling material
assets or operations or raising additional debt or equity capital. We may not be
able to effect any of these actions on a timely basis, on commercially
reasonable terms or at all, or that these actions would be sufficient to meet
our capital requirements. In addition, the terms of our existing or future debt
agreements, including the credit agreements governing our senior secured credit
facilities and each indenture governing the notes, may restrict us from
effecting any of these alternatives.
If we
fail to make scheduled payments on our debt or otherwise fail to comply with our
covenants, we will be in default and, as a result:
|
|
•
|
our
debt holders could declare all outstanding principal and interest to be
due and payable,
|
|
|
•
|
our
secured debt lenders could terminate their commitments and commence
foreclosure proceedings against our assets,
and
|
|
|
•
|
we
could be forced into bankruptcy or
liquidation.
|
The
indenture governing our senior notes and the credit agreements governing our
senior secured credit facilities impose significant operating and financial
restrictions on us and our subsidiaries, which may prevent us from capitalizing
on business opportunities.
The
indenture governing our senior notes and the credit agreements governing our
senior secured credit facilities contain covenants that place significant
operating and financial restrictions on us. These covenants limit our ability
to, among other things:
|
|
•
|
incur
additional indebtedness or enter into sale and leaseback
obligations;
|
|
|
•
|
pay
certain dividends or make certain distributions on capital stock or
repurchase capital stock;
|
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•
|
make
certain capital expenditures;
|
|
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•
|
make
certain investments or other restricted
payments;
|
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|
•
|
have
our subsidiaries pay dividends or make other payments to
us;
|
|
|
•
|
engage
in certain transactions with stockholders or
affiliates;
|
|
|
•
|
sell
certain assets or merge with or into other
companies;
|
|
|
•
|
guarantee
indebtedness; and
|
|
|
•
|
create
liens.
|
8
|
|
As
a result of these covenants, we are limited in how we conduct our business
and we may be unable to raise additional debt or equity financing to
compete effectively or to take advantage of new business opportunities.
The terms of any future indebtedness we may incur could include more
restrictive covenants. If we fail to maintain compliance with these
covenants in the future, we may not be able to obtain waivers from the
lenders and/or amend the covenants.
|
Our
failure to comply with the restrictive covenants described above, as well as
others that may be contained in our senior secured credit facilities from time
to time, could result in an event of default, which, if not cured or waived,
could result in us being required to repay these borrowings before their due
date. If we are forced to refinance these borrowings on less favorable terms,
our results of operations and financial condition could be adversely
affected.
Our
failure to comply with the agreements relating to our outstanding indebtedness,
including as a result of events beyond our control, could result in an event of
default that could materially and adversely affect our results of operations and
our financial condition.
If there
were an event of default under any of the agreements relating to our outstanding
indebtedness, the holders of the defaulted debt could cause all amounts
outstanding, with respect to that debt, to be due and payable immediately. Our
assets or cash flow may not be sufficient to fully repay borrowings under our
outstanding debt instruments if accelerated upon an event of default. Further,
if we are unable to repay, refinance or restructure our secured indebtedness,
the holders of such debt could proceed against the collateral securing that
indebtedness. In addition, any event of default or declaration of acceleration
under one debt instrument could also result in an event of default under one or
more of our other debt instruments.
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
As of May
31, 2008, we operated 397 stores in 44 states throughout the United
States. We own the land and/or building for 41 of our stores and
lease the other 356 stores. Store leases generally provide for fixed
monthly rental payments, plus the payment, in most cases, of real estate taxes
and other charges with escalation clauses. In many locations, our store leases
contain formulas providing for the payment of additional rent based on
sales.
We own
five buildings in Burlington, New Jersey. Of these buildings, two are used by us
as retail space. In addition, we own approximately 97 acres of land in the
townships of Burlington and Florence, New Jersey on which we have constructed
our corporate headquarters and a warehouse/distribution facility. We lease
warehouse facilities of approximately 300,000 square feet in Bristol,
Pennsylvania. We lease approximately 20,000 square feet of office space in New
York City. We own approximately 43 acres of land in Edgewater Park, New Jersey
on which we have constructed a warehouse and office facility of approximately
648,000 square feet. We lease an additional 440,000 square foot distribution
facility opened in April 2006 in San Bernardino, California. These facilities
have significantly expanded our warehousing and distribution
capabilities.
The
following table identifies the years in which store leases, exclusive of
warehouse and corporate location leases, existing at May 31, 2008 expire,
showing both expiring leases for which we have no renewal options available and
expiring leases for which we have renewal options available. For
purposes of this table, only the expiration dates of the current lease term
(exclusive of any available options) are identified.
|
Fiscal years Ending
|
Number
of Leases
Expiring
with No Additional Renewal
Options
|
Number
of Leases
Expiring
with Additional
Renewal Options
|
||||||||
|
2009-2010
|
7
|
97
|
||||||||
|
2011-2012
|
4
|
84
|
||||||||
|
2013-2014
|
10
|
56
|
||||||||
|
2015-2016
|
4
|
22
|
||||||||
|
2017-2018
|
3
|
50
|
||||||||
|
Thereafter
to 2036
|
12
|
42
|
||||||||
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Total
|
40
|
351
|
||||||||
9
We are
party to various litigation matters, in most cases involving ordinary and
routine claims incidental to our business. We cannot estimate with certainty our
ultimate legal and financial liability with respect to such pending litigation
matters. However, we believe, based on our examination of such matters, that our
ultimate liability will not have a material adverse effect on our financial
position, results of operations or cash flows.
Item
4. Submission
of Matters to a Vote of Security Holders
None.
10
PART
II
|
Item
5.
|
Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
No
established trading market currently exists for our common
stock. As of August 29, 2008, Parent was the only holder
of record of our common stock, and 98.6% of Parent’s common stock is held by
various Bain Capital funds. Payment of dividends is prohibited
under our credit agreements, except for certain limited
circumstances. Dividends equal to $0.7 million and $0.1 million were
paid during Fiscal 2008 and Fiscal 2007, respectively, to Parent in order to
repurchase capital stock of the Parent.
|
Item 6.
|
Selected
Financial Data
|
The
following table presents selected historical Consolidated Statements of
Operations and Comprehensive Income (Loss), Balance Sheets and other data for
the periods presented and should only be read in conjunction with our audited
consolidated financial statements and the related notes thereto, and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” each of which are included elsewhere in this Form 10-K. The
historical financial data for the fiscal years ended May 31, 2008 and June 2,
2007, the periods April 13, 2006 to June 3, 2006, and May 29, 2005 to April 12,
2006 and for the fiscal years ended May 28, 2005, and May 29, 2004 have been
derived from our historical audited combined or consolidated financial
statements.
Predecessor/Successor
Presentation. Although Burlington Coat Factory Warehouse
Corporation continued as the same legal entity after the Merger Transaction, the
Selected Financial Data for Fiscal 2006 provided below is presented for two
periods: Predecessor and Successor, which relate to the period preceding the
Merger Transaction, May 29, 2005 to April 12, 2006, and the period succeeding
the Merger Transaction, April 13, 2006 to June 3, 2006. The financial data
provided refers to the operations of the Company and its subsidiaries for both
the Predecessor and Successor periods.
|
(in
thousands ‘000)
|
||||||||||||||||||||||||||||
|
Predecessor
|
Successor
|
Combined
(1)
|
Successor
|
Successor
|
||||||||||||||||||||||||
|
Twelve
Months Ended 5/29/04
|
Twelve
Months Ended 5/28/05
|
Period
from 5/29/05 to 4/12/06
|
Period
from 4/13/06 to 6/3/06
|
Twelve
Months Ended 6/3/06
|
Twelve
Months Ended 6/2/07
|
Twelve
Months Ended 5/31/08
|
||||||||||||||||||||||
|
Revenues
from Continuing Operations
|
$ | 2,860.0 | $ | 3,199.8 | $ | 3,045.3 | $ | 425.2 | $ | 3,470.5 | $ | 3,441.6 | $ | 3,424.0 | ||||||||||||||
|
Income
(Loss) from Continuing Operations, Net of Provision for Income
Tax
|
72.3 | 106.0 | 94.3 | (27.2 | ) | 67.1 | (47.2 | ) | (49.0 | ) | ||||||||||||||||||
|
Discontinued
Operations, Net of Tax Benefit (2)
|
(4.4 | ) | (1.0 | ) | - | - | - | - | - | |||||||||||||||||||
|
Net
Income (Loss)
|
67.9 | 105.0 | 94.3 | (27.2 | ) | 67.1 | (47.2 | ) | (49.0 | ) | ||||||||||||||||||
|
Balance
Sheet Data
|
||||||||||||||||||||||||||||
|
Total
Assets
|
$ | 1,579.2 | $ | 1,673.3 |
Note
(3)
|
$ | 3,213.5 | $ | - | $ | 3,036.5 | $ | 2,964.5 | |||||||||||||||
|
Working
Capital
|
321.8 | 392.3 |
Note
(3)
|
219.3 | - | 280.6 | 294.2 | |||||||||||||||||||||
|
Long-term
Debt
|
133.5 | 132.3 |
Note
(3)
|
1,508.1 | - | 1,456.3 | 1,480.2 | |||||||||||||||||||||
|
Stockholders
Equity
|
845.4 | 926.2 |
Note
(3)
|
419.5 | - | 380.5 | 323.5 | |||||||||||||||||||||
|
Notes:
|
||||||||||||||||||||||||||||
|
|
(1)
Our combined results of operations for the year ended June 3, 2006
represent the addition of the Predecessor period from May 29, 2005
through
April 12, 2006 and the Successor period from April 13, 2006 through
June 3, 2006. This combination does not comply with GAAP or with the rules
for
pro forma presentation, but is presented because we believe it
provides the most meaningful comparison of our results for investors as it
provides
annual comparability between years and is the information that
management uses to make decisions on an annual basis.
|
|||||||||||||||||||||||||||
|
|
(2)
Discontinued operations include the after-tax operations of stores closed
by us during the fiscal years listed.
|
|||||||||||||||||||||||||||
|
|
(3)
Information not available for interim period.
|
|||||||||||||||||||||||||||
11
|
Item 7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
For
purposes of the following “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” unless indicated otherwise or the context
requires, “we,” “us,” “our,” and “Company” refers to the operations of
Burlington Coat Factory Warehouse Corporation and its consolidated subsidiaries,
and the financial statements of Burlington Coat Factory Investments Holdings,
Inc. and its subsidiaries. We maintain our records on the basis of a 52 or 53
week fiscal year ending on the Saturday closest to
May 31. The following discussion and analysis should be
read in conjunction with the “Selected Financial Data” and our
consolidated financial statements, including the notes thereto,
appearing elsewhere herein.
In
addition to historical information, this discussion and analysis contains
forward-looking statements based on current expectations that involve risks,
uncertainties and assumptions, such as our plans, objectives, expectations, and
intentions set forth in the “Cautionary Statement Regarding Forward-Looking
Statements”, which can be found in Item 1A, Risk Factors. Our actual
results and the timing of events may differ materially from those anticipated in
these forward-looking statements as a result of various factors, including those
set forth in the “Risk Factors” section and elsewhere in this
report.
General
Based on
retail industry reports, we are a nationally recognized retailer of
high-quality, branded apparel at every day low prices. We opened our first store
in Burlington, New Jersey in 1972, selling primarily coats and outerwear. Since
then, we have expanded our store base to 397 stores in 44 states, and
diversified our product categories by offering an extensive selection of
in-season, fashion-focused merchandise, including: ladies sportswear, menswear,
coats, family footwear, baby furniture and accessories, as well as home décor
and gifts. We employ a hybrid business model which enables us to offer the low
prices of off-price retailers and the branded merchandise, product breadth and
product diversity of department stores. We acquire desirable, first-quality,
current-brand, labeled merchandise directly from nationally-recognized
manufacturers.
Overview
of Fiscal 2008 Operating Results
We
experienced a decrease in net sales for the 52 week period ended May 31, 2008
compared with the 52 week period ended June 2, 2007 of approximately $10.0
million (0.3%). Net sales were approximately $3.4 billion for Fiscal
2008 (52 weeks) and Fiscal 2007 (52 weeks).
We
experienced a 5.2% comparative store sales decrease from the comparative period
of a year ago due primarily to unseasonably warm weather in September and
October, weakened consumer demand similar to what other retailers experienced
and temporarily low or out of stock issues in certain limited divisions
throughout the fiscal year.
Gross
margin as a percentage of sales increased to 38.3% from 37.6% during the period
ended May 31, 2008 compared with the period ended June 2, 2007, due primarily to
our improved initial markups which are the result of lower costs associated with
better negotiating and buying efforts.
We
recorded a net loss of $49.0 million for the period ended May 31, 2008 compared
with net loss of $47.2 million for the 52 week period ended June 2, 2007. The
primary drivers of the net loss in Fiscal 2008 and Fiscal 2007 are weakened
consumer demand, impairment charges and depreciation, amortization and interest
expense incurred in connection with the financing of the Merger Transaction in
Fiscal 2006. The improvement in our net loss position from Fiscal
2007 to Fiscal 2008 is primarily driven by improved margins.
12
The
following is a list of operating highlights for Fiscal 2008:
|
§
|
20
Burlington Coat Factory Warehouse Stores were
opened.
|
|
§
|
The
acquisition of the rights for up to 24 leases from Value
City.
|
|
§
|
Hired
eight executive and senior management positions in merchandising, finance,
store operations, logistics, IT and strategy to strengthen the management
team and provide the experience to lead our various improvement and
growth initiatives.
|
|
§
|
Completion
of a supply chain network design study and began implementation of a three
year strategy focused on providing best-in-class store service levels and
efficiencies.
|
|
§
|
Establishment
of a Customer Relationships Management (CRM) database to help us better
understand our customer’s buying
behavior.
|
|
§
|
Engagement
of a new advertising partner to help raise the unaided awareness of the
Burlington Coat Factory brand so that we can be more top of mind with our
customers.
|
Management
Initiatives for Fiscal 2009
In Fiscal
2009, management will continue to pursue initiatives to address the decline in
comparative store sales and to support our future growth. We continue to
concentrate on developing strategies related to improving our merchandise flow
and improving our inventory allocation process to place trend right merchandise
in the right stores at the right time.
We are
also engaged with an outside design firm to help us improve the in-store
customer experience by improving in-store signage and flow and
adjacencies of our departments as well as the overall look and feel of our
stores. We believe that improving the signage in our stores will assist our
customers to locate items they are looking for and perhaps other items they
might be excited and surprised to find in the store. By addressing
the way our stores look and feel, we hope to make our stores easier and more fun
to shop.
We are
launching a new marketing campaign focused to reach an emotional connection with
our consumer with the concept that “great minds shop alike.” We
believe that our consumers will be engaged by thinking our buyers’ great minds
(similar to the great minds of our consumers) are looking for the best fashion
deals in the market. We will continue to use print, television, and
radio media for this new campaign which continues to highlight our great
everyday values, our brands, and our trend right fashions as well as our overall
message of Burlington Coat Factory as a value department store.
We
continue to develop our supply chain capabilities. We continue with
our plans to implement a new warehouse management system. Based on
the supply chain network design study that was completed in Fiscal 2008, we have
decided to change our current national network to a regional network to gain
even greater efficiencies in service times to our stores and in the entire
process of moving goods through our distribution centers. As a result
of our desire to change to a regional network, we will be making modifications
to our existing distribution centers and bringing up the warehouse management
system with the new capabilities of the distribution centers in the regional
network during Fiscal 2009 and the fiscal year ended May 29, 2010.
In 2008,
we began to roll out a new layaway database to all of our stores, enhancing our
already successful layaway program. In this new version of layaway, all layaway
and special order information is stored in a database that is accessible to the
stores and the corporate office. All updates to existing layaways are done in
near real-time, increasing the speed and efficiency of the layaway process while
providing improved financial controls. When a customer returns to the
store to make a payment or pick up, the layaway information is easily retrieved,
providing a more pleasant experience for the customer. In addition, repeat
layaway and special order customers can be located in the database, speeding up
the the creation process by eliminating the need to gather duplicate demographic
information.
The
layaway database will allow us to spend more time providing our customers with
personalized service. We expect the rollout of this database to be
completed during Fiscal 2009.
Through
these initiatives, management believes it can improve on our recent results
through better engagement of our customers and efficiencies of the supply
chain.
Uncertainties
and Challenges
As
management strives to increase profitability through achieving positive
comparative store sales and leveraging productivity initiatives focused on
improving the in-store experience, more efficient movement of products from the
vendors to the selling floors, and modifying our marketing plans to increase our
core customer base and increase our share of our current customer’s spend, there
are uncertainties and challenges that we face as a value department store of
apparel and accessories for men, women and children and home furnishings that
could have a material impact on our revenues or income.
13
Economic
Conditions. The macro economic pressures on our consumers from
higher energy prices, tighter credit markets and a prolonged slump in the
housing market have lowered consumer confidence. In order to succeed
in these difficult economic conditions, we need to continue to focus each of our
merchandising categories on the right brands, the right items and trend right
fashions at a great value in order to provide a compelling assortment of
merchandise to our core customers.
Competition, Resale Price
Maintenance, and Margin Pressure. We believe that in order
to remain competitive with off-price retailers and discount stores, we must
continue to offer brand-name merchandise at a discount from traditional
department stores as well as an assortment of merchandise that is appealing to
our customers.
The U.S.
retail apparel and home furnishings markets are highly fragmented and
competitive. We compete for business with department stores, off-price
retailers, specialty stores, discount stores, wholesale clubs, and outlet
stores. We anticipate that competition will increase in the future. Therefore,
we will continue to look for ways to differentiate our stores from those of our
competitors.
With the
recent devaluation of the dollar and the increase of costs of imports from China
and other parts of the world the U.S retail industry is facing increased
pressure on margins. To date, we have been able to compensate for the margin
pressure by not accepting price increases wherever possible, and to a lesser
extent, increasing the selling price of certain merchandise when
appropriate.
In
addition, rising energy costs may cause cost increases related to
freight, payroll and employee benefits, ultimately impacting net profit. We
expect that our cash flows from operating activities and the availability under
our credit facilities will be sufficient for our cash needs.
Changes
to import and export laws could have a direct impact on our operating expenses
and an indirect impact on consumer prices and we cannot predict any future
changes in such laws.
Seasonality of Sales and Weather
Conditions. Our sales, like most other retailers, are subject to seasonal
influences, with the majority of our sales and net income derived during the
months of September, October, November, December and January, which includes the
back-to-school and holiday seasons.
Additionally,
our sales continue to be significantly affected by weather. Generally, our sales
are higher if the weather is cold during the Fall and warm during the early
Spring. Sales of cold weather clothing are increased by early cold weather
during the Fall, while sales of warm weather clothing are improved by early warm
weather conditions in the Spring. Although we have diversified our product
offerings, we believe traffic to our stores is still heavily driven by weather
patterns.
The
Merger Transaction
On
January 18, 2006, we entered into a Merger Agreement (Merger Agreement)
pursuant to which our entire company was sold to affiliates of Bain Capital
(Merger Transaction).
On
April 13, 2006, the Merger Transaction was consummated through a $2.1
billion merger with BCFWC being the surviving corporation. Under the Merger
Agreement, former holders of our common stock, par value $1.00 per share,
received $45.50 per share, or approximately $2.1 billion. Approximately $13.8
million of the $2.1 billion was used, among other things, to settle outstanding
options to purchase our common stock. The Merger Transaction consideration was
funded through the use of our available cash, cash equity contributions from
affiliates of Bain Capital and management, and the debt financings as further
described in Notes 1 and 3 to our consolidated financial
statements.
Following
the consummation of the Merger Transaction, Parent entered into a contribution
agreement with us to effectuate an exchange of shares under Section 351(a)
of the Internal Revenue Code of 1986, as amended. Parent delivered to us all of
BCFWC’s outstanding shares, and we simultaneously issued and delivered all of
our authorized and outstanding shares of common stock to Parent.
In
connection with the Merger Transaction, we entered into other definitive
agreements as further described in Notes 1 and 3 to our consolidated financial
statements.
14
Burlington
Coat Factory Warehouse Corporation Corporate Structure
The chart
below summarizes our corporate structure prior to the Merger Transaction and
related transactions.
15
The chart
below summarizes our corporate structure following the consummation of the
Merger Transaction..
Management
considers numerous factors in assessing our performance. Key performance
measures used by management include comparative store sales, earnings before
interest, taxes, depreciation, amortization and impairment (which we define as
“EBITDA”), gross margin, inventory levels, inventory
turnover, liquidity and comparative store payroll.
Comparative store sales.
Comparative store sales measure performance of a store during the current
reporting period against the performance of the same store in the corresponding
period of the previous year. We define our comparative store sales as sales (net
of sales discounts) of those stores that are beginning their four hundred and
twenty-fifth day of operation (approximately 1 year and 2 months). Existing
stores whose square footage has been changed by more than 20% and relocated
stores are classified as new stores (unless the store remains in the same
shopping complex) for comparative store sales purposes. This method is used in
this section in comparing the results of operations for the fiscal period ended
May 31, 2008 with the results of operations for the fiscal period ended June 2,
2007. We experienced a decrease in comparative store sales
of 5.2% for the fiscal year ended May 31, 2008 compared with the
fiscal year ended June 2, 2007. This decrease is primarily due to
unseasonably warm weather in September and October, weakened consumer demand
similar to what other retailers experienced and temporarily low or out of stock
issues in certain limited divisions throughout the fiscal year.
EBITDA. EBITDA is
a non-GAAP financial measure of our performance. EBITDA provides
management with helpful information with respect to our
operations. It provides additional information with respect to our
ability to meet our future debt service, fund our capital expenditures and
working capital requirements and to comply with various covenants in each
indenture governing our outstanding notes, as well as various covenants related
to our senior secured credit facilities. Our EBITDA for the fiscal
year ended May 31, 2008 was $250.6 million, a $9.6 million decrease compared
with the fiscal year ended June 2, 2007. The decrease in EBITDA is
primarily the result of the decrease in net sales during the same
period.
16
The
following table shows our calculation of EBITDA for the fiscal years ended May
31, 2008 and June 2, 2007:
|
(in
thousands ‘000)
|
||||||||
|
Twelve
Months Ended
|
||||||||
|
May
31, 2008
|
June
2, 2007
|
|||||||
|
Income
(Loss) from Continuing Operations
|
$ | (48,970 | ) | $ | (47,199 | ) | ||
|
Interest
Expense
|
122,684 | 134,313 | ||||||
|
Provision
(Benefit) for Income Tax
|
(25,304 | ) | (25,425 | ) | ||||
|
Depreciation
|
133,060 | 130,398 | ||||||
|
Impairment
|
25,256 | 24,421 | ||||||
|
Amortization
|
43,915 | 43,689 | ||||||
|
EBITDA
|
$ | 250,641 | $ | 260,197 | ||||
Gross Margin. Gross margin is
a measure used by management to indicate whether we are selling merchandise at
an appropriate gross profit. Gross margin is the difference between net sales
and the cost of sales. We experienced an increase in gross
margin percentage for Fiscal 2008 to 38.3%, from 37.6% for Fiscal
2007. The improvement in gross margin was due primarily to
improved initial markups which are the result of lower costs associated with
better negotiating and buying efforts.
Inventory
Levels. Inventory levels are monitored by management to ensure
that our stores are properly stocked to service customer needs while at the same
time ensuring that stores are not over-stocked which would necessitate increased
markdowns to move slow-selling merchandise. At May 31, 2008,
inventory was $719.5 million compared with $710.6 million at June 2,
2007. We believe that our inventory levels as of May 31, 2008
are appropriate, contain a higher percentage of fresh merchandise than in
previous periods and that our inventory is properly valued at the lower of cost
or market.
Inventory
turnover. Inventory turnover is a measure that indicates
how efficiently inventory is bought and sold. It measures the length
of time that we own our inventory. This is significant because
usually the longer the inventory is owned, the more likely markdowns may be
required to sell the inventory. Inventory turnover is calculated by
dividing the retail sales before sales discounts by the average retail value of
the inventory for the period being measured. Our inventory turnover
rate was 2.4 in each of Fiscal 2008 and Fiscal 2007.
Liquidity. Liquidity measures
our ability to generate cash. Management measures liquidity through cash flow
and working capital. Cash flow is the measure of cash generated from operating,
financing and investing activities. We experienced an increase in cash flow of
$30.7 million during the fiscal year ended May 31, 2008 compared with the fiscal
year ended June 2, 2007 primarily due to fluctuations in our line of credit
offset in part by increased capital expenditures. Cash and cash
equivalents increased $6.2 million to $40.1 million as of May 31,
2008.
Changes
in working capital also impact our cash flows. Working capital equals current
assets (exclusive of restricted cash) minus current liabilities. Working capital
at May 31, 2008 was $294.2 million compared with $280.6 million at June 2,
2007. This increase in working capital is the result of several
factors. Increases in working capital resulted from a decrease in the
line item “Accounts Payable” and an increase in the line item “Deferred Tax
Asset” in our Consolidated Balance Sheets. These increases
in our working capital are partially offset by a decrease in the line items
“ Assets Held for Disposal” and an increase in the line item “Other Current
Liabilities” in the our Consolidated Balance Sheets.
Comparative Store
Payroll. Comparative store payroll measures a store’s payroll
during the current reporting period against the payroll of the same store in the
corresponding period of the previous year. We define our comparative store
payroll as stores which were opened for an entire week both in the previous year
and the current year. Comparative store payroll decreased 4.8% for
the fiscal year ended May 31, 2008 compared to the fiscal year ended June 2,
2007 as a result of various process improvements and standard operating
procedures that have been implemented during the year to improve the
efficiencies of our stores and, specifically, the receiving areas within our
stores.
Items
Affecting Comparability
Predecessor/Successor
basis of accounting.
Although
BCFWC continued as the same legal entity after the Merger Transaction, the
discussion regarding Fiscal 2006 reflects two periods: Predecessor and
Successor, which relate to the period preceding the Merger Transaction and the
period succeeding the Merger Transaction, respectively. We refer to our
operations and the operations of our subsidiaries for both the Predecessor and
Successor periods. We have prepared our discussion of the results of operations
for the fiscal year ended June 3,
17
2006 by
comparing the mathematical combination of the Predecessor and Successor periods,
without making pro forma adjustments.
As a
result of the Merger Transaction, our assets and liabilities were adjusted to
their fair value as of the closing date, April 13, 2006. Depreciation and
amortization expenses are higher in the Successor accounting period due to these
fair value assessments resulting in increases to the carrying value of our
property, plant and equipment and intangible assets. Interest expense has
increased substantially in the Successor accounting periods in connection with
our financing arrangements, which includes a $800 million ABL Line of Credit, a
$900 million Term Loan, $305 million of senior notes and $99.3 million of
Holdings Senior Discount Notes, each of which are further described under the
caption below entitled “Liquidity.”
Results
of Operations
The
following table sets forth certain items in our Consolidated Statements of
Operations and Comprehensive Income (Loss) as a percentage of net sales for
periods indicated that are used in connection with the discussion
herein.
|
May
31, 2008
|
June
2, 2007
|
June
3, 2006
|
||||||||||
|
Net
sales
|
100 | % | 100 | % | 100 | % | ||||||
|
Cost
of Sales (Exclusive of Depreciation and Amortization)
|
61.8 | 62.4 | 63.5 | |||||||||
|
Selling
& Administrative
Expenses
|
32.2 | 31.2 | 30.6 | |||||||||
|
Depreciation
|
3.9 | 3.8 | 2.8 | |||||||||
|
Amortization
|
1.3 | 1.3 | 0.3 | |||||||||
|
Impairment
Charges
|
0.7 | 0.7 | - | |||||||||
|
Interest
Expense
|
3.6 | 4.0 | 0.6 | |||||||||
|
Other
(Income) Loss,
Net
|
(0.4 | ) ) | (0.2 | ) | (0.2 | ) | ||||||
|
Other
Revenue
|
0.9 | 1.1 | 0.9 | |||||||||
|
(Loss)
Income from Continuing Operations Before Income Taxes
|
(2.2 | ) | (2.1 | ) | 3.3 | |||||||
|
Income
Tax (Benefit) Expense
|
(0.8 | ) | (0.7 | ) | 1.3 | |||||||
|
Net
(Loss) Income
|
(1.4 | ) % | (1.4 | ) % | 2.0 | % | ||||||
Net Sales. Consolidated
net sales decreased $10.0 million (0.3%) to $3.4 billion for the fiscal year
ended May 31, 2008 compared with the fiscal year ended June 2, 2007. Comparative
stores sales decreased 5.2% for the fiscal year ended May 31, 2008, due
primarily to unseasonably warm weather in September and October, weakened
consumer demand similar to what other retailers experienced and temporarily low
or out of stock issues in certain limited divisions throughout the fiscal
year.
The
decrease in comparative store sales is partially offset by 20 new Burlington
Coat Factory Warehouse stores opened during Fiscal 2008, which
contributed $105.8 million to net sales for the fiscal year ended May 31,
2008. Additionally, sales from stores opened during Fiscal 2007,
which are not included in our definition of comparative store sales, contributed
$58.9 million to Fiscal 2008 results.
Other Revenue. Other
revenue (consisting of rental income from leased departments, sublease rental
income, layaway, alteration and other service charges, dormancy service fees and
miscellaneous revenue items) decreased to $30.6 million for the fiscal year
ended May 31, 2008 compared with $38.2 million for the fiscal year ended June 2,
2007. This decrease is primarily related to a decrease in dormancy service
fees of $5.3 million and decreases in rental income from leased departments of
approximately $2.0 million due primarily to our converting leased departments
into company-run departments.
During
the third quarter of Fiscal 2008, we ceased charging dormancy service fees on
outstanding balances of store value cards and began recognizing an estimate of
the amount of gift cards that would not be redeemed (referred to herein as
breakage income) related to outstanding store value cards and included this
income in the line item “Other Income, Net” in our Consolidated Statements of
Operations and Comprehensive Income (Loss). For additional
information, please see the discussion below under the caption entitled “Other
Income, Net”.
Cost of Sales. Cost
of sales decreased $29.8 million (1.4%) to $2,095.4 million for the fiscal year
ended May 31, 2008 compared with the fiscal year ended June 2, 2007. Cost of
sales, as a percentage of net sales, decreased to 61.8% in Fiscal 2008 from
62.4% in Fiscal 2007. The decrease in cost of sales as a percentage
of sales was due primarily to our improved initial markups which are the result
of lower costs associated with better negotiating and buying
efforts.
18
Our cost
of sales and gross margin may not be comparable to those of other entities,
since some entities include all of the costs related to their buying and
distribution functions in cost of sales. We include these costs in the selling
and administrative expenses, depreciation, and amortization line items in
our Consolidated Statements of Operations and Comprehensive Income (Loss).
We include in our definition of cost of sales all costs of merchandise (net of
purchase discounts and certain vendor allowances), inbound freight, warehouse
outbound freight and freight related to internally transferred merchandise and
certain merchandise acquisition costs, primarily commissions and import
fees.
Selling and Administrative
Expenses. Selling and administrative expenses for the fiscal year
ended May 31, 2008 amounted to $1,090.8 million compared to $1,062.5 million for
the fiscal year ended June 2, 2007, a 2.7% increase. This increase is
due to several factors. First, occupancy related expenses increased
$20.2 million for the fiscal year ended May 31, 2008 compared with the fiscal
year ended June 2, 2007. Rent, utilities and maintenance related
expenses for new stores opened in Fiscal 2008 accounted for $12.8 million of the
$20.2 million increase. Stores opened in Fiscal 2007 that were not
operating for a full year incurred incremental rent, utilities and maintenance
related expenses in Fiscal 2008 of $5.5 million.
In
addition to increases in occupancy related expense, professional fees increased
$3.2 million. The increase in professional fees is primarily related
to our evaluation of the effectiveness of our internal control over financial
reporting. As a non-accelerated filer, we are required to provide our
initial report of management on our internal controls over financial reporting
in this report.
Lastly,
other expense accounts including, but not limited to, miscellaneous taxes,
protection, other and temporary help increased $9.5 million during Fiscal 2008
compared with Fiscal 2007. New store openings during Fiscal 2007 and
Fiscal 2008 account for approximately $3.2 million of the
increase. The increase in temporary help of approximately $1.7
million is primarily related to our distribution centers. During
Fiscal 2008, we receive approximately 82% of our merchandise through our
distribution centers as opposed to receiving only 50% of our merchandise through
our distribution centers in Fiscal 2007.
These
increases were partially offset by a decrease in payroll and payroll related
accounts of $5.7 million for the fiscal year ended May 31, 2008 compared to the
fiscal year ended June 2, 2007. The decrease in payroll and payroll
related accounts of $5.7 million is a function of decreases related to
comparative store payroll of $18.5 million and $13.7 million related to
retention bonuses incurred as part of the Merger Transaction,
partially offset by new store payroll of $14.9 million, incremental payroll
costs of $5.1 million related to stores that were not opened for a full fiscal
year in Fiscal 2007 and an increase of $7.1 million related to payroll at the
corporate office as a result of our filling several open senior management and
management positions. During Fiscal 2007, we recorded $13.7 million
of retention bonuses related to the Merger Transaction. These bonuses
were paid out during Fiscal 2007.
As a
percentage of net sales, selling and administrative expenses were 32.1% for the
year ended May 31, 2008 compared with 31.2% for the year ended June 2,
2007.
Depreciation. Depreciation
expense amounted to $133.1 million for the year ended May 31, 2008 compared with
$130.4 million for the year ended June 2, 2007. This increase of $2.7 million is
attributable primarily to new stores that were opened in Fiscal
2008.
Amortization. Amortization
expense related to the amortization of net favorable leases and deferred debt
charges amounted to $43.9 million at May 31, 2008 compared to $43.7 million at
June 2, 2007.
Impairment
Charges. The carrying value of all long-lived assets are
reviewed for impairment whenever events or circumstances have changed
such that the carrying value of our long-lived assets may not be
recoverable. For the fiscal year ended May 31, 2008, we recorded
impairment charges of $25.3 million related to certain long-lived assets and
intangible assets of thirteen of our stores. For the year ended June
2, 2007, we recorded impairment charges of $24.4 million related to certain
long-lived assets and intangible assets of sixteen of our stores.
Interest Expense. Interest
expense was $122.7 million and $134.3 million for the fiscal years ended May 31,
2008 and June 2, 2007, respectively. The decrease in interest expense is
primarily related to lower interest rates and lower average borrowings on our
ABL Line of Credit and changes in the fair market value of interest rate cap
contracts. Adjustments to the interest rate cap contracts to fair
value amounted to a gain of $0.1 million and a loss of $2.0 million for the
fiscal years ended May 31, 2008 and June 2, 2007, respectively, which are
recorded in the line item “Interest Expense” in our Consolidated Statements of
Operations and Comprehensive Income (Loss).
Other (Income),
Net. Other (income), net (consisting of investment income,
gains and losses on disposition of assets, breakage income and other
miscellaneous items) increased $6.7 million to $12.9 million for the period
ended May 31, 2008 compared with the period ended June 2, 2007. The
increase is primarily related to our recording $5.3 million of breakage income
during Fiscal 2008. As noted above, we discontinued dormancy service
fee income related to store value cards during Fiscal 2008 and began recognizing
breakage income as a result of establishing a gift card
company. Refer to Note 1 to our consolidated financial statements
entitled “Summary of Significant Accounting Policies” for further
information.
19
Income
Taxes. Income tax benefit was $25.3 million for the fiscal
year ended May 31, 2008, compared with $25.4 million for the fiscal year ended
June 2, 2007. The effective tax rates for Fiscal 2008 and Fiscal 2007
were 34.1% and 35%, respectively.
Net Loss. Net
loss amounted to $49.0 million for the fiscal year ended May 31, 2008 compared
with $47.2 million for the fiscal year ended June 2, 2007. The increase in
our net loss position is primarily related to an increase in selling and
administrative costs and depreciation, offset in part by improved margins
as discussed above under the caption entitled “Gross Margin” and a reduction in
interest expense.
Performance
for the Fiscal Year (52 weeks) Ended June 2, 2007 Compared with the Combined
Results for the Fiscal Year (53 weeks) Ended June 3, 2006
Our
combined results of operations for the year ended June 3, 2006 represent the
addition of the Predecessor period from May 29, 2005 through April 12, 2006 and
the Successor period from April 13, 2006 through June 3, 2006. This combination
does not comply with GAAP or with the rules for pro forma presentation, but is
presented because we believe it provides the most meaningful comparison of our
results for investors as it provides annual comparability between years and is
the information that management uses to make decisions on an annual
basis. The following table shows the combination of the Predecessor
and Successor periods:
|
(in thousands ‘000)
|
||||||||||||
|
May
29, 2005 to April 12, 2006
|
April
13, 2006 to June 3, 2006
|
Combined
Total
|
||||||||||
|
REVENUES:
|
||||||||||||
|
Net
Sales
|
$ | 3,017,633 | $ | 421,180 | $ | 3,438,813 | ||||||
|
Other
Revenue
|
27,675 | 4,066 | 31,741 | |||||||||
| 3,045,308 | 425,246 | 3,470,554 | ||||||||||
|
COSTS
AND EXPENSES:
|
||||||||||||
|
Cost
of Sales (Exclusive of Depreciation and
Amortization)
|
1,916,798 | 266,465 | 2,183,263 | |||||||||
|
Selling
and Administrative Expenses
|
897,231 | 154,691 | 1,051,922 | |||||||||
|
Depreciation
|
78,804 | 18,097 | 96,901 | |||||||||
|
Amortization
|
494 | 9,758 | 10,252 | |||||||||
|
Impairment
Charges
|
- | - | - | |||||||||
|
Interest
Expense
|
4,609 | 18,093 | 22,702 | |||||||||
|
Other
Income, Net
|
(3,572 | ) | (4,876 | ) | (8,448 | ) | ||||||
| 2,894,364 | 462,228 | 3,356,592 | ||||||||||
|
(Loss)
Income from Continuing Operations Before (Benefit) Provision for Income
Tax
|
150,944 | (36,982 | ) | 113,962 | ||||||||
|
(Benefit)
Provision for Income Tax
|
56,605 | (9,816 | ) | 46,789 | ||||||||
|
(Loss)
Income from Continuing Operations
|
94,339 | (27,166 | ) | 67,173 | ||||||||
|
Net
(Loss) Income
|
94,339 | (27,166 | ) | 67,173 | ||||||||
|
Net
Unrealized (Loss) on Investments, Net of tax
|
(4 | ) | - | (4 | ) | |||||||
|
Total
Comprehensive (Loss) Income
|
$ | 94,335 | $ | (27,166 | ) | $ | 67,169 | |||||
Net
Sales. Consolidated net sales decreased $35.4 million (1.0%)
to $3.4 billion for the fiscal year ended June 2, 2007 (52 weeks) compared with
the fiscal year ended June 3, 2006 (53 weeks). As previously noted, our fiscal
year ended June 3, 2006 was a 53 week fiscal year and as a result, the first
three fiscal quarters of Fiscal 2007 began and ended one week later than the
corresponding period of Fiscal 2006 and the fourth fiscal quarter of Fiscal 2007
began one week later and ended the same week as Fiscal 2006. Net
sales for Fiscal 2006 were $3.4 billion. Comparative stores sales decreased 2.2%
for the fiscal year ended June 2, 2007, due primarily to unseasonably warm
weather in November and December, unseasonably cool weather in April, and
increased returns resulting from the implementation of a new cash refund return
policy. In addition, supply chain issues, primarily related to shifting direct
store shipments into our distribution centers affected merchandise flow and in
turn negatively impacted sales.
