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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended December 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number 0-24543
COST-U-LESS, INC.
(Exact Name of Registrant as Specified in its Charter)
Washington 91-1615590
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
8160 304th Ave. SE, Bldg. 3, Suite A, Preston, Washington 98050
(Address of Principal Executive Offices): (Zip Code)
(425) 222-5022
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Preferred Stock Purchase Rights
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of
the registrant, based on the closing price on March 20, 2001, as reported on the
Nasdaq SmallCap Market was approximately $5,414,812 (1).
The number of shares of the registrant's Common Stock outstanding at March
20, 2001 was 3,606,376.
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(1) Excludes shares held of record on that date by directors, executive
officers and greater than 10% shareholders of the Registrant. Exclusion of
such shares should not be construed to indicate that any such person
directly or indirectly possesses the power to direct or cause the direction
of the management of the policies of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent not set
forth herein, is incorporated herein by reference from the Registrant's
definitive proxy statement relating to the annual meeting of stockholders to be
held on May 8, 2001, which definitive proxy statement shall be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year to which this Report relates.
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Cost-U-Less, Inc. (the "Company") has re-evaluated whether its New Zealand
operations were "substantially liquidated" in connection with the store closures
in New Zealand in June 2000. Based on its re-evaluation, the Company now
believes that "substantial liquidation," as defined in Statement of Financial
Accounting Standards No. 52 (FAS 52) occurred in June 2000, and therefore the
Company's accounting for New Zealand foreign currency translation requires
adjustment retroactive to June 2000 and for each subsequent quarter through the
third quarter of fiscal 2001. The restatement is a result of the Company's
re-evaluation of the accounting interpretation and application of FAS 52, and
not the result of any improper conduct by Company personnel or lack of internal
controls.
This amendment to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000 amends and restates only those items of the
previously filed Form 10-K which have been affected by the restatement. In order
to preserve the nature and character of the disclosures set forth in such items
as originally filed, no attempt has been made in this amendment to modify or
update such disclosures except as required to reflect the effects of the
restatement and to make nonsubstantial revisions to the notes to the
consolidated financial statements. For additional information regarding the
restatement, see "Notes to Consolidated Financial Statements - Restatement"
included in Part II, Item 8.
This Form 10-K/A corrects the previously issued financial statements. See
Selected Financial Data, Management's Discussion and Analysis of Financial
Condition and Results of Operations and Financial Statements and Supplementary
Data including the Notes to Consolidated Financial Statements.
PART I
When used in this Annual Report, the words "believes," "anticipates" and
"intends" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected. See
"Business--Important Factors That May Affect Future Results." Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. Cost-U-Less, Inc. undertakes no obligation to
publicly release any revisions to these forward-looking statements that may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events. Readers are urged, however, to review the
factors set forth in reports Cost-U-Less, Inc. has filed from time to time with
the Securities and Exchange Commission.
Item 1. Business
Overview
Cost-U-Less, Inc. operates mid-sized warehouse club-style stores in the
United States Territories ("U.S. Territories"), foreign island countries in the
Pacific and the Caribbean, the Hawaiian Islands and Sonora, California. The
Company's primary strategy is to operate in island markets, offering
predominately U.S. branded goods. The Company currently operates eleven stores:
two stores in each of Hawaii and Guam, and one store in each of St. Thomas, St.
Croix, American Samoa, Fiji, Curacao, St. Maarten and Sonora, California.
The Company opened its first retail warehouse store in 1989 in Maui,
Hawaii. In 1992, the Company began to expand by opening stores in other island
locations. After experiencing success with its mid-sized store concept, the
Company began experimenting in late 1992 with similar stores in various mainland
markets while continuing to open stores in island markets. Facing increasing
competition from larger discount retailers and warehouse clubs in its mainland
markets, management decided in 1995 to return its focus to its core island
markets and began closing its mainland stores. The Company's process of closing
five of its six mainland stores was completed in 1997.
In 1998, the Company opened two stores in Fiji. In 1999, the Company opened
two stores in New Zealand and one in Curacao. In 2000, the Company opened a new
store in St. Maarten, located in the Caribbean near the Company's St. Thomas and
St. Croix stores.
In June 2000, the Company closed its two New Zealand stores, as well as its
buying office in Auckland. Although the Company had introduced what it believed
to be the first warehouse club concept to the New Zealand marketplace, the
Company believes that the loyalty of New Zealand customers to many regional
brands resulted in disappointing sales by the new stores of the U.S. brands
primarily sold by the Company.
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In January 2001, the Company announced the closure of one of its two Fiji
stores, due primarily to the impact that the political turmoil in Fiji was
having on the tourist industry. The resulting economic downturn severely
impacted the performance of its store in Nadi, which was closed in February
2001. The Company's remaining store in Fiji is located in the city of Suva,
which is the capital and the primary population center of Fiji.
Industry Overview
Traditional warehouse clubs such as Costco Companies, Inc. ("Costco"), BJ's
Wholesale Club, Inc. and Sam's Club, a division of Wal-Mart Stores, Inc.
("Wal-Mart"), focus on both retail and small-business customers, with store
formats averaging approximately 115,000 square feet. These retailers typically
(i) offer a range of national brand and selected private label products at low
prices, often in case, carton or multiple-pack quantities, (ii) provide
no-frills, self-service warehouse facilities with pallet-stacked product aisles,
and (iii) charge annual membership fees. Although the Company employs many of
the retailing methods of the larger participants in the warehouse club industry,
the Company operates smaller stores (averaging approximately 30,000 square
feet), does not charge a membership fee, typically locates its stores in smaller
geographic areas with less concentrated population centers, and relies to a
greater degree on long-haul water transportation than do other such companies.
While the typical U.S. warehouse club customer has virtually unlimited
access to popular U.S. brand-name products, the Company believes these products
are carried by relatively few local retailers in a number of island markets.
Moreover, island markets often demonstrate unique consumer preferences which
typically require retailers to conduct local research and incorporate flexible
merchandise purchasing policies in order to offer a diverse selection of local
products, as well as popular U.S. brand-name products.
Business Strategy
The Company's business strategy is to enter small island markets ahead of
large warehouse club competitors, select markets familiar with the warehouse
club concept, offer U.S. goods where availability of such goods is minimal and
significant demand exists, leverage island-operations expertise, utilize modern
systems and merchandising methods, offer competitive prices while maintaining
attractive margins, and provide a local product mix while benefiting from low
overhead costs.
Expand to New Markets. The Company intends to pursue future growth by
expanding into markets that other warehouse clubs and discount retailers have
not yet entered, particularly in the Pacific and Caribbean regions. The pace at
which the company will open new stores will be dictated by its strategic
planning process. The Company plans to refine its expansion efforts to focus on
markets with high U.S. brand awareness and demand, as well as other attributes
that typify its most successful stores. Currently, the Company has no plans to
open new stores during 2001, but is in the process of analyzing opportunities
for new stores in the future.
Enter Markets Familiar With Warehouse Concept. The Company plans to seek
markets that have some familiarity with the warehouse club concept. Residents of
potential island markets often gain familiarity with the warehouse club concept
through travel to the U.S. and other markets where warehouse clubs are present.
The Company believes that the presence of this attribute has helped accelerate
market acceptance of Company stores in the past.
Offer U.S. Goods to Meet Market Demand. Markets that have awareness and
acceptance of U.S. goods but have limited access to those goods offer
substantial sales and profit potential. The Company believes procuring U.S.
goods in large volumes and shipping them long distances to island stores are two
of its core competencies.
Leverage Island-Operations Expertise. Through its experience in opening and
operating retail warehouse club-style stores in the U.S. Territories, foreign
island countries and the Hawaiian Islands, the Company believes it has developed
a depth of expertise in dealing with the inherent challenges of island market
operations. The Company has refined a mid-sized building prototype that is
designed to endure severe island weather conditions and that incorporates low
construction costs and easily replicated specifications. Through its
long-standing relationships with steamship lines, the Company negotiates what it
believes to be competitive transportation rates while selecting efficient
shipping routes and utilizing cost-effective freight handling techniques,
including the use of both Company-operated cross-dock depots and independently
operated distribution facilities.
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Utilize Modern Systems and Merchandising Methods. The Company believes that
many merchants in its most promising target markets have not adopted modern
retail operating efficiencies and do not have access to vendor network and
distribution channels equivalent to those developed by the Company.
Emphasize Strong Margins While Maintaining Everyday Low Prices. In addition
to providing a pleasant shopping atmosphere, the Company strives to sell its
products at prices that it believes are lower than those offered by its local
island competitors, yet still above those that could be charged in mainland
markets. By leveraging its retail operating efficiencies, access to
volume-purchasing discounts and distribution capabilities, the Company believes
it is able to acquire some products at a significantly lower cost than that paid
by other local island retailers. Historically, these factors have enabled the
Company to achieve higher margins than those achieved by mainland warehouse
clubs and discount retailers.
Use Localized Product Sourcing Yet Derive Benefits of Centralized
Purchasing. The Company conducts market research through its vendors, store
managers and resident employees to ascertain the product preferences of each
particular locale, including which U.S. brands are favored and which regional
and ethnic items are desired. To the extent possible, the Company's buyers then
procure these products through its centralized purchasing department, thus
deriving the benefits of volume purchase discounts, streamlined distribution and
enhanced selection. The remaining products, including locally produced items
that are available only in a particular region, are generally purchased by store
managers and Company buyers directly from suppliers located in the region.
Market and Site Selection
The Company believes that there are certain key attributes for successful
stores, such as acceptance and demand for U.S. goods, familiarity with the
warehouse concept, and absence of large warehouse club competition. Once the
Company identifies a target location as a possible site for its expansion and is
satisfied with the political and regulatory environment in the target location,
the Company compares the prices charged by local competitors to the prices the
Company would need to charge in order to achieve an acceptable return on its
investment (after factoring in cost of the product, cost of freight, duties,
port charges, transportation and taxes). If the Company's market research
indicates that the Company would be able to charge an adequate price for its
products, the Company commences a formal search for a suitable store site.
Desirable attributes of suitable sites include a central location in a
population center, sufficient space for the Company's facility, including
parking and loading docks, access to utilities and acceptable geological
conditions for successful construction.
The Company generally does not intend to own the land or buildings for its
stores. To the extent, however, that the Company believes it to be advantageous
to purchase land for new store sites or to construct new store buildings, the
Company may use its cash resources or existing financing sources during the
construction period and subsequently attempt to obtain permanent financing after
the stores are opened. The ability of the Company or its potential future
landlords to secure financing for new stores is subject to the availability of
commercial real estate loans; failure to secure adequate financing on a timely
basis would delay or potentially prevent new store openings.
Store Economics
The Company's eleven stores that were open during all of fiscal 2000
generated annual average net sales of approximately $14.6 million, average net
sales per square foot of approximately $500, average annual per store
contribution of approximately $560,000, and average annual per store
contribution before depreciation of approximately $660,000. Store contribution
is store gross profit less direct store operating expenses. The average
investment in buildings, equipment and leasehold improvements as of December 31,
2000 in these eleven stores was approximately $800,000. The average investment
in inventory, net of accounts payable of approximately 60%, was $600,000 at
December 31, 2000. The store contribution return on average investment for
fiscal 2000 for these eleven stores was approximately 40%. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
Store Layout
The Company has incorporated into its prototype store many standard
features found in domestic warehouse clubs that had not been previously used in
many island markets. Store layout and interior designs were planned and
calculated using computer models, with the goal of maximizing the sales per
square foot and providing uniformity among the stores. Further, the Company
believes that its use of loading docks, comparatively large freezer and
refrigeration space with state-of-the-art equipment, efficient shelving and
display racks, computerized cash registers and inventory tracking systems, and
multiple checkout lanes helps give it a
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competitive advantage over many island competitors. Each Company store is
outfitted with adjustable metal shelving that allows the Company to vary the
display of its product based on each location's specific consumer needs. Each
island store has backup generators designed to protect perishables and the
store's security system during disruption of electric service caused by severe
weather conditions that can occur in island markets. Additionally, the Company
has designed its prototype to withstand the severe wind and heavy rain
associated with hurricanes, typhoons and tropical storms.
The Company has used considerable care in developing its store layout,
which features a logical flow to encourage shopping of all departments. When
ready for check out, the customer proceeds to the check-out area in the front of
the store, which usually features 10 lanes. During a typical store visit, the
average customer will spend approximately $47. Various forms of payment are
accepted, including food stamps and debit and credit cards, and credit is
extended to some local businesses and government agencies. Utilizing a no-frills
approach, the stores display items in steel racking, usually on the vendor's
pallets or in open cases, to maximize warehouse space and minimize labor costs.
In-store signage reinforces the basic value image, while stores generate
customer excitement through the use of end-cap displays featuring new
merchandise and special promotions, food demonstrators offering product samples,
and ongoing introduction of new items.
The Company has also attempted to minimize costs through the design of its
stores. The Company does not use expensive fixtures such as floor tiles and
false ceilings, and thereby lowers construction and maintenance costs. In
addition, the Company's refrigeration supplier has designed specialized
refrigeration units using modern equipment that allows for cost-effective
monitoring, maintenance and repair, and keeps energy costs to a minimum. The
Company has also developed standardized construction specifications and has
negotiated competitive prices on its building materials, such as metal exterior
panels, building components, store equipment and shelving, thus allowing the
Company to control material costs on a per-facility basis and help ensure
uniformity of materials throughout its facilities and minimizing the Company's
lease expenses.
Merchandising
The Company typically carries approximately 2,500 stock-keeping units
("SKUs"), compared to the 3,500 to 5,000 SKUs estimated by industry sources to
be carried by traditional warehouse clubs. The stores do not have certain
departments found in most large-format warehouse clubs, such as automobile
tires, bakery, photo finishing and prescription drugs. All stores feature the
following main product categories:
Food-Perishables. Meat, produce, deli, dairy and frozen items
represent approximately 25% of a typical store's net sales. The "reach-in"
freezers and coolers are substantially larger than those found in the
stores of most of the Company's local island competitors.
Food-Non-perishables. Dry grocery goods, including soda, wine, beer,
liquor, candy and snacks, represent approximately 45% of a typical store's
net sales. Also included in this area are ethnic and specialty items
catering to local consumer demands.
