<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
[X]
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997
OR
[_]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-14970
COST PLUS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-1067973
(I.R.S. EMPLOYER IDENTIFICATION NO.)
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
94607
201 CLAY STREET
OAKLAND, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, (510) 893-7300
INCLUDING AREA CODE
FORMER NAME, FORMER ADDRESS AND FORMER
FISCAL YEAR IF CHANGED SINCE LAST
REPORT.
N/A
SECURITIES REGISTERED PURSUANT TO
SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO
SECTION 12(G) OF THE ACT: COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filer pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K X
The aggregate market value of voting stock held by non-affiliates of the
registrant on April 18, 1997 was approximately $58,134,843 based upon the last
sale price reported for such date on the Nasdaq National Market. On that date,
8,109,540 shares of Common Stock, $.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held June 19, 1997 ("Proxy Statement") are incorporated by
reference into Part III.
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PART I
BUSINESS
THE COMPANY
Cost Plus, Inc. ("Cost Plus" or "the Company") is a leading specialty
retailer of casual living and home entertaining products. The Company's
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. Cost Plus opened its
first store in 1958 in San Francisco. After a long period of growth, the
Company was sold in a leveraged buyout in 1987 and profitability subsequently
deteriorated. The Company's current management team, hired beginning in 1990,
instituted a number of key changes in the areas of merchandising,
distribution, systems and controls. As a result, the Company has experienced a
significant improvement in sales and profitability.
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. In fiscal 1996, the Company opened a
total of nine stores, including two in existing markets in Las Vegas and Los
Angeles and seven in new markets in Chicago, Houston, San Antonio and Austin.
MERCHANDISING
Cost Plus' merchandising strategy is to offer customers a large selection of
distinctive items, both nonconsumable and consumable, which are related to the
theme of casual living and home entertaining.
Format and Presentation. The Company's stores are designed to evoke the
feeling of a "marketplace" through colorful and creative visual displays and
merchandise presentations, including goods in open barrels and baskets,
groupings of related products in distinct "shops" within the store, and in-
store activities such as food and coffee tastings. The Company believes that
its marketplace format provides customers with a fun shopping experience and
encourages browsing throughout the store.
The Company's merchandise is organized into major product categories.
Complementary categories are positioned in proximity to one another and cross
merchandising themes are used in merchandise displays to tie different
products and categories 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 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 frequently.
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 with
ten foot high perimeter fixturing and three major focus walls, displaying
chairs, rugs and a coffee/tea marketplace.
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.
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,
quality standards and specifications, and typically are not available at
department stores and other
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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 approximately 50 countries, and many of these
goods are handcrafted by local artisans. The Company also carries branded
goods, primarily in the gourmet food and beverage category such as wine, beer
and gourmet food items.
The Company's products are divided into four major categories. Home decor,
which represented approximately 25% of total fiscal 1996 sales, includes
furniture, rugs, blinds, pillows, frames, garden items and baskets. Tabletop
items, which represented approximately 17% of total fiscal 1996 sales, include
ceramics, glassware, textiles and kitchen utensils from around the world.
Gifts and decorative accessories, which represented approximately 21% of total
fiscal 1996 sales, include collectibles, handcrafted items, posters, cards,
jewelry, bath accessories, wrapping paper, candles and holiday and other
seasonal items. Gourmet food and beverage, which represented approximately 37%
of total fiscal 1996 sales, consist of branded and nonbranded goods including
wine, micro-brewed and imported beer, gourmet foods, coffees, teas and candy.
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 quality products at competitive prices. The
Company complements its competitive everyday prices with "Real Deals,"
opportunistic buys, enabling the Company to pass on additional savings to the
customer. The Company routinely shops a variety of retailers to ensure that
its products are competitively priced.
Planning and Buying. Cost Plus effectively manages a large number of
products by utilizing a centralized merchandise planning system. The Company
maintains its own central buying staff which is responsible for establishing
the assortment of inventory within the merchandise groups each season,
including integrating trends or themes identified by the Company into its
different product categories. The Company 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.
ADVERTISING
The Company advertises through promotional ads in major daily newspapers,
radio, television and direct mail. 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 newspaper tabloids and
color newspaper advertisements in selected markets to highlight product
offerings and selected promotions. Radio and television advertising is often
used for seasonal advertising, such as Christmas. 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 6.0% of total purchases in the fiscal year ended February 1,
1997. A significant portion of Cost Plus' products are made abroad in
approximately 50 countries in Europe, North and South America, Asia and
Africa. 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.
2
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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.
All purchasing decisions are made by the Company's buyers who have primary
responsibility for product selection, assortment 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 reduce
inventory levels and control out-of-stock situations.
The Company currently services all of its stores from its single
distribution center in Stockton, California. Domestically sourced merchandise
is usually delivered to the distribution center by common carrier or by
Company trucks. The Company believes that its distribution center will be able
to handle, or can be upgraded to handle, the Company's store expansion plans
for the Western United States over the next three years. Any significant
interruption in the operation of this facility would have a material adverse
effect on the Company's financial position and results of operations. To
facilitate expanding to new regions such as Illinois and Texas, the Company
anticipates the addition of a second smaller facility in the future.
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 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.
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 categories
compete with such specialty retailers as Bed, Bath & Beyond, The Bombay
Company, Crate & Barrel, Garden Ridge, Lechters, Michaels Stores, Pier 1
Imports, Trader Joe's and Williams-Sonoma. Specialty retailers tend to have
higher prices and a more narrow assortment of products than Cost Plus.
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.
3
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EMPLOYEES
As of February 1, 1997, the Company had 763 full-time and 884 part-time
employees. Of these, 1,389 were employed in the Company's stores and 258 were
employed in the distribution center and corporate office. The Company
regularly supplements its work force with temporary workers especially in the
fourth quarter of each year to service increased customer traffic during the
peak Christmas season. Approximately 164 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" and "Where
you can afford to be different" marks with the United States Patent and
Trademark Office on the Principal Register and has applications pending for
its "Cost Plus World Market" and "World Market" logos. The Company has also
secured California state registration of its "Crossroads" trademark. The
Company's policy is to pursue registration of its trademarks and to oppose
strenuously infringement of its trademarks.
ITEM 2. PROPERTIES
The Company currently operates 60 stores in eleven states. The average
selling space of a Cost Plus World Market is 16,000 square feet. The table
below summarizes the distribution of stores by state:
<TABLE>
<S> <C>
Arizona................................................................ 5
California
Northern California................................................... 17
Southern California................................................... 16
Colorado............................................................... 3
Idaho.................................................................. 1
Illinois............................................................... 3
Nevada................................................................. 2
New Mexico............................................................. 1
Oregon................................................................. 1
Texas.................................................................. 6
Washington............................................................. 4
Wisconsin.............................................................. 1
</TABLE>
The Company leases land and buildings for 52 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 currently leases its executive
headquarters in Oakland, California pursuant to a lease which expires in
October 1998 and its distribution center of approximately 400,000 square feet
in Stockton, California pursuant to a lease which expires in September 2001.
The Company has three renewal options for five years each on its distribution
center lease. See Note 4 of Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings other than
ordinary routine litigation incidental to the business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Effective as of November 29, 1996, the shareholders of the Company approved
by written consent the following proposal:
An increase of 250,000 shares in the number of shares reserved for issuance
under the Company's 1995 Stock Option Plan and certain other amendments to
the 1995 Stock Option Plan.
The proposal was approved with 6,424,128 votes "FOR", 1,072,003 votes
"AGAINST" and 8 votes abstaining. There were 8,090,893 shares of Common Stock
outstanding as of October 25, 1996, the record date for the proposal. No
shares were subject to broker non-votes.
4
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ralph D. Dillon............... 56 Chairman and Chief Executive Officer
Alan E. Zimtbaum.............. 53 President, Chief Operating Officer, Chief
Financial Officer and Secretary
Dennis R. Daugherty........... 53 Executive Vice President, Operations
Executive Vice President, Merchandising and
Kathi P. Lentzsch............. 41 Marketing
Michael S. Adams.............. 54 Vice President, Marketing and Advertising
Patricia A. Belardi........... 54 Vice President, General Merchandising Manager
Malcolm R. Carden............. 50 Director of Finance and Treasurer
Joan S. Fujii................. 50 Vice President, Human Resources
Chief Accounting Officer and Vice President,
Patricia T. Saucy............. 45 Controller
Gary D. Weatherford........... 40 Vice President, Store Operations
</TABLE>
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. Zimtbaum was named President and Chief Operating Officer in August 1996
with continued responsibilities as Chief Financial Officer and Secretary.
Prior to this, Mr. Zimtbaum served as Executive Vice President, Finance, Chief
Financial Officer and Secretary since joining the Company in October 1990.
From February 1990 through June 1990, Mr. Zimtbaum served as Senior Vice
President of Finance at Ames Department Store. From January 1989 through
January 1990, he served as Vice President and Chief Financial Officer at Allez
Stores, a specialty apparel retailer. From 1981 to 1988, he served in various
financial positions including Chief Financial Officer at The Gap.
Mr. Daugherty was appointed to 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
Imposters. Prior to April 1991, she was Vice President, Merchandising at Pier
1 Imports.
Mr. Adams joined the Company in February 1995 as Vice President, Marketing
and Advertising. From August 1992 to February 1995, Mr. Adams managed his own
retail consulting organization, The Sales Promotion Group. From December 1991
to August 1992, Mr. Adams was Vice President, Advertising at Jordan Marsh, a
department store chain. From January 1990 to December 1991, Mr. Adams managed
The Sales Promotion Group. From May 1970 to January 1990, he held various
positions at Macy's Department Stores, including Vice President of
Advertising/Print Media.
Ms. Belardi joined the Company in May 1993 and has served as Vice President,
Merchandising since January 1995. From May 1993 to January 1995, Ms. Belardi
was the Company's Divisional Merchandise Manager, Import Departments. From
August 1988 to May 1993, she was Vice President, Divisional Merchandise
Manager Lingerie and Accessories at Macy's/Bullocks Department Stores. From
1979 to 1988, Ms. Belardi held various merchandise management positions at
Mervyn's Stores.
5
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Mr. Carden was named the Company's Treasurer in August 1996 with continued
responsibilities as Director of Finance. Mr. Carden joined the Company in
October 1986 and has served as Director of Finance since May 1992. 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. 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 Chief Accounting Officer in August 1996
with continued responsibilities as Vice President, Controller. Ms. Saucy
joined the Company in January 1991 and served as Vice President, Controller
from May 1991 to August 1996. 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 a Buyer and Store Design
Director for Cost Plus.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
MARKET INFORMATION
The Company's Common Stock is currently traded in the over-the-counter
market and is quoted on the Nasdaq National Market under the symbol "CPWM",
where it has traded since the Company's initial public offering on April 4,
1996. The following table sets forth the high and low closing sales prices,
for the periods indicated, as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
PRICE RANGE
-------------
HIGH LOW
------ ------
<S> <C> <C>
Fiscal Year Ended February 1, 1997
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
</TABLE>
On April 18, 1997, the last sale price of the Common Stock as reported on
the Nasdaq National Market was $17.50 per share.
SHAREHOLDERS
The number of shareholders of record as of April 18, 1997 was approximately
37. This number excludes shareholders whose stock is held in nominee or street
name by brokers.
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.
6
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
PRO FORMA
TWELVE MONTH
PERIOD ENDED FISCAL YEAR
FISCAL YEAR FEBRUARY 3, ----------------------------
1996 1996 (1) 1994 1993 1992
----------- ------------ -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $214,814 $182,845 $151,196 $133,864 $121,785
Cost of sales and
occupancy.............. 135,072 115,516 95,608 85,338 78,344
-------- -------- -------- -------- --------
Gross profit.......... 79,742 67,329 55,588 48,526 43,441
Selling, general and
administrative
expenses............... 62,649 54,110 46,561 41,371 38,100
Preopening store
expenses............... 2,053 1,620 1,137 614 --
-------- -------- -------- -------- --------
Income from operations.. 15,040 11,599 7,890 6,541 5,341
Interest expense........ 2,451 5,131 4,862 4,851 4,917
-------- -------- -------- -------- --------
Income before income
taxes.................. 12,589 6,468 3,028 1,690 424
Provision for income
taxes.................. 5,162 2,652 1,211 725 273
-------- -------- -------- -------- --------
Net income.............. $ 7,427 $ 3,816 $ 1,817 $ 965 $ 151
======== ======== ======== ======== ========
Net income per common
and common equivalent
share.................. $ 0.92 $ 0.62 -- -- --
======== ========
Weighted average common
and common equivalent
shares outstanding..... 8,105(2) 6,153 -- -- --
======== ========
OPERATING DATA:
Percent of sales:
Gross profit.......... 37.1% 36.8% 36.8% 36.2% 35.7%
Selling, general and
administrative
expenses............. 29.2% 29.6% 30.8% 30.9% 31.3%
Income from
operations........... 7.0% 6.3% 5.2% 4.9% 4.4%
Number of stores:
Opened during period.. 9 6 5 3 --
Closed during period.. -- -- 3 -- 1
Open at end of
period............... 58 49 43 41 38
Average sales per
selling square
foot(3)................ $ 252 $ 238 $ 224 $ 213 $ 199
Comparable store sales
increase(4)............ 6.1% 6.1% 7.7% 6.7% 7.4%
BALANCE SHEET DATA (AT
PERIOD END):
Working capital......... $ 24,807 $ 11,102 $ 8,918 $ 8,180 $ 7,044
Total assets............ 128,198 105,986 99,245 91,860 86,937
Note payable and capital
lease obligations, less
current portion........ 14,215 34,528 34,839 35,070 35,311
Total shareholders'
equity................. 73,209 36,359 32,542 30,723 29,758
</TABLE>
- --------
(1) Effective in fiscal 1995, the Company changed its fiscal year end from the
Saturday closest to the end of February to the Saturday closest to the end
of January. The Company's 1995 fiscal year was approximately 11 months (49
weeks) and ended on February 3, 1996. For comparison purposes, the 1995
results have been restated on a twelve month (54 week) pro forma basis.
All other fiscal years presented consisted of 52 weeks.
(2) Reflects the 2,136,614 shares issued in the Company's initial public
offering in April 1996.
(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.
7
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 11
months (49 weeks) and ended on February 3, 1996. The fiscal years ended
February 25, 1995 (fiscal 1994) and February 1, 1997 (fiscal 1996) each
consist of 12 months (52 weeks). For purposes of the following discussion, the
period ended February 3, 1996 has been restated on a 12 month (54 week) pro
forma basis.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statement of operations data, such 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
FISCAL YEAR TWELVE MONTH FISCAL YEAR
ENDED PERIOD ENDED ENDED
FEBRUARY 1, FEBRUARY 3, FEBRUARY 25,
1997 1996(1) 1995
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales.................. $214,814 100.0% $182,845 100.0% $151,196 100.0%
Cost of sales and occupan-
cy........................ 135,072 62.9 115,516 63.2 95,608 63.2
-------- ----- -------- ----- -------- -----
Gross profit............. 79,742 37.1 67,329 36.8 55,588 36.8
Selling, general and
administrative expenses... 62,649 29.2 54,110 29.6 46,561 30.8
Preopening store expenses.. 2,053 0.9 1,620 0.9 1,137 0.8
-------- ----- -------- ----- -------- -----
Income from operations..... 15,040 7.0 11,599 6.3 7,890 5.2
Interest expense........... 2,451 1.1 5,131 2.8 4,862 3.2
-------- ----- -------- ----- -------- -----
Income before income tax-
es........................ 12,589 5.9 6,468 3.5 3,028 2.0
Provision for income tax-
es........................ 5,162 2.4 2,652 1.4 1,211 0.8
-------- ----- -------- ----- -------- -----
Net income................. $ 7,427 3.5% $ 3,816 2.1% $ 1,817 1.2%
======== ===== ======== ===== ======== =====
Number of stores open at
end of period............. 58 49 43
</TABLE>
- --------
(1) Results of operations for the unaudited pro forma 12 month period includes
54 weeks.
FISCAL 1996 COMPARED TO THE PRO FORMA TWELVE MONTH PERIOD ENDED FEBRUARY 3,
1996
Net Sales. Net sales increased $32.0 million, or 17.5%, to $214.8 million in
fiscal 1996 from $182.8 million in the twelve month period ended February 3,
1996. This increase in net sales was attributable to new stores and an
increase in comparable store sales. At February 1, 1997, the Company operated
58 stores as compared to 49 stores at February 3, 1996. These additional nine
new stores contributed $17.6 million of the sales increase. Comparable store
sales, calculated on a comparable, day-to-day basis, increased 6.1% in fiscal
1996.
