The following table sets forth, for the periods indicated, the percentage of our net sales represented by certain consolidated income statement data.
Comparable-store sales (stores open for a full 13 months) increased 4.7% during fiscal 2005 (as adjusted to reflect a 52-week year) as compared to fiscal 2004. All but one of our stores experienced increased sales as compared to the prior year, primarily due to general inflationary trends, improvements in our assortment of goods and operating improvements including better in-stock inventory levels.
Store Opening Expense. Store opening expenses were $0.3 million in fiscal 2005, as compared to $0.2 million in fiscal 2004. The increase in store opening expenses in fiscal 2005 primarily related to costs associated with the relocation of our St. Croix store, which opened on May 26, 2005. Expenses for both years include costs associated with the evaluation of potential new store locations.
Store Closing Expenses: Store closing expenses of $0.1 million in fiscal 2005 are due to the costs incurred with closing our former St. Croix location after we relocated our store on May 26, 2005.
Net Interest Expense. Interest expense, net, remained flat at $0.4 million for both fiscal 2005 and fiscal 2004, as increased interest costs associated with rising interest rates in fiscal 2005 were offset by the capitalization of approximately $104,000 in interest related to the construction of our St. Croix store, as compared to $12,000 capitalized in the prior year.
Other income (expense): Other income (expense) declined to $42,000 for fiscal 2005, as compared to $80,000 for the same period in the prior year. The decrease in fiscal 2005 as compared to the prior year, was primarily due to losses exceeding gains on foreign currency transactions and translation of intercompany balances for transactions that exceed the permanent investments in foreign countries in fiscal 2005, partially offset by the receipt of a $100,000 non-recurring insurance reimbursement. The income and losses on foreign currency in both fiscal years was primarily attributable to appreciation/depreciation in the Fijian dollar as compared to the U.S. dollar.
Income Tax Provision. We recorded a tax provision in fiscal 2005 of $1.7 million, or 35.4% of pre-tax income. The tax provision primarily represents taxes associated with income generated in the U.S. and U.S. Territories. Additionally, during fiscal 2005, due to certain tax planning strategies, we were able to offset a portion of our foreign subsidiary losses against foreign subsidiary income, which resulted in a decrease in our effective tax rate as compared to prior years.
As of January 1, 2006, we have foreign net operating loss carryforwards (NOLs) of approximately $7.5 million, some of which, if not utilized, will begin expiring in the year 2006. The NOLs include approximately $3.9 million related to Curacao and St. Maarten which are not subject to expiration time limits. Our ability to utilize the NOLs is dependent upon generating taxable income in these foreign jurisdictions. As a result, we have recorded a valuation allowance of $2.4 million attributable to the $2.6 million of tax benefits recorded for net operating loss carryforwards.
Net Income. Our net income was $3.0 million, or $0.72 per fully diluted share, in fiscal 2005, compared to net income of $2.7 million, or $0.69 per fully diluted share, in fiscal 2004.
Fiscal 2004 Compared to Fiscal 2003
Net Sales. Net sales in fiscal 2004 of $209.4 million increased 18.3%, as compared to net sales of $177.1 million for the comparable period in the prior year. Approximately 50% of the increase was due to the reopening of our store in Dededo, Guam in October 2003. The balance of the increase was due to comparable-store sales increases offset by a decline in business-to-business sales as compared to fiscal 2003.
Comparable-store sales (stores open for a full 13 months) increased 13.6% during fiscal 2004 as compared to fiscal 2003. Comparable-store sales are calculated on stores excluding the Guam market as our Dededo, Guam store was closed during the corresponding periods in the prior year and during those periods our Tamuning, Guam store benefited from the temporary closure of our Dededo store. All of our other stores experienced increased sales as compared to the prior year, primarily due to improvements in our assortment of food and general merchandise, operating improvements including better in-stock inventory levels and improved economic conditions in some of our markets.
Gross Margin. Gross margin improved to $38.5 million, or 18.4% of sales, in fiscal 2004 from $31.5 million, or 17.8% of sales, in fiscal 2003. The increase in gross profit as a percent of sales resulted primarily from better sourcing, pricing and merchandising of goods in our stores 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 $26.4 million for fiscal 2004 as compared to $22.3 million for fiscal 2003, but remained flat as a percent of sales at 12.6% of sales for both fiscal 2004 and fiscal 2003. Approximately 50% of the dollar increase in store expenses was attributable to increased expenses associated with
22
operating eleven stores during all of fiscal 2004 as compared to ten stores for ten of the twelve months in fiscal 2003. The remainder of the dollar increase was primarily attributable to a 43% increase in commercial insurance expense, a 13% increase in energy (utility) expense and a 3% increase in rent expense, accelerated depreciation related to the planned 2005 relocation of our St. Croix store, and higher volume-related expenses such as payroll and bankcard fees. As a percent of store sales, payroll and related costs declined in 2004 to 5.2% as compared to 5.5% of store sales in 2003.
General and Administrative Expense. General and administrative expenses increased to $7.1 million in fiscal 2004, as compared to $6.9 million in fiscal 2003. The increase was primarily due to a 34% increase in compensation costs largely resulting from increased performance based awards pursuant to our incentive bonus program. Additionally, we had a 36% increase in commercial insurance costs, partially offset by non-recurring costs incurred in 2003 in connection with a $0.5 million write-down of idle fixed assets from previously closed stores and the acceleration of depreciation of leasehold improvements related to our corporate office move, as well as fiscal 2003 transaction costs incurred in connection with our discussions with ASSI, Inc. regarding a potential strategic business combination that did not occur. General and administrative expenses as a percent of sales decreased to 3.4% in fiscal 2004, as compared to 3.9% in the corresponding period in the prior year, primarily due to the leveraging of corporate expenses over increased store sales.
Store Opening Expense. Store opening expenses were $188,000 in fiscal 2004, as compared to $287,000 in fiscal 2003. Store opening expense in fiscal 2004 related to costs associated with the evaluation of potential new store locations and current store relocations. Store opening expenses in fiscal 2003 primarily related to the reopening of our Dededo, Guam store.
Net Interest Expense. Interest expense, net, decreased to $0.4 million in fiscal 2004 as compared to $0.5 million in fiscal 2003, as borrowings on our line of credit decreased compared to the prior year.
Other income (expense): Other income of $0.1 million in fiscal 2004 was primarily attributable to gains on foreign currency transactions and translation of intercompany balances for transactions that exceeded the permanent investments in those countries. Other income of $0.7 million in fiscal 2003 included a gain of $0.4 million related to the receipt of insurance reimbursements for damage to inventory and equipment sustained from the supertyphoon in Guam and gains of $0.3 million on foreign currency transactions and translation of intercompany balances for transactions that exceeded the permanent investments in those countries. The income on foreign currency in both fiscal years was primarily attributable to appreciation in the Fijian dollar as compared to the U.S. dollar.
Income Tax Provision. We recorded a tax provision in fiscal 2004 of $1.8 million, or 39.8% 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 2004, 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 26, 2004, we had foreign NOLs of approximately $8.2 million, some of which, if not utilized, begin expiring in the year 2006. The NOLs include approximately $4.5 million related to Curacao and St. Maarten which are not subject to expiration time limits. Our ability to utilize the NOLs is dependent upon generating taxable income in the foreign jurisdictions. As a result, we recorded a valuation allowance of $2.4 million attributable to the $2.8 million of tax benefits recorded for net operating loss carryforwards.
Net Income. Our net income was $2.7 million, or $0.69 per fully diluted share, in fiscal 2004, compared to net income of $1.4 million, or $0.38 per fully diluted share, in fiscal 2003.
Liquidity and Capital Resources
We currently finance our operations with proceeds from various credit facilities and internally generated funds. Although we utilized existing working capital to finance the $5.6 million used to purchase the land and construct our new St. Croix store, we hope to re-finance our St. Croix store, and any future relocations and new stores, either through an operating lease, a sale-leaseback arrangement or long-term funding from a financial institution. We intend to continue leasing as many of our store locations as feasible. In those instances where a lease is not available on acceptable terms, we intend to finance our stores utilizing long-term funding from a financial institution (as we currently do for our St. Thomas and St. Maarten buildings).
We generated $4.1 million, $5.7 million and $3.9 million of net cash from operations during fiscal 2005, fiscal 2004 and fiscal 2003, respectively. The $1.6 million decrease in net cash provided by operations in 2005 as compared
23
to 2004, was primarily due to a decrease in accounts payable and other accrued expenses of $5.2 million, partially offset by a decrease in cash used for inventory purchases of $3.7 million. The increase in net cash provided by operations in 2004 as compared to 2003, was primarily due to an increase in net income of $1.3 million and an increase in accounts payable of $3.3 million, partially offset by an increase in cash used for inventory of $2.7 million.
