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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 29, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-24543
COST-U-LESS, INC.
(Exact Name of Registrant as Specified in its Charter)
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.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |_| No |X|
The aggregate market value of the common stock held by non-affiliates of
the registrant, based on the closing price on March 27, 2003, as reported on the
Nasdaq SmallCap Market, was approximately $3,955,775 (1). The aggregate market
value of the common stock held by non-affiliates of the registrant, based on the
closing price on June 28, 2002, as reported on the Nasdaq SmallCap Market, was
$5,167,453 (1).
The number of shares of the registrant's common stock outstanding at March
20, 2003 was 3,606,376.
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(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 shareholders to be
held on May 13, 2003, 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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COST-U-LESS, INC.
INDEX TO FORM 10-K
Page
----
PART I:
Item 1. Business............................................................................ 3
Item 2. Properties.......................................................................... 15
Item 3. Legal Proceedings................................................................... 16
Item4. Submission of Matters to a Vote of Security Holders................................. 16
PART II:
Item 5. Market for Company's Common Stock and Related Shareholder Matters................... 17
Item 6. Selected Financial Data............................................................. 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......................... 25
Item 8. Financial Statements and Supplementary Data......................................... 26
PART III:
Item 10. Executive Officers and Directors of the Registrant.................................. 46
Item 11. Executive Compensation.............................................................. 46
Item 12. Security Ownership of Certain Beneficial Owners and Management...................... 46
Item 13. Certain Relationships and Related Transactions...................................... 46
PART IV:
Item 14. Controls and Procedures............................................................. 47
Item 15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K................... 47
SIGNATURES................................................................................................. 50
Form of Sarbanes-Oxley Section 302(a) Certification (President and Chief Executive Officer)................ 51
Form of Sarbanes-Oxley Section 302(a) Certification (Chief Financial Officer).............................. 52
2
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. We undertake 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," "our," "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. Our primary
strategy is to operate in island markets, offering predominately U.S. branded
goods. We currently operate ten retail stores with an eleventh store being
rebuilt as follows: 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.
We opened our first retail warehouse store in 1989 in Maui, Hawaii. In
1992, we began to expand by opening stores built to our specifications, in other
island locations. After experiencing success with our mid-sized store concept,
we began to enter various mainland markets in late 1992, occupying existing
retail spaces on favorable lease terms, while continuing to open more stores in
island markets that were built to our specifications. Due to a lack of success
in the mainland markets, we decided in 1995 to return our focus to our core
island markets and we began closing our mainland stores. The process of closing
five of our six mainland stores was completed in 1997.
In 1998, we opened two stores in Fiji. In 1999, we opened two stores in
New Zealand and one in Curacao. In 2000, we opened a store in St. Maarten,
located in the Caribbean near our St. Thomas and St. Croix stores.
In June 2000, we closed our two New Zealand stores, as well as our buying
office in Auckland. Although we believed that we had introduced what was to be
the first warehouse club concept to the New Zealand marketplace, we believe that
the loyalty of New Zealand customers to many regional brands resulted in
disappointing sales by the new stores of the U.S. brands we primarily sold.
In February 2001, we closed one of our 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
our store in Nadi, Fiji. Our remaining store in Fiji is located in the city of
Suva, which is the capital and the primary population center of Fiji.
3
On December 8, 2002, our two stores on the island of Guam suffered damage
from Supertyphoon Pongsona, resulting in the immediate closure of both stores.
Our Tamuning store lost its generator in the storm, but reopened shortly
thereafter on December 12th. Our Dededo store, however, suffered more
significant damage, and has yet to reopen. We believe that the building
structure is most likely a total loss and we are in the process of rebuilding
with an expected reopening in late 2003.
We are continuing our focus on our core island store operations by
reviewing our 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, we have no plans to open new stores during 2003 other than
rebuilding our Dededo, Guam store, but we are in the process of analyzing
opportunities for future expansion. While we believe these actions can improve
profitability, there can be no assurance that these actions will be successful.
We also continue to explore ways to maximize long-term value for our
shareholders, including focusing on efforts to increase earnings, responding to
competition, and improving same store sales and gross margins. We believe the
number of new island markets with the attributes for our existing growth
strategy is limited as a result of, among other things, changing market
conditions. We are currently evaluating alternative methods of implementing
future expansion.
Available Information
We are headquartered at 8160 304th Avenue, SE, Building 3, Suite A,
Preston, Washington 98050. We file reports with the Securities and Exchange
Commission, including annual reports on Form 10-K, quarterly reports on Form
10-Q and other reports from time to time. The public may read and copy any
materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth
Street, NW, Washington, DC 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We
are an electronic filer and the SEC maintains an Internet site at
http://www.sec.gov that contains the reports, proxy and information statements,
and other information filed electronically.
Industry Overview
Traditional warehouse clubs such as Costco Companies, Inc., BJ's Wholesale
Club, Inc. and Sam's Club, a division of Wal-Mart Stores, Inc., 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 we employ many of the retailing methods of the larger
participants in the warehouse club industry, we operate smaller stores
(averaging approximately 30,000 square feet), we do not charge a membership fee,
we typically locate our stores in smaller geographic areas with less
concentrated population centers, and we rely 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, we believe that 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
Our current business strategy is to
o enter small island markets ahead of large warehouse club
competitors;
o select markets familiar with the warehouse club concept;
o offer U.S. goods where availability of such goods is minimal and
significant demand exists;
o leverage island-operations expertise;
o utilize modern systems and merchandising methods;
o offer competitive prices while maintaining favorable margins; and
o provide a local product mix while benefiting from low overhead
costs.
Expand to New Markets. We intend to pursue future growth by expanding into
markets that other warehouse clubs and discount retailers have not yet entered,
including but not limited to the Pacific and Caribbean regions. The pace at
which we will open new stores will be dictated by our strategic planning
process. We plan to refine our expansion efforts to focus on markets
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with high U.S. brand awareness and demand, as well as other attributes that
typify our most successful stores. Future development of our business will be
directed to markets in which we can compete effectively by offering competitive
prices while maintaining low costs of goods and services to consumers.
Currently, we believe the number of new island markets with the attributes for
our existing growth strategy is limited, and we have no plans to open new stores
during 2003 other than rebuilding our Dededo, Guam store. However, we continue
to analyze opportunities for new stores in the future.
Enter Markets Familiar With Warehouse Concept. We plan 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.
We believe that the presence of this attribute has helped accelerate market
acceptance of our stores in the past.
Offer U.S. Goods in Markets with Minimal Supply and Significant Demand. We
believe that markets that have awareness and acceptance of U.S. goods but have
limited access to those goods offer substantial sales and profit potential. We
believe that procuring U.S. goods in large volumes and shipping them long
distances to island stores are two of our core competencies.
Leverage Island-Operations Expertise. Through our experience in opening
and operating retail warehouse club-style stores in the U.S. Territories,
foreign island countries and the Hawaiian Islands, we believe that we have
developed a depth of expertise in dealing with the inherent challenges of island
market operations. We have 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 our
long-standing relationships with steamship lines, we negotiate what we believe
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. We believe that many
merchants in our 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 we have developed. By utilizing the modern systems
and merchandising methods we have developed, we believe that we can achieve
greater efficiencies and higher margins than other local island retailers.
Emphasize Strong Margins While Maintaining Everyday Low Prices. In
addition to providing a pleasant shopping atmosphere, we strive to sell products
at prices that we believe are lower than those offered by our local island
competitors, yet still above those that could be charged in large mainland
markets. By leveraging our retail operating efficiencies, access to
volume-purchasing discounts and distribution capabilities, we believe that we
are able to acquire some products at a significantly lower cost than that paid
by other local island retailers. Historically, these factors have enabled us to
achieve higher margins than those achieved by mainland warehouse clubs and
discount retailers.
Use Localized Product Sourcing While Deriving Benefits of Centralized
Purchasing. We conduct market research through our 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, our buyers then procure these
products through our 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 our corporate buyers directly from suppliers located in the region.
Market and Site Selection
We believe 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 we identify a
target location as a possible site for expansion and we are satisfied with the
political and regulatory environment in the target location, we then compare the
prices charged by local competitors to the prices we would need to charge in
order to achieve an acceptable return on our investment (after factoring in cost
of the product, cost of freight, duties, port charges, transportation and
taxes). If our market research indicates that we would be able to charge an
adequate price for our products, we then commence a formal search for a suitable
store site. Desirable attributes of suitable sites include a central location in
a population center, sufficient space for our facility, including parking and
loading docks, access to utilities and acceptable geological conditions for
successful construction.
We generally do not intend to own the land or buildings for our stores. To
the extent, however, that we believe it to be advantageous to purchase land for
our new store sites or to construct new store buildings, we may use our cash
resources or existing financing sources during the construction period and
subsequently attempt to obtain permanent financing after the stores are opened.
Our ability or the ability of a potential landlord to secure financing for new
stores is subject to the availability of
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commercial real estate financing on acceptable terms. Failure to secure adequate
financing on a timely basis would delay or potentially prevent new store
openings.
Store Economics
During fiscal 2002, our stores generated annual average net sales of
approximately $14.7 million, average net sales per square foot of approximately
$490, 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 29, 2002 in these eleven stores was approximately
$1.1 million. The average investment in inventory, net of accounts payable of
approximately 60%, was $670,000 at December 29, 2002. The store contribution
return on average investment for fiscal 2002 for these eleven stores was
approximately 32%.
Store Layout
We have incorporated into our prototype store many standard features found
in domestic warehouse clubs that have 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, we believe that we are able to
gain a competitive advantage over our competitors by utilizing:
o loading docks;
o comparatively large freezer and refrigeration space with
state-of-the-art equipment;
o efficient shelving and display racks;
o computerized cash registers and inventory tracking systems; and
o multiple checkout lanes.
Each of our stores is outfitted with adjustable metal shelving that allows
us to vary the display of our 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.
We have used considerable care in developing our 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 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 a vendor's
pallets or in open cases, to maximize warehouse space and minimize labor costs.
In-store signage reinforces the basic value image, while our 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.
We have also attempted to minimize costs through the design of our stores.
We do not use expensive fixtures such as floor tiles and false ceilings, and
thereby lower our construction and maintenance costs. In addition, our
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. We have also developed standardized
construction specifications and have negotiated competitive prices on building
materials, such as metal exterior panels, building components, store equipment
and shelving, allowing us to control material costs on a per-facility basis and
help ensure uniformity of materials throughout our facilities and to minimize
our lease expenses.
Merchandising
We typically carry approximately 3,000 stock-keeping units ("SKUs"),
compared to the 3,500 to 5,000 SKUs estimated by industry sources to be carried
by traditional warehouse clubs. Our stores do not have certain departments found
in most large-format warehouse clubs, such as automobile tire, bakery, photo
finishing and prescription drug departments. All our stores feature the
following main product categories:
Food-Perishables. Meat, produce, deli, dairy and frozen items
represent approximately 25% 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 our local island competitors.
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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 35% of a typical
store's net sales, and include tobacco, sundries, health and beauty,
office, hardware, electronics, housewares, furniture and sporting goods.
Purchasing. We balance our product mix by providing popular U.S. brand
name products together with local ethnic items found in each island region.
Approximately 30% of our items are produced locally or purchased through local
suppliers in each market. Offering locally purchased merchandise enables us to
better serve our island customers and offer an innovative variation to the
warehouse store format. Our store managers are able to purchase product that may
be available only on their particular islands. Our buyers monitor sales and
inventory levels on a daily basis from all of our stores. In an effort to cater
to retail customers who generally purchase products for home use, we carry
products in various product sizes, including single packages, "bulk packages"
and mid-sized "value-packs." We purchase merchandise from manufacturers and
suppliers on a purchase order basis exclusively.
Pricing. We strive to be the "low price leader" for the markets we serve.
We do not charge our customers a membership fee, thereby allowing all consumers
to receive the benefits of our value-pricing philosophy. We believe that we
provide 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, that operate in some of our island markets. In
an effort to achieve the lowest prices available in a particular market, we
regularly compare prices and products being offered by our local competitors.
Generally, given the economic efficiencies that we can bring to bear with our
ability to purchase product in large quantities as well as our efficient
distribution system that allows us to take advantage of optimal freight and
transportation costs, we believe that we have a competitive advantage when
pricing most of our products compared to local competition. However, if the
comparison of local competitors' prices discloses that our prices exceed those
of our local competition, then our store managers have the authority to reduce
prices to remain competitive. This decentralization of pricing decisions allows
us to respond quickly and efficiently to competitive challenges in each of our
island markets.
Distribution
We currently use a Company-operated distribution facility in San Leandro,
California and third-party operated facilities in Port Everglades, Florida,
Sacramento, California, Auckland, New Zealand and Sydney, Australia. We have no
written agreements with the independently operated distribution facilities, but
instead have month-to-month service relationships. At each distribution
facility, merchandise is received, consolidated and cross-docked, and ultimately
shipped in fully loaded containers to our 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. Our
management has significant experience and long-term relationships with steamship
lines and, with our present volume, has negotiated what we believe to be
competitive transportation rates. We do not have a warehouse, but control
inventory levels in our stores by maintaining sufficient back stock in the
stores combined with efficient cross-dock facilities. For perishable items, such
as meats, frozen and chill goods, we use 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
We consider our management information systems to be a key component of
our strategic plan. We track all inventory movement, sales and purchase orders
by SKU number, vendor number, store and date. We currently use electronic
point-of-sale equipment in all our stores. All data and communications from each
location are sent via our company wide area network, to the computer system
located at our corporate headquarters in Preston, Washington. Our company 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 our headquarters and store
locations is necessary since our stores are located in such remote locations.
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Employee Organization, Training and Compensation
Management of each of our stores generally consist 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.
Our goal is to hire most of our employees from the island market in which
the particular store resides, thus creating job opportunities for local
residents. We attempt to promote our store managers internally. 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. We have 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 our systems and
procedures.
We strive to attract and retain highly motivated, performance-oriented
employees and managers by offering competitive compensation, including bonus
programs based on performance. Since 2000, our Manager Bonus Program has paid
managers an annual bonus based on store and company profitability targets. Prior
to 2000, our Manager Bonus Program was based on the net income of the Company.
In 2001, we also implemented a sales incentive bonus program for all store
employees based on sales targets. Although we believe that we generally pay our
employees above-market wages and are thereby able to attract and retain
high-quality employees, we further believe that island wages are generally lower
than mainland wages and thus result in comparatively lower labor costs.
Customer Service
We bring to our island markets a commitment to customer service that we
believe gives us a competitive advantage in each of the local markets we serve.
Our store layout is designed to maximize floor space used for selling product as
well as to give customers a spacious feel while shopping. We accept various
forms of payments, including food stamps and credit and debit cards, and credit
is selectively extended to some local businesses and government agencies. We
have a 30-day, no-questions-asked return policy. Each of our 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
We generally rely on word-of-mouth advertising in order to save on
advertising and marketing costs and pass on the savings to our customers. We
have historically spent less than 0.2% of net sales on advertising. However, in
more competitive markets, we may experience higher marketing and advertising
costs.
Competition
The warehouse club and discount retail businesses are highly competitive.
We have historically faced significant competition from warehouse clubs and
discount retailers such as Wal-Mart, Kmart and Costco in Hawaii, from Kmart in
the U.S. Virgin Islands and Guam, and PriceSmart in St. Thomas and Guam. Our
competition also consists of discount retailers and other national and
international grocery store chains. Some of our competitors have substantially
greater resources, buying power and name recognition than we have. 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 we
expect that the size of many of the markets in which we operate or expect to
enter will delay or deter entry by many of our larger competitors, there can be
no assurance that our larger competitors will not decide to enter these markets
or that other competitors will not compete more effectively against us. Our
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. We may be
required to implement price reductions and other actions in order to remain
competitive in our markets.
In May 2001, PriceSmart, a membership warehouse club, opened on St.
Thomas, where we have an established market share. To remain competitive in St.
Thomas, among other things, we implemented a customer rewards program, which
presents customers with merchandise certificates based on the achievement of
specified levels of customer purchases. Additionally,
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PriceSmart opened a store in Guam in March of 2002. In response, we remodeled
our Dededo store and increased our price competitiveness and marketing
activities in Guam. Subsequently, on December 8, 2002, our two stores on the
island of Guam suffered damage from Supertyphoon Pongsona, resulting in the
immediate closure of both stores. Our Tamuning store lost its generator in the
storm, but reopened shortly thereafter on December 12th. Our Dededo store,
however, suffered more significant damage, and has yet to reopen. We believe
that the building structure is most likely a total loss and we are in the
process of rebuilding our Dededo store with an expected reopening in late 2003.
As a result of the temporary closure of our Dededo store, we expect sales in
Guam to be negatively impacted in 2003.
Furthermore, our ability to expand into new markets and operate profitably
in new and existing markets may be adversely affected by the existence or entry
of competing warehouse clubs or discount retailers.
Intellectual Property
We obtain proprietary rights protection for trademarks by filing
applications for registrable marks with the U.S. Patent and Trademark Office. We
have been granted federal registration of the name and stylized logo
"Cost-U-Less." In addition, we rely on trade secret laws to protect our
proprietary rights. While we believe that our trademarks and other proprietary
know-how have significant value, changing technology and the competitive
marketplace make our future success dependent principally upon our employees
technical competence and our business strategy.
There can be no assurance that third parties will not assert claims
against us 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 and divert
the efforts of our management, whether or not such litigation is determined in
our favor.
Governmental Regulation
We are 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 we pursue future
expansion in foreign countries, our 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 we believe that we presently comply 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 our business, financial condition and
operating results. See "Risk Factors That May Affect Future Results--Risks
Associated With Island and International Operations."
Employees
As of March 10, 2003, we had 40 full-time equivalent employees at our
corporate headquarters in Preston, Washington, and 12 employees at our main
distribution facility in San Leandro, California. In total, we employ
approximately 500 people worldwide. None of our 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 we face. Additional risks
and uncertainties not presently known to us 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.
Our ability to operate profitably in existing markets and to expand into
new markets may be adversly affected by competing warehouse clubs or discount
retailers. The warehouse club and discount retail businesses are highly
competitive. We have historically 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. Our competition also consists of
discount retailers and other national and international grocery store chains.
Some of our competitors have substantially greater resources, buying power and
name recognition than we have. The cost of doing business in island markets is
typically higher than on the U.S. mainland because
9
of ocean freight and duty costs and higher facility costs. While we expect that
the size of many of the markets in which we operate or expect to enter will
delay or deter entry by many of our larger competitors, there can be no
assurance that our larger competitors will not decide to enter these markets or
that other competitors will not compete effectively against us. Our 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. We may be required to
implement price reductions and other actions in order to remain competitive in
our markets.
In May 2001, PriceSmart opened a store on St. Thomas, where we have an
established market share. To remain competitive in St. Thomas, among other
things, we 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, we remodeled our Dededo store and have increased our price
competitiveness and marketing activities in Guam. During 2002, we experienced a
decline in sales in Guam as a result of the new competitor. There is no
assurance that the steps taken in Guam will cause initial sales losses to
rebound somewhat as they did when similar competition entered our St. Thomas
market. Additionally, on December 8, 2002, our two stores on the island of Guam
suffered damage from Supertyphoon Pongsona, resulting in the immediate closure
of both stores. Our Tamuning store lost its generator in the storm, but reopened
shortly thereafter on December 12th. Our Dededo store, however, suffered more
significant damage, and has yet to reopen. We believe that the building
structure is most likely a total loss and we are in the process of rebuilding
our Dededo store with an expected reopening in late 2003. As a result of the
temporary closure of our Dededo store, we expect sales in Guam to be negatively
impacted in 2003.
Furthermore, our ability to expand into and operate profitably in new
markets may be adversely affected by the existence or entry of competing
warehouse clubs or discount retailers.
A decline in the general economic condition in the United States or in
island markets in which we operate could have a significant impact on our
financial performance. The success of our 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 our island markets,
taxation, consumer spending patterns and customer preferences. There can be no
assurance that consumer spending in our markets will not be adversely affected
by these factors, thereby affecting our growth, net sales and profitability. A
decline in the national or regional economies of the United States and the U.S.
Territories where we currently operate or any foreign countries in which we
currently or will operate could have a material adverse effect on our business,
financial condition and operating results.
If we cannot maintain our existing credit facility, our operations and
business would suffer. A significant portion of our cash flow is generated by
our operations. If our operating results deteriorate, as a result of a decrease
in customer demand or severe pricing pressures from our customers or our
competitors, our ability to generate positive cash flow from operations may be
jeopardized. If we are unable to maintain our existng credit facility, there
would be a material adverse effect on our business, financial condition and
results of operation. Additionally, there can be no assurance that we would be
able to obtain additional financing when needed, or that any available financing
will be on terms acceptable to us.
Because we have a small store base, adverse store performance or increased
expenses will have a more significant adverse impact on our operating and
financial results than if we had a larger store base. We opened our first store
in 1989 and opened a total of 21 stores through December 2002, and presently
operate ten stores due to the December 8, 2002 closure of our Dededo, Guam store
as a result of damage sustained from the Supertyphoon Pongsona. We are in the
process of rebuilding our Dededo store. Our closure of the ten other stores has
adversely affected our operating results. Should (i) any new store be
unprofitable, (ii) any existing store experience a significant decline in
profitability, or (iii) our general and administrative expenses increase, the
effect on our operating results would be more significant than would be the case
if we had a larger store base, and could have a material adverse effect on our
business, financial condition and operating results. Although we intend 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 our
business, financial condition and operating results. In addition, our ability to
acquire products at a lower cost than competitors or obtain volume-based pricing
can be adversely affected because of our small store base.
If we cannot obtain sufficient funds to grow our business, our operations
and business may suffer. We expect to have substantial future capital
requirements to expand our business. Currently, we believe we have sufficient
funds from our existing cash, various credit facilities and cash flow from
operations to fund our operations through the next 12 months. We do not,
however, have sufficient funds to pursue a rapid growth strategy. Our ability to
expand our business and pursue a rapid growth strategy will depend on our
ability to obtain significant external financing. Our ability to obtain
additional financing on acceptable terms depends on a number of factors, such as
market conditions and our operating performance. There can be no assurance that
we will be able to obtain additional financing in a timely manner and upon
acceptable terms, if at all. If we fail to obtain necessary
10
funds upon acceptable terms, we may be forced to delay expansion of our business
or otherwise curtail our operations and our operations and business may suffer.
A prolonged decrease in tourism and air travel could have an indirect but
significant impact on our financial performance, operations and liquidity.
Because our operations are primarily located in the U.S. Territories and foreign
island countries throughout the Pacific and Caribbean, the success of our
operations depends to a significant extent on tourism and the travel industry.
Prolonged adverse occurrences affecting tourism or air travel, particularly to
non-U.S. destinations, including political instability, armed hostilities,
terrorism, or other activity that involves or affects air travel or the tourism
industry generally, could have an indirect but adverse and significant impact on
our financial performance, operations liquidity or capital resources.
If we are unable to overcome challenges resulting from the isolation of
store operations from our corporate management and our increased dependence on
local managers, we may experience decreased productivity or other operational
problems. Our headquarters and administrative offices are located in Preston,
Washington; however, ten of our eleven stores and a majority of our employees
are located on islands. Although we invest resources to hire and train our
on-site managers, the inability of our executives to be physically present at
our current and planned store sites on a regular basis may result in the
following:
o Isolation of store operations from corporate management and an
increased dependence on store managers;
o Diminished ability to oversee employees, which may lead to decreased
productivity or other operational problems;
o Construction delays or difficulties caused by inadequate supervision
of the construction process; and
o Communication challenges
We may need to invest significant resources to update and expand our
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 our business, financial condition and operating results.
Our business could suffer if we are unable to manage the challenges
associated with island and international operations. Our net sales from island
operations represented approximately 89% of our total net sales for fiscal 2002.
We expect that our island and international operations together will continue to
account for nearly all of our total net sales. The distance, as well as the
time-zone differences, involved with island locations impose significant
challenges to our ability to manage our operations. Logistical challenges are
presented by operating individual store units in remote locations, whether in
terms of information flow or transportation of goods. Our inability to
effectively manage our island and international operations could have a
significant adverse effect on our business, results of operations and financial
condition
We may encounter disruption in the transportation of our products which
would significantly harm our business. Our island locales require the
transportation of products over great distances on water, which results in the
following:
o Substantial lags between the procurement and delivery of product,
thus complicating merchandising and inventory control methods;
o Possible loss of product due to potential damage to, or destruction
of, ships or containers delivering our goods;
o Tariff, customs and shipping regulation issues;
o Substantial ocean freight and duty costs; and
o Interruption in the delivery of product due to labor disruption.
Moreover, only a limited number of transportation companies service our
regions, none of which has entered into a long-term contract with us. The
inability or failure of one or more key transportation companies to provide
transportation services to us, changes in the regulations that govern shipping
tariffs or any other disruption in our ability to transport our merchandise
could have a material adverse effect on our business, financial condition and
operating results.
We face a number of uncertainties associated with expansion outside U.S.
Territories. Our failure to adequately address these uncertainities could cause
our business to suffer. Currently, three of our stores are located outside the
U.S. Territories. Our future expansion plans may involve entry into additional
foreign countries, which may involve additional or heightened risks and
challenges that are different from those we currently encounter, including risks
associated with being further removed from the political and economic systems in
the United States and anti-American sentiment as a result of political or
military action. We do not currently engage in currency hedging activities. On
February 15, 2001, we closed one of the two stores we 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 our
store in Nadi. Our 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, or political and
economic changes in other markets, will not have a material adverse effect on
our business, financial condition and operating results. The failure to
adequately address the additional challenges involved with international
operations could have a material
11
adverse effect on our business, financial condition and operating results.
We are exposed to weather and other risks associated with island
operations, which could affect our business and results of our operations. Our
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, our stores. On December
8, 2002, our two stores on the island of Guam suffered damage from Supertyphoon
Pongsona, resulting in the immediate closure of both stores. Our Tamuning store
lost its generator in the storm but reopened shortly thereafter on December
12th. Our Dededo store, however, suffered more significant damage and has yet to
reopen. We believe that the building structure is most likely a total loss. We
are in the process of rebuilding our Dededo store. Losses from business
interruption may not be adequately compensated by insurance and could have a
material adverse impact affect on our business, financial condition and results
of operations.
In addition to weather, island operations involve uncertainties arising
from such as:
o Local business practices, language and cultural considerations,
including the capacity or willingness of local business and
government officials to provide necessary services;
o Ability to acquire, install and maintain modern capabilities such as
dependable and affordable electricity, telephone, computer, Internet
and satellite connections often in undeveloped regions;
o Political, military and trade tensions;
o Currency exchange rate fluctuations and repatriation restrictions;
o Local economic conditions;
o Difficulty enforcing agreements or protecting intellectual property;
and
o Collection of debts and other obligations in foreign countries.
There can be no assurance that we 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 our business, financial
condition and operating results.
If we are unable to manage our fluctating comparable store sales or our
comparable store sales decline, our business and results of operations could
suffer. Historically, our comparable store sales have fluctated significantly. A
variety of factors affect our comparable store sales, including, among others,
actions of competitors (including the opening of additional stores in our
markets), the retail sales environment, general economic conditions, weather
conditions and our ability to execute our business strategy effectively. In
addition, our future expansion may result in opening additional stores in
markets where we already do business. Historically, we have experienced a
reduction in sales at an existing store when we open a new store 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. If our comparable store sales
decline, our business, results of operations and financial condition would
suffer.
If we are unable to execute our growth strategy, our business could
suffer. The success of our future growth strategy will depend to a significant
degree on our ability to do the following:
o Operate our stores on a profitable basis;
o Expand our operations through the opening of new stores;
o Properly identify and enter new markets;
o Locate suitable store sites;
o Negotiate acceptable lease terms;
o Locate local developers to construct facilities to lease;
o Construct or refurbish sites; and
o Obtain necessary funds on acceptable terms.
We have not opened stores in foreign island markets at a rapid pace.
Currently, we have no plans to open new stores during 2003, other than
rebuilding our Dededo, Guam store. We do not have operating experience in many
of the markets in which we may open new stores. In fact, in June 2000, we closed
the two stores that we 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 our other stores. Additionally, in February 2001, we closed
one of our two Fiji stores, due primarily to the impact that the political
turmoil and resulting economic downturn in Fiji were having on the tourist
industry. New markets may present operational, competitive, regulatory and
merchandising challenges that are different from those we currently encounter.
There can be no assurance that we will be able to adapt our operations to
support our future expansion plans or that our new stores will be profitable.
Any failure on our part to manage our growth could have a material adverse
effect on our business, financial condition and operating results.
12
Additionally, we rely significantly on the skill and expertise of our
on-site store managers. We will be required to hire, train and retain skilled
managers and personnel to support any growth, and may experience difficulties
locating store managers and employees who possess the training and experience
necessary to operate our new stores, including our management information and
communications systems, particularly in island markets where language, education
and cultural factors may impose additional challenges. Further, we have
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 we may locate our stores.
There can be no assurance that we will be able to open new stores according to
our business plans, or that we will be able to continue to attract, develop and
retain the personnel necessary to pursue our growth strategy. Failure to do so
could have a material adverse effect on our business, financial condition and
operating results.
We believe that there are certain attributes of appropriate markets into
which we may expand our 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.
We believe the number of new island markets with these attributes is
limited in number as a result of, among other things, the entry by many of our
larger competitors into these markets. If we are unable to expand into new
island markets ahead of large warehouse club competitors, our business,
financial condition and results of operations may be adversely affected.
We also will need to continually evaluate the adequacy of our existing
systems and procedures, including store management, financial and inventory
control and distribution systems. As we grow, we will need to continually
analyze the sufficiency of our distribution depots and inventory distribution
methods and may require additional facilities in order to support our planned
growth. There can be no assurance that we will anticipate all the changing
demands that our expanding operations will impose on such systems. Failure to
adequately update our internal systems or procedures as required could have a
material adverse effect on our business, financial condition and operating
results.
The loss of key personnel could harm our business and results of
operations. Our success depends in large part on the abilities and continued
service of our executive officers and other key employees. In addition, we do
not currently carry key-man life insurance. There can be no assurance that we
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 our
business, financial condition and operating results.
A disruption of our information systems could cause our business and
results of operations to suffer. Our business is highly dependent on
communications and information systems, primarily systems provided by
third-party vendors. Although we have taken a number of precautions against
certain events that could disrupt the operation of our management information
systems, we may experience systems failures or interruptions, which could have a
material adverse effect on our business, financial condition and operating
results. Any failure or interruption of our systems or systems provided by
third-party vendors could cause delays or other problems in our operations,
which could have a material adverse effect on our business, financial condition
and operating results.
We may not be able to utilize certain tax benefits, which could have a
material adverese effect on our results of operations. Utilization of Tax
Benefits. Our ability to utilize various tax benefits is dependent on our
ability to generate adequate taxable income in the United States and in foreign
jurisdictions. As of December 29, 2002, we had recognized an aggregate foreign
tax benefit of $2.6 million on foreign operating losses and a corresponding
valuation allowance of $2.4 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. Utilization of the tax benefit is dependent on our
generating future taxable income. There can be no assurance that we 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 our
business, financial condition and operating results.
13
Certain provisions in our charter documents and otherwise may discourage
third parties from attempting to acquire control of our Company, which may have
an adverse effect on the price of our stock. Pursuant to our Restated Articles
of Incorporation, our 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 our shareholders. Our restated articles and bylaws
also provide for a classified board and special advance notice provisions for
proposed business at annual meetings. In addition, Washington law contains
certain provisions that may have the effect of delaying, deferring or preventing
a hostile takeover of our company.
On February 23, 1999, our 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 our common
stock and have no impact upon the way in which shareholders can trade our common
stock. However, if the plan is not waived by our board of directors, ten days
after a person or group acquires 15% or more of our 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 our shares
at that time. The Rights are designed to cause substantial dilution to a person
or group that attempts to acquire our company without approval of the Board of
Directors, and thereby make a hostile takeover attempt prohibitively expensive
for the potential acquirer. As of December 29, 2002, no rights have become
exercisable. 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 our company, even if shareholders may consider
such a change in control to be in their best interests, which may cause the
price of our common stock to suffer.
We are subject to various governmental regulations, which may have an
adverse effect on our business. Governmental regulations in foreign countries
where we plan to expand our operations might prevent or delay entry into the
market or prevent or delay the introduction, or require modification, of certain
of our operations. Additionally, our 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. We may also be subject to taxation in these foreign jurisdictions,
and the final determination of our tax liabilities may involve the
interpretation of the statutes and requirements of the various domestic and
foreign taxing authorities. We 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 our business, financial condition and operating
results.
14
Item 2. Properties
We currently lease a majority of our existing store locations. We also
lease the land for our St. Thomas and St. Maarten stores, but own 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 our
Sonora store, which opened in an existing facility, all of our stores have been
built to our specifications.
Mid-Sized Format. The average size of our eleven stores is approximately
30,000 square feet, while the traditional warehouse stores found in the United
States average approximately 115,000 square feet. We have developed three store
"footprints" based on a 27,000, 36,000 and 42,000-square-foot facility, which
are adaptable from anywhere between 25,000 to 45,000 square feet. Our 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 our stores in Fiji, St. Thomas,
Curacao and St. Maarten.
We have developed a standard lease that we use as a starting point for our
lease negotiations with each potential landowner/developer. We routinely
negotiate 10-year leases with at least two five-year renewal options. The
following is a summary of our facility locations:
Approximate
Store Square Lease Options to
Location Date Opened Footage Term Expiration Date Extend
-------- ----------- ------- ---- --------------- ------
Dededo, Guam (1).................................. 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 (Land Lease).... June 29, 2000 36,000 25 years February 25, 2024 30 years
(1) On December 8, 2002, our Dededo store on the island of Guam suffered
damage from the Supertyphoon Pongsona, resulting in its immediate closure.
We believe that the building structure is most likely a total loss and we
are currently working with our landlord to rebuild this store.
We relocated our headquarters office in June 2000 and now lease
approximately 14,000 square feet of office space for our headquarters in
Preston, Washington, which lease expires on December 31, 2003. We relocated our
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. We also use
third-party operated distribution facilities in Florida, California, New Zealand
and Australia. We believe that our distribution facilities will be sufficient to
meet our needs at least through the end of fiscal 2003.
15
Item 3. Legal Proceedings
We 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, we do not believe
that any pending legal matters will have a material adverse effect on us.
However, any adverse outcome to future lawsuits against us may result in a
material adverse affect on our financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our shareholders during the fourth
quarter of the fiscal year ended December 29, 2002.
16
PART II
Item 5. Market for Company's Common Stock and Related Shareholder Matters
Our common stock is currently traded on the Nasdaq SmallCap Market under
the symbol "CULS". The number of shareholders of record of our common stock at
March 28, 2003, was 61.
The last sale price of our common stock on the Nasdaq SmallCap Market on
March 27, 2003 was $1.11 per share. High and low sales prices for our common
stock for the periods indicated in 2002 and 2001, 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 2002 (ended December 29, 2002)
First Quarter................................. 1.75 1.16
Second Quarter................................ 2.42 1.31
Third Quarter................................. 1.42 0.75
Fourth Quarter................................ 1.62 0.69
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
We have never declared or paid any cash dividends on our common stock. We
currently anticipate that we will retain all future earnings for use in the
expansion and operations of our business and do not anticipate paying cash
dividends in the foreseeable future.
17
Item 6. Selected Financial Data
The following selected financial data is derived from our audited
consolidated financial statements and accompanying notes. This selected
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and the notes thereto included elsewhere in this report.
Our 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.29, Dec.30, Dec.31, Dec.26, Dec.27,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Income Statement Data:
Net sales ........................................ $ 176,190 $ 177,856 $ 186,299 $ 167,079 $ 133,861
Gross profit ..................................... 29,215 28,932 28,349 27,395 22,324
Operating Expenses:
Store .......................................... 22,181 21,288 21,775 18,254 15,100
General and administrative ..................... 5,934 5,786 6,421 5,654 4,139
Store opening .................................. 14 68 518 1,217 747
Store closing .................................. 0 0 3,740 0 238
Operating income (loss) .......................... 1,086 1,790 (4,105) 2,270 2,100
Interest expense, net ............................ (375) (589) (663) (403) (257)
Other expense .................................... (236) (155) (283) (57) (10)
Income (loss) before income taxes ................ 475 1,046 (5,051) 1,810 1,833
Income tax provision ............................. 190 490 460 656 640
Net income (loss) ................................ $ 285 $ 556 $ (5,511) $ 1,154 $ 1,193
Earnings (loss) per common share:
Basic .......................................... $ 0.08 $ 0.15 $ (1.53) $ 0.32 $ 0.45
Diluted ........................................ $ 0.08 $ 0.15 $ (1.53) $ 0.32 $ 0.43
Weighted average common shares outstanding, basic 3,606 3,606 3,599 3,558 2,664
Weighted average common shares outstanding, ...... 3,615 3,607 3,599 3,618 2,759
diluted
Selected Operating Data:
Store contribution(1) .......................... $ 6,291 $ 6,109 $ 4,940 $ 7,837 $ 6,596
Stores opened .................................. 0 0 1 3 3
Stores closed (2) .............................. 1 1 2 0 1
Stores open at end of period ................... 10 11 12 13 10
Average net comparable store sales per square
foot(3)(4) .................................... $ 490 $ 485 $ 498 $ 515 $ 566
Comparable-store net sales increase
(decrease)(3)(4) .............................. 1.4% (4.7)% (2.2)% 6.8% 9.9 %
Consolidated Balance Sheet Data:
Working capital .................................. $ 4,707 $ 2,568 $ 535 $ 5,992 $ 9,241
Total assets ..................................... 40,190 41,606 41,717 45,812 39,270
Line of credit ................................... 2,367 2,173 2,700 2,163 0
Long-term debt, less current maturities .......... 2,811 3,077 3,344 2,517 2,036
Total shareholders' equity ....................... 15,595 15,341 14,794 20,665 19,596
- ----------
(1) Store contribution is determined by deducting direct store expenses from
store gross profit.
(2) On December 8, 2002, our two stores on the island of Guam suffered damage
from the Supertyphoon Pongsona, resulting in the immediate closure of both
stores. Our Tamuning store, lost its generator in the storm, but reopened
shortly thereafter on December 12th. Our Dededo store, however, suffered
more significant damage, and has yet to reopen.
(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. Our 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.
18
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
We began our operations in 1989 by opening a mid-sized warehouse
club-style store in Maui, Hawaii. In 1992, we began to expand by opening stores
built to our specifications, in other island locations. After experiencing
success with our mid-sized store concept, we began to enter various mainland
markets in late 1992, occupying existing retail spaces on favorable lease terms,
while continuing to open more stores in island markets that were built to our
specifications. Over the course of a three-year period, we opened six mainland
stores and seven island stores. Due to a lack of success in the mainland
markets, we decided in 1995 to return our focus to our core island markets and
we began closing our mainland stores. The process of closing five of our six
mainland stores was completed in 1997. Currently, only one mainland store
remains open and serves as an efficient testing ground for new operating and
merchandising methods. In 1998, we opened two stores in Fiji, and in 1999 we
opened two stores in New Zealand and one in Curacao, Netherland Antilles.
During fiscal 2000, we focused on improving our mix of stores in our
relatively small store base, as under-performing stores were having a materially
adverse impact on our performance. In June 2000, we closed our two New Zealand
stores, as well as our buying office in Auckland. Although we believed that we
had introduced what was to be the first warehouse club concept to the New
Zealand marketplace, we believe that the loyalty of New Zealand customers to
many regional brands resulted in disappointing sales by the new stores of the
U.S. brands we primarily sold. In February 2001, we closed one of our 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 our store in Nadi, Fiji. Our remaining store in Fiji
is located in the city of Suva, which is the capital and the primary population
center of Fiji.
On June 29, 2000, we opened a store on the island of St. Maarten in the
Caribbean. We believe this island market has market conditions that resemble
those in islands in which we have been successful.
We are continuing to focus on our core island store operations by
reviewing our 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, we have no plans to open new stores during 2003 other than
rebuilding our Dededo, Guam store, but we are in the process of analyzing
opportunities for future expansion. While we believe these actions can improve
profitability, there can be no assurance that these actions will be successful.
We also continue to explore ways to maximize long-term value for our
shareholders, including focusing on efforts to increase earnings, responding to
competition, and improving same store sales and gross margins. We believe the
number of new island markets with the attributes for our existing growth
strategy is limited and is decreasing as a result of, among other things,
changing market conditions. We are currently evaluating alternative methods of
implementing future expansion
We currently operate ten retail stores with an eleventh store being
rebuilt as follows: 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. On December 8, 2002, our two stores on the island of Guam suffered
damage from the Supertyphoon Pongsona, resulting in the immediate closure of
both stores. Our Tamuning store, lost its generator in the storm, but reopened
shortly thereafter on December 12th. Our Dededo store, however, suffered more
significant damage, and has yet to reopen. We believe that the building
structure is most likely a total loss and we are in the process of rebuilding
with an expected reopening in late 2003.
Our 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 U.S. Territories, U.S. island states and foreign
island countries, 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 we do not have large seasonal fluctuations
in sales, the fourth quarter is typically the highest sales quarter due to
additional holiday sales.
19
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of our net sales represented by certain consolidated income statement data.
Fiscal Year Ended
-----------------
December 29, December 30, December 31,
2002 2001 2000 *
---- ---- ------
Net sales ....................... 100.0 % 100.0 % 100.0 %
Gross margin .................... 16.6 16.3 15.2
Operating Expenses:
Store ...................... 12.6 12.0 11.7
General and administrative . 3.4 3.3 3.4
Store opening .............. -- -- 0.3
Store closing .............. -- -- 2.0
Operating income (loss) ......... 0.6 1.0 (2.2)
Interest expense, net ........... (0.2) (0.3) (0.4)
Other expense ................... (0.1) (0.1) (0.2)
Income (loss) before income taxes 0.3 0.6 (2.8)
Income tax provision ............ 0.1 0.3 0.2
Net income (loss) ............... 0.2 % 0.3 % (3.0) %
* The year ended December 31, 2000 was a 53-week fiscal year. The years
ended December 29, 2002 and December 30, 2001 were 52-week fiscal years.
Fiscal 2002 Compared to Fiscal 2001
Net Sales. Net sales in fiscal 2002 of $176.2 million declined 0.9% as
compared to net sales of $177.9 million for the comparable period in the prior
year. The slight decline in net sales was primarily due to lower
business-to-business sales in the current year as compared to particularly
strong sales in the prior year. We expect the level of business-to-business
activity to continue to be slightly lower throughout fiscal 2003. Conversely,
comparable-store sales (stores open for a full 13 months) increased 1.4% during
fiscal 2002 as compared to fiscal 2001, as decreased sales in Guam were more
than offset by sales increases in a majority of our other stores. Additionally,
although we are experiencing a decline in sales in Guam as a result of a new
competitor, we expect our sales volume in Guam to rebound somewhat as they did
when the same competitor entered our St. Thomas market in fiscal 2001. However,
on December 8, 2002, our two stores on the island of Guam suffered damage from
Supertyphoon Pongsona, resulting in the immediate closure of both stores. Our
Tamuning store lost its generator in the storm, but reopened shortly thereafter
on December 12th. Our Dededo store, however, suffered more significant damage,
and has yet to reopen. We believe that the building structure is most likely a
total loss and we are in the process of rebuilding our Dededo store with an
expected reopening in late 2003. Although the supertyphoon in Guam had only a
slightly adverse effect on our fiscal 2002 sales, we expect sales in Guam in
2003 to be negatively impacted as a result of the temporary closure of our
Dededo store.
Gross Margin. Gross margin improved to $29.2 million, or 16.6% of sales,
in fiscal 2002 from $28.9 million, or 16.3% of sales, in fiscal 2001. The
increase in gross profit as a percent of sales resulted primarily from
improvements in merchandising and a stronger mix of retail store sales, with
typically higher margins, as compared to business-to-business sales, which
generally provide a lower gross margin but are executed at minimal direct
expense.
Store Expenses. Store expenses increased to $22.2 million for fiscal 2002
as compared to $21.3 million in fiscal 2001. As a percentage of sales, store
expenses increased to 12.6% in fiscal 2002 as compared to 12.0% in fiscal 2001.
The increase in store expenses was primarily due to higher payroll and related
costs associated with an upgrade in store management, higher sales volume and a
higher level of customer service, as well as increases in repairs and
maintenance expense and credit card fees, offset by an improvement in utility
expenses.
General and Administrative Expense. General and administrative expenses
remained relatively flat at $5.9 million, or 3.4% of sales, in fiscal 2002, as
compared to $5.8 million, or 3.3% of sales, in fiscal 2001.
Store Opening Expense. Store opening expenses were $14,000 in fiscal 2002,
as compared to $68,000 in fiscal 2001. Store opening expenses in both years
relate to costs associated with the evaluation of potential new store locations.
20
Net Interest Expense. Net interest expense decreased to $375,000 in fiscal
2002, as compared to $589,000 in fiscal 2001, due primarily to a reduction in
interest rates.
Other income (expense): Other expense of ($236,000) in fiscal 2002
includes expense of ($406,000) related to uninsured losses sustained from the
Supertyphoon in Guam and gains of $170,000 on foreign currency transactions, and
translation of intercompany balances for transactions that exceed the permanent
investments in those countries. Other expense of ($155,000) in fiscal 2001, was
primarily attributable to losses on foreign currency transactions, and
translation of intercompany balances for transactions that exceed the permanent
investments in those countries. The income and (expense) on foreign currency in
both fiscal years is primarily attributable to appreciation and (depreciation)
in the Fijian dollar as compared to the U.S. dollar.
Income Tax Provision. We recorded a tax provision in fiscal 2002 of $0.2
million or 40.0% of pre-tax income. The tax provision represents taxes
associated with income generated in the U.S. and U.S. Territories. No taxes or
tax benefits were provided on foreign pre-tax losses in fiscal 2002, as we
cannot predict whether we will be able to generate an adequate amount of taxable
income in the future to utilize such benefits. As of December 29, 2002, we had
foreign net operating loss carryforwards ("NOL's") of approximately $6.5
million, which, if not utilized, will begin expiring in the year 2006. NOL's in
Australia, Curacao and St. Maarten of approximately $2.9 million are not subject
to expiration time limits. Our ability to utilize the NOL carryforwards is
dependent upon generating taxable income in the foreign jurisdictions. As a
result, we have recorded a valuation allowance of $2.4 million attributable to
the net operating loss carryforwards.
We had foreign tax credit carryforwards of $0.7 million as of December 30,
2001, expiring between 2005 and 2006. During fiscal 2002, we were able to
utilize most of the foreign tax credit carryforwards. We expect to be able to
fully utilize the remaining foreign tax credit carryforward of $0.2 million and,
therefore, no valuation allowance is provided.
Net Income. Our net income decreased to $285,000, or $0.08 per share, for
fiscal 2002, compared to net income of $556,000, or $0.15 per share in fiscal
2001.
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 our 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.
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 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 our buying office in
Auckland, New Zealand in June 2000. Additionally, we 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 our St. Maarten store that opened in June 2000.
21
Store Closing Expense. Store closing expenses of $3.7 million in fiscal
2000, primarily related to the closing of our New Zealand stores in June 2000
and the accruals established for the February 2001 closing of our 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. We did not incur any
material additional store closure expenses in fiscal 2001 related to our 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 our
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.
Income Tax Provision. We 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 tax benefits were recognized on foreign
pre-tax losses in fiscal 2001, as we cannot predict whether we will be able to
generate an adequate amount of taxable income in the future to utilize such
benefits. During the years ended December 30, 2001 and December 31, 2000, we
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 2005 and 2006,
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. Our ability to utilize various tax
benefits is dependent upon generating taxable income in US and foreign
jurisdictions. As a result, we have recorded a valuation allowance of $2.6
million at December 30, 2001, against the tax benefit of 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 net loss in fiscal 2000
resulted primarily from non-recurring charges related to the closure of our two
New Zealand stores, New Zealand operating losses and the write-off of obsolete
equipment.
Liquidity and Capital Resources
We currently finance our operations with proceeds from various credit
facilities, and internally generated funds. Net cash provided by operations was
$0.3 million, $1.5 million and $2.6 million, for fiscal years 2002, 2001 and
2000, respectively. The decrease in net cash provided by operations in 2002 as
compared to 2001 was primarily due to the establishment of a receivable for
assets lost as a result of Supertyphoon Pongsona in Guam and use of cash to
reduce accrued expenses. The decrease in net cash provided by operations in 2001
compared to 2000 was primarily due to an increase in inventory, as our inventory
levels at the end of fiscal 2000 were lower than we prefer due to an over
achievement of our inventory reduction program implemented during the fourth
quarter of 2000, and a reduction in our store closure reserve.
Net cash used in investing activities was $0.4 million, $0.6 million and
$3.3 million, for fiscal years 2002, 2001 and 2000, respectively. Cash was used
in fiscal 2002 and fiscal 2001 for general store improvements. The cash used in
investing activities in 2000 primarily relates to the opening of our St. Maarten
store. Currently, we have no plans to open new stores during 2003 other than
rebuilding our Dededo, Guam store. However, we continue to analyze opportunities
for new stores in the future.
Net cash used by financing activities of $0.1 million in fiscal 2002 was
due to reductions in the outstanding borrowings on our long-term debt, partially
offset by additional borrowings on our line of credit. In fiscal 2001, the $0.8
million of net cash used by financing activities was due to the reduction of
both our line of credit and our long-term debt. The $0.5 million of net cash
provided by financing activities in fiscal 2000 was primarily due to proceeds
from long-term debt used to finance the construction of our St. Maarten store
that opened June 29, 2000.
Foreign currency translation resulted in a gain of $34,000 in fiscal 2001
and losses of $0.1 million and $0.3 million in fiscal years 2002 and 2000,
respectively. The foreign currency translation gains and losses are a result of
the translation of our subsidiaries' operating results and balance sheets from
local currencies to U. S. dollars. In fiscal 2000, we wrote off $0.4 million of
foreign currency translation losses as a result of the substantial liquidation
of our New Zealand operations.
On October 1, 2002, we amended the terms of our line of credit with a
financial institution (1) to extend the term of the line of credit to April 1,
2003; (2) to reduce the amount of the line from $8.0 million to $6.75 million;
and (3) to change the interest rate on the line of credit to the Prime Rate plus
(a) 0% through and including January 1, 2003, (b) 1% from January 2, 2003
through
22
and including February 2, 2003, (c) 2% from February 3, 2003 through and
including March 2, 2003, and (d) 3% from March 3, 2003 and thereafter. No fixed
rate loans are available under the amended line of credit, except that the $2.0
million of fixed rate loans existing on the date of the amendment will continue
until the end of the their respective interest rate periods and thereafter bear
interest with reference to the Prime Rate. The Prime Rate was at 4.25% at
December 29, 2002. At December 29, 2002, we had $2.4 million in borrowings
outstanding on our line of credit and $0.3 million utilized for standby letters
of credit. The lender informed us that it would terminate this credit facility
as of April 1, 2003, but it subsequently extended the terms of the credit
facility until we were able to secure a replacement facility. As of April 10,
2003, this line of credit has been satisfied and has been terminated.
On April 9, 2003, we entered into a replacement line of credit with a
different financial institution that has a three year term, expiring on April 9,
2006. The new line of credit consists of a $6.0 million committed, secured
revolving credit line with a sublimit for letters of credit and bankers'
acceptances in the amount up to $0.5 million. Borrowings are limited to the
lesser of $6.0 million or the amount calculated under the borrowing base. The
borrowing base is calculated as a percentage of our inventory located in the
United States and the U.S. Territories. Borrowings under the replacement line of
credit bear interest at the financial institution's prime rate plus 1.5%. A fee
of 0.25% will be charged on the unused portion of the line of credit. The
replacement line of credit contains various covenants, including a requirement
that we maintain minimum pre-tax income and tangible net worth and limitations
on acquisitions, additional debt, change in control and capital expenditures. We
believe that we are currently in compliance with all such covenants.
In November 1999, we entered into a $2.0 million note payable for the
construction of our new store in St. Maarten. The note payable carries interest
at the prime rate plus 1% (5.25% at December 29, 2002), and is secured by a
first security interest on our St. Maarten leasehold interest and personal
property.
A significant portion of our cash flow is generated by our operations. If
our operating results deteriorate, as a result of a decrease in customer demand
or severe pricing pressures from our customers or our competitors, our ability
to generate positive cash flow from operations may be jeopardized. We believe
that amounts available under our various credit facilities, existing cash
available for working capital purposes, and cash flow from operations will most
likely be sufficient to fund our operations through the next 12 months. There
can be no assurance that we will be able to obtain additional financing when
needed, or that any available financing will be on terms acceptable to us.
Contractual Obligations
As of December 29, 2002, our commitments to make future payments under
long term contractual obligations were as follows (in thousands):
Payments Due by Period
---------------------------------------------------------------------------
Less than 1 to 3 4 to 5 After 5
Contractual Obligations Total 1 year years years years
- ----------------------- ----- ------ ----- ----- -----
Long-term debt $ 3,078 $ 267 $ 534 $ 534 $ 1,743
Operating leases 31,714 4,666 8,126 7,157 11,765
------- ------- ------- ------- -------
Total $34,792 $ 4,933 $ 8,660 $ 7,691 $13,508
======= ======= ======= ======= =======
Critical Accounting Policies
We have chosen accounting policies that we believe are appropriate to
report accurately and fairly our operating results and financial position, and
we apply those accounting policies in a consistent manner. The significant
accounting policies are summarized in Note 1 to the consolidated financial
statements included in this annual report on Form 10-K.
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires us 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. We base our estimates on historical experience and other
factors believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
could differ from those estimates.
We believe that the following accounting policies are the most critical in
the preparation of our financial statements because they involve the most
difficult, subjective or complex judgments about the effect of matters that are
inherently uncertain.
23
Inventories
Inventories are carried at the lower of average cost or market. We provide
for estimated inventory losses between physical inventory counts on the basis of
a percentage of sales. The provision is adjusted periodically to reflect the
trend of actual physical inventory count results.
Foreign Currency Translation
The U.S. dollar is the functional currency for all our locations, except
for Fiji and Netherlands Antilles, where the local currency is the functional
currency. Prior to the closure of our 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 we substantially liquidated operations in that country.
Stock-Based Compensation
We have elected to apply the disclosure-only provisions of Financial
Accounting Standards Board Statement No. 123, Accounting for Stock-Based
Compensation. Accordingly, we account 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 our common stock at the date of grant over the
stock option exercise price. We generally grant stock options at exercise prices
equal to fair market value on the date of grant, as a result, no compensation
cost is recognized.
Income Taxes
Income tax expense includes U.S. and foreign income taxes. We account 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 tax rates and laws that will be in effect when the differences are
expected to reverse. We apply judgment in determining whether it is more likely
than not that the deferred tax assets will be realized, and valuation allowances
are established when necessary. Our effective tax rate is currently higher than
the expected federal statutory rate because valuation allowances have been
established against the tax benefits of foreign losses, as we have no assurance
that we will be able to generate an adequate amount of taxable income in the
future to utilize such benefits. We are developing and implementing certain tax
planning strategies, which may affect our ability to recognize some of the
deferred tax assets that are currently allowed for and may ultimately change our
estimate of the valuation allowance.
Accounting Pronouncements
During 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (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". During 2002, the
FASB issued SFAS No.145, "Revision of FASB Statements No. 4, 44, 64, Amendment
of FASB No. 13, and Technical Corrections", SFAS No. 146, "Accounting for Costs
Associated with Exit and Disposal Activities", SFAS No. 148 "Accounting for
Stock Based Compensation - Transition and Disclosure" and FASB Interpretation
No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". In January 2003, the
FASB issued FASB Interpretation No. 46 "Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research Bulletin No. 51."
The adoption of SFAS Nos. 141, 142, 144, 145 and 148, as well as FASB
Interpretation Nos 45 and 46, did not have a material impact on our consolidated
financial statements. We believe that the adoption of SFAS Nos. 143 and 146 will
not have a material impact on our consolidated financial statements.
The Emerging Issues Task Force released Issue No. 02-16, "Accounting by a
Customer (including a Reseller) for Certain Consideration Received from a
Vendor" in November 2002, applicable to the Company for arrangements entered
into beginning in fiscal 2003. The Company records vendor allowances and
discounts in the income statement when the purpose for which those
24
monies were designated is fulfilled. As such, the Company does not expect the
release to have a significant effect on its results of operations or financial
position.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We operate stores in foreign countries and have 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.
We record gains and losses on foreign currency transactions, and
translation of intercompany balances for transactions that exceed the permanent
investments in those countries in Other Income (Expense). Gains and losses are
primarily attributable to appreciation and (depreciation) in the Fijian dollar
as compared to the U.S. dollar.
We have also assessed our vulnerability to interest rate risk associated
with our financial instruments, including, cash and cash equivalents, lines of
credit and long term debt. Due to the nature of these financial instruments, we
believe that the risk associated with interest rate fluctuations does not pose a
material risk. Our 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.
We do not have any derivative financial instruments as of December 29,
2002.
25
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements and supplementary data are
included beginning on page 27 of this Report:
Page
----
Report of Deloitte & Touche LLP, Independent Auditors........... 27
Report of Ernst & Young LLP, Independent Auditors............... 28
Consolidated Financial Statements:
Consolidated Statements of Operations...................... 29
Consolidated Balance Sheets................................ 30
Consolidated Statements of Shareholders' Equity............ 31
Consolidated Statements of Cash Flows...................... 32
Notes to Consolidated Financial Statements................. 33
26
REPORT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS
Board of Directors
Cost-U-Less, Inc.
Preston, Washington
We have audited the accompanying consolidated balance sheets of
Cost-U-Less, Inc. and subsidiaries (collectively, the Company) as of December
29, 2002 and December 30, 2001, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the years ended December
29, 2002 and December 30, 2001, respectively. Our audit also included the
consolidated financial statement schedule listed in Item 15. 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 29,
2002 and December 30, 2001, and the results of their operations and their cash
flows for the years ended December 29, 2002 and December 30, 2001, respectively,
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 13, 2003 (April 10, 2003 as to Note 16)
27
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
Cost-U-Less, Inc.
We have audited the accompanying consolidated statement of operations,
shareholders' equity and cash flows of Cost-U-Less, Inc. (the "Company") for the
year ended December 31, 2000. Our audit also included the financial statement
schedule listed in the Index at Item 15(a). These 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
audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of Cost-U-Less, Inc. for the year 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.
/s/ ERNST & YOUNG LLP
Seattle, Washington
February 23, 2001, except as to the information included in the second and third
paragraphs under the caption "Foreign Currency Translations and Comprehensive
Income" in Note 1, as to which the date is March 29, 2002
28
COST-U-LESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
Fiscal Year Ended
------------------------------------------------
December 29, December 30, December 31,
2002 2001 2000
------------ ------------ ------------
Net sales ......................................... $ 176,190 $ 177,856 $ 186,299
Merchandise costs ................................. 146,975 148,924 157,950
----------- ----------- -----------
Gross profit ...................................... 29,215 28,932 28,349
Operating expenses:
Store ........................................ 22,181 21,288 21,775
General and administrative ................... 5,934 5,786 6,421
Store openings ............................... 14 68 518
Store closings ............................... 0 0 3,740
----------- ----------- -----------
Total operating expenses .......................... 28,129 27,142 32,454
----------- ----------- -----------
Operating income (loss) ........................... 1,086 1,790 (4,105)
Other expenses:
Interest expense, net ........................ (375) (589) (663)
Other ........................................ (236) (155) (283)
----------- ----------- -----------
Income (loss) before income taxes ................. 475 1,046 (5,051)
Income tax provision .............................. 190 490 460
----------- ----------- -----------
Net income (loss) ................................. $ 285 $ 556 $ (5,511)
=========== =========== ===========
Earnings (loss) per common share:
Basic ........................................ $ 0.08 $ 0.15 $ (1.53)
=========== =========== ===========
Diluted ...................................... $ 0.08 $ 0.15 $ (1.53)
=========== =========== ===========
Weighted average common shares outstanding, basic . 3,606,376 3,606,376 3,599,374
=========== =========== ===========
Weighted average common shares outstanding, diluted 3,614,514 3,607,238 3,599,374
=========== =========== ===========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
29
COST-U-LESS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 29, December 30,
2002 2001
ASSETS ------------ ------------
Current assets:
Cash and cash equivalents ........................................ $ 2,383 $ 2,660
Insurance receivable ............................................. 1,460 --
Accounts receivable (net of allowance of $224 and $120 in 2002 and
2001, respectively) ............................................ 1,713 1,749
Income tax receivable ............................................ 804 368
Inventories ...................................................... 18,626 19,360
Prepaid expenses ................................................. 292 324
Deferred taxes ................................................... 619 780
-------- --------
Total current assets ........................................ 25,897 25,241
Buildings and equipment, net .......................................... 13,510 15,464
Deposits and other assets ............................................. 783 801
Deferred taxes, net ................................................... -- 100
-------- --------
Total assets ................................................ $ 40,190 $ 41,606
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit ................................................... $ 2,367 $ 2,173
Accounts payable ................................................. 15,449 15,885
Accrued expenses ................................................. 2,845 3,824
Accrued store closure reserve .................................... 262 524
Current portion of long-term debt ................................ 267 267
-------- --------
Total current liabilities ................................... 21,190 22,673
Deferred rent ......................................................... 529 515
Deferred taxes, net ................................................... 65 --
Long-term debt, less current portion .................................. 2,811 3,077
-------- --------
Total liabilities ........................................... 24,595 26,265
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, 3,606,376 ................................. 12,446 12,446
Retained earnings ..................................................... 3,842 3,557
Accumulated other comprehensive loss .................................. (693) (662)
-------- --------
Total shareholders' equity .................................. 15,595 15,341
-------- --------
Total liabilities and shareholders' equity .................. $ 40,190 $ 41,606
======== ========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
30
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 26, 1999 ................ 3,576,858 $ 12,422 $ 8,512 $ (269) $ 20,665
Net loss ............................... -- -- (5,511) -- (5,511)
Foreign currency translation adjustments -- -- -- (384) (384)
---------
Comprehensive loss ..................... (5,895)
---------
Exercise of common stock options ....... 29,518 24 -- -- 24
--------- --------- --------- --------- ---------
Balance at December 31, 2000 ................ 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
Net income ............................. -- -- 285 -- 285
Foreign currency translation adjustments -- -- -- (31) (31)
---------
Comprehensive income ................... 254
---------
--------- --------- --------- --------- ---------
Balance at December 29, 2002 ................ 3,606,376 $ 12,446 $ 3,842 $ (693) $ 15,595
========= ========= ========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
31
COST-U-LESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
December 29, December 30, December 31,
2002 2001 2000
------------ ------------ ------------
OPERATING ACTIVITIES:
Net income (loss) ........................................................ $ 285 $ 556 $(5,511)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization ....................................... 1,831 1,886 1,865
Loss on uninsured inventory damaged by Supertyphoon
Ponsonga ....................................................... 350 -- --
Writedown of property and equipment ................................. 33 -- 999
Deferred tax (benefit) provision .................................... 326 45 (89)
Allowance for doubtful accounts ..................................... 104 (134) 104
Cash provided by changes in operating assets and liabilities:
Insurance receivable ........................................... (42) -- --
Accounts receivables ........................................... (68) 393 10
Income tax receivable .......................................... (436) (205) 355
Inventories .................................................... (353) (1,327) 3,572
Prepaid expenses ............................................... 32 (109) 50
Deposits and other assets ...................................... 18 212 (39)
Accounts payable ............................................... (436) 381 (1,020)
Accrued expenses ............................................... (1,057) 709 733
Accrued store closure reserve .................................. (262) (974) 1,498
Deferred rent .................................................. 14 20 81
------- ------- -------
Net cash provided by operating activities ................. 339 1,453 2,608
INVESTING ACTIVITY:
Cash used to purchase buildings and equipment ............................ (435) (558) (3,262)
FINANCING ACTIVITIES:
Proceeds from sale of common stock ....................................... -- -- 24
Proceeds (payments) from (on) line of credit, net ........................ 194 (527) 537
Proceeds from long-term debt ............................................. -- -- 1,093
Payments on long-term debt ............................................... (266) (267) (421)
Payments on capital lease obligations .................................... -- -- (725)
------- ------- -------
Net cash provided (used) by financing activities .......... (72) (794) 508
Foreign currency translation adjustments ................................. (109) 34 (258)
------- ------- -------
Net increase (decrease) in cash and cash equivalents .......................... (277) 135 (404)
Cash and cash equivalents:
Beginning of period ...................................................... 2,660 2,525 2,929
------- ------- -------
End of period ............................................................ $ 2,383 $ 2,660 $ 2,525
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Noncash activities:
Writeoff of Inventory lost in Supertyphoon and accrual of
related costs ..................................................... $ 1,165 $ -- $ --
Writeoff of Fixed Assets lost in Supertyphoon ....................... 603 -- --
Establishment of insurance receivable for Supertyphoon losses ....... 1,418 -- --
Cash paid during the period for:
Interest ............................................................ $ 382 $ 624 $ 816
Income taxes ........................................................ 200 696 276
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
32
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 29, 2002, the Company operated ten retail stores with an
eleventh store being rebuilt as follows: 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. On December 8, 2002, the Company's two
stores on the island of Guam suffered damage from the Supertyphoon Pongsona,
resulting in the immediate closure of both stores. The Company's Tamuning store,
lost its generator in the storm, but reopened shortly thereafter on December
12th. The Company's Dededo store, however, suffered more significant damage, and
has yet to reopen. The Company believes that the building structure is most
likely a total loss and is currently rebuilding this store.
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.
Fiscal Year
The Company reports on a 52/53-week fiscal year, consisting of four
thirteen-week periods and ending on the Sunday nearest to the end of December.
The years ended December 29, 2002 and December 30, 2001 were 52-week fiscal
years. The year ended December 31, 2000 was a 53-week fiscal year.
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.
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. When the Company operated stores in New Zealand (through June 2000),
the functional currency for New Zealand was the New Zealand dollar. 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.
In June 2000 the Company discontinued all major business activities in New
Zealand upon the closure of its two stores and its Auckland buying office. In
2001, the Company determined 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 requiring the restatement of its previously reported 2000
operating results. Pursuant to the restatement, the New Zealand foreign currency
translation adjustment account of $388,000, which was previously recorded within
Other Comprehensive Income (Loss), was written off at June 25, 2000.
Additionally, in 2001 the Company reassessed its calculations of other
foreign currency translation adjustments as they related to that portion of
intercompany transactions that are not considered to be part of the net
investment in the foreign entity. As a result, a further restatement occurred in
2000 to reflect transaction gains and losses for that portion of the
intercompany transactions that represent non-permanent investments in Other
Income (Expense).
33
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Use of Estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States 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.
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 29, 2002 and December 30, 2001. The carrying value of cash,
cash equivalents, receivables and payables approximates their fair value based
on the liquidity of these financial instruments or based on their short-term
nature. The carrying value of long-term debt approximates fair value based on
the variable interest rates charged on the debt.
Inventories
Inventory consists of retail merchandise inventory and is 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. 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 29, 2002 and December 30,
2001 are $2.9 million and $2.6 million, respectively, representing the excess of
outstanding checks over cash on deposit at the banks on which the checks were
drawn.
34
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Revenue Recognition
The Company recognizes revenue from product sales when the customer
purchases the products, generally at the point of sale.
Vendor Allowances
The Company records vendor allowances in the income statement when the
purpose for which those monies were designated is fulfilled. Allowances provided
by vendors generally relate to profitability of inventory recently sold and,
accordingly, are reflected as reductions to cost of merchandise sold as
negotiated. Vendor allowances received for advertising programs reduce the
Company's expense for the related advertising program.
Advertising Costs
The cost of advertising is expensed as incurred. Advertising expenses
incurred during fiscal years 2002, 2001 and 2000 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
In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock Based Compensation - Transition and Disclosure,"
which amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. Adoption of SFAS No.
148 is required for the Company's fiscal year ended December 29, 2002. SFAS No.
148 requires expanded and more prominent disclosure in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method on reported results.
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 usually 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.
35
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
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 2002, 2001, and 2000, 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:
2002 2001 2000
---- ---- ----
(Net income (loss) in thousands)
Net income (loss) as reported .................................. $ 285 $ 556 $ (5,511)
Less: Total stock-based employee compensation expense
determined under fair value method for all awards,
net of tax ............................................... 172 168 191
--------- --------- ---------
Net income (loss) pro forma .................................... $ 113 $ 388 $ (5,702)
========= ========= =========
Earnings (loss) per common share, basic as reported ............ $ 0.08 $ 0.15 $ (1.53)
Earnings (loss) per common share, basic pro forma .............. $ 0.03 $ 0.11 $ (1.58)
Earnings (loss) per common share, diluted as reported .......... $ 0.08 $ 0.15 $ (1.53)
Earnings (loss) per common share, diluted pro forma ............ $ 0.03 $ 0.11 $ (1.58)
The fair value of each option is estimated on the date of grant under the
Black-Scholes option-pricing model using the following assumptions:
2002 2001 2000
---- ---- ----
Risk-free interest rate............... 3.37% 5.17% 6.50%
Expected life......................... 5 years 5 years 5 years
Expected dividend yield............... 0% 0% 0%
Volatility............................ 75% 71% 92%
The weighted average fair values of options granted in 2002, 2001, and
2000 were $0.42, $0.54 and $1.18, respectively.
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 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.
New Accounting Pronouncements
During 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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". During 2002, the
FASB issued SFAS No.145, "Revision of FASB Statements No. 4, 44, 64, Amendment
of FASB No. 13, and Technical Corrections", SFAS No. 146, "Accounting for Costs
Associated with Exit and Disposal Activities", SFAS No. 148 Accounting for Stock
Based Compensation - Transition and Disclosure" and FASB Interpretation No. 45
"Guarantor's
36
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". In January 2003, the FASB issued FASB
Interpretation No. 46 "Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51."
The adoption of SFAS Nos. 141, 142, 144, 145 and 148, as well as FASB
Interpretation Nos 45 and 46, did not have a material impact on the Company's
consolidated financial statements. The Company believes the adoption of SFAS
Nos. 143 and 146 will not have a material impact on the Company's consolidated
financial statements.
The Emerging Issues Task Force released Issue No. 02-16, "Accounting by a
Customer (including a Reseller) for Certain Consideration Received from a
Vendor" in November 2002, applicable to the Company for arrangements entered
into beginning in fiscal 2003. The Company records vendor allowances and
discounts in the income statement when the purpose for which those monies were
designated is fulfilled. As such, the Company does not expect the release to
have a significant effect on its results of operations or financial position.
Reclassifications
Certain reclassifications of prior years' balances have been made for
consistent presentation with the current year.
2. Insurance Receivable
On December 8, 2002, the Company's two stores on the island of Guam
suffered damage from the Supertyphoon Pongsona, resulting in the immediate
closure of both stores. The Company's Tamuning store, lost its generator in the
storm, but reopened shortly thereafter on December 12th. The Company's Dededo
store, however, suffered more significant damage, and has yet to reopen. The
Company believes that the building structure is most likely a total loss. The
Company lost inventory, leasehold improvements and equipment as a result of the
supertyphoon. At December 29, 2002, the Company has recorded a $1.4 million
receivable for losses that it expects to be recovered from insurance. The
receivable represents $0.8 million for inventory losses and $0.6 million for
fixed asset losses. Additionally, the Company recorded a loss of $0.4 million in
Other Expense during fiscal 2002, which represents the amount of inventory
losses and other expenses that are not expected to be recovered from insurance.
3. Buildings and Equipment
Buildings and equipment consist of the following (in thousands) at:
December 29, December 30,
2002 2001
------------ ------------
Buildings .......................................... $ 7,113 $ 7,113
Equipment .......................................... 14,626 15,450
Leasehold improvements ............................. 1,197 1,474
------- -------
Buildings, equipment and leasehold improvements 22,936 24,037
Less accumulated depreciation and amortization ..... 9,458 8,582
------- -------
Net book value of depreciable assets .......... 13,478 15,455
Computer system and software development in progress 32 9
------- -------
Total Buildings and Equipment ...................... $13,510 $15,464
======= =======
The Company wrote-off $0.6 million of equipment and leasehold improvements
lost in the supertyphoon in Guam. The Company believes that such amounts are
recoverable from insurance and has included such amounts in its insurance
receivable at December 29, 2002.
37
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
4. Line of Credit
At December 29, 2002, the Company maintained a $6.75 million line of
credit, as amended, with a commercial bank with an expiration date of April 1,
2003. Borrowings under the amended line of credit bear interest at the Prime
Rate plus (a) 0% through and including January 1, 2003, (b) 1% from January 2,
2003 through and including February 2, 2003, (c) 2% from February 3, 2003
through and including March 2, 2003, and (d) 3% from March 3, 2003 and
thereafter. No fixed rate loans are available under the amended line of credit,
except that the $0.5 million fixed rate loan existing on December 29, 2002,
continued until its expiration on January 6, 2003 at a rate of 3.7%. The Prime
Rate was at 4.25% at December 29, 2002.
At December 29, 2002, the line of credit had $0.3 million utilized for
standby letters of credit, leaving $6.45 million available for operations. At
December 29, 2002, there were $2.4 million in borrowings outstanding on the line
of credit. 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 also 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. In accordance with the terms of this line of credit, the
Company is required to maintain certain financial covenants. As of December 29,
2002, the Company was in compliance with all such covenants.
Subsequent to December 29, 2002, the Company entered into a replacement
line of credit with a different financial institution. See Note 16 - Subsequent
Event.
5. Long-Term Debt
In conjunction with the construction of the St. Thomas store in 1998, the
Company entered into a $2.0 million note payable to a bank which matures in June
2013. Interest on the note at December 29, 2002 is at the prime rate plus 1%
(5.25%). As of December 29, 2002, there was a balance owed of $1.4 million,
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, plus interest.
In November 1999, the Company entered into a $2.0 million credit facility
with a financial institution to fund the construction of the St. Maarten store.
As of December 29, 2002, there was a balance owed of $1.7 million against this
credit facility. Interest on the note at December 29, 2002 is at the prime rate
plus 1% (5.25%). 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, plus interest.
Maturities of long-term debt are as follows (in thousands):
2003............................ $ 267
2004............................ 267
2005............................ 267
2006............................ 267
2007............................ 267
Thereafter...................... 1,743
------
Total.................... $3,078
======
6. Contingencies
The Company is involved from time to time in claims, proceedings and
litigation arising from its business and property ownership. The Company does
not believe that any such claim, proceeding or litigation, either alone or in
the aggregate, will have a material adverse effect on the Company's business,
financial condition or results of operation.
38
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
7. Interest Expense, Net
The components of interest, net are as follows (in thousands):
2002 2001 2000
----- ----- -----
Interest Expense ................... $ 376 $ 589 $ 750
Capitalized Interest ............... 0 0 (86)
Interest Income .................... (1) 0 (1)
----- ----- -----
Interest Expense, net ......... $ 375 $ 589 $ 663
===== ===== =====
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.
8. Income Taxes
Income (loss) before income taxes by jurisdiction is as follows (in
thousands):
2002 2001 2000
------- ------- -------
United States ........................ $ 1,126 $ 2,052 $(1,864)
U.S. Territories ..................... (560) 1,078 1,335
Foreign .............................. (91) (2,084) (4,522)
------- ------- -------
Income (loss) before income taxes $ 475 $ 1,046 $(5,051)
======= ======= =======
The provision for income taxes is as follows (in thousands):
2002 2001 2000
----- ----- -----
Current Income Taxes:
United States ................... $ 71 $ 58 $ 9
U.S. Territories ................ (207) 387 540
Foreign ......................... 0 0 0
----- ----- -----
Current Income Taxes ....... (136) 445 549
----- ----- -----
Deferred Income Taxes
United States ................... 298 51 191
U.S. Territories ................ 28 (6) (80)
Foreign ......................... 0 0 (200)
----- ----- -----
Deferred income taxes ...... 326 45 (89)
----- ----- -----
Provision for Income Taxes ........... $ 190 $ 490 $ 460
===== ===== =====
A reconciliation of the Company's effective tax rate with the federal
statutory rate of 34% for the years ended December 29, 2002, December 30, 2001,
and December 31, 2000, is as follows (dollars in thousands):
2002 2001 2000
------- ------- -------
Tax at U.S. Statutory Rate ............. $ 162 34.0 % $ 355 34.0 % $(1,717) 34.0 %
Non-Deductible Permanent Differences ... 3 0.6 % 3 0.2 % 3 (0.1)%
U.S. Tax Losses not Benefited .......... 0 0.0 % 0 0.0 % 506 (10.0)%
Foreign Tax Losses not Benefited (Taken) 568 119.6 % (316) (30.2)% 1,441 (28.4)%
Foreign Tax Credit not Taken (Utilized) (542) (114.1)% 393 37.6 % 348 (6.9)%
Statutory Rate Difference as Compared to
U.S. Statutory Rate ............... 19 4.0 % 20 1.9 % 43 (0.9)%
Other .................................. (20) (4.2)% 35 3.4 % (164) 3.2 %
------- ------- -------
Effective Income Tax Rate ......... $ 190 40.0 % $ 490 46.9 % $ 460 (9.1)%
======= ======= =======
39
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 29, December 30,
2002 2001
------------ ------------
Deferred Tax Assets
Inventory Adjustments ........................................................... $ 193 $ 130
Vacation Accrual ................................................................ 308 305
Bad Debt Expense ................................................................ 0 108
Deferred Rent ................................................................... 156 175
Store Closure Reserve ........................................................... 117 209
Net Operating Loss Carryforward--Foreign ........................................ 2,591 2,440
Foreign tax credits ............................................................. 199 741
Other ........................................................................... 15 54
------- -------
Total Deferred Tax Assets ....................................................... 3,579 4,162
Valuation Allowance ........................................................ (2,402) (2,579)
------- -------
1,177 1,583
Deferred Tax Liabilities
Cash Discounts .................................................................. (14) (26)
Fixed Asset Basis Difference .................................................... (609) (677)
------- -------
Total Deferred Tax Liabilities .................................................. (623) (703)
------- -------
Net Deferred Tax Assets .............................................................. $ 554 $ 880
======= =======
Net deferred tax assets are classified on the balance sheet as follows (in thousands):
Current Assets .................................................................. $ 619 $ 780
Long-Term Assets, net ........................................................... 100
Long-Term Liabilities, net ...................................................... (65) --
------- -------
Net Deferred Tax Assets ......................................................... $ 554 $ 880
======= =======
As of December 29, 2002, the Company has foreign net operating loss
carryforwards ("NOL's") of approximately $6.5 million, which, if not utilized,
will begin expiring in the year 2006. NOL's in Australia, Curacao and St.
Maarten of approximately $2.9 million are not subject to expiration time limits.
The Company's ability to utilize the NOL's carryforwards is dependent upon
generating taxable income in the foreign jurisdictions. As a result, the Company
has recorded a valuation allowance of $2.4 million attributable to the net
operating loss carryforwards.
The Company had foreign tax credit carryforwards of $0.7 million as of
December 30, 2001, expiring between 2005 and 2006. During 2002, the company was
able to utilize most of the foreign tax credit carryforward. The company expects
to be able to fully utilize the remaining foreign tax credit carryforward of
$0.2 million and therefore no valuation allowance is provided.
9. 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 285,885 options
available for future grant under the 1989 Plan at December 29, 2002. No
additional options will be granted under the 1989 Plan. All options issued under
this plan have expired at December 29, 2002.
40
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
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 years and generally expire ten
years from the date of grant. The options are usually granted at prices equal to
the fair value on the date of grant. There were 78,648 options available for
future grant under the 1998 Plan at December 29, 2002.
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
options to purchase the Company's common stock for each board meeting attended.
The directors combined received a total of 15,750 options in lieu of cash
compensation for their attendance at board meetings during 2002. The options are
priced at the current market value the day following the February 2002 and the
April 2002 board meetings. The options vested immediately and must be exercised
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 vested immediately and the remaining 5,000 options will vest in eighteen
months. Senior management were granted an additional 10,000 options each that
vested immediately in December 2002.
A summary of the status of stock option plans as of December 29, 2002,
December 30, 2001, and December 30, 2000, and changes during the years then
ended are presented below:
2002 2001 2000
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
Outstanding, beginning of year 690,093 $3.75 528,319 $4.51 516,266 $5.40
Granted at fair value ... 294,367 1.26 194,000 1.71 178,213 1.58
Forfeited ............... (63,108) 5.11 (32,226) 3.80 (136,642) 4.93
Exercised ............... 0 0 0 0 (29,518) .79
------- ------- -------
Outstanding, end of year ..... 921,352 2.86 690,093 3.75 528,319 4.51
======= ======= =======
The following summarizes information related to options outstanding and
exercisable at December 29, 2002:
Outstanding Exercisable
----------------------------------------- ---------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Exercise Contractual Exercise
Prices Options Price Life Options Price
- ------------ ------- -------- ----------- ------- --------
$1.02 - 1.44 326,668 $ 1.25 9.48 years 283,668 $ 1.23
1.50 - 2.63 334,175 1.70 8.54 years 310,140 1.68
3.00 - 6.00 79,613 4.97 6.84 years 59,915 4.98
7.00 180,896 7.00 5.67 years 175,539 7.00
------- -------
921,352 2.86 829,262 2.89
======= =======
41
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
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. These warrants
expired in July 2002.
Preferred Share Purchase Rights
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 29, 2002, no rights have become exercisable.
Share Repurchase Program
On October 22, 2002, the Company's Board of Directors adopted a program to
repurchase from time to time at management's discretion shares of its common
stock in the open market or in privately negotiated transactions until December
31, 2002, at prevailing market prices. No repurchases were made during the
defined repurchase window.
10. 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.
The following table sets forth the computation of basic and diluted
earnings (loss) per common share (dollars in thousands):
Fiscal Year Ended
----------------------------------------------
December 29, December 30, December 31,
2002 2001 2000
------------ ------------ ------------
Numerator:
Net income (loss) .................................. $ 285 $ 556 $ (5,511)
=========== =========== ===========
Denominator:
Denominator for basic earnings per share--weighted
average shares .................................. 3,606,376 3,606,376 3,599,374
Effect of potentially dilutive shares:
Stock options and warrants ......................... 8,138 862 0
----------- ----------- -----------
Denominator for diluted earnings per share--adjusted
weighted average shares and assumed conversion of
stock options and warrants ...................... 3,614,514 3,607,238 3,599,374
=========== =========== ===========
Basic earnings (loss) per common share .................. $ 0.08 $ 0.15 $ (1.53)
Diluted earnings (loss) per common share ................ $ 0.08 $ 0.15 $ (1.53)
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.
42
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
11. Geographic Information
Geographic information pertaining to the Company's one reporting segment
is as follows:
Long-lived
Sales Assets
-------- ----------
(in thousands)
2002
United States ............................. $ 44,628 $ 2,976
U.S. Territories and foreign countries (1) 131,562 11,317
-------- --------
$176,190 $ 14,293
======== ========
2001
United States ............................. $ 46,470 $ 3,711
U.S. Territories and foreign countries .... 131,386 12,654
-------- --------
$177,856 $ 16,365
======== ========
2000
United States ............................. $ 45,073 $ 4,452
U.S. Territories and foreign countries .... 141,226 13,646
-------- --------
$186,299 $ 18,098
======== ========
(1) On December 8, 2002, our Dededo store on the island of Guam suffered
damage from the Supertyphoon Pongsona, resulting in its immediate closure.
We believe that the building structure is most likely a total loss and we
are currently working with our landlord to rebuild this store. As of
December 29, 2002, the Company had written-off $0.6 million of equipment
and leasehold improvements lost in the Supertyphoon in Guam.
12. 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.
