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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 29, 2000

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:

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 10-K or any amendment to this FORM 10-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 $1,282,004,683 on April 20, 2000. 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 5,624,044 shares.

The number of shares of Common Stock $.01 par value per share, outstanding as of April 20, 2000, was 111,356,389 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.

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FORM 10-K

ANNUAL REPORT
FOR THE FISCAL YEAR ENDED JANUARY 29, 2000

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PART I

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 leading value retailer specializing in closeout merchandise and toys. At January 29, 2000, the Company operated a total of 2,550 stores in all 50 states, Puerto Rico and Guam and conducted online sales of children’s products. Retail operations are conducted primarily under the following names: Odd Lots, Big Lots, Big Lots Furniture, Mac Frugal’s Bargains •Close-outs, and Pic ‘N’ Save (collectively “Closeout Stores”) and K•B Toys, K•B Toy Works, and K•B Toy Outlet (collectively “Toy Stores”) and KBkids.com.

The Company’s goal is to build upon its leadership position in closeout retailing, a growing segment of the retailing industry, toy retailing and children’s products by expanding its market presence in both existing and new markets.

On June 25, 1999, KB Online Holding LLC (“KB Online”), a wholly-owned subsidiary of the Company and BrainPlay.com, Inc. (“BrainPlay.com”) formed KBkids.com LLC (“KBkids.com”) as a joint venture in order to accelerate KB Toys entrance into the online market and to expand the business of BrainPlay.com. KBkids.com is the successor to the business of BrainPlay.com, an online specialty toy retailer that was founded in August 1995. Substantially all of the assets and liabilities of BrainPlay.com were contributed to KBkids along with cash of $80 million and intangibles valued at $4 million from the Company in connection with the formation of the joint venture.

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 three retail industry groups; closeouts, toys and an online children’s products retail business. 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.

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RETAIL OPERATIONS

Closeout Stores. 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. 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.

The Closeout Stores operation is best known for its wide assortment of closeout merchandise and is the largest of its kind, operating 1,230 retail stores in 43 states. A large number of Closeout Stores operate profitably in relative close proximity. For example, 499 of the total 1,230 Closeout Stores operate in four states; California, Ohio, Texas and Florida. Management believes that there are substantial opportunities to increase store counts in existing markets as well as expanding in new markets.

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. To provide additional value to its customers Closeout Stores also offer private-label merchandise in selected product categories. 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 1,320 stores in all 50 states, Puerto Rico and Guam. 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 portion of the assortment, closeouts represent approximately 22 percent and video hardware and software accounts for about 21 percent. Exclusives, collectibles and K•B’s own creations round out the merchandise mix.

Toy Stores operate under four different small-box store formats. Toy Stores have a large presence in enclosed shopping malls with 943 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.

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KBkids.com. KBkids.com is one of the fastest growing online retailers with an exclusive focus on children’s products. The Internet has emerged as one of the fastest-growing communications, information and commerce mediums in history. Businesses’ and consumers’ rapid acceptance of the Internet as a communications, information and commerce platform has created the foundation for significant growth in business-to-consumer electronic commerce. KBkids.com integrates commerce, content and community and provides consumers with a more complete online children’s products destination.

Under various agreements the Company provides KBkids.com a number of services, including certain executive, human resources, legal, finance, treasury, tax, purchasing and merchandising services.

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 and children’s products business depends in part upon its ability to purchase in-line toys and related merchandise 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 foreign and domestic suppliers which provide the Company with multiple sources for each product category. In fiscal 1999, the Company’s top ten vendors accounted for approximately 26.6% of total purchases with no one vendor accounting for more than 8.5%.

The Company purchases approximately 20% to 25% 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.

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COMPETITIVE CONDITIONS

All aspects of the retailing industry are highly competitive. The Company’s Closeout Stores compete with discount stores (such as Wal-Mart®, KMart® and Target®), deep discount drugstore chains and other value-oriented specialty retailers. The Company’s Toy Stores and KBkids.com competition includes: traditional store-based toy and children’s product retailers, major discount retailers, traditional software and video game retailers, online efforts of the traditional store-based retailers, other online retailers that sell children’s products, physical and online stores of entertainment entities that sell and license children’s products, catalog retailers of children’s products, vendors of children’s products that currently sell or may in the future sell some or all of their products directly online, Internet portals and online service providers that feature shopping services that include children’s products and various smaller online retailers of children’s specialty products. Additionally, the online commerce market presents new, rapidly evolving competitive challenges of its own. 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 wholesalers. 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 traditionally has drawn upon its seasonal credit lines in the first three fiscal quarters and has 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,

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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 42 million two or four page circulars 25 weeks out of the year in all markets. Additionally, for 11 weeks of the year approximately 28 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 35 to 42 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 4 highly recognizable, name-brand products. In-store promotions include periodic loudspeaker announcements featuring special 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 1.5% of total net sales in 1999. 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.

KBkids.com. The primary elements of advertising mix include network and cable television, print, and broad reach online services. The marketing objective is designed to increase traffic to the online store, continue to build brand recognition, acquire new customers and build customer loyalty. Marketing expenditures are scheduled to capitalize on and respond to seasonal demand such as the holiday season. Certain marketing expenditures are discontinued or significantly curtailed during the post-holiday period when they are not cost effective. For the period June 25, 1999 to December 31, 1999, sales and marketing expenses were $58.7 million for KBkids.com.

KBkids.com has secured agreements with leading shopping portals, with positions in children’s products shopping areas. For example, under an agreement with AOL, KBkids.com is a “shopping anchor” in AOL’s children’s products shopping areas for kids, toys and babies. KBkids.com also has agreements with other shopping portals for prominent positioning in their online shopping areas. In addition to the large portal advertising arrangements, online advertising consists of banner advertising focused on web page results from searches or links related to children.

KBkids.com also leverages its relationship with KB Toys in integrated store promotions and circulars. The KB Toys circulars highlight products that are available at the online store and provide item numbers for these products to make purchasing easier on the web site. Signage and other promotional materials in the KB Toys stores include

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the online store’s web address and AOL keyword appearing on KB Toys salespeople’s uniforms, purchase receipts, shopping bags and posters.

KBkids.com has an affiliate program under which other web sites can post the KBkids logo and link to the online store. Affiliates are compensated through a predetermined fee structure.

Kbkids.com has sponsored multiple events to build credibility with, and recognition by, parents, including title sponsorship of a nationally televised sporting event and sponsorship of the daily children’s television show, Teletubbies. Promotions include holiday discounts and coupons, giveaways of popular products, and sweepstakes to win trips and other items such as movie tickets.

KBkids.com also has a customer loyalty program offering customers frequent flyer miles on ten major airlines and other premium goods and services for every dollar spent at the online store.

WAREHOUSING and DISTRIBUTION

Closeout Stores and Toy Stores. 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.

KBkids.com. Fulfillment services, receiving, warehousing and shipping services for KBkids.com are outsourced under a direct marketing services agreement with Keystone Internet Services, Inc. (“Keystone”) a wholly-owned subsidiary of Hanover Direct. The agreement terminates on July 1, 2001 but may be renewed for two-year terms upon agreement of both parties at least 120 days before the end of the then current term. KBkids.com works in tandem with Keystone to manage and monitor order accuracy, fulfillment rate, shipment speed and overall delivery reliability and timeliness. Under the agreement, Keystone receives merchandise from suppliers, stores the merchandise in its warehouse and packs and ships the merchandise to our customers. In addition, Keystone receives, processes and refurbishes returns of our merchandise, and destocks and returns to our suppliers any rejected or overstock merchandise. The agreement also describes service standards that Keystone has agreed to follow in performing its services.

These inventory and fulfillment systems are fully integrated into the online store so that if an item is out of stock it cannot be added to a customer’s cart.

Customers are offered a selection of three levels of shipping service: next day delivery, second day delivery and ground delivery. UPS provides next day and second day delivery services while the United States Postal Service Priority Mail provides the ground delivery services.

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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 29, 2000, the Company had 65,000 active associates comprised of 20,800 full-time and 44,200 part-time associates. Temporary associates hired during the fall and winter holiday selling season increased the number of associates to a peak of approximately 83,500. 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.

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 3,925 to 49,385 selling square feet and average approximately 18,934 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 $650,000, including inventory.

The Company's 1,320 Toy Stores are located in enclosed shopping malls, outlet malls and strip shopping centers across the United States, Puerto Rico and Guam. Enclosed shopping mall-based stores range in size from 830 to 8,085 selling square feet and average approximately 3,315 selling square feet. Outlet mall stores range in size from 3,261 to 6,351 selling square feet and average approximately 4,460 selling square feet. Strip shopping center stores range in size from 1,610 to 15,300 selling square feet and average approximately 7,706 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. The approximate average cost, including inventory, to open a new outlet mall Toy Store or strip shopping center Toy Store is $245,000 and $380,000, respectively, and $400,000 to open a mall store. In addition, 115 temporary Toy Stores under the name K•B Toy Express were operated principally in enclosed shopping malls during the 1999 fall and winter holiday season. The average size of the temporary stores was approximately 4,279 square feet.

With the exception of 55 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 expi-

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rations, exclusive of month to month leases, and state location information for existing store leases at January 29, 2000.

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WAREHOUSE and DISTRIBUTION

At January 29, 2000 the Company operated warehouse and distribution locations throughout the United States totaling 10,322,000 square feet. The Company’s primary warehouse and distribution centers are owned and are located in Ohio, Alabama and California. The facilities utilize advanced warehouse management technology which enable high accuracy and efficient product processing from vendors to the retail stores. The approximate combined weekly output of Closeout Stores and Toy Stores facilities is 1,828,000 and 562,500 cartons per week, respectively.

Statistics, including 1,493,000 square feet of construction-in-progress, for warehouse and distribution centers is presented below:

As necessary, the Company leases additional temporary warehouse space to support its warehousing requirements throughout the year.

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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.

OFFICERS OF THE COMPANY

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 — K•B 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. and Berkshire Life Insurance Company.

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.

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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.

Salvatore Vasta has been with K•B Toys since 1991 and during his tenure has held senior management positions in merchandising and operations for the Toy 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.

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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.

As of March 24, 2000, there were 1,405 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.

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Item 6 Selected Financial Data

The statement of income 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.

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(1)	Includes 1,042 K•B Toy stores acquired May 5, 1996.

*	Fiscal 1995 is comprised of 53 weeks.

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Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT FOR PURPOSES OF “SAFE HARBOR” PROVISIONS OF THE

All forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this annual report or made by management of the Company involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond the Company’s control. Accordingly, the Company’s future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements and, among other things, are based on the Company’s current best estimates that may be proven incorrect as additional information becomes available. While the Company believes its assumptions are reasonable, it cautions that it is impossible to predict factors that could cause actual costs or timetables to differ materially from the expected results. Additionally, the following factors, among others, in some cases have affected and in the future could affect the Company’s financial performance and actual results and could cause actual results for 2000 and beyond to differ materially from those expressed or implied in any forward-looking statements included in this annual report or otherwise made by management: changes in consumer spending patterns, consumer preferences and overall economic conditions, the impact of competition and pricing, changes in weather patterns, political stability, currency and exchange risks and changes in existing or potential duties, tariffs or quotas, availability of suitable store locations at appropriate terms, ability to develop new merchandise, and ability to hire and train associates.

The Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. Readers are also urged to carefully review and consider the various disclosures made by the Company which attempt to advise interested parties of the factors which affect the Company’s business, including Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this annual 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 discussion and analysis presented below should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this report.

New Business

On June 25, 1999, a wholly-owned subsidiary of the Company and BrainPlay.com, Inc., an unaffiliated entity, entered into a Contribution Agreement to form KBkids.com LLC as a joint venture. KBkids.com LLC operates an online retail business offering toys, video games, software, videos and other children’s products. Under the Contribution Agreement, the Company received 80% of the membership units in KBkids.com LLC in exchange for contributing cash of $80,000,000 and intangibles valued at $4,000,000. BrainPlay.com received the remaining 20% of the membership units in exchange for contributing substantially all of its assets and liabilities including its Web site, technology infrastructure and management team.

Terms of the Contribution Agreement provide, among other matters, that the Company or its affiliates can not sell toy products on the Internet until December 31, 2001, or one year after the completion of a capital markets transaction, whichever comes first.

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In addition, as long as the Company owns a majority of the membership interests of KBkids.com LLC, or common stock of KBkids.com Inc. representing at least 10% of the outstanding voting power, neither the Company nor its affiliates can sell any toy products on the Internet unless they are “closeouts.”

Under various operating, service and supply agreements, the Company provides KBkids.com LLC a number of services including certain executive, human resources, legal, finance, treasury, tax, purchasing and merchandising services. The cost of these services are allocated according to established methodologies as determined at arms length.

KBkids.com Inc. Planned Offering of Common Stock and Reorganization

As contemplated by the Contribution Agreement and as further described in a Form S-1 filed with the Securities and Exchange Commission on January 27, 2000, KBkids.com Inc. was formed to facilitate a public offering of stock.

Simultaneously with the consummation of a public offering, a number of structural changes would result as summarized below:

	•	KBkids.com Inc. would invest the net proceeds of a public offering in KBkids.com LLC, and in return KBkids.com Inc. would receive units of membership interest in KBkids.com LLC.
	•	KBkids.com Inc. would become the sole manager of KBkids.com LLC.
	•	The Company would contribute one membership unit in KBkids.com LLC to KBkids.com Inc. in exchange for one share of Class B common stock.
	•	A newly created subsidiary of KBkids.com Inc. would merge into BrainPlay.com Inc., with BrainPlay.com Inc. becoming a wholly-owned subsidiary of KBkids.com Inc. In connection with this subsidiary merger, the equity holders of BrainPlay.com Inc., would receive shares (and/or options to acquire shares) of Class A common stock in KBkids.com Inc.

After this restructuring, KBkids.com LLC would be controlled by KBkids.com Inc., as sole manager of KBkids.com LLC. Additionally, the Company would have the right to exchange its membership units in KBkids.com LLC into an equivalent number of shares of Class A common stock of KBkids.com Inc.

After a public offering, each stockholder of KBkids.com Inc. would have a direct or indirect economic interest in KBkids.com LLC equal to the respective percentage of the aggregate voting power in KBkids.com Inc. held by them.

Business Operations

The Company is a leading value retailer specializing in closeout merchandise and toys. The Company is the largest retailer of closeout products and the largest enclosed mall-based toy retailer in the United States. The Company’s goal is to build upon its leadership position in closeout retailing (a growing segment of the retailing industry), toy retailing and children’s products by expanding its market presence in both existing and new markets. The Company believes that the combination of its strengths in merchandising, purchasing, site selection, distribution and cost containment has made it a low-cost value retailer well-positioned for future growth.

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At January 29, 2000, the Company operated a total of 2,550 stores in all 50 states, Puerto Rico and Guam and conducted online sales of children’s products. Retail operations are conducted primarily under the following names:

Wholesale operations are conducted through Consolidated International and Wisconsin Toy.

The following table compares components of the statements of income of Consolidated Stores as a percent to net sales.

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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.