LETTER TO OUR SHAREHOLDERS
8
ABOUT COST PLUS WORLD MARKET
10
FINANCIAL HIGHLIGHTS
12
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
14
CONSOLIDATED BALANCE SHEETS
20
CONSOLIDATED STATEMENTS OF OPERATIONS
21
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
22
CONSOLIDATED STATEMENTS OF CASH FLOWS
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24
INDEPENDENT AUDITORS' REPORT
32
DIRECTORS, OFFICERS AND CORPORATE DATA
33
STORE LOCATIONS
34
EXHIBIT 13.1
LETTER TO OUR SHAREHOLDERS
Murray H. Dashe
[PHOTO APPEARS HERE] Chairman of the Board,
Chief Executive Officer
and President
(center)
John F. Hoffner
Executive Vice President
of Administration and
Chief Financial Officer
(left)
Kathi P. Lentzsch
Executive Vice President,
Merchandising and Marketing
(right)
Dear Shareholders
There's a lot of sound and fury in retailing today. It's easy to get distracted.
That's why we work so hard at Cost Plus World Market to stay focused on a few
essential disciplines: Perfecting a strong concept. Executing it with
consistency, efficiency, and passion. Continually challenging it for relevance,
and refreshing it with bright new ideas. These are the compass points which have
guided our development for the past 40 years - a period during which Cost Plus
World Market has grown from a single retail outlet into a network of stores
stretching into the Midwest, with a burgeoning national identity as a leader in
casual home furnishings and entertaining.
These compass points have also proven to be valuable guides during our
first three years as a publicly traded company. Cost Plus World Market once
again delivered a strong financial and operating performance in fiscal 1998,
producing record profitability while expanding store count at a 21% annual rate.
Our total sales also grew 21% last year, to $315 million. Same store sales - a
measure of annual sales from all stores open a minimum of 14 months - increased
5.5%, the eighth consecutive year we've produced same store sales in excess of
5%. We also opened 15 new stores last year, introducing Cost Plus World Market
to consumers in St. Louis, Cincinnati, Indianapolis and Omaha. These
accomplishments, coupled with an ongoing commitment to effective margin and
expense management, generated the highest earnings level in the Company's
history. Net income rose 32%, to $13.2 million. Earnings per share increased
27%, to $0.98.
For our customers, we tackle a different kind of challenge - continually
enhancing the shopping experience that has engaged their imaginations and
attracted their repeat business for 40
8 Cost Plus, Inc.
years. In the midst of today's intense competition for consumer attention, our
World Market stores remain distinctive for a number of important reasons. We
offer a unique blend of everchanging merchandise, presented in a casual,
slightly offbeat atmosphere with a sense of discovery awaiting customers around
each corner. We work hard to maintain a friendly, welcoming store environment.
And, perhaps most important, we provide great value in the products we market.
Whether it be a pulse-quickening, one-of-a-kind gift discovery, a repeat
purchase from among our gourmet foods and beverages, or a more substantial
investment in a home furnishing item, our merchandise is competitively priced,
and our customers are regularly delighted with the value they receive for the
dollars they spend in our stores.
Successful, consistent execution is where the interests of our shareholders
and our customers intersect. We place a high priority at Cost Plus World Market
on disciplined growth, cost-effective marketing and advertising strategies,
continually updated information and distribution systems, and meaningful
employee development programs. These factors provide critical, if less visible
support to the creative sourcing and merchandising talents which are the
backbone of our organization's long-term success.
Here, too, we made solid progress during fiscal 1998. Individual store
profitability remained high as we continued to expand beyond our traditional
West Coast markets - strong evidence that our retailing concept has broad
appeal. To support this growth, we added a 100,000 square-foot distribution
center in Indiana that is now serving our Midwestern expansion. We continued to
strengthen our senior management team with the addition of our new
administrative executive vice president and chief financial officer, John
Hoffner, along with key hires in information systems and logistics. And we
relocated our headquarters to a new, significantly larger space with minimal
impact on operating costs.
I have no doubt the noise level will continue to rise in retailing as the
competitive nature of our industry intensifies. We'll face new challenges and
new opportunities at Cost Plus World Market, and I'm confident we will succeed.
The enthusiasm and excitement here continues to grow with every successful
addition to our market base. We are fully committed to building a top-flight
nationwide enterprise, and we have the resources, the management talent and the
creativity to accomplish our biggest dreams.
To all those who support us in this journey - our customers, our employees,
our shareholders - I'd like to express our deepest appreciation.
/s/ Murray Dashe
Murray H. Dashe
Chairman, Chief Executive Officer and President
Cost Plus, Inc. 9
ABOUT COST PLUS WORLD MARKET
Our Mission is to be a specialty retailer
offering customers a wide and ever-
changing selection of exciting products
imported from around the world,
emphasizing both quality and value in
a fun and friendly environment
Fifty Countries, One Store
And an endless variety of product choices for today's casual, home-oriented
lifestyles. Whether decorating a home, planning a dinner party, or just looking
for a special gift, our customers know they will discover thousands of options
in casual furnishings, housewares, gifts, decorative accessories, gourmet foods
and beverages at their local Cost Plus World Market store.
The unique character and wide array of our World Market product lines are
key elements in the Company's enduring consumer appeal. While today's retailing
world is increasingly filled with look-alikes and wannabes, our store aisles are
filled with distinctive, one-of-a-kind items. Many of our products, sourced from
approximately 50 countries around the world, reflect the regional character and
personal artistic expression of the local artisans who created them. Many of our
supplier relationships span decades. Many of our product lines are crafted
exclusively for Cost Plus World Market. It is a product-sourcing strategy
developed over a 40-year history in the import business, and one difficult to
recreate.
10 Cost Plus, Inc.
Adventure Shopping
Enter a Cost Plus World Market for the first time and you're likely to be
surprised. Delightfully so. The informal, rough-hewn backdrop of concrete floors
and exposed beam ceilings. The conscious clutter of aisles spilling over with
merchandise. The bright colors, rich textures and tantalizing aromas that
captivate your senses and evoke the memory of an open air marketplace. All of
these elements play a central role in the shopping experience at Cost Plus World
Market.
