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 September 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, 34,228,076 Shares as of October 25, 2000
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
99 CENTS ONLY STORES
CONSOLIDATED BALANCE SHEETS
(Amounts In Thousands, Except Share Data)
ASSETS
September December
30, 31,
2000 1999
(Unaudited)
CURRENT ASSETS:
Cash $333 $7,984
Short-term investments 66,978 50,971
Accounts receivable, net of allowance for doubtful
accounts of $134 and $140 as of September 30, 2000
and December 31, 1999, respectively 4,047 3,356
Income tax receivable 7,710 4,674
Inventories 64,080 53,932
Other 2,891 1,451
Total current assets 146,038 122,368
PROPERTY AND EQUIPMENT, at cost:
Land 17,781 11,060
Building and improvement 17,357 12,876
Leasehold improvements 31,910 23,786
Fixtures and equipment 17,799 14,718
Transportation equipment 1,940 1,635
Construction in progress 4,582 5,466
91,369 69,541
Less-Accumulated depreciation and amortization (26,164) (20,119)
65,205 49,422
OTHER ASSETS:
Deferred income taxes 11,318 11,318
Long term investments in marketable securities 4,509 8,600
Deposits 308 214
Net assets of discontinued operation. 33,909 26,928
Other 5,013 5,165
55,057 52,225
$266,300 $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
September December
30, 31,
2000 1999
(Unaudited)
CURRENT LIABILITIES:
Current portion of capital lease obligation $10,526 $10,601
Accounts payable 7,626 9,010
Accrued expenses:
Payroll and payroll-related 829 1,967
Sales tax 1,872 2,429
Other 280 421
Workers compensation 2,464 2,095
Total current liabilities 23,597 26,523
LONG-TERM LIABILITIES:
Deferred rent 2,062 1,952
Total Long-term liabilities 2,062 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 34,218,643 at September 30,
2000 and 33,425,232 at December 31, 1999 137,256 116,775
Retained earnings 103,385 78,765
240,641 195,540
$266,300 $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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 19
99
(Amounts In Thousands, Except Per Share Data)
(Unaudited)
Three months Nine months
ended September ended
30, September 30,
2000 1999 2000 1999
NET SALES:
99 Cents Only Stores $98,096 $76,517 $282,06 $210,97
6 7
Bargain Wholesale 11,336 12,202 36,115 34,320
109,432 88,719 318,181 245,297
COST OF SALES 66,992 53,374 194,624 149,106
Gross profit 42,440 35,345 123,557 96,191
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES:
Operating expenses 27,061 20,586 77,057 56,455
Depreciation and amortization 2,206 1,566 6,195 4,389
29,267 22,152 83,252 60,844
Operating income 13,173 13,193 40,305 35,347
OTHER (INCOME) EXPENSE:
Interest income (1,158) (450) (2,643) (1,314)
Interest expense 185 187 555 560
(973) (263) (2,088) (754)
Income from continuing operations before
provisions for income taxes 14,146 13,456 42,393 36,101
PROVISION FOR INCOME TAXES 5,571 5,349 16,723 14,306
Income from continuing operations 8,575 8,107 25,670 21,795
Income (loss) from discontinued (1,050) 53 (1,050) (489)
operation
NET INCOME $7,525 $8,160 $24,620 $21,306
EARNINGS PER COMMON SHARE FROM
CONTINUING OPERATIONS:
Basic $0.25 $0.24 $0.76 $0.65
Diluted $0.25 $0.24 $0.74 $0.64
LOSS PER COMMON SHARE FROM DISCONTINUED
OPERATION:
Basic ($0.03) - ($0.03) ($0.01)
Diluted ($0.03) - ($0.03) ($0.01)
NET EARNINGS PER COMMON SHARE:
Basic $0.22 $0.24 $0.73 $0.64
Diluted $0.22 $0.24 $0.71 $0.63
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic 34,034 33,396 33,709 33,197
Diluted 34,793 34,005 34,490 33,956
The accompanying notes are an integral part of these consolidated financial
statements.
