EXHIBIT 13
1997 ANNUAL REPORT EXCERPTS
Five Year Summary of Selected Financial Data
Pro Forma
Fiscal Year Twelve Month Eleven Month Fiscal Year
--------------------- Period Ended Period Ended ---------------------
(in thousands, except per share February 3, February 3,
and selected operating data) 1997 1996 1996/1/ 1996/1/ 1994 1993
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Statement of Operations Data:
Net sales $ 260,494 $ 214,814 $ 182,845 $ 171,548 $ 151,196 $ 133,864
Cost of sales and occupancy 164,394 135,072 115,516 107,800 95,608 85,338
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Gross profit 96,100 79,742 67,329 63,748 55,588 48,526
Selling, general and
administrative expenses 75,238 62,649 54,110 50,194 46,561 41,371
Preopening store expenses 2,744 2,053 1,620 1,620 1,137 614
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Income from operations 18,118 15,040 11,599 11,934 7,890 6,541
Interest expense 1,679 2,451 5,131 4,843 4,862 4,851
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Income before income taxes 16,439 12,589 6,468 7,091 3,028 1,690
Provision for income taxes 6,432 5,162 2,652 2,909 1,211 725
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Net income $ 10,007 $ 7,427 $ 3,816 $ 4,182 $ 1,817 $ 965
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Net income per share
Basic $ 1.20 $ 0.96 $ 0.65 $ 0.72 -- --
Diluted $ 1.15 $ 0.92 $ 0.62 $ 0.68 -- --
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Selected Operating Data:
Percent of sales:
Gross profit 36.9% 37.1% 36.8% 37.2% 36.8% 36.2%
Selling, general and
administrative expenses 28.9% 29.2% 29.6% 29.3% 30.8% 30.9%
Income from operations 7.0% 7.0% 6.3% 6.9% 5.2% 4.9%
Number of stores:
Opened during period 12 9 6 6 5 3
Closed during period -- -- -- -- 3 --
Open at end of period 70 58 49 49 43 41
Average sales per selling square foot/2/ $ 259 $ 252 $ 238 $ 228 $ 224 $ 213
Comparable store sales increase/3/ 7.0% 6.1% 6.1% 6.6% 7.7% 6.7%
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Balance Sheet Data (at period end):
Working capital $ 52,630 $ 24,807 $ 11,102 $ 11,102 $ 8,918 $ 8,180
Total assets 152,000 128,198 105,986 105,986 99,245 91,860
Note payable and capital lease obligations,
less current portion 15,692 14,215 34,528 34,528 34,839 35,070
Total shareholders' equity 95,609 73,209 36,359 36,359 32,542 30,723
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1 Effective in fiscal 1995, the Company changed its fiscal year end from the
Saturday closest to the end of February to the Saturday closest to the end
of January. The Company's 1995 fiscal year was approximately 11 months (49
weeks) and ended on February 3, 1996. For comparison purposes, the 1995
results have been restated on a twelve month (54 week) pro forma basis. 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.
3 A store is included in comparable comparisons at the beginning of the
store's fourteenth full month of operation.
Cost Plus, Inc. 13
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Effective for the fiscal year ended February 3, 1996, the Company changed its
fiscal year end from the Saturday closest to the end of February to the Saturday
closest to the end of January. The Company's 1995 fiscal year was approximately
11 months (49 weeks) and ended on February 3, 1996. The fiscal years ended
January 31, 1998 (fiscal 1997) and February 1, 1997 (fiscal 1996) each consist
of 12 months (52 weeks). For purposes of the following discussion, the period
ended February 3, 1996 has been restated on a 12 month (54 week) pro forma
basis.
Results of Operations
Fiscal 1997 Compared to Fiscal 1996
Net Sales
Net sales increased $45.7 million, or 21.3%, to $260.5 million in fiscal 1997
from $214.8 million in fiscal 1996. This increase in net sales was attributable
to new stores and an increase in comparable store sales. At January 31, 1998,
the Company operated 70 stores as compared to 58 stores at February 1, 1997.
These additional 12 new stores contributed $20.9 million of the sales increase.
Comparable store sales increased 7.0% in fiscal 1997 primarily as a result of a
larger average transaction size.
Gross Profit
As a percentage of net sales, gross profit was 36.9% in fiscal 1997 compared to
37.1% in fiscal 1996. The decline in gross profit resulted from higher occupancy
costs in new stores partially offset by an improvement in the gross margin
percentage. New stores generally have higher occupancy costs, as a percentage of
net sales, until they reach maturity. The gross margin improvement resulted
primarily from a sales mix more heavily weighted towards higher margin goods and
lower markdowns.
Selling, General and Administrative ("SG&A") Expenses
As a percentage of net sales, SG&A expenses declined to 28.9% in fiscal 1997
compared to 29.2% in fiscal 1996. Lower store and corporate payroll expenses
were partially offset by higher advertising expenses.
