Big Lots, Inc. 10-Q
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 30, 2005
or
|
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|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From to
Commission File Number 1-8897
BIG LOTS, INC.
(Exact name of registrant as specified in its charter)
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|
|
Ohio
(State or other jurisdiction of
incorporation or organization)
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06-1119097
(I.R.S. Employer
Identification No.) |
|
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|
300 Phillipi Road, P.O. Box 28512, Columbus, Ohio
(Address of principal executive office)
|
|
43228-5311
(Zip Code) |
(614) 278-6800
(Registrants telephone number, including area code)
Indicate by check mark 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 (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yesþ Noo
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yesþ Noo
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o Noþ
The number of the registrants common shares, $0.01 par value, outstanding as of September 2, 2005,
was 113,840,695.
BIG LOTS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JULY 30, 2005
TABLE OF CONTENTS
1
Part I. Financial Information
Item 1. Financial Statements
BIG LOTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except per share amounts)
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|
|
|
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Thirteen Weeks Ended |
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Twenty-Six Weeks Ended |
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|
|
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July 31, 2004 |
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July 31, 2004 |
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(as restated - |
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(as restated - |
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July 30, 2005 |
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see Note 2) |
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July 30, 2005 |
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|
see Note 2) |
|
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|
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|
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|
Net sales |
|
$ |
1,051,053 |
|
|
$ |
994,950 |
|
|
|
|
|
|
$ |
2,150,143 |
|
|
$ |
2,014,148 |
|
Cost of sales |
|
|
629,307 |
|
|
|
588,682 |
|
|
|
|
|
|
|
1,279,728 |
|
|
|
1,187,610 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
421,746 |
|
|
|
406,268 |
|
|
|
|
|
|
|
870,415 |
|
|
|
826,538 |
|
Selling and administrative expenses |
|
|
412,421 |
|
|
|
388,216 |
|
|
|
|
|
|
|
820,759 |
|
|
|
770,954 |
|
Depreciation expense |
|
|
28,513 |
|
|
|
26,268 |
|
|
|
|
|
|
|
55,464 |
|
|
|
50,246 |
|
|
|
|
|
|
|
|
Operating (loss) profit |
|
|
(19,188 |
) |
|
|
(8,216 |
) |
|
|
|
|
|
|
(5,808 |
) |
|
|
5,338 |
|
Interest expense |
|
|
1,315 |
|
|
|
4,631 |
|
|
|
|
|
|
|
2,489 |
|
|
|
9,241 |
|
Interest income |
|
|
|
|
|
|
(135 |
) |
|
|
|
|
|
|
(31 |
) |
|
|
(493 |
) |
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(20,503 |
) |
|
|
(12,712 |
) |
|
|
|
|
|
|
(8,266 |
) |
|
|
(3,410 |
) |
Income tax benefit |
|
|
(6,751 |
) |
|
|
(4,981 |
) |
|
|
|
|
|
|
(2,314 |
) |
|
|
(2,030 |
) |
|
|
|
|
|
|
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Net loss |
|
$ |
(13,752 |
) |
|
$ |
(7,731 |
) |
|
|
|
|
|
$ |
(5,952 |
) |
|
$ |
(1,380 |
) |
|
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|
Loss per common share basic |
|
$ |
(0.12 |
) |
|
$ |
(0.07 |
) |
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|
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|
$ |
(0.05 |
) |
|
$ |
(0.01 |
) |
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|
Loss per common share diluted |
|
$ |
(0.12 |
) |
|
$ |
(0.07 |
) |
|
|
|
|
|
$ |
(0.05 |
) |
|
$ |
(0.01 |
) |
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|
Weighted-average common shares outstanding: |
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|
|
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Basic |
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113,244 |
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114,686 |
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113,107 |
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|
115,981 |
|
Dilutive effect of stock options |
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Diluted |
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113,244 |
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|
114,686 |
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|
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|
113,107 |
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|
115,981 |
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The accompanying Notes are an integral part of these Condensed Consolidated Financial
Statements.
2
BIG LOTS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except par value)
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(Unaudited) |
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July 30, 2005 |
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January 29, 2005 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
|
$ |
10,173 |
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$ |
2,521 |
|
Inventories |
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|
912,941 |
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|
895,016 |
|
Deferred income taxes |
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|
73,078 |
|
|
|
73,845 |
|
Other current assets |
|
|
86,731 |
|
|
|
63,400 |
|
|
Total current assets |
|
|
1,082,923 |
|
|
|
1,034,782 |
|
|
Property and equipment net |
|
|
630,523 |
|
|
|
648,741 |
|
Deferred income taxes |
|
|
22,457 |
|
|
|
12,820 |
|
Other assets |
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|
30,107 |
|
|
|
37,241 |
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|
Total assets |
|
$ |
1,766,010 |
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|
$ |
1,733,584 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
|
$ |
156,340 |
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$ |
149,777 |
|
Accrued liabilities |
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|
264,882 |
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|
262,736 |
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|
Total current liabilities |
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|
421,222 |
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|
412,513 |
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|
Long-term obligations |
|
|
173,600 |
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|
159,200 |
|
Other liabilities |
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|
92,963 |
|
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|
86,381 |
|
Commitments and contingencies |
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Shareholders equity: |
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Preferred shares authorized 2,000 shares; $0.01 par value; none issued |
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Common shares authorized 298,000 shares; $0.01 par value;
issued 117,495 shares and 117,495 shares, respectively;
outstanding 113,584 shares and 112,780 shares, respectively |
|
|
1,175 |
|
|
|
1,175 |
|
Treasury shares - 3,911 shares and 4,715 shares, respectively, at cost |
|
|
(52,880 |
) |
|
|
(64,029 |
) |
Unearned compensation |
|
|
(2,519 |
) |
|
|
(1,814 |
) |
Additional paid-in capital |
|
|
471,033 |
|
|
|
472,790 |
|
Retained earnings |
|
|
661,416 |
|
|
|
667,368 |
|
|
Total shareholders equity |
|
|
1,078,225 |
|
|
|
1,075,490 |
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|
Total liabilities and shareholders equity |
|
$ |
1,766,010 |
|
|
$ |
1,733,584 |
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|
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
3
BIG LOTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders Equity (Unaudited)
(In thousands)
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Common |
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Treasury |
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|
Unearned |
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|
Paid-In |
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|
Retained |
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|
Shares |
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|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Compensation |
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|
Capital |
|
|
Earnings |
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|
Total |
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|
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|
|
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|
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|
Balance January 31, 2004 |
|
|
116,594 |
|
|
$ |
1,169 |
|
|
|
333 |
|
|
$ |
(2,735 |
) |
|
$ |
|
|
|
$ |
466,740 |
|
|
$ |
643,605 |
|
|
$ |
1,108,779 |
|
Net loss |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,380 |
) |
|
|
(1,380 |
) |
Exercise of stock options and related tax effects |
|
|
252 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,821 |
|
|
|
|
|
|
|
2,824 |
|
Employee benefits paid with common shares |
|
|
316 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,764 |
|
|
|
|
|
|
|
4,767 |
|
Treasury shares used for deferred compensation plan |
|
|
48 |
|
|
|
|
|
|
|
(48 |
) |
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96 |
|
Purchase of common shares |
|
|
(5,427 |
) |
|
|
|
|
|
|
5,427 |
|
|
|
(75,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75,000 |
) |
Treasury share issuances for stock options |
|
|
255 |
|
|
|
|
|
|
|
(255 |
) |
|
|
3,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 31, 2004 (as restated see Note 2) |
|
|
112,038 |
|
|
|
1,175 |
|
|
|
5,457 |
|
|
|
(74,076 |
) |
|
|
|
|
|
|
474,325 |
|
|
|
642,225 |
|
|
|
1,043,649 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,143 |
|
|
|
25,143 |
|
Exercise of stock options and related tax effects |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,024 |
) |
|
|
|
|
|
|
(1,024 |
) |
Treasury shares used for deferred compensation plan |
|
|
26 |
|
|
|
|
|
|
|
(26 |
) |
|
|
120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120 |
|
Treasury share issuances for stock options |
|
|
544 |
|
|
|
|
|
|
|
(544 |
) |
|
|
7,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,550 |
|
Treasury share issuances for restricted shares |
|
|
172 |
|
|
|
|
|
|
|
(172 |
) |
|
|
2,377 |
|
|
|
(1,866 |
) |
|
|
(511 |
) |
|
|
|
|
|
|
|
|
Earned compensation on restricted shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 29, 2005 |
|
|
112,780 |
|
|
|
1,175 |
|
|
|
4,715 |
|
|
|
(64,029 |
) |
|
|
(1,814 |
) |
|
|
472,790 |
|
|
|
667,368 |
|
|
|
1,075,490 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,952 |
) |
|
|
(5,952 |
) |
Employee benefits paid with treasury shares |
|
|
447 |
|
|
|
|
|
|
|
(447 |
) |
|
|
6,213 |
|
|
|
|
|
|
|
(1,041 |
) |
|
|
|
|
|
|
5,172 |
|
Treasury shares used for deferred compensation plan |
|
|
30 |
|
|
|
|
|
|
|
(30 |
) |
|
|
421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
421 |
|
Treasury share issuances for stock options and related tax effects |
|
|
237 |
|
|
|
|
|
|
|
(237 |
) |
|
|
3,271 |
|
|
|
|
|
|
|
(489 |
) |
|
|
|
|
|
|
2,782 |
|
Treasury share issuances for restricted shares |
|
|
100 |
|
|
|
|
|
|
|
(100 |
) |
|
|
1,382 |
|
|
|
(1,125 |
) |
|
|
(257 |
) |
|
|
|
|
|
|
|
|
Treasury shares forfeited from restricted shares |
|
|
(10 |
) |
|
|
|
|
|
|
10 |
|
|
|
(138 |
) |
|
|
108 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
Earned compensation on restricted shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
312 |
|
|
|
|
|
|
|
|
|
|
|
312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 30, 2005 |
|
|
113,584 |
|
|
$ |
1,175 |
|
|
|
3,911 |
|
|
$ |
(52,880 |
) |
|
$ |
(2,519 |
) |
|
$ |
471,033 |
|
|
$ |
661,416 |
|
|
$ |
1,078,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes are an integral part of these Condensed Consolidated Financial
Statements.
4
BIG LOTS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended |
|
|
|
|
|
|
|
July 31, 2004 |
|
|
|
|
|
|
|
(as restated - |
|
|
|
July 30, 2005 |
|
|
see Note 2) |
|
|
Operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(5,952 |
) |
|
$ |
(1,380 |
) |
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization expense |
|
|
52,756 |
|
|
|
48,952 |
|
Deferred income taxes |
|
|
(8,870 |
) |
|
|
1,613 |
|
Partial charge-off of KB Note |
|
|
6,389 |
|
|
|
|
|
(Gain) loss on sale of assets |
|
|
(681 |
) |
|
|
562 |
|
Employee benefits paid with company shares |
|
|
5,172 |
|
|
|
4,767 |
|
Other |
|
|
119 |
|
|
|
659 |
|
Change in assets and liabilities |
|
|
(15,418 |
) |
|
|
(83,687 |
) |
|
Net cash provided by (used in) operating activities |
|
|
33,515 |
|
|
|
(28,514 |
) |
|
Investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(44,420 |
) |
|
|
(72,361 |
) |
Purchase of short-term investments |
|
|
|
|
|
|
(115,125 |
) |
Redemption of short-term investments |
|
|
|
|
|
|
122,625 |
|
Cash proceeds from sale of assets |
|
|
1,115 |
|
|
|
75 |
|
Other |
|
|
(43 |
) |
|
|
(106 |
) |
|
Net cash used in investing activities |
|
|
(43,348 |
) |
|
|
(64,892 |
) |
|
Financing activities: |
|
|
|
|
|
|
|
|
Proceeds from long-term obligations |
|
|
1,218,200 |
|
|
|
|
|
Payments for long-term obligations |
|
|
(1,203,800 |
) |
|
|
|
|
Payments for treasury shares acquired |
|
|
|
|
|
|
(75,000 |
) |
Proceeds from the exercise of stock options |
|
|
2,663 |
|
|
|
5,729 |
|
Treasury shares used for deferred compensation plan |
|
|
421 |
|
|
|
96 |
|
Other |
|
|
1 |
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
17,485 |
|
|
|
(69,175 |
) |
|
Increase (decrease) in cash and cash equivalents |
|
|
7,652 |
|
|
|
(162,581 |
) |
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
2,521 |
|
|
|
174,003 |
|
|
End of period |
|
$ |
10,173 |
|
|
$ |
11,422 |
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
2,334 |
|
|
$ |
8,560 |
|
Cash paid for income taxes (excluding refunds) |
|
$ |
22,233 |
|
|
$ |
22,852 |
|
The accompanying Notes are an integral part of these Condensed Consolidated Financial
Statements.
5
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
All references herein to the Company are to Big Lots, Inc. and its subsidiaries. The Company is
the nations largest broadline closeout retailer. At July 30, 2005, the Company operated a total of
1,534 stores in 46 states with 1,493 stores under the name Big Lots® and 41 stores under
the name Big Lots Furniture®. The Companys Web site is located at www.biglots.com.
Wholesale operations are conducted through Big Lots Wholesale, Consolidated International,
Wisconsin Toy, and with online sales at www.biglotswholesale.com. The contents of the Companys Web
sites are not part of this report.
Fiscal Year
The Company follows the concept of a 52-53 week fiscal year, which ends on the Saturday nearest to
January 31. Fiscal year 2005 is comprised of 52 weeks and ends on January 28, 2006. Fiscal year
2004 was comprised of 52 weeks and ended on January 29, 2005.
Segment Reporting
The Company manages its business based on one segment, broadline closeout retailing. At July 30,
2005 and July 31, 2004, all of the Companys operations were located within the United States of
America. The following net sales data is presented in accordance with the Financial Accounting
Standards Board (FASB), Statement of Financial Accounting Standards (SFAS) No. 131,
Disclosures about Segments of an Enterprise and Related Information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
Twenty-Six Weeks Ended |
|
|
|
July 30, 2005 |
|
|
July 31, 2004 |
|
|
July 30, 2005 |
|
|
July 31, 2004 |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumables |
|
$ |
316,559 |
|
|
$ |
315,456 |
|
|
$ |
628,917 |
|
|
$ |
634,057 |
|
Home |
|
|
308,991 |
|
|
|
278,510 |
|
|
|
651,580 |
|
|
|
577,740 |
|
Seasonal and toys |
|
|
182,960 |
|
|
|
169,229 |
|
|
|
384,873 |
|
|
|
363,723 |
|
Other |
|
|
242,543 |
|
|
|
231,755 |
|
|
|
484,773 |
|
|
|
438,628 |
|
|
|
|
|
|
Net sales |
|
$ |
1,051,053 |
|
|
$ |
994,950 |
|
|
$ |
2,150,143 |
|
|
$ |
2,014,148 |
|
|
|
|
|
|
The Home category includes furniture, domestics, and home décor departments. The Other
category primarily includes electronics, small appliances, home maintenance, and tools. The Company
internally evaluates and externally communicates overall sales and merchandise performance based on
these key merchandising categories and believes that these categories facilitate analysis of the
Companys results.
Basis of Presentation
The Condensed Consolidated Financial Statements have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC) for interim financial
information. The Condensed Consolidated Balance Sheet at July 30, 2005, the Condensed Consolidated
Statements of Operations for the thirteen and twenty-six weeks ended July 30, 2005 and July 31,
2004 (as restated, see Note 2 (Restatement of Previously Issued Consolidated Financial Statements)
to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q), and the
Condensed Consolidated Statements of Shareholders Equity and of Cash Flows for the twenty-six
weeks ended July 30, 2005 and July 31, 2004 (as restated, see Note 2 (Restatement of Previously
Issued Consolidated Financial Statements) to the Condensed Consolidated Financial Statements in
this Quarterly Report on Form 10-Q), have been prepared by the Company without audit. In the
opinion of management, all normal recurring adjustments necessary to present fairly the financial
condition, results of operations, and cash flows for all periods presented have been made. The
Condensed Consolidated Financial Statements include all the accounts of the Company. All
intercompany transactions have been eliminated.
Certain information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America (GAAP)
have been omitted or condensed. The Company believes the disclosures herein are adequate to make
the information presented not misleading. It is recommended that these
6
Condensed Consolidated Financial Statements be read in conjunction with the Consolidated Financial Statements and Notes
thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended January 29,
2005. Interim results are not necessarily indicative of results for a full year.
Management Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of
significant contingent assets and liabilities at the date of the financial statements, and reported
amounts of revenues and expenses during the reporting periods. Actual results could materially
differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments which are unrestricted as to
withdrawal or use and which have an original maturity of three months or less. Cash equivalents are
stated at cost, which approximates market value.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market using the average cost retail
inventory method. Market is determined based on the estimated net realizable value, which generally
is the merchandise selling price. Under the retail inventory method, inventory is segregated into
departments of merchandise having similar characteristics, and is stated at its current retail
selling value. Inventory retail values are converted to a cost basis by applying specific average
cost factors for each merchandise department. Cost factors represent the average cost-to-retail
ratio for each merchandise department based on beginning inventory and the fiscal year purchase
activity. The retail inventory method requires management to make judgments and contains estimates,
such as the amount and timing of markdowns to clear unproductive or slow-moving inventory, which
may impact the ending inventory valuation and gross profit. These assumptions are based on
historical experience and current information.
Factors considered in the determination of markdowns include current and anticipated demand,
customer preferences, age of the merchandise, and seasonal trends. Permanent markdowns are recorded
as a gross profit reduction in the period of managements decision to initiate price reductions
with the intent not to return the price to regular retail. Promotional markdowns are recorded as a
gross profit reduction in the period the merchandise is sold.
Shrinkage is estimated as a percentage of sales for the period from the last physical inventory
date to the end of the fiscal year. Such estimates are based on experience and the most recent
physical inventory results. While it is not possible to quantify the impact from each cause of
shrinkage, the Company has loss prevention programs and policies that it believes minimize
shrinkage.
Due to the nature of the Companys purchasing practices for closeout and deeply discounted
merchandise, vendors and merchandise suppliers generally do not offer the Company incentives such
as slotting fees, cooperative advertising allowances, buy down agreements, or other forms of
rebates that could materially reduce its cost of sales.
Intangible Assets
Trademarks, service marks, and other intangible assets are stated at cost and are amortized on a
straight-line basis over a period of fifteen years. Where there is an indication of impairment, the
Company evaluates the fair value and future benefits of the related intangible asset and the
anticipated undiscounted future net cash flows from the related intangible asset are calculated and
compared to the carrying value. The Companys assumptions related to estimates of future cash flows
are based on historical results of cash flows adjusted for management projections for future
periods. The net book value of the Companys intangible assets was $0.8 million at both July 30,
2005 and January 29, 2005. The related accumulated amortization was $0.1 million at both July 30,
2005 and January 29, 2005.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization expense are recorded using
the straight-line method over the estimated useful lives of the assets. Leasehold improvements are
amortized on a straight-line basis over the shorter of their estimated useful life or the lease
term.
7
The estimated useful lives by major asset category are as follows:
|
|
|
|
|
|
Land improvements |
|
15 years |
Buildings and leasehold improvements |
|
5 - 40 years |
Fixtures and equipment |
|
5 - 15 years |
Transportation equipment |
|
3 - 7 years |
|
There was no capitalized interest for the thirteen and twenty-six weeks ended July 30, 2005.
Capitalized interest was $0.1 and $0.3 million for the thirteen and twenty-six weeks ended July 31,
2004, respectively.
Impairment
The Company has long-lived assets that consist primarily of property and equipment. The Company
estimates useful lives on buildings and equipment using assumptions based on historical data and
industry trends. Impairment is recorded if the carrying value of the long-lived asset exceeds its
anticipated undiscounted future net cash flows. The Companys assumptions related to estimates of
future cash flows are based on historical results of cash flows adjusted for management projections
for future periods. The Company estimates the fair value of its long-lived assets using readily
available market information for similar assets.
Computer Software Costs
The Company capitalizes certain computer software costs after the application development stage has
been established. Capitalized computer software costs are depreciated using the straight-line
method over five years. The net book value of computer software costs was $15.2 million and $14.2
million at July 30, 2005 and January 29, 2005, respectively.
Share Based Compensation
The Company measures compensation cost for stock options issued to employees and directors using
the intrinsic value-based method of accounting in accordance with Accounting Principles Board
(APB) Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees. The Company has
adopted the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation, as
amended by SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure,
and, as permitted by this standard, continues to apply the recognition and measurement principles
of APB 25 to its stock options and other stock-based employee compensation awards.
The following table presents the compensation cost of the Companys stock options using the fair
value method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
|
|
|
Twenty-Six Weeks Ended |
|
|
July 30, 2005 |
|
|
July 31, 2004 |
|
|
|
|
|
|
July 30, 2005 |
|
|
July 31, 2004 |
|
|
|
|
|
|
|
|
(In thousands, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
(13,752 |
) |
|
$ |
(7,731 |
) |
|
|
|
|
|
$ |
(5,952 |
) |
|
$ |
(1,380 |
) |
Total stock-based employee compensation
expense determined under fair value method
for all awards, net of related tax effect |
|
|
1,006 |
|
|
|
1,285 |
|
|
|
|
|
|
|
1,879 |
|
|
|
2,652 |
|
|
|
|
|
|
|
|
Pro forma |
|
$ |
(14,758 |
) |
|
$ |
(9,016 |
) |
|
|
|
|
|
$ |
(7,831 |
) |
|
$ |
(4,032 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
(0.12 |
) |
|
$ |
(0.07 |
) |
|
|
|
|
|
$ |
(0.05 |
) |
|
$ |
(0.01 |
) |
Pro forma |
|
$ |
(0.13 |
) |
|
$ |
(0.08 |
) |
|
|
|
|
|
$ |
(0.07 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
(0.12 |
) |
|
$ |
(0.07 |
) |
|
|
|
|
|
$ |
(0.05 |
) |
|
$ |
(0.01 |
) |
Pro forma |
|
$ |
(0.13 |
) |
|
$ |
(0.08 |
) |
|
|
|
|
|
$ |
(0.07 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
8
The Company changed its fair value option pricing model from the Black-Scholes model to a
binomial model for all options granted on or after February 1, 2004. The fair value of stock
options granted prior to February 1, 2004, was determined using the Black-Scholes model. The
Company believes that the binomial model considers characteristics of fair value option pricing
that are not available under the Black-Scholes model. Similar to the Black-Scholes model, the
binomial model takes into account variables such as volatility, dividend yield rate, and risk-free
interest rate. In addition, the binomial model considers the contractual term of the option, the
probability that the option will be exercised prior to the end of its contractual life, and the
probability of termination or retirement of the option holder in computing the value of the option.
The assumptions used in the option pricing model for each of the respective periods were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
|
|
|
Twenty-Six Weeks Ended |
|
|
July 30, 2005 |
|
|
July 31, 2004 |
|
|
|
|
|
|
July 30, 2005 |
|
|
July 31, 2004 |
|
|
|
|
|
|
|
|
Weighted-average fair value of options granted |
|
$ |
5.06 |
|
|
$ |
5.49 |
|
|
|
|
|
|
$ |
4.73 |
|
|
$ |
5.56 |
|
Risk-free interest rate |
|
|
4.0 |
% |
|
|
3.9 |
% |
|
|
|
|
|
|
3.9 |
% |
|
|
3.1 |
% |
Expected life (years) |
|
|
6.0 |
|
|
|
5.3 |
|
|
|
|
|
|
|
5.5 |
|
|
|
5.2 |
|
Expected volatility |
|
|
43.6 |
% |
|
|
38.1 |
% |
|
|
|
|
|
|
42.3 |
% |
|
|
39.1 |
% |
Expected annual forfeiture rate |
|
|
3.0 |
% |
|
|
3.0 |
% |
|
|
|
|
|
|
3.0 |
% |
|
|
3.0 |
% |
|
|
|
|
|
|
|
Income Taxes
The Companys income tax accounts reflect estimates of the outcome or settlement of various
asserted and unasserted income tax contingencies including tax audits and administrative appeals.
At any point in time, several tax years may be in various stages of audit or appeal or could be
subject to audit by various taxing jurisdictions. This requires a periodic identification and
evaluation of significant doubtful or controversial issues. The results of the audits, appeals, and
expiration of the statute of limitations are reflected in the income tax accounts accordingly.
The Company has generated deferred tax assets and liabilities due to temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. The Company has established a valuation allowance to reduce its
deferred tax assets to the balance that is more likely than not to be realized.
The effective income tax rate in any period may be materially impacted by the overall level of
income (loss) before income taxes, the jurisdictional mix and magnitude of income (loss), changes
in the income tax laws (which may be retroactive to the beginning of the fiscal year), changes in
the expected outcome or settlement of an income tax contingency, changes in the deferred tax
valuation allowance, and adjustments of a deferred tax asset or liability for enacted changes in
tax laws or rates.
Pension Liabilities
Pension and other retirement benefits, including all relevant assumptions required by GAAP, are
evaluated each year. Due to the technical nature of retirement accounting, outside actuaries are
used to provide assistance in calculating the estimated future obligations. Since there are many
assumptions used to estimate future retirement benefits, differences between actual future events
and prior estimates and assumptions could result in adjustments to pension expenses and
obligations. Certain actuarial assumptions, such as the discount rate and expected long-term rate
of return, have a significant effect on the amounts reported for net periodic pension cost and the
related benefit obligations. The Company reviews external data and historical trends to help
determine the discount rate and expected long-term rate of return. The Companys objective in
selecting a discount rate is to identify the best estimate of the rate at which the benefit
obligations would be settled on the measurement date. In making this estimate, the Company reviews
rates of return on high-quality, fixed-income investments currently available and expected to be
available during the period to maturity of the benefits. This process includes a review of the
bonds available on the measurement date with a quality rating of at least Aa. To develop the
expected long-term rate of return on assets, the Company considers the historical returns and the
future expectations for returns for each asset class, as well as the current or anticipated future
allocation of the pension portfolio.
9
The following table represents components of net periodic pension cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
|
|
|
Twenty-Six Weeks Ended |
|
|
July 30, 2005 |
|
|
July 31, 2004 |
|
|
|
|
|
|
July 30, 2005 |
|
|
July 31, 2004 |
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost benefits earned in the period |
|
$ |
828 |
|
|
$ |
873 |
|
|
|
|
|
|
$ |
1,655 |
|
|
$ |
1,747 |
|
Interest cost on projected benefit obligation |
|
|
787 |
|
|
|
818 |
|
|
|
|
|
|
|
1,575 |
|
|
|
1,637 |
|
Expected investment return on plan assets |
|
|
(1,067 |
) |
|
|
(854 |
) |
|
|
|
|
|
|
(2,134 |
) |
|
|
(1,711 |
) |
Amortization of actuarial loss |
|
|
331 |
|
|
|
377 |
|
|
|
|
|
|
|
663 |
|
|
|
754 |
|
Amortization of prior service cost |
|
|
34 |
|
|
|
34 |
|
|
|
|
|
|
|
68 |
|
|
|
68 |
|
Amortization of transition obligation |
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
7 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
916 |
|
|
$ |
1,251 |
|
|
|
|
|
|
$ |
1,834 |
|
|
$ |
2,502 |
|
|
|
|
|
|
|
|
Weighted-average assumptions used to determine net periodic pension cost were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
|
|
|
Twenty-Six Weeks Ended |
|
|
July 30, 2005 |
|
|
July 31, 2004 |
|
|
|
|
|
|
July 30, 2005 |
|
|
July 31, 2004 |
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.7 |
% |
|
|
6.1 |
% |
|
|
|
|
|
|
5.7 |
% |
|
|
6.1 |
% |
Rate of increase in compensation levels |
|
|
4.0 |
% |
|
|
4.6 |
% |
|
|
|
|
|
|
4.0 |
% |
|
|
4.6 |
% |
Expected long-term rate of return |
|
|
8.5 |
% |
|
|
8.5 |
% |
|
|
|
|
|
|
8.5 |
% |
|
|
8.5 |
% |
Measurement date for plan assets and benefit obligations |
|
|
12/31/04 |
|
|
|
12/31/03 |
|
|
|
|
|
|
|
12/31/04 |
|
|
|
12/31/03 |
|
|
|
|
|
|
|
|
The Companys funding policy is to make annual contributions based on advice from its
actuaries and evaluation of its cash position, but not less than the minimum required by applicable
regulations. The Company expects no required contributions in fiscal year 2005. Discretionary
contributions could be made upon further analysis of the Big Lots Defined Benefit Pension Plan
during fiscal year 2005. No contributions were made during the thirteen and twenty-six weeks ended
July 30, 2005 and July 31, 2004.
Insurance Reserves
The Company is self-insured for certain losses relating to general liability, workers
compensation, and employee medical and dental benefit claims, and the Company has purchased
stop-loss coverage to limit significant exposure in these areas. Accrued insurance liabilities are
based on claims filed and estimates of claims incurred but not reported. Such amounts are
determined by applying actuarially-based calculations taking into account known trends and
projections of future results. Actual claims experience can impact these calculations and, to the
extent that subsequent claim costs vary from estimates, future earnings could be impacted and the
impact could be material.
Fair Value
The carrying value of cash equivalents, accounts receivable, accounts payable, and accrued expenses
approximates fair value because of the relative short maturity of these items. The fair value of
the long-term obligations was estimated based on the quoted market prices for the sale of similar
issues or on the current rates offered to the Company for obligations of the same remaining
maturities. The carrying value of the Companys long-term obligations at July 30, 2005 and January
29, 2005 approximates fair value since the interest rates are variable and approximate current
market rates.
Commitments and Contingencies
In the ordinary course of its business, the Company is subject to various legal actions and claims.
In connection with such actions and claims, the Company must make estimates of potential future
legal obligations and liabilities, which require the use of managements judgment on the outcome of
various issues. Management may also use outside legal counsel to assist in the estimating process;
however, the ultimate outcome of various legal issues could be materially different from
managements estimates and adjustments to income could be required. The assumptions used by
management are based on the requirements of SFAS No. 5, Accounting for Contingencies. The Company
will record, if material, a liability when it has determined that the occurrence of a loss
contingency is probable and the loss can be reasonably estimated, and it will disclose the related
facts in the notes to its financial statements. If the Company determines that the occurrence of a
loss contingency is reasonably
10
possible or that it is probable but the loss cannot be reasonably
estimated, the Company will, if material, disclose the nature of the loss contingency and the
estimated range of possible loss or include a statement that no estimate of loss can be made. The
Company makes these determinations in consultation with its attorneys.
Revenue Recognition
The Company recognizes retail sales in its stores at the time the customer takes possession of
merchandise. All sales are net of discounts and returns and exclude sales tax. The reserve for
retail merchandise returns is based on the Companys prior experience.
Wholesale sales are recognized in accordance with the shipping terms agreed upon on the purchase
order. Wholesale sales are predominantly recognized under freight on board (FOB) origin where
title and risk of loss pass to the buyer when the merchandise leaves the Companys distribution
facility. However, when the shipping terms are FOB destination, recognition of sales revenue is
delayed until completion of delivery to the designated location.
The Company recognizes gift card sales revenue at the time of redemption. The liability for the
gift cards is established for the cash value at the time of purchase. The liability for outstanding
gift cards is recorded in accrued liabilities.
The Company offers price hold contracts on selected furniture merchandise. Revenue for price hold
contracts is recognized when the customer makes the final payment and takes possession of the
merchandise. Cash paid by the customers is recorded in accrued liabilities. In the event that a
sale is not consummated, liquidated damages are recorded as the lesser of: a) $25; b) 10% of the
merchandise purchase price (exclusive of sales tax); or c) the amounts deposited by the customer.
Other Comprehensive Income
The Companys comprehensive income is equal to net income, as there are no items that qualify as
other comprehensive income.
Cost of Sales
Cost of sales includes the cost of merchandise (including related inbound freight to the Companys
distribution centers, duties, and commissions), markdowns, and inventory shrinkage, net of cash
discounts and rebates. The Company classifies outbound distribution and transportation costs as
selling and administrative expenses. Due to this classification, the Companys gross profit rates
may not be comparable to those of other retailers that include outbound distribution and
transportation costs in cost of sales.
Selling and Administrative Expenses
The Company includes store expenses (such as payroll and occupancy costs), outbound distribution
and transportation costs to the Companys stores, advertising, purchasing, insurance, and overhead
costs in selling and administrative expenses. Selling and administrative expense rates may not be
comparable to those of other retailers that include outbound distribution and transportation costs
in cost of sales.
Rent Expense
Rent expense is recognized over the term of the lease. The Company recognizes minimum rent starting
when possession of the property is taken from the landlord, which normally includes a construction
period prior to store opening. When a lease contains a predetermined fixed escalation of the
minimum rent, the Company recognizes the related rent expense on a straight-line basis and records
the difference between the recognized rental expense and the amounts payable under the lease as
deferred incentive rent. The Company also receives tenant allowances, which are recorded in
deferred incentive rent and are amortized as a reduction to rent expense over the term of the
lease. Deferred incentive rent is reflected in other liabilities.
Certain leases provide for contingent rents that are not measurable at inception. These contingent
rents are primarily based on a percentage of sales that are in excess of a predetermined level.
These amounts are excluded from minimum rent and are included in the determination of total rent
expense when it is probable that the expense has been incurred and the amount is reasonably
estimable.
11
Advertising Expense
Advertising costs are expensed as incurred and consist primarily of print and television
advertisements. Advertising expenditures were $23.2 million and $24.4 million for the thirteen
weeks ended July 30, 2005 and July 31, 2004, respectively, and $47.0 million and $45.2 million for
the twenty-six weeks ended July 30, 2005 and July 31, 2004, respectively.
Earnings per Share
Basic earnings (loss) per share is calculated using the weighted-average number of shares
outstanding during the period. Diluted earnings per share includes the additional dilutive effect
of stock options, calculated using the treasury stock method.
There are no adjustments required to be made to weighted-average common shares outstanding for
purposes of computing basic and diluted earnings per share, and there were no securities
outstanding which were excluded from the computation of earnings per share for any period presented
herein. Diluted shares outstanding are equal to basic shares outstanding for the thirteen and
twenty-six weeks ended July 30, 2005 and July 31, 2004, as the Company incurred a loss and to
include the dilutive effect of stock options would be anti-dilutive. As a result, an aggregate of
340,747 and 779,545 common shares subject to unexercised stock options were not included in the
computation of diluted earnings per share for the thirteen weeks ended July 30, 2005 and July 31,
2004, respectively. Common shares subject to unexercised stock options not included in the
computation of diluted earnings per share for the twenty-six weeks ended July 30, 2005 and July 31,
2004, were 185,446 and 898,273, respectively. In addition, 37,317 and 27,072 unvested restricted
shares were not included in diluted earnings per share for the thirteen weeks ended July 30, 2005,
and the twenty-six weeks ended July 30, 2005, respectively.
For the thirteen weeks ended July 30, 2005, and July 31, 2004, stock options outstanding with an
exercise price greater than the weighted-average market price, excluded from the computation of
diluted earnings per share due to their anti-dilutive affect, were 4.9 million and 5.0 million,
respectively. At the end of the first half of fiscal year 2005 and 2004, stock options outstanding
with an exercise price greater than the weighted-average market price, excluded from the
computation of diluted earnings per share due to their anti-dilutive affect, were 5.1 million and
4.7 million, respectively.
Store Pre-opening Costs
Pre-opening costs related to new store openings and the construction periods are expensed as
incurred.
Discontinued Operations
The reserve for discontinued operations, which is included in accrued liabilities in the Condensed
Consolidated Balance Sheets, includes managements estimate of the Companys potential liability
under its lease and mortgage obligations which have been rejected by KB Acquisition Corporation and
certain affiliated entities (collectively, KB) as part of its bankruptcy proceeding. For a
discussion of the discontinued operations, refer to Note 3 (KB Toys Matters) to the Condensed
Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Recent Accounting Pronouncements
In March 2005, the FASB issued Interpretation No. 47 (FIN 47), Accounting for Conditional Asset
Retirement Obligations, an interpretation of FASB issued SFAS No. 143 (SFAS 143), Accounting
for Asset Retirement Obligations. FIN 47 clarifies that the term conditional asset retirement
obligation as used in SFAS 143 refers to a legal obligation to perform an asset retirement
activity in which the timing and (or) method of settlement are conditional on a future event that
may or may not be within the control of the entity. The obligation to perform the asset retirement
activity is unconditional even though uncertainty exists about the timing and (or) method of
settlement. FIN 47 also clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the
end of fiscal years ending after December 15, 2005. Retrospective application for interim financial
information is permitted but is not required. The Company is evaluating the impact of this standard
and does not expect the adoption of this standard to have a material impact on the Companys
financial condition, results of operations, or liquidity.
In December 2004, the FASB issued SFAS No. 153 (SFAS 153), Exchanges of Nonmonetary Assets, an
amendment of APB Opinion No. 29 (APB 29), Accounting for Nonmonetary Transactions. SFAS 153
amends APB 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary asset exchange
has commercial substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS 153 is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The Company is evaluating the impact of
this standard and does not expect the adoption of this standard to have a material impact on the
Companys financial condition, results of operations, or liquidity.
12
NOTE 2 RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS
In light of views expressed by the Office of the Chief Accountant of the Securities and Exchange
Commission on February 7, 2005, the Company reviewed its accounting practices for operating leases
during the fourth quarter of fiscal year 2004 and restated its financial statements for fiscal
years 2000, 2001, 2002, 2003 and the first three quarters of fiscal year 2004 in the Companys
Annual Report on Form 10-K for the fiscal year ended January 29, 2005.
Under the requirements of the FASB Technical Bulletin 85-3, Accounting for Operating Leases with
Scheduled Rent Increases, rent expense should be amortized on a straight-line basis over the term
of the lease. Historically, the Company had determined that the term of the lease began on the
earlier of the commencement date of the lease or the store opening date, rather than at the time
the Company took physical possession of the property to start construction of leasehold
improvements. This had the effect of excluding the construction period of the stores from the
straight-line rent calculation. The Company corrected its accounting policy to begin the lease term
at the possession date. The Company restated its previously reported financial statements to
correct its accounting to include construction periods in store operating leases.
In addition, under FASB Technical Bulletin 88-1, Issues Relating to Accounting for Leases, lease
incentives such as tenant allowances received from the landlord to cover construction costs
incurred by the Company should be reflected as a deferred liability, amortized over the term of the
lease and reflected as a reduction to rent expense. Historically, the Company had classified tenant
allowances as a reduction to property and equipment instead of as a deferred lease credit on the
Consolidated Balance Sheets. As a result, the Company also amortized the deferred lease credit over
the asset life instead of over the lease term, reflected the amortization as a reduction to
depreciation expense instead of as a reduction to rent expense, and reflected tenant allowances as
a reduction of capital expenditures within investing activities instead of a change in operating
activities in the Consolidated Statements of Cash Flows. The Company reassessed this accounting
policy and corrected its accounting policy to treat lease incentives received as a deferred
liability amortized over the lease term. The Company also restated the previously reported
Consolidated Financial Statements to properly account for tenant allowances.
Subsequent to the issuance of the Companys fiscal 2003 financial statements, the Companys
management determined that investments in certain mutual funds and company stock associated with a
non-qualified deferred compensation plan were incorrectly presented as cash instead of non-current
assets and treasury stock on the Consolidated Balance Sheet. Furthermore, the corresponding
deferred compensation liability was incorrectly presented as a current liability instead of a
non-current liability and the acquisition of treasury stock was incorrectly presented as a
component of operating activity instead of as a component of financing activity in the Consolidated
Statements of Cash Flows.
The Company evaluated the materiality of these corrections on its financial statements and
concluded that the incremental impact of these corrections was not material to any quarterly or
annual period; however, the cumulative effect of these corrections was material to the fourth
quarter of fiscal year 2004. As a result, the Company recorded the cumulative effect as of fiscal
year 2000, and restated the Consolidated Balance Sheet at January 31, 2004, and the Consolidated
Statements of Operations, Shareholders Equity and Cash Flows for the years ended January 31, 2004
and February 1, 2003 in the Companys Annual Report on Form 10-K for the period ended January 29,
2005. Additionally, the Company restated the quarterly financial information for fiscal year 2003,
and the first three quarters of fiscal year 2004 in the Companys Annual Report on Form 10-K for
the period ended January 29, 2005.
The Company did not amend its previously filed Annual Reports on Form 10-K or Quarterly Reports on
Form 10-Q for the restatement, and the financial statements and related financial information
contained in such reports should no longer be relied upon. Throughout this Quarterly Report on
Form 10-Q, all referenced amounts for prior periods and prior period comparisons reflect the
balances and amounts on a restated basis.
The cumulative effect of these accounting corrections reduced shareholders equity by $7.3 million
at the beginning of fiscal year 2004. The restatement principally resulted in an increase to the
net loss of $0.4 million and $0.8 million for the thirteen and twenty-six weeks ended July 31,
2004, respectively. Additionally, the restatement resulted in a decrease in cash flows used in
operating activities of $4.3 million, an increase in cash flows used in investing activities of
$5.2 million, and a decrease in cash used in financing activities of less than $0.1 million for the
twenty-six weeks ended July 31, 2004.
13
Investments in auction rate preferred securities and municipal auction rate securities
(collectively, auction rate securities) were reclassified from cash and cash equivalents to
short-term investments. The Company has made corresponding adjustments to its Condensed
Consolidated Statement of Cash Flows for the twenty-six week period ended July 31, 2004 to reflect
the purchases and redemptions of auction rate securities as investing activities rather than as a
component of cash and cash equivalents. This reclassification was made because the auction rate
securities had stated maturities beyond three months. The auction rate securities reclassification
resulted in an increase in purchases and redemptions of short-term investments of $115.1 million
and $122.6 million, respectively, resulting in a net decrease in cash used in investing activities
of $7.5 million in the Condensed Consolidated Statement of Cash Flows for the twenty-six week
period ended July 31, 2004. The reclassifications had no impact on the Companys results of
operations or financial condition.
The following tables summarize the effect of the restatement adjustments and reclassifications in
the Condensed Consolidated Financial Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended July 31, 2004 |
|
Twenty-Six Weeks Ended July 31, 2004 |
|
|
As Previously |
|
|
|
|
|
|
|
|
|
As Previously |
|
|
|
|
|
|
|
|
Reported |
|
Adjustments |
|
As Restated |
|
Reported |
|
Adjustments |
|
As Restated |
|
|
|
|
|
(In thousands, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
$ |
413,755 |
|
|
$ |
(25,539 |
) |
|
$ |
388,216 |
|
|
$ |
819,861 |
|
|
$ |
(48,907 |
) |
|
$ |
770,954 |
|
Depreciation expense |
|
|
|
|
|
|
26,268 |
|
|
|
26,268 |
|
|
|
|
|
|
|
50,246 |
|
|
|
50,246 |
|
Operating (loss) profit |
|
|
(7,487 |
) |
|
|
(729 |
) |
|
|
(8,216 |
) |
|
|
6,677 |
|
|
|
(1,339 |
) |
|
|
5,338 |
|
Loss before income taxes |
|
|
(11,983 |
) |
|
|
(729 |
) |
|
|
(12,712 |
) |
|
|
(2,071 |
) |
|
|
(1,339 |
) |
|
|
(3,410 |
) |
Income tax benefit |
|
|
(4,695 |
) |
|
|
(286 |
) |
|
|
(4,981 |
) |
|
|
(1,490 |
) |
|
|
(540 |
) |
|
|
(2,030 |
) |
Net loss |
|
$ |
(7,288 |
) |
|
$ |
(443 |
) |
|
$ |
(7,731 |
) |
|
$ |
(581 |
) |
|
$ |
(799 |
) |
|
$ |
(1,380 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share basic: |
|
$ |
(0.06 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.01 |
) |
|
$ |
|
|
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share diluted: |
|
$ |
(0.06 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.01 |
) |
|
$ |
|
|
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended July 31, 2004 |
|
|
|
As Previously |
|
|
|
|
|
|
|
|
|
|
As Reclassified |
|
|
|
Reported |
|
|
Reclassifications |
|
|
Adjustments |
|
|
and Restated |
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
$ |
(32,769 |
) |
|
$ |
|
|
|
$ |
4,255 |
|
|
$ |
(28,514 |
) |
Net cash used in investing activities |
|
|
(67,168 |
) |
|
|
7,500 |
|
|
|
(5,224 |
) |
|
|
(64,892 |
) |
Net cash used in financing activities |
|
|
(69,268 |
) |
|
|
|
|
|
|
93 |
|
|
|
(69,175 |
) |
|
Decrease in cash and cash equivalents |
|
|
(169,205 |
) |
|
|
7,500 |
|
|
|
(876 |
) |
|
|
(162,581 |
) |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period |
|
|
191,228 |
|
|
|
(7,500 |
) |
|
|
(9,725 |
) |
|
|
174,003 |
|
|
End of period |
|
$ |
22,023 |
|
|
$ |
|
|
|
$ |
(10,601 |
) |
|
$ |
11,422 |
|
|
NOTE 3 KB TOYS MATTERS
On January 14, 2004, KB filed for bankruptcy protection pursuant to Chapter 11 of title 11 of the
United States Code. KB acquired the KB Toys business from the Company pursuant to a Stock Purchase
Agreement dated as of December 7, 2000 (the KB Stock Purchase Agreement).
14
The Company continues to analyze the information available regarding the effect of KBs bankruptcy
filing on the various continuing rights and obligations of the parties to the KB Stock Purchase
Agreement, including: a) a note issued from Havens Corners Corporation, a subsidiary of KB
Acquisition Corporation and a party to the bankruptcy proceedings (HCC), to the Company, and an
accompanying warrant to acquire common stock of KB Holdings, Inc., the ultimate parent of KB and a
party to the bankruptcy proceedings (KB Holdings); b) the status of KBs indemnification
obligations to the Company with respect to guarantees of KB store leases by the Company and
guarantees (relating to lease and mortgage obligations) for which the Company has indemnification
obligations arising out of its 1996 acquisition of the KB Toys business from Melville Corporation
(now known as CVS New York, Inc., and together with its subsidiaries CVS); and c) the status of
the Companys and KBs other indemnification obligations to each other with respect to general
liability claims, representations and warranties, litigation, taxes, and other payment obligations
pursuant to the KB Stock Purchase Agreement.
When and to the extent the Company believes that a loss is probable, can be reasonably estimated
and is material, the Company records a liability. The Company recorded a $3.7 million charge (net
of tax) in the fourth quarter of fiscal year 2003 associated with the estimated impact of the KB
bankruptcy, which was comprised of a $10.6 million benefit (net of tax) related to the partial
charge-off of the HCC Note and KB Warrant (as each is defined below) and a $14.3 million charge
(net of tax) related to KB guarantee obligations. The Company recorded an additional $6.6 million
charge (net of tax) in the third quarter of fiscal year 2004 related to the estimated impact of
additional guarantee obligations resulting from the KB bankruptcy and, as discussed below, the
Company recorded an additional $3.8 million charge (net of tax) related to an additional partial
charge-off of the HCC Note in the second quarter of fiscal 2005.
In connection with the sale of the KB Toys business, the Company received $258.0 million in cash
and a 10-year note from HCC in the aggregate principal amount of $45.0 million. This note bears
interest, on an in-kind basis, at the rate of 8.0% per annum (principal and interest together known
as the HCC Note). The Company also received a warrant to acquire up to 2.5% of the common stock
of KB Holdings for a stated price per share (KB Warrant). At the time of the sale (the fourth
quarter of fiscal year 2000), the Company evaluated the fair value of the HCC Note received as
consideration in the transaction and recorded the HCC Note at its then estimated fair value of
$13.2 million. The estimated fair value of the HCC Note was based on several factors, including
fair market evaluations obtained from independent financial advisors at the time of the sale, the
Companys knowledge of the underlying KB Toys business and industry, and the risks inherent in
receiving no cash payments until the HCC Note matured in 2010. During fiscal year 2002 and until
KBs bankruptcy filing, the Company recorded the interest earned and accretion of the discount
utilizing the effective interest rate method and provided necessary reserves against such amounts
as a result of its evaluations of the carrying value of the HCC Note. As of February 1, 2003 and
February 2, 2002, the carrying value of the HCC Note was $16.1 million. For tax purposes, the HCC
Note was originally recorded at its face value of $45.0 million, and the Company incurred tax
liability on the interest, which was accrued but was not payable. This resulted in the HCC Note
having a tax basis that was greater than the carrying value on the Companys books.
The HCC Note became immediately due and payable at the time of KBs bankruptcy filing. The Company
engaged an independent investment advisory firm to assist the Company in estimating the fair value
of the HCC Note and KB Warrant for both book and tax purposes. As a result, the Company charged off
a portion of the HCC Note and wrote down the full value of the KB Warrant resulting in a book value
of the HCC Note of $7.3 million, and accordingly recorded a net charge (before tax) to continuing
operations in the fourth quarter of fiscal year 2003 in the amount of $9.6 million. In addition, as
a result of the bankruptcy filing and the partial charge-off, the Company recorded a tax benefit of
$20.2 million in the fourth quarter of fiscal year 2003. A substantial portion of this tax benefit
reflects the charge-off of the higher tax basis of the HCC Note. The book value of the HCC Note was
$7.3 million at January 29, 2005, and $0.9 million at July 30, 2005, following the partial pre-tax
charge-off of $6.4 million recorded in the second quarter of fiscal 2005. The HCC Note is recorded
as a component of long-term assets on the Consolidated Balance Sheets at July 30, 2005 and January
29, 2005.
When the Company acquired the KB Toys business from CVS in May 1996, the Company provided, among
other things, an indemnity to CVS with respect to any losses resulting from KBs failure to pay all
monies due and owing under any KB lease or mortgage obligation guaranteed by CVS. The typical form
of the CVS guarantee provides that the terms of the underlying lease may be extended, amended,
modified or in any way changed without the consent of the guarantor. While the Company controlled
the KB Toys business, the Company provided guarantees containing terms similar to the CVS
guarantees with respect to a limited number of additional store leases. As part of the KB sale, and
in accordance with the terms of the KB Stock Purchase Agreement, KB similarly agreed to indemnify
the Company with respect to all lease and mortgage obligations, including those guaranteed by CVS
and those guaranteed by the Company. To the Companys knowledge, the Company has guarantee or
indemnification obligations, as of July 30, 2005, with respect to: a) approximately 390 KB store
leases; b) two distribution center leases; and c) KBs main office building lease.
15
In connection with the bankruptcy, KB is generally required to continue to make lease payments with
respect to all non-residential real estate leases until the bankruptcy court approves KBs decision
to reject a lease and KB vacates the leased premises that it rejects. If KB rejects a lease that
has been guaranteed by the Company or by CVS, because KB can reject its indemnification obligations
to the Company, the Company could be liable for all or a portion of the lease obligations with
respect to the rejected leases, subject to many factors, including the landlords duty to mitigate,
and the validity of the applicable guarantee. On February 25, 2004, the Company announced that KB
had rejected 389 store leases, of which the Company believes it has guarantee or indemnification
obligations relating to approximately 90. The Company engaged an independent real estate valuation
firm to assist in the analysis of the Companys potential liability with respect to the 90
guaranteed leases. Based upon analysis of the information then available, the Company recorded a
charge to discontinued operations for rent and legal expenses in the fourth quarter of fiscal year
2003 in the amount of $14.3 million (net after a $9.7 million tax benefit) to reflect its best
estimate of this loss contingency.
On October 26, 2004, KB announced its intent to close an additional 141 to 238 underperforming
stores and reject those leases by January 31, 2005. At October 30, 2004, the Company believed that
KB had rejected approximately 598 store leases and that the Company has guarantee or
indemnification obligations relating to approximately 162 of those leases (including 72 resulting
from KBs October 26, 2004, announcement). Using the same methodology to analyze the Companys
potential liability with respect to these additional guaranteed leases, the Company recorded a
charge to discontinued operations in the third quarter of fiscal year 2004 in the amount of $4.9
million (net after a $3.7 million tax benefit) to reflect its best estimate of this loss
contingency. Since October 30, 2004, the Company believes that KB has both rejected a limited
number of additional store leases and withdrew its previous rejection of certain other store
leases. KBs actions have resulted in a net increase of approximately six store lease rejections
(bringing the total rejections to approximately 168) for which the Company believes it has
guarantee or indemnification obligations. No additional charges related to the guarantee
obligations have been recorded by the Company since October 30, 2004.
On March 10, 2004, the Company announced that it had received notice of a default relating to a
first mortgage on the Pittsfield DC. As a result of KBs bankruptcy filing, the mortgage holder
declared an event of default and claimed that the loan had become immediately due and payable (the
Pittsfield DC Note). The Company was informed that, as of January 14, 2004, the Pittsfield DC
Note had an outstanding principal balance of approximately $6.3 million plus accrued interest of
approximately $21,000. Additionally, the mortgage holder claimed that a make-whole premium of
approximately $1.5 million was also due and payable. On November 5, 2004, the Company satisfied its
indemnity obligation with respect to the Pittsfield DC Note at a cost of $8.4 million. The Company
engaged an independent real estate valuation firm to assist it in the analysis of the Companys
potential loss arising from the indemnification payment related to the Pittsfield DC Note. Based
upon analysis of the information then available, the Company recorded a charge to discontinued
operations in the third quarter of fiscal year 2004 in the amount of $1.7 million (net after a $1.0
million tax benefit) to reflect its best estimate of the difference between the subrogation rights
($6.1 million) flowing from the indemnification payment and the net realizable value of the
Pittsfield DC.
On August 16, 2005, KB filed notice of its final lease rejections. Included on the list were four
store leases (including one which the Company has a guarantee or indemnification obligation), the
impact of which has been reflected in the store lease rejection discussion above. The Company is
not aware of any additional rejections of the remaining store leases guaranteed by the Company.
Additionally, the list included both the prime leases and sub-leases relating to two distribution
centers. As previously disclosed, the Company has indemnification obligations relating to both of
the distribution center leases. The Company believes these distribution centers were no longer
being used by KB and had both been sublet to unrelated third parties for rents in excess of the
rents due under the terms of KBs prime leases. The Company is unable to determine at this time
whether any additional liability will result from these rejections or the future default or rejection of any
remaining leases guaranteed by the Company or CVS that have not been rejected by KB. Moreover,
since the typical form of guarantee permits an extension, amendment, modification or other change,
the Company is unable to estimate its maximum potential amount of future payments, if any, required
to satisfy lease guarantees. In the event any liability arises from the rejection of the
distribution centers or additional leases are rejected or defaulted upon, any related charge would
be to discontinued operations. Management does not believe that such a charge would have a material
adverse effect on the Companys financial condition, results of continuing operations, or
liquidity.
16
On
May 13, 2005, KB Toys and the Official Committee of Unsecured Creditors filed a Joint Plan of
Reorganization (the KB Plan), which was later amended on
July 24, 2005. On July 28, 2005, the Company,
along with KB Toys and the Official Committee of Unsecured Creditors entered into a Stipulation and
Agreed Order which, among other things, caused the KB Plan to be further amended. In final form,
the KB Plan was based on a plan funding agreement which KB entered into with an affiliate of
Prentice Capital Management, LP (the Prentice Affiliate). Under the terms of the KB Plan, the
Prentice Affiliate will invest $20 million in the reorganized KB Toys and provide a $25 million
seasonal credit facility in exchange for 90% of the common stock and 100% of the preferred stock of
the reorganized KB Toys. The remaining common stock will be held by a trust for the benefit of the
unsecured creditors of those KB Toys entities being reorganized under the KB Plan. The KB Plan was
confirmed by the United States Bankruptcy Court for the District of Delaware on August 18, 2005.
Under the KB Plan, the Company will be treated on a consolidated basis with all other unsecured
operating subsidiary creditors for purposes of its lease obligations and the Pittsfield DC Note,
and would expect to receive approximately 8% on its allowed unsecured claims relating to these
items. Additionally, the Company expects to receive approximately 1.6%, or $0.9 million, of its
unsecured claim related to the HCC Note. Because the HCC Note had a net book value of $7.3 million
following the partial charge-off recorded in the fourth quarter of fiscal 2003, the Company
recorded an additional $6.4 million pre tax charge (before a $2.6 million tax benefit) to selling
and administrative expenses related to the HCC Note in the second quarter of fiscal 2005. The
Company has not reflected any benefit arising from the KB Plan as
part of its reserve for the lease
obligations and the Pittsfield DC Note.
In addition to including KBs indemnity of the Company with respect to lease and mortgage
obligations, the KB Stock Purchase Agreement contains mutual indemnifications of KB by the Company
and of the Company by KB. These indemnifications relate primarily to losses arising out of general
liability claims, breached or inaccurate representations or warranties, shared litigation expenses,
other payment obligations, and taxes. Under a tax indemnification provision in the KB Stock
Purchase Agreement, the Company is to indemnify KB for tax losses generally related to the periods
prior to the Companys sale of KB. The Company continues to assess the effect of the KB bankruptcy
on such mutual indemnification obligations and has not made any provision for loss contingencies
with respect to any non-lease or non-tax related indemnification obligations. At this time,
management does not believe that such a charge would have a material adverse effect on the
Companys financial condition, results of continuing operations, or liquidity.
On February 9, 2005, the Company commenced a suit in the Delaware Chancery Court against certain of
the officers, directors and shareholders of KB alleging fraud, breach of fiduciary duty, aiding and
abetting breach of fiduciary duty, unjust enrichment, and civil conspiracy. On March 3, 2005, the
United States Bankruptcy Court for the District of Delaware, finding that litigating the state
court action would distract KBs management and thereby hinder its ability to focus on a successful
reorganization, temporarily enjoined the Companys suit. Once permitted by the court, the Company
intends to vigorously prosecute this action to recover its damages arising from defendants actions
resulting in KBs inability to satisfy the HCC Note.
NOTE 4 LONG-TERM OBLIGATIONS
On October 29, 2004, the Company entered into a $500.0 million unsecured credit facility with a
syndicate of lenders (the 2004 Credit Agreement). The 2004 Credit Agreement is scheduled to
mature on October 28, 2009. The proceeds of the 2004 Credit Agreement are available for general
corporate purposes, working capital, and to repay certain indebtedness of the Company, including
amounts that were outstanding related to the $204.0 million in senior notes privately placed in
2001 and the $300.0 million secured revolving credit agreement entered into in 2001. The pricing
and fees related to the 2004 Credit Agreement fluctuate based on the Companys debt rating. Loans
made under the 2004 Credit Agreement may be prepaid by the Company without penalty. The 2004 Credit
Agreement contains financial and other covenants, including, but not limited to, limitations on
indebtedness, liens and investments, as well as the maintenance of two financial ratios a
leverage ratio and a fixed charge coverage ratio. A violation of these covenants could result in a default under the 2004 Credit
Agreement, which would permit the lenders to restrict the Companys ability to further access the
2004 Credit Agreement for loans and letters of credit, and require the immediate repayment of any
outstanding loans under the 2004 Credit Agreement. The Company was in compliance with its financial
covenants at July 30, 2005.
The 2004 Credit Agreement permits, at the Companys option, borrowings at various interest rate
options based on the prime rate or London InterBank Offering Rate plus applicable margin. The 2004
Credit Agreement also permits, as applicable, borrowings at various interest rate options mutually
agreed upon by the Company and the lenders. The weighted average
17
interest rate of the outstanding loans at July 30, 2005 was 4.1%. The Company typically repays and/or borrows on a daily basis in
accordance with the terms of the 2004 Credit Agreement. The daily activity is a net result of the
Companys liquidity position, which is generally affected by: a) cash inflows such as store cash
and other miscellaneous deposits; and b) cash outflows such as check clearings, wire and other
electronic transactions, and other miscellaneous disbursements.
In addition to revolving credit loans, the 2004 Credit Agreement includes a $30.0 million swing
loan sub-limit, a $50.0 million bid loan sub-limit, and a $150.0 million letter of credit
sub-limit. At July 30, 2005, the total borrowings outstanding under the 2004 Credit Agreement were
$173.6 million, which total amount was comprised of $155.0 million in revolving credit loans, $18.6
million in swing loans, and no bid loans. At January 29, 2005, the total borrowings outstanding
under the 2004 Credit Agreement were $159.2 million, which total amount was comprised of $129.2
million in revolving credit loans, $30.0 million in swing loans, and no bid loans. The borrowings
available under the 2004 Credit Agreement, after taking into account the reduction of availability
resulting from outstanding letters of credit totaling $64.9 million, were $261.5 million at July
30, 2005.
NOTE 5 COMMITMENTS AND CONTINGENCIES
The Company is or may be subject to certain commitments and contingencies, including legal
proceedings, taxes, insurance, and other matters that are incidental to its ordinary course of
business. The Company will, if material, record a liability when it has determined that the
occurrence of a loss contingency is probable and the loss can be reasonably estimated, and it will
disclose the related facts in the notes to its financial statements. If the Company determines that
the occurrence of a loss contingency is reasonably possible or that it is probable but the loss
cannot be reasonably estimated, the Company will, if material, disclose the nature of the loss
contingency and the estimated range of possible loss or include a statement that no estimate of
loss can be made. The Company makes these determinations in consultation with its attorneys.
In addition to short-term purchase obligations (i.e., obligations due within one year of July 30,
2005) for retail merchandise issued in the ordinary course of the Companys business, the Company
has an obligation to make future inventory purchases totaling $286.4 million at July 30, 2005. The
Company is not required to meet any periodic minimum purchase requirements under this commitment.
The term of the commitment extends until the purchase requirements of the commitment are satisfied.
The Company is involved in legal actions and claims, including various employment-related matters,
arising in the ordinary course of business. The Company currently believes that such actions and
claims, both individually and in the aggregate, will be resolved without material effect on the
Companys financial condition, results of operations, or liquidity. However, litigation involves an
element of uncertainty. Future developments could cause these actions or claims to have a material
adverse effect on the Companys financial condition, results of operations, and liquidity.
For a discussion of discontinued operations, including KB bankruptcy matters, see Note 3 (KB Toys
Matters) to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
In November 2004, the Company was served a civil complaint wherein it was alleged that the Company
has violated Fair Labor Standards Act regulations by misclassifying as exempt employees its
furniture department managers, sales managers, and assistant managers. This lawsuit was filed as a
putative collective action in the United States District Court for the Eastern District of Texas,
Texarkana Division. A similar action was filed at the end of November 2004, in the United States
District Court for the Eastern District of Louisiana. This lawsuit was also filed as a putative
collective action alleging that the Company violated the Fair Labor Standards Act by misclassifying
assistant managers as exempt. The plaintiffs in both cases are seeking to recover alleged unpaid
overtime compensation, as well as liquidated damages, attorneys fees and costs. The named
plaintiffs seek to recover these damages on behalf of themselves and all other individuals who are
similarly situated. On July 5, 2005, the District Court in Louisiana issued an order conditionally
certifying a class of all current and former assistant store managers who have worked for the Company since November 23, 2001. As a result of that order, notice of the
lawsuit will be sent to approximately 5,500 individuals who will then have the right to opt-in to
the lawsuit. On August 8, 2005, the District Court in Texas issued an order conditionally
certifying a class of all current and former employees who worked for the Company as a furniture
department manager at any time between November 2, 2001 and October 1, 2003. As a result of that
order, notice will be sent to approximately 1,300 individuals who will then have the right to
opt-in to the lawsuit. The Texas case will include furniture department managers only, whereas the
Louisiana case will include only assistant store managers. The Company has the right to file a
motion seeking to decertify the classes after discovery has been conducted. Pending discovery on
the plaintiffs claims, the Company cannot make a determination as to the probability of a loss
contingency resulting from either of
18
these lawsuits or the estimated range of possible loss, if
any. The Company intends to vigorously defend itself against the allegations levied in both
lawsuits. However, the ultimate resolution of these matters could have a material adverse effect on
the Companys financial condition, results of operations, and liquidity.
The Company is self-insured for certain losses relating to general liability, workers
compensation, and employee medical and dental benefit claims, and the Company has purchased
stop-loss coverage in order to limit significant exposure in these areas. Accrued insurance
liabilities are actuarially determined based on claims filed and estimates of claims incurred but
not reported. With the exception of self-insured claims, taxes, employment-related matters, and the
liabilities described above that relate to the KB bankruptcy, the Company has not recorded any
additional significant liabilities for other commitments and contingencies.
NOTE 6 ADDITIONAL DATA
The
following schedule is a summary of other current assets, property and
equipment - net, accrued
liabilities, and other liabilities:
|
|
|
|
|
|
|
|
|
|
|
July 30, 2005 |
|
|
January 29, 2005 |
|
|
(In thousands) |
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
11,516 |
|
|
$ |
13,185 |
|
Refundable taxes |
|
|
6,765 |
|
|
|
6,351 |
|
Prepaid expenses and other current assets |
|
|
68,450 |
|
|
|
43,864 |
|
|
Other current assets |
|
$ |
86,731 |
|
|
$ |
63,400 |
|
|
The increase in prepaid expenses and other current assets is primarily due to an increase of $16.9
million in current prepaid income taxes as the estimated taxes paid on May 15, 2005,
were based on the first quarter profit. In addition, $8.6 million of annual insurance premiums
(which are amortized over 12 months) were renewed and paid in the second quarter.
|
|
|
|
|
|
|
|
|
|
|
July 30, 2005 |
|
|
January 29, 2005 |
|
|
(In thousands) |
|
|
|
|
|
|
|
|
Land and land improvements |
|
$ |
39,882 |
|
|
$ |
39,913 |
|
Buildings and leasehold improvements |
|
|
663,141 |
|
|
|
649,618 |
|
Fixtures and equipment |
|
|
693,648 |
|
|
|
664,352 |
|
Transportation equipment |
|
|
22,792 |
|
|
|
22,741 |
|
Construction-in-progress |
|
|
1,498 |
|
|
|
10,336 |
|
|
Property and equipment cost |
|
|
1,420,961 |
|
|
|
1,386,960 |
|
Less accumulated depreciation |
|
|
790,438 |
|
|
|
738,219 |
|
|
Property and equipment net |
|
$ |
630,523 |
|
|
$ |
648,741 |
|
|
The increase in accumulated depreciation of $52.2 million is comprised of depreciation expense of
$55.5 million offset by disposals of $3.3 million.
19
|
|
|
|
|
|
|
|
|
|
|
July 30, 2005 |
|
|
January 29, 2005 |
|
|
(In thousands) |
|
|
|
|
|
|
|
|
Property, payroll, and other taxes |
|
$ |
112,373 |
|
|
$ |
102,118 |
|
Insurance reserves |
|
|
47,941 |
|
|
|
45,255 |
|
Operating expenses |
|
|
46,964 |
|
|
|
58,792 |
|
KB bankruptcy related reserves |
|
|
32,436 |
|
|
|
32,498 |
|
Salaries and wages |
|
|
23,520 |
|
|
|
20,860 |
|
Interest and income taxes |
|
|
1,648 |
|
|
|
3,213 |
|
|
Accrued liabilities |
|
$ |
264,882 |
|
|
$ |
262,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
July 30, 2005 |
|
|
January 29, 2005 |
|
|
(In thousands) |
|
|
|
|
|
|
|
|
Insurance reserves |
|
$ |
38,567 |
|
|
$ |
35,955 |
|
Deferred incentive rent |
|
|
42,751 |
|
|
|
39,533 |
|
Other long-term liabilities |
|
|
11,645 |
|
|
|
10,893 |
|
|
Other liabilities |
|
$ |
92,963 |
|
|
$ |
86,381 |
|
|
The following analysis supplements changes in assets and liabilities, presented in the
Condensed Consolidated Statements of Cash Flows for the twenty-six weeks ended July 30, 2005 and
July 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended |
|
|
|
July 30, 2005 |
|
|
July 31, 2004 |
|
|
(In thousands) |
|
|
|
|
|
|
|
|
Inventories |
|
$ |
(17,925 |
) |
|
$ |
(48,875 |
) |
Other current assets |
|
|
(23,331 |
) |
|
|
(24,736 |
) |
Other assets |
|
|
617 |
|
|
|
(2,536 |
) |
Accounts payable |
|
|
6,563 |
|
|
|
(12,879 |
) |
Accrued operating expenses |
|
|
10,451 |
|
|
|
4,820 |
|
Interest and income taxes |
|
|
(1,565 |
) |
|
|
(10,214 |
) |
Other liabilities |
|
|
9,772 |
|
|
|
10,733 |
|
|
Change in assets and liabilities |
|
$ |
(15,418 |
) |
|
$ |
(83,687 |
) |
|
For the twenty-six weeks ended July 30, 2005, the $17.9 million change in inventories was primarily
due to the opening of 32 net new stores as inventory on a per store basis is essentially flat as
compared to July 31, 2004. In addition, other current assets changed by $23.3 million primarily
due to an increase of $16.9 million in current prepaid income taxes.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS FOR PURPOSES OF SAFE HARBOR PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe harbor for
forward-looking statements to encourage companies to provide prospective information, so long as
those statements are identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to differ materially from
those discussed in the statements. The Company wishes to take advantage of the safe harbor
provisions of the Act.
20
This report, as well as other verbal or written statements or reports made by or on the behalf of
the Company, may contain or may incorporate material by reference which includes forward-looking
statements within the meaning of the Act. By their nature, all forward-looking statements involve
risks and uncertainties. Statements, other than those based on historical facts, which address
activities, events, or developments that the Company expects or anticipates will or may occur in
the future, including such things as future capital expenditures (including the amount and nature
thereof), business strategy, expansion and growth of the Companys business and operations, future
earnings, store openings and new market entries, anticipated inventory turn, and other similar
matters, as well as statements expressing optimism or pessimism about future operating results or
events, are forward-looking statements, which are based upon a number of assumptions concerning
future conditions that may ultimately prove to be inaccurate. The words believe, anticipate,
project, plan, expect, estimate, objective, forecast, goal, intend, and similar
expressions generally identify forward-looking statements. The forward-looking statements are and
will be based upon managements then-current views and assumptions regarding future events and
operating performance, and are applicable only as of the dates of such statements. Although the
Company believes the expectations expressed in forward-looking statements are based on reasonable
assumptions within the bounds of its knowledge of its business, actual events and results may
materially differ from anticipated results described in such statements.
The Companys ability to achieve the results contemplated by forward-looking statements is subject
to a number of factors, any one, or a combination, of which could materially affect the Companys
business, financial condition, results of operations, or liquidity. These factors may include, but
are not limited to:
|
|
|
the impact of Hurricane Katrina on the Companys customers, stores, inventory,
associates, and distribution network; |
|
|
|
|
the Companys ability to source and purchase merchandise on favorable terms; |
|
|
|
|
interruptions and delays in merchandise supply from the Companys and its vendors
foreign and domestic sources; |
|
|
|
|
risks associated with purchasing, directly or indirectly, merchandise from foreign
sources, including increased import duties and taxes, imposition of more restrictive
quotas, loss of most favored nation trading status, currency fluctuations, work
stoppages, transportation delays, foreign government regulations, political unrest,
natural disasters, war, terrorism, and trade restrictions, including retaliation by the
United States against foreign practices; |
|
|
|
|
the ability to attract new customers and retain existing customers; |
|
|
|
|
the Companys ability to establish effective advertising, marketing, and promotional programs; |
|
|
|
|
economic and weather conditions which affect buying patterns of the Companys customers; |
|
|
|
|
changes in consumer spending and consumer debt levels; |
|
|
|
|
the Companys ability to anticipate buying patterns and implement appropriate inventory strategies; |
|
|
|
|
continued availability of capital and financing on favorable terms; |
|
|
|
|
competitive pressures and pricing pressures, including competition from other retailers; |
|
|
|
|
the Companys ability to comply with the terms of its credit facilities (or obtain waivers for noncompliance); |
|
|
|
|
significant interest rate fluctuations and changes in the Companys credit rating; |
|
|
|
|
the creditworthiness of the Companys former KB Toys business; |
|
|
|
|
the Companys indemnification and guarantee obligations with respect to
approximately 390 KB Toys store leases and other real property leases, some or all of
which may have been rejected or materially modified in connection with the KB Toys
bankruptcy proceedings, as well as other potential costs arising out of the KB Toys
bankruptcy; |
|
|
|
|
litigation risks and changes in laws and regulations, including changes in
accounting standards, the interpretation and application of accounting standards, and
tax laws; |
|
|
|
|
transportation and distribution delays or interruptions that adversely impact the
Companys ability to receive and/or distribute inventory; |
|
|
|
|
the impact on transportation costs from the driver hours of service regulations
adopted by the Federal Motor Carriers Safety Administration that became effective in
January 2004; |
|
|
|
|
the effect of fuel price fluctuations on the Companys transportation costs and customer purchases; |
|
|
|
|
interruptions in suppliers businesses; |
21
|
|
|
the Companys ability to achieve cost efficiencies and other benefits from various
operational initiatives and technological enhancements; |
|
|
|
|
the costs, interruptions, and problems associated with the implementation of, or
failure to implement, new or upgraded systems and technology; |
|
|
|
|
the effect of international freight rates and domestic transportation costs on the Companys profitability; |
|
|
|
|
delays and costs associated with building, opening, and modifying the Companys distribution centers; |
|
|
|
|
the Companys ability to secure suitable new store locations under favorable lease terms; |
|
|
|
|
the Companys ability to successfully enter new markets; |
|
|
|
|
delays associated with constructing, opening, and operating new stores; |
|
|
|
|
the Companys ability to attract and retain suitable employees; and |
|
|
|
|
other risks described from time to time in the Companys filings with the SEC, in
its press releases, and in other communications. |
The foregoing list is not exhaustive. There can be no assurances that the Company has correctly and
completely identified, assessed, and accounted for all factors that do or may affect its business,
financial condition, results of operations, and liquidity. Additional risks not presently known to
the Company or that it believes to be immaterial also may adversely impact the Company. Should any
risks or uncertainties develop into actual events, these developments could have material adverse
effects on the Companys business, financial condition, results of operations, and liquidity.
Consequently, all of the forward-looking statements are qualified by these cautionary statements,
and there can be no assurance that the results or developments anticipated by the Company will be
realized or that they will have the expected effects on the Company or its business or operations.
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only
as of the date thereof. The Company undertakes no obligation to publicly release any revisions to
the forward-looking statements contained in this report, or to update them to reflect events or
circumstances occurring after the date of this report, or to reflect the occurrence of
unanticipated events. Readers are advised, however, to consult any further disclosures the Company
may make on related subjects in its public announcements and SEC filings.
RESTATEMENT OF FINANCIAL STATEMENTS
The accompanying Managements Discussion and Analysis gives effect to the restatement of the
Companys Condensed Consolidated Financial Statements for the second quarter and first half of
fiscal year 2004, as appropriate, to correct the Companys accounting treatment for leases,
depreciation of related leasehold improvements, non-qualified deferred compensation plan assets and
liabilities, and reclassification of auction rate preferred securities and municipal auction rate
securities as described in Note 2 (Restatement of Previously Issued Consolidated Financial
Statements) to the Condensed Consolidated Financial Statements in this Quarterly Report on Form
10-Q. Throughout this Quarterly Report on Form 10-Q, all referenced amounts for prior periods and
prior period comparisons reflect the balances and amounts on a restated basis.
OVERVIEW
The discussion and analysis presented below should be read in conjunction with the Condensed
Consolidated Financial Statements and related Notes included elsewhere herein.
Closeout retailers provide a service to manufacturers by purchasing excess product that generally
results from production overruns, packaging changes, discontinued products, or returns. The Company
also purchases closeout merchandise through other channels, including liquidations, bankruptcies,
and insurance claim settlements. As a result of the lower purchase costs, closeout retailers can
generally offer most merchandise at prices lower than those offered by traditional retailers.
The Company is the nations largest broadline closeout retailer. At July 30, 2005, the Company
operated a total of 1,534 stores in 46 states with 1,493 stores under the name Big Lots®
and 41 stores under the name Big Lots Furniture®. The following table compares the
number of stores in operation at the beginning and end of the twenty-six weeks ended July 30, 2005,
and July 31, 2004.
22
|
|
|
|
|
|
|
|
|
|
|
July 30, 2005 |
|
|
July 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
Stores open at the beginning of the fiscal year |
|
|
1,502 |
|
|
|
1,430 |
|
Stores opened during the period |
|
|
43 |
|
|
|
50 |
|
Stores closed during the period |
|
|
(11 |
) |
|
|
(11 |
) |
|
Stores open at the end of the period |
|
|
1,534 |
|
|
|
1,469 |
|
|
The Company believes its stores are known for their wide assortment of closeout merchandise.
Certain core categories of merchandise, such as consumables, hardlines, and toys, are carried on a
continual basis, although the specific brand-names offered may change frequently. The Companys
stores also offer a small but consistent line of basic items, which the Company believes
strengthens its role as a dependable, one-stop shop for everyday needs. In addition, the stores
feature seasonal items for every major holiday, as well as a wide assortment of merchandise for the
home, including furniture, home décor, and domestics.
The Companys Web site is located at www.biglots.com. Wholesale operations are conducted through
Big Lots Wholesale, Consolidated International, Wisconsin Toy, and with online sales at
www.biglotswholesale.com. The contents of the Companys Web sites are not part of this report.
The Company has historically experienced, and expects to continue to experience, seasonal
fluctuations, with a larger percentage of its net sales and operating profit being realized in the
fourth fiscal quarter. In addition, the Companys quarterly results can be affected by the timing
of new store openings and store closings, the amount of sales contributed by new and existing
stores, the timing of television and circular advertising, and the timing of certain holidays. The
Company purchases substantial amounts of inventory and incurs higher shipping costs and higher
payroll costs in the third fiscal quarter in anticipation of the increased sales activity during
the fourth fiscal quarter.
The seasonality of the Companys business also influences the Companys demand for seasonal
borrowings. The Company historically has drawn upon its credit facilities to fund seasonal working
capital needs and has substantially repaid these seasonal borrowings during the fourth fiscal
quarter. The Company expects that it will maintain borrowings under its $500.0 million unsecured
credit facility entered into in fiscal year 2004 (the 2004 Credit Agreement) throughout fiscal
year 2005. Given the seasonality of the Companys business, the amount of borrowings under the 2004
Credit Agreement may fluctuate materially depending on various factors, including the time of the
year and the Companys need to acquire merchandise inventory.
RECENT DEVELOPMENTS
New Chairman, Chief Executive Officer and President
Effective July 11, 2005, Steven S. Fishman replaced Michael J. Potter as the Companys Chairman,
Chief Executive Officer and President.
KB Toys Update
On January 14, 2004, KB Acquisition Corporation and certain affiliated entities (collectively,
KB) filed for bankruptcy protection pursuant to Chapter 11 of title 11 of the United States Code.
KB acquired the KB Toys business from the Company pursuant to a Stock Purchase Agreement dated as
of December 7, 2000 (the KB Stock Purchase Agreement). On July 28, 2005, the Company entered
into a Stipulation and Agreed Order with KB and the Official Committee of Unsecured Creditors to
support their First Amended Joint Plan of Reorganization (the KB Plan). Under the KB Plan, the
Company expects to receive approximately $0.9 million from its unsecured claim related to the HCC
Note (as defined below). Based upon the Stipulation and Agreed Order and a net book value of $7.3
million related to the HCC Note, the Company has recorded a $3.8 million expense (net after a $2.6
million tax benefit) related to the partial charge-off of the HCC Note in the second quarter of
fiscal year 2005. On August 18, 2005, the bankruptcy court confirmed the KB Plan.
23
Hurricane Katrina
As of September 6, 2005, fifteen of the Companys stores were closed as a result of damage from
Hurricane Katrina. The Company is currently in the process of assessing the extent of damage to
these stores and others in the Gulf Coast region, as well as other consequences of the hurricane.
Accordingly, the Company is unable to determine the related cost at this time.
KB TOYS MATTERS
The Company continues to analyze the information available regarding the effect of KBs bankruptcy
filing on the various continuing rights and obligations of the parties to the KB Stock Purchase
Agreement, including: a) a note issued from Havens Corners Corporation, a subsidiary of KB
Acquisition Corporation and a party to the bankruptcy proceedings (HCC), to the Company, and an
accompanying warrant to acquire common stock of KB Holdings, Inc., the ultimate parent of KB and a
party to the bankruptcy proceedings (KB Holdings); b) the status of KBs indemnification
obligations to the Company with respect to guarantees of KB store leases by the Company and
guarantees (relating to lease and mortgage obligations) for which the Company has indemnification
obligations arising out of its 1996 acquisition of the KB Toys business from Melville Corporation
(now known as CVS New York, Inc., and together with its subsidiaries CVS); and c) the status of
the Companys and KBs other indemnification obligations to each other with respect to general
liability claims, representations and warranties, litigation, taxes, and other payment obligations
pursuant to the KB Stock Purchase Agreement.
When and to the extent the Company believes that a loss is probable, can be reasonably estimated
and is material, the Company records a liability. The Company recorded a $3.7 million charge (net
of tax) in the fourth quarter of fiscal year 2003 associated with the estimated impact of the KB
bankruptcy, which was comprised of a $10.6 million benefit (net of tax) related to the partial
charge-off of the HCC Note and KB Warrant (as each is defined below) and a $14.3 million charge
(net of tax) related to KB guarantee obligations. The Company recorded an additional $6.6 million
charge (net of tax) in the third quarter of fiscal year 2004 related to the estimated impact of
additional guarantee obligations resulting from the KB bankruptcy and, as discussed below, the
Company recorded an additional $3.8 million charge (net of tax) related to an additional partial
charge-off of the HCC Note in the second quarter of fiscal 2005.
In connection with the sale of the KB Toys business, the Company received $258.0 million in cash
and a 10-year note from HCC in the aggregate principal amount of $45.0 million. This note bears
interest, on an in-kind basis, at the rate of 8.0% per annum (principal and interest together known
as the HCC Note). The Company also received a warrant to acquire up to 2.5% of the common stock
of KB Holdings for a stated price per share (KB Warrant). At the time of the sale (the fourth
quarter of fiscal year 2000), the Company evaluated the fair value of the HCC Note received as
consideration in the transaction and recorded the HCC Note at its then estimated fair value of
$13.2 million. The estimated fair value of the HCC Note was based on several factors, including
fair market evaluations obtained from independent financial advisors at the time of the sale, the
Companys knowledge of the underlying KB Toys business and industry, and the risks inherent in
receiving no cash payments until the HCC Note matured in 2010. During fiscal year 2002 and until
KBs bankruptcy filing, the Company recorded the interest earned and accretion of the discount
utilizing the effective interest rate method and provided necessary reserves against such amounts
as a result of its evaluations of the carrying value of the HCC Note. As of February 1, 2003 and
February 2, 2002, the carrying value of the HCC Note was $16.1 million. For tax purposes, the HCC
Note was originally recorded at its face value of $45.0 million, and the Company incurred tax
liability on the interest, which was accrued but was not payable. This resulted in the HCC Note
having a tax basis that was greater than the carrying value on the Companys books.
The HCC Note became immediately due and payable at the time of KBs bankruptcy filing. The Company
engaged an independent investment advisory firm to assist the Company in estimating the fair value
of the HCC Note and KB Warrant for both book and tax purposes. As a result, the Company charged off
a portion of the HCC Note and wrote down the full value of the KB Warrant resulting in a book value
of the HCC Note of $7.3 million, and accordingly recorded a net charge (before tax) to continuing
operations in the fourth quarter of fiscal year 2003 in the amount of $9.6 million. In addition, as
a result of the bankruptcy filing and the partial charge-off, the Company recorded a tax benefit of
$20.2 million in the fourth quarter of fiscal year 2003. A substantial portion of this tax benefit
reflects the charge-off of the higher tax basis of the HCC Note. The book value of the HCC Note
was $7.3 million at January 29, 2005, and was $0.9 million at July 30, 2005, following the partial
pre-tax charge-off of $6.4 million recorded in the second quarter of fiscal 2005. The HCC Note is
recorded as a component of long-term assets on the Consolidated Balance Sheets at July 30, 2005 and
January 29, 2005.
24
When the Company acquired the KB Toys business from CVS in May 1996, the Company provided, among
other things, an indemnity to CVS with respect to any losses resulting from KBs failure to pay all
monies due and owing under any KB lease or mortgage obligation guaranteed by CVS. The typical form
of the CVS guarantee provides that the terms of the underlying lease may be extended, amended,
modified or in any way changed without the consent of the guarantor. While the Company controlled
the KB Toys business, the Company provided guarantees containing terms similar to the CVS
guarantees with respect to a limited number of additional store leases. As part of the KB sale, and
in accordance with the terms of the KB Stock Purchase Agreement, KB similarly agreed to indemnify
the Company with respect to all lease and mortgage obligations, including those guaranteed by CVS
and those guaranteed by the Company. To the Companys knowledge, the Company has guarantee or
indemnification obligations, as of July 30, 2005, with respect to: a) approximately 390 KB store
leases; b) two distribution center leases; and c) KBs main office building lease.
In connection with the bankruptcy, KB is generally required to continue to make lease payments with
respect to all non-residential real estate leases until the bankruptcy court approves KBs decision
to reject a lease and KB vacates the leased premises that it rejects. If KB rejects a lease that
has been guaranteed by the Company or by CVS, because KB can reject its indemnification obligations
to the Company, the Company could be liable for all or a portion of the lease obligations with
respect to the rejected leases, subject to many factors, including the landlords duty to mitigate,
and the validity of the applicable guarantee. On February 25, 2004, the Company announced that KB
had rejected 389 store leases, of which the Company believes it has guarantee or indemnification
obligations relating to approximately 90. The Company engaged an independent real estate valuation
firm to assist in the analysis of the Companys potential liability with respect to the 90
guaranteed leases. Based upon analysis of the information then available, the Company recorded a
charge to discontinued operations for rent and legal expenses in the fourth quarter of fiscal year
2003 in the amount of $14.3 million (net after a $9.7 million tax benefit) to reflect its best
estimate of this loss contingency.
On October 26, 2004, KB announced its intent to close an additional 141 to 238 underperforming
stores and reject those leases by January 31, 2005. At October 30, 2004, the Company believed that
KB had rejected approximately 598 store leases and that the Company has guarantee or
indemnification obligations relating to approximately 162 of those leases (including 72 resulting
from KBs October 26, 2004, announcement). Using the same methodology to analyze the Companys
potential liability with respect to these additional guaranteed leases, the Company recorded a
charge to discontinued operations in the third quarter of fiscal year 2004 in the amount of $4.9
million (net after a $3.7 million tax benefit) to reflect its best estimate of this loss
contingency. Since October 30, 2004, the Company believes that KB has both rejected a limited
number of additional store leases and withdrew its previous rejection of certain other store
leases. KBs actions have resulted in a net increase of approximately six store lease rejections
(bringing the total rejections to approximately 168) for which the Company believes it has
guarantee or indemnification obligations. No additional charges related to the
guarantee obligations have been recorded by the Company since October 30, 2004.
On March 10, 2004, the Company announced that it had received notice of a default relating to a
first mortgage on the Pittsfield DC. As a result of KBs bankruptcy filing, the mortgage holder
declared an event of default and claimed that the loan had become immediately due and payable (the
Pittsfield DC Note). The Company was informed that, as of January 14, 2004, the Pittsfield DC
Note had an outstanding principal balance of approximately $6.3 million plus accrued interest of
approximately $21,000. Additionally, the mortgage holder claimed that a make-whole premium of
approximately $1.5 million was also due and payable. On November 5, 2004, the Company satisfied its
indemnity obligation with respect to the Pittsfield DC Note at a cost of $8.4 million. The Company
engaged an independent real estate valuation firm to assist it in the analysis of the Companys potential loss arising from the indemnification payment related to the Pittsfield DC Note. Based
upon analysis of the information then available, the Company recorded a charge to discontinued
operations in the third quarter of fiscal year 2004 in the amount of $1.7 million (net after a $1.0
million tax benefit) to reflect its best estimate of the difference between the subrogation rights
($6.1 million) flowing from the indemnification payment and the net realizable value of the
Pittsfield DC.
On August 16, 2005, KB filed notice of its final lease rejections. Included on the list were four
store leases (including one which the Company has a guarantee or indemnification obligation), the
impact of which has been reflected in the store lease rejection discussion above. The Company is not aware of any additional rejections of
the remaining store leases guaranteed by the Company. Additionally, the
list included both the prime leases and sub-leases relating to two distribution centers. As
previously disclosed, the Company has indemnification obligations relating to both of the
distribution center leases. The Company believes these distribution centers were no longer being
used by KB and had both been sublet to unrelated third parties for rents in excess of the rents due
under the terms of KBs prime leases. The Company is unable to determine at this
25
time whether any additional liability will result from these rejections or the future default or rejection of any
remaining leases guaranteed by the Company or CVS that have not been rejected by KB. Moreover,
since the typical form of guarantee permits an extension, amendment, modification or other change,
the Company is unable to estimate its maximum potential amount of future payments, if any, required
to satisfy lease guarantees. In the event any liability arises from the rejection of the
distribution centers or additional leases are rejected or defaulted upon, any related charge would
be to discontinued operations. Management does not believe that such a charge would have a material
adverse effect on the Companys financial condition, results of continuing operations, or
liquidity.
On
May 13, 2005, KB Toys and the Official Committee of Unsecured Creditors filed the KB Plan, which
was later amended on July 24, 2005. On July 28, 2005, the Company, along with KB Toys and the Official
Committee of Unsecured Creditors entered into a Stipulation and Agreed Order which, among other
things, caused the KB Plan to be further amended. In final form, the KB Plan was based on a plan
funding agreement which KB entered into with an affiliate of Prentice Capital Management, LP (the
Prentice Affiliate). Under the terms of the KB Plan, the Prentice Affiliate will invest $20
million in the reorganized KB Toys and provide a $25 million seasonal credit facility in exchange
for 90% of the common stock and 100% of the preferred stock of the reorganized KB Toys. The
remaining common stock will be held by a trust for the benefit of the unsecured creditors of those
KB Toys entities being reorganized under the KB Plan. The KB Plan was confirmed by the United
States Bankruptcy Court for the District of Delaware on August 18, 2005.
Under the KB Plan, the Company will be treated on a consolidated basis with all other unsecured
operating subsidiary creditors for purposes of its lease obligations and the Pittsfield DC Note,
and would expect to receive approximately 8% on its allowed unsecured claims relating to these
items. Additionally, the Company expects to receive approximately 1.6%, or $0.9 million, of its
unsecured claim related to the HCC Note. Because the HCC Note had a net book value of $7.3 million
following the partial charge-off recorded in the fourth quarter of fiscal 2003, the Company
recorded an additional $6.4 million pre-tax charge (before a $2.6 million tax benefit) related to
the HCC Note in the second quarter of fiscal 2005. The Company has not reflected any benefit
arising from the KB Plan as part of its reserve for the lease obligations and the Pittsfield DC Note.
In addition to including KBs indemnity of the Company with respect to lease and mortgage
obligations, the KB Stock Purchase Agreement contains mutual indemnifications of KB by the Company
and of the Company by KB. These indemnifications relate primarily to losses arising out of general
liability claims, breached or inaccurate representations or warranties, shared litigation expenses,
other payment obligations, and taxes. Under a tax indemnification provision in the KB Stock
Purchase Agreement, the Company is to indemnify KB for tax losses generally related to the periods
prior to the Companys sale of KB. The Company continues to assess the effect of the KB bankruptcy
on such mutual indemnification obligations and has not made any provision for loss contingencies
with respect to any non-lease or non-tax related indemnification obligations. At this time,
management does not believe that such a charge would have a material adverse effect on the
Companys financial condition, results of continuing operations, or liquidity.
On February 9, 2005, the Company commenced a suit in the Delaware Chancery Court against certain of
the officers, directors and shareholders of KB alleging fraud, breach of fiduciary duty, aiding and
abetting breach of fiduciary duty, unjust enrichment, and civil conspiracy. On March 3, 2005, the
United States Bankruptcy Court for the District of Delaware, finding that litigating the state
court action would distract KBs management and thereby hinder its ability to focus on a successful
reorganization, temporarily enjoined the Companys suit. Once permitted by the court, the Company
intends to vigorously prosecute this action to recover its damages arising from defendants actions
resulting in KBs inability to satisfy the HCC Note.
26
RESULTS OF OPERATIONS
The following table compares components of the Condensed Consolidated Statements of Operations of
the Company as a percentage of net sales at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
|
|
|
Twenty-Six Weeks Ended |
|
|
July 30, 2005 |
|
|
July 31, 2004 |
|
|
|
|
|
|
July 30, 2005 |
|
|
July 31, 2004 |
|
|
|
|
|
|
|
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
59.9 |
|
|
|
59.2 |
|
|
|
|
|
|
|
59.5 |
|
|
|
59.0 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
40.1 |
|
|
|
40.8 |
|
|
|
|
|
|
|
40.5 |
|
|
|
41.0 |
|
Selling and administrative expenses |
|
|
39.2 |
|
|
|
39.0 |
|
|
|
|
|
|
|
38.2 |
|
|
|
38.3 |
|
Depreciation expense |
|
|
2.7 |
|
|
|
2.6 |
|
|
|
|
|
|
|
2.6 |
|
|
|
2.5 |
|
|
|
|
|
|
|
|
Operating profit (loss) |
|
|
(1.8 |
) |
|
|
(0.8 |
) |
|
|
|
|
|
|
(0.3 |
) |
|
|
0.3 |
|
Interest expense |
|
|
0.1 |
|
|
|
0.5 |
|
|
|
|
|
|
|
0.1 |
|
|
|
0.5 |
|
Interest income |
|
|
0.0 |
|
|
|
0.0 |
|
|
|
|
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(1.9 |
) |
|
|
(1.3 |
) |
|
|
|
|
|
|
(0.4 |
) |
|
|
(0.2 |
) |
Income tax benefit |
|
|
(0.6 |
) |
|
|
(0.5 |
) |
|
|
|
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
Net loss |
|
|
(1.3 |
)% |
|
|
(0.8 |
)% |
|
|
|
|
|
|
(0.3 |
)% |
|
|
(0.1 |
)% |
|
|
|
|
|
|
|
THIRTEEN WEEKS ENDED JULY 30, 2005 AND JULY 31, 2004
Net Sales
Net sales increased to $1,051.1 million for the thirteen weeks ended July 30, 2005, compared to
$995.0 million for the thirteen weeks ended July 31, 2004. The Company attributes this net sales
increase of $56.1 million, or 5.6%, to the net addition year over year of 65 stores or 4.4% store
growth, as comparable store sales for the second quarter of fiscal year 2005 were essentially flat
at 0.2%. Comparable store sales are calculated using all stores that have been open for at least
two years as of the beginning of the fiscal year. The comparable store sales increase of 0.2%
consisted of a 2.5% increase in the dollar value of the average basket offset by a 2.3% decrease in
the number of customer transactions. Strong performance in the furniture and seasonal departments
drove the increase in the dollar value of the average basket.
The Company believes that future sales growth is dependent upon increases in the number of customer
transactions and/or increases in the dollar value of the average basket. While the current
economic environment (primarily higher gas prices) continues to impact the Companys core customer
and the discount retail sector, the Company believes opportunities exist to improve customer
traffic through more impactful advertising circulars, a higher concentration of closeout
merchandise, and more consistent merchandising across all categories in the store. The following
table summarizes the comparable store sales results for the thirteen week periods as well as
comparable results in customer transactions and in the value of the average basket:
|
|
|
|
|
|
|
|
|
|
|
July 30, 2005 |
|
|
July 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
Comparable store sales |
|
|
0.2 |
% |
|
|
0.2 |
% |
Customer transactions |
|
|
(2.3 |
)% |
|
|
(2.1 |
)% |
Value of the average basket |
|
|
2.5 |
% |
|
|
2.3 |
% |
|
The following table details net sales by product category with the percentage of each category to
total net sales, and the net sales change in dollars and percentage from the second quarter of
fiscal year 2005 to the same period in fiscal year 2004 in accordance with the Financial Accounting Standards Board (FASB) Statement of Financial Accounting
Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information:
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 30, 2005 |
|
|
July 31, 2004 |
|
|
Change |
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumables |
|
$ |
316,559 |
|
|
|
30.1 |
% |
|
$ |
315,456 |
|
|
|
31.7 |
% |
|
$ |
1,103 |
|
|
|
0.3 |
% |
Home |
|
|
308,991 |
|
|
|
29.4 |
|
|
|
278,510 |
|
|
|
28.0 |
|
|
|
30,481 |
|
|
|
10.9 |
|
Seasonal and toys |
|
|
182,960 |
|
|
|
17.4 |
|
|
|
169,229 |
|
|
|
17.0 |
|
|
|
13,731 |
|
|
|
8.1 |
|
Other |
|
|
242,543 |
|
|
|
23.1 |
|
|
|
231,755 |
|
|
|
23.3 |
|
|
|
10,788 |
|
|
|
4.7 |
|
|
Net sales |
|
$ |
1,051,053 |
|
|
|
100.0 |
% |
|
$ |
994,950 |
|
|
|
100.0 |
% |
|
$ |
56,103 |
|
|
|
5.6 |
% |
|
The Home category includes furniture, domestics, and home décor departments. The Other category
primarily includes electronics, small appliances, home maintenance, and tools. The Company
internally evaluates and externally communicates overall sales and merchandise performance based on
these key merchandising categories and believes that these categories facilitate analysis of the
Companys results.
Gross Profit
Gross profit increased to $421.7 million for the thirteen weeks ended July 30, 2005, compared to
$406.3 million for the thirteen weeks ended July 31, 2004, an increase of $15.4 million, or 3.8%.
Gross profit as a percentage of net sales decreased to 40.1% in the second quarter of fiscal year
2005 compared to 40.8% in the second quarter of fiscal year 2004. The gross profit rate decrease
for the comparable thirteen weeks is principally a result of a combination of higher costs
associated with domestic inbound freight due to increased fuel surcharges and fuel prices and a
lower initial markup (IMU). The Companys IMU continues to be challenged by several factors
including mix within categories, higher raw material costs in resin based products such as plastics
and chemicals, and a competitive pricing environment in the consumables category.
Selling and Administrative Expenses
Selling and administrative expenses increased to $412.4 million for the thirteen weeks ended July
30, 2005, compared to $388.2 million for the thirteen weeks ended July 31, 2004, an increase of
$24.2 million, or 6.2%. The increase was primarily attributable to increased store
occupancy-related costs, including rent and utilities of $6.5 million, a $3.3 million increase in
transportation costs, and increased store payroll costs of $5.5 million consistent with the
increase in the number of stores. Additionally, the Company recorded a $6.4 million expense
related to the partial charge-off of the HCC Note as more fully described in Note 3 (KB Toys
Matters) to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
As a percentage of net sales, selling and administrative expenses were 39.2% for the second quarter
of fiscal year 2005 compared to 39.0% for the second quarter of fiscal year 2004. The 20 basis
point increase was attributable primarily to the partial charge-off of the HCC Note. Absent this
charge, the Company believes that expenses were well managed as leverage was achieved primarily
through tightly managed store controllable expenses and the planned elimination of one advertising
circular during the quarter.
Outbound distribution and transportation costs, which were included in selling and administrative
expenses (see Note 1 (Summary of Significant Accounting Policies) to the Condensed Consolidated
Financial Statements in this Quarterly Report on Form 10-Q) were slightly higher at $57.5 million
for the second quarter of fiscal year 2005 compared to $54.2 million for the second quarter of
fiscal year 2004. As a percentage of net sales, outbound distribution and transportation costs
remained flat in the second quarter of fiscal year 2005 at 5.5% as distribution efficiencies were
essentially offset by the impact of higher fuel prices.
Depreciation Expense
Depreciation expense for the second quarter of fiscal year 2005 was $28.5 million compared to $26.3
million for the same period of fiscal year 2004. The $2.2 million increase is primarily related to
additional capital assets placed in service.
Interest Expense
Interest expense, including the amortization of debt issuance costs, was $1.3 million for the
thirteen weeks ended July 30, 2005, compared to $4.6 million for the thirteen weeks ended July 31,
2004, a decrease of $3.3 million. As a percentage of net sales, interest expense decreased from
0.5% in the second quarter of fiscal year 2004 to 0.1% in the second quarter of fiscal year
28
2005. This decline in the interest expense rate was primarily due to a combination of lower average
borrowings and the lower average interest rate associated with the 2004 Credit Agreement that was
entered into in the third fiscal quarter of last year. The borrowings under the 2004 Credit
Agreement had an average interest rate of 3.9% during the second quarter of fiscal year 2005,
compared to an 8.2% average rate under the $204.0 million senior notes privately placed in 2001
(the Senior Notes) and the $300.0 million secured revolving credit agreement entered into in 2001
(the 2001 Credit Agreement) which were in place during the second quarter of fiscal year 2004.
Income Taxes
The effective income tax benefit rate for the thirteen weeks ended July 30, 2005 was 32.9%,
compared to an effective income tax benefit rate of 39.2% for the same period in fiscal year 2004.
The tax benefit rate decrease was primarily attributable to approximately $916,000 of income tax
expense related to the write-down of deferred income tax assets as a result of Ohio tax reform
enacted during the second quarter of fiscal year 2005, and a decline in the anticipated level and
jurisdictional mix of earnings. The Company anticipates that its effective income tax rate for
fiscal year 2005 will be in the range of 30.7% to 37.4%. This range does not reflect the impact, if
any, of the adoption of or the effect of the finalization (which could occur in fiscal year 2005)
of the Proposed Interpretation of FASB No. 109, regarding Accounting for Uncertain Tax Positions.
TWENTY-SIX WEEKS ENDED JULY 30, 2005 AND JULY 31, 2004
Net Sales
Net sales increased to $2,150.1 million for the twenty-six weeks ended July 30, 2005, compared to
$2,014.1 million for the twenty-six weeks ended July 31, 2004. This net sales increase of $136.0
million, or 6.8%, resulted primarily from an increase in comparable store sales of 1.3% and the
increase in new stores (net of store closings). Comparable store sales are calculated using all
stores that have been open for at least two years as of the beginning of the fiscal year. The
comparable store sales increase of 1.3% consisted of a 4.0% increase in the dollar value of the
average basket offset by a 2.7% decrease in the number of customer transactions. The increase in
the dollar value of the average basket was primarily driven by an increase in the average item
retail sales price.
The following table summarizes the comparable store sales results for the twenty-six week periods
as well as comparable results in customer transactions and in the value of the average basket:
|
|
|
|
|
|
|
|
|
|
|
July 30, 2005 |
|
|
July 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
Comparable store sales |
|
|
1.3 |
% |
|
|
1.5 |
% |
Customer transactions |
|
|
(2.7 |
)% |
|
|
(1.0 |
)% |
Value of the average basket |
|
|
4.0 |
% |
|
|
2.5 |
% |
|
Net sales by product category as a percentage of total net sales, and the net sales change in
dollars and percentage from the first half of fiscal year 2005 to the same period in fiscal year
2004 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 30, 2005 |
|
|
July 31, 2004 |
|
|
Change |
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumables |
|
$ |
628,917 |
|
|
|
29.3 |
% |
|
$ |
634,057 |
|
|
|
31.5 |
% |
|
$ |
(5,140 |
) |
|
|
(0.8 |
)% |
Home |
|
|
651,580 |
|
|
|
30.3 |
|
|
|
577,740 |
|
|
|
28.7 |
|
|
|
73,840 |
|
|
|
12.8 |
|
Seasonal and toys |
|
|
384,873 |
|
|
|
17.9 |
|
|
|
363,723 |
|
|
|
18.0 |
|
|
|
21,150 |
|
|
|
5.8 |
|
Other |
|
|
484,773 |
|
|
|
22.5 |
|
|
|
438,628 |
|
|
|
21.8 |
|
|
|
46,145 |
|
|
|
10.5 |
|
|
Net sales |
|
$ |
2,150,143 |
|
|
|
100.0 |
% |
|
$ |
2,014,148 |
|
|
|
100.0 |
% |
|
$ |
135,995 |
|
|
|
6.8 |
% |
|
29
Gross Profit
Gross profit increased to $870.4 million for the twenty-six weeks ended July 30, 2005, compared to
$826.5 million for the twenty-six weeks ended July 31, 2004, an increase of $43.9 million, or 5.3%.
Gross profit as a percentage of net sales decreased to 40.5% in the first half of fiscal year 2005
compared to 41.0% in the first half of fiscal year 2004. The decline in the gross profit rate for
the twenty-six weeks is primarily due to higher domestic inbound freight costs resulting from
increased fuel surcharges and fuel prices.
Selling and Administrative Expenses
Selling and administrative expenses increased to $820.8 million for the twenty-six weeks ended July
30, 2005, compared to $771.0 million for the twenty-six weeks ended July 31, 2004, an increase of
$49.8 million, or 6.5%. The increase was primarily attributable to increased store
occupancy-related costs, including rent and utilities of $13.9 million and increased store payroll
costs of $13.4 million consistent with the increase in the number of stores. Additionally, the
Company recorded a $6.4 million expense related to the partial charge-off of the HCC Note as more
fully described in Note 3 (KB Toys Matters) to the Condensed Consolidated Financial Statements in
this Quarterly Report on Form 10-Q.
As a percentage of net sales, selling and administrative expenses were 38.2% for the first half of
fiscal year 2005 compared to 38.3% for the first half of fiscal year 2004. The 10 basis point
decrease includes the partial charge-off of the HCC Note which was more than offset by efficiencies
in store payroll management and a reduction of outbound distribution and transportation costs
further discussed below.
Outbound distribution and transportation costs, which were included in selling and administrative
expenses (see Note 1 (Summary of Significant Accounting Policies) to the Condensed Consolidated
Financial Statements in this Quarterly Report on Form 10-Q) increased to $116.9 million for the
first half of fiscal year 2005 compared to $113.7 million for the first half of fiscal year 2004.
As a percentage of net sales, however, outbound distribution and transportation costs decreased by
30 basis points to 5.4% of net sales in the first half of fiscal year 2005 as compared to 5.7% for
the same period in fiscal year 2004. The rate decrease is a function of higher productivity in all
distribution centers coupled with the Companys fifth regional distribution center in Durant,
Oklahoma being fully operational in the first half of fiscal year 2005 versus being in a startup
mode during the first half of fiscal year 2004, partially offset by the impact of higher fuel
prices.
Depreciation Expense
Depreciation expense for the first half of fiscal year 2005 was $55.5 million compared to $50.2
million for the same period of fiscal year 2004. The $5.3 million increase is primarily related to
additional capital assets placed in service.
Interest Expense
Interest expense, including the amortization of debt issuance costs, was $2.5 million for the
twenty-six weeks ended July 30, 2005, compared to $9.2 million for the twenty-six weeks ended July
31, 2004, a decrease of $6.7 million. As a percentage of net sales, interest expense decreased from
0.5% in the first half of fiscal year 2004 to 0.1% in the first half of fiscal year 2005. This
decline in the interest expense rate was primarily due to a combination of lower average borrowings
and the lower average interest rate associated with the 2004 Credit Agreement that was entered into
in the third fiscal quarter of last year. Average borrowings for the first half of fiscal year
2005 were $127.3 million compared to $204.0 million for the same period of fiscal year 2004. The
2004 Credit Agreement had an average interest rate of 3.7% during the first half of fiscal year
2005, compared to an 8.2% average rate under the Senior Notes and the 2001 Credit Agreement, which were in place during
the first half of fiscal year 2004.
Income Taxes
The effective income tax benefit rate for the twenty-six weeks ended July 30, 2005 was 28.0%
compared to an effective income tax benefit rate of 59.5% for the same period in fiscal year 2004.
The Company anticipates that its effective income tax rate for fiscal year 2005 will be in the
range of 30.7% to 37.4%. This range does not reflect the impact, if any, of the adoption of or the
effect of the finalization (which could occur in fiscal year 2005) of the Proposed Interpretation
of FASB No. 109, regarding Accounting for Uncertain Tax Positions. The decreased income tax
benefit rate is primarily attributable to the effect of approximately $916,000 of income tax
expense related to the write-down of deferred income tax assets as a result of Ohio tax reform
enacted during the second quarter of fiscal year 2005, a decline in the anticipated level and
jurisdictional mix of earnings, and a decline in favorable income tax settlements. The 59.5%
effective tax benefit rate in 2004 was higher primarily due to the effect of job creation tax
credit matters (settled and closed during the first fiscal quarter of 2004) over a nominal loss
before income tax base.
30
CAPITAL RESOURCES AND LIQUIDITY
Capital Resources
On October 29, 2004, the Company entered into the 2004 Credit Agreement. The 2004 Credit Agreement
is scheduled to mature on October 28, 2009. The proceeds of the 2004 Credit Agreement are available
for general corporate purposes, working capital, and to repay certain indebtedness of the Company,
including amounts that were outstanding related to the Senior Notes and the 2001 Credit Agreement.
The pricing and fees related to the 2004 Credit Agreement fluctuate based on the Companys debt
rating. Loans made under the 2004 Credit Agreement may be prepaid by the Company without penalty.
The 2004 Credit Agreement contains financial and other covenants, including, but not limited to,
limitations on indebtedness, liens and investments, as well as the maintenance of two financial
ratios a leverage ratio and a fixed charge coverage ratio. A violation of these covenants could
result in a default under the 2004 Credit Agreement, which would permit the lenders to restrict the
Companys ability to further access the 2004 Credit Agreement for loans and letters of credit, and
require the immediate repayment of any outstanding loans under the 2004 Credit Agreement. The
Company was in compliance with its financial covenants at July 30, 2005.
The 2004 Credit Agreement permits, at the Companys option, borrowings at various interest rate
options based on the prime rate or London InterBank Offering Rate plus applicable margin. The 2004
Credit Agreement also permits, as applicable, borrowings at various interest rate options mutually
agreed upon by the Company and the lenders. The weighted average interest rate of the outstanding
loans at July 30, 2005 was 4.1%. The Company typically repays and/or borrows on a daily basis in
accordance with the terms of the 2004 Credit Agreement. The daily activity is a net result of the
Companys liquidity position, which is generally affected by: a) cash inflows such as store cash
and other miscellaneous deposits; and b) cash outflows such as check clearings, wire and other
electronic transactions, and other miscellaneous disbursements.
In addition to revolving credit loans, the 2004 Credit Agreement includes a $30.0 million swing
loan sub-limit, a $50.0 million bid loan sub-limit, and a $150.0 million letter of credit
sub-limit. At July 30, 2005, the total borrowings outstanding under the 2004 Credit Agreement were
$173.6 million, which total amount was comprised of $155.0 million in revolving credit loans, $18.6
million in swing loans, and no bid loans. At January 29, 2005, the total borrowings outstanding
under the 2004 Credit Agreement were $159.2 million, which total amount was comprised of $129.2
million in revolving credit loans, $30.0 million in swing loans, and no bid loans. The borrowings
available under the 2004 Credit Agreement, after taking into account the reduction of availability
resulting from outstanding letters of credit totaling $64.9 million, were $261.5 million at July
30, 2005.
The Company utilizes its credit facility primarily to manage ongoing and seasonal working capital
needs. Given the seasonality of the Companys business, the amount of borrowings under the 2004
Credit Agreement may fluctuate materially depending on various factors, including the time of year
and the Companys need to acquire merchandise inventory. In order to prepare for the 2005 holiday
season, the Company expects borrowings and letters of credit to increase steadily through the end
of the third quarter of fiscal year 2005, with peak borrowings during this period expected to reach
approximately $365.0 million during the second half of October. The Company anticipates that
borrowings will continue to rise slightly during the beginning of the fourth fiscal quarter, with a
decline expected near the middle of the fourth fiscal quarter.
Liquidity
The primary sources of liquidity for the Company are cash flows from operations and, as necessary,
borrowings under the 2004 Credit Agreement. At July 30, 2005, working capital was $661.7 million.
Cash flows provided by operating activities were $33.5 million for the twenty-six weeks ended July
30, 2005, and resulted primarily from net loss adjusted for depreciation and amortization expense
of $46.8 million, and an increase in accounts payable of $6.6 million, supporting the growth in
inventories. These were offset by a $23.3 million increase in other current assets primarily due
to an increase of $16.9 million in current prepaid income taxes. Cash flows used in operating
activities were $28.5 million for the twenty-six weeks ended July 31, 2004, and resulted primarily
from an increase in inventories of $48.9 million, estimated income tax installments of $22.4
million included in other current assets, and a decrease in accounts payable of $12.9 million due
to the timing of receipts and payments for merchandise, offset by net loss adjusted for
depreciation and amortization totaling $47.6 million.
Cash flows used in investing activities were $43.3 million for the twenty-six weeks ended July 30,
2005 compared to $64.9 million for the twenty-six weeks ended July 31, 2004. The decrease of
$21.6 million was primarily due to a decreased level of capital spending related to no store
remodels during the first half of fiscal year 2005 compared to 64 through the first half of fiscal
31
year 2004 and lower distribution center capital spending in fiscal year 2005 as compared to fiscal
year 2004. Capital expenditure requirements in fiscal year 2005 are anticipated to be
approximately $70 to $80 million, and will consist primarily of investments in new stores, the
completion of the Columbus, Ohio distribution center re-engineering project, and maintenance of
existing stores, distribution centers, and the Companys general office.
Cash flows provided by financing activities were $17.5 million for the twenty-six weeks ended July
30, 2005, relating primarily to repayments towards outstanding debt of $1,203.8 million offset by
borrowings of $1,218.2 million. All of the borrowings and repayments were a result of activity
associated with daily cash needs of the Company. For the twenty-six weeks ended July 31, 2004,
cash flows used in financing activities were $69.2 million, due primarily to the purchase of 5.4
million of the Companys common shares for an aggregate cost of $75.0 million, or $13.82 average
per share price paid.
Cash paid for income taxes (excluding refunds) of $22.2 million for the twenty-six week period
ended July 30, 2005, was $0.6 million lower when compared to the same period last year. The
decrease was primarily related to the decline in the Companys fiscal year 2004 taxable income
compared to the prior year.
The Company continues to believe that it has, or, if necessary, has the ability to obtain adequate
resources to fund ongoing operating requirements, future capital expenditures, development of new
projects, and currently maturing obligations. 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 Companys capital resources or liquidity.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements, in conformity with accounting principles generally
accepted in the United States of America (GAAP), requires management to make estimates and
assumptions about future events that affect the amounts reported in the financial statements and
accompanying notes. Actual results could materially differ from those estimates.
The Companys accounting policies and other disclosures required by GAAP are also described in Note
1 (Summary of Significant Accounting Policies) to the Condensed Consolidated Financial Statements
in this Quarterly Report on Form 10-Q. The items listed below are not intended to be a
comprehensive list of all the Companys accounting policies. In many cases, the accounting
treatment of a particular transaction is specifically dictated by GAAP, with no need for
managements judgment in the principles application. There are also areas in which managements
judgment in selecting any available alternative would not produce a materially different result.
The Company has certain critical accounting policies and accounting estimates, which are described
below.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market using the average cost retail
inventory method. Market is determined based on the estimated net realizable value, which generally
is the merchandise selling price. Under the retail inventory method, inventory is segregated into
departments of merchandise having similar characteristics, and is stated at its current retail selling value. Inventory retail values are converted to a cost basis by applying
specific average cost factors for each merchandise department. Cost factors represent the average
cost-to-retail ratio for each merchandise department based on beginning inventory and the fiscal
year purchase activity. The retail inventory method requires management to make judgments and
contains estimates, such as the amount and timing of markdowns to clear unproductive or slow-moving
inventory, which may impact the ending inventory valuation and gross profit. These assumptions are
based on historical experience and current information.
Factors considered in the determination of markdowns include current and anticipated demand,
customer preferences, age of the merchandise, and seasonal trends. Permanent markdowns are recorded
as a gross profit reduction in the period of managements decision to initiate price reductions
with the intent not to return the price to regular retail. Promotional markdowns are recorded as a
gross profit reduction in the period the merchandise is sold.
Shrinkage is estimated as a percentage of sales for the period from the last physical inventory
date to the end of the fiscal year. Such estimates are based on experience and the most recent
physical inventory results. While it is not possible to quantify the impact from each cause of
shrinkage, the Company has loss prevention programs and policies that it believes minimize
shrinkage.
32
Due to the nature of the Companys purchasing practices for closeout and deeply discounted
merchandise, vendors and merchandise suppliers generally do not offer the Company incentives such
as slotting fees, cooperative advertising allowances, buy down agreements, or other forms of
rebates that could materially reduce its cost of sales.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization expense are recorded using
the straight-line method over the estimated useful lives of the assets. Leasehold improvements are
amortized on a straight-line basis over the shorter of their estimated useful life or the lease
term.
The estimated useful lives by major asset category are as follows:
|
|
|
|
|
Land improvements |
|
15 years |
Buildings and leasehold improvements |
|
5 - 40 years |
Fixtures and equipment |
|
5 - 15 years |
Transportation equipment |
|
3 - 7 years |
|
|
|
|
|
There was no capitalized interest for the thirteen and twenty-six weeks ended July 30, 2005.
Capitalized interest was $0.1 and $0.3 million for the thirteen and twenty-six weeks ended July 31,
2004, respectively.
Impairment
The Company has long-lived assets that consist primarily of property and equipment. The Company
estimates useful lives on buildings and equipment using assumptions based on historical data and
industry trends. Impairment is recorded if the carrying value of the long-lived asset exceeds its
anticipated undiscounted future net cash flows. The Companys assumptions related to estimates of
future cash flows are based on historical results of cash flows adjusted for management projections
for future periods. The Company estimates the fair value of its long-lived assets using readily
available market information for similar assets.
Insurance Reserves
The Company is self-insured for certain losses relating to general liability, workers
compensation, and employee medical and dental benefit claims, and the Company has purchased
stop-loss coverage to limit significant exposure in these areas. Accrued insurance liabilities are
based on claims filed and estimates of claims incurred but not reported. Such amounts are
determined by applying actuarially-based calculations taking into account known trends and
projections of future results. Actual claims experience can impact these calculations and, to the extent that subsequent claim costs vary from
estimates, future earnings could be impacted and the impact could be material.
Income Taxes
The Companys income tax accounts reflect estimates of the outcome or settlement of various
asserted and unasserted income tax contingencies including tax audits and administrative appeals.
At any point in time, several tax years may be in various stages of audit or appeal or could be
subject to audit by various taxing jurisdictions. This requires a periodic identification and
evaluation of significant doubtful or controversial issues. The results of the audits, appeals, and
expiration of the statute of limitations are reflected in the income tax accounts accordingly.
The Company has generated deferred tax assets and liabilities due to temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. The Company has established a valuation allowance to reduce its
deferred tax assets to the balance that is more likely than not to be realized.
The effective income tax rate in any period may be materially impacted by the overall level of
income (loss) before income taxes, the jurisdictional mix and magnitude of income (loss), changes
in the income tax laws (which may be retroactive to the beginning of the fiscal year), changes in
the expected outcome or settlement of an income tax contingency, changes in the deferred tax
valuation allowance, and adjustments of a deferred tax asset or liability for enacted changes in
tax laws or rates.
33
Pension Liabilities
Pension and other retirement benefits, including all relevant assumptions required by GAAP, are
evaluated each year. Due to the technical nature of retirement accounting, outside actuaries are
used to provide assistance in calculating the estimated future obligations. Since there are many
assumptions used to estimate future retirement benefits, differences between actual future events
and prior estimates and assumptions could result in adjustments to pension expenses and
obligations. Certain actuarial assumptions, such as the discount rate and expected long-term rate
of return, have a significant effect on the amounts reported for net periodic pension cost and the
related benefit obligations. The Company reviews external data and historical trends to help
determine the discount rate and expected long-term rate of return. The Companys objective in
selecting a discount rate is to identify the best estimate of the rate at which the benefit
obligations would be settled on the measurement date. In making this estimate, the Company reviews
rates of return on high-quality, fixed-income investments currently available and expected to be
available during the period to maturity of the benefits. This process includes a review of the
bonds available on the measurement date with a quality rating of at least Aa. To develop the
expected long-term rate of return on assets, the Company considers the historical returns and the
future expectations for returns for each asset class, as well as the current or anticipated future
allocation of the pension portfolio.
Commitments and Contingencies
In the ordinary course of its business, the Company is subject to various legal actions and claims.
In connection with such actions and claims, the Company must make estimates of potential future
legal obligations and liabilities, which require the use of managements judgment on the outcome of
various issues. Management may also use outside legal counsel to assist in the estimating process;
however, the ultimate outcome of various legal issues could be materially different from
managements estimates and adjustments to income could be required. The assumptions used by
management are based on the requirements of SFAS No. 5, Accounting for Contingencies. The Company
will record, if material, a liability when it has determined that the occurrence of a loss
contingency is probable and the loss can be reasonably estimated, and it will disclose the related
facts in the notes to its financial statements. If the Company determines that the occurrence of a
loss contingency is reasonably possible or that it is probable but the loss cannot be reasonably
estimated, the Company will, if material, disclose the nature of the loss contingency and the
estimated range of possible loss or include a statement that no estimate of loss can be made. The
Company makes these determinations in consultation with its attorneys.
Revenue Recognition
The Company recognizes retail sales in its stores at the time the customer takes possession of
merchandise. All sales are net of discounts and returns and exclude sales tax. The reserve for
retail merchandise returns is based on the Companys prior experience.
Wholesale sales are recognized in accordance with the shipping terms agreed upon on the purchase
order. Wholesale sales are predominantly recognized under freight on board (FOB) origin where
title and risk of loss pass to the buyer when the merchandise leaves the Companys distribution facility. However, when the shipping terms are FOB
destination, recognition of sales revenue is delayed until completion of delivery to the designated
location.
The Company recognizes gift card sales revenue at the time of redemption. The liability for the
gift cards is established for the cash value at the time of purchase. The liability for outstanding
gift cards is recorded in accrued liabilities.
The Company offers price hold contracts on selected furniture merchandise. Revenue for price hold
contracts is recognized when the customer makes the final payment and takes possession of the
merchandise. Cash paid by the customers is recorded in accrued liabilities. In the event that a
sale is not consummated, liquidated damages are recorded as the lesser of: a) $25; b) 10% of the
merchandise purchase price (exclusive of sales tax); or c) the amounts deposited by the customer.
Cost of Sales
Cost of sales includes the cost of merchandise (including related inbound freight to the Companys
distribution centers, duties, and commissions), markdowns, and inventory shrinkage, net of cash
discounts and rebates. The Company classifies outbound distribution and transportation costs as
selling and administrative expenses. Due to this classification, the Companys gross profit rates
may not be comparable to those of other retailers that include outbound distribution and
transportation costs in cost of sales.
34
Selling and Administrative Expenses
The Company includes store expenses (such as payroll and occupancy costs), outbound distribution
and transportation costs to the Companys stores, advertising, purchasing, insurance, and overhead
costs in selling and administrative expenses. Selling and administrative expense rates may not be
comparable to those of other retailers that include outbound distribution and transportation costs
in cost of sales.
Rent Expense
Rent expense is recognized over the term of the lease. The Company recognizes minimum rent starting
when possession of the property is taken from the landlord, which normally includes a construction
period prior to store opening. When a lease contains a predetermined fixed escalation of the
minimum rent, the Company recognizes the related rent expense on a straight-line basis and records
the difference between the recognized rental expense and the amounts payable under the lease as
deferred incentive rent. The Company also receives tenant allowances, which are recorded in
deferred incentive rent and are amortized as a reduction to rent expense over the term of the
lease. Deferred incentive rent is reflected in other liabilities.
Certain leases provide for contingent rents that are not measurable at inception. These contingent
rents are primarily based on a percentage of sales that are in excess of a predetermined level.
These amounts are excluded from minimum rent and are included in the determination of total rent
expense when it is probable that the expense has been incurred and the amount is reasonably
estimable.
Discontinued Operations
The reserve for discontinued operations, which is included in accrued liabilities in the Condensed
Consolidated Balance Sheets, includes managements estimate of the Companys potential liability
under its lease and mortgage obligations which have been rejected by KB as part of its bankruptcy
proceeding. For a discussion of the discontinued operations, refer to Note 3 (KB Toys Matters) to
the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Recent Accounting Pronouncements
In March 2005, the FASB issued Interpretation No. 47 (FIN 47), Accounting for Conditional Asset
Retirement Obligations, an interpretation of FASB issued SFAS No. 143 (SFAS 143), Accounting
for Asset Retirement Obligations. FIN 47 clarifies that the term conditional asset retirement
obligation as used in SFAS 143 refers to a legal obligation to perform an asset retirement
activity in which the timing and (or) method of settlement are conditional on a future event that
may or may not be within the control of the entity. The obligation to perform the asset retirement
activity is unconditional even though uncertainty exists about the timing and (or) method of
settlement. FIN 47 also clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the
end of fiscal years ending after December 15, 2005. Retrospective application for interim financial
information is permitted but is not required. The Company is evaluating the impact of this standard
and does not expect the adoption of this standard to have a material impact on the Companys
financial condition, results of operations, or liquidity.
In December 2004, the FASB issued SFAS No. 153 (SFAS 153), Exchanges of Nonmonetary Assets, an
amendment of APB Opinion No. 29 (APB 29), Accounting for Nonmonetary Transactions. SFAS 153
amends APB 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary asset exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is
effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. The Company is evaluating the impact of this standard and does not expect the adoption of
this standard to have a material impact on the Companys financial condition, results of
operations, or liquidity.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to market risk from exposure to changes in interest rates associated with
the 2004 Credit Agreement. The Company had no fixed rate long-term debt at July 30, 2005. The
Company does not expect changes in interest rates to
35
have a material adverse effect on the Companys financial condition, results of operations, or liquidity; however, there can be no
assurances that interest rates will not materially change. The Company does not believe that a
hypothetical adverse change of 10% in interest rates would have a material adverse effect on the
Companys financial condition, results of operations, or liquidity.
The Company purchases approximately 30% of its product directly from overseas suppliers, all of
which are purchased in U.S. dollars.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Companys management, with the participation of the Companys Chief Executive Officer and Chief
Financial Officer, have evaluated the effectiveness of the Companys disclosure controls and
procedures, as that term is defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act of
1934, as amended (the Exchange Act), as of the end of the period covered by this report. Based on
such evaluation, the Companys Chief Executive Officer and Chief Financial Officer have each
concluded that such disclosure controls and procedures are effective as of the end of the period
covered by this report in order to ensure that information required to be disclosed in the
Companys periodic reports filed or submitted under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified by the SECs rules, forms, and
regulations.
Changes in Internal Control over Financial Reporting
No changes in the Companys internal control over financial reporting, as that term is defined in
Rules 13a-15 and 15d-15 of the Exchange Act, occurred during the Companys most recent fiscal
quarter that have materially affected, or are reasonably likely to materially affect, the Companys
internal control over financial reporting.
36
Part II. Other Information
Item 1. Legal Proceedings.
No response is required under Item 103 of Regulation S-K. For a discussion of certain litigated
matters, refer to Note 3 (KB Toys Matters) and Note 5 (Commitments and Contingencies) to the
Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. Not applicable.
Item 3. Defaults Upon Senior Securities. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its Annual Meeting of Shareholders on May 17, 2005. The shareholders elected the
nine director nominees receiving the greatest number of votes cast in their favor, with votes cast
as follows:
|
|
|
|
|
|
|
|
|
Director1 |
|
For |
|
Withheld |
|
Sheldon M. Berman |
|
|
86,896,984 |
|
|
|
16,205,822 |
|
David T. Kollat |
|
|
84,359,032 |
|
|
|
18,743,774 |
|
Brenda J. Lauderback |
|
|
84,756,886 |
|
|
|
18,345,920 |
|
Philip E. Mallott |
|
|
81,711,643 |
|
|
|
21,391,163 |
|
Ned Mansour |
|
|
87,138,665 |
|
|
|
15,964,141 |
|
Michael J. Potter2 |
|
|
86,301,757 |
|
|
|
16,801,049 |
|
Russell Solt |
|
|
84,755,190 |
|
|
|
18,347,616 |
|
James R. Tener |
|
|
87,909,136 |
|
|
|
15,193,670 |
|
Dennis B. Tishkoff |
|
|
84,753,962 |
|
|
|
18,348,844 |
|
William G. Kelley |
|
|
11,461,498 |
|
|
|
0 |
|
1 Messrs. Berman, Kollat, Mallott, Mansour, Potter, Solt, Tener and Tishkoff and Ms.
Lauderback were nominated by the Companys Board of Directors to serve as directors. As a
shareholder, Mr. Kelley nominated himself at the Annual Meeting of Shareholders.
2 As disclosed in the Companys Current Report on Form 8-K dated July 11, 2005, Michael
J. Potter resigned his positions as Chairman, Chief Executive Officer, and President of the Company
and was replaced in such capacities by Steven S. Fishman. Mr. Potters resignation was effective
July 11, 2005.
Also at the Annual Meeting, the Companys shareholders approved the Big Lots 2005 Long-Term
Incentive Plan, with votes cast as follows:
|
|
|
|
|
For |
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|
79,229,244 |
|
Against |
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12,242,682 |
|
Abstentions |
|
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578,119 |
|
Broker Non-Votes |
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11,057,655 |
|
No other matters were submitted to a vote of the shareholders at the Annual Meeting.
37
Item 5. Other Information. Not applicable.
Item 6. Exhibits.
Exhibits marked with an asterisk (*) are filed herewith. Exhibits 10.1 through 10.5 are management
contracts or compensatory plans, contracts, or arrangements.
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Exhibit No. |
|
Document |
10.1
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Big Lots 2005 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K dated May 17, 2005). |
|
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10.2
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Employment Agreement with Steven S. Fishman (incorporated herein by reference to Exhibit 10.1
to the Companys Current Report on Form 8-K dated June 6, 2005). |
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10.3
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First Amended to Employment Agreement with Michael J. Potter (incorporated herein by reference to Exhibit
10.2 to the Companys Current Report on Form 8-K dated June 6,
2005). |
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10.4
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Big Lots, Inc. Search Committee Compensation (incorporated herein by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K dated July 5, 2005). |
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10.5
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Form of Restricted Stock Award Agreement (incorporated herein by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K dated July 11, 2005). |
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31.1*
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Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
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31.2*
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Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
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32.1*
|
|
Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
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32.2*
|
|
Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
38
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.
Dated: September 7, 2005
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BIG LOTS, INC.
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By: |
/s/ Joe R. Cooper
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|
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Joe R. Cooper
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer, Principal Accounting
Officer and Duly Authorized Officer) |
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39
Exhibit 31.1
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Steven S. Fishman, certify that:
1. |
|
I have reviewed this quarterly report on Form 10-Q of
Big Lots, Inc.; |
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
3. |
|
Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
4. |
|
The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
|
designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared; |
|
|
b) |
|
designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles; |
|
|
c) |
|
evaluated the effectiveness of the registrants disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and |
|
|
d) |
|
disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the registrants most
recent fiscal quarter (the registrants fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over financial reporting;
and |
5. |
|
The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of the registrants board of directors (or persons performing the equivalent
functions): |
|
a) |
|
all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrants ability to record,
process, summarize and report financial information; and |
|
|
b) |
|
any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants internal control
over financial reporting. |
Dated: September 7, 2005
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By: |
/s/ Steven S. Fishman
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|
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|
|
Steven S. Fishman
Chairman of the Board, Chief Executive Officer and President |
|
40
Exhibit 31.2
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Joe R. Cooper, certify that:
1. |
|
I have reviewed this quarterly report on Form 10-Q of Big Lots, Inc.; |
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
3. |
|
Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
4. |
|
The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
|
designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared; |
|
|
b) |
|
designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles; |
|
|
c) |
|
evaluated the effectiveness of the registrants disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and |
|
|
d) |
|
disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the registrants most
recent fiscal quarter (the registrants fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over financial reporting;
and |
5. |
|
The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of the registrants board of directors (or persons performing the equivalent
functions): |
|
a) |
|
all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrants ability to record,
process, summarize and report financial information; and |
|
|
b) |
|
any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants internal control
over financial reporting. |
Dated: September 7, 2005
|
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|
|
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By: |
/s/ Joe R. Cooper
|
|
|
|
|
|
|
|
Joe R. Cooper
Senior Vice President and
Chief Financial Officer |
|
41
Exhibit 32.1
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
This certification is provided pursuant to Section 1350 of Chapter 63 of Title 18 of the United
States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and accompanies
the quarterly report on Form 10-Q (the Report) for the quarter ended July 30, 2005, of Big Lots,
Inc. (the Company). I, Steven S. Fishman, Chairman of the Board, Chief Executive Officer and
President of the Company, certify that:
(i) |
|
the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and |
(ii) |
|
the information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
Dated: September 7, 2005
|
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|
|
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|
By: |
/s/ Steven S. Fishman
|
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|
|
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|
|
Steven S. Fishman
Chairman of the Board, Chief Executive Officer and
President |
|
42
Exhibit 32.2
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
This certification is provided pursuant to Section 1350 of Chapter 63 of Title 18 of the United
States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and accompanies
the quarterly report on Form 10-Q (the Report) for the quarter ended July 30, 2005, of Big Lots,
Inc. (the Company). I, Joe R. Cooper, Senior Vice President and Chief Financial Officer of the
Company, certify that:
(i) |
|
the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and |
(ii) |
|
the information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
Dated: September 7, 2005
|
|
|
|
|
|
|
|
|
By: |
/s/ Joe R. Cooper
|
|
|
|
|
|
|
|
Joe R. Cooper
Senior Vice President and
Chief Financial Officer |
|
|
43