-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IEPkEiBA3/6lM41vkiAYDWszy7Y6JcsI/ycJ1lTZPLKkZ35GmS+wOdW0nlJ6Q5tN e7EMwPanTR4YTGKyXEEmqA== 0000929624-99-000742.txt : 19990428 0000929624-99-000742.hdr.sgml : 19990428 ACCESSION NUMBER: 0000929624-99-000742 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19990130 FILED AS OF DATE: 19990427 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COST PLUS INC/CA/ CENTRAL INDEX KEY: 0000798955 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-VARIETY STORES [5331] IRS NUMBER: 941067973 STATE OF INCORPORATION: CA FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14970 FILM NUMBER: 99601845 BUSINESS ADDRESS: STREET 1: 201 CLAY ST STREET 2: P O BOX 23350 CITY: OAKLAND STATE: CA ZIP: 94607 BUSINESS PHONE: 4158937300 MAIL ADDRESS: STREET 1: P O BOX 23350 STREET 2: P O BOX 23350 CITY: OAKLAND STATE: CA ZIP: 94623 10-K 1 FORM 10-K FOR PERIOD ENDING 1/30/99 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to _________________. Commission file number 0-14970 COST PLUS, INC. (Exact name of registrant as specified in its charter) California 94-1067973 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 200 4th Street 94607 Oakland, California (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code (510) 893-7300 Securities registered pursuant to None Section 12(b) of the Act: Securities registered pursuant to Common Stock, $.01 par value Section 12(g) of the Act: Preferred Share Purchase Rights 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 --- --- Indicate by check mark if disclosure of delinquent filer pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ____ The aggregate market value of voting stock held by non-affiliates of the registrant on March 31, 1999 was approximately $389,345,239 based upon the last sale price reported for such date on the Nasdaq National Market. On that date, 13,346,660 shares of Common Stock, $.01 par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the fiscal year ended January 30, 1999 ("Annual Report") are incorporated by reference into Part II and Part IV. Portions of the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held June 15, 1999 ("Proxy Statement") are incorporated by reference into Part III. PART I ITEM 1. BUSINESS The Company Cost Plus, Inc. ("Cost Plus World Market" or "the Company") is a leading specialty retailer of casual home living and entertaining products. As of January 30, 1999, the Company operated 85 stores under the name "Cost Plus World Market" in 16 states, primarily in the Western United States, but has begun to expand into other regions of the country. Cost Plus World Market's business strategy is to differentiate itself by offering a large and everchanging selection of unique products, many of which are imported, at competitive prices in an exciting shopping environment. Many of Cost Plus World Market's products are proprietary or private label, often incorporating the Company's own designs, "World Market" brand name, quality standards and specifications, and typically are not available at department stores and other specialty retailers. Cost Plus World Market's expansion strategy is to open stores primarily in metropolitan and suburban markets that can support multiple stores and enable the Company to achieve advertising, distribution and operating efficiencies. The Company may also selectively enter mid-size markets which can support one or two stores that the Company believes can meet its profitability criteria. The Company's stores, operated under the name "Cost Plus World Market", are located predominantly in high traffic metropolitan and suburban locales, often near major malls. In fiscal 1998, the Company opened a total of 15 stores, including eight in existing markets in Austin, Chicago, Dallas, Detroit, Houston, Sacramento and San Francisco and seven in new markets in Cincinnati, Indianapolis, Omaha and St. Louis. Merchandising Cost Plus World Market's merchandising strategy is to offer customers a broad selection of distinctive items related to the theme of casual living and home entertaining. Format and Presentation. The Company's stores are designed to evoke the feeling of a "marketplace" through colorful and creative visual displays and merchandise presentations, including goods in open barrels and crates, groupings of related products in distinct "shops" within the store, and in-store activities such as cooking demonstrations and food and coffee tastings. The Company believes that its marketplace effect provides customers with a fun shopping experience and encourages browsing throughout the store. The average selling space of a Cost Plus World Market store is approximately 15,900 square feet, which allows space and flexibility for merchandise displays, product adjacencies and directed traffic patterns. Complementary products are positioned in proximity to one another, and cross merchandising themes are used in merchandise displays to tie different product offerings together. The unobstructed floor plan allows the customer to see virtually all of the different product areas in a Cost Plus World Market store from the entrance. The "power" aisle, where bulk displays highlight sharply priced items, leads the customer through the store into the different product areas. The Company uses a "swing" area near the front of the store to group seasonal products in themes, such as Christmas and Easter. Store signage, including permanent as well as promotional signs, is developed by the Company's in-house graphic design department. End caps, bulk stacks and free standing displays are changed monthly. The Cost Plus World Market store format is also designed to reinforce the Company's value image through exposed ceilings, concrete floors, simple wooden fixtures and open or bulk displays of merchandise. The Company displays most of its inventory on the selling floor and makes effective use of vertical space, for example, a display of chairs arranged on a wall and rugs hanging vertically from display racks. The Company believes that its customers usually visit a Cost Plus World Market store as a destination with a specific purchase in mind. The Company also believes that once in the store, its customers often spend additional time shopping and browsing, usually purchasing more items than they originally intended. Products. The Company believes its distinctive and unique merchandise differentiates the Company from other retailers. Many of Cost Plus World Market's products are proprietary or private label, often incorporating the Company's own designs, "World Market" brand name, quality standards and specifications, and typically are not available at department stores and other specialty retailers. In addition to strengthening the stores' product offering, proprietary and private label goods typically offer higher gross margin opportunities than branded goods. A significant portion of Cost Plus World Market's products are made abroad in approximately 50 countries, and many of these goods are handcrafted by local artisans. 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, rugs, pillows, lamps, window coverings, frames and baskets. Cost Plus World Market's furniture products include ready- to-assemble living and dining room pieces, unusual handcrafted case goods and occasional pieces, as well as outdoor furniture made from a variety of materials such as rattan, hardwood and wrought iron. The Company also sells a number of tabletop and kitchen items including glassware, ceramics, textiles and cooking utensils. Kitchen products offer the casual gourmet an assortment of products organized around a variety of themes such as baking, food preparation, barbeque and international dining. Cost Plus World Market offers a number of gift and decorative accessories, including collectibles, cards, wrapping paper and Christmas and other seasonal items. Because many of the gift and collectible items come from around the world, they contribute to the exotic atmosphere of the stores. Cost Plus World Market also offers its customers a wide selection of gourmet foods and beverages, including wine, microbrewed and imported beer, coffee, tea and mineral water. The wine assortment offers a number of moderately priced premium wines, including a variety of well recognized labels, as well as wines not readily available at neighborhood wine or grocery stores. Consumable products, particularly beverage, generally have lower margins than the Company's average. Coffee, roasted at the Company's own roasting plant, is sold over-the-counter from bulk containers. Gourmet foods include packaged products from around the world and seasonal items that relate to "old world" holidays and customs. Packaged snacks, candy and pasta are displayed in open barrels and crates. All food items typically have a shelf life that lasts six months or longer. The Company replaces or updates many of the items in its merchandise assortment on a regular basis in order to encourage repeat shopping and to promote a sense of discovery. The Company regularly marks down and eliminates items that do not meet its turnover expectations. Pricing. Cost Plus World Market offers quality products at competitive prices. The Company complements its competitive everyday prices with opportunistic buys, enabling the Company to pass on additional savings to the customer. The Company routinely shops a variety of retailers to ensure that its products are competitively priced. Planning and Buying. Cost Plus World Market effectively manages a large number of products by utilizing a centralized merchandise planning system. The Company regularly monitors merchandise through its management information systems to identify and respond to product trends. The Company maintains its own central buying staff which is responsible for establishing the assortment of inventory within the merchandise groups each season, including integrating trends or themes identified by the Company into its different product categories. The Company attempts to moderate the risk associated with merchandise purchasing by testing selected new products in a limited number of stores. The Company's long standing relationships with overseas suppliers, its extensive international buying agency network and its extensive knowledge of the import process facilitate the planning and buying process. The buyers work closely with suppliers to develop unique products that will meet customers' expectations for quality and value. The Company's buyers communicate with district and store managers and use the management information systems to tailor the merchandise mix of individual stores to regional conditions and to better ensure that in-stock availability will be maintained in accordance with the specific requirements of each store. Advertising The Company advertises through promotional ads in major daily newspapers and on radio and television. The Company's approach is to regionalize its advertising and use the most efficient media mix within a geographic area. The Company uses eight to sixteen page full color tabloids and color or black and white newspaper advertisements in selected markets to highlight product offerings and selected promotions. Radio and television media is often used for seasonal advertising, such as Christmas. For store grand openings, the Company uses a combination of newspaper, radio and television. Product Sourcing and Distribution The Company purchases most of its inventory through its central purchasing system, which allows the Company to take advantage of volume purchase discounts and improve controls over inventory and product mix. The Company purchases its merchandise from over 1,500 suppliers, and no supplier represented over 4.0% of total purchases in the fiscal year ended January 30, 1999. A significant portion of Cost Plus World Market's products are made abroad in approximately 50 countries in Europe, 2 North and South America, Asia, Africa and Australia. The Company has established a well developed overseas sourcing network and enjoys long standing relationships with many of its vendors. As is customary in the industry, the Company does not have long-term contracts with any suppliers. The Company's buyers often work with suppliers to produce unique products exclusive to Cost Plus World Market. The Company believes that, although there could be delays in changing suppliers, alternate sources of merchandise for all product categories are available at comparable prices. Cost Plus World Market typically purchases overseas products on a free-on-board shipping point basis, and the Company's insurance on such goods commences at the time it takes ownership. The Company also purchases a number of domestic products, especially in the gourmet food and beverage area. Due to state regulations, wine and beer are purchased from local distributors in each state with purchasing controlled by the Corporate buying office. The Company currently services most of its stores from its primary distribution center in Stockton, California. Domestically sourced merchandise is usually delivered to the distribution center by common carrier or by Company trucks. The Company believes that its distribution center will be able to handle, or can be upgraded to handle, the Company's store expansion plans for the Western United States over the next three years. Any significant interruption in the operation of this facility would have a material adverse effect on the Company's financial position and results of operations. To facilitate servicing regions such as Illinois, Indiana, Michigan, Missouri, Ohio and Wisconsin, the Company has a satellite distribution center located in Peru, Indiana which became operational in a limited capacity during fiscal 1998. This facility is expandable to meet the Company's needs over the next three years. Management Information Systems Each of the Company's stores is linked to the Cost Plus World Market headquarters in Oakland, California through a point-of-sale system that interfaces with an IBM AS/400 computer. The Company's information systems keep a record, which is updated daily, of each merchandise item sold. The point-of-sale system also has scanning, "price-look-up" and on-line credit card approval capabilities, all of which improve transaction accuracy, speed checkout time and increase overall store efficiency. The Company is in the process of upgrading its in-store information system to improve information flow to store management and enhance other in-store capabilities. Purchasing operations are facilitated by the use of computerized merchandise information systems which allow the Company to analyze product sell-through and assist the buyers in making merchandise decisions. The Company's central replenishment system includes a store-specific, individualized inventory "model stock" which enables the Company to maintain adequate stock levels in each location. The Company believes its centralized purchasing system has helped it to reduce in-store inventory levels and control out-of-stock situations. The Company uses several other customized management information and control systems to direct the Company's operations and finances. These computerized systems are designed to ensure the integrity of the Company's inventory, allow the merchandising staff to reprice merchandise, replenish depleted store inventories, track promotions, identify sales trends and monitor merchandise mix throughout all of the Company's stores. The Company's distribution operations use these systems to control, locate, pick and ship inventory to stores. The Company believes that these systems allow for lower average store inventories, higher operating efficiency, better in-stock availability and fewer markdowns. These systems also enable the Company to produce the periodic financial reports necessary for developing budgets and monitoring individual store and consolidated Company performance. The Company believes that its current management information system is readily upgradable to support the Company's planned expansion for the foreseeable future. Competition The markets served by the Company are highly competitive. The Company competes against a diverse group of retailers ranging from specialty stores to department stores and wholesale clubs. The Company's product offerings compete with such specialty retailers as Bed, Bath & Beyond, Crate & Barrel, Pottery Barn, Garden Ridge, Lechters, Michaels Stores, Pier 1 Imports, Trader Joe's and Williams- Sonoma. Specialty retailers tend to have higher prices and a more narrow assortment of products than Cost Plus World Market. Department stores typically have higher prices than Cost Plus World Market for similar merchandise. Wholesale clubs may have lower prices than Cost Plus World Market, but the product assortment is generally more limited. The Company competes with these and other retailers for customers, suitable retail locations and qualified management personnel. 3 Employees As of January 30, 1999, the Company had 1,019 full-time and 1,235 part-time employees. Of these, 1,927 were employed in the Company's stores and 327 were employed in the distribution center and corporate office. The Company regularly supplements its work force with temporary workers, especially in the fourth quarter of each year, to service increased customer traffic during the peak Christmas season. Approximately 124 employees located in 13 stores in Northern California are covered by a collective bargaining agreement which expires on May 31, 2003. The Company believes that it enjoys good relationships with its employees. Trademarks The Company regards its trademarks and service marks as having significant value and as being important to its marketing efforts. The Company has registered its "Cost Plus," "Cost Plus World Market," "Crossroads," "World Market" and "Where you can afford to be different" marks and its "Cost Plus World Market" and "World Market" logos with the United States Patent and Trademark Office on the Principal Register. The Company has also secured California state registration of its "Crossroads" trademark. The Company's policy is to pursue prompt and broad registration of its marks and to vigorously oppose infringement of its marks. Risk Factors This Form 10-K, including the documents incorporated by reference herein, contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including statements that include the words "believes," "expects" or "anticipates," or similar expressions. The Company may also make additional written and oral forward looking statements from time to time. Actual results may differ materially from those discussed in such forward-looking statements due to a number of factors including those set forth below and elsewhere in this Form 10-K and in documents which are incorporated by reference herein. 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. Seasonality and Quarterly Fluctuations. 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 markdown 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. Risks Associated with Expansion. The Company's ability to continue to increase its net sales and earnings will depend in part on its ability to open new stores and to operate such stores on a profitable basis. The Company's continued growth will also depend on its ability to increase sales in its existing stores. The Company opened 15 stores in fiscal 1998 and presently anticipates opening approximately 17 stores in fiscal 1999. The Company intends to open stores in both existing and new geographic markets. The opening of additional stores in an existing market could result in lower net sales from existing Company stores in that market. The success of the Company's planned expansion will be dependent upon many factors, including the identification of suitable markets, the availability and leasing of suitable sites on acceptable terms, the hiring, training and retention of qualified management and other store personnel, the availability of appropriate financing and general economic conditions. To manage its planned expansion, the Company must ensure the continuing adequacy of its existing systems and procedures, including product distribution facilities, store management, financial controls and information systems. There can be no assurance that the Company will be able to achieve its planned expansion, that new stores will be effectively integrated into the Company's existing operations or that such stores will be profitable. 