<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 27, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO ___________
COMMISSION FILE NUMBER 0-24543
COST-U-LESS, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1615590
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12410 SE 32/ND/ STREET
BELLEVUE, WASHINGTON 98005
(Address of principal executive office) (Zip Code)
(425) 644-4241
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X]YES [_]NO.
The registrant had 3,547,340 common shares, par value $0.001, outstanding
at June 27, 1999.
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<PAGE>
COST-U-LESS, INC.
INDEX TO FORM 10-Q
PART 1-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS............................................. 2
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................ 11
PART 2-OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS........................ 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................. 17
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<PAGE>
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Cost-U-Less, Inc.'s (the "Company" or "Cost-U-Less") unaudited condensed
consolidated balance sheet as of June 27, 1999, and the condensed consolidated
balance sheet as of December 27, 1998, unaudited condensed consolidated
statements of income for the 13 and 26 weeks ended June 27, 1999, and June 28,
1998 and the unaudited condensed consolidated statements of cash flows for the
26 weeks then ended are included below. Also, included below are notes to the
unaudited condensed consolidated financial statements.
The Company reports on a 52/53-week fiscal year, consisting of four
thirteen-week periods and ending on the Sunday nearest to the end of December.
Fiscal 1999 is a 52-week year with period four ending on December 26, 1999.
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<PAGE>
COST-U-LESS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 27, December 27,
1999 1998
---------------------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,291 $ 4,289
Receivables, net 1,676 1,853
Inventories, net 19,423 16,685
Other current assets 1,381 721
---------------------------
Total current assets 23,771 23,548
Property and equipment, net 12,867 12,712
Deposits and other assets 966 957
---------------------------
Total assets $ 37,604 $ 37,217
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,168 $ 11,420
Accrued expenses and other liabilities 1,994 1,832
Line of credit 359 -
Current portion of long-term liabilities 1,142 1,055
---------------------------
Total current liabilities 14,663 14,307
Deferred rent 428 524
Long-term debt, less current portion 1,744 2,036
Capital lease obligations, less current portion 410 754
---------------------------
Total liabilities 17,245 17,621
Total shareholders' equity 20,359 19,596
---------------------------
Total liabilities and shareholders' equity $ 37,604 $ 37,217
===========================
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
COST-U-LESS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
13 WEEKS ENDED 26 WEEKS ENDED
---------------------------------------------------
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
---------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 41,227 $ 31,453 $ 79,214 $ 63,205
Merchandise costs 34,358 26,159 65,960 52,711
---------------------------------------------------
Gross profit 6,869 5,294 13,254 10,494
Operating expenses:
Store 4,551 3,655 8,774 7,189
General and administrative 1,366 890 2,710 1,871
Store opening 142 334 417 464
Store closing 0 244 0 244
---------------------------------------------------
Total operating expenses 6,059 5,123 11,901 9,768
---------------------------------------------------
Operating income 810 171 1,353 726
Other income (expense):
Interest income 23 - 71 -
Interest expense (123) (80) (222) (134)
Other 9 - (57) -
---------------------------------------------------
Income before income taxes 719 91 1,145 592
Income tax provision 242 29 392 205
---------------------------------------------------
Net income $ 477 $ 62 $ 753 $ 387
===================================================
Earnings per common share:
Basic $ 0.13 $ 0.03 $ 0.21 $ 0.19
Diluted 0.13 0.03 0.21 0.18
Weighted average common shares
outstanding 3,547,340 1,999,961 3,543,651 1,999,961
===================================================
Weighted average common shares
outstanding, assuming dilution 3,611,977 2,123,383 3,610,530 2,134,971
===================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
COST-U-LESS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
26 WEEKS ENDED
---------------------
June 28, June 28,
1999 1998
---------------------
