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99 CENTS ONLY STORES LLC - 10-KT - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in connection with "Item 6. Selected Financial Data" and "Item 8. Financial Statements and Supplementary Data" of this Report. Overview On December 16, 2013, the board of directors of our sole member, Parent, approved a resolution changing the end of our fiscal year. Prior to the change, our fiscal year ended on the Saturday closest to the last day of March. Our new fiscal year end is the Friday closest to the last day of January, with each successive quarterly period ending the Friday closest to the last day of April, July, October or January, as applicable. As a result of this change, our fiscal year 2014 consisted of 44 weeks and transition fiscal 2014 and the fourth interim period of transition fiscal 2014 ended on January 31, 2014. On January 13, 2012, we merged with Number Merger Sub, Inc. and became a subsidiary of Parent. See Item 1, "Business-Merger" for more information about the Merger. As a result of the Merger, we have prepared separate discussion and analysis of our consolidated operating results, financial condition and liquidity for the "Predecessor" and "Successor" periods relating to the periods preceding and succeeding the Merger, respectively. Fiscal 2013 began on April 1, 2012 and ended on March 30, 2013 and consisted of 52 weeks. Fiscal 2012 is presented as a Successor period from January 15, 2012 to March 31, 2012 consisting of 11 weeks and a Predecessor period from April 3, 2011 to January 14, 2012 consisting of 41 weeks, for a total of 52 weeks. Fiscal 2015 will consist of 52 weeks beginning February 1, 2014 and ending January 30, 2015. For comparability purposes, same-store sales for transition fiscal 2014 are based on the 43-week period ended January 25, 2014 as compared to the 43-week period ended January 26, 2013. Annual same-store sales for all other periods presented are based on the comparable 52-week period. For comparability purposes, average annual sales per store and annual sales per estimated saleable square foot calculations included in this Report are based on trailing 52-week period, ended January 25, 2014 for transition fiscal 2014, ended on March 30, 2013 for fiscal 2013 and ended on March 31, 2012 for fiscal 2012. In accordance with GAAP, we are required to separately present our results for the Predecessor and Successor periods. We have also prepared supplemental unaudited discussion and analysis of the combined Predecessor and Successor periods, on a pro forma basis ("pro forma fiscal year 2012"). Management believes that reviewing our results on a pro forma basis is important in identifying trends or reaching conclusions regarding our overall performance. The unaudited pro forma fiscal year 2012 financial data is for informational purposes only and should be read in conjunction with our historical financial data appearing throughout this Report. During transition fiscal 2014, we had net sales of $1,528.7 million, operating income of $14.2 million and net loss of $12.5 million. Same-store sales in transition fiscal 2014 increased by 3.7%. Average sales per store open at least 12 months, on a trailing 52-week period, increased to $5.4 million in transition fiscal 2014 from $5.3 million in fiscal 2013. Average net sales per estimated saleable square foot (computed for stores open at least 12 months) on a trailing 52-week period increased to $330 per square foot for transition fiscal 2014 from $321 per square foot for fiscal 2013. Existing stores at January 31, 2014 averaged approximately 21,000 gross square feet. In transition fiscal 2014, we continued to expand our store base by opening 27 net new stores. Of these newly opened stores, 13 stores are located in California, two in Nevada, five in Arizona, and seven in Texas. In fiscal 2015, we currently intend to increase our store count by approximately 30 to 35 stores, all of which are expected to be opened in our existing markets. We believe that our near term growth in fiscal 2015 will primarily result from new store openings in our existing territories and increases in same-store sales. Critical Accounting Policies and Estimates The preparation of financial statements requires management to make estimates and assumptions that affect reported earnings. These estimates and assumptions are evaluated on an on-going basis and are based on historical experience and other factors that management believes are reasonable. Estimates and assumptions include, but are not limited to, the areas of inventories, long-lived asset impairment, goodwill and other intangibles, legal reserves, self-insurance reserves, leases, taxes and share-based compensation. We believe that the following items represent the areas where more critical estimates and assumptions are used in the preparation of our financial statements: Inventory valuation. Inventories are valued at the lower of cost or market. Inventory costs are established using a methodology that approximates first in, first out, which for store inventories is based on a retail inventory method. Valuation allowances for shrinkage, as well as excess and obsolete inventory are also recorded. Shrinkage is estimated as a percentage of sales for the period from the last physical inventory date to the end of the applicable period. Such estimates are based on experience and the most recent physical inventory results. Physical inventories are taken at each of our retail stores at least once a year by an outside inventory service company. We perform inventory cycle counts at our warehouses throughout the year. We also perform inventory reviews and analysis on a quarterly basis for both warehouse and store inventory to determine inventory valuation allowances for excess and obsolete inventory. The valuation allowances for excess and obsolete inventory are based on the age of the inventory, sales trends and future merchandising plans. The valuation allowances for excess and obsolete inventory in many locations (including various warehouses, store backrooms, and sales floors of our stores) require management judgment and estimates that may impact the ending inventory valuation and valuation allowances that may affect the reported gross margin for the period. 27 -------------------------------------------------------------------------------- Table of Contents In the fourth quarter of fiscal 2013, we revised our inventory merchandising and liquidation philosophies to significantly reduce and liquidate slow moving inventories prospectively as directed by the current management team. As a result of this change, we recorded a charge to cost of sales and a corresponding reduction in inventory of approximately $9.1 million in the fourth quarter of fiscal 2013. This is a prospective change and did not have an effect on prior periods. At the end of the third quarter of transition fiscal 2014, based on new merchandising plans, we increased our valuation allowances for excess and obsolete inventory. The Company recorded a charge to cost of sales and a corresponding reduction in inventory of approximately $9.6 million. This is a prospective change and did not have an effect on prior periods. Considerable management judgment is necessary to estimate these inventory valuation reserves. As an indicator of the sensitivity of this estimate, a 10% increase in our estimates of expected losses from shrinkage and the excess and obsolete inventory provision at January 31, 2014, would have increased these reserves by approximately $1.8 million and $2.0 million, respectively, and increased pre-tax loss in transition fiscal 2014 by the same amounts. In order to obtain inventory at attractive prices, we take advantage of large volume purchases, closeouts and other similar purchase opportunities. Consequently, our inventory fluctuates from period to period and the inventory balances vary based on the timing and availability of such opportunities. Our inventory was $206.2 million as of January 31, 2014 and $201.6 million as of March 30, 2013. Long-lived asset impairment. We assess the impairment of long-lived assets quarterly or when events or changes in circumstances indicate that the carrying value may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset to expected future net cash flows generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, the carrying amount is compared to its fair value and an impairment charge is recognized to the extent of the difference. Factors that we consider important which could individually or in combination trigger an impairment review include the following: (1) significant underperformance relative to expected historical or projected future operating results; (2) significant changes in the manner we use of the acquired assets or the strategy for our overall business; and (3) significant changes in our business strategies and/or negative industry or economic trends. On a quarterly basis, we assess whether events or changes in circumstances occur that potentially indicate that the carrying value of long-lived assets may not be recoverable. Considerable management judgment is necessary to estimate projected future operating cash flows. Accordingly, if actual results fall short of such estimates, significant future impairments could result. During transition fiscal 2014, we did not record any long-lived asset impairment charges. During fiscal 2013, we wrote down the carrying value of a held for sale property to estimated net realizable value, net of expected disposal costs, and accordingly recorded an asset impairment charge of $0.5 million. During the Successor and Predecessor periods of fiscal 2012, we did not record any long-lived asset impairment charges. We have not made any material changes to our long-lived asset impairment methodology during transition fiscal 2014. Goodwill and other intangible assets. The Merger was accounted for as a purchase business combination, whereby the purchase price paid was allocated to recognize the acquired assets and liabilities at their fair value. In connection with the purchase price allocation, certain intangible assets were established or revalued. The purchase price in excess of the fair value of assets and liabilities was recorded as goodwill. Indefinite-lived intangible assets, such as the 99¢ trademark and goodwill, are not subject to amortization. We assess the recoverability of indefinite-lived intangibles whenever there are indicators of impairment, or at least annually in the fourth quarter. If the recorded carrying value of an intangible asset exceeds our estimated fair value, we record a charge to write the intangible asset down to its fair value. Intangible assets with a definite life are amortized on a straight line basis over their useful lives. Amortizable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable based on undiscounted cash flows, and, if impaired, written down to fair value based on either discounted cash flows or appraised values. Significant judgment is required in determining whether a potential indicator of impairment of long-lived assets exists and in estimating future cash flows used in the impairment tests. 