<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 22, 1996
REGISTRATION NO. 333-2545
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20459
------------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CONSOLIDATED STORES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
06-1119097
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
300 PHILLIPI ROAD, P.O. BOX 28512
COLUMBUS, OHIO 43228-0512
(614) 278-6800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ALBERT J. BELL, ESQ.
300 PHILLIPI ROAD, P.O. BOX 28512
COLUMBUS, OHIO 43228-0512
(614) 278-6800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
Copies to:
MICHAEL WAGER, ESQ.
BENESCH, FRIEDLANDER, COPLAN & ARONOFF P.L.L.
2300 BP AMERICA BUILDING
200 PUBLIC SQUARE
CLEVELAND, OHIO 44114-2378
DAVID J. BEVERIDGE, ESQ.
SHEARMAN & STERLING
599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered
pursuant to a dividend or interest reinvestment plan, please check the following
box.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) PRICE(2) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per
share 5,750,000 $37.38 $196,299,250 $67,690
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<FN>
(1) Includes 750,000 shares subject to an option granted to the Underwriters to
cover any over-allotments.
(2) Estimated solely for the purpose of calculating the registration fee.
Pursuant to Rule 457(c) under the Securities Act of 1933, as amended, the
registration fee applicable to the Common Stock is calculated upon the basis
of the average high and low prices of the Common Stock as reported on the
New York Stock Exchange Composite Tape on May 16, 1996.
(3) Of the 5,750,000 shares being registered (i) 4,025,000 shares were
registered in connection with the original filing of this registration
statement at a proposed maximum aggregate offering price of $131,818,750 and
a registration fee of $45,455 and (ii) 1,725,000 additional shares are being
registered by this filing at a proposed maximum aggregate offering price of
$64,480,500 and a registration fee of $22,235.
(4) Includes $45,455 previously paid in connection with this transaction.
</TABLE>
THIS REGISTRATION STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(A) OF THE SECURITIES ACT.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MAY 22, 1996
PROSPECTUS
5,000,000 SHARES
[LOGO] CONSOLIDATED STORES
CORPORATION
COMMON STOCK
------------------------
All of the 5,000,000 shares of common stock (the "Common Stock") offered
hereby (the "Offering") are being issued and sold by Consolidated Stores
Corporation. The Common Stock is traded on the New York Stock Exchange under the
symbol "CNS." On May 21, 1996, the last reported sale price of the Common Stock
on the New York Stock Exchange was $39 3/8 per share. See "Price Range of Common
Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
Per Share.......................... $ $ $
- ------------------------------------------------------------------------------------------------
Total (3).......................... $ $ $
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<FN>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including certain liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $750,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase up to an additional
750,000 shares of Common Stock, to cover over-allotments, if any. If such
option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
</TABLE>
------------------------
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if issued to and accepted by them and subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject any order in whole or in part. It is expected
that delivery of the shares of Common Stock will be made in New York, New York
on or about , 1996.
------------------------
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
MCDONALD & COMPANY
SECURITIES, INC.
------------------------
The date of this Prospectus is , 1996.
<PAGE> 3
[PHOTOS]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus and the documents incorporated herein by reference.
Unless otherwise indicated, (i) all references in this Prospectus to the
"Company" are to Consolidated Stores Corporation, a Delaware corporation, and
its subsidiaries, (ii) all references in this Prospectus to "Consolidated
Stores" are to the Company prior to the acquisition of Kay-Bee Center, Inc.,
(iii) all references in this Prospectus to "Kay-Bee" are to Kay-Bee Center,
Inc., a California corporation and a subsidiary of the Company acquired in May
1996, and (iv) all the information in this Prospectus assumes that the
over-allotment option granted to the Underwriters has not been exercised. Unless
otherwise indicated, references herein to fiscal years of the Company are to the
Company's 52- or 53-week fiscal year (which ends on the Saturday nearest to
January 31 in the following calendar year). For example, "fiscal 1995" refers to
the Company's fiscal year ended February 3, 1996. References herein to fiscal
years of Kay-Bee are to Kay-Bee's historical fiscal year, which ended on
December 31 of each calendar year. Odd Lots, Big Lots, iTZADEAL!, All For One,
Toy Liquidators, The Amazing Toy Store, Kay-Bee Toys and Toy Works are
trademarks of the Company. Certain of the information contained in this summary
and elsewhere in this Prospectus, including information with respect to the
realization of synergies from the acquisition of Kay-Bee and the Company's
growth strategy, are forward looking statements. For a discussion of important
factors that could affect such matters, see "Risk Factors."
THE COMPANY
The Company is the nation's largest close-out retailer with 1,906 stores
located in all 50 states and Puerto Rico. The Company operates 750 retail
close-out stores, primarily under the names Odd Lots and Big Lots (together,
"Odd Lots/Big Lots"), iTZADEAL! and All For One, in the midwestern, southern and
mid-Atlantic regions of the United States, and 1,156 retail toy stores
throughout the United States and Puerto Rico, primarily under the names Kay-Bee
Toys, Toy Works, The Amazing Toy Store and Toy Liquidators (collectively, the
"Toy Stores"). Approximately 1,045 of the Toy Stores were acquired as of May 5,
1996 in the acquisition (the "Acquisition") of Kay-Bee Center, Inc. from
Melville Corporation ("Melville").
As a value retailer focused on close-out merchandise, the Company seeks to
provide the budget-conscious consumer with a broad range of quality, name-brand
products at exceptional values. The Company's close-out stores typically offer
merchandise at prices 15% to 35% below those offered by other discount retailers
and up to 70% below those offered by traditional retailers. The Company's
close-out stores offer a wide variety of name-brand consumer products, including
food items, health and beauty aids, electronics, housewares, tools, paint, lawn
and garden, hardware, sporting goods, toys and softlines. In addition, these
stores supplement their broad offering of items in core product categories with
a changing mix of new merchandise and seasonal goods such as back-to-school and
holiday merchandise. The Toy Stores offer a broad variety of close-out toys, as
well as currently promoted retail toys (known as "in-line toys") and traditional
toy merchandise. The Company's name-brand close-out merchandise primarily
consists of products obtained from manufacturers' excess inventories, which
generally result from production overruns, package changes, discontinued
products and returns.
The Company's goal is to build upon its leadership position in close-out
retailing, a fast-growing segment of the retailing industry, by expanding its
market presence in its existing and in new markets. The Company has adopted a
business strategy of pursuing growth by capitalizing on the following
competitive strengths: (i) its ability to offer name-brand products at
discounted prices; (ii) its purchasing expertise and strong buying
relationships; (iii) its ability to lease low-cost store sites in strip shopping
centers, enclosed shopping malls and outlet malls on favorable terms; (iv) its
ability to efficiently warehouse and distribute large quantities of merchandise;
and (v) its focus on cost control.
Over the past five fiscal years, Consolidated Stores has experienced
substantial growth in net sales, operating profit and earnings per share. Net
sales have increased from $771.5 million in fiscal 1991 to $1,512.3 million in
fiscal 1995, a compound annual growth rate of 18.3%. This growth has been driven
by new store openings and comparable store sales gains. Consolidated Stores has
increased the number of its stores from
3
<PAGE> 5
337 to 861 during this five-year period, while total retail selling space
increased from approximately 7,000,000 square feet to approximately 12,000,000
square feet, a compound annual growth rate of approximately 14.4%. Merchandising
improvements have increased average sales per square foot from approximately
$109 in fiscal 1991 to approximately $127 in fiscal 1995. Comparable store sales
increases were 5.6%, 4.3%, 1.8%, 3.5% and 4.3% in fiscal 1991, 1992, 1993, 1994
and 1995, respectively. Consolidated Stores also has achieved profitability
improvements with operating margins increasing from 5.0% in fiscal 1991 to 7.4%
in fiscal 1995 and earnings per share increasing from $.44 per share to $1.32
per share during such period.
The Company believes that the combination of its strengths in
merchandising, purchasing, site selection, distribution and cost-containment has
made it a low-cost, value retailer well-positioned for future growth. The
Company's growth strategy is to increase net sales and earnings through:
- New Store Expansion. The Company intends to increase retail selling
space by approximately 10% to 15% per fiscal year. Currently, the
Company's stores are located primarily in the midwestern, southern and
mid-Atlantic regions of the United States. Management believes there are
substantial opportunities to increase the store count in the Company's
existing markets. In addition, the Company believes the southwestern and
western areas of the United States have significant longer-term growth
potential because the Company has few stores in these regions. In fiscal
1996, net of store closings, the Company expects to open 65 to 75 new Odd
Lots/Big Lots stores, 50 to 70 new Toy Stores and 10 new iTZADEAL!
stores.
- Comparable Store Sales Increases. The Company seeks to increase
comparable store sales through an expansion of certain key merchandise
categories and gradual modification of its merchandise mix to include a
greater percentage of items with higher average retail price points as
well as an increased use of television advertising and improvements to
its current inventory management system.
- Realization of Kay-Bee Acquisition Synergies. The Company believes there
are several strategic benefits that can be achieved as a result of the
Acquisition. The Company expects that its increased purchasing power
resulting from the Acquisition will enhance its ability to source
high-quality close-out toys for all of its stores at competitive prices.
In addition, the Company intends to (i) gradually increase the percentage
of higher-margin close-out toys at the Kay-Bee stores and (ii) pursue the
elimination of duplicative administrative expenses resulting from the
Acquisition.
- Selective Acquisitions. The Company believes that the current
consolidation of retailers will present opportunities for strategic
acquisitions. Although the Company is not currently considering any
acquisitions, it intends to review acquisitions in the future as
opportunities arise.
THE ACQUISITION OF KAY-BEE
As of May 5, 1996, Consolidated Stores acquired Kay-Bee for a purchase
price of approximately $315 million (subject to post-closing adjustments),
consisting of $215 million in cash and $100 million of senior subordinated
promissory notes (the "Subordinated Notes") issued to Melville. Kay-Bee operated
1,045 toy stores located in all 50 states and Puerto Rico primarily under the
names Kay-Bee Toys and Toy Works. There are 918 Kay-Bee stores located in
enclosed shopping malls and 127 stores located in strip shopping centers. The
Company believes that Kay-Bee was the largest enclosed shopping mall-based toy
retailer in the United States. On a pro forma basis, after giving effect to the
Acquisition, the Company would have had net sales of $2,597.7 million in fiscal
1995. See "Acquisition of Kay-Bee Center, Inc."
RECENT DEVELOPMENTS
On May 13, 1996, Consolidated Stores announced its financial results for
the first fiscal quarter ended May 4, 1996. See "Recent Developments."
4
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered...................................... 5,000,000 shares
Common Stock Outstanding after the Offering(1)............ 53,105,521 shares
Use of Proceeds........................................... To repay a portion of the
Company's borrowings incurred
under the Revolving Credit
Facility (as defined herein) to
finance the Acquisition. See "Use
of Proceeds."
New York Stock Exchange Symbol............................ CNS
</TABLE>
- ---------------
(1) Based on the number of shares outstanding on May 17, 1996. Excludes
4,416,318 shares of Common Stock reserved for issuance upon exercise of
outstanding stock options and 761,000 shares of Common Stock that will be
reserved for issuance upon stockholder approval of the Company's proposed
1996 Performance Incentive Plan.
5
<PAGE> 7
SUMMARY HISTORICAL FINANCIAL DATA
CONSOLIDATED STORES CORPORATION
<TABLE>
<CAPTION>
FISCAL YEAR ENDED(1)
-------------------------------------------
FEBRUARY 3, JANUARY 28, JANUARY 29,
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE
AND OPERATING DATA)
<S> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Net sales.............................................. $ 1,512,299 $ 1,278,644 $ 1,055,291
Cost of sales.......................................... 868,139 728,494 593,238
---------- ---------- ----------
Gross profit......................................... 644,160 550,150 462,053
Selling and administrative expenses.................... 532,158 451,411 386,116
---------- ---------- ----------
Operating profit..................................... 112,002 98,739 75,937
Interest expense....................................... 8,036 7,238 5,812
Other expense (income)................................. 1,706 (532) (1,591)
---------- ---------- ----------
Income before income taxes............................. 102,260 92,033 71,716
Income taxes........................................... 37,854 36,813 28,689
---------- ---------- ----------
Net income........................................... $ 64,406 $ 55,220 $ 43,027
========== ========== ==========
Earnings per common and common equivalent share of
stock................................................ $ 1.32 $ 1.15 $ .90
Weighted average common and common equivalent shares
outstanding........................................... 48,903 48,077 47,976
OPERATING DATA:
Stores open at end of period........................... 861 752 609
Percentage change in net sales......................... 18.3% 21.2% 13.6%
Percentage change in comparable store sales(2)......... 4.3% 3.5% 1.8%
Total retail selling square footage at end of period
(000's).............................................. 12,023 10,637 9,014
Average net sales per square foot(2)................... $ 126.98 $ 121.71 $ 119.86
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital........................................ $ 253,858 $ 210,601 $ 174,529
Total assets........................................... 639,815 551,620 468,220
Long-term obligations.................................. 25,000 40,000 50,000
Stockholders' equity................................... 389,564 315,234 258,535
</TABLE>
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(1) All years presented are 52-week periods except for fiscal 1995, which
consisted of 53 weeks.
(2) Percentage change in comparable store sales is defined as the annual
percentage change in aggregate net sales from stores that have been open two
full fiscal years at the beginning of the fiscal year. Percentage change in
comparable store sales and average net sales per square foot for fiscal 1995
have been adjusted to reflect comparable 52-week periods.
6
<PAGE> 8
SUMMARY HISTORICAL FINANCIAL DATA
KAY-BEE CENTER, INC.
<TABLE>
<CAPTION>
QUARTER ENDED
(UNAUDITED)
---------------------
MARCH YEAR ENDED DECEMBER 31,
30, APRIL 1, --------------------------------------
1996 1995 1995 1994 1993
-------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT OPERATING DATA)
STATEMENT OF OPERATIONS DATA:
Net sales...................... $177,627 $169,118 $1,077,297 $1,012,164 $919,055
Cost of goods sold, buying and
warehousing costs............ 114,753 113,363 695,987(1) 611,905 543,948
-------- -------- ---------- ---------- ---------
Gross profit................. 62,874 55,755 381,310 400,259 375,107
Store operating, selling,
general and administrative and
depreciation and amortization
expenses...................... 86,255 80,999 363,514 338,403 316,117
Restructuring and asset
impairment charges........... 1,167 -- 65,816(2) -- --
-------- -------- ---------- ---------- ---------
Operating (loss) profit...... (24,548) (25,244) (48,020) 61,856 58,990
Interest expense (income),
net.......................... 546 (122) 5,335 2,081 260
-------- -------- ---------- ---------- ---------
(Loss) earnings before income
taxes and cumulative effect of
change in accounting
principle..................... (25,094) (25,122) (53,355) 59,775 58,730
Income tax (benefit) expense... (10,214) (10,230) (3,102) 22,124 22,249
-------- -------- ---------- ---------- ---------
(Loss) earnings before
cumulative effect of change in
accounting principle.......... (14,880) (14,892) (50,253) 37,651 36,481
Cumulative effect of change in
accounting principle, net.... -- 711 711 -- --
-------- -------- ---------- ---------- ---------
Net (loss) earnings.......... $(14,880) $(15,603) $ (50,964) $ 37,651 $ 36,481
======== ======== ========== ========== =========
OPERATING DATA:
Stores open at end of period... 1,044 1,008 1,004 996 1,030
Percentage change in net
sales........................ 5.0% 1.9% 6.4% 10.1% (4.0)%
Percentage change in comparable
store sales(3)............... 2.5% (0.2)% 2.3% 10.2% (5.4)%
Total retail selling square
footage at end of period
(000's)...................... 4,077 3,831 3,672 3,620 3,692
Average net sales per square
foot......................... $ 43.56 $ 44.17 $ 279.63 $ 273.15 $ 244.29
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital................ $127,102 $155,975 $ 138,819 $ 177,066 $161,971
Total assets................... 439,828 492,718 482,216 567,946 524,467
Long-term debt, including
capital lease obligations.... 11,552 11,824 11,622 11,885 12,124
Shareholder's equity........... 259,606 325,343 274,486 345,580 325,007
</TABLE>
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(1) During December 1995, Kay-Bee undertook $25.8 million of inventory clearance
markdowns in order to liquidate discontinued items and slower-moving
merchandise. This markdown charge resulted in an increase in cost of goods
sold in the fourth quarter.
(2) During the fourth quarter of 1995, Kay-Bee incurred $65.8 million of
restructuring and asset impairment charges to cover the closing of 52
underperforming stores and the write-down of impaired assets.
(3) Annual percentage change in comparable store sales for Kay-Bee is defined as
the percentage change in aggregate net sales from stores that have been open
at least 13 months.
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SUMMARY PRO FORMA COMBINED FINANCIAL DATA
CONSOLIDATED STORES CORPORATION AND KAY-BEE CENTER, INC.
The summary pro forma combined financial data for the Company set forth
below has been derived from the unaudited pro forma combined financial
information included elsewhere in this Prospectus and gives effect to (i) the
Acquisition and the financing thereof, including the issuance of the
Subordinated Notes and borrowings under the Revolving Credit Facility, and (ii)
the Offering and the application of net proceeds therefrom, as if those
transactions had occurred on January 29, 1995 with respect to the statement of
earnings data, and as of February 3, 1996 with respect to the balance sheet and
operating data. The summary unaudited pro forma combined financial data does not
necessarily represent what the Company's financial position and results of
operations would have been if the Acquisition and the financing thereof and the
Offering and the application of the net proceeds therefrom had actually been
completed as of the dates indicated and is not intended to project the Company's
financial position or results of operations for any future period. The following
summary pro forma combined financial data should be read in conjunction with the
audited financial statements of each of Consolidated Stores and Kay-Bee and the
unaudited pro forma combined financial information, including the respective
notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
FEBRUARY 3, 1996(1)
------------------------
(UNAUDITED, IN THOUSANDS
EXCEPT PER SHARE AND
OPERATING DATA)
<S> <C>
STATEMENT OF EARNINGS DATA:
Net sales............................................................... $2,597,721
Cost of sales........................................................... 1,550,202
----------
Gross profit.......................................................... 1,047,519
Selling and administrative expenses..................................... 914,555
----------
Operating profit...................................................... 132,964
Interest expense........................................................ 17,681
Other expense........................................................... 1,706
----------
Earnings before income taxes............................................ 113,577
Income taxes............................................................ 42,023
----------
Net earnings.......................................................... $ 71,554
==========
Earnings per common and common equivalent share of stock................ $ 1.33
Weighted average common and common equivalent shares outstanding........ 53,903
OPERATING DATA:
Stores open at end of period............................................ 1,865
Total retail selling square footage at end of period (000's)............ 15,695
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital......................................................... $ 358,538
Total assets............................................................ 1,082,291
Long-term obligations, including obligations under capital leases....... 111,622
Stockholders' equity.................................................... 571,823
</TABLE>
- ---------------
(1) The pro forma purchase price for the Acquisition was determined based on the
book value as of December 31, 1995 of the Kay-Bee net assets acquired. The
actual purchase price as of May 5, 1996 was higher based primarily on the
increase in seasonal working capital at Kay-Bee for the period from January
1, 1996 to May 4, 1996. This increase in working capital and the borrowings
that would be attributable thereto are not reflected in the unaudited pro
forma combined financial information. Accordingly, the unaudited pro forma
combined financial information reflects a lower purchase price and lower
outstanding borrowings under the Revolving Credit Facility. The Company
borrowed approximately $215 million under the Revolving Credit Facility to
finance the cash portion of the Acquisition, which borrowings will be
partially repaid with the net proceeds from the Offering.
8
<PAGE> 10
RISK FACTORS
Prior to making an investment decision, prospective investors should
consider carefully all of the information set forth in this Prospectus and, in
particular, should evaluate the following risk factors.
ABILITY TO EFFICIENTLY INTEGRATE AND OPERATE KAY-BEE
The future success of the Company will depend in part upon its ability to
integrate and operate Kay-Bee successfully with its core close-out business. The
Acquisition significantly expanded Consolidated Stores' retail sale of in-line
toys, which, as a category, is highly competitive, very seasonal and heavily
dependent on the introduction and marketing of popular products by
manufacturers. The Acquisition also more than doubled the number of retail
stores operated by Consolidated Stores, with most of the acquired stores located
in enclosed shopping malls. While Consolidated Stores operates a number of
enclosed shopping mall-based close-out stores, its historical focus has been
strip shopping centers and outlet malls. Additionally, many of the Kay-Bee
stores are located in geographic areas in which Consolidated Stores has not
previously operated. The future success of the Company will also depend in part
on its ability to retain and assimilate qualified employees of Kay-Bee. There
can be no assurance that the Company will be able to efficiently integrate and
operate Kay-Bee with its core close-out business. A failure to do so could have
a material adverse effect on the Company's results of operations and financial
condition. See "Business -- Acquisition of Kay-Bee."
ABILITY TO ACHIEVE CONTINUED GROWTH
Over the past five fiscal years, Consolidated Stores has experienced
substantial growth in net sales, operating profit and earnings per share. The
Company's continued growth depends on, among other factors, its ability to (i)
open and operate new stores profitably, (ii) increase comparable store sales and
(iii) efficiently integrate and operate Kay-Bee. The Company plans to open 110
to 135 new stores (net of store closings) in fiscal 1996. The Company's ability
to successfully manage its growth is dependent on a number of factors, including
its ability to (a) identify new markets in which it can successfully compete,
(b) locate suitable store sites and negotiate acceptable lease terms, (c)
introduce its stores and the value-oriented, close-out retailing concept in new
markets, (d) adapt its purchasing, distribution, management information and
other systems to accommodate expanded operations, (e) attract and train
qualified personnel and (f) obtain adequate financing. In addition, the
Company's future growth is dependent upon factors beyond the Company's control
such as general economic and business conditions affecting manufacturing and
consumer spending. There can be no assurance that the Company will be able to
achieve its planned store growth or comparable store sales increases or that
such growth will allow the Company to maintain profitability.
COMPETITION
The retail industry is highly competitive. The Company's retail
close-out stores compete with discount stores (such as Wal-Mart(R), KMart(R)
and Target(R)), deep discount drugstore chains and other value-oriented
specialty retailers. The Company's retail toy operations compete directly with
local and regional enclosed shopping mall-based toy retailers, destination toy
stores (such as Toys "R" Us(R)) and discount retailers with toy departments and
indirectly with enclosed shopping mall-based retailers such as concept stores
and theme-based stores that feature toys or toy-related merchandise. Certain of
the Company's competitors have greater financial, distribution, marketing and
other resources than the Company
SEASONALITY
Consolidated Stores historically has experienced seasonality, with a
significant percentage of its net sales and income being realized in the fourth
fiscal quarter. As a result of the Acquisition and the increase in the Company's
retail toy operations, the Company expects to recognize an increasing amount of
its net sales and income during the fourth fiscal quarter and to recognize
operating losses during the other three fiscal quarters. In addition, the
Company's quarterly results can be affected by the timing of store openings and
closings, the amount of net sales contributed by new and existing stores and the
timing of certain holidays. Furthermore, in anticipation of increased sales
activity during the fourth fiscal quarter, the Company purchases substantial
9
<PAGE> 11
amounts of inventory during the second and third fiscal quarters and hires a
significant number of temporary employees to bolster its store staffing during
the fourth fiscal quarter. If for any reason the Company's net sales are below
the Company's expectations for the fourth fiscal quarter, the Company's
financial condition and results of operations could be adversely affected.
The increased seasonality of the Company's business will also increase the
Company's demand for seasonal borrowings. The Company has traditionally drawn
upon its credit lines in the first three fiscal quarters and repaid the
borrowings during the fourth fiscal quarter. The Acquisition will increase the
amount of seasonal borrowings in the first three fiscal quarters. If for any
reason the Company's net sales are below the Company's expectations for the
fourth fiscal quarter, its ability to repay seasonal borrowings in total by
fiscal year end could be adversely affected.
PURCHASING OF SUITABLE MERCHANDISE
The success of the Company's close-out business depends upon its ability to
select and purchase quality merchandise at attractive prices in order to
maintain a balance of product in certain core merchandising categories along
with a changing mix of merchandise. The Company has no continuing contracts for
the purchase of close-out merchandise and relies on buying opportunities from
both existing and new sources, for which it competes with other close-out
merchandisers and wholesalers. In addition, the success of the Company's toy
business depends in part upon its ability to purchase in-line toys at
competitive prices and on competitive terms. Although the Company believes that
its management has longstanding relationships with its suppliers and is
competitively positioned to continue to seek new sources, there can be no
assurance that the Company will be successful in maintaining an adequate
continuing supply of quality merchandise at attractive prices. See
"Business -- Purchasing."
IMPACT OF FOREIGN IMPORTS
The Company imports approximately 20% to 25% of its inventory directly from
certain Asian, South American and European countries, and a material amount of
its domestically purchased merchandise is also manufactured abroad. As a result,
a significant portion of the Company's merchandise supply is subject to certain
risks including increased import duties and more restrictive quotas, loss of
"most favored nation" ("MFN") trading status, currency fluctuations, work
stoppages, transportation delays, economic uncertainties including inflation,
foreign government regulations, political unrest and trade restrictions,
including retaliation by the United States against foreign practices. MFN status
allows the importation of products at lower tariff rates than otherwise imposed
by U.S. laws.
The Company believes at least 65% of its direct and indirect imports come
from the People's Republic of China ("China"). The United States customarily
grants China MFN status, which must be renewed annually. There are currently a
number of trade-related and other issues between the governments of the United
States and China, any one of which could result in the revocation or non-renewal
of China's MFN status. If China's MFN status were revoked or not renewed, the
Company could have higher purchasing costs or a material depletion of available
merchandise because of increased tariffs on products imported from China. While
the Company believes that alternative domestic and foreign sources could supply
merchandise to the Company, an interruption or delay in supply from China or the
Company's other foreign sources, or the imposition of additional duties, taxes
or other charges on these imports, could have a material adverse effect on the
Company's results of operations and financial condition. See
"Business -- Purchasing."
DISRUPTIONS IN RECEIVING AND DISTRIBUTION
Substantially all of the Company's inventory for the Odd Lots/Big Lots, The
Amazing Toy Store and Toy Liquidators stores is shipped directly from suppliers
to the Company's 2,884,100 square foot distribution facility in Columbus, Ohio,
where the inventory is processed and then distributed to stores. A natural
disaster or other calamity that causes long-term damage to the Columbus facility
or any long-term disruption in operations of this facility could have a material
adverse effect on the Company's results of operations and financial condition.
See "Business -- Warehousing and Distribution."
10
<PAGE> 12
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
The Company has adopted a stockholder's rights agreement that includes
certain provisions that are intended to prevent or delay the acquisition of the
Company by means of a tender offer, proxy contest or otherwise. Additionally,
the Company's Restated Certificate of Incorporation authorizes the Board of
Directors to issue preferred stock, without further stockholder approval, which
could have dividend, redemption, liquidation, conversion, voting or other rights
that could adversely affect the voting power or other rights of the holders of
the Common Stock. Finally, the Company is subject to Section 203 of the Delaware
General Corporation Law, which limits transactions between a publicly held
company and "interested stockholders" (generally, those stockholders who,
together with their affiliates and associates, own 15% or more of a company's
outstanding capital stock). Any one of, or a combination of, the above
anti-takeover provisions could discourage a third party from attempting to
acquire control of the Company. See "Description of Capital Stock."
11
<PAGE> 13
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $185 million ($213 million if the Underwriters' over-allotment
option is exercised in full), after deducting the underwriting discount and
expenses of this Offering payable by the Company. Such proceeds will be used to
repay a portion of the approximately $215 million in borrowings that the Company
incurred under the $600.0 million revolving credit facility (the "Revolving
Credit Facility") to finance the Acquisition. The Revolving Credit Facility has
a maturity date of May 3, 1999. Borrowings under the Revolving Credit Facility
accrue interest on a floating rate based on LIBOR. On May 17, 1996, the weighted
average interest rate on borrowings under the Revolving Credit Facility was
6.4%. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Capital Resources and Liquidity."
12
<PAGE> 14
CAPITALIZATION
The following table sets forth (i) the historical capitalization of
Consolidated Stores as of February 3, 1996, (ii) the pro forma capitalization of
the Company as of February 3, 1996, after giving effect to the Acquisition and
related financings, and (iii) the pro forma capitalization of the Company as of
February 3, 1996, after giving effect to the Acquisition and related financings,
and as adjusted to reflect the application of the net proceeds from the
Offering. This presentation should be read in conjunction with the audited
financial statements of Consolidated Stores, including the notes thereto, and
the unaudited pro forma combined financial information of the Company, including
the notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF FEBRUARY 3, 1996
-------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED
-------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt..................... $ 10,000 $ 263 $ 263
======== ======== ========
Long-term debt, less current maturities:
Revolving Credit Facility........................... $ -- $132,607 $ --
Senior notes........................................ 25,000 -- --
Guaranteed first mortgage note...................... -- 7,908 7,908
Obligations under capital leases.................... -- 3,714 3,714
Subordinated Notes.................................. -- 100,000 100,000
-------- -------- --------
Total long-term debt............................. 25,000 244,229 111,622
-------- -------- --------
Stockholders' equity:
Preferred stock, $.01 par value, 2,000,000 shares
authorized; no shares issued....................... -- -- --
Common stock, $.01 par value, 90,000,000 shares
authorized, 47,775,958 shares issued and
outstanding, 52,775,958 shares issued and
outstanding, as adjusted(2)........................ 478 478 528
Non-voting common stock, $.01 par value, 8,000,000
shares authorized; no shares issued................ -- -- --
Additional paid-in capital.......................... 104,511 104,511 289,461
Retained earnings................................... 285,105 282,364 282,364
Other adjustments................................... (530) (530) (530)
-------- -------- --------
Total stockholders' equity....................... 389,564 386,823 571,823
-------- -------- --------
Total capitalization........................ $414,564 $631,052 $ 683,445
======== ======== ========
</TABLE>
- ---------------
(1) The pro forma purchase price for the Acquisition was determined based on the
book value as of December 31, 1995 of the Kay-Bee net assets acquired. The
actual purchase price as of May 5, 1996 was higher based primarily on the
increase in seasonal working capital at Kay-Bee for the period from January
1, 1996 to May 4, 1996. This increase in working capital and the borrowings
that would be attributable thereto are not reflected in the unaudited pro
forma combined financial information. Accordingly, the unaudited pro forma
combined financial information reflects a lower purchase price and lower
outstanding borrowings under the Revolving Credit Facility. The Company
borrowed approximately $215 million under the Revolving Credit Facility to
finance the cash portion of the Acquisition, which borrowings will be
partially repaid with the net proceeds from the Offering.
(2) Excludes 4,590,803 shares of Common Stock reserved for issuance upon
exercise of outstanding stock options and 761,000 shares of Common Stock
that will be reserved for issuance upon stockholder approval of the
Company's proposed 1996 Performance Incentive Plan.
13
<PAGE> 15
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the New York Stock Exchange ("NYSE") under
the symbol "CNS." The following table sets forth, on a per share basis, the high
and low sales prices for the Common Stock as reported on the NYSE for the
periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
FISCAL 1994:
First Quarter.......................................... $20 $16 3/4
Second Quarter......................................... 17 1/4 11 1/2
Third Quarter.......................................... 18 1/2 11 7/8
Fourth Quarter......................................... 19 3/8 15 3/4
FISCAL 1995:
First Quarter.......................................... $20 7/8 $16 1/4
Second Quarter......................................... 23 15 3/4
Third Quarter.......................................... 25 1/8 21 1/8
Fourth Quarter......................................... 25 5/8 19 3/8
FISCAL 1996:
First Quarter.......................................... $37 1/8 $20 3/4
Second Quarter (through May 21, 1996).................. 39 3/8 34 3/8
</TABLE>
The last reported sale price of the Common Stock on the NYSE as of a recent
date is set forth on the cover page of this Prospectus. As of May 17, 1996,
there were 1,306 holders of record of the Common Stock.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company has
followed a policy of reinvesting earnings in the business. In addition, the
Company's indebtedness (including the Revolving Credit Facility and Subordinated
Notes) contains covenants that limit the Company's ability to pay dividends. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources and Liquidity."
14
<PAGE> 16
RECENT DEVELOPMENTS
On May 13, 1996, Consolidated Stores announced its financial results for
the first fiscal quarter ended May 4, 1996. Consolidated Stores had net sales of
$343.2 million in the fiscal quarter ended May 4, 1996, compared with $291.8
million in the first fiscal quarter of 1995, an increase of $51.4 million, or
17.6%. Comparable store sales for stores open two years at the beginning of the
fiscal year increased 5.4% in the 1996 fiscal quarter compared to a 4.3%
improvement in the 1995 period. Operating profit was $7.4 million in the first
fiscal quarter of 1996 compared with $6.0 million in the first fiscal quarter of
1995, an increase of $1.4 million, or 23.3%, and selling, general and
administrative expenses, as a percentage of net sales, were 40.2% in the first
fiscal quarter of 1996 compared to 40.1% in the same 1995 period. Net income in
the first fiscal quarter of 1996 increased 20.0% to $3.6 million, $.07 per
share, compared with net income of $3.0 million, $.06 per share, in the first
fiscal quarter of 1995.
