UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
------ SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 1, 1999
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission file number 0-14970
COST PLUS, INC.
(Exact name of registrant as specified in its charter)
California 94-1067973
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
200 Fourth Street, Oakland, California 94607
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (510) 893-7300
Former name, former address and former fiscal year, N/A
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No___
-----
The number of shares of Common Stock, with $0.01 par value, outstanding on June
4, 1999 was 13,506,363.
COST PLUS, INC.
FORM 10-Q
For the Quarter Ended May 1, 1999
INDEX
PART I. FINANCIAL INFORMATION Page
ITEM 1. Condensed Consolidated Financial Statements
Balance Sheets (unaudited) as of May 1, 1999,
January 30, 1999 and May 2, 1998 3
Statements of Operations (unaudited)
for the three months ended May 1, 1999
and May 2, 1998 4
Statements of Cash Flows (unaudited)
for the three months ended May 1, 1999
and May 2, 1998 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-10
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 11
SIGNATURE PAGE 12
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COST PLUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share amounts, unaudited)
May 1, January 30, May 2,
1999 1999 1998
---------- ------------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 23,239 $ 28,600 $ 19,106
Merchandise inventories 66,339 70,680 53,949
Other current assets 4,722 4,553 3,212
--------- --------- ---------
Total current assets 94,300 103,833 76,267
Property and equipment, net 60,484 59,034 52,821
Other assets, net 9,725 10,274 11,198
--------- --------- ---------
Total assets $ 164,509 $ 173,141 $ 140,286
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,283 $ 17,568 $ 10,143
Income taxes payable 217 8,180 --
Accrued compensation 7,540 7,421 6,917
Other current liabilities 9,962 9,633 7,805
--------- --------- ---------
Total current liabilities 31,002 42,802 24,865
Capital lease obligations 14,944 15,110 15,547
Deferred income taxes 173 173 1,969
Other long-term obligations 6,028 5,653 4,337
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 13,488,474,
13,291,010 and 13,095,852 135 133 131
Additional paid-in capital 106,315 104,065 101,176
Retained earnings (deficit) 5,912 5,205 (7,739)
--------- --------- ---------
Total shareholders' equity 112,362 109,403 93,568
--------- --------- ---------
Total liabilities and shareholders' equity $ 164,509 $ 173,141 $ 140,286
========= ========= =========
See notes to condensed consolidated financial statements.
3
COST PLUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts, unaudited)
Three Months
Ended
---------------------
May 1, May 2,
1999 1998
---------- ---------
Net Sales $ 75,389 $ 56,839
Cost of sales and occupancy 49,525 37,772
---------- ---------
Gross profit 25,864 19,067
Selling, general and administrative expenses 23,543 18,330
Store preopening expenses 994 80
---------- ---------
Income from operations 1,327 657
Net interest expense 167 178
---------- ---------
Income before income taxes 1,160 479
Income taxes 453 187
---------- ---------
Net income $ 707 $ 292
========== =========
Net income per share
Basic $ 0.05 $ 0.02
Diluted $ 0.05 $ 0.02
Weighted average shares outstanding
Basic 13,371 13,019
Diluted 13,876 13,539
See notes to condensed consolidated financial statements.
4
COST PLUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
Three Months Ended
-----------------------
May 1, May 2,
1999 1998
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 707 $ 292
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,655 2,136
Change in assets and liabilities:
Merchandise inventories 4,341 2,657
Other assets 162 (163)
Accounts payable (3,808) (2,947)
Income taxes payable (7,963) (6,282)
Other liabilities 790 308
--------- ---------
Net cash used in operating activities (3,116) (3,999)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,364) (1,873)
--------- ---------
Net cash used in investing activities (4,364) (1,873)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (133) (123)
Cash used for common stock repurchase -- (3,750)
Proceeds from the issuance of common stock 2,252 1,417
--------- ---------
Net cash provided by (used in) financing activities 2,119 (2,456)
--------- ---------
Net decrease in cash and cash equivalents (5,361) (8,328)
Cash and cash equivalents:
Beginning of period 28,600 27,434
--------- ---------
End of period $ 23,239 $ 19,106
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for interest $ 172 $ 191
========= =========
Cash paid for taxes $ 8,415 $ 6,503
========= =========
See notes to condensed consolidated financial statements.
5
COST PLUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended May 1, 1999 and May 2, 1998
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared from the records of the Company without audit and, in the opinion of
management, include all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position at May 1, 1999 and
May 2, 1998; the interim results of operations for the three months ended May 1,
1999 and May 2, 1998; and changes in cash flows for the three month periods then
ended. The balance sheet at January 30, 1999, presented herein, has been
derived from the audited financial statements of the Company for the fiscal year
then ended.
Accounting policies followed by the Company are described in Note 1 to the
audited consolidated financial statements for the fiscal year ended January 30,
1999. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted for purposes of the interim condensed
consolidated financial statements. The condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements, including notes thereto, for the fiscal year ended January 30, 1999.
The results of operations for the three month periods herein presented are not
necessarily indicative of the results to be expected for the full year.
2. REVOLVING LINE OF CREDIT AGREEMENT
On October 12, 1998, the Company entered into a new revolving line of credit
agreement with a bank, which expires on June 1, 2000. 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 May 1, 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 May 1, 1999, the Company had no outstanding borrowings under the
line of credit and $1.4 million outstanding under letters of credit. Interest
expense under borrowing arrangements was $4,000, and $10,000 for the three
months ended May 1, 1999, and May 2, 1998, respectively.
3. STOCK SPLIT
On February 16, 1999, the Company's Board of Directors authorized a three-for-
two split of its common stock effective March 11, 1999 for shareholders of
record at the close of business on March 1, 1999. All share and per share data
in the accompanying condensed consolidated financial statements and notes has
been restated to reflect the stock split.
4. RECONCILIATION OF BASIC SHARES TO DILUTED SHARES
The following is a reconciliation of the weighted average number of shares (in
thousands) used in the Company's basic and diluted per share computations.
Three Months Ended
----------------------------
May 1, 1999 May 2, 1998
----------- -----------
Basic shares 13,371 13,019
Effect of diluted stock options 505 520
------ ------
Diluted shares 13,876 13,539
====== ======
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
AN ASTERISK "*" DENOTES A FORWARD-LOOKING STATEMENT REFLECTING CURRENT
EXPECTATIONS THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER
FROM THOSE DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS, AND SHAREHOLDERS OF
COST PLUS, INC. (THE "COMPANY" OR "COST PLUS') SHOULD CAREFULLY REVIEW THE
CAUTIONARY STATEMENTS SET FORTH IN THIS FORM 10-Q, INCLUDING, "FACTORS THAT MAY
AFFECT FUTURE RESULTS" BEGINNING ON PAGE 7 HEREOF. THE COMPANY MAY FROM TIME TO
TIME MAKE ADDITIONAL WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS, INCLUDING
STATEMENTS CONTAINED IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION AND IN ITS REPORTS TO SHAREHOLDERS. THE COMPANY DOES NOT UNDERTAKE
TO UPDATE ANY FORWARD-LOOKING STATEMENT THAT MAY BE MADE FROM TIME TO TIME BY OR
ON BEHALF OF THE COMPANY.
Results of Operations
The three months (first quarter) ended May 1, 1999 as compared to the three
months (first quarter) ended May 2, 1998.
Net Sales. Net sales increased $18.6 million, or 32.7%, to $75.4 million in the
first quarter of fiscal 1999 from $56.8 million in the first quarter of fiscal
1998. This increase in net sales was attributable to new stores and an increase
in comparable store sales. Comparable store sales rose 10.2% in fiscal 1999,
primarily as a result of a larger average transaction size. At May 1, 1999, the
Company operated 90 stores as compared to 71 stores at May 2, 1998. New and
non-comparable stores contributed approximately $12.7 million of the increase in
net sales.
Gross Profit. As a percentage of net sales, first quarter gross profit was 34.3%
in fiscal 1999 compared with 33.5% in fiscal 1998. The increase in gross profit
resulted from an improvement in merchandise margin percentage, partially offset
by higher occupancy costs in new stores. New stores generally have higher
occupancy costs, as a percentage of net sales, until they reach maturity. The
merchandise margin improvement resulted primarily from a sales mix more heavily
weighted towards higher margin goods, an improvement in initial markon and lower
inventory shrinkage rates.
Selling, General and Administrative ("SG&A") Expenses. As a percentage of net
sales, SG&A expenses decreased to 31.2% in the first quarter of fiscal 1999 from
32.2% in the first quarter of the prior fiscal year. The decrease in the SG&A
expense rate resulted primarily from leveraging store payroll and corporate
overhead expenses against higher net sales and an expanding base of stores.
Store Preopening Expenses. Store preopening expenses, which include grand
opening advertising and preopening merchandise setup expenses, were $1.0 million
in the first quarter of fiscal 1999 and $80,000 in the first quarter of the
prior year. Expenses vary depending on the particular store site and whether it
is located in a new or existing market. The Company opened five stores in the
first quarter of fiscal 1999 compared to one store in the prior year's first
quarter.
Net Interest Expense. Net interest expense for the first quarter, which
includes interest on capital leases net of interest income, was $167,000 for
fiscal 1999 and $178,000 for fiscal 1998.
Income Taxes. The Company's effective tax rate was 39% in the first quarter of
both fiscal 1999 and fiscal 1998.
Factors That May Affect Future Results
The Company's business is highly seasonal, reflecting the general pattern
associated with the retail industry of peak sales and earnings during the
Christmas season. Due to the importance of the Christmas selling season, the
fourth quarter of each fiscal year has historically contributed, and the Company
expects it will continue to contribute, a disproportionate percentage of the
Company's net sales and most of its net income for the 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
7
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 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.
Liquidity and Capital Resources
The Company's primary uses for cash are to fund operating expenses, inventory
requirements and new store expansion. Historically, the Company has financed
its operations primarily from borrowing 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 used in operating activities in the first quarter ended May 1, 1999,
totaled $3.1 million, a decrease of $0.9 million from the prior year. This
decrease resulted primarily from the improved profitability and more efficient
utilization of inventory which was partially offset by higher income tax
payments on the prior year's increased taxable income.
Net cash used in investing activities, primarily for new stores, totaled $4.4
million in the first quarter of 1999 compared to $1.9 million in the prior year.
This increase is due to spending for five stores which opened in the first
quarter of fiscal 1999 compared to only one store which opened in the first
quarter last year. The Company estimates that fiscal 1999 capital expenditures
will approximate $17.0 million.*.
Net cash provided by financing activities was $2.1 million in the first quarter
of fiscal 1999, which was primarily proceeds from the issuance of common stock
in connection with the Company's stock option and stock purchase plans. Net
cash used in financing activities was $2.5 million in the first quarter of
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 common stock issued under the
Company's stock option and stock purchase plans.
On October 12, 1998, the Company entered into a new revolving line of credit
agreement with a bank, which expires on June 1, 2000. 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 May 1, 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 May 1, 1999, the Company had no outstanding borrowings under the
line of credit and $1.4 million outstanding under letters of credit. Interest
expense under borrowing arrangements was $4,000 and $10,000 for the three months
ended May 1, 1999, and May 2, 1998 respectively.
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
8
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 completed during 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 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
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.
Impact of New Accounting Standard
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in either assets or liabilities. This statement is
effective for fiscal years beginning after June 15, 1999 and is
9
not to be applied retroactively to financial statements for prior periods. On
May 20, 1999, the FASB issued an exposure draft on a proposed SFAS which would
defer the effective date of SFAS No. 133 until June 15, 2000. 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.
10
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Amendment of Restated Articles of Incorporation as
filed with the California Secretary of State on February 25,
1999.
3.2 Amended and Restated By-laws dated May 13, 1999.
10.1 Executive Transition Agreement, dated May 7, 1999, between the
Company and Ralph D. Dillon.
27 Financial Data Schedule (submitted for SEC use only).
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the period
covered by this report.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COST PLUS, INC.
----------------------------------------
Registrant
/s/ John F. Hoffner
----------------------------------------
Date: June 14, 1999 By: John F. Hoffner
Executive Vice President, Administration
Chief Financial Officer
12