20
Nineteen
new Burlington Coat Factory Warehouse stores opened during Fiscal 2007,
contributing $86.5 million to net sales for Fiscal 2007.
Other Revenue. Other
revenue (consisting of rental income from leased departments, sublease rental
income, layaway, and alteration and other service charges and miscellaneous
revenue items) increased to $38.2 million for the fiscal year ended June 2, 2007
compared with $31.7 million for the fiscal year ended June 3, 2006. This
increase was primarily related to gift card service fees.
Cost of Sales. Cost
of sales decreased $58.1 million (2.7%) for the fiscal year ended June 2, 2007
compared with the fiscal year ended June 3, 2006. Cost of sales, as a percentage
of net sales, decreased to 62.4% in Fiscal 2007 from 63.5% in Fiscal
2006. The decrease in cost of sales as a percentage of sales was due
primarily to reduced initial merchandise costs and reduced freight costs partly
offset by increased markdown costs during the fiscal year ended June 2, 2007
compared with the period ended June 3, 2006.
Our
cost of sales and gross margin may not be comparable to those of other entities,
since some entities include all of the costs related to their buying and
distribution functions in cost of sales. We include these costs in the line
items “Selling and Administrative Expenses,” “Depreciation,” and “Amortization”
in our Consolidated Statements of Operations and Comprehensive Income (Loss). We
include in our definition of cost of sales all costs of merchandise (net of
purchase discounts and certain vendor allowances), inbound freight, warehouse
outbound freight and freight related to internally transferred merchandise and
certain merchandise acquisition costs, primarily commissions and import
fees.
Selling and Administrative
Expenses. Selling and administrative expenses for the 52 week year
ended June 2, 2007 amounted to $1,062.5 million compared to $1,051.9 million for
the 53 week year ended June 3, 2006, a 1.0%
increase. This increase was due primarily to the increase
in expenses of approximately $22.2 million related to new stores opened in
Fiscal 2007 and approximately $15.0 million in expenses related to non-cash rent
expense, stock option expense resulting from the adoption of SFAS 123(R) and the
payment of advisory fees to Bain Capital. The increase was partially
offset by approximately $10.2 million from our decision not to make a
contribution to the employee profit sharing program and from the effect of the
53rd
week in Fiscal 2006. As a percentage of net sales, selling and
administrative expenses were 31.2% for the period ended June 2, 2007 compared
with 30.6% for the period ended June 3, 2006.
Depreciation. Depreciation
expense amounted to $130.4 million in the period ended June 2, 2007 compared
with $96.9 million in the period ended June 3, 2006. This increase of $33.5
million is attributable primarily to increased depreciation expenses as it
relates to the step up in basis of our fixed assets related to the Merger
Transaction of approximately $421 million and to capital additions made
subsequent to Fiscal 2006.
Amortization. Amortization
expense related to the amortization of net favorable leases and deferred debt
charges amounted to $43.7 million for the fiscal year ended June 2, 2007
compared with $10.3 million for the fiscal year ended June 3, 2006. The increase
in amortization expense is attributable to increased deferred debt charges and
favorable lease assets recorded as part of the Merger Transaction.
Impairment Charges. The
carrying value of all long-lived assets are reviewed for
impairment whenever events or circumstances have changed such that the
carrying value of our long-lived assets may not be recoverable. For the fiscal
year ended June 2, 2007, we recorded impairment charges of $24.4 million related
to certain long-lived assets and intangible assets of sixteen of our
stores. There were no impairment charges recorded for the fiscal year
ended June 3, 2006.
21
Interest Expense. Interest
expense was $134.3 million and $22.7 million for the fiscal years
ended June 2, 2007and June 3, 2006, respectively. The increase in
interest expense is primarily related to our ABL Line of Credit, our Term Loan,
BCFWC senior notes and our senior discount notes which all relate to financing
activities related to the Merger Transaction.
Other (Income),
Net. Other (income), net (consisting of investment income,
gains and losses on disposition of assets and other miscellaneous items)
decreased $2.3 million to $6.2 million for the period ended June 2, 2007
compared with the period ended June 3, 2006. The decrease is
primarily related to decreases in investment income of $3.6 million for the
fiscal year ended June 2, 2007 compared with the fiscal year ended June 3,
2006. Losses on write-offs of fixed assets from closed stores for the
fiscal year ended June 2, 2007 amounted to $3.6 million compared with $2.7
million for the fiscal year ended June 3, 2006. These losses were
offset in part by higher insurance claim recoveries in Fiscal 2007 compared with
Fiscal 2006. Insurance recoveries were $2.9 million and $1.0 million
for the fiscal years ended June 2, 2007 and June 3, 2006,
respectfully.
Income
Tax. Income tax benefit was $25.4 million for the fiscal year
ended June 2, 2007, compared with income tax expense of $46.8 million for the
twelve month period ended June 3, 2006. The effective tax rate for
Fiscal 2007 and Fiscal 2006 were 35.0% and 41.1%, respectively. The
difference in the effective tax rate is due to the Merger Transaction that took
place in Fiscal 2006.
Net Loss. Net
loss amounted to $47.2 million for the fiscal year ended June 2, 2007 compared
with net income of $67.2 million for the fiscal year ended June 3, 2006. The
decrease in earnings of $114.4 million is due primarily to continuing expenses
resulting from the Merger Transaction, including increased depreciation,
amortization and interest expense.
We fund
inventory expenditures during normal and peak periods through cash flows from
operating activities, available cash, and our ABL Line of Credit. Our working
capital needs follow a seasonal pattern, peaking in the second quarter of our
fiscal year when inventory is received for the Fall selling season. Our largest
source of operating cash flows is cash collections from our customers. In
general, our primary uses of cash are the opening of new stores and remodeling
of existing stores, debt servicing, payment of operating expenses and providing
for working capital, which principally represents the purchase of
inventory.
Our
ability to satisfy our interest payment obligations on our outstanding debt will
depend largely on our future performance, which, in turn, is subject to
prevailing economic conditions and to financial, business and other factors
beyond our control. If we do not have sufficient cash flow to service interest
payment obligations on our outstanding indebtedness and if we cannot borrow or
obtain equity financing to satisfy those obligations, our business and results
of operations will be materially adversely affected. We cannot be assured that
any replacement borrowing or equity financing could be successfully
completed.
We
believe that cash generated from operations, along with our existing cash and
revolving credit facilities, will be sufficient to fund our expected cash flow
requirements and planned capital expenditures for at least the next 12 months as
well as the foreseeable future.
Cash
Flow for the Twelve Months Ended May 31, 2008 Compared with the Twelve Months
Ended June 2, 2007
We
generated $6.2 million of positive cash flow for the year ended May 31, 2008
compared with negative cash flow of $24.5 million for the year ended June 2,
2007. Net cash provided by continuing operations of $98.0 million for
Fiscal 2008 is $2.0 million more than the net cash flow provided by continuing
operations of $96.0 million for Fiscal 2007.
Net cash
used in investing activities increased $47.7 million to $100.3 million for
Fiscal 2008. The primary drivers of the increases relate to increased
capital expenditures in Fiscal 2008 of $26.4 million and increased lease
acquisition costs of $7.1 million. Additionally, we generated $11.0
million less of positive cash flow from the change in restricted cash and cash
equivalents in Fiscal 2008 compared to Fiscal 2007. This change
related to our replacing $11.0 million of restricted cash with letters of credit
agreements as collateral for insurance contracts during Fiscal
2007.
Net cash
provided by financing activities increased $76.5 million to positive cash
flow of $8.6 million in Fiscal 2008. The increase is related to our
borrowings and repayments on the ABL Line of Credit. In Fiscal 2008,
we borrowed $22.6 million, net of repayments. In Fiscal 2007, we
repaid $53.2 million, net of borrowings. The increase in borrowings
is primarily related to funding our capital expenditures.
Working
capital increased $13.6 million to $294.2 million during the fiscal year ended
May 31, 2008 compared to $280.6 million for the fiscal year ended June 2,
2007. The increase in working capital is the result of a variety of
factors. Increases in working capital resulted from a decrease in the
line item “Accounts Payable” and an increase in the line item “Deferred Tax
Asset” in our Consolidated Balance Sheets. These increases in
the our working capital are partially offset by a decrease in the line item
“Assets Held for Disposal” and an increase in the line item “Other Current
Liabilities” in the our Consolidated Balance Sheets.
The line
item “Accounts Payable” in our Consolidated Balance Sheets decreased $58.3
million compared with Fiscal 2007. This decrease in the line item
“Accounts Payable” in our Consolidated Balance Sheets is primarily related to a
decrease in merchandise payables as a result of our paying invoices faster in
Fiscal 2008 than in Fiscal 2007.
22
The line
item “Deferred Tax Asset” in our Consolidated Balance Sheets increased $16.2
million compared with Fiscal 2007. This increase is primarily the
result of our establishment of a FIN 48 liability associated with our accounting
of store value cards.
In Fiscal
2008, $30.1 million of assets previously considered held for sale were
reclassified to property and equipment as we determined that it was no longer
likely that they would be sold within the current operating cycle, leading to
the decrease in the line item “Assets Held for Sale” from Fiscal 2007 to Fiscal
2008. Additionally $2.1 million of assets previously held for
disposal were sold during Fiscal 2008. Refer to Footnote number 6,
“Assets Held for Disposal” for further details.
The increase
in the line item “Other Current Liabilities” in the Company’s Consolidated
Balance Sheets is due primarily to an increase of $17.9 million related to the
Company’s accruals. The increase in accruals is due to a variety of
accruals including, but not limited to, increases of $4.8 million related to
accruals for fixed assets as a result of the increased number of stores we are
planning to open in Fiscal 2009, $3.0 million in professional fees as a result
of our evaluation of the effectiveness of our internal control over financial
reporting, and $2.5 million related to electric expenses as a result of rising
energy costs.
Cash Flow for the
Twelve Months Ended June 2, 2007 Compared with the Combined Twelve Months Ended
June 3, 2006
Our
combined cash flows for the year ended June 3, 2006 represent the addition of
the Predecessor period from May 29, 2005 through April 12, 2006 and the
Successor period from April 13, 2006 through June 3, 2006. This combination does
not comply with GAAP or with the rules for pro forma presentation, but is
presented because we believe it provides the most meaningful comparison of our
results for investors as it provides annual comparability between years and is
the information that management uses to make decisions on an annual
basis. The following table shows the combination of the Predecessor
and Successor periods:
|
(Successor)
|
(Predecessor)
|
|||||||||||
|
April
13, 2006 to June 3, 2006
|
May
29, 2005 to April 12, 2006
|
Combined
Total
|
||||||||||
|
Net
Cash (Used in) Provided by Operations
|
$ | (52,893 | ) | $ | 430,979 | $ | 378,086 | |||||
|
Net
Cash Used in Investing Activities
|
$ | (2,057,669 | ) | $ | (63,920 | ) | $ | (2,121,589 | ) | |||
|
Net
Cash Provided by (Used in) Financing Activities
|
$ | 1,855,989 | $ | (102,063 | ) | $ | 1,753,926 | |||||
Net cash
provided by continuing operations amounted to $96.0 million for Fiscal 2007
which reflected a decrease of $282.1 million from $378.1 million of
net cash provided by continuing operations for the comparative period of Fiscal
2006. This decrease in net cash from continuing operations was due primarily to
less cash being generated from the sale of short term investments as was
generated in Fiscal 2006, and from a decrease in net income of $114.4
million. The decrease in net income is primarily due to interest
expenses and other Merger Transaction related expenses such as the accrual of
retention bonuses during Fiscal 2007.
Net cash
(used in) investing activities decreased from $2.1 billion for Fiscal 2006 to
$52.6 million for Fiscal 2007. This decrease was primarily attributable to
acquisition costs related to the Merger Transaction recorded during Fiscal
2006.
Net cash
used in financing activities amounted to $67.9 million for Fiscal 2007
compared with $1.8 billion of net cash provided by financing activities for
Fiscal 2006. This decrease is related to the net debt/equity proceeds related to
the financing of the Merger Transaction received during Fiscal
2006.
Working
capital increased to $280.6 million at June 2, 2007 from
$219.3 million at June 3, 2006. This increase in working capital
was primarily attributed to a decrease in accounts payable of $62.5
million due to fewer purchases in May compared to May of 2006 offset in part by
a $27.4 million increase in assets held for disposal given the anticipated sale
of certain fixed assets.
Debt
The
credit agreements related to our ABL Line of Credit and our Term Loan, and the
indentures governing our outstanding notes, each contain customary covenants,
including, among other things, covenants that restrict our ability to incur
certain additional indebtedness, create or permit liens on assets, or engage in
mergers or consolidations. Our credit agreements and indentures also
contain various and customary events of default with respect to our outstanding
indebtedness, including, without
23
limitation,
the failure to pay interest or principal when the same is due under the credit
agreements, cross default provisions, the failure of representations and
warranties contained in the credit agreements to be true and certain insolvency
events. If an event of default occurs and is continuing, the principal amounts
outstanding thereunder, together with all accrued unpaid interest and other
amounts owed thereunder, may be declared immediately due and payable by the
lenders. Were such an event to occur, we would be forced to seek new financing
that may not be on as favorable terms as our current borrowings.
As of May
31, 2008 we are in compliance with all of our debt covenants. As of
May 31, 2008, we had total debt outstanding of $1.5 billion including: $181.6
million outstanding under the ABL Line of Credit with unused availability of
$274.0 million, and $872.8 million outstanding under our Term
Loan. During Fiscal 2008, we paid down $11.4 million of our
outstanding obligations under our Term Loan, all of which was based on the
Company’s free cash flow (as defined in the credit agreement). The
payment offsets the future mandatory quarterly payments of $2.3 million through
the third quarter of the fiscal year ending May 30, 2009 (Fiscal 2009) and $0.2
million of the quarterly payment to be made in the fourth quarter of Fiscal
2009. During Fiscal 2008, we had borrowings, net of repayments of
$22.6 million under the ABL Line of Credit.
Please
refer to Note 15 to our Consolidated Financial Statements entitled “Long-Term
Debt” for a description of all outstanding debt.
During
Fiscal 2008, we opened 20 new Burlington Coat Factory Warehouse stores and
relocated three stores to new locations within the same trading
markets. We incurred $102.2 million, before the benefit of landlord
allowances of $32.9 million, in capital expenditures during Fiscal 2008
including: $74.4 million for store expenditures, exclusive of
the $32.9 million of landlord allowances, $4.5 million for upgrades of warehouse
and corporate facilities and $23.3 million for computer and other equipment
expenditures.
For
Fiscal 2009, we estimate that we will spend approximately $170.0 million, before
the benefit of landlord allowances of $73.0 million, for store openings,
improvements to warehouse facilities, information technology upgrades, and other
capital expenditures. Of the $170.0 million, approximately $128.0
million, before the benefit of $73.0 million of landlord allowances, has been
allocated for expenditures related to new stores, relocations and other store
requirements, $18.0 million for information technology initiatives and $24.0
million allocated for warehouse and home office system
enhancements. As part of our growth strategy, we plan to open
approximately 40 new Burlington Coat Factory Warehouse stores during Fiscal
2009.
We
currently use an internally developed warehouse management system to receive,
track, and control our product flow. During Fiscal 2009, we will continue our
replacement of this warehouse management system, which is currently planned to
be completed during Fiscal 2010. We believe that the use of the new system will
have a positive impact on efforts to optimize our supply chain
management.
We
monitor the availability of desirable locations for our stores from such sources
as national brokers, professional associations, landlord contacts, dispositions
by other retail chains and bankruptcy auctions. We may seek to acquire a number
of such locations in one or more transactions. If we undertake such
transactions, we may seek additional financing to fund acquisition and carrying
charges (i.e., the cost of rental, maintenance, tax and other obligations
associated with such properties from the time of commitment to acquire to the
time that such locations can be readied for opening as BCF stores) related to
these stores. There can be no assurance, however, that any additional locations
will become available from other retailers or that, if available, we will
undertake to bid or be successful in bidding for such locations. Furthermore, to
the extent that we decide to purchase additional store locations, it may be
necessary to finance such acquisitions with additional long-term
borrowings.
Dividends
Payment
of dividends is prohibited under our credit agreements, except for certain
limited circumstances. Dividends equal to $0.7 million and $0.1
million were paid in Fiscal 2008 and Fiscal 2007, respectively, to our Parent in
order to repurchase capital stock of the Parent from retiring management
personnel.
Certain
Information Concerning Contractual Obligations
The
following table sets forth certain information regarding our obligations to make
future payments under current contracts as of May 31, 2008:
24
|
Payments
During Fiscal Years
|
|||||||||||||||||||||
|
Total
|
Less
Than 1 Year
|
2-3
Years
|
4-5
Years
|
Thereafter
|
|||||||||||||||||
|
Long-Term
Debt(1)
|
$ | 1,463,045 | $ | 3,326 | $ | 215,909 | $ | 852,936 | $ | 390,874 | |||||||||||
|
Interest
on Long-Term Debt
|
516,654 | 101,363 | 201,765 | 160,917 | 52,609 | ||||||||||||||||
|
Capital
Lease Obligations(2)
|
51,680 | 2,497 | 5,173 | 5,379 | 38,631 | ||||||||||||||||
|
Operating
Leases (3)
Related
Party Fees (4)
|
1,095,142 | 164,396 | 303,354 | 254,276 | 373,116 | ||||||||||||||||
| 31,500 | 4,000 | 8,000 | 8,000 | 11,500 | |||||||||||||||||
|
Purchase
Obligations (5)
FIN
48 Liabilities (6)
Other
(7)
|
735,573 | 727,563 | 8,001 | 7 | 2 | ||||||||||||||||
| 38,003 | 12,999 | 3,442 | - | 21,562 | |||||||||||||||||
| 3,000 | - | - | - | 3,000 | |||||||||||||||||
|
Total
|
$ | 3,934,597 | $ | 1,016,144 | $ | 745,644 | $ | 1,281,515 | $ | 891,294 | |||||||||||
|
Notes:
|
|||||||||||||||||||||
|
(1)
Excludes interest on Long-Term Debt.
|
|||||||||||||||||||||
|
(2)
Capital Lease Obligations include future interest payments.
(3)
Represents minimum rent payments for operating leases under the current
terms.
(4)
Represent fees to be paid to Bain Capital under the terms of the advisory
agreement (Please refer to Footnote 23 entitled “Related
Party Transactions” for further detail).
(5)
Represents commitments to purchase goods or services that have not been
received as of May 31, 2008.
(6)
The FIN 48 liabilities represent uncertain tax positions related to
temporary differences. The years for which the temporary
differences related to the uncertain tax positions will reverse have
been estimated in scheduling the obligations within the
table. Additionally, $16.5 million of interest and penalties
included in the Company’s total FIN 48 liability is not included in the
table
above.
(7) Represents
the Company’s Agreement with two former employees and the Chief Executive
Officer to pay their beneficiaries $1.0
million each upon any of their deaths.
|
|||||||||||||||||||||
During
Fiscal 2007, we sold lease rights for three store locations that were previously
operated by the Company. In the event of default by the assignee, we
could be liable for obligations associated with these real estate leases which
have future lease related payments (not discounted to present value) of
approximately $9.0 million through the end of the fiscal year ended May 31,
2014, and which are not reflected in the table above. The scheduled future
minimum rentals for these leases over the next five fiscal years and thereafter
are $2.1 million, $1.8 million, $1.6 million, $1.6 million, and $1.8 million,
respectively. We believe the likelihood of a material liability being
triggered under these leases is remote, and no liability has been accrued for
these contingent lease obligations as of May 31, 2008.
Our
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
(GAAP). We believe there are several accounting policies that are
critical to understanding our historical and future performance as these
policies affect the reported amounts of revenues and other significant areas
that involve management’s judgments and estimates. These critical
accounting policies and estimates have been discussed with our audit
committee. The preparation of our financial statements requires
management to make estimates and assumptions that affect (i) the reported
amounts of assets and liabilities; (ii) the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements; and (iii) the
reported amounts of revenues and expenses during the reporting period. On an
on-going basis, management evaluates its estimates and judgments, including
those related to revenue recognition, inventories, long-lived assets,
intangible assets, goodwill impairment, insurance reserves, sales returns,
allowances for doubtful accounts and income taxes. Historical
experience and various other factors, that are believed to be reasonable under
the circumstances, form the basis for making estimates and judgments about the
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. A critical accounting estimate meets two
criteria: (1) it requires assumptions about highly uncertain matters and (2)
there would be a material effect on the financial statements from either using a
different, although reasonable, amount within the range of the estimate in the
current period or from reasonably likely period-to-period changes in the
estimate.
While
there are a number of accounting policies, methods and estimates affecting our
consolidated financial statements as addressed in Note 1 to our consolidated
financial statements, areas that are particularly critical and significant
include:
Revenue
Recognition. We record revenue at the time of sale and
delivery of merchandise, net of allowances for estimated future returns. We
account for layaway sales and leased department revenue in compliance with Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements, as revised and rescinded by SAB No. 104, Revenue Recognition. Layaway
sales are recognized upon delivery of merchandise to the customer. The amount of
cash received upon initiation of the layaway is
25
recorded
as a deposit liability within the line item “Other Current Liabilities” in the
our Consolidated Balance Sheets. Store value cards (gift
cards and store credits issued for merchandise returns) are recorded as a
liability at the time of issuance, and the related sale is recorded upon
redemption. Prior to December 29, 2007, except where prohibited by law, after 13
months of non-use, a monthly dormancy service fee was deducted from the
remaining balance of the store value card and recorded in the line item “Other
Revenue” in our Consolidated Statements of Operations and Comprehensive Income
(Loss).
On December 29, 2007, in connection
with establishing a gift card company, we discontinued assessing a dormancy
service fee on inactive store value cards. Instead, we now
estimate and recognize store value card breakage income in proportion to actual
store value card redemptions and record such income in the line item “Other
Income, Net” in the our Consolidated Statements of Operations and
Comprehensive Income (Loss). We determine an estimated store value card breakage
rate by
continuously
evaluating historical redemption data. Breakage income is
recognized on a monthly basis in proportion to the historical redemption
patterns for those store value cards for which the likelihood of redemption is
remote.
We present sales, net of sales taxes,
in our Consolidated Statements of Operations and Comprehensive Income
(Loss).
Inventory. Our inventory is
valued at the lower of cost or market using the retail inventory method. Under
the retail inventory method, the valuation of inventory at cost and resulting
gross margin are calculated by applying a calculated cost to retail ratio to the
retail value of inventory. The retail inventory method is an averaging method
that has been widely used in the retail industry due to its practicality.
Additionally, the use of the retail inventory method will result in valuing
inventory at the lower of cost or market if markdowns are currently taken as a
reduction of the retail value of inventory. Inherent in the retail inventory
method calculation are certain significant management judgments and estimates
including merchandise markon, markups, markdowns and shrinkage which
significantly impact the ending inventory valuation at cost as well as the
resulting gross margin. Management believes that our retail inventory method and
application of the average cost method provides an inventory valuation which
approximates cost using a first-in, first-out assumption and results in carrying
value at the lower of cost or market. Estimates are used to charge inventory
shrinkage for the first three fiscal quarters of the fiscal year. Actual
physical inventories are conducted during the fourth quarter of each fiscal year
to calculate actual shrinkage. We also estimate the required markdown and aged
inventory reserves. If actual market conditions are less favorable than those
projected by management, additional markdowns may be required. While we make
estimates on the basis of the best information available to us at the time the
estimates are made, over accruals or under accruals of shrinkage may be
identified as a result of the physical inventory requiring fourth quarter
adjustments.
Long-Lived Assets. We test
for recoverability of long-lived assets whenever events or changes in
circumstances indicate that their carrying amount may not be recoverable. This
includes performing an analysis of anticipated undiscounted future net cash
flows of long-lived assets. If the carrying value of the related assets exceeds
the undiscounted cash flow, we reduce the carrying value to its fair value,
which is generally calculated using discounted cash flows. Various factors
including future sales growth and profit margins are included in this analysis.
To the extent these future projections change, the conclusion regarding
impairment may differ from the estimates. Future adverse changes in market
conditions or poor operating results of underlying assets could result in losses
or an inability to recover the carrying value of the assets that may not be
reflected in an asset’s current carrying value, thereby possibly requiring an
impairment charge in the future. In Fiscal 2008 and 2007, we recorded
$25.3 million and $24.4 million, respectively, in impairment charges related to
long-lived assets and intangible assets.
Intangible Assets. As
discussed above, the Merger Transaction was completed on April 13, 2006 and
was financed by a combination of borrowings under our senior secured credit
facilities, the issuance of the senior notes, the issuance of the holdings
senior discount notes and the equity investment of affiliates of Bain Capital
and management. The purchase price, including transaction costs, was
approximately $2.1 billion. Purchase accounting requires that all assets and
liabilities be recorded at fair value on the acquisition date, including
identifiable intangible assets separate from goodwill. Identifiable intangible
assets include trade names, and net favorable lease positions. Goodwill
represents the excess of cost over the fair value of net assets acquired. The
fair values and useful lives of identified intangible assets are based on many
factors, including estimates and assumptions of future operating performance,
estimates of cost avoidance, the specific characteristics of the identified
intangible assets and our historical experience.
On an
annual basis we compare the carrying value of our indefinite-lived intangible
assets to their estimated fair value. Our finite-lived intangible assets are
reviewed for impairment when circumstances change. If the carrying
value is greater than the respective estimated fair value, we then determine if
the asset is impaired, and whether some, or all, of the asset should be written
off as a charge to operations, which could have a material adverse effect on our
financial results.
Goodwill Impairment. Goodwill
represents the excess of cost over the fair value of net assets acquired. SFAS
No. 142, “Goodwill and
Other Intangible Assets,” requires periodic tests of the impairment of
goodwill. SFAS No. 142 requires a comparison, at least annually, of the net
book value of the assets and liabilities associated with a reporting unit,
including goodwill, with the fair value of the reporting unit, which corresponds
to the discounted cash flows of the reporting unit, in the absence of an active
market. Our impairment analysis of the fair value of the Company includes a
number of assumptions around our future performance, which may differ from
actual results. When this comparison indicates that impairment must
be recorded, the impairment recognized is the amount by which the carrying
amount of the assets exceeds the fair value of these assets.
Our
26
annual
goodwill impairment review is conducted during the last quarter of each fiscal
year. There were no impairment charges recorded on our $42.8 million
and $46.2 million carrying value of goodwill for Fiscal 2008 and Fiscal 2007,
respectively.
Insurance Reserves. We have
risk participation agreements with insurance carriers with respect to workers’
compensation, general liability insurance and health insurance. Pursuant to
these arrangements, we are responsible for paying individual claims up to
designated dollar limits. The amounts included in our costs related to these
claims are estimated and can vary based on changes in assumptions or claims
experience included in the associated insurance programs. For example, changes
in legal trends and interpretations, as well as changes in the nature and method
of how claims are settled, can impact ultimate costs. An increase in
worker’s compensation claims by employees, health insurance claims by employees
or general liability claims may result in a corresponding increase in our costs
related to these claims. Insurance reserves amounted to $36.7 million and $33.7
million at May 31, 2008 and June 2, 2007, respectively.
Reserves for Sales Returns.
We record reserves for future sales returns. The reserves are based on current
sales volume and historical claim experience. If claims experience differs from
historical levels, revisions in our estimates may be required. Sales reserves
amounted to $6.4 million and $5.5 million at May 31, 2008 and June 2, 2007,
respectively. This increase is due to the change in our return policy
in Fiscal 2007, providing for cash back returns in addition to store merchandise
credit for returns.
Allowance for Doubtful
Accounts. We maintain allowances for bad checks, miscellaneous
receivables and losses on credit card accounts. This reserve is calculated based
upon historical collection activities adjusted for known
uncollectibles. As of May 31, 2008 and June 2, 2007, the allowance
for doubtful accounts was $0.6 million and $1.0 million,
respectively.
Income Taxes. We
account for income taxes in accordance with SFAS 109, “Accounting for Income
Taxes.” Our provision for income taxes and effective tax rates are based
on a number of factors, including our income, tax planning strategies,
differences between tax laws and accounting rules, statutory tax rates and
credits, uncertain tax positions, and valuation allowances, by legal entity and
jurisdiction. We use significant judgment and estimations in evaluating our tax
positions.
U.S.
federal and state tax authorities regularly audit our tax returns. We establish
tax reserves when it is considered more likely than not that we will not succeed
in defending our positions. We adjust these tax reserves, as well as the related
interest and penalties, based on the latest facts and circumstances, including
recently published rulings, court cases, and outcomes of tax audits. To the
extent our actual tax liability differs from our established tax reserves, our
effective tax rate may be materially impacted. While it is often difficult to
predict the final outcome of, the timing of, or the tax treatment of any
particular tax position or deduction, we believe that our tax reserves reflect
the most likely outcome of known tax contingencies.
We record
deferred tax assets and liabilities for any temporary differences between the
tax reflected in our financial statements and tax presumed rates. We establish
valuation allowances for our deferred tax assets when we believe it is more
likely than not that the expected future taxable income or tax liabilities
thereon will not support the use of a deduction or credit. For example, we would
establish a valuation allowance for the tax benefit associated with a loss
carryover in a tax jurisdiction if we did not expect to generate sufficient
taxable income to utilize the loss carryover.
On June
3, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation
No. 48 (as amended) – “Accounting for Uncertainty in
Income Taxes – an interpretation of FASB Statement No. 109” (FIN
48). Adjustments related to the adoption of FIN 48 are reflected as an
adjustment to retained earnings in Fiscal 2008. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an entity’s financial
statements in accordance with FASB Statement No. 109, “Accounting for Income
Taxes.” FIN 48 prescribes a
recognition threshold and measurement attributes for financial statement
disclosure of tax positions taken or expected to be taken on a tax
return. FIN 48 requires that we recognize in our financial statements
the impact of a tax position taken or expected to be taken in a tax return, if
that position is “more likely than not” of being sustained upon examination by
the relevant taxing authority, based on the technical merits of the
position. The tax benefits recognized in the financial statements
from such a position are measured based on the largest benefit that has a
greater than fifty percent likelihood of being realized upon ultimate
resolution. Additionally, FIN 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition.
Recent
Accounting Pronouncements
Refer to
Note 2 to our Consolidated Financial Statements entitled “Recent Accounting
Pronouncements” for a discussion of recent accounting pronouncements and their
impact on our consolidated financial statements.
Fluctuations
in Operating Results
We expect
that our revenues and operating results may fluctuate from quarter to quarter or
over the longer term. Certain of the general factors that may cause such
fluctuations are discussed in Item 1A, Risk Factors.
27
Seasonality
Our
business is seasonal, with our highest sales occurring in the months of
September, October, November, December and January of each year. For the past
five fiscal years, an average of 50% of our net sales have occurred during the
period from September through January. Weather, however, continues to be an
important contributing factor to the sale of clothing in the Fall, Winter and
Spring seasons. Generally, our sales are higher if the weather is cold during
the Fall and warm during the early Spring.
Inflation
We do not believe that our operating
results have been materially affected by inflation during the past fiscal
year. During the recent past, the cost of apparel merchandise has
benefited from deflationary pressures in the Far East. In addition,
the we have historically been able to increase our selling prices as the costs
of merchandising and related operating expenses have increased, and therefore,
been able to minimize the impact of inflation on the results of our
operations.
Market
Risk
We are
exposed to market risks relating to fluctuations in interest rates. Our senior
secured credit facilities contain floating rate obligations and are subject to
interest rate fluctuations. The objective of our financial risk management is to
minimize the negative impact of interest rate fluctuations on our earnings and
cash flows. Interest rate risk is managed through the use of a combination of
fixed and variable interest debt as well as the periodic use of interest rate
cap agreements.
As
previously described, we entered into two interest rate cap agreements effective
as of May 30, 2006 and one interest rate cap agreement effective as of May 20,
2009 to manage interest rate risks associated with its long-term debt
obligations. Gains and losses associated with these contracts are accounted for
as interest expense and are recorded under the caption “Interest Expense” on our
Consolidated Statements of Operations and Comprehensive Income (Loss). We
continue to have exposure to interest rate risks to the extent they are not
hedged.
Off-Balance
Sheet Transactions
Other
than operating leases consummated in the normal course of business, we are not
involved in any off-balance sheet arrangements that have or are reasonably
likely to have a material current or future impact on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.
28
|
|
Item
7A.
Quantitative and Qualitative Disclosures About Market
Risk
|
We are
exposed to certain market risks as part of our ongoing business operations.
Primary exposures include changes in interest rates, as borrowings under our ABL
Line of Credit and Term Loan bear interest at floating rates based on LIBOR or
the base rate, in each case plus an applicable borrowing margin. We will manage
our interest rate risk by balancing the amount of fixed-rate and floating-rate
debt. For fixed-rate debt, interest rate changes do not affect earnings or cash
flows. Conversely, for floating-rate debt, interest rate changes generally
impact our earnings and cash flows, assuming other factors are held
constant.
At May
31, 2008, we had $429.5 million principal amount of fixed-rate debt and $1,054.4
million of floating-rate debt. Based on $1,054.4 million outstanding as floating
rate debt, an immediate increase of one percentage point would cause an increase
to cash interest expense of approximately $10.5 million per year. As
of June 2, 2007, we estimated that an immediate increase of one percentage point
would cause an increase to cash interest expense of approximately $10.4 million
per year.
If a one
point increase in interest rate were to occur over the next four quarters
(excluding the interest rate cap), such an increase would result in the
following additional interest expenses (assuming current ABL Line of Credit
borrowing level remains constant with current fiscal year end
levels):
|
Floating-Rate
Debt
|
(in
thousands ‘000)
|
|||||||||||||||||||
|
Principal
Outstanding at May 31, 2008
|
Additional
Interest Expense Q1 2009
|
Additional
Interest Expense Q2 2009
|
Additional
Interest Expense Q3 2009
|
Additional
Interest Expense Q4 2009
|
||||||||||||||||
|
ABL
Line of Credit
|
$ | 181,600 | $ | 454 | $ | 454 | $ | 454 |
$
454
|
|||||||||||
|
Term
Loan
|
872,807 | 2,182 | 2,182 | 2,182 |
2,177
|
|||||||||||||||
|
Total
|
$ | 1,054,407 | $ | 2,636 | $ | 2,636 | $ | 2,636 | $ | 2,631 | ||||||||||
We have
two interest rate cap agreements for a maximum principal amount of $1.0 billion
which limit our interest rate exposure to 7% for our first billion of borrowings
under our variable rate debt obligations and if interest rates were to increase
above the 7% cap rate, then our maximum interest rate exposure would be $46.2
million assuming constant current borrowing levels of $1.0
billion. Currently, we have unlimited interest rate risk related to
our variable rate debt in excess of $1.0 billion. At May 31, 2008,
our borrowing rates related to our ABL Line of Credit averaged
4.1%. At May 31, 2008, the borrowing rate related to our Term Loan
was 4.9%.
Our
ability to satisfy our interest payment obligations on our outstanding debt will
depend largely on our future performance, which in turn, is subject to
prevailing economic conditions and to financial, business and other factors
beyond our control. If we do not have sufficient cash flow to service interest
payment obligations on our outstanding indebtedness and if we cannot borrow or
obtain equity financing to satisfy those obligations, our business and results
of operations will be materially adversely affected. We cannot be assured that
any replacement borrowing or equity financing could be successfully
completed.
A change
in interest rates generally does not have an impact upon our future earnings and
cash flow for fixed-rate debt instruments. As fixed-rate debt matures, however,
and if additional debt is acquired to fund the debt repayment, future earnings
and cash flow may be affected by changes in interest rates. This effect would be
realized in the periods subsequent to the periods when the debt
matures.
On
December 20, 2007, we entered into an interest rate cap agreement to limit
interest rate risk associated with our future long-term debt
obligations. The agreement has a notional amount of $600 million with
a cap rate of 7.0%, and terminates on May 31, 2011. The agreement
will be effective on May 29, 2009, upon termination of our existing $700 million
interest rate cap agreement.
29
Item 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
|
Page
|
|
|
Consolidated
Financial Statements
|
|
|
Report
of Independent Registered Public Accounting Firm
|
35
|
|
Consolidated
Balance Sheets as of May 31, 2008 and June 2, 2007
|
36
|
|
Consolidated
Statements of Operations and Comprehensive Income (Loss) for the fiscal
years ended May 31, 2008 and June 2, 2007, the periods from April 13,
2006 to June 3, 2006 and May 29, 2005 to April 12,
2006
|
37
|
|
Consolidated
Statements of Cash Flows for the fiscal years ended May 31, 2008 and June
2, 2007, the periods from April 13, 2006 to June 3, 2006
and May 29, 2005 to April 12, 2006
|
38
|
|
Consolidated
Statements of Stockholders’ Equity for the fiscal years ended May 31, 2008
and June 2, 2007, the periods from April 13, 2006 to June 3, 2006
and May 29, 2005 to April 12, 2006
|
40
|
|
Notes
to Consolidated Financial Statements for the fiscal years ended May 31,
2008 and June 2, 2007, the periods from April 13, 2006 to June 3,
2006 and May 29, 2005 to April 12,
2006
|
42
|
30
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of Burlington Coat Factory Investments
Holdings, Inc.
Burlington,
New Jersey
We have
audited the accompanying consolidated balance sheets of Burlington Coat Factory
Investments Holdings, Inc. and Subsidiaries (the"Company") as of May 31, 2008
and June 2, 2007, and the related Consolidated Statements of Operations and
Comprehensive Income (Loss), stockholders' equity, and cash flows for the fiscal
years ended May 31,2008 and June 2, 2007, and the period from April 13, 2006 to
June 3,2006 ("Successor") and the period from May 29, 2005 to April 12, 2006
("Predecessor"). Our audits also included the financial statement
schedule listed in the Index at Item 15(a)(2). These financial statements and
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstancers, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal ccontrol over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonnable basis
for our opinion.
In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of May 31, 2008 and June 2,
2007, and the results of its operations and its cash flows for the fiscal years
ended May 31, 2008 and June 2, 2007, the period from April 13, 2006 to June 3,
2006 (Successor), and for the period from May 29, 2005 to April 12, 2006
(Predecessor), in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As
discussed in Note 1 to the consolidated financial statements, effective June 3,
2007 the Company changed its method of accounting for income taxes to conform to
Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109".