Gross Profit. As a percentage of net sales, gross profit increased to 37.1%
in fiscal 1996 from 36.8% in the twelve month period ended February 3, 1996.
This improvement resulted from lower inventory shrink 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 ("SG&A") Expenses. As a percentage of
net sales, SG&A expenses declined to 29.2% in fiscal 1996 compared to 29.6% in
the twelve month period ended February 3, 1996. Lower store and corporate
payroll expenses partially offset by higher advertising expenses contributed
to the reduction in SG&A expenses as a percentage of net sales.
8
<PAGE>
Preopening Store Expenses. Preopening store expenses, which include grand
opening advertising and preopening merchandising expenses, were $2.1 million
for fiscal 1996 and $1.6 million for the twelve month period ended February 3,
1996. The increase in preopening expenses was the result of opening nine
stores in fiscal 1996 versus opening six stores in fiscal 1995. On average,
preopening expenses decreased to $228,000 per store in fiscal 1996 from
$270,000 per store in fiscal 1995.
Interest Expense. Interest expense in fiscal 1996 declined compared to the
twelve month period ended February 3, 1996 as a result of the repayment of
borrowing 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 for fiscal 1996
and the twelve months ended February 3, 1996 was 41%.
PRO FORMA TWELVE MONTH PERIOD ENDED FEBRUARY 3, 1996 COMPARED TO FISCAL 1994
Net Sales. Net sales for the twelve month period ended February 3, 1996 were
$182.8 million, a 20.9% increase from fiscal 1994 net sales of $151.2 million.
Six stores opened during the twelve month period ended February 3, 1996
contributed $14.9 million of the growth in net sales. Comparable store sales,
calculated on a comparable, day-to-day basis, for the proforma period ended
February 3, 1996 increased 6.1% over the prior year.
Gross Profit. As a percentage of net sales, gross profit was 36.8% in both
periods.
Selling, General and Administrative ("SG&A") Expenses. As a percentage of
net sales, SG&A expenses decreased to 29.6% in the twelve month period ended
February 3, 1996 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 the twelve month period ended February 3, 1996 from $1.1 million in
fiscal 1994. The increase in preopening store expenses was attributable to the
opening of six stores in 1995 as compared with five in 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 the pro forma period
ended February 3, 1996 compared to $4.9 million in fiscal 1994.
Provision for Income Taxes. The Company's effective tax rate for the twelve
month period ended February 3, 1996 was 41% compared with 40% in fiscal 1994.
All available net operating loss carryforwards were fully utilized by the
Company in prior periods.
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.
9
<PAGE>
QUARTERLY RESULTS AND SEASONALITY
The following table sets forth the Company's unaudited quarterly operating
results for its eight most recent quarterly periods. The quarterly results
ended April 22, 1995, July 22, 1995, October 21, 1995 and February 3, 1996
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>
THREE MONTHS ENDED
-------------------------------------
MAY 4, AUG. 3, NOV. 2, FEB. 1,
1996 1996 1996 1997
-------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE
DATA AND NUMBER OF STORES)
<S> <C> <C> <C> <C>
Net sales............................... $39,127 $39,986 $45,041 $90,660
Gross profit............................ 13,575 14,212 16,011 35,944
Net income (loss)....................... (395) (197) (863) 8,882
Net income (loss) per common and common
equivalent share....................... $ (0.06) $ (0.02) $ (0.10) $ 1.05
Number of stores open at end of period.. 50 52 57 58
<CAPTION>
THREE MONTHS ENDED
-------------------------------------
APR. 22, JUL. 22, OCT. 21, FEB. 3,
1995 1995 1995 1996(1)
-------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE
DATA AND NUMBER OF STORES)
<S> <C> <C> <C> <C>
Net sales............................... $31,874 $33,083 $36,412 $81,476
Gross profit............................ 10,750 11,626 12,966 31,987
Net income (loss)....................... (638) (920) (1,548) 6,922
Net income (loss) per common and common
equivalent share....................... $ (0.10) $ (0.15) $ (0.25) $ 1.12
Number of stores open at end of period.. 43 45 48 49
</TABLE>
- -------
(1) The three month period ended February 3, 1996 was a fifteen-week period as
compared to the three month period ended February 1, 1997 which was a
thirteen-week period.
The Company's business is highly seasonal, reflecting the general pattern
associated with the retail industry of peak sales and earnings during the
Christmas season. Due to the importance of the Christmas selling season, the
fourth quarter of each fiscal year has historically contributed, and the
Company expects it will continue to contribute, a disproportionate percentage
of the Company's net sales and most of its net income for the entire fiscal
year/1/. Any factors negatively affecting the Company during the Christmas
selling season in any year, including unfavorable economic conditions, could
have a material adverse effect on the Company's financial condition and
results of operations. The Company generally experiences lower sales and
earnings during the first three quarters and, as is typical in the retail
industry, has incurred and may continue to incur losses in these quarters. The
results of operations for these interim periods are not necessarily indicative
of the results for the full fiscal year. In addition, the Company makes
decisions regarding merchandise well in advance of the season in which it will
be sold, particularly for the Christmas selling season. Significant deviations
from projected demand for products could have a material adverse effect on the
Company's financial condition and results of operations, either by lost sales
due to insufficient inventory or lost margin due to the need to mark down
excess inventory.
The Company's quarterly results of operations may also fluctuate based upon
such factors as the number and timing of store openings and related 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.
The Company has identified certain forward-looking statements in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations by a footnote #1. The Company may also make oral forward-looking
statements from time to time. Actual results may differ materially from those
projected in any such forward-looking statements due to a number of factors
including those set forth above.
- -------
/1/ Forward looking statement
10
<PAGE>
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 funds will be sufficient to finance its working capital
and capital expenditure requirements for the next 12 months/1/.
Net cash provided by operating activities in the fiscal year ended February
1, 1997 totaled $14.2 million, an increase of $8.2 million over the eleven
months ended February 3, 1996. Lower interest expense resulting from the
paydown of outstanding debt, operating profit on higher sales and a higher
level of payables due to an earlier Easter contributed to the increase.
Net cash used in investing activities, primarily for new stores, totaled
$8.0 million in the fiscal year ended February 1, 1997 and $5.6 million for
the eleven months ended February 3, 1996. The Company estimates that 1997
capital expenditures will not exceed $10.9 million /1/.
Net cash provided by financing activities in the fiscal year ended February
1, 1997 included approximately $29.1 million received in April 1996 as a
result of the Company's initial public offering. The proceeds were used to
retire the $19.9 million long-term note payable and pay down the $3.2 million
balance then outstanding on the revolving credit line. Remaining unused
proceeds were invested in short-term interest bearing instruments or used for
working capital or general corporate purposes.
On May 7, 1996 the Company terminated its existing line of credit and
concurrently entered into a new revolving line of credit agreement with Bank
of America which expires May 31, 1998. The new agreement allows for cash
borrowings and letters of credit of up to $20.0 million from January 1 through
June 30 and $35.0 million from July 1 though December 31 of each year. The
Company is required to have not more than $5.0 million outstanding, excluding
letters of credit, for a period of at least 45 consecutive 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+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 inventories 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 $2.2 million were outstanding leaving current availability of $17.8
million.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENT
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.
- --------
/1/ Forward looking statement
11
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
COST PLUS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................................ F-2
Consolidated Balance Sheets................................................. F-3
Statements of Consolidated Operations....................................... F-4
Statements of Consolidated Shareholders' Equity............................. F-5
Statements of Consolidated Cash Flows....................................... F-6
Notes to Consolidated Financial Statements.................................. F-7
</TABLE>
<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 four product
categories are (i) home decor including furniture, rugs and baskets, (ii)
tabletop items including glassware, ceramics and kitchen utensils, (iii) gifts
and decorative accessories such as handcrafted products, cards, jewelry, and
seasonal goods and (iv) gourmet food and beverage such as wine, gourmet foods,
coffees and teas.
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 charged to operations and amounts paid as deferred rent. As
part of its lease agreements, the Company receives certain lease incentives,
F-7
<PAGE>
COST PLUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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+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
(liability):
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. -------------------------
RANGE OF REMAINING WEIGHTED AVG. WEIGHTED AVG.
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER 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>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
Information called for by Part III (Items 10, 11, 12 and 13) of this report
on Form 10-K has been omitted as the Company intends to file with Securities
and Exchange Commission not later than May 26, 1997 a definitive Proxy
Statement pursuant to Regulation 14A promulgated under the Securities Exchange
Act of 1934. Such information will be set forth in such Proxy Statement and is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference to
the section entitled "Executive Officers of the Registrant" at the end of Part
I of this report and the Proxy Statement for the Company's 1997 Annual Meeting
of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to
the Proxy Statement for the Company's 1997 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to
the Proxy Statement for the Company's 1997 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to
the Proxy Statement for the Company's 1997 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<C> <S>
(a)1. Financial Statements:
See Item 8 for a list of financial statements.
2. Financial Statement Schedules:
Financial statement schedules of Cost Plus, Inc. have been omitted from
Item 14(d) because they are not applicable or the information is
included in the financial statements or notes thereto.
3. List of Exhibits:
See Exhibit Index on page 14.
</TABLE>
12
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Cost Plus, Inc.
By: /s/ Ralph D. Dillon
----------------------------------
Date: April 25, 1997 RALPH D. DILLON CHAIRMAN AND CHIEF
EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Ralph D. Dillon Chairman and Chief April 25, 1997
- ------------------------------------- Executive Officer
RALPH D. DILLON
/s/ Alan E. Zimtbaum President, Chief April 25, 1997
- ------------------------------------- Operating Officer,
ALAN E. ZIMTBAUM Chief Financial
Officer and
Secretary
/s/ Patricia T. Saucy Chief Accounting April 25, 1997
- ------------------------------------- Officer, Vice
PATRICIA T. SAUCY President and
Controller
/s/ Joseph H. Coulombe Director April 25, 1997
- -------------------------------------
JOSEPH H. COULOMBE
/s/ Danny W. Gurr Director April 25, 1997
- -------------------------------------
DANNY W. GURR
/s/ Mervin G. Morris Director April 25, 1997
- -------------------------------------
MERVIN G. MORRIS
/s/ Edward A. Mule Director April 25, 1997
- -------------------------------------
EDWARD A. MULE
/s/ Olivier L. Trouveroy Director April 25, 1997
- -------------------------------------
OLIVIER L. TROUVEROY
/s/ Thomas D. Willardson Director April 25, 1997
- -------------------------------------
THOMAS D. WILLARDSON
13
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBITS
----------- -----------------------
<C> <S>
3.1 Amended and Restated Articles of Incorporation as filed with the
California Secretary of State on April 1, 1996.
3.2/1/ Amended and Restated By-laws dated July 30, 1996.
10.1/2/ Form of Indemnification Agreement between the Company and each of
its directors and officers.
10.2/2/ Third Amended and Restated 1988 Stock Option Plan and form of
Stock Option Agreement thereunder/3/.
10.3/2/ 1994 Stock Option Plan and form of Stock Option Agreement
thereunder/3/.
10.4 1995 Stock Option Plan, as amended, and form of Stock Option
Agreement thereunder/3/.
10.5 Employment Agreement, dated September 6, 1990 between the Company
and Ralph D. Dillon as amended by the First Amendment to
Employment Agreement dated December 1, 1996/3/.
10.6/2/ Lease Agreement, dated August 27, 1991, as amended, between the
Company and The Stockton Port District for certain warehouses for
storage and distribution located in Stockton, California and
extension thereto dated February 21, 1996.
10.7/2/ Registration Rights Agreement, dated March 16, 1995, between the
Company and certain holders of the Company's securities.
10.8/1/ Business Loan Agreement, dated May 7, 1996, between the Company
and Bank of America National Trust and Savings Association.
10.9/2/ Management Incentive Plan/3/.
10.10/2/ 1996 Employee Stock Purchase Plan/3/.
10.11/2/ 1996 Director Option Plan and form of Stock Option Agreement
thereunder/3/.
10.12 Forms of Employment Severance Agreement/3/.
11 Statement re: Computation of Per Share Earnings.
21/2/ List of Subsidiaries.
23 Independent Auditors' Consent.
27 Financial Data Schedule (submitted for SEC use only).
</TABLE>
- --------
/1/Exhibits 3.2 and 10.8 are incorporated by reference to Exhibits 3.1 and
10.1, respectively, to the Form 10-Q filed for the quarter ended August 3,
1996.
/2/Exhibits 10.1, 10.2, 10.3, 10.6, 10.7, 10.9, 10.10, 10.11 and 21 are
incorporated by reference to Exhibits 10.1, 10.2, 10.3, 10.6, 10.11, 10.12,
10.13, 10.14 and 21.1, respectively, to the Registration Statement on Form S-1
effective April 3, 1996.
/3/Management compensation plan or arrangement.
14
<PAGE>
EXHIBIT 3.1
RESTATED
ARTICLES OF INCORPORATION
OF
COST PLUS, INC.
The undersigned, Ralph D. Dillon and Alan E. Zimtbaum, hereby certify
that:
I. They are the duly elected and acting President and Secretary,
respectively, of Cost Plus, Inc., a California corporation (the "Corporation").
II. The Articles of Incorporation of the Corporation are amended and
restated to read in full as follows:
FIRST: The name of this Corporation is COST PLUS, INC.
SECOND: The purpose of the Corporation is to engage in any lawful act
or activity for which a corporation may be organized under the General
Corporation Law of California other than the banking business, the trust
company business or the practice of a profession permitted to be
incorporated by the California Corporations Code.
THIRD: The Corporation is authorized to issue two classes of stock
designated "Common Stock" and "Preferred Stock." The number of shares of
Common Stock which the Corporation is authorized to issue is 30,000,000,
par value $0.01 per share. The number of shares of Preferred Stock which
the Corporation is authorized to issue is 5,000,000, par value $0.01 per
share.
The Preferred Stock may be issued from time to time in one or more
series pursuant to a resolution or resolutions providing for such issue
duly adopted by the Board of Directors (authority to do so being hereby
expressly vested in the Board). The Board of Directors is authorized to
determine or alter the rights, preferences, privileges and restrictions
granted to or imposed upon any wholly unissued series of Preferred Stock
and to fix the number of shares of any series of Preferred Stock and the
designation of any such series of Preferred Stock. The Board of Directors,
within the limits and restrictions stated in any resolution or resolutions
of the Board of Directors originally fixing the number of shares
constituting any series, may increase or decrease (but not below the number
of shares in any such series then outstanding) the number of shares of any
series subsequent to the issue of shares of that series.
FOURTH: Effective immediately following such time as the Corporation
becomes a Listed Corporation (as defined in and within the meaning of
Section 301.5 of the California General Corporation Law), there shall be no
right with respect to shares of stock of the Corporation to cumulate votes
in the election of directors.
<PAGE>
FIFTH: (a) Limitation of Directors' Liability. The liability of
----------------------------------
the directors of the Corporation for monetary damages shall be eliminated
to the fullest extent permissible under California law.
(b) Indemnification of Corporate Agents. The Corporation is
-----------------------------------
authorized to provide indemnification of agents (as defined in Section 317
of the California General Corporation Law) to the fullest extent
permissible under California law.
(c) Repeal or Modification. Any repeal or modification of the
----------------------
foregoing provisions of this Article FIFTH shall not adversely affect any
right of indemnification or limitation of liability of an agent of the
Corporation relating to acts or omissions occurring prior to such repeal or
modification.
III. The foregoing Amended and Restated Articles of Incorporation has been
duly approved by the Board of Directors and by the required vote of shareholders
in accordance with Sections 902 and 903 of the California General Corporation
Law. The Corporation has 5,909,723 shares of Common Stock outstanding. The
number of votes in favor of the foregoing amendment and restatement equaled or
exceeded the vote required. The percentage vote required for the approval of
the amendment was not less than 66 % of the outstanding shares of Common Stock.
--
<PAGE>
The undersigned declare under penalty of perjury under the laws of the
State of California that they have read the foregoing certificate and know the
contents to be true of their own knowledge.
Executed at Oakland, California.
Dated: March ___, 1996
Ralph D. Dillon
President
Alan E. Zimtbaum
Secretary
-3-
<PAGE>
EXHIBIT 10.4
COST PLUS, INC.
