10-Q 1 0001.txt FORM 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE ----- SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 29, 2000 OR _____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT OF 1934 For the transition period from ______ to _______ Commission file number 0-14970 COST PLUS, INC. (Exact name of registrant as specified in its charter) California 94-1067973 (State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.) organization)
200 4th Street, Oakland, California 94607 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (510) 893-7300 Former name, former address and former fiscal year, N/A if changed since last report. Indicate by check mark 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ ----- The number of shares of Common Stock, $0.01 par value, outstanding on September 1, 2000 was 20,911,240. COST PLUS, INC. FORM 10-Q For the Quarter Ended July 29, 2000 INDEX
PART I. FINANCIAL INFORMATION Page ITEM 1. Condensed Consolidated Financial Statements (unaudited) Balance Sheets as of July 29, 2000, January 29, 2000 and July 31, 1999 3 Statements of Operations for the three and six months ended July 29, 2000 and July 31, 1999 4 Statements of Cash Flows for the six months ended July 29, 2000 and July 31, 1999 5 Notes to Condensed Consolidated Financial Statements 6-7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-10 ITEM 3. Quantitative and Qualitative Disclosure about 10 Market Risk PART II. OTHER INFORMATION ITEM 4. Submission of Matters to a Vote of Security Holders 11 ITEM 5. Other Information 12 ITEM 6. Exhibits and Reports on Form 8-K 12 SIGNATURE PAGE 13
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS COST PLUS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts, unaudited)
July 29, January 29, July 31, 2000 2000 1999 ----------- ------------ ----------- ASSETS Current assets: Cash and cash equivalents $ 16,964 $ 38,411 $ 19,960 Merchandise inventories 95,352 91,402 72,746 Other current assets 9,593 5,654 5,017 ----------- ------------ ----------- Total current assets 121,909 135,467 97,723 Property and equipment, net 70,322 67,520 61,271 Other assets, net 12,187 11,712 9,652 ----------- ------------ ----------- Total assets $ 204,418 $ 214,699 $ 168,646 =========== ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 17,586 $ 26,061 $ 15,626 Income taxes payable -- 9,237 -- Accrued compensation 7,109 8,909 6,321 Other current liabilities 11,535 10,597 10,531 ----------- ------------ ----------- Total current liabilities 36,230 54,804 32,478 Capital lease obligations 13,655 14,416 14,773 Other long-term obligations 7,735 7,144 6,571 Shareholders' equity: Preferred stock, $.01 par value: 5,000,000 shares authorized; none issued and outstanding -- -- -- Common stock, $.01 par value: 67,500,000 shares authorized; issued and outstanding 20,847,758, 20,521,884 and 20,390,963 shares 208 205 204 Additional paid-in capital 119,118 113,240 107,600 Retained earnings 27,472 24,890 7,020 ----------- ------------ ----------- Total shareholders' equity 146,798 138,335 114,824 ----------- ------------ ----------- Total liabilities and shareholders' equity $ 204,418 $ 214,699 $ 168,646 =========== ============ ===========
See notes to condensed consolidated financial statements. 3 COST PLUS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts, unaudited)
Three Months Ended Six Months Ended --------------------------- --------------------------------- July 29, July 31, July 29, July 31, 2000 1999 2000 1999 ----------- ----------- -------------- -------------- Net sales $ 92,765 $ 76,556 $ 185,003 $ 151,945 Cost of sales and occupancy 61,132 50,016 121,579 99,541 ----------- ----------- -------------- -------------- Gross profit 31,633 26,540 63,424 52,404 Selling, general and administrative expenses 28,373 23,729 57,030 47,272 Store preopening expenses 790 786 2,034 1,780 ----------- ----------- -------------- -------------- Income from operations 2,470 2,025 4,360 3,352 Net interest expense 95 209 127 376 ----------- ----------- -------------- -------------- Income before income taxes 2,375 1,816 4,233 2,976 Income taxes 926 708 1,651 1,161 ----------- ----------- -------------- -------------- Net income $ 1,449 $ 1,108 $ 2,582 $ 1,815 =========== =========== ============== ============== Net income per share Basic $ 0.07 $ 0.05 $ 0.13 $ 0.09 Diluted $ 0.07 $ 0.05 $ 0.12 $ 0.09 Weighted average shares outstanding Basic 20,743 20,306 20,655 20,181 Diluted 21,564 21,167 21,462 21,011
See notes to condensed consolidated financial statements. 4 COST PLUS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, unaudited)