<S> <C> <C>
Operating activities
Net income $ 753 $ 387
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 737 486
Writedown of property and equipment 37 203
Deferred tax (benefit) provision (213) 33
Stock compensation 75
Reserve for bad debts 30 39
Cash provided by (used in) changes in operating
assets and liabilities:
Receivables 147 209
Refundable income taxes 68
Inventories (2,738) (2,702)
Prepaid expenses (446) (1,258)
Deposits and other assets (9) (313)
Accounts payable (252) 183
Accrued expenses 113 449
Income tax payable 49 (141)
Deferred rent (96) 43
---------------------
Net cash used in operating activities (1,888) (2,239)
Investing activity - purchases of property and equipment (928) (4,284)
Financing activities
Net borrowings under line of credit 359 4,706
Proceeds from long-term debt 2,771
Principal payments on long-term debt (314) (473)
Payments on capital lease obligations (235) (198)
Net proceeds from sale of common stock 17
Unrealized foreign exchange loss (8) (19)
---------------------
Net cash provided by (used in) financing activities (180) 6,787
---------------------
Net increase (decrease) in cash and cash equivalents (2,997) 264
Cash and cash equivalents at beginning of year 4,288 1,027
---------------------
Cash and cash equivalents at end of year $ 1,291 $ 1,291
=====================
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 223 $ 184
Income taxes $ 243 $ 246
</TABLE>
The accompanying notes are an integral part of these financial statements
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<PAGE>
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 and foreign markets throughout
the Pacific and the Caribbean. At June 27, 1999, the Company operated eleven
stores located in Hawaii, U.S. Virgin Islands, Guam, American Samoa, Fiji,
Netherlands Antilles and California.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC). The financial information 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. The balance
sheet at December 27, 1998 has been derived from the audited financial
statements at that date. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to SEC
rules and regulations. Operating results for the 13 weeks and 26 weeks ended
June 27, 1999, are not necessarily indicative of results that may be expected
for the entire year. All quarterly periods reported consist of 13 weeks. For
further information, refer to the financial statements and footnotes included in
the Company's 10-K filed on March 26, 1999.
Principles of Consolidation
The Company operates wholly owned subsidiaries in Guam, U.S. Virgin
Islands, American Samoa, Nevada, Republic of Fiji, New Zealand, and the
Netherlands Antilles. 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, New Zealand and Netherlands Antilles, which uses those countries' local
currency.
Fiscal Year
The Company's fiscal year ends on the last Sunday in December. The year
ending December 26, 1999 represents a 52-week fiscal year.
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<PAGE>
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies (continued)
Comprehensive Income
Statement No. 130, Reporting Comprehensive Income requires the Company's
foreign currency translation adjustments to be included in other comprehensive
income. For the 13 weeks ended June 27, 1999 and June 28, 1998, total
comprehensive income amounted to $496,000 and $62,000, respectively. For the 26
weeks ended June 27, 1999 and June 28, 1998, total comprehensive income amounted
to $745,000 and $368,000, respectively.
Earnings Per Share
Basic earnings per share is computed on weighted average shares
outstanding. Diluted earnings per share includes the effect of dilutive
securities (options and warrants) except where inclusion is antidilutive.
Recent Accounting Pronouncements
In March 1998, the AICPA issued SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. The Company adopted
the SOP on December 28, 1998. The SOP requires the capitalization of certain
costs incurred after the date of adoption in connection with developing or
obtaining software for internal use. The adoption of the SOP did not have a
material impact on consolidated results of operations, financial position, or
cash flows.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-
Up Activities. The Company adopted the SOP on December 28, 1998. The SOP
requires that the costs of start-up activities be expensed as incurred. Start-up
activities include those one-time activities related to opening a new store or
conducting business in a new territory. The adoption of the SOP did not have
any impact on consolidated results of operations, financial position, or cash
flows.
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.
-8-
<PAGE>
COST-U-LESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
--------------------------------- ---------------------------------
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
--------------------------------- ---------------------------------
(In thousands except per-share data)
<S> <C> <C> <C> <C>
Numerator:
Net income $ 477 $ 62 $ 753 $ 387
Denominator:
Denominator for basic earnings per
share - weighted average shares 3,547,340 1,999,961 3,543,651 1,999,961
Effect of dilutive securities:
Stock options and warrants 64,637 123,422 66,897 135,010
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversion of stock
options and warrants 3,611,977 2,123,383 3,610,530 2,134,971
Basic earnings per common share $ 0.13 $ 0.03 $ 0.21 $ 0.19
Diluted earnings per common share $ 0.13 $ 0.03 $ 0.21 $ 0.18
</TABLE>
-9-
<PAGE>
3. Segment Information
<TABLE>
<CAPTION>
Island Mainland
Stores Stores Other Totals
--------------- --------------- --------------- ---------------
(In Thousands)
<S> <C> <C> <C> <C>
26 Weeks Ended June 27, 1999
Net sales $ 74,255 $ 3,443 $ 1,516 $ 79,214
Contribution (loss) 3,963 (51) 568 4,480
Store opening expense 417 - - 417
Store operating profit (loss) 3,546 (51) 568 4,063
Segment inventories 14,613 820 - 15,433
Segment total assets 29,139 1,340 - 30,479
26 Weeks Ended June 28, 1998
Net sales $ 58,924 $ 3,246 $ 1,035 $ 63,205
Contribution (loss) 3,127 (42) 220 3,305
Store opening expense 464 - - 464
Store closing expense 244 - - 244
Store operating profit (loss) 2,420 (42) 220 2,597
Segment inventories 11,605 673 - 12,278
Segment total assets 23,164 1,233 - 24,397
13 Weeks Ended June 27, 1999
Net sales 38,209 1,751 1,267 41,227
Contribution (loss) 1,936 (13) 394 2,318
Store opening expense 142 - - 142
Store operating profit (loss) 1,794 (13) 394 2,176
13 Weeks Ended June 28, 1998
Net sales 29,377 1,676 400 31,453
Contribution (loss) 1,545 (7) 101 1,639
Store opening expense 334 - - 334
Store closing expense 244 - - 244
Store operating profit (loss) 967 (7) 101 1,061
</TABLE>
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<PAGE>
Reconciliation of Income Contribution to Consolidated Income before Tax
<TABLE>
<CAPTION>
26 Weeks Ended 13 Weeks Ended
-------------------------------- --------------------------------
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
-------------- -------------- -------------- --------------
(In Thousands)
<S> <C> <C> <C> <C>
Total contribution for reportable
segments $ 4,480 $ 3,305 $ 2,318 $ 1,639
Administrative expense not
allocated to segments (2,710) (1,871) (1,366) (890)
Store opening/closing expense (417) (708) (142) (578)
Other income / expense (57) 9
Net interest expense (151) (134) (100) (80)
-------------- -------------- -------------- --------------
Consolidated income before tax $ 1,145 $ 592 $ 719 $ 91
============== ============== ============== ==============
</TABLE>
Reconciliation of Significant Items
<TABLE>
<CAPTION>
Segment Consolidated
Totals Corporate Totals
--------------- --------------- ---------------
(In Thousands)
<S> <C> <C> <C>
Inventories $ 15,433 $ 3,990 $ 19,423
Total assets $ 30,479 $ 7,125 $ 37,604
</TABLE>
4. Income Tax Provision
The effective income tax rate for the second quarter of fiscal 1999 was
33.7% compared to a 32.2% effective tax rate for the second quarter of fiscal
1998. The fluctuation in rate was primarily due to state income tax expense and
varying profits in international locations where tax rates differ from U.S.
rates.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis should be read in conjunction with the
Company's condensed consolidated financial statements and the related notes
thereto appearing in Item 1 of this report. In addition to historical
information, this Form 10-Q contains and may incorporate by reference statements
which may constitute forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from
predicted results. Forward-looking statements may be identified by the use of
forward-looking terminology such as "may," "will," "expect," "estimate,"
"anticipate," "continue," or similar terms, variations of such terms or the
negative of those terms, but the absence of such terms does not mean that a
statement is not forward looking. Factors that could affect the Company's
actual results include, but are not limited to: (i) transportation
difficulties; (ii) isolation of store operations from corporate management;
(iii) weather and other risks associated with island operations, (iv) dependence
on expansion outside the U.S.; (v) dependence on key personnel and local
managers; (iv) reliance on computer systems; (v) risks associated with
significant growth; and (vi) competition. More information about factors that
could affect the Company's financial results is included in the "Risk Factors"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" sections of the Company's 10-K for the year ended December 27, 1998
and filed on March 26, 1999 with the Securities Exchange Commission.