1995 STOCK OPTION PLAN
(adopted November 1, 1995)
(Amended October 15, 1996)
1. Purpose.
-------
The purpose of this Plan is to strengthen Cost Plus, Inc., a
California corporation (the "Company"), by providing an incentive to selected
officers and other key employees and thereby encouraging them to devote their
abilities and industry to the success of the Company's business enterprise. It
is intended that this purpose be achieved by extending to selected officers and
other key employees of the Company and its subsidiaries an added long-term
incentive for high levels of performance and unusual efforts through the grant
of options to purchase Common Stock of the Company.
2. Definitions.
-----------
For purposes of the Plan:
2.1 "Affiliate" means (i) with respect to any Person which is not a
natural person, any other Person that directly or indirectly through one or more
intermediaries controls, or is controlled by or under common control with, such
Person; and (ii) with respect to any Person who is a natural person, any of the
following: (x) any spouse, parent, child, brother or sister of such Person or
any issue of the foregoing (as used in this definition, issue shall include
persons legally adopted into the line of descent), (y) a trust solely for the
benefit of such Person or any spouse, parent, child, brother or sister of such
Person or for the benefit of any issue of the foregoing or (z) any corporation
or partnership which is controlled by such Person, or by any spouse, parent,
child, brother or sister of such Person or by any issue of the foregoing.
2.2 "Agreement" means the written agreement between the Company and
an Optionee evidencing the grant of an Option and setting forth the terms and
conditions thereof.
2.3 "Board" means the Board of Directors of the Company.
2.4 "Cause," unless otherwise defined in the Agreement evidencing a
particular Option, means an Eligible Individual's (i) intentional failure to
perform reasonably assigned duties, (ii) dishonesty or willful misconduct in the
performance of duties, (iii) engaging in a transaction in connection with the
performance of duties to the Company or any of its Subsidiaries thereof which
transaction is adverse to the interests of the Company or any of its
Subsidiaries and which is engaged in for personal profit or (iv) willful
violation of any law, rule or regulation in connection with the performance of
duties (other than traffic violations or similar offenses).
-1-
<PAGE>
2.5 "Change in Capitalization" means any change in the Shares or
exchange of Shares for a different number or kind of shares or other securities
of the Company, by reason of a reclassification, recapitalization, merger,
consolidation, reorganization, spin-off, stock dividend, stock split or reverse
stock split.
2.6 "Code" means the Internal Revenue Code of 1986, as amended.
2.7 "Committee" means a committee, as described in Section 3.1,
appointed by the Board to administer the Plan and to perform the functions set
forth herein.
2.8 "Company" means Cost Plus, Inc., a California corporation.
2.9 "Controlling Shareholders" means Internationale Nederlanden
(U.S.) Capital Corporation and Pearl Street L.P., collectively.
2.10 "Disability" means a physical or mental infirmity which impairs
the Optionee's ability to perform substantially his or her duties for a period
of one hundred eighty (180) consecutive days.
2.11 "Eligible Individual" means any director, officer or employee of
the Company or a Subsidiary, or any consultant or advisor.
2.12 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
2.13 "Fair Market Value" means on any date, (i) with respect to any
stock or other security (including, without limitation, the Shares) (a) if such
security is listed or admitted to trading on a national securities exchange or
the Nasdaq National Market of the National Association of Securities Dealers
Automated Quotation System, the closing price of such security (or the closing
bid, if no shares were reported, as quoted on such system or exchange or the
exchange with the greatest volume of trading in such security for the last
market trading day prior to the time of determination) as reported in the Wall
Street Journal or such other source as the Committee deems reliable, (b) if such
securities are not listed or admitted to trading, the arithmetic mean of the
closing bid price and the closing asked price on such date as quoted on such
other market in which such prices are regularly quoted, or (c) if there have
been no published bid or asked quotations with respect to such security on such
date, the Fair Market Value shall be the value established by the Committee in
good faith and, in the case of securities relating to an Incentive Stock Option,
in accordance with Section 422 of the Code, and (ii) with respect to all other
property and consideration, the value conclusively determined in good faith by
the Committee in its sole discretion. Any determination made by the Committee
hereunder shall be final, binding and non-appealable.
2.14 "First Vesting Date" means, (i) as to Options granted prior to
June 30, 1996, the earlier to occur of June 30, 1997 and the first anniversary
of the Company's Initial Public
-2-
<PAGE>
Offering, and (ii) as to each Option granted on or after June 30, 1996, the
first anniversary of the Grant Date for such Option.
2.15 "Grant Date" means with respect to each Option, the Grant Date
as defined in the applicable Agreement.
2.16 "Incentive Stock Option" means an Option satisfying the
requirements of Section 422 of the Code and designated by the Committee as an
Incentive Stock Option.
2.17 "Independent Third Party" means any Person who, immediately
prior to the contemplated transaction, does not own in excess of 5% of the
Shares on a fully diluted basis (a "5% Owner"), and any Person who is not an
Affiliate of a 5% Owner.
2.18 "Initial Public Offering" means the consummation of the first
public offering of Shares pursuant to one or more effective registration
statements under the Securities Act (other than registrations on Form S-8 or
Form S-4 or any other registration statement used for a business combination or
any successor form to any such Forms) ("Registration Statements").
2.19 "Nonqualified Stock Option" means an Option which is not an
Incentive Stock Option.
2.20 "Option" means an option to purchase Shares granted pursuant to
the Plan.
2.21 "Optionee" means a person to whom an Option has been granted
under the Plan.
2.22 "Outside Director" means a director of the Company who is an
"outside director" within the meaning of Section 162(m) of the Code and the
regulations promulgated thereunder.
2.23 "Own" or any derivation thereof means beneficial ownership as
defined in Rule 13d-3 promulgated under the Exchange Act.
2.24 "Parent" means any corporation which is a parent corporation
(within the meaning of Section 424(e) of the Code) with respect to the Company.
2.25 "Per Share Option Price" means, with respect to each Option, the
per share exercise price with respect to such Option.
2.26 "Person" means any natural person, corporation, partnership,
firm, association, trust, government, governmental agency or any other entity,
whether acting in an individual, fiduciary or other capacity.
-3-
<PAGE>
2.27 "Plan" means this Cost Plus, Inc. 1995 Stock Option Plan.
2.28 "Pooling Period" means, with respect to a Pooling Transaction,
the period ending on the first date on which the combined entity resulting from
such Pooling Transaction publishes combined operating results for at least
thirty (30) days.
2.29 "Pooling Transaction" means an acquisition of the Company in a
transaction which is treated as a "pooling of interests" under generally
accepted accounting principles.
2.30 "Sale of the Company" means any of the following transactions
which are approved by the Board and the shareholders of the Company in
accordance with the Articles of Incorporation of the Company then in effect: (i)
the sale of all or substantially all of the assets of the Company determined on
a consolidated basis, (ii) the complete liquidation or dissolution of the
Company, or (iii) a merger, consolidation or reorganization involving the
Company (a "Business Combination"), unless the shareholders of the Company,
immediately before the Business Combina tion, Own, directly or indirectly, at
least a majority of the combined voting power of the outstanding voting
securities of the corporation resulting from the Business Combination in
substantially the same proportions as their Ownership of the outstanding voting
securities immediately before such transaction.
2.31 "Securities Act" means the Securities Act of 1933, as amended.
2.32 "Shares" means the common stock, par value $.01 per share, of
the Company.
2.33 "Subsidiary" means any corporation which is a subsidiary
corporation (within the meaning of Section 424(f) of the Code) with respect to
the Company.
2.34 "Successor Corporation" means a corporation, or a parent or
subsidiary thereof within the meaning of Section 424(a) of the Code, which
issues or assumes a stock option in a transaction to which Section 424(a) of the
Code applies.
2.35 "Ten-Percent Shareholder" means an Eligible Individual, who, at
the time an Incentive Stock Option is to be granted to him or her, owns (within
the meaning of Section 422(b)(6) of the Code) stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company, or of a Parent or a Subsidiary.
3. Administration.
--------------
3.1 The Plan shall be administered as follows:
(a) The Plan shall be administered by the Committee which shall hold
meetings at such times as may be necessary for the proper administration of the
Plan. The Committee shall keep minutes of its meetings. Except as otherwise
provided in the Company's
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<PAGE>
Articles of Incorporation or By-Laws, a quorum shall consist of not less than
two members of the Committee and a majority of a quorum may authorize any
action. Except as otherwise provided in the Company's Articles of Incorporation
or Bylaws, any decision or determination reduced to writing and signed by the
requisite number of the members of the Committee shall be as fully effective as
if made by the vote of the requisite number of members at a meeting duly called
and held.
(b) Procedure.
---------
(i) Multiple Administrative Bodies. The Committee shall be composed
------------------------------
of the Board or a committee of the Board. The Plan may be administered by
different Committees with respect to different Optionees.
(ii) Section 162(m). To the extent that the Board determines it to be
--------------
desirable to qualify Options granted hereunder as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the Plan shall
be administered by a Committee of two or more Outside Directors.
(iii) Rule 16b-3. To the extent desirable to qualify transactions
----------
hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder
shall be structured to satisfy the requirements for exemption under Rule 16b-3.
(iv) Other Administration. Other than as provided above, the Plan
--------------------
shall be administered by (A) the Board or (B) a Committee, which committee shall
be constituted to satisfy Applicable Laws.
(c) No member of the Committee shall be liable for any action, failure
to act, determination or interpretation made in good faith with respect to this
Plan or any transaction hereunder, except for liability arising from his or her
own willful misfeasance, gross negligence or reckless disregard of his or her
duties. The Company hereby agrees to indemnify each member of the Committee for
all costs and expenses and, to the extent permitted by applicable law, any
liability incurred in connection with defending against, responding to,
negotiation for the settlement of or otherwise dealing with any claim, cause of
action or dispute of any kind arising in connection with any action in
administering this Plan or in authorizing or denying authorization to any
transaction hereunder.
3.2 Subject to the express terms and conditions set forth herein, the
Committee shall have the power from time to time:
(a) to determine those Eligible Individuals to whom Options shall be
granted under the Plan and, subject to Section 5.2, the number of Shares subject
to each Option to be granted, to prescribe the terms and conditions (which need
not be identical) of each such Option, including the Fair Market Value on any
date, the Per Share Option Price for the Shares subject to each Option in
accordance with Section 5.3, and to make any
-5-
<PAGE>
amendment or modification to any Agreement, including the acceleration of
vesting, consistent with the terms of the Plan;
(b) to construe and interpret the Plan and the Options granted
hereunder and to establish, amend and revoke rules and regulations for the
administration of the Plan, including, but not limited to, correcting any defect
or supplying any omission, or reconciling any inconsistency in the Plan or in
any Agreement, in the manner and to the extent it shall deem necessary or
advisable so that the Plan complies with applicable law, including Rule 16b-3
under the Exchange Act and the Code to the extent applicable, and otherwise to
make the Plan fully effective. All decisions and determinations by the Committee
in the exercise of this power shall be final, binding and conclusive upon the
Company, its Subsidiaries, the Optionees, and all other persons having any
interest therein;
(c) to determine the duration and purposes for leaves of absence which
may be granted to an Optionee on an individual basis without constituting a
termination of employ ment or service for purposes of the Plan;
(d) to exercise its discretion with respect to the powers and rights
granted to it as set forth in the Plan; and
(e) generally, to exercise such powers and to perform such acts as are
deemed necessary or advisable to promote the best interests of the Company with
respect to the Plan.
4. Stock Subject to the Plan.
-------------------------
(a) The maximum number of Shares that may be made the subject of
Options granted under the Plan shall be 1,024,669 Shares (post split), less the
aggregate number of Shares from time to time (i) subject to options outstanding
under the Cost Plus, Inc. 1994 Stock Option Plan (the "1994 Option Plan") or
(ii) issued upon exercise of options granted under the 1994 Option Plan. Options
to be granted under the Plan shall be granted under the Form of Cost Plus, Inc.
1995 Stock Option Plan Incentive Stock Option Agreement attached as Exhibit A-1
-----------
or Nonqualified Stock Option Agreement attached as Exhibit A-2, which forms of
-----------
agreement may be modified or amended by the Committee from time to time so long
as any such modified or amended agreement is not inconsistent with any provision
of the Plan.
(b) Upon a Change in Capitalization, the number of Shares set forth in
this Section 4 and in Section 5 shall be adjusted in number and kind pursuant to
Section 6.
(c) Upon the granting of an Option, the number of Shares available for
the granting of further Options shall be reduced by the number of Shares in
respect of which the Option is granted. Whenever any outstanding Option or
portion thereof expires, is canceled or is otherwise terminated for any reason
without having been exercised or payment having been made in respect thereof,
the Shares allocable to the expired, canceled or otherwise terminated portion of
the Option shall again be available for the granting of Options by the Committee
under the terms of the Plan.
-6-
<PAGE>
(d) The Board shall reserve for the purpose of the Plan, out of its
authorized but unissued Shares, 1,024,669 Shares (post split), less the
aggregate number of Shares from time to time (i) subject to options outstanding
under the 1994 Option Plan or (ii) issued upon exercise of options granted under
the 1994 Option Plan.
5. Option Grants for Eligible Individuals.
--------------------------------------
5.1 Authority of Committee. Except as otherwise expressly provided
----------------------
in this Plan, the Committee shall have full and final authority to select those
Eligible Individuals who will receive Options, the terms and conditions of which
shall be set forth in an Agreement; provided, however, that no person shall
-----------------
receive any Incentive Stock Options unless he or she is an employee of the
Company, a Parent or a Subsidiary at the time the Incentive Stock Option is
granted.
5.2 Eligibility.
-----------
(a) No Eligible Individual may be granted, in any fiscal year of the
Company, Options to purchase more than 265,322 Shares; provided that the
limitation set forth in this Section 5.2(a) shall only apply to Options granted
after the Company's Initial Public Offering. If an Option is cancelled (other
than in connection with a Sale of the Company), the cancelled Option will be
counted against the limit set forth in this Section 5.2(a). For this purpose,
if the exercise price of an Option is reduced, the transaction will be treated
as a cancellation of the Option and the grant of a new Option.
(b) Each Option shall be designated in the Agreement as either an
Incentive Stock Option or a Nonqualified Stock Option. However, notwithstanding
such designations, to the extent that the aggregate Fair Market Value:
(i) of Shares subject to an Optionee's Incentive Stock Options granted
by the Company, any Parent or Subsidiary, which
(ii) become exercisable for the first time during any calendar year
(under all plans of the Company or any Parent or Subsidiary) exceeds $100,000,
such excess Options shall be treated as Nonqualified Stock Options. For purposes
of this Section 5.2(b), Incentive Stock Options shall be taken into account in
the order in which they were granted, and the Fair Market Value of the Shares
shall be determined as of the time the Option with respect to such Shares is
granted.
5.3 Option Exercise Price. The Per Share Option Price for the Shares
---------------------
to be issued pursuant to exercise of an Option shall be such price as is
determined by the Committee, but shall be subject to the following:
(a) In the case of an Incentive Stock Option granted to an Eligible
Individual who, at the time of the grant of such Incentive Stock Option, is a
Ten-Percent
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<PAGE>
Shareholder, the Per Share Option Price shall be no less than 110% of the Fair
Market Value per Share on the Grant Date.
(b) In the case of an Incentive Stock Option granted to any Eligible
Individual other than a Ten-Percent Shareholder, the Per Share Option Price
shall be no less than 100% of the Fair Market Value per Share on the Grant Date.
5.4 Duration of Options.
-------------------
(a) Maximum Duration. Each Option granted hereunder shall be for a
----------------
term of not more than ten (10) years from the date it is granted (five (5) years
in the case of an Incentive Stock Option granted to a Ten-Percent Shareholder).
The Committee may, subsequent to the granting of any Option, extend the term
thereof but in no event shall the term as so extended exceed the maximum term
provided for in the preceding sentence.
(b) Termination of Employment.