/s/
DELOITTE & TOUCHE LLP
Parsippany,
New Jersey
August
29, 2008
31
Burlington
Coat Factory Investments Holdings, Inc. and Subsidiaries
Consolidated
Balance Sheets
(All
amounts in thousands, except share data)
|
June
2, 2007
|
||||||||
|
ASSETS
|
||||||||
|
Current
Assets:
|
||||||||
|
Cash
and Cash Equivalents
|
$ | 40,101 | $ | 33,878 | ||||
|
Restricted
Cash and Cash Equivalents
|
2,692 | 2,753 | ||||||
|
Accounts
Receivable (Net of Allowances for Doubtful Accounts of $634 in 2008 and
$969 in 2007)
|
27,137 | 30,590 | ||||||
|
Merchandise
Inventories
|
719,529 | 710,571 | ||||||
|
Deferred
Tax Assets
|
51,376 | 35,143 | ||||||
|
Prepaid
and Other Current Assets
|
24,978 | 34,257 | ||||||
|
Prepaid
Income Taxes
|
3,864 | 1,109 | ||||||
|
Assets
Held for Disposal
|
2,816 | 35,073 | ||||||
|
Total
Current Assets
|
872,493 | 883,374 | ||||||
|
Property
and Equipment—Net of Accumulated Depreciation
|
919,535 | 948,334 | ||||||
|
Tradenames
|
526,300 | 526,300 | ||||||
|
Favorable
Leases—Net of Accumulated Amortization
|
534,070 | 574,879 | ||||||
|
Goodwill
|
42,775 | 46,219 | ||||||
|
Other
Assets
|
69,319 | 57,415 | ||||||
|
Total
Assets
|
$ | 2,964,492 | $ | 3,036,521 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Accounts
Payable
|
$ | 337,040 | $ | 395,375 | ||||
|
Income
Taxes Payable
|
5,804 | - | ||||||
|
Other
Current Liabilities
|
238,866 | 198,627 | ||||||
|
Current
Maturities of Long Term Debt
|
3,653 | 5,974 | ||||||
|
Total
Current Liabilities
|
585,363 | 599,976 | ||||||
|
Long
Term Debt
|
1,480,231 | 1,456,330 | ||||||
|
Other
Liabilities
|
110,776 | 48,447 | ||||||
|
Deferred
Tax Liabilities
|
464,598 | 551,298 | ||||||
|
Commitments
and Contingencies (See Footnote 22)
|
||||||||
|
Stockholders’
Equity:
|
||||||||
|
Common
Stock, Par Value $0.01; Authorized 1,000 shares; 1,000 issued and
outstanding at May 31, 2008 and June 2, 2007
|
- | - | ||||||
|
Capital
in Excess of Par Value
|
457,371 | 454,935 | ||||||
|
Accumulated
Deficit
|
(133,847 | ) | (74,465 | ) | ||||
|
Total
Stockholders’ Equity
|
323,524 | 380,470 | ||||||
|
Total
Liabilities and Stockholders’ Equity
|
$ | 2,964,492 | $ | 3,036,521 | ||||
See Notes
to Consolidated Financial Statements
32
Burlington
Coat Factory Investments Holdings, Inc. and Subsidiaries
Consolidated
Statements of Operations and Comprehensive Income (Loss)
(All
amounts in thousands)
|
(Successor)
|
(Predecessor)
|
|||||||||||||||
|
Year
Ended
May
31, 2008
|
Year
Ended
June
2, 2007
|
April
13, 2006 to June 3, 2006
|
May
29, 2005 to April 12, 2006
|
|||||||||||||
|
REVENUES:
|
||||||||||||||||
|
Net
Sales
|
$ | 3,393,417 | $ | 3,403,407 | $ | 421,180 | $ | 3,017,633 | ||||||||
|
Other
Revenue
|
30,556 | 38,238 | 4,066 | 27,675 | ||||||||||||
|
Total
Revenue
|
3,423,973 | 3,441,645 | 425,246 | 3,045,308 | ||||||||||||
|
COSTS
AND EXPENSES:
|
||||||||||||||||
|
Cost
of Sales
|
2,095,364 | 2,125,160 | 266,465 | 1,916,798 | ||||||||||||
|
Selling
and Administrative Expenses
|
1,090,829 | 1,062,468 | 154,691 | 897,231 | ||||||||||||
|
Depreciation
|
133,060 | 130,398 | 18,097 | 78,804 | ||||||||||||
|
Amortization
|
43,915 | 43,689 | 9,758 | 494 | ||||||||||||
|
Impairment
Charges
|
25,256 | 24,421 | - | - | ||||||||||||
|
Interest
Expense
|
122,684 | 134,313 | 18,093 | 4,609 | ||||||||||||
|
Other
Income, Net
|
(12,861 | ) | (6,180 | ) | (4,876 | ) | (3,572 | ) | ||||||||
|
Total
Costs and Expenses
|
3,498,247 | 3,514,269 | 462,228 | 2,894,364 | ||||||||||||
|
(Loss)
Income Before (Benefit) Provision for Income Tax
|
(74,274 | ) | (72,624 | ) | (36,982 | ) | 150,944 | |||||||||
|
(Benefit)
Provision for Income Tax
|
(25,304 | ) | (25,425 | ) | (9,816 | ) | 56,605 | |||||||||
|
Net
(Loss) Income
|
(48,970 | ) | (47,199 | ) | (27,166 | ) | 94,339 | |||||||||
|
Net
Unrealized (Loss) on Investments, Net of tax
|
- | - | - | (4 | ) | |||||||||||
|
Total
Comprehensive (Loss) Income
|
$ | (48,970 | ) | $ | (47,199 | ) | $ | (27,166 | ) | $ | 94,335 | |||||
See Notes
to Consolidated Financial Statements
33
Burlington
Coat Factory Investments Holdings, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
(All amounts in
thousands)
|
(Successor)
|
(Predecessor)
|
|||||||||||||||
|
Year
Ended
May
31, 2008
|
Year
Ended
June
2, 2007
|
April
13, 2006 to June 3, 2006
|
May
29, 2005 to April 12, 2006
|
|||||||||||||
|
OPERATING
ACTIVITIES
|
||||||||||||||||
|
Net
(Loss) Income
|
$ | (48,970 | ) | $ | (47,199 | ) | $ | (27,166 | ) | $ | 94,339 | |||||
|
Adjustments
to Reconcile Net (Loss) Income to Net Cash Provided by (Used
in) Operating Activities:
|
||||||||||||||||
|
Depreciation
|
133,060 | 130,398 | 18,097 | 78,804 | ||||||||||||
|
Amortization
|
43,915 | 43,689 | 9,758 | 494 | ||||||||||||
|
Impairment
Charges
|
25,256 | 24,421 | - | - | ||||||||||||
|
Accretion
of Senior Notes and Senior Discount Notes
|
11,872 | 11,948 | - | - | ||||||||||||
|
Interest
Rate Cap Contract-Adjustment to Market
|
(70 | ) | 1,971 | - | - | |||||||||||
|
Provision
for Losses on Accounts Receivable
|
2,977 | 2,826 | 374 | 3,479 | ||||||||||||
|
Provision
for Deferred Income Taxes
|
(61,961 | ) | (61,834 | ) | (11,305 | ) | (11,328 | ) | ||||||||
|
Loss
on Disposition of Fixed Assets and Leasehold Improvements
|
1,096 | 3,637 | 1 | 2,742 | ||||||||||||
|
Non-Cash
Stock Option Expense and Deferred
Compensation Amortization
|
2,436 | 7,957 | 848 | - | ||||||||||||
|
Non-Cash
Rent Expense
|
981 | 9,397 | 267 | 1,113 | ||||||||||||
|
Changes
in Assets and Liabilities
|
||||||||||||||||
|
Investments
|
- | 591 | 183 | 133,890 | ||||||||||||
|
Accounts
Receivable
|
(3,187 | ) | (4,258 | ) | (2,296 | ) | 2,059 | |||||||||
|
Merchandise
Inventories
|
(8,958 | ) | (2,386 | ) | 48,971 | (36,274 | ) | |||||||||
|
Prepaid
and Other Current Assets
|
4,682 | 910 | 9,154 | (8,098 | ) | |||||||||||
|
Accounts
Payable
|
(58,335 | ) | (62,480 | ) | (62,176 | ) | 116,189 | |||||||||
|
Other
Current Liabilities
|
21,289 | 3,683 | (39,759 | ) | 50,193 | |||||||||||
|
Deferred
Rent Incentives
|
32,885 | 31,957 | (113 | ) | 3,052 | |||||||||||
|
Other
|
(991 | ) | 788 | 2,269 | 325 | |||||||||||
|
Net
Cash Provided by (Used in) Operations
|
97,977 | 96,016 | (52,893 | ) | 430,979 | |||||||||||
|
INVESTING
ACTIVITIES
|
||||||||||||||||
|
Acquisition
of BCFWC
|
- | - | (2,055,747 | ) | - | |||||||||||
|
Cash
Paid for Property and Equipment
|
(95,615 | ) | (69,188 | ) | (6,275 | ) | (68,923 | ) | ||||||||
|
Change
in Restricted Cash and Cash Equivalents
|
61 | 11,063 | 6 | 1,135 | ||||||||||||
|
Proceeds
from Insurance Recoveries
|
- | - | - | 3,822 | ||||||||||||
|
Proceeds
From Sale of Fixed Assets and Leasehold Improvements
|
- | 4,669 | 4,337 | 697 | ||||||||||||
|
Proceeds
Received from Sale of Assets Held for Disposal
|
2,429 | - | - | - | ||||||||||||
|
Proceeds
From Sale of Partnership Interest
|
- | 850 | - | - | ||||||||||||
|
Lease
Acquisition Costs
|
(7,136 | ) | - | - | (635 | ) | ||||||||||
|
Issuance
of Notes Receivable
|
(72 | ) | (67 | ) | (9 | ) | (55 | ) | ||||||||
|
Other
|
20 | 82 | 19 | 39 | ||||||||||||
|
Net
Cash Used in Investing Activities
|
(100,313 | ) | (52,591 | ) | (2,057,669 | ) | (63,920 | ) | ||||||||
34
|
FINANCING
ACTIVITIES
|
||||||||||||||||
|
Proceeds
from Long Term Debt
|
- | - | - | 470 | ||||||||||||
|
Proceeds
from Long Term Debt—Term Loan
|
- | - | 900,000 | - | ||||||||||||
|
Proceeds
from Long Term Debt - Senior Discount Notes
|
- | - | 75,000 | - | ||||||||||||
|
Proceeds
from Long Term Debt—Senior Notes
|
- | - | 299,114 | - | ||||||||||||
|
Proceeds
from Long Term Debt—ABL Line of Credit
|
685,655 | 649,655 | 428,000 | - | ||||||||||||
|
Principal
Payments on Long Term Debt
|
(1,448 | ) | (1,384 | ) | (46 | ) | (101,167 | ) | ||||||||
|
Principal
Payments on Long Term Debt—Term Loan
|
(11,443 | ) | (13,500 | ) | (2,250 | ) | - | |||||||||
|
Principal
Payments on Long Term Debt—ABL Line of Credit
|
(663,056 | ) | (702,894 | ) | (215,761 | ) | - | |||||||||
|
Equity
Investment
|
- | 300 | - | - | ||||||||||||
|
Proceeds
from Issuance of Common Stock
|
- | - | 445,830 | - | ||||||||||||
|
Purchase
of Interest Rate Cap Contract
|
(424 | ) | - | (2,500 | ) | - | ||||||||||
|
Issuance
of Common Stock Upon Exercise of Stock Options
|
- | - | - | 425 | ||||||||||||
|
Debt
Issuance Costs
|
- | (71,398 | ) | - | ||||||||||||
|
Payment
of Dividends
|
(725 | ) | (100 | ) | - | (1,791 | ) | |||||||||
|
Net
Cash Provided by (Used in) Financing Activities
|
8,559 | (67,923 | ) | 1,855,989 | (102,063 | ) | ||||||||||
|
Increase
(Decrease) in Cash and Cash Equivalents
|
6,223 | (24,498 | ) | (254,573 | ) | 264,996 | ||||||||||
|
Cash
and Cash Equivalents at Beginning of Period
|
33,878 | 58,376 | 312,949 | 47,953 | ||||||||||||
|
Cash
and Cash Equivalents at End of Period
|
$ | 40,101 | $ | 33,878 | $ | 58,376 | $ | 312,949 | ||||||||
|
Supplemental
Disclosure of Cash Flow Information:
|
||||||||||||||||
|
Interest
Paid
|
$ | 109,808 | $ | 124,631 | $ | 6,223 | $ | 5,538 | ||||||||
|
Income
Taxes Paid, Net of Refunds
|
$ | 33,692 | $ | 38,389 | $ | 26,814 | $ | 43,351 | ||||||||
|
Accruals
Related to Purchases of Property and
Equipment
|
$ | (395 | ) | $ | 4,175 | $ | (987 | ) | $ | (1,506 | ) | |||||
See Notes
to Consolidated Financial Statements
35
Burlington
Coat Factory Investments Holdings, Inc. and Subsidiaries
Consolidated
Statements of Stockholders’ Equity
(All
amounts in thousands, except share data)
|
Common
Stock
|
Capital
in Excess of Par Value
|
Retained
Earnings (Accumulated Deficit)
|
Accumulated
Other Comprehensive Income (Loss)
|
Note
Receivable From Options Exercised
|
Treasury
Stock
|
Total
|
||||||||||||||||||||||
|
Predecessor:
|
||||||||||||||||||||||||||||
|
Balance
at May 28, 2005
|
$ | 49,898 | $ | 24,776 | 910,176 | $ | 4 | $ | (41 | ) | $ | (58,660 | ) | $ | 926,153 | |||||||||||||
|
Comprehensive
Income:
|
||||||||||||||||||||||||||||
|
Net
Income
|
- | - | 94,339 | - | - | - | 94,339 | |||||||||||||||||||||
|
Net
Unrealized Loss on Non-current Marketable Securities, Net of
Taxes
|
- | - | - | (4 | ) | - | - | (4 | ) | |||||||||||||||||||
|
Total
Comprehensive Income
|
94,335 | |||||||||||||||||||||||||||
|
Stock
Options Exercised
|
3 | 422 | - | - | - | - | 425 | |||||||||||||||||||||
|
Repayment
of Note receivable from Options Exercised
|
- | - | - | - | 41 | - | 41 | |||||||||||||||||||||
|
Dividend
|
- | - | (1,791 | ) | - | - | - | (1,791 | ) | |||||||||||||||||||
|
Balance
at April 12, 2006
|
$ | 49,901 | $ | 25,198 | $ | 1,002,724 | $ | - | $ | - | $ | (58,660 | ) | $ | 1,019,163 | |||||||||||||
|
Successor:
|
||||||||||||||||||||||||||||
|
Balance
at April 13, 2006
|
- | 445,830 | - | - | - | - | 445,830 | |||||||||||||||||||||
|
Net
Loss
|
- | - | (27,166 | ) | - | - | - | (27,166 | ) | |||||||||||||||||||
|
Deferred
Compensation - Amortization
|
- | 848 | - | - | - | - | 848 | |||||||||||||||||||||
|
Balance
at June 3, 2006
|
- | 446,678 | (27,166 | ) | - | - | - | 419,512 | ||||||||||||||||||||
|
Net
Loss
|
- | - | (47,199 | ) | - | - | - | (47,199 | ) | |||||||||||||||||||
|
Stock
Option Expense
|
- | 2,855 | - | - | - | - | 2,855 | |||||||||||||||||||||
|
Deferred
Compensation – Amortization
|
- | 5,102 | - | - | - | - | 5,102 | |||||||||||||||||||||
|
Equity
Investment
|
- | 300 | - | - | - | - | 300 | |||||||||||||||||||||
|
Dividend
|
- | - | (100 | ) | - | - | - | (100 | ) | |||||||||||||||||||
|
Balance
at June 2, 2007
|
- | 454,935 | (74,465 | ) | - | - | - | 380,470 | ||||||||||||||||||||
|
Net
(Loss)
|
(48,970 | ) | (48,970 | ) | ||||||||||||||||||||||||
|
Adoption
of FIN 48
|
- | (9,687 | ) | - | - | - | (9,687 | ) | ||||||||||||||||||||
|
Stock
Option Expense
|
- | 2,436 | - | - | - | 2,436 | ||||||||||||||||||||||
|
Dividend
|
- | - | (725 | ) | - | - | - | (725 | ) | |||||||||||||||||||
|
Balance
at May 31, 2008
|
$ | - | $ | 457,371 | $ | (133,847 | ) | $ | - | $ | - | $ | - | $ | 323,524 | |||||||||||||
See Notes to Consolidated Financial
Statements
36
Burlington Coat
Factory Investments Holdings, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
1. Summary
of Significant Accounting Policies
Business
Burlington
Coat Factory Investments Holdings, Inc. and its subsidiaries (the Company or
Holdings) operate stores, in 44 states, which sell apparel, shoes and
accessories for men, women and children. A majority of those stores offer a home
furnishings and linens department and a juvenile furniture department. As of May
31, 2008, the Company operates stores under the names “Burlington Coat Factory”
(379 stores), “Cohoes Fashions” (two stores), “MJM Designer Shoes” (fifteen
stores), and “Super Baby Depot” (one store). Cohoes Fashions offers products
similar to that of Burlington Coat Factory. MJM Designer Shoes offers
moderately priced designer and fashion shoes. The Super Baby Depot store offers
baby clothing, accessories, furniture and other merchandise in the middle to
higher price range. During the 52 week period ended May 31, 2008 (Fiscal 2008),
the Company opened 20 Burlington Coat Factory Warehouse stores. Three
existing Burlington Coat Factory Warehouse stores were relocated to new sites
within their existing selling markets. During Fiscal 2008, two MJM
Designer Shoes stores were closed.
Fiscal
Years
The Company defines its fiscal year as
the 52 (or 53) week period ending on the Saturday closest to May
31. The 52 week periods ended May 31, 2008 and June 2, 2007 represent
Fiscal 2008 and Fiscal 2007, respectively.
Basis of
Presentation
The
consolidated financial statements include the accounts of
Holdings. Holdings has no operations and its only asset is all of the
stock in Burlington Coat Factory Warehouse Corporation. All discussions of
operations in this report relate to Burlington Coat Factory Warehouse
Corporation and its subsidiaries (BCFWC), which are reflected in the
consolidated financial statements of the Company.
Although
BCFWC continued as the same legal entity after the Merger Transaction (as
described more fully below and in Note 3 to the consolidated financial
statements entitled “Acquisitions”), the accompanying Consolidated Statements of
Operations and Comprehensive Income (Loss) and Cash Flows are presented for the
Predecessor and Successor periods, which relate to the period preceding the
Merger Transaction and the period succeeding the Merger Transaction,
respectively. References are made to the operations of BCFWC and subsidiaries
for both the Predecessor and Successor periods.
Merger
Transaction
On
January 18, 2006, BCFWC entered into an Agreement and Plan of Merger, dated as
of January 18, 2006 (the Merger Agreement), by and among BCFWC, Burlington Coat
Factory Holdings, Inc. (f/k/a BCFWC Acquisition, Inc.) (Parent) and BCFWC
Mergersub, Inc. (Merger Sub) to sell all of the outstanding common stock of
BCFWC to Parent through a merger with Merger Sub. Parent is, and Merger Sub was,
an entity owned by entities affiliated with Bain Capital Partners, LLC
(collectively, the Equity Sponsors or Investors).
On April
13, 2006, the transactions contemplated by the Merger Agreement were consummated
by the Equity Sponsors through a $2.1 billion merger of Merger Sub with and into
BCFWC, with BCFWC being the surviving corporation in the merger (the Merger or
the Merger Transaction). Under the Merger Agreement, the former holders of
BCFWC’s common stock, par value $1.00 per share, received $45.50 per share. The
Merger consideration was funded through the use of BCFWC’s available cash, cash
equity contributions from the Equity Sponsors and the debt financings as
described more fully below.
Immediately
following the consummation of the Merger Transaction, Parent entered into a
Contribution Agreement with Holdings to effectuate an exchange of shares whereby
Parent delivered to Holdings all of the outstanding shares in BCFWC, and
Holdings simultaneously issued and delivered to Parent 1,000 shares of common
stock constituting all of Holdings’ issued and outstanding common
stock.
37
The
following principal equity capitalization and financing transactions occurred in
connection with the Merger Transaction:
|
·
|
Aggregate
cash equity contributions of approximately $445 million by the Equity
Sponsors and $0.8 million by members of management;
and
|
|
·
|
BCFWC
(1) entered into an $800 million secured Available Business Line
Senior Secured Revolving Facility (ABL Line of Credit), of which $225
million was drawn at closing, (2) entered into a $900 million Senior
Secured Term Loan Facility (Term Loan), all of which was drawn at closing,
(3) issued $305 million face amount 11.13% Senior Notes due 2014 at a
discount of which all the $299 million proceeds were used to finance the
Merger Transactions, and (4) received a cash contribution from
Holdings of $75 million from an issuance of $99.3 million 14.50% Senior
Discount Notes due 2014, all of which was also used to finance the Merger
Transaction.
|
The
proceeds from the equity capitalization and financing transactions, together
with $193 million of available cash, were used to fund the:
|
·
|
Purchase
of all BCFWC common stock then outstanding of approximately $2.1
billion;
|
|
·
|
Settlement
of all stock options of BCFWC then outstanding of approximately $13.8
million; and
|
|
·
|
Fees
and expenses related to the Merger Transaction and the related financing
transactions of approximately $90.8
million.
|
Immediately
following the consummation of the Merger Transaction, the Equity Sponsors
indirectly owned 98.5% of the Parent and management owned 1.5% of the
Parent.
In
connection with the Merger Transaction, effective as of April 13, 2006, the
Certificate of Incorporation of BCFWC Mergersub, Inc. became BCFWC’s Certificate
of Incorporation, which resulted in a reduction of BCFWC’s authorized capital
stock from 5,000,000 preferred shares, par value $1.00 per share, and
100,000,000 common shares, par value $1.00 per share to 1,000 preferred shares,
par value $0.01 per share, and 10,000 common shares, par value $1.00 per share.
As of May 31, 2008, 1,000 shares of BCFWC common stock were held by Holdings and
all 1,000 issued and outstanding shares of Holdings’ common stock were held by
Parent.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Burlington Coat
Factory Investments Holdings, Inc. and all its subsidiaries in which it has
controlling financial interest through direct ownership of a majority voting
interest or a controlling managerial interest. All intercompany accounts and
transactions have been eliminated.
Holdings
was incorporated in the State of Delaware on April 10, 2006. Holdings’
Certificate of Incorporation authorizes 1,000 shares of common stock, par value
of $0.01 per share. All 1,000 shares are issued and outstanding and Parent is
the only holder of record of this stock.
Use of Estimates
The
Company's consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
(GAAP). Certain amounts included in the consolidated financial
statements are estimated based on currently available information and
management's judgment as to the outcome of future conditions and
circumstances. While every effort is made to ensure the integrity of
such estimates, actual results could differ from these estimates.
Cash and Cash
Equivalents
Cash and
cash equivalents represent cash and short-term, highly liquid investments with
maturities of three months or less at the time of purchase.
38
Investments
The
Company classifies its investments in debt and equity securities into
held-to-maturity, available-for-sale or trading categories in accordance with
the provisions of Statement of Financial Accounting Standards (SFAS) No. 115,
“Accounting For Certain
Investments in Debt and Equity Securities.” Debt securities are
classified as held-to-maturity when the Company has the positive intent and
ability to hold the securities to maturity. Held-to-maturity securities are
stated at amortized cost. Debt securities not classified as held-to-maturity are
classified as trading securities and are carried at fair market value, with
unrealized gains and losses included in net income (loss).
Merchandise
inventories as of May 31, 2008 and June 2, 2007 are valued at the lower of cost,
on an average cost basis, or market, as determined by the retail inventory
method. The Company records its cost of merchandise (net of purchase discounts
and certain vendor allowances), certain merchandise acquisition costs (primarily
commissions and import fees), inbound freight, warehouse outbound freight, and
freight on internally transferred merchandise in the line item “Cost of Sales”
in the Company's Consolidated Statements of Operations and Comprehensive Income
(Loss). Costs associated with the Company's warehousing, distribution, buying,
and store receiving functions are included in the line items “Selling and
Administrative Expenses,” “Depreciation” and “Amortization” in the Company's
Consolidated Statements of Operations and Comprehensive Income (Loss).
Warehousing and purchasing costs included in “Selling and Administrative
Expenses” amounted to $63.7 million, $61.7 million, $8.1 million and $48.6
million for the fiscal years ended May 31, 2008 and June 2, 2007, the fiscal
period from April 13, 2006 to June 3, 2006 and the fiscal period from May 29,
2005 to April 12, 2006, respectively. Depreciation related to the
warehousing and purchasing functions amounted to $9.5 million, $10.4 million,
$0.1 million, and $7.8 million for the fiscal years ended May 31, 2008 and June
2, 2007, the fiscal period from April 13, 2006 to June 3, 2006 and the fiscal
period from May 29, 2005 to April 12, 2006, respectively. Also
included in the line item “Selling and Administrative Expenses” are payroll and
payroll related expenses, occupancy related expenses, advertising expenses,
store operating expenses and corporate overhead expenses.
Assets Held for
Disposal
Assets
Held for Disposal represent assets owned by the Company that management has
committed to sell in the near term. The Company has either identified
or is actively seeking out potential buyers for these assets as of the balance
sheet dates. The assets listed in the line item “Assets Held for
Disposal” in the Company’s Consolidated Balance Sheets are comprised of
buildings related to store operations and store leases held by the
Company.
Property
and Equipment
Property
and equipment are recorded at cost, and depreciation is computed using the
straight line method over the estimated useful lives of the
assets. The estimated useful lives are between 20 and 40 years for
buildings, depending upon the expected useful life of the facility, and three to
ten years for store fixtures and equipment. Leasehold improvements
are depreciated over the lease term including any reasonably assured renewal
options or the expected economic life of the improvement, whichever is
less. Repairs and maintenance expenditures are charged to expense as
incurred. Renewals and betterments, which significantly extend the
useful lives of existing property and equipment, are
capitalized. Assets recorded under capital leases are recorded at the
present value of minimum lease payments and are amortized over the lease
term. Amortization of assets recorded as capital leases is included
in the line item “Depreciation” in the Company’s Consolidated Statements of
Operations and Comprehensive Income (Loss).
The
carrying value of all long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable, in accordance with SFAS No.144, “Accounting for the Impairment or
Disposal of Long Lived Assets.” An impairment
charge is recorded when an asset’s carrying value exceeds its fair
value. We recorded $6.5 million and $8.8 million of impairment
charges related to property and equipment during the fiscal years ended May 31,
2008 and June 2, 2007, respectively. These amounts are recorded in
the line item “Impairment Charges” in the Company’s Consolidated Statement of
Operations and Comprehensive Income (Loss).
Capitalized
Computer Software Costs
The
Company accounts for capitalized software in accordance with Statement of
Position (SOP) 98-1, “Accounting for the Costs of Computer
Software Developed for or Obtained for Internal-Use.” The SOP requires
the capitalization of certain costs incurred in connection with developing or
obtaining software for internal use. The Company capitalized $13.1 million,
$12.5 million, $0.3 million and $4.1 million relating to these costs during the
fiscal years ended May 31, 2008 and June 2, 2007 and the periods from
April 13, 2006
39
to June
2, 2006 and May 29, 2005 to April 12, 2006.
As part of the Merger Transaction, the
Company recorded $42.0 million of internally developed software which is
included in the line item “Property and Equipment, net of Accumulated
Depreciation” in the Company’s Consolidated Balance Sheets.
Purchased
and internally developed software is amortized on a straight line basis over the
product’s estimated economic life, which is generally three to five
years. The net carrying value of software is included in the line
item “Property and Equipment” on the Company’s Consolidated Balance Sheets and
software amortization is included in the line item “Depreciation” on the
Company’s Consolidated Statements of Operations and Comprehensive Income
(Loss).
Intangible
Assets
The
Company accounts for intangible assets in compliance with SFAS No.
142, “Goodwill and
Other Intangible Assets” (SFAS No. 142). The Company’s intangible assets
primarily represent a tradename and favorable lease positions. The tradename
asset, the trademark Burlington Coat Factory, is expected to generate cash flows
indefinitely and does not have an estimable or finite useful life; and
therefore, is accounted for as an indefinite-lived asset not subject to
amortization. The values of favorable and unfavorable lease positions are
amortized on a straight-line basis over the expected lease terms. Amortization
of net favorable lease positions is included in the line item “Amortization” in
the Company’s Consolidated Statements of Operations and Comprehensive Income
(Loss).
The
Company tests identifiable intangible assets with an indefinite life for
impairment on an annual basis, relying on a number of factors that include
operating results, business plans and projected future cash flows. The
impairment test consists of a comparison of the fair value of the
indefinite-lived intangible asset with its carrying amount. The
Company determines fair value through multiple valuation
techniques. If the carrying amount exceeds the estimated expected
undiscounted future cash flows, the Company measures the amount of the
impairment by comparing the carrying amount of the asset to its fair
value. The estimation of fair value is measured by discounting
expected future cash flows using an appropriate discount
rate. The Company tested these assets for impairment during the last
quarter of Fiscal 2008. Based upon the Company’s review, impairment
charges were not required.
Identifiable
intangible assets that are subject to amortization are evaluated for impairment
using a process similar to that used to evaluate other long-lived assets as
described below under the caption “Impairment of Long-Lived
Assets.” An impairment loss is recognized for the amount by which the
carrying value exceeds the fair value of the asset. We recorded
impairment charges related to identifiable intangible assets of $18.8 million
and $15.6 million during the fiscal years ended May 31, 2008 and June 2,
2007. These charges are recorded in the line item “Impairment
Charges” in the Company’s Consolidated Statements of Operation and Comprehensive
Income (Loss).
Goodwill
Goodwill
represents the excess of the acquisition cost over the estimated fair value of
tangible assets and other identifiable intangible assets acquired less
liabilities assumed. SFAS No. 142 replaces the amortization of goodwill and
indefinite-lived intangible assets with periodic tests for the impairment of
these assets. SFAS No. 142 requires a comparison, at least annually, of the
carrying value of the assets and liabilities associated with a reporting unit,
including goodwill, with the fair value of the reporting unit. The
Company determines fair value through multiple valuation
techniques. If the carrying value of the assets and liabilities
exceeds the fair value of the reporting unit, we would calculate the implied
fair value of our reporting unit goodwill as compared to the carrying value of
our reporting unit goodwill to determine the appropriate impairment
charge. We estimate the fair value of our reporting unit using widely
accepted valuation techniques. These techniques use a variety of
assumptions to include projected market conditions, discount rates and future
cash flows. Although we believe our assumptions are reasonable,
actual results may vary significantly and may expose us to material impairment
charges in the future. The Company’s annual impairment testing is
conducted during the last quarter of the fiscal year. There were no
impairment charges recorded as result of these tests in Fiscal 2008 or
Fiscal 2007.
Impairment
of Long-Lived Assets
The
Company accounts for impaired long-lived assets in accordance with SFAS No. 144,
“Accounting for the Impairment
or Disposal of Long-Lived Assets.” This statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Also, long-lived assets and
certain intangibles to be disposed of should be reported at the lower of the
carrying amount or fair value less cost to sell. The Company considers
historical performance and future estimated results in its evaluation of
potential impairment and then compares the carrying amount of the asset to the
estimated
40
future
cash flows expected to result from the use of the asset. If the carrying amount
of the asset exceeds the estimated expected undiscounted future cash flows, the
Company measures the amount of the impairment by comparing the carrying amount
of the asset to its fair value. The estimation of fair value is measured by
discounting expected future cash flows by the Company’s incremental borrowing
rate. Impairment charges for Fiscal 2008 and Fiscal 2007
amounted to $25.3 million and $24.4 million, respectively.
Other
Assets
Other
assets consist primarily of deferred financing fees, notes receivable and the
net accumulation of excess rent income, accounted for on a straight-line basis,
over actual rental income receipts. Deferred financing fees are
amortized over the life of the related debt facility using the interest method
of amortization for debt that was issued at a discount and the straight line
method of amortization for all other debt related fees. Amortization
of deferred financing fees is recorded in the line item “Amortization” in the
Company’s Consolidated Statements of Operations and Comprehensive Income
(Loss).
Other
Current Liabilities
Other current liabilities primarily consist of sales tax payable, unredeemed store value cards, accrued payroll costs, self –insurance reserves ($36.7 million and $33.7 million as of May 31, 2008 and June 2, 2007, respectively), accrued operating expenses, layaway deposits, payroll taxes payable, current portion of deferred rent expense and other miscellaneous items.
The Company has risk participation agreements with insurance carriers
with respect to workers' compensation, general liability insurance anxd health
insurance. Pursuant to these arrangements, the Company is responsible for
paying individual claims up to designated dollar limits. The amounts
included in costs related to these claims are estimated and can vary based
on changes in assumptions or claims experience included in the associated
insurance programs. An increase in worker's compensation claims by
employees, health insurance claims by employees or general liability claims may
result in a corrresponding increase in costs related to these claims.
Other
Liabilities
Other
liabilities primarily consist of deferred lease incentives, the net accumulation
of excess straight-line rent expense over actual rental payments and liabilities
associated with the Company’s adoption of Financial Accounting Standards Board
(FASB) Interpretation No. 48, (as amended) – “Accounting for Uncertainty in
Income Taxes – an interpretation of FASB Statement No. 109” (FIN
48).
Deferred
lease incentives are funds received or receivable from landlords used primarily
to offset the costs of store remodelings. These deferred lease incentives are
amortized over the expected lease term including rent holiday periods and option
periods where the exercise of the option can be reasonably
assured. Amortization of deferred lease incentives is included in the
line item “Selling and Administrative Expenses” on the Company’s Consolidated
Statements of Operations and Comprehensive Income (Loss).
Common
Stock
Holdings has 1,000 shares of common
stock issued and outstanding, which are all owned by the
Parent. Parent has authorized 49,700,000 shares of Class A common
stock, par value $0.001 and 5,550,000 shares of Class L common stock, par value
$0.001. Parent has outstanding as of May 31,
2008: 45,123,093 shares of Class A common stock and
5,013,677 shares of Class L common stock. As of June 2, 2007, shares
outstanding were 45,198,117 shares of Class A common stock and 5,022,013 shares
of Class L common stock.
Revenue
Recognition
The
Company records revenue at the time of sale and delivery of merchandise, net of
allowances for estimated future returns. The Company accounts for layaway sales
and leased department revenue in compliance with Staff Accounting Bulletin (SAB)
No. 101, "Revenue Recognition
in Financial Statements", as revised and rescinded by SAB No. 104, "Revenue Recognition".
Layaway sales are recognized upon delivery of merchandise to the customer. The
amount of cash received upon initiation of the layaway is recorded as a deposit
liability in the line item “Other Current Liabilities” in the Company’s
Consolidated Balance Sheets. Store value cards (gift cards and store
credits issued for merchandise returns) are recorded as a liability at the time
of issuance, and the related sale is recorded upon redemption. Prior to December
29, 2007, except where prohibited by law, after 13 months of non-use, a monthly
dormancy service fee was deducted from the remaining balance of store value
cards and recorded in the line item “Other Revenue” in the Company’s
Consolidated Statements of Operations and Comprehensive Income
(Loss).
On
December 29, 2007, the Company discontinued assessing a dormancy service fee on
inactive store value cards and began estimating and recognizing store value card
breakage income in proportion to actual store value card
redemptions. Such income is recorded in the line item “Other Income,
Net” in the Company’s Consolidated Statements of Operations and Comprehensive
Income (Loss). The Company determines an estimated store value card breakage
rate by continuously evaluating historical redemption
data. Breakage income is recognized monthly in proportion to
the historical redemption patterns for those store value cards for
which
41
the
likelihood of redemption is remote.
The
Company presents sales, net of sales taxes, in its Consolidated Statements of
Operations and Comprehensive Income (Loss).
Other
Revenue
Other
revenue consists of rental income received from leased departments, subleased
rental income, layaway, alteration, dormancy and other service charges (Service
Fees) and other miscellaneous items. Service Fees amounted to $10.5 million,
$16.1 million, $0.9 million and $7.8 million for the fiscal years
ended May 31, 2008, June 2, 2007, the period from April 13, 2006 to June 3,
2006, and the period from May 29, 2005 to April 12, 2006,
respectively. The decrease in Service Fees is related to the
Company’s decision to cease charging dormancy service fees on outstanding
balances of store value cards and to recognize breakage income in the line item
“Other Income” in the Company’s Consolidated Statements of Operations and
Comprehensive Income (Loss). (Refer to footnote 12 to the Company’s consolidated
financial statements entitled “Store Value Cards” for further
details). Dormancy service fees contributed $2.2 million, and $7.4
million for the fiscal years ended May 31, 2008 and June 2, 2007,
respectively. Prior to Fiscal 2007, the Company did not recognize
dormancy service income.
Rental
income from leased departments amounted to $7.9 million, $9.9 million, $1.4
million and $9.7 million for the fiscal years ended May 31, 2008, June 2, 2007,
the period from April 13, 2006 to June 3, 2006, and the period from May 29, 2005
to April 12, 2006, respectively. Subleased rental income and other miscellaneous
revenue items amounted to $12.1 million, $12.2 million, $1.8 million, and $10.2
million for the fiscal years ended May 31, 2008, June 2, 2007, the period
from April 13, 2006 to June 3, 2006, and the period from May 29, 2005 to April
12, 2006, respectively.
Vendor
Rebates and Allowances
Rebates
and allowances received from vendors are accounted for in compliance with
Emerging Issues Task Force (EITF) Issue No. 02-16, “Accounting by a Customer (including
a Reseller) for Certain Consideration Received from a Vendor” ("EITF No.
02-16"). EITF Issue No. 02-16 specifically addresses whether a
reseller should account for cash consideration received from a vendor as an
adjustment of cost of sales, revenue, or as a reduction to a cost incurred by
the reseller. Rebates and allowances received from vendors that are dependent on
purchases of inventories are recognized as a reduction of cost of goods sold
when the related inventory is sold or marked down.
Rebates
and allowances that are reimbursements of specific expenses that meet the
criteria of EITF 02-16 are recognized as a reduction of selling and
administrative expenses when earned, up to the amount of the incurred cost. Any
vendor reimbursement in excess of the related incurred cost is recorded as a
reduction of cost of sales. Reimbursements of expenses amounted to $2.0 million,
$0.9 million, $0.1 million, and $0.8 million for the fiscal years ended May 31,
2008, June 2, 2007, the period from April 13, 2006 to June 3, 2006, and the
period from May 29, 2005 to April 12, 2006, respectively.
Store Opening
Expense
Expenses
related to new store openings are charged to operations in the period
incurred.
