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 April 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 (I.R.S. Employer incorporation or organization) Identification No.) 200 Fourth 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, with $0.01 par value, outstanding on June 2, 2000 was 20,701,476. COST PLUS, INC. FORM 10-Q For the Quarter Ended April 29, 2000 INDEX PART I. FINANCIAL INFORMATION Page ITEM 1. Condensed Consolidated Financial Statements Balance Sheets (unaudited) as of April 29, 2000, January 29, 2000 and May 1, 1999 3 Statements of Operations (unaudited) for the three months ended April 29, 2000 and May 1, 1999 4 Statements of Cash Flows (unaudited) for the three months ended April 29, 2000 and May 1, 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 Market Risk 10 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K 11 SIGNATURE PAGE 12 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) April 29, January 29, May 1, 2000 2000 1999 ----------- ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 26,126 $ 38,411 $ 23,239 Merchandise inventories 87,332 91,402 66,339 Other current assets 7,765 5,654 4,722 ----------- ----------- ----------- Total current assets 121,223 135,467 94,300 Property and equipment, net 67,666 67,520 60,484 Other assets, net 12,448 11,712 9,725 ----------- ----------- ----------- Total assets $ 201,337 $ 214,699 $ 164,509 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 17,026 $ 26,061 $ 13,283 Income taxes payable 0 9,237 217 Accrued compensation 8,447 8,909 7,540 Other current liabilities 11,398 10,597 9,962 ----------- ----------- ----------- Total current liabilities 36,871 54,804 31,002 Capital lease obligations 14,301 14,416 14,944 Other long-term obligations 7,659 7,144 6,201 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 20,687,778, 20,521,884 and 20,232,711 207 205 202 Additional paid-in capital 116,276 113,240 106,248 Retained earnings 26,023 24,890 5,912 ----------- ----------- ----------- Total shareholders' equity 142,506 138,335 112,362 ----------- ----------- ----------- Total liabilities and shareholders' equity $ 201,337 $ 214,699 $ 164,509 =========== =========== =========== 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 ---------------------- April 29, May 1, 2000 1999 --------- --------- Net sales $ 92,238 $ 75,389 Cost of sales and occupancy 60,447 49,525 --------- --------- Gross profit 31,791 25,864 Selling, general and administrative expenses 28,657 23,543 Store preopening expenses 1,244 994 --------- --------- Income from operations 1,890 1,327 Net interest expense 32 167 --------- --------- Income before income taxes 1,858 1,160 Income taxes 725 453 --------- --------- Net income $ 1,133 $ 707 ========= ========== Net income per share Basic $ 0.06 $ 0.04 Diluted $ 0.05 $ 0.03 Weighted average shares outstanding Basic 20,558 20,057 Diluted 21,325 20,814 See Notes To Condensed Consolidated Financial Statements. 4 COST PLUS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, unaudited) Three Months Ended ---------------------- April 29, May 1, 2000 1999 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,133 $ 707 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 3,049 2,655 Change in assets and liabilities: Merchandise inventories 4,070 4,341 Other assets (3,022) 162 Accounts payable (6,742) (3,808) Income taxes payable (7,897) (7,963) Other liabilities 904 790 --------- --------- Net cash used in operating activities (8,505) (3,116) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (5,313) (4,364) --------- --------- Net cash used in investing activities (5,313) (4,364) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on capital lease obligations (165) (133) Proceeds from the issuance of common stock 1,698 2,252 --------- --------- Net cash provided by financing activities 1,533 2,119 --------- --------- Net decrease in cash and cash equivalents (12,285) (5,361) Cash and cash equivalents: Beginning of period 38,411 28,600 --------- --------- End of period $ 26,126 $ 23,239 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $ 31 $ 172 ========= ========= Cash paid for taxes $ 9,502 $ 8,415 ========= ========= See notes to condensed consolidated financial statements. 5 COST PLUS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Three Months Ended April 29, 2000 and May 1, 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 April 29, 2000 and May 1, 1999; the interim results of operations for the three months ended April 29, 2000 and May 1, 1999; and changes in cash flows for the three 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 month periods herein presented are not necessarily indicative of the results to be expected for the full year. 2. REVOLVING LINE OF CREDIT AGREEMENT On October 12, 1998, the Company entered into a revolving line of credit agreement with a bank, which was amended on June 15, 1999 and which was replaced by a new agreement effective May 19, 2000. The October 12, 1998 agreement allowed for cash borrowings and letters of credit up to $20.0 million from January 1 through June 30 and up to $40.0 million from July 1 through December 31 of each year. Interest was paid monthly at the bank's reference rate minus 0.5% (8.5% at April 29, 2000) or IBOR plus 1.125%, depending on the nature of the borrowings. The agreement was secured by the Company's inventory and receivables. The Company was subject to certain financial covenants customary with such agreements. At April 29, 2000, the Company had no outstanding borrowings under the line of credit and $1.8 million outstanding under letters of credit. 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 replaces 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% or IBOR/LIBOR plus 0.9%. The Company is subject to certain financial covenants customary with such agreements. 3. 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 consolidated financial statements and notes have been restated to reflect these stock splits. 6 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 ---------------------------- April 29, 2000 May 1, 1999 -------------- ----------- Basic shares 20,558 20,057 Effect of diluted stock options 767 757 -------------- ----------- Diluted shares 21,325 20,814 ============== =========== 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 8 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 (first quarter) ended April 29, 2000 as compared to the three months (first quarter) ended May 1, 1999. Net Sales. Net sales increased $16.8 million, or 22.3%, to $92.2 million in the first quarter of fiscal 2000 from $75.4 million in the first quarter of fiscal 1999. This increase in net sales was attributable to new stores and an increase in comparable store sales. Comparable store sales rose 6.4% in the first quarter of fiscal 2000, primarily as a result of a larger average transaction size. At April 29, 2000, the Company operated 109 stores as compared to 90 stores at May 1, 1999. Gross Profit. As a percentage of net sales, first quarter gross profit was 34.5% in fiscal 2000 compared with 34.3% in fiscal 1999. The increase in gross profit resulted from an improvement in merchandise margin percentage, partially offset by higher occupancy costs in new stores. New stores generally have higher occupancy costs, as a percentage of net sales, until they reach maturity. The merchandise margin improvement resulted primarily from an increase in initial markon. Selling, General and Administrative ("SG&A") Expenses. As a percentage of net sales, SG&A expenses decreased to 31.1% in the first quarter of fiscal 2000 from 31.2% in the first quarter of the prior fiscal year. The decrease in the SG&A expense rate resulted primarily from leveraging store payroll and other store 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 $1.2 million in the first quarter of fiscal 2000 and $1.0 million in the first quarter of the prior year. Expenses vary depending on the particular store site and whether it is located in a new or existing market. The Company opened six stores in the first quarter of fiscal 2000 compared to five stores in the prior year's first quarter. Net Interest Expense. Net interest expense for the first quarter, which includes interest on capital leases and interest expense net of interest income, was $32,000 for fiscal 2000 and $167,000 for fiscal 1999. This decrease resulted primarily from higher cash balances and higher rates on investments. Income Taxes. The Company's effective tax rate was 39% in the first quarter of both fiscal 2000 and fiscal 1999. 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 8 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 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 promotional activity, store closings, refurbishments or relocations, competitive factors and general economic conditions. Liquidity and Capital Resources The Company's primary uses of 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 its 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 expenditure requirements for at least the next 12 months. * Net cash used in operating activities in the first quarter ended April 29, 2000, totaled $8.5 million, an increase of $5.4 million from the prior year. This increase resulted primarily from the timing of payments for merchandise inventory and the collection of construction allowances on new stores opened in the first quarter. Net cash used in investing activities, primarily for new stores, totaled $5.3 million in the first quarter of 2000 compared to $4.4 million in the prior year. This increase is due to spending for six stores which opened in the first quarter of fiscal 2000 compared to five stores which opened in the first quarter last year. The Company estimates that fiscal 2000 capital expenditures will approximate $25.5 million.* Net cash provided by financing activities was $1.5 million in the first quarter of fiscal 2000 and $2.1 million in the first quarter of fiscal 1999, which was primarily proceeds from the issuance of common stock in connection with the Company's stock option and stock purchase plans. On October 12, 1998, the Company entered into a revolving line of credit agreement with a bank, which was amended on June 15, 1999 and which was replaced by a new agreement effective May 19, 2000. The October 12, 1998 agreement allowed for cash borrowings and letters of credit up to $20.0 million from January 1 through June 30 and up to $40.0 million from July 1 through December 31 of each year. Interest was paid monthly at the bank's reference rate minus 0.5% (8.5% at April 29, 2000) or IBOR plus 1.125%, depending on the nature of the borrowings. The agreement was secured by the Company's inventory and receivables. The Company was subject to certain financial covenants customary with such agreements. At April 29, 2000, the Company had no outstanding borrowings under the line of credit and $1.8 million outstanding under letters of credit. 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 replaces 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% or IBOR/LIBOR plus 0.9%. The Company is subject to certain financial covenants customary with such agreements. 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 and is not to be applied retroactively to financial statements for prior periods. Since the Company does not engage in derivative or hedging activities, application of the standard would not have a material effect on the Company's 9 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 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Business Loan Agreement, dated May 19, 2000, between the Company and Bank of America, N.A. 27 Financial Data Schedule (submitted for SEC use only). (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the period covered by this report. 11 SIGNATURES 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: June 13, 2000 By: John F. Hoffner Executive Vice President, Administration Chief Financial Officer 12