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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 29, 2000
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)
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<S> <C>
California 94-1067973
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
200 4th Street 94607
Oakland, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (510) 893-7300
Securities registered pursuant to None
Section 12(b) of the Act:
Securities registered pursuant to Common Stock, $.01 par value
Section 12(g) of the Act: Preferred Share Purchase Rights
</TABLE>
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 March 31, 1999 was approximately $689,817,000 based upon the last
sale price reported for such date on the Nasdaq National Market. On that date,
20,529,443 shares of Common Stock, $.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended January 29, 2000 ("Annual Report") are incorporated by reference into Part
II and Part IV.
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held June 22, 2000 ("Proxy Statement") are incorporated by
reference into Part III.
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PART I
ITEM 1. BUSINESS
The Company
Cost Plus, Inc. ("Cost Plus World Market" or "the Company") is a leading
specialty retailer of casual home furnishings and entertaining products. As of
January 29, 2000, the Company operated 103 stores under the name "World Market,"
"Cost Plus World Market," "Cost Plus" or "Cost Plus Imports" in 16 states,
primarily in the Western United States, but has begun to expand into other
regions of the country. Cost Plus World Market's business strategy is to
differentiate itself by offering a large and everchanging selection of unique
products, many of which are imported, at competitive prices in an exciting
shopping environment. Many of Cost Plus World Market's products are proprietary
or private label, often incorporating the Company's own designs, "World Market"
brand name, quality standards and specifications, and typically are not
available at department stores and other specialty retailers.
Cost Plus World Market's expansion strategy is to open stores primarily in
metropolitan and suburban markets that can support multiple stores and enable
the Company to achieve advertising, distribution and operating efficiencies. The
Company may also selectively enter mid-size markets which can support one or two
stores that the Company believes can meet its profitability criteria. The
Company's stores are located predominantly in high traffic metropolitan and
suburban locales, often near major malls. In fiscal 1999, the Company opened a
total of 18 stores, including ten in existing markets in Austin, Chicago,
Dallas, Detroit, Grand Rapids, Los Angeles, Phoenix and St. Louis and eight in
new markets in Columbus, Cleveland, Lansing, Reno and Spokane.
Merchandising
Cost Plus World Market's merchandising strategy is to offer customers a
broad selection of distinctive items related to the theme of casual home
furnishing and home entertaining.
Format and Presentation. The Company's stores are designed to evoke the
feeling of a "world marketplace" through colorful and creative visual displays
and merchandise presentations, including goods in open barrels and crates,
groupings of related products in distinct "shops" within the store, and in-store
activities such as cooking demonstrations and food and coffee tastings. The
Company believes that its "world marketplace" effect provides customers with a
fun shopping experience and encourages browsing throughout the store.
The average selling space of a Cost Plus World Market store is
approximately 16,000 square feet, which allows space and flexibility for
merchandise displays, product adjacencies and directed traffic patterns.
Complementary products are positioned in proximity to one another, and cross
merchandising themes are used in merchandise displays to tie different product
offerings together. The unobstructed floor plan allows the customer to see
virtually all of the different product areas in a Cost Plus World Market store
from the entrance. The "power" aisle, where bulk displays highlight sharply
priced items, leads the customer through the store into the different product
areas. The Company uses a "swing" area near the front of the store to group
seasonal products in themes, such as Christmas and Easter. Store signage,
including permanent as well as promotional signs, is developed by the Company's
in-house graphic design department. End caps, bulk stacks and free standing
displays are changed frequently.
The Cost Plus World Market store format is also designed to reinforce the
Company's value image through exposed ceilings, concrete floors, simple wooden
fixtures and open or bulk presentations of merchandise. The Company displays
most of its inventory on the selling floor and makes effective use of vertical
space, for example, a display of chairs arranged on a wall and rugs hanging
vertically from racks.
The Company believes that its customers usually visit a Cost Plus World
Market store as a destination with a specific purchase in mind. The Company also
believes that once in the store, its customers often spend additional time
shopping and browsing, often purchasing more items than they originally
intended.
Products. The Company believes its distinctive and unique merchandise
differentiates the Company from other retailers. Many of Cost Plus World
Market's products are proprietary or private label, often incorporating the
Company's own designs, "World Market" brand name, quality standards and
specifications, and typically are not available at department stores and other
specialty retailers. In addition to strengthening the stores' product offering,
proprietary and private label goods typically offer higher gross margin
opportunities than branded goods. A significant portion of Cost Plus World
Market's products are made abroad in approximately 50 countries, and many of
these goods are handcrafted by local artisans.
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The Company's product offerings are designed to provide solutions to
customers' casual living and home entertaining needs. The offerings include
home decorating items such as furniture, rugs, pillows, lamps, window coverings,
frames and baskets. Cost Plus World Market's furniture products include ready-
to-assemble living and dining room pieces, unusual handcrafted case goods and
occasional pieces, as well as outdoor furniture made from a variety of materials
such as rattan, hardwood and wrought iron. The Company also sells a number of
tabletop and kitchen items including glassware, ceramics, textiles and cooking
utensils. Kitchen products offer the casual gourmet an assortment of products
organized around a variety of themes such as baking, food preparation, barbeque
and international dining.
Cost Plus World Market offers a number of gift and decorative accessories,
including collectibles, cards, wrapping paper and Christmas and other seasonal
items. Because many of the gift and collectible items come from around the
world, they contribute to the exotic atmosphere of the stores.
Cost Plus World Market also offers its customers a wide selection of
gourmet foods and beverages, including wine, microbrewed and imported beer,
coffee, tea and mineral water. The wine assortment offers a number of
moderately priced premium wines, including a variety of well recognized labels,
as well as wines not readily available at neighborhood wine or grocery stores.
Consumable products, particularly beverage, generally have lower margins than
the Company's average. Coffee, roasted at the Company's own roasting plant, is
sold over-the-counter from bulk containers. Gourmet foods include packaged
products from around the world and seasonal items that relate to "old world"
holidays and customs. Packaged snacks, candy and pasta are displayed in open
barrels and crates. All food items typically have a shelf life that lasts six
months or longer.
The Company replaces or updates many of the items in its merchandise
assortment on a regular basis in order to encourage repeat shopping and to
promote a sense of discovery. The Company regularly marks down and eliminates
items that do not meet its turnover expectations.
Pricing. Cost Plus World Market offers quality products at competitive
prices. The Company complements its competitive everyday prices with
opportunistic buys, enabling the Company to pass on additional savings to the
customer. The Company routinely shops a variety of retailers to ensure that its
products are competitively priced.
Planning and Buying. Cost Plus World Market effectively manages a large
number of products by utilizing a centralized merchandise planning system. The
Company regularly monitors merchandise activity at the item level through its
management information systems to identify and respond to product trends. The
Company maintains its own central buying staff which is responsible for
establishing the assortment of inventory within the merchandise classifications
each season, including integrating trends or themes identified by the Company
into its different product categories. The Company attempts to moderate the risk
associated with merchandise purchasing by testing selected new products in a
limited number of stores. The Company's long-standing relationships with
overseas suppliers, its international buying agency network and its knowledge
of the import process facilitate the planning and buying process. The buyers
work closely with suppliers to develop unique products that will meet customers'
expectations for quality and value. The Company's buyers communicate with
district and store managers and use the management information systems to tailor
the merchandise mix of individual stores to regional conditions and to better
ensure that in-stock availability will be maintained in accordance with the
specific requirements of each store.
Advertising
The Company advertises through promotional ads in major daily newspapers
and on radio and television. The Company's approach is to regionalize its
advertising and use the most efficient media mix within a geographic area. The
Company uses four to sixteen page full color tabloids and color or black and
white newspaper advertisements in selected markets to highlight product
offerings and selected promotions. Radio and television media is often used for
seasonal advertising, such as Christmas. For store grand openings, the Company
uses a combination of newspaper, radio and television.
Product Sourcing and Distribution
The Company purchases most of its inventory through its central purchasing
system, which allows the Company to take advantage of volume purchase discounts
and improve controls over inventory and product mix. The Company purchases its
merchandise from over 1,600 suppliers, and no supplier represented over 4% of
total purchases in the fiscal year ended January 29, 2000. A significant portion
of Cost Plus World Market's products are made abroad in approximately 50
countries in Europe,
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North and South America, Asia, Africa and Australia. The Company has established
a well developed overseas sourcing network and enjoys long standing
relationships with many of its vendors. As is customary in the industry, the
Company does not have long-term contracts with any suppliers. The Company's
buyers often work with suppliers to produce unique products exclusive to Cost
Plus World Market. The Company believes that, although there could be delays in
changing suppliers, alternate sources of merchandise for all core product
categories are available at comparable prices. Cost Plus World Market typically
purchases overseas products on a free-on-board shipping point basis, and the
Company's insurance on such goods commences at the time it takes ownership. The
Company also purchases a number of domestic products, especially in the gourmet
food and beverage area. Due to state regulations, wine and beer are purchased
from local distributors with purchasing controlled by the Corporate buying
office.
The Company currently services most of its stores from its primary
distribution center in Stockton, California. Domestically sourced merchandise is
usually delivered to the distribution center by common carrier or by Company
trucks. The Company believes that its distribution center will be able to
handle, or can be upgraded to handle, the Company's store expansion plans for
the Western United States over the next two years. Any significant interruption
in the operation of this facility would have a material adverse effect on the
Company's financial position and results of operations. To facilitate servicing
regions such as Illinois, Indiana, Michigan, Missouri, Ohio and Wisconsin, the
Company has a satellite distribution center located in Peru, Indiana which has
been operational in a limited capacity since fiscal 1998. This facility is
expandable to meet the Company's needs over the next three years.
Management Information Systems
Each of the Company's stores is linked to the Cost Plus World Market
headquarters in Oakland, California through a point-of-sale system that
interfaces with an IBM AS/400 computer. The Company's information systems keep a
record, which is updated daily, of each merchandise item sold. The point-of-sale
system also has scanning, "price-look-up" and on-line credit/debit card approval
capabilities, all of which improve transaction accuracy, speed checkout time and
increase overall store efficiency. The Company continually upgrades its in-store
information system to improve information flow to store management and enhance
other in-store administration capabilities.
Purchasing operations are facilitated by the use of computerized merchandise
information systems which allow the Company to analyze product sell-through and
assist the buyers in making merchandise decisions. The Company's central
replenishment system includes SKU/store-specific, individualized inventory
"model stock" logic which enables the Company to maintain adequate stock levels
in each location. The Company believes its centralized purchasing system has
helped it to reduce in-store inventory levels and improve in-stock conditions.
The Company uses several other customized management information and control
systems to direct the Company's operations and finances. These computerized
systems are designed to ensure the integrity of the Company's inventory, allow
the merchandising staff to reprice merchandise, replenish depleted store
inventories, track promotions, identify sales trends and monitor merchandise mix
throughout all of the Company's stores. The Company's distribution operations
use these systems to control, locate, pick and ship inventory to stores. The
Company believes that these systems allow for lower average store inventories,
higher operating efficiency and fewer markdowns.
Additional systems also enable the Company to produce the periodic financial
reports necessary for developing budgets and monitoring individual store and
consolidated Company performance. The Company believes that its current
management information system is readily upgradable to support the Company's
planned expansion for the foreseeable future.
Competition
The markets served by the Company are highly competitive. The Company competes
against a diverse group of retailers ranging from specialty stores to department
stores and wholesale clubs. The Company's product offerings compete with such
specialty retailers as Bed, Bath & Beyond, Crate & Barrel, Pottery Barn, Garden
Ridge, Lechters, Michaels Stores, Pier 1 Imports, Trader Joe's and Williams-
Sonoma. Specialty retailers tend to have higher prices and a more narrow
assortment of products than Cost Plus World Market. Department stores
typically have higher prices than Cost Plus World Market for similar
merchandise. Wholesale clubs may have lower prices than Cost Plus World Market,
but the product assortment is generally more limited. The Company competes with
these and other retailers for customers, suitable retail locations and qualified
management personnel.
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Employees
As of January 29, 2000, the Company had 1,370 full-time and 1,694 part-time
employees. Of these, 2,619 were employed in the Company's stores and 445 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. Employees in 13 stores in Northern California are covered by a
collective bargaining agreement which expires on May 31, 2003. The Company
believes that it enjoys good relationships with its employees.
Trademarks
The Company regards its trademarks and service marks as having significant
value and as being important to its marketing efforts. The Company has
registered its "Cost Plus," "Cost Plus World Market," "Crossroads ," "World
Market" and "Where you can afford to be different" marks and its "Cost Plus
World Market" and "World Market" logos with the United States Patent and
Trademark Office on the Principal Register. The Company has also secured
California state registration of its "Crossroads" trademark. The Company's
policy is to pursue prompt and broad registration of its marks and to vigorously
oppose infringement of its marks.
Risk Factors
This Form 10-K, including the documents incorporated by reference herein,
contains forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, including statements that include
the words "believes," "expects" or "anticipates," or similar expressions. The
Company may also make additional written and oral forward looking statements
from time to time. Actual results may differ materially from those discussed
in such forward-looking statements due to a number of factors including those
set forth below and elsewhere in this Form 10-K and in documents which are
incorporated by reference herein. The Company does not undertake to update any
forward-looking statement that may be made from time to time by or on behalf of
the Company.
Seasonality and Quarterly Fluctuations. The Company's business is highly
seasonal, reflecting the general pattern associated with the retail industry of
peak sales and earnings during the Christmas season. Due to the importance of
the Christmas selling season, the fourth quarter of each fiscal year has
historically contributed, and the Company expects it will continue to
contribute, a disproportionate percentage of the Company's net sales and most of
its net income for the entire fiscal year. Any factors negatively affecting the
Company during the Christmas selling season in any year, including unfavorable
economic conditions, could have a material adverse effect on the Company's
financial condition and results of operations. The Company generally
experiences lower sales and earnings during the first three quarters and, as is
typical in the retail industry, may incur losses in these quarters. The
results of operations for interim periods are not necessarily indicative of the
results for a full fiscal year. In addition, the Company makes decisions
regarding merchandise well in advance of the season in which it will be sold,
particularly for the Christmas selling season. Significant deviations from
projected demand for products could have a material adverse effect on the
Company's financial condition and results of operations, either by lost sales
due to insufficient inventory or lost margin due to the need to markdown excess
inventory.
The Company's quarterly results of operations may also fluctuate based upon
such factors as the number and timing of store openings and related store
preopening expenses, the amount of net sales contributed by new and existing
stores, the mix of products sold, the timing and level of markdowns, store
closings, refurbishments or relocations, competitive factors and general
economic conditions.
Risks Associated with Expansion. The Company's ability to continue to increase
its net sales and earnings will depend in part on its ability to open new stores
and to operate such stores on a profitable basis. The Company's continued growth
will also depend on its ability to increase sales in its existing stores. The
Company opened 18 stores in fiscal 1999 and presently anticipates opening
approximately 24 stores in fiscal 2000. The Company intends to open stores in
both existing and new geographic markets. The opening of additional stores in an
existing market could result in lower net sales from existing Company stores in
that market. The success of the Company's planned expansion will be dependent
upon many factors, including the identification of suitable markets, the
availability and leasing of suitable sites on acceptable terms, the hiring,
training and retention of qualified management and other store personnel, the
availability of appropriate financing and general economic conditions. To manage
its planned expansion, the Company must ensure the continuing adequacy of its
existing systems and procedures, including product distribution facilities,
store management, financial controls and information systems. There can be no
assurance that the Company will be able to achieve its planned expansion, that
new stores will be effectively integrated into the Company's existing operations
or that such stores will be profitable.
The Company's expansion strategy includes opening stores in new geographic
markets. These new markets may present
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competitive and merchandising challenges that are different from those currently
faced by the Company in its existing geographic markets. The Company may incur
higher costs related to advertising and distribution in connection with entering
new markets. If the Company opens stores in new markets that do not perform to
the Company's expectations, or if store openings are delayed, the Company's
financial condition and results of operations could be materially adversely
affected. In addition, in order to sell wine and beer, the Company is required
to obtain alcoholic beverage licenses for each of its new stores, and the laws
regulating the issuance of alcoholic beverage licenses differ from state to
state. Any delays in receiving alcoholic beverage licenses for new stores could
have an adverse impact on such stores' operations.
Risks Associated with Merchandising. The Company's success depends in part
upon the ability of its merchandising staff to anticipate the tastes of its
customers and to provide merchandise that appeals to their preferences. The
Company's strategy requires it to introduce in a timely manner products from
around the world that are affordable, distinctive in quality and design, and not
widely available from other retailers. Many of the Company's products require
long lead times. In addition, a large percentage of the Company's merchandise
changes regularly. The Company's failure to anticipate, identify or react
appropriately to changes in consumer trends could lead to, among other things,
either excess inventories and higher markdowns or a shortage of products and
could have a material adverse effect on the Company's financial condition and
results of operations.
Effect of Economic Conditions and Geographic Concentration. The success of the
Company's business depends to a significant extent upon the level of consumer
spending. Among the factors that affect consumer spending are the general state
of the economy, the level of consumer debt, prevailing interest rates and
consumer confidence in future economic conditions. A substantial majority of the
Company's stores are located in the Western United States, principally in
California. Lower levels of consumer spending in these regions could have a
material adverse effect on the Company's financial condition and results of
operations. Reduced consumer confidence and spending may result in reduced
demand for the Company's products, limitations on the Company's ability to
increase prices and may require increased levels of selling and promotional
expenses, thereby adversely affecting the Company's financial condition and
results of operations.
Risks Associated with Importing. The Company imports a significant portion of
its merchandise from approximately 50 countries. The Company relies on its long-
term relationships with its suppliers but has no long-term contracts with such
suppliers. The Company's future success will depend in large measure upon its
ability to maintain its existing supplier relationships or to develop new ones.