Advertising
Costs
The
Company's net advertising costs consist primarily of newspaper and television
costs. The production costs of net advertising are charged to expense as
incurred. Net advertising expenses are included in the line item
“Selling and Administrative Expenses” on the Company's Consolidated Statements
of Operations and Comprehensive Income (Loss). For the fiscal years
ended May 31, 2008 and June 2, 2007 and the periods from April 13, 2006 to June
3, 2006, and May 29, 2005 to April 12, 2006 advertising expense was $70.8
million, $72.3 million, $9.4 million, and $64.2 million,
respectively.
The
Company nets certain cooperative advertising reimbursements received from
vendors that meet the criteria of EITF 02-16 against specific, incremental,
identifiable costs incurred in connection with selling the vendors'
products. Any excess reimbursement is characterized as a reduction of
inventory and is recognized as a reduction to cost of sales as inventories are
sold. Vendor rebates netted against advertising expenses were $0.4
million, $0.6 million, and $1.1 million for the fiscal years ended May 31, 2008,
June 2, 2007, the period from April 13, 2006 to June 3, 2006,
respectively.
Barter
Transactions
The
Company accounts for barter transactions under SFAS No. 153, “Exchanges of Nonmonetary Assets, an
amendment of APB Opinion Number 29” and EITF 93-11,
42
“Accounting for Barter Transactions
Involving Barter Credits.” Barter transactions with commercial
substance are recorded at the estimated fair value of the products exchanged,
unless the products received have a more readily determinable estimated fair
value. Revenue associated with barter transactions is recorded at the time of
the exchange of the related assets. During the Company’s first
quarter of Fiscal 2008, the Company exchanged $5.2 million of inventory for
certain advertising credits. To account for the exchange, the Company
recorded “Sales” and “Cost of Sales” of $5.2 million in the Company’s
Consolidated Statements of Operations and Comprehensive Income
(Loss). The advertising credits received are to be used over the next
three to five years. The Company recorded prepaid advertising of $1.7
million in the line item “Prepaid and Other Current Assets” and $1.9 million in
the line item “Other Assets” in the Company’s Consolidated Balance Sheet as of
May 31, 2008. For the twelve months ended May 31, 2008, the Company
utilized $1.6 million of the barter advertising credits.
Income
Taxes
The
Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income
Taxes.” Deferred income taxes for Fiscal 2008 and Fiscal 2007
reflect the impact of temporary differences between amounts of assets and
liabilities for financial reporting purposes and such amounts as measured by tax
laws.
On June
3, 2007, we adopted FASB Interpretation No. 48 (as amended) – “Accounting for Uncertainty in
Income Taxes – an interpretation of FASB Statement No. 109” (FIN
48). Adjustments related to the adoption of FIN 48 are reflected as an
adjustment to retained earnings in Fiscal 2008. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an entity’s financial
statements in accordance with FASB Statement No. 109, “Accounting for Income
Taxes.” FIN 48 prescribes a
recognition threshold and measurement attributes for financial statement
disclosure of tax positions taken or expected to be taken on a tax
return. FIN 48 requires that we recognize in our financial statements
the impact of a tax position taken or expected to be taken in a tax return, if
that position is “more likely than not” of being sustained upon examination by
the relevant taxing authority, based on the technical merits of the
position. The tax benefits recognized in the financial statements
from such a position are measured based on the largest benefit that has a
greater than fifty percent likelihood of being realized upon ultimate
resolution. Additionally, FIN 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. We record interest and penalties related
to unrecognized tax benefits as part of income taxes.
Other
income (loss), net, consists of investment income gains (losses), breakage
income, net losses from disposition of fixed assets of $1.1 million,
$3.6 million, and $2.7 million for the fiscal years ended May 31, 2008, June 2,
2007 and the period from April 13, 2006 to June 3, 2006, respectively and other
miscellaneous income items.
As noted
above under the caption “Revenue Recognition” and the caption “Other Revenue,”
the Company ceased recognizing dormancy fees in Fiscal 2008 and began
recognizing breakage income related to store value cards. For the
year ended May 31, 2008, the Company recognized $5.3 million of breakage income
in the line item “Other Income (Loss), Net” In the Company’s Consolidated
Statements of Operations and Comprehensive Income (Loss).
Comprehensive
Income
The
Company presents comprehensive income (loss) as a component of stockholders'
equity in accordance with SFAS No. 130, “Reporting Comprehensive Income.”
For the fiscal years ended May 31, 2008 and June 2, 2007, and for the
period from April 13, 2006 to June 3, 2006, comprehensive income (loss)
consisted of net income (loss). For the period from May 29, 2005 to
April 13, 2006, comprehensive income (loss) consisted primarily of net income
(loss) as well as the net unrealized gain (loss) on investments, net of
tax.
Non-Vested
Stock
At their
option, in lieu of receiving an all cash retention bonus, certain members of
management collectively received $5.9 million in shares of non-vested stock
(66,122 units) in the form of common stock of the Parent. These
shares vested on April 13, 2007. No shares were granted or forfeited
during Fiscal 2008. Non-vested stock compensation was amortized over
a one-year vesting period and amounted to $5.1 million and $0.8 million for the
fiscal year ended June 2, 2007 and for the period from April 13, 2006 to June 3,
2006. Compensation expense related to non-vested stock is recorded by
the Company as additional paid-in-capital.
43
The
Company leases store locations, distribution centers and office space used in
its operations. The Company accounts for these types of leases under
the provisions of SFAS No. 13, “Accounting for Leases” and
subsequent amendments, which require that leases be evaluated and classified as
operating or capital leases for financial reporting purposes. Assets
held under capital leases are included in the line item “Property and Equipment
– Net of Accumulated Amortization” in the Company’s Consolidated Balance
Sheets. For leases classified as operating, the Company calculates
rent expense on a straight line basis over the lesser of the lease term
including renewal options, if reasonably assured, or the economic life of the
leased premises, taking into consideration rent escalation clauses, rent
holidays and other lease concessions. The Company expenses rent during the
construction or build-out phase of the leased property.
Share-Based
Compensation
On June
4, 2006, the Company adopted SFAS No. 123R (Revised 2004), “Share-Based Payment,” using
the modified prospective method, which requires companies to record stock
compensation expense for all non-vested and new awards beginning as of the
adoption date. There are 511,122 units reserved under the 2006
Management Incentive Plan (Plan). As of May 31, 2008, 412,000 units
to purchase options were outstanding. For the fiscal years ended May
31, 2008 and June 2, 2007, the Company recognized non cash stock compensation
expense of $2.4 million and $2.9 million, respectively.
Credit
Risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash, cash equivalents and investments. The Company
manages the credit risk associated with cash equivalents and investments by
investing with high-quality institutions and, by policy, limiting investments
only to those which meet prescribed investment guidelines. The Company has a
policy of making investments in debt securities with short-term ratings of A-1
(or equivalent) or long-term ratings of A and A-2 (or equivalent). The Company
maintains cash accounts that, at times, may exceed federally insured limits. The
Company has not experienced any losses from maintaining cash accounts in excess
of such limits. Management believes that it is not exposed to any significant
risks on its cash and cash equivalent accounts.
Reclassifications
Certain
reclassifications have been made to the prior periods’ Consolidated Statements
of Cash Flows for the fiscal year ended June 2, 2007 and the fiscal periods from
April 13, 2006 to June 3, 2006 and May 29, 2005 to April 12, 2006 to conform to
the classifications used in the current period. For the fiscal year
ended June 2, 2007, $9.4 million and $0.8 million, previously recorded together
in the line item “Non-Cash Rent Expense and Other,” have been reclassified to
the line items “Non-Cash Rent Expense” and “Other,” respectively, in the
Company’s Consolidated Statements of Cash Flows. For the fiscal
period from April 13, 2006 to June 3, 2006, $2.3 million and $0.3 million,
previously recorded together in the line item “Non-Cash Rent Expense and Other,”
have been reclassified to the line items “Non-Cash Rent Expense” and “Other,”
respectively, in the Company’s Consolidated Statements of Cash
Flows. For the fiscal period from May 29, 2005 to April 12, 2006,
$1.1 million and $0.3 million, previously recorded together in the line item
“Non-Cash Rent Expense and Other,” have been reclassified to the line items
“Non-Cash Rent Expense” and “Other,” respectively, in the Company’s Consolidated
Statements of Cash Flows.
2. Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement,” (SFAS No. 157) which
defines fair value, establishes a framework for measurement and expands
disclosure about fair value measurements. Where applicable, SFAS No. 157
simplifies and codifies related guidance within GAAP. This statement shall be
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. In
February 2008, the FASB issued FSP SFAS No. 157-2, “Effective Date for FASB Statement
No. 157” which extended the
application of SFAS No. 157 for all non-recurring fair value measurements of
non-financial assets and non-financial liabilities until fiscal years beginning
after November 15, 2008. The Company does not believe the adoption of
SFAS 157 will have a material impact on our consolidated financial
statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – including an amendment of FASB Statement No.
44
115” (SFAS No. 159). SFAS No. 159
permits entities to choose to measure eligible items (including many financial
instruments and certain other items) at fair value at the specified election
date. Unrealized gains and losses for which the fair value option has been
elected will be reported in earnings at each subsequent reporting
date. This Statement is effective as of the beginning of an entity’s
first fiscal year that begins after November 15, 2007, with early adoption
possible but subject to certain requirements. The Company does not
believe the adoption of SFAS No. 159 will have a material impact on its
consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141, “Business Combinations (revised
2007)” (SFAS No. 141(R)). SFAS No.
141(R) applies to any transaction or other event that meets the definition of a
business combination. Where applicable, SFAS No. 141(R) establishes
principles and requirements for how the acquirer recognizes and measures
identifiable assets acquired, liabilities assumed, noncontrolling interest in
the acquiree and goodwill or gain from a bargain purchase. In
addition, SFAS No. 141(R) determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial effects
of the business combination. SFAS No. 141(R) also applies to
prospective changes in acquired tax assets and liabilities recognized as part of
the Company’s previous acquisitions, by requiring such changes to be recorded as
a component of the income tax provision. This statement is to be applied
prospectively for fiscal years beginning after December 15, 2008. The
Company expects SFAS No. 141(R) will have an impact on accounting for future
business combinations, once adopted, and on prospective changes, if any, of
previously acquired tax assets and liabilities.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS No.
160). SFAS No. 160 amends ARB No. 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It also amends certain of ARB No.
51’s consolidation procedures for consistency with the requirements of SFAS No.
141(R). This statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15,
2008. The statement shall be applied prospectively as of the
beginning of the fiscal year in which the statement is initially
adopted. The Company is in the process of evaluating the impact of
SFAS No. 160 on its consolidated financial statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133”
(SFAS No. 161). SFAS No. 161 amends and expands the
disclosure requirements of SFAS No. 133 with the intent to provide users of
financial statements with an enhanced understanding of: (i) How and why an
entity uses derivative instruments; (ii) How derivative instruments and related
hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (iii) How derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash
flows. This statement is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. The Company is in the process of
evaluating the impact of SFAS No. 161 on its consolidated financial
statements.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (SFAS No. 162). This statement
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with
GAAP. This statement shall be effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting
Principles.” The Company is in the process of evaluating the
impact of SFAS No. 162 on its consolidated financial statements.
3. Acquisitions
As
described above in Note 1, on April 13, 2006, affiliates of Bain Capital
Partners, LLC purchased all of the outstanding capital stock of BCFWC from its
existing stockholders for an aggregate purchase price of approximately $2.1
billion. The aggregate cost together with the costs and fees
necessary to consummate the transaction were financed by equity contributions of
$445.8 million, borrowings from the $800 million ABL Line of Credit, of which
$225 million was drawn at the closing of the Merger Transaction, borrowings from
the $900 million Term Loan, all of which was drawn at closing, issuance of $305
million of Senior Notes, of which all of the $299 million of proceeds were used
in the financing of the Merger Transaction, a cash contribution from Holdings of
$75 million from an issuance of $99.3 million Senior Discount Notes and $193
million of BCFWC’s available cash.
The
acquisition of the Company has been accounted for in accordance with SFAS No.
141, “Business
Combinations.” The purchase price was allocated to the
assets acquired and liabilities assumed based on the estimates of their
respective values at the date of acquisition.
Assets
acquired and liabilities assumed in an acquisition are valued based on fair
market value measures as determined by management. The method used to determine
the asset values include a variety of valuation techniques. With respect to
trademarks, management adopted the income approach to value these intangible
assets. Under the income approach, the value of trademarks was determined by the
present value of potential future revenues from such trademarks based on a
discounted royalty rate.
45
With
respect to internally developed software, the Company determined the value based
on the assumed dollar value of the cost of recreating the source code of such
software. The cost of recreating the source code was based on the labor costs
for the man hours assumed to be required to create such source
code.
In order
to determine the value of our leases, the Company compared our leases with
comparable leases available in the market and discounted current lease rates
over the life of our existing leases.
In order
to determine the step-up in basis for the assets, the Company applied either the
cost approach or market approach, as management determined appropriate. Under
the cost approach, the step-up in basis is determined by the current cost of
replacement less estimated applicable depreciation. Under the market approach,
the step-up is determined by the market value of comparable assets less
applicable depreciation.
The
following table summarizes the allocation of the purchase price to assets
acquired and liabilities assumed at the date of acquisition after revisions to
estimated allocations had been made.
|
April
13, 2006
(in
thousands ‘000)
|
||||
|
Total
acquisition consideration:
|
||||
|
Cash
paid upon acquisition
|
$ | 2,050,918 | ||
|
Liabilities
assumed
|
769,251 | |||
|
Acquisition
related costs
|
4,849 | |||
| 2,825,018 | ||||
|
Less:
book value of net assets acquired
|
1,785,818 | |||
| $ | 1,039,200 | |||
|
Fair
value adjustment for property, plant and equipment
|
$ | 421,675 | ||
|
Tradename
|
526,300 | |||
|
Net
favorable lease positions
|
637,112 | |||
|
Internally
developed software
|
42,000 | |||
|
Deferred
taxes related to valuations
|
(634,106 | ) | ||
|
Goodwill
|
46,219 | |||
| $ | 1,039,200 | |||
At May
31, 2008, restricted cash and cash equivalents consisted of $0.4 million pledged
as collateral for certain insurance contracts and $2.3 million restricted
contractually for the acquisition and maintenance of a building related to a
store operated by the Company. At June 2, 2007, restricted cash and
cash equivalents consisted of $0.4 million pledged as collateral for certain
insurance contracts, for which the related liability is classified in the line
item “Other Current Liabilities” in the Company’s Consolidated Balance Sheets,
and $2.4 million restricted contractually for the acquisition and maintenance of
a building related to a store operated by the Company. During Fiscal
2007, the Company replaced approximately $11.0 million of restricted cash with
letters of credit agreements as collateral for the insurance
contracts.
5. Investments
As of May 31, 2008 and June 2, 2007,
the Company had no investments on its Consolidated Balance
Sheets. During Fiscal 2007, the Company sold equity investments for
$0.7 million for a realized gain of $0.1 million, which is included in the line
item “Proceeds from the Sale of Partnership Interest” in the Company’s
Consolidated Statements of Cash Flows. The gain on sale of
investments is included in the line item “Other Income, Net” in the Company’s
Consolidated Statements of Operations and Comprehensive Income
(Loss).
46
Assets
held for disposal are valued at their fair value, less cost to dispose, as
follows:
|
(in
thousands ‘000)
|
||||||||
|
May
31, 2008
|
June
2, 2007
|
|||||||
|
Fixed
Assets
|
$ | 63 | $ | 32,320 | ||||
|
Favorable
Leases
|
$ | 2,753 | $ | 2,753 | ||||
|
Total
Assets Held for Disposal
|
$ | 2,816 | $ | 35,073 | ||||
The
Company expects to sell the assets noted above to a third party during Fiscal
2009.
During
Fiscal 2008, the Company completed the sale of assets with a carrying value of
$2.1 million that were previously held for sale related to three
locations. Additionally, during Fiscal 2008, certain assets which
were previously held for sale no longer qualified as held for sale due to the
fact that there is no longer an active program to locate a buyer. As
a result, the Company reclassified operating stores with a net fixed asset value
of $30.1 million out of the line item “Assets Held for Disposal” in the
Company’s Consolidated Balance Sheets into the line item “Property and
Equipment, Net.” The reclassification resulted in a charge against
the line item “Other Income, Net” in the Company’s Consolidated Statements of
Operations and Comprehensive Income (Loss) of $0.4 million in Fiscal 2008,
reflecting the adjustment for depreciation expense that would have been
recognized had the asset been continuously classified as held and
used.
During
Fiscal 2007, a loss of $0.8 million was recorded related to the write-down of
certain of these assets to their fair value. This loss was recorded
in the line item “Impairment Charges” in the Company’s Consolidated Statements
of Operation for Fiscal 2007.
Property
and equipment consist of:
|
(in
thousands ‘000)
|
||||||||||||
|
Useful
Lives
|
May
31, 2008
|
June
2, 2007
|
||||||||||
|
Land
|
- | $ | 163,135 | $ | 146,684 | |||||||
|
Buildings
|
20
to 40 Years
|
344,782 | 327,714 | |||||||||
|
Store
Fixtures and Equipment
|
3
to 10 Years
|
269,875 | 241,555 | |||||||||
|
Software
|
3
to 5 Years
|
69,824 | 57,421 | |||||||||
|
Leasehold
Improvements
|
Shorter
of lease term or useful life
|
327,941 | 316,971 | |||||||||
|
Construction
in Progress
|
- | 14,442 | 4,642 | |||||||||
| 1,189,999 | 1,094,987 | |||||||||||
|
Less: Accumulated
Depreciation
|
(270,463 | ) | (146,653 | ) | ||||||||
|
Total
property, plant and equipment, net
|
$ | 919,536 | $ | 948,334 | ||||||||
As of May
31, 2008 and June 2, 2007, assets, net of accumulated amortization of $3.3
million and $1.8 million, respectively, held under capital leases amounted to
approximately $32.9 million and $34.4 million and are included in
Buildings. Amortization expense related to capital leases is included
in the line item “Depreciation” in the Company’s Consolidated Statements of
Operations and Comprehensive Income (Loss). The total amount of
depreciation expense for the fiscal years ended May 31, 2008 and June 2, 2007 is
$133.1 million and $130.4 million, respectively. Depreciation expense
for the periods from April 13, 2006 through June 3, 2006 and from May 29, 2005
through April 12, 2006 amounted to $18.1 million and $78.8 million
respectively.
47
During
Fiscal 2008 and Fiscal 2007, the Company recorded impairment charges
related to Property and Equipment of $6.5 million and $8.8 million, respectively
(Refer to Footnote 10 to the Company’s consolidated financial
statements entitled “Impairment of Long-Lived Assets” for further
discussion).
Internally
developed software is being amortized on a straight line basis over three years
and is being recorded in the line item “Depreciation” in the Company’s
Consolidated Statements of Operations and Comprehensive Income
(Loss). Amortization of internally developed software amounted to
$20.0 million, $17.8 million, $2.0 million and $3.3 million for the fiscal years
ended May 31, 2008 and June 2, 2007 and for the periods from April 13, 2006
through June 3, 2006 and May 29, 2005 through April 12, 2006.
Intangible
assets, at May 31, 2008, consisted primarily of a tradename and favorable lease
positions. Favorable leases are amortized over their expected lease
term.
Intangible
assets as of May 31, 2008 and June 2, 2007 are as follows:
|
(in
thousands ‘000)
|
||||||||||||||||||||||||
|
May
31, 2008
|
June
2, 2007
|
|||||||||||||||||||||||
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
Amount
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
Amount
|
|||||||||||||||||||
|
Tradename
|
$ | 526,300 | $ | - | $ | 526,300 | $ | 526,300 | $ | - | $ | 526,300 | ||||||||||||
|
Favorable
Leases
|
$ | 599,087 | $ | (65,017 | ) | $ | 534,070 | $ | 611,541 | $ | (36,662 | ) | $ | 574,879 | ||||||||||
For the
Fiscal years ended May 31, 2008 and June 2, 2007, impairment charges of $18.8
million and $15.6 million were recorded in connection with impairment of
favorable leases relating to 12 stores, respectively (Refer to
footnote 10 to the Company’s Consolidated Financial Statements entitled
“Impairment of Long-Lived Assets” for further discussion).
The gross
carrying amount of favorable leases as of May 31, 2008 reflects (1) a reduction
of $26.2 million as a result of the impairment of 12 stores in the fiscal year
ended May 31, 2008 partially offset by an increase of $13.8 million due to the
reclassification of unfavorable leases to the line item “Other Liabilities” in
the Company’s Consolidated Balance Sheet.
Accumulated
amortization of favorable leases as of May 31, 2008 reflects increases as a
result of (1) amortization expense of $34.5 million and (2) an increase of $1.3
million related to the reclassification of unfavorable leases discussed, in
the paragraph above, partially offset by a decrease of $7.4 million relating to
the impairment of 12 stores during the fiscal year ended May 31, 2008. The
weighted average amortization period remaining for the Company's favorable
leases is 19.5 years.
The gross
carrying amount of favorable leases as of June 2, 2007 reflects (1) a reduction
of $16.7 million as a result of the impairment of 12 stores in the fiscal year
ended June 2, 2007; the net impairment charge of $15.6 million had previously
been reflected in accumulated amortization, and a (2) a reduction of
$2.9 million relating to assets classified as “Assets Held for Disposal” in the
Company’s Consolidated Balance Sheet at the end of the fiscal year ended June 2,
2007, (refer to footnote 1 to the Company’s Consolidated Financial Statements
entitled “Summary of Significant Account Policies – Assets Held for Disposal” for
further discussion)
Accumulated
amortization of favorable leases as of June 2, 2007 reflects increases as a
result of (1) amortization expense of $33.4 million (net of contra-amortization
of $1.0 million relating to unfavorable leases), this increase was partially
offset by (1) a decrease of $16.7 million resulting from the impairment
charge recognized in fiscal 2007 which decreased both the gross carrying
cost and accumulated amortization as discussed above, and (2) a reduction of
$0.1 million relating to “Assets Held for Disposal,” discussed
above.
48
Amortization
expense of net favorable leases for each of the next five fiscal years is
estimated to be as follows:
|
Fiscal
years:
|
(in thousands
‘000)
|
|||
|
2009
|
$ | 32,902 | ||
|
2010
|
32,856 | |||
|
2011
|
32,789 | |||
|
2012
|
32,339 | |||
|
2013
|
31,224 | |||
|
Total
|
$ | 162,110 | ||
9. Goodwill
Goodwill
amounted to $42.8 million and $46.2 million as of May 31, 2008 and June 2, 2007
respectively. SFAS No. 142 requires an impairment test be performed
at least annually on the carrying value of goodwill. The Company
performed its review for goodwill impairment during the fourth quarter of Fiscal
2008 and Fiscal 2007, respectively. No impairment charge was deemed
necessary in Fiscal 2008 or Fiscal 2007.
A
reconciliation of goodwill as reflected in the consolidated balance sheets as of
June 2, 2007 and as of May 31, 2008 is set forth in the table
below:
|
(in thousands
‘000)
|
||||
|
Goodwill
as of June 2, 2007
|
$ | 46,219 | ||
|
Increase
in net deferred tax liabilities (a)
|
3,899 | |||
|
Reclassification
of unfavorable lease positions (b)
|
(7,343 | ) | ||
|
Goodwill
as of May 31, 2008
|
$ | 42,775 | ||
|
(a) The
change in deferred income taxes recorded during Fiscal 2008 reflects a
change in the Company’s estimate of (1) the tax basis of the net assets
acquired and (2) the blended state tax rate used to calculate deferred
taxes and, in accordance with FASB Emerging Issues Task Force Issue 93-7,
“Uncertainties Related to Income Taxes in a Purchase
Combination.” This adjustment has decreased goodwill related to the
Merger Transaction.
|
||||
|
(b) In
Fiscal 2008, the Company recorded an immaterial correction to write
off unfavorable lease positions with a corresponding reduction of goodwill
in the amount of $7.3 million.
|
||||
10. Impairment
of Long-Lived Assets
Impairment
charges recorded during each of the twelve month periods ended May 31, 2008
and June 2, 2007 amounted to $25.3 million and $24.4 million,
respectively. Impairment charges during these periods related to the
following:
49
|
(in
thousands ‘000)
|
||||||||
|
Asset
Categories
|
Fiscal
2008
|
Fiscal
2007
|
||||||
|
Favorable
Leases
|
$ | 18,786 | $ | 15,605 | ||||
|
Leasehold
Improvements
|
3,908 | 8,021 | ||||||
|
Furniture
and Fixtures
|
2,026 | - | ||||||
|
Assets
Held for Disposal
|
- | 795 | ||||||
|
Other
|
536 | - | ||||||
|
Total
|
$ | 25,256 | $ | 24,421 | ||||
The
impairment of favorable leases is related to twelve of the Company’s stores
for each of Fiscal 2008 and Fiscal 2007. Total impairment
charges for the periods ended May 31, 2008 and June 2, 2007 are related to a
decline in the operating performance of certain stores as well as the current
retail environment and commercial real estate markets.
|
11.
|
Derivatives
and Hedging Activities
|
In 2006,
the Company entered into two interest rate cap agreements to manage interest
rate risk associated with its long-term debt obligations. Each agreement became
effective on May 12, 2006. One interest rate cap agreement has a notional
principal amount of $300 million with a cap rate of 7.0% and terminates on May
31, 2011. This interest rate cap is included in the line item “Other Assets” in
the Company’s Consolidated Balance Sheets. The other agreement has a
notional principal amount of $700 million with a cap rate of 7.0% and terminates
on May 29, 2009 and is included in the line item “Prepaid and Other Current
Assets” in the Company’s Consolidated Balance Sheet. The Company does not
monitor these interest rate cap agreements for hedge effectiveness. Gains and
losses associated with these contracts are recorded in the line item “Interest
Expense” in the Company’s Consolidated Statements of Operations and
Comprehensive Income (Loss).
On
December 20, 2007, the Company entered into an interest rate cap agreement to
limit interest rate risk associated with its future long-term debt
obligations. The agreement has a notional principal amount of $600
million with a cap rate of 7.0% and terminates on May 31, 2011. The
agreement will be effective on May 20, 2009 upon the termination of the existing
$700 million interest rate cap (see above). The Company will
determine prior to the effective date whether it will monitor this interest rate
cap agreement for hedge effectiveness. Until the Company determines
the accounting treatment that will be used, the Company will adjust the interest
rate cap to fair value on a quarterly basis and will record all gains and losses
associated with this contract in the line item “Interest Expense” in the
Company’s Consolidated Statements of Operations and Comprehensive Income
(Loss).
Gains
(Losses) associated with the above interest rate cap agreements that are
included in the line item “Interest Expense” in the Company’s Consolidated
Statements of Operations and Comprehensive Income (Loss) amounted to a $0.1
million gain and $2.0 million loss, respectively, for the fiscal years ended May
31, 2008 and June 2, 2007.
The fair
market value of the interest rate cap agreements included in the line item
“Other Assets” in the Company’s Consolidated Balance Sheets at May 31, 2008 and
June 2, 2007 amounted to $0.8 million and $0.3 million,
respectively.
12. Store
Value Cards
Store
value cards include gift cards and store credits issued from merchandise
returns. Store value cards are recorded as a current liability upon
purchase, and revenue is recognized when the store value card is redeemed for
merchandise. Store value cards issued by the Company do not have an
expiration date and are not redeemable for cash. Beginning in
September of 2007 to December 29, 2007, if a store value card remained inactive
for greater than 13 months, the Company assessed the recipient a monthly
dormancy service fee, where allowed by law, which was automatically deducted
from the remaining value of the card. Dormancy service fee
income was recorded as part of the line item “Other Revenue” in the Company’s
Consolidated Statements of Operations and Comprehensive Income
(Loss).
Early in
Fiscal 2008, the Company determined it had accumulated adequate historical data
to determine a reliable estimate of the amount of gift cards that would not be
redeemed. The Company formed a corporation in Virginia (BCF Cards,
Inc.) to issue the Company’s store value cards commencing December 29,
2007. In connection with the establishment of BCF Cards, Inc., the
Company recorded $4.7 million of store value card breakage income in the line
item “Other Income, Net” in the Company’s Consolidated Statements of Operations
and Comprehensive Income (Loss) because it is not considered part of the
Company's revenues. This amount, which was recorded during the three
months
50
ended
March 1, 2008, included cumulative breakage income related to store value cards
issued since the Company introduced its store value card program.
On
December 29, 2007, the Company discontinued assessing dormancy service fees on
inactive store value cards and began estimating and recognizing store value card
breakage income in proportion to actual store value card
redemptions. Such income is recorded in the line item “Other
Income, Net” in the Company’s Consolidated Statements of Operations and
Comprehensive Income (Loss). The Company now determines an estimated store value
card breakage rate by continuously evaluating historical redemption
data. Breakage income is recognized in proportion to the
historical redemption patterns for those store value cards for which the
likelihood of redemption is remote. During Fiscal 2008, the Company
recorded $5.3 million of breakage income.
The
Company establishes reserves covering future lease obligations and other
ancillary costs related to store closings. These reserves are
included in the line item “Other Liabilities” and “Other Current Liabilities” in
the Company’s Consolidated Balance Sheets and are recorded under the line item
“Selling and Administrative Expenses” in the Company’s Consolidated Statements
of Operations and Comprehensive Income (Loss). Reserves at May 31,
2008 and June 2, 2007 consisted of:
|
(in
thousands ‘000)
|
||||||||||||||||||||
|
Fiscal
Year Reserve Established
|
Balance
at
June
2, 2007
|
Provisions
|
Payments
|
Agreed
Upon Reductions
|
Balance
at
May
31, 2008
|
|||||||||||||||
|
2005
|
$ | 241 | $ | - | $ | (161 | ) | $ | (13 | ) | $ | 67 | ||||||||
|
2006
|
- | - | - | - | - | |||||||||||||||
|
2007
|
1,078 | - | (996 | ) | (82 | ) | - | |||||||||||||
|
2008
|
- | 662 | (616 | ) | 49 | 95 | ||||||||||||||
| $ | 1,319 | $ | 662 | $ | (1,773 | ) | $ | (46 | ) | $ | 162 | |||||||||
The
Company believes that these reserves are adequate to cover the expected
contractual lease payments and other ancillary costs related to the closings.
Scheduled rent related payments for the costs noted above are all expected to be
paid during the fiscal year ended May 30, 2009 (Fiscal
2009).
|
(in
thousands ‘000)
|
||||||||
|
May
31, 2008
|
June
2, 2007
|
|||||||
|
Industrial
Revenue Bonds, 6.13% due in semi-annual payments of various amounts from
September 1, 2008 to September 1, 2010
|
$ | 3,295 | $ | 4,190 | ||||
|
Promissory
Note, 4.43% due in monthly payments of $8 through December
23, 2011
|
300 | 375 | ||||||
|
Promissory
Note, non-interest bearing, due in monthly payments of $17
through January 1, 2012
|
733 | 934 | ||||||
|
Senior
Notes, 11.13% due at maturity on April 15, 2014, semi-annual
interest payments from October 15, 2008 to April 15,
2014
|
300,207 | 299,665 | ||||||
|
Senior
Discount Notes, 14.5% due at maturity on October 15, 2014, semi-annual
interest payments from October 15, 2008 to October 15,
2014
|
99,309 | 87,978 | ||||||
|
$900,000
Senior Secured Term Loan Facility, Libor plus 2.25% due in
quarterly payments of $2,250 from August 30, 2008 to May 28,
2013.
|
872,807 | 884,250 | ||||||
|
$800,000
ABL Senior Secured Revolving Facility, Libor plus spread based on average
outstanding balance.
|
181,600 | 159,000 | ||||||
|
Capital
Lease Obligations
|
25,633 | 25,912 | ||||||
|
Total
debt
|
1,483,884 | 1,462,304 | ||||||
|
Less: current
maturities
|
(3,653 | ) | (5,974 | ) | ||||
|
Long-term
debt, net of current maturities
|
$ | 1,480,231 | $ | 1,456,330 | ||||
51
On April
13, 2006, the Company was acquired by affiliates of Bain Capital Partners, LLC
(Bain Capital). As part of the financing of the acquisition, the
Company entered into agreements with several lenders to establish the $900
million Term Loan and the $800 million ABL Line of Credit. The $900
million Term Loan is for a seven year period at an interest rate of LIBOR plus
2.25%. The loan is to be repaid in quarterly payments of $2.3 million
from August 30, 2008 to May 28, 2013. The Company is also required to
make an additional payment based on 50% of the available free cash flow (as
defined in the credit agreement for the Term Loan), at the end of each fiscal
year. This payment offsets future mandatory quarterly
payments.
Based on
the free cash flow as of June 2, 2007, the Company paid $11.4 million on
September 4, 2007. This payment offsets the mandatory quarterly
payments through the third quarter of Fiscal 2009 and $0.2 million of the
quarterly payment to be made in the fourth fiscal quarter of Fiscal
2009. As a result, the Company is not required to make any cash
payments related to the mandatory quarterly payments earlier than the fourth
fiscal quarter of Fiscal 2009.
The $800
million ABL Line of Credit is for a five-year period at an interest rate of
LIBOR plus a spread which is based on the Company’s annual average borrowings
outstanding. At May 31, 2008, the Company had $274.0 million
available under the ABL Line of Credit. The maximum borrowing under
the facility during the fiscal years ended May 31, 2008 and June 2, 2007 was
$247.2 million and $365.0 million, respectively. Average borrowings
under the facility amounted to $144.0 million at an average interest rate of
6.6% during Fiscal 2008 and $194.5 million at an average interest rate of 7.2%
during Fiscal 2007. At May 31, 2008 and June 2, 2007, $181.6 million
and $159.0 million, respectively, was outstanding under this credit facility and
is included in the line item “Long-Term Debt” in the Company’s Consolidated
Balance Sheets. Commitment fees of .25% are charged on the unused
portion of the facility and are included in the line item “Interest Expense” in
the Company’s Consolidated Statements of Operations and Comprehensive Income
(Loss).
At
May 31, 2008 and June 2, 2007, the Company’s borrowing rate related to the ABL
Line of Credit was 4.1% and 7.2%, respectively. At May 31, 2008 and
June 2, 2007, the borrowing rate related to the Term loan was 4.9% and 7.6%,
respectively.
Both the
Term Loan and the ABL Line of Credit are guaranteed by substantially all of the
Company’s U.S subsidiaries. The ABL Line of Credit is collateralized
by a first lien on the Company’s inventory and receivables and a second lien on
the Company’s real estate and property and equipment. The Term Loan
is collateralized by a first lien on the Company’s real estate, favorable
leases, and machinery and equipment and a second lien on the Company’s inventory
and receivables.
In
addition to the Term Loan and the ABL Line of Credit, the Company entered into
agreements with several lenders to issue a $305 million aggregate principal
amount of senior unsecured notes (Senior Notes) and a $99.3 million aggregate
principal amount of senior unsecured discount notes (Senior Discount
Notes). The $305 million Senior Notes, issued at a $5.9 million
discount, accrue interest at a rate of 11.1% payable semi-annually on October
15th and April 15th of each year. The Senior Notes are
scheduled to mature on April 15, 2014 and are guaranteed by Holdings and each of
the Company’s existing and future subsidiaries. The $99.3 million
Senior Discount Notes were issued at a substantial discount and generated gross
proceeds of approximately $75 million. The Senior Discount Notes
accrete at a rate of 14.5%, compounded semi-annually up to the accreted value of
$99.3 million as of April 15, 2008. Accretion amounted to $11.3
million and $11.5 million for the fiscal years ended May 31, 2008 and June 2,
2007, respectively, and $1.5 million for the fiscal period April 13, 2006 to
June 3, 2006. Accretion of the Senior Discount Notes is included in the line
item “Interest Expense” in the Company’s Consolidated Statements of Operations
and Comprehensive Income (Loss). Interest will be paid semi-annually
on October 15th and April 15th of each year beginning October 15, 2008 at a rate
of 14.5%. The Senior Discount Notes are scheduled to mature on
October 15, 2014 and are not guaranteed by the Company or any of its
subsidiaries.
As of May
31, 2008 we are in compliance with all of our debt covenants. The credit agreements
regarding the ABL Line of Credit and the Term Loan, as well as indentures
governing the Senior Notes and Senior Discount Notes, contain covenants that,
among other things, limit the Company’s and its restricted subsidiaries’ ability
to, among
52
other
things:
|
·
|
pay
dividends on, redeem or repurchase capital
stock;
|
|
·
|
make
investments and other restricted
payments;
|
|
·
|
incur
additional indebtedness or issue preferred
stock;
|
|
·
|
create
liens;
|
|
·
|
permit
dividend or other payment restrictions on our restricted
subsidiaries;
|
|
·
|
sell
all or substantially all of our assets or consolidate or merge with or
into other companies; and
|
|
·
|
engage
in transactions with affiliates.
|
In
January 2006, the Company purchased the ground lease and sublease related to one
of its store locations. The Company financed this purchase partially
through the issuance of a promissory note (Promissory Note) in the principal
amount of $0.5 million. The note bears interest at 4.43% per annum
and matures on December 23, 2011. The outstanding principal balance
of the loan amounted to $0.3 million at May 31, 2008 and is to be repaid in
equal monthly installments of eight thousand dollars, which began on February
23, 2006.
The
Industrial Revenue Bonds were issued in connection with the construction of the
Company’s existing distribution center in Burlington, New Jersey. The
bonds are secured by a first mortgage on the distribution
center. Payment of interest and principal is guaranteed under an
irrevocable letter of credit in the amount of $3.4 million.
On
December 5, 2001, the Company borrowed $2.0 million from the Burlington County
Board of Chosen Freeholders. The proceeds were used for part of the
acquisition and development costs of its warehouse facility in Edgewater Park,
New Jersey. The loan is interest-free and matures on January 1,
2012. The loan amounts to $0.7 million at May 31, 2008 and is to be
repaid in monthly installments of seventeen thousand dollars, which began on
February 1, 2002.
Scheduled
maturities of the Company’s long-term debt and capital lease obligations in each
of the next five fiscal years are as follows:
|
(in
thousands ‘000)
|
||||||||||||
|
Fiscal
years ending in,
|
Long-Term
Debt
|
Capital
Lease Obligations
|
Total
|
|||||||||
|
2009
|
$ | 3,326 | $ | 327 | $ | 3,653 | ||||||
|
2010
|
10,377 | 417 | 10,794 | |||||||||
|
2011
|
205,531 | 518 | 206,049 | |||||||||
|
2012
|
9,186 | 592 | 9,778 | |||||||||
|
2013 and thereafter
|
1,234,625 | 23,778 | 1,258,403 | |||||||||
|
Total
|
1,463,045 | |||||||||||
| 25,632 | 1,488,677 | |||||||||||
|
Less: Unamortized
Discount
|
(4,793 | ) | - | (4,793 | ) | |||||||
|
Total
|
1,458,252 | 25,632 | 1,483,884 | |||||||||
|
Less: current portion
|
(3,326 | ) | (327 | ) | (3,653 | ) | ||||||
|
Long
Term Debt
|
$ | 1,454,926 | $ | 25,305 | $ | 1,480,231 | ||||||
The
capital lease obligations noted above are net of interest charges of $2.2
million, $2.1 million, $2.1 million, $2.1 million and $17.6 million for the
fiscal years ended May 30, 2009, May 29, 2010, May 28, 2011, June 2, 2012 and
thereafter, respectively.
