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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-24543
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COST-U-LESS, INC.
(Exact Name of Registrant as Specified in its Charter)
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Washington 91-1615590 (State or Other Jurisdiction
(I.R.S. Employer of Incorporation
or Organization)Identification No.)
8160 304th Ave. SE, Bldg. 3, Suite A, Preston, Washington 98050
(Address of Principal Executive Offices): (Zip Code)
(425) 222-5022
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Preferred Stock Purchase Rights
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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 filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of the
registrant, based on the closing price on March 20, 2002, as reported on the
Nasdaq SmallCap Market was approximately $4,970,689 (1).
The number of shares of the registrant's Common Stock outstanding at March 20,
2002 was 3,606,376.
(1) Excludes shares held of record on that date by directors, executive
officers and greater than 10% shareholders of the registrant. Exclusion of
such shares should not be construed to indicate that any such person
directly or indirectly possesses the power to direct or cause the
direction of the management of the policies of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent not set
forth herein, is incorporated herein by reference from the Registrant's
definitive proxy statement relating to the annual meeting of stockholders to be
held on May 14, 2002, which definitive proxy statement shall be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year to which this Report relates.
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PART I
This annual report on Form 10-K contains forward-looking statements within
the meaning of the federal securities laws. These forward-looking statements
include without limitation statements regarding our expectations and beliefs
about the market and industry, our goals, plans, and expectations and beliefs
regarding our business strategy, attributes for successful stores,
merchandising and distribution, our beliefs regarding the future success of our
stores and our merchandising strategy, our expectations and beliefs regarding
competition, competitors, the basis of competition and our ability to compete,
our beliefs regarding our ability to hire and retain personnel and the labor
costs associated with island wages, our beliefs regarding period to period
results of operations, our expectations regarding future growth and financial
performance our expectations regarding international sales and our revenues,
our expectations and beliefs regarding revenue and revenue growth, our
expectations regarding our strategies, our expectations regarding fluctuations
in revenues, operating results and comparable store sales, our beliefs and
expectations regarding our existing facilities and the availability of
additional space in the future, our intent to use all available funds for the
expansion and the operation of our business and not to declare or pay any cash
dividends, our beliefs and expectations regarding our results of operation and
financial position, our intentions and expectations regarding utilization of
tax benefits and credits, our beliefs and expectations regarding liquidity and
capital resources and that amounts available under our various credit
facilities, existing cash available for working capital purposes and cash flow
from operations will be sufficient to meet our cash requirements, and our
expectations regarding the impact of recent accounting pronouncements and
revenue recognition matters. These statements are subject to risks and
uncertainties that could cause actual results and events to differ materially
from those anticipated. These risks and uncertainties include without
limitation those identified in the section of this annual report on Form 10-K
entitled "Risk Factors That May Affect Future Results" below. The Company
undertakes no obligation to update forward-looking statements to reflect events
or circumstances occurring after the date of this annual report on Form 10-K.
As used in this annual report on Form 10-K, unless the context otherwise
requires, the terms "we," "us," "the Company," and "Cost-U-Less" refer to
Cost-U-Less, Inc., a Washington corporation, and its subsidiaries.
Item 1. Business
Overview
Cost-U-Less operates mid-sized warehouse club-style stores in the United
States Territories ("U.S. Territories"), foreign island countries in the
Pacific and the Caribbean, the Hawaiian Islands and Sonora, California. The
Company's primary strategy is to operate in island markets, offering
predominately U.S. branded goods. The Company currently operates eleven stores:
two stores in each of Hawaii and Guam, and one store in each of St. Thomas, St.
Croix, American Samoa, Fiji, Curacao, St. Maarten and Sonora, California.
The Company opened its first retail warehouse store in 1989 in Maui,
Hawaii. In 1992, the Company began to expand by opening stores in other island
locations. After experiencing success with its mid-sized store concept, the
Company began experimenting in late 1992 with similar stores in various
mainland markets while continuing to open stores in island markets. Facing
increasing competition from larger discount retailers and warehouse clubs in
its mainland markets, management decided in 1995 to return its focus to its
core island markets and began closing its mainland stores. The Company's
process of closing five of its six mainland stores was completed in 1997.
In 1998, the Company opened two stores in Fiji. In 1999, the Company
opened two stores in New Zealand and one in Curacao. In 2000, the Company
opened a store in St. Maarten, located in the Caribbean near the Company's St.
Thomas and St. Croix stores.
In June 2000, the Company closed its two New Zealand stores, as well as
its buying office in Auckland. Although the Company had introduced what it
believed to be the first warehouse club concept to the New Zealand marketplace,
the Company believes that the loyalty of New Zealand customers to many regional
brands resulted in disappointing sales by the new stores of the U.S. brands
primarily sold by the Company.
In February 2001, the Company closed one of its two Fiji stores, due
primarily to the impact that the political turmoil in Fiji was having on the
tourist industry. The resulting economic downturn severely impacted the
performance of its store in Nadi, Fiji. The Company's remaining store in Fiji
is located in the city of Suva, which is the capital and the primary population
center of Fiji.
During the remainder of fiscal 2001, the Company focused on improving the
operations and merchandising of its eleven stores.
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Industry Overview
Traditional warehouse clubs such as Costco Companies, Inc. ("Costco"),
BJ's Wholesale Club, Inc. and Sam's Club, a division of Wal-Mart Stores, Inc.
("Wal-Mart"), focus on both retail and small-business customers, with store
formats averaging approximately 115,000 square feet. These retailers typically
(i) offer a range of national brand and selected private label products at low
prices, often in case, carton or multiple-pack quantities, (ii) provide
no-frills, self-service warehouse facilities with pallet-stacked product
aisles, and (iii) charge annual membership fees. Although the Company employs
many of the retailing methods of the larger participants in the warehouse club
industry, the Company operates smaller stores (averaging approximately 30,000
square feet), does not charge a membership fee, typically locates its stores in
smaller geographic areas with less concentrated population centers, and relies
to a greater degree on long-haul water transportation than do other such
companies.
While the typical U.S. warehouse club customer has virtually unlimited
access to popular U.S. brand-name products, the Company believes these products
are carried by relatively few local retailers in a number of island markets.
Moreover, island markets often demonstrate unique consumer preferences which
typically require retailers to conduct local research and incorporate flexible
merchandise purchasing policies in order to offer a diverse selection of local
products, as well as popular U.S. brand-name products.
Business Strategy
The Company's business strategy is to enter small island markets ahead of
large warehouse club competitors, select markets familiar with the warehouse
club concept, offer U.S. goods where availability of such goods is minimal and
significant demand exists, leverage island-operations expertise, utilize modern
systems and merchandising methods, offer competitive prices while maintaining
attractive margins, and provide a local product mix while benefiting from low
overhead costs.
Expand to New Markets. The Company intends to pursue future growth by
expanding into markets that other warehouse clubs and discount retailers have
not yet entered, particularly in the Pacific and Caribbean regions. The pace at
which the Company will open new stores will be dictated by its strategic
planning process. The Company plans to refine its expansion efforts to focus on
markets with high U.S. brand awareness and demand, as well as other attributes
that typify its most successful stores. Future development of the Company's
business will be directed to markets in which the Company can compete
effectively by offering competitive prices while maintaining low costs of goods
and services to consumers. Currently, the Company has no plans to open new
stores during 2002, but is in the process of analyzing opportunities for new
stores in the future.
Enter Markets Familiar With Warehouse Concept. The Company plans to seek
markets that have some familiarity with the warehouse club concept. Residents
of potential island markets often gain familiarity with the warehouse club
concept through travel to the U.S. and other markets where warehouse clubs are
present. The Company believes that the presence of this attribute has helped
accelerate market acceptance of Company stores in the past.
Offer U.S. Goods to Meet Market Demand. The Company believes that markets
that have awareness and acceptance of U.S. goods but have limited access to
those goods offer substantial sales and profit potential. The Company believes
procuring U.S. goods in large volumes and shipping them long distances to
island stores are two of its core competencies.
Leverage Island-Operations Expertise. Through its experience in opening
and operating retail warehouse club-style stores in the U.S. Territories,
foreign island countries and the Hawaiian Islands, the Company believes it has
developed a depth of expertise in dealing with the inherent challenges of
island market operations. The Company has refined a mid-sized building
prototype that is designed to endure severe island weather conditions and that
incorporates low construction costs and easily replicated specifications.
Through its long-standing relationships with steamship lines, the Company
negotiates what it believes to be competitive transportation rates while
selecting efficient shipping routes and utilizing cost-effective freight
handling techniques, including the use of both Company-operated cross-dock
depots and independently operated distribution facilities.
Utilize Modern Systems and Merchandising Methods. The Company believes
that many merchants in its most promising target markets have not adopted
modern retail operating efficiencies and do not have access to vendor network
and distribution channels equivalent to those developed by the Company.
Emphasize Strong Margins While Maintaining Everyday Low Prices. In
addition to providing a pleasant shopping atmosphere, the Company strives to
sell its products at prices that it believes are lower than those offered
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by its local island competitors, yet still above those that could be charged in
mainland markets. By leveraging its retail operating efficiencies, access to
volume-purchasing discounts and distribution capabilities, the Company believes
it is able to acquire some products at a significantly lower cost than that
paid by other local island retailers. Historically, these factors have enabled
the Company to achieve higher margins than those achieved by mainland warehouse
clubs and discount retailers.
Use Localized Product Sourcing Yet Derive Benefits of Centralized
Purchasing. The Company conducts market research through its vendors, store
managers and resident employees to ascertain the product preferences of each
particular locale, including which U.S. brands are favored and which regional
and ethnic items are desired. To the extent possible, the Company's buyers then
procure these products through its centralized purchasing department, thus
deriving the benefits of volume purchase discounts, streamlined distribution
and enhanced selection. The remaining products, including locally produced
items that are available only in a particular region, are generally purchased
by store managers and Company buyers directly from suppliers located in the
region.
Market and Site Selection
The Company believes that there are certain key attributes for successful
stores, such as acceptance and demand for U.S. goods, familiarity with the
warehouse concept, and absence of large warehouse club competition. Once the
Company identifies a target location as a possible site for its expansion and
is satisfied with the political and regulatory environment in the target
location, the Company compares the prices charged by local competitors to the
prices the Company would need to charge in order to achieve an acceptable
return on its investment (after factoring in cost of the product, cost of
freight, duties, port charges, transportation and taxes). If the Company's
market research indicates that the Company would be able to charge an adequate
price for its products, the Company commences a formal search for a suitable
store site. Desirable attributes of suitable sites include a central location
in a population center, sufficient space for the Company's facility, including
parking and loading docks, access to utilities and acceptable geological
conditions for successful construction.
The Company generally does not intend to own the land or buildings for its
stores. To the extent, however, that the Company believes it to be advantageous
to purchase land for new store sites or to construct new store buildings, the
Company may use its cash resources or existing financing sources during the
construction period and subsequently attempt to obtain permanent financing
after the stores are opened. The ability of the Company or its potential future
landlords to secure financing for new stores is subject to the availability of
commercial real estate loans; failure to secure adequate financing on a timely
basis would delay or potentially prevent new store openings.
Store Economics
The Company's eleven stores that were open during all of fiscal 2001
generated annual average net sales of approximately $14.7 million, average net
sales per square foot of approximately $485, average annual per store
contribution of approximately $570,000, and average annual per store
contribution before depreciation of approximately $690,000. Store contribution
is store gross profit less direct store operating expenses. The average
investment in buildings, equipment and leasehold improvements as of December
30, 2001 in these eleven stores was approximately $1.2 million. The average
investment in inventory, net of accounts payable of approximately 63%, was
$625,000 at December 30, 2001. The store contribution return on average
investment for fiscal 2001 for these eleven stores was approximately 30%.
Store Layout
The Company has incorporated into its prototype store many standard
features found in domestic warehouse clubs that had not been previously used in
many island markets. Store layout and interior designs were planned and
calculated using computer models, with the goal of maximizing the sales per
square foot and providing uniformity among the stores. Further, the Company
believes that its use of loading docks, comparatively large freezer and
refrigeration space with state-of-the-art equipment, efficient shelving and
display racks, computerized cash registers and inventory tracking systems, and
multiple checkout lanes helps give it a competitive advantage over many island
competitors. Each Company store is outfitted with adjustable metal shelving
that allows the Company to vary the display of its product based on each
location's specific consumer needs. Each island store has backup generators
designed to protect perishables and the store's security system during
disruption of electric service caused by severe weather conditions that can
occur in island markets. Additionally, the Company has designed its prototype
to withstand the severe wind and heavy rain associated with hurricanes,
typhoons and tropical storms.
The Company has used considerable care in developing its store layout,
which features a logical flow to encourage shopping of all departments. When
ready for check out, the customer proceeds to the check-out area
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in the front of the store, which usually features 10 lanes. During a typical
store visit, the average customer will spend approximately $45. Various forms
of payment are accepted, including food stamps and debit and credit cards, and
credit is extended to some local businesses and government agencies. Utilizing
a no-frills approach, the stores display items in steel racking, usually on the
vendor's pallets or in open cases, to maximize warehouse space and minimize
labor costs. In-store signage reinforces the basic value image, while stores
generate customer excitement through the use of end-cap displays featuring new
merchandise and special promotions, food demonstrators offering product
samples, and ongoing introduction of new items.
The Company has also attempted to minimize costs through the design of its
stores. The Company does not use expensive fixtures such as floor tiles and
false ceilings, and thereby lowers construction and maintenance costs. In
addition, the Company's refrigeration supplier has designed specialized
refrigeration units using modern equipment that allows for cost-effective
monitoring, maintenance and repair, and keeps energy costs to a minimum. The
Company has also developed standardized construction specifications and has
negotiated competitive prices on its building materials, such as metal exterior
panels, building components, store equipment and shelving, thus allowing the
Company to control material costs on a per-facility basis and help ensure
uniformity of materials throughout its facilities and minimizing the Company's
lease expenses.
Merchandising
The Company typically carries approximately 2,500 stock-keeping units
("SKUs"), compared to the 3,500 to 5,000 SKUs estimated by industry sources to
be carried by traditional warehouse clubs. The stores do not have certain
departments found in most large-format warehouse clubs, such as automobile
tires, bakery, photo finishing and prescription drugs. All stores feature the
following main product categories:
Food-Perishables. Meat, produce, deli, dairy and frozen items represent
approximately 27% of a typical store's net sales. The "reach-in" freezers and
coolers are substantially larger than those found in the stores of most of the
Company's local island competitors.
Food-Non-perishables. Dry grocery goods, including soda, wine, beer,
liquor, candy and snacks, represent approximately 40% of a typical store's net
sales. Also included in this area are ethnic and specialty items catering to
local consumer demands.
Nonfood. Other nonfood items comprise the remaining 33% of a typical
store's net sales, and include tobacco, sundries, health and beauty, office,
hardware, electronics, housewares, furniture and sporting goods.
