<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 5, 1998.
REGISTRATION NO. 333-52459
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
COST-U-LESS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
WASHINGTON 5331 91-1615590
<S> <C> <C>
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
12410 S.E. 32ND STREET
BELLEVUE, WASHINGTON 98005
(425) 644-4241
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MICHAEL J. ROSE
CHIEF EXECUTIVE OFFICER, PRESIDENT
AND CHAIRMAN OF THE BOARD
COST-U-LESS, INC.
12410 S.E. 32ND STREET
BELLEVUE, WASHINGTON 98005
(425) 644-4241
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------
COPIES TO:
<TABLE>
<S> <C>
GREGORY GORDER MICHAEL J. ERICKSON
NEAL M. SUGGS LAURA A. BERTIN
PERKINS COIE LLP SUMMIT LAW GROUP, P.L.L.C.
1201 THIRD AVENUE, 40TH FLOOR 1505 WESTLAKE AVENUE N., SUITE 300
SEATTLE, WASHINGTON 98101-3099 SEATTLE, WASHINGTON 98109
(206) 583-8888 (206) 281-9881
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD, NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 5, 1998
PROSPECTUS
1,723,222 SHARES
[LOGO OF COST-U-LESS]
COMMON STOCK
Of the 1,723,222 shares of Common Stock offered hereby (the "Offering"),
1,600,000 shares are being sold by Cost-U-Less, Inc. ("Cost-U-Less" or the
"Company") and 123,222 shares are being sold by certain shareholders (the
"Selling Shareholders"). See "Principal and Selling Shareholders." The Company
will not receive any of the proceeds from the sale of shares by the Selling
Shareholders. Prior to the Offering, there has been no public market for the
Company's Common Stock. It is currently estimated that the initial public
offering price will be between $9.50 and $10.50 per share. See "Underwriting"
for factors to be considered in determining the initial public offering price.
Application has been made to have the Common Stock listed on the Nasdaq
National Market under the symbol "CULS."
Approximately 10% of the shares of Common Stock offered by the Company have
been reserved for sale to the Kula Fund, an affiliate of the Commonwealth
Development Corporation ("CDC"). The price per share of the shares to be sold
to the Kula Fund is the same as the price to the public in the Offering. See
"Certain Transactions" and "Underwriting."
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS PROCEEDS TO
PRICE TO AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) SHAREHOLDERS (2)
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<S> <C> <C> <C> <C>
Per Share.............. $ $ $ $
- -----------------------------------------------------------------------------------------------
Total (3).............. $ $ $ $
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</TABLE>
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(1) Excludes a nonaccountable expense allowance payable to Cruttenden Roth
Incorporated, representative of the Underwriters (the "Representative"),
and the value of a warrant to purchase up to 160,000 shares of Common
Stock at an exercise price equal to 120% of the public offering price to
be issued to the Representative (the "Representative's Warrant"). The
Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $920,000 and the Selling Shareholders estimated at $50,000, including
the Representative's nonaccountable expense allowance, assuming a public
offering price of $10.00 per share.
(3) The Company has granted the Underwriters a 45-day option to purchase up to
240,000 shares of Common Stock on the same terms and conditions as set
forth above, solely to cover over-allotments, if any. If all such shares
of Common Stock are purchased, the total Price to Public, Underwriting
Discounts and Commissions, and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
-----------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to certain other conditions, including the right of the Underwriters to
withdraw, cancel, modify or reject any order in whole or in part. It is
expected that delivery of certificates representing the shares will be made on
or about , 1998, at the offices of the Representative, Irvine,
California.
-----------
CRUTTENDEN ROTH
I N C O R P O R A T E D
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
INSIDE FRONT COVER:
[COST-U-LESS LOGO]
[MAP DEPICTING THE COMPANY'S CURRENT STORES, STORES UNDER CONSTRUCTION, SITES
UNDER CONSIDERATION, CORPORATE HEADQUARTERS AND FREIGHT CONSOLIDATION DEPOTS]
CURRENT STORES: Pago Pago, American Samoa; Sonora, California; Dededo, Guam;
Tamuning, Guam; Hilo, Hawaii; Kapaa, Kauai, Hawaii; St. Croix, U.S. Virgin
Islands; St. Thomas, U.S. Virgin Islands
STORES UNDER CONSTRUCTION: Nadi, Fiji; Suva, Fiji; Curacao, Netherlands
Antillies
SITES UNDER CONSIDERATION: Caribbean - Antigua; Aruba; Barbados; Bahamas;
Belize; Bermuda; Dominica; French Guiana; Jamaica; Martinique; St. Lucia; St.
Maartin; St. Vincent & The Grenadines; Trinidad & Tobago. South Pacific - New
Caledonia; New Zealand; Papua New Guinea; Solomon Islands; Suriname; Tahiti;
Tonga; Vanuatu; Western Samoa
CORPORATE HEADQUARTERS: Bellevue, Washington
FREIGHT CONSOLIDATION DEPOTS: Union City, California; Miami, Florida;
Auckland, New Zealand
INSIDE GATEFOLD:
[Nine different pictures depicting the Company's:
. Fresh Produce Department
. Refrigeration Cases
. Meat Department
. Forklift
. Check-out Lanes
. Store Interiors (from an aerial view)
. Computer Systems
. Steel Racking
. Store-fronts]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-
COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME. SEE "UNDERWRITING."
The Company has applied for federal registration of the mark and the
stylized logo "Cost-U-Less." All other trademarks or service marks appearing
in this Prospectus are trademarks or service marks of the respective companies
that utilize them.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements, including the Notes thereto,
appearing elsewhere in this Prospectus. Prospective investors should carefully
consider the information set forth under "Risk Factors." Unless otherwise
indicated, the information contained in this Prospectus assumes that the
Underwriters' over-allotment option is not exercised. Prior to effectiveness of
the Offering, the Company expects to effect a 1-for-3.38773 reverse split of
its outstanding Common Stock. All share and per share information has been
restated to reflect this reverse split.
THE COMPANY
Cost-U-Less is a leading operator of mid-sized warehouse club-style stores in
U.S. territory island markets throughout the Pacific and Caribbean. The
Company's seven island stores are located in Hawaii, the U.S. Virgin Islands,
Guam and American Samoa. The Company has increased its net sales from $13.5
million in 1991 to $125 million in 1997, thereby achieving a compound annual
growth rate of 45%. The Company believes it has developed a proven store
concept, as well as effective operating methods and systems, which together
provide it certain competitive advantages in pursuing the significant
opportunities represented by the many regions that satisfy the Company's
criteria for target island markets. By entering new island markets in the
Pacific and Caribbean, the Company plans to open at least 26 additional stores
within the next four years, including one in each of the last two quarters of
fiscal 1998.
Capitalizing on management's experience in the warehouse club industry, the
Company opened its first retail warehouse store in 1989. In 1992, the Company
initiated its expansion by opening stores in relatively remote 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 while continuing to succeed against similar competitors in
its island stores, management decided in 1995 to return its focus to its core
island markets. In 1996, while further refining its island store concept,
enhancing inventory control and management information systems, adjusting its
island store product mix to include higher-margin items and local merchandise,
and developing a prototype island store design, the Company began the process
of closing nearly all its mainland stores. The Company believes it is now well
positioned to pursue an aggressive growth strategy focused on accelerating the
roll-out of its island stores, starting with two new stores in Fiji for which
leases have been signed and site development has begun.
The warehouse club industry has experienced strong growth in recent years and
consumer acceptance of warehouse club stores has been quite high. According to
Warehouse Club Focus, an industry research group, the U.S. warehouse club
industry achieved compound annual growth rates of 8.4% in retail market share
and 13.4% in industry sales from 1988 to 1997, and reached approximately $41.2
billion in total annual sales in 1997. As the industry has grown, retailing
methods pioneered by warehouse club operators have been well tested and
validated. These methods include emphasizing low overhead by using no-frills
shopping environments and volume purchasing, as well as achieving operating
efficiencies through limited handling of merchandise and floor-to-ceiling
racked shelving. The Company believes that these methods, in combination with
its "no membership fee" policy and its localized merchandising strategy, make
its warehouse club-style stores strongly appealing to island market consumers,
and that additional factors unique to island markets, such as handling
significant geographical or logistical challenges and dealing with various
governmental or cultural issues, together lead to certain competitive
advantages for the Company given its island operations expertise. In addition,
the Company believes that traditional large-format warehouse clubs and discount
retailers are generally unwilling to adapt their multiunit, continent-based
operations to meet the unique characteristics and small populations of island
markets. The Company estimates that there are at least 30 Pacific and Caribbean
islands that meet or exceed its minimum requirements of 40,000 population and
$125 million Gross Domestic Product, and believes these islands represent as
many as 90 potential locations for its island concept stores.
3
<PAGE>
To achieve its anticipated growth, the Company plans to employ a multitier
business strategy designed to leverage the Company's core competencies in
opening and operating stores in distant and diverse locations, while
capitalizing on the inherent features of island markets. Through its past
experience with island operations, the Company has (i) developed a cost-
effective store prototype designed to endure severe island weather conditions,
(ii) negotiated competitive transportation rates, and (iii) adopted innovative
shipping techniques, including use of both cross-dock depots (whereby product
is loaded directly from transportation vehicles to Company containers and
shipped to Company stores with minimal storage time) and independent
distribution facilities. In addition, the Company utilizes modern systems and
merchandising techniques often unused by its local competitors, including
sophisticated computerized systems, efficient shelving and state-of-the-art
refrigeration and air-conditioning equipment, to provide a shopping environment
the Company believes is superior to that of its local competition. Moreover,
benefiting from its retail operating efficiencies, "no membership fee" policy,
and access to volume purchasing discounts, the Company is able to offer
attractive consumer value while maintaining strong margins. The Company also
sources a meaningful portion of its product selection from local island vendors
while deriving the benefits of centralized purchasing. Finally, the Company
manages overhead through the use of efficient facilities, controlled operating
expenditures and labor that the Company believes is less costly than that
generally available in mainland markets.
In addition to its island-operations expertise, the Company believes that its
past success in island markets has also been attributable to a "first-mover"
advantage. By opening stores in markets that other warehouse clubs and discount
retailers have not yet entered, the Company believes that it will be better
able to achieve significant market share and develop name recognition and
customer loyalty, thus further discouraging entry by large-format discount
competition. Accordingly, the Company's future growth is focused on expanding
into relatively untapped markets.
The Company's principal executive offices are located at 12410 S.E. 32nd
Street, Bellevue, Washington 98005, and its telephone number is (425) 644-4241.
The Company was incorporated in the state of Hawaii in April 1989 and
reincorporated in Washington in January 1994. References to Cost-U-Less and the
Company in this Prospectus include the Company and its subsidiaries in Guam,
the U.S. Virgin Islands, American Samoa, Nevada, the Republic of Fiji, New
Zealand, Netherlands Antilles, and the Republic of Vanuatu.
4
<PAGE>
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."
THE OFFERING
<TABLE>
<C> <S>
Common Stock Offered by:
The Company......................... 1,600,000 shares
The Selling Shareholders............ 123,222 shares
Common Stock to Be Outstanding After
the Offering.......................... 3,599,961 shares(1)
Use of Proceeds........................ Repaying outstanding short-term
indebtedness, and funding the
Company's expansion program, working
capital and other general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market Symbol. "CULS"
</TABLE>
- --------
(1) Excludes 984,337 shares of Common Stock reserved for issuance pursuant to
the Company's benefit plans, agreements and warrants, of which options and
warrants to purchase 484,337 shares were outstanding as of March 29, 1998
at a weighted average exercise price of $6.41 per share. No options have
been granted by the Company between March 29, 1998 and the date of this
Prospectus. See "Management--Compensation Pursuant to Plans" and
"Description of Capital Stock."
----------------
This Prospectus contains certain forward-looking statements that involve
known and unknown risks, uncertainties and other factors that may cause actual
results, performance or achievements of the Company or industry trends to
differ materially from those expressed or implied by such forward-looking
statements. Such factors include, among others, those discussed in "Risk
Factors" and elsewhere in this Prospectus.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED(1) QUARTER ENDED(1)
------------------------------ --------------------
DEC. 31, DEC. 29, DEC. 28, MARCH 30, MARCH 29,
1995 1996 1997 1997 1998
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.............. $139,652 $134,820 $124,865 $31,789 $31,753
Gross profit........... 19,477 20,996 20,468 5,066 5,202
Store contribution(2).. 4,528 4,797 5,475 1,136 1,549
Store closing expenses. 400 918 1,346 700 --
Operating income
(loss)................ 800 1,196 1,027 (291) 556
Net income (loss)...... 250 370 363 (278) 326
Diluted earnings (loss)
per common share...... $ 0.11 $ 0.17 $ 0.17 $ (0.14) $ 0.15
Weighted average common
shares outstanding,
assuming dilution..... 2,198 2,147 2,124 2,000 2,151
SELECTED OPERATING DATA:
Island stores:
Stores opened......... 2 -- -- -- --
Stores closed......... 1 -- -- -- --
Stores open at end of
period............... 7 7 7 7 7
Average net sales per
square foot(3)(4).... $ 550 $ 520 $ 519 $ 130 $ 138
Comparable store net
sales increase
(decrease)(4)(5)..... (18.5)% (5.0)% (0.2)% (0.4)% 6.1%
Mainland stores:
Stores opened......... 2 -- -- -- --
Stores closed......... -- 1 2 1 --
Stores open at end of
period............... 4 3 1 2 1
Average net sales per
square foot(3)(4).... $ 258 $ 230 $ 244 $ 49 $ 68
Comparable store net
sales increase
(decrease)(4)(5)..... 8.9% (4.2)% (3.2)% (4.9)% (10.0)%
Total stores open at
end of period......... 11 10 8 9 8
Total comparable store
net sales increase
(decrease)(4)(5)...... (15.8)% (4.9)% (0.5)% (0.9)% 5.2%
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 29, 1998
----------------------
ACTUAL AS ADJUSTED(6)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital......................................... $ 3,059 $16,859
Total assets............................................ 25,223 38,408
Line of credit.......................................... 615 --
Long-term debt, less current maturities................. 1,632 1,632
Total shareholders' equity.............................. 10,052 23,852
</TABLE>
- --------
(1) The Company's fiscal year ends on the last Sunday in December. The fiscal
years ended December 29, 1996 and December 28, 1997 were 52-week fiscal
years, and the fiscal year ended December 31, 1995 was a 53-week fiscal
year. The Company's fiscal quarters are 13 weeks.
(2) Store contribution is determined by deducting store expenses from store
gross profit.
(3) Quarterly average sales per square foot have not been annualized.
(4) Comparable store net sales and average net sales per square foot for fiscal
1995 have been adjusted to reflect a 52-week year.
(5) A new store becomes comparable after it has been open for a full 13 months.
(6) As adjusted to reflect the sale of the 1,600,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
of $10.00 per share and application of the estimated net proceeds
therefrom. See "Use of Proceeds."
6
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Certain statements under the captions "Prospectus Summary,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," as well as statements
made in the following "Risk Factors" and elsewhere in this Prospectus,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may
cause the actual results, performance or achievements of the Company, or
industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: risks
associated with island and international operations; ability to manage growth;
small store base; competition; dependence on key personnel; general economic
conditions; fluctuations in comparable store sales; and other factors
referenced in this Prospectus. Prospective investors should carefully consider
the following risk factors, in addition to the other information in this
Prospectus.
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 1997. The Company expects that its
island and future 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.
Transportation Issues. 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 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, any collusion among the transportation
companies regarding shipping prices or terms, 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--
Operations."
Isolation of Store Operations From Corporate Management; Increased
Dependence on Local Managers. The Company's headquarters and administrative
offices are located in Bellevue, Washington; however, seven of the Company's
eight stores and a majority of its employees are located on remote 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 will 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 do so could have a material adverse effect on the
Company's business, financial condition and operating results. See "Business--
Operations."
Weather and Other Risks Associated With Island Operations. The Company's
operations will be subject to the volatile weather conditions and natural
disasters characteristic of the island markets in which the Company's stores
are located, 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
7
<PAGE>
(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 and install modern
capabilities such as dependable and affordable electricity, telephone,
computer, Internet and satellite connections in remote and often undeveloped
regions, (iii) political, military and trade tensions, (iv) currency exchange
rate fluctuations, (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; any failure to do
so would have a material adverse effect on the Company's business, financial
condition and operating results. See "Business--Expansion Plans."
Expansion Outside U.S. Territories. All of the Company's existing island
stores are located in U.S. territories throughout the Pacific and Caribbean
(the "U.S. Territories") or the Hawaiian Islands. The Company's future
expansion plans involve entry into 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.
Moreover, the Company intends to open two new stores in Fiji, which has been
subject to significant political and economic unrest during recent years. In
addition, while awaiting government approval of a long-term lease, the lessor
of one of the Company's Fijian sites currently holds a short-term lease on the
underlying property that expires prior to the expiration date of the lease
between the Company and the lessor. The failure to adequately address the
additional challenges involved with international operations, and specifically
those associated with the Company's Fijian stores, could have a material
adverse effect on the Company's business, financial condition and operating
results. See "Business--Expansion Plans."
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. There can
be no assurance that any of these risks will not have an adverse effect on the
Company's business, financial condition and operating results. See "Business--
Governmental Regulations."
ABILITY TO MANAGE GROWTH
The Company intends to pursue an aggressive growth strategy, the success of
which will depend to a significant degree on the Company's ability to (i)
expand its operations through the opening of new stores, (ii) operate new
stores on a profitable basis, and (iii) maintain positive comparable store net
sales. The Company currently operates eight stores and plans to open at least
26 new stores by the end of the year 2002, which represents a significant
increase in the number of stores opened and operated by the Company. Although
in prior years the Company opened new stores on a fairly rapid schedule, it
has not opened any new stores in the last two fiscal years. Moreover, to date,
the Company has never opened more than four stores in any given fiscal year
and has no operating experience in most of the markets in which it expects to
open new stores. These 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 these expansion plans
or that the Company's new stores will be profitable.
The Company's ability to open new stores on a timely basis will also depend
on a number of factors, some of which may be beyond the Company's control,
including the ability to (i) properly identify and enter new markets, (ii)
locate suitable store sites, (iii) negotiate acceptable lease terms, (iv)
construct or refurbish sites, and (v) obtain necessary funds on satisfactory
terms. 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,
8
<PAGE>
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 intends to locate its stores. There
can be no assurance that the Company will be able to open the planned number
of new stores according to its store-opening schedule 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. Moreover, 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 the Company
will anticipate all of 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" and "--Expansion Plans."
SMALL STORE BASE
The Company opened its first store in 1989, opened a total of 14 stores in
the following six years, and presently operates eight stores. From December
1994 to June 1997, the Company has closed six stores, which 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
believes that it has carefully planned for the implementation of its expansion
program, 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--General," "--Store Locations" and "--Properties."
COMPETITION
The warehouse club and discount retail businesses are highly competitive.
The Company currently competes in several of its markets against other
warehouse clubs and discount retailers, including Costco Companies, Inc.
("Costco"), Kmart Corporation ("Kmart") and Wal-Mart Stores, Inc. ("Wal-
Mart"). The Company's competition also consists of regional and smaller
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. While the Company expects that
the size of many of the markets in which it operates or expects to enter will
deter entry by most of its larger competitors, there can be no assurance that
the Company's larger competitors will not decide to enter these markets or
that its smaller 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. The Company may be required to implement price
reductions in order to remain competitive should any of its competitors reduce
prices in any of its markets. 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."
9
<PAGE>
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, including Michael
J. Rose, the Company's founder, Chairman of the Board, President and Chief
Executive Officer, Allan C. Youngberg, the Company's Vice President-Chief
Financial Officer, Secretary and Treasurer and Terence R. Buckley, the
Company's Director of Pacific Expansion. None of the Company's executive
officers or key employees, including Messrs. Rose, Youngberg and Buckley, are
subject to employment agreements that would prevent them from leaving the
Company. 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. See "Management--Directors,
Executive Officers and Key Employees."
FLUCTUATIONS IN COMPARABLE-STORE SALES
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 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. The
Company's comparable store sales increases (decreases) over the prior period
were (15.8)%, (4.9)% and (0.5)% in fiscal 1995, 1996 and 1997, respectively,
and 5.2% in the first quarter of fiscal 1998. These factors may result in
future comparable store sales increases that are lower than those experienced
in the first quarter of fiscal 1998. Moreover, there can be no assurance that
comparable store sales for any particular period will not decrease in the
future. Following the Offering, changes in the Company's comparable store
sales could cause the price of the Common Stock to fluctuate substantially.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Results of Operations."
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 impacting 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 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."
DEPENDENCE ON SYSTEMS; YEAR 2000 COMPLIANCE
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, including in connection with its planned
systems revisions, 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. Such failures
and interruptions may result from the inability of certain systems (including
those of the Company and, in particular, of third-party vendors to the
Company) to recognize the
10
<PAGE>
year 2000. The Year 2000 issue is the result of computer programs being
written using two digits, rather than four, to define the applicable year. Any
of the Company's computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. If not
addressed, the direct result of the Year 2000 issue could be a system failure
or miscalculations, causing disruption of operations, including a temporary
inability to process customer transactions, order merchandise, accurately
track inventory and revenue, or engage in similar normal business activities.
The Company has implemented a plan to review and monitor its computer systems
to ensure that they are Year 2000-compliant, but does not believe that it will
be required to invest a material amount of funds to make its systems Year
2000-compliant. The Company's failure to implement its Year 2000 corrections
in a timely fashion or in accordance with its current cost estimates, or the
failure of third-party vendors to correct their Year 2000 problems, 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--Year 2000" and "Business--Operations."
ABSENCE OF PRIOR MARKET FOR COMMON STOCK; VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock,
and there can be no assurance that an active trading market will develop or,
if developed, will be sustained following the Offering. The initial public
offering price of the Common Stock will be determined by negotiations between
the Company and the Representative, and may not be indicative of the market
price of the Common Stock after the Offering. Certain factors, such as sales
of Common Stock into the market by existing shareholders, fluctuations in
operating results of the Company or its competitors, market conditions
generally for equity securities of similar companies, changes in earnings
estimates by analysts and changes in accounting policies, among other factors,
could cause the market price of the Common Stock to fluctuate substantially.
In addition, the market prices of many securities have been highly volatile in
recent years, often as a result of factors unrelated to a company's
operations. Accordingly, the market price of the Common Stock may decline even
if the Company's operating results or prospects have not changed. See "Shares
Eligible for Future Sale" and "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial number of shares of Common Stock in the public
market following the Offering, whether by purchasers in the Offering or
current shareholders or employees of the Company, could adversely affect the
market price of the Common Stock, and could impair the Company's future
ability to raise capital through an offering of its equity securities. Of the
3,599,961 shares to be outstanding following the Offering, the 1,723,222
shares offered hereby will be freely tradeable and the remaining 1,876,739
shares will be "restricted securities" under Rule 144 promulgated under the
Securities Act of 1933, as amended (the "Securities Act"). The Company, its
directors, executive officers, key employees and certain shareholders and
optionholders, who collectively hold an aggregate of 1,638,783 shares and
options and warrants to purchase an aggregate of 484,337 additional shares,
have agreed not to sell, directly or indirectly, any shares owned by them for
a period of 180 days after the date of this Prospectus without the prior
written consent of the Representative. Upon the expiration of this 180-day
lock-up period (or earlier upon the consent of the Representative), all of
these restricted shares (plus shares issuable upon exercise of then-vested
outstanding options and warrants) will become eligible for sale subject to the
restrictions of Rule 144 and Rule 701. The Representative has no current
intention to release any shareholder from the provisions of the lock-up
agreements prior to the expiration of the 180-day lock-up period. See "Shares
Eligible for Future Sale" and "Underwriting."
CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers, in the aggregate, will
beneficially own approximately 26.7% of the outstanding shares of Common Stock
after the Offering (approximately 25.2% if the Underwriters' over-allotment
option is exercised in full). As a result, the Company's directors and
executive
11
<PAGE>
officers, acting together, would be able to significantly influence and may be
able to control many matters requiring approval by the Company's shareholders,
including, without limitation, the election of directors and approval of
significant corporate transactions. In addition, this concentration of
ownership and voting power may have the effect of accelerating, delaying or
preventing a change in control of the Company or otherwise affect the ability
of other shareholders to influence the policies of the Company. See
"Management," "Principal and Selling Shareholders" and "Description of Capital
Stock."
ANTITAKEOVER CONSIDERATIONS
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. This authority, together
with certain provisions of the Company's Restated Articles of Incorporation
(the "Restated Articles"), 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, deterring or
preventing a hostile takeover of the Company. See "Description of Capital
Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution of $3.38 per share in net tangible book value based on an
assumed initial public offering price of $10.00 per share. To the extent that
currently outstanding options to purchase Common Stock are exercised,
purchasers of Common Stock may experience additional dilution. See "Dilution."
ABSENCE OF DIVIDENDS
The Company has never declared or paid any cash dividends on the Common
Stock. In addition, the Company does not anticipate paying any cash dividends
on the Common Stock in the foreseeable future. See "Dividend Policy."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of 1,600,000
shares of Common Stock by the Company hereby, assuming an initial public
offering price of $10.00 per share and after deducting underwriting discounts
and commissions and estimated offering expenses payable by the Company, are
estimated to be approximately $13.8 million (approximately $16.0 million if
the Underwriters' over-allotment option is exercised in full). The Company
will not receive any proceeds from the sale of shares of Common Stock by the
Selling Shareholders. See "Principal and Selling Shareholders." The Company
intends to use the net proceeds of the Offering to repay outstanding short-
term indebtedness, to fund the Company's expansion program and for working
capital and other general corporate purposes. Specifically, the Company
intends to use approximately $4.0 million of the net proceeds to repay the
expected outstanding balance on the Company's revolving working capital line
of credit (the "Line of Credit") with Bank of America NT & SA dba Seafirst
Bank ("Seafirst Bank"). As of March 29, 1998, the outstanding principal on the
Line of Credit was $615,000. The Line of Credit bears interest at Seafirst
Bank's prime rate (8.5% as of March 29, 1998). In addition, the Company plans
to use approximately $7.0 million of the net proceeds to purchase equipment
and store fixtures for new stores and approximately $1.0 million to upgrade
computer systems for the Company's corporate office and its New Zealand buying
office. The remainder of the net proceeds will be used for working capital and
general corporate purposes. Pending their application, the net proceeds of the
Offering will be invested in short-term, interest-bearing, investment-grade
securities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on the Common
Stock, and presently intends to retain any future earnings to finance its
operations and expand its business. In addition, the Company's various credit
facilities restrict the ability of the Company to declare dividends. The
Company therefore does not anticipate paying cash dividends in the foreseeable
future.
13
<PAGE>
CAPITALIZATION
The following table sets forth the Company's Line of Credit and
capitalization as of March 29, 1998, and as adjusted to give effect to the
Offering (after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company) and application of the estimated net
proceeds therefrom, at an assumed initial public offering price of $10.00 per
share.
<TABLE>
<CAPTION>
MARCH 29, 1998
-----------------
AS
ACTUAL ADJUSTED
------- --------
(IN THOUSANDS)
<S> <C> <C>
Line of Credit............................................... $ 615 $ --
======= =======
Long-term debt, less current maturities...................... $ 1,632 $ 1,632
Shareholders' equity:
Preferred Stock, $0.001 par value per share; 2,000,000
shares authorized; no shares issued or outstanding........ -- --
Common Stock, $0.001 par value per share; 25,000,000 shares
authorized; 1,999,961 shares issued and outstanding,
actual; 3,599,961 shares issued and outstanding, as
adjusted(1)(2)............................................ 3,600 17,400
Retained earnings.......................................... 6,491 6,491
Accumulated other comprehensive income..................... (39) (39)
------- -------
Total shareholders' equity................................. 10,052 23,852
------- -------
Total capitalization..................................... $11,684 $25,484
======= =======
</TABLE>
- --------
(1) Excludes 984,337 shares of Common Stock reserved for issuance pursuant to
the Company's benefit plans, agreements and warrants, of which options and
warrants to purchase 484,337 shares were outstanding as of March 29, 1998
at a weighted average exercise price of $6.41 per share. No options were
granted by the Company between March 29, 1998 and the date of this
Prospectus. See "Management--Compensation Pursuant to Plans" and
"Description of Capital Stock."
(2) See Note 6 of Notes to Consolidated Financial Statements.
14
<PAGE>
DILUTION
As of March 29, 1998, the Company's net tangible book value was
approximately $10.0 million, or $5.02 per share of Common Stock. Net tangible
book value per share represents the Company's total assets less intangible
assets less total liabilities divided by the number of shares of Common Stock
outstanding. Without taking into account any other changes in net tangible
book value after March 29, 1998, other than to give effect to the sale of
1,600,000 shares of Common Stock by the Company in the Offering at an assumed
initial public offering price of $10.00 per share and the receipt by the
Company of the estimated net proceeds therefrom, the net tangible book value
of the Company as of March 29, 1998 would have been approximately $23.8
million, or $6.62 per share. This represents an immediate increase in net
tangible book value of $1.60 per share to existing shareholders and an
immediate dilution of $3.38 per share to purchasers of shares of Common Stock
in the Offering, as illustrated by the following:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $10.00
Net tangible book value per share as of March 29, 1998........ $5.02
Increase per share attributable to new investors.............. 1.60
-----
Pro forma net tangible book value per share after the Offering.. 6.62
------
Dilution per share to new investors............................. $ 3.38
======
</TABLE>
The following table summarizes as of March 29, 1998, after giving effect to
the Offering, the differences between existing shareholders and purchasers of
shares of Common Stock in the Offering with respect to the number of shares of
Common Stock purchased from the Company, the total consideration paid and the
average price per share paid:
<TABLE>
<CAPTION>
SHARES
PURCHASED(1)(2) TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders.... 1,999,961 55.6% $ 3,525,000 18.1% $ 1.76
New investors............ 1,600,000 44.4 16,000,000 81.9 10.00
--------- ----- ----------- -----
Total.................... 3,599,961 100.0% $19,525,000 100.0%
========= ===== =========== =====
</TABLE>
- --------
(1) Excludes 984,337 shares of Common Stock reserved for issuance pursuant to
the Company's benefit plans, agreements and warrants, of which options and
warrants to purchase 484,337 shares were outstanding as of March 29, 1998
at a weighted average exercise price of $6.41 per share. No options were
granted by the Company between March 29, 1998 and the date of this
Prospectus. See "Management--Compensation Pursuant to Plans" and
"Description of Capital Stock."
(2) The above table is based on ownership as of March 29, 1998. Sales by the
Selling Shareholders in the Offering will reduce the number of shares held
by existing shareholders to 1,876,739 shares, or 52.1% (48.9% if the
Underwriters' over-allotment option is exercised in full) of the total
number of shares outstanding after the Offering, and will increase the
number of shares held by new investors to 1,723,222 shares, or 47.9%
(51.1% if the Underwriters' over-allotment option is exercised in full) of
the total number of shares of Common Stock outstanding after the Offering.
See "Principal and Selling Shareholders."
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data are qualified in their
entirety by, and should be read in conjunction with, the Company's
Consolidated Financial Statements, including the Notes thereto, and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere in this Prospectus. The consolidated
statements of income data for the fiscal years ended December 29, 1996 and
December 28, 1997 and the consolidated balance sheet data as of December 29,
1996 and December 28, 1997 have been derived from the audited consolidated
financial statements of the Company, which were audited by Ernst & Young LLP,
independent auditors, as indicated in their report included elsewhere in this
Prospectus. The consolidated income statement data for the fiscal year ended
December 31, 1995 have been audited by Deloitte & Touche LLP, as indicated in
their report included elsewhere in this Prospectus. The consolidated
statements of income data for the fiscal years ended December 26, 1993 and
December 25, 1994 and the consolidated balance sheet data as of December 26,
1993, December 25, 1994 and December 31, 1995 are derived from consolidated
financial statements audited by Deloitte & Touche LLP that are not included
herein. The consolidated statements of income data and the consolidated
balance sheet data for the quarters ended March 30, 1997 and March 29, 1998
are derived from unaudited consolidated financial statements included herein
which, in the opinion of management of the Company, reflect all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the financial data for such periods. The results of operations for the quarter
ended March 29, 1998 are not necessarily indicative of the results that may be
expected for any other interim period or for the full fiscal year.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED(1) QUARTER ENDED(1)
-------------------------------------------------- --------------------
DEC. 26, DEC. 25, DEC. 31, DEC. 29, DEC. 28, MARCH 30, MARCH 29,
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA, AVERAGE SALES PER SQUARE
FOOT, NUMBER OF STORES AND PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales.............. $85,567 $117,204 $139,652 $134,820 $124,865 $31,789 $31,753
Gross profit........... 12,144 16,351 19,477 20,996 20,468 5,066 5,202
Operating expenses:
Store.................. 6,414 10,512 14,949 15,843 14,543 3,840 3,535
General and
administrative........ 1,513 2,210 2,728 3,039 3,225 795 981
Store opening.......... 456 643 600 -- 327 22 130
Store closing.......... -- 840 400 918 1,346 700 --
------- -------- -------- -------- -------- ------- -------
Operating income
(loss)................ 3,761 2,146 800 1,196 1,027 (291) 556
Interest expense....... (84) (160) (555) (605) (427) (124) (55)
Other income (expense). 19 176 150 -- (40) -- --
------- -------- -------- -------- -------- ------- -------
Income (loss) before
income taxes.......... 3,696 2,162 395 591 560 (415) 501
Income tax provision
(benefit)............. 1,305 982 145 221 197 (137) 175
------- -------- -------- -------- -------- ------- -------
Net income (loss)...... $ 2,391 $ 1,180 $ 250 $ 370 $ 363 $ (278) $ 326
======= ======== ======== ======== ======== ======= =======
Diluted earnings (loss)
per common share...... $ 1.17 $ 0.53 $ 0.11 $ 0.17 $ 0.17 $ (0.14) $ 0.15
======= ======== ======== ======== ======== ======= =======
Weighted average common
shares outstanding,
assuming dilution..... 2,042 2,210 2,198 2,147 2,124 2,000 2,151
SELECTED OPERATING DATA
Island stores:
Net sales.............. $81,369 $ 97,809 $120,010 $111,413 $111,480 $27,882 $29,547
Store contribution (2). $ 5,852 $ 6,547 $ 4,958 $ 5,212 $ 5,635 $ 1,321 $ 1,584
Stores opened.......... 2 1 2 -- -- -- --
Stores closed.......... -- -- 1 -- -- -- --
Stores open at end of
period................ 5 6 7 7 7 7 7
Average net sales per
square foot(1)(3)..... $ 827 $ 692 $ 560 $ 520 $ 519 $ 130 $ 138
Comparable store net
sales increase
(decrease)(1)(4)...... 10.9% 0.1% (18.5)% (5.0)% (0.2)% (0.4)% 6.1%
Mainland stores:
Net sales.............. $ 4,198 $ 19,394 $ 19,642 $ 23,407 $ 10,684 $ 3,748 $ 1,570
Store contribution (2). $ (157) $ (707) $ (430) $ (415) $ (160) $ (185) $ (35)
Stores opened.......... -- 3 2 -- -- -- --
Stores closed.......... -- 2 -- 1 2 1 --
Stores open at end of
period................ 1 2 4 3 1 2 1
Average net sales per
square foot(1)(3)..... $ 146 $ 208 $ 258 $ 230 $ 244 $ 49 $ 68
Comparable store net
sales increase
(decrease) (1)(4)..... 0.0% 17.6% 8.9% (4.2)% (3.2)% (4.9)% (10.0)%
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
DEC. 26, DEC. 25, DEC. 31, DEC. 29, DEC. 28, MARCH 30, MARCH 29,
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital......... $ 4,479 $ 4,710 $ 3,429 $ 3,635 $ 3,814 $ 3,005 $ 3,059
Total assets............ 13,836 21,907 28,525 24,856 22,815 25,494 25,223
Line of credit.......... -- 622 3,500 1,500 376 2,221 615
Long-term debt, less
current maturities..... 316 798 2,237 1,965 1,169 1,569 1,632
Total shareholders'
equity................. 7,289 8,704 8,957 9,327 9,670 9,049 10,052
</TABLE>
- --------
(1) Fiscal 1995 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
1995 have been adjusted to reflect a 52-week year.
(2) Store contribution is determined by deducting store expenses from store
gross profit.
(3) Quarterly average sales per square foot have not been annualized.
(4) A new store becomes comparable after it has been open for a full 13
months.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with "Selected
Consolidated Financial Data" and the Company's Consolidated Financial
Statements, including the Notes thereto, included elsewhere in this
Prospectus. In addition to historical information, the following "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contains certain forward-looking statements that involve known and unknown
risks and uncertainties. The Company's actual results could differ
significantly from those anticipated in these forward-looking statements as a
result of certain factors, including those discussed in "Risk Factors" and
elsewhere in this Prospectus.
OVERVIEW
Background
Seeking to capitalize on management's experience in the warehouse club
industry, Cost-U-Less began operations in 1989 by opening a mid-sized
warehouse club-style store in Maui, Hawaii. In early 1992, the Company
expanded its operations by opening additional island stores in other
relatively remote 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. Over the course of a three-year period,
the Company opened six mainland stores and seven island stores, but, over
time, found that most of the mainland stores were not profitable and did not
meet the Company's performance expectations. The Company believes that the
unanticipated concurrent expansion of large discount retailers in the
Company's mainland target markets, together with the substantially stronger
buying power, broader name recognition, better ability to afford prime
locations for new facilities and overall greater resources of these
competitors, combined to prevent the success of the Company's mainland stores.
The Company's store concept, however, continued to prove successful in the
more remote, and in many ways more challenging, island markets. The Company
therefore refocused on its core competencies in operating island stores and
began closing its mainland stores. The combined operating losses attributable
to mainland stores, including opening and closing expenses (but excluding any
allocation for related general and administrative or interest expenses) in
fiscal 1993 through 1997 totaled $5.8 million. Currently only one mainland
store remains open; the store is profitable 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. To
date, the Company's island stores have been located in the Hawaiian Islands
and the U.S. Territories. The Company's expansion strategy focuses primarily
on foreign island markets, beginning with the planned opening of its two
stores in Fiji in fiscal 1998.
Store Economics
Cost-U-Less benefits from attractive store-level economics and favorable
returns on investment at its island stores, which the Company believes will
help drive and support its planned expansion. The Company's seven island
stores open during all of fiscal 1997 generated average per store net sales of
$15.9 million, average net sales per square foot of $519, average annual per
store contribution of approximately $805,000 and average annual per store
contribution before depreciation of approximately $888,000. The Company
determines store contribution by deducting store expenses from gross profit.
The Company uses the entire interior space of its store, including receiving
and office space, in calculating average net sales per square foot.
In August 1995, the Company began a program aimed at increasing its gross
margin. The Company (i) added higher margin items, such as fresh meat and
perishables, to its product mix, (ii) negotiated lower freight rates, (iii)
improved and increased item selection in its stores, including offering sizes
that generate higher margins than traditional warehouse pack sizes, and (iv)
emphasized local ethnic items in addition to popular U.S. brand names. As a
result of this program, the Company increased its gross margin from 14.0% in
fiscal 1995 to 16.4% in fiscal 1997.
18
<PAGE>
Since June 1995, the Company has also upgraded its inventory control
systems, by (i) adding bar code scanning at all store cash registers,
receiving docks and distribution facilities, (ii) installing security cameras
in some of its stores, and (iii) implementing an employee incentive program
designed to reward, among other things, reductions in inventory shrink rates.
The effect of implementing these systems has reduced the Company's inventory
shrink expense from 0.6% of net sales in fiscal 1995 to 0.3% in fiscal 1997.
Distribution Facilities
The Company receives, consolidates and loads merchandise at its distribution
facilities, then ships merchandise to its island stores in fully loaded
containers. The Company does not own or operate a warehouse facility and
manages its in-store inventory primarily by electronically monitoring sell-
through of merchandise and maintaining efficient distribution facilities. The
Company's method of inventory management has enabled the Company to achieve
inventory turns of 7.7 for fiscal 1997, which represents an improvement over
the 7.2 inventory turns for fiscal 1996. In-store inventory turns (excluding
product in transit to stores and in the distribution facilities) were 9.5 for
fiscal 1997, compared to 8.5 for fiscal 1996.
Store Openings
The Company expenses store opening costs as incurred. Store opening expenses
include payroll, travel and other costs incurred by the Company in connection
with site selection, licensing, permitting, lease negotiations and
construction supervision, as well as training for new store managers. The
Company anticipates that in fiscal 1998 and 1999 its required investment to
open a new store will be approximately $2.0 million, including approximately
$300,000 for opening expenses, $800,000 for store fixtures and equipment and
$900,000 for inventory. The Company expects to carry approximately $1.8
million of inventory, including $600,000 of inventory in transit. Typically,
50% of the Company's inventory is vendor-financed, resulting in the $900,000
average per-store inventory investment by the Company.
Store Closings
The Company's store closing expenses consist primarily of costs related to
(i) buying out the unexpired portion of the store lease and writing off the
net book value of leasehold improvements and (ii) repairing facilities prior
to their return to the lessor. The Company expenses these items in the period
when the decision is made to close the store.
Wholesale Activities
Beginning in 1997, the Company has sold merchandise from its distribution
facilities at wholesale prices to retailers that, the Company believes, resell
the merchandise in markets not currently served by the Company. In fiscal 1997
and the first quarter of fiscal 1998, gross margin on the Company's wholesale
sales averaged 10.5%. Because there are less handling expenses associated with
the Company's wholesale operations, the Company believes that these operations
provide it with a profit opportunity that does not detract from its primary
business of retail sales.
19
<PAGE>
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, the percentage of
the Company's net sales represented by certain consolidated income statement
data.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED QUARTER ENDED
-------------------------- -------------------
DEC. 31, DEC. 29, DEC. 28, MARCH 29, MARCH 28,
1995 1996 1997 1997 1998
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales....................... 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit.................... 14.0 15.6 16.4 15.9 16.4
Operating expenses:
Store.......................... 10.7 11.7 11.6 12.1 11.1
General and administrative..... 2.0 2.3 2.6 2.5 3.1
Store opening.................. 0.4 -- 0.3 -- 0.4
Store closing.................. 0.3 0.7 1.1 2.2 --
----- ----- ----- ----- -----
Operating income (loss)......... 0.6 0.9 0.8 (0.9) 1.8
Interest expense................ (0.4) (0.5) (0.3) (0.4) (0.2)
Other income.................... 0.1 -- -- -- --
----- ----- ----- ----- -----
Income (loss) before income tax-
es............................. 0.3 0.4 0.5 (1.3) 1.6
Income tax provision (benefit).. 0.1 0.1 0.2 (0.4) 0.6
----- ----- ----- ----- -----
Net income (loss)............... 0.2% 0.3% 0.3% (0.9)% 1.0%
===== ===== ===== ===== =====
</TABLE>
Quarter Ended March 29, 1998 Compared to Quarter Ended March 28, 1997
Net Sales. Net sales of $31.8 million in the first quarter of fiscal 1998
were unchanged compared to the first quarter of fiscal 1997, despite closure
of two mainland stores, which stores in the first quarter of fiscal 1997
together generated approximately $2.0 million in net sales. The Company did
not open any new stores in the first quarter of either year. Comparable store
sales increased 5.2%, or $1.5 million. The Company believes the increase in
comparable store sales in the first quarter of fiscal 1998 was primarily
attributable to the introduction of the Company's program to improve
merchandising and store promotions, and that comparable-store sales could
fluctuate in the future.
Gross Profit. Gross profit increased to $5.2 million from $5.1 million in
the comparable period of the prior year, despite closure of two mainland
stores, which in the first quarter of 1997 together generated $246,000 in
gross profit. Gross margin increased to 16.4% from 15.9% in the comparable
prior period. The increase in gross margin was primarily due to the closure of
two mainland stores with lower gross profit margins, and to increased sales in
higher-margin departments such as fresh meat, perishables and frozen foods in
the Company's other stores. Comparable store gross profit increased $348,000.
Store Expenses. Store expenses decreased $305,000, or 7.9%, to $3.5 million
from $3.8 million in the comparable period of the prior year. The decrease was
primarily attributable to a $431,000 reduction in store expenses associated
with the two mainland stores that were closed in fiscal 1997, which was offset
primarily by an increase of $126,000 from higher wage rates, advertising
expenses and facility costs in the first quarter of fiscal 1998. Store
expenses overall decreased as a percentage of net sales to 11.1% from 12.1%.
General and Administrative Expenses. General and administrative expenses
increased $186,000, or 23.4%, to $981,000 from $795,000 in the comparable
period of the prior year, and increased as a percentage of net sales to 3.1%
from 2.5%. The increase was primarily due to hiring additional corporate
personnel in preparation for the Company's expansion program and a $75,000
one-time noncash expense associated with the grant in January 1998 of a stock
option to one of the Company's directors.
Store Opening Expenses. Store opening expenses were $130,000 in the first
quarter of fiscal 1998 and $22,000 in the comparable period in fiscal 1997.
These expenses were attributable to new stores scheduled to
20
<PAGE>
open in the second half of fiscal 1998 and site selection costs related to
store openings anticipated for fiscal 1999.
Store Closing Expenses. The Company incurred store closing expenses of
$700,000 in the first quarter of fiscal 1997. The Company did not incur any
store closing expenses in the comparable period in fiscal 1998. The Company
expects to incur an estimated $250,000 of expenses in the second quarter of
fiscal 1998 in connection with costs associated with closing the existing St.
Thomas facility, concurrent with opening the new St. Thomas facility.
Interest Expense. Interest expense declined to $55,000 from $124,000 in the
comparable period of the prior year due to a decrease in the Company's average
outstanding borrowings.
Fiscal 1997 Compared to Fiscal 1996
Net Sales. Net sales in fiscal 1997 declined $9.9 million, or 7.4%, to
$124.9 million from $134.8 million in the prior year. The decrease was
primarily due to store closures, which reduced sales by $12.3 million, and a
decline in comparable store sales of $577,000. This decrease in comparable
store sales was largely attributable to the Company's Hawaii stores, for which
sales decreased $1.7 million in fiscal 1997 compared to fiscal 1996. The
Company believes that the decrease in sales for its Hawaii stores was
principally due to a long-term statewide recession and a significant increase
in the level of competition in the Hawaii market. The decrease in net sales
was partially offset by $2.7 million in wholesale sales and by a comparable
store sales increase in the Company's other island stores of $1.5 million, or
1.7%.
Gross Profit. Gross profit decreased to $20.5 million from $21.0 million,
which resulted from a comparable store gross profit increase of $966,000 in
fiscal 1997, offset by a $1.7 million decline in gross profit attributable to
store closures in fiscal 1997. Gross margin increased to 16.4% in fiscal 1997
from 15.6% in fiscal 1996. The increase in gross margin was due to the closure
of three low-margin mainland stores, increased sales in higher-margin
departments such as the fresh meat and perishable departments, and decreased
distribution costs in its island stores.
Store Expenses. Store expenses decreased $1.3 million, or 8.2%, to $14.5
million from $15.8 million, and decreased as a percentage of net sales to
11.6% from 11.7%. The decrease was primarily due to a reduction in store
expenses from closed stores of $2.0 million. This reduction was offset by an
increase in store expenses for existing stores of $673,000, primarily from
wage rate increases associated with pay raises provided by the Company to its
hourly employees during the first three years of employment, the increased
rate at which the Company accrues vacation pay, increased rent associated with
consumer price index increases and utility usage relating to added
refrigeration capabilities.
General and Administrative Expenses. General and administrative expenses
increased $186,000, or 6.1%, to $3.2 million from $3.0 million, and increased
as a percentage of net sales to 2.6% from 2.3%. The increase was primarily due
to an increase in the number of corporate employees hired to support the
Company's planned expansion and increased accounting and tax preparation fees
related to incorporation of U.S. Territory stores as wholly owned
subsidiaries.
Store Opening Expenses. The Company incurred store opening expenses of
$327,000 in fiscal 1997. The Company did not incur any store opening expenses
in fiscal 1996. The fiscal 1997 store opening expenses were primarily for
payroll and travel costs associated with site selection, licensing, permitting
and lease negotiations for new stores.
Store Closing Expenses. Store closing expenses increased to $1.3 million
from $918,000 due to closing two stores in fiscal 1997 compared to closing one
store in fiscal 1996.
