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 November 1, 1997 OR _____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT OF 1934 For the transition period from ______ to _______ Commission file number 0-14970 COST PLUS, INC. (Exact name of registrant as specified in its charter) California 94-1067973 (State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.) organization) 201 Clay 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 December 8, 1997 was 8,686,649. COST PLUS, INC. FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 1, 1997 INDEX PAGE PART I. FINANCIAL INFORMATION ITEM 1. Condensed Consolidated Financial Statements Balance Sheets as of November 1, 1997 (unaudited), February 1, 1997 and November 2, 1996 (unaudited) 3 Statements of Operations (unaudited) for the three and nine months ended November 1, 1997 and November 2, 1996 4 Statements of Cash Flows (unaudited) for the nine months ended November 1, 1997 and November 2, 1996 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 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K 10 SIGNATURE PAGE 11 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS COST PLUS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS) NOVEMBER 1, FEBRUARY 1, NOVEMBER 2, 1997 1997 1996 (UNAUDITED) (SEE NOTE 1) (UNAUDITED) ---------------- ---------------- ---------------- ASSETS Current assets: Cash and cash equivalents $ 567 $ 14,398 $ 1,093 Merchandise inventories 72,165 42,605 56,228 Other current assets 5,559 2,413 3,481 --------- --------- --------- Total current assets 78,291 59,416 60,802 --------- --------- --------- Property and equipment, net 52,755 60,205 58,994 Other assets 10,982 8,577 8,490 --------- --------- --------- Total assets $ 142,028 $ 128,198 $ 128,286 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 16,450 $ 14,706 $ 15,329 Income taxes payable - 6,095 - Accrued compensation 6,883 6,607 6,069 Revolving line of credit 3,600 - 14,239 Other current liabilities 7,583 7,201 7,304 --------- --------- --------- Total current liabilities 34,516 34,609 42,941 Capital lease obligations 15,828 14,215 14,320 Deferred income taxes 3,548 3,548 4,455 Other long-term obligations 3,913 2,617 2,439 Shareholders' equity: Preferred stock, $.01 par value: 5,000,000 shares authorized; none issued and outstanding - - - Common stock, $.01 par value: 30,000,000 authorized; issued and outstanding 8,684,051, 8,099,840 and 8,090,993 87 81 81 Additional paid-in capital 103,132 91,166 90,970 Deficit (18,996) (18,038) (26,920) --------- --------- --------- Total shareholders' equity 84,223 73,209 64,131 --------- --------- --------- Total liabilities and shareholders' equity $ 142,028 $ 128,198 $ 128,286 ========= ========= ========= See notes to condensed consolidated financial statements. 3 COST PLUS, INC. STATEMENTS OF CONDENSED CONSOLIDATED OPERATIONS (IN THOUSANDS EXCEPT PER SHARE AMOUNT, UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED ---------------------------- -------------------------------- NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2, 1997 1996 1997 1996 ------------ ------------ ------------ ------------ NET SALES $ 54,687 $ 45,041 $ 150,506 $ 124,154 COST OF SALES AND OCCUPANCY 35,600 29,030 97,964 80,356 -------- -------- --------- --------- GROSS PROFIT 19,087 16,011 52,542 43,798 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 18,946 15,718 50,490 42,284 PREOPENING STORE EXPENSES 1,639 1,145 2,279 1,985 -------- -------- --------- --------- LOSS FROM OPERATIONS (1,489) (852) (227) (471) INTEREST EXPENSE 589 611 1,370 1,995 -------- -------- --------- --------- LOSS BEFORE INCOME TAXES (2,087) (1,463) (1,597) (2,466) BENEFIT FROM INCOME TAXES (835) (600) (639) (1,011) -------- -------- --------- --------- NET LOSS $ (1,252) $ (863) $ (958) $ (1,455) ======== ======== ========= ========= NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE $ (0.14) $ (0.10) $ (0.11) $ (0.18) ======== ======== ========= ========= WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 8,761 8,488 8,573 7,985 ======== ======== ========= ========= SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 COST PLUS, INC. STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS (IN THOUSANDS, UNAUDITED) NINE MONTHS ENDED --------------------------------- NOVEMBER 1, NOVEMBER 2, 1997 1996 ---------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (958) $ (1,455) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 5,791 4,957 Loss on disposal of property and equipment 45 22 Change in assets and liabilities: Merchandise inventories $ (29,560) $ (21,015) Other assets (3,393) (2,073) Accounts payable 2,360 6,264 Income taxes payable (6,095) (3,359) Other liabilities 1,434 1,052 --------- --------- Net cash used in operating activities (30,376) (15,607) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (9,320) (5,636) Net proceeds from the sale of property and equipment 10,611 - --------- --------- Net cash provided by (used in) investing activities 1,291 (5,636) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under revolving line of credit 3,600 11,074 Payment of note payable to related parties - (19,895) Principal payments on capital lease obligations (318) (251) Proceeds from issuance of stock, net of related costs 11,972 29,227 --------- --------- Net cash provided by financing activities 15,254 20,155 --------- --------- Net decrease in cash and cash equivalents (13,831) (1,088) Cash and cash equivalents: Beginning of period 14,398 2,181 --------- --------- End of period $ 567 $ 1,093 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $ 1,367 $ 2,298 Cash paid for income taxes 7,175 3,339 Non-cash financing activities: Property acquired under capital lease 1,994 -- See notes to condensed consolidated financial statements. 5 COST PLUS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE AND NINE MONTHS ENDED NOVEMBER 1, 1997 AND NOVEMBER 2, 1996 (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 November 1, 1997 and November 2, 1996; the interim results of operations for the three and nine months ended November 1, 1997 and November 2, 1996; and changes in cash flows for the nine months then ended. The balance sheet at February 1, 1997, 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 February 1, 1997. 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 condensed consolidated interim financial statements. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including notes thereto, for the year ended February 1, 1997. The results of operations for the three and nine month periods herein presented are not necessarily indicative of the results to be expected for the full year. Impact of New Accounting Standards --In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings per Share ("EPS"). SFAS 128 requires dual presentation of basic EPS and diluted EPS on the face of all income statements issued after December 15, 1997 for all entities with complex capital structures. Basic EPS is computed as net income divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities. The Company is required to adopt SFAS 128 in the fourth quarter of fiscal 1997 and will restate, at that time, EPS data for prior periods to conform with SFAS 128. Earlier application is not permitted. The pro forma effect assuming adoption of SFAS 128 at the beginning of each period is presented below: Three Months Ended Nine Months Ended ------------------ ----------------- November 1, November 2, November 1, November 2, 1997 1996 1997 1996 ----------- ----------- ----------- ----------- Pro forma EPS: Basic and Diluted...............$(0.15) $(0.11) $(0.12) $(0.19) In June 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income, and No. 131 ("SFAS 131"), Disclosures about Segments of an Enterprise and Related Information. SFAS 130 requires that an enterprise report, by major components and as a single total, the change in its net assets during the period from nonowner sources; and SFAS 131 establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas and major customers. Adoptions of these statements will not impact the Company's consolidated financial position, results of operations or cash flows and any effect will be limited to the form and content of its disclosures. Both statements are effective for fiscal years beginning after December 15, 1997, with earlier application permitted. 6 2. REVOLVING LINE OF CREDIT AGREEMENT On May 7, 1996 the Company entered into a revolving line of credit agreement with Bank of America which was amended on May 15, 1997 and expires June 1, 1999. The amended agreement allows for cash borrowings and letters of credit of up to $20.0 million from January 1 through June 30 and up to $35.0 million from July 1 through December 31 of each year. Interest is paid monthly at the bank's reference rate (8.50% at November 1, 1997) or LIBOR plus 1.75%, depending on the nature of the borrowings. The agreement is secured by the Company's inventory and receivables. The Company is subject to certain financial covenants including minimum tangible net worth and earnings coverage ratio. At November 1, 1997, the Company had $3.6 million of outstanding borrowings under the line of credit and $1.4 million outstanding under letters of credit. 3. SECONDARY PUBLIC OFFERING OF COMMON STOCK On October 3, 1997, a secondary offering of 2,850,000 shares of the Company's common stock was completed. Of the 2,850,000 shares of Common Stock sold, 400,000 shares were sold by the Company and 2,450,000 shares were sold by certain shareholders. The Company did not receive any proceeds from the sale of shares by these shareholders. All shares were sold at a price of $28.25 per share, the last reported sale price on October 2, 1997, yielding net proceeds to the Company of approximately $10.4 million after deducting underwriting discounts and commissions and offering expenses. As described in the Company's prospectus dated October 3, 1997, the proceeds were used primarily for repayment of borrowings, working capital and other general corporate purposes. On November 3, 1997, certain of the selling shareholders sold an additional 138,722 shares as a result of the exercise by the underwriters of an over allotment option. 4. SALE AND LEASEBACK During September 1997, the Company completed the sale of its San Francisco property and the leaseback of its store facility. Proceeds from the sale approximated $10.6 million, after deducting commissions and fees, and were used to pay down the outstanding borrowings on the Company's revolving line of credit. The store facility was leased back for a period of 16 years with three option periods of five years each. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THE THREE MONTHS (THIRD QUARTER) AND NINE MONTHS (YEAR-TO-DATE) ENDED NOVEMBER 1, 1997 AS COMPARED TO THE THREE MONTHS (THIRD QUARTER) AND NINE MONTHS (YEAR- TO-DATE) ENDED NOVEMBER 2, 1996. NET SALES. Net sales increased $9.7 million, or 21.6%, to $54.7 million in the third quarter of fiscal 1997 from $45.0 million in the third quarter of fiscal 1996. Year-to-date, net sales were $150.5 million compared to $124.2 million for the same period of fiscal 1996, an increase of $26.3 million or 21.2%. Comparable store sales rose 6.2% in the third quarter and 6.9% on a year-to-date basis, primarily as a result of a larger average transaction size. New stores also contributed to the increase in net sales for both the third quarter and year-to-date. As of November 1, 1997, the Company operated 68 stores compared to 57 stores as of November 2, 1996. GROSS PROFIT. As a percentage of net sales, gross profit was 34.9% in the third quarter of fiscal 1997 compared to 35.5% in the third quarter of fiscal 1996. Year-to-date, gross profit, as a percentage of net sales, was 34.9% this year compared to 35.3% last year. The decline in gross profit for the third quarter and nine months ended November 1, 1997, was due to higher occupancy costs in the new stores partially offset by an improvement in the merchandise margin percentage. New stores generally have higher occupancy costs, as a percentage of net sales, until they reach maturity. Lower markdowns and shrinkage contributed to the third quarter improvement in merchandise margin. Year-to- date, the merchandise margin improvement resulted from lower shrinkage and a sales mix more heavily weighted towards home furnishings and home decorating products, which generally have higher merchandise margins than the Company average. SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES. As a percentage of net sales, SG&A expenses were 34.6% in the third quarter of fiscal 1997 compared to 34.9% in the same period of last year. This improvement resulted from leveraging store payroll and advertising expenses. Year-to-date, SG&A expenses decreased to 33.5% in the current fiscal year from 34.1% last year. The year- to-date decrease in SG&A, as a percentage of net sales, resulted from leveraging store payroll and other SG&A expenses partially offset by slightly higher advertising costs. PREOPENING STORE EXPENSES. Preopening store expenses, which include grand opening advertising and preopening merchandising expenses were higher in the third quarter and nine months ended November 1, 1997 compared to the third quarter and nine months ended November 2, 1996 as a result of the timing and number of store openings. Year-to-date, the average preopening costs per store declined to approximately $230,000 from $300,000 the prior year. This decrease in average preopening costs per store was primarily attributable to lower grand opening advertising expenses. Expenses are generally incurred in both the month prior to and the month of the store opening and vary in amount depending on the location of a store and whether it is located in a new or existing market. INTEREST EXPENSE. Interest expense, which includes capital lease interest, interest expense and interest income, was $0.6 million in the third quarter of both fiscal 1997 and fiscal 1996. In September 1997, the Company completed the sale of its San Francisco property and the leaseback of its store facility. Proceeds from the sale approximated $10.6 million, after deducting commissions and fees, and were used to pay down the outstanding borrowings on the Company's revolving line of credit. The proceeds from the Company's October public offering of common stock were used for the repayment of outstanding borrowings, working capital and other general corporate purposes. Last year, interest expense included capital lease interest and interest expense on debt which was repaid in April 1996 with the proceeds from the Company's initial public offering of its common stock. PROVISION FOR INCOME TAXES. The Company's effective tax rate was 40.0% in fiscal 1997 compared to 41.0% in fiscal 1996. FACTORS THAT MAY AFFECT FUTURE RESULTS The Company's business is highly seasonal, reflecting the general pattern associated with much of 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 8 Company's net sales and most of its net income for the entire fiscal year/1/. Any factors negatively affecting the Company during the Christmas selling season in any year, including unfavorable economic conditions, could have a material adverse affect on the Company's financial condition and results of operations. 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 margin due to the need to mark down excess inventory. The Company's quarterly results of operations may fluctuate based upon such factors as the number and timing of store openings and related preopening store 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, weather conditions, competitive factors and general economic conditions. The Company has identified certain forward-looking statements in the Management's Discussion and Analysis of Financial Condition and Results of Operations by a footnote #1. The Company may also make oral forward-looking statements from time to time. Actual results may differ materially from those projected in any such forward-looking statements due to a number of factors including those set forth above. LIQUIDITY AND CAPITAL RESOURCES The Company's primary uses for cash, other than to fund operating expenses, are to support inventory requirements and for store expansion. Historically, the Company has financed its operations primarily with borrowings under the Company's credit facilities and internally generated funds. The Company believes that the available borrowings under its revolving line of credit and internally generated funds will be sufficient to finance its working capital and capital requirements for the next 12 months/1/. Net cash used in operating activities for the nine months ended November 1, 1997 totaled $30.4 million, an increase of $14.8 million over the comparable period of the prior fiscal year. This increase resulted from higher income tax payments and the timing of payments for merchandise inventory. In the current fiscal year, net cash provided by investing activities consisted of $10.6 million from the sale of the San Francisco property, partially offset by $9.3 million of property and equipment purchases, primarily for new stores. Last year, net cash used in investing activities, primarily for new stores, totaled $5.6 million. The Company estimates that capital expenditures will approximate $11.0 million in fiscal 1997/1/. Net cash provided by financing activities was $15.3 million in the nine months ended November 1, 1997 and included $3.6 million of net borrowings under the Company's revolving line of credit agreement and $12.0 million from the issuance of stock in connection with the October 1997 offering of the Company's common stock and the Company's stock option and stock purchase plans. Proceeds from the October 1997 offering were used to repay outstanding borrowings, working capital and other general corporate purposes. Cash provided by financing activities in fiscal 1996 included approximately $29.1 million received in April 1996 as a result of the Company's initial public offering. These proceeds were used to retire a $19.9 million long-term note payable and pay down the $3.2 million balance then outstanding on the Company's revolving credit line. Remaining unused proceeds were used for working capital and general corporate purposes. On May 7, 1996 the Company entered into a revolving line of credit agreement with Bank of America which was amended on May 15, 1997 and expires June 1, 1999. The amended agreement allows for cash borrowings and letters of credit of up to $20.0 million from January 1 through June 30 and up to $35.0 million from July 1 through December 31 of each year. Interest is paid monthly at the bank's reference rate (8.50% at November 1, 1997) or LIBOR plus 1.75%, depending on the nature of the borrowings. The agreement is secured by the Company's inventory and receivables. The Company is subject to certain financial covenants including minimum tangible net worth and earnings coverage ratio. At November 1, 1997, the Company had $3.6 million of outstanding borrowings under the line of credit and $1.4 million outstanding under letters of credit. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings per Share ("EPS"). SFAS 128 requires dual presentation of basic EPS and diluted EPS on the face of all income statements issued after December 15, 1997 for all entities with complex capital structures. Basic EPS is computed as net income - ------------------------------------ /1/Forward-looking statement. 9 divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities. The Company is required to adopt SFAS 128 in the fourth quarter of fiscal 1997 and will restate, at that time, EPS data for prior periods to conform with SFAS 128. Earlier application is not permitted. In June 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income, and No. 131 ("SFAS 131"), Disclosures about Segments of an Enterprise and Related Information. SFAS 130 requires that an enterprise report, by major components and as a single total, the change in its net assets during the period from nonowner sources; and SFAS 131 establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas and major customers. Adoptions of these statements will not impact the Company's consolidated financial position, results of operations or cash flows and any effect will be limited to the form and content of its disclosures. Both statements are effective for fiscal years beginning after December 15, 1997, with earlier application permitted. ITEM 6. EXHIBITS AND REPORTS OF FORM 8K (a) Exhibits 11 Statement re: Computation of Net Loss Per Share. 10.1 Employment SeveranceAgreement, dated September 16, 1997, between the Company and Patricia T. Saucy - incorporated by reference to Exhibit 99.1 to the Company's current report on Form 8-K dated September 16, 1997. 27 Financial Data Schedule (submitted for SEC use only). (b) Reports on Form 8-K On October 2, 1997, the Company filed a current report on Form 8-K dated September 16, 1997, reporting the execution of an Employment Severance Agreement dated September 16, 1997 between the Company and Patricia T. Saucy. 10 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/ Patricia T. Saucy -------------------------------- Date: December 16, 1997 By: Patricia T. Saucy Vice President, Finance 11