NOTE 12—SUBSIDIARY GUARANTORS

HDS (the “Debt Issuer”) has outstanding December 2014 First Priority Notes, April 2012 Second Priority Notes, October 2012 Senior Unsecured Notes, and February 2013 Senior Unsecured Notes (collectively the “Notes”) guaranteed by certain of its subsidiaries (the “Subsidiary Guarantors”). The Subsidiary Guarantors are direct or indirect wholly-owned domestic subsidiaries of HDS. The subsidiaries of HDS that do not guarantee the Notes (“Non-guarantor Subsidiaries”) are direct or indirect wholly-owned subsidiaries of HDS and primarily include HDS’s operations in Canada.

The Debt Issuer’s payment obligations under the Notes are jointly and severally guaranteed by the guarantors and all guarantees are full and unconditional.

These guarantees are subject to release under the circumstances as described below:

(i)

concurrently with any direct or indirect sale or disposition (by merger or otherwise) of any Subsidiary Guarantor or any interest therein in accordance with the terms of the applicable indebtedness by HDS or a restricted subsidiary, following which such Subsidiary Guarantor is no longer a restricted subsidiary of HDS;

(ii)

at any time that such Subsidiary Guarantor is released from all of its obligations under all of its guarantees of payment of any indebtedness of HDS or any Subsidiary Guarantor under all other indebtedness and is not a borrower under the ABL Facility;

(iii)

upon the merger or consolidation of any Subsidiary Guarantor with and into HDS or another Subsidiary Guarantor that is the surviving entity in such merger or consolidation, or upon the liquidation of such Subsidiary Guarantor following the transfer of all of its assets to HDS or another Subsidiary Guarantor;

(iv)

concurrently with any Subsidiary Guarantor becoming an unrestricted subsidiary;

(v)

during the period when the rating on the notes is changed to investment grade and certain covenants cease to apply while such investment grade rating is maintained, upon the merger or consolidation of any Subsidiary Guarantor with and into another subsidiary that is not a Subsidiary Guarantor with such other subsidiary being the surviving entity in such merger or consolidation, or upon liquidation of such Subsidiary Guarantor following the transfer of all of its assets to a subsidiary that is not a Subsidiary Guarantor;

(vi)

upon legal or covenant defeasance of HDS’s obligations under the applicable indebtedness, or satisfaction and discharge of the indenture governing the applicable indebtedness; or

(vii)

subject to customary contingent reinstatement provisions, upon payment in full of the aggregate principal amount of all applicable indebtedness then outstanding and all other obligations guaranteed by a Subsidiary Guarantor then due and owing.

In addition, HDS has the right, upon 30 days’ notice to the applicable trustee, to cause any Subsidiary Guarantor that has not guaranteed payment of any indebtedness of HDS or any Subsidiary Guarantor under all other indebtedness and is not a borrower under the ABL Facility to be unconditionally released from all obligations under its Subsidiary Guarantee, and such Subsidiary Guarantee shall thereupon terminate and be discharged and of no further force or effect.

In connection with the issuance of the Notes, HDS determined the need for compliance with Rule 3-10 of SEC Regulation S-X. In lieu of providing separate audited financial statements for the Guarantor Subsidiaries, HDS has included the accompanying Condensed Consolidating Financial Statements in accordance with Rule 3-10(f) of SEC Regulation S-X. The following supplemental financial information sets forth, on a consolidating basis under the equity method of accounting, the condensed statements of operations and comprehensive income, the condensed balance sheets, and the condensed statements of cash flows for the parent company issuer of the Notes, HDS, for the Subsidiary Guarantors and for the Non-guarantor Subsidiaries and total consolidated HDS and subsidiaries (amounts in millions).

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

	Three Months Ended August 2, 2015
	Debt Issuer			Subsidiary Guarantors			Non- Guarantor Subsidiaries			Eliminations			Total HDS

Net Sales	$	—		$	1,973		$	34		$	(1	)	$	2,006
Cost of sales	—			1,324			18			(1		)	1,341

Gross Profit	—			649			16			—			665
Operating expenses:
Selling, general and administrative	22			381			12			—			415
Depreciation and amortization	3			24			1			—			28

Total operating expenses	25			405			13			—			443
Operating Income	(25		)	244			3			—			222
Interest expense	108			60			—			(62		)	106
Interest (income)	(61		)	(1		)	—			62			—
Net (earnings) loss of equity affiliates	(18		)	—			—			18			—
Other (income) expense, net	1			—			—			—			1

Income From Continuing Operations Before Provision (Benefit) for Income Taxes	(55		)	185			3			(18		)	115
Provision (benefit) for income taxes	(164		)	176			1			—			13

Income from Continuing Operations	109			9			2			(18		)	102
Income from discontinued operations, net of tax	—			3			4			—			7

Net Income	$	109		$	12		$	6		$	(18	)	$	109
Other comprehensive income (loss) – foreign currency translation adjustment	(7		)	—			(7		)	7			(7		)

Total Comprehensive Income (Loss)	$	102		$	12		$	(1	)	$	(11	)	$	102

	Three Months Ended August 3, 2014
	Debt Issuer			Subsidiary Guarantors		Non- Guarantor Subsidiaries		Eliminations			Total HDS

Net Sales	$	—		$	1,845	$	35	$	—		$	1,880
Cost of sales	—			1,250		19		—			1,269

Gross Profit	—			595		16		—			611
Operating expenses:
Selling, general and administrative	16			363		13		(1		)	391
Depreciation and amortization	4			50		—		—			54
Restructuring	1			2		—		—			3

Total operating expenses	21			415		13		(1		)	448
Operating Income (Loss)	(21		)	180		3		1			163
Interest expense	115			61		—		(60		)	116
Interest (income)	(62		)	1		—		61			—
Net (earnings) loss of equity affiliates	(72		)	—		—		72			—

Income (Loss) From Continuing Operations Before Provision (Benefit) for Income Taxes	(2		)	118		3		(72		)	47
Provision (benefit) for income taxes	(50		)	66		—		—			16

Income (Loss) from Continuing Operations	48			52		3		(72		)	31
Income (loss) from discontinued operations, net of tax	—			16		1		—			17

Net Income (Loss)	$	48		$	68	$	4	$	(72	)	$	48
Other comprehensive income (loss) – foreign currency translation adjustment	1			—		1		(1		)	1

Total Comprehensive Income (Loss)	$	49		$	68	$	5	$	(73	)	$	49

	Six Months Ended August 2, 2015
	Debt Issuer			Subsidiary Guarantors			Non- Guarantor Subsidiaries			Eliminations			Total HDS

Net Sales	$	—		$	3,666		$	63		$	(1	)	$	3,728
Cost of sales	—			2,456			34			(1		)	2,489

Gross Profit	—			1,210			29			—			1,239
Operating expenses:
Selling, general and administrative	43			740			23			—			806
Depreciation and amortization	7			48			1			—			56

Total operating expenses	50			788			24			—			862
Operating Income (Loss)	(50		)	422			5			—			377
Interest expense	215			121			—			(124		)	212
Interest (income)	(122		)	(2		)	—			124			—
Net (earnings) loss of equity affiliates	(150		)	—			—			150			—
Other (income) expense, net	1			—			—			—			1

Income (Loss) From Continuing Operations Before Provision (Benefit) for Income Taxes	6			303			5			(150		)	164
Provision (benefit) for income taxes	(345		)	174			1			—			(170		)

Income (Loss) from Continuing Operations	351			129			4			(150		)	334
Income (loss) from discontinued operations, net of tax	—			9			8			—			17

Net Income (Loss)	$	351		$	138		$	12		$	(150	)	$	351
Other comprehensive income (loss) – foreign currency translation adjustment	(2		)	—			(2		)	2			(2		)

Total Comprehensive Income (Loss)	$	349		$	138		$	10		$	(148	)	$	349

	Six Months Ended August 3, 2014
	Debt Issuer			Subsidiary Guarantors		Non- Guarantor Subsidiaries			Eliminations			Total HDS

Net Sales	$	—		$	3,448	$	65		$	—		$	3,513
Cost of sales	—			2,334		37			—			2,371

Gross Profit	—			1,114		28			—			1,142
Operating expenses:
Selling, general and administrative	33			705		25			(1		)	762
Depreciation and amortization	9			97		—			—			106
Restructuring	1			5		—			—			6

Total operating expenses	43			807		25			(1		)	874
Operating Income (Loss)	(43		)	307		3			1			268
Interest expense	232			121		—			(121		)	232
Interest (income)	(122		)	—		—			122			—
Net (earnings) loss of equity affiliates	(129		)	—		—			129			—
Other (income) expense, net	3			—		—			—			3

Income (Loss) From Continuing Operations Before Provision (Benefit) for Income Taxes	(27		)	186		3			(129		)	33
Provision (benefit) for income taxes	(68		)	81		—			—			13

Income (Loss) from Continuing Operations	41			105		3			(129		)	20
Income (loss) from discontinued operations, net of tax	(5		)	25		(4		)	—			16

Net Income (Loss)	$	36		$	130	$	(1	)	$	(129	)	$	36
Other comprehensive income (loss) – foreign currency translation adjustment	2			—		2			(2		)	2

Total Comprehensive Income (Loss)	$	38		$	130	$	1		$	(131	)	$	38

CONDENSED CONSOLIDATING BALANCE SHEETS

	As of August 2, 2015
	Debt Issuer			Subsidiary Guarantors		Non-Guarantor Subsidiaries		Eliminations			Total HDS

ASSETS
Current assets:
Cash and cash equivalents	$	101		$	21	$	37	$	—		$	159
Receivables, net	1			1,084		18		—			1,103
Inventories	—			864		19		—			883
Deferred tax asset	—			66		1		(52		)	15
Current assets of discontinued operations	—			519		55		—			574
Other current assets	9			32		2		—			43

Total current assets	111			2,586		132		(52		)	2,777

Property and equipment, net	50			275		3		—			328
Goodwill	—			2,869		—		—			2,869
Intangible assets, net	—			136		2		—			138
Deferred tax asset	—			—		1		—			1
Non-current assets of discontinued operations	—			276		7		—			283
Investment in subsidiaries	3,290			—		—		(3,290		)	—
Intercompany notes receivable	2,192			559		—		(2,751		)	—
Other assets	96			3		—		—			99

Total assets	$	5,739		$	6,704	$	145	$	(6,093	)	$	6,495


LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	12		$	691	$	12	$	—		$	715
Accrued compensation and benefits	34			79		2		—			115
Deferred tax liabilities	52			—		—		(52		)	—
Current liabilities of discontinued operations	—			233		20		—			253
Other current liabilities	119			111		7		—			237

Total current liabilities	217			1,114		41		(52		)	1,320


Long-term debt, excluding current installments	5,279			—		—		—			5,279
Deferred tax liabilities	8			182		—		—			190
Intercompany notes payable	559			2,192		—		(2,751		)	—
Other liabilities	78			24		6		—			108

Total liabilities	6,141			3,512		47		(2,803		)	6,897


Stockholder’s equity (deficit)	(402		)	3,192		98		(3,290		)	(402		)

Total liabilities and stockholder’s equity (deficit)	$	5,739		$	6,704	$	145	$	(6,093	)	$	6,495

	As of February 1, 2015
	Debt Issuer			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Total HDS

ASSETS
Current assets:
Cash and cash equivalents	$	28		$	25	$	32	$	—		$	85
Receivables, net	1			851		16		—			868
Inventories	—			767		17		—			784
Deferred tax asset	—			66		2		(59		)	9
Current assets of discontinued operations	—			455		54					509
Other current assets	12			29		2		—			43

Total current assets	41			2,193		123		(59		)	2,298

Property and equipment, net	55			283		2		—			340
Goodwill	—			2,868		1		—			2,869
Intangible assets, net	—			143		2		—			145
Deferred tax asset	8			—		1		(8		)	1
Non-current assets of discontinued operations	—			288		7		—			295
Investment in subsidiaries	3,216			—		—		(3,216		)	—
Intercompany notes receivable	2,191			611		—		(2,802		)	—
Other assets	109			3		—		—			112

