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 1, 1997 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 9, 1997, was 84,384,840 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 9
Part II - Other Information
Items 1 - 6 14
Signature 15
Page 2
3
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
NOVEMBER 1, FEBRUARY 1,
1997 1997*
- ----------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 27,645 $ 30,044
Accounts receivable 10,935 9,342
Inventories 1,228,513 792,665
Prepaid expenses and deferred income taxes 121,429 94,467
- ----------------------------------------------------------------------------------------------------------------
Total current assets 1,388,522 926,518
- ----------------------------------------------------------------------------------------------------------------
Property and equipment - net 432,647 380,095
Other assets 26,408 23,890
- ----------------------------------------------------------------------------------------------------------------
$ 1,847,577 $ 1,330,503
================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 390,006 $ 295,701
Accrued liabilities and income taxes 47,546 133,635
Notes payable and current maturities of long-term obligations 53,813 27,892
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 491,365 457,228
- ----------------------------------------------------------------------------------------------------------------
Long-term obligations 616,054 151,292
Deferred income taxes and other noncurrent liabilities 47,941 39,898
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
84,359,968 and 83,698,110 shares respectively 844 837
Nonvoting common stock - authorized 8,000,000 shares, $.01 par
value; none issued -- --
Additional paid-in-capital 325,816 312,712
Retained earnings 365,686 369,022
Other adjustments (129) (486)
- ----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 692,217 682,085
- ----------------------------------------------------------------------------------------------------------------
$ 1,847,577 $ 1,330,503
================================================================================================================
* Condensed from audited financial statements
The accompanying notes are an integral part of these condensed financial
statements.
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 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
1997 1996 1997 1996
- ------------------------------------------------------------------------ ----------- ----------- -----------
Net sales $ 669,826 $ 597,314 $ 1,889,026 $ 1,451,830
Cost and expenses:
Cost of sales 384,420 342,230 1,104,591 844,889
Selling and administrative expenses 271,562 248,467 768,767 590,275
Interest expense 8,176 6,344 19,722 12,741
Other - net 426 (1,376) 1,415 (1,668)
- ------------------------------------------------------------------------ ----------- ----------- -----------
664,584 595,665 1,894,495 1,446,237
- ------------------------------------------------------------------------ ----------- ----------- -----------
Income (loss) from continuing operations
before income taxes and extraordinary
charge 5,242 1,649 (5,469) 5,593
Income tax expense (benefit) 2,044 608 (2,133) 2,067
- ------------------------------------------------------------------------ ----------- ----------- -----------
Income (loss) from continuing operations
before extraordinary charge 3,198 1,041 (3,336) 3,526
Discontinued operations -- (4,059) -- (9,657)
Extraordinary charge -- -- -- (1,856)
- ------------------------------------------------------------------------ ----------- ----------- -----------
Net income (loss) $ 3,198 $ (3,018) $ (3,336) $ (7,987)
======================================================================== =========== =========== ===========
Income (loss) per common and common equivalent share:
Continuing operations $ 0.04 $ 0.01 $ (0.04) $ 0.04
Discontinued operations -- (0.04) -- (0.12)
Extraordinary charge -- -- -- (0.02)
- ------------------------------------------------------------------------ ----------- ----------- -----------
Net income (loss) $ 0.04 $ (0.03) $ (0.04) $ (0.10)
======================================================================== =========== =========== ===========
Weighted average common and common equivalent
shares outstanding 88,502 86,774 84,197 83,051
======================================================================== =========== =========== ===========
The accompanying notes are an integral part of these condensed financial
statements.