99 CENTS ONLY STORES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Amounts in Thousands)
Nine months ended
September 30,
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $24,620 $21,306
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 6,195 4,389
Benefit for deferred income taxes - 141
Loss from discontinued operations 1,050 489
Tax Benefit from exercise of non qualified
employee stock options 8,059 3,739
Other (149) (193)
Changes in assets and liabilities associated
with operating activities:
Accounts receivable (691) (1,485)
Inventories (10,148) (5,261)
Other assets (1,382) (2,226)
Accounts payable (1,384) (971)
Accrued expenses (1,836) (1,241)
Worker's compensation 369 (1,238)
Income taxes (3,036) (6,956)
Deferred rent 110 82
Net cash provided by operating activities 21,777 10,575
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (21,828) (11,176)
Purchases of short-term investments (11,916) (3,467)
Net asset of discontinued operations. (8,031) (6,993)
Net cash used in investing activities (41,775) (21,636)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligation (75) (69)
Proceeds from exercise of stock options 12,422 8,745
Net cash provided by financing activities 12,347 8,676
NET DECREASE IN CASH (7,651) (2,385)
CASH, beginning of period 7,984 2,699
CASH, end of period $333 $314
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 accounting principles generally accepted in the
United States. However, certain information and footnote disclosures
normally included in financial statements prepared in conformity with
accounting principles generally accepted in the United States 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, located in Las Vegas,
Nevada. The Company's current retail expansion plans for the 99 Cents Only
Stores include planned new stores in Southern California and Las Vegas,
Nevada, as well as 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 period. "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 nine months ended September 30, 2000
and 1999 (amounts in thousands):
3 Months Ended 9 Months Ended
September 30, September 30,
2000 1999 2000 1999
Weighted average number of common shares
outstanding-Basic......................... 34,034 33,396 33,709 33,197
......
Dilutive effect of outstanding stock 759 609 781 759
options......
Weighted average number of common shares
outstanding-Diluted....................... 34,793 34,005 34,490 33,956
......
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 the 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 September 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
Sept. Within 1 1 year Dec. 31, Within 1 1 year
30, 2000 year or more 1999 year or more
Federal $- $- $- $1,500 $-
Bonds........ $1,500
Municipal 43,324 38,815 4,509 16,421 9,981 6,440
Bonds......
Corporate 2,000 2,000 - 1,560 - 1,560
Securities.
Commercial 26,163 26,163 - 40,090 39,490 600
Paper.....
$71,487 $66,978 $4,509 $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.
In December 1999, the Securities and Exchange Commission staff
released Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition".
SAB No. 101 must be adopted no later than the quarter ending December 31,
2000 with retroactive application effective January 1, 2000. Management
does not expect that adoption of SAB No. 101 will have a material impact on
the Company's revenue recognition, financial position 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 September 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 and the nine
months ended September 30, 2000 follows (amounts in thousands):
Three Months Ended
September 30, Retail Wholesale Total
2000
Net $98,096 $11,336 $109,432
sales.............
Gross 40,089 2,351 42,440
margin..........
1999
Net $76,517 $12,202 $88,719
sales.............
Gross 32,555 2,790 35,345
margin..........
Nine Months Ended
September 30, Retail Wholesale Total
2000
Net $282,066 $36,115 $318,181
sales.............
Gross 115,573 7,984 123,557
margin..........
1999
Net $210,977 $34,320 $245,297
sales.............
Gross 88,315 7,876 96,191
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 September
30, 2000, operated a chain of 96 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 eighteen new 99 Cents Only
Stores in the first nine months of 2000, seventeen in Southern California
and one in Las Vegas, Nevada. The Company plans to open at least two
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 nine 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 99 Cents Only
Stores 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
In December 1999, the Company 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 its revised
growth strategy, the Company decided to sell its Universal subsidiary.
Universal operated a multi-price point variety chain, with 65 stores
located in the Midwest, Texas and 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. Given the success to date of the Las
Vegas, Nevada stores the Company believes that the 99 Cents Only Stores
concept is portable to areas outside the state of California. As a result,
the Company has focused greater management resources to increase its store
growth rate and expand more rapidly in Nevada and into Arizona.
The Company also adopted a definitive plan to sell Universal within
one year, as set forth by guidelines for the accounting treatment of
discontinued operations. The Company engaged an investment banking firm to
evaluate and identify potential buyers for the Universal business and
expected to sell Universal within the one year time frame. The investment
banking firm's marketing process focused upon selling the business as a
going concern. From June 2000 through August 2000, sales presentations were
delivered to both strategic buyers and financial buyers. This process did
not generate the expected interest level from potential buyers that had
been anticipated. The highest offer for the Universal business was
significantly less than the Company's expectations. As a result of the
difficulties encountered in trying to sell Universal and the necessity to
complete the process by December 31, 2000 it was decided by the board of
directors to be in the Company's and the shareholders' best interest to
sell Universal for the Company's carrying value as of the close of business
on September 30, 2000 to, Universal Deals, LLC, a limited liability company
owned 100% by David and Sherry Gold, both significant shareholders of 99
Cents Only Stores. Mr. Gold is also Chairman and CEO of 99 Cents Only
Stores. The Gold's, plan to market and sell the business without a time
constraint in an orderly fashion, either as a whole company, or in clusters
of stores or by unit. The sale will be effective after the close of
business on September 30, 2000. However, the closing will be subject to
customary conditions, including expiration of the Hart-Scott-Rodino waiting
period. The purchase price for Universal is equal to the Company's carrying
book value of the assets of Universal at September 30, 2000 or
approximately $33.9 million. The net assets at September 30, 2000 included
$29.2 million in inventory, net fixed assets of $7.6 million and $0.6
million of other assets. These assets are offset by $3.5 million of
accounts payable, accrued and other liabilities. In connection with this
transaction 99 Cents Only Stores will provide certain ongoing
administrative services to Universal for a management fee. It is expected
that 99 Cents Only Stores will be reimbursed for its full costs incurred
with these services. As of September 30, 2000 the Company recorded an
additional net loss from discontinued operations of $1.1 million, net of
tax benefit of $0.7 million, for operating losses incurred through the date
of sale, in excess of the amounts originally provided in 1999.
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, sale of Universal, 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 orderly
operation of the Company's receiving and distribution process,
(iii) inflation, consumer confidence and other general economic factors,
(iv) the availability of adequate inventory and capital resources, (v) the
risk of a disruption in sales volume in the fourth quarter and other
seasonal factors, (vi) dependence on key personnel and control of the
Company by existing shareholders, (vii) increased competition from new
entrants into the deep-discount retail industry and (viii) 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 September 30, 2000 Compared to Three Months September
30, 1999
NET SALES: Net sales increased $20.7 million, or 23.3%, to $109.4 million
in the 2000 period from $88.7 million in the 1999 period. Retail sales
increased $21.6 million to $98.1 million in the 2000 period from $76.5
million in the 1999 period. The retail net sales increase was primarily
attributable to the net effect of eighteen new stores opened in 2000, the
full quarter effect of 14 net new stores opened in 1999 and the 2.1%
increase in same store sales. Bargain Wholesale net sales were $11.3
million in the 2000 period and $12.2 million in the same period in 1999.
GROSS PROFIT: Gross profit increased approximately $7.1 million, or 20.1%,
to $42.4 million in the third quarter ended September 30, 2000 from $35.3
million in the 1999 period. The increase in gross profit was due to higher
net sales. Overall gross profit margin was 38.8% in the third quarter of
2000 versus 39.8% in 1999. Gross margin was lower primarily as a result of
product category mix factors and merchandise cost factors.
SELLING, GENERAL AND ADMINISTRATIVE: SG&A increased by $7.1 million, or
32.1%, to $29.3 million in the 2000 period from $22.2 million in the 1999
period. As a percentage of net sales, total SG&A increased to 26.7% from
25.0% in 1999. This increase is primarily related to retail and
distribution labor costs, associated with turnover and lack of availability
of qualified employees to fill open positions and spending for systems
technology and infrastructure to support the recently expanded store
opening growth rate and expansion into new markets. The Company charged the
discontinued operations for $0.4 million of labor, distribution and other
direct costs associated with Universal.
OPERATING INCOME FROM CONTINUING OPERATIONS: As a result of the items
discussed above, operating income was $13.2 million in 2000 and was
approximately the same as in 1999. Operating margin was 12.0% in 2000
versus 14.9% 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 September 30, 2000, was $5.6 million compared to $5.3 million
in 1999. The effective rate of the provision for income taxes was
approximately 39.4% in 2000 versus 39.8% in 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 $0.5 million to $8.6 million in 2000 from $8.1
million in the 1999 period. Net income as a percentage of sales was 7.8% in
2000 and 9.2% in 1999.
LOSS FROM DISCONTINED OPERATIONS: In the quarter ended September 30, 2000
the Company recorded an additional charge of approximately $1.1 million,
net of $0.7 million tax benefit, related to the discontinued operations
resulting primarily from operating losses in excess of that which had been
provided for at December 31, 2000. Effective after the close of business on
September 30, 2000, the Company sold the discontinued operations to an
entity controlled by a related party. See "Recent Developments" above.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended
September 30, 1999
NET SALES: Net sales increased $72.9 million, or 29.7%, to $318.2 million
in the 2000 period from $245.3 million in the 1999 period. Retail sales
increased $71.1 million to $282.1 million in the 2000 period from $211.0
million in the 1999 period. The retail net sales increase was attributable
to the net effect of eighteen new stores opened in 2000, the effect of a
full nine months of 14 net new stores opened in the first half of 1999, and
a 3.4% increase in comparable same store sales for the nine-month period.
Bargain Wholesale net sales were $36.1 million in the first nine months of
2000 and $34.3 million for the same period in 1999.
GROSS PROFIT: Gross profit increased approximately $27.4 million, or 28.4%,
to $123.6 million in the 2000 period from $96.2 million in the 1999 period.
The increase in gross profit was due to higher net sales volume. The
overall gross profit margin was 38.8% in the 2000 period as compared to
39.2% in the 1999 period. This variance is due primarily to merchandise
cost factors and product mix variances. The year to date retail gross
margin was 41.0% versus 41.9% 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 $22.4 million, or
36.8%, to $83.3 million in the 2000 period from $60.8 million in the 1999
period. As a percentage of net sales, total SG&A increased to 26.2% from
24.8% in 1999. This increase in 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
for expansion into new markets. Also in this period the Company experienced
additional labor costs the tight labor market and resulting employee
turnover. The Company charged the discontinued operations $0.8 million of
labor, distribution and other direct costs associated with Universal in the
nine-month period ended September 30, 2000. The Company also incurred an
additional $1.5 million of operating costs associated with the operation of
Universal, which were not charged to the discontinued operations.
OPERATING INCOME FROM CONTINUING OPERATIONS: As a result of the items
discussed above, operating income increased $5.0 million, or 14.0%, to
$40.3 million in 2000 from $35.3 million in 1999. Operating margin was
12.7% in 2000 versus 14.4% 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 have increased along
with the average outstanding balance of marketable securities.
PROVISION FOR INCOME TAXES: The provision for income taxes for the nine
months ended September 30, 2000, was $16.7 million compared to $14.3
million in 1999. The effective rate of the provision for income taxes was
approximately 39.4% in 2000 and 39.6% in 1999.
NET INCOME FROM CONTINUING OPERATIONS: As a result of the items discussed
above, net income increased $3.9 million, or 17.8%, to $25.7 million in
2000 from $21.8 million in the 1999 period. Net income as a percentage of
sales was 8.1% in 2000 and 8.9% in 1999.
LOSS FROM DISCONTINED OPERATIONS: In the nine months ended September 30,
2000 the Company recorded an additional charge of approximately $1.1
million net of tax benefit of $0.7 million, related to the discontinued
operations resulting primarily from operating losses in excess of that
which had been provided for at December 31, 1999. Effective after the close
of business on September 30, 2000, the Company sold the discontinued
operations to an entity controlled by a related party. See "Recent
Developments" above.
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 September 30, 2000, the Company owned the land and buildings for
ten of its 99 Cents Only Stores retail store locations and a distribution
center in Minnesota for Universal. The Company may acquire 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 $21.8 million for the nine-month
period ended September 30, 2000, inventories increased $10.1 million, trade
receivables increased $0.7 million and taxes receivable increased $3.0
million. Other assets increased $1.4 million. The Company realized a tax
benefit from the exercise of non-qualified employee stock options of $8.1
million. The Company's accounts payable and accruals for the nine months
ended September 30, 2000 decreased by $1.4 million and $1.8 million
respectively. In the nine months ended September 30, 1999 cash provided by
operations was $10.6 million, inventories increased $5.3 million, trade
receivables increased $1.5 million, taxes receivable increased $7.0 million
and payables and accruals decreased $2.2 million.
Net cash used in investing activities was $41.8 million in 2000,
consisting of expenditures for property and equipment of $21.8 million
(this includes $14.5 million for eighteen 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 $8.0 million
and an increase of $11.9 million in marketable securities. In 1999, the
Company invested $11.2 million in capital expenditures and $3.5 million in
marketable securities. The net assets of the discontinued business
increased $7.0 million in 1999. Cash proceeds from financing activities
were $12.3 million in 2000. This included $0.1 million for payments on the
capitalized warehouse lease offset by $12.4 million of proceeds from the
exercise of stock options. In 1999, proceeds from the exercise of stock
options were $8.7 million.
On September 30, 2000, the Company sold it's discontinued operation to
an entity controlled by a related party for approximately $33.9 million
(see "recent developments" above). Under the term of the sales agreement,
the Company expects to receive cash payment for the discontinued operation
no later than December 31, 2000.
On November 2, 2000 the Company announced that the Company's Board of
Directors authorized the repurchase of up to two million shares of the
Company's common stock. The shares may be purchased from time to time on
the open market at prevailing prices or in privately negotiated
transactions over a period ending on December 31, 2001. The timing and
amount of any shares repurchased will be determined by the Company based on
its evaluation of market conditions and other factors. The Company intends
to use any repurchased shares in connection with its stock option plan. The
Company plans to use existing cash to fund the repurchases.
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.
In December 1999, the Securities and Exchange Commission staff
released Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition".
SAB No. 101 must be adopted no later than the quarter ending December 31,
2000 with retroactive application effective January 1, 2000. Management
does not expect that adoption of SAB No. 101 will have a material impact on
the Company's revenue recognition, financial position 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 its operations will be sufficient to
meet operating needs, capital spending requirements and its stock
repurchase program for at least the next twelve months.
Risk Factors
Rider A
Risks Associated with Sale of Universal
As discussed under "Recent Developments", the Company has entered
into a letter of intent to sell its Universal International subsidiary to a
limited liability company owned by Dave and Sherry Gold, two of the
Company's largest stockholders. In addition Dave Gold is the Company's
Chief Executive Officer and Chairman of the Board of Directors. The closing
of the sale is subject to customary conditions to closing, including the
negotiation and execution of definitive agreements, and the approval of the
Boards of Universal, the Company and the buyer. The sale is subject to the
expiration of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976. as amended.
It is expected that if the sale of Universal is not consummated for
any reason, the Company's current management, under the direction of the
Board of Directors, will continue to manage Universal. Currently, the
Company is not considering any other alternatives to the sale of Universal.
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 September 30, 2000, we opened eighteen 99 Cents
Only Stores and we expect to open at least 2 additional 99 Cents Only
Stores in Southern California 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 2001 retail expansion plan includes new
stores in these regions and thereafter also in Arizona. Accordingly, 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. 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.
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 September 30,
2000, net inventory was $64.1 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.
Increases in federal and state minimum wage requirements could
significantly affect our business. Because 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 and
- 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 96, 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. These 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. Moreover 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 September 30, 2000, the Company had $71.5 million
in marketable securities maturing at various dates through August 2002. 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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBIT 27.1 Financial Data Schedule
b. Report on Form 8-K filed on November 3, 2000, item 5
reported.
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: November 10, 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> 9-mos
<FISCAL YEAR END> Dec. 31 2000
<PERIOD START> Jan. 01 2000
<PERIOD END> Sept. 30,2000
[CASH] 333
[SECURITIES] 66,978
[RECEIVABLES] 4,047
[ALLOWANCES] (134)
[INVENTORY] 64,080
<CURRENT ASSETS> 146,038
[PP&E] 91,369
[DEPRECIATION] (26,164)
<TOTAL ASSETS> 266,300
<CURRENT LIABILITIES> 23,597
[BONDS] 0
<PREFERRED MANDATORY> 0
[PREFERRED] 0
[COMMON] 137,256
<OTHER SE> 103,385 <FN1>
<TOTAL LIABILITY AND EQUITY> 266,300
[SALES] 318,181
<TOTAL REVENUE> 318,181
[CGS] 194,624
<TOTAL COSTS> 83,252
<OTHER EXPENSES> 0
<LOSS PROVISION> 0
<INTEREST EXPENSE> 555
<INCOME PRE TAX> 42,393
<INCOME TAX> 16,723
<INCOME CONTINUING> 25,670
[DISCONTINUED]
(1,050)
[EXTRAORDINARY] 0
[CHANGES] 0
<NET INCOME> 24,620
<EPS PRIMARY> 0.73
<EPS DILUTED> 0.71
<FN1> Retained Earnings