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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 3, 2001

Commission file number 1-8897

CONSOLIDATED STORES CORPORATION

A Delaware Corporation
IRS No. 06-1119097
300 Phillipi Road
P.O. Box 28512
Columbus, Ohio 43228-0512
(614) 278-6800

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 $1,303,024,015 on April 18, 2001. For purposes of this response, executive officers and directors are deemed to be the affiliates of the Registrant and the holdings by non-affiliates were computed as 1,143,061 shares.

The number of shares of Common Stock $.01 par value per share, outstanding as of April 18, 2001, was 113,279,379 and there were no shares of Non-Voting Common Stock, $.01 par value per share outstanding at that date.

Portions of the Registrant’s definitive Proxy Statement to security holders for its Annual Meeting of Stockholders to be held on May 15, 2001, are incorporated by reference into Part III of this Annual Report on Form 10-K.

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FORM 10-K

ANNUAL REPORT
FOR THE FISCAL YEAR ENDED FEBRUARY 3, 2001
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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 the nation’s largest broadline closeout retailer. The Company’s goal is to build upon its leadership position in closeout retailing, a growing segment of the retailing industry, by expanding its market presence in both existing and new markets.

At February 3, 2001, the Company operated a total of 1,290 stores in 46 states. The Company’s retail operations are conducted as BIG LOTS, BIG LOTS FURNITURE, ODD LOTS, PIC ‘N’ SAVE and MAC FRUGAL’S BARGAINS•CLOSE-OUTS. Wholesale operations are conducted under the names CONSOLIDATED INTERNATIONAL and WISCONSIN TOY.

CLOSEOUT RETAILING

Closeout retailers provide a 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.

The Company believes that recent trends in the retail industry are favorable to closeout retailers. These trends include retailer consolidations and just-in-time inventory processes, which management believes resulted in a shift of inventory risk from retailers to manufacturers. In addition, to maintain their market share in an increasingly competitive environment, management believes that 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, management believes that 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

The Company’s stores are known for their wide assortment of closeout merchandise. A large number of stores operate profitably in relative close proximity. For example, 514 of the total 1,290 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 into new markets.

Certain core categories of merchandise are carried on a continual basis, although the specific name-brands offered may change frequently. The Company’s 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, the Company also offers private-label merchandise in selected product categories. Because of their low operating costs, the Company’s stores are generally cash-positive within the first full year of operations, and profitable in the second year.

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WHOLESALE OPERATIONS

The Company also sells merchandise wholesale comprised predominately 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.

DISCONTINUED OPERATIONS

On June 27, 2000, the Company announced its decision to separate the toy and closeout businesses by divesting the Company’s KB Toy Division. The financial statements and notes have been reclassified for all periods presented to reflect the toy segment as a discontinued operation.

On December 7, 2000, the Company closed the sale of its KB Toy Division to an affiliate of Bain Capital, Inc. The buyer purchased the business in conjunction with KB Toy’s management, who the buyer informed the Company were retained to lead the KB Toy business. Gross proceeds totaled approximately $305 million, consisting primarily of $258 million in cash, a note with a face amount of $45 million, and a warrant to acquire common stock of the buyer. Proceeds from the sale were used primarily to pay down existing borrowings under the Company’s Revolving Credit Facility.

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 typically at prices substantially below those paid by conventional retailers. The Company believes that it has built strong relationships with many name-brand manufacturers and has capitalized on its purchasing power in the closeout marketplace to source merchandise that provides exceptional value to customers. The Company has the ability to source and purchase substantially 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. 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 quality closeout merchandise for all of its stores at competitive prices.

The Company has a seasoned buying team with extensive closeout purchasing experience, which the Company believes has enabled it to develop successful long-term relationships with many of the largest and most recognized consumer-product 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 domestic and foreign suppliers that provide the Company with multiple sources for each product category. In fiscal 2000, the Company’s top ten vendors accounted for approximately 14.0% of total purchases with no one vendor accounting for more than 3.2%.

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 competes with discount stores (such as Wal-Mart®, KMart® and Target®), deep discount drugstore chains and other value-oriented specialty retailers. 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.

SEASONALITY

The Company has historically experienced, and expects to continue to experience, seasonal fluctuations, with a significant percentage of its net sales and operating profit 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. 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 business 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.