Nonfood. Other nonfood items comprise the remaining 30% of a typical
store's net sales, and include tobacco, sundries, health and beauty,
office, hardware, electronics, housewares, furniture and sporting goods.
Purchasing. The Company balances its product mix by providing popular U.S.
brand name products together with local ethnic items found in each island
region. Approximately one-third of the Company's items are produced locally or
purchased through local suppliers in each market. Offering locally purchased
merchandise enables the Company to better serve its island customers and offer
an innovative variation to the warehouse store format. Store managers are able
to purchase product that may be available only on their particular islands. The
Company's buyers monitor sales and inventory levels on a daily basis from all of
the Company's stores. In an effort to cater to retail customers who generally
purchase products for home use, the Company carries products in various product
sizes, including single packages, "bulk packages" and mid-sized "value-packs."
The Company purchases merchandise from manufacturers and suppliers on a purchase
order basis exclusively.
Pricing. The Company strives to be the "low price leader" for the markets
it serves. The Company does not charge its customers a membership fee, thereby
allowing all consumers to receive the benefits of the Company's value-pricing
philosophy. The Company provides everyday low prices that are often lower than
regular prices offered at most retailers, such as grocery stores, and are
generally intended to be slightly lower than those offered by mass merchant
discount retailers, such as Wal-Mart and Kmart Corporation ("Kmart"), that
operate in some of the Company's island markets. In an effort to achieve the
lowest prices available in a particular market, the Company regularly compares
prices and products being offered by the Company's local
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competitors. Generally, given the economic efficiencies the Company can bring to
bear with its ability to purchase product at larger quantities as well as its
efficient distribution system that allows it to take advantage of optimal
freight and transportation costs, management believes that the Company has a
competitive advantage when pricing most of its products compared to local
competition. However, if the comparison of local competitors' prices discloses
that the Company's prices exceed those of its local competition, store managers
have the authority to reduce prices to remain competitive. This decentralization
of pricing decisions allows the Company to respond quickly and efficiently to
competitive challenges in each of its island markets.
Distribution
The Company currently uses a Company-operated distribution facility in San
Leandro, California and independently operated facilities in Port Everglades,
Florida, Sacramento, California, Auckland, New Zealand and Sydney, Australia.
The Company has no written agreements with the independently operated
distribution facilities, but instead has month-to-month service relationships.
At each distribution facility, merchandise is received, consolidated and
cross-docked, and ultimately shipped in fully loaded containers to the Company's
stores. Each store has a "lane" designated to it in the depot; when a full
container load is queued into the lane, it is loaded by forklift into a cargo
container, which, when filled, is then delivered to the closest port for
shipment to the designated store. Management has significant experience and
long-term relationships with steamship lines and, with its present volume, has
negotiated what it believes to be competitive transportation rates. The Company
does not have a warehouse, but controls inventory levels in stores by
maintaining sufficient back stock in stores combined with efficient cross-dock
facilities. For perishable items, the Company uses independently operated
consignment depots that are for the Company's exclusive use. Each supplier of
perishable items, such as meats, frozen foods, fruits and vegetables, pays a
storage charge for use of such depots based upon the amount of space used for
storage of each supplier's goods.
Management Information Systems
The Company considers management information systems to be a key component
of its strategic plan. The Company tracks all inventory movement, sales and
purchase orders by SKU number, vendor number, store and date. The Company
currently uses electronic point-of-sale equipment in all stores. All data and
communications from each location are sent via the Company's wide area network,
to the computer system located at the corporate headquarters in Preston,
Washington. The Company installed new computer hardware to operate its inventory
control system in January 1999, which has enhanced, extended and improved the
data capabilities of its systems. The Company's wide area network provides
communications capabilities that allow for quick responses to ever-changing
customer needs and local retail opportunities. The ability to quickly and
consistently communicate between headquarters and store locations is necessary
when stores are located in such remote locations.
Employee Organization, Training and Compensation
Management of each store generally consists of a store manager, one
assistant manager and two to three department managers, depending on the store.
The merchandising manager oversees the training and day-to-day operations of the
stockers and forklift operators. The receiving manager oversees the day-to-day
receiving operations and the receiving clerks. The administrative manager
oversees the training and day-to-day operations of the vault clerks, cashiers
and security personnel, if applicable.
The Company's goal is to hire most of those employees from the island
markets, thus creating job opportunities for local residents. The Company
attempts to promote its store managers internally. The Company requires its
store managers to complete an approximately six-month training program in a
Company store. New store employees initially receive one to two weeks of
training, which typically includes working alongside individuals in comparable
positions before working without direct supervision. The Company has found that
such on-the-job training, together with the use of detailed operating and
training manuals, is an effective way to introduce new employees and managers to
the Company's systems and procedures.
The Company strives to attract and retain highly motivated,
performance-oriented employees and managers by offering competitive
compensation, including bonus programs based on their performance. During 2000,
the Company changed its Manager Bonus Program to one under which managers are
paid an annual bonus based on store and departmental profitability targets.
Prior to 2000, the Company's Manager Bonus Program was based on the net income
of the Company. Although the Company believes that it generally pays its
employees above-market wages and is thereby able to attract and retain
high-quality
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employees, it further believes that island wages are generally lower than
mainland wages and thus result in comparatively lower labor costs.
Customer Service
The Company brings to its island markets a commitment to customer service
that management believes gives it a competitive advantage in each of the local
markets it serves. The Company's store layout is designed to maximize floor
space used for selling product as well as to give customers a spacious feel
while shopping. Various forms of payments are accepted, including food stamps
and credit and debit cards, and credit is extended to some local businesses and
government agencies. The Company has a 30-day, no-questions-asked return policy.
Each of the Company's stores has approximately 10 checkout lanes, which allows
for quick and efficient shopping. Each store features a customer desk where
customers can have questions answered, usually by a management team member. In
addition, employees are trained to help customers locate store products.
Marketing and Advertising
The Company generally relies on word-of-mouth advertising in order to save
on advertising and marketing costs and pass on the savings to its customers. The
Company has historically spent less than 0.2% of net sales on advertising.
However, in more competitive markets, the Company may experience higher
marketing and advertising costs.
Competition
The warehouse club and discount retail businesses are highly competitive.
The Company historically has faced significant competition from warehouse clubs
and discount retailers such as Wal-Mart, Kmart and Costco in Hawaii, and from
Kmart in the U.S. Virgin Islands and Guam. The Company's competition also
consists of discount retailers and other national and international grocery
store chains. Some of the Company's competitors have substantially greater
resources, buying power and name recognition than the Company. The Company plans
to target its future expansion in additional island markets that it believes are
underserved by existing retailers and not yet penetrated by large warehouse
clubs and discount retailers. The cost of doing business in island markets is
typically higher than on the U.S. mainland because of ocean freight and duty
costs and higher facility costs. While the Company expects that the size of many
of the markets in which it operates or expects to enter will delay or deter
entry by many of its larger competitors, there can be no assurance that the
Company's larger competitors will not decide to enter these markets or that
other competitors will not compete more effectively against the Company. The
Company's gross margin and operating income are generally lower for those stores
in markets where traditional warehouse clubs and discount retailers also operate
stores, due to increased price competition and reduced market share. The Company
may be required to implement price reductions and other actions in order to
remain competitive in its markets. A membership warehouse club has announced its
intent to open a store in May 2001 on St. Thomas, where the Company has an
established presence. The Company's ability to expand into new markets and
operate profitably in new and existing markets, particularly small markets, may
be adversely affected by the existence or entry of competing warehouse clubs or
discount retailers.
Trademarks
The Company has been granted federal registration of the name and stylized
logo "Cost-U-Less."
Governmental Regulation
The Company is subject to various applicable laws and regulations
administered by federal, state and foreign regulatory authorities, including,
but not limited to, laws and regulations regarding tax, tariffs, currency
repatriation, zoning, employment and licensing requirements. Additionally, as
the Company pursues future expansion in foreign countries, the Company's
operations will be subject to additional foreign regulatory standards, laws and
regulations, in addition to customs, duties and immigration laws and
regulations. Changes in the foregoing laws and regulations, or their
interpretation by agencies and the courts, occur from time to time. While the
Company believes that it presently complies in all material respects with such
laws and regulations, there can be no assurance that future compliance will not
have a material adverse effect on the Company's business, financial condition
7
and operating results. See "Important Factors That May Affect Future
Results--Risks Associated With Island and International Operations."
Employees
As of March 11, 2001, the Company had 41 full-time employees at its
corporate headquarters in Preston, Washington, and 13 employees at its main
distribution facility in San Leandro, California. In total, the Company employs
approximately 500 people worldwide. None of the Company's employees are covered
by collective bargaining agreements.
Important Factors That May Affect Future Results
You should carefully consider the following factors that may affect future
results and other information included in this Annual Report. The risks and
uncertainties described below are not the only ones the Company faces.
Additional risks and uncertainties not presently known to the Company or that
are currently deemed immaterial also may impair our business operations or could
cause actual results to differ from historical results or those anticipated. If
any of the following risks actually occur, our business, financial condition and
operating results could be materially adversely affected.
Small Store Base. The Company opened its first store in 1989, opened a
total of 21 stores through December 2000, and presently operates eleven stores.
The Company's closure of ten stores has adversely affected the Company's
operating results. Should (i) any new store be unprofitable, (ii) any existing
store experience a decline in profitability, or (iii) the Company's general and
administrative expenses increase to address the Company's expanded operations,
the effect on the Company's operating results would be more significant than
would be the case if the Company had a larger store base, and could have a
material adverse effect on the Company's business, financial condition and
operating results. Although the Company intends to carefully plan for the
implementation of additional stores, there can be no assurance that such plans
can be executed as envisioned or that the implementation of those plans will not
have a material adverse effect on the Company's business, financial condition
and operating results. See "--Business--Business Strategy."
Competition. The warehouse club and discount retail businesses are highly
competitive. The Company historically has faced significant competition from
warehouse clubs and discount retailers, such as Wal-Mart, and Costco in Hawaii,
and from Kmart in the U.S. Virgin Islands and Guam. The Company's competition
also consists of discount retailers and other national and international grocery
store chains. Some of the Company's competitors have substantially greater
resources, buying power and name recognition than the Company. The cost of doing
business in island markets is typically higher than on the U.S. mainland because
of ocean freight and duty costs and higher facility costs. While the Company
expects that the size of many of the markets in which it operates or expects to
enter will delay or deter entry by many of its larger competitors, there can be
no assurance that the Company's larger competitors will not decide to enter
these markets or that other competitors will not compete more effectively
against the Company. The Company's gross margin and operating income are
generally lower for those stores in markets where traditional warehouse clubs
and discount retailers also operate stores, due to increased price competition
and reduced market share. The Company may be required to implement price
reductions and other actions in order to remain competitive in its markets. A
membership warehouse club has announced its intent to open a store in May 2001
on St. Thomas, where the Company has an established presence. Moreover, the
Company's ability to expand into and operate profitably in new markets,
particularly small markets, may be adversely affected by the existence or entry
of competing warehouse clubs or discount retailers. See
"--Business--Competition."
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Ability to Manage Growth. The success of the Company's future growth
strategy will depend to a significant degree on the Company's ability to (i)
operate stores on a profitable basis, (ii) expand its operations through the
opening of new stores, (iii) properly identify and enter new markets, (iv)
locate suitable store sites, (v) negotiate acceptable lease terms, (vi) locate
local developers to construct facilities to lease, (vii) construct or refurbish
sites, and (viii) obtain necessary funds on satisfactory terms. The Company has
not opened stores in foreign island markets at a rapid pace and has no store
openings planned for 2001. The Company has no operating experience in many of
the markets in which it may open new stores. In fact, the Company recently
closed the two stores that it had opened in New Zealand in 1999, as they had
performed below expectations, due in part to competitive and merchandising
challenges that are different from other Company stores. Additionally, the
Company closed one of its two Fiji stores, due primarily to the impact that the
political turmoil in Fiji was having on the tourist industry. The resulting
economic downturn severely impacted the performance of its store in Nadi, which
was closed in February 2001. New markets may present operational, competitive,
regulatory and merchandising challenges that are different from those currently
encountered by the Company. There can be no assurance that the Company will be
able to adapt its operations to support its future expansion plans or that the
Company's new stores will be profitable.
Additionally, the Company relies significantly on the skill and expertise
of its on-site store managers. The Company will be required to hire, train and
retain skilled managers and personnel to support its growth, and may experience
difficulties locating store managers and employees who possess the training and
experience necessary to operate the Company's new stores, including the
Company's management information and communications systems, particularly in
island markets where language, education and cultural factors may impose
additional challenges. Further, the Company has encountered, and may continue to
encounter, substantial delays, increased expenses or loss of potential sites due
to the complexities, cultural differences, and local political issues associated
with the regulatory and permitting processes in the island markets in which the
Company may locate its stores. There can be no assurance that the Company will
be able to open new stores according to its business plans, or that it will be
able to continue to attract, develop and retain the personnel necessary to
pursue its growth strategy. Failure to do so could have a material adverse
effect on the Company's business, financial condition and operating results.
The Company also will need to continually evaluate the adequacy of its
existing systems and procedures, including store management, financial and
inventory control and distribution systems. As the Company grows, it will need
to continually analyze the sufficiency of its distribution depots and inventory
distribution methods and may require additional facilities in order to support
its planned growth. There can be no assurance that the Company will anticipate
all the changing demands that its expanding operations will impose on such
systems. Failure to adequately update its internal systems or procedures as
required could have a material adverse effect on the Company's business,
financial condition and operating results. See "Business--Business Strategy".
Risks Associated With Island and International Operations. The Company's
net sales from island operations represented approximately 89% of the Company's
total net sales for fiscal 2000. The Company expects that its island and
international operations together will continue to account for nearly all of its
total net sales. The distance, as well as the time-zone differences, involved
with island locations impose significant challenges to the Company's ability to
manage its operations. Logistical challenges are presented by operating
individual store units in remote locations, whether in terms of information flow
or transportation of goods.
Isolation of Store Operations From Corporate Management; Increased
Dependence on Local Managers. The Company's headquarters and administrative
offices are located in Preston, Washington; however, ten of the Company's eleven
stores and a majority of its employees are located on islands. Although the
Company invests resources to hire and train its on-site managers, the inability
of the Company's executives to be physically present at the Company's current
and planned store sites on a regular basis may result in (i) an isolation of
store operations from corporate management and an increased dependence on store
managers, (ii) a diminished ability to oversee employees, which may lead to
decreased productivity or other operational problems, (iii) construction delays
or difficulties caused by inadequate supervision of the construction process,
and (iv) communication challenges. The Company may need to invest significant
resources to update and expand its communications systems and information
networks and to devote a substantial amount of time, effort and expense to
national and international travel in order to overcome these challenges; failure
to do so could have a material adverse effect on the Company's business,
financial condition and operating results. See "--Business--Employee
Organization, Training and Compensation."
Uncertainties Associated With Expansion Outside U.S. Territories.
Currently, eight of the Company's stores are located in the U.S. Territories and
foreign island countries throughout the Pacific and Caribbean. The remaining
three stores are in Hawaii and California. The Company's future expansion plans
may involve entry into additional foreign countries, which may involve
additional or heightened risks and challenges that are different from those
currently encountered by the Company, including risks associated with being
further removed from the political and economic systems in the United States.
The Company does not currently engage in currency hedging activities. On
February 15, 2001, the Company closed one of the two stores it operated in
9
Fiji during Fiscal 2000 due primarily to the impact that the political turmoil
in Fiji was having on the tourist industry, with the resulting economic downturn
severely impacting its store in Nadi. The Company's remaining store in Fiji is
located in the city of Suva, which is the capital of Fiji and the primary
population center. There can be no assurance that further political and economic
changes in Fiji will not have a material adverse effect on the Company's
business, financial condition and operating results. The failure to adequately
address the additional challenges involved with international operations, and
specifically those associated with the Company's store in Fiji, could have a
material adverse effect on the Company's business, financial condition and
operating results. See "--Business--Business Strategy."
Difficult Transportation Environment. The Company's island locales require
the transportation of products over great distances on water, which results in
(i) substantial lags between the procurement and delivery of product, thus
complicating merchandising and inventory control methods, (ii) the possible loss
of product due to potential damage to, or destruction of, ships or containers
delivering the Company's goods, (iii) tariff, customs and shipping regulation
issues, and (iv) substantial ocean freight and duty costs. Moreover, only a
limited number of transportation companies service the Company's regions, none
of which has entered into a long-term contract with the Company. The inability
or failure of one or more key transportation companies to provide transportation
services to the Company, changes in the regulations that govern shipping tariffs
or any other disruption in the Company's ability to transport its merchandise
could have a material adverse effect on the Company's business, financial
condition and operating results. See "--Business--Distribution."
Governmental Regulations. Governmental regulations in foreign countries
where the Company plans to expand its operations might prevent or delay entry
into the market or prevent or delay the introduction, or require modification,
of certain of the Company's operations. Additionally, the Company's ability to
compete may be adversely affected by foreign governmental regulations that
encourage or mandate the employment of citizens of, or purchase of supplies from
vendors in a particular jurisdiction. The Company may also be subject to
taxation in these foreign jurisdictions, and the final determination of its tax
liabilities may involve the interpretation of the statutes and requirements of
the various domestic and foreign taxing authorities. The Company may also be
subject to currency repatriation restrictions. There can be no assurance that
any of these risks will not have a material adverse effect on the Company's
business, financial condition and operating results. See
"--Business--Governmental Regulation."
Weather and Other Risks Associated With Island Operations. The Company's
operations are primarily located on islands subject to volatile weather
conditions and natural disasters, which could result in delays in construction
or result in significant damage to, or destruction of, the Company's stores. In
addition, island operations involve uncertainties arising from (i) local
business practices, language and cultural considerations, including the capacity
or willingness of local business and government officials to provide necessary
services, (ii) the ability to acquire, install and maintain modern capabilities
such as dependable and affordable electricity, telephone, computer, Internet and
satellite connections often in undeveloped regions, (iii) political, military
and trade tensions, (iv) currency exchange rate fluctuations and repatriation
restrictions, (v) local economic conditions, (vi) longer payment cycles, (vii)
difficulty enforcing agreements or protecting intellectual property, and (viii)
collection of debts and other obligations in foreign countries. There can be no
assurance that the Company will be able to devote the resources necessary to
meet the challenges posed by island operations, or that losses from business
interruption will be adequately compensated by insurance; any failure to do so
would have a material adverse effect on the Company's business, financial
condition and operating results. See "--Business--Business Strategy."
Dependence on Key Personnel. The Company's success depends in large part on
the abilities and continued service of its executive officers and other key
employees. In addition, the Company does not currently carry key-man life
insurance. There can be no assurance that the Company will be able to retain the
services of such executive officers and other key employees, the loss of any of
whom could have a material adverse effect on the Company's business, financial
condition and operating results.
Impact of General Economic Conditions. The success of the Company's
operations depends to a significant extent on a number of factors relating to
discretionary consumer spending, including employment rates, business
conditions, interest rates, inflation, population and Gross Domestic Product
levels in each of its island markets, taxation, consumer spending patterns and
customer preferences. There can be no assurance that consumer spending in the
Company's markets will not be adversely affected by these factors, thereby
affecting the Company's growth, net sales and profitability. A decline in the
national or regional economies of the United States and the U.S. Territories
where the Company currently operates or any foreign countries in which the
Company currently or will operate could have a material adverse effect on the
Company's business, financial condition and operating results. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
10
Dependence on Systems. As the Company expands, it will need to upgrade or
reconfigure its management information systems. While the Company has taken a
number of precautions against certain events that could disrupt the operation of
its management information systems, it may experience systems failures or
interruptions, which could have a material adverse effect on its business,
financial condition and operating results. The Company's business is highly
dependent on communications and information systems, primarily systems provided
by third-party vendors. Any failure or interruption of the Company's systems or
systems provided by third-party vendors could cause delays or other problems in
the Company's operations, which could have a material adverse effect on the
Company's business, financial condition and operating results. The Company
experienced no negative impact from Year 2000 systems issues.
Utilization of Tax Benefits. The Company's ability to utilize various tax
benefits and credits is dependent on its ability to generate adequate taxable
income in the United States and in foreign jurisdictions. As of December 31,
2000, the Company had recognized an aggregate foreign tax benefit of $2.8
million on foreign operating losses and a corresponding valuation allowance of
$1.9 million. Approximately two-thirds of the Net Operating Losses ("NOL's")
will begin expiring in the year 2006. The remaining NOL's were generated in
Curacao, St. Maarten and Australia and are not subject to expiration time
limits. Additionally, during fiscal 2000, the Company recorded an aggregate
foreign tax credit of $0.3 million and a corresponding valuation allowance of
$0.3 million. Utilization of the tax benefit and foreign tax credit is dependent
on the Company generating future taxable income. There can be no assurance that
the Company will be able to produce adequate future taxable income to utilize
this tax benefit, and failure to generate such income may have a material
adverse effect on the Company's business, financial condition and operating
results. See "Notes to Consolidated Financial Statements--Income Taxes."
Anti-takeover Considerations. Pursuant to the Company's Restated Articles
of Incorporation (the "Restated Articles"), the Company's Board of Directors has
the authority, without shareholder approval, to issue up to 2,000,000 shares of
Preferred Stock and to fix the rights, preferences, privileges and restrictions
of such shares without any further vote or action by the Company's shareholders.
The Company's Restated Articles and Bylaws also provide for a classified board
and special advance notice provisions for proposed business at annual meetings.
These provisions, among others, may have the effect of making it more difficult
for a third party to acquire, or discouraging a third party from attempting to
acquire, control of the Company, even if shareholders may consider such a change
in control to be in their best interests. In addition, Washington law contains
certain provisions that may have the effect of delaying, deferring or preventing
a hostile takeover of the Company.
On February 23, 1999, the Company's Board of Directors declared a dividend
distribution of preferred share purchase rights (the "Rights") pursuant to a
Shareholder Rights Plan. The Rights initially trade with shares of the Company's
Common Stock and have no impact upon the way in which shareholders can trade the
Company's common stock. However, ten days after a person or group acquires 15%
or more of the Company's common stock, or such date, if any, as the Board of
Directors may designate after a person or group commences or publicly announces
its intention to commence a tender or exchange offer which could result in that
person or group owning 15% or more of the common stock (even if no purchases
actually occur), the Rights will become exercisable and separate certificates
representing the Rights will be distributed. The Rights would then begin to
trade independently from the Company's shares at that time. The Rights are
designed to cause substantial dilution to a person or group that attempts to
acquire the Company without approval of the Board of Directors, and thereby make
a hostile takeover attempt prohibitively expensive for the potential acquirer.
As of December 31, 2000, no rights have become exercisable.
Decreases in Sales. Fluctuations in Comparable Store Sales. Although sales
increased 11.5% in fiscal 2000 over fiscal 1999, increased 24.8% in fiscal 1999
over 1998, and increased 7.2% in 1998 over 1997, net sales in fiscal 1997
declined $9.9 million, or 7.4%, to $124.9 million from $134.8 million in fiscal
1996. The decline in fiscal 1997 was primarily due to store closures in the
continental United States and to a slight decline in comparable store (stores
open at least 13 months) sales, largely attributable to the Hawaii market. The
fiscal 2000 increase was primarily due to sales from the St. Maarten store
opened in June 2000, an increase in business sales, the benefit of an additional
week of sales in fiscal 2000 as compared to fiscal 1999 and sales from the New
Zealand stores that opened in November 1999 and were closed in June 2000. The
increase in fiscal 1999 and fiscal 1998 was primarily due to additional stores.
Comparable sales decreased 2.2% in fiscal 2000, increased 6.8% in fiscal 1999
and increased 9.9% in fiscal 1998.
A variety of factors affect the Company's comparable store sales,
including, among others, actions of competitors (including the opening of
additional stores in the Company's markets), the retail sales environment,
general economic conditions, weather conditions and the Company's ability to
execute its business strategy effectively. In addition, the Company's future
expansion may result in opening additional stores in markets where the Company
already does business. The Company has experienced a reduction in sales at an
existing Company store when a new Company store was opened in the same market.
These factors may result in future comparable store sales declines. Moreover,
there can be no assurance that comparable store sales for any particular
11
period will not decrease in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations."
Ability to Maintain Existing Credit and Obtain Additional Credit. The
Company believes that amounts available under its various credit facilities,
existing cash available for working capital purposes, and cash flow from
operations will most likely be sufficient to fund the Company operations through
the next 12 months. However, certain risks exist that could cause the Company's
cash requirements to exceed what is currently available under its existing
credit facilities. There can be no assurance that the Company will be able to
obtain additional financing when needed, or that any available financing will be
on terms acceptable to the Company.
12
Item 2. Properties
The Company currently leases a majority of its existing store locations.
The Company also leases the land for the St. Thomas and St. Maarten stores, but
owns the store facilities. The stores average approximately 30,000 square feet
and range in size from approximately 22,000 square feet to approximately 39,000
square feet. The store leases typically have a term of 10 years with options to
lease for an additional 10 years and typically are net leases. With the
exception of the Sonora store, which opened in an existing facility, all of the
Company's stores have been built to Company specifications.
Mid-Sized Format. The average size of the Company's eleven stores is
approximately 30,000 square feet, while the traditional warehouse stores found
in the United States average approximately 115,000 square feet. The Company has
developed three store "footprints" based on a 27,000, 36,000 and 42,000-square-
foot facility, which is adaptable from anywhere between 25,000 to 45,000 square
feet. The Company's prototype was developed in consultation with architects and
designers who helped design many of the warehouse stores operating in the United
States today. The prototypes were used in the construction of the stores in
Fiji, St. Thomas, Curacao and St. Maarten.
The Company has developed a standard lease that it uses as a starting point
for its lease negotiations with each potential landowner/developer. The Company
routinely negotiates a 10-year lease with at least two five-year renewal
options.
Approximate
Store Square Lease Options to
Location Date Opened Footage Term Expiration Date Extend
-------- ----------- ------- ---- ---------------- ------
Dededo, Guam...................................... May 1, 1992 31,200 10 years May 1, 2002 10 years
Hilo, Hawaii...................................... August 27, 1992 23,000 15 years August 31, 2006 10 years
Kapaa, Kauai...................................... March 18, 1993 22,000 17 years April 22, 2010 10 years
St. Thomas, USVI (Land Lease)..................... June 25, 1998 36,000 20 years September 30, 2017 30 years
Sonora, CA........................................ January 27, 1994 23,150 10 years January 1, 2004 10 years
St. Croix, USVI................................... November 3, 1994 26,210 10 years November 1, 2004 10 years
Tamuning, Guam.................................... March 15, 1995 35,000 15 years March 1, 2010 10 years
Pago Pago, American Samoa......................... March 20, 1995 32,055 10 years February 28, 2005 15 years
Suva, Fiji........................................ November 12, 1998 30,000 10 years November 1, 2008 10 years
Curacao, Netherlands Antilles..................... March 2, 1999 38,711 10 years February 1, 2009 10 years
St. Maarten, Netherlands Antilles (Land Lease).... June 29, 2000 36,000 25 years February 25, 2024 30 years
The Company relocated its headquarters office in June 2000 and now leases
approximately 14,000 square feet of office space for its headquarters in
Preston, Washington, which lease expires on December 31, 2003. The Company
relocated its Union City, California distribution facility in December 1999, to
a distribution facility in San Leandro, California. The San Leandro facility is
approximately 81,000 square feet, and the lease expires on January 31, 2007. The
Company believes that its distribution facilities will be sufficient to meet the
Company's needs at least through the end of fiscal 2003.
Item 3. Legal Proceedings
The Company may be subject to legal proceedings or claims, either asserted
or unasserted, that arise in the ordinary course of business. While the outcome
of these potential claims cannot be predicted with certainty, management does
not believe that any pending legal matters will have a material adverse effect
on the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the fiscal year ended December 31, 2000.
13
PART II
Item 5. Market for Company's Common Stock and Related Shareholder Matters
The Company's Common Stock is currently traded on the Nasdaq SmallCap
Market under the symbol "CULS". The number of shareholders of record of the
Company's Common Stock at March 20, 2001, was 70.
High and low sales prices for the Company's Common Stock for the periods
indicated in 2000 and 1999, are as follows. Such prices reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
Stock Price
-----------
Year High Low
---- ---- ---
Fiscal 2000 (ended December 31, 2000)
First Quarter............................................................ 4.50 2.06
Second Quarter........................................................... 3.00 1.25
Third Quarter............................................................ 2.94 1.25
Fourth Quarter........................................................... 1.88 .94
Fiscal 1999 (ended December 26, 1999)
First Quarter............................................................ 8.13 5.50
Second Quarter........................................................... 6.00 4.63
Third Quarter............................................................ 5.75 4.63
Fourth Quarter........................................................... 5.38 3.88
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently anticipates that it will retain all future earnings
for use in the expansion and operations of its business and does not anticipate
paying cash dividends in the foreseeable future.
Concurrent with the Company's initial public offering on Form S-1
(Registration No. 333-52459) on July 23, 1998, the Company sold 160,000 shares
of Common Stock at $7.00 per share, in a Concurrent Reg. S Placement to Kula
Fund, in reliance on the exemption from registration provided by Regulation S
under the Securities Act of 1933, as amended. As part of the Concurrent Reg. S
Placement, the Company also sold to Kula Fund, for nominal consideration, a
warrant to purchase 117,000 shares of Common Stock at an exercise price equal to
$8.40 per share (120% of the per share price in the initial public offering),
which warrant contains standard net issuance provisions and is exercisable at
any time until July 23, 2002.
Item 6. Selected Financial Data
The Company has re-evaluated whether its New Zealand operations were
"substantially liquidated" in connection with the store closures in New Zealand
in June 2000. Based on its re-evaluation, the Company now believes that
"substantial liquidation," as defined in Statement of Financial Accounting
Standards No. 52 occurred in June 2000, and therefore the Company's accounting
for New Zealand foreign currency translation requires adjustment retroactive to
June 2000 and for each subsequent quarter through the third quarter of fiscal
2001. As a result, the cumulative translation losses that were originally
recorded within other comprehensive income, as a component of shareholders'
equity, have been restated and recorded as part of the store closure expenses in
the June 2000 income statement and the consolidated financial statements as of
December 31, 2000. Concurrent with this re-evaluation, other related foreign
currency translation adjustments have also been restated to reclassify that
portion of intercompany transactions that represent transactions and balances
that are not considered to be part of the net investment in the foreign entity,
and accordingly, related transaction gains and losses are recorded for that
portion representing non-permanent investments. The resulting foreign currency
transaction losses are included in other expenses. See Management's Discussion
and Analysis of Financial Condition and Results of Operations and the Notes to
Consolidated Financial Statements.
14
The following selected financial data should be read in conjunction with
the consolidated financial statements and the notes thereto and the information
contained herein in "Management's Discussion and Analysis of Financial Condition
and Results of Operations." This selected financial data contains certain
financial information that has been restated. See Note 13 to the consolidated
financial statements for further discussion of this matter. The Company's fiscal
year ends on the last Sunday in December. All years presented represent 52-week
fiscal years except fiscal 2000, which was a 53-week fiscal year.
Selected Consolidated Financial and Operating Data
(in thousands, except per share data, average sales per square foot,
number of stores and percentage data)
Dec. 31, Dec. 26, Dec. 27, Dec. 28, Dec. 29,
2000 (1) 1999 1998 1997 1996
-------- ---- ---- ---- ----
Income Statement Data: (as restated)
Net sales............................................ $186,299 $167,079 $133,861 $124,865 $134,820
Gross profit......................................... 28,349 27,395 22,324 20,468 20,996
Operating Expenses:
Store.............................................. 21,775 18,254 15,100 14,543 15,843
General and administrative......................... 6,421 5,654 4,139 3,225 3,039
Store opening...................................... 518 1,217 747 327 0
Store closing...................................... 3,740 0 238 1,346 918
Operating income (loss).............................. (4,105) 2,270 2,100 1,027 1,196
Interest expense, net................................ (663) (403) (257) (427) (605)
Other expense........................................ (283) (57) (10) (40) 0
Income (loss) before income taxes.................... (5,051) 1,810 1,833 560 591
Income tax provision................................. 460 656 640 197 221
Net income (loss).................................... $ (5,511) $ 1,154 $ 1,193 $ 363 $ 370
Earnings (loss) per common share:
Basic.............................................. $ (1.53) $ 0.32 $ 0.45 $ 0.18 $ 0.19
Diluted............................................ $ (1.53) $ 0.32 $ 0.43 $ 0.17 $ 0.17
Weighted average common shares outstanding, diluted. 3,599 3,618 2,759 2,124 2,147
Selected Operating Data:
Store contribution(2).............................. $ 4,940 $ 7,837 $ 6,596 $ 5,475 $ 4,797
Stores opened...................................... 1 3 3 0 0
Stores closed...................................... 2 0 1 2 1
Stores open at end of period....................... 12 13 10 8 10
Average net comparable sales per square foot(3)(4). $ 498 $ 515 $ 566 $ 485 $ 427
Comparable-store net sales increase
(decrease)(3)(4) ................................ (2.2)% 6.8% 9.9% (0.5)% (4.9)%
.
Consolidated Balance Sheet Data:
Working capital...................................... $ 535 $ 5,992 $ 9,241 $ 3,814 $ 3,635
Total assets......................................... 41,717 45,812 39,270 22,815 24,856
Line of credit....................................... 2,700 2,163 0 376 1,500
Long-term debt, less current maturities.............. 3,344 2,517 2,036 1,169 1,965
Total shareholders' equity........................... 14,794 20,665 19,596 9,670 9,327
- --------------
(1) Selected consolidated financial and operating data for 2000 have been
restated. For information regarding the restatement, see "Notes to
Consolidated Financial Statements - Restatement" included in Part II, Item
8.
(2) Store contribution is determined by deducting direct store expenses from
store gross profit.
(3) Fiscal 2000 was a 53-week year; all other fiscal years were 52-week years.
Comparable store net sales and average sales per square foot for fiscal
2000 have been adjusted to reflect a 52-week year. The Company's fiscal
quarters are 13 weeks, except 4th quarter 2000, which was a 14 week
quarter.
(4) A new store becomes comparable after it has been open for a full 13 months.
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Management's Discussion and Analysis of Financial Condition and Results
of Operations presented below reflects certain restatements to our previously
reported operating results for fiscal 2000.
The Company has re-evaluated whether its New Zealand operations were
"substantially liquidated" in connection with the store and buying office
closures in New Zealand in June 2000. Based on its re-evaluation, the Company
now believes that "substantial liquidation," as defined in Statement of
Financial Accounting Standards No. 52 occurred in June 2000, and therefore the
Company's accounting for New Zealand foreign currency translation requires
adjustment retroactive to June 2000 and for each subsequent quarter through the
third quarter of fiscal 2001. As a result, store closing expense and other
expense related to foreign currency translation and foreign currency
transactions in fiscal 2000 were understated by $0.4 million and $0.3 million,
respectively. The cumulative translation losses that were originally recorded
within other comprehensive income, as a component of shareholders' equity, have
been restated and written off as part of the store closing expenses in the June
2000 income statement and the consolidated financial statements as of December
31, 2000. See Management's Discussion and Analysis of Financial Condition and
Results of Operations and the Notes to Consolidated Financial Statements.
This Annual Report on Form 10-K includes forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. This Act
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about themselves as long as they identify
these statements as forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical fact made
in this Annual Report on Form 10-K are forward-looking. In particular,
statements herein regarding future results of operations and financial position,
the Company's ability to develop new markets, manage rapid growth, and any other
guidance on future periods are forward-looking statements. Forward-looking
statements reflect management's expectations and are subject to risks and
uncertainties that could cause actual results to differ materially from
historical results or those anticipated. The following discussions and the
section entitled "Business--Important Factors That May Affect Future Results"
describe some, but not all, of the factors that could cause these differences.
Overview
Cost-U-Less began operations in 1989 by opening a mid-sized warehouse
club-style store in Maui, Hawaii. The Company's store concept was successful in
the smaller, and in many ways more challenging, island markets. The Company
began experimenting in late 1992 with similar stores in various mainland
markets. Over the course of a three-year period, the Company opened six mainland
stores and seven island stores. However, the Company found that most of the
mainland stores did not meet the Company's performance expectations. The Company
therefore focused on its core competencies in operating island stores and began
closing its mainland stores. Currently only one mainland store remains open and
serves as an efficient testing ground for new operating and merchandising
methods. The Company intends to retain this store while targeting its future
growth on island markets. In 1998, the Company opened two stores in Fiji, and in
1999 the Company opened two stores in New Zealand and one in Curacao.
A central focus for the Company in 2000 was to improve the mix of stores in
its relatively small store base, as under-performing stores can have a
materially adverse impact on Company performance. In June 2000, the Company
closed its two stores located in New Zealand and in December 2000, the Company
decided to close its Nadi, Fiji store effective February 2001. In the New
Zealand market, the Company had introduced what it believed to be the first
warehouse club concept to a significantly larger but more competitive
marketplace. However, the strong customer loyalty to regional products that
compete with the U.S. brands primarily sold by the Company, resulted in sales
that were below expectations. The Company's decision to close the Nadi store is
due primarily to the impact that the political turmoil in Fiji was having on the
tourist industry. The resulting economic downturn severely impacted the
performance of its store in Nadi. These actions were in line with the Company's
strategy of evaluating its existing locations and operations in an effort to
improve profitability and cash flow.
On June 29, 2000 the Company opened a store on the island of St Maarten in
the Caribbean. The Company believes this island market has market conditions
that resemble those in islands in which the Company has been successful.
In 2001, the Company will continue its focus on its core island store
operations. The Company will also be reviewing its merchandising strategies,
both those that apply to all stores and those specific to each store in light of
the different conditions in each market. The Company will also analyze
opportunities for future expansion. While management believes these actions can
improve profitability, there can be no assurance that these actions will be
successful.
16
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of the Company's net sales represented by certain consolidated income statement
data.
Fiscal Year Ended
-----------------
December 31, December 26, December 27,
2000 (1) 1999 1998
-------- ---- ----
(as restated)
Net sales..................................................................... 100.0% 100.0% 100.0%
Gross margin.................................................................. 15.2 16.4 16.7
Operating Expenses:
Store.................................................................... 11.7 10.9 11.3
General and administrative............................................... 3.4 3.4 3.1
Store opening............................................................ .3 .7 0.5
Store closing............................................................ 2.0 -- 0.2
Operating income (loss)....................................................... (2.2) 1.4 1.6
Interest expense, net......................................................... (0.4) (0.2) (0.2)
Other expense ............................................................. (0.2) -- --
Income (loss) before income taxes............................................. (2.8) 1.1 1.4
Income tax provision.......................................................... 0.2 0.4 0.5
Net income (loss)............................................................. (3.0)% 0.7% 0.9%
- ------------
(1) Selected consolidated financial and operating data for 2000 have been
restated. For information regarding the restatement, see "Notes to
Consolidated Financial Statements - Restatement" included in Part II,
Item 8.
Fiscal 2000 Compared to Fiscal 1999
Net Sales. Net sales in fiscal 2000 increased 11.5% to $186.3 million from
$167.1 million in fiscal 1999. The increase was primarily due to sales from the
St. Maarten store opened in June 2000, an increase in business sales, the
benefit of an additional week of sales in fiscal 2000 as compared to fiscal 1999
and sales from the New Zealand stores that opened in November 1999 and were
closed in June 2000. Comparable sales (stores open at least 13 months) decreased
2.2% during fiscal 2000, compared to a 6.8% increase in fiscal 1999. The decline
in comparable-store sales was primarily due to deteriorating economies in Guam
and Curacao, Netherland Antilles.
Gross Margin. Gross margin decreased to 15.2% in fiscal 2000 from 16.4% in
fiscal 1999. The decrease was primarily due to the low operating margins in the
New Zealand stores, price reductions associated with the liquidation of New
Zealand inventory and increased business sales, which provide a lower gross
margin, but are executed at minimal direct expense. Excluding business and New
Zealand sales, gross margin would have been consistent with fiscal 1999. Gross
profit dollars increased 3.5% to $28.3 million in fiscal 2000 from $27.4 million
in fiscal 1999, primarily as a result of increased sales.
Store Expenses. Store expenses increased $3.5 million in fiscal 2000 to
$21.8 million from $18.3 million in fiscal 1999. The increase was primarily due
to the new store in St. Maarten and the two stores in New Zealand that opened in
the fourth quarter of fiscal 1999. As a percent of sales, store expenses
increased to 11.7% in fiscal 2000 from 10.9% in fiscal 1999. The increase as a
percent of sales was primarily due to increased utility, rent, repairs and
maintenance, and payroll expenses on relatively flat sales volume and high New
Zealand store expenses on a relatively low sales base.
General and Administrative Expense. General and administrative expenses
increased $0.8 million in fiscal 2000 to $6.4 million compared to $5.6 million
in fiscal 1999. The increase was primarily due to a write-off of obsolete
equipment and severance payments. Excluding these expenses, general and
administrative expenses in fiscal 2000 were consistent with fiscal 1999. General
and administrative expenses as a percent of sales were 3.4% in both fiscal 2000
and fiscal 1999.
Store Opening Expense. Store opening expenses decreased $0.7 million to
$0.5 million in fiscal 2000, compared to $1.2 million in fiscal 1999. Fiscal
2000 store opening expenses were related to the St. Maarten store that opened in
June 2000, whereas the expenses in fiscal 1999 were related to the Curacao store
that opened in March 1999 and the two New Zealand stores that opened in November
of 1999.
17
Store Closing Expense. Store closing expenses of $3.7 million in fiscal
2000 primarily related to the closing of the New Zealand stores in June 2000 and
the accruals established for the planned closure of the Nadi, Fiji store in
February 2001. Closing expenses primarily consist of provisions for lease
settlements, fixed asset write-downs, legal expenses and severance agreements.
Store closing expenses also include a write-off of approximately $0.4 million of
translation losses previously recorded in Other Comprehensive Income, a
component of Shareholders' Equity. Additional expenses (primarily severance
costs) associated with the closure of the Nadi store will be recorded in the
first quarter of Fiscal 2001. Management believes these additional costs will
not have a material impact on the Company's first quarter 2001 results. There
were no store closing expenses in fiscal 1999.
Net Interest Expense. Net interest expense increased $0.3 million to $0.7
million in fiscal 2000 due primarily to additional borrowings incurred during
fiscal 2000 resulting from the construction of the new St. Maarten store and
higher average borrowings on the line of credit than had existed in fiscal 1999.
Other expense: Other expense of $283,000 in fiscal 2000 and $57,000 in
fiscal 1999 was primarily attributable to net losses on foreign currency
transactions.
Income Tax Provision. The Company recorded a tax provision in fiscal 2000
of $0.5 million on a pre-tax loss of $5.1 million. The tax provision represents
taxes associated with income generated in U.S. Territories. No taxes or tax
benefits were provided on the foreign pre-tax loss in fiscal 2000, as the
Company cannot predict whether it will be able to generate an adequate amount of
taxable income in the future to utilize such benefits. As of December 31, 2000,
the Company had recognized an aggregate foreign tax benefit of $2.8 million on
foreign operating losses and a corresponding valuation allowance of $1.9
million. Approximately two-thirds of the Net Operating Losses ("NOL's") will
begin expiring in the year 2006. The remaining NOL's were generated in Curacao,
St. Maarten and Australia and are not subject to expiration time limits.
Additionally, during fiscal 2000, the Company recorded an aggregate foreign tax
credit of $0.3 million and a corresponding valuation allowance of $0.3 million.
Utilization of the tax benefit and foreign tax credit is dependent on the
Company generating future taxable income. There can be no assurance that the
Company will be able to produce adequate future taxable income to utilize this
tax benefit, and failure to generate such income may have a material adverse
effect on the Company's business, financial condition and operating results.
Net Income (Loss). The net loss for fiscal 2000 was $5.5 million, or
($1.53) per fully diluted share, compared to net income of $1.2 million, or
$0.32 per fully diluted share, for fiscal 1999. The net loss in fiscal 2000
resulted primarily from lower margins, increased stores expense, non-recurring
charges related to the closing of the two New Zealand stores in June 2000 and
accrued expenses associated with the planned closure of the Nadi, Fiji store in
February 2001.
Fiscal 1999 Compared to Fiscal 1998
Net Sales. Net sales in fiscal 1999 increased 24.8% to $167.1 million from
$133.9 million in fiscal 1998. The increase was primarily due to a full year of
sales from the two additional stores opened in fiscal 1998, and the Curacao
store that opened in March 1999. Comparable sales (stores open at least 13
months) increased 6.8% during fiscal 1999, compared to 9.9% in fiscal 1998.
Gross Margin. Gross margin decreased to 16.4% in fiscal 1999 from 16.7% in
fiscal 1998. The decrease was primarily due to increased business sales, which
carry lower margins, but are executed at minimal direct expense. Excluding
business sales, gross margin rate was approximately the same as 1998. Gross
profit increased 22.7% to $27.4 million in fiscal 1999 from fiscal 1998 gross
margin dollars of $22.3 million, primarily as a result of increased sales.
Store Expenses. Store expenses increased $3.2 million in fiscal 1999 to
$18.3 million from $15.1 million in fiscal 1998. As a percent of sales, store
expenses decreased to 10.9% in fiscal 1999 from 11.3% in fiscal 1998. The
increase in store expenses was primarily due to a full year of expenses being
required in fiscal 1999 for two additional stores opened in fiscal 1998, and the
new stores opened in fiscal 1999. The decrease in store expenses as a percent of
sales was primarily due to higher sales volume in fiscal 1999 compared to fiscal
1998, while variable expenses increased only 6.8%.
General and Administrative Expense. General and administrative expenses
increased $1.5 million in fiscal 1999, to $5.6 million, compared to $4.1 million
in fiscal 1998. The increase was primarily due to establishing the New Zealand
and Australia buying offices and personnel additions at the corporate office,
primarily in information technology, to support system enhancements and improved
store communications.
18
Store Opening Expense. Store opening expenses increased $0.5 million to
$1.2 million in fiscal 1999, compared to $0.7 million in fiscal 1998. The
increase was primarily due to the costs to open Curacao in the first quarter of
fiscal 1999 and the two New Zealand stores in the fourth quarter of fiscal 1999.
In fiscal 1998, the Company re-located the St. Thomas store, and opened two
Fijian stores. In addition, fiscal 1999 store opening expense included costs to
open the St. Maarten store.
Net Interest Expense. Net interest expense increased $0.1 million to $0.4
million in fiscal 1999, due primarily to additional borrowings incurred during
fiscal 1999 resulting from the construction and opening of new and future
stores.
Liquidity and Capital Resources
The Company has financed its operations with proceeds from its initial
public offering, various credit facilities, and internally generated funds. In
July 1998, the Company raised $8.7 million in net proceeds from its initial
public offering and concurrent private placement. See "Market for Company's
Common Stock and Related Shareholder Matters."
Net cash provided by operations was $2.6 million, $0.2 million, and $1.2
million for fiscal years 2000, 1999 and 1998, respectively. The increase in cash
in fiscal 2000 compared to fiscal 1999 was primarily due to improvements in
inventory management. The decrease in net cash provided by operations in 1999
compared to 1998, was primarily due to an increase in inventory for three
additional stores opened in 1999.
Net cash used in investing activities was $3.3 million, $5.5 million and
$7.2 million, for fiscal years 2000, 1999 and 1998, respectively. The cash used
in investing activities relates to the opening of additional stores.
Additionally, 1998 investing activities included the construction of the
re-located St. Thomas store and new corporate computer hardware. The Company has
no plans to open new stores during fiscal 2001, but is in the process of
analyzing opportunities for new stores in the future.
Net cash provided by financing activities was $0.5 million, $2.1 million
and $10.2 million, for fiscal years 2000, 1999 and 1998, respectively. The cash
generated in fiscal 2000 was primarily due to proceeds from long-term debt that
was used to finance the construction of the St. Maarten store that opened June
29, 2000. The cash generated in fiscal 1999 was primarily used to fund the
Company's new store opened in Curacao and two new stores opened in New Zealand
during 1999. In 1998, the cash generated by financing activities was primarily
due to the Company's July 1998 initial public offering and concurrent Reg. S
placement that provided net proceeds of $8.7 million, and $3.0 million in long
term debt financing related to the construction of the re-located St. Thomas
store.
Foreign currency translation losses increased to $0.3 million in fiscal
2000 as compared to $0.2 million in fiscal 1999 and $47,000 in fiscal 1998. The
foreign currency translation losses are a result of the translation of the New
Zealand and Fijian operating results and balance sheets. In both cases, local
currency values declined when compared to the United States dollar. In addition,
the Company wrote off $0.4 million of foreign currency translation losses
related to its substantial liquidation of its New Zealand operations.
On September 15, 2000, the Company extended the term of its $8.0 million
line of credit with a financial institution to August 1, 2001. Of the $8.0
million line of credit, $1.1 million is utilized for standby letters of credit,
leaving $6.9 million available for operations. At December 31, 2000, the Company
had $2.7 million in borrowings outstanding on its line of credit. Borrowings
under the line of credit bear interest at the Company's option of the financial
institution's prime rate (9.5% at December 31, 2000), or at LIBOR plus 1.75%
(8.4% at December 31, 2000). Collateral for the line of credit consists of
inventories, equipment and trade accounts receivable. The line of credit
contains certain covenants, including the requirement that the Company maintain
minimum tangible net worth and minimum ratios of current assets to current
liabilities, and debt to tangible net worth. The Company must obtain the consent
of the lender to (i) pay dividends, (ii) purchase or sell assets or incur
indebtedness, other than in the ordinary course of business, (iii) make loans
to, or investments in, any other person, (iv) enter into a merger or other
business combination, or (v) make capital expenditures in excess of a specified
limit as of and for the year ended December 31, 2000. The Company is currently
in compliance with all such covenants.
In November 1999, the Company entered into a $2.0 million note payable for
the construction of its new store in St. Maarten. The note payable carries
interest at the prime rate plus 2% (11.50% at December 31, 2000), and is secured
by a first security interest on the St. Maarten leasehold interest and personal
property. The interest rate was raised to the prime rate plus 2% (from prime
rate plus 1%) after the lender expressed concerns about the financial charges
related to the New Zealand store closures.
19
The Company believes that amounts available under its various credit
facilities, existing cash available for working capital purposes, and cash flow
from operations will most likely be sufficient to fund the Company operations
through the next 12 months. However, certain risks exist that could cause the
Company's cash requirements to exceed what is currently available under its
existing credit facilities. There can be no assurance that the Company will be
able to obtain additional financing when needed, or that any available financing
will be on terms acceptable to the Company.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company operates stores in foreign countries and has market risks
associated with foreign currencies. However, sales are primarily made in U.S.
cash or foreign currencies with minimal trade credit extended and no borrowings
exist in foreign currencies. Cash deposited from sales are remitted back to the
U.S. bank account, routinely. Because of the minimal trade credit, the Company's
exposure to foreign currency market risk is not considered significant and is
not concentrated in any single currency. Management does not believe that it
experiences any significant market risk from foreign currencies.
The Company also assessed its vulnerability to interest rate risk
associated with its financial instruments, including, cash and cash equivalents,
lines of credit and long term debt. Due to the nature of these financial
instruments, the Company believes that the risk associated with interest rate
fluctuations does not pose a material risk. The Company's line of credit and
long-term debt can be expected to vary in the future as a result of future
business requirements, market conditions and other factors.
The Company does not have any derivative financial instruments as of
December 31, 2000
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements and supplementary data are
included beginning on page 21 of this Report:
Page
----
Report of Ernst & Young LLP, Independent Auditors................... 21
Consolidated Financial Statements:
Consolidated Statements of Operations.......................... 22
Consolidated Balance Sheets.................................... 23
Consolidated Statements of Shareholders' Equity................ 24
Consolidated Statements of Cash Flows.......................... 25
Notes to Consolidated Financial Statements..................... 26
As more fully disclosed in "Notes to Consolidated Financial Statements",
the Company restated its 2000 Consolidated Financial Statements.
20
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Cost-U-Less, Inc.
We have audited the accompanying consolidated balance sheets of
Cost-U-Less, Inc. (the "Company") as of December 31, 2000 and December 26, 1999
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 2000.
Our audits also included the financial statement schedule listed in the Index at
Item 14(a). The financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Cost-U-Less, Inc. at December 31, 2000 and December 26, 1999 and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in Note 13 to the Consolidated Financial Statements, the
Company has restated its December 31, 2000 Consolidated Financial Statements to
account for certain foreign currency translation and transaction items in
accordance with Statement of Financial Accounting Standard No.52 (FAS 52).
ERNST & YOUNG LLP
Seattle, Washington
February 23, 2001, except as to Note 13, as to which the date is as of March 29,
2002
21
COST-U-LESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
Fiscal Year Ended
-----------------
December 31, December 26, December 27,
2000 1999 1998
---- ---- ----
(as restated)
Net sales ........................................................... $ 186,299 $ 167,079 $ 133,861
Merchandise costs ................................................... 157,950 139,684 111,537
---------- ---------- ----------
Gross profit ........................................................ 28,349 27,395 22,324
Operating expenses:
Store .......................................................... 21,775 18,254 15,100
General and administrative ..................................... 6,421 5,654 4,139
Store openings ................................................. 518 1,217 747
Store closings ................................................. 3,740 0 238
---------- ---------- ----------
Total operating expenses ............................................ 32,454 25,125 20,224
---------- ---------- ----------
Operating income (loss) ............................................. (4,105) 2,270 2,100
Other expense:
Interest expense, net .......................................... (663) (403) (257)
Other .......................................................... (283) (57) (10)
---------- ---------- ----------
Income (loss) before income taxes ................................... (5,051) 1,810 1,833
Income tax provision ................................................ 460 656 640
---------- ---------- ----------
Net income (loss) ................................................... $ (5,511) $ 1,154 $ 1,193
========== ========== ==========
Earnings (loss) per common share:
Basic .......................................................... $ (1.53) $ 0.32 $ 0.45
========== ========== ==========
Diluted ........................................................ $ (1.53) $ 0.32 $ 0.43
========== ========== ==========
Weighted average common shares outstanding, basic ................... 3,599,374 3,557,789 2,664,192
========== ========== ==========
Weighted average common shares outstanding, diluted ................. 3,599,374 3,618,193 2,758,939
========== ========== ==========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
22
COST-U-LESS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, December 26,
2000 1999
---- ----
(as restated)
ASSETS
-------
Current assets:
Cash and cash equivalents ................................................................ $ 2,525 $ 2,929
Receivables (net of allowance of $254 and $150 in 2000 and 1999, respectively) ........... 2,008 2,122
Income tax receivable .................................................................... 163 518
Inventories .............................................................................. 18,033 21,605
Prepaid expenses ......................................................................... 215 265
Deferred taxes ........................................................................... 675 769
------- -------
Total current assets ................................................................ 23,619 28,208
Buildings and equipment, net .................................................................. 16,835 16,563
Deposits and other assets ..................................................................... 1,013 974
Deferred taxes, net ........................................................................... 250 67
------- -------
Total assets ........................................................................ $41,717 $45,812
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Line of credit ........................................................................... $ 2,700 $ 2,163
Accounts payable ......................................................................... 15,504 16,524
Accrued expenses ......................................................................... 3,115 2,382
Accrued store closure reserve ............................................................ 1,498 0
Current portion of long-term debt ........................................................ 267 422
Current portion of capital lease obligations ............................................. 0 725
------- -------
Total current liabilities ........................................................... 23,084 22,216
Deferred rent ................................................................................. 495 414
Long-term debt, less current portion .......................................................... 3,344 2,517
------- -------
Total liabilities ................................................................... 26,923 25,147
Commitments
Shareholders' equity:
Preferred stock--$0.001 par value; Authorized shares--2,000,000; Issued and
outstanding shares, respectively--none ..................................................... -- --
Common stock--$0.001 par value; Authorized shares--25,000,000; Issued and
outstanding shares, respectively--3,606,376 and 3,576,858 .................................. 12,446 12,422
Retained earnings ............................................................................. 3,001 8,512
Accumulated other comprehensive loss .......................................................... (653) (269)
------- -------
Total shareholders' equity .......................................................... 14,794 20,665
------- -------
Total liabilities and shareholders' equity .......................................... $41,717 $45,812
======= =======
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
23
COST-U-LESS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
Accumulated
Common Common Other
Stock-- Stock-- Retained Comprehensive
Shares Amount Earnings Loss Total
------ ------ -------- ---- -----
Balance at December 29, 1997................................. 1,999,961 $ 3,525 $6,165 $ (20) $ 9,670
Net income.............................................. -- -- 1,193 -- 1,193
Foreign currency translation adjustments................ -- -- -- (47)
(47)
-------
Comprehensive income.................................... 1,146
-------
Initial public offering:
Sale of common stock, net of $2,075 of
offering costs....................................... 1,540,000 8,705 -- -- 8,705
Compensation related to stock options................... -- 75 -- -- 75
--------- -------- ------ ------ -------
Balance at December 27, 1998................................. 3,539,961 12,305 7,358 (67) 19,596
Net income.............................................. -- -- 1,154 -- 1,154
Foreign currency translation adjustments................ -- -- -- (202) (202)
-------
Comprehensive income.................................... 952
-------
Exercise of common stock options........................ 36,897 117 -- -- 117
--------- -------- ------ ------ -------
Balance at December 26, 1999................................. 3,576,858 12,422 8,512 (269) 20,665
Net loss (as restated).................................. -- -- (5,511) -- (5,511)
Foreign currency translation adjustments (as restated). -- -- -- (384) (384)
-------
Comprehensive loss (as restated)........................ (5,895)
-------
Exercise of common stock options........................ 29,518 24 -- -- 24
--------- -------- ------ ------ -------
Balance at December 31, 2000 (as restated)................... 3,606,376 $ 12,446 $3,001 $ (653) $14,794
========= ======== ====== ======= =======
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
24
COST-U-LESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
December 31, December 26, December 27,
2000 1999 1998
---- ---- ----
(as restated)
OPERATING ACTIVITIES:
Net income (loss)............................................................... $(5,511) $ 1,154 $ 1,193
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................................. 1,865 1,598 1,092
Writedown of property and equipment........................................ 999 46 195
Deferred tax (benefit) provision........................................... (89) (184) 42
Compensation related to stock options...................................... -- -- 75
Allowance for doubtful accounts............................................ 104 7 118
Cash provided by (used in) changes in operating assets and
liabilities:
Receivables........................................................... 10 (434) (791)
Income tax receivable................................................. 355 (361) 22
Inventories........................................................... 3,572 (4,920) (4,414)
Prepaid expenses...................................................... 50 (54) (73)
Deposits and other assets............................................. (39) (158) (180)
Accounts payable...................................................... (1,020) 3,028 3,454
Accrued expenses...................................................... 733 573 456
Accrued store closure reserve ........................................ 1,498 0 0
Deferred rent......................................................... 81 (110) 43
------- ------- -------
Net cash provided by operating activities........................ 2,608 185 1,232
INVESTING ACTIVITY:
Cash used to purchase buildings and equipment................................... (3,262) (5,495) (7,152)
FINANCING ACTIVITIES:
Proceeds from sale of common stock.............................................. 24 117 8,705
Proceeds (payments) from (on) line of credit, net............................... 537 2,163 (376)
Proceeds from long-term debt.................................................... 1,093 907 3,000
Payments on long-term debt...................................................... (421) (637) (715)
Payments on capital lease obligations........................................... (725) (451) (399)
------- ------- -------
Net cash provided by financing activities........................ 508 2,099 10,215
Foreign currency translation adjustments........................................ (258) (202) (47)
------- ------- -------
Net increase (decrease) in cash and cash equivalents................................. (404) (3,413) 4,248
Cash and cash equivalents:
Beginning of period............................................................. 2,929 6,342 2,094
------- ------- -------
End of period .................................................................. $ 2,525 $ 2,929 $ 6,342
======= ======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................................... $ 816 $ 478 $ 409
Income taxes .............................................................. $ 276 $ 1,187 $ 577
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
25
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Business
Cost-U-Less, Inc. (the "Company") operates mid-sized warehouse club-style
stores in the United States Territories ("U.S. Territories"), foreign island
countries in the Pacific and the Caribbean, the Hawaiian Islands and Sonora,
California. At December 31, 2000, the Company operated twelve stores located in
Hawaii, California, the U.S. Virgin Islands, Netherlands Antilles, Guam,
American Samoa and the Republic of Fiji (Fiji). In the second quarter of fiscal
2000, the Company closed its two New Zealand stores. In January 2001, the
Company announced the closure of its Nadi, Fiji store, which was closed in
February 2001. The Company continues to operate its other store in Fiji, located
in the city of Suva.
Fiscal Year
The Company's fiscal year ends on the last Sunday in December. The year
ended December 31, 2000 was a 53-week fiscal year. The years ended December 26,
1999 and December 27, 1998 were 52-week fiscal years.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries in the U.S. Virgin Islands, Netherlands
Antilles, Guam, American Samoa, Nevada, Fiji and New Zealand. All significant
inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the U.S. requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Foreign Currency Translations
The U.S. dollar is the functional currency for all locations, except for
Fiji and Netherlands Antilles, where the local currency is the functional
currency. Prior to the closure of the New Zealand stores and buying office in
June 2000, the functional currency for New Zealand was its local currency.
Assets and liabilities denominated in foreign currencies are translated at the
applicable exchange rate on the balance sheet date. Net sales costs and expenses
are translated at the average rates of exchange prevailing during the period.
Adjustments resulting from this process are reported, net of taxes, as
accumulated other comprehensive income (loss), a component of Shareholders'
Equity. Realized and unrealized gains on foreign currency transactions are
included in other income (expense). The cumulative translation adjustment
resulting from a net investment in a country is recognized as income or expense
in the period the Company has substantially liquidated operations in that
country. In June 2000, the Company wrote off $0.4 million, which had previously
been recorded in other comprehensive income (loss), resulting from its exit from
the New Zealand market as store closing expenses.
Cash Equivalents
The company considers all highly liquid investments with an initial
maturity three months or less to be cash equivalents.
Financial Instruments
The carrying value of financial instruments, including cash, cash
equivalents, receivables, payables, and long-term debt, approximates market
value at December 31, 2000 and December 26, 1999.
26
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Inventories
Inventories are carried at the lower of average cost or market.
Buildings and Equipment
Buildings and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the assets, ranging from
3 to 20 years. Equipment acquired under capitalized leases is depreciated over
the shorter of the asset's estimated useful life or the life of the related
lease. Leasehold improvements are amortized over the lesser of the term of the
lease or the assets' estimated useful lives.
Long Lived Assets
The Company periodically evaluates the recoverability and possible
impairment of its long-lived assets. Management's analysis is based on several
factors, including, but not limited to, management's plans for future
operations, recent operating results, and projected cash flows.
Accounts Payable
The Company's major bank accounts are replenished as checks are presented.
Accordingly, included in accounts payable at December 31, 2000 and December 26,
1999 are $2.2 million and $3.1 million, respectively, representing the excess of
outstanding checks over cash on deposit at the banks on which the checks were
drawn.
Letter of Credit
As of December 31, 2000 and December 26, 1999, the Company had $1.1 million
outstanding under standby letters of credit.
Revenue Recognition
The Company recognizes revenue from product sales when the customer
purchases the products, generally at the point of sale.
Advertising Costs
The cost of advertising is expensed as incurred. Advertising expenses
incurred during fiscal years 2000, 1999 and 1998 were not material to the
Company's operating results.
Store Opening Costs
Pre-opening costs incurred in connection with the startup and promotion of
new stores are expensed as incurred.
27
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
The Company has elected to apply the disclosure-only provisions of
Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation. Accordingly, the Company accounts for stock-based
compensation using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations under APB No. 25, whereby compensation cost for stock
options is measured as the excess, if any, of the fair value of the Company's
common stock at the date of grant over the stock option exercise price. The
Company grants stock options at exercise prices equal to fair market value on
the date of grant, as a result, no compensation cost has been recognized.
Income Taxes
Income tax expense includes U.S. and foreign income taxes. The Company
accounts for income taxes under the liability method. Under the liability
method, deferred tax and liabilities are determined based on differences between
financial reporting and tax basis of assets and liabilities, and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.
Earnings Per Share
Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period and excludes any dilutive effects of
stock options and warrants. Diluted earnings per share are computed using the
weighted average number of common shares and common stock equivalent shares
outstanding during the period. Common stock equivalent shares are excluded from
the computation if their effect is anti-dilutive.
Comprehensive Income
Comprehensive income includes net income and other comprehensive income,
which refers to the effect of foreign currency translation adjustments. The
Company's comprehensive income is reported in the consolidated statement of
shareholders' equity.
Segment Reporting
The Company operates mid-sized warehouse club-style stores in the United
States (U.S.), U.S. territories, and foreign island countries throughout the
Pacific and the Caribbean. The Company's retail operations are its only
reportable segment. Prior to 1998, the Company segmented its business between
island stores and mainland stores. However, as the Company faced increasing
competition from larger discount retailers and warehouse clubs in its mainland
markets, management decided to focus on its core island markets and thus closed
all but one of its six mainland stores. Subsequent to those store closures, the
financial information used by the Company's chief operating decision maker in
allocating resources and assessing performance is only provided for one
reportable segment as of December 31, 2000. Prior periods have been restated to
reflect the change in segment reporting.
Reclassifications
Certain reclassifications of prior years' balances have been made for
consistent presentation with the current year.
28
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended by
SFAS No. 137 and No. 138, which establishes standards for recognition,
measurement, and reporting of derivatives and hedging activities and is
effective for the Company beginning January 1, 2001. The Company adoption of
this new accounting standard is not expected to have a material impact on the
Company's financial condition or results of operations, as the Company does not
have derivatives nor does it participate in hedging activities.
In December 1999, the staff of the Securities and Exchange Commission
released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition", to
provide guidance on the recognition, presentation, and disclosure of revenues in
financial statements. The Company believes that its revenue recognition
practices are in conformity with the guidelines in SAB 101, as revised, and that
this pronouncement will have no impact on its financial statements.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation, and interpretation of APB
Opinion No. 25," which provides clarification of Opinion No. 25 for certain
issues, such as the determination of who is an employee, the criteria for
determining whether a plan qualifies as a non-compensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and the accounting for an exchange of stock compensation awards
in a business combination. The Company believes that its accounting for stock
based compensation is in conformity with this guidance and, therefore,
Interpretation No. 44 had no impact on the Company's financial condition or
results of operations.
2. Buildings and Equipment
Buildings and equipment consist of the following (in thousands) at:
December 31, December 26,
2000 1999
---- ----
(as restated)
Buildings................................................................................... $ 7,106 $ 2,874
Equipment................................................................................... 14,965 16,263
Leasehold improvements...................................................................... 1,434 1,386
-------- --------
Buildings, equipment and leasehold improvements........................................ 23,505 20,523
Less accumulated depreciation and amortization.............................................. 6,696 5,202
-------- --------
Net book value of depreciable assets................................................... 16,809 15,321
Computer system and software development in progress........................................ 26 0
Construction in progress.................................................................... 0 1,242
-------- --------
Total Buildings and Equipment............................................................... $ 16,835 $ 16,563
======== ========
3. Line of Credit
The Company maintains an $8,000,000 line of credit with a commercial
bank that expires August 1, 2001. Borrowings under the line of credit bear
interest at the Company's option of the financial institution's prime rate (9.5%
at December 31, 2000), or at LIBOR plus 1.75% (8.4% at December 31, 2000).
Borrowings are secured by various Company assets. As of December 31, 2000,
borrowings outstanding under the line of credit amounted to $2,700,000. Amounts
available under the line of credit are reduced by outstanding standby letters of
credit of $1.1 million.
In accordance with the terms of this line of credit, the Company is
required to maintain certain financial covenants. As of and during the year
ended December 31, 2000, the Company was in compliance with all such covenants.
29
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Long-Term Debt
In 1997, the company entered into a $1,000,000 note payable to a bank to
fund construction of the St. Thomas store. The note bore interest at the fixed
rate index plus 1.75%. The note was paid in full in April 2000.
Additionally, in conjunction with the construction of the St. Thomas store,
the Company entered into a $2,000,000 note payable to a bank which matures in
June 2013. Interest on the note at December 31, 2000 is at the prime rate plus
2% (11.5%). As of December 31, 2000, there was a balance owed of $1,677,403,
which is secured by a first leasehold priority mortgage on the St. Thomas
building. The Company makes principal payments of approximately $11,000 per
month.
In November 1999, the Company entered into a $2,000,000 credit facility
with a financial institution to fund the construction of the St. Maarten store.
As of December 31, 2000, there was a balance owed of $1,933,000 against this
credit facility. Interest on the note at December 31, 2000 is at the prime rate
plus 2% (11.5%). The credit facility is secured by a first leasehold security
interest on the St. Maarten property. The Company makes principal payments of
approximately $11,000 per month.
Maturities of long-term debt during the next five fiscal years and
thereafter are as follows (in thousands):
2001............................................... $ 267
2002............................................... 267
2003............................................... 267
2004............................................... 267
2005............................................... 267
Thereafter......................................... 2,276
------
Total....................................... $3,611
======
5. Interest Expense, Net
The components of interest, net are as follows (in thousands):
2000 1999 1998
---- ---- ----
Interest Expense............................................................ $ 750 $ 476 $ 364
Capitalized Interest........................................................ (86) 0 0
Interest Income............................................................. (1) (73) (107)
----- ----- -----
Interest Expense, net.................................................. $ 663 $ 403 $ 257
===== ===== =====
The interest-carrying costs of capital assets under construction are capitalized
based on the Company' weighted average borrowing rate. Capitalized interest in
2000 relates to the construction of the St. Maarten store.
6. Income Taxes
Income (loss) before income taxes by jurisdiction is as follows (in
thousands):
2000 1999 1998
---- ---- ----
(as restated)
United States............................................................... $(1,864) $ 3,070 $1,279
U.S. Territories............................................................ 1,335 1,812 1,375
Foreign .................................................................... (4,522) (3,072) (821)
------- ------- ------
Income (loss) before income taxes...................................... $(5,051) $ 1,810 $1,833
======= ======= ======
30
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The provision for income taxes is as follows (in thousands):
2000 1999 1998
---- ---- ----
Current Income Taxes:
United States........................................................... $ 9 $ 217 $ 112
U.S. Territories........................................................ 540 653 483
Foreign................................................................. 0 (30) 3
----- ----- -----
Current Income Taxes............................................... 549 840 598
----- ----- -----
Deferred Income Taxes
United States........................................................... 191 346 273
U.S. Territories........................................................ (80) 132 0
Foreign ................................................................ (200) (662) (231)
----- ----- -----
Deferred income taxes.............................................. (89) (184) 42
----- ----- -----
Provision for Income Taxes................................................... $ 460 $ 656 $ 640
===== ===== =====
A reconciliation of the Company's effective tax rate with the federal
statutory rate of 34% for the years ended December 31, 2000, December 26, 1999,
and December 27, 1998, is as follows (dollars in thousands):
2000 1999 1998
---- ---- ----
(as restated)
Tax at U.S. Statutory Rate....................................... $(1,717) 34.0 % $615 34.0% $623 34.0%
Non-Deductible Permanent Differences............................. 3 (0.1)% 3 0.2% 10 0.5%
U.S. Tax Losses not Benefited.................................... 506 (10.0)% 0 0.0% 0 0.0%
Foreign Tax Losses not Benefited................................. 1,441 (28.4)% 0 0.0% 32 1.7%
Foreign Tax Credit not Taken..................................... 348 (6.9)% 0 0.0% 0 0.0%
Statutory Rate Difference as Compared to U.S. Statutory Rate:
U.S. Territories.............................................. 43 (0.9)% 45 2.5% 46 2.5%
Other............................................................ (164) 3.2% (7) (0.4)% (71) (3.9)%
------- ---- ----
Effective Income Tax Rate................................... $ 460 (9.1)% $656 36.2% $640 34.9%
======= ==== ====
Effective December 26, 1999, the Company elected to treat its wholly-owned
subsidiary in New Zealand as a branch for U.S. tax purposes. The effect of such
election resulted in a U.S. tax benefit of approximately $396,000 in 1999. In
addition, the Company utilized $321,000 of foreign tax credits in the year ended
December 26, 1999.
31
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
December 31, December 26,
2000 1999
---- ----
Deferred Tax Assets
Inventory Adjustments................................................................. $ 132 $ 152
Vacation Accrual...................................................................... 198 100
Bad Debt Expense...................................................................... 67 51
Deferred Rent......................................................................... 141 144
Store Closure Reserve................................................................. 506 0
Net Operating Loss Carryforward--Foreign.............................................. 2,327 1,103
Foreign tax credits................................................................... 348 0
Other................................................................................. 76 24
------- ------
Total Deferred Tax Assets............................................................. 3,795 1,574
Valuation Allowance.............................................................. (2,247) (199)
------- ------
1,548 1,375
Deferred Tax Liabilities
Cash Discounts........................................................................ (13) (13)
Fixed Asset Basis Difference.......................................................... (610) (526)
------- ------
Total Deferred Tax Liabilities........................................................ (623) (539)
------- ------
Net Deferred Tax Assets.................................................................... $ 925 $ 836
======= ======
The net deferred tax assets are classified on the balance sheet as follows (in thousands):
Current Assets............................................................................. $ 675 $ 769
Long-Term Assets, net...................................................................... 250 67
------- ------
Net Deferred Tax Assets.................................................................... $ 925 $ 836
======= ======
The Company's ability to utilize various tax benefits is dependent on
generating taxable income in the future. At December 31, 2000, the company had
recognized certain net tax benefits of foreign net operating loss carry-forwards
that are dependent on future earnings of the Company's U.S. and foreign
operations. The Company has implemented a tax strategy, which will allow the
Company to utilize these tax benefits. There can be no assurance that the
Company will be able to produce adequate future taxable income to utilize this
tax benefit, and failure to generate such income may have a material adverse
effect on the Company's business, financial condition and operating results.
As of December 31, 2000, the Company has foreign net operating loss
carryforwards ("NOL's") of approximately $6.8 million, which, if not utilized,
will begin expiring in the year 2006. NOL's in Curacao, St. Maarten and
Australia of approximately $2.3 million are not subject to expiration time
limits. During the year ended December 31, 2000, the Company recorded a foreign
tax credit of $0.3 million, which if not utilized, will expire in the year 2005.
Utilization of the NOL's and foreign tax credit carryforwards may be limited in
any given year by alternative minimum tax ("AMT") restrictions, depending upon
each year's AMT calculation.
7. Shareholders' Equity
Common Stock
On May 13, 1998, the Company effected a 1-for-3.38773 reverse split of its
common stock. All outstanding common and common equivalent shares and per-share
amounts in the accompanying financial statement and related notes have been
retroactively adjusted to give effect to the stock split.
On July 23, 1998, the Company sold 1,380,000 shares of common stock at
$7.00 per share in an Initial Public Offering. Concurrent with the Initial
Public Offering on July 23, 1998, the Company issued 277,000 warrants to certain
shareholders at grant prices ranging from $8.40 to $10.15. At December 31, 2000
and December 26, 1999, these warrants were fully vested and exercisable.
32
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Options
The Company maintains an Amended and Restated 1989 Stock Option Plan (the
"1989 Plan") which provides for the granting of incentive and nonqualified stock
options to employees, directors, and consultants of the Company. An aggregate of
398,496 shares of common stock has been authorized for issuance under the 1989
Plan. Options issued under the 1989 Plan vest ratably over five years and expire
ten years from the date of grant and are generally granted at prices equal to
the fair value on the date of grant. There were 238,660 options available for
future grant under the 1989 Plan at December 31, 2000. No additional options
will be granted under the 1989 Plan.
In 1998, the Company adopted, and shareholders approved, issuance of the
1998 Stock Incentive Compensation Plan (the "1998 Plan"). The 1998 Plan provides
for the granting of various stock awards, including stock options and issuance
of restricted stock, with a maximum of 500,000 shares of common stock available
for issuance. Options issued under the 1998 Plan vest at various terms ranging
from immediately to five years and expire ten years from the date of grant and
are generally granted at prices equal to the fair value on the date of grant.
There were 18,906 options available for future grant under the 1998 Plan at
December 31, 2000.
In December 2000, the Board of Directors approved the submission of a
proposal to the Company's shareholders at the next annual meeting to increase
the number of options available for grant under the 1998 Plan by an additional
500,000 shares.
A summary of the status of stock option plans as of December 31, 2000,
December 26, 1999, and December 27, 1998, and changes during the years then
ended are presented below:
2000 1999 1998
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
Outstanding, beginning of year................. 516,266 $ 5.40 452,150 $ 5.35 291,009 $ 5.49
Granted at fair value..................... 178,213 1.58 114,288 5.03 442,546 6.96
Forfeited................................. (136,642) 4.93 (13,275) 5.77 (281,405) 9.08
Exercised................................. (29,518) .79 (36,897) 3.18 -- --
-------- ------- --------
Outstanding, end of year....................... 528,319 4.51 516,266 5.40 452,150 5.35
======== ======= ========
The following summarizes information related to options outstanding and
exercisable at December 31, 2000:
Outstanding Exercisable
----------- -----------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Exercise Contractual Exercise
Prices Options Price Life Options Price
------ ------- ----- ---- ------- -----
$0.79 - 3.38 203,302 $ 1.73 8.94 years 129,089 $ 1.72
3.72 - 6.00 109,298 4.74 7.42 years 62,574 4.53
7.00 215,718 7.00 7.24 years 195,860 7.00
------- -------
528,319 4.51 387,523 4.84
======= =======
In October 1998, the Company offered employees and directors with options
granted with 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, the terms of the new
options, including the vesting schedule, are identical to the terms of the old
options except for officers and directors who accepted a delay in vesting of six
months. The holders of 267,385 options elected to exchange their options under
this repricing offer, including directors of the Company holding 168,246
options. All options surrendered were reissued under the 1998 Plan.
33
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In January 1998, the Company granted 88,554 options with immediate vesting
to a director of the Company. The options were granted with an exercise price of
$7.62, with a deemed fair value of $8.47. Accordingly, for financial statement
presentation purposes, compensation expense of $75,000 was recognized in 1998.
Pro-Forma Disclosure
The Company applies APB No. 25 and related interpretations in accounting
for options under the 1989 and 1998 Plans. Accordingly, stock compensation has
been recognized for the amortized intrinsic value of stock option grants. Had
the stock option compensation expense for the Company's stock option plans been
determined based on the fair value at the grant dates for options granted in
2000, 1999, and 1998, consistent with the fair value methods of SFAS No. 123,
the Company's net income and earnings per share amounts would have been reduced
to these pro-forma amounts.
2000 1999 1998
---- ---- ----
(as restated)
(Net income (loss) in thousands)
Net income (loss) as reported................................................... $(5,511) $1,154 $1,193
Net income (loss) pro forma..................................................... $(5,702) $ 911 $1,068
Earnings (loss) per common share, basic as reported............................. $ (1.53) $ 0.32 $ 0.45
Earnings (loss) per common share, basic pro forma............................... $ (1.58) $ 0.26 $ 0.40
Earnings (loss) per common share, diluted as reported........................... $ (1.53) $ 0.32 $ 0.43
Earnings (loss) per common share, diluted pro forma............................. $ (1.58) $ 0.25 $ 0.39
The fair value of each option is estimated on the date of grant under the
Black-Scholes option-pricing model using the following assumptions:
2000 1999 1998
---- ---- ----
Risk-free interest rate...................................................... 6.50% 6.00% 5.50%
Expected life................................................................ 5 years 5 years 5 years
Expected dividend yield...................................................... 0% 0% 0%
Volatility................................................................... 92% 84% 126%
The weighted average fair values of options granted in 2000, 1999, and 1998
were $1.18, $2.63 and $5.18, respectively.
Warrants
In 1991, the Company issued 29,518 warrants to an officer. The warrants
grant the holder the right to purchase 29,518 shares of the Company's common
stock at a per-share price of $2.37. The warrants are currently exercisable and
expire in March 2001.
Common Stock Reserved
Common stock reserved for future issuance at December 31, 2000 is as
follows:
Stock options............................................................................................ 785,885
Warrants................................................................................................. 306,518
---------
1,092,403
=========
On February 23, 1999, the Company's Board of Directors declared a dividend
distribution of preferred share purchase rights (the "Rights") pursuant to a
Shareholder Rights Plan. The Rights initially trade with shares of the Company's
common stock and have no impact upon the way in which shareholders can trade the
Company's common stock. However, ten days after a person or group acquires 15%
or more of the Company's common stock, or such date, if any, as the Board of
Directors may designate after a
34
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
person or group commences or publicly announces its intention to commence a
tender or exchange offer which could result in that person or group owning 15%
or more of the Company's common stock (even if no purchases actually occur), the
Rights will become exercisable and separate certificates representing the Rights
will be distributed. The Rights would then begin to trade independently from the
Company's shares at that time. As of December 31, 2000, no rights have become
exercisable.
The following table sets forth the computation of basic and diluted earnings
(loss) per common share (dollars in thousands):
Fiscal Year Ended
-----------------
December 31, December 26, December 27,
2000 1999 1998
---- ---- ----
(as restated)
Numerator:
Net income (loss)............................................. $ (5,511) $ 1,154 $ 1,193
Denominator:
Denominator for basic earnings per share--weighted
Average shares............................................. 3,599,374 3,557,789 2,664,192
Effect of dilutive common equivalent shares:
Stock options and warrants.................................... 0 60,404 94,747
Denominator for diluted earnings per share--adjusted
weighted average shares and assumed conversion of
stock options and warrants................................. 3,599,374 3,618,193 2,758,939
Basic earnings (loss) per common share............................. $ (1.53) $ 0.32 $ 0.45
Diluted earnings (loss) per common share........................... $ (1.53) $ 0.32 $ 0.43
Common stock equivalents have been excluded from the dilutive
calculation for the fiscal year ended December 31, 2000, as their impact would
be anti-dilutive.
8. Geographic Information
Geographic information pertaining to the Company's one reporting
segment is as follows:
Long-lived
Sales Assets
----- ------
(in thousands)
2000 (as restated)
United States........................................................................... $ 45,073 $ 4,452
U.S. Territories and foreign countries.................................................. 141,226 13,646
-------- --------
$186,299 $ 18,098
======== ========
1999
United States........................................................................... $ 38,872 $ 3,817
U.S. Territories and foreign countries.................................................. 128,207 13,787
-------- --------
$167,079 $ 17,604
======== ========
1998
United States........................................................................... $ 30,798 $ 3,857
U.S. Territories and foreign countries.................................................. 103,063 9,671
-------- --------
$133,861 $ 13,528
======== ========
9. Store Closures
In June 2000, the Company exited New Zealand market, where it had
previously opened two stores and a buying office in late 1999. In conjunction
with the decision to exit the New Zealand Market, the Company incurred
$3,372,000 in expenses associated with lease buyouts, fixed asset write-downs,
legal expenses, severance payments and other costs typically incurred during the
course of a store closure. Additionally, the Company recorded a write-off to
store closing expenses of approximately $0.4 million related to translation
losses previously recorded in Other Comprehensive Income, a component of
35
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Shareholders' Equity. The write-off relates to the Company's recognition of the
cumulative translation adjustment resulting from its net investment in New
Zealand as expense in the period the Company substantially liquidated operations
in that country.
In December 2000, the Company favorably settled one of the two building
lease agreements as well as the settlement of other store closure related
activity, the impact of which resulted in the Company recovering $755,000 of
previously accrued closure expenses.
Also in December 2000, the Company decided to close its Nadi, Fiji store
effective February 2001. In conjunction with the decision to close the store,
the Company accrued $735,000 in expenses associated with fixed asset
write-downs, lease buyouts, and other costs typically incurred during the course
of a store closure.
The following represents the costs charged to expense related to store
closures during 2000 as well as those that remained in existence at December 31,
2000 (in thousands):
December 31,
2000
----
(as restated)
Accrued store closure reserve at beginning of year...................................... $ --
New Zealand store closure expense recorded in June 2000 3,760
Recovery related to the New Zealand store closure (755)
Fiji store closure expense recorded in December 2000 735
------
Total.................................................................................... 3,740
Less: Store closure expenses paid during year........................................... 1,854
Write off of New Zealand foreign currency translation adjustment account....... 388
------
Accrued store closure reserve at end of year............................................. $1,498
======
Of the $3,740,000 of store closure expenses incurred during the year,
$2,242,000 had been paid or written off as of December 31, 2000, with the
remaining $1,498,000 to be paid in Fiscal 2001.
Total revenues and store operating losses contributed by the three stores
closed, or to be closed, were as follows (in thousands):
2000 1999 1998
---- ---- ----
Total revenues ................................................... $ 6,984 $ 4,202 $ 1,466
======= ======= =======
Store operating losses............................................ $ 2,250 $ 1,005 $ 250
======= ======= =======
Additional expenses (primarily severance costs) associated with the closure
of the Nadi store will be recorded in the first quarter of Fiscal 2001.
Management believes these additional costs will not have a material impact on
the Company's first quarter 2001 results.
10. Lease Commitments
The Company has entered into operating leases for its retail and
administrative office locations. The leases range from 3 to 15 years and include
renewal options. The Company is required to pay a base rent, plus insurance,
taxes, and maintenance. A summary of the Company's future minimum lease
obligations under leases with initial or remaining terms of one year or more is
as follows (in thousands):
2001..................................................................................... $ 4,752
2002..................................................................................... 4,501
2003..................................................................................... 4,300
2004..................................................................................... 3,930
2005..................................................................................... 3,348
Thereafter............................................................................... 14,511
-------
$35,342
=======
36
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rent expense under operating leases for the fiscal years ended December 31,
2000, December 26, 1999, and December 27, 1998 totaled $5,410,000, $4,342,000
and $3,702,000, respectively.
11. Employee Benefit Plans
The Company maintains a 40l(k) profit-sharing plan covering all eligible
employees over the age of 18 with at least six months of service. Participating
employees may elect to defer and contribute up to 15% of their compensation to
the plan, subject to annual limitations under the Internal Revenue Code. The
Company matches employee contributions at a rate of 25%. The Company's matching
contributions to the plan approximated $114,000 $90,000 and $87,000, in fiscal
2000, 1999, and 1998, respectively.
During 2000, the Company changed its Manager Bonus Program to one under
which managers are paid an annual bonus based on store and departmental
profitability targets. Prior to 2000, the Company's Manager Bonus Program was
based on the net income of the Company. All amounts payable under the program
are accrued in the year earned. Accordingly, bonuses accrued under these
programs totaled $184,000, $284,000 and $257,000 for fiscal 2000, 1999 and 1998,
respectively.
12. Quarterly Financial Data (Unaudited)
The following is a summary of the Company's unaudited quarterly results of
operations:
Earnings (Loss)
Per Common
Store Net Share
Weeks Gross Income -----
in Period Net Sales Profit (Loss) Basic Diluted
--------- --------- ------ ------ ----- -------
(in thousands, except store weeks and per-share data)
Fiscal 2000 (as restated) (1)
First quarter................................... 169 $44,272 $6,656 $(827) $ (0.23) $(0.23)
Second quarter (2).............................. 157 44,402 6,276 (5,535) (1.54) (1.54)
Third quarter................................... 156 45,238 7,362 266 0.07 0.07
Fourth quarter.................................. 168 52,387 8,055 585 0.16 0.16
Fiscal 1999 (1)
First quarter................................... 134 $37,987 $6,387 $ 276 $ 0.08 $0.08
Second quarter.................................. 143 41,227 6,868 477 0.13 0.13
Third quarter................................... 143 41,221 6,783 319 0.09 0.09
Fourth quarter.................................. 151 46,644 7,357 82 0.02 0.02
- --------------
(1) Fiscal 2000 was a 53-week year. Fiscal 1999 was a 52-week year. The
Company's fiscal quarters are 13 weeks, except 4th quarter 2000, which was
a 14 week quarter.
(2) The net loss in second quarter 2000 was due to the accrual for store
closure costs of $3.4 million related to the June 2000 closure of the
Company's two New Zealand stores, the write-off of $0.4 million related to
translation losses previously recorded in Other Comprehensive Income and
continued operating losses at such stores.
13. Restatement of Financial Information
The Company has determined that the previous accounting treatment
historically afforded its foreign currency translation adjustment associated
with New Zealand was not consistent with paragraph 14 of Statement of Financial
Accounting Standard No.52 (FAS 52).
In June 2000 the Company discontinued all major business activity in New
Zealand upon the closure of its two stores and its Auckland buying office.
Although the Company had discontinued store and corporate buying activities in
June 2000, for the remainder of 2000 and through the first three quarters of
2001, it continued to base its conclusion that the New Zealand operations were
not substantially liquidated on the fact that the Company was still purchasing
inventory through the New Zealand subsidiary
37
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and negotiating final lease terms on the closed store leases. The Company now
believes that, because the level of the ongoing New Zealand activities was so
small relative to activities prior to the closures, that "substantial
liquidation", as interpreted in paragraph 14 of FAS 52, had in fact occurred in
June 2000, and therefore the New Zealand foreign currency translation account
should have been written off at that time.
As a result, the New Zealand foreign currency translation adjustments of
$388,000, which was previously recorded within Other Comprehensive Income
(loss), has been written off at June 25, 2000, and is included in the Store
Closure Expense of $3,740,000.
Concurrent with this reassessment, other related foreign currency
translation adjustments have also been restated to reclassify that portion of
intercompany transactions that represent transactions and balances that are not
considered to be part of the net investment in the foreign entity, and
accordingly, related transaction gains and losses are recorded for that portion
representing non-permanent investments. Resulting foreign currency transaction
losses of $251,000 are included in other expenses of $283,000.
The following is a summary of the effects of such restatement on the
Company's consolidated financial statements for the year ended December 31, 2000
(in thousands):
As Originally
Reported As Restated
-------- -----------
Consolidated Balance Sheet:
Current assets....................................... $ 23,587 $ 23,619
Total assets......................................... 41,811 41,717
Total liabilities.................................... 26,923 26,923
Total shareholders' equity........................... 14,888 14,794
Consolidated Statement of Operations:
Net sales............................................ $ 186,299 $ 186,299
Gross profit......................................... 28,349 28,349
Store closing expense................................ 3,352 3,740
Other expenses....................................... 32 283
Loss before income taxes............................. (4,412) (5,051)
Net loss............................................. (4,872) (5,511)
Loss per common share - Diluted...................... (1.35) (1.53)
Consolidated Statement of Shareholders' Equity:
Common stock......................................... $ 12,446 $ 12,446
Retained earnings.................................... 3,640 3,001
Accumulated other comprehensive loss................. (1,198) (653)
Total shareholders' equity........................... 14,888 14,794
38
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of the effects of such restatement on the Company's
consolidated unaudited quarterly results of operations year ended December 31,
2000 (in thousands, except earnings (loss) per share):
As Originally
Reported As Restated
-------- -----------
First Quarter:
Net loss............................................. $ (748) $ (827)
Loss per common share - Diluted...................... (0.21) (0.23)
Second Quarter:
Net loss............................................. (5,057) (5,535)
Loss per common share - Diluted...................... (1.40) (1.54)
Third Quarter:
Net income........................................... 396 266
Earnings per common share - Diluted.................. 0.11 0.07
Fourth Quarter:
Net income........................................... 537 585
Earnings per common share - Diluted.................. 0.15 0.16
39
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Executive Officers and Directors of the Registrant
Information called for by Part III, Item 10, is included in the Company's
Proxy Statement relating to the Company's annual meeting of shareholders to be
held on May 8, 2001, and is incorporated herein by reference. Such Proxy
Statement will be filed within 120 days of December 31, 2000, the Company's
fiscal year end.
Item 11. Executive Compensation
Information called for by Part III, Item 11, is included in the Company's
Proxy Statement relating to the Company's annual meeting of shareholders to be
held on May 8, 2001 and is incorporated herein by reference. Such Proxy
Statement will be filed within 120 days of December 31, 2000, the Company's
fiscal year end.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information called for by Part III, Item 12, is included in the Company's
Proxy Statement relating to the Company's annual meeting of shareholders to be
held on May 8, 2001 and is incorporated herein by reference. Such Proxy
Statement will be filed within 120 days of December 31, 2000, the Company's
fiscal year end.
Item 13. Certain Relationships and Related Transactions
Information called for by Part III, Item 13, is included in the Company's
Proxy Statement relating to the Company's annual meeting of shareholders to be
held on May 8, 2001 and is incorporated herein by reference. Such Proxy
Statement will be filed within 120 days of December 31, 2000, the Company's
fiscal year end.
40
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report:
(1) Financial Statements--all consolidated financial statements of the
Company as set forth under Item 8, beginning on p. 21 of this Report.
(2) Financial Statement Schedules--Schedule II Valuation and Qualifying
Accounts.
The independent auditors' report with respect to the financial statement
schedules appears on page 21 of this Report. All other financial statements and
schedules not listed are omitted because either they are not applicable or not
required, or the required information is included in the consolidated financial
statements.
(3) Exhibits
Exhibit
No. Description
--- -----------
3.1* Restated Articles of Incorporation of Cost-U-Less, Inc.
3.2* Amended and Restated Bylaws of Cost-U-Less, Inc.
10.1* 1998 Stock Incentive Compensation Plan
10.2* Amended and Restated 1989 Stock Option Plan
10.3* Form of Director Stock Option Agreement (Vesting)
10.4* Form of Director Stock Option Agreement (Nonvesting)
10.5* Common Stock Purchase Warrant between the Company and Michael J. Rose
10.6 + Business Loan Agreement between Bank of America, N.A. and the Company, dated September 15, 2000
10.7 + Promissory Note between Bank of America N.A. and the Company, dated August 1, 2001
10.8* Construction/Permanent Loan Agreement by and among CULUSVI, Inc., the Company and Banco
Popular de Puerto Rico, dated November 6, 1997
10.9* Lease Agreement between Westmall Limited and the Company, effective March 1, 1998
10.10** Lease Agreement between Fiji Public Service Association and the Company, dated June 4, 1998
10.11* Lease Agreement between Baroud Real Estate Development N.V. and the Company, dated
April 3, 1998
10.12* Ground Lease between Market Square East, Inc. and the Company, dated October 20, 1997
10.13* Sublease Agreement between Tamuning Capital Investment, Inc. and the Company dated July 15,
1994
10.14* Lease Agreement between Ottoville Development Company and the Company, dated March 9,
1994
10.15* Lease Agreement between Inmostrat Corporation and the Company, dated August 1993
10.16* Lease Agreement between Hassan Rahman and the Company, dated July 30, 1993
10.17* Industrial Real Estate Lease (Single-Tenant Facility) between Hilo Partners and the Company,
Dated September 1, 1991
10.18* Indenture of Lease between Kai Pacific Limited and the Company, dated August 30, 1991
10.19* Lease Agreement between Tonko Reyes, Inc. and the Company, dated July 1991
10.20**** Purchase Agreement between Kula Fund and the Company, dated July 28, 1998
10.21**** Common Stock Purchase Warrant between Kula Fund and the Company, dated July 28, 1998
41
Exhibit
No Description
--- -----------
10.22*** Rights Agreement dated March 15, 1999 between the Company and ChaseMellon Shareholder
Services, L.L.C., as rights agent
10.23**** Lease Agreement between Caribe Lumber & Trading N.V. (St. Maarten) and the Company, dated
February 19, 1999
10.24***** Sublease Agreement between New Breed Distribution Corp. of California, Inc. and the Company
Dated November 1, 1999.
10.25***** Lease Agreement between AMB Property, L.P., and the Company dated December 2, 1999.
10.26 + Lease Agreement between BDC Preston Properties One Limited Partnership and the Company dated April 27, 2000.
23.1 ++ Consent of Ernst & Young LLP, Independent Auditors
24.1 + Power of Attorney
- --------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No.
333-52459).
** Incorporated by reference to the Company's Quarterly Report on Form 10-Q
dated September 2, 1998.
*** Incorporated by reference to the Company's Registration Statement on Form
8-A dated March 15, 1999.
**** Incorporated by reference to the Company's Annual Report on Form 10-K
dated March 26, 1999.
***** Incorporated by reference to the Company's Annual Report on Form 10-K
dated March 27, 2000, as amended on April 5, 2000.
+ Previously filed as an Exhibit to the Company's Annual Report on Form 10-K
dated March 28, 2001
++ Filed herewith
(b) Reports on Form 8-K:
On December 22, 2000, the Company filed a report on Form 8-K with
regards to the resignation of Michael J. Rose from the Board of Directors
of the Company, effective December 15, 2000.
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COST-U-LESS, INC.
Date: March 29, 2002 By: /s/ J. JEFFREY MEDER
-------------------------------------
J. Jeffrey Meder
President and
Chief Executive Officer
43
SCHEDULE II
COST-U-LESS, INC.
VALUATION AND QUALIFYING ACCOUNTS
Balance at Balance at
Beginning (1) End of
Description of Year Additions Deductions Year
----------- ------- --------- ---------- ----
Year Ended December 31, 2000
Reserves and allowances deducted from asset accounts:
Allowance for doubtful accounts........................................ $150,000 $205,000 $101,000 $254,000
Year Ended December 26, 1999
Reserves and allowances deducted from asset accounts:
Allowance for doubtful accounts........................................ $143,000 $ 93,000 $ 86,000 $150,000
Year Ended December 27, 1998:
Reserves and allowances deducted from asset accounts:
Allowance for doubtful accounts........................................ $ 25,000 $127,000 $ 9,000 $143,000
- ---------------
(1) Uncollectible accounts written off, net of recoveries.
44