Purchasing. The Company balances its product mix by providing popular U.S.
brand name products together with local ethnic items found in each island
region. Approximately 30% of the Company's items are produced locally or
purchased through local suppliers in each market. Offering locally purchased
merchandise enables the Company to better serve its island customers and offer
an innovative variation to the warehouse store format. Store managers are able
to purchase product that may be available only on their particular islands. The
Company's buyers monitor sales and inventory levels on a daily basis from all
of the Company's stores. In an effort to cater to retail customers who
generally purchase products for home use, the Company carries products in
various product sizes, including single packages, "bulk packages" and mid-sized
"value-packs." The Company purchases merchandise from manufacturers and
suppliers on a purchase order basis exclusively.
Pricing. The Company strives to be the "low price leader" for the markets
it serves. The Company does not charge its customers a membership fee, thereby
allowing all consumers to receive the benefits of the Company's value-pricing
philosophy. The Company provides everyday low prices that are often lower than
regular prices offered at most retailers, such as grocery stores, and are
generally intended to be slightly lower than those offered by mass merchant
discount retailers, such as Wal-Mart and Kmart Corporation ("Kmart"), that
operate in some of the Company's island markets. In an effort to achieve the
lowest prices available in a particular market, the Company regularly compares
prices and products being offered by the Company's local competitors.
Generally, given the economic efficiencies the Company can bring to bear with
its ability to purchase product at larger quantities as well as its efficient
distribution system that allows it to take advantage of optimal freight and
transportation costs, management believes that the Company has a competitive
advantage when pricing most of its products compared to local competition.
However, if the comparison of local competitors' prices discloses that the
Company's prices exceed those of its local competition, store managers have the
authority to reduce prices to remain competitive. This decentralization of
pricing decisions allows the Company to respond quickly and efficiently to
competitive challenges in each of its island markets.
5
Distribution
The Company currently uses a Company-operated distribution facility in San
Leandro, California and independently operated facilities in Port Everglades,
Florida, Sacramento, California, Auckland, New Zealand and Sydney, Australia.
The Company has no written agreements with the independently operated
distribution facilities, but instead has month-to-month service relationships.
At each distribution facility, merchandise is received, consolidated and
cross-docked, and ultimately shipped in fully loaded containers to the
Company's stores. The depot has a "lane" designated for each store; when a full
container load is queued into the lane, it is loaded by forklift into a cargo
container, which, when filled, is then delivered to the closest port for
shipment to the designated store. Management has significant experience and
long-term relationships with steamship lines and, with its present volume, has
negotiated what it believes to be competitive transportation rates. The Company
does not have a warehouse, but controls inventory levels in stores by
maintaining sufficient back stock in stores combined with efficient cross-dock
facilities. For perishable items, such as meats, frozen and chill goods, the
Company uses independently operated consignment depots. Each supplier of such
perishable items pays a storage charge for use of the depots based on the
amount of space used for the storage of the supplier's goods. Fruits and
vegetables are purchased direct from established suppliers who load the
refrigerated containers on a direct basis for each store.
Management Information Systems
The Company considers management information systems to be a key component
of its strategic plan. The Company tracks all inventory movement, sales and
purchase orders by SKU number, vendor number, store and date. The Company
currently uses electronic point-of-sale equipment in all stores. All data and
communications from each location are sent via the Company's wide area network,
to the computer system located at the corporate headquarters in Preston,
Washington. The Company installed new computer hardware to operate its
inventory control system in January 1999, which has enhanced, extended and
improved the data capabilities of its systems. The Company's wide area network
provides communications capabilities that allow for quick responses to
ever-changing customer needs and local retail opportunities. The ability to
quickly and consistently communicate between headquarters and store locations
is necessary when stores are located in such remote locations.
Employee Organization, Training and Compensation
Management of each store generally consists of a store manager, one
assistant manager and two to three department managers, depending on the store.
The merchandising manager oversees the training and day-to-day operations of
the stockers and forklift operators. The receiving manager oversees the
day-to-day receiving operations and the receiving clerks. The administrative
manager oversees the training and day-to-day operations of the vault clerks,
cashiers and security personnel, if applicable.
The Company's goal is to hire most of those employees from the island
markets, thus creating job opportunities for local residents. The Company
attempts to promote its store managers internally. The Company requires its
store managers to complete an approximately six-month training program in a
Company store. New store employees initially receive one to two weeks of
training, which typically includes working alongside individuals in comparable
positions before working without direct supervision. The Company has found that
such on-the-job training, together with the use of detailed operating and
training manuals, is an effective way to introduce new employees and managers
to the Company's systems and procedures.
The Company strives to attract and retain highly motivated,
performance-oriented employees and managers by offering competitive
compensation, including bonus programs based on their performance. During 2000
and 2001, the Company's Manager Bonus Program paid managers an annual bonus
based on store and departmental profitability targets. Prior to 2000, the
Company's Manager Bonus Program was based on the net income of the Company. In
2001, the Company also implemented a sales incentive bonus program for all
store employees based on sales targets. Although the Company believes that it
generally pays its employees above-market wages and is thereby able to attract
and retain high-quality employees, it further believes that island wages are
generally lower than mainland wages and thus result in comparatively lower
labor costs.
Customer Service
The Company brings to its island markets a commitment to customer service
that management believes gives it a competitive advantage in each of the local
markets it serves. The Company's store layout is designed to maximize floor
space used for selling product as well as to give customers a spacious feel
while shopping. Various forms of payments are accepted, including food stamps
and credit and debit cards, and credit is extended to some local businesses and
government agencies. The Company has a 30-day, no-questions-asked return
policy. Each of the
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Company's stores has approximately 10 checkout lanes, which allows for quick
and efficient shopping. Each store features a customer desk where customers can
have questions answered, usually by a management team member. In addition,
employees are trained to help customers locate store products.
Marketing and Advertising
The Company generally relies on word-of-mouth advertising in order to save
on advertising and marketing costs and pass on the savings to its customers.
The Company has historically spent less than 0.2% of net sales on advertising.
However, in more competitive markets, the Company may experience higher
marketing and advertising costs.
Competition
The warehouse club and discount retail businesses are highly competitive.
The Company historically has faced significant competition from warehouse clubs
and discount retailers such as Wal-Mart, Kmart and Costco in Hawaii, and from
Kmart in the U.S. Virgin Islands and Guam. The Company's competition also
consists of discount retailers and other national and international grocery
store chains. Some of the Company's competitors have substantially greater
resources, buying power and name recognition than the Company. The Company
plans to target its future expansion in additional island markets that it
believes are underserved by existing retailers and not yet penetrated by large
warehouse clubs and discount retailers. The cost of doing business in island
markets is typically higher than on the U.S. mainland because of ocean freight
and duty costs and higher facility costs. While the Company expects that the
size of many of the markets in which it operates or expects to enter will delay
or deter entry by many of its larger competitors, there can be no assurance
that the Company's larger competitors will not decide to enter these markets or
that other competitors will not compete more effectively against the Company.
The Company's gross margin and operating income are generally lower for those
stores in markets where traditional warehouse clubs and discount retailers also
operate stores, due to increased price competition and reduced market share.
The Company may be required to implement price reductions and other actions in
order to remain competitive in its markets. PriceSmart, a membership warehouse
club, opened a store in May 2001 on St. Thomas, where the Company has an
established market share. To remain competitive in St. Thomas, the Company
implemented a customer rewards program, which presents customers with
merchandise certificates based on the achievement of specified levels of
customer purchases. Additionally, PriceSmart opened a store in Guam in March of
2002. In response, the Company has remodeled its Dededo store and has increased
its price competitiveness and marketing activities in Guam. The Company's
ability to expand into new markets and operate profitably in new and existing
markets, particularly small markets, may be adversely affected by the existence
or entry of competing warehouse clubs or discount retailers.
Intellectual Property
The Company obtains proprietary rights protection for trademarks by filing
applications for registrable marks with the U.S. Patent and Trademark Office.
The Company has been granted federal registration of the name and stylized logo
"Cost-U-Less." In addition, the Company relies on trade secret laws to protect
its proprietary rights. While the Company believes that its trademarks and
other proprietary know-how have significant value, changing technology and the
competitive marketplace make the Company's future success dependent principally
upon its employees technical competence and the Company's business strategy.
There can be no assurance that third parties will not assert claims
against the Company with respect to existing and future trademarks, trade names
and sales techniques. In the event of litigation to determine the validity of
any third party's claims, such litigation could result in significant expense
to the Company and divert the efforts of the Company's management, whether or
not such litigation is determined in the favor of the Company.
Governmental Regulation
The Company is subject to various applicable laws and regulations
administered by federal, state and foreign regulatory authorities, including,
but not limited to, laws and regulations regarding tax, tariffs, currency
repatriation, zoning, employment and licensing requirements. Additionally, as
the Company pursues future expansion in foreign countries, the Company's
operations will be subject to additional foreign regulatory standards, laws and
regulations, in addition to customs, duties and immigration laws and
regulations. Changes in the foregoing laws and regulations, or their
interpretation by agencies and the courts, occur from time to time. While the
Company believes that it presently complies in all material respects with such
laws and regulations, there can be no assurance that future compliance will not
have a material adverse effect on the Company's business, financial condition
and operating results. See "Risk Factors That May Affect Future Results--Risks
Associated With Island and International Operations."
7
Employees
As of March 10, 2002, the Company had 42 full-time employees at its
corporate headquarters in Preston, Washington, and 14 employees at its main
distribution facility in San Leandro, California. In total, the Company employs
approximately 500 people worldwide. None of the Company's employees are covered
by collective bargaining agreements.
Risk Factors That May Affect Future Results
You should carefully consider the following factors that may affect future
results and other information included in this Annual Report. The risks and
uncertainties described below are not the only ones the Company faces.
Additional risks and uncertainties not presently known to the Company or that
are currently deemed immaterial also may impair our business operations or
could cause actual results to differ from historical results or those
anticipated. If any of the following risks actually occur, our business,
financial condition and operating results could be materially adversely
affected.
Small Store Base. The Company opened its first store in 1989, opened a
total of 21 stores through December 2001, and presently operates eleven stores.
The Company's closure of ten stores has adversely affected the Company's
operating results. Should (i) any new store be unprofitable, (ii) any existing
store experience a decline in profitability, or (iii) the Company's general and
administrative expenses increase to address the Company's expanded operations,
the effect on the Company's operating results would be more significant than
would be the case if the Company had a larger store base, and could have a
material adverse effect on the Company's business, financial condition and
operating results. Although the Company intends to carefully plan for the
implementation of additional stores, there can be no assurance that such plans
can be executed as envisioned or that the implementation of those plans will
not have a material adverse effect on the Company's business, financial
condition and operating results. In addition, the Company's ability to acquire
products at a lower cost than competitors or obtain volume-based pricing can be
adversely affected because of its small store base.
Competition. The warehouse club and discount retail businesses are highly
competitive. The Company historically has faced significant competition from
warehouse clubs and discount retailers, such as Wal-Mart, and Costco in Hawaii,
and from Kmart in the U.S. Virgin Islands and Guam. The Company's competition
also consists of discount retailers and other national and international
grocery store chains. Some of the Company's competitors have substantially
greater resources, buying power and name recognition than the Company. The cost
of doing business in island markets is typically higher than on the U.S.
mainland because of ocean freight and duty costs and higher facility costs.
While the Company expects that the size of many of the markets in which it
operates or expects to enter will delay or deter entry by many of its larger
competitors, there can be no assurance that the Company's larger competitors
will not decide to enter these markets or that other competitors will not
compete more effectively against the Company. The Company's gross margin and
operating income are generally lower for those stores in markets where
traditional warehouse clubs and discount retailers also operate stores, due to
increased price competition and reduced market share. The Company may be
required to implement price reductions and other actions in order to remain
competitive in its markets. PriceSmart opened a store in May 2001 on St.
Thomas, where the Company has an established market share. To remain
competitive in St. Thomas, the Company implemented a customer rewards program,
which presents customers with merchandise certificates based on the achievement
of specified levels of customer purchases. Additionally, PriceSmart opened a
store in Guam in March of 2002. In response, the Company has remodeled its
Dededo store and has increased its price competitiveness and marketing
activities in Guam. Moreover, the Company's ability to expand into and operate
profitably in new markets, particularly small markets, may be adversely
affected by the existence or entry of competing warehouse clubs or discount
retailers.
Ability to Manage Growth. The success of the Company's future growth
strategy will depend to a significant degree on the Company's ability to (i)
operate stores on a profitable basis, (ii) expand its operations through the
opening of new stores, (iii) properly identify and enter new markets, (iv)
locate suitable store sites, (v) negotiate acceptable lease terms, (vi) locate
local developers to construct facilities to lease, (vii) construct or refurbish
sites, and (viii) obtain necessary funds on satisfactory terms. The Company has
not opened stores in foreign island markets at a rapid pace and has no store
openings planned for 2002. The Company has no operating experience in many of
the markets in which it may open new stores. In fact, in June 2000, the Company
closed the two stores that it had opened in New Zealand in 1999, as they had
performed below expectations, due in part to competitive and merchandising
challenges that are different from other Company stores. Additionally, the
Company closed one of its two Fiji stores, due primarily to the impact that the
political turmoil in Fiji was having on the tourist industry.
8
The resulting economic downturn severely impacted the performance of its store
in Nadi, which was closed in February 2001. New markets may present
operational, competitive, regulatory and merchandising challenges that are
different from those currently encountered by the Company. There can be no
assurance that the Company will be able to adapt its operations to support its
future expansion plans or that the Company's new stores will be profitable. Any
failure by the Company to mange its growth could have a material adverse affect
on the Company's business and results of operations.
Additionally, the Company relies significantly on the skill and expertise
of its on-site store managers. The Company will be required to hire, train and
retain skilled managers and personnel to support its growth, and may experience
difficulties locating store managers and employees who possess the training and
experience necessary to operate the Company's new stores, including the
Company's management information and communications systems, particularly in
island markets where language, education and cultural factors may impose
additional challenges. Further, the Company has encountered, and may continue
to encounter, substantial delays, increased expenses or loss of potential sites
due to the complexities, cultural differences, and local political issues
associated with the regulatory and permitting processes in the island markets
in which the Company may locate its stores. There can be no assurance that the
Company will be able to open new stores according to its business plans, or
that it will be able to continue to attract, develop and retain the personnel
necessary to pursue its growth strategy. Failure to do so could have a material
adverse effect on the Company's business, financial condition and operating
results.
The Company may not be able to fully pursue its future growth strategy by
expanding into new island markets. The Company believes that there are certain
attributes of appropriate markets into which the Company may expand its
operations through the opening of new stores, including:
o Acceptance and demand for U.S. goods;
o Familiarity with the warehouse concept;
o Absence of large warehouse club competition;
o Stable political and regulatory environment; and
o Favorable pricing structure to provide adequate return on investment
The Company believes the number of new island markets with these
attributes is limited in number and is decreasing as a result of, among other
things, the entry by many of the Company's larger competitors into these
markets. If the Company is unable to expand into new island markets ahead of
large warehouse club competitors, its business, financial condition and results
of operations may be adversely affected.
The Company also will need to continually evaluate the adequacy of its
existing systems and procedures, including store management, financial and
inventory control and distribution systems. As the Company grows, it will need
to continually analyze the sufficiency of its distribution depots and inventory
distribution methods and may require additional facilities in order to support
its planned growth. There can be no assurance that the Company will anticipate
all the changing demands that its expanding operations will impose on such
systems. Failure to adequately update its internal systems or procedures as
required could have a material adverse effect on the Company's business,
financial condition and operating results.
