Big Lots 2007 Annual Report Download - page 116

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Interest Expense
Interest expense decreased 90.5% to $0.6 million in 2006 compared to $6.3 million in 2005. The $5.7 million
decrease in interest expense was principally due to lower average borrowings of $4.8 million in 2006 compared
to average borrowings of $139.9 million in 2005.
Interest and Investment Income
Interest and investment income increased $3.0 million in 2006 to $3.3 million compared to $0.3 million in 2005.
Because we generated significant cash flow from our operations, we were in an invested position throughout the
majority of 2006. We invested primarily in money 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 2006 compared to 24.8%
for 2005. In 2006, we benefited from a reduction in the valuation allowance as a result of our expectation of
utilizing more net operating loss benefits and the resolution of certain income tax matters. The rate was lower
in 2005 principally due to 1) proportionately larger jurisdictional losses in entities with higher marginal income
tax rates, 2) lower overall income before income taxes, and 3) loss contingency activity partially offset by higher
write-down of deferred income tax assets as a result of state tax law changes.
Discontinued Operations
We recorded income from discontinued operations of $11.4 million in 2006 compared to loss from discontinued
operations of $25.8 million in 2005. The income from discontinued operations in 2006 was principally
comprised of 1) the partial release of our KB bankruptcy lease obligation (as defined in note 11 to the
accompanying consolidated financial statements) of $8.7 million, net of tax, and 2) the release of KB Toys-
related income tax and sales tax indemnification liabilities of $4.7 million, net of tax, partially offset by 1) a
loss on the sale of the Pittsfield, Massachusetts distribution center (formerly owned by the KB Toys business)
of approximately $1.4 million, net of tax and 2) exit-related costs on the 130 closed stores of $1.6 million,
net of tax, including a $0.7 million, pretax pension settlement charge and expenses on the portion of the 130
stores where the leases have not been terminated. We based the revision of the KB bankruptcy lease obligation
on the number of demand notices that we had received from landlords and used information received from
KB Toys, the bankruptcy trust, and our own lease records which date back to when we owned the KB Toys
business. Additionally, we released the tax indemnification liabilities in light of information that we received
as a result of our settlement discussions with the bankruptcy trustee and KB Toys in an attempt to resolve the
tax indemnification claims. Our loss from discontinued operations in 2005 included $25.4 million, net of tax,
primarily related to exit costs and 2005 results of operations of the 130 stores, $0.6 million, net of tax, of income
for the reversal of liabilities associated with the KB Toys business, and $1.0 million, net of tax, associated
with the write-down of the Pittsfield, Massachusetts distribution center to fair value less selling cost, upon its
classification as held for sale.
Capital Resources and Liquidity
Capital Resources
On October 29, 2004, we entered into the $500.0 million Credit Agreement. The Credit Agreement is scheduled
to terminate on October 28, 2009. The proceeds of the Credit Agreement are available for general corporate
purposes, working capital, and to repay certain of our indebtedness.
The pricing and fees related to the Credit Agreement fluctuate based on our debt rating. Loans made under the
Credit Agreement may be prepaid by us without penalty. The Credit Agreement contains financial and other
covenants, including, but not limited to, limitations on indebtedness, liens, and investments, as well as the
maintenance of two financial ratios – a leverage ratio and a fixed charge coverage ratio. A violation of these