Net cash used in investing activities was $6.2 million, $2.5 million and $1.9 million, for fiscal years 2005, 2004 and 2003, respectively. The cash used in investing activities during fiscal 2005, was primarily due to costs associated with the construction of the new building in St. Croix where we relocated our St. Croix store on May 26, 2005. The cash used in investing activities in fiscal 2004 was primarily due to the purchase of land in St. Croix for approximately $0.9 million and costs associated with the construction of the building on this parcel of land. The relocated store is closer to the main trade area in the center of the island than the existing store and has now been increased in size by about 45% to 38,000 square feet. The cash used in investing activities in 2003 primarily related to the reopening of our Dededo, Guam store. The proceeds from insurance settlements received in fiscal 2004 and 2003 relate to insurance reimbursements received on fixed assets lost in the Supertyphoon in Guam.
Although we currently have no plans to open stores in new markets during fiscal 2006, in July 2005 the Cayman Islands Trade and Business Licensing Board granted approval for us to operate a retail and wholesale business in the Cayman Islands through a controlled subsidiary. This is the first in a series of steps that we must take before we can open a store operating under the Cost-U-Less name in the Cayman Islands. We do not have an approximate timing as to when a new store would open in the Cayman Islands, if at all, but expect that it will take at least twelve to eighteen months once the permitting, governmental approval and lease process is complete. In the meantime, we are actively working with local architects and engineers to more precisely define the type of building we could construct as a prelude to applying for construction permits. In addition, we are currently in the process of renovating and expanding the size of our store in St. Thomas by approximately 6,400 square feet (an increase of approximately 18%). We anticipate that the cost associated with building construction and updating equipment will be approximately $1.4 to $2.0 million. Additionally, we anticipate spending approximately $0.2 million to remodel our Kauai store in order to add retail enhancements such as fresh produce by the pound. During fiscal 2006, we also plan to replace our current point of sale system with a new and improved version, which we anticipate will cost approximately $0.7 to $1.0 million, most of which will be financed with a capital lease. In addition to these projects, we continue to explore expansion opportunities in selected markets and additional relocation opportunities for stores in existing markets.
Net cash provided by financing activities of $1.3 million in fiscal 2005 was primarily due to $1.0 million received on equipment purchased for our St. Croix store and $0.4 million received from the exercise of common stock options. Net cash used by financing activities of $1.1 million in fiscal 2004 was primarily due to a $1.0 million reduction in the balance on our line of credit and a $0.8 million decrease in bank checks outstanding, partially offset by $0.8 million of funds received on the sale-leaseback of equipment in Guam. In fiscal 2003, $1.4 million was used to reduce the balance on our line of credit, which was offset by an increase of $1.5 million in bank checks outstanding.
Foreign currency translation resulted in a gain of $15,000 in fiscal 2004 and losses of $24,000 and $235,000 in fiscal years 2005 and 2003, 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.
We have had a line of credit with Wells Fargo Business Credit since April 9, 2003. On May 26, 2005, we amended the line of credit to extend the maturity date of the facility from April 9, 2006, to May 18, 2007. Additionally, the amendment
| • | | reduced the interest rate to an annual interest rate equal to the prime rate; |
| • | | reduced the minimum interest charge to not less than $25,000 per calendar year; |
| • | | increased the unused line fee to a rate of three-eighths of one percent (0.375%) per annum on the average daily unused line; and |
| • | | eliminated the one day interest charge on all payments received on the line of credit. |
Borrowings continue to be limited to the lesser of $6.0 million or the amount calculated under the borrowing base. The borrowing base is equal to the lesser of (a) $6.0 million or (b) the sum of 70% of eligible inventory in the United States of America, plus 60% of eligible inventory in the U.S. Virgin Islands and Guam, less specified reserves.
24
The 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 an amount up to $0.7 million. At January 1, 2006, there was $0.1 million outstanding on the line of credit and $0.1 million in letters of credit outstanding. Borrowings under the amended line of credit were charged interest at Wells Fargo’s prime rate plus 0.5% from the beginning of the most recent fiscal year through May 17, 2005, and at the prime rate from May 18, 2005, through January 1, 2006. At January 1, 2006, the rate charged by Wells Fargo was 7.25%. The line of credit contains various covenants, including a requirement that we maintain minimum pre-tax income and tangible net worth, as well as limitations on acquisitions, additional debt, changes in control and capital expenditures. We believe that we are currently in compliance with all such covenants.
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, declining economic conditions in the markets in which we have stores, or 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 twelve months. However, if such sources of liquidity are unavailable or insufficient to satisfy our liquidity requirements, we may need to issue equity or debt securities, obtain additional credit facilities or consider alternative financing arrangements. 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 January 1, 2006, our commitments to make future payments under contractual obligations were as follows (in thousands):
| | | | Payments Due by Period
| |
|---|
Contractual Obligations
| | | | Total
| | Less than
1 year
| | 1 to 3
years
| | 4 to 5
years
| | After 5
years
|
|---|
| Long-term debt | | | | $ | 2,278 | | | $ | 267 | | | $ | 534 | | | $ | 534 | | | $ | 943 | |
| Operating leases | | | | | 29,987 | | | | 4,893 | | | | 8,799 | | | | 5,136 | | | | 11,159 | |
| Capital leases | | | | | 1,885 | | | | 321 | | | | 642 | | | | 642 | | | | 280 | |
| Total | | | | $ | 34,150 | | | $ | 5,481 | | | $ | 9,975 | | | $ | 6,312 | | | $ | 12,382 | |
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.
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.
25
Long Lived Assets
When facts and circumstances indicate that the carrying values of long-lived assets, including intangibles, may be impaired, we perform an evaluation of the recoverability 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, we recognize an impairment loss by a charge against current operations.
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. 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 liquidate operations in that country.
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 in future periods.
Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (the FASB) issued Statement 123 (revised 2004), “Share-Based Payment” (FAS 123(R)). FAS 123(R) requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. The cost will be measured based on the fair value of the instruments issued. FAS 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. FAS 123(R) replaces FAS 123 and supersedes APB 25. As originally issued in 1995, FAS 123 established as preferable the fair-value-based method of accounting for share-based payment transactions with employees. However, that statement permitted entities the option of continuing to apply the guidance in APB 25, as long as the footnotes to the financial statements disclosed what net income would have been had the preferable fair-value-based method been used. We are required to apply FAS 123(R) as of the beginning of fiscal 2006. We expect to use the modified-prospective method effective with our first quarter of fiscal 2006. We believe that the adoption of this new accounting standard will not have a significant impact on our results of operations or financial position, as we have a limited amount of unvested options and options available for issuance in the future.
On November 24, 2004, the FASB issued Statement No. 151 (FAS 151), “Inventory Costs,” an amendment of ARB No. 43, Chapter 4 which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. FAS 151 requires that abnormal items be recognized as current-period charges, as well as unallocated overheads recognized in the period in which they are incurred. The provisions of this statement are effective for inventory costs incurred during fiscal periods beginning after June 15, 2005. Our adoption of FAS 151 in our first quarter of fiscal 2006 is not expected to have a significant impact on our results of operations or financial position.
26
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. dollars 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 operate in three foreign countries that function under currencies other than the US dollar. Two of the these foreign countries operate under the Netherlands Antilles Guilder that has historically had an exchange rate fixed to the U.S. dollar but there can be no assurance that this will continue. If the Netherlands Antilles Guilder is allowed to float this would lead to an increase in foreign exchange volatility and risk which could have a materially adverse effect on our business, financial condition and operating results. There is also the possibility these three foreign countries that function under currencies other than the U.S. dollar could devalue their currency against the U.S. dollar at any time and if this was to occur there could be a materially adverse effect on our business, financial condition and operating results.
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 did not have any derivative financial instruments as of January 1, 2006.
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Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements and supplementary data are included beginning on page 29 of this Report:
| | | | Page
|
|---|
| Report of Independent Registered Public Accounting Firm | | | | | 29 | |
Consolidated Financial Statements:
| | | | | | |
| Consolidated Statements of Operations | | | | | 30 | |
| Consolidated Balance Sheets | | | | | 31 | |
| Consolidated Statements of Shareholders’ Equity | | | | | 32 | |
| Consolidated Statements of Cash Flows | | | | | 33 | |
| Notes to Consolidated Financial Statements | | | | | 34 | |
28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Cost-U-Less, Inc.
