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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as
permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
COST-U-LESS, INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
CALCULATION OF FILING FEE
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Per unit price or other Proposed
underlying value of maximum
Title of each class of Aggregate number of transaction computed aggregate
securities to which securities to which pursuant to Exchange Act value of
transaction applies: transaction applies Rule 0-11: transaction Total Fee Paid
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[ ] Fee paid previously with preliminary materials.
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[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and indentify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule, or Registration Statement no.:
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(3) Filing Party:
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(4) Date Filed:
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[LOGO OF COST-U-LESS]
April 6, 2001
Dear Cost-U-Less, Inc. Shareholders:
I am pleased to invite you to the Cost-U-Less Annual Meeting of
Shareholders. This year's annual meeting will be at 10:00 a.m. on Tuesday, May
8, 2001 at the Doubletree Hotel (Factoria Room), 300 112th Ave. S.E.,
Bellevue, Washington.
The accompanying Notice of Annual Meeting of Shareholders and the Proxy
Statement describe the formal business to be conducted at the meeting.
We hope you can join us on May 8th. Whether or not you can attend, please
read the attached Proxy Statement. When you have done so, please mark your
votes on the enclosed proxy card, sign and date the proxy card, and return it
to us in the enclosed envelope. Your vote is important, so please return your
proxy card promptly.
Sincerely,
/s/ Martin P. Moore
Martin P. Moore
Secretary
COST-U-LESS, INC.
8160-304th Avenue S.E., Building 3, Suite A
Preston, Washington 98050
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held Tuesday, May 8, 2001
Dear Cost-U-Less Shareholders:
On Tuesday, May 8, 2001, Cost-U-Less, Inc. will hold its Annual Meeting of
Shareholders at the Doubletree Hotel (Factoria Room), 300 112th Ave. S.E.,
Bellevue, Washington. The Annual Meeting will begin at 10:00 a.m. The record
date for the meeting has been set at March 28, 2001. At the Annual Meeting we
will ask you to:
(1) Consider an amendment to, and an increase in, the maximum number of
shares that may be issued under the Company's 1998 Stock Incentive
Compensation Plan;
(2) Ratify the appointment of Ernst & Young LLP as our independent auditors
for the fiscal year ending December 30, 2001; and
(3) Transact any other business properly presented at the meeting.
Only shareholders that owned stock at the close of business on March 28,
2001 will be entitled to notice of and to vote at this meeting or any
adjournments that may take place. For ten days prior to the meeting, a
complete list of shareholders entitled to vote at the meeting will be
available for examination by any shareholder, for any purpose related to the
meeting, during ordinary business hours at the Company's principal offices.
To assure your representation at the Annual Meeting, you are urged to
complete, sign, date, and return the enclosed proxy card as soon as possible
in the enclosed postage prepaid envelope. Your stock will be voted in
accordance with the instructions you give on your proxy card. You may, of
course, attend the Annual Meeting and vote in person even if you have
previously returned your proxy card.
By Order of the Board of Directors,
/s/ Martin P. Moore
Martin P. Moore
Secretary
COST-U-LESS, INC.
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PROXY STATEMENT
For Annual Meeting of Shareholders to be held on May 8, 2001
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The Board of Directors of Cost-U-Less, Inc. ("Cost-U-Less" or the "Company")
is sending you this Proxy Statement in connection with its solicitation of
proxies for use at the Cost-U-Less 2001 Annual Meeting of Shareholders. The
Annual Meeting will be held at the Doubletree Hotel (Factoria Room), 300 112th
Ave. S.E., Bellevue, Washington, on Tuesday, May 8, 2001 at 10:00 a.m. This
Proxy Statement and accompanying form of proxy are being first sent or given
to the shareholders of Cost-U-Less on or about April 6, 2001.
SOLICITATION AND VOTING OF PROXIES
Record Date and Outstanding Shares
Only those shareholders that owned shares of the Company's common stock at
the close of business on March 28, 2001, the record date for the Annual
Meeting, are entitled to vote at the annual meeting. On the record date, there
were 3,606,376 shares of the Company's common stock outstanding, all of which
are entitled to vote with respect to all matters to be acted upon at the
annual meeting.
Quorum
The Company's Bylaws provide that a majority of all of the shares of the
stock entitled to vote, whether present in person or represented by proxy,
shall constitute a quorum for the purpose of transacting business. Votes for
and against, abstentions and "broker non-votes" will each be counted as
present for purposes of determining the presence of a quorum.
Revocability of Proxies
All valid proxies received before the meeting will be exercised. If you give
your proxy to Cost-U-Less, you have the power to revoke it at any time before
it is exercised. Your proxy may be revoked by:
. notifying the Secretary of Cost-U-Less in writing before the Annual
Meeting;
. delivering to the Secretary of Cost-U-Less before the Annual Meeting a
signed proxy with a later date; or
. attending the Annual Meeting and voting in person.
Voting
You are entitled to one vote for each share of common stock you hold. The
proposal to amend the Company's 1998 Stock Incentive Compensation Plan and the
proposal to ratify the appointment of Ernst & Young LLP as our independent
auditors for fiscal 2001 will be approved if the number of votes cast in favor
of the applicable proposal by holders of common stock present, in person or by
proxy, and entitled to vote at the Annual Meeting, exceeds the number of votes
cast against it. Abstentions from voting will have no effect on these
proposals since they will not represent votes cast at the Annual Meeting for
the purpose of voting on such proposals.
If your shares are represented by proxy, they will be voted in accordance
with your directions. If your proxy is signed and returned without any
direction given, your shares will be voted (i) "FOR" the amendment to the
Company's 1998 Stock Incentive Compensation Plan, and (ii) "FOR" the
ratification of the appointment of
1
Ernst & Young LLP as auditors for Cost-U-Less for 2001. Cost-U-Less is not
aware, as of the date of this Proxy Statement, of any matters to be voted on
at the Annual Meeting other than as stated in the Proxy Statement and the
accompanying Notice of Annual Meeting of Shareholders. If any other matters
are properly brought before the Annual Meeting, the enclosed proxy gives
discretionary authority to the persons named in it to vote the shares in their
best judgment.
Brokers who hold shares for the accounts of their clients who have not been
given specific voting instructions as to a matter by their clients may vote
their clients' proxies in their own discretion.
Solicitation of Proxies
Proxies will be solicited by certain of the directors, officers and regular
employees of Cost-U-Less, without payment of any additional compensation to
them. The Company may also request banks and brokers, and other custodians,
nominees and fiduciaries, to solicit their customers who have stock of the
Company registered in the names of such persons and will reimburse them for
their reasonable out-of-pocket costs. Proxies will be solicited by personal
interview, mail and telephone. Any costs relating to such solicitation of
proxies will be borne by Cost-U-Less. In addition, Cost-U-Less may reimburse
brokerage firms and other persons representing beneficial owners of shares of
common stock for their expenses in forwarding solicitation materials to such
beneficial owners.
INFORMATION ABOUT COST-U-LESS
Directors
This section sets forth for the Company's current directors, including
information concerning their age and background.
Director
Name Position With the Company Age Since
---- ------------------------- --- --------
Class I directors nominated
for election at the 2001
Annual Meeting of
Shareholders:
None
Class II directors whose
terms expire at the 2002
Annual Meeting of
Shareholders:
David A. Enger............. Chairman of the Board 55 1993
Gary W. Nettles............ Director 49 1996
Class III directors whose
terms expire at the 2003
Annual Meeting of
Shareholders:
Wayne W. Keener............ Director 63 1989
George C. Textor........... Director 56 1998
J. Jeffrey Meder........... President and Chief Executive Officer 49 1999
Continuing Directors Until 2002
David A. Enger has been a Director of Cost-U-Less since 1993 and has served
as Chairman of the Board since 2000. Mr. Enger has served since 1992 as
Executive Vice President of Keener's, one of the Northwest's largest
distributors of fresh foods. In 1990, Mr. Enger founded the Business & Banking
Institute, where he currently engages in business and banking consulting and
training. From 1980 to 1990, Mr. Enger served as a principal of Management
Advisory Services, Inc., a business and banking consulting firm which he co-
founded in 1980. From 1976 to 1980, Mr. Enger was a vice president of Seafirst
Bank. Mr. Enger serves as a director of Keener's, Colmac Industries, Inc., a
dry-cleaning equipment manufacturer, and Colmac Coil Manufacturing, Inc., a
heating and air-conditioning coils manufacturer.
Gary W. Nettles has been a Director of Cost-U-Less since 1996. Mr. Nettles
is a certified public accountant and President of Guchereau & Nettles, an
accounting firm located in Costa Mesa, California, where he has worked since
1987.
2
Continuing Directors Until 2003
Wayne V. Keener has been a Director of Cost-U-Less since 1989. Since 1960,
Mr. Keener has been the President and Chief Executive Officer of Keener's,
Inc.--dba K&N Meats ("Keener's"), of which he has been a 50% owner since 1989.
Mr. Keener serves as a director of both the National Meat Association and the
North American Meat Association.
George C. Textor has been a Director of Cost-U-Less since January, 1998. Mr.
Textor is a general partner of Capstan Partners, a Seattle-based private
equity investment fund which he co-founded in 1988. From 1982 to 1988, Mr.
Textor was a founding general partner of Cable Howse & Ragen (now Ragen
MacKenzie Group Incorporated), an investment banking and brokerage firm
located in the Pacific Northwest. Mr. Textor serves as a director of Pyramid
Breweries, Inc., a public company that makes specialty beers.
J. Jeffrey Meder became the President and CEO of Cost-U-Less in September,
1999. Previously, he served as co-founder and President/Chief Executive
Officer of Drug Emporium, N.W. He had provided overall direction and vision
for that Company since 1981. During that time, he led the growth of the
Company to twenty stores with over $180 million in sales and employing
approximately 1,600 employees in the Pacific Northwest. Prior to co-founding
Drug Emporium, N.W., Mr. Meder was employed in the banking industry from 1975-
1981. His last position in banking was Assistant Vice President in the
Commercial Division of Huntington National Bank in Columbus, Ohio, where his
responsibilities included business development and work-out loan situations.
Meetings of the Board of Directors
During the fiscal year ended December 31, 2000, the Board of Directors of
the Company held six meetings, the Audit Committee of the Board held three
meetings and the Compensation Committee of the Board held three meetings. The
Company has no standing nominating committee of the Board. No director
attended fewer than 75% of the total number of meetings of the Board and all
of the committees of the Board on which such director served held during that
period.
The members of the Audit Committee during fiscal 2000 were Mr. Enger, Mr.
Keener, Mr. Nettles and Mr. Textor. Mr. Textor ceased to be a member of the
Audit Committee in August 2000. The functions of the Audit Committee include,
among others: recommending to the Board the retention of independent public
auditors; reviewing and approving the planned scope, proposed fee arrangements
and results of the Company's annual audit; reviewing the adequacy of
accounting and financial controls; and reviewing the independence of the
Company's auditors. For additional information concerning the Audit Committee,
see "Report of the Audit Committee" and "Principal Accounting Firm Fees."
The members of the Compensation Committee during fiscal 2000 were Mr. Enger,
Mr. Keener, Mr. Nettles and Mr. Textor. Mr. Keener and Mr. Nettles ceased to
be members of the Compensation Committee in August 2000. The Compensation
Committee reviews and determines the salary and bonus criteria of the Chief
Executive Officer and approves stock option grants to all executive officers.
For additional information about the Compensation Committee, see "Report of
the Compensation Committee on Executive Compensation" and "Executive
Compensation and Other Matters" below.
Compensation of Directors
Non-employee directors of Cost-U-Less are paid $1,500 for each Board of
Directors meeting attended and $250 for each committee meeting attended. Cost-
U-Less also reimburses directors for travel expenses in attending meetings.
Cost-U-Less has granted nonqualified stock options to its directors pursuant
to individual director stock option agreements. In December 1998, the
Directors were granted a 10-year, immediately exercisable option to purchase
10,331 shares of common stock at an exercise price equal to the fair market
value of the underlying shares on, and a 10-year option to purchase 2,951
shares of common stock at an exercise price equal to the fair market value of
the underlying shares, vesting ratably over a five-year period.
3
Each director received an automatic annual grant of options to purchase
1,000 shares of common stock under the Company's 1998 Stock Incentive
Compensation Plan on the date of last year's Annual Shareholders' Meeting. The
Directors will again receive an automatic annual grant of options to purchase
1,000 shares of common stock under the Company's 1998 Stock Incentive
Compensation Plan on the date of the 2001 Annual Shareholders' Meeting.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 20, 2001, certain information
regarding the beneficial ownership of Cost-U-Less common stock by:
. each person known by Cost-U-Less to own beneficially 5% or more of our
common stock;
. each director and nominee for director of Cost-U-Less;
. each executive officer of Cost-U-Less for whom compensation information
is given in the Summary Compensation Table in this Proxy Statement; and
. all directors and executive officers of Cost-U-Less as a group.
To the knowledge of Cost-U-Less, the beneficial owners listed below have
sole voting and investment power with respect to the shares shown as
beneficially owned.
Outstanding Shares
of Common Stock Percent of
Beneficial Owner(1) Beneficially Owned(2) Class
------------------- --------------------- ----------
The Kula Fund(3)............................. 357,000 9.6%
Wayne V. Keener(4)........................... 246,964 6.8
Gary W. Nettles(5)........................... 82,081 2.3
J. Jeffrey Meder(6).......................... 70,000 1.9
Martin P. Moore(7)........................... 42,987 1.2
Roy W. Sorensen(8)........................... 35,000 1.0
David A. Enger(9)............................ 21,282 *
George C. Textor(10)......................... 16,282 *
Michael T. Scalzo(11)........................ 14,745 *
William W. Lofgren(12)....................... 14,540 *
All directors and executive officers as a
group (9 persons)(13)....................... 900,881 22.9%
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* Less than 1% of the outstanding shares of common stock.
(1) All beneficial owners can be reached c/o Cost-U-Less, Inc., 8160-304th
Ave., S.E., Bldg. 3, Ste. A, Preston, Washington 98050.
(2) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission and includes shares over which the
indicated beneficial owner exercises voting and/or investment power.
Shares of common stock subject to options currently exercisable or
exercisable within 60 days of March 20, 2001 are deemed outstanding for
computing the percentage ownership of the person holding the options
but are not deemed outstanding for computing the percentage ownership
of any other person.
(3) Based on the Company's most recent information. Includes 117,000 shares
subject to a warrant exercisable within 60 days of March 20, 2001.
(4) Based on the Company's most recent information and publicly filed
information. Includes 221,387 shares held by Keener's and 25,282 shares
subject to options exercisable within 60 days of March 20, 2001.
Mr. Keener has sole voting and investment power with respect to the
shares held by Keener's.
(5) Based on the Company's most recent information and publicly filed
information. Includes 11,807 shares held by the Alyce Christene
Gangwish Irrevocable Trust of 1995, 33,582 shares held by The Lenz
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Grandchildren's Irrevocable Trust of 2000, 8,855 shares held by the
Brittney Elizabeth Lenz Irrevocable Trust of 1995, and 8,855 shares held
by the Cody Allan Lenz Irrevocable Trust of 1995 (for each of which Mr.
Nettles acts as Co-Trustee), 700 shares held by Guchereau & Nettles SEP
and 18,282 shares subject to options exercisable within 60 days of March
20, 2001.
(6) Includes 50,000 shares subject to options exercisable within 60 days of
March 20, 2001.
(7) Includes 21,500 shares subject to options exercisable within 60 days of
March 20, 2001.
(8) Includes 30,000 shares subject to options exercisable within 60 days of
March 20, 2001.
(9) Represents 21,282 shares subject to options exercisable within 60 days
of March 20, 2001.
(10) Represents 16,282 shares subject to options exercisable within 60 days
of March 20, 2001.
(11) Includes 8,730 shares subject to options exercisable within 60 days of
March 20, 2001.
(12) Represents 14,540 shares subject to options exercisable within 60 days
of March 20, 2001.
(13) Includes 322,898 shares subject to warrants and options exercisable
within 60 days of March 20, 2001.
EXECUTIVE OFFICERS
The following persons are executive officers of Cost-U-Less as of March 20,
2001, who will serve in the capacities noted until the election and
qualification of their successors. Each officer named below is expected to be
re-elected at the Board meeting to be held on May 8, 2001.
Name Age Positions and Offices With Cost-U-Less
---- --- --------------------------------------
J. Jeffrey Meder(1)..... 49 President and Chief Executive Officer
Roy W. Sorensen(2)...... 47 Vice President, Chief Operating Officer
Martin P. Moore(3)...... 44 Vice President, Chief Financial Officer, Secretary & Treasurer
William W. Lofgren(4)... 38 Vice President, Information Systems
Michael T. Scalzo(5).... 36 Vice President, Business Development
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(1) For a biographical summary of J. Jeffrey Meder, see "Directors."
(2) Roy W. Sorensen joined the Company as Vice President, Chief Financial
Officer of Cost-U-Less in September 1999 before becoming Vice President,
Chief Operating Officer in August 2000. Previously, Mr. Sorensen served
as CFO and Treasurer of Drug Emporium NW. In this capacity, he played a
key role in successfully negotiating the sale of the company in July 1998
to Longs Drugs, a $3.1 billion regional retailer. He also has held
various executive financial positions with other companies in the Pacific
Northwest, including Seattle Lighting Fixture Co., Egghead Software, and
Seafirst Corporation. Mr. Sorensen holds a CPA license, and received his
MBA from the University of Puget Sound.
(3) Martin P. Moore joined the Company in December 1998 as corporate
controller before becoming Vice President, Chief Financial Officer in
August 2000. Previously, Mr. Moore served as Manager of Corporate
Planning & Reporting at ATL Ultrasound, Inc., a $500 million medical
equipment manufacturer that was acquired by Philips Electronics in 1998.
Mr. Moore received his MBA from Seattle University in 1993.
(4) William W. Lofgren joined the Company in 1992 as information systems
manager before becoming operations manager in 1996 with overall
operational responsibility for Cost-U-Less' stores. He was promoted to
Vice President, Information Systems in April 1999. Previously, Mr.
Lofgren served as electronic maintenance manager of Costco from 1986 to
1991.
(5) Michael T. Scalzo assisted in creating Cost-U-Less' buying office and was
one of the original buyers for the Company in 1992. Mr. Scalzo became
general merchandise manager in 1995, was promoted to Vice President,
Merchandising in April 1999, and then to Vice President, Business
Development in March 2000.
5
SUMMARY COMPENSATION TABLE
Executive Compensation
The following table sets forth certain compensation information as to (i)
the Chief Executive Officer of Cost-U-Less, (ii) the four other most highly
compensated executive officers and (iii) one other executive officer who would
have been included among the four other most highly compensated executive
officers had he continued to serve as an executive officer through December
31, 2000 (the "Named Executive Officers") for services rendered in all
capacities for Cost-U-Less during the fiscal years ended December 31, 2000,
December 26, 1999 and December 27, 1998.
Long-Term
Compensation
Awards
Annual ------------
Compensation Shares All Other
------------------ Underlying Compensation
Name and Principal Position Year Salary Bonus ($) Options (#) ($)(1)
--------------------------- ---- -------- --------- ------------ ------------
J. Jeffrey Meder(2).......... 2000 $229,387 $11,498 50,000 $15,859
President, Chief Executive 1999 67,500 8,975 -- 2,500
Officer 1998 -- -- -- --
Roy W. Sorensen(3)........... 2000 $127,347 $ 6,387 30,000 $ 1,297
Vice President, Chief 1999 30,289 3,515 -- --
Operating Officer 1998 -- -- -- --
Martin P. Moore(4)........... 2000 $ 95,250 $ 4,797 60,000 $ 2,625
Vice President, Chief 1999 80,077 22,500 2,500 2,500
Financial Officer, 1998 4,038 -- 2,500 --
Secretary and Treasurer
Michael T. Scalzo(5)......... 2000 $124,808 $33,090 5,000 $ 2,625
Vice President, Business 1996 120,000 13,104 10,000 2,500
Development 1998 114,787 11,324 4,451 2,500
William W. Lofgren(6)........ 2000 $123,750 $ 6,050 -- $ 2,625
Vice President, Information 1999 110,000 12,012 10,000 2,500
Systems 1998 107,787 10,570 2,000 2,500
Michael J. Rose(7)........... 2000 $176,923 -- -- $ 8,981
Former Chairman of the Board 1999 250,000 -- -- 3,700
1998 250,000 $37,000 28,041 5,860
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(1) Consists of matching contributions to the Cost-U-Less 401(k) profit-
sharing plan, auto allowances and payments of disability insurance
premiums, if applicable. Mr. Rose's 2000 other compensation includes
$7,250 for board services.
(2) J. Jeffrey Meder joined the Company in September 1999.
(3) Roy W. Sorensen joined the Company in September 1999.
(4) Martin P. Moore joined the Company in December 1998 and was promoted to
Vice President, Chief Financial Officer, Secretary and Treasurer in
August 2000.
(5) Michael T. Scalzo was promoted to Vice President, Business Development in
March 2000.
(6) William W. Lofgren was promoted to Vice President, Information Systems in
April 1999.
(7) Michael J. Rose left the Company in August 2000.
6
Stock Option Grants in Fiscal 2000
The following table sets forth certain information regarding options granted
during the fiscal year ended December 31, 2000, to the Named Executive
Officers.
OPTION GRANTS IN LAST FISCAL YEAR
Potential
Realizable Value
at Assumed
Individual Grants Annual Rates of
-------------------------------------------------------------- Stock Price
Number of Percent of Total Appreciation for
Securities Underlying Options Granted Exercise Option Term(4)
Options to Employees Price Expiration ----------------
Name Granted (#)(1) in Fiscal Year ($/Share)(2) Date(3) 5% ($) 10% ($)
---- --------------------- ---------------- ------------ ---------- ------- --------
J. Jeffrey Meder ....... 50,000 28.1% $1.438 10/23/10 $45,218 $114,590
Roy W. Sorensen ........ 30,000 16.8% $1.438 10/23/10 27,131 68,754
Martin P. Moore ........ 60,000 33.7% $1.500 7/10/10 56,601 143,437
Michael T. Scalzo ...... 5,000 2.8% $2.625 3/6/10 8,254 20,918
William W. Lofgren ..... -- -- -- -- -- --
Michael J. Rose......... -- -- -- -- -- --
- --------
(1) Per the terms of the Cost-U-Less Stock Option Plan of Issuance. Mr. Meder
and Mr. Sorensen's options vested fully upon the date of grant. Mr.
Moore's options vest at the rate of 1/3 on the date of grant and 1/3 per
year thereafter. Mr. Scalzo's options vest ratably over five years.
(2) The exercise price of the options is equal to the closing price of the
common stock as of the day of grant.
(3) All options granted in 2000 terminate 10 years from the date of grant.
(4) The future values of current year grants assume appreciation of 5% and 10%
per year over the 10-year option period, as required by applicable
regulations of the Securities and Exchange Commission and, therefore, are
not intended to forecast possible future appreciation, if any, of the
common stock price. The actual values realized depends on the future
performance of the common stock and overall market conditions, and may be
greater or less than the potential realizable values set forth in the
table.
Stock Option Exercises in Fiscal 2000 and Year-End Values
The following table sets forth certain information concerning exercises of
options to purchase the Company's common stock in the fiscal year ended
December 31, 2000, and unexercised options held as of December 31, 2000, by
the Named Executive Officers.
Number of
Securities Underlying Value of Unexercised
Shares Unexercised Options at In-the-Money Options at
Acquired on Fiscal Year-End (#) Fiscal Year-End ($)(1)
Exercise Value ------------------------- -------------------------
Name (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------ ----------- ------------- ----------- -------------
J. Jeffrey Meder ....... -- -- 50,000 -- -- --
Roy W. Sorensen ........ -- -- 30,000 -- -- --
Martin P. Moore......... -- -- 21,500 43,500 -- --
Michael T. Scalzo ...... -- -- 6,730 15,672 -- --
William W. Lofgren ..... -- -- 12,540 9,790 -- --
Michael J. Rose......... -- -- -- -- -- --
- --------
(1) Stock options are valued based upon the closing price of a share of common
stock as reported on the Nasdaq National Market on December 31, 2000
($1.0312 per share).
7
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
In September 1999, the Company entered into an Executive Compensation and
Benefits Agreement with J. Jeffrey Meder, the President and Chief Executive
Officer of the Company (the "Agreement"), effective on September 1, 1999 (the
"Effective Date"). The Agreement provides for the payment to Mr. Meder of a
salary of $225,000 on an annualized basis for the first year of the Agreement,
subject to Board of Directors' review in subsequent years. Mr. Meder is
eligible to participate in the Company's bonus plan. In 2000, Mr. Meder was
granted an option under the Company's 1998 Stock Incentive Compensation Plan
to purchase 50,000 shares of the Company's common stock. See "Option Grants in
Last Fiscal Year" table. The Agreement also provides for the following
severance benefits if Mr. Meder's employment with the Company terminates other
than for cause (as defined in the Agreement), death, disability or change of
control: (a) a lump sum payment equal to 12 months' of Mr. Meder's base
compensation at the time of termination, and (b) the continuation of Company-
paid benefits for up to one year. If Mr. Meder's employment with the Company
terminates for cause, death or by Mr. Meder, Mr. Meder shall not be entitled
to severance pay or benefits under the Agreement. The Company may terminate
Mr. Meder's employment for disability under certain circumstances without any
obligation to provide severance pay or benefits to Mr. Meder. In the event of
a change of control of the Company, if Mr. Meder's employment with the Company
is terminated other than for cause within 12 months following the change of
control or if Mr. Meder resigns from employment following a material
alteration in his position following the change of control, Mr. Meder is
entitled to receive the benefits described in clauses (a) and (b) above.
In March 2000, the Company entered into an agreement with Michael T. Scalzo,
Vice President, Business Development of the Company (the "Scalzo Agreement").
The Scalzo Agreement provides for Mr. Scalzo to receive a salary subject to
review by the Chief Executive Officer. Pursuant to the Scalzo Agreement, Mr.
Scalzo is entitled to receive options under the Company's 1998 Stock Incentive
Compensation Plan to purchase 10,000 shares of the Company's common stock. In
2000, Mr. Scalzo was granted an option under the Company's 1998 Stock
Incentive Compensation Plan to purchase 5,000 shares of the Company's common
stock. See "Option Grants in Last Fiscal Year" table. Mr. Scalzo will be
awarded severance pay equal to one month of his base salary at the time of
termination for each year of service. If the Company terminates the employment
of Mr. Scalzo for cause (as defined in the Scalzo Agreement), no severance
will be paid.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
Mr. Nettles, Mr. Enger, Mr. Keener and Mr. Textor served on the Compensation
Committee of the Board of Directors for the past fiscal year. In August 2000,
Mr. Textor became the Chairman of the Compensation Committee and also serves
as president of Guchereau & Nettles, an accounting firm. Mr. Enger has served
as Executive Vice President of Keener's, Inc. (dba K&N Meats) ("Keener's)
since 1992, in addition to serving as a director. Mr. Enger also serves as a
director of Colmac Industries, Inc. and Colmac Coil Manufacturing, Inc.
Mr. Keener has served as the president and chief executive officer of Keener's
since 1960 and also serves as a director of both the National Meat Association
and the North American Meat Association. Mr. Textor serves as a general
partner of Capstan Partners, an investment banking firm, and also serves as a
director of Pyramid Breweries, Inc., Flow Solutions, Inc. and Keener's. During
the fiscal year ended December 31, 2000, the Company purchased approximately
$134,000 of product from Keener's. The Company believes that the terms of
these purchases were no less favorable to the Company than those available
from third parties.
Certain Relationships and Related Transactions
Concurrent Reg. S Placement to Kula Fund. During 1997 and 1998, Cost-U-Less
discussed with Commonwealth Development Corporation a range of potential
business relationships. On July 23, 1998 these discussions concluded with the
sale of 160,000 shares of common stock to the Kula Fund in a private placement
(the "Concurrent Reg. S Placement") at a price of $7.00 per share, concurrent
with the Company's initial public offering, and the sale, for nominal
consideration, of a warrant to purchase 117,000 shares of common stock at an
exercise price of $8.40 per share. This warrant contains standard net issuance
provisions (permitting the holder to exchange the warrant for a lesser number
of shares based on the then-current market value of the common
8
stock) and is exercisable at any time until July 23, 2002. These transactions
were structured to meet the requirements of the exclusion from registration
provided by Regulation S under the Securities Act of 1933, as amended.
Gevirtz Option. In January 1998, Donald L. Gevirtz, who was then a director
of Cost-U-Less, was granted a 10-year, immediately exercisable option to
purchase up to 88,554 shares of common stock at an exercise price of $7.62 per
share in connection with his appointment to the Board of Directors. In order
to encourage Mr. Gevirtz to join the Board of Directors, the Board granted him
an option with a per share exercise price that was less than the fair market
value of the common stock on the date of grant. Cost-U-Less therefore
recognized a compensation expense of $75,000 in the first quarter of fiscal
1998 in connection with this grant. In October 1998, Cost-U-Less offered
directors with options having exercise prices greater than $7.00 per share the
opportunity to surrender those options and receive new options with an
exercise price of $7.00 per share. With the exception of the exercise price, a
six-month blackout on exercise and a six-month delay in vesting, the terms of
the new options are identical to the terms of the old options. Although Mr.
Gevirtz resigned in 1999, he still has the option to purchase these shares for
two years from his date of resignation.
Employment of Gerald J. Rose. Gerald J. Rose, the brother of Michael J.
Rose, the former Chairman of the Board of Cost-U-Less, was employed by Cost-U-
Less from January, 1993 through April, 2000 as logistics manager for general
offshore operations of Cost-U-Less. His compensation (including severance) was
approximately $110,000 in fiscal 2000.
Purchases of Product From Beneficial Owner. Cost-U-Less has purchased
product from Keener's, a company that beneficially owns more than 5% of the
common stock and that is 50% owned by Wayne V. Keener, a director of Cost-U-
Less. David A. Enger, an Executive Vice President and director of Keener's, is
also a director of Cost-U-Less. Cost-U-Less purchased from Keener's
approximately $134,000 of product in fiscal 2000. Cost-U-Less believes that
the terms of these purchases were no less favorable to Cost-U-Less than those
available from independent third parties.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the officers, directors and persons who own more than 10% of a registered
class of equity securities of Cost-U-Less to file reports of ownership and
changes in ownership with the Commission. Officers, directors and greater-
than-10% shareholders are required by Commission regulation to furnish Cost-U-
Less with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms it received and
written representations from certain reporting persons that no forms were
required for those persons, Cost-U-Less believes that all filing requirements
applicable to its officers, directors and greater-than-10% beneficial owners
were complied with by such persons. However, due to clerical error, the year-
end Form 5 filing for Messrs. Enger, Nettles, Keener and Textor may not have
been timely filed.
9
PERFORMANCE GRAPH
The graph below compares the cumulative total shareholder return on the
shares of common stock of Cost-U-Less during fiscal year 2000 (commencing on
July 23, 1998, the date on which Cost-U-Less became a publicly held
corporation) with the cumulative total return of the Nasdaq Stock Market Index
(US) and the Nasdaq Retail Trade Stocks Index over the same period (assuming
an investment of $100 in the common stock, stocks comprising The Nasdaq Stock
Market Index (US), and the stocks comprising the Nasdaq Retail Trade Stocks
Index on July 23, 1998, and the reinvestment of all dividends).
Comparison of Five-Year Cumulative Total Returns
Performance Graph for
Cost U Less, Inc.
Prepared by the Center for Research in Security Prices
Produced on 03/14/2001 including data to 12/29/2000
[PERFORMANCE GRAPH APPEARS HERE]
CRSP Total
Returns Index for: 07/1998 12/1998 06/1999 12/1999 06/2000 12/2000
- ------------------ ------- ------- ------- ------- ------- -------
Cost U Less, Inc. 100.0 75.0 67.9 58.9 21.4 14.7
Nasdaq Stock Market
(US Companies) 100.0 113.2 140.8 208.1 208.2 128.4
Nasdaq Retail Trade
Stocks 100.0 97.2 96.6 87.0 63.0 53.9
SIC 5200-5599, 5700-5799,
5900-5999 US & Foreign
Notes:
A. The lines represent monthly index levels derived from compounded daily
returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on the
previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a trading
day, the preceding trading day is used.
D. The index level for all series was set to $100.0 on 07/23/1998.
10
REPORT ON EXECUTIVE COMPENSATION BY THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors is comprised of non-
employee members of the Company's Board of Directors. The Compensation
Committee is responsible for setting and administering the policies governing
annual compensation of the executive officers of the Company. The Compensation
Committee reviews the performance and compensation levels for executive
officers and sets salary levels.
The goals of the Company's executive officer compensation policies are to
attract, retain and reward executive officers who contribute to the Company's
success, to align executive officer compensation with the Company's
performance and to motivate executive officers to achieve the Company's
business objectives.
Base salaries of executive officers are reviewed annually by the
Compensation Committee and adjustments are made based on (i) individual
performance of executive officers for the previous fiscal year, and (ii)
financial results of the Company for the previous year.
The Company strongly believes that equity ownership by executive officers
provides incentives to build shareholder value and aligns the interests of
executive officers with those of the shareholders, and therefore makes
periodic grants of stock options under the Company's 1998 Stock Incentive
Compensation Plan. The size of an option grant to an executive officer has
generally been determined with reference to the responsibilities and expected
future contributions of the executive officer, previous grants to that
officer, as well as recruitment and retention considerations. In 2000, the
Compensation Committee approved stock option grants to certain of the
executive officers consistent with these criteria. See "Option Grants in Last
Fiscal Year."
Mr. Meder's compensation as President and Chief Executive Officer includes
(i) base salary, (ii) annual incentive bonuses and (iii) stock option grants.
The determination of Mr. Meder's base salary is based upon assessments of
individual performance and achievement of predetermined operating goals that
are established annually by the Board of Directors. Assessments of individual
performance include objective standards and subjective evaluations of the
value of Mr. Meder's contributions. Mr. Meder's base salary for fiscal 2000
was set at $225,000. The Compensation Committee granted Mr. Meder a stock
option for 50,000 shares under the 1998 Stock Incentive Compensation Plan.
The Company has considered the provisions of Section 162(m) of the Internal
Revenue Code and related Treasury Department regulations which restrict
deductibility of executive compensation paid to the Company's chief executive
officer and each of the four other most highly compensated executive officers
holding office at the end of any year to the extent such compensation exceeds
$1,000,000 for any of such officers in any year and does not qualify for an
exception under the statute or regulations. Income from options granted under
the 1998 Stock Incentive Compensation Plan would generally qualify for an
exemption from these restrictions so long as the options are granted by a
committee whose members are non-employee directors The Company expects that
the Compensation Committee will generally be comprised of non-employee
directors, and that to the extent such Committee is not so constituted for any
period of time, the options granted during such period will not be likely to
result in compensation exceeding $1,000,000 in any year. To the extent that
total non-exempt compensation exceeds $1,000,000 in fiscal 2000 or any
subsequent year, it will not be deductible. The Committee does not believe
that in general other components of the Company's compensation will be likely
to exceed $1,000,000 for any executive officer in the foreseeable future and
therefore concluded that no further action with respect to qualifying such
compensation for deductibility was necessary at this time. In the future, the
Committee will continue to evaluate the advisability of qualifying its
executive compensation for deductibility of such compensation. The Committee's
policy is to qualify its executive compensation for deductibility under
applicable tax laws as practicable.
COMPENSATION COMMITTEE
George C. Textor
David A. Enger
11
REPORT OF THE AUDIT COMMITTEE
The following is the report of the Audit Committee with respect to the
Company's audited financial statements for the fiscal year ended December 31,
2000. The Audit Committee has reviewed and discussed the Company's audited
financial statements with management. The Audit Committee has discussed with
Ernst & Young LLP, the Company's independent auditors, the matters required to
be discussed by SAS 61 (Communications with Audit Committees), as amended by
SAS 90 (Audit Committee Communications), which includes, among other items,
matters related to the conduct of the audit of the Company's financial
statements. The Audit Committee has also received written disclosures and the
letter from Ernst & Young LLP required by Independence Standards Board
Standard No. 1 (Independent Discussions with Audit Committees) and has
discussed with Ernst & Young LLP their independence from the Company.
The Audit Committee acts pursuant to the Audit Committee Charter adopted by
the Board of Directors on June 6, 2000, a copy of which is attached as
Appendix "A" to this Proxy Statement. Each of the members of the Audit
Committee qualifies as an "independent" director under the current listing
standards of the National Association of Securities Dealers.
Based on the review and discussions referred to above, the Audit Committee
recommended to the Company's Board of Directors that the Company's audited
financial statements be included in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000.
AUDIT COMMITTEE
Gary W. Nettles
David A. Enger
Wayne V. Keener
PROPOSAL 1: APPROVAL OF AMENDMENT OF
1998 STOCK INCENTIVE COMPENSATION PLAN
The board of directors adopted the 1998 Stock Incentive Compensation Plan
(the "1998 Plan"), on April 28, 1998 and the shareholders approved the
adoption of the plan on May 13, 1998. Currently, the maximum number of shares
issuable under the 1998 Plan is 500,000. Because the use of options is an
important factor in attracting and retaining qualified employees and
consultants, the board of directors has amended the 1998 Plan, subject to
shareholder approval, to increase the maximum number of shares issuable under
the 1998 Plan by 500,000 shares, to a total of 1,000,000 shares.
The Internal Revenue Code of 1986 (the "Code") limits the amount of
compensation paid to a corporation's chief executive officer and four other
most highly compensated officers that the corporation may deduct as an expense
for federal income tax purposes. To enable Cost-U-Less to continue to deduct
in full all amounts of ordinary income recognized by its executive officers in
connection with awards granted under the 1998 Plan, the board of directors has
amended the 1998 Plan, subject to shareholder approval, to limit to 500,000
the maximum number of shares for which awards may be granted to any employee
in any fiscal year. However, Cost-U-Less' stock option grants typically do not
approach this limit.
The shareholders are now being asked to approve the increase in the number
of shares issuable under the 1998 Plan by 500,000 shares, from 500,000 shares
to 1,000,000 shares, the grant limit and other modifications. The board of
directors believes that approval of these amendments is in the best interests
of Cost-U-Less and our shareholders because (1) the availability of an
adequate reserve of shares under the 1998 Plan is an important factor in
attracting, motivating and retaining qualified officers and employees
essential to our success and in aligning their long-term interests with those
of the shareholders and (2) approval of the grant limit will allow
12
Cost-U-Less to continue to deduct compensation related to awards granted under
the 1998 Plan for federal income tax purposes.
Summary of the provisions of the 1998 Plan
The following summary of the 1998 Plan is qualified in its entirety by the
specific language of the 1998 Plan, a copy of which is available to any
shareholder upon request.
General. The 1998 Plan provides for the grant of incentive stock options
("ISOs") and nonstatutory stock options, as well as stock awards. As of March
20, 2001, Cost-U-Less had outstanding options under the 1998 Plan to purchase
an aggregate of 481,094 shares. As of March 20, 2001, no options to purchase
shares of common stock granted pursuant to the 1998 Plan had been exercised,
and there were 18,906 shares of common stock available for future grants under
the 1998 Plan, without taking the proposed share reserve increase into
account.
Shares subject to the 1998 Plan. Currently, a maximum of 500,000 shares of
the authorized but unissued or reacquired common stock of Cost-U-Less may be
issued pursuant to the 1998 Plan. The board has amended the 1998 Plan, subject
to shareholder approval, to increase the maximum number of shares issuable
under the 1998 Plan to 1,000,000 shares.
In the event of any stock dividend, stock split, reverse stock split,
combination, reclassification, or similar change in the capital structure of
Cost-U-Less, appropriate adjustments will be made to the shares subject to the
1998 Plan, to the proposed grant limit and to outstanding options. To the
extent any outstanding award under the 1998 Plan expires or terminates prior
to exercise in full, or if Cost-U-Less repurchases shares issued upon exercise
of an award at the purchaser's original cost, the shares of common stock for
which that award is not exercised or the repurchased shares are returned to
the 1998 Plan and will again be available for issuance under the 1998 Plan.
Administration. The board of directors or a duly appointed committee of the
board may administer the 1998 Plan. With respect to the participation of
individuals whose transactions in Cost-U-Less's equity securities are subject
to Section 16 of the Securities Exchange Act of 1934, the 1998 Plan must be
administered in compliance with the requirements, if any, of Rule 16b-3 under
the Exchange Act. Subject to the provisions of the 1998 Plan, the board
determines the persons to whom awards are to be granted, the number of shares
to be covered by each award, whether an option is to be an ISO or a
nonstatutory stock option, the terms of vesting and exercisability of each
award, and all other terms and conditions of the awards. The board will
interpret the 1998 Plan and awards granted thereunder, and all determinations
of the board will be final and binding on all persons having an interest in
the 1998 Plan or any award under the plan.
Eligibility. Generally, all employees, directors and consultants of Cost-U-
Less or of any present or future parent or subsidiary corporations of Cost-U-
Less are eligible to participate in the 1998 Plan. Any person eligible under
the 1998 Plan may be granted a nonstatutory option or a stock award. However,
only employees may be granted ISOs. In addition, subject to shareholder
approval, the board has amended the 1998 Plan to provide that during any
fiscal year of Cost-U-Less, no employee may receive awards under the plan for
more than a total of 500,000 shares.
Terms and conditions of awards. Each award granted under the 1998 Plan is
evidenced by a written agreement between Cost-U-Less and the optionee
specifying the number of shares subject to the award and the other terms and
conditions of the award. For options, the exercise price per share must equal
at least the fair market value of a share of Cost-U-Less common stock on the
date of grant of an ISO and at least 85% of the fair market value of a share
of our common stock on the date of grant of a nonstatutory stock option. The
exercise price of any ISO granted to a person who at the time of grant owns
stock possessing more than 10% of the total combined voting power of all
classes of stock of Cost-U-Less or any parent or subsidiary corporation of
Cost-U-Less, a "10% Shareholder," must be at least 110% of the fair market
value of a share of our common stock on
13
the date of grant. The fair market value of our common stock is based on the
trading price of Cost-U-Less shares on the Nasdaq SmallCap Market.
Generally, the option exercise price may be paid in cash, by check, by
tender of shares of Cost-U-Less common stock owned by the optionee having a
fair market value not less than the exercise price, by the assignment of the
proceeds of a sale or a loan with respect to some or all of the shares of
common stock being acquired upon the exercise of the option, by means of a
promissory note, or by any combination of these. The board may nevertheless
restrict the forms of payment permitted in connection with any option grant.
The board will specify when options granted under the 1998 Plan will become
exercisable and vested. Shares subject to options generally vest and become
exercisable in installments, subject to the optionee's continued employment or
service. The maximum term of an option granted under the 1998 Plan is ten
years, except that an ISO granted to a 10% Shareholder may not have a term
longer than five years.
Stock awards are generally granted subject to such terms, conditions and
restrictions, if any, as the board of directors shall determine, in its sole
discretion, which terms, conditions and restrictions shall be set forth in the
instrument evidencing the stock award.
Options are nontransferable by the optionee other than by will or by the
laws of descent and distribution and are exercisable during the optionee's
lifetime only by the optionee.
Change in control. The 1998 Plan provides that in the event of a change in
control of Cost-U-Less resulting from a merger or sale of substantially all of
our assets, the acquiring corporation may assume or substitute for outstanding
awards granted under the plan. However, if the acquiring corporation does not
assume or substitute for an outstanding award, the award generally will become
fully vested and exercisable prior to the date of the change in control.
Termination or amendment. Unless sooner terminated, no awards may be granted
under the 1998 Plan after April 28, 2008. The board may terminate or amend the
1998 Plan at any time, but the board may not amend the 1998 Plan without
shareholder approval if such shareholder approval is required under any
applicable law, regulation or rule. No amendment may adversely affect an
outstanding option without the consent of the optionee.
Summary of federal income tax consequences of the 1998 Plan
The following summary is intended only as a general guide as to the United
States federal income tax consequences under current law of options granted
under the 1998 Plan and does not attempt to describe all possible federal or
other tax consequences of such participation or tax consequences based on
particular circumstances.
ISOs. An optionee recognizes no taxable income for regular income tax
purposes as the result of the grant or exercise of an ISO qualifying under
Section 422 of the Code. Optionees who do not dispose of their shares for two
years following the date of grant or within one year following the exercise
date will normally recognize a long-term capital gain or loss equal to the
difference, if any, between the sale price and the purchase price of the
shares. If an optionee satisfies such holding periods upon a sale of the
shares, Cost-U-Less will not be entitled to any deduction for federal income
tax purposes. If an optionee disposes of shares within two years after the
date of grant or within one year from the exercise date, referred to as a
disqualifying disposition, the difference between the fair market value of the
shares on the exercise date and the option exercise price, not to exceed the
gain realized on the sale if the disposition is a transaction with respect to
which a loss, if sustained, would be recognized, will be taxed as ordinary
income at the time of disposition. Any gain in excess of that amount will be a
capital gain. If a loss is recognized, there will be no ordinary income, and
such loss will be a capital loss. A capital gain or loss will be long-term if
the optionee's holding period is more than 1 year. Generally, for federal
income tax purposes, Cost-U-Less should be able to deduct any ordinary income
recognized by the optionee upon
14
the disqualifying disposition of the shares, except to the extent the
deduction is limited by applicable provisions of the Code or the regulations
thereunder.
The difference between the option exercise price and the fair market value
of the shares on the exercise date of an ISO is an adjustment in computing the
optionee's alternative minimum taxable income and may be subject to an
alternative minimum tax which is paid if the tax exceeds the regular tax for
the year. Special rules may apply with respect to certain subsequent sales of
the shares in a disqualifying disposition, certain basis adjustments for
purposes of computing the alternative minimum taxable income on a subsequent
sale of the shares and certain tax credits which may arise with respect to
optionees subject to the alternative minimum tax.
Nonstatutory stock options. Options not designated or qualifying as ISOs
will be nonstatutory stock options. Nonstatutory stock options have no special
tax status. An optionee generally recognizes no taxable income as the result
of the grant of such an option. Upon exercise of a nonstatutory stock option,
the optionee normally recognizes ordinary income in an amount equal to the
difference between the option exercise price and the fair market value of the
shares on the exercise date. If the optionee is an employee, the ordinary
income generally is subject to withholding of income and employment taxes.
Upon the sale of stock acquired by the exercise of a nonstatutory stock
option, any gain or loss, based on the difference between the sale price and
the fair market value on the exercise date, will be taxed as capital gain or
loss. A capital gain or loss will be long-term if the optionee's holding
period is more than 12 months. No tax deduction is available to Cost-U-Less
with respect to the grant of a nonstatutory option or the sale of the stock
acquired pursuant to that grant. Cost-U-Less generally should be entitled to a
deduction equal to the amount of ordinary income recognized by the optionee as
a result of the exercise of a nonstatutory option, except to the extent the
deduction is limited by applicable provisions of the Code or the regulations
thereunder.
Vote required and board of directors' recommendation
The affirmative vote of a majority of the votes cast on the proposal at the
annual meeting of shareholders, at which a quorum representing a majority of
all outstanding shares of our common stock is present, either in person or by
proxy, is required for approval of this proposal. Votes for and against,
abstentions and broker non-votes will each be counted as present for purposes
of determining the presence of a quorum. However, abstentions and broker non-
votes will have no effect on the outcome of this vote.
The Board of Directors recommends a vote "FOR" the amendment of the
Company's 1998 Stock Incentive Compensation Plan to increase the number of
shares issuable under the 1998 Plan, to establish the grant limit of 500,000
shares and other modifications.
PROPOSAL 2: RATIFICATION OF APPOINTMENT OF ERNST & YOUNG LLP
AS THE INDEPENDENT AUDITORS OF COST-U-LESS
Unless otherwise instructed, it is the intention of the persons named in the
accompanying form of proxy to vote shares represented by properly executed
proxies for the ratification of the appointment of Ernst & Young LLP as
independent accountants for the Company for 2001. Ernst & Young LLP has
audited the accounts of the Company for 2000. Representatives of Ernst & Young
LLP are expected to attend the Annual Meeting and will have an opportunity to
respond to appropriate questions from shareholders.
15
PRINCIPAL ACCOUNTING FIRM FEES
Fees Billed To The Company By Ernst & Young LLP During Fiscal 2000
Audit Fees. The fees of Ernst & Young LLP for fiscal 2000 were: Annual audit
- - $79,779.
Financial Information Systems Design and Implementation Fees. There were no
fees charged by Ernst & Young LLP during the fiscal year ended December 31,
2000, for professional services related to financial information systems
design and implementation.
All Other Fees. The fees of Ernst & Young LLP for the year ended December
31, 2000 for all services other than fees covered under the headings "Audit
Fees" and "Financial Information Systems Design and Implementation Fees" were
$56,850 including tax and benefit plan related services.
The Board of Directors recommends a vote "FOR" the ratification of the
appointment of Ernst & Young LLP as independent auditors for the Company for
fiscal 2001.
SHAREHOLDER PROPOSALS FOR 2002 ANNUAL MEETING
Under the Commission's proxy rules, shareholder proposals that meet certain
conditions may be included in the proxy statement and proxy card for a
particular annual meeting. Shareholders that intend to present a proposal at
the 2002 Annual Meeting of Cost-U-Less must give notice of the proposal to
Cost-U-Less no later than December 8, 2001 to be considered for inclusion in
the proxy statement and proxy card relating to that meeting. Shareholders that
intend to present a proposal that will not be included in the proxy statement
and proxy card must give notice of the proposal to Cost-U-Less no fewer than
60 nor more than 90 days prior to the date of the 2002 Annual Meeting pursuant
to the Bylaws of Cost-U-Less. Cost-U-Less reserves the right to reject, rule
out of order, or take other appropriate action with respect to any proposal
that does not comply with these and other applicable requirements.
OTHER MATTERS
As of the date of this Proxy Statement, the Board does not intend to
present, and has not been informed that any other person intends to present,
any matters for action at the Annual Meeting other than the matters
specifically referred to in this Proxy Statement. If other matters properly
come before the Annual Meeting, it is intended that the holders of the proxies
will act with respect thereto in accordance with their best judgment.
Copies of the Cost-U-Less 2000 Annual Report to Shareholders are being
mailed to shareholders, together with this Proxy Statement, form of Proxy and
Notice of Annual Meeting of Shareholders. Additional copies of the Annual
Report may be obtained from the Secretary of Cost-U-Less, 8160-304th Ave.,
S.E., Bldg. 3, Ste. A, Preston, Washington 98050.
The Cost-U-Less Annual Report on Form 10-K for the fiscal year ended
December 31, 2000 was filed with the Securities and Exchange Commission on
April 2, 2001. Copies of the Annual Report on Form 10-K may be obtained from
the Secretary of Cost-U-Less, 8160-304th Ave., S.E., Bldg. 3, Ste. A, Preston,
Washington 98050.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ Martin P. Moore
Martin P. Moore
Secretary
Preston, Washington
April 6, 2001
16
APPENDIX A
COST-U-LESS, INC.
CHARTER OF THE AUDIT COMMITTEE OF THE
BOARD OF DIRECTORS
I. STATEMENT OF POLICY
This Charter (the "Charter") specifies the scope of the responsibilities of
the Audit Committee (the "Committee") of the Board of Directors of Cost-U-Less
(the "Company"), and how the Committee carries out those responsibilities,
including the structure, processes, and membership requirements. The primary
function of the Committee is to assist the Board of Directors (the "Board") in
fulfilling its financial oversight responsibilities by reviewing and reporting
to the Board upon (i) the financial reports and other financial information
provided by the Company to any governmental body or to the public, (ii) the
Company's systems of internal and external controls regarding finance,
accounting, legal compliance and ethics that management and the Board have
established and (iii) the Company's auditing, accounting and financial
reporting processes in general. Consistent with this function, the Committee
should encourage continuous improvement of, and should foster adherence to,
the Company's financial policies, procedures and practices at all levels.
The Committee will primarily fulfill these responsibilities, and others as
may be prescribed by the Board from time to time, by carrying out the
activities enumerated in Section IV of this Charter.
II. ORGANIZATION AND MEMBERSHIP REQUIREMENTS
The Committee shall be comprised of three or more directors as determined by
the Board, each of whom shall be independent directors, and free from any
relationship that, in the opinion of the Board, would interfere with the
exercise of his or her independent judgment as a member of the Committee. A
member of the Committee shall be considered independent if, among other
things, such Director:
. is not an employee of the Company or its affiliates and has not been
employed by the Company or its affiliates within the past three years;
. is not a member of the immediate family of an executive officer of the
Company or its affiliates who currently serves in that role or did so
during the past three years;
. has not accepted more than $60,000 in compensation from the Company
during the previous fiscal year (excluding compensation and the related
benefits for Board service, retirement plan benefits or non-
discretionary compensation);
. has not been a partner, controlling shareholder or an executive officer
of any for-profit business to which the Company made, or from which it
received, payments (other than those which arise solely from investments
in the Company's securities) that exceed 5% of the Company's
consolidated gross revenues for that year, or $200,000, whichever is
more, in any of the past three years; and
. is not an executive of another entity on whose Compensation Committee
any of the Company's current executives serves.
All members of the Committee must be able to read and understand fundamental
financial statements, including a balance sheet, income statement, and cash
flow statement. In addition, at least one member must have past employment
experience in finance or accounting, professional certification in accounting,
or other comparable experience or background resulting in the individual's
financial sophistication, including being or having been a chief executive,
chief financial, or other senior officer with financial oversight
responsibilities.
The members of the Committee shall be elected by the Board and shall serve
until their successors shall be duly elected and qualified. Unless a chairman
is elected by the full Board, the members of the Committee may designate a
chairman by majority vote of the full Committee membership.
A-1
III. MEETINGS
The Committee shall meet at least annually with management and the
independent auditors in separate executive sessions to discuss any matters
that the Committee or each of these groups believe should be discussed
privately. In addition, the Committee should meet with the independent
auditors and management on a quarterly basis to review the Company's financial
statements consistent with Section IV.A.4. below.
IV. PROCESSES
To fulfill its responsibilities and duties the Committee shall:
A. Documents/Reports to Review
1. Review and reassess the Charter's adequacy periodically, as conditions
dictate.
2. Review the organization's annual audited financial statements and any
reports or other financial information submitted to any governmental
body, or the public, including any certification, report, opinion, or
review rendered by the independent auditors.
3. Review the regular Management Letter to management prepared by the
independent auditors and management's response.
4. Review the interim financial statements with financial management and
the independent auditors prior to the filing of the Company's Form 10-
Ks and Form 10-Qs. These meetings should include a discussion of the
independent auditors, judgment of the quality of the Company's
accounting and any uncorrected misstatements as a result of the
auditors quarterly review.
5. Maintain written minutes of its meetings, which minutes will be filed
with the minutes of the meetings of the Board. The Committee will also
record its summaries of recommendations to the Board in written form
that will be incorporated as part of the minutes of the Board meeting
at which those recommendations are presented.
B. Independent Auditors
1. Recommend to the Board the selection of the independent auditors,
considering independence and effectiveness.
2. Obtain from the independent auditors a formal written statement
delineating all relationships between the auditor and the Company, and
discussing with the auditor any disclosed relationships or services
that may impact auditor objectivity and independence (consistent with
Independence Standards Board Standard No. 1).
3. Take, or recommend that the Board take, appropriate action to oversee
the independence of the outside auditor.
4. Review the performance of the independent auditors and approve any
proposed discharge of the independent auditors when circumstances
warrant.
5. Periodically consult with the independent auditors out of the presence
of management about internal controls and the fullness and accuracy of
the Company's financial statements.
C. Financial Reporting Processes
1. In consultation with the independent auditors, review the integrity of
the Company's financial reporting processes, both internal and
external.
2. Consider the independent auditors' judgments about the quality and
appropriateness of the Company's accounting principles as applied in
its financial reporting.
3. Consider and approve, if appropriate, changes to the Company's auditing
and accounting principles and practices as suggested by the independent
auditors or management.
A-2
D. Process Improvement
1. Review with management and the independent auditors any significant
judgments made in management's preparation of the financial statements
and the view of each as to appropriateness of such judgments.
2. Review with management and the independent auditors any significant
difficulties encountered during the course of the audit, including any
restrictions on the scope of work or access to required information.
3. Review any significant disagreement among management and the
independent auditors in connection with the preparation of the
financial statements.
4. Review with the independent auditors and management the extent to which
changes or improvements in financial or accounting practices, as
approved by the Committee, have been implemented.
5. Provide oversight and review the Company's asset management policies,
including an annual review of the Company's investment policies and
performance for cash and short-term investments.
E. Ethical and Legal Compliance
1. Ensure that management has set an appropriate corporate "tone" for
quality financial reporting, sound business practices and ethical
behavior.
2. Ensure that management has the proper review system in place to ensure
that the Company's financial statements, reports and other financial
information disseminated to governmental organizations and the public
satisfy legal requirements.
3. Review, with the Company's counsel, legal compliance matters.
4. Review, with the Company's counsel, any legal matter that could have a
significant impact on the Company's financial statements.
5. Perform any other activities consistent with this Charter, the
Company's Bylaws and governing law, as the Committee or the Board deems
necessary or appropriate.
6. If necessary, initiate special investigations, and if appropriate, hire
special counsel or experts to assist the Committee.
A-3
ATTACHMENT 1
COST-U-LESS
AMENDED AND RESTATED
1998 STOCK INCENTIVE COMPENSATION PLAN
SECTION 1. PURPOSE
The purpose of the Cost-U-Less 1998 Incentive Compensation Plan (the
"Plan") is to enhance the long-term shareholder value of Cost-U-Less, Inc., a
Washington corporation (the "Company"), by offering opportunities to employees,
directors, officers, consultants, agents, advisors and independent contractors
of the Company and its Subsidiaries (as defined in Section 2) to participate in
the Company's growth and success, and to encourage them to remain in the service
of the Company and its Subsidiaries and to acquire and maintain stock ownership
in the Company.
SECTION 2. DEFINITIONS
For purposes of the Plan, the following terms shall be defined as set forth
below:
2.1 Award
"Award" means an award or grant made pursuant to the Plan, including,
without limitation, awards or grants of Options and Stock Awards, or any
combination of the foregoing.
2.2 Board
"Board" means the Board of Directors of the Company.
2.3 Cause
"Cause" means dishonesty, fraud, misconduct, unauthorized use or disclosure
of confidential information or trade secrets, or conviction or confession of a
crime punishable by law (except minor violations), in each case as determined by
the Plan Administrator, and its determination shall be conclusive and binding.
2.4 Code
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
2.5 Common Stock
"Common Stock" means the common stock, par value $.01 per share, of the
Company.
2.6 Corporate Transaction
"Corporate Transaction" means any of the following events:
(a) Consummation of any merger or consolidation of the Company in
which the Company is not the continuing or surviving corporation, or pursuant to
which shares of the Common Stock are converted into cash, securities or other
property, if following such merger or consolidation the holders of the Company's
outstanding voting securities immediately prior to such merger or consolidation
own less than 66-2/3% of the outstanding voting securities of the surviving
corporation;
(b) Consummation of any sale, lease, exchange or other transfer in
one transaction or a series of related transactions of all or substantially all
of the Company's assets other than a transfer of the Company's assets to a
majority-owned subsidiary corporation (as the term "subsidiary corporation" is
defined in Section 8.3) of the Company;
(c) Approval by the holders of the Common Stock of any plan or
proposal for the liquidation or dissolution of the Company; or
(d) Acquisition by a person, within the meaning of Section 3(a)(9) or
of Section 13(d)(3) (as in effect on the date of adoption of the Plan) of the
Exchange Act of a majority or more of the Company's outstanding voting
securities (whether directly or indirectly, beneficially or of record).
Ownership of voting securities shall take into account and shall include
ownership as determined by applying Rule 13d-3(d)(1)(i) (as in effect on the
date of adoption of the Plan) under the Exchange Act.
2.7 Disability
"Disability" means "disability" as that term is defined for purposes of
Section 22(e)(3) of the Code.
2.8 Exchange Act
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
2.9 Fair Market Value
"Fair Market Value" shall be as established in good faith by the Plan
Administrator or (a) if the Common Stock is listed on the Nasdaq National
Market, the closing selling price for the Common Stock as reported by the Nasdaq
National Market for a single trading day or (b) if the Common Stock is listed on
the New York Stock Exchange or the American Stock Exchange, the closing selling
price for the Common Stock as such price is officially quoted in the composite
tape of transactions on such exchange for a single trading day. If there is no
such reported price for the Common Stock for the date in question, then such
price on the last preceding date for which such price exists shall be
determinative of the Fair Market Value.
2
2.10 Good Reason
"Good Reason" means the occurrence of any of the following events or
conditions and the failure of the Successor Corporation to cure such event or
condition within 30 days after receipt of written notice by the Holder:
(a) a change in the Holders status, title, position or
responsibilities (including reporting responsibilities) that, in the Holder's
reasonable judgment, represents a substantial reduction in the status, title,
position or responsibilities as in effect immediately prior thereto; the
assignment to the Holder of any duties or responsibilities that, in the Holder's
reasonable judgment, are materially inconsistent with such status, title,
position or responsibilities; or any removal of the Holder from or failure to
reappoint or reelect the Holder to any of such positions, except in connection
with the termination of the Holder's employment for Cause, for Disability or as
a result of his or her death, or by the Holder other than for Good Reason;
(b) a reduction in the Holder's annual base salary;
(c) the Successor Corporation's requiting the Holder (without the
Holder's consent) to be based at any place outside a 35-mile radius of his or
her place of employment prior to a Corporate Transaction, except for reasonably
required travel on the Successor Corporation's business that is not materially
greater than such travel requirements prior to the Corporate Transaction;
(d) the Successor Corporation's failure to (i) continue in effect any
material compensation or benefit plan (or the substantial equivalent thereof) in
which the Holder was participating at the time of a Corporate Transaction,
including, but not limited to, the Plan, or (ii) provide the Holder with
compensation and benefits substantially equivalent (in terms of benefit levels
and/or reward opportunities) to those provided for under each material employee
benefit plan, program and practice as in effect immediately prior to the
Corporate Transaction;
(e) any material breach by the Successor Corporation of its
obligations to the Holder under the Plan or any substantially equivalent plan of
the Successor Corporation; or
(f) any purported termination of the Holder's employment or services
for Cause by the Successor Corporation that does not comply with the terms of
the Plan or any substantially equivalent plan of the Successor Corporation.
2.11 Grant Date
"Grant Date" means the date the Plan Administrator adopted the granting
resolution or a later date designated in a resolution of the Plan Administrator
as the date an Award is to be granted.
2.12 Holder
"Holder" means (a) the person to whom an Award is granted; (b) for a Holder
who has died, the personal representative of the Holder's estate, the person(s)
to whom the Holder's rights under the Award have passed by will or by the
applicable laws of descent and distribution, or the
3
beneficiary designated in accordance with Section 10; or (c) the person(s) to
whom an Award has been transferred in accordance with Section 10.
2.13 Incentive Stock Option
"Incentive Stock Option" means an Option to purchase Common Stock granted
under Section 7 with the intention that it qualify as an "incentive stock
option" as that term is defined in Section 422 of the Code.
2.14 Nonqualified Stock Option
"Nonqualified Stock Option" means an Option to purchase Common Stock
granted under Section 7 other than an Incentive Stock Option.
2.15 Option
"Option" means the right to purchase Common Stock granted under Section 7.
2.16 Plan Administrator
"Plan Administrator" means the Board or any committee of the Board
designated to administer the Plan under Section 3.1.
2.17 Restricted Stock
"Restricted Stock" means shares of Common Stock granted under Section 9,
the rights of ownership of which are subject to restrictions prescribed by the
Plan Administrator.
2.18 Securities Act
"Securities Act" means the Securities Act of 1933, as amended.
2.19 Stock Award
"Stock Award" means an Award granted under Section 9.
2.20 Subsidiary
"Subsidiary," except as provided in Section 8.3 in connection with
Incentive Stock Options, means any entity that is directly or indirectly
controlled by the Company or in which the Company has a significant ownership
interest, as determined by the Plan Administrator, and any entity that may
become a direct or indirect parent of the Company.
2.21 Successor Corporation
"Successor Corporation" has the meaning set forth in Section 11.2.
4
SECTION 3. ADMINISTRATION
3.1 Plan Administrator
The Plan shall be administered by the Board or a committee or committees
(which term includes subcommittees) appointed by, and consisting of two or more
members of, the Board (the "Plan Administrator"). If and so long as the Common
Stock is registered under Section 12(b) or 12(g) of the Exchange Act, the Board
shall consider in selecting the Plan Administrator and the membership of any
committee acting as Plan Administrator, with respect to any persons subject or
likely to become subject to Section 16 of the Exchange Act, the provisions
regarding (a) "outside directors" as contemplated by Section 162(m) of the Code
and (b) "nonemployee directors" as contemplated by Rule 16b-3 under the Exchange
Act. The Board may delegate the responsibility for administering the Plan with
respect to designated classes of eligible persons to different committees
consisting of two or more members of the Board, subject to such limitations as
the Board deems appropriate. Committee members shall serve for such term as the
Board may determine, subject to removal by the Board at any time.
3.2 Administration and Interpretation by the Plan Administrator
Except for the terms and conditions explicitly set forth in the Plan, the
Plan Administrator shall have exclusive authority, in its discretion, to
determine all matters relating to Awards under the Plan, including the selection
of individuals to be granted Awards, the type of Awards, the number of shares of
Common Stock subject to an Award, all terms, conditions, restrictions and
limitations, if any, of an Award and the terms of any instrument that evidences
the Award. The Plan Administrator shall also have exclusive authority to
interpret the Plan and may from time to time adopt, and change, rules and
regulations of general application for the Plan's administration. The Plan
Administrator's interpretation of the Plan and its rules and regulations, and
all actions taken and determinations made by the Plan Administrator pursuant to
the Plan, shall be conclusive and binding on all parties involved or affected.
The Plan Administrator may delegate administrative duties to such of the
Company's officers as it so determines.
3.3 Indemnification
In addition to such other rights of indemnification as they may have as
members of the Board or officers or employees of the Company or its
subsidiaries, members of the Board and any officers or employees of the Company
or its subsidiaries to whom authority to act for the Board or the Company is
delegated shall be indemnified by the Company against all reasonable expenses,
including attorneys' fees, actually and necessarily incurred in connection with
the defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan, or any right
granted hereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding, except in relation to matters as to which it shall be
adjudged in such action, suit or proceeding that such person is liable for gross
negligence, bad faith or intentional misconduct in duties; provided, however,
that within sixty (60) days after the institution of such action, suit or
5
proceeding, such person shall offer to the Company, in writing, the opportunity
at its own expense to handle and defend the same.
SECTION 4. STOCK SUBJECT TO THE PLAN
4.1 Authorized Number of Shares
Subject to adjustment from time to time as provided in Section 11.1, a
maximum of 1,000,000 shares of Common Stock shall be available for issuance
under the Plan. Shares issued under the Plan shall be drawn from authorized and
unissued shares or shares now held or subsequently acquired by the Company.
4.2 Reuse of Shares
Any shares of Common Stock that have been made subject to an Award that
cease to be subject to the Award (other than by reason of exercise or payment of
the Award to the extent it is exercised for or settled in shares) shall again be
available for issuance in connection with future grants of Awards under the
Plan.
SECTION 5. ELIGIBILITY
Awards may be granted under the Plan to those officers, directors and
employees of the Company and its Subsidiaries as the Plan Administrator from
time to time selects. Awards may also be made to consultants, agents, advisors
and independent contractors who provide services to the Company and its
Subsidiaries.
SECTION 6. AWARDS
6.1 Form and Grant of Options
The Plan Administrator shall have the authority, in its sole discretion, to
determine the type or types of Awards to be made under the Plan. Such Awards
may include, but are not limited to, Incentive Stock Options, Nonqualified Stock
Options and Stock Awards. Awards may be granted singly or in combination.
6.2 Acquired Company Option Awards
Notwithstanding anything in the Plan to the contrary, the Plan
Administrator may grant Awards under the Plan in substitution for awards issued
under other plans, or assume under the Plan awards issued under other plans, if
the other plans are or were plans of other acquired entities ("Acquired
Entities") (or the parent of the Acquired Entity) and the new Award is
substituted, or the old award is assumed, by reason of a merger, consolidation,
acquisition of property or of stock, reorganization or liquidation (the
"Acquisition Transaction"). In the event that a written agreement pursuant to
which the Acquisition Transaction is completed is approved by the Board and said
agreement sets forth the terms and conditions of the substitution for or
assumption of outstanding awards of the Acquired Entity, said terms and
conditions shall be deemed to be the action of the Plan Administrator without
any further action by the Plan
6
Administrator, except as may be required for compliance with Rule 16b-3 under
the Exchange Act, and the persons holding such Awards shall be deemed to be
Holders.
SECTION 7. AWARDS OF OPTIONS
7.1 Grant of Options
The Plan Administrator is authorized under the Plan, in its sole
discretion, to issue Options as Incentive Stock Options or as Nonqualified Stock
Options, which shall be appropriately designated.
7.2 Option Exercise Price
The exercise price for shares purchased under an Option shall be as
determined by the Plan Administrator, but shall not be less than 100% of the
Fair Market Value of the Common Stock on the Grant Date with respect to
Incentive Stock Options and not less than 85% of the Fair Market Value of the
Common Stock on the Grant Date with respect to Nonqualified Stock Options.
7.3 Term of Options
The term of each Option shall be as established by the Plan Administrator
or, if not so established, shall be 10 years from the Grant Date.
7.4 Exercise of Options
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option the time at which or the installments in which the
Option shall vest and become exercisable, which provisions may be waived or
modified by the Plan Administrator at any time. If not so established in the
instrument evidencing the Option, the Option will vest and become exercisable
according to the following schedule, which may be waived or modified by the Plan
Administrator at any time:
Period of Holder's Continuous Employment
or Service With the Company or Its Percent of Total Option That Is
Subsidiaries From the Option Grant Date Vested and Exercisable
---------------------------------------- -------------------------------
After 1 year 20%
After 2 years 40%
After 3 years 60%
After 4 years 80%
After 5 years 100%
To the extent that the right to purchase shares has accrued thereunder, an
Option may be exercised from time to time by written notice to the Company, in
accordance with procedures established by the Plan Administrator, setting forth
the number of shares with respect to which the Option is being exercised and
accompanied by payment in full as described in Section 7.5. The Plan
Administrator may determine at any time that an Option may not be exercised as
to less
7
than 100 shares at any one time (or the lesser number of remaining shares
covered by the Option).
7.5 Payment of Exercise Price
The exercise price for shares purchased under an Option shall be paid in
full to the Company by delivery of consideration equal to the product of the
Option exercise price and the number of shares purchased. Such consideration
must be paid in cash or by check or, unless the Plan Administrator in its sole
discretion determines otherwise, either at the time the Option is granted or at
any time before it is exercised, a combination of cash and/or check (if any) and
one or both of the following alternative forms: (a) tendering (either actually
or, if and so long as the Common Stock is registered under Section 12(b) or
12(g) of the Exchange Act, by attestation) Common Stock already owned by the
Holder for at least six months (or any shorter period necessary to avoid a
charge to the Company's earnings for financial reporting purposes) having a Fair
Market Value on the day prior to the exercise date equal to the aggregate Option
exercise price; or (b) if and so long as the Common Stock is registered under
Section 12(b) or 12(g) of the Exchange Act, delivery of a properly executed
exercise notice, together with irrevocable instructions, to (i) a brokerage firm
designated by the Company to deliver promptly to the Company the aggregate
amount of sale or loan proceeds to pay the Option exercise price and any
withholding tax obligations that may arise in connection with the exercise and
(ii) the Company to deliver the certificates for such purchased shares directly
to such brokerage firm, all in accordance with the regulations of the Federal
Reserve Board. In addition, to the extent permitted by the Plan Administrator
in its sole discretion, the exercise price for shares purchased under an Option
may be paid, either singly or in combination with one or more of the alternative
forms of payment authorized by this Section 7.5, by (y) a full-recourse
promissory note delivered pursuant to Section 12 or (z) such other consideration
as the Plan Administrator may permit.
7.6 Post-Termination Exercises
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option whether the Option will continue to be exercisable and
the terms and conditions of such exercise, if a Holder ceases to be employed by,
or to provide services to, the Company or its Subsidiaries, which provisions may
be waived or modified by the Plan Administrator at any time. If not so
established in the instrument evidencing the Option, the Option will be
exercisable according to the following terms and conditions, which may be waived
or modified by the Plan Administrator at any time.
In the case of termination of the Holder's employment or services other
than by reason of death or Cause, the Option shall be exercisable, to the extent
of the number of shares purchasable by the Holder at the date of such
termination, only (a) within one year after the date of termination of the
Holder's employment or services if such termination is coincident with
Disability or (b) within three months after the date of termination of the
Holder's employment or services if such termination is for any reason other than
Disability, but in no event later than the remaining term of the Option.
8
Any Option exercisable at the time of the Holder's death may be exercised,
to the extent of the number of shares purchasable by the Holder at the date of
the Holder's death, by the personal representative of the Holder's estate, the
person(s) to whom the Holder's rights under the Option have passed by will or
the applicable laws of descent and distribution or the beneficiary designated
pursuant to Section 10 at any time or from time to time within one year after
the date of death, but in no event later than the remaining term of the Option.
In the case of termination of the Holder's employment or services for
Cause, the Option shall automatically terminate upon first notification to the
Holder of such termination, unless the Plan Administrator determines otherwise.
If a Holder's employment or services with the Company are suspended pending an
investigation of whether the Holder shall be terminated for Cause, all the
Holder's rights under any Option likewise shall be suspended during the period
of investigation.
Any portion of an Option that is not exercisable on the date of termination
of the Holder's employment or services shall terminate on such date, unless the
Plan Administrator determines otherwise.
A transfer of employment or services between or among the Company and its
Subsidiaries shall not be considered a termination of employment or services.
The effect of a Company-approved leave of absence on the terms and conditions of
an Option shall be determined by the Plan Administrator, in its sole discretion.
7.7 Section 162(m) Grant Limit
Subject to adjustment as provided in Section 11.1, no employee shall be
granted one or more Options within any fiscal year of the Company which in the
aggregate are for the purchase of more than five hundred thousand (500,000)
shares (the "Section 162(m) Grant Limit"). An Option which is canceled in the
same fiscal year of the Company in which it was granted shall continue to be
counted against the Section 162(m) Grant Limit for such period.
SECTION 8. INCENTIVE STOCK OPTION LIMITATIONS
To the extent required by Section 422 of the Code, Incentive Stock Options
shall be subject to the following additional terms and conditions:
8.1 Dollar Limitation
To the extent the aggregate Fair Market Value (determined as of the Grant
Date) of Common Stock with respect to which Incentive Stock Options are
exercisable for the first time during any calendar year (under the Plan and all
other stock option plans of the Company) exceeds $100,000, such portion in
excess of $100,000 shall be treated as a Nonqualified Stock Option. In the
event the Holder holds two or more such Options that become exercisable for the
first time in the same calendar year, such limitation shall be applied on the
basis of the order in which such Options are granted.
9
8.2 10% Shareholders
If an individual owns more than 10% of the total voting power of all
classes of the Company's stock, then the exercise price per share of an
Incentive Stock Option shall not be less than 110% of the Fair Market Value of
the Common Stock on the Grant Date and the Option term shall not exceed five
years. The determination of 10% ownership shall be made in accordance with
Section 422 of the Code.
8.3 Eligible Employees
Individuals who are not employees of the Company or one of its parent
corporations or subsidiary corporations may not be granted Incentive Stock
Options. For purposes of this Section 8.3, "parent corporation" and "subsidiary
corporation" shall have the meanings attributed to those terms for purposes of
Section 422 of the Code.
8.4 Term
The term of an Incentive Stock Option shall not exceed 10 years.
8.5 Exercisability
To qualify for Incentive Stock option tax treatment, an Option designated
as an Incentive Stock Option must be exercised within three months after
termination of employment for reasons other than death, except that, in the case
of termination of employment due to total disability, such Option must be
exercised within one year after such termination. Employment shall not be
deemed to continue beyond the first 90 days of a leave of absence unless the
Holder's reemployment rights are guaranteed by statute or contract. For
purposes of this Section 8.5, "total disability" shall mean a mental or physical
impairment of the Holder that is expected to result in death or that has lasted
or is expected to last for a continuous period of 12 months or more and that
causes the Holder to be unable, in the opinion of the Company and two
independent physicians, to perform his or her duties for the Company and to be
engaged in any substantial gainful activity. Total disability shall be deemed
to have occurred on the first day after the Company and the two independent
physicians have furnished their opinion of total disability to the Plan
Administrator.
8.6 Taxation Incentive Stock Options
In order to obtain certain tax benefits afforded to Incentive Stock Options
under Section 422 of the Code, the Holder must hold the shares issued upon the
exercise of an Incentive Stock Option for two years after the Grant Date of the
Incentive Stock Option and one year from the date of exercise. A Holder may be
subject to the alternative minimum tax at the time of exercise of an Incentive
Stock Option. The Holder shall give the Company prompt notice of any
disposition of shares acquired by the exercise of an Incentive Stock Option
prior to the expiration of such holding periods.
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8.7 Promissory Notes
The amount of any promissory note delivered pursuant to Section 13 in
connection with an Incentive Stock Option shall bear interest at a rate
specified by the Plan Administrator but in no case less than the rate required
to avoid imputation of interest (taking into account any exceptions to the
imputed interest rules) for federal income tax purposes.
SECTION 9. STOCK AWARDS
9.1 Grant of Stock Awards
The Plan Administrator is authorized to make Awards of Common Stock on such
terms and conditions and subject to such restrictions, if any (which may be
based on continuous service with the Company or the achievement of performance
goals), as the Plan Administrator shall determine, in its sole discretion, which
terms, conditions and restrictions shall be set forth in the instrument
evidencing the Award. The terms, conditions and restrictions that the Plan
Administrator shall have the power to determine shall include, without
limitation, the manner in which shares subject to Stock Awards are held during
the periods they are subject to restrictions and the circumstances under which
forfeiture of Restricted Stock shall occur by reason of termination of the
Holder's services.
9.2 Issuance of Shares
Upon the satisfaction of any terms, conditions and restrictions prescribed
in respect to a Stock Award, or upon the Holder's release from any terms,
conditions and restrictions of a Stock Award, as determined by the Plan
Administrator, the Company shall release, as soon as practicable, to the Holder
or, in the case of the Holder's death, to the personal representative of the
Holder's estate or as the appropriate court directs, the appropriate number of
shares of Common Stock.
9.3 Waiver of Restrictions
Notwithstanding any other provisions of the Plan, the Plan Administrator
may, in its sole discretion, waive the forfeiture period and any other terms,
conditions or restrictions on any Restricted Stock under such circumstances and
subject to such terms and conditions as the Plan Administrator shall deem
appropriate.
SECTION 10. ASSIGNABILITY
No Option granted under the Plan may be assigned or transferred by the
Holder other than by will or by the applicable laws of descent and distribution,
and, during the Holder's lifetime, such Awards may be exercised only by the
Holder. Notwithstanding the foregoing, and to the extent permitted by Section
422 of the Code, the Plan Administrator, in its sole discretion, may permit such
assignment, transfer and exercisability and may permit a Holder of such Awards
to designate a beneficiary who may exercise the Award or receive compensation
under the Award after the Holder's death; provided, however, that any Award so
assigned or transferred shall be subject to all the same terms and conditions
contained in the instrument evidencing the Award.
11
SECTION 11. ADJUSTMENTS
11.1 Adjustment of Shares
In the event that, at any time or from time to time, a stock dividend,
stock split, spin-off, combination or exchange of shares, recapitalization,
merger, consolidation, distribution to shareholders other than a normal cash
dividend, or other change in the Company's corporate or capital structure
results in (a) the outstanding shares, or any securities exchanged therefor or
received in their place, being exchanged for a different number or class of
securities of the Company or of any other corporation or (b) new, different or
additional securities of the Company or of any other corporation being received
by the holders of shares of Common Stock of the Company, then the Plan
Administrator shall make proportional adjustments in (i) the maximum number and
kind of securities subject to the Plan as set forth in Section 4.1 and (ii) the
number and kind of securities that are subject to any outstanding Award and the
per share price of such securities, without any change in the aggregate price to
be paid therefor. The determination by the Plan Administrator as to the terms
of any of the foregoing adjustments shall be conclusive and binding.
Notwithstanding the foregoing, a Corporate Transaction shall not be governed by
this Section 11.1 but shall be governed by Section 11.2.
11.2 Corporate Transaction
(a) Except as otherwise provided in the instrument that evidences the
Award, in the event of any Corporate Transaction, each Award that is at the time
outstanding shall automatically accelerate so that each such Award shall,
immediately prior to the specified effective date for the Corporate Transaction,
become 100% vested and exercisable.
(b) Such Award shall not so accelerate, however, if and to the extent
that such Award is, in connection with the Corporate Transaction, either to be
assumed by the successor corporation or parent thereof (the "Successor
Corporation") or to be replaced with a comparable award for the purchase of
shares of the capital stock of the Successor Corporation. The determination of
Award comparability shall be made by the Plan Administrator, and its
determination shall be conclusive and binding. Any such Awards granted to an
"executive officer" (as that term is defined for purposes of Section 16 of the
Exchange Act) of the Company that are assumed or replaced in the Corporate
Transaction and do not otherwise accelerate at that time shall be accelerated in
the event that the Holder's employment or services should subsequently terminate
within two years following such Corporate Transaction, unless such employment or
services are terminated by the Successor Corporation for Cause or by the Holder
voluntarily without Good Reason. The acceleration will not occur if, in the
opinion of the Company's outside accountants, it would render unavailable
"pooling of interest" accounting for a Corporate Transaction that would
otherwise qualify for such accounting treatment.
(c) All such Options shall terminate and cease to remain outstanding
immediately following the consummation of the Corporate Transaction, except to
the extent assumed by the Successor Corporation.
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11.3 Further Adjustment of Options
Subject to Section 11.2, the Plan Administrator shall have the discretion,
exercisable at any time before a sale, merger, consolidation, reorganization,
liquidation or change in control of the Company, as defined by the Plan
Administrator, to take such further action as it determines to be necessary or
advisable, and fair and equitable to Holders, with respect to Awards. Such
authorized action may include (but shall not be limited to) establishing,
amending or waiving the type, terms, conditions or duration of, or restrictions
on, Awards so as to provide for earlier, later, extended or additional time for
exercise and other modifications, and the Plan Administrator may take such
actions with respect to all Holders, to certain categories of Holders or only to
individual Holders. The Plan Administrator may take such action before or after
granting Awards to which the action relates and before or after any public
announcement with respect to such sale, merger, consolidation, reorganization,
liquidation or change in control that is the reason for such action.
11.4 Limitations
The grant of Awards will in no way affect the Company's right to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
SECTION 12. WITHHOLDING
The Company may require the Holder to pay to the Company the amount of any
withholding taxes that the Company is required to withhold with respect to the
grant, exercise, payment or settlement of any Award. In such instances, the
Plan Administrator may, in its discretion and subject to the Plan and applicable
law, permit the Holder to satisfy withholding obligations, in whole or in part,
by paying cash, by electing to have the Company withhold shares of Common Stock
or by transferring shares of Common Stock to the Company, in such amounts, as
are equivalent to the Fair Market Value of the withholding obligation. The
Company shall have the right to withhold from any shares of Common Stock
issuable pursuant to an Award or from any cash amounts otherwise due or to
become due from the Company to the Holder an amount equal to such taxes. The
Company may also deduct from any Award any other amounts due from the Holder to
the Company or a Subsidiary.
SECTION 13. LOANS, INSTALLMENT PAYMENTS AND LOAN GUARANTEES
To assist a Holder (including a Holder who is an officer or a director of
the Company) in acquiring shares of Common Stock pursuant to an Award granted
under the Plan, the Plan Administrator, in its sole discretion, may authorize,
either at the Grant Date or at any time before the acquisition of Common Stock
pursuant to the Award, (a) the extension of a loan to the Holder by the Company,
(b) the payment by the Holder of the purchase price, if any, of the Common Stock
in installments, or (c) the guarantee by the Company of a loan obtained by the
Holder from a third party. The terms of any loans, installment payments or loan
guarantees, including the interest rate and terms of repayment, will be subject
to the Plan Administrator's discretion; provided, however, that repayment of any
Company loan to the Holder shall be
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secured by delivery of a full-recourse promissory note for the loan amount
executed by the Holder, together with any other form of security determined by
the Plan Administrator. The maximum credit available is the purchase price, if
any, of the Common Stock acquired, plus the maximum federal and state income and
employment tax liability that may be incurred in connection with the
acquisition.
SECTION 14. AMENDMENT AND TERMINATION OF PLAN
14.1 Amendment of Plan
The Plan may be amended only by the Board in such respects as it shall deem
advisable; however, to the extent required for compliance with Section 422 of
the Code or any applicable law or regulation, shareholder approval will be
required for any amendment that will (a) increase the total number of shares as
to which Options may be granted under the Plan or that may be issued as Stock
Awards, (b) modify the class of persons eligible to receive Options, or (c)
otherwise require shareholder approval under any applicable law or regulation.
14.2 Termination of Plan
The Board may suspend or terminate the Plan at any time. The Plan will
have no fixed expiration date; provided, however, that no Incentive Stock
Options may be granted more than 10 years after the earlier of the Plan's
adoption by the Board and approval by the shareholders.
14.3 Consent of Holder
Subject to the requirements of Section 422 of the Code with respect to
Incentive Stock Options and to the terms and conditions and within the
limitations of the Plan, the Plan Administrator may modify or amend outstanding
Awards granted under the Plan. The modification or amendment of an outstanding
Award, or the amendment or termination of the Plan, shall not, without the
consent of the Holder, impair or diminish any of the Holder's rights or any of
the obligations of the Company under such Award. Except as otherwise provided
in the Plan, no outstanding Award shall be terminated without the consent of the
Holder. Unless the Holder agrees otherwise, any changes or adjustments made to
outstanding Incentive Stock Options granted under the Plan shall be made in such
a manner so as not to constitute a "modification" as defined in Section 424(h)
of the Code and so as not to cause any Incentive Stock Option issued hereunder
to fail to continue to qualify as an "incentive stock option" as defined in
Section 422(b) of the Code.
SECTION 15. GENERAL
15.1 Award Agreements
Awards granted under the Plan shall be evidenced by a written agreement
that shall contain such terms, conditions, limitations and restrictions as the
Plan Administrator shall deem advisable and that are not inconsistent with the
Plan.
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15.2 Continued Employment or Services; Rights in Awards
None of the Plan, participation in the Plan or any action of the Plan
Administrator taken under the Plan shall be construed as giving any person any
right to be retained in the employ of the Company or limit the Company's right
to terminate the employment or services of any person.
15.3 Registration; Certificates for Shares
The Company shall be under no obligation to any Holder to register for
offering or resale or to qualify for exemption under the Securities Act, or to
register or qualify under state securities laws, any shares of Common Stock,
security or interest in a security paid or issued under, or created by, the
Plan, or to continue in effect any such registrations or qualifications if made.
The Company may restrict the exercise of any Option and may adopt exercise
control restrictions in order to maintain any exemption requirements of federal
or state securities laws. The Company may refuse the exercise of any Option for
which an exemption from registration under federal and state securities laws is
unavailable. The Company may issue certificates for shares with such legends
and subject to such restrictions on transfer and stop-transfer instructions as
counsel for the Company deems necessary or desirable for compliance by the
Company with federal and state securities laws.
Inability of the Company to obtain, from any regulatory body having
jurisdiction, the authority deemed by the Company's counsel to be necessary for
the lawful issuance and sale of any shares hereunder or the unavailability of an
exemption from registration for the issuance and sale of any shares hereunder
shall relieve the Company of any liability in respect of the nonissuance or sale
of such shares as to which such requisite authority shall not have been
obtained.
15.4 No Rights as a Shareholder
No Option shall entitle the Holder to any dividend, voting or other right
of a shareholder unless and until the date of issuance under the Plan of the
shares that are the subject of such Option, free of all applicable restrictions.
15.5 Compliance With Laws and Regulations
Notwithstanding anything in the Plan to the contrary, the Board, in its
sole discretion, may bifurcate the Plan so as to restrict, limit or condition
the use of any provision of the Plan to Holders who are officers or directors
subject to Section 16 of the Exchange Act without so restricting, limiting or
conditioning the Plan with respect to other Holders. Additionally, in
interpreting and applying the provisions of the Plan, any Option granted as an
Incentive Stock Option pursuant to the Plan shall, to the extent permitted by
law, be construed as an "incentive stock option" within the meaning of Section
422 of the Code.
15.6 No Trust or Fund
The Plan is intended to constitute an "unfunded" plan: Nothing contained
herein shall require the Company to segregate any monies or other property, or
shares of Common Stock, or
15
to create any trusts or to make any special deposits for any immediate or
deferred amounts payable to any Holder, and no Holder shall have any rights that
are greater than those of a general unsecured creditor of the Company.
15.7 Severability
If any provision of the Plan or any Award is determined to be invalid,
illegal or unenforceable in any jurisdiction, or as to any person, or would
disqualify the Plan or any Award under any law deemed applicable by the Plan
Administrator, such provision shall be construed or deemed amended to conform to
applicable laws, or, if it cannot be so construed or deemed amended without, in
the Plan Administrator's determination, materially altering the intent of the
Plan or the Award, such provision shall be stricken as to such jurisdiction
person or Award, and the remainder of the Plan and any such Award shall remain
in full force and effect.
SECTION 16. EFFECTIVE DATE
The Plan's effective date is the date on which it is adopted by the Board,
so long as it is approved by the Company's shareholders at any time within 12
months of such adoption.
Adopted by the Board on April 28, 1998 and approved by the Company's
shareholders on May 13, 1998.
Amended to increase the maximum number of shares of Common Stock available
for issuance under the Plan from 500,000 to 1,000,000 by the Board on February
14, 2001 and approved by the Company's shareholders on ____________________,
2001.
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COST-U-LESS, INC.
This Proxy is solicited by the Board of Directors for the
Annual Meeting of Shareholders - May 8, 2001
The undersigned hereby appoint(s) J. Jeffrey Meder and Martin P. Moore, and each
of them, as proxies, with full power of substitution, to represent and vote as
designated all shares of common stock of Cost-U-Less, Inc. held of record by the
undersigned on March 28, 2001 at the Annual Meeting of Shareholders of
Cost-U-Less to be held at the Doubletree Hotel (Factoria Room), 300 112th Ave.
S.E., Bellevue, Washington, at 10:00 a.m. on Tuesday, May 8, 2001, with
authority to vote upon the matters listed below and with discretionary authority
as to any other matters that may properly come before the meeting or any
adjournment or postponement thereof.
IMPORTANT - PLEASE DATE AND SIGN ON THE OTHER SIDE
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. FOLD AND DETACH HERE .
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Please mark
your votes [X]
as indicated
FOR AGAINST ABSTAIN
(1) APPROVE THE AMENDMENT TO THE 1998 STOCK [_] [_] [_]
INCENTIVE COMPENSATION PLAN AND INCREASE
THE MAXIMUM NUMBER OF SHARES THAT MAY BE
ISSUED THEREUNDER.
FOR AGAINST ABSTAIN
(2) RATIFY THE APPOINTMENT OF ERNST & YOUNG [_] [_] [_]
LLP AS THE INDEPENDENT AUDITORS OF COST-U-
LESS FOR FISCAL 2001.
[_] I plan to attend the Annual Meeting
SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BY THE SHAREHOLDER IN
THE SPACE PROVIDED. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED "FOR"
ITEM 1 AND "FOR" ITEM 2. The Board of Directors recommends a vote "FOR" Item 1
and "FOR" Item 2.
___________
| Date ________________________________________
|
| Signature(s) ________________________________
|
| Date ________________________________________
Signature(s) ________________________________
Please sign exactly as name appears hereon.
Attorneys, trustees, executors and other
fiduciaries acting in a representative capacity
should sign their names and give their titles. An
authorized person should sign on behalf of
corporations, partnerships, associates, etc. and
give his or her title. If your shares are held by
two or more persons, each person must sign. Receipt
of the notice of meeting and proxy statement is
hereby acknowledged.
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. FOLD AND DETACH HERE .