The
Company has $45.3 million and $55.6 million in deferred financing fees related
to its long term debt instruments recorded in the line item “Other Assets” in
the Company’s Consolidated Balance Sheets as of May 31, 2008 and June 2, 2007,
respectively. Amortization of deferred financing fees amounted
to $10.3 million for each of the fiscal years ended May 31, 2008 and June 2,
2007, respectively, and $5.3 million and $0.5 million for the periods April 13,
2006 to June 3, 2006 and May 29, 2005 to April 12, 2006,
respectively. Amortization expense for each of the next five fiscal
years is estimated to be as follows:
53
|
Fiscal
years
|
(in thousands
‘000)
|
|||
|
2009
|
$ | 10,358 | ||
|
2010
|
10,361 | |||
|
2011
|
9,820 | |||
|
2012
|
6,731 | |||
|
2013
and thereafter
|
7,984 | |||
|
Total
|
$ | 45,254 | ||
Deferred
financing fees have a weighted average amortization period of approximately 4.8
years.
15. Stock
Option and Award Plans and Stock-Based Compensation
On April
13, 2006, the Parent’s Board of Directors adopted the 2006 Management Incentive
Plan (the Plan). The Plan provides for the granting of service-based and
performance-based stock options, restricted stock and other forms of awards to
executive officers and other key employees of the Company and its subsidiaries.
Awards made pursuant to the Plan are comprised of units of Parent’s common
stock. Each unit consists of nine shares of Class A common stock and one
share of Class L common stock of the Parent. The shares comprising a unit are in
the same proportion as the shares of Class A and Class L common stock held
by all stockholders of the Parent. Options granted pursuant to the Plan are
exercisable only for whole units and cannot be separately exercised for the
individual classes of the Parent common stock. There are 511,122 units reserved
under the Plan consisting of 4,600,098 shares of Class A common stock of Parent
and 511,122 shares of Class L common stock of Parent.
Options
granted during the twelve month period ended May 31, 2008 were all service-based
awards and were granted in three tranches with exercise prices as follows:
Tranche 1: $100 per unit; Tranche 2: $180 per unit; and Tranche 3: $270 per
unit. Options granted during the twelve month period ended June 2, 2007 were all
service-based awards and were granted in three tranches with exercise prices as
follows: Tranche 1: $90 per unit; Tranche 2: $180 per unit; and
Tranche 3: $270 per unit. All of the service-based awards issued in
Fiscal 2008 and Fiscal 2007 vest 40% on the second anniversary of the award with
the remaining amount vesting ratably over the subsequent three years. The final
exercise date for any option granted is the tenth anniversary of the grant
date.
All
options awarded pursuant to the Plan become exercisable upon a change of
control. Unless determined otherwise by the plan administrator, upon
cessation of employment; (1) options that have not vested will terminate
immediately; (2) units previously issued upon the exercise of vested options
will be callable at the Company’s option; and (3) unexercised vested options
will be exercisable for a period of 60 days.
As of May
31, 2008, the Company had 412,000 options outstanding to purchase units, all
of which are service-based awards.
On June
4, 2006, the Company adopted SFAS No. 123R (Revised 2004), “Share-Based Payment,” using
the modified prospective method, which requires companies to record stock
compensation expense for all non-vested and new awards beginning as of the
adoption date. Accordingly, prior period amounts presented herein have not been
restated. For the fiscal years ended May 31, 2008 and June 2, 2007, we
recognized non-cash stock compensation expense of $2.4 ($1.6 million after tax)
and $2.9 million ($1.9 million after tax), respectively, net of a $1.0 million
and $0.4 million forfeiture adjustment that was recorded as a result of actual
forfeitures being higher than initially estimated. Non-cash stock
compensation expense is included in the line item “Selling and Administrative
Expense” in the Company’s Consolidated Statements of Operations and
Comprehensive Income (Loss). The adoption of SFAS 123R had no impact on our
Consolidated Statements of Cash Flow. As of May 31, 2008 there
is approximately $11.8 million of unearned non-cash stock-based compensation
that the Company expects to recognize as expense over the next 4.9 years. The
service-based awards are expensed on a straight-line basis over the requisite
service period of 5 years. As of May 31, 2008, 24% percent of
outstanding options to purchase units have vested.
54
Stock
Option Unit Transactions are summarized as follows:
|
Number
of Units
|
Average
Exercise Price Per Unit
|
|||||||
|
Options
Outstanding June 3, 2006
|
347,500 | $ | 180.00 | |||||
|
Options
issued during the period
|
74,500 | 180.00 | ||||||
|
Options
forfeited during the period
|
(55,000 | ) | 180.00 | |||||
|
Options
cancelled during the period
|
- | - | ||||||
|
Options
exercised during the period
|
- | - | ||||||
|
Options
Outstanding June 2, 2007
|
367,000 | $ | 180.00 | |||||
|
Options
issued during the period
|
155,000 | 183.33 | ||||||
|
Options
forfeited during the period
|
(90,000 | ) | 180.00 | |||||
|
Options
cancelled during the period
|
(20,000 | ) | 180.00 | |||||
|
Options
exercised during the period
|
- | - | ||||||
|
Options
Outstanding May 31, 2008
|
412,000 | $ | 181.25 | |||||
The
following table summarizes information about the options to purchase units that
are outstanding under the Plan as of May 31, 2008:
|
Stock
Option Units Outstanding
|
Option
Units Exercisable
|
|||||||||||||||||||
|
Range
of
Exercise
Prices
|
Number
Outstanding
At
May 31, 2008
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
Weighted
Average
Exercise
Price
|
Number
Exercisable
May
31, 2008
|
||||||||||||||||
|
Tranche
1
|
$ | 90 – 100 | 137,333 | 8.5 | $ | 93.76 | 32,333 | |||||||||||||
|
Tranche
2
|
$ | 180 | 137,333 | 8.5 | $ | 180.00 | 32,333 | |||||||||||||
|
Tranche
3
|
$ | 270 | 137,334 | 8.5 | $ | 270.00 | 32,334 | |||||||||||||
| 412,000 | 97,000 | |||||||||||||||||||
The fair
value of each stock option granted is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants under the Plan in Fiscal 2008 and Fiscal
2007:
|
2008
|
2007
|
|||||||
|
Risk-Free
Interest Rate
|
3.63 – 3.79 | % | 4.75 | % | ||||
|
Expected
Volatility
|
35 | % | 70 | % | ||||
|
Expected
Life (years)
|
6.6 – 7.9 | 4.5 | ||||||
|
Contractual
Life (years)
|
10.0 | 10.0 | ||||||
|
Expected
Dividend Yield
|
0.0 | 0.0 | % | |||||
|
Fair
Value of Options Granted:
|
||||||||
|
Tranche 1
|
$ | 73.85 | $ | 53.13 | ||||
|
Tranche
2
|
$ | 46.81 | $ | 38.79 | ||||
|
Tranche
3
|
$ | 36.83 | $ | 30.53 | ||||
55
Pre-Transaction Stock-Based
Compensation Accounting
Prior to
the closing of the Merger Transaction, BCFWC applied Accounting Principles Board
(APB) Opinion 25, “Accounting
for Stock Issued to Employees,” in accounting for its stock option
awards. Accordingly, compensation expense has not been recorded for the fiscal
period from April 13, 2006 to June 3, 2006 for options to purchase units granted
under the plan and the period from May 29, 2005 to April 12, 2006 for the
options granted prior to the Merger Transaction, for which the
exercise price of the options was equal to or greater than the fair market
value of the options at the grant date. The following table illustrates the
effect had the Company applied the fair value recognition provisions of SFAS No.
123:
|
(in
thousands ‘000)
|
||||||||
|
Successor
|
Predecessor
|
|||||||
|
Period
from
April
13, 2006 to
June
3, 2006
|
Period
from
May
29, 2005 to April 12, 2006
|
|||||||
|
Net
(Loss) income as reported
|
$ | (27,166 | ) | $ | 94,339 | |||
|
Expense
under fair value method, net of tax effect
|
(297 | ) | (567 | ) | ||||
|
Pro
forma net (loss) income
|
$ | (27,463 | ) | $ | 93,772 | |||
The fair
value of each stock option granted was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in Fiscal 2005 (no options were granted
during Fiscal 2006):
|
Grant
1
|
Grant
2
|
||||||||
|
Number
of Shares
|
87,700 | 73,600 | |||||||
|
Risk-Free
Interest Rate
|
4.10 | % |
|
4.10 | % | ||||
|
Expected
Volatility
|
37.65 | % |
|
38.00 | % | ||||
|
Expected
Life
|
5.5
years
|
5.5
years
|
|||||||
|
Contractual
Life
|
10
years
|
10
years
|
|||||||
|
Expected
Dividend Yield
|
0.20 | % |
|
0.20 | % | ||||
|
Fair Value of Options Granted
|
$ | 6.79 | $ | 9.85 | |||||
Any
unexercised stock options at the time of the consummation of the Merger
Transaction were cancelled and each holder received an amount in cash, less
applicable withholding taxes, equal to $45.50 per share less the exercise price
of each option.
The
Company leases 395 stores, warehousing and distribution facilities and office
spaces under operating and capital leases that will expire principally during
the next thirty years. The leases typically include renewal options
and escalation clauses and provide for contingent rentals based on a percentage
of gross sales.
56
The
following is a schedule of future minimum lease payments having an initial or
remaining term in excess of one year (in thousands):
|
(in
thousands ‘000)
|
||||||||
|
Fiscal
years
|
Operating
Leases
|
Capital
Leases
|
||||||
|
2009
|
$ | 159,987 | $ | 2,496 | ||||
|
2010
|
157,816 | 2,556 | ||||||
|
2011
|
145,538 | 2,616 | ||||||
|
2012
|
133,693 | 2,646 | ||||||
|
2013
and thereafter
|
493,699 | 41,365 | ||||||
|
Total
minimum lease payments
|
1,090,733 | 51,679 | ||||||
|
Amount
representing interest
|
- | (26,045 | ) | |||||
|
Present
Value of minimum lease payments…
|
$ | 1,090,733 | $ | 25,634 | ||||
The above
schedule of future minimum lease payments has not been reduced by future minimum
sublease rental income of $53.2 million relating to operating leases under
non-cancelable subleases and other contingent rental agreements.
The
following is a schedule of Rent Expense:
|
(in
thousands ‘000)
|
||||||||||||||||
|
(Successor)
|
(Predecessor)
|
|||||||||||||||
|
Year
Ended
May
31, 2008
|
Year
Ended
June
2, 2007
|
April
13, 2006 to June 3, 2006
|
May
29, 2005 to
April
12, 2006
|
|||||||||||||
|
Rent
Expense:
|
||||||||||||||||
|
Minimum
Rental Payments
|
$ | 150,979 | $ | 134,104 | $ | 17,535 | $ | 110,693 | ||||||||
|
Contingent
Rental Payments
|
1,171 | 2,509 | 462 | 2,520 | ||||||||||||
|
Straight-line
Rent Expense
|
6,768 | 9,431 | 1,444 | (593 | ) | |||||||||||
|
Lease
Incentives Amort. (Net)
|
(4,939 | ) | (3,119 | ) | (607 | ) | 1,191 | |||||||||
|
Total
Rent Expense
|
153,979 | 142,925 | 18,834 | 113,811 | ||||||||||||
|
Less
Sublease Income
|
18,769 | 20,835 | 2,925 | 18,434 | ||||||||||||
|
Total
Net Rent Expense
|
$ | 135,210 | $ | 122,090 | $ | 15,909 | $ | 95,377 | ||||||||
The
Company has a discretionary noncontributory profit-sharing plan covering
employees who meet age and service requirements. The Company also provides
additional retirement security to participants through a cash or deferred
(salary deferral) feature qualifying under Section 401(k) of the Internal
Revenue Code. Participation in the salary deferment feature is
voluntary. Employees may, up to certain prescribed limits, contribute
to the 401(k) plan and a portion of these contributions are matched by the
Company. Under the profit sharing feature, the Company's contribution
to the plan is determined annually by the Board of Directors. During
Fiscal 2008 and Fiscal 2007, the Company determined that a discretionary
contribution to the employee profit sharing plan for the plan years ended
December 31, 2007 and December 31, 2006, respectively, would not be
made.
For the
fiscal years ended May 31, 2008 and June 2, 2007, and the periods from April 13,
2006 to June 2006 and May 29, 2005 to April 12, 2006, the Company recorded $4.1
million, $3.8 million, $0.6 million and $3.8 million of 401(k) plan match
expense, respectively. Offsetting this expense is the reversal of the
profit sharing accrual during the fiscal years ended May 31, 2008 and June 2,
2007. As the profit sharing accrual is based on a calendar year, the
reversal is a reduction of expense of $4.5 million and $1.8 million for the
fiscal years ended May 31, 2008 and June 2, 2007. Based on the
Company’s past performance, it was believed that the payment of the profit
sharing expense in both Fiscal 2008 and Fiscal 2007 was
57
probable. Management
accordingly began accruing the expense on a monthly basis. However,
based on the actual performance of the Company, management determined that the
profit sharing bonus would not be paid out and reversed the accrual
accordingly.
For the
periods from April 13, 2006 to June 3, 2006 and May 29, 2005 to April 12, 2006,
profit sharing expense amounted to $1.0 million and $6.9 million,
respectively.
Earnings
(loss) before income taxes are as follows:
|
(in thousands
‘000)
|
||||||||||||||||
|
May
31, 2008
|
June
2, 2007
|
April
13, 2006 to June 3, 2006
|
May
29, 2005 to April 12, 2006
|
|||||||||||||
|
(Loss)
earnings before income taxes
|
$ | (74,274 | ) | $ | (72,624 | ) | $ | (36,982 | ) | $ | 150,944 | |||||
Income
tax expense (benefit) is as follows:
|
(in
thousands ‘000)
|
||||||||||||||||
|
Period
Ended
|
May
31, 2008
|
June
2, 2007
|
April
13, 2006 to June 3, 2006
|
May
29, 2005 to April 12, 2006
|
||||||||||||
|
Current:
|
||||||||||||||||
|
Federal
|
$ | 32,225 | $ | 33,558 | $ | 1,262 | $ | 58,725 | ||||||||
|
State
and Other
|
15,441 | 2,851 | 229 | 9,206 | ||||||||||||
|
Subtotal
|
47,666 | 36,409 | 1,491 | 67,931 | ||||||||||||
|
Deferred
|
(72,970 | ) | (61,834 | ) | (11,307 | ) | (11,326 | ) | ||||||||
|
Total income
tax expense (benefit)
|
$ | (25,304 | ) | $ | (25,425 | ) | $ | (9,816 | ) | $ | 56,605 | |||||
The tax
rate reconciliations are as follows:
|
Period
Ended
|
May
31, 2008
|
June
2, 2007
|
April
13, 2006 to June 3, 2006
|
May
29, 2005 to April 12, 2006
|
||||||||||||
|
Tax
at statutory rate
|
(35.0 | ) % | (35.0 | ) % | (35.0 | ) % | 35.0 | % | ||||||||
|
State
income taxes, net of federal benefit
|
(1.0 | ) | (5.3 | ) | (2.1 | ) | 3.1 | |||||||||
|
State
tax benefit of net operating losses
|
- | - | - | - | ||||||||||||
|
Change
in valuation allowance
|
- | - | - | - | ||||||||||||
|
Capitalized
acquisition costs
|
- | (3.4 | ) | 10.7 | 0.2 | |||||||||||
|
Other
charges
|
0.5 | 1.3 | - | (0.2 | ) | |||||||||||
|
Tax
credits
|
(2.1 | ) | (1.3 | ) | (0.1 | ) | (0.6 | ) | ||||||||
|
Tax
reserves
|
3.5 | 8.7 | - | - | ||||||||||||
|
Effective
tax rate
|
(34.1 | ) % | (35.0 | ) % | (26.5 | ) % | 37.5 | % | ||||||||
58
The tax
effects of temporary differences are included in deferred tax accounts as
follows:
|
(in
thousands ‘000)
|
||||||||||||||||
|
May
31, 2008
|
June
2, 2007
|
|||||||||||||||
|
Period
Ended
|
Tax
Assets
|
Tax
Liabilities
|
Tax
Assets
|
Tax
Liabilities
|
||||||||||||
|
Current
deferred tax assets and liabilities:
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 254 | $ | - | $ | 383 | $ | - | ||||||||
|
Compensated
absences
|
2,011 | - | 1,556 | - | ||||||||||||
|
Inventory
costs and reserves
capitalized
for tax purposes
|
20,480 | - | 16,245 | - | ||||||||||||
|
Insurance
reserves
|
14,688 | - | 13,344 | - | ||||||||||||
|
Prepaid
items deductible
for
tax purposes
|
- | 1,189 | - | 2,024 | ||||||||||||
|
Sales
return reserves
|
3,860 | - | 3,259 | - | ||||||||||||
|
Reserve
for lawsuits
|
841 | - | 1,153 | - | ||||||||||||
| Deferred revenue | 9,864 | |||||||||||||||
|
Employee
benefit accrual
|
657 | - | 706 | - | ||||||||||||
|
Other
|
- | 90 | 521 | - | ||||||||||||
| Total Current deferred tax assets and liabilities | $ | 52,655 | $ | 1,279 | $ | 37,167 | $ | 2,024 | ||||||||
|
Non-Current
derred tax assets and liabilities:
|
||||||||||||||||
|
Property
and equipment basis adjustments
|
$ | - | $ | 94,080 | $ | - | $ | 125,114 | ||||||||
|
Deferred
rent
|
15,681 | - | 13,591 | - | ||||||||||||
|
Pre-opening
costs
|
1,343 | - | 2,750 | - | ||||||||||||
|
Intangibles
|
- | 428,868 | - | 446,941 | ||||||||||||
|
Employee
benefit compensation
|
2,118 | - | 1,130 | - | ||||||||||||
|
State
net operating losses (net of federal benefit)
|
10,004 | - | 11,341 | - | ||||||||||||
|
Valuation
allowance (net of federal benefit)
|
(4,849 | ) | - | (8,298 | ) | - | ||||||||||
|
Landlord
allowances
|
24,221 | - | ||||||||||||||
|
Accrued
interest
|
4,179 | - | ||||||||||||||
|
Other
|
5,653 | - | 243 | - | ||||||||||||
|
Total
non current deferred tax assets and liabilities
|
$ | 58,350 | $ | 522,948 | $ | 20,757 | $ | 572,055 | ||||||||
As a
result of the Merger Transaction in 2006, the Company incurred a change in
ownership as defined by Section 382 of the Internal Revenue Code, Section 382
imposes limitations on a corporation’s ability to utilize its NOL carryforwards
if it experiences an “ownership change”. In general terms, an ownership change
results from transactions increasing the ownership of certain stockholders in
the stock of a corporation by more than 50% over a three-year period. The
Company’s ability to utilize its state net operating loss carryforwards are
subject to similar state income tax law restrictions.
The
Company determined that, as of May 31, 2008 and June 2, 2007, a valuation
allowance against a substantial majority of the deferred tax assets associated
with state net operating losses was appropriate. Generally Accepted Accounting
Principles require companies to weigh both positive and negative evidence in
determining the need for a valuation allowance. Management has determined that
valuation allowances of $4.8 million and $8.3 million are required against the
$10.0 million and $11.3 million of tax benefits associated with these state net
operating losses. The decrease in the Company’s valuation allowance is primarily
attributable to the change in the projection of future state taxable income and
the ability to utilize the net operating losses resulting from the state
restructuring completed prior to the Merger Transaction. The Company
still believes that it is more likely than not that some amount of the benefit
of the state net operating losses will not be realized. The state net operating
losses have been generated in a number of taxing jurisdictions and are subject
to various expiration periods ranging from five to twenty years beginning with
the Company's 2008 fiscal year. Any future tax benefit recognized by the use of
an NOL established prior to the merger, where a valuation allowance has been
established, will be recorded first to reduce to zero the goodwill related to
the merger, second to reduce to zero other noncurrent intangible assets and
third to reduce income tax expense.
59
The
Company adopted FIN 48 as of June 3, 2007. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an entity’s financial
statements in accordance with SFAS No. 109. FIN 48 prescribes a
recognition threshold and measurement attributes for financial statement
disclosure of tax positions taken or expected to be taken on a tax
return. FIN 48 requires that the Company recognize in its financial
statements the impact of a tax position taken or expected to be taken in a tax
return, if that position is “more likely than not” of being sustained upon
examination by the relevant taxing authority, based on the technical merits of
the position. The tax benefits recognized in the financial statements
from such a position are measured based on the largest benefit that has a
greater than fifty percent likelihood of being realized upon ultimate
resolution. Additionally, FIN 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition.
Upon adoption, the cumulative
effect of applying the provisions of FIN 48 was an increase of approximately
$48.9 million in the liability for unrecognized tax benefits and related
interest and penalty, a $39.2 million decrease in the deferred income tax
liability and a $9.7 million increase in the accumulated
deficit.
A
reconciliation of the beginning and ending amount of gross unrecognized tax
benefits (exclusive of interest and penalties) is as follows:
|
(in
thousands ‘000)
|
||||
|
Gross
Unrecognized Tax Benefits, Exclusive of Interest and
Penalties)
|
||||
|
Beginning
balance at June 3, 2007 (date of adoption)
|
$ | 44,778 | ||
|
Additions
for tax positions of the current year
|
1,222 | |||
|
Additions
for tax positions of prior years
|
109 | |||
|
Reductions
for tax positions of prior years
|
(7,090 | ) | ||
|
Settlements
|
- | |||
|
Lapse
of statute of limitations
|
(1,016 | ) | ||
|
Ending
balance at May 31, 2008
|
$ | 38,003 | ||
As of May 31, 2008, the Company
reported total unrecognized benefits of $38.0 million, of which $8.3 million
would affect the Company’s effective tax rate if recognized. As
a result of positions taken during the year, the Company has recorded $4.0
million of interest and penalties for the twelve months ended May 31, 2008 in
the line item “(Benefit) Provision for Income Taxes”. Cumulative
interest and penalties of $16.6 million have been recorded in the line item
“Other Liabilities” in the Company’s Consolidated Balance Sheet as of May
31, 2008. The Company recognizes interest and penalties related
to unrecognized tax benefits as part of income taxes.
The
Company files tax returns in the U.S. federal jurisdiction and various state
jurisdictions. The Company is open to audit under the statute of
limitations by the Internal Revenue Service for fiscal years 2004 through 2007
and is currently under IRS examination for fiscal years 2004 and
2005. The Company or its subsidiaries’ state income tax returns are
open to audit under the statute of limitations for the fiscal years 2003 through
2007.
Due to
the potential for resolution of federal and state examinations, and the
expiration of various statutes of limitations, it is reasonably possible that
the Company's gross unrecognized tax benefit balance may decrease within the
next twelve months by as much as $13.0 million, related primarily to issues
involving deferred revenue and depreciation.
|
Fair
Value of Financial Instruments
|
The
carrying values of cash and cash equivalents, accounts receivable and accounts
payable approximate fair value due to their short term nature. Interest rates
that are currently available to the Company for issuance of notes payable
(including current maturities) with similar terms and remaining maturities are
used to estimate fair value for notes payable. Fair value of the Company’s
Senior Notes and Senior Discount Notes were determined based on quoted market
prices. The estimated fair value of long-term debt
60
(including
current maturities) is as follows:
|
(in
thousands ‘000)
|
||||||||
|
Carrying
Amount
|
Fair
Value
|
|||||||
|
Senior
Notes, 11.13% due at maturity on April 15, 2014, semi-annual
interest payments from October 15, 2008 to April 15,
2014
|
$ | 300,207 | $ | 222,372 | ||||
|
Senior
Discount Notes, 14.5% due at maturity on October 15, 2014, semi-annual
interest payments from October 15, 2008 to October 15,
2014
|
99,309 | 75,550 | ||||||
|
$900,000
Senior Secured Term Loan Facility, Libor plus 2.25% due in
quarterly payments of $2,250 from August 30, 2008 to May 28,
2013.
|
872,807 | 676,425 | ||||||
|
$800,000
ABL Senior Secured Revolving Facility, Libor plus spread based on average
outstanding balance. (1)
|
181,600 | 181,600 | ||||||
|
Other
Debt (2)
|
29,961 | 29,961 | ||||||
|
Total
debt
|
$ | 1,483,884 | $ | 1,185,908 | ||||
|
(1) The
carrying value of the ABL Line of Credit approximates its fair value due
to its short term nature (borrowings are typically done in 30 day
increments) and its variable interest rate.
|
||||||||
|
(2) Other
debt is primarily made up of capital leases.
|
||||||||
As of
June 2, 2007, the fair value of the Company’s debt was $1,462.3 million compared
to the carrying value of $1,476.2 million. The fair values presented
herein are based on pertinent information available to management as of the
respective year end dates. Although management is not aware of any factors that
could significantly affect the estimated fair value amounts, such amounts have
not been comprehensively revalued for purposes of these financial statements
since that date, and current estimates of fair value may differ from amounts
presented herein.
20. Acquisition
of Value City Leases and Other Leases
Value City
Leases
On
October 3, 2007, BCFWC entered into an Agreement to Acquire Leases and
Lease Properties (the Agreement) from Retail Ventures, Inc., an Ohio
corporation (RVI), together with its wholly-owned subsidiaries, Value City
Department Stores LLC, an Ohio limited liability company (Value City or VCDS),
and GB Retailers, Inc., a Delaware corporation (GB Retailers and, together with
VCDS, the VCDS Tenants), and from Schottenstein Stores Corporation (SSC) and
certain affiliates of SSC (collectively with SSC, the SSC Landlords). RVI, the
VCDS Tenants and the SSC Landlords are collectively referred to as the “Value
City Entities.” As of the date the Agreement was signed, the
aggregate purchase price to be paid by BCFWC for up to 24 leases was
approximately $16.0 million subject to certain potential adjustments
provided for in the Agreement.
The Value
City Entities and BCFWC have undertaken good faith efforts to obtain the
necessary landlord consents and lease amendments to allow the disposition of the
leased premises to occur as specified in the Agreement. In the event that any
necessary landlord consents or lease amendments cannot be obtained, the parties
may remove one or more of the leased premises from the transaction. The
effective dates of the lease assignments and transfer of possession of the
leased premises will occur on various dates, subject to change as described
in the Agreement. The Agreement contains customary representations, warranties
and covenants, and the transactions contemplated by the Agreement are subject to
certain adjustments and closing conditions.
In
connection with the Agreement, the parties entered into an escrow agreement
pursuant to which approximately ten percent (10%) of the purchase price for the
leased premises was deposited with the escrow agent upon execution of the
Agreement and is included in the line item “Prepaid and Other Current Assets” in
the Company’s Consolidated Balance Sheets. The escrow proceeds and the remainder
of the purchase price will be delivered to Value City at the closing of the
contemplated transactions. Also at the
61
closing,
RVI will enter into an indemnification agreement with BCFWC pursuant to which
the Company will provide certain indemnities and undertake certain obligations
in favor of BCFWC.
During
the twelve months ended May 31, 2008, the Company finalized the acquisition
of eight of the Value City leases for a total purchase price of $5.3
million, including $0.3 million of related expenses. The lease
acquisition costs are reflected in the line item “Other Assets” in the Company’s
Consolidated Balance Sheets. In connection with the acquisition
of these leases, the Company received $3.2 million of lease incentives, which
are included in the line item “Other Liabilities” in the Company’s Consolidated
Balance Sheets. The lease acquisition assets and deferred lease
incentives will be amortized to rent expense over the lease term which ranges
from 8 years to 11 years. The Company expects to open stores at
these leased locations in Fiscal 2009.
As of May
31, 2008, four of the original 24 locations were removed from the
transaction. In addition, the Company has made arrangements to transfer
seven locations to the landlords thereof and to enter into leases for such
locations with those landlords, thus reducing the aggregate purchase price of
the entire transaction from $16.0 million to $7.0 million.
Other
Lease Acquisition
During
the twelve months ended May 31, 2008, the Company finalized the acquisition
of a lease related to a location in Puerto Rico for a total purchase
price of $1.5 million. The lease acquisition cost is reflected
in the line item “Other Assets” in the Company’s Consolidated Balance Sheets and
will be amortized to rent expense over the lease term, which is 14
years. The Company expects to open a store at this leased location in
Fiscal 2009.
Additionally,
the Company finalized the purchase of a lease related to a store in Connecticut
for a total purchase price of $0.4 million. The lease acquisition
cost is also reflected in the line item “Other Assets” in the Company’s
Consolidated Balance Sheets and will be amortized to rent expense over the lease
term of approximately nine years.
The
Company reports segment information in accordance with SFAS No.131, “Disclosure about Segments of an
Enterprise and Related Information.” The Company has
identified operating segments at the store level. However, due to the
similar economic characteristics of the store, the Company has aggregated the
stores into one reporting segment operating within the United States.
The
Company establishes reserves for the settlement amount, as well as reserves
relating to legal claims in connection with litigation to which the Company is
party from time to time in the ordinary course of business. The
aggregate amount of such reserves was $2.1 million and $2.9 million as of May
31, 2008 and June 2, 2007, respectively. The Company believes that
potential liabilities in excess of those recorded will not have a material
adverse effect on the Company's consolidated financial statements; however,
there can be no assurances to this effect.
The
Company enters into lease agreements during the ordinary course of business in
order to secure favorable store locations. As of May 31, 2008, the
Company has committed to 38 new lease agreements (exclusive of two relocations)
for locations at which stores are expected to be opened in Fiscal
2009.
The
Company has irrevocable letters of credit in the amount of $52.5 million to
guarantee payment and performance under certain leases, insurance contracts,
debt agreements and utility agreements. Based on the terms of ABL Line of
Credit Agreement, the Company has available letters of credit of $247.5 million
as of May 31, 2008.
The
Company has $735.6 million of purchase commitments related to goods or services
the Company has committed to purchase that have not been received as of the year
ended May 31, 2008. All but approximately $8.0 million of this amount
is expected to be settled during Fiscal 2009.
In
November of 2005, the Company entered into agreements with three of the
Company’s executives whereby upon each of their deaths, the Company will pay
$1.0 million to the respective designated beneficiary.
62
In
connection with the Merger Transaction, the Company entered into an advisory
agreement with Bain Capital (the “Advisory Agreement”) pursuant to which
Bain Capital provides management, consulting, financial and other advisory
services. Pursuant to the agreement, Bain Capital is paid a periodic
fee of $1.0 million per fiscal quarter plus reimbursement for reasonable
out-of-pocket fees, and a fee equal to 1% of the transaction value of each
financing, acquisition, disposition or change of control or similar transaction
by or involving the Company. Fees paid to Bain Capital amounted to
$4.3 million, $4.1 million and $0.5 million for Fiscal 2008, Fiscal 2007 and the
period from April 13, 2006 through June 3, 2006, respectively, and is included
in the line item “Selling and Administrative Expenses” on the Company’s
Consolidated Statements of Operations and Comprehensive Income
(Loss). Bain Capital received a fee of approximately $21.4 million in
consideration for financial advisory services related to the Merger Transaction
during Fiscal 2006. The Advisory Agreement has a 10-year initial
term, and is thereafter subject to automatic one-year extensions unless the
Company or Bain Capital provides written notice of termination, except that the
agreement terminates automatically upon an initial public offering or a change
of control of the Company. If the Advisory Agreement is terminated
early, Bain Capital will be entitled to receive all unpaid fees and unreimbursed
out-of-pocket fees and expenses, as well as the present value of the periodic
fee that would otherwise have been payable through the end of the 10-year
term.
As of May
31, 2008 and June 2, 2007, the Company had $0.3 and $1.3 million,
respectively, of prepaid advisory fees related to the Advisory
Agreement recorded within the line item “Prepaid and Other Current Assets” in
the Company’s Consolidated Balance Sheets.
24. Dividends
Post-Merger
Transaction
Neither
the Company nor any of its subsidiaries may declare or pay cash dividends or
make other distributions of property to any affiliate unless such dividends are
used for certain specified purposes including, among others, to pay general
corporate and overhead expenses incurred by Holdings or Parent in the ordinary
course of business, or the amount of any indemnification claims made by any
director or officer of Holdings or Parent, to pay taxes that are due and payable
by Holdings or any of its direct or indirect subsidiaries, pay interest on
Holdings Senior Discount Notes or other eligible distributions, provided that no
event of default under BCFWC’s debt agreements has occurred or will occur as the
result of such interest payment.
Dividends
equal to $0.7 million were paid during the fiscal year ended May 31, 2008 to
Parent in order to repurchase capital stock of the Parent from executives who
left the Company, which are permissible under our debt agreements.
25. Condensed
Guarantor Data
On April
13, 2006, BCFWC issued $305 million aggregate principal amount of 11.125% Senior
Notes due in 2014. The notes were issued under an indenture issued on April 13,
2006. Holdings and subsidiaries of BCFWC have fully and unconditionally
guaranteed these notes. In addition, Holdings and certain subsidiaries of BCFWC
fully and unconditionally guarantee BCFWC’s obligations under the $800 million
ABL Line of Credit and $900 million Term Loan. These guarantees are both joint
and several. The following condensed consolidating financial statements present
the financial position, results of operations and cash flows of Holdings, BCFWC,
exclusive of subsidiaries (referred to herein as “BCFW”), and the guarantor
subsidiaries. The Company has one non-guarantor subsidiary that is not
wholly-owned and is considered to be “minor” as defined in Rule 3-10 of
Regulation S-X promulgated by the Securities and Exchange
Commission.
Neither the Company nor any of its
subsidiaries may declare or pay cash dividends or make other distributions of
property to any affiliate unless such dividends are used for certain specified
purposes including, among others, to pay general corporate and overhead expenses
incurred by Holdings or Parent in the ordinary course of business, or the amount
of any indemnification claims made by any director or officer of Holdings or
Parent, to pay taxes that are due and payable by Holdings or any of its direct
or indirect subsidiaries, or to pay interest on Holdings Senior Discount Notes,
provided that no event of default under BCFWC’s debt agreements has occurred or
will occur as the result of such interest payment.
Certain reclassifications related to
store credit and gift card balances, included within the line item “Other
Current Liabilities,” have been made to the Condensed Consolidating Balance
Sheet as of May 31, 2008 to conform to the classifications used in the current
period.