The following summary first fiscal quarter financial data should be read in
conjunction with "Capitalization," "Selected Historical Financial Data,"
"Selected Historical Operating Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the audited financial
statements of Consolidated Stores included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
(UNAUDITED)
------------------------------
MAY 4, 1996 APRIL 29, 1995
----------- --------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
STATEMENT OF EARNINGS DATA:
Net sales.................................................... $ 343,229 $291,797
Cost of sales................................................ 197,802 168,897
----------- --------------
Gross profit.............................................. 145,427 122,900
Selling and administrative expenses.......................... 138,059 116,923
----------- --------------
Operating profit.......................................... 7,368 5,977
Other expense................................................ 1,644 1,145
----------- --------------
Income before income taxes................................... 5,724 4,832
Income taxes................................................. 2,118 1,836
----------- --------------
Net income................................................ $ 3,606 $ 2,996
=========== =============
Earnings per common and common equivalent share of stock..... $ 0.07 $ 0.06
=========== =============
Weighted average common and common
equivalent shares outstanding............................. 49,826 48,482
=========== =============
</TABLE>
15
<PAGE> 17
SELECTED HISTORICAL FINANCIAL DATA
CONSOLIDATED STORES CORPORATION
The selected historical financial data set forth in the following table has
been derived from the audited financial statements of Consolidated Stores,
including the notes thereto. The statement of earnings data for the fiscal years
ended February 3, 1996, January 28, 1995 and January 29, 1994 and the balance
sheet data as of February 3, 1996 and January 28, 1995 are derived from the
financial statements of Consolidated Stores, which have been audited by Deloitte
& Touche LLP, independent auditors, and are included elsewhere in this
Prospectus. The statement of earnings data for the fiscal years ended January
30, 1993 and February 1, 1992 and the balance sheet data as of January 29, 1994,
January 30, 1993 and February 1, 1992 are derived from the financial statements
of Consolidated Stores, which also have been audited, but are not included
elsewhere in this Prospectus. This data should be read in conjunction with, and
is qualified by reference to, "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Consolidated Stores Corporation" and the
audited financial statements of Consolidated Stores, including the notes
thereto, and the other financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED(1)
-------------------------------------------------------------------
FEBRUARY 3, JANUARY 28, JANUARY 29, JANUARY 30, FEBRUARY 1,
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Net sales:
Odd Lots/Big Lots....................................... $ 1,286,675 $ 1,112,087 $ 941,471 $ 837,805 $ 744,896
iTZADEAL! and All For One............................... 106,283 93,590 92,283 72,986 7,685
The Amazing Toy Store and Toy Liquidators............... 76,689 45,937 -- -- --
---------- ---------- -------- -------- --------
Total retail.......................................... 1,469,647 1,251,614 1,033,754 910,791 752,581
Other................................................... 42,652 27,030 21,537 18,489 18,916
---------- ---------- -------- -------- --------
Total net sales.................................. 1,512,299 1,278,644 1,055,291 929,280 771,497
Cost of sales:
Odd Lots/Big Lots....................................... 738,675 638,533 531,605 479,536 441,351
iTZADEAL! and All For One............................... 56,585 47,331 45,275 36,973 4,084
The Amazing Toy Store and Toy Liquidators............... 40,598 22,467 -- -- --
---------- ---------- -------- -------- --------
Total retail.......................................... 835,858 708,331 576,880 516,509 445,435
Other................................................... 32,281 20,163 16,358 13,895 14,047
---------- ---------- -------- -------- --------
Total cost of sales.............................. 868,139 728,494 593,238 530,404 459,482
Gross profit:
Odd Lots/Big Lots....................................... 548,000 473,554 409,866 358,269 303,545
iTZADEAL! and All For One............................... 49,698 46,259 47,008 36,013 3,601
The Amazing Toy Store and Toy Liquidators............... 36,091 23,470 -- -- --
---------- ---------- -------- -------- --------
Total retail.......................................... 633,789 543,283 456,874 394,282 307,146
Other................................................... 10,371 6,867 5,179 4,594 4,869
---------- ---------- -------- -------- --------
Total gross profit............................... 644,160 550,150 462,053 398,876 312,015
Selling and administrative expenses....................... 532,158 451,411 386,116 334,494 273,704
---------- ---------- -------- -------- --------
Operating profit........................................ 112,002 98,739 75,937 64,382 38,311
Interest expense.......................................... 8,036 7,238 5,812 5,697 6,265
Other expense (income).................................... 1,706 (532) (1,591) (1,581) (369)
---------- ---------- -------- -------- --------
Income before income taxes.............................. 102,260 92,033 71,716 60,266 32,415
Income taxes.............................................. 37,854 36,813 28,689 23,156 12,317
---------- ---------- -------- -------- --------
Net income.............................................. $ 64,406 $ 55,220 $ 43,027 $ 37,110 $ 20,098
========== ========== ======== ======== ========
Earnings per common and common equivalent share of
stock................................................... $ 1.32 $ 1.15 $ .90 $ .78 $ .44
Weighted average common and common equivalent shares
outstanding.............................................. 48,903 48,077 47,976 47,676 45,797
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital........................................... $ 253,858 $ 210,601 $ 174,529 $ 142,305 $ 120,275
Total assets.............................................. 639,815 551,620 468,220 390,942 329,321
Long-term obligations..................................... 25,000 40,000 50,000 50,000 50,000
Stockholders' equity...................................... 389,564 315,234 258,535 209,459 170,520
</TABLE>
- ---------------
(1) All years presented are 52-week periods except for fiscal 1995, which
consisted of 53 weeks.
16
<PAGE> 18
SELECTED HISTORICAL FINANCIAL DATA
KAY-BEE CENTER, INC.
The selected historical financial data set forth in the following table has
been derived from the financial statements of Kay-Bee, including the notes
thereto. The statement of operations data for each of the three years ended
December 31, 1995 and balance sheet data as of December 31, 1995, 1994 and 1993
are derived from the financial statements of Kay-Bee, which have been audited by
KPMG Peat Marwick LLP, independent auditors, and are included elsewhere in this
Prospectus. The statement of operations data for the quarter ended March 30,
1996 and April 1, 1995 and balance sheet data as of March 30, 1996 and April 1,
1995 are derived primarily from Kay-Bee's unaudited interim financial statements
which are included elsewhere in this Prospectus. The data set forth below should
be read in conjunction with, and is qualified by reference to, "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Kay-Bee Center, Inc.," the financial statements of Kay-Bee, including the notes
thereto, and the other financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
(UNAUDITED)
--------------------
MARCH YEAR ENDED DECEMBER 31,
30, APRIL 1, ------------------------------------
1996 1995 1995 1994 1993
-------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net sales............................. $177,627 $169,118 $1,077,297 $1,012,164 $919,055
Cost of goods sold, buying and
warehousing costs................... 114,753 113,363 695,987(1) 611,905 543,948
-------- -------- ---------- ---------- ---------
Gross profit........................ 62,874 55,755 381,310 400,259 375,107
Store operating, selling, general and
administrative and depreciation and
amortization expenses................ 86,255 80,999 363,514 338,403 316,117
Restructuring and asset impairment
charges............................. 1,167 -- 65,816(2) -- --
-------- -------- ---------- ---------- ---------
Operating (loss) profit............. (24,548) (25,244) (48,020) 61,856 58,990
Interest expense (income), net........ 546 (122) 5,335 2,081 260
-------- -------- ---------- ---------- ---------
(Loss) earnings before income taxes
and cumulative effect of change in
accounting principle................. (25,094) (25,122) (53,355) 59,775 58,730
Income tax (benefit) expense.......... (10,214) (10,230) (3,102) 22,124 22,249
-------- -------- ---------- ---------- ---------
(Loss) earnings before cumulative
effect of change in accounting
principle............................ (14,880) (14,892) (50,253) 37,651 36,481
Cumulative effect of change in
accounting principle, net........... -- 711 711 -- --
-------- -------- ---------- ---------- ---------
Net (loss) earnings................. $(14,880) $(15,603) $ (50,964) $ 37,651 $ 36,481
======== ======== ========== ========== =========
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital....................... $127,102 $155,975 $ 138,819 $ 177,066 $161,971
Total assets.......................... 439,828 492,718 482,216 567,946 524,467
Long-term debt, including capital
lease obligations................... 11,552 11,824 11,622 11,885 12,124
Shareholder's equity.................. 259,606 325,343 274,486 345,580 325,007
</TABLE>
- ---------------
(1) During December 1995, Kay-Bee undertook $25.8 million of inventory clearance
markdowns in order to liquidate discontinued items and slower-moving
merchandise. This markdown charge resulted in an increase in cost of goods
sold in the fourth quarter.
(2) During the fourth quarter of 1995, Kay-Bee incurred $65.8 million of
restructuring and asset impairment charges to cover the closing of 52
underperforming stores and the write-down of impaired assets.
17
<PAGE> 19
SELECTED HISTORICAL OPERATING DATA
CONSOLIDATED STORES
The following table sets forth certain historical operating data of
Consolidated Stores for fiscal years 1991 through 1995.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED(1)
-------------------------------------------------------------------
FEBRUARY 3, JANUARY 28, JANUARY 29, JANUARY 30, FEBRUARY 1,
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Percentage change in net sales...................... 18.3% 21.2% 13.6% 20.5% 13.6%
Percentage change in comparable store sales(2)...... 4.3% 3.5% 1.8% 4.3% 5.6%
Total retail selling square footage at end of period
(000's)............................................ 12,023 10,637 9,014 7,877 7,017
Average net sales per square foot(2)................ $126.98 $121.71 $119.86 $115.64 $108.57
STORES OPENED
Odd Lots/Big Lots................................. 67 79 71 47 37
iTZADEAL! and All For One......................... 50 15 21 120 41
Toy Liquidators and The Amazing Toy Store......... 30 82 -- -- --
------- ------- ------- ------- -------
Total........................................ 147 176 92 167 78
STORES CLOSED
Odd Lots/Big Lots................................. 14 23 20 24 16
iTZADEAL! and All For One......................... 23 10 4 -- 1
Toy Liquidators and The Amazing Toy Store......... 1 -- -- -- --
------- ------- ------- ------- -------
Total........................................ 38 33 24 24 17
STORES OPEN AT END OF PERIOD
Odd Lots/Big Lots................................. 541 488 432 381 358
iTZADEAL! and All For One......................... 209 182 177 160 40
Toy Liquidators and The Amazing Toy Store......... 111 82 -- -- --
------- ------- ------- ------- -------
Total........................................ 861 752 609 541 398
</TABLE>
KAY-BEE
The following table sets forth certain historical operating data of Kay-Bee
for the first fiscal quarter of 1995 and of 1996 and for fiscal years 1993
through 1995.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------- YEAR ENDED DECEMBER 31,
MARCH 30, APRIL 1, ---------------------------
1996 1995 1995 1994 1993
--------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Percentage change in net sales......................... 5.0% 1.9% 6.4% 10.1% (4.0)%
Percentage change in comparable store sales(3)......... 2.5% (0.2)% 2.3% 10.2% (5.4)%
Total retail selling square footage at end of period
(000's).............................................. 4,077 3,831 3,672 3,620 3,692
Average net sales per square foot...................... $ 43.56 $ 44.17 $279.63 $273.15 $244.29
Stores opened.......................................... 3 -- 33 25 25
Stores closed.......................................... 38 11 48 23 --
Reclassification of stores previously (included)
excluded
from operations...................................... 75 23 23 (36) --
Stores open at end of period........................... 1,044 1,008 1,004 996 1,030
</TABLE>
- ---------------
(1) All years presented are 52-week periods except for fiscal 1995, which
consisted of 53 weeks.
(2) Annual percentage change in comparable store sales is defined as the annual
percentage change in aggregate net sales from stores that have been open two
full fiscal years at the beginning of the fiscal year. Percentage change in
comparable store sales and average net sales per square foot for fiscal 1995
have been adjusted to reflect comparable 52-week periods.
(3) Annual percentage change in comparable store sales for Kay-Bee is defined as
the percentage change in aggregate net sales from stores that have been open
at least 13 months.
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is the nation's largest close-out retailer, with 1,906 stores
located in all 50 states and Puerto Rico. The Company operates 750 retail
close-out stores, primarily under the names Odd Lots/Big Lots, iTZADEAL! and All
For One, in the midwestern, southern and mid-Atlantic regions of the United
States, and 1,156 retail toy stores throughout the United States and Puerto
Rico, primarily under the names Kay-Bee Toys, Toy Works, The Amazing Toy Store
and Toy Liquidators. Approximately 1,045 of the Toy Stores were acquired as of
May 5, 1996 in the Acquisition.
The historical results of operations for Kay-Bee must be adjusted in order
to be directly comparable to the cost of sales, gross profit and selling and
administrative expenses of Consolidated Stores. Consolidated Stores has recorded
transportation, distribution and buying expenses as period expenses included in
selling and administrative expenses, while Kay-Bee has recorded these expenses
in cost of goods sold. In fiscal 1995, conforming Kay-Bee's financial statements
to reflect Consolidated Stores' accounting treatment of these expenses would
have resulted in a decrease in cost of sales as a percentage of net sales of
approximately 3.4 percentage points and an equal and offsetting dollar increase
in selling and administrative expenses of Kay-Bee. With the Acquisition, the
Company is conforming Kay-Bee's accounting practices to those of Consolidated
Stores.
Historically, the operating results of Consolidated Stores and Kay-Bee have
reflected differences in cost of sales, gross profit and selling and
administrative expenses expressed as a percentage of net sales. These
differences are attributable in part to the higher percentage of lower margin
in-line toys in the Kay-Bee merchandise mix. The Company anticipates that this
may result in a lower operating margin ratio for the combined entity.
Over the last several fiscal years, the management of Kay-Bee pursued a
strategy of closing underperforming stores. In fiscal 1995, Kay-Bee incurred
$65.8 million of restructuring and asset impairment charges to cover the closing
of 52 underperforming stores and the write-down of impaired assets. In addition,
in December 1995, Kay-Bee undertook $25.8 million of inventory clearance
markdowns in order to liquidate discontinued items and slower-moving
merchandise. This markdown resulted in an increase in cost of sales in the
fourth fiscal quarter.
Though Consolidated Stores has historically experienced seasonality, it has
generally recorded operating profits during each fiscal quarter. However, due to
the increase in the Company's retail toy operations as a result of the
Acquisition, the Company expects it will recognize operating losses during the
first three fiscal quarters and recognize an increasing amount of its net sales,
operating profit and net income during the fourth fiscal quarter.
19
<PAGE> 21
CONSOLIDATED STORES
Results of Operations for Fiscal 1995, 1994 and 1993
The table below compares components of the statements of earnings of
Consolidated Stores as a percentage of net sales.
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Net sales:
Odd Lots/Big Lots............................................. 85.1% 87.0% 89.2%
iTZADEAL! and All For One..................................... 7.0 7.3 8.8
The Amazing Toy Store and Toy Liquidators..................... 5.1 3.6 --
Other......................................................... 2.8 2.1 2.0
------ ------ ------
Total net sales....................................... 100.0 100.0 100.0
Cost of sales................................................... 57.4 57.0 56.2
------ ------ ------
Gross profit............................................... 42.6 43.0 43.8
Selling and administrative expenses............................. 35.2 35.3 36.6
------ ------ ------
Operating profit........................................... 7.4 7.7 7.2
Interest expense................................................ .5 .5 .6
Other income (expense) -- net................................... (.1) -- .2
------ ------ ------
Income before income taxes...................................... 6.8 7.2 6.8
Income tax expense.............................................. 2.5 2.9 2.7
------ ------ ------
Net income................................................. 4.3% 4.3% 4.1%
====== ====== ======
</TABLE>
Fiscal 1995 Compared to Fiscal 1994
Net Sales. Net sales increased to $1,512.3 million in fiscal 1995 from
$1,278.6 million in fiscal 1994, an increase of $233.7 million, or 18.3%. This
increase was attributable to net sales of $127.9 million from 147 new stores and
comparable store sales increases of 4.3%, offset in part by the closing of 38
stores. The increase in comparable store sales was attributable to improved
product offerings and merchandise mix as well as a continued refinement and
expansion of the Consolidated Stores' television advertising program, which was
introduced in the fall of 1994. Comparable store sales were negatively impacted
during the fall/winter holiday selling season by abnormally inclement weather in
many of Consolidated Stores' markets. Additionally, fiscal 1995 was a 53-week
fiscal year, compared to fiscal 1994, which had 52 weeks.
Net sales of Odd Lots/Big Lots stores increased $174.6 million, or 15.7%,
to $1,286.7 million in fiscal 1995 from $1,112.1 million in fiscal 1994. Net
sales of The Amazing Toy Store and Toy Liquidators stores increased $30.8
million, or 67.1%, to $76.7 million in fiscal 1995 from $45.9 million in fiscal
1994. This increase was largely attributable to a full year of operations at Toy
Liquidators in fiscal 1995 (which Consolidated Stores acquired in May 1994), as
well as net sales of $11.3 million from a net of 29 new stores. Net sales at
iTZADEAL! and All For One increased $12.7 million, or 13.6%, to $106.3 million
in fiscal 1995 from $93.6 million in fiscal 1994.
Gross Profit. Gross profit increased to $644.2 million in fiscal 1995 from
$550.2 million in fiscal 1994, an increase of $94.0 million, or 17.1%. As a
percentage of net sales, gross profit decreased to 42.6% in fiscal 1995 from
43.0% in fiscal 1994. The decrease in gross margin was attributable to decreases
in gross margin at both The Amazing Toy Store and Toy Liquidators stores and
iTZADEAL! and All For One stores. Gross margin at The Amazing Toy Store and Toy
Liquidators stores was high in fiscal 1994 due to the advantageous terms on
which Consolidated Stores purchased the inventory of the Toy Liquidators
business in May 1994. The decline in the gross margin at iTZADEAL! and All For
One stores was due to the increase in the number of iTZADEAL! stores relative to
the number of All For One stores. iTZADEAL! stores have a slightly lower gross
margin than All For One stores as a result of the higher mix of domestic,
name-brand close-out products
20
<PAGE> 22
and lower mix of higher-margin import merchandise. Gross margin at Odd Lots/Big
Lots stores remained constant in fiscal 1995 compared to fiscal 1994.
Selling and Administrative Expenses. Selling and administrative expenses
increased to $532.2 million in fiscal 1995 from $451.4 million in fiscal 1994,
an increase of $80.8 million, or 17.9%. As a percentage of net sales, selling
and administrative expenses decreased slightly to 35.2% in fiscal 1995 from
35.3% in fiscal 1994 as a result of the continued leveraging of fixed expenses
over a larger store base and comparable store sales increases.
Interest Expense. Interest expense increased to $8.0 million in fiscal
1995 from $7.2 million in fiscal 1994. The increase was attributable to higher
weighted average debt levels, resulting in part from increased seasonal
borrowings to support higher average inventory levels, and increased effective
interest rates on seasonal borrowings throughout the fiscal year. The increase
in the effective interest rate was offset to some extent by a scheduled
principal payment of $15.0 million on the senior debt.
Income Taxes. The effective tax rate of Consolidated Stores was 37.0% in
fiscal 1995 compared to 40.0% in fiscal 1994. The reduction in the effective tax
rate was attributable to the full fiscal year effect of corporate-owned life
insurance, which was adopted in November 1994, as well as lower effective state
and local income tax rates. This reduction was partially offset by the federally
legislated elimination of the Targeted Jobs Tax Credit ("TJTC"). Realization of
any future tax benefits associated with TJTC and corporate-owned life insurance
is subject to pending federal legislation.
Fiscal 1994 Compared to Fiscal 1993
Net Sales. Net sales increased to $1,278.6 million in fiscal 1994 from
$1,055.3 million in fiscal 1993, an increase of $223.3 million, or 21.2%. This
increase was attributable to net sales of $178.4 million from 176 newly opened
and newly acquired stores and comparable store sales increases of 3.5%, offset
in part by the closing of 33 stores. The increase in comparable store sales was
attributable to improved product offerings and merchandise mix as well as the
introduction of a fall season television advertising program.
Net sales of Odd Lots/Big Lots stores increased $170.6 million, or 18.1%,
to $1,112.1 million in fiscal 1994 from $941.5 million in fiscal 1993. In May
1994, Consolidated Stores acquired 82 Toy Liquidator stores that contributed
$45.9 million in net sales in fiscal 1994. Net sales of iTZADEAL! and All For
One stores increased $1.3 million, or 1.4%, to $93.6 million in fiscal 1994 from
$92.3 million in fiscal 1993.
Gross Profit. Gross profit increased to $550.2 million in fiscal 1994 from
$462.1 million in fiscal 1993, an increase of $88.1 million, or 19.1%. As a
percentage of net sales, gross profit decreased to 43.0% in fiscal 1994 from
43.8% in fiscal 1993. The decrease in gross margin was attributable largely to a
decrease in gross margin at Odd Lots/Big Lots stores that resulted from a
planned change in merchandise mix. Consolidated Stores reduced its offerings of
higher-margin, slower-turning softlines, primarily apparel, and expanded its
offerings of lower-margin, faster-turning merchandise, primarily hardlines such
as electronics. This decrease in gross margins in fiscal 1994 was partially
offset by the higher gross margins of the newly acquired Toy Liquidators
business.
Selling and Administrative Expenses. Selling and administrative expenses
increased to $451.4 million in fiscal 1994 from $386.1 million in fiscal 1993,
an increase of $65.3 million, or 16.9%. As a percentage of net sales, selling
and administrative expenses decreased to 35.3% in fiscal 1994 from 36.6% in
fiscal 1993 as a result of store-level expense control programs as well as the
continued leveraging of fixed expenses over a larger store base and comparable
store sales increases.
Interest Expense. Interest expense increased to $7.2 million in fiscal
1994 from $5.8 million in fiscal 1993. The increase was attributable to higher
weighted average debt levels, resulting from increased seasonal borrowings to
support higher average inventory levels and borrowings to finance the
acquisition of Toy Liquidators, and increased effective interest rates on
seasonal borrowings throughout the fiscal year.
21
<PAGE> 23
Income Taxes. The effective tax rate of Consolidated Stores was 40.0% in
both fiscal 1994 and fiscal 1993. Consolidated Stores did not experience any
material changes in any of the components of the effective tax rate in fiscal
1994 compared to fiscal 1993.
KAY-BEE CENTER, INC.
Results of Operations for the First Fiscal Quarter of 1996 and of 1995 and for
Fiscal 1995, 1994 and 1993
The table below compares components of the statements of operations of
Kay-Bee as a percentage of net sales.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------
MARCH 30, APRIL 1, FISCAL FISCAL FISCAL
1996 1995 1995 1994 1993
--------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales..................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold, buying and warehousing
costs....................................... 64.6 67.0 64.6 60.5 59.2
--------- -------- ------ ------ ------
Gross profit............................. 35.4 33.0 35.4 39.5 40.8
Store operating, selling, general and
administrative and depreciation and
amortization expenses....................... 48.6 47.9 33.8 33.4 34.4
Restructuring and asset impairment charges.... .7 -- 6.1 -- --
--------- -------- ------ ------ ------
Operating (loss) profit.................. (13.9) (14.9) (4.5) 6.1 6.4
Interest expense, net......................... (.3) -- .5 .2 --
--------- -------- ------ ------ ------
(Loss) earnings before income taxes and
cumulative effect of change in accounting
principle................................... (14.2) (14.9) (5.0) 5.9 6.4
Income tax (benefit) expense.................. (5.8) (6.1) (.3) 2.2 2.4
--------- -------- ------ ------ ------
(Loss) earnings before cumulative effect of
change in accounting principle.............. (8.4) (8.8) (4.7) 3.7 4.0
Cumulative effect of change in accounting
principle................................... -- (.4) -- -- --
--------- -------- ------ ------ ------
Net (loss) earnings...................... (8.4)% (9.2)% (4.7)% 3.7% 4.0%
======= ====== ===== ===== =====
</TABLE>
First Fiscal Quarter 1996 Compared to First Fiscal Quarter 1995
Net Sales. Net sales increased to $177.6 million in the fiscal quarter
ended March 30, 1996, from $169.1 million in the same period of fiscal 1995, an
increase of $8.5 million, or 5.0%. This increase was attributable to net sales
of $5.5 million from 36 new stores opened since the first quarter of fiscal
1995, comparable store sales increases of 2.5% and the inclusion of sales of 75
stores previously excluded from operations during fiscal 1995. During the first
fiscal quarter of 1996, Kay-Bee opened 3 new stores, closed 38 stores and
included the operating results of 75 stores that had previously been excluded
from operations during fiscal 1995.
Gross Profit. Gross profit increased to $62.9 million in the first fiscal
quarter of 1996 from $55.8 million in the first fiscal quarter of 1995, an
increase of $7.1 million, or 12.8%. As a percentage of net sales, gross profit
increased to 35.4% in the first fiscal quarter of 1996 from 33.0% in the first
fiscal quarter of 1995. The margin increase was the result of reduced markdowns
during the first fiscal quarter of 1996, partially offset by inventory shortage
costs and increased transportation and distribution expenses resulting from
outside storage requirements and increased store shipments. The need for
markdowns was reduced primarily because $25.8 million of inventory clearance
markdowns were taken in December 1995 in order to liquidate discontinued items
and slower-moving merchandise from store inventories.
Store Operating, Selling, General and Administrative and Depreciation and
Amortization Expenses. Store operating, selling, general and administrative and
depreciation and amortization expenses increased to $86.3 million in the first
fiscal quarter of 1996 from $81.0 million in the first fiscal quarter of 1995,
an increase of $5.3 million, or 6.5%. As a percentage of net sales, store
operating, selling, general and administrative and depreciation and amortization
expenses increased to 48.6% in the first fiscal quarter of 1996 from 47.9% in
the
22
<PAGE> 24
first fiscal quarter of 1995. This increase was primarily the result of the
write-off of fixed assets in 38 stores during the first fiscal quarter of 1996
compared to write-offs of fixed assets in 11 stores closed in the same period of
fiscal 1995.
Restructuring and Asset Impairment Charges. Effective October 1, 1995,
Kay-Bee adopted Statement of Financial Accounting Standards No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." As a result, a $1.2 million charge was recorded for asset impairment during
the first fiscal quarter of 1996.
Interest Expense, Net. Net interest expense increased to $.5 million in the
first fiscal quarter of 1996 from interest income of $.1 million in the first
fiscal quarter of 1995. The increase was attributable to higher weighted average
borrowings outstanding and an increase in the effective interest rate for the
first fiscal quarter of 1996.
Income Tax Benefit. Kay-Bee's first fiscal quarter tax benefit was $10.2
million in each of fiscal 1996 and 1995. This tax benefit was due to operating
losses in the first fiscal quarter of each of 1996 and 1995 reflecting the
seasonal nature of the retail toy industry. The effective tax rate of Kay-Bee
was 40.7% in the first fiscal quarter of each of 1996 and 1995.
Cumulative Effect of Change in Accounting Principle. Effective January 1,
1995, Kay-Bee changed its policy from capitalizing internally developed software
costs to expensing them as incurred. The cumulative effect of this change was to
write off the unamortized balance of capitalized software costs of $.7 million,
net of taxes, during the first fiscal quarter of 1995.
Fiscal 1995 Compared to Fiscal 1994
Net Sales. Net sales increased to $1,077.3 million in fiscal 1995 from
$1,012.2 million in fiscal 1994, an increase of $65.1 million, or 6.4%. This
increase was attributable to net sales of $26.1 million from 33 new stores,
comparable store sales increases of 2.3%, the reclassification of 23 stores
previously excluded from operations and the addition of 34 temporary stores
during the holiday season, offset by the closing of 48 stores during fiscal
1995. Kay-Bee opened 12 new Kay-Bee Toys stores, closed 48 Kay-Bee Toys stores
and included the operating results of 23 Kay-Bee Toys stores that had been
excluded from operations during fiscal 1995. Additionally, 21 Toy Works stores
were opened and no Toy Works stores were closed during fiscal 1995.
Gross Profit. Gross profit decreased to $381.3 million in fiscal 1995 from
$400.3 million in fiscal 1994, a decrease of $19.0 million, or 4.7%. As a
percentage of net sales, gross profit decreased to 35.4% in fiscal 1995 from
39.5% in fiscal 1994. During December 1995, Kay-Bee recorded $25.8 million of
inventory clearance markdowns (at cost) in order to liquidate discontinued items
and slower-moving merchandise from store inventories. In addition to this
December 1995 charge, margin declines were experienced as a result of higher
regular markdowns during the year, higher shrink costs and increased
transportation and distribution expenses resulting from outside storage
requirements.
Store Operating, Selling, General and Administrative and Depreciation and
Amortization Expenses. Store operating, selling, general and administrative and
depreciation and amortization expenses increased to $363.5 million in fiscal
1995 from $338.4 million in fiscal 1994, an increase of $25.1 million, or 7.4%.
As a percentage of net sales, store operating, selling, general and
administrative and depreciation and amortization expenses increased to 33.8% in
fiscal 1995 from 33.4% in fiscal 1994. This increase was primarily the result of
additional sales promotion costs incurred in the planned expansion of the Toy
Works concept and the creation of a holiday promotion catalog for Kay-Bee Toys
stores. Also contributing to increased promotion costs was an expansion in
circulation of Kay-Bee's holiday flyers.
Restructuring and Asset Impairment Charges. Pre-tax restructuring and asset
impairment charges of $65.8 million were recorded in fiscal 1995 to cover the
closing of 52 underperforming stores and the write-down of impaired assets. This
charge consisted of $45.9 million to write-off the remaining balance of goodwill
resulting from Melville's original acquisition of Kay-Bee as well as to provide
for estimated lease settlement costs for stores to be closed, the cost to close
and relocate one of Kay-Bee's warehouse/distribution centers, severance costs
for store closures and the write-down of fixed assets. In addition, a pre-tax
charge of $19.9
23
<PAGE> 25
million was recorded to write-down the carrying value of certain long-lived
assets in connection with the adoption of Statement of Financial Accounting
Standards No. 121.
Interest Expense, Net. Net interest expense increased to $5.3 million in
fiscal 1995 from $2.1 million in fiscal 1994. The increase was attributable to
increased intercompany borrowings for the purchase of inventories as well as an
increase in the effective interest rate in fiscal 1995.
Income Tax (Benefit) Expense. In fiscal 1995, Kay-Bee recorded a tax
benefit of $3.1 million due to its operating losses. This compares to an
effective tax rate in fiscal 1994 of 37.0%. The tax benefit for fiscal 1995 was
significantly less than the statutory tax rate due to the non-deductibility of
the write-off of goodwill.
Fiscal 1994 Compared to Fiscal 1993
Net Sales. Net sales increased to $1,012.2 million in fiscal 1994 from
$919.1 million in fiscal 1993, an increase of $93.1 million, or 10.1%. This
increase was attributable to net sales of $21.5 million from 25 new stores and
comparable store sales increases of 10.2%, offset by the closing of 23 stores
and exclusion of operating results for 36 stores previously included in
operations. Kay-Bee opened 16 new Kay-Bee Toys stores, closed 23 Kay-Bee Toys
stores and reclassified 36 Kay-Bee Toys stores previously included in
operations. Additionally, nine Toy Works stores were opened and none were closed
during fiscal 1994. The increase in comparable store sales was largely driven by
the action toy category, which benefitted from the popularity of Power
Rangers(R), and by the video game category as a result of several popular
16-bit video game
releases.
Gross Profit. Gross profit increased to $400.3 million in fiscal 1994 from
$375.1 million in fiscal 1993, an increase of $25.2 million, or 6.7%. As a
percentage of net sales, gross profit decreased to 39.5% in fiscal 1994 from
40.8% in fiscal 1993. Most of this decrease was attributable to the
non-recurrence in 1994 of the change in 1993 in the calculation of the LIFO
price index with the remainder of the decline resulting from increases in shrink
and transportation expenses.
Store Operating, Selling, General and Administrative and Depreciation and
Amortization Expenses. Store operating, selling, general and administrative and
depreciation and amortization expenses increased to $338.4 million in fiscal
1994 from $316.1 million in fiscal 1993, an increase of $22.3 million, or 7.1%.
As a percentage of net sales, store operating, selling, general and
administrative and depreciation and amortization expenses decreased to 33.4% in
fiscal 1994 from 34.4% in fiscal 1993. This percentage decrease was primarily
the result of the 10.1% sales increase and the resulting leverage of fixed
expenses as well as a reduction in advertising expense.
Interest Expense, Net. Net interest expense increased to $2.1 million in
fiscal 1994 from $.3 million in fiscal 1993. The increase was attributable to
increased intercompany borrowings for the purchase of inventories as well as an
increase in the effective interest rate in fiscal 1994.
Income Tax (Benefit) Expense. The effective tax rate of Kay-Bee was 37.0%
in fiscal 1994 compared to 37.9% in fiscal 1993. The reduction in the effective
rate was primarily due to a reduction in the state tax provision for fiscal
1994.
CAPITAL RESOURCES AND LIQUIDITY
Historical
The primary sources of liquidity for Consolidated Stores over the past
three fiscal years have been cash flow from operations and borrowings under
available credit facilities. Net cash provided by operating activities over the
last three fiscal years, as detailed in the consolidated statements of cash
flows, was $29.4 million, $59.7 million and $29.4 million in fiscal 1995, 1994
and 1993, respectively. As necessary, Consolidated Stores supplemented cash
provided from operations with borrowings under available credit facilities to
fund new store expansion, seasonal inventory purchases, capital expenditure
programs and a scheduled principal payment on senior debt of $15.0 million in
fiscal 1995. The cash provided from operations over the past three fiscal years
has been sufficient to allow Consolidated Stores to fully repay the outstanding
balance of its credit agreements prior to its fiscal year end. Total debt as a
percentage of total capitalization (total debt and stockholders'
24
<PAGE> 26
equity) was 8.2% at February 3, 1996, compared with 13.7% and 16.2% at each of
the respective prior fiscal year ends. Working capital increased from $174.5
million at the end of fiscal 1993 to $253.9 million at the end of fiscal 1995
primarily as a result of increases in inventory associated with new store
openings. Capital expenditures for the last three fiscal years were $48.1
million, $41.6 million and $46.0 million, respectively, and were used primarily
to fund new store openings.
At February 3, 1996, available committed credit facilities were $86.0
million under the Consolidated Stores' old $90.0 million revolving credit
facility and old $50.0 million letter of credit facility. Seasonally, the
revolving credit facility and letter of credit facility were increased to $110.0
million and $75.0 million, respectively. Additionally, $55.0 million of
uncommitted credit facilities were available at February 3, 1996, subject to the
terms of the old revolving credit facility. The Company replaced the old credit
facilities and refinanced the entire amounts outstanding thereunder with
borrowings under the new Revolving Credit Facility.
The primary sources of liquidity for Kay-Bee have historically been cash
flow from operations and borrowings from Melville. Net cash (used in) provided
by operating activities was ($3.7) million, $73.2 million and $35.4 million in
fiscal 1995, 1994 and 1993, respectively and ($92.4) million and ($127.1)
million in the first fiscal quarter of 1996 and of 1995, respectively. Cash flow
from operations in fiscal 1995 and the first fiscal quarter of 1996 and of 1995
was negatively affected by lower earnings. In addition, cash flow from
operations in the first fiscal quarter of 1996 and 1995 was negatively affected
by the seasonality of the toy business. Finally, cash flow from operations in
the first fiscal quarter of 1996 and of 1995 was negatively affected by payments
of accounts payable and accrued expenses and by higher inventory balances
compared to year end 1995 and 1994.
Kay-Bee's capital expenditures for fiscal 1995, 1994 and 1993 and the first
fiscal quarter of 1996 and of 1995 were $46.0 million, $37.0 million, $33.7
million, $4.2 million and $3.2 million, respectively. Capital expenditures
related primarily to new store openings and the remodeling, relocation and
expansion of existing stores. In addition, Kay-Bee incurred significant capital
expenditures in fiscal 1994 and 1993 in connection with the expansion of its
warehouse/distribution centers and improvements in its information systems.
Following the Acquisition
Since the Acquisition, the Company's liquidity requirements consist
primarily of working capital needs, capital expenditures and scheduled payments
of principal and interest on its indebtedness. The Company has significantly
increased cash requirements for debt service relating to the new Revolving
Credit Facility and the Subordinated Notes.
In connection with the Acquisition, the Company's principal operating
subsidiary entered into the Revolving Credit Facility dated May 3, 1996 with a
syndicate of financial institutions to provide the Company with senior bank
financing in an aggregate principal amount of up to $600.0 million. The
Revolving Credit Facility consists of a revolving loan facility (the "Revolver")
with the amount available thereunder equal to $450.0 million and a letter of
credit facility with up to $200.0 million available for the issuance of
documentary and standby letters of credit. The Revolving Credit Facility has a
maturity date of May 3, 1999. The Company borrowed approximately $360 million
under the Revolver to finance the cash portion of the Acquisition, repay the
existing senior debt and refinance the old credit facilities. The net proceeds
from this Offering will be used to repay a portion of the borrowings incurred
under the Revolving Credit Facility to finance the Acquisition.
The Revolving Credit Facility contains a number of covenants, including,
among others, covenants restricting the Company with respect to the incurrence
of indebtedness, the ability to declare, pay or make dividends or other
distributions in excess of prescribed levels, the creation of liens, the making
of certain investments and loans, engaging in unrelated business, the
consummation of certain transactions such as sales of substantial assets,
mergers or consolidations and other transactions. The Company also is required
to comply with certain financial tests and maintain certain financial ratios.
On May 5, 1996, in connection with the Acquisition, the Company issued
$100.0 million of Subordinated Notes to Melville. The Subordinated Notes mature
in 2000 and bear interest at a rate of 7.0% per annum,
25
<PAGE> 27
payable semiannually. The Subordinated Notes are redeemable at the option of the
Company, in whole or in part, after two years from their issuance, at a premium
to their principal amount, plus accrued interest. The Indenture under which the
Subordinated Notes were issued restricts the Company's ability to, among other
things, incur indebtedness, merge, liquidate, pay dividends or make other
restricted payments, engage in transactions with affiliates or enter into
agreements containing payment restrictions affecting subsidiaries. The Indenture
also contains provisions which, among other things, require that the Company, in
the event of a Change in Control, or, in certain circumstances, an Asset Sale
(each as defined in the Indenture), make an offer to purchase all or a specified
amount of the Subordinated Notes at 101.0% or 100.0%, respectively, of the
principal amount, plus accrued and unpaid interest through the purchase date.
The Company is anticipating total capital expenditures in fiscal 1996 to be
approximately $100 million to, among other uses, fund the opening of new stores,
the completion of the expansion of the Columbus, Ohio distribution center and
the purchase of hardware related to the Company's inventory management systems.
The Company believes cash flow generated from future operations and the
availability of borrowings under the Revolving Credit Facility will be
sufficient to fund its capital expenditures and seasonal operating requirements
for the foreseeable future.
SEASONALITY
Consolidated Stores has historically experienced, and the Company expects
to continue to experience, seasonal fluctuations with a significant percentage
of its net sales and income being realized in the fourth fiscal quarter. The
following table illustrates the seasonality in the net sales and operating
income of Consolidated Stores and Kay-Bee.
<TABLE>
<CAPTION>
FISCAL 1995
-------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Consolidated Stores
Net sales as a percent of full year.......... 19.3% 21.5% 23.6% 35.6%
Operating income as a percent of full year... 5.3 14.0 17.2 63.5
Kay-Bee
Net sales as a percent of full year.......... 15.6% 15.4% 16.7% 52.3%
Operating income as a percent of full
year(1).................................... NM NM NM 100.0%
</TABLE>
- ---------------
NM -- Not meaningful.
(1) Excludes both the $65.8 million restructuring and asset impairment
charge to cover the closing of 52 underperforming stores and the
write-down of impaired assets and the $25.8 million of inventory
clearance markdowns.
As a result of the Acquisition and the increase in the Company's retail toy
operations, the Company expects to recognize an increasing amount of its net
sales and income during the fourth fiscal quarter and to recognize operating
losses during the other three fiscal quarters. In addition, the Company's
quarterly results can be affected by the timing of store openings and closings,
the amount of net sales contributed by new and existing stores and the timing of
certain holidays.
26
<PAGE> 28
BUSINESS
INDUSTRY OVERVIEW
Close-out retailing is a fast-growing segment of the U.S. retailing
industry. Close-out retailers provide a valuable service to manufacturers by
purchasing excess product that generally results from production overruns,
package changes, discontinued products and returns. Close-out retailers also
take advantage of generally lower prices in the off-season by buying and
warehousing seasonal merchandise for future sale. As a result of these lower
costs of goods sold, close-out retailers can offer merchandise at prices
significantly lower than those offered by traditional retailers.
Recent trends in the retail industry are favorable to close-out retailers.
These trends include retailer consolidations and just-in-time inventory
processes, which have resulted in a shift of inventory risk from retailers to
manufacturers. In addition, in order to maintain their market share in an
increasingly competitive environment, manufacturers are introducing new products
and new packaging on a more frequent basis. The Company believes that these
trends have helped make close-out retailers an integral part of manufacturers'
overall distribution processes. As a result, manufacturers are increasingly
looking for larger, more sophisticated close-out retailers, such as the Company,
that can purchase larger quantities of merchandise and can control the
distribution and advertising of specific products.
THE COMPANY
The Company is the nation's largest close-out retailer with 1,906 stores
located in all 50 states and Puerto Rico. The Company operates 750 retail
close-out stores, primarily under the names Odd Lots/Big Lots, iTZADEAL! and All
For One, in the midwestern, southern and mid-Atlantic regions of the United
States, and 1,156 retail toy stores throughout the United States and Puerto Rico
primarily under the names Kay-Bee Toys, Toy Works, The Amazing Toy Store and Toy
Liquidators. Approximately 1,045 of the Toy Stores were acquired as of May 5,
1996 in the Acquisition of Kay-Bee from Melville.
The Company's core close-out stores offer substantial savings on a wide
variety of name-brand consumer products, including food items, health and beauty
aids, electronics, housewares, tools, paint, lawn and garden, hardware, sporting
goods, toys and softlines. In addition, these stores supplement their broad
offering of items in core product categories with a changing mix of new
merchandise and seasonal goods such as back-to-school and holiday merchandise.
The Company's Toy Stores offer a broad variety of close-out toys, as well as
in-line toys and traditional toy merchandise. The Company's close-out
merchandise primarily consists of new, name-brand products obtained from
manufacturers' excess inventories, which generally result from production
overruns, package changes, discontinued products and returns.
Over the past five fiscal years, Consolidated Stores has experienced
substantial growth in net sales, operating profit and earnings per share. Net
sales have increased from $771.5 million in fiscal 1991 to $1,512.3 million in
fiscal 1995, a compound annual growth rate of 18.3%. This growth has been driven
by new store openings and comparable store sales gains. Consolidated Stores has
increased the number of its stores from 337 to 861 during this five-year period,
while total retail selling space increased from approximately 7,000,000 square
feet to approximately 12,000,000 square feet, a compound annual growth rate of
approximately 14.4%. Merchandising improvements have increased average sales per
square foot from approximately $109 in fiscal 1991 to approximately $127 in
fiscal 1995. Comparable store sales increases were 5.6%, 4.3%, 1.8%, 3.5% and
4.3% in fiscal 1991, 1992, 1993, 1994 and 1995, respectively. Consolidated
Stores also has achieved profitability improvements with operating margins
increasing from 5.0% in fiscal 1991 to 7.4% in fiscal 1995 and earnings per
share increasing from $.44 per share to $1.32 per share during such period.
The Company was incorporated in Delaware in 1983. Its executive offices are
located at 300 Phillipi Road, P.O. Box 28512, Columbus, Ohio 43228-0512, and its
telephone number is (614) 278-6800.
ACQUISITION OF KAY-BEE
As of May 5, 1996, Consolidated Stores acquired Kay-Bee for a purchase
price of approximately $315 million (subject to post-closing adjustments),
consisting of $215 million in cash and $100 million of Subordinated Notes issued
to Melville. Kay-Bee operated 1,045 toy stores located in all 50 states and
Puerto Rico primarily under the names Kay-Bee Toys and Toy Works. There are 918
Kay-Bee stores located in
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<PAGE> 29
enclosed shopping malls and 127 located in strip shopping centers. The Company
believes that Kay-Bee was the largest enclosed shopping mall-based toy retailer
in the United States. On a pro forma basis, after giving effect to the
Acquisition, the Company would have had net sales of $2,597.7 million in fiscal
1995. See "Acquisition of Kay-Bee Center, Inc."
Consolidated Stores has been in the toy retailing business since its
inception and has operated stand-alone toy stores since its purchase of Toy
Liquidators in 1994. The Acquisition has allowed the Company to expand
significantly its retail toy store business at a relatively low cost. In
addition, as a result of the Acquisition, the Company will more than double its
purchases of close-out toys and become the largest purchaser of close-out toys
in the United States. The Company expects that this combined purchasing power
will enhance its ability to source high-quality close-out toys for all of its
stores at competitive prices. Furthermore, the Company intends to gradually
increase the percentage of higher-margin close-out toys at the Kay-Bee stores
acquired in the Acquisition in order to increase both the gross margins and the
value offering to customers in such stores. The Company also intends to
eliminate duplicative administrative expenses resulting from the Acquisition.
Over the last several fiscal years, the management of Kay-Bee pursued a
strategy of closing underperforming stores. In fiscal 1995, Kay-Bee incurred
$65.8 million of restructuring and asset impairment charges to cover the closing
of 52 underperforming stores and to write-down impaired assets. In addition,
during December 1995, Kay-Bee undertook $25.8 million of inventory clearance
markdowns in order to liquidate discontinued items and slower-moving
merchandise. As a result, the Company does not anticipate it will incur any
significant operating charges in connection with the Acquisition.
BUSINESS STRATEGY
The Company's goal is to build upon its leadership position in close-out
retailing, one of the fastest growing segments of the retailing industry, by
expanding its market presence in its existing and in new markets. The Company
has adopted a business strategy of pursuing growth by capitalizing on the
following competitive strengths: (i) its ability to offer name-brand products at
discounted prices; (ii) its purchasing expertise and strong buying
relationships; (iii) its ability to lease low-cost store sites in strip shopping
centers, enclosed shopping malls and outlet malls on favorable terms; (iv) its
ability to efficiently warehouse and distribute large quantities of merchandise;
and (v) its focus on cost control.
- - Offering Name-Brand Merchandise at Deeply Discounted Prices.
As a retailer focused on close-out merchandise, the Company's goal is to
provide budget-conscious consumers with a broad range of quality name-brand
products at exceptional values. The Company purchases large quantities of
name-brand close-out merchandise from manufacturers' excess inventories,
which generally result from production overruns, package changes,
discontinued products and returns. The Company also takes advantage of the
availability of factory reconditioned products and lower priced,
private-label merchandise in selected product categories in order to
provide additional value to its customers. Primarily as a result of its
strong supplier relationships and purchasing expertise, the Company offers
substantial everyday savings on a wide variety of name-brand consumer
products, including food items, health and beauty aids, electronics,
housewares, tools, paint, lawn and garden, hardware, sporting goods, toys
and softlines, typically offering merchandise at prices 15% to 35% below
those offered by other discount retailers and up to 70% below those offered
by traditional retailers. In addition, the Company supplements its broad
offering of consumer items in core product categories with a changing mix
of new merchandise, including seasonal goods, such as holiday and
back-to-school merchandise.
- - Purchasing Expertise and Strong Buying Relationships.
An integral part of the Company's business is the sourcing and purchasing
of quality name-brand merchandise. The Company has built strong
relationships with many name-brand manufacturers and has capitalized on its
purchasing power in the close-out marketplace in order to source
merchandise that provides exceptional value to customers. As the largest
retailer of close-out merchandise in the United States, the Company
generally has the ability to purchase all of a manufacturer's close-out
merchandise in specific product categories and to control distribution in
accordance with vendor instructions, thus providing a high level of service
and convenience to these manufacturers. Furthermore, the Company's
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<PAGE> 30
strong buying relationships and financial flexibility enable it to purchase
merchandise off-season, typically at lower costs. The Company has
relationships with, and regularly purchases merchandise from, over 2,000
vendors, which provides the Company with multiple sources for each product
category. The Company has significantly expanded its vendor base over the
past several fiscal years as a result of its size, credibility, financial
strength and seasoned buying team.
- - Low Cost Site Selection.
The Company has developed a real estate strategy emphasizing smaller-sized
stores in strip shopping center locations in mid-sized cities and small
towns. The Company believes its ability to obtain these sites on attractive
terms has been enhanced by the ongoing consolidation in the retailing
industry and the migration of many retailers to larger-sized stores. The
Company seeks to enter into three- to five-year leases (with renewal
options) that provide for low rents and generally strives to minimize the
capital required to open a store. In addition to enhancing the Company's
ability to provide value to its customers, this strategy has led to an
attractive store level return on investment.
- - Efficient Warehouse/Distribution Operations.
Since 1990, the Company has focused on increasing the efficiency and
reducing the cost of its operations in order to improve profitability and
enhance its competitive position. The Company believes it operates the
largest retail warehouse/distribution center of its kind in the United
States, which covers 2,884,100 square feet. The size of this facility
enables the Company to store large quantities of merchandise purchased
off-season at low prices for distribution to its stores at a later date.
This highly automated facility uses bar code scanning and high-speed
sortation systems to process and distribute large quantities of constantly
changing merchandise in a timely and cost-efficient manner. In addition,
the Company will begin implementing sophisticated new information systems
in fiscal 1996 that will enable it to more effectively allocate and manage
inventory by SKU. These systems are expected to improve comparable store
sales and inventory turns and reduce the need to move merchandise between
stores. The Company intends to continue to invest in its infrastructure in
order to increase efficiency, reduce cost and support its expanding
operations.
- - Focus on Cost Control.
The Company maintains a disciplined approach to cost control in all aspects
of its business including store expenses, corporate expenses, store leases,
fixtures, leasehold improvements, distribution, transportation and
inventory management. In addition to its low cost approach to store leasing
and efficient warehousing and distribution methods, the Company has
implemented numerous expense savings programs in areas such as store
payroll, shrink control, accident prevention and other store-related
expense categories.
GROWTH STRATEGY
The Company believes that the combination of its strengths in
merchandising, purchasing, site selection, distribution and cost-containment has
made it a low-cost, value retailer well-positioned for future growth. The
Company's growth strategy is to increase net sales and earnings through: (i) new
store expansion; (ii) comparable store sales increases; (iii) the realization of
synergies from the Acquisition; and (iv) selective acquisitions.
- - New Store Expansion.
The Company intends to increase retail selling space by approximately 10%
to 15% per fiscal year. Currently, the Company's stores are located
primarily in the midwestern, southern and mid-Atlantic regions of the
United States. Management believes that there are substantial opportunities
to increase the store count in the Company's existing markets and that the
southern region of the United States represents a near-term opportunity for
filling in its existing markets. The Company has been able to
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<PAGE> 31
operate profitably a large number of stores in relatively close proximity
in markets with favorable demographics and suitable store sites. For
example, the Company operates 105 of the total 541 Odd Lots/Big Lots stores
in Ohio. In addition, the Company believes the southwestern and western
areas of the United States have significant longer-term growth potential
because the Company has few stores in these regions.
Odd Lots/Big Lots. At the end of fiscal 1995, the Company operated 541 Odd
Lots/Big Lots stores in 22 states. The Company believes there are
significant opportunities to increase the store count in existing markets.
The Company also expects significant opportunities for growth in new
geographic regions of the United States, where the Company has few stores.
In fiscal 1996, the Company expects to open 65 to 75 new Odd Lots/Big Lots
stores (net of store closings).
Toy Stores. The Company has a large presence in enclosed shopping malls
with 918 toy stores under the name Kay-Bee Toys. In addition, the Company
has 141 toy stores located in strip shopping centers primarily under the
names Kay-Bee Toys, Toy Works and The Amazing Toy Store and 97 toy stores
located in outlet malls under the name Toy Liquidators. The Company does
not expect to significantly increase the number of enclosed shopping
mall-based toy stores, but does plan to open 40 to 50 new toy stores (net
of store closings) in strip shopping centers in fiscal 1996. These smaller
strip shopping center stores strive to appeal to customers seeking value
and the convenience not offered by toy superstores. The Company believes
that the opening of toy stores in strip shopping centers has significant
potential for growth over the next several years, particularly in the
midwestern and southern regions of the United States. Also, in fiscal 1996,
the Company plans to add 10 to 20 new Toy Liquidators stores (net of store
closings) in outlet malls, where the Company is usually the only toy store.
iTZADEAL! and All For One. The Company has 64 iTZADEAL! and 145 All For One
stores operating in 18 states. The Company plans to appeal to the
value-oriented shopper by opening approximately 10 iTZADEAL! stores in
high-traffic strip shopping centers in fiscal 1996. The Company intends to
close 15 to 20 enclosed shopping mall-based All For One stores as their
leases expire in fiscal 1996 in order to focus more fully on the better
growth opportunities provided by the iTZADEAL! stores.
- - Comparable Store Sales Increases.
The Company continually seeks to increase comparable store sales and has
undertaken several initiatives which it believes should positively affect
comparable store sales over the next several years. The Company is seeking
to attract new customers and gradually increase the size of its average
transaction by introducing and expanding key merchandise categories such as
toys, electronics (including telephones, answering machines and portable
stereos) and furniture and gradually modifying its merchandise mix to
include a greater percentage of items with higher average retail price
points. In addition, the Company has recently introduced television
advertising in certain markets. The Company intends to expand and refine
its use of television advertising to increase awareness of its stores and
to attract new and repeat customers. Furthermore, over the next two fiscal
years, the Company will rollout an improved inventory management system
that the Company expects will allow it to improve its process of allocating
specific products to individual stores based on an item's sales performance
and inventory levels.
- - Realization of Kay-Bee Acquisition Synergies.
The Company believes there are several strategic benefits that can be
achieved as a result of the Acquisition. With the Acquisition, the Company
will more than double its purchases of close-out toys and become the
largest purchaser of close-out toys in the United States. The Company
expects that this increased purchasing power will enhance its ability to
source high-quality close-out toys for all of its stores at competitive
prices. In addition, the Company intends to (i) gradually increase the
percentage of higher-margin close-out toys at the Kay-Bee stores in order
to increase both gross margins and the value offered to customers in such
stores and (ii) pursue the elimination of duplicative administrative
expenses resulting from the Acquisition.
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<PAGE> 32
- - Selective Acquisitions.
Consolidated Stores has grown, in part, through selective acquisitions, and
the Company believes that the current consolidation of retailers may
present opportunities for further strategic acquisitions. Although no
additional acquisitions are currently being considered, the Company will
continue to review acquisitions in the future as opportunities arise.
RETAIL OPERATIONS
Odd Lots/Big Lots
Odd Lots/Big Lots stores, which would have contributed approximately 49.5%
of the Company's pro forma combined net sales in fiscal 1995, carry a wide
variety of name-brand consumer products, including food items, health and beauty
aids, electronics, housewares, tools, paint, lawn and garden, hardware, sporting
goods, toys and softlines. Odd Lots/Big Lots also sell factory reconditioned
products and lower-priced, private-label merchandise in selected product
categories. These core categories of merchandise are carried on a continual
basis, although the specific name-brands offered may change frequently. The
Company also supplements its broad selection of consumer products in core
product categories with seasonal goods and holiday merchandise.
Nearly all of the Company's 541 Odd Lots/Big Lots stores are located in
strip shopping centers. Presently, a majority of the Odd Lots/Big Lots stores
are located in the midwestern, southern and mid-Atlantic regions of the United
States. Individual stores range in size from 10,080 square feet to 81,193 square
feet and average approximately 27,860 square feet. In selecting suitable new
store locations, the Company generally seeks retail space between 22,000 square
feet and 30,000 square feet in size. In fiscal 1995, the average cost to open a
new Odd Lots/Big Lots store in a leased facility was $710,000, including
inventory.
The Company plans to open 65 to 75 new Odd Lots/Big Lots stores (net of
store closings) during fiscal 1996, all of which will be leased. Because of
their low operating costs, Odd Lots/Big Lots stores are generally profitable
within their first full year of operation. Management regularly monitors all
stores against established profitability standards and evaluates underperforming
stores on an individual basis.
Toy Stores
The Company's Toy Stores, which would have contributed approximately 44.7%
of the Company's pro forma combined net sales in fiscal 1995, are located in
enclosed shopping malls, outlet malls and strip shopping centers. Kay-Bee Toys
stores, which are generally located in enclosed shopping malls, carry a
combination of in-line toys and close-out merchandise. Toy Liquidators stores,
which are located in outlet malls, and The Amazing Toy Store and Toy Works
stores, which are located in strip shopping centers, carry primarily close-out
toys supplemented by selected in-line toys.
The Company's 1,156 Toy Stores are located in enclosed shopping malls,
outlet malls and strip shopping centers across the United States. Enclosed
shopping mall-based stores range in size from 2,000 square feet to 8,035 square
feet and average approximately 3,750 square feet. Outlet mall stores range in
size from 3,500 square feet to 6,100 square feet and average approximately 4,723
square feet. Strip shopping center stores have historically ranged in size from
3,000 to 24,220 square feet, and the Company believes the average size of new
strip shopping center stores will be approximately 6,000 square feet.
During fiscal 1996, the Company plans to open 40 to 50 Toy Stores (net of
store closings) in strip shopping centers and 10 to 20 Toy Stores (net of store
closings) in outlet malls, all of which will be leased. In seeking suitable new
store locations, the Company generally seeks retail space in both high-traffic
strip shopping centers and outlet malls. In fiscal 1995, the average cost to
open a new outlet mall store or strip shopping center store was $185,000,
including inventory. The Company does not expect to increase significantly the
number of enclosed shopping mall-based Toy Stores.
In addition, Kay-Bee opened 34 temporary retail stores in enclosed shopping
malls during the 1995 fall/winter holiday season. These temporary stores, which
carried primarily close-out merchandise, were open for approximately six to
eight weeks and allowed Kay-Bee to increase sales and profits during the peak
holiday
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<PAGE> 33
selling season by utilizing vacant store space obtained on favorable terms. The
average size of the temporary stores was approximately 3,750 square feet.
iTZADEAL! and All For One
iTZADEAL! and All For One stores, which would have contributed
approximately 4.1% of the Company's pro forma combined net sales in fiscal 1995,
carry various core merchandise categories such as snack foods, health and beauty
care products, greeting cards, toys, household cleaning products and housewares
that are also available in Odd Lots/Big Lots stores. iTZADEAL! stores are
located in strip shopping centers and offer a varying selection of merchandise
at a range of prices generally under $10.00. All For One stores, located
primarily in enclosed shopping malls, offer merchandise principally at the
single price of $1.00.
Of the Company's 209 iTZADEAL! and All For One stores, 115 are located in
strip shopping centers and 94 are located in enclosed shopping malls. Most of
the iTZADEAL! and All For One stores are located in the midwestern region of the
United States. Individual stores range in size from 1,833 square feet to 10,889
square feet and average approximately 4,574 square feet. In seeking suitable new
store locations, the Company generally seeks retail space in high-traffic strip
shopping centers between 5,000 square feet and 8,000 square feet in size. In
fiscal 1995, the average cost to open a new iTZADEAL! or All For One store was
$160,000, including inventory.
The Company plans to open approximately 10 new iTZADEAL! stores in strip
shopping centers during fiscal 1996, all of which will be leased. In addition,
the Company intends to close 15 to 20 enclosed shopping mall-based All For One
stores as their leases expire in fiscal 1996 in order to focus more fully on the
better growth opportunities provided by the iTZADEAL! stores.
ADVERTISING AND PROMOTION
The Company uses a variety of marketing approaches to promote its stores to
the public. These approaches vary by business, by market and by the time of
year. The Company promotes grand openings of its stores through a variety of
print and radio promotions. In general, the Company utilizes only those
marketing methods that it believes provide an immediate and measurable return on
investment. Historically, the Company's total advertising expense as a percent
of total net sales has been approximately 3.0%.
Odd Lots/Big Lots
The Company's marketing program for its Odd Lots/Big Lots stores is
designed to create an awareness of the broad range of quality, name-brand
merchandise available at low prices. The Company utilizes a combination of
weekly advertising circulars in all markets and television advertising in select
markets. The Company currently distributes approximately 22 million four-page
circulars 42 weeks out of the year. The method of distribution includes a
combination of newspaper inserts and direct mail. These circulars are created
in-house and are distributed regionally in order to take advantage of market
differences caused by climate or other factors. The circulars generally feature
25 to 30 products that vary each week. The Company selects certain markets to
run television promotions based upon factors unique to each market, including
the number of stores, cost of local media and results of preliminary testing.
The Company runs multiple 30-second television spots per week, each of which
feature four to six highly recognizable, name-brand products. In-store
promotions include periodic loudspeaker announcements featuring special bargains
as well as humorous in-store signage to emphasize the significant values offered
to the customer.
Toy Stores
Kay-Bee Toys stores have historically used a combination of a holiday
promotion catalog as well as periodic in-store sales and store signs to promote
their products. Advertising costs are generally below 3.0% of total net sales.
Kay-Bee Toys stores receive the benefit of large amounts of customer traffic in
enclosed shopping malls. Similarly, The Amazing Toy Store, Toy Liquidators and
Toy Works stores have relied primarily on existing customer traffic and in-store
signs to promote their products.
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iTZADEAL! and All For One
iTZADEAL! and All For One stores rely primarily on customer traffic and
in-store signs to attract shoppers to the stores.
PURCHASING
An integral part of the Company's business is its ability to select and
purchase quality close-out merchandise directly from manufacturers and other
vendors at prices substantially below those paid by conventional retailers. The
Company has a seasoned buying team with extensive purchasing experience, which
has enabled the Company to develop successful long-term relationships with many
of the largest and most recognized consumer-product manufacturers in the United
States. As a result of these relationships and the Company's experience and
reputation in the close-out industry, many manufacturers offer purchase
opportunities to the Company prior to attempting to dispose of their merchandise
through other channels. The Company regularly purchases manufacturers' excess
inventories, which generally result from production overruns, package changes,
discontinued products and returns. Due to its size, credibility and financial
strength, the Company frequently purchases all or substantially all of a given
manufacturer's close-out products, thus providing a superior level of service
and convenience to its vendors. The Company supplements its traditional
name-brand close-out purchases with a limited amount of program buys and
private-label merchandise.
The Company's merchandise is purchased from over 2,000 foreign and domestic
suppliers providing the Company with multiple sources for each product category.
In fiscal 1995, Consolidated Stores' top ten vendors accounted for 12% of total
purchases with no one vendor accounting for more than 1.8%. Additionally, during
fiscal 1995 the Company's top five toy vendors, on a pro forma combined basis,
would have provided approximately 24% of the Company's toy merchandise. The
Company purchases approximately 20% to 25% of its products directly from
overseas suppliers including products such as seasonal items, toys, tools,
housewares, giftware and novelties. See "Risk Factors -- Impact of Foreign
Imports."
As a result of the Acquisition, the Company will more than double its
purchases of close-out toys and become the largest purchaser of close-out toys
in the United States. The Company expects that this combined purchasing power
will enhance its ability to source high-quality close-out toys for all of its
stores at competitive prices. See "Risk Factors -- Purchasing of Suitable
Merchandise."
WAREHOUSING AND DISTRIBUTION
An important aspect of the Company's purchasing strategy involves its
ability to warehouse and distribute merchandise quickly and efficiently. The
Company's 2,884,100 square foot primary warehouse/distribution center, located
in Columbus, Ohio, utilizes two high-speed tilt tray sortation systems with a
combined output that currently exceeds 150,000 cartons per day. These systems
include a fully automated warehouse management system that incorporates
high-speed bar code scanning to efficiently sort and load high merchandise
volumes for immediate store delivery. Typically, a retail store receives
additional inventory once a week (usually within 24 hours of dispatch) via a
dedicated trucking fleet and outside transportation companies.
Another important part of the Company's purchasing strategy is its ability
to buy large quantities of merchandise off-season at low prices. As a result,
the Company must warehouse the merchandise until the appropriate season.
Therefore, the Company maintains higher inventories than most conventional
retailers.
For its Kay-Bee Toys and Toy Works stores, the Company has four
warehouse/distribution centers located in Arizona, Kentucky, Massachusetts and
Pennsylvania, totaling 1,069,500 square feet. These warehouse/distribution
centers use automated warehouse management systems that include bar code
scanning and radio frequency technology to allow for high accuracy and efficient
product processing from vendors to retail stores. The combined output of these
warehouse/distribution centers currently averages over 53,000 cartons per day.
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The Company is constructing a new 810,000 square foot
warehouse/distribution facility on its existing acreage in Columbus, Ohio, which
is expected to be completed in June 1996. The Company is evaluating the addition
of strategically placed warehouse/distribution facilities to facilitate its
growth. Currently, the Company expects that it will add at least one
warehouse/distribution center in the Southeast to supplement the Kay-Bee Toys
and Toy Works warehouse/distribution system.
INFORMATION SYSTEMS
The Company has continued to enhance its information systems to support
growth and the operations of its business over the last five fiscal years. The
Company's current systems incorporate fully integrated distribution, allocation,
purchase order management, open-to-buy, point of sale and finance functions and
represent a combination of externally purchased software packages as well as
internally developed software. Current systems enable the Company to take
advantage of operating efficiencies resulting from bar-code scanning and
automated allocation.
During fiscal 1996 and 1997, the Company will begin to rollout its next
generation of inventory management systems. Upon completion, the new system will
provide a number of features that the Company believes will improve inventory
turns, decrease markdowns and lower operating expenses. These features include
the ability to manage inventories on a micro-SKU basis as compared to its
previous macro-SKU based system. Additionally, the new system will incorporate
current inventory ownership by SKU by store when allocating merchandise, whereas
the existing system allocates inventory based on sales potential without the
benefit of store-owned inventory data.
The Company has planned a multi-phased rollout for this system, allowing
for thorough testing and review prior to start up. Initial implementation is
planned for the smaller iTZADEAL! and All For One stores in fiscal 1996 while
implementation for Odd Lots/Big Lots stores is currently scheduled for 1997.
OTHER OPERATIONS
The Company also sells merchandise wholesale from its corporate office in
Columbus, Ohio. The inventory consists almost entirely of merchandise obtained
through the same or shared opportunistic purchases of the retail operation.
Advertising of wholesale merchandise is conducted primarily at trade shows and
by mailings to past and potential customers. Wholesale customers include a wide
and varied range of major national and regional retailers, as well as smaller
retailers, manufacturers, distributors and wholesalers.
ASSOCIATES
At March 31, 1996, Consolidated Stores had 21,633 active associates
comprised of 7,892 full-time and 13,741 part-time associates, and Kay-Bee had
8,996 active associates comprised of 3,329 full-time and 5,667 part-time
associates. Approximately two-thirds of the associates employed by Consolidated
Stores and Kay-Bee were employed on a part-time basis. Temporary associates
hired during the fall/winter holiday selling season increased the number of
associates to peaks of 27,962 and 18,499 for Consolidated Stores and Kay-Bee,
respectively, during fiscal 1995. The relationship with associates is considered
to be good, and the Company is not a party to any labor agreements.
PROPERTIES
Corporate, Warehouse and Distribution
The Company owns a 2,884,100 square foot office, warehouse/distribution
facility located in Columbus, Ohio. Approximately 150,000 square feet of this
facility is utilized as office space for corporate offices. The balance
represents warehouse and distribution space. Warehousing and distribution is
also conducted from leased locations principally located in central Ohio which
total approximately 1,006,000 square feet. Substantially all the close-out
merchandise sold by the Company is received at the Columbus warehouse/
distribution center and is processed for retail sale, as necessary, and
distributed to the retail location or wholesale customer.
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Kay-Bee's executive offices occupy 113,400 square feet of leased space in
Pittsfield, Massachusetts. Currently, the corporate offices are located in three
separate office buildings which are all in close proximity to one another. The
Company has warehouse/distribution centers in Glendale, Arizona; Danville,
Kentucky; Pittsfield, Massachusetts; and Mount Pocono, Pennsylvania, occupying
367,000, 300,000, 254,000 and 148,500 square feet of space, respectively, where
substantially all the toy merchandise sold by the Company's Kay-Bee Toys and Toy
Works stores is received, processed and distributed. The Massachusetts and
Arizona warehouse/distribution centers are owned by the Company while the
Kentucky and Pennsylvania warehouse/distribution centers are leased. In addition
to these locations, the Company leases additional temporary space at locations
near the warehouse/distribution centers to store its expanded inventory.
Stores
All stores are in leased facilities. Store leases generally provide for
fixed monthly rental payments plus the payment, in most cases, of real estate
taxes, utilities, insurance and maintenance. The Kay-Bee Toys and Toy Works
stores leases generally include mall advertising charges. In some locations, the
leases provide formulas requiring the payment of a percentage of sales as
additional rent. Such payments are generally only required when sales reach a
specified level. The typical lease for the Company's close-out stores is for an
initial term of three to five years with multiple, three- to five-year renewal
options, while the typical lease for the Kay-Bee Toys and Toy Works stores is
for an initial term of 10 years with various renewal options. The following
tables set forth store lease expiration and state location information for
existing store leases at February 3, 1996, including information for the Kay-Bee
Toys and Toy Works stores as of May 5, 1996.
<TABLE>
<CAPTION>
NUMBER OF LEASES EXPIRING WITHOUT
NUMBER OF LEASES EXPIRING RENEWAL OPTIONS
----------------------------------------- -----------------------------------------
ITZADEAL! ITZADEAL!
FISCAL ODD LOTS/ AND ALL TOY ODD LOTS/ AND ALL TOY
YEAR BIG LOTS FOR ONE STORES TOTAL BIG LOTS FOR ONE STORES TOTAL
- ----------------------- --------- --------- --------- ----- --------- --------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996................... 102 25 160 287 23 11 132 166
1997................... 112 87 194 393 26 28 162 216
1998................... 79 31 174 284 19 12 155 186
1999................... 113 24 145 282 29 17 124 170
2000................... 95 24 152 271 18 3 109 130
2001 and beyond........ 40 18 331 389 17 16 178 211
--- --- ----- ----- --- -- --- -----
541 209 1,156 1,906 132 87 860 1,079
=== === ===== ===== === == === =====
</TABLE>
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The Company operates 1,906 retail stores located in all 50 states and
Puerto Rico. The following store list shows the number and types of stores that
the Company operates in each state and Puerto Rico.
<TABLE>
<CAPTION>
ITZADEAL! ITZADEAL!
ODD LOTS/ AND ALL TOY ODD LOTS/ AND ALL TOY
BIG LOTS FOR ONE STORES TOTAL BIG LOTS FOR ONE STORES TOTAL
--------- --------- --------- ----- --------- --------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Alabama....... 19 -- 17 36 Nebraska......... -- 1 8 9
Alaska........ -- -- 4 4 Nevada........... -- -- 5 5
Arizona....... -- -- 17 17 New Hampshire.... -- -- 9 9
Arkansas...... -- -- 8 8 New Jersey....... -- -- 36 36
California.... -- -- 115 115 New Mexico....... -- -- 7 7
Colorado...... -- 4 17 21 New York......... 10 -- 84 94
Connecticut... -- -- 30 30 North Carolina... 25 -- 32 57
Delaware...... -- -- 4 4 North Dakota..... -- -- 4 4
Florida....... 56 18 60 134 Ohio............. 105 56 46 207
Georgia....... 33 1 27 61 Oklahoma......... -- -- 12 12
Hawaii........ -- -- 8 8 Oregon........... -- -- 9 9
Idaho......... -- -- 7 7 Pennsylvania..... 22 9 60 91
Illinois...... 20 23 42 85 Puerto Rico...... -- -- 14 14
Indiana....... 36 19 29 84 Rhode Island..... -- -- 4 4
Iowa.......... -- 6 10 16 South Carolina... 18 -- 17 35
Kansas........ 6 -- 7 13 South Dakota..... -- -- 2 2
Kentucky...... 28 17 13 58 Tennessee........ 35 7 25 67
Louisiana..... 6 -- 17 23 Texas............ 6 -- 71 77
Maine......... -- -- 8 8 Utah............. -- -- 8 8
Maryland...... 3 2 36 41 Vermont.......... -- -- 4 4
Massachusetts.. -- -- 39 39 Virginia......... 24 8 43 75
Michigan...... 34 23 38 95 Washington....... -- -- 24 24
Minnesota..... -- 4 12 16 West Virginia.... 22 7 12 41
Mississippi... 10 -- 8 18 Wisconsin........ 10 -- 21 31
Missouri...... 13 3 20 36 Wyoming.......... -- 1 3 4
Montana....... -- -- 3 3
</TABLE>
<TABLE>
<CAPTION>
ITZADEAL!
ODD LOTS/ AND ALL TOY
BIG LOTS FOR ONE STORES TOTAL
--------- --------- --------- -----
<S> <C> <C> <C> <C>
Total Stores..... 541 209 1,156 1,906
Number of
States and
Puerto Rico..... 22 18 51 51
</TABLE>
COMPETITION
The retail industry is highly competitive. The Company's retail close-out
stores compete with discount stores (such as Wal-Mart(R), KMart(R) and
Target(R)), deep discount drugstore chains and other value-oriented specialty
retailers. The Company's retail toy operations compete directly with local and
regional enclosed shopping mall-based toy retailers, destination toy stores
(such as Toys "R" Us(R)) and discount retailers with toy departments and
indirectly with enclosed shopping mall-based retailers such as concept stores
and theme-based stores that feature toys or toy-related merchandise. Certain of
the Company's competitors have greater financial, distribution, marketing and
other resources than the Company.
LEGAL PROCEEDINGS
The Company is party to various legal proceedings arising from its ordinary
course of operations and believes that the outcome of these proceedings,
individually and in the aggregate, will be immaterial.
36
<PAGE> 38
ACQUISITION OF KAY-BEE CENTER, INC.
The following summary of the material provisions of the Stock Purchase
Agreement is subject to, and is qualified in its entirety by reference to, all
of the provisions of the Stock Purchase Agreement, including the definitions
therein of certain terms.
Pursuant to the Stock Purchase Agreement dated March 25, 1996, Consolidated
Stores acquired from Melville all of the issued and outstanding common stock of
Kay-Bee Center, Inc., a California corporation and a holding company for
approximately 800 Kay-Bee subsidiaries, which operate approximately 1,045 retail
toy stores. Consolidated Stores effected the Acquisition through KB
Consolidated, Inc., a newly formed Ohio subsidiary of Consolidated Stores. The
Acquisition was effective as of 12:01 a.m. on May 5, 1996.
The purchase price for all of the Kay-Bee common stock was approximately
$315 million, subject to a post-closing adjustment based on an audit of
Kay-Bee's balance sheet as of May 4, 1996 (for purposes of the Stock Purchase
Agreement, the "Closing Date"). Of this purchase price, $215 million was paid in
cash and $100 million was financed by the Subordinated Notes issued by the
Company to Melville. The purchase price was based on the estimated net book
value of Kay-Bee as of December 31, 1995.
The Stock Purchase Agreement provides for a dollar-for-dollar post-closing
adjustment of the purchase price in the event that the final net book value of
Kay-Bee as of the Closing Date differs from the estimated net book value of $323
million. Melville must provide an audited closing balance sheet of Kay-Bee as of
the Closing Date setting forth the calculation of the final net book value to
Consolidated Stores within 60 days of the Closing Date.
Under the Stock Purchase Agreement, Melville made certain customary
representations, warranties and covenants regarding, among other things, the
capitalization, liabilities, operations, contracts, employees, employee benefit
plans, litigation, environmental condition and financial statements of Kay-Bee
and the corporate authority to consummate the Acquisition. With certain
exceptions as discussed below, Melville's representations and warranties expire
18 months after the Closing Date. The representations and warranties relating to
(i) environmental matters will survive for three years after the Closing Date
and (ii) tax matters and employee benefits will survive until the expiration of
applicable statutes of limitations. Melville has agreed to indemnify
Consolidated Stores and its affiliates against, among other things, losses
arising from the breach of any warranty, covenant or agreement made by Melville
which survives the Closing Date and any damages under the Worker Adjustment
Retraining Notification Act for occurrences prior to the closing of the Stock
Purchase Agreement. Claims against Melville for losses under the indemnities
(other than for certain specified items including, fraud, retained litigation,
taxes, certain lease obligations and certain obligations with respect to
specified employee plans and benefits) for the breach of representations and
warranties must aggregate 2% of the purchase price before claims can be made
against Melville, and then Melville will only be liable for the excess over 1%
of the purchase price. Melville's maximum exposure to liability pursuant to its
indemnities is the purchase price, as adjusted.
37
<PAGE> 39
MANAGEMENT
The following tables set forth certain information about the executive
officers and directors of the Company.
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
OFFICER
NAME AGE OFFICES HELD SINCE
- ------------------------- --- --------------------------------------------------- -------
<S> <C> <C> <C>
William G. Kelley........ 50 Chairman of the Board and Chief Executive Officer 1990
Michael L. Glazer........ 48 President 1995
Albert J. Bell........... 36 Senior Vice President, Legal, Real Estate,
Secretary and General Counsel 1988
Michael J. Potter........ 34 Senior Vice President and Chief Financial Officer 1991
James A. McGrady......... 45 Vice President and Treasurer 1991
Mark D. Shapiro.......... 36 Vice President and Controller 1994
C. Matthew Hunnell....... 33 Senior Vice President-Merchandising 1995
Charles Freidenberg...... 50 Senior Vice President-Merchandising 1995
</TABLE>
BOARD OF DIRECTORS
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DIRECTOR
NAME AGE FOR THE PAST FIVE YEARS SINCE
- ------------------------- --- --------------------------------------------------- -------
<S> <C> <C> <C>
William G. Kelley........ 50 Chairman of the Board and Chief Executive
Officer of the Company 1990
Michael L. Glazer........ 48 President of the Company; Former President,
The Bombay Company (retail home furnishings);
former Executive Vice President, The Bombay
Company 1991
David T. Kollat.......... 57 President and Founder, 22, Inc.
(retail research and consulting) 1990
Nathan P. Morton......... 47 President and Chief Executive Officer,
Open Environment Corporation (software
development) 1990
John L. Sisk............. 68 Retired, Chairman and Chief Executive Officer,
Herman's World of Sporting Goods (retail stores) 1990
Dennis B. Tishkoff....... 53 President and Chief Executive Officer,
Shoe Corporation of America (retail footwear) 1991
William A. Wickham....... 51 President, Chief Executive Officer,
SBC Advertising (advertising and corporate
communications agency) 1992
Sheldon M. Berman........ 55 Chairman, Macaroons, Inc.
(consumer research and marketing services);
former
Chairman, President and founder, Shelly Berman
Communicators (retail marketing and advertising) 1994
</TABLE>
Six meetings of the Board of Directors (the "Board") of Consolidated Stores
were held during fiscal 1995. Each director attended at least 80% of the
meetings of the Board, and the committees on which he served, during the period
for which he served as a director during the fiscal year.
The Board has an Audit Committee, a Compensation Committee and a Nominating
Committee. Messrs. Tishkoff, Sisk and Wickham are the members of the Audit
Committee, which monitors the activities of the Company's independent auditors
and its internal audit functions. The Audit Committee met three times
38
<PAGE> 40
during fiscal 1995. Messrs. Kollat, Sisk and Tishkoff are the members of the
Compensation Committee, which administers the Company's stock option plans and
advises the Board with respect to compensation matters. The Compensation
Committee met three times during fiscal 1995. Messrs. Berman, Kelley, Kollat and
Morton are the members of the Nominating Committee, which is responsible for
interviewing and nominating candidates for election as directors of the Company.
The Nominating Committee did not meet during fiscal 1995. The Nominating
Committee will not consider nominees recommended by security holders.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company currently consists of
90,000,000 shares of Common Stock, par value $.01 per share, 8,000,000 shares of
Non-Voting Common Stock, par value $.01 per share ("Non-Voting Common Stock"),
and 2,000,000 shares of Preferred Stock, par value $.01 per share ("Preferred
Stock"), of which 600,000 shares have been designated as Series A Junior
Participating Preferred Stock. On May 17, 1996, 48,105,521 shares of Common
Stock were outstanding and held by 1,306 holders of record, and no shares of
Non-Voting Common Stock or Preferred Stock were outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share in the election
of directors and on all other matters submitted to a vote of stockholders. Such
holders do not have the right to cumulate their votes in the election of
directors. Holders of Common Stock have no redemption or conversion rights and
no preemptive or other rights to subscribe for securities of the Company. In the
event of a liquidation, dissolution or winding up of the Company, holders of
Common Stock are entitled to share equally and ratably in all of the assets
remaining, if any, after satisfaction of all debts and liabilities of the
Company and the preferential rights of any series of Preferred Stock then
outstanding. The shares of Common Stock outstanding are, and all shares of
Common Stock to be issued in the Offering will be, fully paid and
non-assessable.
Holders of Common Stock have an equal and ratable right to receive
dividends, when, as and if declared by the Board of Directors out of funds
legally available therefor and only after payment of, or provision for, full
dividends on all outstanding shares of any series of Preferred Stock and after
the Company has made provision for any required sinking or purchase funds for
series of Preferred Stock. See "Price Range of Common Stock."
Shares of the Non-Voting Common Stock are convertible, upon a public
offering or public sale by the holder, into the Common Stock on a one-for-one
basis provided that as a result of the conversion the holder and its affiliates
do not, directly or indirectly, own, control or possess the power to vote more
securities issued by the Company than such holder is permitted to own, control
or possess under any applicable law or governmental regulation.
PREFERRED STOCK
Preferred Stock may be issued, from time to time in one or more series, and
the Board, without further approval of the stockholders, is authorized to fix
the dividend rights and terms, redemption rights and terms, liquidation
preferences, conversion rights, voting rights and sinking fund provisions
applicable to each such series of Preferred Stock. If the Company issues a
series of Preferred Stock in the future that has voting rights or preference
over the Common Stock with respect to the payment of dividends and upon the
Company's liquidation, dissolution or winding up, the rights of the holders of
the Common Stock offered hereby may be adversely affected. Preferred Stock may
be issued in the future in connection with acquisitions, financings or other
such matters as the Board deems to be appropriate. Without stockholder approval,
the Board, within the bounds of and subject to federal securities laws and
Delaware law, could authorize the issuance of Preferred Stock which may have the
effect of making a takeover of the Company unpalatable to potential bidders for
the hostile acquisition of the Company.
39
<PAGE> 41
STOCKHOLDERS' RIGHTS AGREEMENT
On April 18, 1989, the Board of Consolidated Stores declared a dividend
distribution of one right (a "Right") for each outstanding share of Common Stock
of the Company, payable to stockholders of record at the close of business on
April 24, 1989, and authorized the attachment of Rights to all shares of Common
Stock issued thereafter, including Common Stock offered in the Offering. Each
Right entitles the registered holder to purchase from the Company a unit
consisting of one one-hundredth of a share (a "Unit") of Series A Junior
Participating Preferred Stock at a purchase price of $35 per Unit (the "Purchase
Price"), subject to adjustment.
The Rights will separate from the Common Stock and a distribution date (the
"Distribution Date") will occur upon the earlier of (i) ten business days
following a public announcement that a person or group of affiliated or
associated persons other than the Company and its subsidiaries or benefit plans
(an "Acquiring Person") has acquired, or obtained the right to acquire,
beneficial ownership of 20% or more of the outstanding shares of the Common
Stock (the "Stock Acquisition Date") or (ii) ten business days (or such later
date as may be determined by the Company's Board) following the commencement of
a tender offer or exchange offer that would result in a person or group
beneficially owning 20% or more of such outstanding shares of the Common Stock.
Until the Distribution Date, (i) the Rights will be evidenced by the
certificates of the Common Stock and will be transferred with and only with such
certificates, (ii) new Common Stock certificates issued after April 24, 1989
will contain a notation incorporating the Rights Agreement by reference and
(iii) the surrender or transfer of any certificates of the Common Stock
outstanding will also constitute the transfer of the Rights associated with the
Common Stock represented by such certificate.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on April 18, 1999, unless earlier redeemed by the
Company.
In the event that a person becomes the beneficial owner of 20% or more of
the then outstanding shares of the Common Stock (except pursuant to a tender
offer or exchange offer for all outstanding shares of Common Stock at a price
and on terms determined by at least a majority of the Board who are not officers
of the Company or representatives of an Acquiring Person to be (i) at a price
which is fair to the Company's stockholders and (ii) otherwise in the best
interests of the Company and its stockholders), each holder of a Right shall
thereafter have the right to receive, upon exercise, common stock of the
acquiring company having a value equal to two times the exercise price of the
Right. Notwithstanding any of the foregoing, following the occurrence of any of
the events set forth in this paragraph, all Rights that are, or (under certain
circumstances) were, beneficially owned by any Acquiring Person will be null and
void. However, Rights are not exercisable following the occurrence of either of
the events set forth above until such time as the Rights are no longer
redeemable by the Company.
In the event that, at any time following the Stock Acquisition Date, (i)
the Company is acquired in a merger or other business combination transaction in
which the Company is not the surviving corporation (other than mergers which
follow certain types of offers) or (ii) more than 50% of the Company's assets,
cash flow or earning power is sold or transferred, each holder of a Right
(except voided Rights) shall thereafter have the right to receive, upon
exercise, common stock of the acquiring company having a value equal to two
times the exercise price of the Right. In the event that Rights cannot be
exercised for common stock of the acquiring company as set forth above, holders
of Rights will be entitled to put the Rights to the Acquiring Person for cash
equal to the Purchase Price.
The Purchase Price payable, and the number of Units of the Preferred Stock
or other securities or property issuable, upon exercise of the Rights is subject
to adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Preferred
Stock, (ii) if holders of the Preferred Stock are granted certain rights or
warrants to subscribe for the Preferred Stock or convertible securities at less
than the current market price of the Preferred Stock or (iii) upon the
distribution to holders of the Preferred Stock of evidences of indebtedness or
assets (excluding regular quarterly cash dividends) or of subscription rights or
warrants (other than those referred to above).
40
<PAGE> 42
In general, at any time until the close of business on the tenth business
day following the Stock Acquisition Date, the Company may redeem the Rights in
whole, but not in part, at a price of $.01 per Right (payable in cash, Common
Stock or other consideration deemed appropriate by the Board). Immediately upon
the action of the Board ordering redemption of the Rights, the Rights will
terminate and the only right of the holders of Rights will be to receive the
$.01 redemption price.
CHANGE OF CONTROL
Section 203 of the Delaware General Corporation Law generally prohibits a
public Delaware corporation, including the Company, from engaging in a Business
Combination (as defined herein) with an Interested Stockholder (as defined
herein) for a period of three years after the date of the transaction in which
an Interested Stockholder became such, unless: (i) the board of directors of the
corporation approved, prior to the date the Interested Stockholder became such,
either such Business Combination or such transaction; (ii) upon consummation of
such transaction, the Interested Stockholder owns at least 85% of the voting
shares of such corporation (excluding specified shares); or (iii) the Business
Combination is approved by the board of directors of the corporation and
authorized by the affirmative vote (at an annual or special meeting and not by
written consent) of at least 66 2/3% of the outstanding voting shares of the
corporation (excluding shares held by the Interested Stockholder). A "Business
Combination" includes (i) mergers, consolidations and sales or other
dispositions of 10% or more of the assets of a corporation to or with an
Interested Stockholder, (ii) certain transactions resulting in the issuance or
transfer to an Interested Stockholder of any stock of such corporation or its
subsidiaries and (iii) other transactions resulting in a disproportionate
financial benefit to an Interested Stockholder. An "Interested Stockholder" is a
person who, together with its affiliates and associates, owns (or within a
three-year period did own) 15% or more of a corporation's stock entitled to vote
generally in the election of directors.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this Offering, the Company will have outstanding
53,105,521 shares of Common Stock, of which 52,995,521 shares will be freely
transferable without restriction or further registration under the Securities
Act of 1933, as amended (the "Securities Act"), including the 5,000,000 shares
offered hereby. The other outstanding shares of Common Stock will be "restricted
securities" as that term is defined in Rule 144 promulgated under the Securities
Act and may only be sold pursuant to a registration statement under the
Securities Act or an applicable exemption from registration pursuant to Rule 144
promulgated thereunder. In connection with the Offering, the Company has agreed
that, during a period of 150 days from the date of this Prospectus, it will not,
without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated, (i) directly or indirectly, offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of any share of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or file any registration statement
under the Securities Act with respect to any of the foregoing or (ii) enter into
any swap or any other agreement or any transaction that transfers, in whole or
in part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise except for (a) shares of Common Stock to be
issued in the Offering, (b) any shares of Common Stock issued by the Company
upon the exercise of an option or warrant or the conversion of a security
outstanding on the date hereof and referred to in this Prospectus or (c) any
shares of Common Stock issued or options to purchase Common Stock granted
pursuant to the Consolidated Stores Corporation 1996 Performance Incentive Plan,
Restricted Stock Plan or Director Stock Option Plan. In addition, certain
officers and directors of the Company who own Common Stock have agreed that
during a period of 150 days from the date of this Prospectus, such holders will
not, without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated and subject to certain exceptions, directly or indirectly, (i)
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of, or otherwise dispose of or transfer any shares of the Common Stock
or any securities convertible into or exchangeable or exercisable for Common
Stock, whenever acquired, or with respect to which such holders acquire the
power of
41
<PAGE> 43
disposition, or file any registration statement under the Securities Act with
respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock, whether
any such swap or transaction is to be settled by delivery of Common Stock or
other securities, in cash or otherwise. Upon expiration of such 150-day period,
the Company and such holders will be able to sell all or a portion of their
shares and the Company will be able to issue shares, in each case in accordance
with applicable securities law, including, in the case of public sales, volume,
manner of sale and other limitations under Rule 144. Sales or the expectation of
sales of a substantial number of shares of Common Stock in the public market
could adversely affect the prevailing market price for the Common Stock. See
"Price Range of Common Stock."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is National City
Bank.
42
<PAGE> 44
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement"), the Company has agreed to sell to each of the
Underwriters named below (the "Underwriters"), and each of the Underwriters, for
whom Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
Montgomery Securities and McDonald & Company Securities, Inc. are acting as
representatives (the "Representatives"), has severally agreed to purchase from
the Company the aggregate number of shares of Common Stock set forth opposite
its name below. In the Purchase Agreement, the several Underwriters have agreed,
subject to the terms and conditions set forth therein, to purchase all the
shares of Common Stock offered hereby, if any are purchased. In the event of
default by an Underwriter, the Purchase Agreement provides that, in certain
circumstances, purchase commitments of the nondefaulting Underwriters may be
increased or the Purchase Agreement may be terminated.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................
Montgomery Securities................................................
McDonald & Company Securities, Inc. .................................
---------
Total................................................... 5,000,000
==========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $ per share. The Underwriters
may allow, and such dealers may reallow, a discount not in excess of $ per
share on sales to certain other dealers. After the Offering, the public offering
price, concession and discount may be changed.
The Company has granted the Underwriters an option, exercisable for 30 days
after the date of this Prospectus, to purchase up to 750,000 additional shares
of Common Stock solely to cover over-allotments, if any, at the public offering
price set forth on the cover page of this Prospectus, less the underwriting
discount. To the extent that the Underwriters exercise such option, each of the
Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage of such shares that the number of
shares of Common Stock to be purchased by it shown in the foregoing table bears
to the total number of shares initially offered to the Underwriters hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect thereof.
In connection with the Offering, the Company has agreed that, during a
period of 150 days from the date of this Prospectus, it will not, without the
prior written consent of Merrill Lynch, (i) directly or indirectly, offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any share of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
file any registration statement under the Securities Act with respect to any of
the foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly, the
economic consequence of ownership of the Common Stock, whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise except for (a)
shares of Common Stock to be issued in the Offering, (b) any shares of Common
43
<PAGE> 45
Stock issued by the Company upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof and referred to in this
Prospectus or (c) any shares of Common Stock issued or options to purchase
Common Stock granted pursuant to the Consolidated Stores Corporation 1996
Performance Incentive Plan, Restricted Stock Plan or Director Stock Option Plan.
In addition, certain officers and directors of the Company who own Common Stock
have agreed that during a period of 150 days from the date of this Prospectus,
such holders will not, without the prior written consent of Merrill Lynch and
subject to certain exceptions, directly or indirectly, (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant for the sale of, or
otherwise dispose of or transfer any shares of the Common Stock or any
securities convertible into or exchangeable or exercisable for Common Stock,
whenever acquired, or with respect to which such holders acquire the power of
disposition, or file any registration statement under the Securities Act with
respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock, whether
any such swap or transaction is to be settled by delivery of Common Stock or
other securities, in cash or otherwise.
Merrill Lynch, from time to time, performs investment banking and other
financial services for the Company for which it receives customary fees. In
connection with the Acquisition, Merrill Lynch provided the Company with a
bridge loan facility that has not been utilized and for which it received
customary fees.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Benesch, Friedlander, Coplan & Aronoff P.L.L.,
Cleveland, Ohio. Certain legal matters relating to the Offering will be passed
upon for the Underwriters by Shearman & Sterling, New York, New York.
EXPERTS
The financial statements of Consolidated Stores Corporation as of February
3, 1996 and January 28, 1995 and for each of the three fiscal years ended
February 3, 1996, January 28, 1995 and January 29, 1994, respectively, included
in this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in accounting and
auditing.
The financial statements of Kay-Bee Center, Inc. as of December 31, 1995,
1994 and 1993 and for each of the three years in the period ended December 31,
1995 included in this Prospectus have been audited by KPMG Peat Marwick LLP,
independent auditors, as indicated in its report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 under the Securities Act with
respect to the securities offered hereby. This Prospectus does not contain all
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement and the exhibits
thereto, copies of which are on file at the offices of the Commission and may be
obtained upon payment of the fee prescribed by the Commission, or may be
examined without charge at the offices of the Commission. Statements contained
in this Prospectus or in any document incorporated in this Prospectus by
reference as to the contents of any contract or other document referred to
herein or therein are not necessarily complete, and, in each instance, reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement or such other document, each such statement being
qualified in all respects by such reference.
44
<PAGE> 46
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Commission. Copies of
reports, proxy and information statements and other information filed by the
Company with the Commission may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judicial Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the following Regional Offices of
the Commission: New York Regional Office, Seven World Trade Center, 13th Floor,
New York, New York 10048 and Chicago Regional Office, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can
also be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Company's
Common Stock is listed on the NYSE, and reports, proxy and information
statements and other information concerning the Company may also be inspected at
the offices of the NYSE located at 20 Broad Street, New York, New York 10005.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents, filed with or furnished to the Commission, and the
information included therein, are incorporated herein by reference and shall be
deemed a part hereof: (i) the Company's Annual Report on Form 10-K for the
fiscal year ending February 3, 1996 filed May 3, 1996, (ii) the Company's
Current Report on Form 8-K filed April 9, 1996, (iii) the Company's Current
Report on Form 8-K filed May 7, 1996, as amended by Form 8-K/A filed May 10,
1996, (iv) the Company's Current Report on Form 8-K filed May 13, 1996 and (v)
all documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act subsequent to the date of this Prospectus and prior to the
termination of this Offering. Any statement contained in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide, without charge, to each person to
whom a copy of this Prospectus has been delivered, upon the written or oral
request of any such person, a copy of any and all of the documents referred to
above that have been incorporated in this Prospectus by reference, other than
exhibits to such documents that are incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
this Prospectus incorporates. Requests should be directed to Michael J. Potter,
Senior Vice President and Chief Financial Officer, 300 Phillipi Road, P.O. Box
28512, Columbus, Ohio 43228-0512, telephone (614) 278-6800. Persons requesting
copies of exhibits that were not specifically incorporated by reference in such
documents will be charged the costs of reproduction and mailing.
45
<PAGE> 47
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
KAY-BEE CENTER, INC. AND SUBSIDIARIES
INDEX TO PRO FORMA FINANCIAL INFORMATION AND HISTORICAL
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PRO FORMA COMBINED FINANCIAL INFORMATION............................................ P-2
Pro Forma Combined Statement of Earnings (Unaudited)................................ P-3
Pro Forma Combined Balance Sheet (Unaudited)........................................ P-5
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES FINANCIAL STATEMENTS
Independent Auditors' Report........................................................ F-1
Consolidated Balance Sheets as of February 3, 1996 and January 28, 1995............. F-2
Consolidated Statements of Earnings for the years ended February 3, 1996, January
28, 1995 and January 29, 1994..................................................... F-3
Consolidated Statements of Stockholders' Equity for the years ended February 3,
1996, January 28, 1995 and January 29, 1994....................................... F-4
Consolidated Statements of Cash flows for the years ended February 3, 1996, January
28, 1995 and January 29, 1994..................................................... F-5
Notes to Consolidated Financial Statements.......................................... F-6
Selected Quarterly Financial Data for the years ended February 3, 1996 and January
28, 1995.......................................................................... F-15
KAY-BEE CENTER, INC. AND SUBSIDIARIES FINANCIAL STATEMENTS
Independent Auditors' Report........................................................ F-17
Consolidated Balance Sheets as of December 31, 1995, 1994 and 1993.................. F-18
Consolidated Statements of Operations for the years ended December 31, 1995, 1994
and 1993.......................................................................... F-19
Consolidated Statements of Shareholder's Equity for the years ended December 31,
1995, 1994
and 1993.......................................................................... F-20
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994
and 1993.......................................................................... F-21
Notes to Consolidated Financial Statements.......................................... F-22
Unaudited Condensed Consolidated Balance Sheet as of March 30, 1996................. F-29
Unaudited Condensed Consolidated Statements of Operations for the fiscal quarters
ended March 30, 1996 and April 1, 1995............................................ F-30
Unaudited Condensed Consolidated Statements of Cash Flows for the fiscal quarters
ended March 30, 1996 and April 1, 1995............................................ F-31
Notes to Unaudited Condensed Consolidated Financial Statements...................... F-32
</TABLE>
P-1
<PAGE> 48
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
KAY-BEE CENTER, INC. AND SUBSIDIARIES
PRO FORMA COMBINED FINANCIAL INFORMATION (UNAUDITED)
As of May 5, 1996, Consolidated Stores acquired Kay-Bee for a purchase
price of approximately $315 million. The purchase price consisted of $215
million of cash and $100 million of Subordinated Notes. The proceeds from the
Offering will be used to repay a portion of the borrowings incurred under the
Revolving Credit Facility to finance the Acquisition.
The unaudited pro forma combined financial information gives effect to the
Acquisition and the financing thereof, including the issuance of the
Subordinated Notes and the borrowings under the Revolving Credit Facility, and
the Offering and the application of the net proceeds therefrom as if they had
occurred on January 29, 1995 for purposes of the unaudited pro forma combined
statement of earnings and as of February 3, 1996 for purposes of the unaudited
pro forma combined balance sheet. The pro forma adjustments that have been
applied to the audited financial statements of Kay-Bee account for the
Acquisition as a purchase.
The pro forma purchase price for the Acquisition was determined based on
the book value as of December 31, 1995 of the Kay-Bee net assets acquired. The
actual purchase price as of May 5, 1996 was higher based primarily on the
increase in seasonal working capital at Kay-Bee for the period from January 1,
1996 to May 4, 1996. This increase in working capital and the borrowings that
would be attributable thereto are not reflected in the unaudited pro forma
combined financial information. Accordingly, the unaudited pro forma combined
financial information reflects a lower purchase price and lower outstanding
borrowings under the Revolving Credit Facility.
The unaudited pro forma combined financial information has been prepared on
the basis of assumptions described in the notes thereto and includes assumptions
relating to the allocation of the consideration paid for the assets and
liabilities of Kay-Bee based on preliminary estimates of their fair value. The
actual allocation of such consideration may differ from that reflected in the
unaudited pro forma combined financial information after valuations and other
procedures to be performed after the closing of the Acquisition have been
completed. The estimated values of the assets and liabilities at the time of the
Acquisition also could vary from the amounts as of December 31, 1995. The
Company, however, does not expect that the effect of any differences will be
material. In addition, the proceeds from the Offering, the interest rate on, and
the amount of, borrowings under the Revolving Credit Facility and the fees and
expenses with respect to the Acquisition and the Offering are assumed solely for
the purpose of presenting the unaudited pro forma combined financial information
set forth below. The actual proceeds from the Offering, the actual interest rate
on, and the amount of, borrowings under the Revolving Credit Facility and actual
fees and expenses may differ from the assumptions set forth below. In the
opinion of management of the Company, all adjustments necessary to present
fairly such unaudited pro forma combined financial information have been made
based on the proposed terms and structure of the Acquisition.
This unaudited pro forma financial information is not necessarily
indicative of what actual results would have been had the Acquisition occurred
at the dates indicated nor do they purport to project the future financial
position or the results of future operations of the Company.
This unaudited pro forma financial information should be read in
conjunction with the accompanying notes and the audited financial statements,
including the notes thereto, of the Company and Kay-Bee, respectively, included
elsewhere in this Prospectus.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
P-2
<PAGE> 49
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
KAY-BEE CENTER, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF EARNINGS (UNAUDITED)
FISCAL YEAR ENDED FEBRUARY 3, 1996
The pro forma combined statement of earnings data has been prepared by
combining the consolidated statements of earnings of Consolidated Stores for the
fiscal year ended February 3, 1996 with the consolidated statements of
operations of Kay-Bee for the fiscal year ended December 31, 1995 and gives
effect to the pro forma adjustments as described in the notes hereto.
<TABLE>
<CAPTION>
CONSOLIDATED
STORES KAY-BEE ADJUSTMENTS PRO FORMA
------------ ---------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales............................. $1,512,299 $1,077,297 $ 8,125(2) $2,597,721
Costs and expenses:
Cost of sales....................... 868,139 695,987(1) 4,763(2) 1,550,202
1,600(7)
(20,287)(7)
Selling and administrative
expenses......................... 532,158 363,514 343(2) 914,555
2,581(5)
(6,553)(6)
2,225(7)
20,287(7)
Restructuring and asset impairment
charges............................ -- 65,816 (65,816)(3) --
Interest expense.................... 8,036 5,335 4,310(4) 17,681
Other expense....................... 1,706 -- -- 1,706
------------ ---------- ----------- ----------
Total costs and expenses......... 1,410,039 1,130,652 (56,547) 2,484,144
------------ ---------- ----------- ----------
Earnings (loss) before income taxes
and cumulative effect of accounting
change............................... 102,260 (53,355) 64,672 113,577
Income taxes (benefit)................ 37,854 (3,102) 7,271(8) 42,023
------------ ---------- ----------- ----------
Earnings (loss) before cumulative
effect of accounting change..... 64,406 (50,253) 57,401 71,554
Cumulative effect of change in
accounting principle, net............ -- 711 (711) --
------------ ---------- ----------- ----------
Net earnings (loss).............. $ 64,406 $ (50,964) $ 58,112 $ 71,554
=========== ========= =========== =========
Earnings per common and common
equivalent share of stock............ $ 1.32 $ 1.33
=========== =========
Weighted average common and common
equivalent shares outstanding........ 48,903 5,000(9) 53,903
=========== =========== =========
</TABLE>
- ---------------
(1) Kay-Bee's historical cost of sales includes an inventory clearance markdown
of $25.8 million that was taken during December 1995 in order to liquidate
discontinued items and slower-moving merchandise. No pro forma adjustment
has been taken for this markdown charge.
(2) Reflects (a) the elimination of the operating results of certain Kay-Bee
stores that operated in fiscal 1995 but were not acquired by Consolidated
Stores and (b) the inclusion of the operating results of certain Kay-Bee
stores acquired by Consolidated Stores that operated in fiscal 1995 but were
treated by Kay-Bee
P-3
<PAGE> 50
as stores excluded from operations. The Company intends to keep these
acquired Kay-Bee stores in operation after the Acquisition.
(3) Reflects the reversal of one-time non-recurring $65.8 million restructuring
and asset impairment charges that were incurred by Kay-Bee in fiscal 1995.
This charge included a $45.9 million charge to write-off the remaining
balance of goodwill resulting from Melville's original acquisition of
Kay-Bee, as well as to provide for (a) the estimated lease settlement costs
for stores to be closed, (b) the cost to close and relocate one of Kay-Bee's
warehouse/distribution centers, (c) severance costs for store closures and
(d) the write-down of fixed assets. The remainder of the charge was a charge
of $19.9 million to write-down the carrying value of long-lived assets in
connection with the adoption of Statement of Financial Accounting Standards
No. 121. See note 2 to the audited financial statements of Kay-Bee.
(4) Represents the additional interest expense for the fiscal year ended
February 3, 1996 that would have been incurred had the Acquisition and the
Offering taken place on January 29, 1995, assuming an interest rate of 6.3%
per annum for borrowings under the Revolving Credit Facility and 7% per
annum for the Subordinated Notes, net of the interest reduction resulting
from the early extinguishment of the Company's 10 1/2% senior notes. A
change of 1/4% in the interest rate payable on the outstanding balance
under the Revolving Credit Facility would change annual interest expense by
approximately $.4 million before the effect of income taxes.
(5) Reflects adjustments to depreciation and amortization based on the
preliminary purchase accounting allocation related to property and equipment
purchased in the Acquisition.
(6) Reflects the elimination of the amortization of goodwill and other
intangible assets expensed during fiscal 1995 by Kay-Bee. The goodwill
resulted from Melville's original acquisition of Kay-Bee and was written-off
by Kay-Bee at the end of fiscal 1995. See note 2 to the audited financial
statements of Kay-Bee and note 3 above.
(7) Reflects adjustments to conform the accounting practices of Kay-Bee to those
of Consolidated Stores, as follows:
<TABLE>
<S> <C>
Increase in costs of sales to reflect additional freight expense
that Kay-Bee had capitalized.................................. $ 1,600
Increase in selling and administrative expense to reflect
additional store supplies expense that Kay-Bee had
capitalized................................................... 2,225
Reclassification of buying and warehousing costs from cost of
sales to selling and administrative expenses.................. 20,287
</TABLE>
(8) Adjustment to reflect income tax effects assuming a combined state and
federal statutory income tax rate of 37%.
(9) Adjustment to reflect the issuance of 5.0 million shares of Common Stock in
this Offering.
P-4
<PAGE> 51
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
KAY-BEE CENTER, INC. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET (UNAUDITED)
AS OF FEBRUARY 3, 1996
The pro forma combined balance sheet as of February 3, 1996 has been
prepared by combining the balance sheet of Consolidated Stores as of February 3,
1996 with the balance sheet of Kay-Bee as of December 31, 1995 and gives effect
to the pro forma adjustments as described in the notes hereto.
<TABLE>
<CAPTION>
NET ASSETS
CONSOLIDATED NOT
STORES KAY-BEE ACQUIRED(1) ADJUSTMENTS PRO FORMA
------------ -------- ------------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents... $ 12,999 $ 16,523 $ 52,393(4) $ 81,915
Accounts receivable......... 8,957 4,523 13,480
Due from parent............. 75,934 $ (75,934) --
Inventories................. 388,346 198,765 1,364 (7,749)(2) 580,726
Prepaid expenses............ 18,265 30,654 (13,857) (4,341)(2) 30,721
Deferred income taxes....... 23,449 -- 23,449
------------ -------- ------------- ----------- ----------
Total current assets..... 452,016 326,399 (88,427) 40,303 730,291
Property and equipment, net... 177,323 151,781 12,420(2) 341,524
Other assets.................. 10,476 4,036 (206) (3,830)(2) 10,476
------------ -------- ------------- ----------- ----------
Total assets........... $639,815 $482,216 $ (88,633) $ 48,893 $1,082,291
=========== ======== ============== =========== =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............ $129,223 $110,428 $ 239,651
Accrued liabilities......... 41,519 76,889 $ (11,226) $ 7,241(3) 114,423
Income taxes................ 17,416 -- 17,416
Current maturities of long-
term obligation............ 10,000 263 (10,000)(4) 263
------------ -------- ------------- ----------- ----------
Total current
liabilities............ 198,158 187,580 (11,226) (2,759) 371,753
Long-term obligations......... 25,000 7,908 75,000(4) 107,908
Capital lease obligations..... -- 3,714 3,714
Deferred income taxes......... 19,879 3,497 (3,497) 19,879
Other noncurrent
liabilities................. 7,214 5,031 (5,031) 7,214
Stockholders' equity.......... 389,564 274,486 (68,879) (23,348)(5) 571,823
------------ -------- ------------- ----------- ----------
Total liabilities
and stockholders'
equity.............. $639,815 $482,216 $ (88,633) $ 48,893 $1,082,291
=========== ======== ============== =========== =========
</TABLE>
P-5
<PAGE> 52
- ---------------
(1) Reflects the elimination of assets not acquired and liabilities not assumed
pursuant to the Stock Purchase Agreement as follows:
<TABLE>
<S> <C>
Intercompany note receivable from Melville........................ $(75,934)
Inventory adjustments............................................. 1,364
Prepaid expenses (Kay-Bee deferred and prepaid income taxes)...... (13,857)
Other assets...................................................... (206)
Accrued liabilities, such as taxes, benefits
and remaining insurance reserves................................ 11,226
Deferred income taxes............................................. 3,497
Other noncurrent liabilities...................................... 5,031
Equity of Melville in the assets of Kay-Bee not acquired.......... 68,879
</TABLE>
(2) Reflects pro forma adjustments including those to allocate purchase price
and those to conform the accounting practices of Kay-Bee to those of
Consolidated Stores, as follows:
<TABLE>
<S> <C>
Decrease in inventory resulting from elimination of capitalized
freight costs and other......................................... $ (7,749)
Decrease in prepaid expenses resulting from elimination of
capitalized store supply costs.................................. (4,341)
Increase in property and equipment................................ 12,420
Decrease in other assets from elimination of favorable leases..... (3,830)
--------
Adjustments to net assets......................................... $ (3,500)
========
</TABLE>
The Acquisition will be accounted for as a purchase pursuant to APB Opinion
No. 16, "Business Combinations." The purchase cost will be allocated to the
assets and liabilities of Kay-Bee based on their fair values. Such
allocations are subject to final determination based on valuations and other
studies to be performed prior to the closing of the Acquisition. The final
values may differ from those set forth below.
<TABLE>
<S> <C> <C>
Purchase Cost:
Cash.................................................. $ 97,607
Subordinated Notes.................................... 100,000
Estimated Acquisition fees and expenses............... 4,500 $202,107
--------
Estimated Book Value:
Melville's equity in Kay-Bee.......................... $274,486
Net assets not acquired............................... (68,879) 205,607
--------
Purchase Cost Below Estimated Book Value................... 3,500
Adjustments to Net Assets (See above)...................... (3,500)
--------
$ -0-
========
</TABLE>
(3) Reflects adjustments to accrued liabilities as follows:
<TABLE>
<S> <C>
Accrual for Acquisition fees and expenses............................ $ 4,500
Accrual for prepayment premium relating to senior notes, net of
tax................................................................ 1,890
Accrual for financing costs, net of tax.............................. 851
--------
$ 7,241
========
</TABLE>
P-6
<PAGE> 53
(4) Reflects the incurrence of indebtedness to finance the Acquisition and
proceeds from the Offering:
<TABLE>
<S> <C>
Repayment of current portion of senior notes...................... $(10,000)
========
Proceeds from borrowings under Revolving Credit Facility.......... 132,607
Proceeds from issuance of Subordinated Notes...................... 100,000
Repayment of senior notes......................................... (25,000)
Net proceeds from issuance of Common Stock in this Offering at an
assumed public offering price of $39.00 per share............... (185,000)
Reclass to cash................................................... 52,393
--------
$ 75,000
========
</TABLE>
(5) Reflects the elimination of Kay-Bee equity and the issuance of Common Stock
in the Offering as follows:
<TABLE>
<S> <C>
Elimination of Kay-Bee equity.................................... $(205,607)
Net proceeds from issuance of Common Stock in the Offering at an
assumed public offering price of $39.00 per share.............. 185,000
Charge for financing costs and extraordinary charge relating to
prepayment of senior notes, net of tax......................... (2,741)
---------
$ (23,348)
=========
</TABLE>
P-7
<PAGE> 54
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Consolidated Stores Corporation:
We have audited the accompanying consolidated balance sheets of
CONSOLIDATED STORES CORPORATION and subsidiaries as of February 3, 1996, and
January 28, 1995, and the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the three fiscal years in the
period ended February 3, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of CONSOLIDATED
STORES CORPORATION and subsidiaries at February 3, 1996, and January 28, 1995,
and the consolidated results of their operations and their cash flows for each
of the three fiscal years in the period ended February 3, 1996, in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Dayton, Ohio
February 26, 1996
(March 25, 1996, as to Note on Proposed Acquisition)
F-1
<PAGE> 55
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF FISCAL YEAR ENDED
---------------------------
FEBRUARY 3, JANUARY 28,
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................... $ 12,999 $ 40,356
Accounts receivable................................................. 8,957 5,524
Inventories......................................................... 388,346 302,132
Prepaid expenses.................................................... 18,265 13,999
Deferred income taxes............................................... 23,449 19,262
-------- --------
Total current assets........................................ 452,016 381,273
Property and equipment -- net......................................... 177,323 161,500
Other assets.......................................................... 10,476 8,847
-------- --------
$ 639,815 $ 551,620
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................... $ 129,223 $ 103,401
Accrued liabilities................................................. 41,519 38,289
Income taxes........................................................ 17,416 18,982
Current maturities of long-term obligations......................... 10,000 10,000
-------- --------
Total current liabilities................................... 198,158 170,672
Long-term obligations................................................. 25,000 40,000
Deferred income taxes................................................. 19,879 17,114
Other noncurrent liabilities.......................................... 7,214 8,600
Commitments and contingencies......................................... -- --
Stockholders' equity:
Preferred stock -- authorized 2,000,000 shares, $.01 par value; none
issued........................................................... -- --
Common stock -- authorized 90,000,000 shares, $.01 par value; issued
47,775,958 shares and 46,866,303 shares,
respectively..................................................... 478 469
Non-voting common stock -- authorized 8,000,000 shares, $.01 par
value; none issued............................................... -- --
Additional paid-in capital.......................................... 104,511 93,872
Retained earnings................................................... 285,105 220,699
Other adjustments................................................... (530) 194
-------- --------
Total stockholders' equity.................................. 389,564 315,234
-------- --------
$ 639,815 $ 551,620
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 56
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Net sales.............................................. $1,512,299 $1,278,644 $1,055,291
Costs and expenses:
Cost of sales........................................ 868,139 728,494 593,238
Selling and administrative expenses.................. 532,158 451,411 386,116
Interest expense..................................... 8,036 7,238 5,812
Other expense (income) -- net........................ 1,706 (532) (1,591)
---------- ---------- ----------
1,410,039 1,186,611 983,575
---------- ---------- ----------
Income before income taxes............................. 102,260 92,033 71,716
Income taxes........................................... 37,854 36,813 28,689
---------- ---------- ----------
Net income................................... $ 64,406 $ 55,220 $ 43,027
========== ========== ==========
Earnings per common and common equivalent share of
stock................................................ $ 1.32 $ 1.15 $ .90
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 57
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Common stock:
Balance at beginning of year............................. $ 469 $ 465 $ 462
Contribution to savings plan............................. 1 1 --
Exercise of stock options................................ 8 3 3
-------- -------- --------
Balance at end of year................................... $ 478 $ 469 $ 465
======== ======== ========
Additional paid-in capital:
Balance at beginning of year............................. $ 93,872 $ 89,817 $ 86,545
Exercise of stock options................................ 9,243 2,655 2,608
Contribution to savings plan............................. 1,396 1,400 664
-------- -------- --------
Balance at end of year................................... $104,511 $ 93,872 $ 89,817
======== ======== ========
Retained earnings:
Balance at beginning of year............................. $220,699 $165,479 $122,452
Net income for the year.................................. 64,406 55,220 43,027
-------- -------- --------
Balance at end of year................................... $285,105 $220,699 $165,479
======== ======== ========
Other adjustments:
Balance at beginning of year............................. $ 194 $ 2,774 $ --
Change in unrealized investment gain..................... 296 (3,048) 4,188
Minimum pension liability adjustment..................... (1,020) 468 (1,414)
-------- -------- --------
Balance at end of year................................... $ (530) $ 194 $ 2,774
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 58
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................. $ 64,406 $ 55,220 $ 43,027
Adjustment for noncash items included in net income:
Depreciation and amortization............................ 30,021 26,477 23,685
Deferred income taxes.................................... (1,018) 256 (2,236)
Other.................................................... 2,373 3,398 3,031
Change in assets and liabilities......................... (66,427) (25,693) (38,081)
-------- -------- --------
Net cash provided by operating activities............. 29,355 59,658 29,426
-------- -------- --------
Cash flows from investment activities:
Capital expenditures..................................... (48,091) (41,558) (45,994)
Investment in corporate owned life insurance............. (6,870) (4,781) --
Other.................................................... 6,476 (1,973) 478
-------- -------- --------
Net cash used in investment activities................ (48,485) (48,312) (45,516)
-------- -------- --------
Cash flows from financing activities:
Payments of senior notes................................. (15,000) -- --
Increase in deferred credits............................. 1,745 3,107 4,723
Proceeds from exercise of stock options.................. 5,028 1,030 986
-------- -------- --------
Net cash provided by (used in) financing activities... (8,227) 4,137 5,709
-------- -------- --------
Increase (decrease) in cash and cash equivalents...... $(27,357) $ 15,483 $(10,381)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 59
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company's primary business is the retail sale of "close-out"
merchandise by offering brand name merchandise at substantial discounts to
traditional retail prices. At February 3, 1996, retail sales were conducted
through 861 retail locations in 39 states.
FISCAL YEAR
The Company follows the concept of a 52/53 week fiscal year which ends on
the Saturday nearest to January 31. Fiscal year 1995 ending February 3, 1996, is
comprised of 53 weeks.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions
have been eliminated. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions which effect reported amounts of assets and liabilities and
disclosure of significant contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investments which are
unrestricted as to withdrawal or use, and which have an original maturity of
three months or less. Cash equivalents are stated at cost which approximates
market value.
INVENTORIES
Retail inventories are stated at the lower of cost or market on the retail
method. Other inventories are stated at the lower of cost (first-in, first-out
method) or market.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are provided on the straight line method for
financial reporting purposes. Service lives are principally forty years for
buildings and from four to ten years for other property and equipment.
INVESTMENTS
Non-current investments in equity securities are classified as Other assets
in the consolidated balance sheets and are stated at fair value. Unrealized
gains on equity securities classified as available-for-sale are recorded as a
separate component of stockholders' equity net of applicable income taxes. The
Company's investment in corporate owned life insurance is recorded net of policy
loans as Other assets.
DEFERRED CREDITS
Deferred credits associated with purchase commitments are classified as
other non-current liabilities and are recognized when earned as a reduction of
the related inventory purchase cost.
F-6
<PAGE> 60
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
PRE-OPENING COSTS
Non-capital expenditures associated with opening new stores are charged to
expense over the first twelve months of store operations.
ACCOUNTING STANDARD CHANGE
In March 1995, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," which establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used, as well as
long-lived assets and certain identifiable intangibles to be disposed of. The
Company will be required to adopt the new standard in the first quarter of 1996.
Based on preliminary evaluation of this Standard's requirements, the Company
does not anticipate its effect to be material to the Company's consolidated
financial position.
PROPOSED ACQUISITION
On March 25, 1996, the Company and Melville Corporation entered into a
Purchase Agreement pursuant to which on May 5, 1996, the Company expects to
acquire Kay-Bee for approximately $315 million, $215 million in cash and $100
million of Subordinated Notes, in a transaction that will be accounted for as a
purchase. The transaction has been approved by the Board of Directors of each
Company and is subject to regulatory review. Kay-Bee, directly or through its
subsidiaries, will operate approximately 1,045 toy stores in 50 states. Store
locations are primarily in enclosed shopping malls.
INVENTORIES
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 3, JANUARY 28,
1996 1995
----------- -----------
<S> <C> <C>
Retail........................................................ $ 368,569 $ 287,287
Other......................................................... 19,777 14,845
-------- --------
$ 388,346 $ 302,132
======== ========
</TABLE>
INCOME TAXES
The provision for income taxes is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Federal -- Currently payable.......................... $32,861 $31,815 $22,733
Deferred.............................................. (1,018) (1,912) 387
State and Local....................................... 6,011 6,910 5,569
------- ------- -------
$37,854 $36,813 $28,689
======= ======= =======
</TABLE>
F-7
<PAGE> 61
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES -- CONTINUED
A reconciliation between the statutory federal income tax rate and the
effective tax rate follows:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Statutory federal income tax rate............................. 35.0% 35.0% 35.0%
Effect of:
State and local income taxes................................ 3.8 4.9 5.1
Targeted jobs tax credit.................................... (0.2) (1.1) (0.7)
Corporate owned life insurance investments.................. (2.2) (0.5) --
Other....................................................... 0.6 1.7 0.6
---- ---- ----
Effective tax rate............................................ 37.0% 40.0% 40.0%
==== ==== ====
</TABLE>
Deferred taxes reflect the effects of temporary differences between
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. For financial reporting purposes
deferred taxes are reflected without reduction for a valuation allowance.
Components of the Company's deferred tax assets and liabilities are presented in
the following table (in thousands).
<TABLE>
<CAPTION>
FEBRUARY 3, JANUARY 28,
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Uniform inventory capitalization............................ $ 8,988 $ 7,139
Inventory valuation allowance............................... 2,309 2,193
Deferred credits............................................ 1,293 192
Other (each less than 5% of total assets)................... 10,859 9,738
------- -------
Total deferred tax assets........................... 23,449 19,262
------- -------
Deferred tax liabilities:
Depreciation................................................ 15,144 14,325
Unrealized gain............................................. 880 760
Other....................................................... 3,855 2,029
------- -------
Total deferred tax liabilities...................... 19,879 17,114
------- -------
Net deferred tax assets....................................... $ 3,570 $ 2,148
======= =======
</TABLE>
Net income taxes paid were $35,158,000, $29,613,000, and $19,288,000 in
1995, 1994, and 1993, respectively.
LONG-TERM OBLIGATIONS
SENIOR NOTES
The 10.5% senior notes are due in semi-annual principal payments commencing
in February 1995, until maturity in August 2002. Subject to the provisions of
the Note Purchase Agreement (Agreement) the Company may prepay all or part of
the outstanding principal balance. The Agreement contains provisions specifying
certain limitations on the Company's operations including the amount of future
long-term obligations, investments, dividends and the maintenance of specific
operating ratios. At February 3, 1996, $176,273,000 of retained earnings was
available for dividends under provisions of the Agreement.
The fair value of the senior notes is estimated based on the current rates
offered to the Company for debt with similar terms and remaining maturities. The
estimated fair value of the senior notes at February 3, 1996,
F-8
<PAGE> 62
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LONG-TERM OBLIGATIONS -- CONTINUED
was $38,600,000 and the related carrying amount was $35,000,000. Maturities of
senior notes during the next five years are as follows (in thousands):
<TABLE>
<S> <C>
1996....................................................... $10,000
1997....................................................... 5,000
1998....................................................... 5,000
1999....................................................... 4,500
2000....................................................... 6,000
</TABLE>
CREDIT AGREEMENTS
The Company has a $90,000,000 unsecured revolving credit agreement through
June 1, 1997, which is seasonally adjusted to $110,000,000 from August through
November of the credit term. Outstanding borrowings, if any, at June 1, 1997,
are payable one year thereafter. The funds available under this agreement may be
used for working capital requirements and other general corporate purposes. The
Company has the option to borrow at various interest rates and is required to
pay a 1/8 of 1% commitment fee on the average daily unused funds. Included in
the revolving credit agreement is a separate $50,000,000 letter of credit
facility which is seasonally adjusted to $75,000,000 from May through July and
expires June 1, 1996. The Company was contingently liable for outstanding
letters of credit totaling $54,000,000 at February 3, 1996. Provisions of the
revolving credit agreement include the maintenance of certain standard financial
ratios similar to those described for senior notes. Additionally, $55,000,000 of
uncommitted short-term credit facilities are available, subject to provisions of
the revolving credit agreement, at February 3, 1996. No borrowings were
outstanding under any such credit agreements.
Interest paid, including capitalized interest of $147,000, $788,000 and
$486,000 in each of the respective previous three fiscal years, was $10,705,000
in 1995, $8,110,000 for 1994, and $6,314,000 in 1993.
DEFERRED CREDITS
The Company has commitments to certain vendors for future inventory
purchases totaling approximately $66,800,000 at February 3, 1996. Terms of the
commitments provide for these inventory purchases to be made through fiscal 1998
or later as may be extended. There are no annual minimum purchase requirements.
EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Company has a defined benefit pension plan covering substantially all
of its employees. Benefits are based on credited years of service and the
employee's compensation during the last five years of employment. The Company's
funding policy is to contribute annually the amount required to meet ERISA
funding standards. Contributions are intended to provide not only for benefits
attributed to service to date but also for those anticipated to be earned in the
future. The Company amended its pension plan to provide benefits only to
employees hired on or before March 31, 1994.
F-9
<PAGE> 63
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EMPLOYEE BENEFIT PLANS -- CONTINUED
The components of net periodic pension cost are comprised of the following
(in thousands):
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Service cost -- benefits earned in the period............ $1,642 $1,671 $ 944
Interest cost on projected benefit obligation............ 811 689 592
Investment return on plan assets......................... (631) (575) (557)
Net amortization and deferral............................ 303 529 96
------ ------ ------
Net periodic pension cost................................ $2,125 $2,314 $1,075
====== ====== ======
Assumptions used in each year of the actuarial
computations were:
Discount rate.......................................... 6.5% 8.4% 7.2%
Rate of increase in compensation levels................ 5.5% 5.0% 5.0%
Expected long-term rate of return...................... 9.0% 9.0% 9.0%
</TABLE>
The following table sets forth the funded status of the Company's defined
benefit plan (in thousands):
<TABLE>
<CAPTION>
FISCAL FISCAL
1995 1994
------- -------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation...................................... $10,857 $ 6,362
Non-vested benefits............................................ 2,091 1,352
------- -------
Accumulated benefit obligation................................... $12,948 $ 7,714
======= =======
Actuarial present value of projected benefit obligation.......... $18,572 $10,278
Plan assets at fair value, primarily cash equivalents,
U.S. Government securities and obligations, and publicly traded
stocks and mutual funds........................................ 8,910 6,848
------- -------
Projected benefit obligation in excess of plan assets............ (9,662) (3,430)
Unrecognized prior service cost.................................. (947) (1,082)
Unrecognized net obligation at transition........................ 239 252
Unrecognized net loss............................................ 9,454 4,006
------- -------
Accrued pension cost............................................. $ (916) $ (254)
======= =======
</TABLE>
Provisions of SFAS No. 87 "Employers' Accounting for Pensions," require
recognition of a minimum pension liability relating to certain unfunded pension
obligations. At February 3, 1996, the minimum pension liability was $3,122,000.
SAVINGS PLAN
The Company has a savings plan with a 401(k) deferral feature for all
eligible employees. Provisions of $1,650,000, $1,564,000, and $1,390,000 have
been charged to operations in fiscal 1995, 1994, and 1993, respectively.
LEASES
Leased property consists primarily of the Company's retail stores and
certain warehouse space. Many of the store leases have rent escalations and
provide the Company pay for real estate taxes, utilities, liability insurance
and maintenance. Certain leases provide for contingent rents, in addition to the
fixed monthly rent,
F-10
<PAGE> 64
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LEASES -- CONTINUED
based on a percentage of store sales above a specified level. Additionally,
leases generally provide options to extend the original terms for an additional
two to twenty years. Minimum operating lease commitments as of February 3, 1996,
are as follows (in thousands):
<TABLE>
<S> <C>
1996.................................................... $ 64,230
1997.................................................... 52,317
1998.................................................... 39,305
1999.................................................... 28,154
2000.................................................... 14,664
Subsequent to 2000...................................... 13,969
--------
Total minimum operating lease payments.......... $212,639
========
</TABLE>
Total rental expense consisted of the following (in thousands):
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Buildings............................................. $74,258 $62,555 $51,105
Equipment............................................. 4,823 4,695 2,807
------ ------ ------
$79,081 $67,250 $53,912
====== ====== ======
</TABLE>
STOCKHOLDERS' EQUITY
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Earnings per common and common equivalent share are based on the weighted
average number of shares outstanding during each period including the additional
number of shares which would have been issuable upon exercise of stock options,
assuming that the Company used the proceeds received to purchase additional
shares at market value. The average number of common and common equivalent
shares outstanding during fiscal 1995, 1994 and 1993 were 48,902,797,
48,077,162, and 47,976,396, respectively.
STOCKHOLDER RIGHTS PLAN
Each share of the Company's common stock has one Right attached. The Rights
trade with the common stock and only become exercisable, or transferable apart
from the common stock, ten business days after a person or group (Acquiring
Person) acquires beneficial ownership of, or commences a tender or exchange
offer for, 20% or more of the Company's common stock. Each Right, under certain
circumstances, entitles its holder to acquire one one-hundredth of a share of
Series A Junior Participating Preferred Stock at a price of $35, subject to
adjustment. If 20% of the Company's common stock is acquired, or a tender offer
to acquire 20% of the Company's common stock is made, each Right not owned by an
Acquiring Person will entitle the holder to purchase Company common stock having
a market value of twice the exercise price of the Rights.
In addition, if the Company is involved in a merger or other business
combination, at any time there is a 20% or more stockholder of the Company, the
Rights will entitle a holder to buy a number of shares of common stock of the
acquiring company having a market value of twice the exercise price of each
Right. The Rights may be redeemed by the Company at $.01 per Right at any time
until the tenth day following public announcement that a 20% position has been
acquired. The Rights expire on April 18, 1999, and at no time have voting power.
F-11
<PAGE> 65
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCKHOLDERS' EQUITY -- CONTINUED
PREFERRED STOCK
In conjunction with the Stockholder Rights Plan the Company has reserved
600,000 shares of preferred stock for issuance thereunder.
STOCK PLANS
The Company measures compensation cost for stock options issued to
employees using the intrinsic value based method of accounting prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees". In October 1995 the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," which requires
adoption no later than fiscal years beginning after December 15, 1995. Pursuant
to the new standard, companies are encouraged, but not required, to adopt the
fair value method of accounting for stock options and similar equity
instruments. The Company has elected to continue measuring compensation cost in
accordance with APB Opinion No. 25 and will adopt the additional disclosure
requirements of Statement No. 123 in fiscal 1996.
STOCK OPTION AND INCENTIVE PLANS
The Company had a Stock Option Plan (Plan) which expired in 1995. The Plan
provided that all options be granted at an exercise price at least equal to the
fair market value of the common stock at the date of grant. Options generally
became exercisable one year following the original date of grant in five equal
annual installments. However, upon an effective change in control of the
Company, all options granted were exercisable.
During 1995, the Company adopted, subject to stockholder approval, the
Consolidated Stores Corporation 1996 Performance Incentive Plan (Incentive
Plan). The Incentive Plan provides for the issuance of stock options, restricted
stock, performance units, stock equivalent units, and stock appreciation rights
(SAR's). The annual maximum number of newly issued shares available for issuance
under the Incentive Plan is 2,000,000 plus an additional 1% of the total number
of issued shares, including any Treasury Stock, at the start of the Company's
fiscal year plus shares available but not issued in previous years of the
Incentive Plan. Total newly issued shares available for use under the Incentive
Plan shall not exceed 15% of the total issued and outstanding Common Stock as of
any measurement date. A minimum of 6,700,000 shares are available for issuance
and the term of each award is determined by a committee of the Board of
Directors charged with administering the Incentive Plan. Options granted under
the Incentive Plan may be either nonqualified or incentive stock options and the
exercise price is not less than the fair market value, as defined, of the
underlying common stock on the date of award. The award price of an SAR is to be
a fixed amount, not less than 100% of the fair market value of a share of common
stock at the date of award. Upon an effective change in control of the Company
all awards outstanding under the Incentive Plan become vested. During 1995 the
Company granted, subject to stockholder approval of the Incentive Plan, 761,000
options with a exercise price of $20.00 per share.
The Company has a Director Stock Option Plan (DSOP), for non-employee
directors, pursuant to which up to 500,000 shares of the Company's common stock
may be issued upon exercise of options granted thereunder. The DSOP is
administered by the Compensation Committee of the Board of Directors pursuant to
an established formula. Neither the Board of Directors, nor the Compensation
Committee, exercise any discretion in administration of the DSOP. Grants are
made annually, 90 days following the annual meeting of stockholders, at an
exercise price equal to 100% of the fair market value on the date of grant. The
present formula provides for an annual grant of 5,000 options to each
non-employee director which becomes fully exercisable over a three year period,
beginning one year subsequent to grant.
F-12
<PAGE> 66
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCK PLANS -- CONTINUED
The following table reflects transactions for the stock option, incentive
and DSOP plans:
<TABLE>
<CAPTION>
SHARES PRICE RANGE
--------- ------------
<S> <C> <C>
Outstanding January 30, 1993............................... 4,027,712 $ 2.12-15.38
Granted.................................................. 708,600 $15.00-20.00
Canceled................................................. 107,160 $ 2.12-16.13
Exercised................................................ 283,945 $ 2.12-13.38
--------- -----------
Outstanding January 29, 1994............................... 4,345,207 $ 2.12-20.00
Granted.................................................. 668,550 $12.00-18.75
Canceled................................................. 77,080 $ 2.50-18.75
Exercised................................................ 310,405 $ 2.12-16.13
--------- -----------
Outstanding January 28, 1995............................... 4,626,272 $ 2.12-20.00
Granted(1)............................................... 1,247,172 $16.25-22.00
Canceled................................................. 447,026 $ 3.63-19.87
Exercised................................................ 835,615 $ 2.12-19.87
--------- -----------
Outstanding February 3, 1996............................... 4,590,803 $ 2.12-22.00
--------- -----------
Exercisable February 3, 1996............................... 2,611,897 $ 2.12-20.00
--------- -----------
Available for grant at February 3, 1996(1)................. --
</TABLE>
- ---------------
(1) Excludes shares subject to shareholder approval of the Incentive Plan.
RESTRICTED STOCK
The Company's Restricted Stock Plan (Plan) permits the granting of 500,000
shares of restricted stock awards to key employees, officers and directors. The
shares are restricted as to the right of sale and other disposition until vested
as determined by the Board of Directors. The Plan provides that on any event
that results in a change in effective control of the Company, all awards of
restricted stock would become vested as of the date of such change in effective
control. The Plan terminates in 1997 or when sooner terminated by the Company's
Board of Directors.
As of February 3, 1996, 220,000 restricted shares were outstanding with
respect to restrictions which had not lapsed and shares available for grant
totaled 173,072. Vesting of issued restricted shares occurs when, and in the
noted amounts, the closing price per share of the Company's common stock on the
New York Stock Exchange is as follows: 50,000 shares vest when the closing price
is $30.00, 60,000 shares vest when the closing price is $35.00, and 110,000
shares vest when the closing price is at $40.00.
F-13
<PAGE> 67
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ADDITIONAL DATA
The following is a summary of certain financial data (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 3, JANUARY 28,
1996 1995
----------- -----------
<S> <C> <C>
Other assets:
Investment in equity securities -- at fair market value... $ 2,316 $ 1,900
Net cash surrender value of life insurance policies....... 6,005 4,190
Other..................................................... 2,155 2,757
-------- --------
$ 10,476 $ 8,847
======== ========
Property and equipment -- at cost:
Land...................................................... $ 7,700 $ 7,577
Buildings................................................. 64,119 62,097
Fixtures and equipment.................................... 233,278 203,745
Transportation equipment.................................. 6,962 6,437
-------- --------
312,059 279,856
Construction-in-progress.................................... 9,689 --
-------- --------
321,748 279,856
Less accumulated depreciation............................... 144,425 118,356
-------- --------
$ 177,323 $ 161,500
======== ========
Accrued liabilities:
Salaries and wages........................................ $ 16,152 $ 11,303
Property, payroll and other taxes......................... 24,120 24,279
Other..................................................... 1,247 2,707
-------- --------
$ 41,519 $ 38,289
======== ========
</TABLE>
The following analysis supplements changes in assets and liabilities
presented in the consolidated statements of cash flows (in thousands).
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Accounts receivable................................ $ (3,433) $ (659) $ (3,251)
Inventories........................................ (86,214) (49,252) (50,037)
Prepaid expenses................................... (4,266) (2,329) (1,778)
Accounts payable................................... 25,822 24,031 3,901
Accrued liabilities................................ 3,230 6,657 1,924
Income taxes....................................... (1,566) (4,141) 11,160
-------- -------- --------
$(66,427) $(25,693) $(38,081)
======== ======== ========
</TABLE>
F-14
<PAGE> 68
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for fiscal 1995 and 1994 is presented
below (in thousands except per share data):
<TABLE>
<CAPTION>
QUARTER
-----------------------------------------------
FIRST SECOND THIRD FOURTH(1) YEAR
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Net sales:
1995............................. $291,797 $325,114 $357,538 $537,850 $1,512,299
1994............................. 242,278 272,813 310,108 453,445 1,278,644
Gross profit:
1995............................. 122,900 138,058 153,438 229,764 644,160
1994............................. 101,682 117,655 135,624 195,189 550,150
Net income:
1995............................. 2,996 8,753 10,144 42,513 64,406
1994............................. 2,384 6,709 8,075 38,052 55,220
Earnings per common and common
equivalent share:
1995............................. 0.06 0.18 0.21 0.87 1.32
1994............................. 0.05 0.14 0.17 0.79 1.15
</TABLE>
- ---------------
(1) The fourth quarter of 1995 is a 14-week period.
F-15
<PAGE> 69
(This page intentionally left blank)
F-16
<PAGE> 70
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Melville Corporation:
We have audited the accompanying consolidated balance sheets of Kay-Bee
Center, Inc. (a wholly-owned subsidiary of Melville Corporation) and
subsidiaries as of December 31, 1995, 1994 and 1993, and the related
consolidated statements of operations, shareholder's equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Kay-Bee
Center, Inc. and subsidiaries as of December 31, 1995, 1994 and 1993, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" effective October 1, 1995 and changed its policy for
accounting for the costs of internally developed software effective January 1,
1995. Also, as discussed in note 1 to the consolidated financial statements, the
Company changed its method of determining the retail price index used to value
inventory under the last-in, first-out method in 1993.
KPMG Peat Marwick LLP
Albany, New York
February 5, 1996, except as
to note 1(a), which is as
of February 22, 1996
F-17
<PAGE> 71
KAY-BEE CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 16,523 $ 7,304 $ 6,118
Accounts receivable...................................... 4,523 3,790 3,877
Due from parent and other divisions...................... 75,934 131,203 118,411
Inventories.............................................. 198,765 201,982 179,977
Prepaid expenses and other current assets................ 30,654 26,052 28,592
-------- -------- --------
Total current assets............................. 326,399 370,331 336,975
-------- -------- --------
Property, plant, equipment and leasehold improvements, at
cost:
Land..................................................... 614 614 614
Buildings and improvements............................... 18,987 17,044 8,235
Fixtures and equipment................................... 135,451 125,147 115,682
Leasehold improvements................................... 82,083 84,493 85,738
Property under capital leases............................ 4,410 4,410 4,410
-------- -------- --------
Total property, plant, equipment and leasehold
improvements................................... 241,545 231,708 214,679
Less accumulated depreciation and amortization........ (89,764) (89,644) (87,912)
-------- -------- --------
Net property, plant, equipment and leasehold
improvements........................................ 151,781 142,064 126,767
Goodwill, net of accumulated amortization of $4,800 in 1994
and $3,257 in 1993....................................... -- 47,270 48,813
Deferred charges and other assets.......................... 4,036 8,281 11,912
-------- -------- --------
Total assets..................................... $482,216 $567,946 $524,467
======== ======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable......................................... $110,428 $108,995 $108,265
Accrued expenses......................................... 76,889 66,532 63,579
Accrued income taxes..................................... -- 17,499 2,942
Other current liabilities................................ 263 239 218
-------- -------- --------
Total current liabilities........................ 187,580 193,265 175,004
Long-term debt, excluding current installments............. 7,908 8,066 8,210
Capital lease obligation, excluding current portion........ 3,714 3,819 3,914
Deferred income taxes...................................... 3,497 4,941 1,566
Other long-term liabilities................................ 5,031 12,275 10,766
-------- -------- --------
Total liabilities................................ 207,730 222,366 199,460
-------- -------- --------
</TABLE>
<TABLE>
<S> <C> <C> <C>
Shareholder's equity:
Common stock, no par value, 100 shares authorized, 10
shares issued and outstanding......................... 10 10 10
Contributed capital...................................... 98,487 98,487 98,487
Retained earnings........................................ 175,989 247,083 226,510
-------- -------- --------
Total shareholder's equity....................... 274,486 345,580 325,007
-------- -------- --------
Total liabilities and shareholder's equity....... $482,216 $567,946 $524,467
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE> 72
KAY-BEE CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- --------
<S> <C> <C> <C>
Net sales............................................... $1,077,297 $1,012,164 $919,055
Cost of goods sold, buying and warehousing costs........ 695,987 611,905 543,948
---------- ---------- --------
Gross profit.......................................... 381,310 400,259 375,107
Store operating, selling, general and administrative
expenses.............................................. 339,678 314,373 292,772
Depreciation and amortization........................... 23,836 24,030 23,345
Restructuring and asset impairment charges.............. 65,816 -- --
---------- ---------- --------
Operating (loss) profit............................... (48,020) 61,856 58,990
Interest expense, net................................... 5,335 2,081 260
---------- ---------- --------
(Loss) earnings before income taxes and cumulative
effect of change in accounting principle.............. (53,355) 59,775 58,730
Income tax (benefit) expense............................ (3,102) 22,124 22,249
---------- ---------- --------
(Loss) earnings before cumulative effect of change in
accounting principle.................................. (50,253) 37,651 36,481
Cumulative effect of change in accounting principle,
net................................................... 711 -- --
---------- ---------- --------
Net (loss) earnings................................... $ (50,964) $ 37,651 $ 36,481
========== ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE> 73
KAY-BEE CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON CONTRIBUTED RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ----------- -------- --------
<S> <C> <C> <C> <C>
Balance as of December 31, 1992................. $ 10 $98,487 $208,600 $307,097
Net earnings.................................... -- -- 36,481 36,481
Dividends paid to parent........................ -- -- (18,571) (18,571)
--- ------- -------- --------
Balance as of December 31, 1993................. 10 98,487 226,510 325,007
Net earnings.................................... -- -- 37,651 37,651
Dividends paid to parent........................ -- -- (17,078) (17,078)
--- ------- -------- --------
Balance as of December 31, 1994................. 10 98,487 247,083 345,580
Net loss........................................ -- -- (50,964) (50,964)
Dividends paid to parent........................ -- -- (20,130) (20,130)
--- ------- -------- --------
Balance as of December 31, 1995................. $ 10 $98,487 $175,989 $274,486
=== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE> 74
KAY-BEE CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) earnings...................................... $(50,964) $ 37,651 $ 36,481
Adjustment to reconcile net (loss) earnings to net cash
(used in) provided by operating activities:
Restructuring and asset impairment charges............ 65,816 -- --
Cumulative effect of change in accounting principle... 711 -- --
Depreciation and amortization......................... 23,836 24,030 23,345
Deferred income tax (benefit) expense................. (1,185) 4,627 20,427
Loss (gain) on disposal of assets..................... -- 1,270 (19)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable.......... (733) 87 (231)
Decrease (increase) in inventories.................. 3,217 (22,005) (14,669)
Increase in prepaid expenses and other current
assets........................................... (3,174) (802) (489)
(Increase) decrease in deferred charges and other
assets........................................... (40) 401 1,121
(Decrease) increase in accounts payable and accrued
expenses......................................... (12,201) 8,645 3,613
(Decrease) increase in accrued income taxes......... (17,742) 14,557 (12,696)
Increase (decrease) in other liabilities............ (11,239) 4,778 (21,464)
-------- -------- --------
Net cash (used in) provided by operating
activities..................................... (3,698) 73,239 35,419
-------- -------- --------
Cash flows from investing activities:
Additions to property, plant, equipment and leasehold
improvements.......................................... (45,974) (37,003) (33,661)
-------- -------- --------
Net cash used in investing activities............ (45,974) (37,003) (33,661)
-------- -------- --------
Cash flows from financing activities:
Dividends paid to parent................................. (20,130) (17,078) (18,571)
Repayment of long-term debt and capital leases........... (239) (218) (277)
Increase (decrease) in book overdrafts................... 23,991 (4,962) 6,671
Decrease (increase) in due from parent and other
divisions............................................. 55,269 (12,792) 10,352
-------- -------- --------
Net cash provided by (used in) financing
activities..................................... 58,891 (35,050) (1,825)
-------- -------- --------
Net increase (decrease) in cash............................ 9,219 1,186 (67)
Cash at beginning of year.................................. 7,304 6,118 6,185
-------- -------- --------
Cash at end of year........................................ $ 16,523 $ 7,304 $ 6,118
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE> 75
KAY-BEE CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
Kay-Bee Center, Inc. (the "Company") is a wholly-owned subsidiary of
Melville Corporation (the "Parent" or "Melville"). The Company was incorporated
in California on November 28, 1995. On February 22, 1996, Melville contributed
all of the outstanding shares of common stock of another subsidiary, Southdale
Kay-Bee Toys, Inc. ("Southdale"), to Kay-Bee Center, Inc. Southdale is a
specialty retailer of toys throughout the United States and Puerto Rico, and
operates both mall-based and free standing stores under the names Kay-Bee Toys
and Toy Works.
The accompanying consolidated financial statements are presented as if
Kay-Bee Center, Inc. had existed and had owned Southdale throughout 1993, 1994
and 1995. All intercompany accounts and transactions have been eliminated in
consolidation.
(B) CASH
The Company's cash management program utilizes zero balance accounts.
Accordingly, all book overdraft balances have been reclassified to current
liabilities.
Cash payments for income taxes and interest for the years ended December 31
were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------ -------
<S> <C> <C> <C>
Income taxes........................................... $24,027 $2,171 $21,613
Interest (net of amounts capitalized).................. $ 5,753 $1,820 $ 521
</TABLE>
(C) INVENTORIES
Inventories are stated at the lower of cost or market. Inventories are
determined primarily by the retail method valued on a last-in, first-out
("LIFO") basis.
(D) FIXED ASSETS
Fixed assets are stated at cost. Fixed assets under capital leases are
stated at the present value of future minimum lease payments. Depreciation and
amortization of property, plant, equipment and leasehold improvements is
computed on a straight-line basis, generally over the estimated useful lives of
the assets or, when applicable, the life of the lease, whichever is shorter.
Buildings, machinery and equipment and furniture and fixtures are depreciated
over estimated lives of 40 years, five to seven years and 10 years,
respectively. Amortization of property under capital leases is computed on a
straight-line basis over the life of the lease. The cost and accumulated
depreciation of fully depreciated fixed assets are removed from the accounts.
Maintenance and repairs are charged directly to expense is incurred. Major
renewals or replacements are capitalized after making necessary adjustments in
the asset and accumulated depreciation accounts for the items renewed or
replaced.
(E) IMPAIRMENT OF LONG-LIVED ASSETS
When changes in circumstances warrant measurement, impairment losses for
store fixed assets are calculated by comparing projected store cash flows over
the lease term to the asset carrying values.
F-22
<PAGE> 76
KAY-BEE CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(F) DEFERRED CHARGES
Deferred charges include beneficial leasehold costs which are being
amortized on a straight-line basis, generally over the remaining life of the
leasehold acquired. Amortization periods range from 6 to 10 years.
(G) GOODWILL
Through 1994, the excess of acquisition cost over the fair value of net
assets acquired was being amortized on a straight-line basis over periods not to
exceed forty years. During 1995, the Company wrote off all remaining goodwill
balances in connection with the adoption of Statement of Financial Accounting
Standards No. 121 (see Note 1(l)) and the 1995 restructuring charge (see note
2).
(H) ADVERTISING COSTS
Advertising costs are generally charged to operations in the year incurred
and totaled $27.4 million in 1995, $19.6 million in 1994 and $22.4 million in
1993. Any vendor credits for cooperative advertising programs are recorded as a
reduction of cost of sales.
(I) STORE OPENING AND CLOSING COSTS
New store opening costs are charged to expense as incurred. In the event a
store is closed before its lease has expired, the total lease obligation, less
sublease rental income, is provided for in the year of closing.
(J) INCOME TAXES
The Parent and its subsidiaries, including the Company, file a consolidated
Federal income tax return and, where applicable, group state and local returns.
The provision for Federal income taxes or Federal income tax benefit recorded by
the Company represents the amount calculated on a separate return basis in
accordance with the tax sharing agreement with the Parent. State income taxes
represent actual amounts paid or payable by the Company.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(K) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(L) ACCOUNTING CHANGES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("Statement No.
109"), the cumulative effect of which was immaterial to the consolidated
financial statements and is therefore not presented separately.
F-23
<PAGE> 77
KAY-BEE CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1993, the Company changed its method of determining retail price
indices used in the valuation of LIFO inventories. The net earnings impact of
this change on 1992 and prior years, individually and cumulatively, was not
determinable. The change increased 1993 pre-tax earnings by $13.8 million.
Effective January 1, 1995, the Company changed its policy from capitalizing
internally developed software costs to expensing them as incurred. The
cumulative effect of this change was to write off the unamortized balance of
capitalized software costs of $1.1 million during the first quarter of 1995.
Effective October 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("Statement No. 121") (see
note 2).
(2) RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
On October 24, 1995, Melville announced a comprehensive restructuring plan
that included the spin-off of the Company. In connection with the initiation of
the plan, a pre-tax charge of $45.9 million was recorded to write-off the
remaining balance of goodwill resulting from Melville's original acquisition of
the Company, as well as to provide for estimated lease settlement costs for
stores to be closed, the costs to relocate one of the Company's distribution
centers, severance costs for store closures and the write-down of fixed assets.
Total sales of stores to be closed were $7.0 million during 1995.
In 1995, the Company also recorded a charge of $19.9 million to write-down
the carrying value of its long-lived assets in connection with the adoption of
Statement No. 121.
The significant components of the restructuring and asset impairment
charges recorded during 1995 were as follows (in thousands):
<TABLE>
<S> <C>
Lease obligations and asset write-downs for store
closings................................................. $10,617
Distribution center relocation............................. 900
Goodwill write-off......................................... 34,330
Other exit costs........................................... 90
-------
45,937
Asset impairment charge in connection with the adoption of
SFAS No. 121............................................. 19,879
-------
$65,816
=======
</TABLE>
The balance of the reserve for restructuring at December 31, 1995 was $4.7
million consisting principally of estimated lease settlement obligations.
In 1992, the Company also recorded a restructuring charge totaling $74.9
million. Results of stores planned to be closed in connection with the 1992
restructuring have been excluded from operations since the announcement date.
(3) INVENTORIES
Inventories at December 31 of each year consisted entirely of finished
goods.
During 1994 and 1993, the liquidation of LIFO cost layers increased net
income by approximately $2.5 million and $6.1 million, respectively.
Had the FIFO method been used, the carrying value of inventories valued on
a LIFO basis would have increased $3.2 million at December 31, 1993. There was
no difference between the carrying value of inventory under the FIFO and LIFO
methods at December 31, 1994 and December 31, 1995.
F-24
<PAGE> 78
KAY-BEE CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) ACCRUED EXPENSES
Accrued expenses at December 31 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Taxes other than income taxes......................... $27,972 $22,501 $22,631
Advertising........................................... 12,472 10,768 5,919
Other................................................. 36,445 33,263 35,029
------- ------- -------
Total....................................... $76,889 $66,532 $63,579
======= ======= =======
</TABLE>
(5) LONG-TERM DEBT
Long-term debt at December 31 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Guaranteed first mortgage note, payable in monthly
installments through April 2015 with interest at
9.25%.................................................. $8,066 $8,210 $8,341
Less current installments................................ 158 144 131
------ ------ ------
$7,908 $8,066 $8,210
====== ====== ======
</TABLE>
The mortgage is secured by title to one of the Company's distribution
centers with a net book value of $9,626,521 at December 31, 1995.
The aggregate long-term debt matures as follows: $158,000 in 1996, $174,000
in 1997, $191,000 in 1998, $209,000 in 1999, $230,000 in 2000 and $7,104,000
thereafter.
(6) LEASES
The Company leases retail stores and warehouse facilities over periods
generally ranging from five to 25 years with options to renew such terms ranging
from five to 15 years and require the Company to pay costs such as real estate
taxes and common area maintenance.
At December 31, 1995, the present value of future payments under capital
leases and minimum rental payments required under operating leases, excluding
obligations for closed facilities, was as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------ ---------
<S> <C> <C>
1996............................................................. $ 472 $ 74,314
1997............................................................. 472 66,780
1998............................................................. 472 58,656
1999............................................................. 472 48,173
2000............................................................. 472 37,295
Thereafter....................................................... 5,188 106,195
------ --------
Total.................................................. 7,548 $ 391,413
========
Less amount representing interest................................ 3,729
------
Present value of future capital lease payments................... $3,819
======
</TABLE>
F-25
<PAGE> 79
KAY-BEE CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net rental expense for all operating leases for the years ended December
31, 1995, 1994 and 1993 is as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Minimum rentals....................................... $85,830 $80,183 $75,637
Contingent rentals.................................... 3,280 3,626 2,833
------- ------- -------
Total rentals......................................... $89,110 $83,809 $78,470
======= ======= =======
</TABLE>
Contingent rentals are based on sales.
Property under capital leases at December 31 included (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Warehouse and office facilities.......................... $4,410 $4,410 $4,410
Less accumulated amortization............................ 1,550 1,371 1,192
------ ------ ------
$2,860 $3,039 $3,218
====== ====== ======
</TABLE>
(7) INCOME TAXES
The components of income tax (benefit) expense for the years ended December
31 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................. $(3,003) $16,097 $ 1,424
State............................................... 1,086 1,400 398
------- ------- -------
(1,917) 17,497 1,822
------- ------- -------
Deferred:
Federal............................................. (1,161) 3,985 16,476
State............................................... (24) 642 3,951
------- ------- -------
(1,185) 4,627 20,427
------- ------- -------
Total....................................... $(3,102) $22,124 $22,249
======= ======= =======
</TABLE>
The effective income tax rate for 1995, 1994 and 1993 differed from the
U.S. Federal income tax rate of 35 percent as a result of the following:
<TABLE>
<CAPTION>
1995 1994 1993
----- ---- ----
<S> <C> <C> <C>
Actual effective income tax rate.............................. (5.8)% 37.0% 37.9%
State income taxes, net of Federal benefit.................... (1.2) (2.5) (4.8)
Write-off of goodwill......................................... (25.7) -- --
Other......................................................... (2.3) 0.5 1.9
---- ----
- -
-----
Statutory income tax rate................................... (35.0)% 35.0% 35.0%
===== ===== =====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
F-26
<PAGE> 80
KAY-BEE CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
as of December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Deferred tax assets:
Inventory................................................... $ 551 $ 2,443 $ 3,606
Restructuring reserves...................................... 4,017 4,933 8,676
Employee benefits........................................... 3,096 3,302 2,554
Tax amortizable intangibles................................. 4,119 -- --
Other assets................................................ 1,658 588 1,236
------- ------- -------
Total deferred tax assets........................... 13,441 11,266 16,072
------- ------- -------
Deferred tax liabilities:
Property, plant, equipment and leasehold improvements....... 6,032 6,446 4,199
Other liabilities........................................... 1,584 1,867 2,203
------- ------- -------
Total deferred tax liabilities...................... 7,616 8,313 6,402
------- ------- -------
Net deferred tax assets............................. $ 5,825 $ 2,953 $ 9,670
======= ======= =======
</TABLE>
Current deferred tax assets of $9,322, $7,894 and $11,236 at December 31,
1995, 1994 and 1993, respectively, are included in prepaid expenses and other
current assets in the accompanying consolidated balance sheets.
Based upon the level of historical taxable income and projections for
future taxable income over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences at December 31, 1995.
(8) COMMITMENTS
At December 31, 1995, 1994 and 1993, the Company had outstanding letters of
credit of approximately $28.4 million, $30.2 million and $15.4 million,
respectively, which were used to guarantee certain foreign purchase contracts.
The Company is not obligated under any formal or informal compensating balance
agreements.
(9) RELATED PARTY TRANSACTIONS
(A) 401(K) PROFIT SHARING PLAN
The Parent has a qualified 401(k) Profit Sharing Plan available to
full-time employees who meet the plan's eligibility requirements. This plan,
which is a defined contribution plan, contains a profit sharing component with
tax-deferred contributions to each employee based on certain performance
criteria, and also permits employees to make contributions up to the maximum
limits allowed by Internal Revenue Code Section 401(k). Under the 401(k)
component, the Parent matches a portion of the employee's contribution under a
predetermined formula based on the level of contribution and years of vesting.
The Parent charges to the Company a portion of the expense related to these
contributions based on the proportionate share of qualifying compensation at the
Company to the total of all such compensation for all Melville plan
participants.
Contributions to the plan by the Company for both profit sharing and
matching of employee contributions were approximately $2.3 million, $2.0 million
and $1.1 million for the years ended December 31, 1995, 1994 and 1993,
respectively.
F-27
<PAGE> 81
KAY-BEE CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(B) EMPLOYEE STOCK OWNERSHIP PLAN
The Company's employees participate in the Parent's Employee Stock
Ownership Plan ("ESOP"). The ESOP is a defined contribution plan for all
employees meeting certain eligibility requirements. During 1989, the ESOP trust
(the "Trust") borrowed $357.5 million at an interest rate of 8.6% through a 20
year loan guaranteed by the Parent. The Trust used the proceeds of the loan to
purchase a new issue of convertible preference stock from the Parent.
The Parent charges compensation expense to the Company based upon total
payments due to the ESOP. The charge allocated to the Company is based on the
Company's proportionate share of qualifying compensation expense and does not
reflect the manner in which the Parent funds these costs or the related tax
benefits realized by the Parent. As a result of the Company's allocation from
the Parent, compensation expense of approximately $3.5 million, $2.5 million and
$2.8 million was recognized in the years ended December 31, 1995, 1994 and 1993,
respectively.
(C) ADMINISTRATIVE COSTS
The Parent allocates various administrative expenses to the Company.
Allocations are based on the Company's ratable share of expenses paid by the
Parent on behalf of the Company for the combined programs. The total costs
allocated to the Company for the years ended December 31, 1995, 1994 and 1993
were $4.2 million, $4.1 million and $5.4 million, respectively.
Melville Realty Company, Inc., a subsidiary of the Parent, guarantees the
leases of certain stores operated by the Company and charges a fee for that
service. In addition, Melville provides services associated with the acquisition
and construction of new stores. The total amount paid by the Company to Melville
and Melville Realty Company, Inc. was approximately $3.3 million in each of the
years ended December 31, 1995, 1994 and 1993. Of these amounts, approximately
$3.1 million, $2.3 million and $3.3 million was capitalized for the years ended
December 31, 1995, 1994 and 1993, respectively. The non-capitalized portion of
these charges is reflected in general and administrative expenses in each
period.
(D) BORROWINGS
The weighted average interest rates on amounts due to and from the Parent
and other divisions of Melville during 1995, 1994 and 1993 were 6.4%, 4.1% and
3.3%, respectively. The related net interest expense recorded by the Company
relative to such borrowing was $4.3 million in 1995 and $0.9 million in 1994. In
1993, the Company recorded net interest income of $0.9 million.
(10) BUSINESS CONCENTRATIONS
The Company's single line of business is the sale of toys and related
products to consumers. Over the past several years, significant consolidation
has occurred among toy manufacturers. As a result, the number of toy
manufacturers from whom the Company purchases merchandise has decreased, and the
percentage of total purchases from certain manufacturers has increased. During
1995, the Company purchased 15.3% and 9.5% of total merchandise purchases from
two manufacturers. During 1994, the Company purchased 13.6%, 10.6%, 5.9% and
5.4% of total merchandise purchases from four manufacturers. During 1993, these
same four manufacturers accounted for 11.2%, 10.7%, 8.7% and 12.6% of total
purchases. No other manufacturer accounts for more than five percent of total
purchases in any year. The Company's inability to obtain merchandise from one or
more of these significant suppliers could have an adverse effect on future
performance.
F-28
<PAGE> 82
KAY-BEE CENTER, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 30,
1996
---------
<S> <C>
ASSETS
Current assets:
Cash............................................................................ $ 9,999
Accounts receivable............................................................. 3,947
Due from parent and other divisions............................................. --
Inventories..................................................................... 234,019
Prepaid expenses and other current assets....................................... 39,466
---------
Total current assets.................................................... 287,431
---------
Property, plant, equipment and leasehold improvements, at cost -- net............. 149,197
Deferred charges and other assets................................................. 3,200
---------
Total assets............................................................ $ 439,828
========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable................................................................ $ 78,760
Accrued expenses................................................................ 36,348
Due to parent................................................................... 44,952
Other current liabilities....................................................... 269
---------
Total current liabilities............................................... 160,329
Long-term debt and capital leases, excluding current installments................. 11,552
Other long-term liabilities....................................................... 8,341
---------
Total liabilities....................................................... 180,222
---------
Shareholder's equity:
Common stock, no par value, 100 shares authorized, 10 shares issued
and outstanding.............................................................. 10
Contributed capital............................................................. 98,487
Retained earnings............................................................... 161,109
---------
Total shareholder's equity.............................................. 259,606
---------
Total liabilities and shareholder's equity.............................. $ 439,828
========
</TABLE>
See accompanying note to unaudited condensed consolidated financial statements.
F-29
<PAGE> 83
KAY-BEE CENTER, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------
MARCH 30, APRIL 1,
1996 1995
--------- --------
<S> <C> <C>
Net sales.............................................................. $ 177,627 $169,118
Cost of goods sold, buying and warehousing costs....................... 114,753 113,363
--------- --------
Gross profit...................................................... 62,874 55,755
Store operating, selling, general and administrative and depreciation
and amortization expenses............................................. 86,255 80,999
Restructuring and asset impairment charges............................. 1,167 --
--------- --------
Operating loss.................................................... (24,548) (25,244)
Interest expense, net.................................................. 546 (122)
--------- --------
Loss before income taxes and cumulative effect of
change in accounting principle........................................ (25,094) (25,122)
Income tax benefit..................................................... (10,214) (10,230)
--------- --------
Loss before cumulative effect of change in accounting principle........ (14,880) (14,892)
Cumulative effect of change in accounting principle.................... -- 711
--------- --------
Net loss.......................................................... $ (14,880) $(15,603)
======== ========
</TABLE>
See accompanying note to unaudited condensed consolidated financial statements.
F-30
<PAGE> 84
KAY-BEE CENTER, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------
MARCH 30, APRIL 1,
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................ $ (14,880) $ (15,603)
Adjustment to reconcile net loss to net cash (used in) provided by
operating activities:
Restructuring charge and asset impairment charges................ 1,167 --
Cumulative effect of change in accounting principle.............. -- 711
Depreciation and amortization.................................... 5,964 6,391
Deferred taxes and other......................................... (234) 577
Change in operating assets and liabilities....................... (84,373) (119,143)
--------- ---------
Net cash used in operating activities.......................... (92,356) (127,067)
--------- ---------
Cash flows from investing activities:
Additions to property, plant, equipment and leasehold
improvements..................................................... (4,195) (3,153)
--------- ---------
Net cash used in investing activities.......................... (4,195) (3,153)
--------- ---------
Cash flows from financing activities:
Dividends paid to parent............................................ -- (4,624)
Repayment of long-term debt and capital leases...................... (36) (33)
Decrease in book overdrafts......................................... (30,823) (12,817)
Decrease in due from parent and other divisions..................... 120,886 149,572
--------- ---------
Net cash provided by financing activities...................... 90,027 132,098
--------- ---------
Net increase (decrease) in cash....................................... (6,524) 1,878
Cash at beginning of period........................................... 16,523 7,304
--------- ---------
Cash at end of period................................................. $ 9,999 $ 9,182
======== =========
</TABLE>
See accompanying note to unaudited condensed consolidated financial statements.
F-31
<PAGE> 85
KAY-BEE CENTER, INC. AND SUBSIDIARIES
NOTE TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the Unaudited Condensed Consolidated
Financial Statements of Kay-Bee Center, Inc. and Subsidiaries (Kay-Bee) include
all adjustments, consisting of only normal recurring adjustments, necessary to
present fairly Kay-Bee's financial position as of March 30, 1996 and the results
of its operations for each of the fiscal quarters ended March 30, 1996 and April
1, 1995. Due to the seasonality of Kay-Bee's operations, the results of its
operations for the interim period ended March 30, 1996 may not be indicative of
total results for the full year. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations promulgated by the Securities and Exchange Commission. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Unaudited Condensed Consolidated Financial Statements should be read in
conjunction with the audited Consolidated Financial Statements and accompanying
notes of Kay-Bee Center, Inc. and Subsidiaries for the year ended December 31,
1995 included in this Prospectus.
F-32
<PAGE> 86
===============================================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON
STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 9
Use of Proceeds......................... 12
Capitalization.......................... 13
Price Range of Common Stock............. 14
Dividend Policy......................... 14
Recent Developments..................... 15
Selected Historical Financial Data...... 16
Selected Historical Operating Data...... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 19
Business................................ 27
Acquisition of Kay-Bee Center, Inc...... 37
Management.............................. 38
Description of Capital Stock............ 39
Underwriting............................ 43
Legal Matters........................... 44
Experts................................. 44
Available Information................... 44
Incorporation of Certain Information by
Reference............................. 45
Index to Pro Forma Financial Information
and Historical Financial Statements... P-1
</TABLE>
===============================================================================
===============================================================================
5,000,000 SHARES
[LOGO]
CONSOLIDATED STORES
CORPORATION
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
MCDONALD & COMPANY
SECURITIES, INC.
, 1996
===============================================================================
<PAGE> 87
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a list of the expenses to be incurred by the Company in
connection with the Offering. Except for the Securities and Exchange Commission
Filing Fee, all fees and expenses are estimated.
<TABLE>
<S> <C>
Securities and Exchange Commission Filing Fee........................... $ 67,690
NASD Filing Fee......................................................... 20,130
NYSE Filing Fee......................................................... 20,120
Accounting Fees and Expenses............................................ 145,000
Legal Fees and Expenses................................................. 200,000
--------
Blue Sky Fees and Expenses.............................................. 17,500
Printing Fees and Expenses.............................................. 277,000
Miscellaneous Expenses.................................................. 2,560
--------
Total.............................................................. $750,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145(a) of the General Corporation Law of the State of Delaware
provides that a Delaware corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or on the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise,
against expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no cause to believe his conduct was unlawful.
Section 145(b) provides that a Delaware corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses actually
and reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted under similar standards, except that no
indemnification may be made in respect to any claim, issue or matter as to which
such person shall have been adjudged to be liable for negligence or misconduct
in the performance of his duty to the corporation unless and only to the extent
that the court in which such action or suit was brought shall determine that
despite the adjudication of liability, such person is fairly and reasonably
entitled to be indemnified for such expenses that the court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful in the defense of any action, suit or proceeding
referred to in subsections (a) and (b) or in the defense of any claim, issue or
matter therein, he shall be indemnified against expenses actually and reasonably
incurred by him in connection therewith; that indemnification provided for by
Section 145 shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled; and that the corporation may purchase and
maintain insurance on behalf of a director or officer of the corporation against
any liability asserted against him or incurred by him in any such capacity or
arising out of his status as such whether or not the corporation would have the
power to indemnify him against such liabilities under such Section 145.
II-1
<PAGE> 88
Section 102(b)(7) provides that a corporation in its original certificate
of incorporation or an amendment thereto validly approved by stockholders may
eliminate or limit personal liability of members of its board of directors or
governing body for violations of a director's duty of care. However, no such
provision may eliminate or limit the liability of a director for breaching his
duty of loyalty, failing to act in good faith, engaging in intentional
misconduct or knowingly violating a law, paying a dividend or approving a stock
repurchase which was illegal, or obtaining an improper personal benefit. A
provision of this type has no effect on the availability of equitable remedies,
such as injunction or rescission, for breach of fiduciary duty. The Company's
Restated Certificate of Incorporation contains such a provision.
The Company's Amended and Restated By-Laws generally provide that the
Company shall indemnify its officers and directors to the fullest extent
permitted by Delaware law against claims against them arising out of their
actions as officers or directors of the Company. The By-Laws also provide that,
to the fullest extent permitted by law, the Company's directors shall not be
personally liable for monetary damages for breach of the directors' fiduciary
duty of care to the Company or its stockholders. This provision does not
eliminate the director's duty of care or eliminate a stockholder's right to seek
equitable remedies such as an injunction or other forms of non-monetary relief.
The Company also maintains insurance for its officers and directors against
claims arising out of their actions as officers and directors of the Company,
whether or not the Company would have the power to indemnify such officers or
directors for the claim under applicable law.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<S> <C>
1 Form of Purchase Agreement between the Company and Merrill Lynch, Pierce, Fenner
and Smith Incorporated, Montgomery Securities and McDonald & Company Securities,
Inc.
5 Opinion of Benesch, Friedlander, Coplan & Aronoff P.L.L., counsel for the Company
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Benesch, Friedlander, Coplan & Aronoff P.L.L. (included as part of
Exhibit 5)
24 Power of Attorney for William G. Kelley, Michael L. Glazer and Michael J. Potter
(included in Part II of the Registration Statement (Reg. No. 333-2545))*
24.1 Power of Attorney for David T. Kollat*
24.2 Power of Attorney for Nathan P. Morton*
24.3 Power of Attorney for John L. Sisk*
24.4 Power of Attorney for Dennis B. Tishkoff*
24.5 Power of Attorney for William A. Wickham*
24.6 Power of Attorney for Sheldon M. Berman*
</TABLE>
- ---------------
* Filed previously.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
II-2
<PAGE> 89
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, each filing of the Registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and each filing of
an employee benefit plan annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) The undersigned Registrant hereby undertakes to deliver or cause
to be delivered with the Prospectus, to each person to whom the Prospectus
is sent or given, the latest annual report to security holders that is
incorporated by reference in the Prospectus and furnished pursuant to and
meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities
Exchange Act of 1934; and, where interim financial information required to
be presented by Article 3 of Regulation S-X is not set forth in the
prospectus, to deliver, or cause to be delivered to each person to whom the
Prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the Prospectus to provide such
interim financial information.
(4) Insofar as indemnification for liabilities arising under the
Securities Exchange Act of 1934 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the Securities Exchange Act of 1934 and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedents, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
II-3
<PAGE> 90
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL
OF THE REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS AMENDMENT
NO. 2 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED ON THE 22ND DAY OF MAY, 1996.
CONSOLIDATED STORES CORPORATION
By: /s/ ALBERT J. BELL
------------------------------------
ALBERT J. BELL
SENIOR VICE PRESIDENT AND SECRETARY
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- -------------------------------------------------------
<S> <C> <C>
* Chairman of the Board May 22, 1996
- ---------------------------------------- and Chief Executive Officer
WILLIAM G. KELLEY
* President and Director May 22, 1996
- ----------------------------------------
MICHAEL L. GLAZER
* Senior Vice President May 22, 1996
- ---------------------------------------- and Chief Financial Officer
MICHAEL J. POTTER
* Director May 22, 1996
- ----------------------------------------
DAVID T. KOLLAT
* Director May 22, 1996
- ----------------------------------------
NATHAN P. MORTON
* Director May 22, 1996
- ----------------------------------------
JOHN L. SISK
* Director May 22, 1996
- ----------------------------------------
DENNIS B. TISHKOFF
* Director May 22, 1996
- ----------------------------------------
WILLIAM A. WICKHAM
* Director May 22, 1996
- ----------------------------------------
SHELDON M. BERMAN
*By: /s/ JAMES E. EGGENSCHWILER
- ----------------------------------------
JAMES E. EGGENSCHWILER
ATTORNEY-IN-FACT
</TABLE>
II-4
<PAGE> 91
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION OF EXHIBIT NUMBER
------- ------------------------------------------------------------------ ---------------
<S> <C> <C>
1 Form of Purchase Agreement between the Company and Merrill Lynch,
Pierce, Fenner and Smith Incorporated, Montgomery Securities and
McDonald & Company Securities, Inc.
5 Opinion of Benesch, Friedlander, Coplan & Aronoff P.L.L., counsel
for the Company
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Benesch, Friedlander, Coplan & Aronoff P.L.L. (included
as part of Exhibit 5)
24 Power of Attorney for William G. Kelley, Michael L. Glazer and
Michael J. Potter (included in Part II of the Registration
Statement (Reg. No. 333-2545))*
24.1 Power of Attorney for David T. Kollat*
24.2 Power of Attorney for Nathan P. Morton*
24.3 Power of Attorney for John L. Sisk*
24.4 Power of Attorney for Dennis B. Tishkoff*
24.5 Power of Attorney for William A. Wickham*
24.6 Power of Attorney for Sheldon M. Berman*
</TABLE>
- ---------------
* Filed previously.
<PAGE> 1
EXHIBIT 1
================================================================================
CONSOLIDATED STORES CORPORATION
(a Delaware corporation)
3,500,000 Shares of Common Stock
PURCHASE AGREEMENT
Dated: May __, 1996
================================================================================
<PAGE> 2
CONSOLIDATED STORES CORPORATION
(a Delaware corporation)
3,500,000 Shares of Common Stock
(Par Value $.01 Per Share)
PURCHASE AGREEMENT
------------------
May __, 1996
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Montgomery Securities
McDonald & Company Securities, Inc.
as Representatives of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Consolidated Stores Corporation, a Delaware corporation (the
"Company"), confirms its agreement with Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and each of the other
Underwriters named in Schedule A hereto (collectively, the "Underwriters", which
term shall also include any underwriter substituted as hereinafter provided in
Section 10 hereof), for whom Merrill Lynch, McDonald & Company Securities, Inc.
and Montgomery Securities are acting as representatives (in such capacity, the
"Representatives"), with respect to the issue and sale by the Company and the
purchase by the Underwriters, acting severally and not jointly, of the
respective numbers of shares of Common Stock, par value $.01 per share, of the
Company ("Common Stock") set forth in said Schedule A, and with respect to the
grant by the Company to the Underwriters, acting severally and not jointly, of
the option described in Section 2(b) hereof to purchase all or any part of
525,000 additional shares of Common Stock to cover over-allotments, if any. The
aforesaid 3,500,000 shares of Common Stock set forth in said Schedule A (the
"Initial Securities") to be purchased by the Underwriters and all or any part
of the
<PAGE> 3
525,000 shares of Common Stock subject to the option described in Section 2(b)
hereof (the "Option Securities") are hereinafter called, collectively, the
"Securities."
The Company understands that the Underwriters propose to make
a public offering of the Securities as soon as the Representatives deem
advisable after this Agreement has been executed and delivered.
The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-3 (No.
333-2545) covering the registration of the Securities under the Securities Act
of 1933, as amended (the "1933 Act"), including the related preliminary
prospectus or prospectuses. Promptly after execution and delivery of this
Agreement, the Company will either (i) prepare and file a prospectus in
accordance with the provisions of Rule 430A ("Rule 430A") of the rules and
regulations of the Commission under the 1933 Act (the "1933 Act Regulations")
and paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or
(ii) if the Company has elected to rely upon Rule 434 ("Rule 434") of the 1933
Act Regulations, prepare and file a term sheet (a "Term Sheet") in accordance
with the provisions of Rule 434 and Rule 424(b). The information included in
such prospectus or in such Term Sheet, as the case may be, that was omitted from
such registration statement at the time it became effective but that is deemed
to be part of such registration statement at the time it became effective (a)
pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A Information"
or (b) pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434
Information." Each prospectus used before such registration statement became
effective, and any prospectus that omitted, as applicable, the Rule 430A
Information or the Rule 434 Information, that was used after such effectiveness
and prior to the execution and delivery of this Agreement, is herein called a
"preliminary prospectus." Such registration statement, including the exhibits
thereto, schedules thereto, if any, and the documents incorporated by reference
therein pursuant to Item 12 of Form S-3 under the 1933 Act, at the time it
became effective and including the Rule 430A Information and the Rule 434
Information, as applicable, is herein called the "Registration Statement." Any
registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations
is herein referred to as the "Rule 462(b) Registration Statement," and after
such filing the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. The final prospectus, including the documents
incorporated by reference therein pursuant to Item 12 of Form S-3 under the 1933
Act, in the form first furnished to the Underwriters for use in connection with
the offering of the Securities is herein called the "Prospectus." If Rule 434 is
relied on, the term "Prospectus" shall refer to the preliminary prospectus dated
May 6, 1996 together with the Term Sheet and all references in this Agreement to
the date of the Prospectus shall mean the date of the Term Sheet. For purposes
of this Agreement, all references to the Registration Statement, any preliminary
prospectus, the Prospectus or any Term Sheet or any amendment or supplement to
any of the foregoing shall be deemed to include the copy filed with the
Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval
system ("EDGAR").
2
<PAGE> 4
All references in this Agreement to financial statements and
schedules and other information which is "contained," "included" or "stated" in
the Registration Statement, any preliminary prospectus or the Prospectus (or
other references of like import) shall be deemed to mean and include all such
financial statements and schedules and other information which is incorporated
by reference in the Registration Statement, any preliminary prospectus or the
Prospectus, as the case may be; and all references in this Agreement to
amendments or supplements to the Registration Statement, any preliminary
prospectus or the Prospectus shall be deemed to mean and include the filing of
any document under the Securities Exchange Act of 1934 (the "1934 Act") which is
incorporated by reference in the Registration Statement, such preliminary
prospectus or the Prospectus, as the case may be.
SECTION 1. REPRESENTATIONS AND WARRANTIES.
-------------------------------
(a) Representations and Warranties by the Company. The Company
represents and warrants to each Underwriter as of the date hereof, as of the
Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery
(if any) referred to in Section 2(b) hereof, and agrees with each Underwriter,
as follows:
(i) COMPLIANCE WITH REGISTRATION REQUIREMENTS. The Company
meets the requirements for use of Form S-3 under the 1933 Act. Each of
the Registration Statement and any Rule 462(b) Registration Statement
has become effective under the 1933 Act and no stop order suspending
the effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company, are contemplated by the Commission, and
any request on the part of the Commission for additional information
has been complied with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time (and, if any Option Securities
are purchased, at the Date of Delivery), the Registration Statement,
the Rule 462(b) Registration Statement and any amendments and
supplements thereto complied and will comply in all material respects
with the requirements of the 1933 Act and the 1933 Act Regulations and
did not and will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. Neither the
Prospectus nor any amendments or supplements thereto, at the time the
Prospectus or any such amendment or supplement was issued and at the
Closing Time (and, if any Option Securities are purchased, at the Date
of Delivery), included or will include an untrue statement of a
material fact or omitted or will omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. If Rule 434
is used, the Company will comply with the requirements of Rule 434. The
representations and warranties in this subsection shall not apply to
statements in or omissions from the Registration Statement or
Prospectus made in reliance upon and in
3
<PAGE> 5
conformity with information furnished to the Company in writing by any
Underwriter through Merrill Lynch expressly for use in the Registration
Statement or Prospectus.
Each preliminary prospectus and the prospectus filed as part
of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the 1933 Act
Regulations and, if applicable, each preliminary prospectus and the
Prospectus delivered to the Underwriters for use in connection with
this offering was identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the
extent permitted by Regulation S-T under the 1933 Act ("Regulation
S-T").
(ii) INCORPORATED DOCUMENTS. The documents incorporated or
deemed to be incorporated by reference in the Registration Statement
and the Prospectus, at the time they were or hereafter are filed with
the Commission, complied and will comply in all material respects with
the requirements of the 1934 Act and the rules and regulations of the
Commission thereunder (the "1934 Act Regulations"), and, when read
together with the other information in the Prospectus, at the time the
Registration Statement became effective, at the time the Prospectus was
issued and at the Closing Time (and if any Option Securities are
purchased, at the Date of Delivery), did not and will not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading.
(iii) INDEPENDENT ACCOUNTANTS. The accountants who
certified the financial statements and supporting schedules included
in the Registration Statement for both the Company and Kay-Bee Center,
Inc. and its subsidiaries (Kay-Bee Center, Inc. and its subsidiaries,
collectively hereinafter referred to as "Kay-Bee") are each
independent public accountants as required by the 1933 Act and the
1933 Act Regulations.
(iv) FINANCIAL STATEMENTS. The consolidated financial
statements for each of the Company and Kay-Bee included in the
Registration Statement and the Prospectus, together with the related
notes thereto, present fairly the financial position of each of the
Company and Kay-Bee, respectively, and their respective consolidated
subsidiaries at the dates indicated and the statements of operations,
stockholders' equity and cash flows of each of the Company and Kay-Bee
and their respective consolidated subsidiaries for the periods
specified; said financial statements have been prepared in conformity
with generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods involved. The supporting
schedules, if any, included in the Registration Statement present
fairly in accordance with GAAP the information required to be stated
therein, except with respect to (1) accounting changes disclosed in
the notes to the Kay-Bee financial statements included in the
Registration Statement and the Prospectus and (2) for the unaudited
condensed financial statements of Kay-Bee, to the extent necessary to
comply with the rules and regulations of the Commission. The selected
financial data and the summary financial
4
<PAGE> 6
information included in the Prospectus present fairly the information
shown therein and have been compiled on a basis consistent with that of
the audited financial statements included in the Registration
Statement. The pro forma combined financial statements and the related
notes thereto included in the Registration Statement and the Prospectus
present fairly the information shown therein, have been prepared in
accordance with the Commission's rules and guidelines with respect to
pro forma financial statements and have been properly compiled on the
bases described therein, and the assumptions used in the preparation
thereof are reasonable and the adjustments used therein are appropriate
to give effect to the transactions and circumstances referred to
therein.
(v) NO MATERIAL ADVERSE CHANGE IN BUSINESS. Since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, except as otherwise stated therein, (A)
there has been no material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business
(a "Material Adverse Effect"), (B) there have been no transactions
entered into by the Company or any of its subsidiaries, other than
those in the ordinary course of business, which are material with
respect to the Company and its subsidiaries considered as one
enterprise, and (C) there has been no dividend or distribution of any
kind declared, paid or made by the Company on any class of its capital
stock.
(vi) GOOD STANDING OF THE COMPANY. The Company has been duly
organized and is validly existing as a corporation in good standing
under the laws of the State of Delaware and has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and to enter into and perform
its obligations under this Agreement; and the Company is duly qualified
as a foreign corporation to transact business and is in good standing
in each other jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure so to qualify or to be in
good standing would not result in a Material Adverse Effect.
(vii) GOOD STANDING OF SUBSIDIARIES. Each subsidiary of the
Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the
failure so to qualify or to be in good standing would not result in a
Material Adverse Effect. Except as otherwise disclosed in the
Registration Statement, all of the issued and outstanding capital stock
of each such subsidiary has been duly authorized and validly issued, is
fully paid and non-assessable and is owned by the
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Company, directly or through subsidiaries, free and clear of any
security interest, mortgage, pledge, lien, encumbrance, claim or
equity; none of the outstanding shares of capital stock of any
subsidiary was issued in violation of the preemptive or similar rights
of any securityholder of such subsidiary. The only material
subsidiaries ("Material Subsidiaries") of the Company are the
subsidiaries listed on Schedule C hereto.
(viii) CAPITALIZATION. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectus in the
column entitled "Actual" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement, pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectus or pursuant to the exercise of options referred to in the
Prospectus). The shares of issued and outstanding capital stock of the
Company have been duly authorized and validly issued and are fully paid
and non-assessable; none of the outstanding shares of capital stock of
the Company was issued in violation of the preemptive or other similar
rights of any securityholder of the Company.
(ix) AUTHORIZATION OF AGREEMENT. This Agreement has been
duly authorized, executed and delivered by the Company.
(x) AUTHORIZATION AND DESCRIPTION OF SECURITIES. The
Securities have been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement and, when issued and delivered
by the Company pursuant to this Agreement against payment of the
consideration set forth herein, will be validly issued, fully paid and
non-assessable; the Common Stock conforms to all statements relating
thereto contained in the Prospectus and such description conforms to
the rights set forth in the instruments defining the same; no holder of
the Securities will be subject to personal liability by reason of being
such a holder; and the issuance of the Securities is not subject to the
preemptive or other similar rights of any securityholder of the
Company.
(xi) ABSENCE OF DEFAULTS AND CONFLICTS. Neither the Company
nor any of its subsidiaries is in violation of its charter or by-laws
or in default in the performance or observance of any obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, deed of trust, loan or credit agreement, note, lease or other
agreement or instrument to which the Company or any of its subsidiaries
is a party or by which it or any of them may be bound, or to which any
of the property or assets of the Company or any subsidiary is subject
(collectively, "Agreements and Instruments") except for such defaults
that would not result in a Material Adverse Effect; and the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated herein and in the Registration Statement
(including the issuance and sale of the Securities and the use of the
proceeds from the sale of the Securities as described in the Prospectus
under the caption "Use of Proceeds") and compliance by the Company with
its obligations
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hereunder have been duly authorized by all necessary corporate action
and do not and will not, whether with or without the giving of notice
or passage of time or both, conflict with or constitute a breach of, or
default or Repayment Event (as defined below) under, or result in the
creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any subsidiary pursuant to, the
Agreements and Instruments (except for such conflicts, breaches or
defaults or liens, charges or encumbrances that would not result in a
Material Adverse Effect), nor will such action result in any violation
of the provisions of the charter or by-laws of the Company or any
subsidiary or any applicable law, statute, rule, regulation, judgment,
order, writ or decree of any government, government instrumentality or
court, domestic or foreign, having jurisdiction over the Company or any
subsidiary or any of their assets, properties or operations. As used
herein, a "Repayment Event" means any event or condition which gives
the holder of any note, debenture or other evidence of indebtedness (or
any person acting on such holder's behalf) the right to require the
repurchase, redemption or repayment of all or a portion of such
indebtedness by the Company or any subsidiary.
(xii) ABSENCE OF LABOR DISPUTE. No labor dispute with the
employees of the Company or any subsidiary exists or, to the knowledge
of the Company, is imminent, and the Company is not aware of any
existing or imminent labor disturbance by the employees of any of its
or any subsidiary's principal suppliers, manufacturers, customers or
contractors, which, in either case, may reasonably be expected to
result in a Material Adverse Effect.
(xiii) ABSENCE OF PROCEEDINGS. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to
the knowledge of the Company, threatened, against or affecting the
Company or any subsidiary, which is required to be disclosed in the
Registration Statement (other than as disclosed therein), or which
might reasonably be expected to result in a Material Adverse Effect, or
which might reasonably be expected to materially and adversely affect
the properties or assets of the Company and its subsidiaries, taken as
a whole, or the consummation of the transactions contemplated in this
Agreement or the performance by the Company of its obligations
hereunder; the aggregate of all pending legal or governmental
proceedings to which the Company or any subsidiary is a party or of
which any of their respective property or assets is the subject which
are not described in the Registration Statement, including ordinary
routine litigation incidental to the business, could not reasonably be
expected to result in a Material Adverse Effect.
(xiv) ACCURACY OF EXHIBITS. There are no contracts or
documents which are required to be described in the Registration
Statement, the Prospectus or the documents incorporated by reference
therein or to be filed as exhibits thereto which have not been so
described and filed as required.
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(xv) POSSESSION OF INTELLECTUAL PROPERTY. The Company and its
subsidiaries own or possess, or can acquire on reasonable terms,
adequate patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks, trade names or other
intellectual property (collectively, "Intellectual Property") necessary
to carry on the business now operated by them, and neither the Company
nor any of its subsidiaries has received any notice or is otherwise
aware of any infringement of or conflict with asserted rights of others
with respect to any Intellectual Property or of any facts or
circumstances which would render any Intellectual Property invalid or
inadequate to protect the interest of the Company or any of its
subsidiaries therein, and which infringement or conflict (if the
subject of any unfavorable decision, ruling or finding) or invalidity
or inadequacy, singly or in the aggregate, would result in a Material
Adverse Effect.
(xvi) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Company of
its obligations hereunder, in connection with the offering, issuance or
sale of the Securities hereunder or the consummation of the
transactions contemplated by this Agreement, except such as have been
already obtained or as may be required under the 1933 Act, the 1933 Act
Regulations or any applicable state securities laws.
(xvii) POSSESSION OF LICENSES AND PERMITS. The Company and its
subsidiaries possess such permits, licenses, approvals, consents and
other authorizations (collectively, "Governmental Licenses") issued by
the appropriate federal, state, local or foreign regulatory agencies or
bodies necessary to conduct the business now operated by them; the
Company and its subsidiaries are in compliance with the terms and
conditions of all such Governmental Licenses, except where the failure
so to comply would not, singly or in the aggregate, have a Material
Adverse Effect; all of the Governmental Licenses are valid and in full
force and effect, except when the invalidity of such Governmental
Licenses or the failure of such Governmental Licenses to be in full
force and effect would not have a Material Adverse Effect; and neither
the Company nor any of its subsidiaries has received any notice of
proceedings relating to the revocation or modification of any such
Governmental Licenses which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would result in a
Material Adverse Effect.
(xviii) TITLE TO PROPERTY. The Company and its subsidiaries
have good and marketable title to all real property owned by the
Company and its subsidiaries and good title to all other properties
owned by them, in each case, free and clear of all mortgages, pledges,
liens, security interests, claims, restrictions or encumbrances of any
kind except such as (a) are described in the Prospectus or (b) do not,
singly or in the aggregate, materially affect the value of such
property and do not interfere with the use made and proposed to be made
of such property by the Company or any of its
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<PAGE> 10
subsidiaries; and all of the leases and subleases material to the
business of the Company and its subsidiaries, considered as one
enterprise, and under which the Company or any of its subsidiaries
holds properties described in the Prospectus, are in full force and
effect, and neither the Company nor any subsidiary has any notice of
any material claim of any sort that has been asserted by anyone adverse
to the rights of the Company or any subsidiary under any of the leases
or subleases mentioned above, or affecting or questioning the rights of
the Company or such subsidiary to the continued possession of the
leased or subleased premises under any such lease or sublease.
(xix) COMPLIANCE WITH CUBA ACT. The Company has complied with,
and is and will be in compliance with, the provisions of that certain
Florida act relating to disclosure of doing business with Cuba,
codified as Section 517.075 of the Florida statutes, and the rules and
regulations thereunder (collectively, the "Cuba Act") or is exempt
therefrom.
(xx) ENVIRONMENTAL LAWS. Except as described in the
Registration Statement and except as would not, singly, or in the
aggregate, result in a Material Adverse Effect, (A) neither the Company
nor any of its subsidiaries is in violation of any federal, state,
local or foreign statute, law, rule, regulation, ordinance, code,
policy or rule of common law or any judicial or administrative
interpretation thereof including any judicial or administrative order,
consent, decree or judgment, relating to pollution or protection of
human health, the environment (including, without limitation, ambient
air, surface water, groundwater, land surface or subsurface strata) or
wildlife, including, without limitation, laws and regulations relating
to the release or threatened release of chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances, petroleum
or petroleum products (collectively, "Hazardous Materials") or to the
manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials (collectively,
"Environmental Laws"), (B) the Company and its subsidiaries have all
permits, authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements,
(C) there are no pending or threatened administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens,
notices of noncompliance or violation, investigation or proceedings
relating to any Environmental Law against the Company or any of its
subsidiaries and (D) there are no events or circumstances that might
reasonably be expected to form the basis of an order for clean-up or
remediation, or an action, suit or proceeding by any private party or
governmental body or agency, against or affecting the Company or any of
its subsidiaries relating to Hazardous Materials or of any
Environmental Laws.
(xxi) STOCK PURCHASE AGREEMENT IN EFFECT. The Stock
Purchase Agreement, dated as of March 25, 1996, between the Company
and Melville Corporation (the "Stock Purchase Agreement") is in full
force and effect, and the Company has
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performed all of its obligations thereunder required to be performed
on or prior to the date hereof.
(xxii) COMPANY IS SOLVENT. On the closing date of the
acquisition of Kay-Bee, May 4, 1996 (the "Acquisition") and
immediately after such closing (after giving effect to the
Acquisition), the Company was and remains Solvent. As used herein, the
term "Solvent" means, with respect to the Company on a particular date,
that on such date (A) the fair market value of the assets of the
Company is greater than the total amount of liabilities (including
contingent liabilities) of the Company, (B) the present fair salable
value of the assets of the Company is greater than the amount that will
be required to pay the probable liabilities of the Company on its debts
as they become absolute and matured, (C) the Company is able to realize
upon its assets and pay its debts and other liabilities, including
contingent obligations, as they mature and (D) the Company does not
have an unreasonably small capital.
(b) Officer's Certificates. Any certificate signed by any
officer of the Company or any of its subsidiaries delivered to the
Representatives or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company to each Underwriter as to the matters
covered thereby.
SECTION 2. SALE AND DELIVERY TO UNDERWRITERS; CLOSING.
-------------------------------------------
(a) Initial Securities. On the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company agrees to sell to each Underwriter, severally and not
jointly, and each Underwriter, severally and not jointly, agrees to purchase
from the Company, at the price per share set forth in Schedule B, the number of
Initial Securities set forth in Schedule A opposite the name of such
Underwriter, plus any additional number of Initial Securities which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof.
(b) Option Securities. In addition, on the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase up to an additional 525,000
shares of Common Stock at the price per share set forth in Schedule B, less an
amount per share equal to any dividends or distributions declared by the Company
and payable on the Initial Securities but not payable on the Option Securities.
The option hereby granted will expire 30 days after the date hereof and may be
exercised in whole or in part from time to time only for the purpose of covering
over-allotments which may be made in connection with the offering and
distribution of the Initial Securities upon notice by the Representatives to the
Company setting forth the number of Option Securities as to which the several
Underwriters are then exercising the option and the time and date of payment and
delivery for such Option Securities. Any such time and date of delivery (a "Date
of Delivery") shall be determined by the Representatives, but shall not be later
than seven full business days after the exercise of said option, nor in any
event prior to the
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Closing Time, as hereinafter defined. If the option is exercised as to all or
any portion of the Option Securities, each of the Underwriters, acting severally
and not jointly, will purchase that proportion of the total number of Option
Securities then being purchased which the number of Initial Securities set forth
in Schedule A opposite the name of such Underwriter bears to the total number of
Initial Securities, subject in each case to such adjustments as the
Representatives in their discretion shall make to eliminate any sales or
purchases of fractional shares.
(c) Payment. Payment of the purchase price for, and delivery
of certificates for, the Initial Securities shall be made at the offices of
Shearman & Sterling, 599 Lexington Avenue, New York, New York, or at such other
place as shall be agreed upon by the Representatives and the Company, at 10:00
A.M. (Eastern time) on the third (fourth, if the pricing occurs after 4:30 P.M.
(Eastern time) on any given day) business day after the date hereof (unless
postponed in accordance with the provisions of Section 10), or such other time
not later than ten business days after such date as shall be agreed upon by the
Representatives and the Company (such time and date of payment and delivery
being herein called "Closing Time").
In addition, in the event that any or all of the Option
Securities are purchased by the Underwriters, payment of the purchase price for,
and delivery of certificates for, such Option Securities shall be made at the
above-mentioned offices, or at such other place as shall be agreed upon by the
Representatives and the Company, on each Date of Delivery as specified in the
notice from the Representatives to the Company.
Payment shall be made to the Company by wire transfer of
immediately available funds to a bank account designated by the Company, against
delivery to the Representatives for the respective accounts of the Underwriters
of certificates for the Securities to be purchased by them. It is understood
that each Underwriter has authorized the Representatives, for its account, to
accept delivery of, receipt for, and make payment of the purchase price for, the
Initial Securities and the Option Securities, if any, which it has agreed to
purchase. Merrill Lynch, individually and not as representative of the
Underwriters, may (but shall not be obligated to) make payment of the purchase
price for the Initial Securities or the Option Securities, if any, to be
purchased by any Underwriter whose funds have not been received by the Closing
Time or the relevant Date of Delivery, as the case may be, but such payment
shall not relieve such Underwriter from its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial
Securities and the Option Securities, if any, shall be in such denominations and
registered in such names as the Representatives may request in writing at least
two full business days before the Closing Time or the relevant Date of Delivery,
as the case may be. The certificates for the Initial Securities and the Option
Securities, if any, will be made available for examination and packaging by the
Representatives in The City of New York not later than 10:00 A.M.
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(Eastern time) on the business day prior to the Closing Time or the relevant
Date of Delivery, as the case may be.
SECTION 3. COVENANTS OF THE COMPANY. The Company covenants
with each Underwriter as follows:
(a) Compliance with Securities Regulations and Commission
Requests. The Company, subject to Section 3(b), will comply with the
requirements of Rule 430A or Rule 434, as applicable, and will notify
the Representatives immediately, and confirm the notice in writing, (i)
when any post-effective amendment to the Registration Statement shall
become effective, or any supplement to the Prospectus or any amended
Prospectus shall have been filed, (ii) of the receipt of any comments
from the Commission, (iii) of any request by the Commission for any
amendment to the Registration Statement or any amendment or supplement
to the Prospectus or for additional information, and (iv) of the
issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing
or suspending the use of any preliminary prospectus, or of the
suspension of the qualification of the Securities for offering or sale
in any jurisdiction, or of the initiation or threatening of any
proceedings for any of such purposes. The Company will promptly effect
the filings necessary pursuant to Rule 424(b) and will take such steps
as it deems necessary to ascertain promptly whether the form of
prospectus transmitted for filing under Rule 424(b) was received for
filing by the Commission and, in the event that it was not, it will
promptly file such prospectus. The Company will make every reasonable
effort to prevent the issuance of any stop order and, if any stop order
is issued, to obtain the lifting thereof at the earliest possible
moment.
(b) Filing of Amendments. The Company will give the
Representatives notice of its intention to file or prepare any
amendment to the Registration Statement (including any filing under
Rule 462(b)), any Term Sheet or any amendment, supplement or revision
to either the prospectus included in the Registration Statement at the
time it became effective or to the Prospectus, whether pursuant to the
1933 Act, the 1934 Act or otherwise, will furnish the Representatives
with copies of any such documents a reasonable amount of time prior to
such proposed filing or use, as the case may be, and will not file or
use any such document to which the Representatives or counsel for the
Underwriters shall object.
(c) Delivery of Registration Statements. The Company has
furnished or will deliver to the Representatives and counsel for the
Underwriters, without charge, signed copies of the Registration
Statement as originally filed and of each amendment thereto (including
exhibits filed therewith or incorporated by reference therein and
documents incorporated or deemed to be incorporated by reference
therein) and signed copies of all consents and certificates of experts,
and will also deliver to the Representatives, without charge, a
conformed copy of the Registration Statement as originally filed and of
each amendment thereto (without exhibits) for each of the
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Underwriters. If applicable, the copies of the Registration Statement
and each amendment thereto furnished to the Underwriters will be
identical to the electronically transmitted copies thereof filed with
the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to
each Underwriter, without charge, as many copies of each preliminary
prospectus as such Underwriter reasonably requested, and the Company
hereby consents to the use of such copies for purposes permitted by the
1933 Act. The Company will furnish to each Underwriter, without charge,
during the period when the Prospectus is required to be delivered under
the 1933 Act or the 1934 Act, such number of copies of the Prospectus
(as amended or supplemented) as such Underwriter may reasonably
request. If applicable, the Prospectus and any amendments or
supplements thereto furnished to the Underwriters will be identical to
the electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company
will comply with the 1933 Act and the 1933 Act Regulations and the 1934
Act and the 1934 Act Regulations so as to permit the completion of the
distribution of the Securities as contemplated in this Agreement and in
the Prospectus. If at any time when a prospectus is required by the
1933 Act to be delivered in connection with sales of the Securities,
any event shall occur or condition shall exist as a result of which it
is necessary, in the opinion of counsel for the Underwriters or for the
Company, to amend the Registration Statement or amend or supplement the
Prospectus in order that the Prospectus will not include any untrue
statements of a material fact or omit to state a material fact
necessary in order to make the statements therein not misleading in the
light of the circumstances existing at the time it is delivered to a
purchaser, or if it shall be necessary, in the opinion of such counsel,
at any such time to amend the Registration Statement or amend or
supplement the Prospectus in order to comply with the requirements of
the 1933 Act or the 1933 Act Regulations, the Company will promptly
prepare and file with the Commission, subject to Section 3(b), such
amendment or supplement as may be necessary to correct such statement
or omission or to make the Registration Statement or the Prospectus
comply with such requirements, and the Company will furnish to the
Underwriters such number of copies of such amendment or supplement as
the Underwriters may reasonably request.
(f) Blue Sky Qualifications. The Company will use its best
efforts, in cooperation with the Underwriters, to qualify the
Securities for offering and sale under the applicable securities laws
of such states and other jurisdictions as the Representatives may
designate and to maintain such qualifications in effect for a period of
not less than one year from the later of the effective date of the
Registration Statement and any Rule 462(b) Registration Statement;
PROVIDED, HOWEVER, that the
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Company shall not be obligated to file any general consent to service
of process or to qualify as a foreign corporation or as a dealer in
securities in any jurisdiction in which it is not so qualified or to
subject itself to taxation in respect of doing business in any
jurisdiction in which it is not otherwise so subject. In each
jurisdiction in which the Securities have been so qualified, the
Company will file such statements and reports as may be required by the
laws of such jurisdiction to continue such qualification in effect for
a period of not less than one year from the effective date of the
Registration Statement and any Rule 462(b) Registration Statement.
(g) Rule 158. The Company will timely file such reports
pursuant to the 1934 Act as are necessary in order to make generally
available to its securityholders as soon as practicable an earnings
statement for the purposes of, and to provide the benefits contemplated
by, the last paragraph of Section 11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net
proceeds received by it from the sale of the Securities in the manner
specified in the Prospectus under "Use of Proceeds."
(i) Listing. The Company will use its best efforts to
effect the listing of the Securities on the New York Stock Exchange.
(j) Restriction on Sale of Securities. During a period of 150
days from the date of the Prospectus, the Company will not, without the
prior written consent of Merrill Lynch, (i) directly or indirectly,
offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of any
share of Common Stock or any securities convertible into or exercisable
or exchangeable for Common Stock or file any registration statement
under the 1933 Act with respect to any of the foregoing or (ii) enter
into any swap or any other agreement or any transaction that transfers,
in whole or in part, directly or indirectly, the economic consequence
of ownership of the Common Stock, whether any such swap or transaction
described in clause (i) or (ii) above is to be settled by delivery of
Common Stock or such other securities, in cash or otherwise. The
foregoing sentence shall not apply to (A) the Securities to be sold
hereunder, (B) any shares of Common Stock issued by the Company upon
the exercise of an option or warrant or the conversion of a security
outstanding on the date hereof and referred to in the Prospectus, (C)
any shares of Common Stock issued or options to purchase Common Stock
granted pursuant to the Consolidated Stores Corporation 1996
Performance Incentive Plan, Restricted Stock Plan or Director Stock
Option Plan.
(k) Reporting Requirements. The Company, during the period
when the Prospectus is required to be delivered under the 1933 Act or
the 1934 Act will file all documents required to be filed with the
Commission pursuant to the 1934 Act within the time periods required by
the 1934 Act and the 1934 Act Regulations.
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SECTION 4. PAYMENT OF EXPENSES.
--------------------
(a) Expenses. The Company will pay all expenses incident to
the performance of its obligations under this Agreement, including (i) the
preparation, printing and filing of the Registration Statement (including
financial statements and exhibits) as originally filed and of each amendment
thereto, (ii) the preparation, printing and delivery to the Underwriters of this
Agreement, any Agreement among Underwriters and such other documents as may be
required in connection with the offering, purchase, sale, issuance or delivery
of the Securities, (iii) the preparation, issuance and delivery of the
certificates for the Securities to the Underwriters, including any stock or
other transfer taxes and any stamp or other duties payable upon the sale,
issuance or delivery of the Securities to the Underwriters, (iv) the fees and
disbursements of the Company's counsel, accountants and other advisors, (v) the
qualification of the Securities under securities laws in accordance with the
provisions of Section 3(f) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriters in connection therewith and in
connection with the preparation of the Blue Sky Survey and any supplement
thereto, (vi) the printing and delivery to the Underwriters of copies of each
preliminary prospectus, any Term Sheets and of the Prospectus and any amendments
or supplements thereto, (vii) the preparation, printing and delivery to the
Underwriters of copies of the Blue Sky Survey and any supplement thereto, (viii)
the fees and expenses of any transfer agent or registrar for the Securities,
(ix) the filing fees incident to, and the reasonable fees and disbursements of
counsel to the Underwriters in connection with, the review by the National
Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of
the Securities, and (x) the fees and expenses incurred in connection with the
listing of the Securities on the New York Stock Exchange.
(b) Termination of Agreement. If this Agreement is terminated
by the Representatives in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the Underwriters for all of their
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Underwriters.
SECTION 5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The
obligations of the several Underwriters hereunder are subject to the accuracy of
the representations and warranties of the Company contained in Section 1 hereof
or in certificates of any officer of the Company or any subsidiary of the
Company delivered pursuant to the provisions hereof, to the performance by the
Company of its covenants and other obligations hereunder, and to the following
further conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the
effectiveness of the Registration Statement shall have been issued
under the 1933 Act or proceedings therefor initiated or threatened by
the Commission, and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of counsel to
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the Underwriters. A prospectus containing the Rule 430A Information
shall have been filed with the Commission in accordance with Rule
424(b) (or a post-effective amendment providing such information shall
have been filed and declared effective in accordance with the
requirements of Rule 430A) or, if the Company has elected to rely upon
Rule 434, a Term Sheet shall have been filed with the Commission in
accordance with Rule 424(b).
(b) Opinions of Counsels for the Company. At Closing Time, the
Representatives shall have received the favorable opinions, dated as of
Closing Time, of Albert J. Bell, Esq., General Counsel of the Company,
and of Benesch, Friedlander, Coplan & Aronoff P.L.L., counsel for the
Company, each in form and substance satisfactory to counsel for the
Underwriters, together with signed or reproduced copies of such letters
for each of the other Underwriters, to the effect set forth in Exhibit
A hereto and to such further effect as counsel to the Underwriters may
reasonably request.
(c) Opinion of Counsel for Underwriters. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of
Closing Time, of Shearman & Sterling, counsel for the Underwriters,
together with signed or reproduced copies of such letter for each of
the other Underwriters with respect to the matters set forth in clauses
A(i), (ii), (iv), (v) (solely as to preemptive or other similar rights
arising by operation of law or under the charter or by-laws of the
Company), (vii) through (ix), inclusive, (xii) (solely as to the
information in the Prospectus under "Description of Capital
Stock--Common Stock"), B(ii) and the penultimate paragraph of Exhibit
AA. hereto. In giving such opinion such counsel may rely, as to all
matters governed by the laws of jurisdictions other than the law of the
State of New York, the federal law of the United States and the General
Corporation Law of the State of Delaware, upon the opinions of counsel
satisfactory to the Representatives. Such counsel may also state that,
insofar as such opinion involves factual matters, they have relied, to
the extent they deem proper, upon certificates of officers of the
Company and its subsidiaries and certificates of public officials.
(d) Officers' Certificate. At Closing Time there shall not
have been, since the date hereof or since the respective dates as of
which information is given in the Prospectus, any material adverse
change in the condition, financial or otherwise, or in the earnings,
business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in
the ordinary course of business, and the Representatives shall have
received a certificate of the President or a Vice President of the
Company and of the chief financial or chief accounting officer of the
Company, dated as of Closing Time, to the effect that (i) there has
been no such material adverse change, (ii) the representations and
warranties in Section 1(a) hereof are true and correct with the same
force and effect as though expressly made at and as of Closing Time,
(iii) the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied at or
16
<PAGE> 18
prior to Closing Time, and (iv) no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or are
contemplated by the Commission.
(e) Accountants' Comfort Letters. At the time of the execution
of this Agreement, the Representatives shall have received from each of
Deloitte & Touche LLP and KPMG Peat Marwick LLP, a letter dated such
date, in form and substance satisfactory to the Representatives,
together with signed or reproduced copies of such letter for each of
the other Underwriters containing statements and information of the
type ordinarily included in accountants' "comfort letters" to
underwriters with respect to the financial statements and certain
financial information contained in the Registration Statement and the
Prospectus.
(f) Bring-down Comfort Letter. At Closing Time the
Representatives shall have received from each of Deloitte & Touche LLP
and KPMG Peat Marwick LLP, a letter, dated as of Closing Time, to the
effect that they reaffirm the statements made in their respective
letters furnished pursuant to subsection (e) of this Section, except
that the specified date referred to shall be a date not more than three
business days prior to Closing Time.
(g) Approval of Listing. At Closing Time the Securities shall
have been approved for listing on the New York Stock Exchange, subject
only to official notice of issuance.
(h) No Objection. The NASD shall not have raised any
objection with respect to the fairness and reasonableness of the
underwriting terms and arrangements.
(i) Lock-up Agreements. At the date of this Agreement,
the Representatives shall have received an agreement substantially in
the form of Exhibit B hereto signed by the persons listed on Schedule
D hereto.
(j) Stock Purchase Agreement. At Closing Time the Stock
Purchase Agreement shall be in full force and effect; the closing
contemplated by the Stock Purchase Agreement shall have been
consummated in accordance with the terms thereof in all material
respects; and the Company shall have provided to the Representatives or
their counsel copies of all closing documents delivered to the parties
to the transactions contemplated by the Stock Purchase Agreement.
(k) Conditions to Purchase of Option Securities. In the event
that the Underwriters exercise their option provided in Section 2(b)
hereof to purchase all or any portion of the Option Securities, the
representations and warranties of the Company contained herein and the
statements in any certificates furnished by the Company or any
subsidiary of the Company hereunder shall be true and correct as of
17
<PAGE> 19
each Date of Delivery and, at the relevant Date of Delivery, the
Representatives shall have received:
(i) OFFICERS' CERTIFICATE. A certificate, dated such
Date of Delivery, of the President or a Vice President of the
Company and of the chief financial or chief accounting officer
of the Company confirming that the certificate delivered at
the Closing Time pursuant to Section 5(d) hereof remains true
and correct as of such Date of Delivery.
(ii) OPINION OF COUNSEL FOR COMPANY. The favorable
opinion of Benesch, Friedlander, Coplan & Aronoff P.L.L.,
counsel for the Company, in form and substance satisfactory to
counsel for the Underwriters, dated such Date of Delivery,
relating to the Option Securities to be purchased on such Date
of Delivery and otherwise to the same effect as the opinion
required by Section 5(b) hereof.
(iii) OPINION OF COUNSEL FOR UNDERWRITERS. The
favorable opinion of Shearman & Sterling, counsel for the
Underwriters, dated such Date of Delivery, relating to the
Option Securities to be purchased on such Date of Delivery and
otherwise to the same effect as the opinion required by
Section 5(c) hereof.
(iv) BRING-DOWN COMFORT LETTER. A letter from each of
Deloitte & Touche LLP and KPMG Peat Marwick LLP, in form and
substance satisfactory to the Representatives and dated such
Date of Delivery, substantially in the same form and substance
as their respective letters furnished to the Representatives
pursuant to Section 5(f) hereof, except that the "specified
date" in each letter furnished pursuant to this paragraph
shall be a date not more than five days prior to such Date of
Delivery.
(l) Additional Documents. At Closing Time and at each Date of
Delivery counsel for the Underwriters shall have been furnished with
such documents and opinions as they may require for the purpose of
enabling them to pass upon the issuance and sale of the Securities as
herein contemplated, or in order to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the
conditions, herein contained; and all proceedings taken by the Company
in connection with the issuance and sale of the Securities as herein
contemplated shall be satisfactory in form and substance to the
Representatives and counsel for the Underwriters.
(m) Termination of Agreement. If any condition specified in
this Section shall not have been fulfilled when and as required to be
fulfilled, this Agreement, or, in the case of any condition to the
purchase of Option Securities on a Date of Delivery which is after the
Closing Time, the obligations of the several Underwriters
18
<PAGE> 20
to purchase the relevant Option Securities, may be terminated by the
Representatives by notice to the Company at any time at or prior to
Closing Time or such Date of Delivery, as the case may be, and such
termination shall be without liability of any party to any other party
except as provided in Section 4 and except that Sections 1, 6 and 7
shall survive any such termination and remain in full force and effect.
SECTION 6. INDEMNIFICATION.
----------------
(a) Indemnification of Underwriters. The Company agrees to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
or of any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission; provided
that (subject to Section 6(d) below) any such settlement is effected
with the written consent of the Company; and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill
Lynch), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission, to the extent that any such
expense is not paid under (i) or (ii) above;
PROVIDED, HOWEVER, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through Merrill Lynch expressly
19
<PAGE> 21
for use in the Registration Statement (or any amendment thereto), including the
Rule 430A Information and the Rule 434 Information, if applicable, or any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto).
(b) Indemnification of Company, Directors and Officers. Each
Underwriter severally agrees to indemnify and hold harmless the Company, its
directors, each of its officers who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act against any and all loss, liability,
claim, damage and expense described in the indemnity contained in subsection (a)
of this Section, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through Merrill Lynch expressly for use in the Registration Statement (or any
amendment thereto) or such preliminary prospectus or the Prospectus (or any
amendment or supplement thereto).
(c) Actions Against Parties; Notification. Each indemnified
party shall give notice as promptly as reasonably practicable to each
indemnifying party of any action commenced against it in respect of which
indemnity may be sought hereunder, but failure to so notify an indemnifying
party shall not relieve such indemnifying party from any liability hereunder to
the extent it is not materially prejudiced as a result thereof and in any event
shall not relieve it from any liability which it may have otherwise than on
account of this indemnity agreement. In the case of parties indemnified pursuant
to Section 6(a) above, counsel to the indemnified parties shall be selected by
Merrill Lynch, and, in the case of parties indemnified pursuant to Section 6(b)
above, counsel to the indemnified parties shall be selected by the Company. An
indemnifying party may participate at its own expense in the defense of any such
action; PROVIDED, HOWEVER, that counsel to the indemnifying party shall not
(except with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying parties be liable for fees
and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances. No
indemnifying party shall, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with
respect to any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever in
respect of which indemnification or contribution could be sought under this
Section 6 or Section 7 hereof (whether or not the indemnified parties are actual
or potential parties thereto), unless such settlement, compromise or consent (i)
includes an unconditional release of each indemnified party from all liability
arising out of such litigation, investigation, proceeding or claim and (ii) does
not include a statement as to or an admission of fault, culpability or a failure
to act by or on behalf of any indemnified party.
20
<PAGE> 22
(d) Settlement Without Consent if Failure to Reimburse. If at
any time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel, such
indemnifying party agrees that it shall be liable for any settlement of the
nature contemplated by Section 6(a)(ii) effected without its written consent if
(i) such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of such settlement.
SECTION 7. CONTRIBUTION. If the indemnification provided for
in Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other hand from the offering
of the Securities pursuant to this Agreement or (ii) if the allocation provided
by clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and of the
Underwriters on the other hand in connection with the statements or omissions
which resulted in such losses, liabilities, claims, damages or expenses, as well
as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand
and the Underwriters on the other hand in connection with the offering of the
Securities pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the
Securities pursuant to this Agreement (before deducting expenses) received by
the Company and the total underwriting discount received by the Underwriters, in
each case as set forth on the cover of the Prospectus, or, if Rule 434 is used,
the corresponding location on the Term Sheet, bear to the aggregate initial
public offering price of the Securities as set forth on such cover.
The relative fault of the Company on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company and the Underwriters agree that it would not be
just and equitable if contribution pursuant to this Section 7 were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to
21
<PAGE> 23
above in this Section 7. The aggregate amount of losses, liabilities, claims,
damages and expenses incurred by an indemnified party and referred to above in
this Section 7 shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any governmental
agency or body, commenced or threatened, or any claim whatsoever based upon any
such untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
any such untrue or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who
controls an Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act shall have the same rights to contribution as such
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act or Section 20 of the
1934 Act shall have the same rights to contribution as the Company. The
Underwriters' respective obligations to contribute pursuant to this Section 7
are several in proportion to the number of Initial Securities set forth opposite
their respective names in Schedule A hereto and not joint.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO
SURVIVE DELIVERY. All representations, warranties and agreements contained in
this Agreement or in certificates of officers of the Company submitted pursuant
hereto, shall remain operative and in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or controlling person, or
by or on behalf of the Company, and shall survive delivery of the Securities to
the Underwriters.
SECTION 9. TERMINATION OF AGREEMENT.
-------------------------
(a) Termination; General. The Representatives may terminate
this Agreement, by notice to the Company, at any time at or prior to Closing
Time (i) if there has been, since the time of execution of this Agreement or
since the respective dates as of which information is given in the Prospectus,
any material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
22
<PAGE> 24
ordinary course of business, or (ii) if there has occurred any material adverse
change in the financial markets in the United States, any outbreak of
hostilities or escalation thereof or other calamity or crisis or any change or
development involving a prospective change in national or international
political, financial or economic conditions, in each case the effect of which is
such as to make it, in the judgment of the Representatives, impracticable to
market the Securities or to enforce contracts for the sale of the Securities, or
(iii) if trading in any securities of the Company has been suspended or limited
by the Commission or the New York Stock Exchange, or if trading generally on the
American Stock Exchange or the New York Stock Exchange or in the Nasdaq National
Market has been suspended or limited, or minimum or maximum prices for trading
have been fixed, or maximum ranges for prices have been required, by any of said
exchanges or by such system or by order of the Commission, the National
Association of Securities Dealers, Inc. or any other governmental authority, or
(iv) if a banking moratorium has been declared by either Federal or New York
authorities.
(b) Liabilities. If this Agreement is terminated pursuant to
this Section, such termination shall be without liability of any party to any
other party except as provided in Section 4 hereof, and provided further that
Sections 1, 6 and 7 shall survive such termination and remain in full force and
effect.
SECTION 10. DEFAULT BY ONE OR MORE OF THE UNDERWRITERS. If one
or more of the Underwriters shall fail at Closing Time or a Date of Delivery to
purchase the Securities which it or they are obligated to purchase under this
Agreement (the "Defaulted Securities"), the Representatives shall have the
right, within 24 hours thereafter, to make arrangements for one or more of the
non-defaulting Underwriters, or any other underwriters, to purchase all, but not
less than all, of the Defaulted Securities in such amounts as may be agreed upon
and upon the terms herein set forth; if, however, the Representatives shall not
have completed such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10%
of the number of Securities to be purchased on such date, each of the
non-defaulting Underwriters shall be obligated, severally and not
jointly, to purchase the full amount thereof in the proportions that
their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the
number of Securities to be purchased on such date, this Agreement or,
with respect to any Date of Delivery which occurs after the Closing
Time, the obligation of the Underwriters to purchase and of the Company
to sell the Option Securities to be purchased and sold on such Date of
Delivery shall terminate without liability on the part of any
non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any
defaulting Underwriter from liability in respect of its default.
23
<PAGE> 25
In the event of any such default which does not result in a
termination of this Agreement or, in the case of a Date of Delivery which is
after the Closing Time, which does not result in a termination of the obligation
of the Underwriters to purchase and the Company to sell the relevant Option
Securities, as the case may be, either the Representatives or the Company shall
have the right to postpone Closing Time or the relevant Date of Delivery, as the
case may be, for a period not exceeding seven days in order to effect any
required changes in the Registration Statement or Prospectus or in any other
documents or arrangements. As used herein, the term "Underwriter" includes any
person substituted for an Underwriter under this Section 10.
SECTION 11. NOTICES. All notices and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
mailed or transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representatives at North Tower, World
Financial Center, New York, New York 10281-1201, attention of Joel Van Dusen;
and notices to the Company shall be directed to it at 300 Phillipi Road, P.O.
Box 28512, Columbus, Ohio 43228-0512, attention of Albert J. Bell, Esq.
SECTION 12. PARTIES. This Agreement shall inure to the benefit
of and be binding upon each of the Underwriters and the Company and their
respective successors. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person, firm or corporation, other
than the Underwriters and the Company and their respective successors and the
controlling persons and officers and directors referred to in Sections 6 and 7
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision herein
contained. This Agreement and all conditions and provisions hereof are intended
to be for the sole and exclusive benefit of the Underwriters and the Company and
their respective successors, and said controlling persons and officers and
directors and their heirs and legal representatives, and for the benefit of no
other person, firm or corporation. No purchaser of Securities from any
Underwriter shall be deemed to be a successor by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK. SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
24
<PAGE> 26
SECTION 14. EFFECT OF HEADINGS. The Article and Section
headings herein and the Table of Contents are for convenience only and shall not
affect the construction hereof.
If the foregoing is in accordance with your understanding of
our agreement, please sign and return to the Company a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement between the Underwriters and the Company in accordance with its terms.
Very truly yours,
CONSOLIDATED STORES
CORPORATION
By
---------------------------
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
MONTGOMERY SECURITIES
MCDONALD & COMPANY SECURITIES, INC.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
-----------------------------------------
Title:
For themselves and as Representatives of the other Underwriters named in
Schedule A hereto.
<PAGE> 27
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
INITIAL
NAME OF UNDERWRITER SECURITIES
------------------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith Incorporated.............
Montgomery Securities..........................................
McDonald & Company Securities, Inc.............................
---------
Total.......................................................... 3,500,000
=========
</TABLE>
Sch A-1
<PAGE> 28
SCHEDULE B
CONSOLIDATED STORES CORPORATION
3,500,000 Shares of Common Stock
(Par Value $.01 Per Share)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $_________________.
2. The purchase price per share for the Securities to be paid by the
several Underwriters shall be $________________, being an amount equal to the
initial public offering price set forth above less $________________ per share;
provided that the purchase price per share for any Option Securities purchased
upon the exercise of the over-allotment option described in Section 2(b) shall
be reduced by an amount per share equal to any dividends or distributions
declared by the Company and payable on the Initial Securities but not payable
on the Option Securities.
Sch B-1
<PAGE> 29
SCHEDULE C
<TABLE>
<CAPTION>
MATERIAL SUBSIDIARIES
JURISDICTION
OF
COMPANY ORGANIZATION
- ------- ------------
<S> <C>
T.R.O., INC IL
CONSOLIDATED STORES CORPORATION OH
C.S. ROSS COMPANY OH
CSIC VENTURE, INC. DE
INDUSTRIAL PRODUCTS OF NEW ENGLAND, INC. ME
BARN ACQUISITION CORPORATION DE
FASHION BARN, INC. NY
MIDWESTERN HOME PRODUCTS, INC. DE
TOOL AND SUPPLY COMPANY OF NEW ENGLAND, INC. DE
SS INVESTMENTS CORPORATION DE
CONSOLIDATED INTERNATIONAL EXPORT CORPORATION BARBADOS
KB CONSOLIDATED, INC. OH
KAY-BEE CENTER, INC.(1) CA
SOUTHDALE KAY-BEE TOY, INC.(2) MN
MALL OF AMERICA KAY-BEE TOY, INC.(3) MN
CW KAY-BEE, INC.(4) NY
K&K KAY-BEE, INC.(5) VA
KAY-BEE TOY & HOBBY SHOPS, INC.(5) MA
</TABLE>
- --------
1 Subsidiary of KB Consolidated, Inc.
2 Subsidiary of Kay-Bee Center, Inc.
3 Subsidiary of Southdale Kay-Bee Toy, Inc.
4 Subsidiary of Mall of America Kay-Bee Toy, Inc.
Sch C-1
<PAGE> 30
SCHEDULE D
List of Persons and Entities
Subject to Lock-Up
William G. Kelley
Michael L. Glazer
Albert J. Bell
Michael J. Potter
James A. McGrady
Mark D. Shapiro
James E. Eggenschwiler
David T. Kollat
Nathan P. Morton
Dennis B. Tishkoff
William A. Wickham
Sheldon M. Berman
Donald A. Mierzwa
Kent A. W. Larson
C. Matthew Hunnell
Charles Freidenberg
Brad A. Waite
M. Steven Bromet
Sch D-1
<PAGE> 31
Exhibit A
FORMS OF OPINION OF COMPANY'S COUNSELS
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
A. Form of Opinion of Benesch, Friedlander, Coplan & Aronoff, P.L.L.
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware.
(ii) The Company has corporate power and authority to own,
lease and operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Purchase
Agreement.
(iii) The Company is duly qualified as a foreign corporation
to transact business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify or
to be in good standing would not result in a Material Adverse Effect.
(iv) The Securities have been duly authorized for issuance and
sale to the Underwriters pursuant to the Purchase Agreement and, when issued and
delivered by the Company pursuant to the Purchase Agreement against payment of
the consideration set forth in the Purchase Agreement, will be validly issued
and fully paid and non-assessable and no holder of the Securities is or will be
subject to personal liability by reason of being such a holder.
(v) The issuance of the Securities is not subject to the
preemptive or other similar rights of any securityholder of the Company.
(vi) Each Material Subsidiary (listed on Schedule C to the
Purchase Agreement) has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus and is
duly qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required, whether
by reason of the ownership or leasing of property or the conduct of business,
except where the failure so to qualify or to be in good standing would not
result in a Material Adverse Effect; except as otherwise disclosed in the
Registration Statement, all of the issued and outstanding capital stock of each
Material Subsidiary has been duly authorized and validly issued, is fully paid
and non-assessable and, to the best of our knowledge and information, is owned
by the Company, directly or through subsidiaries, free and clear of any security
interest, mortgage,
A-1
<PAGE> 32
pledge, lien, encumbrance, claim or equity; none of the outstanding shares of
capital stock of any Material Subsidiary was issued in violation of the
preemptive or similar rights of any securityholder of such Material Subsidiary.
(vii) The Purchase Agreement has been duly authorized,
executed and delivered by the Company.
(viii) We have been advised by the Staff of the Commission
that the Registration Statement, including any Rule 462(b) Registration
Statement, has been declared effective under the 1933 Act; any required filing
of the Prospectus pursuant to Rule 424(b) has been made in the manner and within
the time period required by Rule 424(b); and, to the best of our knowledge, no
stop order suspending the effectiveness of the Registration Statement or any
Rule 462(b) Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or threatened
by the Commission.
(ix) The Registration Statement, including any Rule 462(b)
Registration Statement, the Rule 430A Information and the Rule 434 Information,
as applicable, the Prospectus, excluding the documents incorporated by reference
therein, and each amendment or supplement to the Registration Statement and
Prospectus, excluding the documents incorporated by reference therein, as of
their respective effective or issue dates (other than the financial statements
and supporting schedules included therein or omitted therefrom, as to which we
need express no opinion) appear on their face to have been appropriately
responsive in all material respects with the requirements of the 1933 Act and
the 1933 Act Regulations.
(x) The documents incorporated by reference in the Prospectus
(other than the financial statements and supporting schedules included therein
or omitted therefrom, as to which we need express no opinion), when they were
filed with the Commission, complied as to form in all material respects with the
requirements of the 1934 Act and the rules and regulations of the Commission
thereunder.
(xi) To the best of our knowledge, there is not pending or
threatened any action, suit, proceeding, inquiry or investigation, to which the
Company or any Material Subsidiary is a party, or to which the property of the
Company or any Material Subsidiary is subject, before or brought by any court or
governmental agency or body, domestic or foreign, which might reasonably be
expected to result in a Material Adverse Effect, or which might reasonably be
expected to materially and adversely affect the properties or assets thereof
or the consummation of the transactions contemplated in the Purchase Agreement
or the performance by the Company of its obligations thereunder.
(xii) The information in the Prospectus under "Acquisition of
Kay-Bee Center, Inc." and "Description of Capital Stock" and in the Registration
Statement under Item 15, to the extent that it constitutes matters of law,
summaries of legal matters, the
A-2
<PAGE> 33
Company's charter and bylaws or legal proceedings, or legal conclusions, has
been reviewed by us and is correct in all material respects.
(xiii) To the best of our knowledge, there are no statutes or
regulations that are required to be described in the Prospectus that are not
described as required.
(xiv) All descriptions in the Registration Statement of
contracts and other documents to which the Company or its Material Subsidiaries
are a party are accurate in all material respects; to the best of our knowledge,
there are no franchises, contracts, indentures, mortgages, loan agreements,
notes, leases or other instruments required to be described or referred to in
the Registration Statement or to be filed as exhibits thereto other than those
described or referred to therein or filed or incorporated by reference as
exhibits thereto, and the descriptions thereof or references thereto are correct
in all material respects.
(xv) To the best of our knowledge, neither the Company nor any
Material Subsidiary is in violation of its charter or by-laws and no default by
the Company or any Material Subsidiary exists in the due performance or
observance of any material obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, loan agreement, note, lease or
other agreement or instrument that is described or referred to in the
Registration Statement or the Prospectus or filed or incorporated by reference
as an exhibit to the Registration Statement.
(xvi) No filing with, or authorization, approval, consent,
license, order, registration, qualification or decree of, any court or
governmental authority or agency, domestic or foreign (other than under the 1933
Act and the 1933 Act Regulations, which have been obtained, or as may be
required under the securities or blue sky laws of the various states, as to
which we need express no opinion) is necessary or required in connection with
the due authorization, execution and delivery of the Purchase Agreement or for
the offering, issuance, sale or delivery of the Securities.
(xvii) The execution, delivery and performance of the Purchase
Agreement and the consummation of the transactions contemplated in the Purchase
Agreement and in the Registration Statement (including the issuance and sale of
the Securities and the use of the proceeds from the sale of the Securities as
described in the Prospectus under the caption "Use of Proceeds") and compliance
by the Company with its obligations under the Purchase Agreement do not and will
not, whether with or without the giving of notice or lapse of time or both,
conflict with or constitute a breach of, or default or Repayment Event (as
defined in Section 1(a)(xi) of the Purchase Agreement) under or result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any Material Subsidiary pursuant to any contract,
indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any
other agreement or instrument, known to us, to which the Company or any Material
Subsidiary is a party or by which it or any of them may be bound, or to which
any of the property or assets of the Company or any Material Subsidiary is
subject (except for such conflicts, breaches or defaults or liens, charges or
encumbrances
A-3
<PAGE> 34
that would not have a Material Adverse Effect), nor will such action result in
any violation of the provisions of the charter or by-laws of the Company or any
Material Subsidiary, or any applicable law, statute, rule, regulation, judgment,
order, writ or decree, known to us, of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over the
Company or any Material Subsidiary or any of their respective properties, assets
or operations.
(xviii) The Rights under the Company's Stockholder's Rights
Agreement to which holders of the Securities will be entitled have been duly
authorized and validly issued.
Nothing has come to our attention that would lead us to
believe that the Registration Statement or any amendment thereto, including the
Rule 430A Information and Rule 434 Information (if applicable) (except for
financial statements and schedules and other financial data included or
incorporated by reference therein or omitted therefrom, as to which we make no
statement), at the time such Registration Statement or any such amendment became
effective, contained an untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus or any amendment or
supplement thereto (except for financial statements and schedules and other
financial data included or incorporated by reference therein or omitted
therefrom, as to which we need make no statement), at the time the Prospectus
was issued, at the time any such amended or supplemented prospectus was issued
or at the Closing Time, included or includes an untrue statement of a material
fact or omitted or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
In rendering such opinion, such counsel may rely as to matters
of fact (but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Company and public officials. Such
opinion shall not state that it is to be governed or qualified by, or that it is
otherwise subject to, any treatise, written policy or other document relating to
legal opinions, including, without limitation, the Legal Opinion Accord of the
ABA Section of Business Law (1991).
To the extent such opinion involves matters governed by laws
of jurisdictions other than the State of Ohio, the State of New York, the
general corporation law of the State of Delaware and the federal laws of the
United States of America, such counsel may assume that the laws of such
jurisdictions are the same in substantive effect as the laws of the State of
Ohio.
B. Form of Opinion of Albert Bell, General Counsel
(i) The authorized, issued and outstanding capital stock of
the Company is as set forth in the Prospectus in the column entitled "Actual"
under the caption "Capitalization" (except for subsequent issuances, if any,
pursuant to the Purchase
A-4
<PAGE> 35
Agreement or pursuant to reservations, agreements or employee benefit plans
referred to in the Prospectus or pursuant to the exercise of convertible
securities or options referred to in the Prospectus); the shares of issued and
outstanding capital stock of the Company have been duly authorized and validly
issued and are fully paid and non-assessable; and none of the outstanding shares
of capital stock of the Company was issued in violation of the preemptive or
other similar rights of any securityholder of the Company.
(ii) The form of certificate used to evidence the Common Stock
complies in all material respects with all applicable statutory requirements,
with any applicable requirements of the charter and by-laws of the Company and
the requirements of the New York Stock Exchange.
(iii) The information in the Prospectus under
"Business--Properties" and "Business--Legal Proceedings", to the extent that it
constitutes matters of law, summaries of legal matters, the Company's charter
and bylaws or legal proceedings, or legal conclusions, has been reviewed by me
and is correct in all material respects.
(iv) To the best of my knowledge, there are no statutes or
regulations that are required to be described in the Prospectus that are not
described as required.
In rendering such opinion, such counsel may rely as to matters
of fact (but not as to legal conclusions), to the extent he deems proper, on
certificates of responsible officers of the Company and public officials. Such
opinion shall not state that it is to be governed or qualified by, or that it is
otherwise subject to, any treatise, written policy or other document relating to
legal opinions, including, without limitation, the Legal Opinion Accord of the
ABA Section of Business Law (1991).
A-5
<PAGE> 36
Exhibit B
May __, 1996
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
McDonald & Company Securities, Inc.
Montgomery Securities
as Representatives of the several
Underwriters to be named in the
within-mentioned Purchase Agreement
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: PROPOSED PUBLIC OFFERING BY CONSOLIDATED STORES CORPORATION
-----------------------------------------------------------
Dear Sirs:
The undersigned, a stockholder and an officer and/or director
of Consolidated Stores Corporation, a Delaware corporation (the "Company"),
understands that Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"), McDonald & Company Securities, Inc. and
Montgomery Securities propose to enter into a Purchase Agreement (the "Purchase
Agreement") with the Company providing for the public offering of shares (the
"Securities") of the Company's common stock, par value $.01 per share (the
"Common Stock"). In recognition of the benefit that such an offering will confer
upon the undersigned as a stockholder and an officer and/or director of the
Company, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the undersigned agrees with each
underwriter to be named in the Purchase Agreement that, during a period of 150
days from the date of the Purchase Agreement, the undersigned will not, without
the prior written consent of Merrill Lynch, directly or indirectly, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of, or otherwise dispose of or transfer any shares of the Company's
Common Stock or any securities convertible into or exchangeable or exercisable
for Common Stock, whether now owned or hereafter acquired by the undersigned or
with respect to which the undersigned has or hereafter acquires the power of
disposition, or file any registration statement under the Securities Act of
1933, as amended, with respect to any of the foregoing or (ii) enter into any
swap or any other agreement or any transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of the
Common Stock,
B-1
<PAGE> 37
whether any such swap or transaction is to be settled by delivery of Common
Stock or other securities, in cash or otherwise. The foregoing sentence shall
not apply to (A) the sale of Common Stock pursuant to a tender offer for all of
the outstanding shares of Common Stock, or (B) the sale or other transfer of the
Common Stock in a merger or consolidation of the Company.
Very truly yours,
Signature:
----------------------
Print Name:
---------------------
B-2
<PAGE> 38
Annex A
FORM OF ACCOUNTANTS' COMFORT LETTER PURSUANT TO SECTION 5(e)
[Deloitte & Touche LLP]
We are independent public accountants with respect to the Company within the
meaning of the 1933 Act and the applicable published 1933 Act Regulations
(i) in our opinion, the audited financial statements included
or incorporated by reference in the Registration Statement and the
Prospectus comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published
rules and regulations thereunder;
(ii) on the basis of procedures (but not an examination in
accordance with generally accepted auditing standards) consisting of a
reading of the unaudited interim consolidated financial statements of
the Company for the three-month periods ended May 4, 1996 and April 29,
1995, included in the Registration Statement and the Prospectus (the
"three-month financials"), a reading of the minutes of all meetings of
the stockholders and directors of the Company and its subsidiaries and
the Audit and Compensation Committees of the Company's Board of
Directors since February 4, 1996 and inquiries of certain officials of
the Company and its subsidiaries responsible for financial and
accounting matters, with respect to the three-month periods ended May
4, 1996 and April 29, 1995 and such other inquiries and procedures as
may be specified in such letter, nothing came to our attention that
caused us to believe that:
(a) the three-month financials included in the
Registration Statement and the Prospectus do not comply as to
form in all material respects with the applicable accounting
requirements of the 1933 Act and the 1933 Act Regulations
applicable to unaudited interim financial statements included
in registration statements or any material modifications
should be made to the three-month financials included in the
Registration Statement and the Prospectus for them to be in
conformity with generally accepted accounting principles;
(b) at a specified date not more than five days prior
to the date of this Agreement, there was any change in the
Capital Stock of the Company and its subsidiaries or any
decrease in the consolidated net current assets or
stockholders' equity of the Company and its subsidiaries or
any increase in the long-term debt of the Company and its
subsidiaries, in each case as compared with amounts shown in
the latest balance sheet included in the Registration
Annex A-1
<PAGE> 39
Statement, except in each case for changes, decreases or
increases that the Registration Statement discloses have
occurred or may occur;
(c) for the period from May 4, 1996 to a specified
date not more than five days prior to the date of this
Agreement, there was any decrease in consolidated net sales,
total or per share amounts of income before extraordinary
items or of net income in each case as compared with the
comparable period in the preceding year, except in each case
for any decreases that the Registration Statement discloses
have occurred or may occur;
(iii) based upon the procedures set forth in clause (ii) above
and a reading of the Selected Historical Financial Data included in the
Registration Statement and a reading of the financial statements from
which such data were derived, nothing came to our attention that caused
us to believe that the Selected Historical Financial Data included in
the Registration Statement do not comply as to form in all material
respects with the disclosure requirements of Item 301 of Regulation S-K
of the 1933 Act, that the amounts included in the Selected Historical
Financial Data are not in agreement with the corresponding amounts in
the audited consolidated financial statements for the respective
periods or that the financial statements not included in the
Registration Statement from which certain of such data were derived are
not in conformity with generally accepted accounting principles;
(iv) we have compared the information in the Registration
Statement under selected captions with the disclosure requirements of
Regulation S-K of the 1933 Act and on the basis of limited procedures
specified herein, nothing came to our attention that caused us to
believe that this information does not comply as to form in all
material respects with the disclosure requirements of Items 302, 402
and 503(d), respectively, of Regulation S-K;
(v) based upon the procedures set forth in clause (ii) above,
a reading of the unaudited financial statements of the Company for
[the period] that have not been included in the Registration
Statement. Nothing came to our attention that caused us to believe
that the unaudited amounts for the [most recent period] do not agree
with the amounts set forth in the unaudited consolidated financial
statements for those periods or that such unaudited amounts were not
determined on a basis substantially consistent with that of the
corresponding amounts in the audited consolidated financial
statements;
(vi) we are unable to and do not express any opinion on the
Pro Forma Combined Financial Statements (the "Pro Forma Statement")
included in the Registration Statement or on the pro forma adjustments
applied to the historical amounts included in the Pro Forma Statement;
however, for purposes of this letter we have:
Annex A-2
<PAGE> 40
(A) read the Pro Forma Statement;
(B) performed an audit of the financial
statements to which the pro forma adjustments were applied;
(C) made inquiries of certain officials of the
Company who have responsibility for financial and accounting
matters about the basis for their determination of the pro
forma adjustments and whether the Pro Forma Statement complies
as to form in all material respects with the applicable
accounting requirements of Rule 11-02 of Regulation S-X; and
(D) proved the arithmetic accuracy of the
application of the pro forma adjustments to the historical
amounts in the Pro Forma Statement; and
on the basis of such procedures and such other inquiries and procedures
as specified herein, nothing came to our attention that caused us to
believe that the Pro Forma Statement included in the Registration
Statement does not comply as to form in all material respects with the
applicable requirements of Rule 11-02 of Regulation S-X or that the pro
forma adjustments have not been properly applied to the historical
amounts in the compilation of those statements; and
(vii) in addition to the procedures referred to in clause (ii)
above, we have performed other procedures, not constituting an audit,
with respect to certain amounts, percentages, numerical data and
financial information appearing in the Registration Statement, which
are specified herein, and have compared certain of such items with, and
have found such items to be in agreement with, the accounting and
financial records of the Company.
Annex A-3
<PAGE> 41
Annex B
FORM OF ACCOUNTANTS' COMFORT LETTER PURSUANT TO SECTION 5(e)
[KPMG Peat Marwick LLP]
We are independent public accountants with respect to Kay-Bee Center, Inc.
("Kay-Bee") within the meaning of the 1933 Act and the applicable published 1933
Act Regulations
(i) in our opinion, the audited financial statements and the
related financial statement schedules of Kay-Bee included or
incorporated by reference in the Registration Statement and the
Prospectus comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published
rules and regulations thereunder;
(ii) on the basis of procedures (but not an examination in
accordance with generally accepted auditing standards) consisting of a
reading of the unaudited interim consolidated financial statements of
Kay-Bee for the three-month periods ended March 31, 1996 and March 31,
1995, included or incorporated by reference in the Registration
Statement and the Prospectus (the "10-Q Financials"), a reading of the
minutes of all meetings of the stockholders and directors of Kay-Bee
and its subsidiaries since March 31, 1996, inquiries of certain
officials of Kay-Bee and its subsidiaries responsible for financial and
accounting matters, a review of interim financial information in
accordance with standards established by the American Institute of
Certified Public Accountants in Statement on Auditing Standards No. 71,
Interim Financial Information ("SAS 71"), with respect to the
three-month periods ended March 31, 1996 and March 31, 1995 and such
other inquiries and procedures as may be specified in such letter,
nothing came to our attention that caused us to believe that:
(a) the 10-Q Financials included in the Registration
Statement and the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements
of the 1934 Act and the 1934 Act Regulations applicable to
unaudited interim financial statements included in Form 10-Q
or any material modifications should be made to the 10-Q
Financials included in the Registration Statement and the
Prospectus for them to be in conformity with generally
accepted accounting principles;
(b) at April 30, 1996 and at May 4, 1996, there was
any change in the Capital Stock of Kay-Bee and its
subsidiaries or any decrease in the consolidated net current
assets or stockholders' equity of Kay-Bee and its subsidiaries
or any increase in the long-term debt of Kay-Bee and its
subsidiaries, in each case as compared with amounts shown in
the latest balance sheet included in the Registration
Statement, except in each case for
Annex B-1
<PAGE> 42
changes, decreases or increases that the Registration
Statement discloses have occurred or may occur; or
(c) for the period from March 31, 1996 to April 30,
1996 and for the period from April 30, 1996 to May 4, 1996,
there was any decrease in consolidated net sales, total or per
share amounts of income before extraordinary items or of net
income in each case as compared with the comparable period in
the preceding year, except in each case for any decreases that
the Registration Statement discloses have occurred or may
occur;
(iii) based upon the procedures set forth in clause (ii) above
and a reading of the Selected Historical Financial Data included in the
Registration Statement and a reading of the financial statements from
which such data were derived, nothing came to our attention that caused
us to believe that the Selected Historical Financial Data included in
the Registration Statement do not comply as to form in all material
respects with the disclosure requirements of Item 301 of Regulation S-K
of the 1933 Act, that the amounts included in the Selected Historical
Financial Data are not in agreement with the corresponding amounts in
the audited consolidated financial statements for the respective
periods or that the financial statements not included in the
Registration Statement from which certain of such data were derived are
not in conformity with generally accepted accounting principles;
(iv) we have compared the information in the Registration
Statement under selected captions with the disclosure requirements of
Regulation S-K of the 1933 Act and on the basis of limited procedures
specified herein, nothing came to our attention that caused us to
believe that this information does not comply as to form in all
material respects with the disclosure requirements of Items 302, 402
and 503(d), respectively, of Regulation S-K; and
[(v) based upon the procedures set forth in clause (ii) above,
a reading of the unaudited financial statements of the Company for [the
most recent period] that have not been included in the Registration
Statement and a review of such financial statements in accordance with
SAS 71, nothing came to our attention that caused us to believe that
the unaudited amounts for __________ [the most recent period] do not
agree with the amounts set forth in the unaudited consolidated
financial statements for those periods or that such unaudited amounts
were not determined on a basis substantially consistent with that of
the corresponding amounts in the audited consolidated financial
statements.]
Annex B-2
<PAGE> 43
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PURCHASE AGREEMENT
<S> <C> <C> <C>
SECTION 1. REPRESENTATIONS AND WARRANTIES...................................................................... 3
(a) Representations and Warranties by the Company................................................. 3
(i) COMPLIANCE WITH REGISTRATION REQUIREMENTS............................................ 3
(ii) INCORPORATED DOCUMENTS............................................................... 4
(iii) INDEPENDENT ACCOUNTANTS.............................................................. 4
(iv) FINANCIAL STATEMENTS................................................................. 4
(v) NO MATERIAL ADVERSE CHANGE IN BUSINESS............................................... 5
(vi) GOOD STANDING OF THE COMPANY......................................................... 5
(vii) GOOD STANDING OF SUBSIDIARIES........................................................ 5
(viii) CAPITALIZATION....................................................................... 6
(ix) AUTHORIZATION OF AGREEMENT........................................................... 6
(x) AUTHORIZATION AND DESCRIPTION OF SECURITIES.......................................... 6
(xi) ABSENCE OF DEFAULTS AND CONFLICTS.................................................... 6
(xii) ABSENCE OF LABOR DISPUTE............................................................. 7
(xiii) ABSENCE OF PROCEEDINGS............................................................... 7
(xvii) POSSESSION OF LICENSES AND PERMITS................................................... 8
(xviii) TITLE TO PROPERTY.................................................................... 8
(xix) COMPLIANCE WITH CUBA ACT............................................................. 9
(xx) ENVIRONMENTAL LAWS................................................................... 9
(xxi) STOCK PURCHASE AGREEMENT IN EFFECT................................................... 9
(b) Officer's Certificates........................................................................ 10
SECTION 2. SALE AND DELIVERY TO UNDERWRITERS; CLOSING.......................................................... 10
(a) Initial Securities............................................................................ 10
(b) Option Securities............................................................................. 10
(c) Payment....................................................................................... 11
(d) Denominations; Registration................................................................... 11
SECTION 3. COVENANTS OF THE COMPANY............................................................................ 12
(a) Compliance with Securities Regulations and Commission Requests................................ 12
(b) Filing of Amendments.......................................................................... 12
(c) Delivery of Registration Statements........................................................... 12
(d) Delivery of Prospectuses...................................................................... 13
(e) Continued Compliance with Securities Laws..................................................... 13
(f) Blue Sky Qualifications....................................................................... 13
(g) Rule 158...................................................................................... 14
(h) Use of Proceeds............................................................................... 14
(i) Listing....................................................................................... 14
</TABLE>
i
<PAGE> 44
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(j) Restriction on Sale of Securities............................................................. 14
(k) Reporting Requirements........................................................................ 14
SECTION 4. PAYMENT OF EXPENSES................................................................................. 15
(a) Expenses...................................................................................... 15
(b) Termination of Agreement...................................................................... 15
SECTION 5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS............................................................. 15
(a) Effectiveness of Registration Statement....................................................... 15
(b) Opinions of Counsels for the Company.......................................................... 16
(c) Opinion of Counsel for Underwriters........................................................... 16
(d) Officers' Certificate......................................................................... 16
(e) Accountants' Comfort Letters.................................................................. 17
(f) Bring-down Comfort Letter..................................................................... 17
(g) Approval of Listing........................................................................... 17
(h) No Objection.................................................................................. 17
(i) Lock-up Agreements............................................................................ 17
(j) Stock Purchase Agreement...................................................................... 17
(k) Conditions to Purchase of Option Securities................................................... 17
(i) OFFICERS' CERTIFICATE................................................................ 18
(ii) OPINION OF COUNSEL FOR COMPANY....................................................... 18
(iii) OPINION OF COUNSEL FOR UNDERWRITERS.................................................. 18
(iv) BRING-DOWN COMFORT LETTER............................................................ 18
(l) Additional Documents.......................................................................... 18
(m) Termination of Agreement...................................................................... 18
SECTION 6. INDEMNIFICATION..................................................................................... 19
(a) Indemnification of Underwriters............................................................... 19
(b) Indemnification of Company, Directors and Officers............................................ 20
(c) Actions Against Parties; Notification......................................................... 20
(d) Settlement Without Consent if Failure to Reimburse............................................ 21
SECTION 7. CONTRIBUTION........................................................................................ 21
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY...................................... 22
SECTION 9. TERMINATION OF AGREEMENT............................................................................ 22
(a) Termination; General.......................................................................... 22
(b) Liabilities................................................................................... 23
SECTION 10. DEFAULT BY ONE OR MORE OF THE UNDERWRITERS......................................................... 23
SECTION 11. NOTICES............................................................................................ 24
</TABLE>
ii
<PAGE> 45
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SECTION 12. PARTIES............................................................................................ 24
SECTION 13. GOVERNING LAW AND TIME............................................................................. 24
SECTION 14. EFFECT OF HEADINGS................................................................................. 25
</TABLE>
iii
<PAGE> 1
EXHIBIT 5
May 22, 1996
Board of Directors
Consolidated Stores Corporation
300 Phillipi Road
P.O. Box 28512
Columbus, Ohio 43228-0512
Re: Consolidated Stores Corporation Registration Statement on Form S-3
Gentlemen:
It is our understanding that Consolidated Stores Corporation, a Delaware
corporation (the "Company"), intends to file with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended, a Registration
Statement on Form S-3 (Registration Statement No. 333-2545) (the "Registration
Statement"), which Registration Statement relates to a proposed public offering
of 5,750,000 shares of common stock, par value $.01 per share, of the Company
(the "Shares") (including 750,000 Shares subject to an underwriters'
over-allotment option), to be issued pursuant to the terms of a purchase
agreement to be executed by the Company, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Montgomery Securities and McDonald & Company Securities, Inc. as
representatives of the other underwriters named in Schedule A thereto (the
"Purchase Agreement").
You have requested our opinion in connection with the Company's filing of
the Registration Statement. In this regard, we have examined and relied on
originals or copies, certified or otherwise identified to our satisfaction as
being true copies, of all such records of the Company, all such agreements,
certificates of officers of the Company and others, and such other documents,
certificates and corporate or other records as we have deemed necessary as a
basis for the opinion expressed in this letter including, without limitation,
the Purchase Agreement, the Company's Certificate of Incorporation and the
Registration Statement.
In our examination, we have assumed the genuineness of all signatures, the
legal capacity of all natural persons, the authenticity of all documents
submitted to us as originals and the conformity to original documents of all
documents submitted to us as certified or photostatic copies. As to facts
material to the opinions expressed in this letter, we have relied on statements
and certificates of officers of the Company and of state authorities.
We have investigated such questions of law for the purpose of rendering the
opinion in this letter as we have deemed necessary. We express no opinion in
this letter concerning any law other than the General Corporation Law of the
State of Delaware.
The opinion expressed herein assumes that there is no change in the facts,
circumstances and law in effect on the date of this opinion, particularly as
they relate to corporate authority and the Company's good standing under
Delaware law.
On the basis of and in reliance on the foregoing, we are of the opinion
that the Shares, when sold pursuant to the Purchase Agreement will be validly
issued, fully paid and nonassessable.
The opinions in this letter are rendered to the Company in connection with
the filing of the Registration Statement. We hereby consent to the filing of
this opinion as an exhibit to the Registration Statement and to being named in
the Registration Statement under the heading "Legal Matters" as counsel to the
Company.
Very truly yours,
BENESCH, FRIEDLANDER,
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-2545 of Consolidated Stores Corporation of our report dated February 26,
1996 (March 25, 1996 as to Note on Proposed Acquisition), appearing in the
Prospectus, which is part of this Registration Statement and to the reference to
us under the headings "Selected Historical Financial Data" and "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Dayton, Ohio
May 17, 1996
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors
Melville Corporation:
We consent to the use in this Amendment No. 2 to the Registration Statement
of Consolidated Stores Corporation on Form S-3 (No. 333-2545) of our report on
the consolidated financial statements of Kay-Bee Center, Inc. and subsidiaries
as of December 31, 1995, 1994 and 1993, and for each of the years in the three-
year period ended December 31, 1995, and to the references to our firm under the
headings "Selected Historical Financial Data" and "Experts" in the prospectus
included in the Registration Statement.
KPMG Peat Marwick LLP
Albany, New York
May 21, 1996
