SEC Filing | Big Lots, Inc.

1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 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 Securities registered pursuant to Section 12(b) of the Act: Name of each Exchange Title of each class on which registered ------------------- ------------------- Common Stock $.01 par value New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange 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 [ ] Indicate if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in a definitive proxy or information statement incorporated by reference in Part III of this FORM 1O-K or any amendment to this FORM 1O-K [ ] The aggregate market value (based on the closing price on the New York Stock Exchange) of the Common Stock of the Registrant held by non affiliates of the Registrant was $3,031,625,519 on March 26, 1999. For purposes of this response, executive officers and directors are deemed to be the affiliates of the Registrant and the holdings by non affiliates was computed as 104,538,811 shares. The number of shares of Common Stock $.01 par value per share, outstanding as of March 26, 1999, was 109,901,936 and there were no shares of Non-Voting Common Stock, $.01 par value per share outstanding at that date. Documents Incorporated by Reference ----------------------------------- Portions of the Registrant's Proxy Statement are incorporated by reference into Part III.

2 FORM 10 - K ANNUAL REPORT FOR THE FISCAL YEAR ENDED JANUARY 30, 1999 TABLE OF CONTENTS Page ---- PART I Item 1. Business 3 Item 2. Properties 8 Item 3. Legal Proceedings 10 Item 4. Submission of Matters to Vote of Security Holders 10 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 12 Item 6. Selected Financial Data 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 8. Financial Statements and Supplementary Data 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 41 PART III Item 10. Directors and Executive Officers of the Registrant 41 Item 11. Executive Compensation 41 Item 12. Security Ownership of Certain Beneficial Owners and Management 41 Item 13. Certain Relationships and Related Transactions 41 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 41 FORM 10-K Page 2

3 PART 1 ITEM 1 BUSINESS THE COMPANY Consolidated Stores Corporation was incorporated in Delaware in 1983. Its principal executive offices are located at 300 Phillipi Road, P.O. Box 28512, Columbus, Ohio 43228-0512, and its telephone number is (614) 278-6800. All references herein to the "Company" are to Consolidated Stores Corporation and its subsidiaries. The Company is a value retailer focused on closeout merchandise and toys providing extreme values on a broad range of quality, name-brand merchandise. As of January 30, 1999, the Company operated 2,450 stores located in all 50 states and Puerto Rico and is the nation's largest closeout retailer and largest mall based toy retailer. The Company operated 1,128 retail closeout stores, primarily under the names Odd Lots, Big Lots, Big Lots Furniture, Mac Frugal's Bargains - Close-outs, and Pic `N' Save (collectively "Closeout Stores") and 1,322 retail toy and closeout toy stores primarily under the names KB Toys, KB Toy Works, and KB Toy Outlet (collectively "Toy Stores"). 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. As a growth oriented company the Company looks for opportunities to diversify its core businesses while refining and expanding its existing operations. 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. BUSINESS GROUPS The Company's principal businesses range across two retail industry groups; closeouts and toys. Sales and cost of sales during the last six years for each of the Company's business groups appear in Item 6 "Selected Financial Data" included herein. The percent of net sales to total net sales by business group and gross profit as a percent to net sales by business group for each of the past three fiscal years is presented in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview" also included herein. Financial information by business group, containing information on revenues, operating profit, depreciation and amortization, and capital expenditures for each of the last three fiscal years and identifiable assets for each of the last two fiscal years, appears in the "Notes to Consolidated Financial Statements - Business Group Information" included herein. INDUSTRY OVERVIEW Closeout retailers provide a valuable service to manufacturers by purchasing excess product that generally result from production overruns, package changes, discontinued products and returns. Closeout retailers also take advantage of generally low prices in the off-season by buying and warehousing seasonal merchandise for future sale. As a result of these lower costs of goods sold, closeout retailers can offer merchandise at prices significantly lower than those offered by traditional retailers. Recent trends in the retail industry are favorable to closeout retailers. These trends include retailer consolidations and just-in-time inventory processes, which have resulted in a shift of inventory risk from retailers to manufacturers. FORM 10-K Page 3

4 In addition, in order to maintain their market share in an increasingly competitive environment, manufacturers are introducing new products and new packaging on a more frequent basis. The Company believes that these trends have helped make closeout retailers an integral part of manufacturers' overall distribution process. As a result, manufacturers are increasingly looking for larger, more sophisticated closeout retailers, such as the Company, that can purchase larger quantities of merchandise and can control the distribution and advertising of specific products. RETAIL OPERATIONS CLOSEOUT STORES. The Closeout Stores operation is the largest of its kind operating 1,128 retail stores in 40 states. A large number of Closeout Stores operate profitably in relative close proximity. For example, 298 of the total 1,128 Closeout Stores operate in Ohio and California. During 1998 the Closeout Stores operation expanded its reach to the country's far northern corners, with new locations in Massachusetts, New Hampshire, Rhode Island, Delaware, Washington and Oregon. Management believes that there are substantial opportunities to increase store counts in existing markets and as well as expanding in new markets. The Closeout Stores operation is best known for its wide assortment of closeout merchandise. Manufacturer overruns, package changes, discontinued and factory reconditioned items provide a steady supply of first-quality product at bargain prices. Certain core categories of merchandise are carried on a continual basis, although the specific name-brands offered may change frequently. The Closeout Stores also offer a small but consistent line of basic items, strengthening their role as dependable, one-stop shops for everyday needs. In addition the stores feature seasonal items for every major holiday in all stores. Closeout Stores also offer private-label merchandise in selected product categories in order to provide additional value to its customers. Because of their low operating costs, the Closeout Stores are generally profitable within their first full year of operation. TOY STORES. The Company has been in the toy retailing business since its inception and has significantly expanded its presence in the retail toy trade. The Toy Stores operation is America's largest small-box toy retailer and second largest toy store chain. Excitement for name-brands, attention to value and convenience are the focus in 1,322 stores in all 50 states and Puerto Rico. The Toy Stores offer a broad variety of closeout toys, as well as currently promoted retail toys (known as "in-line toys") and traditional toy merchandise. While in-line toys make up the largest segment of the assortment, closeouts represent approximately 30 percent and video hardware and software accounts for about 25 percent. Exclusives, collectibles and KB's own creations round out the merchandise mix. Toy Stores operate under four different small-box store formats plus an interactive Web site. Toy Stores have a large presence in enclosed shopping malls with 974 Toy Stores where they are usually the exclusive toy store. The balance of the Toy Stores are generally a smaller strip shopping center store or outlet mall store striving to appeal to customers seeking value and the convenience not offered by toy superstores. Enclosed mall and strip shopping center Toy Stores carry a combination of in-line toys and close-out merchandise. Toy Stores located in outlet malls carry primarily closeout toys. The Company also operates temporary stores during the holiday selling season which are open for approximately six to eight weeks and carry primarily closeout merchandise. These temporary stores provide increased sales and profits during the peak holiday selling season by utilizing vacant store space obtained on favorable terms. FORM 10-K Page 4

5 PURCHASING An integral part of the Company's business is the sourcing and purchasing of quality name-brand merchandise directly from manufacturers and other vendors at prices substantially below those paid by conventional retailers. The Company has built strong relationships with many name-brand manufacturers and has capitalized on its purchasing power in the closeout and toy marketplace in order to source merchandise that provides exceptional value to customers. The Company has the ability to source and purchase all of a manufacturer's closeout merchandise in specific product categories and to control distribution in accordance with vendor instructions, thus providing a high level of service and convenience to these manufacturers. Also, the success of the Company's toy business depends in part upon its ability to purchase in-line toys at competitive prices and on competitive terms. The Company supplements its traditional name-brand closeout purchases with a limited amount of program buys and private-label merchandise. The Company expects its purchasing power will continue to enhance its ability to source high quality closeout merchandise and closeout and in-line toys for all of its stores at competitive prices. The Company has seasoned buying teams with extensive purchasing experience, which has enabled the Company to develop successful long-term relationships with many of the largest and most recognized consumer-product and toy manufacturers in the United States. As a result of these relationships and the Company's experience and reputation in the closeout industry, many manufacturers offer purchase opportunities to the Company prior to attempting to dispose of their merchandise through other channels. The Company's merchandise is purchased from more than 3,000 foreign and domestic suppliers which provide the Company with multiple sources for each product category. In fiscal 1998, the Company's top ten vendors accounted for approximately 18.5% of total purchases with no one vendor accounting for more than 4%. The Company purchases approximately 20% of its products directly from overseas suppliers, and a material amount of its domestically purchased merchandise is also manufactured abroad. As a result, a significant portion of the Company's merchandise supply is subject to certain risks including increased import duties and more restrictive quotas, loss of "most favored nation" trading status, currency fluctuations, work stoppages, transportation delays, economic uncertainties including inflation, foreign government regulations, political unrest and trade restrictions, including retaliation by the United States against foreign practices. While the Company believes that alternative domestic and foreign sources could supply merchandise to the Company, an interruption or delay in supply from China or the Company's other foreign sources, or the imposition of additional duties, taxes or other charges on these imports, could have a material adverse effect on the Company's results of operations and financial condition. COMPETITIVE CONDITIONS The retail industry is highly competitive. The Company's Closeout Stores compete with discount stores (such as Wal-Mart(R), KMart(R) and Target(R)), deep discount drugstore chains and other value-oriented specialty retailers. The Company's Toy Stores compete directly with local and regional enclosed shopping mall-based toy retailers, destination toy stores (such as Toys "R" Us(R)) and discount retailers with toy departments and indirectly with enclosed shopping mall-based retailers such as concept stores and theme-based stores that feature toys or toy-related merchandise. Certain of the Company's competitors have greater financial, distribution, marketing and other resources than the Company. The Company has no continuing contracts for the purchase of closeout merchandise and relies on buying opportunities from both existing and new sources, for which it competes with other closeout merchandisers and wholesal- FORM 10-K Page 5

6 ers. The Company believes that its management has long standing relationships with its suppliers and is competitively positioned to continue to seek new sources in order to maintain an adequate continuing supply of quality merchandise at attractive prices. The Company continually evaluates possible candidates for acquisition and intends to continue to seek opportunities to expand its retail businesses. SEASONALITY The Company has experienced seasonality, with a significant percentage of its net sales and income being realized in the fourth fiscal quarter. Additionally, 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. Furthermore, in anticipation of increased sales activity during the fourth fiscal quarter, the Company purchases substantial amounts of inventory during the second and third fiscal quarters and hires a significant number of temporary employees to bolster its stores staffing during the fourth fiscal quarter. The seasonality of the Company's businesses also influences the Company's demand for seasonal borrowings. The Company has traditionally drawn upon its seasonal credit lines in the first three fiscal quarters and substantially repaid the borrowings during the fourth fiscal quarter. ADVERTISING AND PROMOTION The Company uses a variety of marketing approaches to promote its stores to the public. These approaches vary by business, by market and by the time of year. The Company promotes grand openings of its stores through a variety of print and radio promotions. In general, the Company utilizes only those marketing methods that it believes provide an immediate and measurable return on investment. TRADEMARKS. The Company utilizes trademarks, service marks and tradedress ("intellectual property") in its retail operations. The intellectual property is generally owned by intellectual property protection subsidiaries. The Company considers its intellectual property to be among its most valuable assets and where applicable, has registered, or has applications pending, with the United States Patent and Trademark Office. The Company believes that having distinctive intellectual property is an important factor in identifying the Company and distinguishing it from others. CLOSEOUT STORES. The Company's marketing program for its Closeout Stores is designed to create an awareness of the broad range of quality, name-brand merchandise available at low prices providing customers an extreme value. The Closeout Stores utilize a combination of printed advertising circulars in all markets and television advertising in select markets. The Company currently distributes approximately 40 million two or four page circulars 24 weeks out of the year in all markets. Additionally, for 12 weeks of the year approximately 26 million two or four page circulars are distributed predominantly in eastern markets. The method of distribution includes a combination of newspaper inserts and direct mail. These circulars are created in-house and are distributed regionally in order to take advantage of market differences caused by climate or other factors. The circulars generally feature 30 to 35 products that vary each week. The Closeout Stores run television promotions in certain markets based upon factors unique to each market, including the number of stores, cost of local media and results of preliminary testing. The Closeout Stores run multiple 30 second television spots per week, each of which feature 2 to 3 highly recognizable, name-brand products. In-store promotions include periodic loudspeaker announcements featuring special FORM 10-K Page 6

7 bargains as well as humorous in-store signage to emphasize the significant values offered to the customer. The Closeout Stores continue to refine the use of television advertising to increase awareness of the stores, build a brand image, and to attract new and repeat customers. Historically, the Closeout Stores total advertising expense as a percent of total net sales has been approximately 2.5% to 3.0%. TOY STORES. The Toy Stores utilize a combination of a holiday promotion catalog as well as periodic in-store sales and store signs to promote their products. Advertising costs were 1.7% of total net sales in 1998. Enclosed shopping mall Toy Stores receive the benefit of large amounts of customer traffic. Similarly, Toy Stores located in strip centers and outlet malls have relied primarily on existing customer traffic and in-store signs to promote their merchandise. WAREHOUSING AND DISTRIBUTION An important aspect of the Company's closeout and toy purchasing strategy involves its ability to warehouse and distribute merchandise quickly and efficiently. The Company positions its distribution network to enable quick turn of time sensitive product as well as providing longer term warehousing capabilities for off-season buys. Substantially all merchandise sold by the Closeout Stores and Toy Stores is received and processed for retail sale, as necessary, and distributed to the retail location from Company operated warehouse and distribution centers. Data pertaining to warehouse and distribution centers is herein under Item 2 Properties, Warehouse and Distribution. OTHER OPERATIONS The Company also sells merchandise wholesale comprised almost entirely of merchandise obtained through the same or shared opportunistic purchases of the retail operations. Advertising of wholesale merchandise is conducted primarily at trade shows and by mailings to past and potential customers. Wholesale customers include a wide and varied range of major national and regional retailers, as well as smaller retailers, manufacturers, distributors and wholesalers. ASSOCIATES At January 30, 1999, the Company had 58,254 active associates comprised of 19,078 full-time and 39,176 part-time associates. Temporary associates hired during the fall and winter holiday selling season increased the number of associates to a peak of approximately 77,000. Approximately two-thirds of the associates employed throughout the year are employed on a part-time basis. The relationship with associates is considered to be good, and the Company is not a party to any labor agreements. FORM 10-K Page 7

8 ITEM 2 PROPERTIES RETAIL OPERATIONS Closeout Stores are located predominantly in strip shopping centers throughout the southwestern, midwestern, southern and mid-Atlantic regions of the United States. Individual stores range in size from 3,382 to 49,385 selling square feet and average approximately 19,011 selling square feet. In selecting suitable new store locations, the Company generally seeks retail space between 22,000 to 30,000 square feet in size. The average cost to open a new store in a leased facility is approximately $710,000, including inventory. The Company's 1,322 Toy Stores are located in enclosed shopping malls, outlet malls and strip shopping centers across the United States and Puerto Rico. Enclosed shopping mall-based stores range in size from 470 to 7,581 selling square feet and average approximately 3,303 selling square feet. Outlet mall stores range in size from 3,030 to 5,598 selling square feet and average approximately 4,019 selling square feet. Strip shopping center stores range in size from 3,360 to 23,636 selling square feet and average approximately 7,730 selling square feet. The Company believes the average optimum size of a strip shopping center store is approximately 6,000 to 8,000 square feet. During fiscal 1999, the Company will open Toy Stores predominately in strip shopping centers and malls. The approximate average cost, including inventory, to open a new outlet mall Toy Store or strip shopping center Toy Store is $233,000 and $463,000, respectively, and $445,000 to open a mall store. In addition, 135 temporary Toy Stores under the name KB Toy Express were operated principally in enclosed shopping malls during the 1998 fall and winter holiday season. The average size of the temporary stores was approximately 3,795 square feet. With the exception of 53 owned Closeout Store sites, all stores are in leased facilities. Store leases generally provide for fixed monthly rental payments plus the payment, in most cases, of real estate taxes, utilities, insurance and common area maintenance. All Toy Store leases generally include advertising charges. In some locations, the leases provide formulas requiring the payment of a percentage of sales as additional rent. Such payments are generally only required when sales reach a specified level. The typical lease for the Company's Closeout Stores is for an initial term of five years with multiple, three to five year renewal options, while the typical lease for the Toy Stores is for an initial term of ten years with various renewal options. The following tables set forth store lease expirations, exclusive of month to month leases, and state location information for existing store leases at January 30, 1999. Number of Leases Expiring Number of Leases Expiring Without Renewal Options ------------------------------ ------------------------------ Fiscal Year Closeout Toy Total Closeout Toy Total - ------------------------- ---------- ---------- -------- ----------- --------- 1999 122 94 216 66 89 155 2000 169 274 443 67 210 277 2001 200 155 355 67 105 172 2002 149 158 307 56 112 168 2003 168 105 273 65 60 125 2004 and beyond 203 352 555 130 288 418 - -------------------------------------------------------------------------------- 1,011 1,138 2,149 451 864 1,315 - -------------------------------------------------------------------------------- FORM 10-K Page 8