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 changes in the liability related to the
fiscal 2000 store closures as well as the remaining accrual at December 29, 2002
and December 30, 2001 (in thousands):
December 29, December 30,
2002 2001
------------ ------------
Accrued store closure reserve at beginning of year $ 524 $1,498
Less: Store closure expenses paid during year ..... 262 974
------ ------
Accrued store closure reserve at end of year ....... $ 262 $ 524
====== ======
43
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Total revenues and store operating losses contributed by the three stores
closed were as follows (in thousands):
2002 2001 2000
------ ------ ------
Total revenues .................... $ 0 $ 500 $6,984
====== ====== ======
Store operating losses ............ $ 0 $ 141 $2,250
====== ====== ======
13. 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
29, 2002 under noncancellable operating leases with initial or remaining terms
of one year or more is as follows (in thousands):
2003 (1)............................................. $ 4,666
2004................................................. 4,343
2005................................................. 3,783
2006................................................. 3,758
2007................................................. 3,399
Thereafter........................................... 11,765
--------
$ 31,714
========
(1) On December 8, 2002, the Company's two stores on the island of Guam
suffered damage from the Supertyphoon Pongsona, resulting in the immediate
closure of both stores. The Company's Tamuning store, lost its generator
in the storm, but reopened shortly thereafter on December 12th. The
Company's Dededo store, however, suffered more significant damage, and has
yet to reopen. The Company believes that the building structure is most
likely a total loss and is currently rebuilding this store. The annual
rent for the Company's Dededo store included in the 2003 minimum lease
obligations above is $0.5 million. The lease for the Company's Dededo
store provides for abatement of rent until such time as the store reopens.
Rent expense under operating leases for the fiscal years ended December
29, 2002, December 30, 2001, and December 31, 2000 totaled $5.0 million, $5.0
million and $5.4 million, respectively.
14. 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 $96,000, $90,000 and $114,000, in fiscal
2002, 2001 and 2000, respectively.
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 $192,000, $179,000 and $184,000 for fiscal 2002, 2001 and 2000,
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 $112,000 and $17,000 in fiscal 2002 and 2001, respectively.
44
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
15. 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
Weeks Gross Income -----
in Period Net Sales Profit (Loss) Basic Diluted
--------- --------- ------ ------ ----- -------
(in thousands, except store weeks and per-share data)
Fiscal 2002 (1)
First quarter .... 143 $44,998 $ 7,199 $ 72 $0.02 $0.02
Second quarter ... 143 42,665 6,780 (190) (0.05) (0.05)
Third quarter .... 143 43,215 7,428 207 0.06 0.06
Fourth quarter (2) 140 45,312 7,808 196 0.05 0.05
Fiscal 2001 (1)
First quarter (3) 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
- ----------
(1) The Company's fiscal quarters are 13 weeks.
(2) On December 8, 2002, one of the Company's stores in Guam closed due to
damage caused by Supertyphoon Pongsona.
(3) In February 2001, the Company closed its store in Nadi, Fiji.
16. Subsequent Event
At December 29, 2002, the Company maintained a $6.75 million line of
credit, as amended, with a commercial bank with an expiration date of April 1,
2003. The lender informed the Company that it would terminate this credit
facility as of April 1, 2003, but it subsequently extended the terms of the
credit facility until the Company was able to secure a replacement facility. As
of April 10, 2003, this line of credit has been satisfied and has been
terminated.
On April 9, 2003, the Company entered into a replacement line of credit
with a different financial institution that has a three year term, expiring on
April 9, 2006. The new line of credit consists of a $6.0 million committed,
secured revolving credit line with a sublimit for letters of credit and bankers
acceptances in the amount up to $0.5 million. Borrowings are limited to the
lesser of $6.0 million or the amount calculated under the borrowing base. The
borrowing base is calculated as a percentage of the Company's inventory located
in the United States and the U.S. Territories. Borrowings under the replacement
line of credit bear interest at the financial institution's prime rate plus
1.5%. A fee of 0.25% will be charged on the unused portion of the line of
credit.
The replacement line of credit contains certain covenants, including (i) a
requirement that the Company maintain minimum pre-tax income and tangible net
worth and (ii) limitations on acquisitions, investments, additional debt,
intercompany accounts, bonuses, dividends, change in ownership, change in senior
management, change of control, capital expenditures, disposition of assets,
among other covenants.
45
PART III
Item 10. Executive Officers and Directors of the Registrant
Information called for by Part III, Item 10, is included in our proxy
statement relating to our annual meeting of shareholders to be held on May 13,
2003, and is incorporated herein by reference. The proxy statement will be filed
within 120 days of December 29, 2002, our fiscal year end.
Item 11. Executive Compensation
Information called for by Part III, Item 11, is included in our proxy
statement relating to our annual meeting of shareholders to be held on May 13,
2003, and is incorporated herein by reference. The proxy statement will be filed
within 120 days of December 29, 2002, our fiscal year end.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information called for by Part III, Item 12, is included in our proxy
statement relating to our annual meeting of shareholders to be held on May 13,
2003, and is incorporated herein by reference. The proxy statement will be filed
within 120 days of December 29, 2002, our fiscal year end.
Item 13. Certain Relationships and Related Transactions
Information called for by Part III, Item 13, is included in our proxy
statement relating to our annual meeting of shareholders to be held on May 13,
2003, and is incorporated herein by reference. The proxy statement will be filed
within 120 days of December 29, 2002, our fiscal year end.
46
PART IV
Item 14. Controls and Procedures
(a) Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer,
we conducted an evaluation of our disclosure controls and procedures, as
such term is defined under Rule 13a-14(c) promulgated under the Securities
Exchange Act of 1934, as amended, within 90 days of the filing date of
this report. Based on their evaluation, our principal executive officer
and principal accounting officer concluded that our disclosure controls
and procedures are effective.
(b) There have been no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation referenced in paragraph
(a) above.
Item 15. 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. 27 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 27 of this annual 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 Description Filed ------------------------------------------
No. 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. 10-K 3.2 000-24543 04/01/2002
- --------------------------------------------------------------------------------------------------------------------------
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 Compensation 10-K 10.1 000-24543 04/01/2002
Plan*
- --------------------------------------------------------------------------------------------------------------------------
10.2 Form of Stock Option Agreement 10-K 10.2 000-24543 04/01/2002
- --------------------------------------------------------------------------------------------------------------------------
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 Note Modification Agreement dated October 1, 2002 to the 10-Q 10.3 000-24543 11/13/2002
Promissory Note between Bank of America N.A. and the
Company, dated September 15, 2000.
- --------------------------------------------------------------------------------------------------------------------------
10.8.1 Amendment No. 2 dated October 1, 2002 to the Business 10-Q 10.3 000-24543 11/13/2002
Loan Agreement between Bank of America, N.A. and the
Company, dated September 15, 2000
- --------------------------------------------------------------------------------------------------------------------------
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 J. 10-Q 10.3 000-24543 11/13/2002
Jeffrey Meder, dated October 22, 2002*
- --------------------------------------------------------------------------------------------------------------------------
47
10.11 Lease Agreement between Westmall Limited and CUL (Fiji) S-1/A 10.10 333-52459 06/05/1998
Limited, effective March 1, 1998
- --------------------------------------------------------------------------------------------------------------------------
10.12 Lease Agreement between Fiji Public Service Association 10-K 10.1 000-24543 09/02/1998
and CUL (Fiji) Limited, dated June 4, 1998
- --------------------------------------------------------------------------------------------------------------------------
10.13 Lease Agreement between Baroud Real Estate Development S-1 10.12 333-52459 05/12/1998
N.V. and C.U.L. (Curacao) N.V., dated April 3, 1998
- --------------------------------------------------------------------------------------------------------------------------
10.14 Ground Lease between Market Square East, Inc. and S-1 10.13 333-52459 05/12/1998
CULUSVI, Inc., dated October 20, 1997
- --------------------------------------------------------------------------------------------------------------------------
10.15 Sublease Agreement between Taumuning Capital Investment, S-1 10.15 333-52459 05/12/1998
Inc. and Cost-U-Less, Inc., dated July 15, 1994
- --------------------------------------------------------------------------------------------------------------------------
10.16 Lease Agreement between Ottoville Development Company and S-1 10.16 333-52459 05/12/1998
Cost-U-Less, Inc., dated March 9, 1994
- --------------------------------------------------------------------------------------------------------------------------
10.17 Lease Agreement between Inmostrat Corporation and S-1 10.17 333-52459 05/12/1998
Cost-U-Less, Inc., dated August 1993
- --------------------------------------------------------------------------------------------------------------------------
10.18 Lease Agreement between Hassan Rahman and Cost-U-Less, S-1 10.18 333-52459 05/12/1998
Inc., dated July 30, 1993
- --------------------------------------------------------------------------------------------------------------------------
10.19 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
- --------------------------------------------------------------------------------------------------------------------------
10.20 Indenture of Lease between H.C.L. Investments, Inc. and 10-K 10.21 000-24543 04/01/2002
Cost-U-Less, Inc., dated August 21, 1992
- --------------------------------------------------------------------------------------------------------------------------
10.21 Amendment to Lease between H.C.L. Investments, Inc. and 10-K 10.22 000-24543 04/01/2002
Cost-U-Less, Inc., dated April 27, 2000
- --------------------------------------------------------------------------------------------------------------------------
10.22 Lease Agreement between Caribe Lumber & Trading N.V. (St. 10-K 10.26 000-24543 03/26/1999
Maarten) and CUL Sint Maarten N.V., dated February 19,
1999
- --------------------------------------------------------------------------------------------------------------------------
10.23 Sublease Agreement between New Breed Distribution Corp of 10-K/A 10.27 000-24543 04/05/2000
California, Inc. and Cost-U-Less, Inc., dated November 1,
1999
- --------------------------------------------------------------------------------------------------------------------------
10.24 Lease Agreement between AMB Property, L.P. and 10-K/A 10.28 000-24543 04/05/2000
Cost-U-Less, Inc., dated November 12, 1999
- --------------------------------------------------------------------------------------------------------------------------
10.25 First Amendment to Lease Agreement between AMB Property, 10-K 10.28 000-24543 04/01/2002
L.P. and Cost-U-Less, Inc., dated November 21, 2001
- --------------------------------------------------------------------------------------------------------------------------
10.26 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
- --------------------------------------------------------------------------------------------------------------------------
10.27 Lease Agreement between Tonko Reyes, Inc., a Guam 10-K 10.30 000-24543 04/01/2002
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. 10-K 21.1 000-24543 04/01/2002
- --------------------------------------------------------------------------------------------------------------------------
23.1 Consent of Deloitte & Touche LLP X
- --------------------------------------------------------------------------------------------------------------------------
23.2 Consent of Ernst & Young LLP X
- --------------------------------------------------------------------------------------------------------------------------
24.10 Power of Attorney (See page 46) X
- --------------------------------------------------------------------------------------------------------------------------
99.1 Certification of Chief Executive Officer X
- --------------------------------------------------------------------------------------------------------------------------
99.2 Certification of Chief Financial Officer X
- --------------------------------------------------------------------------------------------------------------------------
* Management contract or compensatory plan or arrangement
48
(b) Reports on Form 8-K:
o On October 22, 2002, we filed a report on Form 8-K regarding
our October 17, 2002 press release which announced that our
Board of Directors had adopted a program to repurchase from
time to time at management's discretion shares of our common
stock in the open market or in privately negotiated
transactions until December 31, 2002, at prevailing market
prices. No repurchases were made during the defined repurchase
window.
49
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: April 10, 2003 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 10th day of April 2003.
Signature Title
/s/ GEORGE C. TEXTOR Chairman of the Board
- ---------------------------------
George C. Textor
/s/ J. JEFFREY MEDER President, Chief Executive Officer and
- --------------------------------- Director (Principal Executive Officer)
J. Jeffrey Meder
/s/ MARTIN P. MOORE Vice President, Chief Financial Officer,
- --------------------------------- Secretary and Treasurer (Principal
Martin P. Moore Financial and Accounting Officer)
/s/ DAVID A. ENGER Director
- ---------------------------------
David A. Enger
/s/ GARY W. NETTLES Director
- ---------------------------------
Gary W. Nettles
50
Form of Sarbanes-Oxley Section 302(a) Certification
I, J. Jeffrey Meder, certify that:
1. I have reviewed this annual report on Form 10-K of Cost-U-Less, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: April 10, 2003
/s/ J. Jeffrey Meder
- --------------------
J. Jeffrey Meder
President and
Chief Executive Officer
51
Form of Sarbanes-Oxley Section 302(a) Certification
I, Martin P. Moore, certify that:
1. I have reviewed this annual report on Form 10-K of Cost-U-Less, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: April 10, 2003
/s/ Martin P. Moore
- -------------------
Martin P. Moore
Chief Financial Officer
52
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 29, 2002
Reserves and allowances deducted from asset accounts:
Allowance for doubtful accounts ..................... $120,000 $135,000 $ 31,000 $224,000
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
- ----------
(1) Uncollectible accounts written off, net of recoveries.