Cost Plus (CPWM) 10-Q 2007 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended April 29, 2006

OR

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

For the transition period from                    to                     

Commission file number 0-14970

COST PLUS, INC.

(Exact name of registrant as specified in its charter)

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No  ¨

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

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

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

Yes  ¨    No  x

The number of shares of Common Stock, $0.01 par value, outstanding on June 5, 2006 was 22,065,038.

COST PLUS, INC.

FORM 10-Q

For the Quarter Ended April 29, 2006

INDEX

		Page
PART I.	FINANCIAL INFORMATION
ITEM 1.	Condensed Consolidated Financial Statements (unaudited)
	Balance Sheets as of April 29, 2006, January 28, 2006 and April 30, 2005	3
	Statements of Operations for the three months ended April 29, 2006 and April 30, 2005	4
	Statements of Cash Flows for the three months ended April 29, 2006 and April 30, 2005	5
	Notes to Condensed Consolidated Financial Statements	6-11
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11-15
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	15
ITEM 4.	Controls and Procedures	15
PART II.	OTHER INFORMATION
ITEM 1A.	Risk Factors	16-20
ITEM 6.	Exhibits	20
SIGNATURE PAGE		21

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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

COST PLUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts, unaudited)

	April 29, 2006		January 28, 2006			April 30, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	15,330	$	40,382		$	3,759
Merchandise inventories, net		251,092		252,791			268,492
Other current assets		25,043		15,294			14,498
Total current assets		291,465		308,467			286,749
Property and equipment, net		199,629		203,873			188,134
Goodwill, net		4,178		4,178			4,178
Other assets, net		16,233		15,433			12,937
Total assets	$	511,505	$	531,951		$	491,998
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	45,474	$	57,351		$	50,377
Income taxes payable		—		10,618			—
Accrued compensation		10,152		13,084			9,700
Revolving line of credit		—		—			6,500
Current portion of long-term debt		3,575		5,267			4,330
Other current liabilities		25,875		27,998			23,738
Total current liabilities		85,076		114,318			94,645
Capital lease obligations		11,841		12,268			13,471
Long-term debt		62,144		50,051			54,121
Other long-term obligations		40,315		39,233			35,328
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $.01 par value: 5,000,000 shares authorized; none issued and outstanding		—		—			—
Common stock, $.01 par value: 67,500,000 shares authorized; issued and outstanding 22,065,038; 22,060,788 and 22,015,149 shares		221		220			220
Additional paid-in capital		164,206		163,571			163,128
Retained earnings		147,650		152,442			132,071
Accumulated other comprehensive income (loss)		52		(152	)		(986	)
Total shareholders’ equity		312,129		316,081			294,433
Total liabilities and shareholders’ equity	$	511,505	$	531,951		$	491,998

See notes to condensed consolidated financial statements.

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COST PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts, unaudited)

	Three Months Ended
	April 29, 2006			April 30, 2005
Net sales	$	212,964		$	200,023
Cost of sales and occupancy		149,657			133,304
Gross profit		63,307			66,719
Selling, general and administrative expenses		68,707			65,157
Store preopening expenses		1,525			1,061
Income (loss) from operations		(6,925	)		501
Net interest expense		1,062			726
Loss before income taxes		(7,987	)		(225	)
Income tax benefit		(3,195	)		(87	)
Net loss	$	(4,792	)	$	(138	)
Net loss per weighted average share
Basic	$	(0.22	)	$	(0.01	)
Diluted	$	(0.22	)	$	(0.01	)
Weighted average shares outstanding
Basic		22,062			21,914
Diluted		22,062			21,914

See notes to condensed consolidated financial statements.

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COST PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

	Three Months Ended
	April 29, 2006			April 30, 2005
Cash Flows From Operating Activities:
Net loss	$	(4,792	)	$	(138	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		7,865			6,821
Share-based compensation expense		571			630
Tax effect of disqualifying common stock dispositions		6			238
Deferred income taxes		—			(1,243	)
Changes in assets and liabilities:
Merchandise inventories		1,699			(15,373	)
Other assets		(10,638	)		5,121
Accounts payable		(4,425	)		(22,073	)
Income taxes payable		(10,618	)		(9,692	)
Other liabilities		(3,815	)		(1,883	)
Net cash used in operating activities		(24,147	)		(37,592	)
Cash Flows From Investing Activities:
Purchases of property and equipment		(10,987	)		(31,057	)
Proceeds from sale of property and equipment		3			7
Net cash used in investing activities		(10,984	)		(31,050	)
Cash Flows From Financing Activities:
Net borrowings under revolving line of credit		—			6,500
Proceeds from long-term debt		29,779			20,000
Prepayment of long-term debt		(18,208	)		—
Principal payments on long-term debt		(1,170	)		(680	)
Principal payments on capital lease obligations		(381	)		(366	)
Proceeds from the issuance of common stock		59			4,029
Net cash provided by financing activities		10,079			29,483
Net decrease in cash and cash equivalents		(25,052	)		(39,159	)
Cash and Cash Equivalents:
Beginning of period		40,382			42,918
End of period	$	15,330		$	3,759
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	1,188		$	655
Cash paid for taxes	$	12,421		$	10,532

See notes to condensed consolidated financial statements.