63
Burlington
Coat Factory Investments Holdings, Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets
(All
amounts in thousands, except share data)
|
As
of May 31, 2008
|
||||||||||||||||||||
|
Holdings
|
BCFW
|
Guarantors
|
Eliminations
|
Consolidated
|
||||||||||||||||
|
ASSETS
|
||||||||||||||||||||
|
Current
Assets:
|
||||||||||||||||||||
|
Cash
and Cash Equivalents
|
$ | - | $ | 4,114 | $ | 35,987 | $ | - | $ | 40,101 | ||||||||||
|
Restricted
Cash and Cash Equivalents
|
- | - | 2,692 | - | 2,692 | |||||||||||||||
|
Investments
|
- | - | - | - | - | |||||||||||||||
|
Accounts
Receivable
|
- | 20,930 | 6,207 | - | 27,137 | |||||||||||||||
|
Merchandise
Inventories
|
- | 1,354 | 718,175 | - | 719,529 | |||||||||||||||
|
Deferred
Tax Assets
|
- | 14,222 | 37,154 | - | 51,376 | |||||||||||||||
|
Prepaid
and Other Current Assets
|
- | 11,581 | 13,397 | - | 24,978 | |||||||||||||||
|
Prepaid
Income Taxes
|
- | 935 | 2,929 | - | 3,864 | |||||||||||||||
|
Assets
Held for Disposal
|
- | - | 2,816 | - | 2,816 | |||||||||||||||
|
Total
Current Assets
|
- | 53,136 | 819,357 | - | 872,493 | |||||||||||||||
|
Property
and Equipment—Net of Accumulated
Depreciation
|
- | 58,906 | 860,629 | - | 919,535 | |||||||||||||||
|
Tradename
|
- | 526,300 | - | - | 526,300 | |||||||||||||||
|
Favorable
Leases—Net of Accumulated Amortization
|
- | - | 534,070 | - | 534,070 | |||||||||||||||
|
Goodwill
|
- | 42,775 | - | - | 42,775 | |||||||||||||||
|
Other
Assets
|
323,524 | 1,705,185 | 21,025 | (1,980,415 | ) | 69,319 | ||||||||||||||
|
Total
Assets
|
$ | 323,524 | $ | 2,386,302 | $ | 2,235,081 | $ | (1,980,415 | ) | $ | 2,964,492 | |||||||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||||||||||||||
|
Current
Liabilities:
|
||||||||||||||||||||
|
Accounts
Payable
|
$ | - | $ | 337,040 | $ | - | $ | - | $ | 337,040 | ||||||||||
|
Income
Taxes Payable
|
- | 4,256 | 1,548 | - | 5,804 | |||||||||||||||
|
Other
Current Liabilities
|
- | 128,597 | 110,269 | - | 238,866 | |||||||||||||||
|
Current
Maturities of Long Term Debt
|
- | 2,057 | 1,596 | - | 3,653 | |||||||||||||||
|
Total
Current Liabilities
|
- | 471,950 | 113,413 | - | 585,363 | |||||||||||||||
|
Long
Term Debt
|
- | 1,352,557 | 127,674 | - | 1,480,231 | |||||||||||||||
|
Other
Liabilities
|
- | 17,550 | 103,226 | (10,000 | ) | 110,776 | ||||||||||||||
|
Deferred
Tax Liability
|
- | 220,721 | 243,877 | - | 464,598 | |||||||||||||||
|
Commitments
and Contingencies
|
- | - | - | - | - | |||||||||||||||
|
Stockholders’
Equity:
|
- | - | - | - | - | |||||||||||||||
|
Common
Stock
|
- | - | - | - | - | |||||||||||||||
|
Capital
in Excess of Par Value
|
457,371 | 457,371 | 1,352,271 | (1,809,642 | ) | 457,371 | ||||||||||||||
|
Accumulated
Deficit
|
(133,847 | ) | (133,847 | ) | 294,620 | (160,773 | ) | (133,847 | ) | |||||||||||
|
Total
Stockholders’ Equity
|
323,524 | 323,524 | 1,646,891 | (1,970,415 | ) | 323,524 | ||||||||||||||
|
Total
Liabilities and Stockholders’ Equity
|
$ | 323,524 | $ | 2,386,302 | $ | 2,235,081 | $ | (1,980,415 | ) | $ | 2,964,492 | |||||||||
64
Burlington
Coat Factory Investments Holdings, Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets
(All
amounts in thousands, except share data)
|
As
of June 2, 2007
|
||||||||||||||||||||
|
Holdings
|
BCFW
|
Guarantors
|
Eliminations
|
Consolidated
|
||||||||||||||||
|
ASSETS
|
||||||||||||||||||||
|
Current
Assets:
|
||||||||||||||||||||
|
Cash
and Cash Equivalents
|
$ | - | $ | 20,035 | $ | 13,843 | $ | - | $ | 33,878 | ||||||||||
|
Restricted
Cash and Cash Equivalents
|
- | - | 2,753 | - | 2,753 | |||||||||||||||
|
Investments
|
- | - | - | - | - | |||||||||||||||
|
Accounts
Receivable
|
- | 28,787 | 1,803 | - | 30,590 | |||||||||||||||
|
Merchandise
Inventories
|
- | 1,275 | 709,296 | - | 710,571 | |||||||||||||||
|
Deferred
Tax Assets
|
- | 13,233 | 21,910 | - | 35,143 | |||||||||||||||
|
Prepaid
and Other Current Assets
|
- | 24,741 | 13,849 | (3,224 | ) | 35,366 | ||||||||||||||
|
Assets
Held for Disposal
|
- | - | 35,073 | - | 35,073 | |||||||||||||||
|
Total
Current Assets
|
88,071 | 798,527 | (3,224 | ) | 883,374 | |||||||||||||||
|
Property
and Equipment—Net of Accumulated Depreciation
|
- | 59,856 | 888,478 | - | 948,334 | |||||||||||||||
|
Tradename
|
- | 526,300 | - | - | 526,300 | |||||||||||||||
|
Favorable
Leases—Net of Accumulated Amortization
|
- | - | 574,879 | - | 574,879 | |||||||||||||||
|
Goodwill
|
- | 46,219 | - | - | 46,219 | |||||||||||||||
|
Other
Assets
|
380,470 | 1,738,583 | 9,231 | (2,070,869 | ) | 57,415 | ||||||||||||||
|
Total
Assets
|
$ | 380,470 | $ | 2,459,029 | $ | 2,271,115 | $ | (2,074,093 | ) | $ | 3,036,521 | |||||||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||||||||||||||
|
Current
Liabilities:
|
||||||||||||||||||||
|
Accounts
Payable
|
$ | - | $ | 395,375 | $ | - | $ | - | $ | 395,375 | ||||||||||
|
Income
Taxes Payable
|
- | 3,224 | - | (3,224 | ) | - | ||||||||||||||
|
Other
Current Liabilities
|
- | 111,879 | 86,748 | - | 198,627 | |||||||||||||||
|
Current
Maturities of Long Term Debt
|
- | 4,500 | 1,474 | - | 5,974 | |||||||||||||||
|
Total
Current Liabilities
|
514,978 | 88,222 | (3,224 | ) | 599,976 | |||||||||||||||
|
Long
Term Debt
|
- | 1,338,415 | 117,915 | - | 1,456,330 | |||||||||||||||
|
Other
Liabilities
|
- | 10,622 | 47,825 | (10,000 | ) | 48,447 | ||||||||||||||
|
Deferred
Tax Liability
|
- | 214,544 | 336,754 | - | 551,298 | |||||||||||||||
|
Stockholders’
Equity:
|
- | |||||||||||||||||||
|
Common
Stock
|
- | - | - | |||||||||||||||||
|
Capital
in Excess of Par Value
|
454,935 | 454,935 | 1,522,383 | (1,977,318 | ) | 454,935 | ||||||||||||||
|
Accumulated
Deficit
|
(74,465 | ) | (74,465 | ) | 158,016 | (83,551 | ) | (74,465 | ) | |||||||||||
|
Total
Stockholders’ Equity
|
380,470 | 380,470 | 1,680,399 | (2,060,869 | ) | 380,470 | ||||||||||||||
|
Total
Liabilities and Stockholders’ Equity
|
$ | 380,470 | $ | 2,459,029 | $ | 2,271,115 | $ | (2,074,093 | ) | $ | 3,036,521 | |||||||||
65
Burlington Coat Factory Investments
Holdings, Inc. and Subsidiaries
Condensed
Consolidated Statements of Operations and Comprehensive Income
(Loss)
(All
amounts in thousands)
(Successor)
|
For
the year Ended May 31, 2008
|
||||||||||||||||||||
|
Holdings
|
BCFW
|
Guarantors
|
Eliminations
|
Consolidated
|
||||||||||||||||
|
REVENUES:
|
||||||||||||||||||||
|
Net
Sales
|
$ | - | $ | 3,890 | $ | 3,389,527 | $ | - | $ | 3,393,417 | ||||||||||
|
Other
Revenue
|
- | 470 | 30,086 | - | 30,556 | |||||||||||||||
| - | 4,360 | 3,419,613 | - | 3,423,973 | ||||||||||||||||
|
COSTS
AND EXPENSES:
|
||||||||||||||||||||
|
Cost
of Sales (Exclusive of Depreciation and Amortization)
|
- | 2,550 | 2,092,814 | - | 2,095,364 | |||||||||||||||
|
Selling
and Administrative Expenses
|
- | 147,701 | 943,128 | - | 1,090,829 | |||||||||||||||
|
Depreciation
|
- | 24,754 | 108,306 | - | 133,060 | |||||||||||||||
|
Amortization
|
- | 9,846 | 34,069 | - | 43,915 | |||||||||||||||
|
Impairment
Charges
|
- | - | 25,256 | - | 25,256 | |||||||||||||||
|
Interest
Expense
|
- | 105,759 | 16,925 | - | 122,684 | |||||||||||||||
|
Other
Income, Net
|
- | (4,782 | ) | (8,079 | ) | - | (12,861 | ) | ||||||||||||
|
Equity
in Earnings (Loss) of subsidiaries
|
48,970 | (136,603 | ) | - | 87,633 | - | ||||||||||||||
| 48,970 | 149,225 | 3,212,419 | 87,633 | 3,498,247 | ||||||||||||||||
|
Income
(Loss) Before Provision (Benefit) for Income Tax
|
(48,970 | ) | (144,865 | ) | 207,194 | (87,633 | ) | (74,274 | ) | |||||||||||
|
Provision
for (Benefit from) Income Tax
|
- | (95,895 | ) | 70,591 | - | (25,304 | ) | |||||||||||||
|
Net
Income (Loss)
|
$ | (48,970 | ) | $ | (48,970 | ) | $ | 136,603 | $ | (87,633 | ) | $ | (48,970 | ) | ||||||
66
Burlington
Coat Factory Investments Holdings, Inc. and Subsidiaries
Condensed
Consolidated Statements of Operations and Comprehensive Income
(Loss)
(All
amounts in thousands)
(Successor)
|
For
the year Ended June 2, 2007
|
||||||||||||||||||||
|
Holdings
|
BCFW
|
Guarantors
|
Eliminations
|
Consolidated
|
||||||||||||||||
|
REVENUES:
|
||||||||||||||||||||
|
Net
Sales
|
$ | - | $ | 4,470 | $ | 3,398,937 | $ | - | $ | 3,403,407 | ||||||||||
|
Other
Revenue
|
- | 5,476 | 32,762 | - | 38,238 | |||||||||||||||
| - | 9,946 | 3,431,699 | - | 3,441,645 | ||||||||||||||||
|
COSTS
AND EXPENSES:
|
||||||||||||||||||||
|
Cost
of Sales (Exclusive of Depreciation and Amortization)
|
- | 2,785 | 2,122,375 | - | 2,125,160 | |||||||||||||||
|
Selling
and Administrative Expenses
|
- | 160,324 | 902,144 | - | 1,062,468 | |||||||||||||||
|
Depreciation
|
- | 28,331 | 102,067 | - | 130,398 | |||||||||||||||
|
Amortization
|
- | 6,668 | 37,021 | - | 43,689 | |||||||||||||||
|
Impairment
Charges
|
- | - | 24,421 | - | 24,421 | |||||||||||||||
|
Interest
Expense
|
- | 120,134 | 14,179 | - | 134,313 | |||||||||||||||
|
Other
Income, Net
|
- | (2,501 | ) | (3,679 | ) | - | (6,180 | ) | ||||||||||||
|
Equity
in Earnings (Loss) of subsidiaries
|
47,199 | (151,540 | ) | - | 104,341 | - | ||||||||||||||
| 47,199 | 164,201 | 3,198,528 | 104,341 | 3,514,269 | ||||||||||||||||
|
Income
(Loss) Before Provision (Benefit) for Income Tax
|
(47,199 | ) | (154,255 | ) | 233,171 | (104,341 | ) | (72,624 | ) | |||||||||||
|
Provision
for (Benefit from) Income Tax
|
- | (107,056 | ) | 81,631 | (25,425 | ) | ||||||||||||||
|
Net
Income (Loss)
|
$ | (47,199 | ) | $ | (47,199 | ) | $ | 151,540 | $ | (104,341 | ) | $ | (47,199 | ) | ||||||
67
Burlington
Coat Factory Investments Holdings, Inc. and Subsidiaries
Condensed
Consolidated Statements of Operations and Comprehensive Income
(Loss)
(All
amounts in thousands)
(Successor)
|
For
the period April 13, 2006 to June 3, 2006
|
||||||||||||||||||||
|
Holdings
|
BCFW
|
Guarantors
|
Eliminations
|
Consolidated
|
||||||||||||||||
|
REVENUES:
|
||||||||||||||||||||
|
Net
Sales
|
$ | - | $ | 553 | $ | 420,627 | $ | - | $ | 421,180 | ||||||||||
|
Other
Revenue
|
- | 558 | 3,508 | - | 4,066 | |||||||||||||||
| 1,111 | 424,135 | - | 425,246 | |||||||||||||||||
|
COSTS
AND EXPENSES:
|
||||||||||||||||||||
|
Cost
of Sales (Exclusive of Depreciation and Amortization)
|
- | 361 | 266,104 | - | 266,465 | |||||||||||||||
|
Selling
and Administrative Expenses
|
- | 27,338 | 127,353 | - | 154,691 | |||||||||||||||
|
Depreciation
|
- | 1,183 | 16,914 | - | 18,097 | |||||||||||||||
|
Amortization
|
- | 5,285 | 4,473 | - | 9,758 | |||||||||||||||
|
Impairment
Charges
|
- | - | - | - | - | |||||||||||||||
|
Interest
Expense
|
- | 15,764 | 2,329 | - | 18,093 | |||||||||||||||
|
Other
Income, Net
|
- | 2,385 | (7,261 | ) | - | (4,876 | ) | |||||||||||||
|
Equity
in Earnings (Loss) of subsidiaries
|
27,166 | (6,476 | ) | - | (20,690 | ) | - | |||||||||||||
| 27,166 | 45,840 | 409,912 | (20,690 | ) | 462,228 | |||||||||||||||
|
Income
(Loss) Before Provision (Benefit) for Income Tax
|
(27,166 | ) | (44,729 | ) | 14,223 | 20,690 | (36,982 | ) | ||||||||||||
|
Provision
for (Benefit from) Income Tax
|
- | (17,563 | ) | 7,747 | - | (9,816 | ) | |||||||||||||
|
Net
Income (Loss)
|
$ | (27,166 | ) | $ | (27,166 | ) | $ | 6,476 | $ | 20,690 | $ | (27,166 | ) | |||||||
68
Burlington
Coat Factory Investments Holdings, Inc. and Subsidiaries
Condensed
Consolidated Statements of Operations and Comprehensive Income
(Loss)
(All
amounts in thousands)
(Predecessor)
|
For
the period May 29, 2005 to April 12, 2006
|
||||||||||||||||||||
|
Holdings
|
BCFW
|
Guarantors
|
Eliminations
|
Consolidated
|
||||||||||||||||
|
REVENUES:
|
||||||||||||||||||||
|
Net
Sales
|
$ | - | $ | 4,168 | $ | 3,013,465 | $ | - | $ | 3,017,633 | ||||||||||
|
Other
Revenue
|
- | - | 27,675 | - | 27,675 | |||||||||||||||
| - | 4,168 | 3,041,140 | - | 3,045,308 | ||||||||||||||||
|
COSTS
AND EXPENSES:
|
||||||||||||||||||||
|
Cost
of Sales (Exclusive of Depreciation and Amortization)
|
- | 2,680 | 1,914,118 | - | 1,916,798 | |||||||||||||||
|
Selling
and Administrative Expenses
|
- | 130,038 | 767,193 | - | 897,231 | |||||||||||||||
|
Depreciation
|
- | 9,346 | 69,458 | - | 78,804 | |||||||||||||||
|
Amortization
|
- | 494 | - | - | 494 | |||||||||||||||
|
Impairment
Charges
|
- | - | - | - | - | |||||||||||||||
|
Interest
Expense
|
- | 2,362 | 2,247 | - | 4,609 | |||||||||||||||
|
Other
Income, Net
|
- | 1,367 | (4,939 | ) | - | (3,572 | ) | |||||||||||||
|
Equity
in Earnings (Loss) of subsidiaries
|
- | (187,712 | ) | - | 187,712 | - | ||||||||||||||
| - | (41,425 | ) | 2,748,077 | 187,712 | 2,894,364 | |||||||||||||||
|
Income
(Loss) Before Provision (Benefit) for Income Tax
|
- | 45,593 | 293,063 | (187,712 | ) | 150,944 | ||||||||||||||
|
Provision
for (Benefit from) Income Tax
|
- | (48,746 | ) | 105,351 | - | 56,605 | ||||||||||||||
|
Net
Income (Loss)
|
$ | - | $ | 94,339 | $ | 187,712 | $ | (187,712 | ) | $ | 94,339 | |||||||||
|
Net
Unrealized Gain on Non-Marketable Securities, Net of Tax
|
- | (4 | ) | - | - | (4 | ) | |||||||||||||
|
Total
Comprehensive Income (Loss)
|
$ | - | $ | 94,335 | $ | 187,712 | $ | (187,712 | ) | $ | 94,335 | |||||||||
69
Burlington
Coat Factory Investments Holdings, Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
(All
amounts in thousands)
(Successor)
|
For
the year Ended May 31, 2008
|
||||||||||||||||||||
|
Holdings
|
BCFW
|
Guarantors
|
Eliminations
|
Consolidated
|
||||||||||||||||
|
OPERATING
ACTIVITIES
|
||||||||||||||||||||
|
Net
Cash Provided by (Used in) Operations
|
$ | - | $ | 4,136 | $ | 93,841 | $ | - | $ | 97,977 | ||||||||||
|
INVESTING
ACTIVITIES
|
||||||||||||||||||||
|
Acquisition
of Property and Equipment
|
- | (30,012 | ) | (65,603 | ) | - | (95,615 | ) | ||||||||||||
|
Proceeds
from Sale of Assets Held for Disposal
|
- | - | 2,429 | - | 2,429 | |||||||||||||||
|
Lease
Acquisition Costs
|
- | - | (7,136 | ) | - | (7,136 | ) | |||||||||||||
|
Change
in Restricted Cash and Cash Equivalents
|
- | - | 61 | - | 61 | |||||||||||||||
|
Other
|
- | (52 | ) | - | - | (52 | ) | |||||||||||||
|
Net
Cash Used in Investing Activities
|
- | (30,064 | ) | (70,249 | ) | - | (100,313 | ) | ||||||||||||
|
FINANCING
ACTIVITIES
|
||||||||||||||||||||
|
Proceeds
from ABL Line of Credit
|
- | 685,655 | - | - | 685,655 | |||||||||||||||
|
Principal
Payments on Long Term Debt
|
- | - | (1,448 | ) | - | (1,448 | ) | |||||||||||||
|
Principal
Payment on Long Term Loan
|
- | (11,443 | ) | - | - | (11,443 | ) | |||||||||||||
|
Principal
Payment on ABL Line of Credit
|
- | (663,056 | ) | - | - | (663,056 | ) | |||||||||||||
|
Purchase
of Interest Rate Cap Contract
|
- | (424 | ) | - | - | (424 | ) | |||||||||||||
|
Payment
of Dividends
|
(725 | ) | (725 | ) | - | 725 | (725 | ) | ||||||||||||
|
Receipt
of Dividends
|
725 | - | - | (725 | ) | - | ||||||||||||||
|
Net
Cash Provided by (Used in) Financing Activities
|
- | 10,007 | (1,448 | ) | - | 8,559 | ||||||||||||||
|
Increase
(Decrease) in Cash and Cash Equivalents
|
- | (15,921 | ) | 22,144 | - | 6,223 | ||||||||||||||
|
Cash
and Cash Equivalents at Beginning of Period
|
- | 20,035 | 13,843 | - | 33,878 | |||||||||||||||
|
Cash
and Cash Equivalents at End of Period
|
$ | - | $ | 4,114 | $ | 35,987 | $ | - | $ | 40,101 | ||||||||||
70
Burlington
Coat Factory Investments Holdings, Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
(All
amounts in thousands)
(Successor)
|
For
the year Ended June 2, 2007
|
||||||||||||||||||||
|
Holdings
|
BCFW
|
Guarantors
|
Eliminations
|
Consolidated
|
||||||||||||||||
|
OPERATING
ACTIVITIES
|
||||||||||||||||||||
|
Net
Cash Provided by Operations
|
$ | - | $ | 55,229 | $ | 40,787 | $ | - | $ | 96,016 | ||||||||||
|
INVESTING
ACTIVITIES
|
||||||||||||||||||||
|
Acquisition
of Property and Equipment
|
- | (17,453 | ) | (51,735 | ) | - | (69,188 | ) | ||||||||||||
|
Proceeds
Received from Sales of Assets
|
- | - | 4,669 | - | 4,669 | |||||||||||||||
|
Proceeds
Received from Sale of Partnership Interest
|
- | 850 | - | 850 | ||||||||||||||||
|
Change
in Restricted Cash and Cash Equivalents
|
- | - | 11,063 | - | 11,063 | |||||||||||||||
|
Investing
Activity – Other
|
- | (67 | ) | 82 | - | 15 | ||||||||||||||
|
Net
Cash Used in Investing Activities
|
- | (17,520 | ) | (35,071 | ) | - | (52,591 | ) | ||||||||||||
|
FINANCING
ACTIVITIES
|
||||||||||||||||||||
|
Proceeds
from ABL
|
- | 649,655 | - | - | 649,655 | |||||||||||||||
|
Principal
Payments on Long Term Debt
|
- | - | (1,384 | ) | - | (1,384 | ) | |||||||||||||
|
Principal
Payments on Long Term Loan
|
- | (13,500 | ) | - | - | (13,500 | ) | |||||||||||||
|
Principal
Payments on ABL
|
- | (702,894 | ) | - | - | (702,894 | ) | |||||||||||||
|
Equity
Investment
|
- | 300 | - | - | 300 | |||||||||||||||
|
Receipt
of Dividends
|
100 | - | - | (100 | ) | - | ||||||||||||||
|
Payment
of Dividends
|
(100 | ) | (100 | ) | - | 100 | (100 | ) | ||||||||||||
|
Net
Cash Used in Financing Activities
|
- | (66,539 | ) | (1,384 | ) | - | (67,923 | ) | ||||||||||||
|
Increase
(Decrease) in Cash and Cash Equivalents
|
- | (28,830 | ) | 4,332 | - | (24,498 | ) | |||||||||||||
|
Cash
and Cash Equivalents at Beginning of Period
|
- | 48,865 | 9,511 | - | 58,376 | |||||||||||||||
|
Cash
and Cash Equivalents at End of Period
|
$ | - | $ | 20,035 | $ | 13,843 | $ | - | $ | 33,878 | ||||||||||
71
Burlington
Coat Factory Investments Holdings, Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
(All
amounts in thousands)
(Successor)
|
For
the period April 13, 2006 to June 3, 2006
|
||||||||||||||||||||
|
Holdings
|
BCFW
|
Guarantors
|
Eliminations
|
Consolidated
|
||||||||||||||||
|
OPERATING
ACTIVITIES
|
||||||||||||||||||||
|
Net
Cash Provided by (Used in) Operations
|
$ | - | $ | 138,638 | $ | (191,531 | ) | $ | - | $ | (52,893 | ) | ||||||||
|
INVESTING
ACTIVITIES
|
||||||||||||||||||||
|
Acquisition
Cost
|
- | (2,055,747 | ) | - | - | (2,055,747 | ) | |||||||||||||
|
Acquisition
of Property and Equipment
|
- | (410 | ) | (5,865 | ) | - | (6,275 | ) | ||||||||||||
|
Proceeds
Received from Sales of Fixed Assets and Leaseholds
|
- | - | 4,337 | - | 4,337 | |||||||||||||||
|
Investing
Activity – Other
|
- | (9 | ) | 25 | - | 16 | ||||||||||||||
|
Net
Cash Used in Investing Activities
|
(2,056,166 | ) | (1,503 | ) | - | (2,057,669 | ) | |||||||||||||
|
FINANCING
ACTIVITIES
|
||||||||||||||||||||
|
Proceeds
from Long Term Debt
|
- | 1,702,114 | - | - | 1,702,114 | |||||||||||||||
|
Principal
Payments on Long Term Debt
|
- | (218,011 | ) | (46 | ) | - | (218,057 | ) | ||||||||||||
|
Proceeds
from Issuance of Common Stock
|
- | 445,830 | - | - | 445,830 | |||||||||||||||
|
Purchase
of Interest Rate Cap Contract
|
- | (2,500 | ) | - | - | (2,500 | ) | |||||||||||||
|
Debt
Issuance Costs
|
- | (71,398 | ) | - | - | (71,398 | ) | |||||||||||||
|
Net
Cash Provided by (Used in) Financing Activities
|
- | 1,856,035 | (46 | ) | - | 1,855,989 | ||||||||||||||
|
Decrease
in Cash and Cash Equivalents
|
- | (61,493 | ) | (193,080 | ) | - | (254,573 | ) | ||||||||||||
|
Cash
and Cash Equivalents at Beginning of Period
|
- | 110,358 | 202,591 | - | 312,949 | |||||||||||||||
|
Cash
and Cash Equivalents at End of Period
|
$ | - | $ | 48,865 | $ | 9,511 | $ | - | $ | 58,376 | ||||||||||
72
Burlington
Coat Factory Investments Holdings, Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
(All
amounts in thousands)
(Predecessor)
|
For
the period May 29, 2005 to April 12, 2006
|
||||||||||||||||||||
|
Holdings
|
BCFW
|
Guarantors
|
Eliminations
|
Consolidated
|
||||||||||||||||
|
OPERATING
ACTIVITIES
|
||||||||||||||||||||
|
Net
Cash Provided by Operations
|
$ | - | $ | 177,093 | $ | 253,886 | $ | - | $ | 430,979 | ||||||||||
|
INVESTING
ACTIVITIES
|
||||||||||||||||||||
|
Acquisition
of Property and Equipment
|
- | (9,280 | ) | (59,643 | ) | - | (68,923 | ) | ||||||||||||
|
Proceeds
Received from Insurance
|
- | - | 3,822 | - | 3,822 | |||||||||||||||
|
Investing
Activity – Other
|
- | (31 | ) | 1,212 | - | 1,181 | ||||||||||||||
|
Net
Cash Used in Investing Activities
|
(9,311 | ) | (54,609 | ) | - | (63,920 | ) | |||||||||||||
|
FINANCING
ACTIVITIES
|
||||||||||||||||||||
|
Proceeds
from Long Term Debt
|
- | - | 470 | - | 470 | |||||||||||||||
|
Principal
Payments on Long Term Debt
|
- | (100,000 | ) | (1,167 | ) | - | (101,167 | ) | ||||||||||||
|
Issuance
of Common Stock Upon Exercise of Stock Options
|
- | 425 | - | - | 425 | |||||||||||||||
|
Payments
of Dividends
|
- | (1,791 | ) | - | - | (1,791 | ) | |||||||||||||
|
Net
Cash Used in Financing Activities
|
- | (101,366 | ) | (697 | ) | - | (102,063 | ) | ||||||||||||
|
Increase
in Cash and Cash Equivalents
|
- | 66,416 | 198,580 | - | 264,996 | |||||||||||||||
|
Cash
and Cash Equivalents at Beginning of Period
|
- | 43,942 | 4,011 | - | 47,953 | |||||||||||||||
|
Cash
and Cash Equivalents at End of Period
|
$ | - | $ | 110,358 | $ | 202,591 | $ | - | $ | 312,949 | ||||||||||
73
BURLINGTON
COAT FACTORY INVESTMENTS HOLDINGS, INC. AND SUBSIDIARIES
Schedule
II - Valuation and Qualifying Accounts and Reserves
(All
amounts in thousands)
|
Description
|
Balance
at Beginning of Period
|
Charged
to Expense
|
Charged
to Other Accounts (1)
|
Accounts
Written Off or Deductions (2)
|
Balance
at End of Period
|
|||||||||||||||
|
Successor:
|
||||||||||||||||||||
|
Year
ended May 31, 2008
|
||||||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 969 | $ | 2,977 | $ | - | $ | 3,312 | $ | 634 | ||||||||||
|
Sales
reserves
|
$ | 5,500 | $ | - | $ | 223,336 | $ | 222,436 | $ | 6,400 | ||||||||||
|
Year
ended June 2, 2007
|
||||||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 199 | $ | 2,826 | $ | - | $ | 2,056 | $ | 969 | ||||||||||
|
Sales
reserves
|
$ | 1,900 | $ | - | $ | 165,932 | $ | 162,332 | $ | 5,500 | ||||||||||
|
Period
from April 13, 2006 to June 3, 2006
|
||||||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | - | $ | 789 | $ | - | $ | 590 | $ | 199 | ||||||||||
|
Sales
reserves
|
$ | 2,100 | $ | - | $ | 7,199 | $ | 7,399 | $ | 1,900 | ||||||||||
|
Period
from May 29, 2005 to April 12, 2006
|
||||||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 762 | $ | 3,905 | $ | - | $ | 3,300 | $ | 1,367 | ||||||||||
|
Sales
reserves
|
$ | 2,000 | $ | - | $ | 49,699 | $ | 49,599 | $ | 2,100 | ||||||||||
|
Notes:
|
||||||||||||||||||||
|
(1)
|
Charged
to merchandise sales.
|
|||||||||||||||||||
|
(2)
|
Actual
returns and allowances.
|
|||||||||||||||||||
74
|
Item
9.
|
Changes
in and Disagreements with Accountants on
Accounting
and Financial Disclosure
|
None.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
Our
management team, under the supervision and with the participation of our
principal executive officer and our principal financial officer, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as such term is defined under Rule 13a-15(e) promulgated under
the Securities Exchange Act of 1934, as amended (Exchange Act), as of the last
day of the fiscal period covered by this report, May 31, 2008. The term
disclosure controls and procedures means our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
accumulated and communicated to management, including our principal executive
and principal financial officer, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure. Based on
this evaluation, our principal executive officer and our principal financial
officer concluded that our disclosure controls and procedures were effective as
of May 31, 2008.
Management’s
Report on Internal Control Over Financial Reporting as of May 31,
2008
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is defined in
Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act as a process
designed by, or under the supervision of, the issuer’s principal executive and
principal financial officers, or persons performing similar functions, and
effected by the issuer’s board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with GAAP and includes those policies and procedures that:
|
•
|
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
Issuer;
|
|
•
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that
receipts and expenditures of the Issuer are being made only in accordance
with authorizations of management and directors of the Issuer;
and
|
|
•
|
provide
reasonable assurance regarding the prevention or timely detection of
unauthorized acquisition, use or disposition of the Issuer’s assets that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
accordance with the internal control reporting requirement of the SEC,
management completed an assessment of the adequacy of our internal control over
financial reporting as of May 31, 2008. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control-Integrated
Framework.
Based on
this assessment and the criteria in the COSO Framework, management has
concluded as of May 31, 2008, our internal control over financial reporting
was effective.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.
75
Changes
in Internal Control Over Financial Reporting
During
the fiscal quarter ended May 31, 2008, there were no changes in our internal
control over financial reporting that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
Item
9B. Other
Information
None
Part
III
Item
10. Directors,
Executive Officers and Corporate Governance.
Identification
of Our Directors
Set
forth below is the biographical information for each of our current directors,
including age, business experience, memberships on committees of our Board of
Directors (Board of Directors) and the date when each director first became a
member of our Board of Directors:
Joshua
Bekenstein—Director. Mr. Bekenstein, 50, has served as a
member of our Board of Directors since the closing of the Merger Transaction on
April 13, 2006 and currently serves as a member of our Compensation
Committee. Mr. Bekenstein is currently a Managing Director of
Bain Capital, having joined the firm at its inception in 1984.
Mr. Bekenstein serves as a board member of Bombardier Recreational
Products, Bright Horizons Family Solutions, Dollarama, Michaels Stores, Toys “R”
Us and Waters Corporation. Prior to joining Bain Capital, Mr. Bekenstein
spent two years as a consultant at Bain & Company. Mr. Bekenstein
received an M.B.A. from Harvard Business School and a B.A. from
Yale University.
Jordan
Hitch—Director. Mr. Hitch, 41, has served as a member of
our Board of Directors since the closing of the Merger Transaction on April 13,
2006 and currently serves as a member of our Compensation
Committee. Mr. Hitch is currently a Managing Director of Bain
Capital, having joined the firm in 1997. Mr. Hitch serves as a board member
of Bombardier Recreational Products, Guitar Center and MC Communications.
Prior to joining Bain Capital, Mr. Hitch was a consultant at
Bain & Company where he worked in the financial services, healthcare
and utility industries. Mr. Hitch received an M.B.A., with distinction,
from the University of Chicago Graduate School of Business and a B.S. in
Mechanical Engineering from Lehigh University.
Mark A. Nesci—Chief Executive Officer
and Director. Mr. Nesci, 52, became our Chief Executive
Officer upon the closing of the Merger Transaction on April 13, 2006 and has
served as a member of our Board of Directors since 1989. Prior to
becoming our Chief Executive Officer, Mr. Nesci served as our Executive Vice
President and Chief Operating Officer since 1999. Mr. Nesci has been
employed by us since 1972, beginning his career as a part-time Stock Associate
while in high school. In 1976, he was promoted to Store Manager, followed by
District Manager in 1980. He became Vice President of Real Estate in 1982, and
Vice President of Store Operations in 1983. Mr. Nesci gained the title of
Chief Operating Officer in 1990. In 1999, he was promoted to Executive Vice
President.
John
Tudor—Director. Mr. Tudor, 38, has served as a member of
our Board of Directors since the closing of the Merger Transaction on April 13,
2006 and currently serves as the Chairman of our Audit Committee. Mr.
Tudor is currently a Principal of Bain Capital, having joined the firm in 2000.
Mr. Tudor serves as a board member of Edcon Holdings (Pty) Limited and
Guitar Center. Prior to joining Bain Capital, Mr. Tudor was
a consultant at the Monitor Group. Mr. Tudor received an M.B.A. from
Harvard Business School, where he was a Baker Scholar. He is a
graduate of the University of Cape Town in South Africa, and the University of
Oxford in the United Kingdom, where he was a Rhodes Scholar.
Mark Verdi—Director. Mr.
Verdi, 42, has served as a member of our Board of Directors since October 2007
and currently serves as a member of our Audit Committee. Mr. Verdi is
currently an Operating Partner in the Portfolio Group of Bain Capital, having
joined the firm in 2004. Mr. Verdi serves on the board of managers of OSI
Restaurant Partners. Prior to joining Bain Capital, Mr. Verdi worked
at IBM Global Services from 2001 to 2004. From 1996 to 2001, Mr.
Verdi served as Senior Vice President of Finance and Operations and a member of
the board of directors of Mainspring, Inc., a publicly held strategy consulting
firm. From 1988 to 1996, Mr. Verdi held various positions at
PricewaterhouseCoopers. Mr. Verdi received an M.B.A. from
Harvard Business School and a B.S. from the University of
Vermont.
76
The
directors named above also currently serve as directors of Parent and
BCFWC. Other than the provisions of the Stockholders Agreement
described below under the caption entitled “Governance of the Company,” we do
not know of any arrangements or understandings between any of our directors and
any other person pursuant to which a director was or is to be selected as a
director, other than any arrangements or understandings with our directors
acting solely in their capacities as such.
Governance
of the Company
Our
business, property and affairs are managed by, or under the direction of, our
Board of Directors. In connection with the Merger Transaction, Parent
entered into a Stockholders Agreement, dated as of April 13, 2006, with its
stockholders, including funds associated with Bain Capital and certain
management personnel (Stockholders Agreement). Pursuant to the
Stockholders Agreement, each holder of Management Shares and Investor Shares (as
each term is defined in the Stockholders Agreement) agrees to cast all votes to
which such holder is entitled in respect of such shares:
|
·
|
To
fix the number of members of Parent’s board of directors at such number as
may be specified from time to time by a majority of the holders of the
Investment Shares; and
|
|
·
|
To
elect members of Parent’s board of directors as
follows:
|
|
o
|
one
individual nominated by Bain Capital Fund IX, LLC;
and
|
|
o
|
for
the remaining members of Parent’s board of directors, such individuals
nominated by a majority of the holders of the Investment
Shares.
|
The
Stockholders Agreement additionally provides that Parent will cause our Board of
Directors and the board of directors of BCFWC to consist at all times of the
same members as Parent’s board of directors.
Our
Board of Directors currently consists of five members. Each director
shall hold office until a successor is duly elected and qualified or until his
earlier death, resignation or removal as provided in our
By-Laws. Directors may be removed at any time, with or without cause,
by the holders of a majority of the shares then entitled to vote at an election
of directors. Our Board of Directors currently has two standing committees: an
Audit Committee and a Compensation Committee.
Nominees
to Board of Directors
Since
the date of the Stockholders Agreement there have been no material changes to
the procedures by which security holders may recommend nominees to our Board of
Directors.
Audit
Committee
Our Board
of Directors has a separately designated audit committee consisting of Messrs.
Tudor (Chairman) and Verdi. Our Board of Directors has determined that each of
its members is financially literate but no determination has been made as to the
ability of any director to qualify as a “financial expert” within the meaning of
the regulations adopted by the SEC.
Identification
of Our Executive Officers
Our
executive officers have been elected to their respective offices by our Board of
Directors. Set forth below is the biographical information for each
of our current executive officers (other than Mr. Nesci, our Chief Executive
Officer and a member of our Board of Directors, whose biographical information
is set forth above under the caption above entitled “Identification of Our
Directors”), including age and business experience:
Fred Hand—Executive Vice President –
Stores. Mr. Hand, 44, has served as our Executive Vice
President – Stores since February 11, 2008. Prior to joining us, Mr.
Hand served as Senior Vice President, Group Director of Stores of Macy’s, Inc.
from February 2006 to February 2008. From 2001 to 2006, Mr. Hand
served as Senior Vice President, Stores and Visual Merchandising of Filene's
Department Stores. Mr. Hand held various other positions at the May
Department Stores Company from 1991 to 2001, including
Area Manager, General Manager, and Regional Vice President
Stores.
77
Jack Moore— President of
Merchandising, Planning and Allocation and Marketing. Mr. Moore, 54,
joined us on June 4, 2007 as our as President of Merchandising, Planning and
Allocation and Marketing. Prior to joining us, Mr. Moore served as
President and Chief Operating Officer of Linens ‘N Things, a retailer of home
textiles, housewares and home accessories. Prior to that, Mr. Moore held
various management positions at Kohl's Department Stores from 1997 to 2004
including: Vice President-Divisional Merchandise Manager, Senior Vice President
of Merchandise Planning and Allocation and Executive Vice President, General
Merchandise Manager. Prior to his seven years at Kohl's, Mr. Moore spent 20
years at the department store division of the Target Corporation where he held
significant merchandising and store management positions. Mr. Moore
received a Bachelors Degree in Business Administration from the University of
North Dakota.
Paul C. Tang—Executive Vice
President, General Counsel and Secretary. Mr. Tang, 55,
has has served as our Executive Vice President, General Counsel and Secretary
since 1993. He was named Vice President in 1995, Executive Vice President in
1999 and Secretary in 2001. From 1989 to 1993, Mr. Tang was a partner in
the law firm of Reid & Priest. From 1987 to 1988, he was a partner of
the law firm of Milstein & Tang. From 1980 to 1987, Mr. Tang was
an attorney at the law firm of Phillips Nizer, where he became a partner in
1985. Mr. Tang received an A.B. from Harvard University and holds J.D. and
M.B.A. degrees from Columbia University.
Todd Weyhrich—Executive Vice
President and Chief Financial Officer. Mr. Weyhrich, 45, has
served as our Executive Vice President and Chief Financial Officer since
November 5, 2007. From the commencement of his employment with us on
August 21, 2007 through November 5, 2007, Mr. Weyhrich served as our Chief
Accounting Officer and interim Chief Financial Officer. Prior to
joining us, Mr. Weyhrich served as Chief Financial Officer of Arby’s Restaurant
Group, Inc. from May 2004 to June 2006. From February 2003 to
April 2004, he served as Senior Vice President – Merger Integration of The
Sports Authority and served as Senior Vice President – Controller and Logistics
of The Sports Authority from February 2001 to February 2003. Prior to
that, Mr. Weyhrich was Senior Vice President – Finance from 2000 to 2001 and
Vice President – Controller from 1995 to 2000 of Pamida Holdings Corporation,
which became a wholly-owned subsidiary of ShopKo Stores, Inc. in July
1999. Prior to that, Mr. Weyhrich served in various capacities, most
recently as Audit Senior Manager, with Deloitte & Touche LLP from 1985 to
1995. Mr. Weyhrich received a Bachelors Degree in Business
Administration from Wayne State College in Wayne, Nebraska.
We do not
know of any arrangements or understandings between any of our executive officers
and any other person pursuant to which he was or is to be selected as an
officer, other than any arrangements or understandings with our officers acting
solely in their capacities as such.
Code
of Ethics
We
have adopted a written Code of Business Conduct and Ethics (Code of Business
Conduct) which applies to all of our directors, officers and other employees,
including our principal executive officer, principal financial officer,
principal accounting officer and controller. In addition, we have
adopted a written Code of Ethics for the Chief Executive Officer and Senior
Financial Officers (Code of Ethics) which applies to our principal executive
officer, principal financial officer, principal accounting officer,
controller and
other designated members of our management. We will provide any
person, without charge, upon request, a copy of our Code of Business Conduct or
Code of Ethics. Such requests should be made in writing to the
attention of our Corporate Counsel at the following address: Burlington Coat
Factory Warehouse Corporation, 1830 Route 130 North, Burlington, New Jersey
08016.
Section
16(a) Beneficial Ownership Reporting Compliance
As we do
not have a class of equity securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended (Exchange Act), none of our
directors, officers or stockholders were subject to the reporting requirements
of Section 16(a) of the Exchange Act during the fiscal year ended May 31, 2008
(Fiscal 2008).
Compensation
Discussion and Analysis
The
following Compensation Discussion and Analysis describes the material elements
of compensation for our most highly compensated executive officers as of May 31,
2008 (collectively our named executive officers).
78
Setting
Named Executive Officer Compensation
Currently
comprised of Messrs. Hitch and Bekenstein, the Compensation Committee
(Committee) of our Board of Directors is tasked with discharging our Board of
Directors’ responsibilities related to oversight of the compensation of our
named executive officers and ensuring that our executive compensation program
meets our corporate objectives.
