NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 1, 2008

(UNAUDITED)

1.  Summary of Significant Accounting Policies

Basis of Presentation         

The Condensed Consolidated Financial Statements include the accounts of Burlington Coat Factory Investments Holdings, Inc. and all of its subsidiaries (“Company” or “Holdings”). Burlington Coat Factory Investments Holdings, Inc. has no operations and its only asset is all of the stock in Burlington Coat Factory Warehouse Corporation. All discussions of operations in this report relate to Burlington Coat Factory Warehouse Corporation and its subsidiaries (“BCFWC”), which are reflected in the financial statements of the Company.  The accompanying financial statements are unaudited, but in the opinion of management reflect all adjustments (which are of a normal and recurring nature) necessary for the fair presentation of the results of operations for the interim periods. The balance sheet at June 2, 2007 has been derived from the audited consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended June 2, 2007 (“Fiscal 2007”). Because the Company's business is seasonal in nature, the operating results for the nine month period ended March 1, 2008 is not necessarily indicative of results for the fiscal year ending May 31, 2008 (“Fiscal 2008”).

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these Condensed Consolidated Financial Statements be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for Fiscal 2007.

 

Principles of Consolidation

The Condensed Consolidated Financial Statements include the accounts of Burlington Coat Factory Investments Holdings, Inc. and all of its subsidiaries in which it has a  controlling financial interest through direct ownership of a majority voting interest or a controlling managerial interest.  All intercompany accounts and transactions have been eliminated.

 

Holdings was incorporated in the State of Delaware on April 10, 2006. Holdings’ Certificate of Incorporation authorizes 1,000 shares of common stock, par value of $0.01 per share. All 1,000 shares are issued and outstanding and Burlington Coat Factory Holdings, Inc. (“Parent”) is the only holder of record of this stock.

Revenue Recognition

The Company records revenue at the time of sale and delivery of merchandise, net of allowances for estimated future returns. The Company accounts for layaway sales and leased department revenue in compliance with Staff Accounting Bulletin ("SAB") No. 101, " Revenue Recognition in Financial Statements", as revised and rescinded by SAB No. 104, "Revenue Recognition". Layaway sales are recognized upon delivery of merchandise to the customer. The amount of cash received upon initiation of the layaway is recorded as a deposit liability within “Other Current Liabilities” in the Company’s Condensed Consolidated Balance Sheets.  Store value cards (gift cards and store credits issued for merchandise returns) are recorded as a liability at the time of issuance, and the related sale is recorded upon redemption. Prior to December 29, 2007, except where prohibited by law, after 12 months of non-use, a monthly dormancy service fee was deducted from the remaining balance of the store value card and recorded as “Other Revenue”.   The Company presents sales, net of sales taxes, in its Condensed Consolidated Statement of Operations.

On December 29, 2007, the Company discontinued assessing a dormancy service fee on inactive store value cards.   Instead, the Company now estimates and recognizes store value card breakage income in proportion to actual store value card redemptions and records such income in the line item “Other Income, Net” in the Company’s Condensed Consolidated Statement of Operations. The Company determines an estimated store value card breakage rate by continuously evaluating historical redemption data.   Breakage income is recognized in proportion to the historical redemption patterns for those store value cards for which the likelihood of redemption is remote.  See Note 12 and Note 13.

2. Assets Held for Disposal

Assets Held for Disposal represent assets owned by the Company that management has committed to sell in the near term.  The Company has either identified or is actively seeking out potential buyers for these assets as of the balance sheet dates.  The assets listed as “Assets Held for Disposal” are primarily comprised of buildings related to store operations and store leases held by the Company.

Assets held for disposal are valued at the lower of their carrying value or fair value as follows (in thousands):

During the nine months ended March 1, 2008, the Company completed the sale of assets with a carrying value of $1.9 million that were previously held for sale related to two locations.  Additionally, certain assets which were previously held for sale no longer qualified as held for sale due to the fact that there is no longer an active program to locate a buyer.  As a result, the Company reclassified operating stores with a fixed asset value of $28.0 million out of the line item “Assets Held for Disposal” on the Company’s Condensed Consolidated Balance Sheets into the line item “Property and Equipment, Net.”  The impact of the transaction resulted in a charge against the line item “Other Income, Net” in the Company’s Condensed Consolidated Statements of Operations of $0.3 million for the nine months ended March 1, 2008, reflecting the adjustment for depreciation expense that would have been recognized had the asset been continuously classified as held and used.

The $900 million Senior Secured Term Loan Facility is to be repaid in quarterly payments of $2.3 million from March 1, 2008 to May 28, 2013.  At the end of each fiscal year, the Company is required to make a payment based on 50% of the available free cash flow (as defined in the credit agreement).  This payment offsets future mandatory quarterly payments.  Based on the available free cash flow for the year ended June 2, 2007, the Company paid $11.4 million on September 4, 2007.  This payment offsets the quarterly payments of $2.3 million through the third quarter of the fiscal year ended May 30, 2009 (“Fiscal 2009”) and $0.2 million of the quarterly payment to be made in the fourth quarter of Fiscal 2009.  As a result, the Company is not required to make any cash payments related to the mandatory quarterly payments earlier than the fourth quarter of Fiscal 2009.

Repayments, net of borrowings amounted to $53.3 million for the nine months ended March 1, 2008, related to the Company’s $800 million ABL Senior Secured Revolving Facility.  These repayments are the result of excess cash flow that the Company used to pay down the facility at various points in time.  For the three months ended March 1, 2008, the Company borrowed $2.0 million, net of repayments.

Holdings and certain subsidiaries of BCFWC fully and unconditionally guarantee BCFWC’s obligations under the $800 million ABL Senior Secured Revolving Facility and the $900 million Senior Secured Term Loan Facility.  These guarantees are both joint and several.

As of March 1, 2008, the Company was in compliance with all of its debt covenants.   The agreements regarding the ABL Senior Secured Revolving Facility and the Senior Secured Term Loan  Facility, as well as the indentures governing the BCFWC Senior Notes and Holdings Senior Discount Notes, contain covenants that, among other things, limit the Company’s ability and the ability of the Company’s restricted subsidiaries to pay dividends on, redeem or repurchase capital stock; make investments; incur additional indebtedness or issue preferred stock; create liens; permit dividends or other restricted payments by the Company’s subsidiaries; sell all or substantially all of the Company’s assets or consolidate or merge with or into other companies; and engage in transactions with affiliates.

The Company had $47.9 million and $55.6 million in deferred financing fees, net of accumulated amortization, as of March 1, 2008 and June 2, 2007, respectively, related to its long term debt instruments recorded in the line item “Other Assets” on the Company’s Condensed Consolidated Balance Sheets.  Amortization of deferred financing fees amounted to $7.7 million and $2.6 million for the nine and three month periods ended March 1, 2008, respectively, and $7.7 million and $2.6 million for the nine and three month periods ended March 3, 2007, respectively.  These amounts are recorded in the line item “Amortization” in the Company’s Condensed Consolidated Statements of Operations.

4.  Lines of Credit

The $800 million ABL Senior Secured Revolving Facility was entered into on April 13, 2006 and is for a five-year period at an interest rate of LIBOR plus a spread which is determined by the Company’s annual average borrowings outstanding. The maximum borrowing under the facility during the nine and three month period ended March 1, 2008 was $247.2 million and $105.7 million, respectively. Average borrowings during the nine and three month periods ended March 1, 2008 amounted to $150.4 million and $43.2 million, respectively, at an average interest rate of 7.05% and 6.60%, respectively. At March 1, 2008 and June 2, 2007, $105.7 million and $159.0 million, respectively, were outstanding under this credit facility. Commitment fees of .25% are charged on the unused portion of the facility and are included in the line item “Interest Expense” on the Company’s Condensed Consolidated Statements of Operations.

5.  Derivative Instruments and Hedging Activities

The Company participates in two interest rate cap agreements to manage interest rate risk associated with its long-term debt obligations.  These agreements are classified as “Other Assets” within the Company’s Condensed Consolidated Balance Sheets. Each agreement became effective on May 12, 2006.  One interest rate cap agreement has a notional principal amount of $300 million with a cap rate of 7.0% and terminates on May 31, 2011.  The other agreement has a notional principal amount of $700 million with a cap rate of 7.0% and terminates on May 29, 2009.  The Company does not monitor these interest rate cap agreements for hedge effectiveness.  

On December 20, 2007, the Company entered into an interest rate cap agreement to limit interest rate risk associated with its future long-term debt obligations.  The agreement has a notional principal amount of $600 million with a cap rate of 7.0% and terminates on May 31, 2011.  The agreement has been classified as “Other Assets” within the Company’s Condensed Consolidated Balance Sheets.  The agreement will be effective on May 29, 2009 upon the termination of the Company’s existing $700 million interest rate cap agreement.  The Company will determine prior to the effective date whether it will monitor this interest rate cap agreement for hedge effectiveness. Until the Company determines the accounting treatment that will be used, the Company will adjust the interest rate cap to fair value on a quarterly basis and as a result, gains or losses associated with this agreement will be included in the line item “Interest Expense” on the Company’s Condensed Consolidated Statements of Operations.

Losses associated with the above interest rate cap agreements amounted to $0.2 million and $0.1 million for the nine and three month periods ended March 1, 2008, respectively, compared with $1.9 million and $0.2 million for the nine and three month periods ended March 3, 2007, respectively, and are included in the line item “Interest Expense” on the Company’s Condensed Consolidated Statements of Operations. The fair market value of the interest rate cap agreements at March 1, 2008 and June 2, 2007 amounted to $0.5 million and $0.3 million, respectively and are included in the line item “Other Assets” in the Company’s Condensed Consolidated Balance Sheets.  

 

6 . Store Exit Costs  

The Company establishes reserves covering future obligations of closed stores and stores expected to be closed, including lease and severance obligations.  These reserves are included in the line item “Other Current Liabilities” in the Company’s Condensed Consolidated Balance Sheets and are recorded under the line item “Selling and Administrative

 

 

Expenses” on the Company’s Condensed Consolidated Statement of Operations.  Reserves at March 1, 2008 and June 2, 2007 consisted of (in thousands):

** 2007 reduction of $0.1 million relieved primarily due to the settlement of a liability with a landlord at a lower amount than was accrued.

The Company believes that these reserves are adequate to cover the expected contractual lease payments and other ancillary costs related to the closings. Scheduled rent related payments over the remainder of the contractual obligation periods are: Fiscal 2008 - $0.2 million and Fiscal 2009 - $0.2 million.

7. Income Taxes

As of March 1, 2008, the Company had a current deferred tax asset of $36.8 million and a non-current deferred tax liability of $476.0 million.  As of June 2, 2007, the Company had a current deferred tax asset of $35.1 million and a non-current deferred tax liability of $551.3 million. Current deferred tax assets consisted primarily of certain operating costs and inventory related costs not currently deductible for tax purposes.  Non-current deferred tax liabilities primarily relate to rent expense, pre-opening costs, intangible costs and depreciation expense where the Company has a future obligation for tax purposes.

Income taxes are provided on an interim basis based upon the Company’s estimate of the effective annual income tax rate. The effective tax rate for both the nine and three month periods ended March 1, 2008 differ from the estimate of the effective annual income tax rate due to certain discrete items.   The discrete tax items recorded  for the nine months ended March 1, 2008 consisted of three adjustments: a decrease to tax expense of $0.7 million to adjust deferred tax asset and liabilities for a change in state tax law, an increase to tax expense of $0.1 million for prior year accrual to return adjustment, and net increase to tax expense of $1.0 million as a result of the new requirements under FIN 48 (as defined below) related to the recognition of uncertain tax positions and related interest and penalties.  The discrete tax items recorded for the nine months ended March 3, 2007 consisted of two adjustments: a decrease to tax expense of $3.0 million for prior year accrual to return adjustment, and an increase to tax expense of $0.8 million for certain tax reserves. The effective tax rates for the three month periods ended March 1, 2008 and March 3, 2007 differ from their annual effective tax rates due to adjustments for the effects of the change in the estimated annual effective tax rates used in the first two fiscal quarters of Fiscal 2008 and Fiscal 2007 and discrete items recorded during each three month period.

As of March 1, 2008 and June 2, 2007, valuation allowances amounted to $8.3 million and related primarily to state tax net operating losses. The Company believes that it is more likely than not that a majority of the benefit of the state tax net operating losses will not be realized.  The state net operating losses have been generated in a number of taxing jurisdictions and are subject to various expiration periods ranging from five to twenty years beginning with Fiscal 2008.   Any future tax benefit recognized by the use of a state tax net operating loss that was established prior to the April 13, 2006 Merger Transaction involving Bain Capital, LLC (the “Merger Transaction”), where a valuation allowance has been established, will be recorded first to reduce to zero the goodwill related to the Merger Transaction, second to reduce to zero other non-current intangible assets and third to reduce income tax expense.

The Company adopted Financial Accounting Standards Board ("FASB") Interpretation No. 48, “ Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109” (“FIN 48”) as of June 3, 2007.  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement No. 109, “ Accounting for Income Taxes.”   FIN 48   prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return.  FIN 48 requires that the Company recognize in its financial statements the impact of a tax position taken or expected to be taken in a tax return, if that position is “more likely than not” of being sustained upon examination by the relevant taxing authority, based on the technical merits of the position.  The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.  Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

     Upon adoption, the cumulative effect of applying the provisions of FIN 48 was an increase of approximately $48.9 million in the liability for unrecognized tax benefits and related interest and penalty, a $39.2 million decrease in the deferred income tax liability and a $9.7 million increase in the accumulated deficit.  As of March 1, 2008, there have been no material changes to the Company’s unrecognized tax benefits since the date of adoption. State related FIN 48 liabilities that may be reduced within the next 12 months as a result of a lapse of the statute of limitations are approximately $0.6 million.

     As of March 1, 2008, the Company reported total unrecognized benefits of $55.8 million, of which $19.7 million would affect the Company’s effective tax rate if recognized.  As a result of positions taken during a prior period, the Company recorded $2.8 million and $0.7 million of interest for the nine and three month periods ended March 1, 2008, respectively.  In addition, the Company recorded no penalties for the nine months ended March 1, 2008 and reduced previously recorded penalties of $0.2 million for the three months ended March 1, 2008.  Cumulative interest and penalties of $15.3 million have been recorded on the Company’s Condensed Consolidated Balance Sheet as of March 1, 2008.   The Company recognizes interest and penalties related to unrecognized tax benefits as part of income taxes.

The Company files tax returns in the U.S. federal jurisdiction and various state jurisdictions.  The Company is open to audit under the statute of limitations by the Internal Revenue Service for fiscal years 2004 through 2007 and is currently under IRS examination for fiscal years 2004 and 2005.  The Company or its subsidiaries’ state income tax returns are open to audit under the statute of limitations for the fiscal years 2003 through 2007.

8. Barter Transactions

The Company accounts for barter transactions under Statement of Financial Accounting Standards No. 153 (“SFAS 153”), “ Exchanges of Nonmonetary Assets, an amendment of APB Opinion Number 29” and   Emerging Issues Task Force 93-11 (“EITF 93-11”), “Accounting for Barter Transactions Involving Barter Credits.”   Barter transactions with commercial substance are recorded at the estimated fair value of the products exchanged, unless the products received have a more readily determinable estimated fair value. During the Company’s first quarter of Fiscal 2008, the Company exchanged $5.2 million of inventory for certain advertising credits.  To account for the exchange, the Company recorded “Sales” and “Cost of Sales” of $5.2 million in the Company’s Condensed Consolidated Statements of Operations.  The advertising credits received are to be used over the next three to five years.  The Company recorded prepaid advertising of $1.7 million in the line item “Prepaid and Other Current Assets” and $2.3 million in the line item “Other Assets” in the Company’s Condensed Consolidated Balance Sheet as of March 1, 2008.  For the nine and three month periods ended March 1, 2008, the Company utilized $1.2 million and $0.5 million, respectively, of the barter advertising credits.

9.  Stock Option and Award Plans and Stock-Based Compensation

On April 13, 2006, the Parent’s Board of Directors adopted the 2006 Management Incentive Plan (“Plan”). The Plan provides for the granting of service-based and performance-based stock options and restricted stock to executive officers and other key employees of the Company and its subsidiaries.  Pursuant to the Plan, employees are granted options to purchase units of common stock in the Parent. Each unit consists of nine shares of Class A common stock and one share of Class L common stock of the Parent. The shares comprising a unit are in the same proportion as the shares of Class A and Class L common stock held by all stockholders of the Parent.  The options are exercisable only for whole units and cannot be separately exercised for the individual classes of the Parent’s common stock.  There are 511,122 units reserved under the Plan consisting of 4,600,098 shares of Class A common stock of Parent and 511,122 shares of Class L common stock of Parent.

Units granted during the nine and three month period ended March 1, 2008 are all service-based awards which were granted in three tranches with exercise prices as follows: Tranche 1:  $100 per unit; Tranche 2:  $180 per unit; and Tranche 3:  $270 per unit.  The service-based awards vest 40% on the second anniversary of the award with the remaining amount vesting ratably over the subsequent three years. The final exercise date for any option granted is the tenth anniversary of the grant date.

All options become exercisable upon a change of control. Unless determined otherwise by the plan administrator, upon cessation of employment; (1) options that have not vested will terminate immediately; (2) units previously issued upon the exercise of vested options will be callable at the Company’s option; and (3) unexercised vested options will be exercisable for a period of 60 days.   

As of March 1, 2008, the Company had 414,500 options outstanding to purchase units. All options granted to date are service-based awards. On June 4, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R (Revised 2004), “ Share-Based Payment ” ("SFAS 123R"), using the modified prospective method, which requires companies to record stock compensation expense for all non-vested and new awards beginning as of the adoption date. For the nine and three months ended March 1, 2008, the Company recognized non-cash stock compensation expense of $1.3 million ($0.8 million after tax) and $0.8 million ($0.5 million after tax), respectively, net of a $0.8 million forfeiture adjustment for the nine month period that was recorded as a result of actual forfeitures being higher than initially estimated.  There was no forfeiture adjustment during the three

months ended March 1, 2008.   In comparison, for the nine and three months ended March 3, 2007, the Company recorded $2.4 million ($1.4 million after tax) and $0.8 million ($0.5 million after tax), respectively, of non-cash stock compensation expense.  The amounts for all periods are included in the line item “Selling and Administrative Expense” on the Company’s Condensed Consolidated Statements of Operations. The application of SFAS 123R had no impact on the Company’s Condensed Consolidated Statements of Cash Flow. At March 1, 2008, there was approximately $11.1 million of unearned non-cash stock-based compensation that the Company expects to recognize as expense over the next 5.0 years. The service-based awards are expensed on a straight-line basis over the requisite service period of five years. During the nine and three months ended March 1, 2008, there were options granted to purchase 127,500 and 42,500 units, respectively. There were no options to purchase units cancelled and no options were exercised during the period ended March 1, 2008. At March 1, 2008 no options were exercisable.

Stock Option Unit Transactions are summarized as follows:

The following table summarizes information about the stock options outstanding under the Plan as of March 1, 2008:

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants under the Plan in Fiscal 2007 and Fiscal 2008:

 

10. Impairment of Long-Lived Assets

The Company accounts for impaired long-lived assets in accordance with SFAS No. 144, “ Accounting for the Impairment or Disposal of Long-Lived Assets .” This statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Also, long-lived assets and certain intangibles to be disposed of should be reported at the lower of the carrying amount or fair value less cost to sell. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the estimated future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds the estimated expected undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is measured by discounting expected future cash flows using the Company’s incremental borrowing rate.

Impairment charges recorded during each of the nine and three month periods ended March 1, 2008 amounted to $7.9 million and $0.5 million, respectively.  Impairment charges for both the nine and three month periods ended March 1, 2008 related to favorable lease assets amounted to $4.9 million (related to six of the Company’s stores) and $0.1 million (related to two of the Company’s stores), respectively.  The Company also impaired $1.2 million and $0.1 million of leasehold improvements for the nine and three months ended March 1, 2008, respectively, and $1.3 million and $0.3 million of furniture and fixtures for the nine and three month periods ended March 1, 2008, respectively.  For the nine months ended March 1, 2008, $0.5 million of certain warehouse equipment was also impaired.  Impairment charges recorded during the nine months ended March 3, 2007 amounted to $3.7 million.  There were no impairment charges during the three months ended March 3, 2007.  For the nine months ended March 3, 2007, $2.6 million of the impairment charge related to leasehold improvements and $1.1 million of the impairment charge related to favorable leases at two of the Company’s stores.  The impairment charges for the periods ended March 1, 2008 and March 3, 2007 are predominately related to a decline in operating performance of certain stores.

11.  Comprehensive Income (Loss)

The Company accounts for comprehensive income (loss) in accordance with SFAS No. 130, “ Reporting Comprehensive Income.”   For the nine and three month period ended March 1, 2008 and the nine and three month period ended March 3, 2007, comprehensive income (loss) consisted of net income (loss).  

 

12. Other Revenue

Other Revenue consists of rental income received from leased departments, subleased rental income, layaway, alteration, dormancy and other service charges, and other miscellaneous items.  Layaway, alteration, dormancy and other service fees (“Service Fees”) amounted to $8.6 million and $2.0 million for the nine and three month periods ended March 1, 2008, respectively, compared with $12.6 million and $3.9 million for the nine and three month periods ended March 3, 2007, respectively.  The decrease in Service Fees is related to the Company’s decision to cease charging dormancy service fees on outstanding balances of store value cards (Footnote 13).  Dormancy service fees contributed an additional $3.8 million and $2.0 million for the nine and three month periods ended March 3, 2007 as compared to the same periods ended March 1, 2008.

Rental income from leased departments amounted to $6.3 million and $2.8 million for each of the nine and three month periods ended March 1, 2008, respectively, compared with $8.3 million and $3.5 million for each of the nine and three month periods ended March 3, 2007, respectively. Subleased rental income and other miscellaneous revenue items amounted to $9.1 million and $3.3 million for the nine and three month periods ended March 1, 2008, respectively, compared with $9.4 million and $3.4 million for the nine and three month periods ended March 3, 2007, respectively.

13.  Store Value Cards

Store value cards include gift cards and store credits issued from merchandise returns.  Store value cards are recorded as a current liability upon purchase, and revenue is recognized when the store value card is redeemed for merchandise.  Store value cards issued by the Company do not have an expiration date and are not redeemable for cash.  Prior to December 29, 2007, if a store value card remained inactive for greater than 13 months, the Company assessed the recipient a monthly dormancy service fee, where allowed by law, which was automatically deducted from the remaining value of the card.   Dormancy service fee income was recorded as part of the line item “Other Revenue” in the Company’s Condensed Consolidated Statement of Operations.

Early in Fiscal 2008, the Company determined it had accumulated adequate historical data to determine a reliable estimate of the amount of gift cards that would not be redeemed.  The Company formed a corporation in Virginia (BCF Cards, Inc.) to issue the Company’s store value cards commencing December 29, 2007.  In connection with the establishment of BCF Cards, Inc., the Company recorded $4.7 million of store value card breakage income in the line item “Other Income, Net” in the Company’s Condensed Consolidated Statements of Operations.  This amount, which was all recorded in the three months ended March 1, 2008, included cumulative breakage income related to store value cards issued since the Company introduced its store value card program.

On December 29, 2007, the Company discontinued assessing a dormancy service fee on inactive store value cards.   Instead, the Company estimates and recognizes store value card breakage income in proportion to actual store value card redemptions and records such income in the line item “Other Income, Net” in the Company’s Condensed Consolidated Statement of Operations. The Company now determines an estimated store value card breakage rate by continuously evaluating historical redemption data.   Breakage income is recognized in proportion to the historical redemption patterns for those store value cards for which the likelihood of redemption is remote.

14.  Segment Information

The Company reports segment information in accordance with SFAS No. 131, “ Disclosure about Segments of an Enterprise and Related Information.”   The Company has one reportable segment operating within the United States. Sales by major product categories are as follows (in thousands):

Apparel includes all clothing items for men, women and children and apparel accessories, such as jewelry, perfumes and watches. Home Products includes linens, home furnishings, gifts, baby furniture and baby furnishings.

15.  Acquisition of Value City Leases and Other Leases

Value City Leases

 On October 3, 2007, Burlington Coat Factory Warehouse Corporation and certain wholly-owned subsidiaries (“Burlington”) entered into an Agreement to Acquire Leases and Lease Properties (the “Agreement”) from  Retail Ventures, Inc., an Ohio corporation (“RVI”), together with its wholly-owned subsidiaries, Value City Department Stores LLC, an Ohio limited liability company (“Value City” or “VCDS”), and GB Retailers, Inc., a Delaware corporation (“GB Retailers” and, together with VCDS, the “VCDS Tenants”), and from Schottenstein Stores Corporation (“SSC”) and certain affiliates of SSC (collectively with SSC, the “SSC Landlords”). RVI, the VCDS Tenants and the SSC Landlords are collectively referred to as the “Value City Entities.”  As of the date the Agreement was signed, the aggregate purchase price to be paid by Burlington for up to 24 leases was approximately $16.0 million subject to certain potential adjustments provided for in the Agreement.

The Value City Entities and Burlington have undertaken good faith efforts to obtain the necessary landlord consents and lease amendments to allow the disposition of the leased premises to occur as specified in the Agreement. In the event that any necessary landlord consents or lease amendments cannot be obtained, the parties may remove one or more of the Leased Premises from the transaction. The effective dates of the lease assignments and transfer of possession of the Leased Premises will occur on various dates, subject to change as described in the Agreement. The Agreement contains customary representations, warranties and covenants, and the transactions contemplated by the Agreement are subject to certain adjustments and closing conditions.

In connection with the Agreement, the parties entered into an escrow agreement pursuant to which approximately ten percent (10%) of the purchase price for the leased premises was deposited with the escrow agent upon execution of the Agreement and is included in the line item “Prepaid and Other Current Assets” on the Company’s Condensed Consolidated Balance Sheets. The escrow proceeds and the remainder of the purchase price will be delivered to Value City at the closing of the contemplated transactions. Also at the closing, RVI will enter into an indemnification agreement with Burlington pursuant to which the Company will provide certain indemnities and undertake certain obligations in favor of Burlington.  

During the nine and three months ended March 1, 2008, the Company finalized the acquisition of four of the Value City leases for a total purchase price of $2.6 million, including $0.1 million of related expenses.  The lease acquisition costs are reflected in the line item “Other Assets” in the Company’s Condensed Consolidated Balance Sheet.   In connection with

the acquisition of these leases, the Company received $1.8 million of lease incentives, which are included in the line item “Other Liabilities” in the Company’s Condensed Consolidated Balance Sheet.  The lease acquisition assets and deferred lease incentives will be amortized to rent expense over the lease term which ranges from 8 years to 11 years.   The Company expects to open stores at these leased locations in Fiscal 2009.

As of March 1, 2008, two of the original 24 locations were removed from the transaction.  In addition, the Company has made arrangements to transfer three locations to the landlords thereof and to enter into leases for such locations with such landlords, thus reducing the aggregate purchase price of the entire transaction from $16 million to $9 million.

Other Lease Acquisitions

During the nine and three months ended March 1, 2008, the Company finalized the acquisition of a lease related to a location in Puerto Rico for a total purchase price of $1.5 million.   The lease acquisition cost is reflected in the line item “Other Assets” in the Company’s Condensed Consolidated Balance Sheet and will be amortized to rent expense over the lease term, which is 14 years.  The Company expects to open a store at this leased location in Fiscal 2009.

16.  Commitments and Contingencies

The Company is party to various litigation matters arising in the ordinary course of business. The ultimate legal and financial liability of the Company with respect to such litigation cannot be estimated with certainty, but management believes, based on its examination of these matters, experience to date and discussions with counsel, that ultimate liability from the Company’s various litigation matters will not be material to the business, financial condition, results of operations or cash flows of the Company.

The Company enters into lease agreements during the ordinary course of business in order to secure favorable store locations.  As of March 1, 2008, the Company committed to 37 new lease agreements (exclusive of 5 relocations) for locations at which stores are expected to be opened in Fiscal 2009.

17.  Reclassifications

Certain reclassifications have been made to the Condensed Consolidated Statements of Operations for the nine months ended March 3, 2007 and to the Condensed Consolidated Statement of Cash Flows for the nine months ended March 3, 2007 to conform to the classifications used in the current period.

In the Condensed Consolidated Statements of Operations, for the nine month period ended March 3, 2007, impairment expense of $2.6 million and $1.1 million, previously recorded in the line items “Depreciation” and “Amortization,” respectively,  has been reclassified as “Impairment” for such periods.

In the Condensed Consolidated Statement of Cash Flows for the nine month period ended March 3, 2007, impairment expense of $2.6 million and $1.1 million, previously included in the line items “Depreciation” and “Amortization,” respectively, has been reclassified as “Impairment” for such period.  Additionally, $4.7 million and $0.2 million, previously recorded together in the line item “Non-Cash Rent Expense and Other” have been reclassified to the line items “Non-Cash Rent Expense” and “Other,” respectively in the Company’s Condensed Consolidated Statement of Cash Flows for such period.

 

18. Recent Accounting Pronouncements

 

In September 2006, the FASB issued SFAS No. 157, “ Fair Value Measurement ” (SFAS No. 157) which defines fair value, establishes a framework for measurement and expands disclosure about fair value measurements. Where applicable, SFAS No. 157 simplifies and codifies related guidance within generally accepted accounting principles. This statement shall be effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  The Company is in the process of evaluating the impact of SFAS No. 157 on its Consolidated Financial Statements.  In February 2008, the FASB issued FSP SFAS No. 157-2,  "Effective Date for FASB Statement No. 157."  This FSP permits the delayed application of SFAS No. 157 for all non-recurring fair value measurements of non-financial assists and non-financial liabilities until fiscal years beginning after November 15, 2008.

In February 2007, the FASB issued SFAS No. 159, “ The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115 ” (SFAS No. 159) .   SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value, with unrealized gains and losses related to these financial instruments reported in earnings at each subsequent reporting date.  This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007.  The Company is in the process of evaluating the impact of SFAS No. 159 on its Consolidated Financial Statements.

In December 2007, the FASB issued SFAS No. 141, “ Business Combinations (revised 2007)”   (SFAS No. 141(R)) .   SFAS No. 141(R) applies to any transaction or other

event that meets the definition of a business combination.  Where applicable, SFAS No. 141(R) establishes principles and requirements for how the acquirer recognizes and measures identifiable assets acquired, liabilities assumed, noncontrolling interest in the acquiree and goodwill or gain from a bargain purchase.  In addition, SFAS No. 141(R) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  This statement is to be applied prospectively for fiscal years beginning after December 15, 2008.  The Company is in the process of evaluating the impact of SFAS No. 141(R) on its Consolidated Financial Statements.

In December 2007, the FASB issued SFAS No. 160, “ Noncontrolling Interests in Consolidated Financial Statements, a n a mendment of ARB No. 51 ” (SFAS No. 160) .   SFAS No. 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  It also amends certain of ARB No. 51’s consolidation procedures for consistency with the requirements of SFAS No. 141(R).  This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  The statement shall be applied prospectively as of the beginning of the fiscal year in which the statement is initially adopted.  The Company is in the process of evaluating the impact of SFAS No. 160 on its Consolidated Financial Statements.

In March 2008, the FASB issued SFAS No. 161, “ Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (SFAS No. 161).  SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133 with the intent to provide users of financial statements with an enhanced understanding of: (i) How and why an entity uses derivative instruments; (ii) How derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations and (iii) How derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows.  This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged.  The Company is in the process of evaluating the impact of SFAS No. 161 on its Consolidated Financial Statements.

 

19. Condensed Guarantor Data

 

On April 13, 2006, BCFWC issued $305 million aggregate principal amount of 11   .125% Senior Notes due 2014. The notes were issued under an indenture issued on April 13, 2006. Holdings and subsidiaries of BCFWC have fully and unconditionally guaranteed these notes.  These guarantees are both joint and several.  The following condensed consolidating financial statements present the financial position, results of operations and cash flows of Holdings, BCFWC, exclusive of subsidiaries (referred to herein as “BCFW”), and the guarantor subsidiaries. The Company has one non-guarantor subsidiary that is not wholly-owned and is considered to be “minor” as that term is defined in Rule 3-10 of Regulation S-X promulgated by the Securities and Exchange Commission.

 

Neither the Company nor any of its subsidiaries may declare or pay cash dividends or make other distributions of property to any affiliate unless such dividends are used for certain specified purposes including, among others, to pay general corporate and overhead expenses incurred by Holdings in the ordinary course of business, or the amount of any indemnification claims made by any director or officer of Holdings or the Company, to pay taxes that are due and payable by Holdings or any of its direct or indirect subsidiaries, or to pay interest on Holdings Senior Discount Notes, provided that no event of default under BCFWC’s debt agreements has occurred or will occur as the result of such interest payment.

BURLINGTON COAT FACTORY INVESTMENTS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
		As of March 1, 2008
ASSETS		Holdings				BCFW				Guarantors				Eliminations				Consolidated
		(All amounts in thousands)
Current Assets:
Cash and Cash Equivalents		$	-			$	14,220			$	31,312			$	-			$	45,532
Restricted Cash and Cash Equivalents			-				-				2,707				-				2,707
Investments			-				-				-				-				-
Accounts Receivable, Net			-				24,470				7,102				-				31,572
Merchandise Inventories			-				1,419				782,720				-				784,139
Deferred Tax Asset			-				12,782				24,067				-				36,849
Prepaid and Other Current Assets			-				84,054				9,879				(52,992	)			40,941
Assets Held for Disposal			-				-				5,078				-				5,078
Total Current Assets			-				136,945				862,865				(52,992	)			946,818
Property and Equipment, Net			-				59,980				876,265				-				936,245
Goodwill			-				46,219				-				-				46,219
Tradenames			-				526,300				-				-				526,300
Favorable Leases, Net							-				557,470				-				557,470
Other Assets			370,903				1,679,235				22,181				(2,011,182	)			61,137
Total Assets		$	370,903			$	2,448,679			$	2,318,781			$	(2,064,174	)		$	3,074,189
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable		$	-			$	465,427			$	-			$	-			$	465,427
Other Current Liabilities			-				95,716				183,924				(52,992	)			226,648
Current Maturities of Long Term Debt and Capital Leases			-				-				1,592				-				1,592
Total Current Liabilities			-				561,143				185,516				(52,992	)			693,667
Long Term Debt and Capital Leases			-				1,278,618				126,150				-				1,404,768
Other Liabilities			-				17,196				121,704				(10,000	)			128,900
Deferred Tax Liability			-				220,819				255,132				-				475,951
Stockholders' Equity:
Preferred Stock			-				-				-				-				-
Common Stock			-				-				-				-				-
Capital in Excess of Par Value			456,222				456,222				1,358,399				(1,814,621	)			456,222
(Accumulated Deficit) Retained Earnings			(85,319	)			(85,319	)			271,880				(186,561	)			(85,319	)
Total Stockholders' Equity			370,903				370,903				1,630,279				(2,001,182	)			370,903
Total Liabilities and Stockholders' Equity		$	370,903			$	2,448,679			$	2,318,781			$	(2,064,174	)		$	3,074,189