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5
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THIRTY-NINE WEEKS ENDED
NOVEMBER 1, NOVEMBER 2,
1997 1996
- --------------------------------------------------------------------------------------- ----------
Cash provided by (used for) operations:
Net loss $ (3,336) $ (7,990)
Adjustments to net loss to arrive at cash used by operations:
Extraordinary item, net -- 1,856
Depreciation and amortization 43,743 36,149
Deferred income taxes 13,306 (14,037)
Other 7,991 6,358
Change in assets and liabilities net of effect from acquired
business (465,669) (272,330)
- -------------------------------------------------------------------------------------- ---------
Net cash used for operations (403,965) (249,994)
- -------------------------------------------------------------------------------------- ---------
Cash provided by (used for) investment activities:
Payment for acquired business -- (185,300)
Capital expenditures (99,001) (70,337)
Other 2,650 5,803
- -------------------------------------------------------------------------------------- ---------
Net cash used for investment activities (96,351) (249,834)
- -------------------------------------------------------------------------------------- ---------
Cash provided by (used for) financing activities:
Proceeds from issuance of common stock -- 190,647
Proceeds from credit agreements, net 490,921 375,000
Payment of senior notes and long-term obligations (238) (35,162)
Debt issue payments -- (10,393)
Extinguishment of debt -- (2,946)
Proceeds from exercise of stock options 4,549 3,299
Increase in deferred credits 2,685 3,209
- -------------------------------------------------------------------------------------- ---------
Net cash provided by financing activities 497,917 523,654
- -------------------------------------------------------------------------------------- ---------
Increase (decrease) in cash $ (2,399) $ 23,826
====================================================================================== =========
Supplemental Data
- -----------------
Income taxes paid $ 62,644 $ 15,158
Interest paid 23,045 10,047
Supplemental Disclosure of Non Cash Transactions
- ------------------------------------------------
Issuance of subordinated notes - Note 2
The accompanying notes are an integral part of these condensed financial
statements.
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6
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The condensed consolidated balance sheet at November 1, 1997 and the condensed
consolidated statements of income and statements of cash flows for the thirteen
and thirty-nine week periods ended November 1, 1997 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 1, 1997 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 1, 1997. The results of operations for the period ended November 1,
1997, may not necessarily be indicative of the operating results for the full
year.
Certain reclassifications have been made to the prior year's balance sheet and
income statement to conform to current presentation.
NOTE 2 - ACQUISITION
- --------------------
Effective 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 acquisition was
accounted for as a purchase with the results of KAY-BEE included from the
acquisition date. At May 5, 1996, KAY-BEE operated 1,042 toy stores located in
all 50 states and Puerto Rico primarily under the names Kay-Bee Toys and Toy
Works.
The following summary, prepared on a pro forma basis, combines the results of
operations as if KAY-BEE had been acquired at the beginning of the fiscal year
presented. Included in the pro forma presentation is the impact of certain
purchase adjustments directly attributable to the acquisition which are expected
to have a continuing impact.
(In thousands, except per share data) Thirty-nine
weeks ended
November 2,
1996
=============================================================================
Unaudited
Net sales $ 1,628,220
- -----------------------------------------------------------------------------
Loss from:
Continuing operations before extraordinary charge $ (14,160)
Discontinued operations (9,657)
Extraordinary charge (1,856)
- -----------------------------------------------------------------------------
Net loss $ (25,673)
=============================================================================
Loss per common and common equivalent share of stock:
Continuing operations before extraordinary charge $ (0.17)
Discontinued operations (0.11)
Extraordinary charge (0.02)
- -----------------------------------------------------------------------------
Net loss $ (0.30)
=============================================================================
The pro forma financial information is presented for informational purposes only
and is not necessarily indicative of the operating results that would have
occurred had the KAY-BEE acquisition been consummated as of the beginning of the
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CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
fiscal year presented. Additionally, the pro forma financial information is not
intended to be a prediction of future results and it does not reflect any
synergies that may be achieved from the combined operations.
NOTE 3 - DISCONTINUED OPERATIONS
- --------------------------------
In the fourth quarter of 1996 the Company adopted a plan to close its single
price point and small specialty stores operating under the names of All For One
and iTZADEAL!. Accordingly, the operating results for this business are reported
as a discontinued operation and prior years operating results have been
restated. During the third quarter 1997 and corresponding year to date period,
$4.4 million and $9.4 million, respectively, were charged, net of tax, against
the reserve established in 1996 for discontinued operations.