-------------------------
(i) Death, Disability or Retirement. In the event the Optionee's
-------------------------------
employment with or service as a consultant to or director of the Company is
terminated as a result of Disability or death or the voluntary retirement of the
Optionee at or after age 65 (or age 55 with Company consent) ("Retirement") or
the Optionee dies within the thirty (30) day period described in Section
5.4(b)(iii) below, the Optionee or, in the case of the Optionee's death,
Optionee's legal representatives, may at any time within one (1) year after his
or her termination, exercise any Options then held by the Optionee to the
extent, but only to the extent, that such Options or portions thereof are
exercisable on the date of such termination, after which time such Options shall
terminate in full; provided, however, that if the employment of an Optionee is
terminated as a result of Disability that does not qualify as a "permanent and
total disability" as defined in Code Section 22(e)(3) and the regulations
thereunder, Incentive Stock Options held by the Optionee shall be treated as
Nonqualified Stock Options as of the date that is three (3) months and one (1)
day following such termination of employment. Any portion of an Incentive Stock
Option granted to an Optionee which is not exercised within the three (3) month
period following the Optionee's Retirement shall thereafter cease to be an
Incentive Stock Option and shall be treated as a Nonqualified Stock Option. In
the event of an Optionee's termination of employment due to death as described
in this Section, all Options held by the Optionee shall be exercisable, even as
to Shares previously unvested, by the legatee or legatees under the Optionee's
will, or by the Optionee's personal representatives or distributees and such
person or persons shall be substituted for the Optionee each time the Optionee
is referred to herein. Notwithstanding anything else in this Section, the
Committee may, in its discretion, provide in the Agreement that any Options held
by Optionee on the date Optionee's employment with or service as a consultant or
director of the Company terminates as a result of Disability or Retirement shall
become fully vested and exercisable as of such termination date.
(ii) Cause. In the event Optionee's employment with or service as a
-----
consultant to or director of the Company is terminated for Cause, all Options
held by the Optionee
-8-
<PAGE>
shall terminate on the date of the Optionee's termination whether or not
exercisable.
(iii) Other Termination. If Optionee's employment with or service as a
-----------------
consultant to or director of the Company is terminated for any reason other than
Disability, death, Retirement or Cause (including the Optionee's ceasing to be
employed by or a consultant to or director of a Subsidiary or division of the
Company or any Subsidiary as a result of the sale of such Subsidiary or division
or an interest in such Subsidiary or division), the Optionee may at any time
within thirty (30) days after such termination, exercise any Options held by the
Optionee to the extent, but only to the extent, that such Options or portions
thereof are exercisable on the date of the termination, after which time such
Options shall terminate in full.
5.5 Vesting. Unless otherwise provided for by the Committee in an
-------
Agreement and subject to Section 5.10, each Option shall become vested and
exercisable as to 25% of the aggregate number of Shares covered by the Option on
the First Vesting Date, and as to an additional 25% of the aggregate number of
Shares covered by the Option on each of the first, second and third
anniversaries of the First Vesting Date. Any fractional number of Shares
resulting from the application of the vesting percentage shall be rounded to the
next higher whole number of Shares. To the extent not exercised, installments
shall accumulate and be exercisable, in whole or in part, at any time after
becoming exercisable, but not later than the date an Option expires or
terminates. Notwithstanding the foregoing (or any other provision to the
contrary contained in the Plan or any Agreement) all outstanding Options shall
immediately become fully (100%) vested and exercisable upon a Sale of the
Company. In addition, the Committee may accelerate the exercisability of any
Option or portion thereof at any time.
5.6 Modification. No modification of an Option shall adversely alter
------------
or impair any rights or obligations under the Option without the Optionee's
consent.
5.7 Nontransferability. Unless otherwise provided by the Committee
------------------
in an Agreement, no Option granted hereunder shall be transferable by the
Optionee to whom granted otherwise than by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order as defined in
the Code. An Option may be exercised during the lifetime of such Optionee only
by the Optionee or his or her guardian or legal representative. The terms of
such Option shall be final, binding and conclusive upon the beneficiaries,
executors, administrators, heirs and successors of the Optionee.
5.8 Method of Exercise. The exercise of an Option shall be made only
------------------
by a written notice delivered in person or by mail to the Secretary of the
Company at the Company's principal executive office, specifying the number of
Shares to be purchased and accompanied by payment therefor and otherwise in
accordance with the Agreement pursuant to which the Option was granted. The
purchase price for any Shares purchased pursuant to the exercise of an Option
shall be paid in full upon such exercise by any one or a combination of the
following: (i) cash, (ii) check, (iii) transferring Shares to the Company upon
such terms and conditions as determined by the Committee or (iv) pursuant to a
cashless exercise providing for the exercise of the Option and sale of
-9-
<PAGE>
the underlying Shares by a designated broker and delivery of the Shares by the
Company to such broker. Cashless exercises shall be subject to such procedures
as may be established from time to time by the Committee in its sole discretion.
The Committee shall have discretion to determine at the time of grant of each
Option or at any later date (up to and including the date of exercise) the form
of payment acceptable in respect of the exercise of such Option. With respect to
the transfer of Shares to the Company as payment, in part or in whole, of the
exercise price (i) any Shares transferred to the Company as payment of the
purchase price under an Option shall be valued at their Fair Market Value on the
day preceding the date of exercise of such Option; and (ii) any Shares acquired
upon the exercise of an option must have been owned by the Optionee for more
than six months prior to such transfer. If requested by the Committee, the
Optionee shall deliver the Agreement evidencing the Option to the Secretary of
the Company who shall endorse thereon a notation of such exercise and return
such Agreement to the Optionee. No fractional Shares (or cash in lieu thereof)
shall be issued upon exercise of an Option and the number of Shares that may be
purchased upon exercise shall be rounded to the nearest whole number of Shares.
5.9 Rights of Optionees. No Optionee shall be deemed for any purpose
-------------------
to be the owner of any Shares subject to any Option unless and until (i) the
Option shall have been exercised pursuant to the terms thereof, (ii) the Company
shall have issued and delivered the Shares to the Optionee, and (iii) the
Optionee's name shall have been entered as a shareholder of record on the books
of the Company. Thereupon, the Optionee shall have full voting, dividend and
other ownership rights with respect to such Shares, subject to such terms and
conditions as may be set forth in the applicable Agreement.
5.1 Sale of Company.
---------------
(a) In the event of a Sale of the Company, effective as of the date
of consummation of the transaction constituting the Sale of the Company, at the
election of the Company and, without any action by any Optionee:
(A)(i) each outstanding Option shall become fully (100%) vested and
exercisable, (ii) each Option shall be deemed to have been exercised to the
extent it had not been exercised prior to that date, (iii) the Shares issuable
in connection with the deemed exercise of each Option shall be issued to and in
the name of the acquiror of the Company, if any, and (iv) in respect of each
Share issued in connection with the deemed exercise of an Option, the Optionee
shall receive a per Share payment equal to the number (or amount) and kind of
stock, securities, cash, property or other consideration that each holder of a
Share was entitled to receive in connection with the Sale of the Company,
reduced by the Per Share Option Price, or
(B) each outstanding Option shall become fully (100%) vested and shall
simultaneously be terminated in exchange for a per share payment for each Share
then subject to such Option equal to the number (or amount) and kind of stock,
securities, cash, property or other consideration that each holder of a Share
was entitled to receive in connection with the Sale of the Company, reduced by
the Per Share Option Price, or
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<PAGE>
(C) in the event of a Sale of the Company that is consummated pursuant
to a merger, consolidation or reorganization (a "Transaction"), each outstanding
Option shall become fully (100%) vested and exercisable, and the Plan and the
outstanding Options shall continue in effect in accordance with their respective
terms and each Optionee shall be entitled to receive in respect of each Share
subject to any outstanding Option, upon exercise of such Option, the same number
(or amount) and kind of stock, securities, cash, property or other consideration
that each holder of a Share was entitled to receive in connection with the
Transaction in respect of a Share.
(b) In the event of a Sale of the Company, the Optionee shall sell his
or her Shares and, if shareholder approval of the transaction is required and if
the Company receives an opinion of an independent, nationally recognized
investment banking firm retained by the Board to the effect that the
consideration to be received in such Sale of the Company, as the case may be, is
fair to the shareholders of the Company, shall vote his or her Shares in favor
thereof, and waive any dissenters' rights, preemptive rights, appraisal rights
or similar rights, as the case may be. (The fees and expenses incurred in
obtaining such opinion shall be borne by the Company.)
(c) Any sale of Shares by any Optionee in any Sale of the Company
shall be for the same consideration per share, on the same terms and subject to
the same conditions as the sale by the shareholders of the Company.
(d) In any case, in the event of a Sale of the Company, the payment
made to each Optionee shall be further reduced by an amount equal to the
Optionee's proportionate share of the expenses of sale incurred by the
Controlling Shareholders in connection with the Sale of the Company. In any
Sale of the Company, at the request of the Controlling Shareholders or the
Company, each Optionee shall execute and deliver a counterpart of an agreement
pursuant to which such Optionee agrees to sell its Shares in the Sale of the
Company, provided that such Optionee shall not be required to make, in
--------
connection with such Sale of the Company, any representations and warranties
with respect to the Company or its business or with respect to any other
Optionee or selling shareholder. In addition, each Optionee shall be
responsible for such Optionee's proportionate share of the expenses of sale
incurred by the selling shareholders in connection with the Sale of the Company
and the obligations and liabilities (including obligations and liabilities for
indemnification (including indemnification obligations and liabilities for (x)
breaches of representations and warranties made by the Company or any other
Optionee or selling shareholder with respect to the Company or its business, (y)
breaches of covenants and (z) other matters), amounts paid into escrow and post-
closing purchase price adjustments) incurred by the selling shareholders in
connection with the Sale of the Company; provided that (i) without the written
--------
consent of such Optionee, the amount of such obligations and liabilities shall
not exceed the gross proceeds received by such Optionee in such Sale of the
Company (provided that to the extent the proceeds received by the Optionee in
---------
such Sale of the Company are reduced by the Per Share Option Price, the "gross
proceeds received by such Optionee" shall be deemed to mean the sum of such
proceeds plus the Per Share Option Price for purposes of this Plan) and (ii)
such Optionee shall not
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<PAGE>
be responsible for the fraud of any other Optionee or selling shareholder or any
indemnification obligations and liabilities for breaches of representations and
warranties made by any other Optionee or selling shareholder with respect to
such other Optionee's or selling shareholder's ownership of and title to shares
of capital stock of the Company, organization and authority. In connection with
a Sale of the Company, and subject to Section 5.10(b) and Section 5.10(c)
hereof, each Optionee shall do and perform or cause to be done and performed all
further acts and things and shall execute and deliver all other agreements,
certificates, instruments and documents as the Company or the Controlling
Shareholders reasonably may request in connection with such Sale of the Company.
(e) For all purposes of the Plan, the value of stock, securities,
property or other consideration shall be the Fair Market Value of such stock,
securities, property or other consideration as determined in accordance with
Section 2.13.
(f) In the case of a Transaction which also constitutes a Pooling
Trans action, notwithstanding anything to the contrary contained in the Plan or
any Agreement, (i) to the extent not earlier exercised or terminated under this
Section 5.10, all Options outstanding on the date of the Transaction shall
remain exercisable until the date which is thirty (30) days after the last day
of the Pooling Period, whether or not the Optionee is then an employee of the
Company, but in no event beyond the stated term of the Option, and (ii) if the
Board determines after consultation with an independent accounting firm retained
by the Company (the "Independent Accountant") that it is reasonably necessary in
order to assure that the Pooling Transaction will qualify as such, the Committee
may provide, in its sole discretion and pursuant to the specific recommendations
of the Independent Accountant, that (A) all Options, or, in the alternative,
such Options held by Optionees specifically identified by the Committee, shall
not become immediately and fully exercisable on the date of the Transaction but
rather shall become immediately and fully exercisable on the date following the
last day of the Pooling Period, (B) the Optionees holding such Options shall be
required to surrender such Options (or any portion of such Options) for
cancellation in return for the consideration provided under this Section 5.10
only during the thirty (30) day period commencing on the date following the last
day of the Pooling Period, but in no event after the stated term of the Option,
and/or (C) the consideration specified above in this Section 5.10 shall be paid
in the form of cash, Shares or securities of a successor of the Company or a
combination of the foregoing, as designated by the Committee.
6. Adjustment Upon Changes in Capitalization.
-----------------------------------------
(a) In the event of a Change in Capitalization, the Committee shall
conclusively determine the appropriate adjustments, if any, to (i) the maximum
number and class of Shares or other stock or securities with respect to which
Options may be granted under the Plan, (ii) the maximum number of Shares with
respect to which Options may be granted to any Eligible Individual during the
term of the Plan, and (iii) the number and class of Shares or other stock or
securities which are subject to outstanding Options granted under the Plan, and
the purchase price therefor, if applicable.
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<PAGE>
(b) Any such adjustment in the Shares or other stock or securities
subject to outstanding Incentive Stock Options (including any adjustments in the
purchase price) shall be made in such manner as not to constitute a modification
as defined by Section 424(h)(3) of the Code and only to the extent otherwise
permitted by Sections 422 and 424 of the Code.
(c) If, by reason of a Change in Capitalization, an Optionee shall be
entitled to exercise an Option with respect to, new, additional or different
shares of stock or securities, such new, additional or different shares shall
thereupon be subject to all of the conditions, restrictions and performance
criteria which were applicable to the Shares subject to the Option prior to such
Change in Capitalization.
7. Termination and Amendment of the Plan.
-------------------------------------
The Plan shall terminate on the day preceding the tenth anniversary of
the date of its adoption by the Board and no Option may be granted thereafter.
The Board may sooner terminate the Plan and the Board may at any time and from
time to time amend, modify or suspend the Plan; provided, however, that, except
-----------------
with the consent of the Optionee, no such amendment, modification, suspension or
termination shall impair or adversely alter any Options theretofore granted
under the Plan, nor shall any amendment, modification, suspension or termination
deprive any Optionee of any Shares which he or she may have acquired through or
as a result of the Plan. To the extent necessary and desirable to comply with
the Code or any other applicable laws, the Company shall obtain shareholder
approval of any amendment to the Plan.
8. Non-Exclusivity of the Plan.
---------------------------
The adoption of the Plan by the Board shall not be construed as
amending, modifying or rescinding any previously approved incentive arrangement
or as creating any limitations on the power of the Board to adopt such other
incentive arrangements as it may deem desirable, including, without limitation,
the granting of stock options otherwise than under the Plan, and such arrange
ments may be either applicable generally or only in specific cases.
9. Limitation of Liability.
-----------------------
As illustrative of the limitations of liability of the Company, but
not intended to be exhaustive thereof, nothing in the Plan shall be construed
to:
(i) give any person any right to be granted an Option other than at
the sole discretion of the Committee;
(ii) give any person any rights whatsoever with respect to Shares
except as specifically provided in the Plan;
(iii) limit in any way the right of the Company to terminate the
employment of any
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<PAGE>
person at any time; or
(iv) be evidence of any agreement or understanding, expressed or
implied, that the Company will employ any person at any particular rate of
compensation or for any particular period of time.
10. Regulations and Other Approvals: Governing Law.
----------------------------------------------
10.1 Except as to matters of federal law, this Plan and the rights of
all persons claiming hereunder shall be construed and determined in accordance
with the laws of the State of California without giving effect to conflicts of
law principles.
10.2 The obligation of the Company to sell or deliver Shares with
respect to Options granted under the Plan shall be subject to all applicable
laws, rules, and regulations, including all applicable federal and state
securities laws and all applicable stock exchange rules, and the obtaining of
all such approvals by governmental agencies as may be deemed necessary or
appropriate by the Committee.
10.3 It is intended that from and after the date that any class of
equity securities of the Company are registered under Section 12 of the Exchange
Act, the Plan shall be administered in compliance with Rule 16b-3 promulgated
under the Exchange Act and the Committee shall interpret and administer the
provisions of the Plan or any Agreement in a manner consistent therewith. Any
provisions inconsistent with such Rule shall be inoperative and shall not affect
the validity of the Plan.
10.4 The Board may make such changes as may be necessary or
appropriate to comply with the rules and regulations of any government
authority, or to obtain for Eligible Indi viduals granted Incentive Stock
Options the tax benefits under the applicable provisions of the Code and
regulations promulgated thereunder.
10.5 Each Option is subject to the requirement that, if at any time
the Committee determines, in its discretion, that the listing, registration or
qualification of Shares issuable pursuant to the Plan is required by any
securities exchange or under any state or federal law, or the consent or
approval of any governmental regulatory body is necessary or desirable as a
condition of, or in connection with, the grant of an Option or the issuance of
Shares, no such Options shall be granted or payment made or Shares issued, in
whole or in part, unless listing, registration, qualification, consent or
approval has been effected or obtained free of any conditions other than as
acceptable to the Committee.
10.6 Notwithstanding anything contained in the Plan or any Agreement
to the contrary, in the event that the disposition of Shares acquired pursuant
to the Plan is not covered by a then current registration statement under the
Securities Act of 1933, as amended, and is not otherwise exempt from such
registration, such Shares shall be restricted against transfer to the extent
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<PAGE>
required by the Securities Act of 1933, as amended, and Rule 144 or other
regulations thereunder. The Committee may require any individual receiving
Shares pursuant to an Option granted under the Plan, as a condition precedent to
receipt of such Shares, to represent and warrant to the Company in writing that
the Shares acquired by such individual are acquired without a view to any
distribution thereof and will not be sold or transferred other than pursuant to
an effective registration thereof under said Act or pursuant to an exemption
applicable under the Securities Act of 1933, as amended, or the rules and
regulations promulgated thereunder and to the effect set forth in Section 14 of
the Agreement. The certificates evidencing any of such Shares shall bear an
appropriate legend to reflect their status as restricted securities as
aforesaid.
11. Miscellaneous.
-------------
11.1 Multiple Agreements. The terms of each Option may differ from
-------------------
other Options granted under the Plan at the same time, or at some other time.
The Committee may also grant more than one Option to a given Eligible Individual
during the term of the Plan, either in addition to, or in substitution for, one
or more Options previously granted to that Eligible Individual.
11.2 Withholding of Taxes.
--------------------
(a) At such times as an Optionee recognizes taxable income in
connection with the receipt of Shares, cash or other consideration hereunder (a
"Taxable Event"), the Optionee shall pay to the Company an amount equal to the
federal, state and local income taxes and other amounts as may be required by
law to be withheld by the Company in connection with the Taxable Event (the
"Withholding Taxes") prior to the issuance or the payment of such Shares, cash
or other consideration. The Company shall have the right to deduct from any
payment of cash to an Optionee an amount equal to the Withholding Taxes in
satisfaction of the obligation to pay Withholding Taxes. In satisfaction of the
obligation to pay Withholding Taxes to the Company, the Optionee may make a
written election (the "Tax Election"), which may be accepted or rejected in the
sole discretion of the Committee, to have withheld a portion of the Shares then
issuable to him or her having an aggregate Fair Market Value, on the date
preceding the date of such issuance, equal to the Withholding Taxes.
Notwithstanding the foregoing, the Committee may, by the adoption of rules or
otherwise, (i) modify the provisions of this Section 11.2 or impose such other
restrictions or limitations on Tax Elections as may be necessary to ensure that
the Tax Elections will be exempt transactions under Section 16(b) of the
Exchange Act, and (ii) permit Tax Elections to be made at such other times and
subject to such other conditions as the Committee determines will constitute
exempt transactions under Section 16(b) of the Exchange Act.
(b) If an Optionee makes a disposition, within the meaning of Section
424(c) of the Code and regulations promulgated thereunder, of any Share or
Shares issued to such Optionee pursuant to the exercise of an Incentive Stock
Option within the two-year period commencing on the day after the date of the
grant or within the one-year period commencing on the day after the date of
transfer of such Share or Shares to the Optionee pursuant to such exercise, the
Optionee shall, within ten (10) days of such disposition, notify the Company
thereof, by delivery of
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<PAGE>
written notice to the Company at its principal executive office.
12. Effective Date.
--------------
The Plan shall become effective upon its adoption by the Board of
Directors of the Company; provided that continuance of the Plan shall be subject
to approval by the shareholders of the Company within twelve (12) months after
the date the Plan is so adopted. Such shareholder approval shall be obtained in
the degree and manner required under applicable state and federal law and the
rules of any stock exchange upon which the Shares are listed.
13. Termination of Existing Option Plan.
-----------------------------------
At such time as this Plan shall become effective and shall have been
approved by the shareholders as required by Section 12, the 1994 Stock Option
Plan shall terminate and the Shares allotted for stock option grants under the
1994 Option Plan, other than Shares that are the subject of outstanding options
granted under the 1994 Option Plan, and any Shares which become available due to
the forfeiture, expiration or other termination of any option, or portion
thereof, outstanding under the 1994 Option Plan, shall not be available for the
granting of any further options or other awards under the 1994 Option Plan or
any other option or stock incentive plan or arrangement of the Company. Each
option outstanding under the 1994 Option Plan shall remain outstanding and shall
continue to be subject to the terms of the applicable agreement evidencing the
grant of such option and the terms of the 1994 Option Plan.
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<PAGE>
COST PLUS, INC.
1995 STOCK OPTION PLAN
INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT is effective as of the 18th day of November, 1996 (the
"Grant Date"), between Cost Plus, Inc., a California corporation (the
"Company"), and 1 (the "Optionee").
WHEREAS, the Company has adopted the Cost Plus, Inc. 1995 Stock Option Plan
(the "Plan") in order to provide additional incentive to selected officers,
employees, consultants and directors of the Company and its Subsidiaries; and
WHEREAS, the Committee responsible for administration of the Plan has
determined to grant an Option to the Optionee as provided herein and the Company
and the Optionee hereby wish to establish the terms and conditions applicable to
the Option;
NOW, THEREFORE, the parties hereto agree as follows:
1. Grant of Option.
---------------
1.1 Effective as of the Grant Date, the Company hereby grants to the
Optionee the right and option (the "Option") to purchase all or any part of an
aggregate of 2 whole Shares subject to, and in accordance with, the terms and
conditions set forth in this Agreement.
1.2 The Option is intended to qualify as an Incentive Stock Option to
the maximum extent permissible under Section 422 of the Code (and the
regulations promulgated thereunder); provided, however, that nothing in this
-------- -------
Agreement shall be interpreted as a representation, guarantee or other
undertaking on the part of the Company that the Option is or will be determined
to be an Incentive Stock Option. To the extent that the Option does not qualify
as an Incentive Stock Option with respect to any Share(s) covered by the Option,
the Option shall be a Nonqualified Stock Option with respect to such Share(s).
1.3 This Agreement shall be construed in accordance and consistent
with, and subject to, the terms of the Plan (the provisions of which are
incorporated herein by reference); and, except as otherwise expressly set forth
herein, the capitalized terms used in this Agreement shall have the same
definitions as set forth in the Plan.
2. Purchase Price.
--------------
The price at which the Optionee shall be entitled to purchase Shares
upon the exercise of the Option shall be $18.125 per Share (the "Per Share
Option Price").
3. Duration of Option.
------------------
<PAGE>
The Option shall be exercisable to the extent and in the manner
provided herein for a period of ten (10) years from the Grant Date (the
"Exercise Term"); provided, however, that the Option may be earlier terminated
-----------------
as provided herein.
4. Exercisability of Option.
------------------------
Except as otherwise provided herein, and subject to the continued
provision by Optionee of services to the Company, its Parent, or any Subsidiary,
the Option shall become vested and exercisable as to one-third of the aggregate
number of Shares covered by the Option each year on the anniversary of the grant
date. Any fractional number of Shares resulting from the application of this
fraction shall be rounded to the next higher whole number of Shares. To the
extent not exercised, installments shall accumulate and be exercisable, in whole
or in part, at any time after becoming exercisable, but not later than the date
the Option expires or terminates. Notwithstanding the foregoing (or any other
provision of this Agreement to the contrary) the Option shall immediately become
fully (100%) vested and exercisable upon a Sale of the Company, subject to the
continued provision by Optionee of services to the Company, its Parent or any
Subsidiary as of the date of such transaction.
5. Manner of Exercise and Payment.
------------------------------
5.1 Subject to the terms and conditions of this Agreement and the
Plan, the Option may be exercised by delivery of written notice to the Company,
at its principal executive office. Such notice shall state that the Optionee is
electing to exercise the Option and the number of Shares in respect of which the
Option is being exercised and shall be signed by the person or persons
exercising the Option. If requested by the Committee, such person or persons
shall (i) deliver this Agreement to the Secretary of the Company who shall
endorse thereon a notation of such exercise and (ii) provide satisfactory proof
as to the right of such person or persons to exercise the Option.
5.2 The notice of exercise described above shall be accompanied by
(a) either (i) payment of the full purchase price for the Shares in respect of
which the Option is being exercised, in cash, by check or, at the sole
discretion of the Committee, by transferring Shares to the Company having a Fair
Market Value on the day preceding the date of exercise equal to the cash amount
for which such Shares are substituted or instructions from the Optionee to the
Company directing the Company to deliver a specified number of Shares directly
to a designated broker or dealer pursuant to a cashless exercise election which
is made in accordance with such requirements and procedures as are acceptable to
the Committee in its sole discretion, (b) full payment of all applicable
Withholding Taxes. Any Shares acquired by the Optionee pursuant to the exercise
of an option may not be transferred in satisfaction of the exercise price in
respect of the exercise of any portion of the Option unless such Shares have
been held by the Optionee for at least six (6) months prior to such transfer.
5.3 Upon receipt of the notice of exercise and the required payment
relating to the Shares in respect of which the Option is being exercised and
other required documentation, the
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<PAGE>
Company shall, subject to the Plan and this Agreement, take such action as may
be necessary to effect the transfer to the Optionee of the number of Shares as
to which such exercise was effective.
5.4 The Optionee shall not be deemed to be the holder of or to have
any of the rights of a holder with respect to, any Shares subject to the Option
until (i) the Option shall have been exercised pursuant to the terms of this
Agreement and the Optionee shall have paid the full purchase price for the
number of Shares in respect of which the Option was exercised, (ii) the Company
shall have issued and delivered the Shares to the Optionee, and (iii) the
Optionee's name shall have been entered as a stockholder of record on the books
of the Company, whereupon the Optionee shall have full voting and other
ownership rights with respect to such Shares.
6. Termination of Employment.
-------------------------
6.1 Death, Disability or Retirement. In the event the employment of
-------------------------------
the Optionee is terminated as a result of Disability or death or the voluntary
retirement of the Optionee at or after age 65 (or age 55 with Company consent)
("Retirement") or the Optionee dies within the thirty (30) day period described
in Section 6.3 below, the Optionee may at any time within one (1) year after
such termination of employment, exercise the Option to the extent, but only to
the extent, that the Option or portion thereof was exercisable on the date of
such termination of employment, after which time the Option shall terminate in
full. Any portion of the Option which is not exercised within the three (3)
month period following the Optionee's Retirement shall thereafter cease to be
eligible for treatment as an Incentive Stock Option and shall be treated as a
Nonqualified Stock Option. In the event of the Optionee's death, the Option
shall be exercisable, to the extent provided in the Plan and this Agreement, by
the legatee or legatees under the Optionee's will, or by the Optionee's personal
representatives or distributees and such person or persons shall be substituted
for the Optionee each time the Optionee is referred to herein.
6.2 Cause. In the event the employment of the Optionee is terminated
-----
for Cause, the Option shall terminate on the date of the Optionee's termination
of employment whether or not exercisable.
6.3 Other Termination of Employment. If the employment of the
-------------------------------
Optionee is terminated for any reason other than Disability, death, Retirement
or Cause (including the Optionee's ceasing to be employed by a Subsidiary or
division of the Company or any Subsidiary as a result of the sale of such
Subsidiary or division or an interest in such Subsidiary or division), the
Optionee may at any time within thirty (30) days after such termination of
employment, exercise the Option to the extent, but only to the extent, that the
Option or portion thereof was exercisable on the date of the termination of
employment, after which time the Option shall terminate in full.
7. Nontransferability.
------------------
The Option shall not be transferable other than by will or by the laws
of descent and distribution or pursuant to a qualified domestic relations order
as defined in the Code. During the
-3-
<PAGE>
lifetime of the Optionee, the Option shall be exercisable only by the Optionee,
except in the case of an Option transferred pursuant to a qualified domestic
relations order.
8. No Right to Continued Employment.
--------------------------------
Nothing in this Agreement or the Plan shall be interpreted or
construed to confer upon the Optionee any right with respect to continuance of
employment by the Company or any Subsidiary, nor shall this Agreement or the
Plan interfere in any way with the right of the Company or any Subsidiary to
terminate the Optionee's employment at any time.
9. Change in Company's Capitalization.
----------------------------------
In the event of a Change in Capitalization, the Committee shall make
appropriate adjustments to the number and class of Shares or other stock or
securities subject to the Option and the purchase price for such Shares or other
stock or securities. The Committee's adjustment shall be made in accordance
with the provisions of Section 6 of the Plan and shall be final and binding for
all purposes of the Plan and this Agreement.
10. Taxation.
--------
10.1 Disqualifying Disposition. If the Optionee makes a disposition,
-------------------------
within the meaning of Section 424(c) of the Code and regulations promulgated
thereunder, of any Share or Shares issued to the Optionee pursuant to his
exercise of that portion of the Option designated as an Incentive Stock Option
within the two-year period commencing on the day after the Grant Date or within
the one-year period commencing on the day after the date of transfer of such
Share or Shares to the Optionee pursuant to such exercise, the Optionee shall,
within ten (10) days of such disposition, notify the Company thereof, by
delivery of written notice to the Secretary of the Company, and immediately
deliver to the Company the amount of any applicable withholding taxes under
Federal, state and local law.
10.2 Withholding. The Company shall have the right to deduct from
-----------
any distribution of cash to the Optionee an amount equal to the federal, state
and local income taxes and other amounts as may be required by law to be
withheld (the "Withholding Taxes") with respect to the Option. If the Optionee
is entitled to receive Shares upon exercise of that portion of the Option which
is a Nonqualified Stock Option, the Optionee shall pay the Withholding Taxes to
the Company in cash prior to the issuance of such Shares. In satisfaction of the
Withholding Taxes, the Optionee may make a written election (the "Tax
Election"), which may be accepted or rejected in the discretion of the
Committee, to have withheld a portion of the Shares issuable to him or her upon
exercise of the Option, having an aggregate Fair Market Value, on the date
preceding the date of such issuance, equal to the Withholding Taxes.
11. Optionee Bound by the Plan.
--------------------------
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<PAGE>
The Optionee hereby acknowledges receipt of a copy of the Plan and
agrees to be bound by all the terms and provisions thereof.
12. Modification of Agreement.
-------------------------
This Agreement may be modified, amended, suspended or terminated, and
any terms or conditions may be waived, but only by a written instrument executed
by the parties hereto.
13. Severability.
------------
Should any provision of this Agreement be held by a court of competent
jurisdiction to be unenforceable or invalid for any reason, the remaining
provisions of this Agreement shall not be affected by such holding and shall
continue in full force in accordance with their terms.
14. Governing Law.
-------------
The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of California without
giving effect to the conflicts of laws principles thereof.
15. Successors in Interest.
----------------------
This Agreement shall inure to the benefit of and be binding upon any
successor to the Company. This Agreement shall inure to the benefit of the
Optionee's legal representatives. All obligations imposed upon the Optionee and
all rights granted to the Company under this Agreement shall be final, binding
and conclusive upon the Optionee's heirs, executors, administrators and
successors.
16. Resolution of Disputes.
----------------------
Any dispute or disagreement which may arise under, or as a result of,
or in any way relate to, the interpretation, construction or application of this
Agreement shall be determined by the Committee. Any determination made
hereunder shall be final, binding and conclusive on the Optionee and Company for
all purposes.
17. No Assignment.
-------------
Except as otherwise provided herein, the rights of the Optionee
hereunder may not be assigned or otherwise transferred to any other party.
18. Entire Agreement.
----------------
-5-
<PAGE>
This Agreement and the Plan constitute the entire agreement, and
supersede all prior agreements and understandings, oral and written, between the
parties hereto with respect to the subject matter hereof.
19. Execution and Delivery by Spouse.
--------------------------------
If an Optionee resides in a community property state, any provision
hereunder which requires such Optionee to execute and deliver any agreement,
certificate, instrument or document shall be deemed to also require such
Optionee's spouse to execute and deliver such agreement, certificate, instrument
or document.
By your signature and the signature of the Company's representative below,
you and the Company agree that this Option is granted under and governed by the
terms and conditions of the Plan and this Agreement. Optionee has reviewed the
Plan and this Agreement in their entirety, has had an opportunity to obtain the
advice of counsel prior to executing this Agreement and fully understands all
provisions of the Plan and Agreement. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the Committee
upon any questions relating to the Plan and Agreement. Optionee further agrees
to notify the Company upon any change in the residence address indicated below.
COST PLUS, INC. OPTIONEE
By:
-------------------------- --------------------------
Title: Address:
--------------------------
--------------------------
--------------------------
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<PAGE>
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT, made as of September 6, 1990, between Cost Plus,
Inc., a California corporation (the "Company"), and Ralph Dillon ("Executive").
