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Burlington Coat Factory Warehouse Corp, et al. · 10-KT · For 4/30/10

Filed On 4/30/10, 4:11pm ET   ·   Accession Number 1368775-10-13   ·   SEC Files 1-08739, 333-137916-110

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  As Of                Filer                Filing    For/On/As Docs:Size              Issuer               Agent

 4/30/10  Burlington Coat Factory War..Corp 10-KT       4/30/10   19:6.1M                                   Burlington Coat Fac..Inc
          Burlington Coat Factory Investments Holdings, Inc.

Annual-Transition Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-KT       Form 10Kt 4-30-10                                   HTML   2.46M 
 3: EX-10.14    Exhibit 10-14 Amended and Restated Credit Agmt      HTML     31K 
                          Capitol One                                            
 4: EX-10.16    Exhibit 10-16 Revolving Credit Note Us Bank         HTML     30K 
 5: EX-10.22    Exhibit 10-22 Confirmation and Amendment Ancillary  HTML    107K 
                          Docs                                                   
 6: EX-10.23    Exhibit 10-23 Abl Post Closing Letter               HTML     47K 
 7: EX-10.24    Exhibit 10-24 Abl Grant of Sec Int in Trademarks    HTML     31K 
                          Boa                                                    
 8: EX-10.25    Exhibit 10-25 Tl Grant of Sec Int Bs                HTML     30K 
 9: EX-10.32    Exhibit 10-32 Joinder to Loan Docs Bcfw of Edge     HTML     55K 
                          Inc                                                    
10: EX-10.33    Exhibit 10-33 Joinder to Loan Docs Bcfw of Edge     HTML     56K 
11: EX-10.34    Exhibit 10-34 Mike Geraghty Emt Agmt                HTML    117K 
12: EX-10.35    Exhibit10-35 Joyce Manning Emt Agmt                 HTML    111K 
13: EX-10.35A   Exhibit 10-35A Joyce Manning Emt Agmt Amendment     HTML     15K 
 2: EX-10.9     Exhibit 10-9 Amended and Restated Credit Agmt       HTML     31K 
                          Wells Fargo                                            
14: EX-12       Exhibit 12 Ratio of Earnings to Fixed Charges       HTML     46K 
15: EX-21       Exhibit 21 Subsidiaries of Registrant               HTML     61K 
16: EX-31.1     Exhibit 31-1 Certification                          HTML     17K 
17: EX-31.2     Exhibit 31-2 Certification                          HTML     17K 
18: EX-32.1     Exhibit 32-1 Certification                          HTML     12K 
19: EX-32.2     Exhibit 32-2 Certification                          HTML     12K 


10-KT   —   Form 10Kt 4-30-10


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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 
 
FORM 10-K/T


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

 
 
For the fiscal year ended ________________
 
OR
 
T
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from May 31, 2009 to January 30, 2010
 
1-37917
(Commission File Number) 
 

 
 
 

BURLINGTON COAT FACTORY INVESTMENTS HOLDINGS, INC.
 (Exact name of registrant as specified in its charter)

 
 
  
   
Delaware
 
20-4663833
(State or Other Jurisdiction
of Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
     
1830 Route 130 North
Burlington, New Jersey
 
08016
(Address of Principal Executive Offices)
 
(Zip Code)
 
(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  T
 
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 T    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 T

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

Indicate by check mark 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/T or any amendment to this Form 10-K/T.  T
 
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   T                                                      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 Act).    Yes ¨    No  T

The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant is zero.  The registrant is a privately held corporation.
 
As of April 30, 2010, 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


 






 
 

 

 



 
 
 
 
 

BURLINGTON COAT FACTORY INVESTMENTS HOLDINGS, INC.
INDEX TO TRANSITION REPORT ON FORM 10-K/T

FOR THE 35 WEEK TRANSITION PERIOD FROM MAY 31, 2009 TO JANUARY 30, 2010

     
   
PAGE
PART I.
   
     
Item 1.
Business
    3
Item 1A.
Risk Factors
    6
Item 1B.
Unresolved Staff Comments
   13
Item 2.
Properties
   13
Item 3.
Legal Proceedings
   14
Item 4.
(Removed and Reserved)
   14
     
PART II.
   
     
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
   15
Item 6.
Selected Financial Data
   15
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
   17
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
   46
Item 8.
Financial Statements and Supplementary Data
   48
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
  102
Item 9A.
Controls and Procedures
  102
Item 9B.
Other Information
  103
     
PART III.
   
     
Item 10.
Directors, Executive Officers and Corporate Governance
  103
Item 11.
Executive Compensation
  106
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  122
Item 13.
Certain Relationships and Related Transactions, and Director Independence
  125
Item 14.
Principal Accounting Fees and Services
  128
     
PART IV.
   
     
Item 15.
Exhibits, Financial Statement Schedules
  129
     
SIGNATURES
  134
    135
   






 
 

 

 



 
 
 
 


 
PART I

Item 1.  Business

Overview

Burlington Coat Factory Investments Holdings, Inc. (the Company or Holdings) owns Burlington Coat Factory Warehouse Corporation (BCFWC), which is a nationally recognized retailer of high-quality, branded apparel at everyday low prices. We opened our first store in Burlington, New Jersey in 1972, selling primarily coats and outerwear. Since then, and as of January 30, 2010, we have expanded our store base to 442 stores in 44 states and Puerto Rico 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 decor and gifts. We employ a hybrid business model, offering the low prices of off-price retailers as well as the branded merchandise and product diversity traditionally associated with department stores.  

As used in this Transition Report, the terms “Company,” “we,” “us,” or “our” refer to Holdings and all its subsidiaries.  Holdings has no operations and its only asset is all of the stock of BCFWC. BCFWC was initially organized in 1972 as a New Jersey corporation.  In 1983, BCFWC was reincorporated in Delaware and currently exists as a Delaware corporation.  Holdings was organized in 2006 (and currently exists) as a Delaware corporation.  BCFWC became a wholly-owned subsidiary of Holdings in connection with our acquisition on April 13, 2006 by affiliates of Bain Capital in a take private transaction (Merger Transaction).

Change in Fiscal Year End

In order to conform to the predominant fiscal calendar used within the retail industry, on February 25, 2010 our Board of Directors approved a change in our fiscal year from a fiscal year comprised of the twelve consecutive fiscal months ending on the Saturday closest to May 31 to a fiscal year comprised of the twelve consecutive fiscal months ending on the Saturday closest to January 31.  This Form 10-K/T is a transition report for the 35 week transition period beginning on May 31, 2009, the day following the end of our 2009 fiscal year, and ended on January 30, 2010 (the Transition Period).  The Company’s last three complete fiscal years prior to the Transition Period ended on May 30, 2009 (Fiscal 2009), May 31, 2008 (Fiscal 2008), and June 2, 2007 (Fiscal 2007), and each of those years contained 52 weeks.

Statements that we make about fiscal year 2010 refer to our first full fiscal year after the Transition Period, which will be the 52 week period commencing on January 31, 2010 and ending January 29, 2011 (Fiscal 2010).

The Stores

As of January 30, 2010, we operated 442 stores under the names: “Burlington Coat Factory Warehouse” (424 stores), “MJM Designer Shoes” (15 stores), “Cohoes Fashions” (two stores), and “Super Baby Depot” (one store). Our store base is geographically diversified with stores located in 44 states and Puerto Rico.  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 everyday low prices.

Burlington Coat Factory Warehouse stores (BCF stores) offer customers a complete line of value-priced apparel, including: ladies sportswear, menswear, coats, and family footwear, as well as baby furniture, accessories, home decor 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 timely to changing market conditions and consumer fashion preferences. Furthermore, we believe BCF’s substantial selection of staple, destination products such as coats and products in our Baby Depot departments, as well as men’s and boys’ suits, attracts customers from beyond our local trade areas.  These products drive incremental store-traffic and differentiate us from our competitors.  Over 98% of our net sales are derived from our BCF 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.
 
In some of our stores, we grant unaffiliated third parties the right to use designated store space solely for the purpose of selling such third parties’ goods, including items such as lingerie, fragrances, and jewelry (Leased Departments).  During the Transition Period, our rental income from all such arrangements aggregated less than 1% of our total revenues.  We do not own or have any rights to any trademarks, licenses or other intellectual property used in connection with the brands sold by such unaffiliated third parties.



 
 

 

3



 
 
 
 

Store Expansion
 
Since 1972 when our first store was opened in Burlington, New Jersey, we have expanded to 424 BCF stores, two Cohoes Fashions stores, 15 MJM Designer Shoes stores, and one stand-alone Super Baby Depot store.
 
We believe the size of our typical BCF store represents 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 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 January 30, 2010, we operated stores in 44 states and Puerto Rico, 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 January 30, 2010, we owned the land and/or buildings for 41 of our 442 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.
 
Our current lease model generally provides for a ten year initial term with a number of five year options thereafter.  Typically, our lease strategy includes landlord allowances for leasehold improvements and tenant fixtures.  We believe our lease model keeps us competitive with other retailers for desirable locations.

We have a proven track record of new store expansion. Our store base has grown from 13 stores in 1980 to 442 stores as of January 30, 2010.   Assuming that appropriate locations are identified, we believe that we will be able to execute our growth strategy without significantly impacting our current stores.  The table below shows our store openings and closings since the beginning of the Company’s fiscal year ended May 28, 2005.
 

Fiscal Year
(except for the Transition Period)
 
2005
   
2006
   
2007
   
2008
   
2009
   
Transition Period
 
Stores (Beginning of Period)
   
349
     
362
     
368
     
379
     
397
     
433
 
Stores Opened
   
16
     
12
     
19
     
20
     
37
     
9
 
Stores Closed
   
(3
)
   
(6
)
   
(8
)
   
(2
)
   
(1
)
   
0
 
                                                 
Stores (End of Period)
   
362
     
368
     
379
*
   
397
     
433
     
442
 
                                                 
* Inclusive of three stores that closed because of hurricane damage, which reopened in 2007.
 
 

Distribution
 
We have three distribution centers that ship approximately 82% of merchandise units to our stores.  The remaining 18% of merchandise units are drop shipped.  The three distribution centers occupy an aggregate of 1,490,000 square feet and each includes processing and storage capacity.  Our two primary distribution centers are currently located in Edgewater Park, New Jersey and San Bernardino, California.  Our third distribution center, located in Burlington, New Jersey, is currently being consolidated into our distribution center in Edgewater Park, New Jersey.




 

4



 
We are in the process of transitioning to a new warehouse management system in our distribution network as well as updating our material handling systems.  These updates were implemented in our Edgewater Park, New Jersey facility and allowed us to consolidate our former Bristol, Pennsylvania facility into the Edgewater Park, New Jersey facility during the fourth quarter of Fiscal 2009.  Our lease at the Bristol, Pennsylvania location expired in July of 2009.  Additionally, as noted above, we are in the process of consolidating our Burlington, New Jersey facility into the Edgewater Park, New Jersey facility.  We own the distribution center at the Burlington, New Jersey location and we are evaluating various alternatives to determine the best use for the facility following its consolidation into the Edgewater Park, New Jersey facility.  As part of our process to close this distribution center, we accelerated depreciation related to the assets of this facility.  Our distribution center network leverages automated sorting units to process and ship product to our 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.


Location
Calendar Year Operational
 
Size (sq. feet)
 
Leased or Owned
Burlington, New Jersey
1987
   
402,000
 
Owned
Edgewater Park, New Jersey
2004
   
648,000
 
Owned
San Bernardino, California
2006
   
440,000
 
Leased
             

Customer Demographic
 
Our core customer is the 25–49 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 $60,000.  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 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.

We have empowered our store teams to provide an outstanding customer experience for every customer in every store, every day.  We have streamlined processes and will continue to strive to create opportunities for fast and effective customer interactions.  Our stores must reflect clean, organized merchandise presentations that highlight the brands, value, and diversity of our selection within our assortments.  Through proper staffing flexibility, we provide sale floor coverage during peak shopping hours to better serve the customer on the sales floor and at the check-out.

Marketing and Advertising

We use a variety of broad-based and targeted marketing and advertising strategies to efficiently deliver the right message to the targeted audience at the right time.  These strategies include national television and local radio advertising, direct mail, email marketing and targeted digital and magazine advertisements.  Broadcast communication and reach is balanced with relevant customer contacts to increase frequency of store visits.

Employees
 
As of January 30, 2010, we employed 27,620 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 January 30, 2010, employees at two of our stores were subject to collective bargaining agreements.

Commencing in Fiscal 2009 and continuing through the Transition Period, we executed the implementation of several initiatives, including some that resulted in the elimination of certain positions and the restructuring of certain other jobs and functions, in light of the current challenging economic and retail sales environments.  These efforts resulted in the reduction of our workforce in our corporate office and stores by more than 2,300 positions, or less than 10% of our total workforce.

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.

 



 
 

 

5



 
 
 
 

 
Merchandise Vendors
 
We purchase merchandise from many suppliers, none of which accounted for more than 3% of our net purchases during the Transition Period. 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 our clothing. 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 provide to any person, upon request, copies of our Transition Report on Form 10-K/T, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC).  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.

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 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 (U.S.) 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.
 
 



 
 

 

6



 
 
 
 
 
 
    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 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 current retail environment, 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 91% 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 alternative 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 alternative 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 the five-month period from September through January. 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.
 
 



 
 

 

7



 
 
 
 
 
Fluctuations in comparative store sales and results of operations could cause our business performance to decline substantially.
 
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, 2005, 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; 
 

•  
calendar shifts of holiday or seasonal periods;
 

•  
the effectiveness of our inventory management;
 

•  
changes in our merchandise mix;
 

•  
weather conditions;
 

•  
availability of suitable real estate locations at desirable prices and our ability to locate them; 
 

•  
our ability to effectively manage pricing and markdowns;
 

•  
changes in general economic conditions and consumer spending patterns;
 

•  
our ability to anticipate, understand and meet consumer trends and preferences;
 

•  
actions of competitors; and
 

•  
the attractiveness of our inventory and stores to customers.
 
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 severely damage or destroy one or more of our stores or facilities located in the affected areas, thereby disrupting our business operations. 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.
 
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 resulting in intense competition among retailers to obtain and sell these goods. 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
 
Increases in energy costs may result in an increase in our transportation costs for distribution, utility costs for our stores and costs to purchase our products from suppliers. A sustained 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.
 
 
 



 
 

 

8



 
 
 
 
 
    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. Our financial condition and operations could be impacted by changes in government regulations such as taxes, healthcare reform, and other areas.  The outbreak or escalation of war, or the occurrence of terrorist acts or other hostilities in or affecting the U.S., could lead to a decrease in spending by consumers.
 
The financial crisis which began in 2008, combined with already weakened economic conditions due to high energy costs, deterioration of the mortgage lending market and rising costs of food, has led to a global recession affecting all industries and businesses.  The resultant loss of jobs and decrease in consumer spending has caused businesses to reduce spending and scale down their profit and performance projections.  More specifically, these conditions have led to unprecedented promotional activity among retailers.  In order to increase traffic and drive consumer spending during the current economic crisis, competitors, including department stores, mass merchants and specialty apparel stores, have been offering brand-name merchandise at substantial markdowns.   If we are unable to continue to positively differentiate ourselves from our competitors, our results of operations could be adversely affected.
 
Parties with whom we do business may be subject to insolvency risks which could negatively impact our liquidity.
 
Many economic and other factors are outside of our control, including but not limited to commercial credit availability. Also affected are our vendors who, in many cases depend upon commercial credit to finance their operations.  If they are unable to secure commercial financing, our vendors could seek to change the terms on which they sell to us, which could negatively affect our liquidity. In addition, the inability of vendors to access liquidity, or the insolvency of vendors, could lead to their failure to deliver merchandise to us.
 
 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, swine 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.





 
 

 

9



 
 
 
 
 
 

    Our business would be disrupted severely if either of our primary distribution centers were to shut down.
 
During the Transition Period, central distribution services were extended to approximately 82% of our merchandise units through our distribution facilities.  Our two primary distribution centers are currently located in Edgewater Park, New Jersey and San Bernardino, California.  Our third distribution center, located in Burlington, New Jersey, is currently being consolidated into our distribution center in Edgewater Park, New Jersey.  Most of the merchandise we purchase is shipped directly to our distribution centers, where it is prepared for shipment to the appropriate stores. If either of our current primary distribution centers 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 suppliers via drop shipment, we would incur significantly higher costs and a reduced ability to control inventory levels during the time it takes for us to reopen or replace either of the distribution centers.  
 
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, 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 Burlington, New Jersey headquarters.  If a disaster impacts either location, while it most likely would not fully incapacitate us, our operations could be significantly affected. The failure of our information systems to perform as designed could disrupt our business and harm sales and profitability.
 
Changes in product safety laws may adversely impact our operations.
 
We are subject to regulations by a variety of state and federal regulatory authorities, including the Consumer Product Safety Commission.  The Consumer Product Safety Improvement Act of 2008 (CPSIA) imposes new limitations on the permissible amounts of lead and phthalates allowed in children’s products. These regulations relate principally to product labeling, licensing requirements, flammability testing, and product safety particularly with respect to products used by children.  In the event that we are unable to timely comply with regulatory changes, including those pursuant to the CPSIA, significant fines or penalties could result, and could adversely affect our operations.
 
 



 
 

 

10



 
 
 
 
 
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 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.  Additionally, some of our competitors may have substantially larger marketing budgets, which may provide them with a competitive advantage. 
 
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.
 
As of January 30, 2010, funds associated with Bain Capital own approximately 97.4% of the common stock of Burlington Coat Factory Holdings, Inc. (Parent), with the remainder held by existing members of management. Additionally, management held options to purchase 8.9% of the outstanding shares of Parent’s common stock as of January 30, 2010.  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 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 Related Stockholder Matters, and Item 13, Certain Relationships and Related Transactions, and Director Independence.
 
Changes in legal and accounting rules and regulations may adversely affect our results of operations.
 
We are subject to numerous legal and accounting requirements.  New accounting rules or regulations and varying interpretations of existing accounting rules or regulations have occurred and may occur in the future. Future changes to accounting rules or regulations and failure to comply with laws and regulations could adversely affect our operations and financial results, involve significant expense and divert management’s attention and resources from other matters, which in turn could impact our business.
 
 



 
 

 

11



 
 
 
 
 
Risk Factors Related to Our Substantial Indebtedness
 
Our substantial indebtedness requires 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 January 30, 2010, our total indebtedness was $1,413.4 million, including $301.3 million of 11.1% senior notes due 2014, $99.3 million of 14.5% senior discount notes due 2014, $864.8 million under our Senior Secured Term Loan Facility (Term Loan), and $121.2 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 $85.0 million for the fiscal year ending January 29, 2011, inclusive of minimum interest payments related to 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 successfully carryout any of these actions on a timely basis, on commercially reasonable terms or at all, or be assured 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 affecting 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 indentures 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 indentures 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;
 

 
make certain capital expenditures;
 

 
make certain investments or other restricted payments;
 

 
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.
 
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.
 
 



 
 

 

12



 
 
 
 

Our failure to comply with the restrictive covenants described above, as well as others that may be contained in the indentures governing our senior notes and the credit agreements governing our senior secured credit facilities, 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 unable to refinance these borrowings or 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

Not applicable.

Item 2.     Properties

As of January 30, 2010, we operated 442 stores in 44 states throughout the U.S. and Puerto Rico.  We own the land and/or building for 41 of our stores and lease the other 401 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 distribution facility. We are currently in the process of consolidating our distribution activities previously handled by the Burlington, New Jersey location to our location in Edgewater Park, New Jersey.  As part of our process to close this distribution center, we accelerated depreciation related to the assets of this facility.  We own approximately 43 acres of land in Edgewater Park, New Jersey on which we have constructed a distribution center and office facility of approximately 648,000 square feet. We lease an additional 440,000 square foot distribution facility in San Bernardino, California.  We lease approximately 20,000 square feet of office space in New York City.

The following table identifies the years in which store leases, existing at January 30, 2010, expire, exclusive of distribution and corporate leased location, 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
 
 
2010-2011
     
11
     
34
 
 
2012-2013
     
5
     
83
 
 
2014-2015
     
13
     
117
 
 
2016-2017
     
2
     
46
 
 
2018-2019
     
4
     
62
 
Thereafter to 2038
     
14
     
21
 
Total
     
49
     
363
 

 



 
 

 

13



 
 
 
 
 

Item 3.                      Legal Proceedings

A putative class action lawsuit, entitled May Vang, and all others similarly situated, v. Burlington Coat Factory Warehouse Corporation, Case No. 09-CV-08061-CAS, was filed in the Superior Court of the State of California on September 17, 2009.  The named plaintiff purports to assert claims on behalf of all current, former, and future employees in the United States and the State of California for the relevant statutory time period.  Plaintiff filed an amended complaint on November 16, 2009.  The amended complaint asserts claims for failure to pay all earned hourly wages in violation of the Fair Labor Standards Act (FLSA), failure to pay all earned hourly wages in violation of the California Labor Code, providing compensatory time off in lieu of overtime pay, forfeiture of vacation pay, failure to provide meal and rest periods, secret payment of lower wages than that required by statute or contract, failure to provide accurate, written wage statements, and unfair competition.  The complaint seeks certification as a class with respect to the FLSA claims, certification of a class with respect to California law claims, appointment of class counsel and class representative, civil penalties, statutory penalties, declaratory relief, injunctive relief, actual damages, liquidated damages, restitution, pre-judgment interest, costs of suit and attorney’s fees.  We intend to vigorously defend this action.

    A collective action, entitled Gail Jackson, on her own behalf and other similarly situated, v. Burlington Coat Factory Direct Corp., Burlington Coat Factory Warehouse Corp. and XYZ entities 1-100, Case No. 10-60110-ASG, was filed in the United States District Court for the Southern District of Florida on January 22, 2010.  The named plaintiff, a former department manager, is seeking overtime compensation and other relief pursuant to the FLSA.  Moreover, the named plaintiff claims that she performed work involving job duties that were primarily nonexempt in nature and is seeking overtime compensation, liquidated damages, costs and reasonable attorney’s fees on behalf of all similarly situated employees in the United States.  We intend to vigorously defend this action.
 
Except with respect to the litigation discussed above, no material legal proceedings have commenced or been terminated during the period covered by this report.  We are party to various other 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.      (Removed and Reserved)






 
 

 

14



 


 
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.  Parent is the only holder of record of our common stock and 97.4% 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 $0.2 million, $3.0 million, and $0.7 million were paid during the Transition Period, Fiscal 2009, and Fiscal 2008, 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 Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, each of which are included elsewhere in this Form 10-K/T.  The historical financial data for the Transition Period, the fiscal years ended May 30, 2009, 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 the fiscal year ended May 28, 2005 have been derived from our historical audited 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 following the Merger Transaction, April 13, 2006 to June 3, 2006.  The financial data provided refers to our operations and that of our subsidiaries for both the Predecessor and Successor periods.
 


