1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
Or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11735
99 CENTS ONLY STORES
(Exact name of registrant as specified in its charter)
California 95-2411605
(State or other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) No.)
4000 Union Pacific Avenue, 90023
City of Commerce, California (zip code)
(Address of Principal Executive
Offices)
Registrant's telephone number, including area code: (323) 980-8145
NONE
Former name, address and fiscal year, if change since last report
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has
been subject to such filing requirements for the last 90 days. x
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Common Stock, No Par Value, 33,813,896 Shares as of June 30, 2000
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
99 CENTS ONLY STORES
CONSOLIDATED BALANCE SHEETS
(Amounts In Thousands, Except Share Data)
ASSETS
June 30, December
31,
2000 1999
(Unaudited
)
CURRENT ASSETS:
Cash $304 $7,984
Short-term investments 61,246 50,971
Accounts receivable, net of allowance for doubtful
accounts of $134 and $140 as of June 30, 2000 and
December 31, 1999, respectively 3,622 3,356
Income tax receivable 3,210 4,674
Inventories 58,889 53,932
Other 2,265 1,451
Total current assets 129,536 122,368
PROPERTY AND EQUIPMENT, at cost:
Land 16,438 11,060
Building and improvement 16,461 12,876
Leasehold improvements 29,092 23,786
Fixtures and equipment 16,921 14,718
Transportation equipment 1,635 1,635
Construction in progress 7,520 5,466
88,067 69,541
Less-Accumulated depreciation and amortization (23,907) (20,119)
64,160 49,422
OTHER ASSETS:
Deferred income taxes 11,318 11,318
Long term investments in marketable securities 1,634 8,600
Deposits 242 214
Net assets of discontinued operation. 34,448 26,928
Other 4,632 5,165
52,274 52,225
$245,970 $224,015
The accompanying notes are an integral part of these consolidated balance
sheets.
99 CENTS ONLY STORES
CONSOLIDATED BALANCE SHEETS
(Amounts In Thousands, Except Share Data)
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December
31,
2000 1999
(Unaudited
)
CURRENT LIABILITIES:
Current portion of capital lease obligation $10,551 $10,601
Accounts payable 7,209 9,010
Accrued expenses:
Payroll and payroll-related 840 1,967
Sales tax 914 2,429
Other 833 421
Workers compensation 2,273 2,095
Total current liabilities 22,620 26,523
LONG-TERM LIABILITIES:
Deferred rent 2,032 1,952
Total Long-term liabilities 2,032 1,952
COMMITMENTS AND CONTINGENCIES: - -
SHAREHOLDERS' EQUITY:
Preferred stock, no par value
Authorized-1,000,000 shares
Issued and outstanding-none - -
Common stock, no par value
Authorized-100,000,000 shares
Issued and outstanding 33,813,896 at June 30, 2000
and 33,425,232 at December 31, 1999 125,458 116,775
Retained earnings 95,860 78,765
221,318 195,540
$245,970 $224,015
The accompanying notes are an integral part of these consolidated balance
sheets.
99 CENTS ONLY STORES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
(Amounts In Thousands, Except Per Share Data)
(Unaudited)
Three months Six months ended
ended June 30, June 30,
2000 1999 2000 1999
NET SALES:
99 Cents Only Stores $96,407 $69,827 $183,97 $134,46
0 0
Bargain Wholesale 11,540 11,025 24,779 22,119
107,947 80,852 208,749 156,579
COST OF SALES 66,332 49,611 127,632 95,731
Gross profit 41,615 31,241 81,117 60,848
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES:
Operating expenses 25,124 18,368 49,996 35,871
Depreciation and amortization 2,081 1,429 3,989 2,823
27,205 19,797 53,985 38,694
Operating income 14,410 11,444 27,132 22,154
OTHER (INCOME) EXPENSE:
Interest income (767) (352) (1,485) (864)
Interest expense 185 187 370 373
(582) (165) (1,115) (491)
Income from continuing operations before
provisions for income taxes 14,992 11,609 28,247 22,645
PROVISION FOR INCOME TAXES 5,908 4,591 11,152 8,956
Income from continuing operations 9,084 7,018 17,095 13,689
Loss from discontinued operation - (170) - (543)
NET INCOME $9,084 $6,848 $17,095 $13,146
EARNINGS PER COMMON SHARE FROM
CONTINUING OPERATIONS:
Basic $0.27 $0.21 $0.51 $0.41
Diluted $0.26 $0.21 $0.50 $0.40
LOSS PER COMMON SHARE FROM DISCONTINUED
OPERATION:
Basic - ($0.01) - ($0.01)
Diluted - ($0.01) - ($0.01)
NET EARNINGS PER COMMON SHARE:
Basic $0.27 $0.20 $0.51 $0.40
Diluted $0.26 $0.20 $0.50 $0.39
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic 33,648 33,163 33,525 33,085
Diluted 34,970 34,044 34,489 34,013
The accompanying notes are an integral part of these consolidated financial
statements.