28 -------------------------------------------------------------------------------- Table of Contents During the fourth interim period of transition fiscal 2014, we completed step one of our goodwill impairment test for the two reporting units and determined that there was no impairment of goodwill since the fair value of the reporting units exceeded the carrying amount. Additionally, during the fourth interim period of transition fiscal 2014, we completed our annual indefinite-lived intangible asset impairment test and determined there was no impairment since the fair value of the 99¢ trademark exceeded the carrying amount of the trademark. Considerable management judgment is necessary in estimating future cash flows, market interest rates, discount rates and other factors affecting the valuation of goodwill and intangibles. We use historical financial information, internal plans and projections, and industry information in making such estimates. However, because the new basis of accounting established at the Merger date set the book values of goodwill and intangibles equal to fair value and impairment tests are highly sensitive to changes in assumptions, minor changes to assumptions, including assumptions regarding future performance (including sales growth, pricing and commodity costs) and discount rates, could result in impairment losses. In our transition fiscal 2014 impairment test, both our retail reporting unit and our wholesale reporting unit had excess fair value over the book value of net assets that was substantial. Our 99¢ trademark fair value also exceeded the book value in transition fiscal 2014. Legal reserves. We are subject to private lawsuits, administrative proceedings and claims that arise in the ordinary course of business. A number of these lawsuits, proceedings and claims may exist at any given time. While the resolution of a lawsuit, proceeding or claim may have an impact on our financial results for the period in which it is resolved, and litigation is inherently unpredictable, in management's opinion, none of these matters arising in the ordinary course of business are expected to have a material adverse effect on our financial position, results of operations, or overall liquidity. Material pending legal proceedings (other than ordinary routine litigation incidental to our business) and material proceedings known to be contemplated by governmental authorities are reported in our reports pursuant to the Securities Exchange Act of 1934, as amended. We record a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. There were no material changes in the estimates or assumptions used to determine legal reserves during transition fiscal 2014 and a 10% change in legal reserves would not be material to our consolidated financial position or results of operations. Self-insured workers' compensation liability. We self-insure for workers' compensation claims in California and Texas. We have established a liability for losses from both estimated known and incurred but not reported insurance claims based on reported claims and actuarial valuations of estimated future costs of known and incurred but not yet reported claims. Should an amount of claims greater than anticipated occur, the liability recorded may not be sufficient and additional workers' compensation costs, which may be significant, could be incurred. We do not discount the projected future cash outlays for the time value of money for claims and claim related costs when establishing our workers' compensation liability. As a result of the increase in severity of open claims, we significantly increased our workers' compensation liability reserves in transition fiscal 2014. As an indicator of the sensitivity of this estimate, at January 31, 2014, a 10% increase in our estimate of expected losses from workers compensation claims would have increased this reserve by approximately $7.4 million and increased transition fiscal 2014 pre-tax loss by the same amount. Self-insured health insurance liability. During the second quarter of fiscal 2012 ended October 1, 2011, we began self-insuring for a portion of our employee medical benefit claims. The liability for the self-funded portion of our health insurance program is determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported. We maintain stop loss insurance coverage to limit our exposure for the self-funded portion of our health insurance program. At January 31, 2014, a 10% change in self-insurance liability would not have been material to our consolidated financial position or results of operations. Operating leases. We recognize rent expense for operating leases on a straight-line basis (including the effect of reduced or free rent and rent escalations) over the applicable lease term. The difference between the cash paid to the landlord and the amount recognized as rent expense on a straight-line basis is included in deferred rent. Cash reimbursements received from landlords for leasehold improvements and other cash payments received from landlords as lease incentives are recorded as deferred tenant improvements. Deferred rent related to landlord incentives is amortized as an offset to rent expense using the straight-line method over the applicable lease term. For store closures where a lease obligation still exists, we record the estimated future liability associated with the rental obligation on the cease use date (when the store is closed). Liabilities are established at the cease use date for the present value of any remaining operating lease obligations, net of estimated sublease income, and at the communication date for severance and other exit costs. Key assumptions in calculating the liability include the timeframe expected to terminate lease agreements, estimates related to the sublease potential of closed locations, and estimation of other related exit costs. If actual timing and potential termination costs or realization of sublease income differ from our estimates, the resulting liabilities could vary from recorded amounts. These liabilities are reviewed periodically and adjusted when necessary. As of March 31, 2013, we had an accrual of $0.7 million for lease termination costs associated with Texas store closures. During the first quarter of transition fiscal 2014, we reversed the lease termination costs accrual, and as of January 31, 2014, we did not have any remaining lease obligations in connection with prior Texas store closures. Tax Valuation Allowances and Contingencies. We recognize deferred tax assets and liabilities using the enacted tax rates for the effect of temporary differences between the financial reporting basis and tax basis of recorded assets and liabilities. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the net deferred tax assets will not be realized. We had approximately $124.6 million of net deferred tax liabilities as of January 31, 2014, which was comprised of approximately $102.4 million of net deferred tax assets and $227.0 million of deferred tax liabilities. We had approximately $153.7 million of net deferred tax liabilities as of March 30, 2013, which was comprised of approximately $83.7 million of net deferred tax assets and $237.4 million of deferred tax liabilities, net of tax valuation allowance of $11.6 million. Management evaluated the available evidence in assessing our ability to realize the benefits of our deferred tax assets at January 31, 2014 and concluded it is more likely than not that we will realize all of our deferred tax assets. Significant management judgment is required in accounting for income tax contingencies as the outcomes are often difficult to predict. There are no uncertain tax positions at January 31, 2014. 29 -------------------------------------------------------------------------------- Table of Contents Share-Based Compensation. Subsequent to the Merger, Parent issued options to acquire shares of common stock of our Parent to certain of our executive officers and employees. We account for stock-based payment awards based on their fair values. Stock options have a term of ten years. For awards classified as equity, we estimate the fair value for each option award as of the date of grant using the Black-Scholes option pricing model or other appropriate valuation models. Assumptions utilized to value options in transition fiscal 2014, fiscal 2013 and Successor fiscal 2012 periods include estimating the fair value of Parent's common stock (which is not publicly traded), the term that the options are expected to be outstanding, an estimate of the volatility of Parent's stock price (which is based on a peer group of publicly traded companies), applicable interest rates and the expected dividend yield of Parent's common stock. Other factors involving judgments that affect the expensing of share-based payments include estimated forfeiture rates of stock-based awards. All of the options that we have granted to our executive officers and employees (with the exception of options granted to Rollover Investors that contained no repurchase rights and options granted to our current chief executive officer and certain directors that contain less restrictive repurchase rights) give the Parent repurchase rights as described in more detail in Note 12 to the Consolidated Financial Statements. In accordance with accounting guidance, we have not recorded any stock-based compensation expense for these grants. For all other time-based options, the value of the portion of the award that is ultimately expected to vest is recognized as an expense ratably over the requisite service periods, which is generally a vesting term of five years. As described in more detail in Note 12 to the Consolidated Financial Statements, certain former executive put rights that were previously outstanding were classified as equity awards and revalued using a binomial model at each reporting period with changes in fair value recognized as stock-based compensation expense. As further described in Note 12 to the Consolidated Financial Statements, we have also granted options to our current chief executive officer that will vest only upon achievement of certain performance hurdles. These options were valued using a Monte Carlo simulation method. Compensation expense associated with these options will not be recognized until it is probable that the performance hurdles will be achieved. Predecessor Periods We recognized stock-based compensation expense ratably over the requisite service periods, which was generally a vesting term of three years. Such stock options typically had a term of ten years and were valued using the Black-Scholes option pricing model. The fair value of the performance stock units ("PSUs") and restricted stock units ("RSUs") was based on the stock price on the grant date. The compensation expense related to PSUs was recognized only when it was probable that the performance criteria would be met. The compensation expense related to RSUs was recognized based on the number of shares expected to vest. Stock-based awards outstanding prior to the Merger vested in full in connection with the Merger and were converted into a right to receive Merger Consideration. Results of Operations The following discussion defines the components of the statement of income and should be read in conjunction with "Item 6. Selected Financial Data." Net Sales: Revenue is recognized at the point of sale in our stores ("retail sales"). Bargain Wholesale sales revenue is recognized in accordance with the shipping terms agreed upon on the purchase order. Bargain Wholesale sales are typically recognized free on board origin, where title and risk of loss pass to the buyer when the merchandise leaves our distribution facility. Cost of Sales: Cost of sales includes the cost of inventory, freight in, inter-state warehouse transportation costs and inventory shrinkage (obsolescence, spoilage, and shrink), and is net of discounts and allowances. Cash discounts for satisfying early payment terms are recognized when payment is made, and allowances and rebates based upon milestone achievements such as reaching a certain volume of purchases of a vendor's products are included as a reduction of cost of sales when such contractual milestones are reached. In addition, we analyze our inventory levels and related cash discounts received to arrive at a value for cash discounts to be included in the inventory balance. We do not include purchasing, receiving, distribution, warehouse costs and transportation to and from stores in our cost of sales, which totaled $77.4 million, $77.5 million, $15.6 million and $56.0 million for transition fiscal 2014, fiscal 2013, 2012 Successor period and 2012 Predecessor period, respectively. Due to this classification, our gross profit rates may not be comparable to those of other retailers that include costs related to their distribution network in cost of sales. Selling, General, and Administrative Expenses: Selling, general, and administrative expenses include purchasing, receiving, inspection and warehouse costs, the costs of selling merchandise in stores (payroll and associated costs, occupancy and other store-level costs), distribution costs (payroll and associated costs, occupancy, transportation to and from stores, and other distribution-related costs), and corporate costs (payroll and associated costs, occupancy, advertising, professional fees, stock-based compensation expense and other corporate administrative costs). Selling, general, and administrative expenses also include depreciation and amortization expense. 