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COST PLUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended April 29, 2006 and April 30, 2005

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared from the records of Cost Plus, Inc. (the “Company”) without audit and, in the opinion of management, include all adjustments that are normal and recurring in nature necessary to present fairly the Company’s financial position at April 29, 2006 and April 30, 2005, the interim results of operations for the three months ended April 29, 2006 and April 30, 2005, and changes in cash flows for the three months ended April 29, 2006 and April 30, 2005. The balance sheet at January 28, 2006, presented herein, has been derived from the audited financial statements of the Company for the fiscal year then ended.

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

The results of operations for the three month period ended April 29, 2006, presented herein, are not indicative of the results to be expected for the full year.

2. SHARE-BASED COMPENSATION

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

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

The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of the first day of the Company’s 2006 fiscal year. The Company’s consolidated financial statements as of and for the three months ended April 29, 2006 include the impact of share-based payment expense in accordance with SFAS 123(R). Also, in accordance with the modified prospective transition method, the Company’s consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R).

The Company recognized share-based compensation expense of $571,000 (before any related tax benefit) in the three months ended April 29, 2006 as a component of selling, general and administrative expenses. As of April 29, 2006, there was $7.6 million (before any related tax benefit) of total unrecognized compensation cost related to nonvested share-based payments that is expected to be recognized over a weighted-average period of approximately 1.5 years.

Share-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest. Share-based compensation expense recognized in the Company’s consolidated statement of operations for the three months ended April 29, 2006 includes compensation expense for share-based payment

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awards granted prior to but not yet vested as of January 29, 2006 based on the fair value estimate at the grant date in accordance with the provisions of SFAS 123 and compensation expense for the share-based payment awards granted subsequent to January 28, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). In conjunction with the adoption of SFAS 123(R), compensation expense for all share-based payment awards granted prior to January 29, 2006 will continue to be recognized based on the multiple option approach (accelerated method) and compensation expense for all share-based payment awards granted subsequent to January 28, 2006 will be recognized using the straight-line method. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Share-based compensation expense recognized in the consolidated statement of operations for the first quarter of fiscal 2006 has been reduced for estimated forfeitures.

Prior to the adoption of SFAS 123(R), the Company presented all benefits of tax deductions resulting from the exercise of share-based payment awards as operating cash flows in its statements of cash flows. SFAS 123(R) requires the benefits of tax deductions in excess of the compensation cost recognized for those stock awards (excess tax benefits) to be classified as financing cash flows. For the three months ended April 29, 2006, the Company had no excess tax benefits required to be reported as a financing cash flow.

The following table presents the weighted average assumptions used in the option pricing model for the stock options granted during the three months ended April 29, 2006 and April 30, 2005:

	Three Months Ended
	April 29, 2006			April 30, 2005
				(Pro forma)
Expected dividend rate		—	%		—	%
Volatility		46.8	%		50.0	%
Risk-free interest rate		4.5	%		4.0	%
Expected lives (years)		4.75			4.2
Fair value per option granted	$	8.64		$	11.47

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

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Had share-based employee compensation expense been determined based upon the fair values at the grant dates for awards under the Company’s stock plan in accordance with SFAS 123 for the three months ended April 30, 2005, the Company’s pro forma net earnings, basic and diluted earnings per common share would have been as follows:

(In thousands, except per share data)	Three Months Ended April 30, 2005
Net loss, as reported	$	(138	)
Add: Stock-based compensation expense included in reported net loss, net of related tax effect		381
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effect		(1,446	)
Pro forma net loss	$	(1,203	)
Basic net loss per weighted average share:
As reported	$	(0.01	)
Pro forma	$	(0.05	)
Diluted net loss per weighted average share:
As reported	$	(0.01	)
Pro forma	$	(0.05	)

The following table summarizes stock option activity during the three months ended April 29, 2006:

	Options		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value (In thousands)
Outstanding, January 28, 2006	1,912,904		$	25.24
Granted	527,000			18.94
Exercised	(4,250	)		13.76
Cancelled	(100,834	)		29.12
Outstanding, April 29, 2006	2,334,820		$	23.67	6.4	$	—
Exercisable, April 29, 2006	1,000,195		$	24.74	5.4	$	—

Intrinsic value for stock options is defined as the difference between the market value and the grant price. The total intrinsic value of stock options exercised during the three months ended April 29, 2006 was $14,500. Cash received as a result of stock options exercised during the three months ended April 29, 2006 was $58,500, and the actual tax benefit realized for tax deductions from stock options exercised totaled $6,000.