NOTE 4 - INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
- -------------------------------------------------------------
Income (loss) 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, as applicable, 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.
The Board of Directors authorized 5 for 4 stock splits payable to stockholders
of record on December 10, 1996, and June 10, 1997. These stock splits resulted
in the issuance of 13,388,264 (unadjusted for June 10, 1997 split) and
16,852,771 new shares of common stock, respectively. All references in the
financial statements to average number of shares outstanding and income (loss)
per share amounts have been restated to reflect the splits unless otherwise
noted.
NOTE 5 - STOCK OFFERING
- -----------------------
As of June 10, 1996, the Company completed an offering of 5,125,000 (8,007,812
as adjusted for subsequent stock splits) shares of common stock. Net proceeds to
the Company were approximately $190.6 million.
NOTE 6 - EXTRAORDINARY ITEM
- ---------------------------
During the second quarter of 1996 the Company recorded an extraordinary item in
connection with the early extinguishment of $35 million of 10.5% senior notes.
The charge before income taxes was $2.9 million.
NOTE 7 - NEW ACCOUNTING STANDARDS
- ---------------------------------
The Company calculates earnings (loss) per share using methods prescribed by
Accounting Principles Board Opinion (APB) No. 15, "Earnings per Share". In
February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" which
replaces APB No. 15 and requires adoption for periods ending after December 15,
1997. The Statement will require dual presentation of basic and fully diluted
income (loss) per share on the face of the statement of income. For the periods
ended November 1, 1997, and November 2, 1996, the basic and diluted income
(loss) per share calculated pursuant to SFAS No. 128 are not materially
different from primary income (loss) per share calculated under APB No.
15.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," was issued. SFAS No. 131 establishes standards for the way
that public companies report selected information about operating segments in
annual financial statements and requires that those companies report selected
information about segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. SFAS No. 131, which supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," but
retains the requirement to report information about major customers, requires
that a public company report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and
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CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
deciding how to allocate resources to segments. SFAS No. 131 requires that a
public company report a measure of segment profit or loss, certain specific
revenue and expense items, and segment assets. However, SFAS No. 131 does not
require the reporting of information that is not prepared for internal use if
reporting it would be impracticable. SFAS No. 131 also requires that a public
company report descriptive information about the way that the operating segments
were determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the enterprise's general-purpose financial statements, and changes
in the measurement of segment amounts from period to period. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997. The Company has not determined the effects, if any, that SFAS No. 131 will
have on the disclosures in its consolidated financial statements.
NOTE 8 - SUBSEQUENT EVENT; PROPOSED MERGER
- ------------------------------------------
On November 5, 1997 the Company announced it had entered into an Agreement and
Plan of Merger with Mac Frugal's Bargains Close-outs Inc. (Mac Frugal's). The
transaction is subject to customary conditions, including approval by both
companies' shareholders and regulatory agencies. The transaction is expected to
close in January 1998.
Mac Frugal's operates a chain of 321 closeout retail stores in 18 states. These
stores do business as PIC `N' SAVE and MAC FRUGAL'S BARGAINS CLOSE-OUTS. Mac
Frugal's, headquartered in Dominguez, California, had sales and net income of
$773 million and $43 million, respectively, for the fiscal year ended February
2, 1997
Under the terms of the agreement, Consolidated Stores will issue between 0.88
and 1.00 share of its common stock for each Mac Frugal's share. The final
exchange ratio will be based on the average closing price per share of
Consolidated Stores stock during a twenty day period prior to the effective time
of the merger. Based on Consolidated Stores twenty day average closing price
through November 4, 1997, the exchange ratio would be 0.99.
In connection with the merger the Company expects to take a pretax charge of $75
to $100 million relating to the cost of integrating the two companies. The
stock-for-stock transaction will be accounted for as a pooling-of-interests and
will be tax-free to both companies and their respective shareholders.
