Form 10-Q

-----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, LCQIifA4G+FgAxZpFrU7EhXdurIcA2IrWRNe9eK7d8haGa5Z6V1ocFKMzMO5npjm A1nMXD9aAsM+enT25NjwVQ== 0001193125-06-248552.txt : 20061207 0001193125-06-248552.hdr.sgml : 20061207 20061207152807 ACCESSION NUMBER: 0001193125-06-248552 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20061028 FILED AS OF DATE: 20061207 DATE AS OF CHANGE: 20061207 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COST PLUS INC/CA/ CENTRAL INDEX KEY: 0000798955 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-HOME FURNITURE, FURNISHINGS & EQUIPMENT STORES [5700] IRS NUMBER: 941067973 STATE OF INCORPORATION: CA FISCAL YEAR END: 0128 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14970 FILM NUMBER: 061262509 BUSINESS ADDRESS: STREET 1: 200 FOURTH STREET OAKLAND STREET 2: SEE ADDRESS LISTED ABOVE CITY: OAKLAND STATE: CA ZIP: 94607 BUSINESS PHONE: 5108937300 MAIL ADDRESS: STREET 1: 200 FOURTH STREET OAKLAND STREET 2: SEE ADDRESS LISTED ABOVE CITY: OAKLAND STATE: CA ZIP: 94607 10-Q 1 d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 28, 2006

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-14970

COST PLUS, INC.

(Exact name of registrant as specified in its charter)


California		94-1067973
(State or other jurisdiction of incorporation or Organization)		(I.R.S. Employer Identification No.)

200 4th Street, Oakland, California		94607
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (510) 893-7300

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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

The number of shares of Common Stock, $0.01 par value, outstanding on December 5, 2006 was 22,084,239.

COST PLUS, INC.

FORM 10-Q

For the Quarter Ended October 28, 2006

INDEX


		Page
PART I. FINANCIAL INFORMATION

ITEM 1.	Condensed Consolidated Financial Statements (unaudited)

	Balance Sheets as of October 28, 2006, January 28, 2006 and October 29, 2005	3

	Statements of Operations for the three and nine months ended October 28, 2006 and October 29, 2005	4

	Statements of Cash Flows for the nine months ended October 28, 2006 and October 29, 2005	5

	Notes to Condensed Consolidated Financial Statements	6-11

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12-16

ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	16

ITEM 4.	Controls and Procedures	16

PART II. OTHER INFORMATION

ITEM 1A.	Risk Factors	16-20

ITEM 6.	Exhibits	21

SIGNATURE PAGE		22

PART I. FINANCIAL INFORMATION

ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

COST PLUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts, unaudited)


	October 28, 2006			January 28, 2006			October 29, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	3,400		$	40,382		$	3,775
Merchandise inventories		341,925			252,791			319,877
Income tax receivable		19,713			—			5,385
Other current assets		17,066			15,294			16,456

Total current assets		382,104			308,467			345,493
Property and equipment, net		218,321			203,873			196,970
Goodwill, net		4,178			4,178			4,178
Other assets, net		16,096			15,433			15,169

Total assets	$	620,699		$	531,951		$	561,810

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	66,278		$	57,351		$	69,057
Income taxes payable		—			10,618			—
Current deferred taxes		7,878			6,781			9,423
Accrued compensation		9,940			13,084			9,473
Revolving line of credit		90,000			—			54,500
Current portion of long-term debt		3,671			5,267			4,784
Other current liabilities		21,399			21,217			18,303

Total current liabilities		199,166			114,318			165,540
Capital lease obligations		11,082			12,268			12,676
Long-term debt		77,917			50,051			51,698
Other long-term obligations		41,515			39,233			37,513
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $.01 par value: 5,000,000 shares authorized; none issued and outstanding		—			—			—
Common stock, $.01 par value: 67,500,000 shares authorized; issued and outstanding, 22,065,038; 22,060,788 and 22,047,348 shares		221			220			220
Additional paid-in capital		166,361			163,571			163,444
Retained earnings		124,666			152,442			130,928
Accumulated other comprehensive loss		(229	)		(152	)		(209	)

Total shareholders’ equity		291,019			316,081			294,383

Total liabilities and shareholders’ equity	$	620,699		$	531,951		$	561,810

See notes to condensed consolidated financial statements.

COST PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts, unaudited)


	Three Months Ended						Nine Months Ended
	October 28, 2006			October 29, 2005			October 28, 2006			October 29, 2005
Net sales	$	215,405		$	200,679		$	643,644		$	603,468
Cost of sales and occupancy		149,233			133,947			455,616			400,796

Gross profit		66,172			66,732			188,028			202,672
Selling, general and administrative expenses		79,962			66,700			223,223			195,009
Store preopening expenses		2,618			2,698			4,881			6,055

Income (loss) from operations		(16,408	)		(2,666	)		(40,076	)		1,608
Net interest expense		2,445			1,694			5,024			3,801

Loss before income taxes		(18,853	)		(4,360	)		(45,100	)		(2,193	)
Income tax benefit		(7,123	)		(1,700	)		(17,326	)		(913	)

Net loss	$	(11,730	)	$	(2,660	)	$	(27,774	)	$	(1,280	)

Net loss per weighted average share:
Basic	$	(0.53	)	$	(0.12	)	$	(1.26	)	$	(0.06	)
Diluted	$	(0.53	)	$	(0.12	)	$	(1.26	)	$	(0.06	)
Weighted average shares outstanding:
Basic		22,065			22,029			22,064			21,987
Diluted		22,065			22,029			22,064			21,987

See notes to condensed consolidated financial statements.

COST PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)


	Nine Months Ended
	October 28, 2006			October 29, 2005
Cash Flows from Operating Activities:
Net loss	$	(27,774	)	$	(1,280	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		24,216			21,032
Share-based compensation expense		2,722			630
Loss on asset disposal		403			450
Tax effect of disqualifying common stock dispositions		6			249
Deferred income taxes		217			(873	)
Changes in assets and liabilities:
Merchandise inventories		(89,134	)		(66,758	)
Income tax receivable		(19,713	)		(5,385	)
Other assets		(1,780	)		3,105
Accounts payable		16,437			(3,393	)
Income taxes payable		(10,618	)		(9,692	)
Other liabilities		(763	)		1,984

Net cash used in operating activities		(105,781	)		(59,931	)

Cash Flows from Investing Activities:
Purchases of property and equipment		(46,357	)		(54,443	)
Proceeds from sale of property and equipment		3			91

Net cash used in investing activities		(46,354	)		(54,352	)

Cash Flows from Financing Activities:
Net borrowings under revolving line of credit		90,000			54,500
Proceeds from long-term debt		47,279			20,000
Prepayment of long-term debt		(18,208	)		—
Principal payments on long-term debt		(2,801	)		(2,649	)
Principal payments on capital lease obligations		(1,176	)		(1,095	)
Proceeds from the issuance of common stock		59			4,384

Net cash provided by financing activities		115,153			75,140

Net decrease in cash and cash equivalents		(36,982	)		(39,143	)
Cash and cash equivalents:
Beginning of period		40,382			42,918

End of period	$	3,400		$	3,775

Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	4,629		$	3,627

Cash paid for income taxes	$	12,727		$	14,798

See notes to condensed consolidated financial statements.

COST PLUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and Nine Months Ended October 28, 2006 and October 29, 2005

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared from the records of Cost Plus, Inc. (the “Company”) without audit and, in the opinion of management, include all adjustments that are normal and recurring in nature necessary to present fairly the Company’s financial position at October 28, 2006 and October 29, 2005, the interim results of operations for the three and nine months ended October 28, 2006 and October 29, 2005, and changes in cash flows for the nine months ended October 28, 2006 and October 29, 2005. The balance sheet at January 28, 2006, presented herein, has been derived from the audited financial statements of the Company for the fiscal year then ended.

Accounting policies followed by the Company are described in Note 1 to the audited consolidated financial statements for the fiscal year ended January 28, 2006. Certain information and disclosures normally included in the notes to the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted for purposes of presenting the interim condensed consolidated financial statements. Such statements should be read in conjunction with the audited consolidated financial statements, including notes thereto, for the fiscal year ended January 28, 2006.

The results of operations for the three and nine month periods ended October 28, 2006, presented herein, are not indicative of the results to be expected for the full year.

2. IMPACT OF NEW ACCOUNTING STANDARDS

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. FIN 48 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination based on the technical merits. This interpretation also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company will implement FIN 48 at the beginning of fiscal 2007, and any cumulative effect resulting from the change in accounting principle will be recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact, if any, that the adoption of FIN 48 will have on its financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Qualifying Misstatements in Current Year Financial Statements,” which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB No. 108 is effective for companies with fiscal years ending after November 15, 2006 and is required to be adopted by the Company in its fiscal year ending February 3, 2007. The Company is currently assessing the impact, if any, of the adoption of SAB No. 108.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurement.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently assessing the impact of SFAS No. 157 on its financial statements.

3. SHARE-BASED COMPENSATION

The Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment” at the beginning of fiscal 2006. SFAS 123(R) requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and non-employee directors including stock options and performance share awards based on estimated fair values.

Prior to fiscal 2006, the Company accounted for share-based awards granted to employees and non-employee directors in accordance with the measurement and recognition provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, and complied with the disclosure provisions of FASB Statement No. 123 “Accounting for Stock-Based Compensation,” (“SFAS 123”) and FASB Statement No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure, an Amendment of FASB Statement No. 123.”

The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of the first day of the Company’s 2006 fiscal year. The Company’s consolidated financial statements as of and for the three and nine month periods ended October 28, 2006 include the impact of share-based payment expense in accordance with SFAS 123(R). Also, in accordance with the modified prospective transition method, the Company’s consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R).

The Company recognized share-based compensation expense of $1.0 million (before any related tax benefit) in the three months ended October 28, 2006 and recognized $2.7 million (before any related tax benefit) in the nine months ended October 28, 2006. Share-based compensation expense is included as a component of selling, general and administrative expenses. As of October 28, 2006, there was $5.8 million (before any related tax benefit) of total unrecognized compensation cost related to nonvested share-based payments that is expected to be recognized over a weighted-average period of approximately 1.3 years.

Share-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest. Share-based compensation expense recognized in the Company’s consolidated statement of operations for the three and nine months ended October 28, 2006 includes compensation expense for share-based payment awards granted prior to but not yet vested as of January 29, 2006 based on the fair value estimate at the grant date in accordance with the provisions of SFAS 123, and compensation expense for the share-based payment awards granted subsequent to January 28, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). In accordance with SFAS 123(R), compensation expense for all share-based payment awards granted prior to January 29, 2006 will continue to be recognized based on the multiple option approach (accelerated method) and compensation expense for all share-based payment awards granted subsequent to January 28, 2006 will be recognized using the straight-line method. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Prior to the adoption of SFAS 123(R), the Company presented all benefits of tax deductions resulting from the exercise of share-based payment awards as operating cash flows in its statements of cash flows. SFAS 123(R) requires the benefits of tax deductions in excess of the compensation cost recognized for those stock awards (excess tax benefits) to be classified as financing cash flows. For the nine months ended October 28, 2006, the Company had no excess tax benefits required to be reported as a financing cash flow.

The following table presents the weighted average assumptions used in the option pricing model for the stock options granted during the three and nine month periods ended October 28, 2006 and October 29, 2005, there were no stock options granted for the three month period ended October 28, 2006:


	Three Months Ended						Nine Months Ended
	October 28, 2006			October 29, 2005			October 28, 2006			October 29, 2005
				(Pro forma)						(Pro forma)
Expected dividend rate		—	%		—	%		—	%		—	%
Volatility		—	%		43.6	%		46.8	%		48.1	%
Risk-free interest rate		—	%		4.2	%		4.6	%		4.1	%
Expected lives (years)		—			4.3			4.75			4.2
Fair value per option granted	$	—		$	6.18		$	8.59		$	9.89

The fair value of each option grant was estimated using the Black-Scholes option-pricing model, which was also used for the Company’s pro forma disclosure required under SFAS 123. The Company used its historical stock price volatility for a period approximating the expected life as the basis for its expected volatility assumption consistent with SFAS 123(R) and SAB No. 107. The expected life of stock options represents the weighted-average period the stock options are expected to remain outstanding. The Company has elected to follow the guidance of SAB 107 and adopt the simplified method in determining expected life for its stock option awards. The expected dividend yield assumption is based on the Company’s history of zero dividend payouts and the expectation that no dividends will be paid in the foreseeable future. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with a term equivalent to the expected life of the stock option.

Had share-based employee compensation expense been determined based upon the fair values at the grant dates for awards under the Company’s stock plan in accordance with SFAS 123 for the three and nine month periods ended October 29, 2005, the Company’s pro forma net loss, basic and diluted loss per common share would have been as follows:


(In thousands, except per share data)	Three Months Ended October 29, 2005			Nine Months Ended October 29, 2005
Net loss, as reported	$	(2,660	)	$	(1,280	)
Add: Share-based compensation expense included in reported net income, net of related tax effect		—			381
Deduct: Total share-based employee compensation expense determined under fair value based method for all awards, net of related tax effect		(887	)		(3,732	)

Pro forma net loss	$	(3,547	)	$	(4,631	)

Basic net loss per weighted average share:
As reported	$	(0.12	)	$	(0.06	)
Pro forma	$	(0.16	)	$	(0.21	)
Diluted net loss per weighted average share:
As reported	$	(0.12	)	$	(0.06	)
Pro forma	$	(0.16	)	$	(0.21	)

The following table summarizes stock option activity during the nine months ended October 28, 2006:


	Options		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value (In thousands)
Outstanding, January 28, 2006	1,912,904		$	25.24
Granted	543,000			18.82
Exercised	(4,250	)		13.76
Cancelled	(192,391	)		27.46

Outstanding, October 28, 2006	2,259,263		$	23.53	5.4	$	—

Exercisable, October 28, 2006	1,084,135		$	24.35	4.9	$	—

Intrinsic value for stock options is defined as the difference between the market value and the grant price. The total intrinsic value of stock options exercised during the nine months ended October 28, 2006 was $14,500. Cash received as a result of stock options exercised during the nine months ended October 28, 2006 was $58,500, and the actual tax benefit realized for tax deductions from stock options exercised totaled $6,000.

During the first quarter of fiscal 2006, the Company granted performance share awards (“Performance Shares”) to certain key employees under the 2004 Stock Plan. Performance Shares entitle the holder to receive a number of shares of Cost Plus, Inc. common stock within a specified range of shares at the end of the vesting period. Performance shares are earned using a non-discretionary formula that is based on the Company achieving certain thresholds of comparable store sales growth and income from operations during the performance period. The fair value of performance shares are measured on the grant date and recognized in earnings over the requisite service period in accordance with SFAS 123(R).

The following table summarizes Performance Share activity during the nine months ended October 28, 2006, with the shares granted representing the maximum number of shares that could be achieved:


	Shares	Weighted Average Grant Date Fair Value Per Share
Outstanding at January 28, 2006	—	$	—
Granted	89,250		17.00
Vested	—		—
Forfeited	—		—

Outstanding at October 28, 2006	89,250	$	17.00

The 2004 Stock Plan permits the granting of up to 2,800,000 shares, which includes 900,000 new shares, 100,000 shares transferred from the 1995 plan, 800,000 shares subject to outstanding options under the 1995 Plan if they expire without being exercised, and 1,000,000 shares approved by both the Board of Directors and shareholders in 2006. Under the 2004 Plan, incentive stock options must be granted at fair market value as of the grant date and non-statutory options may be granted at 25% to 100% of the fair market value on the grant date. The term of the options granted under the 2004 Plan and the date when the options become exercisable is determined by the Board of Directors. However, in no event will a stock option granted under the 2004 Plan be exercised more than ten years after the date of grant. The 2004 Plan also includes the ability to grant restricted stock, stock appreciation rights, performance shares, and deferred stock units.

The 1996 Director Option Plan permits the granting of options for up to 703,675 shares of common stock to non-employee directors at fair market value as of the date of grant. Options are exercisable over a maximum term of ten years and vest as determined by the Board of Directors, generally over four years. The number of shares of common stock reserved for issuance under the Director Option Plan increased by 150,000 in 2002, 100,000 in 2004, and 200,000 in 2006. All increases were approved by the Board of Directors and shareholders and are included in the share count above.

4. RECONCILIATION OF BASIC SHARES TO DILUTED SHARES

The following is a reconciliation of the weighted average number of shares (in thousands) used in the Company’s basic and diluted loss per share computations:


	Three Months Ended							Nine Months Ended
	Basic EPS			Effect of Dilutive Stock Options (treasury stock method)	Diluted EPS			Basic EPS			Effect of Dilutive Stock Options (treasury stock method)	Diluted EPS
October 28, 2006
Shares		22,065		—		22,065			22,064		—		22,064
Amount	$	(0.53	)	—	$	(0.53	)	$	(1.26	)	—	$	(1.26	)
October 29, 2005
Shares		22,029		—		22,029			21,987		—		21,987
Amount	$	(0.12	)	—	$	(0.12	)	$	(0.06	)	—	$	(0.06	)

As the effect would have been antidilutive, all 2,348,513 and 2,078,164 stock options and shares of unvested performance share awards were excluded from the computation of diluted loss per share for the third quarter and year-to-date periods of fiscal 2006 and 2005, respectively.

5. COMPREHENSIVE INCOME (LOSS)

Comprehensive loss for the three and nine month periods ended October 28, 2006 and October 29, 2005 was as follows:


	Three Months Ended						Nine Months Ended
(In thousands)	October 28, 2006			October 29, 2005			October 28, 2006			October 29, 2005
Net loss, as reported	$	(11,730	)	$	(2,660	)	$	(27,774	)	$	(1,280	)
Other comprehensive income (loss), net of related tax effect - cash flow hedge		(299	)		581			(77	)		878

Comprehensive loss	$	(12,029	)	$	(2,079	)	$	(27,851	)	$	(402	)

6. LONG-TERM DEBT AND REVOLVING LINE OF CREDIT

In May 2004, the Company completed the $26.5 million purchase of its existing 500,000 square foot Virginia distribution center, which it had previously held under a capital lease. The Company financed $20 million of the purchase through a new 10 year fully amortizing commercial real estate loan, which bears interest at LIBOR plus 0.9% and matures in June 2014. The Company entered into an interest rate swap agreement to effectively fix the interest rate on this loan at 4.82%. The swap is accounted for as a cash flow hedge in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activity” (“SFAS 133”).

In 2004, the Company also began construction on a 500,000 square foot expansion to the existing Virginia distribution center to help meet its future growth requirements. The expansion project was completed and placed in service in the first quarter of fiscal 2005. The Company funded the majority of the expansion project through a $20 million interest only revolving line of credit and the remaining amount was financed through internally generated funds. The Company retired the line of credit in May 2005 with a new $20 million 10 year fully amortizing commercial real estate loan. This loan bears interest at LIBOR plus 0.9%. The Company entered into interest rate swap agreements to effectively fix interest on this loan at a weighted average rate of 6.58%. The swaps are accounted for as a cash flow hedge in accordance with SFAS No. 133.

On April 7, 2006, the Company prepaid a fully amortizing commercial real estate loan in the amount of $18.2 million and terminated a related swap commitment. The loan agreement had been entered into to finance a portion of the acquisition costs of the building and land in Stockton, CA. See Note 7 for a more detailed discussion.

In November 2004, the Company entered into an unsecured five year revolving line of credit agreement (the “Agreement”) with a group of banks that terminated and replaced an existing revolving credit facility. The Agreement allows for cash borrowings and letters of credit under an unsecured revolving credit facility of up to $50.0 million from January through June of each year, increasing to $125.0 million from July through December of each year to coincide with the Company’s Holiday borrowing needs. The Agreement includes a one-time option to increase the size of the revolving credit facility to $150.0 million. Interest is paid quarterly in arrears and bears interest, at the Company’s election, based on a rate equal to Bank of America’s prime rate or LIBOR plus an applicable margin that is based on the Company’s Consolidated Adjusted Leverage Ratio, as defined in the Agreement. The Agreement requires a 30-day “clean-up period” in which Adjusted Total Outstandings, as defined in the Agreement, do not exceed $30.0 million for not less than 30 consecutive days during the period from January 1 through March 31 of each year. The Company is subject to a minimum consolidated tangible net worth requirement, and annual capital expenditures are limited under the Agreement. The Agreement includes limitations on the ability of the Company to incur debt, grant liens, make acquisitions and dispose of assets and also prohibits the Company from making cash dividend payments with respect to any capital stock. The events of default under the Agreement include payment defaults, cross defaults with certain other indebtedness, breaches of covenants and bankruptcy events. In the case of a continuing event of default, the lenders under the Agreement may, among other remedies, eliminate their commitments to make credit available, declare due all unpaid principal amounts outstanding, and require cash collateral for any letter of credit obligations. As of October 28, 2006, the Company was in compliance with its loan covenant requirements, had outstanding borrowings of $90.0 million under its line of credit and had $16.5 million outstanding in letters of credit.

In April 2006, the Company entered into an unsecured 18 month revolving credit facility agreement with Bank of America, N.A. as the lender (the “Credit Facility”). The Credit Facility allows for borrowings of up to $40.0 million to be used for costs and expenses related to the construction of an additional distribution facility adjacent to the Company’s existing facility in Stockton, CA. Accrued interest is paid monthly, and the outstanding principle balance is payable on October 27, 2007. The Credit Facility bears interest, at the Company’s election, at a rate based on LIBOR plus a margin or Bank of America’s prime rate (or the Federal Funds Rate plus 0.5%, if greater). In addition the Company must pay a fee on the unused portion of the Credit Facility (the “Unused Fee”). The Unused Fee is payable quarterly in arrears. The applicable margin and the Unused Fee will be based upon the Company’s consolidated adjusted leverage ratio, as defined in the agreement. The Credit Facility’s financial covenants are the same as those in the Agreement entered into in November 2004, as discussed above. As of October 28, 2006, the Company was in compliance with its loan covenant requirements and had outstanding borrowings of $17.5 million under the Credit Facility. The borrowings under the Credit Facility are classified as long-term debt in the Company’s consolidated balance sheet.

7. SALE-LEASEBACK TRANSACTIONS

On April 7, 2006, the Company entered into a sale-leaseback transaction with Inland Real Estate Acquisitions, Inc., a third party real estate investment trust (“Inland”). In connection with the transaction, the Company sold its Stockton, CA distribution center property to Inland for net proceeds of $29.8 million. The property sold consists of an approximately 500,000 square foot building located on approximately 55 acres. The Company simultaneously entered into a lease agreement with Inland to lease the property back.

The Company accounted for the transaction as a financing whereby the net book value of the asset remains on the Company’s consolidated balance sheet. The Company also recorded a financing obligation in the amount of approximately $29.8 million, which will be amortized over the 34 year period of the leases (including option periods) and approximates the discounted value of total maximum lease payments under the leases. Monthly lease payments are accounted for as principal and interest payments (at an approximate annual rate of 7.2%) on the recorded obligation. As of October 28, 2006, the balance of the financing obligation was $ 29.8 million and was included on the Company’s consolidated balance sheet as long-term debt.

The Company used a portion of the proceeds from the sale of the property of approximately $29.8 million to retire $18.2 million of long-term debt related to the Company’s purchase of the property, and the remaining proceeds were used for other business purposes. The Company also terminated the interest rate swap agreement related to the aforementioned long-term debt.

On October 26, 2006, the Company entered into a Purchase and Sale Agreement (the “Purchase Agreement”) with Inland related to its Virginia distribution center property. Pursuant to the Purchase Agreement, the Company intends to sell its Virginia distribution center property to Inland for net proceeds of $52.3 million. The property being sold consists of approximately 84 acres and includes a distribution facility of approximately 1,000,000 square feet. Provided that all of the conditions set forth in the Purchase Agreement are met, the closing date will be no later than December 15, 2006. On the closing date of the Purchase Agreement, the Company will simultaneously enter into a lease agreement with Inland to lease the property back.

The Company will account for the transaction as a financing whereby the net book value of the asset remains on the Company’s consolidated balance sheet. The Company will also record a financing obligation in the amount of approximately $52.3 million, which will be amortized over the term of the lease. Monthly lease payments will be accounted for as principal and interest payments on the recorded obligation.

The Company will use a portion of the proceeds from the sale of the property of approximately $52.3 million to retire approximately $34.0 million of long-term debt related to the Company’s purchase and expansion of the property, and the remaining proceeds will be used for other business purposes.

8. SHAREHOLDERS’ EQUITY

Stock Repurchase Program

In March 2003, the Company announced a stock repurchase program that was approved by its Board of Directors to repurchase up to 500,000 shares of its common stock. In November 2004, the Company’s Board of Directors authorized the repurchase of an additional 1,000,000 shares. The Company repurchased 425,500 shares under the program in fiscal 2004 and repurchased no shares in fiscal 2005 or year-to-date in fiscal 2006. As of October 28, 2006, there were 1,074,500 shares available for repurchase under the program. The program does not require the Company to repurchase any common stock and may be discontinued at any time.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition, results of operations, liquidity and capital resources should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto for the three months and nine months ended October 28, 2006.

This document contains forward-looking statements, which reflect the Company’s current beliefs and estimates with respect to future events and the Company’s future financial performance, operations and competitive position. Forward looking statements may be identified, without limitation, by use of the words “may,” “should,” “expects,” “anticipates,” “estimates,” “believes,” “looking ahead,” “forecast,” “projects,” “continues,” “intends,” “likely,” “plans” and similar expressions. Actual results may differ materially from those discussed in such forward-looking statements, and shareholders of Cost Plus, Inc. should carefully review the cautionary statements set forth in this form 10-Q. 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. 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.

Overview

Cost Plus, Inc. is a leading specialty retailer of casual home furnishings and entertaining products. The stores feature an ever-changing selection of casual home furnishings, housewares, gifts, decorative accessories, gourmet foods and beverages offered at competitive prices and imported from more than 50 countries. Many items are unique and exclusive to the Company.

In the third quarter of fiscal 2006, net sales increased 7.3% to $215.4 million from $200.7 million last year. Comparable store sales for the quarter decreased 1.3% compared to a 4.7% decrease last year. Year-to-date, net sales were $643.6 million, a 6.7% increase from $603.5 million for the same period last year, with same store sales decreasing 2.9% compared to a 2.8% decrease in the prior year.

Net loss for the third quarter of fiscal 2006 was $11.7 million, or $0.53 per diluted share, versus a net loss of $2.7 million, or $0.12 per diluted share, for the third quarter of fiscal 2005. The loss was primarily due to a decrease in same stores sales, a shift in the timing of advertising spending, and a decrease in merchandise margin due to a shift in sales mix to consumables products. The net loss also included a non-cash share-based compensation charge of approximately $0.03 per diluted share related to the adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”). The year-to-date net loss was $27.8 million, or $1.26 per diluted share, compared with a net loss of $1.3 million, or $0.06 per diluted share, last year.

In the third quarter of fiscal 2006, the Company opened 11 new stores to end the quarter with 283 stores in 34 states. The new store openings, when combined with the closing of four stores, are expected to result in 287 locations at the end of the fiscal year.

Results of Operations

The three months (third quarter) and nine months (year-to-date) ended October 28, 2006 as compared to the three months and nine months ended October 29, 2005.

Net Sales Net sales primarily consist of sales from comparable stores and non-comparable stores. Net sales increased $14.7 million, or 7.3%, to $215.4 million in the third quarter of fiscal 2006 from $200.7 million in the third quarter of fiscal 2005. Year-to-date, net sales were $643.6 million compared to $603.5 million for the same period last year, an increase of $40.2 million, or 6.7%. The increase in net sales for the quarter and year-to-date was attributable to an increase in non-comparable store sales partially offset by a decrease in comparable store sales. Non-comparable store sales increased $17.3 million for the third quarter and $57.6 million year-to-date. Comparable store sales decreased 1.3%, or $2.6 million, in the third quarter of fiscal 2006, compared to a decrease of 4.7%, or $8.8 million, in the third quarter of fiscal 2005. Year-to-date comparable store sales decreased 2.9% compared to a 2.8% decrease for the same period last year. Comparable store sales decreased during the

quarter and year-to-date as a result of decreased customer traffic and an average transaction size that was lower for the quarter and year-to-date. The average transaction size was impacted by a shift in sales mix to consumables. As of October 28, 2006, the calculation of comparable store sales included a base of 248 stores. A store is generally included as comparable at the beginning of the fourteenth month after its grand opening. As of October 28, 2006, the Company operated 283 stores, compared to 258 stores as of October 29, 2005.

The Company classifies its sales into the home furnishings and consumables product lines. In the third quarter, home furnishings accounted for 63% of total sales versus 65% last year and consumables accounted for 37% of total sales versus 35% last year. Year-to-date, home furnishings accounted for 64% of total sales versus 65% last year and consumables accounted for 36% of total sales versus 35% last year.

Cost of Sales and Occupancy Cost of sales and occupancy, which consists of costs to acquire merchandise inventory, costs of freight and distribution, as well as certain facilities costs, increased $15.3 million, or 11.4%, to $149.2 million in the third quarter of fiscal 2006 compared to the third quarter of fiscal 2005. Year-to-date cost of sales and occupancy increased $54.8 million, or 13.7%, to $455.6 million compared to the same period in fiscal 2005. As a percentage of net sales, third quarter cost of sales and occupancy was 69.3% compared to 66.7% for the third quarter of fiscal 2005 and 70.8% compared to 66.4% year-to-date. Cost of sales as a percentage of net sales increased 180 basis points over last year for the third quarter and 350 basis points year-to-date. The increase in cost of sales as a percentage of net sales for the quarter was primarily the result of a higher percentage of consumables sales and poor performance in certain categories of home furnishings. The year-to-date increase was primarily attributable to significant markdowns the Company recorded in the second quarter to clear discontinued merchandise and additional markdowns taken on primarily seasonal merchandise. To a lesser extent, lower initial markups and a shift in sales mix to consumable products also contributed to the increase in cost of sales as a percentage of net sales. Occupancy costs as a percentage of net sales increased 80 basis points over last year for the third quarter and 90 basis points year-to-date primarily as a result of higher expenses associated with new stores and the de-leveraging of occupancy costs due to the decrease in comparable store sales.

Selling, General and Administrative (“SG&A”) Expenses SG&A expenses increased $13.3 million, or 19.9%, to $80.0 million in the third quarter of fiscal 2006 compared to $66.7 million in the third quarter of fiscal 2005. As a percentage of net sales, SG&A expenses for the third quarter of fiscal 2006 were 37.1% compared to 33.2% for the third quarter of fiscal 2005. The increase in SG&A expenses as a percentage of net sales was primarily due to an increase in advertising costs of 260 basis points due to a shift in the timing of advertising spending to the third quarter of fiscal 2006 versus the fourth quarter in fiscal 2005 and decreased leverage on sales, an increase in other SG&A expenses of 90 basis points due to incremental e-commerce overhead and stock-based compensation, and an increase in store payroll of 40 basis points primarily due to decreased leverage on sales and higher store labor costs. The third quarter of fiscal 2006 included $1.0 million related to the expensing of share-based compensation due to the adoption of SFAS 123(R) at the beginning of fiscal 2006. Year-to-date, SG&A expenses increased $28.2 million, or 14.5%, to $223.2 compared to $195.0 million for the same period last year. Year-to-date, SG&A expenses as a percentage of net sales were 34.7% compared to 32.3% for the same period last year. The year-to-date increase in SG&A expenses as a percentage of net sales was primarily due to a shift in the timing of advertising spending, higher store payroll, the expensing of share-based compensation due to the adoption of SFAS 123(R), and decreased leverage on sales.

Store Preopening Expenses Store preopening expenses, which include rent expense incurred prior to opening as well as grand opening advertising and preopening merchandise setup expenses, were $2.6 million in the third quarter of fiscal 2006 compared to $2.7 million in the third quarter of fiscal 2005. The Company opened 11 new stores in the third quarter of fiscal 2006, the same as third quarter of fiscal 2005. Year-to-date store preopening expenses were $4.9 million compared to $6.1 million for the same period last year, with 20 stores opened year-to-date compared to 26 for the same period last year. Store preopening expenses vary depending on the amount of time between the possession date and the store opening, the particular store site and whether it is located in a new or existing market.

Net interest expense Net interest expense, which includes interest on capital leases and debt, net of interest earned on investments, was $2.4 million for the third quarter of fiscal 2006 compared to $1.7 million for the third quarter of fiscal 2005. Year-to-date, net interest expense was $5.0 million compared to $3.8 million for the same period last year. The increase in net interest expense for the quarter and year-to-date was primarily due to additional long-term debt related to the Stockton distribution center and higher seasonal borrowings under the Company’s revolving line of credit.

Income Taxes The Company’s effective tax rate was 37.8% in the third quarter of fiscal 2006 compared to 39.0% in the third quarter of fiscal 2005. The lower effective tax rate is due to the Company’s lower estimated financial results for the year.

Liquidity and Capital Resources

The Company’s cash and cash equivalents balance at October 28, 2006 was $3.4 million compared to $3.8 million at October 29, 2005. The Company’s primary uses for cash are to fund operating expenses, inventory requirements and new store expansion. Historically, the Company has financed its operations primarily from internally generated funds and seasonal borrowings under a revolving credit facility. The Company believes that the combination of its cash and cash equivalents, internally generated funds and available borrowings will be sufficient to finance its working capital, new store expansion and distribution center project requirements for at least the next twelve months.