Risks Associated With Island and International Operations. The Company's
net sales from island operations represented approximately 88% of the Company's
total net sales for fiscal 2001. The Company expects that its island and
international operations together will continue to account for nearly all of
its total net sales. The distance, as well as the time-zone differences,
involved with island locations impose significant challenges to the Company's
ability to manage its operations. Logistical challenges are presented by
operating individual store units in remote locations, whether in terms of
information flow or transportation of goods.
Isolation of Store Operations From Corporate Management; Increased
Dependence on Local Managers. The Company's headquarters and administrative
offices are located in Preston, Washington; however, ten of the Company's
eleven stores and a majority of its employees are located on islands. Although
the Company invests resources to hire and train its on-site managers, the
inability of the Company's executives to be physically present at the Company's
current and planned store sites on a regular basis may result in (i) an
isolation of store operations from corporate management and an increased
dependence on store managers, (ii) a diminished ability to oversee employees,
which may lead to decreased productivity or other operational problems, (iii)
construction delays or difficulties caused by inadequate supervision of the
construction process, and (iv) communication challenges. The
9
Company may need to invest significant resources to update and expand its
communications systems and information networks and to devote a substantial
amount of time, effort and expense to national and international travel in
order to overcome these challenges; failure to do so could have a material
adverse effect on the Company's business, financial condition and operating
results.
Uncertainties Associated With Expansion Outside U.S. Territories.
Currently, eight of the Company's stores are located in the U.S. Territories
and foreign island countries throughout the Pacific and Caribbean. The
remaining three stores are in Hawaii and California. The Company's future
expansion plans may involve entry into additional foreign countries, which may
involve additional or heightened risks and challenges that are different from
those currently encountered by the Company, including risks associated with
being further removed from the political and economic systems in the United
States. The Company does not currently engage in currency hedging activities.
On February 15, 2001, the Company closed one of the two stores it operated in
Fiji due primarily to the impact that the political turmoil in Fiji was having
on the tourist industry, with the resulting economic downturn severely
impacting its store in Nadi. The Company's remaining store in Fiji is located
in the city of Suva, which is the capital of Fiji and the primary population
center. There can be no assurance that further political and economic changes
in Fiji will not have a material adverse effect on the Company's business,
financial condition and operating results. The failure to adequately address
the additional challenges involved with international operations, and
specifically those associated with the Company's store in Fiji, could have a
material adverse effect on the Company's business, financial condition and
operating results.
Difficult Transportation Environment. The Company's island locales require
the transportation of products over great distances on water, which results in
(i) substantial lags between the procurement and delivery of product, thus
complicating merchandising and inventory control methods, (ii) the possible
loss of product due to potential damage to, or destruction of, ships or
containers delivering the Company's goods, (iii) tariff, customs and shipping
regulation issues, and (iv) substantial ocean freight and duty costs. Moreover,
only a limited number of transportation companies service the Company's
regions, none of which has entered into a long-term contract with the Company.
The inability or failure of one or more key transportation companies to provide
transportation services to the Company, changes in the regulations that govern
shipping tariffs or any other disruption in the Company's ability to transport
its merchandise could have a material adverse effect on the Company's business,
financial condition and operating results.
Governmental Regulations. Governmental regulations in foreign countries
where the Company plans to expand its operations might prevent or delay entry
into the market or prevent or delay the introduction, or require modification,
of certain of the Company's operations. Additionally, the Company's ability to
compete may be adversely affected by foreign governmental regulations that
encourage or mandate the employment of citizens of, or purchase of supplies
from vendors in a particular jurisdiction. The Company may also be subject to
taxation in these foreign jurisdictions, and the final determination of its tax
liabilities may involve the interpretation of the statutes and requirements of
the various domestic and foreign taxing authorities. The Company may also be
subject to currency repatriation restrictions. There can be no assurance that
any of these risks will not have a material adverse effect on the Company's
business, financial condition and operating results.
Weather and Other Risks Associated With Island Operations. The Company's
operations are primarily located on islands subject to volatile weather
conditions and natural disasters, which could result in delays in construction
or result in significant damage to, or destruction of, the Company's stores. In
addition, island operations involve uncertainties arising from (i) local
business practices, language and cultural considerations, including the
capacity or willingness of local business and government officials to provide
necessary services, (ii) the ability to acquire, install and maintain modern
capabilities such as dependable and affordable electricity, telephone,
computer, Internet and satellite connections often in undeveloped regions,
(iii) political, military and trade tensions, (iv) currency exchange rate
fluctuations and repatriation restrictions, (v) local economic conditions, (vi)
longer payment cycles, (vii) difficulty enforcing agreements or protecting
intellectual property, and (viii) collection of debts and other obligations in
foreign countries. There can be no assurance that the Company will be able to
devote the resources necessary to meet the challenges posed by island
operations, or that losses from business interruption will be adequately
compensated by insurance; any failure to do so would have a material adverse
effect on the Company's business, financial condition and operating results.
Dependence on Key Personnel. The Company's success depends in large part
on the abilities and continued service of its executive officers and other key
employees. In addition, the Company does not currently carry key-man
10
life insurance. There can be no assurance that the Company will be able to
retain the services of such executive officers and other key employees, the
loss of any of whom could have a material adverse effect on the Company's
business, financial condition and operating results.
Impact of General Economic Conditions. The success of the Company's
operations depends to a significant extent on a number of factors relating to
discretionary consumer spending, including employment rates, business
conditions, interest rates, inflation, population and Gross Domestic Product
levels in each of its island markets, taxation, consumer spending patterns and
customer preferences. There can be no assurance that consumer spending in the
Company's markets will not be adversely affected by these factors, thereby
affecting the Company's growth, net sales and profitability. A decline in the
national or regional economies of the United States and the U.S. Territories
where the Company currently operates or any foreign countries in which the
Company currently or will operate could have a material adverse effect on the
Company's business, financial condition and operating results.
Dependence on Systems. As the Company expands, it will need to upgrade or
reconfigure its management information systems. While the Company has taken a
number of precautions against certain events that could disrupt the operation
of its management information systems, it may experience systems failures or
interruptions, which could have a material adverse effect on its business,
financial condition and operating results. The Company's business is highly
dependent on communications and information systems, primarily systems provided
by third-party vendors. Any failure or interruption of the Company's systems or
systems provided by third-party vendors could cause delays or other problems in
the Company's operations, which could have a material adverse effect on the
Company's business, financial condition and operating results. The Company
experienced no negative impact from Year 2000 systems issues.
Utilization of Tax Benefits. The Company's ability to utilize various tax
benefits and credits is dependent on its ability to generate adequate taxable
income in the United States and in foreign jurisdictions. As of December 30,
2001, the Company had recognized an aggregate foreign tax benefit of $2.4
million on foreign operating losses and a corresponding valuation allowance of
$1.8 million. Approximately one-half of the Net Operating Losses ("NOL's") will
begin expiring in the year 2006. The remaining NOL's were generated in Curacao,
St. Maarten and Australia and are not subject to expiration time limits.
Additionally, during fiscal 2001 and fiscal 2000, the Company recorded foreign
tax credits of $0.4 million and $0.3 million, respectively, with corresponding
valuation allowances for the entire amount of the credits. Utilization of the
tax benefit and foreign tax credits is dependent on the Company generating
future taxable income. There can be no assurance that the Company will be able
to produce adequate future taxable income to utilize this tax benefit, and
failure to generate such income may have a material adverse effect on the
Company's business, financial condition and operating results. See "Notes to
Consolidated Financial Statements--Income Taxes."
Anti-takeover Considerations. Pursuant to the Company's Restated Articles
of Incorporation (the "Restated Articles"), the Company's Board of Directors
has the authority, without shareholder approval, to issue up to 2,000,000
shares of Preferred Stock and to fix the rights, preferences, privileges and
restrictions of such shares without any further vote or action by the Company's
shareholders. The Company's Restated Articles and Bylaws also provide for a
classified board and special advance notice provisions for proposed business at
annual meetings. These provisions, among others, may have the effect of making
it more difficult for a third party to acquire, or discouraging a third party
from attempting to acquire, control of the Company, even if shareholders may
consider such a change in control to be in their best interests. In addition,
Washington law contains certain provisions that may have the effect of
delaying, deferring or preventing a hostile takeover of the Company.
On February 23, 1999, the Company's Board of Directors declared a dividend
distribution of preferred share purchase rights (the "Rights") pursuant to a
Shareholder Rights Plan. The Rights initially trade with shares of the
Company's Common Stock and have no impact upon the way in which shareholders
can trade the Company's common stock. However, ten days after a person or group
acquires 15% or more of the Company's common stock, or such date, if any, as
the Board of Directors may designate after a person or group commences or
publicly announces its intention to commence a tender or exchange offer which
could result in that person or group owning 15% or more of the common stock
(even if no purchases actually occur), the Rights will become exercisable and
separate certificates representing the Rights will be distributed. The Rights
would then begin to trade independently from the Company's shares at that time.
The Rights are designed to cause substantial dilution to a person or group that
attempts to acquire the Company without approval of the Board of Directors, and
thereby make a hostile takeover attempt prohibitively expensive for the
potential acquirer. As of December 30, 2001, no rights have become exercisable.
11
Decreases in Sales. Fluctuations in Comparable Store Sales. Sales declined
4.5% in fiscal 2001 as compared to fiscal 2000. Sales increased 11.5% in fiscal
2000 over fiscal 1999, increased 24.8% in fiscal 1999 over 1998, and increased
7.2% in 1998 over 1997. Sales in fiscal 1997 declined 7.4% compared to fiscal
1996. The decline in fiscal 2001 was primarily due to the impact of
deteriorating ecomomies in Guam, Samoa and Curacao, Netherlands Antilles, as
well as the impact of the opening of a membership warehouse club in St. Thomas.
The decline in 1997 was primarily due to store closures in the continental
United States and to a slight decline in comparable store (stores open at least
13 months) sales, largely attributable to the Hawaii market. The fiscal 2000
increase was primarily due to sales from the St. Maarten store opened in June
2000, an increase in business sales, the benefit of an additional week of sales
in fiscal 2000 as compared to fiscal 1999 and sales from the New Zealand stores
that opened in November 1999 and were closed in June 2000. The increase in
fiscal 1999 and fiscal 1998 was primarily due to additional stores. Comparable
store sales decreased 4.7% in fiscal 2001, 2.2% in fiscal 2000 and 0.5% in
fiscal 1997. Comparable store sales increased 6.8% in fiscal 1999 and 9.9% in
fiscal 1998.
A variety of factors affect the Company's comparable store sales,
including, among others, actions of competitors (including the opening of
additional stores in the Company's markets), the retail sales environment,
general economic conditions, weather conditions and the Company's ability to
execute its business strategy effectively. In addition, the Company's future
expansion may result in opening additional stores in markets where the Company
already does business. The Company has experienced a reduction in sales at an
existing Company store when a new Company store was opened in the same market.
These factors may result in future comparable store sales declines. Moreover,
there can be no assurance that comparable store sales for any particular period
will not decrease in the future.
Ability to Maintain Existing Credit and Obtain Additional Credit. The
Company believes that amounts available under its various credit facilities,
existing cash available for working capital purposes, and cash flow from
operations will most likely be sufficient to fund the Company operations
through the next 12 months. However, if the Company were to lose any of its
various credit facilities, it could cause the Company's cash requirements to
exceed what is currently available under its existing credit facilities. There
can be no assurance that the Company will be able to obtain additional
financing when needed, or that any available financing will be on terms
acceptable to the Company.
Item 2. Properties
The Company currently leases a majority of its existing store locations.
The Company also leases the land for the St. Thomas and St. Maarten stores, but
owns the store facilities. The stores average approximately 30,000 square feet
and range in size from approximately 22,000 square feet to approximately 39,000
square feet. The store leases typically have a term of 10 years with options to
lease for an additional 5 to 10 years and typically are net leases. With the
exception of the Sonora store, which opened in an existing facility, all of the
Company's stores have been built to Company specifications.
Mid-Sized Format. The average size of the Company's eleven stores is
approximately 30,000 square feet, while the traditional warehouse stores found
in the United States average approximately 115,000 square feet. The Company has
developed three store "footprints" based on a 27,000, 36,000 and
42,000-square-foot facility, which is adaptable from anywhere between 25,000 to
45,000 square feet. The Company's prototype was developed in consultation with
architects and designers who helped design many of the warehouse stores
operating in the United States today. The prototypes were used in the
construction of the stores in Fiji, St. Thomas, Curacao and St. Maarten.
The Company has developed a standard lease that it uses as a starting
point for its lease negotiations with each potential landowner/developer. The
Company routinely negotiates a 10-year lease with at least two five-year
renewal options.
12
Approximate
Store Square Lease Options to
Location Date Opened Footage Term Expiration Date Extend
- --------------------------------------- ------------------- -------------- ---------- -------------------- -----------
Dededo, Guam .......................... May 1, 1992 31,200 10 years May 31, 2012 10 years
Hilo, Hawaii .......................... August 27, 1992 23,000 15 years August 31, 2006 10 years
Kapaa, Kauai .......................... March 18, 1993 22,000 17 years April 22, 2010 10 years
St. Thomas, USVI (Land Lease) ......... June 25, 1998 36,000 20 years September 30, 2017 30 years
Sonora, CA ............................ January 27, 1994 23,150 10 years January 1, 2004 10 years
St. Croix, USVI ....................... November 3, 1994 26,210 10 years November 1, 2004 10 years
Tamuning, Guam ........................ March 15, 1995 35,000 15 years March 1, 2010 10 years
Pago Pago, American Samoa ............. March 20, 1995 32,055 10 years February 28, 2005 15 years
Suva, Fiji ............................ November 12, 1998 30,000 10 years November 1, 2008 10 years
Curacao, Netherlands Antilles ......... March 2, 1999 38,711 10 years February 1, 2009 10 years
St. Maarten, Netherlands Antilles June 29, 2000 36,000 25 years February 25, 2024 30 years
(Land Lease) .........................
The Company relocated its headquarters office in June 2000 and now leases
approximately 14,000 square feet of office space for its headquarters in
Preston, Washington, which lease expires on December 31, 2003. The Company
relocated its Union City, California distribution facility in December 1999, to
a distribution facility in San Leandro, California. The San Leandro facility is
approximately 56,000 square feet, and the lease expires on January 31, 2007.
The Company believes that its distribution facilities will be sufficient to
meet the Company's needs at least through the end of fiscal 2003.
Item 3. Legal Proceedings
The Company may be subject to legal proceedings or claims, either asserted
or unasserted, that arise in the ordinary course of business. While the outcome
of these potential claims cannot be predicted with certainty, management does
not believe that any pending legal matters will have a material adverse effect
on the Company. However, any adverse outcome to future lawsuits against the
Company may result in a material adverse affect on its financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the fiscal year ended December 30, 2001.
13
PART II
Item 5. Market for Company's Common Stock and Related Shareholder Matters
The Company's Common Stock is currently traded on the Nasdaq SmallCap
Market under the symbol "CULS". The number of shareholders of record of the
Company's Common Stock at March 20, 2002, was 66.
The closing price of the Company's common stock as quoted on the Nasdaq
Small-cap Market on March 20, 2002 was $1.40 per share. High and low sales
prices for the Company's Common Stock for the periods indicated in 2001 and
2000, are as follows. Such prices reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
Stock Price
---------------------
Year High Low
- ---------------------------------------------- --------- ---------
Fiscal 2001 (ended December 30, 2001)
First Quarter .............................. 1.88 1.06
Second Quarter ............................. 2.00 1.50
Third Quarter .............................. 1.82 0.78
Fourth Quarter ............................. 1.48 0.82
Fiscal 2000 (ended December 31, 2000)
First Quarter .............................. 4.50 2.06
Second Quarter ............................. 3.00 1.25
Third Quarter .............................. 2.94 1.25
Fourth Quarter ............................. 1.88 0.94
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently anticipates that it will retain all future
earnings for use in the expansion and operations of its business and does not
anticipate paying cash dividends in the foreseeable future.
Concurrent with the Company's initial public offering on Form S-1
(Registration No. 333-52459) on July 23, 1998, the Company sold 160,000 shares
of Common Stock at $7.00 per share, in a Concurrent Reg. S Placement to Kula
Fund, in reliance on the exemption from registration provided by Regulation S
under the Securities Act of 1933, as amended. As part of the Concurrent Reg. S
Placement, the Company also sold to Kula Fund, for nominal consideration, a
warrant to purchase 117,000 shares of Common Stock at an exercise price equal
to $8.40 per share (120% of the per share price in the initial public
offering), which warrant contains standard net issuance provisions, is
fully exercisable, and will expire in July 2002.
14
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with
the consolidated financial statements and the notes thereto and the information
contained herein in "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The Company's fiscal year ends on the
last Sunday in December. All years presented represent 52-week fiscal years
except fiscal 2000, which was a 53-week fiscal year.
Selected Consolidated Financial and Operating Data
(in thousands, except per share data, average sales per square foot,
number of stores and percentage data)
Dec.30, Dec.31, Dec.26, Dec.27, Dec.28,
2001 2000(1) 1999 1998 1997
-------------- --------------- ------------- ----------- --------------
(Restated)
Income Statement Data:
Net sales ....................................... $177,856 $186,299 $167,079 $133,861 $124,865
Gross profit .................................... 28,932 28,349 27,395 22,324 20,468
Operating Expenses:
Store .......................................... 21,288 21,775 18,254 15,100 14,543
General and administrative ..................... 5,786 6,421 5,654 4,139 3,225
Store opening .................................. 68 518 1,217 747 327
Store closing .................................. 0 3,740 0 238 1,346
Operating income (loss) ......................... 1,790 (4,105) 2,270 2,100 1,027
Interest expense, net ........................... (589) (663) (403) (257) (427)
Other expense ................................... (155) (283) (57) (10) (40)
Income (loss) before income taxes ............... 1,046 (5,051) 1,810 1,833 560
Income tax provision ............................ 490 460 656 640 197
Net income (loss) ............................... $ 556 $ (5,511) $ 1,154 $ 1,193 $ 363
Earnings (loss) per common share:
Basic .......................................... $ 0.15 $ (1.53) $ 0.32 $ 0.45 $ 0.18
Diluted ........................................ $ 0.15 $ (1.53) $ 0.32 $ 0.43 $ 0.17
Weighted average common shares outstanding,
diluted ........................................ 3,607 3,599 3,618 2,759 2,124
Selected Operating Data:
Store contribution(2) .......................... $ 6,109 $ 4,940 $ 7,837 $ 6,596 $ 5,475
Stores opened .................................. 0 1 3 3 0
Stores closed .................................. 1 2 0 1 2
Stores open at end of period ................... 11 12 13 10 8
Average net comparable store sales per
square foot(3)(4) ............................ $ 485 $ 498 $ 515 $ 566 $ 485
Comparable-store net sales increase
(decrease)(3)(4) ............................. (4.7)% (2.2)% 6.8% 9.9% (0.5)%
Consolidated Balance Sheet Data:
Working capital ................................. $ 2,568 $ 535 $ 5,992 $ 9,241 $ 3,814
Total assets .................................... 41,606 41,717 45,812 39,270 22,815
Line of credit .................................. 2,173 2,700 2,163 0 376
Long-term debt, less current maturities ......... 3,077 3,344 2,517 2,036 1,169
Total shareholders' equity ...................... 15,341 14,794 20,665 19,596 9,670
- ------------
(1) Selected consolidated financial and operating data for 2000 have been
restated. For information regarding the restatement, see "Note 1 to the
Notes to Consolidated Financial Statements" included in Part II, Item 8.
(2) Store contribution is determined by deducting direct store expenses from
store gross profit.
(3) Fiscal 2000 was a 53-week year; all other fiscal years were 52-week years.
Comparable store net sales and average sales per square foot for fiscal
2000 have been adjusted to reflect a 52-week year. The Company's fiscal
quarters are 13 weeks, except 4th quarter 2000, which was a 14 week
quarter.
(4) A new store becomes comparable after it has been open for a full 13 months.
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis contains forward-looking
statements. All statements other than statements of historical fact made in
this Annual Report are forward-looking. Forward-looking statements reflect
management's current expectations and are subject to risks and uncertainties
discussed below, and identified in the section of this annual report on Form
10-K entitled "Risk Factors That May Affect Future Results", that could cause
actual results to differ materially from historical results or those
anticipated.
Overview
Cost-U-Less began operations in 1989 by opening a mid-sized warehouse
club-style store in Maui, Hawaii. The Company's store concept was successful in
the smaller, and in many ways more challenging, island markets. The Company
began experimenting in late 1992 with similar stores in various mainland
markets. Over the course of a three-year period, the Company opened six
mainland stores and seven island stores. However, the Company found that most
of the mainland stores did not meet the Company's performance expectations. The
Company therefore focused on its core competencies in operating island stores
and began closing its mainland stores. Currently only one mainland store
remains open and serves as an efficient testing ground for new operating and
merchandising methods. The Company intends to retain this store while targeting
its future growth on island markets. In 1998, the Company opened two stores in
Fiji, and in 1999 the Company opened two stores in New Zealand and one in
Curacao, Netherland Antilles.
During fiscal 2000, the Company focused on improving its mix of stores in
its relatively small store base, as under-performing stores may have a
materially adverse impact on Company performance. In June 2000, the Company
closed its two New Zealand stores and in February 2001, the Company closed its
Nadi, Fiji store. Although, the Company had introduced what it believed to be
the first warehouse club concept to the New Zealand marketplace, the Company
believes that the loyalty of New Zealand customers to many regional brands
resulted in disappointing sales of the U.S. brands primarily sold by the
Company's two stores. The Company closed the Nadi store primarily due to the
impact that the political turmoil in Fiji was having on the tourist industry.
The resulting economic downturn severely impacted the performance of its store
in Nadi. These actions were in line with the Company's strategy of evaluating
its existing locations and operations in an effort to improve profitability and
cash flow.
On June 29, 2000 the Company opened a store on the island of St. Maarten
in the Caribbean. The Company believes this island market has market conditions
that resemble those in islands in which the Company has been successful.
During the remainder of fiscal 2001, the Company focused on improving the
operations and merchandising of its eleven stores.
The Company currently operates eleven retail stores: two stores in Hawaii
and Guam and one store in each of St. Thomas, St. Croix, American Samoa, Fiji,
Curacao, St. Maarten and Sonora, California. The Company's stores are patterned
after the warehouse club concept, although the stores (i) are smaller
(averaging approximately 30,000 square feet vs. large format warehouse clubs of
approximately 115,000 square feet), (ii) generally target niche markets, mainly
foreign island countries (and U.S. Territories and U.S. island states), where
demographics do not support large format warehouse clubs, (iii) carry a wide
assortment of local and ethnic food items, and (iv) do not charge a membership
fee. Although the Company does not have large seasonal fluctuations in sales,
the fourth quarter is typically the highest sales quarter due to additional
holiday sales.
In 2001, the Company has continued its focus on its core island store
operations. The Company has also been reviewing its merchandising strategies,
both those that apply to all stores and those specific to each store in light
of the different conditions in each market. Currently, the Company has no plans
to open new stores during 2002, but is in the procees of analyzing
opportunities for future expansion. While management believes these actions can
improve profitability, there can be no assurance that these actions will be
successful.
On March 21, 2002, the Company announced that it had determined that the
previous accounting treatment historically afforded its foreign currency
translation adjustment associated with New Zealand was not consistent with
paragraph 14 of Statement of Financial Accounting Standard No.52 (FAS 52).
In June 2000 the Company discontinued all major business activity in New
Zealand upon the closure of its two stores and its Auckland buying office.
Although the Company had discontinued store and corporate buying activities in
June 2000, for the remainder of 2000 and through the first three quarters of
2001, it continued to base its conclusion that the New Zealand operations were
not substantially liquidated on the fact that the Company was still purchasing
inventory through the New Zealand subsidiary and negotiating final lease terms
on the closed store leases. The Company now believes that, because
16
the level of the ongoing New Zealand activities was so small relative to
activities prior to the closures, that "substantial liquidation," as
interpreted in paragraph 14 of FAS 52, had in fact occurred in June 2000, and
therefore the New Zealand foreign currency translation account should have been
written off at that time. The restatement is a result of the Company's
re-evaluation of the accounting interpretation and application of FAS 52, and
not the result of any improper conduct by Company personnel or lack of internal
controls.
As a result, the New Zealand foreign currency translation adjustments of
$388,000, which were previously recorded within Other Comprehensive Income
(loss), have been written off at June 25, 2000, and are included in the Store
Closure Expense of $3,740,000 in fiscal 2000.
Concurrent with this reassessment, other related foreign currency
translation adjustments have also been restated to reclassify that portion of
intercompany transactions that represent transactions and balances that are not
considered to be part of the net investment in the foreign entity, and
accordingly, related transaction gains and losses are recorded for that portion
representing non-permanent investments. Resulting foreign currency transaction
losses of $251,000 are included in other expenses of $283,000 in fiscal 2000.
Refer to the Company's Form 10-K/A for the year ended December 31, 2000, for a
further discussion of the impact of the restatement.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of the Company's net sales represented by certain consolidated income statement
data.
Fiscal Year Ended
-----------------------------------------------
December 30, December 31, December 26,
2001 2000 * 1999
-------------- -------------- -------------
(Restated)
Net sales ................................. 100.0 % 100.0 % 100.0 %
Gross margin .............................. 16.3 15.2 16.4
Operating Expenses:
Store .................................... 12.0 11.7 10.9
General and administrative ............... 3.3 3.4 3.4
Store opening ............................ -- 0.3 0.7
Store closing ............................ -- 2.0 --
Operating income (loss) ................... 1.0 (2.2) 1.4
Interest expense, net ..................... (0.3) (0.4) (0.2)
Other expense ............................. (0.1) (0.2) --
Income (loss) before income taxes ......... 0.6 (2.8) 1.1
Income tax provision ...................... 0.3 0.2 0.4
Net income (loss) ......................... 0.3% (3.0)% 0.7%
* The year ended December 31, 2000 was a 53-week fiscal year. The years ended
December 30, 2001 and December 26, 1999 were 52-week fiscal years.
Fiscal 2001 Compared to Fiscal 2000
Net Sales. Net sales in fiscal 2001 of $177.9 million declined 4.5% as
compared to net sales of $186.3 million for the comparable period in the prior
year. Excluding the $2.9 million of sales attributable to the additional week
in fiscal 2000, sales for fiscal 2001 decreased 3.0% as compared to fiscal
2000. Comparable store sales (stores open at least 13 months) decreased 4.7%
during fiscal 2001 as compared to fiscal 2000. The decline in total sales and
comparable store sales is primarily due to the impact of deteriorating
economies in Guam, Samoa and Curacao, Netherlands Antilles, as well as the
impact of a competitor opening a membership warehouse club in St. Thomas in May
2001. Sales from the Company's St. Maarten store, opened in June of 2000, and
an increase in business sales more than offset the impact of the loss of sales
from the two unprofitable New Zealand stores that were closed in June 2000 and
the unprofitable Nadi, Fiji store that was closed in February 2001. The Company
believes that its business sales in 2002 will be slightly lower than those
attained in 2001.
Gross Margin. Gross margin improved to $28.9 million, or 16.3% of sales,
in fiscal 2001 from $28.3 million, or 15.2% of sales, in fiscal 2000. The
increase in gross profit as a percent of sales was primarily due to
improvements in store operations and merchandising, as well as from the
elimination of low margin sales in the New Zealand and Fiji stores that were
closed in mid 2000 and early 2001, respectively.
Store Expenses. Store expenses decreased $0.5 million in fiscal 2001 to
$21.3 million from $21.8 million in fiscal 2000. The decrease was primarily due
to the closure of the New Zealand stores. As a percent of sales, store
17
expenses increased slightly to 12.0% in fiscal 2001 from 11.7% in fiscal 2000.
The increase as a percent of sales was primarily due to increased utility,
insurance, bad debt and bank fee expenses.
General and Administrative Expense. General and administrative expenses
decreased $0.6 million in fiscal 2001 to $5.8 million compared to $6.4 million
in fiscal 2000. General and administrative expenses were 3.3% of sales in
fiscal 2001, compared to 3.4% in fiscal 2000. The decrease in general and
administrative expenses was primarily due to the closure of the Company's
buying office in Auckland, New Zealand in June 2000. Additionally, the Company
expensed $0.3 million of obsolete equipment in June 2000.
Store Opening Expense. Store opening expenses decreased $0.4 million to
$0.1 million in fiscal 2001, compared to $0.5 million in fiscal 2000. Store
opening expenses in fiscal 2001 related to costs associated with the evaluation
of potential new store locations. Fiscal 2000 store opening expenses were
related to the St. Maarten store that opened in June 2000.
Store Closing Expense. Store closing expenses of $3.7 million in fiscal
2000, primarily related to the closing of the New Zealand stores in June 2000
and the accruals established for the February 2001 closing of the Nadi, Fiji
store. Store closing expenses for fiscal 2000 also include a write-off of
approximately $0.4 million of translation losses previously recorded in Other
Comprehensive Income, a component of Shareholders' Equity. The Company did not
incur any material additional store closure expenses in fiscal 2001 related to
its New Zealand or Fiji store closures.
Net Interest Expense. Net interest expense decreased $0.1 million to $0.6
million in fiscal 2001 as additional interest expense from the long-term
borrowings for the construction of the building for the St. Maarten store that
opened June 29, 2000 was more than offset by lower average borrowings on the
Company's line of credit and reduced interest rates.
Other expense: Other expense of $0.2 million in fiscal 2001 and $0.3
million in fiscal 2000 was primarily attributable to gains and losses on
foreign currency transactions, including intercompany transactions that
represent transactions and balances that are non-permanent investments.
Income Tax Provision. The Company recorded a tax provision in fiscal 2001
of $0.5 million or 46.9% of pre-tax income. The tax provision represents taxes
associated with income generated in the U.S. and U.S. Territories, off-set by a
bad debt deduction related to Fiji. No taxes or tax benefits were provided on
foreign pre-tax losses in fiscal 2001, as the Company cannot predict whether it
will be able to generate an adequate amount of taxable income in the future to
utilize such benefits. As of December 30, 2001, the Company has foreign net
operating loss carryforwards ("NOL's") of approximately $7.0 million, which, if
not utilized, will begin expiring in the year 2006. NOL's in Australia, Curacao
and St. Maarten of approximately $3.5 million are not subject to expiration
time limits. During the years ended December 30, 2001 and December 31, 2000,
the Company recorded foreign tax credits of $0.4 million and $0.3 million,
respectively. If not utilized, the foreign tax credits will expire in the years
2006 and 2005, respectively. Utilization of the NOL's and foreign tax credit
carryforwards may be limited in any given year by alternative minimum tax
("AMT") restrictions, depending upon each year's AMT calculation. The Company's
ability to utilize various tax benefits is dependent upon generating taxable
income in US and foreign jurisdictions. As a result, the Company has recorded a
valuation allowance of $2.6 million attributable to the net operating loss and
foreign tax credit carryforwards.
Net Income (Loss). The net income for fiscal 2001 was $0.6 million, or
$0.15 per fully diluted share, compared to a net loss of $5.5 million, or
$(1.53) per fully diluted share, for fiscal 2000. The losses in fiscal 2000
resulted primarily from non-recurring charges related to the closure of the two
New Zealand stores, New Zealand operating losses and the write-off of obsolete
equipment.
Fiscal 2000 Compared to Fiscal 1999
Net Sales. Net sales in fiscal 2000 increased 11.5% to $186.3 million from
$167.1 million in fiscal 1999. The increase was primarily due to sales from the
St. Maarten store opened in June 2000, an increase in business sales, the
benefit of an additional week of sales in fiscal 2000 as compared to fiscal
1999 and sales from the New Zealand stores that opened in November 1999 and
were closed in June 2000. Comparable store sales (stores open at least 13
months) decreased 2.2% during fiscal 2000, compared to a 6.8% increase in
fiscal 1999. The decline in comparable-store sales was primarily due to
deteriorating economies in Guam and Curacao, Netherland Antilles.
Gross Margin. Gross margin decreased to 15.2% in fiscal 2000 from 16.4% in
fiscal 1999. The decrease was primarily due to the low operating margins in the
New Zealand stores, price reductions associated with the
18
liquidation of New Zealand inventory and increased business sales, which
provide a lower gross margin, but are executed at minimal direct expense.
Excluding business and New Zealand sales, gross margin would have been
consistent with fiscal 1999. Gross profit dollars increased 3.5% to $28.3
million in fiscal 2000 from $27.4 million in fiscal 1999, primarily as a result
of increased sales.
Store Expenses. Store expenses increased $3.5 million in fiscal 2000 to
$21.8 million from $18.3 million in fiscal 1999. The increase was primarily due
to the new store in St. Maarten and the two stores in New Zealand that opened
in the fourth quarter of fiscal 1999. As a percent of sales, store expenses
increased to 11.7% in fiscal 2000 from 10.9% in fiscal 1999. The increase as a
percent of sales was primarily due to increased utility, rent, repairs and
maintenance, and payroll expenses on relatively flat sales volume and high New
Zealand store expenses on a relatively low sales base.
General and Administrative Expense. General and administrative expenses
increased $0.8 million in fiscal 2000 to $6.4 million compared to $5.6 million
in fiscal 1999. The increase was primarily due to a write-off of obsolete
equipment and severance payments. Excluding these expenses, general and
administrative expenses in fiscal 2000 were consistent with fiscal 1999.
General and administrative expenses as a percent of sales were 3.4% in both
fiscal 2000 and fiscal 1999.
Store Opening Expense. Store opening expenses decreased $0.7 million to
$0.5 million in fiscal 2000, compared to $1.2 million in fiscal 1999. Fiscal
2000 store opening expenses were related to the St. Maarten store that opened
in June 2000, whereas the expenses in fiscal 1999 were related to the Curacao
store that opened in March 1999 and the two New Zealand stores that opened in
November of 1999.
Store Closing Expense. Store closing expenses of $3.7 million in fiscal
2000, primarily related to the closing of the New Zealand stores in June 2000
and the accruals established for the planned closure of the Nadi, Fiji store in
February 2001. Closing expenses primarily consist of provisions for lease
settlements, fixed asset write-downs, legal expenses and severance agreements.
Store closing expenses for fiscal 2000 also include a write-off of
approximately $0.4 million of translation losses previously recorded in Other
Comprehensive Income, a component of Shareholders' Equity. There were no store
closing expenses in fiscal 1999.
Net Interest Expense. Net interest expense increased $0.3 million to $0.7
million in fiscal 2000 due primarily to additional borrowings incurred during
fiscal 2000 resulting from the construction of the new St. Maarten store and
higher average borrowings on the line of credit than had existed in fiscal
1999.
Other expense: Other expense of $0.3 million in fiscal 2000 and $57,000 in
fiscal 1999 was primarily attributable to gains and losses on foreign currency
transactions.
Income Tax Provision. The Company recorded a tax provision in fiscal 2000
of $0.5 million on a pre-tax loss of $5.1 million. The tax provision represents
taxes associated with income generated in U.S. Territories. No taxes or tax
benefits were provided on the foreign pre-tax loss in fiscal 2000, as the
Company cannot predict whether it will be able to generate an adequate amount
of taxable income in the future to utilize such benefits. As of December 31,
2000, the Company had recognized an aggregate foreign tax benefit of $2.8
million on foreign operating losses and a corresponding valuation allowance of
$1.9 million. Approximately two-thirds of the Net Operating Losses ("NOL's")
will begin expiring in the year 2006. The remaining NOL's were generated in
Curacao, St. Maarten and Australia and are not subject to expiration time
limits. Additionally, during fiscal 2000, the Company recorded an aggregate
foreign tax credit of $0.3 million and a corresponding valuation allowance of
$0.3 million. Utilization of the tax benefit and foreign tax credit is
dependent on the Company generating future taxable income. There can be no
assurance that the Company will be able to produce adequate future taxable
income to utilize this tax benefit, and failure to generate such income may
have a material adverse effect on the Company's business, financial condition
and operating results.
Net Income (Loss). The net loss for fiscal 2000 was $5.5 million, or
$(1.53) per fully diluted share, compared to net income of $1.2 million, or
$0.32 per fully diluted share, for fiscal 1999. The net loss in fiscal 2000
resulted primarily from lower margins, increased stores expense, non-recurring
charges related to the closing of the two New Zealand stores in June 2000 and
accrued expenses associated with the closure of the Nadi, Fiji store in
February 2001.
Liquidity and Capital Resources
The Company has financed its operations with proceeds from its initial
public offering, various credit facilities, and internally generated funds. In
July 1998, the Company raised $8.7 million in net proceeds from its initial
public offering and concurrent private placement. See "Market for Company's
Common Stock and Related Shareholder Matters."
19
Net cash provided by operations was $1.5 million, $2.6 million, and $0.2
million for fiscal years 2001, 2000 and 1999, respectively. The decrease in net
cash provided by operations in 2001 compared to 2000 was primarily due to an
increase in inventory, as the Company's inventory levels at the end of fiscal
2000 were lower than the Company preferred due to an over achievement of its
inventory reduction program implemented during the fourth quarter of 2000, and
a reduction in the Company's store closure reserve. The increase in cash in
fiscal 2000 compared to fiscal 1999 was primarily due to improvements in
inventory management.
Net cash used in investing activities was $0.6 million, $3.3 million and
$5.5 million, for fiscal years 2001, 2000 and 1999, respectively. Cash was used
in fiscal 2001 for general store improvements. The cash used in investing
activities in 2000 and 1999 relates to the opening of additional stores. The
Company has no plans to open new stores during fiscal 2002, but is in the
process of analyzing opportunities for new stores in the future.
Net cash used by financing activities of $0.8 million in fiscal 2001 was
due to reductions in the outstanding borrowings on both the Company's line of
credit and its long-term debt. Net cash provided by financing activities was
$0.5 million and $2.1 million, for fiscal years 2000 and 1999, respectively.
The cash generated in fiscal 2000 was primarily due to proceeds from long-term
debt used to finance the construction of the St. Maarten store that opened June
29, 2000. The cash generated in fiscal 1999 was primarily used to fund the
Company's new store opened in Curacao and two new stores opened in New Zealand
during 1999.
Foreign currency translations resulted in a gain of $34,000 in fiscal 2001
and losses of $0.3 million and $0.2 million in fiscal years 2000 and 1999,
respectively. The foreign currency translation gains and losses are a result of
the translation of the Company's subsidiaries' operating results and balance
sheets. In fiscal 2000, the Company wrote off $0.4 million of foreign currency
translation losses related to its substantial liquidation of its New Zealand
operations.
On July 31, 2001, the Company extended the term of its $8.0 million line
of credit with a financial institution to August 1, 2002. Of the $8.0 million
line of credit, $0.5 million is utilized for standby letters of credit, leaving
$7.5 million available for operations. At December 30, 2001, the Company had
$2.2 million in borrowings outstanding on its line of credit. Borrowings under
the line of credit bear interest at variable rates established daily at the
Company's option based on the financial institution's prime rate (4.75% at
December 30, 2001), or at its one to six month LIBOR or IBOR rate plus 1.75%
(4.85% at December 30, 2001). Collateral for the line of credit consists of
inventories and equipment. The line of credit contains certain covenants,
including the requirement that the Company maintain minimum tangible net worth
and minimum ratios of current assets to current liabilities, and debt to
tangible net worth. The Company must obtain the consent of the lender to (i)
pay dividends, (ii) purchase or sell assets or incur indebtedness, other than
in the ordinary course of business, (iii) make loans to, or investments in, any
other person, (iv) enter into a merger or other business combination, or (v)
make capital expenditures in excess of a specified limit as of and for the year
ended December 30, 2001. The Company is currently in compliance with all such
covenants.
In November 1999, the Company entered into a $2.0 million note payable for
the construction of its new store in St. Maarten. The note payable carries
interest at the prime rate plus 2% (6.75% at December 30, 2001), and is secured
by a first security interest on the St. Maarten leasehold interest and personal
property. The interest rate was raised to the prime rate plus 2% (from prime
rate plus 1%) after the lender expressed concerns about the financial charges
related to the New Zealand store closures.
The Company believes that amounts available under its various credit
facilities, existing cash available for working capital purposes, and cash flow
from operations will most likely be sufficient to fund the Company operations
through the next 12 months. However, if the Company were to lose any of its
various credit facilities, it could cause the Company's cash requirements to
exceed what is currently available under its existing credit facilities. There
can be no assurance that the Company will be able to obtain additional
financing when needed, or that any available financing will be on terms
acceptable to the Company.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company operates stores in foreign countries and has market risks
associated with foreign currencies. However, sales are primarily made in U.S.
cash or foreign currencies with minimal trade credit extended and no borrowings
exist in foreign currencies. Cash deposited from sales are remitted back to the
U.S. bank account, routinely. Because of the minimal trade credit, the
Company's exposure to foreign currency market risk is not considered
significant and is not concentrated in any single currency. Management does not
believe that it experiences any significant market risk from foreign
currencies.
20
The Company also assessed its vulnerability to interest rate risk
associated with its financial instruments, including, cash and cash
equivalents, lines of credit and long term debt. Due to the nature of these
financial instruments, the Company believes that the risk associated with
interest rate fluctuations does not pose a material risk. The Company's line of
credit and long-term debt can be expected to vary in the future as a result of
future business requirements, market conditions and other factors.
The Company does not have any derivative financial instruments as of
December 30, 2001.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements and supplementary data are
included beginning on page 22 of this Report:
Page
-----
Report of Deloitte & Touche LLP, Independent Auditors .......... 22
Report of Ernst & Young LLP, Independent Auditors .............. 23
Consolidated Financial Statements:
Consolidated Statements of Operations ........................ 24
Consolidated Balance Sheets .................................. 25
Consolidated Statements of Shareholders' Equity .............. 26
Consolidated Statements of Cash Flows ........................ 27
Notes to Consolidated Financial Statements ................... 28
As more fully disclosed in the Company's Form 10-K/A for the year ended
December 31, 2000, the Company restated its 2000 Consolidated Financial
Statements.
21
REPORT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS
Board of Directors
Cost-U-Less, Inc.
Preston, Washington
We have audited the accompanying consolidated balance sheet of
Cost-U-Less, Inc. and subsidiaries (collectively, the Company) as of December
30, 2001 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year then ended. Our audit also included the
consolidated financial statement schedule listed in Item 14. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audit.
We conducted our audit 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
audit provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 30,
2001 and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Seattle, Washington
March 29, 2002
22
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Cost-U-Less, Inc.
We have audited the accompanying consolidated balance sheets of
Cost-U-Less, Inc. (the "Company") as of December 31, 2000 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the two years in the period ended December 31, 2000. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
The financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Cost-U-Less, Inc. at December 31, 2000 and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material respects, the information set
forth therein.
As discussed under the caption "Restatement of Financial Information" in
Note 1 to the Consolidated Financial Statements, the Company has restated its
December 31, 2000 Consolidated Financial Statements to account for certain
foreign currency translation and transaction items in accordance with Statement
of Financial Accounting Standard No.52 (FAS 52).
ERNST & YOUNG LLP
Seattle, Washington
February 23, 2001, except as to the information included under the caption
"Restatement of Financial Information" in Note 1, as to which the date is
March 29, 2002
23
COST-U-LESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
Fiscal Year Ended
-----------------------------------------------
December 30, December 31, December 26,
2001 2000 1999
-------------- -------------- -------------
(Restated)
Net sales ................................................... $ 177,856 $ 186,299 $ 167,079
Merchandise costs ........................................... 148,924 157,950 139,684
---------- ---------- ----------
Gross profit ................................................ 28,932 28,349 27,395
Operating expenses:
Store ..................................................... 21,288 21,775 18,254
General and administrative ................................ 5,786 6,421 5,654
Store openings ............................................ 68 518 1,217
Store closings ............................................ 0 3,740 0
---------- ---------- ----------
Total operating expenses .................................... 27,142 32,454 25,125
---------- ---------- ----------
Operating income (loss) ..................................... 1,790 (4,105) 2,270
Other expenses:
Interest expense, net ..................................... (589) (663) (403)
Other ..................................................... (155) (283) (57)
---------- ---------- ----------
Income (loss) before income taxes ........................... 1,046 (5,051) 1,810
Income tax provision ........................................ 490 460 656
---------- ---------- ----------
Net income (loss) ........................................... $ 556 $ (5,511) $ 1,154
========== ========== ==========
Earnings (loss) per common share:
Basic ..................................................... $ 0.15 $ (1.53) $ 0.32
========== ========== ==========
Diluted ................................................... $ 0.15 $ (1.53) $ 0.32
========== ========== ==========
Weighted average common shares outstanding, basic ........... 3,606,376 3,599,374 3,557,789
========== ========== ==========
Weighted average common shares outstanding, diluted ......... 3,607,238 3,599,374 3,618,193
========== ========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
24
COST-U-LESS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 30, December 31,
2001 2000
-------------- -------------
(Restated)
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 2,660 $ 2,525
Receivables (net of allowance of $120 and $254 in 2001 and 2000,
respectively) ................................................... 1,749 2,008
Income tax receivable ............................................. 368 163
Inventories ....................................................... 19,360 18,033
Prepaid expenses .................................................. 324 215
Deferred taxes .................................................... 780 675
-------- --------
Total current assets ............................................ 25,241 23,619
Buildings and equipment, net ........................................ 15,464 16,835
Deposits and other assets ........................................... 801 1,013
Deferred taxes, net ................................................. 100 250
-------- --------
Total assets .................................................... $ 41,606 $ 41,717
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit .................................................... $ 2,173 $ 2,700
Accounts payable .................................................. 15,885 15,504
Accrued expenses .................................................. 3,824 3,115
Accrued store closure reserve ..................................... 524 1,498
Current portion of long-term debt ................................. 267 267
-------- --------
Total current liabilities ....................................... 22,673 23,084
Deferred rent ....................................................... 515 495
Long-term debt, less current portion ................................ 3,077 3,344
-------- --------
Total liabilities ............................................... 26,265 26,923
Commitments and Contingencies
Shareholders' equity:
Preferred stock--$0.001 par value; Authorized shares--2,000,000;
Issued and outstanding shares--none ................................ -- --
Common stock--$0.001 par value; Authorized shares--25,000,000;
Issued and outstanding shares, respectively--3,606,376 and 3,606,376 12,446 12,446
Retained earnings ................................................... 3,557 3,001
Accumulated other comprehensive loss ................................ (662) (653)
-------- --------
Total shareholders' equity ...................................... 15,341 14,794
-------- --------
Total liabilities and shareholders' equity ...................... $ 41,606 $ 41,717
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
25
COST-U-LESS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
Accumulated
Common Common Other
Stock-- Stock-- Retained Comprehensive
Shares Amount Earnings Loss Total
----------- ----------- ---------- -------------- -------------
Balance at December 27, 1998 ....................... 3,539,961 $ 12,305 $ 7,358 $ (67) $19,596
Net income ....................................... -- -- 1,154 -- 1,154
Foreign currency translation adjustments ......... -- -- -- (202) (202)
-------
Comprehensive income ............................. 952
-------
Exercise of common stock options ................. 36,897 117 -- -- 117
--------- -------- -------- ------ -------
Balance at December 26, 1999 ....................... 3,576,858 12,422 8,512 (269) 20,665
Net loss (Restated) .............................. -- -- (5,511) -- (5,511)
Foreign currency translation adjustments
(Restated) ..................................... -- -- -- (384) (384)
-------
Comprehensive loss (Restated) .................... (5,895)
-------
Exercise of common stock options ................. 29,518 24 -- -- 24
--------- -------- -------- ------ -------
Balance at December 31, 2000 (Restated) ............ 3,606,376 12,446 3,001 (653) 14,794
Net income ....................................... -- -- 556 -- 556
Foreign currency translation adjustments ......... -- -- -- (9) (9)
-------
Comprehensive income ............................. 547
--------- -------- -------- ------ -------
Balance at December 30, 2001 . ..................... 3,606,376 $ 12,446 $ 3,557 $ (662) $15,341
========= ======== ======== ====== =======
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
26
COST-U-LESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
December 30, December 31, December 26,
2001 2000 1999
-------------- -------------- -------------
(Restated)
OPERATING ACTIVITIES:
Net income (loss) .............................................. $ 556 $ (5,511) $ 1,154
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ................................ 1,886 1,865 1,598
Writedown of property and equipment .......................... 0 999 46
Deferred tax (benefit) provision ............................. 45 (89) (184)
Allowance for doubtful accounts .............................. (134) 104 7
Cash provided by (used in) changes in operating assets and
liabilities:
Receivables ................................................ 393 10 (434)
Income tax receivable ...................................... (205) 355 (361)
Inventories ................................................ (1,327) 3,572 (4,920)
Prepaid expenses ........................................... (109) 50 (54)
Deposits and other assets .................................. 212 (39) (158)
Accounts payable ........................................... 381 (1,020) 3,028
Accrued expenses ........................................... 709 733 573
Accrued store closure reserve .............................. (974) 1,498 0
Deferred rent .............................................. 20 81 (110)
-------- --------- --------
Net cash provided by operating activities ................ 1,453 2,608 185
INVESTING ACTIVITY:
Cash used to purchase buildings and equipment .................. (558) (3,262) (5,495)
FINANCING ACTIVITIES:
Proceeds from sale of common stock ............................. 0 24 117
Proceeds (payments) from (on) line of credit, net .............. (527) 537 2,163
Proceeds from long-term debt ................................... 0 1,093 907
Payments on long-term debt ..................................... (267) (421) (637)
Payments on capital lease obligations .......................... 0 (725) (451)
-------- --------- --------
Net cash provided (used) by financing activities ......... (794) 508 2,099
Foreign currency translation adjustments ....................... 34 (258) (202)
-------- --------- --------
Net increase (decrease) in cash and cash equivalents ............ 135 (404) (3,413)
Cash and cash equivalents:
Beginning of period ............................................ 2,525 2,929 6,342
-------- --------- --------
End of period .................................................. $ 2,660 $ 2,525 $ 2,929
======== ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest ..................................................... $ 624 $ 816 $ 478
Income taxes ................................................. $ 696 $ 276 $ 1,187
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
27
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Summary of Significant Accounting Policies
Nature of Business
Cost-U-Less, Inc. (the "Company") operates mid-sized warehouse club-style
stores in the United States Territories ("U.S. Territories"), foreign island
countries in the Pacific and the Caribbean, the Hawaiian Islands and Sonora,
California. At December 30, 2001, the Company operated eleven stores located in
Hawaii, California, the U.S. Virgin Islands, Netherlands Antilles, Guam,
American Samoa and the Republic of Fiji (Fiji). In the second quarter of fiscal
2000, the Company closed its two New Zealand stores. On June 29, 2000, the
Company opened a store in St. Maarten, Netherlands Antilles. In February 2001,
the Company closed its Nadi, Fiji store. The Company continues to operate its
other store in Fiji, located in the city of Suva.
Restatement of Financial Information
The Company has determined that the previous accounting treatment
historically afforded its foreign currency translation adjustment associated
with New Zealand was not consistent with paragraph 14 of Statement of Financial
Accounting Standard No.52 (FAS 52).
In June 2000 the Company discontinued all major business activity in New
Zealand upon the closure of its two stores and its Auckland buying office.
Although the Company had discontinued store and corporate buying activities in
June 2000, for the remainder of 2000 and through the first three quarters of
2001, it continued to base its conclusion that the New Zealand operations were
not substantially liquidated on the fact that the Company was still purchasing
inventory through the New Zealand subsidiary and negotiating final lease terms
on the closed store leases. The Company now believes that, because the level of
the ongoing New Zealand activities was so small relative to activities prior to
the closures, that "substantial liquidation", as interpreted in paragraph 14 of
FAS 52, had in fact occurred in June 2000, and therefore the New Zealand foreign
currency translation account should have been written off at that time.
As a result, the New Zealand foreign currency translation adjustments of
$388,000, which were previously recorded within Other Comprehensive Income
(loss), have been written off at June 25, 2000, and are included in the Store
Closure Expense of $3,740,000 in fiscal 2000.
Concurrent with this reassessment, other related foreign currency
translation adjustments have also been restated to reclassify that portion of
intercompany transactions that represent transactions and balances that are not
considered to be part of the net investment in the foreign entity, and
accordingly, related transaction gains and losses are recorded for that portion
representing non-permanent investments. Resulting foreign currency transaction
losses of $251,000 are included in other expenses of $283,000 in fiscal 2000.
Fiscal Year
The Company's fiscal year ends on the last Sunday in December. The year
ended December 31, 2000 was a 53-week fiscal year. The years ended December 30,
2001 and December 26, 1999 were 52-week fiscal years.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries in the U.S. Virgin Islands, Netherlands
Antilles, Guam, American Samoa, Nevada, Fiji and New Zealand. All significant
inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the U.S. requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Estimates are used for, but not limited to: allowance for
doubtful accounts; depreciable lives of assets; reserves for store closure
expenses; and tax valuation allowances. Future events and their effects cannot
be determined with certainty. Accordingly, the accounting estimates require the
exercise of judgment. The accounting estimates used in the preparation of the
consolidated financial statements may change as new events occur, as more
experience is acquired, as additional information is obtained and as the
Company's operating environment changes. Actual results could differ from those
estimates.
Foreign Currency Translations and Comprehensive Income
The U.S. dollar is the functional currency for all locations, except for
Fiji and Netherlands Antilles, where the local currency is the functional
currency. Prior to the closure of the New Zealand stores in June 2000, the
functional currency for New Zealand was its local currency. Assets and
liabilities denominated in foreign currencies are translated at the applicable
exchange rate on the balance sheet date. Net sales costs and expenses are
translated at the average rates of exchange prevailing during the period.
Adjustments resulting from this process are reported, net of taxes, as
accumulated other comprehensive income (loss), a component of Shareholders'
Equity. Realized and unrealized gains on foreign currency transactions are
included in other income (expense). The cumulative translation adjustment
resulting from a net investment in a country is recognized as income or expense
in the period the Company has substantially liquidated operations in that
country.
28
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Cash Equivalents
The Company considers all highly liquid investments with an initial
maturity three months or less to be cash equivalents.
Financial Instruments
The carrying value of financial instruments, including cash, cash
equivalents, receivables, payables, and long-term debt, approximates market
value at December 30, 2001 and December 31, 2000.
Inventories
Inventories are carried at the lower of average cost or market.
Buildings and Equipment
Buildings and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the assets, ranging
from 3 to 20 years. Equipment acquired under capitalized leases is depreciated
over the shorter of the asset's estimated useful life or the life of the
related lease. Leasehold improvements are amortized over the lesser of the term
of the lease or the assets' estimated useful lives.
Long Lived Assets
When facts and circumstances indicate that the carrying values of
long-lived assets, including intangibles, may be impaired, an evaluation of the
recoverability is performed by comparing the carrying value of the assets to
projected future cash flows in addition to other quantitative and qualitative
analyses. Upon indication that the carrying value of such assets may not be
recoverable, the Company recognizes an impairment loss by a charge against
current operations.
Accounts Payable
The Company's major bank accounts are replenished as checks are presented.
Accordingly, included in accounts payable at December 30, 2001 and December 31,
2000 are $2.6 million and $2.2 million, respectively, representing the excess
of outstanding checks over cash on deposit at the banks on which the checks
were drawn.
Revenue Recognition
The Company recognizes revenue from product sales when the customer
purchases the products, generally at the point of sale.
Advertising Costs
The cost of advertising is expensed as incurred. Advertising expenses
incurred during fiscal years 2001, 2000 and 1999 were not material to the
Company's operating results.
Store Opening Costs
Pre-opening costs incurred in connection with the startup and promotion of
new stores are expensed as incurred.
Stock-Based Compensation
The Company has elected to apply the disclosure-only provisions of
Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation. Accordingly, the Company accounts for stock-based
compensation using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations under APB No. 25, whereby compensation cost for stock
options is measured as the excess, if any, of the fair value of the Company's
common stock at the date of grant over the stock option exercise price. The
Company grants stock options at exercise prices equal to fair market value on
the date of grant, as a result, no compensation cost has been recognized.
Income Taxes
Income tax expense includes U.S. and foreign income taxes. The Company
accounts for income taxes under the liability method. Under the liability
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax basis of assets and liabilities, and are
measured using the enacted
29
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
tax rates and laws that will be in effect when the differences are expected to
reverse. Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts that more likely than not will be realized.
Segment Reporting
The Company operates mid-sized warehouse club-style stores in the United
States (U.S.), U.S. Territories, and foreign island countries throughout the
Pacific and the Caribbean. The Company's retail operations are its only
reportable segment. The financial information used by the Company's chief
operating decision maker in allocating resources and assessing performance is
only provided for one reportable segment.
Reclassifications
Certain reclassifications of prior years' balances have been made for
consistent presentation with the current year.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS No. 137 and
No. 138, which establishes standards for recognition, measurement, and
reporting of derivatives and hedging activities and was effective for the
Company beginning January 1, 2001. The Company's adoption of this new
accounting standard on January 1, 2001 did not have a material impact on the
Company's financial condition or results of operations, as the Company does not
have derivative financial instruments nor does it participate in hedging
activities.
During 2001, the FASB issued SFAS Nos.141, "Business Combinations", 142
"Goodwill and Other Intangible Assets", 143 "Accounting for Asset Retirement
Obligations", and 144 "Accounting for Impairment or Disposal of Long-lived
Assets and for Long-Lived Assets to be Disposed of". The Company does not
believe that the adoption of these accounting standards will have a material
impact on its consolidated financial statements.
2. Buildings and Equipment
Buildings and equipment consist of the following (in thousands) at:
December 30, December 31,
2001 2000
-------------- -------------
(Restated)
Buildings ..................................... $ 7,113 $ 7,106
Equipment ..................................... 15,450 14,965
Leasehold improvements ........................ 1,474 1,434
-------- --------
Buildings, equipment and leasehold
improvements .................................. 24,037 23,505
Less accumulated depreciation and
amortization .................................. 8,582 6,696
-------- --------
Net book value of depreciable assets ......... 15,455 16,809
Computer system and software
development in progress ....................... 9 26
-------- --------
Total Buildings and Equipment ................. $ 15,464 $ 16,835
======== ========
3. Line of Credit
The Company maintains an $8,000,000 line of credit with a commercial bank
that expires August 1, 2002. Borrowings under the line of credit bear interest
at the Company's option of the financial institution's prime rate (4.75% at
December 30, 2001), or at LIBOR plus 1.75% (4.85% at December 30, 2001).
Borrowings are secured by inventories and equipment. Amounts available under
the line of credit are reduced by outstanding standby letters of credit of $0.5
million.
In accordance with the terms of this line of credit, the Company is
required to maintain certain financial covenants. As of and during the year
ended December 30, 2001, the Company was in compliance with all such covenants.
30
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
4. Long-Term Debt
In conjunction with the construction of the St. Thomas store in 1998, the
Company entered into a $2,000,000 note payable to a bank which matures in June
2013. Interest on the note at December 30, 2001 is at the prime rate plus 2%
(6.75%). As of December 30, 2001, there was a balance owed of $1,544,444, which
is secured by a first leasehold priority mortgage on the St. Thomas building.
The Company makes principal payments of approximately $11,000 per month.
In November 1999, the Company entered into a $2,000,000 credit facility
with a financial institution to fund the construction of the St. Maarten store.
As of December 30, 2001, there was a balance owed of $1,800,002 against this
credit facility. Interest on the note at December 30, 2001 is at the prime rate
plus 2% (6.75%). The credit facility is secured by a first leasehold security
interest on the St. Maarten property. The Company makes principal payments of
approximately $11,000 per month.
Maturities of long-term debt during the next five fiscal years and
thereafter are as follows (in thousands):
2002 ......................... $ 267
2003 ......................... 267
2004 ......................... 267
2005 ......................... 267
2006 ......................... 267
Thereafter ................... 2,009
------
Total ...................... $3,344
======
5. Interest Expense, Net
The components of interest, net are as follows (in thousands):
2001 2000 1999
-------- ----------- --------
Interest Expense ................ $ 589 $ 750 $ 476
Capitalized Interest ............ 0 (86) 0
Interest Income ................. 0 (1) (73)
----- ------ -----
Interest Expense, net .......... $ 589 $ 663 $ 403
===== ====== =====
The interest-carrying costs of capital assets under construction are
capitalized based on the Company's weighted average borrowing rate. Capitalized
interest in 2000 relates to the construction of the St. Maarten store.
6. Income Taxes
Income (loss) before income taxes by jurisdiction is as follows (in
thousands):
2001 2000 1999
---------- ------------- ----------
(Restated)
United States .............................. $ 2,052 $ (1,864) $ 3,070
U.S. Territories ........................... 1,078 1,335 1,812
Foreign .................................... (2,084) (4,522) (3,072)
-------- --------- --------
Income (loss) before income taxes ......... $ 1,046 $ (5,051) $ 1,810
======== ========= ========
31
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
The provision for income taxes is as follows (in thousands):
2001 2000 1999
---------- -------- --------
Current Income Taxes:
United States ..................... $ 58 $ 9 $ 217
U.S. Territories .................. 387 540 653
Foreign ........................... 0 0 (30)
---- ------ ------
Current Income Taxes ............. 445 549 840
---- ------ ------
Deferred Income Taxes
United States ..................... 51 191 346
U.S. Territories .................. (6) (80) 132
Foreign ........................... 0 (200) (662)
------ ------ ------
Deferred income taxes ............ 45 (89) (184)
------ ------ ------
Provision for Income Taxes ......... $ 490 $ 460 $ 656
====== ====== ======
A reconciliation of the Company's effective tax rate with the federal
statutory rate of 34% for the years ended December 30, 2001, December 31, 2000,
and December 26, 1999, is as follows (dollars in thousands):
2001 2000 1999
-------- ------------ -----------
(Restated)
Tax at U.S. Statutory Rate ............. $ 355 34.0% $(1,717) 34.0% $ 615 34.0%
Non-Deductible Permanent Differences ... 3 0.2% 3 (0.1)% 3 0.2%
U.S. Tax Losses not Benefited .......... 0 0.0% 506 (10.0)% 0 0.0%
Foreign Tax Losses not Benefited (Taken) (316) (30.2)% 1,441 (28.4)% 0 0.0%
Foreign Tax Credit not Taken ........... 393 37.6% 348 (6.9)% 0 0.0%
Statutory Rate Difference as Compared to
U.S. Statutory Rate ................... 20 1.9% 43 (0.9)% 45 2.5%
Other .................................. 35 3.4% (164) 3.2% (7) (0.4)%
------- ------- ------- ------- ------- -------
Effective Income Tax Rate ............. $ 490 46.9% $ 460 (9.1)% $ 656 36.2%
======= ======= ======= ======= ======= =======
Effective December 26, 1999, the Company elected to treat its wholly-owned
subsidiary in New Zealand as a branch for U.S. tax purposes. The effect of such
election resulted in a U.S. tax benefit of approximately $396,000 in 1999. In
addition, the Company utilized $321,000 of foreign tax credits in the year
ended December 26, 1999.
32
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
December 30, December 31,
2001 2000
-------------- -------------
Deferred Tax Assets
Inventory Adjustments ............................ $ 130 $ 132
Vacation Accrual ................................. 305 198
Bad Debt Expense ................................. 108 67
Deferred Rent .................................... 175 141
Store Closure Reserve ............................ 209 506
Net Operating Loss Carryforward--Foreign ......... 2,440 2,327
Foreign tax credits .............................. 741 348
Other ............................................ 54 76
-------- --------
Total Deferred Tax Assets ........................ 4,162 3,795
Valuation Allowance ............................. (2,579) (2,247)
-------- --------
1,583 1,548
Deferred Tax Liabilities
Cash Discounts ................................... (26) (13)
Fixed Asset Basis Difference ..................... (677) (610)
-------- --------
Total Deferred Tax Liabilities ................... (703) (623)
-------- --------
Net Deferred Tax Assets ........................... $ 880 $ 925
======== ========
Net deferred tax assets are classified on the balance sheet as
follows (in thousands):
Current Assets ................................... $ 780 $ 675
Long-Term Assets, net ............................ 100 250
-------- --------
Net Deferred Tax Assets .......................... $ 880 $ 925
======== ========
As of December 30, 2001, the Company has foreign net operating loss
carryforwards ("NOL's") of approximately $7.0 million, which, if not utilized,
will begin expiring in the year 2006. NOL's in Australia, Curacao and St.
Maarten of approximately $3.5 million are not subject to expiration time
limits. During the years ended December 30, 2001 and December 31, 2000, the
Company recorded foreign tax credits of $0.4 million and $0.3 million,
respectively. If not utilized, the foreign tax credits will expire in the years
2006 and 2005, respectively. Utilization of the NOL's and foreign tax credit
carryforwards may be limited in any given year by alternative minimum tax
("AMT") restrictions, depending upon each year's AMT calculation. The Company's
ability to utilize various tax benefits is dependent upon generating taxable
income in US and foreign jurisdictions. As a result, the Company has recorded a
valuation allowance of $2.6 million attributable to the net operating loss and
foreign tax credit carryforwards.
7. Shareholders' Equity
Stock Options
The Company maintains an Amended and Restated 1989 Stock Option Plan (the
"1989 Plan"), which provides for the granting of incentive and nonqualified
stock options to employees, directors, and consultants of the Company. An
aggregate of 398,496 shares of common stock has been authorized for issuance
under the 1989 Plan. Options issued under the 1989 Plan vest ratably over five
years and expire ten years from the date of grant and were generally granted at
prices equal to the fair value on the date of grant. There were 260,798 options
available for future grant under the 1989 Plan at December 30, 2001. No
additional options will be granted under the 1989 Plan.
In 1998, the Company adopted, and shareholders approved, issuance of the
1998 Stock Incentive Compensation Plan (the "1998 Plan"). The 1998 Plan, as
amended, provides for the granting of various stock awards, including stock
options and issuance of restricted stock, with a maximum of 1,000,000 shares of
common stock available for issuance. Options issued under the 1998 Plan vest at
various terms ranging from immediately to five
33
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
years and expire ten years from the date of grant and are generally granted at
prices equal to the fair value on the date of grant. There were 334,994 options
available for future grant under the 1998 Plan at December 30, 2001.
In December 2001, the Company's Board of Directors agreed to suspend their
cash compensation until July 2002 and instead accept compensation in the form
of 2,000 options to purchase the Company's common stock for each board meeting
attended. The options are to be priced at the current market value the day
following each Board meeting beginning with the February 2002 board meeting.
The options will vest immediately and be exercisable within three years.
Additionally, the board granted the nine members of senior management of
the Company, in consideration of holding their wages at 2001 levels, 10,000
options to purchase the Company's common stock in January 2002. 5,000 of the
options vest immediately and the remaining 5,000 options will vest in eighteen
months.
A summary of the status of stock option plans as of December 30, 2001,
December 31, 2000, and December 26, 1999, and changes during the years then
ended are presented below:
2001 2000 1999
----------------------- ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------ ---------- ------------- ---------- ------------ -----------
Outstanding, beginning of year ......... 528,319 $ 4.51 516,266 $ 5.40 452,150 $ 5.35
Granted at fair value ................. 194,000 1.71 178,213 1.58 114,288 5.03
Forfeited ............................. (32,226) 3.80 (136,642) 4.93 (13,275) 5.77
Exercised ............................. 0 0 (29,518) .79 (36,897) 3.18
------- -------- -------
Outstanding, end of year ............... 690,093 3.75 528,319 4.51 516,266 5.40
======= ======== =======
The following summarizes information related to options outstanding and
exercisable at December 30, 2001:
Outstanding Exercisable
-------------------------------------- -----------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Exercise Contractual Exercise
Prices Options Price Life Options Price
- ------------------ --------- ---------- ------------- --------- -----------
$ 0.79 -- 3.38 382,544 $ 1.70 9.29 years 330,173 $ 1.68
3.72 -- 6.00 96,402 4.80 6.78 years 64,887 4.69
7.00 211,147 7.00 6.63 years 199,868 7.00
------- -------
690,093 3.75 594,928 3.80
======= =======
Pro-Forma Disclosure
The Company applies APB No. 25 and related interpretations in accounting
for options under the 1989 and 1998 Plans. Accordingly, stock compensation has
been recognized for the amortized intrinsic value of stock option grants. Had
the stock option compensation expense for the Company's stock option plans been
determined based on the fair value at the grant dates for options granted in
2001, 2000, and 1999, consistent with the fair value methods of SFAS No. 123,
the Company's net income and earnings per share amounts would have been reduced
to these pro-forma amounts.
2001 2000 1999
----------- ------------- -----------
(Restated)
(Net income (loss) in thousands)
Net income (loss) as reported ............................. $ 556 $ (5,511) $ 1,154
Net income (loss) pro forma ............................... $ 388 $ (5,702) $ 911
Earnings (loss) per common share, basic as reported ....... $ 0.15 $ (1.53) $ 0.32
Earnings (loss) per common share, basic pro forma ......... $ 0.11 $ (1.58) $ 0.26
Earnings (loss) per common share, diluted as reported ..... $ 0.15 $ (1.53) $ 0.32
Earnings (loss) per common share, diluted pro forma ....... $ 0.11 $ (1.58) $ 0.25
34
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
The fair value of each option is estimated on the date of grant under the
Black-Scholes option-pricing model using the following assumptions:
2001 2000 1999
---------- ---------- ----------
Risk-free interest rate .......... 5.17% 6.50% 6.00%
Expected life .................... 5 years 5 years 5 years
Expected dividend yield .......... 0% 0% 0%
Volatility . ..................... 71% 92% 84%
The weighted average fair values of options granted in 2001, 2000, and
1999 were $0.54, $1.18 and $2.63, respectively.
Warrants
On July 23, 1998, the Company sold 1,380,000 shares of common stock at
$7.00 per share in an Initial Public Offering. Concurrent with the Initial
Public Offering on July 23, 1998, the Company issued 277,000 warrants to
certain shareholders at grant prices ranging from $8.40 to $10.15. At December
30, 2001 and December 31, 2000, these warrants were fully vested and
exercisable and expire in July 2002.
Common Stock Reserved
Common stock reserved for future issuance at December 30, 2001 is as
follows:
Stock options ......... 1,285,885
Warrants .............. 277,000
---------
1,562,885
=========
On February 23, 1999, the Company's Board of Directors declared a dividend
distribution of preferred share purchase rights (the "Rights") pursuant to a
Shareholder Rights Plan. The Rights initially trade with shares of the
Company's common stock and have no impact upon the way in which shareholders
can trade the Company's common stock. However, ten days after a person or group
acquires 15% or more of the Company's common stock, or such date, if any, as
the Board of Directors may designate after a person or group commences or
publicly announces its intention to commence a tender or exchange offer which
could result in that person or group owning 15% or more of the Company's common
stock (even if no purchases actually occur), the Rights will become exercisable
and separate certificates representing the Rights will be distributed. The
Rights would then begin to trade independently from the Company's shares at
that time. As of December 30, 2001, no rights have become exercisable.
8. Earnings Per Share
Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period and excludes any dilutive effects of
stock options and warrants. Diluted earnings per share are computed using the
weighted average number of common shares and potentially dilutive shares
outstanding during the period. Potentially dilutive shares are excluded from the
computation if their effect is anti-dilutive.
35
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
The following table sets forth the computation of basic and diluted
earnings (loss) per common share (dollars in thousands):
Fiscal Year Ended
-----------------------------------------------
December 30, December 31, December 26,
2001 2000 1999
-------------- -------------- -------------
(Restated)
Numerator:
Net income (loss) .................................. $ 556 $ (5,511) $ 1,154
=========== ========== ===========
Denominator:
Denominator for basic earnings per share--weighted
average shares ................................... 3,606,376 3,599,374 3,557,789
Effect of potentially dilutive shares:
Stock options and warrants ......................... 862 0 60,404
----------- ---------- -----------
Denominator for diluted earnings per share--adjusted
weighted average shares and assumed conversion of
stock options and warrants ....................... 3,607,238 3,599,374 3,618,193
=========== ========== ===========
Basic earnings (loss) per common share .............. $ 0.15 $ (1.53) $ 0.32
Diluted earnings (loss) per common share ............ $ 0.15 $ (1.53) $ 0.32
Potentially dilutive shares in the amount of 10,421 have been excluded from
the dilutive calculation for the fiscal year ended December 31, 2000, as their
impact would be anti-dilutive.
9. Geographic Information
Geographic information pertaining to the Company's one reporting segment
is as follows:
Long-lived
Sales Assets
----------- -----------
(in thousands)
2001
United States .................................. $ 46,470 $ 3,711
U.S. Territories and foreign countries ......... 131,386 12,654
-------- -------
$177,856 $16,365
======== =======
2000 (Restated)
United States .................................. $ 45,073 $ 4,452
U.S. Territories and foreign countries ......... 141,226 13,646
-------- -------
$186,299 $18,098
======== =======
1999
United States .................................. $ 38,872 $ 3,817
U.S. Territories and foreign countries ......... 128,207 13,787
-------- -------
$167,079 $17,604
======== =======
10. Store Closures
In June 2000, the Company exited the New Zealand market, where it had
previously opened two stores in November and December of 1999. In conjunction
with the decision to exit the New Zealand Market, the Company recorded
$3,372,000 in expenses associated with lease buyouts, fixed asset write-downs,
legal expenses, severance payments and other costs typically incurred during
the course of a store closure. Additionally, the Company recorded a write-off
to store closing expenses of approximately $0.4 million related to translation
losses previously recorded in Other Comprehensive Income, a component of
Shareholders' Equity. The write-off relates to the Company's recognition of the
cumulative translation adjustment resulting from its net investment in New
Zealand as expense in the period the Company substantially liquidated
operations in that country.
36
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
In December 2000, the Company settled one of the two building lease
agreements and other store closure related activity, which resulted in the
Company recovering $755,000 of previously accrued closure expenses. In October
2001, the Company settled its remaining lease agreement in New Zealand.
Also in December 2000, the Company decided to close its Nadi, Fiji store
effective February 2001. In conjunction with the decision to close the store,
the Company accrued $735,000 in expenses associated with fixed asset
write-downs, the estimated cost of lease buyouts, and other costs typically
incurred during the course of a store closure. The Company has yet to settle
its lease agreement in Nadi.
The following represents the costs charged to expense related to store
closures during Fiscal 2000 as well as those that remained in existence at
December 30, 2001 and December 31, 2000 (in thousands):
December 30, December 31,
2001 2000
-------------- -------------
(Restated)
Accrued store closure reserve at beginning of year ....................... $1,498 $ --
New Zealand store closure expense recorded in June 2000 3,760
Recovery related to the New Zealand store closure (755)
Fiji store closure expense recorded in December 2000 735
------
Total Expense ............................................................ 3,740
Less: Store closure expenses paid during year ............................ 974 1,854
Write off of New Zealand foreign currency translation adjustment account -- 388
------ ------
Accrued store closure reserve at end of year ............................. $ 524 $1,498
====== ======
Total revenues and store operating losses contributed by the three stores
closed were as follows (in thousands):
2001 2000 1999
--------- ---------- ----------
Total revenues .................. $ 500 $ 6,984 $ 4,202
====== ======= =======
Store operating losses .......... $ 141 $ 2,250 $ 1,005
====== ======= =======
11. Lease Commitments
The Company has entered into operating leases for its retail and
administrative office locations. The leases range from 3 to 15 years and
include renewal options. The Company is required to pay a base rent, plus
insurance, taxes, and maintenance.
A summary of the Company's future minimum lease obligations at December
30, 2001 under leases with initial or remaining terms of one year or more is as
follows (in thousands):
2002 ............... $ 4,623
2003 ............... 4,588
2004 ............... 4,249
2005 ............... 3,690
2006 ............... 3,664
Thereafter ......... 14,679
--------
$ 35,493
========
Rent expense under operating leases for the fiscal years ended December
30, 2001, December 31, 2000, and December 26, 1999 totaled $5.0 million, $5.4
million and $4.3 million, respectively.
12. Employee Benefit Plans
The Company maintains a 40l(k) profit-sharing plan covering all eligible
employees over the age of 18 with at least six months of service. Participating
employees may elect to defer and contribute up to 15% of their compensation to
the plan, subject to annual limitations under the Internal Revenue Code. The
Company matches employee contributions at a rate of 25%. The Company's matching
contributions to the plan approximated $90,000 $114,000 and $90,000, in fiscal
2001, 2000, and 1999, respectively.
37
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
During 2000, the Company changed its Manager Bonus Program to one under
which managers are paid an annual bonus based on store and departmental
profitability targets. Prior to 2000, the Company's Manager Bonus Program was
based on the net income of the Company. All amounts payable under the program
are accrued in the year earned. Accordingly, bonuses accrued under these
programs totaled $179,000, $184,000 and $284,000 for fiscal 2001, 2000 and
1999, respectively.
During 2001, the Company implemented a sales incentive bonus program for
all store employees based on sales targets. These bonuses are paid monthly and
were approximately $17,000 in fiscal 2001.
13. Quarterly Financial Data (Unaudited)
The following is a summary of the Company's unaudited quarterly results of
operations:
Earnings (Loss)
Per Common
Store Net Share (3)
Weeks Gross Income ------------------------
in Period Net Sales Profit (Loss)(3) Basic Diluted
----------- ----------- -------- ----------- ----------- -----------
(in thousands, except store weeks and per-share data)
Fiscal 2001 (1)
First quarter ............. 151 $43,978 $7,091 $ 43 $ 0.01 $ 0.01
Second quarter ............ 143 44,384 6,996 62 0.02 0.02
Third quarter ............. 143 42,828 7,169 150 0.04 0.04
Fourth quarter ............ 143 46,666 7,676 301 0.08 0.08
Fiscal 2000 (Restated) (1)
First quarter ............. 169 $44,272 $6,656 $ (827) $ (0.23) $ (0.23)
Second quarter (2) ........ 157 44,402 6,276 (5,535) $ (1.54) $ (1.54)
Third quarter ............. 156 45,238 7,362 266 0.07 0.07
Fourth quarter ............ 168 52,387 8,055 585 0.16 0.16
- ------------
(1) Fiscal 2001 was a 52-week year. Fiscal 2000 was a 53-week year. The
Company's fiscal quarters are 13 weeks, except 4th quarter 2000, which was
a 14 week quarter.
(2) The net loss in second quarter 2000 was due to the accrual for store
closure costs of $3.4 million related to the June 2000 closure of the
Company's two New Zealand stores, the write-off of $0.4 million related to
translation losses previously recorded in Other Comprehensive Income and
continued operating losses at such stores.
(3) The following is a summary of the effects of the restatement, as discussed
in Note 1, on the Company's consolidated unaudited quarterly results of
operations (in thousands, except earnings (loss) per share):
As Originally
Reported As Restated
-------- -----------
Fiscal 2001:
First Quarter:
Net income........................................... $ 116 $ 43
Earnings per common share - Basic & Diluted.......... 0.03 0.01
Second Quarter:
Net income........................................... 66 62
Earnings per common share - Basic & Diluted.......... 0.02 0.02
Third Quarter:
Net income........................................... 136 150
Earnings per common share - Basic & Diluted.......... 0.04 0.04
Fiscal 2000:
First Quarter:
Net loss............................................. $ (748) $ (827)
Loss per common share - Basic & Diluted.............. (0.21) (0.23)
Second Quarter:
Net loss............................................. (5,057) (5,535)
Loss per common share - Basic & Diluted.............. (1.40) (1.54)
Third Quarter:
Net income........................................... 396 266
Earnings per common share - Basic & Diluted.......... 0.11 0.07
Fourth Quarter:
Net income........................................... 537 585
Earnings per common share - Basic & Diluted.......... 0.15 0.16
38
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
On December 19, 2001, the Company filed a report on Form 8-K regarding the
dismissal of Ernst & Young LLP as its independent accountants. Concurrently,
the Company announced the engagement of Deloitte & Touche LLP as its new
independent accountants for the fiscal year ending December 30, 2001.
PART III
Item 10. Executive Officers and Directors of the Registrant
Information called for by Part III, Item 10, is included in the Company's
Proxy Statement relating to the Company's annual meeting of shareholders to be
held on May 14, 2002, and is incorporated herein by reference. Such Proxy
Statement will be filed within 120 days of December 30, 2001, the Company's
fiscal year end.
Item 11. Executive Compensation
Information called for by Part III, Item 11, is included in the Company's
Proxy Statement relating to the Company's annual meeting of shareholders to be
held on May 14, 2002 and is incorporated herein by reference. Such Proxy
Statement will be filed within 120 days of December 30, 2001, the Company's
fiscal year end.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information called for by Part III, Item 12, is included in the Company's
Proxy Statement relating to the Company's annual meeting of shareholders to be
held on May 14, 2002 and is incorporated herein by reference. Such Proxy
Statement will be filed within 120 days of December 30, 2001, the Company's
fiscal year end.
Item 13. Certain Relationships and Related Transactions
Information called for by Part III, Item 13, is included in the Company's
Proxy Statement relating to the Company's annual meeting of shareholders to be
held on May 14, 2002 and is incorporated herein by reference. Such Proxy
Statement will be filed within 120 days of December 30, 2001, the Company's
fiscal year end.
39
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report:
(1) Financial Statements--all consolidated financial statements of the
Company as set forth under Item 8, beginning on p. 22 of this Report.
(2) Financial Statement Schedules--Schedule II Valuation and Qualifying
Accounts.
The independent auditors' report with respect to the financial statement
schedules appears on page 24 of this Report. All other financial statements and
schedules not listed are omitted because either they are not applicable or not
required, or the required information is included in the consolidated financial
statements.
(3) Exhibits
Incorporated by Reference
-----------------------------------------------
Exhibit Filed
No. Description Herewith Form Exhibit No. File No. Filing Date
- --------- ---------------------------------------------------------- ---------- ------- ------------- ------------ ------------
3.1 Restated Articles of Incorporation of Cost-U-Less, Inc. S-1/A 3.1 333-52459 06/05/1998
3.2 Amended and Restated Bylaws of Cost-U-Less, Inc. X
4.1 Rights Agreement between Cost-U-Less, Inc. and 8-A 2.1 000-24543 03/15/1999
ChaseMellon Shareholder Services, L.L.C. as rights agent,
dated March 15, 1999
4.2 Form of Common Stock Certificate of Cost-U-Less, Inc. S-1/A 4.1 333-52459 07/10/1998
10.1 Amended and Restated 1998 Stock Incentive X
Compensation Plan*
10.2 Form of Stock Option Agreement X
10.3 Amended and Restated 1989 Stock Option Plan* S-1 10.2 333-52459 05/12/1998
10.4 Form of Director Stock Option Agreement (Vesting)* S-1 10.3 333-52459 05/12/1998
10.5 Form of Director Stock Option Agreement (Nonvesting)* S-1 10.4 333-52459 05/12/1998
10.6 Business Loan Agreement between Cost-U-Less, Inc. and 10-K 10.6 000-24543 04/02/2001
Bank of America, N.A., dated September 15, 2000
10.7 Promissory Note made by Cost-U-Less, Inc. in favor of 10-K 10.7 000-24543 04/02/2001
Bank of America, N.A., dated September 15, 2000
10.8 Loan Modification Agreement between Cost-U-Less, Inc. 10-Q 10.1 000-24543 08/14/2001
and Bank of America, N.A., dated July 31, 2001
10.9 Construction/Permanent Loan Agreement by and among S-1 10.8 333-52459 05/12/1998
CULUSVI, Inc., Cost-U-Less, Inc. and Banco Popular de
Puerto Rico, dated November 6, 1997
10.10 Employment Agreement between Cost-U-Less, Inc. and X
Michael T. Scalzo, dated March 3, 2000*
10.11 Employment Agreement between Cost-U-Less, Inc. and X
Joseph F. Bombara, dated February 20, 2001*
10.12 Lease Agreement between Westmall Limited and CUL S-1/A 10.10 333-52459 06/05/1998
(Fiji) Limited, effective March 1, 1998
10.13 Lease Agreement between Fiji Public Service Association 10-K 10.1 000-24543 09/02/1998
and CUL (Fiji) Limited, dated June 4, 1998
10.14 Lease Agreement between Baroud Real Estate S-1 10.12 333-52459 05/12/1998
Development N.V. and C.U.L. (Curacao) N.V., dated
April 3, 1998
10.15 Ground Lease between Market Square East, Inc. and S-1 10.13 333-52459 05/12/1998
CULUSVI, Inc., dated October 20, 1997
40
Incorporated by Reference
------------------------------------------------
Exhibit Filed
No. Description Herewith Form Exhibit No. File No. Filing Date
- ------------ --------------------------------------------------------- ---------- -------- ------------- ------------ ------------
10.16 Sublease Agreement between Taumuning Capital S-1 10.15 333-52459 05/12/1998
Investment, Inc. and Cost-U-Less, Inc., dated July 15,
1994
10.17 Lease Agreement between Ottoville Development S-1 10.16 333-52459 05/12/1998
Company and Cost-U-Less, Inc., dated March 9, 1994
10.18 Lease Agreement between Inmostrat Corporation and S-1 10.17 333-52459 05/12/1998
Cost-U-Less, Inc., dated August 1993
10.19 Lease Agreement between Hassan Rahman and Cost-U- S-1 10.18 333-52459 05/12/1998
Less, Inc., dated July 30, 1993
10.20 Industrial Real Estate Lease between Hilo Partners and S-1 10.19 333-52459 05/12/1998
Cost-U-Less, Inc., dated September 1, 1991
10.21 Indenture of Lease between H.C.L. Investments, Inc. and X
Cost-U-Less, Inc., dated August 21, 1992
10.22 Amendment to Lease between H.C.L. Investments, Inc. X
and Cost-U-Less, Inc., dated April 27, 2000
10.23 Purchase Agreement between Cost-U-Less, Inc. and Kula 10-K 10.23 000-24543 03/26/1999
Fund Limited, dated July 28, 1998
10.24 Common Stock Warrant issued to Kula Fund Limited, 10-K 10.24 000-24543 03/26/1999
dated July 28, 1998
10.25 Lease Agreement between Caribe Lumber & Trading N.V. 10-K 10.26 000-24543 03/26/1999
(St. Maarten) and CUL Sint Maarten N.V., dated February
19, 1999
10.26 Sublease Agreement between New Breed Distribution 10-K/A 10.27 000-24543 04/05/2000
Corp of California, Inc. and Cost-U-Less, Inc., dated
November 1, 1999
10.27 Lease Agreement between AMB Property, L.P. and Cost- 10-K/A 10.28 000-24543 04/05/2000
U-Less, Inc., dated November 12, 1999
10.28 First Amendment to Lease Agreement between AMB X
Property, L.P. and Cost-U-Less, Inc., dated November 21,
2001
10.29 Lease Agreement between BDC One Preston Properties 10-K 10.26 000-24543 04/02/2001
Limited Partnership and Cost-U-Less, Inc., dated April
27, 2000
10.30 Lease Agreement between Tonko Reyes, Inc., a Guam X
corporation and Cost-U-Less, Inc., dated October 22,
2001
16.1 Letter re: change in certifying accountant 8-K 16.1 000-24543 12/21/2001
21.1 Subsidiaries of Cost-U-Less, Inc. X
23.1 Consent of Deloitte & Touche LLP X
23.2 Consent of Ernst & Young LLP X
24.10 Power of Attorney (See page 42)
* Management contract or compensatory plan or arrangement
(b) Reports on Form 8-K:
o On December 19, 2001, the Company filed a report on Form 8-K regarding
the dismissal of Ernst & Young LLP as its independent accountants.
Concurrently, the Company announced the engagement of Deloitte &
Touche LLP as its new independent accountants for the fiscal year
ending December 30, 2001.
o On March 28, 2002, the Company filed a report on Form 8-K regarding
its March 21, 2002 press release which announced that the Company
intended to restate its financial statements for the second quarter of
fiscal year 2000 and the fiscal year ending December 31, 2000.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COST-U-LESS, INC.
Date: March 29, 2002 By: /s/ J. Jeffrey Meder
-------------------------------
J. Jeffrey Meder
President and
Chief Executive Officer
Each person whose individual signature appears below hereby authorizes and
appoints J. Jeffrey Meder and Martin P. Moore, and each of them, with full
power of substitution and resubstitution and full power to act without the
other, as his or her true and lawful attorney-in-fact and agent to act in his
or her name, place and stead and to execute in the name and on behalf of each
person, individually and in each capacity stated below, and to file, any and
all amendments to this Report, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing,
ratifying and confirming all that said attorneys-in-fact and agents or any of
them or their or his or her substitute or substitutes may lawfully do or cause
to be done by virtue thereof.
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 Company
and in the capacities indicated below on the 29th day of March, 2002.
Signature Title
--------- -----
--------------------- Chairman of the Board
David A. Enger
/s/ J. Jeffrey Meder President and Chief Executive Officer (Principal
---------------------
J. Jeffrey Meder Executive Officer)
/s/ Martin P. Moore Vice President, Chief Financial Officer, Secretary and
--------------------- Treasurer (Principal Financial and Accounting Officer)
Martin P. Moore
--------------------- Director
Arthur W. Buerk
/s/ Gary W. Nettles
--------------------- Director
Gary W. Nettles
/s/ George C. Textor
--------------------- Director
George C. Textor
42
SCHEDULE II
COST-U-LESS, INC.
VALUATION AND QUALIFYING ACCOUNTS
Balance at Balance at
Beginning (1) End of
Description of Year Additions Deductions Year
- ------------------------------------------- ------------ ----------- ------------ -----------
Year Ended December 30, 2001
Reserves and allowances deducted from asset
accounts:
Allowance for doubtful accounts ........... $254,000 $155,000 $289,000 $120,000
Year Ended December 31, 2000
Reserves and allowances deducted from asset
accounts:
Allowance for doubtful accounts ........... $150,000 $205,000 $101,000 $254,000
Year Ended December 26, 1999
Reserves and allowances deducted from asset
accounts:
Allowance for doubtful accounts ........... $143,000 $ 93,000 $ 86,000 $150,000
- ------------
(1) Uncollectible accounts written off, net of recoveries.
43