We have audited the accompanying consolidated balance sheets of Cost-U-Less, Inc. and subsidiaries as of January 1, 2006 and December 26, 2004, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three fiscal years in the period ended January 1, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We have conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cost-U-Less, Inc. and subsidiaries as of January 1, 2006 and December 26, 2004 and the results of their operations and their consolidated cash flows for each of the three fiscal years in the period ended January 1, 2006 in conformity with accounting principles generally accepted in the United States of America.
Our audits were conducted for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The consolidated financial statement schedule listed in Item 15 for three fiscal years in period ended January 1, 2006 is presented for purposes of additional analysis and is not a required part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole.
Seattle, Washington
March 6, 2006
29
COST-U-LESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
| | | | Fiscal Year Ended
| |
|---|
| | | | January 1,
2006
| | December 26,
2004
| | December 28,
2003
|
|---|
| Net sales | | | | $ | 219,414 | | | $ | 209,390 | | | $ | 177,066 | |
| Merchandise costs | | | | | 178,613 | | | | 170,866 | | | | 145,563 | |
| Gross profit | | | | | 40,801 | | | | 38,524 | | | | 31,503 | |
Operating expenses:
| | | | | | | | | | | | | | |
| Store | | | | | 28,567 | | | | 26,408 | | | | 22,304 | |
| General and administrative | | | | | 6,828 | | | | 7,103 | | | | 6,853 | |
| Store openings | | | | | 335 | | | | 188 | | | | 287 | |
| Store closings | | | | | 81 | | | | — | | | | — | |
| Total operating expenses | | | | | 35,811 | | | | 33,699 | | | | 29,444 | |
| |
| Operating income | | | | | 4,990 | | | | 4,825 | | | | 2,059 | |
Other income (expenses):
| | | | | | | | | | | | | | |
| Interest expense, net | | | | | (367 | ) | | | (437 | ) | | | (458 | ) |
| Other | | | | | 42 | | | | 80 | | | | 710 | |
| Income before income taxes | | | | | 4,665 | | | | 4,468 | | | | 2,311 | |
| Income tax provision | | | | | 1,650 | | | | 1,780 | | | | 930 | |
| Net income | | | | $ | 3,015 | | | $ | 2,688 | | | $ | 1,381 | |
| |
Earnings per common share:
| | | | | | | | | | | | | | |
| Basic | | | | $ | 0.77 | | | $ | 0.72 | | | $ | 0.38 | |
| Diluted | | | | $ | 0.72 | | | $ | 0.69 | | | $ | 0.38 | |
| |
| Weighted average common shares outstanding, basic | | | | | 3,939,190 | | | | 3,731,754 | | | | 3,613,988 | |
| Weighted average common shares outstanding, diluted | | | | | 4,168,611 | | | | 3,915,808 | | | | 3,670,908 | |
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
30
COST-U-LESS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| | | | January 1,
2006
| | December 26,
2004
|
|---|
ASSETS
| | | | | | | | | | |
Current assets:
| | | | | | | | | | |
| Cash and cash equivalents | | | | $ | 5,304 | | | $ | 6,081 | |
Accounts receivable (net of allowance of $80 and $205 in 2005 and
2004, respectively) | | | | | 843 | | | | 805 | |
| Inventories | | | | | 23,027 | | | | 23,140 | |
| Prepaid expenses | | | | | 260 | | | | 365 | |
| Deferred taxes, net | | | | | 876 | | | | 688 | |
| Total current assets | | | | | 30,310 | | | | 31,079 | |
| Buildings and equipment, net | | | | | 18,550 | | | | 14,345 | |
| Deposits and other assets | | | | | 772 | | | | 778 | |
| Total assets | | | | $ | 49,632 | | | $ | 46,202 | |
| |
LIABILITIES AND SHAREHOLDERS’ EQUITY
| | | | | | | | | | |
| |
Current liabilities:
| | | | | | | | | | |
| Accounts payable | | | | $ | 15,062 | | | $ | 16,132 | |
| Accrued expenses | | | | | 5,402 | | | | 5,937 | |
| Income taxes payable | | | | | 20 | | | | 27 | |
| Line of credit | | | | | 80 | | | | — | |
| Current portion of long-term debt | | | | | 267 | | | | 267 | |
| Current portion capital leases | | | | | 226 | | | | 102 | |
| Total current liabilities | | | | | 21,057 | | | | 22,465 | |
| Deferred rent | | | | | 527 | | | | 527 | |
| Deferred taxes, net | | | | | 665 | | | | 393 | |
| Long-term debt, less current portion | | | | | 2,011 | | | | 2,277 | |
| Capital lease, less current portion | | | | | 1,329 | | | | 607 | |
| Total liabilities | | | | | 25,589 | | | | 26,269 | |
| |
| 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, 3,990,171 and 3,751,306 in 2005 and
2004, respectively | | | | | 13,931 | | | | 12,795 | |
| Retained earnings | | | | | 10,926 | | | | 7,911 | |
| Accumulated other comprehensive loss | | | | | (814 | ) | | | (773 | ) |
| Total shareholders’ equity | | | | | 24,043 | | | | 19,933 | |
| Total liabilities and shareholders’ equity | | | | $ | 49,632 | | | $ | 46,202 | |
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
31
COST-U-LESS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except share data)
| | | | Common
Stock—
Shares
| | Common
Stock—
Amount
| | Retained
Earnings
| | Accumulated
Other
Comprehensive
Loss
| | Total
|
|---|
| Balance at December 29, 2002 | | | | | 3,606,376 | | | $ | 12,446 | | | $ | 3,842 | | | $ | (693 | ) | | $ | 15,595 | |
| Net income | | | | | — | | | | — | | | | 1,381 | | | | — | | | | 1,381 | |
| Foreign currency translation adjustments | | | | | — | | | | — | | | | — | | | | (127 | ) | | | (127 | ) |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | 1,254 | |
| Exercise of common stock options including income tax benefit | | | | | 82,000 | | | | 151 | | | | — | | | | — | | | | 151 | |
| Balance at December 28, 2003 | | | | | 3,688,376 | | | | 12,597 | | | | 5,223 | | | | (820 | ) | | | 17,000 | |
| Net income | | | | | — | | | | — | | | | 2,688 | | | | — | | | | 2,688 | |
| Foreign currency translation adjustments | | | | | — | | | | — | | | | — | | | | 47 | | | | 47 | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | 2,735 | |
| Stock based compensation | | | | | — | | | | 9 | | | | — | | | | — | | | | 9 | |
| Exercise of common stock options including income tax benefit | | | | | 62,930 | | | | 189 | | | | — | | | | — | | | | 189 | |
| Balance at December 26, 2004 | | | | | 3,751,306 | | | | 12,795 | | | | 7,911 | | | | (773 | ) | | | 19,933 | |
| Net income | | | | | — | | | | — | | | | 3,015 | | | | — | | | | 3,015 | |
| Foreign currency translation adjustments | | | | | — | | | | — | | | | — | | | | (41 | ) | | | (41 | ) |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | 2,974 | |
| Stock based compensation | | | | | — | | | | 24 | | | | — | | | | — | | | | 24 | |
| Exercise of common stock options including income tax benefit | | | | | 238,865 | | | | 1,112 | | | | — | | | | — | | | | 1,112 | |
| Balance at January 1, 2006 | | | | | 3,990,171 | | | $ | 13,931 | | | $ | 10,926 | | | $ | (814 | ) | | $ | 24,043 | |
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
32
COST-U-LESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | January 1,
2006
| | December 26,
2004
| | December 28,
2003
|
|---|
OPERATING ACTIVITIES:
| | | | | | | | | | | | | | |
| Net income | | | | $ | 3,015 | | | $ | 2,688 | | | $ | 1,381 | |
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
| | | | | | | | | | | | | | |
| Depreciation and amortization | | | | | 1,934 | | | | 1,849 | | | | 1,816 | |
| Gain on property damaged by Supertyphoon Ponsonga | | | | | — | | | | — | | | | (411 | ) |
| (Gain) loss on buildings and equipment | | | | | 66 | | | | (31 | ) | | | 436 | |
| Deferred tax (benefit) provision | | | | | 84 | | | | 264 | | | | (5 | ) |
| Tax benefit from exercise of stock options | | | | | 684 | | | | 98 | | | | 62 | |
| Allowance for doubtful accounts | | | | | (125 | ) | | | (3 | ) | | | (16 | ) |
| Stock option expense | | | | | 24 | | | | 9 | | | | — | |
Cash provided by changes in operating assets and liabilities:
| | | | | | | | | | | | | | |
| Insurance receivable | | | | | — | | | | 410 | | | | 607 | |
| Accounts receivable | | | | | 87 | | | | 36 | | | | 891 | |
| Income tax receivable | | | | | (7 | ) | | | 555 | | | | 276 | |
| Inventories | | | | | 113 | | | | (3,600 | ) | | | (914 | ) |
| Prepaid expenses | | | | | 105 | | | | 35 | | | | (108 | ) |
| Deposits and other assets | | | | | 6 | | | | 26 | | | | (16 | ) |
| Accounts payable | | | | | (1,310 | ) | | | 1,708 | | | | (1,624 | ) |
| Accrued expenses | | | | | (535 | ) | | | 1,676 | | | | 1,637 | |
| Deferred rent | | | | | — | | | | 29 | | | | (31 | ) |
| Net cash provided by operating activities | | | | | 4,141 | | | | 5,749 | | | | 3,981 | |
| |
INVESTING ACTIVITY:
| | | | | | | | | | | | | | |
| Cash used to purchase buildings and equipment | | | | | (6,293 | ) | | | (3,258 | ) | | | (1,987 | ) |
| Proceeds from sale of buildings and equipment | | | | | 71 | | | | — | | | | — | |
| Proceeds from insurance settlement | | | | | — | | | | 725 | | | | 121 | |
| Net cash used by investing activities | | | | | (6,222 | ) | | | (2,533 | ) | | | (1,866 | ) |
| |
FINANCING ACTIVITIES:
| | | | | | | | | | | | | | |
| Proceeds from exercise of common stock options | | | | | 428 | | | | 91 | | | | 89 | |
| Proceeds (payments) from (on) line of credit, net | | | | | 80 | | | | (960 | ) | | | (1,407 | ) |