Distribution Center Activities On April 7, 2006, the Company entered into a sale-leaseback transaction with Inland Real Estate Acquisitions, Inc., a third party real estate investment trust (“Inland”). In connection with the transaction, the Company sold its Stockton, CA distribution center property to Inland for net proceeds of $29.8 million. The property sold consists of an approximately 500,000 square foot building located on approximately 55 acres. The Company simultaneously entered into a lease agreement with Inland to lease the property back.

The Company will use a portion of the proceeds from the sale of the property of $52.3 million to retire approximately $34.0 million of long-term debt related to the Company’s purchase and expansion of the property, and the remaining proceeds will be used for other business purposes.

Cash Flows from Operating Activities Net cash used in operating activities totaled $105.8 million year-to-date compared to $59.9 million for the same period last year, an increase of $45.9 million. The increase in net cash used in operations was primarily due to the Company’s year-to-date net loss of $27.8 million versus a net loss of $1.3 million for the same period last year, the resulting higher income tax receivable, and an increase in merchandise inventories partially offset by an increase in the growth of accounts payable compared to the same period last year.

Cash Flows from Investing Activities Net cash used in investing activities totaled $46.4 million year-to-date compared to net cash used of $54.4 million for the same period last year. Net cash used in investing activities decreased primarily because the Company spent $18.1 million year-to-date on the expansion of the Stockton distribution facility versus $31.0 million spent on the purchase and renovation of the distribution facility for the same period last year, and opened 20 stores year-to-date versus 26 stores opened during the same period last year.

The Company estimates that fiscal 2006 capital expenditures will approximate $73.2 million; including approximately $13.3 million for new stores, $40.3 million to expand the distribution center in Stockton, CA, $8.0 million for management information systems and distribution center projects, and $11.6 million allocated to investments in existing stores and various other corporate projects.

Cash Flows from Financing Activities Net cash provided by financing activities was $115.2 million year-to-date compared to $75.1 million for the same period last year. The increase was primarily due to higher net borrowings under the Company’s revolving line of credit of $90.0 million year-to-date versus $54.5 million for the same period last year. The Company had net proceeds from long-term debt of $47.3 million year-to-date versus proceeds from long-term debt of $20.0 million for the same period last year. The $47.3 million in net proceeds from long-term debt is comprised of $29.8 million from the sale-leaseback of the Stockton distribution facility and $17.5 million from a new Credit Facility that is being used to finance the expansion of the Stockton, CA distribution facility. The Company used a portion of the net proceeds from the sale of the Stockton distribution facility of $29.8 million to retire $18.2 million of long-term debt. The Company received $59,000 year-to-date from the issuance of common stock in connection with the exercise of employee stock options versus $4.4 million received for the same period last year.

Revolving Line of Credit In November 2004, the Company entered into an unsecured five year revolving line of credit agreement (the “Agreement”) with a group of banks that terminated and replaced an existing revolving credit facility. The Agreement allows for cash borrowings and letters of credit under an unsecured revolving credit facility of up to $50.0 million from January through June of each year, increasing to $125.0 million from July through December of each year to coincide with the Company’s Holiday borrowing needs. The Agreement includes a one-time option to increase the size of the revolving credit facility to $150.0 million. Interest is paid quarterly in arrears and bears interest, at the Company’s election, based on a rate equal to Bank of America’s prime rate or LIBOR plus an applicable margin that is based on the Company’s Consolidated Adjusted Leverage Ratio, as defined in the Agreement. The Agreement requires a 30-day “clean-up period” in which Adjusted Total Outstandings, as defined in the Agreement, do not exceed $30.0 million for not less than 30 consecutive days during the period from January 1 through March 31 of each year. The Company is subject to a minimum consolidated tangible net worth requirement, and annual capital expenditures are limited under the Agreement. The Agreement includes limitations on the ability of the Company to incur debt, grant liens, make acquisitions and dispose of assets and also prohibits the Company from making cash dividend payments with respect to any capital stock. The events of default under the Agreement include payment defaults, cross defaults with certain other indebtedness, breaches of covenants and bankruptcy events. In the case of a continuing event of default, the lenders under the Agreement may, among other remedies, eliminate their commitments to make credit available, declare due all unpaid principal amounts outstanding, and require cash collateral for any letter of credit obligations. As of October 28, 2006, the Company was in compliance with its loan covenant requirements, had outstanding borrowings of $90.0 million under its line of credit and had $16.5 million outstanding in letters of credit.

Seasonality

The Company’s business is highly seasonal, reflecting the general pattern associated with the retail industry of peak sales and earnings during the fourth quarter (Holiday) selling season. Due to the importance of the Holiday 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.

Available Information

The Company’s Internet web-site address is http://www.worldmarket.com. The Company makes available through its Internet web-site, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Definitive Proxy Statement and Section 16 filings and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the Securities and Exchange Commission.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There are no material changes to the Company’s market risk as disclosed in its Form 10-K filed for the fiscal year ended January 28, 2006.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management evaluated, with the participation of its principal executive officer and its principal financial officer, the effectiveness of its disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Company’s principal executive officer and its principal financial officer have concluded that its disclosure controls and procedures are effective to ensure that information it is required to disclose in reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to its management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Control Over Financial Reporting

There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended October 28, 2006 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1A.

RISK FACTORS

The following information describes certain significant risks and uncertainties inherent in our business. You should carefully consider these risks and uncertainties, together with the other information contained in this Quarterly Report on Form 10-Q and in the Company’s other public filings. If any of such risks and uncertainties actually occurs, the Company’s business, financial condition or operating results could differ materially from the plans, projections and other forward-looking statements included in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in the Company’s other public filings. In addition, if any of the following risks and uncertainties, or if any other disclosed risks and uncertainties, actually occurs, the Company’s business, financial condition or operating results could be harmed substantially, which could cause the market price of our stock to decline, perhaps significantly.

Our business is highly seasonal and our operating results fluctuate significantly from quarter to quarter.

Our business is highly seasonal, reflecting the general pattern associated with the retail industry of peak sales and earnings during the Holiday season. Due to the importance of the Holiday selling season, the fourth quarter of each fiscal year has historically contributed, and we expect will continue to contribute, a large percentage of our net sales and much of our net income for the entire fiscal year. Any factors that have a negative effect on our business during the Holiday selling season in any year, including unfavorable economic conditions, would materially and adversely affect our financial condition and results

of operations. We generally experience lower sales and earnings during the first three quarters and, as is typical in the retail industry, and may incur losses in these quarters. The results of our operations for these interim periods are not necessarily indicative of the results for our full fiscal year.

We also must make decisions regarding merchandise well in advance of the season in which it will be sold. If the demand for our merchandise is significantly different than we have projected, it would harm our business and operating results, either as a result of lost sales due to insufficient inventory or lower gross margin due to the need to mark down excess inventory.

Our quarterly operating results may also fluctuate based on such factors as:

•

delays in the flow of merchandise to our stores,

•

the number and timing of new store openings and related store pre-opening expenses,

•

the amount of sales contributed by new and existing stores,

•

the mix of products sold,

•

the timing and level of markdowns,

•

store closings or relocations,

•

competitive factors,

•

changes in fuel and other shipping costs,

•

general economic conditions,

•

labor market fluctuations,

•

the impact of terrorist activities,

•

changes in accounting rules and regulations, and

•

unseasonable weather conditions.

These fluctuations may also cause a decline in the market price of our common stock.

Our success depends to a significant extent upon the overall level of consumer spending.

As a retail business our success depends to a significant extent upon the overall level of consumer spending. Among the factors that affect consumer spending are the general state of the economy, the level of consumer debt, prevailing interest rates and consumer confidence in future economic conditions. A substantial number of our stores are located in the western United States, especially in California. Lower levels of consumer spending in this region could have a material adverse affect on our financial condition and results of operations. Reduced consumer confidence and spending may result in reduced demand for our merchandise, may limit our ability to increase prices and may require us to incur higher selling and promotional expenses, which in turn would harm our business and operating results.

The occurrence or the threat of international conflicts or terrorist activities could harm our business and result in business interruptions.

Most of the merchandise that we sell is purchased in other countries and must be shipped to the United States, transported from the port of entry to our distribution centers in California or Virginia and distributed to our stores from the distribution centers. The precise timing and coordination of these activities is crucial to our business. The occurrence or threat of international conflicts or terrorist activities and the responses to those developments, for example, the temporary shutdown of a port that we use, could have a significant impact upon our business, our personnel and facilities, our customers and suppliers, the retail and financial markets and general economic conditions.

Our business and operating results are sensitive to changes in energy and transportation costs.

We incur significant costs for the purchase of fuel in transporting goods from foreign ports and to our distribution centers and stores and for utility services in our stores, distribution centers and corporate offices. We continually negotiate pricing for certain transportation contracts and, in a period of rising fuel costs such as we have recently experienced, expect that our vendors for these services will increase their rates to compensate for the higher energy costs. We may not be able to pass these increased costs on to our customers.

We must continue to open new stores and increase sales from existing stores to carry out our growth strategy.

Our ability to increase our sales and earnings depends in part on our ability to continue to open new stores and to operate these stores on a profitable basis. Our continued growth also depends on our ability to increase sales in our existing stores. We opened a net of 30 stores in fiscal 2005 and presently anticipate opening a net of 20 stores in fiscal 2006. We intend to open stores in both existing and new geographic markets. When we open additional stores in existing markets it can result in lower sales from existing stores in that market. The success of our planned expansion will depend upon many factors, including the following:

•

our ability to identify suitable markets for expansion,

•

the selection, availability and leasing of suitable sites on acceptable terms,

•

the hiring, training and retention of qualified management and other store personnel,

•

satisfaction of regulatory requirements in new markets, including alcoholic beverage regulations,

•

control of costs associated with entering new markets, including advertising and distribution costs, and

•

our ability to maintain adequate systems, controls and procedures, including product distribution facilities, store management, financial controls and information systems.

We cannot assure that we will be able to achieve our planned expansion, integrate new stores effectively into our existing operations or operate our new stores profitably.

Our operating results will be harmed if we are unable to improve our comparable store sales.

Our success depends, in part, upon our ability to improve sales at our existing stores. Our comparable store sales, which are defined as sales by stores that have completed 14 full fiscal months of sales, fluctuate from year to year. To ensure a meaningful comparison, we measure comparable store sales on a 52-week basis. For the nine months ended October 28, 2006, comparable store sales decreased by 2.9% compared to a decrease of 2.8% for the same period last year. Various factors affect comparable store sales, including:

•

the general retail sales environment,

•

our ability to source and distribute products efficiently,

•

changes in our merchandise mix,

•

competition,

•

current economic conditions,

•

the timing of release of new merchandise and promotional events,

•

the success of marketing programs, and

•

weather conditions.

These factors and others may cause our comparable store sales to differ significantly from prior periods and from expectations.

If we fail to meet the comparable store sales expectations of investors and security analysts in one or more future periods, the price of our common stock could decline.

We face a number of risks because we import much of our merchandise.

We import a significant amount of our merchandise from over 50 countries and numerous suppliers. We have no long-term contracts with our suppliers, but instead rely on long-term relationships that we have established with many of these suppliers. Our future success will depend to a significant extent on our ability to maintain our relationships with our suppliers or to develop new ones. As an importer, our business is subject to the risks generally associated with doing business abroad such as the following:

•

foreign governmental regulations,

•

economic disruptions,

•

delays in shipments,

•

freight cost increases,

•

changes in political or economic conditions in countries from which we purchase products, and

•

the effect of trade regulation by the United States, including quotas, duties and taxes and other charges or restrictions on imported merchandise.

If these factors or others made the conduct of business in particular countries undesirable or impractical or if additional quotas, duties taxes or other charges or restrictions were imposed by the United States on the importation of our products, our business and operating results would be harmed.

Our dependence on our distribution centers carries certain risks.

Merchandise distribution for all of our stores is currently handled from facilities in Stockton, California and Windsor, Virginia. Any significant interruption in the operation of these facilities, including any interruption as a result of the planned expansion of the Stockton facility, would harm our business and operating results, as would operational inefficiencies or failure to coordinate the operations of these facilities successfully.

We may not be able to forecast customer preferences accurately in our merchandise selections.

Our success depends in part on our ability to anticipate the tastes or our customers and to provide merchandise that appeals to their preferences. Our strategy requires our merchandising staff to introduce products from around the world that meet current customer preferences and that are affordable, distinctive in quality and design and that are not widely available from other retailers. Many of our products require long order lead times. In addition, a large percentage of our merchandise changes regularly. Our failure to anticipate, identify or react appropriately to changes in consumer trends could cause excess inventories and higher markdowns or a shortage of products and could harm our business and operating results.

We face intense competition from a variety of other retailers.

The markets that we serve are very competitive. We compete against a diverse group of retailers ranging from specialty stores to department stores and discounters. Our product offerings compete with such retailers as Bed Bath & Beyond, Target, Linens n’ Things, Crate & Barrel, Pottery Barn, Michaels Stores, Pier 1 Imports, Trader Joe’s and Williams-Sonoma. We compete with these and other retailers for customers, suitable retail locations and qualified management personnel. Many of our competitors have considerably greater financial, marketing and other resources than we have.

We rely on various key management personnel to ensure our success and have had significant management changes in the past year.

Our success will continue to depend on our key management personnel. The loss of the services of one or more of these executives could harm our business and operating results. We do not maintain any key man life insurance policies. In the recent past, we have had significant changes in our management, including our Chief Executive Officer, our Chief Financial

Officer, and our head merchandising officer. Moreover, we have recently added a Senior Vice President, Marketing, and a Senior Vice President, Supply Chain.

Our common stock may be subject to substantial price and volume fluctuations.

The market price of our common stock is affected by factors such as fluctuations in our operating results, a downturn in the retail industry, changes in stock market analysts’ recommendations regarding our company, other retail companies or the retail industry in general and general market and economic conditions. In addition, the stock market can experience price and volume fluctuations that are unrelated to the operating performance of particular companies.

Our business is subject to risks associated with fluctuations in the values of foreign currencies against the United States dollar.

We have significant purchase obligations with suppliers outside of the United States. For the nine months ended October 28, 2006, approximately 6.9% of these purchases were settled in currencies other than the United States dollar. Fluctuations in the rates of exchange between the dollar and other currencies could harm our operating results. We have not hedged our currency risk in the past and do not currently anticipate doing so in the future.

Provisions in our charter documents as well as our stockholders’ rights plan could prevent or delay a change in control of our company and may reduce the market price of our common stock.

Certain provisions of our articles of incorporation and bylaws may have the effect of making it more difficult for a third party to acquire, or may discourage a third party from attempting to acquire control of the Company. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock. Certain of these provisions allow us to issue preferred stock without any vote or further action by the shareholders. In addition, the right to cumulate votes in the election of directors has been eliminated. These provisions may make it more difficult for shareholders to take certain corporate actions and could have the effect of delaying or preventing a change in control of the Company. In addition, our board of directors has adopted a preferred share purchase rights agreement. Pursuant to the rights agreement, our board of directors declared a dividend of one right to purchase one one-thousandth share of our Series A Participating Preferred Stock for each outstanding share of our common stock. These rights could have the effect of delaying, deferring or preventing a change of control of our company, discouraging a proxy contest or making more difficult the acquisition of a substantial block of our common stock. The rights agreement could also limit the price that investors might be willing to pay in the future for our common stock.

Lawsuits and other claims against our company may adversely affect our operating results.

We are involved in litigation, claims and assessments incidental to our business, the disposition of which is not expected to have a material effect on our financial position or results of operations. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions related to these matters. We accrue our best estimate of the probable cost for the resolution of claims. When appropriate, such estimates are developed in consultation with outside counsel handling the matters and are based upon a combination of litigation and settlement strategies. To the extent additional information arises or our strategies change, it is possible that our best estimate of our probable liability may change.

ITEM 6.

EXHIBITS

(a)

Exhibits


10.1		Purchase and Sale Agreement and Joint Escrow Instructions dated October 26, 2006 between Cost Plus, Inc. and Inland Real Estate Acquisitions, Inc., as purchaser.

10.2		Second Amended and Restated Employment Severance Agreement dated April 17, 2006, between Cost Plus, Inc. and Jane Baughman.

31.1		Certification of the Chief Executive Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief Financial Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Chief Executive Officer and Chief Financial Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	COST PLUS, INC.
	Registrant

Date: December 7, 2006	By:	/s/ THOMAS D. WILLARDSON
		Thomas D. Willardson Executive Vice President Chief Financial Officer Duly Authorized Officer

INDEX TO EXHIBITS


10.1		Purchase and Sale Agreement and Joint Escrow Instructions dated October 26, 2006 between Cost Plus, Inc. and Inland Real Estate Acquisitions, Inc., as purchaser.