Overview
During the second quarter ended June 27, 1999, the Company operated eleven
retail stores located in Guam (2), American Samoa (1), Hawaiian Islands (2);
U.S. Virgin Islands (2); Fiji (2); Netherlands Antilles (1) and California (1).
Although the Company's stores are patterned after the warehouse club concept,
the stores (i) are smaller (averaging 29,300 square feet vs. large format
warehouse clubs of approximately 130,000 square feet), (ii) target niche
markets, including foreign island countries (and U.S. Territories and states)
where demographics do not support large format warehouse clubs, (iii) carry a
wide assortment of local and ethnic food items and (iv) do not charge a
membership fee.
Although the Company does not have large seasonal fluctuations in sales,
the fourth quarter is typically the highest sales quarter due to the additional
holiday sales. Operating profits have varied by quarter primarily as a result
of store opening and closing expenses. For the second quarter ended June 27,
1999 store opening costs totaled $142,000. For the second quarter ended June
28, 1998, store opening costs totaled $334,000 and store closing (relocation)
costs totaled $244,000. For the first two quarters of fiscal 1999, store opening
costs totaled $417,000 whereas for the first two quarters ended June 28, 1998,
store opening costs totaled $464,000 and store closing (relocation) costs
totaled $244,000. For the remainder of 1999, the Company does not expect to
incur any store closure costs. Store opening costs for the third quarter are
expected to be in line with the second quarter and higher for the fourth quarter
due to planned store openings.
12
<PAGE>
Comparison of the 13 Weeks Ended June 27, 1999 and June 28, 1998
Net Sales: Net sales for the second quarter of fiscal 1999 increased 31.1%
to $41,227,000 from $31,453,000 during the second quarter of fiscal 1998,
primarily due to two new stores in Fiji, a new store in Curacao that opened
March 2, 1999, and a strong comparable-store sales increase of 9.8% (stores open
for a full 13 months). The increase in comparable-store sales was primarily due
to continued improvement in product mix and a strong demand for high quality
merchandise at a low cost.
Gross Profit: Gross profit in the second quarter of fiscal 1999 increased
to $6,869,000 from $5,294,000 in the second quarter of fiscal 1998. Gross
profit margin at 16.7% of sales for the second quarter of fiscal 1999, was
consistent with a gross profit margin of 16.8% for the second quarter of fiscal
1998.
Operating Expenses: Store expenses for the second quarter of fiscal 1999
increased 24.5% to $4,551,000 from $3,655,000 during the second quarter of
fiscal 1998. As a percentage of net sales, store expenses decreased to 11.0% for
the second quarter of 1999 compared to 11.6% for the second quarter of 1998 due
to increased operating efficiencies.
General and administrative expenses increased $476,000, or 53.5%, to
$1,366,000 for the second quarter of fiscal 1999 from $890,000 for the second
quarter of fiscal 1998. General and administrative expenses increased as a
percentage of net sales to 3.3% for the second quarter of fiscal 1999 compared
to 2.8% for the fiscal year 1998. These increases were primarily due to costs
associated with the Company's expansion program and expenses related to public
company activities. The Company completed its initial public offering in July
1998.
Store opening expenses were $142,000 in the second quarter of fiscal 1999
compared to $334,000 in the second quarter of fiscal 1998. There were no
closing expenses in the second quarter of 1999 compared to $244,000 closing
expenses in the second quarter of 1998. The closing expenses in the second
quarter of 1998 related to the relocation of the store on the island of St.
Thomas. Opening expenses were higher in the second quarter of 1998 due to
opening of the new St. Thomas store and expenses related to the opening of the
store in Nadi, Fiji, which opened on July 1, 1998. Store opening expenses in
the second quarter of 1999 are for expenses incurred in advance of the planned
store openings in the fourth quarter of 1999, and first quarter of 2000.