Interest Expense. Interest expense declined $178,000 in fiscal 1997 due to a
decrease in average outstanding borrowings to $3.7 million in fiscal 1997 from
$6.0 million in fiscal 1996.
21
<PAGE>
Other Expenses. Other expenses were comprised of insurance deductibles for
property and business interruption claims, including those related to the
effects of Typhoon Paka in Guam in December 1997.
Fiscal 1996 Compared to Fiscal 1995
Net Sales. Net sales in fiscal 1996 declined $4.9 million, or 3.5%, to
$134.8 million from $139.7 million. The decrease was due to a number of
factors. Fiscal 1996 was a 52-week year while fiscal 1995 was a 53-week year,
with an additional $2.3 million in sales attributable to the extra week. In
fiscal 1996, the Company closed one store, which further reduced net sales by
$7.0 million, though this reduction was offset by sales increases of $9.0
million in fiscal 1996 in the four stores that the Company opened in fiscal
1995. The Company opened no new stores in fiscal 1996. Comparable store sales
decreased 4.9% in fiscal 1996, primarily due to opening an additional Guam
store in a neighboring town during March 1995. Excluding the original Guam
store, comparable store island sales increased 1.1%, or $856,000.
Gross Profit. The Company's gross profit increased to $21.0 million from
$19.5 million. Gross margin increased to 15.6% from 14.0%. The increase in
gross profit resulted from a comparable store gross profit increase of
$822,000 and a $1.5 million increase from four stores opened in fiscal 1995,
offset by a $758,000 loss of gross profit from a store closure at the end of
fiscal 1995. The increase in gross margin was primarily a result of sales in
higher-margin produce and meat departments, increased selection of other
higher-margin items, decreased freight and distribution costs and increased
prices on non-price-sensitive items.
Store Expenses. Store expenses increased $894,000, or 6.0%, to $15.8 million
from $14.9 million and increased as a percentage of net sales to 11.7% from
10.7%. The increase was attributable to a $1.8 million increase from stores
opened during fiscal 1995 and a $469,000 increase in store expenses related to
increased depreciation, utilities and maintenance expenses associated with new
refrigeration equipment, the increased rate at which the Company accrues
vacation pay, and professional fees associated with store lease negotiations
and incorporation of the island stores, offset by a $1.2 million reduction of
store expenses for stores closed in fiscal 1996. The increase in store
expenses as a percentage of net sales was due primarily to the effect of
opening a second store in Guam during fiscal 1995, which increased total store
expenses for the two Guam stores by $401,000 in fiscal 1996 compared to fiscal
1995.
General and Administrative Expenses. General and administrative expenses
increased $311,000, or 11.4%, to $3.0 million from $2.7 million and increased
as a percentage of net sales to 2.3% from 2.0%. The increase was primarily due
to additional personnel and costs related to four new stores opened in fiscal
1995.
Store Opening Expenses. In fiscal 1995, the Company incurred store opening
expenses of $600,000 for four new stores: one in Guam, one in American Samoa
and two in California. The Company did not incur any store opening expenses in
fiscal 1996.
Store Closing Expenses. Store closing expenses increased to $918,000 from
$400,000. The Company closed one mainland store in December 1996, which
necessitated buying out a long-term lease, and closed the Maui, Hawaii store
in December 1995. The Maui store was near the end of its lease term, and the
Company did not renew the lease because of the continued recession in Hawaii
and the opening of two new large-format discount retail stores in the same
town.
Interest Expense. Interest expense increased $50,000 due to an increase in
average outstanding borrowings to $6.0 million in fiscal 1996 from $4.4
million in fiscal 1995.
Other Income. Other income in fiscal 1995 of $150,000 was comprised of an
insurance recovery for business interruption claims related to the effects of
Hurricane Marilyn in St. Thomas in September 1995.
22
<PAGE>
QUARTERLY OPERATING RESULTS
The following table sets forth unaudited financial information derived from
the Company's consolidated quarterly statements of income for the nine
quarters ended March 29, 1998. This information includes all adjustments,
consisting only of normal recurring accruals, that the Company considers
necessary for a fair presentation.
<TABLE>
<CAPTION>
1996 1997 1998
---------------------------------- ---------------------------------- -------
MAR. 31 JUN. 30 SEP. 29 DEC. 29 MAR. 30 JUN. 29 SEP. 28 DEC. 28 MAR. 29
------- ------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $33,443 $33,844 $32,717 $34,816 $31,789 $31,868 $29,747 $31,461 $31,753
Gross profit............ 4,940 5,194 5,210 5,652 5,066 5,240 4,876 5,286 5,202
Operating expenses:
Store.................. 3,841 3,918 3,918 4,166 3,840 3,677 3,484 3,542 3,535
General and administra-
tive.................. 823 752 691 773 795 788 769 873 981
Store opening.......... -- -- -- -- 22 46 115 144 130
Store closing.......... -- 25 30 863 700 600 -- 46 --
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss). 276 499 571 (150) (291) 129 508 681 556
Interest expense........ (135) (124) (117) (229) (124) (121) (118) (64) (55)
Other income (expense).. -- -- -- -- -- -- -- (40) --
Income tax provision
(benefit).............. 50 140 194 (163) (137) 5 126 203 175
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ 91 $ 235 $ 260 $ (216) $ (278) $ 3 $ 264 $ 374 $ 326
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The Company's quarterly operating results have fluctuated in the past and
are expected to fluctuate in the future as a result of a variety of factors,
including the timing of store openings and related store opening expenses,
weather conditions, price increases by suppliers, actions by competitors,
conditions in the discount retail market in general, regional, national and
international economic conditions and other factors.
The Company expects its business to exhibit some measure of seasonality,
which it believes is typical of the retail industry. Per store sales in the
fourth quarter are typically higher than in other quarters due to holiday
sales. The Company's quarterly results also reflect variations due to the use
of estimates in the first and third quarters for inventory shrink. These
estimates are adjusted to actual physical counts in the second and fourth
quarters. The Company traditionally accrues 0.5% of net sales for inventory
shrink and adjusts the accrual based on the results of the actual physical
count, which generally results in a lower shrink expense in the second and
fourth quarters.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations with internally
generated funds, the Company's credit facilities and private equity
transactions.
Net cash provided by (used in) operations was $205,000 and $(36,000) for the
first quarter of fiscal 1997 and 1998, respectively. In the first quarter of
fiscal 1998, operating cash flow was used primarily to replenish inventories
after the fourth quarter holiday season. In the comparable period in fiscal
1997, the Company was able to replenish inventories primarily from inventories
available from a store closure. For fiscal 1995, 1996 and 1997, net cash
provided by operations was $186,000, $2.3 million and $4.6 million,
respectively. The increase in net cash provided by operations over that period
was attributable to the Company's ability to reduce inventories through
improved inventory and purchasing systems in fiscal 1996 and 1997 and store
closures in each year.
Net cash used in investing activities was $581,000 and $1.8 million for the
first quarter of fiscal 1997 and 1998, respectively. The increase in the first
quarter of fiscal 1998 was primarily due to construction costs incurred for
the new St. Thomas store. Cash used in investing activities for fiscal 1995,
1996 and 1997 was $3.1 million, $2.0 million and $899,000, respectively. The
decline was primarily a result of discontinuing expansion activities during
these years.
23
<PAGE>
Net cash provided by financing activities was $324,000 and $778,000 for the
first quarter of fiscal 1997 and 1998, respectively. The increase in the first
quarter of fiscal 1998 was primarily due to the receipt of $1.0 million from
the construction loan for the new St. Thomas building. Net cash provided by
(used in) financing activities for fiscal 1995, 1996 and 1997 was $4.3
million, $(1.8) million and $(2.7) million, respectively, primarily reflecting
a reduction in the last two fiscal years of the outstanding balance on the
Company's bank credit facilities to $760,000 as of December 28, 1997 from a
high of $8.2 million in June 1995.
On May 1, 1998, the Company renewed and increased the Line of Credit to $7.0
million, which now expires May 1, 1999. Borrowings under the Line of Credit
were $2.1 million at May 1, 1998. Of the borrowings under the Line of Credit,
$633,000 bear interest at the bank's prime rate (8.5% at May 1, 1998) and $1.5
million at the LIBOR plus 1.5% (7.17% at May 1, 1998). The borrowing
collateral for the Line of Credit consists of inventories, equipment and trade
accounts receivable. The Line of Credit contains certain restrictive covenants
relating to working capital, debt-to-equity ratios, minimum equity, payment of
cash dividends and cash flow coverage.
The new St. Thomas store will be constructed and owned by the Company at a
total estimated cost of $3.0 million, including $400,000 for furniture,
fixtures and equipment. The Company obtained $3.0 million of construction
financing from two banks for its new store in St. Thomas. The construction
financing included a $1.0 million note payable with interest at the LIBOR plus
1.75% (7.77% at May 1, 1998), maturing on April 30, 2000. The construction
financing also included a $2.0 million note payable with interest at the
bank's prime rate plus 1.0% (9.5% at May 1, 1998) maturing on June 1, 2013.
The second note is secured by a first priority leasehold mortgage on the new
St. Thomas store. Each of these agreements contains certain restrictive
covenants relating to payment of cash dividends and other matters.
The Company estimates that its total cash outlay for opening a typical
island store will be approximately $2.0 million. The Company plans to open
three stores in fiscal 1998 (one store in St. Thomas and two stores in Fiji),
and six stores in each of fiscal 1999 and 2000. Overall, the Company
anticipates opening at least 26 new stores by the end of fiscal 2002. See
"Business--Expansion Plans."
When opening a new store, as well as on an on-going basis, the Company
expects to finance a substantial portion of its merchandise inventory cost by
using a combination of vendor and bank financing. However, there can be no
assurance that this level of financing will be available in the future on
terms acceptable to the Company.
The Company's cash needs are primarily for working capital to support its
inventory requirements and for store expansion. The Company intends to use a
portion of the net proceeds of the Offering to finance its expansion program
in fiscal 1998 and 1999 and to repay debt outstanding under the Line of
Credit, which is expected to be $4.0 million upon closing of the Offering. See
"Use of Proceeds." The Company believes that the net proceeds of the Offering,
together with amounts from bank financing and fixed-term capital asset loans
and net cash from operations, will be sufficient to satisfy the Company's
currently anticipated working capital and capital expenditure requirements
through fiscal 1999.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits, rather than four, to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. If not addressed,
the direct result of the Year 2000 issue could be a system failure or
miscalculations, causing disruption of operations, including a temporary
inability to process customer transactions, order merchandise, accurately
track inventory and revenue, or engage in similar normal business activities.
The Company has implemented a plan to review and monitor its computer systems
to ensure that they are Year 2000-compliant, but does not believe that it will
be required to invest a material amount of funds to make its systems Year
2000-compliant. The Company's failure to implement its Year 2000 corrections
in a timely fashion or in accordance with its current cost estimates, or the
failure of third-party vendors to correct their Year 2000 problems, could have
a material adverse effect on the Company's business, financial condition and
operating results. See "Risk Factors--Dependence on Systems; Year 2000
Compliance."
24
<PAGE>
BUSINESS
GENERAL
Cost-U-Less is a leading operator of mid-sized warehouse club stores in the
U.S. Territories. The Company enjoys significant benefits from the extensive
experience of its management team in the warehouse club industry. As a result
of prior relationships with industry leaders such as Costco, the Company's
officers and key employees gained competencies related to the operation
methods, purchasing strategies and management information systems employed by
warehouse clubs. The Company's key personnel developed and implemented a
business plan whereby the Company purchased merchandise at retail from
existing large-format warehouse clubs and then resold the merchandise, at
attractive margins, through stores located in relatively remote and
underserved markets. By selling only products proven to be successful at
established warehouse clubs, the Company minimized its need for in-house
buyers and was able to keep corporate costs low. The Company utilized this
strategy for several years and maintained its focus on operating pursuant to
an effective and low-cost business model. However, as sales volume grew, the
Company became able to source its merchandise directly from manufacturers,
thereby significantly reducing its cost of goods. Over time, the Company
augmented its corporate buying team as it began to increasingly tailor its
product mix to its specific markets and further realize the benefits of direct
purchasing. The Company then began to build a functional corporate
infrastructure to support anticipated growth.
Capitalizing on management's experience in the warehouse club industry, the
Company opened its first retail warehouse store in 1989. In 1992, the Company
initiated its expansion by opening stores in relatively remote 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 while continuing to succeed against similar competitors
in its island stores, management decided in 1995 to return its focus to its
core island markets. In 1996, while further refining its island store concept,
enhancing inventory control and management information systems, adjusting its
island store product mix to include higher-margin items and local merchandise,
and developing a prototype island store design, the Company began the process
of closing nearly all its mainland stores. The Company believes it is now well
positioned to pursue an aggressive growth strategy focused on accelerating the
roll-out of its island stores, starting with two new stores in Fiji for which
leases have been signed and site development has begun.
The Company intends to concentrate its future expansion efforts on island
markets, which it believes offer significant opportunities for growth. To
achieve its anticipated growth, the Company plans to employ a multitier
business strategy designed to leverage the Company's core competencies in
opening and operating stores in distant and diverse locations, while
capitalizing on the inherent features of island markets. Moreover, the Company
intends to continue utilizing a "first-mover" advantage. By opening stores in
markets that other warehouse clubs and discount retailers have not yet
entered, the Company believes that it will be better able to achieve
significant market share and develop name recognition and customer loyalty,
thus further discouraging entry by large-format discount competition.
Accordingly, the Company's future growth involves expanding into relatively
untapped markets, and the Company has identified a number of islands
throughout the Pacific and Caribbean in which warehouse clubs and discount
retailers have not opened stores.
INDUSTRY OVERVIEW
According to Warehouse Club Focus, an industry research group, sales in the
warehouse club industry totaled approximately $13.3 billion in 1988,
representing 1% of U.S. nonautomotive retail sales, which totaled
approximately $1.28 trillion. In calendar year 1997, industry-wide sales
totaled approximately $41.2 billion, or 2.1% of all U.S. nonautomotive retail
sales, which totaled approximately $1.93 trillion. These results represent
compound annual growth rates of 13.4% for warehouse club sales and 8.4% for
market share. The compound annual sales growth rate of 13.4% compares to only
4.7% in compound annual growth for U.S. nonautomotive retail sales over the
same period. Warehouse club industry sales have increased steadily, capturing
an increasing percentage of U.S. nonautomotive retail sales in each of the
last 10 years. Spawned in the 1970s with the introduction of a regional
Southern California membership-based retail and wholesale warehouse club, the
warehouse club industry has grown to include three national warehouse club
chains, Costco, BJ's
25
<PAGE>
Wholesale Club, Inc. and Sam's Club (a subsidiary of Wal-Mart), with 1997
annual sales growth rates of 16.5%, 8.6% and 4.8%, respectively.
Traditional warehouse clubs 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, 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. Prior to the
inception of the membership warehouse club concept in the mid-1970s, the
dominant companies selling comparable lines of merchandise were department
stores, grocery stores and traditional wholesalers. Warehouse clubs positioned
themselves as low-price leaders in the communities they entered and thereby
quickly gained market share as their new merchandising concepts and aggressive
marketing techniques led to a more competitive retail environment.
The Company believes that its target island markets are similar in many
respects to those found in the United States before the introduction of the
first warehouse club stores; however, island markets are characterized by
distinct attributes that, management believes, lead to certain competitive
advantages for the Company. Logistical challenges are presented by operating
individual store units in remote locations, whether in terms of information
flow or transportation of goods. Meeting these challenges requires specially
tailored systems and methods. Issues related to receiving local government
approvals, dealing with island real estate and site selection, and
constructing weather-resistant buildings that have been properly formatted for
efficient retailing are difficult to overcome. Retailers, and thus consumers,
in island markets often have limited experience with modern, more effective
retailing methods and therefore, the Company believes, an opportunity exists
to capitalize on competitive advantages inherent in employing such techniques.
In addition, while the typical U.S. warehouse club customer has virtually
unlimited access to popular U.S. brand-name products, these products are
carried by relatively few local island retailers. As a result, an unusually
strong yet largely unsatisfied demand for certain products may exist. Each
island or region demonstrates unique consumer preferences and thus may require
effective retailers to conduct regional research and to incorporate flexible
localized merchandise purchasing policies in order to offer a diverse
selection of local products, as well as popular U.S. brand-name products.
Based on the increasing acceptance of the traditional warehouse-club concept
in mainland markets, the Company's experience and operating results in current
island locations, as well as its market research of potential markets, the
Company believes that significant opportunities exist in island markets for
expansion of its warehouse club store concept.
The Company has identified its prototypical target market as an island with
a minimum population of 40,000 and a Gross Domestic Product of at least $125
million. The Company estimates that at least 30 Pacific and Caribbean islands
meet or exceed these criteria. Based on its estimates, the Company believes
these islands currently represent as many as 90 potential locations for its
island concept stores.
BUSINESS STRATEGY
The Company's goal is to become the leading operator of warehouse club-style
stores in island markets by leveraging its island-operations expertise,
utilizing modern systems and merchandising techniques, offering competitive
prices while maintaining attractive margins, providing a localized product mix
and benefiting from low overhead costs.
Concentrate Expansion Efforts in Island Markets. The Company's expansion
strategy focuses on opening mid-sized warehouse club-style stores in island
markets throughout the Pacific and Caribbean. The Company believes these
markets offer significant opportunities for growth. Specifically, island
markets are often characterized by (i) significant geographic and logistical
challenges, (ii) local competition with minimal experience in modern retailing
methods, and (iii) a high demand for U.S. brand-name products that have
limited availability. In addition, the Company believes that traditional
large-format warehouse club and discount retailers are generally unwilling to
adapt their multiunit, continent-based operations to meet the unique
characteristics and small populations of island markets.
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<PAGE>
Leverage Island-Operations Expertise. Capitalizing on its experience in
opening and operating retail warehouse club-style stores in remote U.S.
Territories and the Hawaiian Islands, the Company has developed core
competencies in overcoming the inherent challenges of island market
operations. The Company has refined a mid-sized building prototype designed to
endure severe island weather conditions. This prototype also incorporates low
construction costs, specifications that can be easily and quickly replicated,
and standardized equipment designed either to be readily repaired by island
employees or efficiently monitored off-site by equipment vendors. Moreover,
the Company has made a significant investment in its information systems and
communication networks, enabling corporate management and store buyers to
receive daily sales and inventory information and maintain regular contact
with in-store management and employees. In addition, through its longstanding
relationships with steamship lines, and with its present volume of deliverable
goods, the Company has negotiated what it believes to be competitive
transportation rates while selecting efficient shipping routes and cost-
effective freight techniques, including the use of both a Company-operated
cross-dock depot and independently operated distribution facilities.
Utilize Modern Systems and Merchandising Methods to Successfully Enter
Target Markets. Merchants in target markets often have not adopted modern
retail operating efficiencies, including computerized cash registers and
inventory-tracking devices, state-of-the-art refrigeration and air-
conditioning equipment, efficient shelving and display racks, improved
forklifts and sophisticated security systems. Moreover, the Company believes
that many locally operated stores do not have access to the vendor network and
distribution channels developed by the Company. As a result, the Company
believes that it will be able to successfully enter remote island markets by
using its advanced systems to provide a superior shopping environment for its
customers by (i) monitoring sales and inventory levels and using this
information to respond rapidly to changing consumer preferences and (ii)
offering a level of product selection and customer service often not found in
most of its local competitors' island stores.
Emphasize Strong Margins While Maintaining Everyday Low Prices. In addition
to providing a pleasant shopping atmosphere, the Company is able to sell its
products at prices that it believes are substantially lower than those offered
by its local island competitors, yet are still above those that could be
charged in mainland markets. By leveraging its retail operating efficiencies
and access to volume-purchasing discounts, the Company is able to acquire its
products at a significantly lower cost than that paid by other island
retailers. The Company passes along much of these savings to its customers
through "low price leader," "everyday low prices" and "dare to compare"
pricing policies. In addition, unlike most warehouse clubs, the Company does
not charge a club membership fee, further providing cost-effective shopping to
its customers. However, due to the considerable demand in island markets for
the Company's goods, the lack of meaningful price competition and the
generally high price levels found in such markets, the Company's prices are
often higher than those charged on the mainland by warehouse clubs and
discount retailers, enabling the Company historically to achieve higher
margins than those achieved by mainland warehouse clubs and discount
retailers.
Use Localized Product Sourcing Yet Derive Benefits of Centralized
Purchasing. An important element of the Company's marketing strategy is to
specifically cater its product selection to each distinct island market. To
this end, the Company conducts market research through its vendors, store
managers and resident employees to ascertain the preferences of each
particular locale, including determining which national brands are favored and
which regional and ethnic items are desired. The Company's buyers then procure
a majority of these products through the Company's 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.
Capitalize on Efficient Facilities, Controlled Operating Expenditures and
Cost-Effective Labor. The Company seeks to minimize costs throughout its
operations in an effort to decrease overhead and increase margins. These
savings are achieved through the use of efficient facilities, including
designing stores that (i) do not incorporate expensive fixtures such as floor
tiles and false ceilings, (ii) are energy-efficient as a result of
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<PAGE>
modern refrigeration and air-conditioning equipment, (iii) encourage self-
service and feature sophisticated scanning systems, thereby reducing labor and
shrink expense, and (iv) maximize selling-floor space, thus reducing overall
space requirements and rental expense. In addition, the Company has been able
to limit advertising expense by relying primarily on "word-of-mouth" publicity
in island markets because of its significant market presence in relation to
most of its competitors. Further, the Company's efforts at controlling
inventory shrink expense have contributed to increased gross profit. Finally,
although the Company generally pays its employees above-market wages and is
thereby able to attract and retain high-quality workers, the Company's labor
costs remain relatively low as a result of the overall low wages typically
paid in island markets.
Relationship with CDC. The Company is seeking to develop a strong
relationship with CDC, a development finance institution of the U.K.
government. Organized in 1948, CDC is engaged in economic development
activities in overseas countries, including venture capital and other
investments, and has significant interests in the Pacific Islands and
Caribbean regions. The Kula Fund, a private equity fund established in 1997
for 12 Pacific Island countries and managed by a CDC affiliate, is financed by
CDC, Asian Development Bank, European Investment Bank, International Finance
Corporation, Agence Francaise de Development/Proparco and Fiji National
Provident Fund. The Company has reserved for purchase by the Kula Fund
approximately 10% of the shares being offered by the Company in the Offering.
The Company also anticipates that Ashley Emberson-Bain will join the Company's
Board of Directors, and expects to sell warrants to the Kula Fund upon
completion of the Offering. Mr. Emberson-Bain has been employed by CDC since
1986 in a variety of management, investment and staff positions. Since 1995,
he has been principally responsible for overseeing CDC investments in the
Pacific Islands. The Company believes that CDC's strong ties to, and knowledge
of, the Pacific Islands and Caribbean regions, and its presence in most areas
where the Company either operates or plans to operate, will strengthen the
Company's business and business strategy. See "Certain Transactions,"
"Underwriting" and "Description of Capital Stock."
EXPANSION PLANS
General. The Company's expansion plans focus on opening new stores in
foreign island markets. The Company believes such island markets offer
significant opportunities for growth because they are often characterized by
(i) significant geographic and logistical barriers to entry, (ii) existing
higher-priced local competitors with minimal experience with modern operating
processes in purchasing, distribution, merchandising and information
technologies, and (iii) a high demand for U.S. brand-name products with
limited availability. The Company intends to resume expansion efforts in
fiscal 1998 after concentrating its efforts in fiscal 1996 and 1997 on (i)
improving internal operating efficiencies, (ii) standardizing its island
business model and related strategies, and (iii) closing nearly all of its
U.S. mainland stores. The Company plans to open three stores in fiscal 1998
(one store in St. Thomas and two stores in Fiji), six stores in fiscal 1999
(one store in Curacao, Netherlands Antilles, where the Company has entered
into a lease and begun preconstruction activities) and six stores in fiscal
2000. Overall, the Company anticipates opening at least 26 new stores by the
end of fiscal 2002 throughout the Caribbean and Pacific.
Mid-Sized Format. The average size of the Company's seven island 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 a store "footprint" based on a 36,000-square-foot facility,
which it believes 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 36,000-square-foot prototype is being used in the
construction of the two stores in Fiji, the store in St. Thomas, and the store
planned for Curacao.
Site Selection. The Company believes that the reduced size of its stores, as
compared to typical large-format discount retailers, will enable it to operate
profitably in markets far less populated than typical warehouse clubs. The
Company chooses potential store sites by comparing the demographics of its
current store base to the demographics of the target market. The following
chart reflects the demographics of the
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Company's current U.S. Territories stores, sites under development and islands
that the Company currently considers to be potential markets for Company
stores during the next several years:
<TABLE>
<CAPTION>
GROSS
DOMESTIC
POPULATION PRODUCT
LOCATION (ESTIMATED) (ESTIMATED)
-------- ----------- -----------
<S> <C> <C>
CURRENT
Guam.......................... 154,000 $ 3.1B
U.S. Virgin Islands........... 102,000 $ 1.2B
American Samoa................ 51,000 $ 253M
UNDER DEVELOPMENT
Fiji.......................... 800,000 $ 1.6B
Netherlands Antilles.......... 211,000 $ 2.0B
SITE SELECTION PHASE
Papua New Guinea.............. 4,142,000 $ 4.6B
New Zealand................... 3,587,000 $65.6B
French Polynesia (Tahiti)..... 229,000 $ 3.4B
Tonga......................... 99,000 $ 125M
Aruba......................... 73,000 $ 1.1B
</TABLE>
Because of the unavailability of detailed demographic studies by third-party
consultants, the Company's market analysis is performed in-house. The Company
compares the results of its analysis with the demographic statistics of its
successful island stores. If the demographics for a targeted location compare
favorably with those of its current island operations, the Company includes
the target location as a potential site for expansion.
Once the Company identifies a target location as a possible site for its
expansion and, further, it is satisfied with 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 of at least 40,000,
sufficient space for the Company's facility, including parking and loading
docks, access to utilities and suitable geological conditions for successful
construction.
Store Openings. The Company prefers to lease its facilities, which are
generally built to Company specifications. To this end, 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. The
Company generally does not incur construction expenses for the building
itself; however, the Company provides each developer with construction
specifications and a project timeline. The Company plans to source
construction materials for its buildings to help control lease costs and
ensure building quality. The Company estimates that it takes approximately
eight months from execution of the lease to store opening. The use of the
Company's prototype plans helps ensure that the building will be properly
configured for installation of the Company's fixtures. The refrigeration
equipment will be installed under the supervision of the equipment vendor,
with the Company's crew installing other equipment. The Company anticipates
that in fiscal 1998 and 1999 its required investment to open a new store will
be approximately $2.0 million, including approximately $300,000 for opening
expenses, $800,000 for store fixtures and equipment and $900,000 for
inventory. The Company expects to carry approximately $1.8 million of
inventory, including $600,000 of inventory in transit. Typically, 50% of the
Company's inventory is vendor-financed, resulting in a $900,000 average per-
store inventory investment by the Company.
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<PAGE>
The new St. Thomas store will be constructed and owned by the Company at a
total estimated cost of $3.0 million, including $400,000 for furniture,
fixtures and equipment. The existing St. Thomas store will be closed when the
new store is opened. The current lease on the existing St. Thomas store
expired March 31, 1998, and the store is being rented on a month-to-month
basis. The equipment and inventories will be relocated to existing and new
stores.
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
Cost-U-Less benefits from attractive store-level economics and favorable
returns on investment at its island stores, which it believes will help drive
and support its planned expansion. The Company's seven island stores open
during all of fiscal 1997 generated annual average net sales of approximately
$15.9 million, average net sales per square foot of $519, average annual per
store contribution of approximately $805,000 and average store contribution
before depreciation of approximately $888,000. The average investment in
equipment and leasehold improvements as of December 28, 1997 in the seven
island stores was approximately $884,000. The average investment in inventory,
net of accounts payable of approximately 50%, was $650,000 at December 28,
1997. The store contribution return on average island investment for fiscal
1997 was 53%.
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<PAGE>
STORE LOCATIONS
The Company currently operates eight warehouse club-style stores: two in
Hawaii, two in Guam, one in St. Thomas, one in St. Croix, one in American
Samoa and one in Sonora, California.
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE LEASE OPTION TO
LOCATION DATE OPENED FOOTAGE TERM EXPIRATION DATE EXTEND
- -------- ---------------- ----------- -------- ----------------- ---------
<S> <C> <C> <C> <C> <C>
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 10 years November 15, 2002 10 years
St. Thomas, USVI........ August 19, 1993 38,700 monthly N/A N/A
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 41,145 15 years March 1, 2010 10 years
Pago Pago, American
Samoa.................. March 20, 1995 32,055 10 years February 28, 2005 15 years
</TABLE>
The Company has signed a land lease to build a new, replacement store on St.
Thomas. The lease has a term of 20 years with an option to extend for an
additional 30 years. The Company has entered into an agreement to lease a
store in Nadi, Fiji, which the Company anticipates will occupy approximately
25,000 square feet and will be built to Company specifications. The lease
contemplated by the agreement will have a 10-year term with an option to
extend for an additional 20 years. The Company has entered into a similar
agreement to lease a store in Suva, Fiji, which it anticipates will occupy
approximately 30,000 square feet and will be built to Company specifications.
The lease contemplated by the agreement will have a 10-year term with an
option to extend for an additional 10 years. The Company is currently
subleasing two small sites in Fiji to maintain its business and regulatory
licenses and test its systems while it awaits the completion of the two new
Fiji stores. The Company has also signed a lease for a store in Curacao,
Netherlands Antilles. The Company anticipates that the store will occupy
approximately 39,000 square feet and will be built to Company specifications.
The lease has a 10-year term with options to extend for an additional 10
years.
MERCHANDISING
Store Layout. The Company has incorporated into its prototype store many
standard features found in domestic warehouse clubs that had been previously
unused in most 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 competitive advantage over its
island competitors. Additionally, because of the damage often caused by severe
weather in its island markets, 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. Customers
enter through large roll-up metal doors and utilize a large shopping cart or,
in some instances, a rolling flat-bed cart for purchases in larger sizes or
quantities. All items are within easy reach on the floor or, because of the
Company's reduced store size, on a shelf above the sales floor. 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 $50. 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 following diagram
represents the layout for the Company's prototype stores under development:
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<PAGE>
[FLOORPLAN OF STORE]
STORE DIAGRAM
The Company has also attempted to minimize costs through the design of its
prototype. 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 a 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. As a
result of the Company's planned expansion and through extensive negotiations
with suppliers, the Company has achieved 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 while reducing the Company's lease expenses.
Product Categories. 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. Certain
departments found in most large-format warehouse clubs such as apparel,
automobile tires and prescription drugs are eliminated at Cost-U-Less. All
Cost-U-Less stores feature the following main product categories:
Food--Perishables. Meat, produce, deli, dairy and frozen items represent
approximately 28% 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--Nonperishables. Dry grocery goods, including soda, wine, beer,
liquor, candy and snacks, represent approximately 42% of a typical store's
net sales. Also included in this area are ethnic and specialty items
catering to local consumer demands.
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<PAGE>
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 names together with local ethnic items found in each island region.
Approximately one-third of the Company's product items are produced locally or
purchased through local suppliers in each market. Offering locally purchased
merchandise enables Cost-U-Less 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, which allows the Company to quickly spot product
trends and discontinue slow-moving products. Morever, 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." This strategy differs from traditional
warehouse clubs, which typically stock only products in bulk quantities to
satisfy their wholesale client base.
Pricing. The Company strives to be the "low price leader" for the markets it
serves. Cost-U-Less does not charge its customers a membership fee, which
allows 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, that operate in the Company's
island markets. In order to ensure that the Company has the lowest prices
available in a particular market, the Company regularly compares prices and
products being offered by the Company's local 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, 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.
OPERATIONS
Distribution and Inventory Management. The Company typically buys directly
from manufacturers in large quantities (full truck loads whenever possible).
The Company currently uses three distribution facilities: a Company-operated
facility in Union City, California and independently operated facilities in
Port Everglades, Florida and Auckland, New Zealand. 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. The Company gives its suppliers of
perishable items notice of its projected supply needs, and these suppliers
deliver product to the depots. However, the Company does not accept delivery
of the product, nor is it responsible for payment, until it places a final
order. Once the final order is placed, the goods are removed from the
consignment depot and loaded onto refrigerated shipping containers located at
the consignment depots, at which point the goods are deemed delivered. The
Company then transports the shipping containers to the nearest port for
shipment to its island stores. By using this procedure, the Company minimizes
loss of perishable product due to over-orders because it does not "purchase"
the goods until it is certain of the needs of its stores.
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<PAGE>
Operating Systems. The Company believes that its operating systems provide a
competitive advantage compared to the local competition. 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. In
addition, the Company is making use of new forklifts that have a smaller
turning radius, resulting in the ability to decrease the width of aisles.
Reducing aisle widths reduces the size requirements for future stores while
maintaining selling space, and produces savings in rent expense as well as
energy costs. 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.
The Company has designated the Sonora, California store as a testing facility
to test various store layouts and display patterns, which enables management
to review and monitor various store designs and innovations before they are
implemented in island locations. In its new stores, the Company will utilize a
specialized refrigeration system comprised of several smaller components
rather than one large component. Because the system uses many different
compressors, the loss of one compressor does not shut down the entire
refrigeration system. At the first indication of system failure, the
refrigeration supplier notifies a local service provider, who visits the
Company's facility and replaces the faulty component. Moreover, the Company
keeps many replacement components on-site. This system also helps minimize the
loss of product associated with damaged refrigeration units.
Management Information Systems. Cost-U-Less 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, and in the depot located in Union City, California. All data
from each location is sent via modems or the Internet to the computer system
located at the Company's corporate headquarters in Bellevue, Washington. Using
both Company personnel and contract consultants, the Company has enhanced,
extended and improved the data capabilities of its software systems to support
an inventory tracking report and comparisons by year, by store, by item and by
vendor. The Company is developing the specifications for integrated systems to
support automatic replenishment of inventory and supplies, and to profile
sales and purchasing trends. The Company is also testing its new procedures
for multi-currency inventory and purchase order functions. The Company
believes that its current computer systems will support anticipated growth
through fiscal 1999 though the Company may upgrade earlier. In order to
maintain its competitive advantage in its chosen markets, the Company uses a
corporate-wide intranet and the Internet, which allows for quick responses to
ever-changing customer needs and local retail opportunities. Because the
Company's stores are located on various islands, the ability to quickly,
consistently and accurately communicate between headquarters and store
locations is imperative. The Company's expansion plans anticipate continued
use of the intranet and the Internet to connect its stores, thereby decreasing
communication costs. The Company plans to integrate new applications aimed at
providing enhanced services, data analysis and improved customer service, thus
raising office and store productivity. While the Company has taken a number of
precautions against certain events that could disrupt the operation of its
management information systems, including in connection with its planned
systems revisions, there can be no assurance that the Company will not
experience systems failure or interruptions, which could have a material
adverse effect on the Company's business, financial condition and operating
results. See "Risk Factors--Dependence on Systems; Year 2000 Compliance."
Employee Organization, Training and Compensation. Management of each Cost-U-
Less store consists of a store manager, two assistant managers and one or more
department managers, depending on the store. Typically, the department
managers are assigned to two categories: merchandising and administrative. The
merchandising manager oversees the training and day-to-day operations of the
stockers, forklift operators and receiving clerks. The administrative manager
oversees the training and day-to-day operations of the vault clerks, cashiers
and security personnel, if applicable.
In order to meet its expansion goals, the Company believes it will need to
hire approximately 45 employees for each new store. The Company's goal is to
hire most of those employees from the island market, 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
34
<PAGE>
in the Company's store in Tamuning, Guam, which is used as a training facility
for potential managers. New store employees receive initially 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 Cost-U-Less 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. Store managers
participate in a manager bonus program that ties compensation awards to the
Company's overall profits. In addition, all store employees are eligible to
participate in an incentive plan whereby they receive monthly bonuses for
increased store sales and control of inventory shrink expense. Although the
Company believes that it generally pays its employees above-market wages and
is thereby able to attract and retain high-quality employees, it believes that
island wages are generally lower than mainland wages and thus result in
decreased labor costs.
Local service providers are also trained in the maintenance and repair of
the Company's refrigeration and air-conditioning systems. The Company and its
refrigeration supplier send crews to facilities during the construction phase
to install these systems. These crews work with local electricians, training
them in the operation and installation of the Company's systems. Thus, when
repairs are necessary, the Company may opt to use a local vendor rather than
incur the expense and time involved in using a service person from either the
U.S. mainland or New Zealand.
CUSTOMER SERVICE
The Company brings to its island markets a commitment to customer service
that it 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 ten 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 currently spends less than 0.2% of net sales on advertising, and
in the past has utilized coupon books, direct mail advertising and newspaper
advertisements. The Company recently hired a manager of marketing and
advertising to analyze demographic and market data necessary for its expansion
plans and to develop marketing and advertising strategies for those markets
that require it.
COMPETITION
The warehouse club and discount retail businesses are highly competitive.
The Company has faced significant competition from warehouse clubs and
discount retailers such as Wal-Mart, Kmart and Costco in Hawaii, Kmart in the
U.S. Virgin Islands, and Kmart and a local joint venture between Price
Enterprises, Inc. and a regional investor in Guam. The Company's competition
also consists of regional and smaller 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 is targeting expansion in additional island markets that
it believes are underserved by existing 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 . After eight years of
experience refining the warehouse club format in island markets, management
believes that significant growth and profit opportunities exist in remote
island markets. While the Company expects that the size of many of the markets
in which it operates or expects to enter will deter entry by most of its
larger competitors, there can be no assurance that the Company's larger
competitors will not decide to enter these markets or that its smaller
competitors will not compete more effectively against the Company. The
Company's gross margin and operating income are generally lower for
35
<PAGE>
those stores in markets where traditional warehouse clubs and discount
retailers also operate stores. The Company may be required to implement price
reductions in order to remain competitive should any of its competitors reduce
prices in any of its markets. 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 "Risk Factors--Competition."
PROPERTIES
The Company currently leases its eight existing store locations. The stores
average approximately 30,000 square feet and range in size from approximately
22,000 square feet to approximately 41,000 square feet. The store leases
typically have a term of ten years with an option to lease for an additional
ten years, with lease rates that increase periodically over the term of the
lease. With the exception of the Sonora store and the current St. Thomas
store, both of which opened in existing facilities, all of the Company's
stores have been built to Company specifications. See "--Store Locations."
The Company leases approximately 40,000 square feet for its distribution
facility in Union City, California, which lease expires on December 31, 1998.
The Company also leases approximately 6,000 square feet of office space for
its headquarters in Bellevue, Washington, which lease expires on April 30,
1999. The Company subleases approximately 2,000 additional square feet at its
headquarters in Bellevue on a month-to-month basis. Beginning on July 1, 1998,
the Company will lease approximately 430 square feet of office space in
Auckland, New Zealand. Such lease term will expire on July 1, 1999, but can be
renewed thereafter on a month-to-month basis. The Company believes that such
corporate offices and distribution facilities will be sufficient to meet the
Company's needs through the end of fiscal 1999. The Company expects it will be
able to renew the Union City, California and Bellevue, Washington leases
annually; however, the Company believes it will be able to find suitable
replacements facilities if either facility lease is not extended.
TRADEMARKS
The Company has applied for 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 or U.S. Territory regulatory authorities,
including, but not limited to, laws and regulations regarding tax, tariffs,
zoning, employment and licensing requirements. Additionally, as the Company
pursues future expansion in foreign countries, the Company's operations will
be subject to foreign regulatory standards involving corresponding 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 and operating results. See "Risk Factors--Risks Associated With
Island and International Operations."
EMPLOYEES
As of May 1, 1998, the Company employed 34 full-time people at its corporate
headquarters in Bellevue, Washington, and 10 people at its main distribution
facility in Union City, California. In total, the Company employs
approximately 365 people worldwide. None of the Company's employees are
covered by collective bargaining agreements. The Company considers its
relationship with its employees to be good.
LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. As of the date
of this Prospectus, the Company is not a party to any litigation that, if
adversely determined, would have a material adverse effect on its business,
financial condition and operating results.
36
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of the Company, and
their ages and positions as of May 1, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS AND
DIRECTORS
Michael J. Rose....... 47 Chairman of the Board, President and Chief Executive Officer
Allan C. Youngberg.... 45 Vice President-Chief Financial Officer, Secretary and Treasurer
Donald L. Gevirtz..... 70 Director
George C. Textor...... 53 Director
David A. Enger........ 52 Director
Wayne V. Keener....... 60 Director
Gary W. Nettles....... 46 Director
KEY EMPLOYEES
Terence R. Buckley.... 61 Director of Pacific Expansion
James F. Arcuri....... 48 Project Manager
Donald A. Kunecke..... 45 Management Information Systems Manager
William W. Lofgren.... 35 Operations Manager
Michael T. Scalzo..... 33 General Merchandise Manager
Paul J. Schulte....... 49 Sales and Marketing Manger
</TABLE>
Prior to the effective date of this Prospectus, the Board of Directors will
be divided into three classes. Each director will serve for a three-year term
and one class will be elected each year by the Company's shareholders,
commencing at the Company's annual shareholders meeting in 1999. Directors
hold office until their terms expire and their successors are elected and
qualified. The terms of the current directors will expire as follows: Messrs.
Nettles and Enger in 1999, Messrs. Keener and Textor in 2000, and Messrs. Rose
and Gevirtz in 2001. Executive officers are appointed by, and serve at the
direction of, the Board of Directors. There are no family relationships
between any of the directors or executive officers of the Company.
EXECUTIVE OFFICERS
Michael J. Rose is the founder, Chairman of the Board, President and Chief
Executive Officer of the Company. Prior to 1992, Mr. Rose was President and a
50% shareholder of Rose-Chamberlin Inc. ("Rose-Chamberlin"), a brokerage
company founded in 1985, which acted as a manufacturers' representative and
sold merchandise primarily to Costco.
Allan C. Youngberg has been Vice President-Chief Financial Officer,
Secretary and Treasurer of the Company since January 1993. Prior to joining
the Company, Mr. Youngberg was President and a 50% shareholder of Youngberg &
Schumacher, P.S., a certified public accounting firm in Bellevue, Washington,
which Mr. Youngberg formed in 1984 and sold in December 1992. Mr. Youngberg is
a Certified Public Accountant.
DIRECTORS
Donald L. Gevirtz has been a Director of the Company since January 1998.
Since 1996, Mr. Gevirtz has served as the director of the Gevirtz Research
Center, a nonprofit organization involved in educational outreach projects.
Mr. Gevirtz served as U.S. Ambassador to the Republic of Fiji, the Kingdom of
Tonga, the Republic of Nauru and the Republic of Tuvalu from 1996 through
1997. From 1970 to 1996, Mr. Gevirtz served as Chairman of the Board and Chief
Executive Officer of the Foothill Group, Inc., a public company engaged in
banking services, which was sold to Norwest Bank Corporation in 1995.
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<PAGE>
George C. Textor has been a Director of the Company since January 1998. Mr.
Textor is a general partner of Capstan Partners, a Seattle-based private
equity investment fund which he co-founded in 1988. From 1982 to 1988, Mr.
Textor was a founding general partner of Cable Howse & Ragen (now Ragen
MacKenzie Group Incorporated), an investment banking and brokerage firm
located in the Pacific Northwest. Mr. Textor serves as a director of Pyramid
Breweries, Inc., a public company that makes specialty beers.
David A. Enger has been a Director of the Company since 1993. Mr. Enger has
served since 1992 as Executive Vice President of Keener's, Inc. dba K&N Meats
("Keener's"), one of the Northwest's largest distributors of fresh foods. In
1990, Mr. Enger founded the Business & Banking Institute, where he currently
engages in business and banking consulting and training. From 1980 to 1990,
Mr. Enger served as a principal of Management Advisory Services, Inc., a
business and banking consulting firm which he co-founded in 1980. From 1976 to
1980 Mr. Enger was a vice president of Seafirst Bank. Mr. Enger serves as a
director of Keener's, Colmac Industries, Inc., a dry-cleaning equipment
manufacturer, and Colmac Coil Manufacturing, Inc., a heating and air-
conditioning coils manufacturer.
Wayne V. Keener has been a Director of the Company since 1989. Since 1960,
Mr. Keener has been the President and Chief Executive Officer of Keener's, of
which he has been a 50% owner since 1989. Mr. Keener serves as a director of
both the National Meat Association and the North American Meat Association.
Gary W. Nettles has been a Director of the Company since 1996. Mr. Nettles
is a Certified Public Accountant and owner of Guchereau & Nettles, an
accounting firm located in Costa Mesa, California, where he has worked since
1987.
KEY EMPLOYEES
Terence R. Buckley has been Director of Pacific Expansion of the Company
since 1998, after joining the Company as a consultant in February 1997. Mr.
Buckley also serves on the board of directors of a wholly owned subsidiary of
the Company. From 1978 until joining the Company, Mr. Buckley worked on
various consulting projects for companies throughout the Pacific, including
projects for Hyatt International Corporation and Fletcher Challenge Limited, a
New Zealand natural resources and construction company. Mr. Buckley has lived
in Fiji for 10 years and has extensive knowledge and contacts in the Pacific
and New Zealand.
James F. Arcuri has been Project Manager of the Company since 1994. He
joined the Company in 1991 as a store manager in Hawaii and opened the Sonora,
California store in 1994. Mr. Arcuri is currently responsible for construction
of new stores and maintenance of store facilities. From 1979 to 1991, Mr.
Arcuri was President of A&F Stores Corporation, a chain of high-end specialty
markets based in southern California. Mr. Arcuri's responsibilities at A&F
Stores included site procurement, lease negotiations, construction management
and working with developers.
Donald A. Kunecke has been Management Information Systems Manager of the
Company since 1995, after joining the Company in 1994 as program manager. From
1992 to 1994, Mr. Kunecke was the principal and owner of Softnet, Inc., a
computer software support company. Mr. Kunecke has over 20 years of experience
with systems development and implementation of relational database management
systems. He has held positions in information technology with Northern
Telecom, Inc., Martin Marietta International, Inc. and Boeing Computer
Services.
William W. Lofgren has been Operations Manager of the Company since 1996,
after joining the Company in 1992 as Information Systems Manager. Mr. Lofgren
has overall operational responsibility for the Company's stores. Prior to
joining the Company, Mr. Lofgren served as Electronic Maintenance Manager of
Costco from 1986 to 1991.
Michael T. Scalzo has been General Merchandise Manager of the Company since
1995, after joining the Company in 1992 as a buyer. Mr. Scalzo assisted in
creating the Company's buying office and was one of
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<PAGE>
the original buyers for the Company. From 1990 to 1992, Mr. Scalzo worked for
Rose-Chamberlin as an account executive.
Paul J. Schulte has been Sales and Marketing Manager of the Company since
January 1998. Mr. Schulte is responsible for the management and direction of
the Company's marketing, advertising and promotional activities. From February
1997 to January 1998, Mr. Schulte worked as a co-principal and consultant of
Crucible, Inc., a direct response mail-order catalog business. From 1995 to
1997, Mr. Schulte was Senior Vice President for Sales and Marketing of Acorto,
Incorporated, a manufacturer and wholesaler of automatic espresso equipment.
From 1994 to 1995, Mr. Schulte was Vice President of Marketing for Seattle
Coffee Holdings, a retailer and wholesaler of specialty coffees. From 1973 to
1994, Mr. Schulte held a variety of senior sales and marketing positions with
the Ford Motor Company.
BOARD COMMITTEES AND COMPENSATION
The Company has established an Audit Committee and a Compensation Committee.
The Audit Committee makes recommendations to the Board of Directors regarding
the selection of independent auditors, reviews the results and scope of the
audit and other services provided by the Company's independent auditors,
reviews the Company's balance sheet, statement of operations and cash flows
and reviews and evaluates the Company's internal control functions. The Audit
Committee consists of Messrs. Enger (Chairman), Keener, Nettles and Textor.
The Compensation Committee reviews and approves the compensation and benefits
for the Company's executive officers, administers the Company's stock option
plans and makes recommendations to the Board of Directors regarding such
matters. The Compensation Committee consists of Messrs. Nettles (Chairman),
Enger, Keener and Gevirtz.
Directors of the Company are paid $1,000 for each Board of Directors meeting
attended and $250 for each committee meeting attended. The Company also
reimburses directors for travel expenses in attending meetings. The Company
has granted nonqualified stock options to its directors pursuant to individual
director stock option agreements. Directors have generally been granted a 10-
year, immediately exercisable option to purchase 10,331 shares of Common Stock
at an exercise price at $10.16 per share, and a 10-year option to purchase
2,951 shares of Common Stock at an exercise price of $10.16 per share, vesting
ratably over a five-year period. In April 1997, the Board of Directors granted
Michael J. Rose a 10-year, immediately exercisable option to purchase 10,331
shares of Common Stock at an exercise price of $10.16 per share, and a 10-year
option to purchase 2,951 shares of Common Stock at an exercise price of $10.16
per share, which will become fully vested on August 1, 1998. See "--Executive
Compensation." In January 1998, the Company granted Donald L. Gevirtz a
10-year, immediately exercisable option to purchase 88,554 shares of Common
Stock at an exercise price of $7.62 per share. See "Certain Transactions." The
Company intends that any future option grants to directors will be made
pursuant to the Company's 1998 Stock Incentive Compensation Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No executive officer of the Company serves as a member of the board of
directors of any entity that has one or more executive officers serving as a
member of the Company's Board of Directors.
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<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth certain
information regarding compensation earned by the Company's Chief Executive
Officer and its one other executive officer (the "Named Executive Officers")
for the fiscal year ended December 28, 1997.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------- ------------
SECURITIES
NAME AND PRINCIPAL UNDERLYING ALL OTHER
POSITION SALARY($) BONUS($)(1) OPTIONS(#) COMPENSATION($)(2)
------------------ --------- ----------- ------------ ------------------
<S> <C> <C> <C> <C>
Michael J. Rose
Chairman of the Board,
President and Chief
Executive Officer..... $220,000 $22,600 13,282 $8,102
Allan C. Youngberg
Vice President-Chief
Financial Officer,
Secretary and
Treasurer............. $160,000 $16,500 -- $3,293
</TABLE>
- --------
(1) Represents bonuses paid pursuant to the Company's Manager Bonus Program.
(2) Consists of matching contributions to the Company's 401(k) profit-sharing
plan of $2,375 for both Mr. Rose and Mr. Youngberg, payments of life
insurance premiums of $1,227 to Mr. Rose and $918 to Mr. Youngberg, and
director's fees of $4,500 paid to Mr. Rose.
Option Grants in Last Fiscal Year. Mr. Youngberg was not granted any stock
options during fiscal 1997. The following table sets forth certain information
regarding stock options granted to Mr. Rose during fiscal 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(3)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ----------------
NAME GRANTED FISCAL YEAR(1) PRICE($/SH)(2) DATE 5%($) 10%($)
---- ---------- -------------- -------------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Rose......... 13,282 29.0% $10.16 4/30/07 $48,087 $156,503
</TABLE>
- --------
(1) Based on a total of 45,744 options granted to employees during fiscal
1997.
(2) In April 1997, the Board of Directors determined that Mr. Rose should
have been granted stock options with the same terms and conditions as
options granted to other directors who served on the Board of Directors
in June 1993. Accordingly, the Board of Directors granted Mr. Rose a 10-
year, immediately exercisable option to purchase 10,331 shares of Common
Stock at an exercise price of $10.16 per share, and a 10-year option to
purchase 2,951 shares of Common Stock at an exercise price of $10.16 per
share, which will become fully vested on August 1, 1998. The fair market
value of the Common Stock in April 1997 was $8.46 per share.
(3) The assumed rates of appreciation are prescribed by the Securities and
Exchange Commission (the "Commission") for illustrative purposes only and
are not intended to forecast or predict future stock prices.
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<PAGE>
Fiscal 1997 Year-End Option Values. No options were exercised by the Named
Executive Officers during fiscal 1997. The following table sets forth certain
information regarding unexercised stock options held by the Named Executive
Officers as of December 28, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR- IN-THE-MONEY OPTIONS AT
END(#) FISCAL YEAR-END ($)(1)
----------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Michael J. Rose............ 49,589 590 $174,652 $ --
Allan C. Youngberg......... 41,325 2,951 $194,652 $ --
</TABLE>
- --------
(1) Calculated on the basis of the fair market value of the Common Stock on
December 28, 1997 at $8.46 per share, based on the price paid for shares
of Common Stock in a transaction between shareholders in November 1997.
COMPENSATION PURSUANT TO PLANS
Manager Bonus Program
The purpose of the Manager Bonus Program (the "Program") is to provide an
incentive to key employees to meet the Company's profit goals. Officers, store
managers and other Company managers are eligible to participate in the
Program. The bonus percentage under the Program is determined by the
Compensation Committee at the beginning of the Program year upon the
recommendation of the Company's Chief Executive Officer and Chief Financial
Officer. Bonuses under the Program are determined on the basis of the
Company's "Adjusted Net Income," as defined in the Program, which is
calculated based on the Company's net income for the previous fiscal year,
income tax expense, bonus expenses and other nonoperating income or expenses
as determined by the Compensation Committee. No bonus is paid under the
Program if the "Adjusted Net Income" is less than 80% of budgeted "Adjusted
Net Income" for the previous fiscal year. Participants in the Program are
eligible for a percentage of the total bonus paid under the Program, based
upon the participant's salary divided by the combined salaries of all
participants employed at the end of the fiscal year. The Compensation
Committee may modify or terminate the Program at any time.
1998 Stock Incentive Compensation Plan
Prior to the effective date of this Prospectus, the Company expects to adopt
the Company's 1998 Stock Incentive Compensation Plan (the "1998 Plan"). The
purpose of the 1998 Plan is to enhance the long-term shareholder value of the
Company by offering employees, directors, officers, consultants, agents,
advisors and independent contractors of the Company and its subsidiaries an
opportunity to participate in the Company's growth and success, and to
encourage them to remain in the service of the Company and its subsidiaries
and acquire and maintain stock ownership in the Company. The 1998 Plan
provides for both stock options and restricted stock awards. A maximum of
500,000 shares of Common Stock will be available for issuance under the 1998
Plan, although no options or stock awards will be granted until after
completion of the Offering.
Stock Option Grants. The Plan Administrator of the 1998 Plan will be the
Compensation Committee (the "Plan Administrator"), which will have the
authority to select individuals who are to receive options under the 1998 Plan
and to specify the terms and conditions of each option granted (incentive or
nonqualified), the exercise price (which, for incentive stock options, must be
at least equal to the fair market value of the Common Stock on the date of
grant), the vesting provisions and the option term. For purposes of the 1998
Plan, fair market value means the closing sale price as reported on the Nasdaq
National Market on the date of grant. Unless otherwise provided by the Plan
Administrator, and to the extent required for incentive stock options by the
Internal Revenue Code of 1986, as amended, an option granted under the 1998
Plan will expire 10 years from the date of grant or, if earlier, three months
after the optionee's termination of service (other than termination for cause)
or one year after the optionee's death or disability.
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<PAGE>
Stock Awards. The Plan Administrator is authorized under the 1998 Plan to
issue shares of Common Stock to eligible participants on such terms and
conditions and subject to such restrictions, if any, as the Plan Administrator
may determine in its sole discretion. Restrictions may be based on continuous
service with the Company or its subsidiaries or the achievement of such
performance goals as the Plan Administrator may determine. Holders of
restricted stock are recorded as shareholders of the Company and have, subject
to certain restrictions, all the rights of shareholders with respect to such
shares.
Adjustments. Proportional adjustments to the aggregate number of shares
issuable under the 1998 Plan and to outstanding awards will be made for stock
splits and other capital adjustments.
Corporate Transactions. In the event of certain Corporate Transactions (as
defined in the 1998 Plan), each outstanding option and restricted stock award
under the 1998 Plan will automatically accelerate so that it will become 100%
vested immediately before the Corporate Transaction, except that acceleration
will not occur if such option or restricted stock award is, in connection with
the Corporate Transaction, to be assumed by the successor corporation or
parent thereof. Any option or restricted stock award granted to an "executive
officer" (as that term is defined for purposes of Section 16 of the Securities
Exchange Act of 1934, as amended) that is assumed or replaced in the Corporate
Transaction and does not otherwise accelerate at that time shall be
accelerated in the event such executive officer, for Good Reason (as defined
in the 1998 Plan), or the successor corporation, without Cause (as defined in
the 1998 Plan), terminates the executive officer's employment or services
within two years following such Corporate Transaction.
Amended and Restated 1989 Stock Option Plan
The Company's Amended and Restated 1989 Stock Option Plan (the "1989 Plan")
provides for the grant of incentive and nonqualified stock options to
employees, officers, directors, agents, consultants and independent
contractors of the Company. An aggregate of 1,350,000 shares of Common Stock
has been authorized for issuance under the 1989 Plan. As of May 1, 1998,
options to purchase an aggregate of 266,207 shares of Common Stock were
outstanding under the 1989 Plan, with exercise prices ranging from $2.37 to
$10.16 per share, and options to purchase 7,084 shares had been exercised. No
additional options will be granted under the 1989 Plan, as future option
grants will be made under the 1998 Plan. Options outstanding under the 1989
Plan will continue to be governed by the terms of the 1989 Plan.
The 1989 Plan is administered by the Compensation Committee, which has the
authority to select individuals who are to receive options under the 1989 Plan
and to specify the terms and conditions of each option granted (incentive or
nonqualified), the exercise price (which for incentive stock options must be
at least equal to the fair market value of the Common Stock on the date of
grant), the vesting provisions and the option term. Each option is exercisable
after the period or periods specified in the option agreement, but no option
may be exercisable after the expiration of 10 years from the date of grant.
Options granted under the 1989 Plan are not transferable other than by will or
the laws of descent and distribution, or by operation of law in the event of
legal disability.
401(k) Plan
The Company maintains a 401(k) profit-sharing plan (the "401(k) Plan") that
covers employees who satisfy certain eligibility requirements relating to
minimum age, length of service and hours worked. Participating employees may
elect to defer and contribute up to 15% of their compensation plus up to 100%
of any Company-paid cash bonus to the 401(k) Plan, not to exceed the dollar
limit set by law. The Company matches 25% of each employee's contribution that
does not exceed 15% of such employee's compensation. The Company's matching
contributions vest over five years at the rate of 20% per year of service.
42
<PAGE>
CERTAIN TRANSACTIONS
Prior to the Offering, the Company entered into transactions and business
relationships with certain of its officers, directors and 5% shareholders. Any
future transactions between the Company and its officers, directors or 5%
shareholders will be subject to approval by a majority of the disinterested
directors and will be on terms that the Company believes are no less favorable
to it than would be available from independent third parties.
Participation in the Offering by Kula Fund. During 1997 and 1998, the
Company discussed with CDC a range of potential business relationships.
Recently, these discussions included the appointment of a representative of
CDC to the Company's Board of Directors and the possible sale of warrants to
CDC, as well as CDC's interest in purchasing shares in the Offering. As a
result of these discussions, 160,000 shares of Common Stock, or approximately
10% of the shares offered by the Company, have been reserved for sale to the
Kula Fund, a private equity fund managed by an affiliate of CDC. See
"Underwriting." Upon completion of the Offering, the Company also intends to
further develop its relationship with CDC by appointing a representative of
CDC to the Company's Board of Directors and selling to the Kula Fund, for
nominal consideration, a warrant to purchase 117,000 shares of Common Stock at
an exercise price equal to 120% of the public offering price, such warrant to
be exercisable for a period of four years. CDC has informed the Company that
Ashley Emberson-Bain is expected to serve as CDC's representative on the Board
of Directors.
Gevirtz Option. In January 1998, Donald L. Gevirtz was granted a 10-year,
immediately exercisable option to purchase up to 88,554 shares of Common Stock
at an exercise price of $7.62 per share in connection with his appointment to
the Board of Directors. In order to encourage Mr. Gevirtz to join the Board of
Directors, the Board granted him an option with a per share exercise price
that was less than the fair market value of the Common Stock on the date of
grant. The Company therefore recognized a compensation expense of $75,000 in
the first quarter of fiscal 1998 in connection with this grant.
Streamline Capital Corporation. In December 1997, the Company entered into
an investment banking agreement with Streamline Capital Corporation
("Streamline Capital"). The principal of Streamline Capital is Steven L.
Gevirtz, the son of Donald L. Gevirtz, a director of the Company. The
agreement provides for investment banking services, including initiation and
implementation of strategic financing arrangements to fund the Company's
expansion. Pursuant to the agreement, as modified in March 1998, the Company
agreed to pay Streamline Capital a monthly retainer of $6,000 (the
"Retainer"), and a transaction fee of $75,000 in connection with the Offering.
The Retainer offsets any transaction fee earned by Streamline Capital. As of
May 1, 1998, the Company had paid Streamline Capital a total of $12,000. The
agreement terminates upon closing of the Offering.
Fiji Lease. In April 1998, the Company entered into a 10-year lease
agreement with Westmall Limited, a Fiji limited liability company, to lease
premises for its new store in Nadi, Fiji. Westmall Limited is partly owned by
Terence R. Buckley, the Company's Director of Pacific Expansion. The monthly
lease payments are approximately $14,000.
Nevada Property Sublease. In December 1996, the Company entered into an
agreement with Orchard Farms, Inc., a California corporation ("Orchard Farms")
wholly owned by Michael J. Rose, the Company's Chairman of the Board,
President and Chief Executive Officer, to sublease property in Sparks, Nevada
for the purposes of storing excess equipment and consolidating merchandise.
The monthly rent for the property was $2,435. The property was subject to a
lease between Orchard Farms and Newport Federal, Inc. In December 1996, the
property was damaged by a flood, and after repeated attempts to repair the
premises, Orchard Farms terminated rental payments in June 1997 due to the
uninhabitable nature of the premises. Orchard Farms and Newport Federal, Inc.
disputed the amount owed under the lease. As a result, in January 1998,
Newport Federal, Inc. brought suit against Orchard Farms and Mr. Rose, as
personal guarantor of the lease, for failure to pay rent. This suit is
currently pending in state district court in Nevada. The Company has not been
named as a defendant in the suit and does not expect the suit to have a
material adverse effect on it.
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<PAGE>
Employment of Gerald J. Rose. Gerald J. Rose, the brother of Michael J.
Rose, has been employed by the Company since January 1993. He currently serves
as the Company's logistics manager for general offshore operations. For fiscal
1995, 1996 and 1997, and the first quarter of fiscal 1998, he earned
compensation of approximately $56,700, $61,700, $67,200 and $20,100,
respectively.
Purchases of Product From Beneficial Owner. The Company has purchased
product from Keener's, a company that beneficially owns more than 5% of the
Company's Common Stock and that is 50% owned by Wayne V. Keener, a director of
the Company. David A. Enger, an Executive Vice President and director of
Keener's, is also a director of the Company. For fiscal 1995, 1996 and 1997
and the first quarter of fiscal 1998, the Company purchased approximately
$254,000, $164,000, $128,000 and $36,000 of product, respectively.
44
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth, as of May 1, 1998, certain information
regarding the beneficial ownership of the Common Stock, as adjusted to reflect
the sale of shares of Common Stock in the Offering, by (a) each person known
by the Company to own beneficially more than 5% of the Common Stock, (b) each
director of the Company, (c) each of the Named Executive Officers, (d) all of
the Company's directors and Named Executive Officers as a group, and (e) each
Selling Shareholder. Except as otherwise indicated, and subject to community
property laws where applicable, the Company believes that the beneficial
owners of the Common Stock listed below, based on information furnished by
such owners, have sole voting and investment power with respect to such
shares.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
BENEFICIAL OWNERSHIP NUMBER AFTER THE
PRIOR TO THE OFFERING(1) OF SHARES OFFERING(1)
----------------------------- OFFERED --------------------
NAME AND ADDRESS SHARES PERCENTAGE HEREBY SHARES PERCENTAGE
---------------- -------------- ----------------------- --------- ----------
<S> <C> <C> <C> <C> <C>
DIRECTORS, NAMED
EXECUTIVE OFFICERS
AND 5% SHAREHOLDERS
Michael J. Rose(2)...... 571,868 27.5% -- 571,868 15.5%
c/o Cost-U-Less, Inc.
12410 S.E. 32nd Street
Bellevue, WA 98005
Wayne V. Keener(3)...... 234,374 11.7 -- 234,374 6.5
P.O. Box 897
Renton, WA 98057
Keener's, Inc........... 221,387 11.1 -- 221,387 6.1
P.O. Box 897
Renton, WA 98057
Gerald M. Podolny and
Cheryl A. Podolny(4)... 143,901 7.2 22,433 121,468 3.4
2000 Partridge Lane
Highland Park, IL 60035
Stephen Lenz(5)......... 139,998 7.0 590 139,408 3.9
12239 N.E. 130th Way,
#F204
Kirkland, WA 98034
Willis Marketing, Inc... 121,024 6.1 -- 121,024 3.4
3010 Harborview Drive
Gig Harbor, WA 98335
Donald L. Gevirtz(6).... 88,554 4.2 -- 88,554 2.4
Gary W. Nettles(7)...... 67,915 3.4 -- 67,915 1.9
Allan C. Youngberg(8)... 45,457 2.2 -- 45,457 1.3
David A. Enger(9)....... 12,692 * -- 12,692 *
George C. Textor(10).... 10,331 * -- 10,331 *
All directors and
executive officers as a
group (7 persons)(11).. 1,031,191 45.7% -- 1,031,191 26.7%
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP NUMBER BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING(1) OF SHARES AFTER THE OFFERING(1)
---------------------------- OFFERED -------------------------
NAME AND ADDRESS SHARES PERCENTAGE HEREBY SHARES PERCENTAGE
---------------- ------------- -------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
SELLING SHAREHOLDERS
Barett, Hale & Gilman
Profit Sharing Plan and
Trust FBO
Paul A. Barrett........ 9,838 * 2,951 6,887 *
Ernest A. Burgess and
Diane J. Burgess....... 7,969 * 7,969 -- *
David L. Chamberlin..... 6,494 * 2,951 3,543 *
Bernard R. Cote......... 2,361 * 2,361 -- *
Christine Gaeckle....... 590 * 590 -- *
Paul J. Lavin, O.D.
Profit Sharing Plan and
Trust.................. 15,644 * 12,692 2,952 *
Douglas W. McCallum..... 31,978 1.6 14,759 17,219 *
Delaware Charter
Guarantee & Trust Co.
TTEE FBO John W.
Peterson IRA........... 47,967 2.4 23,983 23,984 *
Kelley Shawver Rose..... 59,036 3.0 11,807 47,229 1.3
Mark Scalzo............. 11,216 * 4,216 7,000 *
Michael T. Scalzo(12)... 12,988 * 4,999 7,989 *
James Shawver........... 37,683 1.9 3,542 34,141 1.0
Charles H. Simonson and
Mia P. Simonson........ 7,379 * 7,379 -- *
</TABLE>
- --------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with rules of the
Commission and includes shares over which the indicated beneficial owner
exercises voting and/or investment power. Shares of Common Stock subject
to options currently exercisable or exercisable within 60 days are deemed
outstanding for computing the percentage ownership of the person holding
the options but are not deemed outstanding for computing the percentage
ownership of any other person.
(2) Includes 12,077 shares held by the Michael J. Rose Childrens' Trust
dated January 6, 1992, 32,470 shares held by the Michael J. Rose Trust
for Children and Grandchildren, and 79,699 shares subject to a warrant
and to options exercisable within 60 days of May 1, 1998. Mr. Rose
disclaims beneficial ownership of the shares held in trust.
(3) Includes 221,387 shares held by Keener's, Inc. and 12,692 shares subject
to options exercisable within 60 days of May 1, 1998. Mr. Keener has sole
voting and investment power with respect to the shares held by Keener's,
Inc.
(4) Includes 47,967 shares held by the Delaware Charter Guarantee & Trust Co.
Trustee for benefit of Gerald M. Podolny IRA.
(5) Includes 139,408 shares held by The January Trust dated January 23, 1990
of which Mr. Lenz acts as Trustee.
(6) Represents 88,554 shares subject to options exercisable within 60 days of
May 1, 1998.
(7) Includes 11,807 shares held by the Alyce Christene Gangwish Irrevocable
Trust of 1995, 27,477 shares held by The Lenz Educational Partnership,
8,855 shares held by the Brittany Elizabeth Lenz Irrevocable Trust of
1995, and 8,855 shares held by the Cody Allan Lenz Irrevocable Trust of
1995, for each of which Mr. Nettles acts as Co-Trustee, and 10,921 shares
subject to options exercisable within 60 days of May 1, 1998.
(8) Includes 41,325 shares subject to options exercisable within 60 days of
May 1, 1998.
(9) Represents 12,692 shares subject to options exercisable within 60 days of
May 1, 1998.
(10) Represents 10,331 shares subject to options exercisable within 60 days of
May 1, 1998.
(11) Includes 256,214 shares subject to a warrant and options exercisable
within 60 days of May 1, 1998.
(12) Michael T. Scalzo is currently employed by the Company as its General
Merchandise Manager.
46
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 25,000,000 shares of
Common Stock, $0.001 par value per share, and 2,000,000 shares of Preferred
Stock, $0.001 par value per share. The following summary description of the
Company's capital stock is qualified in its entirety by reference to the
Restated Articles and the Company's Restated Bylaws (the "Restated Bylaws"),
copies of which are filed as exhibits to the Registration Statement of which
this Prospectus forms a part.
COMMON STOCK
As of May 1, 1998, the Common Stock was held of record by 83 persons and
entities, and a total of 1,999,961 shares were outstanding or committed for
issuance. In addition, 41 persons held options to purchase up to 454,819
shares of Common Stock.
Holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of shareholders. Subject to preferences that may be
applicable to any outstanding shares of Preferred Stock, the holders of Common
Stock are entitled to receive ratably such dividends, if any, as may be
declared by the Board of Directors out of funds legally available for the
payment of dividends. See "Dividend Policy." In the event of a liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities
and liquidation preferences of any outstanding shares of Preferred Stock.
Holders of Common Stock have no preemptive rights and no rights to convert
their Common Stock into any other securities, and there are no redemption
provisions with respect to such shares. All the outstanding shares of Common
Stock are fully paid and nonassessable. The rights, preferences and privileges
of holders of Common Stock are subject to, and may be adversely affected by,
the rights of holders of shares of any series of Preferred Stock that the
Company may designate and issue in the future.
ROSE WARRANT
In 1991, the Company issued to Michael J. Rose and Kendrick Chamberlin, for
nominal consideration, a warrant to purchase an aggregate of 29,518 shares of
Common Stock at an exercise price of $2.37 per share (the "Rose Warrant"). In
1992, Mr. Rose acquired Mr. Chamberlin's share of the Rose Warrant. The Rose
Warrant is currently exercisable and expires in 2001. The Rose Warrant has
conversion rights and rights in the event of a reclassification of the
Company's Common Stock.
REPRESENTATIVE'S WARRANT
The Company has agreed to sell to the Representative or its designees, for
nominal consideration, a warrant (the "Representative's Warrant") to purchase
up to 160,000 shares of the Company's Common Stock at an exercise price equal
to 120% of the public offering price. The Representative's Warrant is
exercisable for a period of four years, beginning one year from the date of
this Prospectus. At any time during this period, the holder of the
Representative's Warrant shall have the right to require the Company, at the
Company's expense (including reasonable expenses incurred in connection with
Blue Sky qualifications), to prepare and file a registration statement so as
to permit the public offering of the Common Stock underlying the
Representative's Warrant, such registration statement to be kept effective for
a period of up to 120 days. See "Underwriting."
KULA FUND WARRANT
Upon completion of the Offering, the Company expects to appoint a
representative of CDC to the Board of Directors and to sell to the Kula Fund,
for nominal consideration, a warrant to purchase 117,000 shares of Common
Stock at an exercise price equal to 120% of the public offering price, such
warrant to be exercisable for a period of four years. See "Certain
Transactions" and "Underwriting."
PREFERRED STOCK
The Board of Directors has the authority to issue up to 2,000,000 shares of
Preferred Stock in one or more series and to fix the powers, designations,
preferences and relative, participating, optional or other rights thereof,
including dividend rights, conversion rights, voting rights, redemption terms,
liquidation preferences and the number of shares constituting each such
series, without any further vote or action by the Company's
47
<PAGE>
shareholders. No shares of Preferred Stock have been issued. The issuance of
Preferred Stock could have one or more of the following effects: (i) restrict
any Common Stock dividends if Preferred Stock dividends have not been paid,
(ii) dilute the voting power and equity interest of holders of Common Stock to
the extent that any series of Preferred Stock has voting rights or is
convertible into Common Stock or (iii) prevent current holders of Common Stock
from participating in the Company's assets upon liquidation until any
liquidation preferences granted to holders of Preferred Stock are satisfied.
In addition, the issuance of Preferred Stock may, under certain circumstances,
have the effect of discouraging a change in control of the Company by, for
example, granting voting rights to holders of Preferred Stock that require
approval by the separate vote of the holders of Preferred Stock for any
amendment to the Restated Articles or any reorganization, consolidation or
merger (or other similar transaction involving the Company). As a result, the
issuance of Preferred Stock may discourage bids for the Company's Common Stock
at a premium over the market price therefor and could have a material adverse
effect on the market value of the Common Stock. The Board of Directors does
not currently intend to issue any shares of Preferred Stock. See "Risk
Factors--Antitakeover Considerations."
WASHINGTON ANTITAKEOVER STATUTE
Washington law imposes restrictions on certain transactions between a
corporation and certain significant shareholders. Chapter 23B.19 of the
Washington Business Corporation Act (the "WBCA") prohibits a "target
corporation," with certain exceptions, from engaging in certain significant
business transactions with a person or group of persons that beneficially owns
10% or more of the voting securities of the target corporation (an "Acquiring
Person") for a period of five years after such acquisition, unless the
transaction or acquisition of shares is approved by a majority of the members
of the target corporation's board of directors prior to the time of
acquisition. Such prohibited transactions include, among other things, a
merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the Acquiring Person, termination of 5% or
more of the employees of the target corporation as a result of the Acquiring
Person's acquisition of 10% or more of the shares or allowing the Acquiring
Person to receive any disproportionate benefit as a shareholder. After the
five-year period, a "significant business transaction" may take place as long
as it complies with certain "fair price" provisions of the statute. A
corporation may not "opt out" of this statute. This provision may have the
effect of delaying, deterring or preventing a change in control of the
Company. See "Risk Factors--Antitakeover Considerations."
CERTAIN PROVISIONS IN RESTATED ARTICLES
The Restated Articles provide for the division of the Company's Board of
Directors into three classes, as nearly equal in number as possible, each for
a three-year term, with one class being elected each year by the Company's
shareholders. See "Management--Directors, Executive Officers and Key
Employees." Directors may be removed only for cause and only by a vote of not
less than two-thirds of the shares of the Company's capital stock entitled to
vote on an election of the director whose removal is sought.
The Restated Articles require that certain business combinations (including
a merger, share exchange or the sale, lease, exchange, mortgage, pledge,
transfer or other disposition of a substantial part of the Company's assets)
be approved by the holders of not less than two-thirds of the outstanding
shares, unless such business combination shall have been approved by a
majority of Continuing Directors (defined as those individuals who were
members of the Board of Directors on May 11, 1998 or were elected thereafter
on the recommendation of a majority of the Continuing Directors), in which
case the affirmative vote required shall be a majority of the outstanding
shares.
Under the Restated Articles, the shareholders may call a special meeting
only upon the request of holders of at least 25% of the outstanding shares.
The Restated Articles also provide that changes to certain provisions of the
Articles of Incorporation, including those regarding amendment of certain
provisions of the Restated Bylaws or Restated Articles, the classified Board
of Directors, special voting provisions for business combinations and special
meetings of shareholders, must be approved by the holders of not less than
two-thirds of the outstanding shares.
48
<PAGE>
It is possible that these provisions in the Restated Articles may have the
effect of delaying, deterring or preventing a change in control of the
Company.
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY
The Restated Articles include a provision that limits the liability of the
Company's directors to the fullest extent permitted by the WBCA as it
currently exists or as it may be amended in the future. Consequently, subject
to the WBCA, no person shall be liable to the Company or its shareholders for
monetary damages resulting from such person's conduct as a director of the
Company. Amendments to the Restated Articles may not adversely affect any
right of a director of the Company with respect to acts or omissions occurring
prior to such amendment. Section 23B.08.320 of the WBCA provides that the
Restated Articles may not limit any director's liability for acts or omissions
involving intentional misconduct or knowing violations of law, unlawful
distributions or transactions from which the director personally receives a
benefit in money, property or services to which the director is not legally
entitled. In addition, Washington law provides for broad indemnification by
the Company of its officers and directors. The Restated Bylaws implement this
indemnification to the fullest extent permitted by law. Insofar as the
indemnification for liabilities arising under the Securities Act may be
permitted to directors or officers of the Company pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services L.L.C.
49
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 3,599,961 shares of
Common Stock outstanding (3,839,961 shares if the Underwriters' over-allotment
option is exercised in full), assuming no exercise of outstanding options
under the 1998 Plan, the 1989 Plan, the outstanding directors' options or the
Rose Warrant. The 1,723,222 shares sold in the Offering will be freely
tradable without restriction or limitation under the Securities Act, except
for any such shares held by "affiliates" of the Company, as such term is
defined under Rule 144 of the Securities Act, which shares will be subject to
the resale limitations under Rule 144. The remaining 1,876,739 shares are
"restricted securities" within the meaning of Rule 144 and were issued and
sold by the Company in private transactions and may be publicly sold only if
registered under the Securities Act or sold in accordance with an applicable
exemption from registration, such as Rule 144. The Company, the directors,
executive officers, key employees and certain shareholders and option holders,
who collectively hold an aggregate of 1,638,783 shares and options and
warrants to purchase an aggregate of 484,337 additional shares, have agreed
not to sell, directly or indirectly, any shares owned by them for a period of
180 days after the date of this Prospectus without the prior written consent
of the Representative. Upon the expiration of this 180-day lock-up period (or
earlier upon the consent of the Representative), all of these restricted
shares (plus shares issuable upon exercise of then-vested outstanding options
and warrants) will become eligible for sale subject to the restrictions of
Rule 144 and Rule 701.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least
one year, including an affiliate of the Company, would be entitled to sell,
within any three-month period, that number of shares that does not exceed the
greater of 1% of the then-outstanding shares of Common Stock (approximately
36,000 shares) and the average weekly trading volume in the Common Stock
during the four calendar weeks immediately preceding the date on which the
notice of sale is filed with the Commission, provided certain manner of sale
and notice requirements and requirements as to the availability of current
public information about the Company are satisfied. In addition, affiliates of
the Company must comply with the restrictions and requirements of Rule 144,
other than the one-year holding period requirement, in order to sell shares of
Common Stock. As defined in Rule 144, an "affiliate" of an issuer is a person
who directly or indirectly through the use of one or more intermediaries
controls, or is controlled by, or is under common control with, such issuer.
Under Rule 144(k), a holder of "restricted securities" who is not deemed an
affiliate of the issuer and who has beneficially owned shares for at least two
years would be entitled to sell shares under Rule 144(k) without regard to the
limitations described above.
The Company is unable to estimate the number of shares that may be sold in
the future by its existing shareholders or the effect, if any, that such sales
will have on the market price of the Common Stock prevailing from time to
time. Sales of substantial amounts of Common Stock, or the prospect of such
sales, could adversely affect the market price of the Common Stock.
50
<PAGE>
UNDERWRITING
The Underwriters named below, acting through the Representative, have
severally agreed, subject to the terms and conditions contained in the
Underwriting Agreement, to purchase from the Company and the Selling
Shareholders the number of shares of Common Stock indicated below opposite
their respective names at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions, and that the Underwriters are committed to
purchase all of such shares (other than those covered by the over-allotment
option described below), if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Cruttenden Roth Incorporated.......................................
---------
Total............................................................ 1,723,222
=========
</TABLE>
The Company has been advised by the Representative that the Underwriters
propose initially to offer the shares of Common Stock to the public at the
public offering price reflected on the cover page of this Prospectus and to
selected securities dealers at such price less a concession not exceeding
$ per share. The Underwriters may allow, and such dealers may reallow, a
concession not exceeding $ per share to other dealers. After the public
offering of the shares of Common Stock, the public offering price and other
offering terms may be changed.
The Company has granted the Underwriters an over-allotment option,
exercisable during the 45-day period after the date of this Prospectus, to
purchase up to 240,000 additional shares of Common Stock at the public
offering price set forth on the cover page of this Prospectus less the
underwriting discounts and commissions. The Underwriters may exercise the
over-allotment option only to cover over-allotments in the sale of Common
Stock. If the Underwriters exercise the over-allotment option, the
Underwriters will purchase additional shares in approximately the same
proportion as the shares set forth in the above table.
Approximately 10% of the shares being offered by the Company, or 160,000
shares, have been reserved for sale to the Kula Fund. See "Certain
Transactions." The price per share of the shares to be sold to the Kula Fund
is the same as the price to the public in the Offering. The number of shares
available for sale to the public in the Offering will be reduced to the extent
of this purchase. Any reserved shares not so purchased will be offered by the
Underwriters to the public on the same basis as the other shares offered
hereby. Upon completion of the Offering, the Company also intends to further
develop its relationship with CDC by appointing a representative of CDC to the
Board of Directors and selling to the Kula Fund, for nominal consideration, a
four-year warrant to purchase 117,000 shares of Common Stock at an exercise
price of 120% equal to the public offering price. See "Certain Transactions."
In connection with the Offering, the Company has agreed to issue to the
Representative the Representative's Warrant to purchase up to 160,000 shares
of Common Stock. The Representative's Warrant is exercisable for a period of
four years, beginning one year from the date of this Prospectus. The
Representative's Warrant is exercisable at a price equal to 120% of the public
offering price. The Representative's Warrant is nontransferable for a period
of one year following the date of this Prospectus, except to (i) other brokers
or dealers; (ii) one or more bona fide officers and/or partners of the
Representative; (iii) a successor to the transferring holder in a merger or
consolidation; (iv) a purchaser of all or substantially all of the
transferring holder's assets; or (v) any person receiving the Representative's
Warrants from one or more of the persons listed in subsections (i), (ii),
(iii) and (iv). The holders of the Representative's Warrant will have, in that
capacity, no voting, dividend or other shareholder rights; provided, however,
that the number
51
<PAGE>
of shares covered by the Representative's Warrant and the exercise price is
subject to adjustment in certain events to prevent dilution. Additionally, at
any time during the period the Representative's Warrant is exercisable, the
holder of the Representative's Warrant shall have the right to require the
Company, at the Company's expense (including reasonable expenses incurred in
connection with Blue Sky qualifications), to prepare and file a registration
statement so as to permit the public offering of the Common Stock underlying
the Representative's Warrant, such registration statement to be kept effective
for a period of up to 120 days. Any profit realized by the Representative on
the sale of Common Stock issuable on the exercise of the Representative's
Warrant may be deemed to be additional underwriting compensation.
In connection with the Offering, the Company will pay Streamline Capital a
transaction fee of $75,000, which may be deemed to be additional underwriting
compensation. See "Certain Transactions."
The Representative will also receive at the Closing of the Offering a
nonaccountable expense allowance equal to 2% of the aggregate initial public
offering price of the shares of Common Stock sold in the Offering.
The directors, executive officers, key employees and certain shareholders of
the Company and their affiliates, who as of May 1, 1998 held an aggregate of
1,638,783 shares and options and warrants to purchase an aggregate of 484,337
additional shares, have agreed not to sell any shares of Common Stock owned by
such persons, pursuant to Rule 144 under the Securities Act or otherwise,
without the prior written consent of the Representative, for a period of 180
days from the date of the closing of the Offering. The Representative has the
discretion to reduce or eliminate the time period for the lock-up; the
Representative has no current intention to release anyone from the provisions
of the lock-up agreement prior to expiration of the 180-day lock-up period.
The Representative has informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
In addition, the Company and the Selling Shareholders have agreed to
indemnify the Underwriters against certain liabilities, including liabilities
under the Securities Act, and to contribute in certain events to any
liabilities incurred by the Underwriters in connection with the sale of the
shares of Common Stock offered hereby.
Certain persons participating in the Offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the
open market, including by entering stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting of any purchase for the purpose of pegging,
fixing or maintaining the price of the Common Stock. A syndicate covering
transaction means the placing of any bid on behalf of the underwriting
syndicate or the effecting of any purchase to reduce a short position created
in connection with the Offering. A penalty bid means an arrangement that
permits the Underwriters to reclaim a selling concession from a syndicate
member in connection with the Offering when shares of Common Stock sold by the
syndicate member are purchased in syndicate covering transactions. Such
transactions may be effected on the Nasdaq Stock Market, in the over-the-
counter market, or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.
The foregoing sets forth the material terms and conditions of the
Underwriting Agreement, but does not purport to be a complete statement of the
terms and conditions thereof, copies of which are on file at the offices of
the Representative, the Company and the Commission. See "Additional
Information."
LEGAL MATTERS
Certain legal matters will be passed on for the Company and the Selling
Shareholders by Perkins Coie LLP, Seattle, Washington. Certain legal matters
will be passed on for the Underwriters by Summit Law Group, P.L.L.C., Seattle,
Washington. Steven Hale, a partner at Perkins Coie LLP, is a former partner of
Barrett Hale & Gilman (now Barrett Gilman & Ziker), the profit sharing plan of
which is a selling shareholder in the Offering. Mr. Hale has no continuing
interest in such profit sharing plan and disclaims any beneficial interest in
the shares held by the plan.
52
<PAGE>
EXPERTS
Effective December 12, 1996, the Company's Board of Directors retained Ernst
& Young LLP as the independent auditors for the Company. There were no
disagreements with Deloitte & Touche LLP, the Company's former independent
accountants, regarding accounting principles or practices, financial statement
disclosures, or auditing scope or procedures. The former accountants' report
for the fiscal year ended December 31, 1995, which report is included herein,
did not contain an adverse opinion or a disclaimer of an opinion or
qualifications as to uncertainty, audit scope or accounting principles. Prior
to retaining Ernst & Young LLP, the Company had not consulted with Ernst &
Young LLP regarding the application of accounting principles, the type of
audit opinion that might be rendered on the Company's consolidated financial
statements, or any event that was either a reportable event or the subject of
a disagreement.
The Company's consolidated financial statements as of December 29, 1996 and
December 28, 1997, and for the years then ended appearing in this Prospectus
and in the Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report appearing elsewhere herein
and in the Registration Statement, and are included in reliance upon such
report thereon given upon the authority of such firm as experts in auditing
and accounting.
The Company's consolidated financial statements for the year ended December
31, 1995 have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing elsewhere herein and have been so included
in reliance on the reports of such firm given upon their authority as experts
in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby
(the "Registration Statement"). This Prospectus, which constitutes part of the
Registration Statement, omits certain information contained in the
Registration Statement and the exhibits thereto on file with the Commission
pursuant to the Securities Act and the rules and regulations of the Commission
thereunder. The Registration Statement, including the exhibits thereto, may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and
at the Commission's Regional Offices at 7 World Trade Center, Suite 1300, New
York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661, and copies may be obtained at the prescribed rates from the
Public Reference Section of the Commission at its principal office in
Washington, D.C. The Commission also maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically, including the Company, with the
Commission at http://www.sec.gov.
Statements contained in this Prospectus as to the contents of any written
contract, agreement or other document referred to are not necessarily
complete, and reference is made to the copies of contracts, agreements or
other documents filed as exhibits to the Registration Statement, each such
statement being qualified in all respects by such reference.
The Company intends to furnish its shareholders with annual reports
containing audited consolidated financial statements and an opinion thereon
expressed by independent auditors and may furnish its shareholders with
quarterly reports for the first three quarters of each fiscal year containing
unaudited summary consolidated financial information.
53
<PAGE>
COST-U-LESS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................... F-2
Report of Deloitte & Touche LLP, Independent Auditors....................... F-3
Consolidated Financial Statements:
Consolidated Balance Sheets............................................... F-4
Consolidated Statements of Income......................................... F-5
Consolidated Statements of Shareholders' Equity........................... F-6
Consolidated Statements of Cash Flows..................................... F-7
Notes to Consolidated Financial Statements................................ F-8
</TABLE>
F-1
<PAGE>
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. as of December 29, 1996 and December 28, 1997, and the related
consolidated statements of income, shareholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cost-U-Less,
Inc. at December 29, 1996 and December 28, 1997, and the consolidated results
of its operations and its cash flows for the years then ended, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Seattle, Washington
March 13, 1998, except as to Note 11,
as to which the date is May 13, 1998
F-2
<PAGE>
REPORT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS
Board of Directors
Cost-U-Less, Inc.
Bellevue, Washington
We have audited the consolidated balance sheet of Cost-U-Less, Inc. as of
December 31, 1995, which is not included herein, and the accompanying related
consolidated statements of income, shareholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of the Company at December 31,
1995, and the consolidated results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
April 4, 1996 (May 8, 1998 as to Notes 1, 6,
and 7, and May 13, 1998 as to Note 11)
F-3
<PAGE>
COST-U-LESS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 28, MARCH 29,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.............. $ 95 $ 1,028 $ --
Receivables (net of allowance of $25,
$25, and $40 in 1996, 1997, and 1998,
respectively)......................... 715 1,023 934
Refundable income taxes................ 387 179 195
Inventories............................ 14,938 12,271 13,772
Prepaid expenses....................... 315 137 693
Deferred tax assets.................... 418 671 493
------- ------- -------
Total current assets................. 16,868 15,309 16,087
Property and equipment, net.............. 7,428 6,847 8,387
Deposits and other assets................ 419 518 608
Deferred tax assets...................... 141 141 141
------- ------- -------
Total assets......................... $24,856 $22,815 $25,223
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable....................... $ 8,601 $ 8,953 $ 9,776
Accrued expenses....................... 1,517 1,235 1,752
Income taxes payable................... -- 141 --
Line of credit......................... 1,500 376 615
Current portion of long-term debt...... 1,247 384 475
Current portion of capital lease
obligations .......................... 368 406 410
------- ------- -------
Total current liabilities............ 13,233 11,495 13,028
Deferred rent............................ 331 481 511
Long-term debt, less current portion..... 383 -- 582
Capital lease obligations, less current
portion................................. 1,582 1,169 1,050
------- ------- -------
Total liabilities.................... 15,529 13,145 15,171
Commitments
Shareholders' equity:
Preferred stock--$0.001 par value;
Authorized shares--2,000,000; Issued
and outstanding shares--none.......... -- -- --
Common stock--$0.001 par value;
Authorized shares--25,000,000; Issued
and outstanding shares--1,999,961..... 3,525 3,525 3,600
Retained earnings...................... 5,802 6,165 6,491
Accumulated other comprehensive income. -- (20) (39)
------- ------- -------
Total shareholders' equity........... 9,327 9,670 10,052
------- ------- -------
Total liabilities and shareholders'
equity.............................. $24,856 $22,815 $25,223
======= ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
COST-U-LESS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED QUARTER ENDED
-------------------------------------- ----------------------
DECEMBER 31, DECEMBER 29, DECEMBER 28, MARCH 30, MARCH 29,
1995 1996 1997 1997 1998
------------ ------------ ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............... $ 139,652 $ 134,820 $ 124,865 $ 31,789 $ 31,753
Merchandise costs....... 120,175 113,824 104,397 26,723 26,551
---------- ---------- ---------- ---------- ----------
Gross profit............ 19,477 20,996 20,468 5,066 5,202
Operating expenses:
Store................. 14,949 15,843 14,543 3,840 3,535
General and
administrative....... 2,728 3,039 3,225 795 981
Store openings........ 600 -- 327 22 130
Store closings........ 400 918 1,346 700 --
---------- ---------- ---------- ---------- ----------
Total operating
expenses............... 18,677 19,800 19,441 5,357 4,646
---------- ---------- ---------- ---------- ----------
Operating income (loss). 800 1,196 1,027 (291) 556
Other income (expense):
Interest expense...... (555) (605) (427) (124) (55)
Other................. 150 -- (40) -- --
---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes........... 395 591 560 (415) 501
Income tax provision
(benefit).............. 145 221 197 (137) 175
---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ 250 $ 370 $ 363 $ (278) $ 326
========== ========== ========== ========== ==========
Earnings (loss) per
common share:
Basic................. $ 0.13 $ 0.19 $ 0.18 $ (0.14) $ 0.16
========== ========== ========== ========== ==========
Diluted............... $ 0.11 $ 0.17 $ 0.17 $ (0.14) $ 0.15
========== ========== ========== ========== ==========
Weighted average common
shares outstanding..... 1,999,961 1,999,961 1,999,961 1,999,961 1,999,961
========== ========== ========== ========== ==========
Weighted average common
shares outstanding,
assuming dilution...... 2,197,786 2,146,745 2,123,784 1,999,961 2,150,935
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
COST-U-LESS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
----------------
ACCUMULATED
OTHER
RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME TOTAL
--------- ------ -------- ------------- -------
<S> <C> <C> <C> <C> <C>
Balance at December 25, 1994.. 1,999,371 $3,522 $5,182 $-- $ 8,704
Exercise of stock options... 590 3 -- -- 3
Net income and comprehensive
income..................... -- -- 250 -- 250
--------- ------ ------ ---- -------
Balance at December 31, 1995.. 1,999,961 3,525 5,432 -- 8,957
Net income and comprehensive
income -- -- 370 -- 370
--------- ------ ------ ---- -------
Balance at December 29, 1996.. 1,999,961 3,525 5,802 -- 9,327
Net income.................. -- -- 363 -- 363
Other comprehensive income.. -- -- -- (20) (20)
-------
Comprehensive income........ 343
--------- ------ ------ ---- -------
Balance at December 28, 1997.. 1,999,961 3,525 6,165 (20) 9,670
Net income (unaudited)...... -- -- 326 -- 326
Other comprehensive income
(unaudited)................ -- -- -- (19) (19)
-------
Comprehensive income
(unaudited)................ 307
Stock compensation
(unaudited)................ -- 75 -- -- 75
--------- ------ ------ ---- -------
Balance at March 29, 1998
(unaudited).................. 1,999,961 $3,600 $6,491 $(39) $10,052
========= ====== ====== ==== =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
COST-U-LESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED QUARTER ENDED
-------------------------------------- -------------------
DECEMBER 31, DECEMBER 29, DECEMBER 28, MARCH 30, MARCH 29,
1995 1996 1997 1997 1998
------------ ------------ ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....... $ 250 $ 370 $ 363 $(278) $ 326
Adjustments to reconcile
net income (loss) to
net cash provided by
operating activities:
Depreciation........... 779 1,089 917 244 230
Writedown of property
and equipment......... 114 713 637 387 --
Deferred tax (benefit)
provision............. (220) (20) (253) -- 178
Stock compensation..... -- -- -- -- 75
Reserve for bad debts.. -- 25 -- (16) 15
Cash provided by (used
in) changes in
operating assets and
liabilities:
Receivables............ (908) 605 (308) 132 73
Refundable income
taxes................. (515) 128 208 (292) (15)
Inventories............ (665) 1,660 2,667 (65) (1,501)
Prepaid expenses....... 27 (108) 179 (455) (556)
Deposits and other
assets................ 2 31 (193) (44) (89)
Accounts payable....... 1,726 (1,860) 352 (139) 822
Accrued expenses....... (605) (496) (142) 692 376
Deferred rent.......... 201 129 151 39 30
------- ------- ------- ----- -------
Net cash provided by
(used in) operating
activities............. 186 2,266 4,578 205 (36)
INVESTING ACTIVITY--
purchases of property
and equipment.......... (3,081) (2,006) (899) (581) (1,770)
FINANCING ACTIVITIES
Proceeds from exercise
of stock options....... 3 -- -- -- --
Net borrowings
(repayments) under line
of credit.............. 2,878 (2,000) (1,125) 721 239
Proceeds from long-term
debt................... 3,500 1,747 -- -- 1,000
Principal payments on
long-term debt......... (2,112) (1,151) (1,246) (303) (327)
Payments of capital
lease obligations...... -- (406) (375) (94) (115)
Unrealized foreign
exchange loss.......... -- -- -- -- (19)
------- ------- ------- ----- -------
Net cash provided by
(used in) financing
activities............. 4,269 (1,810) (2,746) 324 778
------- ------- ------- ----- -------
Net increase (decrease)
in cash and cash
equivalents............ 1,374 (1,550) 933 (52) (1,028)
Cash and cash
equivalents:
Beginning of period.... 271 1,645 95 95 1,028
------- ------- ------- ----- -------
End of period.......... $ 1,645 $ 95 $ 1,028 $ 43 $ 0
======= ======= ======= ===== =======
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION
Cash paid during the
period for:
Interest............... $ 542 $ 619 $ 442 $ 119 $ 58
Income taxes........... $ 1,012 $ 107 $ 102 $ 175 $ 153
SUPPLEMENTAL DISCLOSURE
OF NONCASH FINANCING
AND INVESTING
ACTIVITIES
Property and equipment
acquired with capital
lease obligations..... $ 663 $ 1,660 $ -- $ -- $ --
</TABLE>
See accompanying notes.