99 CENTS ONLY STORES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Amounts in Thousands)
Six months ended
June 30,
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $17,095 $13,146
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,989 2,823
Benefit for deferred income taxes - 141
Changes in assets and liabilities associated
with operating activities:
Accounts receivable (266) (1,461)
Inventories (4,957) (2,578)
Other assets (309) (992)
Accounts payable (1,801) 2,268
Accrued expenses (2,230) (2,111)
Worker's compensation 178 7
Income taxes 4,884 (638)
Deferred rent 80 52
Net cash provided by operating activities 16,663 10,657
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (18,727) (8,156)
Purchases of short-term investments (3,309) (1,493)
Net asset of discontinued operations. (7,520) (6,262)
Net cash used in investing activities (29,556) (15,911)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligation (50) (46)
Proceeds from exercise of stock options 5,263 4,170
Net cash provided by financing activities 5,213 4,124
NET DECREASE IN CASH (7,680) (1,130)
CASH, beginning of period 7,984 2,699
CASH, end of period $304 $1,569
The accompanying notes are an integral part of these consolidated financial
statements.
99 CENTS ONLY STORES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in conformity with generally accepted accounting principles.
However, certain information and footnote disclosures normally included in
financial statements prepared in conformity with generally accepted
accounting principles have been omitted or condensed pursuant to the rules
and regulations of the Securities and Exchange Commission (SEC). These
statements should be read in conjunction with the Company's December 31,
1999 audited financial statements and notes thereto included in the
Company's Form 10-K filed March 29, 2000. In the opinion of management,
these interim consolidated financial statements reflect all adjustments
(consisting of normal recurring adjustments) necessary for a fair
presentation of the consolidated financial position and results of
operations for each of the periods presented. The results of operations and
cash flows for such periods are not necessarily indicative of results to be
expected for the full year.
Concentration of Operations
The Company's 99 Cents Only Stores are primarily located in Southern
California except for two 99 Cents Only Stores, which are located in Las
Vegas, Nevada. The Company's current retail expansion plans for the 99
Cents Only Stores anticipates that planned new stores will be primarily
located in this general geographic region, as well as anticipated expansion
into Arizona. Consequently, the Company's results of operations and
financial condition are substantially dependent upon general economic
trends and various environmental factors in those regions.
2. EARNINGS PER COMMON SHARE
Earnings per share calculations are in accordance with SFAS No. 128,
"Earnings per Share" (SFAS 128). Accordingly, "basic" earnings per share is
computed by dividing net income by the weighted average number of shares
outstanding for the year. "Diluted" earnings per share is computed by
dividing net income by the total of the weighted average number of shares
outstanding plus the dilutive effect of outstanding stock options (applying
the treasury stock method).
The table below is a reconciliation of the basic weighted average
number of shares outstanding and the diluted weighted average number of
shares outstanding for the three and six months ended June 30, 2000 and
1999 (amounts in thousands):
3 Months Ended 6 Months Ended
June 30, June 30,
2000 1999 2000 1999
Weighted average number of common shares
outstanding-Basic......................... 33,648 33,163 33,525 33,085
......
Dilutive effect of outstanding stock 1,322 881 964 928
options......
Weighted average number of common shares
outstanding-Diluted....................... 34,970 34,044 34,489 34,013
......
3. SHORT-TERM INVESTMENTS
Investments in debt and equity securities are recorded as required by
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The Company's investments are comprised primarily of
investment grade federal and municipal bonds and commercial paper,
primarily with short-term maturities. The Company generally holds
investments until maturity and has not experienced any significant gain or
loss from sales of its investments. Any premium or discount recognized in
connection with the purchase of an investment is amortized over the term of
the investment. As of June 30, 2000 and December 31, 1999, the fair value
of investments approximated the carrying values and were invested as
follows (amounts in thousands):
(Unaudited)
Maturity Maturity
June 30, Within 1 1 year Dec. 31, Within 1 1 year
2000 year or more 1999 year or more
Federal $- $- $- $1,500 $-
Bonds........ $1,500
Municipal 23,089 21,455 1,634 16,421 9,981 6,440
Bonds......
Corporate 895 895 - 1,560 - 1,560
Securities.
Commercial 38,896 38,896 - 40,090 39,490 600
Paper.....
$62,880 $61,246 $1,634 $59,571 $50,971 $8,600
4. NEW AUTHORITATIVE PRONOUNCEMENTS
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 is effective in
2001 and management does not expect adoption of this standard to have a
material impact on the Company's financial reporting or results of
operations.
5. OPERATING SEGMENTS
The Company has two business segments, retail operations and wholesale
distribution. The retail segment includes 99 Cents Only Stores retail
stores. The majority of the product offerings include recognized brand-name
consumable merchandise, regularly available for reorder. Bargain Wholesale
sells the same merchandise at prices generally below normal wholesale
levels to local, regional and national distributors and exporters.
The accounting policies of the segments are described in the summary
of significant accounting policies noted in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999. The Company evaluates
segment performance based on the net sales and gross profit of each
segment. Management does not track segment data or evaluate segment
performance on additional financial information. As such, there are no
separately identifiable segment assets nor is there any separately
identifiable statements of income data (below gross profit) to be
disclosed.