4 The Company's expansion strategy includes opening stores in new geographic markets. These new markets may present competitive and merchandising challenges that are different from those currently faced by the Company in its existing geographic markets. The Company may incur higher costs related to advertising and distribution in connection with entering new markets. If the Company opens stores in new markets that do not perform to the Company's expectations, or if store openings are delayed, the Company's financial condition and results of operations could be materially adversely affected. In addition, in order to sell wine and beer, the Company is required to obtain alcoholic beverage licenses for each of its new stores, and the laws regulating the issuance of alcoholic beverage licenses differ from state to state. Any delays in receiving alcoholic beverage licenses for new stores could have an adverse impact on such stores' operations. Risks Associated with Merchandising. The Company's success depends in part upon the ability of its merchandising staff to anticipate the tastes of its customers and to provide merchandise that appeals to their preferences. The Company's strategy requires it to introduce in a timely manner products from around the world that are affordable, distinctive in quality and design, and not widely available from other retailers. Many of the Company's products require long lead times. In addition, a large percentage of the Company's merchandise changes regularly. The Company's failure to anticipate, identify or react appropriately to changes in consumer trends could lead to, among other things, either excess inventories and higher markdowns or a shortage of products and could have a material adverse effect on the Company's financial condition and results of operations. Effect of Economic Conditions and Geographic Concentration. The success of the Company's business depends to a significant extent upon the level of consumer spending. Among the factors that affect consumer spending are the general state of the economy, the level of consumer debt and consumer confidence in future economic conditions. A substantial majority of the Company's stores are located in the Western United States, principally in California. Lower levels of consumer spending in these regions could have a material adverse effect on the Company's financial condition and results of operations. Reduced consumer confidence and spending may result in reduced demand for the Company's products, limitations on the Company's ability to increase prices and may require increased levels of selling and promotional expenses, thereby adversely affecting the Company's financial condition and results of operations. Risks Associated with Importing. The Company imports a significant portion of its merchandise from approximately 50 countries. The Company relies on its long- term relationships with its suppliers but has no long-term contracts with such suppliers. The Company's future success will depend in large measure upon its ability to maintain its existing supplier relationships or to develop new ones. As an importer, the Company's business is subject to the risks generally associated with doing business abroad, such as foreign governmental regulations, disruptions, delays in shipments or price increases and changes in political or economic conditions in countries in which the Company purchases products. The Company's business is also subject to the risks associated with any new or revised United States legislation and regulations relating to imported products, including quotas, duties, taxes and other charges or restrictions on imported merchandise. Since certain of the Company's purchases are made in currencies other than the U.S. dollar and its financial results are reported in U.S. dollars, fluctuations in the rates of exchange between the U.S. dollar and other currencies may have a material adverse effect on the Company's financial condition and results of operations. Historically, the Company has not hedged its currency risk and does not currently anticipate doing so in the future. If any such factors were to render the conduct of business in particular countries undesirable or impractical, or if additional United States quotas, duties, taxes or other charges or restrictions were imposed upon the importation of the Company's products in the future, the Company's financial condition and results of operations could be materially adversely affected. Risks Related to Distribution Facilities. The Company's distribution functions for most of its stores are currently handled from its facility in Stockton, California. Any significant interruption in the operation of this facility would have a material adverse effect on the Company's financial condition and results of operations. The Company began ramping up an additional distribution facility in Peru, Indiana in fiscal 1998 to service its Midwest and Texas stores. A failure to successfully transition its distribution operations for these stores to the new facility or to coordinate the operations of the two facilities could have a material adverse effect on the Company's financial condition and results of operations. Competition. The market served by the Company is highly competitive. The Company competes against a diverse group of retailers ranging from specialty stores to department stores and wholesale clubs. The Company's product categories compete with such specialty retailers as Bed, Bath & Beyond, Crate & Barrel, Pottery Barn, Garden Ridge, Lechters, Michaels Stores, Pier 1 Imports, Trader Joe's and Williams-Sonoma. The Company competes with these and other retailers for customers, suitable retail locations and qualified management personnel. Many of the Company's competitors have significantly greater financial, marketing 5 and other resources than the Company, and there can be no assurance that the Company will be able to compete successfully in the future. Dependence on Key Personnel. The success of the Company's business will continue to depend upon its key personnel. The Company does not maintain any key man life insurance. The loss of the services of one or more of its key personnel could have a material adverse effect on the Company's financial condition and results of operations. The Company's success in the future will be dependent upon its ability to attract, retain and motivate quality personnel, including store managers. The Company's inability to attract and retain such key employees, including store managers, in the future could have a material adverse effect on the Company's financial condition and results of operations. Possible Volatility of Stock Price. The stock market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of the Company's common stock. In addition, the market price of the shares of common stock is likely to be highly volatile. Factors such as fluctuations in the Company's operating results, a downturn in the retail industry, changes in stock market analysts' recommendations regarding the Company, other retail companies or the retail industry in general and general market and economic conditions may have a significant effect on the market price of the Company's common stock. Risks associated with the Year 2000. The Company's success depends in part upon its ability to mitigate potential significant disruption of its operations due to Year 2000 problems. The Company has a structured approach for modifying existing software and converting to new software to address the Year 2000 issues. 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. 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. There can be no assurance that other entities will achieve Year 2000 compliance or that the Company can timely compensate for its risk should such entities fail to do so. If the Company's internal systems are not adequately remediated, if necessary modifications and conversions by other companies on whose systems some of the Company's business processes depend are not completed on time, or if the Company's contingency plans are not adequate, 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. ITEM 2. PROPERTIES The Company currently operates 90 stores in 16 states. The average selling space of a Cost Plus World Market store is approximately 15,900 square feet. The table below summarizes the distribution of stores by state:
Arizona................. 5 Illinois............ 6 New Mexico....... 1 California.............. Indiana............. 1 Ohio............. 4 Northern California... 19 Michigan............ 8 Oregon........... 2 Southern California... 18 Missouri............ 2 Texas............ 11 Colorado................ 3 Nebraska............ 1 Washington....... 4 Idaho................... 1 Nevada.............. 3 Wisconsin........ 1
The Company leases land and buildings for 83 stores (of which 18 are capital leases), leases land and owns the buildings for six stores and owns the land and building for one store. The Company currently leases its executive headquarters in Oakland, California pursuant to a lease which expires in October 2008. The Company currently leases its distribution facility of approximately 540,000 square feet in Stockton, California pursuant to a lease which expires in September 2001 and has three renewal options for five years each. The Company leases an additional distribution center in Peru, Indiana pursuant to a lease 6 which expires in December 2000, initially covering 100,000 square feet. The lease term can be extended to December 2009 with an additional four options of five years each, and the facility is expandable to 450,000 square feet. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any pending legal proceedings other than ordinary routine litigation incidental to the business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 7 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company are as follows:
Name Age Position - ------------------------- --- ------------------------------------------------------------ Murray H. Dashe.......... 56 Chairman of the Board, Chief Executive Officer and President John F. Hoffner.......... 51 Executive Vice President of Administration, Chief Financial Officer, and Secretary Kathi P. Lentzsch........ 43 Executive Vice President, Merchandising and Marketing Joan S. Fujii............ 52 Senior Vice President, Human Resources Gary D. Weatherford...... 42 Senior Vice President, Store Operations Michael J. Allen......... 44 Vice President, Store Development Charmaine D. Casella..... 36 Vice President, Controller and Chief Accounting Officer Ron P. Perkuchin......... 51 Vice President, Distribution and Logistics Judy A. Soares........... 49 Vice President, Information Systems Malcolm R. Carden........ 52 Treasurer
Mr. Dashe joined the Company in June 1997 and has served as Chairman of the Board and Chief Executive Officer since February 1998 with continued responsibilities as President. In September 1997, Mr. Dashe was appointed President with continued responsibilities as Vice Chairman of the Board. From June 1997 to September 1997, Mr. Dashe served as the Company's Vice Chairman of the Board. Mr. Dashe is responsible for overseeing all day-to-day operations of the Company. From August 1992 to June 1997, he was Chief Operating Officer of Leslie's Poolmart, Inc., a swimming pool supply retail chain, and was a director of that company from August 1989 to November 1996. From April 1990 through June 1992, he was President and Chief Executive Officer of RogerSound Labs, a Southern California retailer of audio/video consumer electronics. From September 1985 through April 1990, Mr. Dashe held several positions with SILO, a consumer electronics and appliance retailer, including Regional President, Regional Vice President and Director of Stores. Previously, he was employed in an executive capacity by other retailers, including Allied Stores Corp., where he served in a variety of positions, including Vice President/Director of Stores. Mr. Hoffner joined the Company in June 1998 as Executive Vice President of Administration, Chief Financial Officer and Secretary. Prior to joining the Company, Mr. Hoffner served as Executive Vice President and Chief Financial Officer of Sweet Factory, Inc. from April 1993 to June 1998. From January 1991 to April 1993, Mr. Hoffner was employed by Wherehouse Entertainment, Inc. where he served as Senior Vice President, Finance and Administration. Prior to that, he held executive positions in finance and administration with retailers such as Dayton Hudson and Federated Department Stores. Ms. Lentzsch joined the Company in February 1997 as Executive Vice President of Merchandising and Marketing. From May 1996 to January 1997, Ms. Lentzsch served as a retail consultant to several specialty retailers. From May 1993 to May 1996, Ms. Lentzsch was employed by Pottery Barn, a division of Williams- Sonoma, Inc., where she was most recently Senior Vice President, Merchandising. From April 1991 to May 1993, Ms. Lentzsch was General Merchandising Manager and Vice President, Merchandising and Marketing at Impostors, a retail costume jewelry chain. Prior to that, she held a number of merchandising and marketing executive positions with several retailers, including Vice President, Merchandising at Pier 1 Imports, Inc. Ms. Fujii was named the Company's Senior Vice President, Human Resources in February 1998. Ms. Fujii joined the Company in May 1991 and served as Vice President, Human Resources from October 1994 until February 1998. From May 1991 to October 1994, Ms. Fujii served as the Company's Director of Human Resources. From September 1975 to May 1991, she was employed by Macy's California in the operations and personnel departments, ultimately serving as Vice President, Human Resources at Macy's Union Square store in San Francisco. Mr. Weatherford was named Senior Vice President, Store Operations in February 1998. Mr. Weatherford joined the Company in January 1988 and served as Vice President, Store Operations from June 1995 until February 1998. From April 1991 to June 1995, Mr. Weatherford served as a Regional Manager for the Company, and from January 1990 to April 1991 he was a Senior Store Manager for the Company. From January 1988 to January 1990, Mr. Weatherford served as a Buyer and Store Design Director for the Company. 8 Mr. Allen was named the Company's Vice President, Store Development in February 1998. Mr. Allen joined the Company in December 1988 and served as Director of Stores from May 1995 until February 1998. From December 1988 to May 1995, Mr. Allen served as Regional Manager for the Company. Prior to joining the Company, Mr. Allen was a Regional Manager and Store Manager for Liquor Barn. Ms. Casella was named Vice President and Chief Accounting Officer with continued responsibilities as the Company's Controller in February 1999. From August 1997 to February 1999, Ms. Casella served as the Company's Controller. Ms. Casella served as the Company's Assistant Controller from February 1993 to August 1997. From August 1991 until January 1993, Ms. Casella was Corporate Accounting Manager for Nestle Food Co., a manufacturer and distributor of food products. Prior to that date, she was a Manager with the public accounting firm of Price Waterhouse LLP. Ms. Casella is a Certified Public Accountant. Mr. Perkuchin joined the Company as Vice President, Distribution and Logistics in May 1998. Prior to joining the Company, Mr. Perkuchin was employed at Ross Stores, an off-price apparel retailer, where he served as Staffing and Production Manager. From December 1995 to April 1997, Mr. Perkuchin served as Vice President of Distribution and Logistics at Home Express, a retailer which specialized in home accessories. From September 1990 to December 1995, Mr. Perkuchin was employed by Mervyn's California, a department store chain part of the Dayton Hudson Corporation, where he most recently served as Northern California Distribution Director. Ms. Soares joined the Company as Vice President Information Systems in May 1998. Prior to joining the Company, Ms. Soares served as Vice President, Management Information Systems of Natural Wonders, a specialty retailer of gift items relating to science and nature, from June 1996 to May 1998. From March 1993 to March 1996, Ms. Soares was employed with Home Express, a retailer which specialized in home accessories, where she served as Vice President, Management Information Systems. Prior to that, Ms. Soares held Senior level information systems positions with various retail companies such as The Gap and Mervyns's. Mr. Carden was named the Company's Treasurer in August 1996. Mr. Carden joined the Company in October 1986 and served as Director of Finance from May 1992 to August 1996. From October 1986 to May 1992, Mr. Carden served as Manager of Financial Planning. Prior to joining the Company, Mr. Carden was Manager of Strategic Planning for Genstar Corporation. PART II Information called for by Part II (Items 5,6,7, and 8) have been filed as Exhibit 13 to this report on Form 10-K. Such information is incorporated herein by reference. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The information required by this item is incorporated herein by reference to the Company's 1998 Annual Report to Shareholders (on page 19), filed as Exhibit 13 to this report on Form 10-K. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated herein by reference to the Company's 1998 Annual Report to Shareholders (on page 13), filed as Exhibit 13 to this report on Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated herein by reference to the Company's 1998 Annual Report to Shareholders (on pages 14 - 19), filed as Exhibit 13 to this report on Form 10-K. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is incorporated herein by reference to the Company's 1998 Annual Report to Shareholders (on page 19), filed as Exhibit 13 to this report on Form 10-K. 9 ITEM 8. FINANCIAL STATEMENTS The information required by this item is incorporated herein by reference to the Company's 1998 Annual Report to Shareholders (on pages 20-32), filed as Exhibit 13 to this report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III Information called for by Part III (Items 10, 11, 12 and 13) of this report on Form 10-K has been omitted as the Company intends to file with Securities and Exchange Commission not later than May 18, 1999 a definitive Proxy Statement pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934. Such information will be set forth in such Proxy Statement and is incorporated herein by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated herein by reference to the section entitled "Executive Officers of the Registrant" at the end of Part I of this report and the Proxy Statement for the Company's 1999 Annual Meeting of Shareholders. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the Proxy Statement for the Company's 1999 Annual Meeting of Shareholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to the Proxy Statement for the Company's 1999 Annual Meeting of Shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to the Proxy Statement for the Company's 1999 Annual Meeting of Shareholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)1. Financial Statements: The following financial statements of Cost Plus, Inc. are incorporated herein by reference to the Company's 1998 Annual Report to Shareholders for the year ended January 30, 1999, filed as Exhibit 13 to this report on Form 10-K: Independent Auditors' Report Consolidated Balance Sheets as of January 30, 1999 and January 31, 1998 Consolidated Statements of Operations for the fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997 Consolidated Statement of Shareholders' Equity for the fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997 Consolidated Statements of Cash Flows for the fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997 Notes to Consolidated Financial Statements 2. Financial Statement Schedules: 10 Financial statement schedules of Cost Plus, Inc. have been omitted from Item 14(d) because they are not applicable or the information is included in the financial statements or notes thereto. 3. List of Exhibits: See Exhibit Index beginning on page 13. (b) Reports on form 8-K: None 11 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Date: April 23, 1999 By: /s/ Murray H. Dashe ---------------------------------------- Murray H. Dashe Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/Murray H. Dashe Chairman of the Board, Chief April 23, 1999 ------------------ Executive Officer and President Murray H. Dashe (Principal Executive Officer) /s/John F. Hoffner Executive Vice President of Administration, April 23, 1999 ------------------ Chief Financial Officer and Secretary John F. Hoffner (Principal Financial and Accounting Officer) /s/Ralph D. Dillon Chairman Emeritus April 23, 1999 ------------------ Ralph D. Dillon /s/Joseph H. Coulombe Director April 23, 1999 --------------------- Joseph H. Coulombe /s/Danny W. Gurr Director April 23, 1999 ---------------- Danny W. Gurr /s/Nancy J. Pedot Director April 23, 1999 ----------------- Nancy J. Pedot /s/Olivier L. Trouveroy Director April 23, 1999 ----------------------- Olivier L. Trouveroy /s/Thomas D. Willardson Director April 23, 1999 ----------------------- Thomas D. Willardson