| Increase (decrease) in bank checks outstanding | | | | | 240 | | | | (816 | ) | | | 1,415 | |
| Proceeds from capital lease obligations | | | | | 1,000 | | | | 805 | | | | — | |
| Payments on capital lease obligations | | | | | (154 | ) | | | (96 | ) | | | — | |
| Payments on long-term debt | | | | | (266 | ) | | | (267 | ) | | | (267 | ) |
| Net cash provided (used) by financing activities | | | | | 1,328 | | | | (1,243 | ) | | | (170 | ) |
| Foreign currency translation adjustments | | | | | (24 | ) | | | 15 | | | | (235 | ) |
| Net increase (decrease) in cash and cash equivalents | | | | | (777 | ) | | | 1,988 | | | | 1,710 | |
Cash and cash equivalents:
| | | | | | | | | | | | | | |
| Beginning of period | | | | | 6,081 | | | | 4,093 | | | | 2,383 | |
| End of period | | | | $ | 5,304 | | | $ | 6,081 | | | $ | 4,093 | |
| |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
| | | | | | | | | | | | | | |
Cash paid during the period for:
| | | | | | | | | | | | | | |
| Interest | | | | $ | 454 | | | $ | 486 | | | $ | 458 | |
| Income taxes | | | | | 888 | | | | 857 | | | | 597 | |
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
33
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 January 1, 2006, the Company operated eleven retail stores 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 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 12, 2002. The Company’s Dededo store, however, suffered more significant damage and had to be closed for reconstruction. The store was rebuilt and it reopened for business on October 3, 2003.
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 26, 2004 and December 28, 2003 were 52-week fiscal years. Fiscal 2005, ending on January 1, 2006, was a 53-week fiscal year with the extra week included in the fourth quarter.
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 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. 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.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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.
34
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
Cash Equivalents
The Company considers all highly liquid investments with an initial maturity three months or less to be cash equivalents.
Financial Instruments
The carrying value of financial instruments, including cash, cash equivalents, receivables, payables, and long-term debt, approximates market value at January 1, 2006 and December 26, 2004. 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.
Accounts Receivable, net
Accounts receivable consist primarily of receivables from local businesses and government agencies, vendor rebates and promotional allowances and other miscellaneous amounts due to the Company. Management determines the allowance for doubtful accounts based on known troubled accounts and historical experience applied to an aging of accounts.
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 for financial reporting purposes. Buildings are generally depreciated over thirty-five years; equipment and fixtures are depreciated over three to ten years; and leasehold improvements are amortized over the lesser of the initial term of the lease or the assets’ estimated useful life. Equipment acquired under capitalized leases is depreciated over the shorter of the asset’s estimated useful life or the life of the related lease.
Long Lived Assets
When facts and circumstances indicate that the carrying values of long-lived assets 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 January 1, 2006 and December 26, 2004 are $3.8 million and $3.5 million, respectively, representing the excess of outstanding checks over cash on deposit in the accounts on which the checks were drawn.
35
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
Insurance/Self Insurance Liabilities
The Company uses a combination of insurance and self-insurance mechanisms to provide for the potential liabilities for workers’ compensation, general liability, property insurance, director and officers’ liability, vehicle liability and employee health care benefits. Liabilities associated with the risks that are retained by the Company are not discounted and are estimated, in part, by considering historical claims experience and outside expertise, demographic factors, severity factors and other actuarial assumptions. The estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends.
Revenue Recognition
The Company recognizes revenue from product sales when the customer purchases the products, generally at the point of sale.
Merchandise Costs
Merchandise costs consist of the purchase price of inventory sold, inbound shipping charges and all costs related to our depot operations, including freight from depots to selling warehouses. Merchandise costs also include salaries and other related expenses incurred in certain fresh food departments.
Vendor Allowances
Periodic payments from vendors in the form of volume rebates or other allowances that are evidenced by signed agreements are reflected in the carrying value of the inventory when earned or as the Company progresses towards earning the rebate and as a component of cost of sales as the merchandise is sold. Other consideration received from vendors is generally recorded as a reduction of merchandise costs upon completion of the terms of the related agreement, or by other systematic and rational approach. 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 2005, 2004 and 2003 were not considered material to the Company’s operating results.
Store Opening Costs
Pre-opening costs incurred in connection with the startup and promotion of new stores are expensed as incurred.
Stock-Based Compensation
The Company has elected to apply the disclosure-only provisions of Financial Accounting Standards Board Statement No. 123 (FAS 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” (APB 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, compensation cost is generally not recognized.
36
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
Had stock option compensation expense for the Company’s stock option plans been recognized based on the estimated fair value on the grant date under the fair value methodology allowed by FAS 123, as amended by FAS 148, the Company’s net income and earnings per share amounts would have been as follows:
| | | | 2005
| | 2004
| | 2003
|
|---|
| | | | (Net income in thousands)
|
|---|
| Net income, as reported | | | | $ | 3,015 | | | $ | 2,688 | | | $ | 1,381 | |
| Add: Stock-based compensation, as reported | | | | | 24 | | | | 9 | | | | — | |
Less: Total stock-based employee compensation expense
determined under fair value method for all awards,
net of tax | | | | | (51 | ) | | | (223 | ) | | | (132 | ) |
| Net income pro forma | | | | $ | 2,988 | | | $ | 2,474 | | | $ | 1,249 | |
| Earnings per common share, basic as reported | | | | $ | 0.77 | | | $ | 0.72 | | | $ | 0.38 | |
| Earnings per common share, basic pro forma | | | | $ | 0.76 | | | $ | 0.66 | | | $ | 0.35 | |
| Earnings per common share, diluted as reported | | | | $ | 0.72 | | | $ | 0.69 | | | $ | 0.38 | |
| Earnings per common share, diluted pro forma | | | | $ | 0.72 | | | $ | 0.63 | | | $ | 0.34 | |
| |
The fair value of each option is estimated on the date of grant under the Black-Scholes option-pricing model using the following assumptions: |
| | | | 2005
| | 2004
| | 2003
|
|---|
| Risk-free interest rate | | | | | 3.65 | % | | | 3.13 | % | | | 3.90 | % |
| Expected life | | | | | 5 | years | | | 5 | years | | | 5 | years |
| Expected dividend yield | | | | | 0 | % | | | 0 | % | | | 0 | % |
| Volatility | | | | | 74 | % | | | 74 | % | | | 74 | % |
The weighted average fair values of options granted in 2005, 2004, and 2003 were $3.21, $1.61 and $0.78, 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.
37
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (the FASB) issued Statement 123 (revised 2004), “Share-Based Payment” (FAS 123(R)). FAS 123(R) requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. The cost will be measured based on the fair value of the instruments issued. FAS 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. FAS 123(R) replaces FAS 123 and supersedes APB 25. As originally issued in 1995, FAS 123 established as preferable the fair-value-based method of accounting for share-based payment transactions with employees. However, that statement permitted entities the option of continuing to apply the guidance in APB 25, as long as the footnotes to the financial statements disclosed what net income would have been had the preferable fair-value-based method been used. The Company will be required to apply FAS 123(R) as of the beginning of fiscal 2006. The Company expects to use the modified-prospective method effective with its first quarter of fiscal 2006. The Company believes that the adoption of this new accounting standard will not have a significant impact on the Company’s results of operations or financial position, as the Company has a limited amount of unvested options and options available for issuance in the future.