But there's clearly method to this madness. The relaxed atmosphere and
sense of fun that pervades a World Market store encourages browsing, impulse
buying and regular, repeat visits. The baskets, barrels and shipping crates that
overflow with merchandise continually beckon customers with the possibility of
yet another discovery. Amid all the bustle, strong focal points on walls,
ceilings and shelf-top displays provide important visual cues which guide
shoppers from point to point, from key product line to key product line. In
today's highly competitive contest for consumer attention, our slightly
irreverent, slightly mysterious, treasure-hunt approach to merchandising helps
attract and hold the interest of shoppers for an average of fifty minutes per
visit.
Building a National Enterprise
Profitable growth, achieved market by market and store by store, is the
centerpiece of our national expansion program. Our primary goal is to build a
network of Cost Plus World Market stores stretching from coast to coast. Annual
growth targets include a 20% increase in store count, mid-single digit
improvement in same-store sales, and a steady strengthening of profit margins,
as operating costs are leveraged over higher sales volume.
To achieve the strongest possible results from geographic expansion, we
cluster store openings in new markets to immediately achieve economies of scale,
and regularly add stores in existing markets to maximize our penetration. We pay
close attention to the costs of distribution, advertising and management
development, and to the opportunities presented by new information technologies.
Most importantly, we measure and manage profitability at Cost Plus World Market
store by store. Our internal performance standards result in a new store model
which achieves operating margins comparable to existing stores within three
years. These disciplines, coupled with the broad-based appeal of our core
retailing concept, provide a strong foundation for the national enterprise we
are determined to build.
Cost Plus, Inc. 11
FINANCIAL HIGHLIGHTS
Pro Forma
Fiscal Year Twelve Month Fiscal Year
------------------------------------- Period Ended -----------
February 3,
1998 1997 1996 1996/1/ 1994
-------- -------- -------- ----------- ----------
(In thousands, except per share
and selected operating data)
Statement of Operations Data:
Net sales $315,135 $260,494 $214,814 $182,845 $151,196
Income from operations 22,924 18,118 15,040 11,599 7,890
Net income 13,236 10,007 7,427 3,816 1,817
Net income per share-diluted/2/ $ 0.98 $ 0.77 $ 0.61 $ 0.41 --
-------- -------- -------- -------- --------
Selected Operating Data:
Number of stores open
(at end of period) 85 70 58 49 43
Average sales per selling square foot/3/ $ 258 $ 259 $ 252 $ 238 $ 224
Comparable store sales increase/4/ 5.5% 7.0% 6.1% 6.1% 7.7%
-------- -------- -------- -------- ---------
Balance Sheet Data (at period end):
Working capital $ 61,031 $ 52,630 $ 24,807 $ 11,102 $ 8,918
Total assets 173,141 152,000 128,198 105,986 99,245
Note payable and capital lease
obligations, less current portion 15,110 15,692 14,215 34,528 34,839
Total shareholders' equity 109,403 95,609 73,209 36,359 32,542
======== ======== ======== ======== =========
/1/ Effective in fiscal 1995, the Company changed its fiscal year 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 comparative 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/ Per share data is restated for a three-for-two common stock split effective
March 11, 1999.
/3/ Calculated using net sales for stores open during the entire period divided
by the selling square feet of such stores.
/4/ A store is considered as comparable at the beginning of its fourteenth full
month of operation.
[GRAPH APPEARS HERE] [GRAPH APPEARS HERE] [GRAPH APPEARS HERE]
Net Sales Operating Income Net Income
Fiscal Years 1994-1998/1/ Fiscal Years 1994-1998/1/ Fiscal Years 1994-1998/1/
(dollars in millions) (dollars in millions) (dollars in millions)
12 Cost Plus, Inc.
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) 1998 1997 1996 1996/1/ 1996/1/ 1994
-------- -------- -------- ---------- ----------- ----------
Statement of Operations Data:
Net sales $315,135 $260,494 $214,814 $182,845 $171,548 $151,196
Cost of sales and occupancy 200,023 164,394 135,072 115,516 107,800 95,608
-------- -------- -------- -------- -------- --------
Gross profit 115,112 96,100 79,742 67,329 63,748 55,588
Selling, general and
administrative expenses 89,261 75,238 62,649 54,110 50,194 46,561
Store preopening expenses 2,927 2,744 2,053 1,620 1,620 1,137
-------- -------- -------- -------- -------- --------
Income from operations 22,924 18,118 15,040 11,599 11,934 7,890
Net interest expense 1,226 1,679 2,451 5,131 4,843 4,862
-------- -------- -------- -------- -------- --------
Income before income taxes 21,698 16,439 12,589 6,468 7,091 3,028
Income taxes 8,462 6,432 5,162 2,652 2,909 1,211
-------- -------- -------- -------- -------- --------
Net income $ 13,236 $ 10,007 $ 7,427 $ 3,816 $ 4,182 $ 1,817
======== ======== ======== ======== ======== ========
Net income per share diluted/2/ $ 0.98 $ 0.77 $ 0.61 $ 0.41 $ 0.45 --
Weighted average shares
outstanding - diluted/2/ 13,575 13,049 12,158 9,230 9,230 --
-------- -------- -------- -------- -------- ---------
Selected Operating Data:
Percent of sales:
Gross profit 36.5% 36.9% 37.1% 36.8% 37.2% 36.8%
Selling, general and
administrative expenses 28.3% 28.9% 29.2% 29.6% 29.3% 30.8%
Income from operations 7.3% 7.0% 7.0% 6.3% 6.9% 5.2%
Number of stores:
Opened during period 15 12 9 6 6 5
Closed during period -- -- -- -- -- 3
Open at end of period 85 70 58 49 49 43
Average sales per selling square foot/3/ $ 258 $ 259 $ 252 $ 238 $ 228 $ 224
Comparable store sales increase/4/ 5.5% 7.0% 6.1% 6.1% 6.6% 7.7%
======== ======== ======== ======== ======== ========
Balance Sheet Data (at period end):
Working capital $ 61,031 $ 52,630 $ 24,807 $ 11,102 $ 11,102 $ 8,918
Total assets 173,141 152,000 128,198 105,986 105,986 99,245
Note payable and capital lease obligations,
less current portion 15,110 15,692 14,215 34,528 34,528 34,839
Total shareholders' equity 109,403 95,609 73,209 36,359 36,359 32,542
======== ======== ======== ======== ======== ========
/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/ Per share data is restated for a three-for-two common stock split effective
March 11, 1999.