9 Number of Stores Open ---------------------------------------------------------------------------------- Closeout Toy Total Closeout Toy Total -------- --------- ---------- -------- ----------- ---------- Alabama 30 19 49 Nebraska 4 7 11 Alaska 4 4 Nevada 9 7 16 Arizona 21 21 42 New Hampshire 1 12 13 Arkansas 6 7 13 New Jersey 3 46 49 California 173 140 313 New Mexico 7 8 15 Colorado 12 17 29 New York 29 97 126 Connecticut 2 31 33 North Carolina 43 36 79 Delaware 1 5 6 North Dakota 4 4 Florida 84 64 148 Ohio 125 55 180 Georgia 48 30 78 Oklahoma 12 13 25 Hawaii 8 8 Oregon 1 13 14 Idaho 3 8 11 Pennsylvania 36 71 107 Illinois 35 47 82 Puerto Rico 24 24 Indiana 49 32 81 Rhode Island 9 9 Iowa 3 11 14 South Carolina 22 16 38 Kansas 9 12 21 South Dakota 2 2 Kentucky 41 19 60 Tennessee 45 29 74 Louisiana 22 18 40 Texas 82 74 156 Maine 7 7 Utah 9 8 17 Maryland 7 37 44 Vermont 3 3 Massachusetts 3 49 52 Virginia 35 42 77 Michigan 36 48 84 Washington 9 27 36 Minnesota 13 13 West Virginia 24 9 33 Mississippi 13 8 21 Wisconsin 12 22 34 Missouri 22 27 49 Wyoming 3 3 Montana 3 3 Closeout Toy Total -------- --------- ---------- Total Stores 1,128 1,322 2,450 Number of states and Puerto Rico 40 51 51 WAREHOUSE AND DISTRIBUTION At January 30, 1999 the Company operated warehouse and distribution locations throughout the United States totaling 10,488,000 square feet. The Company's largest warehouse and distribution campus located in Columbus, Ohio provides separate facilities for both Closeout Stores and Toy Stores warehouse and distribution operations. The Company's primary warehouse and distribution centers for Closeout Stores are located in Ohio, Alabama and California and are owned. Utilizing high-speed sortation systems the Closeout warehouse and distribution operations have a combined output of approximately 2,040,000 cartons per week and utilize approximately 347,000 pallet positions. FORM 10-K Page 9

10 For its Toy Stores as of January 30, 1999, the Company operated primary warehouse and distribution centers, including a shared portion of the primary warehouse and distribution complex, in Alabama and Ohio with other locations in Arizona, Kentucky, Massachusetts, New Jersey, and Pennsylvania. The facilities utilize advanced warehouse management technology which enable high accuracy and efficient product processing from vendors to the retail stores. These facilities have a shipping capacity of approximately 1,290,000 cartons per week. Statistics, for warehouse and distribution centers, by type and locations is as follows: Square Footage (In thousands) ------------------------------------------------------------- Number Closeout Toy Total ---------------- --------------------- -------------------- ------------------- State Owned Leased Owned Leased Owned Leased Owned Leased - ------------- ----- ---------- ---------- ---------- --------- ---------- --------- --------- Alabama 2 1,109 840 1,949 Arizona 1 369 369 California 1 1 1,423 234 1,423 234 Georgia 2 350 350 Kentucky 1 307 307 Massachusetts 1 1 250 105 250 105 New Jersey 1 360 360 Ohio 1 5 2,736 1,430 822 3,558 1,430 Pennsylvania 1 153 153 - --------------------------------------------------------------------------------------------- 7 11 5,268 2,014 2,641 565 7,909 2,579 - --------------------------------------------------------------------------------------------- Total owned and leased 18 7,282 3,206 10,488 As necessary, the Company leases additional temporary warehouse space to support its warehousing requirements throughout the year. ITEM 3 LEGAL PROCEEDINGS The Company is party to various legal proceedings arising from its ordinary course of operations and believes that the outcome of these proceedings, individually and in the aggregate, will be immaterial. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. FORM 10-K Page 10

11 EXECUTIVE OFFICERS OF THE COMPANY Officer Name Age Offices Held Since - -------------------------- ------- ----------------------------------------------------------------------- --------- William G. Kelley 53 Chairman of the Board, Chief Executive Officer and President 1990 Michael L. Glazer 51 Chief Executive Officer and President - KB Toy Division 1995 Albert J. Bell 39 Executive Vice President, Legal, Real Estate, Secretary and General 1988 Counsel Michael J. Potter 37 Executive Vice President and Chief Financial Officer 1991 Kent Larsson 55 Executive Vice President, Merchandising and Sales Promotion - 1998 Closeout Division Donald A. Mierzwa 48 Executive Vice President, Store Operations - Closeout Division 1998 Brad A. Waite 41 Sr. Vice President, Human Resources 1998 James A. McGrady 48 Vice President and Treasurer 1991 Mark D. Shapiro 39 Vice President and Controller 1994 William G. Kelley is a Director of the Company and has served in his present capacity as Chairman of the Board and Chief Executive Officer since 1990. Michael L. Glazer has served on the Company's Board of Directors since 1991 and previous to his appointment as Chief Executive Officer and President - Toy Division in 1998 he held positions as President of the Company, Executive Vice President and President of The Bombay Company, a home furnishings retailer. Mr. Glazer is also a director of Brookstone, Inc. Albert J. Bell has served as the Company's general counsel for over five years and has been employed by the Company since 1987. Michael J. Potter has been with the Company since 1991 and previous to his appointment as Executive Vice President and Chief Financial Officer in 1998 Mr. Potter served as Senior Vice President and Chief Financial Officer and Vice President and Controller. Kent Larsson has been with the Company since 1988 and has held various management and senior management positions in sales promotion and merchandising for the Closeout Division during that time. Donald A. Mierzwa has been with the Company since 1989 and during his tenure has held senior management positions in operations and stores operations for the Closeout Division. Brad A. Waite joined the Company in 1988 and has held various Human Resource management and senior management positions since that time. James A. McGrady has served as the Company's Treasurer for over five years and has been with the Company since 1986. Mark D. Shapiro has been with the Company since 1992 and prior to his appointment as Vice President and Controller served as Assistant Controller. FORM 10-K Page 11

12 PART II ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is listed on the New York Stock Exchange (NYSE) under the symbol "CNS." The following table reflects the high and low sales price per share of common stock as quoted from the NYSE composite transactions for the fiscal period indicated. Prices have been restated to reflect 5 for 4 common stock split effected by a distribution of shares on June 24, 1997, to stockholders of record on June 10, 1997. 1998 1997 ------------------- ------------------- High Low High Low ------- -------- -------- --------- First Quarter $46 1/8 $36 5/8 $34 3/32 $25 51/64 Second Quarter 42 1/2 31 5/16 40 3/4 29 29/32 Third Quarter 39 15 1/2 43 3/8 34 9/16 Fourth Quarter 23 5/8 16 5/8 50 38 1/4 As of March 26, 1999, there were 1,426 registered holders of record of the Company's common stock. The Company has followed a policy of reinvesting earnings in the business and consequently has not paid any cash dividends. At the present time, no change in this policy is under consideration by the Board of Directors. The payment of cash dividends in the future will be determined by the Board of Directors in consideration of business conditions then existing, including the Company's earnings, financial requirements and condition, opportunities for reinvesting earnings, and other factors. FORM 10-K Page 12

13 ITEM 6 SELECTED FINANCIAL DATA The statement of earnings data and the balance sheet data has been derived from the Company's consolidated financial statements and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes thereto included elsewhere herein. Fiscal Year Ended --------------------------------------------------------------------------------- Jan.30, 1999 Jan.31, 1998 Feb.1, 1997 Feb.3, 1996* Jan.28, 1995 Jan.29, 1994 - -------------------------------------------------------------------------------------------------------------------------- ($ In thousands except earnings per share ) Net sales: Closeout Stores $2,510,420 $2,452,474 $2,204,521 $1,991,609 $1,794,170 $1,568,534 Toy Stores 1,643,044 1,562,463 1,178,224 76,689 45,937 - -------------------------------------------------------------------------------------------------------------------------- Total Retail 4,153,464 4,014,937 3,382,745 2,068,298 1,840,107 1,568,534 Other 40,248 40,365 37,419 42,652 27,030 21,537 - -------------------------------------------------------------------------------------------------------------------------- 4,193,712 4,055,302 3,420,164 2,110,950 1,867,137 1,590,071 Cost of sales: Closeout Stores 1,444,534 1,471,423 1,264,780 1,153,315 996,871 867,533 Toy Stores 1,016,586 933,222 687,413 40,598 22,467 - -------------------------------------------------------------------------------------------------------------------------- Total Retail 2,461,120 2,404,645 1,952,193 1,193,913 1,019,338 867,533 Other 30,233 30,788 28,610 32,281 20,163 16,358 - -------------------------------------------------------------------------------------------------------------------------- 2,491,353 2,435,433 1,980,803 1,226,194 1,039,501 883,891 - -------------------------------------------------------------------------------------------------------------------------- Gross profit 1,702,359 1,619,869 1,439,361 884,756 827,636 706,180 Selling and administrative expenses 1,498,696 1,386,989 1,166,918 731,931 654,979 569,240 Merger and other related costs 45,000 - -------------------------------------------------------------------------------------------------------------------------- Operating profit 203,663 187,880 272,443 152,825 172,657 136,940 Interest expense 24,300 25,691 22,991 17,992 12,019 9,489 - -------------------------------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes, extraordinary charge and cumulative effect of accounting change 179,363 162,189 249,452 134,833 160,638 127,451 Income taxes 69,945 76,254 92,992 50,141 63,934 50,771 - -------------------------------------------------------------------------------------------------------------------------- Income from continuing operations before extraordinary charge and cumulative effect of accounting change 109,418 85,935 156,460 84,692 96,704 76,680 (Loss) from discontinued operations (27,538) (5,727) (2,600) (1,716) Extraordinary charge (1,856) Cumulative effect of accounting change (12,649) - -------------------------------------------------------------------------------------------------------------------------- Net income $ 96,769 $ 85,935 $ 127,066 $ 78,965 $ 94,104 $ 74,964 - -------------------------------------------------------------------------------------------------------------------------- FORM 10-K Page 13

14 Fiscal Year Ended --------------------------------------------------------------------------------- Jan.30, 1999 Jan.31, 1998 Feb.1, 1997 Feb.3, 1996 *Jan.28, 1995 Jan.29, 1994 ========================================================================================================================== ($ In thousands except earnings per share ) Income (loss) per share: Continuing operations $ 1.00 $ 0.80 $ 1.49 $ 0.86 $ 0.98$ 0.77 Discontinued operations (0.26) (0.06) (0.03) (0.02) Extraordinary charge (0.02) Cumulative effect of accounting change (0.11) - -------------------------------------------------------------------------------------------------------------------------- $ 0.89 $ 0.80 $ 1.21 $ 0.80 $ 0.95 $ 0.75 ========================================================================================================================== Income (loss) per share - diluted: Continuing operations $ 0.97 $ 0.77 $ 1.44 $ 0.84 $ 0.95 $ 0.75 Discontinued operations (0.25) (0.06) (0.03) (0.02) Extraordinary charge (0.02) Cumulative effect of accounting change (0.11) - -------------------------------------------------------------------------------------------------------------------------- $ 0.86 $ 0.77 $ 1.17 $ 0.78 $ 0.92 $ 0.73 ========================================================================================================================== Average common shares outstanding (In thousands): Basic 109,199 107,621 104,642 98,185 99,352 100,297 Diluted 112,800 112,063 108,402 100,645 101,772 103,098 * Fiscal 1995 is comprised of 53 weeks. BALANCE SHEET DATA: Working capital $ 875,234 $ 582,206 $ 563,543 $ 398,377 $ 254,613 $ 282,852 Total assets 2,042,524 1,746,381 1,715,499 1,058,887 937,996 837,783 Long-term obligations 295,619 115,281 155,049 121,435 44,491 53,869 Stockholders' equity 1,181,902 1,034,542 934,114 619,963 532,115 515,885 STORE OPERATING DATA: Year end gross square footage (000's): - -------------------------------------- Closeout Stores 29,015 26,623 24,253 22,081 19,982 17,609 Toy Stores 6,170 5,781 5,267 552 401 - -------------------------------------------------------------------------------------------------------------------------- 35,185 32,404 29,520 22,633 20,383 17,609 ========================================================================================================================== New stores opened: - ------------------ Closeout Stores 137 118 95 102 122 110 Toy Stores (1) 105 115 1,095 30 82 - -------------------------------------------------------------------------------------------------------------------------- 242 233 1,190 132 204 110 ========================================================================================================================== Stores closed: - -------------- Closeout Stores 34 26 14 16 25 27 Toy Stores 32 50 22 1 - -------------------------------------------------------------------------------------------------------------------------- 66 76 36 17 25 27 ========================================================================================================================== Stores open at end of year: - --------------------------- Closeout Stores 1,128 1,025 933 852 766 669 Toy Stores 1,322 1,249 1,184 111 82 - -------------------------------------------------------------------------------------------------------------------------- 2,450 2,274 2,117 963 848 669 ========================================================================================================================== (1) Includes 1,042 KB Toy stores acquired May 5, 1996. FORM 10-K Page 14

15 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" PROVISIONS OF THE SECURITIES LITIGATION REFORM ACT OF 1995 When used in this discussion and the financial statements that follow, the words, "expect(s)", "feel(s)", "believe(s)", "will ", "may ", "anticipate(s)" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to republish revised forward-looking statements to reflect the occurrence of unanticipated events. 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 the following Management's Discussion and Analysis of Financial Condition and Results of Operations included in this report, as well as, the Company's periodic reports on Forms 10-Q and 8-K filed with the Securities and Exchange Commission. OVERVIEW The Company is the nation's largest closeout retailer and a leading toy retailer with 2,450 stores located in all 50 states and Puerto Rico. The Company operates 1,128 retail closeout stores under the names Odd Lots, Big Lots, Mac Frugal's Bargains - Close-outs, and Pic `N' Save (Closeout Stores) and 1,322 retail toy and closeout toy stores primarily under the names KB Toys, KB Toy Works, and KB Toy Outlet (Toy Stores). The Company is the largest enclosed shopping mall-based toy retailer in the United States. As a value retailer focused on closeout merchandise, the Company seeks to provide the budget-conscious consumer with a broad range of quality, name-brand products at exceptional values. The Company's name-brand closeout merchandise primarily consists of products obtained from manufacturers' excess inventories, which generally result from production overruns, package changes, discontinued products and returns. Management's discussion and analysis has been prepared giving effect to the pooling of interest business combination with Mac Frugal's Bargains - Close-outs, Inc. (Mac Frugal's) on January 16, 1998, and the acquisition, accounted for as a purchase, effective May 5, 1996, of Kay-Bee Toys. In the fourth quarter of 1996 the Company adopted a plan to close its single price point and small specialty stores operating under the names of All For One and iTZADEAL!. Closure of this operation was completed throughout fiscal 1997. Accordingly, the operating results for this business are reported as a discontinued operation at February 1, 1997. The discussion and analysis presented below should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this report. The following table compares components of the statements of earnings of Consolidated Stores as a percent to net sales. FORM 10-K Page 15