On November 24, 2004, the FASB issued Statement No. 151 (FAS 151), “Inventory Costs,” an amendment of ARB No. 43, Chapter 4 which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. FAS 151 requires that abnormal items be recognized as current-period charges, as well as unallocated overheads recognized in the period in which they are incurred. The provisions of this statement are effective for inventory costs incurred during fiscal periods beginning after June 15, 2005. The Company’s adoption of FAS 151 in its first quarter of fiscal 2006 is not expected to have a significant impact on the Company’s results of operations or financial position.
Reclassifications
Certain reclassifications of prior years’ balances have been made for consistent presentation with the current year.
3. | | Buildings and Equipment |
Buildings and equipment consist of the following (in thousands) at:
| | | | January 1,
2006
| | December 26,
2004
|
|---|
| Buildings | | | | $ | 10,783 | | | $ | 7,175 | |
| Equipment | | | | | 16,375 | | | | 15,528 | |
| Leasehold improvements | | | | | 1,095 | | | | 1,234 | |
| Land improvements | | | | | 839 | | | | — | |
| Land | | | | | 906 | | | | — | |
| Equipment under capital lease | | | | | 1,805 | | | | 805 | |
| Buildings, equipment, land and improvements | | | | | 31,803 | | | | 24,742 | |
| Less accumulated depreciation and amortization | | | | | 13,409 | | | | 12,681 | |
| Net book value of depreciable assets | | | | | 18,394 | | | | 12,061 | |
| Construction in progress | | | | | 72 | | | | 2,253 | |
| Computer system and software development in progress | | | | | 84 | | | | 31 | |
| Total Buildings and Equipment | | | | $ | 18,550 | | | $ | 14,345 | |
38
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
The Company has had a line of credit with Wells Fargo Business Credit since April 9, 2003. On May 26, 2005, the Company entered into the Fourth Amendment to the Credit and Security Agreement (the Fourth Amendment) as it relates to its current line of credit. The Fourth Amendment provides for an extension of the maturity date of the Company’s line of credit from April 9, 2006, to May 18, 2007. Additionally, the Fourth Amendment (1) reduces the interest rate to an annual interest rate equal to the “prime rate” as defined by Wells Fargo Bank National Association, (2) reduces the minimum interest charge to not less than $25,000 per calendar year, (3) increases the unused line fee to a rate of three-eighths of one percent (0.375%) per annum on the average daily unused line and (4) eliminates the one day interest charge on all payments received on the line of credit. Borrowings continue to be limited to the lesser of $6.0 million or the amount calculated under the borrowing base. The borrowing base is equal to the lesser of (a) $6.0 million or (b) the sum of 70% of eligible inventory in the United States of America, plus 60% of eligible inventory in the U.S. Virgin Islands and Guam, less specified reserves.
The 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 an amount up to $0.7 million. At January 1, 2006, there was $0.1 million outstanding on the line of credit and $0.1 million in letters of credit outstanding. Borrowings under the amended line of credit were charged interest at the financial institution’s prime rate plus 0.5% from the beginning of the fiscal year through May 17, 2005, and at the prime rate from May 18, 2005, through January 1, 2006. At January 1, 2006, the rate charged by the financial institution was 7.25%.
The line of credit contains various covenants, including a requirement that the Company maintain minimum pre-tax income and tangible net worth and limitations on acquisitions, additional debt, changes in control and capital expenditures. The Company believes that it was in compliance with all such covenants as of January 1, 2006.
In conjunction with the construction of the relocated 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 January 1, 2006 is at the prime rate plus 1% (8.25%). As of January 1, 2006, there was a balance owed of $1.0 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. The note payable matures in June 2015. As of January 1, 2006, there was a balance owed of $1.3 million against this credit facility. Interest on the note at January 1, 2006 is at the prime rate plus 1% (8.25%). 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):
| 2006 | | | | $ | 267 | | | | | |
| 2007 | | | | | 267 | | | | | |
| 2008 | | | | | 267 | | | | | |
| 2009 | | | | | 267 | | | | | |
| 2010 | | | | | 267 | | | | | |
| Thereafter | | | | | 943 | | | | | |
| Total | | | | $ | 2,278 | | | | | |
39
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
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 operations.
The components of interest expense, net are as follows (in thousands):
| | | | 2005
| | 2004
| | 2003
|
|---|
| Interest incurred | | | | $ | 497 | | | $ | 450 | | | $ | 459 | |
| Capitalized interest | | | | | (104 | ) | | | (12 | ) | | | — | |
| Interest income | | | | | (26 | ) | | | (1 | ) | | | (1 | ) |
| Interest expense, net | | | | $ | 367 | | | $ | 437 | | | $ | 458 | |
Income before income taxes by jurisdiction is as follows (in thousands):
| | | | 2005
| | 2004
| | 2003
|
|---|
| United States | | | | $ | 1,426 | | | $ | 1,655 | | | $ | 1,049 | |
| U.S. Territories | | | | | 2,491 | | | | 2,444 | | | | 1,134 | |
| Foreign | | | | | 748 | | | | 369 | | | | 128 | |
| Income before income taxes | | | | $ | 4,665 | | | $ | 4,468 | | | $ | 2,311 | |
The provision for income taxes is as follows (in thousands):
| | | | 2005
| | 2004
| | 2003
|
|---|
Current income taxes:
| | | | | | | | | | | | | | |
| United States | | | | $ | 712 | | | $ | 506 | | | $ | 470 | |
| U.S. Territories | | | | | 854 | | | | 1,010 | | | | 465 | |
| Foreign | | | | | 0 | | | | 0 | | | | 0 | |
| Current income taxes | | | | | 1,566 | | | | 1,516 | | | | 935 | |
Deferred income taxes
| | | | | | | | | | | | | | |
| United States | | | | | (223 | ) | | | 134 | | | | (121 | ) |
| U.S. Territories | | | | | 44 | | | | 18 | | | | (45 | ) |
| Foreign | | | | | 263 | | | | 112 | | | | 161 | |
| Deferred income taxes | | | | | 84 | | | | 264 | | | | (5 | ) |
| Provision for income taxes | | | | $ | 1,650 | | | $ | 1,780 | | | $ | 930 | |
A reconciliation of the Company’s effective tax rate with the federal statutory rate of 34% for the years ended January 1, 2006, December 26, 2004, and December 28, 2003, is as follows (dollars in thousands):
| | | | 2005
| |
| | 2004
| |
| | 2003
| |
|
|---|
| Tax at U.S. Statutory Rate | | | | $ | 1,586 | | | | 34.0 | % | | $ | 1,519 | | | | 34.0 | % | | $ | 786 | | | | 34.0 | % |
| Non-Deductible Permanent Differences | | | | | 25 | | | | 0.5 | % | | | 3 | | | | 0.1 | % | | | 3 | | | | 0.1 | % |
| Foreign Tax Losses not Benefited | | | | | — | | | | — | | | | 290 | | | | 6.5 | % | | | 165 | | | | 7.1 | % |
| Foreign Tax Credit Taken (not utilized) | | | | | 10 | | | | 0.2 | % | | | (17 | ) | | | (0.4 | )% | | | (68 | ) | | | (2.9 | )% |
Statutory Rate Difference as Compared to
U.S. Statutory Rate | | | | | 21 | | | | 0.5 | % | | | 56 | | | | 1.2 | % | | | 38 | | | | 1.6 | % |
| Other | | | | | 8 | | | | 0.2 | % | | | (71 | ) | | | (1.6 | )% | | | 6 | | | | 0.3 | % |
| Effective Income Tax Rate | | | | $ | 1,650 | | | | 35.4 | % | | $ | 1,780 | | | | 39.8 | % | | $ | 930 | | | | 40.2 | % |
40
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): | |||||||||
| | | | January 1,
2006
| | December 26,
2004
|
|---|
Deferred tax assets
| | | | | | | | | | |
| Inventory adjustments | | | | $ | 208 | | | $ | 207 | |
| Vacation accrual | | | | | 403 | | | | 310 | |
| Deferred rent | | | | | 178 | | | | 178 | |
| Accrued expenses | | | | | 276 | | | | 105 | |
| Net operating loss carryforward—foreign | | | | | 2,592 | | | | 2,836 | |
| Foreign tax credits | | | | | 104 | | | | 114 | |
| Total deferred tax assets | | | | | 3,761 | | | | 3,750 | |
| Valuation allowance | | | | | (2,409 | ) | | | (2,418 | ) |
| | | | | | 1,352 | | | | 1,332 | |
Deferred tax liabilities
| | | | | | | | | | |
| Cash discounts | | | | | (24 | ) | | | (20 | ) |
| Fixed asset basis difference | | | | | (1,009 | ) | | | (988 | ) |
| Other | | | | | (108 | ) | | | (29 | ) |
| Total deferred tax liabilities | | | | | (1,141 | ) | | | (1,037 | ) |
| Net deferred tax assets | | | | $ | 211 | | | $ | 295 | |
| |
Net deferred tax assets are classified on the balance sheet as follows (in thousands): | |||||||||
| | | | January 1,
2006
| | December 26,
2004
|
|---|
| Current assets | | | | $ | 876 | | | $ | 688 | |
| Long-term liabilities, net | | | | | (665 | ) | | | (393 | ) |
| Net deferred tax assets | | | | $ | 211 | | | $ | 295 | |
As of January 1, 2006, we have foreign net operating loss carryforwards (“NOLs”) of approximately $7.5 million, some of which, if not utilized, will begin expiring in the year 2006. The NOLs include approximately $3.9 million related to Curacao and St. Maarten which are not subject to expiration time limits. Our ability to utilize these NOLs 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 $2.6 million of tax benefits recorded for net operating loss carryforwards.