Other Income (expense): Interest income of $23,000 for the second quarter
of fiscal 1999 was generated from interest bearing deposits from the net
proceeds from the initial public offering completed on July 23, 1998. There was
no interest income in the second quarter of 1998.
Interest expense increased to $123,000 for the second quarter of 1999 from
$80,000 for the second quarter of fiscal 1998 due primarily to interest on the
long term debt secured by the new St. Thomas store facility that opened June 25,
1998.
Income Tax Provision: The effective income tax rate in the second quarter
of fiscal 1999 was 33.6% compared with 32.1% for the second quarter of fiscal
1998.
Net Income: Net income for the second quarter of fiscal 1999 increased to
$477,000 or $0.13 per share (diluted), compared to net income of $62,000 or
$0.03 per share (diluted), for the second quarter of fiscal 1998. Diluted
common shares outstanding increased to 3,611,977 in the second
13
<PAGE>
quarter of 1999 from 2,123,383 for the second quarter of fiscal 1998, primarily
as a result of the shares sold in the Company's initial public offering and a
concurrent private placement in July 1998.
Shares outstanding at the end of the second quarter were 3,547,340 compared
to 1,999,961 shares outstanding at the end of the second quarter of fiscal 1998.
Comparison of the 26 Weeks Ended June 27, 1999 and June 28, 1998
Net Sales: Net sales for the first two quarters of fiscal 1999 increased
25.3% to $79,214,000 from $63,205,000 during the first two quarters of fiscal
1998, primarily due to two new stores in Fiji, a new store in Curacao that
opened March 2, 1999, and a strong comparable-store sales increase of 10.2%
(stores open for a full 13 months). The increase in comparable-store sales was
primarily due to continued improvement in product mix and a strong demand for
high quality merchandise at a low cost.
Gross Profit: Gross profit in the first two quarters of fiscal 1999
increased to $13,254,000 from $10,494,000 in the first two quarters of fiscal
1998. Gross profit margin at 16.7% of sales for first two quarters of fiscal
1999, was consistent with a gross profit margin of 16.6% for the first two
quarters of fiscal 1998.
Operating Expenses: Store expenses for the first two quarters of fiscal
1999 increased 22.0% to $8,774,000 from $7,189,000 during the first two quarters
second quarter of fiscal 1998. As a percentage of net sales, store expenses
decreased to 11.1% for the first two quarters of 1999 compared to 11.4% for the
first two quarters of 1998 due to increased operating efficiencies.
General and administrative expenses increased $839,000 or 44.8%, to
$2,710,000 for first two quarters of fiscal 1999 from $1,871,000 for the first
two quarters of fiscal 1998. General and administrative expenses increased as a
percentage of net sales to 3.4% for the first two quarters of fiscal 1999
compared to 3.0% for the first two quarters of fiscal year 1998. These
increases were primarily due to costs associated with the Company's expansion
program and expenses related to public company activities. The Company completed
its initial public offering in July 1998.
Store opening expenses were $417,000 in the first two quarters of fiscal
1999 compared to $464,000 in the first two quarters of fiscal 1998. There were
no closing expenses in the first two quarters of 1999 compared to $244,000
closing expenses in the first two quarters of 1998. The closing expenses in the
first two quarters of 1998 related to the relocation of the store on the island
of St. Thomas. Store opening expenses in the first two quarters of 1999 are for
expenses related to the opening of the store in Curacao, Netherlands Antilles,
which opened on March 2, 1999 and expenses incurred in advance of the planned
store openings in the fourth quarter of 1999, and first quarter of 2000.
Opening expenses in the first two quarters of 1998 were impacted by two store
openings, including the opening of the new St. Thomas store and expenses related
to the opening of the store in Nadi, Fiji, which opened on July 1, 1998.
Other Income (expense): Interest income of $71,000 for the first two
quarters of fiscal 1999 was generated from interest bearing deposits from the
net proceeds from the initial public offering completed on July 23, 1998. There
was no interest income in the first two quarters of 1998.