As an importer, the Company's business is subject to the risks generally
associated with doing business abroad, such as foreign governmental regulations,
disruptions, delays in shipments, freight cost increases and changes in
political or economic conditions in countries in which the Company purchases
products. The Company's business is also subject to the risks associated with
any new or revised United States legislation and regulations relating to
imported products, including quotas, duties, taxes and other charges or
restrictions on imported merchandise. Additionally, since certain of the
Company's purchases are made in currencies other than the U.S. dollar and its
financial results are reported in U.S. dollars, fluctuations in the rates of
exchange between the U.S. dollar and other currencies may have a material
adverse effect on the Company's financial condition and results of operations.
Historically, the Company has not hedged its currency risk and does not
currently anticipate doing so in the future. If any such factors were to render
the conduct of business in particular countries undesirable or impractical, or
if additional United States quotas, duties, taxes or other charges or
restrictions were imposed upon the importation of the Company's products in the
future, the Company's financial condition and results of operations could be
materially adversely affected.
Risks Related to Distribution Facilities. The Company's distribution functions
for most of its stores are currently handled from its facility in Stockton,
California. Any significant interruption in the operation of this facility would
have a material adverse effect on the Company's financial condition and results
of operations. The Company has an additional distribution facility in Peru,
Indiana to service its Midwest and Eastern stores. A failure to successfully
coordinate the operations of these facilities could have a material adverse
effect on the Company's financial condition and results of operations.
Competition. The markets served by the Company are highly competitive. The
Company competes against a diverse group of retailers ranging from specialty
stores to department stores and wholesale clubs. The Company's product offerings
compete with such specialty retailers as Bed, Bath & Beyond, Crate & Barrel,
Pottery Barn, Garden Ridge, Lechters, Michaels Stores, Pier 1 Imports, Trader
Joe's and Williams-Sonoma. The Company competes with these and other retailers
for customers, suitable retail locations and qualified management personnel.
Many of the Company's competitors have significantly greater financial,
marketing and other resources than the Company, and there can be no assurance
that the Company will be able to compete successfully in the future.
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Dependence on Key Personnel. The success of the Company's business will
continue to depend upon its key personnel. The Company does not maintain any key
man life insurance. The loss of the services of one or more of its key personnel
could have a material adverse effect on the Company's financial condition and
results of operations. The Company's success in the future will be dependent
upon its ability to attract, retain and motivate quality personnel, including
store managers. The Company's inability to attract and retain such key
employees, in the future could have a material adverse effect on the Company's
financial condition and results of operations.
Possible Volatility of Stock Price. The stock market has from time to time
experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. These broad market fluctuations
have adversely affected the market price of the Company's common stock. Factors
such as fluctuations in the Company's operating results, a downturn in the
retail industry, changes in stock market analysts' recommendations regarding the
Company, other retail companies or the retail industry in general and general
market and economic conditions may have a significant effect on the market price
of the Company's common stock.
ITEM 2. PROPERTIES
As of March 31, 2000, the Company operated 109 stores in 17 states. The
average selling space of a Cost Plus World Market store is approximately 16,000
square feet. The table below summarizes the distribution of stores by state:
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Arizona.................. 7 Idaho....... 1 Nevada....... 3 Wisconsin.....1
California............... Illinois.... 8 New Mexico... 1
Northern California... 19 Indiana..... 1 Ohio......... 11
Southern California... 19 Michigan.... 9 Oregon....... 2
Colorado................. 3 Missouri.... 3 Texas........ 13
Georgia.................. 2 Nebraska.... 1 Washington 5
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The Company leases land and buildings for 102 stores (of which 18 are capital
leases), leases land and owns the buildings for six stores and owns the land and
building for one store. The Company currently leases its executive headquarters
in Oakland, California pursuant to a lease which expires in October 2008. The
Company currently leases its distribution facility of approximately 540,000
square feet in Stockton, California pursuant to a lease which expires in
September 2001 and has three renewal options for five years each. The Company
leases an additional distribution center in Peru, Indiana pursuant to a lease
which expires in December 2000, initially covering 100,000 square feet. The
lease term can be extended to December 2009 with an additional four options of
five years each, and the facility is expandable to 450,000 square feet.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings other than
ordinary routine litigation incidental to the business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
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<CAPTION>
Name Age Position
- ------------------------- --- ------------------------------------------------------------
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Murray H. Dashe ........... 57 Chairman of the Board, Chief Executive Officer and President
John F. Hoffner .......... 52 Executive Vice President of Administration, Chief Financial
Officer and Secretary
Kathi P. Lentzsch ........ 44 Executive Vice President, Merchandising and Marketing
Joan S. Fujii ............ 53 Senior Vice President, Human Resources
Richard L. Grice 54 Senior Vice President, Logistics
Gary D. Weatherford ........43 Senior Vice President, Store Operations
</TABLE>
Mr. Dashe joined the Company in June 1997 and has served as Chairman of the
Board and Chief Executive Officer since February 1998 with continued
responsibilities as President. In September 1997, Mr. Dashe was appointed
President with continued responsibilities as Vice Chairman of the Board. From
June 1997 to September 1997, Mr. Dashe served as the Company's Vice Chairman of
the Board. Mr. Dashe is responsible for overseeing all day-to-day operations
and long-term strategies of the Company. From August 1992 to June 1997, he was
Chief Operating Officer of Leslie's Poolmart, Inc., a swimming pool supply
retail chain, and was a director of that company from August 1989 to November
1996. From April 1990 through June 1992, he was President and Chief Executive
Officer of RogerSound Labs, a Southern California retailer of audio/video
consumer electronics. From September 1985 through April 1990, Mr. Dashe held
several positions with SILO, a consumer electronics and appliance retailer,
including Regional President, Regional Vice President and Director of Stores.
Previously, he was employed in an executive capacity by other retailers,
including Allied Stores Corp., where he served in a variety of positions,
including Vice President/Director of Stores.
Mr. Hoffner joined the Company in June 1998 as Executive Vice President of
Administration, Chief Financial Officer and Secretary. Prior to joining the
Company, Mr. Hoffner served as Executive Vice President and Chief Financial
Officer of Sweet Factory, Inc. from April 1993 to June 1998. From January 1991
to April 1993, Mr. Hoffner was employed by Wherehouse Entertainment, Inc. where
he served as Senior Vice President, Finance and Administration. Prior to that,
he held executive positions in finance and administration with retailers such as
Dayton Hudson and Federated Department Stores.
Ms. Lentzsch joined the Company in February 1997 as Executive Vice President,
Merchandising and Marketing. From May 1996 to January 1997, Ms. Lentzsch served
as a retail consultant to several specialty retailers. From May 1993 to May
1996, Ms. Lentzsch was employed by Pottery Barn, a division of Williams-Sonoma,
Inc., where she was most recently Senior Vice President, Merchandising. From
April 1991 to May 1993, Ms. Lentzsch was General Merchandising Manager and Vice
President, Merchandising and Marketing at Impostors, a retail costume jewelry
chain. Prior to that, she held a number of merchandising and marketing
executive positions with several retailers, including Vice President,
Merchandising at Pier 1 Imports, Inc.
Ms. Fujii was named the Company's Senior Vice President, Human Resources in
February 1998. Ms. Fujii joined the Company in May 1991 and served as Vice
President, Human Resources from October 1994 until February 1998. From May 1991
to October 1994, Ms. Fujii served as the Company's Director of Human Resources.
From September 1975 to May 1991, she was employed by Macy's California in the
operations and personnel departments, ultimately serving as Vice President,
Human Resources at Macy's Union Square store in San Francisco.
Richard L. Grice joined Cost Plus World Market in January 2000 as Senior Vice
President Logistics. Prior to joining the Company, Mr. Grice served as Vice
President Logistics and Chemical Packaging General Manager at Leslie's PoolMart,
Inc., a swimming pool supply retail chain, from January 1996 to January, 2000.
From March 1994 to December 1995, he served as Senior Vice President, General
Manager at Daisy Kingdom, Inc., a manufacturer and retailer of fabrics, crafts
and children's wear, in Portland, Oregon. Prior to that he held a number of
executive positions in distribution and logistics with several department store
and specialty retailers, including Fabric-Centers of America, Inc. (now Jo-
Ann's) from 1988 to 1993, and SILO, a consumer electronics and appliance
retailer, from 1985 to 1988.
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Mr. Weatherford was named Senior Vice President, Store Operations in February
1998. Mr. Weatherford joined the Company in January 1988 and served as Vice
President, Store Operations from June 1995 until February 1998. From April 1991
to June 1995, Mr. Weatherford served as a Regional Manager for the Company, and
from January 1990 to April 1991 he was a Senior Store Manager for the Company.
From January 1988 to January 1990, Mr. Weatherford served as a Buyer and Store
Design Director for the Company.
PART II
Information called for by Part II (Items 5,6,7, and 8) have been filed as
Exhibit 13 to this report on Form 10-K. Such information is incorporated herein
by reference.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information required by this item is incorporated herein by reference to
the Company's 1999 Annual Report to Shareholders (on page 18), filed as Exhibit
13 to this report on Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by reference to
the Company's 1999 Annual Report to Shareholders (on page 13), filed as Exhibit
13 to this report on Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is incorporated herein by reference to
the Company's 1999 Annual Report to Shareholders (on pages 14 - 18), filed as
Exhibit 13 to this report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated herein by reference to
the Company's 1999 Annual Report to Shareholders (on page 18), filed as Exhibit
13 to this report on Form 10-K.
ITEM 8. FINANCIAL STATEMENTS
The information required by this item is incorporated herein by reference to
the Company's 1999 Annual Report to Shareholders (on pages 19 - 32), filed as
Exhibit 13 to this report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
8
<PAGE>
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 12, 2000 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 2000 Annual Meeting of
Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to
the section entitled "Executive Compensation and other Matters" in the Proxy
Statement for the Company's 2000 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 section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement for the Company's 2000 Annual Meeting of
Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to
the section entitled "Certain Relationships and Related Transactions" in the
Proxy Statement for the Company's 2000 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
<S> <C>
(a)1. Financial Statements:
The following financial statements of Cost Plus, Inc. are incorporated
herein by reference to the Company's 1999 Annual Report to Shareholders
for the year ended January 29, 2000, filed as Exhibit 13 to this report
on Form 10-K:
Consolidated Balance Sheets as of January 29, 2000 and
January 30, 1999
Consolidated Statements of Operations for the fiscal years
ended January 29, 2000, January 30, 1999 and January 31,
1998
Consolidated Statement of Shareholders' Equity for the
fiscal years ended January 29, 2000, January 30, 1999 and
January 31, 1998
Consolidated Statements of Cash Flows for the fiscal years
ended January 29, 2000, January 30, 1999 and January 31,
1998
Notes to Consolidated Financial Statements
Independent Auditors' Report
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 beginning on page 11.
(b) Reports on form 8-K:
None
</TABLE>
9
<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.
Date: April 27, 2000 By:/s/ Murray H. Dashe
-----------------------------------
Murray H. Dashe
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Murray H. Dashe Chairman of the Board, Chief April 27, 2000
- --------------------------- Executive Officer and President
Murray H. Dashe (Principal Executive Officer)
/s/ John F. Hoffner Executive Vice President of Administration, April 27, 2000
- --------------------------- Chief Financial Officer and Secretary
John F. Hoffner (Principal Financial and Accounting Officer)
/s/ Joseph H. Coulombe Director April 27, 2000
- ---------------------------
Joseph H. Coulombe
/s/ Danny W. Gurr Director April 27, 2000
- ---------------------------
Danny W. Gurr
/s/ Kim D. Robbins Director April 27, 2000
- ---------------------------
Kim D. Robbins
/s/ Fredric M. Roberts Director April 27, 2000
- ---------------------------
Fredrics M. Roberts
/s/ Olivier L. Trouveroy Director April 27, 2000
- ---------------------------
Olivier L. Trouveroy
/s/ Thomas D. Willardson Director April 27, 2000
- ---------------------------
Thomas D. Willardson
</TABLE>
10
<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
incorporated by reference to Exhibit 3.1 to the Form 10-K filed for the year ended February 1, 1997.
3.1.1 Certificate of Amendment of Restated Articles of Incorporation as filed with the California Secretary of State on
February 25, 1999, incorporated by reference to Exhibit 3.1 to the Form 10 - Q filed for the quarter ended May 1,
1999.
3.1.2 Certificate of Amendment of Restated Articles of Incorporation as filed with the California Secretary of State on
September 24, 1999.
3.2 Certificate of Determination as filed with California Secretary of State on July 27, 1998 incorporated by reference to
Exhibit 3.2 to the Form 10-K filed for the year ended January 30, 1999.
3.3 Amended and Restated By-laws dated November 17, 1999.
4.0 Preferred Shares Rights Agreement, dated June 30, 1998 between Cost Plus, Inc. and BankBoston, N.A., including the
Certificate of Determination, the form of Rights Certificate and the Summary of Rights, incorporated by reference to
Exhibit 1 to the Form 8-A filed on July 27, 1998.
10.1 Form of Indemnification Agreement between the Company and each of its directors and officers, incorporated by
reference to Exhibit 10.1 to the Registration Statement on Form S-1 effective April 3, 1996.
10.2 Registration Rights Agreement, dated March 17, 1995, between the Company and certain holders of the Company's
securities, incorporated by reference to Exhibit 10.11 to the Registration Statement on Form S-1 effective April 3,
1996.
10.3 Lease Agreement, dated August 27, 1991, as amended, between the Company and The Stockton Port District for certain
warehouses for storage and distribution located in Stockton, California and extension thereto dated
February 21, 1996, incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-1 effective
April 3, 1996.
10.4 Lease Agreement, dated August 27, 1997, between the Company and Grissom Redevelopment Authority for certain warehouse
for storage and distribution located in Peru, Indiana, incorporated by reference to Exhibit 10.4 to the Form 10-K
filed for the year ended January 31, 1998.
10.5 Lease agreement between the Company and Square I, LLC for certain Corporate office space located in Oakland,
California, incorporated by reference to Exhibit 10.1 to the Form 10-Q filed for the quarter ended October 31, 1998.
10.6 Business Loan Agreement, dated October 12, 1998, between the Company and Bank of America National Trust and Savings
Association, incorporated by reference to Exhibit 10.2 to the Form 10-Q filed for the quarter ended
October 31, 1998.
10.6.1 Amendment Number 1 to Business Loan Agreement, dated March 12, 1999, between the Company and Bank of America National
Trust and Savings Association, incorporated by reference to Exhibit 10.1 to the Form 10-Q filed for the quarter ended
July 31, 1999.
10.6.2 Amendment Number 2 to the Business Loan Agreement dated June 15, 1999, between the Company and Bank of America
National Trust and Savings Association, incorporated by reference to Exhibit 10.2 to the Form 10-Q filed for the
quarter ended July 31, 1999.
10.7* 1994 Stock Option Plan and form of Stock Option Agreement thereunder, incorporated by reference to Exhibit 10.3 to the
Registration Statement on Form S-1 effective April 3, 1996.
</TABLE>
11
<PAGE>
<TABLE>
<C> <S>
10.8.1* 1995 Stock Option Plan, as amended, incorporated by reference to Exhibit 10.5 to the Form 10-Q filed for the quarter
ended July 31, 1999.
10.8.2* Form of Stock Option Agreement, 1995 Stock Option Plan, incorporated by reference to Exhibit 10.4 to the Form
10-K filed for the year ended February 1, 1997.
10.9.1* 1996 Director Option Plan, as amended, incorporated by reference to Exhibit 10.3 to the Form 10-Q filed for the
quarter ended July 31, 1999.
10.9.2* Form of Stock Option Agreement, 1996 Director Option Plan, incorporated by reference to Exhibit 10.4 to the Form 10-Q
filed for the quarter ended July 31, 1999.
10.10* 1996 Employee Stock Purchase Plan, incorporated by reference to Exhibit 10.13 to the Registration Statement on Form
S-1 effective April 3, 1996.
10.11* The Cost Plus, Inc. Deferred Compensation Plan effective October 1, 1997 incorporated by reference to Exhibit 10.11 to
the Form 10-K filed for the year ended January 31, 1998.
10.12* Management Incentive Plan, incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-1
effective April 3, 1996.
10.13* 1997 Executive Officer and Key Employee Loan Plan, dated May 7, 1997, incorporated by reference to Appendix C of the
Company's Proxy Statement dated May 22, 1997.
10.14.1* Employment Agreement, dated June 17, 1997, between the Company and Murray H. Dashe, incorporated by reference to
Exhibit 10.4 to the Form 10-Q filed for the quarter ended August 2, 1997.
10.14.2* Amendment to Employment Agreement, dated January 13, 1999, between the Company and Murray H. Dashe incorporated by
reference to Exhibit 10.16.2 to the Form 10-K filed for the year ended January 30, 1999.
10.14.3* Amendment to Employment Agreement, dated July 22, 1999, between the Company and Murray H. Dashe, incorporated by
reference to Exhibit 10.6 to the Form 10-Q filed for the quarter ended July 31, 1999.
10.15.1* Employment Agreement, dated February 2, 1997, between the Company and Kathi P. Lentzsch, incorporated by reference to
Exhibit 10.5 to the Form 10-Q filed for the quarter ended August 2, 1997.
10.15.2* Employment Severance Agreement, as amended, dated July 22, 1999, between the Company and Kathi P. Lentzsch
incorporated by reference to Exhibit 10.8 to the Form 10-Q filed for the quarter ended July 31, 1999.
10.16.1* Employment Agreement, dated May 6, 1998, between the Company and John F. Hoffner, incorporated by reference to Exhibit
10.4 to the Form 10-Q filed for the quarter ended August 1, 1998.
10.16.2* Amendment to Employment Agreement, dated January 13, 1999, between the Company and John F. Hoffner incorporated by
reference to Exhibit 10.18.2 to the Form 10-K filed for the year ended January 30, 1999.
10.16.3* Amendment to Employment Agreement, dated July 22, 1999, between the Company and John F. Hoffner, incorporated by
reference to Exhibit 10.7 to the Form 10-Q filed for the quarter ended July 31, 1999.
10.17* Employment Severance Agreement, as amended, dated July 22, 1999 between the Company and Gary D. Weatherford
incorporated by reference to Exhibit 10.9 to the Form 10-Q filed for the quarter ended July 31, 1999.
10.18* Employment Severance Agreement, as amended, dated July 22, 1999, between the Company and Joan S. Fujii. incorporated
by reference to Exhibit 10.10 to the Form 10-Q filed for the quarter ended July 31, 1999.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
10.19* Executive Transition Agreement, dated May 7, 1999, between the Company and Ralph D. Dillon incorporated by reference
to Exhibit 10.1 to the Form 10-Q filed for the quarter ended May 1, 1999.
13 Registrant's 1999 Annual Report to Shareholders (only those portions specifically incorporated by reference into this
Report are deemed "filed" with the Securities and Exchange Commission).
21 List of Subsidiaries, incorporated by reference to Exhibit 21.1 to the Registration Statement on Form S-1 effective
April 3, 1996.
23 Independent Auditors' Consent.
27 Financial Data Schedule for the fiscal year ended January 29, 2000 (submitted for SEC use only).
</TABLE>
* Management compensation plan or arrangement.
13
<PAGE>
EXHIBIT 3.1.2
[FILED WITH THE SECRETARY OF STATE OF THE STATE OF CALIFORNIA ON SEPTEMBER 24,
1999 IN CONNECTION WITH THE 3:2 STOCK SPLIT]
CERTIFICATE OF AMENDMENT
OF RESTATED ARTICLES OF INCORPORATION OF
COST PLUS, INC.
MURRAY H. DASHE and JOHN F. HOFFNER certify that:
1. They are the President and Chief Executive Officer, and the Secretary,
respectively, of COST PLUS, INC. a California corporation.
2. Article THIRD of the Restated Articles of Incorporation of this
corporation is amended to read in its entirety as follows:
"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 67,500,000, 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. Upon the
amendment of this Article III as set forth herein, each two (2) outstanding
shares of Common Stock shall be split up and converted into three (3) shares of
Common Stock.
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 such series subsequent to the issue of shares of that series.
3. The foregoing amendment of the Restated Articles of Incorporation has
been duly approved by the Board of Directors.
4. The amendment which has been made hereby to the Restated Articles of
Incorporation is to effect a three-for-two stock split of the Common shares and
to increase the authorized Common shares proportionately. The Company has no
shares of Preferred Stock outstanding. Pursuant to Section 902(c) of the
California Corporations Code, shareholder approval of this amendment is not
required.
<PAGE>
5. Pursuant to Section 110(c) of the California Corporations Code, the
foregoing amendment of the Restated Articles of Incorporation of this
corporation shall become effective at the close of business on October 1, 1999.
Each of the undersigned declare under penalty of perjury under the laws of
the State of California that the matters set forth in the foregoing certificate
are true of his or her own knowledge.
Executed at Oakland, California on September 20, 1999.
/s/ Murray H. Dashe
-------------------
Murray H. Dashe
President and Chief Executive Officer
/s/ John F. Hoffner
-------------------
John F. Hoffner, Secretary
-2-
<PAGE>
EXHIBIT 3.3
AMENDED AND RESTATED/1/
BY-LAWS
OF
COST PLUS, INC.
(a California corporation)
(the "corporation")
Article I
OFFICES
Section 1.1 Principal Office. The principal office for the transaction of
----------------
the business of the corporation shall be located at 200 4th Street, Oakland,
State of California. The Board of Directors of the corporation (the "Board" or
the "Board of Directors") is hereby granted full power and authority to change
said principal office to another location within or without the State of
California.
Section 1.2 Other Offices. One or more branch or other subordinate offices
-------------
may at any time be fixed and located by the Board of Directors at such place or
places within or without the State of California as it deems appropriate.
Article II
DIRECTORS
Section 2.1 Exercise of Corporate Powers. Except as otherwise provided by
----------------------------
the Articles of Incorporation of the corporation or by the laws of the State of
California now or hereafter in force, the business and affairs of the
corporation shall be managed and all corporate powers shall be exercised by or
under the direction of the Board of Directors. The Board may delegate the
management of the day-to-day operation as permitted by law provided that the
business and affairs of the corporation shall be managed and all corporate
powers shall be exercised under the ultimate direction of the Board. Without
limiting the foregoing, in addition to any other action required by law, by the
Articles of Incorporation or by these By-Laws, approval by the Board of
Directors or a duly established committee of the Board shall be required for any
of the following corporate actions:
(a) the election and removal of the Chairman (if any), the President,
the Chief Financial Officer, or any other executive officer of the corporation
or any significant subsidiary (as such term is defined in Regulation S-X
promulgated under the Securities Act of 1933, as amended)
_______________________
/1/As of November 17, 1999
<PAGE>
of the corporation, the compensation of any of them, and the prescription of
such powers and duties for them as are not inconsistent with the Articles of
Incorporation, these By-Laws or applicable law;
(b) lease of any real property on terms which exceed parameters
approved by the Board;
(c) ceasing of operations at any of the business locations of the
corporation and any writeoff for any such location in excess of $250,000;
(d) sale, exchange, mortgage, pledge or other disposition or
encumbrance by the corporation of any real property or any other assets of the
corporation having a net book or fair market value in excess of $1,000,000 other
than sales of inventory in the ordinary course of business;
(e) settlement of any claim involving a payment or forbearance, or
any writeoff, by the corporation in excess of $500,000 not included in the
annual capital expenditure budgets for the corporation;
(f) appointment of auditors for the corporation and any significant
change in the accounting principles or tax elections applicable to the
corporation which are not mandated by generally accepted accounting principles
or applicable law; and
(g) any contract or other transaction between the corporation and one
or more of its directors or officers or any entity in which one or more of its
directors or officers has a material financial interest.
Section 2.2 Number. The number of directors of the corporation shall be
------
not less than five (5) nor more than nine (9). The exact number of directors
shall be seven (7) until changed, within the limits specified above, by a bylaw
amending this Section 2.2, duly adopted by the Board of Directors or by the
shareholders. The indefinite number of directors may be changed, or a definite
number may be fixed without provision for an indefinite number, by a duly
adopted amendment to the Articles of Incorporation or by an amendment to this
bylaw duly adopted by the vote or written consent of holders of a majority of
the outstanding shares entitled to vote; provided, however, that an amendment
reducing the fixed number or the minimum number of directors to a number less
than five cannot be adopted if the votes cast against its adoption at a meeting,
or the shares not consenting in the case of an action by written consent, are
equal to more than 16-2/3% of the outstanding shares entitled to vote thereon.
No amendment may change the stated maximum number of authorized directors to a
number greater than two times the stated minimum number of directors minus one.
Section 2.3 Need not Be Shareholders. The directors of the corporation
------------------------
need not be shareholders of the corporation.
Section 2.4 Compensation. Directors shall receive such compensation for
------------
their services as directors and such reimbursement for their expenses of
attendance at meetings as may be determined from time to time by resolution of
the Board. Nothing herein contained shall be construed to
-2-
<PAGE>
preclude any director from serving the corporation in any other capacity and
receiving compensation therefor.
Section 2.5 Election and Term of Office. At each annual meeting of
---------------------------
shareholders, directors shall be elected to hold office until the next annual
meeting, provided, that if for any reason, said annual meeting or an adjournment
thereof is not held or the directors are not elected thereat, then the directors
may be elected at any special meeting of the shareholders called and held for
that purpose. The term of office of the directors shall begin immediately after
their election and shall continue until the expiration of the term for which
elected and until their respective successors have been elected and qualified.
Section 2.6 Vacancies. A vacancy or vacancies in the Board of Directors
---------
shall exist when any authorized position of director is not then filled by a
duly elected director, whether caused by death, resignation, removal change in
the authorized number of directors (by the Board or the shareholders) or
otherwise. The Board of Directors may declare vacant the office of a director
who has been declared of unsound mind by an order of court or convicted of a
felony. Except for a vacancy created by the removal of a director, vacancies on
the Board may be filled by a majority of the directors then in office, whether
or not less than a quorum, or by a sole remaining director. A vacancy created by
the removal of a director may be filled only by the approval of the
shareholders. The shareholders may elect a director at any time to fill any
vacancy not filled by the directors, but any such election by written consent
requires the consent of a majority of the outstanding shares entitled to vote.
Any director may resign effective upon giving written notice to the Chairman of
the Board, the President, the Secretary or the Board of Directors of the
corporation, unless the notice specifies a later time for the effectiveness of
such resignation. If the resignation is effective at a future time, a successor
may be elected to take office when the resignation becomes effective.
Section 2.7 Removal. (a) Any and all of the directors may be removed
-------
without cause if such removal is approved by the affirmative vote of a majority
of the outstanding shares entitled to vote at an election of directors, except
that no director may be removed (unless the entire Board is removed) when the
votes cast against removal, or not consenting in writing to such removal, would
be sufficient to elect such director if voted cumulatively at an election at
which the same total number of votes were cast (or, if such action is taken by
written consent, all shares entitled to vote were voted) and the entire number
of directors authorized at the time of the director's most recent election were
then being elected.
(b) Any reduction of the authorized number of directors does not
remove any director prior to the expiration of such director's term of office.
Section 2.8 Approval of Loans. The corporation may, upon the approval of
-----------------
the Board of Directors alone, make loans of money or property to, or guarantee
the obligations of, any officer of the corporation or of its parent, if any,
whether or not a director, or adopt an employee benefit plan or plans
authorizing such loans or guaranties provided that: (i)the Board of Directors
determines that such a loan or guaranty or plan may reasonably be expected to
benefit the corporation; (ii) the corporation has outstanding shares held Of
record by 100 or more persons (determined as provided in Section 605 of the
California General Corporation Law) on the date of approval by the Board of
Directors; and (iii) the approval of the Board of Directors is by a vote
sufficient without counting the
-3-
<PAGE>
vote of any interested director or directors. Notwithstanding the foregoing, the
corporation shall have the power to make loans otherwise permitted by the
California General Corporation Law.
Article III
OFFICERS
Section 3.1 Election and Qualifications. The officers of this corporation
---------------------------
shall consist of a President, a Chief Financial Officer and a Secretary who
shall be chosen by the Board of Directors and such other officers, including a
Chairman of the Board, one or more Vice Presidents, an Assistant Treasurer, an
Assistant Secretary and a Controller, as the Board of Directors shall deem
expedient, who shall be chosen in such manner and hold their offices for such
terms as the Board of Directors may prescribe. Any two or more of such offices
may be held by the same person. Any Vice President, Assistant Treasurer or
Assistant Secretary, respectively, may exercise any of the powers of the
President, the Chief Financial Officer, or the Secretary, respectively, as
directed by the Board of Directors and shall perform such other duties as are
imposed upon such officer by the By-Laws or the Board of Directors.
Section 3.2 Term of Office and Compensation. The term of office and salary
-------------------------------
of each of said officers and the manner and time of the payment of such salaries
shall be fixed and determined by the Board of Directors and may be altered by
said Board from time to time at its pleasure, subject to the rights, if any, of
said officers under any contract of employment.
Section 3.3 Removal and Vacancies. Any officer of the corporation may be
---------------------
removed at the pleasure of the Board of Directors at any meeting or by vote of
shareholders entitled to exercise the majority of voting power of the
corporation at any meeting. Any officer may resign at any time upon written
notice to the corporation without prejudice to the rights, if any, of the
corporation under any contract to which the officer is a party. If any vacancy
occurs in any office of the corporation, the Board of Directors may elect a
successor to fill such vacancy for the remainder of the unexpired term and until
a successor is duly chosen and qualified.
Article IV
CHAIRMAN OF THE BOARD
Section 4.1 Powers and Duties. The Chairman of the Board of Directors, if
-----------------
there be one, shall have the power to preside at all meetings of the Board of
Directors, and to call meetings of the shareholders and of the Board of
Directors to be held within the limitations prescribed by law or by these By-
Laws, at such times and at such places as the Chairman of the Board shall deem
proper. The Chairman of the Board shall have such other powers and shall be
subject to such other duties as the Board of Directors may from time to time
prescribe.
-4-
<PAGE>
Article V
PRESIDENT
Section 5.1 Powers and Duties. The powers and duties of the President are:
-----------------
(a) To act as the chief executive officer of the corporation and,
subject to the control of the Board of Directors, to have general supervision,
direction and control of the business and affairs of the corporation.
(b) To preside at all meetings of the shareholders and, in the
absence of the Chairman of the Board, or if there be none, at all meetings of
the Board of Directors.
(c) To call meetings of the shareholders and also of the Board of
Directors to be held, subject to the limitations prescribed by law or by these
By-Laws, at such times and at such places as the President shall deem proper.
(d) To affix the signature of the corporation to all deeds,
conveyances, mortgages, leases, obligations, bonds, certificates and other
papers and instruments in writing which have been authorized by the Board of
Directors or which do not require the approval of the Board of Directors under
Section 2.1 of the By-Laws and in the judgment of the President should be
executed on behalf of the corporation, to sign certificates for shares of stock
of the corporation and, subject to the direction of the Board of Directors, to
have general charge of the property of the corporation and to supervise and
control all officers, agents and employees of the corporation.
Section 5.2 President pro tem. If neither the Chairman of the Board, the
-----------------
President, nor any Vice President is present at any meeting of the Board of
Directors, a President pro tem may be chosen to preside and act at such meeting.
If neither the President nor any Vice President is present at any meeting of the
shareholders, a President pro tem may be chosen to preside at such meeting.
Article VI
VICE PRESIDENT
Section 6.1 Powers and Duties. In case of the absence, disability or death
-----------------
of the President, the Vice President, or one of the Vice Presidents, shall
exercise all the powers and perform all the duties of the President. If there is
more than one Vice President, the order in which the Vice Presidents shall
succeed to the powers and duties of the President shall be as fixed by the Board
of Directors. The Vice President or Vice Presidents shall have such other powers
and perform such other duties as may be granted or prescribed by the Board of
Directors.
-5-
<PAGE>
Article VII
SECRETARY
Section 7.1 Powers and Duties. The powers and duties of the Secretary are:
-----------------
(a) To keep a book of minutes at the principal office of the
corporation, or such other place as the Board of Directors may order, of all
meetings of its directors and shareholders with the time and place of holding,
whether regular or special, and, if special, how authorized, the notice thereof
given, the names of those present at directors' meetings, the number of shares
present or represented at shareholders' meetings and the proceedings thereof.
(b) To keep the seal of the corporation and to affix the same to all
instruments which may require it.
(c) To keep or cause to be kept at the principal office of the
corporation, or at the office of the transfer agent or agents, a share register,
or duplicate share registers, showing the names of the shareholders and their
addresses, the number and classes of shares held by each, the number and date of
certificates issued for shares, and the number and date of cancellation of every
certificate surrendered for cancellation.
(d) To keep a supply of certificates for shares of the corporation,
to fill in all certificates issued, and to make a proper record of each such
issuance; provided, that so long as the corporation shall have one or more duly
appointed and acting transfer agents of the shares, or any class or series of
shares, of the corporation, such duties with respect to such shares shall be
performed by such transfer agent or transfer agents.
(e) To transfer upon the share books of the corporation any and all
shares of the corporation; provided, that so long as the corporation shall have
one or more duly appointed and acting transfer agents of the shares, or any
class or series of shares, of the corporation, such duties with respect to such
shares shall be performed by such transfer agent or transfer agents, and the
method of transfer of each certificate shall be subject to the reasonable
regulations of the transfer agent to which the certificate is presented for
transfer, and also, if the corporation then has one or more duly appointed and
acting registrars, to the reasonable regulations of the registrar to which the
new certificate is presented for registration; and provided, further, that no
certificate for shares of stock shall be issued or delivered or, if issued or
delivered, shall have any validity whatsoever until and unless it has been
signed or authenticated in the manner provided in Section 14.4 hereof.
(f) To make service and publication of all notices that may be
necessary or proper, and without command or direction from anyone, in case of
the absence, disability, refusal or neglect of the Secretary to make service or
publication of any notices, then such notices may be served and/or published by
the President or a Vice President, or by any person thereunto authorized by
either of them or by the Board of Directors or by the holders of a majority of
the outstanding shares of the corporation.
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(g) Generally to do and perform all such duties as pertain to the
office of Secretary and as may be required by the Board of Directors.
Article VIII
CHIEF FINANCIAL OFFICER
Section 8.1 Powers and Duties. The powers and duties of the Chief
-----------------
Financial Officer are:
(a) To supervise and control the keeping and maintaining of adequate
and correct accounts of the corporation's properties and business transactions,
including accounts of its assets, liabilities, receipts, disbursements, gains,
losses, capital, retained earnings and shares. The books of account shall at all
reasonable times be open to inspection by any director.
(b) To have the custody of all funds, securities, evidence of
indebtedness and other valuable documents of the corporation and, at the Chief
Financial Officer's discretion, to cause any or all thereof to be deposited for
the account of the corporation with such depositary as may be designated from
time to time by the Board of Directors.
(c) To receive or cause to be received, and to give or cause to be
given receipts and acquittances for moneys paid in for the account of the
corporation.
(d) To disburse, or cause to be disbursed, all funds of the
corporation as may be directed by the Board of Directors, taking proper vouchers
for such disbursements.
(e) To render to the President and to the Board of Directors,
whenever they may require, accounts of all transactions and of the financial
condition of the corporation.
(f) Generally to do and perform all such duties as pertain to the
office of Chief Financial Officer and as may be required by the Board of
Directors.
Article IX
TREASURER
Section 9.1 Powers and Duties. The Treasurer shall have such powers and
-----------------
duties as from time to time may be prescribed by the board of directors or these
By-Laws, including custody of and responsibility for all money and investments.
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Article X
CONTROLLER
Section 10.1 Powers and Duties. The Controller, if there be one, shall
-----------------
have the power and duty to keep and maintain adequate and correct accounts of
the corporation's properties and business transactions, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital
retained earnings and shares, and to render to the Chief Financial Officer, the
President and the Board of Directors, whenever they may require, accounts of all
transactions and of the financial condition of the corporation. The Controller
shall generally have the power to do and perform all such other duties as
pertain to the office of Controller and as may be required by the Board of
Directors.
Article XI
COMMITTEES OF THE BOARD
Section 11.1 Appointments and Procedure. The Board of Directors may, by
--------------------------
resolution adopted by a majority of the authorized number of directors,
designate one or more committees, each consisting of two or more directors, to
serve at the pleasure of the Board, designate members of any committee, and
designate one or more directors as alternate members of any committee, who may
replace any absent member at any meeting of the committee.
Section 11.2 Powers. Any committee appointed by the Board of Directors, to
------
the extent provided in the resolution of the Board or in these By-Laws, shall
have all the authority of the Board except with respect to:
(a) the approval of any action for which the California General
Corporation Law or the Articles of Incorporation or these By-Laws requires the
approval or vote of the shareholders or of a majority or supermajority of the
directors then serving on the Board of Directors;
(b) the filling of vacancies on the Board or on any committee;
(c) the fixing of compensation of the directors for serving on the
Board or on any committee;
(d) the amendment or repeal of By-Laws or the adoption of new By-
Laws;
(e) the amendment or repeal of any resolution of the Board which by
its express terms is not so amendable or repealable;
(f) a distribution to the shareholders of the corporation, except at
a rate or in a periodic amount or within a price range determined by the Board;
and
(g) the appointment of other committees of the Board or the members
thereof.
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Section 11.3 Executive Committee. In the event that the Board of Directors
-------------------
appoints an Executive Committee, such Executive Committee, in all cases in which
specific directions to the contrary shall not have been given by the Board of
Directors, shall have and may exercise, during the intervals between the
meetings of the Board of Directors, all the powers and authority of the Board of
Directors in the management of the business and affairs of the corporation
(except as provided in Section 11.2 hereof) in such manner as the Executive
Committee may deem best for the interests of the corporation.
Article XII
MEETINGS OF SHAREHOLDERS
Section 12.1 Place of Meetings. Meetings (whether regular, special or
-----------------
adjourned) of the shareholders of the corporation shall be held at the principal
office for the transaction of business as specified in accordance with Section
1.1 hereof, or any place within or without the State which may be designated by
written consent of all the shareholders entitled to vote thereat, or which may
be designated by the Board of Directors.
Section 12.2 Time of Annual Meetings. The annual meeting of the
-----------------------
shareholders shall be held at the hour of 9:00 o'clock in the morning on the
fourth Thursday in June in each year, if not a legal holiday, and if a legal
holiday, then on the next succeeding business day not a legal holiday, or such
other time or date as may be set by the Board of Directors.
Section 12.3 Special Meetings. (a) Special meetings of the shareholders
----------------
may be called by the Board of Directors, the Chairman of the Board, the
President or the holders of shares entitled to cast not less than 10% of the
vote at the meeting.
(b) If a special meeting is called by any person or persons other
than the Board of Directors, the Chairman of the Board or the President, then
the request shall be in writing, specifying the time of such meeting and the
general nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the Chairman of the Board, the President, any Vice President or
the Secretary of the corporation. The officer receiving the request shall cause
notice to be promptly given to the shareholders entitled to vote, in accordance
with the provisions of Sections 12.4 and 12.5 of these bylaws, that a meeting
will be held at the time requested by the person or persons calling the meeting,
so long as that time is not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after receipt of the request, then the person or persons requesting
the meeting may give the notice. Nothing contained in this paragraph of this
Section 12.3 shall be construed as limiting, fixing or affecting the time when a
meeting of shareholders called by action of the Board of Directors may be held.
Section 12.4 Notice of Meetings. (a) Whenever shareholders are required or
------------------
permitted to take any action at a meeting, a written notice of the meeting shall
be given not less than 10 nor more than 60 days before the day of the meeting to
each shareholder entitled to vote thereat. Such notice
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shall state the place, date and hour of the meeting and (1) in the case of a
special meeting, the general nature of the business to be transacted, and no
other business may be transacted, or (2) in the case of the annual meeting,
those matters which the Board, at the time of the mailing of the notice, intends
to present for action by the shareholder, but subject to the provisions of
subdivision (b) any proper matter may be presented at the meeting for such
action. The notice of any meeting at which directors are to be elected shall
include the names of nominees intended at the time of the notice to be presented
by management for election.
(b) Any shareholder approval at a meeting, other unanimous
approval by those entitled to vote, on any of the matters listed below shall be
valid only if the general nature of the proposal so approved was stated in the
notice of meeting or in any written waiver of notice:
(1) a proposal to approve a contract or other transaction
between a corporation and one or more of its directors, or between a corporation
and any corporation, firm or association in which one or more directors has a
material financial interest;
(2) a proposal to amend the Articles of Incorporation;
(3) a proposal regarding a reorganization, merger or
consolidation involving this corporation;
(4) a proposal to wind up and dissolve the corporation; and
(5) a proposal to adopt a plan of distribution of the
shares, obligations or securities of any other corporation, domestic or foreign,
or assets other than money which is not in accordance with the liquidation
rights of any preferred shares as specified in the Articles of Incorporation.
Section 12.5 Delivery of Notice. Notice of shareholders' meeting or any
------------------
report shall be given either personally or by mail or other means of written
communication, addressed to the shareholder at the address of such shareholder
appearing on the books of the corporation or given by the shareholder to the
corporation for the purpose of notice; or if no such address appears or is
given, at the place where the principal executive office of the corporation is
located or by publication at least once in a newspaper of general circulation in
the county in which the principal executive office is located. The notice or
report shall be deemed to have been given at the time when delivered personally
or deposited in the mail or sent by other means of written communication. An
affidavit of mailing of any notice or report in accordance with the provisions
of this section, executed by the Secretary, Assistant Secretary or any transfer
agent, shall be prima facie evidence of the giving of the notice or report.
If any notice or report addressed to the shareholders at the address of
such shareholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice or report to the
shareholder at such address, all future notices or reports shall be deemed to
have been duly given without further mailing if the same shall be available for
the shareholder upon written
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<PAGE>
demand of the shareholder at the principal executive office of the corporation
for a period of one year from the date of the giving of the notice to all other
shareholders.
Section 12.6 Adjourned Meetings. When a shareholders' meeting is adjourned
------------------
to another time or place, unless the By-Laws otherwise require and except as
provided in this section, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment
is taken. At the adjourned meeting the corporation may transact any business
which might have been transacted at the original meeting. If the adjournment is
for more than 45 days or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to each
shareholder of record entitled to vote at the meeting.
Section 12.7 Consent to Shareholders' Meeting. The transactions of any
--------------------------------
meeting of shareholders, however called and noticed, and wherever held, are as
valid as though had at a meeting duly held after regular call and notice, if a
quorum is present either in person or by proxy, and if either before or after
the meeting each of the persons entitled to vote, not present in person or by
proxy signs a written waiver of notice or a consent to the holding of the
meeting or an approval of the minutes thereof. All such waivers, consents and
approvals shall be filed with the corporate records or made a part of the
minutes of the meeting. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person objects, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened and except that attendance at a meeting is
not a waiver of any right to object to the consideration of matters required by
the California General Corporation Law to be included in the notice but not so
included in the notice if such objection is expressly made at the meeting.
Neither the business to be transacted at nor the purpose of any regular or
special meeting of shareholders need be specified in any written waiver of
notice, unless otherwise provided in the Articles of Incorporation or By-Laws,
except as provided in subdivision (b) of Section 12.4.
Section 12.8 Quorum. (a) The presence in person or by proxy of the persons
------
entitled to vote the majority of the voting shares at any meeting shall
constitute a quorum for the transaction of business. Except as otherwise
expressly required by statute, the Articles of Incorporation and these By-Laws,
if a quorum is present, the affirmative vote of the majority of shares
represented at the meeting and entitled to vote on any matter shall be the act
of the shareholders.
(b) The shareholders present at a duly called or held meeting at
which a quorum is present may continue to transact business until adjournment
notwithstanding the withdrawal of the number of enough shareholders to leave
less than a quorum, if any action taken (other than adjournment) is approved by
at least a majority of the shares required to constitute a quorum.
(c) In the absence of a quorum, any meeting of shareholders from
time to time by the vote of a majority of the shares represented either in
person or by proxy, but no other business may be transacted, except as provided
in subdivision (b).
Section 12.9 Actions without Meeting. (a) Any action which may be taken at
-----------------------
any annual or special meeting of shareholders may be taken without a meeting and
without prior notice, if a consent in writing, setting forth the action so
taken, shall be signed by the holders of outstanding
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<PAGE>
shares having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted; provided that, subject to the provisions of
Section 2.6, directors may not be elected by written consent except by unanimous
written consent of all shares entitled to vote for the election of directors.
(b) Unless the consents of all shareholders entitled to vote have
been solicited in writing,
(1) notice of any shareholder approval on matters described
in subparagraphs (1), (3) or (5) of subdivision (b) of Section 12.4 or
respecting indemnification of agents of the corporation without a meeting by
less than unanimous written consent shall be given at least 10 days before the
consummation of the action authorized by such approval, and
(2) prompt notice shall be given of the taking of any other
corporate action approved by shareholders without a meeting by less than
unanimous written consent, to those shareholders entitled to vote but who have
not consented in writing; the provisions of Section 12.5 shall apply to such
notice.
Section 12.10 Revocation of Consent. Any shareholder giving a written
---------------------
consent, or the shareholder's proxy holders, or a transferee of the shares or a
personal representative of the shareholder or their respective proxy holders,
may revoke the consent by a writing received by the corporation prior to the
time that written consents of the number of shares required to authorize the
proposed action have been filed with the Secretary of the corporation, but may
not do so thereafter. Such revocation is effective upon its receipt by the
Secretary of the corporation.
Section 12.11 Voting Rights. Except as provided in Section 12.13 or in the
-------------
Articles of Incorporation or in any statute relating to the election of
directors or to other particular matters, each outstanding share, regardless of
class, shall be entitled to one vote on each matter submitted to a vote of
shareholders. Any holder of shares entitled to vote on any matter may vote part
of the shares in favor of the proposal and refrain from voting the remaining
shares or vote them against the proposal, other than elections to office, but,
if the shareholder fails to specify the number of shares such shareholder is
voting affirmatively, it will be conclusively presumed that the shareholder's
approving vote is with respect to all shares such shareholder is entitled to
vote.
Section 12.12 Determination of Holders of Record. (a) In order that the
----------------------------------
corporation may determine the shareholders entitled to notice of or to vote at
any meeting or entitled to receive payment of any dividend or other distribution
or allotment of any rights or entitled to exercise any rights in respect of any
other lawful action, the Board of Directors may fix in advance, a record date,
which shall not be more than 60 nor less than 10 days prior to the date of such
meeting nor more than 60 days prior to any other action.
(b) In the absence of any record date set by the Board of
Directors pursuant to subdivision (a) above, then:
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<PAGE>
(1) The record date for determining shareholders entitled
to notice of or to vote at a meeting of shareholders shall be at the close of
business on the business day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the business day next preceding
the day on which the meeting is held.
(2) The record date for determining shareholders entitled
to give consent to corporate action in writing without a meeting, when no prior
action by the Board has been taken, shall be the day on which the first written
consent is given.
(3) The record date for determining shareholders for any
other purpose shall be at the close of business on the day on which the Board
adopts the resolution relating thereto, or the 60th day prior to the date of
such other action, whichever is later.
(c) A determination of shareholders of record entitled to notice
of or to vote at a meeting of shareholders shall apply to any adjournment of the
meeting unless the Board fixes a new record date of the adjourned meeting, but
the Board shall fix a new record date if the meeting is adjourned for more than
45 days from the date set for the original meeting.
(d) Shareholders on the record date are entitled to notice and to
vote or to receive the dividend, distribution or allotment of rights or to
exercise the rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date, except as
otherwise provided in the Articles of Incorporation or these By-Laws or by
agreement or applicable law.
Section 12.13 Election of Directors. (a) In any election of directors, the
---------------------
candidates receiving the highest number of votes of the shares entitled to be
voted for them up to the number of directors to be elected by such shares are
elected.
(b) Election for directors need not be by ballot unless a
shareholder demands election by ballot at the meeting and before the voting
begins or unless the By-Laws so requires.
Section 12.14 Proxies. (a) Every person entitled to vote shares may
-------
authorize another person or persons to act by proxy with respect to such shares.
Any proxy purporting to be executed in accordance with the provisions of the
General Corporation Law of the State of California shall be presumptively valid.
(b) No proxy shall be valid after the expiration of 11 months
from the date thereof unless otherwise provided in the proxy. Every proxy
continues in full force and effect until revoked by the person executing it
prior to the vote pursuant thereto, except as otherwise provided in this
section. Such revocation may be effected by a writing delivered to the
corporation stating that the proxy is revoked or by a subsequent proxy executed
by, or by attendance at the meeting and voting in person by, the person
executing the proxy. The dates contained on the forms of proxy presumptively
determine the order of execution, regardless of the postmark dates on the
envelopes in which they are mailed.
(c) A proxy is not revoked by the death or incapacity of the
maker unless, before the vote is counted, written notice of such death or
incapacity is received by the corporation.
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Section 12.15 Inspectors of Election. (a) In advance of any meeting of
----------------------
shareholders the Board may appoint inspectors of election to act at the meeting
and any adjournment thereof. If inspectors of election are not so appointed, or
if any persons so appointed fail to appear or refuse to act, the chairman of any
meeting of shareholders may, and on the request of any shareholder or a
shareholder's proxy shall, appoint inspectors of election (or persons to replace
those who so fail or refuse) at the meeting. The number of inspectors shall be
either one or three. If appointed at a meeting on the request of one or more
shareholders or proxies, the majority of shares represented in person or by
proxy shall determine whether one or three inspectors are to be appointed.
(b) The inspectors of election shall determine the number of
shares outstanding and the voting power of each, the shares represented at the
meeting, the existence of a quorum and the authenticity, validity and effect of
proxies, receive votes, ballots or consents, hear and determine all challenges
and questions in any way arising in connection with the right to vote, count and
tabulate all votes or consents, determine when the polls shall close, determine
the result and do such acts as may be proper to conduct the election or vote
with fairness to all shareholders.
(c) The inspectors of election shall perform their duties,
impartially, in good faith, to the best of their ability and as expeditiously as
is practical. If there are three inspectors of election, the decision, act or
certificate of a majority is effective in all respects as the decision, act or
certificate of all. Any report or certificate made by the inspectors of election
is prima facie evidence of the facts stated therein.
Section 12.16 Advance Notice of Shareholder Nominations. Nominations of
-----------------------------------------
persons for election to the Board of Directors of the corporation may be made at
a meeting of shareholders by or at the direction of the Board of Directors or by
any shareholder of the corporation entitled to vote in the election of directors
at the meeting who complies with the notice procedures set forth in this
Section. Such nominations, other than those made by or at the direction of the
Board of Directors, shall be made pursuant to timely notice in writing to the
Secretary of the corporation. To be timely, a shareholder's notice shall be
delivered to or mailed and received at the principal executive offices of the
corporation not less than twenty (20) days prior to the meeting; provided,
--------
however, that in the event less than thirty (30) days' notice or prior public
- -------
disclosure of the date of the meeting is given or made to shareholders, notice
by the shareholder to be timely must be so received not later than the close of
business on the tenth day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made. Such shareholder's
notice shall set forth (a)as to each person, if any, whom the shareholder
proposes to nominate for election or re-election as a director: (i) the name,
age, business address and residence address of such person, (ii) the principal
occupation or employment of such person, (iii)the class and number of shares of
the corporation which are beneficially owned by such person, (iv) any other
information relating to such person that is required by law to be disclosed in
solicitations of proxies for election of directors, and (v)such person's written
consent to being named as a nominee and to serving as a director if elected; and
(b) as to the shareholder giving the notice: (i) the name and address, as they
appear on the corporation's books, of such shareholder, (ii) the class and
number of shares of the corporation which are beneficially owned by such
shareholder, and (iii)a description of all arrangements or understandings
between such shareholder and each nominee and any other person or persons
(naming such person or persons) relating to the nomination. At the request of
the Board of Directors any person nominated by the Board of Directors for
election as a director shall furnish to the
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Secretary of the corporation that information required to be set forth in the
shareholder's notice of nomination which pertains to the nominee. No person
shall be eligible for election as a director of the corporation unless nominated
in accordance with the procedures set forth in this Section. The chairman of the
meeting shall, if the facts warrant, determine and declare at the meeting that a
nomination was not made in accordance with the procedures prescribed by these
By-Laws, and if the chairman should so determine, the chairman shall so declare
at the meeting and the defective nomination shall be disregarded.
Section 12.17 Advance Notice of Shareholder Business. At the annual meeting
--------------------------------------
of the shareholders, only such business shall be conducted as shall have been
properly brought before the meeting. To be properly brought before an annual
meeting, business must be: (a) as specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (b)
otherwise properly brought before the meeting by or at the direction of the
Board of Directors, or (c) otherwise properly brought before the meeting by a
shareholder. Business to be brought before the meeting by a shareholder shall
not be considered properly brought if the shareholder has not given timely
notice thereof in writing to the Secretary of the corporation. To be timely, a
shareholder's notice must be delivered to the principal executive offices of the
corporation not less than forty five (45) days prior to the date on which the
corporation first mailed proxy materials for the prior year's annual meeting;
provided, however, that if the corporation's annual meeting of shareholders
- -------- -------
occurs on a date more than thirty (30) days earlier or later than the
corporation's prior year's annual meeting, then the corporation's Board of
Directors shall determine a date a reasonable period prior to the corporation's
annual meeting of shareholders by which date the shareholders notice must be
delivered and publicize such date in a filing pursuant to the Securities
Exchange Act of 1934, as amended, or via press release. Such publication shall
occur at least ten (10) days prior to the date set by the Board of Directors. A
shareholder's notice to the Secretary shall set forth as to each matter the
shareholder proposes to bring before the annual meeting: (i) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (ii) the name and address of
the shareholder proposing such business, (iii) the class and number of shares of
the corporation, which are beneficially owned by the shareholder, (iv) any
material interest of the shareholder in such business, and (v) any other
information that is required by law to be provided by the shareholder in his
capacity as proponent of a shareholder proposal. Notwithstanding anything in
these By-Laws to the contrary, no business shall be conducted at any annual
meeting except in accordance with the procedures set forth in this Section. The
chairman of the annual meeting shall, if the facts warrant, determine and
declare at the meeting that business was not properly brought before the meeting
and in accordance with the provisions of this Section, and, if the chairman
should so determine, the chairman shall so declare at the meeting that any such
business not properly brought before the meeting shall not be transacted.
Article XIII
MEETINGS OF DIRECTORS
Section 13.1 Place of Meetings. Unless otherwise specified in the notice
-----------------
thereof, meetings (whether regular, special or adjourned)of the Board of
Directors of this corporation shall be held at the principal office of the
corporation for the transaction of business, as specified in accordance with
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Section 1.1 hereof, which is hereby designated as an office for such purpose in
accordance with the laws of the State of California, or at any other place
within or without the State which has been designated from time to time by
resolution of the Board or by written consent of all members of the Board.
Section 13.2 Regular Meetings. Regular meetings of the Board of Directors,
----------------
of which no notice need be given except as required by the laws of the State of
California, shall be held after the adjournment of each annual meeting of the
shareholders (which meeting shall be designated the Regular Annual Meeting) and
at such other times as may be designated from time to time by resolution of the
Board of Directors.
Section 13.3 Special Meetings. Special meetings of the Board of Directors
----------------
may be called at any time by the Chairman of the Board or the President or by
any Vice President or the Secretary or by any two or more of the directors.
Section 13.4 Notice of Meetings. Except in the case of regular meetings,
------------------
notice of which has been dispensed with, the meetings of the Board of Directors
shall be held upon four days' notice by mail or 48 hours' notice delivered
personally or by telephone, telegraph or other electronic or wireless means. If
the address of a director is not shown on the records and is not readily
ascertainable, notice shall be addressed to him at the city or place in which
the meetings of the directors are regularly held. Except as set forth in Section
13.6, notice of the time and place of holding an adjourned meeting need not be
given to absent directors if the time and place be fixed at the meeting
adjourned.
Section 13.5 Quorum. A majority of the authorized number of directors
------
constitutes a Quorum of the Board for the transaction of business. Except as
otherwise expressly required by statute, the Articles of Incorporation or these
By-Laws and every act or decision done or made by a majority of the directors
present at a meeting duly held at which a quorum is present shall be regarded as
the act of the Board of Directors. A meeting at which a quorum is initially
present may continue to transact business notwithstanding the withdrawal of
directors, if any action taken is approved by at least a majority of the
required quorum for such meeting.
Section 13.6 Adjourned Meeting. A majority of the directors present,
-----------------
whether or not a quorum is present, may adjourn any meeting to another time and
place. If the meeting is adjourned for more than 24 hours, notice of any
adjournment to another time or place shall be given prior to the time of the
adjourned meeting to the directors who were not present at the time of the
adjournment.
Section 13.7 Waiver of Notice and Consent. (a) Notice of a meeting need
----------------------------
not be given to any director who signs a waiver of notice, whether before or
after the meeting, or who attends the meeting without protesting, prior thereto
or at its commencement, the lack of notice to such director.
(b) The transactions of any meeting of the Board, however called and
noticed or wherever held, are as valid as though had at a meeting duly held
after regular call and notice if a quorum is present and if, either before or
after the meeting, each of the directors not present or who, though present, has
prior to the meeting or at its commencement, protested the lack of proper notice
to him, signs a written waiver of notice, a consent to holding the meeting or an
approval of the
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minutes thereof. All such waivers, consents and approvals shall be filed with
the corporate records or made a part of the minutes of the meeting.
Section 13.8 Action Without a Meeting. Any action required or permitted to
------------------------
be taken by the Board may be taken without a meeting, if all members of the
Board shall individually or collectively consent in writing to such action. Such
written consent or consents shall be filed with the minutes of the proceedings
of the Board. Such action by written consent shall have the same force and
effect as a unanimous vote of such directors.
Section 13.9 Conference Telephone Meetings. Members of the Board may
-----------------------------
participate in a meeting through use of conference telephone or similar
communications equipment, so long as all members participating in such meeting
can hear one another. Participation in a meeting pursuant to this section
constitutes presence in person at such meeting.
Section 13.10 Meetings of Committees. The provisions of this Article apply
----------------------
also to committees of the Board and action by such committees.
Article XIV
SUNDRY PROVISIONS
Section 14.1 Instruments in Writing. All checks, drafts, demands for money
----------------------
and notes of the corporation, and all written contracts of the corporation,
shall be signed by such officer or officers, agent or agents, as the Board of
Directors may from time to time by resolution designate. No officer, agent, or
employee of the corporation shall have power to bind the corporation by contract
or otherwise unless authorized to do so by these By-Laws or by the Board of
Directors.
Section 14.2 Fiscal Year. The fiscal year of this corporation shall end on
-----------
the Saturday nearest to the last day of January of each year.
Section 14.3 Shares Held by the Corporation. Shares in other corporations
------------------------------
standing in the name of this corporation may be voted or represented and all
rights incident thereto may be exercised on behalf of this corporation by the
President or by any other officer of this corporation authorized so to do by
resolution of the Board of Directors.
Section 14.4 Certificates of Stock. There shall be issued to each holder
---------------------
of fully paid shares of the capital stock of the corporation a certificate or
certificates for such shares. Every holder of shares in the corporation shall be
entitled to have a certificate signed in the name of the corporation by the
Chairman or Vice Chairman of the Board or the President or a Vice President and
by the Chief Financial Officer or an Assistant Treasurer or the Secretary or any
Assistant Secretary, certifying the number of shares and the class or series of
shares owned by the shareholder. Any or all of the signatures on the certificate
may be facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the corporation with the same effect
as if such person were an officer, transfer agent or registrar at the date of
issue.
-17-
<PAGE>
Section 14.5 Lost Certificates. The corporation may issue a new share
-----------------
certificate or a new certificate for any other security in the place of any
certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate or the owner's legal representative to give the
corporation a bond (or other adequate security) sufficient to indemnify it
against any claim that may be made against it (including any expense or
liability) on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate. The Board of Directors may
adopt such other provisions and restrictions with reference to lost
certificates, not inconsistent with applicable law, as it shall in its
discretion deem appropriate.
Section 14.6 Certification and Inspection of By-Laws. The corporation
---------------------------------------
shall keep at its principal executive office in this State, or if its principal
executive office is not in this State at its principal business office in this
State, the original or a copy of these By-Laws as amended to date, which shall
be open to inspection by the shareholders at all reasonable times during office
hours. If the principal executive office of the corporation is outside this
State and the corporation has no principal business office in this State, it
shall upon the written request of any shareholder furnish to such shareholder a
copy of the By-Laws as amended to date.
Section 14.7 Notices. Any reference in these By-Laws to the time a notice
-------
is given or sent means, unless otherwise expressly provided, the time a written
notice by mail is deposited in the United States mails, postage prepaid; or the
time any other written notice is personally delivered to the recipient or is
delivered to a common carrier for transmission, or actually transmitted by the
person giving the notice by electronic means, to the recipient; or the time any
oral notice is communicated, in person or by telephone or wireless, to the
recipient or to a person at the office of the recipient who the person giving
wire the notice has reason to believe will promptly communicate it to the
recipient.
Section 14.8 Reports to Shareholders. Except as may otherwise be required
-----------------------
by law, the rendition of an annual report to the shareholders is waived so long
as there are less than 100 holders of record of the shares of the corporation
(determined as provided in Section 605 of the California General Corporation
Law). At such time or times, if any, that the corporation has 100 or more
holders of record of its shares, the Board of Directors shall cause an annual
report to be sent to the shareholders not later than 120 days after the close of
the fiscal year or within such shorter time period as may be required by
applicable law, and such annual report shall contain such information and be
accompanied by such other documents as may be required by applicable law.
Section 14.9 Indemnification of Officers, Directors, Employees and Other
-----------------------------------------------------------
Agents. (a) The corporation shall, to the fullest extent permissible under, and
- ------
in the manner permitted by, California law, indemnify each of its directors and
officers against "Expenses" (as defined in Section 317(a) of the California
General Corporation Law), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any "Proceeding" (as defined
in Section 317(a) of the California General Corporation Law), arising by reason
of the fact that such person is or was an Agent (as defined in Section 317(a) of
the California General Corporation Law) of the corporation. For purposes of this
Section 14.9, a "director" or "officer" of the corporation includes any person
(i) who is or was a director or officer of the corporation, (ii) who is or was
serving at the request of the corporation as a director or officer of another
corporation, partnership, joint venture, trust or other
-18-
<PAGE>
enterprise, or (iii) who was a director of officer of a corporation which was a
predecessor corporation of the corporation or of another enterprise at the
request of such predecessor corporation.
(b) The corporation shall have the power, to the fullest extent
permissible under, and in the manner permitted by, California law, to indemnify
each of its employees and other Agents against Expenses, judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any Proceeding, arising by reason of the fact that such person is or was an
employee or Agent of the corporation. For purposes of this Section 14.9, an
"employee" or "Agent" of the corporation includes any person (i) who is or was
an employee or Agent of the corporation, (ii) who is or was serving at the
request of the corporation as an employee or Agent of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee or Agent of the corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
(c) Expenses incurred in defending any civil or criminal action or
proceeding for which indemnification is required or permitted pursuant to this
Section 14.9 shall be paid by the corporation in advance of the final
disposition of such action or proceeding upon receipt of an undertaking by or on
behalf of the indemnified party to repay such amount if it shall ultimately be
determined that the indemnified party is not entitled to be indemnified as
authorized in this Section 14.9.
(d) Enforcement. Without the necessity of entering into an express
-----------
contract, all rights to indemnification and advances under this Section 14.9
shall be deemed to be contractual rights and be effective to the same extent and
as if provided for in a contract between the corporation and the director or
officer who serves in such capacity at any time while this By-Law and other
relevant provisions of the California General Corporation Law and other
applicable law, if any, are in effect. Any right to indemnification or advances
granted by this Section 14.9 to a director or officer shall be enforceable by or
on behalf of the person holding such right in any court of competent
jurisdiction if (i) the claim for indemnification or advances is denied, in
whole or in part or (ii) no disposition of such claim is made within 90 days of
request therefor. The claimant in such enforcement action (an "Action"), if
successful in whole or in part, shall be entitled to be paid also the expense of
prosecuting his claim. It shall be a defense to any Action that a claimant has
not met the standard of conduct which make it permissible under the California
General Corporation Law for the corporation to indemnify the claimant for the
amount claimed, provided that such defense shall not be available for an Action
brought to enforce a claim for the advancement of expenses pursuant to
subdivision (d) above if the claimant has tendered the required undertaking to
the corporation. It shall not be a defense to an Action, nor shall it create a
presumption that the claimant has not met the applicable standard of conduct,
that the corporation (including its Board of Directors, independent counsel or
shareholders) has failed, prior to the commencement of the Action, to have made
a determination that the indemnification of the claimant is proper in the
circumstances, or that the corporation (including its Board of Directors,
independent counsel or shareholders) has actually determined that the claimant
has not met the applicable standard of conduct.
(e) Non-Exclusivity of Rights. The rights conferred on any person by
-------------------------
this Section 14.9 shall not be exclusive of any other right which such person
may have or hereafter acquire under any statute, provision of the Articles of
Incorporation, By-Laws, agreement, vote of shareholders or
-19-
<PAGE>
disinterested directors or otherwise both as to action in his official capacity
and as to action in another capacity while holding office. The corporation is
specifically authorized to enter into individual contracts with any or all of
its directors, officers, employees or other Agents respecting indemnification
and advances, to the fullest extent permitted by the California General
Corporation Law.
(f) No indemnification or advance shall be made under this Section
14.9, except where such indemnification or advance is mandated by law or the
order, judgment or decree of any court of competent jurisdiction, in any
circumstance where it appears:
(1) That it would be inconsistent with a provision of the
Articles of Incorporation, these By-Laws, a resolution of the shareholders or an
agreement in effect at the time of the accrual of the alleged cause of the
action asserted in the proceeding in which the expenses were incurred or other
amounts were paid, which prohibits or otherwise limits indemnification; or
(2) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
(g) Survival of Rights. The rights conferred on any person by this
------------------
Section 14.9 shall continue as to a person who has ceased to be a director,
officer, employee or other Agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
(h) Insurance. The corporation shall have the power to purchase and
---------
maintain insurance on behalf of any person who is or was an Agent of the
corporation against any liability asserted against or incurred by such person in
such capacity or arising out of such person's status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of this Section 14.9.
(i) Repeal or Modification. Any repeal or modification of this
----------------------
Section 14.9 shall not adversely affect any rights under this Section 14.9 of
any director, officer or other Agent of the corporation relating to acts or
omissions occurring prior to such repeal or modification.
(j) Saving Clause. If this Section 14.9 or any portion hereof shall
-------------
be invalidated on any ground by any court of competent jurisdiction, then the
corporation shall nevertheless indemnify each director or officer, any may
nevertheless indemnify any employee or other Agent, to the full extent permitted
by any applicable portion of this Section 14.9 that shall not have been
invalidated, or by any other applicable law.
(k) If the California General Corporation Law is hereafter amended to
further indemnification of Agents of the corporation, then the Corporation shall
be authorized to indemnify such Agents to the fullest extent permissible under
the California General Corporation Law as so amended.
-20-
<PAGE>
Article XV
CONSTRUCTION OF BY-LAWS WITH REFERENCE TO PROVISIONS OF LAW
Section 15.1 Definitions. Unless defined otherwise in these By-Laws or
-----------
unless the context otherwise requires, terms used herein shall have the same
meaning, if any, ascribed thereto in the California General Corporation Law, as
amended from time to time.
Section 15.2 By-Law Provisions Additional and Supplemental to Provisions
-----------------------------------------------------------
of Law. All restrictions, limitations, requirements and other provisions of
- ------
these By-Laws shall be construed, insofar as possible, as supplemental and
additional to all provisions of law applicable to the subject matter thereof and
shall be fully complied with in addition to the said provisions of law unless
such compliance shall be illegal.
Section 15.3 By-Law Contrary to or Inconsistent with Provisions of Law.
---------------------------------------------------------
Any article, section, subsection, subdivision, sentence, clause or phrase of
these By-Laws which upon being construed in the manner provided in Section 15.2
hereof, shall be contrary to or inconsistent with any applicable provision of
law, shall not apply so long as said provisions of law shall remain in effect,
but such result shall not affect the validity or applicability of any other
portions of these By-Laws, it being hereby declared that these By-Laws would
have been adopted and each article, section, subsection, subdivision, sentence,
clause or phrase thereof, irrespective of the fact that any one or more
articles, sections, subsections, subdivisions, sentences, clauses or phrases is
or are illegal.
Article XVI
ADOPTION, AMENDMENT OR REPEAL OF BY-LAWS
Section 16.1 By Shareholders. Except as otherwise expressly required by
---------------
statute, the Articles of Incorporation or these By-Laws, By-Laws may be adopted,
amended or repealed by the approval of the affirmative vote of a majority of the
outstanding shares of the corporation entitled to vote.
Section 16.2 By the Board of Directors. Except as otherwise expressly
-------------------------
required by statute, the Articles of Incorporation or these By-Laws and subject
to the right of shareholders to adopt, amend or repeal By-Laws, By-Laws other
than a By-Law or amendment thereof changing the authorized number of directors
(except to fix the authorized number of directors pursuant to a By-Law providing
for a variable number of directors) may be adopted, amended or repealed by the
Board of Directors.
-21-
<PAGE>
EXHIBIT 13
TABLE OF CONTENTS
=================
8 LETTER FROM THE CHAIRMAN
10 ABOUT COST PLUS WORLD MARKET
12 FINANCIAL HIGHLIGHTS
13 FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
14 MANAGEMENT'S DISCUSSION AND ANALYSIS
19 CONSOLIDATED BALANCE SHEETS
20 CONSOLIDATED STATEMENTS OF OPERATIONS
21 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
22 CONSOLIDATED STATEMENTS OF CASH FLOWS
23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
32 INDEPENDENT AUDITORS' REPORT
33 DIRECTORS, OFFICERS AND CORPORATE DATA
34 SUMMARY OF STORE LOCATIONS
COST PLUS, INC. 7
<PAGE>
LETTER FROM THE CHAIRMAN
========================
[PHOTO]
Murray H. Dashe
Chairman of the Board, Chief
Executive Officer and President
DEAR SHAREHOLDERS
=================
It was a good year for retailing and a great year for Cost Plus World Market.
Operating in a strong economic environment, we sharpened our focus, refining the
unique shopping experience which has tantalized our customers for more than four
decades. In the process, we achieved record financial results, excellent sales
growth and continued to expand our national network of stores.
Our sales grew by nearly 28% in fiscal 1999 to $402.3 million, fueled by a
21% increase in our store base and an 8.6% increase in same-store sales - the
highest growth rate we've achieved in this key measure of retail performance in
the past nine years. As our store count increased, so did our operating
leverage. We reduced SG&A expenses as a percentage of total sales from 28.3% to
27.4%, the eighth consecutive year of improvement. Together, these
accomplishments produced another year of record earnings for Cost Plus World
Market. Net income rose 48.7% to $19.7 million. Earnings per share increased
43.1% to $0.93.
This performance says a lot about the freshness and versatility of our basic
retail concept, even after more than 41 years in business. We still come to work
each day determined to bring the world to our customers in new and exciting
ways. That's why we regularly travel to more than 50 countries,
8 COST PLUS, INC.
<PAGE>
assembling an ever-changing array of unique, often handcrafted, and always
high-value merchandise to furnish and accessorize their homes and to meet their
entertaining needs. And that's why we strive to offer this merchandise in a
marketplace atmosphere that is as intriguing and entertaining as the products it
features.
But there's clearly more to successful retailing than a strong concept. The
hallmark of a truly great retail enterprise matches merchandising creativity
with consistent execution.
For us at Cost Plus World Market, that means striving each day to manage our
organization with the same fresh thinking, attention to detail and value
orientation that our customers have come to expect in a visit to one of our
stores. We place a high priority on cost-effective marketing, merchandising and
distribution strategies. We make regular investments in infrastructure,
technology and management talent to help ensure that our existing stores operate
efficiently. And we firmly believe in disciplined and fiscally prudent growth,
resulting in a national expansion program financed largely from internal cash
flow.
Last year, we opened 18 new stores and introduced Cost Plus World Market into
five new metropolitan markets: Spokane, Washington; Reno, Nevada; Columbus and
Cleveland, Ohio; and Lansing, Michigan. Whether single or multiple store
openings were involved, in existing markets and new, we achieved or exceeded our
internal pro forma sales expectations. That's encouraging evidence that our
retailing concept retains its broad appeal as we expand across the country, and
that our management team continues to build the expertise and resources needed
to manage our organization effectively as we grow.
Make no mistake. There's no resting around here on our rattan papasan chairs,
no matter how comfortable they may be. There is simply no room for "business as
usual" thinking in our highly competitive and constantly changing industry.
The enduring appeal of our time-tested, value-oriented strategy is
continually updated with the introduction of new products, categories, and
methods of marketing. The 24 new stores we plan to build during the year 2000
and the 30 new stores planned for 2001, will incorporate our latest merchandise
discoveries, tested in 1999, as well as some still in development.
Any retail enterprise which can successfully increase its overall
profitability while negotiating the challenges that accompany high growth, is
better prepared than most to capitalize on the opportunities of the future.
As we conclude a remarkable decade of ever-increasing sales and
profitability, it is only appropriate to thank those who have supported us on
this journey-our customers, our employees, and our shareholders.
/s/ Murray Dashe
Murray H. Dashe
Chairman, Chief Executive Officer and President
COST PLUS, INC. 9
<PAGE>
ABOUT COST PLUS WORLD MARKET
============================
Consistency is one hallmark of a great retailing concept. For nine consecutive
years, Cost Plus World Market has produced annual same-store sales growth at or
above 5%.
Here are three more such hallmarks. Unique, ever-changing products. Fun,
adventure-filled shopping. Prudent national expansion.
FIFTY COUNTRIES, ONE STORE
Unique character, international flavor, endless variety, value pricing-these are
the qualities that have attracted customers to Cost Plus World Market for more
than four decades and are difficult for our competitors to replicate.
Our stores overflow with the bright colors, rich textures and enticing aromas
of products sourced from more than 50 countries. We stock the aisles with a
constantly evolving line of furnishings, kitchen accessories, gifts, food and
beverage that are the perfect complement to today's casual,
FIVE YEAR COMPOUND
ANNUAL GROWTH RATES
(1995-1999)
[GRAPH]
STORES 19%
SALES 22%
OPERATING INCOME 33%
NET INCOME 61%
10 COST PLUS, INC.
<PAGE>
home-oriented lifestyles. Many of our supplier relationships span decades. Many
of our product lines are crafted exclusively for Cost Plus World Market. All are
spiced with a hint of the exotic, a sense of hand-craftsmanship and a hearty
dose of value. Our customers are regularly delighted with the endless variety of
products they find on a visit to one of our stores. However, one item that never
changes is our competitive pricing.
TREASURE-HUNT SHOPPING
There's always something new at a Cost Plus World Market. Discovering recent
additions to our colorful array of merchandise from around the world is all part
of the fun.
The atmosphere in our stores encourages such treasure hunting. They're
designed with exposed beam ceilings, concrete floors and a decided air of
informality. Baskets, barrels and crates overflow with merchandise. Strong focal
points on walls, ceilings and shelf-top displays provide helpful visual cues to
guide shoppers from one key product line to another. Our latest is a home office
collection, offering everything from desks to waste baskets. With so many
tantalizing sights and sounds to captivate the senses, it's hard to resist the
impulse to browse. That means plenty of impulse buying and regular, repeat trips
to our stores, and that is why Cost Plus World Market shoppers spend an average
of 50 minutes per visit.
A GROWING NATIONAL PRESENCE
Five new metropolitan regions were introduced to Cost Plus World Market in 1999,
as our national development program continued its march across the United
States. In total, our store base grew 21% last year, the fifth consecutive year
of double-digit expansion.
Profitable growth, achieved market by market and store by store, is a guiding
principle of our nationwide expansion program. To achieve this goal, we often
cluster store openings in new cities to achieve immediate economies of scale,
and regularly add stores to existing markets to maximize penetration. Rigorous
internal performance standards require that new stores achieve operating margins
comparable to existing stores within three years. Again, in 1999, that objective
was achieved.
================================================================================
Our store base grew 21% last year, the fifth consecutive year of double-digit
expansion.
================================================================================
COST PLUS, INC. 11
<PAGE>
FINANCIAL HIGHLIGHTS
====================
<TABLE>
<CAPTION>
Pro Forma
Twelve Month
Fiscal Year Period Ended
(In thousands, except per share -------------------------------------------- February 3,
and selected operating data) 1999 1998 1997 1996 1996/1/
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $402,292 $315,135 $260,494 $214,814 $182,845
Income from operations 33,130 22,924 18,118 15,040 11,599
Net income 19,685 13,236 10,007 7,427 3,816
Net income per share - diluted/2/ $ 0.93 $ 0.65 $ 0.51 $ 0.41 $ 0.28
- ----------------------------------------------------------------------------------------------------
Selected Operating Data:
Number of stores open
(at period end) 103 85 70 58 49
Average sales per selling square foot/3/ $ 269 $ 258 $ 259 $ 252 $ 238
Comparable store sales increase/4/ 8.6% 5.5% 7.0% 6.1% 6.1%
- ----------------------------------------------------------------------------------------------------
Balance Sheet Data (at period end):
Working capital $ 80,663 $ 61,031 $ 52,630 $ 24,807 $ 11,102
Total assets 214,699 173,141 152,000 128,198 105,986
Note payable and capital lease
obligations, less current portion 14,416 15,110 15,692 14,215 34,528
Total shareholders' equity 138,335 109,403 95,609 73,209 36,359
Current ratio 2.47 2.43 2.52 1.72 1.39
Debt to equity ratio 10.9% 14.3% 16.9% 20.0% 104.6%
====================================================================================================
</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 comparative purposes, the 1995
results have been restated on a twelve month (54 week) pro forma basis. All
other fiscal years presented consisted of 52 weeks.
/2/ Per share data are restated for a three-for-two common stock split effective
March 11, 1999 and a three-for-two common stock split effective
October 11, 1999.
/3/ Calculated using net sales for stores open during the entire period divided
by the selling square feet of such stores.
/4/ A store is considered as comparable at the beginning of its fourteenth full
month of operation.
NET SALES
(dollars in millions)
Fiscal Years 1995-1999/1/
[GRAPH]
1995 182.8
1996 214.8
1997 260.5
1998 315.1
1999 402.3
OPERATING INCOME
(dollars in millions)
Fiscal Years 1995-1999/1/
[GRAPH]
1995 11.6
1996 15.0
1997 18.1
1998 22.9
1999 33.1
NET INCOME
(dollars in millions)
Fiscal Years 1995-1999/1/
[GRAPH]
1995 3.8
1996 7.4
1997 10.0
1998 13.2
1999 19.7
12 COST PLUS, INC.
<PAGE>
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
============================================
<TABLE>
<CAPTION>
Pro Forma
Twelve Month Eleven Month
Fiscal Year Period Ended Period Ended
(In thousands, except per share --------------------------------------------- February 3, February 3,
and selected operating data) 1999 1998 1997 1996 1996/1/ 1996/1/
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $402,292 $315,135 $260,494 $214,814 $182,845 $171,548
Cost of sales and occupancy 255,383 200,023 164,394 135,072 115,516 107,800
- --------------------------------------------------------------------------------------------------------------
Gross profit 146,909 115,112 96,100 79,742 67,329 63,748
Selling, general and
administrative expenses 110,108 89,261 75,238 62,649 54,110 50,194
Store preopening expenses 3,671 2,927 2,744 2,053 1,620 1,620
- --------------------------------------------------------------------------------------------------------------
Income from operations 33,130 22,924 18,118 15,040 11,599 11,934
Net interest expense 859 1,226 1,679 2,451 5,131 4,843
- --------------------------------------------------------------------------------------------------------------
Income before income taxes 32,271 21,698 16,439 12,589 6,468 7,091
Income taxes 12,586 8,462 6,432 5,162 2,652 2,909
- --------------------------------------------------------------------------------------------------------------
Net income $ 19,685 $ 13,236 $ 10,007 $ 7,427 $ 3,816 $ 4,182
==============================================================================================================
Net income per share - diluted/2/ $ 0.93 $ 0.65 $ 0.51 $ 0.41 $ 0.28 $ 0.30
Weighted average shares
outstanding - diluted/2/ 21,189 20,363 19,574 18,237 13,845 13,845
==============================================================================================================
Selected Operating Data:
Percent of sales:
Gross profit 36.5% 36.5% 36.9% 37.1% 36.8% 37.2%
Selling, general and
administrative expenses 27.4% 28.3% 28.9% 29.2% 29.6% 29.3%
Income from operations 8.2% 7.3% 7.0% 7.0% 6.3% 6.9%
Number of stores:
Opened during period 18 15 12 9 6 6
Closed during period -- -- -- -- -- --
Open at end of period 103 85 70 58 49 49
Average sales per
selling square foot/3/ $ 269 $ 258 $ 259 $ 252 $ 238 $ 228
Comparable store sales increase/4/ 8.6% 5.5% 7.0% 6.1% 6.1% 6.6%
==============================================================================================================
Balance Sheet Data (at period end):
Working capital $ 80,663 $ 61,031 $ 52,630 $ 24,807 $ 11,102 $ 11,102
Total assets 214,699 173,141 152,000 128,198 105,986 105,986
Note payable and capital
lease obligations,
less current portion 14,416 15,110 15,692 14,215 34,528 34,528
Total shareholders' equity 138,335 109,403 95,609 73,209 36,359 36,359
Current ratio 2.47 2.43 2.52 1.72 1.39 1.39
Debt to equity ratio 10.9% 14.3% 16.9% 20.0% 104.6% 104.6%
==============================================================================================================
</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/ Per share data are restated for a three-for-two common stock split effective
March 11, 1999 and a three-for-two common stock split effective
October 11, 1999.
/3/ Calculated using net sales for stores open during the entire period divided
by the selling square feet of such stores.
/4/ A store is considered as comparable at the beginning of its fourteenth full
month of operation.
COST PLUS, INC. 13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
==========================================================================
An asterisk "*" denotes a forward-looking statement reflecting current
expectations that involve risks and uncertainties. Actual results may differ
materially from those discussed in such forward-looking statements, and
shareholders of Cost Plus, Inc. (the "Company" or "Cost Plus") should carefully
review the cautionary statements set forth in this Annual Report, including
"Quarterly Results and Seasonality" beginning on page 16. The Company may from
time to time make additional written and oral forward-looking statements,
including statements contained in the Company's filings with the Securities and
Exchange Commission and in its reports to shareholders. The Company does not
undertake to update any forward-looking statement that may be made from time to
time by or on behalf of the Company.
RESULTS OF OPERATIONS
FISCAL 1999 COMPARED TO FISCAL 1998
Net Sales
Net sales increased $87.2 million, or 27.7%, to $402.3 million in fiscal 1999
from $315.1 million in fiscal 1998. The increase in net sales was attributable
to new stores and an increase in comparable store sales. Comparable store sales
rose 8.6% for fiscal 1999, as a result of a larger average transaction size and
an increase in customer count. As of January 29, 2000, the Company operated 103
stores compared to 85 stores as of January 30, 1999.
Gross Profit
As a percentage of net sales, gross profit was 36.5% in both fiscal 1999 and
fiscal 1998.Improvements in merchandise margin offset higher occupancy costs in
new stores. New stores generally have higher occupancy costs, as a percentage of
net sales, until they reach maturity. The improvements in merchandise margin
percentage resulted primarily from lower markdowns and an increase in initial
markon.
Selling, General and Administrative ("SG&A") Expenses
As a percentage of net sales, SG&A expenses decreased to 27.4% in the current
fiscal year from 28.3% last fiscal year. The decrease in the SG&A expense rate
resulted primarily from leveraging store payroll, advertising expense, corporate
overhead and store expenses against higher net sales and an expanded base of
stores.
Store Preopening Expenses
Store preopening expenses, which include grand opening advertising and
preopening merchandise setup expenses, were $3.7 million in fiscal 1999 and $2.9
million in fiscal 1998. Expenses vary depending on the particular store site and
whether it is located in a new or existing market. The Company opened 18 stores
in fiscal 1999 compared to 15 stores in fiscal 1998.
Net Interest Expense
Net interest expense, which includes interest on capital leases and interest
expense net of interest income, was $859,000 in fiscal 1999 and $1.2 million in
fiscal 1998. The decrease in net interest expense was due to higher cash
balances primarily resulting from higher operating cash flows and higher
proceeds from the issuance of common stock in connection with the Company's
stock option and stock purchase plans.
Income Taxes
The Company's effective tax rate was 39% in both fiscal 1999 and fiscal 1998.
14 COST PLUS, INC.
<PAGE>
FISCAL 1998 COMPARED TO FISCAL 1997
Net Sales
Net sales increased $54.6 million, or 21.0%, to $315.1 million in fiscal 1998
from $260.5 million in fiscal 1997. The increase in net sales was attributable
to new stores and an increase in comparable store sales. Comparable store sales
rose 5.5% for fiscal 1998, primarily as a result of a larger average transaction
size. As of January 30, 1999, the Company operated 85 stores compared to 70
stores as of January 31, 1998.
Gross Profit
As a percentage of net sales, gross profit was 36.5% in fiscal 1998 compared
with 36.9% in fiscal 1997. The decrease in gross profit rate resulted from
higher occupancy costs in new stores, partially offset by an improvement in
initial markon and lower inventory shrinkage. New stores generally have higher
occupancy costs, as a percentage of net sales, until they reach maturity.
Selling, General and Administrative ("SG&A") Expenses
As a percentage of net sales, SG&A expenses decreased to 28.3% in fiscal 1998
from 28.9% in fiscal 1997. The decrease in the SG&A expense rate resulted
primarily from leveraging store payroll and corporate overhead expenses against
higher sales.
Store Preopening Expenses
Store preopening expenses, which include grand opening advertising and
preopening merchandise setup expenses, were $2.9 million in fiscal 1998 and $2.7
million in fiscal 1997. Expenses vary depending on the location of a store and
whether it is located in a new or existing market.The Company opened 15 stores
in fiscal 1998 compared to 12 stores in the prior fiscal year.
Net Interest Expense
Net interest expense, which includes interest on capital leases and interest
expense net of interest income, was $1.2 million in fiscal 1998 compared to $1.7
million in fiscal 1997. This decrease in expense resulted from higher interest
income and lower average borrowings throughout the year due to cash generated
from the sale of the Company's San Francisco property and the leaseback of its
store facility in September 1997 and to proceeds from a secondary offering of
the Company's common stock in October 1997.
Income Taxes
The Company's effective tax rate was 39% in both fiscal 1998 and fiscal 1997.
INFLATION
The Company does not believe that inflation has had a material effect on its
financial condition and results of operations during the past three fiscal
years. However, there can be no assurance that the Company's business will not
be affected by inflation in the future.
COST PLUS, INC. 15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
==========================================================================
QUARTERLY RESULTS AND SEASONALITY
The following table sets forth the Company's unaudited quarterly operating
results for its eight most recent quarterly periods.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------
(In thousands, except per share data May 1, July 31, Oct. 30, Jan. 29,
and number of stores) 1999 1999 1999 2000
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 75,389 $ 76,556 $ 82,834 $167,513
Gross profit 25,864 26,540 29,008 65,497
Net income 707 1,108 478 17,392
Net income per share/1/
Basic $ 0.04 $ 0.05 $ 0.02 $ 0.85
Diluted $ 0.03 $ 0.05 $ 0.02 $ 0.82
Number of stores open at end of period 90 94 99 103
<CAPTION>
Three Months Ended
------------------------------------------
(In thousands, except per share data May 2, Aug.1, Oct. 31, Jan. 30,
and number of stores) 1998 1998 1998 1999
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 56,839 $ 58,168 $ 66,689 $133,439
Gross profit 19,067 20,089 23,013 52,943
Net income (loss) 292 105 (782) 13,621
Net income (loss) per share/1/
Basic $ 0.01 $ 0.01 $ (0.04) $ 0.69
Diluted/2/ $ 0.01 $ 0.01 $ (0.04) $ 0.67
Number of stores open at end of period 71 74 82 85
</TABLE>
/1/ Per share data are restated for a three-for-two common stock split effective
March 11, 1999 and a three-for-two common stock split effective
October 11, 1999.
/2/ Loss quarters exclude common stock equivalents since they are antidilutive.
The Company's business is highly seasonal, reflecting the general pattern
associated with the retail industry of peak sales and earnings during the
Christmas season. Due to the importance of the Christmas selling season, the
fourth quarter of each fiscal year has historically contributed, and the Company
expects it will continue to contribute, a disproportionate percentage of the
Company's net sales and most of its net income for the entire fiscal year.* Any
factors negatively affecting the Company during the Christmas selling season in
any year, including unfavorable economic conditions, could have a material
adverse effect on the Company's financial condition and results of
operations. The Company generally experiences lower sales and earnings during
the first three quarters and, as is typical in the retail industry, may incur
losses in these quarters. The results of operations for interim periods are not
necessarily indicative of the results for a full fiscal year. In addition, the
Company makes decisions regarding merchandise well in advance of the season in
which it will be sold, particularly for the Christmas selling season.
Significant deviations from projected demand for products could have a material
adverse effect on the Company's financial condition and results of operations,
either by lost sales due to insufficient inventory or lost gross margin due to
the need to mark down excess inventory.
The Company's quarterly results of operations may also fluctuate based upon such
factors as the number and timing of store openings and related store preopening
expenses, the amount of net sales contributed by new and existing stores, the
mix of products sold, the timing and level of promotional activity, store
closings, refurbishments or relocations, competitive factors and general
economic conditions.
16 COST PLUS, INC.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary uses for cash are to fund operating expenses, inventory
requirements and new store expansion. Historically, the Company has financed its
operations primarily from internally generated funds and borrowings under its
credit facilities. The Company believes that the combination of its cash and
cash equivalents, internally generated funds and available borrowings under its
revolving line of credit will be sufficient to finance its working capital and
capital expenditure requirements for at least the next 12 months.*
Net cash provided by operating activities totaled $22.4 million for fiscal 1999,
an increase of $5.8 million from fiscal 1998. This increase resulted primarily
from improved profitability.
Net cash used in investing activities, primarily for new stores, totaled $17.0
million in fiscal 1999 compared to $14.6 million in 1998. The Company estimates
that fiscal 2000 capital expenditures will approximate $25.5 million.*
Net cash provided by financing activities was $4.4 million in fiscal 1999, which
was primarily proceeds from the issuance of common stock in connection with the
Company's stock option and stock purchase plans. Net cash used in financing
activities was $894,000 in fiscal 1998, primarily as a result of the repurchase
of 337,503 shares of common stock for $3.8 million from the Company's former
Chief Executive Officer, which was partially offset by proceeds from common
stock issued under the Company's stock option and stock purchase plans.
On October 12, 1998, the Company entered into a revolving line of credit
agreement with a bank, which was amended on June 15, 1999 and which expires
June 1, 2000.The amended agreement allows for cash borrowings and letters of
credit of up to $20.0 million from January 1 through June 30 and up to $40.0
million from July 1 through December 31 of each year. Interest is paid monthly
at the bank's reference rate minus 0.5% (8.0% at January 29, 2000) or IBOR plus
1.125%, depending on the nature of the borrowings. The agreement is secured by
the Company's inventory and receivables. The Company is subject to certain
financial covenants customary with such agreements. At January 29, 2000, the
Company had no outstanding borrowings under the line of credit and $3.6 million
outstanding under letters of credit. The Company expects to be able to refinance
this credit facility, in the ordinary course of business, prior to its
expiration date.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in either assets or liabilities. As amended in June 1999 by
SFAS No.137, this statement is effective for fiscal years beginning after June
15, 2000 and is not to be applied retroactively to financial statements for
prior periods. Since the Company does not engage in derivative or hedging
activities, application of the standard would not have a material effect on the
Company's consolidated financial position, results of operations or cash flows.
COST PLUS, INC. 17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
=======================================================================
QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
==========================================================================
The Company is exposed to market risks, which include changes in U.S. interest
rates and, to a lesser extent, foreign exchange rates. The Company does not
engage in financial transactions for trading or speculative purposes.
Interest rate risk
The interest payable on the Company's bank line of credit is based on variable
interest rates and is therefore affected by changes in market interest rates. If
interest rates on existing variable rate debt were to rise 80 basis points (a
10% change from the Company's borrowing rate as of January 29, 2000), the
Company's results of operations and cash flows would not be materially affected.
In addition, the Company has fixed and variable income investments consisting of
cash equivalents and short-term investments which are also affected by changes
in market interest rates. The Company does not use derivative financial
instruments in its investment portfolio.
Foreign currency risks
The Company enters into a significant amount of purchase obligations outside of
the United States which are settled in U.S. Dollars and, therefore, has only
minimal exposure to foreign currency exchange risks. The Company does not hedge
against foreign currency risks and believes that foreign currency exchange risk
is immaterial.
STOCK ACTIVITY
The Company's common stock is currently traded on the over-the-counter market
and is quoted on the Nasdaq National Market under the symbol "CPWM." The
following table sets forth the high and low closing sales prices, for the
periods indicated, as reported by the Nasdaq National Market. Per share data are
restated for a three-for-two common stock split effective March 11, 1999 and a
three-for-two common stock split effective October 11,1999.
As of March 10,2000, the Company had 46 shareholders of record. This number
excludes individual shareholders holding stock in nominee or street name by
brokers. The Company's present policy is to retain its earnings to finance
growth, and it does not intend to pay cash dividends.
Price Range
-----------------------
High Low
- --------------------------------------------------------------------------------
Fiscal Year Ended January 29, 2000
First Quarter $24.17 $15.11
Second Quarter 33.42 20.92
Third Quarter 38.03 26.58
Fourth Quarter 39.94 17.44
Fiscal Year Ended January 30, 1999
First Quarter $15.11 $10.11
Second Quarter 15.55 12.61
Third Quarter 14.19 10.55
Fourth Quarter 16.11 13.11
18 COST PLUS, INC.
<PAGE>
CONSOLIDATED BALANCE SHEETS
===========================
January 29, January 30,
(Dollars in thousands, except per share amounts) 2000 1999
- --------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 38,411 $ 28,600
Merchandise inventories 91,402 70,680
Other current assets 5,654 4,553
- --------------------------------------------------------------------------------
Total current assets 135,467 103,833
Property and equipment, net 67,520 59,034
Other assets, net 11,712 10,274
- --------------------------------------------------------------------------------
Total assets $214,699 $173,141
================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 26,061 $ 17,568
Income taxes payable 9,237 8,180
Accrued compensation 8,909 7,421
Other current liabilities 10,597 9,633
- --------------------------------------------------------------------------------
Total current liabilities 54,804 42,802
Capital lease obligations 14,416 15,110
Other long-term obligations 7,144 5,826
Shareholders' equity:
Preferred stock, $.01 par value: 5,000,000
shares authorized; none issued and outstanding -- --
Common stock, $.01 par value: 67,500,000 shares
authorized; issued and outstanding 20,521,884
and 19,936,517 shares 205 199
Additional paid-in capital 113,240 103,999
Retained earnings 24,890 5,205
- --------------------------------------------------------------------------------
Total shareholders' equity 138,335 109,403
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $214,699 $173,141
================================================================================
See notes to consolidated financial statements.
COST PLUS, INC. 19
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
=====================================
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------
January 29, January 30, January 31,
(In thousands, except per share amounts) 2000 1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $402,292 $315,135 $260,494
Cost of sales and occupancy 255,383 200,023 164,394
- -------------------------------------------------------------------------------------
Gross profit 146,909 115,112 96,100
Selling, general and administrative expenses 110,108 89,261 75,238
Store preopening expenses 3,671 2,927 2,744
- -------------------------------------------------------------------------------------
Income from operations 33,130 22,924 18,118
Net interest expense 859 1,226 1,679
- -------------------------------------------------------------------------------------
Income before income taxes 32,271 21,698 16,439
Income taxes 12,586 8,462 6,432
- -------------------------------------------------------------------------------------
Net income $ 19,685 $ 13,236 $ 10,007
=====================================================================================
Net income per share
Basic $ 0.97 $ 0.67 $ 0.53
Diluted $ 0.93 $ 0.65 $ 0.51
=====================================================================================
Weighted average shares outstanding
Basic 20,321 19,724 18,734
Diluted 21,189 20,363 19,574
====================================================================================
</TABLE>
See notes to consolidated financial statements.
20 COST PLUS, INC.
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
==============================================
<TABLE>
<CAPTION>
Common Stock Additional Retained Total
-------------------- Paid-in Earnings Shareholders'
(In thousands, except shares) Shares Amount Capital (Deficit) Equity
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at February 1,1997 18,224,641 $182 $ 91,065 $(18,038) $ 73,209
Secondary public offering, net of related costs 900,000 9 10,358 10,367
Stock issued under Employee Stock Purchase Plan 21,711 -- 191 191
Exercise of stock options 402,749 4 1,278 1,282
Tax effect of disqualifying stock dispositions 553 553
Net income 10,007 10,007
- ----------------------------------------------------------------------------------------------------------------
Balance at January 31,1998 19,549,101 195 103,445 (8,031) 95,609
Repurchase of stock (337,503) (3) (3,747) (3,750)
Stock issued under Employee Stock Purchase Plan 16,889 -- 195 195
Exercise of stock options 708,030 7 3,149 3,156
Tax effect of disqualifying stock dispositions 957 957
Net income 13,236 13,236
- ----------------------------------------------------------------------------------------------------------------
Balance at January 30,1999 19,936,517 199 103,999 5,205 109,403
Stock issued under Employee Stock Purchase Plan 9,332 -- 249 249
Exercise of stock options 576,035 6 4,761 4,767
Tax effect of disqualifying stock dispositions 4,231 4,231
Net income 19,685 19,685
- ----------------------------------------------------------------------------------------------------------------
Balance at January 29, 2000 20,521,884 $205 $113,240 $ 24,890 $138,335
================================================================================================================
</TABLE>
See notes to consolidated financial statements.
COST PLUS, INC. 21
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------
January 29, January 30, January 31,
(In thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 19,685 $ 13,236 $ 10,007
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 11,052 9,116 7,939
Loss on disposal of property and equipment 173 120 62
Deferred income taxes (2,425) (1,927) (1,513)
Changes in assets and liabilities:
Merchandise inventories (20,722) (14,074) (14,001)
Other assets (997) (990) (1,489)
Accounts payable 6,515 4,400 (1,019)
Other liabilities 9,119 6,734 2,522
- --------------------------------------------------------------------------------------------------
Net cash provided by operating activities 22,400 16,615 2,508
- --------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Purchases of property and equipment (17,023) (14,555) (11,490)
Proceeds from the sale of property -- -- 10,618
- --------------------------------------------------------------------------------------------------
Net cash used in investing activities (17,023) (14,555) (872)
- --------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Principal payments on capital lease obligations (582) (494) (440)
Proceeds from the issuance of common stock 5,016 3,350 11,840
Cash used for common stock repurchase -- (3,750) --
- --------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 4,434 (894) 11,400
- --------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 9,811 1,166 13,036
Cash and cash equivalents:
Beginning of period 28,600 27,434 14,398
- --------------------------------------------------------------------------------------------------
End of period $ 38,411 $ 28,600 $ 27,434
==================================================================================================
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 960 $ 1,230 $ 1,667
==================================================================================================
Cash paid for taxes $ 9,724 $ 7,533 $ 7,204
==================================================================================================
</TABLE>
See notes to consolidated financial statements.
22 COST PLUS, INC.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business
Cost Plus, Inc. and subsidiaries (the"Company") is a specialty retailer of
casual home living and entertaining products. At January 29, 2000, the Company
operated 103 stores under the names "World Market," "Cost Plus World Market,"
"Cost Plus" and "Cost Plus Imports" in 16 states, primarily in the western
United States. The Company's product offerings are designed to provide solutions
to customers' casual home furnishing and home entertaining needs. The offerings
include home decorating items such as furniture and rugs, as well as a variety
of tabletop and kitchen products. Cost Plus World Market stores also offer a
number of gift and decorative accessories including collectibles, cards,
wrapping paper and other seasonal items. In addition, Cost Plus World Market
offers its customers a wide selection of gourmet foods and beverages, including
wine, micro-brewed and imported beer, coffee and tea. The Company accounts for
its operations as one operating segment.
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. Certain reclassifications have been made in prior years'
financial statements to conform with current year classifications.
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, including disclosures of
contingent assets and liabilities, at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. A provision for sales
returns is estimated and recorded in the current year based on actual returns
subsequent to year end.
Fair Value of Financial Instruments
The carrying value of current assets and current liabilities approximates their
fair market value.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less as cash equivalents.
Merchandise Inventories
Inventories are stated at the lower of cost or market as determined under the
retail inventory method. Cost includes certain buying and distribution costs
related to the procurement, processing and transportation of merchandise.
Property and Equipment
Furniture, fixtures and equipment are stated at cost and depreciated using the
straight-line method over their estimated useful lives, which is generally five
years. Buildings and leasehold improvements are amortized on a straight-line
basis over the lesser of the related lease terms or their useful lives.
Capital Leases
Noncancelable leases which meet the criteria of capital leases are capitalized
as assets and amortized on a straight-line basis over their related lease terms.
COST PLUS, INC. 23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
======================================================
Other Assets
Goodwill is amortized on a straight-line basis over 40 years. Lease rights and
interests are amortized on a straight-line basis over their related lease terms.
Long Lived Assets
The Company's policy is to review annually the recoverability of all long-lived
assets and whenever events or changes indicate that the carrying amount of an
asset may not be recoverable. Based upon the Company's review as of January
29, 2000 and January 30,1999, no material adjustments to the carrying value of
such assets were necessary.
Deferred Rent
Certain of the Company's operating leases contain predetermined fixed
escalations of minimum rentals during the initial term. For these leases, the
Company recognizes the related rental expense on a straight-line basis over the
life of the lease and records the difference between amounts charged to
operations and amounts paid as deferred rent. As part of its lease agreements,
the Company may receive certain lease incentives, primarily construction
allowances. These allowances are also deferred and are amortized on a
straight-line basis over the life of the lease as a reduction of rent expense.
Advertising Expense
Advertising costs are expensed as incurred. For the fiscal years ended January
29, 2000, January 30,1999 and January 31, 1998, advertising costs were
$21,651,000, $17,371,000 and $14,202,000, respectively.
Store Preopening Expenses
Store preopening expenses include grand opening advertising, labor, travel and
hiring expenses and are expensed as incurred.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentration of
credit risk, consist principally of cash and cash equivalents. The Company
places its cash with high quality financial institutions. At times, such
balances may be in excess of FDIC insurance limits.
Income Taxes
Income taxes are accounted for using an asset and liability approach that
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
consolidated financial statements or tax returns. In estimating future tax
consequences, all expected future events are taken into consideration except for
changes in the tax laws or rates.
Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," requires that all items recognized under accounting standards as
components of comprehensive income be reported in an annual financial statement
that is displayed with the same prominence as other financial statements. The
Company's comprehensive income and net income are the same.
Stock Splits
On February 16,1999, the Company's Board of Directors authorized a three-for-two
split of its common stock effective March 11, 1999 for shareholders of record at
the close of business on March 1, 1999. On September 16,1999, the Company's
Board of Directors authorized a three-for-two split of its common stock
effective October 11,1999 for
24 COST PLUS, INC.
<PAGE>
shareholders of record at the close of business on October 1,1999. All share and
per share data in the accompanying consolidated financial statements and notes
have been restated to reflect both of these stock splits. As a result of these
splits, the Company's authorized common stock was increased to 67,500,000
shares.
Net Income per Share
The following is a reconciliation of the weighted average number of shares (in
thousands) used in the Company's Basic and Diluted per share computations.
Fiscal Year Ended
---------------------------------------
January 29, January 30, January 31,
2000 1999 1998
- --------------------------------------------------------------------------------
Basic shares 20,321 19,724 18,734
Effect of dilutive stock options 868 639 840
- --------------------------------------------------------------------------------
Diluted shares 21,189 20,363 19,574
================================================================================
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 June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in either assets or liabilities. As amended in June 1999 by
SFAS No. 137, this statement is effective for fiscal years beginning after June
15, 2000 and is not to be applied retroactively to financial statements for
prior periods. Since the Company does not engage in derivative or hedging
activities, application of the standard would not have a material effect on the
Company's consolidated financial position, results of operations or cash flows.
NOTE 2. PROPERTY AND EQUIPMENT
January 29, January 30,
(In thousands) 2000 1999
- --------------------------------------------------------------------------------
Property and equipment consist of the following:
Land and land improvements $ 530 $ 530
Building and leasehold improvements 44,188 36,155
Furniture, fixtures and equipment 45,218 34,809
Facilities under capital leases 28,694 28,694
- --------------------------------------------------------------------------------
Total 118,630 100,188
Less accumulated depreciation (51,110) (41,154)
- --------------------------------------------------------------------------------
Property and equipment, net $ 67,520 $ 59,034
================================================================================
COST PLUS, INC. 25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
================================================================================
NOTE 3. OTHER ASSETS
January 29, January 30,
(In thousands) 2000 1999
- --------------------------------------------------------------------------------
Other assets consist of the following:
Goodwill $ 3,972 $ 3,972
Lease rights and interests 3,146 3,146
Other 9,382 7,326
- --------------------------------------------------------------------------------
Total 16,500 14,444
Less accumulated amortization (4,788) (4,170)
- --------------------------------------------------------------------------------
Other assets, net $ 11,712 $ 10,274
================================================================================
NOTE 4. LEASES
The Company leases certain properties consisting of retail stores, warehouses,
the corporate office and equipment. Store leases typically contain provisions
for two to three renewal options of five to ten years each, with renewal periods
from 2000 to 2040 at the then current market rates. The retail store, warehouse
and corporate office leases generally provide that the Company assumes 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 at 12.75%) and noncancelable operating leases with an initial lease
term in excess of one year at January 29, 2000, are as follows:
<TABLE>
<CAPTION>
(In thousands) Capital Leases Operating Leases Total
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fiscal year:
2000 $ 2,521 $ 26,900 $ 29,421
2001 2,144 26,034 28,178
2002 2,151 25,191 27,342
2003 2,151 24,419 26,570
2004 2,151 23,460 25,611
Thereafter through the year 2040 28,772 129,651 158,423
- ----------------------------------------------------------------------------------------
Minimum lease commitments 39,890 $255,655 $295,545
Less amount representing interest (24,780) ======== ========
- ------------------------------------------------------
Present value of capital lease obligations 15,110
Less current portion (694)
- ------------------------------------------------------
Long-term portion $14,416
======================================================
</TABLE>
Accumulated depreciation related to capital leases amounted to $13,164,000 and
$11,942,000 at January 29, 2000 and January 30,1999, respectively. Depreciation
expense related to capital leases is classified as occupancy cost. For the
fiscal years ended January 29, 2000, January 30,1999 and January 31,1998, such
depreciation expense was $1,223,000, $1,223,000 and $1,139,000, respectively.
Interest expense related to capital leases was $1,898,000, $1,962,000 and
$1,888,000 for the fiscal years ended January 29, 2000, January 30, 1999 and
January 31, 1998, respectively.
26 COST PLUS, INC.
<PAGE>
Minimum and contingent rental expense, which is based upon certain factors such
as sales volume and property taxes, under operating and capital leases, as well
as sublease rental income, are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------
January 29, January 30, January 31,
(In thousands) 2000 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating leases:
Minimum rental expense $ 22,732 $17,100 $13,485
Contingent rental expense 937 821 757
Less sublease rental income (1,281) (1,153) (1,692)
- ------------------------------------------------------------------------------------
Total $ 22,388 $16,768 $12,550
====================================================================================
Capital leases - contingent rental expense $ 1,072 $ 1,022 $ 950
====================================================================================
</TABLE>
Total minimum rental income to be received from noncancelable sublease
agreements through 2011 is approximately $5,735,000 as of January 29, 2000.
NOTE 5. REVOLVING LINE OF CREDIT
On October 12, 1998, the Company entered into a revolving line of credit
agreement with a bank, which was amended on June 15, 1999 and which expires June
1, 2000. The amended agreement allows for cash borrowings and letters of credit
of up to $20.0 million from January 1 through June 30 and up to $40.0 million
from July 1 through December 31 of each year. Interest is paid monthly at the
bank's reference rate minus 0.5% (8.0% at January 29, 2000) or IBOR plus 1.125%,
depending on the nature of the borrowings. The agreement is secured by the
Company's inventory and receivables. The Company is subject to certain financial
covenants customary with such agreements. At January 29, 2000, the Company had
no outstanding borrowings under the line of credit and $3.6 million outstanding
under letters of credit. Interest expense under borrowing arrangements was
$132,000, $109,000 and $211,000 for the fiscal years ended January 29, 2000,
January 30, 1999 and January 31, 1998, respectively. The Company expects to be
able to refinance this credit facility, in the ordinary course of business,
prior to its expiration date.
NOTE 6. INCOME TAXES
The provision for income taxes consists of the following:
Fiscal Year Ended
------------------------------------------
January 29, January 30, January 31,
(In thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Payable:
Federal $ 12,408 $ 8,621 $ 6,683
State 2,603 1,768 1,304
- --------------------------------------------------------------------------------
Total payable 15,011 10,389 7,987
- --------------------------------------------------------------------------------
Deferred:
Federal (2,074) (1,556) (1,346)
State (351) (371) (209)
- --------------------------------------------------------------------------------
Total deferred (2,425) (1,927) (1,555)
- --------------------------------------------------------------------------------
Provision for income taxes $ 12,586 $ 8,462 $ 6,432
================================================================================
COST PLUS, INC. 27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
================================================================================
The differences between the U.S. federal statutory tax rate and the Company's
effective tax rate are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------
January 29, January 30, January 31,
2000 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. federal statutory tax rate 35.0% 35.0% 35.0%
State income taxes (net of U.S. federal income tax benefit) 4.4 4.3 4.3
Non-deductible expenses 0.3 0.4 0.5
Other (0.7) (0.7) (0.7)
- --------------------------------------------------------------------------------------------------
Effective income tax rate 39.0% 39.0% 39.1%
==================================================================================================
</TABLE>
Significant components of the Company's deferred tax assets and liabilities are
as follows:
January 29, January 30,
(In thousands) 2000 1999
- --------------------------------------------------------------------------------
Current deferred tax asset:
Deductible reserves $ 370 $ 341
Long-term deferred tax asset (liability):
Deferred rent 2,435 1,858
Capital leases (1,215) (1,456)
Lease rights (624) (681)
Depreciation 854 (31)
Deferred compensation 318 181
Other 455 (44)
- --------------------------------------------------------------------------------
Total 2,223 (173)
- --------------------------------------------------------------------------------
Net deferred tax assets $ 2,593 $ 168
================================================================================
NOTE 7. EQUITY AND STOCK COMPENSATION PLANS
Stock Split
All share and per share data in the accompanying consolidated financial
statements and notes have been restated to reflect a three-for-two common stock
split effective March 11, 1999 and a three-for-two common stock split effective
October 11, 1999.
Shareholder Rights Plan
Each outstanding share of common stock has a Preferred Share Purchase Right
(expiring on June 30, 2008) which is exercisable only upon the occurrence of
certain change in control events.
28 COST PLUS, INC.
<PAGE>
Options
The Company currently has options outstanding under two employee stock option
plans: the 1994 Stock Option Plan ("1994 Plan") and the 1995 Stock Option Plan
("1995 Plan"). The 1994 Plan permitted the granting of options to employees to
purchase up to 1,940,976 shares of common stock at prices ranging from 85% to
100% of fair market value as of the date of grant. Options are exercisable over
ten years and became fully vested upon the Company's initial public offering in
April 1996. Upon approval of the 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 3,768,006 shares
of common stock, less the aggregate number of shares outstanding under the 1994
Plan grants or any shares issued upon exercise of options granted under the 1994
Plan (821,120 at January 29, 2000). Options are exercisable over ten years and
vest as determined by the Board of Directors, generally over three or four
years. An additional 600,000 increase in the number of shares of common stock
reserved for issuance was approved by the Board of Directors in May 1999 and by
shareholders in June 1999.
On March 13, 1996, the Board of Directors approved the 1996 Director Stock
Option Plan ("Director Option Plan") which was amended by the shareholders in
June 1999. The Director Option Plan permits the granting of options to non-
employee directors to purchase up to 153,675 shares of common stock at fair
market value as of the date of grant. Options are exercisable over ten years and
vest as determined by the Board of Directors, generally over four years.
A summary of activity under the above option Plans is set forth below:
<TABLE>
<CAPTION>
Weighted
Average
Shares Exercise Price
- ------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at February 1,1997 (744,938 exercisable
at a weighted average price of $2.55) 1,921,079 $ 4.70
Granted 1,069,200 9.54
Exercised (402,749) 3.18
Canceled and expired (227,438) 6.27
- ------------------------------------------------------------------------------------
Outstanding at January 31,1998 (733,527 exercisable
at a weighted average price of $4.34) 2,360,092 6.99
Granted 470,250 13.46
Exercised (708,030) 4.34
Canceled and expired (268,691) 8.94
- ------------------------------------------------------------------------------------
Outstanding at January 30,1999 (462,690 exercisable
at a weighted average price of $6.89) 1,853,621 9.36
Granted 644,509 22.27
Exercised (576,035) 8.69
Canceled and expired (202,918) 14.96
- ------------------------------------------------------------------------------------
Outstanding at January 29,2000 1,719,177 13.80
====================================================================================
</TABLE>
COST PLUS, INC. 29
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
======================================================
Additional information regarding options outstanding as of January 29, 2000 is
as follows:
<TABLE>
<CAPTION>
Options Exercisable
-----------------------------
Remaining Weighted Average Weighted Weighted
Number Contractual Average Number Average
Range of Exercise Prices Outstanding Life (Yrs.) Exercise Price Exercisable Exercise Price
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 2.56 - $ 2.64 23,409 5.2 $ 2.60 23,409 $ 2.60
5.03 - 7.00 353,518 6.3 5.79 188,261 5.80
8.00 - 10.72 500,403 7.5 10.36 87,300 9.02
13.11 - 17.81 600,211 8.8 14.86 61,838 13.87
24.75 - 33.44 241,636 9.7 31.12 5,700 24.75
- -----------------------------------------------------------------------------------------------------------
1,719,177 8.0 13.80 366,508 8.02
===============================================================================
</TABLE>
At January 29, 2000, 886,057 and 43,790 shares were available for future grants
under the 1995 Stock Option Plan and the 1996 Director Stock Option Plan,
respectively.
Employee Stock Purchase Plan
On March 13, 1996, the Board of Directors approved the 1996 Employee Stock
Purchase Plan ("Purchase Plan"). A total of 675,000 shares have been authorized
for issuance under the Purchase Plan. Employees who work at least 20 hours per
week and more than five calendar months per calendar year and have been so
employed for at least one year are eligible to have a specified percentage (not
to exceed 10%) of each salary payment withheld to purchase common stock at 90%
of its fair market value as of the last day of the purchase period.
Additional Stock Plan Information
As discussed in Note 1, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with Accounting Principles
Board No.25, "Accounting for Stock Issued to Employees," and its related
interpretations. Consequently, no compensation expense has been recognized in
the financial statements for employee stock arrangements.
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation," requires the disclosure of pro forma net income
and earnings per share had the Company adopted the fair value method as of the
beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based awards
to employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's calculations
were made using the Black-Scholes option pricing model with the following
weighted average assumptions:
Fiscal Year Ended
-------------------------------------
January 29, January 30, January 31,
2000 1999 1998
- --------------------------------------------------------------------------------
Stock volatility 63.0% 52.6% 60.0%
Risk free interest rates 5.4% 5.4% 6.3%
Expected life (in years) 1.8 1.8 1.8
Weighted average fair value per share $ 12.35 $ 6.57 $ 6.11
Expected dividends -- -- --
30 COST PLUS, INC.
<PAGE>
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 1999, fiscal 1998 and fiscal 1997 awards had been amortized to expense
over the vesting period of the awards, consistent with the methods of SFAS 123,
the Company's net income and net income per share would have been reduced to the
pro forma amounts indicated below:
Fiscal Year Ended
----------------------------------------
January 29, January 30, January 31,
(In thousands, except per share data) 2000 1999 1998
- --------------------------------------------------------------------------------
Net income
As reported $19,685 $13,236 $10,007
Pro forma 17,724 11,983 8,920
Basic net income per share
As reported $ 0.97 $ 0.67 $ 0.53
Pro forma 0.87 0.61 0.48
Diluted net income per share
As reported $ 0.93 $ 0.65 $ 0.51
Pro forma 0.84 0.59 0.46
The impact of outstanding non-vested stock options granted prior to fiscal 1995
has been excluded from the pro forma calculation; accordingly, the fiscal 1999,
fiscal 1998 and fiscal 1997 pro forma adjustments are not indicative of future
period pro forma adjustments, when the calculation will include all applicable
stock options.
NOTE 8. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan for employees who meet certain service and age
requirements. Participants may contribute up to 15% of their salaries to a
maximum of $10,000 per year and qualify for favorable tax treatment under
Section 401(k) of the Internal Revenue Code. In fiscal 1997, the Company began
matching 25% of the employee's contribution, up to a maximum of 3% of their base
salary. Beginning in fiscal 2000, the Company will increase the matching to 50%
of the employee's contribution, up to a maximum of 4% of their base salary. The
Company contributed approximately $105,000 in fiscal 1999 and $90,000 in fiscal
1998.
Additionally, beginning in fiscal 1997, a non-qualified deferred compensation
plan was made available to certain employees whose benefits are limited under
Section 401(k) of the Internal Revenue Code. Compensation deferrals approximated
$253,000 for fiscal 1999 and $327,000 for fiscal 1998.
NOTE 9. RELATED PARTY TRANSACTIONS
In February 1998, the Company repurchased 337,503 shares of common stock for
$3,750,000 from its former Chief Executive Officer.
COST PLUS, INC. 31
<PAGE>
INDEPENDENT AUDITORS' REPORT
============================
Board of Directors
Cost Plus, Inc.
Oakland, California
We have audited the accompanying consolidated balance sheets of Cost Plus, Inc.
and subsidiaries as of January 29, 2000 and January 30, 1999, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the fiscal years ended January 29, 2000, January 30,1999 and January 31,1998.
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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Cost Plus, Inc. and subsidiaries as
of January 29,2000 and January 30,1999 and the results of their operations and
their cash flows for the fiscal years ended January 29, 2000, January 30,1999
and January 31,1998 in conformity with accounting principles generally accepted
in the United States of America.
/s/ Deloitte & Touche LLP
San Francisco, California
March 10, 2000
32 COST PLUS, INC.
<PAGE>
DIRECTORS, OFFICERS AND CORPORATE DATA
======================================
[PHOTO]
Senior Management Team: (seated right to left) Murray H. Dashe, Kathi P.
Lentzsch, (standing, left to right) Richard L. Grice, Gary D. Weatherford, John
F. Hoffner, Joan S. Fujii
DIRECTORS
=========
Murray H. Dashe
Chairman, Chief Executive
Officer and President,
Cost Plus, Inc.
Joseph H. Coulombe/1/
Independent Management
Consultant
Danny W. Gurr/1/
President, Dorling
Kindersley Publishing Inc.
Kim D. Robbins/2/
Director of Product
Development, Jack Nadel, Inc.
Fredric M. Roberts/2/
President,
F. M. Roberts and Company, Inc.
Olivier L. Trouveroy/1/
Managing Partner,
ING Equity Partners, L.P.I
Thomas D. Willardson/2/
Senior Vice President of
Finance and Treasurer,
Leap Wireless International
OFFICERS
========
Murray H. Dashe
Chairman of the Board, Chief
Executive Officer and President
John F. Hoffner
Executive Vice President of
Administration, Chief Financial
Officer and Secretary
Kathi P. Lentzsch
Executive Vice President,
Merchandising and Marketing
Joan S. Fujii
Senior Vice President,
Human Resources
Richard L. Grice
Senior Vice President, Logistics
Gary D. Weatherford
Senior Vice President,
Store Operations
Michael J. Allen
Vice President, Store Development
Charmaine D. Casella
Vice President, Controller
and Chief Accounting Officer
Stephen L. Higgins
Vice President, Merchandising
Patricia A. Juckett
Vice President,
Marketing and Advertising
Ron P. Perkuchin
Vice President,
Distribution and Logistics
Ronald J. Rouse
Vice President,
Planning and Allocation
Judy A. Soares
Vice President, Information Systems
CORPORATE DATA
==============
Corporate Headquarters
Cost Plus, Inc.
200 4th Street
Oakland, CA 94607
www.costplusworldmarket.com
Transfer Agent and Registrar
Bank Boston
c/o EquiServe, LP
Boston, MA
(781) 575-3120
Independent Auditors
Deloitte & Touche LLP
San Francisco, CA
General Counsel
Wilson Sonsini Goodrich & Rosati
Palo Alto, CA
/1/ Member of the Audit Committee of the Board of Directors.
/2/ Member of the Compensation Committee of the Board of Directors.
COST PLUS, INC. 33
<PAGE>
COST PLUS WORLD MARKET ACROSS THE COUNTRY
=========================================
[MAP]
ONE HUNDRED NINE STORES NATIONWIDE*
===================================
Arizona
Mesa
Peoria
Phoenix (2)
Scottsdale (2)
Tucson
California
Brea
Citrus Heights
City of Industry
Colma
Concord
Fremont
Fresno
Glendale
La Jolla
La Mesa
Lakewood
Marin
Mission Viejo
Modesto
Mountain View
Oakland
Oceanside
Ontario
Palm Desert
Pasadena
Pleasanton
Roseville
Sacramento
San Diego
San Dimas
San Francisco
San Jose (2)
San Mateo
Santa Ana
Santa Cruz
Santa Rosa
Thousand Oaks
Torrance
Valencia
Walnut Creek
West Los Angeles
Woodland Hills
Colorado
Aurora
Denver (2)
Georgia
Atlanta (2)
Idaho
Boise
Illinois
Aurora
Chicago (2)
Northbrook
Oak Brook
Orland Park
Schaumburg
Skokie
Indiana
Carmel
Michigan
Ann Arbor
Auburn Hills
Kentwood
Lansing
Portage
Rochester Hills
Shelby Township
Troy
Westland
Missouri
Brentwood
Chesterfield
Sunset Hills
Nebraska
Omaha
Nevada
Las Vegas (2)
Reno
New Mexico
Albuquerque
Ohio
Akron
Cincinnati (3)
Columbus (2)
Dublin
Mayfield Heights
Mentor
North Canton
North Olmsted
Oregon
Portland
Tigard
Texas
Austin (3)
Dallas
Grapevine
Houston (5)
Plano (2)
San Antonio
Washington
Bellevue
Lynnwood
Seattle
Spokane
Tukwila
Wisconsin
Madison
*As of March 31, 2000
34 COST PLUS, INC.
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos. 333-
56975, 333-67441 and 333-83561 of Cost Plus, Inc. and subsidiaries on Form S-8
of our report dated March 10, 2000, incorporated by reference in this Annual
Report on Form 10-K of Cost Plus, Inc. and subsidiaries for the year ended
January 29, 2000.
/s/ Deloitte & Touche LLP
San Francisco, California
April 27, 2000
<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 JANUARY 29,
2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> JAN-29-2000
<CASH> 38,411
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 91,402
<CURRENT-ASSETS> 135,467
<PP&E> 118,630
<DEPRECIATION> 51,110
<TOTAL-ASSETS> 214,699
<CURRENT-LIABILITIES> 54,804
<BONDS> 0
0
0
<COMMON> 205
<OTHER-SE> 138,130
<TOTAL-LIABILITY-AND-EQUITY> 214,699
<SALES> 402,292
<TOTAL-REVENUES> 402,292
<CGS> 255,383
<TOTAL-COSTS> 369,162
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 859
<INCOME-PRETAX> 32,271
<INCOME-TAX> 12,586
<INCOME-CONTINUING> 19,685
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,685
<EPS-BASIC> .97
<EPS-DILUTED> .93
</TABLE>