The Company utilizes trademarks, service marks and tradedress in its retail operations. This intellectual property is generally owned by intellectual property protection subsidiaries of the Company. 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.

The Company’s marketing program is designed to create an awareness of the broad range of quality, name-brand merchandise available at closeout prices providing customers an extreme value. The marketing program utilizes a combination of printed advertising circulars in all markets and television advertising in select markets. The Company currently distributes approximately 43 million two or four page circulars 26 weeks out of the year in all markets. Additionally, for 10 weeks of the year in 2000, approximately 30 million two or four page circulars were 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 Company runs 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. Multiple 30-second television spots are run per week, each of which feature two to four highly recognizable, name-brand products. In-store promotions include periodic loudspeaker announcements featuring special bargains as well as in-store signage to emphasize the significant values offered to the customer.

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As part of the Company’s strategy to increase its customer base, the advertising media mix will change in 2001, by increasing television advertising while decreasing the number of circulars. This change is expected to raise the Company’s total television coverage from 30% of sales to 52% of sales. The Company continues to refine the use of television advertising to increase awareness of the stores, strengthen its brand image, and attract new and repeat customers.

On March 1, 2001, the Company announced that it was planning to change its corporate name from Consolidated Stores Corporation to Big Lots, Inc., pending approval by the Company’s Stockholders at its Annual Meeting on May 15, 2001. The Company plans to convert all stores to the Big Lots brand name over a three-year period. The Company believes that Big Lots is its most recognizable brand name and this change will offer numerous opportunities to increase brand awareness among customers, suppliers, investors and the general public. The Company believes the change will also allow it to leverage future television advertising and other expenses.

Historically, total advertising expense as a percent of total net sales has been approximately 2.5% to 3.0%.

WAREHOUSING AND DISTRIBUTION

An important aspect of the Company’s 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 Company 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 described under Item 2 Properties, Warehouse and Distribution.

ASSOCIATES

At February 3, 2001, the Company had 45,676 active associates comprised of 16,162 full-time and 29,514 part-time associates. Temporary associates hired during the fall and winter holiday selling season increased the number of associates to a peak of 54,157. 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.

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Item 2 Properties

RETAIL OPERATIONS

The Company’s stores are located predominantly in strip shopping centers throughout the United States. Individual stores range in size from 5,073 to 78,325 square feet and average approximately 26,000 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.

With the exception of 54 owned 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. 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 is for an initial term of five years with multiple, three to five year renewal options. The following tables set forth store location information and store, office and warehouse lease expirations, exclusive of month to month leases, as of February 3, 2001.

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WAREHOUSE AND DISTRIBUTION

At February 3, 2001 the Company operated warehouse and distribution locations strategically placed across the United States totaling 9,048,000 square feet. The Company’s primary warehouse and distribution centers are owned and located in Ohio, Alabama, California and Pennsylvania. 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 the Company’s facilities is 1,807,000 cartons per week. Statistics, including 1,272,000 square feet of construction-in-progress, for warehouse and distribution centers are presented below:

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

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Item 3 Legal Proceedings

The Company is involved in various litigation and related matters generally incidental to normal operations. In the opinion of management, after consultation with legal counsel, the resolution of pending litigation and related matters is not expected to have a material effect on the financial condition, results of operations or liquidity of the Company.

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

Michael J. Potter was promoted to Chief Executive Officer and President in June 2000. Mr. Potter was appointed Chairman of the Board of Directors in August 2000. Mr. Potter joined the Company in 1991 as Vice President and Controller and was later promoted to Senior Vice President and Chief Financial Officer. In 1998, he was promoted to Executive Vice President and assumed additional responsibilities for Distribution and Information Services.

Albert J. Bell oversees finance, human resources, loss prevention, real estate, legal, and risk management. Mr. Bell was appointed to the Company’s Board of Directors and promoted to Chief Administrative Officer in June 2000. Previous to his promotion in 2000, Mr. Bell served as the Company’s General Counsel for over five years and has been employed by the Company since 1987.

Kent Larsson is responsible for buying, planning and the allocation of merchandise. Mr. Larsson joined the Company in 1988 as Vice President of Sales Promotion and was promoted to Executive Vice president of Merchandising and Sales Promotion in 1998.

Donald A. Mierzwa oversees the Company’s store standards, customer service, personnel development and program implementation and execution. Mr. Mierzwa has been with the Company since 1989 and has served as Executive Vice President of Store Operations since 1999.

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Brad A. Waite is responsible for human resources, loss prevention, risk management, and administrative services. Mr. Waite joined the Company in 1988 as Director of Employee Relations and held various Human Resource management and senior management positions prior to his promotion to his current position in July 2000.

Mark D. Shapiro is responsible for the Company’s financial strategy, performance and controls. He oversees treasury, tax and investor relations, as well as reporting, planning and control functions of the business. Mr. Shapiro joined the Company in 1992 as Director and Assistant Controller and was promoted to Vice President and Controller in 1994. In July 2000, Mr. Shapiro was promoted to Senior Vice president and Chief Financial Officer.

Joe R. Cooper is responsible for the Company’s strategic planning, investor relations, and treasury functions. He joined the Company as Vice President of Strategic Planning and Investor Relations in May 2000. In July 2000, he also assumed responsibility for the treasury department and was appointed Vice President Treasurer. Prior to joining the Company, Mr. Cooper held various financial and accounting positions with Bath & Body Works, KinderCare Learning Center, The Limited, Inc., and KPMG Peat Marwick.

Charles W. Haubiel II is responsible for the Company’s legal affairs. He was promoted to Vice President, General Counsel and Secretary in July 2000. He joined the Company in 1997 as Senior Staff Counsel and was promoted to Director, Corporate Counsel and Assistant Secretary in 1999. Prior to joining the Company, Mr. Haubiel practiced law with the law firm of Vorys, Sater, Seymour & Pease, LLP.

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.” On May 16, 2001 the Company’s NYSE trading symbol will change to “BLI.” The Company will also be changing its name to Big Lots, Inc., pending stockholder approval at the Company’s annual meeting. 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 16, 2001, there were 1,652 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 operations data and the balance sheet data have 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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(a) Fiscal 2000 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 SECURITIES LITIGATION REFORM ACT OF 1995

The Private Securities Litigation Reform Act of 1995 (the “Act”) provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. The Company wishes to take advantage of the “safe harbor” provisions of the Act.

Statements, other than those based on historical facts, which address activities, events or developments that the Company expects or anticipates may occur in the future are forward-looking statements, which are based upon a number of assumptions concerning future conditions that may ultimately prove to be inaccurate. Actual events and results may materially differ from anticipated results described in such statements. The Company’s ability to achieve such results is subject to certain risks and uncertainties, including, but not limited to, sourcing and purchasing merchandise, economic and weather conditions which affect buying patterns of the Company’s customers, changes in consumer spending and consumer debt levels, the Company’s ability to anticipate buying patterns and implement appropriate inventory strategies, continued availability of capital and financing, competitive factors and pricing pressures, and other risks described from time to time in the Company’s filings with the Securities and Exchange Commission. Consequently, all of the forward-looking statements are qualified by these cautionary statements and there can be no assurance that the results or developments anticipated by the Company will be realized or that they will have the expected effects on the Company or its business or operations.

Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date thereof. The Company undertakes no obligation to publicly release any revisions to the forward-looking statements contained in this release, or to update them to reflect events or circumstances occurring after the date of this release, or to reflect the occurrence of unanticipated events.

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.

Sale of Division

On June 27, 2000, the Company announced its decision to separate the toy and closeout businesses by divesting the Company’s KB Toy Division. The financial statements and notes have been reclassified for all periods presented to reflect the toy segment as a discontinued operation.

On December 7, 2000, the Company closed the sale of its KB Toy Division to an affiliate of Bain Capital, Inc. The buyer purchased the business in conjunction with KB Toy’s management, who the buyer informed the Company will be retained to lead the KB Toy business. Gross proceeds totaled approximately $305 million, consisting primarily of $258 million in cash, a note with a face amount of $45 million, and a warrant to acquire common stock of the buyer. The note receivable matures on December 7, 2010 and bears interest at a rate of 8%. The interest is payable in annual installments to be paid by issuing additional notes with substantially identical terms as the original note. The warrant provides that the Company is entitled to purchase up to 2.5% of the common stock of the buyer for a stated per share price. The stock can be purchased any time prior to December 7, 2005. The note and warrant are being accounted for on the cost basis. Proceeds from the sale were used primarily to pay down existing borrowings under the Company’s Revolving Credit Facility.

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Included in the loss from discontinued operations for the year ended February 3, 2001, was a $72.0 million charge, net of tax, recorded in the second quarter. The charge included a $51.3 million loss on disposal for costs to reposition and exit the business, as well as actual and estimated profits and losses associated with the business from the measurement date to the expected date of disposal. The second quarter charge also included a $20.7 million loss from operations for actual operating results prior to the measurement date.

In the third quarter, the Company recorded an after tax loss on the disposal of the discontinued operation of $407 million. Additional losses were recorded on the sale during the third quarter, as the Company’s initial charge during the second quarter assumed no gain or loss on sale. Additionally, the third quarter after tax loss on disposal included the reversal of estimated operating profits and losses of $45 million, net of tax, recorded in the initial second quarter charge.

Fourth quarter net income includes income from discontinued operations of $27.1 million, net of tax, related to the settlement of various contingencies and finalization of estimates related to the sale of the KB Toy Division. For the year, the $27.1 million is reflected as part of the $430.8 million loss on disposal of the Toy segment. Included in the balance sheet at February 3, 2001, are approximately $11 million of remaining reserves for contingencies and other post-closing adjustments related primarily to professional fees, severance and benefit-related items.

Business Operations

The Company is the nation’s largest broadline closeout retailer. The Company’s goal is to build upon its leadership position in closeout retailing, a growing segment of the retailing industry, 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.

At February 3, 2001, the Company operated a total of 1,290 stores operating as BIG LOTS, BIG LOTS FURNITURE, ODD LOTS, PIC ‘N’ SAVE and MAC FRUGAL’S BARGAINS•CLOSEOUTS. Wholesale operations are conducted through CONSOLIDATED INTERNATIONAL and WISCONSIN TOY.

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

The Company has historically experienced, and expects to continue to experience, seasonal fluctuations, with a significant percentage of its net sales and operating profit 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 net sales and operating profit.

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FISCAL 2000 COMPARED TO FISCAL 1999

Net Sales Net sales increased to $3,277.1 million for the fifty-three week fiscal year 2000 from $2,933.7 million for the fifty-two week fiscal 1999, an increase of $343.4 million, or 11.7%. This increase was attributable to sales from 83 new stores offset in part by the closing of 23 stores and a comparable store sales increase of 3.7% that was driven primarily by sales of seasonal goods and furniture.

Gross Profit Gross profit increased $120.6 million, or 9.5%, in fiscal 2000 to $1,385.7 million from $1,265.1 million in fiscal 1999. Gross profit as a percent to net sales was 42.3% in 2000 compared to 43.1% in the previous year. The decline in gross profit percentage was primarily due to increased markdowns taken in the fourth quarter to drive customer traffic during the holiday season and sell through seasonal merchandise, as well as a shift in the level of consumable merchandise available throughout the year.

Selling and Administrative Expenses Selling and administrative expenses increased $104.8 million in fiscal 2000 from $1,095.5 million in fiscal 1999. As a percent to net sales, selling and administrative expenses were 36.6% in fiscal 2000 compared to 37.3% in 1999. Fiscal 2000 selling and administrative rate improvement is primarily attributable to more effective leveraging of fixed expenses in the first two quarters of the year combined with more efficient distribution and transportation throughout the year. Additionally, the Company benefited from the fifty-third week of sales in fiscal 2000 as its relatively fixed expense base could be leveraged with the extra week of sales.

Interest Expense Interest expense increased to $22.9 million in fiscal 2000 from $16.4 million in fiscal 1999. The change in interest expense reflects higher average borrowing levels and higher effective interest rates.

Income Taxes The effective tax rate of the Company was 39.5% in both fiscal 2000 and 1999.

FISCAL 1999 COMPARED TO FISCAL 1998

Net Sales Net sales increased to $2,933.7 million in fiscal 1999 from $2,550.7 million in fiscal 1998, an increase of $383.0 million, or 15.0%. This increase was attributable to sales from 124 new stores offset in part by the closing of 22 stores and a comparable store sales increase of 7.5%. Additionally, sales benefited in 1999 from improved seasonal goods and furniture sales.

Gross Profit Gross profit increased $189.2 million, or 17.6%, in fiscal 1999 to $1,265.1 million from $1,075.9 million in fiscal 1998. Gross profit as a percent to net sales was 43.1% in 1999 compared to 42.2% in the previous year. Gross profit improved as the aggressive pricing strategies during the third and fourth quarters of fiscal 1998 to restore customer traffic while rebuilding store inventories were not anniversaried. Gross profit also benefited from the sell through of seasonal products during the fourth quarter which resulted in an improved markdown realization.

Selling and Administrative Expenses Selling and administrative expenses increased $176.8 million in fiscal 1999 from $918.7 million in fiscal 1998. As a percent to net sales, selling and administrative expenses were 37.3% in fiscal 1999 compared to 36.0% in 1998. Fiscal 1998 selling and administrative expenses were below normal levels reflective of lower costs attributable to the reduced flow of merchandise during that period. Fiscal 1999 selling and administrative expenses were reflective of increased compensation costs and higher distribution and transportation expenses as inventory levels were restored to planned levels.

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Interest Expense Interest expense increased to $16.4 million in fiscal 1999 from $15.8 million in fiscal 1998. The increase was attributable to higher weighted average debt levels for seasonal borrowings as the Company completed its strategic realignment of merchandise inventories to traditional levels.

Income Taxes The effective tax rate of the Company was 39.5% in fiscal 1999 compared to 39.0% in fiscal 1998.

CAPITAL RESOURCES AND LIQUIDITY

The primary sources of liquidity for the Company have been cash flow from operations and, as necessary, borrowings under the Revolving Credit Facility. The Company also utilized uncommitted credit lines, subject to the terms of the Facility, to supplement short-term borrowing requirements. Working capital at February 3, 2001, was $775.6 million and for the year then ended net cash used by operations was $307.9 million. At February 3, 2001, approximately $196.9 million was available for borrowings under the Revolving Credit Facility.

On December 4, 2000, the Company amended its Revolving Credit Facility. The annual working capital needs of the Company were revised as a result of the KB Toy Division divestiture and the credit facility was amended to reduce the available aggregate principal amount from $700 million to $500 million and the seasonal uncommitted credit facilities will no longer be utilized by the Company. Additionally, the expiration date of the Revolving Credit Facility has been revised from May 15, 2003 to May 6, 2002.

On December 7, 2000, the Company closed the sale of its KB Toy Division to an affiliate of Bain Capital, Inc. Gross proceeds totaled approximately $305 million, consisting primarily of $258 million in cash, a note with a face amount of $45 million, and a warrant to acquire common stock of the buyer. Proceeds from the sale were used primarily to pay down existing borrowings under the Company’s Revolving Credit Facility.

Capital expenditures for the last three fiscal years were $114.8 million, $83.1 million and $82.8 million, respectively, and were used primarily to fund new store openings and distribution center expansions. The capital expenditure requirements anticipated for 2001 are approximately $93 million primarily to support existing store improvements and new store expansions, as well as warehouse and equipment requirements.

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 2001 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, future capital expenditures related to the expansion of existing businesses, development of new projects and currently maturing obligations. Additionally, management is not aware of any current trends, events, demands, commitments or uncertainties which reasonably can be expected to have a material impact on the liquidity, capital resources, financial position or results of operations of the Company.

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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 February 3, 2001 and January 29, 2000, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three fiscal years in the period ended February 3, 2001. 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 statements schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 February 3, 2001 and January 29, 2000, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended February 3, 2001, in conformity with accounting principles generally accepted in the United States of America. 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 27, 2001

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CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

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CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)

The accompanying notes are an integral part of these financial statements.

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CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)

The accompanying notes are an integral part of these financial statements.

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CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

The accompany notes are an integral part of these financial statements.

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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 broadline closeout retailer. At February 3, 2001, the Company operated a total of 1,290 stores operating as BIG LOTS, BIG LOTS FURNITURE, ODD LOTS, PIC ‘N’ SAVE and MAC FRUGAL’S BARGAINS•CLOSEOUTS. Wholesale operations are conducted through CONSOLIDATED INTERNATIONAL and WISCONSIN TOY.

Fiscal Year

The Company follows the concept of a 52/53 week fiscal year which ends on the Saturday nearest to January 31. Fiscal 2000 is comprised of 53 weeks, while 1999 and 1998 each are comprised of 52 weeks.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and subsidiaries which Consolidated Stores Corporation directly or indirectly has the ability to exercise significant influence over operating and financial policies. All significant intercompany transactions have been eliminated.

Management Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.

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.

Property and Equipment

Depreciation and amortization are provided on the straight-line method for financial reporting purposes over the estimated useful lives of the assets. Service lives are principally forty years for buildings and from four to ten years for other property and equipment. The Company periodically reviews long-lived assets and certain intangible assets when indicators of impairment exist.

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CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Concluded)

Computer Software Costs

The Company records software development costs in accordance with the American Institute of Certified Public Accountants’ Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.”

Intangible Assets

Tradenames are amortized over a period of fifteen years.

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.

Revenue Recognition

The Company recognizes retail sales in its stores at the time the customer takes possession of merchandise. Wholesale sales are recognized at the time merchandise is shipped to the customer. All sales are net of estimated returns and allowances and exclude sales tax.

Other Comprehensive Income

The Company’s other comprehensive income is equal to net income as there are no items that qualify as components of comprehensive income.

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 Accountants’ 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 pre-opening 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.

Recent Accounting Pronouncements

Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, requires derivatives to be recorded on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in fair value of the derivatives are recorded depending upon whether the instruments meet the criteria for hedge accounting. This Statement will be adopted effective February 4, 2001 and is not expected to have an impact on the financial position, results of operations or cash flows of the Company.

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CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DISCONTINUED OPERATIONS

On June 27, 2000, the Company announced its decision to separate the toy and closeout businesses by divesting the Company’s KB Toy Division. The financial statements and notes have been reclassified for all periods presented to reflect the toy segment as a discontinued operation.

On December 7, 2000, the Company closed the sale of its KB Toy Division to an affiliate of Bain Capital, Inc. The buyer purchased the business in conjunction with KB Toy’s management, who the buyer informed the Company will be retained to lead the KB Toy business. Gross proceeds totaled approximately $305 million, consisting primarily of $258 million in cash, a note with a face amount of $45 million, and a warrant to acquire common stock of the buyer. The note receivable matures on December 7, 2010 and bears interest at a rate of 8%. The interest is payable in annual installments to be paid by issuing additional notes with substantially identical terms as the original note. The warrant provides that the Company is entitled to purchase up to 2.5% of the common stock of the buyer for a stated per share price. The stock can be purchased any time prior to December 7, 2005. The note and warrant are being accounted for on the cost basis. Proceeds from the sale were used primarily to pay down existing borrowings under the Company’s Revolving Credit Facility.

Included in the loss from discontinued operations for the year ended February 3, 2001, was a $72.0 million charge, net of tax, recorded in the second quarter. The charge included a $51.3 million loss on disposal for costs to reposition and exit the business, as well as actual and estimated profits and losses associated with the business from the measurement date to the expected date of disposal. The second quarter charge also included a $20.7 million loss from operations for actual operating results prior to the measurement date.

In the third quarter, the Company recorded an after-tax loss on the disposal of the discontinued operation of $407 million. Additional losses were recorded on the sale during the third quarter, as the Company’s initial charge during the second quarter assumed no gain or loss on sale. Additionally, the third quarter after tax loss on disposal included the reversal of estimated operating profits and losses of $45 million, net of tax, recorded in the initial second quarter charge.

Fourth quarter net income includes income from discontinued operations of $27.1 million, net of tax, related to the settlement of various contingencies and finalization of estimates related to the sale of the KB Toy Division. For the year, the $27.1 million is reflected as part of the $430.8 million loss on disposal of the Toy segment. Included in the balance sheet at February 3, 2001 are approximately $11 million of remaining reserves for contingencies and other post-closing adjustments related primarily to professional fees, severance and benefit-related items.

The following are the components of discontinued operations:

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CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INCOME TAXES

The provision for income taxes is comprised of the following: