Big Lots 2006 Annual Report Download

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2006 Annual Report

Table of contents

  • Page 1
    2006 Annual Report

  • Page 2
    ... 500 company with over 1,350 stores nationwide. For more than three decades, we've delighted our customers with a vibrant mix of exciting brands, unique products, and closeout prices. Big Lots offers new merchandise every week at substantial savings over traditional discount retailers, on average 20...

  • Page 3
    ... and equipment - net Total assets Long-term obligations Shareholders' equity Working capital Current ratio Inventory turnover (a) Long-term obligations to total capitalization Return on assets - continuing operations (a) Return on shareholders' equity - continuing operations (a) $ 269,430 758...

  • Page 4
    ... more of their wallet or weekly spend. We learned that if we deliver a great assortment of branded closeout products, our customers are not inhibited by price. We learned we can drive business during the back-to-school period. Typically this time is reserved for retailers that are heavy in apparel...

  • Page 5
    ...more consumer-focused Web site made our merchandise more interesting and helped turn the goods. Overall we made incredible progress on our WIN strategy. The Big Lots team, working together with the support of our Board of Directors, is executing a dramatic repositioning of our business. But as proud...

  • Page 6
    .... We worked diligently during 2006 to test and learn, and our executive team has reviewed every aspect of our business in order to develop a long-range outlook for what the operating profit potential of this business could be over the next three years. We believe that Big Lots is an operating pro...

  • Page 7
    ... of just how ingrained the spirit of change is and how the drive for innovation and learning has permeated our organization. Perhaps most relevant to you, our shareholders, is that even with our solid trends in sales Steven S. Fishman Chairman, CEO, and President Big Lots, Inc. 2006 Annual Report...

  • Page 8
    ... L. Roney Human Resources Services Harold A. Wilson Distribution & Transportation Services Shelley L. Rubin Advertising Michael A. Schlonsky James R. Tener former President & Chief Operating Officer Brook Mays Music Company Vice Presidents Timothy C. Anderson Store Control Associate Relations...

  • Page 9
    ... at our corporate offices located at 300 Phillipi Road, Columbus, Ohio, on May 31, 2007, beginning at 9:00 a.m. EDT. The following pages contain the formal Notice of Annual Meeting of Shareholders and the Proxy Statement. You should review this material for information concerning the business to be...

  • Page 10

  • Page 11
    ... given that the Annual Meeting of Shareholders of Big Lots, Inc. will be held at our corporate offices located at 300 Phillipi Road, Columbus, Ohio, on May 31, 2007, beginning at 9:00 a.m. EDT. At the Annual Meeting of Shareholders, the holders of outstanding Big Lots, Inc. common shares will act on...

  • Page 12

  • Page 13
    ... ...PROPOSAL ONE: ELECTION OF DIRECTORS ...GOVERNANCE OF BIG LOTS ...Current Members of the Board of Directors ...Board Meetings in Fiscal 2006 ...Role of the Board's Committees ...Audit Committee ...Compensation Committee ...Nominating/Corporate Governance Committee ...Presiding Member of the Board...

  • Page 14
    ...Elements of In-Service Executive Compensation ...Salary ...Bonus ...Equity ...Personal Benefits and Perquisites ...Employment Agreements ...Change in Control ...Retirement Plans ...Pension Plan and Supplemental Pension Plan ...Savings Plan and Supplemental Savings Plan ...Minimum Share Ownership and...

  • Page 15
    ......Audit and Non-Audit Services Pre-Approval Policy ...Fees Paid to Independent Auditor ...Audit Committee Report ...PROPOSAL TWO: RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS BIG LOTS' INDEPENDENT AUDITOR FOR FISCAL 2007 ...SHAREHOLDER PROPOSALS ...ANNUAL REPORT ON FORM 10-K ...PROXY...

  • Page 16

  • Page 17
    ...2007 ("Annual Meeting"), at our corporate offices located at 300 Phillipi Road, Columbus, Ohio. The Notice of Annual Meeting of Shareholders, this Proxy Statement and the accompanying proxy card, together with our Annual Report to Shareholders for the fiscal year ended February 3, 2007 ("fiscal 2006...

  • Page 18
    ... environmental resources. To enroll in the electronic delivery service for future annual meetings of shareholders, use your proxy card information to register online at www.proxyvote.com by indicating that you agree to receive or access shareholder communications electronically in future years. -2-

  • Page 19
    ... entitled to be voted at the Annual Meeting will constitute a quorum, permitting us to conduct our business at the Annual Meeting. Proxies received but marked as abstentions and broker non-votes will be included in the calculation of the number of common shares considered to be represented at the...

  • Page 20
    ... Vice President and Chief Financial Officer, West Marine, Inc. Former President and Chief Operating Officer, Brook Mays Music Company (retail and wholesale music) - Brook Mays Music Company filed for bankruptcy on July 11, 2006; former Chief Operating Officer, The Sports Authority (sporting goods...

  • Page 21
    ... our system of internal controls; and (5) our audit, accounting and financial reporting processes generally. All members of the Audit Committee are independent as required by the Audit Committee's charter and by the applicable New York Stock Exchange ("NYSE") and SEC rules. The Board has determined...

  • Page 22
    ... which he or she presides and, upon the conclusion of an executive session of the Board, meeting with our chief executive officer ("CEO") to address any issues raised during the executive session. Determination of Director Independence The Corporate Governance Guidelines were initially adopted by...

  • Page 23
    .../ Corporate Governance Committee, 300 Phillipi Road, Columbus, Ohio 43228. The written notice must include the prospective nominee's name, age, business address, principal occupation, beneficial ownership of Big Lots' common shares, information that would be required under the rules of the SEC in...

  • Page 24
    ... with our corporate governance policies, practices and guidelines applicable to our directors, nominees for director, officers and employees. The Board and the Nominating/Corporate Governance Committee have also enlisted the assistance of our General Counsel and human resources management to fulfill...

  • Page 25
    ...-7325 Big Lots Board of Directors, 300 Phillipi Road, Columbus, Ohio 43228-5311 www.ci-wackenhut.com/getreal.htm Under a process approved by the Nominating/Corporate Governance Committee for handling correspondence received by Big Lots and addressed to outside directors, our General Counsel reviews...

  • Page 26
    once in any six-month period. Under the current formula, each outside director is granted annually an option to acquire 10,000 Big Lots common shares at an exercise price equal to the closing price of our common shares on the NYSE on the grant date. Except as discussed below, stock options granted ...

  • Page 27
    ...the executive officers named in the Summary Compensation Table, and all our executive officers and directors as a group. The assessment of holders of more than 5% of Big Lots' common shares is based on a review of and reliance upon filings with the SEC. Except as otherwise indicated, all information...

  • Page 28
    ... we hold in connection with the Big Lots Supplemental Savings Plan. Includes 5,468 common shares owned by Xtreem Creative, Inc., of which Mr. Berman serves as Chairman, Chief Executive Officer and President. In its Schedule 13G filed on February 12, 2007, State Street Bank and Trust Company, Trustee...

  • Page 29
    ..., American Century Companies, Inc. and its wholly-owned subsidiary, American Century Investment Management, Inc., 4500 Main Street, 9th Floor, Kansas City, MO 64111, stated that they collectively beneficially owned the number of common shares reported in the table as of December 31, 2006, had sole...

  • Page 30
    ... executive management committee ("EMC"). The EMC is currently comprised of 10 employees - the five executives named in the Summary Compensation Table ("named executive officers") and all other executive vice presidents and senior vice presidents. Specific Committee responsibilities include reviewing...

  • Page 31
    ...years by providing candidates and existing executives with competitive compensation packages. The adherence to and execution of our compensation philosophy is reviewed at least twice annually. At the first regularly scheduled Committee meeting of each year, the Committee meets with our CEO to review...

  • Page 32
    ... (assuming employment continues, awards vest and the market price of our common shares fluctuates through the life of the awards). While the Committee considers the accumulated total value as a factor in setting future compensation levels and making future equity awards, this information is not...

  • Page 33
    ... addition, the named executive officers are entitled to certain benefits according to our policies and under our health, insurance and retirement plans. Each element of compensation has been selected to make sure that our compensation program is competitive with those of other companies with whom we...

  • Page 34
    ... and qualifications, and by the competitive market. A minimum salary for each named executive officer is set forth in his or her respective employment agreement, as described below. Bonus The 2006 Bonus Plan provides for cash compensation to be paid annually when we achieve certain performance...

  • Page 35
    ... any employee, the Committee or the Board manipulated the terms of the equity awards. For equity awards made throughout the fiscal year, generally as a result of a hiring or promotion, the grant date is the date of the related event (i.e., the first day of employment or effective date of promotion...

  • Page 36
    ...-term disability coverage and the amount necessary to hold the named executive officer harmless from the income taxes resulting from such premium payments are paid by Big Lots. All officers at or above the level of vice president have the option of using a Company automobile or accepting a monthly...

  • Page 37
    ...Mr. Fishman's floor, target and stretch performance goals were increased to 50%, 100% and 200% of his salary, respectively. Each employment agreement requires the named executive officer to devote his or her full business time to the affairs of Big Lots and prohibits the named executive officer from...

  • Page 38
    ...may be paid to the named executive officers after termination of their employment with Big Lots, see "Description and Elements of Post-Termination Executive Compensation" below. Change in Control Generally, pursuant to the named executive officers' employment agreements, the 1996 Incentive Plan, the...

  • Page 39
    ...employment for a reason other than death or retirement may receive a reduced pension amount determined by the number of years the participant worked for Big Lots. Normally, a participant will receive a monthly payment from the Pension Plan and/or, if the participant was a highly compensated employee...

  • Page 40
    ...whether the benefits are paid in the form of a single life annuity, a joint and survivor annuity or as a lump sum upon reaching the normal retirement age of 65. Savings Plan and Supplemental Savings Plan All of the named executive officers, as well as substantially all other full-time employees, are...

  • Page 41
    ... pay any unearned compensation or to provide any future benefits to the executive. The named executive officers are entitled to receive salary continuation for two years, in the case of Mr. Fishman, or one year, in the case of the other named executive officers, if terminated without cause, 6 months...

  • Page 42
    ... Fishman's experience. As part of its review of the bonus component of our executive compensation program for fiscal 2006, the Committee and the other outside directors considered various indicia of corporate achievement in order to establish meaningful performance criteria under the 2006 Bonus Plan...

  • Page 43
    ... for performance in fiscal 2006. As a consequence of the fiscal 2006 bonus payments, fiscal 2006 total cash compensation for the named executive officers was at or above the market average. (Note that the compensation surveys used to determine market average for each position report only the bonus...

  • Page 44
    ... compensation in February 2006, the outside directors chose to maintain his then-current base salary. However, based on the outside directors' assessment of Mr. Fishman's performance to date, his ability to formulate and execute our long-term and short-term strategic, operational and business plans...

  • Page 45
    ... to increase Mr. Fishman's fiscal 2006 annualized salary over the minimum established by his employment agreement. The bonuses paid to the named executive officers for fiscal 2006 are shown in the "Non-Equity Incentive Compensation Earnings" column of the Summary Compensation Table. As a result...

  • Page 46
    ... Officer Brad A. Waite, Executive Vice President, Human Resources, Loss Prevention, Real Estate and Risk Management John C. Martin, Executive Vice President, Merchandising Lisa M. Bachmann, Senior Vice President, Merchandise Planning/Allocation and Chief Information Officer Year (b) 2006 Salary...

  • Page 47
    ... Savings Plan" section of the CD&A; The reimbursement of healthcare costs covered by the Executive Benefit Plan, which is described in the "Personal Benefits and Perquisites" section of the CD&A; Big Lots paid premiums for life insurance, which is generally available to all full-time employees; Big...

  • Page 48
    ... 12,000 10,800 480 - - - - (8) (9) In fiscal 2006, Mr. Fishman and Mr. Cooper each received a personal benefit related to a business trip to visit the NYSE on a corporate aircraft. We reported earnings of $675 (plus $317 for tax reimbursement) for both executives on Form W-2 related to such trip...

  • Page 49
    ...,800 216,480 Name (a) Mr. Fishman Mr. Cooper Mr. Waite Mr. Martin Ms. Bachmann (1) (2) (3) (4) (5) (6 ) As discussed in the "Elements of In-Service Executive Compensation - Equity" section of the CD&A, in fiscal 2006, the Board set as the grant date of these equity awards the second day...

  • Page 50
    ... end of fiscal 2006, all equity awards outstanding under our equity compensation plans for each named executive officer. Option Awards (1)(2) Stock Awards Equity Incentive Plan Equity Awards: Incentive Market Plan or Payout Awards: Value of Number of Unearned Unearned Shares, Shares, Units or Units...

  • Page 51
    ... in the "Pension Plan and Supplemental Pension Plan" section of the CD&A. Number of Years Credited Service (#) (c) Present Value of Accumulated Benefit ($) (d) Payments During Last Fiscal Year ($) (e) Name (a) Plan Name (b) Mr. Fishman Mr. Cooper Mr. Waite Mr. Martin Ms. Bachmann N/A N/A Pension...

  • Page 52
    ... a change in control. For additional information regarding the payments and benefits that may be due to each named executive officer upon a change in control or termination, please refer to the "Employment Agreements," "Change in Control," "Retirement Plans," "Minimum Share Ownership and Retention...

  • Page 53
    ... in control constitute an "excess parachute payment" under Section 280G(b) of the IRC, the named executive officer shall receive reimbursement of any excise tax under Section 4999 of the IRC or, in the case of Mr. Fishman and Mr. Cooper, reduce the executive's benefits under his employment agreement...

  • Page 54
    ... Cause Cause Termination Disability Death in Control termination) Salary/Salary Continuation ($) At Target Bonus Non-Equity Level ($) Incentive Plan At Stretch Bonus Compensation Level ($) Heathcare Coverage ($) Long-Term Disability Benefit ($) Use of Automobile/Automobile Allowance ($) Accelerated...

  • Page 55
    ...Control termination) Salary/Salary Continuation ($) At Target Bonus Non-Equity Level ($) Incentive Plan At Stretch Bonus Compensation Level ($) Heathcare Coverage ($) Long-Term Disability Benefit... the payments that may be due to Ms. Bachmann in the event of a change in control or her employment with...

  • Page 56
    ... Audit Committee meeting. The Audit Committee also reviewed the report of management contained in our Annual Report on Form 10-K for fiscal 2006, as well as the independent auditor's Report of Independent Registered Public Accounting Firm included in our Annual Report on Form 10-K related to its...

  • Page 57
    ...in internal procedures and controls. Based on these reviews and discussions, the undersigned members of the Audit Committee recommended to the Board that the audited consolidated financial statements be included in Big Lots' Annual Report on Form 10-K for fiscal 2006 for filing with the SEC. Members...

  • Page 58
    ... 2006 Annual Report on Form 10-K without charge by writing to: Investor Relations Department, Big Lots, Inc., 300 Phillipi Road, Columbus, Ohio 432285311. The fiscal 2006 Annual Report on Form 10-K may also be accessed in the Investors section of our website (www.biglots.com) under the "SEC Filings...

  • Page 59
    ... shares represented by proxies in the enclosed form returned to us will be voted on such matter in accordance with the recommendations of the Board. By order of the Board of Directors, CHARLES W. HAUBIEL II Senior Vice President, General Counsel and Corporate Secretary April 12, 2007 Columbus, Ohio...

  • Page 60
    (This page intentionally left blank.)

  • Page 61
    ... file number 1-8897 BIG LOTS, INC. (Exact name of registrant as specified in its charter) Ohio (State or other jurisdiction of incorporation or organization) 06-1119097 (I.R.S. Employer Identification No.) 300 Phillipi Road, P.O. Box 28512, Columbus, Ohio (Address of principal executive offices...

  • Page 62
    ... Disagreements With Accountants on Accounting and Financial Disclosure ...Controls and Procedures...Other Information ...PART III Directors, Executive Officers and Corporate Governance ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Shareholder...

  • Page 63
    ... of Consolidated Stores Corporation. Our principal executive offices are located at 300 Phillipi Road, Columbus, Ohio 43228, and our telephone number is (614) 278-6800. All of our operations were located within the United States of America at February 3, 2007, and January 28, 2006. Associates At...

  • Page 64
    ...61 Rhode Island ...1 South Carolina ...29 Tennessee ...42 Texas ...112 Utah...10 Vermont ...4 Virginia ...36 Washington ...19 West Virginia ...18 Wisconsin ...15 Wyoming...2 Total stores...1,375 Number of states . . 47 Of our 1,375 stores, 511 stores operate in four states: California, Ohio, Texas...

  • Page 65
    ...in this Form 10-K. Advertising and Promotion Our advertising and promotion program in fiscal year 2006 was designed to continue to build awareness of the Big Lots® brand by featuring the broad range of quality, brand-name merchandise available at closeout prices, which we believe provides customers...

  • Page 66
    ... merchandise inventory, and the timing of the execution of the $600.0 million share repurchase program authorized by our Board of Directors in March 2007. Available Information We make available, free of charge, through the "Investors" section of our website (www.biglots.com) under the "SEC Filings...

  • Page 67
    ..., whether as a result of new information, future events, or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with the SEC. Also note that we provide the following cautionary...

  • Page 68
    ... of four states (Ohio, Texas, California, and Florida) are particularly important as approximately 37% of our current stores operate in these states and 38.5% of our fiscal year 2006 net retail sales occurred in these states. Changes by vendors related to the management of their inventories may...

  • Page 69
    ... retail environment, which makes us vulnerable to changes in price and in consumer preferences. If we do not accurately anticipate future demand for a particular product or the time it will take to obtain new inventory, our inventory levels will not be appropriate and our results of operations...

  • Page 70
    ... on our future results of operations. We believe that we benefit substantially from the leadership and experience of our senior executives. The loss of services of any of these individuals could have a material adverse impact on our business. Competition for key personnel in the retail industry is...

  • Page 71
    ...selling square feet. The average cost to open a new store in a leased facility during fiscal year 2006 was approximately $0.9 million, including cost of inventory. With the exception of 52 owned store sites, all stores are leased. Store leases generally provide for fixed monthly rental payments plus...

  • Page 72
    ... President, Human Resources, Loss Prevention, Real Estate and Risk Management Senior Vice President, Merchandise Planning/Allocation and Chief Information Officer Senior Vice President, Marketing Senior Vice President and Chief Financial Officer Senior Vice President, General Counsel and Corporate...

  • Page 73
    ... as Director of Employee Relations and held various Human Resources management and senior management positions prior to his promotion to Executive Vice President in July 2000. Lisa M. Bachmann is responsible for information technology, merchandise planning, and merchandise allocation functions. Ms...

  • Page 74
    ... price paid per share of $15.90. The following table sets forth information regarding our repurchase of our common shares during the fourth quarter of fiscal year 2006: (In thousands, except price per share data) (c) Total (Cumulative) Number of Shares Purchased as Part of Publicly Announced Plans...

  • Page 75
    ...average price paid per share of $13.82. The repurchased common shares in fiscal years 2004 and 2006 were placed into treasury and are used for general corporate purposes including the issuance of shares related to employee benefit plans. As of April 2, 2007, there were approximately 1,175 registered...

  • Page 76
    ... operations...Weighted-average common shares outstanding: Basic...Diluted ...Balance sheet data: Total assets ...Working capital ...Long-term obligations ...Shareholders' equity...Store data: Total gross square footage ...Total selling square footage ...Stores opened during the fiscal year ...Stores...

  • Page 77
    ... furniture store operations. Reduction of personnel at our stores, distribution centers, and general office. Exit from the frozen food business. Actions taken in fiscal year 2006: Opened fewer stores compared to prior years primarily as a result of rising real estate costs for prospective new sites...

  • Page 78
    ... of loss from discontinued operations related to the 130 closed stores for fiscal years 2006, 2005, and 2004, respectively. 2006 (In thousands) Fiscal Year 2005 2004 Net sales ...Gross margin ...Operating loss ...Loss from discontinued operations, net of tax ... $ - - (2,659) $(1,606) $215,154...

  • Page 79
    ... growing sales per square foot and increasing gross margin dollars. We performed customer research and found that brand names, "treasure hunt," price, value, and savings were most important to our customers. Certain elements of the merchandising strategy were tested and executed in fiscal year 2006...

  • Page 80
    ... net sales and operating profit being realized in the fourth fiscal quarter. In addition, our quarterly results can be affected by the timing of new store openings and store closings, the amount of sales contributed by new and existing stores, the timing of television and circular advertising, and...

  • Page 81
    ... by using all stores that were open for at least two fiscal years as of the beginning of fiscal year 2006. This calculation may not be comparable to other retailers who calculate comparable store sales based on other methods. From a merchandise perspective, the Consumables, Home, and Other were...

  • Page 82
    ... new point-of-sale register system and other items generally considered "maintenance capital" items for our distribution centers and stores in fiscal year 2006. Fiscal year 2005 capital expenditures included capital related to the completion of reengineering of our Columbus, Ohio distribution center...

  • Page 83
    ... market type investments that are considered cash equivalents and other short term high grade bond mutual funds. Income Taxes Our effective income tax rate on income from continuing operations was 33.9% for fiscal year 2006 compared to 24.8% for fiscal year 2005. In fiscal year 2006, we benefited...

  • Page 84
    ... in the fourth quarter, benefited net sales and comparable store sales and were initiated to reduce inventory levels on slower moving items or classifications. Net sales by product category, net sales by product category as a percentage of total net sales, and the net sales change in dollars...

  • Page 85
    ... with the variable rate 2004 Credit Agreement. The weighted-average interest rate of the outstanding loans under the 2004 Credit Agreement at January 28, 2006, was 5.1%. Income Taxes The effective income tax rate of the continuing operations of the Company was 24.8% for fiscal year 2005 compared to...

  • Page 86
    ... year 2006 related primarily to the overpayment of taxes in fiscal year 2005 and had income taxes payable of approximately $28.0 million at the end of fiscal year 2006. We improved our accounts payable leverage principally by extending payment terms to foreign vendors. Cash provided by operating...

  • Page 87
    ... existing property and equipment, a limited number of new store openings, and information technology enhancements. Cash used in financing activities was $71.1 million in fiscal year 2006 and related principally to the $150.0 million share repurchase program partially offset by $57.5 million of...

  • Page 88
    ... for the nonqualified deferred compensation plan based on an average of historical distributions. Our closed store lease termination cost payments are based on contractual terms. Pension contributions are equal to expected benefit payments for the nonqualified plan plus expected contributions to the...

  • Page 89
    ... specific average cost factors for each merchandise department. Cost factors represent the average cost-to-retail ratio for each merchandise department based on beginning inventory and the fiscal year purchase activity. The average cost retail inventory method requires management to make judgments...

  • Page 90
    ... to the stores' operations. Insurance Reserves We are self-insured for certain losses relating to property, general liability, workers' compensation, and employee medical and dental benefit claims, a portion of which is paid by employees. We have purchased stoploss coverage to limit significant...

  • Page 91
    ... trends to help determine the discount rate and expected long-term rate of return. Our objective in selecting a discount rate is to identify the best estimate of the rate at which the benefit obligations would be settled on the measurement date. In making this estimate, we review rates of return on...

  • Page 92
    ... of the merchandise. Amounts paid by customers under price hold contracts are recorded in accrued operating expenses until a sale is consummated. Stock-Based Compensation In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock...

  • Page 93
    ...and wages and $4.1 million of which was included in other liabilities, for the Supplemental Pension Plan. In fiscal year 2006, we began reporting separately the pension impact to cash provided by operations on the consolidated statement of cash flows. Prior periods were reclassified to be consistent...

  • Page 94
    ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are subject to market risk from exposure to changes in interest rates associated with investments that we make from time to time and the 2004 Credit Agreement. We had no fixed rate long-term debt at February 3, 2007. We do not ...

  • Page 95
    ... Registered Public Accounting Firm To the Board of Directors of Big Lots, Inc. Columbus, Ohio We have audited management's assessment, included in the accompanying Management's Report on Internal Control over Financial Reporting included in Item 9A, that Big Lots, Inc. and subsidiaries (the "Company...

  • Page 96
    ... year ended February 3, 2007, of the Company and our report dated April 3, 2007, expressed an unqualified opinion on those financial statements and financial statement schedule and included an explanatory paragraph regarding the Company's adoption of new accounting standards relating to share-based...

  • Page 97
    Report of Independent Registered Public Accounting Firm To the Board of Directors of Big Lots, Inc. Columbus, Ohio We have audited the accompanying consolidated balance sheets of Big Lots, Inc. and subsidiaries (the "Company") as of February 3, 2007 and January 28, 2006, and the related consolidated...

  • Page 98
    BIG LOTS, INC. AND SUBSIDIARIES Consolidated Statements of Operations (In thousands, except per share amounts) Fiscal Year 2005 2006 2004 Net sales ...Cost of sales ...Gross margin ...Selling and administrative expenses ...Depreciation expense ...Operating profit ...Interest expense ...Interest ...

  • Page 99
    ... taxes ...Accrued operating expenses ...Insurance reserves ...KB bankruptcy lease obligation ...Accrued salaries and wages ...Income taxes payable ...Total current liabilities Long-term obligations ...Deferred rent ...Insurance reserves ...Other liabilities ...Shareholders' equity: Preferred shares...

  • Page 100
    ... stock options ...4,672 - (4,672) Tax benefit from sharebased awards ...- - - Treasury shares used for matching contributions to savings plan ...404 - (404) Sale of treasury shares used for deferred compensation plan . . 86 - (86) Stock-based employee compensation expense ...- - - Balance - February...

  • Page 101
    ...net income (loss) to net cash provided by operating activities: Depreciation and amortization expense ...Deferred income taxes ...Employee benefits paid with common shares ...Partial charge-off of HCC Note ...KB Toys matters ...Non-cash share-based compensation expense ...Non-cash impairment charges...

  • Page 102
    ...2007, we operated a total of 1,375 stores in 47 states. Our goal is to build upon our leadership position in broadline closeout retailing by providing our customers with great savings on brand-name closeouts and other value-priced merchandise. The Company's website is located at www.biglots.com. The...

  • Page 103
    .... Payments Received from Vendors Payments received from vendors relate primarily to rebates and reimbursement for markdowns and are recognized in our consolidated statements of operations as a reduction to cost of sales when the related inventory is sold. Store Supplies When opening a new store...

  • Page 104
    ... benefits associated with terminating employees from employment are recognized ratably from the communication date through the estimated future service period, unless the estimated future service period is less than 60 days, in which case we recognize the impact at the communication date. Generally...

  • Page 105
    ... Related to Accounting for the Tax Effects of Share-Based Payment Awards, and, as a result, used the short-cut method to determine our beginning excess tax benefit pool. Additionally, SFAS No. 123(R) requires that the benefit of tax deductions in excess of recognized compensation cost be reported...

  • Page 106
    ... date will require a one-time adjustment in fiscal year 2008 to retained earnings per the transition guidance in SFAS No. 158. We adopted the funding recognition provisions of SFAS No. 158 in fiscal year 2006. To properly report the funded status of our qualified defined benefit pension plan...

  • Page 107
    ...of Significant Accounting Policies (Continued) Pension assumptions are evaluated each year. Actuarial valuations are used to provide assistance in calculating the estimated obligations related to our pension plans. We review external data and historical trends to help determine the discount rate and...

  • Page 108
    ...Amounts paid by customers under price hold contracts are recorded in accrued operating expenses until a sale is consummated. Cost of Sales Cost of sales includes the cost of merchandise (including related inbound freight to our distribution centers, duties, and commissions), markdowns, and inventory...

  • Page 109
    ... merchandise-related freight have been reclassified to accounts payable from accrued operating expenses on the consolidated balance sheet for all periods presented. The reclassification did not impact our previously reported net income, total assets, current liabilities and shareholders' equity...

  • Page 110
    ... quarter of fiscal year 2006. The estimated remaining service life was based on our projected roll out schedule to all remaining stores, approximately one-half in fiscal year 2007 and one-half in fiscal year 2008. Depreciation expense included in loss from discontinued operations of the 130 closed...

  • Page 111
    ... a company-owned and operated store in California for an approximate $12.8 million gain. As part of the sale, we entered into a lease which permits us to occupy and operate the store through January 2009 in exchange for $1 per year rent plus the cost of taxes, insurance, and common area maintenance...

  • Page 112
    ... years 2006, 2005, and 2004, respectively. This lease income (expense) was related to KB Toys leases guaranteed by the Company which were rejected during the KB Toys bankruptcy. Future minimum commitments for equipment, store and warehouse leases, excluding closed store leases and real estate taxes...

  • Page 113
    ... with an average price paid per share of $13.82 in fiscal year 2004. The repurchased common shares were placed into treasury and are used for general corporate purposes including the issuance of shares related to equity compensation and employee benefit plans. In June 2006, we paid $14.7 million...

  • Page 114
    ... stock-based employee compensation expense in fiscal year 2005 as disclosed in Note 1. Additionally, the Committee imposed a holding period that requires all directors, executive vice presidents, and senior vice presidents (including our named executive officers other than Mr. Fishman whose stock...

  • Page 115
    ... Plans (Continued) The assumptions used in the option pricing model for each of the respective periods were as follows: Fiscal Year 2006 2005 2004 Weighted-average fair value of options granted ...Risk-free interest rates ...Expected life (years) ...Expected volatility ...Expected annual forfeiture...

  • Page 116
    BIG LOTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 7 - Stock Plans (Continued) A summary of the annual stock option activity for fiscal years 2004, 2005, and 2006 is as follows: Weighted Average Remaining Contractual Term (years) Options Price (a) ...

  • Page 117
    ...S. Fishman upon the commencement of his employment as our Chairman, Chief Executive Officer and President in fiscal year 2005 vest in one-third increments upon the attainment of mutually agreed common share price targets or fully after five years of service or upon a change in control of the Company...

  • Page 118
    ... certain employees whose hire date precedes April 1, 1994. Benefits under each plan are based on credited years of service and the employee's compensation during the last five years of employment. We maintain the Supplemental Pension Plan for certain highly compensated executives whose benefits were...

  • Page 119
    ... managers perform an annual reallocation of assets in order to address situations outside of the targeted guidelines. The Pension Plan and the Supplemental Pension Plan benefits expected to be paid in each of the following ten fiscal years are as follows: Fiscal Year (In thousands) 2007 ...2008...

  • Page 120
    ... statement of operations. Weighted-average assumptions used to determine net periodic benefit cost were: Fiscal Year 2006 2005 2004 Discount rate ...Rate of increase in compensation levels...Expected long-term rate of return ...Measurement date for plan assets and benefit obligations. . 5.7% to...

  • Page 121
    ... balance sheet. Weighted-average assumptions used to determine benefit obligations for fiscal years 2006 and 2005 were: Fiscal Year 2006 2005 Discount rate ...Rate of increase in compensation levels...Measurement date for plan assets and benefit obligations...Savings Plans 5.9% 3.5% 12/31/06...

  • Page 122
    ... statutory federal income tax rate and the effective income tax rate was as follows: Fiscal Year 2006 2005 2004 Statutory federal income tax rate ...Effect of: State and local income taxes, net of federal tax benefit ...Work opportunity tax and other employment tax credits ...Expiration of capital...

  • Page 123
    ...Workers' compensation and other insurance reserves ...Uniform inventory capitalization ...Accrued rent ...State tax net operating losses, net of federal tax benefit ...Accrued state taxes ...Deferred compensation...KB store lease and other discontinued operations contingencies...Closed store accrual...

  • Page 124
    ...Foreign tax credits ...State and local: State net operating loss carryforwards ...California enterprise zone credits...California alternative minimum tax credits ...New Jersey alternative minimum tax credits ...Total income tax loss and credit carryforwards ... $ 722 233 Expires fiscal years 2008...

  • Page 125
    ... former employees who worked for us as a furniture department manager at any time between November 2, 2001, and October 1, 2003. As a result of that order, notice was sent to approximately 1,300 individuals who had the right to opt-in to the Texas matter. In the third quarter of fiscal year 2006, we...

  • Page 126
    ... operations, including KB Toys matters, see Note 11 to the accompanying consolidated financial statements. We are self-insured for certain losses relating to property, general liability, workers' compensation, and employee medical and dental benefit claims, a portion of which is paid by employees...

  • Page 127
    ... Year 2005 2004 Net sales ...Gross margin ...Operating loss ...Loss from discontinued operations, net of tax ... - - (2,659) $(1,606) $ $215,154 74,109 (41,130) $(25,381) $225,820 90,299 (1,662) $ (1,021) In fiscal year 2006, closed stores operating loss is primarily comprised of exit-related...

  • Page 128
    ...KB Toys filed for bankruptcy protection pursuant to Chapter 11 of title 11 of the United States Code. In connection with the KB Toys business, we incurred charges and subsequently partially reversed charges which have been recognized in our consolidated statements of operations for fiscal years 2006...

  • Page 129
    ... us at each future reporting period. In the event additional liability arises from future defaults on these leases, any related charge would be to discontinued operations. We continue to have KB Lease Obligations with respect to approximately 84 open KB Toys stores and KB Toys' main office building...

  • Page 130
    ...for tax losses generally related to the periods prior to the Company's sale of KB Toys. During the fourth quarter of fiscal year 2006, we reversed prior pretax charges of approximately $4.7 million and net income tax contingencies of approximately $1.7 million, in income from discontinued operations...

  • Page 131
    ... year 2006 was 14 weeks. All other quarters were 13 weeks. Summarized quarterly financial data for fiscal years 2006 and 2005 was as follows: Fiscal Year 2006 (In thousands, except per share amounts) (a) First Second Third Fourth Year Net sales...Gross margin ...Income from continuing operations...

  • Page 132
    ... that information required to be disclosed in the Company's periodic reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the SEC's rules, forms, and regulations. Management's Report on Internal Control over Financial...

  • Page 133
    ...respect to director compensation, executive compensation, and corporate governance, is incorporated herein by reference in response to this item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS Equity Compensation Plan Information The following...

  • Page 134
    ... for issuance under the 2005 Incentive Plan is adjusted annually by adding 0.75% of the total number of issued common shares (including treasury shares) as of the start of each of our fiscal years that the 2005 Incentive Plan is in effect. The information contained under the caption "Stock Ownership...

  • Page 135
    ... costs. Includes non-cash reductions for the write-down of property, inventory, and deferred rent, and cash payments for severance and benefits and contract termination costs. Consists of the remaining liability for severance and benefits and contract termination costs related to closed stores. 75

  • Page 136
    ...(d) to the Company's Form 10-Q for the quarter ended August 3, 2002). Form of Option Award Agreement under the Big Lots, Inc. Amended and Restated Director Stock Option Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Form 8-K dated September 9, 2004). Big Lots 2006 Bonus Plan...

  • Page 137
    ... 10(u) to the Company's Form 10-K for the year ended January 31, 2004). Big Lots Executive Benefit Plan (incorporated herein by reference to Exhibit 10(m) to the Company's Form 10-K for the year ended January 31, 2004). Big Lots, Inc. Non-Employee Director Compensation Package, effective August...

  • Page 138
    ... Amendment to Credit Agreement among Big Lots Stores, Inc., as borrower, the Guarantors named therein, and the Banks named therein. Security Agreement between Big Lots Stores, Inc. and Big Lots Capital, Inc. (incorporated herein by reference to Exhibit 10.2 to the Company's Form 8-K dated October 29...

  • Page 139
    ..., thereunto duly authorized, on this 3rd day of April 2007. BIG LOTS, INC. By: /s/ Steven S. Fishman Steven S. Fishman Chairman of the Board, Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following...

  • Page 140
    ... Holdings, Inc. Midwestern Home Products, Inc. Midwestern Home Products Company, Ltd. Tool and Supply Company of New England, Inc. Sonoran LLC Sahara LLC Great Basin LLC Industrial Products of New England, Inc. SS Investments Corporation Mac Frugal's Bargains * Close-outs Inc. PNS Stores, Inc. West...

  • Page 141
    ... unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and the effectiveness of the Company's internal control over financial reporting) appearing in this Annual Report on Form 10-K of Big Lots, Inc. for the year ended February...

  • Page 142
    ...b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ Steven S. Fishman Steven S. Fishman Chairman of the Board, Chief Executive Officer and President Dated: April 3, 2007

  • Page 143
    ...report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ Joe R. Cooper Joe R. Cooper Senior Vice President and Chief Financial Officer Dated...

  • Page 144
    ... the annual report on Form 10-K (the "Report") for the year ended February 3, 2007, of Big Lots, Inc. (the "Company"). I, Steven S. Fishman, Chairman of the Board, Chief Executive Officer and President of the Company, certify that: the Report fully complies with the requirements of Section...

  • Page 145
    ... 2002, and accompanies the annual report on Form 10-K (the "Report") for the year ended February 3, 2007, of Big Lots, Inc. (the "Company"). I, Joe R. Cooper, Senior Vice President and Chief Financial Officer of the Company, certify that: the Report fully complies with the requirements of Section 13...

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  • Page 149
    ... Annual Meeting of Shareholders will be held at 9:00 a.m. EDT on Thursday, May 31, 2007, at the Big Lots, Inc. corporate office, 300 Phillipi Road, Columbus, Ohio. Whether or not you plan to attend, you are encouraged to vote online or complete and return the proxy card to ensure that your shares...

  • Page 150
    Big Lots, Inc., 300 Phillipi Road, Columbus, Ohio 43228