RECITALS
--------
The Company desires to employ Executive and Executive is willing to accept
employment by the Company on a full-time basis upon the terms and conditions set
forth in this Agreement.
Now, THEREFORE, in consideration of the foregoing premises and the mutual
---------
covenants herein contained, the parties hereto agree as follows:
1. Employment. Subject to the terms and conditions of this Agreement and
----------
its approval by the Board of Directors of the Company (the "Board"), the Company
agrees to employ Executive, and Executive agrees to accept employment by the
Company, for the term and with the duties stated in Section 2.
2. Term and Duties.
---------------
(a) Term of Employment. Subject to the terms and conditions of this
------------------
Agreement, the initial term of employment for Executive under this Agreement
shall commence on September 6, 1990 and shall continue until August 31, 1993.
The initial term of employment provided for herein shall automatically be
extended from year to year beginning on September 1, 1993, if written notice of
termination is not provided by the Company or Executive to the other party at
least 90 days prior to the end of the then current term.
(b) Duties. During the period of his employment hereunder, Executive
------
shall hold the office and perform the duties of President and Chief Executive
Officer of the Company under the direction of the Board and the Executive
Committee. During the period of his employment hereunder, Executive shall be
nominated to serve on the Board and the Executive Committee. Executive shall
devote his best efforts and substantially all of his business time, attention
and skills to the business and affairs of the Company throughout the period of
his employment hereunder, except for such activities as may, from time to time,
be approved by the Board or the Executive Committee.
3. Compensation and Other Benefits; Reimbursement of Expenses.
----------------------------------------------------------
(a) Initial Compensation. Subject to any withholding or deduction
required by law, the Company shall pay Executive $193,000.00 on the date his
employment commences under this Agreement to compensate Executive for his
estimated losses of
1
<PAGE>
bonus to which he would have been entitled and values attributable to non-vested
stock options which would have vested if he had remained in his former
employment through the end of 1990; provided, however, that if Executive later
-------- -------
receives any amount with respect to such bonus or stock options, Executive shall
pay such amount (less any legal fees and expenses incurred by Executive in
connection with the collection thereof) to the Company to the extent necessary
to reimburse the Company for the payment made by the Company pursuant to the
provisions of this Section 3(a). Executive shall consult with the Board or the
Executive Committee prior to instituting and during the prosecution of any
action against his former employer to collect any such amount to assure that
such action does not impair the performance of his duties under this Agreement.
(b) On-Going Compensation. Subject to any withholding or deduction
---------------------
required by law, the Company shall compensate Executive during the period of his
employment hereunder as follows:
(i) Base Salary. The Company shall pay Executive a base salary,
-----------
including a car allowance, in such installments as are consistent with the
payroll practices of the Company, at an annual rate of not less than
$340,000.00, such rate to be reviewed for possible increases prior to each
anniversary of Executive's employment under this Agreement by the Board or
the Executive Committee which may, in its sole discretion, approve a cost of
living or other increase ("Base Salary").
(ii) Guaranteed Bonus and Performance Bonuses. On the first
----------------------------------------
anniversary of Executive's employment under this Agreement, the Company
shall pay Executive a bonus in the amount of $70,000.00 (the "Guaranteed
Bonus"). For each of the Company's fiscal years thereafter where the
Company's performance equals or exceeds 85% of targeted EBIT under the
operating plan approved by the Board or the Executive Committee for that
particular fiscal year, the Company shall pay Executive a bonus equal to 25%
of Base Salary for 85% attainment of such targeted EBIT, increasing at the
rate of 2/3 of 1% of Base Salary for each percentage point increase over 85%
attainment to the level of 35% of Base Salary for 100% attainment, and
thereafter equal to such higher percentages of Base Salary for attainment of
EBIT in excess of such targeted EBIT in accordance with a sliding scale
which is set by the Board or the Executive Committee at the time it approves
the operating plan for such fiscal year and provides for a maximum bonus
equal to 100% of Base Salary (a "Performance Bonus"); provided, however,
-------- -------
that any Performance Bonus for the fiscal year ending March 1, 1992, shall
be reduced by $35,000.00, the portion of the Guaranteed Bonus which the
parties hereby stipulate shall be attributable to such fiscal year. The
Board or the Executive Committee may, in its sole discretion, pay a bonus to
Executive for any given fiscal year even though the
2
<PAGE>
Company shall have failed to realize 85% of targeted EBIT under the
operating plan approved for that particular fiscal year if the Board or
Executive Committee, in its sole discretion, deems it appropriate to award
a bonus to Executive for his individual efforts devoted to the Company
during that particular fiscal year. As used in this clause (ii), "EBIT"
means the warnings of the Company before interest and taxes, with such
other adjustments as Executive and the Board or the Executive Committee may
mutually agree are appropriate, determined by the Company's independent
auditors in accordance with generally accepted accounting principles
consistently applied.
(iii) Equity. Executive shall purchase 14,200 shares of the Company's
------
Series C preferred stock at a price equal to $7.00 per share and shall have
the option to purchase an additional 14,200 shares of the Company's Series
C preferred stock at the same price and 149,760 shares of the Company's
common stock at $0.09 per share on the terms and conditions met forth in
the Stock Agreement executed by the Company and Executive of even date
herewith (the "Stock Agreement").
(iv) Vacation Benefits. Executive shall be entitled to four weeks
-----------------
paid vacation for each year he is employed by Company and he shall have the
right to carry over from year to year any unused portion of his vacation
benefit, provided that such accrued vacation does exceed the maximum amount
--------
permitted under the Company's policies applicable to all employees, which
on the date of this Agreement permit the accrual of up to 160 days of
vacation.
(v) Other Benefits. Executive shall be entitled to receive all other
--------------
benefits of employment generally available to other employees of the
Company and those benefits for which key executives are or shall become
eligible, when and as he becomes eligible therefor, including, without
limitation, group health and life insurance benefits and participation in
the profit sharing plan of the Company; provided, however, that Executive
-------- -------
shall not be entitled (x) to receive any separate car allowance or (y) to
participate in any other bonus, stock purchase or stock option programs or
plans which have been or may be established from time to time for employees
of the Company unless the Board or the Executive Committee, in its
discretion, has authorized such participation.
(c) Reimbursement of Expenses. In addition, during the period of his
-------------------------
employment hereunder, Executive is authorized to incur reasonable business
expenses for promoting the business of the Company and the Company shall pay or
reimburse Executive for reasonable travel, entertainment and other incidental
expenses incurred by him in the performance of his duties to the Company
(exclusive of any private club membership fees or dues); provided that
--------
Executive shall present to the Company written accounts and documentation
thereof reported on such Company
3
<PAGE>
expense report forms and in such manner as may be required by the Company.
4. Relocation Assistance.
---------------------
(a) Upon presentation of such supporting documentation as the Company
may require, the Company shall pay or reimburse Executive for reasonable
transportation, lodging, meals and incidental expenses incurred by Executive and
his spouse for househunting trips prior to relocation and while searching for a
permanent residence after relocation and reasonable expenses incurred in
connection with the shipment and intermediate storage of household effects after
their removal from Executive's former residence until the delivery thereof to
his new residence, provided that the aggregate amount of such expenses does not
--------
exceed $50,000.00.
(b) Executive's former residence shall be appraised by an appraiser
acceptable to the Company and Executive. Executive shall use his best efforts to
sell his former residence as quickly as possible, consistent with Executive's
recovery of the money he has invested in such property. Upon presentation of
such supporting documentation as the Company may require, the Company shall pay
or reimburse Executive for broker's fees (not to exceed 6% of his selling price)
and other reasonable incidental expenses incurred in selling Executive's former
residence, provided that the aggregate amount of such expenses does not exceed
--------
$25,000.00.
(c) If Executive makes an offer to purchase a new residence within
commuting distance of the Company's principal office which is accepted before
the closing on the sale of his former residence, the Company will advance to
Executive up to $80,000.00 to enable Executive to close on the purchase of his
new residence, provided that such amount is not more than 80% of the difference
--------
between the appraised value of Executive's former residence and the indebtedness
secured by such property. Such advance shall be secured by a second mortgage on
Executive's former residence, if requested by the Company, and shall bear
interest at the minimum rate set by the U.S. Treasury Department which the
Company may charge without being imputed further interest. Such advance together
with accrued interest shall be repaid at the time Executive's former residence
is sold.
(d) If the net proceeds to Executive from the sale of his former
residence, as adjusted for any amounts paid to Executive by the Company pursuant
to Section 4(b) above, are less than the money which Executive has invested in
such property, then the Company shall pay Executive the difference between such
net proceeds and the money invested with respect to such property, provided that
--------
(i) either the Company has approved the sale of Executive's former residence or
its sales price is equal to or greater than its appraised value and (ii) the
payment does not exceed $25,000.00. Any amount owing under this Section 4(d) may
be offset by the Company against any advance (and accrued
4
<PAGE>
interest thereon) made to Executive by the Company pursuant to Section 4(c)
above.
(e) All amounts payable under this Section 4 shall be subject to any
withholding or deduction required by law. If during his lifetime Executive
voluntarily terminates his employment with the Company for any reason prior to
September 6, 1991, the Company shall not be obligated to pay to Executive any
sums that may be due hereunder which shall not have previously been paid and the
Company shall have no further liability under this Section 4. Moreover, in such
case any advance made to Executive (together with interest thereon) pursuant to
Section 4(c) above shall be payable upon demand of the Company at any time after
his employment is so terminated.
5. Obligations of Executive During and After Employment.
----------------------------------------------------
(a) Executive agrees that during the term of his employment by the Company
and thereafter so long as he is receiving all or any part of his Base Salary
under this Agreement, he will engage in no other business activities, directly
or indirectly, which are or may be competitive with or which might place him in
a competing position to that of the Company, without the written consent of the
Board or the Executive Committee.
(b) Executive agrees that, during or subsequent to his employment by the
Company, he will not attempt to solicit or induce in any manner any employee or
agent of the Company or any affiliated company to terminate such employment or
agency with the Company or any affiliated company.
(c) Executive acknowledges that during the course of his employment
Executive will have produced and/or have access to confidential information,
records, notebooks, data, formula, specifications, trade secrets, customer lists
and secret inventions and processes of the Company and its affiliated companies,
including, without limitation, Bechtel Investments, Inc. Therefore, during or
subsequent to his employment by the Company, Executive agrees to hold in
confidence and not directly or indirectly to disclose or use or copy or make
lists of any such information, except to the extent authorized by the Company in
writing. All records, files, drawings, documents, equipment, and the like, or
copies thereof, relating to the Company's business, or the business of an
affiliated company, which Executive shall prepare, or use, or come into contact
with, shall be and remain the sole property of the Company, or of an affiliated
company, and shall not be removed from the Company's or the affiliated company's
premises without its written consent, and shall be promptly returned to the
Company upon termination of employment with the Company.
5
<PAGE>
6. Termination By Company.
----------------------
(a) Termination For Cause. Except as otherwise provided herein, the Company
---------------------
may terminate the employment of Executive "for cause" at any time upon written
notice to Executive specifying the cause of termination. If terminated pursuant
to this Section 6(a), the current Base Salary to which Executive is then
entitled shall be paid on a prorated basis to the date of termination, but no
Guaranteed Bonus or Performance Bonus or other incentive compensation shall be
payable for the year in which such termination takes place.
For purposes of this Agreement, "for cause" shall mean a discharge resulting
from a determination by the Board or the Executive Committee that Executive (i)
has engaged in misconduct involving moral turpitude (including dishonesty, fraud
or theft) or constituting a felony, (ii) has failed or refused in any material
respect to follow the lawful directives of the Board or the Executive Committee
which results in damage to the Company, (iii) has failed to perform in any
material respect the duties or obligations imposed on him under this Agreement
(which shall be deemed to include the failure to attend to material duties as a
result of drug or alcohol abuse), or (iv) has breached his fiduciary duty to the
Company in a manner which results in material injury to the business or
reputation of the Company. A termination by the Company under this Section 6(a)
shall not prejudice any remedy to which the Company may be entitled either at
law, in equity, or under this Agreement.
(b) Termination upon Disability or Death. If during the period of his
------------------------------------
employment hereunder the Board or the Executive Committee in good faith
determines that Executive has failed to perform his duties hereunder for more
than 3 months, or 90 business days in any twelve-month period, as a result of
any physical or mental disability not related to drug or alcohol abuse, the
Company shall have the right, upon written notice and payment of the
compensation provided in this Section 6(b), to terminate Executive's employment
under this Agreement. This Agreement shall terminate upon the death of Executive
and payment of the compensation provided in this Section 6(b). By written notice
to the Company, Executive may designate, and from time to time change the
designation of, the beneficiary to receive the payments provided in this Section
6(b). If Executive has not designated a beneficiary, such payments shall be made
to Executive or his estate.
Upon termination for disability or death, Executive's designated beneficiary
shall be entitled to receive the current Base Salary to which Executive is then
entitled, paid on a prorated basis to the date of termination, and the portion
of any Guaranteed Bonus or Performance Bonus to which Executive would otherwise
have been entitled for the year in which such termination took place, determined
and paid as provided in this paragraph. If such termination occurs on or prior
to the first anniversary of Executive's employment under this Agreement, the
6
<PAGE>
portion of the Guaranteed Bonus payable under this Section 6(b) shall be
determined by multiplying $70,000 by the fraction in which the numerator is the
number of days Executive was employed by the Company and the denominator is 365
and such portion of the bonus shall be paid on September 6, 1991. If such
termination occurs thereafter, the portion of any Performance Bonus payable
under this Section 6(b) shall be determined by calculating the amount such bonus
would have been if Executive had continued to be employed by the Company
throughout the entire fiscal year in which such termination took place and
multiplying such amount by the fraction in which the numerator is the number of
days Executive was employed by the Company during such fiscal year and the
denominator is the total number of days in such fiscal year, and such portion of
the bonus shall be paid promptly after the preparation of financial statements
for such fiscal year.
(c) Termination Without Cause. The Company may terminate the
-------------------------
employment of Executive without cause at any time upon written notice to
Executive and payment of the compensation provided in this Section 6(c). On the
date of termination, the Company shall pay Executive his current Base Salary
prorated to the date of termination together with a lump sum equal to 3 months'
Base Salary at the rate in effect on the date of termination. Thereafter, the
Company shall continue to pay Executive his Base Salary at the rate in effect on
the date of termination for a period of 12 months after termination as if he
were still employed by the Company, provided that Executive shall give the
--------
Company prompt written notice of any employment he accepts during such period
and the compensation he is to receive for such employment, and the Base Salary
payable by the Company during such period shall be reduced by the amount of such
other compensation received by Executive during such period.
In addition, Executive shall receive that portion of any
Guaranteed Bonus or Performance Bonus to which Executive would otherwise have
been entitled for the year in which such termination took place, determined and
paid in the manner set forth in Section 6(b) above.
To the extent permitted by the Company's group medical, life and
disability insurance plans, Executive shall be entitled to continue his
participation in and coverage under such plans in the same manner he would
have had he continued to be employed by the Company for the period expiring on
the date he enters new employment or 12 months after the date of termination,
whichever shall first occur. If any such plan does not permit the continued
participation and coverage of Executive, the Company shall pay to Executive at
the time each payment is made to Executive after termination under the first
paragraph or this Section 6(c) the amount which the Company would have paid for
Executive's coverage under such plan if Executive had been in the employment of
the Company for the period to which such payment relates.
7
<PAGE>
The Company's obligation to make further payments under this Section
6(c) shall terminate if and when Executive shall have breached his obligations
under Section 5.
7. Termination by Executive.
------------------------
(a) Termination After Loss of Title, Material Breach,
-------------------------------------------------
Relocation Beyond Geographic Territory of Change of Control. If during
- -----------------------------------------------------------
the term of this Agreement any of the following events shall occur, Executive
may terminate his obligations to perform the duties described in Section 2(b) of
this Agreement by written notice given at any time within 6 months after such
event shall occur, and Executive shall thereupon be entitled to receive the same
compensation which he would be entitled to receive had he been terminated
without cause pursuant to Section 6(c) above:
(i) Executive is not elected to the office of President and
as a member of the Board and the Executive Committee;
(ii) the Company fails to perform in any material respect
its obligations under this Agreement where Executive has not committed a
material breach of his duties and obligations hereunder;
(iii) Executive's principal place of employment is relocated
to a place which is outside a 50 mile radius from the Company's existing
principal office; or
(iv) there is a "change of control".
For purposes of this Agreement, a "change of control" shall mean an
acquisition of the Company by merger, a sale of all or substantially all of
the Company's assets, a purchase of 50% or more of the Company's voting stock,
or any other reorganization that results in a change of 50% or more in the
ownership of the Company's voting stock; provided, however, that a change of
-------- -------
control shall not include any public offering of the Company's capital stock or
any acquisition made by the Company in which all or part of the consideration
for the acquisition shall have been paid in the Company's capital stock, if such
event does not result in an effective change in control of the Company.
(b) Termination for Other Reasons. If during his lifetime Executive
-----------------------------
terminates his employment hereunder other than at the end of the initial term or
any renewal term for any reason other than disability or one of the events set
forth under Section 7(a) above, his then current Base Salary shall be paid on a
prorated basis to the date of termination, but no Guaranteed Bonus or
Performance Bonus or other incentive compensation shall be payable for the year
in which such termination takes place.
8. Effect on Other Benefits. The provisions of this Agreement, and any
------------------------
payment provided for hereunder, shall not reduce any amounts payable under the
Stock Agreement or any other
8
<PAGE>
contract between Executive and the Company or in any way diminish Executive's
accrued rights under any employee benefit plan in which he is entitled to
participate pursuant to Section 3 (b) (v) hereof, except that the provisions of
this Agreement and any payment provided for hereunder shall be in lieu of
payments otherwise due to Executive under any severance policies of the Company.
9. COMPANY'S INSURANCE ON EXECUTIVE. The Company may secure in its own
--------------------------------
name, or otherwise, and at its own expense, life, health, accident or other
insurance covering Executive, or Executive and others. Executive agrees to
assist the Company in procuring such insurance by submitting to usual and
customary medical and other examinations and by signing, as the insured, such
applications and other instruments in writing as may be reasonably required by
the insurance companies to which application is made for such insurance.
Except as provided in the remainder of this Section 9, Executive agrees
that he shall have no right, title or interest in or to any insurance policies
(or the proceeds payable thereunder) which the Company may so elect to take out
or to continue on his life. Upon termination of his employment with the Company,
Executive shall have the option to require that any or all of such life
insurance policies be transferred to him or his designee if permitted by such
policies. Such option may be exercised by Executive by giving written notice and
paying the amount provided in the succeeding sentence to the Company at any time
within 30 days after the date of termination, provided that if such termination
--------
occurs as a result of Executive's disability, the Company shall continue to have
all rights in such policy or policies until the option granted to the Company by
the Stock Agreement to repurchase securities from Executive upon termination is
exercised or expires or the Company gives Executive written notice of its
intention to cancel such policy or policies, whichever date shall first occur,
and Executive may exercise his option under this Section 9 at any time within 30
days after such date. On the date of exercise, Executive shall pay to the
Company any cash surrender value of such policy or policies less any existing
indebtedness against such policy or policies, as of the date of transfer, the
pro rata portion of the premium or premiums on such policy or policies paid
prior to the date of transfer which relates to the period after the date of
transfer and all other costs and expenses incurred to transfer such policy or
policies to Executive. If Executive does not exercise this option within the
time prescribed by this paragraph, the Company may make whatever disposition of
such policy or policies it shall deem proper.
10. WAIVER. A waiver by either party of any of the terms and conditions of
------
this Agreement in any instance shall not be deemed or construed to be a waiver
of such terms or conditions for the future, or of any subsequent breach thereof.
9
<PAGE>
11. Notices. Any and all notices required or permitted to be given
-------
hereunder shall be in writing and shall be deemed to have been given when
personally delivered or 3 days after deposited in the United States mail,
certified or registered mail, postage prepaid and addressed as follows:
To Executive: Ralph Dillon
c/o Perry, Patrick, Farmer & Michaux
900 Baxter Street
P.O. Box 35566
Charlotte, NC 28235
Attention; Bailey Patrick, Jr, Esq.
To the Company: Cost Plus, Inc.
201 Clay Street
Oakland, CA 94607
Attention: Chief Financial Officer
With a copy to: John N. Duff, Jr.
c/o Bechtel Investments, Inc.
50 Fremont Street, Suite 3700
San Francisco, CA 94105
Either party may change the address to which notices to it are to be addressed
by notice to the other party.
12. Assignment. Neither party may assign this Agreement or any rights or
----------
duties hereunder without the other party's prior written consent, except that
this Agreement shall be binding upon and inure to the benefit of any successor
to the Company, whether by merger, sale of assets or stock, or otherwise,
subject to any right Executive may have to terminate his employment pursuant to
Section 7(a).
13. Entire Agreement. This Agreement and the Stock Agreement contain all
----------------
of the understandings and agreements arrived at between the parties. This
Agreement cannot be changed, altered or amended except by an instrument in
writing signed by both parties hereto.
14. Severability. If any provision of this Agreement as applied to either
------------
party or to any circumstances shall be adjudged by a court to be void, voidable
or unenforceable, the same shall in no way affect any other provision of this
Agreement.
15. Arbitration. Any controversy or claim arising out of or relating to
-----------
this Agreement or the breach thereof shall be settled by arbitration in San
Francisco, California, in accordance with the rules of the American Arbitration
Association, and judgment on the award rendered may be entered in any court have
jurisdiction.
10
<PAGE>
16. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original and all of which
together shall be deemed to be one and the same instrument.
17. Applicable Law. This Agreement and the rights, duties and obligations of
--------------
the parties shall be governed by the laws of the State of California applicable
to contracts made and to be performed therein.
IN WITNESS WHEREOF, Executive and the Company have executed this Agreement,
effective as of the day and year first above written.
"EXECUTIVE"
_________________________________
Ralph Dillon
"COMPANY"
COST PLUS, INC.
By:
______________________________
Title: Chairman
___________________________
During the period of Executive's employment under the above Agreement,
Bechtel Investments, Inc. agrees that it will vote the shares of Company capital
stock which it owns or has the power to vote so as to cause Executive to be
elected to the Board and it shall cause its representatives on the Board to vote
in favor of Executive's election to the Executive Committee.
BECHTEL INVESTMENTS, INC.
By:
______________________________
Title: Managing Principal
___________________________
11
<PAGE>
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
---------------------------------------
This Amendment is made effective as of December 1, 1996, by and between
Cost Plus, Inc. (the "Company") and Ralph Dillon ("Executive"). Unless
otherwise defined herein, capitalized terms in this Amendment shall have the
same meaning as in the Employment Agreement dated September 6, 1990 between
Executive and Company (the "Employment Agreement").
RECITAL
Executive and the Company desire to amend the Employment Agreement to
provide a guaranteed term to Executive's age 65 (August 22, 2005), and to
provide for the adjustment of Executive's duties and compensation as provided
herein.
NOW, THEREFORE, in consideration of the foregoing recital and the
respective covenants and agreements of the parties contained in this document
and in consideration of the continuing employment of Executive by the Company,
the Company and the Executive agree to amend the Employment Agreement as
follows:
1. Term of Employment. The term of Executive's employment is extended to the
------------------
date of Executive's 65th birthday, and thereafter, unless either party gives
notice of termination at least 90 days prior to Executive's next birthday
(beginning with his 65th birthday), on an annual basis from that date.
2. Definitions.
------------
a. "CEO Date" shall mean the later of September 30, 1997 or the date that
Executive ceases to serve as Chief Executive Officer of the Company.
b. "COB Date" shall mean the date that is the later of six (6) months
after the date that Executive ceases to serve as Chairman of the Board of the
Company or six (6) months after the CEO Date.
3 Compensation and Duties.
-----------------------
a. Until the CEO Date, Executive's Base Salary and Performance Bonus
under the Employment Agreement shall remain in effect in accordance with the
terms of the Employment Agreement. In the event that Executive ceases to be
Chief Executive Officer of the Company, Executive shall receive, for the fiscal
year in which he ceases to be Chief Executive Officer, a pro rata portion of the
Performance Bonus to which Executive would otherwise have been entitled for the
full fiscal year, determined and paid in the manner set forth in the last
sentence of Section 6(b) of the Employment Agreement using the last date for
which Executive receives his Base Salary as Chief Executive Officer as the date
for proration. The compensation provided for in this paragraph shall be paid in
all events.
<PAGE>
b. From the CEO Date until the COB date, Executive shall continue to be
an employee of the Company and his compensation shall be fixed at an annual rate
of $185,500. Executive may resign as Chairman or be relieved of his duties as
Chairman by the Board at any time, but his compensation shall continue as
provided until the COB Date. Any bonuses to Executive for services to the
Company between the CEO Date and the COB Date will be wholly within the
discretion of the Board of Directors. The compensation provided for in this
paragraph shall be paid in all events.
c. From the COB Date for the remaining term of this Agreement, Executive
shall be paid at the annual minimum wage rate required by applicable California
or federal regulations (presently $13,800 per annum) and his obligated services
to the Company shall be limited to telephone conferences as mutually agreed
upon. Any bonuses to Executive for services to the Company after the COB Date
will be wholly within the discretion of the Board of Directors.
d. Health and all other benefits shall continue for the duration of the
term as provided in the Employment Agreement.
e. If Executive should die before the payments provided for under
paragraphs 3(a) and 3(b) above have been made in full, Company shall pay the
amounts unpaid thereunder to his named beneficiary, and, if none, to his estate
in a lump sum other than any unpaid Performance Bonus which shall be paid in the
manner set forth in the last sentence of Section 6(b) of the Employment
Agreement.
4 Effect on Employment Agreement. The provisions of this Amendment suspend
------------------------------
the operation of Section 2(a) of the Employment Agreement until Executive's 65th
birthday, and they modify the right of the Company to terminate Executive's
employment under Section 6 of the Employment Agreement in that the Company may
remove Executive from his position as Chief Executive Officer or as Chairman of
the Board, but Executive will nevertheless remain as an employee of the Company
and his compensation will be paid as provided herein; provided, however, that
-----------------
the Company shall continue to have the right to terminate Executive's employment
for cause at any time during his term of employment pursuant to Section 6(a) of
the Employment Agreement (other than pursuant to clause 6(a)(iii) thereof).
Except as so modified, the Employment Agreement is confirmed.
IN WITNESS WHEREOF, this Amendment has been entered into as of the date
first set forth above.
EXECUTIVE COST PLUS, INC.
____________________________ By:____________________________
Ralph Dillon
Title:_________________________
<PAGE>
EXHIBIT 10.12
EMPLOYMENT SEVERANCE AGREEMENT
This Severance Agreement (the "Agreement") is made and entered into effective
as of ______________, 199__ (the "Effective Date"), by and between
____________________ (the "Executive") and Cost Plus, Inc. (the "Company").
R E C I T A L S
---------------
A. The Board believes the Company should provide the Executive with certain
severance benefits should the Executive's employment with the Company terminate
under certain circumstances, such benefits to provide the Executive with
enhanced financial security and sufficient incentive and encouragement to remain
with the Company.
B. Certain capitalized terms used in the Agreement are defined in Section 5
below.
AGREEMENT
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Executive by the Company, the
parties agree as follows:
1. Duties and Scope of Employment. The Company shall employ the Executive in
------------------------------
the position of President, Chief Operating Officer, Chief Financial Officer and
Secretary with such duties, responsibilities and compensation as in effect as of
the Effective Date. The Board and the Chief Executive Officer of the Company
(the "CEO") shall have the right to revise such responsibilities and
compensation from time to time as the Board or the CEO may deem necessary or
appropriate. If any such revision constitutes "Involuntary Termination" as
defined in Section 5(c) of this Agreement, the Executive shall be entitled to
benefits upon such Involuntary Termination as provided under this Agreement.
2. At-Will Employment. The Company and the Executive acknowledge that the
------------------
Executive's employment is and shall continue to be at-will, as defined under
applicable law. If the Executive's employment terminates for any reason, the
Executive shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement, or as may otherwise be
available in accordance with the Company's established employee plans and
practices or in accordance with other agreements between the Company and the
Executive. This Agreement shall remain in effect until the earlier of (i) the
date that all obligations of the parties hereunder have been satisfied or (ii)
the date upon which this Agreement terminates by consent of the parties hereto.
3. Severance Benefits.
------------------
<PAGE>
(a) Benefits upon Termination. If the Executive's employment terminates as
-------------------------
a result of Involuntary Termination other than Cause prior to September 1, 1998
and the Executive signs a Release of Claims, then the Company shall pay
Executive's Base Compensation to the Executive until August 31, 1998 with each
monthly installment payable on the last day of such month. Executive shall not
be entitled to receive any payments if Executive's employment terminates as a
result of Executive's voluntary resignation.
(b) Stock Options; Bonus. Executive shall not be entitled to receive any
--------------------
unvested stock options or partial bonus payments for an incomplete bonus plan
year.
(c) Miscellaneous. In addition, (i) the Company shall pay the Executive
-------------
any unpaid base salary due for periods prior to the Termination Date; (ii) the
Company shall pay the Executive all of the Executive's accrued and unused
vacation through the Termination Date; and (iii) following submission of proper
expense reports by the Executive, the Company shall reimburse the Executive for
all expenses reasonably and necessarily incurred by the Executive in connection
with the business of the Company prior to termination. These payments shall be
made promptly upon termination and within the period of time mandated by
applicable law.
4. Non-Solicitation. In consideration for the mutual agreements as set forth
----------------
herein, Executive agrees that Executive shall not, at any time, within twelve
(12) months following termination of Executive's employment with the Company for
any reason, directly or indirectly solicit the employment or other services of
any individual who at that time shall be or within the prior twelve (12) months
shall have been an employee of the Company.
5. Definition of Terms. The following terms referred to in this Agreement
-------------------
shall have the following meanings:
(a) Base Compensation. "Base Compensation" shall mean Executive's monthly
-----------------
base salary for services performed based on the average base salary for the six
(6) months prior to the Termination Date.
(b) Cause. "Cause," unless otherwise defined in the Agreement evidencing a
-----
particular Option, means an Eligible Individual's (i) intentional failure to
perform reasonably assigned duties, (ii) dishonesty or willful misconduct in the
performance of duties, (iii) engaging in a transaction in connection with the
performance of duties to the Company or any of its Subsidiaries thereof which
transaction is adverse to the interests of the Company or any of its
Subsidiaries and which is engaged in for personal profit or (iv) willful
violation of any law, rule or regulation in connection with the performance of
duties (other than traffic violations or similar offenses).
(c) Involuntary Termination. "Involuntary Termination" shall mean:
-----------------------
(i) termination of Executive's employment with the Company for
any reason
-2-
<PAGE>
other than Cause;
(ii) a material reduction in Executive's salary, other than any
such reduction which is part of, and generally consistent with, a general
reduction of officer salaries;
(iii) a material reduction by the Company in the kind or level of
employee benefits (other than salary and bonus) to which Executive is entitled
immediately prior to such reduction with the result that Executive's overall
benefits package (other than salary and bonus) is substantially reduced (other
than any such reduction applicable to officers of the Company generally);
(iv) any material breach by the Company of any material provision
of this Agreement which continues uncured for 30 days following notice thereof;
provided that none of the foregoing shall constitute Involuntary Termination to
the extent Executive has agreed thereto.
(d) Release of Claims. "Release of Claims" shall mean a waiver by
-----------------
Executive, in a form satisfactory to the Company, of all employment related
obligations of and claims and causes of action against the Company.
(e) Termination Date. "Termination Date" shall mean the date on which an
----------------
event which would constitute Involuntary Termination occurs, or the later of (i)
the date on which a notice of termination is given, or (ii) the date (which
shall not be more than thirty (30) days after the giving of such notice)
specified in such notice.
6. Confidentiality. Executive acknowledges that during the course of
---------------
Executive's employment, Executive will have produced and/or have access to
confidential information, records, notebooks, data, formula, specifications,
trade secrets, customer lists and secret inventions, and processes of the
Company and its affiliated companies. Therefore, during or subsequent to
Executive's employment by the Company, Executive agrees to hold in confidence
and not directly or indirectly to disclose or use or copy or make lists of any
such information, except to the extent authorized by the Company in writing.
All records, files, drawings, documents, equipment, and the like, or copies
thereof, relating to the Company's business, or the business of an affiliated
company, which Executive shall prepare, or use, or come into contact with, shall
be and remain the sole property of the Company, or of an affiliated company, and
shall not be removed from the Company's or the affiliated company's premises
without its written consent, and shall be promptly returned to the Company upon
termination of employment with the Company.
7. Successors.
----------
(a) Company's Successors. Any successor to the Company (whether direct or
--------------------
indirect
-3-
<PAGE>
and whether by purchase, lease, merger, consolidation, liquidation or otherwise)
to all or substantially all of the Company's business and/or assets shall assume
the obligations under this Agreement and agree expressly to perform the
obligations under this Agreement in the same manner and to the same extent as
the Company would be required to perform such obligations in the absence of a
succession. For all purposes under this Agreement, the term "Company" shall
include any successor to the Company's business and/or assets which executes and
delivers the assumption agreement pursuant to this subsection (a) or which
becomes bound by the terms of this Agreement by operation of law.
(b) Executive's Successors. The terms of this Agreement and all rights of
----------------------
the Executive hereunder shall inure to the benefit of, and be enforceable by,
the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
8. Notice.
------
(a) General. Notices and all other communications contemplated by this
-------
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. In the case of the Executive, mailed
notices shall be addressed to him at the home address which Executive most
recently communicated to the Company in writing. In the case of the Company,
mailed notices shall be addressed to its corporate headquarters, and all notices
shall be directed to the attention of its CEO.
(b) Notice of Termination. Any termination by the Company for Cause or by
---------------------
the Executive as a result of a voluntary resignation or an Involuntary
Termination shall be communicated by a notice of termination to the other party
hereto given in accordance with Section 8(a) of this Agreement. Such notice
shall indicate the specific termination provision in this Agreement relied upon,
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination under the provision so indicated, and shall
specify the termination date (which shall be not more than 30 days after the
giving of such notice). The failure by the Executive to include in the notice
any fact or circumstance which contributes to a showing of Involuntary
Termination shall not waive any right of the Executive hereunder or preclude the
Executive from asserting such fact or circumstance in enforcing his rights
hereunder.
9. Miscellaneous Provisions.
------------------------
(a) No Duty to Mitigate. The Executive shall not be required to mitigate
-------------------
the amount of any payment contemplated by this Agreement, nor shall any such
payment be reduced by any earnings that the Executive may receive from any other
source.
(b) Waiver. No provision of this Agreement shall be modified, waived or
------
discharged unless the modification, waiver or discharge is agreed to in writing
and signed by the Executive and
-4-
<PAGE>
by an authorized officer of the Company (other than the Executive). No waiver by
either party of any breach of, or of compliance with, any condition or provision
of this Agreement by the other party shall be considered a waiver of any other
condition or provision or of the same condition or provision at another time.
(c) Whole Agreement. No agreements, representations or understandings
---------------
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof.
(d) Severance Provisions in Other Agreements. The Executive acknowledges
----------------------------------------
and agrees that the severance provisions set forth in this Agreement shall
supersede any such provisions in any employment agreement entered into between
the Executive and the Company.
(e) Choice of Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of
California.
(f) Severability. The invalidity or unenforceability of any provision or
------------
provisions of this Agreement shall not affect the validity or enforceability of
any other provision hereof, which shall remain in full force and effect.
(g) No Assignment of Benefits. The rights of any person to payments or
-------------------------
benefits under this Agreement shall not be made subject to option or assignment,
either by voluntary or involuntary assignment or by operation of law, including
(without limitation) bankruptcy, garnishment, attachment or other creditor's
process, and any action in violation of this subsection shall be void.
(h) Employment Taxes. All payments made pursuant to this Agreement will be
----------------
subject to withholding of applicable income and employment taxes.
(i) Assignment by Company. The Company may assign its rights under this
---------------------
Agreement to an affiliate, and an affiliate may assign its rights under this
Agreement to another affiliate of the Company or to the Company; provided,
however, that no assignment shall be made if the net worth of the assignee is
less than the net worth of the Company at the time of assignment. In the case
of any such assignment, the term "Company" when used in a section of this
Agreement shall mean the corporation that actually employs the Executive.
(j) Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which together will constitute one
and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly authorized officer, as of the day and year first
above written.
-5-
<PAGE>
COMPANY: COST PLUS, INC.
------------------------------------
By
------------------------------------
Title
Executive: ------------------------------------
-6-
<PAGE>
EMPLOYMENT SEVERANCE AGREEMENT
This Severance Agreement (the "Agreement") is made and entered into effective
as of ______________, 199__ (the "Effective Date"), by and between __________
(the "Executive") and Cost Plus, Inc. (the "Company").
R E C I T A L S
---------------
A. The Board believes the Company should provide the Executive with certain
severance benefits should the Executive's employment with the Company terminate
under certain circumstances, such benefits to provide the Executive with
enhanced financial security and sufficient incentive and encouragement to remain
with the Company.
B. Certain capitalized terms used in the Agreement are defined in Section 5
below.
AGREEMENT
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Executive by the Company, the
parties agree as follows:
1. Duties and Scope of Employment. The Company shall employ the Executive in
------------------------------
the position of Vice President in charge of General Merchandise with such
duties, responsibilities and compensation as in effect as of the Effective Date.
The Board and the Chief Executive Officer of the Company (the "CEO") shall have
the right to revise such responsibilities and compensation from time to time as
the Board or the CEO may deem necessary or appropriate. If any such revision
constitutes "Involuntary Termination" as defined in Section 5(c) of this
Agreement, the Executive shall be entitled to benefits upon such Involuntary
Termination as provided under this Agreement.
2. At-Will Employment. The Company and the Executive acknowledge that the
------------------
Executive's employment is and shall continue to be at-will, as defined under
applicable law. If the Executive's employment terminates for any reason, the
Executive shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement, or as may otherwise be
available in accordance with the Company's established employee plans and
practices or in accordance with other agreements between the Company and the
Executive. This Agreement shall remain in effect until the earlier of (i) the
date that all obligations of the parties hereunder have been satisfied or (ii)
the date upon which this Agreement terminates by consent of the parties hereto.
3. Severance Benefits.
------------------
(a) Benefits upon Termination. If the Executive's employment terminates as
-------------------------
a result of
<PAGE>
Involuntary Termination other than Cause prior to March 1, 1998 and the
Executive signs a Release of Claims, then the Company shall pay Executive's Base
Compensation to the Executive for six (6) months from the Termination Date with
each monthly installment payable on the last day of such month. Executive shall
not be entitled to receive any payments if Executive's employment terminates as
a result of Executive's voluntary resignation.
(b) Stock Options; Bonus. Executive shall not be entitled to receive any
--------------------
unvested stock options or partial bonus payments for an incomplete bonus plan
year.
(c) Miscellaneous. In addition, (i) the Company shall pay the Executive
-------------
any unpaid base salary due for periods prior to the Termination Date; (ii) the
Company shall pay the Executive all of the Executive's accrued and unused
vacation through the Termination Date; and (iii) following submission of proper
expense reports by the Executive, the Company shall reimburse the Executive for
all expenses reasonably and necessarily incurred by the Executive in connection
with the business of the Company prior to termination. These payments shall be
made promptly upon termination and within the period of time mandated by
applicable law.
4. Non-Solicitation. In consideration for the mutual agreements as set forth
----------------
herein, Executive agrees that Executive shall not, at any time, within twelve
(12) months following termination of Executive's employment with the Company for
any reason, directly or indirectly solicit the employment or other services of
any individual who at that time shall be or within the prior twelve (12) months
shall have been an employee of the Company.
5. Definition of Terms. The following terms referred to in this Agreement
-------------------
shall have the following meanings:
(a) Base Compensation. "Base Compensation" shall mean Executive's monthly
-----------------
base salary for services performed based on the average base salary for the six
(6) months prior to the Termination Date.
(b) Cause. "Cause," unless otherwise defined in the Agreement evidencing a
-----
particular Option, means an Eligible Individual's (i) intentional failure to
perform reasonably assigned duties, (ii) dishonesty or willful misconduct in the
performance of duties, (iii) engaging in a transaction in connection with the
performance of duties to the Company or any of its Subsidiaries thereof which
transaction is adverse to the interests of the Company or any of its
Subsidiaries and which is engaged in for personal profit or (iv) willful
violation of any law, rule or regulation in connection with the performance of
duties (other than traffic violations or similar offenses).
(c) Involuntary Termination. "Involuntary Termination" shall mean:
-----------------------
(i) termination of Executive's employment with the Company for
any reason other than Cause;
-2-
<PAGE>
(ii) a material reduction in Executive's salary, other than any
such reduction which is part of, and generally consistent with, a general
reduction of officer salaries;
(iii) a material reduction by the Company in the kind or level of
employee benefits (other than salary and bonus) to which Executive is entitled
immediately prior to such reduction with the result that Executive's overall
benefits package (other than salary and bonus) is substantially reduced (other
than any such reduction applicable to officers of the Company generally);
(iv) any material breach by the Company of any material provision
of this Agreement which continues uncured for 30 days following notice thereof;
provided that none of the foregoing shall constitute Involuntary Termination to
the extent Executive has agreed thereto.
(d) Release of Claims. "Release of Claims" shall mean a waiver by
-----------------
Executive, in a form satisfactory to the Company, of all employment related
obligations of and claims and causes of action against the Company.
(e) Termination Date. "Termination Date" shall mean the date on which an
----------------
event which would constitute Involuntary Termination occurs, or the later of (i)
the date on which a notice of termination is given, or (ii) the date (which
shall not be more than thirty (30) days after the giving of such notice)
specified in such notice.
6. Confidentiality. Executive acknowledges that during the course of
---------------
Executive's employment, Executive will have produced and/or have access to
confidential information, records, notebooks, data, formula, specifications,
trade secrets, customer lists and secret inventions, and processes of the
Company and its affiliated companies. Therefore, during or subsequent to
Executive's employment by the Company, Executive agrees to hold in confidence
and not directly or indirectly to disclose or use or copy or make lists of any
such information, except to the extent authorized by the Company in writing.
All records, files, drawings, documents, equipment, and the like, or copies
thereof, relating to the Company's business, or the business of an affiliated
company, which Executive shall prepare, or use, or come into contact with, shall
be and remain the sole property of the Company, or of an affiliated company, and
shall not be removed from the Company's or the affiliated company's premises
without its written consent, and shall be promptly returned to the Company upon
termination of employment with the Company.
7. Successors.
----------
(a) Company's Successors. Any successor to the Company (whether direct or
--------------------
indirect and whether by purchase, lease, merger, consolidation, liquidation or
otherwise) to all or
-3-
<PAGE>
substantially all of the Company's business and/or assets shall assume the
obligations under this Agreement and agree expressly to perform the obligations
under this Agreement in the same manner and to the same extent as the Company
would be required to perform such obligations in the absence of a succession.
For all purposes under this Agreement, the term "Company" shall include any
successor to the Company's business and/or assets which executes and delivers
the assumption agreement pursuant to this subsection (a) or which becomes bound
by the terms of this Agreement by operation of law.
(b) Executive's Successors. The terms of this Agreement and all rights of
----------------------
the Executive hereunder shall inure to the benefit of, and be enforceable by,
the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
8. Notice.
------
(a) General. Notices and all other communications contemplated by this
-------
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. In the case of the Executive, mailed
notices shall be addressed to Executive at the home address which Executive most
recently communicated to the Company in writing. In the case of the Company,
mailed notices shall be addressed to its corporate headquarters, and all notices
shall be directed to the attention of its CEO.
(b) Notice of Termination. Any termination by the Company for Cause or by
---------------------
the Executive as a result of a voluntary resignation or an Involuntary
Termination shall be communicated by a notice of termination to the other party
hereto given in accordance with Section 8(a) of this Agreement. Such notice
shall indicate the specific termination provision in this Agreement relied upon,
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination under the provision so indicated, and shall
specify the termination date (which shall be not more than 30 days after the
giving of such notice). The failure by the Executive to include in the notice
any fact or circumstance which contributes to a showing of Involuntary
Termination shall not waive any right of the Executive hereunder or preclude the
Executive from asserting such fact or circumstance in enforcing Executive's
rights hereunder.
9. Miscellaneous Provisions.
------------------------
(a) No Duty to Mitigate. The Executive shall not be required to mitigate
-------------------
the amount of any payment contemplated by this Agreement, nor shall any such
payment be reduced by any earnings that the Executive may receive from any other
source.
(b) Waiver. No provision of this Agreement shall be modified, waived or
------
discharged unless the modification, waiver or discharge is agreed to in writing
and signed by the Executive and by an authorized officer of the Company (other
than the Executive). No waiver by either party of
-4-
<PAGE>
any breach of, or of compliance with, any condition or provision of this
Agreement by the other party shall be considered a waiver of any other condition
or provision or of the same condition or provision at another time.
(c) Whole Agreement. No agreements, representations or understandings
---------------
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof.
(d) Severance Provisions in Other Agreements. The Executive acknowledges
----------------------------------------
and agrees that the severance provisions set forth in this Agreement shall
supersede any such provisions in any employment agreement entered into between
the Executive and the Company.
(e) Choice of Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of
California.
(f) Severability. The invalidity or unenforceability of any provision or
------------
provisions of this Agreement shall not affect the validity or enforceability of
any other provision hereof, which shall remain in full force and effect.
(g) No Assignment of Benefits. The rights of any person to payments or
-------------------------
benefits under this Agreement shall not be made subject to option or assignment,
either by voluntary or involuntary assignment or by operation of law, including
(without limitation) bankruptcy, garnishment, attachment or other creditor's
process, and any action in violation of this subsection shall be void.
(h) Employment Taxes. All payments made pursuant to this Agreement will be
----------------
subject to withholding of applicable income and employment taxes.
(i) Assignment by Company. The Company may assign its rights under this
---------------------
Agreement to an affiliate, and an affiliate may assign its rights under this
Agreement to another affiliate of the Company or to the Company; provided,
however, that no assignment shall be made if the net worth of the assignee is
less than the net worth of the Company at the time of assignment. In the case
of any such assignment, the term "Company" when used in a section of this
Agreement shall mean the corporation that actually employs the Executive.
(j) Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which together will constitute one
and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly authorized officer, as of the day and year first
above written.
COMPANY: COST PLUS, INC.
-5-
<PAGE>
---------------------------------------
By
---------------------------------------
Title
Executive:
---------------------------------------
-6-
<PAGE>
(EXHIBIT 11)
COST PLUS, INC.
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS, UNAUDITED)
<TABLE>
<CAPTION>
FIFTY-TWO FORTY-NINE
WEEKS ENDED WEEKS ENDED
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
<S> <C> <C>
NET INCOME............................................. $7,427 $4,182
====== ======
Weighted average shares outstanding during the period:
Common Stock......................................... 7,721 5,849
Add incremental shares from assumed exercise of stock
options............................................. 384 304
------ ------
Weighted average common and common equivalent shares
outstanding......................................... 8,105 6,153
====== ======
PRIMARY NET INCOME PER SHARE........................... $ 0.92 $ 0.68
====== ======
Weighted average shares outstanding during the period:
Common Stock......................................... 7,721 5,849
Add incremental shares from assumed exercise of stock
options............................................. 383 304
------ ------
Weighted average common and common equivalent shares
outstanding......................................... 8,104 6,153
====== ======
FULLY DILUTED NET INCOME PER SHARE..................... $ 0.92 $ 0.68
====== ======
</TABLE>
<PAGE>
(EXHIBIT 23)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in registration Statement No.
333-3456 of Cost Plus, Inc. on Form S-8 of our report dated March 14, 1997,
appearing in this Annual Report on Form 10-K of Cost Plus, Inc. for the year
ended February 1, 1997.
Deloitte & Touche LLP
San Francisco, California
April 30, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF COST PLUS, INC. FOR THE FISCAL YEAR ENDED FEBRUARY 1,
1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> FEB-04-1996
<PERIOD-END> FEB-01-1997
<CASH> 14,398
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 42,605
<CURRENT-ASSETS> 2,413
<PP&E> 90,813
<DEPRECIATION> 30,608
<TOTAL-ASSETS> 128,198
<CURRENT-LIABILITIES> 34,609
<BONDS> 0
81
0
<COMMON> 0
<OTHER-SE> 73,128
<TOTAL-LIABILITY-AND-EQUITY> 128,198
<SALES> 214,814
<TOTAL-REVENUES> 214,814
<CGS> 135,072
<TOTAL-COSTS> 199,774
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,451
<INCOME-PRETAX> 12,589
<INCOME-TAX> 5,162
<INCOME-CONTINUING> 7,427
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,427
<EPS-PRIMARY> .92
<EPS-DILUTED> .92
</TABLE>
