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 3.4% during fiscal 2006 as compared to fiscal 2005 (as adjusted to reflect a 52-week year). The increase was primarily due to general inflationary trends and related price increases, improvements in market conditions in isolated cases, improvements in our assortment of goods and other operating enhancements.
Store Closing Expenses. Store closing expenses of $0.1 million in fiscal 2005 were due to the costs incurred with relocating our St. Croix store on May 26, 2005.
Net Interest Expense. Interest expense, net, approximated $0.4 million in both fiscal 2006 and fiscal 2005. The additional interest associated with the new debt related to the equipment for the St. Croix relocation and the newly-acquired POS system was more than offset by lower borrowings under the line of credit. Approximately $32,000 in interest was capitalized in fiscal 2006, compared to $104,000 capitalized in the prior year.
Other income (expense). Other income was $6,000 for fiscal 2006 and $42,000 for fiscal 2005 The decrease in fiscal 2006 was primarily due to the receipt of a $0.1 million non-recurring insurance reimbursement in 2005. All other amounts included in other income/(expense) were attributable to gains on foreign currency transactions and translation of intercompany balances for transactions that exceed the permanent investments in those countries.
Income Tax Provision. The provision for income taxes in fiscal 2006 increased to 37.5% of pre-tax income, compared to a provision of 35.4% of pre-tax income in fiscal 2005. The increase in our effective tax rate in fiscal 2006 was primarily due to expenses incurred in the Cayman Islands that were not tax deductible as there are no corporate taxes in the Cayman Islands. This increase was partially offset by the implementation of tax planning strategies in the latter half of fiscal 2005, which enabled us to offset a portion of our other foreign subsidiary losses against foreign subsidiary income.
As of December 31, 2006, we had foreign net operating loss carryforwards (NOLs) of approximately $4.2 million, $0.7 million of which, if not utilized, will begin to expire in fiscal 2010. NOLs totaling $3.3 million expired in 2006. 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 $1.4 million attributable to the $1.4 million of tax benefits recorded for NOLs.
Net Income. Our net income was $2.7 million, or $0.63 per fully diluted share, in fiscal 2006, compared to net income of $3.0 million, or $0.72 per fully diluted share, in fiscal 2005.
Fiscal 2005 (53 weeks) Compared to Fiscal 2004 (52 weeks)
Net Sales. Net sales for the 53 weeks in fiscal 2005 were $219.4 million, an increase of 4.8%, as compared to net sales of $209.4 million for the 52 weeks in fiscal 2004. Approximately 36% of the increase was due to the benefit of an additional week of sales in fiscal 2005 as compared to fiscal 2004. 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 2004.
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.
Gross Margin. Gross margin improved to $40.8 million, or 18.6% of sales, in fiscal 2005 from $38.5 million, or 18.4% of sales, in fiscal 2004. The increase in gross profit as a percent of sales resulted primarily from 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 $28.6 million, or 13.0% of sales, for fiscal 2005 as compared to $26.4 million, or 12.6% of sales, for fiscal 2004. Approximately 30% of the dollar increase in store expenses was attributable to increased payroll and related costs attributable to the higher volume of sales in fiscal 2005. As a percent of store sales, payroll and related costs were 5.2% of store sales in both fiscal 2005 and fiscal 2004. Increased energy (utility) expenses, which were 17% higher than the same period in the prior year, accounted for an additional 28% of the dollar increase in store expenses. We expect energy costs to continue to increase for the foreseeable future. The remainder of the dollar increase was primarily attributable to an increase of 10% in bankcard fees (primarily attributable to higher sales volume), an 8% increase in commercial insurance expense, and increases in depreciation and advertising in fiscal 2005 as compared to fiscal 2004.
General and Administrative Expenses. General and administrative expenses decreased to $6.8 million, or 3.1% of sales, in fiscal 2005, as compared to $7.1 million, or 3.4% of sales, in fiscal 2004. The decrease in general and administrative expenses in fiscal 2005 was primarily due to lower compensation costs largely resulting from
22
decreased performance based awards pursuant to our incentive bonus program as compared to the same awards in the prior year.
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 were 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.
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.
Liquidity and Capital Resources
We currently finance our operations with proceeds from various credit facilities and internally generated funds. In fiscal 2005, we utilized existing working capital to finance the $5.6 million used to purchase the land and construct our new St. Croix store. In December 2006, we entered into an agreement providing for the sale and simultaneous leaseback of the store. The purchase agreement provided for the sale of the building and land on which we currently operate the store to Series B, LLC, an Arizona limited liability company, for $6.2 million. The purchase agreement contained customary representations, warranties, covenants and conditions to close. The purchase agreement was also subject to completion of satisfactory due diligence by Series B. On March 26, 2007, we closed the sale and simultaneous leaseback of the St. Croix store under the purchase agreement. The term of the lease is 15 years and contains two five-year options to extend the term of the lease.
We hope to finance 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 $6.6 million of net cash from operations during fiscal 2006, as compared to $4.1 million in the prior year. The increase of $2.5 million in net cash provided by operating activities in fiscal 2006 compared to the prior year was primarily due to an increase in accounts payable. Accounts payable as a percent of inventory increased to 69% at December 31, 2006 as compared to 65% at January 1, 2006.
Net cash used in investing activities was $4.8 million for fiscal year 2006, as compared to $6.2 million in the prior year. The cash used in investing activities during fiscal 2006 was primarily due to costs associated with renovating and expanding the size of our store in St. Thomas by approximately 6,400 square feet (an increase of approximately 18%) and the replacement of our current POS system with a new and improved version. The cost of building construction and updating equipment associated with our St. Thomas store was approximately $2.0 million
23
and the cost of replacing our current POS system was approximately $1.0 million, a majority of which was refinanced with a capital lease. Additionally, we spent approximately $0.2 million on the remodel of our Kauai store in order to add retail enhancements such as fresh produce by the pound, and we have spent approximately $0.5 million on the development of our store in the Cayman Islands.
We began construction on a new store in the Cayman Islands in late 2006, with a currently estimated completion date late in the third fiscal quarter or in the fourth fiscal quarter of 2007. We anticipate spending approximately $6.0 million to $7.0 million on the building and $2.0 million for equipment during fiscal 2007 for the new store. Although we currently have no plans to open additional stores in new markets during fiscal 2007, we are continuing to explore expansion opportunities in selected markets and additional relocation opportunities for stores in existing markets.