The Company had tax credit carryforwards of $0.1 million as of January 1, 2006, expiring between 2014 and 2015. During 2005, the Company was able to utilize a portion of the tax credit carryforward. The Company expects to be able to fully utilize the remaining tax credit carryforward of $0.1 million and therefore no valuation allowance is provided.
Stock Options
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 2,882 options available for future grant under the 1998 Plan at January 1, 2006.
41
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
A summary of the status of stock option plans as of January 1, 2006, December 26, 2004 and December 28, 2003, and changes during the years then ended are presented below:
| | | | 2005
| | 2004
| | 2003
| |
|---|
| | | | Options
| | Weighted
Average
Exercise
Price
| | Options
| | Weighted
Average
Exercise
Price
| | Options
| | Weighted
Average
Exercise
Price
|
|---|
| Outstanding, beginning of year | | | | | 838,189 | | | $ | 2.88 | | | | 839,243 | | | $ | 2.92 | | | | 921,352 | | | $ | 2.86 | |
| Granted at fair value | | | | | 14,000 | | | | 6.67 | | | | 156,167 | | | | 4.43 | | | | 93,192 | | | | 2.58 | |
| Forfeited | | | | | — | | | | — | | | | (94,291 | ) | | | 6.72 | | | | (93,301 | ) | | | 3.60 | |
| Exercised | | | | | (238,865 | ) | | | 1.79 | | | | (62,930 | ) | | | 1.44 | | | | (82,000 | ) | | | 1.08 | |
| Outstanding, end of year | | | | | 613,324 | | | | 3.39 | | | | 838,189 | | | | 2.88 | | | | 839,243 | | | | 2.92 | |
| |
| Exercisable, end of year | | | | | 611,234 | | | | 3.40 | | | | 826,463 | | | | 2.89 | | | | 809,008 | | | | 2.92 | |
The following summarizes information related to options outstanding and exercisable at January 1, 2006:
| | | | Outstanding
| �� | Exercisable
| |
|---|
Range of
Exercise
Prices
| | | | Options
| | Weighted
Average
Exercise
Price
| | Weighted
Average
Contractual
Life
| | Options
| | Weighted
Average
Exercise
Price
|
|---|
| $1.18–1.88 | | | | | 219,886 | | | $ | 1.64 | | | | 5.87 | years | | | 217,796 | | | $ | 1.64 | |
| 2.00–3.08 | | | | | 180,667 | | | | 2.71 | | | | 7.52 | years | | | 180,667 | | | | 2.71 | |
| 4.38–6.10 | | | | | 159,342 | | | | 5.34 | | | | 7.11 | years | | | 159,342 | | | | 5.34 | |
| 7.00–8.11 | | | | | 53,429 | | | | 7.08 | | | | 2.92 | years | | | 53,429 | | | | 7.08 | |
| | | | | | 613,324 | | | | 3.39 | | | | | | | | 611,234 | | | | 3.40 | |
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. As of January 1, 2006, no rights have become exercisable.
42
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
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. 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 per common share (dollars in thousands):
| | | | Fiscal Year Ended
| |
|---|
| | | | January 1,
2006
| | December 26,
2004
| | December 28,
2003
|
|---|
Numerator:
| | | | | | | | | | | | | | |
| Net income | | | | $ | 3,015 | | | $ | 2,688 | | | $ | 1,381 | |
Denominator:
| | | | | | | | | | | | | | |
Denominator for basic earnings per share—weighted
average shares | | | | | 3,939,190 | | | | 3,731,754 | | | | 3,613,988 | |
Effect of potentially dilutive shares:
| | | | | | | | | | | | | | |
| Stock options | | | | | 229,421 | | | | 184,054 | | | | 56,920 | |
| Denominator for diluted earnings per share—adjusted weighted average shares and assumed conversion of stock options | | | | | 4,168,611 | | | | 3,915,808 | | | | 3,670,908 | |
| Basic earnings per common share | | | | $ | 0.77 | | | $ | 0.72 | | | $ | 0.38 | |
| Diluted earnings per common share | | | | $ | 0.72 | | | $ | 0.69 | | | $ | 0.38 | |
The diluted share calculation for the fiscal years ended January 1, 2006, December 26, 2004 and December 28, 2003, excludes 4,000, 164,947 and 320,875 stock options outstanding, respectively. These options are excluded due to their anti-dilutive effect.
11. | | Geographic Information |
Geographic information pertaining to the Company’s one reporting segment is as follows (in thousands):
| | | | Sales
| | Long-lived
Assets
|
|---|
2005
| | | | | | | | | | |
| United States | | | | $ | 42,222 | | | $ | 1,470 | |
| U.S. Territories and foreign countries | | | | | 177,192 | | | | 17,852 | |
| | | | | $ | 219,414 | | | $ | 19,322 | |
| |
2004
| | | | | | | | | | |
| United States | | | | $ | 43,280 | | | $ | 1,548 | |
| U.S. Territories and foreign countries | | | | | 166,110 | | | | 13,575 | |
| | | | | $ | 209,390 | | | $ | 15,123 | |
| |
2003
| | | | | | | | | | |
| United States | | | | $ | 42,519 | | | $ | 1,745 | |
| U.S. Territories and foreign countries | | | | | 134,547 | | | | 11,916 | |
| | | | | $ | 177,066 | | | $ | 13,661 | |
43
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
The Company has entered into operating leases for its administrative office and certain of its retail 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.
In January 2004, the Company sold and leased back $0.8 million of equipment residing in its reconstructed store in Dededo, Guam. The lease is for seven years with annual rental payments of approximately $0.1 million. In 2005, the Company entered into a capital lease for $1.0 million of equipment at its new St. Croix store. The lease is also for seven years with annual rental payments of approximately $0.2 million.
A summary of the Company’s future minimum lease obligations at January 1, 2006, under noncancellable leases is as follows (in thousands):
Fiscal Year
| | | | Operating
Leases
| | Capital
Lease
|
|---|
| 2006 | | | | $ | 4,893 | | | $ | 321 | |
| 2007 | | | | | 4,525 | | | | 321 | |
| 2008 | | | | | 4,274 | | | | 321 | |
| 2009 | | | | | 3,195 | | | | 321 | |
| 2010 | | | | | 1,941 | | | | 321 | |
| Thereafter | | | | | 11,159 | | | | 280 | |
| Total | | | | $ | 29,987 | | | | 1,885 | |
| Less imputed interest | | | | | | | | | (330 | ) |
| Present value of minimum rental payments | | | | | | | | | 1,555 | |
| Less current portion | | | | | | | | | (226 | ) |
| Capital lease obligation | | | | | | | | $ | 1,329 | |
Rent expense under operating leases for the fiscal years ended January 1, 2006, December 26, 2004 and December 28, 2003, totaled $5.4 million, $5.4 million and $4.7 million, respectively.
13. | | 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 100% of their annual compensation to the plan, subject to annual limitations under the Internal Revenue Code. The Company matches employee contributions at a rate of 25%, up to 15% of their annual compensation. The Company’s matching contributions to the plan approximated $0.1 million in each of fiscal years 2005, 2004 and 2003.