Preopening Store Expenses
Preopening store expenses, which include grand opening advertising and
preopening merchandising expenses, were $2.7 million for fiscal 1997 and $2.1
million for fiscal 1996. The increase in preopening expenses was the result of
opening 12 stores in fiscal 1997 versus opening nine stores in fiscal 1996.
Preopening costs per store in fiscal 1997 were consistent with fiscal 1996.
Interest Expense
Interest expense, which includes capital lease interest, interest expense and
interest income, was $1.7 million for fiscal 1997 and $2.5 million for 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 1997 secondary public offering
of common stock were used for the repayment of outstanding borrowings, working
capital and other general corporate purposes. In fiscal 1996, 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 reduced for fiscal 1997 to 39.1% from 41.0%
in fiscal 1996 as a result of expanding into states with lower tax rates.
Additionally, the fiscal 1996 effective tax rate was higher due to an increase
in the federal income tax rate resulting from the Company's increased
profitability.
14 Cost Plus, Inc.
Fiscal 1996 Compared to the Pro Forma Twelve Month Period Ended February 3, 1996
Net Sales
Net sales increased $32.0 million , or 17.5%, to $214.8 million in fiscal 1996
from $182.8 million in the twelve month period ended February 3, 1996. This
increase in net sales was attributable to new stores and an increase in
comparable store sales, and was slightly offset by two less weeks of sales in
fiscal 1996 than in the pro forma twelve month period ended February 3, 1996. At
February 1, 1997, the Company operated 58 stores as compared to 49 stores at
February 3, 1996. These additional nine new stores contributed $17.6 million of
the sales increase. Comparable store sales, calculated on a comparable, day-to-
day basis, increased 6.1% in fiscal 1996 primarily from a larger average
transaction size.
Gross Profit
As a percentage of net sales, gross profit increased to 37.1% in fiscal 1996
from 36.8% in the twelve month period ended February 3, 1996. This improvement
resulted from lower inventory shrink and freight costs, 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.
Selling, General and Administrative ("SG&A") Expenses
As a percentage of net sales, SG&A expenses declined to 29.2% in fiscal 1996
compared to 29.6% in the twelve month period ended February 3, 1996. As a
percentage of net sales, lower store and corporate payroll expenses were
partially offset by higher advertising expenses.
Preopening Store Expenses
Preopening store expenses, which include grand opening advertising and
preopening merchandising expenses, were $2.1 million for fiscal 1996 and $1.6
million for the twelve month period ended February 3, 1996. The increase in
preopening expenses was the result of opening nine stores in fiscal 1996 versus
opening six stores in fiscal 1995. On average, preopening expenses decreased to
$228,000 per store in fiscal 1996 from $270,000 per store in fiscal 1995.
Interest Expense
Interest expense in fiscal 1996 declined compared to the twelve month period
ended February 3, 1996 as a result of the repayment of borrowings 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 for fiscal 1996 and the twelve months ended
February 3, 1996 was 41.0%. A decrease in the fiscal 1996 effective tax rate,
due to the Company's expansion into states with lower tax rates, was offset by
an increase in the federal income tax rate resulting from the Company's
increased profitability.
While the Company believes the comparisons to pro forma fiscal 1995 provided
above are more meaningful, the discussion below is provided as additional
information.
Fiscal 1996 Compared to the Eleven Month Period Ended February 3, 1996
Fiscal 1996, the twelve month period ended February 1, 1997, was a fifty-two
week period. The eleven month period ended February 3, 1996 was a forty-nine
week period.
Net sales increased $43.3 million in fiscal 1996 due to: (i) the difference in
the number of weeks included in the fiscal years; (ii) the opening of nine
stores subsequent to February 3, 1996; and (iii) an increase in comparable store
sales, which resulted primarily from a larger average transaction size, and an
increase in non-comparable store sales. These additional sales contributed to an
additional $16.0 million in gross profit. SG&A expenses decreased 0.1%, as a
percentage of net sales, primarily as a result of lower store and corporate
payroll expenses as a percentage of net sales. Preopening store expenses
increased $433,000 in fiscal 1996 as a result of opening nine stores compared to
six stores in the prior period, partially offset by a decrease in the average
preopening costs per store. Interest expense declined $2.4 million in fiscal
1996 as a result of the repayment of borrowings in April 1996 with the proceeds
from the Company's initial public offering of its common stock. The Company's
effective tax rate was 41.0% in both periods. Net income increased to $7.4
million in fiscal 1996 from $4.2 million in the prior period.
Cost Plus, Inc. 15
Management's Discussion and Analysis
of Financial Condition and Results of Operations(continued)
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 its eight most recent quarterly periods.
Three Months Ended
----------------------------------------------------------------
May 3, Aug. 2, Nov. 1, Jan. 31,
(In thousands, except per share data and number of stores) 1997 1997 1997 1998
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Net sales $ 48,532 $ 47,287 $ 54,687 $ 109,988
Gross profit 16,726 16,729 19,087 43,558
Net income (loss) 107 187 (1,252) 10,965
Net income (loss) per share
Basic $ 0.01 $ 0.02 $ (0.15) $ 1.26
Diluted/1/ $ 0.01 $ 0.02 $ (0.15) $ 1.20
Number of stores open at end of period 60 60 68 70
Three Months Ended
----------------------------------------------------------------
May 4, Aug. 3, Nov. 2, Feb. 1,
(In thousands, except per share data and number of stores) 1996 1996 1996 1997
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Net sales $ 39,127 $ 39,986 $ 45,041 $ 90,660
Gross profit 13,575 14,212 16,011 35,944
Net income (loss) (395) (197) (863) 8,882
Net income (loss) per share
Basic $ (0.06) $ (0.02) $ (0.11) $ 1.10
Diluted/1/ $ (0.06) $ (0.02) $ (0.11) $ 1.05
Number of stores open at end of period 50 52 57 58
1 Loss quarters exclude common stock equivalents since they are antidilutive.
The Company's business is highly seasonal, reflecting the general pattern
associated with the retail industry of peak sales and earnings during the
Christmas season. Due to the importance of the Christmas selling season, the
fourth quarter of each fiscal year has historically contributed, and the Company
expects it will continue to contribute, a disproportionate percentage of the
Company's net sales and most of its net income for the entire fiscal year. Any
factors negatively affecting the Company during the Christmas selling season in
any year, including unfavorable economic conditions, could have a material
adverse effect on the Company's financial condition and results of operations.
The Company generally experiences lower sales and earnings during the first
three quarters and, as is typical in the retail industry, has incurred and may
continue to incur losses in these quarters. The results of operations for these
interim periods are not necessarily indicative of the results for the 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 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 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, competitive factors and general economic
conditions.
This Annual Report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. The Company may
also make oral forward-looking statements from time to time. Actual results may
differ materially from those projected in such forward-looking statements due to
a number of factors including those set forth above.
16 Cost Plus, Inc.
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
expenditure requirements for the next 12 months.
Net cash provided by operating activities in fiscal 1997 totaled $2.5 million, a
decrease of $11.7 million over fiscal year 1996. This decrease resulted from
increased inventory levels as a result of opening 12 new stores and purchasing
inventory for Easter and the spring season. Additionally, fiscal 1996 inventory
levels were depleted from the exceptional Christmas 1996 sell-through.
Net cash used in investing activities totaled $0.9 million in fiscal 1997. It
consisted of $11.5 million of property and equipment purchases, primarily for
new stores, offset by $10.6 million from the sale of the San Francisco property.
Last year, net cash used in investing activities, primarily for new stores,
totaled $8.0 million. The Company estimates that fiscal 1998 capital
expenditures will approximate $13.7 million.
Net cash provided by financing activities was $11.4 million in fiscal 1997 and
included $11.8 million from the issuance of stock in connection with the October
1997 secondary public 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 January 31, 1998) 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 January 31, 1998, the
Company had no outstanding borrowings under the line of credit and $2.7 million
outstanding under letters of credit.
Impact of Recent Accounting Pronouncement
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.
Cost Plus, Inc. 17
Stock Activity
The Company's common stock is currently traded in the over-the-counter market
and is quoted on the Nasdaq National Market under the symbol "CPWM", where it
has traded since the Company's initial public offering on April 4, 1996. The
following table sets forth the high and low closing sales prices, for the
periods indicated, as reported by the Nasdaq National Market.
On April 9, 1998, the last sale price of the common stock as reported on the
Nasdaq National Market was $33.375 per share and the Company had 35 shareholders
of record as of that date. This number excludes individual shareholders holding
stock in nominee or street name by brokers. The Company's present policy is to
retain its earnings to finance growth and it does not intend to pay cash
dividends.
Price Range
-------------------------
High Low
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Fiscal Year Ended January 31, 1998
First Quarter $ 18.50 $ 15.00
Second Quarter 26.25 16.50
Third Quarter 29.50 23.00
Fourth Quarter 35.25 22.50
Fiscal Year Ended February 1, 1997
First Quarter (from April 4, 1996) 24.38 18.25
Second Quarter 30.50 19.88
Third Quarter 27.75 16.25
Fourth Quarter 21.50 16.00
18 Cost Plus, Inc.
Consolidated Balance Sheets
January 31, February 1,
(In thousands except per share amounts) 1998 1997
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Assets
Current assets:
Cash and cash equivalents $ 27,434 $ 14,398
Merchandise inventories 56,606 42,605
Other current assets 3,137 2,413
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Total current assets 87,177 59,416
Property and equipment, net 53,539 60,205
Other assets 11,284 8,577
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Total assets $ 152,000 $ 128,198
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Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 13,707 $ 14,706
Income taxes payable 6,282 6,095
Accrued compensation 7,132 6,607
Other current liabilities 7,426 7,201
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Total current liabilities 34,547 34,609
Capital lease obligations 15,692 14,215
Deferred income taxes 1,969 3,548
Other long-term obligations 4,183 2,617
Shareholders' equity:
Preferred stock, $.01 par value: 5,000,000 shares authorized;
none issued and outstanding -- --
Common stock, $.01 par value: 30,000,000 shares authorized;
issued and outstanding 8,688,488 and 8,099,840 shares 87 81
Additional paid-in capital 103,553 91,166
Deficit (8,031) (18,038)
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Total shareholders' equity 95,609 73,209
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Total liabilities and shareholders' equity $ 152,000 $ 128,198
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See notes to consolidated financial statements.
Cost Plus, Inc. 19
Statements of Consolidated Operations
Fiscal Year Fiscal Year Eleven Month
Ended Ended Period Ended
January 31, February 1, February 3,
(In thousands except per share amounts) 1998 1997 1996
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Net sales $ 260,494 $ 214,814 $ 171,548
Cost of sales and occupancy 164,394 135,072 107,800
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Gross profit 96,100 79,742 63,748
Selling, general and administrative expenses 75,238 62,649 50,194
Preopening store expenses 2,744 2,053 1,620
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Income from operations 18,118 15,040 11,934
Interest expense 1,679 2,451 4,843
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Income before income taxes 16,439 12,589 7,091
Provision for income taxes 6,432 5,162 2,909
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Net income $ 10,007 $ 7,427 $ 4,182
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Net income per share
Basic $ 1.20 $ 0.96 $ 0.72
Diluted $ 1.15 $ 0.92 $ 0.68
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Weighted average shares outstanding
Basic 8,326 7,721 5,849
Diluted 8,699 8,105 6,153
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See notes to consolidated financial statements.
20 Cost Plus, Inc.
Statement of Consolidated Shareholders' Equity
Preferred Stock Common Stock Additional Total
------------------------ ----------------------- Paid-in Shareholders'
(In thousands except shares) Shares Amount Shares Amount Capital Deficit Equity
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Balance at
February 25, 1995 7,045,707 $ 70 514,400 $ 5 $ 62,114 $(29,647) $ 32,542
Stock conversion, net of
related costs (7,045,707) (70) 5,307,528 53 (392) (409)
Exercise of stock options 84,336 1 43 44
Net income 4,182 4,182
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Balance at
February 3, 1996 -- -- 5,906,264 59 61,765 (25,465) 36,359
Initial public offering,
net of related costs 2,136,614 21 28,876 28,897
Stock issued under
Employee Stock
Purchase Plan 12,700 -- 251 251
Exercise of stock options 44,262 1 178 179
Tax effect of
disqualifying stock
dispositions 96 96
Net income 7,427 7,427
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Balance at
February 1, 1997 -- -- 8,099,840 81 91,166 (18,038) 73,209
Secondary offering,
net of related costs 400,000 4 10,363 10,367
Stock issued under
Employee Stock
Purchase Plan 9,649 -- 191 191
Exercise of stock options 178,999 2 1,280 1,282
Tax effect of
disqualifying stock
dispositions 553 553
Net income 10,007 10,007
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Balance at
January 31, 1998 -- $ -- 8,688,488 $ 87 $ 103,553 $ (8,031) $ 95,609
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See notes to consolidated financial statements.
Cost Plus, Inc. 21
Statements of Consolidated Cash Flows
Fiscal Year Fiscal Year Eleven Month
Ended Ended Period Ended
January 31, February 1, February 3,
(In thousands) 1998 1997 1996
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Cash Flows From Operating Activities:
Net income $ 10,007 $ 7,427 $ 4,182
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 7,939 6,810 5,158
Loss on disposal of property and equipment 62 81 153
Deferred income taxes (1,513) (962) (76)
Change in assets and liabilities:
Merchandise inventories (14,001) (7,392) (4,153)
Other assets (1,489) (1,514) (918)
Accounts payable (1,019) 5,024 (2,692)
Other liabilities 2,522 4,717 4,352
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Net cash provided by operating activities 2,508 14,191 6,006
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Cash Flows From Investing Activities:
Purchases of property and equipment (11,490) (8,001) (5,599)
Proceeds from the sale of property 10,618 -- --
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Net cash used in investing activities (872) (8,001) (5,599)
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Cash Flows From Financing Activities:
Net (payments) borrowings under revolving line of credit -- (3,165) 616
Principal payments on capital lease obligations (440) (336) (243)
Issuance of stock 11,840 29,423 (365)
Payments on other long term debt -- (19,895) --
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Net cash provided by financing activities 11,400 6,027 8
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Net increase in cash and cash equivalents 13,036 12,217 415
Cash and cash equivalents:
Beginning of period 14,398 2,181 1,766
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End of period $ 27,434 $ 14,398 $ 2,181
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Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for interest $ 1,667 $ 2,850 $ 4,943
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Cash paid during the year for taxes $ 7,204 $ 3,358 $ 1,135
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See notes to consolidated financial statements.
22 Cost Plus, Inc.
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 January 31, 1998, the Company
operated 70 stores under the name "Cost Plus World Market" in 12 states
primarily in the western United States. The Company's product offerings are
designed to provide solutions to customers' casual living 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 stores also offer
a number of gift and decorative accessories including collectibles, cards,
wrapping paper and other seasonal items. In addition, Cost Plus offers its
customers a wide selection of gourmet foods and beverages, including wine,
micro-brewed and imported beer, coffee and tea.
Fiscal Year
Effective in fiscal 1995, the Company changed its fiscal year end from the
Saturday closest to the last day of February to the Saturday closest to the last
day of January. The fiscal years ended January 31, 1998 (fiscal 1997) and
February 1, 1997 (fiscal 1996) contain 52 weeks. The eleven month period ended
February 3, 1996 (fiscal 1995) contains 49 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 generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less as cash equivalents.
Merchandise Inventories
Inventories are stated at the lower of cost or market as determined under the
retail inventory method. Cost includes certain buying and distribution costs
related to the procurement and processing of merchandise.
Preopening Store Expenses
Preopening store expenses include grand opening advertising, labor and hiring
expenses and are expensed as incurred.
Property and Equipment
Furniture, fixtures and equipment are stated at cost and depreciated using the
straight-line method over their estimated useful lives which is generally five
years. Leasehold improvements are amortized on a straight-line basis over the
lesser of the related lease terms or useful lives.
Capitalized Leases
Noncancelable leases which meet the criteria of capital leases are capitalized
as assets and amortized over the lease term, using the straight-line method.
Other Assets
Goodwill is amortized on a straight-line basis over 40 years. Lease rights and
interests are amortized on a straight-line basis over the lease term.
Cost Plus, Inc. 23
Notes to Consolidated Financial Statements(continued)
Long Lived Assets
The Company's policy is to review the recoverability of all long-lived assets on
an annual basis and whenever events or changes indicate that the carrying amount
of an asset may not be recoverable. Based upon the Company's review as of
January 31, 1998 and February 1, 1997, no material adjustment was made to the
carrying value of such assets.
Deferred Rent
Certain of the Company's operating leases contain predetermined fixed
escalations of the 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 the amount charged to
operations and amounts paid as deferred rent. As part of its lease agreements,
the Company receives certain lease incentives, primarily construction
allowances. These allowances have been deferred and are amortized on a straight-
line basis over the life of the lease as a reduction of rent expense.
Advertising Expense
Advertising costs are expensed as incurred. For the fiscal years ended January
31, 1998, February 1, 1997 and the eleven month period ended February 3, 1996,
advertising costs were $14,202,000, $11,519,000 and $8,725,000 respectively.
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 amounts
may be in excess of the FDIC insurance limits.
Taxes on Income
Income taxes are accounted for using an asset and liability approach that
requires the 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. In estimating future tax
consequences, all expected future events are considered other than changes in
the tax law or rates.
Net Income per Share
In 1997, the Company adopted the provision of Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), Earnings per Share. SFAS 128 replaces current
earnings per share ("EPS") reporting requirements and requires a dual
presentation of basic 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 reflects the potential dilution that could occur if options
to issue common stock were exercised into common stock. Prior periods have been
restated to conform to SFAS 128.
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.
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
January 31, February 1, February 3,
1998 1997 1996
- --------------------------------------------------------------------------------
Basic shares 8,326 7,721 5,849
Effect of dilutive stock options 373 384 304
- --------------------------------------------------------------------------------
Diluted shares 8,699 8,105 6,153
- --------------------------------------------------------------------------------
Stock Based Compensation
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
24 Cost Plus, Inc.
Impact of New Accounting Standards
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.
Note 2. Property and Equipment
January 31, February 1,
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
Property and equipment consist of the following:
Land and land improvements $ 530 $ 7,030
Building and leasehold improvements 31,246 33,400
Furniture, fixtures and equipment 30,032 23,683
Facilities under capital leases 28,694 26,700
- --------------------------------------------------------------------------------
Total 90,502 90,813
Less accumulated depreciation (36,963) (30,608)
- --------------------------------------------------------------------------------
Property and equipment, net $ 53,539 $ 60,205
- --------------------------------------------------------------------------------
During September 1997, the Company completed the sale of its San Francisco
property and the leaseback of its store facility. Proceeds from the sale
appproximated $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.
Note 3. Other Assets
January 31, February 1,
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
Other assets consist of the following:
Goodwill $ 3,972 $ 3,972
Lease rights and interests 3,146 3,146
Other 7,916 5,805
- --------------------------------------------------------------------------------
Total 15,034 12,923
Less accumulated amortization (3,750) (4,346)
- --------------------------------------------------------------------------------
Other assets $11,284 $ 8,577
- --------------------------------------------------------------------------------
Note 4. Leases
The Company leases certain property consisting of retail stores, warehouses, the
corporate office and equipment. Store leases typically contain provisions for
two to three renewal options for five to ten years each with renewal periods
from 1997 to 2040 at the then current market rates. The retail store, warehouse
and corporate office leases generally provide for the Company to assume the
maintenance and all or a portion of the property tax obligations on the leased
property.
Cost Plus, Inc. 25
Notes to Consolidated Financial Statements (continued)
The minimum rental payments required under capital leases (with interest rates
generally 12.75%) and noncancelable operating leases with an initial lease term
in excess of one year at January 31, 1998, are as follows:
(In thousands) Capital Leases Operating Leases Total
- --------------------------------------------------------------------------------
Year ending:
1998 $ 2,461 $ 16,308 $ 18,769
1999 2,486 15,057 17,543
2000 2,521 15,033 17,554
2001 2,144 14,332 16,476
2002 2,151 13,811 15,962
Thereafter through the year 2040 33,093 93,374 126,467
- --------------------------------------------------------------------------------
Minimum lease commitments 44,856 $167,915 $212,771
---------------------
Less amount representing interest (28,670)
- ------------------------------------------------
Present value of capital lease
obligations 16,186
Less current portion (494)
- ------------------------------------------------
Long-term portion $ 15,692
- ------------------------------------------------
Accumulated depreciation related to capital leases amounted to $10,719,000 and
$9,580,000 at January 31, 1998 and February 1, 1997, respectively. Depreciation
expense related to capitalized leases is classified as occupancy. For the fiscal
years ended January 31, 1998 and February 1, 1997 and the eleven-month period
ended February 3, 1996, such depreciation expense was $1,139,000, $1,098,000 and
$991,000, respectively.
Minimum and contingent rental expense, which are based upon certain factors such
as sales volume and property taxes, under operating and capital leases, as well
as sublease rental income, are as follows:
Fiscal Year Fiscal Year Eleven Month
Ended Ended Period Ended
January 31, February 1, February 3,
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Operating leases:
Minimum rental expense $ 13,485 $ 9,924 $ 7,127
Contingent rental expense 757 554 506
Less sublease rental income (1,692) (1,884) (1,477)
- --------------------------------------------------------------------------------
Total $ 12,550 $ 8,594 $ 6,156
- --------------------------------------------------------------------------------
Capital leases -- contingent
rental expense $ 950 $ 813 $ 685
- --------------------------------------------------------------------------------
Total minimum rental income to be received from noncancelable sublease
agreements through 2011 is approximately $8,380,000 as of January 31, 1998.
Note 5. Revolving Line of Credit
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 January 31, 1998) 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 January 31, 1998, the
Company had no outstanding borrowings under the line of credit and $2.7 million
outstanding under letters of credit.
26 Cost Plus, Inc.
Note 6. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires entities to disclose the fair value of
their financial instruments. The carrying value of current assets and
liabilities approximates their fair market value.
Note 7. Income Taxes
The provision for income taxes consists of the following:
Fiscal Year Fiscal Year Eleven Month
Ended Ended Period Ended
January 31, February 1, February 3,
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Payable:
Federal $ 6,683 $ 5,240 $ 2,399
State 1,304 1,045 586
- --------------------------------------------------------------------------------
Total payable 7,987 6,285 2,985
- --------------------------------------------------------------------------------
Deferred:
Federal (1,346) (989) (11)
State (209) (134) (65)
- --------------------------------------------------------------------------------
Total deferred (1,555) (1,123) (76)
- --------------------------------------------------------------------------------
Provision for income taxes $ 6,432 $ 5,162 $ 2,909
- --------------------------------------------------------------------------------
The differences between the U.S. federal statutory tax rate and the Company's
effective rate are as follows:
Fiscal Year Fiscal Year Eleven Month
Ended Ended Period Ended
January 31, February 1, February 3,
1998 1997 1996
- --------------------------------------------------------------------------------
U.S. federal statutory tax rate 35.0% 35.0% 34.0%
State income taxes (net of U.S.
federal income tax benefit) 4.3 4.7 5.3
Non-deductible expenses 0.5 0.6 0.6
Other (0.7) 0.7 1.1
- --------------------------------------------------------------------------------
Effective income tax rate 39.1% 41.0% 41.0%
- --------------------------------------------------------------------------------
Significant components of the Company's deferred tax assets and liabilities are
as follows:
January 31, February 1, February 3,
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Current deferred tax asset:
Deductible reserves $ 210 $ 276 $ 221
- --------------------------------------------------------------------------------
Long-term deferred tax asset
(liability):
Deferred rent 1,208 838 560
Capitalized leases (1,610) (919) (1,225)
Lease rights (731) (810) (861)
Depreciation (280) (2,016) (2,564)
Other (556) (641) (365)
- --------------------------------------------------------------------------------
Total (1,969) (3,548) (4,455)
- --------------------------------------------------------------------------------
Net deferred tax liabilities $(1,759) $(3,272) $(4,234)
- --------------------------------------------------------------------------------
Cost Plus, Inc. 27
Notes to Consolidated Financial Statements (continued)
Note 8. Equity and Stock Compensation Plans
Stock
On March 17, 1995, the Company consummated a series of agreements
("Agreements") with its shareholders to change its existing capital structure
and amend its credit facilities. The Company and its shareholders agreed to
exchange existing 7,045,707 shares of preferred stock, 514,400 shares of common
stock and 49,315 of unexercised preferred stock options for 5,307,528 shares of
newly issued shares of common stock based on the exchange ratios as specified in
the Agreements. The Company amended and restated its Articles of Incorporation
and By-Laws to state that no shares of preferred stock are authorized.
On February 15, 1996, the Board of Directors authorized the amendment and
restatement its Articles of Incorporation to increase the number of authorized
shares of common stock from 6,819,931 to 30,000,000 and authorize 5,000,000
shares of preferred stock for issuance.
Options
The Company currently has options outstanding under three employee stock option
plans: the 1988 Stock Option Plan ("1988 Plan"), the 1994 Stock Option Plan
("1994 Plan") and the 1995 Stock Option Plan ("1995 Plan"). The 1988 Plan
permitted the granting of options to employees to purchase up to 219,155 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 generally vest
over four years. Upon approval of the 1994 Plan in March 1995, the 1988 Plan was
terminated except for options then outstanding. The 1994 Plan permitted the
granting of options to employees to purchase up to 862,656 shares of common
stock at 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 in November 1995, 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 774,669 shares of
common stock, less the aggregate number of shares outstanding under the 1994
Plan grants or issued upon exercise of options granted under the 1994 Plan
(364,942 at January 31, 1998). Options are exercisable over ten years and vest
as determined by the Board of Directors, generally over three or four years. A
250,000 increase in the number of shares of common stock reserved for issuance
under the 1995 Plan, along with certain other amendments to the 1995 Plan, was
approved by the Board of Directors in October 1996 and the shareholders in
November 1996. An additional 400,000 increase in the number of shares of common
stock reserved for issuance was approved by the Board of Directors and
shareholders in June 1997.
On March 13, 1996, the Board of Directors approved the 1996 Director Stock
Option Plan ("Director Option Plan") which permits the granting of options to
non-employee directors to purchase up to 28,300 shares of common stock at fair
market value as of the date of grant. Each non-employee director elected after
March 13, 1996 will automatically be granted, upon election, a nonstatutory
option to purchase 7,075 shares of common stock. Options are exercisable over
ten years and vest over a four year period. In June 1997, the Board of Directors
and shareholders approved an increase of 40,000 shares of common stock reserved
for issuance under the plan and, to each non-employee director, an automatic
annual grant of a non-statutory option to purchase 2,000 shares.
28 Cost Plus, Inc.
A summary of activity under the above option Plans is set forth below:
Weighted
Average
Exercise
Shares Price
- --------------------------------------------------------------------------
Outstanding at February 25, 1995 (92,599
exercisable at a weighted average price of $0.18) 113,270 $ 0.17
Granted 753,334 8.27
Exercised (84,336) 0.52
Canceled (61,311) 5.77
- --------------------------------------------------------------------------
Outstanding at February 3, 1996 (95,349 exercisable
at a weighted average price of $3.00) 720,957 8.26
Granted 188,725 17.78
Exercised (44,262) 4.01
Canceled (11,607) 8.47
- --------------------------------------------------------------------------
Outstanding at February 1, 1997 (331,083 exercisable
at a weighted average price of $5.74) 853,813 10.57
Granted 475,200 21.46
Exercised (178,999) 7.16
Canceled and expired (101,083) 14.11
- --------------------------------------------------------------------------
Outstanding at January 31, 1998 1,048,931 15.72
- --------------------------------------------------------------------------
Exercisable at January 31, 1998 326,012
- --------------------------------------------------------------------------
Additional information regarding options outstanding as of January 31, 1998 is
as follows:
Weighted Options Exercisable
Average Weighted -----------------------------
Range of Remaining Average Weighted Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Yrs.) Price Exercisable Price
- -----------------------------------------------------------------------------------------------
$ 0.06 - 0.06 367 4.1 $ 0.06 367 $ 0.06
5.77 - 5.94 188,921 7.1 5.78 188,921 5.78
11.31 - 15.75 399,843 8.3 12.90 58,352 11.64
18.00 - 24.13 459,800 9.3 22.28 78,372 18.00
- -----------------------------------------------------------------------------------------------
1,048,931 8.7 $15.72 326,012 $ 9.76
- -----------------------------------------------------------------------------------------------
At January 31, 1998, 182,508 and 49,225 shares were available for future grants
under the 1995 Stock Option Plan and the 1996 Director Stock Option Plan,
respectively.
Employee Stock Purchase Plan
On March 13, 1996, the Board of Directors approved the 1996 Employee Stock
Purchase Plan ("Purchase Plan"). A total of 300,000 shares have been authorized
for issuance under the Purchase Plan. 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 the fair market value of the common stock as of the last day of the purchase
period.
Additional Stock Plan Information
As discussed in Note 1, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with Accounting Principles
Board No. 25, Accounting for Stock Issued to Employees, and its related
interpretations. Accordingly, no compensation expense has been recognized in the
financial statements for employee stock arrangements.
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for
Stock-Based Compensation, requires the disclosure of pro forma net income and
earnings per share had the Company adopted the fair value method as of the
beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based awards
to employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the
Cost Plus, Inc. 29
Notes to Consolidated Financial Statements (continued)
Company's stock options awards. These models also require subjective assumptions
including future stock price volatility and expected time to exercise, which
greatly affect the calculated values. The Company's calculations were made using
the Black-Scholes option pricing model with the following weighted average
assumptions:
Fiscal Year Fiscal Year Eleven Month
Ended Ended Period Ended
January 31, February 1, February 3,
1998 1997 1996
- --------------------------------------------------------------------------------
Stock volatility 60.0% 55.3% 55.3%
Risk free interest rates 6.3% 5.9% 6.2%
Expected life (in years) 1.8 1.8 1.8
Weighted average fair value per
share $13.76 $7.86 $3.87
Expected dividends -- -- --
The Company's calculations are based on a multiple option valuation approach,
and forfeitures are recognized as they occur. If the computed fair values of the
fiscal 1997, 1996 and 1995 awards had been amortized to expense over the vesting
period of the awards, consistent with the methods of SFAS 123, the Company's net
income and net income per share would have been reduced to the pro forma amounts
indicated below:
Fiscal Year Fiscal Year Eleven Month
Ended Ended Period Ended
January 31, February 1, February 3,
(In thousands, except per share data) 1998 1997 1996
- -------------------------------------------------------------------------------------
Net income
As reported $10,007 $7,427 $4,182
Pro forma 8,920 6,747 3,621
Basic net income per share
As reported $ 1.20 $ 0.96 $ 0.72
Pro forma 1.07 0.87 0.62
Diluted net income per share
As reported $ 1.15 $ 0.92 $ 0.68
Pro forma 1.03 0.83 0.62
The impact of outstanding non-vested stock options granted prior to fiscal 1995
has been excluded from the pro forma calculation; accordingly, the fiscal 1997,
fiscal 1996 and fiscal 1995 pro forma adjustments are not indicative of future
period pro forma adjustments, when the calculation will apply to all applicable
stock options.
Note 9. Employee Benefit Plans
The Company has a 401(k) plan for employees who meet certain service and age
requirements. Participants may contribute up to 15% of their salaries to a
maximum of $10,000 and qualify for favorable tax treatment under Section 401(k)
of the Internal Revenue Code. In fiscal 1997, the Company began matching 25% of
the employee's contribution, up to a maximum of 3% of their base salary. The
Company contributed approximately $79,000 in fiscal 1997.
Additionally, beginning in fiscal 1997, a non-qualified, deferred compensation
plan was made available to certain employees whose benefits are limited under
Section 401(k) of the Internal Revenue Code. Compensation deferrals approximated
$129,000 for fiscal 1997.
Note 10. Related Party Transactions
At February 3, 1996, the Company had outstanding $23,060,000 on a note payable
and line of credit agreement and $401,000 in interest payable to two
shareholders. Proceeds from the Company's initial public offering in April 1996
were used to repay the note payable and the then outstanding balance under the
line of credit agreement. In fiscal 1996 and 1995, related interest expense
amounted to $409,405 and $3,073,000 respectively.
30 Cost Plus, Inc.
Independent Auditors' Report
Board of Directors
Cost Plus, Inc.
Oakland, California
We have audited the accompanying consolidated balance sheets of Cost Plus, Inc.
as of January 31, 1998 and February 1, 1997, and the related statements of
consolidated operations, consolidated shareholders' equity and consolidated cash
flows for the fiscal years ended January 31, 1998 and February 1, 1997 and the
eleven month period ended February 3, 1996. 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 generally accepted auditing
standards. 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. as of January 31,
1998 and February 1, 1997 and the results of their operations and their cash
flows for the fiscal years ended January 31, 1998 and February 1, 1997 and the
eleven month period ended February 3, 1996 in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
San Francisco, California
March 17, 1998
Cost Plus, Inc. 31