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 August 3, 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 September 6, 1995, was 53,336,802 and there were no
shares of Nonvoting Common Stock, $.01 par value per share outstanding at
that date.
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 Income 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 8
Part II - Other Information
Items 1 - 6 12
Signature 13
3
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
AUGUST 3, FEBRUARY 3,
1996 1996*
- -----------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $ 23,141 $ 12,999
Accounts receivable 38,419 8,957
Inventories 750,708 388,346
Prepaid expenses and deferred income taxes 77,448 41,714
- -----------------------------------------------------------------------------------------------------
Total current assets 889,716 452,016
- -----------------------------------------------------------------------------------------------------
Property and equipment - net 363,053 177,323
Other assets 33,448 10,476
- -----------------------------------------------------------------------------------------------------
$1,286,217 $ 639,815
=====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 280,304 $ 129,223
Accrued liabilities 41,506 41,519
Income taxes 1,230 17,416
Notes payable and current maturities of long-term obligations 279 10,000
- -----------------------------------------------------------------------------------------------------
Total current liabilities 323,319 198,158
- -----------------------------------------------------------------------------------------------------
Long-term obligations 334,042 25,000
Deferred income taxes and other noncurrent liabilities 42,534 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
53,314,100 and 47,775,958 shares respectively 533 478
Nonvoting common stock - authorized 8,000,000 shares, $.01 par value;
none issued -- --
Additional paid-in-capital 305,450 104,511
Retained earnings 280,133 285,105
Other adjustments 206 (530)
- -----------------------------------------------------------------------------------------------------
Total stockholders' equity 586,322 389,564
- -----------------------------------------------------------------------------------------------------
$1,286,217 $ 639,815
=====================================================================================================
* Condensed from audited financial statements
The accompanying notes are an integral part of these condensed financial
statements.
4
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
August 3, July 29, August 3, July 29,
1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------
Net sales $ 551,403 $ 325,114 $ 894,632 $ 616,911
Cost and expenses:
Cost of sales 325,884 187,056 523,686 355,953
Selling and administrative expenses 230,583 122,372 368,643 239,295
Interest expense 5,654 1,911 7,540 3,219
Other - net (50) (343) (292) (506)
- ---------------------------------------------------------------------------------------------------------
562,071 310,996 899,577 597,961
- ---------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
and extraordinary item (10,668) 14,118 (4,945) 18,950
Income tax expense (benefit) (3,947) 5,365 (1,829) 7,201
- ---------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item (6,721) 8,753 (3,116) 11,749
Extraordinary item (1,856) -- (1,856) --
- ---------------------------------------------------------------------------------------------------------
Net income (loss) ($ 8,577) $ 8,753 ($ 4,972) $ 11,749
================================================================== ========= ========= =========
Income (loss) per common and common
equivalent share:
Income (loss) before extraordinary item ($ 0.12) $ 0.18 ($ 0.06) $ 0.24
Extraordinary item ( 0.04) -- ( 0.04) --
- ---------------------------------------------------------------------------------------------------------
Net income (loss) ($ 0.16) $ 0.18 ($ 0.10) $ 0.24
================================================================== ========= ========= =========
Weighted average common and common
equivalent shares outstanding 54,044 48,864 51,950 48,630
================================================================== ========= ========= =========
The accompanying notes are an integral part of these condensed financial
statements.
5
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
TWENTY-SIX WEEKS ENDED
August 3, July 29,
1996 1995
- ----------------------------------------------------------------------------------------
Cash provided by (used for) operations:
Net income (loss) ($ 4,972) $ 11,749
Adjustments to net income (loss) to arrive at cash used by
operations:
Extraordinary item, net 1,856 --
Depreciation and amortization 21,615 13,329
Deferred income taxes (2,930) (661)
Other 5,491 2,212
Change in assets and liabilities net of effect
from acquired business (122,575) (106,771)
- ----------------------------------------------------------------------------------------
Net cash used for operations (101,515) (80,142)
- ----------------------------------------------------------------------------------------
Cash provided by (used for) investment activities:
Payment for acquired business (214,513) --
Capital expenditures (46,229) (16,212)
Other 1,912 2,147
- ----------------------------------------------------------------------------------------
Net cash used for investment activities (258,830) (14,065)
- ----------------------------------------------------------------------------------------
Cash provided by (used for) financing activities:
Proceeds from issuance of common stock 190,647 --
Proceeds from credit agreements, net 222,600 68,695
Payment of senior notes (35,000) (5,000)
Debt issue payments (10,307) --
Extinguishment of debt (2,946) --
Proceeds from exercise of stock options 2,658 3,946
Increase in deferred credits 2,835 --
- ----------------------------------------------------------------------------------------
Net cash provided by financing activities 370,487 67,641
- ----------------------------------------------------------------------------------------
Increase (decrease) in cash $ 10,142 ($ 26,566)
========================================================================================
Supplemental Disclosure of Cash Flow Information:
- -------------------------------------------------
Income taxes paid $ 14,350 $ 16,079
Interest paid $ 5,245 $ 3,473
Supplemental Disclosure of Non Cash Transactions:
- -------------------------------------------------
Issuance of subordinated notes - Note 4
The accompanying notes are an integral part of these condensed financial
statements.
6
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The condensed consolidated balance sheet at August 3, 1996, and the condensed
consolidated statements of income and statements of cash flows for the thirteen
and twenty-six week periods ended August 3, 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 August 3, 1996, and for the thirteen and twenty-six 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
year ended February 3, 1996. The results of operations for the period ended
August 3, 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 - 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 $190.6 million.
NOTE 4 - ACQUISITION OF KAY-BEE CENTER, INC.
- --------------------------------------------
As of May 5, 1996, the Company acquired Kay-Bee Center, Inc. (KAY-BEE) 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 subordinated notes, issued to Melville Corporation. At May 5, 1996,
KAY-BEE 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 is
accounted for as a purchase.
The unaudited pro forma summary of operations data for each of the twenty-six
week periods ended August 3, 1996 and July 29, 1995, and the thirteen week
period ended July 29, 1995, have been prepared by combining the consolidated
7
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - ACQUISITION OF KAY-BEE CENTER, INC. - CONTINUED
- --------------------------------------------------------
statements of earnings of Consolidated Stores Corporation and Subsidiaries for
each of the periods presented with the consolidated statements of operations
for the respective thirteen week period ended March 30, 1996, and twenty-six
week period ended June 30, 1995, of KAY-BEE, as well as, the estimated purchase
price allocation in accordance with APB 16, the financing, and the issuance of
Common Stock.
Thirteen weeks
ended Twenty-six weeks ended
--------------------------------------------------
July 29, August 3, July 29,
1995 1996 1995
--------------------------------------------------
(In thousands, except loss per share data)
Net sales $489,683 $1,071,022 $948,296
Operating income (loss) 151 (20,951) (17,606)
Net loss (2,654) (20,999) (16,374)
Net loss per common and common equivalent share(1) (0.05) (0.39) (0.30)
(1) Adjusted to reflect issuance of 5,125,000 shares of Common Stock
NOTE 5 - EXTRAORDINARY ITEM
- ---------------------------
During the second quarter of 1996 the Company recorded an extraordinary item in
connection with the early extinguishment for $35 million of 10.5% senior notes.
The charge before income taxes was $2.9 million.
8
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
TRENDS. The Company is the nation's largest close-out retailer, with 1,940
stores located in all 50 states and Puerto Rico. As a value retailer
specializing in close-out merchandise and toys the Company operates 775 retail
close-out and specialty stores 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, 1,165 retail toy and close-out toy stores were in
operation throughout the United States and Puerto Rico under the names KAY-BEE,
TOY WORKS and TOY LIQUIDATORS. As more fully described below, on May 5, 1996,
the Company acquired 1,045 KAY-BEE and TOY WORKS retail toy stores. The Company
believes that KAY-BEE is the largest enclosed mall-based toy retailer in the
United States.
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 Twenty-six weeks ended
August 3, July 29, August 3, July 29,
1996 1995 1996 1995
--------------------------------------------------
(Percent to total net sales)
Net sales:
Close-out and specialty 60.7 93.0 73.2 93.5
Toys 37.8 4.2 24.8 3.7
Other 1.5 2.8 2.0 2.9
--------------------------------------------------
100.0 100.0 100.0 100.0
Cost of sales 59.1 57.5 58.5 57.7
--------------------------------------------------
Gross profit 40.9 42.5 41.5 42.3
Selling and administrative expenses 41.8 37.6 41.2 38.8
--------------------------------------------------
Operating profit (loss) (0.9) 4.9 0.3 3.5
Interest expense 1.0 0.6 0.8 0.5
Other income -- (0.1) -- (0.1)
--------------------------------------------------
Income (loss) before income taxes and extraordinary item (1.9) 4.4 (0.5) 3.1
Income tax expense (benefit) (0.7) 1.7 (0.2) 1.2
--------------------------------------------------
Income (loss) before extraordinary item (1.2) 2.7 (0.3) 1.9
Extraordinary item (0.3) -- (0.2) --
-------------------------------------------------
Net income (loss) (1.5) 2.7 (0.5) 1.9
========= ======= ======= ======
August 3, July 29,
1996 1995
-------------------------------------------------
Retail stores in operation at end of period:
Close-out and specialty 775 715
Toys 1,165 91
======= ======
1,940 806
======= ======
9
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - CONTINUED
- ---------------------------------
The Company has historically experienced seasonal fluctuations with a
significant percentage of its net sales and income being realized in the fourth
fiscal quarter. The Company's quarterly results can also be affected by the
timing of store openings and closings, the amount of net sales contributed by
new and existing stores and the timing of certain holidays. Historically, the
Company has generally recorded operating profits during each fiscal quarter. Due
to the increase in the Company's retail toy operations as a result of the
KAY-BEE acquisition on May 5, 1996, it is anticipated operating losses will be
recognized during the first three fiscal quarters and a increasing amount of net
sales, operating profit and net income will be recognized in the fourth fiscal
quarter. 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.
SALES. Net sales for the thirteen and twenty-six week periods ended August 3,
1996, increased 69.6% and 45.0%, respectively. Comparable store sales for stores
open two years at the beginning of the fiscal year increased 3.2% for the
quarter and 4.0% for the year to date period. The sales improvement reflects the
greater number of close-out and specialty stores in operation during the period
and the sales performance of KAY-BEE acquired at the start of the second quarter
of fiscal 1996.
Net sales by operating unit were as follows:
Thirteen weeks ended
---------------------------------
Percentage
Operating Unit August 3, 1996 July 29, 1995 Change
- ------------------------------------------------------ --------------- -----------------
(In thousands)
Close-out and specialty $334,908 $302,243 10.8%
Toys 208,196 13,659 1,424.2
Other 8,299 9,212 (9.9)
-----------------------------------------------------------------------
$551,403 $325,114 69.6%
================ =============== =================
Twenty-six weeks ended
Percentage
August 3, 1996 July 29, 1995 Change
---------------------------------- --------------- -----------------
(In thousands)
Close-out and specialty $654,884 $576,643 13.6%
Toys 221,737 22,642 879.3
Other 18,011 17,626 2.2
---------------- --------------- -----------------
$894,632 $616,911 45.0%
================ =============== =================
10
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - CONTINUED
- ---------------------------------
GROSS PROFIT. Gross profit as a percent of net sales was 40.9% for the second
quarter of fiscal 1996 compared to 42.5% in the same 1995 period. The decline
for the quarter primarily results from the effects of KAY-BEE acquired at the
beginning of the second quarter which traditionally operates at a lower gross
margin percentage than historically reported by the Company. To a lesser degree,
the declines in gross profit percentage also reflect slightly higher markdowns
experienced by the close-out and specialty operating units. Gross profit was
41.5% and 42.3% for the first six months of fiscal 1996 and 1995, respectively.
SELLING AND ADMINISTRATIVE EXPENSES. As a percent to net sales, selling and
administrative expenses were 41.8% and 37.6% in the second quarter of fiscal
1996 and 1995, respectively and 41.2% and 38.8% in each of the year to date
periods. These increases are primarily attributable to the effect from store
operating expenses of KAY-BEE which are anticipated to be greater as a percent
to sales in the first three fiscal quarters than historically reported by the
Company.
INTEREST EXPENSE. Interest expense increased $3.7 million in the second quarter
of 1996 and rose $4.3 million for the year. These increases result from higher
weighted average borrowing outstanding for the respective periods, principally
associated with operating requirements of KAY-BEE, and a increase in the
effective borrowing rate.
INCOME TAXES. The effective tax rate of the Company is 37.0% in 1996 compared to
38.0% in 1995. 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. Subsequent to August 3, 1996, Federal legislation was
passed which, among other matters, limits the interest deduction associated with
corporate-owned life insurance. The Company is evaluating the impact this
legislation may have on the effective tax rate for future periods.
ACQUISITION OF KAY-BEE. Pursuant to a Stock Purchase Agreement dated March 25,
1996, Consolidated Stores Corporation acquired from Melville Corporation
(Melville) all of the issued and outstanding common stock of KAY-BEE, a
California corporation and a holding company for approximately 800 subsidiaries,
operating 1,045 retail toy stores. 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 subordinated notes by the Company to Melville. The initial purchase
price payment was based on the estimated net book value of KAY-BEE as of
December 31, 1995.
11
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - CONTINUED
- ---------------------------------
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.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The primary sources of liquidity for the Company has been cash flow from
operations and borrowings under available credit facilities.
Concurrent with the acquisition of KAY-BEE the Company terminated its existing
revolving credit agreement and entered into a Revolving Credit Facility dated
May 3, 1996, as amended June 28, 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 and repay
certain existing indebtedness under the prior revolving credit agreement and
senior notes.
In connection with the acquisition of KAY-BEE the Company issued $100 million of
Subordinated Notes. 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.
In the second quarter of 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 $190.6 million were
utilized to repay a portion of the borrowings incurred to finance the
acquisition of KAY-BEE.
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.
12
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.
(a) The Company's Annual Meeting was held on
July 23, 1996.
(b) The number of shares of voting Common Stock,
$.01 par value per share, outstanding as of
June 11, 1996, the record date was 53,298,704.
(c) The number of shares of Common Stock of the
Company represented in person or by proxy and
eligible to vote was 43,166,777.
(d) Proxies were solicited by management pursuant
to Regulation 14 under the Securities Exchange
Act of 1934. There was no solicitation in
opposition to management's nominees as listed
in the proxy statement. All of the nominee's
were elected pursuant to a vote of the
stockholders.
(e) A proposal to approve the Consolidated Stores
Corporation 1996 Performance Incentive Plan was
approved by a majority vote of the
stockholders.
The vote on this proposal was: 29,395,536 11,109,519 52,877
-------------------------------------------------
For Against Abstain
(f) A proposal to approve the Consolidated Stores
Corporation Key Associate Annual Incentive
Compensation Plan was approved by a majority
vote of the stockholders.
The vote on this proposal was: 42,024,968 1,086,337 55,462
-------------------------------------------------
For Against Abstain
Item 5. Other Information. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit No. Document
------------------ -------------------------------------------------------------
27 Financial Data Schedule
(b) Reports on Form 8-K. None.
13
SIGNATURE
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: September 13, 1996 By: /s/ Michael J. Potter
------------------- --------------------------------------
Michael J. Potter, Sr. Vice President,
Chief Financial Officer, and Principal
Accounting Officer
5
1,000
3-MOS
FEB-01-1997
FEB-04-1996
AUG-03-1996
23,141
0
38,419
0
750,708
889,716
527,768
164,715
1,286,217
323,319
334,042
0
0
533
585,789
1,286,217
894,632
894,632
523,686
892,329
(292)
0
7,540
(4,945)
(1,829)
(3,116)
0
(1,856)
0
(4,972)
(0.10)
(0.10)
