===============================================================================
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
[X] Definitive Proxy Statement Rule 14a-6(e)(2))
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
COST-U-LESS, INC.
- -------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- -------------------------------------------------------------------------------
(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
=============================================================================
[CAPTION]
Title of
each class Per unit price or
of other underlying Proposed
securities value of transaction maximum
to which Aggregate number of computed pursuant to aggregate
transaction securities to which Exchange Act value of Total Fee
applies: transaction applies: Rule 0-11: transaction: Paid
- -----------------------------------------------------------------------------
=============================================================================
[_] Fee paid previously with preliminary materials.
_____________________________________________________________________________
[_] Check]box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify 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: _____________________________________________
(2) Form, Schedule, or Registration Statement no.: ______________________
(3) Filing Party: _______________________________________________________
(4) Date Filed: _________________________________________________________
===============================================================================
[LOGO OF COST-U-LESS, INC.]
April 7, 1999
Dear Cost-U-Less, Inc. Shareholders:
I am pleased to invite you to the Cost-U-Less Annual Meeting of
Shareholders. The meeting will be at 10:00 a.m. on Thursday, May 20, 1999 at
the WestCoast Bellevue Hotel (Tamarack Room), 625 116th Ave. N.E., Bellevue,
Washington.
At the meeting, you will have the opportunity to elect two directors to the
Cost-U-Less Board of Directors. You will also have the opportunity to vote
upon a proposal to ratify the appointment of Ernst & Young LLP as independent
auditors for Cost-U-Less, and transact any other business properly presented
at the meeting. In addition, you will have the opportunity to hear what has
happened in our business in the past year and to ask questions. You will find
other detailed information about Cost-U-Less and our operations, including our
audited financial statements, in the enclosed 1998 Annual Report to
Shareholders.
We hope you can join us on May 20. Whether or not you can attend, please
read the enclosed 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/ Allan C. Youngberg
Allan C. Youngberg
Secretary
COST-U-LESS, INC.
12410 S.E. 32nd Street
Bellevue, Washington 98005
----------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held Thursday, May 20, 1999
April 7, 1999
Dear Cost-U-Less Shareholders:
On Thursday, May 20, 1999, Cost-U-Less, Inc. will hold its Annual Meeting of
Shareholders at the WestCoast Bellevue Hotel (Tamarack Room), 625 116th Ave.
N.E., Bellevue, Washington. The Annual Meeting will begin at 10:00 a.m. Only
shareholders that owned stock at the close of business on March 20, 1999 can
vote at this meeting or any adjournments that may take place. At the Annual
Meeting we will ask you to:
. Elect two directors to hold office for the term as described in the
attached Proxy Statement;
. Ratify the appointment of Ernst & Young LLP as our independent auditors;
and
. Transact any other business properly presented at the meeting.
Your Board of Directors recommends that you vote in favor of the two
proposals outlined in this Proxy Statement.
At the meeting we will also report on the 1998 business results of Cost-U-
Less and other matters of interest to shareholders.
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.
The approximate date of mailing for this Proxy Statement and accompanying
proxy card is April 7, 1999.
By Order of the Board of Directors,
/s/ Allan C. Youngberg
Allan C. Youngberg
Secretary
Please note that attendance at the Annual Meeting will be limited to
shareholders as of the record date, or their authorized representatives,
and guests of Cost-U-Less.
COST-U-LESS, INC.
----------------
PROXY STATEMENT
----------------
INFORMATION CONCERNING SOLICITATION AND VOTING
General
The Board of Directors of Cost-U-Less, Inc. is sending you this Proxy
Statement in connection with its solicitation of proxies for use at the Cost-
U-Less 1999 Annual Meeting of Shareholders. The Annual Meeting will be held at
the WestCoast Bellevue Hotel (Tamarack room), 625 116th Ave. N.E., Bellevue,
Washington, on Thursday, May 20, 1999 at 10:00 a.m. Cost-U-Less intends to
give or mail to shareholders definitive copies of this Proxy Statement and
accompanying proxy card on or about April 7, 1999.
Record Date and Outstanding Shares
Only those shareholders that owned common stock at the close of business on
March 20, 1999, the record date for the Annual Meeting, can vote. At that
date, there were 3,539,961 issued and outstanding shares of common stock.
Quorum
A quorum for the Annual Meeting is a majority of the outstanding shares of
common stock entitled to vote and present, whether in person or by proxy, at
the Annual Meeting.
Revocability of Proxies
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. For
the proposal to elect directors, the two directors who receive the greatest
number of affirmative votes cast by holders of common stock present, in person
or by proxy, and entitled to vote at the Annual Meeting, will be elected to
the Board. You are not entitled to cumulate votes in the election of
directors. The proposal to ratify the appointment of Ernst & Young LLP as our
independent auditors will be approved if the number of votes cast in favor of
the 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 in accordance with our
recommendations. 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 may vote such
shares either as directed by their clients or in their own discretion if
permitted by the stock exchange or other organization of which they are
1
members. Members of the New York Stock Exchange are permitted to vote their
clients' proxies in their own discretion as to the election of directors if
their clients have not furnished voting instructions within ten days of the
meeting. Under the exchange rules, certain matters other than the election of
directors are "non-discretionary" and brokers who have received no
instructions from their clients do not have discretion to vote on those items.
When brokers vote proxies on some but not all of the proposals at a meeting,
the missing votes are referred to as "broker non-votes." Broker non-votes are
included in determining the presence of a quorum at the meeting, but they are
not considered "shares present" for voting purposes and have no impact on the
outcome of such proposals, other than to reduce the number of favorable votes
necessary to approve the proposal. Brokers do have discretion to vote on
Proposal 1 (election of directors) and Proposal 2 (ratification of appointment
of Ernst & Young LLP as our independent auditors) and, accordingly, there will
be no broker non-votes on these proposals.
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. 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.
PROPOSAL 1: ELECTION OF DIRECTORS
In accordance with the Bylaws of Cost-U-Less, the Board of Directors has
fixed the number of Directors constituting the Board at seven. Directors
generally are elected for three-year terms, and the Board is divided into
three classes, with one class of Directors elected to a three-year term at
each annual meeting of shareholders. Five of the Directors are serving terms
that continue beyond the 1998 Annual Meeting. Of the continuing Directors, two
are serving terms that will not expire until the 2000 Annual Meeting of
Shareholders and three are serving terms that will not expire until the 2001
Annual Meeting of Shareholders. At the Annual Meeting, two Directors will be
elected to hold office until the 2002 Annual Meeting of Shareholders, or until
their respective successors are elected and qualified.
The Board of Directors has proposed that the following nominees be elected
at the Annual Meeting: David A. Enger and Gary W. Nettles. Messrs. Enger and
Nettles will be elected for three-year terms. Unless otherwise instructed,
persons named in the accompanying proxy will vote for these nominees. Although
Cost-U-Less anticipates that these nominees will be available to serve as
directors, should either of them not accept the nomination, or otherwise be
unable to serve, the proxies will have discretionary authority to vote for a
substitute nominee.
The Board of Directors recommends a vote "FOR" approval of this proposal.
Nominees for the Board of Directors
David A. Enger has been a Director of Cost-U-Less since 1993. Mr. Enger has
served since 1992 as Executive Vice President of Keener's, Inc. dba K&N Meats
("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 2000
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, 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.
Continuing Directors Until 2001
Ashley Emberson-Bain has been a Director of Cost-U-Less since August 1998.
Mr. Emberson-Bain has served since 1986 in a variety of management, investment
and staff positions with Commonwealth Development Corporation ("CDC"), a
development finance institution of the U.K. government. Since 1997, Mr.
Emberson-Bain has been the Chief Executive Officer and Managing Director of
Pacific Capital Partners, a venture capital firm based in Papua New Guinea
that manages the Kula Fund, an affiliate of CDC. Mr. Emberson-Bain has also
served since 1995 as the Regional Manager, Pacific Islands of CDC.
Donald L. Gevirtz has been a Director of Cost-U-Less since January 1998.
Since 1996, Mr. Gevirtz has served as the director of the Gevirtz Research
Center, a nonprofit organization involved in educational outreach projects.
Mr. Gevirtz served as U.S. Ambassador to the Republic of Fiji, the Kingdom of
Tonga, the Republic of Nauru and the Republic of Tuvalu from 1996 through
1997. From 1970 to 1996, Mr. Gevirtz served as Chairman of the Board and Chief
Executive Officer of the Foothill Group, Inc., a public company engaged in
banking services, which was sold to Norwest Bank Corporation in 1995.
Michael J. Rose is the founder, Chairman of the Board, President and Chief
Executive Officer of Cost-U-Less. Prior to 1992, Mr. Rose was President and a
50% shareholder of Rose-Chamberlin Inc., a brokerage company founded in 1985,
which acted as a manufacturers' representative and sold merchandise primarily
to Costco Companies, Inc.
Information on Meetings and Committees of the Board of Directors
During the last fiscal year there were three meetings of the Board of
Directors. All incumbent directors except Mr. Emerson-Bain attended at least
75% of the Board meetings held. All incumbent directors attended at least 75%
of the meetings held by all committees on which they served.
The Board maintains an Audit Committee and a Compensation Committee.
The Audit Committee, currently composed of Messrs. Enger, Keener and Textor,
is responsible, among other things, for recommending the selection of
certified public accountants to the Board of Directors, reviewing the scope
and results of audits, reviewing the accounting policies and procedures of
Cost-U-Less and reviewing systems of internal controls. During the past year,
there were three Audit Committee meetings.
The Compensation Committee, currently composed of Messrs. Nettles
(Chairman), Enger, Gevirtz, Keener and Textor, is responsible for, among other
things, recommending to the Board of Directors the adoption and amendment of
employee benefit plans and arrangements and the engagement of, and terms of
any employment agreements and arrangements with, and terminations of, all
corporate executive officers. During the past year, there were three
Compensation Committee meetings.
3
Compensation of Directors
Directors of Cost-U-Less are paid $1,000 for each Board of Directors meeting
attended and $250 for each committee meeting attended, including attendance at
meetings of subcommittees of which they are not members. 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. Directors have generally been 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,
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. In April 1997, the Board of Directors granted Michael
J. Rose a 10-year, immediately exercisable option to purchase 10,331 shares of
common stock at an exercise price of $10.16 per share, and a 10-year option to
purchase 2,951 shares of common stock at an exercise price of $10.16 per
share, which became fully vested on August 1, 1998. In January 1998, Cost-U-
Less granted Donald L. Gevirtz a 10-year, immediately exercisable option to
purchase 88,554 shares of common stock at an exercise price of $7.62 per
share.
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 and a delay in vesting of six months, the
terms of the new options are identical to the terms of the old options. All
directors elected to exchange their options under this repricing program. All
options surrendered were reissued under the Cost-U-Less 1998 Stock Incentive
Compensation Plan.
Cost-U-Less intends that all future option grants to directors will be made
pursuant to the Cost-U-Less 1998 Stock Incentive Compensation Plan.
PROPOSAL 2: RATIFICATION OF APPOINTMENT OF ERNST & YOUNG LLP
AS THE INDEPENDENT AUDITORS OF COST-U-LESS
The Board unanimously recommends that you vote "FOR" the ratification of the
appointment of Ernst & Young LLP as the independent auditors of Cost-U-Less
for 1999. Ernst & Young has audited the accounts of Cost-U-Less and its
subsidiaries since 1996. Representatives of Ernst & Young are expected to
attend the Annual Meeting and will have the opportunity to make a statement
and to respond to appropriate questions from shareholders. In the event this
ratification of the appointment of Ernst & Young is not approved by a majority
of the votes cast, the selection of other auditors will be considered and
determined by the Board of Directors. The Board of Directors has unanimously
approved the appointment of Ernst & Young as auditors for Cost-U-Less and its
subsidiaries.
The Board of Directors recommends a vote "FOR" approval of this proposal.
4
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 1, 1999, 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 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 Beneficially Owned Class
---------------- ------------------ ----------
Michael J. Rose(2).............................. 608,982 16.9%
c/o Cost-U-Less, Inc.
12410 S.E. 32nd Street
Bellevue, WA 98005
The Kula Fund(3)................................ 357,000 9.8
P.O. Box 188, Port Moresby
Papua New Guinea
Wayne V. Keener(4).............................. 224,633 6.3
P.O. Box 897
Renton, WA 98057
Gary W. Nettles(5).............................. 58,285 1.6
Allan C. Youngberg(6)........................... 47,932 1.3
David A. Enger(7)............................... 2,951 *
All directors and executive officers as a group
(8 persons)(8)................................. 1,299,783 34.4%
- --------
* Less than 1% of the outstanding shares of common stock.
(1) 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 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.
(2) Includes 12,077 shares held by the Michael J. Rose Childrens' Trust dated
January 6, 1992, 32,470 shares held by the Michael J. Rose Trust for
Children and Grandchildren, and 69,366 shares subject to a warrant and to
options exercisable within 60 days of March 1, 1999. Mr. Rose disclaims
beneficial ownership of the shares held in trust.
(3) Includes 117,000 shares subject to a warrant exercisable within 60 days of
March 1, 1999.
(4) Includes 221,387 shares held by Keener's and 2,951 shares subject to
options exercisable within 60 days of March 1, 1999. Mr. Keener has sole
voting and investment power with respect to the shares held by Keener's.
(5) Includes 11,807 shares held by the Alyce Christene Gangwish Irrevocable
Trust of 1995, 27,477 shares held by The Lenz Educational Partnership,
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 591 shares subject to options exercisable
within 60 days of March 1, 1999.
(6) Includes 42,800 shares subject to options exercisable within 60 days of
March 1, 1999.
(7) Represents 2,951 shares subject to options exercisable within 60 days of
March 1, 1999.
(8) Includes 235,659 shares subject to warrants and options exercisable within
60 days of March 1, 1999. Includes shares and a warrant held by the Kula
Fund, which is managed by a venture capital firm for which Mr. Emberson-
Bain serves as Chief Executive Officer and Managing Director.
5
EXECUTIVE OFFICERS
The following persons are executive officers of Cost-U-Less who will serve
in the capacities noted until May 20, 1999, or 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 20, 1999.
Positions and Offices With Cost-U- Officer
Name Age Less Since
---- --- ---------------------------------- -------
Michael J. Rose......... 48 Chairman of the Board, President and 1992
Chief Executive Officer
Allan C. Youngberg...... 46 Executive Vice President, Chief 1993
Financial Officer, Secretary and
Treasurer
For a biographical summary of Mr. Rose, see "PROPOSAL 1: ELECTION OF
DIRECTORS."
Allan C. Youngberg has been Executive Vice President, Chief Financial
Officer, Secretary and Treasurer of Cost-U-Less since January 1993. Prior to
joining Cost-U-Less, Mr. Youngberg was President and a 50% shareholder of
Youngberg & Schumacher, P.S., a certified public accounting firm in Bellevue,
Washington, which Mr. Youngberg founded in 1984 and sold in December 1992. Mr.
Youngberg is a Certified Public Accountant.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain compensation information as to (1)
the Chief Executive Officer of Cost-U-Less and (2) the next most highly
compensated executive officer (the "Named Executive Officers") for services
rendered in all capacities for Cost-U-Less during the fiscal years ended
December 26, 1997 and December 27, 1998.
Long-Term
Annual Compensation
Compensation Awards
---------------- ----------------- All Other
Name and Principal Bonus Shares Underlying Compensation
Position Year Salary ($)(1) Options (#) ($)(2)
------------------ ---- -------- ------- ----------------- ------------
Michael J. Rose........... 1998 $250,000 $37,000 28,041 $5,860
Chairman of the Board, 1997 220,000 22,600 13,282 8,102
President and Chief
Executive Officer
Allan C. Youngberg........ 1998 $175,000 $28,900 14,758 $3,960
Executive Vice President, 1997 160,000 16,500 -- 3,293
Chief Financial Officer,
Secretary and Treasurer
- --------
(1) Represents bonuses paid pursuant to the Cost-U-Less Manager Bonus Program.
(2) Consists of matching contributions to the Cost-U-Less 401(k) profit-
sharing plan of $677 and $2,375 to Mr. Rose and $2,500 and $2,375 to Mr.
Youngberg in 1998 and 1997, respectively; payments of life insurance
premiums of $1,183 and $1,227 to Mr. Rose and $1,460 and $918 to Mr.
Youngberg in 1998 and 1997, respectively; and director's fees of $4,000
and $4,500 paid to Mr. Rose in 1998 and 1997, respectively.
Option Grants in Fiscal 1998
The following table sets forth certain information regarding options granted
during the fiscal year ended December 27, 1998 to the Named Executive
Officers.
Potential
Realizable Value
at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term(4)
--------------------------------------------------------------- ----------------
Percent of Total
Number of Options Granted Exercise
Securities Underlying to Employees Price Expiration
Name Options Granted (#)(1) in Fiscal Year ($/Share)(2) Date(3) 5% ($) 10% ($)
---- ---------------------- ---------------- ------------ ---------- ------- --------
Michael J. Rose......... 28,041 10.2% $7.00 12/15/08 $43,511 $185,551
Allan C. Youngberg...... 14,758 5.4% $7.00 12/15/08 $22,900 $ 97,656
- --------
6
(1) Represents shares subject to options granted pursuant to a repricing
program approved by the Compensation Committee on October 21, 1998. Does
not reflect shares subject to options granted in 1998 but subsequently
surrendered pursuant to the option repricing program. Please see "Option
Repricing" and "Report on Option Repricing."
(2) The exercise price of the options is equal to the price of the common
stock in the Company's initial public offering on July 23, 1998.
(3) All options granted in 1998 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.
Option Exercises in Fiscal 1998 and Year-End Values
The following table sets forth certain information as of December 27, 1998
regarding options held 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
---- ----------- ------------ ----------- ------------- ----------- -------------
Michael J. Rose......... -- $0.0 68,776 25,680 $141,464 $0.0
Allan C. Youngberg...... -- 0.0 41,324 10,331 $ 76,377 $0.0
- --------
(1) Amounts equal the closing price of the common stock on December 27, 1998
($5.25 per share), less the option exercise price, multiplied by the
number of shares exercisable or unexercisable.
Option Repricing
The following table provides information on the repricing of options held by
the Named Executive Officers during fiscal year 1998. All options surrendered
were reissued under the 1998 Stock Incentive Compensation Plan. In December
1996, an option grant for 7,379 shares to Allan Youngberg was repriced from
$16.94 to $8.46 under a repricing offer to all officers, directors and
employees that had options with exercise prices in excess of $10.16 to receive
grants identical to the original grants except for the lower exercise prices.
Cost-U-Less has not repriced any options held by any executive officers during
the past 10 years, other than the December 1996 repricing and those described
below.
Number of Market Price Exercise Length Of
Securities of Stock at Price At New Original Option Term
Underlying Time Of Time Of Exercise Remaining At Date
Name Date Options Repricing Repricing Price(1) Of Repricing
---- ---------------- ---------- ------------ --------- -------- --------------------
Michael J. Rose......... October 21, 1998 2,951 $4.375 $10.16 $7.00 8.5 years
Michael J. Rose......... October 21, 1998 10,331 $4.375 $10.16 $7.00 8.5 years
Michael J. Rose......... October 21, 1998 14,759 $4.375 $ 8.46 $7.00 9.3 years
Allan C. Youngberg...... October 21, 1998 7,379 $4.375 $ 8.46 $7.00 5.8 years
Allan C. Youngberg...... October 21, 1998 7,379 $4.375 $ 8.46 $7.00 9.3 years
- --------
(1) Options granted on October 21, 1998 have an exercise price equal to the
price of the common stock in the Company's initial public offering on July
23, 1998.
7
Report on Option Repricing
On October 21, 1998, the Compensation Committee of the Board of Directors,
in an action ratified by the Board of Directors, approved a program that
allowed officers, directors and employees of Cost-U-Less to exchange options
with exercise prices greater than $7.00 for new options with an exercise price
of $7.00 per share, the price of the common stock offered in the initial
public offering on July 23, 1998. New options will vest according to the
vesting schedule for the original options, except that options granted to
officers and directors cannot be exercised during a six-month blackout period
from December 15, 1998 to June 15, 1999, and are also subject to a six-month
delay in vesting. New options will expire 10 years after the date of exchange
and were granted as nonqualified stock options. All options surrendered were
reissued under the Cost-U-Less 1998 Stock Incentive Compensation Plan.
Immediately prior to the date of the repricing program on October 21, 1998,
options to purchase a total of 443,012 shares were outstanding. Pursuant to
the repricing program, options to purchase a total of 266,648 shares were
exchanged for new options. The Named Executive Officers exchanged a total of
42,799 option shares in the program. See "Executive Compensation--Option
Repricing."
Before implementation of the repricing program, approximately 60% of all
granted and outstanding options had exercise prices greater than the then-
current market price of the common stock ($4.50 as of October 20, 1998). Due
to the significant percentage of "out of the money" options, the Compensation
Committee and the Board of Directors believed that the retention value of the
outstanding grants was significantly diminished and that the repricing program
was critical to the ability of Cost-U-Less to attract, retain and motivate
employees necessary for the long-term success of Cost-U-Less. The Compensation
Committee approved the repricing program as a means of ensuring that optionees
will continue to have meaningful equity incentives to work toward the success
of Cost-U-Less. These adjustments were deemed by the Compensation Committee to
be in the best interests of Cost-U-Less and its shareholders. Furthermore, to
balance the benefits derived from the retention value of the outstanding
grants and the recent sales of shares at $7.00 per share in the initial public
offering in July 1998, the Committee concluded that the grant price per share
should not be less than $7.00, even though the market value was $4.50 on
October 20, 1998.
Compensation Committee
Gary W. Nettles (Chairman)
David A. Enger
Donald L. Gevirtz
Wayne V. Keener
George C. Textor (As of February 23,
1999)
Compensation Committee Interlocks and Insider Participation
The Compensation Committee is currently composed of Messrs. Nettles
(Chairman), Enger, Gevirtz, Keener and Textor. No executive officer of Cost-U-
Less serves as a member of the compensation committee or board of directors of
any entity that has one or more executive officers serving as a member of the
Cost-U-Less Compensation Committee or Board of Directors.
8
REPORT ON EXECUTIVE COMPENSATION BY THE COMPENSATION COMMITTEE
The compensation policy of Cost-U-Less as established by the Board of
Directors is intended to provide competitive compensation to all employees,
giving consideration to the relative contribution and performance of each
employee on an individual basis. It is the Cost-U-Less policy to compensate
its executive officers at levels consistent with industry norms, primarily in
the form of base salary, together with incentive bonuses. In addition, it is
the Cost-U-Less policy to grant stock options to each of its executive
officers to align their interests with shareholder value.
Determining the compensation of executive officers of Cost-U-Less is the
responsibility of the Board of Directors, through the Compensation Committee,
which has overall responsibility for compensation policies for senior
management. The Compensation Committee makes recommendations to the Board of
Directors as to the salaries of, and incentive bonuses awarded to, the Chief
Executive Officer and the Chief Financial Officer.
Executive compensation consists of three major components: base salary,
annual incentive bonuses and stock options. The determination of base salaries
of the Chief Executive Officer and the Chief Financial Officer is based on
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 individual executives. The Compensation
Committee meets early in the year to determine the annual salary component of
executive compensation to be paid during the calendar year. In the case of Mr.
Rose, the Chief Executive officer, the Compensation Committee established a
1998 base salary of $250,000. The Compensation Committee established a 1998
base salary of $175,000 for Mr. Youngberg, the Chief Financial Officer, after
considering the additional responsibilities of the Chief Financial Officer,
primarily resulting from sharing of Chief Operating Officer responsibilities
with Mr. Rose.
Cash incentive bonus compensation to be awarded the executive officers is
administered through the Manager Bonus Program. This program treats executive
officers the same as all other key managers of Cost-U-Less. Early in 1998, the
Compensation Committee approved a bonus of 9% of "Adjusted" net income to be
paid before March 31, 1999 to participants in the Manager Bonus Program
provided that at least 80% of the "Adjusted" net income goal for 1998 is
achieved. "Adjusted" includes certain adjustments to pretax income as
determined by the Compensation Committee. Executive officers and managers
included in the Manager Bonus Program earn their bonus based upon their salary
as a percent of total salaries of participants in the Bonus Program. In 1998,
bonuses under the Bonus Program totaled $269,000, of which executive officers
received $65,900, or 24.5%.
Options to purchase shares of Cost-U-Less common stock were granted to Mr.
Rose and Mr. Youngberg, as well as other employees, during 1998. The option
grants were undertaken pursuant to the Cost-U-Less 1998 Stock Incentive
Compensation Plan, initially implemented in 1998, wherein employees are
eligible to receive a grant of stock options dependent on individual
performance and position held. Under this plan, in 1998 Mr. Rose received
option grants to purchase 28,041 shares of stock at an exercise price of $7.00
per share, of which 13,282 shares were a result of a repricing of options
granted in earlier years. Mr. Youngberg received option grants to purchase
14,758 shares at an exercise price of $7.00 per share, of which 7,379 shares
were a result of a repricing of options granted in earlier years.
Compensation Committee
Gary W. Nettles (Chairman)
David A. Enger
Donald L. Gevirtz
Wayne V. Keener
George C. Textor (As of February 23,
1999)
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 1998 (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)(1) and the Nasdaq Retail Trade Stocks Index(2) 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).
[PERFORMANCE GRAPH APPEARS HERE]
COMPARISON OF CUMULATIVE TOTAL RETURNS SINCE JULY 23, 1998
AMONG COST-U-LESS, INC., THE NASDAQ STOCK MARKET INDEX (US) AND THE
NASDAQ RETAIL TRADE STOCKS INDEX
Industry Company
Market Index Index Index
--------------- --------- ----------
7/23/98 100 100 100
7/31/98 96.85 93.59 98.21
8/31/98 77.86 69.39 76.79
9/30/98 88.61 73.26 73.21
10/30/98 92.24 81.5 71.43
11/30/98 101.32 92.53 62.5
12/27/98 112.7 112.7 75
- --------
(1) The Nasdaq Stock Market Index (US) was prepared by the Center for Research
in Security Prices and includes all U.S. Nasdaq Stock Market companies.
(2) The Nasdaq Retail Trade Stocks Index was prepared by the Center for
Research in Security Prices and includes all U.S. and foreign companies
quoted and traded on the Nasdaq that have a primary Standard Industrial
(SIC) Code in any of the following ranges: 5200-5599, 5700-5799 or 5900-
5999.
(3) Shareholder returns over the indicated period should not be considered
indicative of future shareholder returns. The lines on the graph represent
monthly index levels derived from compounded daily returns including all
dividends.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Concurrent Reg. S Placement to Kula Fund. During 1997 and 1998, Cost-U-Less
discussed with CDC 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 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. In addition, Ashley Emberson-Bain, who
serves as the Chief Executive Officer and Managing Director of Pacific Capital
Partners, a venture firm affiliated with CDC, was appointed to the Board of
Directors of Cost-U-Less following the initial public offering.
Gevirtz Option. In January 1998, Donald L. Gevirtz, 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
10
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.
Streamline Capital Corporation. In December 1997, Cost-U-Less entered into
an investment banking agreement with Streamline Capital Corporation
("Streamline Capital"). The principal of Streamline Capital is Steven L.
Gevirtz, the son of Donald L. Gevirtz. The agreement provided for investment
banking services, including initiation and implementation of strategic
financing arrangements to fund expansion of Cost-U-Less. Pursuant to the
agreement, as modified in March 1998, Cost-U-Less paid to Streamline Capital a
total of $76,000 (including expenses) in connection with the Company's initial
public offering. Cost-U-Less believes that the terms of this transaction were
no less favorable to Cost-U-Less than those available from independent third
parties.
Fiji Lease. In April 1998, Cost-U-Less entered into a 10-year lease
agreement with Westmall Limited, a Fiji limited liability company, to lease
premises for the store in Nadi, Fiji. Westmall Limited is partly owned (25%)
by Terence R. Buckley, Director of Pacific Expansion of Cost-U-Less. The
monthly lease payments are approximately $14,000. Cost-U-Less believes that
the terms of this transaction were no less favorable to Cost-U-Less than those
available from independent third parties.
Employment of Gerald J. Rose. Gerald J. Rose, the brother of Michael J.
Rose, the Chief Executive Officer of Cost-U-Less, has been employed by Cost-U-
Less since January 1993. He currently serves as logistics manager for general
offshore operations of Cost-U-Less. He earned compensation of approximately
$72,000 in fiscal 1998.
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 $129,000 of product in fiscal 1998. 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, or
written representations from certain reporting persons that no forms were
required for those persons, Cost-U-Less believes that during 1998 all filing
requirements required by Section 16(a) applicable to its officers, directors
and greater-than-10% beneficial owners were complied with by such persons.
11
INDEPENDENT PUBLIC ACCOUNTANTS
The Board has selected Ernst & Young LLP, certified public accountants, to
act as independent auditors of Cost-U-Less for the fiscal year ending December
26, 1999. Ernst & Young LLP has been the auditor of Cost-U-Less since 1996.
A representative of Ernst & Young LLP is expected to be present at the
Annual Meeting, with the opportunity to make a statement, if the
representative so desires, and is expected to be available to respond to
appropriate questions from shareholders.
SHAREHOLDER PROPOSALS FOR 2000 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 2000 Annual Meeting of Cost-U-Less must give notice of the proposal to
Cost-U-Less no later than December 9, 1999 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 2000 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 1998 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 may be obtained
from the Secretary of Cost-U-Less, 12410 S.E. 32nd Street, Bellevue,
Washington, 98005.
THE ANNUAL REPORT OF COST-U-LESS ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 27, 1998, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, IS
INCLUDED IN THE COST-U-LESS 1998 ANNUAL REPORT TO SHAREHOLDERS.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ Allan C. Youngberg
Allan C. Youngberg
Secretary
Bellevue, Washington
April 7, 1999
12
COST-U-LESS, INC.
This Proxy is solicited by the Board of Directors for the
Annual Meeting of Shareholders -- May 20, 1999
The undersigned hereby appoint(s) Michael J. Rose and Allan C. Youngberg 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 20, 1999 at the Annual Meeting of Shareholders of Cost-
U-Less to be held at the WestCoast Bellevue Hotel (Tamarack Room), 625 116th
Ave. N.E., Bellevue, Washington, at 10:00 a.m. on Thursday, May 20, 1999, 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.
(1) ELECTION OF TWO DIRECTORS
Nominees: David A. Enger and Gary W. Nettles
FOR the WITHHOLD
Nominees AUTHORITY to
[ ] vote for the
Nominees
[ ]
(2) RATIFY THE APPOINTMENT OF ERNST & YOUNG LLP AS THE INDEPENDENT AUDITORS OF
COST-U-LESS
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
WITHHOLD for the following only: (write the name of the nominee in the
space below)
---------------------------------------------------------------------------
unless otherwise directed, all votes will be apportioned equally among
those persons for whom authority is given to vote
IMPORTANT--PLEASE DATE AND SIGN ON THE OTHER SIDE
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 THE
NOMINEES" IN ITEM 1 AND "FOR" ITEM 2.
The Board of Directors recommends a vote "FOR the Nominees" in Item 1 and "FOR"
Item 2.
Date
------------------------------------
Signature(s)
-----------------------------
Date
------------------------------------
Signature(s)
-----------------------------
Please sign exactly as your 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,
associations, 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.
[ ] I plan to attend the Annual Meeting