F-7
<PAGE>
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 29, 1998 AND FOR THE QUARTERS
ENDED MARCH 30, 1997 AND MARCH 29, 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Cost-U-Less, Inc. (the "Company") operates mid-sized warehouse club-style
stores in "island" markets in U.S. territories throughout the Pacific and
Caribbean. The Company currently operates seven island stores located in
Hawaii, U.S. Virgin Islands, Guam, American Samoa, and one U.S. mainland store
in California.
Principles of Consolidation
The Company operates wholly owned subsidiaries in Guam, U.S. Virgin Islands,
American Samoa, Nevada, Republic of Fiji, New Zealand, and Vanuatu. All
significant intercompany balances and transactions have been eliminated in
consolidation.
The U.S. dollar is the functional currency for all locations, except for
Fiji, which uses the Fijian dollar.
Fiscal Year
The Company's fiscal year ends on the last Sunday in December. The years
ended December 29, 1996 and December 28, 1997 represent 52-week fiscal years,
and the year ended December 31, 1995 was a 53-week fiscal year.
Cash Equivalents
Highly liquid investments maturing within three months from the date of
purchase are classified as cash equivalents.
Financial Instruments
The carrying value of financial instruments, including cash, receivables,
payables, and long-term debt, approximates market value at December 29, 1996
and December 28, 1997.
Inventories
Merchandise inventories are recorded at the lower of average cost or market.
Property and Equipment
Property and equipment are carried at cost. Depreciation is provided using
the straightline method over the estimated useful lives of the assets, ranging
from 5 to 15 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.
The Company's policy to recognize impairment losses relating to long-lived
assets is based on several factors, including, but not limited to,
management's plans for future operations, recent operating results and
projected cash flows.
Advertising Costs
The cost of advertising is expensed as incurred. Advertising expenses
incurred during fiscal years 1995, 1996, and 1997 were not material to the
Company's operating results.
F-8
<PAGE>
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 29, 1998 AND FOR THE QUARTERS
ENDED MARCH 30, 1997 AND MARCH 29, 1998 IS UNAUDITED)
Preopening Costs
Costs incurred in connection with the startup and promotion of new store
openings are expensed as incurred.
Stock-Based Compensation
The Company has elected to apply the disclosure only provisions of Financial
Accounting Standards Board Statement No. 123, 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 price.
Earnings Per Share
Basic earnings per share is computed based on weighted average shares
outstanding. Diluted earnings per share includes the effect of dilutive
securities (options and warrants) except where their inclusion is
antidilutive.
Comprehensive Income
As of December 29, 1997, the Company adopted Statement No. 130, Reporting
Comprehensive Income. Statement No. 130 establishes new rules for the
reporting and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on the Company's net income or
shareholder's equity. Statement No. 130 requires foreign currency translation
adjustments, which prior to adoption were reported separately in shareholder's
equity to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of Statement
No. 130.
During the first quarter of 1997 and 1998, total comprehensive income (loss)
amounted to $(278,000) and $307,000, respectively.
Segment Reporting
Effective January 1, 1997, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of Enterprise and Related Information. This
Statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. Statement No. 131 also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. The adoption of this Statement did not affect
results of operations or financial position.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
F-9
<PAGE>
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 29, 1998 AND FOR THE QUARTERS
ENDED MARCH 30, 1997 AND MARCH 29, 1998 IS UNAUDITED)
Unaudited Interim Financial Information
The financial information as of March 29, 1998 and for the quarters ended
March 30, 1997 and March 29, 1998 is unaudited, but includes all adjustments
(consisting only of normal recurring adjustments) that the Company considers
necessary for a fair presentation of the financial position at such dates and
the operations and cash flows for the periods then ended. Operating results
for the quarter ended March 29, 1998 are not necessarily indicative of results
that may be expected for the entire year. All quarterly periods reported
consist of 13 weeks.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 28, MARCH 29,
1996 1997 1998
------------ ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Equipment.............................. $8,537 $8,238 $8,932
Leasehold improvement.................. 1,204 1,339 1,361
Construction in progress............... -- 94 1,147
------ ------ ------
9,741 9,671 11,440
Less accumulated depreciation.......... 2,313 2,824 3,053
------ ------ ------
Total assets........................... $7,428 $6,847 $8,387
====== ====== ======
</TABLE>
Equipment under capitalized leases had a cost of $2,322,000, $1,733,000, and
$1,733,000 and accumulated depreciation of $184,000, $331,000, and $359,000 at
December 29, 1996, December 28, 1997, and March 29, 1998, respectively.
3. BANK LINE OF CREDIT
At December 28, 1997, the Company had a $6,000,000 line of credit available
from a commercial bank that expires May 1, 1998. Borrowings bear interest at
prime (8.5% at December 28, 1997) and are secured by various Company assets.
As of December 28, 1997, $376,000 was outstanding under the line of credit
agreement.
Terms of this line of credit include covenants that require, among other
things, that the Company maintain certain financial ratios. As of December 28,
1997, the Company was in compliance with these covenants.
4. LONG-TERM DEBT
Long-term debt consists of a note payable to bank due in monthly
installments of $111, including interest at the fixed rate index plus 1.75%
(7.73% at December 28, 1997). The note matures in March 1998, and is secured
by equipment with a net book value of $4,782.
At December 28, 1997, the Company secured additional long-term financing
totaling $3,000,000 for the construction of a new store in St. Thomas. The
financing included a $1,000,000 note payable to a bank with interest at the
fixed rate index plus 1.75% (7.7% at December 28, 1997), maturing April 30,
2000. The
F-10
<PAGE>
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 29, 1998 AND FOR THE QUARTERS
ENDED MARCH 30, 1997 AND MARCH 29, 1998 IS UNAUDITED)
financing also included a $2,000,000 note payable to a bank with interest at
the prime rate plus 1%, maturing June 2013. The note will be secured by a
first leasehold priority mortgage on the new St. Thomas building. There were
no amounts drawn on either of these notes in 1997.
5. INCOME TAXES
The provision for income taxes for the fiscal years ended December 31, 1995,
December 29, 1996, and December 28, 1997, respectively, consists of the
following:
<TABLE>
<CAPTION>
1995 1996 1997
----- ---- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................ $ 6 $ 10 $ --
Foreign............................................ 338 199 463
State.............................................. 21 32 (13)
----- ---- -----
365 241 450
Deferred:
Federal and state.................................. (220) (76) (268)
Foreign............................................ -- 56 15
----- ---- -----
(220) (20) (253)
----- ---- -----
$ 145 $221 $ 197
===== ==== =====
</TABLE>
A reconciliation between the U.S statutory income tax rate and the effective
rate follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ---- ------ ---- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory rate.............. $134 34.0% $201 34.0% $190 34.0%
State income taxes, net of federal bene-
fit.................................... 14 3.5 21 3.6 (9) (1.6)
Foreign related taxes and other......... (3) (0.8) (1) (0.2) 16 2.8
---- ---- ---- ---- ---- ----
Income taxes at effective rate.......... $145 36.7% $221 37.4% $197 35.2%
==== ==== ==== ==== ==== ====
</TABLE>
F-11
<PAGE>
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 29, 1998 AND FOR THE QUARTERS
ENDED MARCH 30, 1997 AND MARCH 29, 1998 IS UNAUDITED)
The significant items comprising the Company's net deferred tax assets are
as follows:
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 28,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Current deferred tax
assets and (liabilities):
Uniform capitalization.. $111 $ 95
Store accruals.......... 289 --
Vacation pay and bad
debts.................. 41 52
Charitable contribution
carryovers............. -- 45
Net operating loss
carryforwards.......... 37 600
Cash discounts and
other.................. (60) (121)
---- ----
Current deferred tax as-
sets, net................ $418 $671
==== ====
Long-term deferred tax
assets and (liabilities):
Deferred rent credits... $112 $163
Foreign tax credits..... 424 434
AMT and other credits... 91 85
Other................... 18 8
Accelerated
depreciation........... (337) (382)
---- ----
308 308
Less valuation allowance.. (167) (167)
---- ----
Long-term deferred tax as-
sets, net................ $141 $141
==== ====
</TABLE>
The Company intends to reinvest the unremitted earnings of its non-U.S.
subsidiaries and postpone their remittance indefinitely. Accordingly, no
provision for U.S. income taxes was required on such earnings. It is not
practicable to estimate the tax liabilities which would result upon such
repatriation.
The valuation allowance has been provided due to uncertainty regarding the
full realization of the Company's foreign tax credits and other long-term
deferred tax assets. Foreign tax credit carryforwards expire in 1999 and 2000.
As of December 28, 1997, the Company had a U.S. net operating loss of
approximately $1,362,000, which will expire in 2012, and a Fiji net operating
loss of approximately $165,000, which will expire in 2006.
6. SHAREHOLDERS' EQUITY
Stock Options
The Company's Amended and Restated 1989 Stock Option Plan (the "1989 Plan")
provides for the granting of incentive and nonqualified stock options to
employees, directors, and consultants of the Company. An aggregate of
1,350,000 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 after 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 1,032,974
options available for future grant under the 1989 Plan at December 28, 1997.
F-12
<PAGE>
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 29, 1998 AND FOR THE QUARTERS
ENDED MARCH 30, 1997 AND MARCH 29, 1998 IS UNAUDITED)
The Company has also granted nonqualified stock options to its Directors.
Options granted to Directors have vesting provisions ranging from immediate
vesting to 20% vesting per year and are generally issued at the fair value at
the date of grant. Options expire after ten years. At December 28, 1997,
66,410 options have been granted at an exercise price of $10.16 per share.
A summary of stock option transactions for the years ended December 31,
1995, December 29, 1996, and December 28, 1997:
<TABLE>
<CAPTION>
1995 1996 1997
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of
year.................... 352,557 $ 8.60 270,320 $ 6.20 270,320 $4.98
Granted................ 11,802 16.94 47,497 8.47 45,744 9.82
Forfeited.............. (93,420) 16.70 (47,497) 13.42 (25,055) 9.45
Exercised.............. (619) 4.03 -- -- -- --
------- ------- -------
Outstanding, end of year. 270,320 6.20 270,320 4.98 291,009 5.49
======= ======= =======
Exercisable, end of year. 174,748 4.78 206,257 4.51 255,340 5.03
======= ======= =======
</TABLE>
The weighted average fair value of options granted in 1995, 1996, and 1997
was $0.82, $0.42 and $0.09, respectively. The following table summarizes
information related to outstanding options at December 28, 1997:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------------------- -------------------
RANGE OF WEIGHTED WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE CONTRACTUAL EXERCISE
PRICES OPTIONS PRICE LIFE OPTIONS PRICE
------------- ------- -------- ----------- ------- --------
<S> <C> <C> <C> <C> <C>
$0.81 - 2.37 73,795 $1.73 2.85 years 73,795 $1.73
3.39 - 3.73 102,569 3.69 4.65 years 102,569 3.69
8.47 - 10.16 114,645 9.49 7.43 years 78,976 9.82
------- -------
291,009 5.49 255,340 5.03
======= =======
</TABLE>
In 1996, the Company offered employees with options granted with exercise
prices of $16.94 per share the opportunity to surrender those options and
receive new options with an exercise price of $8.47 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. The holders
of 29,789 options elected to exchange their options under this repricing
offer.
F-13
<PAGE>
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 29, 1998 AND FOR THE QUARTERS
ENDED MARCH 30, 1997 AND MARCH 29, 1998 IS UNAUDITED)
As described in Note 1, the Company has elected to account for stock-based
compensation expense in accordance with APB No. 25. Accordingly, for fiscal
years 1995, 1996, and 1997, no compensation expense has been recognized for
stock-based compensation since the grant price equaled the estimated fair
value of the stock on the date of grant. Had compensation cost been recognized
based on the fair value at the grant date for options awarded under the Plan,
pro forma net income and net income per share would have been as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Net income as reported............................ $250,000 $370,000 $363,000
Net income pro forma.............................. 248,000 367,000 357,000
Earnings per common share, basic as reported...... $ 0.13 $ 0.19 $ 0.18
Earnings per common share, basic pro forma........ $ 0.12 $ 0.18 $ 0.18
Earnings per common share, diluted as reported.... $ 0.11 $ 0.17 $ 0.17
Earnings per common share, diluted pro forma...... $ 0.11 $ 0.17 $ 0.17
</TABLE>
Compensation expense recognized in providing pro forma disclosures may not
be representative of the effects on pro forma net income for future years
because the above amounts include only the amortization for the fair value of
grants made in fiscal years 1995, 1996, and 1997.
The fair value of each option is estimated on the date of grant under the
Black-Scholes option pricing model with a volatility of zero and using the
following assumptions:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate............................ 6% 6.20% 6.20%
Expected life...................................... 3 years 3 years 3 years
</TABLE>
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 has been
recognized.
Warrants
In 1991, the Company issued 29,518 warrants to an officer. The warrants
grant the holder the right to 29,518 shares of the Company's common stock at
$2.37 per share. The warrants are currently exercisable and expire in 2001.
COMMON STOCK RESERVED
Common stock reserved for future issuance at December 28, 1997 is as
follows:
<TABLE>
<S> <C>
Stock options.................................................... 1,462,612
Warrants......................................................... 29,518
---------
1,492,130
=========
</TABLE>
F-14
<PAGE>
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 29, 1998 AND FOR THE QUARTERS
ENDED MARCH 30, 1997 AND MARCH 29, 1998 IS UNAUDITED)
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED QUARTER ENDED
-------------------------------------- ----------------------
DECEMBER 31, DECEMBER 29, DECEMBER 28, MARCH 30, MARCH 29,
1995 1996 1997 1997 1998
------------ ------------ ------------ ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss)...... $ 250 $ 370 $ 363 $ (278) $ 326
Denominator:
Denominator for basic
earnings per share--
weighted average
shares................ 1,999,961 1,999,961 1,999,961 1,999,961 1,999,961
Effect of dilutive
securities:
Stock options and
warrants............. 197,825 146,784 123,823 -- 150,974
Denominator for diluted
earnings per share--
adjusted weighted
average shares and
assumed conversion of
stock options and
warrants.............. 2,197,786 2,146,745 2,123,784 1,999,961 2,150,935
Basic earnings (loss)
per common share....... $ 0.13 $ 0.19 $ 0.18 $ (0.14) $ 0.16
Diluted earnings (loss)
per common share....... $ 0.11 $ 0.17 $ 0.17 $ (0.14) $ 0.15
</TABLE>
7. SEGMENT INFORMATION AND STORE CLOSURES
The Company reports operating results in two segments due to distinct
geographical and operational differences. These two segments include the
Company's discount retail stores located in its island markets and those
located on the U.S. mainland.
Other business activities include wholesale sales directly from the
Company's distribution facilities. These sales are not significant to include
as a separate segment and are aggregated with other income and expenses that
are not directly related to the operations of the stores in the particular
segments.
F-15
<PAGE>
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 29, 1998 AND FOR THE QUARTERS
ENDED MARCH 30, 1997 AND MARCH 29, 1998 IS UNAUDITED)
<TABLE>
<CAPTION>
ISLAND MAINLAND
STORES STORES OTHER TOTALS
-------- -------- ----- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Net sales..................................... $120,010 $19,642 $ -- $139,652
Contribution.................................. 4,958 (430) -- 4,528
Depreciation.................................. 475 152 -- 627
Store opening expense......................... 267 333 -- 600
Store closing expense......................... 400 -- 400
Segment inventories........................... 10,725 3,196 -- 13,921
Segment total assets.......................... 16,845 5,204 -- 22,049
YEAR ENDED DECEMBER 29, 1996
Net sales..................................... 111,413 23,407 -- 134,820
Contribution.................................. 5,212 (415) 356 5,153
Depreciation.................................. 556 272 -- 828
Store closing expense......................... -- 918 -- 918
Segment inventories........................... 9,543 2,996 -- 12,539
Segment total assets.......................... 16,140 5,154 -- 21,294
YEAR ENDED DECEMBER 28, 1997
Net sales..................................... 111,480 10,684 2,701 124,865
Contribution.................................. 5,635 (160) 450 5,925
Depreciation.................................. 579 110 -- 689
Store opening expense......................... 327 -- -- 327
Store closing expense......................... -- 1,346 -- 1,346
Segment inventories........................... 8,655 764 -- 9,419
Segment total assets.......................... 16,240 1,350 -- 17,590
QUARTER ENDED MARCH 30, 1997
Net sales..................................... 27,882 3,748 159 31,789
Contribution.................................. 1,321 (185) 90 1,226
Segment inventories........................... 9,183 1,450 -- 10,633
Segment total assets.......................... 14,801 2,750 -- 17,551
QUARTER ENDED MARCH 29, 1998
Net sales..................................... 29,547 1,570 636 31,753
Contribution.................................. 1,584 (35) 118 1,667
Segment inventories........................... 8,538 780 -- 9,318
Segment total assets.......................... 15,654 1,345 -- 16,999
</TABLE>
F-16
<PAGE>
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 29, 1998 AND FOR THE QUARTERS
ENDED MARCH 30, 1997 AND MARCH 29, 1998 IS UNAUDITED)
Reconciliation of Contribution to Consolidated Income before Income Taxes
<TABLE>
<CAPTION>
FISCAL YEAR ENDED QUARTER ENDED
-------------------------------------- -------------------
DECEMBER 31, DECEMBER 29, DECEMBER 28, MARCH 30, MARCH 29,
1995 1996 1997 1997 1998
------------ ------------ ------------ --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total contribution for
reportable segments.... $ 4,528 $ 4,797 $ 5,475 $1,136 $1,549
Other contribution...... -- 356 450 90 118
Administrative expense
not allocated to
segments............... (2,728) (3,039) (3,225) (795) (981)
Store opening/closing
expenses............... (1,000) (918) (1,673) (722) (130)
Other income (expense).. 150 -- (40) -- --
Interest expense........ (555) (605) (427) (124) (55)
------- ------- ------- ------ ------
Consolidated income
(loss) before income
taxes.................. $ 395 $ 591 $ 560 $ (415) $ 501
======= ======= ======= ====== ======
</TABLE>
Reconciliation of Significant Items
<TABLE>
<CAPTION>
SEGMENT CONSOLIDATED
TOTALS CORPORATE TOTALS
------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
DECEMBER 31, 1995
OTHER SIGNIFICANT ITEMS
Depreciation..................................... $ 627 $ 152 $ 779
Inventories...................................... 13,921 2,677 16,598
Total assets..................................... 22,049 6,476 28,525
DECEMBER 29, 1996
OTHER SIGNIFICANT ITEMS
Depreciation..................................... 828 261 1,089
Inventories...................................... 12,539 2,399 14,938
Total assets..................................... 21,294 3,562 24,856
DECEMBER 28, 1997
OTHER SIGNIFICANT ITEMS
Depreciation..................................... 689 228 917
Inventories...................................... 9,419 2,852 12,271
Total assets..................................... 17,590 5,225 22,815
MARCH 30, 1997
Inventories...................................... 10,633 4,370 15,003
Total assets..................................... 17,551 7,943 25,494
MARCH 29, 1998
Inventories...................................... 9,318 4,454 13,772
Total assets..................................... 16,999 8,224 25,223
</TABLE>
F-17
<PAGE>
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 29, 1998 AND FOR THE QUARTERS
ENDED MARCH 30, 1997 AND MARCH 29, 1998 IS UNAUDITED)
Geographic Information
<TABLE>
<CAPTION>
LONG-LIVED
SALES ASSETS
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
1995
United States.......................................... $ 51,346 $3,644
Other foreign countries*............................... 88,306 4,031
-------- ------
$139,652 $7,675
======== ======
1996
United States.......................................... $ 46,548 $4,091
Other foreign countries*............................... 88,272 3,756
-------- ------
$134,820 $7,847
======== ======
1997
United States.......................................... $ 34,801 $3,451
Other foreign countries*............................... 90,064 3,914
-------- ------
$124,865 $7,365
======== ======
</TABLE>
- --------
* including U.S. territories
In 1995 and 1996, the Company closed the Maui, Hawaii and San Jose,
California stores, respectively. In 1997, the Company permanently closed the
Davis, California and Walla Walla, Washington stores. The following represents
the costs charged to expense related to the store closures for the indicated
fiscal years:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Lease buyout............................................. $138 $225 $ 421
Leasehold improvement writeoff........................... 114 530 635
Other closure costs...................................... 148 163 290
---- ---- ------
$400 $918 $1,346
==== ==== ======
</TABLE>
The 1997 charge of $1,346,000 includes $256,000 of additional closure costs
related to the termination of stores previously closed.
Total revenues and net operating losses contributed by the four stores
closed during fiscal 1995, 1996, and 1997 were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Total revenues...................................... $18,480 $15,691 $3,433
======= ======= ======
Store operating losses.............................. $ 933 $ 608 $ 243
======= ======= ======
</TABLE>
F-18
<PAGE>
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 29, 1998 AND FOR THE QUARTERS
ENDED MARCH 30, 1997 AND MARCH 29, 1998 IS UNAUDITED)
8. LEASE COMMITMENTS
The Company has entered into operating leases for retail and administrative
office locations. The leases range from 5 to 15 years and include renewal
options. The Company is required to pay a base rent, plus insurance, taxes,
and maintenance. The Company also leases equipment that may be purchased for a
nominal amount on expiration of the lease.
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:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASE LEASE
--------- -------
(IN THOUSANDS)
<S> <C> <C>
1998.................................................... $ 3,284 $ 537
1999.................................................... 3,044 537
2000.................................................... 3,086 778
2001.................................................... 3,110 --
2002.................................................... 2,830 --
Thereafter.............................................. 12,315 --
------- ------
$27,669 1,852
=======
Amounts representing interest........................... (277)
------
Present value of net minimum lease payments............. $1,575
======
</TABLE>
Rent expense under operating leases for the fiscal years ended December 31,
1995, December 29, 1996, and December 28, 1997 totaled $3,614,000, $4,103,000,
and $3,817,000, respectively.
Total minimum capital lease payments include $431,000 of residual value
payments to be paid in fiscal year 2000.
Subsequent to December 28, 1997, the Company entered into agreements to
lease two stores in Fiji, and entered into a lease for one store in Curacao,
Netherlands Antilles. The Fiji agreements contemplate leases with have ten-
year terms and renewal options. Rental rates for the Fiji stores in Fijian
dollars will be $27,000 and $29,000 per month, respectively ($14,000 and
$15,000 in U.S. dollars, respectively). A rental review and adjustment to the
rental rate, if required, will be made every five years on one of the leases.
The Curacao store is a ten-year lease with two five-year options to extend the
lease term. Rental rates for the Curacao store are $64,000 (in U.S. dollars)
per month fixed for the first seven years and adjusted by the Consumer Price
Index for the remaining three years. The Company's future minimum lease
obligations for the Fiji stores are $1,685,000 and $1,804,000, and its future
minimum lease obligation for the Curacao store is $7.7 million. None of the
stores will have any common area charges or taxes. Property insurance for the
buildings will be paid by the Company.
Lease payments will not begin until the buildings are completed. All three
are expected to be completed by the first quarter of 1999.
F-19
<PAGE>
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 29, 1998 AND FOR THE QUARTERS
ENDED MARCH 30, 1997 AND MARCH 29, 1998 IS UNAUDITED)
9. EMPLOYEE BENEFIT PLAN
The Company maintains a 40l(k) profit-sharing plan covering all eligible
employees. Participating employees may elect to defer and contribute a stated
percentage of their compensation to the plan, not to exceed the dollar limit
set by law. The Company matches 25% of each employee's contribution, up to a
maximum of the first 15% of each employee's compensation. The Company's
matching contributions to the plan approximated $70,000, $86,000, and $75,000
in fiscal 1995, 1996, and 1997, respectively.
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the Company's unaudited quarterly results of
operations:
<TABLE>
<CAPTION>
EARNINGS
(LOSS) PER
STORE COMMON
WEEKS NET SHARE(1)
IN NET GROSS INCOME ---------------
PERIOD SALES PROFIT (LOSS) BASIC DILUTED
------ ------- ------ ------ ------ -------
(IN THOUSANDS, EXCEPT STORE WEEKS AND PER-
SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
FISCAL 1996
First quarter..................... 143 $33,443 $4,940 $ 91 $ 0.05 $ 0.04
Second quarter.................... 143 33,844 5,194 235 0.12 0.11
Third quarter..................... 143 32,717 5,210 260 0.13 0.12
Fourth quarter(2)................. 143 34,816 5,652 (216) (0.11) (0.11)
FISCAL 1997
First quarter(3).................. 130 $31,789 $5,066 $(278) $(0.14) $(0.14)
Second quarter(4)................. 117 31,868 5,240 3 -- --
Third quarter..................... 104 29,747 4,876 264 0.13 0.12
Fourth quarter.................... 104 31,461 5,286 374 0.19 0.18
</TABLE>
- --------
(1) Interim per share amounts may not accumulate to annual per share amounts
due to rounding.
(2) Includes store closure costs of $839,000.
(3) Includes store closure costs of $700,000.
(4) Includes store closure costs of $600,000.
11. SUBSEQUENT EVENTS
In December 1997, the Company entered into an investment banking agreement
with Streamline Capital Corporation ("Streamline Capital"). The agreement was
modified in March 1998, whereby the Company will pay Streamline Capital a
monthly retainer of $6,000 and pay a transaction fee of $75,000 for the
completion of an initial public offering ("IPO"). The retainer is used to
offset any transaction fees earned by Streamline Capital. The principal of
Streamline Capital is the son of a director of the Company.
On May 1, 1998, the Company increased its line of credit from a commercial
bank to $7,000,000. The line of credit expires May 1, 1999. Borrowings under
the line of credit bear interest at the bank's prime rate, or, at the
Company's option, at LIBOR index plus 1.5%, and are secured by various Company
assets. The line of credit contains certain restrictive covenants similar to
those under the previous line of credit. (See Note 3.)
On May 12, 1998, the Company's Board of Directors authorized management to
file a Registration Statement with the Securities and Exchange Commission to
permit the Company to sell shares of its common stock to the public.
F-20
<PAGE>
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 29, 1998 AND FOR THE QUARTERS
ENDED MARCH 30, 1997 AND MARCH 29, 1998 IS UNAUDITED)
On May 13, 1998, the Company effected a 1-for-3.38773 reverse split of its
common stock. All share and per-share information has been restated to reflect
this stock split.
On February 28, 1998, the Company adopted the 1998 Stock Incentive
Compensation Plan (the "1998 Plan"). The 1998 Plan includes both stock options
and stock awards, including restricted stock, with a maximum of 500,000 shares
of common stock available for issuance. On May 13, 1998, the shareholders
approved the 1998 Plan. All future option grants will be made under the 1998
Plan, and no additional options will be granted under the 1989 Plan.
F-21
<PAGE>
BACK COVER:
. Picture of a warehouse membership card with a circle/slash overlay with the
following text:
"At Cost-U-Less, You're Already a Member."
Unlike most warehouse club stores, we don't charge you an annual membership
fee just shop at Cost-U-Less."
. Picture of Cost-U-Less logo
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDERS OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER TO SELL OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS NOT
LAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
--------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
page
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 13
Dividend Policy........................................................... 13
Capitalization............................................................ 14
Dilution.................................................................. 15
Selected Consolidated Financial Data...................................... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
Business.................................................................. 25
Management................................................................ 37
Certain Transactions...................................................... 43
Principal and Selling Shareholders........................................ 45
Description of Capital Stock.............................................. 47
Shares Eligible for Future Sale........................................... 50
Underwriting.............................................................. 51
Legal Matters............................................................. 52
Experts................................................................... 53
Additional Information.................................................... 53
Index to Consolidated Financial Statements................................ F-1
</TABLE>
----------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THE OFFERING), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1,723,222 SHARES
[LOGO OF COST-U-LESS]
COMMON STOCK
--------------------
PROSPECTUS
--------------------
CRUTTENDEN ROTH
I N C O R P O R A T E D
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant in
connection with the sale of the Common Stock being registered hereby. All
amounts shown are estimates, except the Securities and Exchange Commission
registration fee, the NASD filing fee and the Nasdaq National Market listing
fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $ 6,082
NASD filing fee.................................................. 2,562
Nasdaq National Market listing fee............................... 53,750
Representative's nonaccountable expense allowance................ 320,000
Blue Sky fees and expenses....................................... 10,000
Printing and engraving expenses.................................. 100,000
Legal fees and expenses.......................................... 175,000
Accounting fees and expenses..................................... 175,000
Transfer agent and registrar fees................................ 10,000
Miscellaneous expenses........................................... 67,606
--------
Total.......................................................... $920,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 23B.08.500 through 23B.08.600 of the WBCA authorize a court to
award, or a corporation's board of directors to grant, indemnification to
directors and officers on terms sufficiently broad to permit indemnification
under certain circumstances for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"). Section 10 of the registrant's
Restated Bylaws (Exhibit 3.2 hereto) provides for indemnification of the
registrant's directors, officers, employees and agents to the maximum extent
permitted by Washington law. The directors and officers of the registrant also
may be indemnified against liability they may incur for serving in that
capacity pursuant to a liability insurance policy maintained by the registrant
for such purpose.
Section 23B.08.320 of the WBCA authorizes a corporation to limit a
director's liability to the corporation or its shareholders for monetary
damages for acts or omissions as a director, except in certain circumstances
involving intentional misconduct, knowing violations of law or illegal
corporate loans or distributions, or any transaction from which the director
personally receives a benefit in money, property or services to which the
director is not legally entitled. Article 8 of the registrant's Restated
Articles of Incorporation (Exhibit 3.1 hereto) contains provisions
implementing, to the fullest extent permitted by Washington law, such
limitations on a director's liability to the registrant and its shareholders.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification
by the Underwriters of the registrant and its executive officers and
directors, and by the registrant of the Underwriters, for certain liabilities,
including liabilities arising under the Securities Act, in connection with
matters specifically provided in writing by the Underwriters for inclusion in
this Registration Statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
From May 1, 1995 through May 1, 1998, the registrant granted stock options
to purchase 78,191 shares of Common Stock at a weighted average exercise price
of $9.50 per share to employees and officers pursuant to its 1989 Stock Option
Plan. Of these options, none have been canceled without being exercised, 590
have been exercised and 77,601 remain outstanding. From May 1, 1995 through
May 1, 1998, the registrant also granted stock options to directors, pursuant
to individual director stock option agreements, to purchase
II-1
<PAGE>
152,013 shares of Common Stock at a weighted average exercise price of $8.68
per share. Of these options, none have been canceled, none have been exercised
and 152,013 remain outstanding.
No underwriters were engaged in connection with these option grants, which
were deemed to be exempt from registration under the Securities Act
principally by virtue of Section 4(2) thereof as transactions not involving
any public offering, and by virtue of Rule 701 promulgated under the
Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement
1.2 Form of Warrant Agreement
3.1 Restated Articles of Incorporation of the registrant
3.2+ Amended and Restated Bylaws of the registrant
4.1* Specimen Common Stock Certificate
5.1* Opinion of Perkins Coie LLP regarding legality of shares
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+ Manager Bonus Program
10.6+ Common Stock Purchase Warrant between the registrant and Michael J.
Rose
10.7+ Business Loan Agreement between Bank of America NT & SA dba
Seafirst Bank and the registrant, dated April 28, 1998
10.8+ Promissory Note between Bank of America NT & SA dba Seafirst Bank
and the registrant, dated December 31, 1997
10.9+ Construction/Permanent Loan Agreement by and among CULUSVI, Inc.,
the registrant and Banco Popular de Puerto Rico, dated November 6,
1997
10.10 Lease Agreement between Westmall Limited and the registrant,
effective March 1, 1998
10.11 Form of Lease Agreement between Fiji Public Service Association and
the registrant
10.12+ Lease Agreement between Baroud Real Estate Development N.V. and the
registrant, dated April 3, 1998
10.13+ Ground Lease between Market Square East, Inc. and the registrant,
dated October 20, 1997
10.14+ Month-to-Month Rental Agreement (Gross) between Whipple Road
Associates and the registrant, dated January 6, 1995
10.15+ Sublease Agreement between Tamuning Capital Investment, Inc. and
the registrant dated July 15, 1994
10.16+ Lease Agreement between Ottoville Development Company and the
registrant, dated March 9, 1994
10.17+ Lease Agreement between Inmostrat Corporation and the registrant,
dated August 1993
10.18+ Lease Agreement between Hassan Rahman and the registrant, dated
July 30, 1993
10.19+ Industrial Real Estate Lease (Single-Tenant Facility) between Hilo
Partners and the registrant, dated September 1, 1991
10.20+ Indenture of Lease between Kai Pacific Limited and the registrant,
dated August 30, 1991
10.21+ Lease Agreement between Tonko Reyes, Inc. and the registrant, dated
July 1991
21.1+ Subsidiaries of the registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Deloitte & Touche, LLP, Independent Auditors
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
23.3* Consent of Perkins Coie LLP (contained in the opinion filed as Exhibit 5.1 hereto)
24.1+ Power of Attorney
27.1+ Financial Data Schedule
</TABLE>
- --------
+ Previously filed
* To be filed by amendment
(b) Financial Statement Schedules
All schedules are omitted because they are inapplicable or the requested
information is shown in the consolidated financial statements of the
registrant or related notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 1 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Bellevue, State of Washington, on the 5th day of June, 1998.
COST-U-LESS, INC.
/s/ Allan Youngberg
By: _________________________________
Allan Youngberg
Executive Vice President, Chief
Financial Officer, Secretary and
Treasurer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities indicated below on the 5th day of June, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
Michael J. Rose* Chairman of the Board, President and Chief
___________________ Executive Officer (Principal Executive
Michael J. Rose Officer)
/s/ Allan Youngberg Executive Vice President, Chief Financial
___________________ Officer, Secretary and Treasurer (Principal
Allan Youngberg Financial and Accounting Officer)
David A. Enger* Director
___________________
David A. Enger
Don L. Gevirtz* Director
___________________
Don L. Gevirtz
Wayne V. Keener* Director
___________________
Wayne V. Keener
Gary W. Nettles* Director
___________________
Gary W. Nettles
George C. Textor* Director
___________________
George C. Textor
/s/ Allan Youngberg
*By: ___________________
Allan Youngberg
Attorney-in-Fact
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement
1.2 Form of Warrant Agreement
3.1 Restated Articles of Incorporation of the registrant
3.2+ Restated Bylaws of the registrant
4.1* Specimen Common Stock Certificate
5.1* Opinion of Perkins Coie LLP regarding legality of shares
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+ 1998 Manager Bonus Program
10.6+ Common Stock Purchase Warrant between the registrant and Michael J.
Rose
10.7+ Business Loan Agreement between Bank of America NT & SA dba Seafirst
Bank and the registrant, dated April 28, 1998
10.8+ Promissory Note between Bank of America NT & SA dba Seafirst Bank and
the registrant, dated December 31, 1997
10.9+ Construction/Permanent Loan Agreement by and among CULUSVI, Inc., the
registrant and Banco Popular de Puerto Rico, dated November 6, 1997
10.10 Lease Agreement between Westmall Limited and the registrant, effective
March 1, 1998
10.11 Form of Lease Agreement between Fiji Public Service Association and
the registrant
10.12+ Lease Agreement between Baroud Real Estate Development N.V. and the
registrant, dated April 3, 1998
10.13+ Ground Lease between Market Square East, Inc. and the registrant,
dated October 20, 1997
10.14+ Month-to-Month Rental Agreement (Gross) between Whipple Road
Associates and the registrant, dated January 6, 1995
10.15+ Sublease Agreement between Tamuning Capital Investment, Inc. and the
registrant dated July 15, 1994
10.16+ Lease Agreement between Ottoville Development Company and the
registrant, dated March 9, 1994
10.17+ Lease Agreement between Inmostrat Corporation and the registrant,
dated August 1993
10.18+ Lease Agreement between Hassan Rahman and the registrant, dated July
30, 1993
10.19+ Industrial Real Estate Lease (Single-Tenant Facility) between Hilo
Partners and the registrant, dated September 1, 1991
10.20+ Indenture of Lease between Kai Pacific Limited and the registrant,
dated August 30, 1991
10.21+ Lease Agreement between Tonko Reyes, Inc. and the registrant, dated
July 1991
21.1+ Subsidiaries of the registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Deloitte & Touche, LLP, Independent Auditors
23.3* Consent of Perkins Coie LLP (contained in the opinion filed as Exhibit
5.1 hereto)
24.1+ Power of Attorney (contained on signature page)
27.1+ Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment
+ Previously filed
<PAGE>
EXHIBIT 1.1
[1,723,222] SHARES/1/
COST-U-LESS, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
_____________, 1998
CRUTTENDEN ROTH INCORPORATED
As Representative of the several Underwriters
18301 Von Karman, Suite 700
Irvine, California 92612
Ladies and Gentlemen:
Cost-U-Less, Inc., a Washington corporation (the "Company"), addresses you
as the Representative (the "Representative") of each of the persons, firms and
corporations listed in Schedule A hereto (herein collectively called the
"Underwriters") and hereby confirms its agreement with the several Underwriters
as follows:
1. DESCRIPTION OF SHARES.
The Company proposes to issue and sell [1,600,000]shares of its authorized
and unissued Common Stock, $.001 par value per share, and certain shareholders
of the Company listed on Schedule B hereto (the "Selling Shareholders") propose
to sell an aggregate of [123,222] shares of Common Stock (said [1,723,222]
shares being herein called the "Firm Shares") to the several Underwriters. In
addition, the Company proposes to grant to the Underwriters an option to
purchase up to [240,000] additional shares of the Company's Common Stock (the
"Option Shares"), as provided in Section 5 hereof. The Company also proposes to
sell to you, individually and not in your capacity as Representative, warrants
(the "Representative's Warrants") to purchase up to [160,000] shares of Common
Stock of the Company (the "Representative's Warrant Stock"), which sale will be
consummated in accordance with the terms and conditions of the Representative's
Warrant Agreement (the "Representative's Warrant Agreement"), the form of which
is filed as an exhibit to the Registration Statement described below. As used
in this Agreement, the term "Shares" shall include the Firm Shares and the
Option Shares. All shares of Common Stock of the Company to be outstanding
after giving effect to the sales contemplated hereby, including the sale of the
Shares, are hereinafter referred to as "Common Stock." Unless
- -------------------------------
/1/ Plus an option to purchase up to [240,000] additional shares from the
Company to cover over-allotments, if any.
<PAGE>
the context otherwise requires, references herein to the "Company" include Cost-
U-Less, Inc. together with its subsidiaries described in the Prospectus (as
hereinafter defined).
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY.
The Company represents and warrants to and agrees with each Underwriter
that:
(a) A registration statement on Form S-1 (File No. 333______) with
respect to the Shares, including a prospectus subject to completion, has been
prepared by the Company in conformity with the requirements of the Securities
Act of 1933, as amended (the "Act"), and the applicable rules and regulations
(the "Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") under the Act and has been filed with the Commission; such
amendments to such registration statement and such prospectus as may have been
required prior to the date hereof have been similarly prepared and filed with
the Commission; and the Company will file such additional amendments to such
registration statement and such prospectus as may hereafter be required.
Copies of such registration statement and amendments and of each related
prospectus (the "Preliminary Prospectuses") have been delivered to you.
If the registration statement relating to the Shares has been declared
effective under the Act by the Commission, the Company will prepare and promptly
file with the Commission the information previously omitted from the
registration statement pursuant to Rule 430A(a) of the Rules and Regulations
pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and Regulations
or as part of a post-effective amendment to the registration statement
(including a final form of prospectus). If the registration statement relating
to the Shares has not been declared effective under the Act by the Commission,
the Company will prepare and promptly file an amendment to the registration
statement, including a final form of prospectus. The term "Registration
Statement" as used in this Agreement shall mean such registration statement,
including financial statements, schedules and exhibits, in the form in which it
became or becomes, as the case may be, effective (including, if the Company
omitted information from the registration statement pursuant to Rule 430A(a) of
the Rules and Regulations, the information deemed to be a part of the
registration statement at the time it became effective pursuant to Rule 430A(b)
of the Rules and Regulations) and, in the event of any amendment thereto after
the effective date of such registration statement, shall also mean (from and
after the effectiveness of such amendment) such registration statement as so
amended. The term "Prospectus" as used in this Agreement shall mean the
prospectus relating to the Shares as included in such Registration Statement at
the time it becomes effective (including, if the Company omitted information
from the Registration Statement pursuant to Rule 430A(a) of the Rules and
Regulations, the information deemed to be a part of the Registration Statement
at the time it became effective pursuant to Rule 430A(b) of the Rules and
Regulations), except that if any revised prospectus shall be provided to the
Underwriters by the Company for use in connection with the offering of the
Shares that differs from the prospectus on file with the Commission at the time
the Registration Statement became or becomes, as the case may be, effective
(whether or not such revised prospectus is required to be filed with the
Commission pursuant to Rule 424(b)(3) of the Rules and Regulations), the term
"Prospectus" shall
-2-
<PAGE>
refer to such revised prospectus from and after the time it is first provided to
the Underwriters for such use.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus or instituted proceedings for that
purpose, and each such Preliminary Prospectus, at the time of filing thereof,
has conformed in all material respects to the requirements of the Act and the
Rules and Regulations and, as of its date, has not included any untrue statement
of a material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and at the time the Registration Statement became or
becomes, as the case may be, effective and at all times subsequent thereto up to
and on the Closing Date (hereinafter defined) and on any later date on which
Option Shares are to be purchased, (i) the Registration Statement and the
Prospectus, contained and will contain all material information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, (ii) the Registration Statemen, did not and will not include any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading,
and (iii) the Prospectus did not and will not include any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that none of the representations and warranties
-------- -------
contained in this subparagraph (b) shall apply to information contained in or
omitted from the Registration Statement or Prospectus in reliance upon, and in
conformity with, written information relating to (i) any Underwriter furnished
to the Company by such Underwriter specifically for use in the preparation
thereof or (ii) any Selling Shareholder furnished to the Company by such Selling
Shareholder specifically for use in the preparation thereof.
(c) The Company does not own or control, directly or indirectly, any
corporation, association or other entity other than the subsidiaries listed in
Exhibit 21 of the Registration Statement. The Company and each of its
subsidiaries has been duly incorporated and is validly existing as a corporation
in good standing under the laws of the jurisdiction of its incorporation with
full power and authority (corporate and other) to own, lease and operate its
properties and conduct its business as described in the Prospectus; the Company
and each of its subsidiaries is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction in which the ownership
or leasing of its properties or the conduct of its business requires such
qualification, except where the failure to be so qualified or be in good
standing would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations or business of the Company taken as a whole; no
proceeding has been instituted in any such jurisdiction, revoking, limiting or
curtailing, or seeking to revoke, limit or curtail, such power and authority or
qualification; the Company is in possession of and operating in compliance with
all authorizations, licenses, certificates, consents, orders and permits from
state, federal and other regulatory authorities that are material to the conduct
of its business, all of which are valid and in full force and effect; the
Company is not in material violation of its charter or bylaws or in default in
the performance or observance of any material obligation, agreement, covenant or
condition contained in any material bond, debenture, note or other evidence of
indebtedness, or in any
-3-
<PAGE>
material lease, contract, indenture, mortgage, deed of trust, loan agreement,
joint venture or other agreement or instrument to which the Company is a party
or by which it or its properties or assets may be bound; and the Company is not
in violation of any law, order, rule, regulation, writ, injunction, judgment or
decree of any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or over its properties or assets.
(d) The Company has full legal right, power and authority to enter
into this Agreement and the Representative's Warrant Agreement and to perform
the transactions contemplated hereby and thereby. Each of this Agreement and
the Representative's Warrant Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement on the part of the
Company, enforceable in accordance with its terms, except as rights to
indemnification under this Agreement or the Representative's Warrant Agreement
may be limited by applicable law and except as the enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles; the performance of this Agreement and the Representative's
Warrant Agreement and the consummation of the transactions herein or therein
contemplated will not violate any provisions of the charter, bylaws or other
organizational document of the Company and will not result in a breach or
violation of any of the terms and provisions of, or constitute, either by itself
or upon notice or the passage of time or both, a default under any bond,
debenture, note or other evidence of indebtedness, or under any lease, contract,
indenture, mortgage, deed of trust, loan agreement, joint venture or other
agreement or instrument to which the Company is a party or by which its
properties or assets may be bound, or any law, order, rule, regulation, writ,
injunction, judgment or decree of any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or over its
properties or assets. No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over the Company or over its properties
or assets is required for the execution and delivery of this Agreement or the
Representative's Warrant Agreement and the consummation by the Company of the
transactions herein and therein contemplated, except such as may be required
under the Act or under state or other securities or Blue Sky laws, all of which
requirements have been satisfied in all material respects.
(e) There is not any pending or, to the Company's knowledge,
threatened action, suit, claim or proceeding against the Company, or any of its
officers or any of its properties, assets or rights before any court, government
or governmental agency or body, domestic or foreign, having jurisdiction over
the Company or over its officers or properties or otherwise that (i) is
reasonably likely to result in any material adverse change in the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company or might materially and adversely affect its properties, assets
or rights, (ii) might prevent consummation of the transactions contemplated
hereby or (iii) is required to be disclosed in the Registration Statement or
Prospectus and is not so disclosed; and there are no agreements, contracts,
leases or documents of the Company of a character required to be described or
referred to in the Registration Statement or Prospectus or to be filed as an
exhibit to the Registration Statement by the Act or the Rules and Regulations or
by the Securities Exchange Act of 1934 (the "Exchange
-4-
<PAGE>
Act") or the rules and regulations of the Commission thereunder that
have not been accurately described in all material respects in the Registration
Statement or Prospectus or filed as exhibits to the Registration Statement.
(f) All outstanding shares of capital stock of the Company have been
duly authorized and validly issued and are fully paid and nonassessable, have
been issued in compliance with all federal and state securities laws, were not
issued in violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities, and the authorized and outstanding capital
stock of the Company is as set forth in the Prospectus under the caption
"Capitalization" and conforms to the statements relating thereto contained in
the Registration Statement and the Prospectus (and such statements correctly
state the substance of the instruments defining the capitalization of the
Company); the Firm Shares and the Option Shares have been duly authorized for
issuance and sale to the Underwriters pursuant to this Agreement and, when
issued and delivered by the Company against payment therefor in accordance with
the terms of this Agreement, will be duly and validly issued and fully paid and
nonassessable, and will be sold free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest; and no preemptive right, co-
sale right, registration right, right of first refusal or other similar right of
shareholders exists with respect to any of the Firm Shares or Option Shares or
the issuance and sale thereof other than those that will automatically expire
upon the consummation of the transactions contemplated on the Closing Date. No
further approval or authorization of any shareholder, the Board of Directors of
the Company or others is required for the issuance and sale or transfer of the
Shares except as may be required under the Act, the Rules and Regulations or
under state or other securities or Blue Sky laws. Except as disclosed in or
contemplated by the Prospectus and the financial statements of the Company, and
the related notes thereto, included in the Prospectus, the Company has no
outstanding options to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into, or
any contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. The
description of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised thereunder,
set forth in the Prospectus accurately and fairly presents the information
required to be shown with respect to such plans, arrangements, options and
rights under the Act and the Rules and Regulations.