Net cash provided by financing activities in fiscal 2006 of $0.3 million was due to $0.6 million in proceeds from a short-term note that was converted into a capital lease in September 2006, and $0.2 million received from the exercise of common stock options, partially offset by payments on capital leases and long-term debt.
Foreign currency translation resulted in a gains of $27,000 in 2006 and a loss of $24,000 in 2005. 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 March 2007, we replaced our asset based line of credit with a working capital line of credit with Wells Fargo Bank. The new line of credit, which has a two-year term, consists of a $6.0 million credit line with a sublimit for letters of credit and bankers’ acceptances in the amount up to $1.0 million. Borrowings under the new line of credit bear interest at either Prime –0.25% or LIBOR +1.75%. A fee of 0.30% will be charged on the unused portion of the line of credit. The new line of credit contains various covenants, including a requirement that we maintain a minimum net profit, a minimum tangible net worth, and that the outstanding balances under the line of credit shall not exceed 30% of net inventory, excluding inventory in St. Maarten and the Cayman Islands. 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, energy related cost increases, 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 December 31, 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 | | | | $ | 2,011 | | | $ | 267 | | | $ | 534 | | | $ | 534 | | | $ | 676 | |
| Operating leases (1) | | | | | 34,711 | | | | 5,073 | | | | 8,817 | | | | 4,996 | | | | 15,825 | |
| Capital leases | | | | | 2,317 | | | | 434 | | | | 868 | | | | 728 | | | | 287 | |
| Total | | | | $ | 39,039 | | | $ | 5,774 | | | $ | 10,220 | | | $ | 6,258 | | | $ | 16,787 | |
| (1) | | Adjusted to reflect the November 7, 2006, amendment to our San Leandro distribution facility lease to extend the expiration date of the lease from January 31, 2007, to January 31, 2012. |
24
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.
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 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 July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109,” which seeks to reduce the diversity in practice associated with the accounting and reporting for uncertainty in income tax positions. FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to
25
be taken in income tax returns. FIN 48 is effective for fiscal years beginning after December 15, 2006 and we will adopt the new requirements in our fiscal first quarter of 2007. The cumulative effects, if any, of adopting FIN 48 will be recorded as an adjustment to retained earnings as of the beginning of the period of adoption. We believe that the adoption of FIN 48 will not have a significant impact on our results of operations or financial position.
In October 2005, the FASB issued Staff Position No. FAS 13-1, “Accounting for Rental Costs Incurred During a Construction Period” (FSP 13-1). FSP 13-1 requires that rental costs associated with ground or building operating leases that are incurred during a construction period be recognized as rental expense. FSP 13-1 is effective for the first reporting period beginning after December 15, 2005. The adoption of FSP 13-1 did not impact our financial statements for fiscal 2006, as we did not have a lease for a site under construction. However, on April 25, 2006, we announced that we had entered into a twenty-year lease with the developer of Governor’s Square in Grand Cayman to lease land on which to construct and operate a store under the Cost-U-Less name. Rental payments under this lease commenced on April 1, 2006. In accordance with FSP 13-1 and other applicable lease accounting guidance, we will expense rental costs over the lease term, which includes the construction period.
In December 2004, the Financial Accounting Standards Board (the FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123(R)). SFAS No. 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. SFAS No. 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. SFAS No. 123(R) replaces SFAS No. 123 and supersedes APB 25. As originally issued in 1995, SFAS No. 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. Effective with the first fiscal quarter of fiscal 2006, we adopted the fair value recognition provisions of SFAS No. 123R, using the modified-prospective transition method. The adoption of this new accounting standard did not have a significant impact on our results of operations or financial position, as we had a limited amount of unvested options and have a limited amount of options available for issuance in the future.
On November 24, 2004, the FASB issued SFAS No. 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. SFAS No. 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 SFAS No. 151 are effective for inventory costs incurred during fiscal periods beginning after June 15, 2005. Our adoption of SFAS No. 151 in our first quarter of fiscal 2006 did not 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 four foreign countries that function under currencies other than the U.S. dollar. Two of the these foreign countries operate under the Netherlands Antilles Guilder and one of these foreign countries operates under the Caymans Island Dollar, both of which have historically had an exchange rate fixed to the U.S. dollar. However, there can be no assurance that this will continue. If the Netherlands Antilles Guilder and/or the Caymans Island Dollar is allowed to float, an increase in foreign exchange volatility and risk would occur, which could have a materially adverse effect on our business, financial condition and operating results. There is also the possibility that these 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 were 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 December 31, 2006.
27
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 December 31, 2006 and January 1, 2006, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three fiscal years in the period ended December 31, 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 December 31, 2006 and January 1, 2006, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 31, 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 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 13, 2007 (March 26, 2007 as to Note 14)
29
COST-U-LESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
| | | | Fiscal Year Ended
| |
|---|
| | | | December 31,
2006
| | January 1,
2006
| | December 26,
2004
|
|---|
| | | |
| | (53 Weeks)
| |
|
|---|
| Net sales | | | | $ | 222,022 | | | $ | 219,414 | | | $ | 209,390 | |
| Merchandise costs | | | | | 180,347 | | | | 178,613 | | | | 170,866 | |
| Gross profit | | | | | 41,675 | | | | 40,801 | | | | 38,524 | |
Operating expenses:
| | | | | | | | | | | | | | |
| Store | | | | | 29,988 | | | | 28,567 | | | | 26,408 | |
| General and administrative | | | | | 6,605 | | | | 6,828 | | | | 7,103 | |
| Store openings | | | | | 415 | | | | 335 | | | | 188 | |
| Store closings | | | | | — | | | | 81 | | | | — | |
| Total operating expenses | | | | | 37,008 | | | | 35,811 | | | | 33,699 | |
| |
| Operating income | | | | | 4,667 | | | | 4,990 | | | | 4,825 | |
Other income (expenses):
| | | | | | | | | | | | | | |
| Interest expense, net | | | | | (405 | ) | | | (367 | ) | | | (437 | ) |
| Other | | | | | 6 | | | | 42 | | | | 80 | |
| Income before income taxes | | | | | 4,268 | | | | 4,665 | | | | 4,468 | |
