<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 30, 1999 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 6, 1999, was 110,825,407 and there were no shares of
Nonvoting Common Stock, $.01 par value per share outstanding at that date.
FORM 10-Q Page 1
<PAGE> 2
CONSOLIDATED STORES CORPORATION
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page
----
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
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II - OTHER INFORMATION
Items 1 - 6 14
Signature 15
FORM 10-Q Page 2
<PAGE> 3
<TABLE>
<CAPTION>
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
October 30, January 30,
1999 1999
- ----------------------------------------------------------------------------- ------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 93,388 $ 75,906
Inventories 1,605,891 1,096,844
Deferred income taxes 105,024 98,739
Other current assets 110,609 63,686
- ----------------------------------------------------------------------------- -------------
Total current assets 1,914,912 1,335,175
- ----------------------------------------------------------------------------- -------------
Property and equipment - net 721,654 683,437
Other assets 39,193 23,912
- ----------------------------------------------------------------------------- -------------
$2,675,759 $2,042,524
============================================================================= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 599,123 $ 337,368
Accrued liabilities and income taxes 90,549 122,221
Current maturities of long-term obligations 156,578 352
- ----------------------------------------------------------------------------- -------------
Total current liabilities 846,250 459,941
- ----------------------------------------------------------------------------- -------------
Long-term obligations 530,905 295,619
Deferred income taxes and other liabilities 104,429 105,062
Minority interest 14,592
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 110,820 and 109,524 shares, respectively 1,108 1,095
Nonvoting common stock - authorized 8,000 shares,
$.01 par value; none issued
Additional paid-in capital 406,429 385,612
Retained earnings 772,046 795,195
- ----------------------------------------------------------------------------- -------------
Total stockholders' equity 1,179,583 1,181,902
- ----------------------------------------------------------------------------- -------------
$2,675,759 $2,042,524
============================================================================= =============
The accompanying notes are an integral part of these condensed financial
statements.
</TABLE>
FORM 10-Q Page 3
<PAGE> 4
<TABLE>
<CAPTION>
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT INCOME PER COMMON SHARE DATA)
Thirteen weeks ended Thirty-nine weeks ended
----------------------------- -----------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
- -------------------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 999,632 $ 856,433 $ 2,853,181 $ 2,503,605
Cost and expenses:
Cost of sales 584,900 504,110 1,668,553 1,469,048
Selling and administrative expenses 436,723 371,007 1,209,598 1,031,483
Interest expense 8,938 8,748 19,409 18,512
- -------------------------------------------------------------------------------- ------------ ------------ ------------
1,030,561 883,865 2,897,560 2,519,043
- -------------------------------------------------------------------------------- ------------ ------------ ------------
Loss before income taxes and minority interest (30,929) (27,432) (44,379) (15,438)
Income taxes benefit (12,217) (10,700) (17,530) (6,029)
- -------------------------------------------------------------------------------- ------------ ------------ ------------
Loss before minority interest (18,712) (16,732) (26,849) (9,409)
Minority interest in net loss of consolidated subsidiary (3,700) (3,700)
- -------------------------------------------------------------------------------- ------------ ------------ ------------
Net loss $ (15,012) $ (16,732) $ (23,149) $ (9,409)
================================================================================ =========== =========== ===========
Loss per common share $ (0.14) $ (0.15) $ (0.21) $ (0.09)
Loss per common share - diluted $ (0.14) $ (0.15) $ (0.21) $ (0.09)
Average common shares outstanding 110,609 109,473 110,191 109,099
Dilutive effect of stock options
- -------------------------------------------------------------------------------- ------------ ------------ ------------
Diluted 110,609 109,473 110,191 109,099
================================================================================ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
FORM 10-Q Page 4
<PAGE> 5
<TABLE>
<CAPTION>
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Thirty-nine weeks ended
-----------------------------------
October 30, October 31,
1999 1998
- ----------------------------------------------------------------------------------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (23,149) $ (9,409)
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 69,998 67,392
Deferred income taxes (6,917) 9,328
Other 15,715 16,422
Change in assets and liabilities (325,887) (480,774)
- ----------------------------------------------------------------------------------- ---------
Net cash used in operating activities (270,240) (397,041)
- ----------------------------------------------------------------------------------- ---------