Page 8
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CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
OVERVIEW. The Company is the nation's largest closeout retailer and the nation's
largest mall-based toy retailer with 1,946 stores located in all 50 states and
Puerto Rico. The Company operates 677 retail closeout stores under the names ODD
LOTS and BIG LOTS (Closeout Stores) in the midwestern, southern and mid-Atlantic
regions of the United States, and 1,269 retail toy and closeout toy stores
throughout the United States and Puerto Rico, primarily under the names KB
TOYS, KB TOY WORKS, and KB TOY OUTLET (Toy Stores). 1,042 of the Toy Stores
were acquired as of May 5, 1996 in the acquisition of KAY-BEE. As a value
retailer specializing in toys and closeout merchandise, the Company seeks to
provide the budget-conscious consumer with a broad range of quality, name-brand
products at exceptional values. Wholesale operations are conducted under the
names CONSOLIDATED INTERNATIONAL and WISCONSIN TOY.
The Closeout Stores typically offer merchandise at prices 15% to 35% below those
offered by other discount retailers and up to 70% below those offered by
traditional retailers. The Closeout Stores offer a wide variety of name-brand
consumer products, including food items, health and beauty aids, electronics,
housewares, tools, paint, lawn and garden, hardware, sporting goods, toys and
softlines. In addition, these stores supplement their broad offering of items in
core product categories with a changing mix of new merchandise and seasonal
goods such as back-to-school and holiday merchandise.
The Toy Stores offer a broad variety of closeout toys, as well as currently
promoted retail toys (known as "in-line toys") and traditional toy merchandise.
The Company has been in the toy retailing business since its inception and has
operated stand-alone toy stores since 1994.
TRENDS. 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. 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 that a substantial amount of net sales, operating
profit and net income will be realized 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.
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CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table compares components of the statement of income as a percent
of net sales and reflects the number of stores in operation at the end of each
period.
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
-------------------- -----------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
(Percent to total net sales)
Net sales:
Closeout 56.9 % 57.3 % 57.1 % 65.9 %
Toys 41.6 40.9 41.3 32.2
Other 1.5 1.8 1.6 1.9
---------------- ---------------- ---------------- ----------------
100.0 100.0 100.0 100.0
Cost of sales 57.4 57.3 58.5 58.2
---------------- ---------------- ---------------- ----------------
Gross profit 42.6 42.7 41.5 41.8
Selling and administrative expenses 40.5 41.6 40.7 40.7
---------------- ---------------- ---------------- ----------------
Operating profit (loss) 2.1 1.1 0.8 1.1
Interest expense 1.2 1.0 1.0 0.9
Other - net 0.1 (0.2) 0.1 (0.1)
---------------- ---------------- ---------------- ----------------
Income (loss) from continuing operations before income
taxes and extraordinary charge 0.8 0.3 (0.3) 0.3
Income tax expense (benefit) 0.3 0.1 (0.1) 0.1
---------------- ---------------- ---------------- ----------------
Income (loss) from continuing operations before
extraordinary charge 0.5 0.2 (0.2) 0.2
Discontinued operations -- (0.7) -- (0.7)
Extraordinary charge -- -- -- (0.1)
---------------- ---------------- ---------------- ----------------
Net income (loss) 0.5 % (0.5)% (0.2)% (0.6)%
================ ================ ================ ================
NOVEMBER 1, NOVEMBER 2,
1997 1996
---------------- ----------------
Retail stores in operation at end of period:
Closeout 677 649
Toys 1,269 1,220
================ ================
1,946 1,869
================ ================
SALES. Net sales for the thirteen and thirty-nine week periods ended November 1,
1997, increased 12.1% and 30.1%, respectively. Comparable store sales for stores
open two years at the beginning of the fiscal year increased 5.4% for the
quarter and 8.2% for the year to date period. In addition to the positive
comparable stores sales increases the sales improvement reflects the greater
number of close-out and specialty stores in operation during the respective
periods and the sales performance of KAY-BEE acquired at the beginning of the
second quarter of fiscal 1996.
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CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net sales by operating unit were as follows:
THIRTEEN WEEKS ENDED
--------------------
Operating Segment NOVEMBER 1, NOVEMBER 2, Percentage
1997 1996 Change
- ------------------- ------------- ---------------- ---------------
(In thousands)
Closeout $381,058 $342,331 11.3%
Toys 278,475 244,328 14.0
Other 10,293 10,655 (3.4)
======== ======== ====
$669,826 $597,314 12.1%
======== ======== ====
Comparable store sales:
- -----------------------
Closeout 2.8%
Toys 8.5%*
TWENTY-SIX WEEKS ENDED
----------------------
NOVEMBER 1, NOVEMBER 2, Percentage
1997 1996 Change
---------------- ---------------- ---------------
(In thousands)
Closeout $1,078,667 $ 957,099 12.7%
Toys 780,081 466,065 67.4
Other 30,278 28,666 5.6
---------- ---------- ----
$1,889,026 $1,451,830 30.1%
========== ========== ====
Comparable store sales:
- -----------------------
Closeout 3.3%
Toys 14.6%*
* Includes KAY-BEE comparable store sales from date of acquisition.
GROSS PROFIT. Gross profit as a percent of net sales was 42.6% for the third
quarter of fiscal 1997 compared to 42.7% in the same 1996 period and was 41.5%
and 41.8% for the first nine months of fiscal 1997 and 1996, respectively. The
quarter reflects improved initial markups in the Closeout segment and a decline
in gross profit percentage of the Toy Stores resulting from increased video
games sales which traditionally have a smaller gross profit percentage. For the
quarter and year to date periods, the Company has gradually increased the
availability of closeout toys in the Toy Stores, which traditionally have a
higher gross profit percentage.
Components of gross profit as a percent to each operating segments sales were as
follows:
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
-------------------- -----------------------
Operating Segment NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
1997 1996 1997 1996
- --------------------------- ---------------- ---------------- ---------------- ----------------
Closeout 42.4% 42.0% 41.9% 41.6%
Toys 43.6 44.5 41.6 43.3
Other 24.2 22.3 25.2 22.7
---------------- ---------------- ---------------- ----------------
42.6% 42.7% 41.5% 41.8%
================ ================ ================ ================
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CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SELLING AND ADMINISTRATIVE EXPENSES. As a percent to net sales, selling and
administrative expenses were 40.5% and 41.6% in the third quarter of fiscal 1997
and 1996 respectively, and 40.7% in each of the year to date periods.
Historically the Toy Stores cost structure has resulted in a higher percentage
ratio of selling and administrative expenses to net sales in the first three
quarters of the year. Accordingly, the comparative year to date increment in
selling and administrative expenses as a percent to net sales reflects the full
period impact in 1997 of KAY-BEE Toys.
INTEREST EXPENSE. Interest expense increased $1.8 million in the third quarter
of 1997 and $7.0 million for the year to date period. The increase was
attributable to higher weighted average debt levels utilized principally to
support operating requirements for the increased number of Toy Stores, increased
inventory levels, and capital expenditures.
INCOME TAXES. The estimated annual effective income tax rate for the Company has
increased from 37.0% in 1996 to 39.0%. The increase in rate results primarily
from the surrender of the Company's corporate-owned life insurance program in
1996.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
Working capital at November 1, 1997, was $897.2 million, a 91.2% increase
compared to $469.3 million at February 1, 1997. The primary sources of liquidity
for the Company has been, and continues to be, cash flow from operations and
borrowings under available credit facilities. Net cash used by operations in
each of the thirty-nine week periods ended November 1, 1997, and November 2,
1996, as detailed in the condensed consolidated statements of cash flows, was
$404.0 million and $250.0 million, respectively. The utilization by operations
in 1997 is principally attributable to increased inventory levels reflecting the
greater number of stores in operation, the strong opportunistic availability of
closeout merchandise, and the impact of seasonality in the toy business. Future
comparisons of funds used and provided by operations are anticipated to continue
to fluctuate as a result of these factors. Additionally, the Company had capital
expenditures of $99.0 million and $70.3 million in each respective year to date
period. Capital expenditures in 1997 are expected to be approximately $110
million to $120 million principally for the anticipated opening of approximately
75 net Closeout Stores and an estimated 80 to 90 net Toy Stores plus capital
requirements for warehouse expansion and systems needs.
