<PAGE> 1
Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT FILED PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998 Commission file number 1-8897
CONSOLIDATED STORES CORPORATION
A Delaware Corporation
IRS No. 06-1119097
1105 North Market Street, Suite 1300
P. O. Box 8985
Wilmington, Delaware 19899
(302) 478-4896
Indicate whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock $.01 par value per share, outstanding as of
December 8, 1998, was 109,494,855 and there were no shares of Nonvoting Common
Stock, $.01 par value per share outstanding at that date.
<PAGE> 2
CONSOLIDATED STORES CORPORATION
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Part II - Other Information
Items 1 - 6 12
Signature 13
</TABLE>
Page 2
<PAGE> 3
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
October 31, January 31,
1998 1998
- ----------------------------------------------------------------------------------------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 70,175 $ 41,714
Inventories 1,484,377 910,668
Deferred income taxes 79,850 86,582
Other current assets 96,752 68,510
- ----------------------------------------------------------------------------------------- ----------
Total current assets 1,731,154 1,107,474
- ----------------------------------------------------------------------------------------- ----------
Property and equipment - net 668,922 613,478
Other assets 22,586 25,429
- ----------------------------------------------------------------------------------------- ----------
$2,422,662 $1,746,381
- ----------------------------------------------------------------------------------------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 485,481 $ 280,117
Accrued liabilities and income taxes 89,022 173,208
Current maturities of long-term obligations 72,544 71,943
- ----------------------------------------------------------------------------------------- ----------
Total current liabilities 647,047 525,268
- ----------------------------------------------------------------------------------------- ----------
Long-term obligations 630,251 115,281
Deferred income taxes 72,965 71,290
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock - authorized 2,000 shares, $.01 par value:
none issued
Common stock - authorized 290,000 shares, $.01 par value; issued
109,488 and 107,796 shares, respectively 1,095 1,078
Nonvoting common stock - authorized 8,000 shares, $.01 par
value; none issued
Additional paid-in capital 382,287 335,038
Retained earnings 689,017 698,426
- ----------------------------------------------------------------------------------------- ----------
Total stockholders' equity 1,072,399 1,034,542
- ----------------------------------------------------------------------------------------- ----------
$2,422,662 $1,746,381
========================================================================================= ==========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
Page 3
<PAGE> 4
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
-------------------- -----------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 856,433 $ 859,559 $ 2,503,605 $2,439,203
Cost and expenses:
Cost of sales 504,110 492,003 1,469,048 1,419,803
Selling and administrative expenses 371,007 336,182 1,031,483 968,528
Interest expense 8,748 9,043 18,512 21,234
- -------------------------------------------------------------------------------------------------------------------
883,865 837,228 2,519,043 2,409,565
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (27,432) 22,331 (15,438) 29,638
Income taxes (benefit) (10,700) 8,709 (6,029) 11,559
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (16,732) $ 13,622 $ (9,409) $ 18,079
===================================================================================================================
Income (loss) per common share $ (0.15) $ 0.13 $ (0.09) $ 0.17
Income (loss) per common share - diluted $ (0.15) $ 0.12 $ (0.09) $ 0.16
Average common shares outstanding 109,473 107,565 109,099 107,512
Dilutive effect of stock options 4,730 4,511
- -------------------------------------------------------------------------------------------------------------------
Diluted 109,473 112,295 109,099 112,023
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
Page 4
<PAGE> 5
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
-----------------------
October 31, 1998 November 1, 1997
- ---------------------------------------------------------------------------------- ----------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ (9,409) $ 18,079
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 67,392 57,025
Deferred income taxes 9,328 13,306
Other 16,422 7,517
Change in assets and liabilities (480,774) (531,704)
- ---------------------------------------------------------------------------------- ----------------
Net cash used in operating activities (397,041) (435,777)
- ---------------------------------------------------------------------------------- ----------------
INVESTMENT ACTIVITIES:
Capital expenditures (124,692) (110,289)
Other 719 4,949
- ---------------------------------------------------------------------------------- ----------------
Net cash used for investment activities (123,973) (105,340)
- ---------------------------------------------------------------------------------- ----------------
FINANCING ACTIVITIES:
Proceeds from credit agreements, net 515,833 548,421
Payment of other debt , net (261) (238)
Proceeds from exercise of stock options 30,476 11,656
Increase in deferred credits 3,427 2,685
Purchase of Mac Frugal's treasury stock (21,236)
Other 373
- ---------------------------------------------------------------------------------- ----------------
Net cash provided by financing activities 549,475 541,661
- ---------------------------------------------------------------------------------- ----------------
Increase (decrease) in cash and cash equivalents $ 28,461 $ 544
================================================================================== ================
Supplemental Disclosure of Cash Flow Information:
Income taxes paid $ 45,363 $ 87,994
Interest paid $ 20,662 $ 24,407
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
Page 5
<PAGE> 6
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The condensed consolidated balance sheet at October 31, 1998, and the condensed
consolidated statements of income and statements of cash flows for the thirteen
and thirty-nine week periods ended October 31, 1998, have been prepared by the
Company without audit. In the opinion of management, all adjustments necessary
to present fairly the financial position, results of operations, and cash flows
at October 31, 1998, and for the thirteen and thirty-nine week periods presented
have been made. Such adjustments consisted only of normal recurring items.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principals
have been omitted or condensed. It is suggested that the condensed consolidated
financial statements be read in conjunction with the financial statements and
notes thereto included in the Company's Annual Report for the year ended January
31, 1998. The results of operations for the period ended October 31, 1998, may
not necessarily be indicative of the operating results for the full year.
NOTE 2 - BUSINESS COMBINATION
- -----------------------------
In January 1998, 23,371,639 common shares were issued in exchange for all
outstanding common shares of Mac Frugal's Bargains o Close-outs Inc. (Mac
Frugal's) a closeout retailer.
The combination constituted a tax-free reorganization and has been accounted for
as a pooling of interests. Accordingly, the accompanying financial statements
have been restated to include the accounts of Mac Frugal's.
In connection with the Mac Frugal's combination the Company recorded a charge in
the fourth quarter of 1997 to operating expense of $45,000,000 for direct and
other related costs pertaining to the combination. Merger transaction costs were
primarily comprised of fees for professional services, severance and similar
related costs. Additionally, the Company recorded a $70,000,000 charge to cost
of sales in the fourth quarter of 1997 for combination related expenses for
discontinued products, inventory consolidation and retail price equalization for
the combined inventories.
Details of the merger and other related costs before applicable taxes are as
follows:
<TABLE>
<CAPTION>
Provided for Utilized in
in fiscal -------------------------
(In thousands) 1997 1997 1998 Balance
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Inventory charges included in cost of sales $ 70,000 $ 10,137 $ 59,863 $
Merger transaction costs:
Professional fees and services 15,500 9,028 5,708 764
Employee severance/termination costs 22,000 12,002 4,331 5,667
Other 7,500 725 2,129 4,646
- ------------------------------------------------------------------------------------------------------------
Total merger transaction costs 45,000 21,755 12,168 11,077
- ------------------------------------------------------------------------------------------------------------
$115,000 $ 31,892 $ 72,031 $ 11,077
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Page 6
<PAGE> 7
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
OVERVIEW. Management's discussion and analysis has been prepared giving effect
to the pooling of interest business combination with Mac Frugal's Bargains o
Close-outs Inc. (Mac Frugal's) on January 16, 1998. Accordingly, the thirteen
and thirty-nine week periods ending October 31, 1998, operating results and cash
flows have been restated to reflect the business combination.
The Company's goal is to build upon its leadership position in closeout
retailing, a growing segment of the retailing industry, and toy retailing by
expanding its market presence in both existing and new markets. The Company
believes that the combination of its strengths in merchandising, purchasing,
site selection, distribution and cost-containment has made it a low-cost, value
retailer well-positioned for future growth.
The Company is the nation's largest closeout retailer and a leading toy retailer
with 2,403 stores located in all 50 states and Puerto Rico. The Company operates
1,091 retail closeout stores under the names Odd Lots, Big Lots, Mac Frugal's
Bargains o Close-outs, and Pic `N' Save (Closeout Stores) and 1,312 retail toy
and closeout toy stores primarily under the names KoB Toys, KoB Toy Works, and
KoB Toy Outlet (Toy Stores). The Company is the largest enclosed shopping
mall-based toy retailer in the United States. As a value retailer focused on
closeout merchandise, the Company seeks to provide the budget-conscious consumer
with a broad range of quality, name-brand products at exceptional values. The
Company's name-brand closeout merchandise primarily consists of products
obtained from manufacturers' excess inventories, which generally result from
production overruns, package changes, discontinued products and returns.
The Company has historically experienced, and expects to continue to experience,
seasonal fluctuations with a significant percentage of its net sales and income
being realized in the fourth fiscal quarter. In addition, the Company's
quarterly results can be affected by the timing of store openings and closings,
the amount of net sales contributed by new and existing stores and the timing of
certain holidays. Quarterly fluctuations in inventory balances are normal
reflecting the opportunistic purchases available at any given time and the
expansion of the Company's store base. Historically, on a per store basis,
inventory levels are lower at the end of the Company's fiscal year and build
through the remaining three quarters of the year to a peak level in the third
quarter. Accounts payable generally follows a trend similar to inventories.
The following tables compare components of the statement of income as a percent
of net sales and reflects the number of stores in operation at the end of each
period.
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
-------------------- -----------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
--------------- ---------------- ----------------- -----------------
(Percent to total net sales)
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0% 100.0 % 100.0%
Gross Profit 41.1 42.8 41.3 41.8
Selling and administrative expenses 43.3 39.1 41.2 39.7
- ----------------------------------------------------------------------------------------------------------------------
Operating profit (loss) (2.2) 3.7 0.1 2.1
Interest expense 1.0 1.1 0.7 0.9
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (3.2) 2.6 (0.6) 1.2
Income taxes (benefit) (1.2) 1.0 (0.2) 0.5
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) (2.0)% 1.6% (0.4)% 0.7%
======================================================================================================================
</TABLE>
Page 7
<PAGE> 8
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
October 31, 1998 November 1, 1997
----------------- -----------------
<S> <C> <C>
Retail stores in operation at end of period:
Closeout 1,091 1,002
Toy 1,312 1,246
----------------- -----------------
2,403 2,248
================= =================
</TABLE>
SALES. Net sales for the thirteen week period ended October 31, 1998, decreased
0.4% to $856.4 million from $859.6 million in the prior year period. Net sales
for the thirty-nine weeks ended October 31, 1998, were $2,503.6 million, a 2.6%
improvement to sales of the prior year to date period of $2,439.2 million.
Comparable store sales for stores open two years at the beginning of the fiscal
year decreased 4.7% for the quarter and 2.1% for the year to date period.
Sales in the closeout segment were negatively impacted by appreciably lower 1998
inventory levels in Odd Lots and Big Lots stores resulting from the strategic
realignment in merchandise mix to offer customers a wider selection of value
oriented brand name merchandise. Additionally, the continued integration of Mac
Frugal's operations with the Company's existing closeout operations and the
implementation of a new merchandise management system, as well as the startup of
a new distribution center, contributed to the lower store level inventories.
Restoration of Odd Lots and Big Lots store inventories to new planned levels was
substantially completed at the end of the third quarter of 1998.
Toy segment 1998 sales continue to be influenced by the timing of new toy
releases compared to 1997, a reduced sales volume associated with certain action
figures which occurred in the first half of 1997 and price adjustments on video
and related products.
Net sales by operating segment were as follows:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED ($ in thousands)
--------------------------------------------------------------
October 31, 1998 November 1, 1997
------------------------------- ------------------------------ Percentage
Operating Segment $ % $ % Change
- ---------------------------------------------- --------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Closeout $557,813 65.1% $570,791 66.4% (2.3)%
Toys 287,798 33.6 278,475 32.4 3.3
Other 10,822 1.3 10,293 1.2 5.1
- ---------------------------------------------- --------------- --------------- -------------- ---------------
$856,433 100.0% $859,559 100.0% (0.4)%
============================================== =============== =============== ============== ===============
</TABLE>
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED ($ in thousands)
--------------------------------------------------------------
October 31, 1998 November 1, 1997
------------------------------- ------------------------------ Percentage
$ % $ % Change
--------------- --------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Closeout $1,666,861 66.6% $1,628,844 66.8% 2.3%
Toys 806,034 32.2 780,081 32.0 3.3
Other 30,710 1.2 30,278 1.2 1.4
- ---------------------------------------------- --------------- --------------- -------------- ---------------
$2,503,605 100.0% $2,439,203 100.0% 2.6%
============================================== =============== =============== ============== ===============
</TABLE>
Page 8
<PAGE> 9
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Comparable store sales by operating segment were as follows:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
-------------------- -----------------------
October 31, November 1, October 31, November 1,
Operating Segment 1998 1997 1998 1997
- ------------------------------ ----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Closeout (6.2)% 3.4% (2.4)% 5.4%
Toys (1.6) 8.5 (1.6) 14.9
- ------------------------------------------------ ----------------- ----------------- ----------------
Total (4.7)% 5.1% (2.1)% 8.4%
============================== ================= ================= ================= ================
</TABLE>
GROSS PROFIT. Gross profit as a percent of net sales was 41.1% for the third
quarter of fiscal 1998 compared to 42.8% in the same 1997 period and was 41.3%
and 41.8% for the first nine months of fiscal 1998 and 1997, respectively. The
decline in gross profit percentage for the quarter reflects lower initial
markups in each of the Closeout and Toy segments. Closeout gross margin in the
quarter was negatively influenced by mix changes as well as more aggressive
pricing strategies in preparation for the holiday selling season. Toys is
primarily reflective of a continued mix shift toward the video game category.
For the year to date period Closeout Stores gross profit percentage is
reflective of a higher initial markup on the mix of inventories at fiscal 1997
year end offset in part by the impact of offering a increased selection of brand
name product. The decline in Toy Stores gross profit percentage is attributable
to the merchandise mix at fiscal 1997 year end which carried a lower initial
markup than the prior fiscal year end combined with the increase in video game
sales.
Components of gross profit as a percent to each operating segments sales were as
follows:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
-------------------- -----------------------
October 31, November 1, October 31, November 1,
Operating Segment 1998 1997 1998 1997
- ------------------------------ ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Closeout 41.6% 42.7% 42.7% 42.2%
Toys 40.9 43.6 39.1 41.6
Other 25.6 24.2 24.9 25.2
- ------------------------------ ----------------- ----------------- ----------------- -----------------
41.1% 42.8% 41.3% 41.8%
============================== ================= ================= ================= =================
</TABLE>
SELLING AND ADMINISTRATIVE EXPENSES. As a percent to net sales, selling and
administrative expenses were 43.3% and 39.1% in the third quarters of fiscal
1998 and 1997 and 41.2% and 39.7% in the respective 1998 and 1997 year to date
periods.
As inventory levels at the Odd Lots and Big Lots stores were restored closer to
planned levels throughout the third quarter of fiscal 1998 the company incurred
a higher than historical ratio of selling and administrative expenses. This, in
combination with the decline of fixed cost leverage from reduced third quarter
sales contributed to the rise in the percent of selling and administrative
expenses to net sales.
INTEREST EXPENSE. Interest expense decreased $0.2 million in the third quarter
of 1998 and declined $2.7 million, or 12.8%, in the year to date period. The
year to date reduction reflects lower weighted average debt levels for
borrowings utilized for inventory purchases and seasonal operating requirements
in addition to lower effective interest rates. The reduction of third quarter
1998 interest expense is principally associated with lower weighted average
interest rates for seasonal borrowings.
Page 9
<PAGE> 10
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INCOME TAXES. The effective tax rate of the Company is 39.0% in the first three
quarters of 1998 and comparative 1997 period.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
Working capital at October 31, 1998, was $1,084.1 million, a 86.2% increase
compared to $582.2 million at January 31, 1998. The primary sources of liquidity
for the Company has been, and continues to be, cash flow from operations and
borrowings under available credit facilities. Net cash used by operations in
each of the thirty-nine week periods ended October 31, 1998, and November 1,
1997, as detailed in the condensed consolidated statements of cash flows, was
$397.0 million and $435.8 million, respectively. The utilization by operations
in each of these periods is principally attributable to increased inventory
levels reflecting the greater number of stores in operation. Future comparisons
of funds used and provided by operations are anticipated to continue to
fluctuate as a result of these and other factors. Additionally, the Company had
capital expenditures of $124.7 million and $110.3 million in each respective
year to date period. Capital expenditures in 1998 are expected to be
approximately $180 million principally for new store openings, including
approximately 100 seasonal toy stores, plus capital requirements for warehouse
expansion and equipment needs.
As necessary, the Company supplemented its capital and operating cash
requirements with borrowings under available credit facilities. The Company's
Revolving Credit Facility (Revolver) has availability to $700 million for a five
year period, expiring in 2003. At October 31, 1998, approximately $101.6 million
was available for borrowings under the Revolver and an additional $155.0 million
of uncommitted credit facilities were available, subject to the terms of the
Revolver.
The Company continues to believe that it will have adequate resources to fund
ongoing operating requirements and future capital expenditures related to the
expansion of existing businesses and development of new projects. Additionally,
management is not aware of any current trends, events, demands, commitments, or
uncertainties which reasonably can be expected to have a material impact on the
liquidity, capital resources, financial position or results of operations of the
Company.
YEAR 2000
- ---------
The "Year 2000" issue arose because many existing computer programs use a
two-digit format, as opposed to four digits, to refer to a year. These programs,
if not corrected, could fail or create erroneous results after the century date
changes on January 1, 2000, or when otherwise dealing with dates later than
December 31, 1999. This "Year 2000" issue is believed to affect virtually all
companies and organizations, including the Company.
Since 1990 the Company has been evaluating, assessing and adjusting all known
date-sensitive systems and equipment for "Year 2000" compliance. The scope of
this effort includes internally developed information technology (IT) systems,
purchased and leased software, embedded systems, and electronic data interchange
transaction processing. The Company also instituted and maintains strict polices
regarding standards for all Network Servers and software, desktop and laptop
computers, operating systems, desktop software and applications, and
communication routers and hubs. The monitoring of "Year 2000" risks has
significantly enhanced the Company's readiness enabling the quick deployment and
testing of compliant hardware and software as it is developed. In 1996 the
Company initiated a "Year 2000" Compliance Committee which inventoried
internally developed production systems and identified those and the data files
which needed to be modified.
In 1997 all package software applications were evaluated to determine which were
not "Year 2000" compliant and a plan was developed for either updating or
eliminating these applications. Also evaluated to determine "Year 2000"
readiness were all computer hardware and operating systems including AS400's,
RISC 6000's, Tandems, Servers, PC's and Cash
Page 10
<PAGE> 11
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Registers. The evaluation phase of the "Year 2000" project is substantially
complete and included both IT, such as noted above, and non-IT equipment, such
as warehouse sortation and security systems.
Substantially all of the Company's operating IT systems are "Year 2000"
compliant and based on the assessment efforts to date, the Company does not
believe that the "Year 2000" issue will have a material adverse effect on its
financial condition or results of operations. However, all situations cannot be
anticipated and, there can be no assurance of timely compliance by third
parties, such as utility companies, government agencies or merchandise
suppliers, which may have an adverse effect on the Company. The Company operates
a large number of geographically dispersed stores and procures its merchandise
for resale and supplies for operational purposes from a vast network of vendors
located both within and outside the United States. The Company is not dependent
on any one vendor for more than 4% of its merchandise purchases. The established
relationships with key vendors are a valued asset, however, substitute products
for most of the goods available for sale in the closeout stores may be obtained
from other vendors. If certain vendors are unable to deliver product on a timely
basis, due to their own "Year 2000" issues, it is anticipated others would be
capable to deliver similar goods. Approximately 20% of the Company's merchandise
is imported, and any significant disruptions in the global transportation
industry, including a delay in the processing of merchandise through customs,
could cause a material adverse impact on the Company's operations. The Company
intends to allocate internal resources and retain dedicated consultants as
necessary to be ready to take action if these events occur.
To date, the Company has not established a formal contingency plan for possible
"Year 2000" issues. Where needed, the Company will establish contingency plans
based on actual testing experience and assessment of outside risks. It is
expected that any formal contingency plans will be in place by July 31, 1999.
The Company has incurred to date approximately $4 million of costs to implement
its "Year 2000" compliance program and presently expects to incur not more than
$2 million of additional costs in the aggregate. All of the Company's "Year
2000" compliance costs have been or are expected to be funded from the Company's
operating cash flow. The Company's "Year 2000" compliance budget does not
include material amounts for hardware replacement because the Company has
historically employed a strategy to continually upgrade its mainframe and
midrange computer systems and to update systems with respect to both preexisting
operations and in conjunction with the acquisitions and mergers effected by the
Company in recent years. Consequently, the Company's "Year 2000" budget has not
required the diversion of funds from or the postponement of the implementation
of other planned IT projects.
The cost of the conversions and the completion dates are based on management's
best estimates and may be updated as additional information becomes available.
Readers are referred to Item 5 of this report, which addresses forward-looking
statements made by the Company.
Page 11
<PAGE> 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. Not applicable.
Item 2. Changes in Securities. Not applicable.
Item 3. Defaults Upon Senior Securities. Not applicable.
Item 4. Submission of Matters to Vote of Security Holders.
No matter was submitted during the third quarter of the fiscal
year covered by this report to a vote of security holders.
Item 5. Other Information.
The Private Securities Litigation Reform Act of 1995 ("the
Act") provides a safe harbor for forward-looking statements
made by or on behalf of the Company. Certain statements
contained in Management's Discussion and Analysis and in other
Company filings are forward-looking statements. These
statements discuss among other things, expected growth, future
revenues, future cash flows and future performance. The
forward looking statements are subject to risks and
uncertainties including but not limited to competitive
pressures, inflation, consumer debt levels, currency exchange
fluctuations, trade restrictions, changes in tariff and
freight rates, capital market conditions, "Year 2000" date
conversion, and other risks indicated in the Company's filings
with the Securities and Exchange Commission. Actual results
may materially differ from anticipated results described in
these statements.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Document
----------- --------------------------------------------------------------------
<S> <C>
10 Employment Agreement with Michael L. Glazer dated September 25, 1998
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K. None.
Page 12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSOLIDATED STORES CORPORATION
-------------------------------
(Registrant)
Dated: December 8, 1998 By: /s/ Michael J. Potter
-------------------------------------------
Michael J. Potter, Executive Vice President,
Chief Financial Officer, and Principal
Accounting Officer
Page 13
<PAGE> 1
EXHIBIT 10
----------
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT is entered into as of the 25th day of September, 1998,
by and among K B TOY OF MASSACHUSETTS, INC., a Massachusetts corporation ("K B
Toy"), CONSOLIDATED STORES CORPORATION, a Delaware corporation and the ultimate
parent company of K B Toy ("CSC") (K B Toy and CSC are hereinafter jointly
referred to as "Employer"), and Michael L. Glazer, an individual residing in
Massachusetts ("Executive").
W I T N E S S E T H:
WHEREAS, Employer and Executive desire to enter into this Employment Agreement
to insure to Employer and Employer's direct and indirect subsidiaries the
services of Executive and to set forth the rights and duties of the parties
thereto; and
WHEREAS, Employer desires to utilize Employee's services and responsibilities in
a manner that will cause Employee to develop confidential and proprietary
information, strategies and practices, the disclosure or use of which by anyone
for the benefit of any person or entity other than Employer would cause
substantial and irreparable harm to Employer; and
WHEREAS, Employer and Employee acknowledge the need for certain restrictions
upon Employee's conduct subsequent to a termination of his employment with
Employer in order to protect Employer from such harm; and
WHEREAS, Employee desires to accept the nature and scope of services and
responsibilities, together with the compensation and other benefits described in
this Employment Agreement, in exchange for, among other things, the restrictions
described in this Employment Agreement which restrict Employee's conduct and
employment with other persons or entities subsequent to a termination of his
employment with Employer.
NOW, THEREFORE, in consideration of the mutual promises herein contained, the
parties agree as follows:
1. EMPLOYMENT; DUTIES.
------------------
(a) EMPLOYMENT. Employer hereby employs Executive and appoints him Chief
Executive Officer and President of CSC's group of affiliated K B Toy
entities commonly referred to internally as the "K B Toy Division,"
the financial aspects of which are included in CSC's annual report to
stockholders as the "Toy Division," as well as the Chief Executive
Officer and President of K B Toy (collectively, "President, Toy
Division"), with such duties as may from time to time be prescribed
by the Board of Directors of K B Toy and CSC and the Chief Executive
Officer of CSC, and Executive hereby accepts such employment, on the
terms and conditions hereinafter set forth.
(b) DUTIES. During the term of this Employment Agreement, Executive shall
devote his entire business time and attention to his employment and
perform diligently such duties as are customarily performed by a
divisional President of a company the size and structure of CSC and
its subsidiaries, together with, as of the date hereof, such other
duties as may be reasonably requested from time to time by the Chief
Executive Officer or the Board of Directors of CSC, which duties
shall be consistent with his position as set forth above and in
Paragraph 2 of this Employment Agreement. Executive shall cooperate
and work with all committees formed by the Board of Directors of CSC
including, but not limited to, the Audit Committee, the Compensation
1
<PAGE> 2
EXHIBIT 10
----------
Committee, and the Nominating Committee. As President, Toy Division,
Executive shall have the authority to implement the policies and
decisions of the Board of Directors of CSC and K B Toy and to assist
the Chief Executive Officer of CSC in directing Employer's business
strategy, development and operations. So long as Executive shall
serve as President, Toy Division, Executive shall report only to the
Board of Directors of each of CSC and K B Toy as well as the Chief
Executive Officer of CSC, and shall not be subject to the authority,
direction or discretion of any officer, whether in a position now
existing or hereafter created or appointed. If there shall occur,
with respect to the Executive, any of the following events: (i) any
diminution of duties or diminution in authority, title or office;
(ii) any assignment of duties inconsistent with his position as
President, Toy Division; (iii) any change in title to a title of
lesser authority; (iv) a material withdrawal of administrative
support, or a permanent assignment to office space inconsistent with
the position of President, Toy Division; (v) any reduction in
compensation not consistent with and equitably proportionate to
general reductions made in compensation of other executive officers
of CSC or K B Toy; or (vi) removal from the Board of Directors of
CSC, or the failure of management to renominate Executive for
membership on CSC's Board of Directors in connection with a meeting
of shareholders, then any such event shall be considered to be a
Change in Control of Employer and shall entitle Executive, in
addition to any other rights he may have, to the rights and remedies
provided in Paragraph 7(d) hereof; PROVIDED, HOWEVER, that Executive
shall notify Employer in writing of any such alleged event or events,
specifying the same, and Employer shall have a period of fifteen (15)
days after such notice to cure, remedy or rescind the actions,
circumstances or conditions causing or giving rise to such event or
events before Executive shall be entitled to exercise any such rights
and remedies. The right of Employer to cure any such alleged event or
events as set forth in the immediately preceding sentence shall be
applicable only in the event that a "Change in Control" shall have
occurred solely by reason of such modification or diminution of
duties or authority and shall not be applicable following the
occurrence of any Change in Control as defined in Paragraph 7(f)
below.
(c) FULL TIME AND ATTENTION. Except as expressly permitted herein,
Executive shall not, without the prior written consent of Employer,
directly or indirectly during the term of this Employment Agreement,
render services of a business, professional or commercial nature to
any other person or firm, whether for compensation or otherwise. So
long as it does not interfere with his full time employment
hereunder, Executive may (i) attend to outside investments and serve
as a director, trustee or officer of or otherwise participate in
educational, welfare, social, religious and civic organizations and
(ii) serve as a director of not more than two (2) public corporations
that are not engaged in the Company Business (as defined in Paragraph
9(a) hereof).
(d) BUSINESS DECISIONS. Executive shall have no liability to Employer for
any act or omission undertaken during the term of this Employment
Agreement in his good faith business judgment in furtherance of his
duties as prescribed in or under this Employment Agreement.
2. TERM AND POSITIONS.
(a) TERM. Subject to the provisions for termination as hereinafter
provided, the term of this Employment Agreement shall begin on May
19, 1998 and shall continue thereafter until Executive's employment
is terminated as provided in Paragraph 7. This Employment Agreement
supersedes and replaces the May 8, 1995 Employment Agreement between
CONSOLIDATED STORES CORPORATION, an Ohio corporation
("Consolidated"), CSC and Executive.
2
<PAGE> 3
EXHIBIT 10
----------
(b) POSITIONS. Executive shall, without any compensation in addition to
that which is specifically provided in this Employment Agreement,
serve as an officer of K B Toy and in such substitute or further
offices or positions with Employer or any subsidiary of Employer as
shall from time to time be reasonably requested by the Chief
Executive Officer or Board of Directors of CSC. Each office and
position with Employer or any subsidiary of Employer in which
Executive may serve or to which he may be appointed shall be
consistent in title and duties with Executive's position as a
divisional President of Employer. For service as a director or
officer of CSC, K B Toy or any subsidiary of either of them, which
service shall in each instance be deemed to be at the request of CSC
and its Board of Directors, Executive shall be entitled to the
protection of the applicable indemnification provisions of the
charter and by-laws of CSC, K B Toy and any such subsidiary, as well
as the protection afforded by that certain Indemnification Agreement
between CSC and Executive dated June 11, 1991, and Employer agrees to
indemnify and hold harmless Executive from and against any claims,
liabilities, damages or expenses incurred by Executive in or arising
out of the status, capacities and activities as an officer or
director of CSC, K B Toy and any subsidiary of either to the maximum
extent permitted by law. For purposes of this Employment Agreement,
all references herein to subsidiaries of CSC and/or K B Toy shall be
deemed to include references to subsidiaries now or hereafter
existing.
3. COMPENSATION.
-------------
(a) SALARY. For all services he may render to CSC and K B Toy (and any
subsidiary of either of them) during the term of this Employment
Agreement, as determined by the Compensation Committee of the CSC
Board of Directors on February 23, 1998, Employer shall pay to
Executive, commencing on February 1, 1998, a salary at the rate (the
"Salary Rate") of Six Hundred and Thirty Thousand Dollars
($630,000.00) per annum, subject to adjustment by the Board of
Directors of CSC, payable in those installments customarily used in
payment of salaries to Employer's executives (but in no event less
frequently than monthly).
(b) BONUS. In addition to the salary compensation as above stated,
Employer shall pay to Executive bonus compensation during the term of
this Employment Agreement in amounts to be determined and paid as
follows:
(i) Beginning February 1, 1998 for each fiscal year of Employer
completed during the term of this Employment Agreement, an
amount equal to the Salary Rate at the end of such fiscal year
multiplied by the Bonus Payout percentage as determined by the
Bonus Program set each fiscal year by the Compensation
Committee of the CSC Board of Directors. The Bonus Program is
based upon the achievement of Employer's annual financial plan.
The Target Bonus for Executive is 100% of base salary and the
Stretch Bonus for Executive is 200% of base salary, both of
which are defined in the Bonus Program and are subject to
adjustment by the Board of Directors of CSC.
(ii) Any bonus paid for a fiscal year under Paragraph 3(b)(i) shall
be paid within forty-five (45) days after Employer's
independent auditor has delivered its opinion with respect to
the financial statements of Employer for such fiscal year
(whether or not Executive is then in the employ of Employer).
Employer shall use all reasonable efforts to cause such auditor
to deliver such opinion within ninety (90) days after the close
of such fiscal year.
(iii) For purposes of this Employment Agreement, the term "fiscal
year" shall mean with respect to any year, the period
commencing on the Sunday next following the Saturday closest to
January 31 in a calendar year and ending in the next following
calendar year on the Saturday closest to January 31.
3
<PAGE> 4
EXHIBIT 10
----------
4. TERMINATION IN THE EVENT OF DEATH OR PERMANENT DISABILITY. In the
event of a termination of employment as a consequence of Employee's
death or "permanent disability" (as defined below) during the term of
this Employment Agreement:
(a) Executive or his estate, as the case may be, shall be entitled to
receive a pro rata portion of the bonus applicable to the fiscal
year in which such death or permanent disability occurs, as such
bonus is determined under Paragraph 3(b) of this Employment
Agreement. Such pro rata portion shall be determined by multiplying
a fraction, the numerator of which shall be the number of days in
the applicable fiscal year elapsed prior to the date of death or
permanent disability, as the case may be, and the denominator of
which shall be 365, by the amount of bonus that would have been
payable, if any, pursuant to such Paragraph 3(b), if Executive had
remained employed under this Employment Agreement for the entire
applicable fiscal year. The bonus shall be paid when and as provided
in Paragraph 3(b)(ii) of this Employment Agreement.
(b) Except as otherwise provided in Paragraphs 5, 6 and 8 of this
Employment Agreement, Executive shall be entitled to no further
compensation or other benefits under this Employment Agreement,
except as to that portion of any unpaid salary and other benefits
accrued and earned by him hereunder up to and including the date of
such death or permanent disability, as the case may be.
(c) For the purposes of this Employment Agreement, Executive's "permanent
disability" occurrence and benefits shall be determined in the same
manner as are other such occurrences and benefits under Employer's
Disability Policy in effect at the date of the occurrence.
5. TRANSPORTATION. During the term of this Employment Agreement,
Employer shall provide Executive with a current luxury model
automobile purchased or leased by Employer, in accordance with
applicable policies of Employer. Employer shall pay all maintenance
and repair expenses with respect to the automobile, procure and
maintain in force at Employer's expense collision, comprehensive, and
liability insurance coverage with respect to the automobile, and pay
operating expenses with respect to the automobile to the extent such
operating expenses are incurred in the conduct of Employer's
business. ~~
6. LIFE INSURANCE AND OTHER BENEFITS.
----------------------------------
(a) Vacation and Sick Leave. Executive shall be entitled to such periods
of vacation and sick leave allowance each year which shall not be
less than as provided under Employer's Vacation and Sick Leave Policy
for executive officers.
(b) Group Plans, Etc. Executive (and his family if their participation is
permitted under the terms of the subject plan) shall be entitled to
participate in any group life, hospitalization, or disability
insurance plan, health program, or other executive benefit plan
(other than bonus compensation or performance plans to the extent
that such plans, in the case of Executive, are in lieu of the bonus
plan set forth in Paragraph 3(b) above) that is generally available
to similarly titled executive officers of K B Toy. Executive's
participation in and benefits under any such plan shall be on the
terms and subject to the conditions specified in the governing
document of the particular plan. Executive shall be entitled to 100%
reimbursement of his medical and dental expenses incurred during the
term of this Employment Agreement.
4
<PAGE> 5
EXHIBIT 10
----------
7. TERMINATION AND FURTHER COMPENSATION.
-------------------------------------
(a) The employment of Executive under this Employment Agreement and the
term hereof may be terminated:
(i) by Employer or Executive at any time upon thirty (30) days
notice to the other party of such termination, or
(ii) by Employer on death or permanent disability of Executive, or
(iii) By Employer for cause at any time. For purposes hereof, the
term "cause" shall mean:
(A) Executive's conviction of fraud or a felony or any crime
involving moral turpitude or Executive's commission of
acts of embezzlement or theft in connection with his
duties or in the course of his employment with Employer
or any subsidiary;
(B) Executive's willful breach of any material provision of
this Employment Agreement which failure has not been
cured in all substantial respects within ten (10) days
after Employer gives notice thereof to Executive; or
(C) Executive's willful, wrongful engagement in any
Competitive Activity (as that term is hereinafter
defined).
Any termination of Executive for "cause" shall not be
effective until all the following shall have taken place:
(i) The Secretary of CSC pursuant to resolution of the Board
of Directors of CSC, shall have given written notice to
Executive that, in the opinion of the Board of
Directors, Executive may be terminated for cause,
specifying the details;
(ii) Executive shall have been given a reasonable opportunity
to appear before the Board of Directors prior to the
determination of the Board evidenced by such resolution;
(iii) With respect to any matters other than Executive's
conviction of fraud or a felony or a crime involving
moral turpitude, Executive shall neither have ceased to
engage in the activity giving rise to the proposed
determination for cause within thirty (30) days after
his receipt of such notice nor diligently taken all
reasonable steps to that end during such thirty (30) day
period and thereafter;
(iv) After complying with the procedures set forth in
subparagraphs (i) through (iii) above, Executive shall
have been delivered a certified copy of a resolution of
the Board of Directors of CSC adopted by the affirmative
vote of not less than three-fourths (3/4) of the entire
membership of the Board of Directors finding that
Executive was guilty of the conduct giving rise to the
termination for cause.
Any termination by reason of the foregoing shall not be in
limitation of any other right or remedy Employer may have
under this Employment Agreement, at law, in equity or
otherwise. On any
5
<PAGE> 6
EXHIBIT 10
----------
termination of this Employment Agreement, Executive shall be
deemed to have resigned from all offices and directorships
held by Executive in Employer and any subsidiaries of
Employer.
The term "Competitive Activity" shall mean Executive's
participation, without the written consent of the Board of
Directors of CSC, in the management of any business operation
of any enterprise if such operation (a "Competitive
Operation") engages in substantial and direct competition with
Employer or any subsidiary. For purposes of this Employment
Agreement, a business enterprise shall be considered in
substantial and direct competition with Employer or any
subsidiary if such business operation's retail sales of toy
merchandise amount to ten percent (10%) or more of such
business operation's total sales. "Competitive Activity" shall
not include (i) the mere ownership of securities in any
publicly traded enterprise and the exercise of rights
appurtenant thereto or (ii) participation in management of any
publicly traded enterprise or business operation thereof other
than in connection with the Competitive Operation of such
enterprise.
(b) In the event of termination for any of the reasons set forth in
subparagraph (a)(iii) of this Paragraph 7, except as otherwise
provided in Paragraph 8 of this Employment Agreement, Executive shall
be entitled to no further compensation or other benefits under this
Employment Agreement (other than as provided by law), except as to
that portion of any unpaid salary and other benefits accrued and
earned by him hereunder up to and including the effective date of
such termination, and Executive shall not be entitled to receive any
bonus determined under Paragraph 3 of this Employment Agreement or
otherwise, except for and in respect of completed fiscal years for
which Executive has not then been paid.
(c) In the event of the termination of Executive's employment by Employer
pursuant to subparagraph (a)(i) above or if a Change in Control is
deemed to have occurred pursuant to Paragraph 1(b), Executive shall
be entitled to severance compensation as follows: (x) the
continuation of his compensation for a period of 365 days, including
bonus compensation (as provided below), and (y) all other benefits
and perquisites to which he is entitled hereunder for a period of 365
days following the date of such termination of employment, except
that (i) the benefits and perquisites referred to in clause (y) shall
be sooner reduced and/or terminated (other than as provided by law)
when and to the extent that the Executive is entitled to receive the
same from another employer during such period (but no obligation of
Executive to attempt to mitigate damages under this subparagraph (c)
shall be implied) and (ii) any bonus compensation to be paid to
Executive in respect of such period shall be limited solely to the
pro rata portion thereof earned in the fiscal year of Employer
(determined in the manner provided in Paragraph 3) in which such
termination occurs, except for and in respect of completed fiscal
years for which Executive has not then been paid. Additionally, the
stock options listed on the attached Exhibit A shall all vest and
become exercisable upon the date of termination of Executive's
employment.
(d) If there is a Change in Control (as defined in Section 7(f) hereof)
and Executive's employment is thereupon terminated or terminated
within twenty four (24) months after the effective date thereof,
Executive shall be entitled to the termination benefits set forth in
Section 7(e) hereof. For purposes of this Employment Agreement,
Executive's employment shall be deemed to have been terminated only
if Employer terminates such employment other than for cause (as
defined in Section 7(a)(iii) hereof) or if a Constructive Termination
occurs. "Constructive Termination" shall mean a resignation by
Executive because of any of the following events: (i) any diminution
of duties or diminution in authority, title or office; (ii) any
assignment of duties inconsistent with his position as President, Toy
Division; (iii) any change in title to a title of lesser authority;
(iv) a material withdrawal of administrative support, or a permanent
assignment to office space inconsistent
6
<PAGE> 7
EXHIBIT 10
----------
with the position of President, Toy Division; (v) any reduction in
compensation not consistent with and equitably proportionate to
general reductions made in compensation of other executive officers
of CSC or K B Toy; or (vi) removal from the Board of Directors of
CSC, or the failure of management to renominate Executive for
membership on CSC's Board of Directors in connection with a meeting
of shareholders (as reasonably determined by Executive in his good
faith discretion).
(e) The benefits payable to Executive pursuant to Section 7(d) hereof are
as follows:
(i) K B Toy shall pay to Executive a lump sum cash payment, net of
any applicable withholding taxes in an amount equal to two
times the annual salary paid or payable to Executive
immediately prior to the effective date of such Change in
Control (the "Lump Sum Payment"); provided, that if there are
fewer than twenty four (24) months remaining from the date of
Executive's termination to Executive's normal retirement date
at age 65, K B Toy shall instead pay Executive the amount
obtained by multiplying the Lump Sum Payment by a fraction, the
numerator of which is the number of months so remaining and the
denominator of which is 24. The applicable amount shall be paid
on the later of (x) the next business day after the day
Executive's employment is terminated, or (y) the next business
day after the effective date of such Change in Control.
(ii) In addition to the payment described in Subsection 7(e)(i)
above, K B Toy shall pay to Executive a lump sum cash payment,
net of any applicable withholding taxes, in an amount equal to
two times the Executive's then current annual Stretch Bonus, as
defined in the Bonus Program described in Subsection 3(b)(i)
above (the "Lump Sum Bonus Payment"); provided, that (A) in the
event the Executive's then current Stretch Bonus is undefined
or is not subject to a maximum payout, the Executive's annual
Stretch Bonus shall be deemed to be 200% of the Executive's
then current base salary and (B) if there are fewer than twenty
four (24) months remaining from the date of Executive's
termination to Executive's normal retirement date at age 65,
K B Toy shall instead pay Executive the amount obtained by
multiplying the Lump Sum Bonus Payment by a fraction, the
numerator of which is the number of months so remaining and the
denominator of which is 24. Executive shall receive the Lump
Sum Bonus Payment at the same time Executive receives the Lump
Sum Payment described in Subsection 7(e)(i) above.
(iii) The stock options listed on the attached Exhibit A shall all
vest and become exercisable upon the date of termination of
Executive's employment.
(iv) For a period of one year, Executive (and his family, if their
participation is permitted under the terms of the subject plan)
shall be entitled to participate in any group life,
hospitalization, or disability insurance plan, health program,
or other executive benefit plan (other than bonus compensation
or performance plans to the extent that such plans, in the case
of Executive, are in lieu of the bonus plan set forth in
Subsection 7(e)(ii) above) that is generally available to
similarly titled executive officers of K B Toy; provided, that
Executive's participation in the plans referred to in this
Subsection 7(e)(iv) shall be terminated (other than as provided
by law) when and to the extent that Executive is entitled to
receive the same from another employer during such period.
Executive's participation in and benefits under any such plan
shall be on the terms and subject to the conditions specified
in the governing document of the particular plan, including,
but not limited to, reimbursement of 100% of all medical and
dental expenses incurred during the period of participation in
the plans referred to above.
7
<PAGE> 8
EXHIBIT 10
----------
(v) If all or any portion of the amount payable to Executive under
this Employment Agreement, either alone or together with other
amounts that Executive is entitled to receive in connection
with a Change in Control, constitutes "excess parachute
payments," within the meaning of Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), or successor
provision, that are subject to the excise tax imposed by
Section 4999 of the Code (or any similar tax or assessment),
the amounts payable hereunder shall be increased to the extent
necessary to place Executive in the same after-tax position as
Executive would have been in had no such excise tax or
assessment been imposed on any such payment paid or payable to
Executive under this Employment Agreement or any other payment
that Executive may receive as a result of such Change in
Control. The determination of the amount of any such tax or
assessment and the resulting amount of incremental payment
required hereby in connection therewith shall be made by the
independent accounting firm employed by K B Toy immediately
prior to the applicable Change in Control, within thirty (30)
calendar days after the payment of the amount payable pursuant
to Subsections (e)(i), (e)(ii) and (e)(iv) hereof, and said
incremental payment shall be made within five (5) business days
after said determination has been made. For purposes of
determining the amount of incremental payment required by this
Subsection, Executive shall be deemed (A) to pay federal income
taxes at the highest marginal rate of federal income taxation
for the calendar year in which the incremental payment is to be
made; (B) to pay any applicable state and local income taxes at
the highest marginal rate of taxation for the calendar year in
which the incremental payment is to be made, net of the maximum
reduction in federal income taxes which could be obtained from
deduction of such state and local taxes if paid in such year
(determined without regard to limitations on deductions based
upon the amount of Executive's adjusted gross income); and (C)
to have otherwise allowable deductions for federal, state, and
local income tax purposes at least equal to those disallowed
because of the inclusion of such incremental payments in
Executive's adjusted gross income.
(vi) If, after the date upon which any payment required under this
Employment Agreement has been made, it is determined (pursuant
to final judgment of a court of competent jurisdiction, or an
agreed upon tax assessment) that the amount of excise or other
similar taxes or assessments payable by Executive is greater
than the amount initially so determined, then K B Toy shall pay
Executive an amount equal to the sum of (i) such additional
excise or other similar taxes, plus (ii) any interest, fines
and penalties resulting from such underpayment, plus (iii) an
amount necessary to reimburse Executive for any income, excise
or other tax or assessment payable by Executive with respect to
the amounts specified in (i) and (ii) above, and the
reimbursement provided by this clause (iii). Payment thereof
shall be made within five (5) business days after the date upon
which such subsequent determination is made.
(f) As used herein, "Change in Control" means any of the following
events: (i) any person or group (as defined for purposes of Section
13(d) of the Securities Exchange Act of 1934) becomes the beneficial
owner of, or has the right to acquire (by contract, option, warrant,
conversion of convertible securities or otherwise), 20% or more of
the outstanding equity securities of CSC entitled to vote for the
election of directors; (ii) a majority of the Board of Directors of
CSC is replaced within any period of two years or less by directors
not nominated and approved by a majority of the directors of CSC in
office at the beginning of such period (or their successors so
nominated and approved), or a majority of the Board of Directors of
CSC at any date consists of persons not so nominated and approved;
(iii) the stockholders of CSC approve an agreement to reorganize,
merge or consolidate with another corporation (other than K B Toy or
an affiliate); or (iv) the stockholders of CSC adopt a plan or
approve an agreement to sell or otherwise dispose of all or
8
<PAGE> 9
EXHIBIT 10
----------
substantially all of CSC's assets (including without limitation, a
plan of liquidation or dissolution), in a single transaction or
series of related transactions. The effective date of any such Change
in Control shall be the date upon which the last event occurs or last
action taken such that the definition of such Change in Control (as
set forth above) has been met. For purposes of this Employment
Agreement, the term "affiliate" shall mean: (i) any person or entity
qualified as part of an affiliated group which includes K B Toy and
CSC pursuant to Section 1504 of the Code; or (ii) any person or
entity qualified as part of a parent-subsidiary group of trades and
businesses under common control within the meaning of Treasury
Regulation Section 1.414(c)(2)(b). Determination of affiliate shall
be tested as of the date immediately prior to any event constituting
a Change in Control. The other provisions of this Paragraph 7(f)
notwithstanding, the term "Change in Control" shall not mean any
transaction, merger, consolidation, or reorganization in which CSC
exchanges or offers to exchange newly issued or treasury shares in an
amount less than 50% of the then outstanding equity securities of CSC
entitled to vote for the election of directors, for 51% or more of
the outstanding equity securities entitled to vote for the election
of at least the majority of the directors of a corporation other than
Employer or an affiliate thereof (the "Acquired Corporation"), or for
all or substantially all of the assets of the Acquired Corporation.
(g) Executive shall provide K B Toy with at least forty five (45) days
notice of any election by Executive to terminate his employment,
which shall set forth in detail the grounds upon which any
Constructive Termination of Executive's employment is based, and
shall not be entitled to the benefits available hereunder in
connection therewith unless such notice is timely given.
(h) If any amount due Executive hereunder is not paid when due, then K B
Toy shall pay interest on said amount at an annual rate equal to the
base lending rate of National City Bank, Cleveland, Ohio, or
successor, as in effect from time to time, for the period between the
date on which such payment is due and the date said amount is paid.
(i) K B Toy's obligation to pay Executive the compensation and to make
the arrangements required hereunder shall be absolute and
unconditional and shall not be affected by any circumstance,
including, without limitation, any setoff, counterclaim, recoupment,
defense or other right that K B Toy may have against Executive or
otherwise. All amounts payable by K B Toy under this Employment
Agreement, including, without limitation, legal fees and expenses,
shall be paid without notice or demand and shall be secured by CSC's
unrestricted guarantee of due and punctual payment. Subject to the
proviso in Section 7(h) above, each and every payment made hereunder
by K B Toy shall be final and K B Toy shall not seek to recover all
or any part of such payment from Executive or from whosoever may be
entitled thereto, for any reason whatsoever. Executive shall not be
obligated to seek other employment or compensation or insurance in
mitigation of any amount payable or arrangement made under any
provision of this Employment Agreement, and the obtaining of any such
other employment or compensation or insurance shall in no event
effect any reduction of K B Toy's obligations to make the payments
and arrangements required to be made under this Employment Agreement.
(j) From and after any termination of Executive's employment, Executive
shall retain in confidence and not use for his own benefit or on
behalf of any other person or entity any confidential information
known to him concerning CSC, K B Toy, their respective subsidiaries
or their respective businesses so long as such information is not
publicly disclosed by someone other than Executive.
9
<PAGE> 10
EXHIBIT 10
----------
(k) In partial consideration of the benefits granted to Executive herein,
Executive agrees that during the six-month period immediately
following Executive's termination, if Executive shall have received
benefits under Section 7(e) above, Executive shall not engage in any
Competitive Activity, as defined in Section 7(a).
(l) Any provision in this Employment Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective only to the extent of such prohibition or
unenforceability without invalidating or affecting the remaining
provision hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such
provision in any other jurisdiction.
(m) Except as specifically set forth herein, this Employment Agreement
shall not be deemed to negate, supersede or alter any other agreement
or arrangement between Executive and Consolidated, CSC or K B Toy or
any other rights to which Executive may be entitled, and shall be and
remain in effect in addition to any such other agreement or rights,
whether now existing or later created.
8. EXPENSES. Employer shall reimburse Executive during the term of this
Employment Agreement for travel, entertainment and other expenses
reasonably incurred by Executive in the promotion of Employer's
business. Executive shall furnish such documentation with respect to
reimbursement to be paid under this Paragraph 8 as Employer shall
reasonably request.
9. COVENANTS OF EXECUTIVE.
(a) Covenant Against Competition. Executive acknowledges that (i) the
principal businesses of Employer include the operation of its "Odd
Lots", "Big Lots", "MacFrugal's" and "Pic N' Save" discount general
merchandise consumer goods retail outlets, the inventories of which
are acquired primarily through special purchase situations such as
overstocks, closeouts, liquidations, bankruptcies, wholesale
distribution of overstock, distress, liquidation and other volume
inventories, the operation of its K B Toy, K B Toy Works, and K B Toy
Liquidator toy stores, and the operation of its Big Lots Furniture
and Odd Lots Furniture stores (the "Company Business"); (ii) Employer
is one of the limited number of persons who has developed such
business; (iii) the Company Business is national in scope; (iv)
Executive's work for Employer will give him access to the
confidential affairs of Employer; and (v) the agreements and
covenants of Executive contained in this Paragraph 9 are essential to
the business and goodwill of Employer. Accordingly, Executive
covenants and agrees that:
(A) During the term of Executive's employment with Employer and for
a period of two (2) years (the "Restricted Period") following
either the voluntary termination of such employment by
Executive or the termination of such employment for "cause" (as
such terms is defined in Subsection 7(a)(iii) above, Executive
shall not in any location where Employer's retail stores are
located throughout the United States of America, directly or
indirectly, (1) engage in the Company Business for Executive's
own account (other than pursuant to this Employment Agreement),
(2) render any services to any person engaged in such
activities (other than Employer), or (3) or engage in any
Competitive Activity (as defined above), PROVIDED, HOWEVER,
that in the event of a Change in Control the Restricted Period
shall be for a period of six (6) months.
(B) During the Restricted Period, Executive shall keep secret and
retain in strictest confidence, and shall not use for his
benefit or the benefit of others, all confidential matters
relating to the Company Business hereafter learned by
Executive, and shall not disclose them to anyone except with
10
<PAGE> 11
EXHIBIT 10
----------
Employer's express written consent and except for information
which (i) is at the time of receipt or thereafter becomes
publicly known through no wrongful act of Executive, or (ii) is
received from a third party not under an obligation to keep
such information confidential and without breach of this
Employment Agreement.
(C) So long as there has not occurred a Change in Control,
Executive shall not, during the Restricted Period, without
Employer's prior written consent, directly or indirectly,
solicit or encourage to leave the employment of Employer or any
of its subsidiaries, any executive of Employer or any of its
subsidiaries.
(D) All memoranda, notes, lists, records and other documents (and
all copies thereof) made or compiled by Executive or made
available to Executive concerning the Company Business shall be
Employer's property and shall be delivered to Employer at any
time on request.
(b) Rights and Remedies Upon Breach. If Executive breaches any of the
provisions of Paragraph 9(a) (the "Restrictive Covenants"), or a
breach thereof is imminent, Employer shall have the following rights
and remedies, each of which rights and remedies shall be independent
of the other and severally enforceable, and all of which rights and
remedies shall be in addition to, and not in lieu of, any other
rights and remedies available to Employer under law or in equity:
(i) The right and remedy to have the Restrictive Covenants
specifically enforced by any court having equity jurisdiction,
including, without limitation, the right to an entry against
Executive of restraining orders and injunctions (preliminary,
temporary or permanent) against violations, threatened or
actual, and whether or not then continuing, of such covenants,
it being acknowledged and agreed that any such breach or
threatened breach will cause irreparable injury to Employer and
that money damage will not provide adequate remedy to Employer;
and
(ii) The right and remedy to require Executive to account for and
pay over to Employer all compensation, profits, monies,
accruals, increments, or other benefits derived or received by
him as the result of any transactions constituting a breach of
the Restrictive Covenants. Employer may set off any amounts
finally determined to be due it under this Paragraph 9(b)
against any amounts owed to Executive.
(c) Severability of Covenants. Executive acknowledges and agrees that the
Restrictive Covenants are reasonable in geographical and temporal
scope, with respect to the activities restricted and in all other
respects. If it is determined that any of the Restrictive Covenants,
or any part thereof, is invalid or unenforceable, the remainder of
the Restrictive Covenants shall not thereby be affected and shall be
given full effect, without regard to the invalid portions.
(d) Blue-Pencilling. If it is determined that any of the Restrictive
Covenants, or any part thereof, is unenforceable because of the
duration or geographical scope of such provision, the duration or
scope of such provision, as the case may be, shall be reduced so that
such provision becomes enforceable and, in its reduced form, such
provision shall then be enforceable and shall be enforced.
10. WITHHOLDING TAXES. Except as otherwise provided, all payments to
Executive, including the bonus compensation under this Employment
Agreement, shall be subject to withholding on account of federal,
11
<PAGE> 12
EXHIBIT 10
----------
state, and local taxes as required by law. Any amounts remitted by
Employer to the appropriate taxing authorities as taxes withheld by
Employer from Executive on income realized by Executive shall reduce
the amounts payable by Employer to Executive hereunder. If any
particular payment required hereunder is insufficient to provide the
amount of such taxes required to be withheld, Employer may withhold
such taxes from any other payment due Executive.
11. NO CONFLICTING AGREEMENTS. Executive represents and warrants that he
is not a party to any agreement, contract or understanding, whether
employment or otherwise, which would restrict or would prohibit him
from undertaking or performing employment in accordance with the
terms and conditions of this Employment Agreement.
12. SEVERABLE PROVISIONS. The provisions of this Employment Agreement are
severable, and if any one or more provisions may be determined to be
illegal or otherwise unenforceable, in whole or in part, the
remaining provisions and any partially unenforceable provision to the
extent enforceable in any jurisdiction shall, nevertheless, be
binding and enforceable.
13. BINDING AGREEMENT. Subject to Executive's consent, each of CSC and K
B Toy shall require any successor (whether direct or indirect), by
purchase, merger, consolidation, reorganization or otherwise, to all
or substantially all of the business and/or assets of any of them
expressly to assume and to agree to perform this Employment Agreement
in the same manner and to the same extent that each of them would be
required to perform if no such succession has taken place. This
Employment Agreement shall be binding upon and inure to the benefit
of each of CSC and K B Toy and any successor of any of them,
including without limitation any persons acquiring directly or
indirectly all or substantially all of the business and/or assets of
any of them whether by sale, merger, consolidation, reorganization or
otherwise (and such successor shall thereafter be deemed the
"Employer" for purposes of this Employment Agreement), but shall not
otherwise be assignable or delegatable by CSC or K B Toy. In the
event Executive fails to consent to the assumption of this Employment
Agreement, this Employment Agreement shall be deemed terminated by
Employer pursuant to Paragraph 7(a)(i), effective as of the date such
succession has taken place.
This Employment Agreement shall inure to the benefit of and be
enforceable by Executive and each of Executive's personal or legal
representatives, executive, administrators, successor, heirs,
distributees and/or legatees.
14. NOTICES. Any notice or other communication required or permitted
hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed, sent by facsimile transmission or sent by
certified, registered or express mail, postage prepaid. Any such
notice shall be deemed given when so delivered personally,
telegraphed, telexed, or sent by facsimile transmission or, if mailed
five (5) days after the date of deposit in the United States mails as
follows:
<TABLE>
<S> <C>
(i) if to the Employer to: Consolidated Stores Corporation
300 Phillipi Road
Columbus, Ohio 43228-1310
Attention: Albert J. Bell, Esq.
Executive Vice President
with a copy to: Chairman of the Compensation Committee
of the CSC Board of Directors
</TABLE>
12
<PAGE> 13
EXHIBIT 10
----------
<TABLE>
<S> <C>
(ii) if to the Executive to: Michael L. Glazer
c/o Kirkland & Ellis
200 East Randolph
Chicago, Illinois 60601
Attention: Donald G. Kempf, Jr.
or John E. Kirkpatrick
</TABLE>
Any such person may by notice given in accordance with this Paragraph
to the other parties hereto, designate another address or person for
receipt by such person of notices hereunder.
15. WAIVER. The failure of either party to enforce any provision or
provisions of this Employment Agreement shall not in any way be
construed as a waiver of any such provision or provisions as to any
future violations thereof, nor prevent that party thereafter from
enforcing each and every other provision of this Employment
Agreement. The rights granted the parties herein are cumulative and
the waiver of any single remedy shall not constitute a waiver of such
party's rights to assert all other legal remedies available to it
under the circumstances.
16. MISCELLANEOUS. This Employment Agreement supersedes all prior
agreements and understandings between the parties and may not be
modified or terminated orally. No modification, termination or
attempted waiver shall be valid unless in writing and signed by the
party against whom the same is sought to be enforced. If Executive is
successful in any proceeding against Employer to collect amounts due
Executive under this Employment Agreement, Employer shall reimburse
Executive for his court costs and reasonable attorneys' fees in
connection therewith.
17. GOVERNING LAW. This Employment Agreement shall be governed by and
constructed according to the laws of the State of Ohio.
18. CAPTIONS AND PARAGRAPHS HEADINGS. Captions and paragraph headings
used herein are for convenience and are not a part of this Employment
Agreement and shall not be used in construing it.
19. INTERPRETATION. Where necessary or appropriate to the meaning hereof,
the singular and plural shall be deemed to include each other, and
the masculine, feminine and neuter shall be deemed to include each
other.
20. AMENDMENTS. Neither CSC nor K B Toy shall amend, terminate, or
suspend this Employment Agreement or any provision hereof without the
written consent of Executive.
21. LEGAL FEES AND EXPENSES. It is the intent of Employer that Executive
not be required to incur the expenses associated with the enforcement
of his rights under this Employment Agreement by litigation or other
legal action because the cost and expense thereof would substantially
detract from the benefits intended to be extended to Executive
hereunder. Accordingly, if it should appear to Executive that
Employer has failed to comply with any of its obligations under this
Employment Agreement, or in the event that Employer or any other
person takes any action to declare this Employment Agreement void
and/or unenforceable, or institutes any litigation designed to deny,
and/or to recover from, Executive the benefits intended to be
provided to Executive hereunder, Employer hereby irrevocably
authorizes Executive from time to
13
<PAGE> 14
EXHIBIT 10
----------
time to retain counsel of his choice to represent Executive in
connection with the initiation or defense of any litigation and/or
other legal action, whether by or against Employer or any director,
officer, stockholder, or other person affiliated with Employer in any
jurisdiction. K B Toy shall pay Executive's actual expenses for
attorneys' fees and disbursements, together with such additional
payments, if any, as may be necessary so that the net after-tax
payments so made to Executive equal such fees and disbursements;
provided, that Executive shall be responsible for his own fees and
expenses with respect to any lawsuit between Executive and Employer
to enforce rights or obligations under this Employment Agreement in
which Employer is the prevailing party. The fees and expenses
incurred by Executive in instituting or responding to any such
negotiation or legal action shall be paid by K B Toy as they are
incurred, in advance of the final disposition of the action or
proceeding, upon receipt of an undertaking by Executive to repay such
amounts if Employer is ultimately determined to be the prevailing
party. Notwithstanding any existing or prior attorney-client
relationship between Employer and such counsel, Executive may enter
into an attorney-client relationship with such counsel, and in that
connection Employer acknowledges that a confidential relationship
shall exist between Executive and such counsel.
IN WITNESS WHEREOF, the parties have caused this Employment Agreement to be
effective as of the date first listed above.
<TABLE>
<CAPTION>
Attest: CONSOLIDATED STORES CORPORATION,
a Delaware Corporation
<S> <C>
By:
----------------------------- ---------------------------------
Asst. Secretary William G. Kelley, Chairman
and Chief Executive Officer
Attest: K B TOY OF MASSACHUSETTS, INC.,
a Massachusetts Corporation
By:
----------------------------- ---------------------------------
Asst. Secretary Albert J. Bell, Executive Vice President
---------------------------------
MICHAEL L. GLAZER
</TABLE>
14
<PAGE> 15
EXHIBIT 10
----------
EXHIBIT A
The stock options evidenced by that certain CONSOLIDATED STORES CORPORATION
NON-QUALIFIED STOCK OPTION PLAN AGREEMENT, as amended by the FIRST AMENDMENT TO
NON-QUALIFIED STOCK OPTION PLAN AGREEMENT, by and between CSC and Executive, the
originals of which are attached hereto as EXHIBIT C-1 and EXHIBIT C-2.
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM CONSOLIDATED STORES
CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FILED IN FORM 10Q
AS OF OCTOBER 31, 1998, AND THE THIRTEEN AND THIRTY-NINE WEEK PERIODS THEN
ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 70,715
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 1,484,377
<CURRENT-ASSETS> 1,731,154
<PP&E> 1,108,171
<DEPRECIATION> 439,249
<TOTAL-ASSETS> 2,422,662
<CURRENT-LIABILITIES> 647,047
<BONDS> 630,251
0
0
<COMMON> 1,095
<OTHER-SE> 1,071,304
<TOTAL-LIABILITY-AND-EQUITY> 2,422,662
<SALES> 856,433
<TOTAL-REVENUES> 856,433
<CGS> 504,110
<TOTAL-COSTS> 875,117
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,748
<INCOME-PRETAX> (27,432)
<INCOME-TAX> (10,700)
<INCOME-CONTINUING> (16,732)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,732)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