10.2		Second Amended and Restated Employment Severance Agreement dated April 17, 2006, between Cost Plus, Inc. and Jane Baughman.

31.1		Certification of the Chief Executive Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief Financial Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Chief Executive Officer and Chief Financial Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

EX-10.1 2 dex101.htm PURCHASE AND SALE AGREEMENT AND JOINT ESCROW INSTRUCTIONS Purchase and Sale Agreement and Joint Escrow Instructions

Exhibit 10.1

PURCHASE AND SALE AGREEMENT AND JOINT ESCROW INSTRUCTIONS

THIS PURCHASE AND SALE AGREEMENT AND JOINT ESCROW INSTRUCTIONS (“Agreement”) is made and entered into as of this 26th day of October, 2006, by and between COST PLUS, INC., a California corporation (“Seller”), and INLAND REAL ESTATE ACQUISITIONS, INC., an Illinois corporation, or assignee (“Buyer”).

W I T N E S S E T H T H A T :

WHEREAS, Buyer wishes to purchase, and Seller wishes to sell, the Property (as hereinafter defined), but only upon the terms and conditions hereinafter set forth;

NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree as follows:

Section 1. Definitions and Exhibits.

1.1 Definitions. For purposes of this Agreement, each of the following terms, when used herein with an initial capital letter, shall have the meaning ascribed to it as follows:

Agreement. This Purchase and Sale Agreement and Joint Escrow Instructions.

Broker. NAI BT Commercial Real Estate.

Building. The warehouse building containing approximately 1,010,903 square feet, which is located on the Land and known locally as Parcel 4 of the Shirley T. Holland Industrial Park.

Closing. The closing and consummation of the purchase and sale of the Property pursuant hereto, including, without limitation, the recording of the Deed in the Clerk’s Office of the Circuit Court of Isle of Wight County, Virginia.

Closing Date. The date on which the Closing occurs as provided in Section 11.1.

Closing Documents. Seller’s Closing Documents (as defined in Section 11.2) together with Buyer’s Closing Documents (as defined in Section 11.3).

Contract Date. The date upon which this Agreement shall be deemed effective, which shall be the date on which each of Seller and Buyer has executed this Agreement and each of them has received a counterpart executed by the other, which date shall be inserted in the blank first above written.

Deed. The Special Warranty Deed to be executed by Seller in the form attached hereto and incorporated herein as Exhibit D.

Earnest Money. The amount deposited by Buyer in escrow with Escrow Agent as earnest money pursuant to the terms and conditions of Section 3, together with any interest earned thereon (which shall follow principal).

Environmental Matter. Any matter or circumstance related in any manner whatsoever to (i) the disposal or release of solid, liquid or gaseous waste into the environment, (ii) the treatment, storage, disposal or other handling of any Hazardous Materials, (iii) the placement of structures or materials into waters of the United States, (iv) above-ground or underground storage tanks used for the storage of petroleum, petroleum products, or Hazardous Materials, or (v) the presence of any Hazardous Materials, including, but not limited to, asbestos, in any building, structure or workplace, which matter or circumstance exists at the Property on or before the Closing Date.

Escrow Agent. Chicago Title & Trust Company in Chicago, Illinois, acting as Escrow Agent pursuant to the terms and conditions of Section 3 and the Escrow Agreement.

Escrow Agreement. That certain Earnest Money Escrow Agreement of even date herewith among Seller, Buyer and Escrow Agent referred to in Section 3 and attached hereto and incorporated herein as Exhibit A.

Franz Property. All that tract or parcel of land described or depicted on Exhibit B-2 attached hereto and incorporated herein, containing approximately 2.362 acres.

Governmental Requirements. Laws, rules and regulations of federal, state and local governmental authorities having jurisdiction over the Property including, but not limited to, environmental laws, rules and regulations and zoning laws, rules and regulations.

Hazardous Materials. As defined in Section 6.3.

Improved Land. All that tract or parcel of land described or depicted on Exhibit B-1 attached hereto and incorporated herein, containing approximately 81.852 acres. The Improvements are located on the Improved Land.

Improvements. The Building and any other buildings, structures and improvements located upon the Improved Land.

Inspection Date. As defined in Section 6.6.

Intangible Interests. All intangible personal property used in the operation of, located at, or associated with the Property, including without limitation transferable permits, licenses, entitlements, certificates, approvals, and consents granted or issued by any governmental or quasi-governmental agency; all warranties and guarantees, if any, by third parties covering the Property and the improvements, including without limitation all warranties and guarantees by architects, contractors, subcontractors, engineers, and/or vendors; and all rights and claims that Seller has or may have against third parties with respect to the Property.

Land. Collectively, the Improved Land and the Franz Property.

Parties. Seller and Buyer, collectively.

Permitted Title Exceptions. Those matters approved by Buyer on or before the Inspection Date, those matters identified on Exhibit C attached hereto and incorporated herein, and, to the extent not included in Exhibit C, current and future property taxes and assessments not yet due and payable, any zoning laws and ordinances, any existing general utility easements serving the Property and any other rights or interests recorded in the public records where the Land is located.

Property. All of Seller’s right, title and interest in, to and under the following property:

(i) The Franz Property and all improvements located thereon (the “Franz Improvements”);

(ii) The Improved Land;

(iii) The Improvements;

(iv) The Intangible Interests; and

(v) All rights of way or use, licenses, tenements, hereditaments, appurtenances and easements now or hereafter belonging or pertaining to any of the foregoing, except those, if any, hereinafter reserved to Seller.

Proration Date. The effective date of the prorations provided in Section 4.2, which is 11:59 p.m. on the eve of the Closing Date.

Purchase Price. The purchase price for the Property described in Section 4.1.

Seller Related Parties. As defined in Section 18.13.

Title Commitment. As defined in Section 5.

Title Insurer. Chicago Title & Trust Company.

1.2 Exhibits. Attached hereto and forming an integral part of this Agreement are the following exhibits, all of which are incorporated into this Agreement as fully as if the contents thereof were set out in full herein at each point of reference thereto:


Exhibit A -		Escrow Agreement

Exhibit B-1-		Description of Improved Land

Exhibit B-2-		Description of Franz Property

Exhibit C -		Permitted Title Exceptions

Exhibit D -		Form of Special Warranty Deed

Exhibit E -		Non-Foreign Certificate

Exhibit F-		General Assignment

Exhibit G -		Lease

Exhibit H -		Form R-5

Section 2. Purchase and Sale. Subject to and in accordance with the terms and provisions hereof, Seller agrees to sell and Buyer agrees to purchase the Property.

Section 3. Deposit.

3.1 Earnest Money. Buyer shall deposit with the Escrow Agent, whose address is: 171 N. Clark Street, Chicago, Illinois 60601, Attention: Nancy Castro, Telephone: 312-223-2709, Facsimile: 312-223-2108, the sum of ONE MILLION DOLLARS ($1,000,000) (the “Deposit”) upon full execution of this Agreement. The Deposit and all interest accruing thereon shall be referred to collectively as the “Earnest Money”. The Escrow Agent shall invest the Earnest Money in an interest bearing account of an FDIC-insured bank, and the Earnest Money shall be held by Escrow Agent until applied at Closing in accordance with this Agreement or until the Earnest Money is otherwise disbursed in accordance with this Agreement. The Earnest Money shall be retained or refunded, as the case may be, in accordance with the terms of this Agreement and, except if Buyer defaults on its obligations under this Agreement resulting in termination of this Agreement by Seller, shall be applied as a credit against the Purchase Price at Closing. Notwithstanding the foregoing, Buyer may unilaterally withdraw the Earnest Money on or before the Inspection Date in which event this Agreement shall automatically terminate. Seller and Buyer agree to sign all forms required by Escrow Agent for the holding and investing of the Earnest Money, such as IRS and bank account forms, and for such purposes the Earnest Money shall be considered the property of Buyer until such time as Escrow Agent disburses the Earnest Money to either Seller or Buyer pursuant to this Agreement. The preceding sentence shall not change in any way the other provisions in this Agreement concerning the holding and disbursing of the Earnest Money.

3.2 Escrow Agent Instructions. The terms and conditions set forth in this Agreement shall constitute both an agreement between Seller and Buyer and instructions for the Escrow Agent. If there is any conflict or inconsistency between this Agreement and any separate or additional instructions required by Escrow Agent (“Additional Instructions”), this Agreement shall prevail and govern. The Additional Instructions shall not modify or amend the provisions of this Agreement unless otherwise expressly set forth by mutual written instructions or consent of Buyer and Seller.

Section 4. Purchase Price.

4.1 Purchase Price. The purchase price (the “Purchase Price”) for the Property shall be FIFTY TWO MILLION TWO HUNDRED SEVENTY-FIVE THOUSAND DOLLARS ($52,275,000), of which Fifty Two Million Dollars ($52,000,000) shall be allocated to the Improved Land, the Improvements, the Intangibles and all rights of way or use, licenses, tenements, hereditaments, appurtenances and easements now or hereafter belonging or pertaining to any of the foregoing and of which Two Hundred Seventy-Five Thousand Dollars ($275,000) shall be allocated to the Franz Property and all improvements located thereon.

The Purchase Price, as adjusted by the prorations provided in Section 4.2 and as reduced by the Earnest Money (which, unless otherwise disbursed hereunder, shall be disbursed by Escrow Agent at the Closing to Seller as a portion of the Purchase Price), shall be deposited by Buyer with the Escrow Agent at the Closing in United States dollars, by Federal Reserve System wire transfer or other immediately available funds acceptable to Escrow Agent.

4.2 Prorations. The following items shall be prorated between Seller and Buyer as of the Proration Date, and prorations favoring Buyer, to the extent determinable as of the Proration Date, shall reduce the Purchase Price payable by Buyer at the Closing, and such prorations favoring Seller, to the extent determinable as of the Proration Date, shall increase the Purchase Price payable by Buyer at the Closing:

4.2.1 Isle of Wight County property taxes and assessments of every nature, including storm water fees, for the tax period of Closing.

4.2.2 Sanitary sewer taxes, assessments and utility charges, if any.

4.2.3 Operating expenses of the Property, if any.

4.2.4 If the parties make any errors in the closing prorations or if they subsequently determine that any dollar amount prorated is or was incorrect, each agrees, upon notice from the other within six (6) months after the Closing, to make any adjustment necessary to correct the error, including payment of any amount to the other then determined to be owing.

Buyer and Seller shall promptly pay to the other party any amount due to the other party as a result of any proration required under this Section 4.2. All amounts due hereunder shall be payable no later than twenty (20) days after demand by the payee. The terms and conditions set forth in this Section 4.2 shall expressly survive the Closing hereunder only for the period of time necessary to achieve final prorations of all amounts due and owing hereunder, but in any event no later than two (2) years after the Closing.

Section 4.3. Intentionally Deleted.

Section 5. Title to the Land and the Improvements. The Land, the Improvements and the Franz Improvements are to be sold and conveyed by Seller to Buyer, and accepted by Buyer from Seller, subject to (i) those items listed on Exhibit C attached hereto and by this reference made a part hereof, (ii) nondelinquent general, special and supplemental real property taxes and assessments, and (iii) all other covenants, conditions, restrictions, easements, licenses, reservations, rights of way and other matters that are either recorded against the Land or which are reflected in the Survey, herein defined, and that are not objected to by Buyer pursuant to this Section 5 of this Agreement. Seller shall convey good and insurable title to the Land, the Improvements and the Franz Improvements to Buyer in the form of the Deed. Buyer shall have the option of taking title to the Improved Land and the Improvements by a Deed separate from the Deed to the Franz Property and the Franz Improvements and may also direct Seller to convey title to the Franz Property and the Franz Improvements to a separate entity affiliated with Buyer. Seller shall obtain a current Urban ALTA/ACSM spotted survey (the “Survey”) in accordance with the minimum standard detail requirements for ALTA/ACSM Land Title surveys established and adopted by ALTA and ACSM in 2005 including all Title A Optional Responsibilities Items 1-4, 6, 7(a), (b)(1), (c), 8, 9, 10, 11(a), 12-16 certified to Buyer, its successors and assigns, lenders and the Title Insurer. Additionally, Seller shall obtain from the Title Insurer through Pioneer Title Co., an agent of the Title Insurer, an owner’s title insurance commitment on the current ALTA Extended Coverage form, in the amount of the Purchase Price and naming Buyer as the proposed insured (the “Title Commitment”), together with copies of all documents shown in the Title Commitment as exceptions to the title to the Property. Buyer shall have ten (10) calendar days after receipt of the Survey, Title Commitment and copies of all exceptions to give written notice to Seller of any objections which Buyer may have to the title to the Land. If Buyer fails to give any notice to Seller by such date, Buyer shall be deemed to have waived such right to object to any title exceptions or defects except with respect to title exceptions or defects of which Buyer receives notice following its required time to notify Seller. If Buyer does give Seller timely notice of objection to any other title exceptions or defects, Seller shall then have the right, but not the obligation, for a period of five (5) calendar days after such notice, to reasonably cure or satisfy such objection. The procurement by Seller, at its sole expense, of an endorsement to the Title Commitment, insuring Buyer against any title exceptions or defects, shall be deemed a cure by Seller of such exception or defect. Notwithstanding the foregoing, Seller shall in all events be required to cure, at or before the Closing, monetary liens in a definite and ascertainable amount and all other title exceptions or defects caused by Seller’s intentional and wrongful acts that may be cured by the payment of money. If such objection is not so timely and reasonably cured, then Buyer shall, within five (5) calendar days thereafter, elect, by written notice given to Seller on or before such fifth (5th) day, either to (a) terminate this Agreement, in which case the

Earnest Money shall be returned to Buyer by Escrow Agent, and the parties shall have no further rights or obligations hereunder, except for those which expressly survive any such termination, or (b) waive its objections hereunder and proceed with the transaction pursuant to the remaining terms and conditions of this Agreement. If Buyer fails to give Seller notice of its election by such time, it shall be deemed to have elected the option contained in subparagraph (b) above. If Seller does so reasonably cure or satisfy such objection, then this Agreement shall continue in full force and effect. Buyer shall have the right at any time to waive any objections that it may have made and, thereby, to preserve this Agreement in full force and effect.

Section 6. Limitation on Warranties and Buyer’s Inspection.

6.1 Disclaimer of Representations and Warranties by Seller. BUYER HEREBY ACKNOWLEDGES AND AGREES THAT THE SALE OF THE PROPERTY HEREUNDER IS AND WILL BE MADE ON AN “AS IS, WHERE IS” BASIS AND THAT EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS AGREEMENT, SELLER HAS NOT MADE, DOES NOT MAKE AND SPECIFICALLY NEGATES AND DISCLAIMS ANY REPRESENTATIONS, WARRANTIES OR GUARANTIES OF ANY KIND OR CHARACTER WHATSOEVER, WHETHER EXPRESS OR IMPLIED, ORAL OR WRITTEN, PAST, PRESENT, FUTURE OR OTHERWISE, OF, AS TO, CONCERNING OR WITH RESPECT TO, THE PROPERTY, INCLUDING, WITHOUT LIMITATION, (i) ENVIRONMENTAL MATTERS RELATING TO THE PROPERTY OR ANY PORTION THEREOF, (ii) GEOLOGICAL CONDITIONS, INCLUDING, WITHOUT LIMITATION, SUBSIDENCE, SUBSURFACE CONDITIONS, WATER TABLE CONDITIONS, UNDERGROUND WATER RESERVOIRS, AND LIMITATIONS REGARDING THE WITHDRAWAL OF WATER AND FAULTING, (iii) WHETHER OR NOT AND TO THE EXTENT TO WHICH THE PROPERTY OR ANY PORTION THEREOF IS AFFECTED BY ANY STREAM (SURFACE OR UNDERGROUND), BODY OF WATER, FLOOD PRONE AREA, FLOOD PLAIN, FLOODWAY OR SPECIAL FLOOD HAZARD, (iv) DRAINAGE ISSUES, CONDITIONS OR PROBLEMS, (v) SOIL CONDITIONS, INCLUDING THE EXISTENCE OF INSTABILITY, PAST SOIL REPAIRS, SOIL ADDITIONS OR CONDITIONS OF SOIL FILL, OR SUSCEPTIBILITY TO LANDSLIDES, OR THE SUFFICIENCY OF ANY UNDERSHORING, (vi) THE ZONING OR OTHER LAND USE RESTRICTIONS TO WHICH THE PROPERTY OR ANY PORTION THEREOF MAY BE SUBJECT, (vii) THE AVAILABILITY OF ANY UTILITIES TO THE PROPERTY OR ANY PORTION THEREOF INCLUDING, WITHOUT LIMITATION, WATER, SEWAGE, GAS AND ELECTRIC SERVICE, (viii) USAGES OF ADJOINING PROPERTY, (ix) ACCESS TO THE PROPERTY OR ANY PORTION THEREOF, (x) THE VALUE, COMPLIANCE WITH THE PLANS AND SPECIFICATIONS, SIZE, LOCATION, AGE, USE, DESIGN, QUALITY, DESCRIPTION, DURABILITY, STRUCTURAL INTEGRITY, OPERATION, TITLE TO, OR PHYSICAL OR FINANCIAL CONDITION OF, THE PROPERTY, OR ANY PORTION THEREOF, OR ANY INCOME, EXPENSES, CHARGES, LIENS, ENCUMBRANCES, RIGHTS, OR CLAIMS ON OR AFFECTING, OR PERTAINING TO, THE PROPERTY OR ANY PART THEREOF, (xi) THE PRESENCE OF HAZARDOUS MATERIALS (AS MORE FULLY DESCRIBED IN

SECTION 6.3 BELOW) IN OR ON, UNDER OR IN THE VICINITY OF THE PROPERTY, (xii) THE CONDITION OR USE OF THE PROPERTY OR COMPLIANCE OF THE PROPERTY WITH ANY OR ALL PAST, PRESENT OR FUTURE FEDERAL, STATE OR LOCAL ORDINANCES, RULES, REGULATIONS OR LAWS, BUILDING, FIRE OR ZONING ORDINANCES, CODES OR OTHER SIMILAR LAWS, (xiii) THE EXISTENCE OR NON-EXISTENCE OF UNDERGROUND STORAGE TANKS, (xiv) ANY OTHER MATTER AFFECTING THE STABILITY OR INTEGRITY OF THE LAND OR IMPROVEMENTS, (xv) THE POTENTIAL FOR FURTHER DEVELOPMENT OF THE PROPERTY, (xvi) THE EXISTENCE OF VESTED LAND USE, ZONING OR BUILDING ENTITLEMENTS AFFECTING THE PROPERTY, AND (xvii) THE MERCHANTABILITY OF THE PROPERTY OR FITNESS OF THE PROPERTY FOR ANY PARTICULAR PURPOSE (BUYER AFFIRMING THAT BUYER HAS NOT RELIED ON SELLER’S SKILL OR JUDGMENT TO SELECT OR FURNISH THE PROPERTY FOR ANY PARTICULAR PURPOSE, AND THAT SELLER MAKES NO WARRANTY THAT THE PROPERTY IS FIT FOR ANY PARTICULAR PURPOSE).

6.2 Inspection by Buyer. Buyer acknowledges that it will complete all physical and financial examinations relating to the acquisition of the Property hereunder and, subject to the express representations and warranties of Seller contained herein, will acquire the same solely on the basis of such examinations and the title insurance protection afforded by the owner’s title insurance policy to be issued pursuant to the Title Commitment and not on any information provided or to be provided by Seller. Except as expressly set forth in this Agreement, Seller makes no representation or warranty as to the truth, accuracy or completeness of any materials, data or information delivered by Seller to Buyer in connection with the transaction contemplated by this Agreement. Buyer acknowledges and agrees that all materials, data and information delivered or made available by Seller to Buyer in connection with the transaction contemplated by this Agreement are provided to Buyer as a convenience only and that any reliance on or use of such materials, data or information by Buyer shall be at the sole risk of Buyer, except as otherwise expressly stated herein. Without limiting the generality of the foregoing provisions, Buyer acknowledges and agrees that (a) any environmental or other report with respect to the Property which is delivered or made available by Seller to Buyer shall be for general informational purposes only, (b) Buyer shall not have any right to rely on any such report delivered or made available by Seller to Buyer, but rather will rely on its own inspections and investigations of the Property and any reports commissioned by Buyer with respect thereto, and (c) neither Seller, any affiliate of Seller, nor the person or entity which prepared any such report delivered or made available by Seller to Buyer shall have any liability to Buyer for any inaccuracy in or omission from any such report. Buyer further acknowledges and agrees that any information provided or to be provided with respect to the Property including, without limitation, any due diligence materials, was obtained from a variety of sources and that, except for the express representations and warranties contained in this Agreement, Seller has not made any independent investigation or verification of such information and makes no representations as to the accuracy or completeness of such information. Seller shall not be liable for any failure to investigate the Property nor shall Seller be bound in any manner by any verbal or written statements, representations, appraisals, environmental assessment reports, or other information pertaining to the Property or the operation thereof, furnished by Seller or by any real estate

broker, attorney, agent, representative, employee, servant or other person acting on Seller’s behalf, except as expressly set forth herein. It is expressly understood and agreed that the amount of the Purchase Price reflects, and the Property is being sold by Seller and purchased by Buyer subject to, the foregoing disclaimers, which shall survive Closing.

6.3 Waiver and Release by Buyer. Except as otherwise expressly set forth in this Agreement, Buyer, for itself and any entity affiliated with Buyer, waives and releases Seller, the Seller Related Parties and their respective employees, agents, officers, trustees, directors and shareholders from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs or expenses of whatever kind or nature, known or unknown, existing and future, contingent or otherwise (including any action or proceeding, brought or threatened, or ordered by any appropriate governmental entity) made, incurred, or suffered by Buyer or any entity affiliated with Buyer relating to the presence, misuse, use, disposal, release or threatened release of any hazardous or toxic materials, chemicals or wastes at the Property and any liability or claim related to the Property arising under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Resource Conservation and Recovery Act, and the Toxic Substance Control Act, all as amended, or any other cause of action based on any other state, local, or federal environmental law, rule or regulation; provided, however, the foregoing waiver and release shall not apply to (i) the release by Seller of Hazardous Materials at or affecting the Property or violations by Seller of environmental laws to the extent affecting the Property or (ii) violations of environmental laws within the actual knowledge of Seller and not disclosed to Buyer prior to Closing. As used herein, “Hazardous Materials” shall mean substances which are designated, defined or classified as a hazardous substance, hazardous material or contaminant under applicable environmental laws currently in effect as of the Contract Date. Buyer acknowledges that unknown and unsuspected Hazardous Materials may hereafter be discovered on or about the Property, and Buyer knowingly releases Seller and the Seller Related Parties from any and all liability related thereto (except as expressly provided above). Buyer hereby agrees, represents and warrants that the matters released herein are not limited to matters which are known, disclosed, suspected or foreseeable.




Seller’s Initials				Buyer’s Initials

The provisions of this Section 6.3 shall survive indefinitely any Closing or termination of this Agreement and shall not be merged into the Closing Documents.

6.4 Physical and Document Inspection. Not later than two (2) business days after full execution of this Agreement, Seller shall deliver to Buyer complete copies of each of the following documents related to the Property that it has in its possession or control: (a) a Phase I environmental report and an ALTA survey of the Property, and (b) plans and specifications and a certificate of occupancy for the Building.

6.5 Buyer’s Inspection. Buyer and its agents shall have the right, from time to time prior to the Closing, to enter upon the Property to examine the same and the condition thereof, and to conduct such surveys and to make all such engineering and other inspections, tests and studies as Buyer shall determine to be reasonably necessary, all at Buyer’s sole cost and expense; provided, however, Buyer shall not conduct any environmental investigations of the

Property beyond a Phase I environmental site assessment (i.e. no sampling or drilling) without obtaining Seller’s prior written consent. Buyer agrees to give Seller at least twenty-four (24) hours advance written notice of such examinations or surveys and to conduct such examinations or surveys during normal business hours. Unless Seller waives such right in writing, a representative of Seller must be present with Buyer during all examinations or surveys of the Property conducted by Buyer. Buyer agrees to restore the Property to its condition prior to any such examinations or surveys immediately after conducting the same. Buyer hereby indemnifies and holds Seller harmless from and against any claims for injury or death to persons, damage to property or other losses, damages or claims, including, in each instance, attorneys’ fees and litigation costs, to the extent arising out of any action of any person or firm entering the Property on Buyer’s behalf as aforesaid, which indemnity shall survive the Closing and any termination of this Agreement without the Closing having occurred.

6.6 Formal Inspection Period. Notwithstanding Buyer’s right of inspection contained in Section 6.5 above, with respect to the condition of the Property, Buyer’s obligation to close under this Agreement is subject to and conditioned upon Buyer’s investigation and study of and satisfaction with the Property. Buyer shall have until 5:00 p.m. Eastern Standard time on the sixtieth (60^th) day following full execution of this Agreement (the “Inspection Date”), to make any such investigations and studies with respect to the Property as Buyer deems appropriate, and to terminate this Agreement, by written notice to Seller, to be given on or before the Inspection Date, if Buyer is not, for any reason, satisfied with the Property. If Buyer fails timely to give notice of such termination, then Buyer’s rights under this Section 6.6 shall be deemed to have been waived by Buyer and this Agreement shall remain in full force and effect without any longer being subject to this Section 6.6. If Buyer does give notice of termination on or before the Inspection Date, the Earnest Money shall be refunded to Buyer by Escrow Agent, and the parties shall have no further rights or obligations hereunder, except for those which expressly survive any such termination, and, thereafter, Buyer shall promptly provide to Seller, without charge and without warranty, copies of any reports, surveys, drawings, tests or other written documents obtained by Buyer from third parties with respect to the Property.

6.7 Intentionally Deleted.

Section 7. Intentionally Deleted.

Section 8. Representations and Warranties.

As of the Contract Date, Seller hereby warrants and represents to Buyer as follows:

8.1 No Litigation. Seller has not received any written notice of any actual, pending or threatened litigation or proceeding, including, without limitation, condemnation or other exercise of the power of eminent domain, by any organization, person, individual or governmental agency against Seller with respect to the Property or against the Property. Seller has no actual knowledge of any other pending or threatened litigation, condemnation or other exercise of the power of eminent domain which would affect the Property.

8.2 No Violation of Law. Seller has received no written notice from any governmental authority alleging or asserting that the Property is not in compliance with applicable Governmental Requirements.

8.3 Authority. Seller is a duly organized and validly formed corporation under the laws of the State of California, is in good standing in the State of California, is not subject to any voluntary or involuntary bankruptcy or other proceeding for dissolution or liquidation thereof, has obtained all requisite authorizations to enter into this Agreement with Buyer and to consummate and close the purchase and sale of the Property pursuant hereto, and that the parties executing this Agreement on behalf of Seller are duly authorized to do so.

8.4 Non-Foreign Status. Seller is not a “foreign person” as that term is defined in the Internal Revenue Code of 1986, as amended and the Regulations promulgated pursuant thereto.

8.5 No Leases. There are no leases, licenses, or other rights of occupancy in effect at the Property.

8.6 Other Buyers. Other than this Agreement and Seller’s loan facility and/or credit agreements with Bank of America, there is no binding agreement, understanding, letter of intent, or other commitment or arrangement of any kind between Seller and any other person, firm, corporation, or other entity relating to the sale, lease, or other disposition of the Property or any portion or component thereof.

8.7 Performance Under Contract. To Seller’s knowledge, Seller’s entering into this Agreement does not and at the time of Closing will not violate any provisions of any agreement or judicial order to which Seller is a party or to which Seller or the Property is subject.

Whenever a representation and warranty made by Seller in this Section 8 is limited to Seller’s “knowledge” or “actual knowledge”, such term shall mean the current actual knowledge of the authorized representative of Seller responsible, on behalf of Seller, for the acquisition, development, leasing, management, operation and disposition of the Property and construction of the Improvements, without any independent inquiry or investigation and without any personal liability on the part of any of them, and the knowledge of no other past, present or future employee of Seller shall be imputed to Seller for the purposes hereof. The foregoing definition of “knowledge” or “actual knowledge” shall apply to such terms wherever used in this Agreement with respect to statements, warranties or actions of Seller, including, without limitation, Section 6.3.

Section 9. Buyer’s Conditions to Closing.

9.1 Seller’s Representations and Warranties. The representations and warranties contained in Section 8 are true and correct in all material respects at Closing. The representations and warranties contained in Section 8 shall survive Closing for a period of one year following the Closing Date (except for 8.3 and 8.4 which shall survive for a period of four years) and shall terminate upon expiration of such one year period, except as to claims asserted in writing by Buyer prior to that time.

9.2 Seller’s Compliance. Seller shall have complied with each and every condition and material covenant of this Agreement to be kept or complied with by Seller.

9.3 ALTA Survey. Buyer shall have obtained the Survey in a form reasonably satisfactory to Buyer.

Section 10. No Leases. Seller will not, so long as this Agreement remains in effect, enter into any leases, licenses, or occupancy agreements affecting the Property.

Section 11. Closing.

11.1 Time and Place. Provided that all of the conditions set forth in this Agreement are theretofore fully satisfied or performed, the Closing shall be conducted by Escrow Agent, at its offices at 171 North Clark Street, Chicago, Illinois 60601, commencing at 10:00 a.m., on a date selected by Buyer and reasonably acceptable to Seller, but in no event later than December 15, 2006. Seller and Buyer will execute and deliver to Escrow Agent such closing instructions, either jointly or separately, not later than the day before the date of Closing, as may be necessary to enable Escrow Agent to administer and complete the Closing in accordance with the provisions of this Agreement and the Additional Instructions.

11.2 Seller’s Closing Documents. For and in consideration of, and as a condition precedent to, Buyer’s delivery to Seller of the Purchase Price, Seller shall obtain and deliver to Buyer, or cause to be obtained and delivered to Buyer, at the Closing the following documents (collectively, the “Seller’s Closing Documents”, all of which shall be duly executed and witnessed, which documents Buyer agrees to execute where required):

11.2.1 A Deed, in the form attached as Exhibit D as to the Improved Land and the Improvements and in the form attached as Exhibit D-1 as to the Franz Property and the Franz Improvements, conveying to Buyer (or in the case of the Franz Property and the Franz Improvements to the Buyer’s designated affiliate), all of Seller’s right, title and interest in and to the Improved Land and Improvements, and the Franz Property and the Franz Improvements, respectively, subject to the Permitted Title Exceptions and such other exceptions as are permitted by Section 5.

11.2.2 A Non-Foreign Certificate, in the form attached as Exhibit E;

11.2.3 Such evidence as the Title Insurer shall reasonably require as to the authority of the parties acting on behalf of Seller and Buyer to enter into this Agreement and to discharge the obligations of Seller and Buyer pursuant hereto;

11.2.4 That certain Form R-5 as required by the Virginia Department of Taxation, duly executed by Seller, in the form attached as Exhibit H (as attached, the “Form R-5”);

11.2.5 A closing statement;

11.2.6 An affidavit of title or other affidavit customarily required of sellers by the Title Insurer to remove the standard exceptions from an owner’s ALTA extended coverage title insurance policy which are capable of being removed by such an affidavit;

11.2.7 A General Assignment in the form attached hereto as Exhibit F;

11.2.8 A current ALTA Owner’s Extended Coverage Policy of Title Insurance issued by the Title Insurer (or, at the election of the Buyer and at Seller’s expense, two such policies, one insuring the Buyer’s title to the Improved Land and Improvements and the other insuring Buyer’s designated affiliate’s title to the Franz Property and the Franz Improvements), in the amount of the Purchase Price (or in the case of two policies, each policy being in the amount allocated to the Improved Land and the Improvements and the Franz Property and Franz Improvements, respectively, in Section 4.1) and showing title to the Property vested in Buyer and Buyer’s designated affiliate, if applicable, subject to the Permitted Title Exceptions, with such endorsements as Buyer shall reasonably request and which shall include 3.1 zoning with parking, comprehensive, subdivision, utility facility, survey, access, single tax lot, waiver of the creditors’ rights exception, waiver of the arbitration clause and environmental lien endorsements;

11.2.9 A lease agreement, substantially in the form attached hereto as Exhibit G, whereby Seller agrees to lease from Buyer (or IWSGT, as applicable), and Buyer agrees to lease (or cause to be leased) to Seller, the Improved Land and Improvements;

11.2.10 Insurance certificate in the form as is required by the lease naming the Buyer’s assignee and lender as insured parties;

11.2.11 Estoppel certificate executed by Seller, as lessee, in a commercially reasonable form; and

11.2.12 Such further instructions, documents and information as Buyer or Title Insurer may reasonably request as necessary to consummate the purchase and sale contemplated by this Agreement. Seller agrees to furnish a separate set of Seller’s Closing Documents, appropriately modified from the Exhibits attached to this Agreement, if requested by Buyer in order to separate the conveyance of the Improved Land and the Improvements from the conveyance of the Franz Property and the Franz Improvements.

11.3 Buyer’s Closing Documents. For and in consideration of, and as a condition precedent to, Seller’s delivery to Buyer of the Deed, Buyer shall obtain and deliver to Seller, or cause to be obtained and delivered to Seller, at the Closing the following documents (collectively, the “Buyer’s Closing Documents”, all of which shall be duly executed and witnessed, which documents Seller agrees to execute where required):

11.3.1 Such evidence as the Title Insurer shall reasonably require as to the authority of the parties acting on behalf of Seller and Buyer to enter into this Agreement and to discharge the obligations of Seller and Buyer pursuant hereto;

11.3.2 A closing statement;

11.3.3 A General Assignment in the form attached hereto as Exhibit F;

11.3.4 A lease agreement, in the form attached hereto as Exhibit G, whereby Seller agrees to lease from Buyer (or IWSGT, as applicable), and Buyer agrees to lease (or cause to be leased) to Seller, the Improved Land and Improvements; and

11.3.5 Such further instructions, documents and information as Seller or Title Insurer may reasonably request as necessary to consummate the purchase and sale contemplated by this Agreement. Buyer agrees to furnish a separate set of Buyer’s Closing Documents, appropriately modified from the Exhibits attached to this Agreement, in order to separate the conveyance of the Improved Land and the Improvements from the conveyance of the Franz Property and the Franz Improvements as determined by Buyer.

11.4 Costs. At the Closing, Seller and Buyer shall pay their own respective costs incurred with respect to the consummation of the purchase and sale of the Property as contemplated herein, including, without limitation, attorneys’ fees. Seller shall be responsible for payment of the Virginia Grantor’s tax due under Section 58.1-802 of the Code of Virginia of 1950, as amended (the “Va. Code”), the Virginia recordation tax on the Deed, or Deeds if applicable, and the lease agreement under Section 58.1-801 and Section 58.1-807 of the Va. Code, respectively, all Isle of Wight County recordation taxes imposed under Section 58.1-814 of the Va. Code, Escrow Agent fees, recording fees, closing costs, all Survey costs and the premium to Pioneer Title Co. for an ALTA owner’s standard policy, or policies if applicable, of title insurance (with all endorsements).

Section 12. Default and Remedies.

12.1 Buyer’s Default. In the event of a default by Buyer under the terms of this Agreement and continuation of such default for a period of five (5) calendar days after receipt of written notice from Seller (except that no such notice shall be required for a failure by Buyer to tender the Purchase Price and execute the applicable Closing Documents on the Closing Date in accordance with Section 11.2), Escrow Agent shall disburse the Earnest Money to Seller, and Seller shall be entitled, as its sole and exclusive remedy hereunder, to retain the Earnest Money as full liquidated damages for such default of Buyer, whereupon this Agreement shall terminate and the parties shall have no further rights or obligations hereunder, except for those which expressly survive any such termination. It is hereby agreed that Seller’s damages in the event of a default by Buyer hereunder are uncertain and difficult to ascertain, and that the Earnest Money constitutes a reasonable liquidation of such damages and is intended not as a penalty, but as full liquidated damages. Buyer covenants not to bring any action or suit challenging the amount of liquidated damages provided hereunder in the event of such default. Notwithstanding the foregoing, if Buyer interferes with or makes any attempt to interfere with Seller receiving or

retaining, as the case may be, the liquidated damages provided for in this Section 12.1 (other than on the basis that Buyer, in good faith, disputes Seller’s contention that Buyer is in default hereunder), Seller shall have the right to elect to recover all collection costs necessary to enforce its rights hereunder together with the Earnest Money. This provision shall expressly survive the termination of this Agreement.

12.2 Seller’s Default. In the event of a default by Seller under the terms of this Agreement which is first discovered by Buyer prior to the Closing and is not cured by Seller within five (5) calendar days after receipt of written notice from Buyer, or as otherwise provided hereunder (except that only one (1) days notice shall be required for a failure by Seller to execute and tender the Closing Documents on the Closing Date in accordance with Section 11.2), Buyer’s sole and exclusive remedies hereunder shall be either to (i) terminate this Agreement and receive a refund of the Earnest Money from Escrow Agent (except as provided to the contrary in Section 8) or (ii) subject to compliance by Buyer with Section 12.2.1, seek specific performance of Seller’s obligations under this Agreement, without any reduction in the Purchase Price. Except as expressly provided to the contrary in this Agreement, Buyer shall have no right to seek or recover any damages from Seller in the event of a default by Seller under the terms of this Agreement. Notwithstanding the foregoing, if the remedy of specific performance is not available because of Seller’s intentional misconduct, Buyer shall be entitled to assert a claim against Seller for damages incurred by Buyer as a result thereof.

12.2.1 SPECIFIC PERFORMANCE. BUYER SHALL ONLY BE ENTITLED TO THE REMEDY OF SPECIFIC PERFORMANCE IF BUYER IS READY, WILLING AND ABLE TO PERFORM BUYER’S OBLIGATIONS UNDER THIS AGREEMENT WITHOUT ANY VARIANCE OR MODIFICATION (EXCEPT VARIANCES AND MODIFICATIONS, IF ANY, WHICH MAY BE SET FORTH IN WRITING AND EXECUTED AND DELIVERED BY BOTH SELLER AND BUYER), PROVIDED THAT BUYER SHALL NOT BE REQUIRED TO DEPOSIT WITH THE ESCROW AGENT THE PURCHASE PRICE AND ANY OTHER AMOUNTS REQUIRED OF BUYER TO CLOSE HEREUNDER UNTIL ONE DAY BEFORE THE ACTUAL CLOSING. BUYER AND SELLER HEREBY EVIDENCE THEIR SPECIFIC CONSENT TO THE TERMS OF THIS SECTION 12 BY PLACING THEIR INITIALS IN THE PLACE PROVIDED HEREINAFTER.




Seller’s Initials				Buyer’s Initials

12.3 Seller’s Misrepresentation or Breach of Warranty. In the event of a misrepresentation or breach of warranty by Seller under Section 8 of this Agreement which is first discovered by Buyer after the Closing Date but within one (1) year after the Closing Date, Buyer shall notify Seller, in writing, of the specifics of such default. Seller shall have sixty (60) days after receipt of Buyer’s notice in which to cure said default (or such longer time if such default cannot be reasonably cured within said sixty (60) day period, but in no event later than one hundred eighty (180) days). If Seller is unable to cure said default within said cure period, Buyer’s sole recourse against Seller shall be to file an action or proceeding against Seller for the actual damages (excluding any consequential or punitive damages) suffered by Buyer as a direct result of such default. No action or proceeding thereon of any kind whatsoever shall be valid or

enforceable, at law or in equity, if not commenced in the appropriate jurisdiction within one (1) year after the Closing Date. Notwithstanding the foregoing, the total liability of Seller for breach of warranty discovered after the Closing Date will never exceed, in the aggregate, $500,000, except to the extent caused by Seller’s intentional misconduct.

Section 13. Condemnation or Destruction.

13.1 Condemnation. If, prior to the Closing, all or any material part of the Property is subject to a bona fide threat of condemnation by a body having the power of eminent domain, or is taken by eminent domain or condemnation, or sale in lieu thereof, then Buyer, by written notice to Seller, to be received within twenty (20) calendar days of Buyer’s receiving Seller’s notice of such threat, condemnation or taking, but no later than the Closing Date, may elect to terminate this Agreement. For the purposes of this Section 13.1, a “material” part of the Property will have been taken by condemnation or be under threat of condemnation if the loss of such part of the Property would have a material and adverse impact on access to the Property or operation of the Property as contemplated by Buyer.

13.2 Damage or Destruction. If, prior to the Closing, all or any material part of the Property is damaged or destroyed by fire or other casualty, Seller agrees to give Buyer immediate written notice of such occurrence and the nature and extent of such damage and destruction, and Buyer, by written notice to Seller, to be received within twenty (20) calendar days of Buyer’s receipt of Seller’s notice of such damage or destruction, but no later than the Closing Date, may elect to terminate this Agreement. For the purposes of this Section 13.2, a “material” part of the Property will have been damage or destroyed if Seller’s estimate of the cost to repair such damage exceeds $327,500.

13.3 Termination. If this Agreement is terminated as a result of the provisions of either Section 13.1 or Section 13.2 hereof, Buyer shall be entitled to receive a refund of the Earnest Money from Escrow Agent, whereupon the parties shall have no further rights or obligations hereunder, except for those which expressly survive any such termination.

13.4 Awards and Proceeds. If Buyer does not elect (or is not entitled) to terminate this Agreement following any notice of a threat of taking or taking by condemnation or notice of damage or destruction to the Property, as provided above, this Agreement shall remain in full force and effect and the conveyance of the Property contemplated herein, less any interest taken by eminent domain or condemnation, or sale in lieu thereof, shall be effected with no further adjustments. At the Closing, Seller shall assign, transfer and set over to Buyer all of Seller’s right, title and interest in and to any awards, payments or insurance proceeds for the actual value of the property lost or destroyed, up to but not in excess of the Purchase Price, that have been or may thereafter be made for any such taking, sale in lieu thereof or damage or destruction, to the extent such awards, payments or proceeds shall not have theretofore been used for restoration of the Property pursuant to a plan of restoration approved in advance in writing by Buyer. Seller shall also credit Buyer in cash at Closing for any deductible amount with respect to any insurance proceeds implicated by such damage or destruction.

Section 14. Assignment.

14.1 Assignment by Buyer. Except as herein expressly provided, Buyer shall not, without the prior written consent of Seller, which Seller may withhold in its sole and absolute discretion, assign any of Buyer’s rights hereunder or any part thereof to any person, firm, partnership, corporation or other entity, other than a parent, affiliate or subsidiary, or an affiliate or subsidiary of a parent, of Buyer or a real estate investment trust sponsored by Buyer. If any assignment requiring Seller’s consent is made with the consent of Seller, or if any assignment not requiring Seller’s consent is made, then the sale contemplated by this Agreement shall be consummated in the name of, and by and through the authorized officials of, any such assignee, but Buyer shall not be relieved of its obligations under this Agreement.

14.2 Assignment by Seller. From and after the Contract Date, Seller shall not, without the prior written consent of Buyer, which consent Buyer may withhold in its sole and absolute discretion, assign, transfer, convey, hypothecate or otherwise dispose of all or any part of its right, title or interest in or to the Property. Notwithstanding the foregoing, Seller shall have the right to assign, transfer or convey, without Buyer’s consent, Seller’s right, title or interest in or to the Property (or any portion thereof) to any parent, affiliate or subsidiary of Seller, provided that Seller remains responsible for the performance of its covenants and obligations under this Agreement.

Section 15. Buyer’s Representation and Warranty. Buyer does hereby represent and warrant to Seller as of the Contract Date and the Closing Date that it is a validly formed corporation under the laws of the State of Illinois; that it is in good standing in the state of its organization and qualified to do business in the Commonwealth of Virginia; that it is not subject to any involuntary proceeding for the dissolution or liquidation thereof; that it has all requisite authorizations to enter into this Agreement with Seller and to consummate the transactions contemplated hereby; and that the parties executing this Agreement on behalf of Buyer are duly authorized to so do.

Section 16. Broker and Broker’s Commission.

16.1 If Closing actually occurs, Seller shall pay to Broker a commission, out of the Seller’s proceeds at Closing, in accordance with a separate agreement between Seller and Broker. Broker shall only be entitled to such commission if and when the transaction contemplated herein actually closes. Buyer shall have no responsibility for payment of such commission.

16.2 Buyer and Seller each warrant and represent to the other that, with the exception of the Broker, such party has not employed or otherwise engaged a real estate broker or agent in connection with the transaction contemplated hereby. Each party agrees to indemnify and hold the other harmless from any loss or cost suffered or incurred by it as a result of the other’s representation herein being untrue. This Section 16 shall expressly survive the Closing hereunder and any termination of this Agreement.

Section 17. Notices.

Wherever any notice or other communication is required or permitted hereunder, such notice or other communication shall be in writing and shall be delivered by hand, by nationally-recognized overnight express delivery service, by U. S. registered or certified mail, return receipt requested, postage prepaid, or by facsimile with prompt telephone confirmation to the addresses set out below or at such other addresses as are specified by written notice delivered in accordance herewith:


SELLER:
		COST PLUS, INC.
		200 Fourth Street
		Oakland, California 94607
		Telephone: (510) 808-9119
		Facsimile: (510) 893-3084
		Attn: Tom Willardson

With a copy to:
		Cooper, White & Cooper LLP
		201 California Street, 17th Floor
		San Francisco, CA 94111
		Telephone: (415) 433-1900
		Facsimile: (415) 433-5530
		Attn: Beau Simon

With a copy to:
		Williams Mullen
		222 Central Park Avenue
		Suite 1700
		Virginia Beach, VA 23462
		Telephone: (757) 473-5387
		Facsimile: (757) 473-0395
		Attn: William W. Harrison, Jr.

BUYER:
		INLAND REAL ESTATE ACQUISITIONS, INC.
		2901 Butterfield Road
		Oak Brook, IL 60523
		Telephone: (630) 218-4948
		Facsimile: (630) 218-4935
		Attn: G. Joseph Cosenza


With a copy to:
		Gary Pechter, Esq.
		The Inland Real Estate Group, Inc.
		2901 Butterfield Road
		Oak Brook, IL 60523
		Telephone: (630) 645-2084
		Facsimile: (630) 218-4900

Any notice or other communication mailed as hereinabove provided shall be deemed effectively given and received (a) on the date of delivery, if delivered by hand or overnight express delivery service; (b) on the date indicated on the return receipt if mailed; or (c) on the date of transmission, if sent by facsimile with prompt telephonic confirmation. If any notice mailed is properly addressed but returned for any reason, such notice shall be deemed to be effective notice and to be given on the date of mailing.

Section 18. Miscellaneous.

18.1 Governing Law; Headings; Rules of Construction. This Agreement shall be governed by and construed in accordance with the internal laws of the Commonwealth of Virginia, without reference to the conflicts of laws or choice of law provisions thereof. The titles of sections and subsections herein have been inserted as a matter of convenience of reference only and shall not control or affect the meaning or construction of any of the terms or provisions herein. All references herein to the singular shall include the plural, and vice versa. The parties agree that this Agreement is the result of negotiation by the parties, each of whom was represented by counsel, and thus, this Agreement shall not be construed against the maker thereof.

18.2 No Waiver. Neither the failure of either party to exercise any power given such party hereunder or to insist upon strict compliance by the other party with its obligations hereunder, nor any custom or practice of the parties at variance with the terms hereof shall constitute a waiver of either party’s right to demand exact compliance with the terms hereof.

18.3 Entire Agreement. This Agreement contains the entire agreement of the parties hereto with respect to the Property and the subject matter hereof, and no representations, inducements, promises or agreements, oral or otherwise, between the parties not embodied herein or incorporated herein by reference shall be of any force or effect.

18.4 Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, legal representatives, successors and assigns (subject to Section 14 above).

18.5 Amendments. No amendment to this Agreement shall be binding on any of the parties hereto unless such amendment is in writing and is executed by the party against whom enforcement of such amendment is sought.

18.6 Possession. Possession of the Property shall be granted by Seller to Buyer no later than the Closing Date, subject to the Permitted Title Exceptions and other title matters allowed under Section 5.

18.7 Date For Performance. If the time period by which any right, option or election provided under this Agreement must be exercised, or by which any act required hereunder must be performed, or by which the Closing must be held, expires on a Saturday, Sunday or legal or bank holiday, then such time period shall be automatically extended through the close of business on the next regularly scheduled business day.

18.8 Recording. Seller and Buyer agree that they will not record this Agreement and that they will not record a short form of this Agreement.

18.9 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which, when taken together, shall constitute but one and the same instrument.

18.10 Time of the Essence. Time shall be of the essence of this Agreement and each and every term and condition hereof.

18.11 Severability. This Agreement is intended to be performed in accordance with, and only to the extent permitted by, all applicable laws, ordinances, rules and regulations, and is intended, and shall for all purposes be deemed to be, a single, integrated document setting forth all of the agreements and understandings of the parties hereto with respect to the subject matter hereof, and superseding all prior negotiations, understandings and agreements of such parties. If any term or provision of this Agreement or the application thereof to any person or circumstance shall for any reason and to any extent be held to be invalid or unenforceable, then such term or provision shall be ignored, and to the maximum extent possible, this Agreement shall continue in full force and effect, but without giving effect to such term or provision.

18.12 Confidentiality. Each of Seller and Buyer shall keep the terms of this Agreement strictly confidential and shall not disclose or permit its employees or agents to disclose the terms of this Agreement, except for reasonably necessary disclosures to its attorneys, accountants, officers, directors, key employees, members and lenders. Buyer agrees to keep confidential any of the documents, material or information regarding the Property supplied to Buyer by Seller or by any third party at Seller’s request, including, without limitation any environmental site assessment reports furnished to Buyer except to Buyer’s consultants, officers, directors, key employees, prospective lenders, investors, financial advisors, attorneys and any permitted assignees of this Agreement on a “need to know” basis, unless Buyer is compelled to disclose such documents, material or information by law or by subpoena. Buyer agrees to indemnify and hold harmless the Seller Related Parties from and against any and all losses, damages, claims and liabilities of any kind (including, without limitation, reasonable attorneys’ fees) arising out of Buyer’s breach of this Section 18.12. In the event that the Closing does not occur in accordance with the terms of this Agreement, Buyer shall return to Seller all of the documents, material or information regarding the Property supplied to Buyer by Seller or at the request of Seller. The provisions of this Section 18.12 shall survive the termination of this Agreement but shall no longer be applicable following Closing in accordance with the terms of this Agreement. Notwithstanding the foregoing, the provisions of this Section 18.12 shall not apply to any information which is within the public domain.

18.13 Seller Related Parties. As used herein, the “Seller Related Parties” shall mean Seller and its officers, directors, trustees, shareholders, partners, members, participants, affiliates, subsidiaries, employees, representatives, agents, contractors, heirs, legal representatives, successors and assigns.

18.14 No Offer Until Executed. The submission of this Agreement to Buyer for examination or consideration does not constitute an offer to sell the Property and this Agreement shall become effective, if at all, only upon the full execution and delivery thereof by Buyer and Seller.

IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed and sealed by its duly authorized signatory, effective as of the day and year first above written.

SELLER:


Date: October 26, 2006	COST PLUS, INC., a California corporation

	By:	/s/ Tom Willardson
		Name:	Tom Willardson
		Title:	Executive Vice President and Chief Financial Officer

BUYER:


Date: October 26, 2006	INLAND REAL ESTATE ACQUISITIONS, INC., an Illinois corporation

	By:	/s/ G. Joseph Cosenza
		Name:	G. Joseph Cosenza
		Title:	President

JOINDER BY BROKER

Broker hereby joins in execution of this Agreement in its capacity as a real estate broker licensed to do business in the Commonwealth of Virginia and acknowledges the fee or commission due it from Seller as a result of the transaction described in this Agreement is set forth in the letter agreement between Seller and Broker dated , 2006. Broker also acknowledges that payment of the aforesaid fee or commission is conditioned upon the Closing and the receipt of the Purchase Price by Seller. Broker agrees to deliver a receipt to Seller at the Closing for the fee or commission due Seller’s Broker and a release stating that no other fees or commissions are due it from Seller or Buyer arising out of the sale of the Property, and otherwise in a form reasonably required by Seller or the Title Insurer. Broker warrants and represents to Seller and Buyer that (a) Broker is a real estate broker licensed to do business in the Commonwealth of Virginia and (b) there are no other brokers cooperating with or claiming through or under Broker in connection with the transaction contemplated hereby. Broker further agrees to indemnify, defend and hold harmless Seller and Buyer from any claim whatsoever (including, without limitation, reasonable attorneys’ fees, court costs and costs of appeal) from a breach of any representation or warranty of Broker contained herein.


NAI BT Commercial Real Estate.

By:
Name:
Title:

EXHIBIT A

EARNEST MONEY ESCROW AGREEMENT

This Escrow Agreement is made as of the __ day of ______, 2006, by and among COST PLUS, INC., a California corporation (“Seller”), INLAND REAL ESTATE ACQUISITIONS, INC., an Illinois corporation (“Buyer”), and CHICAGO TITLE & TRUST COMPANY (“Escrow Agent”).

RECITALS

Seller and Buyer have entered into a certain purchase and sale agreement and joint escrow instructions (“Purchase Agreement”) concerning real property located in Isle of Wight County, Virginia.

In connection with the Purchase Agreement, Seller and Buyer have requested Escrow Agent to receive funds to be held in escrow and applied in accordance with the terms and conditions of this Escrow Agreement.

NOW THEREFORE, in consideration of the above recitals, the mutual promises set forth herein and other good and valuable consideration, the parties agree as follows:

1. ESCROW AGENT. Chicago Title & Trust Company hereby agrees to act as Escrow Agent in accordance with the terms and conditions hereof.

2. INITIAL DEPOSIT. Escrow Agent shall receive an initial deposit in the amount of $1,000,000. Any additional amounts deposited with Escrow Agent shall be added to the initial deposit and together with the initial deposit and all interest earned thereon shall be referred to herein collectively as the “Escrow Fund”.

3. DEPOSITS OF FUNDS. All checks, money orders or drafts will be processed for collection in the normal course of business. Escrow Agent may initially deposit such funds in its custodial or escrow accounts which may result in the funds being commingled with escrow funds of others for a time; however, as soon as the Escrow Fund has been credited as collected funds to Escrow Agent’s account, then Escrow Agent shall immediately deposit the Escrow Fund into an interest bearing account with any reputable trust company, bank, savings bank, savings association, or other financial services entity. Deposits held by Escrow Agent shall be subject to the provisions of applicable state statues governing unclaimed property. Seller and Buyer will execute the appropriate Internal Revenue Service documentation for the giving of taxpayer identification information relating to this account. Seller and Buyer do hereby certify that each is aware the Federal Deposit Insurance Corporation coverages apply to a maximum amount of $100,000 per depositor. Further, Seller and Buyer understand that Escrow Agent assumes no responsibility for, nor will Seller or Buyer hold same liable for any loss occurring which arises from a situation or event under the Federal Deposit Insurance Corporation coverages.

A-1

All interest will accrue to and be reported to the Internal Revenue Service for the account of Buyer, as set forth below:


Name:		INLAND REAL ESTATE ACQUISITIONS, INC.
Address:		2901 Butterfield Road
		Oak Brook, IL 60523
		Attn: G. Joseph Cosenza
Telephone:		(630) 218-4948
Facsimile:		(630) 218-4935

Tax Identification Number:

Escrow Agent shall not be responsible for any penalties, or loss of principal or interest, or any delays in the withdrawal of the funds which may be imposed by the depository institution as a result of the making or redeeming of the investment pursuant to Seller and Buyer instructions.

4. DISBURSEMENT OF ESCROW FUND. Escrow Agent may disburse all or any portion of the Escrow Fund in accordance with and in reliance upon written instructions from both Seller and Buyer provided that Buyer may unilaterally withdraw the entire Escrow Fund on or before , 2006. The Escrow Agent shall have no responsibility to make an investigation or determination of any facts underlying such instructions or as to whether any conditions upon which the funds are to be released have been fulfilled or not fulfilled, or to whom funds are released.

5. DEFAULT AND/OR DISPUTES. In the event any party to the transaction underlying this Agreement shall tender any performance after the time when such performance was due, Escrow Agent may proceed under this Agreement unless one of the parties to this Agreement shall give to the Escrow Agent written direction to stop further performance of the Escrow Agent’s functions hereunder. In the event written notice of default or dispute is given to the Escrow Agent by any party, or if Escrow Agent receives contrary written instructions from any party, the Escrow Agent will promptly notify all parties of such notice. Thereafter, Escrow Agent will decline to disburse funds or to deliver any instrument or otherwise continue to perform its escrow functions, except upon receipt of a mutual written agreement of the parties or upon an appropriate order of court. In the event of a dispute, the Escrow Agent is authorized to deposit the escrow into a court of competent jurisdiction for a determination as to the proper disposition of said funds. In the event that the funds are deposited in court, the Escrow Agent shall be entitled to file a claim in the proceeding for its costs and counsel fees, if any.

6. ESCROW AGENT FEES AND OTHER EXPENSES. Escrow Agent shall be paid its ordinary and reasonable charges for services provided hereunder by Seller. Escrow Agent shall not be required to advance its own funds for any purpose provided that any such advance, made at its option, shall be promptly reimbursed by the party for whom it is advanced, and such optional advance shall not be an admission of liability on the part of Escrow Agent.

A-2

7. PERFORMANCE OF DUTIES. In performing any of its duties under this Agreement, or upon the claimed failure to perform its duties hereunder, Escrow Agent shall not be liable to anyone for any damages, losses or expenses which may occur as a result of Escrow Agent so acting, or failing to act; provided, however, Escrow Agent shall be liable for damages arising out of its willful default or gross negligence under this Agreement. Accordingly, Escrow Agent shall not incur any such liability with respect to (i) any good faith act or omission upon advice of counsel given with respect to any questions relating to the duties and responsibilities of Escrow Agent hereunder, or (ii) any good faith act or omission in reliance upon any document, including any written notice or instructions provided for in the Agreement, not only as to its due execution and to the validity and effectiveness of its provisions but also as to the truth and accuracy of any information contained therein, which Escrow Agent shall in good faith believe to be genuine, to have been signed or presented by the proper person or persons and to conform with the provisions of this Agreement.

8. LIMITATIONS OF LIABILITY. Escrow Agent shall not be liable for any loss or damage resulting from the following:

(a) The effect of the transaction underlying this Agreement including without limitation, any defect in the title to the real estate, any failure or delay in the surrender of possession of the property, the rights or obligations of any party in possession of the property, the financial status or insolvency of any other party, and/or any misrepresentation of fact made by any other party;

(b) The default, error, act or failure to act by any other party to the escrow;

(c) Any loss, loss of value or impairment of funds which have been deposited in escrow while those funds are in the course of collection or while those funds are on deposit in a depository institution if such loss or loss of value or impairment results from the failure, insolvency or suspension of a depository institution;

(d) Any defects or conditions of title to any property that is the subject of this Agreement provided, however, that this limitation of liability shall not affect the liability of Chicago Title & Trust Company under any title insurance policy which it has issued or may issue. NOTE: No title insurance liability is created by this Agreement.

(e) Escrow Agent’s compliance with any legal process including but not limited to, subpoena, writs, orders, judgments and decrees of any court whether issued with or without jurisdiction and whether or not subsequently vacated, modified, set aside or reversed.

9. HOLD HARMLESS. Buyer and Seller shall indemnify the Escrow Agent and hold the Escrow Agent harmless from all damage, costs, claims and expenses arising from performance of its duties as Escrow Agent including reasonable attorneys’ fees, except for those damages, costs, claims and expenses resulting form the gross negligence or willful misconduct of the Escrow Agent.

10. TERMINATION. This Agreement shall terminate upon the first to occur of (a) one year from the date hereof, in which event Escrow Agent shall disburse the Escrow Fund to the person who deposited such funds, less Escrow Agent’s fees and expenses, unless this Agreement is extended by written agreement of all parties including the Escrow Agent; (b) the disbursement by Escrow Agent of all of the Escrow Fund; (c) the joint written instructions of Buyer and Seller.

A-3

11. RELEASE OF PAYMENT. Payment of the funds so held in escrow by the Escrow Agent, in accordance with the terms, conditions and provisions of this Escrow Agreement, shall fully and completely discharge and exonerate the Escrow Agent from any and all future liability or obligations of any nature or character at law or equity to the parties hereto or under this Agreement.

12. NOTICES.


SELLER:
		COST PLUS, INC.
		200 Fourth Street
		Oakland, California 94607
		Telephone: (510) 808-9119
		Facsimile: (510) 893-3084
		Attn: Tom Willardson

With a copy to:
		Cooper, White & Cooper LLP
		201 California Street, 17^th Floor
		San Francisco, CA 94111
		Telephone: (415) 433-1900
		Facsimile: (415) 433-5530
		Attn: Beau Simon

With a copy to:
		Williams Mullen
		222 Central Park Avenue
		Suite 1700
		Virginia Beach, VA 23462
		Telephone: (757) 473-5387
		Facsimile: (757) 473-0395
		Attn: William W. Harrison, Jr.

BUYER:
		INLAND REAL ESTATE ACQUISITIONS, INC.
		2901 Butterfield Road
		Oak Brook, IL 60523
		Telephone: (630) 218-4948
		Facsimile: (630) 218-4935
		Attn: G. Joseph Cosenza

A-4


With a copy to:
		Gary Pechter, Esq.
		The Inland Real Estate Group, Inc.
		2901 Butterfield Road
		Oak Brook, IL 60523
		Telephone: (630) 645-2084
		Facsimile: (630) 218-4900

ESCROW AGENT:
		CHICAGO TITLE & TRUST COMPANY
		171 North Clark Street
		Div. II, 3^rd Floor
		Chicago, IL 60601
		Attn: Nancy Castro
		Telephone: 312-223-2709
		Telecopy: 312-223-2108

13. This Agreement shall be binding upon and inure to the benefit of the parties respective successors and assigns.

14. This Agreement shall be governed by and construed in accordance with the Laws of the Commonwealth of Virginia.

15. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which, when taken together, shall constitute but one and the same instrument.

16. Time shall be of the essence of this Agreement and each and every term and condition hereof.

17. In the event a dispute arises between Buyer and Seller under this Agreement, the losing party shall pay the attorney’s fees and court costs of the prevailing party.

IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed and sealed as of the date first stated above.


Date: , 2006	SELLER: COST PLUS, INC., a California corporation

	By:
		Name:	Tom Willardson
		Title:	Executive Vice President and Chief Financial Officer

A-5


Date: , 2006	BUYER: INLAND REAL ESTATE ACQUISITIONS, INC., an Illinois corporation

	By:
		Name:	G. Joseph Cosenza
		Title:	President

Date: , 2006	ESCROW AGENT: CHICAGO TITLE & TRUST COMPANY

	By:
		Name:
		Title:

	By:
		Name:
		Title:

A-6

EXHIBIT B-1

LEGAL DESCRIPTION OF IMPROVED LAND

ALL THAT certain parcel of land lying, situate and being in Windsor District, Isle of Wight County, Virginia, being designated as Parcel 4 containing 81.852 acres as shown on that certain plat entitled, “PLAT SHOWING A CONSOLIDATION OF PARCELS 2A AND 3, SHIRLEY T. HOLLAND INDUSTRIAL PARK AND 34.520 ACRES OF LAND FORMING PARCEL 4, SHIRLEY T. HOLLAND INDUSTRIAL PARK, WINDSOR DISTRICT, ISLE OF WIGHT COUNTY, VIRGINIA”, dated May 3, 2004, and recorded May 14, 2004, in the Clerk’s Office of the Circuit Court of Isle of Wight County, Virginia in Plat Cabinet 2, Slide 119, Pages 8 and 9.

IT BEING the same property conveyed to Cost Plus, Inc., a California corporation by deeds from the Industrial Development Authority of Isle of Wight County, a political subdivision of the Commonwealth of Virginia, dated May 14, 2004, and recorded as Instrument Number 040003244, and GEM Big Bethel, L.L.C., a Virginia limited liability company, dated May 14, 2004, and recorded May 14, 2004 as Instrument Number 040003243, and Isle of Wight County, Virginia, a political subdivision of the Commonwealth of Virginia, dated May 14, 2004, and recorded May 14, 2004 as Instrument Number 040003246.

B-1

EXHIBIT B-2

LEGAL DESCRIPTION OF FRANZ PROPERTY

ALL THAT certain parcel of land lying, situate and being in Windsor District, Isle of Wight County, Virginia, being designated as Parcel 5, containing 2.362 acres as shown on that certain plat entitled, “PLAT SHOWING A CONSOLIDATION OF THREE PARCELS OF LAND CONTAINING A TOTAL OF 2.362 ACRES FORMING PARCEL 5, SHIRLEY T. INDUSTRIAL PARK”, dated May 26, 2004, and recorded July 13, 2004, in the Clerk’s Office of the Circuit Court of Isle of Wight County (the “Clerk’s Office”) in Plat Cabinet 2, Slide 121, Page 17.

IT BEING the same property conveyed to Cost Plus, Inc., a California corporation by deed from the Industrial Development Authority of Isle of Wight County, a political subdivision of the Commonwealth of Virginia, dated May 14, 2004, and recorded May 14, 2004 as Instrument Number 040003244, and Maureen V. Franz, dated July 12, 2004, recorded July 13, 2004 as Instrument Number 040004825.

B-2

EXHIBIT C

PERMITTED TITLE EXCEPTIONS

1. Taxes and assessments for the current fiscal year or tax period in which the Closing occurs and subsequent years not yet due and payable.

2. Such state of facts which would are shown by the Survey.

3. Other title exceptions listed in Buyer’s Title Commitment or of public record.

EXHIBIT D

FORM OF SPECIAL WARRANTY DEED

SPECIAL WARRANTY DEED


Tax Parcel No. _____________		Prepared by:
Consideration: $52,275,000		Williams, Mullen
		222 Central Park Avenue
		Suite 1700
		Virginia Beach, VA 23462

THIS DEED, made this day of , 2006, by and between COST PLUS, INC., a California corporation, to be indexed as grantor (the “Grantor”), and INLAND REAL ESTATE ACQUISITIONS, INC., an Illinois corporation, to be indexed as grantee (the “Grantee”), provides as follows:

W I T N E S S E T H :

That for and in consideration of the sum of Ten Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Grantor does hereby grant and convey unto the Grantee with SPECIAL WARRANTY of Title, the following described real estate, to-wit:

D-1

This conveyance is made expressly subject to recorded restrictions, conditions and easements affecting said real estate of record.

[SIGNATURES COMMENCE ON THE FOLLOWING PAGE]

D-2

WITNESS the following signature and seal pursuant to due corporate authority:


COST PLUS, INC.,
a California corporation

By:		[SEAL]
Name:	Thomas D. Willardson
Title:	Executive Vice President and Chief Financial Officer

STATE OF CALIFORNIA

OF , to-wit:

The foregoing deed was acknowledged before me, the undersigned Notary Public, in my jurisdiction aforesaid, this day of , 200_, by Thomas D. Willardson as Executive Vice President and Chief Financial Officer of Cost Plus, Inc., a California corporation, on behalf of the corporation.

My Commission expires: .

__________________________________________________

D-3

EXHIBIT D-1

FORM OF SPECIAL WARRANTY DEED

SPECIAL WARRANTY DEED


Tax Parcel No. _____________		Prepared by:
Consideration: $52,275,000		Williams, Mullen
		222 Central Park Avenue
		Suite 1700
		Virginia Beach, VA 23462

THIS DEED, made this day of , 2006, by and between COST PLUS, INC., a California corporation, to be indexed as grantor (the “Grantor”), and [Insert name of Buyer’s designated affiliate], an Illinois , to be indexed as grantee (the “Grantee”), provides as follows:

W I T N E S S E T H :

This conveyance is made expressly subject to recorded restrictions, conditions and easements affecting said real estate of record.

[SIGNATURES COMMENCE ON THE FOLLOWING PAGE]

D-4

WITNESS the following signature and seal pursuant to due corporate authority:


COST PLUS, INC.,
a California corporation

By:		[SEAL]
Name:	Thomas D. Willardson
Title:	Executive Vice President and Chief Financial Officer

STATE OF CALIFORNIA

OF , to-wit:

My Commission expires: .

__________________________________________________

D-5

EXHIBIT E

TRANSFEROR’S CERTIFICATION OF NON-FOREIGN STATUS

To inform INLAND REAL ESTATE ACQUISITIONS, INC., an Illinois corporation (“Transferee”), that withholding of tax under Section 1445 of the Internal Revenue Code of 1986, as amended (the “Code”), will not be required upon the transfer to Transferee by COST PLUS, INC., a California corporation (“Transferor”), of certain real property, located in Isle of Wight County, Commonwealth of Virginia, Transferor hereby certifies to Transferee:

1. Transferor is not a foreign corporation, foreign partnership, foreign trust, or foreign estate (as those terms are defined in the Code and the regulations promulgated thereunder);

2. Transferor’s U.S. tax identification number is ; and

3. Transferor’s office address is 200 4^th Street, Oakland, CA 94607.

Transferor understands that this Certification may be disclosed to the Internal Revenue Service by Transferee and that any false statement contained herein could be punished by fine, imprisonment, or both.

Transferor understands that Transferee is relying on this Certification in determining whether withholding is required upon said transfer.

Under penalty of perjury, the undersigned declares that this Certification is true and correct.

Executed as of , 2006.


COST PLUS, INC., a California corporation

By:
Name:		Thomas D. Willardson
Title:		Executive Vice President and Chief Financial Officer

E-1

EXHIBIT F

GENERAL ASSIGNMENT

THIS ASSIGNMENT is made as of the day of , 2006, by COST PLUS, INC., a California corporation (“Assignor”), to INLAND REAL ESTATE ACQUISITIONS, INC., an Illinois corporation (“Assignee”).

W I T N E S S E T H:

WHEREAS, contemporaneously with the execution and delivery of this Assignment, Assignor has sold, conveyed and assigned to Assignee all of its right, title and interest in and to the real property described in Exhibit A attached hereto and by this reference made a part hereof, together with all improvements thereon (the “Improvements”) and all rights, easements and appurtenances thereto (hereinafter collectively referred to as the “Property”); and

WHEREAS, Assignor has agreed to assign to Assignee all of Assignor’s right, title and interest in and to all assignable guaranties and warranties in connection with the Improvements and to certain property, contract rights and other matters more fully described below subject to the terms and conditions hereinafter set forth.

NOW, THEREFORE, for and in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Assignor, subject to the terms hereof, hereby assigns, transfers, and sells to Assignee, without recourse, the following:

(1) All Assignor’s right, title, and interest in and to all transferable architectural, mechanical, engineering, and other plans and specifications, including site plans, floor plans, drawings, schematics, and surveys, relating to the Property;

(2) All transferable certificates, permissions, consents, authorizations, variances, waivers, licenses, approvals, and other permits from any governmental authority in respect of the Property;

(3) All the right, title, interest, claim and demand which Assignor has in the guaranties and warranties described on Exhibit B attached hereto and incorporated herein by this reference (collectively, the “Warranties”) in connection with the Improvements to the extent assignable. Notwithstanding anything to the contrary contained herein, if any Warranty cannot be assigned by Assignor, Assignor agrees to fully cooperate with Assignee (at no cost to Assignor) to enforce the terms of the Warranty on behalf of Assignee.

Notwithstanding anything to the contrary contained herein, this Assignment (a) shall not apply to any portion of the Warranties or other rights or instruments described herein which apply to Improvements not located on the Property and (b) shall be subject and subordinate to Assignor’s assignment, if any, of any Warranties or other rights or instruments described herein to any tenants of the Property under leases with Assignor as of the date hereof.

F-1

IN WITNESS WHEREOF, Assignor has duly executed this Assignment the day and year first above written.

ASSIGNOR:


COST PLUS, INC., a California corporation

By:
Name:		Tom Willardson
Title:		Executive Vice President and Chief Financial Officer

F-2

EXHIBIT A TO ASSIGNMENT OF GUARANTIES AND WARRANTIES

PARCEL 1:

PARCEL 2:

F-3

EXHIBIT B TO GENERAL ASSIGNMENT

GUARANTIES AND WARRANTIES

EXHIBIT G

LEASE AGREEMENT

F-4

EX-10.2 3 dex102.htm SECOND AMENDED AND RESTATED EMPLOYMENT SEVERANCE AGREEMENT Second Amended and Restated Employment Severance Agreement

Exhibit 10.2

SECOND AMENDED AND RESTATED EMPLOYMENT SEVERANCE AGREEMENT

This Second Amended and Restated Employment Severance Agreement (the “Agreement”) is made and entered into effective as of 4/17/06 (the “Effective Date”), by and between Jane Baughman (the “Employee”) and Cost Plus, Inc. (the “Company”).

R E C I T A L S

A. The Company desires to retain the services of the Employee, and the Employee desires to be employed by the Company, on the terms and subject to the conditions set forth in this Agreement.

B. The Board of Directors of the Company (the “Board”) believes the Company should provide the Employee with certain severance benefits should the Employee’s employment with the Company terminate under certain circumstances, such benefits to provide the Employee with enhanced financial security and sufficient incentive and encouragement to remain with the Company.

C. This Agreement amends and restates the Amended and Restated Employment Severance Agreement dated April 29, 2005 between the Company and the Employee.

D. Certain capitalized terms used in the Agreement are defined in Section 6 below.

AGREEMENT

In consideration of the mutual covenants herein contained, and in consideration of the continuing employment of the Employee by the Company, the Amended and Restated Employment Severance Agreement is hereby amended and restated in its entirety as set forth herein, and the parties further agree as follows:

1. Duties and Scope of Employment. The Company shall employ the Employee in the position of Vice President of Finance 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 6(d) of this Agreement, the Employee shall be entitled to benefits upon such Involuntary Termination as provided under this Agreement.

2. At-Will Employment. The Company and the Employee acknowledge that the Employee’s employment is and shall continue to be at-will, as defined under applicable law. If the Employee’s employment terminates for any reason, the Employee 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 Employee. 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. Unless the Employee is entitled to benefits under Section 3(b) of this Agreement, if the Employee’s employment terminates as a result of Involuntary Termination prior to June 15, 2007 and the Employee signs and does not revoke a Release of Claims, then the Company shall pay the Employee’s Base Compensation on a salary continuation basis in accordance with the Company’s normal payroll practices to the Employee for six (6) months from the Termination Date. The Employee shall not be entitled to receive any payments if Employee 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 Employee’s employment terminates as a result of Involuntary Termination prior to June 15, 2007 and the Employee signs and does not revoke a Release of Claims, then the Company shall pay the Employee’s Base Compensation on a salary continuation basis in accordance with the Company’s normal payroll practices to the Employee for six (6) months from the Termination Date. The Employee shall not be entitled to receive any payments if the Employee voluntarily terminates employment other than as a result of an Involuntary Termination.

(c) Stock Options; Bonus. Unless otherwise provided in the Company’s stock option plans or in the Employee’s stock option agreements, the Employee shall not be entitled to acceleration of any unvested stock options or partial bonus payments for an incomplete bonus plan year upon the termination of the Employee’s employment for any reason, including an Involuntary Termination.

(d) Miscellaneous. In addition to the benefits described in Section 3(a) or Section 3(b) of this Agreement, upon the termination of the Employee’s employment, (i) the Company shall pay the Employee any unpaid base salary due for periods prior to the Termination Date; (ii) the Company shall pay the Employee all of the Employee’s accrued and unused vacation through the Termination Date; and (iii) following submission of proper expense reports by the Employee, the Company shall reimburse the Employee for all expenses reasonably and necessarily incurred by the Employee in connection with the business of the Company prior to the Termination Date. These payments shall be made promptly upon termination and within the period of time mandated by applicable law.

4. Limitation on Payments.

(a) Code Section 409A. If the Company reasonably determines that Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) will result in the imposition of additional tax to an earlier payment of the severance and other benefits provided in this Agreement or otherwise payable to the Employee, then the first six (6) months of the Employee’s

-2-

severance benefits under Section 3 of this Agreement will accrue during the six (6)-month period following the Employee’s termination and will become payable in a lump sum payment on the date that is six (6) months and one (1) day following the date of the Employee’s termination of employment. The remaining severance benefits will be payable as provided in Section 3 of this Agreement.

(b) Code Section 280G. In the event that the severance and other benefits provided for in this Agreement or otherwise payable to the Employee (i) constitute “parachute payments” within the meaning of Section 280G of the Code and (ii) but for this Section 4, would be subject to the excise tax imposed by Section 4999 of the Code, then the Employee’s severance benefits under Section 3(b) of this Agreement shall be either:

(i) delivered in full, or

(ii) delivered as to such lesser extent which would result in no portion of such severance benefits being subject to excise tax under Section 4999 of the Code,

whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999 of the Code, results in the receipt by the Employee on an after-tax basis, of the greatest amount of severance benefits, notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code. Unless the Company and the Employee otherwise agree in writing, any determination required under this Section 4 shall be made in writing by the Company’s independent public accountants immediately prior to Change of Control (the “Accountants”), whose determination shall be conclusive and binding upon the Employee and the Company for all purposes. For purposes of making the calculations required by this Section 4, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Employee shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 4.

5. Non-Solicitation. In consideration for the mutual agreements as set forth herein, the Employee agrees that the Employee shall not, at any time, within twelve (12) months following termination of the Employee’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.

6. Definition of Terms. The following terms referred to in this Agreement shall have the following meanings:

(a) Base Compensation. “Base Compensation” means the Employee’s monthly base salary paid by the Company for services performed calculated as the average base salary for the six (6) months completed prior to the Termination Date. If the Employee has not been employed by the Company for six (6) complete months prior to the Termination Date, Base Compensation shall be calculated as the average base salary for the period of the Employee’s employment.

-3-

(b) Cause. “Cause” means the Employee’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 the Employee’s personal enrichment or (iv) willful violation of any material law, rule or regulation in connection with the performance of duties.

(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 (2)-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.

-4-

(d) Involuntary Termination. “Involuntary Termination” means:

(i) termination of the Employee’s employment by the Company for any reason other than Cause;

(ii) a material reduction in the Employee’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 the Employee is entitled immediately prior to such reduction with the result that the Employee’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 thirty (30) days following notice thereof; or

(v) a material reduction in the Employee’s titles, duties, responsibilities, or authority;

provided that none of the foregoing shall constitute Involuntary Termination to the extent Employee has agreed thereto. Any purported Involuntary Termination pursuant to Section 6(d)(ii) through 6(d)(v) will not be effective until the Employee has delivered to the Company a written explanation which describes the basis for the Employee’s belief that the Employee should be permitted to terminate her employment and have it treated as an Involuntary Termination and the Company has been given thirty (30) days to cure any curable violation.

(e) Release of Claims. “Release of Claims” shall mean a waiver by Employee, 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 that 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.

(g) Management Incentive Plan. “Management Incentive Plan” shall mean the Company’s bonus program, as implemented by the Company’s board of directors from time to time and pursuant to which the Employee may receive incentive-based compensation at fiscal year end.

7. Confidentiality. The Employee acknowledges that during the course of the Employee’s employment, the Employee 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 the Employee’s employment by the Company, the Employee 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,

-5-

documents, equipment, and the like, or copies thereof, relating to the Company’s business, or the business of an affiliated company, which the Employee 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.

8. 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) Employee’s Successors. The terms of this Agreement and all rights of the Employee hereunder shall inure to the benefit of, and be enforceable by, the Employee’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.

9. 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 Employee, mailed notices shall be addressed to Employee at the home address that the Employee 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 Employee 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 9(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 thirty (30) days after the giving of such notice). The failure by the Employee to include in the notice any fact or circumstance which contributes to a showing of Involuntary Termination shall not waive any right of the Employee hereunder or preclude the Employee from asserting such fact or circumstance in enforcing Employee’s rights hereunder.

-6-

10. Miscellaneous Provisions.

(a) Non-Disparagement. The Employee agrees to refrain from any defamation, libel or slander of the Company and its respective officers, directors, employees, investors, shareholders, administrators, affiliates, divisions, subsidiaries, predecessor and successor corporations, and assigns or tortious interference with the contracts and relationships of the Company and its respective officers, directors, employees, investors, shareholders, administrators, affiliates, divisions, subsidiaries, predecessor and successor corporations, and assigns. The Employee acknowledges and agrees that any breach of this paragraph shall constitute a material breach of the Agreement and shall entitle the Company immediately to recover all consideration paid under this Agreement, including, but not limited to the consideration described in Section 3.

(b) No Duty to Mitigate. The Employee 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 Employee may receive from any other source.

(c) 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 Employee and by an authorized officer of the Company (other than the Employee). 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.

(d) 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.

(e) Severance Provisions in Other Agreements. The Employee acknowledges and agrees that the severance provisions set forth in this Agreement shall supersede any such provisions in any other agreement entered into between the Employee and the Company.

(f) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California.

(g) 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.

(h) 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.

(i) Employment Taxes. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes.

-7-

(j) Code Section 409A. This Agreement will be deemed amended to the extent necessary to avoid imposition of any additional tax or income recognition prior to actual payment to the Employee under Section 409A of the Code and any temporary, proposed or final Treasury Regulations and guidance promulgated thereunder and the parties agree to cooperate with each other and to take reasonably necessary steps in this regard.

(k) 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 Employee.

(l) 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.

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/ Barry Feld
				By

				CEO
				Title

EMPLOYEE:				/s/ Jane Baughman
				Jane Baughman

-8-

EX-31.1 4 dex311.htm CERTIFICATION OF CEO Certification of CEO

Exhibit 31.1

CERTIFICATION

I, Barry J. Feld, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Cost Plus, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 7, 2006

/s/ BARRY J. FELD

Barry J. Feld

Chief Executive Officer, President

(Principal Executive Officer)

EX-31.2 5 dex312.htm CERTIFICATION OF CFO Certification of CFO

Exhibit 31.2

CERTIFICATION

I, Thomas D. Willardson, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Cost Plus, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 7, 2006

/s/ THOMAS D. WILLARDSON

Thomas D. Willardson

Executive Vice President, Chief Financial Officer

(Principal Financial Officer)

EX-32.1 6 dex321.htm CERTIFICATION OF CEO & CFO Certification of CEO & CFO

Exhibit 32.1

Certification of the Chief Executive Officer

and the Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350,

As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Cost Plus, Inc. (the “Company”) on Form 10-Q for the period ended October 28, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Barry J. Feld, Chief Executive Officer and President of the Company, and Thomas D. Willardson, Executive Vice President and Chief Financial Officer, hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ BARRY J. FELD

Barry J. Feld

Chief Executive Officer, President

(Principal Executive Officer)

December 7, 2006

/s/ THOMAS D. WILLARDSON

Thomas D. Willardson

Executive Vice President,

Chief Financial Officer

(Principal Financial Officer)

December 7, 2006

-----END PRIVACY-ENHANCED MESSAGE-----

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents