EXHIBIT 13
Murray H. Dashe
Chairman, Chief Executive Officer and President
To Our Shareholders
In 2001, Cost Plus World Market faced its most challenging year in a decade.
Like many retailers, we were confronted by a slowing economy and the dramatic
decline in consumer spending which followed the events of September 11.
Additionally, problems that arose during the development and deployment of new
distribution systems and processes temporarily impeded the flow of merchandise
to our stores, further damaging third quarter sales. I'm pleased to report,
however, that we rose to meet all of these challenges. In the fourth quarter,
merchandise flowed more quickly and smoothly than ever in our history, and our
fourth quarter operating results were at record levels. This momentum has
continued into fiscal 2002.
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[PICTURE]
Murray H. Dashe
Chairman, Chief Executive Officer and President
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SOLID OPERATING RESULTS For the 52 weeks ended February 2, 2002, Cost Plus World
Market sales were $568.5 million, up 15.2% from $493.7 million for the 53 weeks
of fiscal 2000. The majority of this sales growth came from our stores outside
California, since the impact of the recession has been greater in our home
state. Same store sales for the year rose 0.3%, primarily reflecting the
softness of the midyear period, but fourth quarter same store sales rebounded to
a 2.7% increase year-to-year. While net income for fiscal 2001 at $20.2 million,
or $0.93 per share, lagged the prior year's $21.7 million, or $1.00 per share,
the Company's strong return to record earnings of $19.8 million, or $0.91 per
share, in the fourth quarter, provided evidence that we had effectively resolved
the issues facing us.
Along the way we improved operating efficiencies and eliminated weaknesses. The
challenges of this past year also proved the capability of a number of key
employees whose performances in the face of adversity were truly exceptional.
Some of these people have recently been promoted in recognition of their
contributions, and this letter would be incomplete without acknowledging their
efforts -- and indeed, the efforts of all Cost Plus World Market's employees --
during 2001. We are confident that our management team is now the strongest it
has ever been, and among the finest in the retail industry.
From management's perspective, then, the Company emerged from fiscal 2001 leaner
and stronger, and able to identify and solve tough problems effectively. We also
feel that our solid financial results for the year and the consistently strong
performance of our new stores demonstrate the continuing power of Cost Plus
World Market's unique retail concept.
The rest of this year's annual report is devoted to describing this successful
concept in more detail, and you are encouraged to read on to learn how the
particular attributes that differentiate Cost Plus World Market -- our unique
product assortment, our value orientation, and the casual, comfortable and fun
shopping environment of our stores -- translate into competitive advantage and
consistently strong operating results.
A UNIQUE -- AND PROVEN -- RETAIL CONCEPT At the heart of this concept is our
ability to source, develop and sell products that shoppers often won't find
anywhere else. Customers come to Cost Plus World Market knowing they'll find
great values and high quality, but they also expect to find originality and
authenticity. That has always been one of our hallmarks and it is why as much as
60% of our product assortment is new every year. Doing this successfully
requires a clear sense of market trends -- which comes from listening carefully
to our customers -- coupled with a great deal of creativity from our buyers and
product development teams. It also requires constant experimentation. Throughout
the year, we test new product ideas in a limited number of stores to determine
which merchandise has enduring, broad-based appeal. Those products are then
rolled out into all our stores. The most successful products can evolve into
categories; the most successful categories can grow into entire departments.
The ability to develop and establish popular new product lines has made Cost
Plus World Market an increasingly strong competitor in the growing market for
home furnishings. It has also helped drive our top and bottom line growth for
more than a decade. In 2001, for example, we saw steadily rising consumer demand
for our home office furniture and bed and bath furnishings, both of which are
recent experiments that have quickly grown into popular new product categories.
By focusing a higher percentage of our November and December marketing efforts
around these and other home furnishing categories, we were able to stimulate
increased sales of all our home merchandise during the important Holiday selling
season. The Holiday
6 CPWM
season is traditionally very strong for our food and beverage products, and this
year was no exception. However, the shift in sales mix toward our higher-margin
home furnishing offerings had a positive impact on our fourth quarter
profitability. And, again, we are seeing these sales trends continuing into
fiscal 2002.
A COMMITMENT TO PROFITABLE GROWTH Supporting such a large, eclectic and
continuously changing product assortment requires a highly efficient
distribution operation, and as previously noted, in fiscal 2001 we implemented
new systems and significantly strengthened our distribution management
Company-wide in order to improve our overall inventory management. That goal has
been achieved.
This success has resulted from the hard work of many individuals throughout the
Company and is reflected in how much more efficient our distribution operations
are today. We have learned a great deal from our distribution development
experience, and we are putting those lessons to work as we prepare for the
mid-2002 opening of our new 500,000 square-foot distribution center near
Norfolk, Virginia. With exhaustive planning, in-depth training and a carefully
phased rollout, we are confident that the new facility will come online
successfully and be operating efficiently at needed capacity by the Holiday
season.
BUILDING ON OUR MOMENTUM IN FISCAL 2002 Indeed, as we move forward into fiscal
2002, we are confident about all aspects of Cost Plus World Market's operations.
Our unique and evolving product assortment is generating strong store traffic
and growing customer interest in our expanded home furnishings offering. Our
Company-wide cost control efforts continue to improve our operating efficiency.
And our concept is proving very popular in each new market we enter. Our goal
for fiscal 2002 is to add a net of 25 new stores -- mostly in the Midwest, East
and Southeast -- for a total of 175 stores in 23 states at year end, with more
than 70% of our stores outside our home base of California. Ultimately we
believe we can operate up to 450 stores nationwide located in both large and
medium-sized metropolitan markets, meaning there is still a great deal of growth
potential for Cost Plus World Market.
Our job now is to realize that potential, and all of us at the Company are
committed both to improving our operating performance and to translating our
success into increased shareholder value at Cost Plus World Market. We look
forward to reporting to you on our continued progress toward these goals in the
months and years ahead.
/s/ Murray Dashe
Murray H. Dashe
Chairman, Chief Executive Officer and President
March 2002
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Net Sales
(dollars in millions)
1997 260.5
1998 315.1
1999 402.3
2000 493.7
2001 568.5
Operating Income
(dollars in millions)
1997 18.1
1998 22.9
1999 33.1
2000 36.2
2001 34.1
Net Income
(dollars in millions)
1997 10.0
1998 13.2
1999 19.7
2000 21.7
2001 20.2
Five Year Compound
Annual Growth Rate
1997-2001
Stores Sales Operating Income Net Income
21% 21% 18% 22%
16 CPWM
MANAGEMENT'S DISCUSSION AND ANALYSIS 18
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA 22
CONSOLIDATED BALANCE SHEETS 27
CONSOLIDATED STATEMENTS OF OPERATIONS 28
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 29
CONSOLIDATED STATEMENTS OF CASH FLOWS 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 31
INDEPENDENT AUDITORS' REPORT 41
DIRECTORS, OFFICERS AND CORPORATE DATA 42
STORE LOCATIONS 43
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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 Annual Report, including
"Quarterly Results and Seasonality" beginning on page 23. 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Cost Plus, Inc. and its subsidiaries' discussion and analysis of its financial
condition and results of operations are based upon the Company's consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements requires the Company to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent assets and liabilities. Estimates
and assumptions include, but are not limited to, inventory values, fixed asset
lives, intangible asset values, deferred income taxes, self-insurance reserves
and the impact of contingencies and litigation. The Company bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from those
estimates under different assumptions or conditions. The Company has also chosen
certain accounting policies when options are available, including:
. the retail inventory method of accounting for inventories.
. the intrinsic value method to account for common stock incentive
awards.
These accounting policies are applied consistently for all years presented.
Operating results would be affected if other alternatives were used. Information
about the impact on operating results by using APB Opinion No. 25 "Accounting
for Stock Issued to Employees" is included in footnote 7 to the consolidated
financial statements.
Although not all inclusive, the Company believes that the following
represent the more critical estimates and assumptions used in the preparation of
the consolidated financial statements.
REVENUE RECOGNITION The Company's revenue recognition process does not involve
significant judgment or estimates. A provision for sales returns is estimated
and recorded in the current year based on actual returns subsequent to year end.
NET SALES Net sales consist of sales from comparable stores and non-comparable
stores. A store is not included in comparable store sales until the first day of
the fiscal month beginning with the fourteenth full fiscal month of sales.
Non-comparable store sales include sales in the current fiscal year from stores
opened during the previous fiscal year before they are considered comparable
stores and new stores opened during the current fiscal year.
INVENTORY Inventories are stated at the lower of cost or market under the retail
inventory method ("RIM"), in which the valuation of inventories at cost and the
resulting gross margins are calculated by applying a calculated cost-to-retail
ratio to the retail value of inventories. RIM is an averaging method that is
widely used in the retail industry due to its practicality. Also, the Company's
use of the retail inventory method will result in valuing inventories at lower
of cost or market as markdowns are currently taken as a reduction of the retail
value of inventories. Inherent in the RIM calculation are certain significant
management judgments and estimates including, among others, merchandise markon,
markdowns
18 CPWM
and shrinkage, which impact the ending inventory valuation at cost as well as
resulting gross margins. These estimates, coupled with the fact that the RIM is
an averaging process can, under certain circumstances, produce distorted or
inaccurate cost figures. To reduce the potential of such distortions in the
valuation of inventory, the Company's RIM utilizes 26 departments in which
fairly homogeneous classes of merchandise inventories having similar gross
margins are grouped. In addition, failure to take timely markdowns could result
in an overstatement of cost under the lower of cost or market principle. When
necessary, the Company records a markdown allowance that reduces inventory value
to the lower of cost or market. Management believes that the Company's RIM
provides an inventory valuation that reasonably approximates cost and results in
carrying inventory at the lower of cost or market.*
INSURANCE / BENEFITS The Company records estimates for certain health and
welfare, workers' compensation and casualty insurance costs that are
self-insurance programs with per occurrence and aggregate limits on losses.
Should a greater amount of claims occur compared to what was estimated or costs
of medical care increase beyond what was anticipated, reserves recorded may not
be sufficient and additional costs to the consolidated financial statements
could be required.
OTHER ACCOUNTING ESTIMATES Estimates inherent in the preparation of the
Company's financial statements include those associated with the evaluation of
the recoverability of deferred tax assets and goodwill as well as those used in
the determination of liabilities related to litigation, claims and assessments.
Various assumptions and other factors underlie the determination of these
significant estimates. The process of determining significant estimates is fact
specific and takes into account factors such as historic experience and current
and expected economic conditions. The Company constantly reevaluates these
significant factors and makes adjustments where facts and circumstances dictate.
To date, actual results have not significantly deviated from those determined
using the estimates described above.
The Company has not recorded a valuation allowance to reduce its deferred
tax assets. The Company has considered future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the need for the valuation
allowance. In the event the Company were to determine that it would not be able
to realize all or part of its net deferred tax assets in the future, an
adjustment to the deferred tax assets would be charged to income in the period
such determination was made. Likewise, should the Company determine it would be
able to realize deferred tax assets in the future in excess of the net recorded
amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made.
The Company had goodwill in the amount of $4.2 million at February 2, 2002.
In connection with the adoption of Statement of Financial Accounting Standard
(SFAS) No. 142, "Goodwill and Other Intangible Assets," the Company performed an
impairment test which resulted in no impairment being identified.
The Company is involved in litigation, claims and assessments incidental to
its business, the disposition of which is not expected to have a material effect
on the Company's financial position or results of operations.* It is possible,
however, that future results of operations for any particular quarterly or
annual period could be materially affected by changes in the Company's
assumptions related to these proceedings.* The Company accrues its best estimate
of the probable cost for the resolution of claims. When appropriate, such
estimates are developed in consultation with outside counsel handling the
matters and are based upon a combination of litigation and settlement
strategies. To the extent additional information arises or the Company's
strategies change, it is possible that the Company's best estimate of its
probable liability in these matters may change.*
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FORWARD-LOOKING STATEMENTS AND FACTORS AFFECTING FUTURE PERFORMANCE
This report includes a number of forward-looking statements, which reflect the
Company's current beliefs and estimates with respect to future events and the
Company's future financial performance, operations and competitive position. The
words "expect," "anticipate," "estimate," "believe," "looking ahead,"
"forecast," "plan" and similar expressions identify forward-looking statements.
The Company's continued success depends, in part, upon its ability to
increase sales at existing locations, to open new stores and to operate stores
on a profitable basis. There can be no assurance that the Company's existing
strategies and store expansion program will result in a continuation of revenue
and profit growth. Future economic and industry trends that could potentially
impact revenue and profitability remain difficult to predict.
The forward-looking statements that are contained in this report are
subject to known and unknown risks and uncertainties that could cause the
Company's actual results to differ materially from historical results or current
expectations. These factors include, without limitation, a general deterioration
in economic trends, ongoing competitive pressures in the retail industry,
obtaining acceptable store locations, timely introduction and customer
acceptance of its merchandise offering, the Company's ability to successfully
open its new distribution center in a timely and cost-effective manner, the
Company's ability to successfully extend its geographic reach into new markets,
unseasonable weather trends, changes in the level of consumer spending on or
preferences for home-related merchandise, the Company's ability to attract and
retain the retail talent necessary to execute its strategies, international
political strife and the effects on the flow or price of merchandise from
overseas, further terrorist attacks and our nation's response thereto and the
Company's ability to implement and integrate various new systems and
technologies. In addition, the Company's corporate headquarters, one of its
distribution centers and approximately one-third of its stores are located in
California. Therefore, a downturn in the California economy or a major natural
disaster there could significantly affect the Company's operating results and
financial condition.
In addition to the above factors, the retail industry is highly seasonal.
The net sales of the Company for the fourth (Holiday) fiscal quarter are
historically higher than each of the first three fiscal quarters. The Company
has realized a significant portion of its profits in each fiscal year during the
fourth fiscal quarter. If intensified price competition, lower than anticipated
consumer demand or other factors were to occur during the fourth fiscal quarter,
the Company's fiscal year results could be adversely affected.
RESULTS OF OPERATIONS
FISCAL 2001 COMPARED TO FISCAL 2000
NET SALES Net sales increased $74.8 million, or 15.2%, to $568.5 million in
fiscal 2001, a 52-week fiscal year, from $493.7 million in fiscal 2000, a
53-week fiscal year. The increase in net sales was attributable to new stores
and a slight increase in comparable store sales. Comparable store sales rose
0.3% for fiscal 2001, compared to a 4.6% increase in fiscal 2000. Comparable
store sales were impacted by lower sales in the third fiscal quarter due
primarily to the weak economy, temporarily exacerbated by the September 11th
tragedy and an impeded flow of goods to stores associated with the installation
of a new warehousing system. Comparable store sales decreased 7.4% in the third
fiscal quarter, yet recovered to a 2.7% increase for the fourth fiscal quarter
of 2001. As of February 2, 2002, the Company operated 150 stores compared to 127
stores as of February 3, 2001.
20 CPWM
GROSS PROFIT As a percentage of net sales, gross profit was 34.4% in fiscal 2001
and 35.9% in fiscal 2000. The reduction is substantially explained by a sales
mix shift to lower margin consumable goods and higher markdowns to stimulate
foot traffic. Reduced leverage on occupancy costs from a higher percentage of
new stores in the base and increased transportation costs also negatively
impacted margin. Newer stores generally have higher occupancy costs as a
percentage of sales until they reach maturity.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES As a percentage of net
sales, SG&A expenses increased slightly to 27.6% in the current year from 27.5%
last year. The increase in the SG&A expense rate resulted primarily from reduced
sales leverage on lower comparable store sales growth, higher depreciation due
to new stores and new information systems.
STORE PREOPENING EXPENSES Store preopening expenses, which include grand opening
advertising and preopening merchandise setup expenses, were $4.6 million in
fiscal 2001 and $5.0 million in fiscal 2000. Expenses vary depending on the
particular store site and whether it is located in a new or existing market. The
Company opened 23 stores in fiscal 2001 compared to 24 stores in fiscal 2000.
NET INTEREST EXPENSE Net interest expense, which includes interest on capital
leases and interest expense net of interest income, was $962,000 in fiscal 2001
and $666,000 in fiscal 2000. The increase in net interest expense was due to
lower interest earned on investments due to a significant drop in the prime rate
and higher average borrowings.
INCOME TAXES The Company's effective tax rate was 39.0% in both fiscal 2001 and
fiscal 2000.
FISCAL 2000 COMPARED TO FISCAL 1999
NET SALES Net sales increased $91.4 million, or 22.7%, to $493.7 million in
fiscal 2000, a 53-week fiscal year, from $402.3 million in fiscal 1999, a
52-week fiscal year. The increase in net sales was attributable to new stores
and an increase in comparable store sales. Comparable store sales rose 4.6% for
fiscal 2000, as a result of a larger average transaction. As of February 3,
2001, the Company operated 127 stores compared to 103 stores as of January 29,
2000.
GROSS PROFIT As a percentage of net sales, gross profit was 35.9% in fiscal 2000
and 36.5% in fiscal 1999. This change is substantially explained by heavier
promotional and clearance markdowns to meet competitive sales pressures, reduced
leverage on occupancy costs from a higher percentage of new stores in the base,
as well as increased fuel and transportation costs. Newer stores generally have
higher occupancy costs as a percentage of sales until they reach maturity.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES As a percentage of net
sales, SG&A expenses increased slightly to 27.5% in the current fiscal year from
27.4% in fiscal 1999. The increase in the SG&A expense rate resulted primarily
from higher advertising expenditures to respond to a more difficult retail
environment in the fourth quarter.
STORE PREOPENING EXPENSES Store preopening expenses, which include grand opening
advertising and preopening merchandise setup expenses, were $5.0 million in
fiscal 2000 and $3.7 million in fiscal 1999. Expenses vary depending on the
particular store site and whether it is located in a new or existing market. The
Company opened 24 stores in fiscal 2000 compared to 18 stores in fiscal 1999.
NET INTEREST EXPENSE Net interest expense, which includes interest on capital
leases and interest expense net of interest income, was $666,000 in fiscal 2000
and $859,000 in fiscal 1999. The modest decrease in net interest expense was due
to higher interest rates on short-term investments and a modest increase in the
average cash balances available for investment.
INCOME TAXES The Company's effective tax rate was 39.0% in both fiscal 2000 and
fiscal 1999.
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FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
Fiscal Year
--------------------------------------------------------
(In thousands, except per share and selected operating data) 2001 2000/1/ 1999 1998 1997
--------------------------------------------------------
Statement of Operations Data:
Net sales $568,472 $493,661 $402,292 $315,135 $260,494
Cost of sales and occupancy 372,948 316,500 255,383 200,023 164,394
--------------------------------------------------------
Gross profit 195,524 177,161 146,909 115,112 96,100
Selling, general and administrative expenses 156,832 135,923 110,108 89,261 75,238
Store preopening expenses 4,612 5,044 3,671 2,927 2,744
--------------------------------------------------------
Income from operations 34,080 36,194 33,130 22,924 18,118
Net interest expense 962 666 859 1,226 1,679
--------------------------------------------------------
Income before income taxes 33,118 35,528 32,271 21,698 16,439
Income taxes 12,916 13,856 12,586 8,462 6,432
--------------------------------------------------------
Net income $ 20,202 $ 21,672 $ 19,685 $ 13,236 $ 10,007
========================================================
Net income per share -- basic $ 0.95 $ 1.04 $ 0.97 $ 0.67 $ 0.53
Net income per share -- diluted $ 0.93 $ 1.00 $ 0.93 $ 0.65 $ 0.51
Weighted average shares outstanding -- basic 21,355 20,813 20,321 19,724 18,734
Weighted average shares outstanding -- diluted 21,756 21,568 21,189 20,363 19,574
========================================================
Selected Operating Data:
Percent of sales:
Gross profit 34.4% 35.9% 36.5% 36.5% 36.9%
Selling, general and administrative expenses 27.6% 27.5% 27.4% 28.3% 28.9%
Income from operations 6.0% 7.3% 8.2% 7.3% 7.0%
Number of stores:
Opened during period 23 24 18 15 12
Closed during period -- -- -- -- --
Open at end of period 150 127 103 85 70
Average sales per selling square foot/2/ $ 258 $ 273 $ 269 $ 258 $ 259
Comparable store sales increase 0.3% 4.6% 8.6% 5.5% 7.0%
========================================================
Balance Sheet Data (at period end):
Working capital $117,381 $ 98,001 $ 80,663 $ 61,031 $ 52,630
Total assets 317,940 252,865 214,699 173,141 152,000
Note payable and capital lease obligations,
less current portion 33,216 13,474 14,416 15,110 15,692
Total shareholders' equity 198,709 169,121 138,335 109,403 95,609
Current ratio 2.54 2.59 2.47 2.43 2.52
Debt to equity ratio 17.2% 8.2% 10.9% 14.3% 16.9%
========================================================
/1/ The Company's fiscal year end is the Saturday closest to the end of January.
Fiscal 2000 was 53 weeks and ended on February 3, 2001. All other fiscal
years presented consisted of 52 weeks.
/2/ Calculated using net sales for stores open during the entire period divided
by the selling square feet of such stores.
22 CPWM
INFLATION
The Company does not believe that inflation has had a material effect on its
financial condition and results of operations during the past three fiscal
years. However, there can be no assurance that the Company's business will not
be affected by inflation in the future.
QUARTERLY RESULTS AND SEASONALITY
The following table sets forth the Company's unaudited quarterly operating
results for the eight most recent quarterly periods.
Fiscal Quarters Ended
-----------------------------------------------------------------------
(In thousands, except per share data and number of stores) May 5, 2001 August 4, 2001 November 3, 2001 February 2, 2002
-----------------------------------------------------------------------
Net sales $112,915 $112,101 $113,544 $229,912
Gross profit 37,261 37,342 36,294 84,627
Net income (loss) 1,233 1,509 (2,321) 19,781
Net income (loss) per share
Basic $ 0.06 $ 0.07 $ (0.11) $ 0.93
Diluted $ 0.06 $ 0.07 $ (0.11) $ 0.91
Number of stores open
at end of period 132 137 145 150
Fiscal Quarters Ended
-----------------------------------------------------------------------
(In thousands, except per share data and number of stores) April 29, 2000 July 29, 2000 October 28, 2000 February 3, 2001/1/
-----------------------------------------------------------------------
Net sales $ 92,238 $ 92,765 $101,913 $206,745
Gross profit 31,791 31,633 35,333 78,404
Net income 1,133 1,449 283 18,807
Net income per share
Basic $ 0.06 $ 0.07 $ 0.01 $ 0.90
Diluted $ 0.05 $ 0.07 $ 0.01 $ 0.87
Number of stores open
at end of period 109 113 122 127
/1/ The three months ended February 3, 2001 was a fourteen-week period as
compared to the three months ended February 2, 2002 which was a thirteen-
week period.
The Company's business is highly seasonal, reflecting the general pattern
associated with the retail industry of peak sales and earnings during the fourth
quarter (Holiday) season. Due to the importance of the Holiday 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 Holiday 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 these 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
CPWM 23
which it will be sold, particularly for the Holiday 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 delays in the flow of merchandise, changes in the anticipated
opening of the Company's new distribution center in mid-2002, 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, changes in fuel and other shipping costs, general economic
conditions, increases in utility costs in California and other states where the
Company has operations, labor market fluctuations, changes in accounting rules
and regulations and unseasonable weather 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 seasonal borrowings
under the Company's revolving credit facility. The Company believes that the
combination of its cash and cash equivalents, internally generated funds and
available borrowings under a revolving line of credit will be sufficient to
finance its working capital and capital expenditure requirements for at least
the next twelve months.*
Net cash provided by operating activities totaled $28.0 million for fiscal
2001, an increase of $5.9 million from fiscal 2000. The increase in net cash
provided by operating activities is primarily due to an increase in current
liabilities, partially offset by an increase in inventories and deposits on
equipment for the Company's second distribution center to be opened in fiscal
2002.
Net cash used in investing activities, primarily capital expenditures for
new stores, totaled $27.4 million in fiscal 2001 compared to $26.5 million in
fiscal 2000. The Company estimates that fiscal 2002 capital expenditures will
approximate $26.5 million, including approximately $14.0 million for new stores,
$5.0 million for information systems projects, the most significant of which is
a warehouse management system for the Virginia distribution center (VDC), and
$5.1 million for distribution center projects, primarily equipment to outfit the
VDC.* Additionally $4.5 million of equipment purchases for the VDC will be
financed under capital lease arrangements.*
Net cash provided by financing activities was $6.0 million in fiscal 2001
and $4.8 million in fiscal 2000 which were primarily proceeds from the issuance
of common stock in connection with the Company's stock option and stock purchase
plans.
The table below presents significant contractual obligations of the Company
at February 2, 2002.
Contractual Obligations (in millions) Less than 1 year 1-3 years 4-5 Years After 5 Years Total Amount Committed
- ---------------------------------------------------------------------------------------------------------------------------
Operating leases $ 42.3 $ 117.4 $ 70.4 $ 121.0 $ 351.1
Capital leases (principal and interest) 4.0 12.1 8.0 52.0 76.1
--------------------------------------------------------------------
Total contractual obligations $ 46.3 $ 129.5 $ 78.4 $ 173.0 $ 427.2
====================================================================
As of February 2, 2002, the Company did not have any other debt outstanding. The
Company has no financial arrangements involving special purpose entities or
lease agreements commonly described as synthetic leases.
24 CPWM
The Company has an unsecured revolving line of credit agreement with a
bank. The agreement allows for cash borrowings and letters of credit up to $25.0
million from January 1, 2002 through the expiration date of June 1, 2002.
Interest is paid monthly based on the Company's election of the bank's reference
rate minus 0.75% (4.00% at February 2, 2002) or IBOR/LIBOR plus 0.9%. The
Company is subject to certain financial covenants customary with such
agreements. At February 2, 2002, the Company had no outstanding borrowings under
the line of credit and $8.2 million outstanding under letters of credit.
The line of credit represents the Company's only commercial credit
facilities. The Company believes the line of credit is sufficient to provide for
borrowing needs.*
The Company has received two proposals for an unsecured credit facility to
replace the agreement expiring on June 1, 2002. The terms of each of the
proposals provide up to a maximum of $75 million in available credit. The
Company anticipates it will be subject to certain financial covenants customary
with such agreements.
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities," as amended, in fiscal 2001. Adoption of this statement does
not have an impact on the Company's current financial position or results of
operations.
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 142, "Goodwill and Other Intangible Assets," (effective for the Company for
fiscal 2002). SFAS No. 142 specifies that goodwill and certain intangible assets
will no longer be amortized but instead will be subject to periodic impairment
testing. The adoption of the new standard will reduce annual amortization
expense by approximately $312,000, in fiscal 2002.*
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which becomes effective for the
Company for fiscal 2002. Adoption of this standard is not expected to have a
material effect on the Company's financial position or results of operations.*
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to financial market risks, which include changes in U.S.
interest rates and, to a lesser extent, foreign exchange rates. The Company does
not engage in financial transactions for trading or speculative purposes.
INTEREST RATE RISK The interest payable on the Company's bank line of credit is
based on variable interest rates and is therefore affected by changes in market
interest rates. If interest rates on existing variable rate debt were to rise 40
basis points (a 10% change from the Company's borrowing rate as of February 2,
2002), the Company's results of operations and cash flows would not be
materially affected. In addition, the Company has fixed and variable income
investments consisting of cash equivalents and short-term investments which are
also affected by changes in market interest rates.
FOREIGN CURRENCY RISKS The Company enters into a significant amount of purchase
obligations outside of the United States of America which are settled in U.S.
Dollars and, therefore, the Company has only minimal exposure to foreign
currency exchange risks. The Company does not hedge against foreign currency
risks and believes that foreign currency exchange risk is immaterial.
CPWM 25
STOCK ACTIVITY
The Company's common stock is currently traded on the over-the-counter market
and is quoted on the Nasdaq National Market under the symbol "CPWM." The
following table sets forth the high and low closing sales prices, for the
periods indicated, as reported by the Nasdaq National Market.
Price Range
----------------
High Low
----------------
FISCAL YEAR ENDED FEBRUARY 2, 2002
First Quarter $27.81 $21.13
Second Quarter 30.18 25.25
Third Quarter 27.00 15.29
Fourth Quarter 27.94 20.20
FISCAL YEAR ENDED FEBRUARY 3, 2001
First Quarter $35.19 $15.94
Second Quarter 35.88 24.13
Third Quarter 38.81 24.81
Fourth Quarter 31.94 19.19
As of April 9, 2002, the Company estimated it has approximately 6,200
shareholders. The Company's present policy is to retain its earnings to finance
growth and does not intend to pay cash dividends.
26 CPWM
CONSOLIDATED BALANCE SHEETS
February 2, February 3,
(In thousands, except share amounts) 2002 2001
------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 45,420 $ 38,815
Merchandise inventories 131,344 109,829
Other current assets 16,789 11,107
------------------------
Total current assets 193,553 159,751
Property and equipment, net 110,922 78,694
Goodwill 4,178 4,340
Other assets 9,287 10,080
------------------------
Total assets $317,940 $252,865
========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 43,990 $ 31,592
Income taxes payable 10,082 9,933
Accrued compensation 8,305 8,506
Other current liabilities 13,795 11,719
------------------------
Total current liabilities 76,172 61,750
Capital lease obligations 33,216 13,474
Other long-term obligations 9,843 8,520
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 21,549,643 and
21,005,337 shares 215 210
Additional paid-in capital 131,730 122,349
Retained earnings 66,764 46,562
------------------------
Total shareholders' equity 198,709 169,121
------------------------
Total liabilities and shareholders' equity $317,940 $252,865
========================
See notes to consolidated financial statements.
CPWM 27
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended
--------------------------------------
February 2, February 3, January 29,
(In thousands, except per share amounts) 2002 2001 2000
--------------------------------------
Net sales $568,472 $493,661 $402,292
Cost of sales and occupancy 372,948 316,500 255,383
--------------------------------------
Gross profit 195,524 177,161 146,909
Selling, general and administrative expenses 156,832 135,923 110,108
Store preopening expenses 4,612 5,044 3,671
--------------------------------------
Income from operations 34,080 36,194 33,130
Interest income 882 1,293 1,179
Interest expense (1,844) (1,959) (2,038)
--------------------------------------
Income before income taxes 33,118 35,528 32,271
Income taxes 12,916 13,856 12,586
--------------------------------------
Net income $ 20,202 $ 21,672 $ 19,685
======================================
Net income per share
Basic $ 0.95 $ 1.04 $ 0.97
Diluted $ 0.93 $ 1.00 $ 0.93
======================================
Weighted average shares outstanding
Basic 21,355 20,813 20,321
Diluted 21,756 21,568 21,189
======================================
See notes to consolidated financial statements.
28 CPWM
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional Total
------------------------
Paid-in Retained Shareholders'
(In thousands, except shares) Shares Amount Capital Earnings Equity
----------------------------------------------------------------
Balance at January 30, 1999 19,936,517 $ 199 $ 103,999 $ 5,205 $ 109,403
Stock issued under Employee
Stock Purchase Plan 9,332 -- 249 249
Exercise of stock options 576,035 6 4,761 4,767
Tax effect of disqualifying
stock dispositions 4,231 4,231
Net income 19,685 19,685
----------------------------------------------------------------
Balance at January 29, 2000 20,521,884 205 113,240 24,890 138,335
Stock issued under Employee
Stock Purchase Plan 15,768 -- 380 380
Exercise of stock options 467,685 5 5,138 5,143
Tax effect of disqualifying
stock dispositions 3,591 3,591
Net income 21,672 21,672
----------------------------------------------------------------
Balance at February 3, 2001 21,005,337 210 122,349 46,562 169,121
Stock issued under Employee
Stock Purchase Plan 16,417 -- 355 355
Exercise of stock options 527,889 5 6,029 6,034
Tax effect of disqualifying
stock dispositions 2,997 2,997
Net income 20,202 20,202
----------------------------------------------------------------
Balance at February 2, 2002 21,549,643 $ 215 $ 131,730 $ 66,764 $ 198,709
================================================================
See notes to consolidated financial statements.
CPWM 29
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
----------------------------------------
February 2, February 3, January 29,
(In thousands) 2002 2001 2000
----------------------------------------
Cash Flows From Operating Activities:
Net income $ 20,202 $ 21,672 $ 19,685
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 16,320 13,887 11,052
Loss on disposal of property and equipment 203 407 173
Deferred income taxes 234 (2,103) (2,425)
Changes in assets and liabilities:
Merchandise inventories (21,515) (18,427) (20,722)
Other assets (5,667) (3,172) (997)
Accounts payable 12,398 6,520 6,515
Other liabilities 5,832 3,317 9,119
----------------------------------------
Net cash provided by operating activities 28,007 22,101 22,400
----------------------------------------
Cash Flows From Investing Activities:
Purchases of property and equipment (27,411) (26,529) (17,023)
----------------------------------------
Net cash used in investing activities (27,411) (26,529) (17,023)
----------------------------------------
Cash Flows From Financing Activities:
Principal payments on capital lease obligations (380) (691) (582)
Proceeds from the issuance of common stock 6,389 5,523 5,016
----------------------------------------
Net cash provided by financing activities 6,009 4,832 4,434
----------------------------------------
Net increase in cash and cash equivalents 6,605 404 9,811
Cash and Cash Equivalents:
Beginning of period 38,815 38,411 28,600
----------------------------------------
End of period $ 45,420 $ 38,815 $ 38,411
========================================
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 912 $ 669 $ 960
========================================
Cash paid for taxes $ 9,537 $ 11,672 $ 9,724
========================================
Non-cash Financing:
Capital lease obligation related to distribution center $ 20,632 $ -- $ --
========================================
See notes to consolidated financial statements.
30 CPWM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS Cost Plus, Inc. and subsidiaries (the "Company") is a specialty
retailer of casual home living and entertaining products. At February 2, 2002,
the Company operated 150 stores in 19 states under the names "World Market,"
"Cost Plus World Market," "Cost Plus" and "Cost Plus Imports." The Company's
product offerings are designed to provide solutions to customers' casual home
furnishing and home entertaining needs. The offerings include home decorating
items such as furniture and rugs, as well as a variety of tabletop and kitchen
products. Cost Plus World Market stores also offer a number of gift and
decorative accessories including collectibles, cards, wrapping paper and other
seasonal items. In addition, Cost Plus World Market offers its customers a wide
selection of gourmet foods and beverages, including wine, micro-brewed and
imported beer, coffee and tea. The Company accounts for its operations as one
operating segment.
FISCAL YEAR The Company's fiscal year end is the Saturday closest to the end of
January. The current fiscal year ended February 2, 2002 (fiscal 2001) contained
52 weeks. Consistent with the National Retail Federation fiscal calendar, the
fiscal year ended February 3, 2001 (fiscal 2000) contained 53 weeks. The fiscal
year ended January 29, 2000 (fiscal 1999) consisted of 52 weeks.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of Cost Plus, Inc. and its subsidiaries. Intercompany balances and
transactions are eliminated in consolidation.
ACCOUNTING 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 that affect the reported
amounts of assets and liabilities, including disclosures of contingent assets
and liabilities, as of the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of cash and
cash equivalents, accounts receivable and accounts payable approximates their
estimated fair value.
STOCK-BASED COMPENSATION The Company accounts for stock-based awards to
employees using the intrinsic value method prescribed by Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." The
disclosure requirements of Statement of Financial Accounting Standard (SFAS) No.
123, "Accounting for Stock-Based Compensation," are set forth in footnote 7 to
the consolidated financial statements.
CASH EQUIVALENTS The Company considers all highly liquid investments with
original maturities of three months or less as cash equivalents.
INVENTORIES Inventories are stated at lower of cost or market under the retail
inventory method ("RIM"), in which the valuation of inventories at cost and the
resulting gross margins are calculated by applying a calculated cost-to-retail
ratio to the retail value of inventories. Cost includes certain buying and
distribution costs related to the procurement, processing and transportation of
merchandise. Management believes that the Company's RIM provides an inventory
valuation which reasonably approximates cost and results in carrying inventory
at the lower of cost or market.*
CPWM 31
PROPERTY AND EQUIPMENT Furniture, fixtures and equipment are stated at cost and
are depreciated using the straight-line method over the following estimated
useful lives:
Store fixtures and equipment 3-10 years
Leasehold improvements Lesser of life of the asset or life of lease
Computer equipment and software 3-5 years
CAPITAL LEASES Noncancelable leases which meet the criteria of capital leases
are capitalized as assets in property and equipment and amortized on a
straight-line basis over their related lease terms.
OTHER ASSETS Other assets include lease rights and interests, deferred taxes and
other intangibles. Lease rights and interests are amortized on a straight-line
basis over their related lease terms.
GOODWILL Goodwill is amortized on a straight-line basis over 40 years.
Accumulated amortization as of February 2, 2002 and February 3, 2001 was $2.4
million and $2.2 million, respectively.
IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS The Company's management believes
that the carrying value of long-lived assets is appropriate and no adjustments
to the carrying value of such assets is necessary.*
SELF-INSURANCE The Company is self insured for workers' compensation, general
liability costs and certain health insurance plans with per occurrence and
aggregate limits on losses. The self-insurance liability recorded in the
financial statements is based on claims filed and an estimate of claims incurred
but not yet reported.
DEFERRED RENT Certain of the Company's operating leases contain predetermined
fixed escalations of minimum rentals during the initial term. For these leases,
the Company recognizes the related rental expense on a straight-line basis over
the life of the lease and records the difference between amounts charged to
operations and amounts paid as deferred rent. As part of its lease agreements,
the Company may receive certain lease incentives, primarily construction
allowances. These allowances are also deferred and are amortized on a
straight-line basis over the life of the lease as a reduction of rent expense.
The cumulative net excess of recorded rent expense over lease payments made in
the amount of $8.6 million and $7.6 million is reflected in other liabilities in
the balance sheets as of February 2, 2002 and February 3, 2001, respectively.
REVENUE RECOGNITION Revenue is recognized at the point of sale, net of estimated
sales returns.
ADVERTISING EXPENSE Advertising costs, which include newspaper, television,
radio and other media advertising, are expensed as incurred. For the fiscal
years 2001, 2000 and 1999, advertising costs were $30.6 million, $27.2 million
and $21.7 million, respectively.
STORE PREOPENING EXPENSES Store preopening expenses include grand opening
advertising, labor, travel and hiring expenses and are expensed as incurred.
CONCENTRATION OF CREDIT RISK Financial instruments, which potentially subject
the Company to concentration of credit risk, consist principally of cash and
cash equivalents. The Company places its cash with high quality financial
institutions. At times, such balances may be in excess of FDIC insurance limits.
INCOME TAXES Income taxes are accounted for using an asset and liability
approach that requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been recognized in the
Company's consolidated financial statements or tax returns.
32 CPWM
COMPREHENSIVE INCOME The Company's comprehensive income and net income are the
same for all periods presented.
NET INCOME PER SHARE SFAS No. 128 "Earnings Per Share," requires earnings per
share (EPS) to be computed and reported as both basic EPS and diluted EPS. Basic
EPS is computed by dividing net income by the weighted average number of common
shares outstanding for the period. Diluted EPS is computed by dividing net
income by the weighted average number of common shares and dilutive common stock
equivalents (stock awards and stock options) outstanding during the period.
Dilutive EPS reflects the potential dilution that could occur if options to
issue common stock were exercised into common stock. The following is a
reconciliation of the weighted average number of shares used in the Company's
basic and diluted per share computations.
Fiscal Year Ended
-------------------------------------------
February 2, February 3, January 29,
(In thousands) 2002 2001 2000
-------------------------------------------
Basic shares 21,355 20,813 20,321
Effect of dilutive stock options 401 755 868
-------------------------------------------
Diluted shares 21,756 21,568 21,189
===========================================
Certain options to purchase common stock were outstanding but were not included
in the computation of diluted earnings per share because the effect would be
anti-dilutive. For the fiscal years ended February 2, 2002, February 3, 2001 and
January 29, 2000, these options totaled 288,374; 241,049 and 46,036,
respectively.
IMPACT OF NEW ACCOUNTING STANDARDS In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
subsequently amended by SFAS Nos. 137 and 138 in June 2000. The adoption of
these standards did not have an impact on the financial position or results of
operations of the Company because the Company does not have derivative
instruments which require such valuation.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." The standard provides that intangible assets with finite useful lives
be amortized and that goodwill and intangible assets with indefinite lives not
be amortized, but rather be tested at least annually for impairment. The Company
will adopt the standard in fiscal 2002. Beginning in fiscal 2002, the Company
will stop the amortization of goodwill with a net carrying value of $4.2 million
for a net annual reduction in amortization of $162,000. The Company has
evaluated such goodwill under the specified transitional impairment test and
does not believe such evaluation will result in an impairment loss.* The net
carrying value of other intangible assets included in other assets was $731,000.
Amortization expense related to these assets in fiscal 2001 totaled $132,000.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." The Company does not believe the adoption of this
statement in fiscal 2002 will have an impact on its consolidated financial
statements.*
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Long-Lived Assets," which addresses accounting for and reporting
of the impairment or disposal of long-lived assets that will be effective for
fiscal year 2002. The Company has determined that the adoption of SFAS No. 144
will have no impact on its financial position or results of operations.*
CPWM 33
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
February 2, February 3,
(In thousands) 2002 2001
-------------------------
Land and land improvements $ 530 $ 530
Building and leasehold improvements 61,221 52,872
Furniture, fixtures and equipment 74,645 60,281
Facilities under capital leases 45,296 27,449
-------------------------
Total 181,692 141,132
Less accumulated depreciation and amortization (70,770) (62,438)
-------------------------
Property and equipment, net $ 110,922 $ 78,694
=========================
NOTE 3. OTHER ASSETS
Other assets consist of the following:
February 2, February 3,
(In thousands) 2002 2001
-------------------------
Deferred income taxes $ 4,500 $ 4,454
Lease rights and interests 3,146 3,146
Other intangibles 1,400 1,220
Other 4,027 4,521
-------------------------
Total 13,073 13,341
Less accumulated amortization (3,786) (3,261)
-------------------------
Other assets, net $ 9,287 $ 10,080
=========================
NOTE 4. LEASES
The Company leases certain properties consisting of retail stores, warehouses,
the corporate office and equipment. Store leases typically contain initial terms
and provisions for two to three renewal options of five to ten years each, with
renewal periods from 2002 to 2040 at the then-current market rates. The retail
store, warehouse and corporate office leases generally provide that the Company
assumes the maintenance and all or a portion of the property tax obligations on
the leased property.
34 CPWM
The minimum rental payments required under capital leases (with interest rates
ranging from 8.1% to 12.7%) and noncancelable operating leases with an initial
lease term in excess of one year at February 2, 2002, are as follows:
(In thousands) Capital Leases Operating Leases Total
- ----------------------------------------------------------------------------------------
Fiscal year:
2002 $ 4,038 $ 42,283 $ 46,321
2003 4,038 41,138 45,176
2004 4,038 39,347 43,385
2005 3,999 36,898 40,897
2006 3,989 35,909 39,898
Thereafter through the year 2040 55,966 155,518 211,484
-----------------------------------------
Minimum lease commitments 76,068 $ 351,093 $427,161
======================
Less amount representing interest (41,962)
----------
Present value of capital lease obligations 34,106
Less current portion (890)
----------
Long-term portion $ 33,216
==========
Accumulated depreciation related to capital leases was $12.1 million and
$13.9 million at February 2, 2002 and February 3, 2001, respectively.
Depreciation expense related to capital leases is classified as occupancy cost.
For fiscal years 2001, 2000 and 1999 such depreciation expense was $964,000,
$1.2 million and $1.2 million, respectively. Interest expense related to capital
leases was $1.7 million, $1.8 million and $1.9 million for fiscal years 2001,
2000 and 1999, respectively.
Minimum and contingent rental expense, which is based upon certain factors such
as sales volume and property taxes, under operating and capital leases and
sublease rental income are as follows:
Fiscal Year Ended
-----------------------------------------
February 2, February 3, January 29,
(In thousands) 2002 2001 2000
-----------------------------------------
Operating leases:
Minimum rental expense $ 36,671 $ 28,488 $ 22,732
Contingent rental expense 751 981 937
Less sublease rental income (1,137) (1,070) (1,281)
-----------------------------------------
Total $ 36,285 $ 28,399 $ 22,388
=========================================
Capital leases -- contingent rental expense $ 1,119 $ 1,047 $ 1,072
=========================================
Total minimum rental income to be received from noncancelable sublease
agreements through 2011 is approximately $3.6 million as of February 2, 2002.
CPWM 35
NOTE 5. REVOLVING LINE OF CREDIT
The Company has an unsecured revolving line of credit agreement with a bank. The
agreement allows for cash borrowings and letters of credit up to $25.0 million
from January 1, 2002 through the expiration date of June 1, 2002. Interest is
paid monthly based on the Company's election of the bank's reference rate minus
0.75% (4.00% at February 2, 2002) or IBOR/LIBOR plus 0.9%. The Company is
subject to certain financial covenants customary with such agreements. At
February 2, 2002, the Company had no outstanding borrowings under the line of
credit and $8.2 million outstanding under letters of credit. Interest expense
under borrowing arrangements was $172,000, $167,000 and $132,000 for fiscal
years 2001, 2000 and 1999, respectively.
The Company has received two proposals for an unsecured credit facility to
replace the agreement expiring June 1, 2002. The terms of each of the proposals
provide up to a maximum of $75 million in available credit. The Company
anticipates it will be subject to certain financial covenants customary with
such agreements.
NOTE 6. INCOME TAXES
The provision for income taxes consists of the following:
Fiscal Year Ended
----------------------------------------
February 2, February 3, January 29,
(In thousands) 2002 2001 2000
----------------------------------------
Current:
Federal $ 10,788 $ 13,442 $ 12,408
State 1,894 2,517 2,603
----------------------------------------
Total current 12,682 15,959 15,011
----------------------------------------
Deferred:
Federal 422 (1,788) (2,074)
State (188) (315) (351)
----------------------------------------
Total deferred 234 (2,103) (2,425)
----------------------------------------
Provision for income taxes $ 12,916 $ 13,856 $ 12,586
========================================
The differences between the U.S. federal statutory tax rate and the Company's
effective tax rate are as follows:
Fiscal Year Ended
----------------------------------------
February 2, February 3, January 29,
2002 2001 2000
----------------------------------------
U.S. federal statutory tax rate 35.0% 35.0% 35.0%
State income taxes (net of U.S.
federal income tax benefit) 3.3 4.0 4.4
Non-deductible expenses 0.2 0.3 0.3
Other 0.5 (0.3) (0.7)
----------------------------------------
Effective income tax rate 39.0% 39.0% 39.0%
========================================
36 CPWM
Significant components of the Company's deferred tax assets and liabilities are
as follows:
--------------------------
February 2, February 3,
(In thousands) 2002 2001
--------------------------
Current deferred tax asset (liability):
Deductible reserves and other $ (39) $ 241
Long-term deferred tax asset (liability):
Deferred rent 3,154 2,963
Capital leases 12 (860)
Lease rights (484) (549)
Depreciation 922 1,827
Deferred compensation 546 414
Other 350 659
--------------------------
Total 4,500 4,454
--------------------------
Net deferred tax assets $ 4,461 $ 4,695
==========================
NOTE 7. EQUITY AND STOCK COMPENSATION PLANS
SHAREHOLDER RIGHTS PLAN Each outstanding share of common stock has a Preferred
Share Purchase Right (expiring on June 30, 2008) which is exercisable only upon
the occurrence of certain change in control events.
OPTIONS The Company currently has options outstanding under two employee stock
option plans: the 1994 Stock Option Plan (1994 Plan) and the 1995 Stock Option
Plan (1995 Plan). The 1994 Plan permitted the granting of options to employees
to purchase up to 1,940,976 shares of common stock at prices ranging from 85% to
100% of fair market value as of the date of grant. Options are exercisable over
ten years and became fully vested upon the Company's initial public offering in
April 1996. Upon approval of the 1995 Plan, the 1994 Plan was terminated except
for options then outstanding.
The 1995 Plan permits the granting of options to employees and directors to
purchase, at fair market value as of the date of grant, up to 4,718,006 shares
of common stock, less the aggregate number of shares relating to options granted
and outstanding under the 1994 Plan (821,120 at February 2, 2002). Options are
exercisable over ten years and vest as determined by the Board of Directors,
generally over three or four years. A 350,000 increase in the number of shares
of common stock reserved for issuance was approved by the Board of Directors in
February 2001 and by shareholders in June 2001.
On March 13, 1996, the Board of Directors approved the 1996 Director Stock
Option Plan (Director Option Plan) which was last amended by the shareholders in
June 2000. The Director Option Plan permits the granting of options to
non-employee directors to purchase up to 253,675 shares of common stock at fair
market value as of the date of grant. Options are exercisable over ten years and
vest as determined by the Board of Directors, generally over four years.
CPWM 37
A summary of activity under the previous option Plans is set forth below:
Weighted
Average
Exercise
Shares Price
----------------------
Outstanding at January 30, 1999 (462,690 exercisable
at a weighted average price of $6.89) 1,853,621 $ 9.36
Granted 644,509 22.27
Exercised (576,035) 8.69
Canceled and expired (202,918) 14.96
----------------------
Outstanding at January 29, 2000 (366,508 exercisable
at a weighted average price of $8.02) 1,719,177 13.80
Granted 623,137 19.72
Exercised (467,685) 10.97
Canceled and expired (143,106) 19.51
----------------------
Outstanding at February 3, 2001 (659,880 exercisable
at a weighted average price of $13.89) 1,731,523 16.21
Granted 1,000,532 22.60
Exercised (527,889) 11.43
Canceled and expired (234,063) 20.56
----------------------
Outstanding at February 2, 2002 1,970,103 $ 20.23
======================
The following table summarizes information about the weighted average remaining
contractual life (in years) and the weighted average exercise prices for stock
options both outstanding and exercisable as of February 2, 2002:
Options Outstanding Options Exercisable
- ---------------------------------------------------------------- --------------------------
Number Remaining Number
Exercise Price Range of Shares Life (Yrs.) Exercise Price of Shares Exercise Price
- ---------------------------------------------------------------- --------------------------
$ 2.56--$ 2.64 21,871 3.2 $ 2.60 21,871 $ 2.60
5.03-- 7.00 88,629 4.3 5.79 88,629 5.79
8.00-- 10.72 116,839 5.4 10.16 116,839 10.16
13.11-- 19.19 542,983 7.6 16.09 188,442 15.38
20.00-- 27.17 981,682 9.1 22.71 131,111 23.76
31.13-- 33.81 218,099 7.4 32.44 155,395 32.56
---------------------------------------- --------------------------
1,970,103 8.0 $ 20.23 702,287 $ 18.27
======================================== ==========================
EMPLOYEE STOCK PURCHASE PLAN On March 13, 1996, the Board of Directors approved
the 1996 Employee Stock Purchase Plan (Purchase Plan). A total of 675,000 shares
have been authorized for issuance under the Purchase Plan, of which 565,319
remain available for issue as of February 2, 2002. Employees who work at least
20 hours per week and more than five calendar months per calendar year and have
been so employed for at least one year are eligible to have a specified
percentage (not to exceed 10%) of each salary payment withheld to purchase
common stock at 90% of its fair market value as of the last day of the purchase
period. During fiscal 2001, 2000 and 1999, employees purchased approximately
16,417; 15,768 and 9,332 shares, respectively, of the Company's common stock
under the Purchase Plan at weighted average per-share prices of $21.65, $24.08
and $26.70, respectively.
38 CPWM
ADDITIONAL STOCK PLAN INFORMATION The Company continues to account for its
stock-based awards using the intrinsic value method in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees" and its related
interpretations. Consequently, no compensation expense has been recognized in
the financial statements for employee stock arrangements.
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes a fair
value method of accounting for stock options and other equity instruments. SFAS
No. 123 requires the disclosure of pro forma net income and earnings per share
as if the Company had adopted the fair value method. For determining pro forma
earnings per share, the fair value of the stock options and employees' purchase
rights were estimated using the Black-Scholes option pricing model with the
following assumptions:
Fiscal Year Ended
--------------------------------------
February 2, February 3, January 29,
Stock Options 2002 2001 2000
- ------------------------------------------------------------------------------------------
Expected life after vesting (in years) 1.8 1.8 1.8
Expected volatility 62.5% 65.0% 63.0%
Risk free interest rates 4.4% 6.4% 5.4%
Weighted average fair value per share granted $12.10 $11.22 $12.35
Expected dividends -- -- --
The Company's calculations are based on a multiple option approach and
forfeitures are recognized as they occur. Had compensation cost for these stock
option and stock purchase plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the methods of SFAS No.
123, the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
Fiscal Year Ended
---------------------------------------
February 2, February 3, January 29,
(In thousands, except per share data) 2002 2001 2000
---------------------------------------
Net income:
As reported $ 20,202 $ 21,672 $ 19,685
Pro forma 16,382 17,981 17,724
Basic net income per share:
As reported $ 0.95 $ 1.04 $ 0.97
Pro forma 0.77 0.86 0.87
Diluted net income per share:
As reported $ 0.93 $ 1.00 $ 0.93
Pro forma 0.75 0.83 0.84
CPWM 39
NOTE 8. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan for employees who meet certain service and age
requirements. Participants may contribute up to 25% of their salaries to a
maximum of $11,000 per year or participants age 50 or older may contribute up to
100% of their salaries to a maximum of $12,000 per year. The Company matches 50%
of the employee's contribution, up to a maximum of 4% of base salary. The
Company contributed approximately $442,000 in fiscal 2001, $328,000 in fiscal
2000 and $105,000 in fiscal 1999.
In addition, a non-qualified deferred compensation plan is available to
certain employees whose benefits are limited under Section 401(k) of the
Internal Revenue Service Code. Compensation deferrals approximated $685,000 for
fiscal 2001 and $514,000 for fiscal 2000.
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company estimates that fiscal 2002 capital expenditures will approximate
$26.5 million.* In addition, the Company has arranged for approximately $4.5
million of equipment purchases for a new distribution center to be financed
under a capital lease arrangement.*
The Company is involved in litigation, claims and assessments incidental to
its business, the disposition of which is not expected to have a material effect
on the Company's financial position or results of operations.* It is possible,
however, that future results of operations for any particular quarterly or
annual period could be materially affected by changes in the Company's
assumptions related to these proceedings.* The Company accrues its best estimate
of the probable cost for the resolution of claims. When appropriate, such
estimates are developed in consultation with outside counsel handling these
matters and are based upon a combination of litigation and settlement
strategies. To the extent additional information arises or the Company's
strategies change, it is possible that the Company's best estimate of its
probable liability in these matters may change.*
40 CPWM
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS AND SHAREHOLDERS
COST PLUS, INC.
OAKLAND, CALIFORNIA
We have audited the accompanying consolidated balance sheets of Cost Plus, Inc.
and subsidiaries (the "Company") as of February 2, 2002 and February 3, 2001,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three fiscal years in the period ended February 2,
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements 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 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 financial position of Cost Plus, Inc. and
subsidiaries as of February 2, 2002 and February 3, 2001 and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended February 2, 2002 in conformity with accounting principles generally
accepted in the United States of America.
/s/ Deloitte & Touche LLP
San Francisco, California
March 15, 2002
DIRECTORS, OFFICERS AND CORPORATE DATA
Directors
Murray H. Dashe
Chairman, Chief Executive Officer and President, Cost Plus, Inc.
Joseph H. Coulombe/1/
Independent Management Consultant
Barry J. Feld/2/
President, Chief Executive Officer, PCA International, Inc.
Professional Photography Service Firm
Danny W. Gurr/1/
President, The Quarto Group, Inc.
Illustrated Book Publisher
Kim D. Robbins/2/
Director of Product Development, Jack Nadel, Inc.
Direct Response Marketing Agent
Fredric M. Roberts/2/
President, F. M. Roberts and Company, Inc.
Investment Banking Firm
Thomas D. Willardson/1/
Independent Financial Consultant
/1/ Member of the Audit Committee of the Board of Directors.
/2/ Member of the Compensation Committee of the Board of Directors.
Corporate Data
Corporate Headquarters
Cost Plus, Inc.
200 4th Street
Oakland, CA 94607
www.costplusworldmarket.com
Annual Report (Form 10-K)
A copy of the Company's fiscal 2001 Annual Report on Form 10-K as filed with the
Securities and Exchange Commission is available to shareholders by contacting
the Investor Relations Department at the address above or by calling (510)
893-7300, ext. 3003.
Transfer Agent and Registrar
Bank Boston
c/o EquiServe, LP
Boston, MA
(781) 575-3120
Independent Auditors
Deloitte & Touche LLP
San Francisco, CA
Corporate Counsel
Wilson Sonsini Goodrich & Rosati
Palo Alto, CA
Senior Officers
Murray H. Dashe
Chairman of the Board, Chief Executive Officer and President
Gary D. Weatherford
Executive Vice President, Operations
Michael J. Allen
Senior Vice President, Store Operations
Joan S. Fujii
Senior Vice President, Human Resources
Stephen L. Higgins
Senior Vice President, Merchandising
John J. Luttrell
Senior Vice President and Chief Financial Officer
Judith A. Soares
Senior Vice President, Cost Plus Management Services, Inc.
Officers
Jane L. Baughman
Vice President, Financial Planning, Treasurer and Corporate Secretary
Gail H. Fuller
Vice President, Divisional Merchandise Manager, Trend Director
Lisa J. Griffin
Vice President, Planning and Allocation
Patricia A. Juckett
Vice President, Marketing and Advertising
Cliff A. March
Vice President, Information Services
Clay E. Selland
Vice President, Controller
[PHOTO]
Our new distribution center in Windsor, Virginia.
42 CPWM
Cost Plus World Market Across the Country
One Hundred Fifty-three Stores Nationwide*
Arizona San Mateo Michigan Oregon
Chandler Santa Ana Ann Arbor Clackamas
Mesa Santa Barbara Auburn Hills Eugene
Peoria Santa Cruz Kentwood Gresham
Phoenix (2) Santa Rosa Lansing Portland
Scottsdale (2) Sherman Oaks Portage Tigard
Tucson (2) Stockton Rochester Hills
Temecula Shelby Township Texas
California Thousand Oaks Troy Austin (4)
Bakersfield Torrance Westland Dallas
Brea Valencia Fort Worth
Citrus Heights Vallejo Missouri Grapevine
City of Industry Walnut Creek Brentwood Houston (5)
Colma Woodland Hills Chesterfield Plano (2)
Concord Sunset Hills San Antonio (3)
Escondido Colorado
Fremont Aurora Nebraska Virginia
Fresno Denver (2) Omaha Arlington
Glendale Thornton Fairfax
La Jolla Nevada Falls Church
La Mesa Georgia Las Vegas (2) Kingstowne
Lakewood Atlanta (4) Reno Sterling
Los Angeles (2)
Marin Idaho New Mexico Washington
Mission Viejo Boise Albuquerque Bellevue
Modesto Santa Fe Lynnwood
Mountain View Illinois Seattle
Northridge Aurora North Carolina Spokane
Oakland Chicago (2) Cary Tacoma
Oceanside Evanston Charlotte (3) Tukwila
Ontario Gurnee Durham Woodinville
Oxnard Kildeer Greensboro
Palm Desert Northbrook Winston-Salem Wisconsin
Pasadena Oak Brook Madison
Pleasanton Orland Park Ohio
Roseville Schaumburg Akron *As of April 2, 2002
Sacramento Skokie Avon
San Diego St. Charles Cincinnati (4)
San Dimas Columbus (3)
San Francisco Indiana Mayfield Heights
San Jose (2) Carmel Mentor
San Luis Obispo North Canton
North Olmsted
CPWM 43
1505-AR-2002