(g) Ernst & Young LLP and Deloitte & Touche LLP, which have expressed
their opinions with respect to the financial statements of the Company filed
with the Commission as a part of the Registration Statement, which are included
in the Prospectus, are independent accountants within the meaning of the Act and
the Rules and Regulations. The audited financial statements of the Company,
together with the related schedules and notes, and the unaudited financial
information included in the Registration Statement and Prospectus,
fairly present the financial position and the results of operations of the
Company at the respective dates and for the respective periods to which they
apply. Such financial statements of the Company, together with the related
schedules and notes, filed with the Commission as part of the Registration
Statement, have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods as certified by Ernst &
Young LLP and Deloitte & Touche LLP, as
-5-
<PAGE>
the case may be. The selected and summary financial and statistical data
included in the Registration Statement present fairly the information shown
therein and have been compiled on a basis consistent with the audited financial
statements presented therein. No other financial statements or schedules are
required to be included in the Registration Statement.
(h) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, except as specifically
disclosed or contemplated therein, there has not been (i) any material adverse
change in the condition (financial or otherwise), earnings, operations or
business of the Company, (ii) any transaction that is material to the Company,
(iii) any obligation, direct or contingent, incurred by the Company that is
material to the Company, (iv) any change in the capital stock or outstanding
indebtedness of the Company that is material to the Company, (v) any dividend or
distribution of any kind declared, paid or made on the capital stock of the
Company or (vi) any loss or damage (whether or not insured) to the property of
the Company which has a material adverse effect on the condition (financial or
otherwise), earnings, operations or business of the Company.
(i) Except as set forth in the Registration Statement and Prospectus,
(i) the Company has good and marketable title to all properties and assets
described in the Registration Statement and Prospectus as owned by it, free and
clear of any pledge, lien, security interest, encumbrance, claim or equitable
interest, other than such as would not have a material adverse effect on the
condition (financial or otherwise), earnings, operations or business of the
Company, (ii) the agreements to which the Company is a party described in the
Registration Statement are valid agreements, enforceable by the Company, except
as the enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles and, to the
Company's knowledge, the other contracting party or parties thereto are not in
material breach or material default under any of such agreements and (iii) the
Company has valid and enforceable leases for all properties described in the
Registration Statement and Prospectus as leased by it, except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles. Except as set forth in the
Registration Statement and Prospectus, the Company owns or leases all such
properties as are necessary to its operations as now conducted and as described
in the Registration Statement and the Prospectus.
(j) The Company has timely filed all federal, state, local and foreign
tax returns required to be filed by it and has paid all taxes shown thereon as
due, and there is no tax deficiency that has been or, to the Company's
knowledge, is reasonably likely to be asserted against the Company, which might
have a material adverse effect on the condition (financial or otherwise),
earnings, operations or business of the Company, and all tax liabilities are
adequately provided for on the books of the Company.
(k) The Company maintains insurance with insurers of recognized
financial responsibility of the types and in the amounts generally deemed
adequate for its business including, but not limited to, insurance covering real
and personal property owned or leased by the Company
-6-
<PAGE>
against theft, damage, destruction, acts of vandalism and all other risks
customarily insured against, all of which insurance is in full force and effect;
the Company has not been refused for material reasons any insurance coverage
sought or applied for; and the Company does not have any reason to believe that
it will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition (financial or otherwise), earnings, operations or
business of the Company.
(l) To the Company's knowledge, no labor disturbance by the employees
of the Company exists or is threatened. No collective bargaining agreement
exists with any of the Company's employees and, to the best of the Company's
knowledge, no such agreement is threatened.
(m) Except as disclosed in or specifically contemplated by the
Prospectus, the Company owns or possesses adequate rights to use all patent
rights, trade secrets, mask works, know-how, trademarks, copyrights, licenses,
service marks and trade names that are necessary to conduct its businesses as
described in the Registration Statement and Prospectus; the Company has not
received any notice of, and has no knowledge of, any infringement of or conflict
with asserted rights of the Company by others with respect to any patent rights,
trade secrets, mask works, know-how, trademarks, copyrights, licenses, service
marks or trade names; and the Company has not received any notice of, and has no
knowledge of, any infringement of or conflict with asserted rights of others
with respect to any patent rights, trade secrets, mask works, know-how,
trademarks, copyrights, licenses, service marks or trade names which, singly or
in the aggregate, in the event of an unfavorable decision, ruling or finding,
would have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company.
(n) The Common Stock has been registered pursuant to Section 12(g) of
the Exchange Act and has been approved for quotation on the Nasdaq National
Market, and the Company has taken no action designed to, or likely to have the
effect of, terminating the registration of the Common Stock under the Exchange
Act or delisting the Common Stock from the Nasdaq National Market, nor has the
Company received any notification that the Commission or the National
Association of Securities Dealers, Inc. ("NASD") is contemplating terminating
such registration or listing.
(o) The Company has been advised concerning the Investment Company Act
of 1940, as amended (the "1940 Act"), and the rules and regulations thereunder,
and has in the past conducted, and intends in the future to conduct, its affairs
in such a manner as to ensure that it will not become an "investment company" or
a company "controlled" by an "investment company" within the meaning of the 1940
Act and such rules and regulations.
(p) The Company has not distributed and will not distribute prior to
the later of (i) the Closing Date, or any date on which Option Shares are to be
purchased, as the case may be, and (ii) completion of the distribution of the
Shares, any offering material in connection with the
-7-
<PAGE>
offering and sale of the Shares other than any Preliminary Prospectuses, the
Prospectus, the Registration Statement and other materials, if any, permitted by
the Act.
(q) The Company has not at any time during the last five (5) years (i)
made any unlawful contribution to any candidate for foreign office or failed to
disclose fully any contribution in violation of law, or (ii) made any payment to
any federal or state governmental officer or official, or other person charged
with similar public or quasi-public duties, other than payments required or
permitted by the laws of the United States or any jurisdiction thereof.
(r) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization in violation of law or manipulation of the price of
the Common Stock to facilitate the sale or resale of the Shares.
(s) Except as disclosed in the Registration Statement, each officer,
director and director-nominee of the Company and each beneficial owner of the
Company's Common Stock has agreed in writing that such person will not without
the prior written consent of the Representative (which consent may be withheld
in its sole discretion), for a period of 180 days subsequent to the closing of
the public offering (which currently is expected to take place approximately
three days after the effective date of the Registration Statement) (the "Lock-up
Period"), in any way directly or indirectly, offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or securities convertible or
exchangeable or exercisable for Common Stock (other than shares, if any, that
are sold pursuant to this Agreement) (collectively, "Securities") or publicly
announce such person's intention to do any of the foregoing. Furthermore, such
person will also agree and consent to the entry of stop transfer instructions
with the Company's transfer agent against the transfer of the Securities held by
such person except in compliance with this restriction. The Company has
provided to counsel for the Underwriters a complete and accurate list of all
shareholders of the Company and the number and type of securities held by each
shareholder. The Company has provided to counsel for the Underwriters true,
accurate and complete copies of all of the agreements pursuant to which its
officers, directors, director-nominees and shareholders have agreed to such
restrictions (the "Lock-up Agreements"). The Company hereby represents and
warrants that it will not release any of its officers, directors or director-
nominees or other shareholders from any Lock-up Agreements currently existing or
hereafter effected without the prior written consent of the Representative.
(t) Except as set forth in the Registration Statement and Prospectus,
(i) the Company is in material compliance with all rules, laws and regulations
relating to the use, treatment, storage and disposal of toxic substances and
protection of health or the environment (the "Environmental Laws") that are
applicable to its business, (ii) the Company has received no notice from any
governmental authority or third party of an asserted claim under the
Environmental Laws, which claim is required to be disclosed in the Registration
Statement and the Prospectus, (iii) to its knowledge, the Company is not likely
to be required to make future material capital expenditures to comply with the
Environmental Laws and (iv) no property which is owned, leased or occupied by
the Company has been designated as a Superfund site pursuant to the
-8-
<PAGE>
Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42
U.S.C. (S) 9601, et seq.), or otherwise designated as a contaminated site under
-- ----
applicable state or local law.
(u) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, including without limitation cash receipts,
(iii) access to assets is permitted only in accordance with management's general
or specific authorization, and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(v) There are no outstanding loans, advances (except normal advances
for business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company to or for the benefit of any of the officers,
directors or director-nominees of the Company or any of the members of the
families of any of them, except as disclosed in the Registration Statement and
the Prospectus.
(w) The Representative's Warrants have been duly and validly
authorized by the Company and upon delivery to you in accordance with the
Representative's Warrant Agreement will be duly issued and legal, valid and
binding obligations of the Company.
(x) The Representative's Warrant Stock has been duly authorized and
reserved for issuance upon the exercise of the Representative's Warrants and
when issued upon payment of the exercise price therefor will be validly issued,
fully paid and nonassessable shares of Common Stock of the Company.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLING SHAREHOLDERS.
Each of the Selling Shareholders severally, and not jointly, represents and
warrants to, and agrees with, the several Underwriters that:
(a) Such Selling Shareholder has, and on the Closing Date will have,
good and marketable title to the Shares proposed to be sold by such Selling
Shareholder hereunder on such closing date and full right, power and authority
to enter into this Agreement and to sell, assign, transfer and deliver such
Shares hereunder, free and clear of all voting trust arrangements, liens,
encumbrances, equities, security interests, restrictions and claims whatsoever,
other than pursuant to this Agreement and the Shareholders' Agreement (as
defined below); and upon delivery of and payment for such Shares hereunder, the
Underwriters will acquire good and marketable title thereto, free and clear of
all liens, encumbrances, equities, claims, restrictions, security interests,
voting trusts or other defects of title whatsoever.
(b) Such Selling Shareholder has executed and delivered a Power of
Attorney and caused to be executed and delivered on his behalf a Custody
Agreement (hereinafter collectively referred to as the "Shareholders'
Agreement") and in connection herewith such Selling
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Shareholder further represents, warrants and agrees that such Selling
Shareholder has deposited in custody, under the Shareholders' Agreement, with
the agent named therein (the "Agent") as custodian, certificates in negotiable
form for the Shares to be sold hereunder by such Selling Shareholder, for the
purpose of further delivery pursuant to this Agreement. Such Selling Shareholder
agrees that the Shares to be sold by such Selling Shareholder on deposit with
the Agent are subject to the interests of the Company and the Underwriters, that
the arrangements made for such custody are to that extent irrevocable, and that
the obligations of such Selling Shareholder hereunder shall not be terminated,
except as provided in this Agreement or in the Shareholders' Agreement, by any
act of such Selling Shareholder, by operation of law, by the death or incapacity
of such Selling Shareholder or by the occurrence of any other event. If the
Selling Shareholder should die or become incapacitated, or if any other event
should occur, before the delivery of the Shares hereunder, the documents
evidencing Shares then on deposit with the Agent shall be delivered by the Agent
in accordance with the terms and conditions of this Agreement and the
Shareholders' Agreement as if such death, incapacity or other event had not
occurred, regardless of whether or not the Agent shall have received notice
thereof. This Agreement and the Shareholders' Agreement have been duly executed
and delivered by or on behalf of such Selling Shareholder and the form of such
Shareholders' Agreement has been delivered to you.
(c) The performance of this Agreement and the Shareholders' Agreement
and the consummation of the transactions contemplated hereby and thereby will
not result in a breach or violation by such Selling Shareholder of any of the
terms or provisions of, or constitute a default by such Selling Shareholder
under, any indenture, mortgage, deed of trust, trust (constructive or other),
loan agreement, lease, franchise, license or other agreement or instrument to
which such Selling Shareholder is a party or by which such Selling Shareholder
or any of its properties is bound, any statute, or any judgment, decree, order,
rule or regulation of any court or governmental agency or body applicable to
such Selling Shareholder or any of its properties, other than breaches or
violations which do not adversely affect such Selling Shareholder's ability to
perform under this Agreement or the Shareholders' Agreement.
(d) Such Selling Shareholder has not taken and will not take, directly
or indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result in stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale of the
Shares, except usual and customary market maker and brokerage transactions up to
two business days prior to the offering contemplated hereby in each case in
accordance with applicable Commission regulations.
(e) To the extent that any statements or omissions made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, are made in reliance upon and in conformity
with written information furnished to the Company by such Selling Shareholder
specifically for use therein, such Preliminary Prospectus and the Registration
Statement did, and the Prospectus and any further amendments or supplements to
the Registration Statement and the Prospectus will, when they become effective
or are filed with the Commission, as the case may be, not contain any untrue
statement of material fact or omit any
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material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances under which they were made.
(f) To the best of its knowledge, such Selling Shareholder is not
aware that any of the representations and warranties set forth in Section 2
above is untrue or inaccurate in any material respect.
4. REPRESENTATION, WARRANTIES AND AGREEMENTS OF THE UNDERWRITERS.
The information set forth in the last paragraph on the front cover page
(insofar as such information relates to the Underwriters), in the first
paragraph on page 2, concerning stabilization and over-allotment by the
Underwriters, and in [second] and [seventh] paragraphs under the caption
"Underwriting" in any Preliminary Prospectus and in the final form of Prospectus
filed pursuant to Rule 424(b) constitutes the only information furnished by the
Underwriters to the Company for inclusion in any Preliminary Prospectus, the
Prospectus or the Registration Statement, and you, on behalf of the respective
Underwriters, represent and warrant to the Company that the statements made
therein do not include any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
5. PURCHASE, SALE AND DELIVERY OF SHARES.
On the basis of the representations, warranties and agreements herein
contained, but subject to the terms and conditions herein set forth, (i) the
Company agrees to issue and sell to the Underwriters [1,600,000] of the Firm
Shares and (ii) each Selling Shareholder agrees, severally and not jointly, to
sell to the Underwriters in the respective amounts set forth in Schedule B
hereto, an aggregate of [123,222] of the Firm Shares. Each Underwriter agrees,
severally and not jointly, to purchase from the Company and the Selling
Shareholders, at a purchase price of $_____ per share, the respective number of
Firm Shares as hereinafter set forth. The obligation of each Underwriter to the
Company and the Selling Shareholders shall be to purchase from the Company and
the Selling Shareholders that number of Firm Shares which is set forth opposite
the name of such Underwriter in Schedule A hereto (subject to adjustment as
provided in Section 11).
Delivery of definitive certificates for the Firm Shares to be purchased by
the Underwriters pursuant to this Section 5 shall be made against payment of the
purchase price therefor by the several Underwriters by certified or official
bank check or checks drawn in next-day funds, payable to the order of the
Company and the Selling Shareholders (or the Agent) (and the Company and the
Selling Shareholders agree not to deposit any such check in the bank on which it
is drawn until the day following the date of its delivery to the Company and the
Selling Shareholders) at the offices of the Representative, or such other place
as may be agreed upon among the Representative and the Company, at 6:00 A.M.,
California time, on the third (3rd) full business day following the first day
that Shares are traded (or at such time and date to which payment and delivery
shall have been postponed pursuant to Section 11 hereof), such time and date of
payment and delivery being herein called the "Closing Date." The certificates
for the Firm Shares to be so delivered will be
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made available to you at such office or such other location as you may
reasonably request for checking at least one (1) full business day prior to the
Closing Date and will be in such names and denominations as you may request,
such request to be made at least two (2) full business days prior to the Closing
Date. If the Representative so elects, delivery of the Firm Shares may be made
by credit through full fast transfer to the accounts at The Depository Trust
Company designated by the Representative.
It is understood that you, individually, and not as the Representative of
the several Underwriters, may (but shall not be obligated to) make payment of
the purchase price on behalf of any Underwriter or Underwriters whose check or
checks shall not have been received by you prior to the Closing Date for the
Firm Shares to be purchased by such Underwriter or Underwriters. Any such
payment by you shall not relieve any such Underwriter or Underwriters of any of
its or their obligations hereunder.
On the basis of the representations, warranties and agreements herein
contained, but subject to the terms and conditions herein set forth, the Company
hereby grants to the several Underwriters, for the purpose of covering over-
allotments in connection with the distribution and sale of the Firm Shares only,
a nontransferable option to purchase, in the respective amounts set forth on the
Schedule B, up to an aggregate of [240,000] Option Shares at the purchase price
per share for the Firm Shares set forth in this Section 5. Such option may be
exercised by the Representative on behalf of the several Underwriters on one or
more occasions in whole or in part during the forty-five (45) day period after
the date on which the Firm Shares are initially offered to the public, by giving
written notice to the Company and the Agent. The number of Option Shares to be
purchased by each Underwriter upon the exercise of such option shall be the same
proportion of the total number of Option Shares to be purchased as the number of
Firm Shares purchased by such Underwriter (set forth in Schedule A hereto) bears
to the total number of Firm Shares purchased by the several Underwriters (set
forth in Schedule A hereto), adjusted by the Representative in such manner as to
avoid fractional shares.
Delivery of definitive certificates for the Option Shares to be purchased
by the several Underwriters pursuant to the exercise of the option granted by
this Section 5 shall be made against payment of the purchase price therefor by
the several Underwriters by certified or official bank check or checks drawn in
next-day funds, payable to the order of the Company (and the Company agrees not
to deposit any such check in the bank on which it is drawn until the day
following the date of its delivery). Such delivery and payment shall take place
at the offices of the Representative, or at such other place as may be agreed
upon by the Representative and the Company (i) on the Closing Date, if written
notice of the exercise of such option is received by the Company at least three
(3) full business days prior to the Closing Date, or (ii) on a date which shall
not be later than the fifth (5th) full business day following the date the
Company receives written notice of the exercise of such option, if such notice
is received by the Company less than three (3) full business days prior to the
Closing Date.
To the extent that the option is not exercised for the entire [240,000]
Option Shares, the number of Option Shares to be sold by the Company shall be
that number which bears the same
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relationship to the aggregate number of Option Shares being purchased as the
maximum number of Option Shares being sold by the Company bears to [240,000].
The certificates for the Option Shares to be so delivered will be made
available to you at such office or such other location as you may reasonably
request for inspection at least two (2) full business days prior to the date of
payment and delivery and will be in such names and denominations as you may
request, such request to be made at least three (3) full business days prior to
such date of payment and delivery. If the Representative so elects, delivery of
the Option Shares may be made by credit through full fast transfer to the
accounts at The Depository Trust Company designated by the Representative.
It is understood that you, individually, and not as the Representative of
the several Underwriters, may (but shall not be obligated to) make payment of
the purchase price on behalf of any Underwriter or Underwriters whose check or
checks shall not have been received by you prior to the date of payment and
delivery for the Option Shares to be purchased by such Underwriter or
Underwriters. Any such payment by you shall not relieve any such Underwriter or
Underwriters of any of its or their obligations hereunder.
Upon exercise of any option provided for in this Section 5, the obligations
of the several Underwriters to purchase such Option Shares will be subject (as
of the date hereof and as of the date of payment and delivery for such Option
Shares) to the accuracy of and compliance with the representations, warranties
and agreements of the Company and the Selling Shareholders herein, to the
accuracy of the statements of the Company, officers of the Company and the
Selling Shareholders made pursuant to the provisions hereof, to the performance
by the Company and the Selling Shareholders of their obligations hereunder, and
to the condition that all proceedings taken at or prior to the payment date in
connection with the sale and transfer of such Option Shares shall be reasonably
satisfactory in form and substance to you and to Underwriters' Counsel, and you
shall have been furnished with all such documents, certificates and opinions as
you may reasonably request in order to evidence the accuracy and completeness of
any of the representations, warranties or statements, the performance of any of
the covenants or agreements of the Company or the Selling Shareholders or the
compliance with any of the conditions herein contained in each case in all
material respects.
After the Registration Statement becomes effective, the several
Underwriters intend to make an initial public offering (as such term is
described in Section 13 hereof) of the Firm Shares at an initial public offering
price of $_____ per share. After the initial public offering, the several
Underwriters may, in their discretion, vary the public offering price.
6. FURTHER AGREEMENTS OF THE COMPANY.
The Company agrees with the several Underwriters that:
(a) The Company will use best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective as promptly as possible; it will notify you,
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promptly after it shall receive notice thereof, of the time when the
Registration Statement or any subsequent amendment to the Registration Statement
has become effective or any supplement to the Prospectus has been filed; if the
Company omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules and
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule
424(b) of the Rules and Regulations or as part of a post-effective amendment to
such Registration Statement as originally declared effective which is declared
effective by the Commission; if for any reason the filing of the final form of
Prospectus is required under Rule 424(b)(3) of the Rules and Regulations, it
will provide evidence satisfactory to you that the Prospectus contains such
information and has been filed with the Commission within the time period
prescribed; it will notify you promptly of any request by the Commission for the
amending or supplementing of the Registration Statement or the Prospectus or for
additional information; promptly upon your request, it will prepare and file
with the Commission any amendments or supplements to the Registration Statement
or Prospectus which, in the opinion of counsel for the several Underwriters
("Underwriters' Counsel"), may be necessary or advisable in connection with the
distribution of the Shares by the Underwriters; it will promptly prepare and
file with the Commission, and promptly notify you of the filing of, any
amendments or supplements to the Registration Statement or Prospectus which may
be necessary to correct any statements or omissions, if, at any time when a
prospectus relating to the Shares is required to be delivered under the Act, any
event shall have occurred as a result of which the Prospectus or any other
prospectus relating to the Shares as then in effect would include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; in case any Underwriter is required to deliver a
prospectus nine (9) months or more after the effective date of the Registration
Statement in connection with the sale of the Shares, it will prepare promptly
upon request, but at the expense of such Underwriter, such amendment or
amendments to the Registration Statement and such prospectus or prospectuses as
may be necessary to permit compliance with the requirements of Section 10(a)(3)
of the Act; and it will file no amendment or supplement to the Registration
Statement or Prospectus which shall not previously have been submitted to you a
reasonable time prior to the proposed filing thereof or to which you shall
reasonably object in writing, subject, however, to compliance with the Act and
the Rules and Regulations and the rules and regulations of the Commission
thereunder and the provisions of this Agreement.
(b) The Company will advise you promptly after it shall have received
notice or obtained knowledge of the issuance of any stop order by the Commission
suspending the effectiveness of the Registration Statement or of the initiation
or threat of any proceeding for that purpose; and it will promptly use its best
efforts to prevent the issuance of any stop order or to obtain its withdrawal at
the earliest possible moment if such stop order should be issued.
(c) The Company will use reasonable efforts to qualify the Shares for
offering and sale under the securities laws of such jurisdictions as you may
designate and to continue such qualifications in effect for so long as may be
required for purposes of the distribution of the Shares, except that the Company
shall not be required in connection therewith or as a condition thereof to
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qualify as a foreign corporation or to execute a general consent to service of
process in any jurisdiction in which it is not otherwise required to be so
qualified or to so execute a general consent to service of process. In each
jurisdiction in which the Shares shall have been qualified as above provided,
the Company will make and file such statements and reports in each year as are
or may be reasonably required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available, copies of
the Registration Statement (three of which will be signed and which will include
all exhibits), each Preliminary Prospectus, the Prospectus and any amendments or
supplements to such documents, including any prospectus prepared to permit
compliance with Section 10(a)(3) of the Act (three of which will include all
exhibits) all in such quantities as you may from time to time reasonably
request.
(e) The Company will make generally available to its shareholders as
soon as practicable, but in any event not later than the forty-fifth (45th) day
following the end of the fiscal quarter first occurring after the first
anniversary of the effective date of the Registration Statement, an earnings
statement (which will be in reasonable detail but need not be audited) complying
with the provisions of Section 11(a) of the Act and covering a twelve (12)-month
period beginning after the effective date of the Registration Statement.
(f) During a period of five (5) years after the date hereof and for so
long as the Company is subject to Section 13 or 15 of the Exchange Act, the
Company will furnish to its shareholders as soon as practicable after the end of
each respective period, annual reports (including financial statements audited
by independent certified public accountants) and unaudited quarterly reports of
operations for each of the first three quarters of the fiscal year, and will
furnish to you and the other several Underwriters hereunder, upon request (i)
concurrently with furnishing such reports to its shareholders, statements of
operations of the Company for each of the first three (3) quarters in the form
furnished to the Company's shareholders, (ii) concurrently with furnishing to
its shareholders, a balance sheet of the Company as of the end of such fiscal
year, together with statements of operations, of shareholders' equity, and of
cash flows of the Company for such fiscal year, accompanied by a copy of the
certificate or report thereon of independent certified public accountants, (iii)
as soon as they are available, copies of all reports (financial or other) mailed
to shareholders, (iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, any securities
exchange or the NASD, (v) every material press release and every material news
item or article in respect of the Company or its affairs which was generally
released to shareholders or prepared by the Company, and (vi) any additional
information of a public nature concerning the Company or its business which you
may reasonably request. During such five (5)-year period, if the Company shall
have active subsidiaries, the foregoing financial statements shall be on a
consolidated basis to the extent that the accounts of the Company and its
subsidiaries are consolidated, and shall be accompanied by similar financial
statements for any significant subsidiary that is not so consolidated.
(g) The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
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(h) The Company will maintain a transfer agent and a registrar (which
may be the same entity) for its Common Stock.
(i) The Company will file Form SR in conformity with the
requirements of the Act and the Rules and Regulations.
(j) If the transactions contemplated hereby are not consummated by
reason of any failure, refusal or inability on the part of the Company to
perform any agreement on its part to be performed hereunder or to fulfill any
condition of the Underwriters' obligations hereunder, or if the Company shall
terminate this Agreement pursuant to Section 12(a) hereof, or if the
Underwriters shall terminate this Agreement pursuant to Section 12(b)(i), and,
in the judgment of the Representative, a public offering price of $5.00 or more
per share is available, then the Company shall (i) reimburse the Representative
in full for its out-of-pocket expenses, including without limitation, its legal
fees and disbursements incurred prior to the termination; (ii) pay all Blue Sky
filing fees and expenses, including Blue Sky legal fees not to exceed an
aggregate of $10,000; (iii) indemnify and hold harmless the Representative for
any expenses incurred by the Company in connection with the transactions
contemplated by this Agreement, including but not limited to printing expenses
and its accounting and legal fees; (iv) not sell any of its capital stock to the
public through another underwriter for a period of at least six months, or if it
does so, then the Company shall pay to you $150,000 in addition to the amounts
paid to you pursuant to subparagraphs (i), (ii) and (iii) above, which the
Company and you agree is fair compensation to the Representative for services
performed with respect to the transactions contemplated hereby; and (v) in the
event the Company enters into an agreement to be acquired or merges, sells all
or substantially all of the assets or otherwise effects a corporate
reorganization with any other entity (a "Corporate Transaction") and, as a
result, the public offering contemplated hereby is abandoned, (x) pay you a cash
fee of $250,000, which the Company and you agree is fair compensation to you for
services performed with respect to the public offering contemplated hereby (such
cash fee to be in addition to the amounts paid to you pursuant to subparagraphs
(i), (ii) and (iii) above) or (y) engage you as the Company's exclusive
financial advisor with respect to the Corporate Transaction and upon request of
the Company, you shall act as the Company's investment banker in connection with
any such acquisition and shall render such services as are customary in
connection therewith, in consideration for standard and customary fees.
(k) If at any time during the ninety (90)-day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
if reasonably requested by you, forthwith prepare, and, if permitted by law,
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.
(l) During the Lock-up Period, the Company will not, without the prior
written consent of the Representative, effect the Disposition of, directly or
indirectly, any Securities
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other than (i) the sale of the Firm Shares and the Option Shares hereunder and,
(ii) the Company's issuance of options or Common Stock under the Company's
presently authorized stock option plans or restricted stock plans (collectively,
the "Option Plans").
7. EXPENSES.
(a) The Company and the Selling Shareholders agree with each
Underwriter that:
(i) The Company and the Selling Shareholders (with the costs
attributable to the Selling Shareholders being based on their pro rata
participation in the Registration Statement) will pay and bear all costs and
expenses in connection with the preparation, printing and filing of the
Registration Statement (including financial statements, schedules and exhibits),
Preliminary Prospectuses and the Prospectus and any amendments or supplements
thereto; the printing of this Agreement, the Agreement Among Underwriters, the
Selected Dealer Agreement, the Preliminary Blue Sky Survey and any supplemental
Blue Sky Survey, the Underwriters' Questionnaire and Power of Attorney, and any
instruments related to any of the foregoing; the issuance, purchase, sale and
delivery of the Shares hereunder to the several Underwriters, including all fees
and expenses of filing the Registration Statement with the SEC and NASD;
transfer taxes, if any; the cost of all certificates representing the Shares;
transfer agents' and registrars' fees; the fees and disbursements of counsel and
accountants for the Company; all fees and other charges of the Company's
independent certified public accountants; the cost of furnishing to the several
Underwriters copies of the Registration Statement (including appropriate
exhibits), Preliminary Prospectus and the Prospectus, and any amendments or
supplements to any of the foregoing; all fees (including filing fees) and costs
of qualifying the Shares under the laws of such jurisdictions as you may
designate (including fees of counsel for the Underwriters related to such
qualification, up to a maximum of $10,000); the Company's road show costs and
expenses, the cost of preparing bound volumes of the documents relating to the
public offering of Common Stock contemplated hereby; and all other expenses
directly incurred by the Company in connection with the performance of its
obligations hereunder. The Representative shall pay the fees and disbursements
of its counsel and the Representative's road show costs and expenses.
(ii) In addition to its other obligations under Section 7(a)(i)
hereof, if the Shares are sold pursuant to this Agreement, the Company will pay
to the Representative a nonaccountable expense allowance equal to 2.0% of the
initial public offering price of the Shares. This nonaccountable expense
allowance with respect to the Firm Shares shall be paid to you on the Closing
Date and the nonaccountable expense allowance with respect to the Option Shares
shall be paid to you on the closing of the sale to you of such Option Shares.
(iii) In addition to its other obligations under Section 9
hereof, the Company and the Selling Shareholders, as the case may be, agree
that, as an interim measure during the pendency of any claim, action,
investigation, inquiry or other proceeding described in Section 9(a) hereof, it
will reimburse the Underwriters, as the case may be, on a monthly basis for all
reasonable legal or other expenses incurred in connection with investigating or
defending any
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such claim, action, investigation, inquiry or other proceeding, notwithstanding
the absence of a judicial determination as to the propriety and enforceability
of the Company's obligation to reimburse the Underwriters for such expenses and
the possibility that such payments might later be held to have been improper by
a court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Underwriters shall
promptly return such payment to the Company together with interest, compounded
daily, determined on the basis of the prime rate (or other commercial lending
rate for borrowers of the highest credit standing) listed from time to time in
The Wall Street Journal (the "Prime Rate"). Any such interim reimbursement
payments which are not made to the Underwriters within thirty (30) days of a
request for reimbursement shall bear interest at the Prime Rate from the date of
such request.
(b) In addition to their other obligations under Section 9(b) hereof,
the Underwriters severally and not jointly agree that, as an interim measure
during the pendency of any claim, action, investigation, inquiry or other
proceeding described in Section 9(b) hereof, they will reimburse the Company and
Selling Shareholders, as the case may be, on a monthly basis for all reasonable
legal or other expenses incurred in connection with investigating or defending
any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Underwriters' obligation to reimburse the Company and the
Selling Shareholders for such expenses and the possibility that such payments
might later be held to have been improper by a court of competent jurisdiction.
To the extent that any such interim reimbursement payment is so held to have
been improper, the Company and the Selling Shareholders shall promptly return
such payment to the Underwriters together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the Company and the Selling Shareholders within
thirty (30) days of a request for reimbursement shall bear interest at the Prime
Rate from the date of such request.
(c) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Sections 7(a)(iii) and 7(b)
hereof, including the amounts of any requested reimbursement payments, the
method of determining such amounts and the basis on which such amounts shall be
apportioned among the reimbursing parties, shall be settled by arbitration
conducted pursuant to the Code of Arbitration Procedure of the NASD in Orange
County, California (or as close geographically to Orange County, California as
is reasonably practical). Any such arbitration must be commenced by service of
a written demand for arbitration or a written notice of intention to arbitrate,
therein electing the arbitration tribunal. In the event the party demanding
arbitration does not make such designation of an arbitration tribunal in such
demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 7(a)(iii) and 7(b)
hereof and will not resolve the ultimate propriety or enforceability of the
obligation to indemnify for expenses which is created by the provisions of
Sections 9(a) and 9(b) hereof or the obligation to contribute to expenses which
is created by the provisions of Section 9(d) hereof.
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8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS.
The obligations of the several Underwriters to purchase and pay for the
Shares as provided herein shall be subject to the accuracy, as of the date
hereof and the Closing Date and any later date on which Option Shares are to be
purchased, as the case may be, of the representations and warranties of the
Company and the performance by the Company of its obligations hereunder and to
the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 2:00 P.M., California time, on the date of this Agreement, or such later
date as shall be consented to in writing by you; and no stop order suspending
the effectiveness thereof shall have been issued and no proceedings for that
purpose shall have been initiated or, to the knowledge of the Company or any
Underwriter, threatened by the Commission, and any request of the Commission for
additional information (to be included in the Registration Statement or the
Prospectus or otherwise) shall have been complied with to the satisfaction of
Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in connection
with this Agreement, the form of Registration Statement and the Prospectus, and
the registration, authorization, issuance, sale and delivery of the Shares,
shall have been reasonably satisfactory to Underwriters' Counsel, and such
counsel shall have been furnished with such documents and information as they
may reasonably have requested to enable them to pass upon the matters referred
to in this Section.
(c) You shall be satisfied that since the respective dates as of which
information is given in the Registration Statement and Prospectus, (i) there
shall not have been any change in the capital stock of the Company other than
pursuant to the exercise of outstanding options and warrants disclosed in the
Prospectus or any material change in the indebtedness of the Company, (ii)
except as set forth or contemplated by the Registration Statement or the
Prospectus, no material verbal or written agreement or other transaction shall
have been entered into by the Company, which is not in the ordinary course of
business, (iii) no loss or damage (whether or not insured) to the property of
the Company shall have been sustained which materially and adversely affects the
condition (financial or otherwise), business, results of operations or prospects
of the Company, (iv) no legal or governmental action, suit or proceeding
affecting the Company which is material to the Company or which affects or may
affect the transactions contemplated by this Agreement shall have been
instituted or threatened and (v) there shall not have been any material change
in the condition (financial or otherwise), business, management, results of
operations or prospects of the Company which makes it impractical or inadvisable
in the judgment of the Representative to proceed with public offering or
purchase the Common Shares as contemplated hereby.
(d) You shall have received on the Closing Date and on any later date on
which Option Shares are purchased, as the case may be, an opinion of Perkins
Coie LLP, counsel for the Company, dated the Closing Date or such later date on
which Option Shares are purchased,
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addressed to the Underwriters in form as set forth as Exhibit A hereto and
substance satisfactory to counsel for the Underwriters
Counsel rendering such opinion may rely as to questions of fact upon
representations or certificates of officers of the Company, and of government
officials, in which case its opinion is to state that they are so relying and
that they have no knowledge of any material misstatement or inaccuracy in any
such opinion, representation or certificate. Copies of any representation or
certificate so relied upon shall be delivered to you, as Representatives of the
Underwriters, and to Underwriters' Counsel.
(e) You shall have received on the Closing Date an opinion or opinions
of counsel for the Selling Shareholders, addressed to the Underwriters dated the
Closing Date in form as set forth as Exhibit B hereto and substance satisfactory
to counsel for the Underwriters.
(f) You shall have received on the Closing Date and on any later date
on which Option Shares are purchased, as the case may be, an opinion of local
counsel for each jurisdiction in which the Company owns a subsidiary (which
counsel are listed on Schedule C hereto), dated the Closing Date or such later
date on which Option Shares are purchased, addressed to the Underwriters in form
as set forth as Exhibit C hereto and substance satisfactory to counsel for the
Underwriters.
(g) You shall have received on the Closing Date and on any later date
on which Option Shares are purchased, as the case may be, an opinion of Summit
Law Group, P.L.L.C. in form and substance satisfactory to you, with respect to
the sufficiency of all such corporate proceedings and other legal matters
relating to this Agreement and the transactions contemplated hereby as you may
reasonably require, and the Company shall have furnished to such counsel such
documents as they may have requested for the purpose of enabling them to pass
upon such matters.
(h) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, a letter from
Ernst & Young LLP, addressed to the Company and the Underwriters, dated the
Closing Date or such later date on which Option Shares are purchased, as the
case may be, confirming that they are independent certified public accountants
with respect to the Company within the meaning of the Act and the applicable
published Rules and Regulations and based upon the procedures described in such
letters delivered to you concurrently with the execution of this Agreement
(herein called the "Original Letter"), but carried out to a date not more than
three (3) business days prior to the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, (i) confirming, to the
extent true, that the statements and conclusions set forth in the Original
Letter are accurate as of the Closing Date or such later date on which Option
Shares are to be purchased, as the case may be, and (ii) setting forth any
revisions and additions to the statements and conclusions set forth in the
Original Letter which are necessary to reflect any changes in the facts
described in the Original Letter since the date of such letter, or to reflect
the availability of more recent financial statements, data or information. The
letter shall not disclose any change in the condition (financial
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or otherwise), earnings, operations or business of the Company from that set
forth in the Registration Statement or Prospectus, which, in your sole judgment,
is material and adverse and that makes it, in your sole judgment, impracticable
or inadvisable to proceed with the public offering of the Shares as contemplated
by the Prospectus. The Original Letter from Ernst & Young LLP shall be addressed
to or for the use of the Underwriters in form and substance satisfactory to the
Underwriters and shall (i) represent, to the extent true, that they are
independent certified public accountants with respect to the Company within the
meaning of the Act and the applicable published Rules and Regulations; (ii) with
respect to the letter from Ernst & Young LLP, set forth its opinion with respect
to its examination of the balance sheets of the Company as of March 29, 1998,
December 31, 1997 and December 31, 1996 and related statements of operations,
shareholders' equity and cash flows for the each of the fiscal years in the
three-year period ended December 31, 1997; and (iii) address other matters
agreed upon by Ernst & Young LLP and you. In addition, you shall have received
from Ernst & Young LLP a letter addressed to the Company and made available to
you for the use of the Underwriters stating that its review of the Company's
system of internal accounting controls, to the extent they deemed necessary in
establishing the scope of its examination of the Company's financial statements
as of March 29, 1998 did not disclose any weaknesses in internal controls that
they considered to be material weaknesses.
(i) You shall have received on the Closing Date and on any later
date on which Option Shares are purchased, as the case may be, a certificate of
the Company, dated the Closing Date or such later date on which Option Shares
are to be purchased, as the case may be, signed by the President and the Chief
Financial Officer of the Company, to the effect that, and you shall be satisfied
that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the
Closing Date or any later date on which Option Shares are to be
purchased, as the case may be, and the Company has complied, in
all material aspects, with all the agreements and satisfied all
the conditions on its part to be performed or satisfied, in all
material respects, at or prior to the Closing Date or any later
date on which Option Shares are to be purchased, as the case may
be;
(ii) No stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose
have been instituted or, to their knowledge, are pending or
threatened under the Act;
(iii) When the Registration Statement became effective and at all times
subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or
supplements thereto, contained all material information required
to be included therein by the Act and the Rules and Regulations
or the Exchange Act and the applicable rules and regulations of
the Commission thereunder, as the case may be, and in all
material respects conformed to the requirements of the
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Act and the Rules and Regulations or the Exchange Act and the
applicable rules and regulations of the Commission thereunder, as
the case may be, the Registration Statement, and any amendment or
supplement thereto, did not and does not include any untrue
statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, the Prospectus, and any amendment or
supplement thereto, did not and does not include any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and,
since the effective date of the Registration Statement, there has
occurred no event required to be set forth in an amended or
supplemented Prospectus that has not been so set forth; and
(iv) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not
been (a) any material adverse change in the condition (financial
or otherwise), earnings, operations or business of the Company,
(b) any transaction that is material to the Company, (c) any
obligation, direct or contingent, incurred by the Company, that
is material to the Company, (d) any change in the capital stock
or outstanding indebtedness of the Company, (e) any dividend or
distribution of any kind declared, paid or made on the capital
stock of the Company, or (f) any loss or damage (whether or not
insured) to the property of the Company which has a material
adverse effect on the condition (financial or otherwise),
earnings, operations or business of the Company.
(j) The Company shall have obtained and delivered to you an agreement
from each officer, director and director-nominee of the Company, and each
beneficial owner of the Common Stock immediately after the offering contemplated
hereby, in writing prior to the date hereof that such person will not, during
the Lock-up Period, effect the Disposition of any Securities now owned or
hereafter acquired directly by such person or with respect to which such person
has or hereafter acquires the power of disposition, otherwise than (i) as a bona
fide gift or gifts, provided the donee or donees thereof agree in writing to be
bound by this restriction, (ii) through an intra-family transfer or transfers to
rusts for estate planning purposes or (iii) with the prior written consent of
the Representative. The foregoing restriction is expressly agreed to preclude
the holder of the Securities from engaging in any hedging or other transaction
which is designed to or reasonably expected to lead to or result in a
Disposition of Securities during the Lock-up Period, even if such Securities
would be disposed of by someone other than the such holder. Such prohibited
hedging or other transactions would include, without limitation, any short sale
(whether or not against the box) or any purchase, sale or grant of any right
(including, without limitation, any put or call option) with respect to any
Securities or with respect to any security (other than a broad-based market
basket or index) that includes, relates to or derives any significant part of
its value from Securities. Furthermore, such person will have also agreed and
consented to the entry
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of stop transfer instructions with the Company's transfer agent against the
transfer of the Securities held by such person except in compliance with this
restriction.
(k) The Company shall have furnished to you such further certificates
and documents as you shall reasonably request, including certificates of
officers of the Company as to the accuracy of the representations and warranties
of the Company, as to the performance by the Company of its obligations
hereunder and as to the other conditions concurrent and precedent to the
obligations of the Underwriters hereunder.
(l) The Representative's Warrant Agreement shall have been entered
into by the Company and you, and the Representative's Warrants shall have been
issued and sold to you pursuant thereto.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company will furnish you with such number of
conformed copies of such opinions, certificates, letters and documents as you
shall reasonably request.
9. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company and each of the Selling Shareholders, severally and
not jointly, agrees to indemnify and hold harmless each Underwriter against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject (including, without limitation, in its capacity
as an Underwriter or as a "qualified independent underwriter" within the meaning
of Schedule E of the Bylaws of the NASD), under the Act, the Exchange Act or
otherwise, specifically including, but not limited to, losses, claims, damages
or liabilities, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon (i) with respect to
the Company, any breach of any representation, warranty, agreement or covenant
of the Company herein contained, or any failure of the Company to perform its
obligations hereunder or under law, (ii) with respect to each of the Selling
Shareholders, arise out of or are based in whole or in part on any inaccuracy in
the representations and warranties of such Selling Shareholder contained herein
or any failure of such Selling Shareholder to perform its obligations hereunder
or under law, (iii) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading (but, with respect to
each of the Selling Shareholder only to the extent that such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished by such Selling
Shareholder, in its capacity as such, to the Company or the Underwriters,
directly or through such Selling Shareholders' representatives, specifically for
inclusion therein) and agrees to reimburse each Underwriter for any legal or
other expenses reasonably incurred by it in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
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that neither the Company nor any Selling Shareholder shall be liable in any
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such case to the extent that any such loss, claim, damage, liability or action
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in the Registration Statement, such
Preliminary Prospectus or the Prospectus, or any such amendment or supplement
thereto, in reliance upon, and in conformity with, written information relating
to any Underwriter furnished to the Company as described in Section 4 hereof,
and, provided further, that the indemnity agreement provided in this Section
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9(a) with respect to any Preliminary Prospectus shall not inure to the benefit
of any Underwriter from whom the person asserting any losses, claims, damages,
liabilities or actions based upon any untrue statement or alleged untrue
statement of material fact or omission or alleged omission to state therein a
material fact purchased Shares, if a copy of the Prospectus in which such untrue
statement or alleged untrue statement or omission or alleged omission was
corrected had not been sent or given to such person within the time required by
the Act and the Rules and Regulations, unless such failure is the result of
noncompliance by the Company with Section 6(d) hereof.
The indemnity agreement in this Section 9(a) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls any Underwriter within the meaning of the Act or the Exchange
Act. This indemnity agreement shall be in addition to any liabilities which the
Company may otherwise have.
(b) Each Underwriter, severally and not jointly, agrees to indemnify
and hold harmless the Company and the Selling Shareholders against any losses,
claims, damages or liabilities, joint or several, to which the Company may
become subject under the Act or otherwise, specifically including, but not
limited to, losses, claims, damages or liabilities, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written information
furnished to the Company as described in Section 4 hereof, and agrees to
reimburse the Company and the Selling Shareholders for any legal or other
expenses reasonably incurred by the Company in connection with investigating or
defending any such loss, claim, damage, liability or action.
The indemnity agreement in this Section 9(b) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each officer of
the Company who signed the Registration Statement and each director of the
Company and each person, if any, who controls the Company or any of the Selling
Shareholders within the meaning of the Act or the Exchange Act. This indemnity
agreement shall be in addition to any liabilities which each Underwriter may
otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
9 of notice of the commencement of any action, such indemnified party shall, if
a claim in respect
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thereof is to be made against any indemnifying party under this Section 9,
notify the indemnifying party in writing of the commencement thereof but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Section 9. In case any such action is brought against any indemnified party, and
it notified the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein and, to the extent that it shall
elect by written notice delivered to the indemnified party promptly after
receiving the aforesaid notice from such indemnified party, to assume the
defense thereof, with counsel reasonably satisfactory to such indemnified party;
provided, however, that if the defendants in any such action include both the
- -------- -------
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be legal defenses available to it
and/or other indemnified parties which are different from or additional to those
available to the indemnifying party which pose a conflict of interest for such
counsel, the indemnified party or parties shall have the right to select
separate counsel to assume such legal defenses and to otherwise participate in
the defense of such action on behalf of such indemnified party or parties. Upon
receipt of notice from the indemnifying party to such indemnified party of the
indemnifying party's election so to assume the defense of such action and
approval by the indemnified party of counsel, the indemnifying party will not be
liable to such indemnified party under this Section 9 for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof unless (i) the indemnified party shall have employed separate
counsel in accordance with the proviso to the next preceding sentence (it being
understood, however, that the indemnifying party shall not be liable for the
expenses of more than one separate counsel (together with appropriate local
counsel) approved by the indemnifying party representing all the indemnified
parties under Section 9(a) or 9(b) hereof who are parties to such action), (ii)
the indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of commencement of the action or (iii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the expense of
the indemnifying party. In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have approved the terms of such settlement; provided that such
--------
consent shall not be unreasonably withheld. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnification could have
been sought hereunder by such indemnified party, unless such settlement includes
an unconditional release of such indemnified party from all liability on claims
that are the subject matter of such indemnification.
(d) In order to provide for just and equitable contribution in any
action in which a claim for indemnification is made pursuant to this Section 9
but it is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 9 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that the Underwriters
severally and not jointly are responsible pro rata for the portion represented
by
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the percentage that the underwriting discount bears to the initial public
offering price, and the Company and the Selling Shareholders are responsible for
the remaining portion, provided, however, that (i) no Underwriter shall be
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required to contribute any amount in excess of the underwriting discount
applicable to the Shares purchased by such Underwriter and (ii) no person guilty
of a fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. The contribution agreement in this Section 9(d)
shall extend upon the same terms and conditions to, and shall inure to the
benefit of, each person, if any, who controls the Underwriters or the Company
within the meaning of the Act or the Exchange Act and each officer of the
Company who signed the Registration Statement and each director of the Company.
(e) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 9, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 9 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act. The parties are advised that federal or state public policy, as interpreted
by the courts in certain jurisdictions, may be contrary to certain of the
provisions of this Section 9, and the parties hereto hereby expressly waive and
relinquish any right or ability to assert such public policy as a defense to a
claim under this Section 9 and further agree not to attempt to assert any such
defense.
10. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS TO SURVIVE DELIVERY.
All representations, warranties, covenants and agreements of the Company
and the Underwriters herein or in certificates delivered pursuant hereto, and
the indemnity and contribution agreements contained in Sections 7 and 9 and
hereof shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any controlling person
within the meaning of the Act or the Exchange Act, or by or on behalf of the
Company or any of its officers, directors or controlling persons within the
meaning of the Act or the Exchange Act, and shall survive the delivery of the
Shares to the several Underwriters hereunder or termination of this Agreement.
11. SUBSTITUTION OF UNDERWRITERS.
If any Underwriter or Underwriters shall fail to take up and pay for the
number of Firm Shares agreed by such Underwriter or Underwriters to be purchased
hereunder upon tender of such Firm Shares in accordance with the terms hereof,
and if the aggregate number of Firm Shares which such defaulting Underwriter or
Underwriters so agreed but failed to purchase does not exceed 10% of the Firm
Shares, the remaining Underwriters shall be obligated, severally in proportion
to their respective commitments hereunder, to take up and pay for the Firm
Shares of such defaulting Underwriter or Underwriters.