14
<PAGE>
Interest expense increased to $222,000 for the first two quarters of 1999
from $134,000 for the first two quarters of fiscal 1998 due primarily to
interest on the long-term debt secured by the new St. Thomas store facility that
opened June 25, 1998.
Income Tax Provision: The effective income tax rate in the first two
quarters of fiscal 1999 was 34.2% compared with 34.6% for the first two quarters
of fiscal 1998.
Net Income: Net income for the first two quarters of fiscal 1999 increased
to $753,000 or $0.21 per share (diluted), compared to net income of $387,000 or
$0.18 per share (diluted), for the first two quarters of fiscal 1998. Diluted
weighted average common shares outstanding increased to 3,610,530 in the first
two quarters of 1999 from 2,134,971 for the first two quarters of fiscal 1998,
primarily as a result of the shares sold in the Company's initial public
offering and a concurrent private placement in July 1998.
Liquidity and Capital Resources
The discussion below contains forward-looking statements that involve risks
and uncertainties, and should be read in conjunction with the disclosure in the
Company's 10-K for the year ended December 27, 1998, filed on March 26, 1999.
Actual results may differ materially.
The Company has historically financed its operations with internally
generated funds, the Company's credit facilities and private equity
transactions. In July 1998, the Company raised $8.7 million in net proceeds
from its initial public offering and a concurrent private placement.
Net cash used in operations was $1,888,000 and $2,239,000 for the first two
quarters of 1999 and 1998, respectively. In the first two quarters of 1999 cash
was used primarily to supply inventories for the new store in Curacao that
opened March, 2 1999. In the first two quarters of 1998, cash was used
primarily to supply inventories for the new stores that opened in St. Thomas
USVI at the end of the second quarter and Fiji that opened July 2, 1998.
Net cash used in investing activities was $928,000 and $4,284,000 for the
first two quarters of 1999 and 1998, respectively. A significant portion of the
equipment for the new Curacao store that opened March 2, 1999 was acquired in
the fourth quarter of 1998. In the first two quarters of 1998, the Company was
acquiring equipment for the new store in St. Thomas, U.S. Virgin Islands and
Nadi, Fiji, resulting in a significantly higher investment.
Net cash provided by (used in) financing activities was ($181,000) and
$6,787,000 for first two quarters of 1999 and 1998, respectively. In the first
two quarters of 1999 principal payments on long term debt and capital lease
payments were partia1ly offset by borrowing under the Company's line of credit.
For the first two quarters of 1998 cash provided by financing activities
resulted from proceeds under the Company's line of credit and proceeds from long
term financing.
In April 1999, the Company renewed and increased its line of credit with
Bank of America NT&SA d.b.a. "Seafirst Bank" to $8.0 million, which expires May
1, 2000. Borrowings under the credit facility bear interest at the bank's prime
rate or at LIBOR plus 1.5%. The collateral for the line of credit consists of
inventories, equipment and trade accounts receivable. Borrowings under the line
of credit as of June 27, 1999 were $359,000. The borrowings were repaid in July
1999 and the Company expects to utilize the credit facilities until the fourth
quarter of 1999 as a result of new store openings.
15
<PAGE>
In 1998, the Company entered into a loan agreement and borrowed $2.0
million from Banco Popular de Puerto Rico ("Banco Popular") payable with
interest at the bank's prime rate plus 1.0% (8.75% at June 27, 1999) maturing on
June 1, 2013. As of June 27, 1999, the Company owed $1,877,000 on the note.
The note is secured by a first priority leasehold mortgage on the St. Thomas
store and is governed by a loan agreement containing certain covenants
applicable to the Company's subsidiary that owns such store. The subsidiary is
currently in compliance with such covenants.
In 1998, the Company entered into a loan agreement and borrowed $1.0
million from Seafirst Bank, payable with interest at 7.77%, maturing on April
30, 2000 and is secured by the same collateral securing the line of credit with
Seafirst Bank. As of June 27, 1999, the Company owed $478,000 on the note.