 

 
(in millions)
 
 
Successor
 
Period from 4/13/06 to 6/3/06
 
Twelve Months Ended 6/2/07
 
Twelve Months Ended 5/31/08
 
Twelve Months Ended 5/30/09
 
Transition Period from 5/31/09 to 1/30/10
 
Revenues from Continuing Operations
$
425.2
 
$
3,441.6
 
$
3,424.0
 
$
3,571.4
 
$
2,479.3
 
                               
(Loss) Income from Continuing Operations, Net of (Benefit) Provision for Income Taxes
 
(27.2)
(2)
 
(47.2)
(2)
 
(49.0)
(2)
 
(191.6)
(2)
 
18.7
(2)
                               
Discontinued Operations, Net of Tax  
     Benefit (3)
 
-
   
-
   
-
   
-
   
-
 
                               
Net (Loss) Income
 
(27.2)
   
(47.2)
(2)
 
(49.0)
(2)
 
(191.6)
(2)
 
18.7
(2)
                               
Total Comprehensive (Loss) Income
 
(27.2)
   
(47.2)
   
(49.0)
   
(191.6)
   
18.7
 
                               
Balance Sheet Data
 
As of 6/3/06
   
As of 6/2/07
   
As of 5/31/08
   
As of 5/30/09
   
As of 1/30/10
 
                               
Total Assets
$
3,213.5
 
$
3,036.5
 
$
2,964.5
 
$
2,533.4
 
$
2,394.0
 
                               
Working Capital
 
219.3
   
280.6
   
284.4
   
312.3
   
349.7
 
                               
Long-Term Debt
 
1,508.1
   
1,456.3
   
1,480.2
   
1,438.8
   
1,399.2
 
                               
Stockholder’s Equity
 
419.5
   
380.5
   
323.5
   
135.1
   
154.5
 
                               
 


 



 

15



 

     
(in millions)
 
     
Predecessor
 
     
Twelve Months
Ended 5/28/05
   
Period from
5/29/05 to 4/12/06
 
Revenues from Continuing Operations
    $ 3,199.8           $ 3,045.3  
                         
Income from Continuing Operations, Net of Provision for
    Income Tax
      106.0             94.3  
                         
Discontinued Operations, Net of Tax Benefit (3)
      (1.0 )    (3)         -  
                           
Net Income
      105.0               94.3  
                           
Total Comprehensive Income
      105.0               94.3  
                           
Balance Sheet Data
   
As of 5/28/05
           
As of 4/12/06
 
                           
Total Assets
      1,673.3               (1)  
                           
Working Capital
      392.3               (1)  
                           
Long-term Debt
      132.3               (1)  
                           
Stockholder’s Equity
      926.2               (1)  
                           
Notes:
 
 
 
  (1)  Information not required for interim period.
 
(2)
Net Loss during Fiscal 2007, Fiscal 2008, and Fiscal 2009 reflect impairment charges of $24.4 million, $25.3 million, and $332.0 million, respectively.  Net Income for the Transition Period reflects impairment charges of $46.8 million. The impairment charges in Fiscal 2007, Fiscal 2008 and the Transition Period relate entirely to our long-lived assets while the impairment charge in Fiscal 2009 relate to both our tradenames and our long-lived assets (refer to Note 8 entitled “Intangible Assets” and Note 10 entitled “Impairment of Long-Lived Assets” to our Consolidated Financial Statements for further discussion regarding our impairment charges).
 
 
(3)
Discontinued operations include the after-tax operations of stores closed by us during the fiscal years listed.
     


 



 

16



 

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. Except for the 35 week transition period ended January 30, 2010, we maintain our records on the basis of a 52 or 53 week fiscal year ending on the Saturday closest to January 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 under the caption entitled “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 Item 1A, Risk Factors and elsewhere in this report.
 
Change in Fiscal Year

In order to conform to the predominant fiscal calendar used within the retail industry, on February 25, 2010 our Board of Directors approved a change in our fiscal year from a fiscal year comprised of the twelve consecutive fiscal months ending on the Saturday closest to May 31 to a fiscal year comprised of the twelve consecutive fiscal months ending on the Saturday closest to January 31.  This Form 10-K/T is a transition report for the 35 week transition period beginning on May 31, 2009, the day following the end of our 2009 fiscal year, and ended on January 30, 2010 (the Transition Period).  Fiscal 2009 ended on May 30, 2009 and was a 52 week year.  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.

Statements that we make about fiscal year 2010 refer to our first full fiscal year after the Transition Period, which will be the 52 week period commencing on January 31, 2010 and ending January 29, 2011 (Fiscal 2010).

General
 
We are a nationally recognized retailer of high-quality, branded apparel at everyday 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 442 stores in 44 states and Puerto Rico, 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 decor and gifts. We employ a hybrid business model which enables us to offer the low prices of off-price retailers and the branded merchandise and product diversity of department stores. We acquire desirable, first-quality, current-brand, labeled merchandise directly from nationally-recognized manufacturers.
 
As of January 30, 2010, we operated 442 stores under the names “Burlington Coat Factory Warehouse” (424 stores), “MJM Designer Shoes” (15 stores), “Cohoes Fashions” (two stores), and “Super Baby Depot” (one store) in 44 states and Puerto Rico.  For the Transition Period, we generated total revenues of approximately $2,479.3 million.
 
Executive Summary 
 
Overview of 35 Week Transition Period Ended January 30, 2010 Operating Results
 
We experienced a decrease in net sales for the 35 weeks ended January 30, 2010 compared with the 35 weeks ended January 31, 2009.  Consolidated net sales decreased $19.0 million, or 0.8%, to $2,457.6 million  for the 35 weeks ended January 30, 2010 from $2,476.6 million  for the 35 weeks ended January 31, 2009.  This decrease was attributable to:


·  
a comparative store sales decrease of $114.2 million, or 4.8%, to $2,263.2 million,

·  
a decrease in barter sales of $10.8 million, and

·  
a decrease in net sales of $2.5 million from stores closed since the comparable period in Fiscal 2009, partially offset by;

·  
an increase in net sales of $63.2 million for stores previously opened that are not included in our comparative store sales,

·  
an increase in net sales of $34.1 million related to nine new stores opened during the Transition Period, and

·  
an increase in layaway and other sales of $10.8 million.

We believe the comparative store sales decrease was primarily due to weather conditions.  November of 2009 was the warmest November in the last eight years.  Also contributing to our decrease in comparative store sales was weakened consumer demand as a result of the contraction of credit available to consumers and the overall challenging retail conditions.

Gross margin as a percentage of net sales increased from 39.0% during the 35 weeks ended January 31, 2009 to 39.3% during the Transition Period.  The improvement in gross margin as a percentage of net sales is due to fewer markdowns during the 35 weeks ended January 30, 2010 compared with the 35 weeks ended January 31, 2009.  This improvement in gross margin as a percentage of net sales is almost entirely offset by increased shrink during the 35 weeks ended January 30, 2010 compared with the 35 weeks ended January 31, 2009.



 
 

 

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Selling and administrative expenses as a percentage of net sales increased from 30.7% during the 35 weeks ended January 31, 2009 to 30.9% during the Transition Period.  Total selling and administrative expenses decreased $1.3 million from $761.1 million during the 35 weeks ended January 31, 2009 to $759.8 million, which includes the opening of nine new stores during the Transition Period.  The decrease in selling and administrative expenses during the Transition Period was due to various initiatives that reduced store payroll, maximized supply chain efficiencies and reduced our overall headcount by approximately 2,300 positions, or slightly less than 10% of the total workforce.  The increase in selling and administrative expenses as a percentage of net sales during the Transition Period compared with the 35 weeks ended January 31, 2009 is due to the decrease in comparative store net sales.
 
We recorded net income of $18.7 million for the 35 weeks ended January 30, 2010 compared with a net loss of $155.6 million for the 35 weeks ended January 31, 2009.  The loss recorded during the 35 weeks ended January 31, 2009 was primarily the result of impairment charges recorded during the period.  The results of the Transition Period do not purport to be indicative of the results in the future or for the 52 weeks ending May 31, 2010 had the Company not changed its fiscal year.
 
Store Openings, Closings, and Relocations.

 During the Transition Period, we opened nine new Burlington Coat Factory Warehouse stores (BCF stores).  Two of those new store openings were in locations within the same trading markets as two existing stores.  The existing stores remained open through January 30, 2010 in order to liquidate merchandise and cease operations.  Those stores are expected to close during the first six months of Fiscal 2010.  As of January 30, 2010, we operated 442 stores under the names "Burlington Coat Factory Warehouse" (424 stores), "Cohoes Fashions" (two stores), "MJM Designer Shoes" (15 stores) and "Super Baby Depot" (one store).  

We continue to pursue our growth plans and invest in capital projects that meet our required financial hurdles. During Fiscal 2010, we plan to open between 15 and 23 new stores (exclusive of two relocations).
 
Ongoing Initiatives for Fiscal 2010

 We continue to focus on a number of ongoing initiatives aimed at increasing our overall profitability by improving our comparative store sales trends and reducing expenses.  These initiatives include, but are not limited to:
 

·  
Improving comparative store sales:


·  
Enhancing our merchandise content.  We are focused on our core female customer who shops for herself and her family. We are working toward building assortments that better address her needs – trend right, desirable brands at great everyday low prices. We plan on delivering exceptional values that fit within a good, better, and best pricing strategy. By maximizing our in-season buys, we believe that we are able to take advantage of known trends and in-season buying opportunities.


·  
Refining our store experience through the eyes of the customer.  We have empowered our store teams to provide an outstanding customer experience for every customer in every store, every day. We have, and will continue to strive, to streamline processes to create opportunities for fast and effective customer interactions. Our stores must reflect clean, organized merchandise presentations that highlight the brands, value and diversity of our selection within our assortments. Through proper staffing flexibility we provide sales floor coverage during peak shopping hours to better serve the customer on the sales floor and at the check-out.

We plan to execute these initiatives during Fiscal 2010 by:


·  
Continuing to allocate incremental payroll to stores for such things as additional early morning recovery and overnight stocking crews to ensure goods are moved quickly from the store docks to the selling floor.


·  
Continuing the implementation of a chain wide store housekeeping initiative to ensure our stores reflect clean organized merchandise presentation and are easier and more comfortable to shop.


·  
Continuing the implementation of a store refresh program with respect to stores that we have identified as having certain needs such as new carpet, painting, fitting room improvements and various other improvements.  We expect to complete the refresh program with respect to the original 25 stores selected by the end of May 2010.  We are in the process of identifying additional stores to refresh through the end of Fiscal 2010.



 
 

 

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·  
Continuing the implementation of upgraded lighting retrofits in our stores which will make the stores more energy efficient while improving the lighting within the stores, making it easier for customers to navigate the stores.  With respect to the original 70 stores initially identified for lighting retrofits, 60 of those lighting retrofits have been completed with the remaining lighting retrofits expected to be completed by the end of May 2010.  We are in the process of identifying additional stores to upgrade the lighting retrofits through the end of Fiscal 2010.


·  
Continuing the implementation of a new signing program in all our stores that will make them easier to navigate and shop.  This program is still in the early stages of development.  To date, the new signage has been installed, and is being tested, at three stores and we are planning to install the new signage at all additional new stores planned to be opened during Fiscal 2010.


·  
Keeping inventory fresh through improved receipt management. This initiative is targeted to ensure that we have the right goods, in the right store, at the right time. We are working to better develop and tailor assortments regionally to address seasonal and lifestyle differences.  We are continuing to refine our processes supporting consistent merchandise flow by continuing to better align receipts with sales. In addition, we believe we can improve receipt management by incorporating flow, inventory turnover, and exit strategies for fashion and seasonal product into the day-to-day business process.


·  
The continued reduction of our cost structure:


o  
Reduce store payroll costs. We introduced a new store management model during the beginning of the 2009 calendar year. This new model was designed to provide more consistent management coverage by sales volume.  Also during the beginning of the 2009 calendar year, we began to allocate payroll to our stores based primarily on an expected sales per labor hour metric.  Finally, we began to closely monitor new hire wage rates to ensure that new hires commenced employment at rates commensurate with their experience. These actions have allowed us to operate our business more efficiently without sacrificing our ability to serve our customers.  We intend to continue to refine our processes regarding payroll management during Fiscal 2010.


o  
Supply chain efficiencies.  We continue to work on several logistics initiatives which we expect will result in reduced logistics cost and improved service levels.  We are in the process of consolidating our Burlington, New Jersey distribution center into our Edgewater Park, NJ distribution center and implementing a new warehouse management system within the Edgewater Park, NJ and San Bernardino, CA distribution centers which will allow for further improvements in productivity by providing functionality not currently available and will allow flexibility in processing any goods received at either of the two facilities.  In turn, as both facilities will be able to process all receipts in an efficient manner, we expect to be able to reduce the amount of transportation miles required to service our stores.  Lastly, we have implemented a performance management program designed to drive productivity improvements within the four walls of our distribution centers.  We intend to re-invest a portion of these logistics savings in policies and procedures intended to improve efficiencies at the store level.

 

·  
Deliver Consistent Gross Margin.  We continue to focus on having stable gross margin as a percentage of net sales.
 
     We plan to execute this initiative during Fiscal 2010 by:
 

o  
Continuing to manage our receipt to reduction ratio.  By matching receipt dollars to sales and markdown dollars we will continue to be able to take advantage of in season buying opportunities and to capitalize on those businesses that are trending well.
 

o  
Continuing to ensure adequate open to buy and buying more opportunistically in season.  By staying liquid, we put ourselves in a position to be able to take advantage of opportunistic in-season buys that will maximize our sales.
 

o  
Continuing to improve the amount of current inventory as a percentage of our total inventory.  By having more current inventory in our merchandise mix, we will take fewer markdowns, and have more pricing flexibility to provide great value to our customers without reducing our overall margins.
 

o  
Reducing our shrink as a percentage of net sales.  We are adding additional resources to help improve existing controls and processes to reduce our shrink as a percentage of net sales without impacting the store experience.  We expect results to occur over time with most of these shrink reductions becoming apparent in the fiscal year ended January 28, 2012.
 

 



 
 

 

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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 spending, 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.

General Economic Conditions.   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.  During Fiscal 2009 and continuing into the Transition Period, there was significant deterioration in the global financial markets and economic environment, which we believe continues to negatively impact consumer spending at many retailers, including us. In response to the ongoing economic crisis, we continue to take steps to increase opportunities to profitably drive sales and to curtail operating expenses where prudent.  Where appropriate, we have reinvested some of these savings back into our business and store experience.

We closely monitor our net sales, gross margin, expenses and working capital.  We have performed scenario planning such that if our net sales decline, we have identified variable costs that could be reduced to partially mitigate the impact of these declines.  If adverse economic trends continue to deteriorate, or if our efforts to counteract the impacts of these trends are not sufficiently effective, there could be a negative impact on our financial performance and position in future fiscal periods.  For further discussion of the risks to us regarding general economic conditions, please refer to the section below entitled “Liquidity and Capital Resources” and Item 1A, Risk Factors.

Competition 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.
 
The U.S retail industry continues to face increased pressure on margins as the overall challenging retail conditions have led consumers to be more value conscious.  The weak retail environment helped to offset this pressure with a plentiful supply of goods in the market which created downward pricing pressure for wholesale purchases.
 
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 through 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.
 
 



 

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Key Performance Measures
 
We consider numerous factors in assessing our performance. Key performance measures used by management include comparative store sales, gross margin and inventory levels, receipt-to-reduction ratio, 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.  The method of calculating comparative store sales varies across the retail industry.  As a result, our definition of comparative store sales may differ from other retailers.  
 
During the two months ended January 30, 2010, we changed our definition of comparative store sales.  We now define comparative store sales as sales of those stores commencing on the first day of the fiscal month one year after the end of their grand opening activities, which normally conclude within the first two months of operations.  Previously, we defined comparative store sales as sales of those stores (net of sales discounts) following their four hundred and twenty-fifth day of operation (approximately one year and two months).  This change aligns our external reporting of comparative store sales with how the metric is reviewed internally by senior management.  The table below depicts our comparative store sales under both the current and previous definitions for the Transition Period, Fiscal 2009, and Fiscal 2008.   
 
 
 
Current Definition
 
Previous Definition
Transition Period Ended
(4.8.8)%
 
(5.0)%
Fiscal 2009
(2.5.5)%
 
(2.5)%
Fiscal 2008
(5.1.1)%
 
(5.2)%
 
 
    Comparative store sales which were reported under the previous definition of comparative store sales for the three months ended August 29, 2009 and November 28, 2009 were not materially different than those that would have been reported under the current definition of comparative store sales.
 
Various factors affect comparative store sales, including, but not limited to, current economic conditions, weather conditions, the timing of our releases of new merchandise and promotional events, the general retail sales environment, consumer preferences and buying trends, changes in sales mix among distribution channels, competition, and the success of marketing programs.  While any and all of these factors can impact comparative store sales, we believe that the decrease in comparative store sales during the Transition Period was driven by weather conditions and weakened customer demand.  The decrease in comparative store sales during Fiscal 2009 was primarily attributable to weakened consumer demand as a result of the overall challenging retail conditions.  The decrease in comparative store sales during Fiscal 2008 was due to a combination of unfavorable weather, weakened consumer demand, and temporarily low or out of stock issues in certain limited divisions.
  
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.  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 certain of these costs in the "Selling and Administrative Expenses" and "Depreciation and Amortization" line items in our Consolidated Statements of Operations and Comprehensive Income (Loss).  We include in our "Cost of Sales" line item all costs of merchandise (net of purchase discounts and certain vendor allowances), inbound freight, distribution center outbound freight and certain merchandise acquisition costs, primarily commissions and import fees.  Gross margin as a percentage of net sales increased from 39.0% during the 35 weeks ended January 31, 2009 to 39.3% during the Transition Period.

Inventory Levels.   Inventory at January 30, 2010 was $613.3 million compared with $641.8 million at May 30, 2009.  The decrease of $28.5 million was due to the seasonality of our business combined with our ongoing initiatives to enhance our supply chain efficiencies and our merchandise content.  These factors resulted in a decrease of average inventory at January 30, 2010 of approximately 6.4% to $1.4 million per store compared with the average store inventory of $1.5 million at May 30, 2009.

Inventory at January 30, 2010 decreased $81.7 million from $695.0 million at January 31, 2009.  This decrease was the result of our initiatives to enhance our supply chain efficiencies and our merchandise content.  Average store inventory at January 30, 2010 decreased approximately 14.8% to $1.4 million per store compared with average store inventory of $1.6 million at January 31, 2009.

In order to better serve our customers, and maximize sales, we continue to refine our merchandising mix and inventory levels within our stores.  Our efforts to date have resulted in a 14.8% reduction in average store inventory at January 30, 2010 compared with January 31, 2009.  By managing our inventories conservatively we believe we will be better able to deliver a continual flow of fresh merchandise to our customers.  We continue to move toward more productive inventories by increasing the amount of current inventory as a percent of total inventory.
 



 

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Receipt-to-Reduction Ratio.   We are in the process of refining a more consistent merchandise flow based on a receipt-to-reduction ratio.  In other words, we are attempting to match forecasted levels of receipts to forecasted sales on a monthly basis.  We believe this will result in a more normalized receipt cadence to support sales and will ultimately lead to an improved inventory turnover ratio.

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 retail sales before sales discounts by the average retail value of the inventory for the period being measured.  Our annualized inventory turnover rate for the Transition Period has increased from 2.4 turns per year at May 30, 2009 to 2.7 turns per year at January 30, 2010.  The inventory turnover calculation is based on a rolling 13 month average of inventory and the last 12 months sales.  We expect inventory turnover to increase in Fiscal 2010.
 
Liquidity.  Liquidity measures our ability to generate cash.  Management measures liquidity through cash flow and working capital position.  Cash flow is the measure of cash generated from operating, financing, and investing activities.  We experienced a decrease in cash flow of $2.7 million during the Transition Period compared with the 35 weeks ended January 31, 2009 due to accelerated payments of $274.8 million as part of the Company’s working capital management strategy implemented at the end of the Transition Period.  The acceleration of payments decreased cash flow from operating activities related to the Company’s accounts payable from January 31, 2009 to January 30, 2010; which was almost entirely offset by decreased uses of cash in investing and financing activities.  The decrease in cash used in investing activities was primarily due to decreased capital expenditures as a result of fewer store openings during the Transition Period compared with the 35 weeks ended January 31, 2009.  The decrease in cash used in financing activities was primarily due to higher payments, net of borrowings, on our ABL Line of Credit.  During the Transition Period and the 35 weeks ended January 31, 2009, we made net repayments on our ABL Line of Credit of $29.1 million and $151.6 million, respectively.  Cash and cash equivalents decreased $1.1 million from May 30, 2009 to $24.8 million at January 30, 2010 (discussed in more detail under the caption below entitled “Liquidity and Capital Resources”).  

Changes in working capital also impact our cash flows. Working capital equals current assets (exclusive of restricted cash and cash equivalents) minus current liabilities. Working capital at January 30, 2010 was $349.7 million compared with $312.3 million at May 30, 2009 and $179.7 million at January 31, 2009.  The increase in working capital from both May 30, 2009 and January 31, 2009 is primarily attributable to decreased accounts payable at January 30, 2010, as a result of the timing of payments, which was partially offset by decreased inventory levels as a result of the decreases in our average store inventory of 6.4% from May 30, 2009 and 14.8% from January 30, 2009.

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 comparative store payroll as the aggregate payroll of all stores which were opened for an entire week both in the previous fiscal year (or period, as applicable) and the current fiscal year (or period, as applicable).  Comparative store payroll decreased 11.8% during the Transition Period compared with the 35 weeks ended January 31, 2009 as a result of our ongoing initiative to reduce store payroll costs.  This was accomplished through a variety of initiatives.  First, we introduced a new store management model that was designed to provide consistent management coverage by sales volume.  We also began managing store payroll based primarily on an expected sales per labor hour metric.  Lastly, we began to closely monitor new hire wage rates to ensure new hires commenced employment at rates commensurate with their experience.  We believe that these actions will allow us to operate the business more efficiently without sacrificing our ability to serve our customers.

Results of Operations – Transition Period

The following table sets forth certain items in our Consolidated Statements of Operations and Comprehensive Income (Loss) as a percentage of net sales for the 35 week Transition Period ended January 30, 2010 and the comparable 35 week period used in connection with the subsequent discussion.  Financial information for the 35 weeks ended January 30, 2010 and January 31, 2009 is derived from audited and unaudited financial statements, respectively (refer to Note 2 of the Consolidated Financial Statements entitled “Fiscal Year End Change” for further details).