The Company has a Manager Bonus Program, which provides for annual bonuses for managers based on store and company performance. All amounts payable under the program are accrued in the year earned. Accordingly, bonuses accrued under this program totaled $0.7 million, $1.4 million and $0.5 million for fiscal 2005, 2004 and 2003, respectively.
The Company also has a sales incentive bonus program for all store employees based on sales targets and inventory shrink goals. These bonuses are paid monthly and were approximately $0.1 million, $0.2 million and $0.1 million in fiscal 2005, 2004 and 2003, respectively.
44
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
14. | | Quarterly Financial Data (Unaudited) |
The following is a summary of the Company’s unaudited quarterly results of operations:
| | | |
| |
| |
| |
| | Earnings
Per Common
Share
| |
|---|
| | | | Total Store
Weeks
in Period
| | Net Sales
| | Gross
Profit
| | Net
Income
| | Basic
| | Diluted
|
|---|
| | | | (in thousands, except store weeks and per-share data)
| |
|---|
Fiscal 2005(1)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| First quarter | | | | | 143 | | | $ | 53,239 | | | $ | 9,574 | | | $ | 734 | | | $ | 0.19 | | | $ | 0.18 | |
| Second quarter | | | | | 143 | | | | 52,295 | | | | 9,698 | | | | 512 | | | | 0.13 | | | | 0.12 | |
| Third quarter | | | | | 143 | | | | 53,011 | | | | 10,020 | | | | 639 | | | | 0.16 | | | | 0.15 | |
| Fourth quarter | | | | | 154 | | | | 60,869 | | | | 11,509 | | | | 1,130 | | | | 0.28 | | | | 0.27 | |
| |
Fiscal 2004(1)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| First quarter | | | | | 143 | | | $ | 50,078 | | | $ | 9,066 | | | $ | 537 | | | $ | 0.14 | | | $ | 0.14 | |
| Second quarter | | | | | 143 | | | | 50,813 | | | | 9,353 | | | | 637 | | | | 0.17 | | | | 0.16 | |
| Third quarter | | | | | 143 | | | | 51,088 | | | | 9,459 | | | | 554 | | | | 0.15 | | | | 0.14 | |
| Fourth quarter | | | | | 143 | | | | 57,411 | | | | 10,646 | | | | 960 | | | | 0.26 | | | | 0.24 | |
| (1) | | The Company’s fiscal quarters are 13 weeks except fourth quarter 2005, which was a 14 week quarter. |
45
Item 9. | | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
Item 9A. | | Controls and Procedures |
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-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.
Item 9B. | | Other Information |
None.
46
PART III
Item 10. | | Executive Officers and Directors of the Registrant |
Information called for by Part III, Item 10, is incorporated by reference to the information in our proxy statement relating to our 2006 annual meeting of shareholders.
Item 11. | | Executive Compensation |
Information called for by Part III, Item 11, is incorporated by reference to the information in our proxy statement relating to our 2006 annual meeting of shareholders.
Item 12. | | Security Ownership of Certain Beneficial Owners and Management |
Information called for by Part III, Item 12, is incorporated by reference to the information in our proxy statement relating to our 2006 annual meeting of shareholders.
Item 13. | | Certain Relationships and Related Transactions |
Information called for by Part III, Item 13, is incorporated by reference to the information in our proxy statement relating to our 2006 annual meeting of shareholders.
Item 14. | | Principal Accountant Fees and Services |
Information called for by Part III, Item 14, is incorporated by reference to the information in our proxy statement relating to our 2006 annual meeting of shareholders.
47
PART IV
Item 15. | | Exhibits and Financial Statement Schedules |
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. 28 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 29 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.
| | | |
| |
| | Incorporated by Reference
| |
|---|
Exhibit
No.
| | | | Description
| | Filed
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-Q | | | 3.1 | | | | 000-24543 | | | | 08/11/2003 | |
| 4.1 | | | | Rights Agreement between Cost-U-Less, Inc. and ChaseMellon Shareholder Services, L.L.C. as rights agent, dated March 15, 1999 | | | | 8-A | | | 2.1 | | | | 000-24543 | | | | 03/15/1999 | |
| 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 Plan* | | | | 10-K | | | 10.1 | | | | 000-24543 | | | | 04/01/2002 | |
| 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 | | | | Form of Indemnification Agreement* | | | | 10-Q | | | 10.1 | | | | 000-24543 | | | | 08/11/2003 | |
| 10.7 | | | | Credit and Security Agreement, dated April 9, 2003, by and between Cost-U-Less, Inc., CULGUAM, Inc., CULNEV, Inc., CULUSVI, Inc., and Wells Fargo Business Credit, Inc. | | | | 8-K | | | 10.1 | | | | 000-24543 | | | | 04/11/2003 | |
| 10.8 | | | | First Amendment dated as of October 17, 2003 to the Credit and Security Agreement dated April 9, 2003, by and between Cost-U-Less, Inc., CULGUAM, Inc., CULNEV, Inc., CULUSVI, Inc., and Wells Fargo Business Credit, Inc. | | | | 10-K | | | 10.8 | | | | 000-24543 | | | | 03/26/2004 | |
| 10.9 | | | | Second Amendment dated as of March 2, 2004 to the Credit and Security Agreement dated April 9, 2003, by and between Cost-U-Less, Inc., CULGUAM, Inc., CULNEV, Inc., CULUSVI, Inc., and Wells Fargo Business Credit, Inc. | | | | 10-K | | | 10.9 | | | | 000-24543 | | | | 03/26/2004 | |
| 10.10 | | | | Third Amendment dated as of November 11, 2004 to the Credit and Security Agreement dated April 9, 2003, by and between Cost-U-Less, Inc., CULGUAM, Inc., CULNEV, Inc., CULUSVI, Inc., and Wells Fargo Business Credit, Inc. | | | | 10-K | | | 10.10 | | | | 000-24543 | | | | 03/23/2005 | |
48
| | | |
| |
| | Incorporated by Reference
| |
|---|
Exhibit
No.
| | | | Description
| | Filed
Herewith
| | Form
| | Exhibit No.
| | File No.
| | Filing Date
|
|---|
| 10.11 | | | | Fourth Amendment dated as of May 18, 2005 to the Credit and Security Agreement dated April 9, 2003, by and between Cost-U-Less, Inc., CULGUAM, Inc., CULNEV, Inc., CULUSVI, Inc., and Wells Fargo Business Credit, Inc. (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on June 1, 2005) | | | | 8-K | | | 10.1 | | | | 000-24543 | | | | 06/01/2005 | |
| 10.12 | | | | Construction/Permanent Loan Agreement by and among CULUSVI, Inc., Cost-U-Less, Inc. and Banco Popular de Puerto Rico, dated November 6, 1997 | | | | S-1 | | | 10.8 | | | | 333-52459 | | | | 05/12/1998 | |
| 10.13 | | | | Employment Agreement between Cost-U-Less, Inc. and J. Jeffrey Meder, dated October 20, 2004* | | | | 8-K | | | 10.1 | | | | 000-24543 | | | | 10/26/2004 | |
| 10.14 | | | | Lease Agreement between Westmall Limited and CUL (Fiji) Limited, effective March 1, 1998 | | | | S-1/A | | | 10.10 | | | | 333-52459 | | | | 06/05/1998 | |
| 10.15 | | | | Lease Agreement between Fiji Public Service Association and CUL (Fiji) Limited, dated June 4, 1998 | | | | 10-K | | | 10.13 | | | | 000-24543 | | | | 03/26/2004 | |
| 10.16 | | | | Lease Agreement between Baroud Real Estate Development N.V. and C.U.L. (Curacao) N.V., dated April 3, 1998 | | | | S-1 | | | 10.12 | | | | 333-52459 | | | | 05/12/1998 | |
| 10.17 | | | | Ground Lease between Market Square East, Inc. and CULUSVI, Inc., dated October 20, 1997 | | | | S-1 | | | 10.13 | | | | 333-52459 | | | | 05/12/1998 | |
| 10.18 | | | | First Amendment to Ground Lease between Market Square East, Inc. and CULUSVI, Inc., dated November 29, 2005 | | X | | | | | | | | | | | | | | | | |
| 10.19 | | | | Sublease Agreement between Tamuning Capital Investment, Inc. and Cost-U-Less, Inc., dated
July 15, 1994 | | | | S-1 | | | 10.15 | | | | 333-52459 | | | | 05/12/1998 | |
| 10.20 | | | | Lease Agreement between Haleck Enterprises Incorporated and Cost-U-Less, Inc., dated
February 3, 2005 | | | | 8-K | | | 99.1 | | | | 000-24543 | | | | 02/09/2005 | |
| 10.21 | | | | Lease Agreement between Inmostrat Corporation and Cost-U-Less, Inc., dated August 1993 | | | | S-1 | | | 10.17 | | | | 333-52459 | | | | 05/12/1998 | |
| 10.22 | | | | Lease Agreement between Hassan Rahman and
Cost-U-Less, Inc., dated July 30, 1993 | | | | S-1 | | | 10.18 | | | | 333-52459 | | | | 05/12/1998 | |
| 10.23 | | | | Addendum to Lease Agreement between Hassan Rahman and Cost-U-Less, Inc., dated March 21, 2005 | | | | 10-Q | | | 10.2 | | | | 000-24543 | | | | 05/10/2005 | |
| 10.24 | | | | Industrial Real Estate Lease between Hilo Partners and Cost-U-Less, Inc., dated September 1, 1991 | | | | S-1 | | | 10.19 | | | | 333-52459 | | | | 05/12/1998 | |
| 10.25 | | | | Indenture of Lease between H.C.L. Investments, Inc. and Cost-U-Less, Inc., dated August 21, 1992 | | | | 10-K | | | 10.21 | | | | 000-24543 | | | | 04/01/2002 | |
| 10.26 | | | | Amendment to Lease between H.C.L. Investments, Inc. and Cost-U-Less, Inc., dated April 27, 2000 | | | | 10-K | | | 10.22 | | | | 000-24543 | | | | 04/01/2002 | |
| 10.27 | | | | Lease Agreement between Caribe Lumber & Trading N.V. (St. Maarten) and CUL Sint Maarten N.V., dated February 19, 1999 | | | | 10-K | | | 10.24 | | | | 000-24543 | | | | 03/23/2005 | |
| 10.28 | | | | Sublease Agreement between New Breed Distribution Corp of California, Inc. and Cost-U-Less, Inc., dated November 1, 1999 | | | | 10-K/A | | | 10.27 | | | | 000-24543 | | | | 04/05/2000 | |
| 10.29 | | | | Lease Agreement between AMB Property, L.P. and Cost-U-Less, Inc., dated November 12, 1999 | | | | 10-K/A | | | 10.28 | | | | 000-24543 | | | | 04/05/2000 | |
49
| | | |
| |
| | Incorporated by Reference
| |
|---|
Exhibit
No.
