Five Below, Inc
FIVE BELOW, INC (Form: 10-Q, Received: 06/13/2013 17:22:38)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549  
 
Form 10-Q
 
(mark one)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 4, 2013 .
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from             to             
Commission file number: 001-35600
 
Five Below, Inc.
(Exact name of Registrant as Specified in its Charter)
 
Pennsylvania

75-3000378
(State or Other Jurisdiction of
Incorporation or Organization)

(I.R.S. Employer
Identification No.)
 
 
 
1818 Market Street, Suite 1900
 
 
Philadelphia, PA
 
19103
(Address of Principal Executive Offices)
 
(Zip Code)
(215) 546-7909
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
x   (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   ý

The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of June 11, 2013 was 54,026,085 .




FIVE BELOW, INC.
Index
 
 
 
Page
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.





PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIVE BELOW, INC.
Balance Sheets
(Unaudited)
(in thousands, except share and per share data)
 
 
May 4, 2013
 
February 2, 2013
 
April 28, 2012
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
36,722

 
$
56,081

 
$
14,503

Inventories
75,339

 
60,831

 
51,531

Income taxes receivable

 

 
7,400

Prepaid income taxes
621

 
36

 

Deferred income taxes
1,441

 
1,295

 
4,911

Prepaid expenses and other current assets
10,481

 
11,433

 
10,706

Total current assets
124,604

 
129,676

 
89,051

Property and equipment, net of accumulated depreciation and amortization of $34,463, $31,530, and $24,811, respectively
61,611

 
59,040

 
44,441

Other assets
877

 
944

 
449

 
$
187,092

 
$
189,660

 
$
133,941

Liabilities and Shareholders’ Equity (Deficit)
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Line of credit
$

 
$

 
$

Current portion of notes payable
15,000

 
15,000

 

Accounts payable
27,971

 
27,952

 
22,496

Income taxes payable
558

 
7,083

 
1,019

Accrued salaries and wages
2,725

 
4,204

 
1,436

Other accrued expenses
13,569

 
14,545

 
11,235

Total current liabilities
59,823

 
68,784

 
36,186

Notes payable
19,500

 
19,500

 
250

Deferred rent and other
31,187

 
29,082

 
22,258

Deferred income taxes
1,431

 
1,550

 
5,708

Total liabilities
111,941

 
118,916

 
64,402

Commitments and contingencies (note 4)


 


 


Preferred stock, $0.01 par value. Authorized 5,000,000, 5,000,000, and 100,000,000 shares, respectively; 5,000,000, 5,000,000, and 10,000,000 shares undesignated, respectively; zero, zero, and 90,000,000 shares designated as Series A 8% Convertible Preferred Stock, respectively. Issued and outstanding zero, zero, and 89,291,773 shares, respectively, with a liquidation preference of zero, zero, and $218,588, respectively.



 
191,855

Shareholders’ equity (deficit):
 
 
 
 
 
Common stock, $0.01 par value. Authorized 120,000,000 shares; issued and outstanding 54,019,137, 53,980,797, and 18,262,303  shares, respectively.
540

 
540

 
183

Additional paid-in capital
273,474

 
270,637

 
12,270

Accumulated deficit
(198,863
)
 
(200,433
)
 
(134,769
)
Total shareholders’ equity (deficit)
75,151

 
70,744

 
(122,316
)
 
$
187,092

 
$
189,660

 
$
133,941

See accompanying notes to financial statements.

1



FIVE BELOW, INC.
Statements of Operations
(Unaudited)
(in thousands, except share and per share data)
 
 
Thirteen Weeks Ended
May 4, 2013
 
April 28, 2012
Net sales
$
95,604

 
$
71,829

Cost of goods sold
65,391

 
48,809

Gross profit
30,213

 
23,020

Selling, general and administrative expenses
27,024

 
24,985

Operating income (loss)
3,189

 
(1,965
)
Interest expense (income), net
511

 
(37
)
Income (loss) before income taxes
2,678

 
(1,928
)
Income tax expense (benefit)
1,108

 
(771
)
Net income (loss)
1,570

 
(1,157
)
Series A 8% Convertible Preferred Stock cumulative dividends

 
(4,168
)
Net income attributable to participating securities
(31
)
 

Net income (loss) attributable to common shareholders
$
1,539

 
$
(5,325
)
Basic income (loss) per common share
$
0.03

 
$
(0.32
)
Diluted income (loss) per common share
$
0.03

 
$
(0.32
)
Weighted average shares outstanding:
 
 
 
Basic shares
52,943,243

 
16,420,716

Diluted shares
53,399,778

 
16,420,716

See accompanying notes to financial statements.

2



FIVE BELOW, INC.

Statement of Shareholders’ Equity
(Unaudited)
(in thousands, except share data)
 
 
Shareholders’ Equity
Common stock
 
Additional 
paid-in capital
 
Accumulated deficit
 
Total shareholders’ equity
Shares
 
Amount
 
Balance, February 2, 2013
53,980,797

 
$
540

 
$
270,637

 
$
(200,433
)
 
$
70,744

Stock-based compensation expense
1,559

 

 
2,197

 

 
2,197

Exercise of options to purchase common stock
36,781

 

 
158

 

 
158

Vesting of restricted shares related to stock option exercises

 

 
80

 

 
80

Excess tax benefit related to exercises of stock options

 

 
402

 

 
402

Net income

 

 

 
1,570

 
1,570

Balance, May 4, 2013
54,019,137

 
$
540

 
$
273,474

 
$
(198,863
)
 
$
75,151

See accompanying notes to financial statements.

3



FIVE BELOW, INC.

Statements of Cash Flows
(Unaudited)
(in thousands)
 
 
Thirteen Weeks Ended
May 4, 2013
 
April 28, 2012
Operating activities:
 
 
 
Net income (loss)
$
1,570

 
$
(1,157
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
Depreciation and amortization
2,933

 
2,107

Amortization of deferred financing costs
78

 
7

Warrant expense related to professional service providers for services rendered

 
43

Stock-based compensation expense
2,359

 
6,330

Deferred income tax (benefit) expense
(265
)
 
4,354

Changes in operating assets and liabilities:
 
 
 
Prepaid income taxes
(585
)
 

Income tax receivable

 
(7,400
)
Inventories
(14,508
)
 
(12,741
)
Prepaid expenses and other assets
941

 
(3,621
)
Accounts payable
703

 
(799
)
Income taxes payable
(6,525
)
 
(8,120
)
Accrued salaries and wages
(1,479
)
 
(7,818
)
Deferred rent
2,405

 
1,555

Other accrued expenses
602

 
3,562

Net cash used in operating activities
(11,771
)
 
(23,698
)
Investing activities:
 
 
 
Capital expenditures
(8,148
)
 
(4,801
)
Net cash used in investing activities
(8,148
)
 
(4,801
)
Financing activities:
 
 
 
Proceeds from exercise of warrants and stock options to purchase common stock
158

 
201

Repurchase of unvested restricted shares related to stock option exercises

 
(17
)
Excess tax benefit related to restricted shares and the exercise of stock options
402

 
1,525

Net cash provided by financing activities
560

 
1,709

Net decrease in cash and cash equivalents
(19,359
)
 
(26,790
)
Cash and cash equivalents at beginning of period
56,081

 
41,293

Cash and cash equivalents at end of period
$
36,722

 
$
14,503

See accompanying notes to financial statements.

4



FIVE BELOW, INC.
Notes to Financial Statements
(Unaudited)

(1) Summary of Significant Accounting Policies

(a) Nature of Business
Five Below, Inc. (the “Company”) is a specialty value retailer offering merchandise targeted at the teen and pre-teen demographic. The Company offers an edited assortment of products, priced at $5 and below. The Company’s edited assortment of products includes select brands and licensed merchandise. The Company believes its merchandise is readily available, and that there are a number of potential vendors that could be utilized, if necessary, under approximately the same terms the Company is currently receiving; thus, it is not dependent on a single vendor or a group of vendors.

The Company is incorporated in the Commonwealth of Pennsylvania and as of May 4, 2013 operated 258 stores in Pennsylvania, New Jersey, Delaware, Maryland, Virginia, Massachusetts, New Hampshire, West Virginia, North Carolina, New York, Connecticut, Rhode Island, Ohio, Illinois, Indiana, Michigan, Missouri and Georgia, each operating under the name “Five Below.”

On June 12, 2013 , the Company completed an internal business restructuring pursuant to which the Company formed Five Below Merchandising, Inc., a wholly-owned subsidiary (the “Subsidiary”), and transferred to the Subsidiary assets, operations and employees related to the Company's merchandising operations (the “Restructuring”). Going forward, the Subsidiary will purchase and sell to the Company certain goods for sale at the Company's retail locations and the Company will provide to the Subsidiary back office support, office space and other services, in each case, pursuant to agreements between the Company and the Subsidiary. In connection with the Restructuring, on June 12, 2013 , the Company amended and restated the Loan and Security Agreement (note 3) and certain other ancillary documents to the Company's Revolving Credit Facility in order to, among other things, allow the Company to form and capitalize the Subsidiary and make the Subsidiary a party to the Loan and Security Agreement as a guarantor of the Company's obligations thereunder. The Subsidiary has also acceded to the credit agreement and certain ancillary documents to the Company's Term Loan Facility (note 3) as a guarantor of the Company's obligations thereunder. For accounting purposes, going forward, the Company's financial statements will include the accounts of the Company and the newly formed corporation. All intercompany transactions and accounts will be eliminated in consolidation.

(b) Fiscal Year
The Company operates on a 52/53-week fiscal year ending on the Saturday closest to January 31. References to “fiscal year 2013” or “fiscal 2013” refer to the period from February 3, 2013 to February 1, 2014 and consists of a 52-week fiscal year. References to “fiscal year 2012” or “fiscal 2012” refer to the period from January 29, 2012 to February 2, 2013 and consisted of a 53-week fiscal year. The fiscal quarters ended May 4, 2013 and April 28, 2012 refer to the 13-week periods ended as of those dates.

(c) Basis of Presentation
The balance sheets as of May 4, 2013 and April 28, 2012 , the statements of operations for the thirteen weeks ended May 4, 2013 and April 28, 2012 , the statement of shareholders’ equity for the thirteen weeks ended May 4, 2013 and the statements of cash flows for the thirteen weeks ended May 4, 2013 and April 28, 2012 have been prepared by the Company in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim reporting and are unaudited. In the opinion of management, the financial statements include all known adjustments (which consist primarily of normal, recurring accruals, estimates and assumptions that impact the financial statements) necessary to present fairly the financial position at the balance sheet dates and the results of operations and cash flows for the periods ended May 4, 2013 and April 28, 2012 . The balance sheet as of February 2, 2013 , presented herein, has been derived from the audited balance sheet included in the Company's Annual Report on Form 10-K for fiscal 2012 as filed with the Securities and Exchange Commission on March 28, 2013 and referred to herein as the “Annual Report,” but does not include all disclosures required by U.S. GAAP. These financial statements should be read in conjunction with the financial statements for the fiscal year ended February 2, 2013 and footnotes thereto included in the Annual Report. The results of operations for the thirteen weeks ended May 4, 2013 and April 28, 2012 are not necessarily indicative of operating results for the year ending February 1, 2014 or any other period.


5



(d) Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation at the measurement date:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Inputs, other than Level 1, that are either directly or indirectly observable.
Level 3: Unobservable inputs developed using the Company’s estimates and assumptions which reflect those that market participants would use.

The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to the measurement. The Company’s financial instruments consist primarily of cash equivalents, accounts payable, and borrowings under a line of credit and Term Loan Facility (as defined in note 3). The Company believes that: (1) the carrying value of cash equivalents and accounts payable are representative of their respective fair value due to the short-term nature of these instruments; and (2) the carrying value of the borrowings under the line of credit and Term Loan Facility approximates their fair value because the line of credit’s and Term Loan Facility's interest rates vary with market interest rates. The Company considers the inputs utilized to determine the fair value of the borrowings under the Term Loan Facility to be Level 2 inputs. At May 4, 2013 February 2, 2013 , and April 28, 2012 , the Company had cash equivalents of $30.1 million , $35.7 million and $9.6 million , respectively. The Company’s cash equivalents consist of credit card receivables and a money market account for which fair value was determined based on Level 1 inputs.

(2) Income (Loss) Per Common Share

Basic income (loss) per common share amounts are calculated using the weighted-average number of common shares outstanding for the period. Diluted income (loss) per common share amounts are calculated using the weighted-average number of common shares outstanding for the period and include the dilutive impact of preferred stock using the if-converted method and exercise of stock options and warrants as well as assumed lapse of restrictions on restricted stock awards and shares currently available for purchase under the Company's Employee Stock Purchase Plan, which is minor, using the treasury stock method.

The two-class method is used to calculate basic and diluted income (loss) per common share since the Company’s preferred and restricted stock are participating securities under Accounting Standards Codification (“ASC”) 260, Earnings per share . The two-class method is an earnings allocation formula that determines income per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Under the two-class method, basic income (loss) per common share is computed by dividing net income (loss) attributable to common shares after allocation of income to participating securities by the weighted-average number of common shares outstanding during the period. Diluted income (loss) per common share is computed using the more dilutive of the two-class method or the if-converted method. In periods of net loss, no effect is given to participating securities since they do not contractually participate in the losses of the Company.


6



The following table reconciles net income (loss) and the weighted average common shares outstanding used in the computations of basic and diluted income (loss) per common share (in thousands, except for share and per share data):
 
 
Thirteen Weeks Ended
May 4, 2013
 
April 28, 2012
Numerator:
 
 
 
Net income (loss)
$
1,570

 
$
(1,157
)
Series A 8% Convertible Preferred Stock cumulative dividends

 
(4,168
)
Net income attributable to participating securities
(31
)
 

Net income (loss) attributable to common shareholders
$
1,539

 
$
(5,325
)
Denominator:
 
 
 
Weighted-average common shares outstanding - basic
52,943,243

 
16,420,716

Dilutive impact of options
456,535

 

Weighted-average common share outstanding - diluted
53,399,778

 
16,420,716

Per common share:
 
 
 
Basic income (loss) per common share
$
0.03

 
$
(0.32
)
Diluted income (loss) per common share
$
0.03

 
$
(0.32
)
For the thirteen weeks ended May 4, 2013 , $31 thousand of net income was attributable to participating securities, as the two-class method was more dilutive, and the remainder was attributable to common shareholders. For the thirteen weeks ended April 28, 2012 , as the Company was in a net loss position, the net losses were solely attributable to common shareholders.

For the thirteen weeks ended April 28, 2012 , preferred stock that could be converted to 30,894,953 shares of common stock were not included in the computation of diluted earnings per share, as the effect of doing so would have been anti-dilutive. The preferred stock was converted to common stock on July 24, 2012.

The effects of the assumed exercise of stock options of 115,953 shares of common stock and the impact of shares to be issued under the Company's Employee Stock Purchase Plan, which is minor, for the thirteen weeks ended May 4, 2013 were excluded from the calculation of diluted net income as their impact would have been anti-dilutive.

For the thirteen weeks ended April 28, 2012 , the effects of the assumed exercise of the combined stock options and warrants and the vesting of restricted share awards of 2,432,891 shares of common stock were excluded from the calculation of diluted net loss as the effect would be anti-dilutive due to a net loss to common shareholders.

The aforementioned excluded shares do not reflect the impact of any incremental repurchases under the treasury stock method.

(3) Term Loan Facility and Line of Credit

Term Loan Facility
On May 16, 2012, the Company entered into a $100.0 million term loan facility with Goldman Sachs Bank USA as administrative agent for a syndicate of lenders (the “Term Loan Facility”). The Company used the net proceeds from the Term Loan Facility and cash on hand to pay a dividend on all outstanding shares of the Company's common and preferred stock (note 5), totaling $99.5 million . On the same day, the Company amended and restated its existing senior secured Revolving Credit Facility with Wells Fargo Bank, National Association, which is defined below under “—Line of Credit.”


7



The Term Loan Facility provided for a term loan of $100.0 million and matures on the earlier of (i) May 16, 2015 and (ii) the date on which such facility is accelerated following the occurrence of an event of default. The Term Loan Facility provides for interest on borrowings, at the option of the Company, at an alternate base rate which is the greater of (i) the administrative agent’s prime rate in effect on such day and (ii) the federal funds effective rate in effect on such day plus 0.50% with a 2.00% floor, plus a margin of 3.25% , or a London Interbank Offer Rate (“LIBOR”) based rate with a 1.00% floor plus a margin of 4.25% . The credit agreement for the Term Loan Facility includes a maximum consolidated net leverage ratio financial covenant, the calculation of which allows the Company to net up to $10.0 million of its cash and cash equivalents against its indebtedness. The Company’s leverage ratio must not exceed 2.75 x to 2.50 x for the testing periods in calendar year 2013, 2.00 x for the testing periods in calendar year 2014 and 1.75 x thereafter.

The credit agreement for the Term Loan Facility also includes customary negative and affirmative covenants including, among others, limitations on the Company’s ability to: (i) incur additional debt; (ii) create liens; (iii) make certain investments, loans and advances; (iv) sell assets; (v) pay dividends or make distributions or other restricted payments; (vi) engage in mergers or consolidations; or (vii) change its business.

The Term Loan Facility is subject to repayment upon the receipt of certain proceeds, including those from the sale of certain assets, insurance proceeds and indebtedness not otherwise permitted. The Term Loan Facility was also subject to repayment of $50.0 million upon the receipt of proceeds from the Company’s initial public offering (the “IPO”). The Company closed its IPO on July 24, 2012. On July 27, 2012, the Company repaid $65.3 million of principal on the Term Loan Facility and $0.7 million of interest. On October 26, 2012, the Company repaid $0.3 million of principal on the Term Loan Facility. As of May 4, 2013 , the balance outstanding under the Term Loan Facility was $34.5 million , bearing interest at a rate of 5.25% . During the thirteen weeks ended May 4, 2013 , the Company paid interest of approximately $0.5 million related to the Term Loan Facility. Pursuant to the terms of the Term Loan Facility, due to the repayment of $65.3 million of principal under the Term Loan Facility in July 2012, the Company is no longer required to make minimum quarterly payments. In May 2013, subsequent to the thirteen weeks ended May 4, 2013 , the Company repaid $15.0 million of principal on the Term Loan Facility. This amount was classified as a current liability on the Company's balance sheets as of May 4, 2013 and February 2, 2013 . The remaining unpaid balance will be due upon maturity.

In connection with the Term Loan Facility, the Company incurred deferred financing costs of $2.7 million which are being amortized over the term of the Term Loan Facility. The amortization is included in interest expense (income), net, in the statements of operations. In connection with the $65.3 million principal repayment on the Term Loan Facility in July 2012, $1.6 million of the deferred financing costs were written off and included in loss on debt extinguishment in the statements of operations. The remaining deferred financing costs, net of amortization, are included in other assets in the balance sheet as of May 4, 2013 . In connection with the $15.0 million principal repayment on the Term Loan Facility in May 2013, subsequent to the thirteen weeks ended May 4, 2013 , approximately $0.3 million of the deferred financing costs will be written off and included in loss on debt extinguishment in the statements of operations for the twenty-six weeks ending August 3, 2013.

Amounts under the credit agreement for the Term Loan Facility may become due upon certain events of default including, among others, failure to comply with the credit agreement’s covenants, bankruptcy, default on certain other indebtedness or a change in control. The default rate under the Term Loan Facility is 2.00%  per annum.

All obligations under the Term Loan Facility are secured by substantially all of the Company’s assets and are guaranteed by the Subsidiary. As of May 4, 2013 , the Company was in compliance with the financial covenant and other covenants applicable to it under the Term Loan Facility.

Line of Credit
On August 18, 2006, the Company entered into a loan and security agreement (the “Loan and Security Agreement”) with Wachovia Bank National Association (predecessor in interest to Wells Fargo Bank, National Association) that included a revolving line of credit with advances tied to a borrowing base. The Loan and Security Agreement has been amended and/or restated several times, the latest on June 12, 2013 (as amended and restated, the “Revolving Credit Facility”), generally to extend the maturity date, increase maximum borrowings, adjust the applicable interest rates, permit the formation and capitalization of subsidiaries, make the Subsidiary a party to the agreement as a guarantor of the Company's obligations and modify certain definitions. The Revolving Credit Facility allows maximum borrowings of $20.0 million with advances tied to a borrowing base and expires on the earliest to occur of (i) May 16, 2017, (ii) the date which is 45 days prior to the maturity date of the Term Loan Facility if the Term Loan Facility remains outstanding or (iii) upon the occurrence of an event of default. The Revolving Credit Facility may be increased to $30.0 million upon certain conditions. The Revolving Credit Facility includes a $5.0 million sub limit for the issuance of letters of credit. The borrowing base is 90% of eligible credit card receivables plus 90% of the net recovery percentage of eligible inventory less established reserves. In connection with the

8



Revolving Credit Facility, the Company incurred deferred financing costs of $50 thousand in May 2012, which are being amortized over the remaining term of the Revolving Credit Facility.

The Revolving Credit Facility provides for interest on borrowings, at the Company's option, at (a) a prime rate plus a margin of (i)  0.75% if excess availability is greater than or equal to 75% , (ii)  1.0% if excess availability is less than 75% but greater than or equal to 33% or (iii)  1.25% if excess availability is less than 33% or (b) a LIBOR-based rate plus a margin of (i)  1.75% if excess availability is greater than or equal to 75% , (ii)  2.00% if excess availability is less than 75% but greater than or equal to 33% or (iii)  2.25% if excess availability is less than 33% . The Revolving Credit Facility further provides for a letter of credit fee equal to the LIBOR-based rate plus (i)  1.75% if excess availability is greater than or equal to 75% , (ii)  2.00% if excess availability is less than 75% but greater than or equal to 33% or (iii)  2.25% if excess availability is less than 33% . The Revolving Credit Facility also contains an unused credit facility fee of 0.375%  per annum and is subject to a servicing fee of approximately $12 thousand per year.

The Revolving Credit Facility includes a covenant which requires the Company to maintain minimum excess collateral availability of no less than the greater of (i)  10% of the then effective maximum credit and (ii)  $3.0 million .

The Revolving Credit Facility also includes customary negative and affirmative covenants including, among others, limitations on the Company’s ability to (i) incur additional debt; (ii) create liens; (iii) make certain investments, loans and advances; (iv) sell assets; (v) pay dividends or make distributions or other restricted payments; (vi) engage in mergers or consolidations; or (vii) change the Company's business.

Additionally, the Revolving Credit Facility is subject to payment upon the receipt of certain proceeds, including those from the sale of certain assets and is subject to an increase in the interest rate on borrowings and the letter of credit fee of 2.0% upon an event of default. Amounts under the Revolving Credit Facility may become due upon certain events of default including among others, failure to comply with the Revolving Credit Facility's covenants, bankruptcy, default on certain other indebtedness or a change in control.

As of May 4, 2013 , the Company had no borrowings outstanding and had approximately $19.4 million of the $20.0 million available on the line of credit under the Revolving Credit Facility as approximately $0.6 million was outstanding in letters of credit.

All obligations under the Revolving Credit Facility are secured by substantially all of the Company’s assets and are guaranteed by the Subsidiary. As of May 4, 2013 , the Company was in compliance with the covenants applicable to it under the Revolving Credit Facility.

(4) Commitments and Contingencies

The Company leases property and equipment under non-cancelable operating leases. Certain retail store lease agreements provide for contingent rental payments if the store’s net sales exceed stated levels (percentage rents) and/or contain escalation clauses, which provide for increases in base rental for increases in future operating costs. Many of the Company’s leases provide for one or more renewal options for periods ranging from five to seven  years. The Company’s operating lease agreements, including assumed extensions which are generally those that take the lease to a ten -year term, expire through 2023.


9



The Company’s minimum rental commitments under operating lease agreements, including assumed extensions, as of May 4, 2013 , are as follows (in thousands):
 
 
Retail
stores
 
Corporate
office and
distribution
centers
 
Total
Fiscal year:
 
 
 
 
 
Remaining 2013
$
30,367

 
$
2,330

 
$
32,697

2014
42,991

 
4,413

 
47,404

2015
42,287

 
4,678

 
46,965

2016
41,340

 
3,097

 
44,437

2017
40,912

 
2,610

 
43,522

Thereafter
153,485

 
13,031

 
166,516

 
$
351,382

 
$
30,159

 
$
381,541

 
Rent expense, including base and contingent rent under operating leases, was $9.5 million and $6.9 million for the thirteen weeks ended May 4, 2013 and April 28, 2012 , respectively. Contingent rents were $0.1 million and $0.1 million for the thirteen weeks ended May 4, 2013 and April 28, 2012 , respectively.

The Company has employment agreements with certain key employees that provide for, among other things, salary, bonus, severance, and change-in-control provisions. The severance and change of control provisions under these agreements provide for additional payments upon employee separation of up to approximately $4.1 million .

From time to time, the Company is involved in certain legal actions arising in the ordinary course of business. In management’s opinion, the outcome of such actions will not have a material adverse effect on the Company’s financial condition or results of operations.

As of May 4, 2013 , the Company has other purchase commitments of approximately $0.9 million consisting of purchase agreements for materials that will be used in the construction of new stores.

(5) Shareholders’ Equity

As of May 4, 2013 , the Company is authorized to issue 120,000,000 shares of common stock, $0.01 par value, and 5,000,000 shares of preferred stock, $0.01 par value. The holders of common stock are entitled to one vote per share of common stock and are entitled to receive dividends if declared by the board of directors. The preferred stock may be issued from time to time in series as designated by the board of directors. The designations, powers, preferences, voting rights, privileges, options, conversion rights, and other special rights of the shares of each such series of preferred stock and the qualifications, limitations and restrictions thereof shall be designated by the board of directors.

Preferred Stock
On October 14, 2010, the Company issued 89,291,773 shares of Series A 8% Convertible Preferred Stock for cash proceeds of $191.9 million , net of offering costs of $2.1 million . The shares of Series A 8% Convertible Preferred Stock were entitled to receive cumulative dividends of 8% of their original issue price of $2.17 per share per year compounded annually and payable in cash when and if declared by the Company’s board of directors; however, the Company could not pay, unless otherwise consented to by the holders of Series A 8% Convertible Preferred Stock, any dividends on common stock unless an equal amount of dividends per share (on an as converted basis) was simultaneously paid to the holders of the Series A 8% Convertible Preferred Stock. Effective immediately prior to the closing of the IPO on July 24, 2012, all outstanding shares of Series A 8% Convertible Preferred Stock were converted into 30,894,953 shares of common stock and ceased to be entitled to the payment of any dividends that accrued on such shares as of the effective time of the conversion.

In the event of any liquidation, dissolution, or winding up of the Company, as defined, or deemed liquidation event, as defined, the holders of the Series A 8% Convertible Preferred Stock were entitled to receive the greater of the original issue price of $2.17 per share plus any accrued and unpaid dividends, or the amount that would have been paid if the Series A 8% Convertible Preferred Stock was converted to common stock, before any payment was made to the common shareholders. The Series A 8% Convertible Preferred Stock was presented outside of shareholders’ equity (deficit) since its redemption under certain circumstances was beyond the control of the Company’s management.

10




Common Stock
In March 2012, options to purchase 2,020,620 shares of common stock granted during the fiscal year ended January 29, 2011, including options to purchase 1,010,310 shares that were subject to time-based and performance-based vesting, were cancelled and an equal number of restricted shares were granted. One-third of the shares vested immediately in March 2012 and another one-third of the shares vested in March 2013. The remaining one-third will vest in March 2014. In connection with the cancellation and grant, the Company will record total compensation expense of $17.4 million , of which $5.3 million was recorded on the date of the modification and the remainder is recorded on a straight-line basis over the two -year vesting period.

On July 17, 2012, the Company amended its articles of incorporation to reflect a 0.3460 -for-1 reverse stock split of
its common stock. The amendment also changed the authorized shares of the Company's common stock to 120,000,000 shares.
Concurrent with the reverse stock split, the Company adjusted (i) the conversion price of its Series A 8% Convertible Preferred
Stock, (ii) the number of shares subject to and the exercise price of its outstanding stock option awards under its equity
incentive plan and (iii) the number of shares subject to and the exercise price of its outstanding warrants to equitably reflect the
split. All common stock share and per-share data included in the financial statements and footnotes thereto, give effect to the reverse stock split and the change in authorized shares and have been adjusted retroactively for all periods presented.

On September 27, 2012, the Company’s board of directors approved the Five Below, Inc. 2012 Employee Stock Purchase Plan (the “ESPP”), which remained subject to shareholder approval. The Company's shareholders approved the ESPP on May 30, 2013, at the Company's annual meeting of shareholders. The number of shares of common stock reserved for issuance, which is subject to other limitations, is 500,000 shares. The ESPP allows eligible employees the opportunity to purchase shares of the Company’s common stock through payroll deductions at a discount of 10% of the fair market value of such shares on the purchase date. The ESPP's effective date is retroactive to January 1, 2013 and is intended to be qualified as an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code of 1986.

On February 4, 2013, the Company completed its secondary public offering of 13,012,250 shares of common stock at a price of $35.65 per share. The shares sold in the secondary public offering were registered under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to the Company's registration statements on Form S-1 (File No. 333-186043 and File No. 333-186275), which were declared effective by the Securities and Exchange Commission on January 29, 2013. All of the shares sold in the secondary public offering were sold by selling shareholders and the Company did not receive any proceeds. The Company incurred fees of approximately $1.0 million related to legal, accounting, and other fees in connection with the secondary public offering, which is included in selling, general and administrative expenses in the fiscal 2012 statements of operations.

On May 14, 2013, the Company filed a registration statement on Form S-1 (File No. 333-188578) under the Securities Act with the Securities and Exchange Commission related to a proposed secondary public offering of shares of its common stock to be sold exclusively by participating selling shareholders. Certain shareholders intend to sell 8,563,172 shares of common stock in the secondary public offering and the underwriters are expected to be granted an option to purchase a maximum of 1,284,475 additional shares from the shareholders to cover overallotments of shares. The Company will not receive any proceeds from the proposed secondary public offering or the exercise of the underwriters' option to purchase additional shares. The estimated secondary public offering expenses payable by the Company are approximately $1.0 million , which includes legal, accounting and printing costs and various other fees associated with the registration of common stock. The Company did not incur any fees related to the registration statement during the thirteen weeks ended May 4, 2013. Such fees will be expensed as incurred. The secondary public offering is expected to close during the thirteen weeks ending August 3, 2013.

(6) Common Stock Options

Effective July 26, 2002, the Company adopted the 2002 Equity Incentive Plan (the “Plan”) pursuant to which the Company’s board of directors may grant stock options and restricted shares to officers, directors, key employees, and professional service providers. The Plan, as amended as of July 24, 2012, allows for the issuance of up to a total of 7,600,000 shares under the Plan. All stock options have a term not greater than 10 years. Stock options vest and become exercisable in whole or in part, in accordance with vesting conditions set by the Company’s board of directors. Options granted to date generally vest over four years from the date of grant. As of May 4, 2013 , 4,873,709 stock options or restricted shares were available for grant.

On August 25, 2010, the Company’s board of directors agreed to allow option holders, as of that date, to exercise, during a twenty day offer period, all options issued and outstanding under the Plan, regardless if those options were vested and

11



exercisable (“Vested Options”) or were not currently vested and exercisable (“Unvested Options”). On October 13, 2010, the holders of the stock options exercised all of their outstanding Vested Options and Unvested Options to purchase shares of the Company’s common stock. The Unvested Options were exercised for restricted shares of common stock that have the same vesting schedule as the Unvested Options that were exercised for those shares. The restricted shares are subject to repurchase by the Company should the option holder’s employment be terminated prior to the vesting at a purchase price equal to the lesser of: (i) the exercise price paid for the restricted shares, and (ii) the fair market value of the restricted shares at the time of repurchase. For accounting purposes, as the shares remain subject to their original vesting provisions, the early exercises are being recorded as if the original options remain outstanding until the respective shares vest. Exercise proceeds received prior to the shares vesting are recorded as a deposit liability in other accrued expenses on the balance sheets. As of May 4, 2013 , $0.2 million was recorded as a deposit liability.

The following table summarizes the activity related to the restricted shares of common stock (in thousands):
 
 
Number of
shares
 
Deposit
liability
Unvested, February 2, 2013
31,542

 
$
308

Vested
(11,137
)
 
(80
)
Unvested, May 4, 2013
20,405

 
$
228


Stock option activity under the Plan was as follows:
 
Options
outstanding
 
Weighted
average
exercise
price
 
Weighted
average
remaining
contractual
term
Balance at February 2, 2013  
1,187,817

 
$
10.43

 
9.3
Granted
122,250

 
37.22

 
 
Forfeited
(4,843
)
 
4.95

 
 
Exercised
(36,781
)
 
4.28

 
 
Balance at May 4, 2013
1,268,443

 
$
13.21

 
8.9
Exercisable at May 4, 2013
56,158

 
$
10.73

 
7.2

Included in the options outstanding as of May 4, 2013 are options to purchase shares of common stock by non-employees. The Company accounts for stock-based compensation for non-employee stock options by using the Black-Scholes option-pricing model and records expense as the options vest. Non-employee options subject to vesting are required to be periodically revalued over their service period, which is generally the same as the vesting period.

The fair value of each option award granted to employees, including outside directors, is estimated on the date of grant and the fair value of each option award granted to non-employees is estimated on the date of grant and is required to be periodically revalued over the contractual period until the option award is exercised or forfeited using the Black-Scholes option-pricing model with the following weighted average assumptions:
 
 
Thirteen Weeks Ended
May 4, 2013
 
April 28, 2012
Expected volatility
50.0
%
 
50.0
%
Risk-free interest rate
1.1
%
 
1.5
%
Expected life of options - for employee grants
6.3 years

 
7.0 years

Expected dividend yield
%
 
%

The Company uses the simplified method to estimate the expected term of the option. The expected volatility incorporates historical and implied volatility of similar entities whose share price are publicly available. The risk-free rate for the expected term of the option was based on the U.S. Treasury yield curve in effect at the time of grant.

The per-share weighted average grant-date fair value of stock options granted to employees, including outside directors, for the thirteen weeks ended May 4, 2013 and April 28, 2012 was $18.15 and $4.36 , respectively.

12




As of May 4, 2013 , there was $13.3 million of total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Plan, excluding options that vest upon the achievement of performance targets. That cost is expected to be recognized over a weighted average vesting period of 2.0  years.

(7) Income Taxes

The following table summarizes the Company’s income tax expense and effective tax rates for the thirteen weeks ended May 4, 2013 and April 28, 2012 (in thousands):
 
 
Thirteen Weeks Ended
May 4, 2013
 
April 28, 2012
Income (loss) before income taxes
$
2,678

 
$
(1,928
)
Income tax expense (benefit)
$
1,108

 
$
(771
)
Effective tax rate
41.4
%
 
40.0
%

The effective tax rates for the thirteen weeks ended May 4, 2013 and April 28, 2012 were based on the Company’s forecasted annualized effective tax rates and were adjusted for discrete items that occurred within the periods presented. The effective tax rate for the thirteen weeks ended May 4, 2013 was impacted by permanent book to tax differences related to fees expected to be incurred for the secondary public offering.

For the thirteen weeks ended May 4, 2013 and April 28, 2012 , total income taxes paid were $8.1 million and $8.9 million , respectively.

The Company had no material accrual for uncertain tax positions or interest or penalties related to income taxes on the Company’s balance sheets at May 4, 2013 February 2, 2013 or April 28, 2012 , and has not recognized any material uncertain tax positions or interest and/or penalties related to income taxes in the statements of operations for the thirteen weeks ended May 4, 2013 and April 28, 2012 .

The Company files a federal income tax return as well as state tax returns. The Company’s U.S. federal income tax returns for the fiscal years ended January 30, 2010 and thereafter remain subject to examination by the U.S. Internal Revenue Service (“IRS”). State returns are filed in various state jurisdictions, as appropriate, with varying statutes of limitation and remain subject to examination for varying periods up to 3 to 4 years depending on the state.

(8)    Related-Party Transactions

During both the thirteen weeks ended May 4, 2013 and April 28, 2012 , the Company incurred fees of $0.3 million related to services provided by certain shareholders and professional service firms for which certain shareholders are partners.
 

13



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with “Selected Financial Data” and the financial statements and related notes included in our Annual Report on Form 10-K for our fiscal year ended February 2, 2013 and referred to herein as the “Annual Report,” and the financial statements and related notes as of and for the thirteen weeks ended May 4, 2013 included in Part I, Item 1 of this Quarterly Report on Form 10-Q. The statements in this discussion regarding expectations of our future performance, liquidity and capital resources and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described below in “Special Note Regarding Forward-Looking Statements” and in Part II, "Item 1A. Risk Factors.” Our actual results may differ materially from those contained in or implied by any forward-looking statements.
We operate on a fiscal calendar widely used by the retail industry that results in a given fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to January 31 of the following year. References to “fiscal year 2013” or “fiscal 2013” refer to the period from February 3, 2013 to February 1, 2014 and consists of a 52-week fiscal year. References to “fiscal year 2012” or “fiscal 2012” refer to the period from January 29, 2012 to February 2, 2013 and consisted of a 53-week fiscal year. The fiscal quarters ended May 4, 2013 and April 28, 2012 refer to the 13-week periods ended as of those dates. Historical results are not necessarily indicative of the results to be expected for any future period and results for any interim period may not necessarily be indicative of the results that may be expected for a full year.


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts or present facts or conditions, such as statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, the introduction of new merchandise, and the implementation of our marketing and branding strategies. In many cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or the negative of these terms or other comparable terminology.

The forward-looking statements contained in this Quarterly Report on Form 10-Q reflect our views as of the date of this report about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, but not limited to, those factors described in Part I, “Item 1A. Risk Factors” in our Annual Report, as amended by the risk factors included in Part II, “Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q. These factors include without limitation:

failure to successfully implement our growth strategy;
disruptions in our ability to select, obtain, distribute and market merchandise profitably;
ability to successfully expand our distribution network capacity;
disruptions to our distribution network or the timely receipt of inventory;
inability to attract and retain qualified employees;
ability to increase sales and improve the efficiencies, costs and effectiveness of our operations;
dependence on our executive officers and other key personnel or our inability to hire additional qualified personnel;
ability to successfully manage our inventory balances and inventory shrinkage;
lease obligations;
changes in our competitive environment, including increased competition from other retailers;
increasing costs due to inflation, increased operating costs or energy prices;
the seasonality of our business;
disruptions to our information technology systems in the ordinary course or as a result of system upgrades;
failure to maintain adequate internal controls;
ability to obtain additional financing;
failure to secure customers’ confidential or credit card information, or other private data relating to our employees or our company;

14



natural disasters, unusual weather conditions, pandemic outbreaks, global political events, war and terrorism;
current economic conditions and other economic factors;
the impact of governmental laws and regulations and the outcomes of legal proceedings;
inability to protect our brand name, trademarks and other intellectual property rights;
increased costs as a result of being a public company; and
restrictions imposed by our indebtedness on our current and future operations.

Readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on these forward-looking statements. All of the forward-looking statements we have included in this quarterly report are based on information available to us on the date of this report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as otherwise required by law.


Overview
Five Below is a rapidly growing specialty value retailer offering a broad range of trend-right, high-quality merchandise targeted at the teen and pre-teen customer. We offer a dynamic, edited assortment of exciting products, all priced at $5 and below, including select brands and licensed merchandise across our category worlds. As of May 4, 2013 , we operated 258 stores in 18 states.


How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of performance and financial measures. These key measures include net sales, comparable store sales, cost of goods sold and gross profit, selling, general and administrative expenses, and operating income.

Net Sales
Net sales constitute gross sales net of merchandise returns for damaged or defective goods. Net sales consist of sales from comparable stores and non-comparable stores. Revenue from the sale of gift cards is deferred and not included in net sales until the gift cards are redeemed to purchase merchandise.

Our business is seasonal and as a result, our net sales fluctuate from quarter to quarter. Net sales are usually highest in the fourth fiscal quarter due to the year-end holiday season.

Comparable Store Sales
Comparable store sales include net sales from stores that have been open for at least 15 full months from their opening date. Comparable stores include the following:

Stores that have been remodeled while remaining open;
Stores that have been relocated within the same trade area, to a location that is not significantly different in size, in which the new store opens at about the same time as the old store closes; and
Stores that have expanded, but are not significantly different in size, within their current locations.

For stores that are relocated or expanded, the following periods are excluded when calculating comparable store sales:

The period of construction and pre-opening during which the store is closed through:
the last day of the fiscal year in which the store was relocated or expanded (for stores that increased significantly in size); or
the last day of the fiscal month in which the store re-opens (for all other stores); and
The period beginning on the first anniversary of the date the store closed for construction through the first anniversary of the date the store re-opened.

There may be variations in the way in which some of our competitors and other retailers calculate comparable or “same store” sales. As a result, data in this quarterly report regarding our comparable store sales may not be comparable to similar data made available by other retailers. Non-comparable store sales are comprised of new store sales, sales for stores not open for a full 15 months, and sales from existing store relocation and expansion projects that were temporarily closed and not included in comparable store sales.

15




Measuring the change in fiscal year-over-year comparable store sales allows us to evaluate how our store base is performing. Various factors affect comparable store sales, including:

consumer preferences, buying trends and overall economic trends;
our ability to identify and respond effectively to customer preferences and trends;
our ability to provide an assortment of high-quality, trend-right and everyday product offerings that generate new and repeat visits to our stores;
the customer experience we provide in our stores;
the level of traffic near our locations in the power, community and lifestyle centers in which we operate;
competition;
changes in our merchandise mix;
pricing;
our ability to source and distribute products efficiently;
the timing of promotional events and holidays;
the timing of introduction of new merchandise and customer acceptance of new merchandise;
our opening of new stores in the vicinity of existing stores;
the number of items purchased per store visit; and
weather conditions.

Opening new stores is an important part of our growth strategy. As we continue to pursue our growth strategy, we expect that a significant percentage of our net sales will continue to come from new stores not included in comparable store sales. Accordingly, comparable store sales is only one measure we use to assess the success of our growth strategy.

Cost of Goods Sold and Gross Profit
Gross profit is equal to our net sales less our cost of goods sold. Gross margin is gross profit as a percentage of our net sales. Cost of goods sold reflects the direct costs of purchased merchandise and inbound freight, as well as store occupancy, distribution and buying expenses. Store occupancy costs include rent, common area maintenance, utilities and property taxes for all store locations. Distribution costs include costs for receiving, processing, warehousing and shipping of merchandise to or from our distribution centers and between store locations. Buying costs include compensation expense and other costs for our internal buying organization.

These costs are significant and can be expected to continue to increase as our company grows. The components of our cost of goods sold may not be comparable to the components of cost of goods sold or similar measures of our competitors and other retailers. As a result, data in this quarterly report regarding our gross profit and gross margin may not be comparable to similar data made available by our competitors and other retailers.

The variable component of our cost of goods sold is higher in higher volume quarters because the variable component of our cost of goods sold generally increases as net sales increase. We regularly analyze the components of gross profit as well as gross margin. Any inability to obtain acceptable levels of initial markups, a significant increase in our use of markdowns, and a significant increase in inventory shrinkage or inability to generate sufficient sales leverage on the store occupancy, distribution and buying components of costs of goods sold could have an adverse impact on our gross profit and results of operations. Changes in the mix of our products may also impact our overall cost of goods sold.

Selling, General and Administrative Expenses
Selling, general and administrative, or SG&A, expenses are composed of payroll and other compensation, marketing and advertising expense, depreciation and amortization expense and other selling and administrative expenses. SG&A expenses as a percentage of net sales are usually higher in lower sales volume quarters and lower in higher sales volume quarters.

The components of our SG&A expenses may not be comparable to those of other retailers. We expect that our SG&A expenses will increase in future periods due to our continuing store growth and in part due to additional legal, accounting, insurance and other expenses we expect to incur as a result of being a public company. Among other things, we expect that compliance with the Sarbanes-Oxley Act of 2002 and related rules and regulations could result in significant incremental legal, accounting and other overhead costs. In addition, any increase in future stock option or other stock-based grants or modifications will increase our stock-based compensation expense included in SG&A.


16



Operating Income
Operating income equals gross profit less SG&A expenses. Operating income excludes interest expense or income and income tax expense or benefit. We use operating income as an indicator of the productivity of our business and our ability to manage SG&A expenses. Operating income percentage measures operating income as a percentage of our net sales.


Stock Split
On July 17, 2012, we amended our articles of incorporation to reflect a 0.3460-for-1 reverse stock split of our common stock. The amendment also changed the authorized shares of our common stock to 120,000,000 shares. Concurrent with the reverse stock split, we adjusted (i) the conversion price of our Series A 8% convertible preferred stock, (ii) the number of shares subject to and the exercise price of our outstanding stock option awards under our equity incentive plan and (iii) the number of shares subject to and the exercise price of our outstanding warrants to equitably reflect the split. All common stock share and per-share data presented in this quarterly report gives effect to the reverse stock split and the change in authorized shares and have been adjusted retroactively for all periods presented.


Results of Operations
The following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage of our net sales.
 
 
Thirteen Weeks Ended
May 4, 2013
 
April 28, 2012
(in millions, except total stores)
Statements of Operations Data: (1)
 
 
 
Net sales
$
95.6

 
$
71.8

Cost of goods sold
65.4

 
48.8

Gross profit
30.2

 
23.0

Selling, general and administrative expenses
27.0

 
25.0

Operating income (loss)
3.2

 
(2.0
)
Interest expense (income), net
0.5

 

Income (loss) before income taxes
2.7

 
(1.9
)
Income tax expense (benefit)
1.1

 
(0.8
)
Net income (loss)
$
1.6

 
$
(1.2
)
Percentage of Net Sales:
 
 
 
Net sales
100.0
%
 
100.0
 %
Cost of goods sold
68.4
%
 
68.0
 %
Gross profit
31.6
%
 
32.0
 %
Selling, general and administrative expenses
28.3
%
 
34.8
 %
Operating income (loss)
3.3
%
 
(2.7
)%
Interest expense (income), net
0.5
%
 
(0.1
)%
Income (loss) before income taxes
2.8
%
 
(2.7
)%
Income tax expense (benefit)
1.2
%
 
(1.1
)%
Net income (loss)
1.6
%
 
(1.6
)%
Operational Data:
 
 
 
Total stores at end of period
258

 
199

Comparable store sales growth
4.2
%
 
10.4
 %
Average net sales per store (2)
$
0.4

 
$
0.4

(1)
Components may not add to total due to rounding.
(2)
Only includes stores open during the full period.



17



Thirteen Weeks Ended May 4, 2013 Compared to the Thirteen Weeks Ended April 28, 2012

Net Sales
Net sales increased to $95.6 million in the thirteen weeks ended May 4, 2013 from $71.8 million in the thirteen weeks ended April 28, 2012 , an increase of $23.8 million , or 33.1% . The increase was the result of a non-comparable store sales increase of $20.8 million and a comparable store sales increase of $3.0 million . The increase in non-comparable store sales was driven by stores that opened in fiscal 2012 but have not been open for 15 full months and new stores. We plan to open 60 net new stores during fiscal 2013.

Comparable store sales increased 4.2% for the thirteen weeks ended May 4, 2013 compared to the thirteen weeks ended April 28, 2012 . This increase resulted from an increase of approximately 2.7% in the number of transactions in our stores and an increase in the average dollar value of transactions of approximately 1.5% .

Cost of Goods Sold and Gross Profit
Cost of goods sold increased to $65.4 million in the thirteen weeks ended May 4, 2013 from $48.8 million in the thirteen weeks ended April 28, 2012 , an increase of $16.6 million , or 34.0% . The increase in cost of goods sold was primarily the result of a $11.8 million increase in the merchandise costs of goods resulting from an increase in sales, a $3.0 million increase in store occupancy costs as a result of new store openings, and a $1.4 million increase in distribution costs primarily due to an increase in sales as well as the opening of a second distribution center.

Gross profit increased to $30.2 million in the thirteen weeks ended May 4, 2013 from $23.0 million in the thirteen weeks ended April 28, 2012 , an increase of $7.2 million , or 31.2% . Gross margin decreased to 31.6% in the thirteen weeks ended May 4, 2013 from 32.0% for the thirteen weeks ended April 28, 2012 , a decrease of approximately 40 basis points. The decrease in gross margin was primarily the result of the increase in distribution costs as a result of the opening of a second distribution center, which decreased margin by approximately 70 basis points. This decrease was partially offset by the increase in store occupancy and buying expense increasing at a lower rate than the increase in net sales, which increased margin by approximately 20 basis points.

Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $27.0 million in the thirteen weeks ended May 4, 2013 from $25.0 million in the thirteen weeks ended April 28, 2012 , an increase of $2.0 million , or 8.2% . As a percentage of net sales, selling, general and administrative expenses decreased approximately 650 basis points to 28.3% in the thirteen weeks ended May 4, 2013 compared to 34.8% in the thirteen weeks ended April 28, 2012 . The increase in selling, general and administrative expense was primarily the result of increases of $4.7 million in store-related expenses to support new store growth and $1.4 million of corporate related expenses, partially offset by a decrease of $4.1 million in stock-based compensation expense primarily related to the cancellation of certain stock options in exchange for the grant of restricted shares in March 2012.

Interest Expense (Income), Net
Interest expense, net increased to $0.5 million in the thirteen weeks ended May 4, 2013 from $37 thousand of interest income, net in the thirteen weeks ended April 28, 2012 , an increase of $0.5 million . The increase in interest expense resulted from the outstanding balance of our Term Loan Facility (see –“Liquidity and Capital Resources -Term Loan Facility ” section below).

Income Tax Expense (Benefit)
Income tax expense for the thirteen weeks ended May 4, 2013 was $1.1 million compared to a $0.8 million income tax benefit for the thirteen weeks ended April 28, 2012 , an increase of $1.9 million . This increase in income tax expense was primarily the result of a $4.6 million increase in pre-tax income. Our effective tax rate was 41.4% for the thirteen weeks ended May 4, 2013 compared to 40.0% for the thirteen weeks ended April 28, 2012 . Our effective tax rate for the thirteen weeks ended May 4, 2013 was impacted by permanent book to tax differences related to fees expected to be incurred for our secondary public offering. For the remainder of fiscal 2013, we believe our effective tax rate will be approximately 40.0% .

Net Income (Loss)
As a result of the foregoing, net income increased to $1.6 million in the thirteen weeks ended May 4, 2013 from a net loss of $1.2 million in the thirteen weeks ended April 28, 2012 , an increase of $2.7 million , or 235.7% .



18



Liquidity and Capital Resources

Overview
Our primary sources of liquidity are cash flows from operations, historical equity financings and borrowings under our Revolving Credit Facility (defined in “-Line of Credit”). Our primary cash needs are for capital expenditures and working capital. During fiscal 2012, we also entered into a Term Loan Facility (defined in “- Term Loan Facility ”) and used the proceeds to pay a dividend in May 2012.

Capital expenditures typically vary depending on the timing of new store openings and infrastructure-related investments. We plan to make capital expenditures of approximately $27 million in fiscal 2013, which we expect to fund from cash generated from operations. We expect to devote approximately $15 million of our capital expenditure budget in fiscal 2013 to construct and open 60 net new stores with the remainder projected to be spent on store relocations, remodels, and expansion projects, the distribution centers, and corporate infrastructure.

Our primary working capital requirements are for the purchase of store inventory and payment of payroll, rent, other store operating costs and distribution costs. Our working capital requirements fluctuate during the year, rising in the third and fourth fiscal quarters as we take title to increasing quantities of inventory in anticipation of our peak, year-end holiday shopping season in the fourth fiscal quarter. Fluctuations in working capital are also driven by the timing of new store openings.

Historically, we have funded our capital expenditures and working capital requirements during the fiscal year with cash on hand and borrowings under our Revolving Credit Facility. We did not have any direct borrowings under our Revolving Credit Facility during the thirteen weeks ended May 4, 2013 . When we have used our Revolving Credit Facility, the amount of indebtedness outstanding under it has tended to be the highest in the beginning of the fourth quarter of each fiscal year. Over the past three fiscal years, to the extent that we have drawn on the facility, we have paid down the borrowings before the end of the fiscal year with cash generated during our peak selling season in the fourth quarter.

On June 12, 2013 , we completed an internal business restructuring pursuant to which we formed Five Below Merchandising, Inc., a wholly-owned subsidiary (the “Subsidiary”), and transferred to the Subsidiary assets, operations and employees related to our merchandising operations (the “Restructuring”). Going forward, the Subsidiary will purchase and sell to us certain goods for sale at our retail locations and we will provide to the Subsidiary back office support, office space and other services, in each case, pursuant to agreements between us and the Subsidiary. In connection with the Restructuring, on June 12, 2013 , we amended and restated the Loan and Security Agreement (defined in “- Line of Credit ”) and certain other ancillary documents to our Revolving Credit Facility in order to, among other things, allow us to form and capitalize the Subsidiary and make the Subsidiary a party to the Loan and Security Agreement as a guarantor of our obligations thereunder. The Subsidiary has also acceded to the credit agreement and certain ancillary documents to our Term Loan Facility as a guarantor of our obligations thereunder. For accounting purposes, going forward, our financial statements will include the accounts of Five Below, Inc. and the newly formed corporation. All intercompany transactions and accounts will be eliminated in consolidation.

The balance outstanding under the Term Loan Facility was $34.5 million as of May 4, 2013 . Pursuant to the terms of the Term Loan Facility, due to the repayment of $65.3 million of principal under the Term Loan Facility in July 2012, we are no longer required to make minimum quarterly payments. In May 2013, subsequent to the end of the thirteen weeks ended May 4, 2013, we repaid $15.0 million of principal on the Term Loan Facility. This amount was classified as a current liability on our balance sheets as of May 4, 2013 and February 2, 2013. The remaining unpaid balance will be due upon maturity.

Based on our growth plans, we believe that our cash position, net cash provided by operating activities and availability under our Revolving Credit Facility will be adequate to finance our planned capital expenditures, working capital requirements and debt service over the next 12 months and for the foreseeable future thereafter. If cash flows from operations and borrowings under our Revolving Credit Facility are not sufficient or available to meet our requirements, then we will be required to obtain additional equity or debt financing in the future. There can be no assurance that equity or debt financing will be available to us when we need it or, if available, that the terms will be satisfactory to us and not dilutive to our then-current shareholders.


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Cash Flows
A summary of our cash flows from operating, investing and financing activities is presented in the following table:
 
 
Thirteen Weeks Ended
May 4, 2013
 
April 28, 2012
(in millions) (1)
Net cash used in operating activities
$
(11.8
)
 
$
(23.7
)
Net cash used in investing activities
(8.1
)
 
(4.8
)
Net cash provided by financing activities
0.6

 
1.7

Net decrease during period in cash and cash equivalents
$
(19.4
)
 
$
(26.8
)
(1) Components may not add to total due to rounding.

Cash Used in Operating Activities
Net cash used in operating activities for the thirteen weeks ended May 4, 2013 was $11.8 million , a decrease of approximately $11.9 million compared to the thirteen weeks ended April 28, 2012 . The decrease in net cash used in operating activities was primarily the result of the payment of $6.0 million of non-contractual bonuses during the thirteen weeks ended April 28, 2012 to certain executive officers for performance in fiscal 2011 and an increase in operating cash flows from store performance.

Cash Used in Investing Activities
Net cash used in investing activities for the thirteen weeks ended May 4, 2013 was $8.1 million , an increase of $3.3 million compared to the thirteen weeks ended April 28, 2012 related solely to capital expenditures. The increase in capital expenditures was primarily for the build-out of our second distribution center, our new store construction, and corporate infrastructure.

Cash Provided by Financing Activities
Net cash provided by financing activities for the thirteen weeks ended May 4, 2013 was $0.6 million , a decrease of $1.1 million compared to the thirteen weeks ended April 28, 2012 . The decrease in net cash provided by financing activities was primarily the result of a decrease of $1.1 million related to the excess tax benefits related to shares of restricted stock and the exercise of stock options.

Term Loan Facility
On May 16, 2012, we entered into a $100.0 million Term Loan Facility with Goldman Sachs Bank USA as administrative agent for a syndicate of lenders (the “Term Loan Facility”). We used the net proceeds from the Term Loan Facility and cash on hand to pay a dividend on our common and preferred stock, totaling $99.5 million .

The Term Loan Facility provided for a term loan of $100.0 million and matures on the earlier of (i) May 16, 2015 and (ii) the date on which such facility is accelerated following the occurrence of an event of default. The Term Loan Facility provides for interest on borrowings, at our option, at an alternate base rate which is the greater of (i) the administrative agent’s prime rate in effect on such day and (ii) the federal funds effective rate in effect on such day plus 0.50% with a 2.00% floor, plus a margin of 3.25% , or a London Interbank Offer Rate (“LIBOR”) based rate with a 1.00% floor plus a margin of 4.25% . The credit agreement for the Term Loan Facility includes a maximum consolidated net leverage ratio financial covenant, the calculation of which allows us to net up to $10.0 million of our cash and cash equivalents against our indebtedness. Our leverage ratio must not exceed 2.75 x to 2.50 x for the testing periods in calendar year 2013, 2.00 x for the testing periods in calendar year 2014 and 1.75 x thereafter.

The credit agreement for the Term Loan Facility also includes customary negative and affirmative covenants including, among others, limitations on our ability to: (i) incur additional debt; (ii) create liens; (iii) make certain investments, loans and advances; (iv) sell assets; (v) pay dividends or make distributions or other restricted payments; (vi) engage in mergers or consolidations; or (vii) change our business.

The Term Loan Facility is subject to repayment upon the receipt of certain proceeds, including those from the sale of certain assets, insurance proceeds and indebtedness not otherwise permitted. The Term Loan Facility was also subject to repayment of $50.0 million upon the receipt of proceeds from our initial public offering (the "IPO"). We closed the IPO on July 24, 2012. On July 27, 2012, we repaid $65.3 million of principal against the Term Loan Facility and $0.7 million of interest. On October 26, 2012, we repaid $0.3 million of principal on the Term Loan Facility. As of May 4, 2013 , the balance outstanding under the Term Loan Facility was $34.5 million bearing interest at a rate of 5.25% . Pursuant to the terms of the

20



Term Loan Facility, due to the repayment of $65.3 million of principal under the Term Loan Facility in July 2012, we are no longer required to make minimum quarterly payments. In May 2013, subsequent to the thirteen weeks ended May 4, 2013 , we repaid $15.0 million of principal on the Term Loan Facility. This amount was classified as a current liability on our balance sheet as of May 4, 2013 . The remaining unpaid balance will be due upon maturity.

In connection with the Term Loan Facility, we incurred deferred financing costs of $2.7 million which are being amortized over the term of the Term Loan Facility. The amortization is included in interest expense, net, in the statements of operations. In connection with the repayment in July 2012, $1.6 million of the deferred financing costs were written off. The remaining deferred financing costs, net of amortization, are included in other assets on the balance sheet at May 4, 2013 . In connection with the $15.0 million principal repayment on the Term Loan Facility in May 2013, approximately $0.3 million of the deferred financing costs will be written off and included in loss on debt extinguishment in the statements of operations for the twenty-six weeks ending August 3, 2013.

Amounts under the credit agreement for the Term Loan Facility may become due upon certain events of default including, among others, failure to comply with the credit agreement’s covenants, bankruptcy, default on certain other indebtedness or a change in control. The default rate under the Term Loan Facility is 2.00%  per annum.

All obligations under the Term Loan Facility are secured by substantially all of our assets and are guaranteed by
the Subsidiary. As of May 4, 2013 , we were in compliance with the financial covenant and other covenants applicable to us under the Term Loan Facility.

Line of Credit
On August 18, 2006, we entered into a loan and security agreement (the “Loan and Security Agreement”) with a bank that included a revolving line of credit with advances tied to a borrowing base. The Loan and Security Agreement has been amended and/or restated several times, the latest on June 12, 2013 (as amended and restated, the “Revolving Credit Facility”), generally to extend the maturity date, increase maximum borrowings, adjust the applicable interest rates, permit the formation and capitalization of subsidiaries, make the Subsidiary a party to the agreement as a guarantor of our obligations and modify certain definitions. The Revolving Credit Facility allows maximum borrowings of $20.0 million with advances tied to a borrowing base and expires on the earliest to occur of (i) May 16, 2017, (ii) the date which is 45 days prior to the maturity date of the Term Loan Facility if the Term Loan Facility remains outstanding or (iii) upon the occurrence of an event of default. The Revolving Credit Facility may be increased to $30.0 million upon certain conditions. The Revolving Credit Facility includes a $5.0 million sub limit for the issuance of letters of credit. The borrowing base is 90% of eligible credit card receivables plus 90% of the net recovery percentage of eligible inventory less established reserves.

The Revolving Credit Facility provides for interest on borrowings, at our option, at (a) a prime rate plus a margin of (i) 0.75% if excess availability is greater than or equal to 75%, (ii) 1.0% if excess availability is less than 75% but greater than or equal to 33% or (iii) 1.25% if excess availability is less than 33% or (b) a LIBOR-based rate plus a margin of (i) 1.75% if excess availability is greater than or equal to 75%, (ii) 2.00% if excess availability is less than 75% but greater than or equal to 33% or (iii) 2.25% if excess availability is less than 33%. The Revolving Credit Facility further provides for a letter of credit fee equal to the LIBOR-based rate plus (i) 1.75% if excess availability is greater than or equal to 75%, (ii) 2.00% if excess availability is less than 75% but greater than or equal to 33% or (iii) 2.25% if excess availability is less than 33%. The Revolving Credit Facility also contains an unused credit facility fee of 0.375% per annum and is subject to a servicing fee of $12,000 per year.

The Revolving Credit Facility includes a covenant which requires us to maintain minimum excess collateral availability of no less than the greater of (i) 10% of the then effective maximum credit and (ii) $3.0 million.

The Revolving Credit Facility also includes customary negative and affirmative covenants including, among others, limitations on our ability to (i) incur additional debt; (ii) create liens; (iii) make certain investments, loans and advances; (iv) sell assets; (v) pay dividends or make distributions or other restricted payments; (vi) engage in mergers or consolidations; or (vii) change our business.

Additionally, the Revolving Credit Facility is subject to payment upon the receipt of certain proceeds, including those from the sale of certain assets and is subject to an increase in the interest rate on borrowings and the letter of credit fee of 2.0% upon an event of default. Amounts under the Revolving Credit Facility may become due upon certain events of default including among others, failure to comply with the Revolving Credit Facility covenants, bankruptcy, default on certain other indebtedness or a change in control.


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As of May 4, 2013, we had no borrowings outstanding and had approximately $19.4 million of the $20.0 million available on the line of credit under the Revolving Credit Facility as approximately $0.6 million was outstanding in letters of credit.

All obligations under the Revolving Credit Facility are secured by substantially all of our assets and are guaranteed by the Subsidiary. As of May 4, 2013 , we were in compliance with the covenants applicable to us under the Revolving Credit Facility.

Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results may vary from estimates in amounts that may be material to the financial statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our financial statements. Our critical accounting policies and estimates are discussed in the Annual Report. We believe that there have been no significant changes to our critical accounting policies during the thirteen weeks ended May 4, 2013 .


Contractual Obligations

Except as set forth below, there have been no material changes to our contractual obligations as disclosed in the Annual Report, other than those which occur in the ordinary course of business.

Since February 2, 2013 , we have entered into 14 new fully executed retail leases with an average term of 10 years and other lease modifications that have future minimum lease payments of approximately $21.3 million. In addition, as of May 4, 2013 , the balance outstanding under the Term Loan Facility was $34.5 million . Pursuant to the terms of the Term Loan Facility, due to the repayment of $65.3 million of principal under the Term Loan Facility in July 2012, we are no longer required to make minimum quarterly payments. In May 2013, subsequent to the end of the thirteen weeks ended May 4, 2013, we repaid $15.0 million of principal on the Term Loan Facility. This amount was classified as a current liability on our balance sheets as of May 4, 2013 and February 2, 2013. The remaining unpaid balance will be due upon maturity. The balance bears an interest rate of 5.25%.


Off Balance Sheet Arrangements

As of and for the thirteen weeks ended May 4, 2013 , except for operating leases entered into in the normal course of business, we were not party to any material off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, net sales, expenses, results of operations, liquidity, capital expenditures or capital resources.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk
Our principal market risk relates to interest rate sensitivity, which is the risk that future changes in interest rates will reduce our net income or net assets. We have a Revolving Credit Facility which includes a revolving line of credit with advances tied to a borrowing base, and a Term Loan Facility, both of which bear interest at a variable rate. Because our Revolving Credit Facility and Term Loan Facility bear interest at a variable rate, we will be exposed to market risks relating to changes in interest rates.

As of May 4, 2013, we had no borrowings outstanding and had approximately $19.4 million of the $20.0 million available on the line of credit under the Revolving Credit Facility as approximately $0.6 million was outstanding in letters of credit. The Revolving Credit Facility provides for interest on borrowings, at our option, at (a) a prime rate plus a margin of (i) 0.75% if excess availability is greater than or equal to 75%, (ii) 1.0% if excess availability is less than 75% but greater than or equal to 33% or (iii) 1.25% if excess availability is less than 33% or (b) a LIBOR-based rate plus a margin of (i) 1.75% if excess availability is greater than or equal to 75%, (ii) 2.00% if excess availability is less than 75% but greater than or equal to 33% or (iii) 2.25% if excess availability is less than 33%. The Revolving Credit Facility further provides for a letter of credit fee equal to the LIBOR-based rate plus (i) 1.75% if excess availability is greater than or equal to 75%, (ii) 2.00% if excess availability is less than 75% but greater than or equal to 33% or (iii) 2.25% if excess availability is less than 33%.

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As of May 4, 2013 , the principal amount of the Term Loan Facility was $34.5 million. The Term Loan Facility provides for interest on borrowings, at our option, at an alternate base rate which is the greater of (i) the administrative agent's prime rate in effect on such day and (ii) the federal funds effective rate in effect on such day plus 0.50% with a 2.00% floor plus a margin of 3.25% or a LIBOR-based rate with a 1.00% floor plus a margin of 4.25%. Based on a sensitivity analysis at May 4, 2013 , a 100 basis point increase in market interest rates would increase our annual interest expense on the Term Loan Facility by approximately $0.3 million . We do not use derivative financial instruments for speculative or trading purposes, but this does not preclude our adoption of specific hedging strategies in the future.

Impact of Inflation
Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our historical results of operations and financial condition have been immaterial. We cannot assure you, however, that our results of operations and financial condition will not be materially impacted by inflation in the future.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as defined in Rule 13(a)-15(e), as of the end of the period covered by this Quarterly Report on Form 10-Q pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q are effective at a reasonable assurance level in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent or detect all errors and all fraud. While our disclosure controls and procedures are designed to provide reasonable assurance of their effectiveness, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Changes in Internal Control over Financial Reporting
There was no change to our internal control over financial reporting during the thirteen weeks ended May 4, 2013 that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.


23



PART II—OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS

We are subject to various proceedings, lawsuits, disputes, and claims arising in the ordinary course of our business. Many of these actions raise complex factual and legal issues and are subject to uncertainties. Actions filed against us from time to time include commercial, intellectual property, customer, and employment actions, including class action lawsuits. The plaintiffs in some actions seek unspecified damages or injunctive relief, or both. Actions are in various procedural stages, and some are covered in part by insurance. We cannot predict with assurance the outcome of actions brought against us. Accordingly, adverse developments, settlements, or resolutions may occur and negatively impact income in the quarter of such development, settlement, or resolution. If a potential loss arising from these lawsuits, claims and pending actions is probable and reasonably estimable, we record the estimated liability based on circumstances and assumptions existing at the time. Although the outcome of these and other claims cannot be predicted with certainty, management does not believe that the ultimate resolution of these matters will have a material adverse effect on our financial condition or results of operations.

ITEM 1A. RISK FACTORS

Risk factors that affect our business and financial results are discussed in Part I, “Item 1A. Risk Factors,” in our Annual Report. There have been no material changes in our risk factors from those previously disclosed in our Annual Report. You should carefully consider the risks described in our Annual Report, which could materially affect our business, financial condition or future results. The risks described in our Annual Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.
 
ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.
 
ITEM 5. OTHER INFORMATION

On June 12, 2013 , we entered into a Third Amended and Restated Loan and Security Agreement among us, as borrower, the Subsidiary, as guarantor, and Wells Fargo Bank, National Association, as lender. Among other things, the amendment and restatement removed restrictions on our ability to form and capitalize subsidiaries and added the Subsidiary as a party to the agreement as a guarantor of our obligations thereunder. The Subsidiary also acceded to our Credit Agreement, dated May 16, 2012, with Goldman Sachs Bank USA as administrative agent, and certain ancillary documents to our Term Loan Facility as a guarantor of our obligations thereunder pursuant to the terms of (i) a Guarantee Joinder Agreement, dated June 12, 2013 , executed by the Subsidiary and acknowledged and accepted by Goldman Sachs Bank USA (the “Joinder Agreement”) and (ii) Supplement No. 1, dated June 12, 2013 , by and between the Subsidiary and Goldman Sachs Bank USA, to the Security Agreement, dated as of May 16, 2012, among Five Below, Inc. and Goldman Sachs Bank USA (the “Security Agreement Supplement”). The foregoing descriptions of the Third Amended and Restated Loan and Security Agreement, the Joinder Agreement, and the Security Agreement Supplement are summaries only and each is qualified in its entirety by reference to the complete text of the agreement, a copy of which is attached as Exhibit 10.5, Exhibit 10.6 and Exhibit 10.7, respectively, to this Quarterly Report on Form 10-Q and incorporated herein by reference.

 

24



ITEM 6. EXHIBITS

(a) Exhibits
 
No.
  
Description
 
 
 
10.1*

 
Form of Award Agreement for Restricted Shares (Directors) (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on March 11, 2013).

 
 
 
10.2*

 
Five Below, Inc. Compensation Policy for Non-Employee Directors (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on March 11, 2013).

 
 
 
10.3
 
Form of Non-Qualified Stock Option Agreement (Employees)
 
 
 
10.4
 
Form of Non-Qualified Stock Option Agreement (Executives)
 
 
 
10.5
 
Third Amended and Restated Loan and Security Agreement, dated June 12, 2013, by and between Five
Below, Inc., Five Below Merchandising, Inc. and Wells Fargo Bank, National Association
 
 
 
10.6
 
Guarantee Joinder Agreement, dated June 12, 2013, by Five Below Merchandising, Inc. and acknowledged and accepted by Goldman Sachs Bank USA, to the Credit Agreement, dated as of May 16, 2012, among Five Below, Inc. and the Lenders Party thereto, and Goldman Sachs Bank USA, Barclays Bank PLC and Jefferies Finance, LLC, collectively as lead arrangers and lead bookrunners and, individually, as administrative agent and collateral agent, syndication agent, and documentation agent, respectively, and Credit Suisse AG, Cayman Islands Branch, Deutsche Bank Trust Company Americas, UBS Securities LLC and Wells Fargo Bank, National Association, as arrangers and bookrunners
 
 
 
10.7
 
Supplement No. 1, dated as of June 12, 2013, by and between Five Below Merchandising, Inc. and Goldman Sachs Bank USA, to the Security Agreement, dated as of May 16, 2012, among Five Below, Inc. and Goldman Sachs Bank USA
 
 
 
31.1
  
Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2
  
Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1
  
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2
  
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101†
  
The following financial information from this Quarterly Report on Form 10-Q for the fiscal quarter ended May 4, 2013, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Unaudited Balance Sheets as of May 4, 2013, February 2, 2013 and April 30, 2012; (ii) the Unaudited Statements of Operations for the Thirteen Weeks Ended May 4, 2013 and April 30, 2012; (iii) the Unaudited Statement of Shareholders’ Equity for the Thirteen Weeks Ended May 4, 2013; (iv) the Unaudited Statements of Cash Flows for the Thirteen Weeks Ended May 4, 2013 and April 30, 2012 and (v) the Notes to Unaudited Financial Statements, tagged in detail.

25



*

Incorporated by reference.
Pursuant to applicable securities laws and regulations, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Exchange Act of 1934, as amended, and otherwise is not subject to liability under those sections.


26



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
FIVE BELOW, INC.
 
 
 
Date: June 13, 2013
 
/s/ Thomas G. Vellios
 
 
Thomas G. Vellios
 
 
President and Chief Executive Officer
(duly authorized officer and Principal Executive Officer)
 
 
 
Date: June 13, 2013
 
/s/ Kenneth R. Bull
 
 
Kenneth R. Bull
 
 
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)


27



EXHIBIT INDEX
 
No.
  
Description
 
 
 
10.3
 
Form of Non-Qualified Stock Option Agreement (Employees)
 
 
 
10.4
 
Form of Non-Qualified Stock Option Agreement (Executives)
 
 
 
10.5
 
Third Amended and Restated Loan and Security Agreement, dated June 12, 2013, by and between Five
Below, Inc., Five Below Merchandising, Inc. and Wells Fargo Bank, National Association
 
 
 
10.6
 
Guarantee Joinder Agreement, dated June 12, 2013, by Five Below Merchandising, Inc. and acknowledged and accepted by Goldman Sachs Bank USA, to the Credit Agreement, dated as of May 16, 2012, among Five Below, Inc. and the Lenders Party thereto, and Goldman Sachs Bank USA, Barclays Bank PLC and Jefferies Finance, LLC, collectively as lead arrangers and lead bookrunners and, individually, as administrative agent and collateral agent, syndication agent, and documentation agent, respectively, and Credit Suisse AG, Cayman Islands Branch, Deutsche Bank Trust Company Americas, UBS Securities LLC and Wells Fargo Bank, National Association, as arrangers and bookrunners
 
 
 
10.7
 
Supplement No. 1, dated as of June 12, 2013, by and between Five Below Merchandising, Inc. and Goldman Sachs Bank USA, to the Security Agreement, dated as of May 16, 2012, among Five Below, Inc. and Goldman Sachs Bank USA
 
 
 
31.1
  
Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2
  
Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1
  
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2
  
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101†
  
The following financial information from this Quarterly Report on Form 10-Q for the fiscal quarter ended May 4, 2013, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Unaudited Balance Sheets as of May 4, 2013, February 2, 2013 and April 30, 2012; (ii) the Unaudited Statements of Operations for the Thirteen Weeks Ended May 4, 2013 and April 30, 2012; (iii) the Unaudited Statement of Shareholders’ Equity for the Thirteen Weeks Ended May 4, 2013; (iv) the Unaudited Statements of Cash Flows for the Thirteen Weeks Ended May 4, 2013 and April 30, 2012 and (v) the Notes to Unaudited Financial Statements, tagged in detail.
 
Pursuant to applicable securities laws and regulations, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Exchange Act of 1934, as amended, and otherwise is not subject to liability under those sections.


28


Exhibit 10.3
FIVE BELOW, INC.
AMENDED AND RESTATED EQUITY INCENTIVE PLAN
NON-QUALIFIED STOCK OPTION AGREEMENT
Five Below, Inc. (the “Company”) hereby grants to [__________] (the “Optionee”) an option (the “Option”) to purchase a total of [_________] shares of Common Stock of the Company (the “Option Shares”), at the price and on the terms set forth herein, and in all respects subject to the terms, definitions and provisions of the Five Below, Inc. Amended and Restated Equity Incentive Plan (the “Plan”) applicable to non-qualified stock options, which terms and provisions are hereby incorporated by reference herein. Unless the context herein otherwise requires, the terms defined in the Plan shall have the same meanings when used herein.
1.      Nature of the Option. This Option is intended to be a nonstatutory stock option and is not intended to be an Incentive Stock Option within the meaning of section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), or to otherwise qualify for any special tax benefits to the Optionee.
2.      Date of Grant; Term of Option. This Option is granted this [______] day of [________, 20__] (the “Date of Grant”) and it may not be exercised later than the date that is ten (10) years after the Date of Grant, subject to earlier termination, as provided in the Plan or Section 5 hereof. For purposes of this Agreement, the term “Effective Date of Grant” shall mean [__________, 20__].
3.      Option Exercise Price. The Option exercise price is [$_______] per Share.
4.      Exercise of Option. This Option shall be exercisable during its term only in accordance with the terms and provisions of the Plan and this Award Agreement as follows:
(a)      Right to Exercise.
(i) In General . Subject to Section 4(a)(ii) and 4(a)(iii) of this Option, the Option will vest and become exercisable according to the following schedule:
If the Optionee has remained an active employee of the Company or an Affiliate of the Company from the Effective Date of Grant to the:
Then the Option will vest and become exercisable with respect to:
Second Anniversary of the Effective Date of Grant
50% of the Option Shares
Third Anniversary of the Effective Date of Grant
An additional 25% of the Option Shares
Fourth Anniversary of the Effective Date of Grant
The remaining 25% of the Option Shares

(ii) Accelerated Vesting on Change in Control . In the event of a Change in Control, the Option will vest and become exercisable with respect to fifty percent (50%) of the then unvested Option Shares, as of the date of such Change in Control.

(iii) Accelerated Vesting for Certain Terminations . If the Optionee ceases to be employed by the Company (and its Affiliates, as applicable) after the first anniversary of the Effective Date of Grant and prior to the Second Anniversary as a result of: (i) his or her Disability, (ii) his or her death or (iii) a termination by the Company (or its Affiliate(s), as applicable) without Cause, then





the Option will vest and become exercisable with respect to twenty five percent (25%) of the Option Shares and will remain exercisable for the applicable time period provided in Section 5.

(b)      Method of Exercise. The Optionee may exercise this Option by providing written notice stating the election to exercise this Option. Such written notice must be signed by the Optionee and must be delivered in person or by certified mail to the Secretary of the Company or such other person as may be designated by the Company. The written notice must be accompanied by payment of the option exercise price in the manner described in Section 4(c), and by any other agreements required by the Board or its Committee and/or the terms of the Plan. This Option will be deemed to be exercised only upon the receipt by the Company of such written notice, payment of the option exercise price and any other agreements required by the Board or its Committee, the terms of the Plan and/or this Award Agreement. The Optionee will have no right to vote or receive dividends and will have no other rights as a stockholder with respect to such Shares notwithstanding the exercise of this Option, until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate(s) evidencing Shares that are being issued upon exercise of this Option. The certificate(s) for the Shares will be registered in the name of the Optionee and will contain any legend as may be required under the Plan, this Award Agreement, and/or applicable law.
(c)      Method of Payment . The method of payment of the option exercise price will be determined by the Board or its Committee and may consist entirely of cash, certified check, or such other consideration or method of payment as may be authorized under the Plan.
(d)      Partial Exercise . This Option may be exercised in whole or in part; provided , however , that any exercise may apply only with respect to a whole number of Shares.
(e)      Restrictions on Exercise . This Option may not be exercised if the issuance of these Shares upon such exercise would constitute a violation of any applicable federal or state securities laws or other laws or regulations. In addition, as a further condition to the exercise of this Option, the Company may require the Optionee to make any representation or warranty to the Company as may be required by or advisable under any applicable law or regulation.
5.      Termination of Relationship with the Company.
(a)      Voluntary Termination. If the Optionee terminates his or her employment with the Company (and its Affiliates, as applicable) for any reason other than death or Disability, the Option (to the extent exercisable at the time of such termination) may be exercised at any time within ninety (90) days after the date of such termination. To the extent that the Option is not exercisable at the time of such termination, or to the extent the Option is not exercised within the time specified herein, the Option shall terminate.
(b)      Disability. If the Optionee's employment by the Company (and its Affiliates, as applicable) terminates due to Disability, the Option (to the extent exercisable at the time of such termination) may be exercised by the Optionee or his or her legal guardian or representative at any time within twelve (12) months after such termination. To the extent that the Option is not exercisable on the date of termination, or to the extent the Option is not exercised within the time specified herein, the Option shall terminate.
(c)      Death. If the Optionee's employment by the Company (and its Affiliates, as applicable) terminates due to his or her death, the Option (to the extent exercisable at the time of such death) will remain exercisable for twelve (12) months after the date of death by the Optionee's estate or by





a person who acquired the right to exercise the Option by bequest or inheritance. To the extent that the Option is not exercisable on the date of death, or to the extent the Option is not exercised within the time specified herein, the Option shall terminate.
(d)      Termination Without Cause. If the Company (or its Affiliate(s), as applicable) terminates Optionee's employment with the Company (and its Affiliates, as applicable) without Cause, the Option (to the extent exercisable at the time of such termination) may be exercised at any time within ninety (90) days after the date of such termination. To the extent that the Option is not exercisable at the time of such termination, or to the extent the Option is not exercised within the time specified herein, the Option shall terminate.
(e)      Termination for Cause. If the Company (or its Affiliate(s), as applicable) terminates Optionee's employment with the Company (and its Affiliates, as applicable) for Cause, the Option will then terminate immediately and automatically, and the Optionee shall have no further rights therein.
Notwithstanding any other provision of this Section 5, the Option shall not be exercisable after the expiration of the term set forth in Section 2 hereof.
6.      Non‑Transferability of Option. This Option may not be sold, pledged, assigned, hypothecated, gifted, transferred or disposed of in any manner either voluntarily or involuntarily by operation of law, other than by will or by the laws of descent or distribution. During the Optionee's lifetime, this Option is exercisable only by the Optionee (or by such Optionee's legal guardian or representative as provided in Section 5). Subject to the foregoing and the terms of the Plan, the terms of this Option will be binding upon the executors, administrators, legal guardians, representatives and heirs of the Optionee, meaning for purposes of this Award Agreement, both testamentary heirs and heirs by intestacy.
7.      No Continuation of Employment or Engagement. Neither the Plan nor this Option shall confer upon any Optionee any right to continue in the service of the Company or any of its Affiliates or limit, in any respect, the right of the Company (or its Affiliates, as applicable) to discharge the Optionee at any time, with or without Cause and with or without notice.
8.      Withholding. The Company and its Affiliates reserve the right to withhold, in accordance with any applicable laws, from any consideration payable or property transferable to Optionee any taxes required to be withheld by federal, state or local law as a result of the grant or exercise of this Option or the sale or other disposition of the Shares. If the amount of any consideration payable to the Optionee is insufficient to pay such taxes or if no consideration is payable to the Optionee, upon the request of the Company or its Affiliate, the Optionee (or such other person entitled to exercise this Option pursuant to Section 5 hereof) will pay to the Company or its Affiliate (as applicable) an amount sufficient for the Company or its Affiliate to satisfy any federal, state or local tax withholding requirements applicable to and as a condition to the grant or exercise of this Option or the sale or other disposition of the Shares issued upon the exercise of this Option.
9.      The Plan. The Optionee has received a copy of the Plan (a copy of which is attached hereto), has read the Plan and is familiar with its terms, and hereby accepts the Option subject to all of the terms and provisions of the Plan, as amended from time to time. Pursuant to the Plan, the Board or its Committee is authorized to interpret the Plan and to adopt rules and regulations not inconsistent with the Plan as it deems appropriate. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board or its Committee upon any questions arising under the Plan.





10.      Spousal Consent. As a condition to the effectiveness of the grant of the Option, the Optionee's spouse (if any) is required to execute the attached “Consent of Spouse.”
11.      Governing Law. This Award Agreement will be construed in accordance with the laws of the Commonwealth of Pennsylvania, without regard to the application of the principles of conflicts of laws.
12.      Amendment. Subject to the provisions of the Plan, this Award Agreement may be amended at any time by the Company or its delegate; provided, however, that any modification or amendment of this Award Agreement which adversely affects the Optionee shall require the written consent of the Optionee.
13.      Entire Agreement. This Award Agreement, together with the Plan and the other exhibits attached thereto or hereto, represents the entire agreement between the parties hereto relating to the subject matter hereof, and merges and supersedes all prior and contemporaneous discussions, agreements and understandings of every nature relating to the award of Options to Optionee by the Company.
[ signature page follows ]
























IN WITNESS WHEREOF, this Award Agreement has been executed by the parties on the date(s) indicated below.
FIVE BELOW, INC.
By:      ____________________________________


Name:      ____________________________________


Title:      ____________________________________


Date: ____________________________________


OPTIONEE


__________________________________________
Signature

__________________________________________
Address

__________________________________________


Date: ____________________________________










ACKNOWLEDGMENT
The Optionee acknowledges receipt of a copy of the Plan, a copy of which is attached hereto, and represents that he or she has read and is familiar with the terms and provisions thereof and hereby accepts this Option subject to all of the terms and provisions of the Award Agreement and the Five Below, Inc. Equity Incentive Plan (the “Plan”). The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board or the Committee upon any questions arising under the Plan.
Date: ____________________          _________________________
Signature of Optionee
_________________________
Name of Optionee

_________________________
Address
_________________________
City, State, Zip Code



































CONSENT OF SPOUSE


I, , spouse of [______________], have read the foregoing Non-Qualified Stock Option Agreement (the “ Agreement ”). I am aware by the terms of the Five Below, Inc. Amended and Restated Equity Incentive Plan (the “ Plan ”) and the Agreement that the transfer of the stock option awarded pursuant to the Agreement (the “ Option ”) is restricted. I hereby consent to such restrictions, approve of the provisions of the Agreement, and agree that if I pre‑decease my spouse, the successors of my community property or other interest (if any) in such Option or shares will hold such shares subject to the provisions of the Agreement. In consideration of the grant of the Option as set forth in that Agreement, I hereby appoint my spouse as my attorney-in-fact with respect to the exercise of any rights under the Agreement and agree to be bound by the provisions of the Agreement insofar as I may have any rights in said Agreement or any shares issued pursuant thereto under the community property laws or similar laws relating to marital property.
______________________________
Signature of Spouse
______________________________
Date







Exhibit 10.4
FIVE BELOW, INC.
AMENDED AND RESTATED EQUITY INCENTIVE PLAN
NON-QUALIFIED STOCK OPTION AGREEMENT
Five Below, Inc. (the “Company”) hereby grants to [__________] (the “Optionee”) an option (the “Option”) to purchase a total of [_________] shares of Common Stock of the Company (the “Option Shares”), at the price and on the terms set forth herein, and in all respects subject to the terms, definitions and provisions of the Five Below, Inc. Amended and Restated Equity Incentive Plan (the “Plan”) applicable to non-qualified stock options, which terms and provisions are hereby incorporated by reference herein. Unless the context herein otherwise requires, the terms defined in the Plan shall have the same meanings when used herein.
1.      Nature of the Option. This Option is intended to be a nonstatutory stock option and is not intended to be an Incentive Stock Option within the meaning of section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), or to otherwise qualify for any special tax benefits to the Optionee.
2.      Date of Grant; Term of Option. This Option is granted this [______] day of [________, 20__] (the “Date of Grant”) and it may not be exercised later than the date that is ten (10) years after the Date of Grant, subject to earlier termination, as provided in the Plan or Section 5 hereof. For purposes of this Agreement, the term “Effective Date of Grant” shall mean [__________, 20__].
3.      Option Exercise Price. The Option exercise price is [$_______] per Share.
4.      Exercise of Option. This Option shall be exercisable during its term only in accordance with the terms and provisions of the Plan and this Award Agreement as follows:
(a)      Right to Exercise.
(i) In General . Subject to Section 4(a)(ii) and 4(a)(iii) of this Option, the Option will vest and become exercisable according to the following schedule:
If the Optionee has remained an active employee of the Company or an Affiliate of the Company from the Effective Date of Grant to the:
Then the Option will vest and become exercisable with respect to:
Second Anniversary of the Effective Date of Grant
50% of the Option Shares
Third Anniversary of the Effective Date of Grant
An additional 25% of the Option Shares
Fourth Anniversary of the Effective Date of Grant
The remaining 25% of the Option Shares

(ii) Accelerated Vesting on Change in Control . In the event of a Change in Control, the Option will vest and become fully exercisable with respect to all then unvested Option Shares, as of the date of such Change in Control.

(iii) Accelerated Vesting for Certain Terminations . If the Optionee ceases to be employed by the Company (and its Affiliates, as applicable) after the first anniversary of the Effective Date of Grant and prior to the Second Anniversary as a result of: (i) his or her Disability, (ii) his or her death or (iii) a termination by the Company (or its Affiliate(s), as applicable) without Cause, then





the Option will vest and become exercisable with respect to twenty five percent (25%) of the Option Shares and will remain exercisable for the applicable time period provided in Section 5.

(b)      Method of Exercise. The Optionee may exercise this Option by providing written notice stating the election to exercise this Option. Such written notice must be signed by the Optionee and must be delivered in person or by certified mail to the Secretary of the Company or such other person as may be designated by the Company. The written notice must be accompanied by payment of the option exercise price in the manner described in Section 4(c), and by any other agreements required by the Board or its Committee and/or the terms of the Plan. This Option will be deemed to be exercised only upon the receipt by the Company of such written notice, payment of the option exercise price and any other agreements required by the Board or its Committee, the terms of the Plan and/or this Award Agreement. The Optionee will have no right to vote or receive dividends and will have no other rights as a stockholder with respect to such Shares notwithstanding the exercise of this Option, until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate(s) evidencing Shares that are being issued upon exercise of this Option. The certificate(s) for the Shares will be registered in the name of the Optionee and will contain any legend as may be required under the Plan, this Award Agreement, and/or applicable law.
(c)      Method of Payment . The method of payment of the option exercise price will be determined by the Board or its Committee and may consist entirely of cash, certified check, or such other consideration or method of payment as may be authorized under the Plan.
(d)      Partial Exercise . This Option may be exercised in whole or in part; provided , however , that any exercise may apply only with respect to a whole number of Shares.
(e)      Restrictions on Exercise . This Option may not be exercised if the issuance of these Shares upon such exercise would constitute a violation of any applicable federal or state securities laws or other laws or regulations. In addition, as a further condition to the exercise of this Option, the Company may require the Optionee to make any representation or warranty to the Company as may be required by or advisable under any applicable law or regulation.
5.      Termination of Relationship with the Company.
(a)      Voluntary Termination. If the Optionee terminates his or her employment with the Company (and its Affiliates, as applicable) for any reason other than death or Disability, the Option (to the extent exercisable at the time of such termination) may be exercised at any time within ninety (90) days after the date of such termination. To the extent that the Option is not exercisable at the time of such termination, or to the extent the Option is not exercised within the time specified herein, the Option shall terminate.
(b)      Disability. If the Optionee's employment by the Company (and its Affiliates, as applicable) terminates due to Disability, the Option (to the extent exercisable at the time of such termination) may be exercised by the Optionee or his or her legal guardian or representative at any time within twelve (12) months after such termination. To the extent that the Option is not exercisable on the date of termination, or to the extent the Option is not exercised within the time specified herein, the Option shall terminate.
(c)      Death. If the Optionee's employment by the Company (and its Affiliates, as applicable) terminates due to his or her death, the Option (to the extent exercisable at the time of such death) will remain exercisable for twelve (12) months after the date of death by the Optionee's estate or by





a person who acquired the right to exercise the Option by bequest or inheritance. To the extent that the Option is not exercisable on the date of death, or to the extent the Option is not exercised within the time specified herein, the Option shall terminate.
(d)      Termination Without Cause. If the Company (or its Affiliate(s), as applicable) terminates Optionee's employment with the Company (and its Affiliates, as applicable) without Cause, the Option (to the extent exercisable at the time of such termination) may be exercised at any time within ninety (90) days after the date of such termination. To the extent that the Option is not exercisable at the time of such termination, or to the extent the Option is not exercised within the time specified herein, the Option shall terminate.
(e)      Termination for Cause. If the Company (or its Affiliate(s), as applicable) terminates Optionee's employment with the Company (and its Affiliates, as applicable) for Cause, the Option will then terminate immediately and automatically, and the Optionee shall have no further rights therein.
Notwithstanding any other provision of this Section 5, the Option shall not be exercisable after the expiration of the term set forth in Section 2 hereof.
6.      Non‑Transferability of Option. This Option may not be sold, pledged, assigned, hypothecated, gifted, transferred or disposed of in any manner either voluntarily or involuntarily by operation of law, other than by will or by the laws of descent or distribution. During the Optionee's lifetime, this Option is exercisable only by the Optionee (or by such Optionee's legal guardian or representative as provided in Section 5). Subject to the foregoing and the terms of the Plan, the terms of this Option will be binding upon the executors, administrators, legal guardians, representatives and heirs of the Optionee, meaning for purposes of this Award Agreement, both testamentary heirs and heirs by intestacy.
7.      No Continuation of Employment or Engagement. Neither the Plan nor this Option shall confer upon any Optionee any right to continue in the service of the Company or any of its Affiliates or limit, in any respect, the right of the Company (or its Affiliates, as applicable) to discharge the Optionee at any time, with or without Cause and with or without notice.
8.      Withholding. The Company and its Affiliates reserve the right to withhold, in accordance with any applicable laws, from any consideration payable or property transferable to Optionee any taxes required to be withheld by federal, state or local law as a result of the grant or exercise of this Option or the sale or other disposition of the Shares. If the amount of any consideration payable to the Optionee is insufficient to pay such taxes or if no consideration is payable to the Optionee, upon the request of the Company or its Affiliate, the Optionee (or such other person entitled to exercise this Option pursuant to Section 5 hereof) will pay to the Company or its Affiliate (as applicable) an amount sufficient for the Company or its Affiliate to satisfy any federal, state or local tax withholding requirements applicable to and as a condition to the grant or exercise of this Option or the sale or other disposition of the Shares issued upon the exercise of this Option.
9.      The Plan. The Optionee has received a copy of the Plan (a copy of which is attached hereto), has read the Plan and is familiar with its terms, and hereby accepts the Option subject to all of the terms and provisions of the Plan, as amended from time to time. Pursuant to the Plan, the Board or its Committee is authorized to interpret the Plan and to adopt rules and regulations not inconsistent with the Plan as it deems appropriate. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board or its Committee upon any questions arising under the Plan.





10.      Spousal Consent. As a condition to the effectiveness of the grant of the Option, the Optionee's spouse (if any) is required to execute the attached “Consent of Spouse.”
11.      Governing Law. This Award Agreement will be construed in accordance with the laws of the Commonwealth of Pennsylvania, without regard to the application of the principles of conflicts of laws.
12.      Amendment. Subject to the provisions of the Plan, this Award Agreement may be amended at any time by the Company or its delegate; provided, however, that any modification or amendment of this Award Agreement which adversely affects the Optionee shall require the written consent of the Optionee.
13.      Entire Agreement. This Award Agreement, together with the Plan and the other exhibits attached thereto or hereto, represents the entire agreement between the parties hereto relating to the subject matter hereof, and merges and supersedes all prior and contemporaneous discussions, agreements and understandings of every nature relating to the award of Options to Optionee by the Company.
[ signature page follows ]









IN WITNESS WHEREOF, this Award Agreement has been executed by the parties on the date(s) indicated below.
FIVE BELOW, INC.
By:      ____________________________________


Name:      ____________________________________


Title:      ____________________________________


Date: ____________________________________


OPTIONEE


__________________________________________
Signature

__________________________________________
Address

__________________________________________


Date: ____________________________________












ACKNOWLEDGMENT
The Optionee acknowledges receipt of a copy of the Plan, a copy of which is attached hereto, and represents that he or she has read and is familiar with the terms and provisions thereof and hereby accepts this Option subject to all of the terms and provisions of the Award Agreement and the Five Below, Inc. Equity Incentive Plan (the “Plan”). The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board or the Committee upon any questions arising under the Plan.
Date: ____________________          _________________________
Signature of Optionee
_________________________
Name of Optionee

_________________________
Address
_________________________
City, State, Zip Code















CONSENT OF SPOUSE


I, , spouse of [______________], have read the foregoing Non-Qualified Stock Option Agreement (the “ Agreement ”). I am aware by the terms of the Five Below, Inc. Amended and Restated Equity Incentive Plan (the “ Plan ”) and the Agreement that the transfer of the stock option awarded pursuant to the Agreement (the “ Option ”) is restricted. I hereby consent to such restrictions, approve of the provisions of the Agreement, and agree that if I pre‑decease my spouse, the successors of my community property or other interest (if any) in such Option or shares will hold such shares subject to the provisions of the Agreement. In consideration of the grant of the Option as set forth in that Agreement, I hereby appoint my spouse as my attorney-in-fact with respect to the exercise of any rights under the Agreement and agree to be bound by the provisions of the Agreement insofar as I may have any rights in said Agreement or any shares issued pursuant thereto under the community property laws or similar laws relating to marital property.
______________________________
Signature of Spouse
______________________________
Date




Exhibit 10.5


THIRD AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
by and between
FIVE BELOW, INC.,
as Borrower,
and
FIVE BELOW MERCHANDISING, INC.,
as Original Guarantor,
and
WELLS FARGO BANK, NATIONAL ASSOCIATION ,
as Lender
Dated: June 12, 2013








TABLE OF CONTENTS
 
 
 
Page
Section 1.
DEFINITIONS
1

 
 
 
Section 2.
CREDIT FACILITIES
29

2.1.
Revolving Loans
29

2.2.
Letters of Credit
30

2.3.
Mandatory Prepayments
31

2.4.
Cash Dominion; Borrower Account Protocols
32

 
 
 
Section 3.
INTEREST AND FEES
33

3.1.
Interest
33

3.2.
Letter of Credit Fees
34

3.3.
Changes in Laws and Increased Costs of Loans.
34

 
 
 
Section 4.
CONDITIONS PRECEDENT AND POST-CLOSING DELIVERIES
35

4.1.
Conditions Precedent to Initial Revolving Loans and Letters of Credit
35

4.2.
Conditions Precedent to All Revolving Loans and Letters of Credit
37

4.3.
Post-Closing Deliveries
37

 
 
 
Section 5.
GRANT AND PERFECTION OF SECURITY INTEREST
37

5.1.
Continuing Grant of Security Interest
37

5.2.
Excluded Collateral
39

5.3.
Perfection of Security Interests
40

 
 
 
Section 6.
COLLECTION AND ADMINISTRATION
43

6.1.
Borrower's Loan Accounts
43

6.2.
Statements
44

6.3.
Collection of Accounts
44

6.4.
Payments
45

6.5.
Taxes
46

6.6.
Authorization to Make Revolving Loans
47

6.7.
Use of Proceeds
47

 
 
 
Section 7.
COLLATERAL REPORTING AND COVENANTS
48

7.1.
Collateral Reporting
48

7.2.
Accounts Covenants
49

7.3.
General Inventory Covenants
50





7.4.
Periodic Appraisals
51

7.5.
Power of Attorney
51

7.6.
Right to Cure
52

7.7.
Access to Premises; Periodic Field Audits
52

 
 
 
Section 8.
REPRESENTATIONS AND WARRANTIES
53

8.1.
Corporate Existence, Power and Authority
53

8.2.
Name; State of Organization; Chief Executive Office; Collateral Locations
53

8.3.
Financial Statements; No Material Adverse Change
54

8.4.
Priority of Liens; Title to Properties
54

8.5.
Tax Returns
54

8.6.
Litigation
55

8.7.
Compliance with Other Agreements and Applicable Laws
55

8.8.
Environmental Compliance
55

8.9.
Credit Card Agreements
56

8.10.
Employee Benefits
57

8.11.
Bank Accounts
57

8.12.
Intellectual Property
57

8.13.
Subsidiaries; Affiliates; Capitalization; Solvency
57

8.14.
Labor Disputes
58

8.15.
Material Contracts
58

8.16.
Payable Practices
58

8.17.
Accuracy and Completeness of Information
58

8.18.
Survival of Warranties; Cumulative
59

 
 
 
Section 9.
AFFIRMATIVE AND NEGATIVE COVENANTS
59

9.1.
Maintenance of Existence
59

9.2.
New Collateral Locations
59

9.3.
Compliance with Laws, Regulations, Etc.
59

9.4.
Payment of Taxes and Claims
60

9.5.
Insurance
60

9.6.
Financial Statements and Other Notices.
61

9.7.
Sale of Assets, Consolidation, Merger, Dissolution, Etc.
63

9.8.
Encumbrances
65

9.9.
Indebtedness
68

9.10.
Loans, Investments, Etc.
70

9.11.
Restricted Payments
70

9.12.
[Reserved]
71

9.13.
Compliance with ERISA
71

9.14.
End of Fiscal Years; Fiscal Quarters
71





9.15.
Credit Card Agreements
71

9.16.
Change in Business
72

9.17.
License Agreements.
72

9.18.
Foreign Assets Control Regulations, Etc.
72

9.19.
Leased Personal Property
73

9.20.
Costs and Expenses
73

9.21.
Further Assurances
73

9.22.
Minimum Excess Collateral Availability
74

9.23.
Sale and Leaseback Transactions
74

9.24.
Additional Collateral; Additional Guarantors.
74

 
 
 
Section 10.
EVENTS OF DEFAULT AND REMEDIES
76

10.1.
Events of Default
76

10.2.
Remedies.
78

 
 
 
Section 11.
GUARANTEE
81

11.1.
The Guarantee
81

11.2.
Obligations Unconditional
82

11.3.
Reinstatement
83

11.4.
Subrogation; Subordination
83

11.5.
Remedies
83

11.6.
Instrument for the Payment of Money
84

11.7.
Continuing Guarantee
84

11.8.
General Limitation on Guaranteed Obligations
84

11.9.
Release of Guarantors
84

11.10.
Right of Contribution
84

 
 
 
Section 12.
JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW.
85

12.1.
Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver.
85

12.2.
Waiver of Notices
86

12.3.
Amendments and Waivers
86

12.4.
Waiver of Counterclaims
86

12.5.
Indemnification
86

12.6.
Waiver of Special Damages
87

 
 
 
Section 13.
TERM OF AGREEMENT; MISCELLANEOUS
87

13.1.
Term.
87

13.2.
Interpretative Provisions.
88

13.3.
Notices
89





13.4.
Partial Invalidity
90

13.5.
Successors
90

13.6.
Assignments; Participations
90

13.7.
Entire Agreement
91

13.8.
USA Patriot Act
91

13.9.
Counterparts, Etc.
91

13.10.
Release
91

13.11.
Intercreditor Agreement.
92

13.12.
Borrower Authorized.
92

 
 
 





INDEX
TO
EXHIBITS AND SCHEDULES
Exhibit A
Form of Borrowing Base Certificate
Exhibit B
Information Certificate
Exhibit C
Form of Covenant Compliance Certificate
Exhibit D
Form of Intercreditor Agreement
Exhibit E
Form of Intercompany Note
Exhibit F
Form of Joinder Agreement
Schedule 1.30
Credit Card Agreements
Schedule 1.36
Customs Brokers






THIRD AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
This Third Amended and Restated Loan and Security Agreement dated June 12, 2013 (this “Agreement”) is entered into by and between FIVE BELOW, INC., a Pennsylvania corporation (the “Borrower”), FIVE BELOW MERCHANDISING, INC., a Pennsylvania corporation (the “Original Guarantor”), and WELLS FARGO BANK, NATIONAL ASSOCIATION, a national banking association, as successor by merger to Wachovia Bank, N.A. (the “Lender”).
W I T N E S S E T H:
WHEREAS, Borrower and Lender are parties to that certain Second Amended and Restated Loan and Security Agreement dated May 16, 2012 (as amended from time to time, the “Original Loan Agreement”); and
WHEREAS, Borrower and Lender have agreed to modify the Original Loan Agreement in accordance with the terms referenced herein; and
WHEREAS, this Agreement shall be an amendment and restatement of and substitution for the Original Loan Agreement, but shall in no way be construed as a repayment, novation or satisfaction of the Obligations as defined in the Original Loan Agreement;
WHEREAS, the Obligations and all Collateral securing the Obligations under the Original Loan Agreement and this Agreement are and shall at all times be deemed to be continuous;
NOW, THEREFORE, in consideration of the mutual conditions and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Original Loan Agreement is hereby amended and restated in its entirety and the parties hereto agree as follows:




SECTION 1. DEFINITIONS
For purposes of this Agreement, the following terms shall have the respective meanings given to them below:
1.1.      “ABL Priority Collateral” shall mean the “Revolving Facility First Lien Collateral” as defined in the Intercreditor Agreement.
1.2.      “Accounts” shall mean all present and future rights of any Loan Party to payment of a monetary obligation, whether or not earned by performance, which is not evidenced by chattel paper or an instrument, (a) for property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of, (b) for services rendered or to be rendered, (c) for a secondary obligation incurred or to be incurred, or (d) consisting of Credit Card Receivables.
1.3.      “Adjusted Borrowing Base” shall mean, at any time, the amount equal to the Borrowing Base minus the Minimum Excess Collateral Availability.
1.4.      “Affiliate” shall mean, with respect to a specified Person, any other Person which directly or indirectly, through one or more intermediaries, controls or is controlled by or is under common control with such Person, and without limiting the generality of the foregoing, includes (a) any Person which beneficially owns or holds ten percent (10%) or more of any class of Voting Stock of such Person or other equity interests in such Person, and (b) any Person of which such Person beneficially owns or holds ten percent (10%) or more of any class of Voting Stock or in which such Person beneficially owns or holds ten percent (10%) or more of the equity interests. For the purposes of this definition, the term “control” (including with correlative meanings, the terms “controlled by” and “under common control with”), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of Voting Stock, by agreement or otherwise.
1.5.      “Applicable L/C Rate” shall mean, at any time, the rate equal to the LMIR Rate, plus the applicable percentage set forth in the definition of “Applicable Margin” for LMIR Rate Loans.
1.6.      “Applicable Margin” shall mean, at any time, as to the Interest Rate for LMIR Rate Loans and the Interest Rate for Prime Rate Loans, the applicable percentage (on a per annum basis) set forth below if the Borrower’s Quarterly Average Excess Availability for the immediately preceding Fiscal Quarter is at or within the amounts indicated for such percentage as of the last day of the immediately preceding calendar quarter :




Quarterly Average Excess Availability
Applicable Margin for LMIR Rate Loans
Applicable Margin for Prime Rate Loans
Availability: less than 33% of then effective Maximum Credit
2.25%
1.25%
Availability: less than 75% but greater than or equal to 33% of then effective Maximum Credit
2.00%
1.00%
Availability: greater than or equal to 75% of then effective Maximum Credit
1.75%
0.75%

provided , that , (i) the Applicable Margin shall be calculated and established once each calendar quarter and shall remain in effect until adjusted thereafter after the end of such calendar quarter, (ii) each adjustment of the Applicable Margin shall be effective as of the first day of a calendar quarter based on the Quarterly Average Excess Availability for the immediately preceding calendar quarter and (iii) notwithstanding anything herein to the contrary, the Applicable Margin beginning as of the Closing Date through the Fiscal Quarter ending July 31, 2013 shall be 1.75% for LMIR Rate Loans and 0.75% for Prime Rate Loans.
1.7.      “Asset Sale” shall mean any Disposition of any property by any Loan Party. Notwithstanding the foregoing, none of the following shall constitute “Asset Sales”; (a) any Disposition of assets permitted by, or expressly referred to in, Section 9.7 (other than Section 9.7(b)(viii)); (b) so long as the Term Loan Agreement is in effect, any Disposition of the Term Priority Collateral; and (c) any Disposition of any property by any Loan Party for fair market value resulting in less than $250,000 in Net Cash Proceeds per Disposition (or series of related Dispositions) and less than $750,000 in Net Cash Proceeds in any Fiscal Year.
1.8.      “Attributable Indebtedness” shall mean, when used with respect to any Sale and Leaseback Transaction by any Loan Party, as at the time of determination, the present value (discounted at a rate equivalent to such Loan Party’s then-current weighted average cost of funds for borrowed money as at the time of determination, compounded on a semi-annual basis) of the total obligations of the lessee for rental payments (and substantially similar payments) during the remaining term of the lease included in any such Sale and Leaseback Transaction.
1.9.      “Bank Product Provider” shall mean Lender, an Affiliate of Lender, or any other financial institution (but in the case of an Affiliate of Lender or any other financial institution, only to the extent approved by Lender) that provides any Bank Products to Borrower.
1.10.      “Bank Products” shall mean any one or more of the following types or services or facilities provided to Borrower by a Bank Product Provider: (a) credit cards or stored value cards or (b) cash management or related services, including (i) the automated clearinghouse transfer of funds for the account of Borrower pursuant to agreement or overdraft for any accounts of Borrower maintained at any Bank Product Provider that are subject to the




control of Lender pursuant to any Deposit Account Control Agreement to which Lender or any Affiliate of Lender is a party, as applicable, and (ii) controlled disbursement services and (iii) Hedge Agreements if and to the extent permitted hereunder.
1.11.      “Bankruptcy Code” means the United States Bankruptcy Code (11 U.S.C. § 101, et seq.), as amended, and any successor statute.
1.12.      “Borrower” shall mean Five Below, Inc., a Pennsylvania corporation, in its capacity as Borrower under this Agreement.
1.13.      “Borrowing Base” shall mean, at any time, the amount equal to: ninety percent (90%) of the Eligible Credit Card Receivables of Borrower, plus ninety percent (90%) of the Net Recovery Percentage of Eligible Inventory of Borrower multiplied by the Value thereof, minus Reserves attributable to Borrower.
1.14.      “Borrowing Base Certificate” shall mean a certificate substantially in the form of Exhibit “A” hereto, as such form may from time to time be modified by Lender, which is duly completed (including all schedules thereto) and executed by the Senior Vice President of Finance or other chief financial officer of Borrower and delivered to Lender.
1.15.      “Business Day” shall mean any day other than a Saturday, Sunday, or other day on which commercial banks are authorized or required to close under the laws of the Commonwealth of Pennsylvania, and a day on which Lender is open for the transaction of business, except that if a determination of a Business Day shall relate to any LMIR Rate Loans, the term Business Day shall also exclude any day on which banks are closed for dealings in dollar deposits in the London interbank market or other applicable Eurodollar Rate market.
1.16.      “Capital Expenditures” shall mean all expenditures for, or contracts for expenditures for, any fixed or capital assets or improvements, or for replacements, substitutions or additions thereto, which have a useful life of more than one (1) year, including, but not limited to, the direct or indirect acquisition of such assets by way of offset items or otherwise and shall include the principal amount of capitalized lease payments during the applicable period.
1.17.      “Capital Leases” shall mean, with respect to any Person, any lease of (or any agreement conveying the right to use) any property by such person as lessee (whether real, personal or mixed) which in accordance with GAAP, is required to be reflected as a liability on such person’s balance sheet.
1.18.      “Capital Stock” shall mean, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of such Person’s capital stock or other equity interests at any time outstanding, and any and all rights, warrants or options exchangeable for or convertible into such capital stock or other interests (but excluding any debt security that is exchangeable for or convertible into such capital stock).
1.19.      “Cash Dominion Event” shall mean the occurrence of either: (a) an Event of Default under this Agreement; or (b) the failure of the Borrower at any time during any Non-




Peak Period to maintain Excess Borrowing Availability greater than or equal to twenty percent (20%) of the then-effective Maximum Credit.
1.20.      “Cash Dominion Period” shall mean, with respect to any Cash Dominion Event, the period beginning as of the occurrence of such Cash Dominion Event and ending after the Borrower has maintained ninety (90) consecutive days during which (a) Excess Borrowing Availability is greater than or equal to thirty-five percent (35%) of the then-effective Maximum Credit; and (b) no Event of Default has occurred or is continuing.
1.21.      “Cash Equivalents” shall mean, as of any date of determination, as to any Person, any of the following: (a) securities issued, or directly, unconditionally and fully guaranteed or insured, by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support thereof) having maturities of not more than one year from the date of acquisition by such person, (b) time deposits and certificates of deposit or bankers’ acceptances of Lender or any commercial bank having, or which is the principal banking subsidiary of a bank holding company organized under the laws of the United States of America, any state or commonwealth thereof or the District of Columbia having, capital and surplus aggregating in excess of $250,000,000 and a rating of “A” (or such other similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act of 1933, as amended from time to time, and any successor statute) with maturities of not more than one year from the date of acquisition by such person, (c) commercial paper issued by any person meeting the qualifications specified in clause (b) above, or incorporated in the United States of America rated at least A-1 or the equivalent thereof by Standard & Poor’s Rating Service or Fitch Rating Limited or at least P-1 or the equivalent thereof by Moody’s Investors Service Inc., and in each case maturing not more than one year after the date of acquisition by such person, (d) repurchase obligations with a term of not more than thirty (30) days for underlying securities of the types described in clause (a) above entered into with any financial institution having combined capital and surplus and undivided profits of not less than $1,000,000,000, (e) repurchase agreements and reverse repurchase agreements relating to marketable direct obligations issued or unconditionally guaranteed by the United States of America or issued by any governmental agency thereof and backed by the full faith and credit of the United States of America, in each case maturing within ninety (90) days or less from the date of acquisition; provided, that, the terms of such agreements comply with the guidelines set forth in the Federal Financial Agreements of Depository Institutions with Securities Dealers and Others, as adopted by the Comptroller of the Currency on October 31, 1985, (f) shares of any money market mutual fund that (i) has substantially all of its assets invested continuously in the types of investments referred to in clauses (a) through (e) above, and (ii) has the highest rating obtainable from either Standard & Poor’s Rating Service or Moody’s Investors Service Inc., and (e) demand deposit accounts maintained in the ordinary course of business.
1.22.      “Casualty Event” shall mean any loss of title (other than through a consensual Disposition of such property in accordance with this Agreement) or any loss of or damage to or any destruction of, or any condemnation or other taking (including by any Governmental Authority) of, any property of any Loan Party. “Casualty Event” shall include any




taking of all or any part of any Real Property of any person or any part thereof, in or by condemnation or other eminent domain proceedings pursuant to any Legal Requirement, or by reason of the temporary requisition of the use or occupancy of all or any part of any Real Property of any person or any part thereof by any Governmental Authority, or any settlement in lieu thereof. Notwithstanding the foregoing, “Casualty Event” shall not include the loss of title or loss of or damage to or any destruction of, or any condemnation or other taking (including by any Governmental Authority) of, (a) any property of any Loan Party with a fair market value of less than $700,000 in Net Cash Proceeds per such event and less than $1,500,000 in Net Cash Proceeds in any Fiscal Year; and (b) so long as the Term Loan Agreement is in effect, the Term Priority Collateral.
1.23.      “Change of Control” shall mean (a) the transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of Borrower to any Person or group (as such term is used in Section 13(d)(3) of the Exchange Act); (b) the liquidation or dissolution of Borrower or the adoption of a plan by the stockholders of Borrower relating to the dissolution or liquidation of Borrower; (c) any Person or group (as such term is used in Section 13(d)(3) of the Exchange Act), other than Permitted Investors shall have acquired beneficial ownership of more than 35 percent of the voting power of the outstanding Voting Stock of the Borrower; or (d) any Person or group (as such term is used in Section 13(d)(3) of the Exchange Act) other than Permitted Investors shall have acquired beneficial ownership of sufficient voting power of the outstanding Voting Stock such that such Person or group becomes entitled to name or replace a voting majority of the Board of Directors.
1.24.      “Closing Date” shall mean June 12, 2013.
1.25.      “Code” shall mean the Internal Revenue Code of 1986, as the same now exists or may from time to time hereafter be amended, modified, recodified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto.
1.26.      “Collateral” shall have the meaning set forth in Section 5.1 hereof.
1.27.      “Collateral Access Agreement” shall mean an agreement in writing, in form and substance satisfactory to Lender, from any lessor of premises to any Loan Party, or any other person to whom any Collateral is consigned or who has custody, control or possession of any such Collateral or is otherwise the owner or operator of any premises on which any of such Collateral is located, in favor of Lender with respect to the Collateral at such premises or otherwise in the custody, control or possession of such lessor, consignee or other person.
1.28.      “Commitment” shall mean the Lender’s commitment to provide the Credit Facility.
1.29.      “Credit Card Acknowledgments” shall mean, collectively, the agreements in favor of Lender, by Credit Card Issuers or Credit Card Processors who are parties to Credit Card Agreements, acknowledging Lender’s first priority security interest in the monies due and to become due to any Loan Party (including, without limitation, credits and reserves) under the Credit Card Agreements, and agreeing to transfer all such amounts to the Payment Account, as




the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced.
1.30.      “Credit Card Agreements” shall mean all agreements now or hereafter entered into by any Loan Party with any Credit Card Issuer or any Credit Card Processor, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, including, but not limited to, the agreements listed on Schedule 1.30 hereto.
1.31.      “Credit Card Issuer” shall mean any person (other than a Loan Party) who issues or whose members issue credit cards, including, without limitation, MasterCard or VISA bank credit or debit cards or other bank credit or debit cards issued through MasterCard International, Inc., Visa, U.S.A., Inc. or Visa International and American Express, Discover, Diners Club, Carte Blanche and other non-bank credit or debit cards, including, without limitation, credit or debit cards issued by or through American Express Travel Related Services Company, Inc. or Novus Services, Inc.
1.32.      “Credit Card Processor” shall mean any servicing or processing agent or any factor or financial intermediary who facilitates, services, processes or manages the credit authorization, billing transfer and/or payment procedures with respect to a Loan Party’s sales transactions involving credit card or debit card purchases by customers using credit cards or debit cards issued by any Credit Card Issuer.
1.33.      “Credit Card Receivables” shall mean, collectively, (a) all present and future rights of Borrower to payment from any Credit Card Issuer, Credit Card Processor or other third party arising from sales of goods or rendition of services to customers who have purchased such goods or services using a credit or debit card and (b) all present and future rights of Borrower to payment from any Credit Card Issuer, Credit Card Processor or other third party in connection with the sale or transfer of Accounts arising pursuant to the sale of goods or rendition of services to customers who have purchased such goods or services using a credit card or a debit card, including, but not limited to, all amounts at any time due or to become due from any Credit Card Issuer or Credit Card Processor under the Credit Card Agreements or otherwise.
1.34.      “Credit Facility” shall mean the Revolving Loans and Letters of Credit provided to or for the benefit of Borrower pursuant to Sections 2.1 and 2.2 hereof.
1.35.      “Current Borrowing Base Report” shall have the meaning set forth in Section 7.1 (a)(i) hereof.
1.36.      “Customs Broker” shall mean any person listed on Schedule 1.36 hereto or such other person selected by a Loan Party after written notice by Borrower to Lender who is reasonably acceptable to Lender to perform port of entry services to process Inventory imported by Borrower or one of its Subsidiaries from outside the United States of America and to supply facilities, labor and materials to Borrower or its Subsidiaries in connection therewith.
1.37.      “DACA Account” shall mean any deposit or other bank account of any Loan Party subject to a Deposit Account Control Agreement.




1.38.      “DACA Account Bank” shall mean a Non-Wells Fargo Account Bank with which any Loan Party and Lender have entered into a Deposit Account Control Agreement.
1.39.      “Default” shall mean an act, condition or event which with notice or passage of time or both would constitute an Event of Default.
1.40.      “Deposit Account Control Agreement” shall mean an agreement in writing, in form and substance satisfactory to Lender, by and among Lender, any Loan Party and any bank at which such Loan Party maintains a deposit account, which provides that such bank will comply with instructions originated by Lender directing disposition of the funds in the deposit account without further consent by such Loan Party and has such other terms and conditions as Lender may reasonably require.
1.41.      “Discretionary DACA Protocol Event” shall mean the Borrower’s maintenance of Excess Borrowing Availability at any time during any Non-Peak Period less than thirty-five percent (35%) but greater than or equal to twenty percent (20%) of the then-effective Maximum Credit.
1.42.      “Disposition” shall mean, with respect to any property, any conveyance, sale, lease, sublease, assignment, transfer or other disposition of such property.
1.43.      “Disregarded Domestic Person” shall mean any direct or indirect Domestic Subsidiary that is treated as a disregarded entity for United States federal income tax purposes if substantially all of its assets consist of the equity of one or more direct or indirect Foreign Subsidiaries.
1.44.      “Distribution Center” shall mean the approximately 600,000 square foot distribution center located in Olive Branch, Mississippi leased by Borrower under a lease agreement expiring in 2022 with options to renew for three successive five-year periods.
1.45.      “Domestic Subsidiary” shall mean any Subsidiary other than a Foreign Subsidiary.
1.46.      “Eligible Credit Card Receivables” shall mean Credit Card Receivables of Borrower which are and continue to be acceptable to Lender, in each case based on the criteria set forth below as determined by Lender in good faith. Credit Card Receivables shall be Eligible Credit Card Receivables if:
(a)      such Credit Card Receivables arise from the actual and bona fide sale and delivery of goods or rendition of services by Borrower in the ordinary course of the business of Borrower which transactions are completed in accordance with the terms and provisions contained in any agreements binding on Borrower or the other party or parties related thereto;
(b)      such Credit Card Receivables are not past due (beyond any stated applicable grace period, if any, therefor) pursuant to the terms set forth in the Credit Card




Agreements with the Credit Card Issuer or Credit Card Processor of the credit card or debit card used in the purchase which give rise to such Credit Card Receivables;
(c)      such Credit Card Receivables are not unpaid more than five (5) Business Days after the date of the sale of Inventory giving rise to such Credit Card Receivables;
(d)      all material procedures required by the Credit Card Issuer or the Credit Card Processor of the credit card or debit card used in the purchase which gave rise to such Credit Card Receivables shall have been followed by Borrower and all documents required for the authorization and approval by such Credit Card Issuer or Credit Card Processor shall have been obtained in connection with the sale giving rise to such Credit Card Receivables;
(e)      the required authorization and approval by such Credit Card Issuer or Credit Card Processor shall have been obtained for the sale giving rise to such Credit Card Receivables;
(f)      Borrower shall have submitted all materials required by the Credit Card Issuer or Credit Card Processor obligated in respect of such Credit Card Receivables in order for Borrower to be entitled to payment in respect thereof;
(g)      the Credit Card Issuer or Credit Card Processor obligated in respect of such Credit Card Receivable has not failed to remit any monthly payment in respect of such Credit Card Receivable;
(h)      such Credit Card Receivables comply with the applicable terms and conditions contained in Section 7.2 of this Agreement;
(i)      the Credit Card Issuer or Credit Card Processor with respect to such Credit Card Receivables has not asserted a counterclaim, defense or dispute and does not have, and does not engage in transactions which may give rise to, any right of setoff against such Credit Card Receivables (other than setoffs to fees and chargebacks consistent with the practices of such Credit Card Issuer or Credit Card Processor with Borrower as of the date hereof or as such practices may change as a result of changes to the policies of such Credit Card Issuer or Credit Card Processor applicable to its customers generally and unrelated to the circumstance of Borrower); provided , that the portion of the Credit Card Receivables owing by such Credit Card Issuer or Credit Card Processor in excess of the amount asserted to be owing or owing by Borrower to such Credit Card Issuer or Credit Card Processor pursuant to such setoffs, fees and chargebacks may be deemed Eligible Credit Card Receivables;
(j)      the Credit Card Issuer or Credit Card Processor with respect to such Credit Card Receivables has not set off against amounts otherwise payable by such Credit Card Issuer or Credit Card Processor to Borrower for the purpose of establishing a reserve or collateral for obligations of Borrower to such Credit Card Issuer or Credit Card Processor (notwithstanding that the Credit Card Issuer or Credit Card Processor may have setoffs for fees and chargebacks consistent with the practices of such Credit Card Issuer or Credit Card Processor with Borrower as of the date hereof or as such practices may hereafter change as a




result of changes to the policies of such Credit Card Issuer or Credit Card Processor applicable to its customers generally and unrelated to the circumstances of Borrower); provided , that the portion of the Credit Card Receivables owing by such Credit Card Issuer or Credit Card Processor in excess of the amount set off by such Credit Card Issuer or Credit Card Processor to establish such reserves or collateral may be deemed Eligible Credit Card Receivables;
(k)      there are no facts, events or occurrences which would materially impair the validity, enforceability or collectability of such Credit Card Receivables or materially reduce the amount payable or materially delay payment thereunder (other than for setoffs for fees and chargebacks consistent with the practices of such Credit Card Issuer or Credit Card Processor with Borrower as of the date hereof or as such practices may hereafter change as a result of changes to the policies of such Credit Card Issuer or Credit Card Processor applicable to its customers generally and unrelated to the circumstances of Borrower);
(l)      such Credit Card Receivables are subject to the first priority, valid and perfected security interest and lien of Lender, in the sole discretion of Lender, and any goods giving rise thereto are not, and were not at the time of the sale thereof, subject to any security interest or lien in favor of any person other than Lender except as otherwise permitted in this Agreement, in each case subject to and in accordance with the terms and conditions applicable hereunder to any such permitted security interest or lien;
(m)      there are no proceedings or actions which are pending or to the best of Borrower’s knowledge threatened, against the Credit Card Issuers or Credit Card Processors with respect to such Credit Card Receivables which would reasonably be expected to result in any material adverse change in the financial condition of any such Credit Card Issuer or Credit Card Processor;
(n)      such Credit Card Receivables are owed by Credit Card Issuers or Credit Card Processors deemed creditworthy at all times by Lender in good faith;
(o)      no event of default has occurred under the Credit Card Agreement of Borrower with the Credit Card Issuer or Credit Card Processor who has issued the credit card or debit card or handles payments under the credit card or debit card used in the sale which gave rise to such Credit Card Receivables which event of default gives such Credit Card Issuer or Credit Card Processor the right to cease or suspend payments to Borrower, except as may have been waived in writing by such Credit Card Issuer or Credit Card Processor, and the Credit Card Issuer or Credit Card Processor has not sent any written notice of default and/or notice of its intention to cease or suspend payments to Borrower in respect of such Credit Card Receivables, and such Credit Card Agreements are otherwise in full force and effect and constitute the legal, valid, binding and enforceable obligations of the parties thereto;
(p)      the terms of the sale giving rise to such Credit Card Receivables and all practices of Borrower with respect to such Credit Card Receivables comply in all material respects with applicable Federal, State, and local laws and regulations; and




(q)      the customer using the credit card or debit card giving rise to such Credit Card Receivable shall not have returned the merchandise purchased giving rise to such Credit Card Receivable.
General criteria for Eligible Credit Card Receivables may only be changed and any new criteria for Eligible Credit Card Receivables may only be established by Lender in good faith and in accordance with its customary practices for similarly situated borrowers, upon notice to Borrower, based on either: (i) an event, condition or other circumstance arising after the date hereof, or (ii) existing on the date hereof to the extent Lender has no written notice thereof from Borrower prior to the date hereof, in either case under clause (i) or (ii) which adversely affects or could reasonably be expected to adversely affect the Credit Card Receivables in the good faith determination of Lender. Any Credit Card Receivables which are not Eligible Credit Card Receivables shall nevertheless be part of the Collateral.
1.47.      “Eligible In-Transit Inventory” shall mean all finished goods Inventory owned, prepaid or to be owned by Borrower that is not covered by a Letter of Credit and that is or will be in transit from outside of the United States to one of Borrower’s locations in the continental United States, and which (a) as of the date such Inventory becomes owned by Borrower (i) is fully insured, (ii) is subject to a first priority security interest in and lien upon such goods in favor of Lender (except for any possessory lien upon such goods in the possession of handlers, stores of goods, a freight carrier or shipping company securing only the freight charges for the transportation of such goods to Borrower), (iii) all documents, notices, instruments, statements and bills of lading relating thereto, if any, which Lender may deem necessary or desirable to evidence ownership by Borrower and/or to give effect to and protect the liens, security interests and other rights of Lender in connection therewith are delivered to Lender, and (iv) is subject to a Collateral Access Agreement when in the possession, custody or control of any Customs Broker; and (b) are and remain acceptable to Lender for lending purposes in its sole discretion.
1.48.      “Eligible Inventory” shall mean Inventory (including Eligible L/C Inventory) consisting of finished goods held for resale in the ordinary course of the business of Borrower which are acceptable to Lender, in each case based on the criteria set forth below as determined by Lender in good faith. In general, Eligible Inventory shall not include (a) work-in-process; (b) raw materials; (c) spare parts for equipment; (d) packaging and shipping materials; (e) supplies used or consumed in Borrower’s business; (f) Inventory at premises which are not owned or not leased and controlled by Borrower; provided, that, Eligible Inventory shall include (i) Inventory at retail store locations in the United States of America which are leased by Borrower or owned and operated by a person other than Borrower, and (ii) Inventory at retail store locations outside the United States of America which are leased by Borrower or owned and operated by a person other than Borrower and at all other non-retail locations leased by Borrower or owned and operated by a person other than Borrower (both inside and outside of the United States of America), only to the extent that Lender has received a Collateral Access Agreement from the lessor or the owner or operator with respect to such location, and, if required by Lender in the case of this subclause (ii), (A) UCC financing statements (or, in the case of Inventory outside the United States, other evidence of perfection as determined in Lender’s reasonable




discretion) between the lessor or owner and operator, as consignee/bailee, and Borrower, as consignor/bailor, in form and substance satisfactory to Lender, which are duly assigned to Lender and (B) written notice of Lender’s first priority security interest in such Inventory to any lender to the lessor or owner and operator of such location; (g) Inventory which is in transit from outside of the United States to one of Borrower’s locations in the continental United States, other than Eligible In-Transit Inventory; provided, that, in no event shall the Eligible In-Transit Inventory component of Eligible Inventory exceed $500,000 at any one time; (h) Inventory subject to a security interest or lien in favor of any person other than Lender except those security interests or liens (i) permitted in this Agreement that are subordinate to the security interest of Lender pursuant to an intercreditor agreement in form and substance satisfactory to Lender between Lender and the holder of such other security interest or lien, and (ii) arising from time to time in favor of common carriers transporting Inventory from one Borrower location to another for a period of no greater than 5 Business Days; (i) bill and hold goods; (j) Slow Moving Inventory, other than Packaway Inventory; provided, that, (i) any item of Packaway Inventory shall only constitute Eligible Inventory from the date of Borrower’s acquisition of such Inventory until the conclusion of the second selling season to which such item relates and during which Borrower should reasonably hold such item out for sale, immediately following Borrower’s acquisition of such item, and (ii) in no event shall the Value of Packaway Inventory exceed five percent (5%) of Inventory at any one time; (k) Inventory which is not subject to the first priority, valid and perfected security interest of Lender, as determined in the sole discretion of Lender; (l) damaged and/or defective Inventory; (m) returned Inventory which is not held for sale in the ordinary course of business; and (n) Inventory purchased or sold on consignment.
General criteria for Eligible Inventory may only be changed and any new criteria for Eligible Inventory may only be established by Lender in good faith and in accordance with its customary practices for similarly situated borrowers, upon notice to Borrower, based on either: (i) an event, condition or other circumstance arising after the date hereof, or (ii) an event, condition or other circumstance existing on the date hereof to the extent Lender has no written notice thereof from Borrower prior to the date hereof, in either case under clause (i) or (ii) which adversely affects or could reasonably be expected to adversely affect the Inventory in the good faith determination of Lender. Any Inventory which is not Eligible Inventory shall nevertheless be part of the Collateral.
1.49.      “Eligible LC Inventory” shall mean all finished goods Inventory owned or to be owned by Borrower and covered by a documentary Letter of Credit, and which finished goods Inventory is or will be in transit to one of Borrower’s locations in the continental United States, and which finished goods Inventory (a) as of the date such Inventory becomes owned by Borrower (i) is fully insured, (ii) is subject to a first priority security interest in and lien upon such goods in favor of Lender (except for any possessory lien upon such goods in the possession of handlers, storers of goods, a freight carrier or shipping company securing only the freight charges for the transportation of such goods to Borrower), and (iii) all documents, notices, instruments, statements and bills of lading relating thereto, if any, which Lender may deem necessary or desirable to evidence ownership by Borrower and/or to give effect to and protect the liens, security interests and other rights of Lender in connection therewith are delivered to Lender; and (b) are and remain acceptable to Lender for lending purposes in its sole discretion.




1.50.      “Environmental Laws” shall mean all foreign, Federal, State and local laws (including common law), legislation, rules, codes, licenses, permits (including any conditions imposed therein), authorizations, judicial or administrative decisions, injunctions or agreements between any Loan Party and any Governmental Authority, (a) relating to pollution and the protection, preservation or restoration of the environment (including air, water vapor, surface water, ground water, drinking water, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource), or to human health or safety, (b) relating to the exposure to, or the use, storage, recycling, treatment, generation, manufacture, processing, distribution, transportation, handling, labeling, production, release or disposal, or threatened release, of Hazardous Materials, or (c) relating to all laws with regard to recordkeeping, notification, disclosure and reporting requirements respecting Hazardous Materials. The term “Environmental Laws” includes (i) the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Federal Superfund Amendments and Reauthorization Act, the Federal Water Pollution Control Act of 1972, the Federal Clean Water Act, the Federal Clean Air Act, the Federal Resource Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste Amendments thereto), the Federal Solid Waste Disposal and the Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act, and the Federal Safe Drinking Water Act of 1974, (ii) applicable state counterparts to such laws and (iii) any common law or equitable doctrine that may impose liability or obligations for injuries or damages due to, or threatened as a result of, the presence of or exposure to any Hazardous Materials.
1.51.      “Equipment” shall mean, with respect to any Loan Party, all of such Loan Party’s now owned and hereafter acquired equipment, wherever located, including machinery, data processing and computer equipment (whether owned or licensed and including embedded software), vehicles, tools, furniture, fixtures, all attachments, accessions and property now or hereafter affixed thereto or used in connection therewith, and substitutions and replacements thereof, wherever located.
1.52.      “ERISA” shall mean the Employee Retirement Income Security Act of 1974, together with all rules, regulations and interpretations thereunder or related thereto.
1.53.      “ERISA Affiliate” shall mean any person required to be aggregated with any Loan Party under Sections 414(b), 414(c), 414(m) or 414(o) of the Code.
1.54.      “ERISA Event” shall mean (a) any “reportable event”, as defined in Section 4043(c) of ERISA or the regulations issued thereunder, with respect to a Pension Plan, other than events as to which the requirement of notice has been waived in regulations by the Pension Benefit Guaranty Corporation; (b) the adoption of any amendment to a Pension Plan that would require the provision of security pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA; (c) a complete or partial withdrawal by any Loan Party or any ERISA Affiliate from a Multiemployer Plan or a cessation of operations which is treated as such a withdrawal or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Pension Plan amendment as a termination under Section 4041 or 4041A of ERISA, or the commencement of proceedings by the Pension Benefit Guaranty




Corporation to terminate a Pension Plan; (e) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan; (f) the imposition of any liability under Title IV of ERISA, other than the Pension Benefit Guaranty Corporation premiums due but not delinquent under Section 4007 of ERISA, upon any Loan Party or any ERISA Affiliate in excess of $100,000 and (g) any other event or condition with respect to any Pension Plan maintained, or contributed to, by any ERISA Affiliate that could reasonably be expected to result in liability of any Loan Party in excess of $100,000.
1.55.      “Event of Default” shall mean the occurrence or existence of any event or condition described in Section 10.1 hereof.
1.56.      “Excess Borrowing Availability” shall mean the amount, as determined by Lender, calculated at any date, equal to: (a) the lesser of (i) the Adjusted Borrowing Base, or (ii) the Maximum Credit (in each case after giving effect to any Reserves then in effect); minus (b) the sum of: (i) the amount of all then outstanding and unpaid Obligations of Borrower, plus (ii) the amount of all then outstanding Letter of Credit Obligations.
1.57.      “Excess Collateral Availability” shall mean the amount, as determined by Lender, calculated at any date, equal to: (a) the Borrowing Base (after giving effect to any Reserves then in effect) minus (b) the sum of: (i) the amount of all then outstanding and unpaid Obligations of Borrower, plus (ii) the amount of all then outstanding Letter of Credit Obligations.
1.58.      “Exchange Act” shall mean the Securities Exchange Act of 1934, together with all rules, regulations and interpretations thereunder or related thereto.
1.59.      “Excluded Accounts” shall mean (a) any bank accounts established by Borrower or its Subsidiaries used exclusively for payroll, payroll taxes or employee benefits, escrow, customs, insurance, or fiduciary purposes or compliance with legal requirements, to the extent such legal requirements prohibit the granting of a lien thereon, (b) any accounts for the purpose of maintaining cash and Cash Equivalents subject to Permitted Liens of the type described in Sections 9.8(f), (j) and (m); or (c) any other account (other than any deposit account that constitutes or contains proceeds of any ABL Priority Collateral) that is excluded from the collateral securing the Term Loan Agreement.
1.60.      “Excluded Subsidiary” shall mean (a) any Subsidiary that is not a Wholly Owned Subsidiary, (b) any Immaterial Subsidiary, (c) any Subsidiary that is prohibited by applicable law, regulation or contractual obligation from guaranteeing the Obligations or that would require governmental (including regulatory) consent, approval, license or authorization in order to provide such guarantee or where the making of such guarantee would result in material adverse tax consequences (as reasonably determined by the Borrower), (d) any Domestic Subsidiary of the Borrower that is a Disregarded Domestic Person, (e) any direct or indirect Domestic Subsidiary of a direct or indirect Foreign Subsidiary of the Borrower, (f) any Foreign Subsidiary and (g) any other Subsidiary with respect to which, in the reasonable judgment of the




Lender and the Borrower, the burden or cost of providing a guarantee of the Obligations shall outweigh the benefits to be afforded thereby.
1.61.      “Fee Letter” shall mean the letter agreement executed by Borrower and Lender as of May 16, 2012 regarding the payment of certain fees by Borrower to Lender in connection with and on account of the financial accommodations made to Borrower hereunder.
1.62.      “Financing Agreements” shall mean, collectively, this Agreement, the Fee Letter, each Joinder Agreement, and all notes, guarantees, security agreements, deposit account control agreements, investment property control agreements, intercreditor agreements and all other agreements, documents and instruments now, prior to, or at any time hereafter executed and/or delivered by any Loan Party in connection with the credit obligations of the Loan Parties to Lender.
1.63.      “Fiscal Quarter” shall mean each period of thirteen or fourteen weeks ending on or about April 30, July 31, October 31 and January 31.
1.64.      “Fiscal Year” shall mean the 52/53 week period ending on the Saturday closest to January 31 of the following year.
1.65.      “Foreign Subsidiary” shall mean (a) a Subsidiary that is organized under the laws of a jurisdiction other than the United States of America or any state thereof or the District of Columbia (and including a Subsidiary of such a Subsidiary) and (b) any direct or indirect Subsidiary that is (i) a “controlled foreign corporation” within the meaning of Section 957(a) of the Code and any Subsidiary of such controlled foreign corporation or (ii) a domestic corporation or domestic partnership for U.S. federal income tax purposes, all or substantially all of whose assets consist of Capital Stock in one or more entities described in clause (i) above.
1.66.      “Funding Bank” shall have the meaning set forth in Section 3.3(a)
1.67.      “GAAP” shall mean generally accepted accounting principles in the United States of America as in effect from time to time as set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and the statements and pronouncements of the Financial Accounting Standards Board which are applicable to the circumstances as of the date of determination consistently applied.
1.68.      “Governmental Authority” shall mean any nation or government, any state, province, or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.
1.69.      “Guarantor” shall mean the Original Guarantor and each Domestic Subsidiary of any Loan Party that is or becomes a party to this Agreement pursuant to Section 9.24; provided, however, that the Guarantors shall not include any Excluded Subsidiary.




1.70.      “Hazardous Materials” shall mean any hazardous, toxic or dangerous substances, materials and wastes, including hydrocarbons (including naturally occurring or man-made petroleum and hydrocarbons), flammable explosives, asbestos, urea formaldehyde insulation, radioactive materials, biological substances, polychlorinated biphenyls, pesticides, herbicides and any other kind and/or type of pollutants or contaminants (including materials which include hazardous constituents), sewage, sludge, industrial slag, solvents and/or any other similar substances, materials, or wastes and including any other substances, materials or wastes that are or become regulated under any Environmental Law (including any that are or become classified as hazardous or toxic under any Environmental Law).
1.71.      “Hedge Agreement” shall mean an agreement between a Loan Party and a Bank Product Provider that is a rate swap agreement, basis swap, forward rate agreement, commodity swap, forward commodity contracts, interest rate option, forward foreign exchange agreement, spot foreign exchange agreement, rate cap agreement rate, floor agreement, rate collar agreement, currency swap agreement, cross-currency rate swap agreement, currency option, any other similar agreement (including any option to enter into any of the foregoing or a master agreement for any the foregoing together with all supplements thereto) for the purpose of protecting against or managing exposure to fluctuations in interest or exchange rates, currency valuations or commodity prices.
1.72.      “Immaterial Subsidiaries” shall mean all Subsidiaries of the Borrower designated as such in writing by the Borrower to the Lender from time to time for which (a) the aggregate value of assets of any such Subsidiary does not exceed 2% of the consolidated total assets of the Borrower and its Subsidiaries, (b) the aggregate value of assets of all such Subsidiaries does not exceed 5% of the consolidated total assets of the Borrower and its Subsidiaries, (c) the gross revenue of such Subsidiary does not exceed 2% of the consolidated gross revenues of the Borrower and its Subsidiaries and (d) the aggregate gross revenues of all such Subsidiaries does not exceed 5% of the consolidated gross revenues of the Borrower and its Subsidiaries, in each case determined as of the last day of the most recent Fiscal Quarter or Fiscal Year for which financial statements have been delivered in accordance with Section 9.6. If, at any time and from time to time after the Closing Date, one or more Subsidiaries shall cease to qualify as “Immaterial Subsidiaries”, then the Borrower shall, on the date on which financial statements are in accordance with Section 9.6 for such Fiscal Quarter or Fiscal Year, as the case may be, delivered pursuant to this Agreement, designate in writing to the Lender one or more of such Subsidiaries (which shall cease to constitute “Immaterial Subsidiaries”) as may be necessary to ensure compliance with this definition.
1.73.      “Indebtedness” shall mean, with respect to any Person, any liability, whether or not contingent, (a) in respect of borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof) or evidenced by bonds, notes, debentures or similar instruments; (b) representing the balance deferred and unpaid of the purchase price of any property or services (other than an account payable to a trade creditor (whether or not an Affiliate) incurred in the ordinary course of business of such Person and payable in accordance with customary trade practices); (c) all obligations as lessee under leases which have been, or should be, in accordance with GAAP recorded as Capital Leases; (d)




any contractual obligation, contingent or otherwise, of such Person to pay or be liable for the payment of any indebtedness described in this definition of another Person, including, without limitation, any such indebtedness, directly or indirectly guaranteed, or any agreement to purchase, repurchase, or otherwise acquire such indebtedness, obligation or liability or any security therefor, or to provide funds for the payment or discharge thereof, or to maintain solvency, assets, level of income, or other financial condition; (e) all obligations with respect to redeemable stock and redemption or repurchase obligations under any Capital Stock or other equity securities issued by such Person; (f) all reimbursement obligations and other liabilities of such Person with respect to surety bonds (whether bid, performance or otherwise), letters of credit, banker’s acceptances, drafts or similar documents or instruments issued for such Person’s account; (g) all indebtedness of such Person in respect of indebtedness of another Person for borrowed money or indebtedness of another Person otherwise described in this definition which is secured by any consensual lien, security interest, collateral assignment, conditional sale, mortgage, deed of trust, or other encumbrance on any asset of such Person, whether or not such obligations, liabilities or indebtedness are assumed by or are a personal liability of such Person, all as of such time; (h) all obligations, liabilities and indebtedness of such Person (marked to market) arising under swap agreements, cap agreements and collar agreements and other agreements or arrangements designed to protect such person against fluctuations in interest rates or currency or commodity values; (i) all obligations owed by such Person under License Agreements with respect to non-refundable, advance or minimum guarantee royalty payments; (j) indebtedness of any partnership or joint venture in which such Person is a general partner or a joint venturer to the extent such Person is liable therefor as a result of such Person’s ownership interest in such entity, except to the extent that the terms of such indebtedness expressly provide that such Person is not liable therefor or such Person has no liability therefor as a matter of law and (k) the principal and interest portions of all rental obligations of such Person under any synthetic lease or similar off-balance sheet financing where such transaction is considered to be borrowed money for tax purposes but is classified as an operating lease in accordance with GAAP.
1.74.      “Information Certificate” shall mean the Information Certificate of Borrower attached as Exhibit “B” hereto, containing material information with respect to Borrower and the Original Guarantor and their respective businesses and assets as of the date hereof, provided by or on behalf of Borrower and the Original Guarantor to Lender in connection with the preparation of this Agreement and the financing arrangements provided for herein.
1.75.      “Intellectual Property” shall mean any Loan Party’s now owned and hereafter arising or acquired: patents, patent rights, patent applications, copyrights, works which are the subject matter of copyrights, copyright applications, copyright registrations, trademarks, servicemarks, trade names, trade styles, trademark and service mark applications, and licenses and rights to use any of the foregoing and all applications, registrations and recordings relating to any of the foregoing as may be filed in the United States Copyright Office, the United States Patent and Trademark Office, or in any similar office or agency of the United States of America, any State, any political subdivision thereof or in any other country or jurisdiction, together with all rights and privileges arising under applicable law with respect to such Loan Party’s use of any of the foregoing; all extensions, renewals, reissues, divisions, continuations, and continuations-




in-part of any of the foregoing; all rights to sue for past, present and future infringement of any of the foregoing; inventions, trade secrets, formulae, processes, compounds, drawings, designs, blueprints, surveys, reports, manuals, and operating standards; goodwill (including any goodwill associated with any trademark or servicemark, or the license of any trademark or servicemark); customer and other lists in whatever form maintained; trade secret rights, copyright rights, rights in works of authorship, domain names and domain name registration; software and contract rights relating to computer software programs, in whatever form created or maintained.
1.76.      “Intercompany Note” shall mean an intercompany demand promissory note substantially in the form of Exhibit E.
1.77.      “Intercreditor Agreement” shall mean that certain Lien Subordination and Intercreditor Agreement dated as of May 16, 2012 among the Lender, the Term Loan Agent and the Borrower substantially in the form attached as Exhibit “D” hereto, as the same may be amended, amended and restated, supplemented or otherwise modified in accordance with its terms.
1.78.      “Interest Rate” shall mean,
(a)      as to Prime Rate Loans, a rate equal to the Prime Rate plus the Applicable Margin for Prime Rate Loans, and
(b)      as to LMIR Rate Loans, a rate equal to the LMIR Rate plus the Applicable Margin for LMIR Rate Loans.
Notwithstanding anything to the contrary contained in this definition, the Interest Rate shall mean the percentage per annum set forth above plus (in each case) two percent (2%) per annum, at Lender’s option, (i) for the period (A) from and after the effective date of termination or non-renewal hereof until such time as all Obligations are indefeasibly paid and satisfied in full in immediately available funds, or (B) from and after the date of the occurrence of any Event of Default, and for so long as such Event of Default is continuing as determined by Lender and (ii) on Revolving Loans to Borrower at any time outstanding in excess of the Adjusted Borrowing Base or Maximum Credit (whether or not such excess(es) arise or are made with or without Lender’s knowledge or consent and whether made before or after an Event of Default).
1.79.      “Inventory” shall mean all of Borrower’s now owned and hereafter existing or acquired goods, wherever located, which (a) are leased by Borrower as lessor; (b) are held by Borrower for sale or lease or to be furnished under a contract of service; (c) are furnished by Borrower under a contract of service; or (d) consist of raw materials, work in process, finished goods or materials used or consumed in its business.
1.80.      “Investments” shall have the meaning set forth in Section 9.10.
1.81.      “IPO” shall mean the underwritten primary public offering of the Borrower’s common Capital Stock on July 19, 2012 (and any subsequent secondary public offerings in respect of Borrower’s common Capital Stock) pursuant to an effective registration




statement filed with the Securities and Exchange Commission in accordance with the Securities Act.
1.82.      “Joinder Agreement” shall mean a joinder agreement substantially in the form of Exhibit F or such other form as shall be approved by the Lender and the Borrower.
1.83.      “Legal Requirements” shall mean, as to any Person, the organizational documents of such Person, and any treaty, law (including the common law), statute, ordinance, code, rule, regulation, guidelines, license, permit requirement, order or determination of an arbitrator or a court or other Governmental Authority, and the interpretation or administration thereof, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.
1.84.      “Lender” shall mean Wells Fargo Bank, National Association, as successor by merger to Wachovia Bank, N.A., and its successors and assigns.
1.85.      “Letter of Credit Documents” shall mean, with respect to any Letter of Credit, such Letter of Credit, any amendments thereto, any documents delivered in connection therewith, any application therefor, and any agreements, instruments, guarantees or other documents (whether general in application or applicable only to such Letter of Credit) governing or providing for (a) the rights and obligations of the parties concerned or at risk or (b) any collateral security for such obligations.
1.86.      “Letter of Credit Limit” shall mean $5,000,000.
1.87.      “Letter of Credit Obligations” shall mean, at any time, the aggregate undrawn amount of all Letters of Credit outstanding at such time.
1.88.      “Letters of Credit” shall mean all letters of credit (whether documentary or stand-by and whether for the purchase of inventory, equipment or otherwise) issued by Lender for the account of the Borrower pursuant to this Agreement, and all amendments, renewals, extensions or replacements thereof.
1.89.      “License Agreement” shall mean any agreement or other arrangement pursuant to which any Loan Party has a license or other right to use any trademarks, logos, designs, representations or other Intellectual Property owned by another Person and material to the conduct of the business of the Loan Parties, excluding commercially available off-the-shelf software.
1.90.      “LMIR Rate”, for any day, shall mean the rate for one month U.S. dollar deposits as reported on the page of the Reuters Screen which displays an average British Bankers Association Interest Settlement Rate (such page currently being LIBOR01 page) as of 11:00 a.m., London time (rounded upwards, if necessary, to the nearest 1/100 th of one percent (1%)), on such day, or if such day is not a London business day, then the immediately preceding London business day (or if not so reported, then as determined by Bank from another recognized source or interbank quotation).




1.91.      “LMIR Rate Loan” means a Revolving Loan, or portion thereof, during any period in which it bears interest at an annual rate based upon the LMIR Rate. All LMIR Rate Loans shall be denominated in US Dollars.
1.92.      “Loan Parties” shall mean the Borrower and the Guarantors.
1.93.      “Material Adverse Effect” shall mean a material adverse effect on (a) the financial condition, business, performance or operations of Borrower and its Subsidiaries, taken as a whole; (b) the legality, validity or enforceability of this Agreement or any of the other Financing Agreements; (c) the legality, validity, enforceability, perfection or priority of the security interests and liens of Lender upon the Collateral; (d) the Collateral or its value taken as a whole; (e) the ability of Borrower and the Guarantors (taken as a whole) to repay the Obligations or of Borrower and the Guarantors (taken as a whole) to perform their obligations under this Agreement or any of the other Financing Agreements as and when to be performed; or (f) the ability of Lender to enforce the Obligations or realize upon the Collateral or otherwise with respect to the rights and remedies of Lender under this Agreement or any of the other Financing Agreements.
1.94.      “Material Contract” shall mean any contract or other agreement (other than the Financing Agreements and the Term Loan Documents), whether written or oral, to which any Loan Party is a party as to which the breach, nonperformance, cancellation or failure to renew by any party thereto would have a Material Adverse Effect, including, without limitation, any Credit Card Agreement. Material Contracts shall not include purchase orders for inventory or for furniture and fixtures in the ordinary course of business, and shall only include leases of real property to which a Loan Party is a party to the extent that the leased premises is any non-retail location.
1.95.      “Maximum Credit” shall mean, at any time, the amount of $20,000,000, plus the amount of any Maximum Credit Incremental Increase then in effect in accordance with the provisions of Section 2.1(c) hereof.
1.96.      “Maximum Credit Incremental Increase” shall have the meaning set forth in Section 2.1(c).
1.97.      “Minimum Excess Collateral Availability” shall have the meaning set forth in Section 9.22 of this Agreement.
1.98.      “Multiemployer Plan” shall mean a “multiemployer plan” as defined in Section 4001(a)(3) of ERISA which is or was at any time during the current year or the immediately preceding six (6) years contributed to by any Loan Party or any ERISA Affiliate or with respect to which any Loan Party or any ERISA Affiliate may incur any liability.
1.99.      “Net Cash Proceeds” shall mean, with respect to any sale, lease, transfer or other disposition of any asset, any Asset Sale, any Casualty Event, or the sale or issuance of any Indebtedness by Borrower or any of its Subsidiaries, the aggregate amount of cash received from time to time (whether as initial consideration or through payment or disposition of deferred




consideration) by or on behalf of Borrower or any of its Subsidiaries in connection with such transaction after deducting therefrom only (without duplication) (a) reasonable and customary brokerage commissions, underwriting fees and discounts, legal fees, accountant’s fees, investment banking fees, finder’s fees, other similar fees and commissions and reasonable out-of-pocket expenses, (b) the amount of taxes reasonably estimated by Borrower to be actually and reasonably attributable to such transaction, and (c) the amount of any Indebtedness secured by a security interest, lien or other encumbrance (other than a security interest, lien or other encumbrance created under any Financing Agreements) on such asset that, by the terms of such transaction, is required to be repaid upon such disposition, in each case to the extent, but only to the extent, that the amounts so deducted are actually paid to Borrower or any of its Subsidiaries.
1.100.      “Net Recovery Percentage” shall mean the fraction, expressed as a percentage, (a) the numerator of which is the amount equal to the recovery on the aggregate amount of the Inventory at such time on a “going out of business sale” basis as set forth in the most recent appraisal of Inventory received by Lender in accordance with Section 7.4, net of operating expenses, liquidation expenses and commissions, and (b) the denominator of which is the applicable original cost of the aggregate amount of the Inventory subject to appraisal. The Net Recovery Percentage for Inventory used in Section 1.10 shall be based on the percentage in the most recent appraisal applicable to the time period for which the Borrowing Base is being calculated.
1.101.      “Non-DACA Account” shall mean any deposit or other bank account of any Loan Party not subject to a current and effective Deposit Account Control Agreement.
1.102.      “Non-Peak Period” shall mean all times during any calendar year other than the Peak Period.
1.103.      “Non-Wells Fargo Account” shall mean any deposit or other bank account maintained by any Loan Party at any financial institution other than Wells Fargo Bank, National Association.
1.104.      “Non-Wells Fargo Account Bank” shall mean any bank at which a Non-Wells Fargo Account is maintained.
1.105.      “Obligations” shall mean (a) any and all Revolving Loans, Letter of Credit Obligations and all other obligations, liabilities and indebtedness of every kind, nature and description owing by Borrower and the other Loan Parties to Lender and/or any of its Affiliates, including principal, interest, charges, fees, costs and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, arising under this Agreement or any of the other Financing Agreements or on account of any Letter of Credit and all other Letter of Credit Obligations, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal term of this Agreement or after the commencement of any case with respect to any Loan Party under the Bankruptcy Code or any similar statute (including the payment of interest and other amounts which would accrue and become due but for the commencement of such case, whether or not such amounts are allowed or allowable in whole or in part in such case), whether direct or indirect, absolute or contingent, joint or several, due or




not due, primary or secondary, liquidated or unliquidated, or secured or unsecured; and (b) all obligations, liabilities and indebtedness of every kind, nature and description owing by Borrower and the other Loan Parties to Lender or any Bank Product Provider arising under or pursuant to any Bank Products, whether now existing or hereafter arising.
1.106.      “Original Guarantor” shall mean Five Below Merchandising, Inc., a Pennsylvania corporation, in its capacity as Guarantor under this Agreement.
1.107.      “Other Taxes” shall have the meaning given to such term in Section 6.5(c).
1.108.      “Packaway Inventory” means Inventory which is held by Borrower for sale only during certain selling seasons of the year, including, without limitation, holiday items.
1.109.      “Payment Account” shall mean account no. 2079951067231 maintained by Lender and/or such other account or accounts maintained by Lender which Lender may from time to time designate to Borrower as the Payment Account for purposes of this Agreement and the other Financing Agreements.
1.110.      “Peak Period” shall mean the period between October 1 through December 1 in any calendar year.
1.111.      “Pension Plan” shall mean a “pension plan” (as defined in Section 3(2) of ERISA) subject to Title IV of ERISA which any Loan Party sponsors, maintains, or to which any Loan Party or any ERISA Affiliate makes, is making, or is obligated to make contributions, other than a Multiemployer Plan.
1.112.      “Permits” shall have the meaning given to such term in Section 8.7(b).
1.113.      “Permitted Investors” shall mean and include (i) any Person or group that was a stockholder of the Borrower on May 16, 2012 or his/her/its respective Affiliates, and (ii) equity investors that participated in the Borrower’s IPO.
1.114.      “Permitted Investments” shall mean each of the following:
(a)      (i) accounts receivables owing to Borrower or any of its Subsidiaries if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary terms, (ii) investments in cash and Cash Equivalents, (iii) endorsement of instruments held for collection in the ordinary course of business, (iv) lease, utility and other similar deposits in the ordinary course of business and (v) accounts receivable and notes receivable from financially troubled counterparts in the ordinary course of business in order to prevent or limit loss;
(b)      loans and advances by Borrower or any of its Subsidiaries to directors, employees or officers of Borrower or such Subsidiary not to exceed the principal amounts set forth in Section 9.10 at any time;




(c)      obligations of account debtors to Borrower or any of its Subsidiaries arising from Accounts which are past due evidenced by a promissory note made by such account debtor payable to Borrower or such Subsidiary, the principal amount of which note shall not exceed $25,000 in any one case or $100,000 in the aggregate at any time outstanding; provided , that , promptly upon the receipt by any Loan Party of the original of any such promissory note, such promissory note shall be endorsed to the order of Lender by such Loan Party and promptly delivered to Lender as so endorsed;
(d)      Investments outstanding on the date hereof;
(e)      Hedge Agreements permitted pursuant to Section 9.9(c) or Section 9.9(m);
(f)      Investments in securities of trade creditors or customers in the ordinary course of business that are received in settlement of bona fide disputes or pursuant to any plan of reorganization or liquidation or similar arrangement upon the bankruptcy or insolvency of such trade creditors or customers;
(g)      Investments made as a result of consideration received in connection with a sale or other disposition made in compliance with Section 9.7(b);
(h)      Restricted Payments in compliance with Section 9.11;
(i)      other Investments in an aggregate amount not to exceed $3,500,000 on the date such Investments are made to the extent, and only to the extent: (A) at the time such Investments are made Excess Borrowing Availability is not less than $3,000,000; and (B) such Investments are not made with Revolving Loan Proceeds;
(j)      so long as no Default or Event of Default then exists or would result therefrom, the Borrower and its Subsidiaries may make Investments that are made in exchange for the substantially concurrent sale of Capital Stock of the Borrower permitted to be issued by it hereunder;
(k)      promissory notes or other obligations of directors, officers or other employees of the Borrower or any of its Domestic Subsidiaries in connection with such directors’, officers’ or employees’ purchase of Capital Stock of the Borrower or any direct or indirect parent thereof, so long as no cash is advanced by the Borrower or any of its Subsidiaries in connection with such Investment;
(l)      Investments that may arise as a result of the consummation of Sale and Leaseback Transactions permitted under Section 9.23;
(m)      Investments by (i) the Borrower in any Guarantor, (ii) the Borrower or any of its Subsidiaries in the Borrower or any Guarantor, (iii) a Subsidiary of the Borrower that is not a Loan Party in any other Subsidiary of the Borrower that is not a Loan Party, and (iv) the Borrower or any Guarantor in any Subsidiary of the Borrower that is not a




Guarantor in a maximum amount for all such Investments to all such Subsidiaries not to exceed $2,000,000 at any time outstanding; provided that any Investment in the form of a loan or advance shall be evidenced by an Intercompany Note (and shall be subject to the subordination provisions contained therein if made to a Subsidiary that is a Loan Party) and, in the case of a loan or advance by a Loan Party, pledged by such Loan Party as Collateral;
(n)      Investments of any person that becomes a Subsidiary on or after the Closing Date in an aggregate amount for all such Subsidiaries not to exceed $2,500,000 on the date such person becomes a Subsidiary; provided that (i) such Investments exist at the time such person is acquired, (ii) such Investments are not made in anticipation or contemplation of such person becoming a Subsidiary, and (iii) such Investments are not directly or indirectly recourse to the Borrower or any of its Subsidiaries or any of their respective assets, other than to the person that becomes a Subsidiary;
(o)      other Investments in an aggregate amount not to exceed $3,500,000 on the date such Investments are made; and
(p)      unsecured intercompany loans by any of the Subsidiaries of the Borrower to the Borrower evidenced by an Intercompany Note (and subject to the subordination provisions contained therein) for purposes and in amounts that would otherwise be permitted to be made as Restricted Payments to the Borrower.
1.115.      “Permitted Liens” shall have the meaning given to such term in Section 9.8.
1.116.      “Person” or “person” shall mean any individual, sole proprietorship, partnership, corporation (including any corporation which elects subchapter S status under the Code), limited liability company, limited liability partnership, business trust, unincorporated association, joint stock corporation, trust, joint venture or other entity or any government or any agency or instrumentality or political subdivision thereof.
1.117.      “Primary Non-Wells Fargo Account Bank” shall mean any bank or financial institution at which Non-Wells Fargo Accounts are maintained to the extent that such Non-Wells Fargo Accounts receive deposits from eight (8) or more of the Borrower’s retail locations.
1.118.      “Prime Rate” shall mean the higher of (i) the rate from time to time publicly announced by Lender as its “prime rate,” whether or not such announced rate is the best rate available at Lender and subject to each increase or decrease in such “prime rate,” effective as of the first day of the month after any such increase or decrease occurs; and (ii) the rate which is the Federal Funds Rate in effect from time to time, plus one-half percent (.50%).
1.119.      “Prime Rate Loans” shall mean any Revolving Loans or portion thereof on which interest is payable based on the Prime Rate in accordance with the terms thereof. All Prime Rate Loans shall be denominated in US Dollars.




1.120.      “Quarterly Average Excess Availability” shall mean, at any time, the average of the daily Excess Borrowing Availability of Borrower for the immediately preceding Fiscal Quarter as calculated by Lender.
1.121.      “Real Property” shall mean all now owned and hereafter acquired real property of any Loan Party, including leasehold interests, together with all buildings, structures, and other improvements located thereon and all licenses, easements and appurtenances relating thereto, wherever located.
1.122.      “Receivables” shall mean all of the following now owned or hereafter arising or acquired property of any Loan Party: (a) all Accounts; (b) all interest, fees, late charges, penalties, collection fees and other amounts due or to become due or otherwise payable in connection with any Account; (c) all payment intangibles of any Loan Party; (d) letters of credit, indemnities, guarantees, security or other deposits and proceeds thereof issued or payable to any Loan Party or otherwise in favor of or delivered to any Loan Party in connection with any Account or any Credit Card Receivables; and (e) all other accounts, contract rights, chattel paper, instruments, notes, general intangibles and other forms of obligations owing to any Loan Party, whether from the sale and lease of goods or other property, licensing of any property (including Intellectual Property or other general intangibles), rendition of services or from loans or advances by any Loan Party or to or for the benefit of any third person (including loans or advances to any Affiliates or Subsidiaries of such Loan Party) or otherwise associated with any Accounts, Inventory or general intangibles of any Loan Party (including, without limitation, choses in action, causes of action, tax refunds, tax refund claims, any funds which may become payable to any Loan Party in connection with the termination of any Pension Plan or other employee benefit plan and any other amounts payable to any Loan Party from any Pension Plan or other employee benefit plan, rights and claims against carriers and shippers, rights to indemnification, business interruption insurance and proceeds thereof, casualty or any similar types of insurance and any proceeds thereof and proceeds of insurance covering the lives of employees on which any Loan Party is a beneficiary).
1.123.      “Records” shall mean, with respect to any Loan Party, all of such Loan Party’s present and future books of account of every kind or nature, purchase and sale agreements, invoices, ledger cards, bills of lading and other shipping evidence, statements, correspondence, memoranda, credit files and other data relating to the Collateral or any account debtor, together with the tapes, disks, diskettes and other data and software storage media and devices, file cabinets or containers in or on which the foregoing are stored (including any rights of such Loan Party with respect to the foregoing maintained with or by any other person).
1.124.      “Reserves” shall mean as of any date of determination, such amounts as Lender may from time to time establish and revise in good faith in accordance with its customary practices for similarly situated borrowers, reducing the amount of Revolving Loans and Letters of Credit which would otherwise be available to Borrower under the lending formula(s) provided for herein: (a) to reflect events, conditions, contingencies or risks which adversely affect, or would have a reasonable likelihood of adversely affecting, either (i) any of the Collateral of the types or categories included in the Borrowing Base or related thereto or its value or (ii) the assets




or business of Borrower or (iii) the security interests and other rights of Lender in the Collateral (including the enforceability, perfection and priority thereof); or (b) to reflect Lender’s good faith belief that any collateral report or financial information furnished by or on behalf of Borrower to Lender is or may have been incomplete, inaccurate or misleading in any material respect; or (c) to reflect outstanding Letter of Credit Obligations as provided in Section 2.2 hereof; or (d) on account of the aggregate amount of all then outstanding and unpaid trade payables and other obligations of Borrower which are outstanding more than sixty (60) days past due as of the end of the immediately preceding month, except for such trade payables and other obligations being disputed in good faith by Borrower; or (e) in respect of any state of facts which Lender determines in good faith constitutes a Default or an Event of Default. Notwithstanding the foregoing, to the extent that Lender establishes Reserves with respect to specific Collateral categories, the Value of any Collateral that becomes the subject of such a Reserve shall be included as a Reserve only once, irrespective of whether or not such Collateral Value could be included in more than one Reserve category.
Without limiting the generality of the foregoing, Reserves may be established to reflect any of the following: (a) that dilution with respect to the Credit Card Receivables (based on the ratio of the aggregate amount of non-cash reductions in Credit Card Receivables for any period to the aggregate dollar amount of the sales of Borrower giving rise to Credit Card Receivables for such period) as calculated by Lender for any period, is or is reasonably anticipated to be greater than five percent (5%), (b) inventory shrinkage, (c) reserves in respect of markdowns and cost variances (pursuant to discrepancies between the purchase order price of Inventory and the actual cost thereof), (d) any and all amounts in respect of sales, use and/or withholding taxes which are past due, (e) any and all rental payments, service changes or other amounts which are past due to lessors of personal property, (f) up to fifty percent (50%) of the aggregate amount of merchandise gift certificates and coupons as certified by the Borrower in its Financial Statements, (g) an increase in the number of days of the turnover of Inventory or a change in the mix of the Inventory that results in an overall decrease in the value thereof or a deterioration in its nature or quality (but only to the extent not addressed by the lending formulas in a manner satisfactory to Lender), (h) variances between the perpetual inventory records of Borrower and the results of any test counts of Inventory conducted by Lender with respect thereto, in excess of the percentage acceptable to Lender, (i) the aggregate amount of deposits, if any, received by Borrower from its retail customers in respect of unfilled orders for merchandise and the purchase price of layaway goods, (j) obligations, liabilities or indebtedness (contingent or otherwise) of Borrower to Lender, any Affiliate of Lender or any other financial institution acceptable to Lender (but in each case as to any Affiliate of Lender or other financial institution, only to the extent approved by Lender) arising under or in connection with any Hedge Agreement of Borrower with Lender, any Affiliate of Lender or any other financial institution acceptable to Lender, to the extent that such obligation, liabilities or indebtedness constitute Obligations as such term is defined herein or otherwise receive the benefit of the security interest of Lender in any Collateral, (k) any and all duty and freight charges in respect of Inventory in transit to the Borrower from outside the United States, (l) any and all rental payments, service charges or other amounts past due to lessors or owners and operators of real property at which any Inventory or Records are located, except to the extent such amounts are being disputed by Borrower in good faith, as determined by Lender in its sole discretion, (m) any and all rental payments, service




charges or other amounts to become due to any lessor or owner and operator of any retail location outside the United States or any non-retail location other than the Borrower’s corporate headquarters (whether inside or outside the United States) at which any Inventory or Records are located unless such lessor or owner and operator is a party to a Collateral Access Agreement with Lender; provided , that , the Reserves established pursuant to this clause (m) shall not exceed at any time the aggregate of amounts payable for the next three (3) months to such lessor or owner and operator of such location; provided further , that , the foregoing limitation on the amount of the Reserves shall only apply so long as (i) no Event of Default shall exist or have occurred and be continuing, (ii) neither Borrower nor Lender shall have received notice of any event of default by the Borrower under the lease with respect to such location, and (iii) Borrower has not granted to such lessor or owner and operator a security interest or lien upon any assets of Borrower.
The amount of any Reserve established by Lender shall have a reasonable relationship to the event, condition or other matter which is the basis for such Reserve as determined by Lender in good faith. In the event that based on the calculation of the Borrowing Base or the Adjusted Borrowing Base by Lender at the time, the establishment of a Reserve at such time will result in there being no Excess Borrowing Availability at such time, Lender shall give Borrower one (1) Business Day’s notice prior to establishing such new Reserves. Promptly upon the receipt of such notice, Borrower shall take such action as may be required so that the event, condition or matters that is the basis for the Reserve no longer exists in a manner and to the extent reasonably satisfactory to Lender. In no event shall such notice and opportunity limit the right of Lender to establish such Reserve unless Lender shall have determined that the event, condition or other matter that is the basis for such new Reserve no longer exists or has otherwise been addressed in a manner and to the extent reasonably satisfactory to Lender so that Lender determines that such Reserve does not need to be established.
1.125.      “Restricted Payment” shall mean (a) any cash dividend or other cash distribution, direct or indirect, on account of any shares of any class of Capital Stock of Borrower or any of its Subsidiaries, now or hereafter outstanding, (b) any redemption, retirement, sinking fund or similar payment on account of, or purchase or other acquisition for value, direct or indirect, of any shares of any class of Capital Stock of Borrower or any of its Subsidiaries other than redemptions of existing Capital Stock funded from the proceeds of the issuance of new Capital Stock, (c) any cash payment made to redeem, purchase, repurchase or retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire any shares of any class of Capital Stock of Borrower or any of its Subsidiaries now or hereafter outstanding other than such payments made with respect to required tax withholdings on the vesting, exercise and/or delivery of any outstanding warrants, options or other rights to acquire any shares of any class of Capital Stock or any employee or former employee of Borrower and/or its Affiliates, or (d) any payment to any Affiliate, officer or director of Borrower or any of its Subsidiaries, except as specifically permitted by this Agreement or made to any Affiliate of Borrower who is an employee