<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 29, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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 September 7, 2000, was 111,450,511 and there were no shares of Nonvoting
Common Stock, $.01 par value per share, outstanding at that date.
FORM 10-Q
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CONSOLIDATED STORES CORPORATION
QUARTERLY REPORT ON FORM 10-Q
INDEX
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<TABLE>
<CAPTION>
Page
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<S> <C>
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 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 8
Part II - Other Information
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signature 13
</TABLE>
FORM 10-Q Page 2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
July 29, January 29,
ASSETS 2000 2000
---------- ----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 59,885 $ 96,337
Inventories 863,126 735,926
Deferred income taxes 74,354 68,282
Other current assets 64,424 42,216
------------------------------------------------------------------------ ---------- ----------
Total current assets 1,061,789 942,761
------------------------------------------------------------------------ ---------- ----------
Property and equipment - net 456,070 433,077
Other assets 4,222 4,713
Net assets of discontinued segment 667,807 482,148
------------------------------------------------------------------------ ---------- ----------
$2,189,888 $1,862,699
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 184,794 $ 181,869
Accrued liabilities and income taxes 87,117 115,374
Current maturities of long-term obligations 99,600 140,100
------------------------------------------------------------------------ ---------- ----------
Total current liabilities 371,511 437,343
------------------------------------------------------------------------ ---------- ----------
Long-term obligations 515,000 50,000
Deferred income taxes and other liabilities 75,127 75,294
------------------------------------------------------------------------ ---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock - authorized 2,000 shares, $.01 par value; none issued - -
Common stock - authorized 290,000 shares, $.01 par value; issued 111,364
shares and 111,000 shares, respectively 1,114 1,110
Nonvoting common stock - authorized 8,000 shares, $.01 par value;
none issued - -
Additional paid-in capital 411,687 407,647
Retained earnings 815,449 891,305
------------------------------------------------------------------------ ---------- ----------
Total stockholders' equity 1,228,250 1,300,062
------------------------------------------------------------------------ ---------- ----------
$2,189,888 $1,862,699
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
FORM 10-Q Page 3
<PAGE> 4
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER COMMON SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
----------------------------- -----------------------------
JULY 29, JULY 31, JULY 29, JULY 31,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 708,518 $ 641,638 $ 1,431,657 $ 1,286,217
Costs and expenses:
Cost of sales 410,008 368,392 829,454 734,495
Selling and administrative expenses 278,243 255,664 554,727 509,888
Interest expense 4,934 3,666 8,467 6,806
------------------------------------------ ----------- ----------- ----------- -----------
693,185 627,722 1,392,648 1,251,189
------------------------------------------ ----------- ----------- ----------- -----------
Income from continuing operations before
income taxes 15,333 13,916 39,009 35,028
Income tax expense 6,056 5,497 15,408 13,836
------------------------------------------- ----------- ----------- ----------- -----------
Income from continuing operations 9,277 8,419 23,601 21,192
Discontinued operations (71,956) (12,835) (99,457) (29,329)
------------------------------------------- ----------- ----------- ----------- -----------
Net loss $ (62,679) $ (4,416) $ (75,856) $ (8,137)
=========== =========== =========== ===========
Income (loss) per common share - basic:
Income from continuing operations $ 0.08 $ 0.08 $ 0.21 $ 0.19
Discontinued Operations (0.64) (0.12) (0.89) (0.26)
------------------------------------------- ----------- ----------- ----------- -----------
Net loss $ (0.56) $ (0.04) $ (0.68) $ (0.07)
=========== =========== =========== ===========
Income (loss) per common share - diluted:
Income from continuing operations $ 0.08 $ 0.07 $ 0.21 $ 0.19
Discontinued operations (0.64) (0.11) (0.89) (0.26)
------------------------------------------- ----------- ----------- ----------- -----------
Net loss $ (0.56) $ (0.04) $ (0.68) $ (0.07)
=========== =========== =========== ===========
Average common shares outstanding:
Basic 111,360 110,123 111,233 109,982
Dilutive effect of stock options 1,191 3,266 1,144 3,266
------------------------------------------- ----------- ----------- ----------- -----------
Diluted 112,551 113,389 112,377 113,248
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
FORM 10-Q Page 4
<PAGE> 5
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