The Company accounts for inter-segment transfer at cost through its
inventory and inter-company accounts. All such transfers have been
eliminated in consolidation.
At June 30, 2000, the Company had no customers representing more than
4 percent of Bargain Wholesale's net sales. Substantially all of the
Company's net sales were to customers located in the United States.
Reportable segment information for the three months ended June 30, 2000,
and the six months ended June 30, 2000 follows (amounts in thousands).
Three Months Ended
June 30, Retail Wholesale Total
2000
Net $96,407 $11,540 $107,947
sales.............
Gross 39,161 2,454 41,615
Margin..........
1999
Net $69,827 $11,025 $80,852
sales.............
Gross 28,710 2,531 31,241
Margin..........
Six Months Ended
June 30, Retail Wholesale Total
2000
Net $183,970 $24,779 $208,749
sales.............
Gross 75,485 5,632 81,117
Margin..........
1999
Net $134,460 $22,119 $156,579
sales.............
Gross 55,763 5,085 60,848
Margin..........
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company has been engaged since 1976 in the purchase and sale of
name-brand, close-out and regularly available general merchandise. Since
that time, the Company has sold its merchandise on a wholesale basis
through its Bargain Wholesale division. On August 13, 1982, the Company
opened its first 99 Cents Only Stores retail location and as of June 30,
2000, operated a chain of 91 deep-discount 99 Cents Only Stores. The
Company's growth during the last four years has come primarily from new
store openings. The Company opened ten, thirteen and eighteen stores in
1997, 1998 and 1999, respectively (ten, eleven and fourteen respectively,
net of relocated stores). The Company opened twelve new 99 Cents Only
Stores in the first six months of 2000, eleven in Southern California and
one in Las Vegas, Nevada. The Company plans to open at least eight
additional 99 Cents Only Stores during the remainder of the year.
Bargain Wholesale's growth over the three years ended December 31,
1999 and the first six months of 2000 was primarily attributable to an
increased focus on large domestic and international accounts and expansion
into new geographic markets. The Company generally realizes a lower gross
profit margin on Bargain Wholesale's net sales compared to its retail net
sales. However, Bargain Wholesale complements the Company's retail
operations by allowing the Company to purchase in larger volumes at more
favorable pricing and to generate additional net sales with relatively
small incremental increases in operating expenses.
As part of its strategy to expand retail operations, the Company has
at times opened larger new stores in close proximity to existing stores
where the Company determined that the trade area could support a larger
facility. In some of these situations, the Company retained its existing
store so long as it continued to contribute store-level operating income.
While this strategy was designed to increase revenues and store-level
operating income, it has had a negative impact on comparable store net
sales as some customers migrated from the existing store to the larger new
store. The Company believes that this strategy has impacted its historical
comparable sales growth.
Recent Developments
Universal International. The Company has determined it would be in its best
interest, and that of its shareholders, to focus its efforts on increasing
the growth rate of 99 Cents Only Stores. In conjunction with this revised
growth strategy, the Company has decided to sell its Universal subsidiary.
Universal operates a multi-price point variety chain, with 65 stores
located in the Midwest, Texas and Upstate New York, under the trade names
Only Deals and Odd's-N-End's. Among other factors, the Company also
considered its successful opening of its first 99 Cents Only Store outside
the state of California in Las Vegas, Nevada. The success of the Las Vegas,
Nevada store helps to prove that the 99 Cents Only Stores concept is
portable to areas outside the State of California. As a result, the Company
will focus greater management resources to expand more rapidly in Nevada
and into Arizona.
The Company has adopted a definitive plan to sell Universal and has
engaged an investment-banking firm to evaluate and identify potential
buyers for the Universal business. The Company expects to sell Universal
within one year. The Company has $34.4 million of net assets of
discontinued business at June 30, 2000. The value of Universal's net assets
at June 30, 2000 includes $29.6 million in inventory, net fixed assets of
$7.8 million,$3.8 million of working capital advances for inventory
purchases and $3.0 million of other assets. This is offset by $3.3 million
of accounts payable, accrued and other liabilities and $6.5 million of
reserve for loss on disposition.
The Company's estimated net loss on the disposal of Universal of $9.0
million is based on the net realizable value of the business, a $1.2
million loss from operations to the disposal date, and the estimated
selling costs offset by a $2.6 million tax benefit. Universal's results of
operations for the quarter ended June 30, 2000 have been included in the
reserve for loss on disposal.
The Company has made in this Form 10-Q forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934 concerning the Company's
operations, expansion plans, economic performance, financial condition,
store openings, purchasing abilities, sales per square foot and comparable
store net sales trends and capital requirements. Such forward-looking
statements may be identified by the use of words such as "believe",
"anticipate," "intend" and "expect" and variations thereof. Such
forward-looking statements are subject to various risks and uncertainties,
certain of which are beyond the Company's control. Actual results could
differ materially from those currently anticipated due to a number of
factors. Some of those factors include (i) the Company's ability to open
new stores on a timely basis and operate them profitably, (ii) the
Company's ability to sell or otherwise dispose of the Universal operation
on a timely basis, (iii) the orderly operation of the Company's receiving
and distribution process, (iv) inflation, consumer confidence and other
general economic factors, (v) the availability of adequate inventory and
capital resources, (vi) the risk of a disruption in sales volume in the
fourth quarter and other seasonal factors, (vii) dependence on key
personnel and control of the Company by existing shareholders, (viii)
increased competition from new entrants into the deep-discount retail
industry and (ix) the Company's ability to open new stores and operate them
profitably in new regions such as Nevada and Arizona. The Company does not
ordinarily make projections of its future operating results and undertakes
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
Readers of this report should carefully read the risk factors included
in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 and in this Form 10-Q.