The Company is currently negotiating a $2.0 million credit facility for the
construction of its store in St. Maarten, Netherlands Antilles and anticipates
that the terms and conditions will be similar to the loan agreement with Banco
Popular secured by the St. Thomas store.
The Company estimates that its total cash outlay for opening a typical
island store will be approximately $1.8 million. The Company plans to open one
store in 1999 in addition to the Curacao store that opened on March 2, 1999, and
open four stores in 2000. Construction is currently underway on the store in
St. Maarten and two stores in New Zealand. The Company also recognizes that its
ability to open these stores is subject to considerable risk and that further
delays as a result of weather and other factors outside of the Company's control
could result in one or more of these store openings to be delayed. 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 believes that the amounts available on its current credit
facility, existing cash available for working capital purposes, new credit
facilities for the construction of the St. Maarten store, and cash flow from
future operations will be sufficient to open the stores planned in its expansion
in 1999 and 2000. The Company expects additional increases in the Company's
existing line of credit and additional long term debt financing for both new
store construction and equipment will be obtainable as needed. However, there
are no assurances that such financing will be available when the Company needs
it.
Year 2000 Compliance
The Company believes that all of its material systems are Year 2000-
compliant, and expects that its total costs to make all its systems Year 2000-
compliant will be less than $100,000. The Company has contacted all of its
inventory suppliers plus other vendors and suppliers with which its systems
interface and exchange data or upon which it business depends, such as banks,
security alarm monitoring providers, refrigeration equipment suppliers and
maintenance providers and other service suppliers. These efforts are designed
to minimize the extent to which the Company's business will be vulnerable in the
event of the failure of these third parties to remedy their own Year 2000
issues.
The Company's core business systems are now Year 2000 compliant. All
programming changes for Year 2000 compliance were completed by July 1, 1999. A
final test of the core systems is scheduled to be completed by August 31, 1999.
In addition, the backroom software at the Company's stores runs on stand alone
personal computers running in a DOS environment that
16
<PAGE>
requires modifications to be Year 2000 compliant. These stand alone systems at
the Company's stores are currently being replaced with systems that bring them
on line with the Corporate system. This process is scheduled to be completed by
October 31, 1999. Contingency plans are in place to modify the existing backroom
software and hardware should the upgrade not be completed before Year 2000.
Management believes that sourcing product from alternative vendors that are
Year 2000 compliant will minimize any potential interruption in product, if one
or more vendors are not able to deliver product in accordance with terms of any
purchase order. The availability of power is considered a significant concern
by management. Although most of the local power companies servicing the islands
that the Company operates have acknowledged Year 2000 compliance, the Company's
back-up generators can provide a secondary source of power. The Company has
experienced disruption in power for extended periods of time on numerous
occasions as a result of hurricanes and believes that the backup generators will
allow the stores to continue to operate should any power outages occur as a
result of Year 2000 problems. There can be no assurances, however, that
disruptions resulting from Year 2000 issues will not adversely affect the
Company's results of operations or financial position.
17
<PAGE>
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Computation of Earnings Per Share*
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated March 15, 1999, reporting on
Items 5 and 7, relating to the declaration by the Board of Directors of the
Company of a dividend of one preferred share purchase right for each
outstanding share of common stock of the Company, in connection with a
Shareholder Rights Agreement entered into between the Company and
ChaseMellon Shareholder Services, L.L.C., as rights agent.
* See Note 2 to the Unaudited Condensed Consolidated Financial Statements
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
COST-U-LESS, INC.
(Registrant)
Date______________________ /s/ Michael J. Rose
-------------------------------------------
Michael J. Rose
Chairman of the Board, President and
Chief Executive Officer
Date______________________ /s/ Martin P. Moore
-------------------------------------------
Martin P. Moore
Interim Chief Financial Officer
19
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
11.1 Computation of Earnings Per Share*
27.1 Financial Data Schedule
________________
* See Note 2 to the Unaudited Condensed Consolidated Financial Statements
20
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