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If any Underwriter or Underwriters so defaults and the aggregate number of
Firm Shares which such defaulting Underwriter or Underwriters agreed but failed
to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for twenty-
four (24) hours to allow the several Underwriters the privilege of substituting
within twenty-four (24) hours (including non-business hours) another underwriter
or underwriters (which may include any nondefaulting Underwriter) satisfactory
to the Company. If no such underwriter or underwriters shall have been
substituted as aforesaid by such postponed Closing Date, the Closing Date may,
at the option of the Company, be postponed for a further twenty-four (24) hours,
if necessary, to allow the Company the privilege of finding another underwriter
or underwriters, satisfactory to you, to purchase the Firm Shares which the
defaulting Underwriter or Underwriters so agreed but failed to purchase. If it
shall be arranged for the remaining Underwriters or substituted underwriter or
underwriters to take up the Firm Shares of the defaulting Underwriter or
Underwriters as provided in this Section 11, (i) the Company shall have the
right to postpone the time of delivery for a period of not more than seven (7)
full business days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement or supplements to the Prospectus which
may thereby be made necessary, and (ii) the respective number of Firm Shares to
be purchased by the remaining Underwriters and substituted underwriter or
underwriters shall be taken as the basis of their underwriting obligation. If
the remaining Underwriters shall not take up and pay for all such Firm Shares so
agreed to be purchased by the defaulting Underwriter or Underwriters or
substitute another underwriter or underwriters as aforesaid and the Company
shall not find or shall not elect to seek another underwriter or underwriters
for such Firm Shares as aforesaid, then this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the preceding
paragraph of this Section 11, the Company shall not be liable to any Underwriter
(except as provided in Sections 7 and 9 hereof) nor shall any Underwriter (other
than an Underwriter who shall have failed, otherwise than for some reason
permitted under this Agreement, to purchase the number of Firm Shares agreed by
such Underwriter to be purchased hereunder, which Underwriter shall remain
liable to the Company and the other Underwriters for damages, if any, resulting
from such default) be liable to the Company (except to the extent provided in
Sections 7 and 9 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 11.
12. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective at the earlier of (i) 6:30
A.M., California time, on the second full business day following the effective
date of the
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Registration Statement, or (ii) the time of the initial public offering of any
of the Shares by the Underwriters after the Registration Statement becomes
effective. The time of the initial public offering shall mean the time of the
release by you, for publication, of the first newspaper advertisement relating
to the Shares, or the time at which the Shares are first generally offered by
the Underwriters to the public by letter, telephone, telegram or telecopy,
whichever shall first occur. By giving notice as set forth in Section 13 before
the time this Agreement becomes effective, you, as Representative of the several
Underwriters, or the Company, may prevent this Agreement from becoming effective
without liability of any party to any other party, except as provided in
Sections 6(j), 7 and 9 hereof.
(b) You, as Representative of the several Underwriters, shall have the
right to terminate this Agreement by giving notice as hereinafter specified at
any time at or prior to the Closing Date or on or prior to any later date on
which Option Shares are purchased, as the case may be, (i) if the Company shall
have failed, refused or been unable to perform any agreement on its part to be
performed, or (ii) because any other condition of the Underwriters' obligations
hereunder required to be fulfilled is not fulfilled, including, without
limitation, any change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company from that set forth in
the Registration Statement or Prospectus, which, in your sole judgment, is
material and adverse, or (iii) if additional material governmental restrictions,
not in force and effect on the date hereof, shall have been imposed upon trading
in securities generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange or on the American Stock Exchange or
in the over the counter market by the NASD, or trading in securities generally
shall have been suspended on either such exchange or in the over the counter
market by the NASD, or if a banking moratorium shall have been declared by
federal, New York or California authorities, or (iv) if the Company shall have
sustained a loss by strike, fire, flood, earthquake, accident or other calamity
of such character as to interfere materially with the conduct of the business
and operations of the Company regardless of whether or not such loss shall have
been insured, or (v) if there shall have been a material adverse change in the
general political or economic conditions or financial markets as in your
reasonable judgment makes it inadvisable or impracticable to proceed with the
offering, sale and delivery of the Shares, or (vi) if there shall have been an
outbreak or escalation of hostilities or of any other insurrection or armed
conflict or the declaration by the United States of a national emergency which,
in the reasonable opinion of the Representatives, makes it impracticable or
inadvisable to proceed with the public offering of the Shares as contemplated by
the Prospectus. Any termination pursuant to any of subparagraphs (ii) through
(vi) above shall be without liability of any party to any other party except as
provided in Sections 7 and 9 hereof. In the event of termination pursuant to
subparagraph (i) above, the Company shall also remain obligated to pay costs and
expenses pursuant to Sections 6(j), 7 and 9 hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 12, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.
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13. NOTICES.
All notices or communications hereunder, except as herein otherwise
specifically provided, shall be in writing and if sent to you shall be mailed,
delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by
letter) to you c/o Cruttenden Roth Incorporated, 18301 Von Karman, Suite 700,
Irvine, California 92715, telecopier number (714) 852-9603, Attention: Jay
Sherwood; if sent to the Company, such notice shall be mailed, delivered,
telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to
12410 S.E. 32nd Street, Bellevue, Washington 98005, Attention: Michael J. Rose.
14. PARTIES.
This Agreement shall inure to the benefit of and be binding upon the
several Underwriters, the Company and the Selling Shareholders and their
respective executors, administrators, successors and assigns. Nothing expressed
or mentioned in this Agreement is intended or shall be construed to give any
person or corporation, other than the parties hereto and their respective
executors, administrators, successors and assigns, and their controlling persons
within the meaning of the Act or the Exchange Act, officers and directors
referred to in Section 9 hereof, any legal or equitable right, remedy or claim
in respect of this Agreement or any provisions herein contained, this Agreement
and all conditions and provisions hereof being intended to be and being for the
sole and exclusive benefit of the parties hereto and their respective executors,
administrators, successors and assigns and said controlling persons and said
officers and directors, and for the benefit of no other person or corporation.
No purchaser of any of the Shares from any Underwriter shall be construed a
successor or assign by reason merely of such purchase. The Agreement
constitutes the entire agreement and understanding of the parties with respect
to the subject matter hereof.
In all dealings with the Company under this Agreement, you shall act on
behalf of each of the several Underwriters, and the Company shall be entitled to
act and rely upon any statement, request, notice or agreement made or given by
you on behalf of each of the several Underwriters.
15. APPLICABLE LAW.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of California.
16. COUNTERPARTS.
This Agreement may be signed in several counterparts, each of which will
constitute an original.
If the foregoing correctly sets forth the understanding among the Company
and the several Underwriters, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
the Company and the several Underwriters.
Very truly yours,
-29-
<PAGE>
COST-U-LESS, INC.
By:________________________________
Name:__________________________
Title:_________________________
SELLING SHAREHOLDERS
By:________________________________
Attorney-in-fact
Accepted as of the date first above written:
CRUTTENDEN ROTH INCORPORATED
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.
By: CRUTTENDEN ROTH INCORPORATED
By:__________________________________
Name:______________________________
Title:_____________________________
-30-
<PAGE>
SCHEDULE A
NUMBER OF FIRM SHARES TO BE
UNDERWRITERS PURCHASED
Cruttenden Roth Incorporated
Total
-31-
<PAGE>
SCHEDULE B
SELLING SHAREHOLDERS NUMBER OF OPTION SHARES
-32-
<PAGE>
SCHEDULE C
LIST OF LOCAL COUNSEL
United States Virgin Islands:
- ----------------------------
Henry Smock or Anna Paiewonsky of
Henry M. Smock, P.C. USVI
Guam:
- ----
William C. William or Mary P. Quinata of
Carlsmith Ball Wichman Case & Ichiki.
American Samoa:
- --------------
Roy Hall of
Hall & Associates
Curacao, Netherlands Antilles:
- -----------------------------
Deanna Chemaley of
Decro Trust N.V.
Fiji and Vanuatu:
- ----------------
Chen Young of
Young & Associates
New Zealand:
- -----------
[Insert Information]
Nevada:
- ------
[Insert Information]
-33-
<PAGE>
EXHIBIT 1.2
WARRANT AGREEMENT
This Warrant Agreement (this "Agreement") dated as of _______________, 1998
is by and between Cost-U-Less, Inc., a Washington corporation (the "Company"),
and Cruttenden Roth Incorporated (the "Representative").
WHEREAS, the Representative has agreed pursuant to an Underwriting
Agreement dated ________________, 1998 (the "Underwriting Agreement") to act as
the representative of the several underwriters in connection with the proposed
public offering (the "Public Offering") by the Company and certain of its
shareholders of [1,963,222] shares of Common Stock, including up to [240,000]
additional shares of Common Stock to cover over-allotments, if any; and
WHEREAS, pursuant to Section 1 of the Underwriting Agreement, the Company
has agreed to issue warrants (the "Warrants") to the Representative to purchase,
at a price of $0.001 per warrant, up to an aggregate of [160,000] shares
(hereinafter, and as the number thereof may be adjusted hereto, the "Warrant
Shares") of the Company's Common Stock, $0.001 par value per share (the "Common
Stock"), each Warrant initially entitling the holder thereof to purchase one
share of Common Stock.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein and in the Underwriting Agreement set forth and for other good and
valuable consideration, the parties hereto agree as follows:
1. ISSUANCE OF WARRANTS: FORM OF WARRANT. The Company will issue and
deliver to the Representative, Warrants to purchase [160,000] Warrant Shares on
the Closing Date referred to in the Underwriting Agreement, in consideration
for, and as part of the Representative's compensation in connection with, its
acting as the representative of the several underwriters for the Public Offering
pursuant to the Underwriting Agreement. The text of the Warrants and of the
form of election to purchase Warrants Shares shall be substantially as set forth
in Exhibit A attached hereto. The Warrants shall be executed on behalf of the
---------
Company by the manual or facsimile signature of the present or any future
Chairman of the Board, President or Vice President of the Company, under its
corporate seal, affixed or in facsimile, attested by the manual or facsimile
signature of the Secretary or an Assistant Secretary of the Company.
Warrants bearing the manual or facsimile signatures of individuals who were
at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any one of them shall have ceased to
hold such offices prior to the delivery of such Warrants or did not hold such
offices on the date of this Agreement. Warrants shall be dated as of the date
of execution thereof by the Company either upon initial issuance or upon
division, exchange, substitution or transfer.
2. REGISTRATION. The Warrants shall be numbered and registered on the
books of the Company (the "Warrant Register") as they are issued. The Company
shall be entitled to treat the registered holder of any Warrant on the Warrant
Register (the "Holder") as the owner in fact
<PAGE>
therefor for all purposes and shall not be bound to recognize any equitable or
other claim to or interest in such Warrant on the part of any other person, and
shall not be liable for any registration or transfer of Warrants which are
registered or are to be registered in the name of a fiduciary or the nominee of
a fiduciary unless made with the actual knowledge that a fiduciary or nominee is
committing a breach of trust in requesting such registration or transfer, or
with the knowledge of such facts that its participation therein amounts to bad
faith. The Warrants shall be registered initially in the name of "Cruttenden
Roth Incorporated" or in such other denominations as the Representative may
request in writing to the Company.
3. EXCHANGE OF WARRANT CERTIFICATES. Subject to any restriction upon
transfer set forth in this Agreement, each Warrant certificate may be exchanged
for another certificate or certificates entitling the Holder thereof to purchase
a like aggregate number of Warrant Shares as the certificate or certificates
surrendered then entitled such Holder to purchase. Any Holder desiring to
exchange a Warrant certificate or certificates shall make such request in
writing delivered to the Company, and shall surrender, properly endorsed, the
certificate or certificates to be so exchanged. Thereupon, the Company shall
execute and deliver to the person entitled thereto a new Warrant certificate or
certificates, as the case may be, as so requested.
4. TRANSFER OF WARRANTS. Until [one year after the effective date], the
Warrants will not be sold, transferred, assigned or hypothecated except to (i)
other brokers or dealers; (ii) one or more bona fide officers and/or partners of
the Representative; (iii) a successor to the transferring Holder in merger or
consolidation; (iv) a purchaser of all or substantially all of the transferring
Holder's assets; or (v) any person receiving the Warrants from one or more of
the persons listed in this Section 4 at such person's or persons' death pursuant
to will, trust or the laws of intestate succession, each of whom agrees in
writing to be bound by the terms hereof. The Warrants shall be transferable
only on the Warrant Register upon delivery thereof duly endorsed by the Holder
or by the Holder's duly authorized attorney or representative, or accompanied by
proper evidence of succession, assignment or authority to transfer. In all
cases of transfer by an attorney, the original power of attorney, duly approved,
or an official copy thereof, duly certified, shall be deposited with the
Company. In case of transfer by executors, administrators, guardians or other
legal representatives, duly authenticated evidence of their authority shall be
produced and may be required to be deposited with the Company in its discretion.
Upon any registration of transfer, the Company shall deliver a new Warrant or
Warrants to the person entitled thereto.
5. TERM OF WARRANTS; EXERCISE OF WARRANTS.
5.1 Each Warrant entitles the registered owner thereof to purchase
one share of Common Stock at any time from 10:00 a.m., Pacific time, on [one
year after the effective date] (the "Initiation Date") until 6:00 p.m., Pacific
time, on [five years after the effective date] (the "Expiration Date") at a
purchase price of $ [120% of the initial public offering price] subject to
adjustment (the "Warrant Price"). Notwithstanding the foregoing, if at 6:00
p.m., Pacific time on the Expiration Date, any Holder or Holders of the Warrants
have not exercised their Warrants and the Closing Price (as defined below) for
the Common Stock on the Expiration Date is greater than the Warrant Price, then
each such unexercised Warrant
-2-
<PAGE>
shall be automatically converted into a number of shares of Common Stock of the
Company equal to: (A) the number of shares of Common Stock then issuable upon
exercise of a Warrant multiplied by (B) a fraction (1) the numerator of which is
the difference between the Closing Price for the Common Stock on the Expiration
Date and the Warrant Price and (2) the denominator of which is the Closing Price
for the Common Stock on the Expiration Date.
5.2 The Warrant Price and the number of Warrant Shares issuable upon
exercise of each Warrant are subject to adjustment upon the occurrence of
certain events, pursuant to the provisions of Section 11 of this Agreement.
Subject to the provisions of this Agreement, each Holder of Warrants shall have
the right, which may be exercised as expressed in the Warrant Certificate, to
purchase from the Company (and the Company shall issue and sell to such Holder
of Warrants) the number of fully paid and nonassessable Warrant Shares specified
in such Warrant Certificate, upon surrender to the Company, or its duly
authorized agent, of such Warrant Certificate, with the form of election to
purchase on the reverse thereof duly filled in and signed, and upon payment to
the Company of the Warrant Price, as adjusted in accordance with the provisions
of Section 11 of this Agreement, for the number of Warrant Shares in respect of
which such Warrants are then exercised. Payment of such Warrant Price shall be
made in cash, by wire transfer or by certified or official bank check, or any
combination thereof. No adjustment shall be made for any dividends on any
Warrant Shares of stock issuable upon exercise of a Warrant.
5.3 Upon such surrender of Warrants, and payment of the Warrant Price
as aforesaid, the Company shall issue and cause to be delivered with all
reasonable dispatch to or upon the written order of the Holder of such Warrants
and in such name or names as such registered Holder may designate, a certificate
or certificates for the number of full Warrant Shares so purchased upon the
exercise of such Warrants, together with cash, as provided in Section 12 of this
Agreement, in respect of any fraction of a share otherwise issuable upon such
surrender and, if the number of Warrants represented by a Warrant certificate
shall not be exercised in full, a new Warrant certificate, executed by the
Company for the balance of the number of whole Warrant Shares.
5.4 If permitted by applicable law, such certificate or certificates
shall be deemed to have been issued and any person so designated to be named
therein shall be deemed to have become a holder of record of such shares as of
the date of the surrender of such Warrants and payment of the Warrant Price as
aforesaid. The rights of purchase represented by the Warrants shall be
exercisable, at the election of the registered Holders thereof, either as an
entirety or from time to time for only part of the shares specified therein.
6. COMPLIANCE WITH GOVERNMENT REGULATIONS. The Company covenants that if
any shares of Common Stock required to be reserved for purposes of exercise or
conversion of Warrants require, under any Federal or state law or applicable
governing rule or regulation of any national securities exchange, registration
with or approval of any governmental authority, or
listing on any such national securities exchange before such shares may be
issued upon exercise, the Company will in good faith and as expeditiously as
possible endeavor to cause such shares to be
-3-
<PAGE>
duly registered, approved or listed on the relevant national securities
exchange, as the case may be; provided, however, that (except to the extent
-------- -------
legally permissible with respect to Warrant of which the Representative is the
Holder) in no event shall such shares of Common Stock be issued, and the Company
is hereby authorized to suspend the exercise of all Warrants, for the period
during which such registration, approval or listing is required but not in
effect.
7. PAYMENT OF TAXES. The Company will pay all documentary stamp taxes, if
any, attributable to the initial issuance of the Warrants or the securities
comprising the Warrant Shares upon the exercise of Warrants; provided, however,
-------- -------
that the Company shall not be required to pay any tax or taxes which may be
payable in respect of any transfer involved in the issue or delivery of any
warrants or certificate for Warrant Shares in a name other than that of the
registered Holder of such warrants.
8. MUTILATED OR MISSING WARRANTS. In case any of the Warrants shall be
mutilated, lost, stolen or destroyed, the Company shall issue and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant, or
in lieu of and substitution for the Warrant lost, stolen or destroyed, a new
Warrant of like tenor and representing an equivalent right or interest; but only
upon receipt of evidence reasonably satisfactory to the Company of such loss,
theft or destruction of such Warrant and, if requested, indemnity or bond also
reasonably satisfactory to the Company. An applicant for such substitute
Warrants shall also comply with such other reasonable regulations and pay such
other reasonable charges as the Company may prescribe.
9. RESERVATION OF WARRANT SHARES. There has been reserved out of the
authorized and unissued shares of Common Stock a number of shares sufficient to
provide for the exercise of the Warrants, and the transfer agent for the Common
Stock ("Transfer Agent") and every subsequent Transfer Agent for any shares of
the Company's capital stock issuable upon the exercise of any of the rights of
purchase aforesaid are hereby irrevocably authorized and directed at all times
until the Expiration Date to reserve such number of authorized and unissued
shares as shall be required for such purpose. The Company will keep a copy of
this Agreement on file with the Transfer Agent and with every subsequent
Transfer Agent for any shares of the Company's capital stock issuable upon the
exercise of the rights of purchase represented by the Warrants. The Company
will supply such Transfer Agent with duly executed stock certificates for such
purposes and will itself provide or otherwise make available any cash which may
be issuable as provided in Section 12 of this Agreement. The Company will
furnish to such Transfer Agent a copy of all notices of adjustments, and
certificates related thereto, transmitted to each Holder pursuant to Section
11.2 of this Agreement. All Warrants surrendered in the exercise of the rights
thereby evidenced shall be canceled.
10. OBTAINING STOCK EXCHANGE LISTINGS. The Company will from time to time
take all action which may be necessary so that the Warrant Shares, immediately
upon their issuance upon the exercise of Warrants, will be listed on the
securities exchanges and stock markets within the United States of America, if
any, on which other shares of Common Stock are then listed.
-4-
<PAGE>
11. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF WARRANT SHARES. The number
and kind of securities purchasable upon the exercise of each Warrant and the
Warrant Price shall be subject to adjustment from time to time upon the
happening of certain events as hereinafter defined. For purposes of this Section
11, "Common Stock" means shares now or hereafter authorized of any class of
common stock of the Company and any other stock of the Company, however
designated, that has the right (subject to any prior rights of any class or
series of preferred stock) to participate in any distribution of the assets or
earnings of the Company without limit as to per share amount.
11.1 MECHANICAL ADJUSTMENTS. The number of Warrant Shares
purchasable upon the exercise of each Warrant and the Warrant Price shall be
subject to adjustment as follows:
(a) In case the Company shall (i) pay a dividend in shares of
Common Stock, (ii) subdivide its outstanding shares of Common Stock, (iii)
combine its outstanding shares of Common Stock or (iv) issue by reclassification
of its shares of Common Stock other securities of the Company (including any
such reclassification in connection with a consolidation or merger in which the
Company is the surviving corporation), the number of Warrant Shares purchasable
upon exercise of each warrant immediately prior thereto shall be adjusted so
that the Holder of each Warrant shall be entitled to receive the kind and number
of Warrant Shares or other securities of the Company which he would have owned
or would have been entitled to receive after the happening of any of the events
described above, had such Warrants been exercised immediately prior to the
happening of such event or any record date with respect thereto. An adjustment
made pursuant to this paragraph (a) shall become effective immediately after the
effective date of such event retroactive to the record date, if any, for such
event. Such adjustment shall be made successively whenever any event listed
above shall occur.
(b) In case the Company shall distribute to all holders of its
shares of Common Stock (including any such distribution made in connection with
a consolidation or merger in which the Company is the surviving corporation)
evidences of its indebtedness or assets (excluding cash dividends or
distributions payable out of consolidated earnings or earned surplus and
dividends or distribution referred to in paragraph (a) above or in the paragraph
immediately following this paragraph) or rights, options or warrants, or
convertible or exchangeable securities containing the right to subscribe for or
purchase shares of Common Stock, then in each case the number of Warrant Shares
thereafter purchasable upon the exercise of each Warrant shall be determined by
multiplying the number of Warrant Shares theretofore purchasable upon the
exercise of each Warrant by a fraction, the numerator of which shall be the then
current market price per share of Common Stock (as defined in paragraph (c)
below) on the date of such distribution, and the denominator of which shall be
the then current market price per share of Common Stock, less the then fair
value (as reasonably determined by the Board of Directors of the Company) of the
portion of the assets or evidences of indebtedness so distributed or of such
subscription rights, options or warrants, or of such convertible or exchangeable
securities applicable to one share of Common Stock.
-5-
<PAGE>
Such adjustment shall be made whenever any such distribution is made and shall
become effective on the date of distribution retroactive to the record date for
the determination of stockholders entitled to receive such distribution.
In the event of a distribution by the Company to all holders of its shares
of Common Stock of a subsidiary or securities convertible into or exercisable
for such stock, then in lieu of an adjustment in the number of Warrant Shares
purchasable upon the exercise of each Warrant, the Holder of each Warrant, upon
the exercise thereof at any time after such distribution, shall be entitled to
receive from the Company, such subsidiary or both, as the Company shall
determine, the stock or other securities to which such Holder would have been
entitled if such Holder had exercised such Warrant immediately prior thereto,
all subject to further adjustment as provided in this Section 11.1; provided,
--------
however, that no adjustment in respect of dividends or interest on such stock or
- -------
other securities shall be made during the term of a Warrant or upon the exercise
of a Warrant.
(c) For the purpose of any computation under paragraph (b) of this
Section, the current market price per share of Common Stock at any date shall be
the average of the daily Closing Prices for 20 consecutive trading days
commencing 30 trading days before the date of such computation. The selling
price for each day (the "Closing Price") shall be the last such reported sales
price regular way or, in case no such reported sale takes place on such day, the
average of the closing bid and asked prices regular way for such day, in each on
the principal national securities exchange on which the shares of Common Stock
are listed or admitted to trading or, if not listed or admitted to trading, the
average of the closing bid and asked prices of the Common Stock in the over-the
counter market as reported by the Nasdaq National Market System or Nasdaq
SmallCap System or if not approved for quotation on the Nasdaq National Market
System or Nasdaq SmallCap System, the average of the closing bid and asked
prices as furnished by two members of the National Association of Securities
Dealers, Inc. selected from time to time by the Company for that purpose.
(d) No adjustment in the number of Warrant Shares purchasable
hereunder shall be required unless such adjustment would require an increase or
decrease of at least one percent (1%) in the number of Warrant Shares
purchasable upon the exercise of each Warrant; provided, however, that any
-------- -------
adjustments which by reason of this paragraph (d) are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations shall be made to the nearest one-thousandth of a share.
(e) Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant is adjusted, as herein provided, the Warrant Price
payable upon exercise of each Warrant shall be adjusted by multiplying such
Warrant Price immediately prior to such adjustment by a fraction, the numerator
of which shall be the number of Warrant Shares purchasable upon the exercise of
each Warrant immediately prior to such adjustment, and the denominator of which
shall be the number of Warrant Shares purchasable immediately thereafter.
-6-
<PAGE>
(f) No adjustment in the number of Warrant Shares purchasable
upon the exercise of each Warrant need be made under paragraph (b) if the
Company issues or distributes to each Holder of Warrants the rights, options,
warrants or convertible or exchangeable securities, or evidences of indebtedness
or assets referred to in those paragraphs which each Holder of Warrants would
have been entitled to receive had the Warrants been exercised prior to the
happening of such event or the record date with respect thereto. No adjustment
need be made for a change in the par value of the Warrant Shares.
(g) In the event that at any time, as a result of an adjustment
made pursuant to paragraph (a) above, the Holders shall become entitled to
purchase any securities of the Company other than shares of Common Stock,
thereafter the number of such other shares so purchasable upon exercise of each
Warrant and the Warrant Price of such shares shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Warrant Shares contained in this Section 11, and
the other provisions of this Agreement, with respect to the Warrant and Warrant
Shares, shall apply as nearly equivalent as practicable on like terms to such
other securities.
(h) Upon the expiration of any rights, options, warrants or
conversion or exchange privileges for which an adjustment was made hereunder, if
any thereof shall not have been exercised, the Warrant Price and the number of
shares of Common Stock purchasable upon the exercise of each Warrant shall, upon
such expiration, be readjusted and shall thereafter be such as it would have
been had it been originally adjusted (or had the original adjustment not been
required, as the case may be) as if (i) the only shares of Common Stock so
issued were the shares of Common Stock, if any, actually issued or sold upon the
exercise of such rights, options, warrants or conversion or exchange rights and
(ii) such shares of Common Stock, if any, were issued or sold for the
consideration actually received by the Company upon such exercise plus the
aggregate consideration, if any, actually received by the Company for the
issuance, sale or grant of all such rights, options, warrants or conversion or
exchange rights whether or not exercised; provided, however, that no such
-------- -------
readjustment shall have the effect of increasing the Warrant Price or decreasing
the number of shares of Common Stock purchasable upon the exercise of each
Warrant by an amount in excess of the amount of the adjustment initially made in
respect to the issuance, sale or grant of such rights, options, warrants or
conversion or exchange rights.
11.2 NOTICE OF ADJUSTMENT. Whenever the number of Warrant Shares
purchasable upon the exercise of each Warrant or the Warrant Price of such
Warrant Shares is adjusted, as herein provided, the Company shall promptly mail
by first class, postage prepaid, to each Holder notice of such adjustment or
adjustments and a certificate of a firm of independent public accountants
selected by the Board of Directors of the Company (who may be the regular
accountants employed by the Company) setting forth the number of Warrant Shares
purchasable upon the exercise of each Warrant and the Warrant Price of such
Warrant Shares after such adjustment, setting forth a brief statement of the
facts requiring such adjustment and setting forth the computation by which such
adjustment was made.
-7-
<PAGE>
11.3 NO ADJUSTMENT FOR DIVIDENDS. Except as provided in Section
11.1, no adjustments in respect of any dividends shall be made during the term
of a Warrant or upon the exercise of a Warrant.
11.4 PRESERVATION OF PURCHASE RIGHTS UPON MERGER, CONSOLIDATION ETC.
In case of any consolidation of the Company with or merger of the Company into
another corporation or in case of any sale, transfer or lease to another
corporation of all or substantially all the property of the Company, the Company
or such successor or purchasing corporation, as the case may be, shall execute
with each Holder an agreement that each Holder shall have the right thereafter
upon payment of the Warrant Price in effect immediately prior to such action to
purchase upon exercise of each Warrant the kind and amount of shares and other
securities, cash and property which he would have owned or would have been
entitled to receive after the happening of such consolidation, merger, sale,
transfer or lease had such Warrant been exercised immediately prior to such
action; provided, however, that no adjustment in respect of dividends, interest
-------- -------
or other income on or from such shares or other securities, cash and property
shall be made during the term of a Warrant or upon the exercise of a Warrant.
Such agreement shall provide for adjustments, which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Section
11. The provisions of this Section 11.4 shall similarly apply to successive
consolidations, mergers, sales transfer or leases.
11.5 STATEMENTS ON WARRANTS. Irrespective of any adjustments in the
Warrant Price or the number or kind of shares purchasable upon the exercise of
the Warrants, Warrants theretofore or thereafter issued may continue to express
the same price and number and kind of shares as are stated in the Warrants
initially issuable pursuant to this Agreement.
11.6 OPTIONAL CONVERSION; NET ISSUANCE PROVISIONS.
(a) In addition to and without limiting the rights of the
Holders of the Warrants under the terms of this Agreement and the Warrants, the
holder of the Warrants shall have the right (the "Conversion Right") to convert
the Warrants or any portion thereof into shares of Common Stock as provided in
this Section 11.6 at any time or from time to time after the first anniversary
of the date hereof and prior to its expiration. Upon exercise of the Conversion
Right with respect to a particular number of shares subject to the Warrants (the
"Converted Warrant Shares"), the Company shall deliver to the Holder of the
Warrants, without payment by the Holder of any exercise price or any cash or
other consideration, the number of shares of Common Stock equal to the quotient
obtained by dividing the Net Value (as hereinafter defined) of the Converted
Warrant Shares by the fair market value (as defined in paragraph (c) below) of a
single share of Common Stock, determined in each case as of the close of
business on the Conversion Date (as hereinafter defined). The "Net Value" of the
Converted Warrant Shares shall be determined by subtraction of the aggregate
warrant purchase price of the Converted Warrant Shares (which aggregate warrant
purchase price includes the consideration actually received by the Company upon
such exercise plus the aggregate consideration, if any, actually received by the
Company for the issuance of the
-8-
<PAGE>
Warrants) from the aggregate fair market value of the Converted Warrant Shares.
No fractional shares shall be issuable upon exercise of the Conversion Right,
and if the number of shares to be issued in accordance with the foregoing
formula is other than a whole number, the Company shall pay to the Holder of the
Warrants an amount in cash equal to the fair market value of the resulting
fractional share.
(b) The Conversion Right may be exercised by the Holder of the
Warrants by the surrender of such Warrants at the principal office of the
Company together with a written statement specifying that the holder thereby
intends to exercise the Conversion Right and indicating the number of shares
subject to the Warrants which are being surrendered (referred to in paragraph
(a) above as the Converted Warrant Shares) in exercise of the Conversion Right.
Such conversion shall be effective upon receipt by the Company of the Warrants
together with the aforesaid written statement, or on such later date as is
specified therein (the "Conversion Date"), not later than the expiration date of
the Warrants. Certificates for the shares of Common Stock issuable upon
exercise of the Conversion Right together with a check in payment of any
fractional share and, in the case of a partial exercise, new warrants evidencing
the shares remaining subject to the Warrants, shall be issued as of the
Conversion Date and shall be delivered to the holder of the Warrants within 7
days following the Conversion Date.
(c) For purposes of this paragraph 11.6, the "fair market
value" of a share of Common Stock as of a particular date shall be its "current
market price," calculated as described in paragraph 11.1(c) hereof.
12. FRACTIONAL INTERESTS. The Company shall not be required to issue
fractional Warrant Shares on the exercise of Warrants. If more than one Warrant
shall be presented for exercise in full at the sale time by the same holder, the
number of full Warrant Shares which shall be issuable upon the exercise thereon
shall be computed on the basis of the aggregate number of Warrant Shares
purchasable on exercise of the Warrants so presented. If any fraction of a
Warrant Share would, except for the provisions of this Section 12 be issuable on
the exercise of any Warrant (or specified portion thereof), the Company shall
pay an amount in cash equal to the closing price for one share of the Common
Stock, as defined in Section 11.1(c), on the trading day immediately preceding
the date the Warrant is presented for exercise, multiplied by such faction.
13. REGISTRATION UNDER THE SECURITIES ACT OF 1933. The Representative
represents and warrants to the Company that it will not dispose of the Warrants
or the Warrant Shares except pursuant to (i) an effective registration statement
under the Securities Act of 1933, as amended (the "Act"), including a post-
effective amendment to the Registration Statement, (ii) Rule 144 under the Act
(or any similar rule under the Act relating to the disposition of securities),
or (iii) an opinion of counsel, reasonably satisfactory to counsel of the
Company, that an exemption from such registration is available.
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14. CERTIFICATES TO BEAR LEGENDS. The Warrant, the Warrant Shares or other
securities issued upon exercise of the Warrant shall be subject to a stop-
transfer order and the certificate or certificates therefore shall bear the
following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW.
SAID SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT.
15. REGISTRATION RIGHTS.
15.1 Demand Registration Rights. The Company covenants and agrees
--------------------------
with the Representative and any subsequent Holders of the Warrants and/or
Warrant Shares that, on one occasion, within 30 days after receipt of a written
request from Holders of a majority interest of the aggregate of Warrants and/or
Warrant Shares issued pursuant to this Agreement that such Holders of the
Warrants and/or Warrant Shares desire and intend to transfer the Warrants and/or
Warrant Shares under such circumstances that a public offering, within the
meaning of the Act, will be involved, the Company shall, on that one occasion,
file a registration statement (and use its best efforts to cause such
registration statement to become effective under the Act) at the Company's
expense (including reasonable expenses incurred in connection with Blue Sky
qualifications) with respect to the offering and sale or other disposition of
the Warrant Shares (the "Offered Warrant Shares"); provided, however, that the
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Company shall have no obligation to comply with the foregoing provisions of this
Section 15.1 if in the opinion of counsel to the Company reasonably acceptable
to the Holder or Holders, from whom such written requests have been received,
registration under the Act is not required for the transfer of the Offered
Warrant Shares in the manner proposed by such person or persons or that a post-
effective amendment to an existing registration statement would be legally
sufficient for such transfer (in which latter event the Company shall promptly
file such post-effective amendment (and use its best efforts to cause such
amendment to become effective under the Act)). Notwithstanding the foregoing,
the Company shall not be obligated to file a registration statement with respect
to the Offered Warrant Shares on more than one occasion.
The Company may defer the preparation and filing of a registration
statement for up to 90 days after the request for registration is made if the
Board of Directors determines in good faith that such registration or post-
effective amendment would materially adversely affect or otherwise materially
interfere with a proposed or pending transaction by the Company, including
without limitation a material financing or a corporate reorganization, or during
any period of time in which the Company is in possession of material inside
information concerning the Company or its securities, which information the
Company determines in good faith is not ripe for disclosure.
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The Company shall not honor any request to register Warrant Shares
pursuant to this Section 15.1 received later than five (5) years from the
effective date of the Company's Registration Statement on Form S-1 (File No.
________) (the "Effective Date"). The Company shall not be required (i) to
maintain the effectiveness of the registration statement beyond the earlier to
occur of 120 days after the effective date of the registration statement or the
date on which all of the Offered Warrant Shares have been sold (the "Termination
Date" or (ii) to cause any registration statement with respect to the Warrant
Shares to become effective prior to the Initiation Date. All expenses of
registration pursuant to this Section 15.1 shall be borne by the Company
(excluding underwriting discounts and commissions on Warrant Shares not sold by
the Company).
The Company shall be obligated pursuant to this Section 15.1 to
include in the registration statement Warrant Shares that have not yet been
purchased by a Holder of Warrants so long as such Holder of Warrants submits an
undertaking to the Company that such Holder intends to exercise Warrants
representing the number of Warrant Shares to be included in such registration
statement prior to the consummation of the public offering with respect to such
Warrant Shares. In addition, such Holder of Warrants is permitted to pay the
Company the Warrant Price for such Warrant Shares upon the consummation of the
public offering with respect to such Warrant Shares.
15.2 Piggy-back Registration Rights. The Company covenants and
------------------------------
agrees with the Holders and any subsequent Holders of the Warrants and/or
Warrant Shares that in the event the Company proposes to file a registration
statement under the Act with respect to any class of security (other than in
connection with an exchange offer, a non-cash offer or a registration statement
on Form S-8 or other unsuitable registration statement form) which becomes or
which the Company believes will become effective at any time after the
Initiation Date then the Company shall in each case give written notice of such
proposed filing to the Holders of Warrants and Warrant Shares at least 30 days
before the proposed filing date and such notice shall offer to such Holders the
opportunity to include in such registration statement such number of Warrant
Shares as they may request, unless, in the opinion of counsel to the Company
reasonably acceptable to any such Holder of Warrants or Warrant Shares who
wishes to have Warrant Shares included in such registration statement,
registration under the Act is not required for the transfer of such Warrants
and/or Warrant Shares in the manner proposed by such Holders. The Company shall
not honor any such request to register any such Warrant Shares if the request is
received later than five (5) years from the Effective Date, and the Company
shall not be required to honor any request to register any such Warrant Shares
if the Company is not notified in writing of any such request pursuant to this
Section 15.2 within at least 20 days after the Company has given notice to the
Holders of the filing. The Company shall permit, or shall cause the managing
underwriter of a proposed offering to permit, the Holders of Warrant Shares
requested to be included in the registration (the "Piggy-back Shares") to
include such Piggy-back Shares in the proposed offering on the same terms and
conditions as applicable to securities of the Company included therein or as
applicable to securities of any person other than the Company and the Holders of
Piggy-back Shares if the securities of any such person are included therein.
Notwithstanding
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the foregoing, if any such managing underwriter shall advise the Company in
writing that it believes that the distribution of all or a portion of the Piggy-
back Shares requested to be included in the registration statement concurrently
with the securities being registered by the Company would materially adversely
affect the distribution of such securities by the Company for its own account,
then the Holders of such Piggy-back Shares shall delay their offering and sale
of Piggyback Shares (or the portion thereof so designated by such managing
underwriter) for such period, not to exceed 120 days, as the managing
underwriter shall request provided that no such delay shall be required as to
Piggy-back Shares if any securities of the Company are included in such
registration statement for the account of any person other than the Company and
the Holders of Piggy-back Shares. In the event of such delay, the Company shall
file such supplements, post-effective amendments or separate registration
statement, and take any such other steps as may be necessary to permit such
Holders to make their proposed offering and sale for a period of 120 days
immediately following the end of such period of delay ("Piggy-back Termination
Date"); provided, however, that if at the Piggy-back Termination Date the
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Piggyback Shares are covered by a registration statement which is, or required
to remain, in effect beyond the Piggy-back Termination Date, the Company shall
maintain in effect the registration statement as it relates to the Piggy-back
Shares for so long as such registration statement remains or is required to
remain in effect for any of such other securities. All expenses of registration
pursuant to this Section 15.2 shall be borne by the Company (including
reasonable expenses incurred in connection with Blue Sky qualifications), except
that underwriting commissions and expenses attributable to the Piggy-back Shares
and fees and disbursements of counsel (if any) to the Holders requesting that
such Piggy-back Shares be offered will be borne by such Holders.
The Company shall be obligated pursuant to this Section 15.2 to
include in the Piggy-back Offering, Warrant Shares that have not yet been
purchased by a holder of Warrants so long as such Holder of Warrants submits an
undertaking to the Company that such Holder intends to exercise Warrants
representing the number of Warrant Shares to be included in such Piggy-back
Offering prior to the consummation of such Piggy-back Offering. In addition,
such Holder of Warrants is permitted to pay the Company the Warrant Price for
such Warrant Shares upon the consummation of the Piggy-back Offering.
If the Company decides not to proceed with a Piggy-back Offering, the
Company has no obligation to proceed with the offering of the Piggy-back Shares,
unless the Holders of the Warrants and/or Warrant Shares otherwise comply with
the provisions of Section 15.1 hereof (without regard to the 30 days' written
request required thereby).
15.3 In connection with the registration of Warrant Shares in
accordance with Section 15.1 and 15.2 above, the Company agrees to:
(a) Use its best efforts to register or qualify the Warrant
Shares for offer or sale under the state securities or Blue Sky laws of such
states which the Holders of such Warrant Shares shall designate, until the dates
specified in Section 15.1 and 15.2 above in connection with registration under
the Act; provided, however, that in no event shall the
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Company be obligated to qualify to do business in any jurisdiction where it is
not now so qualified or to take any action which would subject it to general
service of process in any jurisdiction where it is not now so subject or to
register or get a license as a broker or dealer in securities in any
jurisdiction where it is not so registered or licensed or to register or qualify
the Warrant Shares for offer or sale under the state securities or Blue Sky laws
of any state other than the states in which some or all of the shares offered or
sold in the Public Offering were registered or qualified for offer and sale.
(b) (i) In the event of any post-effective amendment or other
registration with respect to any Warrant Shares pursuant to Section 15.1 or 15.2
above, the Company will indemnify and hold harmless any Holder whose Warrant
Shares are being so registered, and each person, if any, who controls such
Holder within the meaning of the Act, against any losses, claims, damages or
liabilities, joint or several, to which such Holder or such controlling person
may be subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained, on the effective date thereof, in any such registration statement,
any preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading; and will
reimburse each such Holder and each such controlling person for any legal or
other expenses reasonably incurred by such Holder or such controlling person in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company will not be liable in
-------- -------
such case to the extent that any such loss, claim, damage or liability arises
out of or is based upon any untrue statement or alleged untrue statement or
omission or alleged omission made in any such registration statement, any
preliminary prospectus or final prospectus, or any amendment or supplement
thereto, in reliance upon and in conformity with written information furnished
by such Holder expressly for use in the preparation thereof. The Company will
not be liable to a claimant to the extent of any misstatement corrected or
remedied in any amended prospectus if the Company timely delivers a copy of such
amended prospectus to such indemnified person and such indemnified person does
not timely furnish such amended prospectus to such claimant. The Company shall
not be required to indemnify any Holder or controlling person for any payment
made to any claimant in settlement of any suit or claim unless such payment is
approved by the Company.
(ii) Each Holder of Warrants and/or Warrant Shares who
participates in a registration pursuant to Section 15.1 or 15.2 will indemnify
and hold harmless the Company, each of its directors, each of its officers who
have signed any such registration statement, and each person, if any, who
controls the Company within the meaning of the Act, against any losses, claims,
damages or liabilities to which the Company, or any such director, officer or
controlling person may become subject under the Act, or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue or alleged untrue statement or any
material fact contained in any such registration statement, any preliminary
prospectus or final prospectus, or any amendment or
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supplement thereto, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in any such registration
statement, any preliminary prospectus or final prospectus, or any amendment or
supplement thereto, in reliance upon and in conformity with written information
furnished by such Holder expressly for use in the preparation thereof; and will
reimburse any legal or other expenses reasonably incurred by the Company, or any
such director, officer or controlling person in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
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that the indemnity agreement contained in this subparagraph (ii) shall not apply
to amounts paid to any claimant in settlement of any suit or claim unless such
payment is first approved by such Holder.
(iii) In order to provide for just and equitable contribution
in any action in which a claim for indemnification is made pursuant to this
clause (b)(iii) of Section 15.3 but is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
this clause (b)(iii) of Section 15.3 provides for indemnification in such case,
all the parties hereto shall contribute to the aggregate losses, claims, damages
or liabilities to which they may be subject (after contribution from others) in
such proportion so that each Holder whose Warrant Shares are being registered is
responsible pro rata for the portion represented by the public offering price
received by such Holder from the sale of such Holder's Warrant Shares, and the
Company is responsible for the remaining portion; provided, however, that (i) no
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Holder shall be required to contribute any amount in excess of the public
offering price received by such Holder from the sale of such Holder's Warrant
Shares and (ii) no person guilty of a fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who is not guilty of such fraudulent misrepresentation. This subsection
(b)(iii) shall not be operative as to any Holder of Warrant Shares to the extent
that the Company has received indemnity under this clause (b)(iii) of Section
15.3.
16. NO RIGHTS AS STOCKHOLDER; NOTICES TO HOLDERS. Nothing contained in
this Agreement or in any of the Warrants shall be construed as conferring upon
the Holders or their transferee(s) the right to vote or to receive dividends or
to consent to or receive notice as stockholders in respect of any meeting of
stockholders for the election of directors of the Company or any other matter or
any rights whatsoever as stockholders of the Company. If, however, at any time
prior to the expiration of the Warrants and prior to their exercise, any of the
following events occur:
(a) the Company shall declare any dividend payable in any
securities upon its shares of Common Stock or make any distribution (other than
a cash dividend) to the holders of its shares of Common Stock; or
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(b) the Company shall offer to the holders of its shares of Common
Stock any additional shares of Common Stock or securities convertible into or
exchangeable for shares of Common Stock or any right to subscribe to or purchase
any thereof; or
(c) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation, merger, sale, transfer or lease of all
or substantially all of its property, assets and business as an entirety) shall
be proposed, then in any one or more of said events the Company shall (i) give
notice in writing of such event to the Holders, as provided in Section 17 hereof
and (ii) if there are more than 100 Holders, cause notice of such event to be
published once in The Wall Street Journal (national edition), such giving of
notice and publication to be completed at least 20 days prior to the date fixed
as a record date or the date of closing the transfer books for the determination
of the stockholders entitled to such dividend, distribution or subscription
rights, or for the determination of stockholders entitled to vote on such
proposed dissolution, liquidation or winding up. Such notice shall specify such
record date or the date of closing the transfer books, as the case may be.
Failure to publish, mail or receive such notice or any defect therein or in the
publication or mailing thereof shall not affect the validity of any action taken
in connection with such dividend, distribution or subscription rights, or such
proposed dissolution, liquidation or winding up.
17. NOTICES. Any notice pursuant to this Agreement to be given or made by
the registered Holder of any Warrant to the Company shall be sufficiently given
or made if sent by first-class mail or facsimile to:
Cost-U-Less, Inc.
12410 S.E. 32nd Street
Bellevue, Washington 98005
Attn: President
Fax: 425-641-3393
Notices or demands authorized by this Agreement to be given or made by the
Company to the registered Holder of any Warrant shall be sufficiently given or
made (except as otherwise provided in this Agreement) if sent by first-class
mail to such Holder at the address of such Holder as shown on the Warrant
Register.
18. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California without giving effect to
principles of conflicts of laws.
19. SUPPLEMENTS AND AMENDMENTS. The Company and the Representative may
from time to time supplement or amend this Agreement in order to cure any
ambiguity or to correct or supplement any provision contained herein, or to make
any other provisions in regard to matters or questions arising hereunder which
the Company and the Representative may deem necessary or desirable and which
shall not be inconsistent with the provisions of the Warrants and which shall
not adversely affect the interests of the Holders. This Agreement may also be
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supplemented or amended from time to time by a writing executed by or on behalf
of the Company and all of the Holders.
20. SUCCESSOR. All the covenants and provisions of this Agreement by or
for the benefit of the Company or the Holders shall bind and inure to the
benefit of their respective successors and assigns hereunder. Assignments by
the Holders of their rights hereunder shall be made in accordance with Section 4
hereof.
21. MERGER OR CONSOLIDATION OF THE COMPANY. So long as Warrants remain
outstanding, the Company will not merge or consolidate with or into, or sell,
transfer or lease all or substantially all of its property to, any other
corporation unless the successor or purchasing corporation, as the case may be
(if not the Company), shall expressly assume, by supplemental agreement executed
and delivered to the Holders, the due and punctual performance and observance of
each and every covenant and condition of this Agreement to be performed and
observed by the Company.
22. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Holders, any legal or equitable right, remedy or claim under this Agreement, but
this Agreement shall be for the sole and exclusive benefit of the Company any
the Holders of the Warrants and Warrant Shares.
23. CAPTIONS. The captions of the sections and subsections of this
Agreement have been reserved for convenience only and shall have no substantive
effect.
24. COUNTERPARTS. This Agreement may be executed in any number of
counterparts each of which when so executed shall be deemed to be an original;
but such counterparts together shall constitute but one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day, month and year first above written.
CRUTTENDEN ROTH INCORPORATED
Attest:
____________________________ By:___________________________
Name:
Title:
COST-U-LESS, INC.
Attest:
____________________________ By:__________________________
Name:
Title:
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EXHIBIT A
[Form of Warrant Certificate]
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW. SAID
SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR
AN EXEMPTION THEREFROM UNDER SAID ACT
WARRANT CERTIFICATE
OF
COST-U-LESS, INC.
EXERCISABLE ON OR BEFORE [FIVE YEARS FROM EFFECTIVE DATE]
No. 1 ______________ Warrants
This Warrant Certificate certifies that the registered holder hereof or its
registered assigns, is the registered holder of Warrants expiring [five years
from effective date] (the "Warrants") to purchase Common Stock, $0.001 par value
per share (the "Common Stock"), of Cost-U-Less, Inc., a Washington corporation
(the "Company"). Each Warrant entitles the holder upon exercise to receive from
the Company from 10:00 a.m., Pacific time, on [one year from effective date]
through and until 6:00 p.m., Pacific time, on [five years from effective date],
one fully paid and nonassessable share of Common Stock (a "Warrant Share") at
the initial exercise price (the "Warrant Price") of [120% of initial public
offering price] payable in lawful money of the United States of America upon
surrender of this Warrant Certificate and payment of the Warrant Price at the
conditions set forth herein and in the Warrant Agreement referred to on the
reverse hereof. The Warrant Price and number of Warrant Shares issuable upon
exercise of the Warrants are subject to adjustment upon the occurrence of
certain events set forth in the Warrant Agreement.
No Warrant may be exercised after 6:00 p.m., Pacific Time, on [five years
from effective date], (the "Expiration Date"). Notwithstanding the foregoing, if
at 6:00 p.m., Pacific time on the Expiration Date, any Holder or Holders of the
Warrants have not exercised their Warrants and the Closing Price (as defined in
the Warrant Agreement) for the Common Stock on the Expiration Date is greater
than the Warrant Price, then each such unexercised Warrant shall be
automatically
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converted into a number of shares of Common Stock of the Company equal to: (A)
the number of shares of Common Stock then issuable upon exercise of a Warrant
multiplied by (B) a fraction (1) the numerator of which is the difference
between the Closing Price for the Common Stock on the Expiration Date and the
Warrant Price and (2) the denominator of which is the Closing Price for the
Warrant Stock on the Expiration Date.
Reference is hereby made to the further provisions of this Warrant
Certificate set forth on the reverse hereof and such further provisions shall
for all purposes have the same effect as though fully set forth at this price.
This Warrant Certificate shall not be valid unless countersigned by the
Company.
IN WITNESS WHEREOF, Cost-U-Less, Inc.. has caused this Warrant Certificate
to be signed on behalf of the Company by the manual or facsimile signature of
the present or any future Chairman of the Board, President or Vice President of
the Company, under its corporate seal, affixed or in facsimile, attested by the
manual or facsimile signature of the Secretary or an Assistant Secretary of the
Company.
Dated: [Effective Date] COST-U-LESS, INC.
______________________________
Michael J. Rose
President and Chief Executive Officer
Attest:
______________________________
Secretary/Assistant Secretary
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[FORM OF WARRANT CERTIFICATE]
[REVERSE]
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants expiring [five years from effective date],
entitling the holder on exercise to receive shares of Common Stock, $0.001 par
value per share, of the Company (the "Common Stock"), and are issued or to be
issued pursuant to a Warrant Agreement, dated as of __________, 1998 (the
"Warrant Agreement"), duly executed and delivered by the Company, which Warrant
Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrants. A copy of the Warrant Agreement may be
obtained by the holder hereof upon written request to the Company.
The Warrants may be exercised at any time on or before [five years from
effective date]. The holder of Warrants evidenced by this Warrant Certificate
may exercise them by surrendering this Warrant Certificate, with the form of
election to purchase set forth hereon properly completed and executed, together
with payment of the Warrant Price at the office of the Company designated for
such purpose. In the event that upon any exercise of Warrants evidenced hereby
the number of Warrants exercised shall be less than the total number of Warrants
evidenced hereby, there shall be issued to the holder hereof or his assignee a
new Warrant Certificate evidencing the number of Warrants not exercised. No
adjustment shall be made for any dividends on any Common Stock issuable upon
exercise of this Warrant.
The Warrant Agreement provides that upon the occurrence of certain events
the number of shares of Common Stock issuable upon the exercise of each Warrant
shall be adjusted. If the number of shares of Common Stock issuable upon such
exercise is adjusted, the Warrant Agreement provides that the Warrant Price set
forth on the face hereof may, subject to certain conditions, be adjusted. No
fractions of a share of Common Stock will be issued upon the exercise of any
Warrants but the Company will pay the cash value thereof determined as provided
in the Warrant Agreement. The Warrant Agreement also provides that, while the
Warrants are exercisable, the holders of the Warrants shall have an optional
conversion right to convert, without payment of any exercise price or any cash
or other consideration by such holders, the Warrants or any portion thereof into
a number of shares of Common Stock as specified in the Warrant Agreement.
The holders of the Warrants are entitled to certain registration rights
with respect to the Common Stock purchasable upon exercise thereof. Said
registration rights are set forth in full in the Warrant Agreement.
Warrant Certificates, when surrendered at the office of the Company by the
registered holder thereof in person or by legal representative or attorney duly
authorized in writing, may be exchanged, in the manner and subject to the
limitations provided in the Warrant Agreement, but
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without payment of any service charge, for another Warrant certificate of
Warrant Certificates of like tenor evidencing in the aggregate a like number of
Warrants.
Upon due presentation for registration of transfer of this Warrant
Certificate at the office of the Company, a new Warrant certificate or Warrant
certificates of like tenor and evidencing in the aggregate a like number of
Warrants shall be issued to other transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided in the Warrant Agreement,
without charge except for any tax or other governmental charge imposed in
connection therewith.
The Company may deem and treat the registered holder(s) thereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, of any distribution to the holder(s) hereof and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
Neither the Warrants nor this Warrant Certificate entitles any holder hereof to
any rights of a stockholder of the Company.
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(FORM OF ELECTION TO PURCHASE)
(TO BE EXECUTED UPON EXERCISE OF WARRANT)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to receive ____________ shares of
Common Stock and herewith tenders payment for such shares in accordance with the
terms of the Warrant Agreement. The undersigned requests that a certificate for
such shares be registered in the name of _____________________________, whose
address is ______________________________________ and that such shares be
delivered to ______________________ whose address is __________________________
________________________________________. If said number of shares is less than
all of the shares of Common Stock purchasable hereunder, the undersigned
requests that a new Warrant Certificate representing the remaining balance of
such shares be registered in the name of ________________________, whose address
is _______________________, and that such Warrant Certificate be delivered to
_______________________, whose address is _________________________________.
Signature:
Date:
Signature Guaranteed:
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(FORM OF ASSIGNMENT)
(TO BE EXECUTED UPON ASSIGNMENT OF WARRANTS)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto
(Name and Address of Assignee Must Be Printed or Typewritten)
___________________________________
___________________________________
___________________________________
the within Warrants, hereby irrevocably constituting and appointing
________________ Attorney to transfer said Warrants on the books of the Company,
with full power of substitution in the premises.
Dated: ________________________________________________________
Signature of Registered Holder
Note: The signature on this assignment must correspond with the name as it
appears upon the face of the within Warrant Certificate in every particular,
without alteration or enlargement or any change whatever.
Signature Guaranteed: __________________________
(Signature must be guaranteed by a bank or trust company having an office
or correspondent in the United States or by a member firm of a registered
securities exchange or the National Association of Securities Dealers, Inc.)
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EXHIBIT 3.1
RESTATED ARTICLES OF INCORPORATION
OF
COST-U-LESS, INC.
Pursuant to RCW 23B.10.070, the following constitutes Restated Articles of
Incorporation of the undersigned, a Washington corporation.
ARTICLE 1. NAME
The name of this corporation is Cost-U-Less, Inc..
ARTICLE 2. SHARES
Effective upon the filing of these Restated Articles of Incorporation with
the Secretary of State of the State of Washington, every (3.38773) shares of
issued and outstanding Common Stock of this corporation shall be changed and
reclassified into (1) share of Common Stock, par value $.001 per share, of this
corporation. After giving effect to the 1-for-3.38773 stock split, the total
number of shares which the corporation is authorized to issue is 27,000,000
shares, consisting of 25,000,000 shares of Common Stock having a par value of
$.001 per share and 2,000,000 of Preferred Stock having a par value of $.001 per
share. The Common Stock is subject to the rights and preferences of the
Preferred Stock as hereinafter set forth.
The Preferred Stock may be issued from time to time in one or more series
in any manner permitted by law and the provisions of these Articles of
Incorporation as determined from time to time by the Board of Directors and
stated in the resolution or resolutions providing for the issuance thereof,
prior to the issuance of any shares thereof. The Board of Directors shall have
the authority to fix and determine and to amend, subject to the provisions
hereof, the rights and preferences of the shares of any series that is wholly
unissued or to be established including, without limitation, any dividend,
liquidation, voting, redemption and conversion rights for such series. Unless
otherwise specifically provided in the resolution establishing any series, the
Board of Directors shall further have the authority, after the issuance of
shares of a series whose number it has designated, to amend the resolution
establishing such series to decrease the number of shares of that series, but
not below the number of shares of such series then outstanding.
ARTICLE 3. PREEMPTIVE RIGHTS
No preemptive rights shall exist with respect to shares of stock or
securities convertible into shares of stock of this corporation.
<PAGE>
ARTICLE 4. CUMULATIVE VOTING
The right to cumulate votes in the election of Directors shall not exist
with respect to shares of stock of this corporation.
ARTICLE 5. DIRECTORS
The number of Directors of this corporation shall be determined in the
manner provided by the Bylaws and may be increased or decreased from time to
time in the manner provided therein. Prior to the election of Directors at the
May 1998 special meeting of the shareholders (or written consent in lieu of such
meeting, if applicable), unless a Director earlier dies, resigns or is removed,
his or her term of office shall expire at the next annual meeting of
shareholders. At the 1998 election of Directors at the May 1998 special
meeting of the shareholders (or written consent in lieu of such meeting, if
applicable), the Board of Directors shall be divided into three classes, with
such classes to be as equal in number as may be possible, with any Director or
Directors in excess of the number divisible by three being assigned to Class 3
and Class 2, as the case may be. At the first election of Directors to such
classified Board of Directors, each Class 1 Director shall be elected to serve
until the next ensuing annual meeting of shareholders, each Class 2 Director
shall be elected to serve until the second ensuing annual meeting of
shareholders and each Class 3 Director shall be elected to serve until the third
ensuing annual meeting of shareholders. At each annual meeting of shareholders
following the meeting at which the Board of Directors is initially classified,
the number of Directors equal to the number of Directors in the class whose term
expires at the time of such meeting shall be elected to serve until the third
ensuing annual meeting of shareholders. Notwithstanding any of the foregoing
provisions of this Article, Directors shall serve until their successors are
elected and qualified or until their earlier death, resignation or removal from
office, or until there is a decrease in the number of Directors.
The Directors of this corporation may be removed only for cause by the
holders of not less than two-thirds of the shares entitled to elect the Director
or Directors whose removal is sought in the manner provided by the Bylaws.
ARTICLE 6. BYLAWS
The Board of Directors shall have the power to adopt, amend or repeal the
Bylaws of this corporation, subject to approval by a majority of the Continuing
Directors (as defined in Article 10); provided, however, the Board of Directors
may not repeal or amend any bylaw that the shareholders have expressly provided
may not be amended or repealed by the Board of Directors. The shareholders
shall also have the power to adopt, amend or repeal the Bylaws of this
corporation by the affirmative vote of the holders of not less than two-thirds
of the outstanding shares and, to the extent, if any, provided by resolution or
resolutions of the Board of Directors providing for the issuance of a series of
Common or Preferred Stock, not less than two-thirds of the outstanding shares
entitled to vote thereon, voting as a class.
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ARTICLE 7. AMENDMENTS TO ARTICLES OF INCORPORATION
This corporation reserves the right to amend or repeal, by the affirmative
vote of the holders of a majority of the outstanding shares and, to the extent,
if any, provided by resolution or resolutions of the Board of Directors
providing for the issuance of a series of Common or Preferred stock, majority of
the outstanding shares entitled to vote thereon, voting as a class, any of the
provisions contained in these Articles of Incorporation; provided, however, that
amendment or repeal of Article 5, Article 6, Article 7, Article 9, or Article 10
shall require the affirmative vote of the holders of two-thirds of the
outstanding shares. The rights of the shareholders of this corporation are
granted subject to this reservation. Notwithstanding the foregoing, until this
corporation qualifies as a "public company" under the Washington Business
Corporation Act, all amendments to or the repeal of these Articles of
Incorporation shall require the affirmative vote of the holders of two-thirds of
the outstanding shares.
ARTICLE 8. LIMITATION OF DIRECTOR LIABILITY
To the full extent that the Washington Business Corporation Act, as it
exists on the date hereof or may hereafter be amended, permits the limitation or
elimination of the liability of Directors, a Director of this corporation shall
not be liable to this corporation or its shareholders for monetary damages for
conduct as a Director. Any amendments to or repeal of this Article 8 shall not
adversely affect any right or protection of a Director of this corporation for
or with respect to any acts or omissions of such Director occurring prior to
such amendment or repeal.
ARTICLE 9. SPECIAL MEETINGS OF SHAREHOLDERS
Special meetings of the shareholders may be called in the manner provided
by the Bylaws of this corporation; provided, however, that upon qualification of
the corporation as a "public company" under the Washington Business Corporation
Act the percentage of votes required to call a special meeting shall be twenty-
five percent (25%).
ARTICLE 10. SPECIAL VOTING REQUIREMENTS
In addition to any affirmative vote required by law, by these Restated
Articles of Incorporation or otherwise, any "Business Combination" (as
hereinafter defined) involving this corporation shall be subject to approval in
the manner set forth in this Article 10.
10.1 DEFINITIONS
For the purposes of this Article 10:
(a) "Business Combination" means (i) a merger, share exchange or
consolidation of this corporation or any of its Subsidiaries with any
other corporation; (ii) the sale, lease, exchange, mortgage, pledge,
transfer or other disposition or encumbrance, whether in one
transaction or a series of transactions, by this
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<PAGE>
corporation or any of its Subsidiaries of all or a substantial part of
this corporation's assets otherwise than in the usual and regular
course of business; or (iii) any agreement, contract or other
arrangement providing for any of the foregoing transactions.
(b) "Continuing Director" means any member of the Board of Directors who
was a member of the Board of Directors on May 7, 1998 or who is
elected to the Board of Directors after May 7, 1998 upon the
recommendation of a majority of the Continuing Directors voting
separately and as a subclass of Directors on such recommendation.
(c) "Subsidiary" means a domestic or foreign corporation, a majority of
the outstanding voting shares of which are owned, directly or
indirectly, by this corporation.
10.2 VOTE REQUIRED FOR BUSINESS COMBINATIONS
10.2.1 SUPERMAJORITY VOTE
Except as provided in subsections 10.2.2 and 10.2.3 hereof, the affirmative
vote of the holders of not less than two-thirds of the outstanding shares
entitled to vote thereon and, to the extent, if any, provided by resolution
adopted by the Board of Directors authorizing the issuance of a class or series
of Common Stock or Preferred Stock, the affirmative vote of the holders of not
less than two-thirds of the outstanding shares of such class or series, voting
as a separate voting group, shall be required for the adoption or authorization
of a Business Combination.
10.2.2 MAJORITY VOTE
Notwithstanding subsection 10.2.1 hereof, if a Business Combination shall
have been approved by a majority of the Continuing Directors, voting separately
and as a subclass of Directors, and if such Business Combination is otherwise
required to be approved by this corporation's shareholders pursuant to the
provisions of the Washington Business Corporation Act or of these Restated
Articles of Incorporation other than this Article 10, then the affirmative vote
of the holders of not less than a majority of the outstanding shares entitled to
vote thereon and, to the extent, if any, provided by resolution adopted by the
Board of Directors authorizing the issuance of a class or series of Common Stock
or Preferred Stock, the affirmative vote of the holders of not less than a
majority of the outstanding shares of such class or series, voting as a separate
voting group, shall be required for the adoption or authorization of such
Business Combination.
10.2.3 NO SHAREHOLDER VOTE
Notwithstanding subsection 10.2.1 or 10.2.2 hereof, if a Business
Combination shall have been approved by a majority of the Continuing Directors,
voting separately and as a subclass of Directors, and if such Business
Combination is not otherwise required to be
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<PAGE>
approved by this corporation's shareholders pursuant to the provisions of the
Washington Business Corporation Act or of these Restated Articles of
Incorporation other than this Article 10, then no vote of the shareholders of
this corporation shall be required for approval of such Business Combination.
These Restated Articles of Incorporation are executed by said corporation
by its duly authorized officer.
DATED: ____________, 1998
COST-U-LESS, INC.
By
------------------------------------
Allan Youngberg, Vice President
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<PAGE>
CERTIFICATE REGARDING
RESTATED ARTICLES OF INCORPORATION
OF
COST-U-LESS, INC.
Pursuant to RCW 23B.10.070, the undersigned hereby certifies that the
foregoing restatement of the Articles of Incorporation of Cost-U-Less, Inc.
contains the following amendments to the existing Articles of Incorporation:
Articles 1 through 13 are amended in their entirety to read as
set forth in Articles 1 through 10 of the Restated Articles of
Incorporation attached hereto.
The date of the adoption of the Restated Articles of Incorporation
containing such amendments by the shareholders of this corporation is
__________, 1998. The amendments were duly approved by the shareholders of this
corporation in accordance with the provisions of RCW 23B.10.030 and RCW
23B.10.040.
DATED: ____________, 1998
COST-U-LESS, INC.
By
------------------------------------
Allan Youngberg, Vice President
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<PAGE>
EXHIBIT 10.1
COST-U-LESS
1998 STOCK INCENTIVE COMPENSATION PLAN
SECTION 1. PURPOSE
The purpose of the Cost-U-Less 1998 Stock Incentive Compensation Plan (the
"Plan") is to enhance the long-term shareholder value of Cost-U-Less, a
Washington corporation (the "Company"), by offering opportunities to employees,
directors, officers, consultants, agents, advisors and independent contractors
of the Company and its Subsidiaries (as defined in Section 2) to participate in
the Company's growth and success, and to encourage them to remain in the service
of the Company and its Subsidiaries and to acquire and maintain stock ownership
in the Company.
SECTION 2. DEFINITIONS
For purposes of the Plan, the following terms shall be defined as set forth
below:
2.1 AWARD
"Award" means an award or grant made pursuant to the Plan, including,
without limitation, awards or grants of Options and Stock Awards, or any
combination of the foregoing.
2.2 BOARD
"Board" means the Board of Directors of the Company.
2.3 CAUSE
"Cause" means dishonesty, fraud, misconduct, unauthorized use or disclosure
of confidential information or trade secrets, or conviction or confession of a
crime punishable by law (except minor violations), in each case as determined by
the Plan Administrator, and its determination shall be conclusive and binding.
2.4 CODE
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
2.5 COMMON STOCK
"Common Stock" means the common stock, par value $.01 per share, of the
Company.
2.6 CORPORATE TRANSACTION
"Corporate Transaction" means any of the following events:
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(a) Consummation of any merger or consolidation of the Company in
which the Company is not the continuing or surviving corporation, or
pursuant to which shares of the Common Stock are converted into cash,
securities or other property, if following such merger or consolidation the
holders of the Company's outstanding voting securities immediately prior to
such merger or consolidation own less than 66-2/3% of the outstanding
voting securities of the surviving corporation;
(b) Consummation of any sale, lease, exchange or other transfer in one
transaction or a series of related transactions of all or substantially all
of the Company's assets other than a transfer of the Company's assets to a
majority-owned subsidiary corporation (as the term "subsidiary corporation"
is defined in Section 8.3) of the Company;
(c) Approval by the holders of the Common Stock of any plan or
proposal for the liquidation or dissolution of the Company; or
(d) Acquisition by a person, within the meaning of Section 3(a)(9) or
of Section 13(d)(3) (as in effect on the date of adoption of the Plan) of
the Exchange Act of a majority or more of the Company's outstanding voting
securities (whether directly or indirectly, beneficially or of record).
Ownership of voting securities shall take into account and shall include
ownership as determined by applying Rule 13d-3(d)(1)(i) (as in effect on the
date of adoption of the Plan) under the Exchange Act.
2.7 DISABILITY
"Disability" means "disability" as that term is defined for purposes of
Section 22(e)(3) of the Code.
2.8 EXCHANGE ACT
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
2.9 FAIR MARKET VALUE
"Fair Market Value" shall be as established in good faith by the Plan
Administrator or (a) if the Common Stock is listed on the Nasdaq National
Market, the closing selling price for the Common Stock as reported by the Nasdaq
National Market for a single trading day or (b) if the Common Stock is listed on
the New York Stock Exchange or the American Stock Exchange, the closing selling
price for the Common Stock as such price is officially quoted in the composite
tape of transactions on such exchange for a single trading day. If there is no
such reported price for the Common Stock for the date in question, then such
price on the last preceding date for which such price exists shall be
determinative of the Fair Market Value.
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2.10 GOOD REASON
"Good Reason" means the occurrence of any of the following events or
conditions and the failure of the Successor Corporation to cure such event or
condition within 30 days after receipt of written notice by the Holder:
(a) a change in the Holder's status, title, position or
responsibilities (including reporting responsibilities) that, in the Holder's
reasonable judgment, represents a substantial reduction in the status, title,
position or responsibilities as in effect immediately prior thereto; the
assignment to the Holder of any duties or responsibilities that, in the Holder's
reasonable judgment, are materially inconsistent with such status, title,
position or responsibilities; or any removal of the Holder from or failure to
reappoint or reelect the Holder to any of such positions, except in connection
with the termination of the Holder's employment for Cause, for Disability or as
a result of his or her death, or by the Holder other than for Good Reason;
(b) a reduction in the Holder's annual base salary;
(c) the Successor Corporation's requiring the Holder (without the
Holder's consent) to be based at any place outside a 35-mile radius of his or
her place of employment prior to a Corporate Transaction, except for reasonably
required travel on the Successor Corporation's business that is not materially
greater than such travel requirements prior to the Corporate Transaction;
(d) the Successor Corporation's failure to (i) continue in effect any
material compensation or benefit plan (or the substantial equivalent thereof) in
which the Holder was participating at the time of a Corporate Transaction,
including, but not limited to, the Plan, or (ii) provide the Holder with
compensation and benefits substantially equivalent (in terms of benefit levels
and/or reward opportunities) to those provided for under each material employee
benefit plan, program and practice as in effect immediately prior to the
Corporate Transaction;
(e) any material breach by the Successor Corporation of its
obligations to the Holder under the Plan or any substantially equivalent plan of
the Successor Corporation; or
(f) any purported termination of the Holder's employment or services
for Cause by the Successor Corporation that does not comply with the terms of
the Plan or any substantially equivalent plan of the Successor Corporation.
2.11 GRANT DATE
"Grant Date" means the date the Plan Administrator adopted the granting
resolution or a later date designated in a resolution of the Plan Administrator
as the date an Award is to be granted.
2.12 HOLDER
"Holder" means (a) the person to whom an Award is granted; (b) for a Holder
who has died, the personal representative of the Holder's estate, the person(s)
to whom the Holder's rights under the Award have passed by will or by the
applicable laws of descent and distribution, or the
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beneficiary designated in accordance with Section 10; or (c) the person(s) to
whom an Award has been transferred in accordance with Section 10.
2.13 INCENTIVE STOCK OPTION
"Incentive Stock Option" means an Option to purchase Common Stock granted
under Section 7 with the intention that it qualify as an "incentive stock
option" as that term is defined in Section 422 of the Code.
2.14 NONQUALIFIED STOCK OPTION
"Nonqualified Stock Option" means an Option to purchase Common Stock
granted under Section 7 other than an Incentive Stock Option.
2.15 OPTION
"Option" means the right to purchase Common Stock granted under Section 7.
2.16 PLAN ADMINISTRATOR
"Plan Administrator" means the Board or any committee of the Board
designated to administer the Plan under Section 3.1.
2.17 RESTRICTED STOCK
"Restricted Stock" means shares of Common Stock granted under Section 9,
the rights of ownership of which are subject to restrictions prescribed by the
Plan Administrator.
2.18 SECURITIES ACT
"Securities Act" means the Securities Act of 1933, as amended.
2.19 STOCK AWARD
"Stock Award" means an Award granted under Section 9.
2.20 SUBSIDIARY
"Subsidiary," except as provided in Section 8.3 in connection with
Incentive Stock Options, means any entity that is directly or indirectly
controlled by the Company or in which the Company has a significant ownership
interest, as determined by the Plan Administrator, and any entity that may
become a direct or indirect parent of the Company.
2.21 SUCCESSOR CORPORATION
"Successor Corporation" has the meaning set forth in Section 11.2.
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SECTION 3. ADMINISTRATION
3.1 PLAN ADMINISTRATOR
The Plan shall be administered by the Board or a committee or committees
(which term includes subcommittees) appointed by, and consisting of two or more
members of, the Board (the "Plan Administrator"). If and so long as the Common
Stock is registered under Section 12(b) or 12(g) of the Exchange Act, the Board
shall consider in selecting the Plan Administrator and the membership of any
committee acting as Plan Administrator, with respect to any persons subject or
likely to become subject to Section 16 of the Exchange Act, the provisions
regarding (a) "outside directors" as contemplated by Section 162(m) of the Code
and (b) "nonemployee directors" as contemplated by Rule 16b-3 under the Exchange
Act. The Board may delegate the responsibility for administering the Plan with
respect to designated classes of eligible persons to different committees
consisting of two or more members of the Board, subject to such limitations as
the Board deems appropriate. Committee members shall serve for such term as the
Board may determine, subject to removal by the Board at any time.
3.2 ADMINISTRATION AND INTERPRETATION BY THE PLAN ADMINISTRATOR
Except for the terms and conditions explicitly set forth in the Plan, the
Plan Administrator shall have exclusive authority, in its discretion, to
determine all matters relating to Awards under the Plan, including the selection
of individuals to be granted Awards, the type of Awards, the number of shares of
Common Stock subject to an Award, all terms, conditions, restrictions and
limitations, if any, of an Award and the terms of any instrument that evidences
the Award. The Plan Administrator shall also have exclusive authority to
interpret the Plan and may from time to time adopt, and change, rules and
regulations of general application for the Plan's administration. The Plan
Administrator's interpretation of the Plan and its rules and regulations, and
all actions taken and determinations made by the Plan Administrator pursuant to
the Plan, shall be conclusive and binding on all parties involved or affected.
The Plan Administrator may delegate administrative duties to such of the
Company's officers as it so determines.
SECTION 4. STOCK SUBJECT TO THE PLAN
4.1 AUTHORIZED NUMBER OF SHARES
Subject to adjustment from time to time as provided in Section 11.1, a
maximum of 500,000/1/ shares of Common Stock shall be available for issuance
under the Plan. Shares issued under the Plan shall be drawn from authorized and
unissued shares or shares now held or subsequently acquired by the Company.
4.2 REUSE OF SHARES
Any shares of Common Stock that have been made subject to an Award that
cease to be subject to the Award (other than by reason of exercise or payment of
the Award to the extent it is
__________
/1/ This number reflects the adjustment pursuant to the 1:3.38773 reverse stock
split.
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exercised for or settled in shares) shall again be available for issuance in
connection with future grants of Awards under the Plan.
SECTION 5. ELIGIBILITY
Awards may be granted under the Plan to those officers, directors and
employees of the Company and its Subsidiaries as the Plan Administrator from
time to time selects. Awards may also be made to consultants, agents, advisors
and independent contractors who provide services to the Company and its
Subsidiaries.
SECTION 6. AWARDS
6.1 FORM AND GRANT OF OPTIONS
The Plan Administrator shall have the authority, in its sole discretion, to
determine the type or types of Awards to be made under the Plan. Such Awards
may include, but are not limited to, Incentive Stock Options, Nonqualified Stock
Options and Stock Awards. Awards may be granted singly or in combination.
6.2 ACQUIRED COMPANY OPTION AWARDS
Notwithstanding anything in the Plan to the contrary, the Plan
Administrator may grant Awards under the Plan in substitution for awards issued
under other plans, or assume under the Plan awards issued under other plans, if
the other plans are or were plans of other acquired entities ("Acquired
Entities") (or the parent of the Acquired Entity) and the new Award is
substituted, or the old award is assumed, by reason of a merger, consolidation,
acquisition of property or of stock, reorganization or liquidation (the
"Acquisition Transaction"). In the event that a written agreement pursuant to
which the Acquisition Transaction is completed is approved by the Board and said
agreement sets forth the terms and conditions of the substitution for or
assumption of outstanding awards of the Acquired Entity, said terms and
conditions shall be deemed to be the action of the Plan Administrator without
any further action by the Plan Administrator, except as may be required for
compliance with Rule 16b-3 under the Exchange Act, and the persons holding such
Awards shall be deemed to be Holders.
SECTION 7. AWARDS OF OPTIONS
7.1 GRANT OF OPTIONS
The Plan Administrator is authorized under the Plan, in its sole
discretion, to issue Options as Incentive Stock Options or as Nonqualified Stock
Options, which shall be appropriately designated.
7.2 OPTION EXERCISE PRICE
The exercise price for shares purchased under an Option shall be as
determined by the Plan Administrator, but shall not be less than 100% of the
Fair Market Value of the Common Stock on the Grant Date with respect to
Incentive Stock Options and not less than 85% of the Fair Market Value of the
Common Stock on the Grant Date with respect to Nonqualified Stock Options.
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7.3 TERM OF OPTIONS
The term of each Option shall be as established by the Plan Administrator
or, if not so established, shall be 10 years from the Grant Date.
7.4 EXERCISE OF OPTIONS
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option the time at which or the installments in which the
Option shall vest and become exercisable, which provisions may be waived or
modified by the Plan Administrator at any time. If not so established in the
instrument evidencing the Option, the Option will vest and become exercisable
according to the following schedule, which may be waived or modified by the Plan
Administrator at any time:
<TABLE>
<CAPTION>
Period of Holder's Continuous Employment or Service
With the Company or Its Subsidiaries Percent of Total Option
From the Option Grant Date That Is Vested and Exercisable
----------------------------------------------------- ------------------------------
<S> <C>
After 1 year 20%
After 2 years 40%
After 3 years 60%
After 4 years 80%
After 5 years 100%
</TABLE>
To the extent that the right to purchase shares has accrued thereunder, an
Option may be exercised from time to time by written notice to the Company, in
accordance with procedures established by the Plan Administrator, setting forth
the number of shares with respect to which the Option is being exercised and
accompanied by payment in full as described in Section 7.5. The Plan
Administrator may determine at any time that an Option may not be exercised as
to less than 100 shares at any one time (or the lesser number of remaining
shares covered by the Option).
7.5 PAYMENT OF EXERCISE PRICE
The exercise price for shares purchased under an Option shall be paid in
full to the Company by delivery of consideration equal to the product of the
Option exercise price and the number of shares purchased. Such consideration
must be paid in cash or by check or, unless the Plan Administrator in its sole
discretion determines otherwise, either at the time the Option is granted or at
any time before it is exercised, a combination of cash and/or check (if any) and
one or both of the following alternative forms: (a) tendering (either actually
or, if and so long as the Common Stock is registered under Section 12(b) or
12(g) of the Exchange Act, by attestation) Common Stock already owned by the
Holder for at least six months (or any shorter period necessary to avoid a
charge to the Company's earnings for financial reporting purposes) having a Fair
Market Value on the day prior to the exercise date equal to the aggregate Option
exercise price; or (b) if and so long as the Common Stock is registered under
Section 12(b) or 12(g) of the Exchange Act, delivery of a properly executed
exercise notice, together with irrevocable
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instructions, to (i) a brokerage firm designated by the Company to deliver
promptly to the Company the aggregate amount of sale or loan proceeds to pay the
Option exercise price and any withholding tax obligations that may arise in
connection with the exercise and (ii) the Company to deliver the certificates
for such purchased shares directly to such brokerage firm, all in accordance
with the regulations of the Federal Reserve Board. In addition, to the extent
permitted by the Plan Administrator in its sole discretion, the exercise price
for shares purchased under an Option may be paid, either singly or in
combination with one or more of the alternative forms of payment authorized by
this Section 7.5, by (y) a full-recourse promissory note delivered pursuant to
Section 12 or (z) such other consideration as the Plan Administrator may permit.
7.6 POST-TERMINATION EXERCISES
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option whether the Option will continue to be exercisable, and
the terms and conditions of such exercise, if a Holder ceases to be employed by,
or to provide services to, the Company or its Subsidiaries, which provisions may
be waived or modified by the Plan Administrator at any time. If not so
established in the instrument evidencing the Option, the Option will be
exercisable according to the following terms and conditions, which may be waived
or modified by the Plan Administrator at any time.
In the case of termination of the Holder's employment or services other
than by reason of death or Cause, the Option shall be exercisable, to the extent
of the number of shares purchasable by the Holder at the date of such
termination, only (a) within one year after the date of termination of the
Holder's employment or services if such termination is coincident with
Disability or (b) within three months after the date of termination of the
Holder's employment or services if such termination is for any reason other than
Disability, but in no event later than the remaining term of the Option.
Any Option exercisable at the time of the Holder's death may be exercised,
to the extent of the number of shares purchasable by the Holder at the date of
the Holder's death, by the personal representative of the Holder's estate, the
person(s) to whom the Holder's rights under the Option have passed by will or
the applicable laws of descent and distribution or the beneficiary designated
pursuant to Section 10 at any time or from time to time within one year after
the date of death, but in no event later than the remaining term of the Option.
In the case of termination of the Holder's employment or services for
Cause, the Option shall automatically terminate upon first notification to the
Holder of such termination, unless the Plan Administrator determines otherwise.
If a Holder's employment or services with the Company are suspended pending an
investigation of whether the Holder shall be terminated for Cause, all the
Holder's rights under any Option likewise shall be suspended during the period
of investigation.
Any portion of an Option that is not exercisable on the date of termination
of the Holder's employment or services shall terminate on such date, unless the
Plan Administrator determines otherwise.
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A transfer of employment or services between or among the Company and its
Subsidiaries shall not be considered a termination of employment or services.
The effect of a Company-approved leave of absence on the terms and conditions of
an Option shall be determined by the Plan Administrator, in its sole discretion.
SECTION 8. INCENTIVE STOCK OPTION LIMITATIONS
To the extent required by Section 422 of the Code, Incentive Stock Options
shall be subject to the following additional terms and conditions:
8.1 DOLLAR LIMITATION
To the extent the aggregate Fair Market Value (determined as of the Grant
Date) of Common Stock with respect to which Incentive Stock Options are
exercisable for the first time during any calendar year (under the Plan and all
other stock option plans of the Company) exceeds $100,000, such portion in
excess of $100,000 shall be treated as a Nonqualified Stock Option. In the
event the Holder holds two or more such Options that become exercisable for the
first time in the same calendar year, such limitation shall be applied on the
basis of the order in which such Options are granted.
8.2 10% SHAREHOLDERS
If an individual owns more than 10% of the total voting power of all
classes of the Company's stock, then the exercise price per share of an
Incentive Stock Option shall not be less than 110% of the Fair Market Value of
the Common Stock on the Grant Date and the Option term shall not exceed five
years. The determination of 10% ownership shall be made in accordance with
Section 422 of the Code.
8.3 ELIGIBLE EMPLOYEES
Individuals who are not employees of the Company or one of its parent
corporations or subsidiary corporations may not be granted Incentive Stock
Options. For purposes of this Section 8.3, "parent corporation" and "subsidiary
corporation" shall have the meanings attributed to those terms for purposes of
Section 422 of the Code.
8.4 TERM
The term of an Incentive Stock Option shall not exceed 10 years.
8.5 EXERCISABILITY
To qualify for Incentive Stock Option tax treatment, an Option designated
as an Incentive Stock Option must be exercised within three months after
termination of employment for reasons other than death, except that, in the case
of termination of employment due to total disability, such Option must be
exercised within one year after such termination. Employment shall not be
deemed to continue beyond the first 90 days of a leave of absence unless the
Holder's reemployment rights are guaranteed by statute or contract. For
purposes of this Section 8.5, "total disability" shall mean a mental or physical
impairment of the Holder that is expected to
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<PAGE>
result in death or that has lasted or is expected to last for a continuous
period of 12 months or more and that causes the Holder to be unable, in the
opinion of the Company and two independent physicians, to perform his or her
duties for the Company and to be engaged in any substantial gainful activity.
Total disability shall be deemed to have occurred on the first day after the
Company and the two independent physicians have furnished their opinion of total
disability to the Plan Administrator.
8.6 TAXATION OF INCENTIVE STOCK OPTIONS
In order to obtain certain tax benefits afforded to Incentive Stock Options
under Section 422 of the Code, the Holder must hold the shares issued upon the
exercise of an Incentive Stock Option for two years after the Grant Date of the
Incentive Stock Option and one year from the date of exercise. A Holder may be
subject to the alternative minimum tax at the time of exercise of an Incentive
Stock Option. The Holder shall give the Company prompt notice of any
disposition of shares acquired by the exercise of an Incentive Stock Option
prior to the expiration of such holding periods.
8.7 PROMISSORY NOTES
The amount of any promissory note delivered pursuant to Section 13 in
connection with an Incentive Stock Option shall bear interest at a rate
specified by the Plan Administrator but in no case less than the rate required
to avoid imputation of interest (taking into account any exceptions to the
imputed interest rules) for federal income tax purposes.
SECTION 9. STOCK AWARDS
9.1 GRANT OF STOCK AWARDS
The Plan Administrator is authorized to make Awards of Common Stock on such
terms and conditions and subject to such restrictions, if any (which may be
based on continuous service with the Company or the achievement of performance
goals), as the Plan Administrator shall determine, in its sole discretion, which
terms, conditions and restrictions shall be set forth in the instrument
evidencing the Award. The terms, conditions and restrictions that the Plan
Administrator shall have the power to determine shall include, without
limitation, the manner in which shares subject to Stock Awards are held during
the periods they are subject to restrictions and the circumstances under which
forfeiture of Restricted Stock shall occur by reason of termination of the
Holder's services.
9.2 ISSUANCE OF SHARES
Upon the satisfaction of any terms, conditions and restrictions prescribed
in respect to a Stock Award, or upon the Holder's release from any terms,
conditions and restrictions of a Stock Award, as determined by the Plan
Administrator, the Company shall release, as soon as practicable, to the Holder
or, in the case of the Holder's death, to the personal representative of the
Holder's estate or as the appropriate court directs, the appropriate number of
shares of Common Stock.
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<PAGE>
9.3 WAIVER OF RESTRICTIONS
Notwithstanding any other provisions of the Plan, the Plan Administrator
may, in its sole discretion, waive the forfeiture period and any other terms,
conditions or restrictions on any Restricted Stock under such circumstances and
subject to such terms and conditions as the Plan Administrator shall deem
appropriate.
SECTION 10. ASSIGNABILITY
No Option granted under the Plan may be assigned or transferred by the
Holder other than by will or by the applicable laws of descent and distribution,
and, during the Holder's lifetime, such Awards may be exercised only by the
Holder. Notwithstanding the foregoing, and to the extent permitted by Section
422 of the Code, the Plan Administrator, in its sole discretion, may permit such
assignment, transfer and exercisability and may permit a Holder of such Awards
to designate a beneficiary who may exercise the Award or receive compensation
under the Award after the Holder's death; provided, however, that any Award so
assigned or transferred shall be subject to all the same terms and conditions
contained in the instrument evidencing the Award.
SECTION 11. ADJUSTMENTS
11.1 ADJUSTMENT OF SHARES
In the event that, at any time or from time to time, a stock dividend,
stock split, spin-off, combination or exchange of shares, recapitalization,
merger, consolidation, distribution to shareholders other than a normal cash
dividend, or other change in the Company's corporate or capital structure
results in (a) the outstanding shares, or any securities exchanged therefor or
received in their place, being exchanged for a different number or class of
securities of the Company or of any other corporation or (b) new, different or
additional securities of the Company or of any other corporation being received
by the holders of shares of Common Stock of the Company, then the Plan
Administrator shall make proportional adjustments in (i) the maximum number and
kind of securities subject to the Plan as set forth in Section 4.1 and (ii) the
number and kind of securities that are subject to any outstanding Award and the
per share price of such securities, without any change in the aggregate price to
be paid therefor. The determination by the Plan Administrator as to the terms
of any of the foregoing adjustments shall be conclusive and binding.
Notwithstanding the foregoing, a Corporate Transaction shall not be governed by
this Section 11.1 but shall be governed by Section 11.2.
11.2 CORPORATE TRANSACTION
(a) Except as otherwise provided in the instrument that evidences the
Award, in the event of any Corporate Transaction, each Award that is at the time
outstanding shall automatically accelerate so that each such Award shall,
immediately prior to the specified effective date for the Corporate Transaction,
become 100% vested and exercisable.
(b) Such Award shall not so accelerate, however, if and to the extent that
such Award is, in connection with the Corporate Transaction, either to be
assumed by the successor corporation or parent thereof (the "Successor
Corporation") or to be replaced with a comparable award for the purchase of
shares of the capital stock of the Successor Corporation. The
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<PAGE>
determination of Award comparability shall be made by the Plan Administrator,
and its determination shall be conclusive and binding. Any such Awards granted
to an "executive officer" (as that term is defined for purposes of Section 16 of
the Exchange Act) of the Company that are assumed or replaced in the Corporate
Transaction and do not otherwise accelerate at that time shall be accelerated in
the event that the Holder's employment or services should subsequently terminate
within two years following such Corporate Transaction, unless such employment or
services are terminated by the Successor Corporation for Cause or by the Holder
voluntarily without Good Reason. The acceleration will not occur if, in the
opinion of the Company's outside accountants, it would render unavailable
"pooling of interest" accounting for a Corporate Transaction that would
otherwise qualify for such accounting treatment.
(c) All such Options shall terminate and cease to remain outstanding
immediately following the consummation of the Corporate Transaction, except to
the extent assumed by the Successor Corporation.
11.3 FURTHER ADJUSTMENT OF OPTIONS
Subject to Section 11.2, the Plan Administrator shall have the discretion,
exercisable at any time before a sale, merger, consolidation, reorganization,
liquidation or change in control of the Company, as defined by the Plan
Administrator, to take such further action as it determines to be necessary or
advisable, and fair and equitable to Holders, with respect to Awards. Such
authorized action may include (but shall not be limited to) establishing,
amending or waiving the type, terms, conditions or duration of, or restrictions
on, Awards so as to provide for earlier, later, extended or additional time for
exercise and other modifications, and the Plan Administrator may take such
actions with respect to all Holders, to certain categories of Holders or only to
individual Holders. The Plan Administrator may take such action before or after
granting Awards to which the action relates and before or after any public
announcement with respect to such sale, merger, consolidation, reorganization,
liquidation or change in control that is the reason for such action.
11.4 LIMITATIONS
The grant of Awards will in no way affect the Company's right to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
SECTION 12. WITHHOLDING
The Company may require the Holder to pay to the Company the amount of any
withholding taxes that the Company is required to withhold with respect to the
grant, exercise, payment or settlement of any Award. In such instances, the
Plan Administrator may, in its discretion and subject to the Plan and applicable
law, permit the Holder to satisfy withholding obligations, in whole or in part,
by paying cash, by electing to have the Company withhold shares of Common Stock
or by transferring shares of Common Stock to the Company, in such amounts as are
equivalent to the Fair Market Value of the withholding obligation. The Company
shall have the right to withhold from any shares of Common Stock issuable
pursuant to an Award or from any cash amounts otherwise due or to become due
from the Company to the Holder an
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<PAGE>
amount equal to such taxes. The Company may also deduct from any Award any other
amounts due from the Holder to the Company or a Subsidiary.
SECTION 13. LOANS, INSTALLMENT PAYMENTS AND LOAN GUARANTEES
To assist a Holder (including a Holder who is an officer or a director of
the Company) in acquiring shares of Common Stock pursuant to an Award granted
under the Plan, the Plan Administrator, in its sole discretion, may authorize,
either at the Grant Date or at any time before the acquisition of Common Stock
pursuant to the Award, (a) the extension of a loan to the Holder by the Company,
(b) the payment by the Holder of the purchase price, if any, of the Common Stock
in installments, or (c) the guarantee by the Company of a loan obtained by the
Holder from a third party. The terms of any loans, installment payments or loan
guarantees, including the interest rate and terms of repayment, will be subject
to the Plan Administrator's discretion; provided, however, that repayment of any
Company loan to the Holder shall be secured by delivery of a full-recourse
promissory note for the loan amount executed by the Holder, together with any
other form of security determined by the Plan Administrator. The maximum credit
available is the purchase price, if any, of the Common Stock acquired, plus the
maximum federal and state income and employment tax liability that may be
incurred in connection with the acquisition.
SECTION 14. AMENDMENT AND TERMINATION OF PLAN
14.1 AMENDMENT OF PLAN
The Plan may be amended only by the Board in such respects as it shall deem
advisable; however, to the extent required for compliance with Section 422 of
the Code or any applicable law or regulation, shareholder approval will be
required for any amendment that will (a) increase the total number of shares as
to which Options may be granted under the Plan or that may be issued as Stock
Awards, (b) modify the class of persons eligible to receive Options, or (c)
otherwise require shareholder approval under any applicable law or regulation.
14.2 TERMINATION OF PLAN
The Board may suspend or terminate the Plan at any time. The Plan will
have no fixed expiration date; provided, however, that no Incentive Stock
Options may be granted more than 10 years after the earlier of the Plan's
adoption by the Board and approval by the shareholders.
14.3 CONSENT OF HOLDER
Subject to the requirements of Section 422 of the Code with respect to
Incentive Stock Options and to the terms and conditions and within the
limitations of the Plan, the Plan Administrator may modify or amend outstanding
Awards granted under the Plan. The modification or amendment of an outstanding
Award, or the amendment or termination of the Plan, shall not, without the
consent of the Holder, impair or diminish any of the Holder's rights or any of
the obligations of the Company under such Award. Except as otherwise provided
in the Plan, no outstanding Award shall be terminated without the consent of the
Holder. Unless the Holder agrees otherwise, any changes or adjustments made to
outstanding Incentive Stock
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Options granted under the Plan shall be made in such a manner so as not to
constitute a "modification" as defined in Section 424(h) of the Code and so as
not to cause any Incentive Stock Option issued hereunder to fail to continue to
qualify as an "incentive stock option" as defined in Section 422(b) of the Code.
SECTION 15. GENERAL
15.1 AWARD AGREEMENTS
Awards granted under the Plan shall be evidenced by a written agreement
that shall contain such terms, conditions, limitations and restrictions as the
Plan Administrator shall deem advisable and that are not inconsistent with the
Plan.
15.2 CONTINUED EMPLOYMENT OR SERVICES; RIGHTS IN AWARDS
None of the Plan, participation in the Plan or any action of the Plan
Administrator taken under the Plan shall be construed as giving any person any
right to be retained in the employ of the Company or limit the Company's right
to terminate the employment or services of any person.
15.3 REGISTRATION; CERTIFICATES FOR SHARES
The Company shall be under no obligation to any Holder to register for
offering or resale or to qualify for exemption under the Securities Act, or to
register or qualify under state securities laws, any shares of Common Stock,
security or interest in a security paid or issued under, or created by, the
Plan, or to continue in effect any such registrations or qualifications if made.
The Company may restrict the exercise of any Option and may adopt exercise
control restrictions in order to maintain any exemption requirements of federal
or state securities laws. The Company may refuse the exercise of any Option for
which an exemption from registration under federal and state securities laws is
unavailable. The Company may issue certificates for shares with such legends
and subject to such restrictions on transfer and stop-transfer instructions as
counsel for the Company deems necessary or desirable for compliance by the
Company with federal and state securities laws.
Inability of the Company to obtain, from any regulatory body having
jurisdiction, the authority deemed by the Company's counsel to be necessary for
the lawful issuance and sale of any shares hereunder or the unavailability of an
exemption from registration for the issuance and sale of any shares hereunder
shall relieve the Company of any liability in respect of the nonissuance or sale
of such shares as to which such requisite authority shall not have been
obtained.
15.4 NO RIGHTS AS A SHAREHOLDER
No Option shall entitle the Holder to any dividend, voting or other right
of a shareholder unless and until the date of issuance under the Plan of the
shares that are the subject of such Option, free of all applicable restrictions.