12 INDEX TO EXHIBITS
Exhibit No. Description of Exhibits - ----------- ----------------------- 3.1 Amended and Restated Articles of Incorporation as filed with the California Secretary of State on April 1, 1996 incorporated by reference to Exhibit 3.1 to the Form 10-K filed for the year ended February 1, 1997. 3.2 Certificate of Determination as filed with California Secretary of State on July 27, 1998. 3.3 Amended and Restated By-laws dated June 18, 1998. 10.1 Form of Indemnification Agreement between the Company and each of its directors and officers, incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-1 effective April 3, 1996. 10.2 Registration Rights Agreement, dated March 17, 1995, between the Company and certain holders of the Company's securities, incorporated by reference to Exhibit 10.11 to the Registration Statement on Form S-1 effective April 3, 1996. 10.3 Lease Agreement, dated August 27, 1991, as amended, between the Company and The Stockton Port District for certain warehouses for storage and distribution located in Stockton, California and extension thereto dated February 21, 1996, incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-1 effective April 3, 1996. 10.4 Lease Agreement, dated August 27, 1997, between the Company and Grissom Redevelopment Authority for certain warehouse for storage and distribution located in Peru, Indiana, incorporated by reference to Exhibit 10.4 to the Form 10-K filed for the year ended January 31, 1998. 10.5 Lease agreement between the Company and Square I, LLC for certain Corporate office space located in Oakland, California, incorporated by reference to the Form 10-Q filed for the quarter ended October 31, 1998. 10.6 Business Loan Agreement, dated October 12, 1998, between the Company and Bank of America National Trust and Savings Association, incorporated by reference to Exhibit 10.2 to the Form 10-Q filed for the quarter ended October 31, 1998. 10.7* Third Amended and Restated 1988 Stock Option Plan and form of Stock Option Agreement thereunder, incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-1 effective April 3, 1996. 10.8* 1994 Stock Option Plan and form of Stock Option Agreement thereunder, incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-1 effective April 3, 1996. 10.9.1* 1995 Stock Option Plan, as amended, incorporated by reference to Exhibit 10.1 to the Form 10-Q filed for the quarter ended August 1, 1998. 10.9.2* Form of Stock Option Agreement, 1995 Stock Option Plan, incorporated by reference to Exhibit 10.4 to the Form 10-K filed for the year ended February 1, 1997. 10.10.1* 1996 Director Option Plan, as amended, incorporated by reference to Exhibit 10.2 to the Form 10-Q filed for the quarter ended August 2, 1997. 10.10.2* Form of Stock Option Agreement, 1996 Director Option Plan, incorporated by reference to Exhibit 10.14 to the Registration Statement on Form S-1 effective April 3, 1996. 10.11* 1996 Employee Stock Purchase Plan, incorporated by reference to Exhibit 10.13 to the Registration Statement on Form S-1 effective April 3, 1996. 10.12* The Cost Plus, Inc. Deferred Compensation Plan effective October 1, 1997 incorporated by reference to Exhibit 10.11 to the Form 10-K filed for the year ended January 31, 1998.
13
10.13* Management Incentive Plan, incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-1 effective April 3, 1996. 10.14* 1997 Executive Officer and Key Employee Loan Plan, dated May 7, 1997, incorporated by reference to Appendix C of the Company's Proxy Statement dated May 22, 1997. 10.15.1* Employment Agreement, dated September 6, 1990, between the Company and Ralph D. Dillon as amended by the First Amendment to Employment Agreement dated December 1, 1996, incorporated by reference to Exhibit 10.4 to the Form 10-K filed for the year ended February 1, 1997. 10.15.2* Amendment to Employment Agreement, dated February 12, 1998, between the Company and Ralph D. Dillon incorporated by reference to Exhibit 10.14.2 to the Form 10-K filed for the year ended January 31, 1998. 10.16.1* Employment Agreement, dated June 17, 1997, between the Company and Murray H. Dashe, incorporated by reference to Exhibit 10.4 to the Form 10-Q filed for the quarter ended August 2, 1997. 10.16.2* Amendment to Employment Agreement, dated January 13, 1999, between the Company and Murray H. Dashe. 10.17.1* Employment Agreement, dated February 2, 1997, between the Company and Kathi P. Lentzsch, incorporated by reference to Exhibit 10.5 to the Form 10-Q filed for the quarter ended August 2, 1997. 10.17.2* Employment Severance Agreement, dated January 13, 1999, between the Company and Kathi P. Lentzsch. 10.18.1* Employment Agreement, dated May 6, 1998, between the Company and John F. Hoffner, incorporated by reference to Exhibit 10.4 to the Form 10-Q filed for the quarter ended August 1, 1998. 10.18.2* Amendment to Employment Agreement, dated January 13, 1999, between the Company and John F. Hoffner. 10.19* Employment Severance Agreement, dated January 13, 1999 between the Company and Gary D. Weatherford. 10.20* Employment Severance Agreement, dated January 13, 1999, between the Company and Joan S. Fujii. 10.21 Preferred Shares Rights Agreement, dated June 30, 1998 between Cost Plus, Inc. and BankBoston, N.A., including the Certificate of Determination, the form of Rights Certificate and the Summary of Rights, incorporated by reference to Exhibit 1 to the Form 8-A filed on July 27, 1998. 13 Registrant's 1998 Annual Report to Shareholders (only those portions specifically incorporated by reference into this Report are deemed "filed" with the Securities and Exchange Commission). 21 List of Subsidiaries, incorporated by reference to Exhibit 21.1 to the Registration Statement on Form S-1 effective April 3, 1996. 23 Independent Auditors' Consent. 27 Financial Data Schedule for the fiscal year ended January 30, 1999 (submitted for SEC use only).
* Management compensation plan or arrangement. 14 EX-3.2 2 CERTIFICATE OF DETERMINATION EXHIBIT 3.2 CERTIFICATE OF DETERMINATION OF RIGHTS, PREFERENCES AND PRIVILEGES OF SERIES A PARTICIPATING PREFERRED STOCK OF COST PLUS, INC. We, Murray H. Dashe and John F. Hoffner, the President and the Secretary, respectively, of Cost Plus, Inc. (the "Corporation"), a corporation organized and existing under the General Corporation Law of the State of California, in accordance with the provisions of Section 401 thereof, DO HEREBY CERTIFY: That the authorized number of shares of Preferred Stock of the Corporation is 5,000,000, that no such Preferred Stock has been issued and no Series A Preferred Stock has been issued; and That pursuant to the authority conferred upon the Board of Directors by the Articles of Incorporation of the said Corporation, the said Board of Directors on June 30, 1998 adopted the following resolution creating a series of 100,000 shares of Preferred Stock designated as Series A Participating Preferred Stock: "RESOLVED, that pursuant to the authority vested in the Board of Directors of the Corporation by the Articles of Incorporation, the Board of Directors does hereby provide for the issue of a series of Preferred Stock of the Corporation, to be designated "Series A Participating Preferred Stock," $0.01 par value, initially consisting of 100,000 shares, and to the extent that the designations, powers, preferences and relative and other special rights and the qualifications, limitations and restrictions of the Series A Participating Preferred Stock are not stated and expressed in the Articles of Incorporation, does hereby fix and herein state and express such designations, powers, preferences and relative and other special rights and the qualifications, limitations and restrictions thereof, as follows (all terms used herein which are defined in the Articles of Incorporation shall be deemed to have the meanings provided therein): Section 1. Designation and Amount. The shares of such series shall be ---------------------- designated as "Series A Participating Preferred Stock," no par value, and the number of shares constituting such series shall be 100,000. Section 2. Dividends and Distributions. --------------------------- (A) Subject to the prior and superior right of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Participating Preferred Stock with respect to dividends, the holders of shares of Series A Participating Preferred Stock shall be entitled to receive when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the last day of January, April, July and October in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to, subject to the provision for adjustment hereinafter set forth, 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock of the Corporation (the "Common Stock") since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Participating Preferred Stock. In the event the Corporation shall at any time after June 30, 1998 (the "Rights Dividend Declaration Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Participating Preferred Stock were entitled immediately prior to such event under the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Participating Preferred Stock as provided in paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock). (C) Dividends shall begin to accrue on outstanding shares of Series A Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Participating Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of shares of Series A Participating ------------- Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Participating Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the shareholders of the Corporation. In the event the Corporation shall at any time after the Rights Dividend Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series A Participating Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein or by law, the holders of shares of Series A Participating Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of shareholders of the Corporation. (C) Except as required by law, holders of Series A Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. Certain Restrictions. -------------------- (A) The Corporation shall not declare any dividend on, make any distribution on, or redeem or purchase or otherwise acquire for consideration any shares of Common Stock after the first issuance of a share or fraction of a share of Series A Participating Preferred Stock unless concurrently therewith it shall declare a dividend on the Series A Participating Preferred Stock as required by Section 2 hereof. (B) Whenever quarterly dividends or other dividends or distributions payable on the Series A Participating Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Participating Preferred Stock outstanding shall have been paid in full, the Corporation shall not (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Participating Preferred Stock; (ii) declare or pay dividends on, or make any other distributions on, any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with Series A Participating Preferred Stock, except dividends paid ratably on the Series A Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Participating Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Participating Preferred Stock; (iv) purchase or otherwise acquire for consideration any shares of Series A Participating Preferred Stock, or any shares of stock ranking on a parity with the Series A Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (C) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series A Participating ----------------- Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. Section 6. Liquidation, Dissolution or Winding Up. -------------------------------------- (A) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Participating Preferred Stock unless, prior thereto, the holders of shares of Series A Participating Preferred Stock shall have received two-hundred thousand dollars ($200,000) per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Series A Liquidation Preference"). Following the payment of the full amount of the Series A Liquidation Preference, no additional distributions shall be made to the holders of shares of Series A Participating Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the "Common Adjustment") equal to the quotient obtained by dividing (i) the Series A Liquidation Preference by (ii) 1,000 (as appropriately adjusted as set forth in subparagraph (C) below to reflect such events as stock splits, stock dividends and recapitalization with respect to the Common Stock) (such number in clause (ii), the "Adjustment Number"). Following the payment of the full amount of the Series A Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series A Participating Preferred Stock and Common Stock, respectively, holders of Series A Participating Preferred Stock and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with respect to such Preferred Stock and Common Stock, on a per share basis, respectively. (B) In the event, however, that there are not sufficient assets available to permit payment in full to the Series A Liquidation Preference and the liquidation preferences of all other series of Preferred Stock, if any, which rank on a parity with the Series A Participating Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock. (C) In the event the Corporation shall at any time after the Rights Dividend Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case (a) the Series A Liquidation Preference in effect immediately prior to such event shall be adjusted by multiplying such Liquidation Preference by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately after such event, and (b) the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation, Merger, etc. In case the Corporation shall --------------------------- enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Dividend Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Participating Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. No Redemption. The shares of Series A Participating Preferred ------------- Stock shall not be redeemable. Section 9. Ranking. The Series A Participating Preferred Stock shall rank ------- junior to all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise. Section 10. Amendment. The Articles of Incorporation of the Corporation --------- shall not be further amended in any manner which would materially alter or change the powers, preference or special rights of the Series A Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding shares of Series A Participating Preferred Stock, voting separately as a class. Section 11. Fractional Shares. Series A Participating Preferred Stock may ----------------- be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Participating Preferred Stock. RESOLVED FURTHER, that the President or any Vice President and the Secretary or any Assistant Secretary of this corporation be, and they hereby are, authorized and directed to prepare and file (or cause to be prepared and filed) a Certificate of Determination of Rights, Preferences and Privileges in accordance with the foregoing resolution and the provisions of California law and to take such actions as they may deem necessary or appropriate to carry out the intent of the foregoing resolution." We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Dated: July 21, 1998 /s/ Murray Dashe ------------------------------------------------- Murray H. Dashe, President and Chief Executive Officer /s/ John F. Hoffner ------------------------------------------------- John F. Hoffner, Secretary EX-3.3 3 AMENDED AND RESTATED BY-LAWS DATED 6/18/98 EXHIBIT 3.3 AMENDED AND RESTATED/1/ BY-LAWS OF COST PLUS, INC. (a California corporation) (the "corporation") Article I OFFICES Section 1.1 Principal Office. The principal office for the transaction ----------- ---------------- of the business of the corporation shall be located at 201 Clay Street, Oakland, State of California. The Board of Directors of the corporation (the "Board" or the "Board of Directors") is hereby granted full power and authority to change said principal office to another location within or without the State of California. Section 1.2 Other Offices. One or more branch or other subordinate ----------- ------------- offices may at any time be fixed and located by the Board of Directors at such place or places within or without the State of California as it deems appropriate. Article II DIRECTORS Section 2.1 Exercise of Corporate Powers. Except as otherwise provided ----------- ---------------------------- by the Articles of Incorporation of the corporation or by the laws of the State of California now or hereafter in force, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. The Board may delegate the management of the day-to-day operation as permitted by law provided that the business and affairs of the corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the Board. Without limiting the foregoing, in addition to any other action required by law, by the Articles of Incorporation or by these By-Laws, approval by the Board of Directors or a duly established committee of the Board shall be required for any of the following corporate actions: (a) the election and removal of the Chairman (if any), the President, the Chief Financial Officer, or any other executive officer of the corporation or any significant subsidiary (as such term is defined in Regulation S-X promulgated under the Securities Act of 1933, as amended) of the - ----------------------- /1/ As of June 18, 1998 corporation, the compensation of any of them, and the prescription of such powers and duties for them as are not inconsistent with the Articles of Incorporation, these By-Laws or applicable law; (b) lease of any real property on terms which exceed parameters approved by the Board; (c) ceasing of operations at any of the business locations of the corporation and any writeoff for any such location in excess of $250,000; (d) sale, exchange, mortgage, pledge or other disposition or encumbrance by the corporation of any real property or any other assets of the corporation having a net book or fair market value in excess of $1,000,000 other than sales of inventory in the ordinary course of business; (e) settlement of any claim involving a payment or forbearance, or any writeoff, by the corporation in excess of $500,000 not included in the annual capital expenditure budgets for the corporation; (f) appointment of auditors for the corporation and any significant change in the accounting principles or tax elections applicable to the corporation which are not mandated by generally accepted accounting principles or applicable law; and (g) any contract or other transaction between the corporation and one or more of its directors or officers or any entity in which one or more of its directors or officers has a material financial interest. Section 2.2 Number. The number of directors of the corporation ----------- ------ shall be not less than five (5) nor more than nine (9). The exact number of directors shall be eight (8) until changed, within the limits specified above, by a bylaw amending this Section 2.2, duly adopted by the Board of Directors or by the shareholders. The indefinite number of directors may be changed, or a definite number may be fixed without provision for an indefinite number, by a duly adopted amendment to the Articles of Incorporation or by an amendment to this bylaw duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the fixed number or the minimum number of directors to a number less than five cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of an action by written consent, are equal to more than 16-2/3% of the outstanding shares entitled to vote thereon. No amendment may change the stated maximum number of authorized directors to a number greater than two times the stated minimum number of directors minus one. Section 2.3 Need Not Be Shareholders. The directors of the ----------- ------------------------ corporation need not be shareholders of the corporation. Section 2.4 Compensation. Directors shall receive such ----------- ------------ compensation for their services as directors and such reimbursement for their expenses of attendance at meetings as may be determined from time to time by resolution of the Board. Nothing herein contained shall be construed -2- to preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Section 2.5 Election and Term of Office. At each annual meeting of ----------- --------------------------- shareholders, directors shall be elected to hold office until the next annual meeting, provided, that if for any reason, said annual meeting or an adjournment thereof is not held or the directors are not elected thereat, then the directors may be elected at any special meeting of the shareholders called and held for that purpose. The term of office of the directors shall begin immediately after their election and shall continue until the expiration of the term for which elected and until their respective successors have been elected and qualified. Section 2.6 Vacancies. A vacancy or vacancies in the Board of ----------- --------- Directors shall exist when any authorized position of director is not then filled by a duly elected director, whether caused by death, resignation, removal change in the authorized number of directors (by the Board or the shareholders) or otherwise. The Board of Directors may declare vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony. Except for a vacancy created by the removal of a director, vacancies on the Board may be filled by a majority of the directors then in office, whether or not less than a quorum, or by a sole remaining director. A vacancy created by the removal of a director may be filled only by the approval of the shareholders. The shareholders may elect a director at any time to fill any vacancy not filled by the directors, but any such election by written consent requires the consent of a majority of the outstanding shares entitled to vote. Any director may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. Section 2.7 Removal. (a) Any and all of the directors may be ----------- ------- removed without cause if such removal is approved by the affirmative vote of a majority of the outstanding shares entitled to vote at an election of directors, except that no director may be removed (unless the entire Board is removed) when the votes cast against removal, or not consenting in writing to such removal, would be sufficient to elect such director if voted cumulatively at an election at which the same total number of votes were cast (or, if such action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of the director's most recent election were then being elected. (b) Any reduction of the authorized number of directors does not remove any director prior to the expiration of such director's term of office. Section 2.8 Approval of Loans. The corporation may, upon the ----------- ----------------- approval of the Board of Directors alone, make loans of money or property to, or guarantee the obligations of, any officer of the corporation or of its parent, if any, whether or not a director, or adopt an employee benefit plan or plans authorizing such loans or guaranties provided that: (i) the Board of Directors determines that such a loan or guaranty or plan may reasonably be expected to benefit the corporation; (ii) the corporation has outstanding shares held of record by 100 or more persons (determined as provided in Section 605 of the -3- California General Corporation Law) on the date of approval by the Board of Directors; and (iii) the approval of the Board of Directors is by a vote sufficient without counting the vote of any interested director or directors. Notwithstanding the foregoing, the corporation shall have the power to make loans otherwise permitted by the California General Corporation Law. Article III OFFICERS Section 3.1 Election and Qualifications. The officers of this ----------- --------------------------- corporation shall consist of a President, a Chief Financial Officer and a Secretary who shall be chosen by the Board of Directors and such other officers, including a Chairman of the Board, one or more Vice Presidents, an Assistant Treasurer, an Assistant Secretary and a Controller, as the Board of Directors shall deem expedient, who shall be chosen in such manner and hold their offices for such terms as the Board of Directors may prescribe. Any two or more of such offices may be held by the same person. Any Vice President, Assistant Treasurer or Assistant Secretary, respectively, may exercise any of the powers of the President, the Chief Financial Officer, or the Secretary, respectively, as directed by the Board of Directors and shall perform such other duties as are imposed upon such officer by the By-Laws or the Board of Directors. Section 3.2 Term of Office and Compensation. The term of office ----------- ------------------------------- and salary of each of said officers and the manner and time of the payment of such salaries shall be fixed and determined by the Board of Directors and may be altered by said Board from time to time at its pleasure, subject to the rights, if any, of said officers under any contract of employment. Section 3.3 Removal and Vacancies. Any officer of the ----------- --------------------- corporation may be removed at the pleasure of the Board of Directors at any meeting or by vote of shareholders entitled to exercise the majority of voting power of the corporation at any meeting. Any officer may resign at any time upon written notice to the corporation without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. If any vacancy occurs in any office of the corporation, the Board of Directors may elect a successor to fill such vacancy for the remainder of the unexpired term and until a successor is duly chosen and qualified. Article IV CHAIRMAN OF THE BOARD Section 4.1 Powers and Duties. The Chairman of the Board of ----------- ----------------- Directors, if there be one, shall have the power to preside at all meetings of the Board of Directors, and to call meetings of the shareholders and of the Board of Directors to be held within the limitations prescribed by law or by these By-Laws, at such times and at such places as the Chairman of the Board shall deem proper. The Chairman of the Board shall have such other powers and shall be subject to such other duties as the Board of Directors may from time to time prescribe. -4- Article V PRESIDENT Section 5.1 Powers and Duties. The powers and duties of the ----------- ----------------- President are: (a) To act as the chief executive officer of the corporation and, subject to the control of the Board of Directors, to have general supervision, direction and control of the business and affairs of the corporation. (b) To preside at all meetings of the shareholders and, in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board of Directors. (c) To call meetings of the shareholders and also of the Board of Directors to be held, subject to the limitations prescribed by law or by these By-Laws, at such times and at such places as the President shall deem proper. (d) To affix the signature of the corporation to all deeds, conveyances, mortgages, leases, obligations, bonds, certificates and other papers and instruments in writing which have been authorized by the Board of Directors or which do not require the approval of the Board of Directors under Section 2.1 of the By-Laws and in the judgment of the President should be executed on behalf of the corporation, to sign certificates for shares of stock of the corporation and, subject to the direction of the Board of Directors, to have general charge of the property of the corporation and to supervise and control all officers, agents and employees of the corporation. Section 5.2 President pro tem. If neither the Chairman of the ----------- ----------------- Board, the President, nor any Vice President is present at any meeting of the Board of Directors, a President pro tem may be chosen to preside and act at such meeting. If neither the President nor any Vice President is present at any meeting of the shareholders, a President pro tem may be chosen to preside at such meeting. Article VI VICE PRESIDENT Section 6.1 Powers and Duties. In case of the absence, disability ----------- ----------------- or death of the President, the Vice President, or one of the Vice Presidents, shall exercise all the powers and perform all the duties of the President. If there is more than one Vice President, the order in which the Vice Presidents shall succeed to the powers and duties of the President shall be as fixed by the Board of Directors. The Vice President or Vice Presidents shall have such other powers and perform such other duties as may be granted or prescribed by the Board of Directors. -5- Article VII SECRETARY Section 7.1 Powers and Duties. The powers and duties of the ----------- ----------------- Secretary are: (a) To keep a book of minutes at the principal office of the corporation, or such other place as the Board of Directors may order, of all meetings of its directors and shareholders with the time and place of holding, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present at directors' meetings, the number of shares present or represented at shareholders' meetings and the proceedings thereof. (b) To keep the seal of the corporation and to affix the same to all instruments which may require it. (c) To keep or cause to be kept at the principal office of the corporation, or at the office of the transfer agent or agents, a share register, or duplicate share registers, showing the names of the shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for shares, and the number and date of cancellation of every certificate surrendered for cancellation. (d) To keep a supply of certificates for shares of the corporation, to fill in all certificates issued, and to make a proper record of each such issuance; provided, that so long as the corporation shall have one or more duly appointed and acting transfer agents of the shares, or any class or series of shares, of the corporation, such duties with respect to such shares shall be performed by such transfer agent or transfer agents. (e) To transfer upon the share books of the corporation any and all shares of the corporation; provided, that so long as the corporation shall have one or more duly appointed and acting transfer agents of the shares, or any class or series of shares, of the corporation, such duties with respect to such shares shall be performed by such transfer agent or transfer agents, and the method of transfer of each certificate shall be subject to the reasonable regulations of the transfer agent to which the certificate is presented for transfer, and also, if the corporation then has one or more duly appointed and acting registrars, to the reasonable regulations of the registrar to which the new certificate is presented for registration; and provided, further, that no certificate for shares of stock shall be issued or delivered or, if issued or delivered, shall have any validity whatsoever until and unless it has been signed or authenticated in the manner provided in Section 14.4 hereof. (f) To make service and publication of all notices that may be necessary or proper, and without command or direction from anyone, in case of the absence, disability, refusal or neglect of the Secretary to make service or publication of any notices, then such notices may be served and/or published by the President or a Vice President, or by any person thereunto authorized by either of them or by the Board of Directors or by the holders of a majority of the outstanding shares of the corporation. -6- (g) Generally to do and perform all such duties as pertain to the office of Secretary and as may be required by the Board of Directors. Article VIII CHIEF FINANCIAL OFFICER Section 8.1 Powers and Duties. The powers and duties of the Chief ----------- ----------------- Financial Officer are: (a) To supervise and control the keeping and maintaining of adequate and correct accounts of the corporation's properties and business transactions, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall at all reasonable times be open to inspection by any director. (b) To have the custody of all funds, securities, evidence of indebtedness and other valuable documents of the corporation and, at the Chief Financial Officer's discretion, to cause any or all thereof to be deposited for the account of the corporation with such depositary as may be designated from time to time by the Board of Directors. (c) To receive or cause to be received, and to give or cause to be given receipts and acquittances for moneys paid in for the account of the corporation. (d) To disburse, or cause to be disbursed, all funds of the corporation as may be directed by the Board of Directors, taking proper vouchers for such disbursements. (e) To render to the President and to the Board of Directors, whenever they may require, accounts of all transactions and of the financial condition of the corporation. (f) Generally to do and perform all such duties as pertain to the office of Chief Financial Officer and as may be required by the Board of Directors. Article IX TREASURER Section 9.1 Powers and Duties. The Treasurer shall have such ----------- ----------------- powers and duties as from time to time may be prescribed by the board of directors or these By-Laws, including custody of and responsibility for all money and investments. -7- Article X CONTROLLER Section 10.1 Powers and Duties. The Controller, if there be one, ------------ ----------------- shall have the power and duty to keep and maintain adequate and correct accounts of the corporation's properties and business transactions, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital retained earnings and shares, and to render to the Chief Financial Officer, the President and the Board of Directors, whenever they may require, accounts of all transactions and of the financial condition of the corporation. The Controller shall generally have the power to do and perform all such other duties as pertain to the office of Controller and as may be required by the Board of Directors. Article XI COMMITTEES OF THE BOARD Section 11.1 Appointments and Procedure. The Board of Directors ------------ -------------------------- may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two or more directors, to serve at the pleasure of the Board, designate members of any committee, and designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. Section 11.2 Powers. Any committee appointed by the Board of ------------ ------ Directors, to the extent provided in the resolution of the Board or in these By- Laws, shall have all the authority of the Board except with respect to: (a) the approval of any action for which the California General Corporation Law or the Articles of Incorporation or these By-Laws requires the approval or vote of the shareholders or of a majority or supermajority of the directors then serving on the Board of Directors; (b) the filling of vacancies on the Board or on any committee; (c) the fixing of compensation of the directors for serving on the Board or on any committee; (d) the amendment or repeal of By-Laws or the adoption of new By-Laws; (e) the amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable; (f) a distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the Board; and -8- (g) the appointment of other committees of the Board or the members thereof. Section 11.3 Executive Committee. In the event that the Board of ------------ ------------------- Directors appoints an Executive Committee, such Executive Committee, in all cases in which specific directions to the contrary shall not have been given by the Board of Directors, shall have and may exercise, during the intervals between the meetings of the Board of Directors, all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation (except as provided in Section 11.2 hereof) in such manner as the Executive Committee may deem best for the interests of the corporation. Article XII MEETINGS OF SHAREHOLDERS Section 12.1 Place of Meetings. Meetings (whether regular, special ------------ ----------------- or adjourned) of the shareholders of the corporation shall be held at the principal office for the transaction of business as specified in accordance with Section 1.1 hereof, or any place within or without the State which may be designated by written consent of all the shareholders entitled to vote thereat, or which may be designated by the Board of Directors. Section 12.2 Time of Annual Meetings. The annual meeting of the ------------ ----------------------- shareholders shall be held at the hour of 9:00 o'clock in the morning on the fourth Thursday in June in each year, if not a legal holiday, and if a legal holiday, then on the next succeeding business day not a legal holiday, or such other time or date as may be set by the Board of Directors. Section 12.3 Special Meetings. Special meetings of the shareholders ------------ ---------------- may be called by the Board of Directors, the Chairman of the Board, the President or the holders of shares entitled to cast not less than 10% of the vote at the meeting. Section 12.4 Notice of Meetings. (a) Whenever shareholders are ------------ ------------------ required or permitted to take any action at a meeting, a written notice of the meeting shall be given not less than 10 nor more than 60 days before the day of the meeting to each shareholder entitled to vote thereat. Such notice shall state the place, date and hour of the meeting and (1) in the case of a special meeting, the general nature of the business to be transacted, and no other business may be transacted, or (2) in the case of the annual meeting, those matters which the Board, at the time of the mailing of the notice, intends to present for action by the shareholder, but subject to the provisions of subdivision (b) any proper matter may be presented at the meeting for such action. The notice of any meeting at which directors are to be elected shall include the names of nominees intended at the time of the notice to be presented by management for election. (b) Any shareholder approval at a meeting, other unanimous approval by those entitled to vote, on any of the matters listed below shall be valid only if the general nature of the proposal so approved was stated in the notice of meeting or in any written waiver of notice: -9- (1) a proposal to approve a contract or other transaction between a corporation and one or more of its directors, or between a corporation and any corporation, firm or association in which one or more directors has a material financial interest; (2) a proposal to amend the Articles of Incorporation; (3) a proposal regarding a reorganization, merger or consolidation involving this corporation; (4) a proposal to wind up and dissolve the corporation; and (5) a proposal to adopt a plan of distribution of the shares, obligations or securities of any other corporation, domestic or foreign, or assets other than money which is not in accordance with the liquidation rights of any preferred shares as specified in the Articles of Incorporation. (c) To be properly brought before an annual meeting or special meeting, nominations for the election of directors or other business (not specified in Section 12.4 (b)) must be (1) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (2) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (3) otherwise properly brought before the meeting by a shareholder. For such nominations or other business to be considered properly brought before the meeting by a shareholder, such shareholder must have given timely notice and in proper form of his intent to bring such business before such meeting. To be timely, such shareholder's notice must be delivered to or mailed and received by the secretary of the corporation not less than 35 days prior to the meeting; provided, however, that in the event that less than 60 days notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. To be in proper form, a shareholder's notice to the secretary shall set forth: (1) the name and address of the shareholder who intends to make the nominations, propose the business, and, as the case may be, the name and address of the person or persons to be nominated or the nature of the business to be proposed; (2) a representation that the shareholder is a holder of record of stock of the corporation entitled to vote at such meeting and, if applicable, intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice or introduce the business specified in the notice; (3) if applicable, a description of all arrangements or understandings between the shareholders and each nominee and any other person or persons (naming such person or persons, pursuant to which the nomination or nominations are to be made by the shareholder); -10- (4) such other information regarding each nominee or each matter of business to be proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated, or intended to be nominated, or the matter been proposed, or intended to be proposed by the board of directors; and (5) if applicable, the consent of each nominee to serve as director of the corporation if so elected. The chairman of the meeting may refuse to acknowledge the nomination of any person or the proposal of any business not made in compliance with the foregoing procedure. Section 12.5 Delivery of Notice. Notice of shareholders' meeting or ------------ ------------------ any report shall be given either personally or by mail or other means of written communication, addressed to the shareholder at the address of such shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice; or if no such address appears or is given, at the place where the principal executive office of the corporation is located or by publication at least once in a newspaper of general circulation in the county in which the principal executive office is located. The notice or report shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication. An affidavit of mailing of any notice or report in accordance with the provisions of this section, executed by the Secretary, Assistant Secretary or any transfer agent, shall be prima facie evidence of the giving of the notice or report. If any notice or report addressed to the shareholders at the address of such shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice or report to the shareholder at such address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available for the shareholder upon written demand of the shareholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice to all other shareholders. Section 12.6 Adjourned Meetings. When a shareholders' meeting is ------------ ------------------ adjourned to another time or place, unless the By-Laws otherwise require and except as provided in this section, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 45 days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting. Section 12.7 Consent to Shareholders' Meeting. The transactions of ------------ -------------------------------- any meeting of shareholders, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, -11- and if either before or after the meeting each of the persons entitled to vote, not present in person or by proxy signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required by the California General Corporation Law to be included in the notice but not so included in the notice if such objection is expressly made at the meeting. Neither the business to be transacted at nor the purpose of any regular or special meeting of shareholders need be specified in any written waiver of notice, unless otherwise provided in the Articles of Incorporation or By-Laws, except as provided in subdivision (b) of Section 12.4. Section 12.8 Quorum. (a) The presence in person or by proxy of the ------------ ------ persons entitled to vote the majority of the voting shares at any meeting shall constitute a quorum for the transaction of business. Except as otherwise expressly required by statute, the Articles of Incorporation and these By-Laws, if a quorum is present, the affirmative vote of the majority of shares represented at the meeting and entitled to vote on any matter shall be the act of the shareholders. (b) The shareholders present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment notwithstanding the withdrawal of the number of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. (c) In the absence of a quorum, any meeting of shareholders from time to time by the vote of a majority of the shares represented either in person or by proxy, but no other business may be transacted, except as provided in subdivision (b). Section 12.9 Actions without Meeting. (a) Any action which may be ------------ ----------------------- taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted; provided that, subject to the provisions of Section 2.6, directors may not be elected by written consent except by unanimous written consent of all shares entitled to vote for the election of directors. (b) Unless the consents of all shareholders entitled to vote have been solicited in writing, (1) notice of any shareholder approval on matters described in subparagraphs (1), (3) or (5) of subdivision (b) of Section 12.4 or respecting indemnification of agents of the -12- corporation without a meeting by less than unanimous written consent shall be given at least 10 days before the consummation of the action authorized by such approval, and (2) prompt notice shall be given of the taking of any other corporate action approved by shareholders without a meeting by less than unanimous written consent, to those shareholders entitled to vote but who have not consented in writing; the provisions of Section 12.5 shall apply to such notice. Section 12.10 Revocation of Consent. Any shareholder giving a ------------- --------------------- written consent, or the shareholder's proxy holders, or a transferee of the shares or a personal representative of the shareholder or their respective proxy holders, may revoke the consent by a writing received by the corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary of the corporation, but may not do so thereafter. Such revocation is effective upon its receipt by the Secretary of the corporation. Section 12.11 Voting Rights. Except as provided in Section 12.13 or ------------- ------------- in the Articles of Incorporation or in any statute relating to the election of directors or to other particular matters, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of shareholders. Any holder of shares entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, other than elections to office, but, if the shareholder fails to specify the number of shares such shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares such shareholder is entitled to vote. Section 12.12 Determination of Holders of Record. (a) In order that ------------- ---------------------------------- the corporation may determine the shareholders entitled to notice of or to vote at any meeting or entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action, the Board of Directors may fix in advance, a record date, which shall not be more than 60 nor less than 10 days prior to the date of such meeting nor more than 60 days prior to any other action. (b) In the absence of any record date set by the Board of Directors pursuant to subdivision (a) above, then: (1) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. (2) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board has been taken, shall be the day on which the first written consent is given. -13- (3) The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the 60th day prior to the date of such other action, whichever is later. (c) A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board fixes a new record date of the adjourned meeting, but the Board shall fix a new record date if the meeting is adjourned for more than 45 days from the date set for the original meeting. (d) Shareholders on the record date are entitled to notice and to vote or to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Articles of Incorporation or these By-Laws or by agreement or applicable law. Section 12.13 Election of Directors. (a) In any election of ------------- --------------------- directors, the candidates receiving the highest number of votes of the shares entitled to be voted for them up to the number of directors to be elected by such shares are elected. (b) Election for directors need not be by ballot unless a shareholder demands election by ballot at the meeting and before the voting begins or unless the By-Laws so require. Section 12.14 Proxies. (a) Every person entitled to vote shares may ------------- ------- authorize another person or persons to act by proxy with respect to such shares. Any proxy purporting to be executed in accordance with the provisions of the General Corporation Law of the State of California shall be presumptively valid. (b) No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Every proxy continues in full force and effect until revoked by the person executing it prior to the vote pursuant thereto, except as otherwise provided in this section. Such revocation may be effected by a writing delivered to the corporation stating that the proxy is revoked or by a subsequent proxy executed by, or by attendance at the meeting and voting in person by, the person executing the proxy. The dates contained on the forms of proxy presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed. (c) A proxy is not revoked by the death or incapacity of the maker unless, before the vote is counted, written notice of such death or incapacity is received by the corporation. Section 12.15 Inspectors of Election. (a) In advance of any meeting ------------- ---------------------- of shareholders the Board may appoint inspectors of election to act at the meeting and any adjournment thereof. If inspectors of election are not so appointed, or if any persons so appointed fail to appear or refuse to act, the chairman of any meeting of shareholders may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election (or persons to replace those who so fail or -14- refuse) at the meeting. The number of inspectors shall be either one or three. If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares represented in person or by proxy shall determine whether one or three inspectors are to be appointed. (b) The inspectors of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum and the authenticity, validity and effect of proxies, receive votes, ballots or consents, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes or consents, determine when the polls shall close, determine the result and do such acts as may be proper to conduct the election or vote with fairness to all shareholders. (c) The inspectors of election shall perform their duties, impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. Any report or certificate made by the inspectors of election is prima facie evidence of the facts stated therein. Article XIII MEETINGS OF DIRECTORS Section 13.1 Place of Meetings. Unless otherwise specified in the ------------ ----------------- notice thereof, meetings (whether regular, special or adjourned) of the Board of Directors of this corporation shall be held at the principal office of the corporation for the transaction of business, as specified in accordance with Section 1.1 hereof, which is hereby designated as an office for such purpose in accordance with the laws of the State of California, or at any other place within or without the State which has been designated from time to time by resolution of the Board or by written consent of all members of the Board. Section 13.2 Regular Meetings. Regular meetings of the Board of ------------ ---------------- Directors, of which no notice need be given except as required by the laws of the State of California, shall be held after the adjournment of each annual meeting of the shareholders (which meeting shall be designated the Regular Annual Meeting) and at such other times as may be designated from time to time by resolution of the Board of Directors. Section 13.3 Special Meetings. Special meetings of the Board of ------------ ---------------- Directors may be called at any time by the Chairman of the Board or the President or by any Vice President or the Secretary or by any two or more of the directors. Section 13.4 Notice of Meetings. Except in the case of regular ------------ ------------------ meetings, notice of which has been dispensed with, the meetings of the Board of Directors shall be held upon four days' notice by mail or 48 hours' notice delivered personally or by telephone, telegraph or other electronic or wireless means. If the address of a director is not shown on the records and is not readily ascertainable, notice shall be addressed to him at the city or place in which the meetings of the -15- directors are regularly held. Except as set forth in Section 13.6, notice of the time and place of holding an adjourned meeting need not be given to absent directors if the time and place be fixed at the meeting adjourned. Section 13.5 Quorum. A majority of the authorized number of ------------ ------ directors constitutes a Quorum of the Board for the transaction of business. Except as otherwise expressly required by statute, the Articles of Incorporation or these By-Laws and every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. Section 13.6 Adjourned Meeting. A majority of the directors present, ------------ ----------------- whether or not a quorum is present, may adjourn any meeting to another time and place. If the meeting is adjourned for more than 24 hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment. Section 13.7 Waiver of Notice and Consent. (a) Notice of a meeting ------------ ---------------------------- need not be given to any director who signs a waiver of notice, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. (b) The transactions of any meeting of the Board, however called and noticed or wherever held, are as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the directors not present or who, though present, has prior to the meeting or at its commencement, protested the lack of proper notice to him, signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes thereof. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 13.8 Action Without a Meeting. Any action required or ------------ ------------------------ permitted to be taken by the Board may be taken without a meeting, if all members of the Board shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board. Such action by written consent shall have the same force and effect as a unanimous vote of such directors. Section 13.9 Conference Telephone Meetings. Members of the Board may ------------ ----------------------------- participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Participation in a meeting pursuant to this section constitutes presence in person at such meeting. Section 13.10 Meetings of Committees. The provisions of this Article ------------- ---------------------- apply also to committees of the Board and action by such committees. -16- Article XIV SUNDRY PROVISIONS Section 14.1 Instruments in Writing. All checks, drafts, demands for ------------ ---------------------- money and notes of the corporation, and all written contracts of the corporation, shall be signed by such officer or officers, agent or agents, as the Board of Directors may from time to time by resolution designate. No officer, agent, or employee of the corporation shall have power to bind the corporation by contract or otherwise unless authorized to do so by these By-Laws or by the Board of Directors. Section 14.2 Fiscal Year. The fiscal year of this corporation shall ------------ ----------- end on the Saturday nearest to the last day of January of each year. Section 14.3 Shares Held by the Corporation. Shares in other ------------ ------------------------------ corporations standing in the name of this corporation may be voted or represented and all rights incident thereto may be exercised on behalf of this corporation by the President or by any other officer of this corporation authorized so to do by resolution of the Board of Directors. Section 14.4 Certificates of Stock. There shall be issued to each ------------ --------------------- holder of fully paid shares of the capital stock of the corporation a certificate or certificates for such shares. Every holder of shares in the corporation shall be entitled to have a certificate signed in the name of the corporation by the Chairman or Vice Chairman of the Board or the President or a Vice President and by the Chief Financial Officer or an Assistant Treasurer or the Secretary or any Assistant Secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. Section 14.5 Lost Certificates. The corporation may issue a new ------------ ----------------- share certificate or a new certificate for any other security in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate or the owner's legal representative to give the corporation a bond (or other adequate security) sufficient to indemnify it against any claim that may be made against it (including any expense or liability) on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. The Board of Directors may adopt such other provisions and restrictions with reference to lost certificates, not inconsistent with applicable law, as it shall in its discretion deem appropriate. Section 14.6 Certification and Inspection of By-Laws. The ------------ --------------------------------------- corporation shall keep at its principal executive office in this State, or if its principal executive office is not in this State at its principal business office in this State, the original or a copy of these By-Laws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. -17- If the principal executive office of the corporation is outside this State and the corporation has no principal business office in this State, it shall upon the written request of any shareholder furnish to such shareholder a copy of the By-Laws as amended to date. Section 14.7 Notices. Any reference in these By-Laws to the time a ------------ ------- notice is given or sent means, unless otherwise expressly provided, the time a written notice by mail is deposited in the United States mails, postage prepaid; or the time any other written notice is personally delivered to the recipient or is delivered to a common carrier for transmission, or actually transmitted by the person giving the notice by electronic means, to the recipient; or the time any oral notice is communicated, in person or by telephone or wireless, to the recipient or to a person at the office of the recipient who the person giving wire the notice has reason to believe will promptly communicate it to the recipient. Section 14.8 Reports to Shareholders. Except as may otherwise be ------------ ----------------------- required by law, the rendition of an annual report to the shareholders is waived so long as there are less than 100 holders of record of the shares of the corporation (determined as provided in Section 605 of the California General Corporation Law). At such time or times, if any, that the corporation has 100 or more holders of record of its shares, the Board of Directors shall cause an annual report to be sent to the shareholders not later than 120 days after the close of the fiscal year or within such shorter time period as may be required by applicable law, and such annual report shall contain such information and be accompanied by such other documents as may be required by applicable law. Section 14.9 Indemnification of Officers, Directors, Employees and ------------ ----------------------------------------------------- Other Agents. (a) The corporation shall, to the fullest extent permissible - ------------ under, and in the manner permitted by, California law, indemnify each of its directors and officers against "Expenses" (as defined in Section 317(a) of the California General Corporation Law), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any "Proceeding" (as defined in Section 317(a) of the California General Corporation Law), arising by reason of the fact that such person is or was an Agent (as defined in Section 317(a) of the California General Corporation Law) of the corporation. For purposes of this Section 14.9, a "director" or "officer" of the corporation includes any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director of officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. (b) The corporation shall have the power, to the fullest extent permissible under, and in the manner permitted by, California law, to indemnify each of its employees and other Agents against Expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any Proceeding, arising by reason of the fact that such person is or was an employee or Agent of the corporation. For purposes of this Section 14.9, an "employee" or "Agent" of the corporation includes any person (i) who is or was an employee or Agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or Agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or -18- Agent of the corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. (c) Expenses incurred in defending any civil or criminal action or proceeding for which indemnification is required or permitted pursuant to this Section 14.9 shall be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Section 14.9. (d) Enforcement. Without the necessity of entering into an express ----------- contract, all rights to indemnification and advances under this Section 14.9 shall be deemed to be contractual rights and be effective to the same extent and as if provided for in a contract between the corporation and the director or officer who serves in such capacity at any time while this By-Law and other relevant provisions of the California General Corporation Law and other applicable law, if any, are in effect. Any right to indemnification or advances granted by this Section 14.9 to a director or officer shall be enforceable by or on behalf of the person holding such right in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part or (ii) no disposition of such claim is made within 90 days of request therefor. The claimant in such enforcement action (an "Action"), if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. It shall be a defense to any Action that a claimant has not met the standard of conduct which make it permissible under the California General Corporation Law for the corporation to indemnify the claimant for the amount claimed, provided that such defense shall not be available for an Action brought to enforce a claim for the advancement of expenses pursuant to subdivision (d) above if the claimant has tendered the required undertaking to the corporation. It shall not be a defense to an Action, nor shall it create a presumption that the claimant has not met the applicable standard of conduct, that the corporation (including its Board of Directors, independent counsel or shareholders) has failed, prior to the commencement of the Action, to have made a determination that the indemnification of the claimant is proper in the circumstances, or that the corporation (including its Board of Directors, independent counsel or shareholders) has actually determined that the claimant has not met the applicable standard of conduct. (e) Non-Exclusivity of Rights. The rights conferred on any person by ------------------------- this Section 14.9 shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of the Articles of Incorporation, By-Laws, agreement, vote of shareholders or disinterested directors or otherwise both as to action in his official capacity and as to action in another capacity while holding office. The corporation is specifically authorized to enter into individual contracts with any or all of its directors, officers, employees or other Agents respecting indemnification and advances, to the fullest extent permitted by the California General Corporation Law. (f) No indemnification or advance shall be made under this Section 14.9, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears: -19- (1) That it would be inconsistent with a provision of the Articles of Incorporation, these By-Laws, a resolution of the shareholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (2) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. (g) Survival of Rights. The rights conferred on any person by this ------------------ Section 14.9 shall continue as to a person who has ceased to be a director, officer, employee or other Agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (h) Insurance. The corporation shall have the power to purchase and --------- maintain insurance on behalf of any person who is or was an Agent of the corporation against any liability asserted against or incurred by such person in such capacity or arising out of such person's status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Section 14.9. (i) Repeal or Modification. Any repeal or modification of this ---------------------- Section 14.9 shall not adversely affect any rights under this Section 14.9 of any director, officer or other Agent of the corporation relating to acts or omissions occurring prior to such repeal or modification. (j) Saving Clause. If this Section 14.9 or any portion hereof shall ------------- be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each director or officer, any may nevertheless indemnify any employee or other Agent, to the full extent permitted by any applicable portion of this Section 14.9 that shall not have been invalidated, or by any other applicable law. (k) If the California General Corporation Law is hereafter amended to further indemnification of Agents of the corporation, then the Corporation shall be authorized to indemnify such Agents to the fullest extent permissible under the California General Corporation Law as so amended. Article XV CONSTRUCTION OF BY-LAWS WITH REFERENCE TO PROVISIONS OF LAW Section 15.1 Definitions. Unless defined otherwise in these By-Laws ------------ ----------- or unless the context otherwise requires, terms used herein shall have the same meaning, if any, ascribed thereto in the California General Corporation Law, as amended from time to time. Section 15.2 By-Law Provisions Additional and Supplemental to ------------ ------------------------------------------------ Provisions of Law. All restrictions, limitations, requirements and other - ----------------- provisions of these By-Laws shall be construed, -20- insofar as possible, as supplemental and additional to all provisions of law applicable to the subject matter thereof and shall be fully complied with in addition to the said provisions of law unless such compliance shall be illegal. Section 15.3 By-Law Contrary to or Inconsistent with Provisions of ------------ ----------------------------------------------------- Law. Any article, section, subsection, subdivision, sentence, clause or phrase - --- of these By-Laws which upon being construed in the manner provided in Section 15.2 hereof, shall be contrary to or inconsistent with any applicable provision of law, shall not apply so long as said provisions of law shall remain in effect, but such result shall not affect the validity or applicability of any other portions of these By-Laws, it being hereby declared that these By-Laws would have been adopted and each article, section, subsection, subdivision, sentence, clause or phrase thereof, irrespective of the fact that any one or more articles, sections, subsections, subdivisions, sentences, clauses or phrases is or are illegal. Article XVI ADOPTION, AMENDMENT OR REPEAL OF BY-LAWS Section 16.1 By Shareholders. Except as otherwise expressly required ------------ --------------- by statute, the Articles of Incorporation or these By-Laws, By-Laws may be adopted, amended or repealed by the approval of the affirmative vote of a majority of the outstanding shares of the corporation entitled to vote. Section 16.2 By the Board of Directors. Except as otherwise ------------ ------------------------- expressly required by statute, the Articles of Incorporation or these By-Laws and subject to the right of shareholders to adopt, amend or repeal By-Laws, By- Laws other than a By-Law or amendment thereof changing the authorized number of directors (except to fix the authorized number of directors pursuant to a By-Law providing for a variable number of directors) may be adopted, amended or repealed by the Board of Directors. -21- EX-10.16.2 4 AMENDMENT TO EMPLOYMENT AGREEMENT EXHIBIT 10.16.2 AMENDMENT TO EMPLOYMENT AGREEMENT AMENDMENT, dated as of January 13, 1999 (the "Amendment"), to the Executive Employment Agreement, dated June 12, 1997, between Cost Plus, Inc., a California corporation, and Murray Dashe (the "Employee") (the "Employee Agreement"). WITNESSETH: ----------- WHEREAS, the parties hereto desire to amend certain provisions of the Employment Agreement as provided herein; NOW, THEREFORE, in consideration of the premises and mutual agreements contained herein, and for other valuable consideration the receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Amendment of Section 3(a). Section 3(a) of the Employment Agreement is ------------------------- hereby amended in its entirety and a new Section 3(b) shall be added to read as follows. The former Section 3(b) and all subsections of Section 3 thereafter shall be renumbered accordingly: 3. Severance Benefits. ------------------ (a) Benefits upon Termination. Except as provided in Section ------------------------- 3(b), if the Executive's employment terminates as a result of Involuntary Termination prior to June 15, 2000 and the Executive signs a Release of Claims, then the Company shall pay Executive's Base Compensation to the Executive for twelve (12) months from the Termination Date with each monthly installment payable on the last day of such month. Executive shall not be entitled to receive any payments if Executive voluntarily terminates employment other than as a result of an Involuntary Termination. (b) Benefits upon Termination After a Change of Control. If --------------------------------------------------- after a Change of Control the Executive's employment terminates as a result of Involuntary Termination prior to June 15, 2000 and the Executive signs a Release of Claims, then the Company shall pay Executive's Base Compensation to the Executive for eighteen (18) months from the Termination Date with each monthly installment payable on the last day of such month. Executive shall not be entitled to receive any payments if Executive voluntarily terminates employment other than as a result of an Involuntary Termination. 2. Amendment to Section 6. A new Section 16(b) shall be added to the ---------------------- Employment Agreement to read as follows. The present Section 16(b) and all subsections thereafter shall be renumbered accordingly. (c) "Change of Control" means the occurrence of any of the following events: (i) The acquisition by any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of the "beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company's then outstanding voting securities; (ii) A change in the composition of the Board of Directors of the Company occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board of Directors of the Company with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual not otherwise an Incumbent Director whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company); (iii) A merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the approval by the stockholders of the Company of a plan or complete liquidation of the Company or of an agreement for the sale or disposition by the Company of all or substantially all the Company's assets; (iv) The sale of all or substantially all of the assets of the Company determined on a consolidated basis; or (v) The complete liquidation or dissolution of the Company. 3. Counterparts. This Amendment may be signed in any number of ------------ counterparts, all of which counterparts, taken together, shall constitute one and the same instrument. 4. Governing Law. This Amendment and the rights and obligations of the ------------- parties hereto shall be governed by, and construed and interpreted in accordance with, the law of the State of California. 2 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. COST PLUS, INC. By: /s/ John F. Hoffner ---------------------- Name: John F. Hoffner Title: EVP, CFO MURRAY DASHE /s/ Murray Dashe ---------------- SIGNATURE PAGE OF AMENDMENT TO THE EMPLOYMENT AGREEMENT 3 EX-10.17.2 5 EMPLOYMENT SEVERANCE AGREEMENT EXHIBIT 10.17.2 EMPLOYMENT SEVERANCE AGREEMENT This Severance Agreement (the "Agreement") is made and entered into effective as of January 13, 1999 (the "Effective Date"), by and between Kathi Lentzsch (the "Executive") and Cost Plus, Inc. (the "Company"). R E C I T A L S --------------- A. The Board believes the Company should provide the Executive with certain severance benefits should the Executive's employment with the Company terminate under certain circumstances, such benefits to provide the Executive with enhanced financial security and sufficient incentive and encouragement to remain with the Company. B. Certain capitalized terms used in the Agreement are defined in Section 5 below. AGREEMENT In consideration of the mutual covenants herein contained, and in consideration of the continuing employment of Executive by the Company, the parties agree as follows: 1. Duties and Scope of Employment. The Company shall employ the ------------------------------ Executive in the position of Executive Vice President, Merchandising/Marketing with such duties, responsibilities and compensation as in effect as of the Effective Date. The Board and the Chief Executive Officer of the Company (the "CEO") shall have the right to revise such responsibilities and compensation from time to time as the Board or the CEO may deem necessary or appropriate. If any such revision constitutes "Involuntary Termination" as defined in Section 5(c) of this Agreement, the Executive shall be entitled to benefits upon such Involuntary Termination as provided under this Agreement. 2. At-Will Employment. The Company and the Executive acknowledge that ------------------ the Executive's employment is and shall continue to be at-will, as defined under applicable law. If the Executive's employment terminates for any reason, the Executive shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement, or as may otherwise be available in accordance with the Company's established employee plans and practices or in accordance with other agreements between the Company and the Executive. This Agreement shall remain in effect until the earlier of (i) the date that all obligations of the parties hereunder have been satisfied or (ii) the date upon which this Agreement terminates by consent of the parties hereto. 3. Severance Benefits. ------------------ (a) Benefits upon Termination. Except as provided in Section 3(b), ------------------------- if the Executive's employment terminates as a result of Involuntary Termination prior to June 15, 2000 and the Executive signs a Release of Claims, then the Company shall pay Executive's Base Compensation to the Executive for twelve (12) months from the Termination Date with each monthly installment payable on the last day of such month. Executive shall not be entitled to receive any payments if Executive voluntarily terminates employment other than as a result of an Involuntary Termination. (b) Benefits upon Termination After a Change of Control. If after a --------------------------------------------------- Change of Control the Executive's employment terminates as a result of Involuntary Termination prior to June 15, 2000 and the Executive signs a Release of Claims, then the Company shall pay Executive's Base Compensation to the Executive for eighteen (18) months from the Termination Date with each monthly installment payable on the last day of such month. Executive shall not be entitled to receive any payments if Executive voluntarily terminates employment other than as a result of an Involuntary Termination. (c) Stock Options; Bonus. Executive shall not be entitled to receive -------------------- any unvested stock options or partial bonus payments for an incomplete bonus plan year. (d) Miscellaneous. In addition, (i) the Company shall pay the ------------- Executive any unpaid base salary due for periods prior to the Termination Date; (ii) the Company shall pay the Executive all of the Executive's accrued and unused vacation through the Termination Date; and (iii) following submission of proper expense reports by the Executive, the Company shall reimburse the Executive for all expenses reasonably and necessarily incurred by the Executive in connection with the business of the Company prior to termination. These payments shall be made promptly upon termination and within the period of time mandated by applicable law. 4. Non-Solicitation. In consideration for the mutual agreements as set ---------------- forth herein, Executive agrees that Executive shall not, at any time, within twelve (12) months following termination of Executive's employment with the Company for any reason, directly or indirectly solicit the employment or other services of any individual who at that time shall be or within the prior twelve (12) months shall have been an employee of the Company. 5. Definition of Terms. The following terms referred to in this ------------------- Agreement shall have the following meanings: (a) Base Compensation. "Base Compensation" shall mean Executive's ----------------- monthly base salary for services performed based on the average base salary for the six (6) months prior to the Termination Date. (b) Cause. "Cause," unless otherwise defined in the Agreement ----- evidencing a particular Option, means an Eligible Individual's (i) intentional failure to perform reasonably assigned -2- duties, (ii) dishonesty or willful misconduct in the performance of duties, (iii) engaging in a transaction in connection with the performance of duties to the Company or any of its Subsidiaries thereof which transaction is adverse to the interests of the Company or any of its Subsidiaries and which is engaged in for personal profit or (iv) willful violation of any law, rule or regulation in connection with the performance of duties (other than traffic violations or similar offenses). (c) "Change of Control" means the occurrence of any of the following events: (i) The acquisition by any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of the "beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company's then outstanding voting securities; (ii) A change in the composition of the Board of Directors of the Company occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board of Directors of the Company with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual not otherwise an Incumbent Director whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company); (iii) A merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the approval by the stockholders of the Company of a plan of complete liquidation of the Company or of an agreement for the sale or disposition by the Company of all or substantially all the Company's assets; (iv) The sale of all or substantially all of the assets of the Company determined on a consolidated basis; or (v) The complete liquidation or dissolution of the Company. (d) Involuntary Termination. "Involuntary Termination" shall mean: ----------------------- (i) termination of Executive's employment by the Company for any reason other than Cause; -3- (ii) a material reduction in Executive's salary, other than any such reduction which is part of, and generally consistent with, a general reduction of officer salaries; (iii) a material reduction by the Company in the kind or level of employee benefits (other than salary and bonus) to which Executive is entitled immediately prior to such reduction with the result that Executive's overall benefits package (other than salary and bonus) is substantially reduced (other than any such reduction applicable to officers of the Company generally); (iv) any material breach by the Company of any material provision of this Agreement which continues uncured for 30 days following notice thereof; provided that none of the foregoing shall constitute Involuntary Termination to the extent Executive has agreed thereto. (e) Release of Claims. "Release of Claims" shall mean a waiver by ----------------- Executive, in a form satisfactory to the Company, of all employment related obligations of and claims and causes of action against the Company. (f) Termination Date. "Termination Date" shall mean the date on ---------------- which an event which would constitute Involuntary Termination occurs, or the later of (i) the date on which a notice of termination is given, or (ii) the date (which shall not be more than thirty (30) days after the giving of such notice) specified in such notice. 6. Confidentiality. Executive acknowledges that during the course of --------------- Executive's employment, Executive will have produced and/or have access to confidential information, records, notebooks, data, formula, specifications, trade secrets, customer lists and secret inventions, and processes of the Company and its affiliated companies. Therefore, during or subsequent to Executive's employment by the Company, Executive agrees to hold in confidence and not directly or indirectly to disclose or use or copy or make lists of any such information, except to the extent authorized by the Company in writing. All records, files, drawings, documents, equipment, and the like, or copies thereof, relating to the Company's business, or the business of an affiliated company, which Executive shall prepare, or use, or come into contact with, shall be and remain the sole property of the Company, or of an affiliated company, and shall not be removed from the Company's or the affiliated company's premises without its written consent, and shall be promptly returned to the Company upon termination of employment with the Company. 7. Successors. ---------- (a) Company's Successors. Any successor to the Company (whether -------------------- direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company's business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence -4- of a succession. For all purposes under this Agreement, the term "Company" shall include any successor to the Company's business and/or assets which executes and delivers the assumption agreement pursuant to this subsection (a) or which becomes bound by the terms of this Agreement by operation of law. (b) Executive's Successors. The terms of this Agreement and all ---------------------- rights of the Executive hereunder shall inure to the benefit of, and be enforceable by, the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 8. Notice. ------ (a) General. Notices and all other communications contemplated by ------- this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Executive, mailed notices shall be addressed to Executive at the home address which Executive most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its CEO. (b) Notice of Termination. Any termination by the Company for Cause --------------------- or by the Executive as a result of a voluntary resignation or an Involuntary Termination shall be communicated by a notice of termination to the other party hereto given in accordance with Section 8(a) of this Agreement. Such notice shall indicate the specific termination provision in this Agreement relied upon, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated, and shall specify the termination date (which shall be not more than 30 days after the giving of such notice). The failure by the Executive to include in the notice any fact or circumstance which contributes to a showing of Involuntary Termination shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing Executive's rights hereunder. 9. Miscellaneous Provisions. ------------------------ (a) No Duty to Mitigate. The Executive shall not be required to ------------------- mitigate the amount of any payment contemplated by this Agreement, nor shall any such payment be reduced by any earnings that the Executive may receive from any other source. (b) Waiver. No provision of this Agreement shall be modified, waived ------ or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Executive and by an authorized officer of the Company (other than the Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. -5- (c) Whole Agreement. No agreements, representations or --------------- understandings (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to the subject matter hereof. (d) Severance Provisions in Other Agreements. The Executive ---------------------------------------- acknowledges and agrees that the severance provisions set forth in this Agreement shall supersede any such provisions in any employment agreement entered into between the Executive and the Company. (e) Choice of Law. The validity, interpretation, construction and ------------- performance of this Agreement shall be governed by the laws of the State of California. (f) Severability. The invalidity or unenforceability of any ------------ provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect. (g) No Assignment of Benefits. The rights of any person to payments ------------------------- or benefits under this Agreement shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor's process, and any action in violation of this subsection shall be void. (h) Employment Taxes. All payments made pursuant to this Agreement ---------------- will be subject to withholding of applicable income and employment taxes. (i) Assignment by Company. The Company may assign its rights under --------------------- this Agreement to an affiliate, and an affiliate may assign its rights under this Agreement to another affiliate of the Company or to the Company; provided, however, that no assignment shall be made if the net worth of the assignee is less than the net worth of the Company at the time of assignment. In the case of any such assignment, the term "Company" when used in a section of this Agreement shall mean the corporation that actually employs the Executive. (j) Counterparts. This Agreement may be executed in counterparts, ------------ each of which shall be deemed an original, but all of which together will constitute one and the same instrument. -6- IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written. COMPANY: COST PLUS, INC. /s/ Murray H. Dashe -------------------------------------------- By: MURRAY H. DASHE CEO -------------------------------------------- Executive /s/ Kathi P. Lentzsch ------------------------------------ KATHI LENTZSCH -7- EX-10.18.2 6 AMENDMENT TO EMPLOYMENT AGREEMENT EXHIBIT 10.18.2 AMENDMENT TO EMPLOYMENT AGREEMENT AMENDMENT, dated as of January 13, 1999 (the "Amendment"), to the Executive Employment Agreement, dated May 6, 1998, between Cost Plus, Inc., a California corporation and John Hoffner (the "Employee") (the "Employment Agreement"). WITNESSETH: ----------- WHEREAS, the parties hereto desire to amend certain provisions of the Employment Agreement as provided herein; NOW, THEREFORE, in consideration of the premises and mutual agreements contained herein, and for other valuable consideration the receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Amendment of Section 3(a). Section 3(a) of the Employment Agreement ------------------------- is hereby amended in its entirety and a new Section 3(b) shall be added to read as follows. The present Section 3(b) and all subsections of Section 3 thereafter shall be renumbered accordingly: 3. Severance Benefits. ------------------ (a) Benefits upon Termination. Except as provided in Section ------------------------- 3(b), if the Executive's employment terminates as a result of Involuntary Termination prior to June 15, 2000 and the Executive signs a Release of Claims, then the Company shall pay Executive's Base Compensation to the Executive for twelve (12) months from the Termination Date with each monthly installment payable on the last day of such month. Executive shall not be entitled to receive any payments if Executive voluntarily terminates employment other than as a result of an Involuntary Termination. (b) Benefits upon Termination After a Change of Control. If after --------------------------------------------------- a Change of Control the Executive's employment terminates as a result of Involuntary Termination prior to June 15, 2000 and the Executive signs a Release of Claims, then the Company shall pay Executive's Base Compensation to the Executive for eighteen (18) months from the Termination Date with each monthly installment payable on the last day of such month. Executive shall not be entitled to receive any payments if Executive voluntarily terminates employment other than as a result of an Involuntary Termination. 2. Amendment to Section 6. A new Section 16(b) shall be added to the ----------------------- Employment Agreement to read as follows. The present Section 16(b) and all subsections thereafter shall be renumbered accordingly. (c) "Change of Control" means the occurrence of any of the following events: (i) The acquisition by any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of the "beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company's then outstanding voting securities; (ii) A change in the composition of the Board of Directors of the Company occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board of Directors of the Company with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual not otherwise an Incumbent Director whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company); (iii) A merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the approval by the stockholders of the Company of a plan or complete liquidation of the Company or of an agreement for the sale or disposition by the Company of all or substantially all the Company's assets; (iv) The sale of all or substantially all of the assets of the Company determined on a consolidated basis; or (v) The complete liquidation or dissolution of the Company. 3. Counterparts. This Amendment may be signed in any number of ------------ counterparts, all of which counterparts, taken together, shall constitute one and the same instrument. 4. Governing Law. This Amendment and the rights and obligations of the ------------- parties hereto shall be governed by, and construed and interpreted in accordance with, the law of the State of California. -2- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. COST PLUS, INC. By: /s/ Murray H. Dashe -------------------------------- Name: Murray H. Dashe Title: CEO JOHN HOFFNER /s/ John F. Hoffner -------------------------------- SIGNATURE PAGE OF AMENDMENT TO THE EMPLOYMENT AGREEMENT -3- EX-10.19 7 EMPLOYMENT SEVERANCE AGREEMENT EXHIBIT 10.19 EMPLOYMENT SEVERANCE AGREEMENT This Severance Agreement (the "Agreement") is made and entered into effective as of January 13, 1999 (the "Effective Date"), by and between Gary Weatherford (the "Executive") and Cost Plus, Inc. (the "Company"). RECITALS -------- A. The Board believes the Company should provide the Executive with certain severance benefits should the Executive's employment with the Company terminate under certain circumstances, such benefits to provide the Executive with enhanced financial security and sufficient incentive and encouragement to remain with the Company. B. Certain capitalized terms used in the Agreement are defined in Section 5 below. AGREEMENT In consideration of the mutual covenants herein contained, and in consideration of the continuing employment of Executive by the Company, the parties agree as follows: 1. Duties and Scope of Employment. The Company shall employ the Executive ------------------------------ in the position of Senior Vice President in charge of Stores with such duties, responsibilities and compensation as in effect as of the Effective Date. The Board and the Chief Executive Officer of the Company (the "CEO") shall have the right to revise such responsibilities and compensation from time to time as the Board or the CEO may deem necessary or appropriate. If any such revision constitutes "Involuntary Termination" as defined in Section 5(c) of this Agreement, the Executive shall be entitled to benefits upon such Involuntary Termination as provided under this Agreement. 2. At-Will Employment. The Company and the Executive acknowledge that the ------------------ Executive's employment is and shall continue to be at-will, as defined under applicable law. If the Executive's employment terminates for any reason, the Executive shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement, or as may otherwise be available in accordance with the Company's established employee plans and practices or in accordance with other agreements between the Company and the Executive. This Agreement shall remain in effect until the earlier of (i) the date that all obligations of the parties hereunder have been satisfied or (ii) the date upon which this Agreement terminates by consent of the parties hereto. 3. Severance Benefits. ------------------ (a) Benefits upon Termination. Except as provided in Section 3(b), if ------------------------- the Executive's employment terminates as a result of Involuntary Termination prior to June 15, 2000 and the Executive signs a Release of Claims, then the Company shall pay Executive's Base Compensation to the Executive for six (6) months from the Termination Date with each monthly installment payable on the last day of such month. Executive shall not be entitled to receive any payments if Executive voluntarily terminates employment other than as a result of an Involuntary Termination. (b) Benefits upon Termination After a Change of Control. If after a --------------------------------------------------- Change of Control the Executive's employment terminates as a result of Involuntary Termination prior to June 15, 2000 and the Executive signs a Release of Claims, then the Company shall pay Executive's Base Compensation to the Executive for nine (9) months from the Termination Date with each monthly installment payable on the last day of such month. Executive shall not be entitled to receive any payments if Executive voluntarily terminates employment other than as a result of an Involuntary Termination. (c) Stock Options: Bonus. Executive shall not be entitled to receive -------------------- any unvested stock options or partial bonus payments for an incomplete bonus plan year. (d) Miscellaneous. In addition, (i) the Company shall pay the ------------- Executive any unpaid base salary due for periods prior to the Termination Date; (ii) the Company shall pay the Executive all of the Executive's accrued and unused vacation through the Termination Date; and (iii) following submission of proper expense reports by the Executive, the Company shall reimburse the Executive for all expenses reasonably and necessarily incurred by the Executive in connection with the business of the Company prior to termination. These payments shall be made promptly upon termination and within the period of time mandated by applicable law. 4. Non-Solicitation. In consideration for the mutual agreements as set ---------------- forth herein, Executive agrees that Executive shall not, at any time, within twelve (12) months following termination of Executive's employment with the Company for any reason, directly or indirectly solicit the employment or other services of any individual who at that time shall be or within the prior twelve (12) months shall have been an employee of the Company. 5. Definition of Terms. The following terms referred to in this Agreement ------------------- shall have the following meanings: (a) Base Compensation. "Base Compensation" shall mean Executive's ----------------- monthly base salary for services performed based on the average base salary for the six (6) months prior to the Termination Date. 2 (b) Cause. "Cause," unless otherwise defined in the Agreement ----- evidencing a particular Option, means an Eligible Individual's (i) intentional failure to perform reasonably assigned duties, (ii) dishonesty or willful misconduct in the performance of duties, (iii) engaging in a transaction in connection with the performance of duties to the Company or any of its Subsidiaries thereof which transaction is adverse to the interests of the Company or any of its Subsidiaries and which is engaged in for personal profit or (iv) willful violation of any law, rule or regulation in connection with the performance of duties (other than traffic violations or similar offenses). (c) "Change of Control" means the occurrence of any of the following events: (i) The acquisition by any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of the "beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company's then outstanding voting securities; (ii) A change in the composition of the Board of Directors of the Company occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board of Directors of the Company with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual not otherwise an Incumbent Director whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company); (iii) A merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the approval by the stockholders of the Company of a plan of complete liquidation of the Company or of an agreement for the sale or disposition by the Company of all or substantially all the Company's assets; (iv) The sale of all or substantially all of the assets of the Company determined on a consolidated basis; or (v) The complete liquidation or dissolution of the Company. 3 (d) Involuntary Termination. "Involuntary Termination" shall mean: ----------------------- (i) termination of Executive's employment by the Company for any reason other than Cause; (ii) a material reduction in Executive's salary, other than any such reduction which is part of, and generally consistent with, a general reduction of officer salaries; (iii) a material reduction by the Company in the kind or level of employee benefits (other than salary and bonus) to which Executive is entitled immediately prior to such reduction with the result that Executive's overall benefits package (other than salary and bonus) is substantially reduced (other than any such reduction applicable to officers of the Company generally); (iv) any material breach by the Company of any material provision of this Agreement which continues uncured for 30 days following notice thereof; provided that none of the foregoing shall constitute Involuntary Termination to the extent Executive has agreed thereto. (e) Release of Claims. "Release of Claims" shall mean a waiver by ----------------- Executive, in a form satisfactory to the Company, of all employment related obligations of and claims and causes of action against the Company. (f) Termination Date. "Termination Date" shall mean the date on which ---------------- an event which would constitute Involuntary Termination occurs, or the later of (i) the date on which a notice of termination is given, or (ii) the date (which shall not be more than thirty (30) days after the giving of such notice) specified in such notice. 6. Confidentiality. Executive acknowledges that during the course of --------------- Executive's employment, Executive will have produced and/or have access to confidential information, records, notebooks, data, formula, specifications, trade secrets, customer lists and secret inventions, and processes of the Company and its affiliated companies. Therefore, during or subsequent to Executive's employment by the Company, Executive agrees to hold in confidence and not directly or indirectly to disclose or use or copy or make lists of any such information, except to the extent authorized by the Company in writing. All records, files, drawings, documents, equipment, and the like, or copies thereof, relating to the Company's business, or the business of an affiliated company, which Executive shall prepare, or use, or come into contact with, shall be and remain the sole property of the Company, or of an affiliated company, and shall not be removed from the Company's or the affiliated company's premises without its written consent, and shall be promptly returned to the Company upon termination of employment with the Company. 4 7. Successors. ---------- (a) Company's Successors. Any successor to the Company (whether -------------------- direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company's business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term "Company" shall include any successor to the Company's business and/or assets which executes and delivers the assumption agreement pursuant to this subsection (a) or which becomes bound by the terms of this Agreement by operation of law. (b) Executive's Successors. The terms of this Agreement and all ---------------------- rights of the Executive hereunder shall inure to the benefit of, and be enforceable by, the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 8. Notice. ------ (a) General. Notices and all other communications contemplated by ------- this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Executive, mailed notices shall be addressed to Executive at the home address which Executive most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its CEO. (b) Notice of Termination. Any termination by the Company for Cause --------------------- or by the Executive as a result of a voluntary resignation or an Involuntary Termination shall be communicated by a notice of termination to the other party hereto given in accordance with Section 8(a) of this Agreement. Such notice shall indicate the specific termination provision in this Agreement relied upon, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated, and shall specify the termination date (which shall be not more than 30 days after the giving of such notice). The failure by the Executive to include in the notice any fact or circumstance which contributes to a showing of Involuntary Termination shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing Executive's rights hereunder. 9. Miscellaneous Provisions. ------------------------ (a) No Duty to Mitigate. The Executive shall not be required to ------------------- mitigate the amount of any payment contemplated by this Agreement, nor shall any such payment be reduced by any earnings that the Executive may receive from any other source. 5 (b) Waiver. No provision of this Agreement shall be modified, waived ------ or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Executive and by an authorized officer of the Company (other than the Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (c) Whole Agreement. No agreements, representations or understandings --------------- (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to the subject matter hereof. (d) Severance Provisions in Other Agreements. The Executive ---------------------------------------- acknowledges and agrees that the severance provisions set forth in this Agreement shall supersede any such provisions in any employment agreement entered into between the Executive and the Company. (e) Choice of Law. The validity, interpretation, construction and ------------- performance of this Agreement shall be governed by the laws of the State of California. (f) Severability. The invalidity or unenforceability of any provision ------------ or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect. (g) No Assignment of Benefits. The rights of any person to payments ------------------------- or benefits under this Agreement shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor's process, and any action in violation of this subsection shall be void. (h) Employment Taxes. All payments made pursuant to this Agreement ---------------- will be subject to withholding of applicable income and employment taxes. (i) Assignment by Company. The Company may assign its rights under --------------------- this Agreement to an affiliate, and an affiliate may assign its rights under this Agreement to another affiliate of the Company or to the Company; provided, however, that no assignment shall be made if the net worth of the assignee is less than the net worth of the Company at the time of assignment. In the case of any such assignment, the term "Company" when used in a section of this Agreement shall mean the corporation that actually employs the Executive. (j) Counterparts. This Agreement may be executed in counterparts, ------------ each of which shall be deemed an original, but all of which together will constitute one and the same instrument. 6 IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written. COMPANY: COST PLUS, INC. By /s/ Murray H. Dashe ------------------- Title CEO ------------------- Executive: /s/ Gary Weatherford --------------------- GARY WEATHERFORD 7 EX-10.20 8 EMPLOYMENT SEVERANCE AGREEMENT EXHIBIT 10.20 EMPLOYMENT SEVERANCE AGREEMENT This Severance Agreement (the "Agreement") is made and entered into effective as of January 13, 1999 (the "Effective Date"), by and between Joan Fujii (the "Executive") and Cost Plus, Inc. (the "Company"). RECITALS -------- A. The Board believes the Company should provide the Executive with certain severance benefits should the Executive's employment with the Company terminate under certain circumstances, such benefits to provide the Executive with enhanced financial security and sufficient incentive and encouragement to remain with the Company. B. Certain capitalized terms used in the Agreement are defined in Section 5 below. AGREEMENT In consideration of the mutual covenants herein contained, and in consideration of the continuing employment of Executive by the Company, the parties agree as follows: 1. Duties and Scope of Employment. The Company shall employ the Executive ------------------------------ in the position of Senior Vice President in charge of Human Resources with such duties, responsibilities and compensation as in effect as of the Effective Date. The Board and the Chief Executive Officer of the Company (the "CEO") shall have the right to revise such responsibilities and compensation from time to time as the Board or the CEO may deem necessary or appropriate. If any such revision constitutes "Involuntary Termination" as defined in Section 5(c) of this Agreement, the Executive shall be entitled to benefits upon such Involuntary Termination as provided under this Agreement. 2. At-Will Employment. The Company and the Executive acknowledge that the ------------------ Executive's employment is and shall continue to be at-will, as defined under applicable law. If the Executive's employment terminates for any reason, the Executive shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement, or as may otherwise be available in accordance with the Company's established employee plans and practices or in accordance with other agreements between the Company and the Executive. This Agreement shall remain in effect until the earlier of (i) the date that all obligations of the parties hereunder have been satisfied or (ii) the date upon which this Agreement terminates by consent of the parties hereto. 3. Severance Benefits. ------------------ (a) Benefits upon Termination. Except as provided in Section 3(b), ------------------------- if the Executive's employment terminates as a result of Involuntary Termination prior to June 15, 2000 and the Executive signs a Release of Claims, then the Company shall pay Executive's Base Compensation to the Executive for six (6) months from the Termination Date with each monthly installment payable on the last day of such month. Executive shall not be entitled to receive any payments if Executive voluntarily terminates employment other than as a result of an Involuntary Termination. (b) Benefits upon Termination After a Change of Control. If after a --------------------------------------------------- Change of Control the Executive's employment terminates as a result of Involuntary Termination prior to June 15, 2000 and the Executive signs a Release of Claims, then the Company shall pay Executive's Base Compensation to the Executive for nine (9) months from the Termination Date with each monthly installment payable on the last day of such month. Executive shall not be entitled to receive any payments if Executive voluntarily terminates employment other than as a result of an Involuntary Termination. (c) Stock Options: Bonus. Executive shall not be entitled to receive -------------------- any unvested stock options or partial bonus payments for an incomplete bonus plan year. (d) Miscellaneous. In addition, (i) the Company shall pay the ------------- Executive any unpaid base salary due for periods prior to the Termination Date; (ii) the Company shall pay the Executive all of the Executive's accrued and unused vacation through the Termination Date; and (iii) following submission of proper expense reports by the Executive, the Company shall reimburse the Executive for all expenses reasonably and necessarily incurred by the Executive in connection with the business of the Company prior to termination. These payments shall be made promptly upon termination and within the period of time mandated by applicable law. 4. Non-Solicitation. In consideration for the mutual agreements as set ---------------- forth herein, Executive agrees that Executive shall not, at any time, within twelve (12) months following termination of Executive's employment with the Company for any reason, directly or indirectly solicit the employment or other services of any individual who at that time shall be or within the prior twelve (12) months shall have been an employee of the Company. 5. Definition of Terms. The following terms referred to in this Agreement ------------------- shall have the following meanings: (a) Base Compensation. "Base Compensation" shall mean Executive's ----------------- monthly base salary for services performed based on the average base salary for the six (6) months prior to the Termination Date. (b) Cause. "Cause," unless otherwise defined in the Agreement ----- evidencing a particular Option, means an Eligible Individual's (i) intentional failure to perform reasonably assigned 2 duties, (ii) dishonesty or willful misconduct in the performance of duties, (iii) engaging in a transaction in connection with the performance of duties to the Company or any of its Subsidiaries thereof which transaction is adverse to the interests of the Company or any of its Subsidiaries and which is engaged in for personal profit or (iv) willful violation of any law, rule or regulation in connection with the performance of duties (other than traffic violations or similar offenses). (c) "Change of Control" means the occurrence of any of the following events: (i) The acquisition by any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of the "beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company's then outstanding voting securities; (ii) A change in the composition of the Board of Directors of the Company occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board of Directors of the Company with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual not otherwise an Incumbent Director whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company); (iii) A merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the approval by the stockholders of the Company of a plan of complete liquidation of the Company or of an agreement for the sale or disposition by the Company of all or substantially all the Company's assets; (iv) The sale of all or substantially all of the assets of the Company determined on a consolidated basis; or (v) The complete liquidation or dissolution of the Company. (d) Involuntary Termination. "Involuntary Termination" shall mean: ----------------------- (i) termination of Executive's employment by the Company for any reason other than Cause; 3 (ii) a material reduction in Executive's salary, other than any such reduction which is part of, and generally consistent with, a general reduction of officer salaries; (iii) a material reduction by the Company in the kind or level of employee benefits (other than salary and bonus) to which Executive is entitled immediately prior to such reduction with the result that Executive's overall benefits package (other than salary and bonus) is substantially reduced (other than any such reduction applicable to officers of the Company generally); (iv) any material breach by the Company of any material provision of this Agreement which continues uncured for 30 days following notice thereof; provided that none of the foregoing shall constitute Involuntary Termination to the extent Executive has agreed thereto. (e) Release of Claims. "Release of Claims" shall mean a waiver by ----------------- Executive, in a form satisfactory to the Company, of all employment related obligations of and claims and causes of action against the Company. (f) Termination Date. "Termination Date" shall mean the date on which ---------------- an event which would constitute Involuntary Termination occurs, or the later of (i) the date on which a notice of termination is given, or (ii) the date (which shall not be more than thirty (30) days after the giving of such notice) specified in such notice. 6. Confidentiality. Executive acknowledges that during the course of --------------- Executive's employment, Executive will have produced and/or have access to confidential information, records, notebooks, data, formula, specifications, trade secrets, customer lists and secret inventions, and processes of the Company and its affiliated companies. Therefore, during or subsequent to Executive's employment by the Company, Executive agrees to hold in confidence and not directly or indirectly to disclose or use or copy or make lists of any such information, except to the extent authorized by the Company in writing. All records, files, drawings, documents, equipment, and the like, or copies thereof, relating to the Company's business, or the business of an affiliated company, which Executive shall prepare, or use, or come into contact with, shall be and remain the sole property of the Company, or of an affiliated company, and shall not be removed from the Company's or the affiliated company's premises without its written consent, and shall be promptly returned to the Company upon termination of employment with the Company. 7. Successors. ---------- (a) Company's Successors. Any successor to the Company (whether -------------------- direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company's business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence 4 of a succession. For all purposes under this Agreement, the term "Company" shall include any successor to the Company's business and/or assets which executes and delivers the assumption agreement pursuant to this subsection (a) or which becomes bound by the terms of this Agreement by operation of law. (b) Executive's Successors. The terms of this Agreement and all ---------------------- rights of the Executive hereunder shall inure to the benefit of, and be enforceable by, the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 8. Notice. ------ (a) General. Notices and all other communications contemplated by ------- this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Executive, mailed notices shall be addressed to Executive at the home address which Executive most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its CEO. (b) Notice of Termination. Any termination by the Company for Cause --------------------- or by the Executive as a result of a voluntary resignation or an Involuntary Termination shall be communicated by a notice of termination to the other party hereto given in accordance with Section 8(a) of this Agreement. Such notice shall indicate the specific termination provision in this Agreement relied upon, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated, and shall specify the termination date (which shall be not more than 30 days after the giving of such notice). The failure by the Executive to include in the notice any fact or circumstance which contributes to a showing of Involuntary Termination shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing Executive's rights hereunder. 9. Miscellaneous Provisions. ------------------------ (a) No Duty to Mitigate. The Executive shall not be required to ------------------- mitigate the amount of any payment contemplated by this Agreement, nor shall any such payment be reduced by any earnings that the Executive may receive from any other source. (b) Waiver. No provision of this Agreement shall be modified, waived ------ or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Executive and by an authorized officer of the Company (other than the Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. 5 (c) Whole Agreement. No agreements, representations or --------------- understandings (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to the subject matter hereof. (d) Severance Provisions in Other Agreements. The Executive ---------------------------------------- acknowledges and agrees that the severance provisions set forth in this Agreement shall supersede any such provisions in any employment agreement entered into between the Executive and the Company. (e) Choice of Law. The validity, interpretation, construction and ------------- performance of this Agreement shall be governed by the laws of the State of California. (f) Severabiliiy. The invalidity or unenforceability of any ------------ provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect. (g) No Assignment of Benefits. The rights of any person to payments ------------------------- or benefits under this Agreement shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor's process, and any action in violation of this subsection shall be void. (h) Employment Taxes. All payments made pursuant to this Agreement ---------------- will be subject to withholding of applicable income and employment taxes. (i) Assignment by Company. The Company may assign its rights under --------------------- this Agreement to an affiliate, and an affiliate may assign its rights under this Agreement to another affiliate of the Company or to the Company; provided, however, that no assignment shall be made if the net worth of the assignee is less than the net worth of the Company at the time of assignment. In the case of any such assignment, the term "Company" when used in a section of this Agreement shall mean the corporation that actually employs the Executive. (j) Counterparts. This Agreement may be executed in counterparts, ------------ each of which shall be deemed an original, but all of which together will constitute one and the same instrument. 6 IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written. COMPANY: COST PLUS, INC. By /s/ Murray H. Dashe -------------------- Title CEO ----------------- Executive: /s/ Joan Fujii -------------- JOAN FUJII 7 EX-13 9 REGISTRANT'S 1998 ANNUAL REPORT 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. EX-23 10 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333-27739, 333-56975 and 333-67441 of Cost Plus, Inc. and subsidiaries on Form S-8 of our report dated March 15, 1999, incorporated by reference in this Annual Report on Form 10-K of Cost Plus, Inc. and subsidiaries for the year ended January 30, 1999. /s/ Deloitte & Touche LLP San Francisco, California April 27, 1999 EX-27 11 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF COST PLUS, INC. FOR THE TWELVE MONTHS ENDED JANUARY 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JAN-30-1999 FEB-01-1998 JAN-30-1999 28,600 0 0 0 70,680 103,833 100,188 41,154 173,141 42,802 0 0 0 133 109,270 173,141 315,135 315,135 200,023 292,211 0 0 1,226 21,698 8,462 13,236 0 0 0 13,236 1.01 0.98 Per share data is restated for a three-for-two common stock split effective March 11, 1999 for shareholders of record on March 1, 1999. Prior Financial Data Schedules have not been restated for the re-capitalization.
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