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 November 2, 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
December 4, 1996, was 53,494,673 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
FORM 10-Q Page 2
3
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
November 2, February 3
1996 1996*
- --------------------------------------------------------------------------------------------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 36,825 $ 12,999
Accounts receivable 10,941 8,957
Inventories 1,063,410 388,346
Prepaid expenses and deferred income taxes 89,944 41,714
- --------------------------------------------------------------------------------------------- ---------
Total current assets 1,201,120 452,016
- --------------------------------------------------------------------------------------------- ---------
Property and equipment - net 370,557 177,323
Other assets 27,692 10,476
- --------------------------------------------------------------------------------------------- ---------
$ 1,599,369 $ 639,815
============================================================================================= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 439,643 $ 129,223
Accrued liabilities 39,577 41,519
Income taxes 9,097 17,416
Notes payable and current maturities of long-term obligations 30,285 10,000
- --------------------------------------------------------------------------------------------- ---------
Total current liabilities 518,602 198,158
- --------------------------------------------------------------------------------------------- ---------
Long-term obligations 456,368 25,000
Deferred income taxes and other noncurrent liabilities 40,228 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
53,378,316 and 47,775,958 shares respectively 534 478
Non-voting common stock - authorized 8,000,000 shares, $.01 par
value; none issued -- --
Additional paid-in-capital 307,124 104,511
Retained earnings 277,115 285,105
Other adjustments (602) (530)
- --------------------------------------------------------------------------------------------- ----------
Total stockholders' equity 584,171 389,564
- --------------------------------------------------------------------------------------------- ---------
$ 1,599,369 $ 639,815
============================================================================================= =========
* Condensed from audited financial statements
The accompanying notes are an integral part of these condensed financial statements.
FORM 10-Q Page 3
4
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
November 2, October 28, November 2, October 28,
1996 1995 1996 1995
- ---------------------------------------------------------------------- ------------ ------------ ------------
Net sales $ 616,511 $ 357,538 $ 1,511,143 $ 974,449
Cost and expenses:
Cost of sales 353,520 204,100 877,206 560,053
Selling and administrative expenses 262,206 134,161 630,848 373,456
Interest expense 6,954 2,844 14,494 6,063
Other - net (1,376) 72 (1,668) (434)
- ---------------------------------------------------------------------- ----------- ------------ ------------
621,304 341,177 1,520,880 939,138
- ---------------------------------------------------------------------- ----------- ------------ ------------
Income (loss) before income taxes and
extraordinary item (4,793) 16,361 (9,737) 35,311
Income expense (benefit) (1,774) 6,217 (3,603) 13,418
- ---------------------------------------------------------------------- ----------- ------------ ------------
Income (loss) before extraordinary item (3,019) 10,144 (6,134) 21,893
Extraordinary item -- -- (1,856) --
- ---------------------------------------------------------------------- ----------- ------------ ------------
Net income (loss) ($3,019) $ 10,144 ($7,990) $ 21,893
====================================================================== =========== ============ ============
Income (loss) per common and common equivalent share:
Income (loss) before extraordinary item ($0.05) $ 0.21 ($0.12) $ 0.45
Extraordinary item -- -- (0.03) --
- ---------------------------------------------------------------------- ----------- ----------- ------------
Net income (loss) ($0.05) $ 0.21 ($0.15) $ 0.45
====================================================================== =========== ============ ============
Weighted average common and common equivalent
shares outstanding 55,536 49,111 53,153 48,805
====================================================================== =========== ============ ============
The accompanying notes are an integral part of these condensed financial
statements.
FORM 10-Q Page 4
5
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THIRTY-NINE WEEKS ENDED
November 2, October 28,
1996 1995
- ------------------------------------------------------------------------------------------ -------------
Cash provided by (used for) operations:
Net income (loss) $ (7,990) $ 21,893
Adjustments to net income (loss) to arrive at cash used by operations:
Extraordinary item, net 1,856 --
Depreciation and amortization 36,149 21,893
Deferred income taxes (14,037) (4,006)
Other 6,358 2,063
Change in assets and liabilities net of effect from acquired
business (272,330) (173,104)
- ------------------------------------------------------------------------------------------ -----------
Net cash used for operations (249,994) (131,261)
- ------------------------------------------------------------------------------------------ -----------
Cash provided by (used for) investment activities:
Payment for acquired business (185,300) --
Capital expenditures (70,337) (31,011)
Other 5,803 3,638
- ------------------------------------------------------------------------------------------ -----------
Net cash used for investment activities (249,834) (27,373)
- ------------------------------------------------------------------------------------------ -----------
Cash provided by (used for) financing activities:
Proceeds from issuance of common stock 190,647 --
Proceeds from credit agreements, net 375,000 137,100
Payment of senior notes and long-term obligations (35,162) (10,000)
Debt issue payments (10,393) --
Extinguishment of debt (2,946) --
Proceeds from exercise of stock options 3,299 4,392
Increase in deferred credits 3,209 1,490
- ------------------------------------------------------------------------------------------ -----------
Net cash provided by financing activities 523,654 132,982
- ------------------------------------------------------------------------------------------ -----------
Increase (decrease) in cash $ 23,826 $ (25,652)
========================================================================================== ===========
Supplemental Data
- -----------------
Income taxes paid $ 15,158 $ 23,524
Interest paid 10,047 7,668
Supplemental Disclosure of Non Cash Transactions
- ------------------------------------------------
Issuance of subordinated notes - Note 4
The accompanying notes are an integral part of these condensed financial
statements.
FORM 10-Q Page 5
6
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The condensed consolidated balance sheet at November 2, 1996, and the condensed
consolidated statements of income and statements of cash flows for the thirteen
and thirty-nine week periods ended November 2, 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 November 2, 1996, and for the thirteen and thirty-nine 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 November 2,
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 an initial 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. Post-closing
adjustments recorded in the third quarter 1996, reduced the cash component of
the purchase price by $29.7 million to $185.3 million. This transaction is
accounted for as a purchase. 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.
FORM 10-Q Page 6
7
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - ACQUISITION OF KAY-BEE CENTER, INC. - CONTINUED
- --------------------------------------------------------
The unaudited pro forma summary of operations data for each of the thirty-nine
week periods ended November 2, 1996, and October 28, 1995, and the thirteen week
period ended October 28, 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 respective thirteen week period ended March 30, 1996, and thirty-nine week
period ended July 29, 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 Thirty-nine weeks ended
------------------- ---------------------------------------
October 28, November 2, October 28,
1995 1996 1995
------------------- ------------------ ------------------
(In thousands, except loss per share data)
Net sales $538,155 $1,687,533 $1,486,451
Operating income (loss) 3,746 (19,167) (15,754)
Net loss (1,533) (24,018) (17,907)
Net loss per common and common equivalent share (1) (0.03) (0.43) (0.33)
(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.
NOTE 6 - SUBSEQUENT EVENT
- -------------------------
On November 19, 1996, the Board of Directors declared and authorized a 5 for 4
stock split of the Company's $.01 par value voting common stock to be effected
by a distribution of additional shares on December 24, 1996, to stockholders of
record on December 10, 1996.
FORM 10-Q Page 7
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 1,981
stores located in all 50 states and Puerto Rico. As a value retailer
specializing in close-out merchandise and toys the Company operates 796 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, 1,185 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 Thirty-nine weeks ended
November 2, October 28, November 2, October 28,
1996 1995 1996 1995
---------- ----------- ----------- -----------
(Percent to total net sales)
Net sales:
Close-out and specialty 58.6% 91.6% 67.3% 92.8%
Toys 39.6 5.1 30.8 4.2
Other 1.7 3.3 1.9 3.0
----- ----- ----- -----
100.0 100.0 100.0 100.0
Cost of sales 57.3 57.1 58.0 57.5
----- ----- ----- -----
Gross profit 42.7 42.9 42.0 42.5
Selling and administrative expenses 42.5 37.5 41.7 38.3
----- ----- ----- -----
Operating profit (loss) 0.2 5.4 0.3 4.2
Interest expense 1.1 0.8 1.0 0.6
Other income (0.2) -- (0.1) --
----- ----- ----- -----
Income (loss) before income taxes and
extraordinary item (0.7) 4.6 (0.6) 3.6
Income tax expense (benefit) (0.3) 1.7 (0.2) 1.4
----- ----- ----- -----
Income (loss) before extraordinary item (0.4) 2.9 (0.4) 2.2
Extraordinary item -- -- (0.1) --
===== ===== ===== =====
Net income (loss) (0.4)% 2.9% (0.5)% 2.2%
===== ===== ===== =====
November 2, October 28,
1996 1995
----------- ------------
Retail stores in operation at end of period:
Close-out and specialty 796 742
Toys 1,185 103
------- -------
1,981 845
======= =======
FORM 10-Q Page 8
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 thirty-nine week periods ended November 2,
1996, increased 72.4% and 55.1%, respectively. Comparable store sales for stores
open two years at the beginning of the fiscal year increased 5.6% for the
quarter and 4.7% 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
------------------------------
November 2, October 28, Percentage
Operating Unit 1996 1995 Change
- ----------------------------- ------------ -------------- ------------
(In thousands)
Close-out and specialty $361,528 $327,652 10.3%
Toys 244,328 18,102 1,249.7
Other 10,655 11,784 (9.6)
======== ======== ========
$616,511 $357,538 72.4%
======== ======== ========
Thirty-nine weeks ended
-----------------------------
November 2, October 28, Percentage
1996 1995 Change
-------------- ------------- -------------
(In thousands)
Close-out and specialty $1,016,412 $904,295 12.4%
Toys 466,065 40,744 1,043.9
Other 28,666 29,410 (2.5)
---------- -------- --------
$1,511,143 $974,449 55.1%
========== ======== ========
FORM 10-Q Page 9
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 42.7% for the third
quarter of fiscal 1996 compared to 42.9% in the same 1995 period. The decline in
gross profit percentage primarily reflects slightly higher markdowns and lower
initial markups experienced by the close-out and specialty operating units.
Gross profit was 42.0% and 42.5% for the first nine months of fiscal 1996 and
1995, respectively.
SELLING AND ADMINISTRATIVE EXPENSES. As a percent to net sales, selling and
administrative expenses were 42.5% and 37.5% in the third quarter of fiscal 1996
and 1995 respectively, and 41.7% and 38.3% 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 $4.1 million in the third quarter
of 1996 and rose $8.4 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, as well as an 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. During the third quarter of 1996 Federal legislation was
passed which, among other matters, limits the interest deduction associated with
corporate-owned life insurance. The Company is terminating its participation in
the corporate-owned life insurance program and does not anticipate an increase
in the effective tax rate for 1996 as a result of this action.
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 initial purchase price for all of the KAY-BEE common stock was approximately
$315 million, subject to a post-closing adjustment based on an audit of
KAY-BEE's balance sheet. The initial purchase price was 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. Post-closing adjustments recorded in
the third quarter 1996, reduced the cash component of the purchase price by
$29.7 million to $185.3 million.
Under the Stock Purchase Agreement, Melville made standard representations,
warranties and covenants.
FORM 10-Q Page 10
11
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. At November 2, 1996, approximately $106 million was available for
direct borrowings under the Revolving Credit Facility.
Additionally, from time-to-time the Company utilizes uncommitted credit
facilities, subject to terms of the Revolving Credit Facility, to supplement
short-term borrowing requirements.
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.
FORM 10-Q Page 11
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.
No matter was submitted during the
third 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. None
Exhibit No. Document
------------------ ------------------------------
27 Financial Data Schedule
(b) Reports on Form 8-K. None.
FORM 10-Q Page 12
13
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: December 4, 1996 By: /s/ Michael J. Potter
---------------------
Michael J. Potter,
Sr. Vice President, Chief
Financial Officer, and
Principal Accounting Officer
FORM 10-Q Page 13
5
3-MOS
FEB-1-1997
FEB-4-1996
NOV-2-1996
36,825
0
10,941
0
1,063,410
1,201,120
548,653
178,096
1,599,369
518,602
456,368
534
0
0
583,637
1,599,369
1,511,143
1,511,143
877,206
1,508,054
(1,668)
0
14,494
(9,737)
(3,603)
(6,134)
0
(1,856)
0
(7,990)
(0.15)
(0.15)
