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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 15, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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COST PLUS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 94-1067973
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
RALPH D. DILLON
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
COST PLUS, INC.
201 CLAY STREET 201 CLAY STREET
OAKLAND, CALIFORNIA 94607 OAKLAND, CALIFORNIA 94607
(510) 893-7300 (510) 893-7300
(ADDRESS, INCLUDING ZIP CODE, AND (NAME, ADDRESS, INCLUDING ZIP CODE, AND
TELEPHONE NUMBER, INCLUDING AREA TELEPHONE NUMBER, INCLUDING AREA CODE, OF
CODE, OF REGISTRANT'S PRINCIPAL AGENT FOR SERVICE)
EXECUTIVE OFFICES)
COPIES TO:
HENRY P. MASSEY, JR. ESQ. PETER LILLEVAND, ESQ.
PETER S. HEINECKE, ESQ. IAIN MICKLE, ESQ.
WADY H. MILNER, ESQ. DAVID C. RITCHEY, ESQ.
WILSON SONSINI GOODRICH & ROSATI ORRICK, HERRINGTON & SUTCLIFFE LLP
PROFESSIONAL CORPORATION OLD FEDERAL RESERVE BANK BUILDING
650 PAGE MILL ROAD 400 SANSOME STREET
PALO ALTO, CA 94304 SAN FRANCISCO, CALIFORNIA 94111
(650) 493-9300 (415) 392-1122
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration
Statement.
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
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<S> <C> <C> <C> <C>
Common Stock, $0.01 par
value................. 3,130,300 shares $26.57 $83,172,071 $25,204
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</TABLE>
(1) Includes 408,300 shares that the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(c) as of September 9, 1997.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
SEPTEMBER 15, 1997
2,722,000 Shares
[LOGO OF COST PLUS WORLD MARKET]
Common Stock
-----------
Of the 2,722,000 shares of Common Stock offered hereby, 400,000 shares are
being offered by Cost Plus, Inc. ("Cost Plus" or the "Company") and 2,322,000
shares are being offered by certain shareholders of the Company (the "Selling
Shareholders"). The Company will not receive any proceeds from the sale of
shares by the Selling Shareholders. See "Principal and Selling Shareholders."
The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol CPWM. On September 12, 1997, the last reported sale price for the Common
Stock was $27.125 per share. See "Price Range of Common Stock."
-----------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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UNDERWRITING
PRICE DISCOUNTS PROCEEDS PROCEEDS TO
TO AND TO SELLING
PUBLIC COMMISSIONS COMPANY (1) SHAREHOLDERS
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<S> <C> <C> <C> <C>
Per Share......................... $ $ $ $
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Total(2).......................... $ $ $ $
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</TABLE>
(1) Before deducting expenses of the offering payable by the Company, estimated
at $350,000.
(2) Certain of the Selling Shareholders have granted to the Underwriters a 30-
day option to purchase up to 408,300 additional shares of Common Stock
solely to cover over-allotments, if any. To the extent that the option is
exercised, the Underwriters will offer the additional shares at the Price
to Public shown above. If the option is exercised in full, the total Price
to Public, Underwriting Discounts and Commissions, and Proceeds to Selling
Shareholders will be $ , $ and $ , respectively. See
"Underwriting."
-----------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about
, 1997.
BT ALEX. BROWN
WILLIAM BLAIR & COMPANY
MONTGOMERY SECURITIES
ROBERTSON, STEPHENS & COMPANY
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
[Top of cover: Picture of coffee, tea and candy displays beneath a World
Marketplace awning, with wine, pasta and candy displays in the foreground.]
[Bottom left-hand corner of the cover: Picture of various styles of chairs
displayed against a wall under a sign reading "Cost Plus Woodcrafts."]
[Bottom right-hand corner of the cover: Picture of rugs displayed on the wall
and on hanging racks with a couch, chair, side table and coffee table in the
foreground.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON
STOCK FOLLOWING THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON
STOCK OR MAINTAIN THE PRICE OF THE COMMON STOCK, AND THE IMPOSITION OF PENALTY
BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements and notes thereto
appearing elsewhere in this Prospectus. As used in this Prospectus, "fiscal
1992," "fiscal 1993," "fiscal 1994," "fiscal 1995" and "fiscal 1996" refer to
the fiscal years ended February 27, 1993, February 26, 1994, February 25, 1995,
February 3, 1996 and February 1, 1997, respectively, and "fiscal 1997" and
"fiscal 1998" refer to the fiscal years ending January 31, 1998 and January 30,
1999, respectively. The Company changed its 1995 fiscal year end from February
25, 1996 to February 3, 1996 and, as a result, fiscal 1995 was an 11-month
period. "Pro forma fiscal 1995" refers to the 12-month period ended February 3,
1996.
THE COMPANY
Cost Plus is a leading specialty retailer of casual home living and
entertaining products. As of September 15, 1997, the Company operated 66 stores
under the name "Cost Plus World Market" in 12 states. Cost Plus' business
strategy is to differentiate itself by offering a large and ever-changing
selection of unique products, many of which are imported, at competitive prices
in an exciting shopping environment. Many of Cost Plus' products are
proprietary or private label, often incorporating the Company's own designs,
"World Market" brand name, quality standards and specifications, and typically
are not available at department stores and other specialty retailers.
Cost Plus targets its product offerings to reflect broad consumer trends
which include an emphasis on more casual lifestyles, an increased investment in
the home and a greater focus on value. The Company's product offerings are
designed to provide solutions to customers' casual living and home entertaining
needs. The offerings include home decorating items such as furniture and rugs
as well as a variety of tabletop and kitchen products. Cost Plus stores also
offer a number of gift and decorative accessories including collectibles,
cards, wrapping paper and other seasonal items. In addition, Cost Plus offers
its customers a wide selection of gourmet foods and beverages, including wine,
micro-brewed and imported beer, coffee and tea.
The Company strives to create an exciting shopping experience by implementing
its merchandising strategy in a unique store environment. The Company's stores
average approximately 16,000 selling square feet. The stores are designed to
evoke the feeling of a "marketplace" through colorful and creative visual
displays and merchandise presentations, including goods in open barrels and
baskets, groupings of related products in distinct "shops" within the store,
and in-store activities such as cooking demonstrations and food and coffee
tastings. The Company believes that this marketplace environment provides
customers with a fun shopping experience and encourages browsing throughout the
store. In addition, the Company frequently changes its merchandise and visual
displays in order to promote a sense of discovery and to encourage repeat
shopping.
A significant portion of Cost Plus' products are made abroad in over 50
countries, and many of these goods are handcrafted by local artisans. Since its
founding, the Company has established a well developed overseas sourcing
network and enjoys long-standing relationships with many of its vendors. The
Company is committed to providing value to its customers through competitive
everyday prices complemented by selected promotions. Cost Plus' value image is
reinforced by the Company's trademark slogan, "Cost Plus--Where you can afford
to be different."
Cost Plus' expansion strategy is to open stores primarily in metropolitan and
suburban markets that can support multiple stores and enable the Company to
achieve advertising, distribution and operating efficiencies. The Company may
also selectively enter mid-size markets which can support one or two stores
that the Company believes can meet its profitability criteria. Cost Plus stores
are located predominantly in high traffic metropolitan and suburban locales,
often near major malls. The Company operates stores located primarily in the
Western United States, but recently has begun to expand into other regions of
the country. In fiscal 1996, the Company opened a total of nine stores,
including stores in new markets in Texas and Illinois. The Company anticipates
opening a total of 12 stores in fiscal 1997, primarily in existing markets and
in new markets in Wisconsin and Michigan. The Company anticipates opening
approximately 15 stores in fiscal 1998.
3
<PAGE>
THE OFFERING
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<C> <S>
Common Stock offered by the Company hereby.......... 400,000 shares
Common Stock offered by the Selling Shareholders
hereby............................................. 2,322,000 shares
Common Stock to be outstanding after the offering... 8,610,502 shares(/1/)
Use of proceeds..................................... Store expansion, working
capital and general
corporate purposes
Nasdaq National Market symbol....................... CPWM
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
PRO FORMA
FISCAL YEAR ELEVEN MONTH TWELVE MONTH SIX MONTHS ENDED
---------------------------- PERIOD ENDED PERIOD ENDED FISCAL -------------------
FEBRUARY 3, FEBRUARY 3, YEAR AUGUST 3, AUGUST 2,
1992 1993 1994 1996(2) 1996(2) 1996 1996 1997
-------- -------- -------- ------------ ------------ -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales.............. $121,785 $133,864 $151,196 $171,548 $182,845 $214,814 $79,113 $95,819
Gross profit........... 43,441 48,526 55,588 63,748 67,329 79,742 27,787 33,455
Income from opera-
tions................. 5,341 6,541 7,890 11,934 11,599 15,040 381 1,271
Interest expense....... 4,917 4,851 4,862 4,843 5,131 2,451 1,384 781
Net income (loss)...... $ 151 $ 965 $ 1,817 $ 4,182 $ 3,816 $ 7,427 $ (592) $ 294
Net income (loss) per
common and common
equivalent share...... $ 0.68 $ 0.62 $ 0.92 $(0.08) $ 0.03
Weighted average common
and common equivalent
shares outstanding.... 6,153 6,153 8,105 7,733 8,489
OPERATING DATA:
Number of stores:
Opened during period... -- 3 5 6 6 9 3 2
Closed during period... 1 -- 3 -- -- -- -- --
Open at end of period.. 38 41 43 49 49 58 52 60
Average sales per
selling square
foot(3)............... $ 199 $ 213 $ 224 $ 228 $ 238 $ 252 $ 98 $ 100
Comparable store sales
increase(4)........... 7.4% 6.7% 7.7% 6.6% 6.1% 6.1% 4.8% 7.3%
</TABLE>
<TABLE>
<CAPTION>
AUGUST 2, 1997
--------------------
AS
ACTUAL ADJUSTED(5)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $ 24,960 $ 34,904
Total assets.............................................. 123,682 133,626
Capital lease obligations, less current portion........... 13,980 13,980
Total shareholders' equity................................ 74,308 84,252
</TABLE>
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(1) Excludes 912,146 shares of Common Stock issuable upon exercise of stock
options outstanding at August 2, 1997 under the Company's stock option
plans. Subsequent to August 2, 1997, the Company granted options to
purchase an additional 254,000 shares of Common Stock.
(2) The Company changed its 1995 fiscal year end from February 25, 1996 to
February 3, 1996 and, as a result, fiscal 1995 was an 11 month (49 week)
period. The pro forma twelve month period ended February 3, 1996 was a 54
week period.
(3) Calculated using net sales for stores open during the entire period divided
by the selling square feet of such stores.
(4) A store is included in comparable comparisons at the beginning of the
store's fourteenth full month of operation.
(5) Adjusted to reflect the sale by the Company of the 400,000 shares of Common
Stock offered hereby at an assumed public offering price of $27.125 per
share, after deducting underwriting discounts and commissions and estimated
offering expenses and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."
4
<PAGE>
RISK FACTORS
This Prospectus, including the documents incorporated by reference herein,
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), including
statements that include the words "believes," "expects" or "anticipates" or
similar expressions. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause actual results,
performance or achievements of the Company to differ materially from those
expressed or implied by such forward-looking statements. Such factors include,
among others, the risk factors discussed below and elsewhere in this
Prospectus and in documents which are incorporated by reference herein. In
analyzing an investment in the securities offered hereby, prospective
investors should carefully consider, together with the other matters referred
to herein, the risk factors described below. The Company cautions the reader,
however, that this list of risk factors may not be exhaustive.
Seasonality and Quarterly Fluctuations. The Company's business is highly
seasonal, reflecting the general pattern associated with much of the retail
industry of peak sales and earnings during the Christmas season. Due to the
importance of the Christmas selling season, the fourth quarter of each fiscal
year has historically contributed, and the Company expects it will continue to
contribute, a disproportionate percentage of the Company's net sales and most
of its net income for the entire fiscal year. Any factors negatively affecting
the Company during the Christmas selling season in any year, including
unfavorable economic conditions, could have a material adverse effect on the
Company's financial condition and results of operations. In addition, the
Company makes decisions regarding merchandise well in advance of the season in
which it will be sold, particularly for the Christmas selling season.
Significant deviations from projected demand for products could have a
material adverse effect on the Company's financial condition and results of
operations, either by lost sales due to insufficient inventory or lost margin
due to the need to markdown excess inventory.
The Company's quarterly results of operations may fluctuate based upon such
factors as the number and timing of store openings and related preopening
store expenses, the amount of net sales contributed by new and existing
stores, the mix of products sold, the timing and level of markdowns, store
closings, refurbishments or relocations, competitive factors and general
economic conditions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Quarterly Results and Seasonality."
Risks Associated with Expansion. The Company's ability to continue to
increase its net sales and earnings will depend in part on its ability to open
new stores and to operate such stores on a profitable basis. The Company's
continued growth will also depend on its ability to increase sales in its
existing stores. The Company opened nine stores in fiscal 1996 and presently
anticipates opening a total of 12 stores in fiscal 1997 and approximately 15
stores in fiscal 1998. The Company intends to open stores in both existing and
new geographic markets. The opening of additional stores in an existing market
could result in lower net sales from existing Company stores in that market.
The success of the Company's planned expansion will be dependent upon many
factors, including the identification of suitable markets, the availability
and leasing of suitable sites on acceptable terms, the hiring, training and
retention of qualified management and other store personnel, the availability
of appropriate financing and general economic conditions. To manage its
planned expansion, the Company must ensure the continuing adequacy of its
existing systems and procedures, including product distribution facilities,
store management, financial controls and information systems. There can be no
assurance that the Company will be able to achieve its planned expansion, that
new stores will be effectively integrated into the Company's existing
operations or that such stores will be profitable.
The Company's expansion strategy includes opening stores in new geographic
markets. These new markets may present competitive and merchandising
challenges that are different from those currently faced by the Company in its
existing geographic markets. The Company may incur higher costs related to
5
<PAGE>
advertising and distribution in connection with entering new markets. If the
Company opens stores in new markets that do not perform to the Company's
expectations or if store openings are delayed, the Company's financial
condition and results of operations could be materially adversely affected. In
addition, in order to sell wine and beer, the Company is required to obtain
alcoholic beverage licenses for each of its new stores and the laws regulating
the issuance of alcoholic beverage licenses differ from state to state. Any
delays in receiving alcoholic beverage licenses for new stores could have an
adverse impact on such stores' operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business--
Growth Strategy."
Risks Associated with Merchandising. The Company's success depends in part
upon the ability of its merchandising staff to anticipate the tastes of its
customers and to provide merchandise that appeals to their preferences. The
Company's strategy requires it to introduce in a timely manner products from
around the world that are affordable, distinctive in quality and design, and
not widely available from other retailers. Many of the Company's products
require long lead times. In addition, a large percentage of the Company's
merchandise changes regularly. The Company's failure to anticipate, identify
or react appropriately to changes in consumer trends could lead to, among
other things, either excess inventories and higher markdowns or a shortage of
products and could have a material adverse effect on the Company's financial
condition and results of operations. See "Business--Merchandising."
Effect of Economic Conditions and Geographic Concentration. The success of
the Company's business depends to a significant extent upon the level of
consumer spending. Among the factors that affect consumer spending are the
general state of the economy, the level of consumer debt and consumer
confidence in future economic conditions. A substantial majority of the
Company's stores are located in the Western United States, principally in
California. Lower levels of consumer spending in these regions could have a
material adverse effect on the Company's financial condition and results of
operations. Reduced consumer confidence and spending may result in reduced
demand for the Company's products, limitations on the Company's ability to
increase prices and may require increased levels of selling and promotional
expenses, thereby adversely affecting the Company's financial condition and
results of operations. See "Business--Store Locations."
Risks Associated with Importing. The Company imports a significant portion
of its merchandise from over 50 countries. The Company relies on its long-term
relationships with its suppliers but has no long-term contracts with such
suppliers. The Company's future success will depend in large measure upon its
ability to maintain its existing supplier relationships or to develop new
ones.
As an importer, the Company's business is subject to the risks generally
associated with doing business abroad, such as foreign governmental
regulations, disruptions or delays in shipments and changes in political or
economic conditions in countries in which the Company purchases products. The
Company's business is also subject to the risks associated with any new or
revised United States legislation and regulations relating to imported
products, including quotas, duties, taxes and other charges or restrictions on
imported merchandise. Since certain of the Company's purchases are made in
currencies other than the U.S. dollar and its financial results are reported
in U.S. dollars, fluctuations in the rates of exchange between the U.S. dollar
and other currencies may have a material adverse effect on the Company's
financial condition and results of operations. Historically, the Company has
not hedged its currency risk and does not currently anticipate doing so in the
future. If any such factors were to render the conduct of business in
particular countries undesirable or impractical, or if additional United
States quotas, duties, taxes or other charges or restrictions were imposed
upon the importation of the Company's products in the future, the Company's
financial condition and results of operations could be materially adversely
affected. See "Business--Product Sourcing and Distribution."
Risks Related to Distribution Facilities. The Company's distribution
functions for all of its stores are currently handled from a single facility
in Stockton, California. Any significant interruption in the operation of this
facility would have a material adverse effect on the Company's financial
condition and results of
6
<PAGE>
operations. In addition, the Company intends to begin ramping up an additional
distribution facility in Indiana in fiscal 1998 to service its Midwest and
Texas stores. A failure to successfully transition its distribution operations
for these stores to the new facility or to coordinate the operations of the
two facilities could have a material adverse effect on the Company's financial
condition and results of operations. See "Business--Product Sourcing and
Distribution."
Competition. The market served by the Company is highly competitive. The
Company competes against a diverse group of retailers ranging from specialty
stores to department stores and wholesale clubs. The Company's product
offerings compete with such specialty retailers as Bed, Bath & Beyond, The
Bombay Company, Crate & Barrel, Lechters, Michaels Stores, Pier 1 Imports,
Pottery Barn, Trader Joe's and Williams-Sonoma. The Company competes with
these and other retailers for customers, suitable retail locations and
qualified management personnel. Many of the Company's competitors have
significantly greater financial, marketing and other resources than the
Company, and there can be no assurance that the Company will be able to
compete successfully in the future. See "Business--Competition."
Dependence on Key Personnel. The success of the Company's business will
continue to depend upon its key personnel, particularly Ralph D. Dillon, Chief
Executive Officer and Chairman of the Board, and Murray H. Dashe, President
and Vice Chairman of the Board. The Company does not maintain any key man life
insurance. The loss of the services of one or more of its key personnel could
have a material adverse effect on the Company's financial condition and
results of operations. The Company's success in the future will be dependent
upon its ability to attract, retain and motivate quality personnel, including
store managers. The Company's inability to attract and retain such key
employees, including store managers, in the future could have a material
adverse effect on the Company's financial condition and results of operations.
See "Management."
Control by Certain Existing Shareholders. Upon completion of this offering,
the Company's executive officers, directors and entities affiliated with
certain of the Company's directors will beneficially own approximately 30.3%
of the outstanding shares of Common Stock (25.8% if the Underwriters' over-
allotment option is exercised in full). As a result, these shareholders,
acting together, would be able to exert substantial influence over the
election of directors and other matters requiring a shareholder vote,
including the amendment of the Company's charter documents, merger or
dissolution of the Company and sale of all or substantially all of the
Company's assets. See "Principal and Selling Shareholders."
Shares Eligible for Future Sale. Substantial sales of the Company's Common
Stock in the public market after this offering could adversely affect the
market price of the Common Stock. Upon completion of this offering, 8,610,502
shares of Common Stock will be outstanding. Holders of 2,407,820 of those
shares, including the Selling Shareholders and the directors and the executive
officers of the Company, have agreed not to sell or otherwise dispose of any
of their shares for 90 days from the date of this Prospectus without the prior
written consent of BT Alex. Brown Incorporated. BT Alex. Brown Incorporated,
at any time and without notice, may release all or any part of the shares from
these restrictions. The remaining 6,202,682 shares will be freely tradeable in
the public market upon completion of this offering.
Possible Volatility of Stock Price. The stock market has from time to time
experienced significant price and volume fluctuations that are unrelated to
the operating performance of particular companies. These broad market
fluctuations may adversely affect the market price of the Company's Common
Stock. In addition, the market price of the shares of Common Stock is likely
to be highly volatile. Factors such as fluctuations in the Company's operating
results, a downturn in the retail industry, changes in stock market analysts'
recommendations regarding the Company, other retail companies or the retail
industry in general and general market and economic conditions may have a
significant effect on the market price of the Company's Common Stock.
7
<PAGE>
Effect of Certain Charter and By-law Provisions. Certain provisions of the
Company's Restated Articles of Incorporation and By-laws 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 the Company's Common Stock. Certain of these
provisions allow the Company 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.
8
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 400,000 shares of
Common Stock offered by it hereby are estimated to be $9.9 million, at an
assumed public offering price of $27.125 per share and after deducting
underwriting discounts and commissions and estimated offering expenses. The
Company intends to use the net proceeds for store expansion, working capital
and other general corporate purposes. Pending such uses, the Company intends
to invest the net proceeds from this offering in short-term, investment-grade,
interest-bearing instruments. The Company will not receive any of the proceeds
from the sale of shares of Common Stock by the Selling Shareholders.
DIVIDEND POLICY
The Company intends to retain any future earnings for funding growth and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "CPWM." The following table sets forth for the periods indicated the
high and low closing prices for the Common Stock as reported on the Nasdaq
National Market.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL 1996
First Quarter (from April 4, 1996)....................... $24.38 $18.25
Second Quarter........................................... 30.50 19.88
Third Quarter............................................ 27.75 16.25
Fourth Quarter........................................... 21.50 16.00
FISCAL 1997
First Quarter............................................ 18.50 15.00
Second Quarter .......................................... 26.25 16.38
Third Quarter (through September 12, 1997)............... 28.25 23.75
</TABLE>
On September 12, 1997, the last reported sale price of the Company's Common
Stock on the Nasdaq National Market was $27.125 per share. As of August 2,
1997, there were approximately 39 holders of record of the Company's Common
Stock, and the number of beneficial holders of the Common Stock was estimated
to be in excess of 1,000.
THE COMPANY
The Company's executive offices are located at 201 Clay Street, Oakland,
California 94607, and its telephone number is (510) 893-7300. The Company was
incorporated in 1946 in California. "Cost Plus" and the "Company" as used in
this Prospectus refer to Cost Plus, Inc. and its consolidated subsidiaries.
"Cost Plus," "Cost Plus World Market" and "Where you can afford to be
different" are registered trademarks of the Company and the "Cost Plus" logo,
the "Cost Plus World Market" logo and the "World Market" logo are trademarks
of the Company. Trademarks of others are also referred to in this Prospectus.
9
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
August 2, 1997, and as adjusted as of such date to give effect to the sale of
the 400,000 shares of Common Stock offered by the Company hereby, at an
assumed public offering price of $27.125 per share and after deducting
underwriting discounts and commissions and estimated offering expenses, and
the application of the estimated net proceeds therefrom:
<TABLE>
<CAPTION>
AUGUST 2, 1997
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Capital lease obligations, less current portion.......... $ 13,980 $ 13,980
Shareholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares au-
thorized; none issued or outstanding.................. -- --
Common stock, $0.01 par value; 30,000,000 shares autho-
rized; 8,210,502 shares issued and outstanding, actu-
al; 8,610,502 shares issued and outstanding, as ad-
justed(1)............................................. 82 86
Additional paid-in capital............................. 91,970 101,910
Accumulated deficit.................................... (17,744) (17,744)
-------- --------
Total shareholders' equity........................... 74,308 84,252
-------- --------
Total capitalization................................. $ 88,288 $ 98,232
======== ========
</TABLE>
- --------
(1) Excludes 912,146 shares of Common Stock issuable upon exercise of stock
options outstanding at August 2, 1997 under the Company's stock option
plans. Subsequent to August 2, 1997, the Company granted options to
purchase an additional 254,000 shares of Common Stock.
10
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
The selected consolidated financial and operating data set forth below is
qualified in its entirety by, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto
included elsewhere in this Prospectus. The statement of operations data set
forth below for fiscal 1994, fiscal 1995 and fiscal 1996 and the consolidated
balance sheet data at the ends of fiscal 1995 and fiscal 1996 are derived from
the consolidated financial statements of the Company included elsewhere in
this Prospectus, which have been audited by Deloitte & Touche LLP. The pro
forma statement of operations data set forth below for pro forma fiscal 1995
is derived from Company records. The statement of operations data for fiscal
1992 and fiscal 1993, and the balance sheet data at the end of fiscal 1992,
fiscal 1993 and fiscal 1994, are derived from audited consolidated financial
statements not included herein. The selected financial data as of and for the
six months ended August 3, 1996 and August 2, 1997 are derived from unaudited
financial statements of the Company included in this Prospectus that have been
prepared on the same basis as the audited financial statements and, in the
opinion of management, contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and results of operations for such periods. Results for interim
periods are not necessarily indicative of results for the entire year.
<TABLE>
<CAPTION>
PRO FORMA
FISCAL YEAR ELEVEN MONTH TWELVE MONTH SIX MONTHS ENDED
---------------------------- PERIOD ENDED PERIOD ENDED FISCAL --------------------
FEBRUARY 3, FEBRUARY 3, YEAR AUGUST 3, AUGUST 2,
1992 1993 1994 1996(1) 1996(1) 1996 1996 1997
-------- -------- -------- ------------ ------------ -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales.............. $121,785 $133,864 $151,196 $171,548 $182,845 $214,814 $ 79,113 $ 95,819
Cost of sales and
occupancy............. 78,344 85,338 95,608 107,800 115,516 135,072 51,326 62,364
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit........... 43,441 48,526 55,588 63,748 67,329 79,742 27,787 33,455
Selling, general and
administrative
expenses.............. 38,100 41,371 46,561 50,194 54,110 62,649 26,566 31,544
Preopening store
expenses.............. -- 614 1,137 1,620 1,620 2,053 840 640
-------- -------- -------- -------- -------- -------- -------- --------
Income from
operations............ 5,341 6,541 7,890 11,934 11,599 15,040 381 1,271
Interest expense....... 4,917 4,851 4,862 4,843 5,131 2,451 1,384 781
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes.......... 424 1,690 3,028 7,091 6,468 12,589 (1,003) 490
Provision for (benefit
from) income taxes.... 273 725 1,211 2,909 2,652 5,162 (411) 196
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $ 151 $ 965 $ 1,817 $ 4,182 $ 3,816 $ 7,427 $ (592) $ 294
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per
common and common
equivalent share...... $ 0.68 $ 0.62 $ 0.92 $ (0.08) $ 0.03
======== ======== ======== ======== ========
Weighted average common
and common equivalent
shares outstanding.... 6,153 6,153 8,105 7,733 8,489
OPERATING DATA:
Number of stores:
Opened during period... -- 3 5 6 6 9 3 2
Closed during period... 1 -- 3 -- -- -- -- --
Open at end of period.. 38 41 43 49 49 58 52 60
Average sales per sell-
ing square foot(2).... $ 199 $ 213 $ 224 $ 228 $ 238 $ 252 $ 98 $ 100
Comparable store sales
increase(3)........... 7.4% 6.7% 7.7% 6.6% 6.1% 6.1% 4.8% 7.3%
BALANCE SHEET DATA (AT
PERIOD END):
Working capital........ $ 7,044 $ 8,180 $ 8,918 $ 11,102 $ 11,102 $ 24,807 $ 19,671 $ 24,960
Total assets........... 86,937 91,860 99,245 105,986 105,986 128,198 110,853 123,682
Note payable and
capital lease
obligations, less
current portion....... 35,311 35,070 34,839 34,528 34,528 14,215 14,424 13,980
Total shareholders' eq-
uity.................. 29,758 30,723 32,542 36,359 36,359 73,209 64,812 74,308
</TABLE>
- -------
(1) The Company changed its 1995 fiscal year end from February 25, 1996 to
February 3, 1996 and, as a result, fiscal 1995 was an 11 month (49 week)
period. The pro forma twelve month period ended February 3, 1996 was a 54
week period.
(2) Calculated using net sales for stores open during the entire period
divided by the selling square feet of such stores.
(3) A store is included in comparable comparisons at the beginning of the
store's fourteenth full month of operation.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains certain forward-looking statements within the
meaning of the federal securities laws. Actual results could differ materially
from those projected in the forward-looking statements due to a number of
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus.
OVERVIEW
Cost Plus opened its first store in 1958 in San Francisco, on the current
site of the Company's flagship Fisherman's Wharf store. Over the next three
decades, the Company grew steadily within the California market, increasing to
25 stores with net sales of approximately $68 million in 1985. In 1987, the
Company underwent a leveraged buyout. Between 1987 and 1990, Cost Plus opened
13 stores in Arizona, California, Colorado, New Mexico and Washington. During
this period, the Company incurred significant losses, primarily as a result of
interest charges on a high level of debt, inadequate merchandise information
systems, a high cost distribution system, and a change in merchandising mix
which reduced gross margins.
Beginning in 1990, the Company recruited a new management team, including
Ralph D. Dillon as Chief Executive Officer. The new management team effected a
significant turnaround, which involved suspension of the store expansion
program and a focus on improving the profitability of the existing store base
by revamping Cost Plus' merchandising and operating strategies. In particular,
the Company developed the "Cost Plus World Market" store format, improved its
merchandising mix, increased store labor productivity, installed centralized
systems and controls, reduced high inventory shrinkage rates, relocated its
distribution center and reduced associated costs, and closed certain under-
performing stores. In addition, Cost Plus significantly reduced its financial
leverage in fiscal 1992 through a recapitalization which included the
conversion of $28.7 million of debt into equity.
As a result of these changes, Cost Plus returned to profitability in fiscal
1992 and commenced a store expansion program, opening 23 stores from fiscal
1992 through fiscal 1996. The Company anticipates opening a total of 12 stores
in fiscal 1997 and approximately 15 stores in fiscal 1998.
The Company believes that it benefits from attractive store level economics.
The Company's average store size is approximately 16,000 selling square feet.
The average investment by the Company for the nine stores opened in fiscal
1996, including leasehold improvements (net of landlord allowances),
equipment, the cost of inventory to furnish the store and preopening store
expenses, was approximately $1.1 million. The average net sales and store
level contribution, as a percentage of net sales (which excludes any
preopening store expenses, advertising, allocated corporate overhead and
interest), for fiscal 1996 was $4.0 million and 19.2%, respectively, for all
stores opened at least 13 months at the end of fiscal 1996.
Effective for the fiscal year ended February 3, 1996, the Company changed
its fiscal year end from the Saturday closest to the end of February to the
Saturday closest to the end of January. The Company's 1995 fiscal year was
approximately 11 months (49 weeks) and ended on February 3, 1996. Prior fiscal
years presented and fiscal 1996 consist of 52 weeks. "Pro forma fiscal 1995"
refers to the 12 month (54 week) period ended February 3, 1996.
12
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statement of operations data expressed as a percentage of net sales and the
number of stores open at the end of each such period:
<TABLE>
<CAPTION>
PRO FORMA
ELEVEN MONTH TWELVE MONTH SIX MONTHS ENDED
FISCAL PERIOD ENDED PERIOD ENDED FISCAL -------------------
YEAR FEBRUARY 3, FEBRUARY 3, YEAR AUGUST 3, AUGUST 2,
1994 1996(1) 1996(1) 1996 1996 1997
------ ------------ ------------ ------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales and
occupancy.............. 63.2 62.8 63.2 62.9 64.9 65.1
----- ----- ----- ----- ----- -----
Gross profit............ 36.8 37.2 36.8 37.1 35.1 34.9
Selling, general and
administrative
expenses............... 30.8 29.3 29.6 29.2 33.5 32.9
Preopening store
expenses............... 0.8 1.0 0.9 0.9 1.1 0.7
----- ----- ----- ----- ----- -----
Income from operations.. 5.2 6.9 6.3 7.0 0.5 1.3
Interest expense........ 3.2 2.8 2.8 1.1 1.7 0.8
----- ----- ----- ----- ----- -----
Income (loss) before
income taxes........... 2.0 4.1 3.5 5.9 (1.2) 0.5
Provision for (benefit
from) income taxes..... 0.8 1.7 1.4 2.4 (0.5) 0.2
----- ----- ----- ----- ----- -----
Net income (loss)....... 1.2% 2.4% 2.1% 3.5% (0.7)% 0.3%
===== ===== ===== ===== ===== =====
Number of stores open at
end of period.......... 43 49 49 58 52 60
</TABLE>
- -------
(1) The Company changed its 1995 fiscal year end from February 25, 1996 to
February 3, 1996 and, as a result, fiscal 1995 was an 11 month (49 week)
period. The pro forma twelve month period ended February 3, 1996 was a 54
week period.
SIX MONTHS ENDED AUGUST 2, 1997 COMPARED TO SIX MONTHS ENDED AUGUST 3, 1996
Net Sales. Net sales increased $16.7 million, or 21.1%, to $95.8 million in
the first six months of fiscal 1997 from $79.1 million in the first six months
of fiscal 1996. This increase was attributable to the opening of eight stores
subsequent to August 3, 1996, which contributed $11.0 million in net sales,
and an increase in comparable store sales of 7.3%, which contributed $5.7
million of the net sales increase. The increase in comparable store sales
resulted primarily from a larger average transaction size. As of August 2,
1997, the Company operated 60 stores compared to 52 stores at August 3, 1996.
Gross Profit. As a percentage of net sales, gross profit in the first six
months of fiscal 1997 was 34.9% compared to 35.1% in the first six months of
fiscal 1996. This slight decrease resulted from higher occupancy costs in new
stores, partially offset by a sales mix more heavily weighted towards home
furnishings and home decorating products, which generally have higher gross
margins than the Company average. Lower inventory shrinkage also offset the
higher occupancy costs. New stores generally have higher occupancy costs, as a
percentage of net sales, until they reach maturity.
Selling, General and Administrative ("SG&A") Expenses. As a percentage of
net sales, SG&A expenses decreased to 32.9% in the first six months of fiscal
1997 from 33.5% in the first six months of the prior fiscal year. As a
percentage of net sales, lower store payroll and other SG&A expenses were
partially offset by higher advertising costs to support an earlier Easter and
a new spring merchandising event.
Preopening Store Expenses. Preopening store expenses, which include grand
opening advertising and preopening merchandising expenses, were lower in the
first six months of fiscal 1997 primarily as a result of the timing of store
openings. In addition, the average preopening costs per store decreased to
$217,000 from $240,000. This decrease in the average preopening costs per
store was primarily attributable to lower grand opening advertising expenses.
Expenses are generally incurred in both the month prior to and the month of
the store opening and vary depending on the location of a store and whether
the store is in a new or existing market.
13
<PAGE>
Interest Expense. Interest expense in the first six months of fiscal 1997
consisted of $911,000 in capital lease interest partially offset by $130,000
of net interest income. In the first six months of the previous fiscal year,
interest expense included capital lease interest and interest expense on debt
which was repaid in April 1996 with the proceeds from the Company's initial
public offering of its Common Stock.
Provision for Income Taxes. The Company's effective tax rate was 40.0% in
the first six months of fiscal 1997 compared to 41.0% in the first six months
of fiscal 1996.
FISCAL 1996 COMPARED TO PRO FORMA FISCAL 1995
Net Sales. Net sales increased $32.0 million, or 17.5%, to $214.8 million in
fiscal 1996 from $182.8 million in pro forma fiscal 1995. This increase was
attributable to: (i) the opening of nine stores subsequent to February 3,
1996, which contributed $17.6 million in net sales; (ii) an increase in
comparable store sales, which contributed $5.5 million of the net sales
increase; and (iii) $8.9 million contributed by stores opened prior to
February 3, 1996 which were not included in the comparable store base. The
increase in sales was slightly offset by two less weeks of sales in fiscal
1996 than in pro forma fiscal 1995, due to the change in year end. The
increase in comparable store sales resulted primarily from a larger average
transaction size. Comparable store sales, calculated on a comparable, day-to-
day basis, increased 6.1% over the prior year.
Gross Profit. As a percentage of net sales, gross profit increased to 37.1%
in fiscal 1996 from 36.8% in pro forma fiscal 1995. This improvement resulted
primarily from lower inventory shrinkage and freight costs, partially offset
by higher occupancy costs in new stores. New stores generally have higher
occupancy costs as a percentage of net sales until they reach maturity.
Selling, General and Administrative Expenses. As a percentage of net sales,
SG&A expenses declined to 29.2% in fiscal 1996 compared to 29.6% in pro forma
fiscal 1995. As a percentage of net sales, lower store and corporate payroll
expenses were partially offset by higher advertising expenses.
Preopening Store Expenses. Preopening store expenses were $2.1 million in
fiscal 1996 and $1.6 million in pro forma fiscal 1995. The increase in
preopening expenses was the result of opening nine stores in fiscal 1996
versus opening six stores in pro forma fiscal 1995 which was partially offset
by a decrease in the average pre-opening costs per store to $228,000 per store
in fiscal 1996 from $270,000 per store in pro forma fiscal 1995. The decrease
in the average preopening costs per store was primarily attributable to lower
grand opening advertising expenses.
Interest Expense. Interest expense in fiscal 1996 declined compared to pro
forma fiscal 1995 as a result of the repayment of borrowings in April 1996
with the proceeds from the Company's initial public offering of its Common
Stock.
Provision for Income Taxes. The Company's effective tax rate in fiscal 1996
and pro forma fiscal 1995 was 41.0%.
PRO FORMA FISCAL 1995 COMPARED TO FISCAL 1994
Net Sales. Net sales increased $31.6 million, or 20.9%, to $182.8 million in
pro forma fiscal 1995 from $151.2 million in fiscal 1994. This increase was
attributable to: (i) the opening of six stores subsequent to February 25,
1995, which contributed $14.9 million in net sales; (ii) an increase in
comparable store sales, which contributed $10.7 million of the net sales
increase; and (iii) $6.0 million contributed by stores opened prior to
February 25, 1995 which were not included in the comparable store base. The
increase in comparable store sales resulted primarily from a larger average
transaction size and two extra weeks of sales than in the prior year due to
the change in year end. Comparable store sales, calculated on a comparable,
day-to-day basis, for pro forma fiscal 1995 increased 6.1% over the prior
year.
14
<PAGE>
Gross Profit. As a percentage of net sales, gross profit was 36.8% in both
periods.
Selling, General and Administrative Expenses. As a percentage of net sales,
SG&A expenses decreased to 29.6% in pro forma fiscal 1995 compared with 30.8%
in fiscal 1994. This decline primarily resulted from lower store and corporate
payroll expenses as a percentage of net sales.
Preopening Store Expenses. Preopening store expenses increased to $1.6
million in pro forma fiscal 1995 from $1.1 million in fiscal 1994. The
increase in preopening store expenses was attributable to the opening of six
stores in pro forma fiscal 1995 as compared with five in fiscal 1994 and to an
increase in the average preopening costs per store to $270,000 from $223,000.
The increase in the average preopening costs per store resulted primarily from
higher grand opening advertising expenses.
Interest Expense. Interest expense was $5.1 million in pro forma fiscal 1995
compared to $4.9 million in fiscal 1994.
Provision for Income Taxes. The Company's effective tax rate in pro forma
fiscal 1995 was 41.0% compared with 40.0% in fiscal 1994. All available net
operating loss carryforwards were fully utilized by the Company in prior
periods.
WHILE THE COMPANY BELIEVES THE COMPARISONS TO PRO FORMA FISCAL 1995 PROVIDED
ABOVE ARE MORE MEANINGFUL, THE DISCUSSION BELOW IS PROVIDED AS ADDITIONAL
INFORMATION.
FISCAL 1996 COMPARED TO THE ELEVEN MONTH PERIOD ENDED FEBRUARY 3, 1996
Fiscal 1996, the twelve month period ended February 1, 1997, was a fifty-two
week period. The eleven month period ended February 3, 1996 was a forty-nine
week period.
Net sales increased $43.3 million in fiscal 1996 due to: (i) the difference
in the number of weeks included in the fiscal years; (ii) the opening of nine
stores subsequent to February 3, 1996; and (iii) an increase in comparable
store sales, which resulted primarily from a larger average transaction size,
and an increase in non-comparable store sales. These additional sales
contributed to an additional $16.0 million in gross profit. SG&A expenses, as
a percentage of net sales, decreased 0.1% in fiscal 1996 primarily as a result
of lower store and corporate payroll expenses as a percentage of net sales.
Preopening store expenses increased $433,000 in fiscal 1996 as a result of
opening nine stores compared to six stores in the prior period, partially
offset by a decrease in the average preopening costs per store. Interest
expense declined $2.4 million in fiscal 1996 as a result of the repayment of
borrowings in April 1996 with the proceeds from the Company's initial public
offering of its Common Stock. The Company's effective tax rate was 41.0% in
both periods. Net income increased to $7.4 million in fiscal 1996 from $4.2
million in the prior period.
ELEVEN MONTH PERIOD ENDED FEBRUARY 3, 1996 COMPARED TO FISCAL 1994
The eleven month period ended February 3, 1996 was a forty-nine week period.
Fiscal 1994, the twelve month period ended February 25, 1995, was a fifty-two
week period.
Net sales increased $20.4 million in the eleven month period ended February
3, 1996 due to the opening of six stores subsequent to February 25, 1995, an
increase in comparable store sales, which resulted primarily from a larger
average transaction size, and an increase in non-comparable store sales,
partially offset by the difference in the number of weeks included in the
periods. These additional sales contributed to an additional $8.2 million in
gross profit. SG&A expenses, as a percentage of net sales, declined 1.5%,
primarily as a result of lower store and corporate payroll expenses as a
percentage of net sales. Preopening store expenses increased $486,000 due to
more store openings and an increase in the average preopening costs per store.
Interest expense was approximately $4.8 million in both periods. The Company's
effective tax rate was 41.0% compared to 40.0% in fiscal 1994. Net income
increased to $4.2 million from $1.8 million in fiscal 1994.
15
<PAGE>
INFLATION
The Company does not believe that inflation has had a material effect on its
financial condition and results of operations during the past three fiscal
years. However, there can be no assurance that the Company's business will not
be affected by inflation in the future.
QUARTERLY RESULTS AND SEASONALITY
The following table sets forth the Company's unaudited quarterly operating
results for its ten most recent quarterly periods. The quarterly results for
pro forma fiscal 1995 have been restated to reflect the change in the
Company's fiscal year end to the Saturday closest to the end of January.
<TABLE>
<CAPTION>
FISCAL QUARTER
---------------------------------------------------------------------------------------
PRO FORMA 1995 1996 1997
------------------------------------ ---------------------------------- ---------------
FIRST SECOND THIRD FOURTH(1) FIRST SECOND THIRD FOURTH FIRST SECOND
------- ------- ------- --------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT NUMBER OF STORES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $31,874 $33,083 $36,412 $81,476 $39,127 $39,986 $45,041 $90,660 $48,532 $47,287
Cost of sales and
occupancy.............. 21,124 21,457 23,446 49,489 25,552 25,774 29,030 54,716 31,806 30,558
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 10,750 11,626 12,966 31,987 13,575 14,212 16,011 35,944 16,726 16,729
Selling, general and
administrative
expenses............... 10,733 11,442 13,327 18,608 13,055 13,511 15,718 20,365 15,786 15,758
Preopening store
expenses............... 83 527 813 197 284 556 1,145 68 440 200
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. (66) (343) (1,174) 13,182 236 145 (852) 15,511 500 771
Interest expense........ 1,016 1,217 1,449 1,449 905 479 611 456 321 460
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... (1,082) (1,560) (2,623) 11,733 (669) (334) (1,463) 15,055 179 311
Provision for (benefit
from) income taxes..... (444) (640) (1,075) 4,811 (274) (137) (600) 6,173 72 124
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ (638) $ (920) $(1,548) $ 6,922 $ (395) $ (197) $ (863) $ 8,882 $ 107 $ 187
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Number of stores open at
end of period.......... 43 45 48 49 50 52 57 58 60 60
</TABLE>
- --------
(1) The fourth quarter of pro forma fiscal 1995 was a 15-week period. All
other quarters were 13 weeks.
The Company's business is highly seasonal, reflecting the general pattern
associated with much of the retail industry of peak sales and earnings during
the Christmas season. Due to the importance of the Christmas selling season,
the fourth quarter of each fiscal year has historically contributed, and the
Company expects it will continue to contribute, a disproportionate percentage
of the Company's net sales and most of its net income for the entire fiscal
year. Any factors negatively affecting the Company during the Christmas
selling season in any year, including unfavorable economic conditions, could
have a material adverse effect on the Company's financial condition and
results of operations. In addition, the Company makes decisions regarding
merchandise well in advance of the season in which it will be sold,
particularly for the Christmas selling season. Significant deviations from
projected demand for products could have a material adverse effect on the
Company's financial condition and results of operations, either by lost sales
due to insufficient inventory or lost margin due to the need to markdown
excess inventory.
The Company's quarterly results of operations may fluctuate based upon such
factors as the number and timing of store openings and related preopening
store expenses, the amount of net sales contributed by new and existing
stores, the mix of products sold, the timing and level of markdowns, store
closings, refurbishments or relocations, weather conditions, competitive
factors and general economic conditions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary uses for cash, other than to fund operating expenses,
are to support inventory requirements and for store expansion. Historically,
the Company has financed its operations primarily with borrowings under the
Company's credit facilities and internally generated funds. The Company
believes that the available borrowings under its revolving line of credit and
internally generated
16
<PAGE>
funds, together with the funds raised in this offering, will be sufficient to
finance its working capital and capital expenditure requirements for at least
the next 12 months.
Net cash used in operating activities in the six months ended August 2,
1997, totaled $13.6 million, an increase of $7.1 million over the comparable
period of the prior fiscal year. This increase resulted from higher income tax
payments and the timing of payments for merchandise inventory. Net cash
provided by operating activities in fiscal 1996 totaled $14.2 million, an
increase of $8.2 million over the prior period. This increase was due to a
higher operating profit and a higher level of payables due to an earlier
Easter.
Net cash used in investing activities, primarily for new stores, totaled
$5.5 million for the first six months of fiscal 1997 compared to $3.1 million
in the comparable period of the prior fiscal year, and $8.0 million for fiscal
1996 compared to $5.6 million for the eleven month period ended February 3,
1996. The Company estimates that capital expenditures will approximate $11.0
million in fiscal 1997.
Net cash provided by financing activities was $5.5 million in the first six
months of fiscal 1997 and included $4.9 million of borrowings under the
Company's revolving line of credit agreement and $805,000 from the issuance of
stock to employees pursuant to the Company's stock option and stock purchase
plans. Net cash provided by financing activities in fiscal 1996 included
approximately $29.1 million received in April 1996 as a result of the
Company's initial public offering. These proceeds were used to retire a $19.9
million long-term note payable and pay down the $3.2 million balance then
outstanding on the Company's revolving credit line. Remaining unused proceeds
were used for working capital and general corporate purposes. The Company has
entered into an agreement to sell its San Francisco property and lease back
the store facility, subject to the satisfaction of certain conditions. If the
transaction is completed, the Company will receive approximately $10.5 million
in cash.
On May 7, 1996, the Company entered into a revolving line of credit
agreement with Bank of America, which was amended on May 15, 1997 and expires
June 1, 1999. The amended agreement allows for cash borrowings and letters of
credit up to $20.0 million from January 1 through June 30 and up to $35.0
million from July 1 through December 31 of each year. Interest is paid monthly
at the bank's reference rate (8.50% at August 2, 1997) or LIBOR plus 1.75%,
depending on the nature of the borrowings. The agreement is secured by the
Company's inventory and receivables. The Company is subject to certain
financial covenants including minimum tangible net worth and earnings coverage
ratio. At August 2, 1997, the Company had $4.9 million of outstanding
borrowings under the line of credit and $2.9 million outstanding under letters
of credit.
IMPACT OF NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings per Share
("EPS"). SFAS 128 requires dual presentation of basic EPS and diluted EPS on
the face of all income statements issued after December 15, 1997 for all
entities with complex capital structures. Basic EPS is computed as net income
divided by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur from
common shares issuable through stock options, warrants and other convertible
securities. The Company is required to adopt SFAS 128 in the fourth quarter of
fiscal 1997 and will restate, at that time, EPS data for prior periods to
conform with SFAS 128. Earlier application is not permitted.
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive
Income, and No. 131 ("SFAS 131"), Disclosures about Segments of an Enterprise
and Related Information. SFAS 130 requires that an enterprise report, by major
components and as a single total, the change in its net assets during the
period from nonowner sources; and SFAS 131 establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major
customers. Adoptions of these statements will not impact the Company's
consolidated financial position, results of operations or cash flows and any
effect will be limited to the form and content of its disclosures. Both
statements are effective for fiscal years beginning after December 15, 1997,
with earlier application permitted.
17
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BUSINESS
This Prospectus contains certain forward-looking statements within the
meaning of the federal securities laws. Actual results could differ materially
from those projected in the forward-looking statements due to a number of
factors including those set forth under "Risk Factors" and elsewhere in this
Prospectus.
THE COMPANY
Cost Plus is a leading specialty retailer of casual home living and
entertaining products. As of September 15, 1997, the Company operated 66
stores under the name "Cost Plus World Market" in 12 states, primarily in the
Western United States. Cost Plus' business strategy is to differentiate itself
by offering a large and ever-changing selection of unique products, many of
which are imported, at competitive prices in an exciting shopping environment.
Many of Cost Plus' products are proprietary or private label, often
incorporating the Company's own designs, "World Market" brand name, quality
standards and specifications, and typically are not available at department
stores and other specialty retailers.
BUSINESS STRATEGY
The Company's goal is to be the leading specialty retailer of casual home
living and entertaining products in each of its selected geographic markets.
The following elements of the Company's strategy are designed to build and
reinforce the image of Cost Plus as a destination store which fulfills a wide
range of its customers' casual lifestyle needs:
Distinctive Merchandise. The Company believes that its focus on distinctive
and ever-changing merchandise selection differentiates Cost Plus from other
retailers. A significant portion of the Company's merchandise is made abroad
in over 50 countries, and many of these goods are handcrafted by local
artisans. The Company's buyers actively work with designers, artists and
suppliers to develop products, many of which are designed by or exclusively
for Cost Plus. The Company frequently changes its merchandise and visual
displays in order to promote a sense of discovery in its stores and to
encourage repeat shopping.
Complementary Product Offerings. Cost Plus stores offer a variety of related
products designed to fulfill its customers' needs for casual home decor and
entertaining. The offerings include home decorating items such as furniture
and rugs as well as a variety of tabletop and kitchen products. Cost Plus
stores also offer a number of gift and decorative accessories including
collectibles, cards, wrapping paper, Christmas and other seasonal items. In
addition, Cost Plus offers its customers a wide selection of gourmet foods and
beverages. The Company believes its unique product mix differentiates it from
other retailers.
Exciting Shopping Environment. The Company strives to create an exciting
shopping experience by implementing its merchandise strategy in a unique store
environment. The Company's stores are designed to evoke the feeling of a
"marketplace" through colorful and creative visual displays and merchandise
presentations, including goods in open barrels and baskets, groupings of
related products in distinct "shops" within the store, and in-store activities
such as cooking demonstrations and food and coffee tastings. Complementary
products are positioned in proximity to one another and cross merchandising
themes are used in merchandise displays to tie different product offerings
together. The Company believes this marketplace environment provides customers
with a fun shopping experience and encourages browsing throughout the store.
Attentive Customer Service. The Company seeks to provide attentive and
helpful customer service without being intrusive. Sales personnel are
instructed to respond to customers' questions and are trained
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<PAGE>
to be particularly knowledgeable in the merchandise about which most questions
arise, such as furniture, coffee and wine. The Company believes that its
approach to customer service reinforces its image as a fun and friendly place
to shop.
Value for the Customer. The Company is committed to providing value to its
customers through competitive everyday prices complemented by selected
promotions. The Company's value image is reinforced by the Company's trademark
slogan, "Cost Plus--Where you can afford to be different," as well as its
store format which includes bulk displays, open ceilings, concrete floors and
simple wooden fixtures.
GROWTH STRATEGY
Cost Plus' growth strategy is to open stores in new and existing geographic
markets as well as to increase sales in existing stores. The Company plans to
open stores primarily in metropolitan and suburban markets that can support
multiple stores and enable the Company to achieve advertising, distribution
and operating efficiencies. The Company may also selectively enter mid-size
markets which can support one or two stores that the Company believes meet its
profitability criteria. As part of its site selection process, Cost Plus
analyzes demographic, psychographic and competitive data to evaluate a trade
area's suitability. Cost Plus stores are located predominantly in high traffic
metropolitan and suburban locales, often near major malls in sites co-anchored
by other lifestyle retailers. In fiscal 1996, the Company opened nine stores,
including stores in new markets in Illinois and Texas. In fiscal 1997, the
Company has opened two stores in Texas, one in Wisconsin, one in California,
one in Illinois, three in Michigan and currently anticipates opening four
additional stores in existing markets. The Company anticipates opening
approximately 15 stores in fiscal 1998. In addition to new store openings, the
Company seeks to increase sales in existing stores through advertising to
attract new customers and through merchandising presentations and an in-store
marketing program to increase the average transaction size. See "Risk
Factors--Risks Associated with Expansion."
MERCHANDISING
Cost Plus' merchandising strategy is to offer customers a large selection of
distinctive items related to the theme of casual home living and entertaining.
Products. The Company believes its distinctive and unique merchandise
differentiates Cost Plus from other retailers. Many of Cost Plus' products are
proprietary or private label, often incorporating the Company's own designs,
"World Market" brand name, quality standards and specifications, and typically
are not available at department stores and other specialty retailers. In
addition to strengthening the stores' product offering, proprietary and
private label goods typically offer higher gross margin opportunities than
branded goods. A significant portion of Cost Plus' products are made abroad in
over 50 countries, and many of these goods are handcrafted by local artisans.
See "Risk Factors--Risks Associated with Merchandising."
The Company's product offerings are designed to provide solutions to
customers' casual living and home entertaining needs. The offerings include
home decorating items such as furniture, rugs, pillows, frames and baskets.
Cost Plus' furniture products include ready-to-assemble living and dining room
pieces as well as outdoor furniture made from a variety of materials such as
rattan, hardwood and wrought iron. The Company also sells a number of tabletop
and kitchen items including glassware, ceramics, textiles and cooking
utensils. Kitchen products offer the casual gourmet an assortment of products
organized around a variety of themes such as baking, food preparation,
barbecue and international dining.
Cost Plus World Markets offer a number of gift and decorative accessories,
including collectibles, cards, wrapping paper and Christmas and other seasonal
items. Because many of the gift and collectible items come from around the
world, they contribute to the exotic atmosphere of the stores.
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<PAGE>
Cost Plus also offers its customers a wide selection of gourmet foods and
beverages, including wine, micro-brewed and imported beer, coffee and tea. The
wine assortment offers a number of moderately priced premium wines, including
a variety of well recognized labels as well as wines not readily available at
neighborhood wine or grocery stores. Coffee, roasted at the Company's own
roasting plant, is sold over-the-counter from bulk containers. Packaged
snacks, candy and pasta are displayed in open barrels and crates. Gourmet
foods include a sampling of products from around the world, including seasonal
items that relate to "old world" holidays and customs.
Cost Plus offers a broad assortment of products that enables customers to
select among a wide range of designs, colors and styles. An average Cost Plus
World Market store carries approximately 9,000 to 12,000 SKUs at any time. The
large size of the Company's stores allows Cost Plus to devote more space to
its products than that devoted to similar products at many other specialty and
department stores. The Company replaces or updates many of the items in its
merchandise assortment on a regular basis in order to promote a sense of
discovery and to encourage repeat shopping. The Company regularly marks down
and eliminates items that do not meet its turnover expectations.
Pricing. Cost Plus offers high quality products at competitive prices. The
Company complements its competitive everyday prices with "Real Deals" which
reflect opportunistic buys by the Company, enabling the Company to pass on
additional savings to the customer. The Company routinely shops a variety of
retailers to ensure that its products are competitively priced. In fiscal
1996, Cost Plus customers spent, on average, approximately $26 per
transaction.
Planning and Buying. Cost Plus effectively manages a large number of
products by utilizing a centralized merchandise planning system. The Company
maintains a central buying staff which is responsible for establishing the
assortment of inventory within the merchandise groups each season, including
integrating trends or themes identified by the Company into its different
product offerings. The Company regularly monitors merchandise through its
management information systems to identify and respond to product trends. The
Company attempts to moderate the risk associated with merchandise purchasing
by testing selected new products in a limited number of stores. The Company's
long-standing relationships with overseas suppliers and its extensive
knowledge of the import process facilitate the planning and buying process.
The buyers work closely with suppliers to develop unique products that will
meet customers' expectations for quality and value. The Company's buyers
communicate with district and store managers and use the management
information systems to tailor the merchandise mix of individual stores to
regional conditions and to better ensure that in-stock availability will be
maintained in accordance with the specific requirements of each store.
COST PLUS WORLD MARKET
Format and Presentation. The Company's stores are designed to evoke the
feeling of a "marketplace" through colorful and creative visual displays and
merchandise presentations, including goods in open barrels and baskets,
groupings of related products in distinct "shops" within the store, and in-
store activities such as cooking demonstrations and food and coffee tastings.
The Company believes that its marketplace effect provides customers with a fun
shopping experience and encourages browsing throughout the store.
The average selling space of a Cost Plus World Market is approximately
16,000 square feet, which allows space and flexibility for merchandise
displays, product adjacencies and directed traffic patterns. Complementary
products are positioned in proximity to one another and cross merchandising
themes are used in merchandise displays to tie different product offerings
together. The unobstructed floor plan allows the customer to see virtually all
of the different product areas in a Cost Plus World Market from the store
entrance. The "power" aisle, in which "Real Deals" are displayed, leads the
customer through the store into the different product areas. The Company uses
a "swing" area near the front of the store to group seasonal products in
themes, such as Christmas and Easter. Store signage, including permanent as
20
<PAGE>
well as promotional signs, is developed by the Company's in-house graphic
design department. End caps, bulk stacks and free standing displays are
changed monthly.
The Cost Plus World Market format is also designed to reinforce the store's
value image through exposed ceilings, concrete floors, simple wooden fixtures
and open or bulk displays of merchandise. The Company displays most of its
inventory on the selling floor and makes effective use of vertical space
through, for example, a display of chairs arranged on a wall and rugs hanging
from vertical display racks.
The Company believes that its customers usually visit a Cost Plus store as a
destination store with a specific purchase in mind. The Company also believes
that once in the store, its customers often spend additional time shopping and
browsing, usually purchasing more items than they originally intended.
Store Operations and Training. A typical Cost Plus store is staffed with a
store manager, two to four assistant managers, two or three sales associates
dedicated to certain product areas, including furniture, coffee and wine, and
approximately 25 to 30 full-time and part-time sales associates, depending on
the season. Cost Plus has incentive compensation programs for its district,
store and assistant managers to reward individual and store performance. The
Company recognizes individual performance through internal promotions and
actively assists its managers and other sales personnel in reaching
performance goals through training seminars and programs.
Store Economics. The Company believes that it benefits from attractive store
level economics. The Company's average store size is approximately 16,000
selling square feet. The average investment by the Company for the nine stores
opened in fiscal 1996, including leasehold improvements (net of landlord
allowances), equipment, the cost of inventory to furnish the store, and
preopening store expenses, was approximately $1.1 million. The average net
sales and store level contribution as a percentage of net sales (which
excludes any preopening store expenses, advertising, allocated corporate
overhead and interest) for fiscal 1996 was $4.0 million and 19.2%,
respectively, for all stores opened at least 13 months at the end of fiscal
1996. See "Risk Factors--Effect of Economic Conditions and Geographic
Concentration."
CUSTOMER SERVICE
The Company seeks to provide attentive and helpful customer service without
being intrusive. Sales personnel are instructed to respond to customers'
questions and are trained to be particularly knowledgeable in the merchandise
about which most questions arise, such as furniture, coffee and wine. The
Company also provides and replies to customer comment cards, which are
directed to the Company's Chief Executive Officer, and uses focus groups to
further ensure a high level of customer satisfaction. The Company believes
that its approach to customer service reinforces its image as a fun and
friendly place to shop.
ADVERTISING
The Company advertises through direct mail, promotional ads in major daily
newspapers, radio and television. The Company's approach is to regionalize its
advertising and to use the most efficient media mix within a geographic area.
The Company uses four to ten page full color mailers and color newspaper
advertisements in selected markets to highlight product offerings and selected
promotions. Radio and television advertising is often used for store openings
and for seasonal advertising, such as Christmas and Easter. For store grand
openings, the Company uses a combination of newspaper, direct mail, radio and
television.
PRODUCT SOURCING AND DISTRIBUTION
The Company purchases all of its inventory through its central purchasing
system, which allows the Company to take advantage of volume purchase
discounts and improve controls over inventory and product mix. The Company
purchases its merchandise from over 1,500 suppliers, and no supplier
represented over 6% of total purchases in fiscal 1996. A significant portion
of Cost Plus' products are made
21
<PAGE>
abroad in over 50 countries including China, Thailand, India, Indonesia,
Taiwan and Italy. The Company has established a well developed overseas
sourcing network and enjoys long-standing relationships with many of its
vendors. As is customary in the industry, the Company does not have long-term
contracts with any suppliers. The Company's buyers often work with suppliers
to produce unique products exclusive to Cost Plus. The Company believes that,
although there could be delays in changing suppliers, alternate sources of
merchandise for all product categories are available at comparable prices.
Cost Plus purchases overseas products on a free-on-board shipping point basis
and the Company's insurance on such goods commences at the time it takes
ownership. The Company also purchases a number of domestic products,
especially in the gourmet food and beverage area. See "Risk Factors--Risks
Associated with Importing."
All purchasing decisions are made by the Company's buyers who have primary
responsibility for product selection, stocking levels and pricing. Purchasing
operations are facilitated by the use of computerized merchandise information
systems which allow the Company to analyze product sell-through and assist the
buyers in making merchandise decisions. The Company's central replenishment
system includes a store-specific, individualized inventory "model stock" which
enables the Company to maintain adequate stock levels in each location. The
Company believes its centralized purchasing system has helped it to minimize
inventory and control out-of-stock situations.
The Company currently services all of its stores from its distribution
facility in Stockton, California. Domestically sourced merchandise is usually
delivered to the distribution facility by common carrier or by Company trucks.
The Company believes that this distribution facility will be able to handle,
or can be upgraded to handle, the Company's store expansion plans for the
Western United States over the next three years. In addition, the Company has
signed a lease for a distribution facility in Peru, Indiana which is expected
to support the distribution of goods to its Midwest and Texas stores beginning
in fiscal 1998.
Cost Plus operates its own coffee roasting facility located in Stockton,
California. Green coffee beans are purchased on the spot commodity market,
then stored and roasted as needed. Cost Plus roasted more than 400,000 pounds
of coffee beans in fiscal 1996 to fill store orders. Currently, the facility
has excess capacity and the Company believes its facility will be able to
handle a significant expansion in coffee sales with only minimal increases in
operating expense.
MANAGEMENT INFORMATION SYSTEMS
Each of the Company's stores is linked to the Cost Plus headquarters in
Oakland, California through a point-of-sale system that interfaces with an IBM
AS/400 computer. The Company's information systems keep a record, which is
updated daily, of each merchandise item sold. The point-of-sale system also
has scanning, "price-look-up" and on-line credit card approval capabilities,
all of which improve transaction accuracy, speed checkout time and increase
overall store efficiency. The Company is in the process of upgrading its in-
store information system to improve information flow to store management,
improve store productivity through labor scheduling and enhance other in-store
capabilities.
The Company uses several other customized management information and control
systems to direct the Company's operations and finances. These computerized
systems are designed to ensure the integrity of the Company's inventory, allow
the merchandising staff to reprice merchandise, replenish depleted store
inventories, identify sales trends and monitor merchandise mix at individual
stores and throughout all of the Company's stores. The Company believes that
these systems allow for lower average store inventories, higher operating
efficiency, better in-stock availability and fewer markdowns. These systems
also enable the Company to produce the periodic financial reports necessary
for monitoring and developing budgets for the Company's expanding business.
The Company believes that its current management information system is readily
upgradeable to support the Company's planned expansion for the foreseeable
future.
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<PAGE>
STORE LOCATIONS (66 AS OF SEPTEMBER 15, 1997)
[MAP OF U.S. WITH LOCATIONS]
ARIZONA CALIFORNIA- IDAHO TEXAS
Mesa SOUTHERN Boise Austin
Phoenix (2) Brea Grapevine
Scottsdale City of Industry ILLINOIS Houston (3)
Tucson Glendale Aurora Plano
La Jolla Chicago San Antonio
CALIFORNIA- La Mesa Oakbrook
NORTHERN Lakewood Skokie WASHINGTON
Citrus Heights Los Angeles Bellevue
Colma Mission Viejo MICHIGAN Lynnwood
Concord Oceanside Grand Rapids Seattle
Fremont Palm Desert Rochester Hills Tukwila
Fresno Pasadena Westland
Greenbrae San Diego WISCONSIN
Modesto San Dimas NEVADA Madison
Mountain View Santa Ana Las Vegas (2)
Oakland Torrance
Pleasanton Westlake Village NEW MEXICO
Sacramento Woodland Hills Albuquerque
San Francisco
San Jose (2) COLORADO OREGON
San Mateo Aurora Tigard
Santa Rosa Denver (2)
Walnut Creek
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<PAGE>
PROPERTY
The Company leases land and buildings for 58 stores (of which 17 are capital
leases), leases land and owns the buildings for six stores and owns the land
and buildings for two stores. The Company has executed an agreement to sell
its San Francisco property and lease back the store facility, subject to the
satisfaction of certain conditions. The Company currently leases its executive
headquarters in Oakland, California pursuant to a lease which expires in
October 1998. The Company anticipates moving its executive headquarters to a
leased location near its existing headquarters in fiscal 1998. The Company
currently leases its distribution facility of approximately 400,000 square
feet in Stockton, California pursuant to a lease which expires in September
2001 and has three renewal options for five years each. The Company has signed
a three year lease, with four renewal options for five years each, for an
additional distribution facility in Peru, Indiana, initially covering 100,000
square feet and expandable to 450,000 square feet.
COMPETITION
The markets served by the Company are highly competitive. The Company
competes against a diverse group of retailers ranging from specialty stores to
department stores and wholesale clubs. The Company's product offerings compete
with such specialty retailers as Bed, Bath & Beyond, The Bombay Company, Crate
& Barrel, Lechters, Michaels Stores, Pier 1 Imports, Pottery Barn, Trader
Joe's and Williams-Sonoma. Specialty retailers tend to have higher prices and
a more narrow assortment of products than Cost Plus. Department stores
typically have higher prices than Cost Plus for similar merchandise. Wholesale
clubs may have lower prices than Cost Plus, but the product assortment is
generally more limited. The Company competes with these and other retailers
for customers, suitable retail locations and qualified management personnel.
See "Risk Factors--Competition."
EMPLOYEES
As of August 2, 1997, the Company had approximately 808 full-time and
approximately 1,228 part-time employees. Of these, approximately 1,736 were
employed in the Company's stores and approximately 300 were employed in the
distribution facility and corporate office positions. The Company regularly
supplements its work force with temporary workers, especially in the fourth
quarter of each year, to service increased customer traffic during the peak
Christmas season. Approximately 100 employees located in the 13 stores in
Northern California are covered by a collective bargaining agreement which
expires on December 31, 1998. The Company believes that its relationships with
its employees are good.
TRADEMARKS
The Company regards its trademarks and service marks as having significant
value and as being important to its marketing efforts. The Company has
registered its "Cost Plus," "Cost Plus World Market," "Crossroads," "World
Market" and "Where you can afford to be different" marks and its "Cost Plus
World Market" and "World Market" logos with the United States Patent and
Trademark Office on the Principal Register. The Company has also secured
California state registration of its "Crossroads" mark. The Company's policy
is to pursue registration of its marks and to oppose vigorously infringement
of its marks.
LITIGATION
The Company is not a party to any material pending legal proceedings.
24
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
June 30, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Ralph D. Dillon.................. 56 Chief Executive Officer and Chairman of
the Board
Murray H. Dashe.................. 55 President and Vice Chairman of the
Board
Dennis R. Daugherty.............. 54 Executive Vice President, Operations
Kathi P. Lentzsch................ 41 Executive Vice President, Merchandising
and Marketing
Joan S. Fujii.................... 50 Vice President, Human Resources
Patricia T. Saucy................ 45 Acting Chief Financial Officer, Vice
President, Finance, Chief Accounting
Officer and Secretary
Gary D. Weatherford.............. 40 Vice President, Store Operations
Malcolm R. Carden................ 50 Treasurer
Charmaine D. Casella............. 34 Controller
Joseph H. Coulombe(2)............ 67 Director
Danny W. Gurr(2)................. 39 Director
Mervin G. Morris(1).............. 76 Director
Edward A. Mule(1)................ 34 Director
Olivier L. Trouveroy(1)(2)....... 42 Director
Thomas D. Willardson(1).......... 46 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Mr. Dillon has served as Chairman and Chief Executive Officer since August
1996. Prior to August 1996, Mr. Dillon served as President, Chairman and Chief
Executive Officer since joining the Company in September 1990. From August
1987 to August 1990, Mr. Dillon served as President, Chief Operating Officer
and a member of the Board of Directors of Family Dollar Stores, Inc., a
discount retail chain. From 1985 to 1987, he was President and Chief Operating
Officer of Coast America Corporation, a hardware store chain. From 1982 to
1984, he served as President and Chief Executive Officer of Bowater Home
Center, Inc., a chain of home improvement stores.
Mr. Dashe joined the Company in June 1997 as Vice Chairman of the Board and
was named President in September 1997. Mr. Dashe is responsible for overseeing
all day-to-day operations of the Company. From August 1992 to June 1997, he
was Chief Operating Officer of Leslie's Poolmart, Inc., a swimming pool
supplies retail chain, and was a director of that company from August 1989 to
November 1996. From May 1990 through August 1992, he was President and Chief
Executive Officer of RogerSound Labs, a Southern California retailer of
audio/video consumer electronics. From September 1985 through April 1990, Mr.
Dashe held several positions with SILO, a consumer electronics and appliance
retailer, including Regional President, Regional Vice President and Director
of Stores. Previously, he was employed in an executive capacity by other
retailers, including Allied Stores Corp., where he served in a variety of
positions, including Vice President/Director of Stores.
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<PAGE>
Mr. Daugherty was appointed Executive Vice President of Operations in August
1996. Prior to August 1996, Mr. Daugherty served as Vice President,
Distribution/Logistics since joining the Company in December 1990. From
January 1988 to December 1990, Mr. Daugherty was employed by Coast to Coast
Stores, Inc. (formerly Coast America Corp.) where he served most recently as
Vice President of Distribution. Prior to that, Mr. Daugherty held various
positions with the United States Armed Forces relating to transportation and
distribution operations.
Ms. Lentzsch joined the Company in February 1997 as Executive Vice President
of Merchandising and Marketing. From May 1993 to May 1996, Ms. Lentzsch served
as Senior Vice President, Merchandising at Pottery Barn. From April 1991 to
May 1993, Ms. Lentzsch was Vice President, Merchandising and Marketing at
Impostors, a retail jewelry chain. Previously, she served as Vice President,
Merchandising at Pier 1 Imports. Prior to that, she held a number of
merchandising and marketing executive positions with several retailers.
Ms. Fujii joined the Company in May 1991 and has served as Vice President,
Human Resources since October 1994. From May 1991 to October 1994, Ms. Fujii
served as the Company's Director of Human Resources. From 1975 to May 1991,
she was employed by Macy's California in the operations and personnel
departments, ultimately serving as Vice President, Human Resources at Macy's
Union Square store in San Francisco.
Ms. Saucy was named the Company's Acting Chief Financial Officer and
Secretary in September 1997, its Vice President, Finance in August 1997 and
its Chief Accounting Officer in August 1996. Ms. Saucy joined the Company in
January 1991 and served as Vice President, Controller from May 1991 to August
1997. From January 1991 to May 1991, Ms. Saucy served as the Company's
Controller. From August 1990 to January 1991, she was Vice President and
Controller at Crescent Jewelers, a jewelry retailer. From January 1986 to
April 1990, Ms. Saucy served as Assistant Controller at Ross Stores, an off-
price apparel retailer.
Mr. Weatherford joined the Company in January 1988 and has served as Vice
President, Store Operations since June 1995. From April 1991 to June 1995, Mr.
Weatherford served as a Regional Manager for the Company, and from January
1990 to April 1991, he was a Senior Store Manager for the Company. From
January 1988 to January 1990, Mr. Weatherford served as Buyer and Store Design
Director for Cost Plus.
Mr. Carden was named the Company's Treasurer in August 1996. Mr. Carden
joined the Company in October 1986 and served as Director of Finance from May
1992 to August 1996. From October 1986 to May 1992, Mr. Carden served as
Manager of Financial Planning. Prior to joining the Company, Mr. Carden was
Manager of Strategic Planning for Genstar Corporation.
Ms. Casella was named the Company's Controller in August 1997. Ms. Casella
served as the Company's Assistant Controller from February 1993 to August
1997. From August 1991 until January 1993, Ms. Casella was Corporate
Accounting Manager for Nestle Food Co., a manufacturer and distributor of food
products. Prior to that date, she was a Manager with the public accounting
firm of Price Waterhouse LLP. Ms. Casella is a Certified Public Accountant.
Mr. Coulombe has served as a director of the Company since November 1995.
From February 1995 to April 1995, Mr. Coulombe served as President and Chief
Executive Officer of Sport Chalet Inc., a sporting goods retailer. From
February 1994 to January 1995, Mr. Coulombe served as Chief Executive
26
<PAGE>
Officer of Provigo Corp., a wholesale and retail grocer. From November 1992 to
February 1994, Mr. Coulombe was an independent business consultant. From March
1992 to October 1992, Mr. Coulombe served as Executive Vice President of
Pacific Enterprises, with principal responsibility for Thrifty Corporation, an
operator of drug and sporting goods chain stores and also served as Co-
Chairman of Thrifty Corporation. From June 1989 through March 1992, Mr.
Coulombe served as an independent business consultant. Mr. Coulombe is the
founder of Trader Joe's, a specialty food grocery chain, and served as its
Chief Executive Officer from 1957 to 1989.
Mr. Gurr has served as a director of the Company since November 1995. From
September 1991 to the present, Mr. Gurr has served as President and Chief
Executive Officer of Lauriat's Books, Inc., an operator of various bookstore
chains. From November 1995 until June 1997, Mr. Gurr served as President and
Chief Executive Officer of Chadwick Miller, Inc., an importer and wholesaler
of housewares and gifts. From September 1990 to September 1991, Mr. Gurr was
Vice President of Publishing and Acquisition for the Outlet Book Company
Division of Random House, Inc.
Mr. Morris has served as a director of the Company since November 1995. Mr.
Morris has been a private investor since June 1979. Mr. Morris founded
Mervyn's Stores in 1949. He was Chairman and Chief Executive Officer of
Mervyn's until 1979. He has previously served as a director at Dayton Hudson
Corporation, Pacific Gas & Electric Co. and Saga Corporation.
Mr. Mule has served as a director of the Company since May 1995. Since
September 1984, Mr. Mule has been employed by Goldman, Sachs & Co., an
investment bank, serving in various departments including mergers and
acquisitions, high yield bond finance and in the office of the Chairman. Mr.
Mule has been a Managing Director of Goldman, Sachs & Co. since 1994.
Mr. Trouveroy has served as a director of the Company since March 1995. Mr.
Trouveroy joined ING in 1992 and currently serves as a managing partner of ING
Equity Partners, LP I. From 1990 through 1991 Mr. Trouveroy was a managing
director of General Electric Capital Corporation ("GECC") in charge of GECC's
Corporate Finance office in Paris, France. From 1984 to 1990, Mr. Trouveroy
was an investment banker in the mergers and acquisitions department of Drexel
Burnham Lambert Incorporated in New York, most recently as a first vice
president. Mr. Trouveroy also serves as a director of American Communications
Services, Inc., a local access telecommunications provider.
Mr. Willardson was re-elected as a director of the Company in March 1996. He
served also as a director of the Company from March 1991 to February 1996. Mr.
Willardson is a Vice President and Associate Managing Director of Bechtel
Enterprises Inc., a wholly-owned investment and development subsidiary of
Bechtel Group, Inc. He served as a manager of that company from July 1995
until August 1997. From January 1986 to July 1995, Mr. Willardson served as a
manager at The Fremont Group, an investment company.
The number of the directors of the Company is currently set at eight and
currently all directors are elected annually and serve until the next annual
meeting of shareholders or until the election and qualification of their
successors. All executive officers serve at the discretion of the Board of
Directors. There are no family relationships between any of the directors or
executive officers of the Company.
27
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information known to the Company with respect
to the beneficial ownership of its Common Stock as of June 30, 1997, and as
adjusted to reflect the sale of Common Stock offered hereby, by (i) each
person or entity who is known by the Company to own beneficially more than 5%
of the Common Stock, (ii) each of the Company's directors, (iii) the Chief
Executive Officer and each of the three other most highly compensated current
executive officers of the Company, (iv) all current directors and executive
officers as a group and (v) each Selling Shareholder.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO NUMBER OF OWNED AFTER
OFFERING(2) SHARES OFFERING(2)
----------------- BEING -----------------
NAME AND ADDRESS(1) NUMBER PERCENT OFFERED NUMBER PERCENT
------------------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
ING Equity Partners, LP, I
Corporation (3)(4)
135 East 57th Street
New York, NY 10022............. 2,320,409 28.4% 1,150,000 1,170,409 13.6%
The Goldman Sachs Group, L.P.(4)
(5)
85 Broad Street
New York, NY 10004............. 2,320,409 28.4 1,150,000 1,170,409 13.6
Ralph D. Dillon(6).............. 250,375 3.0 22,000 228,375 2.6
Murray H. Dashe................. -- -- -- -- --
Dennis R. Daugherty(7).......... 54,566 * -- 54,566 *
Patricia T. Saucy(8)............ 21,410 * -- 21,410 *
Joseph H. Coulombe.............. 1,768 * -- 1,768 *
Danny W. Gurr(9)................ 1,500 * -- 1,500 *
Mervin G. Morris................ 1,768 * -- 1,768 *
Edward A. Mule(4)(10)........... 2,320,409 28.4 1,150,000 1,170,409 13.6
Olivier L. Trouveroy(4)(11)..... 2,320,409 28.4 1,150,000 1,170,409 13.6
Thomas D. Willardson(4)......... 1,768 * -- 1,768 *
All directors and executive
officers as a group
(15 persons)(12)............... 5,024,156 59.4 2,322,000 2,702,156 30.3
</TABLE>
- --------
* Less than 1%
(1) Except as otherwise indicated in the footnotes to this table and pursuant
to applicable community property laws, the persons named in the table have
sole voting and investment power with respect to the shares of Common
Stock shown.
(2) Percentage ownership is based on 8,157,704 shares of Common Stock
outstanding as of June 30, 1997, and 8,610,502 shares of Common Stock
outstanding after the offering, plus any shares issuable pursuant to the
options held by the person or group in question which may be exercised
within 60 days of June 30, 1997. Assumes no exercise of the Underwriters'
over-allotment option.
(3) Shares held of record by Internationale Nederlanden (U.S.) Capital
Corporation ("ING") on behalf of ING Equity Partners LP, I ("Equity
Partners"), the beneficial owner of such shares. If the Underwriters'
over-allotment option is exercised in full, ING and Equity Partners will
sell an additional 204,150 shares in this offering.
(4) Includes 1,768 shares issuable upon exercise of stock options exercisable
within 60 days of June 30, 1997.
(5) Shares held by Goldman Sachs Credit Partners L.P., ("Goldman Sachs Credit
Partners") an affiliate of The Goldman Sachs Group, L.P. ("GS Group"). If
the Underwriters' over-allotment option is exercised in full, Goldman
Sachs Credit Partners will sell an additional 204,150 shares in this
offering.
(6) Includes 65,249 shares held by The Dillon Trust, of which Mr. Dillon and
his spouse are trustees and 1,000 shares registered in the name of Mr.
Dillon's spouse, Carol Dillon. Also includes 185,126 shares issuable upon
exercise of stock options exercisable within 60 days of June 30, 1997.
(7) Includes 330 shares registered in the name of Mr. Daugherty's spouse, Sue
Daugherty. Also includes 39,891 shares issuable upon exercise of stock
options exercisable within 60 days of June 30, 1997.
(8) Includes 2,222 shares held by The Saucy Family Trust of which Ms. Saucy
and her spouse are trustees. Also includes 19,188 shares issuable upon
exercise of stock options exercisable within 60 days of June 30, 1997.
(9) Includes 300 shares registered in the name of Mr. Gurr's spouse, Vivian
Southwell.
(10) Consists of 2,320,409 shares held by Goldman Sachs Credit Partners. Mr.
Mule, a director of the Company, is a Managing Director of GS Group,
which has a 99% interest in the company that is the general partner of
Goldman Sachs Credit Partners, and has the right to direct the voting and
disposition of the shares. Accordingly, Mr. Mule may be deemed to be a
beneficial owner of these shares. Mr. Mule disclaims beneficial ownership
of such shares except to the extent of his pecuniary interest therein.
(11) Consists of 2,320,409 shares held by ING. Mr. Trouveroy, a director of
the Company, is a managing partner of Equity Partners. Accordingly, Mr.
Trouveroy may be deemed to be a beneficial owner of these shares. Mr.
Trouveroy disclaims beneficial ownership of such shares except to the
extent of his pecuniary interests therein.
(12) See notes (3) through (11) above. Also includes an additional 44,827
shares issuable upon exercise of stock options exercisable within 60 days
of June 30, 1997.
28
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
BT Alex. Brown Incorporated, William Blair & Company, L.L.C., Montgomery
Securities and Robertson, Stephens & Company LLC, have severally agreed to
purchase from the Company and the Selling Shareholders the following
respective numbers of shares of Common Stock at the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
BT Alex. Brown Incorporated...........................................
William Blair & Company, L.L.C........................................
Montgomery Securities.................................................
Robertson, Stephens & Company LLC.....................................
---------
Total................................................................. 2,722,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares
are purchased.
The Company has been advised by the Representatives of the Underwriters that
the Underwriters propose to offer the shares of Common Stock to the public at
the public offering price set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to certain other dealers. After the public
offering, the offering price and other selling terms may be changed by the
Representatives of the Underwriters.
Certain of the Selling Shareholders have granted to the Underwriters an
option, exercisable not later than 30 days after the date of this Prospectus,
to purchase up to 408,300 additional shares of Common Stock at the public
offering price less the underwriting discounts and commissions set forth on
the cover page of this Prospectus. To the extent that the Underwriters
exercise such option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof that the number of shares
of Common Stock to be purchased by it shown in the above table bears to
2,722,000 and such Selling Shareholders will be obligated, pursuant to the
option, to sell such shares to the Underwriters. The Underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
Common Stock offered hereby. If purchased, the Underwriters will offer such
additional shares on the same terms as those on which the 2,722,000 shares are
being offered.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
The Company's directors and executive officers and the Selling Shareholders
have agreed not to offer, sell or otherwise dispose of the shares of Common
Stock held by them immediately prior to completion of this offering for a
period of 90 days after the commencement of this offering without the prior
written consent of BT Alex. Brown Incorporated except to the extent being sold
in this offering. The Company has entered into a similar agreement, except
that it may issue, and grant options to purchase, shares of Common Stock under
its current stock option and purchase plans and pursuant to other currently
outstanding options. BT Alex. Brown Incorporated, at any time and without
notice, may release all or any part of the shares from these restrictions.
29
<PAGE>
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
Goldman, Sachs & Co., an affiliate of The Goldman Sachs Group, L.P. (the
"Goldman Group"), is expected to be one of the Underwriters of this offering.
As of the date of this Prospectus, the Goldman Group beneficially owns more
than 10% of the Common Stock of the Company. See "Principal and Selling
Shareholders." Accordingly, the offering of Common Stock will be conducted in
compliance with the Rules of Conduct of the National Association of Securities
Dealers, Inc.
The Underwriters have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in this offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level
above that which might otherwise prevail in the open market. A "stabilizing
bid" is a bid for or the purchase of the Common Stock on behalf of the
Underwriters for the purpose of fixing or maintaining the price of the Common
Stock. A "syndicate covering transaction" is the bid for or the purchase of
the Common Stock on behalf of the Underwriters to reduce a short position
incurred by the Underwriters in connection with this offering. A "penalty bid"
is an arrangement permitting the Underwriters to reclaim the selling
concession otherwise accruing to an Underwriter or dealer in connection with
this offering if the Common Stock originally sold by such Underwriter or
dealer is purchased by the Underwriters in a syndicate covering transaction
and has therefore not been effectively placed by such Underwriter or dealer.
The Underwriters have advised the Company that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
As permitted by Rule 103 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), Underwriters or prospective Underwriters that
are market makers ("passive market makers") in the Common Stock may make bids
for or purchases of Common Stock on the Nasdaq National Market until such
time, if any, when a stabilizing bid for such securities has been made. Rule
103 generally provides that: (i) a passive market maker's net daily purchases
of the Common Stock may not exceed 30% of its average daily trading volume in
such securities for the two full consecutive calendar months (or any 60
consecutive days ending within the 10 days) immediately preceding the filing
date of the registration statement of which this Prospectus forms a part; (ii)
a passive market maker may not effect transactions or display bids for the
Common Stock at a price that exceeds the highest independent bid for the
Common Stock by persons who are not passive market makers; and (iii) bids made
by passive market makers must be identified as such.
30
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company and the Selling Shareholders by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California. Certain legal matters in
connection with this offering will be passed upon for the Underwriters by
Orrick, Herrington & Sutcliffe LLP, San Francisco, California. Attorneys of
Wilson Sonsini Goodrich & Rosati, Professional Corporation representing the
Company in this offering own 3,000 shares of the Company's Common Stock.
EXPERTS
The consolidated financial statements of Cost Plus, Inc. and subsidiaries as
of February 3, 1996 and February 1, 1997 and for the fiscal year ended
February 25, 1995, the 11 month period ended February 3, 1996, and the fiscal
year ended February 1, 1997, appearing in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as set forth in their report
thereon appearing herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange Act
and in accordance therewith files reports, proxy and information statements,
and other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy and information statements, and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, as well as the regional offices of the
Commission located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and Seven World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates. The Commission maintains a World Wide Web site
that contains reports, proxy and information statements, and other information
that are filed through the Commission's Electronic Data Gathering, Analysis
and Retrieval System. This Web site can be accessed at http://www.sec.gov.
The Company has filed with the Commission a Registration Statement on Form
S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits thereto, certain parts of which
are omitted in accordance with the rules and regulations of the Commission.
For further information with respect to the Company and the Common Stock,
reference is made to the Registration Statement and the exhibits thereto.
Statements contained in this Prospectus as to the contents of any contract or
other document are not necessarily complete and, in each instance, reference
is made to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. Copies of the Registration Statement, including all exhibits
thereto, may be obtained from the Commission's principal office in Washington,
D.C. upon payment of the fees prescribed by the Commission, or may be examined
without charge at the offices of the Commission described above.
31
<PAGE>
INFORMATION INCORPORATED BY REFERENCE
The following documents filed by the Company with the Commission pursuant to
the Exchange Act are incorporated by reference herein: (i) the Company's
Annual Report on Form 10-K for the year ended February 1, 1997, as amended,
and the Quarterly Reports on Form 10-Q for the fiscal quarters ended May 3,
1997 and August 2, 1997; (ii) the description of the Company's Common Stock to
be offered hereby contained in the Company's Registration Statement on Form 8-
A filed on March 1, 1996 pursuant to Section 12(g) of the Exchange Act
including any amendment or report filed for the purpose of updating such
description and (iii) all other reports and other documents filed by the
Company pursuant to Sections 13(a), 14 and 15(d) of the Exchange Act since the
end of the fiscal year covered by the Annual Report referred to above and
prior to the completion of this offering.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of the Registration Statement and this Prospectus to the extent
that a statement contained in the Registration Statement or in this Prospectus
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of the Registration Statement or this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus is delivered (including any beneficial owner),
upon the written or oral request of any such person, a copy of any or all of
the documents referred to above or elsewhere herein which have been
incorporated by reference in this Prospectus, other than exhibits to such
documents. Requests for such copies should be directed to Patricia T. Saucy,
Acting Chief Financial Officer, Vice President, Finance, Chief Accounting
Officer and Secretary, Cost Plus, Inc., 201 Clay Street, Oakland, California
94607, (510) 893-7300, extension 3071.
32
<PAGE>
COST PLUS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS - FISCAL YEAR ENDED FEBRUARY 1, 1997,
ELEVEN MONTH PERIOD ENDED FEBRUARY 3, 1996, AND FISCAL YEAR ENDED
FEBRUARY 25, 1995
Independent Auditors' Report........................................... F-2
Consolidated Balance Sheets............................................ F-3
Statements of Consolidated Operations.................................. F-4
Statement of Consolidated Shareholders' Equity......................... F-5
Statements of Consolidated Cash Flows.................................. F-6
Notes to Consolidated Financial Statements............................. F-7
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - SIX MONTHS ENDED AUGUST 2,
1997 AND
AUGUST 3, 1996
Condensed Consolidated Balance Sheets.................................. F-16
Statements of Condensed Consolidated Operations........................ F-17
Statements of Condensed Consolidated Cash Flows........................ F-18
Notes to Condensed Consolidated Financial Statements................... F-19
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Cost Plus, Inc.
Oakland, California
We have audited the accompanying consolidated balance sheets of Cost Plus,
Inc. as of February 1, 1997 and February 3, 1996, and the related statements
of consolidated operations, consolidated shareholders' equity and consolidated
cash flows for the fiscal year ended February 1, 1997, the eleven month period
ended February 3, 1996 and the fiscal year ended February 25, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Cost Plus, Inc. as of
February 1, 1997 and February 3, 1996, and the results of their operations and
their cash flows for the fiscal year ended February 1, 1997, the eleven month
period ended February 3, 1996 and the fiscal year ended February 25, 1995 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
San Francisco, California
March 14, 1997
F-2
<PAGE>
COST PLUS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 14,398 $ 2,181
Merchandise inventories.............................. 42,605 35,213
Other current assets................................. 2,413 1,960
-------- --------
Total current assets............................... 59,416 39,354
Property and equipment, net............................ 60,205 58,300
Other assets........................................... 8,577 8,332
-------- --------
Total assets....................................... $128,198 $105,986
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 14,706 $ 9,422
Income taxes payable................................. 6,095 3,359
Accrued compensation................................. 6,607 5,373
Revolving line of credit with related parties........ -- 3,165
Other current liabilities............................ 7,201 6,933
-------- --------
Total current liabilities.......................... 34,609 28,252
Capital lease obligations.............................. 14,215 14,633
Note payable to related parties........................ -- 19,895
Deferred income taxes.................................. 3,548 4,455
Other long-term obligations............................ 2,617 2,392
Shareholders' equity:
Preferred stock, $.01 par value: 5,000,000 and 0
shares authorized; none issued and outstanding...... -- --
Common stock, $.01 par value: 30,000,000 and
6,819,931 shares authorized; issued and outstanding
8,099,840 and 5,906,264 shares...................... 81 59
Additional paid-in capital........................... 91,166 61,765
Deficit.............................................. (18,038) (25,465)
-------- --------
Total shareholders' equity......................... 73,209 36,359
-------- --------
Total liabilities and shareholders' equity............. $128,198 $105,986
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
COST PLUS, INC.
STATEMENTS OF CONSOLIDATED OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ELEVEN MONTH FISCAL YEAR
ENDED PERIOD ENDED ENDED
FEBRUARY 1, FEBRUARY 3, FEBRUARY 25,
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Net sales............................... $214,814 $171,548 $151,196
Cost of sales and occupancy............. 135,072 107,800 95,608
-------- -------- --------
Gross profit.......................... 79,742 63,748 55,588
Selling, general and administrative
expenses............................... 62,649 50,194 46,561
Preopening store expenses............... 2,053 1,620 1,137
-------- -------- --------
Income from operations.................. 15,040 11,934 7,890
Interest expense........................ 2,451 4,843 4,862
-------- -------- --------
Income before income taxes.............. 12,589 7,091 3,028
Provision for income taxes.............. 5,162 2,909 1,211
-------- -------- --------
Net income.............................. $ 7,427 $ 4,182 $ 1,817
======== ======== ========
Net income per common and common
equivalent share....................... $ 0.92 $ 0.68
======== ========
Weighted average common and common
equivalent shares outstanding.......... 8,105 6,153
======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
COST PLUS, INC.
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARES)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
------------------ ---------------- PAID-IN SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
---------- ------ --------- ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
February 26, 1994...... 7,045,707 $ 70 514,400 $ 5 $62,114 $(31,464) $30,725
Net income.............. 1,817 1,817
---------- ---- --------- --- ------- -------- -------
Balance at
February 25, 1995...... 7,045,707 70 514,400 5 62,114 (29,647) 32,542
Stock conversion, net of
related costs.......... (7,045,707) (70) 5,307,528 53 (392) (409)
Exercise of stock
options................ 84,336 1 43 44
Net income.............. 4,182 4,182
---------- ---- --------- --- ------- -------- -------
Balance at
February 3, 1996....... -- -- 5,906,264 59 61,765 (25,465) 36,359
Initial public offering,
net of related costs... 2,136,614 21 28,876 28,897
Stock issued under
employee stock
purchase plan.......... 12,700 -- 251 251
Exercise of stock
options................ 44,262 1 178 179
Tax effect of
disqualifying stock
dispositions........... 96 96
Net income.............. 7,427 7,427
---------- ---- --------- --- ------- -------- -------
Balance at
February 1, 1997....... -- $ -- 8,099,840 $81 $91,166 $(18,038) $73,209
========== ==== ========= === ======= ======== =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
COST PLUS, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ELEVEN MONTH FISCAL YEAR
ENDED PERIOD ENDED ENDED
FEBRUARY 1, FEBRUARY 3, FEBRUARY 25,
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................... $ 7,427 $ 4,182 $ 1,817
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization.......... 6,810 5,158 4,884
Loss on disposal of property and
equipment............................. 81 153 492
Deferred income taxes.................. (962) (76) (483)
Change in assets and liabilities:
Merchandise inventories.............. (7,392) (4,153) (4,643)
Other assets......................... (1,514) (918) 40
Accounts payable..................... 5,024 (2,692) 5,845
Other liabilities.................... 4,717 4,352 4,080
------- ------- -------
Net cash provided by operating
activities........................ 14,191 6,006 12,032
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.... (8,001) (5,599) (6,535)
------- ------- -------
Net cash used in investing
activities........................ (8,001) (5,599) (6,535)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings under
revolving line of credit.............. (3,165) 616 (3,679)
Principal payments on capital lease
obligations........................... (336) (243) (191)
Issuance of stock...................... 29,423 (365) --
Payments on other long term debt....... (19,895) -- --
------- ------- -------
Net cash provided by (used in)
financing activities.............. 6,027 8 (3,870)
------- ------- -------
Net increase in cash and cash
equivalents............................. 12,217 415 1,627
Cash and cash equivalents:
Beginning of period.................... 2,181 1,766 139
------- ------- -------
End of period.......................... $14,398 $ 2,181 $ 1,766
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for
interest.............................. $ 2,850 $ 4,943 $ 4,922
======= ======= =======
Cash paid during the year for taxes.... $ 3,358 $ 1,135 $ 109
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
COST PLUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business--Cost Plus, Inc. and subsidiaries (the "Company") is a specialty
retailer of casual home living and entertaining products. At February 1, 1997,
the Company operated 58 stores under the name "Cost Plus World Market" in ten
states primarily in the western United States. The Company's product offerings
are designed to provide solutions to customers' casual living and home
entertaining needs. The offerings include home decorating items such as
furniture and rugs as well as a variety of tabletop and kitchen products. Cost
Plus stores also offer a number of gift and decorative accessories including
collectibles, cards, wrapping paper and other seasonal items. In addition,
Cost Plus offers its customers a wide selection of gourmet foods and
beverages, including wine, micro-brewed and imported beer, coffee and tea.
Fiscal Year--Effective in fiscal 1995, the Company has changed its fiscal
year end from the Saturday closest to the last day of February to the Saturday
closest to the last day of January. The fiscal years ended February 1, 1997
(fiscal 1996) and February 25, 1995 (fiscal 1994) contain 52 weeks. The eleven
month period ended February 3, 1996 (fiscal 1995) contains 49 weeks.
Principles of Consolidation--The consolidated financial statements include
the accounts of Cost Plus, Inc. and its subsidiaries. Intercompany balances
and transactions are eliminated in consolidation.
Accounting Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Cash Equivalents--The Company considers all highly liquid investments with
original maturities of three months or less as cash equivalents.
Merchandise Inventories--Inventories are stated at the lower of cost or
market as determined under the retail inventory method. Cost includes certain
buying and distribution costs related to the procurement and processing of
merchandise.
Preopening Store Expenses--Preopening store expenses include grand opening
advertising, labor and hiring expenses and are expensed as incurred.
Property and Equipment--Furniture, fixtures and equipment are stated at cost
and depreciated using the straight-line method over their estimated useful
lives which is generally five years. Leasehold improvements are amortized on a
straight-line basis over the lesser of the related lease terms or useful
lives.
Capitalized Leases--Noncancelable leases which meet the criteria of capital
leases are capitalized as assets and amortized over the lease term, using the
straight-line method.
Other Assets--Goodwill is amortized on a straight-line basis over 40 years.
Lease rights and interests are amortized on a straight-line basis over the
lease term.
Long-Lived Assets--The Company's policy is to review the recoverability of
all long-lived assets on an annual basis and whenever events or changes
indicate that the carrying amount of an asset may not be recoverable. Based
upon the Company's review as of February 1, 1997 and February 3, 1996, no
material adjustment was made to the carrying value of such assets.
Deferred Rent--Certain of the Company's operating leases contain
predetermined fixed escalations of the minimum rentals during the initial
term. For these leases, the Company recognizes the related rental expense on a
straight-line basis over the life of the lease and records the difference
between the amount
F-7
<PAGE>
COST PLUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
charged to operations and amounts paid as deferred rent. As part of its lease
agreements, the Company receives certain lease incentives, primarily
construction allowances. These allowances have been deferred and are amortized
on a straight-line basis over the life of the lease as a reduction of rent
expense.
Advertising Expense--Advertising costs are expensed as incurred. For the
fiscal year ended February 1, 1997, the eleven month period ended February 3,
1996, and the fiscal year ended February 25, 1995, advertising costs were
$11,519,000, $8,725,000 and $7,763,000 respectively.
Concentration of Credit Risk--Financial instruments, which potentially
subject the Company to concentration of credit risk, consist principally of
cash and cash equivalents. The Company places its cash with high quality
financial institutions. At times, such amounts may be in excess of the FDIC
insurance limits.
Taxes on Income--Income taxes are accounted for using an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized
in the Company's consolidated financial statements or tax returns. In
estimating future tax consequences, all expected future events are considered
other than changes in the tax law or rates.
Earnings per Share--Earnings per share are computed by dividing net income
by the weighted average number of common and common equivalent shares
outstanding during the period. Common stock options issued within one year of
the Company's initial public offering were considered as outstanding for the
entire period ended February 3, 1996.
Stock Based Compensation--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations.
Impact of New Accounting Standards--In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 128 ("SFAS 128"), Earnings per Share ("EPS"). SFAS 128 requires dual
presentation of basic EPS and diluted EPS on the face of all income statements
issued after December 15, 1997 for all entities with complex capital
structures. Basic EPS is computed as net income divided by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares issuable
through stock options, warrants and other convertible securities. The pro
forma effect assuming adoption of SFAS 128 at the beginning of each period is
presented below:
<TABLE>
<CAPTION>
FISCAL FISCAL
1996 1995
------ ------
<S> <C> <C>
Pro forma EPS:
Basic........................................................ $0.96 $0.72
Diluted...................................................... $0.92 $0.68
</TABLE>
F-8
<PAGE>
COST PLUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Land and land improvements........................... $ 7,030 $ 7,075
Building and leasehold improvements.................. 33,400 30,510
Furniture, fixtures and equipment.................... 23,683 19,164
Facilities under capital leases...................... 26,700 26,700
-------- --------
Total............................................ 90,813 83,449
Less accumulated depreciation........................ (30,608) (25,149)
-------- --------
Property and equipment, net.......................... $ 60,205 $ 58,300
======== ========
</TABLE>
3. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Goodwill............................................. $ 3,972 $ 3,972
Lease rights and interests........................... 3,146 3,146
Other................................................ 5,805 5,099
------- -------
Total............................................ 12,923 12,217
Less accumulated amortization........................ (4,346) (3,885)
------- -------
Other assets......................................... $ 8,577 $ 8,332
======= =======
</TABLE>
F-9
<PAGE>
COST PLUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. LEASES
The Company leases certain property consisting of retail stores, warehouses,
the corporate office and equipment. Store leases typically contain provisions
for two to three renewal options for five to ten years each with renewal
periods from 1997 to 2040 at the then current market rates. The retail store,
warehouse and corporate office leases generally provide for the Company to
assume the maintenance and all or a portion of the property tax obligations on
the leased property.
The minimum rental payments required under capital leases (with interest
rates generally 12.75%) and noncancelable operating leases with an initial
lease term in excess of one year at February 1, 1997, are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES TOTAL
------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Year ending: 1998............................. $ 2,245 $ 12,966 $ 15,211
1999............................. 2,245 12,337 14,582
2000............................. 2,270 10,919 13,189
2001............................. 2,305 10,993 13,298
2002............................. 1,928 10,623 12,551
Thereafter through the year 2040............... 32,006 76,798 108,804
------- -------- --------
Minimum lease commitments...................... 42,999 $134,636 $177,635
======== ========
Less amount representing interest.............. (28,367)
-------
Present value of capital lease obligations..... 14,632
Less current portion........................... (417)
-------
Long-term portion.............................. $14,215
=======
</TABLE>
Accumulated depreciation related to capital leases amounted to $9,580,000
and $8,482,000 at February 1, 1997 and February 3, 1996, respectively.
Depreciation expense related to capitalized leases is classified as occupancy.
For the fiscal year ended February 1, 1997, the eleven-month period ended
February 3, 1996 and the fiscal year ended February 25, 1995, such
depreciation expense was $1,098,000, $991,000 and $1,097,000, respectively.
Minimum and contingent rental expense, which are based upon certain factors
such as sales volume and property taxes, under operating and capital leases,
as well as sublease rental income, are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ELEVEN MONTH FISCAL YEAR
ENDED PERIOD ENDED ENDED
FEBRUARY 1, FEBRUARY 3, FEBRUARY 25,
1997 1996 1995
----------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating leases:
Minimum rental expense............. $ 9,924 $ 7,127 $ 6,447
Contingent rental expense.......... 554 506 488
Less sublease rental income........ (1,884) (1,477) (1,423)
------- ------- -------
Total............................ $ 8,594 $ 6,156 $ 5,512
======= ======= =======
Capital leases--contingent rental
expense............................. $ 813 $ 685 $ 712
======= ======= =======
</TABLE>
Total minimum rental income to be received from noncancelable sublease
agreements through 2011 is approximately $13,651,000 as of February 1, 1997.
F-10
<PAGE>
COST PLUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. REVOLVING LINE OF CREDIT AND NOTE PAYABLE TO RELATED PARTIES
Revolving line of credit and note payable to related parties (see Note 10)
consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Revolving line of credit............................. $-- $ 3,165
==== =======
Note payable......................................... $-- $19,895
Less current portion................................. -- --
---- -------
Total............................................ $-- $19,895
==== =======
</TABLE>
On May 7, 1996 the Company entered into a revolving line of credit agreement
with Bank of America which expires May 31, 1998. The Company's existing
revolving line of credit agreement was terminated. The new agreement allows
for cash borrowings and letters of credit of up to $20,000,000 from January 1
through June 30 and $35,000,000 from July 1 through December 31 of each year.
The Company is required to have not more than $5,000,000 outstanding,
excluding letters of credit, for a period of 45 days between December 1 and
March 31 of the next year. Interest is paid monthly at the bank's reference
rate (8.25% at February 1, 1997) or LIBOR plus 2%, depending on the nature of
the borrowings. A commitment fee on the unused portion is payable quarterly,
in arrears, at .125% per year. The agreement is secured by the Company's
inventory and receivables. The Company is required to maintain certain
financial loan covenants including minimum tangible net worth, earnings
coverage ratio and inventory turn. At February 1, 1997, the Company had no
outstanding borrowings under the line of credit. Letters of credit totaling
$2,160,590 were outstanding leaving current availability of $17,839,410.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires entities to disclose the fair value
of their financial instruments. The carrying value of current assets and
liabilities approximates their fair market value.
7. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ELEVEN MONTH FISCAL YEAR
ENDED PERIOD ENDED ENDED
FEBRUARY 1, FEBRUARY 3, FEBRUARY 25,
1997 1996 1995
----------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Payable:
Federal............................. $5,240 $2,399 $1,293
State............................... 1,045 586 401
------ ------ ------
Total payable..................... 6,285 2,985 1,694
------ ------ ------
Deferred:
Federal............................. (989) (11) (330)
State............................... (134) (65) (153)
------ ------ ------
Total deferred.................... (1,123) (76) (483)
------ ------ ------
Provision for income taxes............ $5,162 $2,909 $1,211
====== ====== ======
</TABLE>
F-11
<PAGE>
COST PLUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In the year ended February 26, 1994 and prior years, the Company's
California taxable income or loss was included in a California unitary
combined franchise tax return with a shareholder who will absorb any
California tax liability or benefit resulting therefrom. In subsequent
periods, the Company is not included in the combined franchise tax return with
this shareholder and has provided for its own California state taxes payable.
The differences between the U.S. federal statutory tax rate and the
Company's effective rate are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ELEVEN MONTH FISCAL YEAR
ENDED PERIOD ENDED ENDED
FEBRUARY 1, FEBRUARY 3, FEBRUARY 25,
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
U.S. federal statutory tax rate...... 35.0% 34.0% 34.0%
State income taxes (net of U.S.
federal income tax benefit)......... 4.7 5.3 5.7
Goodwill amortization................ 0.6 0.6 1.6
Other................................ 0.7 1.1 (1.3)
---- ---- ----
Effective income tax rate............ 41.0% 41.0% 40.0%
==== ==== ====
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ELEVEN MONTH FISCAL YEAR
ENDED PERIOD ENDED ENDED
FEBRUARY 1, FEBRUARY 3, FEBRUARY 25,
1997 1996 1995
----------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current deferred tax asset:
Deductible reserves................ $ 276 $ 221 $ 336
------- ------- -------
Long-term deferred tax asset (liabil-
ity):
Deferred rent...................... 838 560 703
Capitalized leases................. (919) (1,225) (1,578)
Lease rights....................... (810) (861) (925)
Depreciation....................... (2,016) (2,564) (2,877)
Other.............................. (641) (365) 32
------- ------- -------
Total............................ (3,548) (4,455) (4,645)
------- ------- -------
Net deferred tax liabilities......... $(3,272) $(4,234) $(4,309)
======= ======= =======
</TABLE>
8. EQUITY AND STOCK COMPENSATION PLANS
STOCK
During the year ended February 25, 1995, the Company amended and restated
its Articles of Incorporation to increase the number of authorized shares of
common stock from 1,461,034 to 6,819,931.
On March 17, 1995, the Company consummated a series of agreements
("Agreements") with its shareholders to change its existing capital structure
and amend its credit facilities. The Company and its shareholders agreed to
exchange existing 7,045,707 shares of preferred stock, 514,400 shares of
common stock and 49,315 of unexercised preferred stock options for 5,307,528
shares of newly issued shares of common stock based on the exchange ratios as
specified in the Agreements. The Company amended and restated its Articles of
Incorporation to state that no shares of preferred stock are authorized.
F-12
<PAGE>
COST PLUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On February 15, 1996, the Board of Directors authorized the amendment and
restatement of its Articles of Incorporation to increase the number of
authorized shares of common stock from 6,819,931 to 30,000,000 and authorize
5,000,000 shares of preferred stock for issuance.
OPTIONS
The Company currently has options outstanding under three employee stock
option plans: the 1988 Stock Option Plan ("1988 Plan"), the 1994 Stock Option
Plan ("1994 Plan") and the 1995 Stock Option Plan ("1995 Plan"). The 1988 Plan
permitted the granting of options to employees to purchase up to 219,155
shares of common stock at prices ranging from 85% to 100% of fair market value
as of the date of grant. Options are exercisable over ten years and generally
vest over four years. Upon approval of the 1994 Plan in March 1995, the 1988
Plan was terminated except for options then outstanding. The 1994 Plan
permitted the granting of options to employees to purchase up to 862,656
shares of common stock at fair market value as of the date of grant. Options
are exercisable over ten years and became fully vested upon the Company's
initial public offering in April 1996. Upon approval of the 1995 Plan in
November 1995, the 1994 Plan was terminated except for options then
outstanding.
The 1995 Plan permits the granting of options to employees and directors to
purchase, at fair market value as of the date of grant, up to 774,669 shares
of common stock, less the aggregate number of shares outstanding under the
1994 Plan grants or issued upon exercise of options granted under the 1994
Plan (364,927 at February 1, 1997). Options are exercisable over ten years and
vest as determined by the Board of Directors, generally over three or four
years. A 250,000 increase in the number of shares of common stock reserved for
issuance under the 1995 Plan, along with certain other amendments to the 1995
Plan, was approved by the Board of Directors in October 1996 and the
shareholders in November 1996.
On March 13, 1996, the Board of Directors approved the 1996 Director Stock
Option Plan ("Director Option Plan") which permits the granting of options to
non-employee directors to purchase up to 28,300 shares of common stock at fair
market value as of the date of grant. Each non-employee director elected after
March 13, 1996 will automatically be granted, upon election, a nonstatutory
option to purchase 7,075 shares of common stock. Options are exercisable over
ten years and vest over a four year period.
A summary of activity under the above option Plans is set forth below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------- --------
<S> <C> <C>
Outstanding at February 26, 1994......................... 136,326 $0.17
Canceled............................................... (23,056) 0.17
-------
Outstanding at February 25, 1995 (92,599 exercisable at a
weighted average price of $0.18)........................ 113,270 0.17
Granted................................................ 753,334 8.27
Exercised.............................................. (84,336) 0.52
Canceled............................................... (61,311) 5.77
-------
Outstanding at February 3, 1996 (95,349 exercisable at a
weighted average price of $3.00)........................ 720,957 8.26
Granted................................................ 188,725 17.78
Exercised.............................................. (44,262) 4.01
Canceled............................................... (11,607) 8.47
-------
Outstanding at February 1, 1997.......................... 853,813 10.57
=======
Exercisable at February 1, 1997.......................... 331,083
=======
</TABLE>
F-13
<PAGE>
COST PLUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Additional information regarding options outstanding as of February 1, 1997
is as follows:
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
WEIGHTED AVG. -------------------------
REMAINING WEIGHTED AVG. WEIGHTED AVG.
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YRS.) PRICE EXERCISABLE PRICE
--------------- ----------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$ 0.06 - 0.06 2,310 5.1 $ 0.06 1,757 $0.06
5.77 - 5.94 329,326 8.1 5.77 329,326 5.77
11.31 - 15.00 347,602 8.8 11.46 -- --
18.00 - 18.25 174,575 9.8 18.01 -- --
------- --- ------ ------- -----
853,813 8.7 $10.57 331,083 $5.74
======= === ====== ======= =====
</TABLE>
At February 1, 1997, 144,601 and 21,225 shares were available for future
grants under the 1995 Plan and Director Option Plan, respectively.
EMPLOYEE STOCK PURCHASE PLAN
On March 13, 1996, the Board of Directors approved the 1996 Employee Stock
Purchase Plan ("Purchase Plan"). A total of 300,000 shares have been
authorized for issuance under the Purchase Plan. Employees who work at least
20 hours per week and more than five calendar months per calendar year and
have been so employed for at least one year are eligible to have a specified
percentage (not to exceed 10%) of each salary payment withheld to purchase
common stock at 90% of the fair market value of the common stock as of the
last day of the purchase period.
ADDITIONAL STOCK PLAN INFORMATION
As discussed in Note 1, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with Accounting
Principles Board No. 25, Accounting for Stock Issued to Employees, and its
related interpretations. Accordingly, no compensation expense has been
recognized in the financial statements for employee stock arrangements.
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting
for Stock-Based Compensation, requires the disclosure of pro forma net income
and earnings per share had the Company adopted the fair value method as of the
beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based awards
to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely
tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock options awards. These models
also require subjective assumptions including future stock price volatility
and expected time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the Black-Scholes option pricing model
with the following weighted average assumptions: expected life, 1.8 years
following vesting; stock volatility, 55.3% in both fiscal 1996 and in fiscal
1995; risk free interest rates, 5.9% in fiscal 1996 and 6.2% in fiscal 1995;
and no dividends during the expected term. The Company's calculations are
based on a multiple option valuation approach, and forfeitures are recognized
as they occur. If the computed fair values of the fiscal 1996 and fiscal 1995
awards had been amortized to expense over the vesting period of the awards,
pro forma net income would have been $7,251,000 ($0.90 per share) in fiscal
1996 and $3,621,000 ($0.60 per share) in fiscal 1995. However, the impact of
outstanding non-vested stock options granted prior to fiscal 1995 has been
excluded from the pro forma calculation; accordingly, the fiscal 1996 and
fiscal 1995 pro forma adjustments are not indicative of future period pro
forma adjustments, when the calculation will apply to all applicable stock
options.
F-14
<PAGE>
COST PLUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan for employees who meet certain service and age
requirements. Participants may contribute up to 15% of their salaries to a
maximum of $9,500 and qualify for favorable tax treatment under Section 401(k)
of the Internal Revenue Code.
10. RELATED PARTY TRANSACTIONS
At February 3, 1996, the Company had outstanding $23,060,000 on a note
payable and line of credit agreement and $401,000 in interest payable to two
shareholders (see Note 5). Proceeds from the Company's initial public offering
in April 1996 were used to repay the note payable and the then outstanding
balance under the line of credit agreement. In the fiscal year ended February
1, 1997, the eleven month period ended February 3, 1996 and the fiscal year
ended February 25, 1995, related interest expense amounted to $409,405,
$3,073,000 and $2,976,000, respectively.
F-15
<PAGE>
COST PLUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS, UNAUDITED)
<TABLE>
<CAPTION>
AUGUST AUGUST
2, 3,
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 786 $ 1,314
Merchandise inventories.................................. 50,557 41,231
Other current assets..................................... 2,609 2,060
-------- --------
Total current assets................................... 53,952 44,605
Property and equipment, net................................ 61,459 58,026
Other assets............................................... 8,271 8,222
-------- --------
Total assets........................................... $123,682 $110,853
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 10,943 $ 9,583
Income taxes payable..................................... -- 677
Accrued compensation..................................... 5,927 5,047
Revolving line of credit................................. 4,900 2,909
Other current liabilities................................ 7,222 6,718
-------- --------
Total current liabilities.............................. 28,992 24,934
Capital lease obligations.................................. 13,980 14,424
Deferred income taxes...................................... 3,548 4,455
Other long-term obligations................................ 2,854 2,228
Shareholders' equity:
Preferred stock, $.01 par value: 5,000,000 shares autho-
rized
August 2, 1997; none issued and outstanding............. -- --
Common stock, $.01 par value: 30,000,000 shares
authorized; issued and outstanding 8,210,502 and
8,071,449 shares........................................ 82 81
Additional paid-in capital............................... 91,970 90,788
Deficit.................................................. (17,744) (26,057)
-------- --------
Total shareholders' equity............................. 74,308 64,812
-------- --------
Total liabilities and shareholders' equity............. $123,682 $110,853
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
F-16
<PAGE>
COST PLUS, INC.
STATEMENTS OF CONDENSED CONSOLIDATED OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS, UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------
AUGUST 2, AUGUST 3,
1997 1996
--------- ---------
<S> <C> <C>
Net sales................................................. $95,819 $79,113
Cost of sales and occupancy............................... 62,364 51,326
------- -------
Gross profit............................................ 33,455 27,787
Selling, general and administrative expenses.............. 31,544 26,566
Preopening store expenses................................. 640 840
------- -------
Income from operations.................................... 1,271 381
Interest expense.......................................... 781 1,384
------- -------
Income (loss) before income taxes......................... 490 (1,003)
Provision for (benefit from) income taxes................. 196 (411)
------- -------
Net income (loss)....................................... $ 294 $ (592)
======= =======
Net income (loss) per common and common equivalent share.. $ .03 $ (.08)
======= =======
Weighted average common and common equivalent shares out-
standing................................................. 8,489 7,733
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
F-17
<PAGE>
COST PLUS, INC.
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------
AUGUST 2, AUGUST 3,
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $ 294 $ (592)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 3,874 3,285
Loss on disposal of property and equipment................ 31 --
Change in assets and liabilities:
Merchandise inventories.................................. (7,952) (6,018)
Other assets............................................. (171) (242)
Accounts payable......................................... (3,147) 512
Income taxes payable..................................... (6,095) (2,682)
Other liabilities........................................ (449) (746)
------- -------
Net cash used in operating activities................... (13,615) (6,483)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................ (5,494) (3,110)
------- -------
Net cash used in investing activities................... (5,494) (3,110)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings under revolving line of credit... 4,900 (256)
Payment of note payable to related parties................. -- (19,895)
Principal payments on capital lease obligations............ (208) (168)
Proceeds from issuance of stock, net of related costs...... 805 29,045
------- -------
Net cash provided by financing activities............... 5,497 8,726
------- -------
Net decrease in cash and cash equivalents.................. (13,612) (867)
Cash and cash equivalents:
Beginning of period...................................... 14,398 2,181
------- -------
End of period............................................ $ 786 $ 1,314
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
F-18
<PAGE>
COST PLUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED AUGUST 2, 1997 AND AUGUST 3, 1996
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared from the records of the Company without audit and, in the
opinion of management, include all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position at
August 2, 1997 and August 3, 1996; the interim results of operations for the
six months ended August 2, 1997 and August 3, 1996; and changes in cash flows
for the six months then ended.
Accounting policies followed by the Company are described in Note 1 to the
audited consolidated financial statements for the fiscal year ended February
1, 1997. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted for purposes of the condensed
consolidated interim financial statements. The condensed consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements, including notes thereto, for the fiscal
year ended February 1, 1997.
The results of operations for the six month periods herein presented are not
necessarily indicative of the results to be expected for the full year.
Impact of New Accounting Standards--In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 128 ("SFAS 128"), Earnings per Share ("EPS"). SFAS 128 requires dual
presentation of basic EPS and diluted EPS on the face of all income statements
issued after December 15, 1997 for all entities with complex capital
structures. Basic EPS is computed as net income divided by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares issuable
through stock options, warrants and other convertible securities. The Company
is required to adopt SFAS 128 in the fourth quarter of fiscal 1997 and will
restate, at that time, EPS data for prior periods to conform with SFAS 128.
Earlier application is not permitted. The pro forma effect assuming adoption
of SFAS 128 at the beginning of each period is presented below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------
AUGUST 2, AUGUST 3,
1997 1996
--------- ---------
<S> <C> <C>
Pro forma EPS:
Basic................................................... $0.04 $(0.08)
Diluted................................................. $0.03 $(0.08)
</TABLE>
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive
Income, and No. 131 ("SFAS 131"), Disclosures about Segments of an Enterprise
and Related Information. SFAS 130 requires that an enterprise report, by major
components and as a single total, the change in its net assets during the
period from nonowner sources; and SFAS 131 establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, service, geographic areas and major customers.
Adoptions of these statements will not impact the Company's consolidated
financial position, results of operations or cash flows and any effect will be
limited to the form and content of its disclosures. Both statements are
effective for fiscal years beginning after December 15, 1997, with earlier
application permitted.
F-19
<PAGE>
COST PLUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. STATEMENTS OF CASH FLOWS SUPPLEMENTAL DISCLOSURES
Total cash paid for interest and income taxes was as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------
AUGUST 2, AUGUST 3,
1997 1996
--------- ---------
($000, UNAUDITED)
<S> <C> <C>
Interest................................................ $ 764 $1,763
Income Taxes............................................ $6,649 $2,322
</TABLE>
3. REVOLVING LINE OF CREDIT AGREEMENT
On May 7, 1996, the Company entered into a revolving line of credit
agreement with Bank of America which was amended on May 15, 1997 and expires
June 1, 1999. The amended agreement allows for cash borrowings and letters of
credit up to $20.0 million from January 1 through June 30 and up to $35.0
million from July 1 through December 31 of each year. Interest is paid monthly
at the bank's reference rate (8.50% at August 2, 1997) or LIBOR plus 1.75%,
depending on the nature of the borrowings. The agreement is secured by the
Company's inventory and receivables. The Company is required to maintain
certain financial loan covenants including minimum tangible net worth and
earnings coverage ratio. At August 2, 1997, the Company had $4.9 million of
outstanding borrowings under the line of credit and $2.9 million outstanding
under letters of credit.
4. STOCK OPTION PLANS
In June 1997, the Company amended its 1995 Stock Option Plan to increase the
number of shares available for grant by 400,000 to a total of 1,424,669
shares, less the aggregate number of shares issued or subject to options
outstanding under the 1994 Stock Option Plan. The 1996 Director Option Plan
was also amended to increase the number of shares available for grant by
40,000 to a total of 68,300 shares.
F-20
<PAGE>
[Top left-hand corner of the cover: Close-up picture of a coffee bag and a tea
bag, both displaying the World Market logo, with scattered coffee beans in the
foreground.]
[Top right-hand corner of the cover: Picture of various tabletop items displayed
in a wood cabinet.]
[Bottom left-hand corner of the cover: Picture of various collectible items,
including small figurines, masks and vases with an Asian theme.]
[Bottom right-hand corner of the cover: Picture of pasta, pasta sauce, olive oil
and serving items displayed on a wooden table with baskets of pasta in the
foreground.]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING
SHAREHOLDERS OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................... 3
Risk Factors............................................................... 5
Use of Proceeds............................................................ 9
Dividend Policy............................................................ 9
Price Range of Common Stock................................................ 9
The Company................................................................ 9
Capitalization............................................................. 10
Selected Consolidated Financial and
Operating Data............................................................ 11
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................................ 12
Business................................................................... 18
Management................................................................. 25
Principal and Selling Shareholders......................................... 28
Underwriting............................................................... 29
Legal Matters.............................................................. 31
Experts.................................................................... 31
Available Information...................................................... 31
Information Incorporated by Reference...................................... 32
Index to Consolidated Financial
Statements................................................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,722,000 Shares
[LOGO OF COST PLUS WORLD MARKET]
Common Stock
------------
PROSPECTUS
------------
BT ALEX. BROWN
WILLIAM BLAIR & COMPANY
MONTGOMERY SECURITIES
ROBERTSON, STEPHENS & COMPANY
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale of
Common Stock being registered. All amounts are estimates, except the SEC
registration fee, the NASD filing fee and the Nasdaq National Market listing
fee, and are payable by the Registrant.
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
SEC registration fee............................................... $ 25,204
NASD filing fee.................................................... 8,818
Nasdaq National Market listing fee................................. 8,000
Printing........................................................... 100,000
Legal fees and expenses............................................ 85,000
Accounting fees and expenses....................................... 65,000
Blue Sky fees and expenses......................................... 5,000
Transfer agent and registrar fees.................................. 5,000
Fees of custodian.................................................. 5,000
Miscellaneous expenses............................................. 42,978
--------
Total.............................................................. $350,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 317 of the California Corporations Code authorizes a court to award,
or a corporation's Board of Directors to grant, indemnity to directors and
officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act. The Registrant's By-laws provide
that the Registrant shall indemnify its directors and officers to the fullest
extent permitted by California law, including circumstances in which
indemnification is otherwise discretionary under California law. The
Registrant has entered into indemnification agreements with its directors and
officers containing provisions which are in some respects broader than the
specific indemnification provisions contained in the California Corporations
Code. The indemnification agreements may require the Registrant, among other
things, to indemnify its directors and officers against certain liabilities
that may arise by reason of their status or service as directors or officers
(other than liabilities arising from willful misconduct of culpable nature),
to advance their expenses incurred as a result of any proceeding against them
as to which they could be indemnified, and to obtain directors' and officers'
insurance if available on reasonable terms. Article Fifth of the Registrant's
Restated Articles of Incorporation provides for indemnification of its
directors and officers to the maximum extent permitted by the California
Corporations Code and Section 13.9 of the Registrant's Amended and Restated
By-laws provides for indemnification of its directors, officers, employees and
other agents to the maximum extent permitted by the California Corporation
Code. Reference is also made to Section 8 of the Underwriting Agreement
contained in Exhibit 1.1 hereto, which contains provisions with respect to the
indemnification of the officers and directors of the Registrant against
certain liabilities.
II-1
<PAGE>
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
1.1 Underwriting Agreement.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
23.1 Consent of Deloitte & Touche LLP (see page II-5).
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-3).
</TABLE>
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) of 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining the liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that such a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in Act and will be governed by the
final adjudication of such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Oakland, State of California, on the 15th day of
September, 1997.
COST PLUS, INC.
By: /s/ Ralph D. Dillon
-----------------------------------
Ralph D. Dillon, Chairman and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Ralph D. Dillon, Patricia T. Saucy and Henry P.
Massey, Jr. and each of them, his attorneys-in-fact, each with the power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to sign any registration
statement for the same offering covered by this Registration Statement that is
to be effective upon filing pursuant to Rule 462(b) promulgated under the
Securities Act of 1933, and all post-effective amendments thereto, and to file
the same, with all exhibits thereto in all documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about
the premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that such attorneys-in-fact and
agents or any of them, or his or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Ralph D. Dillon Chief Executive Officer and September 15, 1997
- ------------------------------------ Director (Principal
Ralph D. Dillon Executive Officer)
/s/ Murray H. Dashe President and Director September 15, 1997
- ------------------------------------
Murray H. Dashe
/s/ Patricia T. Saucy Acting Chief Financial September 15, 1997
- ------------------------------------ Officer, Vice President,
Patricia T. Saucy Finance, Chief Accounting
Officer and Secretary
(Principal Accounting and
Financial Officer)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Joseph H. Coulombe Director September 2, 1997
- ------------------------------------
Joseph H. Coulombe
/s/ Danny Gurr Director September 2, 1997
- ------------------------------------
Danny Gurr
/s/ Mervin G. Morris Director September 2, 1997
- ------------------------------------
Mervin G. Morris
/s/ Edward A. Mule Director September 2, 1997
- ------------------------------------
Edward A. Mule
/s/ Olivier Trouveroy Director September 2, 1997
- ------------------------------------
Olivier Trouveroy
/s/ Thomas D. Willardson Director September 2, 1997
- ------------------------------------
Thomas D. Willardson
</TABLE>
II-4
<PAGE>
EXHIBIT 23.1
[LETTERHEAD OF DELOITTE & TOUCHE LLP]
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Cost Plus, Inc. and
Subsidiaries on Form S-3 of our report dated March 14, 1997, appearing in the
Prospectus, which is a part of this Registration Statement, and to the
references to us under the headings "Selected Consolidated Financial and
Operating Data" and "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
San Francisco, California
September 15, 1997
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Underwriting Agreement.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
23.1 Consent of Deloitte & Touche LLP (see page II-5).
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-3).
</TABLE>
<PAGE>
EXHIBIT 1.1
2,722,000 SHARES
COST PLUS, INC.
COMMON STOCK
($0.01 PAR VALUE)
UNDERWRITING AGREEMENT
----------------------
September __, 1997
BT ALEX. BROWN INCORPORATED
WILLIAM BLAIR & COMPANY, L.L.C.
MONTGOMERY SECURITIES
ROBERTSON, STEPHENS & COMPANY LLC
As Representatives of the
Several Underwriters
c/o BT Alex. Brown Incorporated
135 East Baltimore Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
Cost Plus, Inc., a California corporation (the "Company"), and certain
shareholders of the Company (the "Selling Shareholders") propose to sell to the
several underwriters (the "Underwriters") named in Schedule I hereto for whom
you are acting as representatives (the "Representatives") an aggregate of
2,722,000 shares of the Company's Common Stock, $0.01 par value (the "Firm
Shares"), of which 400,000 shares will be sold by the Company and 2,322,000
shares will be sold by the Selling Shareholders. If you are the only
Underwriters, all references to the Representatives shall be deemed to be to the
Underwriters. The respective amounts of the Firm Shares to be so purchased by
the several Underwriters are set forth opposite their names in Schedule I
hereto, and the respective amounts to be sold by the Selling Shareholders are
set forth opposite their names in Schedule II hereto. The Company and the
Selling Shareholders are sometimes referred to herein collectively as the
"Sellers." Certain of the Selling Shareholders also propose to sell at the
Underwriters' option an aggregate of up to 408,300 additional shares of the
Company's Common Stock (the "Option Shares") as set forth below.
As the Representatives, you have advised the Company and the Selling
Shareholders (a) that you are authorized to enter into this Agreement on behalf
of the several
<PAGE>
Underwriters, and (b) that the several Underwriters are willing, acting
severally and not jointly, to purchase the numbers of Firm Shares set forth
opposite their respective names in Schedule I, plus their pro rata portion of
the Option Shares if you elect to exercise the over-allotment option in whole or
in part for the accounts of the several Underwriters. The Firm Shares and the
Option Shares (to the extent the aforementioned option is exercised) are herein
collectively called the "Shares."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. Representations and Warranties of the Company and the
-----------------------------------------------------
Selling Shareholders.
--------------------
(a) The Company represents and warrants to each of the
Underwriters as follows:
(i) A registration statement on Form S-3 (File No. 333-
____) with respect to the Shares has been carefully prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended (the
"Act"), and the Rules and Regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder and has been
filed with the Commission. The Company has complied with the conditions for the
use of Form S-3. Copies of such registration statement, including any amendments
thereto, the preliminary prospectuses (meeting the requirements of the Rules and
Regulations) contained therein and the exhibits, financial statements and
schedules, as finally amended and revised, have heretofore been delivered by the
Company to you. Such registration statement, together with any registration
statement filed by the Company pursuant to Rule 462(b) of the Act, herein
referred to as the "Registration Statement," which shall be deemed to include
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, has become effective under the Act and no
post-effective amendment to the Registration Statement has been filed as of the
date of this Agreement. "Prospectus" means (a) the form of prospectus first
filed with the Commission pursuant to Rule 424(b) or (b) the last preliminary
prospectus included in the Registration Statement filed prior to the time it
becomes effective or filed pursuant to Rule 424(a) under the Act that is
delivered by the Company to the Underwriters for delivery to purchasers of the
Shares, together with the term sheet or abbreviated term sheet filed with the
Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus
included in the Registration Statement prior to the time it becomes effective is
herein referred to as a "Preliminary Prospectus." Any reference herein to the
Registration Statement, any Preliminary Prospectus or to the Prospectus shall be
deemed to refer to and include any documents incorporated by reference therein,
and, in the case of any reference herein to any Prospectus, also shall be deemed
to include any documents incorporated by reference therein, and any supplements
or amendments thereto, filed with the Commission after the date of filing of the
Prospectus under Rules 424(b) or 430A, and prior to the termination of the
offering of the Shares by the Underwriters.
2
<PAGE>
(ii) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State of
California, with corporate power and authority to own or lease its properties
and conduct its business as described in the Registration Statement. Each of
Cost Plus of Idaho, Inc. and Cost Plus of Texas, Inc. (collectively, the
"Subsidiaries") has been duly organized and is validly existing as a corporation
in good standing under the laws of the jurisdiction of its incorporation, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement. The Subsidiaries are the
only subsidiaries, direct or indirect, of the Company. The Company and each of
the Subsidiaries are duly qualified to transact business in all jurisdictions in
which the conduct of their business requires such qualification, except where
the failure to be so qualified would not have a material adverse effect upon the
business of the Company and its Subsidiaries taken as a whole. The outstanding
shares of capital stock of each of the Subsidiaries have been duly authorized
and validly issued, are fully paid and non-assessable and are owned by the
Company free and clear of all liens, encumbrances and equities and claims; and
no options, warrants or other rights to purchase, agreements or other
obligations to issue or other rights to convert any obligations into shares of
capital stock or ownership interests in the Subsidiaries are outstanding.
(iii) The outstanding shares of Common Stock of the
Company, including all shares to be sold by the Selling Shareholders, have been
duly authorized and validly issued and are fully paid and non-assessable; the
portion of the Shares to be issued and sold by the Company have been duly
authorized and when issued and paid for as contemplated herein will be validly
issued, fully paid and non-assessable; and no preemptive rights of shareholders
exist with respect to any of the Shares or the issue and sale thereof. Neither
the filing of the Registration Statement nor the offering or sale of the Shares
as contemplated by this Agreement gives rise to any rights, other than those
which have been waived or satisfied, for or relating to the registration of any
shares of Common Stock.
(iv) The information set forth under the caption
"Capitalization" in the Prospectus is true and correct. All of the Shares
conform to the description thereof contained in the Registration Statement. The
form of certificates for the Shares conforms to the corporate law of the
jurisdiction of the Company's incorporation.
(v) The Commission has not issued an order preventing or
suspending the use of any Prospectus relating to the proposed offering of the
Shares nor instituted proceedings for that purpose. The Registration Statement
contains, and the Prospectus and any amendments or supplements thereto will
contain, all statements which are required to be stated therein by, and will
conform to, the requirements of the Act and the Rules and Regulations. The
documents incorporated by reference in the Prospectus, at the time filed with
the Commission, conformed in all respects to the requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or the Act, as
applicable, and the rules and regulations of the Commission thereunder. The
Registration Statement and any amendment thereto do not contain, and will not
contain, any untrue statement of a material fact and do not omit, and will
3
<PAGE>
not omit, to state any material fact required to be stated therein or necessary
to make the statements therein not misleading. The Prospectus and any
amendments and supplements thereto do not contain, and will not contain, any
untrue statement of material fact; and do not omit, and will not omit, to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that the Company makes no
representations or warranties as to information contained in or omitted from the
Registration Statement or the Prospectus, or any such amendment or supplement,
in reliance upon, and in conformity with, written information furnished to the
Company by or on behalf of any Underwriter through the Representatives,
specifically for use in the preparation thereof.
(vi) The consolidated financial statements of the Company
and the Subsidiaries, together with related notes as set forth or incorporated
by reference in the Registration Statement, present fairly the financial
position and the results of operations and cash flows of the Company and the
consolidated Subsidiaries, at the indicated dates and for the indicated periods.
Such financial statements and related notes have been prepared in accordance
with generally accepted principles of accounting, consistently applied
throughout the periods involved, and all adjustments necessary for a fair
presentation of results for such periods have been made. The summary financial
and statistical data included or incorporated by reference in the Registration
Statement presents fairly the information shown therein and such data has been
compiled on a basis consistent with the financial statements presented therein
and the books and records of the Company. The pro forma financial statements and
other pro forma financial information included in the Registration Statement and
the Prospectus present fairly the information shown therein, have been prepared
in accordance with the Commission's rules and guidelines with respect to pro
forma financial statements, have been properly compiled on the pro forma bases
described therein, and, in the opinion of the Company, the assumptions used in
the preparation thereof are reasonable and the adjustments used therein are
appropriate to give effect to the transactions or circumstances referred to
therein.
(vii) Deloitte & Touche LLP, who have certified certain
of the financial statements filed with the Commission as part of, or
incorporated by reference in, the Registration Statement, are independent public
accountants as required by the Act and the Rules and Regulations.
(viii) There is no action, suit, claim or proceeding
pending or, to the knowledge of the Company, threatened against the Company or
any of the Subsidiaries before any court or administrative agency or otherwise
which if determined adversely to the Company or any of its Subsidiaries might
result in any material adverse change in the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise) or
prospects of the Company and of the Subsidiaries taken as a whole or might
prevent the consummation of the transactions contemplated hereby, except as set
forth in the Registration Statement.
4
<PAGE>
(ix) The Company and the Subsidiaries have good and
marketable title to all of the properties and assets reflected in the financial
statements (or as described in the Registration Statement) hereinabove
described, subject to no lien, mortgage, pledge, charge or encumbrance of any
kind except those reflected in such financial statements (or as described in the
Registration Statement) or which are not material in amount. The Company and the
Subsidiaries occupy their leased properties under valid and binding leases
conforming in all material respects to the description thereof set forth in the
Registration Statement.
(x) The Company and the Subsidiaries have filed all
federal, state, local and foreign income tax returns which have been required to
be filed and have paid all taxes indicated by said returns and all assessments
received by them or any of them to the extent that such taxes have become due
and are not being contested in good faith. All tax liabilities have been
adequately provided for in the financial statements of the Company.
(xi) Since the respective dates as of which information
is given in the Registration Statement, as it may be amended or supplemented,
there has not been any material adverse change or any development involving a
prospective material adverse change in or affecting the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise), or prospects of the Company and its Subsidiaries taken as a whole,
whether or not occurring in the ordinary course of business, and there has not
been any material transaction entered into or any material transaction that is
probable of being entered into by the Company or the Subsidiaries, other than
transactions in the ordinary course of business and changes and transactions
described in the Registration Statement, as it may be amended or supplemented.
The Company and the Subsidiaries have no material contingent obligations which
are not disclosed in the Company's financial statements which are included in
the Registration Statement.
(xii) Neither the Company nor any of the Subsidiaries is
or with the giving of notice or lapse of time or both, will be, in violation of
or in default under its Charter or By-Laws or under any agreement, lease,
contract, indenture or other instrument or obligation to which it is a party or
by which it, or any of its properties, is bound and which default is of material
significance in respect of the condition, financial or otherwise, of the Company
and its Subsidiaries taken as a whole or the business, management, properties,
assets, rights, operations, condition (financial or otherwise) or prospects of
the Company and the Subsidiaries taken as a whole. The execution and delivery of
this Agreement and the consummation of the transactions herein contemplated and
the fulfillment of the terms hereof will not conflict with or result in a breach
of any of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust or other agreement or instrument to which the
Company or any Subsidiary is a party, or of the Charter or by-laws of the
Company or any order, rule or regulation applicable to the Company or any
Subsidiary of any court or of any regulatory body or administrative agency or
other governmental body having jurisdiction.
5
<PAGE>
(xiii) The Company has the legal right, corporate power
and authority to enter into this Agreement and to perform the transactions
contemplated hereby. This Agreement has been duly authorized, executed and
delivered by the Company.
(xiv) Each approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory, administrative or
other governmental body necessary in connection with the execution and delivery
by the Company of this Agreement and the consummation of the transactions herein
contemplated (except such additional steps as may be required by the Commission,
the National Association of Securities Dealers, Inc. (the "NASD") or such
additional steps as may be necessary to qualify the Shares for public offering
by the Underwriters under state securities or Blue Sky laws) has been obtained
or made and is in full force and effect.
(xv) The Company and each of the Subsidiaries holds all
material licenses, certificates and permits from governmental authorities which
are necessary to the conduct of their businesses; and neither the Company nor
any of the Subsidiaries has infringed any patents, patent rights, trade names,
trademarks, service marks, copyrights or trade secrets, which infringement is
material to the business of the Company and the Subsidiaries taken as a whole.
The Company knows of no material infringement by others of patents, patent
rights, trade names, trademarks, service marks, copyrights or trade secrets
owned by or licensed to the Company.
(xvi) Neither the Company, nor to the Company's best
knowledge, any of its affiliates, has taken or may take, directly or indirectly,
any action designed to cause or result in, or which has constituted or which
might reasonably be expected to constitute, the stabilization or manipulation of
the price of the shares of Common Stock to facilitate the sale or resale of the
Shares.
(xvii) Neither the Company nor any Subsidiary is an
"investment company" within the meaning of such term under the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations
of the Commission thereunder.
(xviii) The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (a)
transactions are executed in accordance with management's general or specific
authorization; (b) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (c) access to assets is
permitted only in accordance with management's general or specific
authorization; and (d) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(xix) There are no contracts or other documents required
to be described in the Registration Statement or to be filed as exhibits to the
Registration Statement by the Act or by the Rules and Regulations which have not
been described or filed as required.
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(xx) The Company and each of its Subsidiaries carry, or
are covered by, insurance in such amounts and covering such risks as is adequate
for the conduct of their respective businesses and the value of their respective
properties and as is customary for companies engaged in similar industries.
(xxi) The Company is in compliance in all material
respects with all presently applicable provisions of the Employee Retirement
Income Security Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for
which the Company would have any liability; the Company has not incurred and
does not expect to incur liability under (a) Title IV of ERISA with respect to
termination of, or withdrawal from, any "pension plan" or (b) Sections 412 or
4971 of the Internal Revenue Code of 1986, as amended, including the regulations
and published interpretations thereunder (the "Code"); and each "pension plan"
for which the Company would have any liability that is intended to be qualified
under Section 401(a) of the Code is so qualified in all material respects and
nothing has occurred, whether by action or by failure to act, which would cause
the loss of such qualification.
(xxii) The Company confirms as of the date hereof that it
is in compliance with all provisions of Section 1 of Laws of Florida, Chapter
92-198, An Act Relating to Disclosure of Doing Business with Cuba, and the
---------------------------------------------------------
Company further agrees that if it commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba after the
date the Registration Statement becomes or has become effective with the
Commission or with the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information reported or
incorporated by reference in the Prospectus, if any, concerning the Company's
business with Cuba or with any person or affiliate located in Cuba changes in
any material way, the Company will provide the Department with notice of such
business or change, as appropriate, in a form acceptable to the Department.
(b) Each of the Selling Shareholders severally represents
and warrants as follows:
(i) Such Selling Shareholder now has and at the Closing
Date and the Option Closing Date, as the case may be (as such dates are
hereinafter defined), will have good and marketable title to the Firm Shares and
the Option Shares to be sold by such Selling Shareholder, free and clear of any
liens, encumbrances, equities and claims, and full right, power and authority to
effect the sale and delivery of such Firm Shares and Option Shares; and upon the
delivery of, against payment for, such Firm Shares and Option Shares pursuant to
this Agreement, the Underwriters will acquire good and marketable title thereto,
free and clear of any liens, encumbrances, equities and claims.
(ii) Such Selling Shareholder has full right, power and
authority to execute and deliver this Agreement, the Power of Attorney, and the
Custodian
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Agreement referred to below and to perform its obligations under such
Agreements. The execution and delivery of this Agreement and the consummation
by such Selling Shareholder of the transactions herein contemplated and the
fulfillment by such Selling Shareholder of the terms hereof will not require any
consent, approval, authorization, or other order of any court, regulatory body,
administrative agency or other governmental body (except as may be required
under the Act, state securities laws or Blue Sky laws) and will not result in a
breach of any of the terms and provisions of, or constitute a default under, the
organizational documents of such Selling Shareholder, if not an individual, or
any indenture, mortgage, deed of trust or other agreement or instrument to which
such Selling Shareholder is a party, or of any order, rule or regulation
applicable to such Selling Shareholder of any court or of any regulatory body or
administrative agency or other governmental body having jurisdiction.
(iii) Such Selling Shareholder has not taken and will not
take, directly or indirectly, any action designed to, or which has constituted,
or which might reasonably be expected to cause or result in the stabilization or
manipulation of the price of the Common Stock of the Company and, other than as
permitted by the Act, the Selling Shareholder will not distribute any prospectus
or other offering material in connection with the offering of the Shares.
(iv) The information pertaining to such Selling
Shareholder under the caption "Principal and Selling Shareholders" in the
Prospectus is complete and accurate in all material respects.
2. Purchase, Sale and Delivery of the Firm Shares.
----------------------------------------------
(a) On the basis of the representations, warranties and
covenants herein contained, and subject to the conditions herein set forth, the
Sellers agree to sell to the Underwriters and each Underwriter agrees, severally
and not jointly, to purchase, at a price of $[_____] per share, the number of
Firm Shares set forth opposite the name of each Underwriter in Schedule I
hereof, subject to adjustments in accordance with Section 9 hereof. The number
of Firm Shares to be purchased by each Underwriter from each Seller shall be as
nearly as practicable in the same proportion to the total number of Firm Shares
being sold by each Seller as the number of Firm Shares being purchased by each
Underwriter bears to the total number of Firm Shares to be sold hereunder. The
obligations of the Company and of each of the Selling Shareholders shall be
several and not joint.
(b) Certificates in negotiable form for the total number of
the Shares to be sold hereunder by the Selling Shareholders have been placed in
custody with The First National Bank of Boston, as custodian (the "Custodian"),
pursuant to the Custodian Agreement executed by each Selling Shareholder for
delivery of all Firm Shares and any Option Shares to be sold hereunder by the
Selling Shareholders. Each of the Selling Shareholders specifically agrees that
the Firm Shares and any Option Shares represented by the certificates held in
custody for the Selling Shareholders under the Custodian Agreement are subject
to the interests of the Underwriters
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hereunder, that the arrangements made by the Selling Shareholders for such
custody are to that extent irrevocable, and that the obligations of the Selling
Shareholders hereunder shall not be terminable by any act or deed of the Selling
Shareholders (or by any other person, firm or corporation including the Company,
the Custodian or the Underwriters) or by operation of law (including the death
of an individual Selling Shareholder or the dissolution of a corporate Selling
Shareholder) or by the occurrence of any other event or events, except as set
forth in the Custodian Agreement. If any such event should occur prior to the
delivery to the Underwriters of the Firm Shares or the Option Shares hereunder,
certificates for the Firm Shares or the Options Shares, as the case may be,
shall be delivered by the Custodian in accordance with the terms and conditions
of this Agreement as if such event had not occurred. The Custodian is
authorized to receive and acknowledge receipt of the proceeds of sale of the
Shares held by it against delivery of such Shares.
(c) Payment for the Firm Shares to be sold hereunder is to
be made in New York Clearing House funds by certified or bank cashier's checks
drawn to the order of, or by wire transfers of same-day funds to an account
specified by, the Company for the shares to be sold by it and to the order of,
or an account specified by, The First National Bank of Boston, as Custodian, for
the shares to be sold by the Selling Shareholders, in each case against delivery
of certificates therefor to the Representatives for the several accounts of the
Underwriters. Such payment is to be made at the offices of Wilson Sonsini
Goodrich & Rosati, Professional Corporation, and such delivery is to be made at
the offices of BT Alex. Brown Incorporated, 135 East Baltimore Street,
Baltimore, Maryland, at 10:00 a.m., Baltimore time, on the third business day
after the date of this Agreement or at such other time and date not later than
five business days thereafter as you and the Company shall agree upon, such time
and date being herein referred to as the "Closing Date." (As used herein,
"business day" means a day on which the New York Stock Exchange is open for
trading and on which banks in New York are open for business and not permitted
by law or executive order to be closed.) The certificates for the Firm Shares
will be delivered in such denominations and in such registrations as the
Representatives request in writing not later than the second full business day
prior to the Closing Date, and will be made available for inspection by the
Representatives at least one business day prior to the Closing Date.
(d) In addition, on the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Selling Shareholders listed on Schedule III hereto hereby grant an
option to the several Underwriters to purchase the Option Shares at the price
per share as set forth in the first paragraph of this Section 2. The maximum
number of Option Shares to be sold by such Selling Shareholders is set forth
opposite their respective names on Schedule III hereto. The option granted
hereby may be exercised in whole or in part by giving written notice (i) at any
time before the Closing Date and (ii) only once thereafter within 30 days after
the date of this Agreement, by you, as Representatives of the several
Underwriters, to the Company, the Attorney-in-Fact, and the Custodian setting
forth the number of Option Shares as to which the several Underwriters are
exercising the option, the names and denominations in which the Option Shares
are to
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<PAGE>
be registered and the time and date at which such certificates are to be
delivered. If the option granted hereby is exercised in part, the respective
number of Option Shares to be sold by each of the Selling Shareholders listed in
Schedule III hereto shall be determined on a pro rata basis in accordance with
the percentages set forth opposite their names on Schedule III hereto, adjusted
by you in such manner as to avoid fractional shares. The time and date at which
certificates for Option Shares are to be delivered shall be determined by the
Representatives but shall not be earlier than three nor later than 10 full
business days after the exercise of such option, nor in any event prior to the
Closing Date (such time and date being herein referred to as the "Option Closing
Date"). If the date of exercise of the option is three or more business days
before the Closing Date, the notice of exercise shall set the Closing Date as
the Option Closing Date. The number of Option Shares to be purchased by each
Underwriter shall be in the same proportion to the total number of Option Shares
being purchased as the number of Firm Shares being purchased by such Underwriter
bears to the total number of Firm Shares, adjusted by you in such manner as to
avoid fractional shares. The option with respect to the Option Shares granted
hereunder may be exercised only to cover over-allotments in the sale of the Firm
Shares by the Underwriters. You, as Representatives of the several
Underwriters, may cancel such option at any time prior to its expiration by
giving written notice of such cancellation to the Company and the Attorney-in-
Fact. To the extent, if any, that the option is exercised, payment for the
Option Shares shall be made on the Option Closing Date in New York Clearing
House funds by certified or bank cashier's check drawn to the order of, or by
wire transfer of same-day funds to an account specified by, The First National
Bank of Boston, as Custodian, for the Option Shares to be sold by the Selling
Shareholders against delivery of certificates therefor at the offices of BT
Alex. Brown Incorporated, 135 East Baltimore Street, Baltimore, Maryland.
3. Offering by the Underwriters.
----------------------------
It is understood that the several Underwriters are to make a
public offering of the Firm Shares as soon as the Representatives deem it
advisable to do so. The Firm Shares are to be initially offered to the public at
the public offering price set forth in the Prospectus. The Representatives may
from time to time thereafter change the public offering price and other selling
terms. To the extent, if at all, that any Option Shares are purchased pursuant
to Section 2 hereof, the Underwriters will offer them to the public on the
foregoing terms.
It is further understood that you will act as the
Representatives for the Underwriters in the offering and sale of the Shares in
accordance with a Master Agreement Among Underwriters entered into by you and
the several other Underwriters.
4. Covenants of the Company and the Selling Shareholders.
-----------------------------------------------------
(a) The Company covenants and agrees with the several
Underwriters that:
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<PAGE>
(i) The Company will (A) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule 430A of
the Rules and Regulations is followed, to prepare and timely file with the
Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form
approved by the Representatives containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A of
the Rules and Regulations and (B) not file any amendment to the Registration
Statement or supplement to the Prospectus or any document incorporated by
reference therein of which the Representatives shall not previously have been
advised and furnished with a copy or to which the Representatives shall have
reasonably objected in writing or which is not in compliance with the Rules and
Regulations or the rules and regulations under the Exchange Act, as applicable,
and (C) file on a timely basis all reports and any definitive proxy or
information statements required to be filed by the Company with the Commission
subsequent to the date of the Prospectus and prior to the termination of the
offering of the Shares by the Underwriters.
(ii) The Company will advise the Representatives promptly
(A) when the Registration Statement or any post-effective amendment thereto
shall have become effective, (B) of receipt of any comments from the Commission,
(C) of any request of the Commission for amendment of the Registration Statement
or for supplement to the Prospectus or for any additional information, and (D)
of the issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement or the use of the Prospectus or of the institution
of any proceedings for that purpose. The Company will use its best efforts to
prevent the issuance of any such stop order preventing or suspending the use of
the Prospectus and to obtain as soon as possible the lifting thereof, if issued.
(iii) The Company will cooperate with the Representatives in
endeavoring to qualify the Shares for sale under the securities laws of such
jurisdictions as the Representatives may reasonably have designated in writing
and will make such applications, file such documents, and furnish such
information as may be reasonably required for that purpose, provided the Company
shall not be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction where it is not now so
qualified or required to file such a consent. The Company will, from time to
time, prepare and file such statements, reports, and other documents, as are or
may be required to continue such qualifications in effect for so long a period
as the Representatives may reasonably request for distribution of the Shares.
(iv) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary Prospectus
as the Representatives may reasonably request. The Company will deliver to, or
upon the order of, the Representatives during the period when delivery of a
Prospectus is required under the Act, as many copies of the Prospectus in final
form, or as thereafter amended or supplemented, as the Representatives may
reasonably request. The Company will deliver to the Representatives at or
before the Closing Date, four signed copies of the Registration Statement and
all amendments thereto including all
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<PAGE>
exhibits filed therewith, and will deliver to the Representatives such number of
copies of the Registration Statement (including such number of copies of the
exhibits filed therewith that may reasonably be requested), including documents
incorporated by reference therein, and of all amendments thereto, as the
Representatives may reasonably request.
(v) The Company will comply with the Act and the Rules and
Regulations, and the Exchange Act, and the rules and regulations of the
Commission thereunder, so as to permit the completion of the distribution of the
Shares as contemplated in this Agreement and the Prospectus. If during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, any event shall occur as a result of which, in the
judgment of the Company or in the reasonable opinion of the Underwriters, it
becomes necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances existing at the time the
Prospectus is delivered to a purchaser, not misleading, or, if it is necessary
at any time to amend or supplement the Prospectus to comply with any law, the
Company promptly will either (A) prepare and file with the Commission an
appropriate amendment to the Registration Statement or supplement to the
Prospectus or (B) prepare and file with the commission an appropriate filing
under the Exchange Act which shall be incorporated by reference in the
Prospectus so that the Prospectus as so amended or supplemented will not, in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with the law.
(vi) The Company will make generally available to its
security holders, as soon as it is practicable to do so, but in any event not
later than 15 months after the effective date of the Registration Statement, an
earnings statement (which need not be audited) in reasonable detail, covering a
period of at least 12 consecutive months beginning after the effective date of
the Registration Statement, which earnings statement shall satisfy the
requirements of Section 11(a) of the Act and Rule 158 of the Rules and
Regulations and will advise you in writing when such statement has been so made
available.
(vii) The Company will, for a period of five years from the
Closing Date, deliver to the Representatives copies of annual reports and copies
of all other documents, reports and information furnished by the Company to its
shareholders or filed with any securities exchange pursuant to the requirements
of such exchange or with the Commission pursuant to the Act or the Exchange Act.
The Company will deliver to the Representatives similar reports with respect to
significant subsidiaries, as that term is defined in the Rules and Regulations,
which are not consolidated in the Company's financial statements.
(viii) No offering, sale, short sale or other disposition of
any shares of Common Stock of the Company or other securities convertible into
or exchangeable or exercisable for shares of Common Stock or derivative of
Common Stock (or agreement for such) will be made for a period of 90 days after
the date of this Agreement, directly or indirectly, by the Company otherwise
than hereunder or with the prior written consent of BT Alex. Brown Incorporated
except that the
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Company may, without such consent, issue shares upon the exercise of options
issued pursuant to the Company's 1988 Option Plan, 1994 Stock Option Plan, 1995
Stock Option Plan and 1996 Director Option Plan and the Company may issue shares
under its 1996 Employee Stock Purchase Plan.
(ix) The Shares have been approved for quotation, subject to
notice of issuance, on the Nasdaq National Market.
(x) The Company has caused each officer and director of the
Company to furnish to you, on or prior to the date of this Agreement, a letter
or letters, in form and substance satisfactory to the Underwriters, pursuant to
which each such person shall agree not to offer, sell, sell short or otherwise
dispose of any shares of Common Stock of the Company or other capital stock of
the Company, or any other securities convertible, exchangeable or exercisable
for Common Stock of the Company or derivative of Common Stock owned by such
person or request the registration for the offer or sale of any of the foregoing
(or as to which such person has the right to direct the disposition of) for a
period of 90 days after the date of this Agreement, directly or indirectly,
except with the prior written consent of BT Alex. Brown Incorporated
("Lockup Agreements").
(xi) The Company shall apply the net proceeds of its sale of
the Shares as set forth in the Prospectus.
(xii) The Company shall not invest or otherwise use the
proceeds received by the Company from its sale of the Shares in such a manner as
would require the Company or any of the Subsidiaries to register as an
investment company under the 1940 Act.
(xiii) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
for the Common Stock.
(xiv) The Company will not take, directly or indirectly, any
action designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any securities of the Company.
(b) Each of the Selling Shareholders covenants and agrees
with the several Underwriters that:
(i) No offering, sale, short sale or other disposition
of any shares of Common Stock of the Company or other capital stock of the
Company or other securities convertible, exchangeable or exercisable for Common
Stock or derivative of Common Stock owned by the Selling Shareholder and no
request to register the offer or sale of any of the foregoing (or as to which
the Selling Shareholder has the right to direct the disposition of) will be made
for a period of 90 days after the date of this Agreement,
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<PAGE>
directly or indirectly, by such Selling Shareholder otherwise than hereunder or
with the prior written consent of BT Alex. Brown Incorporated.
(ii) In order to document the Underwriters' compliance
with the reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 and the Interest and Dividend Tax Compliance Act of
1983 with respect to the transactions herein contemplated, each of the Selling
Shareholders agrees to deliver to you prior to or at the Closing Date a properly
completed and executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department regulations in
lieu thereof).
(iii) Such Selling Shareholder will not take, directly
or indirectly, any action designed to cause or result in, or that has
constituted or might reasonably be expected to constitute, the stabilization or
manipulation of the price of any securities of the Company.
5. Costs and Expenses.
------------------
The Company will pay all costs, expenses and fees incident
to the performance of the obligations of the Sellers under this Agreement,
including, without limiting the generality of the foregoing, the following:
accounting fees of the Company; the fees and disbursements of counsel for the
Company and the Selling Shareholders; the cost of printing and delivering to, or
as requested by, the Underwriters copies of the Registration Statement,
Preliminary Prospectuses, the Prospectus, this Agreement, the Underwriters'
Selling Memorandum, the Underwriters' Invitation Letter, the Blue Sky Survey and
any supplements or amendments thereto; the filing fees of the Commission; the
filing fees and expenses (including legal fees and disbursements) incident to
securing any required review by the NASD of the terms of the sale of the Shares;
the listing fee of The Nasdaq Stock Market; and the expenses, including the fees
and disbursements of counsel for the Underwriters, incurred in connection with
the qualification of the Shares under state securities or Blue Sky laws. The
Company shall not, however, be required to pay for any of the Underwriters'
expenses (other than those related to qualification under NASD regulations and
state securities or Blue Sky laws) except that, if this Agreement shall not be
consummated because the conditions in Section 6 hereof are not satisfied, or
because this Agreement is terminated by the Representatives pursuant to Section
11(a) or Section 11(b)(i), 11(b)(vi) or 11(b)(vii) hereof, or by reason of any
failure, refusal or inability on the part of the Company or the Selling
Shareholders to perform any undertaking or satisfy any condition of this
Agreement or to comply with any of the terms hereof on their part to be
performed, unless such failure to satisfy said condition or to comply with said
terms be due to the default or omission of any Underwriter, then the Company
shall reimburse the several Underwriters for reasonable out-of-pocket expenses,
including fees and disbursements of counsel, reasonably incurred in connection
with investigating, marketing and proposing to market the Shares or in
contemplation of performing their obligations hereunder; but the Company and the
Selling Shareholders shall not in any event be liable to any of
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<PAGE>
the several Underwriters for damages on account of loss of anticipated profits
from the sale by them of the Shares.
6. Conditions of Obligations of the Underwriters.
---------------------------------------------
The several obligations of the Underwriters to purchase the
Firm Shares on the Closing Date and the Option Shares, if any, on the Option
Closing Date are subject to the accuracy, as of the Closing Date or the Option
Closing Date, as the case may be, of the representations and warranties of the
Company and the Selling Shareholders contained herein, and to the performance by
the Company and the Selling Shareholders of their covenants and obligations
hereunder and to the following additional conditions:
(a) The Registration Statement and all post-effective
amendments thereto shall have become effective and any and all filings required
by Rule 424 and Rule 430A of the Rules and Regulations shall have been made, and
any request of the Commission for additional information (to be included in the
Registration Statement or otherwise) shall have been disclosed to the
Representatives and complied with to their reasonable satisfaction. No stop
order suspending the effectiveness of the Registration Statement, as amended
from time to time, shall have been issued and no proceedings for that purpose
shall have been taken or, to the knowledge of the Company or the Selling
Shareholders, shall be contemplated by the Commission and no injunction,
restraining order, or order of any nature by a federal or state court of
competent jurisdiction shall have been issued as of the Closing Date which would
prevent the issuance of the Shares.
(b) The Representatives shall have received on the Closing
Date or the Option Closing Date, as the case may be, the opinion of Wilson
Sonsini Goodrich & Rosati, Professional Corporation, counsel for the Company
and the Selling Shareholders, dated the Closing Date or the Option Closing Date,
as the case may be, addressed to the Underwriters (and stating that it may be
relied upon by counsel to the Underwriters) to the effect that:
(i) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State of
California, with corporate power and authority to own or lease its properties
and conduct its business as described in the Registration Statement; each of the
Subsidiaries has been duly organized and is validly existing as a corporation in
good standing under the laws of the jurisdiction of its incorporation, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement; the Company and each of the
Subsidiaries are duly qualified to transact business in all jurisdictions in
which the conduct of their business requires such qualification, or in which the
failure to qualify would have a material adverse effect upon the business of the
Company and the Subsidiaries taken as a whole; and the outstanding shares of
capital stock of each of the Subsidiaries have been duly authorized and validly
issued and are fully paid and non-assessable and are owned by the Company or
15
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a Subsidiary; and, to the best of such counsel's knowledge, the outstanding
shares of capital stock of each of the Subsidiaries is owned free and clear of
all liens, encumbrances and equities and claims, and no options, warrants or
other rights to purchase, agreements or other obligations to issue or other
rights to convert any obligations into any shares of capital stock or of
ownership interests in the Subsidiaries are outstanding.
(ii) The Company has authorized and outstanding capital
stock as set forth under the caption "Capitalization" in the Prospectus; the
authorized shares of the Company's Common Stock have been duly authorized; the
outstanding shares of the Company's Common Stock, including the Shares to be
sold by the Selling Shareholders, have been duly authorized and validly issued
and are fully paid and non-assessable; all of the Shares conform to the
description thereof contained or incorporated by reference in the Prospectus;
the certificates for the Shares, assuming they are in the form filed with the
Commission, are in due and proper form; the shares of Common Stock, including
the Option Shares, if any, to be sold by the Company pursuant to this Agreement
have been duly authorized and will be validly issued, fully paid and non-
assessable when issued and paid for as contemplated by this Agreement; and no
preemptive rights of shareholders exist with respect to any of the Shares or the
issue or sale thereof.
(iii) Except as described in or contemplated by the
Prospectus, to the knowledge of such counsel, there are no outstanding
securities of the Company convertible or exchangeable into or evidencing the
right to purchase or subscribe for any shares of capital stock of the Company
and there are no outstanding or authorized options, warrants or rights of any
character obligating the Company to issue any shares of its capital stock or any
securities convertible or exchangeable into or evidencing the right to purchase
or subscribe for any shares of such stock; and except as described in the
Prospectus, to the knowledge of such counsel, no holder of any securities of the
Company or any other person has the right, contractual or otherwise, which has
not been satisfied or effectively waived, to cause the Company to sell or
otherwise issue to them, or to permit them to underwrite the sale of, any of the
Shares or the right to have any Common Shares or other securities of the Company
included in the Registration Statement or the right, as a result of the filing
of the Registration Statement, to require registration under the Act of any
shares of Common Stock or other securities of the Company.
(iv) The Registration Statement has become effective
under the Act and, to the best of the knowledge of such counsel, no stop order
proceedings with respect thereto have been instituted or are pending or
threatened under the Act.
(v) The Registration Statement, the Prospectus and each
amendment or supplement thereto and document incorporated by reference therein
comply as to form in all material respects with the requirements of the
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<PAGE>
Act and the Exchange Act, as applicable, and the applicable rules and
regulations thereunder (except that such counsel need express no opinion as to
the financial statements and related schedules included or incorporated by
reference therein). The conditions for the use of Form S-3, set forth in the
General Instructions thereto, have been satisfied.
(vi) Such counsel does not know of any contracts or
documents required to be filed as exhibits to or incorporated by reference in
the Registration Statement or described in the Registration Statement or the
Prospectus which are not so filed, incorporated by reference or described as
required, and such contracts and documents as are summarized in the Registration
Statement or the Prospectus are fairly summarized in all material respects.
(vii) Such counsel knows of no material legal or
governmental proceedings pending or threatened against the Company or any of the
Subsidiaries except as set forth in the Prospectus.
(viii) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will not
conflict with or result in a breach of any of the terms or provisions of, or
constitute a default under, the Charter or by-laws of the Company, or any
agreement or instrument known to such counsel to which the Company or any of the
Subsidiaries is a party or by which the Company or any of the Subsidiaries may
be bound.
(ix) This Agreement has been duly authorized, executed
and delivered by the Company.
(x) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is necessary in connection with the execution and delivery of
this Agreement and the consummation of the transactions herein contemplated
(other than as may be required by the NASD or as required by state securities
and Blue Sky laws as to which such counsel need express no opinion) except such
as have been obtained or made, specifying the same (except that such counsel
need express no opinion as to compliance with laws related to the sale of
alcoholic beverages and licenses therefor).
(xi) The Company is not, and will not become, as a result of
the consummation of the transactions contemplated by this Agreement, and
application of the net proceeds therefrom as described in the Prospectus,
required to register as an investment company under the 1940 Act.
(xii) This Agreement has been duly authorized,
executed and delivered on behalf of the Selling Shareholders.
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<PAGE>
(xiii) Each Selling Shareholder has full legal right, power
and authority, and any approval required by law (other than as required by state
securities and Blue Sky laws as to which such counsel need express no opinion),
to sell, assign, transfer and deliver the portion of the Shares to be sold by
such Selling Shareholder.
(xiv) The Custodian Agreement and the Power of Attorney
executed and delivered by each Selling Shareholder is valid and binding.
(xv) The Underwriters (assuming that they are bona fide
purchasers within the meaning of the Uniform Commercial Code) have acquired good
and marketable title to the Shares being sold by each Selling Shareholder on the
Closing Date, and the Option Closing Date, as the case may be, free and clear of
all liens, encumbrances, equities and claims.
In rendering such opinion Wilson Sonsini Goodrich & Rosati,
Professional Corporation may rely as to matters governed by the laws of states
other than California or federal laws on local counsel in such jurisdictions and
as to matters pertaining to the Selling Shareholders on separate counsel to the
Selling Shareholders, provided that in each case Wilson Sonsini Goodrich &
Rosati, Professional Corporation shall state that they believe that they and the
Underwriters are justified in relying on such other counsel. In addition to the
matters set forth above, such opinion shall also include a statement to the
effect that nothing has come to the attention of such counsel which leads them
to believe that (i) the Registration Statement (including all documents
incorporated by reference), at the time it became effective under the Act (but
after giving effect to any modifications incorporated therein pursuant to Rule
430A under the Act) and as of the Closing Date or the Option Closing Date, as
the case may be, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, and (ii) the Prospectus (including all
documents incorporated by reference), or any supplement thereto, on the date it
was filed pursuant to the Rules and Regulations and as of the Closing Date or
the Option Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they are made,
not misleading (except that such counsel need express no view as to financial
statements, schedules and statistical information therein). With respect to
such statement, Wilson Sonsini Goodrich & Rosati, Professional Corporation may
state that their belief is based upon the procedures set forth therein, but is
without independent check and verification.
(c) The Representatives shall have received from Orrick,
Herrington & Sutcliffe LLP, counsel for the Underwriters, an opinion dated the
Closing Date or the Option Closing Date, as the case may be, substantially to
the effect specified in subparagraphs (iv), (v) and (x) of Paragraph (b) of this
Section 6, and that the Company is a duly organized and validly existing
corporation under the laws of the State of California. In rendering such opinion
Orrick, Herrington & Sutcliffe LLP
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<PAGE>
may rely as to all matters governed other than by the laws of the State of
California or federal laws on the opinion of counsel referred to in Paragraph
(b) of this Section 6. In addition to the matters set forth above, such opinion
shall also include a statement to the effect that nothing has come to the
attention of such counsel which leads them to believe that (i) the Registration
Statement, or any amendment thereto, as of the time it became effective under
the Act (but after giving effect to any modifications incorporated therein
pursuant to Rule 430A under the Act) and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (ii) the
Prospectus, or any supplement thereto, on the date it was filed pursuant to the
Rules and Regulations and as of the Closing Date or the Option Closing Date, as
the case may be, contained an untrue statement of a material fact or omitted to
state a material fact, necessary in order to make the statements therein, in the
light of the circumstances under which they are made, not misleading (except
that such counsel need express no view as to financial statements, schedules and
statistical information therein). With respect to such statement, Orrick,
Herrington & Sutcliffe LLP may state that their belief is based upon the
procedures set forth therein, but is without independent check and verification.
(d) The Representatives shall have received at or prior to the
Closing Date from Orrick, Herrington & Sutcliffe LLP a memorandum or summary, in
form and substance satisfactory to the Representatives, with respect to the
qualification for offering and sale by the Underwriters of the Shares under the
state securities or Blue Sky laws of such jurisdictions as the Representatives
may reasonably have designated to the Company.
(e) You shall have received, on each of the dates hereof, the
Closing Date and the Option Closing Date, as the case may be, a letter dated the
date hereof, the Closing Date or the Option Closing Date, as the case may be, in
form and substance satisfactory to you, of Deloitte & Touche LLP confirming that
they are independent public accountants within the meaning of the Act and the
applicable published Rules and Regulations thereunder and stating that in their
opinion the financial statements examined by them and included in the
Registration Statement comply in form in all material respects with the
applicable accounting requirements of the Act and the related published Rules
and Regulations; and containing such other statements and information as is
ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial and statistical
information contained in the Registration Statement and Prospectus.
(f) The Representatives shall have received on the Closing Date
or the Option Closing Date, as the case may be, a certificate or certificates of
the Chief Executive Officer and the Chief Financial Officer of the Company to
the effect that, as of the Closing Date or the Option Closing Date, as the case
may be, each of them severally represents as follows:
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<PAGE>
(i) The Registration Statement has become effective
under the Act and no stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceedings for such purpose have been taken
or are, to his knowledge, contemplated by the Commission;
(ii) The representations and warranties of the Company
contained in Section 1 hereof are true and correct as of the Closing Date or the
Option Closing Date, as the case may be;
(iii) All filings required to have been made pursuant
to Rules 424 or 430A under the Act have been made;
(iv) He has carefully examined the Registration
Statement and the Prospectus (including all documents incorporated therein by
reference) and, in his opinion, as of the effective date of the Registration
Statement, the statements contained or incorporated by reference in the
Registration Statement were true and correct, and such Registration Statement
and Prospectus did not omit to state a material fact required to be stated
therein or necessary in order to make the statements therein not misleading, and
since the effective date of the Registration Statement, no event has occurred
which should have been set forth in a supplement to or an amendment of the
Prospectus which has not been so set forth in such supplement or amendment; and
(v) Since the respective dates as of which information
is given in the Registration Statement and Prospectus, there has not been any
material adverse change or any development involving a prospective material
adverse change in or affecting the condition, financial or otherwise, of the
Company and its Subsidiaries taken as a whole or the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company and the Subsidiaries taken as a whole,
whether or not arising in the ordinary course of business.
(g) The Company and the Selling Shareholders shall have furnished
to the Representatives such further certificates and documents confirming the
representations and warranties, covenants and conditions contained herein and
related matters as the Representatives may reasonably have requested.
(h) The Firm Shares and Option Shares, if any, shall have been
approved for quotation upon notice of issuance on the Nasdaq National Market.
(i) The Lockup Agreements described in Section 4(a)(x) shall be
in full force and effect.
The opinions and certificates mentioned in this Agreement shall
be deemed to be in compliance with the provisions hereof only if they are in all
material
20
<PAGE>
respects satisfactory to the Representatives and to Orrick, Herrington &
Sutcliffe LLP, counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section
6 shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be terminated by
the Representatives by notifying the Company and the Selling Shareholders of
such termination in writing or by telegram at or prior to the Closing Date or
the Option Closing Date, as the case may be.
In such event, the Selling Shareholders, the Company and the
Underwriters shall not be under any obligation to each other (except to the
extent provided in Sections 5 and 8 hereof).
7. Conditions of the Obligations of the Sellers.
--------------------------------------------
The obligations of the Sellers to sell and deliver the
portion of the Shares required to be delivered as and when specified in this
Agreement are subject to the conditions that at the Closing Date or the Option
Closing Date, as the case may be, no stop order suspending the effectiveness of
the Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
8. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of the Act, against any losses, claims, damages or liabilities to which
such Underwriter or any such controlling person may become subject under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) arise out of or are based upon (i) any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or (ii) the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; and will reimburse each Underwriter and
each such controlling person upon demand for any legal or other expenses
reasonably incurred by such Underwriter or such controlling person in connection
with investigating or defending any such loss, claim, damage or liability,
action or proceeding or in responding to a subpoena or governmental inquiry
related to the offering of the Shares, whether or not such Underwriter or
controlling person is a party to any action or proceeding; provided, however,
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement, or omission or alleged omission made in
the Registration Statement, any Preliminary Prospectus, the Prospectus, or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically
21
<PAGE>
for use in the preparation thereof. This indemnity agreement will be in
addition to any liability which the Company may otherwise have.
(b) Each Selling Shareholder, jointly and severally, agrees
to indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of the Act, against any losses,
claims, damages or liabilities to which such Underwriter or any such controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon any misstatement in or omission from the
representations and warranties of the Selling Shareholders set forth in Section
1(b) hereof. In no event, however, shall the liability of any Selling
Shareholder for indemnification under this Section 8(b) exceed the proceeds
received by such Selling Shareholder from the Underwriters in the offering. This
indemnity agreement will be in addition to any liability which the Selling
Shareholders may otherwise have.
(c) Each Underwriter severally and not jointly will
indemnify and hold harmless the Company, each of its directors, each of its
officers who have signed the Registration Statement, the Selling Shareholders,
and each person, if any, who controls the Company or the Selling Shareholders
within the meaning of the Act, against any losses, claims, damages or
liabilities to which the Company or any such director, officer, Selling
Shareholder or controlling person may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or (ii) the omission or the alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading in the light of the circumstances under
which they were made; and will reimburse any legal or other expenses reasonably
incurred by the Company or any such director, officer, Selling Shareholder or
controlling person in connection with investigating or defending any such loss,
claim, damage, liability, action or proceeding; provided, however, that each
Underwriter will be liable in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or alleged
omission has been made in the Registration Statement, any Preliminary
Prospectus, the Prospectus or such amendment or supplement, in reliance upon and
in conformity with written information furnished to the Company by or through
the Representatives specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which such Underwriter
may otherwise have.
(d) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to this Section 8, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing. No
indemnification provided for in Section 8(a), (b) or (c) shall be available to
any party who shall fail to give notice as provided in this Section 8(d) if the
party
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<PAGE>
to whom notice was not given was unaware of the proceeding to which such notice
would have related and was materially prejudiced by the failure to give such
notice, but the failure to give such notice shall not relieve the indemnifying
party or parties from any liability which it or they may have to the indemnified
party for contribution or otherwise than on account of the provisions of Section
8(a), (b) or (c). In case any such proceeding shall be brought against any
indemnified party and it shall notify the indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate therein and, to
the extent that it shall wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel satisfactory to
such indemnified party and shall pay as incurred the fees and disbursements of
such counsel related to such proceeding. In any such proceeding, any
indemnified party shall have the right to retain its own counsel at its own
expense. Notwithstanding the foregoing, the indemnifying party shall pay as
incurred (or within 30 days of presentation) the fees and expenses of the
counsel retained by the indemnified party in the event (i) the indemnifying
party and the indemnified party shall have mutually agreed to the retention of
such counsel, (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified party
and representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them or (iii) the
indemnifying party shall have failed to assume the defense and employ counsel
acceptable to the indemnified party within a reasonable period of time after
notice of commencement of the action. It is understood that the indemnifying
party shall not, in connection with any proceeding or related proceedings in the
same jurisdiction, be liable for the reasonable fees and expenses of more than
one separate firm for all such indemnified parties. Such firm shall be
designated in writing by you in the case of parties indemnified pursuant to
Section 8(a) and (b) and by the Company and the Selling Shareholders in the case
of parties indemnified pursuant to Section 8(c). The indemnifying party shall
not be liable for any settlement of any proceeding effected without its written
consent but if settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified party from
and against any loss or liability by reason of such settlement or judgment. In
addition, the indemnifying party will not, without the prior written consent of
the indemnified party, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified party is
an actual or potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action or
proceeding.
(e) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) in such proportion as
is appropriate to reflect the relative benefits received by the
23
<PAGE>
Company and the Selling Shareholders on the one hand and the Underwriters on the
other from the offering of the Shares. If, however, the allocation provided by
the immediately preceding sentence is not permitted by applicable law then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company and the Selling
Shareholders on the one hand and the Underwriters on the other in connection
with the statements or omissions which resulted in such losses, claims, damages
or liabilities (or actions or proceedings in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Selling Shareholders on the one hand and the Underwriters on the
other shall be deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the Company and the
Selling Shareholders bear to the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Selling Shareholders on
the one hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company, the Selling Shareholders and the Underwriters agree
that it would not be just and equitable if contributions pursuant to this
Section 8(e) were determined by pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations referred
to above in this Section 8(e). The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) referred to above in this Section 8(e) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this subsection (e), (i) no
Underwriter shall be required to contribute any amount in excess of the
underwriting discounts and commissions applicable to the Shares purchased by
such Underwriter, (ii) no person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation, and (iii) no
Selling Shareholder shall be required to contribute any amount in excess of the
lesser of (A) that proportion of the total of such losses, claims, damages or
liabilities indemnified or contributed against equal to the proportion of the
total Shares sold hereunder which is being sold by such Selling Shareholder, or
(B) the proceeds received by such Selling Shareholder from the Underwriters in
the offering. The Underwriters' obligations in this Section 8(e) to contribute
are several in proportion to their respective underwriting obligations and not
joint.
(f) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment thereto,
each
24
<PAGE>
party against whom contribution may be sought under this Section 8 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
(g) Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or contribution under
this Section 8 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers or any persons
controlling the Company, (ii) acceptance of any Shares and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 8.
9. Default by Underwriters.
-----------------------
If on the Closing Date or the Option Closing Date, as the
case may be, any Underwriter shall fail to purchase and pay for the portion of
the Shares which such Underwriter has agreed to purchase and pay for on such
date (otherwise than by reason of any default on the part of the Company or a
Selling Shareholder), you, as Representatives of the Underwriters, shall use
your reasonable efforts to procure within 36 hours thereafter one or more of the
other Underwriters, or any others, to purchase from the Company and the Selling
Shareholders such amounts as may be agreed upon and upon the terms set forth
herein, the Firm Shares or Option Shares, as the case may be, which the
defaulting Underwriter or Underwriters failed to purchase. If during such 36
hours you, as such Representatives, shall not have procured such other
Underwriters, or any others, to purchase the Firm Shares or Option Shares, as
the case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (a) if the aggregate number of shares with respect to which
such default shall occur does not exceed 10% of the Firm Shares or Option
Shares, as the case may be, covered hereby, the other Underwriters shall be
obligated, severally, in proportion to the respective numbers of Firm Shares or
Option Shares, as the case may be, which they are obligated to purchase
hereunder, to purchase the Firm Shares or Option Shares, as the case may be,
which such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of shares of Firm Shares or Option Shares, as the case may
be, with respect to which such default shall occur exceeds 10% of the Firm
Shares or Option Shares, as the case may be, covered hereby, the Company and the
Selling Shareholders or you as the Representatives of the Underwriters will have
the right, by written notice given within the next 36-hour period to the parties
to this Agreement, to terminate
25
<PAGE>
this Agreement without liability on the part of the non-defaulting Underwriters
or of the Company or of the Selling Shareholders except to the extent provided
in Section 8 hereof. In the event of a default by any Underwriter or
Underwriters, as set forth in this Section 9, the Closing Date or Option Closing
Date, as the case may be, may be postponed for such period, not exceeding seven
days, as you, as Representatives, may determine in order that the required
changes in the Registration Statement or in the Prospectus or in any other
documents or arrangements may be effected. The term "Underwriter" includes any
person substituted for a defaulting Underwriter. Any action taken under this
Section 9 shall not relieve any defaulting Underwriter from liability in respect
of any default of such Underwriter under this Agreement.
10. Notices.
-------
All communications hereunder shall be in writing and,
except as otherwise provided herein, will be mailed, delivered, telecopied or
Telegraphed and confirmed as follows: if to the Underwriters, to BT Alex. Brown
Incorporated, 101 California Street, San Francisco, California 94104,
Attention: Peter B. Breck; with a copy to BT Alex. Brown Incorporated, 135
East Baltimore Street, Baltimore, Maryland 21202, Attention: General Counsel; if
to the Company or the Selling Shareholders, to Cost Plus, Inc., 201 Clay Street,
Oakland, California 94607, Attention: Ralph D. Dillon, Chief Executive Officer.
11. Termination.
-----------
This Agreement may be terminated by you by notice to the
Sellers as follows:
(a) at any time prior to the earlier of (i) the time the
Shares are released by you for sale by notice to the Underwriters, or (ii) 11:30
a.m. on the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date, with respect to
the Firm Shares, and prior to the Option Closing Date, with respect to the
Option Shares, if any of the following has occurred: (i) since the respective
dates as of which information is given in the Registration Statement and the
Prospectus, any material adverse change or any development involving a
prospective material adverse change in or affecting the condition, financial or
otherwise, of the Company and its Subsidiaries taken as a whole or the earnings,
business, management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company and its Subsidiaries taken
as a whole, whether or not arising in the ordinary course of business, (ii) any
outbreak or escalation of hostilities or declaration of war or national
emergency or other national or international calamity or crisis or change in
economic or political conditions if the effect of such outbreak, escalation,
declaration, emergency, calamity, crisis or change on the financial markets of
the United States would, in your reasonable judgment, make it impracticable to
market the Shares or to enforce contracts for the sale of the Shares, or (iii)
suspension of trading in securities generally on the New York Stock Exchange or
the American
26
<PAGE>
Stock Exchange or limitation on prices (other than limitations on hours or
numbers of days of trading) for securities on either such Exchange, (iv) the
enactment, publication, decree or other promulgation of any statute, regulation,
rule or order of any court or other governmental authority which in your opinion
materially and adversely affects or may materially and adversely affect the
business or operations of the Company, (v) declaration of a banking moratorium
by United States or New York State authorities, (vi) any downgrading in the
rating of the Company's debt securities by any "nationally recognized
statistical rating organization" (as defined for purposes of Rule 436(g) under
the Exchange Act); (vii) the suspension of trading of the Company's Common Stock
by the Commission on the Nasdaq National Market or (viii) the taking of any
action by any governmental body or agency in respect of its monetary or fiscal
affairs which in your reasonable opinion has a material adverse effect on the
securities markets in the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
12. Successors.
----------
This Agreement has been and is made solely for the benefit
of the Underwriters, the Company and the Selling Shareholders and their
respective successors, executors, administrators, heirs and assigns, and the
officers, directors and controlling persons referred to herein, and no other
person will have any right or obligation hereunder. No purchaser of any of the
Shares from any Underwriter shall be deemed a successor or assign merely because
of such purchase.
13. Information Provided by Underwriters.
------------------------------------
The Company, the Selling Shareholders and the Underwriters
acknowledge and agree that the only information furnished or to be furnished by
any Underwriter to the Company for inclusion in any Prospectus or the
Registration Statement consists of the information set forth in the last
paragraph on the front cover page of the Prospectus (insofar as such information
relates to the Underwriters), legends in the Prospectus required by Item 502(d)
of Regulation S-K under the Act and the information under the caption
"Underwriting" in the Prospectus.
14. Miscellaneous.
-------------
The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or its directors or officers and (c) delivery of and payment for the
Shares under this Agreement.
This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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<PAGE>
This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Maryland.
If the foregoing letter is in accordance with your
understanding of our agreement, please sign and return to us the enclosed
duplicates hereof, whereupon it will become a binding agreement among the
Selling Shareholders, the Company and the several Underwriters in accordance
with its terms.
Any person executing and delivering this Agreement as
Attorney-in-Fact for a Selling Shareholder represents by so doing that he has
been duly appointed as Attorney-in-Fact by such Selling Shareholder pursuant to
a validly existing and binding Power of Attorney which authorizes such Attorney-
in-Fact to take such action.
Very truly yours,
COST PLUS, INC.
By ________________________________________
Ralph D. Dillon,
Chief Executive Officer
Selling Shareholders listed on Schedules II
and III
By ________________________________________
Attorney-in-Fact
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
BT ALEX. BROWN INCORPORATED
WILLIAM BLAIR & COMPANY, L.L.C.
MONTGOMERY SECURITIES
ROBERTSON, STEPHENS & COMPANY LLC
As Representatives of the several
Underwriters listed on Schedule I
By: BT Alex. Brown Incorporated
By: _____________________________
Authorized Officer
28
<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
NUMBER OF FIRM
SHARES TO
UNDERWRITER BE PURCHASED
- ----------- --------------
BT Alex. Brown Incorporated.......................................
William Blair & Company, L.L.C....................................
Montgomery Securities.............................................
Robertson, Stephens & Company LLC.................................
Total............................................................. =======
29
<PAGE>
SCHEDULE II
SCHEDULE OF SELLING SHAREHOLDERS
NUMBER OF FIRM
SELLING SHAREHOLDER SHARES TO BE SOLD
- ------------------- -----------------
Goldman Sachs Credit Partners L.P................................. 1,150,000
Internationale Nederlanden (U.S.) Capital Corporation............. 1,150,000
Ralph D. Dillon................................................... 22,000
Total......................................... 2,322,000
=========
30
<PAGE>
SCHEDULE III
SCHEDULE OF OPTION SHARES
MAXIMUM NUMBER PERCENTAGE OF
OF OPTION SHARES TOTAL NUMBER OF
NAME OF SELLER TO BE SOLD OPTION SHARES
- -------------- ---------------- ---------------
Goldman Sachs Credit Partners L.P. 204,150 50%
Internationale Nederlanden (U.S.)
Capital Corporation 204,150 50%
------- ---
Total 408,300 100%
31
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF WILSON SONSINI GOODRICH & ROSATI]
September 15, 1997
Cost Plus, Inc.
201 Clay Street
Oakland, CA 94607
Attention: Ralph D. Dillon
RE: REGISTRATION STATEMENT ON FORM S-3
----------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-3 to be filed by you
with the Securities and Exchange Commission on or about September 15, 1997 (the
"Registration Statement") in connection with the registration under the
Securities Act of 1933, as amended, of 3,130,300 shares of Common Stock of Cost
Plus, Inc. (the "Shares"). As your counsel in connection with this transaction,
we have examined the proceedings proposed to be taken in connection with said
sale and issuance of the Shares.
It is our opinion that, upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, and upon completion of the proceedings being taken in order to permit
such transactions to be carried out in accordance with the securities laws of
the various states, where required, the Shares when issued and sold in the
manner referred to in the Registration Statement will be legally and validly
issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part hereof, and
any amendment thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ Wilson Sonsini Goodrich & Rosati, P.C.
[HPM]