/3/ Calculated using net sales for stores open during the entire period divided
by the selling square feet of such stores.
/4/ A store is considered as comparable at the beginning of its fourteenth full
month of operation.
Cost Plus, Inc. 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
An asterisk "*" denotes a forward-looking statement reflecting current
expectations that involve risks and uncertainties. Actual results may differ
materially from those discussed in such forward-looking statements, and
shareholders of Cost Plus, Inc. (the "Company" or "Cost Plus") should carefully
review the cautionary statements set forth in this Annual Report, including
"Quarterly Results and Seasonality" beginning on page 16. 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
FISCAL 1998 COMPARED TO FISCAL 1997
Net Sales
Net sales increased $54.6 million, or 21.0%, to $315.1 million in fiscal 1998
from $260.5 million in fiscal 1997. The increase in net sales was attributable
to new stores and an increase in comparable store sales. Comparable store sales
rose 5.5% for fiscal 1998, primarily as a result of a larger average transaction
size. As of January 30, 1999, the Company operated 85 stores compared to 70
stores as of January 31, 1998. New and non-comparable stores contributed
approximately $40.8 million of the increase in net sales.
Gross Profit
As a percentage of net sales, gross profit was 36.5% this year compared with
36.9% last year. The decrease in gross profit rate resulted from higher
occupancy costs in new stores, partially offset by an improvement in initial
markon and lower inventory shrinkage. 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 decreased to 28.3% in the current
fiscal year from 28.9% last fiscal year. The decrease in the SG&A expense rate
resulted primarily from leveraging store payroll and corporate overhead expenses
against higher sales.
Store Preopening Expenses
Store preopening expenses, which include grand opening advertising and
preopening merchandise setup expenses, were $2.9 million in fiscal 1998 and $2.7
million in fiscal 1997. Expenses vary depending on the location of a store and
whether it is located in a new or existing market. The Company opened 15 stores
in fiscal 1998 compared to 12 stores in the prior fiscal year.
Net Interest Expense
Net interest expense, which includes interest on capital leases and interest
expense net of interest income, was $1.2 million in fiscal 1998 compared to $1.7
million in fiscal 1997. This decrease in expense resulted from higher interest
income and lower average borrowings throughout the year due to cash generated
from the sale of the Company's San Francisco property and the leaseback of its
store facility in September 1997 and to proceeds from a secondary offering of
the Company's common stock in October 1997.
Income Taxes
The Company's effective tax rate was 39% in both fiscal 1998 and fiscal 1997.
14 Cost Plus, Inc.
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. Comparable store sales
increased 7.0% in fiscal 1997, primarily as a result of a larger average
transaction size. At January 31, 1998, the Company operated 70 stores compared
to 58 stores at February 1, 1997. New and non-comparable stores contributed
approximately $31.1 million of the increase in net sales.
Gross Profit
As a percentage of net sales, gross profit was 36.9% in fiscal 1997 compared to
37.1% in fiscal 1996. The decrease in gross profit rate resulted from higher
occupancy costs in 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. The merchandise 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 decreased to 28.9% in fiscal 1997
compared to 29.2% in fiscal 1996. This decrease resulted from lower store and
corporate payroll expenses, as a percentage of net sales, which were partially
offset by higher advertising expenses.
Store Preopening Expenses
Store preopening expenses, which include grand opening advertising and
preopening merchandise setup expenses, were $2.7 million for fiscal 1997 and
$2.1 million for fiscal 1996. The increase in store preopening expenses was the
result of opening 12 stores in fiscal 1997 versus opening nine stores in fiscal
1996. Store preopening expenses per store in fiscal 1997 were consistent with
fiscal 1996.
Net Interest Expense
Net interest expense, which includes capital lease interest and interest expense
net of 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 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.
Income Taxes
The Company's effective tax rate was reduced for fiscal 1997 to 39% from 41% in
fiscal 1996 as a result of expanding into states with lower tax rates.
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.
Cost Plus, Inc. 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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
--------------------------------------------------------
(In thousands, except per May 2, Aug. 1, Oct. 31, Jan. 30,
share data and number of stores) 1998 1998 1998 1999
---------- --------- --------- ---------
Net sales $56,839 $58,168 $66,689 $133,439
Gross profit 19,067 20,089 23,013 52,943
Net income (loss) 292 105 (782) 13,621
Net income (loss) per share/1/
Basic $ 0.02 $ 0.01 $ (0.06) $ 1.03
Diluted/2/ $ 0.02 $ 0.01 $ (0.06) $ 1.00
Number of stores open at end of period 71 74 82 85
Three Months Ended
--------------------------------------------------------
(In thousands, except per May 3, Aug. 2, Nov. 1, Jan. 31,
share data and number of stores) 1997 1997 1997 1998
---------- --------- --------- ---------
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/1/
Basic $ 0.01 $ 0.02 $ (0.10) $ 0.84
Diluted/2/ $ 0.01 $ 0.01 $ (0.10) $ 0.80
Number of stores open at end of period 60 60 68 70
/1/ Per share data is restated for a three-for-two common stock split effective
March 11, 1999.
/2/ 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
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 margin
due to the need to mark down excess inventory.
The Company's quarterly results of operations may also fluctuate based upon such
factors as the number and timing of store openings and related store preopening
expenses, the amount of net sales contributed by new and existing stores, the
mix of products sold, the timing and level of markdowns, store closings,
refurbishments or relocations, competitive factors and general economic
conditions.
16 Cost Plus, Inc.
YEAR 2000 READINESS DISCLOSURE
State of readiness
The Year 2000 issue is primarily the result of certain computer systems using a
two-digit format rather than four-digits to indicate the year. Such computer
systems will, unless modified, be unable to interpret dates beyond the year
1999, potentially causing errors and failures which may disrupt operations of
such systems. To address this issue, the Company has developed a comprehensive
plan (the "Plan") intended to ensure that all critical systems, devices and
applications, as well as data exchanged with customers, trade suppliers and
other third parties, have been evaluated and will be suitable for continued use
into and beyond the year 2000. In addition to areas normally associated with
information technology ("IT"), the Plan also includes areas normally considered
outside of IT, but which may utilize embedded microprocessors with potential
Year 2000 problems.