As necessary, the Company supplements its capital and operating cash
requirements with borrowings under available credit facilities. At November 1,
1997, approximately $28.6 million was available for direct borrowings under the
Company's $600 million Revolving Credit Facility (Revolver) and an additional
$65.0 million of uncommitted credit facilities were available, subject to the
terms of the Revolver.
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. Other than the
planned merger as more fully described below, management is not aware of any
other 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.
OTHER EVENTS; PLANNED MERGER
- ----------------------------
On November 5, 1997 the Company announced it had entered into an Agreement and
Plan of Merger with Mac Frugal's Bargains Close-outs Inc. (Mac Frugal's). The
transaction is subject to customary conditions, including approval by both
companies' shareholders and regulatory agencies. The transaction is expected to
close in January 1998.
Mac Frugal's operates a chain of 321 closeout retail stores in 18 states. These
stores do business as PIC `N' SAVE and MAC FRUGAL'S BARGAINS CLOSE-OUTS. Mac
Frugal's, headquartered in Dominguez, California, had sales and net income of
$773 million and $43 million, respectively, for the fiscal year ended February
2, 1997.
Page 12
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CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Under the terms of the agreement, Consolidated Stores will issue between 0.88
and 1.00 share of its common stock for each Mac Frugal's share. The final
exchange ratio will be based on the average closing price per share of
Consolidated Stores stock during a twenty day period prior to the effective time
of the merger. Based on Consolidated Stores twenty day average closing price
through November 4, 1997, the exchange ratio would be 0.99.
Management believes the merger will result in a number of important synergies
and it is expected that certain business functions of Mac Frugal's will be
integrated into the operations of the Company following the merger. In
connection with the merger the Company expects to take a pretax charge of $75
to $100 million relating to the cost of integrating the two companies. The
merger is expected to be accretive to earnings, before synergies or any onetime
charges associated with the merger. The stock-for-stock transaction will be
accounted for as a pooling-of-interests and will be tax-free to both companies
and their respective shareholders.
This transaction will expand the Company's closeout store presence from coast to
coast, with over 1,000 closeout store locations and minimal market overlap. Mac
Frugal's stores are comparable to the Company's ODD LOTS and BIG LOTS STORES in
size and the closeout merchandise strategies of the two companies are similar.
The combined company is projected to have over $4 billion in revenue for the
fiscal year ending January 1998.
Page 13
14
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.
The Private Securities Litigation Reform Act of 1995 ("the
Act") provides a safe harbor for forward-looking statements
made by or on behalf of the Company. Certain statements
contained in Management's Discussion and Analysis and in other
Company filings are forward-looking statements. These
statements discuss among other things, expected growth, future
revenues, future cash flows and future performance. The
forward looking statements are subject to risks and
uncertainties including but not limited to competitive
pressures, inflation, consumer debt levels, currency exchange
fluctuations, trade restrictions, changes in tariff and
freight rates, capital market conditions, and other risks
indicated in the Company's filings with the Securities and
Exchange Commission. Actual results may materially differ from
anticipated results described in these statements.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit No. Document
----------- ----------------------------------------
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 and Plan of Merger with Mac
Frugal's - Bargains Close-outs Inc. Nov. 6, 1997
Page 14
15
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 9, 1997 By: /s/ Michael J. Potter
---------------------------------
Michael J. Potter,
Sr. Vice President, Chief
Financial Officer, and
Principal Accounting Officer
Page 15
5
3-MOS
JAN-31-1998
FEB-02-1997
NOV-01-1997
27,645
0
10,935
0
1,228,513
1,388,522
654,937
222,290
1,847,577
491,365
616,054
0
0
844
691,373
1,847,577
669,826
669,826
384,420
655,982
426
0
8,176
5,242
2,044
3,198
0
0
0
3,198
0.04
0.04