| Income tax provision | | | | | 1,600 | | | | 1,650 | | | | 1,780 | |
| Net income | | | | $ | 2,668 | | | $ | 3,015 | | | $ | 2,688 | |
| |
Earnings per common share:
| | | | | | | | | | | | | | |
| Basic | | | | $ | 0.66 | | | $ | 0.77 | | | $ | 0.72 | |
| Diluted | | | | $ | 0.63 | | | $ | 0.72 | | | $ | 0.69 | |
| |
| Weighted average common shares outstanding, basic | | | | | 4,016,469 | | | | 3,939,190 | | | | 3,731,754 | |
| Weighted average common shares outstanding, diluted | | | | | 4,243,339 | | | | 4,168,611 | | | | 3,915,808 | |
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)
| | | | December 31,
2006
| | January 1,
2006
|
|---|
ASSETS
| | | | | | | | | | |
Current assets:
| | | | | | | | | | |
| Cash and cash equivalents | | | | $ | 7,420 | | | $ | 5,304 | |
Accounts receivable (net of allowance of $66 and $80 in 2006 and
2005, respectively) | | | | | 1,133 | | | | 843 | |
| Inventories | | | | | 22,829 | | | | 23,027 | |
| Prepaid expenses | | | | | 200 | | | | 260 | |
| Deferred taxes, net | | | | | 849 | | | | 876 | |
| Total current assets | | | | | 32,431 | | | | 30,310 | |
| Buildings and equipment, net | | | | | 20,881 | | | | 18,550 | |
| Deposits and other assets | | | | | 723 | | | | 772 | |
| Total assets | | | | $ | 54,035 | | | $ | 49,632 | |
| |
LIABILITIES AND SHAREHOLDERS’ EQUITY
| | | | | | | | | | |
| |
Current liabilities:
| | | | | | | | | | |
| Accounts payable | | | | $ | 15,831 | | | $ | 15,062 | |
| Accrued expenses | | | | | 5,337 | | | | 5,402 | |
| Income taxes payable | | | | | 369 | | | | 20 | |
| Line of credit | | | | | — | | | | 80 | |
| Current portion of long-term debt | | | | | 267 | | | | 267 | |
| Current portion capital leases | | | | | 311 | | | | 226 | |
| Total current liabilities | | | | | 22,115 | | | | 21,057 | |
| Deferred rent | | | | | 677 | | | | 527 | |
| Deferred taxes, net | | | | | 899 | | | | 665 | |
| Long-term debt, less current portion | | | | | 1,744 | | | | 2,011 | |
| Capital lease, less current portion | | | | | 1,604 | | | | 1,329 | |
| Total liabilities | | | | | 27,039 | | | | 25,589 | |
| |
| 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, 4,028,718 and 3,990,171 in 2006 and
2005, respectively | | | | | 14,172 | | | | 13,931 | |
| Retained earnings | | | | | 13,594 | | | | 10,926 | |
| Accumulated other comprehensive loss | | | | | (770 | ) | | | (814 | ) |
| Total shareholders’ equity | | | | | 26,996 | | | | 24,043 | |
| Total liabilities and shareholders’ equity | | | | $ | 54,035 | | | $ | 49,632 | |
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 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 | |
| Net income | | | | | — | | | | — | | | | 2,668 | | | | — | | | | 2,668 | |
| Foreign currency translation adjustments | | | | | — | | | | — | | | | — | | | | 44 | | | | 44 | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | 2,712 | |
| Stock based compensation | | | | | — | | | | 20 | | | | — | | | | — | | | | 20 | |
| Exercise of common stock options including income tax benefit | | | | | 38,547 | | | | 221 | | | | — | | | | — | | | | 221 | |
| Balance at December 31, 2006 | | | | | 4,028,718 | | | $ | 14,172 | | | $ | 13,594 | | | $ | (770 | ) | | $ | 26,996 | |
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)
| | | | Fiscal Year Ended
| |
|---|
| | | | December 31,
2006
| | January 1,
2006
| | December 26,
2004
|
|---|
OPERATING ACTIVITIES:
| | | | | | | | | | | | | | |
| Net income | | | | $ | 2,668 | | | $ | 3,015 | | | $ | 2,688 | |
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
| | | | | | | | | | | | | | |
| Depreciation and amortization | | | | | 2,416 | | | | 1,934 | | | | 1,849 | |
| (Gain) loss on buildings and equipment | | | | | 66 | | | | 66 | | | | (31 | ) |
| Deferred tax provision | | | | | 261 | | | | 84 | | | | 264 | |
| Tax benefit from exercise of stock options | | | | | ��� | | | | 684 | | | | 98 | |
| Allowance for doubtful accounts | | | | | (14 | ) | | | (125 | ) | | | (3 | ) |
| Stock option expense | | | | | 20 | | | | 24 | | | | 9 | |
Cash provided by changes in operating assets and liabilities:
| | | | | | | | | | | | | | |
| Insurance receivable | | | | | — | | | | — | | | | 410 | |
| Accounts receivable | | | | | (276 | ) | | | 87 | | | | 36 | |
| Income taxes | | | | | 349 | | | | (7 | ) | | | 555 | |
| Inventories | | | | | 198 | | | | 113 | | | | (3,600 | ) |
| Prepaid expenses | | | | | 60 | | | | 105 | | | | 35 | |
| Deposits and other assets | | | | | 49 | | | | 6 | | | | 26 | |
| Accounts payable | | | | | 671 | | | | (1,310 | ) | | | 1,708 | |
| Accrued expenses | | | | | (65 | ) | | | (535 | ) | | | 1,676 | |
| Deferred rent | | | | | 150 | | | | — | | | | 29 | |
| Net cash provided by operating activities | | | | | 6,553 | | | | 4,141 | | | | 5,749 | |
| |
INVESTING ACTIVITIES:
| | | | | | | | | | | | | | |
| Cash used to purchase buildings and equipment | | | | | (4,804 | ) | | | (6,293 | ) | | | (3,258 | ) |
| Proceeds from sale of buildings and equipment | | | | | 8 | | | | 71 | | | | — | |
| Proceeds from insurance settlement | | | | | — | | | | — | | | | 725 | |
| Net cash used by investing activities | | | | | (4,796 | ) | | | (6,222 | ) | | | (2,533 | ) |
| |
FINANCING ACTIVITIES:
| | | | | | | | | | | | | | |
| Proceeds from exercise of common stock options | | | | | 171 | | | | 428 | | | | 91 | |
| Tax benefit from exercise of stock options | | | | | 50 | | | | — | | | | — | |
| Proceeds from short term note payable (1) | | | | | 608 | | | | — | | | | — | |
| Proceeds (payments) from (on) line of credit, net | | | | | (80 | ) | | | 80 | | | | (960 | ) |
| Increase (decrease) in bank checks outstanding | | | | | 98 | | | | 240 | | | | (816 | ) |
| Proceeds from capital lease obligations | | | | | — | | | | 1,000 | | | | 805 | |
| Payments on capital lease obligations | | | | | (248 | ) | | | (154 | ) | | | (96 | ) |
| Payments on long-term debt | | | | | (267 | ) | | | (266 | ) | | | (267 | ) |
| Net cash provided (used) by financing activities | | | | | 332 | | | | 1,328 | | | | (1,243 | ) |
| Foreign currency translation adjustments | | | | | 27 | | | | (24 | ) | | | 15 | |
| Net increase (decrease) in cash and cash equivalents | | | | | 2,116 | | | | (777 | ) | | | 1,988 | |
Cash and cash equivalents:
| | | | | | | | | | | | | | |
| Beginning of period | | | | | 5,304 | | | | 6,081 | | | | 4,093 | |
| End of period | | | | $ | 7,420 | | | $ | 5,304 | | | $ | 6,081 | |
| |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
| | | | | | | | | | | | | | |
Cash paid during the period for:
| | | | | | | | | | | | | | |
| Interest | | | | $ | 449 | | | $ | 454 | | | $ | 486 | |
| Income taxes | | | | | 985 | | | | 888 | | | | 857 | |
| (1) | | In September 2006, the Company refinanced its short-term note payable with a seven-year capital lease. |
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 December 31, 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. In July 2005, the Cayman Islands Trade and Business Licensing Board granted the Company approval to operate a retail and wholesale business in the Cayman Islands through a controlled subsidiary organized in the Cayman Islands. On April 25, 2006, the Company entered into a long-term lease with the developer of Governor’s Square in Grand Cayman to lease land on which to construct and operate a store under the Cost-U-Less name. Construction on the new store began in late 2006 with a currently estimated completion date late in the third fiscal quarter or in the fourth fiscal quarter of 2007.
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 31, 2006 and December 26, 2004 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, Cayman 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, the Cayman Islands 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.
Cash Equivalents
The Company considers all highly liquid investments with an initial maturity three months or less to be cash equivalents.
34
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
Financial Instruments
The carrying value of financial instruments, including cash, cash equivalents, receivables, payables, and long-term debt, approximates market value at December 31, 2006 and January 1, 2006. 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 asset’s 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 December 31, 2006 and January 1, 2006 are $3.9 million and $3.8 million, respectively, representing the excess of outstanding checks over cash on deposit in the accounts on which the checks were drawn.
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.
35
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
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 2006, 2005 and 2004 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 adopted Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payments,” which revises SFAS No. 123, “Accounting for Stock-Based Compensation,” in the first quarter of fiscal 2006. Prior to the adoption of SFAS No. 123R, the Company accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for stock options. Under the previous guidelines, compensation cost for stock options was 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. Because the Company generally grants stock options to employees at exercise prices equal to fair market value on the date of grant, no significant compensation cost has been recognized for option grants in periods prior to fiscal 2006. As permitted by SFAS No. 123, stock-based compensation was included as a pro forma disclosure in the notes to the consolidated financial statements.
Effective with the first fiscal quarter of fiscal 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R, using the modified-prospective transition method. Under this transition method, stock-based compensation expense is recognized in the consolidated financial statements for stock options granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. Results for prior periods have not been restated, as provided for under the modified-prospective method.
Prior to the adoption of SFAS No. 123R, the Company presented all tax benefits resulting from the exercise of stock options as operating cash inflows in the consolidated statements of cash flows, in accordance with the provisions of the Emerging Issues Task Force Issue No 00-15, “Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified Employee Stock Option.” SFAS No. 123R requires the benefits of tax deductions in excess of the compensation cost recognized for those options to be classified as financing cash inflows rather than operating cash inflows, on a prospective basis. This amount is shown as “Tax benefit from exercise of stock options” on the consolidated statement of cash flows.
36
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
Had stock option compensation expense for the Company’s stock option plan been recognized based on the estimated fair value on the grant date under the fair value methodology allowed by SFAS No. 123, as amended by SFAS No. 148, the Company’s net income and earnings per share amounts would have been as follows:
| | | | 2005
| | 2004
|
|---|
| | | | (Net income in thousands)
| |
|---|
| Net income, as reported | | | | $ | 3,015 | | | $ | 2,688 | |
| 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 | ) |
| Net income pro forma | | | | $ | 2,988 | | | $ | 2,474 | |
| Earnings per common share, basic as reported . | | | | $ | 0.77 | | | $ | 0.72 | |
| Earnings per common share, basic pro forma . | | | | $ | 0.76 | | | $ | 0.66 | |
| Earnings per common share, diluted as reported . | | | | $ | 0.72 | | | $ | 0.69 | |
| Earnings per common share, diluted pro forma . | | | | $ | 0.72 | | | $ | 0.63 | |
Disclosures for fiscal year 2006 are not presented because the amounts are recognized in the consolidated financial statements.
The fair value of each option, for recognition of compensation expense in 2006 and for presentation of pro forma expense in 2005 and 2004, was estimated on the date of grant under the Black-Scholes option-pricing model using the following assumptions:
| | | | 2006
| | 2005
| | 2004
|
|---|
| Risk-free interest rate | | | | | 5.03 | % | | | 3.65 | % | | | 3.13 | % |
| Expected life | | | | | 5 years | | | | 5 years | | | | 5 years | |
| Expected dividend yield | | | | | 0 | % | | | 0 | % | | | 0 | % |
| Volatility | | | | | 69 | % | | | 74 | % | | | 74 | % |
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant with an equivalent remaining term. The expected life of options granted has been estimated based upon the vesting period and historical experience of employee behavior. The Company has have never declared nor paid any cash dividends on its common stock and does not anticipate paying cash dividends in the foreseeable future. The expected volatility was estimated using the historical volatility of the Company’s common stock.
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. 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
In July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109,” which seeks to reduce the diversity in practice associated with the accounting and reporting for uncertainty in income tax positions. FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to
37
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
be taken in income tax returns. FIN 48 is effective for fiscal years beginning after December 15, 2006 and the Company will adopt the new requirements in its fiscal first quarter of 2007. The cumulative effects, if any, of adopting FIN 48 will be recorded as an adjustment to retained earnings as of the beginning of the period of adoption. The Company believes that the adoption of FIN 48 will not have a significant impact on its results of operations or financial position.
In October 2005, the FASB issued Staff Position No. FAS 13-1, “Accounting for Rental Costs Incurred During a Construction Period” (FSP 13-1). FSP 13-1 requires that rental costs associated with ground or building operating leases that are incurred during a construction period be recognized as rental expense. FSP 13-1 is effective for the first reporting period beginning after December 15, 2005. The adoption of FSP 13-1 did not impact the Company’s financial statements for fiscal 2006, as the Company did not have a lease for a site under construction. However, on April 25, 2006, the Company announced that it had entered into a twenty-year lease with the developer of Governor’s Square in Grand Cayman to lease land on which to construct and operate a store under the Cost-U-Less name. Rental payments under this lease commenced on April 1, 2006. In accordance with FSP 13-1 and other applicable lease accounting guidance, the Company will expense rental costs over the lease term, which includes the construction period.
Reclassifications
Certain reclassifications of prior years’ balances have been made for consistent presentation with the current year.
2. | | Buildings and Equipment |
Buildings and equipment consist of the following (in thousands):
| | | | December 31,
2006
| | January 1,
2006
|
|---|
| Buildings | | | | $ | 12,040 | | | $ | 10,783 | |
| Equipment | | | | | 17,449 | | | | 16,375 | |
| Leasehold improvements | | | | | 1,300 | | | | 1,095 | |
| Land improvements | | | | | 1,041 | | | | 839 | |
| Land | | | | | 906 | | | | 906 | |
| Equipment under capital lease | | | | | 2,413 | | | | 1,805 | |
| Buildings, equipment, land and improvements | | | | | 35,149 | | | | 31,803 | |
| Less accumulated depreciation and amortization | | | | | 14,644 | | | | 13,409 | |
| Net book value of depreciable assets | | | | | 20,505 | | | | 18,394 | |
| Construction in progress | | | | | 338 | | | | 72 | |
| Computer system and software development in progress | | | | | 38 | | | | 84 | |
| Total Buildings and equipment | | | | $ | 20,881 | | | $ | 18,550 | |
The Company has maintained a line of credit with Wells Fargo Business Credit since April 9, 2003. On May 26, 2005, the Company entered into a Fourth Amendment to the Credit and Security Agreement (the Fourth Amendment) as it relates to the line of credit. The Fourth Amendment extended the maturity date of the line of credit from April 9, 2006, to May 18, 2007. Additionally, the Fourth Amendment (1) reduced the interest rate to an annual interest rate equal to the “prime rate” as defined by Wells Fargo Bank National Association, (2) reduced the minimum interest charge to not less than $25,000 per calendar year, (3) 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 (4) eliminated the one day interest charge on all payments received on the line of credit. The line of credit was further amended on April 20, 2006, to update specific financial covenants contained in the credit agreement, including minimum book net worth, minimum net income and capital expenditures.
38
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
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 December 31, 2006, there were no amounts outstanding on the line of credit and no letters of credit outstanding. At December 31, 2006, the rate charged by Wells Fargo was 8.25%.
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 contains various covenants, all of which the Company believes it was in compliance with as of December 31, 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 December 31, 2006 is at the prime rate plus 1% (9.25%). As of December 31, 2006, there was a balance owed of $0.9 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 December 31, 2006, there was a balance owed of $1.1 million against this credit facility. Interest on the note at December 31, 2006 is at the prime rate plus 1% (9.25%). 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):
| 2007 | | | | $ | 267 | | | | | |
| 2008 | | | | | 267 | | | | | |
| 2009 | | | | | 267 | | | | | |
| 2010 | | | | | 267 | | | | | |
| 2011 | | | | | 267 | | | | | |
| Thereafter | | | | | 676 | | | | | |
| Total | | | | $ | 2,011 | | | | | |
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):
| | | | 2006
| | 2005
| | 2004
|
|---|
| Interest incurred | | | | $ | 447 | | | $ | 497 | | | $ | 450 | |
| Capitalized interest | | | | | (32 | ) | | | (104 | ) | | | (12 | ) |
| Interest income | | | | | (10 | ) | | | (26 | ) | | | (1 | ) |
| Interest expense, net | | | | $ | 405 | | | $ | 367 | | | $ | 437 | |
39
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
Income before income taxes by jurisdiction is as follows (in thousands):
| | | | 2006
| | 2005
| | 2004
|
|---|
| United States | | | | $ | 827 | | | $ | 1,426 | | | $ | 1,655 | |
| U.S. Territories | | | | | 2,267 | | | | 2,491 | | | | 2,444 | |
| Foreign | | | | | 1,174 | | | | 748 | | | | 369 | |
| Income before income taxes | | | | $ | 4,268 | | | $ | 4,665 | | | $ | 4,468 | |
The provision for income taxes is as follows (in thousands):
| | | | 2006
| | 2005
| | 2004
|
|---|
Current income taxes:
| | | | | | | | | | | | | | |
| United States | | | | $ | 346 | | | $ | 712 | | | $ | 506 | |
| U.S. Territories | | | | | 710 | | | | 854 | | | | 1,010 | |
| Foreign | | | | | 283 | | | | 0 | | | | 0 | |
| Current income taxes | | | | | 1,339 | | | | 1,566 | | | | 1,516 | |
| |
Deferred income taxes
| | | | | | | | | | | | | | |
| United States | | | | | (43 | ) | | | (223 | ) | | | 134 | |
| U.S. Territories | | | | | 94 | | | | 44 | | | | 18 | |
| Foreign | | | | | 210 | | | | 263 | | | | 112 | |
| Deferred income taxes | | | | | 261 | | | | 84 | | | | 264 | |
| Provision for income taxes | | | | $ | 1,600 | | | $ | 1,650 | | | $ | 1,780 | |
A reconciliation of the Company’s effective tax rate with the federal statutory rate of 34% for the years ended December 31, 2006, January 1, 2006, and December 26, 2004, is as follows (dollars in thousands):
| | | | 2006
| |
| | 2005
| |
| | 2004
| |
|
|---|
| Tax at U.S. Statutory Rate | | | | $ | 1,451 | | | | 34.0 | % | | $ | 1,586 | | | | 34.0 | % | | $ | 1,519 | | | | 34.0 | % |
| Non-Deductible Permanent Differences | | | | | 47 | | | | 1.1 | % | | | 25 | | | | 0.5 | % | | | 3 | | | | 0.1 | % |
| Foreign Tax Losses not Benefited (Taken) | | | | | (69 | ) | | | (1.6 | )% | | | — | | | | — | | | | 290 | | | | 6.5 | % |
| Foreign Tax Credit Taken (not utilized) | | | | | — | | | | | | | | 10 | | | | 0.2 | % | | | (17 | ) | | | (0.4 | )% |
Statutory Rate Difference as Compared to
U.S. Statutory Rate | | | | | 131 | | | | 3.1 | % | | | 21 | | | | 0.5 | % | | | 56 | | | | 1.2 | % |
| Other | | | | | 40 | | | | 0.9 | % | | | 8 | | | | 0.2 | % | | | (71 | ) | | | (1.6 | )% |
| Effective Income Tax Rate | | | | $ | 1,600 | | | | 37.5 | % | | $ | 1,650 | | | | 35.4 | % | | $ | 1,780 | | | | 39.8 | % |
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):
| | | | December 31,
2006
| | January 1,
2006
|
|---|
Deferred tax assets
| | | | | | | | | | |
| Inventory adjustments | | | | $ | 232 | | | $ | 208 | |
| Vacation accrual | | | | | 417 | | | | 403 | |
| Deferred rent | | | | | 175 | | | | 178 | |
| Accrued expenses | | | | | 246 | | | | 276 | |
| Net operating loss carryforward—foreign | | �� | | | 1,448 | | | | 2,592 | |
| Foreign tax credits | | | | | — | | | | 104 | |
| Total deferred tax assets | | | | | 2,518 | | | | 3,761 | |
| Valuation allowance | | | | | (1,448 | ) | | | (2,409 | ) |
| | | | | | 1,070 | | | | 1,352 | |
| Deferred tax liabilities | | | | | | | | | | |
| Cash discounts | | | | | (33 | ) | | | (24 | ) |
| Fixed asset basis difference | | | | | (1,056 | ) | | | (1,009 | ) |
| Other | | | | | (31 | ) | | | (108 | ) |
| Total deferred tax liabilities | | | | | (1,120 | ) | | | (1,141 | ) |
| Net deferred tax assets | | | | $ | (50 | ) | | $ | 211 | |
The Company has established a valuation allowance in the full amount of the net deferred tax asset balance as sufficient uncertainty exists regarding its ability to realize such tax assets in the future. The net decrease in the valuation allowance for the year ending December 31, 2006, was due to the expiration of $3.3 million of NOL’s during Fiscal 2006.
Net deferred tax assets are classified on the balance sheet as follows (in thousands):
| | | | December 31,
2006
| | January 1,
2006
|
|---|
| Current assets | | | | $ | 849 | | | $ | 876 | |
| Long-term liabilities, net | | | | | (899 | ) | | | (665 | ) |
| Net deferred tax assets | | | | $ | (50 | ) | | $ | 211 | |
As of December 31, 2006, the Company has foreign net operating loss carryforwards (“NOLs”) of approximately $4.2 million, some of which, if not utilized, will begin expiring in the year 2010. The Company’s ability to utilize these NOLs is dependent upon generating taxable income in the foreign jurisdictions. As a result, the Company has recorded a valuation allowance of $1.4 million attributable to the $1.4 million of tax benefits recorded for net operating loss carryforwards.
The Company had a tax credit carryforward of $0.1 million as of January 1, 2006. During 2006, the Company was able to utilize the full amount of the tax credit carryforward.
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 357 shares available for future grant under the 1998 Plan at December 31, 2006.
41
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
The following table summarizes the stock option transactions during the fiscal year ended December 31, 2006:
| | | | Options
| | Weighted
Average
Exercise
Price
| | Weighted
Average
Contractual
Life
| | Aggregate
Intrinsic
Value (a)
|
|---|
| Outstanding at January 1, 2006 | | | | | 613,324 | | | $ | 3.39 | | | | — | | | | — | |
| Granted at fair value | | | | | 4,000 | | | | 8.09 | | | | — | | | | — | |
| Forfeited | | | | | (1,475 | ) | | | 4.75 | | | | — | | | | — | |
| Exercised | | | | | (38,547 | ) | | | 4.45 | | | | — | | | | — | |
| Outstanding at December 31, 2006 | | | | | 577,302 | | | | 3.35 | | | | 5.10 | | | $ | 2,713,319 | |
| Exercisable at December 31, 2006 | | | | | 577,302 | | | | 3.35 | | | | 5.10 | | | $ | 2,713,319 | |
| (a) | | The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. |
The weighted average fair values of options granted in fiscal years 2006, 2005 and 2004 were $4.97, $3.21 and $1.61, respectively.
The Company recognized stock compensation costs of $20,000, $24,000 and $9,000 and a related tax benefit of $8,000, $8,000, and $4,000 during fiscal years 2006, 2005 and 2004, respectively. The expense recorded for the portion vesting in the current period for the 2,090 options granted prior to, but not vested as of, January 1, 2006, was less than $1,000. These options were fully vested as of December 31, 2006.
Cash proceeds, tax benefits and intrinsic value related to total stock options exercised during fiscal years 2006, 2005 and 2004 were as follows (in thousands):
| | | | 2006
| | 2005
| | 2004
|
|---|
| Proceeds from stock options exercised | | | | $ | 171 | | | $ | 428 | | | $ | 91 | |
| Tax benefit related to stock options exercised | | | | | 50 | | | | 684 | | | | 98 | |
| Intrinsic value of stock options exercised | | | | | 146 | | | | 2,014 | | | | 302 | |
The following summarizes information related to options outstanding and exercisable at December 31, 2006:
| | | | Outstanding
| | Exercisable
| |
|---|
Range of
Exercise
Prices
| | | | Options
| | Weighted
Average
Exercise
Price
| | Weighted
Average Remaining
Contractual
Life
| | Options
| | Weighted
Average
Exercise
Price
|
|---|
| $1.18–1.88 | | | | | 219,090 | | | $ | 1.64 | | | | 4.32 | years | | | 219,090 | | | $ | 1.64 | |
| 2.00–3.08 | | | | | 160,668 | | | | 2.73 | | | | 6.23 | years | | | 160,668 | | | | 2.73 | |
| 4.38–6.10 | | | | | 154,867 | | | | 5.35 | | | | 5.82 | years | | | 154,867 | | | | 5.35 | |
| 7.00–8.11 | | | | | 42,677 | | | | 7.21 | | | | 2.26 | years | | | 42,677 | | | | 7.21 | |
| | | | | | 577,302 | | | | 3.35 | | | | 5.10 | years | | | 577,302 | | | | 3.35 | |
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 December 31, 2006, no rights have become exercisable. The Rights will expire on March 15, 2009, unless earlier redeemed or exchanged by the Company.
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
| |
|---|
| | | | December 31,
2006
| | January 1,
2006
| | December 26,
2004
|
|---|
Numerator:
| | | | | | | | | | | | | | |
| Net income | | | | $ | 2,668 | | | $ | 3,015 | | | $ | 2,688 | |
| Denominator: | | | | | | | | | | | | | | |
Denominator for basic earnings per share—weighted
average shares | | | | | 4,016,469 | | | | 3,939,190 | | | | 3,731,754 | |
Effect of potentially dilutive shares:
| | | | | | | | | | | | | | |
| Stock options | | | | | 226,870 | | | | 229,421 | | | | 184,054 | |
Denominator for diluted earnings per share—adjusted
weighted average shares and assumed conversion of
stock options | | | | | 4,243,339 | | | | 4,168,611 | | | | 3,915,808 | |
| Basic earnings per common share | | | | $ | 0.66 | | | $ | 0.77 | | | $ | 0.72 | |
| Diluted earnings per common share | | | | $ | 0.63 | | | $ | 0.72 | | | $ | 0.69 | |
The diluted share calculations for the fiscal years ended January 1, 2006 and December 26, 2004 exclude outstanding stock options representing 4,000 and 164,947 shares, respectively. These options are excluded due to their anti-dilutive effect. No stock options have been excluded in the stock calculation for the fiscal year ended December 31, 2006.
10. | | Geographic Information |
Geographic information pertaining to the Company’s one reporting segment is as follows (in thousands):
| | | | Sales
| | Long-lived
Assets
|
|---|
2006
| | | | | | | | | | |
| United States | | | | $ | 41,526 | | | $ | 1,534 | |
| U.S. Territories and foreign countries | | | | | 180,496 | | | | 20,070 | |
| | | | | $ | 222,022 | | | $ | 21,604 | |
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 | |
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 generally 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 December 31, 2006, under noncancellable leases is as follows (in thousands):
Fiscal Year
| | | | Operating
Leases
| | Capital
Lease
|
|---|
| 2007 | | | | $ | 5,073 | | | $ | 434 | |
| 2008 | | | | | 4,945 | | | | 434 | |
| 2009 | | | | | 3,872 | | | | 434 | |
| 2010 | | | | | 2,629 | | | | 434 | |
| 2011 | | | | | 2,367 | | | | 294 | |
| Thereafter | | | | | 15,825 | | | | 287 | |
| Total | | | | $ | 34,711 | | | | 2,317 | |
| Less imputed interest | | | | | | | | | (402 | ) |
| Present value of minimum rental payments | | | | | | | | | 1,915 | |
| Less current portion | | | | | | | | | (311 | ) |
| Capital lease obligation | | | | | | | | $ | 1,604 | |
Rent expense under operating leases for the fiscal years ended December 31, 2006, January 1, 2006 and December 26, 2004 totaled $5.6 million, $5.4 million and $5.4 million , respectively.
12. | | Employee Benefit Plans |
The Company maintains a 40l(k) profit-sharing plan covering all eligible employees over the age of 18 with at least six months of service. Participating employees may elect to defer and contribute up to 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 2006, 2005 and 2004.
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 $0.6 million, $0.7 million and $1.4 million for fiscal 2006, 2005 and 2004, 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, $0.1 million and $0.2 million and in fiscal 2006, 2005 and 2004, respectively.
44
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
13. | | 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 2006(1)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| First quarter | | | | | 143 | | | $ | 54,692 | | | $ | 10,199 | | | $ | 758 | | | $ | 0.19 | | | $ | 0.18 | |
| Second quarter | | �� | | | 143 | | | | 53,568 | | | | 10,053 | | | | 475 | | | | 0.12 | | | | 0.11 | |
| Third quarter | | | | | 143 | | | | 54,613 | | | | 10,312 | | | | 522 | | | | 0.13 | | | | 0.12 | |
| Fourth quarter | | | | | 143 | | | | 59,149 | | | | 11,111 | | | | 913 | | | | 0.23 | | | | 0.21 | |
| |
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 | |
| (1) | | The Company’s fiscal quarters are 13 weeks except fourth quarter 2005, which was a 14-week quarter. |
Line of Credit
In March 2007, the Company replaced its asset based line of credit with a working capital line of credit with Wells Fargo Bank. The new line of credit, which has a two-year term, consists of a $6.0 million credit line with a sublimit for letters of credit and bankers’ acceptances in the amount up to $1.0 million. Borrowings under the new line of credit bear interest at either Prime –0.25% or LIBOR +1.75%. A fee of 0.30% will be charged on the unused portion of the line of credit. The new line of credit contains various covenants, including a requirement that we maintain a minimum net profit, a minimum tangible net worth, and that the outstanding balances under the line of credit shall not exceed 30% of net inventory, excluding inventory in St. Maarten and the Cayman Islands. The Company believes that it is currently in compliance with all such covenants.
St. Croix Sale-Leaseback
On December 21, 2006, the Company entered into an agreement providing for the sale and simultaneous leaseback of its St. Croix store. The purchase agreement provided for the sale of the building and land on which it currently operates the store to Series B, LLC, an Arizona limited liability company, for $6.2 million. The purchase agreement contained customary representations, warranties, covenants and conditions to close. The purchase agreement was also subject to completion of satisfactory due diligence by Series B. On March 26, 2007, the Company closed the sale and simultaneous leaseback of the St. Croix store under the purchase agreement. The term of the lease is 15 years and contains two five-year options to extend the term of the lease. The Company has agreed to pay rent at a rate of $42,666.67 per month, with an increase of ten percent at the end of each five-year period.
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 |
St. Croix Sale-Leaseback
On December 21, 2006, we entered into an agreement providing for the sale and simultaneous leaseback of our St. Croix store. The purchase agreement provided for the sale of the building and land on which we currently operate the store to Series B, LLC, an Arizona limited liability company, for $6.2 million. The purchase agreement contained customary representations, warranties, covenants and conditions to close. The purchase agreement was also subject to completion of satisfactory due diligence by Series B.
On March 26, 2007, we closed the sale and simultaneous leaseback of the St. Croix store under the purchase agreement. The term of the lease is 15 years and contains two five-year options to extend the term of the lease. We have agreed to pay rent at a rate of $42,666.67 per month, with an increase of ten percent at the end of each five-year period.
Chief Executive Officer Employment Agreement
On March 26, 2007, we entered into an employment agreement with J. Jeffrey Meder to continue to serve as our president and chief executive officer. The agreement is effective as of March 1, 2007, and continues through February 28, 2011, unless extended by mutual agreement or terminated sooner under the terms of the agreement. The agreement provides for the payment to Mr. Meder of an initial annual salary of $385,000, subject to annual review and adjustment by the board of directors. Mr. Meder will also be eligible for an annual bonus of $100,000, adjusted upward or downward as appropriate, based on the achievement of specified financial targets. In addition, Mr. Meder will receive a bonus of $50,000 for each new store we open.
Either party may terminate the agreement at any time and for any reason upon 30 days written notice to the other party. If we terminate Mr. Meder’s employment prior to the end of the term of the agreement other than for cause, disability or change in control (all as defined in the agreement), he is entitled to receive severance pay equal to twenty-four months’ base salary paid pro-rata on regular company paydays and continuation of benefits for twelve months. If Mr. Meder’s employment is terminated within twelve months following a change of control (as defined in the agreement), he is entitled to a lump sum payment equal to twelve months’ base salary and, the continuation of benefits for twelve months and the immediate vesting of all options or other rights to acquire our common stock.
46
PART III
Item 10. | | Directors, Executive Officers and Corporate Governance |
Information called for by Part III, Item 10, is incorporated by reference to the information in our proxy statement relating to our 2007 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 2007 annual meeting of shareholders.
Item 12. | | Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters |
Information called for by Part III, Item 12, is incorporated by reference to the information in our proxy statement relating to our 2007 annual meeting of shareholders.
Item 13. | | Certain Relationships and Related Transactions, and Director Independence |
Information called for by Part III, Item 13, is incorporated by reference to the information in our proxy statement relating to our 2007 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 2007 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 agreement, dated March 14, 2007 between Cost-U-Less, Inc. and Wells Fargo Bank | | | | 8-K | | | 99.1 | | | | 000-24543 | | | | 03/16/2007 | |
| 10.8 | | | | 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 | |
| 10.9 | | | | Construction/Permanent Loan Agreement by and among CUL (SINT MAARTEN) N.V., Cost-U-Less, Inc., CULUSVI, Inc. and Banco Popular de Puerto Rico, dated December 17, 1999 | | X | | | | | | | | | | | | | | | | |
| 10.10 | | | | Employment Agreement between Cost-U-Less, Inc. and J. Jeffrey Meder, dated October 20, 2004* | | | | 8-K | | | 10.1 | | | | 000-24543 | | | | 10/26/2004 | |
| 10.11 | | | | Lease Agreement between Westmall Limited and CUL (Fiji) Limited, effective March 1, 1998 | | | | S-1/A | | | 10.10 | | | | 333-52459 | | | | 06/05/1998 | |
| 10.12 | | | | Lease Agreement between Fiji Public Service Association and CUL (Fiji) Limited, dated June 4, 1998 | | | | 10-K | | | 10.13 | | | | 000-24543 | | | | 03/26/2004 | |
| 10.13 | | | | 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 | |
| 10.14 | | | | Ground Lease between Market Square East, Inc. and CULUSVI, Inc., dated October 20, 1997 | | | | S-1 | | | 10.13 | | | | 333-52459 | | | | 05/12/1998 | |
| 10.15 | | | | First Amendment to Ground Lease between Market Square East, Inc. and CULUSVI, Inc., dated November 29, 2005 | | | | 10-K | | | 10.18 | | | | 000-24543 | | | | 03/29/2006 | |
48
| | | |
| |
| | Incorporated by Reference
| |
|---|
Exhibit
No.
| | | | Description
| | Filed
Herewith
| | Form
| | Exhibit No.
| | File No.
| | Filing Date
|
|---|
| 10.16 | | | | 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 | |
| 10.17 | | | | Lease Agreement between Haleck Enterprises Incorporated and Cost-U-Less, Inc., dated
February 3, 2005 | | | | 8-K | | | 99.1 | | | | 000-24543 | | | | 02/09/2005 | |
| 10.18 | | | | Lease Agreement between Inmostrat Corporation and Cost-U-Less, Inc., dated August 1993 | | | | S-1 | | | 10.17 | | | | 333-52459 | | | | 05/12/1998 | |
| 10.19 | | | | 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 | |
| 10.20 | | | | 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 | |
| 10.21 | | | | 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 | |
| 10.22 | | | | 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 | |
| 10.23 | | | | 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 | |
| 10.24 | | | | 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 | |
| 10.25 | | | | 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 | |
| 10.26 | | | | Amendment to Lease Agreement between AMB
Partners II, L.P. and Cost-U-Less, Inc., dated November 7, 2006 | | X | | | | | | | | | | | | | | | | |
| 10.27 | | | | 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 | |
| 10.28 | | | | 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 | |
| 10.29 | | | | 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 | |
| 10.30 | | | | Executive Severance Plan* | | | | 10-K | | | 10.31 | | | | 000-24543 | | | | 03/26/2004 | |
| 10.31 | | | | 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 | |
| 10.32 | | | | Summary of Cost-U-Less, Inc. 2005 Incentive
Bonus Program* | | | | 8-K | | | 99.1 | | | | 000-24543 | | | | 12/21/2004 | |
| 10.33 | | | | Summary of Cost-U-Less, Inc. Non-Employee
Director Compensation* | | | | 8-K | | | 99.1 | | | | 000-24543 | | | | 08/02/2005 | |
49
| | | |
| |
| | Incorporated by Reference
| |
|---|
Exhibit
No.
| | | | Description
| | Filed
Herewith
| | Form
| | Exhibit No.
| | File No.
| | Filing Date
|
|---|
| 10.34 | | | | 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 | |
| 10.35 | | | | Lease Agreement between Governor’s Square Limited and Cayman Cost U Less Limited dated April 19, 2006 ** | | | | 10-Q | | | 10.1 | | | | 000-24543 | | | | 08/11/2006 | |
| 10.36 | | | | Purchase Agreement and Escrow Instructions between Cost-U-Less, Inc., a Washington corporation, as seller, and Series B, LLC, as buyer, dated December 21, 2006 | | X | | | | | | | | | | | | | | | | |
| 21.1 | | | | Subsidiaries of Cost-U-Less, Inc. | | X | | | | | | | | | | | | | | | | |
| 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 28, 2007 | | | | 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 28th day of March 2007.
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 December 31, 2006 | | | | |
Reserves and allowances deducted from asset accounts: | | | | |
Allowance for doubtful accounts | $80,000 | ($8,000) | $6,000 | $66,000 |
| | | | |
| | | | |
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 |
_________________________
(1) | Uncollectible accounts written off, net of recoveries. |
1