16 Fiscal Year ----------------------------- 1998 1997 1996 ==================================================================================================== Net sales: Closeout Stores 59.9% 60.5% 64.5% Toy Stores 39.2 38.5 34.5 ---------------------------------------------------------------------------------------------------- Total Retail 99.1 99.0 99.0 Other 0.9 1.0 1.0 ---------------------------------------------------------------------------------------------------- Total net sales 100.0 100.0 100.0 ---------------------------------------------------------------------------------------------------- Gross Profit: Closeout Stores 42.5 40.0 42.6 Toy Stores 38.1 40.3 41.7 ---------------------------------------------------------------------------------------------------- Total Retail 40.7 40.1 42.3 Other 24.9 23.7 23.5 ---------------------------------------------------------------------------------------------------- Total Gross Profit 40.6 39.9 42.1 Selling and administrative expenses 35.7 34.2 34.3 Non selling and administrative expenses (gains) 1.1 (0.2) ---------------------------------------------------------------------------------------------------- Operating profit 4.9 4.6 8.0 Interest expense 0.6 0.6 0.7 ---------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes, extraordinary charge, and cumulative effect of accounting change 4.3 4.0 7.3 Income taxes 1.7 1.9 2.7 ---------------------------------------------------------------------------------------------------- Income from continuing operations before extraordinary charge and cumulative effect of accounting change 2.6 2.1 4.6 Loss from discontinued operations 0.8 Extraordinary charge 0.1 Cumulative effect of accounting change (0.3) ---------------------------------------------------------------------------------------------------- Net income 2.3% 2.1% 3.7% ==================================================================================================== 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 illustrates the seasonality in the net sales and operating income. Quarter --------------------------------------- First Second Third Fourth(1) ----- ---------- --------- ------------ Fiscal 1998 Percent net sales of full year 19.6% 19.7% 20.4% 40.3% Operating profit (loss) percentage of full year 2.7 8.0 (9.2) 98.5 Fiscal 1997 Percent net sales of full year 19.2 19.8 21.2 39.8 Operating profit percentage of full year 1.1 7.6 13.6 77.7 (1) Excludes non selling and administrative expenses of $45 million in 1997. FORM 10-K Page 16

17 FISCAL 1998 COMPARED TO FISCAL 1997 NET SALES Net sales increased to $4,193.7 million in fiscal 1998 from $4,055.3 million in fiscal 1997, an increase of $138.4 million, or 3.4%. This increase was attributable to sales from 242 new stores offset in part by the closing of 66 stores and a comparable store sales decline of 1.3%. Closeout Stores net sales increased $57.9 million, or 2.4%, to $2,510.4 million in fiscal 1998 from $2,452.5 million in fiscal 1997. Contributing to this increase was the addition of 103 net new stores during the year offset by a fall in comparable stores sales of 2.1%. Sales in the closeout segment were negatively impacted by appreciably lower 1998 Closeout store inventory levels resulting from the strategic realignment in merchandise mix to offer customers a wider selection of value oriented brand name merchandise. Additionally, the continued integration of Mac Frugal's operations with the Company's existing Closeout operations and the implementation of a new merchandise management system, as well as the startup of a new distribution center, contributed to the lower store level inventories. Restoration of Closeout Stores inventories to new planned levels was substantially completed at the end of fiscal 1998. Net sales of Toy Stores increased $80.6 million, 5.2%, in fiscal 1998 to $1,643.0 million from $1,562.5 million in the prior fiscal year. This improvement reflects the addition of 73 net new stores during the fiscal year offset by a comparable store sales decline of 0.2%. As with most of the toy industry, Toy Stores 1998 sales were negatively influenced by the reduced number of popular new toy introductions compared to 1997. GROSS PROFIT Gross profit increased $82.5 million, or 5.1%, in fiscal 1998 to $1,702.4 million from $1,619.9 million in fiscal 1997. Gross profit as a percent to sales was 40.6% in 1998 compared to 39.9% in the previous year. In connection with the Mac Frugal's merger the Company recorded a fourth quarter 1997 charge of $70,000,000 ($42,700,000 after tax, or $.38 per diluted common share) to reflect costs for discontinued products, inventory consolidation and retail price equalization for the combined inventory assortment. This charge reduced gross profit as a percent of sales by 1.8% in fiscal 1997. Closeout Stores gross profit as a percent to sales was 42.5% in 1998 compared to 40.0% (42.9% excluding the effect of the charge noted above) in 1997. Closeout Stores gross margin was negatively influenced by aggressive pricing strategies during the third and fourth quarters in order to restore customer traffic while rebuilding store inventories. Toy Stores gross profit was 38.1% in 1998 compared to 40.3% in 1997 reflecting a merchandise mix at fiscal 1997 year end which carried a lower initial markup than the prior fiscal year end combined with the increase in video game sales. SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses increased $111.7 million in fiscal 1998 from $1,387.0 million in fiscal 1997. As a percent to sales selling and administrative expenses were 35.7% in comparison to 34.2% (before merger and other related costs) in 1997. As Closeout Stores inventory levels were restored closer to planned levels throughout the second half of 1998 the company incurred a higher than historical ratio of selling and administrative expenses. This, in combination with the decline of fixed cost leverage from reduced comparable store sales contributed to the rise in the percent of selling and administrative expenses to net sales. FORM 10-K Page 17

18 INTEREST EXPENSE Interest expense declined to $24.3 million in fiscal 1998 from $25.7 million in fiscal 1997. The decrease was attributable to lower weighted average debt levels and a lower effective interest rate attributable to seasonal borrowings. INCOME TAXES The effective tax rate of the Company was 39% in 1998 compared to 47% in fiscal 1997. This decline is principally associated with merger and other charges in connection with the business combination with Mac Frugal's in 1997. FISCAL 1997 COMPARED TO FISCAL 1996 NET SALES Net sales increased to $4,055.3 million in fiscal 1997 from $3,420.2 million in fiscal 1996, an increase of $635.1 million, or 18.6%. This increase was attributable to full year impact of sales for KB Toys acquired in May of 1996, sales from 233 new stores and comparable store sales increases of 6.9%, offset in part by the closing of 76 stores. Closeout Stores net sales increased $248.0 million, or 11.2%, to $2,452.5 million in fiscal 1997 from $2,204.5 million in fiscal 1996. Contributing to this increase was a rise in comparable stores sales of 4.8% and the addition of 92 net new stores during the year. Net sales of Toy Stores increased $384.3 million in fiscal 1997 to $1,562.5 million. This improvement reflects a comparable store sales increase of 10.1%, the addition of 65 net new stores, and the full period impact of sales from the date of acquisition of KB Toys. GROSS PROFIT Gross profit increased $180.5 million, or 12.5%, in fiscal 1997 to $1,619.9 million from $1,439.4 million in fiscal 1996. In the fourth quarter of 1997 the Company recorded a $70,000,000 ($42,700,000 after tax, or $.38 per diluted common share) inventory charge to reflect costs associated with the Mac Frugal's merger for discontinued products, inventory consolidation and retail price equalization for the combined inventory assortment. This charge reduced gross profit as a percent of sales by 1.8%. Adjusted for the inventory charge gross profit was 41.7% in fiscal 1997 compared to 42.1% for the prior year. The effect of the above noted charge reduced fiscal 1997 Closeout Stores gross profit percentage by 2.9% to 40.0% in contrast to 1996 gross profit of 42.6%. Toy Stores gross profit was 40.3% in 1997 compared to 41.7% in 1996. The decline in Toy Stores gross profit is principally attributable to the higher volume of video sales in 1997 which have a lower profit margin than traditional toys. SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses increased $220.1 million in fiscal 1997 from $1,167.0 million in fiscal 1996. This increase is attributable to the full year impact in 1997 of operating expenses associated with KB Toys acquired in May 1996. Selling and administrative expenses in fiscal 1996 include a gain of $6.1 million related to the fire loss settlement for one of the Company's warehouses. Historically the KB Toy stores cost structure has incurred a higher percentage ratio of selling and administrative expenses to net sales. MERGER AND OTHER RELATED CHARGES In connection with the Mac Frugal's merger the Company recorded a fourth quarter charge to operating expense of $45,000,000 ($40,500,000 after taxes, or $.36 per diluted common share) for direct and other related costs pertaining to the combination. Merger transaction costs were primarily comprised of fees for professional services, severance and similar related costs. FORM 10-K Page 18

19 INTEREST EXPENSE Interest expense increased to $25.7 million in fiscal 1997 from $23.0 million in fiscal 1996. The increase was attributable to higher weighted average debt levels principally to support requirements associated with the operations of the increased number of stores, increased inventory levels, capital expenditures and the pre merger stock buy back program of Mac Frugal's. INCOME TAXES The effective tax rate of the Company increased to 47.0% in fiscal 1997 from 37.2% in 1996. This increase is principally associated with merger and other charges in connection with the business combination with Mac Frugal's. Additionally, the Company surrendered its corporate-owned life insurance program in 1996. CAPITAL RESOURCES AND LIQUIDITY The primary sources of liquidity for the Company have been cash flow from operations and borrowings under available credit facilities. Total debt as a percent of total capitalization (total long term debt and stockholders equity) was 20.0% at January 30, 1999, compared with 10.0% and 14.2% at each of the respective prior fiscal year ends. Working capital has increased from $582.2 million in 1997 to $875.2 million at January 30, 1999. This data reflects the strength of the Company's balance sheet and the ability to absorb debt financing as, and if, necessary. Capital expenditures for the last three fiscal years have been $166.6 million, $146.5 million and $104.8 million, respectively, and were used primarily to fund new store openings and distribution center expansions. The capital expenditure requirements anticipated for 1999 are approximately $164 million primarily to support new store expansion and warehouse and equipment requirements. 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 January 30, 1999, approximately $462.3 million was available for borrowings under the Revolver and $200 million of uncommitted credit facilities were available, subject to the terms of the revolving credit facility. The Company has issued $100 million of Subordinated Notes which mature in the year 2000 and bear interest at a rate of 7% per annum, payable semiannually. The Subordinated Notes are redeemable at the option of the Company, in whole or in part, after two years from their issuance, at a premium to their principal, plus accrued interest. 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 does not expect changes in interest rates in 1999 to have a material effect on income or cash flows, however there can be no assurances that interest rates will not materially change. The Company continues to believe that it has, or if necessary has the ability to obtain, adequate resources 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. FORM 10-K Page 19

20 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. 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. Substantially all of the Company's operating IT systems are "Year 2000" compliant and based on the assessment efforts to date, the Company does not believe that the "Year 2000" issue will have a material adverse effect on its financial condition or results of operations. 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. The Company intends to allocate internal resources and retain dedicated consultants as necessary to be ready to take action if these events occur. To date, the Company has not established a formal contingency plan for possible "Year 2000" issues. Where needed, the Company will establish contingency plans based on actual testing experience and assessment of outside risks. It is expected that any formal contingency plans will be in place by July 31, 1999. The Company has incurred to date approximately $4 million of costs to implement its "Year 2000" compliance program and presently expects to incur not more than $2 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 FORM 10-K Page 20

21 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 Item 5 of this report, which addresses forward-looking statements made by the Company. FORM 10-K Page 21

22 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT To the Board of Directors of Consolidated Stores Corporation: We have audited the accompanying consolidated balance sheets of CONSOLIDATED STORES CORPORATION and subsidiaries as of January 30, 1999, and January 31, 1998, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three fiscal years in the period ended January 30, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14(a)2. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of CONSOLIDATED STORES CORPORATION and subsidiaries at January 30, 1999, and January 31, 1998, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended January 30, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in the Summary of Significant Accounting Policies note to the financial statements, the Company changed its method of accounting for pre-opening costs in 1998. DELOITTE & TOUCHE LLP Dayton, Ohio February 23, 1999 FORM 10-K Page 22

23 CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) Fiscal Year 1998 1997 1996 - --------------------------------------------------------------------------------------------------- Net sales $4,193,712 $4,055,302 $3,420,164 Costs and expenses: Cost of sales 2,491,353 2,435,433 1,980,803 Selling and administrative expenses 1,498,696 1,386,989 1,166,918 Merger and other related charges 45,000 Interest expense 24,300 25,691 22,991 - --------------------------------------------------------------------------------------------------- 4,014,349 3,893,113 3,170,712 - --------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes, extraordinary charge and cumulative effect of change in accounting principle 179,363 162,189 249,452 Income taxes 69,945 76,254 92,992 - --------------------------------------------------------------------------------------------------- Income from continuing operations before extraordinary charge and cumulative effect of change in accounting principle 109,418 85,935 156,460 Loss from discontinued operations (27,538) Extraordinary charge (1,856) Cumulative effect of change in accounting principle (12,649) - --------------------------------------------------------------------------------------------------- Net income $ 96,769 $ 85,935 $ 127,066 - --------------------------------------------------------------------------------------------------- Income per common share: Continuing operations $ 1.00 $ 0.80 $ 1.49 Discontinued operations (0.26) Extraordinary charge (0.02) Cumulative effect of change in accounting principle (0.11) - --------------------------------------------------------------------------------------------------- $ 0.89 $ 0.80 $ 1.21 - --------------------------------------------------------------------------------------------------- Income per common share - diluted: Continuing operations $ 0.97 $ 0.77 $ 1.44 Discontinued operations (0.25) Extraordinary charge (0.02) Cumulative effect of change in accounting principle (0.11) - --------------------------------------------------------------------------------------------------- $ 0.86 $ 0.77 $ 1.17 - --------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. FORM 10-K Page 23

24 CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except par value) January 30, January 31, 1999 1998 ===================================================================================== ASSETS CURRENT ASSETS: Cash and cash equivalents $ 75,906 $ 41,714 Inventories 1,096,844 910,668 Deferred income taxes 98,739 86,582 Other current assets 63,686 68,510 - ------------------------------------------------------------------------------------- Total current assets 1,335,175 1,107,474 - ------------------------------------------------------------------------------------- Property and equipment - net 683,437 613,478 Other assets 23,912 25,429 - ------------------------------------------------------------------------------------- $2,042,524 $1,746,381 ===================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 337,368 $ 280,117 Accrued liabilities 100,956 134,288 Income taxes 21,265 38,920 Current maturities of long-term obligations 352 71,943 - ------------------------------------------------------------------------------------- Total current liabilities 459,941 525,268 - ------------------------------------------------------------------------------------- Long-term obligations 295,619 115,281 Deferred income taxes 105,062 71,290 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 109,524 shares and 107,796 shares, respectively 1,095 1,078 Nonvoting common stock - authorized 8,000 shares, $.01 par value; none issued Additional paid-in capital 385,612 335,038 Retained earnings 795,195 698,426 - ------------------------------------------------------------------------------------- Total stockholders' equity 1,181,902 1,034,542 - ------------------------------------------------------------------------------------- $2,042,524 $1,746,381 ===================================================================================== The accompanying notes are an integral part of these financial statements. FORM 10-K Page 24

25 CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands) Additional Other Com- Common Paid-in Retained prehensive Treasury Stock Capital Earnings Income Stock Total ================================================================================================================= Balance at February 4, 1996 $ 719 $105,493 $515,854 $(530) $ (1,573) $619,963 Net income for the year 127,066 127,066 Other comprehensive income 44 44 Total comprehensive income 127,110 Issuance of common stock 51 190,588 190,639 5 for 4 stock split 134 (134) Exercise of stock options and issue of restricted stock 12 24,758 24,770 Contribution to savings plan 1 2,181 2,182 Purchase of treasury stock, at cost (30,631) (30,631) Noncash compensation expense 81 81 - ----------------------------------------------------------------------------------------------------------------- Balance at February 1, 1997 917 322,967 642,920 (486) (32,204) 934,114 Net income for the year 85,935 85,935 Other comprehensive income 486 486 Total comprehensive income 86,421 5 for 4 stock split 169 (169) Exercise of stock options 55 31,214 31,269 Contribution to savings plan 1 3,912 3,913 Purchase of treasury stock, at cost (21,235) (21,235) Treasury stock retired (64) (22,946) (30,429) 53,439 Noncash compensation expense 60 60 ================================================================================================================= Balance at January 31, 1998 1,078 335,038 698,426 1,034,542 Net income for the year 96,769 96,769 Exercise of stock options 16 47,253 47,269 Contribution to savings plan 1 3,321 3,322 - ----------------------------------------------------------------------------------------------------------------- Balance at January 30, 1999 $1,095 $385,612 $795,195 $1,181,902 ================================================================================================================= The accompanying notes are an integral part of these financial statements. FORM 10-K Page 25

26 CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Fiscal Year ----------------------------------- 1998 1997 1996 ================================================================================================== OPERATING ACTIVITIES: Net income $96,769 $85,935 $127,066 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 84,006 79,163 66,631 Deferred income taxes 29,702 2,926 (6,929) Other 17,000 19,879 13,005 Cumulative effect of change in accounting principle 12,649 Discontinued operations 18,900 Change in assets and liabilities (183,891) (38,376) (29,634) - -------------------------------------------------------------------------------------------------- Net cash provided by operating activities 56,235 149,527 189,039 - -------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Capital expenditures (166,649) (146,460) (104,784) Payment for acquired business (185,300) Other 1,517 (4,142) 14,915 - -------------------------------------------------------------------------------------------------- Net cash used in investing activities (165,132) (150,602) (275,169) - -------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Proceeds from issuance of common stock 190,639 Purchase of Mac Frugal's treasury stock (21,235) (30,631) Payments of senior notes and long-term obligations - net (442) (58,313) Proceeds from credit arrangements 108,747 1,553 Debt issue payments (10,393) Extinguishment of debt (2,946) Proceeds from exercise of stock options 33,314 18,840 12,356 Proceeds attributable to deferred credits 3,638 3,716 Other 1,028 752 1,101 - -------------------------------------------------------------------------------------------------- Net cash provided by financing activities 143,089 3,106 105,529 - -------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents $ 34,192 $ 2,031 $ 19,399 ================================================================================================== The accompanying notes are an integral part of these financial statements. FORM 10-K Page 26

27 CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS - ----------------------- The Company is the nation's largest closeout retailer and largest mall based toy retailer with stores located in all 50 states and Puerto Rico. As a value-oriented retailer specializing in closeout merchandise and toys the Company operates a total of 2,450 stores at January 30, 1999, comprised of 1,128 retail closeout specialty stores under the names ODD LOTS, BIG LOTS, MAC FRUGAL'S BARGAINS - CLOSE-OUTS, and PIC `N' SAVE and 1,322 retail toy and closeout toy stores under the names KB TOYS, KB TOY WORKS, and KB TOY OUTLET. FISCAL YEAR - ----------- The Company follows the concept of a 52/53 week fiscal year which ends on the Saturday nearest to January 31. BASIS OF PRESENTATION - --------------------- The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions which affect reported amounts of assets and liabilities and disclosure of significant contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. RECLASSIFICATION - ---------------- Beginning in 1998, other income/expense has been included in selling and administrative expenses. Amounts reported in prior years have been reclassified to conform to the 1998 presentation. CASH AND CASH EQUIVALENTS - ------------------------- Cash and cash equivalents consist of highly liquid investments which are unrestricted as to withdrawal or use, and which have an original maturity of three months or less. Cash equivalents are stated at cost which approximates market value. INVENTORIES - ----------- Inventories are stated at the lower of cost or market, first-in first-out basis, primarily on the retail method. DEPRECIATION AND AMORTIZATION - ----------------------------- Depreciation and amortization are provided on the straight line method for financial reporting purposes. Service lives are principally forty years for buildings and from four to ten years for other property and equipment. FORM 10-K Page 27

28 CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- CONTINUED INVESTMENTS - ----------- Noncurrent investments in equity securities are classified as other assets in the consolidated balance sheets and are stated at fair value. Unrealized gains on equity securities classified as available-for-sale are recorded in other comprehensive income net of applicable income taxes. DEFERRED CREDITS - ---------------- Deferred credits associated with purchase commitments are classified as other noncurrent liabilities and are recognized when earned as a reduction of the related inventory purchase cost. ACCOUNTING PRINCIPLE CHANGE - --------------------------- In the fourth quarter of 1998 the Company changed its method of accounting for pre-opening costs in conformity with Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" as promulgated by The American Institute of Certified Public Accountant's Accounting Standards Executive Committee. Historically, non-capital expenditures associated with opening new stores were charged to expense over the first twelve months of store operations. The change involves expensing these and other preopening costs as incurred rather than capitalizing and subsequently amortizing such costs. The change in accounting principle resulted in a write-off of capitalized costs as of February 1, 1998 totaling $12,649,000 net of tax benefit of $8,087,000. The effect of this change in accounting principle is considered immaterial to all quarters of fiscal 1998. EXTRAORDINARY CHARGE - -------------------- During the second quarter of 1996 the Company recorded an extraordinary charge in connection with the early extinguishment of $35 million of 10.5% senior notes. The charge before income taxes was $2.9 million. BUSINESS COMBINATIONS In January 1998, 23,371,639 common shares were issued in exchange for all outstanding common shares of Mac Frugal's Bargains - Close-outs, Inc. (Mac Frugal's) a closeout retailer. The combination constituted a tax-free reorganization and has been accounted for as a pooling of interests. In connection with the Mac Frugal's combination the Company recorded a fourth quarter charge to operating expense of $45,000,000 ($40,500,000 after taxes, or $.36 per diluted common share) for direct and other related costs pertaining to the combination. Merger transaction costs were primarily comprised of fees for professional services, severance and similar related costs. Additionally, the Company recorded a $70,000,000 ($42,700,000 after tax, or $.38 per diluted common share) charge to cost of sales in the fourth quarter of 1997 for combination related expenses for discontinued products, inventory consolidation and retail price equalization for the combined inventories. In the fourth quarter of 1997, the Company utilized $31,892,000 relating to these charges and substantially all of the remaining $83,108,000 balance was utilized in fiscal 1998. Excluding the cost of sales charge and merger and other related charges income per share, assuming dilution, would have been $1.51 in fiscal 1997. FORM 10-K Page 28

29 CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BUSINESS COMBINATIONS - CONTINUED Effective May 5, 1996, the Company acquired Kay-Bee Center, Inc. (KB) for a initial purchase price of $185.3 million. This acquisition was accounted for as a purchase with the results of KB included from the acquisition date. At May 5, 1996, KB operated 1,042 toy stores located in all 50 states and Puerto Rico. The following summary, prepared on a pro forma basis, combines the results of operations as if KB had been acquired at the beginning of the fiscal years presented. Included in the pro forma presentation is the impact of certain purchase adjustments directly attributable to the acquisition which are expected to have a continuing impact. (In thousands except per share data) 1996 =========================================================== (Unaudited) Net sales $3,596,555 Income from continuing operations before $ 138,774 extraordinary charge Net income $ 109,380 Income per share - diluted: Continuing operations $ 1.26 Net income $ 0.99 The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the KB acquisition been consummated as of the beginning of the fiscal years presented. Additionally, the pro forma financial information is not intended to be a prediction of future results and it does not reflect any synergies that may be achieved from the combined operations. DISCONTINUED OPERATIONS In the fourth quarter of 1996 the Company adopted a plan to close its single price point and small specialty stores operating under the names of All For One and iTZADEAL!. Closures of the 165 stores open at February 1, 1997, were completed throughout fiscal 1997. Accordingly, the operating results for this business are reported as a discontinued operation for fiscal 1996. Summary operating results and financial information of this discontinued operation are as follows: (In thousands) 1996 ==================================================== Net sales $ 84,253 Gross profit $ 38,134 Loss before income taxes $(13,710) Income tax benefit 5,072 ---------------------------------------------------- (8,638) Loss on store closures, net of tax (18,900) ---------------------------------------------------- $(27,538) ==================================================== FORM 10-K Page 29

30 CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INCOME TAXES The provision for income taxes on income from continuing operations before income taxes, cumulative effect of change in accounting principle and extraordinary charge is comprised of the following: (In thousands) 1998 1997 1996 ---------------------------------------------------------------------------- Federal - Currently payable $39,604 $59,843 $77,195 Deferred - Federal, state and local 21,615 2,926 4,134 State and Local - currently payable 8,283 12,411 10,540 Foreign 443 1,074 1,123 ---------------------------------------------------------------------------- $69,945 $76,254 $92,992 ---------------------------------------------------------------------------- A reconciliation between the statutory federal income tax rate and the effective tax rate follows: 1998 1997 1996 --------------------------------------------------------------------------------------- Statutory Federal income tax rate 35.0% 35.0% 35.0% Effect of: State and local income taxes, net of Federal tax benefit 3.4 5.0 3.5 Work Opportunity and Targeted jobs tax credit (0.4) (0.3) (0.1) Merger and other related charges 8.0 Other 1.0 (0.7) (1.2) --------------------------------------------------------------------------------------- Effective tax rate 39.0% 47.0% 37.2% --------------------------------------------------------------------------------------- Deferred taxes reflect the effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Components of the Company's deferred tax assets and liabilities are presented in the following table. (In thousands) 1998 1997 ------------------------------------------------------------------------ Deferred tax assets: Uniform inventory capitalization $ 27,502 $19,184 Discontinued operations 383 Inventory valuation allowance 3,688 27,338 Deferred credits 3,241 1,072 Other (each less than 5% of total assets) 64,308 38,605 ------------------------------------------------------------------------ Total deferred tax assets 98,739 86,582 ------------------------------------------------------------------------ Deferred tax liabilities: Depreciation 59,238 56,280 Deferred gain 9,422 9,761 Other 36,402 5,249 ------------------------------------------------------------------------ Total deferred tax liabilities 105,062 71,290 ------------------------------------------------------------------------ Net deferred tax assets (liabilities) $ (6,323) $15,292 ------------------------------------------------------------------------ FORM 10-K Page 30

31 CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INCOME TAXES - CONTINUED Net income taxes paid were $44,614,000, $96,695,000, and $24,811,000 in 1998, 1997, and 1996, respectively. LONG-TERM OBLIGATIONS Long-term debt was comprised of the following on the dates indicated: (In thousands) 1998 1997 --------------------------------------------------------------- Credit Agreements $185,000 $ 68,600 7% Subordinated Notes 100,000 100,000 9.25% Mortgage Note 7,512 7,705 Capital leases 3,459 3,587 Other 7,332 --------------------------------------------------------------- 295,971 187,224 Less current portion 352 71,943 --------------------------------------------------------------- $295,619 $115,281 --------------------------------------------------------------- Annual maturities of long-term debt for the next five fiscal years are: 1999, $352,000; 2000, $100,386,000; 2001, $425,000; 2002, $467,000; 2003, $185,513,000 and thereafter $8,828,000. Interest paid, including capitalized interest of $2,161,000, $1,386,000 and $258,000 in each of the respective previous three fiscal years, was $26,693,000 in 1998, $30,437,000 in 1997, and $24,206,000 for 1996. CREDIT AGREEMENTS - ----------------- The Company has a $700,000,000 Revolving Credit Facility (Revolver) with a syndicate of financial institutions to provide unsecured senior bank financing. The Revolver has a expiration date of May 15, 2003, and requires the maintenance of certain standard financial ratios and prohibits the payment of cash dividends. At January 30, 1999, approximately $462,309,000 was available for borrowings under the Revolver. The Company was contingently liable for outstanding letters of credit under the Revolver totaling $52,691,000 at January 30, 1999. Direct borrowings under the Revolver at January 30, 1999, were at a weighted average rate of 5.2%. Additionally, $200,000,000 of uncommitted short-term credit facilities are available, subject to provisions of the Revolver, at January 30, 1999. There were no borrowings under the uncommitted facilities at January 30, 1999, and as of January 31, 1998 $55,000,000 of uncommitted facilities were outstanding at a rate of 5.9%. SUBORDINATED NOTES - ------------------ In connection with the acquisition of KB the Company issued $100,000,000 of Subordinated Notes. The Subordinated Notes mature in the year 2000 and bear interest at a rate of 7% per annum, payable semiannually. The Subordinated Notes are redeemable, subject to provisions of the Revolver, at the option of the Company, in whole or in FORM 10-K Page 31

32 CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS LONG-TERM OBLIGATIONS - CONTINUED part, after two years from their issuance, at a premium to their principal, plus accrued interest. Provisions of the Subordinated Notes provide, among other matters, limitations on; additional indebtedness, payments of certain indebtedness, and asset sales. The estimated fair value at January 30, 1999, was $100,763,000 and the related carrying amount was $100,000,000. COMMITMENTS The Company has commitments to certain vendors for future inventory purchases totaling approximately $568,865,000 at January 30, 1999. Terms of the commitments provide for these inventory purchases to be made through fiscal 2004 or later as may be extended. There are no annual minimum purchase requirements. EMPLOYEE BENEFIT PLANS PENSION BENEFITS - ---------------- The Company has a qualified defined benefit pension plan covering certain employees hired on or before March 31, 1994, and a non-qualified supplemental defined benefit pension plan effective January 1, 1996, covering a select group of highly compensated employees to ensure the overall retirement pension benefits frozen for such group of employees under the qualified plan. Benefits under each plan are based on credited years of service and the employee's compensation during the last five years of employment. The Company's funding policy is to contribute annually the amount required to meet ERISA funding standards and to provide not only for benefits attributed to service to date but also for those anticipated to be earned in the future. The following provides a reconciliation of benefit obligations, plan assets and funded status of all plans as of December 31. (In thousands) 1998 1997 ---------------------------------------------------------------------- Change in benefit obligation Benefit obligation at beginning of year $26,365 $20,539 Service cost 3,281 2,934 Interest cost 1,673 1,496 Benefits paid (1,421) (1,150) Actuarial loss 1,044 2,546 Other (200) ---------------------------------------------------------------------- Benefit obligation at end of year $30,742 $26,365 ---------------------------------------------------------------------- Change in plan assets Fair market value at beginning of year $16,246 $14,152 Actual return on plan assets 2,766 2,107 Employer contribution 6,033 1,137 Benefits paid (1,421) (1,150) Other (114) ---------------------------------------------------------------------- Fair market value at end of year $23,510 $16,246 ---------------------------------------------------------------------- FORM 10-K Page 32

33 CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS EMPLOYEE BENEFIT PLANS - CONTINUED (In thousands) 1998 1997 ------------------------------------------------------------------- Funded status $ (7,232) $(10,119) Unrecognized actuarial loss 6,644 7,868 Unrecognized transition obligation 199 212 Unrecognized prior service cost (542) (677) ------------------------------------------------------------------- Accrued benefit cost $ 931 $ 2,716 ------------------------------------------------------------------- Assumptions used in each year of the actuarial computations were: Discount rate 6.5% 6.5% Rate of increase in compensation levels 5.5% 5.5% Expected long-term rate of return 9.0% 9.0% The components of net periodic pension cost are comprised of the following: (In thousands) 1998 1997 1996 -------------------------------------------------------------------------------- Service cost - benefits earned in the period $3,281 $2,934 $2,849 Interest cost on projected benefit obligation 1,674 1,496 1,174 Investment return on plan assets (1,485) (1,252) (917) Net amortization and deferral 778 760 922 -------------------------------------------------------------------------------- Net periodic pension cost $4,248 $3,938 $4,028 -------------------------------------------------------------------------------- The projected benefit obligation, accumulated benefit obligation and fair market value of plan assets for plans with accumulated benefit obligations in excess of plan assets (the Non-Qualified plan) at December 31, 1998, were $1,658,000, $795,000 and $0, respectively and as of December 31, 1997 were $1,159,000, $439,000 and $0. SAVINGS PLAN - ------------ The Company has a savings plan with a 401(k) deferral feature and a Top Hat Plan with a similar deferral feature for all eligible employees. Provisions of $5,164,000, $5,406,000, and $4,161,000 have been charged to operations in fiscal 1998, 1997, and 1996, respectively. LEASES Leased property consists primarily of the Company's retail stores and certain warehouse space. Many of the store leases have rent escalations and provide that the Company pay for real estate taxes, utilities, liability insurance and maintenance. Certain leases provide for contingent rents, in addition to the fixed monthly rent, based on a percentage of store sales above a specified level. In addition, some leases provide options to extend the original terms for an additional two to twenty years. Minimum lease commitments as of January 30, 1999, are as follows: FORM 10-K Page 33

34 CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS LEASES - CONTINUED Capital Operating (In thousands) Leases Leases ------------------------------------------------------------------------- 1999 $ 472 $194,105 2000 472 155,312 2001 472 124,729 2002 472 96,649 2003 472 70,710 Subsequent to 2003 3,732 185,813 ------------------------------------------------------------------------- Total future minimum lease payments 6,092 $827,318 Less: interest 2,633 -------- ------------------------------------------------------ Present value of minimum lease payments $3,459 ------------------------------------------------------ Total rental expense charged to continuing operations for operating leases of stores and warehouses consisted of the following: (In thousands) 1998 1997 1996 -------------------------------------------------------------- Minimum rentals $297,243 $271,211 $204,277 Contingent rents 9,531 7,129 6,103 -------------------------------------------------------------- $306,774 $278,340 $210,380 -------------------------------------------------------------- STOCKHOLDERS' EQUITY INCOME PER SHARE - ---------------- There are no adjustments required to be made to income from continuing operations before extraordinary charge for purposes of computing basic and diluted income per share and there were no securities outstanding at January 30, 1999 which were excluded from the computation of income per share. A reconciliation of the average number of common shares outstanding used in the basic and diluted income per share computation is as follows: Average Common Shares Outstanding ------------------------------------ (In thousands) 1998 1997 1996 ---------------------------------------------------------------------------- Basic 109,199 107,621 104,642 Dilutive effect of stock options 3,601 4,442 3,760 ---------------------------------------------------------------------------- Diluted 112,800 112,063 108,402 ---------------------------------------------------------------------------- FORM 10-K Page 34

35 CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STOCKHOLDERS' EQUITY - CONTINUED OTHER COMPREHENSIVE INCOME - -------------------------- In 1998 the Company adopted SFAS No. 130 "Reporting Comprehensive Income". This statement establishes rules for reporting of comprehensive income and its components. The adoption of this statement had no impact on the Company's net income or stockholders' equity. Other comprehensive income consists of the following: (In thousands) 1998 1997 1996 ----------------------------------------------------------------------------- Minimum pension liability $772 $2,350 Change in unrealized investment gain (2,315) Income tax (expense) benefit (286) 9 ----------------------------------------------------------------------------- $486 $ 44 ----------------------------------------------------------------------------- Prior years financial statements have been reclassified to conform to these requirements. STOCKHOLDER RIGHTS PLAN - ----------------------- Each share of the Company's common stock has one Right attached. The Rights trade with the common stock and only become exercisable, or transferable apart from the common stock, ten business days after a person or group (Acquiring Person) acquires beneficial ownership of, or commences a tender or exchange offer for, 20% or more of the Company's common stock. Each Right, under certain circumstances, entitles its holder to acquire a fraction of a share of Series A Junior Participating Preferred Stock at a price of $35, subject to adjustment. If 20% of the Company's common stock is acquired, or a tender offer to acquire 20% of the Company's common stock is made, each Right not owned by an Acquiring Person will entitle the holder to purchase Company common stock having a market value of twice the exercise price of the Rights. In addition, at any time the Rights are exercisable, in the event the Company is acquired in a merger or business combination (and is not the surviving entity) or more than 50% of the Company's assets, cash flow or earning power is sold or transferred, the Rights will entitle a holder to buy a number of shares of common stock of the acquiring company having a market value of twice the exercise price of each Right. The Rights may be redeemed by the Company at $.01 per Right at any time until the tenth day following public announcement that a 20% position has been acquired. The Rights expire on April 18, 1999, and at no time have voting power. PUBLIC OFFERING OF COMMON STOCK - ------------------------------- In June 1996, the Company issued 8,007,813, adjusted for 5 for 4 splits on December 10, 1996, and June 10, 1997, shares of common stock. Net proceeds to the Company totaled $190,639,000 and were utilized to repay a portion of the borrowings incurred to finance the acquisition of KB. PREFERRED STOCK - --------------- In conjunction with the Stockholder Rights Plan the Company has reserved 600,000 shares of preferred stock for issuance thereunder. FORM 10-K Page 35

36 CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STOCK PLANS STOCK COMPENSATION PLANS - ------------------------ At January 30, 1999, the Company has two stock-based compensation plans, which are described below. The Company applies APB Opinion 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for any options issued pursuant to any plan. The compensation cost that has been charged against fiscal 1996 income for the Restricted Stock Plan, which expired in 1997, was $7,037,000. Had compensation cost for the Company's various option plans, including the pre-merger effect of Mac Frugal's plans, been determined consistent with FASB Statement 123, the Company's net income and income per share would have been reduced to the pro forma amounts indicated below: (In thousands except per share data) 1998 1997 1996 -------------------------------------------------------------------------- Net income As reported $96,769 $85,935 $127,066 Pro forma 83,282 82,999 123,267 Income per common share: As reported $0.89 $0.80 $1.21 Pro forma 0.76 0.77 1.18 Income per common share - diluted: As reported $0.86 $0.77 $1.17 Pro forma 0.74 0.74 1.14 FIXED STOCK OPTION PLANS - ------------------------ Consolidated Stores Corporation 1996 Performance Incentive Plan (Incentive Plan) provides for the issuance of stock options, restricted stock, performance units, stock equivalent units, and stock appreciation rights (SAR's). The number of newly issued shares of common stock available for issuance under the Incentive Plan is 3,125,000 plus an additional 1% of the total number of issued shares, including any Treasury Stock, at the start of the Company's fiscal year plus shares available but not issued in previous years of the Incentive Plan. Total newly issued shares of common stock available for use under the Incentive Plan shall not exceed 15% of the total issued and outstanding Common Stock as of any measurement date. At January 30, 1999, 8,025,571 shares of common stock were available for issuance under the Incentive Plan. The term of each award is determined by a committee of the Board of Directors charged with administering the Incentive Plan. Stock options granted under the Incentive Plan may be either nonqualified or incentive stock options and the exercise price may not be less than the fair market value, as defined, of the underlying common stock on the date of award. The award price of a SAR is to be a fixed amount, not less than 100% of the fair market value of a share of common stock at the date of award. Upon an effective change in control of the Company all awards outstanding under the Incentive Plan automatically vest. The Company has a Director Stock Option Plan (DSOP), for non-employee directors, pursuant to which up to 781,250 shares of the Company's common stock may be issued upon exercise of options granted thereunder. The DSOP is administered by the Compensation Committee of the Board of Directors pursuant to an established formula. Neither the Board of Directors, nor the Compensation Committee, exercise any discretion in administration of the DSOP. Grants are made annually, 90 days following the annual meeting of stockholders, at an exercise price FORM 10-K Page 36

37 CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STOCK PLANS - CONTINUED equal to 100% of the fair market value on the date of grant. The present formula provides for an annual grant of 5,000 options to each non-employee director which becomes fully exercisable over a three year period, 20% the first year and 40% each subsequent year, beginning one year subsequent to grant. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996, respectively; no dividend yield for any year; expected volatility of 65%, 39% and 42%; risk-free interest rates of 4.8%, 5.3% and 6.0%; and expected lives of 2.3, 2.2 and 2.5. A summary of the Company's various option plans for fiscal 1998, 1997 and 1996 and changes during each respective fiscal year is presented below: 1998 1997 1996 ---- ---- ---- (In thousands except price data) Shares Price(1) Shares Price(1) Shares Price(1) ----------------------------------------------------------------------------------------------------------------- Under option outstanding at beginning of year 10,710,059 $14.31 12,438,089 $11.25 10,325,979 $ 7.74 Granted 3,641,677 27.44 1,495,232 23.38 3,568,641 26.28 Exercised 1,601,742 20.19 1,522,745 13.19 1,210,784 10.23 Forfeited 807,107 24.25 1,700,517 23.58 245,747 13.52 ----------------------------------------------------------------------------------------------------------------- Under option at end of year 11,942,887 $16.85 10,710,059 $14.31 12,438,089 $ 11.25 ----------------------------------------------------------------------------------------------------------------- Options exercisable at end of year 6,100,528 6,500,029 Weighted average fair value of options granted during the year $15.96 $5.64 (1) Weighted average per share exercise price The following table summarizes information about fixed stock options outstanding at January 30, 1999: Range of Prices Options Outstanding Options Exercisable ---------------------- ----------------------------------- ---------------------------- Weighted Average Weighted Weighted Number of Remaining Average Number of Average Greater Less than Options Contractual Exercise Options Exercise than or equal to Outstanding Life (Years) Price Exercisable Price --------------------------------------------------------------------------------------- $ 1 $10 3,133,785 2.3 $ 4.28 3,116,371 $ 4.26 $10 $20 4,924,199 7.2 13.37 2,209,019 11.79 $20 $30 2,124,608 8.0 26.30 762,113 26.37 $30 1,760,295 9.0 37.57 13,025 38.44 ---------------------------------------------------------------- 11,942,887 6.3 $16.85 6,100,528 $9.82 ---------------------------------------------------------------- FORM 10-K Page 37

38 CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ADDITIONAL DATA The following is a summary of certain financial data: (In thousands) 1998 1997 -------------------------------------------------------------- Property and equipment - at cost: Land $ 52,239 $ 49,310 Buildings 250,520 205,758 Fixtures and equipment 726,056 687,962 Transportation equipment 29,524 28,536 -------------------------------------------------------------- 1,058,339 971,566 Construction-in-progress 54,045 18,827 -------------------------------------------------------------- 1,112,384 990,393 Less accumulated depreciation 428,947 376,915 -------------------------------------------------------------- $ 683,437 $613,478 -------------------------------------------------------------- (In thousands) 1998 1997 -------------------------------------------------------------- Accrued liabilities: Salaries and wages $57,009 $ 89,022 Property, payroll and other taxes 41,304 42,801 Other 2,643 2,465 -------------------------------------------------------------- $100,956 $134,288 -------------------------------------------------------------- The following analysis supplements changes in assets and liabilities presented in the consolidated statements of cash flows. (In thousands) 1998 1997 1996 ------------------------------------------------------------------ Inventories $(186,176) $ 64,272 $(165,639) Other current assets (3,979) (12,832) 8,608 Accounts payable 57,251 (55,858) 82,070 Accrued liabilities (33,332) 5,575 (12,135) Income taxes (17,655) (39,533) 57,462 ------------------------------------------------------------------ $(183,891) $(38,376) $ (29,634) ------------------------------------------------------------------ FORM 10-K Page 38

39 CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BUSINESS GROUP INFORMATION The Company's principal businesses range across two retail industry groups; closeouts and toys. The Company's Closeout Stores carry a wide variety of name-brand consumer products and also sell factory reconditioned products and lower-priced, private-label merchandise in selected product categories. Certain core categories of merchandise are carried on a continual basis, although the specific name-brands offered may change frequently. The Toy Stores offer a broad variety of closeout toys, as well as currently promoted retail toys (known as "in-line toys") and traditional toy merchandise. The accounting policies of the business groups are the same as those described in the Summary of Significant Accounting Policies note to the financial statements. Financial information by business group, containing information on revenues, operating profit, depreciation and amortization, and capital expenditures for each of the last three fiscal years and identifiable assets for each of the last two fiscal years, is presented below. (In thousands) 1998 1997 1996 ==================================================================== Revenues: Closeout $2,510,420 $2,452,474 $2,204,521 Toys 1,643,044 1,562,463 1,178,224 Other 40,248 40,365 37,419 -------------------------------------------------------------------- $4,193,712 $4,055,302 $3,420,164 ==================================================================== Operating profit (loss): Closeout $ 150,943 $ 205,908 $ 179,232 Toys 46,462 101,027 96,474 Other and corporate (a) 6,258 (119,055) (3,263) -------------------------------------------------------------------- $ 203,663 $ 187,880 $ 272,443 ==================================================================== (a)Fiscal 1997 includes $70,000 and $45,000 of inventory and merger related charges associated with the Mac Frugal's Bargains - Close-outs, Inc. acquisition. Depreciation and amortization: Closeout $ 53,681 $ 54,438 $ 47,044 Toys 30,269 24,648 15,358 Other and corporate 56 77 4,229 -------------------------------------------------------------------- $ 84,006 $ 79,163 $ 66,631 ==================================================================== Capital expenditures: Closeout $ 82,813 $ 85,714 $ 53,497 Toys 83,836 60,746 49,009 Other and corporate 2,278 -------------------------------------------------------------------- $ 166,649 $ 146,460 $ 104,784 ==================================================================== FORM 10-K Page 39

40 BUSINESS GROUP INFORMATION - CONTINUED Identifiable assets were comprised of the following: (In thousands) 1998 1997 ---------------------------------------------------------- Closeout $1,252,015 $1,118,119 Toys 760,459 604,893 Other and corporate 30,050 23,369 ---------------------------------------------------------- $2,042,524 $1,746,381 ========================================================== SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for fiscal 1998 and 1997 is presented below: Quarter ------------------------------------------------------ (In thousands, except per share data) First Second Third Fourth Year - -------------------------------------------------------------------------------------------------------------------------- 1998 Net Sales $823,302 $823,870 $856,433 $1,690,107 $4,193,712 Gross profit $340,009 $342,225 $352,323 $ 667,802 $1,702,359 Net income (loss) $ 817 $ 6,506 $(16,732) $ 106,178 $ 96,769 Income (loss) per common share (b) $ 0.01 $ 0.06 $ (0.15) $ 0.97 $ 0.89 Income (loss) per common share - diluted (b) $ 0.01 $ 0.06 $ (0.15) $ 0.95 $ 0.86 1997(a) Net Sales $778,338 $801,306 $859,559 $1,616,099 $4,055,302 Gross profit $317,365 $334,479 $367,556 $ 600,469 $1,619,869 Net income (loss) $ (1,324) $ 5,781 $ 13,622 $ 67,856 $ 85,935 Income (loss) per common share (b) $ (0.01) $ 0.05 $ 0.13 $ 0.63 $ 0.80 Income (loss) per common share - diluted (b) $ (0.01) $ 0.05 $ 0.12 $ 0.60 $ 0.77 (a) See Business Combinations for discussion of fourth quarter merger and other related charges and associated expenses included in cost of sales recorded in connection with the acquisition of Mac Frugal's. (b) Income (loss) per share calculations for each quarter is based on the applicable weighted average shares outstanding for each period and may not necessarily be equal to the full year income (loss) per share amount. FORM 10-K Page 40

41 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None. PART III ITEMS 10-13 Pursuant to General Instruction G to Form 10-K, the information called for by Items 10, with respect to directors of the Company (to the extent not set forth in Part I hereof), 11, 12, and 13 is incorporated by reference to the Company's 1999 Proxy Statement, which involves the election of directors, the final copy of which the Company filed with the Securities and Exchange Commission, pursuant to Regulation 14A, on April 9, 1999. PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Index to Consolidated Financial Statements, Financial Statement Schedules and Exhibits Page ---- 1. Financial Statements Independent Auditors' Report 22 Consolidated Statements of Income 23 Consolidated Balance Sheets 24 Consolidated Statements of Stockholders' Equity 25 Consolidated Statements of Cash Flows 26 Notes to Consolidated Financial Statements 27 2. Financial Statement Schedules Schedule Description -------- -------------------------------- II Valuation and Qualifying Accounts 46 All other financial statements and schedules not listed in the preceding indexes are omitted as the information is not applicable or the information is presented in the consolidated financial statements or notes thereto. FORM 10-K Page 41

42 (b) Reports on Form 8-K None. (c) Exhibits Exhibits marked with an asterisk (*) are filed herewith. Exhibit No. Document - ----------- ------------------------------------------------------------------- 3(a) Form of Restated Certificate of Incorporation of the Company (Exhibit 4(a) to the Company Registration Statement (No. 33-6086) on Form S-8 and incorporated herein by reference) 3(b) Amended and Restated By-laws of the Company (Exhibit 3(c) to the Company's Annual Report on Form 10-K for the year ended February 3, 1990 and incorporated herein by reference) 3(c) Amendment to By-laws dated April 14, 1992 (Exhibit 3(c) to the Company's Annual Report on Form 10-K for the year ended February 1, 1992 and incorporated herein by reference) 4(a) Specimen Stock Certificate (Exhibit 4(a) to the Company's Annual Report on Form 10-K for the year ended February 1, 1992 and incorporated herein by reference) 4(b) Summary of Rights to Purchase Preferred Stock (Exhibit 4(b) to the Company's Annual Report on Form 10-K for the year ended February 3, 1990 and incorporated herein by reference) 4(c) Rights Agreement between the Company and National City Bank (Exhibit 4(c) to the Company's Annual Report on Form 10-K for the year ended February 3, 1990 and incorporated herein by reference) 4(d) Form of Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of the Company (Exhibit 4(d) to the Company's Annual Report on Form 10-K for the year ended February 3, 1990 and incorporated herein by reference) 10(a) Consolidated Stores Corporation 1996 Performance Incentive Plan as Amended and Restated on July 23, 1996 (Exhibit 10(a) to the Company's Annual Report on Form 10-K for the year ended February 1, 1997 and incorporated herein by reference) 10(b) Consolidated Stores Corporation Directors Stock Option Plan (Exhibit 10(q) to the Company's Registration Statement (No. 33-42502) on Form S-8 and incorporated herein by reference) 10(a)(i) Consolidated Stores Corporation Amended and Restated Directors Stock Option Plan (Exhibit 10(c)(ii) to the Company's Annual Report on Form 10-K for the year ended February 1, 1992 and incorporated herein by reference) 10(c) Consolidated Stores Corporation Supplemental Savings Plan (Exhibit 10(r) to the Company's Registration Statement (No. 33-42692) on Form S-8 and incorporated herein by reference) 10(d) CSIC Pension Plan and Trust dated March 1, 1976 (Exhibit 10(h)(ii) to the Company's Registration Statement (No. 2-97642) on Form S-1 and incorporated herein by reference) FORM 10-K Page 42

43 Exhibit No. Document - ----------- ------------------------------------------------------------------- 10(d)(i) Amendment to CSIC Pension Plan and Trust (Exhibit 10(h)(ii) to the Company's Registration Statement (No. 2-97642) on Form S-1 and incorporated herein by reference) 10(d)(ii) Amendment No. 2 to CSIC Pension Plan and Trust (Filed as an Exhibit to the Company's Registration Statement (No. 33-6086) on Form S-8 and incorporated herein by reference) 10(e) Amended and Restated Credit Agrement dated as of May 15, 1998 by and among Consolidated Stores Corporation, an Ohio corporation (the "Borrower"), the BANKS (as defined), and The Bank of New York, in its capacity as Syndication Agent and as a Managing Agent, National City Bank, in its capacity as Administrative Agent ("Administrative Agent") and as a Managing Agent, PNC Bank, National Association, in its capacity as Arranger, as Documentation Agent (the "Documentation Agent") and as a Managing Agent, and Bank One, N.A., in its capacity as a Co-Syndication Agent and a Managing Agent and NationsBank, N.A., Fleet National Bank, Bank of America NT & SA, and First Union National Bank, as Managing Agents (Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended August 1, 1998, and incorporated herein by reference) 10(f) Transfer Agreement, dated as of May 9, 1997, among Consolidated Stores Corporation, an Ohio corporation, Nashua Hollis CVS, Inc., a New Hampshire corporation, The Bank of New York, a New York banking corporation, as Trustee, and each of the purchasers (as defined) (Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended August 2, 1997, and incorporated herein by reference) 10(g) Consolidated Stores Corporation, Note Agreement dated May 9, 1997, for $100,000,000 7% Senior Subordinated Notes Due May 4, 2000 (Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended August 2, 1997, and incorporated herein by reference) 10(h) Stock Purchase Agreement dated as of March 25, 1996 between Melville Corporation and Consolidated Stores Corporation relating to the purchase and sale of 100% of the Common Stock of Kay-Bee Center, Inc. (Exhibit B to the Company's Current Report on Form 8-K dated April 8, 1996, and incorporated herein by reference) 10(h)(i) Amendment No. 1 to Stock Purchase Agreement dated as of March 25, 1996 between Melville Corporation and Consolidated Stores Corporation relating to the purchase and sales of 100% of the Common Stock of Kay-Bee Center, Inc. (Exhibit 10 to the Company's Current Report on Form 8-K dated May 10, 1996, and incorporated herein by reference) 10(i) Agreement and Plan of Merger by and Among Consolidated Stores Corporation, MBC Consolidated Acquisition Corporation and Mac Frugal's Bargains - Close-outs, Inc. dated as of November 4, 1997 (Exhibit 1 to the Company's Current Report on Form 8-K dated November 5, 1997, and incorporated herein by reference) 10(j) Employment Agreement with William G. Kelley (Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended August 1, 1998, and incorporated herein by reference) 10(k) Employment Agreement with Armen Bahadurian (Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended July 29, 1995, and incorporated herein by reference) 10(l) Employment Agreement with Charles Freidenberg (Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended July 29, 1995, and incorporated herein by reference) FORM 10-K Page 43

44 Exhibit No. Document - ----------- ------------------------------------------------------------------- 10(m) Employment Agreement with Michael L. Glazer (Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended October 31, 1998, and incorporated herein by reference) 10(n) Consulting Agreement, dated as of November 4, 1997, by and between Philip L. Carter and Consolidated Stores Corporation (Exhibit 2.2 to the Company's Registration Statement (No. 333-41143) (included in Joint Proxy Statement/Prospectus as Annex B) on Form S-4 and incorporated herein by reference) 10(o) Noncompetition Agreement, dated as of November 4, 1997, by and between Philip L. Carter and Consolidated Stores Corporation (Exhibit 2.3 to the Company's Registration Statement (No. 333-41143) (included in Joint Proxy Statement/Prospectus as Annex C) on Form S-4 and incorporated herein by reference) 10(p) Consolidated Stores Corporation Savings Plan and Trust, as amended and restated (Exhibit 10(q)(i) to the Company's Annual Report on Form 10-K for the year ended February 3, 1990 and incorporated herein by reference) 10(q) The Consolidated Stores Corporation Key Associate Annual Incentive Compensation Plan (Exhibit 10(n) to the Company's Annual Report on Form 10-K for the year ended February 1, 1997 and incorporated herein by reference) 10(r)* Form of Executive Severance Agreement of the Company 10(s)* Form of Senior Executive Severance Agreement of the Company 10(t) Consolidated Stores Executive Benefits Plan (Exhibit 10(t) to the Company's Annual Report on Form 10-K for the year ended February 3, 1990 and incorporated herein by reference) 21* List of subsidiaries of the Company 23* Consent of Deloitte & Touche LLP 24 Power of Attorney for William G. Kelley, Michael L. Glazer and Michael J. Potter (Exhibit 24 included in Part II of the Company's Registration Statement (No. 333-2545) on Form S-3 and incorporated herein by reference) 24.1 Power of Attorney for David T. Kollat (Exhibit 24.1 to the Company's Registration Statement (No. 333-2545) on Form S-3 and incorporated herein by reference) 24.2 Power of Attorney for Nathan P. Morton (Exhibit 24.2 to the Company's Registration Statement (No. 333-2545) on Form S-3 and incorporated herein by reference) 24.3 Power of Attorney for Dennis B. Tishkoff (Exhibit 24.4 to the Company's Registration Statement (No. 333-2545) on Form S-3 and incorporated herein by reference) 24.4 Power of Attorney for William A. Wickham (Exhibit 24.5 to the Company's Registration Statement (No. 333-2545) on Form S-3 and incorporated herein by reference) 24.5 Power of Attorney for Sheldon M. Berman (Exhibit 24.6 to the Company's Registration Statement (No. 333-2545) on Form S-3 and incorporated herein by reference) 24.6 Power of Attorney for W. Eric Carlborg (Exhibit 24.6 to the Company's Registration Statement (No. 333-32063) on Form S-8 and incorporated herein by reference) FORM 10-K Page 44

45 Exhibit No. Document - ----------- ------------------------------------------------------------------- 24.7 Power of Attorney for Brenda J. Lauderback (Exhibit 24.7 to the Company's Registration Statement (No. 333-32063) on Form S-8 and incorporated herein by reference) 27* Financial Data Schedule FORM 10-K Page 45

46 CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (In thousands) Additions ------------------------ Balance at Charged to Charged to Balance at Beginning of Cost and Other End of Period Expense Accounts(2) Deductions Period - ------------------------------------------------------------------------------------------------------------- Fiscal year ended January 30, 1999: Inventory valuation allowance $65,101 $ 4,827 $61,094 $ 8,834 Fiscal year ended January 31, 1998: Inventory valuation allowance(1) 11,826 92,812 39,537 65,101 Fiscal year ended February 1, 1997: Inventory valuation allowance(1) 24,506 6,678 10,200 29,558 11,826 (1) Applicable to continuing operations and consists primarily of reserve for markdowns of aged goods and similar inventory reserves. (2) Value from company acquired. FORM 10-K Page 46

47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on behalf by the undersigned, thereunto duly authorized. CONSOLIDATED STORES CORPORATION Date: April 23, 1999 By:/s/ William G. Kelley ------------------------------- William G. Kelley 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 persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: April 23, 1999 /s/ William G. Kelley ------------------------------- William G. Kelley Chairman of the Board , Chief Executive Officer and President Date: April 23, 1999 /s/ Michael J. Potter ------------------------------- Michael J. Potter Executive Vice President, Chief Financial and Accounting Officer Date: April 23, 1999 Sheldon M. Berman William G. Kelley Nathan Morton W. Eric Carlborg David T. Kollat Dennis B. Tishkoff Michael L. Glazer Brenda J. Lauderback William A. Wickham Directors Directors Directors Albert J. Bell, by signing his name hereto, does hereby sign this Form 10-K pursuant to the Powers of Attorney executed by the Directors named, filed with the Securities and Exchange Commission on behalf of such Directors, all in the capacities indicated and on the date stated, such persons being a majority of the Directors of the Registrant. /s/ Albert J. Bell ------------------------------- Albert J. Bell Attorney-in-Fact Dated: April 23, 1999 FORM 10-K Page 47

1 EXHIBIT 10(r) EXECUTIVE SEVERANCE AGREEMENT This Agreement ("Agreement") is entered into and made effective as of the __th day of _______, 1999 by and among CONSOLIDATED STORES CORPORATION, an Ohio corporation ("Consolidated"), CONSOLIDATED STORES CORPORATION, a Delaware corporation and the ultimate parent company of Consolidated ("CSC") and ____________, an individual residing in Ohio (the "Executive"). WHEREAS, the Board of Directors of Consolidated (the "Board") believes it is in the best interests of Consolidated and its shareholders to assure the continued services of Executive, undiminished by any actual or perceived threat to continued employment that may arise from an actual or threatened Change in Control (as defined herein) of Consolidated or CSC; WHEREAS, should Consolidated or CSC receive any proposal that may result in a Change in Control, the Board believes it imperative that Consolidated and the Board be able to rely upon the Executive's continued employment in the Executive's then current position, and that Consolidated be able to receive and rely upon Executive's advice, if it requests it, as to the best interests of Consolidated, CSC and their respective share/stockholders, without concern that Executive might be distracted by the personal uncertainties and risks created by such a proposal; and WHEREAS, Executive wishes to continue to serve in Executive's then current capacity, subject to assurance that in the event of a Change in Control, Executive will have a reasonable degree of financial security; NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, Consolidated, CSC and Executive agree as follows: 1. If there is a Change in Control (as defined in Section 3 hereof) and Executive's employment is thereupon terminated or terminated within twenty four (24) months after the effective date thereof, Executive shall be entitled to the termination benefits set forth in Section 2 hereof. For purposes of this Agreement, Executive's employment shall be deemed to have been terminated only if Consolidated terminates such employment other than for Cause or if a Constructive Termination occurs. "Cause" shall mean Executive's conviction of a felony, or an act or acts of personal dishonesty on Executive's part intended to result and resulting in material harm to Consolidated, or any refusal by Executive to perform his assigned duties for a period exceeding ten (10) consecutive business days, other than any such refusal arising from a Constructive Termination or by reason of temporary physical or mental disability or illness. "Constructive Termination" shall mean a resignation by Executive because of any material adverse change or material diminution in Executive's reporting relationships, job description, duties, responsibilities, compensation, perquisites, office or location of employment (as reasonably determined by Executive in his/her good faith discretion); provided, however, that Executive shall notify Consolidated in writing at least forty five (45) days in advance of any election by Executive to terminate his or her employment hereunder, specifying the nature of the alleged adverse change or diminution, and Consolidated or CSC, as the case may be, shall have a period of ten (10) business days after the receipt of such notice to cure such alleged adverse change or diminution before Executive shall be entitled to exercise any such rights and remedies. Executive shall not be entitled to the benefits available hereunder unless such notice is timely given. FORM 10-K Page 48

2 EXHIBIT 10(r) 2. The benefits payable to Executive pursuant to Section 1 hereof are as follows: A. Consolidated shall pay to Executive a lump sum cash payment, net of any applicable withholding taxes, in an amount equal to the annual salary paid or payable to Executive immediately prior to the effective date of such Change in Control (the "Lump Sum Payment"); provided, however, that if there are fewer than twelve (12) months remaining from the date of Executive's termination to Executive's normal retirement date under any retirement plan then in effect, Consolidated shall instead pay Executive the amount obtained by multiplying the Lump Sum Payment by a fraction, the numerator of which is the number of months so remaining and the denominator of which is 12. The applicable amount shall be paid on the later of (x) the next business day after the day Executive's employment is terminated, or (y) the next business day after the effective date of such Change in Control. B. In addition to the payment described in Subsection 2.A. above, Consolidated shall pay to Executive a lump sum cash payment, net of any applicable withholding taxes, in an amount equal to the Executive's then current annual Stretch Bonus, as defined and determined annually by the Compensation Committee of the CSC Board of Directors (the "Lump Sum Bonus Payment"); provided, however, that (i) in the event the Executive's then current Stretch Bonus is undefined or is not subject to a maximum payout, the Executive's annual Stretch Bonus shall be deemed to be 200% of the Executive's then current base salary and (ii) if there are fewer than twelve (12) months remaining from the date of Executive's termination to Executive's normal retirement date under any retirement plan then in effect, Consolidated shall instead pay Executive the amount obtained by multiplying the Lump Sum Bonus Payment by a fraction, the numerator of which is the number of months so remaining and the denominator of which is 12. Executive shall receive the Lump Sum Bonus Payment at the same time Executive receives the Lump Sum Payment described in Subsection 2.A. above. C. For a period of one year, Executive (and his or her family, if their participation is permitted under the terms of the subject plan) shall be entitled to participate in any group life, hospitalization, or disability insurance plan, health program, or other executive benefit plan (other than bonus compensation or performance plans to the extent that such plans, in the case of Executive, are in lieu of the bonus plan set forth in Subsection 2.B. above) that is generally available to similarly titled executive officers of Consolidated; provided, however, that Executive's participation in the plans referred to in this Subsection 2.C. shall be terminated (other than as provided by law) when and to the extent that Executive is entitled to receive the same from another employer during such period. Executive's participation in and benefits under any such plan shall be on the terms and subject to the conditions specified in the governing document of the particular plan. D. If all or any portion of the amount payable to Executive under this Agreement, either alone or together with other amounts that Executive is entitled to receive in connection with a Change in Control, constitutes "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), or any successor provision, that are subject to the excise tax imposed by Section 4999 of the Code (or any similar tax or assessment), the amounts payable hereunder shall be increased to the extent necessary to place Executive in the same after-tax position as Executive would have been in had no such excise tax or assessment been imposed on any such payment paid or payable to Executive under this Agreement or any other FORM 10-K Page 49

3 EXHIBIT 10(r) payment that Executive may receive as a result of such Change in Control. The determination of the amount of any such tax or assessment and the resulting amount of incremental payment required hereby in connection therewith shall be made by the independent accounting firm employed by Consolidated immediately prior to the applicable Change in Control, within thirty (30) calendar days after the payment of the amount payable pursuant to Subsections 2.A. and 2.B. hereof, and said incremental payment shall be made within five (5) business days after said determination has been made. E. If, after the date upon which any payment required under this Agreement has been made, it is determined (pursuant to final judgment of a court of competent jurisdiction or an agreed upon tax assessment) that the amount of excise or other similar taxes or assessments payable by Executive is greater than the amount initially so determined, then Consolidated shall pay Executive an amount equal to the sum of (i) such additional excise or other similar taxes, plus (ii) any interest, fines and penalties resulting from such underpayment, plus (iii) an amount necessary to reimburse Executive for any income, excise or other tax or assessment payable by Executive with respect to the amounts specified in (i) and (ii) above, and the reimbursement provided by this clause (iii). Payment thereof shall be made within five (5) business days after the date upon which such subsequent determination is made. 3. As used herein, "Change in Control" means any of the following events: (i) any person or group (as defined for purposes of Section 13(d) of the Securities Exchange Act of 1934) becomes the beneficial owner of, or has the right to acquire (by contract, option, warrant, conversion of convertible securities or otherwise), 20% or more of the outstanding equity securities of CSC entitled to vote for the election of directors; (ii) a majority of the Board of Directors of CSC is replaced within any period of two years or less by directors not nominated and approved by a majority of the directors of CSC in office at the beginning of such period (or their successors so nominated and approved), or a majority of the Board of Directors of CSC at any date consists of persons not so nominated and approved; (iii) the stockholders of CSC approve an agreement to reorganize, merge or consolidate with another corporation (other than Consolidated or an affiliate); or (iv) the stockholders of CSC adopt a plan or approve an agreement to sell or otherwise dispose of all or substantially all of CSC's assets (including without limitation, a plan of liquidation or dissolution), in a single transaction or series of related transactions. The effective date of any such Change in Control shall be the date upon which the last event occurs or last action is taken such that the definition of such Change in Control (as set forth above) has been met. For purposes of this Agreement, the term "affiliate" shall mean: (i) any person or entity qualified as part of an affiliated group which includes Consolidated and CSC pursuant to Section 1504 of the Code; or (ii) any person or entity qualified as part of a parent-subsidiary group of trades and businesses under common control within the meaning of Treasury Regulation Section 1.414(c)(2)(b). Determination of affiliate shall be tested as of the date immediately prior to any event constituting a Change in Control. The other provisions of this Section 3 notwithstanding, the term "Change in Control" shall not mean any transaction, merger, consolidation, or reorganization in which CSC exchanges or offers to exchange newly issued or treasury shares in an amount less than 50% of the then outstanding equity securities of CSC entitled to vote for the election of directors, for 51% or more of the outstanding equity securities entitled to vote for the election of at least the majority of the directors of a corporation other than CSC or an affiliate thereof (the "Acquired Corporation"), or for all or substantially all of the assets of the Acquired Corporation. FORM 10-K Page 50

4 EXHIBIT 10(r) 4. If Executive hires legal counsel with respect to any alleged failure by Consolidated or CSC to comply with any of the terms of this Agreement, or institutes any negotiation or institutes or responds to any legal action to assert or defend the validity of or to enforce Executive's rights under, or to recover damages for breach of, this Agreement, Consolidated shall pay Executive's actual expenses for attorneys' fees and disbursements, together with such additional payments, if any, as may be necessary so that the net after-tax payments so made to Executive equal such fees and disbursements; provided, however, that Executive shall be responsible for his own fees and expenses with respect to any lawsuit between Executive and Consolidated to enforce rights or obligations under this Agreement in which Consolidated is the prevailing party. The fees and expenses incurred by Executive in instituting or responding to any such negotiation or legal action shall be paid by Consolidated as they are incurred, in advance of the final disposition of the action or proceeding, upon receipt of an undertaking by Executive to repay such amounts if Consolidated is ultimately determined to be the prevailing party. 5. If any amount due Executive hereunder is not paid when due, then Consolidated shall pay interest on said amount at an annual rate equal to the base lending rate of National City Bank, Cleveland, Ohio, or successor, as in effect from time to time, for the period between the date on which such payment is due and the date said amount is paid. 6. Consolidated's obligation to pay Executive the compensation and to make the arrangements required hereunder shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, any setoff, counterclaim, recoupment, defense or other right that Consolidated may have against Executive or otherwise. All amounts payable by Consolidated hereunder shall be paid without notice or demand. Subject to the proviso in Section 1 above, each and every payment made hereunder by Consolidated shall be final and Consolidated shall not seek to recover all or any part of such payment from Executive or from whosoever may be entitled thereto, for any reason whatsoever. Executive shall not be obligated to seek other employment or compensation or insurance in mitigation of any amount payable or arrangement made under any provision of this Agreement, and the obtaining of any such other employment or compensation or insurance, except as otherwise provided in this Agreement, shall in no event effect any reduction of Consolidated's obligations to make the payments and arrangements required to be made under this Agreement. 7. From and after any termination of Executive's employment, Executive shall retain in confidence and not use for his own benefit or on behalf of any other person or entity any confidential information known to him concerning CSC, Consolidated, their respective subsidiaries or their respective businesses so long as such information is not publicly disclosed by someone other than Executive. 8. In partial consideration of the benefits granted to Executive herein, Executive agrees that during the six-month period immediately following Executive's termination, if Executive shall have received benefits under Section 2 above, Executive shall not engage in any Competitive Activity. For purposes of this Agreement, "Competitive Activity" shall mean Executive's participation, without the approval of the Board or the written consent of the chief executive officer of Consolidated, in the management of any business operation of any enterprise if such operation (a "Competitive Operation") engages in substantial and direct competition with Consolidated's closeout business operation at the date of Executive's termination. For purposes of this Agreement, a closeout business operation shall be considered in substantial and direct competition with Consolidated's closeout business operation if such business operation's sales of FORM 10-K Page 51

5 EXHIBIT 10(r) closeout merchandise amount to ten percent (10%) or more of such business operation's total sales. Competitive Activity shall not include (i) the mere ownership of securities in any enterprise or (ii) participation in the management of any enterprise or of any business operation thereof, other than in connection with a Competitive Operation of such enterprise. 9. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provision hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 10. Except as specifically set forth herein, this Agreement supersedes and replaces any and all prior Senior Executive Severance Agreements or Executive Severance Agreements between the parties, but shall not be deemed to negate, supersede or alter any other agreement or arrangement between Executive and Consolidated or CSC or any other rights to which Executive may be entitled, and shall be and remain in effect in addition to any such other agreement or rights, whether now existing or later created. 11. This Agreement shall be effective for a one year period beginning with the effective date hereof (the "Initial Term") and shall automatically be renewed for successive one year periods commencing on successive anniversaries of the date hereof (each, a "Renewal Term"), subject to the following conditions: A. this Agreement shall be deemed terminated upon any termination or other cessation whatsoever of Executive's employment for any reason prior to a Change in Control; B. this Agreement may be terminated by the mutual agreement of Executive and Consolidated; C. Consolidated may terminate this Agreement at any time effective upon thirty (30) days prior written notice being given; provided, however, that such notice shall be ineffective if a Change in Control shall occur prior to the effective date of such termination. Notwithstanding anything to the contrary herein, this Agreement shall not be terminated or deemed terminated except by mutual agreement of Executive and Consolidated (i) during the first twenty four (24) months after the effective date of a Change in Control or (ii) during any period when Consolidated or CSC has knowledge that any third person has taken steps reasonably calculated to effect a Change in Control, until such third person has abandoned or terminated his or its efforts in connection therewith. Upon any termination hereof, Executive shall have no further rights hereunder, except to the extent that rights to any benefit have accrued hereunder because of a Change in Control occurring prior to such termination. 12. In consideration of and as inducement to Executive to enter into this Agreement, CSC hereby absolutely and unconditionally guarantees to Executive the full, complete and timely payment and performance of all obligations of Consolidated arising out of or in connection with this Agreement. This guaranty shall be enforceable against CSC without any suit or proceeding by Executive against Consolidated and without any notice of nonpayment or nonperformance hereunder. FORM 10-K Page 52

6 EXHIBIT 10(r) 13. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors, assigns, heirs and legal representatives. Consolidated shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of Consolidated, by agreement in form and substance satisfactory to Executive, expressly to assume and agree to perform and discharge all obligations of Consolidated arising under this Agreement. All references herein to Consolidated shall be deemed to include any such successor. 14. This Agreement shall in all respects be subject to, governed by and construed in accordance with the laws of the State of Ohio. IN WITNESS WHEREOF, this Agreement has been executed as of the day and year first above written. ATTEST: CONSOLIDATED STORES CORPORATION, a Delaware corporation By: Secretary, Albert J. Bell William G. Kelley Its Chief Executive Officer ATTEST: CONSOLIDATED STORES CORPORATION, an Ohio corporation By: Secretary, Albert J. Bell Michael J. Potter Its Executive Vice President ("EXECUTIVE") FORM 10-K Page 53

1 EXHIBIT 10(s) SENIOR EXECUTIVE SEVERANCE AGREEMENT This Agreement ("Agreement") is entered into and made effective as of the __th day of ___________ 1999 by and among CONSOLIDATED STORES CORPORATION, an Ohio corporation ("Consolidated"), CONSOLIDATED STORES CORPORATION, a Delaware corporation and the ultimate parent company of Consolidated ("CSC") and_____________, an individual residing in ____ (the "Executive"). WHEREAS, the Board of Directors of Consolidated (the "Board") believes it is in the best interests of Consolidated and its shareholders to assure the continued services of Executive, undiminished by any actual or perceived threat to continued employment that may arise from an actual or threatened Change in Control (as defined herein) of Consolidated or CSC; WHEREAS, should Consolidated or CSC receive any proposal that may result in a Change in Control, the Board believes it imperative that Consolidated and the Board be able to rely upon the Executive's continued employment in the Executive's then current position, and that Consolidated be able to receive and rely upon Executive's advice, if it requests it, as to the best interests of Consolidated, CSC and their respective share/stockholders, without concern that Executive might be distracted by the personal uncertainties and risks created by such a proposal; and WHEREAS, Executive wishes to continue to serve in Executive's then current capacity, subject to assurance that in the event of a Change in Control, Executive will have a reasonable degree of financial security; NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, Consolidated, CSC and Executive agree as follows: 1. there is a Change in Control (as defined in Section 3 hereof) and Executive's employment is thereupon terminated or terminated within twenty four (24) months after the effective date thereof, Executive shall be entitled to the termination benefits set forth in Section 2 hereof. For purposes of this Agreement, Executive's employment shall be deemed to have been terminated only if Consolidated terminates such employment other than for Cause or if a Constructive Termination occurs. "Cause" shall mean Executive's conviction of a felony, or an act or acts of personal dishonesty on Executive's part intended to result and resulting in material harm to Consolidated, or any refusal by Executive to perform his assigned duties for a period exceeding ten (10) consecutive business days, other than any such refusal arising from a Constructive Termination or by reason of temporary physical or mental disability or illness. "Constructive Termination" shall mean a resignation by Executive because of any material adverse change or material diminution in Executive's reporting relationships, job description, duties, responsibilities, compensation, perquisites, office or location of employment (as reasonably determined by Executive in his/her good faith discretion); provided, however, that Executive shall notify Consolidated in writing at least forty five (45) days in advance of any election by Executive to terminate his or her employment hereunder, specifying the nature of the alleged adverse change or diminution, and Consolidated or CSC, as the case may be, shall have a period of ten (10) business days after the receipt of such notice to cure such alleged adverse change or diminution before Executive shall be entitled to exercise any such rights and remedies. Executive shall not be entitled to the benefits available hereunder unless such notice is timely given. FORM 10-K Page 54

2 EXHIBIT 10(s) 2. The benefits payable to Executive pursuant to Section 1 hereof are as follows: A. Consolidated shall pay to Executive a lump sum cash payment, net of any applicable withholding taxes, in an amount equal to two times the annual salary paid or payable to Executive immediately prior to the effective date of such Change in Control (the "Lump Sum Payment"); provided, however, that if there are fewer than twenty four (24) months remaining from the date of Executive's termination to Executive's normal retirement date under any retirement plan then in effect, Consolidated shall instead pay Executive the amount obtained by multiplying the Lump Sum Payment by a fraction, the numerator of which is the number of months so remaining and the denominator of which is 24. The applicable amount shall be paid on the later of (x) the next business day after the day Executive's employment is terminated, or (y) the next business day after the effective date of such Change in Control. B. In addition to the payment described in Subsection 2.A. above, Consolidated shall pay to Executive a lump sum cash payment, net of any applicable withholding taxes, in an amount equal to two times the Executive's then current annual Stretch Bonus, as defined and determined annually by the Compensation Committee of the CSC Board of Directors (the "Lump Sum Bonus Payment"); provided, however, that (i) in the event the Executive's then current Stretch Bonus is undefined or is not subject to a maximum payout, the Executive's annual Stretch Bonus shall be deemed to be 200% of the Executive's then current base salary and (ii) if there are fewer than twenty four (24) months remaining from the date of Executive's termination to Executive's normal retirement date under any retirement plan then in effect, Consolidated shall instead pay Executive the amount obtained by multiplying the Lump Sum Bonus Payment by a fraction, the numerator of which is the number of months so remaining and the denominator of which is 24. Executive shall receive the Lump Sum Bonus Payment at the same time Executive receives the Lump Sum Payment described in Subsection 2.A. above. C. For a period of one year, Executive (and his or her family, if their participation is permitted under the terms of the subject plan) shall be entitled to participate in any group life, hospitalization, or disability insurance plan, health program, or other executive benefit plan (other than bonus compensation or performance plans to the extent that such plans, in the case of Executive, are in lieu of the bonus plan set forth in Subsection 2.B. above) that is generally available to similarly titled executive officers of Consolidated; provided, however, that Executive's participation in the plans referred to in this Subsection 2.C. shall be terminated (other than as provided by law) when and to the extent that Executive is entitled to receive the same from another employer during such period. Executive's participation in and benefits under any such plan shall be on the terms and subject to the conditions specified in the governing document of the particular plan, including, but not limited to, reimbursement of 100% of all medical and dental expenses incurred during the period of participation in the plans referred to above. D. If all or any portion of the amount payable to Executive under this Agreement, either alone or together with other amounts that Executive is entitled to receive in connection with a Change in Control, constitutes "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), or any successor provision, that are subject to the excise tax imposed by Section 4999 of the Code (or any similar tax or assessment), the amounts FORM 10-K Page 55

3 EXHIBIT 10(s) payable hereunder shall be increased to the extent necessary to place Executive in the same after-tax position as Executive would have been in had no such excise tax or assessment been imposed on any such payment paid or payable to Executive under this Agreement or any other payment that Executive may receive as a result of such Change in Control. The determination of the amount of any such tax or assessment and the resulting amount of incremental payment required hereby in connection therewith shall be made by the independent accounting firm employed by Consolidated immediately prior to the applicable Change in Control, within thirty (30) calendar days after the payment of the amount payable pursuant to Subsections 2.A. and 2.B. hereof, and said incremental payment shall be made within five (5) business days after said determination has been made. E. If, after the date upon which any payment required under this Agreement has been made, it is determined (pursuant to final judgment of a court of competent jurisdiction or an agreed upon tax assessment) that the amount of excise or other similar taxes or assessments payable by Executive is greater than the amount initially so determined, then Consolidated shall pay Executive an amount equal to the sum of (i) such additional excise or other similar taxes, plus (ii) any interest, fines and penalties resulting from such underpayment, plus (iii) an amount necessary to reimburse Executive for any income, excise or other tax or assessment payable by Executive with respect to the amounts specified in (i) and (ii) above, and the reimbursement provided by this clause (iii). Payment thereof shall be made within five (5) business days after the date upon which such subsequent determination is made. 3. As used herein, "Change in Control" means any of the following events: (i) any person or group (as defined for purposes of Section 13(d) of the Securities Exchange Act of 1934) becomes the beneficial owner of, or has the right to acquire (by contract, option, warrant, conversion of convertible securities or otherwise), 20% or more of the outstanding equity securities of CSC entitled to vote for the election of directors; (ii) a majority of the Board of Directors of CSC is replaced within any period of two years or less by directors not nominated and approved by a majority of the directors of CSC in office at the beginning of such period (or their successors so nominated and approved), or a majority of the Board of Directors of CSC at any date consists of persons not so nominated and approved; (iii) the stockholders of CSC approve an agreement to reorganize, merge or consolidate with another corporation (other than Consolidated or an affiliate); or (iv) the stockholders of CSC adopt a plan or approve an agreement to sell or otherwise dispose of all or substantially all of CSC's assets (including without limitation, a plan of liquidation or dissolution), in a single transaction or series of related transactions. The effective date of any such Change in Control shall be the date upon which the last event occurs or last action is taken such that the definition of such Change in Control (as set forth above) has been met. For purposes of this Agreement, the term "affiliate" shall mean: (i) any person or entity qualified as part of an affiliated group which includes Consolidated and CSC pursuant to Section 1504 of the Code; or (ii) any person or entity qualified as part of a parent-subsidiary group of trades and businesses under common control within the meaning of Treasury Regulation Section 1.414(c)(2)(b). Determination of affiliate shall be tested as of the date immediately prior to any event constituting a Change in Control. The other provisions of this Section 3 notwithstanding, the term "Change in Control" shall not mean any transaction, merger, consolidation, or reorganization in which CSC exchanges or offers to exchange newly issued or treasury shares in an amount less than 50% of the then outstanding equity securities of CSC entitled to vote for the election of directors, for 51% or more of the outstanding equity securities FORM 10-K Page 56

4 EXHIBIT 10(s) entitled to vote for the election of at least the majority of the directors of a corporation other than CSC or an affiliate thereof (the "Acquired Corporation"), or for all or substantially all of the assets of the Acquired Corporation. 4. If Executive hires legal counsel with respect to any alleged failure by Consolidated or CSC to comply with any of the terms of this Agreement, or institutes any negotiation or institutes or responds to any legal action to assert or defend the validity of or to enforce Executive's rights under, or to recover damages for breach of, this Agreement, Consolidated shall pay Executive's actual expenses for attorneys' fees and disbursements, together with such additional payments, if any, as may be necessary so that the net after-tax payments so made to Executive equal such fees and disbursements; provided, however, that Executive shall be responsible for his own fees and expenses with respect to any lawsuit between Executive and Consolidated to enforce rights or obligations under this Agreement in which Consolidated is the prevailing party. The fees and expenses incurred by Executive in instituting or responding to any such negotiation or legal action shall be paid by Consolidated as they are incurred, in advance of the final disposition of the action or proceeding, upon receipt of an undertaking by Executive to repay such amounts if Consolidated is ultimately determined to be the prevailing party. 5. If any amount due Executive hereunder is not paid when due, then Consolidated shall pay interest on said amount at an annual rate equal to the base lending rate of National City Bank, Cleveland, Ohio, or successor, as in effect from time to time, for the period between the date on which such payment is due and the date said amount is paid. 6. Consolidated's obligation to pay Executive the compensation and to make the arrangements required hereunder shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, any setoff, counterclaim, recoupment, defense or other right that Consolidated may have against Executive or otherwise. All amounts payable by Consolidated hereunder shall be paid without notice or demand. Subject to the proviso in Section 1 above, each and every payment made hereunder by Consolidated shall be final and Consolidated shall not seek to recover all or any part of such payment from Executive or from whosoever may be entitled thereto, for any reason whatsoever. Executive shall not be obligated to seek other employment or compensation or insurance in mitigation of any amount payable or arrangement made under any provision of this Agreement, and the obtaining of any such other employment or compensation or insurance, except as otherwise provided in this Agreement, shall in no event effect any reduction of Consolidated's obligations to make the payments and arrangements required to be made under this Agreement. 7. From and after any termination of Executive's employment, Executive shall retain in confidence and not use for his own benefit or on behalf of any other person or entity any confidential information known to him concerning CSC, Consolidated, their respective subsidiaries or their respective businesses so long as such information is not publicly disclosed by someone other than Executive. 8. In partial consideration of the benefits granted to Executive herein, Executive agrees that during the six-month period immediately following Executive's termination, if Executive shall have received benefits under Section 2 above, Executive shall not engage in any Competitive Activity. For purposes of this Agreement, "Competitive Activity" shall mean Executive's participation, without the approval of the Board or the written consent of the chief executive officer of Consolidated, in the management of any business FORM 10-K Page 57

5 EXHIBIT 10(s) operation of any enterprise if such operation (a "Competitive Operation") engages in substantial and direct competition with Consolidated's closeout business operation at the date of Executive's termination. For purposes of this Agreement, a closeout business operation shall be considered in substantial and direct competition with Consolidated's closeout business operation if such business operation's sales of closeout merchandise amount to ten percent (10%) or more of such business operation's total sales. Competitive Activity shall not include (i) the mere ownership of securities in any enterprise or (ii) participation in the management of any enterprise or of any business operation thereof, other than in connection with a Competitive Operation of such enterprise. 9. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provision hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 10. Except as specifically set forth herein, this Agreement supersedes and replaces any and all prior Senior Executive Severance Agreements or Executive Severance Agreements between the parties, but shall not be deemed to negate, supersede or alter any other agreement or arrangement between Executive and Consolidated or CSC or any other rights to which Executive may be entitled, and shall be and remain in effect in addition to any such other agreement or rights, whether now existing or later created. 11. This Agreement shall be effective for a one year period beginning with the effective date hereof (the "Initial Term") and shall automatically be renewed for successive one year periods commencing on successive anniversaries of the date hereof (each, a "Renewal Term"), subject to the following conditions: A. this Agreement shall be deemed terminated upon any termination or other cessation whatsoever of Executive's employment for any reason prior to a Change in Control; B. this Agreement may be terminated by the mutual agreement of Executive and Consolidated; C. Consolidated may terminate this Agreement at any time effective upon thirty (30) days prior written notice being given; provided, however, that such notice shall be ineffective if a Change in Control shall occur prior to the effective date of such termination. Notwithstanding anything to the contrary herein, this Agreement shall not be terminated or deemed terminated except by mutual agreement of Executive and Consolidated (i) during the first twenty four (24) months after the effective date of a Change in Control or (ii) during any period when Consolidated or CSC has knowledge that any third person has taken steps reasonably calculated to effect a Change in Control, until such third person has abandoned or terminated his or its efforts in connection therewith. Upon any termination hereof, Executive shall have no further rights hereunder, except to the extent that rights to any benefit have accrued hereunder because of a Change in Control occurring prior to such termination. 12. In consideration of and as inducement to Executive to enter into this Agreement, CSC hereby absolutely and unconditionally guarantees to Executive the full, complete and timely payment and performance of FORM 10-K Page 58

6 EXHIBIT 10(s) all obligations of Consolidated arising out of or in connection with this Agreement. This guaranty shall be enforceable against CSC without any suit or proceeding by Executive against Consolidated and without any notice of nonpayment or nonperformance hereunder. 13. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors, assigns, heirs and legal representatives. Consolidated shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of Consolidated, by agreement in form and substance satisfactory to Executive, expressly to assume and agree to perform and discharge all obligations of Consolidated arising under this Agreement. All references herein to Consolidated shall be deemed to include any such successor. 14. This Agreement shall in all respects be subject to, governed by and construed in accordance with the laws of the State of Ohio. IN WITNESS WHEREOF, this Agreement has been executed as of the day and year first above written. ATTEST: CONSOLIDATED STORES CORPORATION, a Delaware corporation By: Secretary, Albert J. Bell William G. Kelley Its Chief Executive Officer ATTEST: CONSOLIDATED STORES CORPORATION, an Ohio corporation By: Secretary, Albert J. Bell Michael J. Potter Its Executive Vice President ("EXECUTIVE") FORM 10-K Page 59

1 EXHIBIT 21 SUBSIDIARIES Name Jurisdiction ------------------------------------------------------------------------------------------ ------------ 1. TRO, Inc.....................................................................................IL 2. Capital Retail Systems, Inc..................................................................OH 3. Consolidated Stores Corporation..............................................................OH 4. K.B. Consolidated, Inc.......................................................................OH 5. Mac Frugal's Bargains - Close-outs Inc.......................................................DE 6. PNS Stores, Inc..............................................................................CA 7. West Coast Liquidators, Inc..................................................................CA 8. CSC Distribution, Inc........................................................................AL 9. Consolidated Property Holdings, Inc..........................................................NV 10. C.S. Ross Company............................................................................OH 11. Industrial Products of New England, Inc......................................................ME 12. Midwestern Home Products, Inc................................................................DE 13. Midwestern Home Products Company, Ltd........................................................OH 14. Tool and Supply Company of New England, Inc..................................................DE 15. SS Investments Corporation...................................................................DE 16. Kay-Bee Center, Inc..........................................................................CA 17. Southdale Kay-Bee Toy, Inc...................................................................MN 18. Mall of America Kay-Bee Toy, Inc.............................................................MN 19. KB Holdings, Inc.............................................................................NV 20. Kay-Bee Toy & Hobby Shops, Inc...............................................................MA 21. KB Toy Distribution South, Inc...............................................................AL 22. K B Toy of Alaska, Inc.......................................................................AK 23. K B Toy of Arkansas, Inc.....................................................................AR 24. K B Toy of Arizona, Inc......................................................................AZ 25. K B Toy of California, Inc...................................................................DE 26. K B Toy of Colorado, Inc.....................................................................CO 27. K B Toy of Connecticut, Inc..................................................................CT 28. K B Toy of Florida, Inc......................................................................FL 29. K B Toy of Hawaii, Inc.......................................................................NY 30. Ala Moana Kay-Bee Toy, Inc...................................................................NY 31. K B Toy of Idaho, Inc........................................................................ID 32. K B Toy of Massachusetts, Inc................................................................MA 33. KBTOYS.COM, INC..............................................................................MA 34. K B Toy of Maryland, Inc.....................................................................MD 35. K B Toy of North Carolina, Inc...............................................................VA 36. K B Toy of Nebraska, Inc.....................................................................NE 37. Pheasant Kay-Bee Toy, Inc....................................................................NH 38. K B Toy of New Jersey, Inc...................................................................NJ 39. K B Toy of Nevada, Inc.......................................................................NV 40. K B Toy of Ohio, Inc.........................................................................OH 41. K B Toy of Pennsylvania, Inc.................................................................PA 42. K B Toy of South Dakota, Inc.................................................................SD 43. K B Toy of Tennessee, Inc....................................................................TN FORM 10-K Page 60

2 SUBSIDIARIES Name Jurisdiction ------------------------------------------------------------------------------------------ ------------ 44. KB Toy of Texas, Inc.........................................................................TX 45. K B Toy of Utah, Inc.........................................................................UT 46. K B Toy of Virginia, Inc.....................................................................VA 47. K B Toy of Washington, Inc...................................................................WA 48. K B Toy of Wisconsin, Inc....................................................................NY 49. K B Toy of Wyoming, Inc......................................................................WY 50. Carolina Kay-Bee Toy, Inc....................................................................NY 51. Las Americas Kay-Bee Toy, Inc................................................................NY 52. Rio Hondo Kay-Bee Toy, Inc...................................................................NY 53. Centro Del Sur Kay-Bee Toy, Inc..............................................................NY 54. Calle Betances Kay-Bee Toy, Inc..............................................................NY 55. Bayamon Kay-Bee Toy, Inc.....................................................................NY 56. Cordero Ave. (Caguas) Kay-Bee Toy, Inc.......................................................NY 57. Atocha Street Kay-Bee Toy, Inc...............................................................NY 58. Fajardo State Rd. Kay-Bee Toy, Inc...........................................................NY 59. Main Street (Yauco) Kay-Bee Toy, Inc.........................................................NY 60. Mayaguez Kay-Bee Toy, Inc....................................................................NY 61. Aguadilla Kay-Bee Toy, Inc...................................................................NY 62. Plaza Del Caribe Kay-Bee Toy, Inc............................................................NY 63. Montehiedra Kay-Bee Toy, Inc.................................................................NY 64. Kay-Bee De Diego Street, Inc.................................................................OH 65. Kay-Bee Isabela, Inc.........................................................................OH 66. Kay-Bee Palma Real, Inc......................................................................OH 67. Kay-Bee Del Norte, Inc.......................................................................OH 68. Kay-Bee Guayama, Inc.........................................................................OH 69. Kay-Bee Carolina, Inc........................................................................OH 70. Kay-Bee Plaza Del Atlantico, Inc.............................................................OH 71. Kay-Bee Caguas Centrum, Inc..................................................................OH 72. Kay-Bee Playa del Sol, Inc...................................................................OH 73. Kay-Bee Western Plaza, Inc...................................................................OH 74. Kay-Bee Yabucoa, Inc.........................................................................OH 75. Kay-Bee Manati, Inc..........................................................................OH 76. Barn Acquisition Corporation.................................................................DE 77. Fashion Barn, Inc............................................................................NY 78. Fashion Barn of New Jersey, Inc..............................................................NJ 79. Fashion Barn of Florida, Inc.................................................................FL 80. Fashion Barn of Indiana, Inc.................................................................IN 81. Fashion Barn of Pennsylvania, Inc............................................................PA 82. Fashion Barn of Oklahoma, Inc................................................................OK 83. Fashion Barn of Texas, Inc...................................................................TX 84. Fashion Barn of Ohio, Inc....................................................................OH 85. Fashion Outlets Corp.........................................................................NY 86. Fashion Barn of Vermont, Inc.................................................................VT FORM 10-K Page 61

3 SUBSIDIARIES Name Jurisdiction ------------------------------------------------------------------------------------------ ------------ 87. Fashion Barn of Virginia, Inc................................................................VA 88. Fashion Barn of South Carolina, Inc..........................................................SC 89. Fashion Barn of North Carolina, Inc..........................................................NC 90. Fashion Barn of West Virginia, Inc...........................................................WV 91. Fashion Bonanza, Inc.........................................................................NY 92. Rogers Fashion Industries, Inc...............................................................NY 93. Saddle Brook Distributors, Inc...............................................................NY 94. DTS, Inc.....................................................................................NY 95. Fashion Barn of Missouri, Inc................................................................MO 96. Fashion Barn, Inc............................................................................MA 97. Fashion Barn of Georgia, Inc.................................................................GA FORM 10-K Page 62

1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We hereby consent to the incorporation by reference in (i) Registration Statement No. 33-42502 on Form S-8 pertaining to Consolidated Stores Corporation Director Stock Option Plan (ii) Registration Statement No. 33-42692 on Form S-8 pertaining to Consolidated Stores Corporation Supplemental Savings Plan (iii) Post Effective Amendment No. 2 to Registration Statement No. 33-6068 on Form S-8 pertaining to Consolidated Stores Corporation Executive Stock Option and Stock Appreciation Rights Plan (iv) Post Effective Amendment No. 1 to Registration Statement No. 33-19378 on Form S-8 pertaining to Consolidated Stores Corporation Savings Plan (v) Post Effective Amendment No. 2 to Registration Statement No. 333-2545 on Form S-3 pertaining to the issuance of Consolidated Stores Corporation Common Shares (vi) Registration Statement No. 333-32063 on Form S-8 pertaining to Consolidated Stores Corporation 1996 Performance Incentive Plan and (vii) Registration Statement No. 333-41143 on Form S-4 pertaining to the issuance of Consolidated Stores Corporation Common Shares of our report dated February 23, 1999, appearing in this Annual Report on Form 10-K of Consolidated Stores Corporation for the year ended January 30, 1999. Deloitte & Touche LLP Dayton, Ohio April 23, 1999 FORM 10-K Page 63

5 This schedule contains summary financial data extracted from Consolidated Stores Corporation and Subsidiaries Consolidated Financial Statements filed in Form 10-K as of January 30, 1999, and the fiscal year then ended, and is qualified in its entirety by reference to such financial statements.

YEAR JAN-30-1999 FEB-1-1998 JAN-30-1999 75,906 0 16,781 0 1,096,844 1,335,175 1,112,384 428,947 2,042,524 459,941 295,619 0 0 1,095 1,180,807 2,042,524 4,193,712 4,193,712 2,491,353 3,990,049 0 0 24,300 179,363 69,945 109,418 0 0 (12,649) 96,769 0.89 0.86