The
Committee makes decisions regarding salaries, annual bonuses and equity
incentive compensation for our named executive officers. The Committee is also
responsible for reviewing and approving corporate goals and objectives relevant
to the compensation of our named executive officers, as well as evaluating their
performance in light of those goals and objectives. Based on this review and
evaluation, as well as on input from our chief executive officer regarding the
performance of our other named executive officers and his recommendations as to
their compensation, the Committee, as authorized by our Board of Directors,
determines and approves our named executive officers’ compensation. The
Committee also administers our incentive compensation and certain benefit plans.
Our named executive officers do not play a role in their own compensation
determinations.
Objectives
of Our Compensation Program
Our
overall objective is to have a compensation program that will allow us to
attract and retain executive officers of a caliber and level of experience
necessary to effectively manage our business and motivate such executive
officers to increase our value. We believe that, in order to achieve that
objective, our program must:
|
·
|
provide
each named executive officer with compensation opportunities that are
competitive with the compensation opportunities available to executives in
comparable positions at companies with whom we compete for
talent;
|
|
·
|
tie
a significant portion of each named executive officer’s compensation to
our financial performance; and
|
|
·
|
promote
and reward the achievement of objectives that our Board of Directors
believe will lead to long-term growth in shareholder
value
|
New
Members of Our Management Team
New
members of our management team include Messrs. Moore, Weyhrich and Hand, each of
whom joined us in Fiscal 2008 in line with our overall goal of attracting
superior talent. Consequently, the process for determining the compensation of
Messrs. Moore, Weyhrich and Hand was significantly influenced by our need to
attract new and additional talent.
Prior to
hiring a new executive officer to fill a vacant or a newly created position, we
typically described the responsibilities of the position and the skills and
level of experience required for the position to one or more national executive
search firms. The search firm(s) informed us about the compensation ranges of
executives in positions with similar responsibilities at comparable companies,
and provided us with guidance as to how different skills and levels of
experience impact those compensation ranges. By using the
information obtained from the search firms, the Committee determined target
compensation ranges for the positions we were seeking to fill, taking into
account the individual candidates’ particular skills and levels of experience.
In specific circumstances, when making an offer to a new executive officer, the
Committee also
considered other factors such as the amount of unvested compensation that the
executive officer had with his former employer.
By
using information provided by one or more search firms, the Committee sought to ensure that
the compensation information considered was both comprehensive and
reliable. The Committee would most likely use a
similar benchmarking process in seeking to fill new executive officer positions,
as it has enabled us to attract superior individuals for key positions by
providing for reasonable and competitive compensation.
Elements
of Compensation
Our
executive compensation program utilizes three primary integrated elements to
accomplish the objectives described above:
|
·
|
base
salary;
|
|
·
|
annual
incentive awards; and
|
|
·
|
long-term
equity incentives.
|
79
We believe
that we can meet the objectives of our executive compensation program by
achieving a balance among these three elements that is competitive with our
industry peers and creates appropriate incentives for our named executive
officers. Actual compensation levels are a function of both corporate and
individual performance as described under each compensation element below. In
making compensation determinations, the Committee considers, among other
things, the competitiveness of compensation both in terms of individual pay
elements and the aggregate compensation package.
Mix
of Total Compensation
In regard
to the allocation of the various pay elements within the total compensation
program, no formula or specific weightings or relationships are used. Cash
compensation includes the base salary and annual incentive awards which, for our
named executive officers, are targeted to a percentage of base salary to
emphasize performance-based compensation, rather than salaries or other forms,
which are fixed compensation. Perquisites and other types of non-cash benefits
are used on a limited basis and, other than certain relocation expenses
reimbursed by us to Messrs. Moore, Weyhrich and Hand, represent only a small
portion of total compensation for our named executive officers. Equity
compensation includes long-term incentives, which provide a long-term capital
appreciation element to our executive compensation program and are not
performance-based.
Base
Salary
We
provide our named executive officers with base salary in the form of fixed cash
compensation to compensate them for services rendered during the fiscal
year. The base salary of each of our named executive officers is
reviewed for adjustment annually by the Committee. Generally, in making a
determination of whether to make base salary adjustments, the Committee
considers the following factors:
|
·
|
our
success in meeting our strategic operational and financial
goals;
|
|
·
|
each
named executive officer’s individual
performance;
|
|
·
|
length
of service to us of such named executive
officer;
|
|
·
|
changes
in scope of responsibilities of such named executive officer;
and
|
|
·
|
competitive
market compensation paid by other companies for similar
positions.
|
In
addition, the Committee considers internal
equity within our organization and, when reviewing the base salaries of our
named executive officers, their current aggregate compensation.
Messrs.
Moore, Weyhrich and Hand were each hired by us during Fiscal 2008 and,
therefore, their initial base salaries for Fiscal 2008 were determined through
the “executive search firm” process described above under the caption entitled
“New Members of Our Management Team.” The base salaries of each of
these individuals in fiscal years after Fiscal 2008 are subject to annual review
by the Committee. The base salaries of Messrs. Nesci, Tang and
Fitzgerald were originally established pursuant to their employment agreement
with us, based on the scope of their responsibilities and may be increased from
time to time by the Committee. The Committee reviewed the annual base
salary rates for Messrs. Nesci and Fitzgerald for the fiscal year ended June 2,
2007 (Fiscal 2007) and, pursuant to this review, determined that such salaries
were generally appropriate for the position and responsibilities assigned to
each named executive officer and should not be increased for Fiscal 2008.
Based upon certain individual achievements during Fiscal 2007, the
Committee determined that the base
salary of Mr. Tang should be increased to $325,000 for Fiscal 2008.
Effective
as of November 3, 2007, Mr. Weyhrich received an increase in salary of $100,000
from $350,000 to $450,000 to reflect his promotion to Chief Financial
Officer. Mr. Weyhrich was appointed as our Chief Financial Officer on
November 5, 2007 after having served as our interim Chief Financial Officer
since the commencement of his employment with us on August 21,
2007.
Annual
Incentive Awards
Annual
incentive awards are an important part of the overall compensation we pay our
named executive officers. Unlike base salary, which is fixed, annual incentive
awards are paid only if specified performance levels are achieved during the
year. We believe that annual incentive awards encourage our named executive
officers to focus on specific short-term business and financial goals.
Our
80
named
executive officers are eligible to receive annual cash incentive awards under
our annual Management Incentive Bonus Plan (Bonus Plan).
For
Fiscal 2008, our named executive officers had an annual incentive award target
of up to 50% of their base salary under the Bonus Plan. Each named executive
officer’s annual incentive target is weighted 100% on our EBITDA results. We
believe that weighting annual incentive targets in this way more closely aligns
the named executive officer’s interests with our stockholders’ interests, as we
believe that EBITDA is a more accurate indicator of our financial performance.
We calculate EBITDA, for this purpose, as earnings before interest, tax,
depreciation and amortization with certain adjustments. Our EBITDA
goals are determined through our annual financial planning process, and this
financial plan is presented to our Board of Directors for approval.
Achievement
at the target EBITDA would result in a payout at the target level (i.e., 50% of
each named executive officer’s base salary). If actual EBITDA
performance is less than the established EBITDA target but is greater than a
predetermined threshold EBITDA, each named executive officer would be eligible
for an incentive bonus equivalent to a fractional share of his target bonus
determined by the proportion of the actual EBITDA achieved in relation to target
EBITDA. If actual EBITDA is greater than target EBITDA, each named
executive officer would be eligible for the target bonus plus an additional
bonus payment equivalent to a percentage of every dollar above the EBITDA
target, subject to a maximum determined each year. If actual EBITDA
is less than the threshold EBITDA, no bonus will be earned by any named
executive officer. Notwithstanding the foregoing formulas, the
Committee has the discretion to pay more or less than the formula amount to any
named executive officer.
As
described in the footnotes to the Summary Compensation Table below, our
employment agreements with each of Messrs. Moore, Weyhrich and Hand provide for
guaranteed bonuses in lieu of direct participation in the Bonus Plan for Fiscal
2008. Mr. Fitzgerald voluntarily terminated his employment (other
than for good reason) prior to May 31, 2008 and, as such, he was not eligible to
receive any awards pursuant to the Bonus Plan for Fiscal
2008. Accordingly, Messrs. Nesci and Tang were the only named
executive officers eligible to receive an award pursuant to the Bonus Plan for
Fiscal 2008. During the first quarter of 2009, the Committee assessed
our corporate performance against the threshold EBITDA level and the target
EBITDA level established under the Bonus Plan. As we did not meet the threshold
EBITDA level, no awards were granted under the Bonus Plan for Fiscal
2008.
Long-Term
Incentives
We
believe that long-term incentives are a component of compensation that helps us
to attract and retain our named executive officers. These incentives also align
the financial rewards paid to our named executive officers with our long-term
performance, thereby encouraging our named executive officers to focus on
long-term goals. We offer long-term incentives under our 2006 Management
Incentive Plan (Incentive Plan) which Parent adopted concurrently with the
Merger Transaction. Under the Incentive Plan, named executive
officers (as well as other key employees) are eligible to receive restricted
stock or stock options to purchase common stock. Awards of restricted stock and
stock options under the Incentive Plan generally are expressed in terms of
“units”, and such awards are made only in connection with the commencement of
employment with us. Each unit consists of nine shares of Class A
Common Stock of Parent (Class A Stock) and one share of Class L Common Stock of
Parent (Class L Stock). Options granted under the Incentive Plan are
exercisable only for whole units and cannot be separately exercised for the
individual classes of Parent common stock.
Upon
commencement of their employment with us, each of Messrs. Moore, Weyhrich and
Hand received options to purchase 40,000, 12,500 and 10,000 units under the
Incentive Plan, respectively. As provided for under his employment
agreement with us, Mr. Weyhrich received an additional option grant of 7,500
units concurrently with his elevation to Chief Financial Officer on November 5,
2007. As a result of the cessation of his employment with us on
September 21, 2007, all of Mr. Fitzgerald’s options (none of which had vested on
or before such date) were immediately forfeited as of such
date. Messrs. Nesci and Tang received 70,000 and 20,000 options to
purchase units under the Incentive Plan, respectively. Such options
were granted in April 2006. The amounts of such awards were based on
each named executive officer’s position with us and the total target
compensation packages deemed appropriate for their positions. The
Committee felt
theses awards were reasonable and consistent with the nature of the individuals’
responsibilities.
Options
granted to our named executive officers under the Incentive Plan are exercisable
in three tranches. The first tranche has an exercise price equal to
the fair market value of the underlying unit on the grant date. The exercise
prices of the other tranches are set at an escalating scale. Option
awards vest 40% on the second anniversary of the award with the remaining
options vesting ratably over the subsequent three years. All options
become exercisable upon a change of control and unless determined otherwise by
the plan administrator, upon cessation of employment, options that have not
vested will terminate immediately, units issued upon the exercise of vested
options will be callable under our Stockholders Agreement and unexercised vested
options will be exercisable for a period of 60 days. The final
exercise date for any option granted is the tenth anniversary of the grant
date.
81
More
detail about the stock options granted to our named executive officers
(including the vesting provisions related to these grants) are set out in the
tables that follow this discussion.
Benefits
and Perquisites
Benefits
We maintain
broad-based benefits that are provided to all full-time employees, including
health, dental, life and disability insurance. Certain of these
benefits require employees to pay a portion of the premium. These benefits are
offered to our named executive officers on the same basis as all other
employees. We also maintain a savings plan in which our named
executive officers who have at least one year of employment with us are eligible
to participate, along with a substantial majority of our employees. The savings
plan is a traditional 401(k) plan, under which we match 100% of the first 3% of
the named executive officer’s compensation that is deferred and 50% of the next
2% of the named executive officer’s compensation that is deferred, up to the
Internal Revenue Code limit for each respective year in which the named
executive officer participates in the plan. Mr. Fitzgerald is no
longer employed by us and therefore does not receive any of these benefits.
Perquisites or Other Personal
Benefits
Although
our named executive officers are entitled to few perquisites or other personal
benefits that are not otherwise available to all of our employees, we do provide
our named executive officers with perquisites that the Committee believes are reasonable
and consistent with the perquisites that would be available to them at companies
with whom we compete for experienced senior management. We provide each of our
named executive officers with the use of a company car, company paid car
maintenance, and reimbursement of gas and insurance
expenses. Additionally, certain of our newly hired executive officers
received tax grossed up reimbursement of relocation expenses.
Other
than certain relocation expenses reimbursed by us to Messrs. Moore, Weyhrich and
Hand, these perquisites or other personal benefits represent a relatively modest
portion of each named executive officer’s compensation. The cost of
these perquisites or other personal benefits to us is set forth below in the
Summary Compensation Table under the column “All Other Compensation” and detail
about each element is set forth in the footnote table following the Summary
Compensation Table. We do not anticipate any significant changes to
the perquisites or other personal benefits levels of our named executive
officers for Fiscal 2009.
Tax
and Accounting Considerations
We
structure our compensation program in a manner that is consistent with our
compensation philosophy and objectives. However, in the course of
making decisions about executive compensation, the Committee takes into account
certain tax and accounting considerations. For example, they take into account
Section 409A of the Internal Revenue Code regarding non-qualified deferred
compensation. In making decisions about executive compensation, they
also consider how various elements of compensation will affect our financial
reporting. For example, they consider the impact of Statement of Financial
Accounting Standards No. 123(R), “Share-Based Payment,” which requires us
to recognize the cost of employee services received in exchange for awards of
equity instruments based upon the grant date fair value of those
awards.
While it
is the general intention of the Committee to design the components of our
executive compensation program in a manner that is tax efficient for both us and
our named executive officers, there can be no assurance that the they will
always approve compensation that is tax advantageous for us.
Termination
Based Compensation
The
severance arrangements applicable to our named executive officers are set forth
in each of their respective employment agreements. Additionally, each
named executive officer’s option grant agreement provides that all outstanding
options will fully vest upon a change-in-control. A detailed discussion of
compensation payable upon termination or changes-in-control is provided below
under the caption entitled “Potential Payments Upon Termination or
Change-in-Control.”
Compensation Committee Report
We, the
Compensation Committee of the Board of Directors of Burlington Coat Factory
Investments Holdings, Inc., have reviewed and discussed the “Compensation
Discussion and Analysis” set forth above with management and, based on such
review and
82
discussions,
we recommend to the Board of Directors that the “Compensation Discussion and
Analysis” set forth above be included in this Annual Report on Form
10-K.
Compensation
Committee of the Board of Directors:
Jordan
Hitch
Joshua
Bekenstein
August 29,
2008
The preceding Compensation Committee
Report shall not be deemed to be incorporated by reference into any filing made
by us under the Securities Act or the Exchange Act, notwithstanding any general
statement contained in any such filing incorporating this report by reference,
except to the extent we incorporate such report by specific
reference.
83
Summary
Compensation Table
The
following table sets forth summary information concerning the compensation of
our named executive officers.
|
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Option
Awards ($) (2)
|
All
Other Compensation
($)
(9)
|
Total
($)
|
||||||||||||||||||||
|
Mark
A. Nesci, President and Chief Executive Officer
|
2008
2007
|
600,000
600,000
|
-
6,500,000
|
(1) |
571,480
571,433
|
60,333
29,650
|
1,231,813
7,701,083
|
|||||||||||||||||||
|
Thomas
Fitzgerald,
Former
Executive Vice President and Chief Financial Officer (3)
|
2008
2007
|
220,066
500,000
|
-
350,000
|
(4) |
-
|
34,519
1,130,528
|
254,585
1,980,528
|
|||||||||||||||||||
|
Todd
Weyhrich,
Executive
Vice President and Chief Financial Officer (8)
|
2008
|
335,654 | 212,000 | (5) | 91,230 | 565,356 | 1,204,240 | |||||||||||||||||||
|
Jack
Moore, President of Merchandising, Planning and Allocation and
Marketing
|
2008
|
500,000 | 250,000 | (6) | 208,892 | 769,930 | 1,728,822 | |||||||||||||||||||
|
Fred
Hand, Executive Vice President - Stores
|
2008
|
153,846 | 581,277 | (7) | 21,958 | 173,303 | 930,384 | |||||||||||||||||||
|
Paul
Tang,
ExecutiveVice
President, General Counsel and Secretary
|
2008
2007
|
324,808
320,000
|
-
100,000
|
(1) |
163,280
163,267
|
13,141
13,615
|
501,229
596,882
|
|||||||||||||||||||
|
(1)
Represents the retention bonus paid pursuant to the terms of each named
executive officer’s employment agreement on April 13,
2007.
|
||||||||||||||||||||||||||
|
(2)
Represents (i) with respect to Messrs. Weyhrich, Moore and Hand,
compensation expense recognized in Fiscal 2008 related to options to
purchase units of
Parent’s common stock granted to the named executive officers in
Fiscal 2008; and (ii) with respect to Messrs. Nesci and Tang, the portions
of options to
purchase units of Parent’s common stock granted in Fiscal 2006 that
were expensed in Fiscal 2008. Each unit consists of nine shares of
Class A Stock and
one share of Class L Stock. The amounts shown were calculated
in accordance with SFAS 123R, excluding the effect of certain forfeiture
assumptions, and
are based on a number of key assumptions described in Note 15 to our
Consolidated Financial Statements. The amount of compensation, if any,
actually
realized by a named executive officer from the exercise and sale of
vested stock options will depend on numerous factors, including the
continued
employment of the named executive officer during the vesting period
of the award and the amount by which the stock price on the day of
exercise and sale
exceeds the stock option exercise price. As a result of the
cessation of his employment with us on September 21, 2007, all of Mr.
Fitzgerald’s options (none
of which had vested on or before such date) were immediately
forfeited as of such date. The vesting terms and conditions of option
awards to our named
executive officers are described below under the table entitled
“Grants of Plan-Based Awards.”
|
||||||||||||||||||||||||||
|
(3)
Mr. Fitzgerald left our employment on September 21, 2007, and the amounts
included with respect to Fiscal 2008 represent amounts earned during
Fiscal
2008.
|
||||||||||||||||||||||||||
|
(4)
Represents a sign-on bonus of which 50%, net of taxes, was forfeited in
connection with Mr. Fitzgerald’s departure from our
employment.
|
||||||||||||||||||||||||||
|
(5)
Represents a bonus in lieu of direct participation in the Bonus Plan for
the first year of employment.
|
||||||||||||||||||||||||||
|
(6)
Represents a bonus in lieu of participation in the Bonus Plan for the
first year of employment.
|
||||||||||||||||||||||||||
|
(7)
Represents (i) a bonus in the amount of $250,000 in lieu of direct
participation in the Bonus Plan for the first year of employment,
pro-rated for actual number
of days from February 11, 2008 (the date of the commencement of his
employment) until May 31, 2008 divided by 365; (ii) repair bonuses in the
amounts of
$148,750 and $75,000 (Grossed-Up Bonus) to recompense Mr. Hand for
bonuses from his prior employer which were forfeited by reason of Mr.
Hand’s
employment with us; (iii) reimbursement in the amount of $31,500 for
income taxes paid by Mr. Hand resulting from the inclusion of the
Grossed-Up Bonus
in his taxable income; and (iv) a special incentive sign-on bonus in
the amount of $250,000.
|
||||||||||||||||||||||||||
|
(8)
Mr. Weyhrich has served as our Executive Vice President and Chief
Financial Officer since November 5, 2007.
|
||||||||||||||||||||||||||
|
(9)
The amounts reported in this column for Fiscal 2008 represent the
following:
|
||||||||||||||||||||||||||
84
|
Name
|
Relocation
Expenses($)(a)
|
Company
Matching 401(k) Contributions
($)
|
Automobile
Reimbursement ($)(b)
|
Other
Perquisites or Contractual Arrangements ($)(c)
|
Total
$
|
|||||||||||||||
|
Mark
A. Nesci
|
- | 9,000 | 51,333 | - | 60,333 | |||||||||||||||
|
Thomas
Fitzgerald
|
34,370 | - | 149 | - | 34,519 | |||||||||||||||
|
Todd
Weyhrich
|
500,403 | - | 64,953 | - | 565,356 | |||||||||||||||
|
Jack
Moore
|
716,749 | - | 53,181 | - | 769,930 | |||||||||||||||
|
Fred
Hand
|
120,635 | - | 49,328 | 3,340 | 173,303 | |||||||||||||||
|
Paul
Tang
|
- | 9,000 | 4,141 | - | 13,141 | |||||||||||||||
|
|
(a) Consists of the incremental
costs to us associated with relocating the named executive
officer from his
prior residence to a permanent residence within reasonable commuting
distance from our principal
offices
in Burlington, New Jersey, and includes, among other relocation and
temporary living expenses
for which we have reimbursed each named executive officer, (i)
reimbursement for losses sustained on
the sale of the prior residence of each of the following named
executive officers: Mr. Weyhrich -
$165,255; and Mr. Moore - $360,000; and (ii) reimbursement for
income taxes paid by the following
named executive officers resulting from the inclusion of the
relocation expenses in his taxable income:
Mr. Weyhrich - $139,901; Mr. Moore - $202,346; and Mr. Hand -
$24,981.
|
|||||||||||||||||||
|
|
(b)
Consists of the following incremental costs to us associated with the
provision of the use of a company
car: (i) the costs we incurred to purchase a new car for each of the
following named executive officers in
Fiscal 2008: Mr. Nesci - $42,436; Mr. Weyhrich - $62,171; Mr. Moore -
$49,911; and Mr. Hand - $47,715;
(ii) insurance costs in the amount of $1,000 (per individual)
incurred by us with respect to the car used
by each of Messrs. Nesci, Weyhrich, Moore, Hand, and Tang; (iii)
fuel expenses in the following
amounts: Mr. Nesci - $6,481; Mr. Weyhrich - $1,782; Mr. Fitzgerald -
$149; Mr. Moore - $2,270; Mr.
Hand - $613; and Mr. Tang - $2,715; and (iv) maintenance
expenses in the following amounts: Mr. Nesci
- $1,417; and Mr. Tang - $426. We purchased the car used
by Mr. Tang in 2005 for $40,049.
|
|||||||||||||||||||
|
|
(c)
Represents amounts reimbursed by us to the named executive officer for
Consolidated Omnibus Budget
Reconciliation Act (COBRA) continuation coverage
premiums.
|
|||||||||||||||||||
85
Grants
of Plan-Based Awards
The
following table sets forth non-equity incentive plan awards and option awards
granted during Fiscal 2008 to our named executive officers. There
were no stock awards granted to our named executive officers during Fiscal
2008.
|
|
|||||||||||
|
Estimated
Future Payouts Under Non-Equity Incentive Plan Awards (1)
|
|||||||||||
|
Name
|
Grant
Date
|
Target
($)
|
All
Other Option Awards: Number of Securities Underlying Options (#)
(2)
|
Exercise
or Base Price of Option Awards
|
Grant
Date Fair Value of Stock and Option Awards (3)
|
||||||
|
Mark
A. Nesci
|
-
|
300,000
|
-
|
-
|
-
|
||||||
|
Thomas
Fitzgerald
|
-
|
-
|
-
|
-
|
-
|
||||||
|
Todd
Weyhrich
|
11/5/07
|
2,500
2,500
2,500
|
$100/
unit
$180/unit
$270/unit
|
$73.85/unit
$46.81/unit
$36.83/unit
|
|||||||
|
8/21/07
|
4,166
4,167
4,167
|
$100/
unit
$180/unit
$270/unit
|
$73.85/unit
$46.81/unit
$36.83/unit
|
||||||||
|
Jack
Moore
|
7/26/07
|
13,333
13,333
13,334
|
$100/
unit
$180/unit
$270/unit
|
$73.85/unit
$46.81/unit
$36.83/unit
|
|||||||
|
Fred
Hand
|
2/11/08
|
3,333
3,333
3,334
|
$100/
unit
$180/unit
$270/unit
|
$73.85/unit
$46.81/unit
$36.83/unit
|
|||||||
|
Paul
Tang
|
-
|
162,500
|
-
|
-
|
-
|
||||||
|
(1) For
Fiscal 2008, we did not meet the applicable EBITDA target and, as such, no
cash bonus was earned last year or paid to Messrs Nesci or Tang under the
Bonus Plan for Fiscal 2008. As described
above, Messrs. Weyhrich, Moore and Hand received guaranteed bonuses in
lieu of direct participation in the Bonus Plan for Fiscal 2008. Mr.
Fitzgerald voluntarily resigned from our employment on September 21,
2007. Accordingly, he was not entitled to any payment under the Bonus
Plan in Fiscal 2008.
|
|||||||||||
|
(2) Consists
of stock options awarded during Fiscal 2008 under our Incentive Plan in
connection with the commencement of each named executive officer’s
employment with us.
|
|||||||||||
|
(3) The
amounts in this column represent the grant date fair value of the awards
computed in accordance with SFAS 123R.
|
|||||||||||
86
Narrative
Disclosure to Summary Compensation Table and Grants of Plan-Based Awards
Table
We
have written employment agreements with each of our named executive officers
that provide for, among other things, the payment of base salary, reimbursement
of certain costs and expenses, and for each named executive officer’s
participation in our Bonus Plan and employee benefit plans. Additionally, we
have written agreements with each named executive officer pursuant to which we
grant options to purchase units under our Incentive Plan.
In
addition, each employment agreement specifies payments and benefits that would
be due to such named executive officer upon the termination of his employment
with us. For additional information regarding amounts payable upon
termination to each of our named executive officers, see the discussion below
under the caption entitled “Potential Payments Upon Termination or Change in
Control.”
Outstanding
Equity Awards at Fiscal Year-End
The
following table sets forth all outstanding equity awards (comprised exclusively
of options to purchase units under our Incentive Plan) held by each of our
named executive officers as of May 31, 2008:
|
Name
|
Number
of Units Underlying Unexercised Options
(#)
Exercisable
|
Number
of Units Underlying Unexercised Options
(#)
Unexercisable (1)
|
Option
Exercise Price
|
Option
Expiration Date(2)
|
||||||||
|
Mark
A. Nesci
|
9,334
9,333
9,333
|
14,000
14,000
14,000
|
$90/
unit
$180/unit
$270/unit
|
4/13/16
4/13/16
4/13/16
|
||||||||
|
Thomas
Fitzgerald
|
-
|
-
|
-
|
-
|
||||||||
|
Todd
Weyhrich
|
_
_
_
|
2,500
2,500
2,500
|
$100/
unit
$180/unit
$270/unit
|
11/5/17
11/5/17
11/5/17
|
||||||||
|
_
_
_
|
4,166
4,167
4,167
|
$100/
unit
$180/unit
$270/unit
|
8/21/17
8/21/17
8/21/17
|
|||||||||
|
Jack
Moore
|
_
_
_
|
13,333
13,333
13,334
|
$100/
unit
$180/unit
$270/unit
|
7/26/17
7/26/17
7/26/17
|
||||||||
|
Fred
Hand
|
_
_
_
|
3,333
3,333
3,334
|
$100/
unit
$180/unit
$270/unit
|
2/11/18
2/11/18
2/11/18
|
||||||||
|
Paul
Tang
|
2,667
2,667
2,666
|
4,000
4,000
4,000
|
$90/
unit
$180/unit
$270/unit
|
4/13/16
4/13/16
4/13/16
|
||||||||
|
(1)
The options vest 40% on the second anniversary of the grant date, 20% on
the third anniversary of the grant date, 20% on the fourth anniversary of
the grant date and 20% on the fifth anniversary of the grant
date.
|
||||||||||||
|
(2)
The final exercise date for any option granted is the tenth anniversary of
the grant date.
|
||||||||||||
87
Option
Exercises and Stock Vested
There
were no option exercises, and no vesting of stock held, by any of our named
executive officers during Fiscal 2008.
Pension Benefits
None
of our named executive officers participate in or have account balances in
qualified or non-qualified defined benefit plans sponsored by us.
Nonqualified Deferred
Compensation
None
of our named executive officers participate in or have account balances in any
defined contribution or other plan that provides for the deferral of
compensation on a basis that is not tax-qualified.
Potential
Payments Upon Termination or Change-in-Control
The
following is a discussion of payments and benefits that would be due to each of
our named executive officers upon the termination of his employment with us.
Other than with respect to Mr. Fitzgerald, who resigned from our employment on
September 21, 2007, the amounts in the table below assume that each termination
was effective as of May 31, 2008 and are merely illustrative of the impact of a
hypothetical termination of each executive’s employment. The amounts to be
payable upon an actual termination of employment can only be determined at the
time of such termination based on the facts and circumstances then
prevailing.
Termination
Without Cause or for Good Reason
Each
named executive officer’s employment agreement provides that he will be entitled
to receive the following in the event that his employment is terminated by us
without “cause” or by him for “good reason” (as those terms are defined
below):
|
·
|
all
previously earned and accrued but unpaid base salary and vacation and
unpaid business expenses up to the date of such
termination;
|
|
·
|
as
applicable, any unpaid guaranteed bonuses or unreimbursed permitted
relocation expenses;
|
|
·
|
a
pro-rated portion of the then current year’s annual target performance
bonus under the Bonus Plan through the date of termination, based on
actual results (Bonus Payment);
|
|
·
|
a
severance payment (Severance Payment) equal to his then current base
salary (in Mr. Nesci’s case, two times his then current base salary);
and
|
|
·
|
full
continuation of his hospital, health, disability, medical and life
insurance benefits during the one-year period commencing on the date of
termination (in Mr. Nesci’s case, a two year period commencing on the date
of termination) (Healthcare
Continuation).
|
Each
named execute officer shall only be entitled to receive the Bonus Payment,
Severance Payment and Healthcare Continuation in the event that he:
|
·
|
executes
a release of claims in respect of his employment with us;
and
|
|
·
|
has
not breached, as of the date of termination or at any time during the
period for which such payments or services are to be made, certain
restrictive covenants (Restrictive Covenants) contained in his employment
agreement regarding (i) confidentiality, (ii) intellectual property
rights, and (iii) non-competition and non-solicitation (each of which
extend for a period of one year (or two years, in the case of Mr. Nesci)
following termination of employment for any reason other than
cause).
|
Our
obligation to make such payments or provide such services will terminate upon
the occurrence of any such breach during such period. Payments shall
be paid by us in regular installments in accordance with our general payroll
practices.
88
For
purposes of each named executive officer’s employment agreement,
|
·
|
“cause”
means the named executive officer (i) is convicted of a felony or other
crime involving dishonesty towards us or material misuse of our property;
(ii) engages in willful misconduct or fraud with respect to us or any of
our customers or suppliers or an intentional act of dishonesty or
disloyalty in the course of his employment; (iii) refuses to perform his
material obligations under his employment agreement which failure is not
cured within 15 days after written notice to him; (iv) misappropriates one
or more of our material assets or business opportunities; or (v) breaches
a Restrictive Covenant which breach, if capable of being cured, is not
cured within 10 days of written notice to him;
and
|
|
·
|
“good
reason” means the occurrence of any of the following events without the
written consent of the named executive officer: (i) a material diminution
of his duties or the assignment to him of duties that are inconsistent in
any substantial respect with the position, authority or responsibilities
associated with his position; (ii) our requiring him to be based at a
location which is 50 or more miles from his principal office location on
the date he commences employment with us; or (iii) a material breach by us
of our obligations pursuant to his employment agreement (which such breach
goes uncured after notice and a reasonable opportunity to
cure). No such condition is deemed to be “good reason” unless
(i) we are notified within 30 days of the initial existence of such
condition and are provided with a period of at least 30 days from the date
of notice to remedy the condition, and (ii) within 10 days after the
expiration of such period (but in no event later than 120 days after the
initial existence of the condition), the named executive officer actually
terminates his employment with us by providing written notice of
resignation for our failure to remedy the
condition.
|
Termination
for Any Other Reason
In the event that he is terminated for
any other reason, including as a result of his death, disability, voluntary
resignation for other than good reason or by resolution of our Board of
Directors for cause, each named executive officer’s employment agreement
provides that he shall only be entitled to receive all previously earned and
accrued but unpaid base salary, vacation and unpaid business expenses up to the
date of such termination.
Change-in-Control
None
of our named executive officers are entitled to receive any payments upon a
change-in-control pursuant to the terms of his employment
agreement. Pursuant to the terms of each named executive officer’s
option grant agreement, all outstanding options will fully vest upon a
change-in-control.
Death
Benefit Agreement
On
November 8, 2005, we entered into a death benefit agreement (Death Benefit
Agreement) with Mr. Nesci which provides that, subject to certain conditions set
forth in the Death Benefit Agreement, we will pay to Mr. Nesci’s estate or a
designated beneficiary a death benefit in the amount of $1,000,000 (less
applicable withholding taxes) payable at the election of the payee in either
(i) a single lump sum, (ii) five equal annual installments (together,
in the case of each installment after the first, with interest on the unpaid
balance), or (iii) the form of an annuity selected by the payee to be
purchased by us. The Death Benefit Agreement also provides that, in the event
that Mr. Nesci is terminated without “cause” (as defined in the Death Benefit
Agreement), the death benefit will continue to be payable.
89
|
Termination
Without Cause or for Good Reason
|
Change
in Control
|
|||||||||||||||||||||
|
Name
|
Salary
Payment($)
|
Bonus
Payment ($) (2)
|
Healthcare
Continuation (3)
|
Termination
for Any Other Reason ($)
|
Option
Acceleration ($)(5)
|
|||||||||||||||||
|
Mark
A.
Nesci
|
1,200,000 |
-
|
16,740 | – | (4) | 437,046 | ||||||||||||||||
|
Thomas
Fitzgerald (1)
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||
|
Todd
Weyhrich
|
450,000 | 212,000 |
-
|
58,194
|
||||||||||||||||||
| 8,370 | ||||||||||||||||||||||
|
Jack
Moore
|
500,000 | - |
-
|
116,397
|
||||||||||||||||||
| 6,740 | ||||||||||||||||||||||
|
Fred
Hand
|
500,000 | 76,027 | 8,370 |
-
|
29,097
|
|||||||||||||||||
|
Paul
Tang
|
325,000 |
_
|
8,370 |
-
|
124,873 | |||||||||||||||||
|
(1)
Mr. Fitzgerald voluntarily resigned (other than for good reason) from our
employment on September 21, 2007. Accordingly, he was entitled to
receive only previously earned and accrued but unpaid base salary,
vacation and unpaid business expenses through such date.
|
||||||||||||||||||||||
|
(2)
The bonus amounts shown for Messrs. Weyhrich, Moore and Hand represent
guaranteed bonuses in lieu of direct participation in the Bonus Plan for
Fiscal 2008. As we did not meet the target EBITDA levels established
by the Bonus Plan for Fiscal 2008, no awards under the Bonus Plan would be
payable to Messrs. Nesci or Tang.
|
||||||||||||||||||||||
|
(3)
Healthcare continuation amounts shown for Messrs. Nesci, Weyhrich, Moore,
Hand and Tang represent the Company’s portion of the executive’s health
insurance costs based on the elections the employees had made as of May
31, 2008.
|
||||||||||||||||||||||
|
(4)
If Mr. Nesci’s termination is caused by his death, Mr. Nesci’s estate will
receive $1,000,000 pursuant to his Death Benefit Agreement. Under Mr.
Nesci’s employment agreement and our employment agreement with each other
named executive officer, in the event that such executive officer is
terminated for any other reason, including as a result of his death,
disability, voluntary resignation for other than good reason or by
resolution of our Board of Directors for cause, he shall only be entitled
to receive all previously earned and accrued but unpaid base salary,
vacation and unpaid business expenses up to the date of such
termination.
|
||||||||||||||||||||||
|
(5)
As described above, all outstanding options fully vest upon a
change-in-control. Because shares of our capital stock are not
publicly traded, the value of the options held by our named executive
officers is only available when a valuation is performed. The shares
were valued at $108.73 per unit
(Valuation Price) at May 31, 2008. The dollar value in this column
represents the product obtained by multiplying the number of accelerated
options by the difference between the (i) Valuation Price and (ii)
option exercise price.
|
||||||||||||||||||||||
Compensation
of Directors
The
members of our Board of Directors are not separately compensated for their
services as directors, other than reimbursement for out-of-pocket expenses
incurred in connection with rendering such services.
Compensation
Committee Interlocks and Insider Participation
Messrs.
Bekenstein and Hitch served at all times during Fiscal 2008, and continue to
currently serve, on the Committee. Neither of these individuals has
ever been an officer or an employee of ours. In addition, none of our executive
officers serve as a
90
member
of the board of directors or compensation committee of any entity that has one
or more executive officers serving as a member of our Board of Directors or the
Committee.
Security Ownership of Our Directors,
Executive Officers, and 5% Beneficial Owners
As a
result of the Merger Transaction, all of BCFWC’s outstanding capital stock is
beneficially owned by us, and all of our outstanding capital stock is
beneficially owned by Parent. The following table shows information about the
beneficial ownership of Parent’s common stock as of August 29, 2008 by:
|
·
|
Each
person we know to be the beneficial owner of at least five percent of
Parent’s common stock;
|
|
·
|
Each
current director;
|
|
·
|
Each
of our named executive officers;
and
|
|
·
|
All
current directors and executive officers as a
group.
|
The
table also sets forth ownership information for these persons regarding unvested
stock options for which these persons are not deemed to beneficially own the
underlying shares of common stock. Each such option is comprised of “units” of
common stock in Parent. Each unit consists of nine shares of Class A Stock and
one share of Class L Stock.
The percentages of shares outstanding
provided in the table below are based upon 5,013,677 shares of Class L Stock of
and 45,123,093 shares of Class A Stock outstanding as of August 29,
2008.
|
Name
of Beneficial Owner(1)
|
Number
of Shares of
Class
L Stock Beneficially Owned
|
Percentage
of Class
|
Number
of Shares of
Class
A Stock Beneficially Owned
|
Percentage
of Class
|
Options
to Purchase Units Not Exercisable Within the Next 60
Days
|
|||||||||||||||
|
Affiliates
of Bain Capital, LLC (2)
|
4,944,444 | 98.6 | % | 44,499,996 | 98.6 | % | — | |||||||||||||
|
Mark
A. Nesci (3)
|
41,689 | * | 375,201 | * | 42,000 | |||||||||||||||
|
Todd
Weyhrich (4)
|
— | — | — | — | 20,000 | |||||||||||||||
|
Jack
Moore (5)
|
— | — | — | — | 40,000 | |||||||||||||||
|
Fred
Hand (6)
|
— | — | — | — | 10,000 | |||||||||||||||
|
Thomas
Fitzgerald (7)
|
— | — | — | — | — | |||||||||||||||
|
Paul
Tang (8)
|
5,245 | * | 47,205 | * | 12,000 | |||||||||||||||
|
Joshua
Bekenstein (9)
|
— | — | — | — | — | |||||||||||||||
|
Jordan
Hitch (9)
|
— | — | — | — | — | |||||||||||||||
|
John
Tudor (10)
|
— | — | — | — | — | |||||||||||||||
|
Mark
Verdi (10)
|
— | — | — | — | — | |||||||||||||||
|
Executive
Offers and Directors as a Group (9 Persons) (11)
|
1 | % | 422,406 | 1 | % | 124,000 | ||||||||||||||
| 46,934 | ||||||||||||||||||||
* Less than 1%
(1) A
“beneficial owner” of a security is determined in accordance with Rule 13d-3
under the Exchange Act and generally means any person who, directly or
indirectly, through any contract, arrangement, understanding, relationship, or
otherwise, has or shares:
|
·
|
voting
power which includes the power to vote, or to direct the voting of, such
security; and/or
|
91
|
·
|
investment
power which includes the power to dispose, or to direct the disposition
of, such security.
|
|
·
|
Unless
otherwise indicated, each person named in the table above has sole voting and
investment power, or shares voting and investment power with his spouse (as
applicable), with respect to all shares of stock listed as owned by that person.
Shares issuable upon the exercise of options that are exercisable within
60 days of August 29, 2008 are included in the table above and are
considered to be outstanding for the purpose of calculating the percentage of
outstanding shares of Parent’s common stock held by the person, but not for the
purpose of calculating the percentage of outstanding shares held by any other
person. The address of our named executive officers is c/o Burlington Coat
Factory Warehouse Corporation, 1830 Route 130 North, Burlington, New Jersey
08016.
(2) Includes
shares beneficially owned, and with respect to which sole power to vote and sole
power of disposition are held, by each of Bain Capital Integral Investors, LLC
(Integral), Bain Capital Fund IX, LLC (Fund IX), BCIP TCV, LLC (BCIP TCV) and
BCIP-G Associates (BCIP-G) as follows:
|
Name
of Fund
|
Class
L Stock
|
Class
A Stock
|
||||||
|
Integral
|
2,523,111 | 23,077,824 | ||||||
|
Fund
IX
|
2,361,567 | 21,254,078 | ||||||
|
BCIP
TCV
|
58,596 | 157,560 | ||||||
|
BCIP-G
|
1,170 | 10,534 | ||||||
Bain
Capital Fund IX, L.P. (Fund IX LP) is the sole member of Fund
IX. Bain Capital Partners IX, L.P. (Partners IX) is the general
partner of Fund IX LP. Bain Capital Investors, LLC (BCI) is the
administrative member of each of Integral and BCIP TCV, the managing partner of
BCIP-G, and the general partner of Partners IX. BCI, by virtue
of the relationships described above, may be deemed to beneficially own the
shares held by Integral, BCIP TCV, and BCIP-G. BCI disclaims
beneficial ownership of such shares except to the extent of its pecuniary
interest therein. Fund IX LP, Partners IX, and BCI, by virtue of the
relationships described above, may be deemed to beneficially own the shares held
by Fund IX LLC. Fund IX LP, Partners IX, and BCI disclaim beneficial
ownership of such shares except to the extent of their pecuniary interest
therein. The address of each entity referenced in this footnote is
111 Huntington Avenue, Boston, Massachusetts 02199.
(3) Mr.
Nesci’s Class L Stock is comprised of (i) 38,889 shares of Class L Stock that
fully vested on April 13, 2007,
and (ii) options to purchase 2,800 shares of Class L Stock that vested on
April 13, 2008. Mr. Nesci’s Class A Stock is comprised of (i) 350,001
shares of Class A Stock that fully vested on April 13, 2007, and (ii) options to purchase
25,200 shares of Class A Stock that vested on April 13,
2008. One-third of Mr. Nesci’s options to purchase units not
exercisable within the next 60 days shall vest on April 13, 2009, 2010 and 2011,
respectively. All options become exercisable upon a change of control
and unless determined otherwise by the plan administrator, upon cessation of
employment, options that have not vested will terminate immediately, units
issued upon the exercise of vested options will be callable and unexercised
vested options will be exercisable for a period of 60 days. The final
exercise date for all options granted to Mr. Nesci is April 13,
2016.
(4) 12,500
of Mr. Weyhrich’s options to purchase units not exercisable within the next 60
days were granted on August 21, 2007 (Tranche 1). Accordingly, 40% of
such options shall vest on August 21, 2009, and then one-third of the remaining
60% shall vest on August 21, 2010, 2011 and 2012, respectively. 7,500
of Mr. Weyhrich’s options to purchase units not exercisable within the next 60
days were granted on November 5, 2007 (Tranche 2). Accordingly, 40%
of such options shall vest on November 5, 2009, and then one-third of the
remaining 60% shall vest on November 5, 2010, 2011 and 2012,
respectively. All options become exercisable upon a change of control
and unless determined otherwise by the plan administrator, upon cessation of
employment, options that have not vested will terminate immediately, units
issued upon the exercise of vested options will be callable and unexercised
vested options will be exercisable for a period of 60 days. The final
exercise date for all options granted in Tranche 1 is August 21, 2017 and the
final exercise date for all options granted in Tranche 2 is November 5,
2017.
(5) 40%
of Mr. Moore’s options to purchase units not exercisable within the next 60 days
shall vest on July 26, 2009, and then one-third of the remaining 60% shall vest
on July 26, 2010, 2011 and 2012, respectively. All options become
exercisable upon a change of control and unless determined otherwise by the plan
administrator, upon cessation of employment, options that have not vested will
terminate immediately, units issued upon the exercise of vested options will be
callable and unexercised vested options will be exercisable for a period of 60
days. The final exercise date for all options granted to Mr. Moore is
July 26, 2017.
(6) 40%
of Mr. Hand’s options to purchase units not exercisable within the next 60 days
shall vest on February 11, 2010, and then one-third of the remaining 60% shall
vest on February 11, 2011, 2012 and 2013, respectively. All options
become exercisable upon a change of control and unless determined otherwise by
the plan administrator, upon cessation of employment, options that
have
92
not
vested will terminate immediately, units issued upon the exercise of vested
options will be callable and unexercised vested options will be exercisable for
a period of 60 days. The final exercise date for all options granted
to Mr. Hand is February 11, 2018.
(7) In
connection with his employment with us, Mr. Fitzgerald received options to
purchase 30,000 units. As a result of the cessation of his employment
with us on September 21, 2007, all of Mr. Fitzgerald’s options (none of which
had vested on or before September 21, 2007) were immediately forfeited as of
such date.
(8) Mr.
Tang’s Class L Stock is comprised of (i) 4,445 shares of Class L Stock that
fully vested on April 13, 2007,
and (ii) options to purchase 800 shares of Class L Stock that vested on
April 13, 2008. Mr. Tang’s Class A Stock is comprised of (i) 40,005
shares of Class A Stock that fully vested on April 13, 2007, and (ii) options to purchase
7,200 shares of Class A Stock that vested on April 13,
2008. One-third of Mr. Tang’s options to purchase units not
exercisable within the next 60 days shall vest on April 13, 2009, 2010 and 2011,
respectively. All options become exercisable upon a change of control
and unless determined otherwise by the plan administrator, upon cessation of
employment, options that have not vested will terminate immediately, units
issued upon the exercise of vested options will be callable and unexercised
vested options will be exercisable for a period of 60 days. The final
exercise date for all options granted to Mr. Tang is April 13,
2016.
(9) Messrs.
Bekenstein and Hitch are managing directors of BCI, and by virtue of the
relationships described in footnote 2, Mr. Messrs. Bekenstein and Hitch may be
deemed to beneficially own the shares owned by Integral, BCIP TCV, BCIP-G, and
Fund IX LLC. Messrs. Bekenstein and Hitch disclaim beneficial
ownership of such shares except to the extent of their pecuniary interest
therein. The address of Messrs. Bekenstein and Hitch is c/o Bain
Capital Partners, LLC, 111 Huntington Avenue, Boston, Massachusetts
02199.
(10) Messrs.
Tudor and Verdi are general partners of each of BCIP Associates III (BCIP III)
and BCIP Trust Associates III (BCIP Trust III). BCIP III is the
manager and sole member of BCIP Associates III, LLC (BCIP III LLC), which may be
deemed to hold 1,107,809 shares of Class A Stock and 79,985 shares of Class L
Stock by virtue of its membership in Integral. BCIP Trust III is the
manager and sole member of BCIP Associates T III, LLC (BCIP T III LLC), which
may be deemed to hold 129,086 shares of Class A Stock and 57,449 shares of Class
L Stock by virtue of its membership in BCIP TCV. Messrs. Tudor and
Verdi may be deemed to beneficially own the shares owned by BCIP III LLC and
BCIP T III LLC. Messrs. Tudor and Verdi disclaim beneficial ownership
of such shares except to the extent of their pecuniary interest
therein. The address of Messrs. Tudor and Verdi, as well as each of
the entities referenced in this footnote, is c/o Bain Capital Partners, LLC, 111
Huntington Avenue, Boston, Massachusetts 02199.
(11) Includes
our current directors (Messrs. Nesci, Bekenstein, Hitch, Tudor and Verdi) and
our current executive officers (Messrs. Nesci, Weyhrich, Moore, Hand and
Tang).
Securities Authorized for Issuance
Under Equity Compensation Plans
The
following table sets forth, as of May 31, 2008, information concerning
equity compensation plans under which Parent’s securities are authorized for
issuance. The table does not reflect grants, awards, exercises, terminations or
expirations since that date.
|
Plan
Category
|
(A)
Number
of
Securities
to be
Issued
Upon
Exercise
of
Outstanding
Options,
Warrants
and
Rights
|
(B)
Weighted
Average
Exercise
Price of
Outstanding
Options,
Warrants
and Rights
|
(C)
Number
of Securities
Remaining
Available
for
Future Issuance
under
Equity
Compensation
Plans
(excluding
securities
reflected
in
column (A))
|
|||||||||
|
Plans
Approved by Shareholders
|
(1 | ) | $ | 181.25 | (2 | ) | ||||||
|
Plans
Not Approved by Shareholders
|
- | - | - | |||||||||
|
Total
|
(1 | ) | (2 | ) | ||||||||
(1) As
of May 31, 2008, 3,708,000 shares of Class A Stock and 412,000
shares of Class L Stock were issuable pursuant to outstanding options
under our Incentive Plan.
(2) As
of May 31, 2008, 342,018 shares of Class A Stock and 38,002
shares of Class L Stock may be issued pursuant to future issuances
under our Incentive Plan.
93
Except as
described below and other than the employment relationships and related
compensation described under Item 11, Executive Compensation, since the
beginning of Fiscal 2008 we have not been a party to, nor have we currently
proposed, any transaction or series of similar transactions in which the amount
exceeds $120,000 and in which any director, executive officer, beneficial owner
of more than 5% of Parent’s common stock or any member of the immediate family
of any of the foregoing persons had or will have a direct or indirect material
interest.
Merchandise
Purchase Orders
During Fiscal 2008 and Fiscal
2007, we had cash expenditures with Fashion Options, Inc. for merchandise
orders for an aggregate approximate total of $6.3 million and $3.8 million,
respectively. Steven Koster, our former Vice President, Senior
Divisional Merchandise Manager for Menswear, has or had a son-in-law who is or
was a salesperson for Fashion Options, Inc. Steve Koster resigned from our
employment in October 2007.
2006
Management Incentive Plan
In connection with the Merger
Transaction, Holdings adopted the Incentive Plan, which provides for grants of
awards to designated employees subject to the terms and conditions set forth in
the Incentive Plan. 511,122 shares of Class L stock and 4,600,098 shares of
Class A stock are reserved for issuance under the Incentive
Plan.
Stockholders
Agreement
In connection with the Merger
Transaction, Parent entered into the Stockholders Agreement with its
stockholders, including funds associated with Bain Capital, which among other
things establishes the composition of our Board of Directors (as discussed in
further detail in Item 10, Directors, Executive Officers and Corporate
Governance, under the caption entitled “Governance of the Company”), provides
certain restrictions and rights with respect to sale and issuance of Parent’s
common stock and provides for limited approval rights in favor of Bain
Capital. In particular, the Stockholders Agreement provides that no
stockholder may transfer his or her common stock except to permitted transferees
and except in compliance with certain restrictions on transfer. Parent’s
stockholders have the right to sell a pro rata portion of their common stock if
funds associated with Bain Capital elect to sell all or a portion of its common
stock. The holders of a majority of Parent’s outstanding common stock
(and in some cases funds associated with Bain Capital acting alone) also have
the right to cause a sale of the Company to occur and to require the other
holders of our common stock to participate in such a sale. If Parent
or any affiliate of Parent proposes to issue new equity securities, each holder
of Parent’s common stock will have the right to purchase its pro rata share of such new
securities. In addition, under the Stockholders Agreement, funds
associated with Bain Capital and other holders of common stock will have the
ability to cause Parent to register their shares of common stock and to
participate in registrations by us of Holdings’ or any other affiliate’s common
stock. We will be responsible for paying expenses of holders of
Parent’s common stock in connection with any such registration.
Advisory
Agreement
In connection with the Merger
Transaction, we entered into an advisory agreement with Bain Capital pursuant to
which Bain Capital provides us with management and consulting services and
financial and other advisory services. Pursuant to the agreement, we
pay Bain Capital a periodic fee of $1 million per fiscal quarter plus
reimbursement for reasonable out-of-pocket fees, and a fee equal to 1% of the
transaction value of each financing, acquisition, disposition or change of
control or similar transaction by or involving us. Bain Capital
received a fee of approximately $21 million in consideration for financial
advisory services related to the Merger Transaction. The advisory
agreement has a 10-year initial term, and thereafter is subject to automatic
one-year extensions unless we or Bain Capital provides written notice of
termination, except that the agreement terminates automatically upon an initial
public offering or a change of control. If the agreement is
terminated early, then Bain Capital will be entitled to receive all unpaid fees
and unreimbursed out-of-pocket fees and expenses, as well as the present value
of the periodic fee that would otherwise have been payable through the end of
the term. The agreement includes customary indemnities in favor of
Bain Capital.
94
Indemnification
The Merger Agreement provides that,
after the Merger, Parent and BCFWC will, jointly and severally, and Parent will
cause BCFWC to, indemnify and hold harmless the individuals who are now, or have
been at any time prior to the execution of the Merger Agreement or who become
such prior to the effective time of the Merger, our directors or officers or any
of our subsidiaries, or our employees
or any of its subsidiaries providing services to or for such a director or
officer in connection with the Merger Agreement or any of the transactions
contemplated by the Merger Agreement, against costs and liabilities incurred in
connection with any pending, threatened or completed claim, action, suit,
proceeding or investigation arising out of or pertaining to (i) the fact
that such individual is or was an officer, director, employee, fiduciary or
agent of BCFWC or any of its subsidiaries, or (ii) matters occurring or
existing at or prior to the effective time of the Merger (including acts or
omissions occurring in connection with the Merger Agreement and the transactions
contemplated thereby), whether asserted or claimed prior to, at or after the
effective time of the Merger.
The Merger Agreement provides that we
will provide, for a period of six years after the Merger becomes effective,
directors’ and officers’ liability insurance for the benefit of those persons
covered under our officers’ and directors’ liability insurance policy on terms
with respect to coverage and amounts no less favorable than those of the policy
in effect as of the execution of the Merger Agreement, provided that, subject to
certain exceptions, the surviving corporation will not be obligated to pay
premiums in excess of 300% of the annualized policy premium based on a rate as
of the execution of the Merger Agreement. Notwithstanding the
foregoing, prior to the effective time of the Merger we are permitted to
purchase prepaid “tail” policies in favor of such indemnified persons with
respect to the matters referred to above (provided that the annual
premium for such tail policy may not exceed 300% of the annualized policy
premium based on a rate as of the execution of the Merger Agreement), in which
case Parent has agreed to maintain such tail policies in effect and continue to
honor the obligations under such policies.
Parent
and BCFWC have also agreed (i) to continue in effect for at least six years
after the effective time of the Merger all rights to indemnification existing in
favor of, and all exculpations and limitations of the personal liability of, the
directors, officers, employees, fiduciaries and agents of BCFWC and its
subsidiaries in our certificate of incorporation as of the effective time of the
Merger with respect to matters occurring at or prior to the effective time of
the Merger and (ii) to honor our indemnification agreements with our
directors (including one former director, Harvey Morgan) and with certain
officers, including Mr. Nesci. Each such indemnification agreement
provides, among other things, that we will indemnify such indemnified person to
the fullest extent permitted by the Delaware General Corporation Law (DGCL),
including advancement of legal fees and other expenses incurred by the
indemnified person in connection with any legal proceedings arising out the
indemnified person’s service as director and/or officer, subject to certain
exclusions and procedures set forth in the indemnification
agreement.
In
addition, our officers and directors under our Certificate of Incorporation and
Bylaws are indemnified and held harmless against any and all claims alleged
against any of them in their official capacities to the fullest extent
authorized by the DGCL as it exists today or as it may be amended but only to
the extent that such amendment permits the Company to provide broader
indemnification rights than previously permitted.
Review,
Approval or Ratification of Transactions with Related Persons
Under
our Code of Business Conduct, which was approved by our Board of Directors,
employees are asked to avoid potential, or the appearance of, conflicts of
interest, and if the avoidance of such conflict of interest is not possible,
then the employee is required to make full written disclosure of the proposed
transaction for review by the employee’s immediate supervisor who should in turn
bring it to the attention of our Corporate Compliance Officer in appropriate
circumstances. Our Code of Business Conduct specifically
discusses standards applicable to certain prohibited conflicts of interest
including, but not limited to, the following:
|
·
|
Employment
by, directorship with or financial interests in any competitor, customer,
distributor, vendor, or supplier where such employment, directorship or
financial interest would influence, or appear to influence, action on our
behalf;
|
|
·
|
Loans
to, and guarantees of obligations of, employees or directors incurred for
personal reasons;
|
|
·
|
Supervision,
review or influence on the job evaluation or salary of persons with whom
employees have a family or close
relationship;
|
|
·
|
Dealings
with businesses which provide or seek to provide goods or services to us
in which immediate family members or close relationships of employees have
an ownership interest in or work in a managerial or executive capacity
for;
|
|
·
|
Dealings
with charitable or community organizations in individual capacities rather
than our behalf;
|
95
|
·
|
Solicitation
or distribution activities not relating to our
business;
|
|
·
|
Lobbying
activities (or even the appearance of lobbying any governmental body or
public official) as our
representative;
|
|
·
|
Appropriation
of the benefit of certain business ventures, opportunities or potential
opportunities; and
|
|
|
|
·
|
Acceptance
of gifts and commercial bribery.
|
Director
Independence
Although
we do not currently have securities listed on a national securities exchange or
on an inter-dealer quotation system, prior to the Merger Transaction our Board
of Directors utilized director independence standards designed to satisfy the
corporate governance requirements of the New York Stock Exchange (NYSE) when
determining whether or not members of our Board of Directors were
independent. Under such standards, none of the current member of our
Board of Directors or Nicholas Nomico, who resigned from our Board of Directors
in October 2007, would be considered independent.
Under
NYSE rules, we are considered a “controlled company” because more than 50% of
Parent’s voting power is held by affiliates of Bain Capital. Accordingly,
even if we were a listed company, we would not be required by NYSE rules to
maintain a majority of independent directors on our Board of Directors, nor
would we be required to maintain a compensation committee or a
nominating/corporate governance committee comprised entirely of independent
directors. We do not maintain a nominating/corporate governance committee
and our compensation committee does not include any independent
directors.
Item
14. Principal Accountant Fees and
Services
Fees Paid to the Principal Accountant
— 2008 and 2007
The
following table sets forth the aggregate fees billed to us by Deloitte & Touche
LLP (D&T), our independent registered public accounting firm, for the fiscal
years ended May 31, 2008 and June 2, 2007:
|
Year
Ended
|
||||||||
|
May
31, 2008
|
June
2, 2007
|
|||||||
|
Audit
Fees (1)
|
$ | 2,060,000 | $ | 1,700,258 | ||||
|
Tax
Fees
|
- | - | ||||||
|
All
Other Fees
|
- | - | ||||||
|
Total
|
$ | 2,060,000 | $ | 1,700,258 | ||||
_________________
|
(1)
|
Audit
Fees — represents aggregate fees paid or accrued for (i) the audit of our
annual financial statements and review of our interim financial
statements, and (ii) fees for services that are normally provided by our
independent registered public accounting firm in connection with statutory
and regulatory filings.
|
96
Audit
Committee Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Auditors
In accordance with its charter, the
Audit Committee of our Board of Directors must pre-approve all audit and
permissible non-audit services to be provided by D&T. In its
review of non-audit service fees, the Audit Committee considers, among other
things, the possible effect of the performance of such services on the
independence of our independent registered public accounting
firm. All services provided by D&T for the years ended May 31,
2008 and June 2, 2007 were pre-approved by the Audit Committee.
97
|
(a)
|
Documents
Filed as Part of this Report
|
|
(1)
|
Financial Statements.
The consolidated financial statements filed as part of this Report are
listed on the Index to Consolidated Financial Statements on page 32 of
this Report.
|
|
(2)
|
Financial Statement
Schedules. Schedule II - Valuation and Qualifying Accounts filed as
part of this Report is set forth on page 74 of this Report. All other
financial statement schedules have been omitted here because they are not
applicable, not required, or the information is shown in the consolidated
financial statements or notes
thereto.
|
|
(3)
|
Exhibits Required by
Item 601 of Regulation S-K. See
Item 15(b) below.
|
|
(b)
|
Exhibits
Required by Item 601 of Regulation
S-K
|
The
following is a list of exhibits required by Item 601 of Regulation S-K
and filed as part of this Report. Exhibits that previously have been
filed are incorporated herein by reference.
|
EXHIBIT NO.
|
DESCRIPTION
|
|
1.1
(2)
|
Senior
Discount Note Purchase Agreement, dated as of April 10, 2006, among
Burlington Coat Factory Investments Holdings, Inc. and the Initial
Purchasers.
|
|
1.2
(1)
1.3
(1)
|
Joinder
to the Senior Note Purchase Agreement, dated as of April 10, 2006, among
Burlington Coat Factory Warehouse Corporation and the Guarantors party
thereto.
Senior
Note Purchase Agreement, dated as of April 10, 2006, among BCFWC
Mergersub, Inc. and the Initial Purchasers
|
|
2.1
(2)
|
Non-Competition
and Confidentiality Agreement, dated April 13, 2006, between Burlington
Coat Factory Holdings, Inc and Monroe Milstein.
|
|
2.2
(2)
|
Non-Competition
and Confidentiality Agreement, dated April 13, 2006, between Burlington
Coat Factory Holdings, Inc and Andrew Milstein.
|
|
2.3
(2)
2.4
(1)
|
Non-Competition
and Confidentiality Agreement, dated April 13, 2006, between Burlington
Coat Factory Holdings, Inc and Stephen Milstein.
Agreement
and Plan of Merger, dated as of January 18, 2006, by and among Burlington
Coat Factory Warehouse Corporation, BCFWC Acquisition, Inc. and BCFWC
Mergersub, Inc.
|
|
3.1
(1)
|
Certificate
of Incorporation of Burlington Coat Factory Investments Holdings,
Inc.
|
|
3.2
(1)
|
By-laws
of Burlington Coat Factory Investments Holdings, Inc.
|
|
4.1
(2)
|
Senior
Discount Notes Indenture, dated as of April 13, 2006, by and among
Burlington Coat Factory Investments Holdings, Inc. and Wells Fargo Bank,
N.A., as Trustee.
|
|
4.2
(2)
|
Registration
Rights Agreement, dated as of April 13, 2006, by and among Burlington Coat
Factory Investments Holdings, Inc. and the Initial
Purchasers.
|
|
4.3
(2)
|
Form
of 141/2%
Senior Discount Note due 2014 (included in Exhibit
4.1).
|
|
4.4
(1)
4.5
(1)
4.6
(2)
|
Senior
Notes Indenture, dated as of April 13, 2006, by and among Burlington Coat
Factory Warehouse Corporation, the Guarantors party thereto and Wells
Fargo Bank, N.A., as Trustee.
Form
of 11.125% Senior Note due 2014 (included in Exhibit 4.4).
Registration
Rights Agreement, dated as of April 13, 2006, by and among Burlington Coat
Factory Warehouse Corporation party thereto, the Guarantors party thereto
and the Initial Purchasers.
|
|
10.1
(1)
|
Credit
Agreement, dated as of April 13, 2006, among Burlington Coat Factory
Warehouse Corporation, as the Borrower, the Facility Guarantors party
thereto, Bear Stearns Corporate Lending Inc., as Administrative Agent and
as Collateral Agent, the Lenders party thereto, Banc of America Securities
LLC, as Syndication Agent, Wachovia Bank, National Association and
JPMorgan Chase Bank, N.A., as Co-Documentation
Agents.
|
98
|
10.2
(1)
|
Guaranty,
dated as of April 13, 2006, by Burlington Coat Factory Holdings, Inc.,
Burlington Coat Factory Investments Holdings, Inc. and each of the
Facility Guarantors party thereto in favor of Bear Stearns Corporate
Lending Inc., as Administrative Agent and Bear Stearns Corporate Lending
Inc., as Collateral Agent.
|
|
|
10.3
(1)
|
Security
Agreement, dated as of April 13, 2006, by and among Burlington Coat
Factory Warehouse Corporation, as the Borrower, Burlington Coat Factory
Holdings, Inc., Burlington Coat Factory Investments Holdings, Inc., and
each of the Facility Guarantors party thereto, and Bear Stearns Corporate
Lending Inc., as Collateral Agent.
|
|
|
10.4
(1)
|
Intellectual
Property Security Agreement, dated as of April 13, 2006, by and among
Burlington Coat Factory Warehouse Corporation, as the Borrower, Burlington
Coat Factory Holdings, Inc., Burlington Coat Factory Investments Holdings,
Inc., and each of the Facility Guarantors party thereto, and Bear Stearns
Corporate Lending Inc., as Collateral Agent.
|
|
|
10.5
(1)
|
Pledge
Agreement, dated as of April 13, 2006, by and among Burlington Coat
Factory Warehouse Corporation, Burlington Coat Factory Holdings, Inc.,
Burlington Coat Factory Investments Holdings, Inc., Burlington Coat
Factory Realty Corp., Burlington Coat Factory Purchasing, Inc., and
K&T Acquisition Corp., as the Pledgors, and Bear Stearns Corporate
Lending Inc., as Collateral Agent.
|
|
|
10.6
(1)
|
Credit
Agreement, dated as of April 13, 2006 among Burlington Coat Factory
Warehouse Corporation, as Lead Borrower, the Borrowers and the Facility
Guarantors party thereto, and Bank of America, N.A., as Administrative
Agent and as collateral agent, the Lenders party thereto, Bear Stearns
Corporate Lending Inc., as Syndication Agent, and Wachovia Bank, National
Association, The CIT Group/Business Credit, Inc., General Electric Capital
Corporation, JPMorgan Chase Bank, N.A., as Co-Documentation
Agents.
|
|
|
10.7
(1)
|
Revolving
Credit Note, dated as of April 13, 2006, by the Borrowers party thereto in
favor of PNC Bank, National Association.
|
|
|
10.8
(1)
|
Revolving
Credit Note, dated as of April 13, 2006, by the Borrowers party thereto in
favor of Siemens Financial Services, Inc.
|
|
|
10.9
(1)
|
Revolving
Credit Note, dated as of April 13, 2006, by the Borrowers party thereto in
favor of Wells Fargo Retail Finance, LLC.
|
|
|
10.10
(1)
|
Revolving
Credit Note, dated as of April 13, 2006, by the Borrowers party thereto in
favor of National City Business Credit, Inc.
|
|
|
10.11
(1)
|
Revolving
Credit Note, dated as of April 13, 2006, by the Borrowers party thereto in
favor of Citizens Bank of Pennsylvania.
|
|
|
10.12
(1)
|
Revolving
Credit Note, dated as of April 13, 2006, by the Borrowers party thereto in
favor of HSBC Business Credit (USA), Inc.
|
|
|
10.13
(1)
|
Revolving
Credit Note, dated as of April 13, 2006, by the Borrowers party thereto in
favor of Sovereign Bank.
|
|
|
10.14
(1)
|
Revolving
Credit Note, dated as of April 13, 2006, by the Borrowers party thereto in
favor of North Fork Business Capital Corporation.
|
|
|
10.15
(1)
|
Form
of Swingline Note.
|
|
|
10.16
(1)
|
Guaranty,
dated as of April 13, 2006, by the Facility Guarantors party thereto in
favor of Bank of America, N.A., as Administrative Agent and Bank of
America, N.A., as Collateral Agent.
|
|
|
10.17
(1)
|
Security
Agreement, dated as of April 13, 2006, by and among each of the Borrowers
party thereto, each of the Facility Guarantors party thereto, and Bank of
America, N.A., as Collateral Agent.
|
|
|
10.18
(1)
|
Intellectual
Property Security Agreement, dated as of April 13, 2006, by and among each
of the Borrowers party thereto, each of the Facility Guarantors party
thereto, and Bank of America, N.A., as Collateral
Agent.
|
|
|
10.19
(1)
|
Pledge
Agreement, dated as of April 13, 2006, by and between Burlington Coat
Factory Holdings, Inc., Burlington Coat Factory Investments Holdings,
Inc., Burlington Coat Factory Warehouse Corporation, Burlington Coat
Factory Realty Corp., Burlington Coat Factory Purchasing, Inc., K&T
Acquisition Corp., Burlington Coat Factory of New York, LLC, Burlington
Coat Factory Warehouse of Baytown, Inc., Burlington Coat Factory of Texas,
Inc., as the Pledgors, and Bank of America, N.A., as Collateral
Agent.
|
|
|
10.20
* (1)
|
Employment
Agreement, dated as of April 13, 2006, by and between Burlington Coat
Factory Warehouse Corporation and Mark Nesci.
|
|
|
10.21
* (6)
|
Employment
Agreement, dated as of June 1, 2007, by and between Burlington Coat
Factory Warehouse Cororation and Jack E. Moore, Jr.
|
|
|
10.22
* (5)
|
Employment
Agreement, dated as of January 28, 2008, by and between Burlington Coat
Factory Warehouse Corporation and Fred Hand.
|
|
|
10.23*
(4)
|
Employment
Agreement, dated as of August 16, 2007, by and between Burlington Coat
Factory Warehouse Corporation and Todd Weyhrich.
|
|
|
10.23.1
* (8)
|
Amendment
to Employment Agreement, dated as of June 27, 2008, by and between
Burlington Coat Factory Warehouse Corporation and Todd
Weyhrich.
|
|
|
10.24
(1)
|
Advisory
Agreement, dated as of April 13, 2006, by and among Burlington Coat
Factory Holdings, Inc., Burlington Coat Factory Warehouse Corporation and
Bain Capital Partners, LLC.
|
|
|
10.25
* (1)
|
Form
of Restricted Stock Grant Agreement Pursuant to Burlington Coat Factory
Holdings, Inc. 2006 Management Incentive Plan.
|
|
|
10.26
* (1)
|
Form
of Non-Qualified Stock Option Agreement, dated as of April 13, 2006,
between Burlington Coat Factory Holdings, Inc. and Employees without
Employment Agreements.
|
|
|
10.27
* (1)
|
Form
of Non-Qualified Stock Option Agreement, dated as of April 13, 2006,
between Burlington Coat Factory Holdings, Inc. and Employees with
Employment Agreements.
|
|
|
10.28
* (1)
|
Burlington
Coat Factory Holdings, Inc. 2006 Management Incentive
Plan.
|
|
|
10.29
(3)
|
Amendment
to Credit Agreement, dated as of December 12, 2006 among Burlington Coat
Factory Warehouse Corporation, as Lead Borrower, the Borrowers and the
Facility Guarantors party thereto, and Bank of America, N.A., as
Administrative Agent and as collateral agent, the Lenders party thereto,
Bear Stearns Corporate Lending Inc., as Syndication Agent, and Wachovia
Bank, National Association, The CIT Group/Business Credit, Inc., General
Electric Capital Corporation, JPMorgan Chase Bank, N.A., as
Co-Documentation Agents.
|
|
|
10.30
(3)
|
Amendment
to Credit Agreement, dated as of December 12, 2006 among Burlington Coat
Factory Warehouse Corporation, as the Borrower, the Facility Guarantors
party thereto, Bear Stearns Corporate Lending Inc., as Administrative
Agent and as Collateral Agent, the Lenders party thereto, Banc of America
Securities LLC, as Syndication Agent, Wachovia Bank, National Association
and JPMorgan Chase Bank, N.A., as Co-Documentation
Agents.
|
|
|
10.31
(7)
|
Agreement
to Acquire Leases and Lease Properties, dated October 3, 2007, by and
among Burlington Coat
Factory Warehouse Corporation (and certain wholly-owned subsidiaries),
Retail Ventures, Inc. (together with its wholly-owned subsidiaries), Value
City Department Stores LLC, GB Retailers, Inc., and Schottenstein Stores
Corporation (and certain affiliates of SSC).
|
|
|
10.32*
(1)
10.33*
(1)
10.34*
(9)
10.35*
(1)
|
Employment
Agreement, dated as of April 13, 2006, by and between
Burlington Coat Factory Warehouse Corporation and Paul
Tang.
Employment
Agreement, dated as of June 26, 2006, by and between Burlington Coat
Factory Warehouse Corporation and Elizabeth Williams.
Separation
Agreement, dated as of June 1, 2007, by and between Burlington Coat
Factory Warehouse Corporation and Elizabeth Williams.
Employment
Agreement, dated as of August 30, 2006, by and between Burlington Coat
Factory Warehouse Corporation and Thomas Fitzgerald.
|
|
|
10.36*
10.37
10.38
10.39
10.40
10.41
|
Form
of Employment Agreement
Revolving
Credit Note, dated as of December 12, 2006, by the Borrowers party thereto
in favor of Wachovia Bank, National Association.
Supplement
to Pledge Agreement by and among Burlington Coat Factory Warehouse
Corporation, Burlington coat Factory Purchasing, Inc. and Bear Stearns
Corporate Lending Inc., as Collateral Agent.
Joinder
to Loan Documents, dated as of May 27, 2008, by and among Bank of America,
N.A., as Administrative Agent, and the Existing Borrowers, New Borrowers
and Facility Guarantors party thereto.
Supplement
to Pledge Agreement by and among Burlington Coat Factory Warehouse
Corporation, Burlington coat Factory Purchasing, Inc. and Bank of America,
N.A., as Collateral Agent.
Joinder
to Loan Documents, dated as of May 27, 2008, by and among and Bear Stearns
Corporate Lending Inc., as Administrative Agent, Burlington Coat Factory
Warehouse Corporation, and the Existing Facility Guarantors and the New
Facility Guarantors party thereto.
|
|
|
12
|
Statement
re Calculation of Ratio of Earnings to Fixed Charges.
|
|
|
21
|
Subsidiaries
of the Registrant.
|
|
|
31.1
|
Certification
of Principal Executive Officer required by Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
31.2
|
Certification
of Principal Financial Officer required by Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
32.1
|
Certification
of Principal Executive Officer pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
32.2
|
Certification
of Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
(1)
|
Incorporated
by reference to Burlington Coat Factory Warehouse Corporation’s
Registration Statement on Form S-4, No. 333-137916, filed on
October 10, 2006.
|
|
(2)
|
Incorporated
by reference to Registrant’s Registration Statement on Form S-4, No.
333-137917, filed on October 10,
2006.
|
|
(3)
|
Incorporated
by reference to Burlington Coat Factory Warehouse Corporation’s Amendment
No. 2 to Registration Statement on Form S-4, No. 333-137916, filed on
December 29, 2006.
|
|
(4)
|
Incorporated
by reference to our Current Report on Form 8-K filed on August 17,
2007.
|
|
(5)
|
Incorporated
by reference to our Quarterly Report on Form 10-Q for the quarter ended
March 1, 2008 filed on April 15,
2008.
|
|
(6)
|
Incorporated
by reference to our Quarterly Report on Form 10-Q for the quarter ended
September 1, 2007 filed on October 16,
2007.
|
|
(7)
|
Incorporated
by reference to our Current Report on Form 8-K filed on October 9,
2007.
|
|
(8)
|
Incorporated
by reference to our Current Report on Form 8-K filed on June 27,
2008.
|
(9) Incorporated
by reference to our Annual Report on Form 10-K for the fiscal year ended June 2,
2007 filed on August 30, 2007.
|
*
|
Management
Contract or Compensatory Plan or Arrangement.
|
|
(c)
|
Financial
Statement Schedules
|
None.
99
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
BURLINGTON
COAT FACTORY INVESTMENTS HOLDINGS, INC.
|
|
By: /s/ Mark
A. Nesci
|
|
Mark A. Nesci
President
and Chief Executive Officer
|
|
|
Date:
August 29, 2008
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the registrant and in the
capacities indicated on the 29th day of August 2008.
|
Signature
|
|
Title
|
|
|
/s/ Mark A.
Nesci
|
|
President
and Chief Executive Officer and Director (Principal Executive
Officer)
|
|
|
Mark
A. Nesci
|
|||
|
/s/ Todd
Weyhrich
|
|
Executive
Vice President and Chief Financial Officer (Principal Financial
Officer
|
|
|
Todd
Weyhrich
|
and
Principal Accounting Officer)
|
||
|
/s/ Joshua Bekenstein
|
|
Director
|
|
|
Joshua
Bekenstein
|
|||
|
/s/ Jordan Hitch
|
|
Director
|
|
|
Jordan
Hitch
|
|||
|
/s/ John Tudor
|
|
Director
|
|
|
John
Tudor
|
|||
|
/s/
Mark Verdi
|
|||
|
Mark
Verdi
|
Director
|
||
100
EXHIBIT INDEX
|
Exhibit
|
Description
|
|
|
10.36
10.37
10.38
10.39
10.40
10.41
|
Form
of Employment Agreement
Revolving
Credit Note, dated as of December 12, 2006, by the Borrowers
party thereto in favor of Wachovia Bank, National
Association.
Supplement
to Pledge Agreement by and among Burlington Coat Factory Warehouse
Corporation, Burlington coat Factory Purchasing, Inc. and Bear Stearns
Corporate Lending Inc., as Collateral Agent.
Joinder
to Loan Documents, dated as of May 27, 2008, by and among Bank of America,
N.A., as Administrative Agent, and the Existing Borrowers, New Borrowers
and Facility Guarantors party thereto.
Supplement
to Pledge Agreement by and among Burlington Coat Factory Warehouse
Corporation, Burlington coat Factory Purchasing, Inc. and Bank of America,
N.A., as Collateral Agent.
Joinder
to Loan Documents, dated as of May 27, 2008, by and among and Bear Stearns
Corporate Lending Inc., as Administrative Agent, Burlington Coat Factory
Warehouse Corporation, and the Existing Facility Guarantors and the New
Facility Guarantors party thereto.
|
|
|
12
|
Statement
re Calculation of Ratio of Earnings to Fixed Charges.
|
|
|
21
|
Subsidiaries
of the Registrant.
|
|
|
31.1
|
Certification
of Principal Executive Officer required by Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
31.2
|
Certification
of Principal Financial Officer required by Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.1
|
Certification
of Principal Executive Officer pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2
|
Certification
of Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
101