ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
Retail Operations
The Company’s stores are located in the United States, predominantly in strip shopping centers, and have an average store size of approximately 29,600 gross square feet, of which an average of 21,300 square feet is selling square feet. The average cost to open a new store in a leased facility during fiscal year 2005 was approximately $1.0 million, including cost of inventory.
With the exception of 53 owned store sites, all stores are leased. Store leases generally provide for fixed monthly rental payments plus the payment, in most cases, of real estate taxes, common area maintenance (“CAM”), and property insurance. 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 exceed a specified level. The typical lease is for an initial term of five to ten years with multiple five-year renewal options. Approximately 70 store leases have sales termination clauses which can result in the Company exiting a location at its option if certain sales volume results are not achieved as indicated in the agreed upon lease conditions.
Excluding closed stores, eight month-to-month leases, and owned locations, store lease expirations were as follows at January 28, 2006:
Warehouse and Distribution
At January 28, 2006, the Company operated warehouse and distribution facilities strategically placed across the United States totaling 10,183,300 square feet. The Company’s primary warehouse and distribution facilities are owned and located in Ohio, California, Alabama, Oklahoma, and Pennsylvania. The facilities utilize advanced warehouse management technology, which enables high accuracy and efficient product processing from vendors to the retail stores. The combined output of the Company’s facilities is approximately 2.7 million cartons per week.
The number of owned and leased warehouse and distribution facilities and the corresponding square footage of the facilities by state at January 28, 2006, were as follows:
The Durant, Oklahoma distribution center (the “Durant DC”) began receiving merchandise in January 2004 and began shipping merchandise in April 2004. In an effort to further expand its sales in the furniture category nationally, the Company entered into a lease for the Redlands, California distribution center (the “Redlands DC”) in April 2004 in order to support the Company’s growth of furniture sales in the western regions of the country. In fiscal year 2005, the Company exited the frozen food business and no longer stores perishable merchandise in third party warehouses.
Other Properties
The Company owns the office facility in Columbus, Ohio that serves as its general office for corporate employees.
As a result of funding a mortgage guarantee obligation associated with the KB Toys bankruptcy, the Company obtained title to a distribution center in Pittsfield, Massachusetts (the “Pittsfield DC”). The Company has no intention of using this property in its current operations, and it is available for immediate sale in its present condition. For additional information regarding the Pittsfield DC, see Note 2 to the consolidated financial statements in this Annual Report on Form 10-K.
No response is required under Item 103 of Regulation S-K. For a discussion of certain litigated matters, please refer to Note 2 and Note 5 to the consolidated financial statements in this Annual Report on Form 10-K.
ITEM 4.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 2005.
EXECUTIVE OFFICERS OF THE REGISTRANT
The Company’s executive officers at January 28, 2006, were as follows:
Steven S. Fishman became Chairman, Chief Executive Officer and President in July 2005. Prior to joining the Company, Mr. Fishman was the President, Chief Executive Officer and Chief Restructuring Officer of Rhodes, Inc., a furniture retailer. Rhodes, Inc. filed for bankruptcy on November 4, 2004. Mr. Fishman was also Chairman and Chief Executive Officer of Frank’s Nursery & Crafts, Inc., a lawn and garden specialty retailer, which filed for bankruptcy on September 8, 2004, and President and Founder of SSF Resources, Inc., an investment and consulting firm.
John C. Martin is responsible for the Company’s merchandising. Prior to joining the Company in 2003, Mr. Martin was the President of Garden Ridge Corporation, an arts and crafts retailer. Garden Ridge Corporation filed for bankruptcy on February 2, 2004. Mr. Martin also served as President and Chief Operating Officer of Michaels Stores, Inc., an arts and crafts retailer, and President, Retail Stores Division of OfficeMax Incorporated, an office supply retailer.
Donald A. Mierzwa is responsible for the Company’s store operations, including store standards, customer service, personnel development, program implementation, and execution. Mr. Mierzwa has been with the Company since 1989 and has served as Executive Vice President of Store Operations since 1999.
Brad A. Waite is responsible for human resources, loss prevention, real estate, risk management, and administrative services. Mr. Waite joined the Company in 1988 as Director of Employee Relations and held various Human Resources management and senior management positions prior to his promotion to Executive Vice President in July 2000.
Lisa M. Bachmann is responsible for the Company’s information technology, merchandise planning and merchandise allocation functions. Ms. Bachmann joined the Company as Senior Vice President of Merchandise Planning, Allocation and Presentation in March 2002, and was promoted to her current role in August 2005. Prior to joining the Company, Ms. Bachmann was Senior Vice President of Planning and Allocation at Ames Department Stores, Inc., a discount retailer. Ames Department Stores, Inc. filed for bankruptcy on August 20, 2001.
Joe R. Cooper was promoted to Senior Vice President and Chief Financial Officer in February 2004, and is responsible for the Company’s finance functions. He oversees treasury, tax and investor relations, as well as the reporting, planning and control functions of the business. Mr. Cooper joined the Company as Vice President of Strategic Planning and Investor Relations in May 2000. In July 2000, he assumed responsibility for the treasury department and was appointed Vice President, Treasurer.
Charles W. Haubiel II is responsible for the Company’s legal affairs. He was promoted to Senior Vice President, General Counsel and Corporate Secretary in November 2004. Mr. Haubiel joined the Company in
1997 as Senior Staff Counsel and was promoted to Director, Corporate Counsel and Assistant Secretary in 1999 and to Vice President, General Counsel and Corporate Secretary in 2000.
Kent A. Larsson is responsible for the oversight of various special projects at the request of the Company’s CEO. Previously, Mr. Larsson was Senior Vice President, Marketing and was responsible for marketing, merchandise presentation, sales promotion, and public relations. Mr. Larsson joined the Company in 1988 as Vice President, Sales Promotion and held various senior management positions in merchandising and marketing prior to his current position.
Timothy A. Johnson is responsible for the Company’s strategic planning and investor relations functions. He was promoted to Vice President, Strategic Planning and Investor Relations in February 2004. He joined the company in 2000 as Director of Strategic Planning.
Paul A. Schroeder is responsible for internal and external financial reporting and accounting operations including payroll, accounts payable and inventory control. Mr. Schroeder joined the Company as Director, Accounting Operations in April 2005, and was promoted to Vice President, Controller in September 2005. Prior to joining the Company, Mr. Schroeder was Director of Finance at American Signature, Inc., a furniture retailer, and held various finance positions at Limited Brands, Inc., a clothing and fashion retailer.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common shares are listed on the New York Stock Exchange (the “NYSE”) under the symbol “BLI.” The following table reflects the high and low sales prices per common share as reported on the NYSE composite tape for the fiscal periods indicated:
The Company has followed a policy of reinvesting available cash in the business or executing share repurchase programs when authorized by the Board of Directors. The Company historically has not paid dividends. Currently, 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 taking into account business conditions then existing, including the Company’s earnings, financial requirements and condition, opportunities for reinvesting cash, and other factors.
On February 22, 2006, the Company announced that its Board of Directors authorized the repurchase of up to $150.0 million of the Company’s common shares. The Company expects the purchases to be made from time to time in the open market or in privately negotiated transactions with such purchases to be completed within one year of the announcement. Common shares acquired through the repurchase program will be available for general corporate purposes.
In May 2004, the Company’s Board of Directors authorized the repurchase of up to $75.0 million of the Company’s common shares. Pursuant to this authorization, the Company purchased 5.4 million common shares having an aggregate cost of $75.0 million with an average price paid per share of $13.82. All such repurchases were made by the Company prior to the fourth quarter of fiscal year 2004. The repurchased common shares were placed into treasury to be used for general corporate purposes including the issuance of shares for employee benefits, the exercise of stock options, and the issuance of restricted shares.
As of March 27, 2006, there were approximately 1,322 registered holders of record of the Company’s common shares.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
The following statements of operations and balance sheet data have 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 related Notes. Prior period amounts applicable to the statements of operations have been adjusted to recognize the results of the 130 stores reported in discontinued operations as a result of store closings in fiscal year 2005.
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The discussion and analysis presented below should be read in conjunction with the consolidated financial statements and related Notes. Please refer to Item 1A of this Annual Report on Form 10-K for a discussion of forward-looking statements and certain risk factors that may have a material effect on the Company’s business, financial condition, results of operations, and liquidity.
RECENT DEVELOPMENTS
What’s Important Now (WIN) Strategy
In 2005, the Company initiated a strategic assessment of its operations. Specifically, the Company is focusing on opportunities for improved financial performance as a result of a continuing detailed analysis of real estate, operating expenses, and merchandising. This strategic assessment is resulting in specific initiatives collectively referred to by the Company as its “WIN Strategy.” We believe that the tactical plans for 2006 have been set. Fiscal year 2006 will also be a year of significant testing activity to help develop a long term strategic direction for the Company. The following is a discussion of these specific initiatives.
Real Estate
As part of the real estate analysis, on October 6, 2005, the Company announced its decision to close approximately 126 underperforming stores in addition to the 40 stores previously planned for closure in fiscal year 2005. The Company completed its evaluation of underperforming stores in the fourth quarter and, as a result, 174 stores were closed during fiscal year 2005. The Company does not have any significant continuing involvement in the operations of each store after closure. To determine if cash flows of each closed store met the Statement of Financial Standards (“SFAS”) No. 144 criteria for reporting each store in discontinued operations, resulting in their elimination from ongoing operations, the Company evaluated a number of qualitative and quantitative factors, including: proximity to remaining open stores, physical location within a metropolitan or non-metropolitan area, and expected transferability of sales between open and closed stores. Based on these criteria, the Company determined that the results of 130 stores should be reported as discontinued operations for all periods presented. The Company has included in discontinued operations the net sales and associated costs which were directly related to and specifically identifiable in relation to these 130 stores. Certain costs such as general office, field operations, national advertising, fixed distribution costs, and interest expense were not allocated to discontinued operations because these costs were not specifically identifiable at the store level. The table below identifies the significant components of income (loss) from discontinued operations related to these closed stores for fiscal years 2005, 2004, and 2003, respectively.
The Company’s results of discontinued operations in fiscal year 2005 include pretax losses in the amount of $41.1 million as the result of the 130 stores reported in discontinued operations in fiscal year 2005, including $43.6 million of exit-related pretax costs incurred primarily in the fourth quarter of fiscal year 2005, the reversal of pretax charges of $0.4 million associated with the KB Toys business and a pretax non-cash impairment charge of $0.7 million and other related charges of $0.3 million associated with the reclassification of the Pittsfield DC as held-for-sale and the related write-down of its carrying value to fair value less selling cost. The table below summarizes the type and amount of charges recorded as a result of the store closures and identifies remaining obligations as of January 28, 2006:
Asset write-downs include assets used in normal operations of retail stores and remaining unrecoverable net book values of fixtures, equipment, and signs. The inventory write-downs above are specific to the markdowns associated with liquidation sales conducted at the closed stores, which qualified for discontinued operations accounting treatment. The Company records markdowns throughout the year in the normal course of business. The markdowns associated with the liquidation sales are the only markdowns included in the table above.
Future cash outlays related to store closure obligations are anticipated to be $10.3 million in fiscal year 2006, $5.2 million in fiscal year 2007, $3.1 million in fiscal year 2008, and $1.4 million thereafter.
Operating Expenses
The Company’s review of its operating expenses resulted in personnel reductions in the general office, field operations, and distribution centers. Realignments of resources were made based on the store closings and lower expected store growth in the near term. Additionally, some redundancies between the closeout store operations and the furniture store operations were eliminated.
Merchandising
As part of a review of its merchandising strategy, the Company in fiscal year 2005: 1) closed its stand-alone furniture stores; 2) executed a series of markdowns lowering in-store inventory levels in certain categories and improving inventory turnover; and 3) exited the frozen food business. The Company is continuing to develop its merchandise strategy with the goals of growing sales per square foot and increasing gross margin dollars. The Company has performed customer research and found that brand names, treasure hunt, price, value and savings are most important to its customers. The Company has taken this research and is working with its existing vendors and developing relationships with new vendors to produce a merchandising plan for each category. Certain elements of these plans will be tested and executed in fiscal year 2006. The Company will monitor the results of these tests to modify future merchandising plans as necessary to achieve its goals.
KB Toys and Pittsfield Distribution Center Update
Although the KB Toys business emerged from bankruptcy in fiscal year 2005, the claims process associated with the bankruptcy remains open. As a result of uncertainties associated with the continuance of the bankruptcy claims process, the Company believes it is possible that it will continue to receive in fiscal year 2006 demands from landlords for guarantees related to the KB Lease Obligations. The Company is an unsecured creditor of the bankruptcy trust with respect to losses it has incurred in connection with KB Lease Obligations and is unable to estimate the timing or amount of any recovery it can expect to receive upon resolution of these claims. Accordingly, no recoveries related to the KB Toys bankruptcy have been recorded
by the Company. In addition, the typical KB Lease Obligation provides that the terms of the underlying lease may be extended, amended or modified without the consent of the guarantor. The Company has concluded that its reserve for the KB Lease Obligations is adequate at January 28, 2006. Based on the uncertainties related to the KB Lease Obligations, the Company will continue to evaluate the adequacy of these reserves as dictated by the facts and circumstances available to the Company at each future reporting period. In the event additional liability arises from future defaults on the KB Lease Obligations, any related charge would be to discontinued operations.
In fiscal year 2005, the Company initiated plans to dispose of the Pittsfield DC, which was acquired by the Company as a result of an indemnification of a mortgage guarantee satisfied by the Company in fiscal year 2004. The property is available for immediate sale in its present condition and is actively being marketed by a reputable broker. The Company has no intention of using this property in its current operations. As a result, at January 28, 2006, the Pittsfield DC has been classified as held-for-sale, as defined by SFAS No. 144, and accordingly, its carrying value at January 28, 2006 has been adjusted to its estimated fair value less applicable selling costs, resulting in a pretax non-cash impairment charge of $0.7 million and other related charges of $0.3 million included in loss from discontinued operations in fiscal year 2005.
As partial consideration for the sale of the KB Toys business, the Company received a 10-year note from Havens Corners Corporation (“HCC”), a subsidiary of KB Acquisition Corporation and a party to the bankruptcy proceedings, in the aggregate principal amount of $45.0 million (principal and interest together known as the “HCC Note”). Upon receipt of the HCC Note in fiscal year 2000, the Company evaluated its fair value and recorded it at an estimated fair value of $13.2 million. The note bears interest, on an in-kind basis, at the rate of 8.0% per annum; however, the Company discontinued the accrual of interest on the HCC Note in fiscal year 2003 as a result of the KB Toys bankruptcy. Under the KB Toys bankruptcy plan, the Company expects to receive $0.9 million as satisfaction of the HCC Note. In fiscal year 2005, the Company partially charged off the HCC Note in the amount of $6.4 million in order to reflect a remaining balance receivable of $0.9 million. This partial charge off was reported in selling and administrative expenses.
For a discussion of these matters and other matters related to the KB Toys business, see Note 2 to the consolidated financial statements in this Annual Report on Form 10-K.
Amendment to the 2004 Credit Agreement
On October 25, 2005, the Company and its lenders entered into an amendment to the 2004 Credit Agreement in order to eliminate the impact on the covenant calculations of the charges related to the store closing plan discussed in Note 2 to the consolidated financial statements.
Share Repurchase Program
On February 22, 2006, the Company announced that its Board of Directors authorized the repurchase of up to $150.0 million of the Company’s common shares. The Company expects the purchases to be made from time to time in the open market or in privately negotiated transactions with such purchases to be completed within one year of the announcement. Common shares acquired through the repurchase program will be available for general corporate purposes.
Results of Operations
The following table compares components of the consolidated statements of operations of the Company as a percentage of net sales:
The Company has historically experienced, and expects to continue to experience, seasonal fluctuations, with a larger percentage of its net sales and operating profit being realized in the fourth fiscal quarter. In addition, the Company’s quarterly results can be affected by the timing of new store openings and store closings, the amount of sales contributed by new and existing stores, the timing of television and circular advertising, and the timing of certain holidays. The Company purchases substantial amounts of inventory and incurs higher shipping costs and higher payroll costs in the third fiscal quarter in anticipation of the increased sales activity during the fourth fiscal quarter.
The following table sets forth the seasonality of net sales and operating profit by fiscal quarter:
Furniture Growth
During fiscal year 2005, the Company continued to add furniture departments ranging in size from 2,000 to 5,000 square feet to its closeout stores. The furniture department net sales have grown over the last ten years to a level representing 13.5% of the Company’s net sales in fiscal year 2005 compared to 11.7% in fiscal year 2004 and 11.1% in fiscal year 2003. The Company offered a furniture assortment within 1,320 of its 1,401 existing closeout stores at the end of fiscal year 2005.
Fiscal Year 2005 Compared To Fiscal Year
Net Sales
Net sales increased 6.8% to $4,429.9 million in fiscal year 2005 compared to $4,149.3 million in fiscal year 2004. This increase is due to new stores opened in fiscal years 2004 and 2005 and the comparable store sales increase of 1.8% for fiscal year 2005. Comparable store sales are calculated by the Company using all stores
that were open for at least two fiscal years as of the beginning of fiscal year 2005. This calculation may not be comparable to other retailers who calculate comparable stores sales based on other methods. Fiscal year 2005 comparable store sales were driven by a 4.6% increase in the value of the average basket partially offset by a 2.8% decline in customer transactions. Customer transactions, which declined 2.8%, continue to be challenging across the discount sector. From a merchandise perspective, Home, which includes furniture, was the best performing category. As part of the Company’s merchandising initiatives, clearance markdowns, primarily in the fourth quarter, benefited net sales and comparable store sales and were initiated to reduce inventory levels on slower moving items or classifications.
The following table summarizes comparable store sales, customer transactions, and the value of the average basket for fiscal year 2005 compared to fiscal year 2004:
The Company internally evaluates and externally communicates overall sales and merchandise performance based on the following key merchandising categories and believes these categories facilitate analysis of the Company’s financial performance. Net sales by product category, net sales by product category as a percentage of total net sales, and net sales change in dollars and percentage in fiscal year 2005 compared to fiscal year 2004 were as follows:
The Consumables category includes sales increases in plastics, paper, and food, partially offset by a decrease in health and beauty. The Home category includes strong performance in furniture and home decor. Seasonal and toys includes sales increases for lawn & garden and toys, partially offset by decreases in trim-a-tree and harvest. The Other category includes strong performances in electronics, home appliances, and tools.
Gross Margin
Gross margin dollars increased 2.6% to $1,731.7 million in fiscal year 2005 compared to $1,687.1 million in fiscal year 2004. Gross margin as a percentage of net sales was 39.1% in fiscal year 2005 compared to 40.7% in fiscal year 2004. This gross margin rate decline of 160 basis points was primarily due to clearance-related markdowns, higher inbound freight costs, and certain initial markup-related cost pressures such as higher resin-based material costs. Inbound freight costs are higher as a result of higher fuel costs and transportation capacity constraints. The Company continues to develop its merchandising strategy focused on increasing gross margin dollars through improved buying decisions, better pricing strategies, and a focus on improving inventory turnover.
Selling and Administrative Expenses
Selling and administrative expenses increased 5.1% to $1,596.1 million in fiscal year 2005 compared to $1,518.6 million in fiscal year 2004. Selling and administrative expenses as a percentage of net sales were 36.0% in fiscal year 2005 compared to 36.6% in fiscal year 2004.
Selling and administrative expenses increased over fiscal year 2004 primarily due to costs associated with higher levels of sales and increased carton volume. The $77.5 million increase was primarily attributable to
increased store payroll costs of $20.9 million, increased store occupancy-related costs, including rent and utilities, of $23.0 million, increased general office costs of $11.7 million, the partial charge-off of the HCC Note of $6.4 million, increased advertising costs of $6.0 million, and increased distribution and transportation costs of $5.1 million. The increase in general office is primarily resulting from an increase in wage and benefit-related costs.
Outbound distribution and transportation costs, which were included in selling and administrative expenses (see Note 1 to the consolidated financial statements) increased 2.3% to $223.8 million in fiscal year 2005 compared to $218.7 million in fiscal year 2004. Outbound distribution and transportation expenses as a percentage of net sales were 5.1% in fiscal year 2005 compared to 5.3% in fiscal year 2004. The 20 basis point decrease was primarily due to improved efficiency at the distribution centers, particularly the Durant DC. In addition, productivity has improved at the Columbus DC after two years of re-engineering efforts. Partially offsetting these cost savings were higher diesel fuel costs incurred on outbound freight and higher utility costs at the distribution centers.
Depreciation Expense
Depreciation expense for fiscal year 2005 was $108.7 million compared to $99.4 million for fiscal year 2004. The $9.3 million increase was principally related to new store growth.
Interest Expense
Interest expense decreased 74.6% to $6.3 million in fiscal year 2005 compared to $24.8 million in fiscal year 2004. The $18.5 million decrease in interest expense was due to the $8.9 million debt prepayment charge incurred in fiscal year 2004 in connection with the repayment of the $204.0 million in senior notes privately placed in 2001 (the “Senior Notes”) and the retirement of the $300.0 million secured revolving credit agreement entered into in 2001 (the “2001 Credit Agreement”), lower average borrowings in fiscal year 2005, and a lower effective interest rate in fiscal year 2005. The prepayment charge was incurred in order to replace the Senior Notes, which carried a weighted-average yield of 8.2%, and the 2001 Credit Agreement with the variable rate 2004 Credit Agreement. The weighted-average interest rate of the outstanding loans under the 2004 Credit Agreement at January 28, 2006, was 5.1%.
Income Taxes
The effective income tax rate of the continuing operations of the Company was 24.8% for fiscal year 2005 compared to 30.1% for fiscal year 2004. The rate was lower in fiscal year 2005 because of 1) proportionately larger jurisdictional losses in entities with higher marginal income tax rates; 2) the adjustment of loss contingencies to recognize the expiration of the statute of limitations; offset by 3) the write-down of deferred income tax assets as a result of state tax law changes (including Ohio tax reform enacted in the second quarter of fiscal year 2005).
The Company anticipates the fiscal year 2006 effective income tax rate to fall within a range of 36.0% to 40.0%.
Discontinued Operations
The Company recorded a pretax loss of $41.7 million from discontinued operations in fiscal year 2005 compared to a pretax loss of $13.0 million in fiscal year 2004. The Company’s results of discontinued operations in fiscal year 2005 include pretax losses in the amount of $41.1 million as the result of 130 stores reported in discontinued operations in fiscal year 2005 which include $43.6 million of exit-related pretax costs incurred primarily in the fourth quarter of fiscal year 2005, the reversal of pretax charges of $0.4 million associated with the KB Toys business and pretax charges of $1.0 million associated with the reclassification of the Pittsfield DC as held-for-sale and the related write-down of its carrying value to fair value less selling cost. The Company’s discontinued operations in fiscal year 2004 relate to pretax losses in the amount of $1.7 million as the result of the 130 stores reported in discontinued operations and pretax charges of $11.3 million associated with the KB Toys business.
Fiscal Year 2004 Compared To Fiscal Year
Net Sales
Net sales increased 5.2% to $4,149.3 million in fiscal year 2004 compared to $3,942.7 million in fiscal year 2003. The Company attributes this increase principally to new store growth as comparable store sales were flat for fiscal year 2004. Comparable store sales consisted of a 2.0% increase in the value of the average basket driven by strong gains in hardlines and home décor departments, as well as the addition of 224 new furniture departments. Average basket gains were offset by a 2.0% decrease in the number of customer transactions, which the Company believes was principally the result of the impact that macro economic pressure of higher prices for gas, home heating oil, and other commodities had on the Company’s core customer.
The following table summarizes comparable store sales, customer transactions, and the value of the average basket for fiscal year 2004 compared to fiscal year 2003:
Net sales by product category, net sales by product category as a percentage of total net sales, and the net sales change in dollars and percentage in fiscal year 2004 compared to fiscal year 2003 were as follows:
The Consumables category includes sales increases in food, health and beauty, paper, and pet. The Home category includes strong performance in furniture, domestics, and stationery. Seasonal and toys includes sales weakness in holiday-oriented departments partially offset by growth in toys and lawn & garden. The Other category includes sales increases in electronics, home appliances, and jewelry partially offset by a decrease in apparel.
Gross Margin
Gross margin dollars increased 2.2% to $1,687.1 million in fiscal year 2004 compared to $1,650.5 million in fiscal year 2003. Gross margin as a percentage of net sales was 40.7% in fiscal year 2004 compared to 41.9% in fiscal year 2003. This gross margin rate decline of 120 basis points was primarily due to lower sales in higher margin merchandise, such as holiday-oriented departments in Seasonal and toys, an increased markdown rate due to a flat comparable store sales and the need for additional markdowns on seasonally-sensitive categories, giftable items with low sell-through rates, and selected discontinued styles in furniture.
Selling and Administrative Expenses
Selling and administrative expenses increased 5.5% to $1,518.6 million in fiscal year 2004 compared to $1,439.4 million in fiscal year 2003. Selling and administrative expenses as a percentage of net sales were 36.6% in fiscal year 2004 compared to 36.5% in fiscal year 2003.
Selling and administrative expenses increased over fiscal year 2003 primarily due to an increase in the number of stores, costs associated with higher levels of sales, and increased carton volume. The $79.2 million increase was primarily attributable to increased store payroll costs of $23.5 million, increased distribution and
transportation costs of $19.9 million, and increased store occupancy-related costs, including rent and utilities, of $26.2 million.
Outbound distribution and transportation costs, which were included in selling and administrative expenses increased 10.0% to $218.7 million in fiscal year 2004 compared to $198.8 million in fiscal year 2003. Outbound distribution and transportation expenses as a percentage of net sales were 5.3% in fiscal year 2004 compared to 5.0% in fiscal year 2003. The 30 basis point increase was primarily due to the de-leveraging impact of the Durant DC in its first year, rising fuel rates, and increased one-way carrier rates as a result of the revised driver hours of service regulations.
Depreciation Expense
Depreciation expense for fiscal year 2004 was $99.4 million compared to $89.0 million for fiscal year 2003. The $10.4 million increase was principally related to new store growth, store remodels, and the opening of the Durant DC during the first quarter of 2004.
Interest Expense
Interest expense, including the amortization of obligation issuance costs, increased 51.2% to $24.8 million in fiscal year 2004 compared to $16.4 million in fiscal year 2003. The $8.4 million increase in interest expense was due to the $8.9 million debt prepayment charge incurred in connection with the early repayment of the Senior Notes and the 2001 Credit Agreement. This prepayment charge was incurred in order to replace the Senior Notes, which carried a weighted-average yield of 8.2%, and the 2001 Credit Agreement with the variable rate 2004 Credit Agreement. The weighted-average interest rate on the outstanding loans under the 2004 Credit Agreement at January 29, 2005 was 3.2%.
Income Taxes
The effective income tax rate of the continuing operations of the Company was 30.1% for fiscal year 2004 compared to 19.5% for fiscal year 2003. The rate was substantially lower in fiscal year 2003 because of the reversal in fiscal year 2003 of a $15.0 million deferred tax asset valuation allowance related to the partial charge-off of the HCC Note.
In November 2003, the Internal Revenue Service issued Revenue Ruling 2003-112 which clarified the definition of eligible employees for purposes of the Welfare to Work and Work Opportunity tax credits. The Company has filed protective refund claims for its fiscal years 1994 through 2001 based on this ruling. Claims for fiscal years 2002 and 2003 will be filed at a later date but prior to the expiration of the statute of limitations. Because of the contingent nature of this claim, no tax benefit has been recorded for this item.
Discontinued Operations
Discontinued operations resulted in a pretax loss of $13.0 million in fiscal year 2004 compared to a pretax loss of $17.8 million in fiscal year 2003. The Company’s discontinued operations in fiscal year 2004 include pretax losses in the amount of $1.7 million for the results of 130 stores reported in discontinued operations and pretax charges of $11.3 million associated with the KB Toys business. The Company’s discontinued operations in fiscal year 2003 include pretax income in the amount of $6.6 million for the results of the 130 stores reported in discontinued operations and pretax charges of $24.4 million associated with the KB Toys business.
Capital Resources and Liquidity
Capital Resources
On October 29, 2004, the Company entered into the 2004 Credit Agreement which is scheduled to mature on October 28, 2009. The proceeds of the 2004 Credit Agreement are available for general corporate purposes, working capital, and to repay certain indebtedness of the Company, including all amounts that were outstanding under the 2001 Credit Agreement and the Senior Notes. The pricing and fees related to the
2004 Credit Agreement fluctuate based on the Company’s debt rating. Loans made under the 2004 Credit Agreement may be prepaid by the Company without penalty. The 2004 Credit Agreement contains financial and other covenants, including, but not limited to, limitations on indebtedness, liens, and investments, as well as the maintenance of two financial ratios - a leverage ratio and a fixed charge coverage ratio. A violation of these covenants could result in a default under the 2004 Credit Agreement, which would permit the lenders to restrict the Company’s ability to further access the 2004 Credit Agreement for loans and letters of credit, and require the immediate repayment of any outstanding loans under the 2004 Credit Agreement. On October 25, 2005, the Company and the lenders entered into an amendment to the 2004 Credit Agreement in order to eliminate the impact on the covenant calculations of the charges related to the store closings discussed in Note 2 to the consolidated financial statements. The Company was in compliance with its amended financial covenants under the 2004 Credit Agreement at January 28, 2006.
The 2004 Credit Agreement permits, at the Company’s option, borrowings at various interest rate options based on the prime rate or London InterBank Offering Rate plus applicable margin. The 2004 Credit Agreement also permits, as applicable, borrowings at various interest rate options mutually agreed upon by the Company and the lenders. The weighted average interest rate of the outstanding loans at January 28, 2006, was 5.1%. The Company typically repays and/or borrows on a daily basis in accordance with the terms of the 2004 Credit Agreement. The daily activity is a net result of the Company’s liquidity position, which is generally affected by: 1) cash inflows such as store cash and other miscellaneous deposits; and 2) cash outflows such as check clearings, wire and other electronic transactions, and other miscellaneous disbursements.
In addition to revolving credit loans, the 2004 Credit Agreement includes a $30.0 million swing loan sub-limit, a $50.0 million bid loan sub-limit, and a $150.0 million letter of credit sub-limit. At January 28, 2006, the total borrowings outstanding under the 2004 Credit Agreement were $5.5 million, all in swing loans. The borrowings available under the 2004 Credit Agreement, after taking into account the reduction of availability resulting from outstanding letters of credit totaling $65.0 million, were $429.5 million at January 28, 2006.
The Company utilizes its credit facility primarily to manage ongoing and seasonal working capital. Given the seasonality of the Company’s business, the amount of borrowings under the 2004 Credit Agreement may fluctuate materially depending on various factors, including the time of year and the Company’s need to acquire merchandise inventory. The Company anticipates borrowings and letters of credit through the end of May 2006 to range between $50.0 million and $75.0 million, excluding any impact resulting from the execution of the $150.0 million share repurchase authorized by the Board of Directors in February 2006.
Liquidity
The primary source of liquidity for the Company is cash flows from operations and, as necessary, borrowings under the 2004 Credit Agreement. At January 28, 2006, working capital was $557.2 million.
Cash provided by operating activities was $213.0 million during fiscal year 2005 and resulted primarily from net loss of $(10.1) million, depreciation and amortization expense of $114.6 million and a decrease in net assets of $102.1 million over fiscal year 2004. The $102.1 million decrease in net assets was primarily a result of lower inventory of $58.9 million, higher accounts payable of $11.7 million, higher accrued operating expenses of $22.0 million, and higher other liabilities of $25.0 million. The reduction in inventory is primarily a result of fewer stores open at the end of fiscal year 2005 compared to prior year and the impact of the markdown clearance sales. The higher accrued operating expenses are primarily due to the increased current portion of lease obligation resulting from the closure of certain stores before their full lease term expired. The increase in other liabilities is primarily due to the non-current portion of the lease obligation associated with the closed stores and an increase in the non-current portion of insurance reserves for workers’ compensation and general liability.
Cash provided by operating activities was $71.3 million during fiscal year 2004 and resulted primarily from net income of $23.8 million and depreciation and amortization expense of $101.9 million partially offset by an increase in net assets of $70.0 million. The impact of closing the underperforming stores and the series of markdowns taken on slower moving inventory had the effect of significantly strengthening the Company’s balance sheet in fiscal year 2005 compared to fiscal year 2004.
Cash used in investing activities of $66.7 million in fiscal year 2005 and $127.8 million in fiscal year 2004 was primarily related to capital expenditures of $68.5 million and $135.3 million in each of the respective fiscal years. Capital expenditures in fiscal year 2005 were primarily due to opening 73 new stores. Capital expenditures in fiscal year 2004 were primarily driven by the re-engineering of the Columbus DC, remodeling 66 existing stores, and opening 103 new stores. Capital expenditure requirements in fiscal year 2006 are anticipated to range between $50 million and $55 million, focused on maintaining existing property and equipment along with a limited number of new store openings and information technology enhancements.
Cash used in financing activities was $147.1 million in fiscal year 2005 and related primarily to the net repayment of borrowings outstanding under the 2004 Credit Agreement. Cash used in financing activities was $115.0 million in fiscal year 2004 including net repayments of debt of $44.8 million and acquisition of treasury stock costing $75.0 million. The Company announced a share repurchase program of $150.0 million on February 22, 2006, which it expects to complete within one year of the announcement. The amount of the repurchase program was based in part on the level of cash provided by operations in fiscal year 2005.
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. 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 Company’s capital resources or liquidity.
Contractual Obligations
The following table summarizes payments due under the Company’s contractual obligations at January 28, 2006:
(1)
The disclosure of contractual obligations in this table is based on assumptions and estimates that the Company believes to be reasonable as of the date of this report. Those assumptions and estimates may prove to be inaccurate; consequently, the amounts provided in the table may differ materially from those amounts that the Company ultimately incurs. Variables that may cause the stated amounts to vary from those actually incurred include, but are not limited to: the termination of a contractual obligation prior to its stated or anticipated expiration; fees or damages incurred as a result of the premature termination or breach of a contractual obligation; the acquisition of more or less services or goods under a contractual obligation than are anticipated by the Company as of the date of this report; fluctuations in third party fees, governmental charges or market rates that the Company is obligated to pay under contracts it has with certain vendors; and the exercise of renewal options under or the automatic renewal of contracts that provide for the same.
(2)
Long-term debt obligations consist of the total borrowings outstanding under the 2004 Credit Agreement. Borrowings under the 2004 Credit Agreement are permitted under various interest rate options based on the prime rate or London InterBank Offering Rate plus applicable margin, as well as borrowings at various interest rate options mutually agreed upon by the Company and the lenders. The Company also had outstanding letters of credit totaling $65.0 million at January 28, 2006. Approximately $57.2 million of the outstanding letters of credit represent stand-by letters of credit and the Company does not expect to meet conditions requiring significant cash payments on these letters of credit; accordingly, they have been excluded from the preceding table. The remaining outstanding letters of credit represent commercial letters of credit whereby the related obligation is included in Purchase Obligations. The table assumes that the 2004 Credit Agreement is paid at maturity. For a further discussion, see Note 4 to the consolidated financial statements.
(3)
Operating lease obligations include, among other items, leases for the Company’s retail stores, warehouse space, offices, and certain office equipment. The future minimum commitments for store, warehouse space, and office operating leases are $824.3 million. For a discussion of leases, see Note 8 to the consolidated financial statements. Many of the store lease obligations require the Company to pay for CAM, real estate taxes, and property insurance. The Company estimates that future obligations for CAM, real estate taxes, and property insurance are $280.6 million at January 28, 2006. The Company has made certain assumptions and estimates in order to account for its contractual obligations relative to CAM, real estate taxes, and property insurance. Those assumptions and estimates include, but are not limited to: extrapolation of historical data to estimate the Company’s future obligations; calculation of the Company’s obligations based on per square foot averages where no historical data is available for a particular leasehold; and assumptions related to certain increases over historical data where the Company’s obligation is a prorated share of all lessees’ obligations within a particular property. The remaining $23.7 million relates primarily to the operating leases of certain office equipment with remaining terms of less than one year or a month-to-month basis.
(4)
For purposes of the operating lease and purchase obligation disclosures, the Company has assumed that it will make all payments scheduled or reasonably estimated to be made under those obligations that have a determinable expiration date, and the Company disregarded the possibility that such obligations may be prematurely terminated or extended, whether automatically by the terms of the obligation or by agreement of the Company and its vendor, due to the speculative nature of premature termination or extension. Where an operating lease or purchase obligation is subject to a month-to-month term or another automatically renewing term, the Company disclosed its minimum commitment under such obligation, such as one month in the case of a month-to-month obligation and the then-current term in the case of another automatically renewing term, due to the uncertainty of the length of the eventual term.
(5)
Purchase obligations include outstanding purchase orders for retail merchandise issued in the ordinary course of the Company’s business that are valued at $389.5 million, the entirety of which represents obligations due within one year of January 28, 2006. Purchase obligations also include a commitment for future inventory purchases totaling $263.3 million at January 28, 2006. While the Company is not required to meet any periodic minimum purchase requirements under this commitment, for purposes of this tabular disclosure, the Company has included the value of the purchases that it anticipates making during each
of the reported periods, as purchases will count toward its fulfillment of the aggregate obligation. The remaining $304.4 million is primarily related to distribution and transportation commitments.
(6)
The obligations disclosed in this table are exclusive of the contingent liabilities, guarantees, and indemnities related to KB Toys. For further discussion, see Note 2 to the consolidated financial statements.
Off-Balance Sheet Arrangements
As of January 28, 2006, the Company has approximately 167 KB Lease Obligations. The relevant guarantees were issued prior to January 1, 2003, and are not subject to the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 45. The typical KB Lease Obligation provides that the terms of the underlying lease may be extended, amended, or modified without the consent of the guarantor. As a result, the Company is unable to estimate any potential range of loss in the event of non-performance or non-performance by KB Toys, as applicable. See Note 2 to the consolidated financial statements in this Annual Report on Form 10-K for further discussion of KB Toys matters.
Critical Accounting Policies and Estimates
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America (“GAAP”), requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. On an on-going basis, management evaluates its estimates and judgments, including those related to inventories, long-lived assets, insurance reserves, income taxes, contingencies, leases, and pension. Management bases its estimates and judgments on historical experience, current trends, and various other factors that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates. Management has discussed the development and selection of its critical accounting policies and estimates with the Audit Committee of the Board of Directors and believes the following assumptions and estimates are the most critical to reporting its results of operations and financial position. See Note 1 to the consolidated financial statements for additional information about the Company’s accounting policies.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market using the average cost retail inventory method. Market is determined based on the estimated net realizable value, which generally is the merchandise selling price. Under the average cost retail inventory method, inventory is segregated into departments of merchandise having similar characteristics, at its current retail selling value. Inventory retail selling values are converted to a cost basis by applying specific average cost factors for each merchandise department. Cost factors represent the average cost-to-retail ratio for each merchandise department based on beginning inventory and the fiscal year purchase activity. The average cost retail inventory method requires management to make judgments and contains estimates, such as the amount and timing of markdowns to clear unproductive or slow-moving inventory, which may impact the ending inventory valuation and gross margin. These assumptions are based on historical experience and current information.
Permanent markdowns are recorded as a gross margin reduction in the period of management’s decision to initiate price reductions with the intent not to return the price to regular retail. Promotional markdowns are recorded as a gross margin reduction in the period the merchandise is sold. Factors considered in the determination of markdowns include current and anticipated demand, customer preferences, age of the merchandise, and seasonal trends.
Shrinkage is recorded as a reduction to inventories and gross margin and is estimated as a percentage of sales for the period from the last physical inventory date to the end of the reporting period. Such estimates are based on the Company’s actual experience and the Company’s most recent physical inventory results. While it is not possible to quantify the impact from each cause of shrinkage, the Company has loss prevention programs and policies that it believes minimize shrinkage.
Long-Lived Assets
Depreciation and amortization expense of property and equipment are recorded on a straight-line basis using estimated service lives. Leasehold improvements are amortized on a straight-line basis using the shorter of their estimated service lives or the lease term. When a decision has been made to dispose of property and equipment prior to the end of the previously estimated service life, depreciation estimates are revised to reflect the use of the asset over the shortened estimated service life. The cost of assets sold or retired and the related accumulated depreciation are removed from the accounts with any resulting gain or loss included in net income. Maintenance and repairs are charged to expense as incurred. Major repairs that extend service lives are capitalized.
The estimated service lives by major asset category are as follows:
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the undiscounted future cash flows from the long-lived asset are less than the carrying value, the Company recognizes a loss equal to the difference between the carrying value and the fair value of the asset. The Company’s assumptions related to valuation of long-lived assets include, but are not limited to, management’s plans for future operations, recent operating results, and projected cash flows. The Company estimates the fair value of its long-lived assets using readily available market information for similar assets.
When material, the Company classifies the results of operations of closed stores as discontinued operations when the operations and cash flows of the stores have been (or will be) eliminated from ongoing operations and the Company no longer has any significant continuing involvement in the operations associated with the stores after closure. The Company generally meets the second criteria on all closed stores as, upon closure, operations cease and the Company has no continuing involvement. To determine if cash flows have been (or will be) eliminated from ongoing operations, the Company evaluates a number of qualitative and quantitative factors, including, but not limited to, proximity to remaining open stores and estimates of sales migration from the closed store to any stores remaining open. The estimated sales migration is based on the Company’s historical estimates of sales migration upon opening a new store in a similar market. For purposes of reporting the operations of stores meeting the criteria for discontinued operations, the Company reports net sales, gross margin, and related operating costs that are directly related to and specifically identifiable with respect to those stores’ operations as discontinued operations. Certain corporate-level charges, such as general office cost, field operations, national advertising, fixed distribution costs, and interest cost, are not allocated to discontinued operations because the Company believes that these costs are not specific to the stores’ operations.
Insurance Reserves
The Company is self-insured for certain losses relating to property, general liability, workers’ compensation, and employee medical and dental benefit claims, a portion of which is paid by employees. The Company has purchased stop-loss coverage to limit significant exposure in these areas. Accrued insurance liabilities and related expenses are based on actual claims filed and estimates of claims incurred but not reported. The estimated accruals are determined by applying actuarially-based calculations taking into account known trends and projections of future results. General liability and workers’ compensation liabilities are recorded at the Company’s estimate of their net present value while other liabilities for insurance reserves are not discounted. Actual future claims experience can impact these calculations and, to the extent that subsequent claim costs vary from estimates, future earnings could be impacted materially.
Income Taxes
Significant judgment is required in determining the provision for income taxes and related accruals and deferred tax assets and liabilities. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, the Company’s tax returns are subject to audit by various tax authorities. Although the Company believes that its estimates are reasonable, actual results could differ from these estimates resulting in a final tax outcome that may be materially different from that which is reflected in the Company’s consolidated financial statements.
Contingencies
The Company is subject to various claims and contingencies including legal actions, lease termination obligations on closed stores, lease indemnification obligations on KB Toys stores, and other claims arising out of the normal course of business. In connection with such claims and contingencies, the Company estimates the likelihood and amounts of any potential obligation using management’s judgment. Management uses subject matter experts including various internal and external experts to assist in the estimating process; however, the ultimate outcome of the various claims and contingencies could be materially different from management’s estimates, and adjustments to income could be required. With respect to the lease termination obligations and lease indemnification obligations, the Company considers the remaining minimum lease payments, estimated sublease rentals that could be reasonably obtained, and other potentially mitigating factors. In addition, as market conditions or other factors change, the estimate of the obligations could be materially different. The Company continually evaluates the adequacy of its recorded obligations for claims and contingences based on current information, including settlement amounts of individual lease obligations compared to recorded contractual obligations. The Company accrues a liability if the likelihood of an adverse outcome is probable and the amount is estimable. If the likelihood of an adverse outcome is only reasonably possible (as opposed to probable), or if it is probable but an estimate is not determinable, disclosure of a material claim or contingency is made in the notes to the consolidated financial statements. In addition,
because it is not permissible to establish a litigation reserve until the loss is both probable and estimable, in some cases there may be insufficient time to establish a reserve prior to the actual incurrence of the loss (upon verdict and judgment at trial, for example, or in the case of a quickly negotiated settlement).
Lease Accounting
Rent expense is recognized over the term of the lease. The Company recognizes minimum rent starting when possession of the property is taken from the landlord, which normally includes a construction period prior to store opening. When a lease contains a predetermined fixed escalation of the minimum rent, the Company recognizes the related rent expense on a straight-line basis and records the difference between the recognized rental expense and the amounts payable under the lease as deferred incentive rent. The Company also receives tenant allowances, which are recorded in deferred rent and are amortized as a reduction to rent expense over the term of the lease.
Certain leases provide for contingent rents that are not measurable at inception. Contingent rent includes rent based on a percentage of sales that are in excess of a predetermined level. Contingent rent is excluded from minimum rent and is included in the determination of total rent expense when it is probable that the expense has been incurred and the amount is reasonably estimable.
Pension
Pension assumptions are evaluated each year. Outside actuaries are used to provide assistance in calculating the estimated obligations for pension. The Company reviews external data and historical trends to help determine the discount rate and expected long-term rate of return. The Company’s objective in selecting a discount rate is to identify the best estimate of the rate at which the benefit obligations would be settled on the measurement date. In making this estimate, the Company reviews rates of return on high-quality, fixed-income investments currently available and expected to be available during the period to maturity of the benefits. This process includes a review of the bonds available on the measurement date with a quality rating of Aa or better. To develop the expected long-term rate of return on assets, the Company considered the historical returns and the future expectations for returns for each asset class, as well as the current or anticipated future allocation of the pension portfolio. The discount rate used to determine the net periodic pension cost for fiscal year 2005 was 5.7%. A 0.5% decrease in the discount rate would increase net periodic pension cost by $0.2 million. The long-term rate of return on assets used to determine net periodic pension cost in fiscal year 2005 was 8.5%. A 1.0% decrease in the expected long-term rate of return on plan assets would increase the net periodic pension cost by $0.5 million.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which requires an entity to measure the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award using an option-pricing model. The cost of the awards, including the related tax effects, will be recognized in the consolidated statements of operations. This statement eliminates the alternative to use the intrinsic value method for valuing share-based compensation, which typically resulted in recognition of no compensation cost. On April 15, 2005, the SEC issued Release No. 33-8568, which amended the effective date for SFAS No. 123(R), to the first interim or annual period of the first fiscal year beginning after June 15, 2005, with early adoption permitted. The Company adopted SFAS No. 123(R) as of January 29, 2006, using the modified prospective method of adoption, in which compensation cost is recognized for all awards granted subsequent to the date of adoption of this statement as well as for the unvested portion of awards outstanding as of the effective date.
Because the Company previously accounted for options issued under the Company’s incentive plans under the intrinsic value method permitted under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, the adoption of SFAS No. 123(R) is expected to have a significant impact on the Company’s results of operations, although it will have no impact on the Company’s overall financial position. The impact of SFAS No. 123(R) cannot be accurately estimated at this time, as it will depend on the market value and amount of share-based awards granted in future periods. However, had the Company adopted
SFAS No. 123(R) in a prior period, the impact would approximate the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share. SFAS No. 123(R) also requires that tax benefits received in excess of compensation cost be reclassified from cash provided by operating activities to cash used in financing activities in the consolidated statements of cash flows. This change in classification will reduce net operating cash flows and increase net financing cash flows in the periods after adoption for any excess tax benefits realized. While the amount of this change cannot be estimated at this time, the amount of operating cash flows recognized in prior periods for such excess tax deductions was not significant in fiscal years 2005, 2004, and 2003, respectively.
See Note 10 to the consolidated financial statements for a discussion of the acceleration of vesting on certain stock options in the fourth quarter of fiscal year 2005.
In March 2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”), Accounting for Conditional Asset Retirement Obligations”, which is effective no later than the end of fiscal years ending after December 15, 2005. FIN 47 clarifies that the term conditional asset retirement obligation as used in SFAS No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. Thus, the timing and/or method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred, generally upon acquisition, constructions, or development and/or through the normal operation of the asset. Uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. SFAS No. 143 acknowledges that in some cases, sufficient information may not be available to reasonably estimate the fair value of an asset retirement obligation. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The Company adopted the provisions of FIN 47 during the fourth quarter of fiscal year 2005, and this adoption did not have a material impact on the Company’s consolidated financial statements in this Annual Report on Form 10-K.
Commitments
For a discussion of commitments, refer to Note 2, Note 4, Note 5, and Note 8 to the consolidated financial statements.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk from exposure to changes in interest rates associated with the 2004 Credit Agreement. The Company had no fixed rate long-term debt at January 28, 2006. The Company does not expect changes in interest rates in fiscal year 2006 to have a material adverse effect on the Company’s financial condition, results of operations, or liquidity; however, there can be no assurances that interest rates will not materially change. The Company does not believe that a hypothetical adverse change of 10% in interest rates would have a material adverse effect on the Company’s financial condition, results of operations, or liquidity.
The Company purchases approximately 30.6% of its product directly from overseas suppliers, all of which are purchased in U.S. dollars.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report Of Independent Registered Public Accounting Firm
To the Board of Directors of Big Lots, Inc.
Columbus, Ohio
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting included in Item 9A, that Big Lots, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of January 28, 2006, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of January 28, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 28, 2006, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended January 28, 2006, of the Company and our report dated April 13, 2006, expressed an unqualified opinion on those financial statements and financial statement schedule.
DELOITTE & TOUCHE LLP
Dayton, Ohio
April 13, 2006
Report of Independent Registered Public Accounting Firm
To the Board of Directors of Big Lots, Inc.
Columbus, Ohio
We have audited the accompanying consolidated balance sheets of Big Lots, Inc. and subsidiaries (the “Company”) as of January 28, 2006 and January 29, 2005, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended January 28, 2006. Our audits also included the financial statement schedule listed in the Index at Item 15(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 the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 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 financial position of Big Lots, Inc. and subsidiaries at January 28, 2006 and January 29, 2005, and the results of their operations and their cash flows for each of the three years in the period ended January 28, 2006, in conformity with accounting principles generally accepted in the United States of America. 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.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of January 28, 2006, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated April 13, 2006, expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
DELOITTE & TOUCHE LLP
Dayton, Ohio
April 13, 2006
BIG LOTS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share amounts)
The accompanying Notes are an integral part of these consolidated financial statements.
BIG LOTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except par value)
The accompanying Notes are an integral part of these consolidated financial statements.
BIG LOTS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
(In thousands)
The accompanying Notes are an integral part of these consolidated financial statements.
BIG LOTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
The accompanying Notes are an integral part of these consolidated financial statements.
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Description of Business
All references herein to the “Company” are to Big Lots, Inc. and its subsidiaries. The Company is the nation’s largest broadline closeout retailer. At January 28, 2006, the Company operated a total of 1,401 stores in 47 states. The Company’s goal is to build upon its leadership position in broadline closeout retailing by providing its customers with great savings on brand name closeouts and other value-priced merchandise through a unique shopping experience. The Company’s web site is located at www.biglots.com. The contents of the Company’s web site are not part of this report.
Basis of Presentation
The consolidated financial statements have been prepared in accordance with GAAP, and include all the accounts of the Company. All significant intercompany accounts and transactions have been eliminated.
Fiscal Year
The Company follows the concept of a 52-53 week fiscal year, which ends on the Saturday nearest to January 31. Fiscal years 2005, 2004, and 2003 were comprised of 52 weeks. Fiscal year 2006 will be 53 weeks.
Segment Reporting
The Company manages its business based on one segment, broadline closeout retailing. At January 28, 2006 and January 29, 2005, all of the Company’s operations were located within the United States of America.
Management Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect reported amounts of assets and liabilities, disclosure of significant contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could materially differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents primarily consist of amounts on deposit with financial institutions, outstanding checks, credit and debit card receivables, and highly liquid investments which are unrestricted to withdrawal or use and which have an original maturity of three months or less. Amounts due from banks for credit and debit card transactions are typically settled in less than seven days. Amounts due from banks for these transactions totaled $15.5 million and $12.6 million at January 28, 2006 and January 29, 2005, respectively. Cash equivalents are stated at cost, which approximates market value.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market using the average cost retail inventory method. Market is determined based on the estimated net realizable value, which generally is the merchandise selling price. Under the average cost retail inventory method, inventory is segregated into departments of merchandise having similar characteristics, and is stated at its current retail selling value. Inventory retail values are converted to a cost basis by applying specific average cost factors for each merchandise department. Cost factors represent the average cost-to-retail ratio for each merchandise department based on beginning inventory and the fiscal year purchase activity.
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1 - Summary of Significant Accounting Policies (Continued)
Payments Received from Vendors
Payments received from vendors relate primarily to rebates and reimbursement for markdowns and are recognized in the Company’s consolidated statements of operations as a reduction to cost of sales when the related inventory is sold.
Store Supplies
When opening a new store, the initial shipment of supplies (including primarily signage, security-related items, bags, and miscellaneous store supplies) is capitalized at the store opening date. Subsequent replenishments of store supplies are expensed. Capitalized store supplies are adjusted as appropriate for changes in estimated quantities or costs.
Intangible Assets
Trademarks, service marks, and other intangible assets are stated at cost and are amortized on a straight-line basis over a period of 15 years. Where there is an indication of impairment, the Company evaluates the fair value and future benefits of the related intangible asset and the anticipated undiscounted future net cash flows from the related intangible asset is calculated and compared to the carrying value. The Company’s assumptions related to estimates of future cash flows are based on historical results of cash flows adjusted for management projections for future periods.
Property and Equipment - Net
Property and equipment are stated at cost. Depreciation and amortization expense are recorded using the straight-line method over the estimated service lives of the assets. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated service lives or the lease term. The cost of assets sold or retired and the related accumulated depreciation are removed from the accounts with any resulting gain or loss included in net income. Maintenance and repairs are charged to expense as incurred. Major renewals that extend service lives are capitalized. The Company capitalizes certain computer software costs after the application development stage has been established.
The estimated service lives by major asset category are as follows:
Capitalized interest was an insignificant amount in fiscal year 2005, $0.6 million in fiscal year 2004, and $3.7 million in fiscal year 2003.
Impairment
The Company has long-lived assets that consist primarily of property and equipment. The Company estimates service lives on buildings and equipment using assumptions based on historical data and industry trends. When a decision has been made to dispose of property and equipment prior to the end of the previously estimated service life, depreciation estimates are revised to reflect the use of the asset over the shortened estimated service life. The Company reviews historical operating results at the store level in order to determine if impairment indicators are present. Impairment is recorded if impairment indicators are present
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1 - Summary of Significant Accounting Policies (Continued)
and if the carrying value of the long-lived asset exceeds its anticipated undiscounted future net cash flows. The Company’s assumptions related to estimates of future cash flows are based on historical results of cash flows adjusted for management projections for future periods. The Company estimates the fair value of its long-lived assets using readily available market information for similar assets.
Closed Store Accounting
The Company recognizes an obligation for the fair value of lease termination costs when the Company ceases using the leased property in its operations. In measuring fair value, the Company considers the remaining minimum lease payments, estimated sublease rentals that could be reasonably obtained, and other potentially mitigating factors. The Company discounts the estimated obligation using the applicable credit adjusted interest rate, resulting in accretion expense in periods subsequent to the period of initial measurement. The Company continues to monitor the obligation for lease liability in subsequent periods and revises any estimated liabilities, if necessary. Severance and benefits associated with terminating employees from employment are recognized ratably from the communication date through the estimated future service period, unless the estimated future service period is less than 60 days, in which case the Company recognizes the impact at the communication date. Generally all other store closing costs are recognized when incurred.
When material, the Company classifies the results of operations of closed stores as discontinued operations when the operations and cash flows of the stores have been (or will be) eliminated from ongoing operations and the Company no longer has any significant continuing involvement in the operations associated with the stores after closure. The Company generally meets the second criteria on all closed stores, as upon closure, operations cease and the Company has no continuing involvement. To determine if cash flows have been (or will be) eliminated from ongoing operations, the Company evaluates a number of qualitative and quantitative factors, including, but not limited to, proximity to remaining open stores and estimated sales migration from the closed store to any stores remaining open. The estimated sales migration is based on the Company’s historical estimates of sales migration upon opening a new store in a similar market. For purposes of reporting the operations of stores meeting the criteria for discontinued operations, the Company reported net sales, gross margin, and related operating costs that are directly attributable to and specifically identifiable with those stores operations as discontinued operations. Certain corporate level charges, such as general office cost, field operations, national advertising, fixed distribution costs, and interest cost are not allocated to discontinued operations because these costs are not specific to the store’s operations.
Stock-Based Compensation
The Company measures compensation cost for stock options issued to employees and directors using the intrinsic value-based method of accounting in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees. The Company has adopted the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, and, as permitted by these standards, continues to apply the recognition and measurement principles of APB No. 25 to its stock options and other stock-based employee compensation awards.
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1 - Summary of Significant Accounting Policies (Continued)
The following table presents net income (loss) and earnings per share if the fair value method had been applied to all outstanding and unvested awards in each period:
The increase in pro forma stock-based employee compensation expense in fiscal year 2005 is due to acceleration of vesting of certain stock options (See Note 10 to the consolidated financial statements).
Income Taxes
The Company has generated deferred tax assets and liabilities due to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company assesses the adequacy and need for a valuation allowance for deferred tax assets. The Company also considers SFAS No. 109 tax planning strategies in determining the amount of valuation allowance required. The Company has established a valuation allowance to reduce its deferred tax assets to the balance that is more likely than not to be realized.
The effective income tax rate in any period may be materially impacted by the overall level of income (loss) before income taxes, the jurisdictional mix and magnitude of income (loss), changes in the income tax laws (which may be retroactive to the beginning of the fiscal year), changes in the expected outcome or settlement of an income tax contingency, changes in the deferred tax valuation allowance, and adjustments of a deferred tax asset or liability for enacted changes in tax laws or rates.
The Company’s income tax accounts reflect estimates of the outcome or settlement of various asserted and unasserted income tax contingencies (and interest thereon) including tax audits and administrative appeals. At any point in time, several tax years may be in various stages of audit or appeal or could be subject to audit by various taxing jurisdictions. This requires a periodic identification and evaluation of significant doubtful or controversial issues. The results of the audits, appeals, and expiration of the statute of limitations are reflected in the income tax accounts accordingly.
Pension
Pension assumptions are evaluated each year. Outside actuaries are used to provide assistance in calculating the estimated obligations for pension. The Company reviews external data and historical trends to help determine the discount rate and expected long-term rate of return. The Company’s objective in selecting a discount rate is to identify the best estimate of the rate at which the benefit obligations would be settled on the measurement date. In making this estimate, the Company reviews rates of return on high-quality, fixed-income investments currently available and expected to be available during the period to maturity of
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1 - Summary of Significant Accounting Policies (Continued)
the benefits. This process includes a review of the bonds available on the measurement date with a quality rating of Aa or better. To develop the expected long-term rate of return on assets, the Company considered the historical returns and the future expectations for returns for each asset class, as well as the current or anticipated future allocation of the pension portfolio.
Insurance Reserves
The Company is self-insured for certain losses relating to property, general liability, workers’ compensation, and employee medical and dental benefit claims, a portion of which is paid by employees. The Company has purchased stop-loss coverage to limit significant exposure in these areas. Accrued insurance liabilities and related expenses are based on actual claims filed and estimates of claims incurred but not reported. The estimated accruals are determined by applying actuarially-based calculations. General liability and workers’ compensation liabilities are recorded at the Company’s estimate of their net present value while other liabilities for insurance reserves are not discounted.
Fair Value of Financial Instruments
The carrying value of cash equivalents, accounts receivable, accounts payable, and accrued expenses approximates fair value because of the relative short maturity of these items. The carrying value of the Company’s long-term obligations at January 28, 2006 and January 29, 2005, approximates fair value because the interest rates are variable and approximate current market rates.
Commitments and Contingencies
The Company is subject to various claims and contingencies including legal actions and other claims arising out of the normal course of business. In connection with such claims and contingencies, the Company estimates the likelihood and amounts of any potential obligation using management’s judgment. Management uses subject matter experts including various internal and external experts to assist in the estimating process. The Company accrues, if material, a liability if the likelihood of an adverse outcome is probable and the amount is estimable. If the likelihood of an adverse outcome is only reasonably possible (as opposed to probable), or if it is probable but an estimate is not determinable, disclosure of a material claim or contingency is made in the notes to the consolidated financial statements.
Revenue Recognition
The Company recognizes retail sales in its stores at the time the customer takes possession of merchandise. All sales are net of discounts and returns and exclude sales tax. The reserve for retail merchandise returns is estimated based on the Company’s prior experience.
The Company recognizes sales revenue related to gift cards at the time of redemption. The liability for the gift cards is established for the cash value at the time of purchase. The liability for outstanding gift cards is recorded in accrued operating expenses.
The Company offers price hold contracts on selected furniture merchandise. Revenue for price hold contracts is recognized when the customer makes the final payment and takes possession of the merchandise. In the event that a sale is not consummated, liquidated damages are recorded as the lesser of: 1) $25; 2) 10% of the merchandise purchase price (exclusive of sales tax); or 3) the amounts deposited by the customer. Cash paid by the customer is recorded in accrued operating expenses.
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1 - Summary of Significant Accounting Policies (Continued)
Other Comprehensive Income
The Company’s comprehensive income is equal to net income, as there are no items that qualify as other comprehensive income.
Cost of Sales
Cost of sales includes the cost of merchandise (including related inbound freight to the Company’s distribution centers, duties, and commissions), markdowns, and inventory shrinkage, net of cash discounts and rebates. The Company classifies warehousing and outbound distribution and transportation costs as selling and administrative expenses. Due to this classification, the Company’s gross margin rates may not be comparable to those of other retailers that include warehousing and outbound distribution and transportation costs in cost of sales.
Selling and Administrative Expenses
The Company includes store expenses (such as payroll and occupancy costs), warehousing and outbound distribution and transportation costs to the Company’s stores, advertising, purchasing, insurance, non-income taxes, and overhead costs in selling and administrative expenses. Selling and administrative expense rates may not be comparable to those of other retailers that include outbound distribution and transportation costs in cost of sales. Outbound distribution and transportation costs included in selling and administrative expenses were $223.8 million, $218.7 million, and $198.8 million for fiscal years 2005, 2004, and 2003, respectively.
Rent Expense
Rent expense is recognized over the term of the lease. The Company recognizes minimum rent starting when possession of the property is taken from the landlord, which normally includes a construction period prior to store opening. When a lease contains a predetermined fixed escalation of the minimum rent, the Company recognizes the related rent expense on a straight-line basis and records the difference between the recognized rental expense and the amounts payable under the lease as deferred incentive rent. The Company also receives tenant allowances, which are recorded in deferred incentive rent and are amortized as a reduction to rent expense over the term of the lease.
Certain leases provide for contingent rents that are not measurable at inception. Contingent rent includes rent based on a percentage of sales that are in excess of a predetermined level. Contingent rent is excluded from minimum rent and is included in the determination of total rent expense when it is probable that the expense has been incurred and the amount is reasonably estimable.
Advertising Expense
Advertising costs are expensed as incurred, consist primarily of print and television advertisements, and are included in selling and administrative expenses. Advertising expenses were $103.2 million, $97.2 million, and $102.3 million for fiscal years 2005, 2004, and 2003, respectively.
Earnings per Share
Basic earnings per share is calculated using the weighted-average number of shares outstanding during the period. Diluted earnings per share includes the additional dilutive effect of stock options and unvested restricted stock, calculated using the treasury stock method.
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1 - Summary of Significant Accounting Policies (Continued)
Store Pre-opening Costs
Pre-opening costs related to new store openings and the construction periods are expensed as incurred.
Guarantees
In accordance with FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, the Company recognizes a liability for the fair value of guarantees when issued. Guarantees issued prior to January 1, 2003, are not subject to the fair value recognition rules but are required to be disclosed. With respect to guarantee obligations issued prior to January 1, 2003, the Company records a liability if the obligation is estimable in the period incurred.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which requires an entity to measure the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award using an option-pricing model. The cost of the awards, including the related tax effects, will be recognized in the consolidated statement of operations. SFAS No. 123(R) eliminates the alternative to use the intrinsic value method for valuing share-based compensation, which typically resulted in recognition of no compensation cost. On April 15, 2005, the SEC issued Release No. 33-8568, which amended the effective date for SFAS No. 123(R) to the first interim or annual period of the first fiscal year beginning after June 15, 2005, with early adoption permitted. The Company adopted SFAS No. 123(R) as of January 29, 2006, using the modified prospective method of adoption, in which compensation cost is recognized for all awards granted subsequent to the date of this statement as well as for the unvested portion of awards outstanding as of the effective date.
Because the Company previously accounted for options issued under the Company’s incentive plans under the intrinsic value method permitted under APB No. 25, the adoption of SFAS No. 123(R) is expected to have a significant impact on the Company’s results of operations, although it will have no impact on the Company’s overall financial position. The impact of SFAS 123(R) cannot be accurately estimated at this time, as it will depend on the market value and amount of share based awards granted in future periods. However, had the Company adopted SFAS No. 123(R) in a prior period, the impact would approximate the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share. SFAS No. 123(R) also requires that tax benefits received in excess of compensation cost be reclassified from cash provided by operating activities to cash used in financing activities in the consolidated statements of cash flows. This change in classification will reduce cash provided by operating activities and increase cash used in financing activities for periods after adoption for any excess tax benefits realized. While the amount of this change cannot be estimated at this time, the amount of operating cash flows recognized in prior periods for such excess tax deductions was not significant in fiscal years 2005, 2004, and 2003, respectively.
In March 2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”), Accounting for Conditional Asset Retirement Obligations, which is effective no later than the end of fiscal years ending after December 15, 2005. FIN 47 clarifies that the term conditional asset retirement obligation as used in SFAS No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. Thus, the timing and/or method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred, generally upon acquisition, constructions, or development
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1 - Summary of Significant Accounting Policies (Continued)
and/or through the normal operation of the asset. Uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. SFAS No. 143 acknowledges that in some cases, sufficient information may not be available to reasonably estimate the fair value of an asset retirement obligation. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The Company adopted the provisions of FIN 47 during the fourth quarter of fiscal year 2005, and this adoption did not have a material impact on the Company’s consolidated financial statements.
Note 2 - Discontinued Operations
The Company reports discontinued operations upon disposition of a component of the Company’s business when the cash flows have been or will be eliminated from the Company’s ongoing operations and when a long-lived asset qualifies for held-for-sale treatment. As a result, the Company’s discontinued operations for fiscal years 2005, 2004, and 2003, are comprised of the following:
Closed Stores
On October 6, 2005, the Company announced its decision to close approximately 126 underperforming stores in addition to the 40 stores previously planned for closure in fiscal year 2005. The Company completed its evaluation of underperforming stores in the fourth quarter and, as a result, 174 stores were closed during fiscal year 2005. To determine if cash flows of each store have been (or will be) eliminated from ongoing operations, the Company evaluated a number of qualitative and quantitative factors, including: proximity to remaining open stores, physical location within a metropolitan or non-metropolitan statistical area and transferability of sales between open and closed trade areas. Based on these criteria, the Company determined that the results of 130 stores should be reported as discontinued operations for all periods presented. The Company has included in discontinued operations the net sales and associated costs which were directly related to and specifically identifiable with these 130 stores. Certain costs such as general office, field operations, national advertising, fixed distribution costs, and interest expense were not allocated to discontinued operations because these costs were not specifically identifiable at the store level. The table below identifies the significant components of income (loss) from discontinued operations for these closed stores for fiscal years 2005, 2004, and 2003, respectively.
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 2 - Discontinued Operations (Continued)
The Company’s results of discontinued operations in fiscal year 2005 include pretax losses in the amount of $41.1 million as the result of the 130 stores reported in discontinued operations in fiscal year 2005, including $43.6 million of exit-related pretax costs incurred primarily in the fourth quarter of fiscal year 2005, the reversal of pretax charges of $0.4 million associated with the KB Toys business and a pretax non-cash impairment charge of $0.7 million and other related charges of $0.3 million associated with the reclassification of the Pittsfield DC as held-for-sale and the related write-down of its carrying value to fair value less selling cost. The table below summarizes the type and amount of charges recorded as a result of the store closures and identifies remaining obligations as of January 28, 2006:
Asset write-downs include assets used in normal operations of retail stores and include remaining unrecoverable net book values of fixtures, equipment, and signs. The inventory write-downs above are specific to the markdowns associated with the liquidation sales conducted at the closed stores which qualified for discontinued operations accounting treatment. The Company records markdowns throughout the year in the normal course of business. The markdowns associated with the liquidation sales are the only markdowns included in the table above.
Future cash outlays under these store closure obligations are anticipated to be $10.3 million in fiscal year 2006, $5.2 million in fiscal year 2007, $3.1 million in fiscal year 2008, and $1.4 million thereafter.
KB Toys Matters
On January 14, 2004, KB Toys filed for bankruptcy protection pursuant to Chapter 11 of title 11 of the United States Code. KB Toys acquired the business from the Company pursuant to a Stock Purchase Agreement dated as of December 7, 2000 (the “KB Stock Purchase Agreement”). In connection with the KB Toys bankruptcy, the Company incurred charges which have been recognized in the Company’s consolidated statements of operations for fiscal years 2005, 2004, and 2003. The following table summarizes these charges:
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 2 - Discontinued Operations (Continued)
The fiscal year 2005 loss from discontinued operations for the Pittsfield DC is excluded from the above table, and thus treated separately from KB Toys matters in fiscal year 2005 because during fiscal year 2005, the Company obtained title to the Pittsfield DC. As discussed below, the fiscal year 2005 loss from discontinued operations for the Pittsfield DC is due to the asset meeting held-for-sale criteria during fiscal year 2005.
HCC Note - Partial Charge-Off
As partial consideration for the sale of the KB Toys business, the Company received the HCC Note. The Company also received a warrant to acquire up to 2.5% of the common stock of KB Holdings, Inc. for a stated price per share (“KB Warrant”). Upon receipt of the HCC Note in fiscal year 2000, the Company evaluated its fair value and recorded it at an estimated fair value of $13.2 million. During fiscal year 2002 and until KB Toys’ bankruptcy filing, the Company recorded the interest earned and accretion of the discount utilizing the effective interest rate method and provided necessary reserves against such amounts as a result of its evaluations of the carrying value of the HCC Note. For tax purposes, the HCC Note was originally recorded at its face value of $45.0 million, and the Company incurred tax liability on the interest, which was accrued but was not payable. This resulted in the HCC Note having a tax basis that was greater than the carrying value on the Company’s books.
The HCC Note became immediately due and payable at the time of KB Toys’ bankruptcy filing. As a result of the bankruptcy filing, the Company ceased accruing interest on the HCC Note, charged off a portion of the HCC Note to reduce its carrying value to fair market value, and wrote down the full value of the KB Warrant resulting in a pretax charge to continuing operations in fiscal year 2003 in the amount of $9.6 million. In addition, the Company recorded a tax benefit in continuing operations of $20.2 million in fiscal year 2003 reflecting the charge-off of the higher tax basis of the HCC Note. As of January 29, 2005, the $7.3 million carrying amount of the HCC Note was included in the Company’s other assets on the consolidated balance sheet.
Under the KB Toys bankruptcy plan (the “KB Plan”), confirmed by the bankruptcy court on August 18, 2005, the Company expects to receive $0.9 million on its claim for payment of the HCC Note from the bankruptcy trust. As a result, the Company recorded a pretax charge to continuing operations in fiscal year 2005 in the amount of $6.4 million to reduce the carrying value of the HCC Note to $0.9 million. As of January 28, 2006, the $0.9 million carrying amount of the HCC Note was included in the Company’s other assets on the consolidated balance sheet.
Lease Indemnifications
When the Company acquired the KB Toys business from Melville Corporation (now known as CVS New York, Inc., and together with its subsidiaries “CVS”) in May 1996, the Company provided, among other things, an indemnity to CVS with respect to any losses resulting from KB Toys’ failure to pay all monies due and owing under any KB Toys lease or mortgage obligation. While the Company controlled the KB Toys business, the Company provided guarantees with respect to a limited number of additional store leases. As part of the sale of the KB Toys business by the Company, and in accordance with the terms of the KB Stock Purchase Agreement, KB Toys similarly agreed to indemnify the Company with respect to all lease and mortgage obligations. These guarantee and lease obligations are collectively referred to as the “KB Lease Obligations.” In connection with the bankruptcy, KB Toys rejected 226 store leases and two distribution center leases for which the Company believes it may have guarantee or indemnification obligations; however 31 of the rejected store leases expired on or before January 31, 2004 according to the Company’s records. The Company estimated and recorded pretax charges in discontinued operations of $24.4 million with respect to 90 leases rejected by KB Toys in fiscal year 2003 and $8.6 million with respect to 72 leases rejected by KB Toys in fiscal year 2004. In fiscal year 2005, an additional 33 store leases and two distribution center
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 2 - Discontinued Operations (Continued)
leases were rejected. During fiscal year 2005, the Company reversed approximately $0.4 million of the KB Toys lease obligation originally providing for professional fees that are no longer expected to be incurred. Based on payments made to landlords of approximately $5.0 million during fiscal year 2005, and the level of demand notices received from landlords requesting payment, the Company believes that the additional rejections in fiscal year 2005 are adequately provided for by the $27.2 million remaining unpaid KB Lease Obligations recorded as of January 28, 2006.
The claims process associated with the KB Toys bankruptcy remains open. As a result of uncertainties associated with the continuance of the bankruptcy claims process, the Company believes it is possible that it will continue to receive demand notices from landlords in fiscal year 2006. The Company is an unsecured creditor of the bankruptcy trust with respect to losses it has incurred in connection with the KB Lease Obligations and is unable to estimate the timing or amount of any recovery it can expect to receive upon resolution of these claims. Accordingly, no recoveries related to the KB Toys bankruptcy have been recorded by the Company. In addition, the typical KB Lease Obligation provides that the terms of the underlying lease may be extended, amended, or modified without the consent of the guarantor. The Company has concluded that its reserve for KB Lease Obligations is adequate at January 28, 2006. Based on the uncertainties related to the KB Lease Obligations, the Company intends to continue to evaluate the adequacy of these reserves as dictated by the facts and circumstances available to the Company at each future reporting period. In the event additional liability arises from future defaults on these leases, any related charge would be to discontinued operations.
At the date of its emergence and as of January 28, 2006, the Company had KB Lease Obligations with respect to approximately 167 remaining KB Toys store leases and KB Toys’ main office building. Because these remaining guarantees were issued prior to January 1, 2003, they are not subject to the fair value recognition provisions of FASB Interpretation No. 45. However, the Company will recognize a liability if a loss in connection with any of the KB Lease Obligations becomes probable and reasonably estimable.
Pittsfield Distribution Center
As a result of the KB Toys bankruptcy, the Company received notice of a default relating to a first mortgage (guaranteed by CVS) on the Pittsfield DC. On November 5, 2004, the Company satisfied its indemnity obligation with respect to the Pittsfield DC at a cost of $8.4 million. The Company recorded a charge to discontinued operations in fiscal year 2004 in the amount of $2.7 million to reflect its best estimate of the difference between the subrogation rights flowing from the indemnification payment and the net realizable value of the Pittsfield DC.
In the fourth quarter of fiscal year 2005, the Company initiated plans to dispose of the Pittsfield DC. The property is available for immediate sale in its present condition and is actively being marketed by a reputable broker. The Company has no intention of using this property in its current operations. As a result, the Pittsfield DC has been classified as held-for-sale, as defined by SFAS No. 144, and accordingly, its carrying value at January 28, 2006 has been adjusted to its estimated fair value less applicable selling costs resulting in a pretax non-cash impairment charge of $0.7 million and other related charges of $0.3 million included in loss from discontinued operations. In order to estimate the fair value of this property, the Company considered, among other things, prior appraisal information, current listing price, current market specific analysis of commercial real estate brokers, and the location of the property. The asset value is included in other current assets on the consolidated balance sheet as of January 28, 2006.
Other KB Toys Matters
In addition to including KB Toys’ indemnity of the Company with respect to lease and mortgage obligations, the KB Stock Purchase Agreement contains mutual indemnifications of KB Toys by the Company and of the
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 2 - Discontinued Operations (Continued)
Company by KB Toys. These indemnifications relate primarily to losses arising out of general liability claims, breached or inaccurate representations or warranties, shared litigation expenses, other payment obligations, and taxes. Under a tax indemnification provision in the KB Stock Purchase Agreement, the Company is to indemnify KB Toys for tax losses generally related to the periods prior to the Company’s sale of KB Toys. As a result of uncertainties associated with the continuance of the bankruptcy claims process, the Company continues to assess the effect of the KB Toys bankruptcy on such mutual indemnification obligations and has not made any provision for loss contingencies with respect to any non-lease or non-tax related indemnification obligations. As of January 28, 2006, management does not believe that the impact would have a material adverse effect on the Company’s financial condition, results of continuing operations, or liquidity.
During fiscal year 2003, discontinued operations reflect the substantial resolution and closure of tax audit activity, the closing of the statute of limitations, and changes in the expected outcome of tax contingencies related to KB Toys state and local non-income tax matters. As a result of the substantial resolution and closure of these items in fiscal year 2003, the Company reversed previously accrued income taxes of approximately $4.7 million and sales and use taxes of approximately $1.1 million related to KB Toys.
Note 3 - Property and Equipment - Net
Property and equipment - net consists of:
Depreciation expense included in loss from discontinued operations was $12.2 million, $4.9 million, and $4.7 million for fiscal years 2005, 2004, and 2003, respectively.
In fiscal year 2005, the Company incurred $2.0 million in asset impairment charges, included in selling and administrative expenses on the consolidated statement of operations, for the write-down of long-lived assets of 14 stores. Assets are reviewed for impairment at the store level. Stores with a history of operating losses are reviewed for impairment. The Company compares the net book value of long-lived assets at stores identified by this review, to estimated future cash flows of each specific store in order to determine whether impairment exists. If the assets are not recoverable by the estimated future cash flows, an impairment is recognized to write-down the long-lived assets to fair value.
Note 4 - Long-Term Obligations
On October 29, 2004, the Company entered into the 2004 Credit Agreement. The 2004 Credit Agreement is scheduled to mature on October 28, 2009. The proceeds of the 2004 Credit Agreement are available for general corporate purposes, working capital, and to repay certain indebtedness of the Company, including amounts that were outstanding related to the Senior Notes and the 2001 Credit Agreement. The pricing and fees related to the
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 4 - Long-Term Obligations (Continued)
2004 Credit Agreement fluctuate based on the Company’s debt rating. Loans made under the 2004 Credit Agreement may be prepaid by the Company without penalty. The 2004 Credit Agreement contains financial and other covenants, including, but not limited to, limitations on indebtedness, liens, and investments, as well as the maintenance of two financial ratios - a leverage ratio and a fixed charge coverage ratio. A violation of these covenants could result in a default under the 2004 Credit Agreement, which would permit the lenders to restrict the Company’s ability to further access the 2004 Credit Agreement for loans and letters of credit, and require the immediate repayment of any outstanding loans under the 2004 Credit Agreement. On October 25, 2005, the Company and the lenders entered into an amendment to the 2004 Credit Agreement in order to eliminate the impact on the covenant calculations of the estimated charges related to the store closings discussed in Note 2 to the consolidated financial statements. The Company was in compliance with its amended financial covenants at January 28, 2006.
The 2004 Credit Agreement permits, at the Company’s option, borrowings at various interest rate options based on the prime rate or London InterBank Offering Rate plus applicable margin. The 2004 Credit Agreement also permits, as applicable, borrowings at various interest rate options mutually agreed upon by the Company and the lenders. The weighted average interest rate of the outstanding loans was 5.1% and 3.2% at January 28, 2006, and January 29, 2005, respectively. The Company typically repays and/or borrows on a daily basis in accordance with the terms of the 2004 Credit Agreement. The daily activity is a net result of the Company’s liquidity position, which is generally affected by: 1) cash inflows such as store cash and other miscellaneous deposits; and 2) cash outflows such as check clearings, wire and other electronic transactions, and other miscellaneous disbursements.
In addition to revolving credit loans, the 2004 Credit Agreement includes a $30.0 million swing loan sub-limit, a $50.0 million bid loan sub-limit, and a $150.0 million letter of credit sub-limit. At January 28, 2006, the total borrowings outstanding under the 2004 Credit Agreement were $5.5 million, all in swing loans. At January 29, 2005, the total borrowings outstanding under the 2004 Credit Agreement were $159.2 million, with $129.2 million in revolving credit loans and $30.0 million in swing loans. The borrowings available under the 2004 Credit Agreement, after taking into account the reduction of availability resulting from outstanding letters of credit totaling $65.0 million, were $429.5 million at January 28, 2006.
Due to the early repayment of the Senior Notes and the 2001 Credit Agreement, interest expense in the third quarter of fiscal year 2004 included debt prepayment charges of $8.9 million.
Note 5 - Commitments and Contingencies
The Company has purchase obligations for retail merchandise issued in the ordinary course of its business that are valued at $389.5 million, the entirety of which represents obligations due within one year of January 28, 2006. Purchase obligations also include a commitment for future inventory purchases totaling $263.3 million at January 28, 2006. The Company paid $44.0 million, $52.5 million, and $44.2 million related to this commitment during fiscal years 2005, 2004, and 2003, respectively. The Company is not required to meet any periodic minimum purchase requirements under this commitment. The term of the commitment extends until the purchase requirement is satisfied.
The Company is involved in legal actions and claims, including various employment-related matters, arising in the ordinary course of its business. The Company currently believes that such actions and claims, both individually and in the aggregate, will be resolved without material effect on the Company’s financial condition, results of operations, or liquidity. However, litigation involves an element of uncertainty. Future developments could cause these actions or claims to have a material adverse effect on the Company’s financial condition, results of operations, and liquidity.
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 5 - Commitments and Contingencies (Continued)
In November 2004, the Company was served a civil complaint wherein it was alleged that the Company had violated the Fair Labor Standards Act regulations by misclassifying as exempt employees its furniture department managers, sales managers, and assistant managers. This lawsuit was filed as a putative collective action in the United States District Court for the Eastern District of Texas, Texarkana Division. A similar action was filed at the end of November 2004, in the United States District Court for the Eastern District of Louisiana. This lawsuit was also filed as a putative collective action alleging that the Company violated the Fair Labor Standards Act by misclassifying assistant managers as exempt. The plaintiffs in both cases are seeking to recover, on behalf of themselves and all other individuals who are similarly situated, alleged unpaid overtime compensation, as well as liquidated damages, attorneys’ fees and costs. On July 5, 2005, the District Court in Louisiana issued an order conditionally certifying a class of all current and former assistant store managers who have worked for the Company since November 23, 2001. As a result of that order, notice of the lawsuit was sent to approximately 5,500 individuals who had the right to opt-in to the lawsuit. On August 8, 2005, the District Court in Texas issued an order conditionally certifying a class of all current and former employees who worked for the Company as a furniture department manager at any time between November 2, 2001, and October 1, 2003. As a result of that order, notice was sent to approximately 1,300 individuals who had the right to opt-in to the lawsuit. The Texas case will include furniture department managers only, whereas the Louisiana case will include only assistant store managers. While the original period to opt-in to the lawsuits has passed, the period is expected to be extended for certain individuals based on several factors, the most significant of which is the impact that the hurricanes of 2005 had on mail delivery in certain areas of the Gulf Coast states. Until such time as the opt-in period has fully lapsed, the Company will be unable to determine the number of individuals that will be included in each lawsuit. As of January 28, 2006, approximately 1,100 individuals had joined the Louisiana case, and approximately 300 individuals had joined the Texas case. The Company has the right to file a motion seeking to decertify the classes after discovery has been conducted. Pending discovery on the plaintiffs’ claims, the Company cannot make a determination as to the probability of a loss contingency resulting from either of these lawsuits or the estimated range of possible loss, if any. The Company intends to vigorously defend itself against the allegations levied in both lawsuits. However, the ultimate resolution of these matters could have a material adverse effect on the Company’s financial condition, results of operations, and liquidity.
On October 13, 2005, the Company was served a civil complaint wherein it was alleged that the Company had violated certain California wage and hour laws. This class action lawsuit was filed in the Superior Court of the State of California, County of Ventura. The plaintiff is seeking to recover, on her own behalf and on behalf of all other individuals who are similarly situated, alleged unpaid wages and rest and meal period compensation, as well as penalties, injunctive and other equitable relief, reasonable attorneys’ fees, and costs. Pending discovery on the plaintiff’s claims, the Company cannot make a determination as to the probability of a loss contingency resulting from this lawsuit or the estimated range of possible loss, if any. The Company intends to vigorously defend itself against the allegations levied in this lawsuit. However, the ultimate resolution of this matter could have a material adverse effect on the Company’s financial condition, results
of operations, and liquidity.
The Company announced on August 20, 2003, that it reached a preliminary agreement to settle two class action lawsuits filed in the Superior Court of San Bernardino County, California, relating to the calculation of earned overtime wages for certain former and current store managers and assistant store managers in that state. Final court approval of the preliminary settlement was received on February 4, 2004. During the fourth quarter of fiscal year 2003, the Company adjusted the total related charge to $5.7 million (net of tax), $0.6 million lower than its original estimate which was recorded during the second quarter of fiscal year 2003.
The Company announced on August 20, 2003, that it had reached a preliminary agreement to settle a national class action lawsuit relating to certain advertising practices of KB Toys. The Court issued a final order
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 5 - Commitments and Contingencies (Continued)
approving the agreement during the fourth quarter of fiscal year 2003. The Company contributed $2.1 million toward the settlement and accordingly, a charge of $1.2 million (net of tax) was recorded to discontinued operations in the third quarter of fiscal year 2003.
For a discussion of discontinued operations, including KB Toys matters, see Note 2 to the consolidated financial statements.
The Company is self-insured for certain losses relating to property, general liability, workers’ compensation, and employee medical and dental benefit claims (a portion of which is paid by employees), and the Company has purchased stop-loss coverage in order to limit significant exposure in these areas. Accrued insurance liabilities are actuarially determined based on claims filed and estimates of claims incurred but not reported. With the exception of self-insured claims, taxes, employment-related matters, the lawsuits described above, and the liabilities that relate to the KB Toys bankruptcy, the Company has not recorded any additional significant liabilities for other commitments and contingencies.
Note 6 - Income Taxes
The provision (benefit) for income taxes from continuing operations was comprised of the following:
The deferred income tax benefit from discontinued operations was $3.7 million for fiscal year 2005 and $5.1 million for fiscal year 2004.
Reconciliation between the statutory federal income tax rate and the effective income tax rate was as follows:
The expiration of the capital loss carryover and related reduction in the valuation allowance in 2005 relates to a $9.1 million capital loss that was generated in fiscal year 2000 in connection with the sale of the KB Toys business.
The reduction in the valuation allowance in fiscal year 2003 primarily relates to the reversal of the deferred tax asset associated with the partial charge-off of the HCC Note. The full face value of the HCC Note and
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 6 - Income Taxes (Continued)
subsequent interest income was included in the Company’s income tax returns. In fiscal year 2001, the Company believed it would sell the HCC Note to an unrelated third party at an amount equal to the fair value of the HCC Note as reflected on its financial statements. A sale of the HCC Note would have resulted in a capital loss that the Company believed that it could not have utilized. A valuation allowance of approximately $15.0 million was recorded through the end of fiscal year 2002 as an offset to the federal and state deferred tax assets which represented the difference between the Company’s book and tax basis of the HCC Note.
Income tax payments and refunds were as follows:
Deferred taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities were as follows:
The reduction in the valuation allowances from fiscal year 2004 to fiscal year 2005 relates primarily to a decrease in the valuation allowances attributable to the expiration of the capital loss carryover and the
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 6 - Income Taxes (Continued)
carryover of local tax credits. The valuation allowances shown in the table above include state income tax valuation allowances that are net of the federal tax benefit.
Net deferred tax assets were shown separately on the consolidated balance sheets as current and noncurrent deferred income taxes. The following table summarizes net deferred income tax assets from the balance sheet:
The Company has established valuation allowances to reflect that it is more likely than not that a portion of the federal and state deferred tax assets may not be realized.
The Company has the following income tax loss and credit carryforwards at January 28, 2006 (amounts are shown net of tax excluding the federal income tax effect of the state and local items):
The Company’s income taxes payable have been reduced and certain state net operating loss carryforwards increased by the tax benefits associated with dispositions of employee stock options. The Company receives an income tax benefit calculated as the difference between the fair market value of the stock issued at the time of exercise and the option price. These benefits were credited directly to shareholders’ equity and were not significant for any period presented.
In November 2003, the IRS issued Revenue Ruling 2003-112 which clarified the definition of eligible employees for purposes of the welfare to work and work opportunity tax credits. The Company has filed protective refund claims for fiscal years 1994 through 2002. Because of the contingent nature of these claims, no tax benefit has been recorded for this item.
Throughout fiscal year 2005, the Company settled various state audits and as a result reversed approximately $3.6 million of previously accrued state taxes. Closure of various federal and state income tax statutes during the third and fourth quarters of fiscal year 2005 resulted in a net reversal of approximately $1.2 million in federal and state taxes.
In the first quarter of fiscal year 2004, the Company settled a contingency related to a jobs creation tax credit matter and as a result reversed approximately $1.0 million of previously accrued state taxes. Closure of various state and local income tax contingencies also occurred in the fourth quarter of fiscal year 2004 resulting in a net reversal of approximately $1.8 million of previously accrued state income taxes .
Also, during fiscal year 2004, the Company finalized the audit of Mac Frugal’s • Bargains Close-outs Inc. (“MFI”) consolidated income tax returns for years prior to its acquisition by the Company. MFI was acquired
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 6 - Income Taxes (Continued)
by the Company in 1998. These issues were substantially settled with the Appeals Division of the IRS in fiscal year 2003. Also in fiscal year 2003 various state and local income tax examinations were substantially resolved or closed. As a result, in fiscal year 2003 the Company reversed approximately $3.1 million in previously accrued federal and state income taxes relating to continuing operations and approximately $4.7 million relating to discontinued operations.
Years after fiscal year 2001 are open to examination by the IRS. Various states routinely audit the Company and its subsidiaries. The Company believes that it has adequately provided for tax, interest, and penalties, if any, that may result from future audit adjustments relating to these years.
Note 7 - Employee Benefit Plans
Pension Benefits
The Company has a qualified defined benefit pension plan (the “Pension Plan”) and a nonqualified supplemental defined benefit pension plan (the “Supplemental Pension Plan”) covering certain employees whose hire date precedes April 1, 1994. 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 maintains the Supplemental Pension Plan for certain highly compensated executives whose benefits were frozen in the Pension Plan in 1996. The Supplemental Pension Plan is designed to pay benefits in the same amount as if the participants continued to accrue benefits under the Pension Plan. The Company has no obligation to fund the Supplemental Pension Plan, and all assets and amounts payable under the Supplemental Pension Plan are subject to the claims of the general creditors of the Company.
The investments owned by the Pension Plan are managed with the primary objective of utilizing a balanced approach with equal emphasis on income and capital appreciation. Investment results are compared to the performance metrics on a quarterly basis. Changing market cycles require flexibility in asset allocation to allow movement of capital within the asset classes for purposes of increasing investment return and/or reducing risk. The targeted ranges of asset allocations are:
As permitted by the Company’s investment policy, equity securities may include the Company’s common shares. At December 31, 2005 and 2004, the Pension Plan owned 2,594 shares and 1,793 shares of Big Lots, Inc. common shares, respectively.
Financial futures contracts and financial options contracts can be utilized for purposes of implementing hedging strategies. All assets must have readily ascertainable market value and be easily marketable. There were no futures contracts owned by the Pension Plan at January 28, 2006.
The equity portfolio will be generally fully invested with minimal emphasis on short-term market fluctuations and broadly diversified. Global equities (foreign) and American Depository Receipts of similar high quality may also be included to further diversify the portfolio.
Fixed income investments of a single issuer (with the exception of U.S. Government or fully guaranteed agencies) must not exceed 10% of the total fixed income portfolio. Corporate obligation issues must meet or exceed a credit rating of Aa at the time of purchase and during the holding period. There are no limitations on the maximum amount allocated to each credit rating within the fixed income portfolio.
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 7 - Employee Benefit Plans (Continued)
The asset allocations at December 31 by asset category were as follows:
The Company’s funding policy of the Pension Plan is to make annual contributions based on advice from its actuaries and evaluation of its cash position, but not less than the minimum required by applicable regulations. The Company expects no required contributions in fiscal year 2006. Additional discretionary contributions could be made upon further analysis of the Pension Plan during fiscal year 2006. The assets allocated to debt securities of 26.2% at December 31, 2005 were below the low end of the targeted range of 30.0%, primarily due to the impact of a $3.8 million contribution made by the Company in December 2005, and the impact of rising interest rates on the value of the debt securities held by the Pension Plan. The asset managers perform an annual reallocation of assets in order to address situations outside of the targeted guidelines.
The Pension Plan and the Supplemental Pension Plan benefits expected to be paid in each of the following ten fiscal years are as follows:
The estimated future benefit payments are based on the same assumptions as those used to measure the Company’s benefit obligations at January 28, 2006.
The components of net periodic pension cost were comprised of the following:
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 7 - Employee Benefit Plans (Continued)
Weighted-average assumptions used to determine net periodic benefit cost were:
The following table sets forth certain information for the Pension Plan and the Supplemental Pension Plan at December 31:
The following schedule provides a reconciliation of projected benefit obligations, plan assets, funded status, and amounts recognized for the Pension Plan and Supplemental Pension Plan at December 31:
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 7 - Employee Benefit Plans (Continued)
Weighted-average assumptions used to determine benefit obligations for fiscal years 2005 and 2004 were:
Savings Plans
The Company has a savings plan with a 401(k) deferral feature and a nonqualified deferred compensation plan with a similar deferral feature for eligible employees. The Company contributes a matching percentage of employee contributions which is invested directly in the Company’s common shares. The Company’s matching contributions are subject to IRS regulations. During the fiscal years 2005, 2004, and 2003, the Company expensed $5.5 million, $5.2 million, and $4.6 million, respectively, for Company matching contributions. In connection with its nonqualified deferred compensation plan, the Company has purchased mutual fund investments of $8.6 million and $8.5 million at January 28, 2006 and January 29, 2005, respectively, which are recorded in other assets. These investments were classified as trading securities and were recorded at their fair value. The Company has recorded treasury stock of $2.5 million at January 28, 2006 and January 29, 2005, in connection with the nonqualified deferred compensation plan.
Note 8 - Leases
Leased property consists primarily of the Company’s retail stores and certain warehouse space. Many of the store leases provide that the Company pay for real estate taxes, CAM, and property insurance. Certain leases provide for contingent rents or may have rent escalations. In addition, many leases provide options to extend the original terms for an additional one to fifteen years.
Total retail store and warehouse lease expense, including real estate taxes, CAM, and property insurance, charged to continuing operations for operating leases of stores, warehouses, and offices consisted of the following:
Lease expense for operating leases associated with the 130 closed stores included in loss from discontinued operations was $15.2 million, $16.8 million, and $15.8 million for 2005, 2004, and 2003, respectively.
Lease related income (expense) for the KB Toys business included in loss from discontinued operations was $0.4 million, $(8.6) million and $(24.4) million for fiscal years 2005, 2004, and 2003, respectively. This lease expense was related to KB Toys leases guaranteed by the Company which were rejected during the KB Toys bankruptcy.
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 8 - Leases (Continued)
Future minimum commitments for store and warehouse operating leases, excluding closed store leases and excluding real estate taxes, CAM, and property insurance, at January 28, 2006, were as follows:
Note 9 - Shareholders’ Equity
Earnings per Share
There are no adjustments required to be made to weighted-average common shares outstanding for purposes of computing basic and diluted earnings per share and there were no securities outstanding at January 28, 2006, which were excluded from the computation of earnings per share.
A reconciliation of the number of weighted-average common shares outstanding used in the basic and diluted earnings per share computations is as follows:
The dilutive effect of stock options excludes the incremental effect related to outstanding stock options with an exercise price in excess of the common shares weighted-average market price because their impact is antidilutive. At the end of fiscal years 2005, 2004, and 2003, stock options outstanding with an exercise price greater than the weighted-average market price were 5.0 million, 5.1 million, and 6.5 million, respectively.
On February 22, 2006, the Company announced that its Board of Directors authorized the repurchase of up to $150.0 million of the Company’s common shares. The Company expects the purchases to be made from time to time in the open market or in privately negotiated transactions with such purchases to be completed within one year of the announcement. Common shares acquired through the repurchase program will be available for general corporate purposes.
In May 2004, the Company’s Board of Directors authorized the repurchase of up to $75.0 million of the Company’s common shares. Pursuant to this authorization, the Company purchased 5.4 million common shares having an aggregate cost of $75.0 million with an average price paid per share of $13.82. The repurchased common shares were placed into treasury and are used for general corporate purposes including the issuance of shares for employee benefits, the exercise of stock options, and the issuance of restricted shares.
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 10 - Stock Plans
Stock Option Plans
In May 2005, the shareholders of the Company approved the Big Lots 2005 Long-Term Incentive Plan (the “2005 Incentive Plan”). The 2005 Incentive Plan replaced the Big Lots, Inc. 1996 Performance Incentive Plan, as amended (the “1996 Incentive Plan”). Beginning January 1, 2006, equity awards will be issued under the 2005 Incentive Plan.
The 1996 Incentive Plan and 2005 Incentive Plan authorize the issuance of incentive and nonqualified stock options, restricted stock, performance units, and stock appreciation rights. The Company has not issued performance units or stock appreciation rights. As a result of its expiration, there are no common shares available for issuance under the 1996 Incentive Plan at January 28, 2006. The number of common shares available for issuance under the 2005 Incentive Plan consists of 1) an initial allocation of 1,250,000 common shares, 2) 2,001,142 common shares, the number of common shares that were available under the 1996 Incentive Plan upon its expiration, and 3) an annual increase equal to 0.75% of the total number of issued common shares (including treasury shares) as of the start of each of the Company’s fiscal years during which the 2005 Incentive Plan is in effect. The Compensation Committee of the Board of Directors (“Committee”), which is charged with administering the 2005 Incentive Plan, determines the term of each award. Options granted to employees generally expire on the lesser of: 1) the term set by the Committee, which has historically been 7 to 10 years from the grant date; 2) one year following death or disability; or 3) three months following termination. Stock options granted under the 1996 Incentive Plan and 2005 Incentive Plan may be either nonqualified or incentive stock options, and the exercise price may not be less than the fair market value of the underlying common shares on the date of award. Unless there is a change in control of the Company, the options generally vest ratably over a four-year or five-year period. See below for a discussion of the acceleration of vesting for certain options which occurred in the fourth quarter of fiscal year 2005. Upon a change in control of the Company, all awards outstanding automatically vest.
The Company maintains the Big Lots Director Stock Option Plan (“Director Stock Option Plan”) for non-employee directors. The number of common shares initially available for issuance under the Director Stock Option Plan was 781,250 shares. The Director Stock Option Plan is administered by the Committee pursuant to an established formula. Neither the Board of Directors nor the Committee exercises any discretion in administration of the Director Stock Option Plan. Grants are made annually, approximately 90 days following the Annual Meeting of Shareholders, at an exercise price equal to 100% of the fair market value on the date of grant. The present formula provides to each non-employee director an annual grant of an option to acquire 10,000 of the Company’s common shares which become fully exercisable over a three-year period: 20% of the shares on the first anniversary, 60% on the second anniversary, and 100% on the third anniversary. Options granted to non-employee directors expire on the lesser of: 1) 10 years plus one month; or 2) one year following death or disability; or 3) at the end of the trading window immediately following termination.
On November 21, 2005, the Company announced that the Compensation Committee, after discussion with the Board of Directors, approved accelerating the vesting of stock options representing approximately 3.8 million of the Company’s shares awarded on or before February 21, 2005, under the 1996 Incentive Plan and the Director Stock Option Plan. The Committee did not, however, accelerate the vesting of stock options granted after February 21, 2005, including those granted to the Company’s current Chief Executive Officer, Steven S. Fishman, or the vesting of stock options granted to the Company’s former Chief Executive Officer, Michael J. Potter. The decision to accelerate vesting of stock options was made primarily to reduce non-cash compensation expense that would have been recorded in future periods following the adoption of SFAS No. 123(R) in the first quarter of fiscal year 2006. The Company also believes this action will have a positive effect on associate morale and retention. This action resulted in an insignificant amount of expense recorded in the fourth quarter of fiscal year 2005 for the impact of the shares estimated to be modified and is expected to
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 10 - Stock Plans (Continued)
enable the Company to eliminate pretax expense of approximately $11.7 million over the five year period during which the stock options would have vested, subject to the impact of additional adjustments related to cancelled stock options. The acceleration resulted in additional proforma stock-based employee compensation expense in fiscal year 2005 as disclosed in Note 1. The Company also believes this action will have a positive effect on employee morale and retention. Additionally, the Committee imposed a holding period that requires all directors, executive vice presidents, and senior vice presidents (including the Company’s named executive officers other than Messrs. Fishman and Potter whose stock options were not accelerated) to refrain from selling shares acquired upon the exercise of the accelerated stock options until the date on which the exercise would have been permitted under the stock option’s original vesting terms or, if earlier, the director or officer’s death, permanent and total disability, or termination of employment.
As required by the disclosure provisions of SFAS No. 123, the Company estimates the fair value of stock options in order to present the proforma net income and earnings per share as if the fair value method of accounting for options had been adopted. For purposes of this disclosure, the Company used a binomial model to determine the fair value of all options granted on or after February 1, 2004. The fair value of stock options granted prior to February 1, 2004, was determined using the Black-Scholes model. The Company believes that the binomial model considers characteristics of fair value option pricing that are not available under the Black-Scholes model and, therefore, the binomial model provides a more accurate estimate of fair value. Similar to the Black-Scholes model, the binomial model takes into account variables such as volatility, dividend yield rate, and risk-free interest rate. In addition, the binomial model considers the contractual term of the option, the probability that the option will be exercised prior to the end of its contractual life, and the probability of termination or retirement of the option holder in computing the value of the option. The assumptions used in the option pricing models for each of the respective periods were as follows:
The following table summarizes information about the Company’s stock option plans at January 28, 2006:
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 10 - Stock Plans (Continued)
Changes in the status of outstanding options were as follows:
(a)
Weighted-average per share exercise price.
During fiscal year 2005, the Company granted 100,000 restricted common shares with a closing market price of $11.25. These restricted shares vest in thirds upon the attainment of mutually agreed common share price targets and fully after five years of service or upon the change in control of the Company.
During fiscal year 2004, the Company granted 172,000 restricted common shares with a closing market price of $10.85. These restricted shares vest equally over three years. During fiscal year 2005, 53,998 of the restricted shares granted in fiscal year 2004 vested and 10,000 of the restricted shares granted in fiscal year 2004 were forfeited. The restricted share grants were made in accordance with the 1996 Incentive Plan. The restricted shares granted during fiscal year 2004 will fully vest if the employee is involuntarily terminated without cause or upon change in control of the Company. The 2004 restricted share grants will be forfeited, in whole or in part, as applicable, if the employee voluntarily terminates his or her employment or if the employee is terminated for cause.
The fair value of the restricted shares as measured at the grant date is amortized on a straight-line basis to selling and administrative expense over the vesting period. The unamortized portion of the restricted shares expense is included as a separate component of shareholders’ equity.
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 11 - Business Segment Data
The following data is presented in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information.
The Home category includes furniture, domestics, and home décor departments. The Other category primarily includes electronics, apparel, home maintenance, small appliances, and tools. The Company internally evaluates and externally communicates overall sales and merchandise performance based on these key merchandising categories and believes that these categories facilitate analysis of the Company’s financial performance.
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 12 - Selected Quarterly Financial Data (Unaudited)
The selected quarterly financial data does not agree to previous quarterly reports issued by the Company as a result of the 130 stores reported in discontinued operations and closed by the Company in the fourth quarter of fiscal year 2005. Summarized quarterly financial data for fiscal years 2005 and 2004 was as follows:
(a)
Income (loss) per share calculations for each quarter are 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.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, performed an evaluation of the Company’s disclosure controls and procedures pursuant to paragraph (b) of Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded, as of the end of the period covered by this report, that such disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America.
Internal control systems, no matter how well designed and operated, have inherent limitations, including the possibility of the circumvention or overriding of controls. Due to these inherent limitations, the Company’s internal control over financial reporting may not prevent or detect misstatements. As a result, projections of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control system as of January 28, 2006. In making its assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework. Based on this assessment, management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company maintained effective internal control over financial reporting, in all material respects, as of January 28, 2006.
The Company’s Independent Registered Public Accounting Firm, Deloitte & Touche LLP, has issued an attestation report on management’s assessment of the Company’s internal control over financial reporting. The report appears in the Financial Statements and Supplementary Data section of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
No changes in the Company’s internal control over financial reporting, as that term is defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act, occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Not applicable.
PART III
ITEM 10.
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the captions “Governance of the Company” and “Stock Ownership” in the 2006 Proxy Statement, with respect to directors, the code of ethics, the Audit Committee, the audit committee financial experts of the Company, and Section 16(a) beneficial ownership reporting compliance, is incorporated herein by reference in response to this item.
The information contained under the captions “Governance of the Company - Director Compensation,” “Compensation Committee Report on Executive Compensation,” and “Executive Compensation” in the 2006 Proxy Statement, with respect to director and executive compensation, is incorporated herein by reference in response to this item.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
Equity Compensation Plan Information
The information contained under the captions “Executive Compensation - Equity Compensation Plan Information” and “Stock Ownership - Ownership of Company Stock by Certain Beneficial Owners and Management” in the 2006 Proxy Statement, with respect to securities authorized for issuance under equity compensation plans and security ownership of certain beneficial owners and management, is incorporated herein by reference in response to this item.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
Pre-Approval Policy
The Audit Committee of the Board has adopted the Audit and Non-Audit Services Pre-Approval Policy. Under the policy, the Audit Committee is required to pre-approve all audit and permissible non-audit services performed by the independent auditor in order to assure that the provision of those services does not impair the independent auditor’s independence. Pre-approval is detailed as to the particular service or category of service and is subject to a specific engagement authorization. The Audit Committee requires the independent auditor and management to report on the actual fees incurred for each category of service at Audit Committee meetings throughout the year.
During the year, circumstances may arise when it may become necessary to engage the independent auditor for additional services which have not been approved. In those instances, the Audit Committee requires specific pre-approval before engaging the independent auditor. The Audit Committee may delegate pre-approval authority to one or more of its members for those instances when pre-approval is needed prior to a scheduled Audit Committee meeting. The member or members to whom pre-approval authority is delegated must report any pre-approval decisions to the Audit Committee at its next scheduled meeting.
Consistent with the policy, all audit and non-audit services rendered by the Company’s independent auditors in fiscal year 2005, including the related fees, were pre-approved by the Audit Committee.
Audit and Non-Audit Fees
The fees incurred by the Company for the professional services rendered by Deloitte & Touche LLP, the Company’s independent auditor, during the two most recently completed fiscal years were as follows:
(a)
Principally audits of employee benefit plans and accounting consultation.
(b)
Principally tax planning and tax compliance services.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Index to Consolidated Financial Statements, Financial Statement Schedules and Exhibits
(a)
Documents filed as part of this report:
All other financial statements and schedules not listed in the preceding index are omitted because they are not required or are not applicable or because the information required to be set forth therein either was not material or is included in the consolidated financial statements or Notes thereto.
BIG LOTS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(a)
Consists of markdowns of aged goods.
(c)
Consists of reserve for merchandise returns and markdowns of aged goods.
(d)
Includes charges for the write-down of property, inventory and deferred rent, severance and benefits, and contract termination cost.
(e)
Includes non-cash reductions for the write-down of property, inventory, and deferred rent, and cash payments for severance and benefits and contract termination costs.
(f)
Consists of the remaining liability for severance and benefits and contract termination costs related to closed stores.
(3)
Exhibits. Exhibits marked with an asterisk (*) are filed herein. Copies of exhibits will be furnished upon written request and payment of the Company’s reasonable expenses in furnishing the exhibits. Exhibits 10.1 through 10.33 are management contracts or compensatory plans or arrangements.
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 its behalf by the undersigned, thereunto duly authorized, on this 13th day of April 2006.
BIG LOTS, INC.
By:
/s/ Steven S. FishmanSteven S. Fishman
Chairman of the Board, Chief Executive Officer
and President
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 indicated on the 13th day of April 2006.
/s/ Steven S. FishmanSteven S. Fishman
Chairman of the Board, Chief Executive Officer
and President (Principal Executive Officer)
/s/ Joe R. CooperJoe R. Cooper
Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
/s/ Sheldon M. Berman*Sheldon M. Berman
Director
/s/ Ned Mansour*Ned Mansour
Director
/s/ David T. Kollat*David T. Kollat
Director
/s/ Russell Solt*Russell Solt
Director
/s/ Brenda J. Lauderback*Brenda J. Lauderback
Director
/s/ James R. Tener*James R. Tener
Director
/s/ Philip E. Mallott*Philip E. Mallott
Director
/s/ Dennis B. Tishkoff*Dennis B. Tishkoff
Director
*
The above named Directors of the Registrant execute this report by Charles W. Haubiel II, their attorney-in-fact, pursuant to the powers of attorney executed by the above-named Directors and filed with the Securities and Exchange Commission, all in the capacities indicated and on the 13th day of April, 2006.
By: /s/ Charles W. Haubiel IICharles W. Haubiel II
Attorney-in-Fact