The Company's Year 2000 Project (the "Project") has been divided into four
phases: i) assessment; ii) remediation; iii) testing and certification; and iv)
contingency planning. An assessment of all IT systems has been completed. The
remediation of in-house systems was approximately 85% complete at the end of
fiscal 1998 and is targeted for completion by the end of the first quarter of
fiscal 1999.* The Company expects that all key hardware and software systems
will be tested and determined to be compliant by the end of the second quarter
of fiscal 1999, with any remaining work on minor systems scheduled for
completion in the third quarter of fiscal 1999*. Hardware upgrades which were
planned for growth, some of which also assist in Year 2000 compliance, have been
accelerated into fiscal 1998 and fiscal 1999.
The Company is in the process of surveying key vendors, suppliers and service
providers for their readiness. This process is expected to be complete by the
end of the second quarter of fiscal year 1999.* Assessment of the risks
associated with vendors and third party service providers' failure to remediate
their own Year 2000 issues will continue throughout the duration of the Project.
Costs to address Year 2000 issues
In addressing the Year 2000 Project, the Company has relied and continues to
rely primarily on internal resources, with supervised support from consultants
and contractors. Internal costs, which are principally payroll for its
information systems personnel, are not separately tracked. The costs for the
Year 2000 Project have not been and are not expected to be material.* Costs are
consistent with and included in the Company's operating budgets and, based on
information gathered to date, future Project costs are not expected to have a
material adverse effect on the results of operations in any period, on
liquidity, financial position or other information technology project
schedules.*
Risks of the Year 2000 issues
The Company believes that its structured approach toward modifications of
existing software and conversions to new software for certain applications, as
discussed above, should mitigate significant disruption of its operations due to
potential Year 2000 problems.* The Company has also identified areas of
potential third party risk, which include communications systems, utilities and
elements of the merchandise supply chain, including procurement, transportation
and import activities. The disruption of communications systems and utilities
could impact the Company's ability to operate its stores. The inability of
principal suppliers to be Year 2000 compliant could result in delays in product
deliveries from such suppliers and disruption of the Company's distribution
channel. There can be no assurance that other entities will achieve Year 2000
compliance or that the Company can timely compensate for its risks should such
entities fail to do so. If the Company's internal systems are not adequately
remediated, or if necessary modifications and conversions by other companies on
whose systems some of the Company's business processes depend are not completed
on time, the Year 2000 issue could have a material adverse effect on the
Company's operations.
The Company's plans for expenditures to achieve Year 2000 compliance and the
dates by which Year 2000 compliance will be achieved are based on management's
best estimates. These estimates include certain assumptions about future events,
including the continued availability of certain resources. However, there can be
no assurance that these estimates will be
Cost Plus, Inc. 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
achieved, and because of the complex interdependencies involved with Year 2000
issues, actual results could differ materially from these estimates. Because of
the range of possible issues and the large number of variables involved, it is
impossible to quantify the potential financial impact of problems if the
Company's remediation efforts or the efforts of those with whom it does business
are not successful.
Contingency plans
The Company is developing contingency plans for critical business processes in
the event of compliance failure on the part of the Company or its business
partners including communications systems, utilities, suppliers and other
service providers. Contingency plans will be completed by approximately the end
of the second quarter of fiscal 1999.* However, there can be no assurance that
such contingency plans will address all of the Year 2000 issues which the
Company might ultimately encounter.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary uses for cash are to fund operating expenses, inventory
requirements and new store expansion. Historically, the Company has financed its
operations primarily 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 totaled $16.6 million for fiscal 1998,
an increase of $14.1 million from fiscal 1997. This increase resulted primarily
from cash generated by higher sales and the timing of payments for merchandise
inventories received near the end of the fiscal year.
Net cash used in investing activities, primarily for new stores, totaled $14.6
million in fiscal 1998. In fiscal 1997, net cash used in investing activities
totaled $872,000 and consisted of $11.5 million of property and equipment
purchases, primarily for new stores, partially offset by $10.6 million from the
sale of the San Francisco property. The Company estimates that fiscal 1999
capital expenditures will approximate $16.1 million.*
Net cash used in financing activities was $894,000 in fiscal 1998, primarily as
a result of the repurchase of 225,002 shares of common stock for $3.8 million
from the Company's former Chief Executive Officer, which was partially offset by
proceeds from stock issued under the Company's stock option and stock purchase
plans. Net cash provided by financing activities was $11.4 million in fiscal
1997, which was primarily proceeds from the issuance of stock in connection with
the October 1997 secondary 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 for repayment of outstanding borrowings and for working
capital and other general corporate purposes.
On October 12, 1998, the Company entered into a revolving line of credit
agreement with a bank, which expires June 1, 2000. This agreement replaced the
Company's previous revolving line of credit agreement. The new agreement allows
for cash borrowings and letters of credit of 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 is paid monthly at the bank's reference rate minus 0.5% (7.25% at
January 30, 1999) or IBOR plus 1.125%, 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 customary with such
agreements. At January 30, 1999, the Company had no outstanding borrowings under
the line of credit and $1.3 million outstanding under letters of credit.
IMPACT OF NEW ACCOUNTING STANDARDS
Effective February 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This statement
requires that all items recognized under accounting standards as components of
comprehensive income be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. The
Company's comprehensive income and net income are the same.
Effective February 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information." This statement establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas and major customers.
18 Cost Plus, Inc.
The Company's operations include only activities related to the sale of casual
home living and entertaining products to the general public through similar
stores throughout the United States and comprise only one segment. Therefore,
adoption of this standard did not impact the Company's financial statement
presentation.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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. This statement is effective for fiscal
years beginning after June 15, 1999 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 consolidated financial position, results of
operations or cash flows.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risks, which include changes in U.S. interest
rates and, to a lesser extent, foreign exchange rates. The Company does not
engage in financial transactions for trading or speculative purposes.
Interest rate risk
The interest payable on the Company's bank line of credit is based on variable
interest rates and is therefore affected by changes in market interest rates. If
interest rates on existing variable rate debt rise 73 basis points (a 10% change
from the Company's borrowing rate as of January 30, 1999), the Company's results
of operations and cash flows will not be materially affected. In addition, the
Company has fixed and variable income investments consisting of cash equivalents
and short-term investments which are also affected by changes in market interest
rates. The Company does not use derivative financial instruments in its
investment portfolio.
Foreign currency risks
The Company enters into a significant amount of purchase obligations outside of
the United States which are settled in U.S. Dollars and, therefore, has only
minimal exposure to foreign currency exchange risks. The Company does not hedge
against foreign currency risks and believes that foreign currency exchange risk
is immaterial.
STOCK ACTIVITY
The Company's common stock is currently traded on the over-the-counter market
and is quoted on the Nasdaq National Market under the symbol "CPWM", 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. Per share data is
restated for a three-for-two common stock split effective March 11, 1999.
On March 12, 1999, the last sale price of the common stock as reported on the
Nasdaq National Market was $25.63 per share, and the Company had 29 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
------ ------
Fiscal Year Ended January 30, 1999
First Quarter $22.67 $15.17
Second Quarter 23.33 18.92
Third Quarter 21.29 15.83
Fourth Quarter 24.17 19.67
Fiscal Year Ended January 31, 1998
First Quarter $12.33 $10.00
Second Quarter 17.50 11.00
Third Quarter 19.67 15.33
Fourth Quarter 23.50 15.00
Cost Plus, Inc. 19
CONSOLIDATED BALANCE SHEETS
January 30, January 31,
(Dollars in thousands, except per share amounts) 1999 1998
------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 28,600 $ 27,434
Merchandise inventories 70,680 56,606
Other current assets 4,553 3,137
-------- --------
Total current assets 103,833 87,177
Property and equipment, net 59,034 53,539
Other assets, net 10,274 11,284
-------- --------
Total assets $173,141 $152,000
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 17,568 $ 13,707
Income taxes payable 8,180 6,282
Accrued compensation 7,421 7,132
Other current liabilities 9,633 7,426
-------- --------
Total current liabilities 42,802 34,547
Capital lease obligations 15,110 15,692
Deferred income taxes 173 1,969
Other long-term obligations 5,653 4,183
Shareholders' equity:
Preferred stock, $.01 par value: 5,000,000 shares authorized;
none issued and outstanding -- --
Common stock, $.01 par value: 45,000,000 shares authorized;
issued and outstanding 13,291,010 and 13,032,733 shares 133 130
Additional paid-in capital 104,065 103,510
Retained earnings (deficit) 5,205 (8,031)
-------- --------
Total shareholders' equity 109,403 95,609
-------- --------
Total liabilities and shareholders' equity $173,141 $152,000
======== ========
See notes to consolidated financial statements.
20 Cost Plus, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended
----------------------------------------------
January 30, January 31, February 1,
(In thousands, except per share amounts) 1999 1998 1997
----------- ----------- -----------
Net sales $315,135 $260,494 $214,814
Cost of sales and occupancy 200,023 164,394 135,072
-------- -------- --------
Gross profit 115,112 96,100 79,742
Selling, general and administrative expenses 89,261 75,238 62,649
Store preopening expenses 2,927 2,744 2,053
-------- -------- --------
Income from operations 22,924 18,118 15,040
Net interest expense 1,226 1,679 2,451
-------- -------- --------
Income before income taxes 21,698 16,439 12,589
Income taxes 8,462 6,432 5,162
-------- -------- --------
Net income $ 13,236 $ 10,007 $ 7,427
======== ======== ========
Net income per share
Basic $ 1.01 $ 0.80 $ 0.64
Diluted $ 0.98 $ 0.77 $ 0.61
======== ======== ========
Weighted average shares outstanding
Basic 13,149 12,489 11,582
Diluted 13,575 13,049 12,158
======== ======== ========
See notes to consolidated financial statements.
Cost Plus, Inc. 21
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Common Stock
---------------------- Additional Retained Total
Paid-in Earnings Shareholders'
(In thousands, except shares) Shares Amount Capital (Deficit) Equity
------------- ------------- ------------- ------------- -------------
Balance at
February 3, 1996 8,859,396 $ 88 $ 61,736 $ (25,465) $ 36,359
Initial public offering,
net of related costs 3,204,921 32 28,865 28,897
Stock issued under
Employee Stock
Purchase Plan 19,050 -- 251 251
Exercise of stock options 66,393 1 178 179
Tax effect of
disqualifying stock
dispositions 96 96
Net income 7,427 7,427
------------- ------------- ------------- ------------- -------------
Balance at
February 1, 1997 12,149,760 121 91,126 (18,038) 73,209
Secondary public offering,
net of related costs 600,000 6 10,361 10,367
Stock issued under
Employee Stock
Purchase Plan 14,474 -- 191 191
Exercise of stock options 268,499 3 1,279 1,282
Tax effect of
disqualifying stock
dispositions 553 553
Net income 10,007 10,007
------------- ------------- ------------- ------------- -------------
Balance at
January 31, 1998 13,032,733 130 103,510 (8,031) 95,609
Repurchase of stock (225,002) (2) (3,748) (3,750)
Stock issued under
Employee Stock
Purchase Plan 11,259 -- 195 195
Exercise of stock options 472,020 5 3,151 3,156
Tax effect of
disqualifying stock
dispositions 957 957
Net income 13,236 13,236
------------- ------------- ------------- ------------- -------------
Balance at
January 30, 1999 13,291,010 $ 133 $ 104,065 $ 5,205 $ 109,403
============= ============= ============= ============= =============
See notes to consolidated financial statements.
22 Cost Plus, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
--------------------------------------------
January 30, January 31, February 1,
(In thousands) 1999 1998 1997
----------- ----------- -----------
Cash Flows From Operating Activities:
Net income $ 13,236 $ 10,007 $ 7,427
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,116 7,939 6,810
Loss on disposal of property and equipment 120 62 81
Deferred income taxes (1,927) (1,513) (962)
Change in assets and liabilities:
Merchandise inventories (14,074) (14,001) (7,392)
Other assets (990) (1,489) (1,514)
Accounts payable 4,400 (1,019) 5,024
Other liabilities 6,734 2,522 4,717
----------- ----------- -----------
Net cash provided by operating activities 16,615 2,508 14,191
----------- ----------- -----------
Cash Flows From Investing Activities:
Purchases of property and equipment (14,555) (11,490) (8,001)
Proceeds from the sale of property -- 10,618 --
----------- ----------- -----------
Net cash used in investing activities (14,555) (872) (8,001)
----------- ----------- -----------
Cash Flows From Financing Activities:
Net payments under revolving line of credit -- -- (3,165)
Principal payments on capital lease obligations (494) (440) (336)
Proceeds from the issuance of stock 3,350 11,840 29,423
Cash used for common stock repurchase (3,750) -- --
Payments on other long-term debt -- -- (19,895)
----------- ----------- -----------
Net cash (used in) provided by financing activities (894) 11,400 6,027
----------- ----------- -----------
Net increase in cash and cash equivalents 1,166 13,036 12,217
Cash and cash equivalents:
Beginning of period 27,434 14,398 2,181
----------- ----------- -----------
End of period $ 28,600 $ 27,434 $ 14,398
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for interest $ 1,230 $ 1,667 $ 2,850
=========== =========== ===========
Cash paid during the year for taxes $ 7,533 $ 7,204 $ 3,358
=========== =========== ===========
See notes to consolidated financial statements.
Cost Plus, Inc. 23
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 30, 1999, the Company
operated 85 stores under the name "Cost Plus World Market" in 16 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.
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, as well as disclosures of
contingent 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.
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 current
liabilities approximates their fair market value.
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, processing and transportation of merchandise.
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. Buildings and leasehold improvements are amortized on a straight-line
basis over the lesser of the related lease terms or their useful lives.
Capital Leases
Noncancelable leases which meet the criteria of capital leases are capitalized
as assets and amortized on a straight-line basis over their related lease terms.
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 their related lease terms.
Long Lived Assets
The Company's policy is to review the recoverability of all long-lived assets
annually 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 30,
1999 and January 31, 1998, no material adjustments to the carrying value of such
assets were necessary.
24 Cost Plus, Inc.
Deferred Rent
Certain of the Company's operating leases contain predetermined fixed
escalations of minimum rentals during the initial term. For these leases, the
Company recognizes the related rental expense on a straight-line basis over the
life of the lease and records the difference between amounts charged to
operations and amounts paid as deferred rent. As part of its lease agreements,
the Company receives certain lease incentives, primarily construction
allowances. These allowances are also deferred and are amortized on a straight-
line basis over the life of the lease as a reduction of rent expense.
Advertising Expense
Advertising costs are expensed as incurred. For the fiscal years ended January
30, 1999, January 31, 1998 and February 1, 1997, advertising costs were
$17,371,000, $14,202,000 and $11,519,000, respectively.
Store Preopening Expenses
Store preopening expenses include grand opening advertising, labor and hiring
expenses and are expensed as incurred.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentration of
credit risk, consist principally of cash and cash equivalents. The Company
places its cash with high quality financial institutions. At times, such
balances may be in excess of FDIC insurance limits.
Income Taxes
Income taxes are accounted for using an asset and liability approach that
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
consolidated financial statements or tax returns. In estimating future tax
consequences, all expected future events are taken into consideration except for
changes in the tax laws or rates.
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. All share and per share data
in the accompanying consolidated financial statements and notes has been
restated to reflect the stock split.
Net Income per Share
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 Ended
------------------------------------------
January 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
Basic shares 13,149 12,489 11,582
Effect of dilutive stock options 426 560 576
----------- ----------- -----------
Diluted shares 13,575 13,049 12,158
----------- ----------- -----------
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.
Impact of New Accounting Standards
Effective February 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This statement
requires that all items recognized under accounting standards as components of
comprehensive income be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. The
Company's comprehensive income and net income are the same.
Cost Plus, Inc. 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Effective February 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information." This statement establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas and major customers. The Company's
operations include only activities related to the sale of casual home living and
entertaining products to the general public through similar stores throughout
the United States and comprise only one segment. Therefore, adoption of this
standard did not impact the Company's consolidated financial statement
presentation.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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. This statement is effective for fiscal
years beginning after June 15, 1999 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 consolidated financial position, results of
operations or cash flows.
NOTE 2. PROPERTY AND EQUIPMENT
January 30, January 31,
(In thousands) 1999 1998
----------- -----------
Property and equipment consist of the following:
Land and land improvements $ 530 $ 530
Building and leasehold improvements 36,155 31,246
Furniture, fixtures and equipment 34,809 30,032
Facilities under capital leases 28,694 28,694
----------- -----------
Total 100,188 90,502
Less accumulated depreciation (41,154) (36,963)
----------- -----------
Property and equipment, net $ 59,034 $ 53,539
=========== ===========
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.
NOTE 3. OTHER ASSETS
January 30, January 31,
(In thousands) 1999 1998
----------- -----------
Other assets consist of the following:
Goodwill $ 3,972 $ 3,972
Lease rights and interests 3,146 3,146
Other 7,326 7,916
----------- -----------
Total 14,444 15,034
Less accumulated amortization (4,170) (3,750)
----------- -----------
Other assets, net $10,274 $11,284
=========== ===========
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 of five to ten years each, with renewal periods
from 1999 to 2040 at the then current market rates. The retail store, warehouse
and corporate office leases generally provide that the Company assume the
maintenance and all or a portion of the property tax obligations on the leased
property.
26 Cost Plus, Inc.
The minimum rental payments required under capital leases (with interest rates
generally at 12.75%) and noncancelable operating leases with an initial lease
term in excess of one year at January 30, 1999, are as follows:
(In thousands) Capital Leases Operating Leases Total
-------------- ---------------- ----------
Fiscal year:
1999 $ 2,486 $ 22,166 $ 24,652
2000 2,521 22,151 24,672
2001 2,144 21,273 23,417
2002 2,151 20,414 22,565
2003 2,151 19,638 21,789
Thereafter through the year 2040 30,922 117,340 148,262
-------------- ---------------- ----------
Minimum lease commitments 42,375 $ 222,982 $265,357
================ ==========
Less amount representing interest (26,683)
--------------
Present value of capital lease obligations 15,692
Less current portion (582)
--------------
Long-term portion $ 15,110
==============
Accumulated depreciation related to capital leases amounted to $11,942,000 and
$10,719,000 at January 30, 1999 and January 31, 1998, respectively. Depreciation
expense related to capital leases is classified as occupancy. For the fiscal
years ended January 30, 1999, January 31, 1998 and February 1, 1997, such
depreciation expense was $1,223,000, $1,139,000 and $1,098,000, respectively.
Interest expense related to capital leases was $1,962,000, $1,888,000 and
$1,870,000 for the fiscal years ended January 30, 1999, January 31, 1998 and
February 1, 1997, respectively.
Minimum and contingent rental expense, which is 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 Ended
---------------------------------------------------
January 30, January 31, February 1,
(In thousands) 1999 1998 1997
------------ ------------ -----------
Operating leases:
Minimum rental expense $ 17,100 $ 13,485 $ 9,924
Contingent rental expense 821 757 554
Less sublease rental income (539) (1,692) (1,884)
------------ ------------ -----------
Total $ 17,382 $ 12,550 $ 8,594
============ ============ ===========
Capital leases -- contingent rental expense $ 1,022 $ 950 $ 813
============ ============ ===========
Total minimum rental income to be received from noncancelable sublease
agreements through 2011 is approximately $7,024,000 as of January 30, 1999.
NOTE 5. REVOLVING LINE OF CREDIT
On October 12, 1998, the Company entered into a revolving line of credit
agreement with a bank, which expires on June 1, 2000. This agreement replaced
the Company's previous revolving line of credit agreement. The new agreement
allows for cash borrowings and letters of credit of 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 is paid monthly at the bank's reference rate minus
0.5% (7.25% at January 30, 1999) or IBOR plus 1.125%, 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 customary
with such agreements. At January 30, 1999, the Company had no outstanding
borrowings under the line of credit and $1.3 million outstanding under letters
of credit. Interest expense under borrowing arrangements was $109,000, $211,000
and $779,000 for the fiscal years ended January 31, 1999, January 30, 1998 and
February 1, 1997, respectively.
Cost Plus, Inc. 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 6. INCOME TAXES
The provision for income taxes consists of the following:
Fiscal Year Ended
--------------------------------------------------
January 30, January 31, February 1,
(In thousands) 1999 1998 1997
----------- ----------- -----------
Payable:
Federal $ 8,621 $ 6,683 $ 5,240
State 1,768 1,304 1,045
----------- ----------- -----------
Total payable 10,389 7,987 6,285
----------- ----------- -----------
Deferred:
Federal (1,556) (1,346) (989)
State (371) (209) (134)
----------- ----------- -----------
Total deferred (1,927) (1,555) (1,123)
----------- ----------- -----------
Provision for income taxes $ 8,462 $ 6,432 $ 5,162
=========== =========== ===========
The differences between the U.S. federal statutory tax rate and the Company's
effective tax rate are as follows:
Fiscal Year Ended
--------------------------------------------------
January 30, January 31, February 1,
(In thousands) 1999 1998 1997
----------- ----------- -----------
U.S. federal statutory tax rate 35.0% 35.0% 35.0%
State income taxes (net of U.S. federal income tax benefit) 4.3 4.3 4.7
Non-deductible expenses 0.4 0.5 0.6
Other (0.7) (0.7) 0.7
----------- ----------- -----------
Effective income tax rate 39.0% 39.1% 41.0%
=========== =========== ===========
Significant components of the Company's deferred tax assets and liabilities are
as follows:
January 30, January 31,
(In thousands) 1999 1998
----------- -----------
Current deferred tax asset:
Deductible reserves $ 341 $ 210
Long-term deferred tax asset (liability):
Deferred rent 1,858 1,208
Capital leases (1,456) (1,610)
Lease rights (681) (731)
Depreciation (31) (280)
Deferred compensation 181 --
Other (44) (556)
----------- -----------
Total (173) (1,969)
----------- -----------
Net deferred tax assets (liabilities) $ 168 $(1,759)
=========== ===========
28 Cost Plus, Inc.
NOTE 7. EQUITY AND STOCK COMPENSATION PLANS
Stock Split
All share and per share data in the accompanying consolidated financial
statements and notes has been restated to reflect a three-for-two split of the
Company's common stock effective March 11, 1999.
Shareholder Rights Plan
Each outstanding share of common stock has a Preferred Share Purchase Right
(expiring on June 30, 2008) which is exercisable only upon the occurrence of
certain change in control events.
Options
The Company currently has options outstanding under 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 and 1994
Plans permitted the granting of options to employees to purchase up to 1,622,717
shares of common stock at prices ranging from 85% to 100% of fair market value
as of the date of grant. Options are exercisable over ten years and became fully
vested upon the Company's initial public offering in April 1996. Upon approval
of the 1994 Plan in March 1995, the 1988 Plan was terminated except for options
then outstanding. 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 2,137,004 shares
of common stock, less the aggregate number of shares outstanding under the 1994
Plan grants or any shares issued upon exercise of options granted under the 1994
Plan (547,413 at January 30, 1999). Options are exercisable over ten years and
vest as determined by the Board of Directors, generally over three or four
years. An additional 375,000 increase in the number of shares of common stock
reserved for issuance was approved by the Board of Directors in March 1998 and
by shareholders in June 1998.
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 102,450 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 10,613 shares of common stock. In addition, each non-employee
director will automatically receive an annual grant of a non-statutory option to
purchase 3,000 shares. Options are exercisable over ten years and vest over a
four-year period.
A summary of activity under the above option Plans is set forth below:
Weighted
Average
Exercise
Shares Price
---------- ---------
Outstanding at February 3, 1996 (143,024 exercisable at a weighted average price of $2.00) 1,081,436 $ 5.51
Granted 283,088 11.85
Exercised (66,393) 2.67
Canceled (17,411) 5.65
---------- ---------
Outstanding at February 1, 1997 (496,625 exercisable at a weighted average price of $3.83) 1,280,720 7.05
Granted 712,800 14.31
Exercised (268,499) 4.77
Canceled and expired (151,625) 9.41
---------- ---------
Outstanding at January 31, 1998 (489,018 exercisable at a weighted average price of $6.51) 1,573,396 10.48
Granted 313,500 20.19
Exercised (472,020) 6.51
Canceled and expired (179,127) 13.41
---------- ---------
Outstanding at January 30, 1999 1,235,749 14.04
========== =========
Cost Plus, Inc. 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Additional information regarding options outstanding as of January 30, 1999 is
as follows:
Options Exercisable
-------------------------------
Remaining Weighted Average Weighted Average Weighted Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life (Yrs.) Price Exercisable Price
------------------------- ----------- ---------------- ---------------- ------------- ----------------
$ 0.04 - $ 0.04 119 3.1 $ 0.04 119 $ 0.04
3.85 - 3.96 35,809 6.2 3.87 35,809 3.87
7.54 - 10.50 386,649 7.3 8.86 139,822 9.44
12.00 - 16.67 557,872 8.3 15.17 132,711 13.03
19.67 - 22.25 255,300 9.4 20.84 -- --
------------------------- ----------- ---------------- ---------------- ------------- ----------------
1,235,749 8.2 14.04 308,461 10.33
=========== ================ ================ ============= ================
At January 30, 1999, 526,302 and 61,088 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 450,000 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 its fair market value 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. Consequently, 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 Company's stock option 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 Ended
---------------------------------------
January 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
Stock volatility 52.6% 60.0% 55.3%
Risk free interest rates 5.4% 6.3% 5.9%
Expected life (in years) 1.8 1.8 1.8
Weighted average fair value per share $9.85 $9.17 $5.24
Expected dividends -- -- --
30 Cost Plus, Inc.
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 1998, fiscal 1997 and fiscal 1996 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 Ended
---------------------------------------------
January 30, January 31, February 1,
(In thousands, except per share data) 1999 1998 1997
----------- ----------- -----------
Net income
As reported $13,236 $10,007 $7,427
Pro forma 11,983 8,920 6,747
Basic net income per share
As reported $ 1.01 $ 0.80 $ 0.64
Pro forma 0.91 0.71 0.58
Diluted net income per share
As reported $ 0.98 $ 0.77 $ 0.61
Pro forma 0.88 0.69 0.55
The impact of outstanding non-vested stock options granted prior to fiscal 1995
has been excluded from the pro forma calculation; accordingly, the fiscal 1998,
fiscal 1997 and fiscal 1996 pro forma adjustments are not indicative of future
period pro forma adjustments, when the calculation will include all applicable
stock options.
NOTE 8. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan for employees who meet certain service and age
requirements. Participants may contribute up to 15% of their salaries to a
maximum of $10,000 per year 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 $90,000 in fiscal 1998 and $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
$327,000 for fiscal 1998 and $129,000 for fiscal 1997.
NOTE 9. RELATED PARTY TRANSACTIONS
In February 1998, the Company repurchased 225,002 shares of common stock for
$3,750,000 from its former Chief Executive Officer.
Cost Plus, Inc. 31
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS
COST PLUS, INC.
OAKLAND, CALIFORNIA
We have audited the accompanying consolidated balance sheets of Cost Plus, Inc.
and subsidiaries as of January 30, 1999 and January 31, 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997.
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. and subsidiaries as
of January 30, 1999 and January 31, 1998 and the results of their operations and
their cash flows for the fiscal years ended January 30, 1999, January 31, 1998
and February 1, 1997 in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
March 15, 1999
32 Cost Plus, Inc.
DIRECTORS, OFFICERS AND CORPORATE DATA
BOARD OF DIRECTORS
Murray H. Dashe
Chairman,
Chief Executive Officer and President
Cost Plus, Inc.
Ralph D. Dillon
Chairman Emeritus
Cost Plus, Inc.
Joseph H. Coulombe/1/
Independent Management
Consultant
Danny W. Gurr/1/
President
Dorling Kindersley Publishing Inc.
Nancy Pedot/2/
Independent Management
Consultant
Olivier L. Trouveroy/1/,/2/
Managing Partner
ING Equity Partners, L.P.I
Thomas D. Willardson/2/
Senior Vice President of
Finance and Treasurer
Leap Wireless International
CORPORATE OFFICERS
Murray H. Dashe
Chairman of the Board,
Chief Executive Officer
and President
John F. Hoffner
Executive Vice President of
Administration, Chief Financial
Officer and Secretary
Kathi P. Lentzsch
Executive Vice President,
Merchandising and Marketing
Joan S. Fujii
Senior Vice President,
Human Resources
Gary D. Weatherford
Senior Vice President,
Store Operations
Michael J. Allen
Vice President,
Store Development
Charmaine D. Casella
Vice President, Controller and
Chief Accounting Officer
Patricia A. Juckett
Vice President, Marketing and Advertising
Ron P. Perkuchin
Vice President,
Distribution and Logistics
Judy A. Soares
Vice President,
Information Systems
Malcolm R. Carden
Treasurer
CORPORATE DATA
Corporate Headquarters
Cost Plus, Inc.
200 4th Street
Oakland, CA 94607
Transfer Agent and Registrar
The First National Bank of Boston
c/o Boston EquiServe, LP
Canton, MA
(617) 575-3120
Independent Auditors
Deloitte & Touche LLP
San Francisco, CA
General Counsel
Wilson Sonsini Goodrich & Rosati
Palo Alto, CA
/1/ Member of the Audit Committee of the Board of Directors.
/2/ Member of the Compensation Committee of the Board of Directors.
Cost Plus, Inc. 33
COST PLUS WORLD MARKET ACROSS THE COUNTRY
[MAP APPEARS HERE]
Ninety Stores Nationwide*
Arizona
Mesa
Phoenix (2)
Scottsdale
Tucson
California
Brea
Citrus Heights
City of Industry
Colma
Concord
Fremont
Fresno
Glendale
La Jolla
La Mesa
Lakewood
Marin
Mission Viejo
Modesto
Mountain View
Oakland
Oceanside
Palm Desert
Pasadena
Pleasanton
Roseville
Sacramento
San Diego
San Dimas
San Francisco
San Jose (2)
San Mateo
Santa Ana
Santa Cruz
Santa Rosa
Thousand Oaks
Torrance
Valencia
Walnut Creek
West Los Angeles
Woodland Hills
Colorado
Aurora
Denver (2)
Idaho
Boise
Illinois
Aurora
Chicago (2)
Oak Brook
Schaumburg
Skokie
Indiana
Carmel
Michigan
Ann Arbor
Auburn Hills
Kentwood
Portage
Rochester Hills
Shelby Township
Troy
Westland
Missouri
Brentwood
Sunset Hills
Nebraska
Omaha
Nevada
Las Vegas (2)
Reno
New Mexico
Albuquerque
Ohio
Cincinnati (2)
Columbus
Springdale
Oregon
Portland
Tigard
Texas
Austin (2)
Dallas
Grapevine
Houston (3)
Plano
San Antonio
Sugar Land
The Woodlands
Washington
Bellevue
Lynnwood
Seattle
Tukwila
Wisconsin
Madison
*As of March 31, 1999
34 Cost Plus, Inc.