30 -------------------------------------------------------------------------------- Table of Contents Other Expense (Income): Other expense (income) relates primarily to loss on extinguishment of debt, interest expense on our debt, capitalized leases and the impairment charges related to our marketable securities, net of interest income on our marketable securities. The following table sets forth for the periods indicated, certain selected income statement data, including such data as a percentage of net sales. The ten months ended January 31, 2014 consists of 44 weeks. The year ended March 30, 2013 consists of 52 weeks. The Successor period from January 15, 2012 to March 31, 2012 consists of 11 weeks while the Predecessor period from April 3, 2011 to January 14, 2012 consists of 41 weeks.(the percentages may not add up due to rounding): Ten Months Ended Year Ended For the Periods % of % of January 15, 2012 % of April 3, 2011 % of January 31, Net March 30, Net to Net to Net 2014 Sales 2013 Sales March 31, 2012 Sales January 14, 2012 Sales (Successor) (Successor) (Predecessor) (Predecessor) (Amounts in thousands, except percentages) Net Sales: 99¢ Only Stores $ 1,486,699 97.2 % $ 1,620,683 97.1 % $ 329,361 97.2 % $ 1,158,733 97.1 % Bargain Wholesale 42,044 2.8 47,968 2.9 9,555 2.8 34,047 2.9 Total sales 1,528,743 100.0 1,668,651 100.0 338,916 100.0 1,192,780 100.0 Cost of sales (excluding depreciation and amortization expense shown separately below) 946,048 61.9 1,028,295 61.6 203,775 60.1 711,002 59.6 Gross profit 582,695 38.1 640,356 38.4 135,141 39.9 481,778 40.4 Selling, general and administrative expenses: Operating expenses 514,511 33.7 523,495 31.4 110,477 32.6 376,122 31.5 Depreciation 52,467 3.4 56,810 3.4 11,361 3.4 21,855 1.8 Amortization of intangible assets 1,500 0.1 1,767 0.1 374 0.1 14 0.0 Total selling, general and administrative expenses 568,478 37.2 582,072 34.9 122,212 36.1 397,991 33.4 Operating income 14,217 0.9 58,284 3.5 12,929 3.8 83,787 7.0 Other (income) expense: Interest income (16 ) 0.0 (342 ) 0.0 (29 ) 0.0 (291 ) 0.0 Interest expense 50,820 3.3 60,898 3.6 16,223 4.8 381 0.0 Other-than-temporary investment impairment due to credit loss - 0.0 - 0.0 - 0.0 357 0.0 Loss on extinguishment of debt 4,391 0.3 16,346 1.0 - 0.0 - 0.0 Other - 0.0 380 0.0 (75 ) 0.0 (107 ) 0.0 Other expenses, net 55,195 3.6 77,282 4.6 16,119 4.8 340 0.0 (Loss) income before provision for income taxes (40,978 ) (2.7 ) (18,998 ) (1.1 ) (3,190 ) (0.9 ) 83,447 7.0 (Benefit) provision for income taxes (28,493 ) (1.9 ) (10,089 ) (0.6 ) 2,103 0.6 33,699 2.8 Net (loss) income $ (12,485 ) (0.8 ) $ (8,909 ) (0.5 )% $ (5,293 ) (1.6 )% $ 49,748 4.2 % 31 -------------------------------------------------------------------------------- Table of Contents The following discussion of our financial performance also includes supplemental unaudited pro forma consolidated financial information for fiscal year 2012. Because the Merger occurred during the fourth fiscal quarter of fiscal 2012, we believe this information aids in the comparison between the years presented. The pro forma information does not purport to represent what our results of operations would have been had the Merger and related transactions actually occurred at the beginning of the year indicated, and they do not purport to project our results of operations or financial condition for any future period. The following table contains selected pro forma income statement data for fiscal 2012, including such data as a percentage of net sales. See "Unaudited Pro Forma Consolidated Financial Information" below. Unaudited Pro Forma Fiscal Year Ended March 31, % of 2012 Net Sales (Amounts in thousands, except percentages) Net Sales: 99¢ Only Stores $ 1,488,094 97.2 % Bargain Wholesale 43,602 2.8 Total sales 1,531,696 100.0 Cost of sales (excluding depreciation and amortization expense shown separately below) 914,777 59.7 Gross profit 616,919 40.3 Selling, general and administrative expenses: Operating expenses 461,530 30.1 Depreciation 42,488 2.8 Amortization of intangible assets 1,764 0.1 Total selling, general and administrative expenses 505,782 33.0 Operating income 111,137 7.3 Other (income) expenses: Interest income (320 ) (0.0 ) Interest expense 69,629 4.5 Other-than-temporary investment impairment due to credit loss 357 0.0 Other (182 ) (0.0 ) Total other expense, net 69,484 4.5 Income before provision for income taxes 41,653 2.7 Provision for income taxes 19,624 1.3 Net income $ 22,029 1.4 % 32 -------------------------------------------------------------------------------- Table of Contents Ten Months Ended January 31, 2014 (44 Weeks) Compared Fiscal Year Ended March 30, 2013 (52 Weeks) Net sales. Total net sales decreased $140.0 million, or 8.4%, to $1,528.7 million in transition fiscal 2014, a 44-week period, from $1,668.7 million in fiscal 2013, a 52-week period. The decrease in total net sales was primarily due to the fact that there were eight fewer weeks in transition fiscal 2014 as compared to fiscal 2013. Net retail sales decreased $134.0 million, or 8.3%, to $1,486.7 million in transition fiscal 2014 from $1,620.7 million in fiscal 2013. Bargain Wholesale net sales decreased by approximately $6.0 million, or 12.3%, to $42.0 million in transition fiscal 2014 from $48.0 million in fiscal 2013. Net retail sales for stores that were open at least 15 months in transition fiscal 2014 were $1,343.1 million, representing 3.7% increase in same-store sales over a comparable 43-week period of the prior year. The 3.7% increase in same-store sales was from increased transactions and higher average ticket. The full year effect of new stores opened in fiscal 2013 was $68.0 million and effect of new stores opened in transition fiscal 2014 was $47.0 million. We closed one store in transition fiscal 2014 which contributed $0.7 million in sales. During transition fiscal 2014, we added 27 net new stores: 13 in California, five in Arizona, two in Nevada and seven in Texas. At the end of transition fiscal 2014, we had 343 stores compared to 316 stores at the end of fiscal 2013. Gross retail square footage as of January 31, 2014 and March 30, 2013 was 7.14 million and 6.63 million, respectively. As of January 25, 2014, on a trailing 52-week period basis, our stores open for the full year averaged net sales of $5.4 million per store and $330 per estimated saleable square foot. Gross profit. Gross profit was $582.7 million in transition fiscal 2014 compared to $640.4 million in fiscal 2013. As a percentage of net sales, overall gross margin decreased to 38.1% in transition fiscal 2014, from 38.4% in fiscal 2013. Among the gross profit components, cost of products sold decreased by 10 basis points compared to fiscal 2013, primarily attributable to a shift in the product mix toward lower margin merchandise. Gross profit was negatively impacted by an excess and obsolete inventory reserve charge of $9.6 million in the third quarter of transition fiscal 2014, representing 60 basis points (as described in Note 1 to the Consolidated Financial Statements), compared to a $9.1 million inventory reserve in fiscal 2013, representing 60 basis points. The remaining change was due to other less significant items included in cost of sales. Operating expenses. Operating expenses were $514.5 million in transition fiscal 2014 compared to $523.5 million in fiscal 2013. As a percentage of net sales, operating expenses increased to 33.7% for transition fiscal 2014 from 31.4% for fiscal 2013. Of the 230 basis point increase in operating expenses as a percentage of net sales, retail operating expenses increased by 20 basis points, distribution and transportation costs increased by 50 basis points, corporate expenses increased by 50 basis points, and other items increased by 110 basis points, as described below. Retail operating expenses for transition fiscal 2014 increased as a percentage of net sales by 20 basis points to 21.7% of net sales, compared to 21.5% of net sales for fiscal 2013. The increase was primarily due to higher utility costs and outside service fees as a percentage of net sales. Distribution and transportation expenses for transition fiscal 2014 increased as a percentage of net sales by 50 basis points to 5.1% of net sales, compared to 4.6% as a percentage of net sales for fiscal 2013. The increase in distribution and transportation expenses compared to fiscal 2013 was primarily due to higher labor costs and increases in rent expense for additional warehouse space. Corporate operating expenses for transition fiscal 2014 increased as a percentage of net sales by 50 basis points to 4.5% of net sales, compared to 4.0% of net sales for fiscal 2013. The increase as a percentage of sales was primarily due to higher legal expenses and outside professional service fees. This increase as a percentage of sales was partially offset by higher payroll-related severance charges of $10.2 million in fiscal 2013 compared to restructuring charges of $4.4 million in transition fiscal 2014 related to a third quarter of transition fiscal 2014 reduction in force. The remaining operating expenses for transition fiscal 2014 increased as a percentage of net sales by 110 basis points to 2.4% of net sales, compared to 1.3% of net sales in fiscal 2013. In transition fiscal 2014, primarily as a result of an increase in severity of workers' compensation claims, we recorded increases to workers' compensation accrual of $38.4 million, representing 250 basis points (as described in Note 11 to the Consolidated Financial Statements). This increase in remaining operating expenses was partially offset by lower stock-based compensation expense attributable to a decrease in the fair value of former executive put rights, that resulted in a negative stock-based compensation expense of $4.8 million, compared to an expense of $18.4 million for fiscal 2013. In fiscal 2013, we recorded stock-based compensation expense of $18.4 million (including $9.9 million of accelerated vesting expense for three executive officers and one employee who separated from their positions in the fourth quarter of fiscal 2013 and $6.5 million related to former executive officers' put rights) (see Note 12, "Stock-Based Compensation Plans" to our Consolidated Financial Statements). Depreciation and amortization. Depreciation was $52.5 million in transition fiscal 2014 compared to $56.8 million in fiscal 2013. Depreciation as a percentage of net sales was 3.4% in transition fiscal 2014 and 3.4% for fiscal 2013. Amortization was $1.5 million in transition fiscal 2014 and $1.8 million in fiscal 2013, reflecting fewer weeks in transition fiscal 2014. 33 -------------------------------------------------------------------------------- Table of Contents Operating income. Operating income was $14.2 million for transition fiscal 2014 compared to operating income of $58.3 million for fiscal 2013. Operating income as a percentage of net sales was 0.9% in transition fiscal 2014 compared to 3.5% in fiscal 2013. The decrease in operating income as a percentage of net sales was primarily due to changes in gross margin and operating expenses, as discussed above. Interest expense and loss on extinguishment of debt. Interest expense was $50.8 million in transition fiscal 2014 compared to $60.9 million in fiscal 2013, primarily due to the fact that there were eight fewer weeks in transition fiscal 2014. Loss on extinguishment of debt was $4.4 million for transition fiscal 2014 and $16.3 million for fiscal 2013, relating to amendments to the First Lien Term Loan Facility (as defined below) in October 2013 and April 2012, respectively. Interest income and other expenses. Interest income for transition fiscal 2014 was not significant due to liquidation of our previously-held investment portfolio. Interest income was $0.3 million for fiscal 2013. Other expense of $0.4 million in fiscal 2013, primarily reflects realized losses on sale of investments. (Benefit) provision for income taxes. The provision for income taxes was a benefit of $28.5 million in transition fiscal 2014 compared to a benefit of $10.1 million in fiscal 2013, due to pre-tax losses in both periods. The effective tax rate for transition fiscal 2014 was (69.5)% compared to an effective tax rate of (53.1)% for fiscal 2013. The effective combined federal and state income tax rates for transition fiscal 2014 differ from the statutory rates due to the benefit of federal hiring credits, the release of valuation allowance on the California enterprise zone credit carry-forward and other discrete items recognized during the transition fiscal 2014 (as described in Note 6 to the Consolidated Financial Statements). The effective combined federal and state income tax rates for fiscal 2013 differ from the statutory rates due to the release of valuation allowance on the Texas margin tax credit carry-forward and benefit of federal hiring credits. Net loss. As a result of the items discussed above, net loss for transition fiscal 2014 was $12.5 million compared to a net loss of $8.9 million in fiscal 2013. Net loss as a percentage of net sales was (0.8)% in transition fiscal 2014 compared to net loss as a percentage of sales of (0.5)% in fiscal 2013. For Year Ended March 30, 2013 (Successor) Net sales. Total net sales for fiscal 2013 were $1,668.7 million, a 52-week period. Net retail sales for fiscal 2013 were $1,620.7 million. Bargain Wholesale net sales were $48.0 million. Net retail sales for stores that were open at least 15 months in fiscal 2013 were $1,530.5 million, representing 4.3% increase in same-store sales over prior year. The full year effect of new stores opened in the Successor and Predecessor periods of fiscal 2012 was $53.4 million and effect of 19 new stores opened in fiscal 2013 was $34.5 million. We closed one store in fiscal 2013 which contributed $2.3 million in sales. During fiscal 2013, we added 19 new stores: 14 in California, three in Nevada and two in Texas. We closed one store during fiscal 2013. On March 30, 2013, we had 316 stores. Gross retail square footage as of March 30, 2013 was approximately 6.63 million. For 99¢ Only stores open all of fiscal 2013, the average net sales per estimated saleable square foot was $321 and the average annual net sales per store were $5.3 million, including the Texas stores open for the full year. Gross profit. During fiscal 2013, gross profit was $640.4 million. As a percentage of net sales, overall gross margin was 38.4% during fiscal 2013. Among gross profit components, cost of products sold was negatively impacted by a shift in product mix toward lower margin products, and to a lesser extent by merchandise price increases. Gross profit was also negatively impacted by a revision to our excess and obsolescence methodology due to a change in our inventory purchasing philosophy. As a result of this change, we increased our excess and obsolescence reserve by $9.1 million in the fourth quarter of fiscal 2013. Furthermore, inventory shrinkage as a percent of net sales was negatively impacted by higher inventory shrinkage based on store physical inventories taken during fiscal 2013 and the resulting increase in our shrinkage reserves. Operating expenses. During fiscal 2013, operating expenses were $523.5 million. As a percentage of net sales, operating expenses were 31.4% for fiscal 2013. Retail operating expenses for fiscal 2013 were 21.5% of net sales. Distribution and transportation expenses were 4.6% of net sales for fiscal 2013. Corporate operating expenses for fiscal 2013 were 4.0% of net sales. The remaining operating expenses for fiscal 2013 were 1.3% of net sales. On January 23, 2013, Eric Schiffer, Jeff Gold and Howard Gold separated from their positions as Chief Executive Officer, Chief Administrative Officer and Executive Vice President of Special Projects, respectively. We recorded severance charges of $10.2 million and accelerated vesting of their stock options that resulted in additional $9.3 million of stock-based compensation expense in the fourth quarter of fiscal 2013. In addition, during the fourth quarter of fiscal 2013, we recorded $6.5 million in additional stock-based compensation associated with the valuation of the former executive put rights (see Note 12, "Stock-Based Compensation Plans" to our Consolidated Financial Statements). Depreciation and amortization. During fiscal 2013, depreciation and amortization of intangibles were $56.8 million and $1.8 million, respectively. Depreciation was 3.4% of net sales and amortization was 0.1% of net sales. Depreciation and amortization expense in fiscal 2013 includes the increase in the net book value ("step-up") in basis to fair value of our property and equipment and revaluation of intangible assets as a result of the Merger. 34 -------------------------------------------------------------------------------- Table of Contents Operating income. Operating income was $58.3 million for fiscal 2013. Operating income was 3.5% of net sales. Interest expense and loss on extinguishment of debt. Interest expense was $60.9 million, primarily reflecting debt service on borrowings used to finance the Merger. Loss on extinguishment of debt was $16.3 million relating to amendment of the First Lien Term Loan Facility in April 2012. The interest income for fiscal 2013 was not significant due to liquidation of our previously-held investment portfolio. Interest income and other expense. Other expense of $0.4 million in fiscal 2013, primarily reflects realized losses on sale of investments. Interest income for fiscal 2013 was not significant due to liquidation of our previously-held investment portfolio. (Benefit) provision for income taxes. The provision for income taxes was a benefit of $10.1 million in fiscal 2013. The effective tax rate for the fiscal 2013 was (53.1%). The effective combined federal and state income tax rates differ from the statutory rates due to the release of valuation allowance on the Texas margin tax credit carry-forward and benefit of federal hiring credits. Net loss. As a result of the items discussed above, we recorded a net loss of $8.9 million. Net loss as a percentage of net sales was (0.5%) during fiscal 2013. For the Period from January 15, 2012 to March 31, 2012 (Successor) Net sales. Total net sales for the Successor period were $338.9 million, an 11-week period. Net retail sales for the Successor period were $329.4 million. Bargain Wholesale net sales were $9.5 million in the Successor period. During the Successor period, we added six new stores: five in California and one in Texas. We did not close any stores during the Successor period. On March 31, 2012, we had 298 stores. Gross retail square footage as of March 31, 2012 was approximately 6.29 million. Gross profit. During the Successor period, gross profit was $135.1 million. As a percentage of net sales, overall gross margin was 39.9% during the Successor period. Operating expenses. During the Successor period, operating expenses were $110.5 million. As a percentage of net sales, operating expenses were 32.6% for the Successor period. Retail operating expenses for the Successor period were 21.5% of net sales. Distribution and transportation expenses were 4.6% of net sales for the Successor period. Corporate operating expenses for the Successor period were 3.2% of net sales. The remaining operating expenses for the Successor period were 3.3% of net sales. The Successor period included legal and professional fees of $10.6 million related to the Merger. Depreciation and amortization. During the Successor period, depreciation and amortization of intangibles were $11.4 million and $0.4 million, respectively. Depreciation was 3.4% of net sales and amortization was 0.1% of net sales. Depreciation and amortization expense in the Successor period includes the step-up in basis to fair value of our property and equipment and revaluation of intangible assets as a result of the Merger. Operating income. Operating income was $12.9 million for the Successor period. Operating income was 3.8% of net sales. Other expense, net. Other expense was $16.1 million for the Successor period, which included $16.2 million of interest expense, reflecting debt service on borrowings used to finance the Merger. The interest income for the Successor period was not significant due to liquidation of a substantial part of our previously-held investment portfolio. Provision for income taxes. The income tax provision in the Successor period was $2.1 million. The effective tax rate for the Successor period was (65.9%). The effective combined federal and state income tax rates are higher than the statutory rates due to non-deductibility of certain transaction costs associated with the Merger. Net loss. As a result of the items discussed above, we recorded a net loss of $5.3 million. Net loss as a percentage of net sales was (1.6%) during the Successor period. For the Period from April 3, 2011 to January 14, 2012 (Predecessor) Net sales. Total net sales for the 2012 Predecessor period were $1,192.8 million, a 41-week period. Net retail sales for the 2012 Predecessor period were $1,158.7 million. Bargain Wholesale net sales were $34.1 million in the 2012 Predecessor period. During the 2012 Predecessor period, we added seven new stores: three in California, two in Arizona, one in Nevada, and one in Texas. We did not close any stores in California during the Predecessor period. 35 -------------------------------------------------------------------------------- Table of Contents Gross profit. During the 2012 Predecessor period, gross profit was $481.8 million. As a percentage of net sales, overall gross margin was 40.4% during the Predecessor period. Among gross profit components, cost of products sold was negatively impacted due to merchandise price increases and a shift in product mix. Operating expenses. During the 2012 Predecessor period, operating expenses were $376.1 million. As a percentage of net sales, operating expenses were 31.5%. Retail operating expenses for the 2012 Predecessor period were 21.8% of net sales. Distribution and transportation expenses were 4.7% of net sales. Corporate operating expenses were 3.4% of net sales. Other operating expenses for the period were 1.7% of net sales. The 2012 Predecessor period included legal and professional fees of $15.2 million related to the Merger. Depreciation and amortization. During the 2012 Predecessor period, depreciation and amortization was $21.9 million. Depreciation and amortization was 1.8% of net sales. Operating income. Operating income was $83.8 million for the 2012 Predecessor period. Operating income as a percentage of net sales was 7.0%. Other income/expense, net. Other expense was $0.3 million for the 2012 Predecessor period, of which $0.4 million was investment impairment charges related to credit losses on our auction rate securities and $0.4 million related to interest expense. The interest income for the 2012 Predecessor period was $0.3 million. Provision for income taxes. The income tax provision in the 2012 Predecessor period was $33.7 million. The effective tax rate for the 2012 Predecessor period was 40.4%. The effective combined federal and state income tax rates are higher than the statutory rates due to non-deductibility of certain transaction costs associated the Merger, partially offset by tax credits and the effect of certain revenues and/or expenses that are not subject to taxation. Net income. As a result of the items discussed above, we recorded a net income of $49.8 million. Net income as a percentage of net sales was 4.2%. Supplemental Management's Discussion and Analysis - Fiscal Year Ended March 30, 2013 Compared to Pro Forma Fiscal Year Ended March 31, 2012 Net sales. Total net sales increased $137.0 million, or 8.9%, to $1,668.7 million in fiscal 2013, a 52-week period, from $1,531.7 million in pro forma fiscal 2012, a 52-week period. Net retail sales increased $132.6 million, or 8.9%, to $1,620.7 million in fiscal 2013 from $1,488.1 million in pro forma fiscal 2012. Bargain Wholesale net sales increased by approximately $4.4 million, or 10.0%, to $48.0 million in fiscal 2013 from $43.6 million in pro forma fiscal 2012. Of the $132.6 million increase in net retail sales, $63.1 million was due to a 4.3% increase in same-store sales for all stores open at least 15 months in fiscal 2013 and 2012, which includes an approximately 50 basis point benefit of two Easter selling seasons that occurred in early April 2012 and late March 2013, compared to one Easter selling season in pro forma fiscal 2012. The same-store sales increase was attributable to an approximately 2.1% increase in transaction counts and an increase in average ticket size by approximately 2.1%. The full year effect of stores opened in pro forma fiscal 2012 increased sales by $38.2 million and the effect of new stores opened during fiscal 2013 increased net retail sales by $34.5 million. The increase in sales was partially offset by a decrease in sales of approximately $3.2 million due to the effect of closing one store in California upon expiration of its lease during fiscal 2013. During fiscal 2013, we added 19 new stores: 14 in California, three in Nevada and two in Texas. We closed one store in California during fiscal 2013. At the end of fiscal 2013, we had 316 stores compared to 298 as of the end of fiscal 2012. Gross retail square footage as of March 30, 2013 and March 31, 2012 was 6.63 million and 6.29 million, respectively. For 99¢ Only stores open all of fiscal 2013, the average net sales per estimated saleable square foot, on a comparable 52-week period, was $321 and the average annual net sales per store were $5.3 million, including the Texas stores open for the full year. Gross profit. Gross profit increased $23.5 million, or 3.8%, to $640.4 million in fiscal 2013 from $616.9 million in pro forma fiscal 2012. As a percentage of net sales, overall gross margin decreased to 38.4% in fiscal 2013 from 40.3% in pro forma fiscal 2012. Among gross profit components, cost of products sold increased by 50 basis points compared to pro forma fiscal 2012, primarily due to a shift in product mix and, to a lesser extent, merchandise price increases. Gross profit was also negatively impacted by a revision to our excess and obsolescence methodology due to a change in our inventory purchasing philosophy. As a result of this change, we increased our excess and obsolescence reserves by $9.1 million in the fourth quarter of fiscal 2013 representing 60 basis points. Furthermore, inventory shrinkage increased by 70 basis points compared to pro forma fiscal 2012, primarily due to higher inventory shrinkage based on the store physical inventories taken during fiscal 2013 and the resulting increase in our inventory shrinkage reserves. The remaining change was made up of increases in other less significant items included in cost of sales. 36 -------------------------------------------------------------------------------- Table of Contents Operating expenses. Operating expenses increased by $62.0 million, or 13.4%, to $523.5 million in fiscal 2013 from $461.5 million in pro forma fiscal 2012. As a percentage of net sales, operating expenses increased to 31.4% for fiscal 2013 from 30.1% for pro forma fiscal 2012. Of the 130 basis point increase in operating expenses as a percentage of net sales, retail operating expenses decreased by 30 basis points, distribution and transportation costs decreased by ten basis points, corporate expenses increased by 60 basis points, and other items increased by 110 basis points as described below. Retail operating expenses for fiscal 2013 decreased as a percentage of net sales by 30 basis points to 21.5% of net sales, compared to 21.8% of net sales for pro forma fiscal 2012. The decrease was primarily due to both lower utilities expenses, as well as lower payroll-related expenses (primarily due to improved store labor productivity and leveraging positive same-store sales.) Distribution and transportation expenses for fiscal 2013 decreased as a percentage of net sales by ten basis points to 4.6% of net sales, compared to 4.7% as a percentage of net sales for pro forma fiscal 2012. Corporate operating expenses for fiscal 2013 increased as a percentage of net sales by 60 basis points to 4.0% of net sales, compared to 3.4% of net sales for pro forma fiscal 2012. The increase as a percentage of net sales was primarily due to payroll-related severance charges of $10.2 million incurred in the fourth quarter of fiscal 2013 in connection with changes in management. The remaining operating expenses for fiscal 2013 increased as percentage of net sales by 110 basis points to 1.3% of net sales, compared to 0.2% of net sales for pro forma fiscal 2012. In fiscal 2013, we recorded stock-based compensation expense of $18.4 million (including $9.9 million of accelerated vesting expense for four officers who separated from their positions in the fourth quarter of fiscal 2013 and $6.5 million related to former executive officer put rights) compared to stock-based compensation of $2.0 million in pro forma fiscal 2012. Depreciation and amortization. Depreciation increased $14.3 million, or 33.7%, to $56.8 million in fiscal 2013 from $42.5 million in pro forma fiscal 2012. The increase was primarily a result of adding new depreciable assets from new store openings, full year depreciation impact of stores opened in pro forma fiscal 2012 and adding new depreciable assets for completed information technology projects. Depreciation as a percentage of net sales was 3.4% in fiscal 2013 and 2.8% for the pro forma fiscal 2012. Amortization was $1.8 million in both fiscal 2013 and pro forma fiscal 2012. Operating income. Operating income was $58.3 million for fiscal 2013 compared to operating income of $111.1 million for pro forma fiscal 2012. Operating income as a percentage of net sales was 3.5% in fiscal 2013 compared to 7.3% in pro forma fiscal 2012. The decrease in operating income as a percentage of net sales was primarily due to changes in gross margin, depreciation and operating expenses, as discussed above. Interest expense and loss on extinguishment of debt. Interest expense was $60.9 million in fiscal 2013, primarily reflecting debt service on borrowings used to finance the Merger. Loss on extinguishment of debt was $16.3 million relating to amendment of the First Lien Term Loan Facility in April 2012. Interest expense was $69.6 million in pro forma fiscal 2012, reflecting debt service on borrowings used to finance the Merger. Interest income and other expenses. Interest income was $0.3 million for both fiscal 2013 and pro forma fiscal 2012. Other expense of $0.4 million in fiscal 2013, primarily reflects realized losses on sale of investments. In pro forma fiscal 2012 we recorded $0.4 million of investment impairment charges on our auction rate securities. (Benefit) provision for income taxes. The provision for income taxes was a benefit of $10.1 million in fiscal 2013 compared to a provision of $19.6 million in pro forma fiscal 2012, due to a pre-tax loss in fiscal 2013. The effective tax rate for fiscal 2013 was (53.1%) compared to an effective tax rate of 47.1% for pro forma fiscal 2012. The effective combined federal and state income tax rates for fiscal 2013 differ from the statutory rates due to the release of valuation allowance on the Texas margin tax credit carry-forward and benefit of federal hiring credits. The pro forma fiscal 2012 effective combined federal and state income tax rates are higher than the statutory rates due to non-deductibility of certain transaction costs associated with the Merger. Net income/loss. As a result of the items discussed above, net income decreased $30.9 million to a net loss of $8.9 million in fiscal 2013 from $22.0 million in pro forma fiscal 2012. Net loss as a percentage of net sales was (0.5%) in fiscal 2013 and compared to net income as a percentage of sales of 1.4% in pro forma fiscal 2012. 37 -------------------------------------------------------------------------------- Table of Contents Unaudited Pro Forma Condensed Consolidated Financial Information The following unaudited pro forma condensed consolidated statements of operations have been developed by applying pro forma adjustments to our audited statement of operations for the Predecessor period from April 3, 2011 through January 14, 2012, and for the Successor period from January 15, 2012 to March 31, 2012. The unaudited pro forma condensed consolidated statements of operations for the fiscal year ended March 31, 2012 gives effect to the Merger as if it had occurred on April 2, 2011. The unaudited pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable under the circumstances. The unaudited pro forma condensed consolidated financial data is presented for informational purposes only. The unaudited pro forma condensed consolidated financial data does not purport to represent what our results of operations would have been had the Merger actually occurred on the dates indicated and does not purport to project our results of operations for any future period. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the information contained in other sections of this Report including "Item 6. Selected Financial Data," in our historical audited consolidated financial statements and related notes thereto, and other sections of this "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Report. All pro forma adjustments and their underlying assumptions are described more fully in the notes to our unaudited pro forma condensed consolidated statements of operations. The unaudited pro forma condensed consolidated financial information has been prepared to give effect to the Merger including the accounting for the acquisition of our business as a purchase business combination, in accordance with ASC 805, "Business Combinations." The unaudited pro forma condensed consolidated statements of operations do not reflect non-recurring charges that have been incurred in connection with the Merger, including (i) certain non-recurring expenses related to the Merger of approximately $25.8 million, and (ii) the stock-based compensation expense of approximately $1.0 million relating to the accelerated vesting of stock based awards to management and associates that vested as a result of the Merger. 38 -------------------------------------------------------------------------------- Table of Contents For the Fiscal Year Ended March 31, 2012 Historical Historical Pro Forma Successor Predecessor Adjustments Pro Forma (Amounts in thousands) Net Sales: 99¢ Only Stores $ 329,361 $ 1,158,733 $ - $ 1,488,094 Bargain Wholesale 9,555 34,047 - 43,602 Total sales 338,916 1,192,780 - 1,531,696 Cost of sales (excluding depreciation and amortization expense shown separately below) 203,775 711,002 - 914,777 Gross profit 135,141 481,778 - 616,919 Selling, general and administrative expenses: Operating expenses 110,477 376,122 (25,069 )(a) 461,530 Depreciation 11,361 21,855 9,272 (b) 42,488 Amortization of intangible assets 374 14 1,376 (c) 1,764 Total selling, general and administrative expenses 122,212 397,991 (14,421 ) 505,782 Operating income 12,929 83,787 14,421 111,137 Other (income) expenses: Interest income (29 ) (291 ) - (320 ) Interest expense 16,223 381 53,025 (d) 69,629 Other-than-temporary investment impairment due to credit loss - 357 - 357 Other (75 ) (107 ) - (182 ) Total other expense, net 16,119 340 53,025 69,484 (Loss) income before provision for income taxes (3,190 ) 83,447 (38,604 ) 41,653 Provision for income taxes 2,103 33,699 (16,178 )(e) 19,624 Net (loss) income $ (5,293 ) $ 49,748 $ (22,426 ) $ 22,029 -------------------------------------------------------------------------------- (a) Represents adjustments to increase historical expenses for ongoing expenses incurred in connection with the Merger and adjustments to eliminate one-time historical expenses incurred in connection with the Merger (in thousands): Fiscal Year Ended March 31, 2012 (1) Credit facility annual administration fee (i) $ 158 Favorable/unfavorable lease amortization, net (ii) 155 Executive compensation (iii) 583 Rent expenses (renegotiated leases) (iv) 788 Subtotal - ongoing expenses 1,684 One-time merger costs (v) (26,753 ) Total operating expenses $ (25,069 ) -------------------------------------------------------------------------------- (1) Represents adjustments to the predecessor period from April 3, 2011 to January 14, 2012, as the successor period from January 15, 2012 to March 31, 2012 already includes these adjustments. (i) Represents adjustments to administrative fees associated with the First Lien Term Facility and the ABL Facility in connection with the Merger. (ii) Represents adjustments resulting from the amortization of favorable lease assets and unfavorable lease liability recorded in connection with the Merger, amortized on a straight-line basis over the remaining lease terms of each lease. (iii) Represents adjustments to compensation expense resulting from new executive salaries of certain named executives based on new employment arrangements in connection with the Merger. (iv) Represents adjustments resulting from the renegotiation of certain leases with the Rollover Investors and their affiliates in connection with the Merger. (v) Represents adjustments to eliminate one-time historical expenses incurred in connection with the Merger, principally legal and financial advisory fees. (b) Represents adjustments resulting from the step-up of depreciable property and equipment of approximately $150 million depreciated on a straight-line basis over their respective remaining useful lives. (c) Represents adjustments resulting from the increase in the estimated fair market values of finite-lived intangible assets. Finite-lived intangibles assets include the Rinso and Halsa private label brands which will be amortized over a remaining useful life of 20 years and the Bargain Wholesale customer relationships which will be amortized over a remaining useful life of 12 years. The useful lives of these finite-lived intangible assets were based on the expected future cash flows associated with these assets. We based the remaining useful lives for these finite-lived intangible assets at the point in time we expected to realize substantially all of the benefit of projected future cash flows. 39 -------------------------------------------------------------------------------- Table of Contents (d) Represents the following adjustments to interest expense, net (in thousands): Fiscal Year Ended March 31, 2012 (1) Pro forma cash interest expense (i) $ 48,160 Pro forma deferred financing costs amortization expense (i) 4,865 Less: interest expense, historical (ii) - Additional expense $ 53,025 -------------------------------------------------------------------------------- (1) Represents adjustments to the predecessor period from April 3, 2011 to January 14, 2012, as the successor period from January 15, 2012 to March 31, 2012 already includes these adjustments. (i) Reflects the adjustments to interest expense as a result of the increase in annual interest expense associated with borrowings under the First Lien Term Facility and the issuance of Senior Notes, including the amortization of deferred financing costs associated with Senior Notes, the First Lien Term Facility and the ABL Facility and accretion of the original issue discount ("OID") associated with the First Lien Term Facility. The deferred financing costs and OID is being recognized over the respective terms of the debt agreements using the effective interest method. (ii) Historical interest expense has not been adjusted for interest income as amounts are not material and has not been adjusted for interest related to tax matters. (e) To reflect the tax effect of the pro forma adjustments, using a combined federal and state statutory tax rate of approximately 40%, and excludes pro forma adjustments that result in no tax benefit, including non-deductible depreciation expenses and one-time historical expenses incurred in connection with the Merger. Effects of Inflation During transition fiscal 2014 and fiscal 2013, inflation did not have a material impact on our overall operations. We experienced increases in health care costs, fuel costs and some vendor prices during the Predecessor and Successor periods of fiscal 2012. Increases in various costs due to future inflation may impact our operating results to the extent that such increases cannot be passed along to our customers. See Item 1A, "Risk Factors-Risks Related to Our Business-Inflation may affect our ability to keep pricing almost all of our merchandise at 99.99¢ or less." Liquidity and Capital Resources We historically funded our operations principally from cash provided by operations, short-term investments and cash on hand, and until the Merger, did not generally rely upon external sources of financing. After the Merger, our capital requirements consist primarily of purchases of inventory, expenditures related to new store openings, investments in information technology and supply chain infrastructure, working capital requirements for new and existing stores, including lease obligations, and debt service requirements. Our primary sources of liquidity are the net cash flow from operations, which we believe will be sufficient to fund our regular operating needs and principal and interest payments on our indebtedness, together with availability under our ABL Facility (as defined below) for at least the next 12 months. We currently do not intend to use the availability under our ABL Facility to fund our capital needs in fiscal 2015; however, depending on the exact timing of budgeted capital expenditures, we may borrow under our ABL Facility for short-term capital requirements from time to time. Availability under our ABL Facility is not expected to materially affect our ability to make immediate buying decisions, willingness to take on large volume purchases or ability to pay cash or accept abbreviated credit terms. As of January 31, 2014, we held $34.8 million in cash, and our total indebtedness was $855.4 million, consisting of borrowings under our First Lien Term Loan Facility of $605.4 million and $250 million of our Senior Notes. We had up to an additional $175 million of available borrowings under our ABL Facility and, subject to certain limitations and the satisfaction of certain conditions, we were also permitted to incur up to an aggregate of $100 million of additional borrowings under incremental facilities in our ABL Facility and First Lien Term Loan Facility. As of January 31, 2014, availability under the ABL Facility subject to the borrowing base was $135.9 million. We also have, and will continue to have, significant lease obligations. As of January 31, 2014, our minimum annual rental obligations under long-term operating leases for fiscal 2015 are $59.7 million. These obligations are significant and could affect our ability to pursue significant growth initiatives, such as strategic acquisitions, in the future. However, we expect to be able to service these obligations from our net cash flow from operations, and we do not expect these obligations to negatively affect our expansion plans for the foreseeable future, including our plans to increase our store count, planned upgrades to our information technology systems and other planned capital expenditures. 40 -------------------------------------------------------------------------------- Table of Contents Credit Facilities and Senior Notes On January 13, 2012, in connection with the Merger, we obtained Credit Facilities provided by a syndicate of lenders arranged by Royal Bank of Canada as administrative agent, as well as other agents and lenders that are parties to these Credit Facilities. As of January 31, 2014, the Credit Facilities include (a) $175 million in commitments under the ABL Facility and (b) $612.3 million in aggregate principal amount under the First Lien Term Loan Facility. First Lien Term Loan Facility The First Lien Term Loan Facility initially provided for $525 million of borrowings (which could be increased by up to $150.0 million in certain circumstances). All obligations under the First Lien Term Loan Facility are guaranteed by Parent and our direct 100% owned subsidiary, 99 Cents Only Stores Texas, Inc. ("99 Cents Texas" and together with Parent, the "Credit Facilities Guarantors"). In addition, the First Lien Term Loan Facility is secured by pledges of certain of our equity interests and equity interests of the Credit Facilities Guarantors. We were required to make scheduled quarterly payments each equal to 0.25% of the original principal amount of the term loan (approximately $1.3 million), with the balance due on the maturity date, January 13, 2019. Borrowings under the First Lien Term Loan Facility bore interest at an annual rate equal to an applicable margin plus, at our option, (A) a base rate ("Base Rate") determined by reference to the highest of (a) the interest rate in effect determined by the administrative agent as "Prime Rate" (3.25% as of January 31, 2014), (b) the federal funds effective rate plus 0.50% and (c) an adjusted Eurocurrency rate for one month (determined by reference to the greater of the Eurocurrency rate for the interest period multiplied by the Statutory Reserve Rate or 1.50% per annum) plus 1.00%, or (B) an Adjusted Eurocurrency Rate. On April 4, 2012, we amended the terms of our existing seven-year $525 million First Lien Term Loan Facility, and incurred refinancing costs of $11.2 million. The amendment, among other things, decreased the applicable margin from London Interbank Offered Rate ("LIBOR") plus 5.50% (or Base Rate plus 4.50%) to LIBOR plus 4.00% (or Base Rate plus 3.00%) and decreased the LIBOR floor from 1.50% to 1.25%. The maximum capital expenditures covenant in the First Lien Term Loan Facility was also amended to permit an additional $5 million in capital expenditures each year throughout the term of the First Lien Term Loan Facility. We determined that a portion of the refinancing transaction was to be accounted for as debt extinguishment, representing the outstanding principal amount of loans held by lenders under the original First Lien Term Loan Facility that were not lenders under the amended First Lien Term Loan Facility. In the first quarter of fiscal 2013, in accordance with applicable guidance for debt modification and extinguishment, we recognized a $16.3 million loss on debt extinguishment related to a portion of the unamortized debt issuance costs, unamortized OID and refinancing costs incurred in connection with the amendment for the portion of the First Lien Term Loan Facility that was extinguished. On October 8, 2013, we completed a repricing of our First Lien Term Loan Facility, borrowed $100 million of incremental term loans and amended certain other provisions thereof. The amendment decreased the interest rate applicable to the term loans from LIBOR plus 4.00% (or Base Rate plus 3.00%) to LIBOR plus 3.50% (or Base Rate plus 2.50%) and decreased the LIBOR floor from 1.25% to 1.00%. Under the amendment, the incremental term loans have the same interest rate as the other term loans. We will continue to be required to make scheduled quarterly payments each equal to 0.25% of the amended principal amount of the term loan (approximately $1.5 million). The maturity date of January 13, 2019 of the First Lien Term Loan Facility was not affected by the amendment. We determined that a portion of the repricing transaction should be accounted for as debt extinguishment. In the third quarter of transition fiscal 2014, in accordance with applicable guidance for debt modification and extinguishment, we recognized a loss on debt extinguishment of approximately $4.4 million related to a portion of the unamortized debt issuance costs, unamortized OID and repricing costs incurred in connection with the amendment for the portion of the First Lien Term Loan Facility that was extinguished. In addition, the amendment to the First Lien Term Loan Facility (a) amended certain restricted payment provisions to permit the Gold-Schiffer Purchase (as defined below) (see "-Repurchase Transaction with Rollover Investors" for more information), (b) removed the maximum capital expenditures covenant, (c) modified the existing provision restricting the Company's ability to make dividend and other payments so that from and after March 31, 2013 the permitted payment amount represents the sum of (i) a calculation based on 50% of Consolidated Net Income (as defined in the First Lien Term Loan Facility agreement), if positive, or a deficit of 100% of Consolidated Net Income, if negative, and (ii) $20 million, and (d) permitted proceeds of any sale leasebacks of any assets acquired after January 13, 2012 to be reinvested in the Company's business without restriction. 41 -------------------------------------------------------------------------------- Table of Contents As of January 31, 2014, the interest rate charged on the First Lien Term Loan Facility was 4.50% (1.00% Eurocurrency rate, plus the Eurocurrency loan margin of 3.50%). As of January 31, 2014, the amount outstanding under the First Lien Term Loan Facility was $605.4 million. Following the end of each fiscal year, we are required to prepay the First Lien Term Loan Facility in an amount equal to 50% of Excess Cash Flow (as defined in the First Lien Term Loan Facility agreement and with stepdowns to 25% and 0% based on achievement of specified total leverage ratios), minus the amount of certain voluntary prepayments of the First Lien Term Loan Facility and/or the ABL Facility during such fiscal year. The required Excess Cash Flow payment for fiscal 2013 was $3.3 million and was made in July 2013. There is no Excess Cash Flow payment required for transition fiscal 2014. The First Lien Term Loan Facility includes restrictions on our ability and the ability of Parent, 99 Cents Texas and certain of our future subsidiaries to, incur or guarantee additional indebtedness, pay dividends on, or redeem or repurchase, our capital stock, make certain acquisitions or investments, materially change our business, incur or permit to exist certain liens, enter into transactions with affiliates or sell our assets to, make capital expenditures or merge or consolidate with or into, another company. As of January 31, 2014, we were in compliance with the terms of the First Lien Term Loan Facility. During the first quarter of fiscal 2013, we entered into an interest rate swap agreement to limit the variability of cash flows associated with interest payments on our First Lien Term Loan Facility that result from fluctuations in the LIBOR rate. The swap limits our interest exposure on a notional value of $261.8 million to 1.36% plus an applicable margin of 3.50%. The term of the swap is from November 29, 2013 through May 31, 2016. The fair value of the swap on the trade date was zero as we neither paid nor received any value to enter into the swap, which was entered into at market rates. The fair value of the swap at January 31, 2014 was a liability of $3.0 million. ABL Facility The ABL Facility provides for up to $175.0 million of borrowings (which may be increased by up to $50.0 million in certain circumstances), subject to certain borrowing base limitations. All obligations under the ABL Facility are guaranteed by us, Parent and 99 Cents Texas (collectively, the "ABL Guarantors"). The ABL Facility is secured by substantially all of our assets and the assets of the ABL Guarantors. Borrowings under the ABL Facility bear interest for an initial period until June 30, 2012 at an applicable margin plus, at our option, a fluctuating rate equal to (A) the highest of (a) the Federal Funds Rate plus 0.50%, (b) the interest rate in effect determined by the administrative agent as "Prime Rate" (3.25% at the date of the Merger), and (c) Adjusted Eurocurrency Rate (determined to be the LIBOR rate multiplied by the Statutory Reserve Rate) for an interest period of one (1) month plus 1.00% or (B) the Adjusted Eurocurrency Rate. The interest rate charged on borrowings under the ABL Facility from the date of the Merger until June 30, 2012 was 4.25% (the base rate (Prime Rate at 3.25%) plus the applicable margin of 1.00%). Thereafter, borrowings under the ABL Facility will have variable pricing and will be based, at our option, on (a) LIBOR plus an applicable margin to be determined (1.75% as of January 31, 2014) or (b) the determined base rate (Prime Rate) plus an applicable margin to be determined (0.75% at January 31, 2014) in each case based on a pricing grid depending on average daily excess availability for the most recently ended quarter. In addition to paying interest on outstanding principal under the Credit Facilities, we were required to pay a commitment fee to the lenders under the ABL Facility on unused commitments at a rate of 0.375% for the period from the date of the Merger until June 30, 2012. Thereafter, the commitment fee will be adjusted at the beginning of each quarter based upon the average historical excess availability of the prior quarter (0.50% for the quarter ended January 31, 2014). We must also pay customary letter of credit fees and agency fees. As of January 31, 2014 and March 30, 2013, we had no outstanding borrowings under the ABL Facility, outstanding letters of credit were $1.0 million and availability under the ABL Facility, subject to the borrowing base was $135.9 million as of January 31, 2014. The ABL Facility includes restrictions on our ability, and the ability of the Parent and certain of our subsidiaries to, incur or guarantee additional indebtedness, pay dividends on, or redeem or repurchase, our capital stock, make certain acquisitions or investments, materially change our business, incur or permit to exist certain liens, enter into transactions with affiliates or sell our assets to, make capital expenditures or merge or consolidate with or into, another company. The ABL Facility was amended on April 4, 2012 to permit an additional $5 million in capital expenditures for each year during the term of the ABL Facility. As of January 31, 2014, we were in compliance with the terms of the ABL Facility. On October 8, 2013, we amended the ABL Facility to (a) remove the maximum capital expenditures covenant and (b) modify the existing provision restricting the Company's ability to make dividend and other payments so that such payments are subject to achievement of (i) Excess Availability (as defined in the ABL Facility agreement) that is at least the greater of (A) 15% of Maximum Credit (as defined in the ABL Facility agreement) and (B) $20 million and (ii) (A) a ratio of EBITDA (as defined in the ABL Facility) to fixed charges of at least 1.0x or (B) Excess Availability that is at least the greater of 25% of Maximum Credit (as defined in the ABL Facility) and $40 million. 42 -------------------------------------------------------------------------------- Table of Contents Senior Notes On December 29, 2011, we issued $250 million aggregate principal amount of Senior Notes that mature on December 15, 2019. The Senior Notes are guaranteed by 99 Cents Texas (the "Senior Notes Guarantor"). In connection with the issuance of the Senior Notes, we entered into a registration rights agreement that required us to file an exchange offer registration statement, enabling holders to exchange the Senior Notes for registered notes with terms identical in all material respects to the terms of the Senior Notes, except the registered notes would be freely tradable. The exchange offer was closed on November 7, 2012. Pursuant to the terms of the indenture governing the Senior Notes (the "Indenture"), we may redeem all or a part of the Senior Notes at certain redemption prices applicable based on the date of redemption. The Senior Notes are (i) equal in right of payment with all of our and the Senior Notes Guarantor's existing and future senior indebtedness; (ii) effectively junior to our and the Senior Notes Guarantor's existing and future secured indebtedness, to the extent of the value of the interest of the holders of that secured indebtedness in the assets securing such indebtedness; (iii) unconditionally guaranteed on a senior unsecured unsubordinated basis by the Senior Notes Guarantor; and (iv) junior to the indebtedness or other liabilities of our subsidiaries that are not guarantors. We are not required to make any mandatory redemptions or sinking fund payments, and may at any time or from time to time purchase notes in the open market. The Indenture contains covenants that, among other things, limit our ability and the ability of certain of our subsidiaries to incur or guarantee additional indebtedness, create or incur certain liens, pay dividends or make other restricted payments, incur restrictions on the payment of dividends or other distributions from our restricted subsidiaries, make certain investments, transfer or sell assets, engage in transactions with affiliates, or merge or consolidate with other companies or transfer all or substantially all of our assets. As of January 31, 2014, we were in compliance with the terms of the Indenture. Repurchase Transaction with Rollover Investors On October 15, 2013, Parent and the Company entered into an agreement with the Rollover Investors, pursuant to which (a)(i) Parent purchased from each Rollover Investor all of the shares of Class A Common Stock and Class B Common Stock, owned by such Rollover Investor and (ii) all of the options to purchase shares of Class A Common Stock and Class B Common Stock held by such Rollover Investor were repurchased, for aggregate consideration of approximately $129.7 million and (b) the Company agreed to certain amendments to the Non-Competition, Non-Solicitation and Confidentiality Agreements and the Separation and Release Agreements with the Rollover Investors who were former management of the Company. The Gold-Schiffer Purchase was completed on October 21, 2013. Prior to completion of the transaction, Howard Gold resigned from the board of directors of each of Parent and the Company. The Gold-Schiffer Purchase was funded through a combination of borrowings of $100 million of incremental term loans under the First Lien Term Loan Facility and cash on hand at the Company and Parent. In connection with the Gold-Schiffer Purchase, we made a distribution to Parent of $95.5 million and an investment in shares of preferred stock of Parent of $19.2 million. (See Note 7 to our Consolidated Financial Statements for information on restrictions under instruments governing the Company's indebtedness on the Company's ability to make dividend and similar payments.) In addition, we made a payment of $7.8 million to the Rollover Investors to repurchase all options to purchase Class A Common Stock and Class B Common Stock held by the Rollover Investors. 43 -------------------------------------------------------------------------------- Table of Contents Cash Flows Operating Activities Ten Months Ended Year Ended For the Periods January 15, 2012 April 3, 2011 January 31, March 30, to to 2014 2013 March 31, 2012 January 14, 2012 (Successor) (Successor) (Successor) (Predecessor) (44 Weeks) (52 Weeks) (11 Weeks) (41 Weeks) (amounts in thousands) Cash flows from operating activities: Net (loss) income $ (12,485 ) $ (8,909 ) $ (5,293 ) $ 49,748 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation 52,467 56,810 11,361 21,855 Amortization of deferred financing costs and accretion of OID 3,681 4,229 1,425 - Amortization of intangible assets 1,500 1,767 374 14 Amortization of favorable/unfavorable leases, net 438 182 38 - Loss on extinguishment of debt 4,391 16,346 - - (Gain) loss on disposal of fixed assets (357 ) 895 130 8 (Gain) loss on interest rate hedge (92 ) 592 - - Long-lived assets impairment - 515 - - Investments impairment - - - 357 Excess tax benefit from share-based payment arrangements (138 ) - - (5,401 ) Deferred income taxes (28,999 ) (32,800 ) (1,411 ) (10,492 ) Stock-based compensation (4,766 ) 18,387 137 2,745 Changes in assets and liabilities associated with operating activities: Accounts receivable 58 1,321 (182 ) (1,162 ) Inventories (4,643 ) 5,811 17,850 (42,538 ) Deposits and other assets (3,049 ) (7,163 ) (210 ) (920 ) Accounts payable 20,653 6,458 (8,761 ) 5,533 Accrued expenses 12,682 1,700 8,025 15,599 Accrued workers' compensation 34,420 474 (356 ) (3,050 ) Income taxes (529 ) 6,339 (1,736 ) 10,769 Deferred rent 8,365 4,025 714 1,191 Other long-term liabilities (2,673 ) 4,445 (70 ) - Net cash provided by operating activities $ 80,924 $ 81,424 $ 22,035 $ 44,256 Cash provided by operating activities in transition fiscal 2014 was $80.9 million and consisted of (i) net loss of $12.5 million; (ii) net loss adjustments for depreciation and other non-cash items of $28.1 million; (iii) increase in working capital activities of $60.8 million; and (iv) increase in other activities of $4.5 million, primarily due to increase in deferred rent partially offset by a decrease other long-term liabilities, and an increase in other long-term assets. The increase in working capital activities was primarily due to increases in accrued workers' compensation, accrued expenses and accounts payable, which were partially offset by an increase inventories. Cash provided by operating activities in fiscal 2013 was $81.4 million and consisted of (i) net loss of $8.9 million; (ii) net loss adjustments for depreciation and other non-cash items of $66.9 million; (iii) increase in working capital activities of $16.5 million; and (iv) increase in other activities of $6.9 million, primarily due to increase in deferred rent and other long-term liabilities and a decrease in other long-term assets. Increase in working capital activities was primarily due to decreases in inventories and income taxes receivable, increases in account payable and accrued expenses, which were partially offset by an increase in other current assets. Cash provided by operating activities from January 15, 2012 to March 31, 2012 (Successor) was $22.0 million and consisted of (i) net loss of $5.3 million; (ii) net loss adjustments for depreciation and other non-cash items of $12.1 million; (iii) increase in working capital activities of $15.2 million; and (iv) decrease in other activities of $0.2 million. Increase in working capital activities was primarily due to decreases in inventories and deposits and other assets and an increase in accrued expenses, which were partially offset by a decrease in accounts payable. Inventories decreased by approximately $17.9 million, primarily due to purchase of seasonal (primarily Easter) inventory. Cash provided by operating activities from April 3, 2011 to January 14, 2012 (Predecessor) was $44.3 million and consisted of (i) net income of $49.7 million; (ii) net income adjustments for depreciation and other non-cash items of $9.1 million; (iii) decrease in working capital activities of $15.4 million; and (iv) increase in other activities of $0.7 million. Decrease in working capital activities was primarily due to increases in inventories and a decrease workers' compensation liability, which were partially offset by the increase in accounts payable, accrued expenses and a decrease in income tax receivable. Inventories increased by approximately $42.5 million, primarily due to purchase of seasonal (primarily Easter) items and opportunistic purchases. 44 -------------------------------------------------------------------------------- Table of Contents Investing Activities Ten Months Ended Year Ended For the Periods January 15, 2012 April 3, 2011 January 31, March 30, to to 2014 2013 March 31, 2012 January 14, 2012 (Successor) (Successor) (Successor) (Predecessor) (44 weeks) (52 Weeks) (11 Weeks) (41 Weeks) Cash flows from investing activities: Acquisition of 99¢ Only Stores $ - $ - $ (1,477,563 ) $ - Deposit - Merger consideration - - 177,322 (177,322 ) Purchases of property and equipment (62,090 ) (62,494 ) (13,170 ) (33,570 ) Proceeds from sale of fixed assets 1,473 12,064 1,910 98 Purchases of investments - (1,996 ) (6,277 ) (52,623 ) Proceeds from sale of investments - 5,256 24,519 226,805 Net cash used in investing activities $ (60,617 ) $ (47,170 ) $ (1,293,259 ) $ (36,612 ) Capital expenditures in transition fiscal 2014 consisted of property acquisitions, leasehold improvements, fixtures and equipment for new store openings, information technology projects and other capital projects of $62.1 million. Capital expenditures in fiscal 2013 consisted of property acquisitions, leasehold improvements, fixtures and equipment for new store openings, information technology projects and other capital projects of $62.5 million. Property purchases in fiscal 2013 included the acquisition for $13.5 million of a 1.6 acre site with two adjacent buildings and parking lots. The site is in a high visibility commercial area of west Los Angeles, California that we plan to develop into one of our stores. Proceeds from sale of fixed assets primarily relate to sale-leaseback transactions and sale of held for sale warehouse. In fiscal 2013, we completed the liquidation of our investment portfolio. Net cash used in investing activities from January 15, 2012 to March 31, 2012 (Successor) was $1,293.3 million, primarily as a result of the Merger that required cash payments of $1,477.6 million. Capital expenditures from January 15, 2012 to March 31, 2012 (Successor) consisted of property acquisitions, leasehold improvements, fixtures and equipment for new store openings, information technology projects and other capital projects of $13.2 million. Net cash used in investing activities from April 3, 2011 to January 14, 2012 (Predecessor) was $36.6 million. Capital expenditures from April 3, 2011 to January 14, 2012 (Predecessor) consisted of property acquisitions, leasehold improvements, fixtures and equipment for new store openings, information technology projects and other capital projects of $33.6 million. We estimate that total capital expenditures over the next twelve months will be approximately $75 million, comprised of approximately $60 million for leasehold improvements and fixtures and equipment for new and existing stores and approximately $15 million primarily related to information technology and supply chain infrastructure. We are finalizing our plans regarding our supply chain, which could increase our capital spend in this area over the next 12 months. 45 -------------------------------------------------------------------------------- Table of Contents Financing Activities Ten Months Ended Years Ended For the Periods January 15, 2012 April 3, 2011 March 30, to to January 31, 2014 2013 March 31, 2012 January 14, 2012 (Successor) (Successor) (Successor) (Predecessor) (44 Weeks) (52 Weeks) (11 Weeks) (41 Weeks) Cash flows from financing activities: Investment in Number Holdings, Inc. preferred stock $ (19,200 ) $ - $ - $ - Dividend paid (95,512 ) - - - Proceeds from debt 100,000 - 774,500 - Payments of debt (6,174 ) (5,237 ) (11,313 ) - Payments of debt issuance costs (2,343 ) (11,230 ) (31,411 ) - Payments of capital lease obligation (69 ) (77 ) (13 ) (56 ) Payments to repurchase stock options of Number Holdings, Inc. (7,781 ) - - - Proceeds from equity contribution - - 535,900 - Repurchases of common stock related to issuance of Performance Stock Units - - - (1,744 ) Proceeds from exercise of stock options - - - 3,359 Excess tax benefit from share-based payment arrangements 138 - - 5,401 Net cash (used in) provided by financing activities $ (30,941 ) $ (16,544 ) $ 1,267,663 $ 6,960 Net cash used in financing activities in transition fiscal 2014 was comprised primarily of payments made in connection with the Gold-Schiffer Purchase, partially offset by additional borrowings under the First Lien Term Loan Facility used to fund part of the Gold-Schiffer Purchase. Net cash used in financing activities in fiscal 2013 is comprised primarily of payment of debt issuance costs and repayments of debt. Net cash provided by financing activities from January 15, 2012 to March 31, 2012 (Successor) was $1,267.7 million, consisting primarily of proceeds from debt issuances and equity contributions, partially offset by payment of debt issuance costs and repayments of debt. Net cash provided by financing activities from April 3, 2011 to January 14, 2012 (Predecessor) was $7.0 million, consisting primarily of proceeds from the exercise of stock options partially offset by payments to satisfy employee tax obligations related to the issuance of performance stock units as part of our Predecessor equity incentive plan. Off-Balance Sheet Arrangements As of January 31, 2014, we had no off-balance sheet arrangements. Contractual Obligations The following table summarizes our consolidated contractual obligations (in thousands) as of January 31, 2014. Payment due by period Total Less than 1 year 1-3 years 3-5 years More than 5 years Debt obligations $ 862,277 $ 6,138 $ 12,276 $ 593,863 $ 250,000 Interest payments (a) 306,686 56,323 111,746 112,874 25,743 Capital lease obligations 285 88 197 - - Operating lease obligations 337,892 59,696 96,367 64,586 117,243 Purchase obligations (b) 7,475 2,993 2,182 2,040 260 Deferred compensation liability 1,142 - - - 1,142 Total $ 1,515,757 $ 125,238 $ 222,768 $ 773,363 $ 394,388 -------------------------------------------------------------------------------- (a) Includes interest expense on fixed and variable debt. Variable debt interest expense based on amended First Lien Term Loan Facility Agreement; see Note 7, "Debt" to our Consolidated Financial Statements. 46 -------------------------------------------------------------------------------- Table of Contents (b) Purchase obligations include legally binding agreements that primarily consist of construction contracts of new stores, and purchases and service commitment for logistics and store operations. Amounts committed under open purchase orders for merchandise are not included if cancelable without penalty prior to a date that precedes the vendors' scheduled shipment date. We do not have any liabilities related to uncertain tax positions as of January 31, 2014. See Note 6, "Income Tax Provision" to our Consolidated Financial Statements. Lease Commitments We lease various facilities under operating leases, which will expire at various dates through fiscal year 2031. Most of the lease agreements contain renewal options and/or provide for fixed rent escalations or increases based on the Consumer Price Index. Total minimum lease payments under each of these lease agreements, including scheduled increases, are charged to operations on a straight-line basis over the term of each respective lease. Most leases require us to pay property taxes, maintenance and insurance. Rental expenses (including property taxes, maintenance and insurance) charged to operations in transition fiscal 2014 were approximately $60.8 million. Rental expenses (including property taxes, maintenance and insurance) charged to operations in fiscal 2013 were approximately $63.0 million. Rental expense (including property taxes, maintenance and insurance) charged to operating expenses for the periods of January 15, 2012 to March 31, 2012 and April 3, 2011 to January 14, 2012 was $13.1 million and $44.0 million, respectively. We typically seek leases with a five-year to ten-year term and with multiple five-year renewal options. See "Item 2. Properties." The large majority of our store leases were entered into with multiple renewal periods, which are typically five years and occasionally longer. Variable Interest Entities As of January 31, 2014 and March 30, 2013, we did not have any variable interest entities. Seasonality and Quarterly Fluctuations We have historically experienced and expect to continue to experience some seasonal fluctuations in our net sales, operating income, and net income. During the quarters that have included the Halloween, Christmas and Easter selling seasons, we have historically experienced higher net sales and higher operating income. Our quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the timing of certain these holidays, the timing of new store openings and the merchandise mix. During fiscal 2013 there were two Easter selling seasons that occurred in early April 2012 and in late March 2013. There was no Easter selling season in transition fiscal 2014. New Authoritative Standards Information regarding new authoritative standards is contained in Note 1, "Basis of Presentation and Summary of Significant Accounting Policies" to our Consolidated Financial Statements which is incorporated herein by this reference. 47 -------------------------------------------------------------------------------- Table of Contents |