Total assets	$	5,620		$	6,389	$	136	$	(6,085	)	$	6,060


LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	14		$	485	$	11	$	—		$	510
Accrued compensation and benefits	50			90		4		—			144
Current installments of long-term debt	34			—		—		—			34
Deferred tax liabilities	59			—		—		(59		)	—
Current liabilities of discontinued operations	—			200		17		—			217
Other current liabilities	124			97		9		—			230

Total current liabilities	281			872		41		(59		)	1,135


Long-term debt, excluding current installments	5,223			—		—		—			5,223
Deferred tax liabilities	—			174		—		(8		)	166
Intercompany notes payable	611			2,191		—		(2,802		)	—
Other liabilities	265			26		5		—			296

Total liabilities	6,380			3,263		46		(2,869		)	6,820


Stockholder’s equity (deficit)	(760		)	3,126		90		(3,216		)	(760		)

Total liabilities and stockholder’s equity (deficit)	$	5,620		$	6,389	$	136	$	(6,085	)	$	6,060

CONDENSED CONSOLIDATING CASH FLOW STATEMENTS

	Six Months Ended August 2, 2015
	Debt Issuer			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Eliminations			Total HDS

Net cash flows from operating activities	$	112		$	(21	)	$	7		$	—		$	98

Cash flows from investing activities
Capital expenditures	(7		)	(35		)	(1		)	—			(43		)
Proceeds from sale of property and equipment	—			1			—			—			1
Proceeds from (payments of) intercompany notes	—			51			—			(51		)	—

Net cash flows from investing activities	(7		)	17			(1		)	(51		)	(42		)

Cash flows from financing activities
Borrowings (repayments) of intercompany notes	(51		)	—			—			51			—
Repayments of long-term debt	(16		)	—			—			—			(16		)
Borrowings on long-term revolver	562			—			—			—			562
Repayments of long-term revolver	(526		)	—			—			—			(526		)
Other financing activities	(1		)	—			—			—			(1		)

Net cash flows from financing activities	(32		)	—			—			51			19

Effect of exchange rates on cash	—			—			(1		)	—			(1		)

Net increase (decrease) in cash & cash equivalents	$	73		$	(4	)	$	5		$	—		$	74
Cash and cash equivalents at beginning of period	28			25			32			—			85

Cash and cash equivalents at end of period	$	101		$	21		$	37		$	—		$	159

	Six Months Ended August 3, 2014
	Debt Issuer			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Eliminations			Total HDS

Net cash flows from operating activities	$	44		$	—		$	10		$	—		$	54

Cash flows from investing activities
Capital expenditures	(8		)	(53		)	—			—			(61		)
Investments in equity affiliates - Return of capital	27			—			—			(27		)	—
Proceeds from sale of property and equipment	—			1			—			—			1
Proceeds from (payments of) intercompany notes	—			56			—			(56		)	—

Net cash flows from investing activities	19			4			—			(83		)	(60		)

Cash flows from financing activities
Equity contribution (return of capital)	—			—			(27		)	27			—
Borrowings (repayments) of intercompany notes	(56		)	—			—			56			—
Borrowings of long-term debt	20			—			—			—			20
Repayments of long-term debt	(24		)	—			—			—			(24		)
Borrowings on long-term revolver	306			—			—			—			306
Repayments of long-term revolver	(196		)	—			—			—			(196		)
Debt issuance and modification fees	(3		)	—			—			—			(3		)
Other financing activities	(2		)				—			—			(2		)

Net cash flows from financing activities	45			—			(27		)	83			101

Effect of exchange rates on cash	—			—			1			—			1

Net increase (decrease) in cash & cash equivalents	$	108		$	4		$	(16	)	$	—		$	96
Cash and cash equivalents at beginning of period	53			17			41			—			111

Cash and cash equivalents at end of period	$	161		$	21		$	25		$	—		$	207