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

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The following table summarizes Performance Share activity during the three months ended April 29, 2006, with the shares granted representing the maximum number of share shares that could be achieved:

	Shares	Weighted Average Grant Date Fair Value Per Share
Nonvested at January 28, 2006	—	$	—
Granted	89,250		17.00
Vested	—		—
Forfeited	—		—
Nonvested at April 29, 2006	89,250	$	17.00

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

The 1996 Director Option Plan permits the granting of options to non-employee directors to purchase up to 503,675 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. The number of shares of common stock reserved for issuance under the Director Option Plan increased by 150,000 in 2002 and 100,000 in 2004, both increases were approved by the Board of Directors and shareholders and are included in the share count above.

3. RECONCILIATION OF BASIC SHARES TO DILUTED SHARES

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

	Three Months Ended
	Basic EPS			Effect of Dilutive Stock Options (treasury stock method)		Diluted EPS
April 29, 2006
Shares		22,062			—		22,062
Amount	$	(0.22	)	$	0.00	$	(0.22	)
April 30, 2005
Shares		21,914			—		21,914
Amount	$	(0.01	)	$	0.00	$	(0.01	)

For the three months ended April 29, 2006 and April 30, 2005, options to purchase 2,334,820 and 2,052,971 shares of common stock, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effect would be antidilutive.

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4. COMPREHENSIVE INCOME

Comprehensive loss for the three months ended April 29, 2006 and April 30, 2005 was as follows:

	Three Months Ended
(In thousands)	April 29, 2006			April 30, 2005
Net loss, as reported	$	(4,792	)	$	(138	)
Other comprehensive income net of taxes - cash flow hedge		204			101
Comprehensive loss	$	(4,588	)	$	(37	)

5. LONG-TERM DEBT AND REVOLVING LINE OF CREDIT

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

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

On April 7, 2006, the Company prepaid a fully amortizing commercial real estate loan in the amount of $18.2 million and terminated a related swap commitment. The loan agreement had been entered into to finance a portion of the acquisition costs of the building and land in Stockton, CA. See Note 6 for a more detailed discussion.

In November 2004, the Company entered into an unsecured five year revolving line of credit agreement (the “Agreement”) with a group of banks that terminated and replaced an existing revolving credit facility. The Agreement allows for cash borrowings and letters of credit under an unsecured revolving credit facility of up to $50.0 million from January through June of each year, increasing to $125.0 million from July through December of each year to coincide with the Company’s Holiday borrowing needs. The Agreement includes a one-time option to increase the size of the revolving credit facility to $150.0 million. Interest is paid quarterly in arrears and bears interest, at the Company’s election, based on a rate equal to Bank of America’s prime rate or LIBOR plus an applicable margin that is based on the Company’s Consolidated Adjusted Leverage Ratio, as defined in the Agreement. The Agreement requires a 30-day “clean-up period” in which Adjusted Total Outstandings, as defined in the Agreement, do not exceed $30.0 million for not less than 30 consecutive days during the period from January 1 through March 31 of each year. The Company is subject to a minimum consolidated tangible net worth requirement, and annual capital expenditures are limited under the Agreement. The Agreement includes limitations on the ability of the Company to incur debt, grant liens, make acquisitions, make certain restricted payments such as dividend payments, and dispose of assets. The events of default under the Agreement include payment defaults, cross defaults with certain other indebtedness, breaches of covenants and bankruptcy events. In the case of a continuing event of default, the lenders under the Agreement may, among other remedies, eliminate their commitments to make credit available, declare due all unpaid principal amounts outstanding, and require cash collateral for any letter of credit obligations. As of April 29, 2006, the Company was in compliance with its loan covenant requirements, had no outstanding borrowings under its line of credit and had $18.2 million outstanding in letters of credit.

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In April 2006, the Company entered into an unsecured 18 month revolving credit facility agreement with Bank of America, N.A. as the lender (the “Credit Facility”). The Credit Facility allows for borrowings of up to $40.0 million to be used for costs and expenses related to the construction of an additional distribution facility adjacent to the Company’s existing facility in Stockton, CA. The Credit Facility will be repaid in monthly payments of accrued interest, with the entire outstanding balance payable on October 27, 2007. The Credit Facility will bear interest, at the Company’s election, at a rate based on LIBOR plus a margin or Bank of America’s prime rate (or the Federal Funds Rate plus 0.5%, if greater). In addition the Company will pay a fee on the unused portion of the Credit Facility (the “Unused Fee”). The Unused Fee will be payable quarterly in arrears. The applicable margin and the Unused Fee will be based upon the Company’s consolidated adjusted leverage ratio, as defined in the agreement. The Credit Facility’s financial covenants are the same as those in the Agreement entered into in November 2004, as discussed above. As of April 29, 2006, the Company was in compliance with its loan covenant requirements and had no outstanding borrowings under the Credit Facility.

