Big Lots 2009 Annual Report Download - page 146

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Interest Expense
Interest expense increased $2.8 million to $5.3 million in 2008 compared to $2.5 million in 2007. The increase
in interest expense was principally due to higher average borrowings of $151.8 million in 2008 compared to
average borrowings of $37.9 million in 2007. The higher average borrowings caused interest expense to be
higher by approximately $4 million. The higher average borrowings were driven principally by the acquisition
of our common shares under our publicly announced share repurchase programs. Our average effective interest
rate of 3.5% in 2008 was lower than our average effective interest rate of 6.6% in 2007. The decrease in the
average effective interest rate, which resulted from generally lower rates in the overall short-term interest rate
markets, decreased our interest expense by approximately $1.0 million in 2008.
Interest and Investment Income
Interest and investment income decreased $5.1 million in 2008 to $0.1 million compared to $5.2 million in 2007.
The decline in interest and investment income was caused by the reduction in funds available to invest in 2008
compared to 2007. Our average invested amount in 2008 was $3.6 million compared to $130.4 million in 2007.
The decline in funds available for investment was caused by the $750 million of share repurchases under our
2007 Share Repurchase Programs during the period March 2007 through February 2008. In 2007, we invested
primarily in money market type investments that were considered cash equivalents and other short term high
grade bond mutual funds. We did not hold any investment balances at the end of 2008.
Income Taxes
Our effective income tax rate on income from continuing operations was 38.0% for 2008 compared to 36.8% for
2007. The net increase in 2008 was driven by a decrease in nontaxable municipal interest income, the increase
in the valuation allowance on unrealized capital losses (versus a net decrease in the valuation allowance in
2007), and a change in the jurisdictional earnings mix, partially offset by the settlement of certain income
tax matters.
Discontinued Operations
Loss from discontinued operations was $3.3 million, net of tax, in 2008 compared to income from discontinued
operations of $7.3 million, net of tax in 2007. The 2008 loss from discontinued operations of $3.3 million, net
of tax, was comprised of $3.0 million, net of tax, for the KB-II Bankruptcy Lease Obligation (as defined in note
11 to the accompanying consolidated financial statements) and $0.3 million, net of tax, for exit-related costs on
the remaining 2005 closed stores which met the criteria for classification as discontinued operations. KB Toys
declared bankruptcy again in December 2008. As a result of this bankruptcy filing, KB Toys rejected 31 store
leases for which we believe we have an indemnification obligation. Based on the lease data for these 31 stores
and using our prior experience with these matters, we estimated a KB-II Bankruptcy Lease Obligation of
$3.0 million, net of tax. The income from discontinued operations in 2007 was principally comprised of 1) the
release of our KB-I Bankruptcy Lease Obligations of $6.6 million, net of tax, 2) the recognition of $1.1 million
of proceeds, net of tax, from the bankruptcy trust as recovery for prior charges incurred by us for KB-I
Bankruptcy Lease Obligations and the Pittsfield, Massachusetts distribution center (formerly owned by KB
Toys) mortgage guarantee, and 3) exit-related costs on the 130 closed stores of $0.6 million, net of tax, related to
expenses on the portion of the 130 stores where the leases have not been terminated.
Capital Resources and Liquidity
On April 28, 2009, we entered into the 2009 Credit Agreement, a new $500 million three-year unsecured credit
facility that replaced the 2004 Credit Agreement. The 2009 Credit Agreement is scheduled to expire on April
28, 2012. In connection with our entry into the 2009 Credit Agreement, we paid an aggregate amount of $5.6
million of bank fees and expenses, which are being amortized over the term of the agreement. Proceeds from
borrowings under the 2009 Credit Agreement are available for general corporate purposes, working capital,
and to repay certain of our indebtedness. The 2009 Credit Agreement includes a $150 million letter of credit
sublimit and a $30 million swing loan sublimit. The interest rates, pricing and fees under the 2009 Credit
Agreement fluctuate based on our debt rating. The 2009 Credit Agreement allows us to select our interest rate