NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Aéropostale, Inc. and its subsidiaries (“we”, “us”, “our”, the “Company” or “Aéropostale”) is a specialty retailer of casual apparel and accessories, principally serving young women and men through its Aéropostale stores and website and 4 to 12 year-olds through its P.S. from Aéropostale stores and website. The Company provides customers with a focused selection of high quality fashion and fashion basic merchandise at compelling values through its retail stores and e-commerce channel. Aéropostale maintains control over its proprietary brands by designing, sourcing, marketing and selling all of its own merchandise, other than in licensed stores outside the United States. Aéropostale products can be purchased in Aéropostale stores and online at
www.aeropostale.com
(this and any other references in this Quarterly Report on Form 10-Q to
www.aeropostale.com,
www.ps4u.com
or
www.gojane.com
are solely references to a uniform resource locator, or URL, and are inactive textual references only, not intended to incorporate the websites into this Quarterly Report on Form 10-Q). P.S. from Aéropostale products can be purchased in P.S. from Aéropostale stores, in certain Aéropostale stores and online at
www.ps4u.com
and
www.aeropostale.com
. We also operate GoJane.com, an online women's fashion footwear and apparel retailer. GoJane products can be purchased online at
www.gojane.com
. As of
April 30, 2016
, we operated
805
stores, consisting of
739
Aéropostale stores in all
50
states and in Puerto Rico,
41
Aéropostale stores in Canada, as well as
25
P.S. from Aéropostale stores in
12
states. In addition, pursuant to various licensing agreements, our licensees operated
322
Aéropostale and P.S. from Aéropostale locations in the Middle East, Asia, Europe and Latin America as of
April 30, 2016
. We recently announced new licensing agreements to bring stores to Thailand, Egypt and Indonesia, and our licensees recently opened stores in India and the Republic of Ireland.
Recent Developments
Bankruptcy Proceedings
On May 4, 2016, (the “Petition Date”), Aéropostale, Inc. and each of its subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) and the filings therein (the “Chapter 11 Filings”). The chapter 11 cases (the “Chapter 11 Cases”) have been consolidated for procedural purposes only and are being administered jointly under the caption “In re Aéropostale, Inc., et al.,” Case No. 16-11275. During the pendency of the Chapter 11 Cases, we will continue to operate our business as a “debtor in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.
DIP Financing
In connection with the Chapter 11 Filings, Aéropostale, Inc., as borrower, certain Debtors as guarantors, the lenders party thereto from time to time, and Crystal Financial, LLC, entered into an asset-based credit facility in an aggregate principal amount of up to
$160 million
(the “DIP Facility”). On May 6, 2016, the Bankruptcy Court granted interim approval to the Company to draw
$100 million
in financing from the DIP Facility, which the Company is using for general purposes and also has utilized to pay off the Credit Facility (as defined below). On June 10, 2016, the DIP Facility was approved by the Bankruptcy Court for the full amount of
$160 million
. For further discussion see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Financial Performance and Liquidity
Amongst other things, declining mall traffic due to a shift in customer demand away from apparel to technology and personal experiences, a highly promotional and competitive retail environment and a change in our customers' taste and preference have contributed to unfavorable financial performance. We have experienced declining comparable store sales and incurred net losses from operations. This has led to cash outflows from operations of
$68.5 million
in fiscal 2015,
$55.7 million
in fiscal 2014 and
$38.4 million
in fiscal 2013.
As we discuss further below, we have taken numerous steps to enhance our liquidity position, including, among other things, amending our Credit Facility with Bank of America N.A. on August 18, 2015 to increase borrowing availability and extend the maturity date (see Note 11 to the Notes to Consolidated Financial Statements), effectuating our plan to restructure the P.S. from Aéropostale business and to reduce costs and close under-performing Aéropostale stores in the United States and Canada, focusing on merchandising and operational initiatives described throughout this Report, and taking various other strategic actions directed toward improving our profitability and liquidity. During fiscal 2015, we reduced our capital expenditures to
$15.7 million
from
$23.8 million
in fiscal 2014, and expect to further reduce capital expenditures to less than
$14.0 million
during fiscal 2016. See “Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.”
In addition, following a strategic business review in the fourth quarter of 2015, we instituted an aggressive cost reduction program targeting both direct and indirect spending across the organization (“2015 Cost Reduction Program”). The Company expects this program to generate approximately
$35.0 million
to
$40.0 million
in annualized pre-tax savings which is expected to be fully achieved in fiscal 2016. As part of this program, we reduced our corporate headcount by approximately
100
positions, or
13%
, at the end of fiscal 2015. In fiscal 2014, we reduced our corporate headcount by
100
open or occupied corporate positions (“2014 Cost Reduction Program”).
In March 2016, we announced that the Company was engaged in a dispute with MGF Sourcing relating to the Sourcing Agreement (as hereinafter defined). This caused a disruption in the supply of merchandise and resulted in both a liquidity constraint and lost sales. On May 11, 2016, the Company reached an agreement in principle with MGF Sourcing to resolve the dispute which has been approved of the Bankruptcy Court. Under the terms of this agreement, outstanding purchase orders will be fulfilled under revised terms and no further purchase orders will be written. Upon fulfillment of open purchase orders and payment of post-bankruptcy petition invoices, the agreement shall terminate.
In the first quarter of 2016, our Board of Directors authorized management to explore a full range of strategic alternatives, including a potential sale or restructuring of the Company. The Company retained financial and other advisors to assist in a review of alternatives.
On May 4, 2016, the Company filed the Chapter 11 Filings and entered into the DIP Facility to assist with financing its ongoing operations. The Company announced the closure of
113
U.S. locations, as well as all
41
stores in Canada. The Company also announced that as a part of its effort to position the Company for long-term success, it is reviewing its leases and other contracts to ensure they are competitive with current market dynamics and other financial considerations, which may lead to additional store closings.
We expect to continue to operate in the normal course of business during the reorganization process. Unless otherwise authorized by the Bankruptcy Court, the Bankruptcy Code prohibits us from making payments to creditors on account of pre-petition claims. Vendors are, however, being paid for goods furnished and services provided after the Petition Date in the ordinary course of business. Further, while we continue to explore strategic alternatives through the reorganization process, we will also continue to focus internally on improving our performance through our merchandising, operational and financial initiatives. We expect to implement our strategic initiatives and our additional merchandising and operational initiatives as described in Note 1 of our Annual Report on Form 10-K for the fiscal year ended January 30, 2016, in an effort to improve liquidity and profitability; however, there can be no assurance of whether or when we will successfully emerge from bankruptcy or if any of the alternatives we are considering will be successfully completed on acceptable terms.
While our financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should we be unable to continue as a going concern, our liquidity constraints have raised substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is contingent upon, among other things, the consummation of a plan of reorganization and our ability to comply with the financial and other covenants contained in the DIP Facility.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America. However, in the opinion of our management, all adjustments necessary for a fair presentation of the results of the interim periods have been made. These adjustments consist primarily of normal recurring accruals and estimates that impact the carrying value of assets and liabilities. Actual results may differ materially from these estimates. The consolidated balance sheet as of
January 30, 2016
was derived from audited financial statements.
Our business is highly seasonal, and historically, we have realized a significant portion of our sales and cash flows in the second half of the year, attributable to the impact of the back-to-school selling season in the third quarter and the holiday selling season in the fourth quarter. As a result, our working capital requirements fluctuate during the year, increasing in mid-summer in anticipation of the third and fourth quarters. Our business is also subject, at certain times, to calendar shifts which may occur during key selling times such as school holidays, Easter and regional fluctuations in the calendar during the back-to-school selling season. Therefore,
our interim period unaudited condensed consolidated financial statements may not be indicative of our full-year results of operations, financial condition or cash flows. These unaudited condensed consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for our fiscal year ended
January 30, 2016
(“Fiscal
2015
10-K”).
References to “
2016
” or “fiscal
2016
” mean the
52
-week period ending
January 28, 2017
and references to “
2015
” or “fiscal
2015
” mean the
52
-week period ended
January 30, 2016
. References to “the
first
quarter of
2016
” mean the thirteen-week period ended
April 30, 2016
and references to “the
first
quarter of
2015
” mean the thirteen-week period ended
May 2, 2015
.
3. Supplier Agreement
On February 2, 2015, we revised and renewed a master sourcing agreement (“Supplier Agreement”) with one of our suppliers. Under the
ten
-year agreement, we received an advance volume purchase discount equivalent to approximately
$1.75 million
per annum throughout the life of the Supplier Agreement, or a total cash payment of
$17.5 million
, in return for a commitment of meeting certain minimum thresholds. On April 19, 2016, we amended and restated the Supplier Agreement. This amendment decreased the annual purchase commitment and removed the opportunity to receive additional purchase discounts.
The Supplier Agreement requires us to meet an annual purchase minimum threshold that approximates
15%
of our fiscal 2015 consolidated cost of sales. Should we fail to meet the annual purchase minimum thresholds, we would be required to make a shortfall payment to the supplier based on a scaled percentage of the applicable annual purchase minimum shortfall during the applicable period. We expect to meet the annual purchase minimum for fiscal 2016.
In connection with the Supplier Agreement, we earned
$4.5 million
in rebates which reduced our liability from
$17.5 million
to
$13.0 million
, of which
$1.8 million
is classified in accrued expenses as of April 30, 2016. This liability is amortized upon receipt of merchandise.
4. Sycamore Transactions
On May 23, 2014, we entered into (i) a Loan and Security Agreement (the "Loan Agreement") with affiliates of Sycamore Partners, (ii) a Stock Purchase Agreement (the "Stock Purchase Agreement") with Aero Investors LLC, an affiliate of Sycamore Partners for the purchase of
1,000
shares of Series B Convertible Preferred Stock of the Company,
$0.01
par value (the "Series B Preferred Stock") and (iii) an Investor Rights Agreement with Sycamore Partners. Simultaneously with entering into the Loan Agreement, we amended our existing revolving credit facility with Bank of America, N.A. to allow for the incurrence of the additional debt under the Loan Agreement.
The accounting guidance related to multiple deliverables in an arrangement provides direction on determining if separate contracts should be evaluated as a single arrangement and if an arrangement involves a single unit of accounting or separate units of accounting. We determined that there were
four
units of accounting or elements of the arrangement which included Tranche A Loan, Tranche B Loan, Series B convertible preferred stock and the Sourcing Agreement (as hereinafter defined). We allocated the initial value based on the relative fair values of each element in the transaction. We estimated the fair values of Tranche A Loan and Tranche B Loan using the discounted cash flow method. Under this method, the projected interest and principal payments are projected through the life of each loan. These cash flows are then discounted to the present value at an appropriate market-derived discount rate, taking into account market yields at the date of issuance and an assessment of the credit rating applicable to us based on the consideration of various credit metrics along with the terms of each loan (such as duration, coupon rate, etc.) to derive an indication of fair value. These instruments are classified as a Level 3 measurement, as they are not publicly traded and therefore, we are unable to obtain quoted market prices. The Series B Preferred Stock represents a convertible security that can be exchanged for shares of Company common stock upon the payment of a cash conversion price of
$7.25
per common share equivalent. Effectively, the Series B Preferred Stock has the characteristic of a warrant as each share represents an option to purchase
3,932.018
shares of common stock at an exercise price of
$7.25
per common share and there is no dividend or liquidation preference associated with the Series B Preferred Stock. Accordingly, the Black-Scholes model was used to determine the fair value of the Convertible Shares with an expected life of
10
years, a risk free interest rate of
2.54%
and expected volatility of
50%
. The Sourcing Agreement was determined to be at fair value and therefore no proceeds were allocated to the agreement.
As of May 23, 2014 and September 30, 2015, Lemur LLC, an affiliate of Sycamore Partners, owned approximately
8%
of our outstanding common stock. Stefan Kaluzny, a managing director at Sycamore Partners, joined our Board of Directors upon the closing of this transaction. In addition to Mr. Kaluzny, Sycamore Partners received the right to appoint one additional member to our Board, and appointed Julian R. Geiger, who subsequently agreed to become our CEO on August 18, 2014. Additionally, a third independent appointee was mutually agreed upon by Sycamore Partners and us. Mr. Kaluzny did not stand for re-election to our Board of Directors at our 2015 Annual Meeting. Sycamore Partners and its affiliates and Mr. Kaluzny are considered related parties
due to their ownership interest in us (see Note 17 for a further discussion). In August 2015, Kent A. Kleeberger, a Sycamore Partners appointee, joined our Board of Directors. Mr. Kleeberger resigned from the Board of Directors on February 5, 2016.
As of February 9, 2016, Lemur LLC ceased to be the beneficial owner of more than five percent of the Company's common stock.
Loan Agreement
The Loan Agreement made term loans available to us in the principal amount of
$150.0 million
, consisting of
two
tranches: a
five
-year
$100.0 million
term loan facility (the "Tranche A Loan") and a
10
-year
$50.0 million
term loan facility (the "Tranche B Loan" and, together with the Tranche A Loan, the "Term Loans").
On May 23, 2014, the Term Loans were disbursed in full and we received net proceeds of
$137.6 million
from affiliates of Sycamore Partners, after deducting the first year interest payment and certain issuance fees.
The Tranche A Loan bears interest at a rate equal to
10%
per annum and, at our election, up to
50%
of the interest can be payable-in-kind during the first three years and up to
20%
of the interest can be payable-in-kind during the final two years. The first year of interest under the Tranche A Facility in the amount of
$10.0 million
was prepaid in cash in full on May 23, 2014, and no other interest payments were required to be paid during the first year of the Tranche A Loan. The Tranche A Loan has no annual scheduled repayment requirements. The Tranche A Loan was scheduled to mature on May 23, 2019. The Tranche B Loan does not accrue any interest and is to be repaid in equal annual installments of
10%
per annum beginning in fiscal 2016.
The Term Loans are guaranteed by certain of our domestic subsidiaries and secured by a second priority security interest in all assets of the Company and certain of our subsidiaries that were already pledged for the benefit of Bank of America, N.A., as agent, under its existing revolving credit facility, and a first priority security interest in our, and certain of our subsidiaries', remaining assets.
Prior to the Chapter 11 Filings, the Tranche A Loan was scheduled to mature on May 23, 2019 and the Tranche B Loan was scheduled to mature on the earlier of (a) tenth anniversary of the end of the Start-Up Period (as such term is defined in the Sourcing Agreement described below) and (b) the expiration or termination of the Sourcing Agreement. However, the Chapter 11 Filings triggered events of default and an automatic acceleration of the Term Loans.
The Loan Agreement contains representations, covenants and events of default that are substantially consistent with our revolving credit facility with Bank of America, N.A. The Loan Agreement also contains a
$70.0 million
minimum liquidity covenant. The Company was in compliance with the minimum liquidity covenant under the Loan Agreements at
April 30, 2016
.
The proceeds of the Term Loans were used for working capital and other general corporate purposes. Prepayment of the Tranche A Loan would have required payment of a premium of
10%
of the principal amount prepaid on or before the one year anniversary of the closing and
5%
of the principal amount prepaid on or before the second anniversary of the closing. There is no prepayment penalty after the second anniversary of the closing. The Tranche B Loan may be prepaid at any time without premium or penalty.
We recorded liabilities for the Term Loans using imputed interest based on our best estimate of its incremental borrowing rates. The effective interest rate used for Tranche A Loan was
7.24%
, resulting in an initial present value of
$101.7 million
and a resulting debt premium of
$1.7 million
. The premium is being amortized to interest expense over the expected term of the debt using the effective interest method. The effective interest rate for Tranche B Loan used was
7.86%
, resulting in an initial present value of
$30.0 million
and a debt discount of
$20.0 million
, which is also being amortized to interest expense over the expected term of the debt. Additionally, we recorded deferred financing fees of
$5.9 million
related to the Term Loans which are being amortized to interest expense over the expected terms of the debt.
We had fair values of
$144.2 million
in borrowings outstanding under the Loan Agreement, with face value of
$150.0 million
as of
April 30, 2016
. Fair value outstanding for Tranche A Loan was
$109.3 million
, with a face value of
$100.0 million
. Fair value outstanding for Tranche B Loan was
$34.9 million
, with a face value of
$50.0 million
. Total interest associated with this transaction was
$2.6 million
for the
first
quarter of
2016
.
In connection with the Chapter 11 Filings, these Term Loans have been reclassified to current liabilities on the Balance Sheet.
Series B Convertible Preferred Stock
Concurrent with, and as a condition to, entering into the Loan Agreement, we issued
1,000
shares of Series B Preferred Stock to affiliates of Sycamore Partners at an aggregate offer price of
$0.1 million
. Each share of Series B Preferred Stock is convertible at any time at the option of the holder on or prior to May 23, 2024 into shares of common stock at an initial conversion rate of
3,932.018
for each share of Series B Preferred Stock. The common stock underlying the Series B Preferred Stock represents
5%
of our issued and outstanding common stock as of May 23, 2014. The Series B Preferred Stock is convertible into shares of the common stock at an initial cash conversion price of
$7.25
per share of the underlying common stock. The number of shares of Series B Preferred Stock or common stock to be issued upon exercise and the respective exercise prices are subject to adjustment for changes in the Series B Preferred Stock or common stock, such as stock dividends, stock splits, and similar changes. In the event of a change of control transaction, the Series B Preferred Stock will automatically convert into common stock subject to payment by the holder of such Series B Preferred Stock of the aggregate cash conversion price then in effect, if such conversion price is lower than the per share consideration to be received in the change of control transaction. If the per share consideration to be received in the change of control transaction is less than or equal to the per share cash conversion price then in effect, the Series B Preferred Stock will be automatically converted into a right to receive an amount per share equal to the par value of such share of Series B Preferred Stock.
We analyzed the embedded conversion option for derivative accounting consideration under FASB ASC Subtopic 815-15, “Derivatives and Hedging” and determined that the conversion option should be classified as equity. We also analyzed the conversion option for beneficial conversion features consideration under ASC Subtopic 470-20 “Convertible Securities with Beneficial Conversion Features” and noted none. The Series B Preferred Stock was recorded in equity at a fair value of
$5.9 million
upon issuance, and was not recorded as a liability on the Consolidated Balance Sheet.
Non-Exclusive Sourcing Agreement
As a condition to funding the Tranche B Loan, we and one of our subsidiaries also entered into a non-exclusive Sourcing Agreement (the "Sourcing Agreement") with TSAM (Delaware) LLC (d/b/a MGF Sourcing US LLC), an affiliate of Sycamore Partners ("MGF"). The price of merchandise sold to us by MGF pursuant to the Sourcing Agreement was required to be competitive to market. We commenced sourcing goods with MGF pursuant to the Sourcing Agreement during the fourth quarter of 2014.
We guaranteed the obligations of our subsidiary under the Sourcing Agreement. The Sourcing Agreement required us to purchase a minimum volume of product for a period of
10 years
commencing with our first fiscal quarter of 2016 (such period, the "Minimum Volume Commitment Period"), of between
$240.0 million
and
$280.0 million
per annum depending on the year (the "Minimum Volume Commitment"). If we failed to purchase the applicable Minimum Volume Commitment in any given year, we would be required to pay a shortfall commission to MGF, based on a scaled percentage of the applicable Minimum Volume Commitment shortfall during the applicable period.
Under the Sourcing Agreement, MGF was required to pay to us an annual rebate, equal to a fixed amount multiplied by the percentage of annual purchases made by us (including purchases deemed to be made by virtue of payment of the shortfall commission) relative to the Minimum Volume Commitment, to be applied towards the payment of the required amortization on the Tranche B Loan. The Sourcing Agreement provided for certain carryover credits if we purchased a volume of product above the Minimum Volume Commitment during the applicable Minimum Volume Commitment Period.
We could terminate the Sourcing Agreement upon
nine
months' prior notice at any time after the first
three years
of the Minimum Volume Commitment Period elapsed, subject to payment of a termination fee scaled to the term remaining under the Sourcing Agreement.
In March 2016, we announced that the Company was engaged in a dispute with MGF Sourcing relating to the Sourcing Agreement. This caused a disruption in the supply of merchandise and resulted in both a liquidity constraint and lost sales. On May 11, 2016, the Company reached an agreement with MGF Sourcing to resolve the dispute as evidenced by the amendment to the Sourcing Agreement dated May 16, 2016, which has been approved by the Bankruptcy Court. Under the terms of this agreement, outstanding purchase orders will be fulfilled under revised terms and no further purchase orders will be written. Upon fulfillment of open purchase orders and payment of post-bankruptcy petition invoices, the agreement shall terminate.
5. Restructuring Program
On April 30, 2014, following an assessment of changing consumer shopping patterns, management and the Board of Directors approved a comprehensive plan to restructure the P.S. from Aéropostale business, which is included in our retail store and e-
commerce segment, and to reduce costs. As of January 31, 2015, we closed
126
P.S. from Aéropostale stores, primarily in mall locations, and streamlined and improved the Company's expense structure. The 2014 Cost Reduction Program also targeted direct and indirect spending across the organization during fiscal 2014.
The following is a summary of (benefit) expense recognized in restructuring charges in the statement of operations associated with this program:
|
|
|
|
|
|
|
|
|
|
|
|
|
13 weeks ended
|
|
|
April 30, 2016
|
|
May 2, 2015
|
|
|
(In thousands)
|
|
Asset impairment charges
|
$
|
—
|
|
|
$
|
—
|
|
|
Severance costs
|
—
|
|
|
—
|
|
|
Lease costs, net of liability reversals
|
—
|
|
|
(236
|
)
|
|
Other exit costs
|
—
|
|
|
294
|
|
|
Total
|
$
|
—
|
|
|
$
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairments
|
|
Severance
|
|
Lease Costs
|
|
Unamortized Tenant Allowance and Deferred Rent
|
|
Other Exit Costs
|
|
Total
|
|
|
(In thousands)
|
|
Liability/Charge at Program Inception
|
$
|
30,497
|
|
|
$
|
1,060
|
|
|
$
|
1,046
|
|
|
$
|
(17,718
|
)
|
|
$
|
1,886
|
|
|
$
|
16,771
|
|
|
Additions
|
—
|
|
|
3,054
|
|
|
18,355
|
|
|
—
|
|
|
2,435
|
|
|
23,844
|
|
|
Paid or Utilized
|
(30,497
|
)
|
|
(4,114
|
)
|
|
(13,042
|
)
|
|
—
|
|
|
(4,321
|
)
|
|
(51,974
|
)
|
|
Adjustments
|
—
|
|
|
—
|
|
|
(6,359
|
)
|
|
17,718
|
|
|
—
|
|
|
11,359
|
|
|
Liability as of April 30, 2016
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
We closed
115
P.S. from Aéropostale stores during the fourth quarter of fiscal 2014 related to the above mentioned restructuring program. We elected to early adopt the provisions of ASU 2014-08, "Discontinued Operations and Disclosures of Disposals of Components of an Entity", as of the beginning of the fourth quarter of fiscal 2014. We assessed the disposal group under this guidance and concluded the closure of the disposal group to be a "strategic shift". However, this strategic shift was not determined to be a "major" strategic shift based on the portion of our consolidated business that the disposal group represented. Accordingly the disposal group was not presented in the financial statements as discontinued operations. However, we have concluded that this disposal group was an individually significant disposal group. There were
no
pretax losses for this disposal group of stores for the
first
quarter of 2016 and $
0.1
million for the first
quarter of fiscal 2015
.
6. Fair Value Measurements
We follow the guidance in ASC Topic 820, “Fair Value Measurement” (“ASC 820”) as it relates to financial and nonfinancial assets and liabilities. ASC 820 prioritizes inputs used in measuring fair value into a hierarchy of three levels:
Level 1 – Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 – Observable inputs other than quoted prices included in Level 1, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs derived principally from or corroborated by observable market data.
Level 3 – Unobservable inputs reflecting the Company’s own assumptions about the inputs that market participants would use in pricing the asset or liability based on the best information available.
In accordance with the fair value hierarchy described above, the following table shows the fair value of our financial assets and liabilities that are required to be remeasured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
April 30,
2016
|
|
January 30,
2016
|
|
May 2,
2015
|
|
April 30,
2016
|
|
January 30,
2016
|
|
May 2,
2015
|
|
April 30,
2016
|
|
January 30,
2016
|
|
May 2,
2015
|
|
|
(In thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
1
|
$
|
27
|
|
|
$
|
41,509
|
|
|
$
|
41,054
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Total
|
$
|
27
|
|
|
$
|
41,509
|
|
|
$
|
41,054
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GoJane performance plan liability
2
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
736
|
|
|
$
|
723
|
|
|
$
|
1,468
|
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
736
|
|
|
$
|
723
|
|
|
$
|
1,468
|
|
1
Cash equivalents include money market investments valued as Level 1 inputs in the fair value hierarchy. The fair value of cash equivalents approximates their carrying value due to their short-term maturities.
2
Under the terms of the fiscal 2012 GoJane acquisition agreement, the purchase price also includes contingent cash payments of up to an aggregate of
$8.0 million
if certain financial metrics are achieved by the GoJane business during the
five
year period beginning on the acquisition date (the "GJ Performance Plan"). These performance payments are not contingent upon continuous employment by the
two
individual former stockholders of GoJane. The GJ Performance Plan liability is measured at fair value using Level 3 inputs as defined in the fair value hierarchy. The fair value of the contingent payments as of the acquisition date was estimated to be
$7.0 million
. This was based on a weighted average expected achievement probability and a discount rate over the expected payment stream. Each quarter, we remeasure the GJ Performance Plan liability at fair value. During the fourth quarter of 2015 and 2014, we remeasured the liability and reversed
$0.8 million
and
$4.5 million
, respectively, based on the probability of achieving the payment targets.
The following table provides a reconciliation of the beginning and ending balances of the GJ Performance Plan measured at fair value using significant unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 weeks ended
|
|
|
|
April 30, 2016
|
|
May 2, 2015
|
|
|
|
(In thousands)
|
|
Balance at beginning of period
|
|
$
|
723
|
|
|
$
|
1,446
|
|
|
Accretion of interest expense
|
|
13
|
|
|
22
|
|
|
GoJane consideration payment
|
|
—
|
|
|
—
|
|
|
Balance at end of period
|
|
$
|
736
|
|
|
$
|
1,468
|
|
The
$0.7 million
liability as of
April 30, 2016
was included in non-current liabilities. The
$1.5 million
liability as of
May 2, 2015
was included in non-current liabilities.
Non-Financial Assets
We recorded asset impairment charges of approximately
$14.9 million
during the
first
quarter of
2016
. The impairment charges relate to
45
stores that were not previously impaired in addition to previously impaired stores. This impairment charge was included in cost of sales. We did not record any asset impairment charges during the
first
quarter of
2015
.
These amounts included the write-down of long-lived assets at stores that were assessed for impairment because of (a) changes in circumstances that indicated the carrying value of assets may not be recoverable, or (b) management’s intention to relocate or close stores. Impairment charges were primarily related to revenues and/or gross margins not meeting targeted levels at the respective stores as a result of macroeconomic conditions, location related conditions and other factors that were negatively impacting the sales and cash flows of these locations.
The table below sets forth by level within the fair value hierarchy the fair value of long-lived assets for which impairment was recognized for the first quarter of fiscal 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
Total Fair Value
|
|
Total Losses
|
|
|
|
(In thousands)
|
|
April 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets held and used
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 5, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets held and used
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
7. Stockholders’ Equity
Accumulated Other Comprehensive Income (Loss)
The following table sets forth the components of accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30,
2016
|
|
January 30,
2016
|
|
May 2,
2015
|
|
|
(In thousands)
|
|
Pension liability, net of tax
|
$
|
1,156
|
|
|
$
|
1,148
|
|
|
$
|
1,004
|
|
|
Cumulative foreign currency translation adjustment
|
2,752
|
|
|
2,241
|
|
|
983
|
|
|
Total accumulated other comprehensive income
|
$
|
3,908
|
|
|
$
|
3,389
|
|
|
$
|
1,987
|
|
The changes in components in accumulated other comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 weeks ended
|
|
|
April 30, 2016
|
|
|
Pension Liability
|
|
Foreign Currency Translation
|
|
Total
|
|
|
(In thousands)
|
|
Beginning balance at January 30, 2016
|
$
|
1,148
|
|
|
$
|
2,241
|
|
|
$
|
3,389
|
|
|
Other comprehensive income before reclassifications
|
8
|
|
|
511
|
|
|
519
|
|
|
Reclassified from accumulated other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
Net current-period other comprehensive (loss) income
|
$
|
8
|
|
|
$
|
511
|
|
|
$
|
519
|
|
|
Ending balance at April 30, 2016
|
$
|
1,156
|
|
|
$
|
2,752
|
|
|
$
|
3,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 weeks ended
|
|
|
May 2, 2015
|
|
|
Pension Liability
|
|
Foreign Currency Translation
|
|
Total
|
|
|
(In thousands)
|
|
Beginning balance at February 1, 2015
|
$
|
1,937
|
|
|
$
|
1,161
|
|
|
$
|
3,098
|
|
|
Other comprehensive income before reclassifications
|
—
|
|
|
(178
|
)
|
|
(178
|
)
|
|
Reclassified from accumulated other comprehensive loss
|
(933
|
)
|
|
—
|
|
|
(933
|
)
|
|
Net current-period other comprehensive income
|
$
|
(933
|
)
|
|
$
|
(178
|
)
|
|
$
|
(1,111
|
)
|
|
Ending balance at May 2, 2015
|
$
|
1,004
|
|
|
$
|
983
|
|
|
$
|
1,987
|
|
The details for the reclassifications out of accumulated comprehensive income for fiscal 2015 and fiscal 2014 are not presented as the Supplemental Executive Retirement Plan is not material to the Consolidated Financial Statements.
Stock Repurchase Program
We have the ability to repurchase our common stock under a stock repurchase program. The repurchase program may be modified or terminated by the Board of Directors at any time and there is no expiration date for the program. The extent and timing of repurchases will depend upon general business and market conditions, stock prices, opening and closing of the stock trading window, and liquidity and capital resource requirements going forward. During each of the first
quarter of fiscal 2016
and
2015
, we did not repurchase shares of our common stock under our stock repurchase program. Under the program to date, we have repurchased
60.1 million
shares of our common stock for
$1.0 billion
. As of
April 30, 2016
, we have approximately
$104.4 million
of repurchase authorization remaining under our
$1.15 billion
share repurchase program.
In addition to the above program, we withheld
0.1 million
shares for minimum statutory withholding taxes of
$22,000
related to the vesting of stock awards during the first quarter of 2016 and
0.4 million
shares for minimum statutory withholding taxes of
$401,000
during the first quarter of 2015.
8. Loss Per Share
The following table sets forth the computations of basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 weeks ended
|
|
|
|
April 30,
2016
|
|
May 2,
2015
|
|
|
|
(In thousands, except per share data)
|
|
Net loss
|
$
|
(58,417
|
)
|
|
$
|
(45,268
|
)
|
|
|
Weighted average basic shares
|
80,313
|
|
|
79,275
|
|
|
|
Impact of dilutive securities
|
34
|
|
|
—
|
|
|
|
Weighted average diluted shares
|
80,347
|
|
|
79,275
|
|
|
|
Basic loss per share
|
$
|
(0.73
|
)
|
|
$
|
(0.57
|
)
|
|
|
Diluted loss per share
|
$
|
(0.73
|
)
|
|
$
|
(0.57
|
)
|
|
All options to purchase shares, in addition to restricted, performance shares and convertible preferred shares, were excluded from the computation of diluted loss per share because the effect would be anti-dilutive.
9. Accrued Expenses
and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2016
|
|
January 30, 2016
|
|
May 2, 2015
|
|
|
(In thousands)
|
|
Accrued gift cards
|
$
|
16,846
|
|
|
$
|
19,969
|
|
|
$
|
19,395
|
|
|
Accrued compensation and retirement benefit plan liabilities
|
8,035
|
|
|
12,839
|
|
|
10,534
|
|
|
Accrued rent
|
4,584
|
|
|
4,519
|
|
|
—
|
|
|
Current portion of exit cost obligations
|
—
|
|
|
—
|
|
|
7,012
|
|
|
Other
|
22,879
|
|
|
37,192
|
|
|
42,647
|
|
|
Total accrued expenses and other current liabilities
|
$
|
52,344
|
|
|
$
|
74,519
|
|
|
$
|
79,588
|
|
10. Other Non-Current Liabilities
Other non-current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2016
|
|
January 30, 2016
|
|
May 2, 2015
|
|
|
(In thousands)
|
|
Deferred rent
|
$
|
37,827
|
|
|
$
|
37,810
|
|
|
$
|
38,415
|
|
|
Deferred tenant allowance
|
16,412
|
|
|
17,419
|
|
|
21,891
|
|
|
Advance volume purchase discount
|
11,224
|
|
|
10,215
|
|
|
13,422
|
|
|
Non-current portion of exit cost obligations
|
—
|
|
|
—
|
|
|
5,486
|
|
|
Other
|
10,584
|
|
|
10,910
|
|
|
11,296
|
|
|
Total other non-current liabilities
|
$
|
76,047
|
|
|
$
|
76,354
|
|
|
$
|
90,510
|
|
11. Revolving Credit Facility
In September 2011, we entered into an amended and restated revolving credit facility with Bank of America, N.A. (as further amended, the “Credit Facility”), which was guaranteed by all of our domestic subsidiaries (the "Guarantors") and secured by substantially all of our assets. The Credit Facility originally provided for a revolving credit line up to
$175.0 million
. The Credit Facility is available for working capital and general corporate purposes. The Credit Facility was scheduled to expire on September 22, 2016.
In June 2012, Bank of America, N/A. issued to us a stand-by letter of credit in the amount of approximately
$250,000
.
On February 21, 2014, the Company, certain of its direct and indirect subsidiaries, including GoJane LLC, the Lenders party thereto, and Bank of America, N.A., as agent for the ratable benefit of the Credit Parties (in such capacity, the “Agent”), entered into a Joinder and First Amendment to Third Amended and Restated Loan and Security Agreement and Amendment to Certain Other Loan Documents (the “First Amendment”). The First Amendment amended the Credit Facility, among other things, to increase from
$175.0 million
to
$230.0 million
the aggregate amount of loans and other extensions of credit available to the Borrower under the Credit Facility by (i) the addition of a
$30.0 million
first-in, last-out revolving loan facility based on the appraised value of certain intellectual property of the Company, and (ii) an increase in the Company’s existing revolving credit facility by
$25.0 million
, from
$175.0 million
to
$200.0 million
(which continued to include a
$40.0 million
sublimit for the issuance of letters of credit). In addition, the accordion feature of the Credit Facility, under which the Company could request an increase in the commitments of the Lenders thereunder from time to time, was reduced from
$75.0 million
to
$50.0 million
. GoJane LLC, an indirect wholly-owned subsidiary of the Company, also joined the Credit Facility as a new guarantor.
In connection with this agreement, we amended the Credit Facility with Bank of America N.A. to allow for the incurrence of this additional debt under the Loan Agreement.
On August 18, 2015, the Company entered into a Fourth Amendment to the Credit Facility and Amendment to Certain Other Loan Documents (the “Fourth Amendment”). Among other things, the Fourth Amendment extended the maturity date of the Credit
Facility, until at least February 21, 2019, with automatic extensions, under certain circumstances set forth in the Fourth Amendment, to August 18, 2020; provided for a reduction in the maximum principal amount of extensions of credit that may be made under the Credit Facility from
$230 million
to
$215 million
; provided for a seasonal increase in the advance rate on inventory under the borrowing base formula for the revolving credit facility contained in the Credit Facility; increased to
$40 million
the maximum aggregate principal amount of loans that may be borrowed under the FILO loan facility contained in the Credit Facility and provided for an annual decrease, commencing in 2017, in the advance rate under the borrowing base formula for FILO loans; and reflected the addition of General Electric Capital Corporation as an additional lender under the Credit Facility. The reduction in the maximum principal amount of extensions of credit under the Credit Facility was primarily driven by the Company’s strategic decision to close underperforming stores, thus reducing inventory levels.
Loans under the Credit Facility were secured by substantially all of our assets and were guaranteed by the Guarantors. Upon the occurrence of a Suspension Event (which is defined in the Credit Facility as an event of default or any occurrence, circumstance or state of facts which would become an event of default after notice, or lapse of time, or both) or, in certain circumstances, a Cash Dominion Event (any event of default or failure to maintain availability in an amount greater than
12.5%
of the lesser of the Borrowing Base (Revolving Credit) and Commitments (Revolving Credit) (as such terms are defined in the Credit Facility)), our ability to borrow funds, make investments, pay dividends and repurchase shares of our common stock may have been limited, among other limitations. Direct borrowings under the Credit Facility bear interest at a margin over either LIBOR or the Prime Rate (as each such term is defined in the Credit Facility).
The Credit Facility also contained covenants that required us to have a specified minimum amount of cash and availability on hand and to have obtained an unqualified audit opinion. These covenants also restricted our ability to, among other things:
|
|
|
|
•
|
incur additional debt or encumber assets of the Company;
|
|
|
|
|
•
|
merge with or acquire other companies;
|
|
|
|
|
•
|
sell, transfer, lease or dispose of assets; and
|
|
|
|
|
•
|
make loans or guarantees.
|
Events of default under the Credit Facility included, without limitation and subject to grace periods and notice provisions in certain circumstances, failure to pay principal amounts when due, breaches of covenants, misrepresentation, default on leases or other indebtedness, excess uninsured casualty loss, excess uninsured judgment or restraint of business, failure to maintain specified availability levels, business failure or application for bankruptcy, legal challenges to loan documents or a change in control. Upon the occurrence of an event of default under the Credit Facility, the Lenders could have, including but not limited to, ceased making loans, terminated the Credit Facility and declared that all amounts outstanding are immediately due and payable, and taken possession of and sold all assets that had been used as collateral.
The Company was subject to a fixed charge coverage ratio if availability levels were lower than the lesser of
10%
of the Borrowing Base (Revolving Credit) or Dollar Commitments (Revolving Credit), as defined in the Credit Facility.
Availability under the Credit Facility was based on a borrowing base consisting of merchandise inventory, certain intellectual property and receivables. As of
April 30, 2016
we had borrowings of
73.5 million
, and as of
January 30, 2016
and
May 2, 2015
we had
no
borrowings under the Credit Facility. In June 2012, Bank of America, N.A. issued a stand-by letter of credit under the Credit Facility. As of
April 30, 2016
, the outstanding letter of credit was approximately
$250,000
and expires on June 30, 2016. We do not have any other stand-by or commercial letters of credit outstanding as of
April 30, 2016
under the Credit Facility.
As of
April 30, 2016
, our remaining availability under the Credit Facility was approximately
$74.3 million
.
The Chapter 11 Filings triggered an event of default and an automatic acceleration of our loans under the Credit Facility. On May 9, 2016, we repaid
$73.4 million
outstanding, using the funds available under our DIP Facility, and we also cash collateralized the standby letter of credit, which currently remains outstanding.
12. Retirement Benefit Plans
Retirement benefit plan liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30,
2016
|
|
January 30,
2016
|
|
May 2,
2015
|
|
|
(In thousands)
|
|
Supplemental Executive Retirement Plan (“SERP”)
|
$
|
1,204
|
|
|
$
|
1,394
|
|
|
$
|
1,412
|
|
|
Other retirement plan liabilities
|
4,484
|
|
|
4,273
|
|
|
4,445
|
|
|
Total
|
$
|
5,688
|
|
|
$
|
5,667
|
|
|
$
|
5,857
|
|
|
Less amount classified in accrued expenses related to SERP
|
—
|
|
|
—
|
|
|
—
|
|
|
Less amount classified in accrued expenses related to other retirement plan liabilities
|
1,387
|
|
|
1,196
|
|
|
754
|
|
|
Long-term retirement benefit plan liabilities
|
$
|
4,301
|
|
|
$
|
4,471
|
|
|
$
|
5,103
|
|
401(k) Plan
We maintain a qualified, defined contribution retirement plan with a 401(k) salary deferral feature that covers substantially all of our employees who meet certain requirements. Under the terms of the plan, employees may contribute, subject to statutory limitations, up to
100%
of gross earnings and historically, we have provided a matching contribution of
50%
of the first
5%
of gross earnings contributed by the participants. We also have the option to make additional contributions or to suspend the employer contribution at any time. The employer's matching contributions vest over a
five
-year service period with
20%
vesting after
two
years and
50%
vesting after year
three
. Vesting increases thereafter at a rate of
25%
per year so that participants will be fully vested after
five
years of service. During fiscal 2011, we established separate defined contribution plans for eligible employees in both Canada and Puerto Rico who meet certain requirements. Contribution expense for all plans was not material to the unaudited condensed consolidated financial statements for any period presented.
Supplemental Executive Retirement Plan
We maintain a Supplemental Executive Retirement Plan, or "SERP". This plan is a non-qualified defined benefit plan for
one
remaining executive. The plan is non-contributory and not funded and provides benefits based on years of service and compensation during employment. Participants are fully vested upon entrance in the plan. Pension expense is determined using the projected unit credit cost method to estimate the total benefits ultimately payable to officers and this cost is allocated to service periods. The actuarial assumptions used to calculate pension costs are reviewed annually.
The liability related to the SERP was
$1.2 million
as of
April 30, 2016
,
$1.4 million
as of
January 30, 2016
and
$1.4 million
as of
May 2, 2015
. During March 2015, we paid Thomas P. Johnson, our former Chief Executive Officer,
$6.0 million
from our SERP. In conjunction with the payment to Mr. Johnson, we recorded a benefit of
$1.0 million
in SG&A, with a corresponding amount recorded to relieve accumulated other comprehensive loss included in our stockholders' equity. This accounting treatment is in accordance with settlement accounting procedures under the provisions of ASC Topic 715, "Compensation - Retirement Benefits".
Other Retirement Plan Liabilities
We have a long-term incentive deferred compensation plan established for the purpose of providing long-term incentives to a select group of management. The plan is a non-qualified, non-contributory defined contribution plan and is not funded. Participants in this plan include all employees designated by us as Vice President, or other higher-ranking positions that are not participants in the SERP. We record annual monetary credits to each participant's account based on compensation levels and years as a participant in the plan. Annual interest credits are applied to the balance of each participant's account based upon established benchmarks. Each annual credit is subject to a
three
-year cliff-vesting schedule, and participants' accounts will be fully vested upon retirement after completing
five
years of service and attaining age
55
. The liabilities related to this plan were
$4.2 million
as of
April 30, 2016
,
$4.2 million
as of
January 30, 2016
and
$4.4 million
as of
May 2, 2015
. Compensation expense related to this plan was not material to our unaudited condensed consolidated financial statements for any period presented.
We maintain a postretirement benefit plan for certain executives that provides retiree medical and dental benefits. The plan is an "other post-employment benefit plan", or "OPEB", and is not funded. Pension expense and the liability related to this plan were not material to our unaudited condensed consolidated financial statements for any period presented.
13. Stock-Based Compensation
Under the provisions of ASC 718, all forms of share-based payment to employees and directors, including stock options, must be treated as compensation and recognized in the statement of operations.
On May 8, 2014, the Board unanimously approved the 2014 Omnibus Incentive Plan (the “Omnibus Plan”), which is an amendment and restatement of our Second Amended and Restated 2002 Long-Term Incentive Plan, as amended (the “2002 Plan”). The Omnibus Plan became effective upon stockholder approval at the Annual Meeting of Stockholders on June 30, 2014. Stock-based compensation awarded after June 30, 2014 is awarded under the Omnibus Plan. Shares issued as a result of stock-based compensation transactions have been funded with the issuance of new shares of the Company's common stock.
Restricted Stock Units
Beginning in fiscal 2013, certain of our employees have been awarded restricted stock units, pursuant to restricted stock unit agreements. The restricted stock units awarded to employees cliff vest at varying times, most typically following between
one
and
three years
of continuous service from the award date. Certain shares awarded may also vest upon a qualified retirement at or following age
65
, or upon a qualified early retirement under the provisions adopted in 2012 whereby the awardee completes
10
years of service, attains age
55
and retires. All restricted stock units awarded under the 2002 Plan immediately vest upon a change in control of the Company.
The following table summarizes restricted stock units outstanding as of
April 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average
Grant-Date Fair Value
|
|
|
(In thousands)
|
|
|
|
Outstanding as of January 30, 2016
|
631
|
|
|
$
|
3.28
|
|
|
Granted
|
2,226
|
|
|
0.24
|
|
|
Vested
|
(25
|
)
|
|
7.14
|
|
|
Cancelled
|
(84
|
)
|
|
2.18
|
|
|
Outstanding as of April 30, 2016
|
2,748
|
|
|
$
|
0.82
|
|
Total compensation expense is being amortized over the shorter of the achievement of retirement or early retirement status, or the vesting period. Compensation expense related to restricted stock unit activity was
$0.2 million
for the
first
quarter of
2016
and
$0.6 million
for the
first
quarter of
2015
. As of
April 30, 2016
, there was
$1.2 million
of unrecognized compensation cost related to restricted stock units that is expected to be recognized over the weighted average period of
1.3
years. The total fair value of restricted stock units vested was
$0.2 million
during the
first
quarter of
2016
. The total fair value of units vested was
$0.8 million
during the first quarter of 2015.
Additionally, beginning in the first quarter of fiscal 2014, certain of our employees have been awarded cash-settled restricted stock units, pursuant to cash-settled restricted stock unit agreements. The cash-settled restricted stock units awarded to employees cliff vest at varying times up to approximately
three years
of continuous service. Certain shares awarded may also vest upon a qualified retirement at or following age
65
, or upon a qualified early retirement under the provisions adopted in 2012 whereby the awardee completes
10
years of service, attains age
55
and retires. All cash-settled restricted stock units immediately vest upon a change in control of the Company. We may, in our sole discretion, at any time during the term, convert the cash-settled restricted stock units into stock-settled restricted stock units. The cash-settled restricted stock units are treated as liability awards in accordance with ASC 718. During January 2015, we converted
262,000
shares of cash-settled restricted stock units to stock-settled restricted stock units.
The following table summarizes cash-settled restricted stock units outstanding as of
April 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average
Grant-Date Fair Value
|
|
|
(In thousands)
|
|
|
|
Outstanding as of January 30, 2016
|
468
|
|
|
$
|
0.26
|
|
|
Granted
|
—
|
|
|
—
|
|
|
Vested
|
(8
|
)
|
|
0.18
|
|
|
Cancelled
|
(37
|
)
|
|
0.18
|
|
|
Outstanding as of April 30, 2016
|
423
|
|
|
$
|
0.04
|
|
Total compensation expense is being amortized over the shorter of the achievement of retirement or early retirement status, or the vesting period. Compensation expense related to restricted shares activity was a benefit of
$0.1 million
for the
first
quarter of
2016
and an expense of
$0.5 million
for the
first
quarter of
2015
. As of
April 30, 2016
, there was
no
unrecognized compensation cost related to cash-settled restricted stock units that is expected to be recognized over the weighted average period of
0.92
years.
Restricted Shares
Certain of our employees and all of our directors have been awarded non-vested common stock (restricted shares), pursuant to non-vested stock agreements. The restricted shares awarded to employees generally cliff vest after up to
three
years of continuous service. Certain shares awarded may also vest upon a qualified retirement at or following age
65
, or upon a qualified early retirement under the provisions adopted in 2012 whereby an awardee completes
10
years of service, attains age
55
and retires. All restricted shares immediately vest upon a change in control of the Company. Grants of restricted shares awarded to directors vest in full after
one
year after the date of the grant.
The following table summarizes non-vested shares of stock outstanding as of
April 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average
Grant-Date Fair Value
|
|
|
(In thousands)
|
|
|
|
Outstanding as of January 30, 2016
|
717
|
|
|
$
|
7.72
|
|
|
Granted
|
—
|
|
|
—
|
|
|
Vested
|
(609
|
)
|
|
3.08
|
|
|
Cancelled
|
(95
|
)
|
|
8.36
|
|
|
Outstanding as of April 30, 2016
|
13
|
|
|
$
|
11.70
|
|
Total compensation expense is being amortized over the shorter of the achievement of retirement or early retirement status, or the vesting period. Compensation expense related to restricted shares activity was
$0.2 million
for the
first
quarter of
2016
and
$1.5 million
for the
first
quarter of
2015
. As of
April 30, 2016
, the unrecognized compensation expense related to restricted share awards that is expected to be recognized over the weighted average period of less than
one
year is immaterial. The total fair value of shares vested was
$5.1 million
during the
first
quarter of
2016
and
$1.3 million
during the
first
quarter of
2015
.
In connection with the GoJane acquisition, we granted restricted shares based on the stock price on the date granted to the
two
individual stockholders of GoJane, with compensation expense recognized over the
three
year cliff vesting period. If the aggregate dollar value of the restricted shares on the vesting date is less than
$8.0 million
, then we shall pay to the
two
individual stockholders an amount in cash equal to the difference between
$8.0 million
and the fair market value of the restricted shares on the vesting date. During the
first
quarter of
2016
, we paid out the balance due of
$7.6 million
that was recorded as of January 30, 2016. For the
first
quarter of
2015
, we recorded compensation expense of
$0.2 million
and had a corresponding liability of
$5.0 million
based on the Company's stock price as of
May 2, 2015
.
Performance Shares
Certain of our executives have been awarded performance shares, pursuant to performance share agreements. The performance shares cliff vest at the end of
three
years of continuous service with us and are contingent upon meeting various separate performance conditions based upon consolidated earnings targets or market conditions based upon total shareholder return targets.
All performance shares immediately vest upon a change in control of the Company (as communicated to the executives awarded performance shares). Compensation cost for the performance shares with performance conditions related to consolidated earnings targets is periodically reviewed and adjusted based upon the probability of achieving certain performance targets. If the probability of achieving targets changes, compensation cost will be adjusted in the period that the probability of achievement changes. The fair value of performance based awards is based upon the fair value of the Company's common stock on the date of grant. For market based awards that vest based upon total shareholder return targets, the effect of the market conditions is reflected in the fair value of the awards on the date of grant using a Monte-Carlo simulation model. A Monte-Carlo simulation model estimates the fair value of the market based award based upon the expected term, risk-free interest rate, expected dividend yield and expected volatility measure for the Company and its peer group. Compensation expense for market based awards is recognized over the vesting period regardless of whether the market conditions are expected to be achieved.
The following table summarizes performance shares of stock outstanding as of
April 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance-based
|
|
Market-based
|
|
|
Performance Shares
|
|
Performance Shares
|
|
|
Shares
|
|
Weighted Average
Grant-Date Fair Value
|
|
Shares
|
|
Weighted Average
Grant-Date Fair Value
|
|
|
(In thousands)
|
|
|
|
(In thousands)
|
|
|
|
Outstanding as of January 30, 2016
|
—
|
|
|
$
|
—
|
|
|
220
|
|
|
$
|
9.65
|
|
|
Granted
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Vested
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Cancelled
|
—
|
|
|
—
|
|
|
(69
|
)
|
|
19.18
|
|
|
Outstanding as of April 30, 2016
|
—
|
|
|
$
|
—
|
|
|
151
|
|
|
$
|
5.34
|
|
Total compensation expense is being amortized over the vesting period. During the first quarter of 2016, we recorded compensation expense of
$0.1 million
related to the market-based performance shares which we granted, and
$0.3 million
related to market-based performance shares for the
first
quarter of
2015
.
No
compensation expense related to performance-based shares was recognized during the first quarters of fiscal 2016 and 2015.
The following table summarizes unrecognized compensation cost and the weighted-average years expected to be recognized related to performance share awards outstanding as of
April 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance-based
|
|
Market-based
|
|
|
Performance Shares
|
|
Performance Shares
|
|
Total unrecognized compensation (in thousands)
|
$
|
—
|
|
|
$
|
245
|
|
|
Weighted-average years expected to recognize compensation cost (years)
|
0
|
|
|
1
|
|
Cash-Settled Stock Appreciation Rights ("CSARs")
In conjunction with the execution of the employment agreement with Mr. Johnson, our former CEO, on May 3, 2013, we granted him an award of CSARs, with an award date value of
$5.6 million
. The number of CSARs granted was determined in accordance with the agreement by dividing
$5.6 million
by the Black Scholes value of the closing price of a share of the Company's common stock on the award date. As of
April 30, 2016
, there was
no
unrecognized compensation cost related to CSARs. As a result of the departure of Mr. Johnson after the end of the second quarter of 2014, 2/3 of these CSARs were forfeited. The remaining vested shares expired on August 29, 2015. For the first quarter of 2015 we did not record any expense or benefit related to this incentive award.
Performance Based Bonus
The Employment Agreement with Julian R. Geiger, our Chief Executive Officer, provides for a special performance based bonus. If, during any consecutive
90
calendar day period during the third year of the term of the Employment Agreement the average closing price per share of the Company’s common stock is
$15.93
or higher, Mr. Geiger will be entitled to a performance-
based cash bonus equal to
2%
of the amount, if any, by which the Company’s average market capitalization during the period with the highest 90 day average stock price during the third year of the term of the Employment Agreement exceeds
$255.4
million (the “Effective Date Market Cap”). If prior to the achievement of such performance metric, Mr. Geiger’s employment is terminated by the Company without Cause, by Mr. Geiger for Good Reason, upon Mr. Geiger’s death or by the Company due to his Disability, or there is a Change of Control (each a “Qualifying Event”), and as of the date of such Qualifying Event the common stock price exceeds
$3.24
, then, the amount of the performance-based cash bonus will instead be
2%
of the amount, if any, by which the Company’s average market capitalization over the
30
calendar day period immediately preceding the Qualifying Event exceeds the Effective Date Market Cap.
We have recorded a liability for this award that was immaterial to the unaudited condensed financial statements as of
April 30, 2016
.
Stock Options
We have an Omnibus Incentive Plan under which we may grant qualified and non-qualified stock options to purchase shares of our common stock to executives, consultants, directors, or other key employees. Stock options may not be granted at less than the fair market value at the date of grant. Stock options generally vest over
four
years on a pro-rata basis and expire after
eight
years. Compensation expense is recognized on a straight-line basis over the term. All outstanding stock options immediately vest upon (i) a change in control of the company (as defined in the plan) and (ii) termination of the employee within
one
year of such change of control.
For the first
quarter of fiscal 2016
, the weighted average assumptions used in our Black-Scholes option pricing model were expected volatility of
64.4%
, expected term of
4.16
years, a risk-free interest rate of
1.32%
, and an expected forfeiture rate of
0%
.
The following table summarizes stock option transactions for common stock during the
first
quarter of
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
|
Weighted-Average Remaining Contractual Term
|
|
Aggregate Intrinsic Value
|
|
|
(In thousands)
|
|
|
|
(In years)
|
|
(In millions)
|
|
Outstanding as of January 30, 2016
|
2,554
|
|
|
$
|
3.34
|
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
|
Cancelled
1
|
(24
|
)
|
|
11.54
|
|
|
|
|
|
|
Outstanding as of April 30, 2016
|
2,530
|
|
|
$
|
3.26
|
|
|
5.58
|
|
$
|
—
|
|
|
Options vested as of April 30, 2016 and expected to vest
|
2,530
|
|
|
$
|
3.26
|
|
|
5.58
|
|
$
|
—
|
|
|
Exercisable as of April 30, 2016
|
1,182
|
|
|
$
|
3.33
|
|
|
5.55
|
|
$
|
—
|
|
1
The number of options cancelled includes approximately
24,000
expired shares.
In accordance with his employment agreement, Mr. Geiger was granted an award of options to purchase
1.5 million
shares of our common stock during the first quarter of 2015. These stock options have a strike price of
$3.17
per share, vest over
two
years on a pro-rata basis, and have a
seven
year life. During fiscal 2014, and also in accordance with his employment agreement, Mr. Geiger was granted an award of options to purchase
2.0 million
shares that had a strike price of
$3.24
and vest over
three
years on a pro-rata basis with a
seven
year life. During the fourth quarter of 2015 Mr. Geiger voluntarily relinquished
1.0 million
in stock options previously granted.
We recognized
$0.4 million
in compensation expense related to stock options during the
first
quarter of
2016
and
$0.5 million
during the
first
quarter of
2015
.
The following table summarizes information regarding non-vested outstanding stock options as of
April 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average
Grant-Date Fair Value
|
|
|
(In thousands)
|
|
|
|
Non-vested as of January 30, 2016
|
1,360
|
|
|
$
|
1.57
|
|
|
Granted
|
—
|
|
|
—
|
|
|
Vested
|
(2
|
)
|
|
6.39
|
|
|
Canceled
|
(10
|
)
|
|
0.71
|
|
|
Non-vested as of April 30, 2016
|
1,348
|
|
|
$
|
1.56
|
|
As of
April 30, 2016
, there was
$0.8 million
of total unrecognized compensation cost related to non-vested options that we expect will be recognized over the remaining weighted-average vesting period of
1
year.
14. Commitments and Contingent Liabilities
Legal Proceedings
- During the pendency of the Chapter 11 Cases, all pending litigation wherein we are named as a defendant is generally stayed by operation of federal bankruptcy law, absent further order by the Bankruptcy Court. We are party to various litigation matters and proceedings in the ordinary course of business. In the opinion of our management, dispositions of these matters are not expected to have a material adverse effect on our financial position, results of operations or cash flows.
Contingencies -
On May 23, 2014, we entered into a
$150.0 million
secured credit facility with affiliates of Sycamore Partners. In connection with this agreement, we also entered into a sourcing agreement with an affiliate of Sycamore Partners that requires us to purchase a minimum volume of product for
10 years
. This purchase commitment commenced during the first quarter of fiscal 2016 and is between
$240.0 million
and
$280.0 million
per annum depending on the year. In March 2016, we announced that the Company was engaged in a dispute with this affiliate of Sycamore Partners (MGF Sourcing) relating to the Sourcing Agreement. On May 11, 2016, the Company reached an agreement with MGF Sourcing to resolve the dispute as evidenced by the amendment to the Sourcing Agreement dated May 16, 2016, which has been approved by the Bankruptcy Court. Under the terms of this agreement, outstanding purchase orders will be fulfilled under revised terms and no further purchase orders will be written. Upon fulfillment of open purchase orders and payment of post-bankruptcy petition invoices, the agreement shall terminate (see Note 4).
On February 2, 2015, we revised and renewed a Supplier Agreement with one of our suppliers. Should we fail to meet annual purchase minimum thresholds in this agreement we would be liable to make certain agreed upon shortfall payments to this supplier.
On April 19, 2016, we amended and restated the Supplier Agreement. This amendment decreased the annual purchase commitment and removed the opportunity to receive additional purchase discounts (see Note 3).
In June 2012, Bank of America, N.A. issued a stand-by letter of credit under the Credit Facility. On May 9, 2016, we cash collateralized the stand-by letter of credit which expires on June 30, 2016. We do not have any other stand-by or commercial letters of credit as of
April 30, 2016
.
We have various product license agreements that obligate us to pay the licensor at least the guaranteed minimum royalty amount based on sales of their products.
We have not issued any third party guarantees or commercial commitments as of
April 30, 2016
.
Executive Severance Plan
- We have a Change of Control Severance Plan (“the Plan”), which entitles certain executive level employees to receive certain payments upon a termination of employment after a change of control (as defined in the Plan) of the Company. The adoption of the Plan did not have any impact on the unaudited condensed consolidated financial statements for any periods presented.
15. Income Taxes
We review the annual effective tax rate on a quarterly basis and make necessary changes if information or events merit. The estimated annual effective tax rate is forecasted quarterly using actual historical information and forward-looking estimates. The estimated annual effective tax rate may fluctuate due to changes in forecasted annual operating income; changes to the valuation allowance for deferred tax assets; changes to actual or forecasted permanent book to tax differences (non-deductible expenses); impacts from future tax settlements with state, federal or foreign tax authorities (such changes would be recorded discretely in the
quarter in which they occur), or impacts from tax law changes. To the extent such changes impact our deferred tax assets or liabilities, these changes would generally be recorded discretely in the quarter in which they occur.
Uncertain tax positions, inclusive of interest and penalties were
$6.9 million
as of
April 30, 2016
,
$6.9 million
at
January 30, 2016
, and
$7.3 million
at
May 2, 2015
. Of these amounts,
$4.8 million
was recorded as a direct reduction of the related deferred tax assets as of
April 30, 2016
and
January 30, 2016
and
$5.3 million
was recorded as of
May 2, 2015
. Reversal of uncertain tax positions, net of related deferred tax assets, would favorably impact our effective tax rate. These uncertain tax positions are subject to change based on future events, the timing of which is uncertain, however the Company does not anticipate that the balance of such uncertain tax positions will significantly change during the next twelve months.
We file income tax returns in the U.S. and in various states, Canada and Puerto Rico. All tax returns remain open for examination generally for our
2012
through
2015
tax years by various taxing authorities. However, certain states may keep their statute of limitations open for
six
to
ten
years. Our U.S. federal filings for the years 2010 to 2014 are currently under examination by the Internal Revenue Service.
16. Segment Information
FASB ASC Topic 280, “Segment Reporting” (“ASC 280”)
,
establishes standards for reporting information about a company’s operating segments. We have
two
reportable segments: a) retail stores and e-commerce; and b) international licensing. Our reportable segments were identified based on how our business is managed and evaluated. The reportable segments represent the Company’s activities for which discrete financial information is available and which is utilized on a regular basis by our chief operating decision maker (“CODM”), our Chief Executive Officer, to evaluate performance and allocate resources. The retail stores and e-commerce segment includes the aggregation of the Aéropostale U.S., Aéropostale Canada, P.S. from Aéropostale and GoJane operating segments. In identifying our reportable segments, the Company considers economic characteristics, as well as products, customers, sales growth potential and long-term profitability. The accounting policies of the Company’s reportable segments are consistent with those described in Note 1 of our Annual Report on Form 10-K for the fiscal year ended January 30, 2016. All intercompany transactions are eliminated in consolidation. We do not rely on any customer as a major source of revenue.
The following tables provide summary financial data for each of our reportable segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 weeks ended
|
|
|
|
April 30, 2016
|
|
May 2, 2015
|
|
Net sales:
|
|
|
|
|
|
Retail stores and e-commerce net sales
|
|
$
|
290,779
|
|
|
$
|
310,896
|
|
|
International licensing revenue
|
|
7,861
|
|
|
7,747
|
|
|
Total net sales
|
|
$
|
298,640
|
|
|
$
|
318,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 weeks ended
|
|
|
|
April 30, 2016
|
|
May 2, 2015
|
|
(Loss) income from operations:
|
|
|
|
|
|
Retail stores and e-commerce
1
|
|
$
|
(44,236
|
)
|
|
$
|
(45,826
|
)
|
|
International licensing
|
|
6,569
|
|
|
6,576
|
|
|
Other
2
|
|
(14,875
|
)
|
|
(1,206
|
)
|
|
Total loss from operations
|
|
$
|
(52,542
|
)
|
|
$
|
(40,456
|
)
|
1
Such amounts include all corporate overhead and shared service function costs and we have not allocated a portion of these costs to international licensing in this presentation.
2
Other items for all periods presented above, which are all related to the retail stores and e-commerce segment, included store closing costs, restructuring charges (See Note 5), store asset impairment charges and other income (charges) that are not included in the segment income (loss) from operations reviewed by the CODM.
Depreciation expense and capital expenditures have not been separately disclosed as the amounts primarily relate to the retail stores and e-commerce segment. Such amounts are not material for the international licensing segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2016
|
|
January 30, 2016
|
|
May 2, 2015
|
|
Total assets:
|
|
|
|
|
|
|
|
Retail stores and e-commerce
|
|
$
|
289,577
|
|
|
$
|
345,429
|
|
|
$
|
421,352
|
|
|
International licensing
|
|
9,437
|
|
|
8,954
|
|
|
7,677
|
|
|
Total assets
|
|
$
|
299,014
|
|
|
$
|
354,383
|
|
|
$
|
429,029
|
|
17. Related Parties
On May 23, 2014, we entered into a strategic sourcing relationship with an affiliate of Sycamore Partners, which included
$150.0 million
in secured credit facilities (see Note 4 for a further discussion). As of May 23, 2014 and December 31, 2015, Lemur LLC, an affiliate of Sycamore Partners owned approximately
8%
of our outstanding common stock. Sycamore Partners and its affiliates are considered related parties due to the agreements described above combined with their ownership interest in us. In addition to the related party transactions presented on the Consolidated Statement of Operations during the
first
quarter of
2016
, we had the following transactions with these related parties during that period:
|
|
|
|
•
|
Merchandise purchased from an affiliate of Sycamore Partners was
$40.2 million
during the
first
quarter of
2016
, of which
$30.9 million
was included in our merchandise inventories as of
April 30, 2016
,
|
•
Accounts payable of
$9.3 million
to an affiliate of Sycamore Partners as of
April 30, 2016
, and
•
Payments of
$43.7 million
to an affiliate of Sycamore Partners during the first
quarter of fiscal 2016
.
Additionally, Scopia Capital Management, LLC owned approximately
9.0%
of our common stock as of December 31, 2015, and was considered a related party due to their ownership interest in us. We did not have any transactions with this related party during the
first
quarter of
2016
. As of March 3, 2016, Scopia Capital Management, LLC ceased to be the beneficial owners of more than five percent of the Company's common stock.
As of February 9, 2016, Lemur LLC ceased to be the beneficial owner or more than five percent of the Company's common stock.
18. Recent Accounting Developments
In May 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The update amends certain guidance in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606). These amendments are intended to improve revenue recognition in the areas of collectability; presentation of sales tax and other similar taxes collected from customers; non-cash consideration; contract modifications and completed contracts at transition. The update also makes a transition technical correction stating that entities who elect to use the full retrospective transition method to adopt the new revenue standard would no longer be required to disclose the effect of the change in accounting principle on the period of adoption (as is currently required by ASC 250-10-50-1(b)(2)); however, entities would still be required to disclose the effects on pre-adoption periods that were retrospectively adjusted. The ASU's effective date and transition provisions are aligned with the requirements in the new revenue standard ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Management is still assessing the impact of the adoption to our consolidated financial statement
s.
In April 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The update amends certain guidance in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606). These amendments relate to identifying performance obligations as they pertain to 1) immaterial promised goods or services 2) shipping and handling activities and 3) identifying when promises
represent performance obligations; and licensing implementation guidance as it pertains to 1) determining the nature of an entity's promise in granting a license 2) sales-based and usage-based royalties 3) restrictions of time, geographic location, and use and 4) renewals of licenses that provide a right to use IP.
The ASU's effective date and transition provisions are aligned with the requirements in the new revenue standard ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Management is still assessing the impact of the adoption to our consolidated financial statement
s.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). The update simplifies several aspects of accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. The adoption of ASU 2016-09 is not expected to have a material effect on our consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 is intended to improve the reporting of leasing transactions to provide users of financial statements with more decision-useful information. The standard requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Management is still assessing the impact of the adoption to our consolidated financial statement
s.
In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes ("ASU 2015-17"), to simplify the presentation of deferred taxes in the statement of financial position. Under ASU 2015-17, entities will no longer be required to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. Rather, the standard requires deferred tax liabilities and assets to be classified as noncurrent in a classified statement of financial position. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and early application is permitted as of the beginning of an interim or annual reporting period. Management has retroactively adopted this ASU for the year ended January 30, 2016, which did not have a material effect.
In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Inventory, Simplifying the Measurement of Inventory ("ASU 2015-11") which requires an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The adoption of ASU 2015-11 is not expected to have a material effect on our consolidated financial statements.
In April 2015, the FASB issued Accounting Standards Update No. 2015-05, Customers' Accounting for Fees Paid in a Cloud Computing Arrangement ("ASU 2015-05"). ASU 2015-05 will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement by providing guidance as to whether an arrangement includes the sale or license of software. ASU 2015-05 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. The adoption of ASU 2015-05 is not expected to have a material effect on our consolidated financial statements.
In April 2015, the FASB issued Accounting Standards Update No. 2015-04, Compensation—Retirement Benefits (Topic 715) ("ASU 2015-04"). This update provides a practical expedient for employers with fiscal year-ends that do not fall on a month-end by permitting those employers to measure defined benefit plan assets and obligations as of the month-end that is closest to the entity's fiscal year-end. ASU 2015-04 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The adoption of ASU 2015-04 is not expected to have a material effect on our consolidated financial statements.
In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest - Imputation of Interest ("ASU 2015-03"). ASU 2015-03 requires that debt issuance costs related to a recognized liability be presented in the balance sheet as a direct reduction from the carrying amount of debt liability, consistent with debt discounts or premiums. ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The adoption of ASU 2015-03 is not expected to have a material effect on our consolidated financial statements.
19. Subsequent Events
Filing of Voluntary Petitions under Chapter 11 of the Bankruptcy Code
On May 4, 2016 (the “Petition Date”), we and our subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) and the filings therein (the “Chapter 11 Filings”). The Chapter 11 Filings constituted an event of default and automatic acceleration of our prepetition loans. The Chapter 11 cases have been consolidated for procedural purposes only and are being administered jointly under the caption “In re Aéropostale, Inc., et al.,” Case No. 16-11275.” During the pendency of the Chapter 11 cases, we will continue to operate our businesses as a “debtor in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.
DIP Financing
In connection with the Chapter 11 Filings, the Company entered into the DIP Facility, which provides for a loan with an aggregate principal amount of
$160 million
. On May 6, 2016, the Bankruptcy Court granted approval for us to draw
$100 million
in interim financing from the DIP Facility, which we are using for general purposes and also have utilized to pay off the Credit Facility (as defined above), which was used, in part, to repay the Credit Facility (see Note 11). The DIP Facility requires that we maintain minimum excess availability of at least (a)
$25.0 million
during the month of May 2016 and (b)
$13.0 million
at all times thereafter. In addition, the DIP Facility includes a covenant that requires us to limit expenditures to amounts provided in an agreed DIP budget, subject to certain permitted variances. Furthermore, the DIP Facility includes a series of milestones related to the Chapter 11 Cases. While these milestones allow us to simultaneously pursue both a plan of reorganization and a sale process, either path requires us to achieve a series of intermediate process benchmarks and, in any event, requires that a plan become effective or a sale be consummated, in either case, within 145 days after the Petition Date. Failure to comply with these covenants or milestones would result in an event of default under the DIP Facility and permit the lenders thereunder to accelerate the loans and otherwise exercise remedies under the loan documentation for the DIP Facility.
On June 9, 2016, the DIP Facility was amended pursuant to the Third Amendment to the Secured Superpriority Debtor-in-Possession Loan, Security and Guaranty Agreement (the “Third Amendment") to extend the date by which the final order approving the DIP Facility must be entered into the docket by the Bankruptcy Court.
On June 10, 2016, the Bankruptcy Court granted final approval of
$160 million
in interim financing under the DIP Facility.
On July 1, 2016, the DIP Facility was amended pursuant to the Fourth Amendment to the Secured Superpriority Debtor-in-Possession Loan, Security and Guaranty Agreement (the “Fourth Amendment”) to, among other things, amend certain milestone dates with respect to the Chapter 11 Cases consistent with the agreement reflected in the DIP Order.
Supplier Dispute
In March 2016, we announced that the Company was engaged in a dispute with MGF Sourcing relating to the Sourcing Agreement. This caused a disruption in the supply of merchandise and resulted in both a liquidity constraint and lost sales. On May 11, 2016, the Company reached an agreement with MGF Sourcing to resolve the dispute as evidenced by the amendment to the Sourcing Agreement dated May 16, 2016, which has been approved by the Bankruptcy Court. Under the terms of this agreement, outstanding purchase orders will be fulfilled under revised terms and no further purchase orders will be written. Upon fulfillment of open purchase orders and payment of post-bankruptcy petition invoices, the agreement shall terminate.
Store Closures and Workforce Reduction
In connection with the Chapter 11 Filings, on May 4, 2016, the Company announced the closure of
113
U.S. locations, as well as all
41
stores in Canada.
In addition, during the second quarter of fiscal 2016, in order to align the size and composition of the Company’s workforce with its expected future operating and capital plans, the Company determined to reduce its workforce by
82
full-time employees, representing approximately
14%
of the employees in the Company’s corporate staff. The Company estimates that during the second quarter of 2016 it will record a total of approximately
$1.4
to
$1.7 million
in pre-tax expenses related to employee-termination benefits, which consist of cash expenditures related primarily to one-time severance costs and out-placement services.