6. SIGNIFICANT EVENT

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

The Company is accounting for the transaction as a financing whereby the net book value of the asset will remain on the Company’s consolidated balance sheet. The Company will also record a financing obligation in the amount of approximately $29.8 million, which will be amortized over the 34 year period of the leases (including option periods) and approximates the discounted value of total maximum lease payments under the leases. Monthly lease payments will be accounted for as principal and interest payments (at an approximate annual rate of 7.2%) on the recorded obligation. As of April 29, 2006, the balance of the financing obligation was $ 29.8 million and was included in the Company’s consolidated balance sheet as long-term debt.

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

7. SHAREHOLDERS’ EQUITY

Stock Repurchase Program

In March 2003, the Company announced a stock repurchase program that was approved by its Board of Directors to repurchase up to 500,000 shares of its common stock. In November 2004, the Company’s Board of Directors authorized the repurchase of an additional 1,000,000 shares. The Company repurchased 425,500 shares under the program in fiscal 2004 and repurchased no shares in fiscal 2005. There were no shares repurchased under the program in the first quarter of fiscal 2006. As of April 29, 2006, there were 1,074,500 shares available for repurchase under the program. The program does not require the Company to repurchase any common stock and may be discontinued at any time.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition, results of operations, liquidity and capital resources should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto for the three months ended April 29, 2006.

This document contains forward-looking statements, which reflect the Company’s current beliefs and estimates with respect to future events and the Company’s future financial performance, operations and competitive position. Forward looking statements may be identified, without limitation, by use of the words “may,” “should,” “expects,” “anticipates,” “estimates,”

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“believes,” “looking ahead,” “forecast,” “projects,” “continues,” “intends,” “likely,” “plans” and similar expressions. Actual results may differ materially from those discussed in such forward-looking statements, and shareholders of Cost Plus, Inc. should carefully review the cautionary statements set forth in this form 10-Q. The Company may from time to time make additional written and oral forward-looking statements, including statements contained in the Company’s filings with the Securities and Exchange Commission. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company.

Overview

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

Net revenue for the first quarter of fiscal 2006 was $213.0 million, a 6.5% increase over the first quarter of fiscal 2005 net revenue of $200.0 million. Same store sales for the quarter decreased 4.3%, compared to a 1.9% decrease for the first quarter of 2005. The Company believes that weaker than expected customer traffic and lower sales of upholstered and outdoor furniture and certain other home furnishings categories were the primary reasons for the comparable store sales decrease.

The Company reported a net loss of $4.8 million, or $0.22 per diluted share, for the first quarter of fiscal 2006. The net loss includes a charge of approximately $0.03 per diluted share related to the closing of two stores and the departure of the Company’s EVP of Merchandising. The net loss also includes a non-cash charge of approximately $0.02 per diluted share associated with the expensing of stock options required under Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”). The Company reported a net loss of $138,000, or $0.01 per diluted share, in the first quarter of fiscal 2005. Those results include a charge of approximately $0.09 per diluted share related to the closure of four stores and the departure of the Company’s former CEO. The Company did not expense stock options in 2005.

In the first quarter of fiscal 2006, the Company opened seven new stores and closed two existing stores to end the quarter with 272 stores in 34 states. Although the Company believes there is still ample room for more than 600 stores in the United States it has decided to slow down new store growth to 24 stores in fiscal 2006. The new store openings, when combined with the closing of four stores, are expected to result in 287 locations by the end of the year.

Results of Operations

The three months ended April 29, 2006 as compared to the three months ended April 30, 2005.

Net SalesNet sales consist of sales from comparable stores and non-comparable stores. Net sales increased $12.9 million, or 6.5%, to $213.0 million in the first quarter of fiscal 2006 from $200.0 million in the first quarter of fiscal 2005. The increase in net sales was attributable to an increase in non-comparable store sales partially offset by a decrease in comparable store sales. Comparable store sales decreased 4.3%, or $8.5 million, in the first quarter of fiscal 2006 compared to a decrease of 1.9%, or $3.4 million, in the first quarter of fiscal 2005. Comparable store sales decreased primarily as a result of decreased customer traffic partially offset by an increase in average transaction size. As of April 29, 2006, the calculation of comparable store sales included a base of 233 stores. A store is generally included as comparable at the beginning of the fourteenth month after its grand opening. Non-comparable store sales increased $21.3 million for the quarter. As of April 29, 2006, the Company operated 272 stores compared to 238 stores as of April 30, 2005.

The Company classifies its sales into the home furnishings and consumables product lines. Home furnishings were 61.8% of sales in the first quarter of fiscal 2006 compared to 63.5% in the first quarter of fiscal 2005 and consumables were 38.2% in the first quarter of fiscal 2006 compared to 36.5% in the first quarter of fiscal 2005.

Cost of Sales and OccupancyCost of sales and occupancy, which consists of costs to acquire merchandise inventory, costs of freight and distribution, as well as certain facilities costs, increased $16.4 million, or 12.3%, to $149.7 million, in the first quarter of fiscal 2006 compared to the first quarter of fiscal 2005. As a percentage of net sales, total cost of sales and occupancy increased 370 basis points to 70.3% in the first quarter of fiscal 2006 from 66.6% in first quarter of fiscal 2005. Cost of sales for the quarter

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increased by 270 basis points compared to the first quarter of fiscal 2005 primarily due to a significantly higher mix of consumables to total net sales resulting from a longer Easter selling season, lower initial markup, and higher markdowns primarily in furniture and textiles. Occupancy costs increased as a percentage of net sales by 100 basis points compared to the first quarter of fiscal 2005 primarily as a result of higher real estate tax assessments, and the de-leveraging of occupancy costs due to the decrease in comparable store sales.

Selling, General and Administrative (“SG&A”) Expenses SG&A expenses increased $3.6 million, or 5.4%, to $68.7 million, in the first quarter of fiscal 2006 compared to the first quarter of fiscal 2005. As a percentage of net sales, SG&A expenses decreased to 32.3% in the first quarter of fiscal 2006 from 32.6% in the first quarter of fiscal 2005. The decrease was primarily due to lower spending on advertising related to cuts in weekly newspaper print ads partially offset by de-leveraging from lower comparable store sales. SG&A expenses for the first quarter of fiscal 2006 included charges totaling approximately $700,000 related to the closure of two stores and severance costs from the departure of the former Executive Vice President of Merchandising. The first quarter of fiscal 2006 also included a charge of $571,000 related to the expensing of share-based compensation due to the adoption of SFAS 123(R) at the beginning of fiscal 2006. SG&A expenses for the first quarter of fiscal 2005 included charges totaling $3.1 million related to the departure of the former Chief Executive Officer and the closure of four stores.

Store Preopening ExpensesStore preopening expenses, which include rent expense incurred prior to opening as well as grand opening advertising and preopening merchandise setup expenses, were $1.5 million in the first quarter of fiscal 2006 compared to $1.1 million in the first quarter of fiscal 2005. The Company opened seven stores in the first quarter of fiscal 2006 compared to five in the first quarter of fiscal 2005. Store preopening expenses vary depending on the amount of time between the possession date and the store opening, the particular store site and whether it is located in a new or existing market.

Net interest expenseNet interest expense, which includes interest on capital leases and debt, net of interest earned on investments, was $1.1 million in the first quarter of fiscal 2006 compared to $726,000 in the first quarter of fiscal 2005. The increase in net interest expense was primarily due to the debt associated with the purchase of the Stockton, CA distribution facility in fiscal 2005 and the new debt related to its subsequent sale-leaseback in first quarter of fiscal 2006, partially offset by lower seasonal borrowings on the Company’s revolving line of credit and higher investment income.

Income TaxesThe Company’s effective tax rate was 40.0% in the first quarter of fiscal 2006 compared to 38.5% in the first quarter of fiscal 2005. The increase in the effective tax rate was primarily due to the impact of adopting SFAS 123(R). As a result of adopting SFAS 123 (R), the compensation expense associated with incentive stock options increased the Company’s effective tax rate. Additionally, the effective tax rate is expected to fluctuate from quarter to quarter, due to the timing of incentive stock option exercises and sales in relation to the level of earnings. The Company expects its effective tax rate to be approximately 40.0% for the remainder of the year.

Liquidity and Capital Resources

The Company’s cash and cash equivalents balance at April 29, 2006 was $15.3 million compared to $3.8 million at April 30, 2005. The Company’s primary uses for cash are to fund operating expenses, inventory requirements and new store expansion. Historically, the Company has financed its operations primarily from internally generated funds and seasonal borrowings under a revolving credit facility. The Company believes that the combination of its cash and cash equivalents, internally generated funds and available borrowings will be sufficient to finance its working capital, new store expansion and distribution center project requirements for at least the next twelve months.

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

The Company is accounting for the transaction as a financing whereby the net book value of the asset will remain on the Company’s consolidated balance sheet. The Company will also record a financing obligation in the amount of approximately $29.8 million, which will be amortized over the 34-year period of the leases (including option periods) and approximates the discounted value of total maximum lease payments under the leases. Monthly lease payments will be accounted for as principal

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and interest payments (at an approximate annual rate of 7.2%) on the recorded obligation. As of April 29, 2006, the balance of the financing obligation was $29.8 million and was included in the Company’s consolidated balance sheet as long-term debt.

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

Cash Flows From Operating Activities Net cash used in operating activities totaled $24.1 million for the first quarter of fiscal 2006 compared to $37.6 million in the first quarter of fiscal 2005, a decrease of $13.4 million. The decrease in net cash used in operations was primarily due to decreased inventory levels compared the first quarter last year and the related decrease in accounts payable partially offset by a higher net loss and an increase in other assets due the timing of rent payments.

Cash Flows From Investing Activities Net cash used in investing activities totaled $11.0 million in the first quarter of fiscal 2006 compared to net cash used of $31.1 million in the first quarter of fiscal 2005. The decrease is primarily due to the fiscal 2005 purchase of a Stockton, CA distribution facility for $25.1 million that is included in net cash used in investing activities for the first quarter of fiscal 2005.

The Company estimates that fiscal 2006 capital expenditures will approximate $73.9 million; including approximately $13.1 million for new stores, $40.6 million to expand the distribution center in Stockton, CA, $8.1 million for management information systems and distribution center projects, and $12.1 million allocated to investments in existing stores and various other corporate projects.

Cash Flows From Financing Activities Net cash provided by financing activities was $10.1 million in the first quarter of fiscal 2006 compared to $29.5 million in the first quarter of fiscal 2005. For the first quarter of fiscal 2006, the Company had proceeds from long-term debt of $29.8 million and a prepayment of long-term debt of $18.2 million related to the sale-leaseback of the Stockton, CA distribution facility compared to proceeds from long-term debt of $20.0 million in the first quarter of fiscal 2005 for the purchase of the Stockton, CA distribution facility. The Company had no net borrowings under its revolving line of credit for the first quarter of fiscal 2006 compared to $6.5 million for the first quarter of fiscal 2005. The Company received $59,000 in the first quarter of fiscal 2006 from the issuance of common stock in connection with the exercise of employee stock options versus $4.0 million received in the first quarter of fiscal 2005.

Revolving Line of Credit In November 2004, the Company entered into an unsecured five year revolving line of credit agreement (the “Agreement”) with a group of banks that terminated and replaced an existing revolving credit facility. The Agreement allows for cash borrowings and letters of credit under an unsecured revolving credit facility of up to $50.0 million from January through June of each year, increasing to $125.0 million from July through December of each year to coincide with the Company’s Holiday borrowing needs. The Agreement includes a one-time option to increase the size of the revolving credit facility to $150.0 million. Interest is paid quarterly in arrears and bears interest, at the Company’s election, based on a rate equal to Bank of America’s prime rate or LIBOR plus an applicable margin that is based on the Company’s Consolidated Adjusted Leverage Ratio, as defined in the Agreement. The Agreement requires a 30-day “clean-up period” in which Adjusted Total Outstandings, as defined in the Agreement, do not exceed $30.0 million for not less than 30 consecutive days during the period from January 1 through March 31 of each year. The Company is subject to a minimum consolidated tangible net worth requirement, and annual capital expenditures are limited under the Agreement. The Agreement includes limitations on the ability of the Company to incur debt, grant liens, make acquisitions, make certain restricted payments such as dividend payments, and dispose of assets. The events of default under the Agreement include payment defaults, cross defaults with certain other indebtedness, breaches of covenants and bankruptcy events. In the case of a continuing event of default, the lenders under the Agreement may, among other remedies, eliminate their commitments to make credit available, declare due all unpaid principal amounts outstanding, and require cash collateral for any letter of credit obligations. As of April 29, 2006, the Company was in compliance with its loan covenant requirements, had no outstanding borrowings under its line of credit and had $18.2 million outstanding in letters of credit.

In April 2006, the Company entered into an unsecured 18 month revolving credit facility agreement with Bank of America, N.A. as the lender (the “Credit Facility”). The Credit Facility allows for borrowings of up to $40.0 million to be used for costs and expenses related to the construction of an additional distribution facility adjacent to the Company’s existing facility in Stockton, California. The Credit Facility will be repaid in monthly payments of accrued interest, with the entire outstanding balance payable on October 27, 2007. The Credit Facility will bear interest, at the Company’s election, at a rate based on

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LIBOR plus a margin or Bank of America’s prime rate (or the Federal Funds Rate plus 0.5%, if greater). In addition the Company will pay a fee on the unused portion of the Credit Facility (the “Unused Fee”). The Unused Fee will be payable quarterly in arrears. The applicable margin and the Unused Fee will be based upon the Company’s consolidated adjusted leverage ratio, as defined in the agreement. The Credit Facility’s financial covenants are the same as those in the Agreement entered into in November 2004, as discussed above. As of April 29, 2006, the Company was in compliance with its loan covenant requirements and had no outstanding borrowings under the Credit Facility.

Seasonality

The Company’s business is highly seasonal, reflecting the general pattern associated with the retail industry of peak sales and earnings during the fourth quarter (Holiday) selling season. Due to the importance of the Holiday selling season, the fourth quarter of each fiscal year has historically contributed, and the Company expects it will continue to contribute, a disproportionate percentage of the Company’s net sales and most of its net income for the entire fiscal year.

Available Information

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended April 29, 2006 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

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

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

Our business is highly seasonal, reflecting the general pattern associated with the retail industry of peak sales and earnings during the Holiday season. Due to the importance of the Holiday selling season, the fourth quarter of each fiscal year has historically contributed, and we expect will continue to contribute, a large percentage of our net sales and much of our net income for the entire fiscal year. Any factors that have a negative effect on our business during the Holiday selling season in any year, including unfavorable economic conditions, would materially and adversely affect our financial condition and results of operations. We generally experience lower sales and earnings during the first three quarters and, as is typical in the retail industry, may incur losses in these quarters. The results of our operations for these interim periods are not necessarily indicative of the results for our full fiscal year.

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

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

• delays in the flow of merchandise to our stores,

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

• the amount of sales contributed by new and existing stores,

• the mix of products sold,

• the timing and level of markdowns,

• store closings or relocations,

• competitive factors,

• changes in fuel and other shipping costs,

• general economic conditions,

• labor market fluctuations,

• the impact of terrorist activities,

• changes in accounting rules and regulations, and

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• unseasonable weather conditions.

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

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

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

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

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

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

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

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

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

• our ability to identify suitable markets for expansion,

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

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

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

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

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

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

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

Our success depends, in part, upon our ability to improve sales at our existing stores. Our comparable store sales, which are defined as sales by stores that have completed 14 full fiscal months of sales, fluctuate from year to year. To ensure a meaningful comparison, we measure comparable store sales on a 52-week basis. In first quarter of fiscal 2006, comparable store sales decreased by 4.3% compared to a decrease of 1.9% in the first quarter of fiscal 2005. Various factors affect comparable store sales, including:

• the general retail sales environment,

• our ability to source and distribute products efficiently,

• changes in our merchandise mix,

• competition,

• current economic conditions,

• the timing of release of new merchandise and promotional events,

• the success of marketing programs, and

• weather conditions.

These factors and others may cause our comparable store sales to differ significantly from prior periods and from expectations. If we fail to meet the comparable store sales expectations of investors and security analysts in one or more future periods, the price of our common stock could decline.

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

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

• foreign governmental regulations,

• economic disruptions,

• delays in shipments,

• freight cost increases,

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

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

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

Our dependence on our distribution centers carries certain risks.

Merchandise distribution for all of our stores is currently handled from facilities in Stockton, California and Windsor, Virginia. Any significant interruption in the operation of these facilities, including any interruption as a result of the planned expansion of

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the Stockton facility, would harm our business and operating results, as would operational inefficiencies or failure to coordinate the operations of these facilities successfully.

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

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

We face intense competition from a variety of other retailers.

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

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

Our success will continue to depend on our key management personnel. The loss of the services of one or more of these executives could harm our business and operating results. We do not maintain any key man life insurance policies. In the recent past, we have had significant changes in our management, including our Chief Executive Officer and our Chief Financial Officer. Moreover, we have recently added a Senior Vice President, Marketing, and a Senior Vice President, Supply Chain, and our Executive Vice President of Merchandising and Marketing has terminated employment and has not yet been replaced.

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

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

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

We have significant purchase obligations with suppliers outside of the United States. During the first quarter of fiscal 2006, approximately 3.5% of these purchases were settled in currencies other than the United States dollar. Fluctuations in the rates of exchange between the dollar and other currencies could harm our operating results. We have not hedged our currency risk in the past and do not currently anticipate doing so in the future.

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

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

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

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

ITEM 6. EXHIBITS

(a) Exhibits

3.1	Amended and Restated Bylaws dated May 12, 2006
10.1	Credit Agreement dated April 28, 2006 between Cost Plus, Inc. and Bank of America, N.A., as lender.
10.2	Purchase and Sale Agreement between Cost Plus Inc. and Inland Real Estate Acquisitions, Inc., as purchaser.
10.2.1	Lease Agreement between Cost Plus, Inc., as lessee, and Inland Western Stockton Airport Way, L.L.C. (“First Landlord”), as lessor, dated as of April 7, 2006.
10.2.2	Subground Lease Agreement between Cost Plus, Inc., as lessee, and Western Stockton Ground Tenant, L.L.C. (“Second Landlord”), as lessor dated as of April 7, 2006.
10.3	Amendment to Credit Agreement dated April 7, 2006, between Cost Plus, Inc., the lenders named therein, and Bank of America, N.A. as the administrative agent, amending the Credit Agreement dated November 10, 2004, between Cost Plus, Inc., the lenders named therein and Bank of America, N.A., as the administrative agent and letter of credit issuer, incorporated by reference to Exhibit 10.1 of the Form 8-K filed on November 16, 2004.
10.4	Modification Agreement dated April 7, 2006 between Cost Plus, Inc., and Bank of America, N.A., amending the Loan Agreement dated May 14, 2004 between Cost Plus, Inc. and Bank of America, N.A., as Lender, incorporated by reference to Exhibit 10.1 of the Form 10-Q filed for the quarter ended May 1, 2004.
10.5	Form of Notice of Grant of Performance Shares and Performance Share Agreement under the 2004 Stock Plan, incorporated by reference to Exhibit 10.1 of the Form 8-K filed on April 21, 2006.
10.6	Fourth Amended and Restated Employment Severance Agreement dated April 17, 2006, between Cost Plus, Inc. and Mike Allen.
10.7	Employment Severance Agreement dated April 17, 2006, between Cost Plus, Inc. and Frank Castiglione.
10.8	Fourth Amended and Restated Employment Severance Agreement dated April 17, 2006, between Cost Plus, Inc. and Joan Fujii.
10.9	Employment Severance Agreement dated April 17, 2006, between Cost Plus, Inc. and Rayford Whitley.
10.10	Employment Severance Agreement dated April 17, 2006, between Cost Plus, Inc. and Thomas Willardson.
31.1	Certification of the Chief Executive Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer and Chief Financial Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURE

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

	COSTPLUS, INC. Registrant
Date: June 8, 2006	By:	/s/ THOMAS D. WILLARDSON
		Thomas D. Willardson
		Executive Vice President
		Chief Financial Officer
		Duly Authorized Officer

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INDEX TO EXHIBITS

3.1	Amended and Restated Bylaws dated May 12, 2006
10.1	Credit Agreement dated April 28, 2006 between Cost Plus, Inc. and Bank of America, N.A., as lender.
10.2	Purchase and Sale Agreement between Cost Plus Inc. and Inland Real Estate Acquisitions, Inc., as purchaser.
10.2.1	Lease Agreement between Cost Plus, Inc., as lessee, and Inland Western Stockton Airport Way, L.L.C. (“First Landlord”), as lessor, dated as of April 7, 2006.
10.2.2	Subground Lease Agreement between Cost Plus, Inc., as lessee, and Western Stockton Ground Tenant, L.L.C. (“Second Landlord”), as lessor dated as of April 7, 2006.
10.3	Amendment to Credit Agreement dated April 7, 2006, between Cost Plus, Inc., the lenders named therein, and Bank of America, N.A. as the administrative agent, amending the Credit Agreement dated November 10, 2004, between Cost Plus, Inc., the lenders named therein and Bank of America, N.A., as the administrative agent and letter of credit issuer, incorporated by reference to Exhibit 10.1 of the Form 8-K filed on November 16, 2004.
10.4	Modification Agreement dated April 7, 2006 between Cost Plus, Inc., and Bank of America, N.A., amending the Loan Agreement dated May 14, 2004 between Cost Plus, Inc. and Bank of America, N.A., as Lender, incorporated by reference to Exhibit 10.1 of the Form 10-Q filed for the quarter ended May 1, 2004.
10.5	Form of Notice of Grant of Performance Shares and Performance Share Agreement under the 2004 Stock Plan, incorporated by reference to Exhibit 10.1 of the Form 8-K filed on April 21, 2006.
10.6	Fourth Amended and Restated Employment Severance Agreement dated April 17, 2006, between Cost Plus, Inc. and Mike Allen.
10.7	Employment Severance Agreement dated April 17, 2006, between Cost Plus, Inc. and Frank Castiglione.
10.8	Fourth Amended and Restated Employment Severance Agreement dated April 17, 2006, between Cost Plus, Inc. and Joan Fujii.
10.9	Employment Severance Agreement dated April 17, 2006, between Cost Plus, Inc. and Rayford Whitley.
10.10	Employment Severance Agreement dated April 17, 2006, between Cost Plus, Inc. and Thomas Willardson.
31.1	Certification of the Chief Executive Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer and Chief Financial Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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