INVESTMENT ACTIVITIES:
Capital expenditures (111,532) (124,692)
Other (2,054) 719
- ----------------------------------------------------------------------------------- ---------
Net cash used for investment activities (113,586) (123,973)
- ----------------------------------------------------------------------------------- ---------
FINANCING ACTIVITIES:
Proceeds from credit agreements, net 391,798 515,833
Payment of other debt, net (286) (261)
Proceeds from exercise of stock options 9,796 30,476
Increase in deferred credits 3,427
- ----------------------------------------------------------------------------------- ---------
Net cash provided by financing activities 401,308 549,475
- ----------------------------------------------------------------------------------- ---------
Increase in cash and cash equivalents $ 17,482 $ 28,461
=================================================================================== =========
Supplemental Disclosure of Cash Flow Information:
Income taxes paid $ 42,340 $ 45,363
Interest paid 21,403 20,662
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
FORM 10-Q 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 30, 1999, and the condensed
consolidated statements of income and statements of cash flows for the thirteen
and thirty-nine week periods ended October 30, 1999, 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 30, 1999, 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 principles
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
30, 1999. The results of operations for the periods ended October 30, 1999, may
not necessarily be indicative of the operating results for the full year.
NOTE 2 - BUSINESS VENTURES
Effective June 25, 1999, BrainPlay.com, Inc., an unaffiliated entity, and the
Company, through wholly owned subsidiaries, formed a new limited liability
company, KBkids.com LLC to operate an online retail business offering toys,
video games, software, videos and other children's products. The Company will
contribute $80 million, as scheduled, by November 1, 1999, to the new entity in
addition to KoB Toys buying, merchandising and other management expertise.
BrainPlay.com, Inc. contributed substantially all of its assets including its
Web site, its technology infrastructure and its management team. KBkids.com LLC,
is 80% owned by subsidiaries of the Company and 20% by BrainPlay.com, Inc.
FORM 10-Q Page 6
<PAGE> 7
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
All forward-looking statements (as such term is defined in the Private
Securities Litigation Reform Act of 1995) contained in this Form 10-Q or made by
management of the Company involve risks and uncertainties and are subject to
change based on various important factors, many of which may be beyond the
Company's control. Accordingly, the Company's future performance and financial
results may differ materially from those expressed or implied in any such
forward-looking statements. Among other things, the foregoing statements as to
costs and dates relating to the Year 2000 effort are forward-looking and are
based on the Company's current best estimates that may be proven incorrect as
additional information becomes available. The Company's Year 2000 related
forward-looking statements are also based on assumptions about many important
factors, including the technical skills of employees and independent
contractors, the representations and preparedness of third parties, the ability
of vendors to deliver merchandise or perform services required by the Company
and the collateral effects of the Year 2000 issues on the Company's business
partners and customers. While the Company believes its assumptions are
reasonable, it cautions that it is impossible to predict factors that could
cause actual costs or timetables to differ materially from the expected results.
In addition to Year 2000 issues, the following factors, among others, in some
cases have affected and in the future could affect the Company's financial
performance and actual results and could cause actual results for 1999 and
beyond to differ materially from those expressed or implied in any
forward-looking statements included in this Form 10-Q or otherwise made by
management: changes in consumer spending patterns, consumer preferences and
overall economic conditions, the impact of competition and pricing, changes in
weather patterns, political stability, currency and exchange risks and changes
in existing or potential duties, tariffs or quotas, availability of suitable
store locations at appropriate terms, ability to develop new merchandise and
ability to hire and train associates.
The Company does not undertake to publicly update or revise its forward-looking
statements even if experience or future changes make it clear that any projected
results expressed or implied therein will not be realized. Readers are also
urged to carefully review and consider the various disclosures made by the
Company which attempt to advise interested parties of the factors which affect
the Company's business, including Management's Discussion and Analysis of
Financial Condition and Results of Operations included in this report.
OVERVIEW
Consolidated Stores Corporation is a leading value retailer specializing in
closeout merchandise and toys. The Company is the largest retailer of closeout
products and the largest enclosed shopping mall-based toy retailer in the United
States. 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.
Effective June 25, 1999, BrainPlay.com, Inc., an unaffiliated entity, and the
Company, through wholly owned subsidiaries, formed a new limited liability
company, KBkids.com LLC to operate an online retail business offering toys,
video games, software, videos and other children's products. The Company will
contribute $80 million, as scheduled, by November 1, 1999, to the new entity in
addition to KoB Toys buying, merchandising and other management expertise.
BrainPlay.com, Inc. contributed substantially all of its assets including its
Web site, its technology infrastructure and its management team. KBkids.com LLC,
is 80% owned by subsidiaries of the Company and 20% by BrainPlay.com, Inc. As of
October 30, 1999, the Company contributed $70 million of its commitment. It is
anticipated the KBkids.com LLC operation will record substantial pretax
operating losses for the balance of fiscal 1999.
FORM 10-Q Page 7
<PAGE> 8
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
At October 30, 1999, the Company operated a total of 2,550 stores in all 50
states Puerto Rico and Guam. Retail operations are conducted primarily under the
following names:
Closeout Toy
- ---------------------------------------- --------------------------------------
Odd Lots KoB Toys
Big Lots KoB Toy Works
Big Lots Furniture KoB Toy Outlet
Mac Frugal's Bargains o Close-outs KBkids.com
Pic `N' Save
Wholesale operations are conducted through Consolidated International and
Wisconsin Toy.
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 follow a trend similar to inventories.
ANALYSIS OF OPERATIONS
Third quarter 1999 net loss was $15.0 million, or $0.14 per share, compared with
a net loss of $16.7 million, or $0.15 per share, for the same period of 1998.
For the thirty-nine week periods of 1999 and 1998 net losses were $23.1 million,
or $0.21 per share, and $9.4 million, or $0.09 per share, respectively. Third
quarter and year-to-date 1999 results include a net loss of $14.8 million, or
$0.14 per share, related to the operations of KBkids.com LLC. Excluding net
losses attributable to KBkids.com LLC third quarter 1999 earnings were
break-even and year-to-date net loss was $0.07 per share.
The following tables reflect the number of stores in operation at the end of
each period and compares components of the statement of income as a percent of
net sales.
<TABLE>
<CAPTION>
October 30, October 31,
1999 1998
--------------- ----------------
<S> <C> <C>
Retail stores in operation at end of period:
Closeout 1,207 1,091
Toy 1,343 1,312
--------------- ----------------
2,550 2,403
=============== ================
</TABLE>
FORM 10-Q Page 8
<PAGE> 9
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
<TABLE>
<CAPTION>
Thirteen weeks ended Thirty-nine weeks ended
------------------------------ -----------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
-------------- -------------- ------------ -------------
(Percent to total net sales)
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Gross Profit 41.5 41.1 41.5 41.3
Selling and administrative expenses 43.7 43.3 42.4 41.2
- ----------------------------------------------------------------------- ------------- ------------- -------------
(2.2) (2.2) (0.9) 0.1
Interest expense 0.9 1.0 0.7 0.7
- ----------------------------------------------------------------------- ------------- ------------- -------------
Loss before income taxes and minority interest (3.1) (3.2) (1.6) (0.6)
Income taxes benefit (1.2) (1.2) (0.7) (0.2)
- ----------------------------------------------------------------------- ------------- ------------- -------------
Loss before minority interest (1.9) (2.0) (0.9) (0.4)
Minority interest in net loss of consolidated subsidiary (0.4) (0.1)
- ----------------------------------------------------------------------- ------------- ------------- -------------
Net loss (1.5)% (2.0)% (0.8)% (0.4)%
======================================================================= ============= ============= =============
</TABLE>
SALES. Net sales for the thirteen and thirty-nine week periods ended October 30,
1999, increased 16.7% and 14.0%, respectively. These increases reflect the
greater number of stores in operation for each period of 1999 in addition to
comparable store sales increases of 9.2% for the quarter and 6.7% for the year
to date period.
Net sales by operating segment were as follows:
<TABLE>
<CAPTION>
Thirteen weeks ended ($ in thousands)
----------------------------------------------------------------
October 30, 1999 October 31, 1998
----------------------------- ------------------------------- Percentage
Operating Segment $ % $ % Change
- ------------------------------ --------------- ------------- --------------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Closeout $661,417 66.2% $557,813 65.1% 18.6%
Toys 326,102 32.6 287,798 33.6 13.3
Other 12,113 1.2 10,822 1.3 11.9
- ------------------------------------------- ------- -------- ------- ----
$999,632 100.0% $856,433 100.0% 16.7%
=========================================== ========= ======== ======== =====
<CAPTION>
Thirty-nine weeks ended ($ in thousands)
----------------------------------------------------------------
October 30, 1999 October 31, 1998
----------------------------- ------------------------------- Percentage
$ % $ % Change
--------------- ------------- --------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Closeout $1,928,609 67.6% $1,666,861 66.6% 15.7%
Toys 893,434 31.3 806,034 32.2 10.8
Other 31,138 1.1 30,710 1.2 1.4
- -------------------------------------------- ------- ---------- ------ ----
$2,853,181 100.0% $2,503,605 100.0% 14.0%
============================================ ======= ========== ====== ====
</TABLE>
FORM 10-Q Page 9
<PAGE> 10
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
<TABLE>
<CAPTION>
Comparable store sales by operating segment were as follows:
Thirteen weeks ended Thirty-nine weeks ended
---------------------------- ----------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Closeout 9.8% (6.2)% 7.7% (2.4)%
Toys 8.0 (1.6) 4.8 (1.6)
- ------------------------------------------- ------------ ------------ ------------
Total 9.2% (4.7)% 6.7% (2.1)%
=========================================== ============ ============ ============
</TABLE>
GROSS PROFIT. Gross profit as a percent of net sales was 41.5% for the third
quarter and year-to-date period of fiscal 1999 compared to 41.1% and 41.3% in
the same 1998 periods. The improvement in Closeout Stores gross profit
percentage is reflective of the improved markdown and shrink performance and a
historically low gross profit percentage in the 1998 period. The improvements in
gross profit were partially offset by increased import freight costs over the
prior year. The change in Toy Stores gross profit percentage is primarily
associated with the mix of sales in lower margin categories such as video, as
well as, being negatively impacted by KBkids.com LLC.
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 30, October 31, October 30, October 31,
Operating Segment 1999 1998 1999 1998
- ------------------------------ --------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Closeout 42.7% 41.6% 43.0% 42.7%
Toys 39.5 40.9 38.8 39.1
Other 28.8 25.6 27.7 24.9
- ------------------------------------------------- --------------- ------------- -------------
41.5% 41.1% 41.5% 41.3%
================================================= =============== ============ =============
</TABLE>
SELLING AND ADMINISTRATIVE EXPENSES. As a percent to net sales, selling and
administrative expenses were 43.7% in the third quarter of fiscal 1999 and 42.4%
for the year to date period. For 1999 selling and administrative expenses
include operations of KBkids.com LLC which increased the percent to sales by
3.1% for the quarter and 1.1% in the year-to-date period. In the respective
periods of fiscal 1998 selling and administrative expenses were 43.3% and 41.2%.
Fiscal 1998 selling and administrative expenses were below normal levels
reflective of lower costs attributable to the reduced flow of merchandise to
Closeout stores during that period.
INTEREST EXPENSE. Interest expense increased slightly in the third quarter and
year-to-date periods of 1999 reflective of higher average debt levels on
borrowings for seasonal operating requirements and capital expenditures offset
to some extent by lower effective interest rates.
INCOME TAXES. The effective tax rate of the Company is anticipated to be 39.5%
in fiscal 1999 compared to 39.0% in fiscal 1998. This increase is primarily
associated with state and local taxes.
FORM 10-Q Page 10
<PAGE> 11
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
The primary sources of liquidity for the Company have been cash flow from
operations and as necessary borrowings under available credit facilities.
Working capital at October 30, 1999, was $1,068.7 million compared to $1,084.1
million at October 31, 1998. For the thirty-nine week periods ended October 30,
1999, and October 31, 1998, net cash used by operations was $270.2 million and
$397.0 million and capital expenditures were $111.5 million and $124.7 million,
respectively.
The Company has a Revolving Credit Facility which provides senior bank financing
in an aggregate principal amount of up to $700 million. The facility has a
maturity date of May 15, 2003. From time-to-time the Company also utilizes
uncommitted credit facilities, subject to the terms of the Revolving Credit
Facility, to supplement short-term borrowing requirements. At October 30, 1999,
approximately $133.9 million was available for borrowings under the Revolving
Credit Facility and $107.3 million of uncommitted credit facilities were
available.
The funding commitment and anticipated pretax operating losses of the KBkids.com
LLC operation for the balance of fiscal 1999 are not expected to have a
significant impact on the Company's ability 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.
ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (FAS 133), which is effective for quarters beginning after June 15,
2000. FAS 133 requires all derivatives to be recorded on the balance sheet at
fair value and establishes accounting treatment for various types of hedges. The
Company has a limited exposure to derivative products and is analyzing the
implementation requirements of FAS 133. No material impact on reported results
is currently anticipated after the adoption of FAS 133.
IMPACT OF 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
policies 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.
FORM 10-Q Page 11
<PAGE> 12
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 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.
The Company believes its IT systems are "Year 2000" compliant. 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.
Despite the significant efforts to address "Year 2000" concerns, the Company
could potentially experience disruptions to some of its operations, including,
but not limited to, loss of communications links with certain store locations,
delays in receipt of inventory, loss of electric power, inability to process
transactions, send purchase orders or engage in similar normal business
activities resulting from non compliant systems used by third party business and
governmental entities. Although minimal business disruption is anticipated the
Company has established contingency plans to ensure that the core business
operations are able to continue in the event of a "Year 2000" issue. These plans
are based on existing emergency response plans, business continuity plans and
the results of the "Year 2000" project. The operating segments have considered
various contingencies, such as operational alternatives, alternative merchandise
vendors and alternative service providers. Additionally, several areas within
the Company have adopted mandatory attendance policies for certain managers,
staff and consultants for the days surrounding the millennium change in order to
assure adequate and appropriate managerial and other response to address any
"Year 2000" related problem that may arise and, if necessary, may be handled by
manual intervention.
The Company has incurred to date approximately $5 million of costs to implement
its "Year 2000" compliance program and presently expects to incur not more than
$.5 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 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 of this report, which addresses forward-looking
statements made by the Company.
FORM 10-Q Page 12
<PAGE> 13
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not entered into any transactions using derivative financial
instruments or derivative commodity instruments. The Company is subject to
market risk from exposure to changes in interest rates based on its financing,
investing and cash management activities. The Company utilizes various credit
facilities to fund seasonal working capital requirements which are comprised
primarily of variable rate debt. As of October 30, 1999, the Company had
outstanding variable rate borrowings of $576.2 million at a weighted average
interest rate of 5.65%.
FORM 10-Q Page 13
<PAGE> 14
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. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit No. Document
----------- --------
27 Financial Data Schedule (only submitted to SEC
in electronic format)
(b) Reports on Form 8-K. None.
FORM 10-Q Page 14
<PAGE> 15
SIGNATURE
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 10, 1999 By: /s/ Michael J. Potter
----------------- ----------------------------------
Michael J. Potter,
Executive Vice President,
Chief Financial Officer, and
Principal Accounting Officer
FORM 10-Q Page 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
10-Q as of October 30, 1999, and the periods then ended, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> OCT-30-1999
<CASH> 93,388
<SECURITIES> 0
<RECEIVABLES> 14,438
<ALLOWANCES> 0
<INVENTORY> 105,024
<CURRENT-ASSETS> 1,914,912
<PP&E> 1,216,916
<DEPRECIATION> 495,262
<TOTAL-ASSETS> 2,675,759
<CURRENT-LIABILITIES> 846,250
<BONDS> 530,905
0
0
<COMMON> 1,108
<OTHER-SE> 1,178,475
<TOTAL-LIABILITY-AND-EQUITY> 2,675,759
<SALES> 2,853,181
<TOTAL-REVENUES> 2,853,181
<CGS> 1,668,553
<TOTAL-COSTS> 2,878,151
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,409
<INCOME-PRETAX> (44,379)
<INCOME-TAX> (17,530)
<INCOME-CONTINUING> (26,849)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,149)
<EPS-BASIC> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