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<PAGE>
15.5 COMPLIANCE WITH LAWS AND REGULATIONS
Notwithstanding anything in the Plan to the contrary, the Board, in its
sole discretion, may bifurcate the Plan so as to restrict, limit or condition
the use of any provision of the Plan to Holders who are officers or directors
subject to Section 16 of the Exchange Act without so restricting, limiting or
conditioning the Plan with respect to other Holders. Additionally, in
interpreting and applying the provisions of the Plan, any Option granted as an
Incentive Stock Option pursuant to the Plan shall, to the extent permitted by
law, be construed as an "incentive stock option" within the meaning of Section
422 of the Code.
15.6 NO TRUST OR FUND
The Plan is intended to constitute an "unfunded" plan. Nothing contained
herein shall require the Company to segregate any monies or other property, or
shares of Common Stock, or to create any trusts, or to make any special deposits
for any immediate or deferred amounts payable to any Holder, and no Holder shall
have any rights that are greater than those of a general unsecured creditor of
the Company.
15.7 SEVERABILITY
If any provision of the Plan or any Award is determined to be invalid,
illegal or unenforceable in any jurisdiction, or as to any person, or would
disqualify the Plan or any Award under any law deemed applicable by the Plan
Administrator, such provision shall be construed or deemed amended to conform to
applicable laws, or, if it cannot be so construed or deemed amended without, in
the Plan Administrator's determination, materially altering the intent of the
Plan or the Award, such provision shall be stricken as to such jurisdiction,
person or Award, and the remainder of the Plan and any such Award shall remain
in full force and effect.
SECTION 16. EFFECTIVE DATE
The Plan's effective date is the date on which it is adopted by the Board,
so long as it is approved by the Company's shareholders at any time within 12
months of such adoption.
Adopted by the Board on __________, 199__ and approved by the Company's
shareholders on __________, 199__.
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<PAGE>
PLAN ADOPTION AND AMENDMENTS/ADJUSTMENTS
<TABLE>
<CAPTION>
Date of
Adoption/
Amendment/ Date of Shareholder
Adjustment Section Effect of Amendment Approval
---------- -------- ------------------- -------------------
<S> <C> <C> <C>
</TABLE>
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<PAGE>
EXHIBIT 10.10
SECOND SCHEDULE
F I J I
LEASE
WESTMALL LIMITED a limited liability company having its registered office at
Lautoka (hereinafter called "the lessor") hereby leases to CUL (FIJI) LIMITED a
limited liability company having its registered office at Lautoka (hereinafter
called "the lessee") to be held by the lessee as tenant for the period of ten
(10) years commencing on the 1st day of March, 1998 or if consent of the
Minister of Lands is not obtained by that day then the 1st day of the 1st month
following the date of the Minister of Land's consent at the monthly rental of
$27,083.33 (Twenty seven thousand eighty three dollars and thirty three cents)
per month payable on the 1st day of each and every month at the times and in
the manner hereinafter provided. ALL THAT improvement by way of a shopping
centre complex with car-park space for vehicles constructed by the Lessor
pursuant to an agreement dated day of , 1998 between the
Lessor and Lessee and comprising a floor area of not less than 25,000 square
feet hereinafter referred to as "the demised premises" situated on the land
described as follows:-
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Title Number Description Island City Area
A R P
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
C.L. Lot 1 D.P. 2913 "Natavolivoli" Vitilevu Nadi
and "Nawainitoki" (part of)
- ------------------------------------------------------------------------------------
</TABLE>
This Lease is subject to the following conditions. restrictions and covenants:-
- --------------------------------------------------------------------------------
Lodged by: YOUNG & ASSOCIATES, SOLICITORS,
LAUTOKA, FIJI.
....................No...........
Registered .........at...........
...................... Date .....................................
Registrar of Titles Documents:................................
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1. THE Lessee hereby agrees with the Lessor as follows:-
(a) To pay the reserved rent (less any deduction, set-off or counter-claim
which the lessee is entitled to raise against the lessor) in Lautoka
to the lessor or to such agent as he shall from time to time in
writing direct in Suva to the Lessor or to such agent as he shall from
time to time in writing direct.
(b) To pay promptly all garbage fees charges for electricity and water
consumed on the demised premises and not to commit or permit any act
or omission whereby the water or electricity supply shall be or become
liable to be disconnected.
(c) Subject to paragraph 3(h) hereof from time to time and at all times
throughout the said term to uphold and maintain in good and tenantable
repair the interior of the walls floors and ceilings but not if it
relates to structural aspect thereof of the demised premises and the
windows doors locks and fastenings thereof and (but without prejudice
to the Lessee's obligations under paragraph (d) of this clause) the
electrical water and sewerage installations therein and all the
Lessor's fittings and fixtures in connection therewith (fair wear and
tear and damage by fire storm earthquake or inevitable accident or
strikes and riots or civil commotion or action of the States enemies
(without neglect or wilful default of the Lessee) alone excepted and
at the expiry or sooner determination of the said term to deliver up
to the Lessor the demised premises in good and tenantable repair save
only as aforesaid.
(d) At the expense of the Lessee to replace or repair all broken circuit
fuses, wall switches and lampholders in the electricity installations
of the demised premises and promptly renew the washers or any leaking
taps in the demised premises.
(e) Not to throw or permit to be thrown any rubbish or other substances or
things out of any windows or doors of the demised premises or in or
about other parts of the said building to which the Lessee shall have
access or into any water closet or other water supply apparatus of the
demised premises and not to do or permit any act whereby the exterior
walls of the demised premises shall be discoloured defaced or damaged.
(f) To duly and promptly comply with all lawful notices and requirements
of the relevant City Council; Medical; Health and other proper Public
Authorities relating to the demised premises in respect of matters
arising from the Lessee's neglect or default.
(g) (i) Not at any time to do or suffer any act or omission upon or about
the demised premises which may render any increased or extra
premium payable for the insurance of the said building against
loss or damage by fire or which may make void or voidable any
policy for such insurance.
(ii) To keep the Lessor indemnified against all claims, actions,
losses and expenses of any nature which the Lessor may suffer or
incur or for which the Lessor may become liable in respect of:
(1) The neglect or careless use or misuse by the Lessee or
persons under the control of the Lessee of the demised
premises or arising out of any faulty fixture or fitting of
the Lessee:
(2) Any accident or damage to property or any person arising
from any occurrence in or near the demised premises wholly
or in part by reason of any act or omission by the Lessee or
persons under the control of the Lessee.
(h) Not to suffer or permit any person or persons to carry out or permit
to be carried on in or upon the demised premises any noise or
offensive or immoral business trade calling or purpose nor create any
nuisance thereon or do or suffer to be done any act matter or thing
which shall or may be or may grow to the
2
<PAGE>
annoyance nuisance grievance damage or disturbance of the Lessor or
occupiers of any adjoining lands or premises.
(i) To permit the Lessor or its servants agents contractors or workmen at
all reasonable times and on giving notice to the Lessee to enter into
and upon the demised premises to view the state and condition thereof
or for the purpose of executing repairs or renovations thereto or to
any other part of the building of which the demised premises form part
provided however that the Lessor its servants agents contractors or
workmen shall not enter any strong-room cage or place in the demised
premises where money securities or documents are kept unless
accompanied by an officer of the Lessee and that the Lessor will use
all reasonable endeavours to ensure that any repair or renovation work
shall be carried out in a manner which will not unduly interfere with
the Lessee's business.
2. THE Lessor hereby agrees with the Lessee as follows:-
(a) Except as expressly made payable by the Lessee to duly and punctually
pay all city rates insurance premiums and other assessments and
charges levied charged or imposed on the Lessor's said land and/or
the building thereon or on the Lessor or occupier thereof in respect
thereof.
(b) The Lessee paying the rent hereby reserved and observing and
performing all and singular the agreements and stipulations on the
Lessee's part herein contained or implied shall peaceably hold and
enjoy the demised premises during the said term of years without any
interruption by the Lessor or any person rightfully claiming under or
in trust for the Lessor.
(c) The Lessor will keep in good and tenantable repair and condition the
buildings on the demised premises so that the Lessee shall have the
full and free use and benefit thereof and the demised premises and
without limiting the generality of the foregoing the Lessor will at
all times maintain in good condition and proper working order the
water electrical sewerage and drainage installation in or serving the
said buildings or the demised premises except in the case of a defect
occasioned by the negligence or default of the Lessee.
(d) The Lessee may at its option and at its own cost, paint the interior
or exterior of the demised premises or any part thereof during the
currency of the Lease.
(e) The Lessee shall be at liberty without consent of the Lessor to
transfer or assign this Lease or sublet or otherwise part with
possession of the demised premises or any part thereof.
(f) The Lessor will insure and keep insured during the currency of this
Lease all buildings on the demised premises for their full replacement
value against all risks including (but not limited to) fire, malicious
damage, hurricane and earthquake and shall apply all or any proceeds
received under any policy of insurance towards reinstatement or repair
of the buildings or any part thereof as hereafter provided.
3. IT is hereby agreed and declared by and between the parties hereto as
follows:-
(a) If the demised premises or any part thereof shall at any time during
the continuance of this Lease be partially destroyed or damaged by
fire floods lightning storm tempest earthquake strikes riots civil
commotion or action of the State's enemies but not to such an extent
as to render the same unfit for the occupation and use of the Lessee
then the Lessor will at lessor expense forthwith and with all
reasonable speed reinstate the same and a fair and just proportion of
the rent hereby reserved according to the nature and extent of the
damage sustained shall be suspended and cease to be payable until the
premises shall have been reinstated and made fit for the occupation
and use of the Lessee and in the case of any dispute arising as to the
amount of such
3
<PAGE>
abatement of rent the same shall be referred to arbitration under the
provisions of the Arbitration Act.
(b) In case the demised premises shall be destroyed or damaged by fire
flood lightning storm tempest earthquake strikes riots civil commotion
or action of the State's enemies to such an extent as to render the
same wholly untenantable or if through the lawful act of any public
authority the Lessee shall be deprived of the use and enjoyment of the
demised premises then at the absolute option of the Lessee to be
exercised in writing the Lease hereby created may immediately cease
and determine but without prejudice to the rights of either party in
respect of any antecedent breach or non-observance of any covenant or
provisions hereof. If the Lessee does not so exercise the lessee right
to determine this Lease within three (3) months from the date of
Lessor advising the Lessee in writing of its agreement to reinstate
the demised premises then this Lease shall continue for the remaining
term and any renewal hereby granted in respect of the demised
premises. In that event the Lessee shall be entitled to construct such
new building as it shall decide and the Lessor will apply or cause to
be applied insurance proceeds received by or for it towards such cost
of construction.
(c) If the whole of the demised Premises, of if such portions of the
facilities and building improvements comprising part of the demised
Premises as may be required for the reasonable use of the Lessee's
business, shall be taken by virtue of any condemnation or eminent
domain proceeding, this Lease, at the option of the Lessee, shall
automatically terminate as of the date of any final judgment entered
under such condemnation, or as of the date possession is taken by the
condemning authority, whichever is earlier. In the event the Lessee
does not exercise such right to terminate this lease, this Lease shall
continue and the Lessee shall continue in possession of the remainder
of the demised Premises under the terms herein provided, except that
the monthly rent payable herein shall be reduced in proportion to the
amount of the land area of the demised Premises so taken. The Lessee
shall have the right to recover from any condemning authority that
portion of any award attributed to the Lessee's leasehold interest.
(d) If and whenever the rent shall be in arrear and unpaid for twenty (21)
days from the due date the same may be levied by distress.
(e) If the rent hereby reserved or any part thereof shall be in arrear and
unpaid for the space of twenty-eight (28) days whether the same shall
have been legally or formally demanded or not or if and whenever there
shall be any breach or non-observance or non-performance of any
stipulation condition or agreement herein on the part of the Lessee
contained or implied it shall be lawful for the Lessor forthwith or at
any time thereafter without making any demand or giving any notice or
doing or seeing to the doing of any act matter or thing to re-enter
upon and take possession of the demised premises or any part thereof
in the name of the whole whereupon the term hereby created shall
absolutely cease and determine but without releasing the Lessee from
liability for any rent due or accruing due hereunder or from liability
for any antecedent breach of any stipulation agreement or condition
hereunder.
(f) That no waiver by the Lessor of one breach of any covenant obligation
or provision in this Lease contained or implied shall operate as a
waiver of another breach of the same or of any other covenant
obligation or provision in this Agreement contained or implied.
(g) In the event of the Lessee holding over after the expiration or sooner
determination of the term hereby granted or any lawful renewal thereof
with the consent of the Lessor the Lessee shall become a monthly
Lessee only of the Lessor at a monthly rental equivalent to a monthly
rent payable by the Lessee hereunder after the expiration or sooner
determination of such term or renewal thereof and otherwise on the
said terms and conditions mutatis mutandis as those herein contained
so far as applicable.
(h) The Lessee may prior to the commencement of the said term and from
time to time during the said term and at its discretion make erect or
install alterations additions decorations improvements
4
<PAGE>
fixtures fittings and appliances within the existing building on the
demised premises for the purpose of its business and such shall remain
the property of the Lessee and upon the expiration or earlier
termination of this Lease, the Lessee may remove the same.
(i) (i) In case the Lessor shall at any time fail neglect or default in
making any payment required of it under or for the benefit of
this Lease (such as and without limitation but by way of
illustration only insurance premium and city rates) it shall be
lawful for but not obligatory upon the Lessee to pay the same and
any moneys paid for or on behalf of the Lessor by the Lessee
shall carry interest at Bank rate prevailing from time to time on
overdraft accounts and all such moneys including accrued interest
shall be payable on Demand.
(ii) Without discharging the Lessor's liability to pay and as security
only the Lessor hereby irrevocably authorises the Lessee to
deduct all moneys and interest payable by the Lessor under the
preceding sub-clause from the rentals payable under clause 1 (a).
4. AS long as the Lessee is not in default under this Lease, the Lessee shall
have the option to renew the term of this Lease for three renewal terms (each, a
"Renewal Term") of 10 years, 5 years and 5 years such renewal to be upon the
covenants, terms and conditions as set forth in this Lease, except that annual
rent for such Renewal Term will be the "Fair Market Rental Value" (defined
below) of the Premises at the commencement of the Renewal Term. In order to
exercise its option to renew, Lessee shall give written notice to Lessor not
less that one hundred eighty (180) days prior to the end of the then-current
lease term.
"Fair Market Rental Value" shall be determined as follows. Lessor and Lessee
shall seek to agree as to Fair Market Value within thirty (30) days after Lessee
gives Lessor notice of its election to renew this Lease. If Lessor and Lessee do
not agree about Fair Market Rental Value within such thirty (30) day period, the
following provisions shall apply.
(a) Within fifteen (15) days after the expiration of the thirty (30) day
period, the Lessor and Lessee shall each identify an impartial,
licensed real estate professional familiar to the Namaka area to act
as a valuation expert. If either party fails to appoint an expert
within such fifteen (15) day period, then the determination of the
expert first appointed will be final, conclusive and binding on both
parties.
(b) The named experts shall together determine the Fair Market Rental
Value. In making such determination, the experts shall consider the
rentals at which leases are being concluded for comparable
5
<PAGE>
space in the Building and for comparable space in comparable
buildings. If the experts fail to agree on the Fair Market Rental
Value within thirty (30) days of their appointment and the difference
in their conclusions about Fair Market Rental Value is (10%) or less
of the lower of the two determinations, Fair Market Rental Value shall
be the average of the two determinations.
(c) If the two experts fail to agree on Fair Market Rental Value and the
difference between the two determinations exceeds ten percent (10%) of
the lower of the two determinations then the experts shall appoint a
third expert, similarly impartial and qualified, to determine the Fair
Market Rental Value. This third expert shall determine the Fair Market
Rental Value within thirty (30) days of his or her appointment, and
his or her determination will be final, conclusive and binding on
Lessor and Lessee. The Lessor and Lessee shall each execute and
deliver an agreement confirming annual rent for the renewal term.
(d) The Lessor and the Lessee shall each pay the fees of any expert
appointed by the Lessor and Lessee, respectively, and Lessor and
Lessee shall each pay one-half (1/2) of the fees of the third expert,
if any.
5. IN consideration of the sum of $1.00 (One dollar) paid to the Lessor by the
Lessee (the receipt of which sum the Lessor hereby acknowledges) the Lessor
agrees and undertakes that if at any time during the term of this Lease or any
renewal thereof the Lessor shall decide to sell the property comprised in this
Lease the said property shall be first offered in writing to the Lessee. The
said offer shall be at a price and upon the terms and conditions as the Lessor
shall advise and the offer shall remain open for acceptance by the Lessee for
such period as shall be stipulated being not less than two months from the date
of the service of the offer upon the Lessee. Upon receipt of the said offer the
Lessee may cause a valuation to be done of the property by a qualified
registered valuer in Fiji appointed mutually by the parties or failing agreement
by the firm. Such valuation shall be used by the parties as a basis for
negotiating an acceptance of the said offer or any other price that may be
mutually agreed. Should the parties fail to mutually agree upon a price or
should the Lessee refuse to accept the said offer or fail to do so within the
stipulated time then the
6
<PAGE>
Lessor shall be free to sell the said property to anyone else but such sale
shall not be at a price lower nor the terms and conditions any less onerous
than those already offered to the Lessee. In any event the cost of the said
valuation shall be shared equally by the Lessor and the Lessee.
6. THIS Lease is subject to the consent of Minister of Lands pursuant to the
provisions of Section 6 of the Lands Sales Act as the Lessor shall obtain such
consent before the execution of this Lease.
7. (a) THE Lessor warrants and represents that any use, storage, treatment,
or transportation of Hazardous Substances, as defined hereinafter
which has occurred in or on the demised Premises prior to the date
hereof has been in compliance with all applicable federal, state and
local laws, regulations and ordinances. The Lessor additionally
warrants and represents that no release, leak, discharge, spill,
disposal or emission of Hazardous Substances has occurred in, on or
under the demised Premises, and that the demise Premises are free of
Hazardous Substances as of the date hereof.
(b) THE Lessor agrees to indemnify and hold harmless the Lessee from any
and all claims, damages, fines, judgments, penalties, costs,
liabilities or losses (including, without limitation, any and all sums
paid for settlement of claims, attorneys' fees, consultant and expert
fees) arising during or after the lease term from or in connection
with the presence or suspected presence of Hazardous Substances in or
on the demised Premises, unless the Hazardous Substances are present
solely as a result of negligence, willful misconduct or other acts of
the Lessee, its agents, employees, contractors or invitees. Without
limitation of the foregoing, this indemnification shall include any
and all costs incurred due to any investigation of the site or any
cleanup, removal or restoration mandated by a federal, state or local
agency or political subdivision, unless the Hazardous Substances are
present solely as a result of negligence, willful misconduct or other
acts of the Lessee, its agents, employees, contractors or invitees.
This indemnification shall specifically include any and all costs due
to Hazardous Substances which flow,
7
<PAGE>
diffuse, migrate or percolate into, onto or under the demised Premises
after the lease term commences.
(c) As used herein, "Hazardous Substances" shall mean any substance or
material defined or designated as hazardous or toxic waste, hazardous
or toxic material, a hazardous, toxic or radioactive substance or
other similar term by any federal, state or local environmental
statue, regulation or ordinance presently in effect or that may be
promulgated in this future as such statutes, regulations and
ordinances may be amended from time to time.
8. (a) THE Lessee shall pay all Value Added Tax (or any similar tax levied in
substitution therefore) on all payments by the Lessee in terms of this
Lease where such payments are levied with such tax.
(b) THE Lessee shall upon demand pay to the Lessor all Value Added Tax (or
any similar tax levied in substitution therefore) paid or payable by
the Lessor in respect of:
(i) the rental payable under this Lease;
(ii) any other payments paid or payable by the Lessee under this Lease
or paid by the Lessor on behalf of the Lessee in terms of the
Lessee's obligations to make such payment under this Lease.
9. (a) IF any dispute or difference shall arise between the parties as to:
(i) The meaning or application of any part of this Lease; or
(ii) Any other matter in connection with or which may have an effect
on this Lease
the dispute or difference ("the Issue") shall be referred to the award
of a single arbitrator to be agreed upon between the Lessor and the
Lessee.
(b) If the Lessor and the Lessee are unable to agree upon a single
arbitrator within 10 days of either the Lessor or the Lessee notifying
the other in writing of their wish to have the Issue arbitrated then
either party ("the Notifying Party") may at any time subsequently by
notice in writing to the other party ("the
8
<PAGE>
Receiving Party") require the Issue to be determined by two
arbitrators (one to be appointed by the Lessor and one to be appointed
by the Lessee) and their umpire (to be appointed by the arbitrators
before proceeding to determine the Issue). The notice to be given by
the Notifying Party pursuant to this subclause shall:
(i) Nominate the arbitrator appointed by the Notifying Party;
and
(ii) Require the Receiving Party to nominate its arbitrator by a
date not less than 10 days after the date of service of the
notice on the Receiving Party; and
(iii) Warn the Receiving Party of the consequences under subclause
8 (c) of failure to appoint an arbitrator by the date
specified by the Notifying Party.
(c) If the Receiving Party shall fail to appoint its arbitrator by the
date specified then the Notifying Party may by notice in writing to
the Receiving Party have the Issue determined solely by the Notifying
Party's arbitrator.
(d) If any arbitrator appointed pursuant to subclauses 8 (a) or (b)
refuses or fails to act in pursuance of the arbitration (including
appointing an umpire if necessary) within a reasonable time of their
appointment then either the Lessor or the Lessee may (provided the
defaulting arbitrator has first been given in writing a reasonable
time in which to act) request the President of the Fiji Law Society to
appoint a replacement arbitrator or an umpire (if the arbitrators are
unable to agree on an umpire) who shall act in lieu of the defaulting
arbitrator or as the umpire as the case may be.
(e) Time shall be of the essence under this clause.
(f) The parties agree to be bound by any decision or award completed
pursuant to this clause.
(g) This provision shall survive the expiration or earlier determination
of this Lease.
(h) Any referral to arbitration under this clause shall be a submission to
arbitration under the Arbitration Act Cap 38 which
9
<PAGE>
Act shall, to the extent not inconsistent with anything in this
clause, apply to any such submission.
10. ALL notices required hereunder shall be in writing and may be personally
delivered or mailed by certified or registered mail, addresssed to the
respective parties, and all notices, demands or other writing to be made, given
or sent hereunder, or which may be so given or made or sent by any party to the
other shall be deemed to have been fully given or made when personally delivered
or if mailed, 10 calendar days following the deposit thereof in the Fiji mail,
registered or certified, postage prepaid, and addressed to the respective
parties as follows:-
Lessor: WESTMALL LIMITED
P.O. Box 7,
Nadi,
Fiji Islands.
Attention : Mr. Terry Buckley
Lessee: CUL (FIJI) LIMITED
12410 S.E. 32nd Street,
Bellevue,
WA 98005,
Attention : Mr. Jim Rose
11. EACH party shall bear half the Solicitors cost in preparing and attending
to execution of this Lease except that the Lessee shall pay disbursements for
the stamping and registration of the same.
12. EACH party acknowledges that it has been specifically advised by Young &
Associates, Solicitors to obtain seperate and independent legal advice on this
agreement and the transaction contemplated therein.
10
<PAGE>
THE SCHEDULE
------------
IN WITNESS WHEREOF the parties have subscribed their names the day and year
hereinbefore appearing.
THE COMMON SEAL of WESTMALL LIMITED )
was hereunto affixed in our presence )
and we certify that we are the proper ) [THE COMMON SEAL OF WESTMALL LIMITED]
officers by whom and in whose presence )
the said Seal is to be affixed: )
[SIGNATURE ILLEGIBLE] [SIGNATURE ILLEGIBLE]
- --------------------------------- --------------------------------
Director Director
THE COMMON SEAL of CUL (FIJI) )
LIMITED was hereunto affixed )
in our presence and we certify ) [THE COMMON SEAL OF CUL (FIJI) LIMITED]
that we are the proper officers )
by whom and in whose presence )
the said Seal is to be affixed: )
/s/ Michael J. Rose /s/ Allan Youngberg
- --------------------------------- --------------------------------
Director Director
MEMORANDUM OF PRIOR LEASES, MORTGAGES AND ENCUMBRANCES REFERRED TO:
Nil
Correct for the purposes of Land Transfer Act.
--------------------------------
Solicitor for the Lessee
<PAGE>
[PROPOSED LAYOUT PLAN OF WEST MALL DEVELOPMENT FIJI]
<PAGE>
EXHIBIT 10.11
____________________
SECOND SCHEDULE
F I J I
-------
____________________
LEASE
-----
FIJI PUBLIC SERVICE ASSOCIATION a trade union duly registered under the Trade
Union Act (Cap 96) (hereinafter called "the Lessor" ) hereby leases to CUL
(FIJI) LIMITED a limited liability company having its registered office at
Lautoka (hereinafter called "the Lessee") to be held by the Lessee as tenant for
the period of ten (10) years commencing on the 1st day of December, 1998 or if
consent of the Minister of Lands is not obtained by that day then the 1st day of
the 1st month following the date of the Minister of Land's consent at the
monthly rental of $29,000.00 (Twenty nine thousand dollars) per month plus VAT
payable on the 1st day of each and every month at the times and in the manner
hereinafter provided for the initial period of 5 years and thereafter at a Fair
Market Value rent to be agreed between the Lessor and the Lessee for the next 5
years which rent is to be determined in accordance with the procedure set out in
clause 4 hereof if no agreement is reached the Lessor and the Lessee which rent
in any event shall not be less than $29,000.00 per month TOGETHER WITH ALL THAT
improvement by way of a supermarket complex (comprising a floor area of not less
than 30,000 square feet) with car-park space for 90 vehicles constructed by the
Lessor pursuant to an Agreement dated ____ day of _________, 1998 between the
Lessor and Lessee situated on the south western part of the freehold land
situated at Laucala Bay Road, Suva hereinafter referred to as "the demised
premises" and identified in the Schedule hereto ON ALL THAT OR PARCEL OF LAND
described as follows:-
<TABLE>
<CAPTION>
Area
Title Number Description Island City A R P
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lot 1 on Slightly in excess
C. T. 24859 DP No. 6617 Vitilevu Suva of 1 acre
- -------------------------------------------------------------------------------------------------------
</TABLE>
______________________________________________ Lodged by: YOUNG & ASSOCIATES,
SOLICITORS,
No. LAUTOKA. FIJI.
- ---------------------------- ---------------
Registered at
------------------ ----------------
------------------------------------ Date
Registrar of Titles ---------------------------
Documents:
______________________________________________ ----------------------
<PAGE>
This Lease is subject to the following conditions, restrictions and covenants:
1. THE Lessee hereby agrees with the Lessor as follows: -
(a) To pay the reserved rent Plus VAT in Suva to the Lessor or to such
agent as it shall from time to time in writing direct;
(b) To pay promptly all apportioned (according to the area utilized) Suva
City Council rates, garbage fees, charges for electricity and water
consumed on the demised premises and not to commit or permit any act
or omission whereby the water or electricity supply shall be or become
liable to be disconnected;
(c) Subject to paragraph 3(h) hereof from time to time and at all times
throughout the said term to uphold and maintain in good and tenantable
repair the interior of the walls floors and ceilings but not if it
relates to structural aspect thereof of the demised premises and the
windows doors locks and fastenings thereof and (but without prejudice
to the Lessee's obligations under paragraph (d) of this clause) the
electrical water and sewerage installations therein and all the
Lessor's fittings and fixtures in connection therewith (fair wear and
tear and damage by fire storm earthquake or inevitable accident or
strikes and riots or civil commotion or action of the States enemies
(without neglect or wilful default of the Lessee) alone excepted and
at the expiry or sooner determination of the said term to deliver up
to the Lessor the demised premises in and tenantable repair save only
as aforesaid;
(d) At the expense of the Lessee to replace or repair all defective or
broken circuit fuses, wall switches and lampholders in the electricity
installations of the demised premises, promptly renew the washers or
any leaking taps in the demised premises and repair and replace all
broken glass including exterior windows in the premises;
(e) Not to throw or permit to be thrown any rubbish or other substances or
things out of any windows or doors of the demised premises or in or
about other parts of the said building to which the Lessee shall have
access or into any water closet or other water supply apparatus of the
demised premises and not to do or permit any act whereby the exterior
walls of the demised premises shall be discolored defaced or damaged;
(f) To duly and promptly comply with all lawful notices and requirements
of the relevant City Council; Medical; Health and other proper Public
Authorities relating to the demised premises in respect of matters
arising from the Lessee's neglect or default;
(g) (i) Not at any time to do or suffer any act or omission upon or about
the demised premises which may render any increased or extra premium
payable for the insurance of the said building against loss or damage
by fire or which may make void or voidable any policy for such
insurance;
(ii) To keep the Lessor indemnified against all claims, actions,
losses and expenses of any nature which the Lessor may suffer or incur
or for which the Lessor may become liable in respect of:
-2-
<PAGE>
(1) The neglect or careless use or misuse by the Lessee or persons
under the control of the Lessee of the demised premises or
arising out of any faulty fixture or fitting of the Lessee;
(2) Any accident or damage to property or any person arising from any
occurrence in or near the demised premises wholly or in part by
reason of any act or omission by the Lessee or persons under the
control of the Lessee;
(h) Not to suffer or permit any person or persons to carry out or permit
to be carried on in or upon the demised premises any noise or
offensive or immoral business trade calling or purpose nor create any
nuisance thereon or do or suffer to be done any act matter or thing
which shall or may be or may grow to the annoyance nuisance grievance
damage or disturbance of the Lessor or occupiers of any adjoining
lands or premises;
(i) To permit the Lessor or its servants agents contractors or workmen at
all reasonable times and on giving notice to the Lessee to enter into
and upon the demised premises to view the state and condition thereof
or for the purpose of executing repairs or renovations thereto or to
any other part of the building of which the demised premises form part
provided however that the Lessor its servants agents contractors or
workmen shall not enter any strong-room cage or place in the demised
premises where money securities or documents are kept unless
accompanied by an officer of the Lessee and that the Lessor will use
all reasonable endeavors to ensure that any repair or renovation work
shall be carried out in a manner which will not unduly interfere with
the Lessee's business;
(j) The Lessee will not without the consent in writing of the Lessor bring
upon the demised premises any machinery or plant or equipment unless
reasonably necessary or proper for the conduct of the Lessees use of
the demised premises as herein provided and in no event shall any such
machinery plant or equipment be of such nature or size as to cause or
in the reasonable opinion of the Lessor be likely to cause any
structural or other damage to the floors or walls or any other parts
of the demised premises or the common parts. Before bringing any such
equipment upon the demised premises, or the common parts the Lessee
shall inform the Lessor of the Lessee's intention so to do and the
Lessor may direct the routing installation and location of all such
machinery plant and equipment and the Lessee shall observe and comply
with all such directions PROVIDED HOWEVER the Lessor acknowledges that
not withstanding the foregoing, it will and does permit the Lessee to
use heavy duty fork lifts on the demised premises or the common parts
in the normal course of business;
(k) The Lessee will not use or permit to be used the premises or any part
thereof otherwise then as a supermarket;
(l) The Lessee will not assign transfer demise sublet or part with or
share the possession of or grant any license affecting or otherwise
deal with or dispose of the demised premises or any part thereof or
any act or deed procure the demised premises or any part thereof to be
assigned transferred demised sublet shared or put into the possession
of any person or persons without the consent in writing of the Lessor
first had and
-3-
<PAGE>
obtained which consent shall not be reasonably or arbitrarily withheld
where the assignee or sub-lessee is financially sound reputable and
reliable and is able to provide a similar bank bond in respect of this
Lease as set out in clause 13 hereof.
2. THE Lessor hereby agrees with the lessee as follows:-
(a) Except as expressly made payable by the Lessee to duly and punctually
pay all insurance premiums and other assessments and charges levied
charged or imposed on the Lessor's said land and/or the building
thereon or on the Lessor or occupier thereof in respect thereof;
(b) The Lessee paying the rent hereby reserved and observing and
performing all and singular the agreements and stipulations on the
Lessee's part herein contained or implied shall peaceably hold and
enjoy the demised premises during the said term of years without any
interruption by the Lessor or any person rightfully claiming under or
in trust for the Lessor;
(c) The Lessor will keep in good and tenantable repair and condition the
buildings on the demised premises so that the Lessee shall have the
full and free use and benefit thereof and the demised premises and
without limiting the generality of the foregoing the Lessor will at
all times maintain in good condition and proper working order the
water electrical sewerage and drainage installation in or serving the
said buildings or the demised premises except in the case of a defect
occasioned by the negligence or default of the Lessee;
(d) The Lessee may at its option and at its own cost, paint the interior
or exterior of the demised premises or any part thereof during the
currency of the Lease;
(e) The Lessor will insure and keep insured during the currency of this
Lease all buildings on the demised premises for their full replacement
value against all risks including (but not limited to) fire, malicious
damage, hurricane and earthquake and shall apply all or any proceeds
received under any policy of insurance towards reinstatement or repair
of the buildings or any part thereof as hereafter provided.
3. IT is hereby agreed and declared by and between the parties hereto as
follows:-
(a) If the demised premises or any part thereof shall at any time during
the continuance of this lease be partially destroyed or damaged by
fire floods lighting storm tempest earthquake strikes riots civil
commotion or action of the State's enemies but not to such an extent
as to render the same unfit for the occupation and use of the Lessee
then the Lessor will at Lessor's expense forthwith and with all
reasonable speed reinstate the same and a fair and just proportion of
the rent hereby reserved according to the nature and extent of the
damage sustained shall be suspended and cease to be payable until the
premises shall have been reinstated and made fit for the occupation
and use of the Lessee and in the case of any dispute arising as to the
amount of such abatement of rent the same shall be referred to
arbitration under the provisions of the Arbitration Act;
-4-
<PAGE>
(b) In case the demised premises shall be destroyed or damaged by fire
flood lightning storm tempest earthquake strikes riots civil commotion
or action of the State's enemies to such an extent as to render the
same wholly untenantable or if through the lawful act of any public
authority the Lessee shall be deprived of the use and enjoyment of the
demised premises then at the absolute option of the Lessee to be
exercised in writing the Lease hereby created may immediately cease
and determine but without prejudice to the rights of either party in
respect of any antecedent breach or non-observance of any covenant or
provisions hereof. If the Lessee does not so exercise the lessee
right to determine this Lease within (6) six months from the date of
entitlement or if it earlier notifies the Lessor of its desire not to
so determine the Lease then this Lease shall continue for the
remaining term and any renewal hereby granted in respect of the
demised term premises. In that event the Lessee shall be entitled to
construct such new building as it shall decide and the Lessor will
apply or cause to be applied insurance proceeds received by or for it
towards such cost of construction;
(c) If the whole of the demised Premises, or if such portions of the
facilities and building improvements comprising part of the demised
Premises as may be required for the reasonable use of the Lessee's
business, shall be taken by virtue of any condemnation or eminent
domain proceeding, this Lease, at the option of the Lessee, shall
automatically terminate as of the date of any final judgment entered
under such condemnation, or as of the date possession is taken by the
condemning authority, whichever is earlier. In the event the Lessee
does not exercise such right to terminate this lease, this Lease shall
continue and the Lessee shall continue in possession of the remainder
of the demised Premises under the terms herein provided, except that
the monthly rent payable herein shall be reduced in proportion to the
amount of the land area of the demised Premises so taken. The Lessee
shall have the right to recover from any condemning authority that
portion of any award attributed to the Lessee's leasehold interest;
(d) If and whenever the rent shall be in arrear and unpaid for twenty (21)
days from the due date the same may be levied by distress;
(e) Without prejudice to the rights power and remedies of the Lessor
otherwise under this Agreement the Lessee will pay to the Lessor
interest at the rate of 13.5% per annum on any moneys including rent
due but unpaid for seven (7) days by the Lessee to the Lessor on any
account whatsoever pursuant to this Agreement such interest to be
computed from the due date for the payment of the moneys in respect of
which the interest is chargeable until payment of such moneys in full
and to be recoverable in like manner as rent in arrears;
(f) If the rent hereby reserved or any part thereof shall be in arrear and
unpaid for the space of twenty-eight (28) days whether the same shall
have been legally or formally demanded or not or if and whenever there
shall be any breach or non-observance or non-performance of any
stipulation condition or agreement herein on the part of the Lessee
contained or implied it shall be lawful for the Lessor forthwith or at
any time thereafter without making any demand or giving any notice or
doing or seeing to the doing of any act matter or thing to re-enter
upon and take possession of the demised
-5-
<PAGE>
premises or any part thereof in the name of the whole whereupon the
term hereby created shall absolutely cease any rent due or accruing
due hereunder or from liability for any antecedent breach of any
stipulation agreement or condition hereunder;
(g) That no waiver by the Lessor of one breach of any covenant obligation
or provision in this Lease contained or implied shall operate as a
waiver of another breach of the same or of any other covenant
obligation or provision in this Agreement contained or implied;
(h) In the event of the Lessee holding over after the expiration or sooner
determination of the term hereby granted or any lawful renewal thereof
with the consent of the Lessor the Lessee shall become a monthly
Lessee only of the Lessor at a monthly rental equivalent to a monthly
rent payable by the Lessee hereunder after the expiration or sooner
determination of such term or renewal thereof and otherwise on the
said terms and conditions mutatis mutandis as those herein contained
so far as applicable;
(i) The Lessee may prior to the commencement of the said term and from
time to time during the said term and at its discretion make erect or
install alterations additions decorations improvements fixtures
fittings and appliances within the existing building on the demised
premises for the purpose of its business and such shall remain the
property of the Lessee and upon the expiration or earlier termination
of this Lease, the Lessee may remove the same provided that it makes
good any damage to the Lessor's premises occasioned by such removal.
4. AS long as the Lessee is not in default under this Lease, the Lessee shall
have the option to renew the term of this Lease for two renewal terms (each, a
"Renewal Term") of five (5) years provided the Lessee gives to the Lessor at
least nine (9) months notice of its intention to renew the Lease such renewal to
be upon the covenants, terms and conditions as set forth in this Lease, except
that annual rent for such Renewal Term will be the "Fair Market Rental Value"
(defined below) of the Premises at the commencement of the Renewal Term but in
any event the annual rent shall not be less than the rent for the previous term.
In order to exercise its option to renew, Lessee shall give written notice to
Lessor not less that one (1) year prior to the end of the then-current lease
term.
"Fair Market Rental Value" shall be determined as follows: Lessor and Lessee
shall seek to agree as to Fair Market Value within thirty (30) days after Lessee
gives Lessor notice of its election to renew this Lease. If Lessor and Lessee
do not agree about Fair Market Rental Value within such thirty (30) day period,
the following provisions shall apply:
(a) Within fifteen (15) days after the expiration of the thirty (30) day
period, the Lessor and Lessee shall each identify an impartial,
licensed real estate professional familiar to
-6-
<PAGE>
the Suva area to act as a valuation expert. If either party fails to
appoint an expert within such fifteen (15) day period, then the
determination of the expert first appointed will be final, conclusive
and binding on both parties.
(b) The named experts shall together determine the Fair Market Rental
Value. In making such determination, the experts shall consider the
rentals at which leases are being concluded for comparable space in
the Building and for comparable space in comparable buildings. If the
experts fail to agree on the Fair Market Rental Value within thirty
(30) days of their appointment and the difference in their conclusions
about Fair Market Rental Value is (10%) or less of the lower of the
two determinations. Fair Market Rental Value shall be the average of
the two determinations.
(c) If the two experts fail to agree on Fair Market Rental Value and the
difference between the two determinations exceeds ten percent (10%) of
the lower of the two determinations then the experts shall appoint a
third expert, similarly impartial and qualified, to determine the Fair
Market Rental Value. This third expert shall determine the Fair
Market Rental Value within thirty (30) days of his or her appointment,
and his or her determination will be final, conclusive and binding on
Lessor and Lessee. The Lessor and Lessee shall each execute and
deliver an agreement confirming annual rent for the renewal term.
(d) The Lessor and the Lessee shall each pay the fees of any expert
appointed by the Lessor and Lessee, respectively, and Lessor and
Lessee shall each pay one-half (1/2) of the fees of the third expert,
if any.
5. IN consideration of the sum of $1.00 (One dollar) paid to the Lessor by
the Lessee (the receipt of which sum the Lessor hereby acknowledges) the Lessor
agrees and undertakes that if at any time during the term of this Lease or any
renewal thereof the Lessor shall decide to sell the property comprised in
Certificate of Title No. 24859 then the said property shall be first offered in
writing to the Lessee. The said offer shall be at a price and upon the terms
and conditions as the Lessor shall advise and the offer shall remain open for
acceptance by the Lessee for such period as shall be stipulated being not less
than one month from the date of the service of the offer upon the Lessee. Upon
receipt of
-7-
<PAGE>
the said offer the Lessee may cause a valuation to be done at its
cost of the property by a qualified registered valuer in Fiji appointed mutually
by the parties or failing agreement by the firm. Such valuation shall be used
by the parties as a basis for negotiating an acceptance of the said offer or any
other price that may be mutually agreed. Should the parties fail to mutually
agree upon a price or should the Lessee refuse to accept the said offer or fail
to do so within the stipulated time then the Lessor shall be free to sell the
said property to anyone else but such sale shall not be at a price lower nor the
terms and conditions any less onerous than those already offered to the Lessee.
In any event the cost of the said valuation shall be shared equally by the
Lessor and the Lessee.
6. THIS Lease is subject to the consent of Minister of Lands pursuant to the
provisions of Section 6 of the Lands Sales Act. The Lessor shall obtain such
consent before the execution of this Lease.
7. (a) THE Lessee shall pay all Value Added Tax (or any similar tax
levied in substitution therefore) on all payments by the Lessee in
terms of this Lease where such payments are levied with such tax.
(b) THE Lessee shall upon demand pay to the Lessor all Value Added Tax (or
Any similar tax levied in substitution therefore) paid or payable by
the Lessor in respect of:
(i) the rental payable under this Lease;
(ii) any other payments paid or payable by the Lessee under this Lease
or paid by the Lessor on behalf of the Lessee in terms of the
Lessee's obligations to make such payment under this Lease.
8. (a) IF any dispute or difference shall arise between the parties as to:
(i) The meaning or application of any part of this Lease; or
(ii) Any other matter in connection with or which may have an effect
on this Lease
the dispute or difference ("the Issue") shall be referred to the award of a
single arbitrator to be agreed upon between the Lessor and the Lessee.
(b) If the Lessor and the Lessee are unable to agree upon a single
arbitrator within 10 days of either the Lessor or the Lessee notifying
the other in writing of their wish to
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have the Issue arbitrated then either party ("the Notifying Party")
may at any time subsequently by notice in writing to the other party
("the Receiving Party") required the Issue to be determined by two
arbitrators (one to be appointed by the Lessor and one to be appointed
by the Lessee) and their umpire (to be appointed by the arbitrators
before proceeding to determine the Issue). The notice to be given by
the Notifying Party pursuant to this subclause shall:
(i) Nominate the arbitrator appointed by the Notifying Party; and
(ii) Require the Receiving Party to nominate its arbitrator by a
date not less than 10 days after the date of service of the
notice on the Receiving Party; and
(iii) Warn the Receiving Party of the consequences under subclause 8
(c) of failure to appoint an arbitrator by the date specified
by the Notifying Party.
(c) If the Receiving Party shall fail to appoint its arbitrator by the
date specified then the Notifying Party may by notice in writing to
the Receiving Party have the Issue determined solely by the Notifying
Party's arbitrator.
(d) If any arbitrator appointed pursuant to subclauses 8 (a) or (b)
refuses or fails to act in pursuance of the arbitration (including
appointing an umpire if necessary) within a reasonable time of their
appointment then either the Lessor or the Lessee may (provided the
defaulting arbitrator has first been given in writing a reasonable
time in which to act) request the President of the Fiji Law Society to
appoint a replacement arbitrator or an umpire (if the arbitrators are
unable to agree on an umpire) who shall act in lieu of the defaulting
arbitrator or as the umpire as the case may be.
(e) Time shall be of the essence under this clause.
(f) The parties agree to be bound by any decision or award completed
pursuant to this clause.
(g) This provision shall survive the expiration or earlier determination
of this Lease.
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<PAGE>
(h) Any referral to arbitration under this clause shall be a submission to
arbitration under the Arbitration Act Cap 38 which Act shall, to the
extent not inconsistent with anything in this clause, apply to any
such submission.
10. ALL notices required hereunder shall be in writing and may be personally
delivered or mailed by certified or registered mail, addressed to the respective
parties, and all notices, demands or other writing to be made, given or sent
hereunder, or which may be so given or made or sent by any party to the other
shall be deemed to have been fully given or made when personally delivered or if
mailed, 3 calendar days following the deposit thereof in the Fiji mail,
registered or certified, postage prepaid, and addressed to the respective
parties as follows:-
Lessor: The Secretary,
FIJI PUBLIC SERVICES ASSOCIATION,
G.P.O. Box 1405,
Suva, Fiji.
Tel: 311662
Fax: 301099
Attn: Mr. Mahendra Chaudhary
Lessee: The Managing Director,
CUL (FIJI) LIMITED,
P.O. Box 7,
Nadi, Fiji.
Tel: 722670
Fax: 720080
Attn: Mr. Terence Buckley
11. EACH party shall bear its own Solicitors cost in preparing and attending to
execution of this Lease except that the Lessee shall pay disbursements for the
stamping and registration of the same.
12. THIS Lease shall be governed by the laws of Fiji.
13. IN consideration of this Lease the Lessee shall arrange with a Bank in Fiji
on execution hereof to give to the Lessor a Bank Bond in the sum of $180,000.00
for the first 5 years as security for the due observance and performance by the
Lessee of the conditions and stipulations hereinbefore contained and on its part
to be observed and performed. The Bank Bond shall be reduced by $30,000.00 per
completed year after completion of 5 years of the Lease until it is reduced to
$90,000.00 on completion of the eighth year of the lease when it shall be
maintained at $90,000.00 for
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<PAGE>
the balance of the term and the said Bank Bond will
apply to any renewal of the term in accordance with clause 4 hereof.
AND IT ITS EXPRESSILY DECLARED AND AGREED by the Lessee that the said Bank Bond
shall be provided to the Lessor until expiration of the term of this Lease and
that the Lessor shall be entitled to the proceeds of the Bank Bond or part
thereof in the event any rent monies is owing or any loss or damage is sustained
to the Lessor by reason of the non-fulfillment or non-observance of any of the
terms and covenants herein to be performed by the Lessee.
PROVIDED HOWEVER at the expiration or earlier lawful termination of the Lease,
the Lessor shall be entitled to the proceeds of the Bank Bond held hereunder.
IN WITNESS WHEREOF the parties have subscribed their names the day and year
hereinbefore appearing.
THE COMMON SEAL of FIJI PUBLIC )
SERVICE ASSOCIATION was hereunto )
affixed by direction of the Council )
of the Association in the presence of )
A. BATISARESAR the President and )
M.P. CHAUDHARY the General )
Secretary of the Association and who )
certify that they are the proper officers )
by whom and in whose presence the )
Seal is to be affixed: )
- ----------------------------- -----------------------------
President General Secretary
THE COMMON SEAL of CUL (FIJI) )
LIMITED was hereunto affixed in our )
presence and we certify that we are the ) [Seal]
proper officers by whom and in whose )
presence the said Seal is to be affixed: )
/s/ Terence Buckley
- ----------------------------- -----------------------------
Director Secretary
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<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
March 13, 1998, except for Note 11 as to which the date is May 13, 1998 in
Amendment No. 1 to the Registration Statement (Form S-1 No. 333-52459) and
related Prospectus of Cost-U-Less, Inc. for the registration of 1,963,222
shares of its Common Stock.
/s/ ERNST & YOUNG LLP
Seattle, Washington
June 5, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Amendment No. 1 to the Registration Statement (No.
333-52459) of Cost-U-Less, Inc. on Form S-1 of our report dated April 4, 1996
(May 8, 1998 as to Notes 1, 6 and 7, and May 13, 1998 as to Note 11) on the
consolidated financial statements of Cost-U-Less, Inc. as of December 31, 1995
and for the year then ended, appearing in the Prospectus, which is part of
this Registration Statement, and to the reference to us under the headings
"Selected Consolidated Financial Data" and "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
June 5, 1998