Six Months Ended --------------------------- July 29, July 31, 2000 1999 ------------ ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,582 $ 1,815 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 6,227 5,444 Change in assets and liabilities: Merchandise inventories (3,950) (2,066) Other assets (2,256) (185) Accounts payable (6,053) (1,465) Income taxes payable (9,237) (8,180) Other liabilities 81 476 ----------- --------- Net cash used in operating activities (12,606) (4,161) ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (11,941) (7,815) ----------- --------- Net cash used in investing activities (11,941) (7,815) ----------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on capital lease obligations (336) (270) Proceeds from the issuance of common stock 3,436 3,606 ----------- --------- Net cash provided by financing activities 3,100 3,336 ----------- --------- Net decrease in cash and cash equivalents (21,447) (8,640) Cash and cash equivalents: Beginning of period 38,411 28,600 ----------- --------- End of period $ 16,964 $ 19,960 =========== ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $ 190 $ 380 =========== ========= Cash paid for taxes $ 10,629 $ 9,615 =========== =========
See notes to condensed consolidated financial statements. 5 COST PLUS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Three and Six Months Ended July 29, 2000 and July 31, 1999 (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared from the records of the Company without audit and, in the opinion of management, include all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position at July 29, 2000 and July 31, 1999; the interim results of operations for the three and six months ended July 29, 2000 and July 31, 1999; and changes in cash flows for the six months then ended. The balance sheet at January 29, 2000, presented herein, has been derived from the audited financial statements of the Company for the fiscal year then ended. Accounting policies followed by the Company are described in Note 1 to the audited consolidated financial statements for the fiscal year ended January 29, 2000. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted for purposes of the interim condensed consolidated financial statements. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including notes thereto, for the fiscal year ended January 29, 2000. The results of operations for the three and six month periods herein presented are not necessarily indicative of the results to be expected for the full year. 2. STOCK SPLIT On February 16, 1999, the Company's Board of Directors authorized a three- for-two split of its common stock effective March 11, 1999 for shareholders of record at the close of business on March 1, 1999. On September 16, 1999, the Company's Board of Directors authorized a three-for-two split of its common stock effective October 11, 1999 for shareholders of record at the close of business on October 1, 1999. Fiscal 1999 share and per share data in the accompanying condensed financial statements and notes have been restated to reflect these stock splits. 3. STOCK OPTION PLANS In June 2000, pursuant to a vote of its shareholders, the Company amended its 1995 Stock Option Plan to increase the number of shares available for grant by 350,000 to a total of 4,718,006 shares, less the aggregate number of shares issued or subject to options outstanding under the 1994 Stock Option Plan. Additionally, pursuant to a vote of its shareholders, the Company amended its 1996 Director Option Plan to increase the shares reserved for issuance by 100,000 to a total of 253,675 shares. 6 COST PLUS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 4. RECONCILIATION OF BASIC SHARES TO DILUTED SHARES The following is a reconciliation of the weighted average number of shares (in thousands) used in the Company's basic and diluted per share computations. Three Months Ended Six Months Ended ------------------- ------------------- July 29, July 31, July 29, July 31, 2000 1999 2000 1999 -------- -------- -------- -------- Basic shares 20,743 20,306 20,655 20,181 Effect of dilutive stock options 821 861 807 830 ------- -------- -------- -------- Diluted shares 21,564 21,167 21,462 21,011 ======= ======== ======== ======== 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AN ASTERISK "*" DENOTES A FORWARD-LOOKING STATEMENT REFLECTING CURRENT EXPECTATIONS THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS, AND SHAREHOLDERS OF COST PLUS, INC. (THE "COMPANY" OR "COST PLUS") SHOULD CAREFULLY REVIEW THE CAUTIONARY STATEMENTS SET FORTH IN THIS FORM 10-Q, INCLUDING, "FACTORS THAT MAY AFFECT FUTURE RESULTS" BEGINNING ON PAGE 9 HEREOF. THE COMPANY MAY FROM TIME TO TIME MAKE ADDITIONAL WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS, INCLUDING STATEMENTS CONTAINED IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION AND IN ITS REPORTS TO SHAREHOLDERS. THE COMPANY DOES NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING STATEMENT THAT MAY BE MADE FROM TIME TO TIME BY OR ON BEHALF OF THE COMPANY. Results of Operations The three months (second quarter) and six months (year-to-date) ended July 29, 2000 as compared to the three months (second quarter) and six months (year-to- date) ended July 31, 1999. Net Sales. Net sales increased $16.2 million, or 21.2%, to $92.8 million in the second quarter of fiscal 2000 from $76.6 million in the second quarter of fiscal 1999. Year-to-date, net sales were $185.0 million compared to $151.9 million for the same period of fiscal 1999, an increase of $33.1 million, or 21.8%. The increase in net sales, for the three and six months of fiscal 2000, was attributable to new stores and an increase in comparable store sales. Comparable store sales rose 7.1% in the second quarter and 6.8% in the six months, principally as a result of a larger average transaction size. At July 29, 2000, the Company operated 113 stores compared to 94 stores as of July 31, 1999. Gross Profit. As a percentage of net sales, second quarter gross profit was 34.1% in fiscal 2000 compared to 34.7% in fiscal 1999. Year-to-date, gross profit, as a percentage of net sales, was 34.3% this fiscal year compared to 34.5% last fiscal year. The decrease in the gross profit percentage in the second quarter resulted from a decrease in merchandise margin percentage due to the absorption of Easter clearance markdowns from a later Easter this year. The merchandise margin decrease year-to-date was primarily related to a sales mix more heavily weighted towards lower margin goods. Selling, General and Administrative ("SG&A") Expenses. As a percentage of net sales, SG&A expenses decreased to 30.6% in the second quarter of fiscal 2000 from 31.0% in the second quarter of the prior fiscal year. Year-to-date, SG&A expenses decreased to 30.8% in the current fiscal year from 31.1% last fiscal year. The decrease in the SG&A rates resulted primarily from leveraging store payroll and corporate overhead expenses against higher net sales and an expanding base of stores. Store Preopening Expenses. Store preopening expenses, which include grand opening advertising and preopening merchandise setup expenses, were $790,000 in the second quarter of fiscal 2000 and $786,000 in the second quarter of the prior fiscal year. Expenses vary depending on the particular store site and whether it is located in a new or existing market. The Company opened four stores in each of the second quarters of fiscal 2000 and fiscal 1999. Year-to- date, store preopening expenses were $2.0 million in fiscal 2000 and $1.8 million fiscal 1999, as a result of opening ten stores this fiscal year compared to nine stores in last fiscal year. Net Interest Expense. Net interest expense for the second quarter, which includes interest on capital leases net of interest income, was $95,000 for fiscal 2000 and $209,000 for fiscal 1999. For the six months, net interest expense was $127,000 in fiscal 2000 compared to $376,000 in fiscal 1999. The decrease in net interest expense was due to a reduction in capitalized lease obligations and to slightly higher interest income on investments. Income Taxes. The Company's effective tax rate was 39.0% in fiscal 2000 and fiscal 1999. 8 Factors That May Affect Future Results The Company's business is highly seasonal, reflecting the general pattern associated with the retail industry of peak sales and earnings during the Christmas season. Due to the importance of the Christmas selling season, the fourth quarter of each fiscal year has historically contributed, and the Company expects it will continue to contribute, a disproportionate percentage of the Company's net sales and most of its net income for the entire fiscal year.* Any factors negatively affecting the Company during the Christmas selling season in any year, including unfavorable economic conditions, could have a material adverse effect on the Company's financial condition and results of operations. The Company generally experiences lower sales and earnings during the first three quarters and, as is typical in the retail industry, may incur losses in these quarters. The results of operations for interim periods are not necessarily indicative of the results for a full fiscal year. In addition, the Company makes decisions regarding merchandise well in advance of the season in which it will be sold, particularly for the Christmas selling season. Significant deviations from projected demand for products could have a material adverse effect on the Company's financial condition and results of operations, either by lost gross sales due to insufficient inventory or lost gross margin due to the need to mark down excess inventory. The Company's quarterly results of operations may also fluctuate based upon such factors as the number and timing of store openings and related store preopening expenses, the amount of net sales contributed by new and existing stores, the mix of products sold, the timing and level of markdowns, store closings, refurbishments or relocations, competitive factors and general economic conditions. Liquidity and Capital Resources The Company's primary uses for cash are to fund operating expenses, inventory requirements and new store expansion. Historically, the Company has financed its operations primarily from internally generated funds and borrowings under the Company's credit facilities. The Company believes that the combination of its cash and cash equivalents, internally generated funds and available borrowings under its revolving line of credit will be sufficient to finance its working capital and capital expenditures requirements for the next 12 months.* Net cash used in operating activities in the first half of fiscal 2000 totaled $12.6 million, an increase of $8.4 million from the comparable period of the prior fiscal year. This increase resulted primarily from higher income tax payments, increased inventories to support a larger number of store openings in the third quarter and an acceleration of Christmas merchandise receipts to accommodate an earlier in-store set-up in fiscal 2000 versus fiscal 1999, an increase in construction allowances receivable on new stores opened in fiscal 2000 and timing of payments for merchandise inventory. Net cash used in investing activities, primarily for new stores, totaled $11.9 million for the first half of fiscal 2000 compared to $7.8 million in the comparable period of the prior fiscal year. The Company estimates that capital expenditures will approximate $27.0 million in fiscal 2000.* Net cash provided by financing activities was $3.1 million in the first half of fiscal 2000 and $3.3 million in the comparable period of fiscal 1999 both of which were primarily proceeds from the issuance of common stock in connection with the Company's stock option and stock purchase plans. Effective May 19, 2000, the Company entered into a new, unsecured revolving line of credit agreement with a bank, which expires June 1, 2002. This agreement replaced the amended October 12, 1998 revolving line of credit agreement. The new agreement allows for cash borrowings and letters of credit up to $10.0 million from January 1 through June 30 of each year, $40.0 million from July 1, 2000 through December 31, 2000 and $50.0 million from July 1, 2001 through December 31, 2001. Interest is paid monthly based on the Company's election of the bank's reference rate minus 0.75% (8.75 % at July 29, 2000) or IBOR/LIBOR plus 0.9%. The Company is subject to certain financial covenants customary with such agreements. At July 29, 2000, the Company had no outstanding borrowings under the line of credit and $3.1 million outstanding under letters of credit. 9 Impact of New Accounting Standard In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in either assets or liabilities. As amended in June 1999 by SFAS No. 137, this statement is effective for fiscal years beginning after June 15, 2000. Since the Company does not engage in derivative or hedging activities, application of the standard is not expected to have a material effect on the Company's consolidated financial position, results of operations or cash flows. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK There are no material changes to our market risk as disclosed in the Company's report on Form 10-K filed for the fiscal year ended January 29, 2000. 10 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's 2000 Annual Meeting of Shareholders held on June 22, 2000, the shareholders voted on the following proposals: Proposal 1. To elect six directors for the ensuing year and until their successors are elected. Proposal 2. To approve an amendment to the Company's 1995 Stock Option Plan to increase the shares reserved for issuance thereunder by 350,000 shares. Proposal 3. To approve an amendment to the Company's 1996 Director Option Plan to increase the shares reserved for issuance thereunder by 100,000 shares. Proposal 4. To ratify and approve the appointment of Deloitte & Touche LLP as independent auditors of the Company for the fiscal year ending February 3, 2001. 2000 ANNUAL MEETING ELECTION RESULTS Proposal 1 - Election of Directors Name For Withheld ---- --- -------- Murray H. Dashe 18,747,318 103,201 Joseph H. Coulombe 18,749,734 100,785 Danny W. Gurr 18,730,189 120,330 Kim D. Robbins 18,732,187 118,332 Fredric M. Roberts 18,750,937 99,582 Thomas D. Willardson 18,730,349 120,170 Proposals 2, 3 and 4 Broker Proposal For Against Abstain Non-Votes -------- --- ------- ------- --------- 2. Amendment to the 1995 14,100,392 4,091,527 658,600 0 Stock Option Plan 3. Amendment to the 1996 14,567,631 3,617,928 664,960 0 Director Option Plan 4. Appointment of Deloitte 18,613,398 234,794 2,327 0 & Touche LLP 11 ITEM 5. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 1996 Director Option Plan, as amended. 10.2 1995 Stock Option Plan, as amended. 27 Financial Data Schedule (submitted for SEC only). (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the periods covered by this report. 12 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COST PLUS, INC. --------------------------------------------- Registrant /s/ John F. Hoffner _____________________________________________ Date: September 11, 2000 By: John F. Hoffner Executive Vice President, Administration Chief Financial Officer 13