 

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35 Weeks Ended January 30, 2010
   
35 Weeks Ended January 31, 2009
 
Statement of Operations Data:
           
Net Sales
    100 %     100 %
Other Revenue
    0.9       0.8  
        Total Revenue
    100.9       100.8  
                 
Cost of Sales (Exclusive of Depreciation and Amortization, As Shown Below)
    60.7       61.0  
Selling & Administrative Expenses
    30.9       30.7  
Restructuring and Separation Costs
    0.1       0.1  
Depreciation and Amortization
    4.2       4.3  
Interest Expense
    2.4       3.0  
Impairment Charges – Long Lived Assets
    1.9       1.1  
Impairment Charges - Trademark
    0.0       11.3  
Other Income, Net
    (0.6 )     (0.2 )
         Total Expense
    99.6       111.3  
                 
Income Before Income Tax Expense
    1.3       (10.5 )
Income Tax Expense
    0.5       4.2  
                 
Net Income
    0.8 %     (6.3 )%


 Performance for the 35 Weeks Ended January 30, 2010 (Transition Period) Compared with the 35 Weeks Ended January 31, 2009

Net Sales

We experienced a decrease in net sales for the 35 weeks ended January 30, 2010 compared with the 35 weeks ended January 31, 2009.  Consolidated net sales decreased $19.0 million, or 0.8%, to $2,457.6 million  for the 35 weeks ended January 30, 2010 from $2,476.6 million  for the 35 weeks ended January 31, 2009.  This decrease was primarily attributable to:


·  
a comparative store sales decrease of $114.2 million, or 4.8%, to $2,263.2 million,

·  
a decrease in barter sales of $10.8 million, and

·  
a decrease in net sales of $2.5 million from stores closed since the comparable period in Fiscal 2009, partially offset by;

·  
an increase in net sales of $63.2 million for stores previously opened that are not included in our comparative store sales,

·  
an increase in net sales of $34.1 million related to nine new stores opened during the Transition Period, and

·  
an increase in layaway and other sales of $10.8 million.

We believe the comparative store sales decrease was due to weather conditions and weakened consumer demand.  November of 2009 was the warmest November in the last eight years.  The weakened consumer demand was a result of the contraction of credit available to consumers and the overall challenging retail conditions.

Other Revenue

Other revenue (consisting of rental income from leased departments, subleased rental income, layaway, alterations, other service charges, and miscellaneous revenue items) increased $1.4 million to $21.7 million for the 35 weeks ended January 30, 2010 compared with $20.3 million for the 35 weeks ended January 31, 2009.  This increase was primarily related to an increase in layaway fees of $1.8 million.

Cost of Sales

Cost of sales decreased $18.1 million (1.2%) for the 35 weeks ended January 30, 2010 compared with the 35 weeks ended January 31, 2009.  Cost of sales as a percentage of net sales decreased to 60.7% for the 35 weeks ended January 30, 2010 compared with 61.0% during the 35 weeks ended January 31, 2009.  The dollar decrease of $18.1 million in cost of sales between the 35 weeks ended January 30, 2010 and the 35 weeks ended January 31, 2009 was primarily related to the decrease in our net sales during the same periods.

For the 35 week period ended January 30, 2010 as compared with the 35 weeks ended January 31, 2009, we experienced an increase in gross margin as a percent of net sales from 39.0% to 39.3%.  The improvement in our gross margin as a percent of net sales is primarily the result of fewer markdowns during the 35 weeks ended January 31, 2010 as compared with the 35 weeks ended January 31, 2009.  Markdowns improved 0.7% as a percentage of net sales as a result of our ongoing initiative to increase the amount of current inventory as a percent of our total inventory, ultimately leading to fewer markdowns.  The improvement in markdowns is almost entirely offset by increased shrink of 0.6% as a percentage of net sales during the 35 weeks ended January 30, 2010 as compared with the 35 weeks ended January 31, 2009.
 
 



 

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Selling and Administrative Expenses

Selling and administrative expenses decreased $1.3 million (or 0.2%) to $759.8 million for the 35 weeks ended January 30, 2010 from $761.1 million for the 35 weeks ended January 31, 2009.  The decrease in selling and administrative expenses is summarized in the table below:




   
(in thousands)
     
   
35 Weeks Ended
                 
           
$ Variance
   
% Change
     
Payroll and Payroll Related
  $ 337,057     $ 358,074     $ (21,017 )     (5.9 )
%
Advertising
    49,378       57,283       (7,905 )     (13.8 )  
Benefit Costs
    9,054       12,176       (3,122 )     (25.6 )  
Business Insurance
    22,955       17,071       5,884       34.5    
Occupancy
    246,082       235,534       10,548       4.5    
Other
    95,248       80,924       14,324       17.7    
Selling & Administrative Expenses
  $ 759,774     $ 761,062     $ (1,288 )     (0.2 )
%


The decrease in selling and administrative expense during the 35 weeks ended January 30, 2010 compared with the 35 weeks ended January 31, 2009 was primarily caused by decreases in payroll and payroll related costs.  The decrease in payroll and payroll related costs of approximately $21.0 million was primarily related to a decrease in our comparative store payroll of $30.6 million or 11.8% and a corresponding decrease in payroll taxes of $1.8 million as a result of our initiative to reduce store payroll costs including the reduction of janitorial payroll in conjunction with our initiative to replace janitorial payroll with a third party provider.  

These decreases in comparative store payroll and payroll taxes were partially offset by the impact of new and non-comparative store payroll of $7.1 million and an increase of $5.2 million related to vacation expense as a result of the change in our new personal time policy which was adopted in July 2008.

The decrease in advertising expense of $7.9 million during the 35 weeks ended January 30, 2010 compared with the 35 weeks ended January 31, 2009 was primarily related to shifts in the media used for marketing communications and a decrease in the number of grand opening advertisements.  During the Transition Period we opened nine new BCF stores.  During the 35 weeks ended January 31, 2009, we incurred additional marketing and advertising expense in connection with the opening of 34 new BCF stores.

The decrease in benefit costs of $3.1 million for the 35 week period ended January 30, 2010 compared with the 35 weeks ended January 31, 2009 was primarily a result of decreased 401(k) Plan expense.  Under our 401(k) Plan, we are able to utilize monies recovered through forfeitures to fund some or all of our annual contributions obligation.  A “forfeiture” is the portion of our contribution that is lost by a 401(k) Plan participant who terminates employment prior to becoming fully vested in such contribution.  Based on the forfeitures available to us, we were not required to record any 401(k) Plan expense during the 35 weeks ended January 30, 2010.  The Company used $3.5 million of 401(k) Plan forfeitures to fund the entire 401(k) Plan Match for the 2009 401(k) Plan year.

The increase in business insurance of $5.9 million in the 35 weeks ended January 30, 2010 compared with the 35 weeks ended January 31, 2009 was the result of our claims experience for the period.  During the Transition Period, we experienced an increase in the cost of workers’ compensation claims and an increase in the number of general liability claims, each of which we believe was a result of the current economic environment.

The increase in occupancy related costs of $10.5 million in the 35 weeks ended January 30, 2010 as compared with the 35 weeks ended January 31, 2009 was primarily related to new store openings.   New BCF stores opened during the 35 weeks ended January 30, 2010 accounted for $4.2 million of the total increase;  new BCF stores opened during this period that were not operating for a full 35 weeks in Fiscal 2009 incurred incremental occupancy costs of $4.5 million during the 35 week period ended January 30, 2010.  Excluding the impact of new store openings between the 35 week periods ended January 30, 2010 and January 31, 2009:


·  
janitorial service expense increased $4.0 million due to our initiative to replace janitorial payroll with a third party provider, and  


·  
real estate taxes increased $1.0 million due primarily to annual tax rate increases.
 
 

 



 

24



 
These increases were partially offset by a decrease in utilities expense of $2.7 million as a result of our ongoing initiative to reduce costs.

The increase in other selling and administrative expenses of $14.3 million for the 35 week period ended January 30, 2010 compared with the 35 weeks ended January 31, 2009 was primarily due to a $7.5 million increase in our legal reserve, and a $3.0 million increase associated with the acceleration of fees associated with store physical inventories related to the Company’s change in fiscal year end.
 

Restructuring and Separation Costs

In an effort to better align our resources with our business objectives, in Fiscal 2009, we reviewed all areas of the business to identify efficiency opportunities to enhance our performance. In light of the challenging economic and retail sales environments, we accelerated the implementation of several initiatives, including some that resulted in the elimination of certain positions and the restructuring of certain other jobs and functions.  Our restructuring and separation efforts commenced in the third quarter of Fiscal 2009, and continued during the 35 week period ended January 30, 2010.  We incurred $2.4 million and $1.9 million in restructuring and separation costs during the Transition Period and the 35 weeks ended January 31, 2009, respectively.

Depreciation and Amortization

Depreciation and amortization expense related to the depreciation of fixed assets and the amortization of favorable and unfavorable leases amounted to $103.6 million for the 35 weeks ended January 30, 2010 compared with $106.8 for the 35 weeks ended January 31, 2009.  The decrease in depreciation and amortization expense was primarily a result of various assets that were recorded pursuant to purchase accounting in conjunction with the Merger Transaction.  These assets became fully depreciated during Fiscal 2009, which resulted in less depreciation expense during the Transition Period.

During the Transition Period, the Company made a reclassification of amortization of deferred financing fees from the line item “Depreciation and Amortization” in our Consolidated Statements of Operations and Comprehensive Income (Loss) to the line item “Interest Expense” in our Consolidated Statements of Operations and Comprehensive Income (Loss) for each of the fiscal years ended May 30, 2009, May 31, 2008, and June 2, 2007.  Refer to Note 1 of the Consolidated Financial Statements for further discussion of this change in presentation.

Interest Expense

Interest expense was $59.5 million and $74.3 million for 35 week periods ended January 30, 2010 and January 31, 2009, respectively.  The decrease in interest expense was primarily driven by lower average interest rates on our Term Loan and ABL Line of Credit and a lower average balance on our ABL Line of Credit as follows:


     
 
35 Weeks Ended
 
     
Average Interest Rate – ABL Line of Credit
      2.7 %       4.4 %
                     
Average Interest Rate – Term Loan
      2.6 %       4.8 %
                     
Average Balance – ABL Line of Credit
 $
 
31.5 million
 
 $
 
219.5 million
 
 
 
Offsetting the decrease in interest expense were smaller gains on the adjustments of our interest rate cap agreements to fair value during the Transition Period as compared to the 35 weeks ended January 31, 2009.  Our interest rate cap agreements are discussed in more detail in Item 7A, Quantitative and Qualitative Disclosures About Market Risk and Note 11 to our Consolidated Financial Statements entitled “Derivatives and Hedging Activities.”  Adjustments of the interest rate cap agreements to fair value resulted in gains of $0.5 million and $2.7 million for the 35 weeks ended January 30, 2010 and the 35 weeks ended January 31, 2009, respectively, each of which were recorded in the line item “Interest Expense” in our Consolidated Statements of Operations and Comprehensive Income (Loss).  

During the Transition Period, the Company made a reclassification of amortization of deferred financing fees from the line item “Depreciation and Amortization” in our Consolidated Statements of Operations and Comprehensive Income (Loss) to the line item “Interest Expense” in our Consolidated Statements of Operations and Comprehensive Income (Loss) for each of the fiscal years ended May 30, 2009, May 31, 2008, and June 2, 2007.  Refer to Note 1 of our Consolidated Financial Statements for further discussion of this change in presentation.
 

 



 

25



 
Impairment Charges – Long-Lived Assets

Impairment charges related to long-lived assets were $46.8 million and $28.1 million for the 35 weeks ended January 30, 2010 and January 31, 2009, respectively.  The increase in impairment charges was primarily related to the decline in the operating performance of 33 stores as a result of decreased comparative store sales primarily attributed to unfavorable weather conditions and declining macroeconomic conditions (refer to Note 10 to our Consolidated Financial Statements entitled “Impairment of Long-Lived Assets” for further discussion).
 
    The recoverability assessment related to these store-level assets requires judgments and estimates of future revenues, gross margin rates and store expenses.  We base these estimates upon our past and expected future performance.  We believe our estimates are appropriate in light of current market conditions.  However, future impairment charges could be required if we do not achieve our current revenue or cash flow projections for each store.

The majority of the impairment charges for the 35 week period ended January 30, 2010 was related to the impairment of favorable leases in the amount of $34.6 million related to 24 of our stores.  We also impaired $9.4 million of leasehold improvements, $2.3 million of furniture and fixtures and $0.4 million of other long-lived assets.  
 
The majority of the impairment charges for the 35 week period ended January 31, 2009 was related to the impairment of favorable leases in the amount of $20.9 million related to 15 of our stores.  We also impaired $5.8 million of leasehold improvements and $1.4 million of furniture and fixtures.  

Impairment Charges – Tradenames

There was no impairment charge related to our tradenames during the 35 weeks ended January 30, 2010.  Impairment charges related to our tradenames during the 35 weeks ended January 31, 2009 amounted to $279.3 million.  In accordance with ASC Topic No. 350, “Intangibles – Goodwill and Other,” (Topic 350), we have historically and will continue to perform our annual impairment testing of goodwill and indefinite-lived assets at the beginning of each May, which will be the beginning of the second quarter of Fiscal 2010.

In connection with the preparation of our Condensed Consolidated Financial Statements for the third quarter of Fiscal 2009, we concluded that it was appropriate to test our goodwill and indefinite-lived intangible assets for recoverability in light of the following factors:


·  
Recent significant declines in the U.S. and international financial markets and the resulting impact of such events on current and anticipated future macroeconomic conditions and customer behavior;


·  
The determination that these macroeconomic conditions were impacting our current sales trends as evidenced by the decreases in comparative store sales that we were experiencing;


·  
Decreased comparative store sales results of the peak holiday and winter selling seasons in the third quarter which were significant to our financial results for the year;


·  
Declines in market valuation multiples of peer group companies used in the estimate of our business enterprise value; and


·  
Our expectation that then current comparative store sales trends would continue for an extended period.  As a result, we revised our plans to a more moderate store opening plan which reduced our future projections of revenue and operating results offset by initiatives that have been implemented to reduce our cost structure.

The recoverability assessment with respect to the tradenames used in our operations requires us to estimate the fair value of the tradenames as of the assessment date.  Such determination is made using the “relief from royalty” valuation method.  Inputs to the valuation model include:
 

·  
Future revenue and profitability projections associated with the tradenames;


·  
Estimated market royalty rates that could be derived from the licensing of our tradenames to third parties in order to establish the cash flows accruing to our benefit as a result of ownership of the tradenames; and


·  
The rate used to discount the estimated royalty cash flow projections to their present value (or estimated fair value) based on the risk and nature of our cash flows.
 
During the 35 weeks ended January 31, 2009, we recorded an impairment charge related to our tradenames in the amount of $279.3 million.  This impairment charge reflected lower revenues and profitability projections associated with our tradenames in the near term and lower estimated market royalty rate expectations in light of the then current general economic conditions compared with the analysis we performed during Fiscal 2008.  Our projected revenues within the model were based on comparative store sales and new store assumptions over a nine year period.  A less aggressive new store opening plan combined with revised comparative store sales assumptions for the first fiscal year of the projection had a significant negative impact on the valuation.  We believe our estimates were appropriate based upon the then current market conditions (refer to Note 8 to our Consolidated Financial Statements entitled “Intangible Assets” for further discussion). 
 



 
 

 

26



 

In accordance with Topic 350, there were no triggering events that required us to test goodwill for impairment during the 35 weeks ended January 30, 2010.  During the 35 weeks ended January 31, 2009, and in conjunction with our tradename impairment testing, we also assessed our goodwill for impairment.  Based upon this analysis of our recorded goodwill, we determined that none of our goodwill was impaired during the 35 week period ended January 31, 2009.  We believe our estimates were appropriate based upon then current market conditions.  However, future impairment charges could be required if we do not achieve our current cash flow, revenue and profitability projections or our weighted average cost of capital increases or market valuation multiple associated with peer group companies decline.

Other Income, net

Other income, net (consisting of investment income, gains and losses on disposition of assets, breakage income and other miscellaneous items) increased $10.6 million to $15.3 million during the 35 week period ended January 30, 2010 from the 35 week period ended January 31, 2009.  

The increase in other income during the Transition Period compared with the 35 weeks ended January 30, 2009 was primarily related to the following:


·  
An increase in miscellaneous income of $6.0 million primarily related to a gain on a legal settlement in our favor and other miscellaneous income,

·  
an increase in gain on investment of $5.5 million related to additional distributions received from the Reserve Fund in excess of those anticipated (refer to Note 5 to our Consolidated Financial Statements entitled “Investment in Money Market Fund” for further discussion),

·  
an increase of $2.1 million related to insurance recoveries, and

·  
an increase in breakage income of $2.8 million (refer to Note 12 to our Consolidated Financial Statements entitled “Store Value Cards” for further discussion); partially offset by

·  
a $5.1 million decrease related to a loss on the disposal of various fixed assets primarily related to our conversion to a new warehouse management system in Edgewater Park, New Jersey.

Income Tax Expense     

Income tax expense was $11.6 million for the 35 week period ended January 30, 2010 compared with an income tax benefit of $104.7 million for the 35 weeks ended January 31, 2009.   The effective tax rates were 38.3% and 40.2%, respectively, for the 35 week periods ended January 30, 2010 and January 31, 2009.   The decrease in the effective tax rate was primarily due to a change in the valuation allowance for state net operating losses and lower state blended tax rates, which had the effect of reducing our net deferred tax liability and decreasing our income tax expense (refer to Note 18 entitled "Income Taxes" for further information).

Net Income

Net income amounted to $18.7 million for the 35 weeks ended January 30, 2010 compared with a net loss of $155.6 for the 35 weeks ended January 31, 2009.  The increase in our operating results of $174.3 million was primarily attributable to fewer impairments.

Results of Operations – Fiscal Years Ended 2009, 2008 and 2007

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.
 
 



 

27



 
 

 
         
Statement of Operations Data:
             
Net Sales
   
100.0
%
100.0
%
100.0
%
Other Revenue
   
0.8
 
0.9
 
1.1
 
        Total Revenue
   
100.8
 
100.9
 
101.1
 
                 
Cost of Sales (Exclusive of Depreciation and Amortization, As Shown Below)
   
62.1
 
61.8
 
62.4
 
Selling & Administrative Expenses
   
31.5
 
32.2
 
31.2
 
Restructuring and Separation Costs
   
0.2
 
 -
 
 -
 
Depreciation and Amortization
   
4.5
 
4.9
 
4.8
 
Interest Expense
   
2.9
 
3.9
 
4.3
 
Impairment Charges – Long Lived Assets
   
1.1
 
0.7
 
0.7
 
Impairment Charges - Tradenames
   
8.3
 
-
 
-
 
Other Income, Net
   
(0.2
)
(0.4
)
(0.2
)
Total Expense
   
110.4
 
103.1
 
103.2
 
Loss Before Income Tax Benefit
   
(9.6
)
(2.2
)
(2.1
Income Tax Benefit
   
(4.2
)
(0.8
)
(0.7
                 
Net Loss
   
(5.4
 
)%
(1.4
)%
(1.4
)%


Performance for the Fiscal Year (52 weeks) Ended May 30, 2009 Compared with the Fiscal Year (52 weeks) Ended May 31, 2008

Net Sales

We experienced an increase in net sales for Fiscal 2009 compared with Fiscal 2008.  Consolidated net sales increased $148.6 million, or 4.4%, to $3,542.0 million  for Fiscal 2009 from $3,393.4 million  for Fiscal 2008. This increase was attributable to:


·  
an increase in net sales of $222.8 million related to 36 net new stores opened in 2009,

·  
an increase in net sales of $42.1 million for stores opened in 2008 that are not included in our comparative store sales,

·  
an increase in barter sales of $5.5 million, partially offset by

·  
a comparative store sales decrease of $83.9 million, or 2.5%, to $3,213.1 million, and


·  
a decrease in net sales of $19.4 million from stores closed since the comparable period last year.

We believe the comparative store sales decrease was due primarily to weakened consumer demand as a result of the contraction of credit available to consumers and the overall challenging retail conditions.

Other Revenue

Other revenue (consisting of rental income from leased departments; subleased rental income; layaway, alteration, dormancy, and other service charges; and miscellaneous revenue items) decreased $1.2 million to $29.4 million for Fiscal 2009 from $30.6 million for Fiscal 2008. This decrease was primarily related to a decrease in dormancy fees of $2.2 million, partially offset by an increase in layaway fees of $1.1 million.

The decrease in dormancy fees was related to our decision during the third quarter of Fiscal 2008 to cease charging dormancy fees on outstanding balances of store value cards, which were recorded in the line item “Other Revenue” in our Consolidated Statements of Operations and Comprehensive Income (Loss), and begin recording store value card breakage income in the line item “Other Income, Net” in our Statements of Operations and Comprehensive Income (Loss).  These dormancy fees contributed an additional $2.2 million to the line item “Other Revenue” in our Statements of Operations and Comprehensive Income (Loss) for Fiscal 2008 compared with Fiscal 2009.  We now recognize breakage income related to outstanding store value cards in the line item “Other Income, Net” in our  Statements of Operations and Comprehensive Income (Loss) (refer to Note 12 to our Consolidated Financial Statements entitled “Store Value Cards” for further discussion).
 
 

 



 

28



 
Cost of Sales

Cost of sales increased $104.4 million, or 5.0%, for Fiscal 2009 compared with Fiscal 2008. Cost of sales as a percentage of net sales increased to 62.1% during Fiscal 2009 from 61.8% in Fiscal 2008.  The dollar increase of $104.4 million in cost of sales between Fiscal 2008 and Fiscal 2009 was primarily related to the operation of 36 net new stores which were opened in Fiscal 2009.

Gross margin as a percent of net sales decreased from 38.2% for Fiscal 2008 to 37.9% for Fiscal 2009. The decline in gross margin was primarily due to increased shrink results based on physical inventories taken in the fourth quarter of Fiscal 2009.

Selling and Administrative Expenses

Selling and administrative expenses increased $24.4 million, or 2.2%, to $1,115.2 million for Fiscal 2009 from $1,090.8 million for Fiscal 2008.  The increase in selling and administrative expenses is summarized in the table below:



   
(in thousands)
 
   
Year Ended
             
           
$ Variance
   
% Change
 
Occupancy
 
 $
351,555
   
 $
304,052
   
 $
47,503
     
15.6
%
Business Insurance
   
32,515
     
26,994
     
5,521
     
20.5
 
Advertising
   
75,188
     
70,879
     
4,309
     
6.1
 
Benefit Costs
   
13,049
     
14,555
     
(1,506
)
   
(10.3
)
Other
   
124,689
     
138,713
     
(14,024
)
   
(10.1
)
Payroll and Payroll Related
   
518,252
     
535,636
     
(17,384
)
   
(3.2
)
Selling & Administrative Expenses
 
 $
1,115,248
   
 $
1,090,829
   
 $
24,419
     
2.2
%

The increase in occupancy related costs of $47.5 million during Fiscal 2009 was primarily related to new store openings.  New stores opened in Fiscal 2009 accounted for $29.0 million of the total increase.  Stores opened in Fiscal 2008 that were not operating for a full twelve months in Fiscal 2008 incurred incremental occupancy costs of $4.2 million during Fiscal 2009.

Excluding the impact of new store openings between Fiscal 2008 and Fiscal 2009:


·  
utility expenses increased $4.6 million due primarily to an increase in electricity rates,


·  
janitorial service expense increased $7.7 million due to our initiative to replace janitorial payroll with a third party, provider, and  


·  
real estate taxes increased $3.8 million due primarily to annual tax rate increases.

The increase in business insurance of $5.5 million in Fiscal 2009 compared with Fiscal 2008 was the result of our claims experience for the year.  During Fiscal 2009, we experienced an increase in the value of workers’ compensation claims and an increase in the number of general liability claims which we believe was a result of the current economic environment.

The increase in advertising expense of $4.3 million during Fiscal 2009 compared with Fiscal 2008 was primarily related to increases in advertising as a result of 36 net new stores opened during Fiscal 2009.  This increase was partially offset by the continued cost efficiencies realized by our internal performance of an increasing number of production and creative functions.
  
  The increases in selling and administrative expense during Fiscal 2009 were partially offset by decreases in payroll and payroll related costs, other costs and benefit costs.  The decrease in other selling and administrative expenses of approximately $14.0 million during Fiscal 2009 was a result of several initiatives included in our plan to reduce our cost structure, as well as decreases in costs related to security, miscellaneous taxes, temporary help and travel and entertainment.

The decrease in payroll and payroll related costs of approximately $17.4 million was primarily related to a decrease in our comparative store payroll related to our initiative to reduce store payroll costs and the reduction of janitorial payroll in conjunction with our initiative to replace janitorial payroll with a third party provider.  These initiatives resulted in a decrease in comparative store payroll of $43.0 million during Fiscal 2009.  Additionally, vacation expense decreased $6.7 million during Fiscal 2009 as a result of our implementation of a new vacation and personal time policy.
 



 

29



 
 The decreases in payroll and payroll related costs were partially offset by new store payroll and increased bonus and stock compensation expense in Fiscal 2009 compared with Fiscal 2008.  New store payroll related to the opening of 36 net new stores during Fiscal 2009 contributed an additional $23.3 million to payroll.  Additionally, incremental payroll related to stores that were opened during Fiscal 2008, but were not operating for the full fiscal period contributed incremental payroll expense of $2.9 million.  Bonus and stock compensation expense increased $7.1 million and $1.3 million, respectively, in Fiscal 2009 compared with Fiscal 2008.  The increase in bonus expense of $7.1 million for Fiscal 2009 was due to the fact that during Fiscal 2008 we did not achieve the targets under our bonus plan, and consequently, reversed the previously recognized expense of $1.5 million during the fiscal year.  In contrast, during Fiscal 2009, the Company did attain the bonus targets so there was not a similar reversal during Fiscal 2009.   The increase in stock compensation expense of $1.3 million was related to a greater number of options and restricted stock awards granted in Fiscal 2009 compared with Fiscal 2008.

Restructuring and Separation Costs

Our restructuring and separation efforts commenced in Fiscal 2009 and resulted in costs totaling $7.0 million for the fiscal year; no restructuring or separation costs were incurred in Fiscal 2008.  In an effort to better align our resources with our business objectives, we reviewed all areas of the business to identify efficiency opportunities to enhance our performance. In light of the challenging economic and retail sales environments, we accelerated the implementation of several initiatives, including some that resulted in the elimination of certain positions and the restructuring of certain other jobs and functions.  This resulted in the reduction of approximately 2,300 positions in our corporate office and our stores during the third and fourth quarters of Fiscal 2009. This reduction, which amounted to slightly less than 9% of our workforce, resulted in a severance and related payroll tax charge of $2.8 million.
 
Additionally, on February 16, 2009 our former President and Chief Executive Officer entered into a separation agreement with us.  As part of his separation agreement, we paid his salary through May 30, 2009 at which time continuation payments and other benefits payable as provided in his separation agreement commenced.  We recorded a charge of $1.8 million of continuation payments related to the separation of our former President and Chief Executive Officer during Fiscal 2009.  The continuation payments will be paid out in bi-weekly installments through May 30, 2011.  Continuation payments of $0.2 million were paid during Fiscal 2009.

In addition to the continuation payments, other charges relating to benefits payable pursuant to the former President and Chief Executive Officer’s separation agreement included additional non-cash compensation charges of approximately $2.4 million during Fiscal 2009 related to the repurchase of a portion of his restricted stock and a modification of his stock options (refer to Note 17 to our  Consolidated Financial Statements entitled “Restructuring and Separation Costs” and Note 14 to our  Consolidated Financial Statements entitled “Stock Option and Award Plans and Stock-Based Compensation” for further discussion relating to the additional non-cash compensation charges).
 
Depreciation and Amortization

Depreciation and amortization expense related to the depreciation of fixed assets and the amortization of favorable and unfavorable leases and deferred debt charges amounted to $159.6 million for Fiscal 2009 compared with $166.7 million for Fiscal 2008.  The decrease in depreciation and amortization expense in Fiscal 2009 compared with Fiscal 2008 was primarily a result of various assets that were recorded pursuant to purchase accounting in conjunction with the Merger Transaction.   These assets were fully depreciated during Fiscal 2009, which resulted in less depreciation expense during the fiscal year.

During the Transition Period, the Company made a reclassification of amortization of deferred financing fees from the line item “Depreciation and Amortization” in our Consolidated Statements of Operations and Comprehensive Income (Loss) to the line item “Interest Expense” in our Consolidated Statements of Operations and Comprehensive Income (Loss) for each of the fiscal years ended May 30, 2009, May 31, 2008, and June 2, 2007.  Refer to Note 1 of our Consolidated Financial Statements for further discussion of this change in presentation.

Interest Expense

Interest expense was $102.7 million for Fiscal 2009 compared with $133.0 million for Fiscal 2008. This decrease in interest expense was primarily related to lower average interest rates on our ABL Line of Credit and our Term Loan in Fiscal 2009 compared with Fiscal 2008, partially offset by a higher average balance on the ABL Line of Credit as follows: 




 

30



 
 
       
   
Year Ended
 
         
Average Interest Rate – ABL Line of Credit
   
4.3
 %
   
6.6
 %
                 
Average Interest Rate – Term Loan
   
4.3
 %
   
7.0
 %
                 
Average Balance – ABL Line of Credit
 
 $
148.4 million
   
 $
144.0 million
 
 
Also contributing to the decrease in interest expense were gains on the adjustments of our interest rate cap agreements to fair value.  Our interest rate cap agreements are more fully discussed in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of this Transition Report and Note 11 to our Consolidated Financial Statements entitled “Derivatives and Hedging Activities.”  Adjustments of the interest rate cap agreements to fair value resulted in gains of $4.2 million and $0.1 million, respectively, for Fiscal 2009 and Fiscal 2008, each of which are recorded as “Interest Expense” in our Consolidated Statements of Operations and Comprehensive Income (Loss).  The gains in Fiscal 2009 were primarily the result of an increase in the underlying market rates, which in turn, increased the value of the interest rate cap agreements.

During the Transition Period, the Company made a reclassification of amortization of deferred financing fees from the line item “Depreciation and Amortization” in our Consolidated Statements of Operations and Comprehensive Income (Loss) to the line item “Interest Expense” in our Consolidated Statements of Operations and Comprehensive Income (Loss) for each of the fiscal years ended May 30, 2009, May 31, 2008, and June 2, 2007.  Refer to Note 1 of our Consolidated Financial Statements for further discussion of this change in presentation.
 
Impairment Charges – Long-Lived Assets

Impairment charges related to long-lived assets for Fiscal 2009 were $37.5 million compared with $25.3 million for Fiscal 2008.  The increase in impairment charges was primarily related to the decline in the operating performance of 37 stores as a result of the declining macroeconomic conditions that were negatively impacting our comparative store sales (refer to Note 10 to our Consolidated Financial Statements entitled “Impairment of Long-Lived Assets” for further discussion).

The recoverability assessment related to these store-level assets requires judgments and estimates of future revenues, gross margin rates and store expenses.  We base these estimates upon our past and expected future performance.  We believe our estimates are appropriate in light of current market conditions.  However, future impairment charges could be required if we do not achieve our current revenue or cash flow projections for each store.

The majority of the impairment charges for Fiscal 2009 were related to the impairment of favorable leases in the amount of $26.1 million related to 21 of our stores.  We also impaired $6.3 million of leasehold improvements, $2.1 million of furniture and fixtures and $3.0 million of other long-lived assets during Fiscal 2009.  

 The majority of impairment charges for Fiscal 2008 related to favorable lease assets of $18.8 million, leasehold improvements of $3.9 million and furniture and fixtures of $2.0 million.  Impairment charges at the store level were primarily related to a decline in the operating performance of the respective stores as a result of weakening consumer demand during the period.

Impairment Charges – Tradenames

Impairment charges related to our tradenames totaled $294.6 million during Fiscal 2009.  There were no impairment charges related to our tradenames during Fiscal 2008.  We typically perform our annual impairment testing of goodwill and indefinite-lived intangible assets at the beginning of May of each fiscal year.  However, in connection with the preparation of our Consolidated Financial Statements for the third quarter of Fiscal 2009, we concluded that it was appropriate to test our goodwill and indefinite-lived intangible assets for recoverability at that time in light of the following factors:


·  
Recent significant declines in the U.S. and international financial markets and the resulting impact of such events on current and anticipated future macroeconomic conditions and customer behavior;


·  
The determination that these macroeconomic conditions were impacting our current sales trends as evidenced by the decreases in comparative store sales that we were experiencing;


·  
Decreased comparative store sales results of the peak holiday and winter selling seasons in the third quarter which are significant to our financial results for the year;


·  
Declines in market valuation multiplies of peer group companies used in the estimate of our business enterprise value; and


·  
Our expectation that current comparative store sales trends would continue for an extended period.  As a result, we revised our plans to a more moderate store opening plan which reduced our future projections of revenue and operating results offset by initiatives that have been implemented to reduce our cost structure.
 



 

31



 
 
In addition to our testing during the third quarter of Fiscal 2009, we updated that testing during the fourth quarter of Fiscal 2009, in accordance with our policies, using the same methodology. The recoverability assessment with respect to the tradenames used in our operations requires us to estimate the fair value of the tradenames as of the assessment date.  Such determination is made using the “relief from royalty” valuation method.  Inputs to the valuation model include:
 

·  
Future revenue and profitability projections associated with the tradenames;


·  
Estimated market royalty rates that could be derived from the licensing of our tradenames to third parties in order to establish the cash flows accruing to our benefit as a result of ownership of the tradenames; and


·  
Rate used to discount the estimated royalty cash flow projections to their present value (or estimated fair value) based on the risk and nature of our cash flows.

Based upon the impairment analysis of our tradenames during Fiscal 2009, we determined that a portion of the tradenames was impaired and recorded an impairment charge of $288.3 million.  This impairment charge reflects lower revenues and profitability projections associated with our tradenames in the near term and lower estimated market royalty rate expectations in light of current general economic conditions compared with the analysis we performed during Fiscal 2008. Our projected revenues within the model were based on comparative store sales and new store assumptions over a nine year period.   A less aggressive new store opening plan combined with revised comparative store sales assumptions for the first fiscal year of the projection had a significant negative impact on the valuation.  We believed our estimates were appropriate based upon then current market conditions (refer to Note 8 to our Consolidated Financial Statements entitled “Intangible Assets” for further discussion). 
 
During the fourth quarter of Fiscal 2009, we purchased additional tradename rights in the amount of $6.3 million based on our belief that these tradename rights will ultimately provide us with substantial marketing benefits.  Historically, we have been restricted in our advertising campaigns to only refer to the Company as Burlington Coat Factory and we were required to note that we were not affiliated with Burlington Industries.  The purchase of these tradename rights allow us to shorten the Company name as appropriate based on the current marketing campaign and eliminates the requirement to note that we are not affiliated with Burlington Industries.  Based on our tradenames impairment assessment, we could not support an increase in the asset value of our tradenames on our Consolidated Balance Sheets.  As a result, we immediately impaired the acquired asset.

As a result of the impairments noted during the third quarter, we also assessed our goodwill for impairment. Based upon the interim impairment analysis of our recorded goodwill during the third quarter of Fiscal 2009, and the update that we performed during the fourth quarter, we determined that none of our goodwill was impaired.  We believe our estimates are appropriate based upon current market conditions.  However, future impairment charges could be required if we do not achieve our current cash flow, revenue and profitability projections or our weighted average cost of capital increases or market valuation multiple associated with peer group companies continue to decline.

Other Income, net

Other income, net (consisting of investment income, gains and losses on disposition of assets, breakage income and other miscellaneous items) decreased $6.9 million to $6.0 million for Fiscal 2009.  This decrease was primarily attributable to our recording a loss on our investment in The Reserve Primary Fund (Fund) of $4.7 million and a decrease in breakage income of $2.2 million during Fiscal 2009 compared with Fiscal 2008.

Based on various communications issued by the Fund throughout Fiscal 2009, we recorded a $4.7 million loss on our investment in the Fund (refer to Note 19 to our Consolidated Financial Statements entitled “Fair Value of Financial Instruments” for further discussion).

Breakage income decreased $2.2 million to $3.1 million during 2009 (refer to Note 12 to our Consolidated Financial Statements entitled “Store Value Cards” for further discussion).  The decrease in breakage income was related to our initial recording of breakage income during the third quarter of Fiscal 2008.  In connection with the establishment of BCF Cards, Inc., we recorded $4.7 million of store value card breakage income in the line item “Other Income/Expense, Net” in our Consolidated Statements of Operations and Comprehensive Income (Loss) during the third quarter of Fiscal 2008, which included cumulative breakage income related to store value cards issued since we introduced our store value card program.

Income Tax Expense
     
Income tax benefit was $147.4 million and $25.3 million for Fiscal 2009 and Fiscal 2008, respectively.  Income tax benefit resulting from the tradenames impairment discussed above was $116.8 million for Fiscal 2009.  The effective tax rates for Fiscal 2009 and Fiscal 2008 were 43.5% and 34.1%, respectively.  In Fiscal 2008 we recorded increases to our FIN 48 tax liability which had the effect of reducing our overall income tax benefit and effective tax rate for the year (refer to Note 18 entitled "Income Taxes" for further information).  The increase in the effective tax rate was also due to lower state blended tax rates which had the effect of reducing our net deferred tax liability and increasing our income tax benefit.
 
 



 

32



 

 
Net Loss

Net losses amounted to $191.6 million for Fiscal 2009 compared with net losses of $49.0 million for Fiscal 2008.  The decrease in our operating results of $142.6 million was primarily attributable to increased impairment charges related to our tradenames and long-lived assets, partially offset by increased sales driven primarily by non-comparative stores, improved expense management as part of our initiative to reduce our cost structure, and lower interest expense incurred during Fiscal 2009 compared with Fiscal 2008.

Performance for the Fiscal Year (52 weeks) Ended May 31, 2008 Compared with the Fiscal Year (52 weeks) Ended June 2, 2007
 
Net Sales

We experienced a decrease in net sales for Fiscal 2008 compared with Fiscal 2007.  Consolidated net sales decreased $10.0 million, or 0.3%, to $3,393.4 million for Fiscal 2008 from $3,403.4 million for Fiscal 2007. This decrease was primarily attributable to:


·  
a comparative store sales decrease of $166.8 million, or 5.1%, to $3,122.5 million and

·  
a decrease in net sales of $13.8 million from stores closed since the comparable period last year, partially offset by

·  
an increase in net sales of $105.8 million for stores opened in Fiscal 2008,

·  
an increase in net sales of $62.5 million for stores opened in Fiscal 2007 that are not included in our comparative store sales, and

·  
an increase in barter sales of $5.0 million.

The decrease in comparative stores sales of 5.1% for Fiscal 2008, was 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.

Other Revenue  

Other revenue (consisting of rental income from leased departments, sublease rental income, layaway, alterations and other service charges, dormancy service fees and miscellaneous revenue items) decreased to $30.6 million for Fiscal 2008 compared with $38.2 million for Fiscal 2007. This decrease was 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 operated 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, or 1.4%, to $2,095.4 million for Fiscal 2008 compared with Fiscal 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 net sales was due primarily to our improved initial markups which were the result of lower costs associated with better negotiating and buying efforts.

Selling and Administrative Expenses

Selling and administrative expenses increased $28.3 million (2.7%) to $1,090.8 million for Fiscal 2008 from $1,062.5 million for Fiscal 2007.  The increase in selling and administrative expenses is summarized in the table below:




 

33



 

   
(in thousands)
 
   
Year Ended
             
           
$ Variance
   
% Change
 
Occupancy
 
 $
304,052
   
 $
283,880
   
 $
20,172
     
7.1
%
Other
   
138,713
     
124,573
     
14,140
     
11.4
 
Business Insurance
   
26,994
     
24,583
     
2,411
     
9.8
 
Advertising
   
70,879
     
72,302
     
(1,423
)
   
(2.0
)
Benefit Costs
   
14,555
     
16,241
     
(1,686
)
   
(10.4
)
Payroll and Payroll Related
   
535,636
     
540,889
     
(5,253
)
   
(1.0
)
Selling & Administrative Expenses
 
 $
1,090,829
   
 $
1,062,468
   
 $
28,361
     
2.7
%

The increase in occupancy related expenses of $20.2 million for Fiscal 2008 compared with Fiscal 2007 was primarily related to new store openings.  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, other selling and administrative costs increased $14.1 million.  Included in other selling and administrative costs are professional fees, which increased $3.2 million during Fiscal 2008, compared with Fiscal 2007.  The increase in professional fees was primarily related to our evaluation of the effectiveness of our internal control over financial reporting.  As a non-accelerated filer, we were required to provide our initial report of management on our internal controls over financial reporting in our Form 10-K for Fiscal 2008.

Other expenses, including, but not limited to, miscellaneous taxes, protection and temporary help increased $9.5 million during Fiscal 2008 compared with Fiscal 2007.  New store openings during Fiscal 2007 and Fiscal 2008 accounted for approximately $3.2 million of the increase.  The increase in temporary help of approximately $1.7 million was primarily related to our distribution centers.  We received approximately 82% of our merchandise through our distribution centers during Fiscal 2008 compared with 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 $5.3 million for Fiscal 2008 compared with Fiscal 2007.  The decrease in payroll and payroll related accounts of $5.3 million was a function of decreases of $18.5 million related to comparative store payroll 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 32.2% for Fiscal 2008 compared with 31.2% for Fiscal 2007.

Restructuring and Separation Costs

No restructuring or separation costs were incurred in Fiscal 2008 or Fiscal 2007.

Depreciation and Amortization

Depreciation and amortization expense amounted to $166.7 million for Fiscal 2008 compared with $163.8 million for Fiscal 2007. This increase of $2.9 million was primarily attributable to new stores that were opened in Fiscal 2008.  

During the Transition Period, the Company made a reclassification of amortization of deferred financing fees from the line item “Depreciation and Amortization” in our Consolidated Statements of Operations and Comprehensive Income (Loss) to the line item “Interest Expense” in our Consolidated Statements of Operations and Comprehensive Income (Loss) for each of the fiscal years ended May 30, 2009, May 31, 2008, and June 2, 2007.  Refer to Note 1 of the Consolidated Financial Statements for further discussion of this change in presentation.

Interest Expense

Interest expense was $133.0 million and $144.6 million for Fiscal 2008 and Fiscal 2007, respectively. The decrease in interest expense was primarily related to a lower average balance on our ABL Line of Credit and lower average interest rates on our ABL Line of Credit and our Term Loan in Fiscal 2008 compared with Fiscal 2007 as follows:
 
 



 

34



 

 
     
 
Year Ended
 
     
Average Interest Rate – ABL Line of Credit
      6.6 %       7.2 %
                     
Average Interest Rate – Term Loan
      7.0 %       7.6 %
                     
Average Balance – ABL Line of Credit
 $
 
144.0 million
 
 $
 
194.5 million
 

Also contributing to the decrease in interest expense were gains on the adjustments of our interest rate cap agreements to fair value.  Our interest rate cap agreements are more fully discussed in Item 7A entitled “Quantitative and Qualitative Disclosures About Market Risk” of this Transition Report and Note 11 to our Consolidated Financial Statements entitled “Derivatives and Hedging Activities.”  Adjustments of the interest rate cap agreements to fair value resulted in a gain of $0.1 million and a loss of $2.0 million, respectively, for Fiscal 2008 and Fiscal 2007, each of which were recorded as “Interest Expense” in our Consolidated Statements of Operations and Comprehensive Income (Loss).

During the Transition Period, the Company made a reclassification of amortization of deferred financing fees from the line item “Depreciation and Amortization” in our Consolidated Statements of Operations and Comprehensive Income (Loss) to the line item “Interest Expense” in our Consolidated Statements of Operations and Comprehensive Income (Loss) for each of the fiscal years ended May 30, 2009, May 31, 2008, and June 2, 2007.  Refer to Note 1 of the Consolidated Financial Statements for further discussion of this change in presentation.
 
Impairment Charges – Long-Lived Assets  

Impairment charges related to long-lived assets for Fiscal 2008 were $25.3 million compared with $24.4 million for Fiscal 2007.  The increase in impairment charges was primarily related to the decline in operating performance of 13 stores as a result of the declining macroeconomic conditions that were negatively impacting our current comparative store sales.

The recoverability assessment related to these store-level assets requires judgments and estimates of future revenues, gross margin rates and store expenses.  We base these estimates upon our past and expected future performance.  We believe our estimates are appropriate in light of current market conditions.  However, future impairment charges could be required if we do not achieve our current revenue or cash flow projections for each store.

The majority of the impairment charges for Fiscal 2008 were related to the impairment of favorable leases in the amount of $18.8 million.  We also impaired $3.9 million of leasehold improvements and $2.0 million of furniture and fixtures.  

 The majority of the impairment charges for Fiscal 2007 were related to favorable lease assets in the amount of $15.6 million and $8.0 million of leasehold improvements.  Impairment charges at the store level were primarily related to a decline in the operating performance of the respective stores as a result of weakening consumer demand during Fiscal 2007.

Impairment Charges – Tradenames

There were no impairment charges related to our tradenames in Fiscal 2008 or Fiscal 2007.

Other Income/Expense, Net  

Other income/expense, 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 Fiscal 2008 compared with Fiscal 2007.  The increase was primarily related to our recording $5.3 million of breakage income during Fiscal 2008.  As noted above, we discontinued charging dormancy service fees on outstanding store value cards during Fiscal 2008 and began recognizing breakage income in the line item “Other Income, Net” in our Consolidated Statements of Operations and Comprehensive Income (Loss) as a result of establishing a gift card company.  Refer to Note 12 to our Consolidated Financial Statements entitled “Store Value Cards” for further information.

Income Tax Expense

Income tax benefit was $25.3 million for Fiscal 2008 compared with $25.4 million for Fiscal 2007.  The effective tax rates for Fiscal 2008 and Fiscal 2007 were 34.1% and 35.0%, respectively.

Net Loss

Net loss amounted to $49.0 million for Fiscal 2008 compared with $47.2 million for Fiscal 2007. The increase in our net loss position was primarily related to an increase in selling and administrative costs and depreciation and amortization, offset in part by improved margins and a reduction in interest expense.
 
 



 

35



 

 
Liquidity and Capital Resources
 
We fund inventory expenditures during normal and peak periods through cash flows from operating activities, available cash, and our ABL Line of Credit. Liquidity may be affected by the terms we are able to obtain from vendors and their factors.   Our working capital needs follow a seasonal pattern, peaking each October and November 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 providing for working capital, which principally represents the purchase of inventory, the payment of operating expenses, debt servicing, and opening of new stores and remodeling of existing stores.  As of January 30, 2010, we had unused availability on our ABL Line of Credit of $158.6 million.

Our ability to satisfy our interest payment obligations on our outstanding debt and maintain compliance with our debt covenants, as discussed below, 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 on terms similar to our current financing agreements, or at all.

During Fiscal 2009 and, to a lesser extent, the Transition Period, there was a significant deterioration in the global financial markets and economic environment, which we believe has negatively impacted consumer spending at many retailers, including us.  In response to this, we have taken, and continue to take, steps to increase opportunities to profitably drive sales, improve margins and continue to improve the efficiency of our operations.

As discussed throughout this Transition Report, we implemented certain initiatives in response to the difficult economic environment which included reducing our cost structure during Fiscal 2009 and the Transition Period through various payroll initiatives and supply chain efficiencies.  A portion of these savings were reinvested in our operations and in enhancing our store experience.  We believe that we have prudently managed our capital expenditures, allowing us to appropriately act on opportunities to grow our business.  We closely monitor our net sales, gross margin, expenses and working capital.  We have performed scenario planning such that if our net sales decline, we have identified variable costs that could be reduced to partially mitigate the impact of these declines and maintain compliance with our debt covenants.
 
Despite the current trends in the retail environment and their negative impact on our comparative store sales, we believe that cash generated from operations, along with our existing cash and our ABL Line of Credit, will be sufficient to fund our expected cash flow requirements and planned capital expenditures for at least the next twelve months as well as the foreseeable future.  However, there can be no assurance that we would be able to continue to offset the decline in our comparative store sales with continued savings initiatives in the event that the economy continues to decline. 

Our Term Loan agreement contains financial, affirmative and negative covenants and requires that we, among other things; maintain on the last day of each fiscal quarter a consolidated leverage ratio not to exceed a maximum amount. Specifically, our total debt to Adjusted EBITDA, as each term is defined in the credit agreement governing the Term Loan, for the trailing twelve months most recently ended on or prior to such date, may not exceed 5.5 to 1 at January 30, 2010; 5.25 to 1 at May 1, 2010, July 31, 2010, and October 30, 2010; 5.00 to 1 at January 29, 2011; and 4.75 to 1 at April 30, 2011 and thereafter.  Adjusted EBITDA is a non-GAAP financial measure of our liquidity.  Adjusted EBITDA, as defined in the credit agreement governing our Term Loan, starts with consolidated net income for the period and adds back (i) depreciation, amortization, impairments and other non-cash charges that were deducted in arriving at consolidated net income, (ii) the provision for taxes, (iii) interest expense, (iv) advisory fees, and (v) unusual, non-recurring or extraordinary expenses, losses or charges as reasonably approved by the administrative agent for such period.  Adjusted EBITDA is used to calculate the consolidated leverage ratio.  We present Adjusted EBITDA because we believe it is a useful supplemental measure in evaluating the performance of our business and provides greater transparency into our results of operations.  Adjusted EBITDA provides management, including our chief operating decision maker, with helpful information with respect to our operations such as our ability to meet our future debt service, fund our capital expenditures and working capital requirements, and comply with various covenants in each indenture governing our outstanding notes and the credit agreements governing our senior secured credit facilities which are material to our financial condition and financial statements.  As of January 30, 2010, we were in compliance with all of our covenants.

Given the importance Adjusted EBITDA has on our operations, achievement at a predetermined threshold Adjusted EBITDA level is required for the payment of incentive awards to our corporate employees under our Management Incentive Bonus Plan (Bonus Plan) for the Transition Period.  The Bonus Plan is more fully described under the caption “Annual Incentive Awards” in Item 11, Executive Compensation.
 
Adjusted EBITDA has limitations as an analytical tool, and should not be considered either in isolation or as a substitute for net income or other data prepared in accordance with GAAP or for analyzing our results or cash flows from operating activities, as reported under GAAP.  Some of these limitations include: 
 
 



 

36



 
 
 

·  
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

·  
Adjusted EBITDA does not reflect our interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

·  
Adjusted EBITDA does not reflect our income tax expense or the cash requirements to pay our taxes;

·  
Adjusted EBITDA does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;

·  
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will likely have to be replaced in the future, and Adjusted EBITDA measures do not reflect any cash requirements for such replacements; and

·  
Other companies in our industry may calculate Adjusted EBITDA differently such that our calculation may not be directly comparable.

 
 
Adjusted EBITDA for the 35 weeks ended January 30, 2010 increased $12.0 million, or 4.8%, to $260.5 million from $248.5 million for the 35 weeks ended January 31, 2009.  This improvement in Adjusted EBITDA was primarily the result of the cost reductions realized during the Transition Period, as further described above under the caption entitled “Executive Summary.”

Adjusted EBITDA for Fiscal 2009 increased $22.8 million, or 8.4%, to $294.8 from $272.0 million for Fiscal 2008.  This improvement in Adjusted EBITDA was primarily the result of sales growth from new stores and the cost reductions realized during Fiscal 2009.
 
Adjusted EBITDA for Fiscal 2008 decreased $23.5 million, or 8.0%, to $272.0 from $295.5 million for Fiscal 2007.  This decrease in Adjusted EBITDA was primarily the result of a decrease in net sales and increased selling and administrative expenses due to new stores opened in Fiscal 2008.
 
The following table shows our calculation of Adjusted EBITDA for the 35 week periods ended January 30, 2010 and January 31, 2009, and the 52 week periods for Fiscal 2009, Fiscal 2008, and Fiscal 2007, which were derived from audited and unaudited financial information.

                                                                                                                                                                                                                
   
(in thousands)
     
 
35 Week Period Ended
   
Years Ended
               
 
                         
Reconciliation of Net Income (Loss) to Adjusted EBITDA:
                             
Net Income (Loss)
$
18,653
 
$
(155,643
)
 
$
(191,583
)
$
(48,970
)
$
     (47,199)
Interest Expense
 
59,476
   
74,263
     
102,716
   
132,993
   
144,563
Income Tax Expense (Benefit)
 
11,570
   
(104,667
)
   
(147,389
)
 
(25,304
)
 
(25,425)
Depreciation and Amortization
 
103,605
   
106,823
     
159,607
   
166,666
   
163,837
Impairment Charges - Long-Lived Assets
 
46,776
   
28,134
     
37,498
   
25,256
   
24,421
Impairment Charges - Tradenames
 
-
   
279,300
     
294,550
   
-
   
-
Interest Income
 
(196)
   
(535
)
   
(641
)
 
(1,975
)
 
(3,845)
Transaction-Related Expenses (a)
 
-
      -      
-
   
-
   
390
Non Cash Straight-Line Rent Expense (b)
 
4,196
   
6,236
     
7,358
   
6,768
   
9,431
Retention Bonus (c)
 
-
      -      
-
   
-
   
13,854
Advisory Fees (d)
 
2,879
   
3,342
     
4,660
   
4,316
   
4,119
Stock Compensation Expense (e)
 
994
   
2,728
     
6,124
   
2,436
   
2,856
Professional Fees (f)
 
-
   
-
     
-
   
-
   
1,864
Sox Compliance (g)
 
-
   
1,077
     
1,189
   
2,989
   
-
(Gain) Loss on Investment in Money Market Fund (h)
 
(3,849)
   
1,669
     
4,661
   
-
   
-
Amortization of Purchased Lease Rights (i)
 
560
   
620
     
893
   
140
   
-
Severance (j)
 
2,264
   
1,929
     
2,737
   
-
   
-
Franchise Taxes (k)
 
751
   
631
     
1,500
   
760
   
37
Insurance Reserve (l)
 
3,731
   
255
     
5,561
   
2,950
   
2,928
Advertising Expense Related to Barter Transactions (m)
 
1,816
   
1,875
     
2,334
   
1,636
   
-
CEO Transition Costs (n)
 
-
   
-
     
2,173
   
-
   
-
Loss on Disposal of Fixed Assets (o)
 
5,824
   
468
     
805
   
1,351
   
3,677
Change in Fiscal Year End Costs (p)
 
1,445
   
-
     
-
   
-
   
-
Adjusted EBITDA
$
260,495
 
 $
248,505
   
$
294,753
 
$
272,012
 
$
295,508
                         
Reconciliation of Adjusted EBITDA to Net Cash Provided by Operating Activities:
                             
Adjusted EBITDA
$
260,495
 
  $
248,505
   
$
294,753
 
$
272,012
 
$
295,508
Interest Expense
 
(59,476)
   
(74,263
)
   
(102,716
)
 
(132,993
)
 
(144,563)
Changes in Operating Assets and Liabilities
 
(72,323)
   
118,846
     
(30,929
)
 
(19,050
)
 
(59,970)
Other Items, Net
 
(25,169)
   
(25,245
)
   
11,188
   
(21,992
)
 
5,041
Net Cash Provided by Operating Activities
$
103,527
 
  $
267,843
   
$
172,296
 
$
97,977
 
$
96,016
                               
Net Cash Used in Investing Activities
$
(54,074
)
  $
(109,887
)
 
$
(145,280
)
$
(100,313
)
$
(52,591)
                               
Net Cash (Used in) Provided by Financing Activities
$
(50,513
)
  $
(156,351
)
 
$
(41,307
)
$
8,559
 
$
(67,923)




 
 

 

37



 

           During the Transition Period, in accordance with the credit agreement governing the Term Loan and ABL, and with approval from the administrative agents for the Term Loan and ABL Line of Credit, we changed our methodology of calculating Adjusted EBITDA such that costs incurred in connection with our change in fiscal year end (quantified in note (p) to the foregoing table) are added back to consolidated net income when calculating Adjusted EBITDA.  This change has no impact on the Adjusted EBITDA amounts presented for prior periods.



  (a)
Represents third party costs (primarily legal fees) incurred in connection with the Merger Transaction, as approved by the administrative agents for the Term Loan and ABL Line of Credit.

  (b)
Represents the difference between the actual base rent and rent expense calculated in accordance with GAAP (on a straight line basis), in accordance with the credit agreements governing the Term Loan and ABL Line of Credit.

  (c)
Represents the accrual of retention bonuses to be paid to certain members of management on the first anniversary of the Merger Transaction for services rendered to us, as approved by the administrative agents for the Term Loan and ABL Line of Credit.

  (d)
Represents the annual advisory fee of Bain Capital expensed during the fiscal periods, in accordance with the credit agreements governing the Term Loan and ABL Line of Credit.

  (e)
Represents expenses recorded under ASC No. 718 “Stock Compensation” during the fiscal periods, in accordance with the credit agreements governing the Term Loan and ABL Line of Credit.

  (f)
Represents professional fees associated with one-time costs consisting of consulting fees in connection with the corporate restructuring of our stores which was incurred within twelve months after the closing date of the Merger Transaction, as approved by the administrative agents for the Term Loan and ABL Line of Credit.

  (g)
As a voluntary non-accelerated filer, we furnished our initial management report on Internal Controls Over Financial Reporting in our Annual Report on Form 10-K for Fiscal 2008. These costs represent professional fees related to this compliance effort that were incurred during Fiscal 2008 and the first quarter of Fiscal 2009, as well as fees incurred as part of our ongoing internal controls compliance effort for Fiscal 2009, as approved by the administrative agents for the Term Loan and ABL Line of Credit.

  (h)
Represents the (gain) loss on our investment in the Reserve Primary Fund (Fund), related to a decline in the fair value of the underlying securities held by the Fund, as approved by the administrative agents for the Term Loan and ABL Line of Credit.  Refer to the discussion below under the caption entitled “Investment in Money Market Fund,” and Note 5 to the Consolidated Financial Statements also entitled “Investment in Money Market Fund” for further details.

  (i)
Represents amortization of purchased lease rights which are recorded in rent expense within our selling and administrative line items, in accordance with the credit agreements governing the Term Loan and ABL Line of Credit.

  (j)
Represents a severance charge resulting from a reduction of approximately 10% of our workforce during the Transition Period and Fiscal 2009 (refer to Note 17 to our Consolidated Financial Statements entitled “Restructuring and Separation Costs” for further discussion), in accordance with the credit agreements governing the Term Loan and ABL Line of Credit.

  (k)
Represents franchise taxes paid based on our equity, as approved by the administrative agents for the Term Loan and ABL Line of Credit.

  (l)
Represents the non-cash change in reserves based on estimated general liability, workers compensation and health insurance claims as approved by the administrative agents for the Term Loan and ABL Line of Credit.

  (m)
Represents non-cash advertising expense based on the usage of barter advertising credits obtained as part of a non-cash exchange of inventory, as approved by the administrative agents for the Term Loan and ABL Line of Credit.

  (n)
Represents recruiting costs incurred in connection with the hiring of our new President and Chief Executive Officer on December 2, 2008, and other benefits payable to our former President and Chief Executive Officer pursuant to the separation agreement we entered into with him on February 16, 2009.  Both of these adjustments were approved by the administrative agents for the Term Loan and ABL Line of Credit.

  (o)
Represents the gross non-cash loss recorded on the disposal of certain assets in the ordinary course of business, as in accordance with the credit agreements governing the Term Loan and ABL Line of Credit.

  (p)
Represents costs incurred in conjunction with changing our fiscal year end from the Saturday closest to May 31 to the Saturday closest to January 31 commencing with the transition period ending January 30, 2010.  This change was approved by the administrative agents for the Term Loan and ABL Line of Credit.
 

 



 

38



 
Investment in Money Market Fund

During Fiscal 2009, the Company made investments into The Reserve Primary Fund (Fund) of $56.3 million.  On September 22, 2008, the Fund announced that redemptions of shares of the Fund were suspended pursuant to an SEC order so that an orderly liquidation may be effected for the protection of the Fund’s investors.  As of January 30, 2010, the Company received total distributions of its investment in the Fund of $55.4 million.  Of the $55.4 million received from the Fund, $4.8 million was received during the 35 week transition period ended January 30, 2010, and resulted in a gain of $3.8 million during the Transition Period, as compared to a loss of $4.7 million during Fiscal 2009.  Accordingly, the Company has incurred $0.9 million of cumulative losses related to its investment in the Fund.

Cash Flows
 
Net cash flows for the 35 week periods ended January 30, 2010, as derived from audited financial statements, and January 31, 2009, as derived from unaudited financial statements, and for Fiscal 2009, Fiscal 2008 and Fiscal 2007 as derived from audited financial statements were as follows:

   
(in thousands)
 
   
 
35 Weeks Ended January 30, 2010
   
 
35 Weeks Ended January 31, 2009
 
Year Ended
   
Year Ended
   
Year Ended
 
                             
Net cash provided by operating activities
$
103,527
 
$
267,843
 
$
172,296
   
$
97,977
   
$
96,016
 
                                   
Net cash used in investing activities
 
(54,074
)
 
(109,887
)
 
(145,280
)
   
(100,313
)
   
(52,591
)
                                   
Net cash (used in) provided by financing activities
 
(50,513
)
 
(156,351
)
 
(41,307
)
   
8,559
     
(67,923
)
                                   
(Decrease) Increase in cash and cash equivalents
$
(1,060
)
$
1,605
 
$
(14,291
)
 
$
6,223
   
$
(24,498
)


Cash Flows for the 35 Weeks Ended January 30, 2010 Compared with the 35 Week Ended January 31, 2009

We used $1.1 million of cash flow for the 35 weeks ended January 30, 2010 compared with generating $1.6 million of cash flow for the 35 week period ended January 31, 2009.  Net cash provided by operating activities amounted to $103.5 million for the 35 weeks ended January 30, 2010.  For the 35 weeks ended January 31, 2009, net cash provided by operating activities was $267.8 million.  The decrease in net cash provided by operating activities was primarily the result of our working capital management strategy at the end of the Transition Period in which we accelerated $274.8 million of payments that typically would not have been made until the first quarter of Fiscal 2010.    This lowered our accounts payable balance at the end of the Transition Period which resulted in a decrease in accounts payable for the 35 weeks ended January 30, 2010 of $151.5 million compared with the 35 week period of Fiscal 2009.  There was no such working capital management strategy in place during the 35 weeks ended January 31, 2009.

The decrease in net cash flows provided by operating activities was partially offset by improvements in net cash used in investing and financing activities.  Net cash used in investing activities decreased to $54.1 million for the 35 weeks ended January 30, 2010 from $109.9 million for the 35 weeks ended January 31, 2009.  This reduction was primarily the result of decreased capital expenditures during the 35 weeks ended January 30, 2010 compared with the 35 week period ended January 31, 2009.  Capital expenditures decreased $35.9 million for the 35 weeks ended January 30, 2010 compared with the 35 weeks ended January 31, 2009 due to fewer store openings during the 35 weeks ended January 30, 2010 compared with the first 35 weeks of Fiscal 2009.

Net cash used in financing activities decreased $105.8 million during the 35 weeks ended January 30, 2010 compared with the 35 weeks ended January 31, 2009.  The primary driver of the decreased use of cash in financing activities was related to repayments, net of borrowings, on our ABL Line of Credit.  Repayments, net of borrowings, on our ABL Line of Credit amounted to $29.1 million and $151.6 million, respectively, for the 35 weeks ended January 30, 2010 and January 31, 2009.
 



 

39



 
Cash flow and working capital levels assist management in measuring our ability to meet our cash requirements.  Working capital measures our current financial position.  Working capital is defined as current assets (exclusive of restricted cash) less current liabilities.  Working capital at January 30, 2010 was $349.7 million compared with $179.7 million at January 31, 2009.  The increase in working capital was primarily the result of decreased accounts payable as of January 30, 2010 compared with January 31, 2009 due to the Company’s working capital management strategy.

Cash Flows for the Twelve Months Ended May 30, 2009 Compared with the Twelve Months Ended May 31, 2008

We used $14.3 million of cash flow during Fiscal 2009 compared with generating $6.2 million of cash flow in Fiscal 2008.  Net cash provided by operating activities was $172.3 million for Fiscal 2009 compared with $98.0 million for Fiscal 2008.  The improvement in net cash provided by operating activities was primarily the result of improved operating results, exclusive of all non-cash charges of $65.8 million.  This increase was primarily the result of increased sales from new store growth, decreased selling and administrative costs in connection with our plan to reduce our cost structure, and decreased interest expense as a result of lower average interest rates on our ABL Line of Credit and our Term Loan.
  
The improvements in cash flows provided by operating activities were offset by increased cash outlays in investing and financing activities.  For Fiscal 2009, we used $41.3 million of cash in financing activities, the majority of which represents repayments, net of borrowings, of $31.3 million, on our ABL Line of Credit.  For Fiscal 2008, we generated $8.6 million in cash from financing activities, the majority of which represents borrowings, net of repayments, of $22.6 million on our ABL Line of Credit.  Cash flow used in investing activities increased $45.0 million due primarily to higher levels of capital expenditures, the re-designation of cash and cash equivalents to investments in money market funds, partially offset by redemptions of our investment in the Fund during Fiscal 2009 as compared with the Fiscal 2008, and the purchase of tradename rights during Fiscal 2009.

Working capital at May 30, 2009 was $312.3 million compared with $284.4 million at May 31, 2008.  The increase in working capital from May 31, 2008 to May 30, 2009 was primarily due to a decrease in accounts payable as a result of in the timing of payments in Fiscal 2009 compared with Fiscal 2008.

Cash Flows for the Twelve Months Ended May 31, 2008 Compared With the Twelve Months Ended June 2, 2007
 
 We generated $6.2 million of cash flow during Fiscal 2008 compared with using $24.5 million of cash flow during Fiscal 2007.  Net cash provided by operating activities increased $2.0 million to $98.0 million for Fiscal 2008 from $96.0 million for Fiscal 2007.
 
Net cash used in investing activities increased $47.7 million to $100.3 million for Fiscal 2008, primarily related to an increased level of capital expenditures of $26.4 million and increased lease acquisition costs of $7.1 million.  Additionally, we generated $11.0 million less cash flow in Fiscal 2008 compared with Fiscal 2007 as a result of 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 in Fiscal 2008, resulting in positive cash flow of $8.6 million at the end of the fiscal year.  The increase was 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 was primarily related to funding our capital expenditures. 

Operational Growth
 
During the Transition Period, we opened nine new Burlington Coat Factory Warehouse Stores (“BCF” stores).  As of January 30, 2010, we operated 442 stores under the names "Burlington Coat Factory Warehouse" (424 stores), "Cohoes Fashions" (two stores), "MJM Designer Shoes" (15 stores) and "Super Baby Depot" (one store).   

We monitor the availability of desirable locations for our stores by, among other things, evaluating dispositions by other retail chains, bankruptcy auctions and presentations by real estate developers, brokers and existing landlords.  Most of our stores are located in malls, strip shopping centers, regional power centers or are freestanding.  We also lease existing space and have opened a limited number of built-to-suit locations.  For most of our new leases, we provide for a minimum initial ten year term with a number of five year options thereafter.  Typically, our lease strategy includes landlord allowances for leasehold improvements.  We believe our lease model makes us competitive with other retailers for desirable locations.  We may seek to acquire a number of such locations either through transactions to acquire individual locations or transactions that involve the acquisition of multiple locations simultaneously.
 
From time to time we make available for sale certain assets based on current market conditions.  These assets are recorded in the line item "Assets Held for Disposal" in our Consolidated Balance Sheets.  Based on prevailing market conditions, we may determine that it is no longer advantageous to continue marketing certain assets and will reclassify those assets out of the line item "Assets Held for Disposal" and into the respective asset category.  Upon this reclassification, we assess the assets for impairment and reclassify them based on the lesser of their carrying value or fair value less cost to sell.
 
 



 

40



 
 
Debt

Holdings and each of our current and future subsidiaries, except one subsidiary which is considered minor, have jointly, severally and unconditionally guaranteed BCFWC’s obligations pursuant to the $721 million ABL Line of Credit, $900 million Term Loan and the $305 million of Senior Notes due in 2014.  As of January 30, 2010, we were in compliance with all of our debt covenants. Significant changes in our debt consist of the following:

$721 Million ABL Senior Secured Revolving Facility
 
    On January 15, 2010, we completed an amendment and restatement of the credit agreement governing our ABL Line of Credit, which (among other things) extended the maturity date for consenting lenders constituting $600 million of commitments to February 5, 2014.  As part of the amendment and restatement, we eliminated the outstanding $65 million A-1 tranche commitments, although we maintained the ability to restore up to $65 million of the A-1 tranche with the consent of lenders holding the majority of outstanding commitments. We offered the banks in the terminated A-1 tranche the option to convert to the A tranche or opt out of the agreement altogether.  This reduced our total line of credit to $721 million through May 31, 2011, after which the line of credit will be reduced to $600 million through the new maturity date.  The $600 million ABL Line of Credit has a springing maturity requirement whereby the ABL Line of Credit will mature 45 days prior to May 28, 2013, the maturity date of the Term Loan, if the Term Loan is not extended or refinanced prior to such date unless the pro forma credit availability condition has been satisfied after implementation of a Term Loan maturity reserve or the outstanding principal amount under the Term Loan maturing prior to February 5, 2014 is not more than $75 million.  We believe the $600 million line of credit will provide adequate liquidity to support our operating activities.  A further description of the amended and restated credit agreement governing the ABL Line of Credit and related transactions, including a description of covenants, fees and interest rates, is contained in Item 1.01 of our Current Report on Form 8-K, filed with the SEC on January 19, 2010.  

The facility will carry an interest rate of LIBOR plus a spread which is determined by our annual average borrowings outstanding.  Commitment fees of 0.75% to 1.0%, based on our usage of the line of credit, will be charged on the unused portion of the facility and will be included in the line item “Interest Expense” on the Company’s Consolidated Statements of Operations.

During the Transition Period, we made repayments of principal, net of borrowings, in the amount of $29.1 million.  As of January 30, 2010, we had $121.2 million outstanding under the ABL Line of Credit and unused availability of $158.6 million.

$900 Million Term Loan

    On February 25, 2010, we entered into a second amendment to the credit agreement governing the Term Loan.  Among other things, the amendment provides that consolidated EBITDA (as defined in credit agreement governing the Term Loan) will be increased or decreased for any period to the extent necessary to eliminate the effects during such period of any increase or decrease in legal, auditing, consulting, and accounting related expenses for such period relating directly to our change in fiscal year compared to the amount of such expenses that would have been incurred in such period had the fiscal year change not occurred.  The amendment also provides that for purposes of any calculation of consolidated interest coverage ratio and consolidated leverage ratio, as of the last day of any fiscal quarter ending on or after January 30, 2010 and prior to the completion of the fiscal year ending the Saturday closest to January 31, 2011, consolidated EBITDA and consolidated interest expense will be determined for the most recent period of twelve consecutive fiscal months.  Pursuant to the terms of the amendment, we paid a fee to each lender consenting to the amendment in the amount of 0.05% (or $0.4 million) of the principal amount of such lender’s outstanding loan under the credit agreement governing the Term Loan.  A further description of the second amendment to the credit agreement governing the Term Loan is contained in Item 1.01 of our Current Report on Form 8-K, filed with the SEC on February 26, 2010.  
 
As of January 30, 2010, we had $864.8 million outstanding under the Term Loan.  Based on our available free cash flow as of January 30, 2010, we are required to make a repayment of principal in the amount of $11.5 million during Fiscal 2010.  This repayment, which will be made during the first quarter for Fiscal 2010, will offset the mandatory quarterly payments of $2.3 million through the second quarter of the fiscal year ending January 28, 2012 (Fiscal 2011) and $0.3 million of the mandatory quarterly payment for the third quarter of Fiscal 2011.

 Capital Expenditures

We spent $56.9 million, net of $7.6 million of landlord allowances, in capital expenditures during the Transition Period.  These capital expenditures include $35.1 million (net of the $7.6 million of landlord allowances) for store expenditures, $11.1 million for upgrades of distribution facilities, and $10.7 million for computer and other equipment.  
 
For Fiscal 2010, we estimate that we will spend between $100 million and $110 million, net of the benefit of landlord allowances of approximately $38 million, for store openings, improvements to distribution facilities, information technology upgrades, and other capital expenditures.  Of the total planned expenditures, approximately $60 million, net of the benefit of $38 million of landlord allowances, is currently expected for expenditures related to new stores, relocations and other store requirements.  Capital of approximately $38 million is expected to support information technology and the remaining capital is currently expected to support continued distribution facility enhancements and other initiatives.  As part of our growth strategy, we plan to open between 15 and 23 new BCF stores (exclusive of two relocations) and remodel one additional BCF store during Fiscal 2010.

We are in the process of transitioning to a new warehouse management system in our distribution network as well as updating our material handling systems.  These updates were implemented in our Edgewater Park, New Jersey facility and have allowed us to consolidate our former Bristol, Pennsylvania facility into the Edgewater Park facility.  Additionally, we are in the process of consolidating our Burlington, New Jersey facility into the Edgewater Park facility.  As part of our process to close this distribution center, we accelerated our depreciation related to the assets of this facility.  The Edgewater Park facility has both the capacity and storage capability to handle the volume previously handled by the Bristol and Burlington facilities.  During Fiscal 2010, we anticipate that the transition to our new warehouse management system will be completed throughout our two primary distribution centers in Edgewater Park and San Bernardino, California, and we believe that the use of the new system will have a positive impact on efforts to optimize our supply chain management.
 



 

41



 
 
Dividends

Payment of dividends is prohibited under our credit agreements, except for limited circumstances.  Dividends equal to $0.2 million, $3.0 million, and $0.7 million were paid in the Transition Period, Fiscal 2009, and Fiscal 2008 respectively, to Holdings in order to repurchase capital stock of the Parent from executives who left our employment.

Certain Information Concerning Contractual Obligations
 
The following table sets forth certain information regarding our obligations to make future payments under current contracts as of January 30, 2010:
 

   
Payments Due By Period 
(in thousands)
 
     
Total
   
Less Than 1 Year
   
2-3 Years
   
4-5 Years
   
Thereafter
 
                                 
Long-Term Debt Obligations (1)
   
$
1,392,038
   
$
13,697
   
$
444,392
   
$
933,949
   
$
-
 
Interest on Long-Term Debt
     
290,027
     
71,320
     
138,129
     
80,578
     
-
 
Capital Lease Obligations(2)
     
47,498
     
2,616
     
5,340
     
5,488
     
34,054
 
Operating Lease Obligations (3)
Related Party Fees (4)
     
1,168,167
     
175,396
     
345,302
     
286,179
     
361,290
 
   
24,830
     
4,000
     
8,000
     
8,000
     
4,830
 
Purchase Obligations (5)
Topic No. 740 and Other Tax Liabilities (6)
     
402,710
     
400,887
     
1,682
     
103
     
38
 
   
33,966
     
-
     
4,793
     
-
     
29,173
 
Letters of Credit (7)
     
79,646
     
79,646
     
-
     
-
     
-
 
Other (8)
     
5,472
     
2,229
     
243
     
-
     
3,000
 
                                           
Total
   
$
3,444,354
   
$
749,791
   
$
947,881
   
$
1,314,297
   
$
432,385
 
                                           
 
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 our advisory agreement with them (refer to Note 22 to our Consolidated Financial Statements entitled “Related Party Transactions” for further detail).
 
(5)
Represents commitments to purchase goods or services that have not been received as of January 30, 2010.
 
(6)
The Topic No. 740 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, $10.8 million of interest and penalties included in our total Topic No. 740 liability is not included in the table above. 
 
(7)
Represents irrevocable letters of credit guaranteeing payment and performance under certain leases, insurance contracts, debt agreements and utility agreements as of January 30, 2010 (refer to Note 21 to our Consolidated Financial Statements entitled “Commitments and Contingencies” for further discussion).
 
(8)
Represents severance agreements with former members of management, and our agreements with each of three former employees (including our former President and Chief Executive Officer) to pay their beneficiaries $1.0 million upon their deaths.


During Fiscal 2007, we sold lease rights for three store locations that were previously operated by us.  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 $5.7 million through the end of our fiscal year ending February 1, 2014, and which are not reflected in the table above. The scheduled future aggregate minimum rentals for these leases over the four consecutive fiscal years following the Transition Period are $1.6 million, $1.6 million, $1.7 million, and $0.8 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 January 30, 2010.
 



 

42



 
Critical Accounting Policies and Estimates
 
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.  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 ongoing 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.
 
In June 2009, the Financial Accounting Standards Board (FASB) issued authoritative accounting guidance which established the FASB Accounting Standards Codification (Codification or ASC) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities and stated that all guidance contained in the Codification carries an equal level of authority. The authoritative accounting guidance recognized that rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants. We adopted the provisions of the authoritative accounting guidance for the interim reporting period ended November 28, 2009, the adoption of which did not have a material effect on our Consolidated Financial Statements.

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 entitled “Summary of Significant Accounting Policies,” 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 present sales, net of sales taxes, in our Consolidated Statements of Operations and Comprehensive Income (Loss).  We account for layaway sales and leased department revenue in compliance with ASC Topic No. 605, Revenue Recognition in Financial Statements.  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 within the line item “Other Current Liabilities” in 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 subsidiary, 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 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.

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 is widely used in the retail industry due to its practicality.  Additionally, the use of the retail inventory method results 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. Typically, estimates are used to charge inventory shrinkage for the first three quarters of a fiscal year.  Actual physical inventories are typically conducted during the fourth quarter of each fiscal year to calculate actual shrinkage.  For the Transition Period, we conducted our physical inventories during the two month period ended January 30, 2010.

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 in a typical fiscal year.
 

 



 

43



 
Long-Lived Assets. We test for recoverability of long-lived assets in accordance with Topic 360 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. The recoverability assessment related to these store-level assets requires judgments and estimates of future revenues, gross margin rates and store expenses.  We base these estimates upon our past and expected future performance.  We believe our estimates are appropriate in light of current market conditions.  To the extent these future projections change, our conclusions 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 the Transition Period, and in Fiscal 2009 and Fiscal 2008, we recorded $12.0 million, $10.0 million and $6.5 million, respectively, in impairment charges related to long-lived assets (exclusive of finite-lived 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 senior notes and 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 required 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 tradenames, 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 (tradenames) to their estimated fair value.  The recoverability assessment with respect to the tradenames used in our operations requires us to estimate the fair value of the tradenames as of the assessment date.  Such determination is made using the “relief from royalty” valuation method.  Inputs to the valuation model include:
 

·  
Future revenue and profitability projections associated with the tradenames;


·  
Estimated market royalty rates that could be derived from the licensing of our tradenames to third parties in order to establish the cash flows accruing to our benefit as a result of ownership of the tradenames; and


·  
Rate used to discount the estimated royalty cash flow projections to their present value (or estimated fair value) based on the risk and nature of our cash flows.

Our finite-lived intangible assets are reviewed for impairment whenever circumstances change, in conjunction with the impairment testing of our long-lived assets as described above.   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.   Impairment charges of $34.6 million, $26.1 million and $18.8 million were recorded related to our finite-lived intangible assets during the Transition Period, Fiscal 2009 and Fiscal 2008, respectively, and are included in the line item “Impairment Charges – Long-Lived Assets” in our Consolidated Statements of Operations and Comprehensive Income (Loss).  During the Transition Period, we did not record any impairment charges related to our indefinite-lived intangible assets.  During Fiscal 2009 we recorded $294.6 million of impairment charges related to our indefinite-lived intangible assets in the line item “Impairment Charges – Tradenames” in our Consolidated Statement of Operations and Comprehensive Income (Loss).  During Fiscal 2008 there were no impairment charges related to our indefinite-lived intangible assets.
 
Goodwill  Impairment.  Goodwill represents the excess of cost over the fair value of net assets acquired.  Topic No. 350 requires periodic tests of the impairment of goodwill.  Topic No. 350 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 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 annual goodwill impairment review is typically performed during the beginning of May of the fiscal year.    For Fiscal 2009, in response to several factors (as more fully described in Note 9 to the Company’s Consolidated Financial Statements entitled “Goodwill”), including, but not limited to recent declines in the U.S. and international financial markets, decreased comparative store sales results of the peak holiday and winter selling seasons and our expectation that the current comparative store sales trends would continue for an extended period, we determined that it was appropriate to perform our annual goodwill impairment testing in the third and fourth quarters of Fiscal 2009.  There were no impairment charges recorded on the carrying value of our goodwill for the Transition Period, Fiscal 2009 or Fiscal 2008.
 
 



 

44



 
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 workers’ 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 $45.7 million and $42.3 million at January 30, 2010 and May 30, 2009, respectively.
 
Reserves for Sales Returns. We record reserves for future sales returns.  The reserves are based on current sales volume and historical returns experience.  If actual returns differ from historical levels, revisions in our estimates may be required. Sales reserves amounted to $2.3 million and $6.2 million at January 30, 2010 and May 30, 2009, respectively.  
 
Income Taxes.  We account for income taxes in accordance with ASC Topic No. 740 “Income Taxes” (Topic No. 740).  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 FASB Interpretation No. 48 (as amended) – “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109,” as codified in Topic No. 740. Adjustments related to the adoption of Topic No. 740 are reflected as an adjustment to retained earnings in Fiscal 2008.  Topic No. 740 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements, and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return.  Topic No. 740 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, Topic No. 740 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Recent Accounting Pronouncements

Refer to Note 3 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 fiscal quarter to fiscal quarter or over the longer term. Certain of the general factors that may cause such fluctuations are discussed in Item 1A, Risk Factors and elsewhere in the Transition Report.
 
Seasonality
 
Our business is seasonal, with our highest sales occurring in the months of September through January of each year. For the past 60 months, an average of 50.2% of our net sales occurred during the period from September through January. Weather, however, continues to be an important contributing factor to our sales. 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 35 week period ended January 30, 2010.  During the recent past, the cost of apparel merchandise has decreased due to deflationary pressures as a result of the overall challenging retail conditions.  




 
 

 

45



 

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 more fully described in Note 11 to our Consolidated Financial Statements entitled, “Derivatives and Hedging Activities,” we enter into interest rate cap agreements to manage interest rate risks associated with our 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 and letters of credit, as more fully described above under the caption “Certain Information Concerning Contractual Obligations,” 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.

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 January 30, 2010, we had $427.4 million principal amount of fixed-rate debt and $986.0 million of floating-rate debt. Based on $986.0 million outstanding as floating rate debt, an immediate increase of one percentage point would cause an increase to cash interest expense of approximately $9.8 million per year, resulting in $9.8 million less in our pre-tax earnings.  As of May 30, 2009, we estimated that an immediate increase of one percentage point would cause an increase to cash interest expense of approximately $10.2 million per year.  This sensitivity analysis assumes our mix of financial instruments and all other variables will remain constant in future periods.  These assumptions are made in order to facilitate the analysis and are not necessarily indicative of our future intentions.
 
If a one point increase in interest rate were to occur over the next four fiscal quarters (excluding the effect of our interest rate cap agreements discussed below), such an increase would result in the following additional interest expenses (assuming our current ABL Line of Credit borrowing level remains constant with fiscal year end levels):

 
 

 

                         
Floating-Rate Debt
 
(in thousands)
 
Principal Outstanding at January 30, 2010
   
Additional Interest Expense Q1 2010
   
Additional Interest Expense Q2
2010
 
Additional Interest
Expense Q3 2010
 
Additional Interest Expense Q4 2010
                         
ABL Line of Credit
 
$
121,200
   
$
303
   
$
303
 
$
303
  $
303
                                 
Term Loan
   
864,752
     
2,160
     
2,131
   
2,131
 
2,131
                                 
Total
 
$
985,952
   
$
2,463
   
$
2,434
 
$
2,434
  $
2,434
                                 


 We have two interest rate cap agreements for a maximum principal amount of $900 million which limit our interest rate exposure to 7% for our first $900 million 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 $37.3 million on borrowing levels of up to $900 million.  Currently, we have unlimited interest rate risk related to our variable rate debt in excess of $900 million.  At January 30, 2010, our borrowing rate related to our ABL Line of Credit was 5.3%.  At January 30, 2010, the borrowing rate related to our Term Loan was 2.5%.

On January 16, 2009, we entered into two additional interest rate cap agreements to limit interest rate risk associated with our future long-term debt.  Each agreement will be effective on May 31, 2011 upon termination of the two interest rate cap agreements noted above.  The new agreements each have a notional principal amount of $450 million with a cap rate of 7.0% and terminate on May 31, 2015.



 
 

 

46



 


We and our subsidiaries, affiliates, and significant shareholders may from time to time seek to retire or purchase our outstanding debt (including publicly issued debt) through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions, by tender offer or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.  During Fiscal 2009, an affiliate of Bain Capital, LLC, our indirect controlling stockholder, purchased a portion of Holdings' 14 1/2% Senior Discount Notes due 2014 (the Purchased Notes).  The Purchased Notes were sold in October of 2009. 
 
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.
 

 



 
 

 

47



 
 
 
 


Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 
   
 
Page
Consolidated Financial Statements
 
Report of Independent Registered Public Accounting Firm
49
Consolidated Balance Sheets as of January 30, 2010,  May 30, 2009 and May 31, 2008
50
Consolidated Statements of Operations and Comprehensive Income (Loss) for the 35 weeks ended January 30, 2010, and the fiscal years ended May 30, 2009,  May 31, 2008 and June 2, 2007
51
Consolidated Statements of Cash Flows for 35 weeks ended January 30, 2010 and the fiscal years ended May 30, 2009, May 31, 2008 and June 2, 2007
52
Consolidated Statements of Stockholder’s Equity for the 35 weeks ended January 30, 2010 and the fiscal years ended May 30, 2009, May 31, 2008 and June 2, 2007
54
Notes to Consolidated Financial Statements for the 35 weeks ended January 30, 2010 and the fiscal years ended May 30, 2009, May 31, 2008 and June 2, 2007
55







 



 
 

 

48



 
 
 
 



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 January 30, 2010, May 30, 2009, and May 31, 2008, and the related consolidated statements of operations and comprehensive income (loss), stockholder’s equity, and cash flows for the 35 weeks ended January 30, 2010 and each of the three years in the period ended May 30, 2009.  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 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 circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion. 

 In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Burlington Coat Factory Investments Holdings, Inc. and subsidiaries as of January 30, 2010, May 30, 2009, and May 31, 2008, and the results of their operations and their cash flows for the 35 weeks ended January 30, 2010 and each of the three years in the period ended May 30, 2009, 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 adopted new guidance on the accounting for uncertainty in income taxes.


/s/ DELOITTE & TOUCHE LLP


Parsippany, New Jersey
April 30, 2010





 

49



 
 
 
 


BURLINGTON COAT FACTORY INVESTMENTS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except share amounts)

 
           
                 
ASSETS
               
Current Assets:
               
Cash and Cash Equivalents
$
24,750
 
$
25,810
   
$
40,101
 
Restricted Cash and Cash Equivalents
 
2,605
   
2,622
     
2,692
 
Investment in Money Market Fund
 
-
   
995
     
-
 
Accounts Receivable (Net of Allowances for Doubtful Accounts of $513 in 2010, $629 in 2009 and $634 in 2008)
 
31,278
   
25,468
     
27,137
 
Merchandise Inventories
 
613,295
   
641,833
     
719,529
 
Deferred Tax Assets
 
29,644
   
52,958
     
51,376
 
Prepaid and Other Current Assets
 
29,443
   
30,047
     
24,978
 
Prepaid Income Taxes
 
4,841
   
6,249
     
3,864
 
Assets Held for Disposal
 
521
   
2,717
     
2,816
 
                     
Total Current Assets
 
736,377
   
788,699
     
872,493
 
                     
Property and Equipment—Net of Accumulated Depreciation
 
856,149
   
895,827
     
919,535
 
Tradenames
 
238,000
   
238,000
     
526,300
 
Favorable Leases—Net of Accumulated Amortization
 
421,091
   
477,572
     
534,070
 
Goodwill
 
47,064
   
47,064
     
42,775
 
Other Assets
 
95,313
   
86,206
     
69,319
 
                     
Total Assets
$
2,393,994
 
$
2,533,368
   
$
2,964,492
 
                     
LIABILITIES AND STOCKHOLDER’S EQUITY
                   
Current Liabilities:
                   
Accounts Payable
$
139,802
 
$
229,757
   
$
337,040
 
Income Taxes Payable
 
14,223
   
18,100
     
5,804
 
Other Current Liabilities
 
215,814
   
215,127
     
238,866
 
Current Maturities of Long Term Debt
 
14,201
   
10,795
     
3,653
 
                     
Total Current Liabilities
 
384,040
   
473,779
     
585,363
 
                     
Long Term Debt
 
1,399,152
   
1,438,751
     
1,480,231
 
Other Liabilities
 
173,067
   
159,409
     
110,776
 
Deferred Tax Liabilities
 
283,235
   
326,364
     
464,598
 
                     
Commitments and Contingencies (Note 13, 15, 21, and 22)
 
 
 
               
Stockholder’s Equity:
                   
Common Stock, Par Value $0.01; Authorized 1,000 Shares; 1,000 Issued and Outstanding at January 30, 2010, May 30, 2009 and May 31, 2008
 
-
   
  -
     
  -
 
Capital in Excess of Par Value
 
464,489
   
463,495
     
457,371
 
Accumulated Deficit
 
(309,989)
   
(328,430
)
   
(133,847
)
Total Stockholder’s Equity
 
154,500
   
135,065
     
323,524
 
Total Liabilities and Stockholder’s Equity
$
2,393,994
 
$
2,533,368
   
$
2,964,492
 

See Notes to Consolidated Financial Statements


 



 
 

 

50



 
 
 
 




BURLINGTON COAT FACTORY INVESTMENTS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(All amounts in thousands)

                         
   
 
35 Weeks Ended January 30,
   
Year Ended
   
Year Ended
   
Year Ended
 
REVENUES:
                       
Net Sales
$
2,457,567
   
$
3,541,981
   
$
3,393,417
   
$
3,403,407
 
Other Revenue
 
21,730
     
29,386
     
30,556
     
38,238
 
                               
 Total Revenue
 
2,479,297
     
3,571,367
     
3,423,973
     
3,441,645
 
                               
COSTS AND EXPENSES:
                             
Cost of Sales (Exclusive of Depreciation and Amortization as Shown Below)
 
1,492,349
     
2,199,766
     
2,095,364
     
2,125,160
 
Selling and Administrative Expenses
 
759,774
     
1,115,248
     
1,090,829
     
1,062,468
 
Restructuring and Separation Costs (Note 17)
 
2,429
     
6,952
     
-
     
-
 
Depreciation and Amortization
 
103,605
     
159,607
     
166,666
     
163,837
 
Interest Expense (Inclusive of Gain/Loss on Interest Rate Cap Agreements)
 
59,476
     
102,716
     
132,993
     
144,563
 
Impairment Charges – Long-Lived Assets
 
46,776
     
37,498
     
25,256
     
24,421
 
Impairment Charges – Tradenames
 
-
     
294,550
     
-
     
-
 
Other Income, Net
 
(15,335
)
   
(5,998
)
   
(12,861
)
   
(6,180
)
                               
 Total Costs and Expenses
 
2,449,074
     
3,910,339
     
3,498,247
     
3,514,269
 
 
Income/ (Loss) Before Income Tax Expense/(Benefit)
 
30,223
     
(338,972
)
   
(74,274
)
   
(72,624
)
 
Income Tax Expense/(Benefit)
 
11,570
     
(147,389)
     
(25,304
)
   
(25,425
)
                               
Net Income/(Loss)
 
18,653
     
(191,583
)
   
(48,970
)
   
(47,199
)
                               
Total Comprehensive Income/(Loss)
$
18,653
   
$
(191,583
)
 
$
(48,970
)
 
$
(47,199
)
                               
 
See Notes to Consolidated Financial Statements


 



 
 

 

51



 
 
 
 

 
BURLINGTON COAT FACTORY INVESTMENTS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)

 
                       
   
35 Weeks Ended January 30, 2010
 
Year Ended
   
Year Ended
   
Year Ended
 
OPERATING ACTIVITIES
                     
Net Income (Loss)
$
18,653
 
$
(191,583
)
 
$
(48,970
)
 
$
(47,199
)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities:
                           
Depreciation and Amortization
 
103,605
   
159,607
     
166,666
     
163,837
 
Amortization of Debt Issuance Costs
 
8,238
   
10,335
     
10,309
     
10,250
 
Impairment Charges – Long-Lived Assets
 
46,776
   
37,498
     
25,256
     
24,421
 
Impairment Charges – Tradenames
 
-
   
294,550
     
-
     
-
 
Accretion of Senior Notes and Senior Discount Notes
 
449
   
608
     
11,872
     
11,948
 
Interest Rate Cap Contracts-Adjustment to Market
 
(455)
   
(4,173
)
   
(70
   
1,971
 
Provision for Losses on Accounts Receivable
 
1,993
   
2,832
     
2,977
     
2,826
 
Provision for Deferred Income Taxes
 
(19,815)
   
(144,106
)
   
(61,961
)
   
(61,834
)
Loss on Disposition of Fixed Assets and Leasehold Improvements
 
5,386
   
297
     
1,096
     
3,637
 
(Gain)/Loss on Investments in Money Market Fund
 
(3,849)
   
4,661
     
-
     
-
 
Non-Cash Stock Option Expense
 
994
   
6,124
     
2,436
     
7,957
 
Non-Cash Rent Expense
 
(3,327)
   
(296
)
   
981
     
9,397
 
                             
Changes in Assets and Liabilities:
                           
Investments
 
-
   
-
     
-
     
591
 
Accounts Receivable
 
(3,638)
   
(175
)
   
(3,187
)
   
(4,258
)
Merchandise Inventories
 
28,538
   
77,696
     
(8,958
)
   
(2,386
Prepaid and Other Current Assets
 
2,013
   
(7,538
)
   
4,682
     
910
 
Accounts Payable
 
(89,955)
   
(107,283
)
   
(58,335
)
   
(62,480
)
Other Current Liabilities and Income Tax Payable
 
(8,737)
   
8,345
     
21,289
     
3,683
 
Deferred Rent Incentives
 
7,649
   
38,730
     
32,885
     
31,957
 
Other Long-Term Assets and Long-Term Liabilities
 
9,009
   
(13,833
)
   
(991
   
788
 
                             
Net Cash Provided by Operations
 
103,527
   
172,296
     
97,977
     
96,016
 
                             
INVESTING ACTIVITIES
                           
Cash Paid for Property and Equipment
 
(60,035)
   
(129,957
)
   
(95,615
)
   
(69,188
)
Change in Restricted Cash and Cash Equivalents
 
17
   
70
     
61
     
11,063
 
Proceeds From Sale of Property and Equipment and Assets Held for Sale
 
1,062
   
369
     
2,429
     
4,669
 
Proceeds From Sale of Partnership Interest
 
-
   
-
     
-
     
850
 
Lease Acquisition Costs
 
-
   
(3,978
)
   
(7,136
   
-
 
Issuance of Notes Receivable
 
-
   
-
     
(72
)
   
(67
)
Redesignation of Cash Equivalents to Investment in Money Market Fund
 
-
   
(56,294
)
   
-
     
-
 
Redemption of Investment in Money Market Fund
 
4,844
   
50,637
     
-
     
-
 
Purchase of Tradenames Rights
 
-
   
(6,250
)
   
-
     
-
 
Other
 
38
   
123
     
20
     
82
 
                             
Net Cash Used in Investing Activities
 
(54,074)
   
(145,280
)
   
(100,313
)
   
(52,591
)
                             
 





 
 

 

52



 
 
 
 



FINANCING ACTIVITIES
                     
Proceeds from Long Term Debt—ABL Line of Credit
 
444,315
   
857,051
     
685,655
     
649,655
 
Principal Payments on Long Term Debt
 
(1,537)
   
(1,597
)
   
(1,448
)
   
(1,384
)
Principal Payments on Long Term Debt—Term Loan
 
(5,998)
   
(2,057
)
   
(11,443
)
   
(13,500
)
Principal Payments on Long Term Debt—ABL Line of Credit
 
(473,422)
   
(888,344
)
   
(663,056
)
   
(702,894
)
Equity Investment
 
-
   
-
     
-
     
300
 
Purchase of Interest Rate Cap Contract
 
-
   
(3,360)
     
(424
)
   
-
 
Payment of Dividends
 
(212)
   
(3,000)
     
(725
)
   
(100
)
Debt Issuance Costs
 
(13,659)
   
-
     
-
         
                             
Net Cash (Used in) Provided by Financing Activities
 
(50,513)
   
(41,307
)
   
8,559
     
(67,923
)
                             
(Decrease) Increase in Cash and Cash Equivalents
 
(1,060)
   
(14,291
)
   
6,223
     
(24,498
)
Cash and Cash Equivalents at Beginning of Period
 
25,810
   
40,101
     
33,878
     
58,376
 
                             
Cash and Cash Equivalents at End of Period
$
24,750
 
$
25,810
   
$
40,101
   
$
33,878
 
                             
Supplemental Disclosure of Cash Flow Information:
                           
Interest Paid
$
47,963
 
$
96,543
   
$
109,808
   
$
124,631
 
                             
Income Tax (Refund) Payment, Net
$
48,764
 
$
(5,341
)
 
$
33,692
   
$
38,389
 
                             
Non-Cash Investing Activities:
                           
Accrued Purchases of Property and
      Equipment
$
10,667
 
$
(1,849
)
 
$
(395
)
 
$
4,175
 
      Sale of Assets Held for Disposal for Notes Receivable
 
(2,000)
   
-
     
-
     
-
 
                             
 
 
See Notes to Consolidated Financial Statements
 


 



 
 

 

53



 
 
 
 





BURLINGTON COAT FACTORY INVESTMENTS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
(All amounts in thousands)

   
Common Stock
   
Capital in Excess of Par Value
   
Retained Earnings (Accumulated Deficit)
   
Total
 
                         
                                 
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 ASC Topic No. 740
   
-
        -      
(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
 
                                 
Net Loss
                   
(191,583
)
   
(191,583
)
Stock Option Expense
   
-
     
6,124
             
6,124
 
Dividend
   
-
     
-
     
(3,000
)
   
(3,000
)
                                 
Balance at May 30, 2009
   
-
     
463,495
     
(328,430
)
   
135,065
 
                                 
Net Income
   
  -
        -      
18,653
     
18,653
 
Stock Option Expense
   
  -
     
  994
        -      
994 
 
Dividend
   
  -
        -      
(212) 
     
(212) 
 
                                 
Balance at January 30, 2010
 
$
-
   
$
464,489
   
$
(309,989)
   
$
154,500
 


 
See Notes to Consolidated Financial Statements


 



 
 

 

54



 
 
 
 


BURLINGTON COAT FACTORY INVESTMENTS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  Summary of Significant Accounting Policies

Business and Current Conditions

As of January 30, 2010, Burlington Coat Factory Investments Holdings, Inc. and its subsidiaries (the Company or Holdings) operate 442 stores in 44 states and Puerto Rico, selling apparel, shoes and accessories for men, women and children. A majority of those stores offer a home furnishing and linens department and a juvenile furniture department.  As of January 30, 2010, the Company operated stores under the names “Burlington Coat Factory” (424 stores), “Cohoes Fashions” (two stores), “MJM Designer Shoes” (15 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 35 week period ended January 30, 2010 (the Transition Period), the Company opened nine new Burlington Coat Factory Warehouse stores.

The primary subsidiary of the Company is Burlington Coat Factory Warehouse Corporation (BCFWC), which was initially organized in 1972 as a New Jersey corporation.  In 1983, BCFWC was reincorporated in Delaware and currently exists as a Delaware corporation.  Holdings was incorporated in 2006 (and currently exists) as a Delaware corporation.  In 2006, BCFWC became a wholly-owned subsidiary of Holdings in a take private transaction (the Merger Transaction).

Prior to the 35 week Transition Period (as defined below under the caption “Fiscal Years”), the Company experienced recurring annual net losses since its formation in April 2006.  These losses were primarily the result of impairment charges and increased interest expense associated with the Company’s leveraged debt structure as detailed in Note 13 to the Company’s Consolidated Financial Statements entitled “Long Term Debt.”  During the Transition Period, the Company recorded impairment charges of $46.8 million related to its long-lived assets (refer to Notes 8 and 10 to the Company's Consolidated Financial Statements entitled "Intangible Assets" and “Impairment of Long-Lived Assets”, respectively, for further discussion). 

Significant declines in the United States and international financial markets and the resulting impact of such events on macroeconomic conditions have impacted and are anticipated to continue to impact customer behavior and consumer spending at retailers which impacts the Company’s sales trends.  In response to these economic conditions, the Company implemented several initiatives to restructure its workforce and reduce its cost structure (refer to Note 17 to the Company's Consolidated Financial Statements entitled "Restructuring and Separation Costs" for further discussion).  The Company continues to focus on a number of ongoing initiatives aimed at improving its comparative store sales and operating results.  The Company believes it is also prudently managing its capital spending and operating expenses. 

Despite the current trends in the retail environment and their negative impact on the Company’s comparative store sales, the Company believes that cash generated from operations, along with its existing cash and availability under its ABL Line of Credit, will be sufficient to fund its expected cash flow requirements and planned capital expenditures for at least the next twelve months as well as the foreseeable future.  However, there can be no assurance that, should the economy continue to decline, the Company would be able to continue to offset decreases in its comparative store sales with continued savings initiatives.  At January 30, 2010, working capital was $349.7 million, cash and cash equivalents were $24.8 million and unused availability under the Company’s ABL Senior Secured Revolving Facility (ABL Line of Credit) was $158.6 million.  

Fiscal Years

In order to conform to the predominant fiscal calendar used within the retail industry, on February 25, 2010 the Company’s Board of Directors approved a change in the Company’s fiscal year from a fiscal year comprised of the twelve consecutive fiscal months ending on the Saturday closest to May 31 to a fiscal year comprised of the twelve consecutive fiscal months ending on the Saturday closest to January 31.  As a result, these Consolidated Financial Statements are included in the Company’s Transition Report on Form 10-K/T for the 35 week transition period beginning on May 31, 2009 (the day following the end of our 2009 fiscal year) and ended on January 30, 2010 (Transition Period). Our last three complete fiscal years prior to the Transition Period ended on May 30, 2009 (Fiscal 2009), May 31, 2008 (Fiscal 2008), and June 2, 2007 (Fiscal 2007), and each of those years contained 52 weeks.  All references to quarters, unless otherwise noted, refer to the historical quarters of the Company’s fiscal years prior to the fiscal year end change.  See Note 2 to the Company’s Consolidated Financial Statements entitled “Fiscal Year End Change” for the comparative Consolidated Statements of Operations and Comprehensive Income (Loss) for the 35 week periods ended January 30, 2010 and January 31, 2009.




 
 

 

55



 
 
 
 

Basis of Presentation                                                                                                                                                          

The Consolidated Financial Statements include the accounts of the Company.  The Company has no operations and its only asset is all of the stock in BCFWC. All discussions of operations in this report relate to BCFWC, which are reflected in the Consolidated Financial Statements of the Company.

In June 2009, the Financial Accounting Standards Board (FASB) issued authoritative accounting guidance which established the FASB Accounting Standards Codification (Codification or ASC) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities and stated that all guidance contained in the Codification (the Topics) carries an equal level of authority. The authoritative accounting guidance recognized that rules and interpretive releases of the Securities and Exchange Commission (SEC) under federal securities laws are also sources of authoritative Generally Accepted Accounting Principles (GAAP) for SEC registrants. The Company adopted the provisions of the authoritative accounting guidance for the interim reporting period ended November 28, 2009, the adoption of which had no effect on the Company’s Consolidated Financial Statements for such period.

Principles of Consolidation

The Consolidated Financial Statements include the accounts of the Company in which it has controlling financial interest through direct ownership. All intercompany accounts and transactions have been eliminated.

The Company was incorporated in the State of Delaware on April 10, 2006. The Company’s 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 Burlington Coat Factory Holdings, Inc. (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 GAAP.  Certain amounts included in the Consolidated Financial Statements are estimated based on historical experience, 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, and such differences could have a material impact on the Company’s Consolidated Financial Statements.
 
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.  Book cash overdrafts are reclassified to the line item “Accounts Payable” on the Company’s Consolidated Balance Sheets for financial reporting purposes.

Accounts Receivable

Accounts receivable consists of credit card receivables, lease incentive receivables and other receivables.  Accounts receivable are recorded at net realizable value, which approximates fair value.
 
Inventories

Merchandise inventories as of January 30, 2010, May 30, 2009, and May 31, 2008 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, distribution center 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 distribution, buying, and store receiving functions are included in the line items “Selling and Administrative Expenses” and “Depreciation and Amortization” in the Company's Consolidated Statements of Operations and Comprehensive Income (Loss).  Distribution and purchasing costs included in “Selling and Administrative Expenses” amounted to $40.1 million, $63.3 million, $63.7 million and $61.7 million for the 35 weeks ended January 30, 2010, Fiscal 2009, Fiscal 2008 and Fiscal 2007, respectively. Depreciation and amortization related to the distribution and purchasing functions for the same periods amounted to $12.3 million, $9.3 million, $9.5 million, and $10.4 million, respectively.   

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 land related to store operations and purchased lease rights.




 
 

 

56



 
 
 
 

Based on prevailing market conditions, the Company may determine that it is no longer advantageous to continue marketing certain assets and reclassify those assets out of the line item “Assets Held for Disposal” and into the respective asset category.  Upon this reclassification, the Company would assess the assets for impairment and reclassify them based on the lesser of their carrying value or fair value less cost to sell (refer to Note 6 to the Company’s Consolidated Financial Statements entitled “Assets Held for Disposal” for further details).

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 expensed 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 and Amortization” 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 ASC Topic No. 360 “Property, Plant, and Equipment” (Topic No. 360).  An impairment charge is recorded when an asset’s carrying value exceeds its fair value.  The Company recorded $12.0 million, $10.0 million, $6.5 million and $8.8 million of impairment charges related to property and equipment during the 35 weeks ended January 30, 2010 and the fiscal years ended May 30, 2009, May 31, 2008 and June 2, 2007, respectively.  These amounts are recorded in the line item “Impairment Charges – Long-Lived Assets” in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).

Capitalized Computer Software Costs

The Company accounts for capitalized software in accordance with ASC Topic No. 350 Intangibles – Goodwill and Other” (Topic No. 350).  Topic No. 350 requires the capitalization of certain costs incurred in connection with developing or obtaining software for internal use. The Company capitalized $7.2 million, $18.6 million, and $13.1 million relating to these costs during the 35 weeks ended January 30, 2010 and the fiscal years ended May 30, 2009, and May 31, 2008, respectively. 

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 – Net of Accumulated Depreciation” on the Company’s Consolidated Balance Sheets and software amortization is included in the line item “Depreciation and Amortization” on the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).

Intangible Assets
 
The Company accounts for intangible assets in accordance with Topic No. 350.  The Company’s intangible assets primarily represent tradenames and favorable lease positions. The tradename asset, 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 “Depreciation and Amortization” in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).
 
Indefinite-lived intangible assets: The Company tests identifiable intangible assets with an indefinite life for impairment on an annual basis, or when a triggering event occurs, 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.  See Note 8 to the Consolidated Financial Statements entitled “Intangible Assets” for further discussion of impairment charges recorded as part of the Company’s review.

Finite-lived intangible assets: Identifiable intangible assets that are subject to amortization are evaluated for impairment in accordance with Topic No. 360 using a process similar to that used to evaluate other long-lived assets as described in Note 10 to the Company’s Consolidated Financial Statements entitled  “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.  For the favorable lease positions, 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 the Company’s risk adjusted rate of interest.  The Company recorded impairment charges related to identifiable intangible assets of $34.6 million, $26.1 million, $18.8 million and $15.6 million during the 35 weeks ended January 30, 2010 and the fiscal years ended May 30, 2009, May 31, 2008 and June 2, 2007, respectively.  These charges are recorded in the line item “Impairment Charges – Long-Lived Assets” in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).



 
 

 

57



 
 
 
 


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. Topic No. 350 replaces the amortization of goodwill and indefinite-lived intangible assets with periodic tests for the impairment of these assets.  Topic No. 350 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, the Company would calculate the implied fair value of its reporting unit goodwill as compared with the carrying value of its reporting unit goodwill to determine the appropriate impairment charge.  The Company estimates the fair value of its reporting unit using widely accepted valuation techniques.  These techniques use a variety of assumptions including projected market conditions, discount rates and future cash flows.  See Note 9 to the Company’s Consolidated Financial Statements entitled “Goodwill” for further discussion of the fair value of reporting unit goodwill.

Impairment of Long-Lived Assets

The Company accounts for impaired long-lived assets in accordance with Topic No. 360.  This Topic 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 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 either based on prices for similar assets or measured by discounting expected future cash flows by the Company’s risk adjusted rate of interest.   See Note 10 to the Company’s Consolidated Financial Statements entitled “Impairment of Long-Lived Assets” for further discussion of the Company’s measurement of impairment of long-lived assets.

Other Assets

Other assets consist primarily of deferred financing fees, landlord owned store assets that the Company has paid for as part of its lease, purchased lease rights, 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 “Interest Expense” in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).  Landlord owned assets represent leasehold improvements at certain stores where the landlord has retained title to such assets.  These assets are amortized over the straight line rent period and the amortization is included in the line item “Depreciation and Amortization” in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).  Purchased lease rights are amortized over the straight line rent period and the amortization is recorded in the line item “Selling and Administrative Expenses” in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).  Both landlord owned assets and purchased lease rights are assessed for impairment in accordance with Topic No. 360.  During the 35 weeks ended January 30, 2010 and Fiscal 2009, the Company recorded an impairment charge of $0.1 million and $1.4 million, respectively, related to landlord owned assets and purchased lease rights.  There were no such impairment charges in Fiscal 2008 or Fiscal 2007.
 
Other Current Liabilities

Other current liabilities primarily consist of sales tax payable, customer liabilities, accrued payroll costs, self-insurance reserves, accrued operating expenses, payroll taxes payable, current portion of deferred rent expense and other miscellaneous items.  Customer liabilities totaled $33.2 million, $39.1 million and $40.0 million as of January 30, 2010, May 30, 2009 and May 31, 2008, respectively.
 
The Company has risk participation agreements with insurance carriers with respect to workers' compensation, general liability insurance and 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 workers’ compensation claims by employees, health insurance claims by employees or general liability claims may result in a corresponding increase in costs related to these claims.  Self insurance reserves were $45.7 million, $42.3 million and $36.7 million as of January 30, 2010, May 30, 2009 and May 31, 2008, respectively.  At January 30, 2010, the portion of the self insurance reserve expected to be paid in the next twelve months of $24.2 million was recorded in the line item "Other Current Liabilities" in the Company's Consolidated Balance Sheets.   The remaining balance of $21.5 million was recorded in the line item "Other Liailities" in the Company's Consolidated Balance Sheets.  Prior to January 30, 2010, all of the Company's self insurance reserves were recorded in the line item "Other Current Liabilities" in the Company's Consolidated Balance Sheets.
 
   



 
 

 

58



 
 
 
 
 
Other Liabilities

Other liabilities primarily consist of deferred lease incentives, the net accumulation of excess straight-line rent expense over actual rental payments and tax liabilities associated with the uncertainty in income taxes recognized by the Company in accordance with ASC Topic No. 740 “Income Taxes” (Topic No. 740).

Deferred lease incentives are funds received or receivable from landlords used primarily to offset the costs of store remodeling. 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

The Company has 1,000 shares of common stock issued and outstanding, all of which are owned by the Parent.  Parent has 51,674,204 shares of Class A common stock, par value $0.001 per share and 5,769,356 shares of Class L common stock, par value $0.001 per share, authorized.  As of January 30, 2010, 45,669,546 shares of Class A common stock and 5,074,394 shares of Class L common stock were outstanding. As of May 30, 2009, 45,851,301 shares of Class A common stock and 5,094,589 shares of Class L common stock were 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 were outstanding.  
 
 
Revenue Recognition

The Company records revenue at the time of sale and delivery of merchandise, net of allowances for estimated future returns.  The Company presents sales, net of sales taxes, in its Consolidated Statements of Operations and Comprehensive Income (Loss).  The Company accounts for layaway sales and leased department revenue in compliance with ASC Topic No. 605 “Revenue Recognition” (Topic No. 605).  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 the likelihood of redemption is remote.  

Other Revenue

Other revenue consists of rental income received from leased departments; subleased rental income; layaway, alteration, dormancy and other service charges, inclusive of shipping and handling revenues (Service Fees); and other miscellaneous items.
 


   
 
 
     (in thousands)  
   
35 Weeks Ended
   
Years Ended
 
                 
                         
Service Fees
 
$
8,183
   
$
9,517
   
$
10,529
   
$
16,110
 
Rental Income from Leased Departments
   
5,997
     
8,699
     
7,886
     
9,889
 
Subleased Rental Income and Other Miscellaneous Items
   
7,550
     
11,170
     
12,141
     
12,239
 
Total
 
$
21,730
   
$
29,386
   
$
30,556
   
$
38,238
 



The decrease in Service Fees from Fiscal 2007 through Fiscal 2009 was primarily 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 Note 12 to the Company’s Consolidated Financial Statements entitled “Store Value Cards” for further details).   In Fiscal 2008 and Fiscal 2007, dormancy service fees contributed $2.2 million and $7.4 million to the line item “Other Revenue.”  



 
 

 

59



 
 
 
 


Rental income from leased departments results from arrangements at some of the Company’s stores where the Company has granted unaffiliated third parties the right to use designated store space solely for the purpose of selling such third parties’ goods, including such items as lingerie, fragrances and jewelry.  The Company does not own or have any rights to any tradenames, licenses or other intellectual property in connection with the brands sold by such unaffiliated third parties.  

Vendor Rebates and Allowances

Rebates and allowances received from vendors are accounted for in compliance with Topic No. 605, which 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 Topic No. 605 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, exclusive of advertising rebates, amounted to $1.3 million, $2.6 million, $2.0 million and $0.9 million for the 35 weeks ended January 30, 2010 and for the fiscal years ended May 30, 2009, May 31, 2008, and June 2, 2007, respectively.

Advertising Costs

The Company's net advertising costs consist primarily of newspaper and television costs. The production costs of net advertising are expensed 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 35 weeks ended January 30, 2010 and for the fiscal years ended May 30, 2009, May 31, 2008 and June 2, 2007, advertising expense was $49.4 million, $75.2 million, $70.8 million and $72.3 million, respectively.
 
The Company nets certain cooperative advertising reimbursements received from vendors that meet the criteria of Topic No. 605 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 $0.2 million, $1.7 million, $0.4 million and $0.6 million for the 35 weeks ended January 30, 2010 and for the fiscal years ended May 30, 2009, May 31, 2008, and June 2, 2007, respectively.
 
Barter Transactions

The Company accounts for barter transactions under ASC Topic No. 845 Nonmonetary Transactions.”  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 35 weeks ended January 30, 2010, the Company did not enter into any new barter agreements.  For the fiscal years ended May 30, 2009 and May 31, 2008, the Company exchanged $10.7 million and $5.2 million, respectively, of inventory for certain advertising credits.  To account for the exchange, the Company recorded “Sales” and “Cost of Sales” of $10.7 million and $5.2 million in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) during Fiscal 2009 and Fiscal 2008, respectively.  The advertising credits received are to be used over the five consecutive fiscal years following the 35 weeks ended January 30, 2010

Based on the expected usage of barter credits, the Company recorded prepaid advertising of $2.7 million in the line item “Prepaid and Other Current Assets” and $7.5 million in the line item “Other Assets” in the Company’s Consolidated Balance Sheet as of January 30, 2010.  During the 35 weeks ended January 30, 2010, the Company utilized $1.8 million of the barter advertising credits.

Based on the expected usage of barter credits, the Company recorded prepaid advertising of $2.7 million in the line item “Prepaid and Other Current Assets” and $9.3 million in the line item “Other Assets” in the Company’s Consolidated Balance Sheet as of May 30, 2009.  The Company utilized $2.3 million of the barter advertising credits during Fiscal 2009.

During Fiscal 2008, based on the expected usage of barter credits, 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.  The Company utilized $1.6 million of the barter advertising credits during Fiscal 2008.




 
 

 

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Income Taxes

The Company accounts for income taxes in accordance with Topic No. 740.  Deferred income taxes reflect the impact of temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. A valuation allowance against the Company’s deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining the need for a valuation allowance, management is required to make assumptions and to apply judgment, including forecasting future earnings, taxable income, and the mix of earnings in the jurisdictions in which the Company operates. Management periodically assesses the need for a valuation allowance based on the Company’s current and anticipated results of operations.  The need for and the amount of a valuation allowance can change in the near term if operating results and projections change significantly.

On June 3, 2007, the Company adopted Topic No. 740 (formerly FIN 48). Adjustments related to the adoption of Topic No. 740 are reflected as an adjustment to retained earnings in Fiscal 2008.  Topic No. 740 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements, and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return.  Topic No. 740 requires the recognition in the Company’s Consolidated Financial Statements of 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 Company’s Consolidated 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, Topic No. 740 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  The Company records interest and penalties related to unrecognized tax benefits as part of income taxes.

Other Income, Net

Other income, net, consists of investment income gains and losses, breakage income, net losses from disposition of fixed assets, 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 35 weeks ended January 30, 2010 and for the fiscal years ended May 30, 2009, and May 31, 2008, the Company recognized $4.9 million, $3.1 million, and $5.3 million, respectively, of breakage income in the line item “Other Income, Net” in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).

Comprehensive Income (Loss)

The Company presents comprehensive income (loss) on its Consolidated Statements of Operations and Comprehensive Income (Loss) in accordance with ASC Topic No. 220 Comprehensive Income.”   For the 35 weeks ended January 30, 2010 and for the fiscal years ended May 30, 2009, May 31, 2008 and June 2, 2007, comprehensive income (loss) consisted of net income (loss).  

Lease Accounting

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 ASC Topic No. 840, Leases” (Topic No. 840) 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 Depreciation” 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

The Company accounts for share-based compensation in accordance with ASC Topic No. 718, “Stock Compensation” (Topic No. 718), which requires companies to record stock compensation expense for all non-vested and new awards beginning as of the adoption date.  There are 730,478 units reserved under the 2006 Management Incentive Plan (as amended).  Each unit consists of nine shares of Parent’s Class A common stock and one share of Parent’s Class L common stock.  As of January 30, 2010, 478,500 options to purchase units and 95,052 units of restricted stock, were outstanding and are being accounted for under Topic No. 718.  For the 35 weeks ended January 30, 2010 and for the fiscal years ended May 30, 2009, May 31, 2008 and June 2, 2007, the Company recognized non cash stock compensation expense of $1.0 million, $6.1 million, $2.4 million and $8.0 million, respectively (refer to Note 14 to the Company’s Consolidated Financial Statements entitled “Stock Option and Award Plans and Stock Based Compensation” for further details).




 
 

 

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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 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.

Change in Presentation

The Company made a reclassification to the prior periods’ Consolidated Statements of Operations and Consolidated Statements of Cash Flow for the fiscal years ended May 30, 2009, May 31, 2008, and June 2, 2007.  The Company had $10.3 million in amortization of deferred financing fees, related to its debt instruments, for each of the fiscal years ended May 30, 2009, May 31, 2008, and June 2, 2007.  These amounts, which the Company has previously disclosed as deferred debt amortization, and classified in the line item “Depreciation and Amortization” in the Consolidated Statements of Operations and Comprehensive Income (Loss), have been reclassified to the line item “Interest Expense” in the Consolidated Statements of Operations and Comprehensive Income (Loss).  The Company believes that this presentation results in a classification of this amortization that is more comparable to industry peers.  In the operating activities section of the Consolidated Statements of Cash Flow, the amortization of deferred financing fees was previously classified in the line item “Depreciation and Amortization.”  The amortization of deferred financing fees portion of the line item has been reclassified out of “Depreciation and Amortization” to a new line item within the operating activities section, “Amortization of Debt Issuance Costs.”  The Company reclassified $10.3 million, for the fiscal years ended May 30, 2009, May 31, 2008, and June 2, 2007, from “Depreciation and Amortization” to “Amortization of  Debt Issuance Costs” in the Consolidated Statements of Cash Flows.
 
2.           Fiscal Year End Change

On February 25, 2010, the Company’s Board of Directors resolved that the fiscal year that began on May 31, 2009, would end on the Saturday nearest January 31, 2010, and from and after that date, fiscal years would be the 52 or 53 week periods ending on the Saturday closest to January 31 of each successive year.  As a result, the 35 week transition period from May 31, 2009 to January 30, 2010 and the comparative 35 week period from June 1, 2008 to January 31, 2009 are presented in this Form 10-K/T.

       For comparative purposes, Consolidated Statements of Operations and Comprehensive Income (Loss) for the 35 weeks ended January 30, 2010 and January 31, 2009 are presented as follows:

 
(in thousands)
 
 
35 Weeks Ended
 
 
 
 
(Unaudited)
 
REVENUES:
       
Net Sales
$
2,457,567
 
$
2,476,635
 
Other Revenue
 
21,730
   
20,277
 
 Total Revenue
 
2,479,297
   
2,496,912
 
             
COSTS AND EXPENSES:
           
Cost of Sales (Exclusive of Depreciation and Amortization as Shown Below)
 
1,492,349
   
1,510,409
 
Selling and Administrative Expenses
 
759,774
   
761,062
 
Restructuring and Separation Costs (Note 17)
 
2,429
   
1,929
 
Depreciation and Amortization
 
103,605
   
106,823
 
Interest Expense (Inclusive of Gain/Loss on Interest Rate Cap Agreements)
 
59,476
   
74,263
 
Impairment Charges – Long-Lived Assets
 
46,776
   
28,134
 
Impairment Charges – Tradenames
 
-
   
279,300
 
Other Income, Net
 
(15,335)
   
(4,698)
 
 Total Costs and Expenses
 
2,449,074
   
2,757,222
 
             
 
Income (Loss) Before Income Tax Expense (Benefit)
 
30,223
   
(260,310)
 
 
Income Tax Expense (Benefit)
 
11,570
   
(104,667)
 
             
Net Income (Loss)
 
18,653
   
(155,643)
 
             
Total Comprehensive Income (Loss)
$
18,653
 
$
(155,643)
 
             
 

 



 

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3.        Recent Accounting Pronouncements
 
    In May 2009, the FASB issued SFAS No. 165, Subsequent Events” (SFAS No. 165), as codified under ASC No. 855 Subsequent Events” (Topic No. 855). Topic No. 855 requires companies to recognize in the financial statements the effects of subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Companies are not permitted to recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date and before financial statements are issued. For certain subsequent events, a company must disclose the nature of the event, an estimate of its financial effect, or a statement that such an estimate cannot be made. Topic No. 855 applies prospectively for interim or annual financial periods ending after June 15, 2009. The Company adopted the provisions of Topic No. 855 as of May 31, 2009.  Its adoption did not have a material impact on the Consolidated Financial Statements.
 
    In February 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements” (ASU 2010-09).  The amendments remove the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements.  ASU 2010-09 was effective upon issuance.  Its adoption did not have a material impact on the Consolidated Financial Statements.
 
    In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic No. 820): Improving Disclosures about Fair Value Measurements” (ASU 2010-06).  This ASU provides amendments that will require more robust disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1, 2, and 3.  ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements.  These disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  Early application is permitted.  The adoption of ASU 2010-06 is not expected to have a material impact on the Consolidated Financial Statements.
 
    In March 2010, the FASB issued ASU No. 2010-11, “Derivatives and Hedging (Topic No. 815): Scope Exception Related to Embedded Credit Derivatives” (ASU 2010-11). ASU 2010-11 clarifies the only form of embedded credit derivative that is exempt from embedded derivative bifurcation requirements is one that is related only to the subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature.  The amendments in this ASU are effective at the beginning of a reporting entity’s first fiscal quarter beginning after June 15, 2010.  Early adoption is permitted at the beginning of each entity’s first fiscal quarter beginning after March 5, 2010. The adoption of ASU 2010-11 is not expected to have a material impact on the Consolidated Financial Statements.

4.         Restricted Cash and Cash Equivalents
 
    At January 30, 2010 and May 30, 2009, restricted cash and cash equivalents consisted of $2.6 million restricted contractually for the acquisition and maintenance of a building related to a store operated by the Company.  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.  

5.         Investment in Money Market Fund
 
    In September 2008, as part of the Company's overnight cash management strategy, the Company invested $56.3 million in The Reserve Primary Fund (Fund), a money market fund registered with the SEC under the Investment Company Act of 1940.   On September 22, 2008, the Fund announced that redemptions of shares of the Fund were suspended pursuant to an SEC order so that an orderly liquidation may be effected for the protection of the Fund’s investors.  Upon the SEC’s announcement, this investment was reclassified out of the line item “Cash and Cash Equivalents” and into the line item “Investment in Money Market Fund” on the Company’s Consolidated Balance Sheets.  Interest income was recognized when earned.



 
 

 

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During Fiscal 2009, based on various announcements from the Fund, the Company recorded total other than temporary impairments of $4.7 million related to its investment in the line item “Other Income, Net.”  Also during Fiscal 2009, the Company received distributions from the Fund that totaled $50.6 million, leaving a remaining investment of $1.0 million as of May 30, 2009.

During the 35 weeks ended January 30, 2010, the Company received total distributions of $4.8 million, which exceeded the Company’s total investment of $1.0 million at May 30, 2009.  The $3.8 million of distributions received in excess of the Company’s investment at May 30, 2009 were recorded in the line item “Other Income, Net,” in the Company’s Consolidated Statement of Operations and Comprehensive Income (Loss).

6.           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 either identified or was actively seeking out potential buyers for these assets as of the balance sheet dates.  Included in the line item “Assets Held for Disposal” in the Company’s Consolidated Balance Sheet as of January 30, 2010 is an owned parcel of land adjacent to one of the Company’s stores.

As of May 30, 2009, assets included in the line item “Assets Held for Disposal” in the Company’s Consolidated Balance Sheet were comprised of owned parcels of land adjacent to two of the Company’s stores, a purchased lease right related to one of the Company’s stores, and various distribution equipment that was being held for sale.

As of May 31, 2008, assets included in the line item “Assets Held for Disposal” in the Company’s Consolidated Balance Sheet were comprised of leasehold improvements and a favorable lease related to one of the Company’s stores.

Assets held for disposal are valued at the lower of their carrying value or fair value less cost to sell as follows:


 
   
(in thousands)
 
               
Property and Equipment
 
$
521
   
$
783
   
$
63
 
Favorable Leases
   
-
     
-
     
2,753
 
Purchased Lease Right
   
-
     
1,934
     
-
 
   
$
521
   
$
2,717
   
$
2,816
 


During the 35 week period ended January 30, 2010, the Company sold assets with a total carrying value of $2.0 million that were held for sale as of May 30, 2009, including all the distribution equipment and the purchased lease right.  In exchange for the purchased lease right, the Company received a $2.0 million note receivable, of which the Company received its first installment payment of $0.4 million in January 2010.  Of the remaining $1.6 million, $0.4 million is included in the line item “Prepaid and Other Current Assets” on the Company’s Consolidated Balance Sheet and $1.2 million is included in the line item “Other Assets” on the Company’s Consolidated Balance Sheet.  The sale of both the distribution equipment and the purchased lease right resulted in no gain or loss in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).

During the fiscal year ended May 30, 2009, certain assets related to one of the Company’s stores, which were previously held for sale at May 31, 2008, no longer qualified as held for sale due to the fact that, subsequent to May 31, 2008, there was no longer an active program to locate a buyer.  Due to the deteriorating real estate market, the Company determined that it was in its best interest to no longer market this location and instead to continue to hold and use this location in the ordinary course of business.  As a result, the Company reclassified assets related to this location with a net long-lived asset value of $2.8 million out of the line item “Assets Held for Disposal” in the Company’s Consolidated Balance Sheets and into the line items “Property and Equipment, Net of Accumulated Depreciation” and “Favorable Leases, Net of Accumulated Amortization.”  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 $0.3 million during the fiscal year ended May 30, 2009, reflecting the adjustment for depreciation and amortization expense that would have been recognized had the asset group been continuously classified as held and used.  In addition, the Company assessed these assets for impairment and determined that no impairment charge was necessary at the time of reclassification.



 
 

 

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7.           Property and Equipment

Property and equipment consist of:

          (in thousands)  
   
Useful Lives
             
                         
Land
    N/A     $ 162,089     $ 162,172     $ 163,135  
Buildings
 
20 to 40 Years
      348,780       346,557       344,781  
Store Fixtures and Equipment
 
3 to 10 Years
      326,165       335,891       269,875  
Software
 
3 to 5 Years
      95,681       88,473       69,824  
Leasehold Improvements
 
Shorter of lease term or useful life
      331,746       337,148       327,941  
Construction in Progress
    N/A       23,414       3,429       14,442  
              1,287,875       1,273,670       1,189,998  
Less:  Accumulated Depreciation
            (431,726 )     (377,843 )     (270,463 ) )
                                 
Total Property and Equipment, Net of Accumulated Depreciation
          $ 856,149     $ 895,827     $ 919,535  
                                 


As of January 30, 2010, May 30, 2009 and May 31, 2008, assets, net of accumulated amortization of $6.1 million, $5.2 million and $3.3 million, respectively, held under capital leases amounted to approximately $30.1 million, $31.0 million, and $32.9 million, respectively, and are included in the line item “Buildings” in the foregoing table.  Amortization expense related to capital leases is included in the line item “Depreciation and Amortization” in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).  The total amount of depreciation expense for the 35 weeks ended January 30, 2010 and for the fiscal years ended May 30, 2009, May 31, 2008 and June 2, 2007 is $80.4 million, $125.7 million, $133.1 million and $130.4 million, respectively.  

During the 35 weeks ended January 30, 2010, and the fiscal years ended May 30, 2009, May 31, 2008 and June 2, 2007, the Company recorded impairment charges related to Property and Equipment of $12.0 million, $10.0 million, $6.5 million and $8.8 million, respectively (refer to Note 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 and Amortization” in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).  Depreciation and amortization of internally developed software amounted to $8.2 million, $20.7 million, $20.0 million and $17.8 million, respectively, for the 35 weeks ended January 30, 2010 and for the fiscal years ended May 30, 2009, May 31, 2008 and June 2, 2007.



 
 

 

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8.           Intangible Assets

The Company accounts for indefinite-lived intangible assets and finite-lived intangible assets in accordance with Topic No. 350 and Topic No. 360, respectively.  In accordance with Topic No. 350, indefinite-lived intangible assets not subject to amortization shall be tested for impairment on an annual basis, and between annual tests in certain circumstances.  The Company typically performs this assessment in the beginning of May of the fiscal year.  For the 35 weeks ended January 30, 2010, there were no triggering events that required that Company to accelerate its Topic No. 350 testing.    For Fiscal 2009, the Company concluded it was appropriate to test its indefinite-lived intangible assets for recoverability in the third fiscal quarter (refer to Note 9 to the Company’s Consolidated Financial Statements entitled “Goodwill” for further discussion regarding the Company’s decision to accelerate impairment testing under Topic No. 350 in Fiscal 2009).

In accordance with Topic No. 360, the Company tests long-lived assets and certain identifiable intangibles (favorable leases) to be held and used by an entity for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. 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 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 either based on prices for similar assets or measured by discounting expected future cash flows using the Company’s risk adjusted interest rate (refer to Note 10 to the Company’s Consolidated Financial Statements entitled “Impairment of Long-Lived Assets” for further discussion regarding the Company’s impairment testing under Topic No. 360).

Intangible assets at January 30, 2010, May 30, 2009 and May 31, 2008 consist primarily of a tradenames and favorable lease positions as follows:
 


                                                                                               
 
     (in thousands)  
         
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net Amount
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net Amount
 
                                     
Tradenames
 
$
238,000
   
$
-
   
$
238,000
   
$
238,000
   
$
-
   
$
238,000
 
                                                 
Favorable Leases
 
$
521,775
   
$
(100,684
)
 
$
421,091
   
$
567,034
   
$
(89,462
)
 
$
477,572
 
   
           
                     
Gross Carrying Amount
   
Accumulated Amortization
   
Net Amount
 
                                     
Tradenames
                         
$
526,300
   
$
-
   
$
526,300
 
                                                 
Favorable Leases
                         
$
599,087
   
$
(65,017
)
 
$
534,070
 

 
Tradenames

The gross carrying amount of the Company’s tradenames as of January 30, 2010 reflects no change in the balance from May 30, 2009.

The change in the gross carrying amount of the Company’s tradenames at May 30, 2009 compared with May 31, 2008 reflects (i) an increase of $6.3 million pursuant to the purchase of additional tradename rights during the fourth quarter of Fiscal 2009, and (ii) an impairment charge of $294.6 million.  The impairment charge consists of $288.3 million related to the Company’s Fiscal 2009 impairment testing, as further described below, and an additional $6.3 million impairment charge taken related to the aforementioned acquired tradename rights.  Based on the Company’s tradename impairment assessment, the Company could not support an increase in the asset value of its tradenames.  As a result, the Company immediately impaired the acquired asset.



 
 

 

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The recoverability assessment with respect to the tradenames used in the Company’s operations requires the Company to estimate the fair value of the tradenames as of the assessment date.  Such determination is made using "relief from royalty" valuation method.  Inputs to the valuation model include:
 

·  
Future revenue and profitability projections associated with the tradenames;


·  
Estimated market royalty rates that could be derived from the licensing of the Company’s tradenames to third parties in order to establish the cash flows accruing to the benefit of the Company as a result of its ownership of the tradenames; and


·  
A rate used to discount the estimated royalty cash flow projections to their present value (or estimated fair value) based on the risk and nature of the Company’s cash flows.


Based upon the impairment analysis of the tradenames conducted during the third quarter of Fiscal 2009, and updated during the fourth quarter of Fiscal 2009, the Company determined that a portion of the tradenames was impaired and recorded an impairment charge of $294.6 million.  This impairment charge reflected lower revenues and profitability projections associated with the Company's tradenames in the near term and lower estimated market royalty rate expectations in light of the then current general economic conditions. The Company’s projected revenues within the model were based on comparative store sales and new store assumptions over a nine year period.  The Company believes its estimates were appropriate based upon current market conditions. 

Favorable Leases

Fiscal 2010

The gross carrying amount of the Company’s favorable leases as of January 30, 2010 reflects a reduction of $45.3 million as a result of the impairment of 24 stores (refer to Note 10 entitled “Impairment of Long-Lived Assets” for further discussion).

 Accumulated amortization of favorable leases as of January 30, 2010 reflects increased amortization expense of $21.8 million, partially offset by a decrease of $10.6 million resulting from the impairment charge recognized in the 35 weeks ended January 30, 2010, as discussed above, which decreased both the carrying cost and accumulated amortization of the favorable leases.

Fiscal 2009

The gross carrying amount of the Company’s favorable leases as of May 30, 2009 reflects (i) a reduction of $35.0 million as a result of  the impairment of 21 stores (refer to Note 10 entitled “Impairment of Long-Lived Assets” for further discussion); and (ii) an increase of $2.9 million during Fiscal 2009 compared with Fiscal 2008 due to the Company reclassifying a favorable lease that was previously included in the line item “Assets Held for Disposal” into the line item “Favorable Leases, Net of Accumulated Amortization” (refer to Note 6 to the Company’s Consolidated Financial Statements entitled “Assets Held for Disposal” for further information).

Accumulated amortization of favorable leases as of May 30, 2009 reflects increases as a result of (i) amortization expense of $33.0 million and (ii) $0.3 million of amortization related to the reclassification of a favorable lease that was reclassified from the line item “Assets Held for Sale” to the line item “Favorable Leases, Net of Accumulated Amortization,” as discussed in the paragraph above.  These increases were partially offset by a decrease of $8.9 million resulting from the impairment charge recognized in Fiscal 2009, as discussed above, which decreased both the carrying cost and accumulated amortization of the favorable leases. 


The weighted average amortization period remaining for the Company's favorable leases is 17.6 years.  Amortization expense of favorable leases for each of the next five fiscal years is estimated to be as follows:

Fiscal years:
 
(in thousands)
 
       
2010
 
$
31,105
 
2011
   
29,854
 
2012
   
28,590
 
2013
   
27,972
 
2014
   
26,812
 
         
Total
 
$
144,333
 
         
 
 

 



 

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9.   Goodwill
 
The Company accounts for goodwill in accordance with Topic No. 350.  In accordance with Topic No. 350, goodwill shall be tested for impairment on an annual basis, and between annual tests in certain circumstances.  The Company typically performs this testing during the beginningof May of each fiscal year.  For the 35 weeks ended January 30, 2010, there were no triggering events that required the Company to accelerate its Topic No. 350 impairment testing.  For Fiscal 2009, the Company concluded that it was appropriate to test its goodwill for recoverability in connection with the preparation of the Company’s Condensed Consolidated Financial Statements for the third quarter of Fiscal 2009 in light of the following factors:
 

·  
Significant declines in the U.S. and international financial markets and the resulting impact of such events on current and anticipated future macroeconomic conditions and customer behavior;


·  
The determination that these macroeconomic conditions were impacting the Company’s sales trends as evidenced by decreases in comparative store sales;


·  
Decreased comparative store sales during  the peak holiday and winter selling seasons which are significant to the Company’s annual financial results;


·  
Declines in market valuation multiples of peer group companies used in the estimate of the Company’s business enterprise value; and


·  
The Company’s expectation that unfavorable comparative store sales trends would continue for an extended period.  

 
As a result, the Company revised its business strategies to include a more moderate store opening plan which reduced  future projections of revenue and operating results offset by initiatives that were implemented to reduce the Company's cost structure as discussed in Note 17 to the Company’s Consolidated Financial Statements entitled “Restructuring and Separation Costs.”

 
 
The Company assesses the recoverability of goodwill using a combination of valuation approaches to determine the Company’s business enterprise value including: (i) discounted cash flow techniques and (ii) a market approach using a guideline public company methodology.  Inputs to the valuation model include: