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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1998
Commission file number 1-8897
CONSOLIDATED STORES CORPORATION
A Delaware Corporation
IRS No. 06-1119097
1105 North Market Street, Suite 1300
P.O. Box 8985
Wilmington, Delaware 19899
(302) 478-4896
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of each class on which registered
------------------- -------------------
Common Stock $.01 par value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Indicate whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate if the disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in a definitive proxy or information statement
incorporated by reference in Part III of this FORM 10-K or any amendment to this
FORM 10-K [ ]
The aggregate market value (based on the closing price on the New York Stock
Exchange) of the Common Stock of the Registrant held by non affiliates of the
Registrant was $4,711,479,611 on March 27, 1998. For purposes of this response,
executive officers and directors are deemed to be the affiliates of the
Registrant and the holdings by non affiliates was computed as 107,079,082
shares.
The number of shares of Common Stock $.01 par value per share, outstanding as of
March 27, 1998, was 107,378,774 and there were no shares of Non-Voting Common
Stock, $.01 par value per share outstanding at that date.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement are incorporated by reference
into Part III.
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FORM 10-K
ANNUAL REPORT
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to Vote of Security Holders 12
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 42
PART III
Item 10. Directors and Executive Officers of the Registrant 42
Item 11. Executive Compensation 42
Item 12. Security Ownership of Certain Beneficial Owners and Management 42
Item 13. Certain Relationships and Related Transactions 42
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 42
FORM 10-K Page 2
3
PART I
ITEM 1 BUSINESS
THE COMPANY
Consolidated Stores Corporation was incorporated in Delaware in 1983. Its
principal executive offices are located at 300 Phillipi Road, P.O. Box 28512,
Columbus, Ohio 43228-0512, and its telephone number is (614) 278-6800. All
references herein to the "Company" are to Consolidated Stores Corporation and
its subsidiaries.
The Company is a value retailer focused on closeout merchandise and toys seeking
to provide the budget conscious consumer with a broad range of quality,
name-brand products at exceptional values. As of January 31, 1998, the Company
operated 2,274 stores located in all 50 states and Puerto Rico and is the
nation's largest closeout retailer and largest mall based toy retailer. The
Company operated 1,025 retail closeout stores, primarily under the names Odd
Lots, Big Lots, Mac Frugal's Bargains Close-outs, and Pic `N' Save
(collectively "Closeout Stores") and 1,249 retail toy and closeout toy stores
primarily under the names KB Toys, KB Toy Works, and KB Toy Outlet
(collectively "Toy Stores").
The Company's goal is to build upon its leadership position in closeout
retailing, a growing segment of the retailing industry, and toy retailing by
expanding its market presence in both existing and new markets. The Company
believes that the combination of its strengths in merchandising, purchasing,
site selection, distribution and cost-containment has made it a low-cost, value
retailer well-positioned for future growth.
BUSINESS GROUPS
The Company's principal businesses range across two retail industry groups;
closeouts and toys. Sales and cost of sales during the last six years for each
of the Company's business groups appear in Item 6 "Selected Financial Data"
included herein. The percent of net sales to total net sales by business group
and gross profit as a percent to net sales by business group for each of the
past three fiscal years is presented in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Overview" also included herein.
Financial information by business group, containing information on revenues,
operating profit, depreciation and amortization, and capital expenditures for
each of the last three fiscal years and identifiable assets for each of the last
two fiscal years, appears in the "Notes to Consolidated Financial Statements -
Business Group Information" included herein.
INDUSTRY OVERVIEW
Closeout retailers provide a valuable service to manufacturers by purchasing
excess product that generally result from production overruns, package changes,
discontinued products and returns. Closeout retailers also take advantage of
generally low prices in the off-season by buying and warehousing seasonal
merchandise for future sale. As a result of these lower costs of goods sold,
closeout retailers can offer merchandise at prices significantly lower than
those offered by traditional retailers.
Recent trends in the retail industry are favorable to closeout retailers. These
trends include retailer consolidations and just-in-time inventory processes,
which have resulted in a shift of inventory risk from retailers to
manufacturers. In addition, in order to maintain their market share in an
increasingly competitive environment, manufacturers are
FORM 10-K Page 3
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introducing new products and new packaging on a more frequent basis. The Company
believes that these trends have helped make closeout retailers an integral part
of manufacturers' overall distribution process. As a result, manufacturers are
increasingly looking for larger, more sophisticated closeout retailers, such as
the Company, that can purchase larger quantities of merchandise and can control
the distribution and advertising of specific products.
RETAIL OPERATIONS
CLOSEOUT STORES. The Company has been able to operate profitably a large number
of Closeout Stores in relatively close proximity in markets with favorable
demographics and suitable store sites. For example, the Company operates 281 of
the total 1,025 Closeout Stores in Ohio and California. Management believes that
there are substantial opportunities to increase store counts in existing
markets.
The Company's Closeout Stores carry a wide variety of name-brand consumer
products, including food items, health and beauty aids, electronics, housewares,
tools, paint, lawn and garden, hardware, sporting goods, toys and softlines. The
Closeout Stores also sell factory reconditioned products and lower-priced,
private-label merchandise in selected product categories. Certain core
categories of merchandise are carried on a continual basis, although the
specific name-brands offered may change frequently. The Company also supplements
its broad selection of consumer products in core product categories with
seasonal goods and holiday merchandise. Closeout Stores are located
predominantly in strip shopping centers located in the southwestern, midwestern,
southern and mid-Atlantic regions of the United States. Because of their low
operating costs, the Closeout Stores are generally profitable within their first
full year of operation.
TOY STORES. The Company has been in the toy retailing business since its
inception and has operated stand-alone toy stores since 1994. As discussed
below (see "Business Combinations and Discontinued Operation") the acquisition
of Kay-Bee Center, Inc. (KB) enabled the Company to expand significantly its
retail toy store business at a relatively low cost. As a result of the
acquisition, the Company has more than doubled its purchases of closeout toys
and became the largest purchaser of closeout toys in the United States. The
Company believes that this combined purchasing power has enhanced its ability
to source high-quality closeout toys for all of its stores at competitive
prices.
The Toy Stores offer a broad variety of closeout toys, as well as currently
promoted retail toys (known as "in-line toys") and traditional toy merchandise.
The Company's Toy Stores are located in enclosed shopping malls, outlet malls,
and strip shopping centers. The Company has a large presence in enclosed
shopping malls with 930 Toy Stores where the Company is usually the exclusive
toy store. The balance of the Toy Stores are generally a smaller strip shopping
center store striving to appeal to customers seeking value and the convenience
not offered by toy superstores. Enclosed mall and strip shopping center Toy
Stores carry a combination of in-line toys and close-out merchandise. Toy Stores
located in outlet malls carry primarily closeout toys.
The Company also operates temporary stores during the holiday selling season
which are open for approximately six to eight weeks and carry primarily closeout
merchandise. These temporary stores provide increased sales and profits during
the peak holiday selling season by utilizing vacant store space obtained on
favorable terms.
BUSINESS COMBINATIONS AND DISCONTINUED OPERATION
In the last two fiscal years, the Company has completed the following business
combinations which have significantly expanded its presence in closeout and toy
retailing.
FORM 10-K Page 4
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In January, 1998, Consolidated Stores Corporation exchanged 23.4 million shares
of its common stock for all of the outstanding stock of Mac Frugal's Bargains
Closeouts, Inc. (Mac Frugal's). The merger increased the number of retail stores
operated by the Company by approximately 20%, and significantly expanded the
Company's retail sale of close-out merchandise, which, as a category, is highly
competitive, very seasonal and heavily dependent on the ability to select and
purchase quality merchandise at attractive prices. Additionally, most of the Mac
Frugal's stores are located in the southwestern United States, a geographic area
in which Consolidated Stores had not previously operated retail closeout stores.
Historically, the Company focused its closeout store operations in the
Midwestern, Southern and Mid-Atlantic regions of the United States. This
business combination was accounted for as a pooling of interest and,
accordingly, all financial statements have been restated to include the results
of Mac Frugal's for all periods presented.
In May 1996, the Company acquired KB (including 1,042 retail toy stores) from
Melville Corporation for an initial purchase price of approximately $315
million (subject to post-closing adjustments), consisting of $215 million in
cash and $100 million of subordinated notes. Post-closing adjustments recorded
in the third quarter 1996, reduced the cash component of the purchase price by
$29.7 million to $185.3 million. This acquisition was accounted for as a
purchase with the results of KB included in the consolidated financial
statements from the acquisition date.
In the fourth quarter of 1996 the Company adopted a plan to close its single
price point and small specialty stores operating under the names of All For One
and ITZADEAL!. Accordingly, the operating results for this business are reported
as a discontinued operation and prior years operating results have been
restated.
For additional information concerning the merger, acquisition, and discontinued
operation described above, see "Notes to Consolidated Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company continually evaluates possible candidates for acquisition and
intends to continue to seek opportunities to expand its retail businesses.
COMPETITIVE CONDITIONS
The retail industry is highly competitive. The Company's Closeout Stores compete
with discount stores (such as Wal-Mart(R), KMart(R) and Target(R)), deep
discount drugstore chains and other value-oriented specialty retailers. The
Company's Toy Stores compete directly with local and regional enclosed shopping
mall-based toy retailers, destination toy stores (such as Toys "R" Us(R)) and
discount retailers with toy departments and indirectly with enclosed shopping
mall-based retailers such as concept stores and theme-based stores that feature
toys or toy-related merchandise. Certain of the Company's competitors have
greater financial, distribution, marketing and other resources than the Company.
The Company has no continuing contracts for the purchase of closeout merchandise
and relies on buying opportunities from both existing and new sources, for which
it competes with other closeout merchandisers and wholesalers. The Company
believes that its management has long standing relationships with its suppliers
and is competitively positioned to continue to seek new sources in order to
maintain an adequate continuing supply of quality merchandise at attractive
prices.
FORM 10-K Page 5
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SEASONALITY
The Company has experienced seasonality, with a significant percentage of its
net sales and income being realized in the fourth fiscal quarter. Additionally,
quarterly results can be affected by the timing of store openings and closings,
the amount of net sales contributed by new and existing stores and the timing of
certain holidays. Furthermore, in anticipation of increased sales activity
during the fourth fiscal quarter, the Company purchases substantial amounts of
inventory during the second and third fiscal quarters and hires a significant
number of temporary employees to bolster its stores staffing during the fourth
fiscal quarter.
The seasonality of the Company's businesses also influences the Company's demand
for seasonal borrowings. The Company has traditionally drawn upon its seasonal
credit lines in the first three fiscal quarters and substantially repaid the
borrowings during the fourth fiscal quarter.
BUSINESS STRATEGY
The Company's goal is to increase net sales and earnings and enhance shareholder
value through (i) new store expansion, (ii) comparable store sales increases,
(iii) realization of acquisition synergies and other cost savings programs and
(iv) prudent and selective acquisitions. Accordingly, a business strategy has
been implemented of pursuing growth by capitalizing on the Company's following
competitive strengths: (a) the ability to offer name-brand products at
discounted prices; (b) its purchasing expertise and strong buying relationships;
(c) the ability to lease low cost store sites in strip shopping centers,
enclosed shopping malls and outlet malls on favorable terms; (d) the ability to
efficiently warehouse and distribute large quantities of merchandise; and (e)
its focus on cost control.
OFFERING NAME-BRAND MERCHANDISE AT DEEPLY DISCOUNTED PRICES. Primarily as a
result of its strong supplier relationships and purchasing expertise, the
Company offers substantial everyday savings on a wide variety of name-brand
consumer products. The Company's business relies upon its ability to select and
purchase quality merchandise at attractive prices in order to maintain a balance
of product in certain core merchandising categories along with a changing mix of
merchandise. The Company purchases large quantities of name-brand closeout
merchandise from manufacturers' excess inventories, which generally result from
production overruns, package changes, discontinued products and returns. The
Company also takes advantage of the availability of factory reconditioned
products and lower priced, private-label merchandise in selected product
categories in order to provide additional value to its customers. In addition,
the Company supplements its broad offering of consumer items in core product
categories with a changing mix of new merchandise, including seasonal goods,
such as holiday and back-to-school merchandise.
PURCHASING EXPERTISE AND STRONG BUYING RELATIONSHIPS. An integral part of the
Company's business is the sourcing and purchasing of quality name-brand
merchandise directly from manufacturers and other vendors at prices
substantially below those paid by conventional retailers. The Company has built
strong relationships with many name-brand manufacturers and has capitalized on
its purchasing power in the closeout and toy marketplace in order to source
merchandise that provides exceptional value to customers. As the largest
retailer of closeout merchandise and closeout toys in the United States, the
Company has the ability to purchase all of a manufacturer's closeout merchandise
in specific product categories and to control distribution in accordance with
vendor instructions, thus providing a high level of service and convenience to
these manufacturers. Also, the success of the Company's toy business depends in
part upon its ability to purchase in-line toys at competitive prices and on
competitive terms. The Company supplements its traditional name-brand closeout
purchases with a limited amount of program buys and private-label merchandise.
The Company expects its purchasing power will continue to enhance
FORM 10-K Page 6
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its ability to source high quality closeout merchandise and closeout and in-line
toys for all of its stores at competitive prices.
The Company has a seasoned buying team with extensive purchasing experience,
which has enabled the Company to develop successful long-term relationships with
many of the largest and most recognized consumer-product manufacturers in the
United States. As a result of these relationships and the Company's experience
and reputation in the closeout industry, many manufacturers offer purchase
opportunities to the Company prior to attempting to dispose of their merchandise
through other channels.
The Company's merchandise is purchased from more than 3,000 foreign and domestic
suppliers which provide the Company with multiple sources for each product
category. In fiscal 1997, the Company's top ten vendors accounted for
approximately 20% of total purchases with no one vendor accounting for more than
4%.
The Company purchases approximately 20% of its products directly from overseas
suppliers, and a material amount of its domestically purchased merchandise is
also manufactured abroad. As a result, a significant portion of the Company's
merchandise supply is subject to certain risks including increased import duties
and more restrictive quotas, loss of "most favored nation" trading status,
currency fluctuations, work stoppages, transportation delays, economic
uncertainties including inflation, foreign government regulations, political
unrest and trade restrictions, including retaliation by the United States
against foreign practices. While the Company believes that alternative domestic
and foreign sources could supply merchandise to the Company, an interruption or
delay in supply from China or the Company's other foreign sources, or the
imposition of additional duties, taxes or other charges on these imports, could
have a material adverse effect on the Company's results of operations and
financial condition.
LOW COST SITE SELECTION. The Company has developed a real estate strategy for
its Closeout Stores emphasizing smaller-sized stores in strip shopping center
locations in mid-sized cities and small towns. The Company believes its ability
to obtain these sites on attractive terms has been enhanced by the ongoing
consolidation in the retailing industry and the migration of many retailers to
larger-sized stores. The Company seeks to enter into three to five year leases
(with renewal options) that provide for low rents and generally strives to
minimize the capital required to open a store. In addition to enhancing the
Company's ability to provide value to its customers, this strategy has led to an
attractive store level return on investment. The Company will focus its future
site selection for Toy Stores primarily in strip shopping centers.
EFFICIENT WAREHOUSE AND DISTRIBUTION OPERATIONS. The Company has focused on
increasing the efficiency and reducing the cost of its warehouse and
distribution operations in order to improve profitability and enhance its
competitive position. The Company is capable of storing large quantities of
merchandise purchased off-season at low prices for distribution to its stores at
a later date. This enhances the Company's purchasing capabilities by enabling
vendors to ship goods earlier than in a traditional retail concept.
FOCUS ON COST CONTROL. The Company maintains a disciplined approach to cost
control in all aspects of its business including store expenses, corporate
expenses, store leases, fixtures, leasehold improvements, distribution,
transportation and inventory management. In addition to its low cost approach to
store leasing and efficient warehousing and distribution methods, the Company
has implemented numerous expense savings programs in areas such as store
payroll, shrink control, accident prevention and other store-related expense
categories.
FORM 10-K Page 7
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ADVERTISING AND PROMOTION
The Company uses a variety of marketing approaches to promote its stores to the
public. These approaches vary by business, by market and by the time of year.
The Company promotes grand openings of its stores through a variety of print and
radio promotions. In general, the Company utilizes only those marketing methods
that it believes provide an immediate and measurable return on investment.
TRADEMARKS. The Company utilizes trademarks, service marks and tradedress
("intellectual property") in its retail operations. The intellectual property is
generally owned by intellectual property protection subsidiaries. The Company
considers its intellectual property to be among its most valuable assets and
where applicable, has registered, or has applications pending, with the United
States Patent and Trademark Office. The Company believes that having distinctive
intellectual property is an important factor in identifying the Company and
distinguishing it from others.
CLOSEOUT STORES. The Company's marketing program for its Closeout Stores is
designed to create an awareness of the broad range of quality, name-brand
merchandise available at low prices. The Closeout Stores utilize a combination
of weekly advertising circulars in all markets and television advertising in
select markets. The Company currently distributes approximately 39 million two
or four page circulars between 22 and 41 weeks out of the year. The method of
distribution includes a combination of newspaper inserts and direct mail. These
circulars are created in-house and are distributed regionally in order to take
advantage of market differences caused by climate or other factors. The
circulars generally feature 20 to 35 products that vary each week. The Closeout
Stores run television promotions in certain markets based upon factors unique to
each market, including the number of stores, cost of local media and results of
preliminary testing. The Closeout Stores run multiple 30-second television spots
per week, each of which feature 4 to 6 highly recognizable, name-brand products.
In-store promotions include periodic loudspeaker announcements featuring special
bargains as well as humorous in-store signage to emphasize the significant
values offered to the customer. The Closeout Stores are refining the use of
television advertising to increase awareness of the stores and to attract new
and repeat customers.
Historically, the Closeout Stores total advertising expense as a percent of
total net sales has been approximately 3.0%.
TOY STORES. The Toy Stores utilize a combination of a holiday promotion catalog
as well as periodic in-store sales and store signs to promote their products.
Advertising costs were 1.7% of total net sales in 1997. Enclosed shopping mall
Toy Stores receive the benefit of large amounts of customer traffic. Similarly,
Toy Stores located in strip centers and outlet malls have relied primarily on
existing customer traffic and in-store signs to promote their merchandise.
WAREHOUSING AND DISTRIBUTION
An important aspect of the Company's purchasing strategy involves its ability to
warehouse and distribute merchandise quickly and efficiently. As a result, the
Company must warehouse certain merchandise until the appropriate season and
therefore maintains higher inventories than most conventional retailers. The
Company believes it operates the largest retail warehouse and distribution
center of its kind in the United States at its primary warehouse and
distribution site in Columbus, Ohio. This highly automated facility incorporates
high-speed bar code scanning to efficiently sort and load merchandise for
immediate store delivery in a timely and cost-efficient manner. The Company has
started the implementation of a sophisticated new information system in its
closeout business that will enable it to more effectively allocate and manage
inventory by SKU. These systems are expected to improve comparable store sales
and inventory turns and reduce the need to move merchandise between stores. The
FORM 10-K Page 8
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Company intends to continue to invest in its infrastructure in order to increase
efficiency, reduce cost and support its expanding operations.
Substantially all the closeout merchandise sold by the Closeout Stores is
received and processed for retail sale, as necessary, and distributed to the
retail location or wholesale customer from the primary warehouse and
distribution center or at the Rancho Cucamonga, California site.
The Company leases additional temporary warehouse space as necessary to support
its warehousing requirements throughout the year.
Typically, a Closeout Store receives additional inventory once a week (usually
within 24 hours of dispatch) via a dedicated trucking fleet and outside
transportation companies.
INFORMATION SYSTEMS
Over the last five fiscal years the Company has continued to enhance its
information systems to support growth and the operations of its business. The
Company's current systems incorporate fully integrated distribution, allocation,
purchase order management, open-to-buy, point of sale and finance functions and
represent a combination of externally purchased software packages as well as
internally developed software. Current systems enable the Company to take
advantage of operating efficiencies resulting from bar-code scanning and
automated allocation.
The Company will continue to roll out its next generation of inventory
management systems for its Closeout Stores. Upon completion, the new system will
provide a number of features that the Company believes will improve inventory
turns, decrease markdowns and lower operating expenses. These features include
the ability to manage inventories on a micro-SKU basis as compared to its
previous macro-SKU based system. Additionally, the new system will incorporate
current inventory ownership by SKU by store when allocating merchandise, whereas
the existing system allocates inventory based on sales potential without the
benefit of store-owned inventory data. The Company has planned a multi-phased
roll out for this system, allowing for thorough testing and review prior to
start up.
OTHER OPERATIONS
The Company also sells merchandise wholesale from its corporate office in
Columbus, Ohio. The inventory consists almost entirely of merchandise obtained
through the same or shared opportunistic purchases of the retail operations.
Advertising of wholesale merchandise is conducted primarily at trade shows and
by mailings to past and potential customers. Wholesale customers include a wide
and varied range of major national and regional retailers, as well as smaller
retailers, manufacturers, distributors and wholesalers.
ASSOCIATES
At January 31, 1998, the Company had 50,324 active associates comprised of
18,869 full-time and 31,455 part-time associates. Temporary associates hired
during the fall and winter holiday selling season increased the number of
associates to a peak of approximately 74,900. Approximately two-thirds of the
associates employed throughout the year are employed on a part-time basis. The
relationship with associates is considered to be good, and the Company is not a
party to any labor agreements.
FORM 10-K Page 9
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ITEM 2 PROPERTIES
RETAIL OPERATIONS
Closeout Stores are located predominantly in strip shopping centers throughout
the southwestern, midwestern, southern and mid-Atlantic regions of the United
States. Individual stores range in size from 4,427 to 70,417 selling square feet
and average approximately 19,228 selling square feet. In selecting suitable new
store locations, the Company generally seeks retail space between 22,000 to
30,000 square feet in size. The average cost to open a new store in a leased
facility is approximately $700,000, including inventory. The Company plans to
open 120 to 150 new stores, net of store closings, during fiscal 1998, all of
which will be leased.
The Company's 1,249 Toy Stores are located in enclosed shopping malls, outlet
malls and strip shopping centers across the United States and Puerto Rico.
Enclosed shopping mall-based stores range in size from 675 to 7,581 selling
square feet and average approximately 3,270 selling square feet. Outlet mall
stores range in size from 3,030 to 5,616 selling square feet and average
approximately 4,021 selling square feet. Strip shopping center stores range in
size from 2,068 to 23,636 selling square feet. The Company believes the average
optimum size of a strip shopping center store is approximately 6,000 to 8,000
square feet. During fiscal 1998, the Company will open Toy Stores predominately
in strip shopping centers and malls. The approximate average cost, including
inventory, to open a new outlet mall store or strip shopping center store is
$250,000 and $470,000, respectively, and $430,000 to open a mall store. In
addition, 88 temporary Toy Stores were operated principally in enclosed shopping
malls during the 1997 fall and winter holiday season. The average size of the
temporary stores was approximately 3,700 square feet.
With the exception of 53 owned Closeout Store sites, all stores are in leased
facilities. Store leases generally provide for fixed monthly rental payments
plus the payment, in most cases, of real estate taxes, utilities, insurance and
common area maintenance. All Toy Store leases generally include advertising
charges. In some locations, the leases provide formulas requiring the payment of
a percentage of sales as additional rent. Such payments are generally only
required when sales reach a specified level. The typical lease for the Company's
Closeout Stores is for an initial term of three to five years with multiple,
three to five year renewal options, while the typical lease for the Toy Stores
is for an initial term of 10 years with various renewal options. The following
tables set forth store lease expirations, exclusive of month to month leases,
and state location information for existing store leases at January 31, 1998.
Number of Leases Expiring
Number of Leases Expiring Without Renewal Options
-----------------------------------------------------------------
Fiscal Year Closeout Toy Total Closeout Toy Total
- ---------------------------------------------------------------------------------------
1998 101 105 206 74 93 167
1999 164 194 358 80 169 249
2000 164 172 336 70 137 207
2001 186 158 344 59 100 159
2002 127 131 258 52 74 126
2003 and beyond 270 302 572 33 256 289
- --------------------------------------------------------------------------------------
1,012 1,062 2,074 368 829 1,197
- --------------------------------------------------------------------------------------
FORM 10-K Page 10
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Number of Stores Open
-------------------------------------------------------------------------------------
Closeout Toy Total Closeout Toy Total
--------------------------------- ----------------------------------
Alabama 26 19 45 Nebraska 3 7 10
Alaska 4 4 Nevada 9 5 14
Arizona 21 18 39 New Hampshire 11 11
Arkansas 3 7 10 New Jersey 2 42 44
California 168 129 297 New Mexico 6 8 14
Colorado 12 17 29 New York 20 86 106
Connecticut 32 32 North Carolina 37 32 69
Delaware 5 5 North Dakota 4 4
Florida 80 61 141 Ohio 113 57 170
Georgia 48 30 78 Oklahoma 11 12 23
Hawaii 8 8 Oregon 11 11
Idaho 2 6 8 Pennsylvania 30 64 94
Illinois 32 45 77 Puerto Rico 22 22
Indiana 45 32 77 Rhode Island 7 7
Iowa 1 10 11 South Carolina 23 15 38
Kansas 8 8 16 South Dakota 2 2
Kentucky 37 19 56 Tennessee 42 28 70
Louisiana 25 18 43 Texas 79 76 155
Maine 7 7 Utah 9 8 17
Maryland 6 36 42 Vermont 3 3
Massachusetts 43 43 Virginia 29 40 69
Michigan 34 46 80 Washington 27 27
Minnesota 13 13 West Virginia 22 10 32
Mississippi 12 7 19 Wisconsin 10 22 32
Missouri 20 24 44 Wyoming 3 3
Montana 3 3
Closeout Toy Total
-------------------------------------
Total Stores 1,025 1,249 2,274
Number of states and Puerto Rico 34 51
WAREHOUSE AND DISTRIBUTION
The Company's primary 3,558,000 square foot owned warehouse and distribution
center is located in Columbus, Ohio and utilizes two high-speed tilt tray
sortation systems with a combined output of approximately 1,400,000 cartons per
week. The Company's primary warehouse and distribution center has approximately
242,000 pallet positions for the warehousing of merchandise.
At January 31, 1998, warehouse space utilized by the Closeout operations totaled
6,600,004 square feet consisting principally of locations in Ohio, Alabama and
California.
For its Toy Stores as of January 31, 1998, the Company operated warehouse and
distribution centers, including a shared portion of the primary warehouse and
distribution center, in Alabama, Arizona, Kentucky, Massachusetts,
FORM 10-K Page 11
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Ohio, New Jersey, and Pennsylvania. These facilities totalled approximately
2,647,000 square feet with a combined shipping capacity of 1,200,000 cartons per
week. These warehouse and distribution centers use automated warehouse
management systems that include bar code scanning and radio frequency technology
to allow for high accuracy and efficient product processing from vendors to the
retail stores.
Statistics, for warehouse and distribution centers, by type and locations is as
follows:
Number Square Footage
------------------------------------------------
State Owned Leased Owned Leased
- -------------------------------------------------------------------
(In thousands)
Alabama 1 1 647 281
Arizona 1 369
California 1 1 1,423 234
Georgia 1 250
Kentucky 1 1 105 202
Massachusetts 1 1 250 105
New Jersey 1 360
Ohio 1 5 3,558 1,464
Pennsylvania 1 153
- ------------------------------------------------------------------
7 11 6,712 2,689
- ------------------------------------------------------------------
ITEM 3 LEGAL PROCEEDINGS
The Company is party to various legal proceedings arising from its ordinary
course of operations and believes that the outcome of these proceedings,
individually and in the aggregate, will be immaterial.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of stockholders was held on January 15, 1998, to consider and
vote upon a proposal to issue up to a maximum of 28,000,000 shares of
Consolidated Stores Corporation common stock, par value $.01, pursuant to the
Agreement and Plan of Merger, dated as of November 4, 1997, by and among the
Consolidated Stores Corporation, MBC Consolidated Acquisition Corporation, a
wholly owned subsidiary of Consolidated Stores Corporation, and Mac Frugal's
Bargains Close-outs, Inc. which provided for the merger of MBC Consolidated
Acquisition Corporation with and into Mac Frugal's Bargains Close-outs, Inc.
72,764,559, (86.23% of shares eligible to vote) votes were cast for the
issuance, 28,560 votes were cast against and 131,954 votes abstained.
FORM 10-K Page 12
13
EXECUTIVE OFFICERS OF THE COMPANY
Officer
Name Age Offices Held Since
---- --- ------------ -----
William G. Kelley 52 Chairman of the Board and Chief Executive Officer 1990
Michael L. Glazer 50 President 1995
Albert J. Bell 38 Executive Vice President, Legal, Real Estate, Secretary
and General Counsel 1988
Michael J. Potter 36 Executive Vice President and Chief Financial Officer 1991
Charles Freidenberg 52 Sr. Vice President - Merchandising 1995
James A. McGrady 47 Vice President and Treasurer 1991
Mark D. Shapiro 38 Vice President and Controller 1994
William G. Kelley is a Director of the Company and has served in his present
capacity as Chairman of the Board and Chief Executive Officer since 1990. Mr.
Kelley is also a director of National City Bank.
Michael L. Glazer has served on the Company's Board of Directors since 1991 and
previous to his appointment as President of the Company in 1995 he held
positions as Executive Vice President and President of The Bombay Company, a
home furnishings retailer. Mr. Glazer is also a director of Brookstone, Inc.
Albert J. Bell has served as the Company's general counsel for over five years
and has been employed by the Company since 1987.
Charles Freidenberg has been with the Company since 1983 and has held senior
management positions in the merchandising area for the past five years.
Michael J. Potter has been with the Company since 1991 and previous to his
appointment as Executive Vice President and Chief Financial Officer in 1998, Mr.
Potter served as Senior Vice President and Chief Financial Officer and Vice
President and Controller.
James A. McGrady has served as the Company's Treasurer for over five years and
has been with the Company since 1986.
Mark D. Shapiro has been with the Company since 1992 and prior to his
appointment as Vice President and Controller served as Assistant Controller.
FORM 10-K Page 13
14
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the New York Stock Exchange (NYSE) under
the symbol "CNS." The following table reflects the high and low sales price per
share of common stock as quoted from the NYSE composite transactions for the
fiscal period indicated. Prices have been restated to reflect 5 for 4 common
stock splits effected by a distribution of shares on June 24, 1997 and December
24, 1996, to stockholders of record on June 10, 1997 and December 10, 1996,
respectively.
1997 1996
----------------------- --------------------------
High Low High Low
----------------------- --------------------------
First Quarter $34 3/32 $25 51/64 $23 49/64 $ 13 9/32
Second Quarter 40 3/4 29 29/32 25 59/64 19 13/64
Third Quarter 43 3/8 34 9/16 28 5/16 21 3/64
Fourth Quarter 50 38 1/4 27 23/64 22 61/64
As of March 27, 1998, there were 1,425 holders of record of the Company's common
stock.
The Company has followed a policy of reinvesting earnings in the business and
consequently has not paid any cash dividends. At the present time, no change in
this policy is under consideration by the Board of Directors. The payment of
cash dividends in the future will be determined by the Board of Directors in
consideration of business conditions then existing, including the Company's
earnings, financial requirements and condition, opportunities for reinvesting
earnings, and other factors.
FORM 10-K Page 14
15
ITEM 6 SELECTED FINANCIAL DATA
The statement of earnings data and the balance sheet data has been derived from
the Company's consolidated financial statements and should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations and the Consolidated Financial Statements and Notes
thereto included elsewhere herein.
Fiscal Year Ended
-----------------------------------------------------------------------------------------
Jan. 31, 1998 Feb. 1, 1997 Feb. 3, 1996* Jan. 28, 1995 Jan. 29, 1994 Jan. 30, 1993
- -----------------------------------------------------------------------------------------------------------------------
($ In thousands except earnings per share )
Net sales:
Closeout Stores $ 2,452,474 $ 2,204,521 $ 1,991,609 $ 1,794,170 $ 1,568,534 $1,378,100
Toy Stores 1,562,463 1,178,224 76,689 45,937
- -----------------------------------------------------------------------------------------------------------------------
Total Retail 4,014,937 3,382,745 2,068,298 1,840,107 1,568,534 1,378,100
Other 40,365 37,419 42,652 27,030 21,537 18,489
- -----------------------------------------------------------------------------------------------------------------------
4,055,302 3,420,164 2,110,950 1,867,137 1,590,071 1,396,589
Cost of sales:
Closeout Stores 1,471,423 1,264,780 1,153,315 996,871 867,533 761,040
Toy Stores 933,222 687,413 40,598 22,467
- -----------------------------------------------------------------------------------------------------------------------
Total Retail 2,404,645 1,952,193 1,193,913 1,019,338 867,533 761,040
Other 30,788 28,610 32,281 20,163 16,358 13,895
- -----------------------------------------------------------------------------------------------------------------------
2,435,433 1,980,803 1,226,194 1,039,501 883,891 774,935
- -----------------------------------------------------------------------------------------------------------------------
Gross profit 1,619,869 1,439,361 884,756 827,636 706,180 621,654
Selling and administrative
expenses 1,385,682 1,166,988 730,225 655,511 570,831 535,092
Merger and other related costs 45,000
- -----------------------------------------------------------------------------------------------------------------------
Operating profit 189,187 272,373 154,531 172,125 135,349 86,562
Other expense - net 26,998 22,921 19,698 11,487 7,898 10,258
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing
operations before
income taxes and
extraordinary charge 162,189 249,452 134,833 160,638 127,451 76,304
Income taxes 76,254 92,992 50,141 63,934 50,771 28,690
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing
operations before
extraordinary charge 85,935 156,460 84,692 96,704 76,680 47,614
(Loss) income from discontinued
operations (27,538) (5,727) (2,600) (1,716) 844
Extraordinary charge (1,856)
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 85,935 $ 127,066 $ 78,965 $ 94,104 $ 74,964 $ 48,458
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) per share:
Continuing operations $ 0.80 $ 1.49 $ 0.86 $ 0.98 $ 0.77 $ 0.47
Discontinued operations (0.26) (0.06) (0.03) (0.02) 0.01
Extraordinary charge (0.02)
- -----------------------------------------------------------------------------------------------------------------------
$ 0.80 $ 1.21 $ 0.80 $ 0.95 $ 0.75 $ 0.48
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) per share - diluted:
Continuing operations $ 0.77 $ 1.44 $ 0.84 $ 0.95 $ 0.75 $ 0.46
Discontinued operations (0.25) (0.06) (0.03) (0.02) 0.01
Extraordinary charge (0.02)
- -----------------------------------------------------------------------------------------------------------------------
$ 0.77 $ 1.17 $ 0.78 $ 0.92 $ 0.73 $ 0.47
- -----------------------------------------------------------------------------------------------------------------------
Average common shares
outstanding (In thousands):
Basic 107,621 104,642 98,185 99,352 100,297 100,290
Diluted 112,063 108,402 100,645 101,772 103,098 102,971
* Fiscal 1995 is comprised of 53 weeks.
FORM 10-K Page 15
16
SELECTED FINANCIAL DATA - CONTINUED
Fiscal Year Ended
---------------------------------------------------------------------
Jan. 31, Feb. 1, Feb. 3, Jan. 28, Jan. 29, Jan. 30,
1998 1997 1996* 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
($ In thousands)
BALANCE SHEET DATA:
Working capital $ 582,206 $ 563,543 $ 398,377 $254,613 $282,852 $248,139
Total assets 1,746,381 1,715,499 1,058,887 937,996 837,783 762,699
Long-term obligations 115,281 155,049 121,435 44,491 53,869 104,475
Stockholders' equity 1,034,542 934,114 619,963 532,115 515,885 433,906
STORE OPERATING DATA:
Year end gross square footage (000's):
Closeout Stores 26,623 24,253 22,081 19,982 17,609 15,472
Toy Stores 5,781 5,267 552 401
- --------------------------------------------------------------------------------------------------------------
32,404 29,520 22,633 20,383 17,609 15,472
- --------------------------------------------------------------------------------------------------------------
New stores opened:
Closeout Stores 118 95 102 122 110 59
Toy Stores (1) 115 1,095 30 82
- --------------------------------------------------------------------------------------------------------------
233 1,190 132 204 110 59
- --------------------------------------------------------------------------------------------------------------
Stores closed:
Closeout Stores 26 14 16 25 27 24
Toy Stores 50 22 1
- --------------------------------------------------------------------------------------------------------------
76 36 17 25 27 24
- --------------------------------------------------------------------------------------------------------------
Stores open at end of year:
Closeout Stores 1,025 933 852 766 669 586
Toy Stores 1,249 1,184 111 82
- --------------------------------------------------------------------------------------------------------------
2,274 2,117 963 848 669 586
- --------------------------------------------------------------------------------------------------------------
(1) Includes 1,042 KB Toy stores acquired May 5, 1996.
FORM 10-K Page 16
17
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" PROVISIONS OF THE
SECURITIES LITIGATION REFORM ACT OF 1995
When used in this discussion and the financial statements that follow, the
words, "expect(s)", "feel(s)", "believe(s)", "will", "may", "anticipate(s)" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Readers are cautioned
not to place undue reliance on these forward-looking statements which speak only
as of the date hereof. The Company undertakes no obligation to republish revised
forward-looking statements to reflect the occurrence of unanticipated events.
Readers are also urged to carefully review and consider the various disclosures
made by the Company which attempt to advise interested parties of the factors
which affect the Company's business, including the following Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in this report, as well as, the Company's periodic reports on Forms
10-Q and 8-K filed with the Securities and Exchange Commission.
OVERVIEW
Management's discussion and analysis has been prepared giving effect to the
pooling of interest business combination with Mac Frugal's Bargains
Close-outs, Inc. (Mac Frugal's) on January 16, 1998. Effective May 5, 1996,
1,042 Toy Stores were acquired from Melville Corporation and accounted for as a
purchase. In the fourth quarter of 1996 the Company adopted a plan to close its
single price point and small specialty stores operating under the names of All
For One and iTZADEAL!. Closures of the 165 stores open at February 1, 1997, was
completed throughout fiscal 1997. Accordingly, the operating results for this
business are reported as a discontinued operation at February 1, 1997, and prior
years operating results have been restated to reflect continuing operations. The
discussion and analysis presented below should be read in conjunction with the
consolidated financial statements and related notes appearing elsewhere in this
report.
The Company is the nation's largest closeout retailer and a leading toy retailer
with 2,274 stores located in all 50 states and Puerto Rico. The Company operates
1,025 retail closeout stores under the names Odd Lots, Big Lots, Mac Frugal's
Bargains Close-outs, and Pic `N' Save (Closeout Stores) and 1,249 retail toy
and closeout toy stores primarily under the names KB Toys, KB Toy Works, and
KB Toy Outlet (Toy Stores). The Company is the largest enclosed shopping
mall-based toy retailer in the United States. As a value retailer focused on
closeout merchandise, the Company seeks to provide the budget-conscious consumer
with a broad range of quality, name-brand products at exceptional values. The
Company's name-brand closeout merchandise primarily consists of products
obtained from manufacturers' excess inventories, which generally result from
production overruns, package changes, discontinued products and returns.
The following table compares components of the statements of earnings of
Consolidated Stores as a percent to net sales.
FORM 10-K Page 17
18
Fiscal Year
--------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------
Net sales:
Closeout Stores 60.5% 64.5% 94.4%
Toy Stores 38.5 34.5 3.6
- -------------------------------------------------------------------------------------------------------
Total Retail 99.0 99.0 98.0
Other 1.0 1.0 2.0
- -------------------------------------------------------------------------------------------------------
Total net sales 100.0 100.0 100.0
- -------------------------------------------------------------------------------------------------------
Gross Profit:
Closeout Stores 40.0 42.6 42.1
Toy Stores 40.3 41.7 47.1
- -------------------------------------------------------------------------------------------------------
Total Retail 40.1 42.3 42.3
Other 23.7 23.5 24.3
- -------------------------------------------------------------------------------------------------------
Total Gross Profit 39.9 42.1 41.9
Selling and administrative expenses 34.2 34.3 34.6
Non selling and administrative expenses (gains) 1.1 (0.2)
- -------------------------------------------------------------------------------------------------------
Operating profit 4.6 8.0 7.3
Interest expense 0.6 0.7 0.9
Other expense 0.1
- -------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes and
extraordinary charge 4.0 7.3 6.3
Income taxes 1.9 2.7 2.4
- -------------------------------------------------------------------------------------------------------
Income from continuing operations before extraordinary charge 2.1 4.6 3.9
Loss from discontinued operations 0.8 0.3
Extraordinary charge 0.1
- -------------------------------------------------------------------------------------------------------
Net income 2.1% 3.7% 3.6%
- -------------------------------------------------------------------------------------------------------
The Company has historically experienced, and expects to continue to experience,
seasonal fluctuations with a significant percentage of its net sales and income
being realized in the fourth fiscal quarter. In addition, the Company's
quarterly results can be affected by the timing of store openings and closings,
the amount of net sales contributed by new and existing stores and the timing of
certain holidays. The following table illustrates the seasonality in the net
sales and operating income.
Quarter
--------------------------------------------
First Second Third Fourth(1)
--------------------------------------------
Fiscal 1997
Percent net sales of full year 19.2% 19.8% 21.2% 39.8%
Operating profit percentage of full year 1.1 7.6 13.6 77.7
Fiscal 1996 (Pro forma(2))
Percent net sales of full year 18.3 19.2 21.5 41.0
Operating profit (loss) percentage of full year (3.4) 2.5 7.0 93.9
(1) Excludes non selling and administrative expenses of $45 million in 1997 and
a non selling and administrative gain of $6 million in 1996.
(2) Reflects acquisition of KB Toys at the beginning of 1996.
FORM 10-K Page 18
19
FISCAL 1997 COMPARED TO FISCAL 1996
NET SALES. Net sales increased to $4,055 million in fiscal 1997 from $3,420
million in fiscal 1996, an increase of $635 million, or 18.6%. This increase
was attributable to full year impact of sales for KB Toys acquired in May of
1996, sales from 233 new stores and comparable store sales increases of 6.9%,
offset in part by the closing of 76 stores.
Closeout Stores net sales increased $248.0 million, or 11.2%, to $2,452 million
in fiscal 1997 from $2,205 million in fiscal 1996. Contributing to this
increase was a rise in comparable stores sales of 4.8% and the addition of 92
net new stores during the year. Net sales of Toy Stores increased $384.2
million in fiscal 1997 to $1,562 million. This improvement reflects a
comparable store sales increase of 10.1%, the addition of 65 net new stores,
and the full period impact of sales from the date of acquisition of KB Toys.
GROSS PROFIT. Gross profit increased $180.5 million, or 12.5%, in fiscal 1997 to
$1,620 million from $1,439 million in fiscal 1996. In the fourth quarter of
1997 the Company recorded a $70,000,000 ($42,700,000 after tax, or $.38 per
diluted common share) inventory charge to reflect costs associated with the Mac
Frugal's merger for discontinued products, inventory consolidation and retail
price equalization for the combined inventory assortment. This charge reduced
gross profit as a percent of sales by 1.8%. Adjusted for the inventory charge
gross profit was 41.7% in fiscal 1997 compared to 42.1% for the prior year.
The effect of the above noted charge reduced fiscal 1997 Closeout Stores gross
profit percentage by 2.9% to 40.0% in contrast to 1996 gross profit of 42.6%.
Toy Stores gross profit was 40.3% in 1997 compared to 41.7% in 1996. The decline
in Toy Stores gross profit is principally attributable to the higher volume of
video sales in 1997 which have a lower profit margin than traditional toys.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
increased $218.7 million in fiscal 1997 from $1,167 million in fiscal 1996. This
increase is attributable to the full year impact in 1997 of operating expenses
associated with KB Toys acquired in May 1996. Selling and administrative
expenses in fiscal 1996 include a gain of $6.1 million related to the fire loss
settlement for one of the Company's warehouses. Historically the KB Toy stores
cost structure has incurred a higher percentage ratio of selling and
administrative expenses to net sales.
MERGER AND OTHER RELATED CHARGES. In connection with the Mac Frugal's merger the
Company recorded a fourth quarter charge to operating expense of $45,000,000
($40,500,000 after taxes, or $.36 per diluted common share) for direct and other
related costs pertaining to the combination. Merger transaction costs were
primarily comprised of fees for professional services, severance and similar
related costs.
INTEREST EXPENSE. Interest expense increased to $25.7 million in fiscal 1997
from $23.0 million in fiscal 1996. The increase was attributable to higher
weighted average debt levels principally to support requirements associated
with the operations of the increased number of stores, increased inventory
levels, capital expenditures and the pre merger stock buy back program of Mac
Frugal's.
INCOME TAXES. The effective tax rate of the Company increased to 47.0% in fiscal
1997 from 37.2% in 1996. This increase is principally associated with merger and
other related charges in connection with the business combination with Mac
Frugal's. Additionally, the Company surrendered its corporate-owned life
insurance program in 1996.
FORM 10-K Page 19
20
FISCAL 1996 COMPARED TO FISCAL 1995
NET SALES. Net sales increased to $3,420 million in fiscal 1996 from $2,111
million in fiscal 1995, an increase of $1,309 million, or 62%. This increase was
attributable to an increase of $1,102 million of Toy sales, sales from 148 new
stores and a comparable store sales increase of 6.7%. The sales increase was
offset in part by the closing of 36 stores and the 53rd week of sales effect in
fiscal 1995.
Net sales of Closeout Stores increased $212.9 million, or 10.7%, to $2,204
million in fiscal 1996 from $1,992 million in fiscal 1995. This increase was
attributable to the opening of 81 net new closeout stores and a comparable store
sales increase of 3.3%. Toy Stores sales improved primarily as a result of the
acquisition of KB Toys in May of 1996.
GROSS PROFIT. Gross profit increased to $1,439 million in fiscal 1996 from
$884.8 million in fiscal 1995, an increase of $554.6 million, or 62.7%. Fiscal
1995 includes a $35 million noncash charge attributable to Mac Frugal's for
the liquidation of aged inventories. A majority of these markdowns were taken
in the fourth quarter of 1995 and the first quarter of 1996. As a percentage of
net sales, gross profit improved to 42.1% compared to 41.9% in fiscal 1995.
Closeout Stores gross profit was 42.6% in 1996 compared to 42.1% in 1995. Toy
Stores gross profit was 41.7% in 1996 compared to 47.1% in 1995. The decline in
Toy Stores gross profit is principally attributable to the higher percentage of
lower margin in-line toys in the KB merchandise mix compared to the primarily
closeout selection offered by the Toy Stores in prior years. The Company
increased the mix of closeout toys offered in its KB Toy stores subsequent to
fiscal 1996.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
increased to $1,167 million in fiscal 1997 from $730.2 million in fiscal 1995,
an increase of $436.8 million. This increase is attributable to the acquisition
of the KB Toy Stores. As a percentage of net sales, selling and administrative
expenses decreased slightly to 34.3%, excluding a $6.1 million one time gain, in
fiscal 1996 from 34.6% in fiscal 1995.
INTEREST EXPENSE. Interest expense increased to $23.0 million in fiscal 1996
from $18.0 million in fiscal 1995. The increase was attributable to higher
weighted average debt levels principally to support requirements associated
with the operations of the increased number of Toy Stores, increased effective
interest rates on seasonal borrowings throughout the fiscal year, pre merger
stock buy backs, and debt associated with the issuance of $100 million of
subordinated debentures related to the acquisition of Kay-Bee Center, Inc. The
increase in the effective interest rate was offset to some extent by the early
extinguishment of $35 million of senior debt.
INCOME TAXES. The effective tax rate of the Company was 37.2% in fiscal 1996 and
1995.
CAPITAL RESOURCES AND LIQUIDITY
The primary sources of liquidity for the Company have been cash flow from
operations and borrowings under available credit facilities. Total debt as a
percent of total capitalization (total debt and stockholders equity) was 10% at
January 31, 1998, compared with 14.2% and 16.4% at each of the respective prior
fiscal year ends. Working capital has increased from $254.6 million at the
beginning of fiscal 1995 to $582.2 million at January 31, 1998. This data
reflects the strength of the Company's balance sheet and the ability to absorb
debt financing as, and if, necessary.
FORM 10-K Page 20
21
Capital expenditures for the last three fiscal years have been $146.5 million,
$104.8 million and $74.2 million, respectively, and were used primarily to fund
new store openings and distribution center expansions. The capital expenditure
requirements anticipated for 1998 are approximately $180 million primarily to
support new store expansion of 300 stores and warehouse and equipment
requirements.
The Company has a Revolving Credit Facility which provides senior bank financing
in an aggregate principal amount of up to $600 million. The facility has a
maturity date of May 3, 2000. From time-to-time the Company also utilizes
uncommitted credit facilities, subject to the terms of the Revolving Credit
Facility, to supplement short-term borrowing requirements. At January 31, 1998,
approximately $517.8 million was available for borrowings under the Revolver and
$72 million of uncommitted credit facilities were available, subject to the
terms of the revolving credit facility.
In 1996 the Company issued $100 million of Subordinated Notes. The Subordinated
Notes mature in the year 2000 and bear interest at a rate of 7% per annum,
payable semiannually. The Subordinated Notes are redeemable at the option of the
Company, in whole or in part, after two years from their issuance, at a premium
to their principal, plus accrued interest.
Over the past three fiscal years Mac Frugal's utilized approximately $53.4
million for the repurchase of common stock. At the present time the Company does
not, and does not anticipate having in the near future, a stock repurchase
program.
The Company continues to believe that it has, or if necessary has the ability to
obtain, adequate resources to fund ongoing operating requirements and future
capital expenditures related to the expansion of existing businesses and
development of new projects. Additionally, management is not aware of any
current trends, events, demands, commitments, or uncertainties which reasonably
can be expected to have a material impact on the liquidity, capital resources,
financial position or results of operations of the Company.
IMPACT OF YEAR 2000
The Company has been addressing computer software modifications or replacements
to enable transactions to process properly in the year 2000. All necessary
changes are anticipated to occur in a timely manner and the cost will not have a
significant impact on the ongoing results of operations.