| | | | Description
| | Filed
Herewith
| | Form
| | Exhibit No.
| | File No.
| | Filing Date
|
|---|
| 10.30 | | | | First Amendment to Lease Agreement between AMB Property, L.P. and Cost-U-Less, Inc., dated November 21, 2001 | | | | 10-K | | | 10.28 | | | | 000-24543 | | | | 04/01/2002 | |
| 10.31 | | | | Lease Agreement between BDC One Preston Properties Limited Partnership and Cost-U-Less, Inc., dated April 27, 2000 | | | | 10-K | | | 10.26 | | | | 000-24543 | | | | 04/02/2001 | |
| 10.32 | | | | Lease Agreement between Tonko Reyes, Inc., a
Guam corporation and Cost-U-Less, Inc., dated October 22, 2001 | | | | 10-K | | | 10.30 | | | | 000-24543 | | | | 04/01/2002 | |
| 10.33 | | | | Amendment to Lease Agreement between Tonko Reyes, Inc., a Guam corporation and Cost-U-Less, Inc., dated October 22, 2001 | | | | 10-K | | | 10.29 | | | | 000-24543 | | | | 03/26/2004 | |
| 10.34 | | | | Lease Agreement between Sun Life Assurance
Company of Canada and Cost-U-Less, Inc., dated November 18, 2003 | | | | 10-K | | | 10.30 | | | | 000-24543 | | | | 03/26/2004 | |
| 10.35 | | | | Executive Severance Plan* | | | | 10-K | | | 10.31 | | | | 000-24543 | | | | 03/26/2004 | |
| 10.36 | | | | Real Estate Purchase and Sale Agreement dated
April 30, 2004, between Mint Capital, Casco Inc., and Cost-U-Less, Inc. | | | | 10-Q | | | 10.1 | | | | 000-24543 | | | | 08/10/2004 | |
| 10.37 | | | | Summary of Cost-U-Less, Inc. 2005 Incentive
Bonus Program* | | | | 8-K | | | 99.1 | | | | 000-24543 | | | | 12/21/2004 | |
| 10.38 | | | | Summary of Cost-U-Less, Inc. Non-Employee
Director Compensation* | | | | 8-K | | | 99.1 | | | | 000-24543 | | | | 08/02/2005 | |
| 10.39 | | | | Shareholders Agreement dated July 11, 2005 between Cost-U-Less Cayman Holdings, an exempted company incorporated under the laws of the Cayman Islands; Cayman Drug Limited, a company incorporated in the Cayman Islands; Cayman Cost-U-Less Limited, a company incorporated under the laws of the Cayman Islands; Naul Bodden of c/o NCB Consulting Ltd in the Cayman Islands; and Robert Bodden of c/o NCB Consulting Ltd in the Cayman Islands. ** | | | | 10-Q | | | 10.1 | | | | 000-24543 | | | | 11/08/2005 | |
| 16.1 | | | | Letter re: change in certifying accountant | | | | 8-K | | | 16.1 | | | | 000-24543 | | | | 06/24/2003 | |
| 21.1 | | | | Subsidiaries of Cost-U-Less, Inc. | | | | 10-K | | | 21.1 | | | | 000-24543 | | | | 04/01/2002 | |
| 23.1 | | | | Consent of Independent Registered Public
Accounting Firm | | X | | | | | | | | | | | | | | | | |
| 24.10 | | | | Power of Attorney (See page 51) | | X | | | | | | | | | | | | | | | | |
| 31.1 | | | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | X | | | | | | | | | | | | | | | | |
| 31.2 | | | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | X | | | | | | | | | | | | | | | | |
| 32.1 | | | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | X | | | | | | | | | | | | | | | | |
| 32.2 | | | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | X | | | | | | | | | | | | | | | | |
| * | | Management contract or compensatory plan or arrangement |
| ** | | This exhibit (or portions thereof) has been filed separately with the Commission pursuant to an application for confidential treatment. The confidential portions of this Exhibit have been omitted and are marked by an asterisk. |
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | COST-U-LESS, INC. |
| Date: March 29, 2006 | | | | By: /s/ J. Jeffrey Meder
J. Jeffrey Meder
President and Chief Executive Officer
|
Each person whose individual signature appears below hereby authorizes and appoints J. Jeffrey Meder and Martin P. Moore, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file, any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his or her substitute or substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Company and in the capacities indicated below on the 29th day of March 2006.
Signature
| | | | Title
|
|---|
| |
/s/ GEORGE C. TEXTOR
George C. Textor | | | | Chairman of the Board |
| |
/s/ J. JEFFREY MEDER
J. Jeffrey Meder | | | | President, Chief Executive Officer and Director (Principal
Executive Officer) |
| |
/s/ MARTIN P. MOORE
Martin P. Moore | | | | Vice President, Chief Financial Officer, Secretary and
Treasurer (Principal Financial and Accounting Officer) |
| |
/s/ ROBERT C. DONEGAN
Robert C. Donegan | | | | Director |
| |
/s/ DAVID A. ENGER
David A. Enger | | | | Director |
| |
/s/ GARY W. NETTLES
Gary W. Nettles | | | | Director |
51
SCHEDULE II
COST-U-LESS, INC.
VALUATION AND QUALIFYING ACCOUNTS
Description
| | | | Balance at
Beginning
of Year
| | Additions
(Reductions)
| | (1)
Deductions
| | Balance at
End of
Year
|
|---|
Year Ended January 1, 2006
| | | | | | | | | | | | | | | | | | |
Reserves and allowances deducted from asset accounts:
| | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | | | $ | 205,000 | | | | ($15,000 | ) | | $ | 110,000 | | | $ | 80,000 | |
| |
Year Ended December 26, 2004
| | | | | | | | | | | | | | | | | | |
Reserves and allowances deducted from asset accounts:
| | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | | | $ | 208,000 | | | $ | 93,000 | | | $ | 96,000 | | | $ | 205,000 | |
| |
Year Ended December 28, 2003
| | | | | | | | | | | | | | | | | | |
Reserves and allowances deducted from asset accounts:
| | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | | | $ | 224,000 | | | $ | 160,000 | | | $ | 176,000 | | | $ | 208,000 | |
| (1) | | Uncollectible accounts written off, net of recoveries. |