Results of Operations
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30,
1999
NET SALES: Net sales increased $27.1 million, or 33.5%, to $107.9 million
in the 2000 period from $80.9 million in the 1999 period. Retail sales
increased $26.6 million to $96.4 million in the 2000 period from $69.8
million in the 1999 period. The retail net sales increase was attributable
to the net effect of twelve new stores opened in 2000, the full quarter
effect of 14 net new stores opened in 1999, and a 5.3% increase in
comparable same store sales. Bargain Wholesale net sales were $11.5 million
in the 2000 period and $11.0 million in the same period in 1999.
GROSS PROFIT: Gross profit increased approximately $10.4 million, or 33.2%,
to $41.6 million in the second quarter ended June 30, 2000 from $31.2
million in the 1999 period. The increase in gross profit was due to higher
net sales. Overall gross profit margin was 38.6% in the 2000 period was the
same as that in the 1999 period. Product category sales mix variations
affected the gross profit margin between the retail and wholesale margins
as well as merchandise cost factors.
SELLING, GENERAL AND ADMINISTRATIVE: SG&A increased by $7.4 million, or
37.4%, to $27.2 million in the 2000 period from $19.8 million in the 1999
period. As a percentage of net sales, total SG&A increased to 25.2% from
24.4% in 1999. This increase in the selling, general and administrative
expenses is due to new store opening costs and spending for systems
technology and infrastructure to support the recently expanded growth rate
and expansion into new markets.
OPERATING INCOME FROM CONTINUING OPERATIONS: As a result of the items
discussed above, operating income increased $3.0 million, or 25.9%, to
$14.4 million in 2000 from $11.4 million in 1999. Operating margin was
13.4% in 2000 versus 14.2% in 1999.
INTEREST INCOME (EXPENSE): Interest income (expense) relates to interest on
the Company's capitalized leases, net of interest earned on the Company's
cash balances and short-term and long-term investments. The change in net
interest between 2000 and 1999 was due to interest earned on short-term
marketable securities. During 2000 and 1999, the Company had no bank debt.
PROVISION FOR INCOME TAXES: The provision for income taxes for the three
months ended June 30, 2000, was $5.9 million compared to $4.6 million in
1999. The effective rate of the provision for income taxes was
approximately 39.4% in 2000 versus 39.5% 1999. This variance results from
available tax credits and tax free interest income earned.
NET INCOME FROM CONTINUING OPERATIONS: As a result of the items discussed
above, net income increased $2.1 million, or 29.4% to $9.1 million in 2000
from $7.0 million in the 1999 period. Net income as a percentage of sales
was 8.4% in 2000 and 8.7% in 1999.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
NET SALES: Net sales increased $52.2 million, or 33.3%, to $208.7 million
in the 2000 period from $156.6 million in the 1999 period. Retail sales
increased $49.5 million to $184.0 million in the 2000 period from $134.5
million in the 1999 period. The retail net sales increase was attributable
to the net effect of twelve new stores opened in 2000, the full six months
effect of 14 net new stores opened in the first half of 1999, and a 4.1%
increase in comparable same store sales for the six-month period. Bargain
Wholesale net sales were $24.8 million in first six months of 2000 and
$22.1 million for the same period in 1999.
GROSS PROFIT: Gross profit increased approximately $20.3 million, or 33.3%,
to $81.1 million in the 2000 period from $60.8 million in the 1999 period.
The increase in gross profit was due to higher net sales volume. The
overall gross profit margin of 38.9% in the 2000 period was the same as
that in the 1999 period. The year to date retail gross margin was 41.0%
versus 41.5% in 1999. The change in the gross profit margin is due to sales
mix and merchandise cost factors.
SELLING, GENERAL AND ADMINISTRATIVE: SG&A increased by $15.3 million, or
39.5%, to $54.0 million in the 2000 period from $38.7 million in 1999
period. As a percentage of net sales, total SG&A increased to 25.9% from
24.7% in 1999. This increase in the selling, general and administrative
expenses is due to new store opening costs and spending for systems
technology and infrastructure to support the recently expanded growth rate
and expansion into new markets.
OPERATING INCOME FROM CONTINUING OPERATIONS: As a result of the items
discussed above, operating income increased $5.0 million, or 22.5%, to
$27.1 million in 2000 from $22.2 million in 1999. Operating margin was
13.0% in 2000 versus 14.2% in 1999.
INTEREST INCOME (EXPENSE): Interest income (expense) relates to interest on
the Company's capitalized leases, net of interest earned on the Company's
cash balances and short-term and long-term investments. The change in net
interest between 2000 and 1999 was due to interest earned on short-term
marketable securities. During 2000 and 1999, the Company had no bank debt.
Average interest rates earned on marketable securities has increased as has
the average outstanding balance of marketable securities.
PROVISION FOR INCOME TAXES: The provision for income taxes for the six
months ended June 30, 2000, was $11.2 million compared to $9.0 million in
1999. The effective rate of the provision for income taxes was
approximately 39.5% in both 2000 and 1999.
NET INCOME FROM CONTINUING OPERATIONS: As a result of the items discussed
above, net income increased $3.4 million, or 24.9% to $17.1 million in 2000
from $13.7 million in the 1999 period. Net income as a percentage of sales
was 8.2% in 2000 and 8.7% in 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations principally from cash provided
by operations, and has not generally relied upon external sources of
financing. The Company's capital requirements result primarily from
purchases of inventory, expenditures related to store openings and the
working capital requirements for new and existing stores. The Company takes
advantage of close-out and other special situation opportunities which
frequently results in large volume purchases, and as a consequence, its
cash requirements are not constant or predictable during the year and can
be affected by the timing and size of its purchases.
The Company maintains cash and short-term investments with highly
qualified financial institutions. At various times such amounts may be in
excess of insured limits.
As of June 30, 2000, the Company had purchased the land and buildings
for eight of its 99 Cents Only Stores retail store locations and a
distribution center in Minnesota for Universal. The Company may purchase
other locations in the future. Available cash not immediately needed for
such purposes has been invested in short-term investment grade securities.
Net cash provided by operations was $16.7 million and $10.7 million
for the periods ended June 30, 2000 and June 30, 1999, respectively. In
2000, inventories increased $5.0 million and receivables increased $0.3
million. In 1999, inventories increased $2.6 million and receivables
increased $1.5 million. The Company's accounts payable decreased by $1.8
million in 2000. In 1999, accounts payable increased $2.3 million. Other
assets increased $0.3 million in 2000 and $1.0 million in 1999.
Net cash used in investing activities was $29.6 million in 2000,
consisting of expenditures for property and equipment of $18.7 million
(which includes $8.4 million for twelve new 99 Cents Only Stores and a
purchase of a $7.3 million distribution center in Minnesota for Universal),
increases in the net asset of the discontinued operation of $7.5 million
and an increase of $3.3 million in marketable securities. In 1999, the
Company invested $8.2 million in capital expenditures and $1.5 million in
marketable securities. The net assets of the discontinued business
increased $6.3 million in 1999. Cash proceeds from financing activities
were $5.2 million in 2000. This included $0.1 million for payments on the
capitalized warehouse lease offset by $5.3 million of proceeds from the
exercise of stock options. In 1999, proceeds from the exercise of stock
options were $4.2 million.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 is effective in
2001 and management does not expect adoption of this standard to have a
material impact on the Company's financial reporting or results of
operations.
The Company plans to open new 99 Cents Only Stores at a targeted
annual rate of 25%. The Company's cash needs for new store openings are
expected to total approximately $17 million in 2000. Pre-opening expenses
are not capitalized by the Company. The Company believes that its total
capital expenditure requirements, including new store openings, existing
store refurbishment and the exercise of the purchase option for the
Company's current distribution facility, will increase to approximately $35
million in 2000. Capital expenditures in 2000 are currently expected to be
incurred primarily for new store openings, improvements to existing stores,
the purchase of distribution facilities and information systems. The
Company believes that cash flow from operations will be sufficient to meet
operating needs and capital spending requirements for at least the next
twelve months.
Risk Factors
Inflation
The Company's ability to provide quality merchandise at the 99 cents
price point is subject to certain economic factors, which are beyond the
Company's control, including inflation. Inflation could have a material
adverse effect on the Company's business and results of operations,
especially given the constraints on the Company to pass on any incremental
costs due to price increases or other factors. The Company believes that it
will be able to respond to ordinary price increases resulting from
inflationary pressures by adjusting the number of items sold at the single
price point (e.g., two items for 99 cents instead of three items for 99
cents) and by changing its selection of merchandise. Nevertheless, a
sustained trend of significantly increased inflationary pressure could
require the Company to abandon its single price point of 99 cents per item,
which could have a material adverse effect on the Company's business and
results of operations. See also "We are vulnerable to uncertain economic
factors and changes in the minimum wage" for a discussion of additional
risks attendant to inflationary conditions.
We Depend on New Store Openings for Future Growth
Our operating results depend largely on our ability to open and
operate new stores successfully and to manage a larger business profitably.
In 1997, 1998 and 1999, we opened ten, thirteen and eighteen 99 Cents Only
Stores, respectively (ten, eleven and fourteen stores, respectively, net of
relocated stores). As of June 30, 2000, we opened twelve 99 Cents Only
Stores and we expect to open at least 8 additional 99 Cents Only Stores in
Southern California and Nevada during the remainder of the year. We plan
to open new stores over the next several years at a rate of approximately
25% per year. Our strategy depends on many factors, including our ability
to identify suitable markets and sites for our new stores, negotiate leases
with acceptable terms, refurbish stores, appropriately upgrade our
financial and management information systems and controls and manage our
operating expenses. In addition, we must be able to continue to hire,
train, motivate and retain competent managers and store personnel. Many of
these factors are beyond our control. As a result, we cannot assure you
that we will be able to achieve our expansion goals. Any failure by us to
achieve our expansion goals on a timely basis, obtain acceptance in markets
in which we currently have limited or no presence, attract and retain
management and other qualified personnel, appropriately upgrade our
financial and management information systems and control or manage
operating expenses could adversely affect our future operating results and
our ability to execute our business strategy.
We also cannot assure you that when we open new stores, we will
improve our results of operations. A variety of factors, including store
location, store size, rental terms, the level of store sales and the level
of initial advertising influence if and when a store becomes profitable.
Assuming that our planned expansion occurs as anticipated, our store base
will include a relatively high proportion of stores with relatively short
operating histories. We cannot assure you that our new stores will achieve
the sales per saleable square foot and store-level operating margins
currently achieved at our existing stores. If our new stores on average
fail to achieve these results, our planned expansion could produce a
decrease in our overall sales per saleable square foot and store-level
operating margins. Increases in the level of advertising and pre-opening
expenses associated with the opening of new stores could also contribute to
a decrease in our operating margins. Finally, the opening of new stores in
existing markets has in the past and may in the future reduce retail sales
of existing stores in those markets, negatively affecting comparable store
sales.
Our operations are mainly concentrated in Southern California
All but two of our 99 Cents Only Stores are currently located in
Southern California. The Company currently has two stores in Las Vegas,
Nevada. In addition, our year 2000 retail expansion plan includes new
stores in these regions and thereafter also in Arizona. As a result, our
results of operations and financial condition depend upon trends in the
Southern California economy. For example, this region experienced an
economic recession in the early 1990s. Although this recession had no
material effect on our business, between 1989 and 1993 most California
counties, particularly Los Angeles, recorded a significant decline in
retail spending. Recovery in these retail markets has continued from 1995
through 1999. However, this trend may not continue and retail spending
could decline in the future. In addition, Southern California historically
has been vulnerable to certain natural disasters and other risks, such as
earthquakes, fires, floods and civil disturbance. At times, these events
have disrupted the local economy. These events could also pose physical
risks to our properties. Although we maintain standard property and
business interruption insurance, we do not have earthquake insurance on our
properties.
We could experience disruptions in receiving and distribution
Our success depends upon whether our receiving and shipment schedules
are organized and well managed. As we continue to grow, we may face
unexpected demands on our warehouse operations that could cause delays in
delivery of merchandise to or from our warehouses to our stores. A fire,
earthquake or other disaster at our warehouses could hurt our business,
financial condition and results of operations, particularly because much of
our merchandise consists of close-outs and other irreplaceable products.
Although we maintain standard property and business interruption insurance,
we do not have earthquake insurance on our properties.
Although we try to limit our risk of exposure to potential product
liability claims, we do not know if the limitations in our agreements are
enforceable. We maintain insurance covering damage from use of our
products. If any product liability claim is successful and large enough,
our business could suffer.
We depend upon our relationships with our suppliers and the availability of
close-out and special-situation merchandise
Our success depends in large part on our ability to locate and
purchase quality close-out and special-situation merchandise at attractive
prices. This helps us maintain a mix of name-brand and other merchandise
at the 99 cents price point. We cannot be certain that such merchandise
will continue to be available in the future. Further, we may not be able to
find and purchase merchandise in quantities necessary to accommodate our
growth. Additionally, our suppliers sometimes restrict the advertising,
promotion and method of distribution of their merchandise. These
restrictions in turn may make it more difficult for us to quickly sell
these items from our inventory.
Although we believe our relationships with our suppliers are good, we
do not have long term agreements with any supplier. As a result, we must
continuously seek out buying opportunities from our existing suppliers and
from new sources. We compete for these opportunities with other
wholesalers and retailers, discount and deep-discount chains, mass
merchandisers, food markets, drug chains, club stores and various
privately-held companies and individuals. Although we do not depend on any
single supplier or group of suppliers and believe we can successfully
compete in seeking out new suppliers, a disruption in the availability of
merchandise at attractive prices could impair our business.
We purchase in large volumes and our inventory is highly concentrated
To obtain inventory at attractive prices, we take advantage of large
volume purchases, close-outs and other special situations. As a result, our
inventory levels are generally higher than other discount retailers. At
December 31, 1997, 1998 and 1999, we recorded net inventory of $43.1
million, $49.6 million and $53.9 million, respectively. As of June 30,
2000, net inventory is $58.9 million.
We periodically review the net realizable value of our inventory and
make adjustments to its carrying value when appropriate. The current
carrying value of our inventory reflects our belief that we will realize
the net values recorded on our balance sheet. However, we may not be able
to do so. If we sell large portions of our inventory at amounts less than
their carrying value or if we write down a significant part of our
inventory, our cost of sales, gross profits, operating income and net
income could suffer greatly during the period in which such event or events
occur.