-----------------------------
JULY 29, JULY 31,
2000 1999
------------- ------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (75,856) $ (8,137)
Adjustments to reconcile net loss to net cash used in
operating activities:
Discontinued operations 99,457 29,329
Depreciation and amortization 30,651 27,243
Deferred income taxes (6,239) 30,462
Other 4,457 6,706
Change in assets and liabilities (174,740) (169,306)
Cash used by discontinued operations (285,116) (114,000)
----------------------------------------------------- --------- ---------
Net cash used in operating activities (407,386) (197,703)
----------------------------------------------------- --------- ---------
INVESTING ACTIVITIES:
Capital expenditures (54,045) (35,670)
Other 360 875
----------------------------------------------------- --------- ---------
Net cash used in investing activities (53,685) (34,795)
----------------------------------------------------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from credit arrangements, net 424,500 232,300
Proceeds from exercise of stock options 119 8,092
----------------------------------------------------- --------- ---------
Net cash provided by financing activities 424,619 240,392
----------------------------------------------------- --------- ---------
Increase (decrease) in cash and cash equivalents $ (36,452) $ 7,894
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid $ 67,576 $ 41,652
Interest paid 12,431 10,535
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
FORM 10-Q Page 5
<PAGE> 6
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
------------------------------
The condensed consolidated financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. The condensed consolidated balance sheet at July 29,
2000, and the condensed consolidated statements of operations and statements of
cash flows for the thirteen week and twenty-six week periods ended July 29, 2000
and July 31, 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 for all 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 accounting principles generally accepted
in the United States of America have been omitted or condensed, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. 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 on Form 10-K for the
fiscal year ended January 29, 2000. Interim results are not necessarily
indicative of results for a full year.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
-----------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company is required to adopt SFAS No.
133 in the year ended February 2, 2002. SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. In June 1999, SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral
of the Effective Date of FASB Statement No. 133-- an amendment of FASB Statement
No. 133," was issued. This amendment delayed the effective date of SFAS No. 133
to fiscal years beginning after June 15, 2000. Management is reviewing the
impact of SFAS No. 133 on its financial statements, and does not believe that
its adoption will have a material impact on the consolidated financial
position, results of operations and cash flows.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which
provides guidance on applying accounting principles generally accepted in the
United States of America for recognizing revenue. SAB No. 101, as amended, is
effective for the fourth quarter of 2000. Management is reviewing the impact of
SAB No. 101 on its financial statements, and does not believe that its adoption
will have a material impact on the consolidated financial position, results of
operations and cash flows.
FORM 10-Q Page 6
<PAGE> 7
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - DISCONTINUED OPERATIONS
--------------------------------
On June 27, 2000, the Company announced its decision to separate the toy and
closeout businesses by divesting the Company's K*B Toy Division. The Company
plans to complete the divestiture within 12 months from the June announcement.
The financial statements and notes have been reclassified for all periods
presented to reflect the toy segment as a discontinued operation. During the
second quarter, the Company recorded a $72.0 million charge, net of tax,
associated with the planned divestiture. The charge represents costs to
reposition and exit the business along with estimated and actual operating
results prior to divestiture. The second quarter net loss from operations of the
toy segment of $20.7 million relates to the segment's results of operations
prior to the measurement date of June 27, 2000.
Included in the Loss on disposal were reserves for inventory sku rationalization
of $54.6 million (before taxes), of which approximately $50.0 million has been
utilized as of July 29, 2000. The remainder is expected to be utilized prior to
the divestiture. The net assets of the toy segment principally represent working
capital items including inventory, accounts payable and accrued expenses, as
well as fixed assets at July 29, 2000 and January 29, 2000. At July 29, 2000,
the discontinued operations had assets of $845.8 million and liabilities of
$178.0 million.
The following are the components of discontinued operations:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
---------------------------- ----------------------------
JULY 29, JULY 31, JULY 29, JULY 31,
(All dollar amounts in thousands) 2000 1999 2000 1999
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Loss from operations of toy
segment, net of income
tax benefit of $13,515 and
$31,470 in the thirteen and
twenty-six weeks ended
July 29, 2000, respectively $ (20,700) $ (12,835) $ (48,201) $ (29,329)
Loss on disposal of toy segment,
net of income tax benefit of
$18,389 (51,256) - (51,256) -
--------- --------- --------- ---------
$ (71,956) $ (12,835) $ (99,457) $ (29,329)
========= ========= ========= =========
</TABLE>
FORM 10-Q Page 7
<PAGE> 8
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" PROVISIONS OF 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 quarterly report 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 and, among other things, are based on the
Company's current best estimates that may be proven incorrect as additional
information becomes available. 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.
Additionally, 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 2000 and beyond to differ materially
from those expressed or implied in any forward-looking statements included in
this report 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, as well
as, the Company's periodic reports filed with the Securities and Exchange
Commission.
RECENT ANNOUNCEMENTS
On June 27, 2000, the Company announced its decision to separate the toy
and closeout businesses by divesting the company's K*B Toy Division. The Company
plans to complete the divestiture within 12 months from the June announcement.
During the second quarter, the Company recorded a $72.0 million charge, net of
tax, associated with the planned divestiture. The charge represents costs to
reposition and exit the business along with estimated and actual operating
results prior to divestiture.
OVERVIEW
The Company is a leading value retailer with its continuing operations
specializing in closeout merchandise. The Company is the largest retailer of
closeout products in the United States. The Company's goal is to build upon its
leadership position by expanding its market presence in both existing and new
markets. The Company believes that the combination of its strengths make it a
low-cost value retailer well positioned for future growth.
FORM 10-Q Page 8
<PAGE> 9
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At July 29, 2000, the Company operated a total of 1,258 retail closeout stores
in 45 states, operating as Odd Lots, Big Lots, Big Lots Furniture, MacFrugal's
Bargains - Close-outs and Pic `N' Save.
Wholesale operations are conducted through Consolidated International and
Wisconsin Toy.
As part of the discounted operation, the Company operated a total of 1,309
retail toy stores in all 50 states, Puerto Rico and Guam as K*B Toys, K*B Toy
Works, K*B Toy Outlet and conducted online sales of children's products as
KBkids.com.
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.
The following table compares components of the statement of operations as a
percent of net sales and reflects the number of stores in operation at the end
of each period.
<TABLE>
<CAPTION>
THIRTEEN TWENTY-SIX
WEEKS ENDED WEEKS ENDED
----------------------------- -----------------------------
JULY 29, JULY 31, JULY 29, JULY 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Gross profit 42.1 42.6 42.1 42.9
Selling and administrative expenses 39.3 39.8 38.7 39.6
----------------------------------- -------- -------- ------- -------
Operating profit 2.9 2.7 3.3 3.3
Interest expense 0.7 0.5 0.6 0.6
----------------------------------- -------- -------- ------- -------
Income from continuing operations
before income taxes 2.2 2.2 2.7 2.7
Income tax expense 0.9 0.9 1.1 1.1
----------------------------------- -------- -------- ------- -------
Income from continuing operations 1.3 1.3 1.6 1.6
Discontinued operations (10.1) (2.0) (6.9) (2.2)
----------------------------------- -------- -------- ------- -------
Net loss (8.8)% (0.7)% (5.3)% (0.6)%
======== ======== ======= =======
Number of stores in operation at
end of period 1,258 1,177 1,258 1,177
</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
RESULTS OF OPERATIONS
NET SALES - Net sales for the thirteen and twenty-six week periods ended July
29, 2000, increased 10.4% and 11.3%, respectively, when compared to the
comparable periods in 1999. These increases were attributable to the increased
number of stores in operation for each period in 2000 in addition to comparable
stores sales increases of 3.7% for the quarter and 4.4% for the year to date
period.
GROSS PROFIT - Gross profit as a percent of net sales was 42.1% for the second
quarter of fiscal 2000 compared to 42.6% in the same 1999 period. Gross profit
as a percent of net sales was 42.1% and 42.9% for the first six months of fiscal
2000 and 1999, respectively. The declines were the result of a shift in the
level of consumable merchandise available in the respective periods.
SELLING AND ADMINISTRATIVE EXPENSES - As a percentage to net sales, selling and
administrative expenses were 39.3% in the second quarter of fiscal 2000 and
38.7% for the year to date period. In the respective periods of fiscal 1999,
selling and administrative expenses were 39.8% and 39.6%. Current year's rate
improvement is primarily attributable to more effective leveraging of fixed
expenses combined with more efficient distribution and transportation.
INTEREST EXPENSE - Interest expense increased $1.3 million in the second quarter
of 2000 and increased $1.7 million for the year to date period. The change in
interest expense reflects higher average borrowing levels and higher effective
interest rates.
INCOME TAXES - The effective tax rate of the Company is anticipated to be 39.5%
in fiscal 2000.
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 July 29, 2000, was $690.3 million and for the twenty-six week
period then ended net cash used by operations was $407.4 million and capital
expenditures were $54.0 million.
The Company has a Revolving Credit Facility that 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 July 29, 2000,
approximately $30.0 million was available for borrowings under the Revolving
Credit Facility and $130.4 million of uncommitted credit facilities were
available.
The Company continues to believe that it has, or if necessary has the ability to
obtain, adequate resources to fund ongoing operating requirements, future
capital expenditures related to the expansion of existing businesses,
development of new projects and currently maturing obligations. 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.
FORM 10-Q Page 10
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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 a Vote of Security Holders.
(a) The Company's Annual Meeting was held on May 16, 2000.
The number of shares of voting Common Stock, $.01 par value,
outstanding as of March 24, 2000, the record date, was
110,995,171. The number of shares of Common Stock of the
Company represented in person or by proxy and eligible to vote
was 90,407,523. The stockholders voted on the following
matters:
(1) Election of Directors. Proxies were solicited by management
pursuant to Regulation 14 under the Securities Exchange Act of
1934. There was no solicitation in opposition to management's
nominees as listed in the proxy statement. All of the
nominee's were elected pursuant to a vote of the stockholders.
(2) To consider a shareholder proposal seeking the termination
of the Company's Rights Agreement or stockholder action
thereon.
<TABLE>
<CAPTION>
The vote on this proposal was:
58,923,629 20,638,622 2,229,042
---------- ---------- ---------
<S> <C> <C>
(For) (Against) (Abstain - including broker non-votes)
</TABLE>
(3) To transact other business as properly presented before the
meeting.
The vote on this proposal was:
<TABLE>
<CAPTION>
45,036,830 18,705,613 24,946,407
---------- ---------- ----------
<S> <C> <C>
(For) (Against) (Abstain - including broker non-votes)
</TABLE>
Page 11
<PAGE> 12
Item 5. Other Information.
On June 26, 2000, the Company entered into Employment Agreements with Michael J.
Potter and Albert J. Bell, copies of which are attached hereto as Exhibits 10(a)
and 10(b), respectively. On June 27, 2000, the Company entered into an Amended
and Restated Employment Agreement with William G. Kelley, a copy of which is
attached hereto as Exhibit 10(c).
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit No. Document
----------- --------
10(a) Employment Agreement with Michael J. Potter dated as of June
26, 2000.
10(b) Employment Agreement with Albert J. Bell dated as of June 26,
2000.
10(c) Amended and Restated Employment Agreement with William G.
Kelley dated June 27, 2000.
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
FORM 10-Q Page 12
<PAGE> 13
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: September 8, 2000 By: /s/ Mark D. Shapiro
---------------------------------- --------------------------
Mark D. Shapiro, Senior Vice
President & Chief Financial Officer
FORM 10-Q Page 13
