1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT FILED PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 4, 1996 Commission file number 1-8897
CONSOLIDATED STORES CORPORATION
A Delaware Corporation
IRS No. 06-1119097
1105 North Market Street, Suite 1300
P. O. Box 8985
Wilmington, Delaware 19899
(302) 478-4896
Indicate 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, and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock $.01 par value per share, outstanding as of
June 10, 1996, was 53,298,704 and there were no shares of Non-voting Common
Stock, $.01 par value per share outstanding at that date.
FORM 10-Q
2
CONSOLIDATED STORES CORPORATION
QUARTERLY REPORT ON FORM 10-Q
INDEX
-----
Page
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Earnings 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II - Other Information
Signature 14
FORM 10-Q Page 2 of 15
3
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
May 4, February 3,
1996 1996*
- --------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 39,504 $ 12,999
Restricted cash 214,515 --
Accounts receivable 7,885 8,957
Inventories 444,515 388,346
Prepaid expenses and deferred income taxes 48,473 41,714
- --------------------------------------------------------------------------------
Total current assets 754,892 452,016
- --------------------------------------------------------------------------------
Property and equipment - net 180,384 177,323
Other assets 21,903 10,476
- --------------------------------------------------------------------------------
$ 957,179 $ 639,815
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 131,774 $ 129,223
Accrued liabilities 37,942 41,519
Income taxes 8,184 17,416
Current maturities of long-term obligations 10,000 10,000
- --------------------------------------------------------------------------------
Total current liabilities 187,900 198,158
- --------------------------------------------------------------------------------
Long-term obligations 345,000 25,000
Deferred income taxes and other noncurrent liabilities 26,406 27,093
Stockholders' equity:
Preferred stock - authorized 2,000,000 shares,
$.01 par value; none issued -- --
Common stock - authorized 90,000,000 shares, $.01
par value; issued 48,075,276 and 47,775,958
shares respectively 481 478
Common stock - authorized 8,000,000 shares, $.01
par value; none issued -- --
Additional paid-in-capital 108,714 104,511
Retained earnings 288,711 285,105
Other adjustments (33) (530)
- --------------------------------------------------------------------------------
Total stockholders' equity 397,873 389,564
- --------------------------------------------------------------------------------
$ 957,179 $ 639,815
================================================================================
* Condensed from audited financial statements
The accompanying notes are an integral part of these condensed financial
statements.
FORM 10-Q Page 3 of 15
4
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Thirteen weeks ended
----------------------
May 4, April 29,
1996 1995
- ----------------------------------------------------------------------
Net sales $ 343,229 $ 291,797
Cost and expenses:
Cost of sales 197,802 168,897
Selling and administrative expenses 138,059 116,923
Interest expense 1,886 1,308
Other - net (242) (163)
- ----------------------------------------------------------------------
337,505 286,965
- ----------------------------------------------------------------------
Income before income taxes 5,724 4,832
Income taxes 2,118 1,836
- ----------------------------------------------------------------------
Net income $ 3,606 $ 2,996
======================================================================
Income per common and common equivalent share $ .07 $ .06
======================================================================
Weighted average common and common
equivalent shares outstanding 49,826 48,482
======================================================================
The accompanying notes are an integral part of these condensed financial
statements.
FORM 10-Q Page 4 of 15
5
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Thirteen weeks ended
---------------------
May 4, April 29,
1996 1995
- ---------------------------------------------------------------------------------------------
Cash provided by (used for) operations:
Net income $ 3,606 $ 2,996
Items not effecting cash:
Depreciation and amortization 8,164 6,792
Deferred income taxes (740) 1,204
Other 1,825 1,836
Change in assets and liabilities (71,454) (63,641)
- ---------------------------------------------------------------------------------------------
Net cash used for operations (58,599) (50,813)
- ---------------------------------------------------------------------------------------------
Cash provided by (used for) investment activities:
Capital expenditures (11,375) (6,398)
Other 508 596
- ---------------------------------------------------------------------------------------------
Net cash used for investment activities (10,867) (5,802)
- ---------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities:
Proceeds from credit agreements 320,000 32,695
Payment of debt issue expenses (11,388) --
Proceeds from exercise of stock options 1,234 1,427
Payment of long-term obligations -- (5,000)
Other 640 --
- ---------------------------------------------------------------------------------------------
Net cash provided by financing activities 310,486 29,122
- ---------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents and restricted cash $ 241,020 $(27,493)
=============================================================================================
The accompanying notes are an integral part of these condensed financial
statements.
FORM 10-Q Page 5 of 15
6
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The condensed consolidated balance sheet at May 4, 1996, and the condensed
consolidated statements of earnings and statements of cash flows for the
thirteen week period ended May 4, 1996, have been prepared by the Company
without audit. In the opinion of management, all adjustments necessary to
present fairly the financial position, results of operations, and cash flows at
May 4, 1996, and for the thirteen week periods presented have been made. Such
adjustments consisted only of normal recurring items.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principals have been omitted or condensed. It is suggested that the condensed
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report for the
fiscal year ended February 3, 1996. The results of operations for the period
ended May 4, 1996, may not necessarily be indicative of the operating results
for the full year.
NOTE 2 - EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
- --------------------------------------------------------
Earnings per common and common equivalent share are based on the weighted
average number of shares outstanding during each period which includes the
additional number of shares which would have been issued upon exercise of stock
options assuming that the Company used the proceeds received to purchase
additional shares at market value.
NOTE 3 - SUBSEQUENT EVENTS
- --------------------------
ACQUISITION OF KAY-BEE CENTER, INC.
As of May 5, 1996, the Company acquired Kay-Bee Center, Inc. from Melville
Corporation for a purchase price of approximately $315 million (subject to
post-closing adjustments), consisting of $215 million in cash and $100 million
of senior Subordinated Promissory Notes, issued to Melville Corporation. Kay-Bee
Center, Inc. operated 1,045 toy stores located in all 50 states and Puerto Rico
primarily under the names Kay-Bee Toys and Toy Works. This transaction will be
accounted for as a purchase.
STOCK OFFERING
As of June 10, 1996, the Company completed an offering of 5,125,000 shares
of common stock, including a underwriters' over-allotment of 125,000 shares. Net
proceeds to the Company were approximately $191.4 million.
FORM 10-Q Page 6 of 15
7
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3 - PRO FORMA SUMMARY OF OPERATIONS DATA (UNAUDITED)
- ---------------------------------------------------------
The unaudited pro forma summary of operations data for each of the
thirteen week periods ended May 4, 1996, and April 29, 1995, have been prepared
by combining the consolidated statements of earnings of Consolidated Stores
Corporation and Subsidiaries for each of the periods presented with the
consolidated statements of operations for the thirteen week periods ended March
30, 1996, and April 1, 1995, of Kay-Bee Center, Inc., as well, as the estimated
price allocation in accordance with APB 16, the Financing and the issuance of
Common Stock.
Thirteen weeks ended
-------------------------------------
May 4 April 29,
1996 1995
- -----------------------------------------------------------------------------------------------------
(In thousands, except loss per share data)
Net sales $519,619 $458,613
Operating loss (16,172) (18,614)
Net loss (12,422) (13,185)
Net loss per common and common equivalent share (1)
(0.23) (0.25)
(1) Adjusted to reflect issuance of 5,125,000 shares of Common Stock
FORM 10-Q Page 7 of 15
8
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED MAY 4, 1996 COMPARED TO THIRTEEN WEEKS ENDED APRIL 29, 1995
- --------------------------------------------------------------------------------
OVERVIEW
TRENDS The Company is the nation's largest close-out retailer with 887
retail stores located in 39 states at May 4, 1996. The Company operates
close-out retail stores, primarily under the names Odd Lots/Big Lots, iTZADEAL!
and All For One, in the midwestern, southern and mid-Atlantic regions of the
United States. Additionally, the Company operates toy stores, under the names
Toy Liquidators and The Amazing Toy Store which carry primarily close-out toys
supplemented by selected in-line toys. The table below compares components of
the statements of earnings of the Company as a percent to net sales and reflects
the number of retail stores in operation at the end of each period.
Thirteen weeks ended
----------------------
May 4, April 29,
1996 1995
--------- ---------
Net sales:
Retail 97.2% 97.1%
Other 2.8 2.9
--------- ---------
Total net sales 100.0 100.0
Cost of sales 57.6 57.9
--------- ---------
Gross profit 42.4 42.1
Selling and administrative expenses 40.2 40.1
--------- ---------
Operating profit 2.2 2.0
Interest expense 0.5 0.4
Other income 0.1 0.1
--------- ---------
Income before income taxes 1.8 1.7
Income taxes 0.6 0.6
========= =========
Net income 1.2% 1.1%
========= =========
Retail stores in operation at end of period:
Odd Lots/Big Lots 559 498
iTZADEAL! and All For One 210 197
Toy Liquidators and The Amazing Toy Store 118 85
========= =========
887 780
========= =========
The Company has historically experienced, and expects to continue to
experience, seasonal fluctuations with a significant percentage of its net sales
and income being realized in the fourth fiscal quarter. In addition, the
Company's quarterly results can be affected by the timing of store openings and
closing, the amount of net
FORM 10-Q Page 8 of 15
9
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
OVERVIEW - CONTINUED
sales contributed by new and existing stores and the timing of certain holidays.
Quarterly fluctuations in inventory balances are normal reflecting the
opportunistic purchases available at any given time and the expansion of the
Company's store base. Historically, on a per store basis, inventory levels are
lower at the end of the Company's fiscal year and build through the remaining
three quarters of the year to a peak level in the third quarter. Accounts
payable generally follow a trend similar to inventories.
NET SALES Net sales increased to $343.2 million in the thirteen week
period ended May 4, 1996, from $291.8 million in the same period of 1995, an
increase of $51.4 million, or 17.6%. Retail sales increased $50.1 million, or
17.7%, to $333.5 million in first quarter of 1996 from $283.4 million in the
same 1995 period. This increase was attributable to net sales of $42.8 million
from 146 new stores and comparable store sales increases for stores open two
years at the beginning of the fiscal year of 5.4%, offset in part by the closing
of 39 stores. The increase in comparable store sales was attributable to
improved product offerings and merchandise mix as well as a continued refinement
and expansion of the Company's television advertising program, which was
introduced in the fall of 1994.
GROSS PROFIT Gross profit increased to $145.4 million in the first quarter
of fiscal 1996 from $122.9 million in the 1995 period, an increase of $22.5
million, or 18.3%. As a percentage of net sales, gross profit increased to 42.4%
in the 1996 quarter from 42.1% for the 1995 first quarter. Retail gross profit
as a percent to sales improved to 42.9% from 42.6% in the first quarters of 1996
and 1995, respectively. The advance in gross margin is primarily attributable to
an improved initial markup and favorable product mix offset to some extent by
slightly higher markdowns and inventory shortages.
SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses
increased to $138.1 million for the first thirteen weeks of fiscal 1996 from
$116.9 million in the same 1995 period, an increase of $21.2 million, or 18.1%.
This reflects the greater number of stores in operation during the 1996 period.
As a percentage of net sales, selling and administrative expenses increased
moderately to 40.2% in the 1996 quarter compared to 40.1% in the first quarter
of 1995.
INTEREST EXPENSE Interest expense as a percent to net sales was 0.5% and
0.4% in each of the first quarters of 1996 and 1995, respectively. The Company
incurred increased weighted average borrowings and a rise in effective interest
rates on seasonal debt during the first quarter of 1996 compared to 1995 to
support increased inventory balances for the increased number of stores in
operation and for capital expenditure programs. Accordingly, interest expense
rose $0.6 million, or 44.2%, for the thirteen weeks ended May 4, 1996 compared
to the same period ended April 29, 1995.
INCOME TAXES The effective tax rate of the Company was 37.0% in the
first quarter of 1996 compared to 38.0% in the 1995 quarter. The reduction in
the effective tax rate is principally attributable to the recognition of tax
planning benefits for state and local income taxes. Included in the calculation
of the Company's effective tax rate is the recognition of benefits of a
corporate-owned life insurance program established in 1994. Realization of any
future and potentially certain past tax benefits associated with
corporate-owned life insurance are subject to pending federal legislation.
FORM 10-Q Page 9 of 15
10
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of liquidity for the Company has been cash flow
from operations and borrowings under available credit facilities. Net cash used
by operations in each of the thirteen week periods ended May 4, 1996, and April
29, 1995, as detailed in the condensed consolidated statements of cash flows,
was $58.6 million and $50.8 million, respectively. Additionally, the Company
had capital expenditures of $11.4 million and $6.4 million in each respective
first fiscal quarter. As necessary, the Company supplemented its capital and
operating cash requirements in the first quarter with borrowings under
available credit facilities.
As more fully described below, concurrent with the acquisition of Kay-Bee
Center, Inc. the Company terminated its existing revolving credit agreement and
entered into a Revolving Credit Facility dated May 3, 1996, with a syndicate of
financial institutions to provide senior bank financing in an aggregate
principal amount of up to $600 million. The Revolving Credit Facility consists
of a revolving loan facility (the "Revolver") with the amount available
thereunder equal to $450 million and a letter of credit facility with up to $200
million available for the issuance of documentary and standby letters of credit.
The facility has a maturity date of May 3, 1999. At May 4, 1996, the Company
borrowed $320 million under the Revolver to finance the acquisition of Kay-Bee
Center, Inc. and repay certain existing indebtedness under the prior revolving
credit agreement.
As of June 10, 1996, the Company completed an offering of 5,125,000 shares
of common stock, including a underwriters' over-allotment of 125,000 shares. Net
proceeds to the Company of approximately $191.4 million were utilized to repay a
portion of the borrowings incurred to finance the acquisition of Kay-Bee Center,
Inc.
The Company's capital structure has changed significantly from the
issuance of common stock and increased credit facilities. The Company continues
to believe that it will have adequate resources to fund ongoing operating
requirements and future capital expenditures related to the expansion of
existing businesses and development of new projects. Additionally, management is
not aware of any current trends, events, demands, commitments, or uncertainties
which reasonably can be expected to have a material impact on the liquidity,
capital resources, financial position or results of operations of the Company.
ACQUISITION OF KAY-BEE CENTER, INC.
THE ACQUISITION Pursuant to a Stock Purchase Agreement dated March 25,
1996, Consolidated Stores Corporation (the "Company") acquired from Melville
Corporation (Melville) all of the issued and outstanding common stock of Kay-Bee
Center, Inc., a California corporation ("Kay-Bee") and a holding company for
approximately 800 subsidiaries, operating 1,045 retail toy stores (the
"Acquisition"). Consolidated Stores effected the Acquisition through KB
Consolidated, Inc., a newly formed subsidiary of the Company. The Acquisition
was effective as of 12:01 a.m. on May 5, 1996.
The purchase price for all of the Kay-Bee common stock is approximately
$315 million, subject to a post-closing adjustment based on an audit of
Kay-Bee's balance sheet. The purchase price is comprised of $215 million in cash
and $100 million of senior subordinated notes (the "Subordinated Notes") issued
by the
FORM 10-Q Page 10 of 15
11
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
ACQUISITION OF KAY-BEE CENTER, INC. - CONTINUED
Company to Melville. The initial purchase price payment was based on the
estimated net book value of Kay-Bee as of December 31, 1995.
The Stock Purchase Agreement provides for a dollar-for-dollar post-closing
adjustment of the purchase price in the event that the final net book value of
Kay-Bee as of the closing date differs from the estimated net book value.
Melville must provide to the Company within 60 days of the closing date an
audited closing balance sheet of Kay-Bee as of the closing date setting forth
the calculation of the final net book value.
Under the Stock Purchase Agreement, Melville made standard
representations, warranties and covenants. Melville has agreed to indemnify the
Company and its affiliates against, among other things, losses arising from the
breach of warranties or covenants made by Melville and any damages under the
Worker Adjustment Retraining Notification Act for occurrences prior to the
closing of the Stock Purchase Agreement. With certain exceptions claims against
Melville for losses under the indemnities for the breach of representations and
warranties must aggregate 2.0% of the purchase price before claims can be made
and then Melville will only be liable for the excess over 1.0% of the purchase
price. Melville's maximum exposure to liability pursuant to its indemnities is
the purchase price, as adjusted.
THE FINANCING - SUBORDINATED NOTES On May 5, 1996, in connection with the
Acquisition the Company issued the Subordinated Notes to Melville. The
Subordinated Notes mature in 2000 and bear interest at a rate of 7% per annum,
payable semiannually. The Subordinated Notes are redeemable at the option of the
Company, in whole or in part, after two years from their issuance, at a premium
to their principal, plus accrued interest. The Indenture under which the
Subordinated Notes were issued restricts the Company's ability to, among other
things, incur indebtedness, merge, liquidate, pay dividends or make other
restricted payments, engage in transactions with affiliates or enter into
agreements containing payment restrictions affecting subsidiaries. The Indenture
also contains provisions which, among other things, require that the Company in
the event of a Change in Control or, in certain circumstances, an Asset Sale
(each as defined in the Indenture) make an offer to purchase all or a specified
amount of the Subordinated Notes.
THE FINANCING - BRIDGE LOAN FACILITY In connection with the Acquisition,
the Company's principal operating subsidiary entered into a Bridge Loan Facility
dated May 3, 1996, with Merrill Lynch Capital Corporation to provide bridge
financing in an aggregate principal amount of up to $100 million. The
consummation of the Offering (as defined below), terminated the Bridge Loan
Facility.
THE FINANCING - REVOLVING CREDIT FACILITY In connection with the
Acquisition, the Company's principal operating subsidiary entered into a
Revolving Credit Facility dated May 3, 1996, with a syndicate of financial
institutions to provide senior bank financing in an aggregate principal amount
of up to $600 million. The Revolving Credit Facility consists of a revolving
loan facility (the "Revolver") with the amount available thereunder equal to
$450 million and a letter of credit facility with up to $200 million available
for the issuance of documentary and standby letters of credit. The facility has
a maturity date of May 3, 1999. The Company borrowed $320 million under the
Revolver to finance the acquisition of Kay-Bee and repay certain existing
indebtedness.
FORM 10-Q Page 11 of 15
12
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
ACQUISITION OF KAY-BEE CENTER, INC. - CONTINUED
The Revolving Credit Facility contains a number of covenants, including
among others, covenants restricting the Company with respect to the incurrence
of indebtedness, the ability to declare, pay or make dividends or other
distributions in excess of prescribed levels, the creation of liens, the making
of certain investments and loans, engaging in unrelated business, the
consummation of certain transactions such as sales of substantial assets,
mergers or consolidations and other transactions. The Company is also required
to comply with certain financial tests and maintain certain financial ratios.
THE FINANCING - OFFERING OF COMMON SHARES (THE "OFFERING") In connection
with an underwritten public offering the Company sold 5,125,000 shares of Common
Stock (including 125,000 shares in connection with underwriters'
over-allotment). All shares were sold by the Company. The Company granted
underwriters an option to purchase up to 750,000 shares of Common Stock to cover
over-allotments which as of June 10, 1996, 125,000 shares were sold subject to
the over-allotment. Proceeds from the Offering will be used to repay a portion
of the Company's borrowings incurred under the Revolving Credit Facility.
FORM 10-Q Page 12 of 15
13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. Not applicable.
Item 2. Changes in Securities. Not applicable.
Item 3. Defaults Upon Senior Securities. Not applicable.
Item 4. Submission of Matters to Vote of Security Holders.
No matter was submitted during the first quarter of the
fiscal year covered by this report to a vote of security
holders.
Item 5. Other Information. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit No. Topic
--------------- -------------------------------------
27 Financial Data Schedule
(b) Reports on Form 8-K.
During the quarter covered by this report the Company
filed the following Current Report.
Form/Date Topic
--------------- -------------------------------------
Form 8-K Agreement to purchase Kay-Bee Center,
April 9, 1996 Inc. from Melville Corporation
FORM 10-Q Page 13 of 15
14
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.
CONSOLIDATED STORES CORPORATION
-------------------------------
(Registrant)
Dated: June 12, 1995 By: /s/ Michael J. Potter
------------- --------------------------------------
Michael J. Potter, Sr. Vice President,
Chief Financial Officer, and Principal
Accounting Officer
FORM 10-Q Page 14 of 15
5
1,000
3-MOS
FEB-01-1997
FEB-04-1996
MAY-04-1996
254,019
0
7,885
0
444,515
754,892
332,145
151,761
957,179
187,900
345,000
481
0
0
397,392
957,179
343,229
343,229
197,802
335,861
1,644
0
0
5,724
2,118
3,606
0
0
0
3,606
.07
.07