We face strong competition
We compete in both the acquisition of inventory and sale of
merchandise with other wholesalers, discount and deep-discount stores,
single price point merchandisers, mass merchandisers, food markets, drug
chains, club stores and other retailers. Our industry competitors also
include many privately held companies and individuals. At times, these
competitors are also customers of our Bargain Wholesale division. In the
future, new companies may also enter the deep-discount retail industry.
Additionally, we currently face increasing competition for the purchase of
quality close-out and other special-situation merchandise. Some of our
competitors have substantially greater financial resources and buying power
than us. Our capability to compete will depend on many factors including
our ability to successfully purchase and resell merchandise at lower prices
than our competitors. We cannot assure you that we will be able to compete
successfully against our current and future competitors.
We are vulnerable to uncertain economic factors and changes in the minimum
wage
Our ability to provide quality merchandise at our 99 Cents price point
could be hindered by certain economic factors beyond our control, including
but not limited to:
- increases in inflation;
- increases in operating costs;
- increases in employee health care costs;
- increases in prevailing wage levels; and
- decreases in consumer confidence levels.
As a result, increases in federal and state minimum wage requirements
significantly affect our business. In California, the minimum wage
increased [in March 1997 from $4.75 to $5.00 per hour], in September 1997
from $5.00 to $5.15 per hour, in March 1998 to $5.75 per hour. The federal
minimum wage increased in September 1997 to $5.15 per hour. In addition,
the federal government or the state of California may, in the future,
implement additional increases to the minimum wage. Since we provide
consumers with merchandise at a 99 Cents price point, we typically cannot
pass on to them any incremental costs. As a result, significant increases
in the minimum wage requirements could impair our business.
We face risks associated with international sales and purchases
Although international sales historically have not been important to
our consolidated net sales, they have contributed to growth in Bargain
Wholesale's net sales. In addition, some of the inventory we purchase is
manufactured outside the United States. There are many risks associated
with doing business internationally. Our international transactions may be
subject to risks such as:
- political instability;
- currency fluctuations;
- exchange rate controls;
- changes in import and export regulations;
- changes in tariff and freight rates.
The United States and other countries have also proposed various forms
of protectionist trade legislation. Any resulting changes in current tariff
structures or other trade policies could lead to fewer purchases of our
products and could adversely affect our international operations.
We could encounter risks related to transactions with our affiliates
We currently lease 12 of our 91, 99 Cents Only Stores and a parking
lot for one of these stores from certain members of the Gold family and
their affiliates. Our annual rental expense for these facilities totaled
approximately $2.0 million, $2.2 million and $1.9 million in 1997, 1998 and
1999, respectively. We believe that our lease terms are just as favorable
to us as they would be for an unrelated party. Under our current policy, we
enter into real estate transactions with our affiliates only for the
renewal or modification of existing leases and on occasions where we
determine that such transactions are in our best interests. Moreover, the
independent members of our Board of Directors must unanimously approve all
real estate transactions between us and our affiliates. They must also
determine that such transactions are equivalent to a negotiated
arm's-length transaction with a third party. We cannot guarantee that we
will reach agreements with the Gold family on renewal terms for the
properties we currently lease from them. Also, even if we agree to such
terms, we cannot be certain that our independent directors will approve
them. If we fail to renew one of these leases, we could be forced to
relocate or close the leased store. Any relocations or closures we
experience will be costly and could adversely affect our business.
We rely heavily on our management team
Our success depends substantially on David Gold and Eric Schiffer, our
Chief Executive Officer and President, respectively. We also rely on the
continued service of our executive officers and other key management,
particularly Helen Pipkin, our Senior Vice President of Wholesale
Operations. We have not entered into employment agreements with any of our
executive officers and we do not maintain key person life insurance on
them. As we continue to grow, our success will depend on our ability to
identify, attract, hire, train, retain and motivate other highly skilled
management personnel. Competition for such personnel is intense, and we
may not be able to successfully attract, assimilate or retain sufficiently
qualified candidates.
Our operating results may fluctuate and may be affected by seasonal buying
patterns
Historically, our highest net sales and operating income have occurred
during the fourth quarter, which includes the Christmas and Halloween
selling seasons. During 1998 and 1999, we generated approximately 28.1% and
31.8%, respectively, of our net sales and approximately 32.9% and 36.2%,
respectively, of our operating income during the fourth quarter.
Accordingly, any decrease in net sales during the fourth quarter could
reduce our profitability and impair our results of operations for the
entire year.
In addition to seasonality, many other factors may cause our results
of operations to vary significantly from quarter to quarter. Some of these
factors are beyond our control. The factors include:
- the number and timing of sales contributed to new stores;
- the level of advertising and pre-opening expenses associated with new
stores;
- the integration of new stores into our operations;
- general economic health of the deep-discount retail industry;
- changes in the mix of products sold;
- unexpected increases in shipping costs;
- ability to successfully manage our inventory levels;
- changes in our personnel;
- fluctuations in the amount of consumer spending; and
- the amount and timing of operating costs and capital expenditures
relating to the growth of our business.
We are subject to environmental regulations
Under various federal, state and local environmental laws and
regulations, current or previous owners or occupants of property may become
liable for the costs of removing any hazardous substances found on the
property. These laws and regulations often impose liability without regard
to fault. We currently lease all but eight of our stores, as well as our
warehouse and distribution facility (where our executive offices are
located). We have the option to purchase our warehouse and distribution
facility in December 2000, which we plan to do. However, in the future we
may be required to incur substantial costs for preventive or remedial
measures associated with the presence of hazardous materials. In addition,
we operate one underground diesel storage tank and one above-ground propane
storage tank at our warehouse. Although we have not been notified of, and
are not aware of, any current environmental liability, claim or
non-compliance, we could incur costs in the future related to our leased
properties and our storage tanks.
In the ordinary course of our business, we sometimes handle or dispose
of commonplace household products that are classified as hazardous
materials under various environmental laws and regulations. We have adopted
policies regarding the handling and disposal of these products, and we
train our employees on how to handle and dispose of them. We cannot assure
you that our policies and training will successfully help us avoid
potential violations of these environmental laws and regulations in the
future.
Anti-takeover Effect; We are controlled by our existing shareholders
In addition to some governing provisions in our Articles of
Incorporation and Bylaws, we are also subject to certain California laws
and regulations which could delay, discourage or prevent others from
initiating a potential merger, takeover or other change in our control,
even if such actions would benefit our shareholders and us. In addition,
David Gold, our Chairman and Chief Executive Officer, and members of his
immediate family and certain of their affiliates beneficially own
15,421,993 shares of our voting stock. As a result, they have the ability
to influence all matters requiring the vote of our shareholders, including
the election of our directors and most of our corporate actions. They can
also control our policies and potentially prevent a change in our control.
This could adversely affect the voting and other rights of our other
shareholders and could depress the market price of our common stock.
Our stock price could fluctuate widely
The market price of our common stock has risen substantially since our
initial public offering on May 23, 1996. Trading prices for our common
stock could fluctuate significantly due to many factors, including:
- the depth of the market for our common stock;
- changes in expectations of our future financial performance,
including financial estimates by securities analysts and
investors;
- variations in our operating results;
- conditions or trends in our industry or in the industries of any of
our significant clients;
- additions or departures of key personnel; and
- future sales of our common stock.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to interest rate risk for its investments in
marketable securities. At June 30, 2000, the Company had $62,900,000 in
marketable securities maturing at various dates through October 2001. The
Company's investments are comprised primarily of investment grade federal
and municipal bonds and commercial paper. The Company generally holds
investments until maturity. Any premium or discount recognized upon the
purchase of an investment is amortized over the term of the investment.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The Company held its 2000 Annual Meeting of Stockholders on May 11,
2000. There were three matters submitted for a vote of the shareholders.
The first matter was the election of eight directors to hold office for a
one-year term. The second matter was an amendment to the 99 Cents Only
Stores Amended and Restated Articles of Incorporation to increase the
authorized number of shares of Common Stock from 40,000,000 shares to
100,000,000 shares. The third matter was to consider and act upon a
shareholder proposal. The results of the voting for the directors were
29,930,361 shares voted for each of the directors and 220,087 shares
against each of the directors. The results of the voting for the increase
in the number of authorized shares was 28,055,883 for, 2,094,269 against
and 296 abstain. The results of the voting for the shareholder proposal
were 290,451 for 23,701,559 against 1,390,724 abstain and 4,767,714
unvoted.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBIT 3.1 Amendment to amended and restated Articles of
Incorporation
b. EXHIBIT 27.1 Financial Data Schedule
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
99 CENTS ONLY
STORES
Date: July 25, 2000 /s/ Andrew A.
Farina
Andrew A. Farina
Chief Financial Officer
(Duly Authorized Officer)
EXHIBIT 27.1
99 Cents Only Stores
Financial Data Schedule
This Schedule contains summary financial information
extracted from 99 Cents Only Stores' Financial
Statements and is qualified in its entirety by
reference to such financial statements.
(amounts in thousands)
<PERIOD TYPE> 6-mos
<FISCAL YEAR END> Dec. 31 2000
<PERIOD START> Jan. 01 2000
<PERIOD END> June 30,2000
[CASH] 304
[SECURITIES] 61,246
[RECEIVABLES] 6,832
[ALLOWANCES] (134)
[INVENTORY] 58,889
<CURRENT ASSETS> 129,536
[PP&E] 88,067
[DEPRECIATION] (23,907)
<TOTAL ASSETS> 245,970
<CURRENT LIABILITIES> 22,620
[BONDS] 0
<PREFERRED MANDATORY> 0
[PREFERRED] 0
[COMMON] 125,458
<OTHER SE> 95,860 <FN1>
<TOTAL LIABILITY AND EQUITY> 245,970
[SALES] 107,947
<TOTAL REVENUE> 107,947
[CGS] 66,332
<TOTAL COSTS> 27,205
<OTHER EXPENSES> 0
<LOSS PROVISION> 0
<INTEREST EXPENSE> 185
<INCOME PRE TAX> 14,992
<INCOME TAX> 5,908
<INCOME CONTINUING> 9,084
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
<NET INCOME> 9,084
<EPS PRIMARY> 0.27
<EPS DILUTED> 0.26
<FN1> Retained Earnings