FORM 10-K Page 21
22
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Consolidated Stores Corporation:
We have audited the accompanying consolidated balance sheets of CONSOLIDATED
STORES CORPORATION and subsidiaries as of January 31, 1998, and February 1,
1997, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three fiscal years in the period ended January
31, 1998. Our audits also included the financial statement schedule listed in
the Index at Item 14(a)2. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of CONSOLIDATED STORES
CORPORATION and subsidiaries at January 31, 1998, and February 1, 1997, and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the period ended January 31, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
Deloitte & Touche LLP
Dayton, Ohio
March 2, 1998
FORM 10-K Page 22
23
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Fiscal Year
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
Net sales $ 4,055,302 $ 3,420,164 $2,110,950
Costs and expenses:
Cost of sales 2,435,433 1,980,803 1,226,194
Selling and administrative expenses 1,385,682 1,166,988 730,225
Merger and other related charges 45,000
Interest expense 25,691 22,991 17,992
Other expense (income) - net 1,307 (70) 1,706
- -------------------------------------------------------------------------------------------------------------
3,893,113 3,170,712 1,976,117
- -------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes and
extraordinary charge 162,189 249,452 134,833
Income taxes 76,254 92,992 50,141
- -------------------------------------------------------------------------------------------------------------
Income from continuing operations before
extraordinary charge 85,935 156,460 84,692
Loss from discontinued operations 27,538 5,727
Extraordinary charge 1,856
- -------------------------------------------------------------------------------------------------------------
Net income $ 85,935 $ 127,066 $ 78,965
- -------------------------------------------------------------------------------------------------------------
Income (loss) per common share:
Continuing operations $ 0.80 $ 1.49 $ 0.86
Discontinued operations (0.26) (0.06)
Extraordinary charge (0.02)
- -------------------------------------------------------------------------------------------------------------
$ 0.80 $ 1.21 $ 0.80
- -------------------------------------------------------------------------------------------------------------
Income (loss) per common share - diluted:
Continuing operations $ 0.77 $ 1.44 $ 0.84
Discontinued operations (0.25) (0.06)
Extraordinary charge (0.02)
- -------------------------------------------------------------------------------------------------------------
$ 0.77 $ 1.17 $ 0.78
- -------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
FORM 10-K Page 23
24
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
January 31, February 1,
1998 1997
- -------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 41,714 $ 39,683
Inventories 910,668 974,940
Deferred income taxes 86,582 67,447
Other current assets 68,510 55,678
- -------------------------------------------------------------------------------------------
Total current assets 1,107,474 1,137,748
- -------------------------------------------------------------------------------------------
Property and equipment - net 613,478 553,590
Other assets 25,429 24,161
- -------------------------------------------------------------------------------------------
$ 1,746,381 $1,715,499
- -------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 280,117 $ 335,975
Accrued liabilities 134,288 128,713
Income taxes 38,920 78,453
Current maturities of long-term obligations 71,943 31,064
- -------------------------------------------------------------------------------------------
Total current liabilities 525,268 574,205
- -------------------------------------------------------------------------------------------
Long-term obligations 115,281 155,049
Deferred income taxes 71,290 49,229
Other noncurrent liabilities 2,902
Commitments and contingencies
Stockholders' equity:
Preferred stock - authorized 2,000 shares, $.01 par value:
none issued
Common stock - authorized 290,000 shares (1997) and 90,000
shares (1996), $.01 par value; issued 107,796 shares and
91,644 shares, respectively 1,078 917
Nonvoting common stock - authorized 8,000 shares, $.01 par
value; none issued
Additional paid-in capital 335,038 322,967
Retained earnings 698,426 642,920
Other adjustments (486)
- -------------------------------------------------------------------------------------------
1,034,542 966,318
Treasury stock, at cost, 1,494 shares (1996) 32,204
- -------------------------------------------------------------------------------------------
Total stockholders' equity 1,034,542 934,114
- -------------------------------------------------------------------------------------------
$ 1,746,381 $1,715,499
- -------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
FORM 10-K Page 24
25
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Fiscal Year
1997 1996 1995
- ------------------------------------------------------------------------------------------------------
COMMON STOCK:
Balance at beginning of year $ 917 $ 719 $ 750
Issuance of common stock 51
5 for 4 stock split 169 134
Contribution to savings plan 1 1 1
Treasury stock retired (64) (40)
Exercise of stock options and issue of restricted stock 55 12 8
- ------------------------------------------------------------------------------------------------------
Balance at end of year $ 1,078 $ 917 $ 719
- ------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year $ 322,967 $ 105,493 $ 97,636
Issuance of common stock 190,588
Treasury stock retired (22,946) (3,314)
5 for 4 stock split (169) (134)
Exercise of stock options and issue of restricted stock 31,214 24,758 9,689
Noncash compensation expense 60 81 86
Contribution to savings plan 3,912 2,181 1,396
- ------------------------------------------------------------------------------------------------------
Balance at end of year $ 335,038 $ 322,967 $ 105,493
- ------------------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year $ 642,920 $ 515,854 $ 515,616
Treasury stock retired (30,429) (78,727)
Net income for the year 85,935 127,066 78,965
- ------------------------------------------------------------------------------------------------------
Balance at end of year $ 698,426 $ 642,920 $ 515,854
- ------------------------------------------------------------------------------------------------------
OTHER ADJUSTMENTS:
Balance at beginning of year $ (486) $ (530) $ 194
Change in unrealized investment gain (1,436) 296
Minimum pension liability adjustment 486 1,480 (1,020)
- ------------------------------------------------------------------------------------------------------
Balance at end of year $ (486) $ (530)
- ------------------------------------------------------------------------------------------------------
TREASURY STOCK:
Balance at beginning of year $ (32,204) $ (1,573) $ (82,081)
Purchase of treasury stock, at cost (21,235) (30,631) (1,573)
Treasury stock retired 53,439 82,081
- ------------------------------------------------------------------------------------------------------
Balance at end of year $ (32,204) $ (1,573)
- ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
FORM 10-K Page 25
26
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal Year
1997 1996 1995
- -------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 85,935 $ 127,066 $ 78,965
Adjustments to reconcile net income to net cash provided by
operating activities:
Discontinued operations 18,900
Depreciation and amortization 79,163 66,631 48,236
Deferred income taxes 2,926 (6,929) (8,341)
Other 19,879 13,005 2,881
Change in assets and liabilities (38,376) (29,634) (76,174)
- -------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 149,527 189,039 45,567
- -------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Payment for acquired business (185,300)
Capital expenditures (146,460) (104,784) (74,208)
Investment in corporate owned life insurance (6,870)
Other (4,142) 14,915 6,683
- -------------------------------------------------------------------------------------------------------
Net cash used in investing activities (150,602) (275,169) (74,395)
- -------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 190,639
Purchase of Mac Frugal's treasury stock (21,235) (30,631) (1,573)
Payments of senior notes and long-term obligations - net (442) (58,313) (4,763)
Proceeds from credit arrangements 1,553
Debt issue payments (10,393)
Extinguishment of debt (2,946)
Proceeds from exercise of stock options 18,840 12,356 5,460
Proceeds attributable to deferred credits 3,638 3,716 1,745
Other 752 1,101 1,213
- -------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,106 105,529 2,082
- -------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents $ 2,031 19,399 (26,746)
- -------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
FORM 10-K Page 26
27
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company is the nation's largest closeout retailer and largest mall based toy
retailer with stores located in all 50 states and Puerto Rico. As a value
retailer specializing in closeout merchandise and toys the Company operates a
total of 2,274 stores at January 31, 1998, comprised of 1,025 retail closeout
specialty stores under the names ODD LOTS, BIG LOTS, MAC FRUGAL'S BARGAINS
CLOSE-OUTS, and PIC `N' SAVE and 1,249 retail toy and closeout toy stores under
the names KB TOYS, KB TOY WORKS, and KB TOY OUTLET.
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 1995 ending February 3, 1996, is
comprised of 53 weeks.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany transactions have
been eliminated. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions which affect reported amounts of assets and liabilities and
disclosure of significant contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could 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.
INVENTORIES
Inventories are stated at the lower of cost or market, first-in first-out basis,
primarily on the retail method.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are provided on the straight line method for
financial reporting purposes. Service lives are principally forty years for
buildings and from four to ten years for other property and equipment.
INVESTMENTS
Noncurrent investments in equity securities are classified as other assets in
the consolidated balance sheets and are stated at fair value. Unrealized gains
on equity securities classified as available-for-sale are recorded as a separate
component of stockholders' equity net of applicable income taxes. The Company's
investment in corporate owned life insurance is recorded net of policy loans as
other assets.
DEFERRED CREDITS
Deferred credits associated with purchase commitments are classified as other
noncurrent liabilities and are recognized when earned as a reduction of the
related inventory purchase cost.
FORM 10-K Page 27
28
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- CONTINUED
PRE-OPENING COSTS
Non-capital expenditures associated with opening new stores are charged to
expense over the first twelve months of store operations.
ACCOUNTING STANDARDS CHANGES
In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") 128, "Earnings Per Share".
In 1997, SFAS 130, "Reporting Comprehensive Income" and SFAS 131, "Disclosures
About Segments of an Enterprise and Related Information" were issued. These
standards, which will become effective in 1998, expand or modify disclosures
and, accordingly will have no effect on the Company's consolidated financial
position, results of operations or cash flows.
BUSINESS COMBINATIONS
In January 1998, 23,371,639 common shares were issued in exchange for all
outstanding common shares of Mac Frugal's Bargains Close-outs, Inc. (Mac
Frugal's) a closeout retailer.
The combination constituted a tax-free reorganization and has been accounted for
as a pooling of interests. Accordingly, the accompanying financial statements
have been restated to include the accounts of Mac Frugal's for all periods
presented. Certain conforming reclassifications have been made to Mac Frugal's
financial statements. Net sales, income from continuing operations and net
income of the separate companies for the periods preceding the acquisition were:
Fiscal Year
Nine months ended -------------------------
(In thousands) Nov. 1, 1997 1996 1995
- -------------------------------------------------------------------------------------------------
Net sales:
Consolidated Stores $1,889,026 $2,647,516 $1,406,016
Mac Frugal's 550,177 772,648 704,934
- -------------------------------------------------------------------------------------------------
$2,439,203 $3,420,164 $2,110,950
- -------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before extraordinary charge:
Consolidated Stores $ (3,336) $ 113,311 $ 70,133
Mac Frugal's 21,415 43,149 14,559
- -------------------------------------------------------------------------------------------------
$ 18,079 $ 156,460 $ 84,692
- -------------------------------------------------------------------------------------------------
Net income:
Consolidated Stores $ (3,336) $ 83,917 $ 64,406
Mac Frugal's 21,415 43,149 14,559
- -------------------------------------------------------------------------------------------------
$ 18,079 $ 127,066 $ 78,965
- -------------------------------------------------------------------------------------------------
FORM 10-K Page 28
29
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BUSINESS COMBINATIONS - CONTINUED
In connection with the Mac Frugal's combination the Company recorded a fourth
quarter charge to operating expense of $45,000,000 ($40,500,000 after taxes, or
$.36 per diluted common share) for direct and other related costs pertaining to
the combination. Merger transaction costs were primarily comprised of fees for
professional services, severance and similar related costs.
Additionally, the Company recorded a $70,000,000 ($42,700,000 after tax, or $.38
per diluted common share) charge to cost of sales in the fourth quarter of 1997
for combination related expenses for discontinued products, inventory
consolidation and retail price equalization for the combined inventories.
Excluding the cost of sales charge and merger and other related charges income
per share, assuming dilution, would have been $1.51 in fiscal 1997.
Details of the merger and other related costs before applicable taxes are as
follows:
Provided for Utilized in
(In thousands) in fiscal 1997 1997 Balance
- --------------------------------------------------------------------------------------------
Inventory charges included in cost of sales $ 70,000 $10,137 $59,863
Merger transaction costs:
Professional fees and services 15,500 9,028 6,472
Employee severence/termination costs 22,000 12,002 9,998
Other 7,500 725 6,775
- --------------------------------------------------------------------------------------------
Total merger transaction costs 45,000 21,755 23,245
- --------------------------------------------------------------------------------------------
$115,000 $31,892 $83,108
- --------------------------------------------------------------------------------------------
Effective May 5, 1996, the Company acquired Kay-Bee Center, Inc. (KB) from
Melville Corporation for a initial purchase price of $185.3 million. This
acquisition was accounted for as a purchase with the results of KB included
from the acquisition date. At May 5, 1996, KB operated 1,042 toy stores located
in all 50 states and Puerto Rico.
The following summary, prepared on a pro forma basis, combines the results of
operations as if KB had been acquired at the beginning of the fiscal years
presented. Included in the pro forma presentation is the impact of certain
purchase adjustments directly attributable to the acquisition which are expected
to have a continuing impact.
(In thousands) 1996 1995
- -------------------------------------------------------------------------------
(Unaudited)
Net sales $3,596,555 $3,196,372
Income from continuing operations before
extraordinary charge $ 138,774 $ 47,098
Net income $ 109,380 $ 41,369
Income per share - diluted:
Continuing operations $ 1.26 $ 0.43
Net income $ 0.99 $ 0.38
FORM 10-K Page 29
30
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BUSINESS COMBINATIONS - CONTINUED
The pro forma financial information is presented for informational purposes only
and is not necessarily indicative of the operating results that would have
occurred had the KB acquisition been consummated as of the beginning of the
fiscal years presented. Additionally, the pro forma financial information is not
intended to be a prediction of future results and it does not reflect any
synergies that may be achieved from the combined operations.
DISCONTINUED OPERATIONS
In the fourth quarter of 1996 the Company adopted a plan to close its single
price point and small specialty stores operating under the names of All For One
and iTZADEAL!. Closures of the 165 stores open at February 1, 1997, were
completed throughout fiscal 1997. Accordingly, the operating results for this
business are reported as a discontinued operation for fiscal 1996 and 1995.
Summary operating results and financial information of this discontinued
operation are as follows:
(In thousands) 1996 1995
- -----------------------------------------------------------------------------
Net sales $ 84,253 $106,283
Gross profit $ 38,134 $ 49,698
Loss before income taxes $(13,710) $ (9,091)
Income tax benefit 5,072 3,364
- -----------------------------------------------------------------------------
(8,638) (5,727)
Loss on store closures, net of tax (18,900)
- -----------------------------------------------------------------------------
$(27,538) $ (5,727)
- -----------------------------------------------------------------------------
INCOME TAXES
The provision for income taxes on continuing operations is comprised of the
following:
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
Federal - Currently payable $59,843 $77,195 $48,656
Deferred 2,926 4,134 (7,673)
State and Local 12,411 10,540 9,158
Foreign 1,074 1,123
- -------------------------------------------------------------------------------
$76,254 $92,992 $50,141
- -------------------------------------------------------------------------------
FORM 10-K Page 30
31
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES - CONTINUED
A reconciliation between the statutory federal income tax rate and the effective
tax rate follows:
1997 1996 1995
- ------------------------------------------------------------------------------------------------
Statutory Federal income tax rate 35.0% 35.0% 35.0%
Effect of:
State and local income taxes 5.0 3.5 3.7
Work Opportunity and Targeted jobs tax credit (0.3) (0.1) (0.5)
Corporate owned life insurance investments (0.7) (1.9)
Merger and other related charges 8.0
Other (0.7) (0.5) 0.9
- ------------------------------------------------------------------------------------------------
Effective tax rate 47.0% 37.2% 37.2%
- ------------------------------------------------------------------------------------------------
Deferred taxes reflect the effects of temporary differences between carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Components of the Company's deferred tax
assets and liabilities are presented in the following table.
(In thousands) 1997 1996
- ----------------------------------------------------------------------------------
Deferred tax assets:
Uniform inventory capitalization $19,184 $20,270
Discontinued operations 383 11,458
Inventory valuation allowance 27,338 9,061
Deferred credits 1,072 1,596
Other (each less than 5% of total assets) 38,605 25,062
- ----------------------------------------------------------------------------------
Total deferred tax assets 86,582 67,447
- ----------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation 63,964 32,839
Other 7,326 16,390
- ----------------------------------------------------------------------------------
Total deferred tax liabilities 71,290 49,229
- ----------------------------------------------------------------------------------
Net deferred tax assets $15,292 $18,218
- ----------------------------------------------------------------------------------
Net income taxes paid were $96,695,000, $24,811,000, and $58,476,000 in 1997,
1996, and 1995, respectively.
FORM 10-K Page 31
32
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LONG-TERM OBLIGATIONS
Long-term debt was comprised of the following on the dates indicated:
(In thousands) 1997 1996
- ------------------------------------------------------------------------
Credit Agreements $ 68,600 $ 67,600
7% Subordinated Notes 100,000 100,000
9.25% Mortgage Note 7,705 7,880
Industrial Development Revenue Bonds 2,000 2,000
Capital leases 3,587 3,704
Other, primarily deferred rent 5,332 4,929
- ------------------------------------------------------------------------
187,224 186,113
Less current portion 71,943 31,064
- ------------------------------------------------------------------------
$115,281 $155,049
- ------------------------------------------------------------------------
Annual maturities of long-term debt for the next five fiscal years are: 1998,
$71,943,000; 1999, $352,000; 2000, $100,386,000; 2001, $425,000; 2002, $467,000
and thereafter $13,651,000.
Interest paid, including capitalized interest of $1,386,000, $258,000 and
$227,000 in each of the respective previous three fiscal years, was $30,437,000
in 1997, $24,206,000 for 1996, and $23,154,000 in 1995.
CREDIT AGREEMENTS
The Company has a $600,000,000 Revolving Credit Facility (Revolver) with a
syndicate of financial institutions to provide unsecured senior bank financing.
The Revolver has a maturity date of May 3, 2000, and requires the maintenance of
certain standard financial ratios and prohibits the payment of cash dividends.
At January 31, 1998, approximately $517,780,000 was available for borrowings
under the Revolver. The Company was contingently liable for outstanding letters
of credit under the Revolver totaling $68,620,000 at January 31, 1998.
Additionally, the Company has guaranteed letters of credit totaling $23,331,000
relating to letters of credit assumed in the merger of Mac Frugal's. Direct
borrowings under the Revolver at January 31, 1998, were at a rate of 5.9%.
Additionally, $72,000,000 of uncommitted short-term credit facilities are
available, subject to provisions of the Revolver, at January 31, 1998.
Borrowings under the uncommitted facilities were $55,000,000 as of January 31,
1998, at a rate of 5.9%. There were no direct borrowings outstanding pursuant to
any uncommitted credit facilities at February 1, 1997.
SUBORDINATED NOTES
In connection with the acquisition of KB the Company issued $100,000,000 of
Subordinated Notes. The Subordinated Notes mature in the year 2000 and bear
interest at a rate of 7% per annum, payable semiannually. The Subordinated Notes
are redeemable, subject to provisions of the Revolver, at the option of the
Company, in whole or in part, after two years from their issuance, at a premium
to their principal, plus accrued interest. Provisions of the Subordinated Notes
provide, among other matters, limitations on; additional indebtedness, payments
of certain indebtedness, and asset sales. The estimated fair value at January
31, 1998, was $99,882,000 and the related carrying amount was $100,000,000.
FORM 10-K Page 32
33
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LONG-TERM OBLIGATIONS - CONTINUED
EXTRAORDINARY CHARGE
During the second quarter of 1996 the Company recorded an extraordinary charge
in connection with the early extinguishment of $35 million of 10.5% senior
notes. The charge before income taxes was $2.9 million.
COMMITMENTS
The Company has commitments to certain vendors for future inventory purchases
totaling approximately $34,500,000 at January 31, 1998. Terms of the commitments
provide for these inventory purchases to be made through fiscal 1998 or later as
may be extended. There are no annual minimum purchase requirements.
EMPLOYEE BENEFIT PLANS
PENSION BENEFITS
The Company has a qualified defined benefit pension plan covering certain
employees hired on or before March 31, 1994, and a non-qualified supplemental
defined benefit pension plan effective January 1, 1996, covering a select group
of highly compensated employees to ensure the overall retirement pension
benefits frozen for such group of employees under the qualified plan. Benefits
under each plan are based on credited years of service and the employee's
compensation during the last five years of employment. The Company's funding
policy is to contribute annually the amount required to meet ERISA funding
standards and to provide not only for benefits attributed to service to date but
also for those anticipated to be earned in the future.
The components of net periodic pension cost are comprised of the following:
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------
Service cost - benefits earned in the period $2,934 $2,849 $1,642
Interest cost on projected benefit obligation 1,496 1,174 811
Investment return on plan assets (1,252) (917) (631)
Net amortization and deferral 760 922 303
- -------------------------------------------------------------------------------------------
Net periodic pension cost $3,938 $4,028 $2,125
- -------------------------------------------------------------------------------------------
Assumptions used in each year of the actuarial computations were:
Discount rate 6.5% 7.1% 6.5%
Rate of increase in compensation levels 5.5% 5.5% 5.5%
Expected long-term rate of return 9.0% 9.0% 9.0%
FORM 10-K Page 33
34
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EMPLOYEE BENEFIT PLANS - CONTINUED
The following table sets forth the funded status of the Company's defined
benefit plan.
(In thousands) 1997 1996
- ------------------------------------------------------------------------------------
Actuarial present value of:
Vested benefit obligation $15,703 $11,733
Non-vested benefits 3,131 3,011
- ------------------------------------------------------------------------------------
Accumulated benefit obligation $18,834 $14,744
- ------------------------------------------------------------------------------------
Actuarial present value of projected benefit obligation $26,365 $20,539
Plan assets at fair value, primarily cash equivalents, U.S.
Government securities and obligations, and publicly traded
stocks and mutual funds 16,246 14,152
- ------------------------------------------------------------------------------------
Projected benefit obligation in excess of plan assets (10,119) (6,387)
Unrecognized prior service cost (677) (812)
Unrecognized net obligation at transition 212 225
Unrecognized net loss 7,868 7,059
- ------------------------------------------------------------------------------------
Prepaid pension cost $ 2,716 $ 85
- ------------------------------------------------------------------------------------
SAVINGS PLAN
The Company has a savings plan with a 401(k) deferral feature and a Top Hat Plan
with a similar deferral feature for all eligible employees. Provisions of
$5,406,000, $4,161,000, and $2,551,000 have been charged to operations in fiscal
1996, 1995, and 1994, respectively.
LEASES
Leased property consists primarily of the Company's retail stores and certain
warehouse space. Many of the store leases have rent escalations and provide that
the Company pay for real estate taxes, utilities, liability insurance and
maintenance. Certain leases provide for contingent rents, in addition to the
fixed monthly rent, based on a percentage of store sales above a specified
level. In addition, some leases provide options to extend the original terms for
an additional two to twenty years. Minimum lease commitments as of January 31,
1998, are as follows:
FORM 10-K Page 34
35
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LEASES - CONTINUED
Capital Operating
(In thousands) Leases Leases
- ------------------------------------------------------------------------
1998 $ 472 $ 224,804
1999 472 194,315
2000 472 159,384
2001 472 127,053
2002 472 95,493
Subsequent to 2002 4,204 $ 284,200
- ------------------------------------------------------------------------
Total future minimum lease payments 6,564 $1,085,249
Less: interest 2,977 --------------
- ----------------------------------------------------------------
Present value of minimum lease payments $3,587
- ----------------------------------------------------------------
Total rental expense charged to continuing operations for operating leases of
stores and warehouses consisted of the following:
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
Minimum rentals $271,211 $204,277 $101,844
Contingent rents 7,129 6,103 1,167
- -------------------------------------------------------------------------------
$278,340 $210,380 $103,011
- -------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
STOCK SPLIT
All references in the financial statements to average common shares outstanding
and related prices, per share amounts, and stock option data have been restated
to reflect 5 for 4 stock splits to stockholders of record on December 10, 1996,
and June 10, 1997.
PUBLIC OFFERING OF COMMON STOCK
In June 1996, the Company issued 8,007,813, adjusted for the 5 for 4 splits,
shares of common stock. Net proceeds to the Company totaled $190,639,000 and
were utilized to repay a portion of the borrowings incurred to finance the
acquisition of KB.
INCOME PER SHARE
There are no adjustments required to be made to income from continuing
operations before extraordinary charge for purposes of computing basic and
diluted income per share and there were no securities outstanding at January 31,
1998, which were excluded from the computation of income per share.
A reconciliation of the average number of common shares outstanding used in the
basic and diluted income per share computation is as follows:
FORM 10-K Page 35
36
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCKHOLDERS' EQUITY - CONTINUED
Average Common Shares Outstanding
-------------------------------------------
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------------
Basic 107,621 104,642 98,185
Dilutive effect of stock options 4,442 3,760 2,460
- ------------------------------------------------------------------------------
Diluted 112,063 108,402 100,645
- ------------------------------------------------------------------------------
STOCKHOLDER RIGHTS PLAN
Each share of the Company's common stock has one Right attached. The Rights
trade with the common stock and only become exercisable, or transferable apart
from the common stock, ten business days after a person or group (Acquiring
Person) acquires beneficial ownership of, or commences a tender or exchange
offer for, 20% or more of the Company's common stock. Each Right, under certain
circumstances, entitles its holder to acquire a fraction of a share of Series A
Junior Participating Preferred Stock at a price of $35, subject to adjustment.
If 20% of the Company's common stock is acquired, or a tender offer to acquire
20% of the Company's common stock is made, each Right not owned by an Acquiring
Person will entitle the holder to purchase Company common stock having a market
value of twice the exercise price of the Rights.
In addition, at any time the Rights are exercisable, in the event the Company is
acquired in a merger or business combination (and is not the surviving entity)
or more than 50% of the Company's assets, cash flow or earning power is sold or
transferred, the Rights will entitle a holder to buy a number of shares of
common stock of the acquiring company having a market value of twice the
exercise price of each Right. The Rights may be redeemed by the Company at $.01
per Right at any time until the tenth day following public announcement that a
20% position has been acquired. The Rights expire on April 18, 1999, and at no
time have voting power.
PREFERRED STOCK
In conjunction with the Stockholder Rights Plan the Company has reserved 600,000
shares of preferred stock for issuance thereunder.
STOCK PLANS
STOCK COMPENSATION PLANS
At January 31, 1998, the Company has two stock-based compensation plans, which
are described below. Effective with the merger, and in accordance with the terms
of the Mac Frugal's stock option plans, outstanding Mac Frugal's options were
assumed by the Company and converted to options to purchase Company common stock
at a ratio of .94 of one share of Mac Frugal's common stock for each share of
Company common stock. The Company applies APB Opinion 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for any options issued pursuant to any plan. The
compensation cost that has been charged against income for the Restricted Stock
Plan, which expired in 1997, was $7,037,000, $750,000 in 1996 and 1995,
respectively. Had compensation cost for the Company's various option plans,
including the pre merger effect of Mac Frugal's plans, been determined
consistent with FASB Statement 123, the Company's net income and income per
share would have been reduced to the pro forma amounts indicated below:
FORM 10-K Page 36
37
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK PLANS - CONTINUED
(In thousands except per share data) 1997 1996 1995
- -----------------------------------------------------------------------------------------------
Net income
As reported $85,935 $127,066 $78,965
Pro forma 82,999 123,267 77,263
Income per common share:
As reported $0.80 $1.21 $0.80
Pro forma 0.77 1.18 0.79
Income per common share - diluted:
As reported $0.77 $1.17 $0.78
Pro forma 0.74 1.14 0.77
FIXED STOCK OPTION PLANS
Consolidated Stores Corporation 1996 Performance Incentive Plan (Incentive Plan)
provides for the issuance of stock options, restricted stock, performance units,
stock equivalent units, and stock appreciation rights (SAR's). The number of
newly issued shares of common stock available for issuance under the Incentive
Plan is 3,125,000 plus an additional 1% of the total number of issued shares,
including any Treasury Stock, at the start of the Company's fiscal year plus
shares available but not issued in previous years of the Incentive Plan. Total
newly issued shares of common stock available for use under the Incentive Plan
shall not exceed 15% of the total issued and outstanding Common Stock as of any
measurement date. A minimum of 10,468,750 shares of common stock are available
for issuance and the term of each award is determined by a committee of the
Board of Directors charged with administering the Incentive Plan. Stock options
granted under the Incentive Plan may be either nonqualified or incentive stock
options and the exercise price may not be less than the fair market value, as
defined, of the underlying common stock on the date of award. The award price of
a SAR is to be a fixed amount, not less than 100% of the fair market value of a
share of common stock at the date of award. Upon an effective change in control
of the Company all awards outstanding under the Incentive Plan automatically
vest.
Prior to 1996 the Company had a Stock Option Plan (Plan) which expired in 1995.
The Plan provided that all options be granted at an exercise price at least
equal to the fair market value of the common stock at the date of grant. Options
generally became exercisable one year following the original date of grant in
five equal annual installments.
The Company has a Director Stock Option Plan (DSOP), for non-employee directors,
pursuant to which up to 781,250 shares of the Company's common stock may be
issued upon exercise of options granted thereunder. The DSOP is administered by
the Compensation Committee of the Board of Directors pursuant to an established
formula. Neither the Board of Directors, nor the Compensation Committee,
exercise any discretion in administration of the DSOP. Grants are made annually,
90 days following the annual meeting of stockholders, at an exercise price equal
to 100% of the fair market value on the date of grant. The present formula
provides for an annual grant of 5,000 options to each non-employee director
which becomes fully exercisable over a three year period, 20% the first year and
40% each subsequent year, beginning one year subsequent to grant.
FORM 10-K Page 37
38
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK PLANS - CONTINUED
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995, respectively; no dividend
yield for any year; expected volatility of 39%, 42% and 32%; risk-free interest
rates of 5.3%, 6.0% and 4.9%; and expected lives of 2.2, 2.5 and 2.4 years.
A summary of the Company's various option plans, including the pre-merger plans
of Mac Frugal's, as of January 31, 1998, February 1, 1997, and February 3, 1996,
and changes during the fiscal years ended on those dates is presented below:
(In thousands except price data) 1997 1996 1995
-------------------------------------------------------------------------
Shares Price(1) Shares Price(1) Shares Price(1)
- -------------------------------------------------------------------------------------------------------------
Under option outstanding
at beginning of year 12,438,089 $11.25 10,325,979 $ 7.74 8,371,516 $ 6.40
Granted 1,495,232 23.38 3,568,641 26.28 4,128,651 12.52
Exercised 1,522,745 13.19 1,210,784 10.23 1,344,569 4.03
Forfeited 1,700,517 23.58 245,747 13.52 829,619 11.47
- --------------------------------------------------------------------------------------------------------------------
Under option at end of year 10,710,059 $14.31 12,438,089 $11.25 10,325,979 $ 7.74
- --------------------------------------------------------------------------------------------------------------------
Options exercisable at end of year 6,500,029
Weighted average fair value of
options granted during the year $5.64
(1) Weighted average per share exercise price
The following table summarizes information about fixed stock options outstanding
at January 31, 1998:
Range of Prices Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------
Weighted
Average Weighted
Number of Remaining Average Number of Weighted
Greater Less than Options Contractual Exercise Options Average
than or equal to Outstanding Life (Years) Price Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------
$ 1 $10 3,273,563 3.2 $ 4.34 3,234,045 $ 4.29
$10 $20 4,088,163 6.9 12.04 2,205,364 12.12
$20 $30 3,236,491 8.9 26.38 1,060,620 26.56
$30 111,842 9.7 40.34
-----------------------------------------------------------------------
10,710,059 6.4 $14.30 6,500,029 $10.58
-----------------------------------------------------------------------
FORM 10-K Page 38
39
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ADDITIONAL DATA
The following is a summary of certain financial data:
(In thousands) 1997 1996
- ---------------------------------------------------------------------
Property and equipment - at cost:
Land $ 49,310 $ 46,535
Buildings 205,758 191,012
Fixtures and equipment 687,962 611,860
Transportation equipment 28,536 21,698
- ---------------------------------------------------------------------
971,566 871,105
Construction-in-progress 18,827 1,605
- ---------------------------------------------------------------------
990,393 872,710
Less accumulated depreciation 376,915 319,120
- ---------------------------------------------------------------------
$613,478 $553,590
- ---------------------------------------------------------------------
(In thousands) 1997 1996
- ---------------------------------------------------------------------
Accrued liabilities:
Salaries and wages $ 89,022 $ 99,078
Property, payroll and other taxes 42,801 27,254
Other 2,465 2,381
- ---------------------------------------------------------------------
$134,288 $128,713
- ---------------------------------------------------------------------
The following analysis supplements changes in assets and liabilities presented
in the consolidated statements of cash flows.
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------
Inventories $ 64,272 $(165,639) $(104,728)
Other current assets (12,832) 8,608 (6,129)
Accounts payable (55,858) 82,070 38,671
Accrued liabilities 5,575 (12,135) 5,068
Income taxes (39,533) 57,462 (9,056)
- -----------------------------------------------------------------------------------
$(38,376) $ (29,634) $ (76,174)
- -----------------------------------------------------------------------------------
FORM 10-K Page 39
40
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BUSINESS GROUP INFORMATION
Business group information follows:
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------
Revenues:
Closeout $ 2,452,474 $ 2,204,521 $1,991,609
Toys 1,562,463 1,178,224 76,689
Other 40,365 37,419 42,652
- -----------------------------------------------------------------------------
$ 4,055,302 $ 3,420,164 $2,110,950
- -----------------------------------------------------------------------------
Operating profit (loss):
Closeout $ 205,908 $ 179,232 $ 146,930
Toys 101,027 96,474 7,438
Other and corporate (a) (117,748) (3,333) 163
- -----------------------------------------------------------------------------
$ 189,187 $ 272,373 $ 154,531
- -----------------------------------------------------------------------------
(a) Fiscal 1997 includes $70,000 and $45,000 of inventory and merger related
charges associated with the Mac Frugal's Bargains Close-outs, Inc.
acquisition.
Depreciation and amortization:
Closeout $ 54,438 $ 47,044 $43,584
Toys 24,648 15,358 534
Other and corporate 77 4,229 4,118
- ---------------------------------------------------------------------------
$ 79,163 $ 66,631 $48,236
- ---------------------------------------------------------------------------
Capital expenditures:
Closeout $ 85,714 $ 53,497 $67,470
Toys 60,746 49,009 2,419
Other and corporate 2,278 4,319
- ---------------------------------------------------------------------------
$146,460 $104,784 $74,208
- ---------------------------------------------------------------------------
Identifiable assets were comprised of the following:
(In thousands) 1997 1996
- ---------------------------------------------------------------------------
Closeout $1,118,119 $1,028,773
Toys 604,893 619,688
Other and corporate 23,369 67,038
- ---------------------------------------------------------------------------
$1,746,381 $1,715,499
- ---------------------------------------------------------------------------
FORM 10-K Page 40
41
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for fiscal 1997 and 1996 is presented below:
Quarter
-------------------------------------------------------------------------
(In thousands, except per share data) First Second Third Fourth Year
- ------------------------------------------------------------------------------------------------------------------------
1997(a)
Net Sales $778,338 $801,306 $859,559 $1,616,099 $4,055,302
Gross profit $317,365 $334,479 $367,556 $ 600,469 $1,619,869
Net income (loss) $ (1,324) $ 5,781 $ 13,622 $ 67,856 $ 85,935
Income (loss) per common share (b) $ (0.01) $ 0.05 $ 0.13 $ 0.63 $ 0.80
Income (loss) per common share - diluted (b) $ (0.01) $ 0.05 $ 0.12 $ 0.60 $ 0.77
1996(C)
Net Sales $481,101 $690,499 $771,802 $1,476,762 $3,420,164
Gross profit $205,514 $282,176 $330,044 $ 621,627 $1,439,361
Income (loss):
Continuing operations $ 9,399 $ (389) $ 6,150 $ 141,300 $ 156,460
Discontinued operations (2,281) (3,317) (4,059) (17,881) (27,538)
Extraordinary charge (1,856) (1,856)
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 7,118 $ (5,562) $ 2,091 $ 123,419 $ 127,066
- ------------------------------------------------------------------------------------------------------------------------
Income (loss) per common share (b):
Continuing operations $ 0.10 $ 0 $ 0.06 $ 1.32 $ 1.49
Discontinued operations (0.03) (0.03) (0.04) (0.17) (0.26)
Extraordinary charge (0.02) (0.02)
- ------------------------------------------------------------------------------------------------------------------------
$ 0.07 $ (0.05) $ 0.02 $ 1.15 $ 1.21
- ------------------------------------------------------------------------------------------------------------------------
Income (loss) per common share - diluted (b):
Continuing operations $ 0.09 $ $ 0.06 $ 1.27 $ 1.44
Discontinued operations (0.02) (0.03) (0.04) (0.16) (0.25)
Extraordinary charge (0.02) (0.02)
- ------------------------------------------------------------------------------------------------------------------------
$ 0.07 $ (0.05) $ 0.02 $ 1.11 $ 1.17
- ------------------------------------------------------------------------------------------------------------------------
(a) See Business Combinations for discussion of fourth quarter merger and other
related charges and associated expenses included in cost of sales recorded
in connection with the acquisition of Mac Frugal's.
(b) Income (loss) per share calculations for each quarter is based on the
applicable weighted average shares outstanding for each period and may not
necessarily be equal to the full year income (loss) per share amount.
(c) Includes the results of KB Toys from date of acquisition; May 5, 1996.
FORM 10-K Page 41
42
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
None.
PART III
ITEMS 10-13
Pursuant to Instruction G(3) to Form 10-K, the information required in Items 10
- - 13 is incorporated by reference from the Company's definitive proxy statement
which will be filed with the Commission pursuant to Regulation 14A on or about
April 15, 1998.
Information regarding Executive Officers of the Company is furnished in a
separate item captioned "Executive Officers of the Company" in Part I of this
report.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Index to Consolidated Financial Statements, Financial Statement Schedules
and Exhibits
Page
----
1. Financial Statements
Independent Auditors' Report 22
Consolidated Statements of Income 23
Consolidated Balance Sheets 24
Consolidated Statements of Stockholders' Equity 24
Consolidated Statements of Cash Flows 26
Notes to Consolidated Financial Statements 27
2. Financial Statement Schedules
Schedule Description
-------- ----------------------------------
II Valuation and Qualifying Accounts 47
All other financial statements and schedules not listed in the preceding indexes
are omitted as the information is not applicable or the information is presented
in the consolidated financial statements or notes thereto.
FORM 10-K Page 42
43
(b) Reports on Form 8-K
Date Topic
- -------------------- ----------------------------------------------------------
November 5, 1997 Announcement of Agreement and Plan of Merger among
Consolidated, MBC Consolidated Acquisition Corporation and
Mac Frugal's Bargains Close-outs, Inc.
January 16, 1998 Announcement that on January 15, 1998, the stockholders of
Consolidated Stores Corporation approved the share
issuance pursuant to the terms of the Agreement and Plan
of Merger, dated November 4, 1997, among Consolidated, MBC
Consolidated Acquisition Corporation and Mac Frugal's
Bargains Close-outs, Inc. and the subsequent
consummation of the transaction on January 16, 1998.
(c) Exhibits
Exhibits marked with an asterisk (*) are filed herewith.
Exhibit No. Document
- ----------- -----------------------------------------------------------------
3(a) Form of Restated Certificate of Incorporation of the Company
(Exhibit 4(a) to the Company Registration Statement (No.
33-6086) on Form S-8 and incorporated herein by reference)
3(b) Amended and Restated By-laws of the Company (Exhibit 3(c) to the
Company's Annual Report on Form 10-K for the year ended February
3, 1990, and incorporated herein by reference)
3(c) Amendment to By-laws dated April 14, 1992 (Exhibit 3(c) to the
Company's Annual Report on Form 10-K for the year ended February
1, 1992, and incorporated herein by reference)
4(a) Specimen Stock Certificate (Exhibit 4(a) to the Company's Annual
Report on Form 10-K for the year ended February 1, 1992, and
incorporated herein by reference)
4(b) Summary of Rights to Purchase Preferred Stock (Exhibit 4(b) to
the Company's Annual Report on Form 10-K for the year ended
February 3, 1990, and incorporated herein by reference)
4(c) Rights Agreement between the Company and National City Bank
(Exhibit 4(c) to the Company's Annual Report on Form 10-K for
the year ended February 3, 1990, and incorporated herein by
reference)
4(d) Form of Certificate of Designation, Preferences and Rights of
Series A Junior Participating Preferred Stock of the Company
(Exhibit 4(d) to the Company's Annual Report on Form 10-K for
the year ended February 3, 1990, and incorporated herein by
reference)
10(a) Consolidated Stores Corporation 1996 Performance Incentive Plan
as Amended and Restated on July 23, 1996, (Exhibit 10(a) to the
Company's Annual Report on Form 10-K for the year ended February
1, 1997, and incorporated herein by reference)
10(b) Consolidated Stores Corporation Directors Stock Option Plan
(Exhibit 10(q) to the Company's Registration Statement (No.
33-42502) on Form S-8 and incorporated herein by reference)
10(b)(i) Consolidated Stores Corporation Amended and Restated Directors
Stock Option Plan (Exhibit 10(c)(ii) to the Company's Annual
Report on Form 10-K for the year ended February 1, 1992, and
incorporated herein by reference)
FORM 10-K Page 43
44
Exhibit No. Document
- ----------- -----------------------------------------------------------------
10(c) Consolidated Stores Corporation Supplemental Savings Plan
(Exhibit 10(r) to the Company's Registration Statement (No.
33-42692) on Form S-8 and incorporated herein by reference)
10(d) CSIC Pension Plan and Trust dated March 1, 1976, (Exhibit
10(h)(ii) to the Company's Registration Statement (No. 2-97642)
on Form S-1 and incorporated herein by reference)
10(d)(i) Amendment to CSIC Pension Plan and Trust (Exhibit 10(h)(ii) to
the Company's Registration Statement (No. 2-97642) on Form S-1
and incorporated herein by reference)
10(d)(ii) Amendment No. 2 to CSIC Pension Plan and Trust (Filed as an
Exhibit to the Company's Registration Statement (No. 33-6086) on
Form S-8 and incorporated herein by reference)
10(e) Amended and Restated Credit Agreement dated as of May 3, 1996,
by and among Consolidated Stores Corporation, an Ohio
corporation (the "Borrower"), the BANKS (as defined), and The
Bank of New York, in its capacity as Syndication Agent and as
Managing Agent, National City Bank of Columbus, in its capacity
as Administrative Agent ("Administrative Agent") and as Managing
Agent, PNC Bank, Ohio, National Association, in its capacity as
Arranger, as Documentation Agent (the "Documentation Agent") and
as Managing Agent , Bank One, Columbus, N.A., in its capacity as
Managing Agent, and National City Bank in its capacity as
Managing Agent (Exhibit 10(d) to the Company's Annual Report on
Form 10-K for the year ended February 1, 1997, and incorporated
herein by reference)
10(e)(i) Amendment Number One to Amended and Restated Credit Agreement
(Exhibit 10 to the Company's Quarterly Report on Form 10-Q for
the quarter ended May 3, 1997, and incorporated herein by
reference)
10(f) Transfer Agreement, dated as of May 9, 1997, among Consolidated
Stores Corporation, an Ohio corporation, Nashua Hollis CVS,
Inc., a New Hampshire corporation, The Bank of New York, a New
York banking corporation, as Trustee, and each of the purchasers
(as defined) (Exhibit 10(a) to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 2, 1997, and incorporated
herein by reference)
10(g) Consolidated Stores Corporation, Note Agreement dated May 9,
1997, for $100,000,000 7% Senior Subordinated Notes Due May 4,
2000, (Exhibit 10(b) to the Company's Quarterly Report on Form
10-Q for the quarter ended August 2, 1997, and incorporated
herein by reference)
10(h) Stock Purchase Agreement dated as of March 25, 1996, between
Melville Corporation and Consolidated Stores Corporation
relating to the purchase and sale of 100% of the Common Stock of
Kay-Bee Center, Inc. (Exhibit B to the Company's Current Report
on Form 8-K dated April 8, 1996, and incorporated herein by
reference)
10(h)(i) Amendment No. 1 to Stock Purchase Agreement dated as of March
25, 1996, between Melville Corporation and Consolidated Stores
Corporation relating to the purchase and sales of 100% of the
Common Stock of Kay-Bee Center, Inc. (Exhibit 10 to the
Company's Current Report on Form 8-K dated May 10, 1996, and
incorporated herein by reference)
10(i) Agreement and Plan of Merger by and Among Consolidated Stores
Corporation, MBC Consolidated Acquisition Corporation and Mac
Frugal's Bargains Close-outs, Inc. dated as of November 4,
1997, (Exhibit 1 to the Company's Current Report on Form 8-K
dated November 5, 1997, and incorporated herein by reference)
10(j) Employment Agreement with William G. Kelley (Exhibit 10(r) to
the Company's Annual Report on Form 10-K for the year ended
February 3, 1990, and incorporated herein by reference)
FORM 10-K Page 44
45
Exhibit No. Document
- ----------- -----------------------------------------------------------------
10(j)(i) Amendment No. 1 to Employment Agreement with William G. Kelley
(Exhibit 10(f)(i) to the Company's Annual Report on Form 10-K
for the year ended February 3, 1996, and incorporated herein by
reference)
10(k) Employment Agreement with Armen Bahadurian (Exhibit 10(a) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
July 29, 1995, and incorporated herein by reference)
10(l) Employment Agreement with Charles Freidenberg (Exhibit 10(b) to
the Company's Quarterly Report on Form 10-Q for the quarter
ended July 29, 1995, and incorporated herein by reference)
10(m) Employment Agreement with Michael L. Glazer (Exhibit 10(c) to
the Company's Quarterly Report on Form 10-Q for the quarter
ended July 29, 1995, and incorporated herein by reference)
10(n) Employment Agreement with C. Matthew Hunnell (Exhibit 10(d) to
the Company's Quarterly Report on Form 10-Q for the quarter
ended July 29, 1995, and incorporated herein by reference)
10(o) Consulting Agreement, dated as of November 4, 1997, by and
between Philip L. Carter and Consolidated Stores Corporation
(Exhibit 2.2 to the Company's Registration Statement (No.
333-41143) (included in Joint Proxy Statement/Prospectus as
Annex B) on Form S-4 and incorporated herein by reference)
10(p) Noncompetition Agreement, dated as of November 4, 1997, by and
between Philip L. Carter and Consolidated Stores Corporation
(Exhibit 2.3 to the Company's Registration Statement (No.
333-41143) (included in Joint Proxy Statement/Prospectus as
Annex C) on Form S-4 and incorporated herein by reference)
10(q) Consolidated Stores Corporation Savings Plan and Trust, as
amended and restated (Exhibit 10(q)(i) to the Company's Annual
Report on Form 10-K for the year ended February 3, 1990, and
incorporated herein by reference)
10(r) The Consolidated Stores Corporation Key Associate Annual
Incentive Compensation Plan (Exhibit 10(n) to the Company's
Annual Report on Form 10-K for the year ended February 1, 1997,
and incorporated herein by reference)
10(s) Form of Executive Severance Agreement of the Company (Exhibit
10(s)(i) to the Company's Annual Report on Form 10-K for the
year ended February 3, 1990, and incorporated herein by
reference)
10(t) Consolidated Stores Executive Benefits Plan (Exhibit 10(t) to
the Company's Annual Report on Form 10-K for the year ended
February 3, 1990, and incorporated herein by reference)
21* List of subsidiaries of the Company
23* Consent of Deloitte & Touche LLP
24 Power of Attorney for William G. Kelley, Michael L. Glazer and
Michael J. Potter (Exhibit 24 included in Part II of the
Company's Registration Statement (No. 333-2545) on Form S-3 and
incorporated herein by reference)
24.1 Power of Attorney for David T. Kollat (Exhibit 24.1 to the
Company's Registration Statement (No. 333-2545) on Form S-3 and
incorporated herein by reference)
24.2 Power of Attorney for Nathan P. Morton (Exhibit 24.2 to the
Company's Registration Statement (No. 333-2545) on Form S-3 and
incorporated herein by reference)
FORM 10-K Page 45
46
Exhibit No. Document
- ----------- -----------------------------------------------------------------
24.3 Power of Attorney for Dennis B. Tishkoff (Exhibit 24.4 to the
Company's Registration Statement (No. 333-2545) on Form S-3 and
incorporated herein by reference)
24.4 Power of Attorney for William A. Wickham (Exhibit 24.5 to the
Company's Registration Statement (No. 333-2545) on Form S-3 and
incorporated herein by reference)
24.5 Power of Attorney for Sheldon M. Berman (Exhibit 24.6 to the
Company's Registration Statement (No. 333-2545) on Form S-3 and
incorporated herein by reference)
24.6 Power of Attorney for W. Eric Carlborg (Exhibit 24.6 to the
Company's Registration Statement (No. 333-32063) on Form S-8 and
incorporated herein by reference)
24.7 Power of Attorney for Brenda J. Lauderback (Exhibit 24.7 to the
Company's Registration Statement (No. 333-32063) on Form S-8 and
incorporated herein by reference)
27* Financial Data Schedule
FORM 10-K Page 46
47
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
----------------------------
Balance at Charged to Charged to
Beginning of Cost and Other Balance at
Period Expense Accounts (2) Deductions End of Period
- ---------------------------------------------------------------------------------------------------------------
Fiscal year ended January 31, 1998:
Inventory valuation allowance(1) $11,826 $92,812 $ $39,537 $65,101
Fiscal year ended February 1, 1997:
Inventory valuation allowance(1) 24,506 6,678 10,200 29,558 11,826
Fiscal year ended February 3, 1996:
Inventory valuation allowance(1) 4,706 36,307 16,507 24,506
(1) Applicable to continuing operations and consists primarily of reserve for
markdowns of aged goods and similar inventory reserves.
(2) Value from company acquired.
FORM 10-K Page 47
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on behalf
by the undersigned, thereunto duly authorized.
CONSOLIDATED STORES CORPORATION
Date: April 21, 1998 By: /s/ William G. Kelley
----------------------------------
William G. Kelley
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: April 21, 1998 /s/ William G. Kelley
----------------------------------
William G. Kelley
Chairman of the Board and Chief
Executive Officer
Date: April 21, 1998 /s/ Michael L. Glazer
----------------------------------
Michael L. Glazer
President
Date: April 21, 1998 /s/ Michael J. Potter
----------------------------------
Michael J. Potter
Executive Vice President,
Chief Financial and
Accounting Officer
Date: April 21, 1998
Sheldon M. Berman William G. Kelley Nathan Morton
W. Eric Carlborg David T. Kollat Dennis B. Tishkoff
Michael L. Glazer Brenda J. Lauderback William A. Wickham
Directors Directors Directors
Albert J. Bell, by signing his name hereto, does hereby sign this Form 10-K
pursuant to the Powers of Attorney executed by the Directors named, filed with
the Securities and Exchange Commission on behalf of such Directors, all in the
capacities indicated and on the date stated, such persons being a majority of
the Directors of the Registrant.
/s/ Albert J. Bell
----------------------------------
Albert J. Bell
Attorney-in-Fact
Dated: April 21, 1998
FORM 10-K Page 48