1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000
Or
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
of Incorporation or Organization) Identification 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
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, no par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Security
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. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. o
The aggregate market value of Common Stock held by non-affiliates of
the Registrant on March 21, 2001 was $1,180,554,066 based on a $22.96
closing price for the Common Stock on such date. For purposes of this
computation, all executive officers and directors have been deemed to be
affiliates. Such determination should not be deemed to be an admission that
such executive officers and directors are, in fact, affiliates of the
Registrant.
Indicate the number of shares outstanding of each of the issuer's
classes of stock as of the latest practicable date.
Common Stock, No Par Value, 51,417,860 Shares as of March 21, 2001
Portions of Part III of this report have been incorporated by
reference from the Company's Proxy Statement for the 2001 Annual
Shareholders meeting.
99 CENTS ONLY STORES
Table of Contents
Pag
e
Part I
Item 1. Business 2
Item 2. Properties 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Part II
Item 5. Market for Registrant's Common Stock and Related Stockholder 14
Matters
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition 17
and Results of Operations
Item 7A.Quantitative and Qualitative Disclosures About Market Risk 30
Item 8. Financial Statements and Supplementary Data 31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 47
Part III
Item 10.Directors and Executive Officers of the Registrant 47
Item 11.Executive Compensation 47
Item 12.Security Ownership of Certain Beneficial Owners and 47
Management
Item 13.Certain Relationships and Related Transactions 47
Part IV
Item 14.Exhibits, Financial Statement Schedules and Reports on Form 47
8-K
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This Report contains statements that constitute "forward-looking
statements" within the meaning of Section 21E of the Exchange Act and
Section 27A of the Securities Act. The words "expect," "estimate,"
"anticipate", "predict," "believe" and similar expressions and variations
thereof are intended to identify forward-looking statements. Such
statements appear in a number of places in this filing and include
statements regarding the intent, belief or current expectations of 99 Cents
Only Stores (the "Company"), its directors or officers with respect to,
among other things (a) trends affecting the financial condition or results
of operations of the Company and (b) the business and growth strategies of
the Company. The stockholders of the Company are cautioned not to put undue
reliance on such forward-looking statements. Such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and actual results may differ materially from those
projected in this Report, for the reasons, among others, discussed in the
Sections - "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Risk Factors." The Company undertakes no
obligation to publicly revise these forward-looking statements to reflect
events or circumstances that arise after the date hereof. Readers should
carefully review the risk factors described in other documents the Company
files from time to time with the Securities and Exchange Commission,
including the Quarterly Reports on Form 10-Q and any Current Reports on
Form 8-K filed by the Company.
PART I
Item 1. Business
99 Cents Only Stores (the "Company") is a leading deep-discount
retailer of primarily name-brand, consumable general merchandise. The
Company's stores offer a wide assortment of regularly available consumer
goods as well as a broad variety of first-quality, close-out merchandise.
In 2000, a majority of the Company's product offerings were comprised of
recognizable name-brand merchandise and were regularly available for
reorder. The Company provides customers significant value on their everyday
household needs and an exciting shopping experience in
customer-service-oriented stores, which are attractively merchandised,
brightly lit and well-maintained. The Company believes that its name-brand
focus, along with a product mix emphasizing value-priced food and beverage
and other everyday household items, increases the frequency of consumer
visits and impulse purchases and reduces the Company's exposure to
seasonality and economic cycles. The Company believes its format appeals to
value-conscious customers in all socio-economic groups and results in a
high volume of sales. As of March 22, 2001, the Company operates 104 retail
stores, 99 in Southern California, 2 in Central California and 3 in Las
Vegas, Nevada. These stores have an average size of approximately 19,200
square feet. The Company's 99 Cents Only Stores generated average net sales
per estimated saleable square foot of $318, which the Company believes is
among the highest in the deep-discount convenience store industry, and
average net sales per store of $4.5 million for stores open the full year
in 2000.
The Company opened its first 99 Cents Only Store in 1982 and believes
that it operates the nation's oldest existing single price point general
merchandise chain. The Company competes in the deep-discount industry,
which is one of the fastest growing retail sectors in the United States.
The Company significantly increased its rate of store expansion and its
average size store, in conjunction with its initial public offering in
May 1996, expanding its 99 Cents Only Stores from 36 stores and 332,100
estimated saleable square feet at December 31, 1995 to 98 stores and
1,424,280 estimated saleable square feet at December 31, 2000, representing
a compound annual growth rate ("CAGR") of 22% and 34%, respectively. The
Company believes that its attractive store-level economics facilitates its
expansion. Historically, the Company's 99 Cents Only Stores have been
profitable within their first year of operation. In the first quarter of
2001, the Company opened seven stores and closed one and plans to open an
additional 19 net new stores during the remainder of the year. The Company
intends to continue its planned store expansion over the next several years
at a targeted growth rate of approximately 25% per year. The Company
estimates that the Southern and Central California market and the Clark
County, Nevada market has the potential for over 199, 99 Cents Only Stores.
The Company intends to expand into Arizona in 2001 and believes that the
Arizona market has the potential for 35 stores.
The Company also sells merchandise through its Bargain Wholesale
division at prices generally below normal wholesale levels to local,
regional, and national discount, drug and grocery store chains and
independent retailers, distributors and exporters. Bargain Wholesale
complements the Company's retail operations by allowing the Company to
purchase in larger volumes at more favorable pricing, to be exposed to a
broader selection of opportunistic buys and to generate additional sales
with relatively small incremental increases in operating expenses,
contributing to strong overall operating margins for the Company. Bargain
Wholesale represented 11.0% of the Company's net sales in 2000.
Industry
The Company participates primarily in the deep-discount retail
industry, with its 99 Cents Only Stores. Deep discount retail is
distinguished from other retail formats by the purchase of close-out and
other special-situation merchandise at prices substantially below original
wholesale cost, and the subsequent sale of this merchandise at prices
significantly below regular retail. This results in a continually changing
selection of specific brands of products. The deep-discount retail industry
is one of the fastest growing retail sectors in the United States.
The sale of close-out or special-situation merchandise develops in
response to the need of manufacturers, wholesalers and others to distribute
merchandise outside their normal channels. Close-out or special-situation
merchandise becomes available for a variety of reasons, including a
manufacturer's over-production, discontinuance due to a change in style,
color, size, formulation or packaging, the inability to move merchandise
effectively through regular channels, reduction of excess seasonal
inventory, discontinuation of test-marketed items and the financial needs
of the manufacturer.
Many deep-discount retailers also sell merchandise that can be
purchased from a manufacturer or wholesaler on a regular basis. Although
this merchandise can usually be purchased at less than original wholesale
and sold below normal retail, the discount, if any, is generally less than
with close-out merchandise. Deep-discount retailers sell regularly
available merchandise to ensure a degree of consistency in their product
offerings and to establish themselves as a reliable source of basic goods.
Business Strategy
The Company's goal is to continue to provide significant value to its
customers on a wide variety of consumable merchandise in an exciting store
environment. The Company's strategies to achieve this goal include the
following:
Focus on "Name-Brand" Consumables. The Company strives to exceed its
customers' expectations of the range and quality of name-brand consumable
merchandise that can be purchased for 99 Cents. During 2000, the Company
purchased merchandise from more than 999 suppliers, including
Colgate-Palmolive Company, The Dial Corp., Eveready Battery Company Inc.,
General Electric Company, Gerber Products Company, Hershey Foods Corp.,
Johnson & Johnson, Kraft General Foods, Inc., Lever Brothers Company,
Mattel Inc., The Mead Corporation, Nabisco Inc., Nestle, The Pillsbury
Company, The Procter & Gamble Company, Revlon Inc. and SmithKline Beecham
Corporation.
Broad Selection of Regularly Available Merchandise. The Company's retail
stores offer consumer items in each of the following staple product
categories: food including frozen and deli items, beverages, health and
beauty aids, household products (cleaning supplies, paper goods, etc.),
housewares (glassware, kitchen items, etc.), hardware, stationary and party
goods, seasonal goods, baby products and toys, giftware, pet products and
clothing. The Company ensures that its merchandise offering is complete by
supplementing its name-brand merchandise with private-label items. By
consistently offering a wide selection of basic household consumable items,
the Company encourages customers to shop the stores for their everyday
household needs, leading to a high frequency of customer visits.
Attractively Merchandised and Well-Maintained Stores. The Company strives
to provide its customers an exciting shopping experience in
customer-service-oriented stores which are attractively merchandised,
brightly lit and well-maintained. The Company's stores are merchandised and
laid out in a "supermarket" format with items in the same category grouped
together. In addition, the shelves are restocked as needed during the day.
By offering merchandise in an attractive, convenient and familiar
environment, the Company believes its stores appeal to a wide demographic
of customers.
Strong Long-Term Supplier Relationships. The Company believes that it has
developed a reputation as a leading purchaser of name-brand, re-orderable
and close-out merchandise at discount prices through its ability to make
immediate buying decisions, experienced buying staff, willingness to take
on large volume purchases and take possession of merchandise immediately,
ability to pay cash or accept abbreviated credit terms, reputation for
prompt payment, commitment to honor all issued purchase orders and
willingness to purchase goods close to a target season or out of season.
The Company's relationship with its suppliers is further enhanced by its
ability to minimize channel conflict for the manufacturer by quickly
selling name-brand merchandise without, if requested by the supplier,
advertising or wholesaling the item. Additionally, the Company believes its
well-maintained, attractively merchandised stores have contributed to a
reputation among suppliers for protecting their brand image.
Complementary Bargain Wholesale Operations. Bargain Wholesale complements
the Company's retail operations by allowing the Company to purchase in
larger volumes at more favorable pricing to be exposed to a broader
selection of opportunistic buys and to generate additional sales with
relatively small incremental increases in operating expenses, contributing
to strong overall operating margins for the Company. Net sales in the
Company's wholesale division grew from $40.5 million in 1996 to $49.9
million in 2000, primarily due to an increased focus on large domestic and
international accounts and expansion into new geographic markets. The
Company maintains showrooms in New York City and Chicago to support its
Bargain Wholesale operation.
Adherence to Disciplined Cost Controls and Savvy Purchasing. The Company
is able to provide its customers with significant value while maintaining
strong operating margins through an adherence to a disciplined cost control
program. The Company purchases merchandise at substantially discounted
prices as a result of its buyers' knowledge, experience and negotiating
ability and its established reputation among its suppliers. The Company
applies this same approach to its relationships with other vendors and
strives to maintain a lean operating environment focused on increasing net
income.
Focus on Larger Stores in Convenient Locations. The Company's 99 Cents
Only stores are conveniently located in freestanding buildings,
neighborhood shopping centers (anchored by 99 Cents Only Stores or
co-anchored with a supermarket and/or a drug store) or downtown central
business districts where consumers are more likely to do their regular
household shopping. The Company's 104 existing 99 Cents Only Stores average
approximately 19,200 gross square feet. Since January 1, 1996, the Company
has opened 69 new stores with an average of 20,500 gross square feet and
currently targets new store locations between 15,000 and 25,000 gross
square feet. The Company's larger 99 Cents Only Stores allow it to more
effectively display a wider assortment of merchandise, carry deeper stock
positions and provide customers with a more inviting and convenient
environment that encourages customers to shop longer and buy more. The
Company's decision to target larger stores reflects higher average annual
net sales per store and operating income typically achieved by these
stores.
Experienced Management Team and Depth of Employee Option Grants. 99 Cents
Only Stores' management team has many years of retail experience and has
demonstrated its skills through a proven track record of financial
performance. The Company's management strongly believes that employee
ownership of the Company's stock helps build employee pride in the stores
that significantly contributes to the success of the Company and its
operations. Accordingly, all members of management of the Company (other
than David Gold, the Company's Chief Executive Officer, Howard Gold, Senior
Vice President of Distribution, Jeff Gold, Senior Vice President of Real
Estate and Information Systems, Eric Schiffer, President and Karen
Schiffer, Senior Buyer) and all employees with tenure of more than six
months with the Company receive an annual grant of stock options. As of
December 31, 2000, the Company's employees (other than executive officers)
held options to purchase an aggregate of 4,092,690 shares, or over 7.9% of
the fully diluted shares of Common Stock outstanding.
Growth Strategy
Management believes that future growth will primarily result from new
store openings facilitated by the following:
The Western United States has Significant Potential for Growth. The
Company's 99 Cents Only Stores are located primarily in Southern [and
Central] California. By continuing to focus 99 Cents Only Store openings in
Southern California for the immediate future, the Company can leverage its
brand awareness in the region and take advantage of its existing warehouse
and distribution facility, regional advertising and other management and
operating efficiencies. The Company's growth strategy in Southern
California will focus on opening locations in existing markets as well as
expanding into markets adjacent to those currently served. The Company now
operates eight 99 Cents Only Stores in San Diego County and three stores in
Las Vegas, Nevada. The Company has plans to open at least 25 net new 99
Cents Only Stores in 2001. The 2001 store additions will be located in
Southern and Central California and Las Vegas, Nevada. The Company intends
to open its first store in the Phoenix Arizona area in 2001. The Company
will have opened seven new stores in the first three months of 2001, net of
one closure, six stores in California and one in Las Vegas, Nevada. The
Company plans to open additional 19 net new stores during the remainder of
2001. The Company has secured sites for six additional store locations and
has signed nine letters of intent to lease prospective store sites.
Generally, the Company expects that at least 50% of the letters of intent
will become store sites. The Company intends to continue its planned store
expansion over the next several years at a targeted rate of approximately
25% per year. The Company estimates that the Southern and Central
California market and the Clark County, Nevada area market have the
potential for over 199, 99 Cents Only Stores. It also estimates that the
Arizona market has the potential for 35 stores.
Portable Format Facilitates Geographic Expansion. The Company believes
that its concept of consistently offering a broad selection of name-brand
consumables, at value pricing, in a convenient store format is portable to
most other densely populated areas of the country. In November 1999, the
Company opened its first 99 Cents Only Stores outside the state of
California in Las Vegas, Nevada and opened an additional store in Las
Vegas, Nevada in March of 2000. Both stores have performed above Company
expectations and have consistently been two of the Company's top performing
stores.
Acquisitions. The Company considers lease acquisition opportunities as
they are presented to the Company and may make acquisitions of a chain, or
chains, of clustered retail sites in densely populated regions, primarily
for the purpose of acquiring favorable lease locations.
Retail Operations
The Company's retail stores offer customers a wide assortment of
regularly available consumer goods, as well as a broad variety of
first-quality, close-out merchandise, generally at a significant discount
from normal retail. All merchandise sold in the Company's 99 Cents Only
Stores retail stores sells for 99 cents per item or two or more items for
99 cents. The Company strives to exceed its customers' expectations of the
range and quality of name-brand consumables that can be purchased for 99
cents.
The following table sets forth relevant information with respect to
the growth of the Company's existing 99 Cents Only Store operations (dollar
amounts in thousands, except sales per square foot):
Year Ended December 31,
1996 1997 1998 1999 2000
99 Cents Only Stores net
retail sales $143,163 $186,024 $238,868 $312,306 $402,071
99 Cents Only Stores annual
net sales growth rate 17.3% 29.9% 28.4% 30.7% 28.7%
99 Cents Only Stores store
count at beginning of year 36 43 53 64 78
New stores 8 10 13 18 20
Stores closed 1(a) - 2(a) 4(a) -
Total store count at year 43 53 64 78 98
end
Average 99 Cents Only Stores
net sales per store open
the full year(b) $3,667 $3,750 $4,147 $4,433 $4,487
Estimated saleable square
footage at year end for 99
Cents Only Stores 455,200 631,500 822,900 1,102,36 1,424,280
9
Average net sales per
estimated saleable square $389 $354 $335 $332 $318
foot(b)
Change in comparable 99
Cents Only Stores net 2.8% 1.5% 4.3% 6.1% 2.0%
sales(c)
(a) Stores closed due to relocation to a larger nearby site.
(b) For stores open for the entire fiscal year for 99 Cents Only Stores.
(c) In 1996, 99 Cents Only Stores computed comparable net sales for stores
open for two years. Commencing in 1997, change in comparable stores
net sales compares net sales for all stores open at least 15 months.
Merchandising. All of the Company's stores offer a broad variety of
first-quality, name-brand and other close-out merchandise as well as a wide
assortment of regularly available consumer goods. The Company also carries
a line of private label consumer products made exclusively for the Company.
The Company believes that the success of its 99 Cents Only Stores concept
arises from the value inherent in selling primarily name-brand consumables,
most of which retails elsewhere from $1.19 to $9.99, for only 99 cents per
item or group of items. Each store typically carries over five thousand
different stock keeping units (SKU). The merchandise sold in the Company's
stores primarily consists of a wide variety of basic consumer items such as
food, including frozen and deli, beverages, health and beauty aids and
household products (cleaning supplies, paper goods, etc.). The stores also
carry house-wares (glassware, kitchen items, etc.), hardware, stationary
and party goods, seasonal, baby products and toys, giftware, pet products
and clothing.
While each of the Company's stores regularly carry a variety of basic
household consumer items, the stores differ from typical discount retail
stores in that they do not continuously stock complete lines of
merchandise. Although a majority of the merchandise purchased by the
Company is available for reorder, the mix of specific brands of merchandise
frequently changes, depending upon the availability of close-out and other
special-situation merchandise at suitable prices. Since commencing its
closeout purchasing strategy in 1976, the Company has not experienced
difficulty in obtaining name brand closeouts as well as re-orderable
merchandise at attractive prices. Management believes that continuously
changing specific name-brands found in its stores from one week to the next
encourages impulse and larger volume purchases, results in customers
shopping more frequently and helps to create a sense of urgency, awareness
and excitement. Unlike many discount retailers, the Company rarely imposes
limitations on the quantity of specific items that may be purchased by a
single consumer.
The Company targets value-conscious consumers from a wide range of
socio-economic backgrounds with diverse demographic characteristics.
Purchases are by cash, credit or debit card. The Company's stores do not
accept checks or manufacturers' coupons. The Company's stores are open
every day with opening hours designated to meet the needs of family
consumers. The Company advertises that its stores are open "9:00 a.m. to
9:00 p.m., 9 days a week."
Store Size, Layout and Locations. As of March 22, 2001, the Company had
104, 99 Cents Only Stores. The stores include 101 locations in Southern
[and Central] California, and 3 stores located in Las Vegas, Nevada. The
stores average over 19,200 gross square feet. Since January 1, 1996, the
Company has opened 69 new stores that average over 19,200 gross square feet
and currently targets new store locations between 15,000 and 25,000 gross
square feet. The Company's larger 99 Cents Only Stores allow it to more
effectively display a wider assortment of merchandise, carry deeper stock
positions and provide customers with a more inviting and convenient
environment that encourages customers to shop longer and buy more. The
Company's decision to target larger stores reflects higher average annual
store revenues typically achieved by these stores.
The Company's stores are conveniently located in freestanding
buildings, neighborhood shopping centers (anchored by 99 Cents Only Stores,
a supermarket and/or a drug store) or downtown central business districts
where consumers are more likely to do their regular household shopping. The
stores are located primarily in more densely populated, demographically
diverse neighborhoods. The Company's 104 existing 99 Cents Only Stores are
located in California and Nevada: 101 in seven counties in Southern [and
Central] California and 3 in Las Vegas, Nevada.
The Company's stores are attractively merchandised, brightly lit,
well-maintained, "destination" locations. The layout of each of the
Company's stores is customized to the actual size and configuration of the
individual location. The interior of each store is, however, designed to
reflect a uniform format, like a typical supermarket, featuring
attractively displayed products in windows, consistent merchandise display
techniques, bright lighting, lower shelving height that allows unobstructed
visibility throughout the store, distinctive color scheme, interior and
exterior signage and customized check-out counters, floors, price tags,
shopping carts and shopping bags. The Company emphasizes a strong visual
presentation in all key traffic areas of the store. Merchandising displays
are maintained throughout the day, change frequently and often incorporate
seasonal themes. The Company believes that due to the continuously changing
brand-names, the lower shelving height and the absence of aisle description
signs, the typical customer tends to shop the whole store.
The Company leases 93 of its 104 99 Cents Only Stores retail
locations. The Company typically seeks leases with an initial five-year to
ten-year term and with one or more five-year options. See "Item 2
Properties." The Company identifies potential sites through a network of
contacts within the brokerage and real estate communities, information
provided by vendors, customers and employees and through the efforts of the
Company's real estate department. Most leases have renewal options ranging
from three to ten years.
As part of its strategy to expand retail operations, the Company has,
at times, opened 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 effect on comparable stores net sales as some
customers migrated from the existing store to the close-by larger new
store. Except for 10 relocations to larger stores, the Company has never
closed one of its 99 Cents Only Stores.
Store Management. Substantially all merchandise decisions with respect to
pricing and advertising are made at the Company's headquarters. The Company
employs 20 district managers and two regional managers responsible for
store operations. Each district manager is responsible for up to seven
stores. Reporting to each district manager is one merchandising supervisor
responsible for store merchandising in that district. The store managers
also report to the district manager. These district managers are supervised
by the two regional managers that report to the Company's Vice President of
Retail Operations. District managers visit each store in their district at
least twice a week and focus on the implementation of the Company's
policies, operations and merchandising philosophy. District managers also
help train store management and assist store management with scheduling.
The Vice President of Retail Operations also supervises a cashier's
training school located at the Company's corporate offices. Each
merchandising supervisor and his crew (usually six to ten experienced stock
people) visit each of the stores at least once a week and help the store
managers to maintain and improve the appearance of the sales floor, move
merchandise sections, organize the stockroom and train store personnel.
Typically the Company's stores are staffed with a manager and two or three
assistant managers. Store managers are responsible for assessing their
respective store's stocking needs and ordering accordingly.
Advertising. Advertising expenditures were $2.4 million, $2.4 million and
$2.7 million for 1998, 1999 and 2000, respectively, or 0.8%, 0.7% and 0.6%
of net sales, respectively. The Company manages its advertising without the
assistance of an outside agency. The Company allocates the majority of its
advertising budget to newspaper and radio advertising. The Company's
advertising strategy emphasizes the offering of nationally recognized,
name-brand merchandise at significant savings. The Company minimizes its
advertising expenditures by an efficient implementation of its advertising
program combined with word-of-mouth publicity, locations with good
visibility and efficient signage. Because of the Company's distinctive
grand opening promotional campaign, which includes the sale of nine
televisions for 99 cents each and nine microwave ovens for 99 cents each,
grand openings often attract long lines of customers and receive media
coverage. The Company believes that one of its biggest challenges is
attracting affluent customers to shop its stores. The Company also uses a
direct mail campaign for new customers who are homeowners in more upscale
neighborhoods. The Company believes the direct mail campaign has been
successful in attracting new customers.
Bargain Wholesale
In 2000, Bargain Wholesale sold merchandise to over 999 customers,
including other wholesalers, small local retailers, large regional and
national retailers and exporters. During 2000, no single customer accounted
for more than 4.5% of Bargain Wholesale's net sales. The Company advertises
its wholesale operations primarily through direct mail. The Company plans
to continue to expand its wholesale operations by continuing its focus on
the needs of large domestic and international accounts, expansion into new
geographic markets, increasing its marketing and promotional programs,
increasing the number of trade shows at which it exhibits, focusing on its
showrooms in Chicago and New York City, enhancing customer service and
aggressively contacting its customers on a more frequent basis through
telephone, facsimile and mail.
The Company's wholesale product line is substantially similar to its
retail product line, although the Company has seen strong growth in re-
orderable and private label merchandise within its wholesale operations.
Bargain Wholesale has recently begun a program to provide merchandise for
the "dollar" promotional aisles of certain supermarkets and drugstores. The
Company offers 15-day payment terms to its Bargain Wholesale customers who
meet the Company's credit standards. Customers located abroad, certain
smaller customers or others who do not meet the Company's credit standards
must pay cash upon pickup or before shipment of merchandise.
Bargain Wholesale complements the Company's retail operations by
allowing the Company to purchase in larger volumes at more favorable
pricing, to be exposed to a broader selection of opportunistic buys and to
generate additional net sales with relatively small incremental increases
in operating expenses contributing to strong overall margins for the
Company. Bargain Wholesale also allows the Company to purchase goods which
it would not otherwise purchase for distribution through its 99 Cents Only
Stores and provides the Company with a channel by which it may distribute
merchandise at prices other than 99 cents.
Bargain Wholesale conducts its wholesale operations through its 15,000
square foot product showroom located at the Company's warehouse and
distribution facility. The Company's showrooms in New York and Chicago also
continue to support Bargain Wholesale's operations.
Purchasing
The Company's purchasing department staff consists of thirteen buyers
managed by the Company's Vice President of Purchasing. The Company's Chief
Executive Officer also participates in the Company's purchasing activities.
The Company's buyers purchase for 99 Cents Only Stores and Bargain
Wholesale. The Company believes a primary factor contributing to its
success is its ability to identify and take advantage of opportunities to
purchase merchandise with high customer interest at lower than regular
wholesale prices. The Company purchases most of its merchandise directly
from the manufacturer. The Company's other sources of merchandise include
wholesalers, manufacturers' representatives, importers, barter companies,
auctions, professional finders and other retailers. The Company develops
new sources of merchandise primarily by attending industry trade shows,
advertising, marketing brochures and referrals.
The Company has no continuing contracts for the purchase of
merchandise and must continuously seek out buying opportunities from both
its existing suppliers and new sources. No single supplier accounted for
more than 1.8% of the Company's total purchases in 2000. During 2000, the
Company purchased merchandise from more than 999 suppliers, including
Colgate-Palmolive Company, The Dial Corp., Eveready Battery Company Inc.,
General Electric Company, Gerber Products Company, The Gillette Company,
Hershey Foods Corp., Johnson & Johnson, Kraft General Foods Inc., Lever
Brothers Company, Mattel Inc., The Mead Corporation, Nabisco Inc., Nestle,
The Pillsbury Company, The Procter & Gamble Company, Revlon Inc. and
SmithKline Beecham Corporation. Many of these companies have been supplying
products for the Company in excess of four years.
A significant portion of the merchandise purchased by the Company in
2000 was close-out or special-situation merchandise. The Company has
developed strong relationships with many manufacturers and distributors
that recognize that their special-situation merchandise can be moved
quickly through the Company's retail and wholesale distribution channels.
The sale of closeout or special-situation merchandise develops in response
to the need of manufacturers, wholesalers and others to distribute
merchandise outside their normal channels. The Company's buyers search
continuously for close-out opportunities. The Company's experience and
expertise in buying merchandise has enabled it to develop relationships
with many manufacturers that often offer some or all of their close-out
merchandise to the Company prior to attempting to sell it through other
channels. The key elements to these supplier relationships include the
Company's (i) ability to make immediate buy decisions, (ii) experienced
buying staff, (iii) willingness to take on large volume purchases and take
possession of merchandise immediately, (iv) ability to pay cash or accept
abbreviated credit terms, (v) reputation for prompt payment,
(vi) commitment to honor all issued purchase orders and (vii) willingness
to purchase goods close to a target season or out of season. The Company's
relationship with its suppliers is further enhanced by its ability to
minimize channel conflict for the manufacturer by quickly selling
name-brand merchandise without, if requested by the supplier, advertising
or wholesaling the item. The Company believes this reputation along with
its well-maintained, attractively merchandised stores have contributed to a
reputation among suppliers for protecting their brand image.
In 2000, re-orderable merchandise accounted for a majority of the
Company's purchases. The Company's strong relationships with many
manufacturers and distributors, along with its ability to purchase in large
volumes, also enable the Company to purchase re-orderable name-brand goods
at discounted wholesale prices. The Company focuses its purchases of re-
orderable merchandise on a limited number of SKUs, which allows the Company
to make purchases in large volumes.
The Company is continuously developing new private label consumer
products to broaden the assortment of merchandise that is consistently
available. The Company also has an in-house import operation, which
primarily purchases re-orderable merchandise. The Company imports products
from various European, South American and Asian countries with the single
largest supplier coming from Europe. Merchandise directly imported by the
Company accounted for approximately 11% of total merchandise purchased in
2000. The Company primarily imports merchandise in product categories,
which are not brand sensitive to consumers such as kitchen items, house-
wares, toys, seasonal products, pet-care and hardware.
Warehousing and Distribution
The Company owns an 880,000 square foot, single level warehouse and
distribution facility located on approximately 23 acres in the City of
Commerce, California. The Company's headquarters are located in this
facility. The Company also leases an additional 80,000 square foot of
warehouse storage space adjacent to its main distribution facility and
15,000 square feet of deli and frozen product storage space. All of the
three sites are located near downtown Los Angeles and have close access to
the Southern California freeway and rail systems and the ports of Los
Angeles and Long Beach. The main distribution facility has 129 dock doors
available for receiving or shipping, over 25 dock levers and, new racking
with over 10,000 pallet positions. Most of the Company's merchandise is
shipped by truck directly from manufacturers and other suppliers to the
Company's warehouse and distribution facility. As part of its distribution
network, the Company owns a fleet of 48 tractors and 75 trailers, which are
primarily used to deliver merchandise to its stores. Full truck deliveries
are made from its distribution center to each store typically three times a
week. Product is delivered to a store the day after the store places a
scheduled order. Most of the merchandise is requested by the store in
conjunction with the Company's buyers (i.e., ordered by the store manager)
as opposed to being determined by the distribution center (i.e., sent by
order of the Company's distribution personnel). The Company attempts to
optimally utilize its fleet by a combination of filling outbound trucks to
capacity and instituting a backhaul program whereby products are picked up
from suppliers in conjunction with deliveries to stores in the same general
area. Backhauls accounted for approximately half of all merchandise picked
up by the Company's trucks. The Company also uses its own vehicles to pick
up certain shipments at local ports and rail yards. The size of the
Company's distribution center allows storage of bulk one-time close-out
purchases and seasonal or holiday items without incurring additional costs.
The Company believes that its current warehouse and distribution facilities
will be able to support distribution to approximately 200 additional stores
in Southern California. There can be no assurance that the Company's
existing warehouse will provide adequate storage space for the Company's
long-term storage needs.
Information Systems
The Company's business is currently supported by a standard accounting
and financial reporting system utilizing a PC-based local area network
(LAN) and a separate IBM UNIX based in-house developed inventory control
system. The Company's store ordering system was upgraded in 2000 utilizing
a radio frequency hand held scanning device. This system also is a
customized system and has improved the overall order processing turn around
time as well as improving the inventory availability to the stores. This
system is processed from a back office PC system at each retail location.
The Company has installed a Wide Area Network (WAN) to improve voice and
data communications among the stores, the warehouse and the administrative
functions. The Company implemented a test of Point of Sale with barcode
scanning (POS) at a single retail location in late 2000 and plans to expand
this test to 5 locations and complete the POS test by the end of the second
quarter of 2001.
The Company's Information Systems staffing is comprised of 13
employees. The Company believes that its management information systems and
inventory control systems along with the initiatives indicated above will
be adequate to support the Company's current needs. The Company intends to
continue to enhance its systems to support its future planned store growth
and to take advantage of new proven technology.
Competition
The Company faces competition in both the acquisition of inventory and
sale of merchandise from other wholesalers, discount stores, single price
point merchandisers, mass merchandisers, food markets, drug chains, club
stores and other retailers. Industry competitors also include a large
number of privately held companies and individuals. In some instances these
competitors are also customers of the Company's Bargain Wholesale division.
There is increasing competition with other wholesalers and retailers,
including other deep-discount retailers, for the purchase of quality
close-out and other special-situation merchandise. Some of these
competitors have substantially greater financial resources and buying power
than the Company. The Company's ability to compete will depend on many
factors including the success of its purchase and resale of such
merchandise at lower prices than the competition. The Company may face
intense competition in the future from new entrants in the deep-discount
retail industry, among others, that could have an adverse effect on the
Company's business and results of operations.
Employees
At December 31, 2000, the Company had 4,044 employees: 3,526 in its
retail operation, 371 in its warehouse and distribution facility, 130 in
its corporate offices and 17 in its wholesale division. None of the
Company's employees is party to a collective bargaining agreement. The
Company considers relations with its employees to be good. The Company
offers certain benefits, including health insurance, 401(k) benefits to its
full time employees and an executive deferred compensation plan. All
members of management (other than David Gold, the Company's Chief Executive
Officer, Howard Gold, Senior Vice President of Distribution, Jeff Gold,
Senior Vice President of Real Estate and Information Systems, Eric
Schiffer, President and Karen Schiffer, Senior Buyer) and all full-time
employees, hired before January 1, 2001 receive an annual grant of stock
options.
Trademarks and Service Marks
"99 Cents Only Stores" and "99 Cents" are registered service marks of
the Company and are listed on the United States Patent and Trademark Office
Principal Register. "Bargain Wholesale" is a service mark used by the
Company. Management believes that the Company's trademarks, service marks
and trade names are an important but not critical element of the Company's
merchandising strategy.
Environmental Matters
Under various federal, state and local environmental laws and
regulations, a current or previous owner or occupant of real property may
become liable for the costs of removal or remediation of hazardous
substances at such real property. Such laws and regulations often impose
liability without regard to fault. As of March 22, 2001 the Company leased
93 of its 104 existing stores and the Company owned its warehouse and
distribution facilities (where its executive offices are located). The
Company also owns a warehouse facility in Eagan, Minnesota that is
currently leased to Universal International. In connection with such
properties, the Company could be held liable for the costs of remedial
actions with respect to hazardous substances. In addition, the Company
operates one underground diesel storage tank and one above-ground propane
tank at its warehouse and distribution facility. Although the Company has
not been notified of, and is not otherwise aware of, any specific current
environmental liability, claim or non-compliance, there can be no assurance
that the Company will not be required to incur redemption or other costs in
the future in connection with its leased properties or its storage tanks or
otherwise. In the ordinary course of its business, the Company from time to
time handles or disposes of ordinary household products that are classified
as hazardous materials under various federal, state and local environmental
laws and regulations. The Company has adopted policies regarding the
handling and disposal of these products, and has implemented a training
program for employees on hazardous material handling and disposal. There
can be no assurance, however, that such policies or training will be
successful in assisting the Company in avoiding violations of environmental
laws and regulations relating to the handling and disposal of such products
in the future.
Item 2. Properties
As of March 22, 2001, the Company leased 93 of its 104 store
locations. The Company currently leases 13 store locations and a parking
lot associated with one of these stores from the Gold Family.
Management believes that the Company's stable operating history,
excellent credit history and ability to generate substantial customer
traffic give the Company significant leverage when negotiating lease terms.
Most of the Company's leases provide for fixed rents, subject to periodic
adjustments. Certain of the Company's store leases contain provisions that
grant the Company a right of first refusal to acquire the subject site.
The following table sets forth, as of March 22, 2001, information
relating to the expiration dates of the Company's current retail stores
leases:
Expiri Expirin Expirin Expiring
ng g g 2006
2001 2002-20 2004-20 and Beyond
03 05
7(a) 9 29 48
(a) Includes two store leased on a month-to-month basis.
The Company has purchased 11 locations, one opened in 1996, two in
1997, one in 1998, three in 1999, two in 2000, one in 2001 and one existing
store. The Company may also purchase other locations in the future.
As of March 22, 2001, the Company owned its main warehouse,
distribution and executive office facility, located in the City of Commerce
California. The Company had been leasing this facility since December 1993.
At that time, the Company entered into a seven year, triple net lease
agreement with a purchase option, which was accounted for on the Company's
financial statements as a capitalized lease obligation. The lease included
the Company's initial payment of $2.75 million and eighty-four monthly
payments of $70,000. As part of the lease agreement, the Company received
$500,000 in 1993 and $1.0 million in 1994 to apply to renovation costs. The
facility's fire prevention and lighting systems were completely upgraded. A
state-of-the-art sprinkler system, hundreds of new smoke-vents (skylights)
and energy efficient lighting with motion detectors were installed. The
Company exercised its option to purchase the building in December 2000 for
$10.5 million. The Company funded the acquisition of this facility from its
investments in marketable securities. The Company also leases an additional
80,000 square feet of warehouse storage space adjacent to its main
distribution facility and 15,000 square feet of deli and frozen product
storage space which is also located in the vicinity.
Item 3. Legal Proceedings
The Company is periodically subject to legal actions, which arise in
the ordinary course of its business. The Company does not believe that any
pending action is material to its results of operations or financial
condition.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The Common Stock is traded on the New York Stock Exchange under the
symbol "NDN." The following table sets forth, for the calendar periods
indicated, the high and low closing prices per share of the Common Stock as
reported by the New York Stock Exchange. The Common Stock was not publicly
traded prior to the Company's initial public offering on May 23, 1996. All
stock prices have been restated to reflect a three for two stock split
effected in the form of stock dividend paid on March 20, 2001.
Price Range
High Low
1999:
First Quarter $24.5 $19.8
9 7
Second Quarter 25.09 20.50
Third Quarter 25.46 17.21
Fourth Quarter 19.13 12.59
2000:
First Quarter $26.1 $15.5
7 0
Second Quarter 28.71 22.67
Third Quarter 36.87 26.29
Fourth Quarter 33.46 13.67
2001:
First Quarter through March 21, 2001 22.96 11.86
The closing price as reported on March 21, 2001 on the New York Stock
Exchange is set forth on the cover page of this Form 10-K. As of March 21,
2001, the Company had approximately 11,868 holders of the Common Stock
including 489 shareholders of record.
The Company has not paid any cash dividends with respect to the Common
Stock. The Company presently intends to retain future earnings to finance
its development and expansion and therefore does not anticipate the payment
of any cash dividends in the foreseeable future. Payment of future
dividends, if any, will depend upon future earnings and capital
requirements of the Company and other factors, which the Board of Directors
considers appropriate.
Item 6. Selected Financial Data
The following table sets forth, selected financial and operating data
of the Company for the periods indicated. The following selected statement
of operations data for each of the three years ended December 31, 1998,
1999, and 2000, and the balance sheet data as of December 31, 1999 and 2000
are derived from the financial statements and the notes thereto included
elsewhere herein audited by Arthur Andersen LLP, independent public
accountants, as set forth in their report also included elsewhere herein.
The selected statements of operations data for the years ended December 31,
1996 and 1997, and the balance sheet data as of December 31, 1996, 1997 and
1998 are derived from financial statements audited by Arthur Andersen LLP
not included herein. The following information should be read in
conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements of the
Company and notes thereto included elsewhere in this report.
Year Ended December 31,
1996 1997 1998 1999 2000
(Amounts in thousands, except per share and
operating data)
Statement of Operations Data:
Net sales:
99 Cents Only Stores $143,163 $186,024 $238,868 $312,306 $402,071
Bargain Wholesale(g) 40,480 44,831 53,202 47,652 49,876
Total 183,643 230,855 292,070 359,958 451,947
Cost of sales 120,922 146,797 183,044 218,496 275,395
Gross profit 62,721 84,058 109,026 141,462 176,552
Selling, general and
administrative expenses:
Operating expenses 37,683 49,850 62,424 80,089 107,981
Depreciation and 2,009 2,989 4,506 5,927 8,666
amortization
Total operating expenses 39,692 52,839 66,930 86,016 116,647
Operating income 23,029 31,219 42,096 55,446 59,905
Other (income) expense, net (126) (855) (1,428) (1,059) (3,617)
Income from continuing
operations before provision
for income taxes 23,155 32,074 43,524 56,505 63,522
Provision for income
taxes(a):
Pro forma 9,453 - - - -
Historical 2,418 13,124 17,032 22,367 24,664
Income from continuing
operations(a): - - - -
Pro forma 13,702 - - - -
Historical $20,737 $18,950 $26,492 $34,138 $38,858
Income (loss) from
discontinued operation net
of income tax provision of
$910 in 1998 and income tax
benefit of $2,111 and $700
in 1999 and 2000 - - 201 (3,167) (1,050)
respectively
Loss on disposal of
discontinued operation
including a provision of
$1,200 for operating losses
during phase-out period,
net of income benefit of - - - (9,000) -
$2,613
Net Income $20,737 $18,950 $26,693 $21,971 $37,808
Earnings per common share
from continuing
operations (a)(f):
Pro forma-Basic $0.34 - - - -
Pro forma-Diluted $0.31 - - - -
Historical-Basic $0.52 $0.41 $0.55 $0.68 $0.77
Historical-Diluted $0.47 $0.40 $0.54 $0.67 $0.75
Earnings (loss) per common
share from discontinued
operations(f):
Historical-Basic - - $0.01 ($0.06) ($0.02)
Historical-Diluted - - - ($0.06) ($0.02)
Earnings (loss) per common
share from disposal of
discontinued
operations(f):
Historical-Basic - - - ($0.18) -
Historical-Diluted - - - ($0.18) -
Earnings per common share
(a)(f):
Pro forma-Basic $0.34 - - - -
Pro forma-Diluted $0.31 - - - -
Historical-Basic $0.52 $0.41 $0.56 $0.44 $0.75
Historical-Diluted $0.47 $0.40 $0.54 $0.43 $0.73
Weighted average number of
common shares outstanding:
Pro forma-Basic 40,258 - - - -
Pro forma-Diluted (b) 43,998 - - - -
Historical-Basic 40,258 46,356 48,068 49,878 50,750
Historical-Diluted 43,998 46,890 49,127 50,978 51,722
Company Operating Data:
Sales Growth
99 Cents Only Stores 17.3% 29.9% 28.4% 30.7% 28.7%
Bargain Wholesale(g) 33.4 10.7 18.7 (10.0) 4.7
Total Company sales 20.2 25.7 26.5 23.2 25.6
Gross margin 34.2 36.4 37.3 39.3 39.1
Operating margin 12.5 13.5 14.4 15.4 13.3
Income from continuing
operations:
Pro forma 7.5 - - - -
Historical 11.3 8.2 9.1 9.5 8.6
Retail Operating Data(c):
99 Cents Only Stores at end
of period 43 53 64 78 98
Change in comparable stores
net sales (d) 2.8% 1.5% 4.3% 6.1% 2.0%
Average net sales per store
open the full year $3,667 $3,750 $4,147 $4,433 $4,487
Average net sales per
estimated saleable square $389 $354 $335 $332 $318
foot(e)
Estimated saleable square
footage at year end 455,200 631,500 822,900 1,102,36 1,424,28
9 0
As of December 31,
1996 1997 1998 1999 2000
Balance Sheet Data:
Working capital $58,822 $60,791 $81,439 $105,637 $166,779
Total assets 98,997 119,443 194,167 224,015 277,285
Long-term debt - - - - -
Capital lease obligation,
including current portion 9,366 8,709 8,005 7,251 -
Total shareholders' equity 76,505 96,308 164,365 195,540 253,533
(a) Prior to May 1, 1996 the Company was treated as an S corporation
for federal and state income tax purposes. The presentation for 1996
reflects a pro forma provision for income taxes as if the Company had
always been a C corporation, at an assumed effective tax rate of
41.0%, plus the effect of deferred taxes and tax credits.
(b) Diluted weighted average common equivalent shares in 1996 include
1,362,000 shares to fund certain notes issued and dividends payable
declared to then existing shareholders, in connection with the
termination of the Company's status as an S corporation.
(c) Includes retail operating data solely for the Company's 99 Cents Only
Stores.
(d) For the year 1996, change in comparable stores net sales compares net
sales for stores open the entire two periods compared. Commencing in
1997, change in comparable stores net sales compares net sales for all
stores open at least 15 months.
(e) Computed based upon estimated total saleable square footage of stores
open for the entire period.
(f) All earnings per share amounts have been restated to reflect the
adoption of SFAS No. 128, "Earnings per Share," effective December 15,
1997 and the three-for-two stock split distributed on March 20, 2001.
(g) In 1998, Bargain Wholesale sales includes $12.0 million inter-company
sales to Universal billed at cost.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following management's discussion and analysis should be read in
connection with "Item 6. Selected Financial Data," and "Item 8. Financial
Statements."
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 location and as of March 22, 2001,
operated a chain of 104 deep-discount 99 Cents Only Stores. The Company's
growth during the last three fiscal years has come primarily from new store
openings and growth in its Bargain Wholesale division. The Company opened
thirteen, eighteen and twenty stores in 1998, 1999 and 2000, respectively
(eleven, fourteen and twenty, respectively, net of relocated stores). The
Company opened seven stores and closed (relocated) one through March 22,
2001 (4 stores in Southern, two in Central California and one in Las Vegas,
Nevada). The Company plans to open an additional 19 net new stores during
the remainder of the year, including stores in Phoenix, Arizona. The
Company has secured sites for six additional store locations.
Bargain Wholesale's growth over the three years ended December 31,
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.
In the past, 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 store. 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.
During the three years in the period from January 1, 1998 to
December 31, 2000, average net sales per estimated saleable square foot
(computed on 99 Cents Only Stores open for a full year) declined from $335
per square foot to $318 per square foot. This trend reflects the Company's
determination to target larger locations for new store development.
Existing stores average approximately 19,200 gross square feet. Since
January 1, 1996, the Company has opened 69 new stores (including one
relocation in 1996, two in 1998 and four in 1999) that average 20,500 gross
square feet. The Company currently targets new store locations between
15,000 and 25,000 gross feet. Although it is the Company's experience that
larger stores generally have lower average net sales per square foot than
smaller stores, larger stores generally achieve higher average annual store
revenues and operating income.
99 Cents Only Stores has increased its net sales, operating income and
income from continuing operations in each of the last five years. In 2000
it had net sales of $451.9 million, operating income of $59.9 million and
income from continuing operations of $38.9 million before a charge of $1.1
million from the discontinued operation, representing a 25.6%, 8.0% and
13.8% increase over 1999, respectively. From 1996 through 2000, the Company
had a CAGR in net sales, operating income and income from continuing
operations of 25.3%, 27.0% and 29.8%, respectively.
Recent Developments
Universal International. 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 International, Inc. and Odd's-n-End's, Inc. subsidiaries
(together "Universal"). 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, Inc. and Universal Odd's-n-End's,
Inc., both of which are 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
Universal business at a time they determined appropriate in an orderly
fashion, either as a whole company, or in clusters of stores or by unit.
The sale was effective as of the close of business on September 30, 2000.
The purchase price for Universal was paid in cash and was equal to the
Company's carrying book value, as is, of the assets of Universal at
September 30, 2000 or $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 were offset by $3.5 million of
accounts payable, accrued and other liabilities. In connection with this
transaction, 99 Cents Only Stores is providing certain ongoing
administrative services to Universal pursuant to a services agreement for a
management fee of 6% of Universal sales revenues. It is expected that 99
Cents Only Stores will be reimbursed for its full costs incurred with these
services. During the fiscal year 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. In the fourth quarter of
2000, the Company has received $1.3 million in management fees under the
management agreement with Universal. The Company has also received $0.4
million in lease payments for rental of a distribution facility to
Universal.
Results of Operations
The following table sets forth, for the periods indicated, certain
selected income statement data, including such data as a percentage of net
sales:
Years Ended December 31,
1998 1999 2000
(Amounts in thousands)
Net sales:
99 Cents Only Stores $238,8 81.8 $312,3 86.8 $402,0 89.0
68 % 06 % 71 %
Bargain Wholesale 53,202 18.2 47,652 13.2 49,876 11.0
Total 292,07 100. 359,95 100. 451,94 100.
0 0 8 0 7 0
Cost of sales 183,04 62.7 218,49 60.7 275,39 60.9
4 6 5
Gross profit 109,02 37.3 141,46 39.3 176,55 39.1
6 2 2
Selling, general and administrative
expenses:
Operating expenses 62,424 21.4 80,089 22.3 107,98 23.9
1
Depreciation and amortization 4,506 1.5 5,927 1.6 8,666 1.9
Total 66,930 22.9 86,016 23.9 116,64 25.8
7
Operating income 42,096 14.4 55,446 15.4 59,905 13.3
Other (income) expense, net (1,428 (0.5 (1,059 (0.3 (3,617 (0.8
) ) ) ) ) )
Income from continuing operations
before provision for income taxes 43,524 14.9 56,505 15.7 63,522 14.1
Provision for income taxes 17,032 5.8 22,367 6.2 24,664 5.5
Income from continuing operations 26,492 9.1 34,138 9.5 38,858 8.6
Income (loss) from discontinued
operation net of income tax
provision of $910 in 1998, an
income tax benefit of $2,111 201 0.0 (3,167 (0.9 (1,050 (0.2
and $700 in 1999 and 2000 ) ) ) )
respectively.
Loss from disposal of discontinued
operation including a provision of
$1,200 for operating losses
during the phase-out net of income
tax benefit of $2,613 - - (9,000 (2.5 - -
) )
Net Income $26,69 9.1% $21,97 6.1% $37,80 8.4%
3 1 8
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Net Sales. Total net sales increased $92.0 million, or 25.6%, from $360.0
million in 1999 to $451.9 million in 2000. 99 Cents Only Stores net sales
increased approximately $89.8 million, or 28.7%, from $312.3 million in
1999 to $402.1 million in 2000. Bargain Wholesale net sales increased
approximately $2.2 million, or 4.7%, from $47.7 million in 1999 to $49.9
million in 2000. The increase in 99 Cents Only Stores net sales was
attributed to the net effect of 20 net new stores opened in 2000 and the
full year effect of 18 stores opened in 1999. Comparable stores net sales
increased 2.0% from 1999 to 2000. The increase in Bargain Wholesale net
sales was primarily attributed to an increased focus on large international
and domestic accounts and expansion into new geographic markets.
Gross profit. Gross profit, which consists of total net sales, less cost
of sales, increased approximately $35.1 million, or 24.8%, from $141.5
million in 1999 to $176.6 million in 2000. The increase in gross profit
dollars was primarily due to higher sales volume. As a percentage of net
sales, gross profit was 39.1% in 2000 versus 39.3% in 1999. This 0.2%
variation results from product cost and mix factors.
Selling, general and administrative. Selling, general and administrative
expenses ("SG&A"), which include operating expenses and depreciation and
amortization, increased $30.6 million, or 35.6%, from $86.0 million in 1999
to $116.6 million in 2000. The increase over 1999 is associated with year
2000 new store growth and the full year effect of 1999 new stores. SG&A
increased as a percentage of net sales from 23.9% in 1999 to 25.8% in 2000.
The increase in SG&A expenses is directly attributable to 20 net new store
openings and to the additional field and corporate support staff hired to
support the future new store growth and expansion outside of the state of
California. Key staff positions were added in risk management, information
systems, real estate, distribution, human resources and buying.
Operating income. Operating income increased $4.5 million, or 8.0%, from
$55.4 million in the 1999 period to $59.9 million in 2000. Operating income
as a percentage of net sales was 15.4% in 1999 to 13.3% in 2000 primarily
due to the increase in the operating costs discussed above.
Other (income) expense. Other (income) expense relates primarily to the
interest income on the Company's marketable securities, net of interest
expense on the Company's capitalized warehouse lease. Interest expense was
$0.7 million in 2000 and in 1999. The Company had no bank debt during 2000
or 1999. Interest income earned on the Company's marketable securities was
$4.0 million in 2000 and $1.8 million in 1999. At December 31, 2000, the
Company held $109.4 million in short-term investments and $2.9 million in
long-term investments. The Company's short-term investments are comprised
primarily of investment grade federal and municipal bonds and commercial
paper, all with short-term maturities. The Company generally holds
investments until maturity. Also included in 2000 is $0.4 million of income
under a lease agreement with Universal for a distribution facility.
Provision for income taxes. The provision for income taxes in 2000 was
$24.7 million, or 5.5% of net sales, compared to $22.4 million, or 6.2% of
net sales, in 1999. The effective combined federal and state rates of the
provision for income taxes were 38.8% and 39.6% in 2000 and 1999,
respectively. The effective combined federal and state rates are less than
the statutory rates in each period due to the benefit of certain tax-exempt
interest and welfare to work tax credits. See Note 4 of "Notes to Financial
Statements."
Income from continuing operations. As a result of the items discussed
above, net income from continuing operations increased $4.7 million, or
13.8%, from $34.1 million in 1999 to $39.0 million in 2000 before a charge
of $1.1 million from the discontinued operation. Income from continuing
operations as a percentage of net sales was 8.6% in 2000 and 9.5% in 1999.
Discontinued operations. The Board of Directors approved the sale of
Universal for an amount equal to the carrying value of the Company's
investment, $33.9 million, as of the close of business on September 30,
2000 (see "Recent Developments" above). The Company recorded an additional
loss from discontinued operations of $1.1 million, net of tax benefit of
$0.7 million, for Universal and Odd's-n-End's operating losses incurred
through the date of sale, in excess of the amounts originally provided in
1999.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net Sales. Total net sales increased $67.9 million, or 23.2%, from $292.1
million in 1998 to $360.0 million in 1999. 99 Cents Only Stores net sales
increased approximately $73.4 million, or 30.7%, from $238.9 million in
1998 to $312.3 million in 1999. Bargain Wholesale net sales increased
approximately $6.5 million, or 15.7%, from $41.2 million in 1998 (excluding
the $12.0 million sales to Universal billed at cost in 1998) to $47.7
million in 1999. The increase in 99 Cents Only Stores net sales was
attributed to the net effect of 14 net new stores opened in 1999 and the
full year effect of 11 stores opened in 1998. Comparable stores net sales
increased 6.1% from 1998 to 1999. The net increase in Bargain Wholesale net
sales was primarily attributed to an increased focus on large international
and domestic accounts and expansion into new geographic markets. Offsetting
these positive developments was the adverse effect of the slow-down in
shipments to export brokers.
Gross profit. Gross profit, which consists of total net sales, less cost
of sales, increased approximately $32.5 million, or 29.8%, from $109.0
million in 1998 to $141.5 million in 1999. The increase in gross profit
dollars was primarily due to higher sales volume. As a percentage of net
sales, gross profit improved from 37.3% in 1998 to 39.3% in 1999 reflecting
the effect of a 7 to 1 ratio in 1999 of retail sales versus wholesale
sales. The ratio in 1998 was 6 to 1, retail versus wholesale, excluding the
$12.0 million sales to Universal billed at cost.
Selling, general and administrative. Selling, general and administrative
expenses ("SG&A"), which include operating expenses and depreciation and
amortization, increased $19.1 million, or 28.5%, from $66.9 million in 1998
to $86.0 million in 1999. The increase over 1998 is associated with 1999
new store growth and the full year effect of 1998 new stores. SG&A
increased as a percentage of net sales from 22.9% in 1998 to 23.9% in 1999.
The increase in SG&A expenses is directly attributed to 14 net new store
openings.
Operating income. Operating income increased $13.4 million, or 31.7%, from
$42.1 million in the 1998 period to $55.4 million in 1999. Operating income
increased as a percentage of net sales from 14.4% in 1998 to 15.4% in 1999
primarily due to the increase in gross margin as discussed above.
Other (income) expense. Other (income) expense relates to the interest
income on the Company's marketable securities, net of interest expense on
the Company's capitalized warehouse lease. The Company had no bank debt
during 1999 and $2.2 million in 1998. Interest income earned on the
Company's marketable securities was $1.8 million in 1999. At December 31,
1999, the Company held $51.0 million in short-term investments and $8.6
million in long-term investments. The Company's short-term investments are
comprised primarily of investment grade federal and municipal bonds and
commercial paper, all with short-term maturities. The Company generally
holds investments until maturity.
Provision for income taxes. The provision for income taxes in 1999 was
$22.4 million, or 6.2% of net sales, compared to $17.0 million, or 5.8% of
net sales, in 1998. The effective combined federal and state rates of the
provision for income taxes were 39.6% and 39.1% in 1999 and 1998,
respectively. The effective combined federal and state rates are less than
the statutory rates in each period due to the benefit of certain tax-exempt
interest and other credits. See Note 4 of "Notes to Financial Statements."
Income from continuing operations. As a result of the items discussed
above, net income increased $7.6 million, or 28.9%, from $26.5 million in
1998 to $34.1 million in 1999 before a charge of $12.2 million from the
discontinued operations. Net income from continuing operations as a
percentage of net sales was 9.5% in 1999 and 9.1% in 1998.
Discontinued operations. On March 4, 2000, the Board of Directors approved
the disposition of the entire operations of Universal and Odd's-n-End's,
which and Odd's-n-, which comprised the Odd's-N-End's and Only Deals retail
stores. The net losses of these operations for all periods are included in
the consolidated statements of income under "discontinued operations".
Revenues from such operations were $31.1 million in 1998 and $83.3 million
in 1999. The carrying value of the assets at December 31, 1999, were $26.9
million, which is net of approximately $9.0 million in provision for loss
on discontinued operations. The provision for loss on discontinued
operations reflected in the consolidated statements of income includes the
write-down of the assets of Universal to estimated net realizable values
and the estimated costs of disposing of these operations along with the
estimated net loss from operations of $1.2 million through the estimated
date of disposal, less expected tax benefits of approximately $2.6 million
applicable thereto.
Liquidity and Capital Resources
Since inception, 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 requirement results
primarily from purchases of inventory, expenditures related to new store
openings and working capital requirements for new and existing stores. The
Company takes advantage of close-out and other special-situation
opportunities, which frequently result 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.
During 1998, 1999 and 2000, net cash provided by operations was $31.0
million, $26.0 million and $50.4 million, respectively. Net cash provided
by operations reflects increases in inventories in the amount of $6.5
million, $4.3 million and $9.8 million during 1998, 1999 and 2000,
respectively. During 1998, 1999 and 2000, net cash used in investing
activities for purchases of property and equipment was $12.5 million,
$18.0 million and $26.7 million, respectively. Included in the $26.7
million of capital expenditures for 2000 was a distribution facility for
Universal purchased for $7.0 million. The facility is currently being
leased to the purchaser of Universal. The Company believes the acquisition
of the distribution facility was at a favorable purchase price relative to
current market values and will be able to be resold for a gain. Also in
2000 the Company used $1.5 million to repurchase 97.1 thousand shares of
its outstanding stock under its stock repurchase program. Under the
Company's stock repurchase plan the Company may repurchase up to 2 million
shares 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 Company plans to use existing cash to fund repurchases, which
will be used in connection with its employee stock option plan. In addition
the Company received $33.9 million for the sale of Universal. Cash used in
investing activities for the purchase of short-term investments was
$14.0 million, $13.0 and $52.7 million in 1998, 1999 and 2000 respectively.
In 2000, net cash provided by financing activities was $5.7 million;
these funds represented payments of capital lease obligations and the
exercise of its option in December 2000, to purchase the Company's main
warehouse and corporate office facility. The net cash payment included $7.3
million on the remaining lease obligation offset by proceeds from the
exercise of non-qualified employee stock options of $13.0 million. In 1999,
net cash provided by financing activities was $4.2 million; these funds
represented payment for capital lease obligations and proceeds from
exercise of non-qualified stock options. In 1998, net cash provided by
financing activities was $29.0 million; these funds included the proceeds
from secondary public offering of $27.2 million and proceed from exercise
of non-qualified stock options offset by capital leased payment of $0.7
million.
The Company does not maintain any credit facilities with any bank.
However, the Company maintains a surety bond of approximately $1.6 million
for self-insured workers compensation.
The Company plans to open new 99 Cents Only Stores at a targeted
annual rate of 25%. The average investment per new store opened in 2000,
including leasehold improvements, furniture, fixtures and equipment,
inventory and pre-opening expenses, was approximately $660,000. The Company
does not capitalize pre-opening expenses. The Company's cash needs for new
store openings are expected to total approximately $16.5 million in 2001.
The Company's total planned expenditures in 2001 for additions to fixtures
and leasehold improvements of existing stores as well as for distribution
expansion and replacement will be approximately $7.0 million. The Company
believes that its total capital expenditure requirements (including new
store openings) will approximate $23.5 million in 2001. 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.
Seasonality and Quarterly Fluctuations
The Company has historically experienced and expects to continue to
experience some seasonal fluctuation in its net sales, operating income and
net income. The highest sales periods for the Company are the Christmas and
Halloween seasons. A greater amount of the Company's net sales and
operating and net income is generally realized during the fourth quarter.
The Company's quarterly results of operations may also fluctuate
significantly as a result of a variety of other factors, including the
timing of certain holidays (e.g., Easter) and the timing of new store
openings and the merchandise mix. Further, the operations of Universal are
even more dependent upon results in the fourth quarter.
The following table sets forth certain unaudited results of operations
for each quarter during 1999 and 2000 and such information as a percentage
of net sales. The unaudited information has been prepared on the same basis
as the audited financial statements appearing elsewhere in this report and
includes all adjustments, which management considers necessary for a fair
presentation of the financial data shown. The operating results for any
quarter are not necessarily indicative of the results to be attained for
any future period.
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quart Quart Quart Quarte Quart Quart Quart Quarte
er er er r er er er r
Year Ended December 31, Year Ended December 31,
1999 2000
(Amounts in thousands)
Net sales:
99 Cents Only $64,6 $69,8 $76,5 $101,3 $87,5 $96,4 $98,0 $120,0
Stores 33 27 17 29 63 07 96 05
Bargain Wholesale 11,09 11,02 12,20 13,332 13,23 11,54 11,33 13,761
4 5 1 9 0 6
Total 75,72 80,85 88,71 114,66 100,8 107,9 109,4 133,76
7 2 8 1 02 47 32 6
Gross profit 29,60 31,24 35,34 45,270 39,50 41,61 42,44 52,995
7 1 4 2 5 0
Operating income 10,71 11,44 13,19 20,099 12,72 14,41 13,17 19,600
0 4 3 2 0 3
Income from
continuing
operations 6,671 7,018 8,107 12,342 8,011 9,084 8,575 13,188
Income (loss) from
discontinued
operations (373) (170) 53 (2,677 - - (1,05 -
) 0)
(Loss) on disposal
of discontinued
operations - - - (9,000 - - - -
)
Net Income $6,29 $6,84 $8,16 $665 $8,01 $9,08 $7,52 $13,18
8 8 0 1 4 5 8
Earnings per common
share from
continuing
operations:
Basic $0.14 $0.14 $0.16 $0.24 $0.16 $0.18 $0.17 $0.26
Diluted $0.13 $0.14 $0.16 $0.24 $0.16 $0.17 $0.16 $0.26
Earnings (loss)per
common share from
discontinued
operations:
Basic ($0.0 - - ($0.05 - - ($0.0 -
1) ) 2)
Diluted ($0.0 - - ($0.05 - - ($0.0 -
1) ) 2)
(Loss)per common
share on disposal
of discontinued
operations:
Basic - - - ($0.18 - - - -
)
Diluted - - - ($0.18 - - - -
)
Net earnings per
share:
Basic $0.13 $0.14 $0.16 $0.01 $0.16 $0.18 $0.15 $0.26
Diluted $0.12 $0.14 $0.16 $0.01 $0.16 $0.17 $0.14 $0.26
Shares Outstanding
Basic 49,50 49,77 50,09 50,055 50,10 50,47 51,05 51,312
1 4 4 4 2 1
Diluted 50,92 51,06 51,00 50,661 51,01 52,45 52,18 52,063
3 6 7 3 5 9
Percent of Net
sales
Net sales:
99 Cents Only 85.4% 86.4% 86.2% 88.4% 86.9% 89.3% 89.6% 89.7%
Stores
Bargain Wholesale 14.6 13.6 13.8 11.6 13.1 10.7 10.4 10.3
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Gross profit 39.1 38.6 39.8 39.5 39.2 38.6 38.8 39.6
Operating income 14.1 14.2 14.9 17.5 12.6 13.3 12.0 14.7
Income from
continuing
operations 8.8% 8.7% 9.1% 10.8% 7.9% 8.4% 7.8% 9.9%
New Authoritative Pronouncements
In June 1998 and June 1999, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting from Derivative Investments and Hedging Activities," and SFAS
No. 137, which delayed the effective date of SFAS No. 133. The Company
adopted the standard in January 2001. Management does not expect the
adoption of this standard to have a material impact on the Company's
financial position or results of operations.
In December 1999, the SEC staff released Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition, to provide guidance on the recognition,
presentation and disclosure of revenue in financial statements. Application
of the guidance in SAB No. 101 was effective January 1, 2000. The
application of SAB No. 101 did not have a material effect on the Company's
revenue recognition and results of operations.
In September 2000 the FASB issued SFAS No. 140, " Accounting for
Transfers and Servicing of Financial Asset and Extinguishment of
Liabilities, a replacement of SFAS No. 125." The standard is effective in
2001 and management does not expect adoption of this standard to have a
material effect on the Company's financial position or results of
operations.
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 1998, 1999 and 2000, we opened thirteen, eighteen and twenty 99 Cents
Only Stores, respectively (eleven stores in 1998 and fourteen stores in
1999, respectively, net of relocated stores). As of March 22, 2001, we
opened seven stores and closed one and we expect to open at least 19
additional stores in 2001. 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 three of our 99 Cents Only Stores are currently located in
Southern [and Central] California. The Company currently has three stores
in Las Vegas, Nevada. In addition, our year 2001 retail expansion plan
includes new stores in these regions and in Arizona. Accordingly, our
results of operations and financial condition largely 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 since
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 closeouts and other irreplaceable products.
Although we maintain standard property and business interruption insurance,
we do not have earthquake insurance on our properties. Although we maintain
standard property and business interruption insurance, we do not have
earthquake insurance.
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, 1998, 1999 and 2000, we recorded net inventory of $49.6
million, $53.9 million and $63.7 million, respectively.
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.
In January 2001 California enacted a minimum wage increase of $0.50
per hour with an additional $0.50 increase required in January 2002. The
Company believes that annual payroll expenses could increase approximately
less than 1.0% over this two-year period as a result. Because we provide
consumers with merchandise at a 99 cents fixed price point, we typically
cannot pass on cost increases to our customers. However the Company
believes that the increased minimum wage will result in incremental
customer spending in our stores.
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 13 of our 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 $2.2 million, $1.9 million and $1.9 million in 1998, 1999 and
2000, 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 1999 and 2000, we generated approximately 31.8% and
29.6%, respectively, of our net sales and approximately 36.2% and 32.7%,
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 of new stores and timing of new store openings;
- 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 11 of our stores. In December 2000,
the Company exercised its option to purchase its main warehouse and
distribution facility (where our executive offices are located) for $10.5
million. 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
23,324,510 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 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to interest rate risk for its investments in
marketable securities. At December 31, 2000, the Company had $112,297,000
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 with
purchase of an investment is amortized over the term of the investment. At
December 31, 2000, the fair value of investments approximated the carrying
value.
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Pag
e
99 Cents Only Stores
Report of Independent Public Accountants 32
Balance Sheets as of December 31, 1999 and 2000 33
Statements of Income for the years ended December 31, 1998, 1999 and 35
2000
Statements of Changes in Shareholders' Equity for the years ended 36
December 31, 1998, 1999 and 2000
Statements of Cash Flows for the years ended December 31, 1998, 1999 37
and 2000
Notes to the Financial Statements 38
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 99 Cents Only Stores:
We have audited the accompanying balance sheets of 99 Cents Only Stores (a
California Corporation) as of December 31, 1999 and 2000 and the related
statements of income, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of 99 Cents Only Stores as
of December 31, 1999 and 2000, and the results of its operations and its
cash flows for each of the three years in the period ended December 31,
2000 in conformity with accounting principles generally accepted in the
United States.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 20, 2001
(Except for the matters
discussed in note 13,
as to which the date
is February 27, 2001)
99 CENTS ONLY STORES
BALANCE SHEETS
DECEMBER 31, 1999 AND 2000
(Amounts In Thousands, Except Share Data)
ASSETS
1999 2000
CURRENT ASSETS:
Cash $7,984 $9,034
Short-term investments 50,971 109,43
0
Accounts receivable, net of allowance for doubtful accounts
of $140 and $113 as of December 31, 1999 and 2000, 3,356 3,569
respectively
Income tax receivable 4,674 -
Inventories 53,932 63,693
Other 1,451 2,663
Total current assets 122,368 188,38
9
PROPERTY AND EQUIPMENT, at cost:
Land 11,060 17,781
Building and improvement 12,876 17,357
Leasehold improvements 23,786 34,026
Fixtures and equipment 14,718 19,533
Transportation equipment 1,635 2,250
Construction in progress 5,466 5,091
69,541 96,038
Accumulated depreciation and amortization (20,119 (28,63
) 6)
49,422 67,402
OTHER ASSETS:
Deferred income taxes 11,318 12,841
Long term investments in marketable securities 8,600 2,867
Deposits 214 308
Net asset of discontinued operation. 26,928 -
Other 5,165 5,478
52,225 21,494
$224,01 $277,2
5 85
The accompanying notes are an integral part of these balance sheets.
99 CENTS ONLY STORES
BALANCE SHEETS
DECEMBER 31, 1999 AND 2000
(Amounts In Thousands, Except Share Data)
LIABILITIES AND SHAREHOLDERS' EQUITY
1999 2000
CURRENT LIABILITIES:
Current portion of capital lease obligation $809 $ -
Accounts payable 9,010 12,622
Accrued expenses:
Payroll and payroll-related 1,967 2,530
Sales tax 2,429 2,802
Other 421 340
Workers compensation 2,095 2,764
Income taxes payable - 552
Total current liabilities 16,731 21,610
LONG-TERM LIABILITIES:
Deferred rent 1,952 2,142
Accrued interest 3,350 -
Capital lease obligation, net of current portion 6,442 -
11,744 2,142
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-60,000,000 shares
Issued and outstanding 50,137,848 at December 31, 1999 and
51,303,075 at December 31, 2000 116,775 138,487
Retained earnings 78,765 115,046
195,540 253,533
$224,01 $277,28
5 5
The accompanying notes are an integral part of these balance sheets.
99 CENTS ONLY STORES
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(Amounts In Thousands, Except Per Share Data)
1998 1999 2000
NET SALES:
99 Cents Only Stores $238,86 $312,30 $402,07
8 6 1
Bargain Wholesale 53,202 47,652 49,876
292,070 359,958 451,947
COST OF SALES 183,044 218,496 275,395
Gross profit 109,026 141,462 176,552
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Operating expenses 62,424 80,089 107,981
Depreciation and amortization 4,506 5,927 8,666
66,930 86,016 116,647
Operating income 42,096 55,446 59,905
OTHER (INCOME) EXPENSE:
Interest income (2,180) (1,805) (3,969)
Interest expense 752 746 712
Other - - (360)
(1,428) (1,059) (3,617)
Income from continuing operation before tax 43,524 56,505 63,522
provision
PROVISION FOR INCOME TAX 17,032 22,367 24,664
Income from continuing operations 26,492 34,138 38,858
Income (loss) from discontinued operation net of
income tax provision of $910 in 1998, an
income tax benefit of $2,111 and $700 in 1999 201 (3,167) (1,050)
and 2000 respectively
Loss from disposal of discontinued operation
including a provision of $1,200 for operating
losses during the phase-out period net of - (9,000) -
income tax benefit of $2,613
NET INCOME $26,693 $21,971 $37,808
EARNINGS PER COMMON SHARE FROM CONTINUING
OPERATIONS:
Basic $0.55 $0.68 $0.77
Diluted $0.54 $0.67 $0.75
EARNINGS (LOSS) PER COMMON SHARE FROM
DISCONTINUED OPERATION:
Basic $0.01 ($0.06) ($0.02)
Diluted - ($0.06) ($0.02)
(LOSS) PER COMMON SHARE FROM DISPOSAL OF
DISCONTINUED OPERATION:
Basic - ($0.18) -
Diluted - - ($0.18) -
NET EARNINGS FOR COMMON SHARE:
Basic $0.56 $0.44 $.75
Diluted $0.54 $0.43 $.73
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic 48,068 49,878 50,750
Diluted 49,127 50,978 51,722
The accompanying notes are an integral part of these financial statements.
99 CENTS ONLY STORES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(Amounts In Thousands)
Share Amount Retain
s ed
Earnin
gs
Common Stock
BALANCE, December 31, 1997 46,44 $66,207 $30,10
6 1
Net income 26,693
Tax benefit from exercise of stock options - 2,195 -
Proceeds from exercise of stock options 486 2,477 -
Net proceeds from secondary public offering 1,877 27,188 -
Shares issued in connection with acquisition of 673 9,504 -
Universal
BALANCE, December 31, 1998 49,48 107,571 56,794
2
Net income - - 21,971
Tax benefit from exercise of stock options - 4,229 -
Proceeds from exercise of stock options 655 4,975 -
BALANCE, December 31, 1999 50,13 116,775 78,765
7
Net income - - 37,808
Tax benefit from exercise of stock options - 8,223 -
Proceeds from exercise of stock options 1,245 12,961 -
Compensation expense in connection with cash-less 18 528
exercise
Shares repurchased under stock buyback program (97) - (1,527
)
BALANCE, December 31, 2000 51,30 $138,48 $115,0
3 7 46
The accompanying notes are an integral part of these financial statements.
99 CENTS ONLY STORES
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(Amounts in Thousands)
1998 1999 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $26,693 $21,971 $37,808
Adjustment to reconcile net income to net cash
provided by operating activities:
(Income) loss from discontinued operations (201) 3,167 1,050
Provision for loss on disposal of discontinued
operation - 9,000 -
Depreciation and amortization 4,506 5,927 8,666
Compensation expense for cash-less exercise of
stock options - - 528
Tax Benefit from exercise of non qualified
employee stock options 2,195 4,229 8,223
Benefit for deferred income taxes (395) (4,976) (1,523)
Changes in asset and liabilities associated with
operating activities net of businesses acquired:
Accounts receivable (945) (901) (213)
Inventories (6,520) (4,298) (9,761)
Other assets (1,935) (2,888) (1,525)
Deposits 51 (31) (94)
Receivable from affiliated entity 230 - -
Accounts payable 6,792 (3,316) 3,612
Accrued expenses (380) 1,158 855
Accrued worker's compensation 281 723 669
Income taxes (238) (4,647) 5,226
Deferred rent 274 202 190
Accrued interest 615 660 (3,350)
Net cash provided by operating activities 31,023 25,980 50,361
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (12,461 (17,953 (26,646
) ) )
Purchases of short-term investments (13,976 (13,011 (52,726
) ) )
Repurchase of Company stock - - (1,527)
Net asset of discontinued operations (31,730 6,048 (8,031)
)
Proceed from sale of Universal International, - - 33,909
Inc.
Net cash used in investing activities (58,167 (24,916 (55,021
) ) )
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligation (704) (754) (7,251)
Net proceeds from secondary public offering 27,188 - -
Proceeds from exercise of stock options 2,477 4,975 12,961
Net cash provided (used in) financing 28,961 4,221 5,710
activities
NET INCREASE (DECREASE) IN CASH 1,817 5,285 1,050
CASH, beginning of period 882 2,699 7,984
CASH, end of period $2,699 $7,984 $9,034
The accompanying notes are an integral part of these financial statements.
99 CENTS ONLY STORES
NOTES TO FINANCIAL STATEMENTS
December 31, 2000
1. Line of Business
The Company, (including the operations of its 99 Cents Only Stores and
Bargain Wholesale) primarily retails various consumable products and
operated 78 and 98 stores at December 31, 1999 and 2000, respectively. The
Company is also a wholesale distributor of various consumable products.
2. Concentration of Operations in Southern California
Most of the Company's retail stores are located in Southern
California. In addition, the Company's current retail expansion plans
anticipate that most new stores will be located in this geographic region.
Consequently, the Company's results of operations and financial condition
are dependent upon general economic trends and various environmental
factors in Southern California. The Company also has three stores in Las
Vegas, Nevada.
3. Summary of Significant Accounting Policies
Use of Estimates
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Inventories
Inventories are priced at the lower of cost (first in, first out) or
market.
Depreciation and Amortization
Property and equipment are amortized and depreciated on the
straight-line basis over the following useful lives of the assets:
Building and improvements 30 - 27.5 years
Leasehold improvements Lesser of 5 years or
Remaining lease term
Fixtures and equipment 5 years
Transportation equipment 3 years
The Company follows the policy of capitalizing expenditures that
materially increase asset lives and charging ordinary repairs and
maintenance to operations as incurred.
Earnings per 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).
A reconciliation of the basic weighted average number of shares
outstanding and the diluted weighted average number of shares outstanding
for each of the three years in the period ended December 31, 2000 follows:
1998 1999 2000
(Amounts in
thousands)
Weighted average number of common shares
outstanding-Basic 48,06 49,87 50,75
8 8 0
Dilutive effect of outstanding stock 1,059 1,100 972
options
Weighted average number of common shares
outstanding-Diluted 49,12 50,97 51,72
7 8 2
In the years 2000 and 1999, respectively, approximately 7,000 and
1,054 options were excluded from the calculation of fully diluted shares
outstanding because the option price was above the average market price
during the year.
Concentration of Risk
The Company maintains cash and short-term investments with highly
qualified financial institutions. At various times such amounts are in
excess of insured limits.
Deferred Rent
Certain of the Company's operating leases for its retail locations
include scheduled increasing monthly payments. In accordance with generally
accepted accounting principles, the Company has accounted for the leases to
provide straight-line charges to operations over the lives of the leases.
Revenue Recognition
Revenue is recognized at the point of sale for retail sales and at the
time of shipment for wholesale sales.
Pre-Opening Costs
The Company expenses, as incurred, all pre-opening costs related to
the opening of new retail stores.
Statements of Cash Flows
The Company prepares its statements of cash flows using the indirect
method as prescribed by the Statement of Financial Accounting Standards No.
95. The Company considers all investments with original maturities of three
months or less to be cash equivalents.
Cash payments for income taxes were $16,727,000, $21,756,000 and
$12,474,425 in 1998, 1999 and 2000, respectively. Interest payments totaled
approximately $136,000, $86,000 and $31,000 for the years December 31,
1998, 1999 and 2000, respectively.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, short-term and
long-term investments and short-term trade receivables and payables. The
carrying value for all such instruments, considering the terms, appropriate
fair value at December 31, 1999 and 2000, respectively.
Impairment of Long-Live Assets
The Company reviews its long-lived assets for impairment whenever
events or changes indicate that the carrying amount of an asset or group of
assets may not be recoverable. No impairment losses were recorded during
the years ended December 31, 1998, 1999 or 2000.
New Authoritative Pronouncements
In June 1998 and June 1999, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting from Derivative Investments and Hedging Activities," and SFAS
No. 137, which delayed the effective date of SFAS No. 133. The Company
adopted the standard in January 2001. Management does not expect the
adoption of the standard to have a material impact on the Company's
financial position or results of operations.
In December 1999, the SEC staff released Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition, to provide guidance on the recognition,
presentation and disclosure of revenue in financial statements. Application
of the guidance in SAB No. 101 was effective January 1, 2000. The
application of SAB No. 101 did not have a material effect on the Company's
revenue recognition and results of operations.
In September 2000 the FASB issued SFAS No. 140, " Accounting for
Transfers and Servicing of Financial Asset and Extinguishment of
Liabilities, a replacement of SFAS No. 125." The standard is effective in
2001 and management does not expect adoption of the standard to have a
material effect on the Company's financial position or results of
operations.
Reclassifications
Certain amounts in the prior years have been reclassified to conform
to the current year's presentation.
4. Income Tax Provision
The provisions for income taxes from continuing operations for the years
ended December 31, 1998, 1999 and 2000 are as follows:
Years Ended December 31,
(Amounts in thousands)
1998 1999 2000
Current:
Federal $15,249 $20,192 $20,917
State 2,178 2,885 5,270
17,427 23,077 26,187
Deferred (395) (710) (1,523)
Provisions for income taxes $17,032 $22,367 $24,664
Differences between the provisions for income taxes and income taxes
at the statutory federal income tax rate for the years ended December 31,
1998, 1999 and 2000 are as follows:
Year Ended December 31,
(Amounts in thousands)
1998 1999 2000
Amoun Perce Amoun Perce Amoun Perce
t nt t nt t nt
Income tax at statutory federal $15,2 35.0% $19,7 35.0% $22,2 35.0%
rate 33 77 32
State income taxes, net of
federal income tax effect 2,405 5.5 3,012 5.3 3,386 5.3
Effect of permanent differences (255) (0.6) (64) (0.1) (291) (0.5)
Welfare to work, LARZ and other
job credits (393) (0.9) (380) (0.6) (663) (1.0)
Other 42 0.1 22 - - -
$17,0 39.1% $22,3 39.6% $24,6 38.8%
32 67 64
A detail of the Company's deferred tax asset as of December 31, 1999
and 2000 is as follows:
Years Ended
December 31,
(Amounts in
thousands)
1999 2000
Inventory $606 $516
Uniform inventory capitalization 971 1,026
Depreciation 2,326 3,018
Liability for claims 112 112
Workers' compensation 845 1,114
Deferred rent 787 840
State taxes 1,216 1,839
Other, net 117 308
Net operating loss carry-forward 9,140 8,608
16,120 17,381
Net deferred tax liabilities (262) -
15,858 17,381
Valuation allowance (4,540) (4,540)
$11,318 $12,841
In connection with the acquisition and subsequent sale of Universal and
Odd's-N-End's, the Company has remaining federal net operating loss carry-
forwards of approximately $24.6 million which it can use to offset income.
Future use of this loss carry-forwards may be limited and expire at various
dates through 2013. Due to the uncertainty of the future use of such loss
carry-forwards, the Company has recorded a valuation allowance equal to the
tax effect of the loss carry-forward that may not be realizable.
5. Investments
Investment 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. The
Company generally holds investments until maturity. Any premium or discount
recognized in connection with the purchase of an investment is amortized
over the term of the investment. As of December 31, 1999 and 2000, the fair
value of investments approximated the carrying values and were invested as
follows:
(Amounts in thousands) 1999 Maturity 2000 Maturity
Within 1 year Within 1 year
1 or 1 or
year more year more
Federal bonds $1,500 $1,500 - - - -
Municipal bonds 16,421 9,981 $6,440 $65,621 $62,754 $2,867
Corporate Securities 1,560 - 1,560 2,000 2,000 -
Commercial paper 40,090 39,490 600 44,676 44,676 -
$112
$59,571 50,971 $8,600 $112,29 $109,43 $2,867
7 0
6. Purchase of Facility
In December 2000 the Company exercised its option to purchase its main
warehouse, distribution and corporate office facility (approximately
880,000 square feet) for $10.5 million. Included in property and equipment
is approximately $13.7 million of land and building, at cost, related to
this property. Lease payments of $809,000 were also made during the year.
7. Related-Party Transactions
The Company leases certain retail facilities from its principal
shareholders. Rental expense for these facilities was approximately $2.2
million, $1.9 million and $1.9 million in 1998, 1999 and 2000,
respectively.
During 1998, the Company incurred legal fees of $60,000 to the law
firm in which a director of the Company is a partner.
Effective September 30, 2000, the Company sold its discontinued
operation, Universal International, Inc. to a Company owned 100% by Dave
and Sherry Gold, both significant shareholders of 99 Cents Only Stores (see
note 12). Mr. Gold is also an executive officer and director. From October
1, 2000 to December 31, 2000, the Company recorded $1.3 million and $0.4
million under a Services Agreement and Lease Agreement, respectively,
related to this transaction (see note 12).
8. Commitments and Contingencies
Credit Facility
The Company does not maintain any credit facilities with any bank.
Lease Commitments
The Company leases various facilities under operating leases, which
expire at various dates through 2012. Some of the lease agreements contain
renewal options and/or provide for scheduled increases or increases based
on the Consumer Price Index. Total minimum lease payments under each of
these lease agreements, including scheduled increases, are charged to
operations on a straight-line basis over the life of each respective lease.
Certain leases require the payment of property taxes, maintenance and
insurance. Rental expense charged to operations in 1998, 1999 and 2000 was
approximately $10.6 million, $11.0 million and $15.6 million, respectively.
As of December 31, 2000, the minimum annual rentals payable under all
non-cancelable operating leases were as follows:
(Amounts
in
thousands
)
Year ending December 31:
2001 13,303
2002 12,579
2003 12,330
2004 11,163
2005 8,768
Thereafter 19,219
$77,362
In addition, the Company also leases certain retail facilities on a
month-to-month basis. The aggregate monthly rental payment for
month-to-month lease at December 31, 2000 was approximately thirteen
thousand dollars.
Workers' Compensation
Effective August 11, 1993, the Company became self-insured as to
workers' compensation claims. The Company carries excess workers'
compensation insurance, which covers any individual claim in excess of
$250,000 with a $2.0 million ceiling. The Company provides for losses of
estimated known and incurred but not reported insurance claims. Known
claims are estimated and accrued when reported. At December 31, 1999 and
2000, the Company had accrued approximately $2.1 million and $2.8 million,
respectively, for estimated workers' compensation claims.
In connection with the self-insurance of workers' compensation, the
Company is required, by the State of California, to maintain a $1.6 million
surety bond.
Legal Matters
The Company is named as a defendant in various legal matters arising
in the normal course of business. In management's opinion, none of these
matters will have a material effect on the Company's financial position or
its results of operations.
Advertising
The Company expenses advertising costs as incurred. Advertising
expenses were $2.4 million, $2.4 million and $2.7 million for 1998, 1999
and 2000, respectively.
9. Stock Option Plan
The Company's 1996 Stock Option Plan is a fixed plan, which provides
for the granting of non-qualified and incentive options to purchase up to
9,250,500 shares of common stock. Options may be granted to officers,
employees, directors and consultants. Grants may be at fair market value at
the date of grant or at a price determined by the compensation committee
consisting of three outside members of the board of directors (the
"Committee"). Options vest over a three-year period, one-third one year
from the date of grant and one third per year thereafter. Options expire
ten years from the date of grant.
The following table summarizes stock options available for grant.
Year Year Year
ended ended ended
December December December
31, 31, 31,
1998 1999 2000
Beginning Balance 33,000 1,588,830 3,351,510
Authorized 3,124,999 3,000,000 -
Granted (1,834,56 (1,459,52 (1,241,04
7) 4) 1)
Cancelled 265,398 222,204 498,223
Available for future grant 1,588,830 3,351,510 2,608,692
A summary of the status of the Plan for the years ended December 31,
1998, 1999 and 2000 follows:
December 31, December 31, December 31,
1998 1999 2000
Weigh Weigh Weigh
ted ted ted
Avera Avera Avera
Shares ge Shares ge Shares ge
Exerc Exerc Exerc
ise ise ise
Price Price Price
Outstanding at the
beginning of the year 2,948,08 $5.59 4,031,34 $6.99 4,612,599 $14.2
8 9 3
Granted 1,834,56 15.65 1,459,52 23.47 1,241,041 22.67
8 4
Exercised (485,909 4.37 (656,070 10.12 (1,262,72 10.58
) ) 7)
Cancelled (265,398 6.79 (222,204 18.19 (498,223) 20.77
) )
Outstanding at the end of
the year 4,031,34 6.99 4,612,59 14.23 4,092,690 17.41
9 9
Exercisable at the end of
the year 932,204 $5.79 1,712,05 $7.89 1,739,655 $11.6
5 9
Weighted average fair
value of options granted $15.6 $15.1 $16.1
5 1 2
The following table summarizes information about stock options
outstanding at December 31, 2000.
Weighted Weight Weight
Range of Average ed ed
Exercise Options Remaining Averag Options Averag
Prices Outstandi Contractual e Exercisab e
ng life Exerci le Exerci
se se
Price Price
$3.51-$4.46 351,398 5.4 $3.59 351,398 $3.59
$5.82-$8.70 573,926 6.3 7.04 573,926 7.04
$10.60- 836,476 7.4 15.03 443,899 14.97
$15.69
$16.00- 2,320,390 8.8 22.90 370,432 22.62
$23.50
$24.12- 10,500 9.3 24.52 - -
$24.54
4,092,690 7.9 17.41 1,739,655 11.69
The Company has elected to continue to measure compensation costs
associated with its stock option plan under APB 25, "Accounting for Stock
Issued to Employees" and accordingly, under SFAS No. 123, the expected
impact on the Company's financial statements is included in this expanded
footnote disclosure.
Had the Company applied the fair value based method of accounting,
which is not required, to all grants of stock options, under SFAS 123, the
Company would have recorded additional compensation expense and computed
pro forma net income and earnings per share amounts as follows for the
years ended December 31, 1998, 1999 and 2000 (amounts in thousands, except
for per share data):
December 31,
1998 1999 2000
Additional compensation expense $8,36 $16,0 $11,8
0 71 88
Pro forma net income 21,67 12,32 19,81
7 8 4
Pro forma earnings per share:
Basic $0.45 $0.25 $0.51
Diluted $0.44 $0.24 $0.50
These pro forma amounts were determined by estimating the fair value
of each option on its grant date using the Black-Scholes option-pricing
model with the following assumptions:
December 31,
1998 1999 2000
Risk free interest rate 4.9% 5.5% 5.7%
Expected life 8.8 10 10
years years years
Expected stock price volatility 77% 67% 54%
Expected dividend yield None None None
10. Operating Segments
The Company has two business segments, retail operations and wholesale
distribution. The majority of the product offerings include recognized
brand-name consumable merchandise, regularly available for reorder. Bargain
Wholesale sales 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 the same as those
described above in the summary of significant accounting policies. The
Company evaluates segment performance based on 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 accounts.
The Company had no customers representing more than 10 percent of net
sales. Substantially all of the Company's net sales were to customers
located in the United States.
Reportable segment information for the years ended December 31, 1998, 1999
and 2000 follows (in 000's):
Retail Wholesale Total
1998
Net sales $238,868 $53,202 $292,070
Gross Margin 99,021 10,005 109,026
1999
Net sales $312,306 $47,652 $359,958
Gross Margin 130,317 11,145 141,462
2000
Net sales $402,071 $49,876 $451,947
Gross Margin 166,054 10,498 176,552
11. 401(k) Plan
In 1998 the Company adopted a 401(k) Plan (the Plan). All full time
employees are eligible to participate in the plan after 3 months of
service. The Company does not match employee contributions. The Company may
elect to make a discretionary contribution to the Plan. For the years ended
December 31, 1999 and 2000, no discretionary contributions were made.
12. Discontinued Operations
On March 4, 2000, the Board of Directors approved the disposition of
Universal International, Inc. and Odd's-n-End's, Inc., which comprises the
retail operations of Odds-n-Ends, Inc. and Only Deals, Inc.
The Company engaged an investment-banking firm in May 2000 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, Inc., 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 in an orderly
fashion, either as a whole company, or in clusters of stores or by unit.
The sale was effective as of the close of business on September 30, 2000.
The sales price for Universal was the Company's carrying value as of the
close of business on September 30, 2000, which was $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 were
offset by $3.5 million of accounts payable, accrued and other liabilities.
In connection with this transaction 99 Cents Only Stores is providing
certain ongoing administrative and other services to Universal pursuant to
a Services Agreement. The management fee is based on 6% of Universal's
sales volume.
The net losses of these operations for all periods are included in the
consolidated statements of income under "discontinued operations". Revenues
from such operations were $31,107 in 1998 and $83,264 in 1999. The
provisions for loss on discontinued operations reflected in the statement
of income, includes the write-down of the assets of Universal operations to
estimate net realizable values and the estimated cost of disposing these
operations along with the estimated loss of $1,200 million through the
estimated date of disposal, less the expected tax benefits of approximately
$2,613 applicable thereto.
During the fiscal year 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. In the fourth quarter of
2000, the Company has received $1.3 million in management fees under the
Services Agreement with Universal. The Company has also received $0.4
million in lease payments for rental of a distribution facility to
Universal. These amounts are included in total net selling, general and
administrative expenses and other income, respectively, in 2000.
13. Stock Split
On February 27, 2001, The Company's Board of Directors approved a
three-for-two stock split to be distributed on March 20, 2001 to holders of
record on May 14, 2001. The accompanying financial statements have been
adjusted to give retroactive effect to this stock split as if it had
occurred at the beginning of all periods presented.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding Directors and Executive Officers of the
registrant required by Item 401 of Regulation S-K and information regarding
Directors and Executive Officers of the registrant required by Item 405 of
Regulation S-K is presented under the captions "Election of Directors,"
"Management" and "Section 16(a) Beneficial Ownership Reporting Compliance"
in the definitive Proxy Statement for the Company's 2001 Annual Meeting of
Shareholders, and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by Item 402 of Regulation S-K is presented
under the caption "Executive Compensation" in the definitive Proxy
Statement for the Company's 2001 Annual Meeting of Shareholders, and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 403 of Regulation S-K is presented
under the caption "Principal Shareholders" in the definitive Proxy
Statement for the Company's 2001 Annual Meeting of Shareholders, and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by Item 404 of Regulation S-K is presented
under the caption "Certain Relationships" in the definitive Proxy Statement
for the Company's 2001 Annual Meeting of Shareholders, and is incorporated
herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
1. Financial Statements. Reference is made to the Index to the Financial
Statements set forth in item 8 on page 31 of this Form 10-K.
2. Financial Statement Schedules. All Schedules for which provision is
made in the applicable accounting regulations of the Securities and
Exchange Commission are included herein.
3. Exhibits. The Exhibits listed on the accompanying Index to Exhibits
are filed as part of, or incorporated by reference into, this report.
4. Reports on Form 8-K.
A Report on Form 8-K was filed on January 28, 2000 Item 5.
A Report on Form 8-K was filed on February 18, 2000 Item 5.
A Report on Form 8-K was filed on November 3, 2000 Item 5.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized.
99 CENTS ONLY STORES
By
: /s/ Eric Schiffer
President
Pursuant to the requirements of the Securities Exchange Act of 1934
this Annual Report on Form 10K has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.
Signature Title Date
Chairman of the Board and Chief March 22,
/s/ David Gold Executive Officer 2001
Senior Vice President of March 22,
/s/ Howard Gold Distribution and Director 2001
Senior Vice President of Real March 22,
/s/ Jeff Gold Estate and Information Systems 2001
and Director
March 22,
/s/ Eric Schiffer President and Director 2001
March 22,
/s/ Andy Farina Chief Financial Officer 2001
March 22,
/s/ William Christy Director 2001
March 22,
/s/ Lawrence Glascott Director 2001
March 22,
/s/ Marvin L. Holen Director 2001
March 22,
/s/ Ben Schwartz Director 2001
March 22,
/s/ John Shields Director 2001
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 99 Cents Only Stores:
We have audited in accordance with auditing standards generally accepted in
the United States, the financial statements of 99 Cents Only Stores in this
Form 10-K and have issued our report thereon dated February 20, 2001
(except for the matters discussed in note 13, as to which date is February
27, 2001). Our audits were made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The schedule listed in the
accompanying index is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states
in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 20, 2001
(Except for the matters
discussed in note 13,
as to which the date
is February 27, 2001)
99 ONLY STORES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For Each of the Three Years in the Period Ended December 31, 2000
Beginni End of
ng Addit Reduction Other Year
of Year ion
Amounts in Thousands
For the year ended December 31,
2000:
Allowance for doubtful account $140 $- $27 $- $113
Inventory reserve 1,503 - 224 - 1,279
For the year ended December 31,
1999:
Allowance for doubtful account 169 - 29 - 140
Inventory reserve 2,589 - 1,086 - 1,503
For the year ended December 31,
1998:
Allowance for doubtful account 178 - 9 - 169
Inventory reserve $3,762 - $1,173 - $2,589
Exhibit Index
Exhib Exhibit Description
it
Numbe
r
3.1 Amended and Restated Articles of Incorporation of the
Registrant.(1)
3.2 Amended and Restated Bylaws of the Registrant.(1)
4.1 Specimen certificate evidencing Common Stock of the Registrant.(1)
10.1 Form of Indemnification Agreement and Schedule of Indemnified
Parties.(1)
10.2 [Reserved]
10.3 Form of Tax Indemnification Agreement, between and among the
Registrant and the Existing Shareholders.(1)
10.4 1996 Stock Option Plan.(1)
10.5 Lease for 730 West Foothill Boulevard, Azusa, California, dated as
of December 1, 1995, by and between the Registrant as Tenant and
HKJ Gold, Inc. as Landlord, as amended(1).
10.6 Lease for 13023 Hawthorne Boulevard, Hawthorne, California, dated
April 1 1994, by and between the Registrant as Tenant and HKJ Gold,
Inc. as Landlord, as amended.(1)
10.7 Lease for 6161 Atlantic Boulevard, Maywood, California, dated
November 11, 1985, by and between the Registrant as Lessee and
David and Sherry Gold, among others, as Lessors.(1)
10.8 Lease for 14139 Paramount Boulevard, Paramount, California, dated
as of March 1 1996, by and between the Registrant as Tenant and
14139 Paramount Properties as Landlord, as amended.(1)
10.9 Release Agreement, dated March 25, 1996, regarding 11382 Beach
Boulevard, Stanton, California, by and between the Registrant and
11382 Beach Partnership.(1)
10.10 Lease for 6124 Pacific Boulevard, Huntington Park, California,
dated January 31, 1991, by and between the Registrant as Tenant and
David and Sherry Gold as the Landlord, as amended.(1)
10.11 Lease for 14901 Hawthorne Boulevard, Lawndale, California, dated
November 1, 1991, by and between Howard Gold, Karen Schiffer and
Jeff Gold, dba 14901 Hawthorne Boulevard Partnership as Landlord
and the Registrant as Tenant, as amended.(1)
10.12 Lease for 5599 Atlantic Avenue, North Long Beach, California, dated
August 13, 1992, by and between the Registrant as Tenant and HKJ
Gold, Inc. as Landlord, as amended.(1)
10.13 Lease for 1514 North Main Street, Santa Ana, California, dated as
of November 12, 1993, by and between the Registrant as Tenant and
Howard Gold, Jeff Gold, Eric J. Schiffer and Karen R. Schiffer as
Landlord, as amended.(1)
10.14 Lease for 6121 Wilshire Boulevard, Los Angeles, California, dated
as of July 1, 1993, by and between the Registrant as Tenant and HKJ
Gold, Inc. as Landlord, as amended; and lease for 6101 Wilshire
Boulevard, Los Angeles, California, dated as of December 1, 1995,
by and between the Registrant as Tenant and David and Sherry Gold
as Landlord, as amended.(1)
10.15 Lease for 8625 Woodman Avenue, Arleta, California, dated as of July
8, 1993, by and between the Registrant as Tenant and David and
Sherry Gold as Landlord, as amended.(1)
10.16 Lease for 2566 East Florence Avenue, Walnut Park, California, dated
as of April 18, 1994, by and between HKJ Gold, Inc. as Landlord and
the Registrant as Tenant, as amended.(1)
10.17 Lease for 3420 West Lincoln Avenue, Anaheim, California, dated as
of March 1, 1996, by and between the Registrant as Tenant and HKJ
Gold, Inc. as Landlord, as amended.(1)
10.18 Master Lease for 4000 East Union Pacific Avenue, City of Commerce,
. California ("Warehouse and Distribution Facility Lease"), dated as
of December 20, 1993, by and between the Registrant as Lessee and
TBC Realty II Corporation ("TBC") as Lessor, together with Lease
Guaranty ("Lease Guaranty"), dated December 20, 1993, by and
between Sherry and David Gold and TBC with respect thereto and
Letter Agreement, dated December 15, 1993, among Registrant, The
Mead Corporation, TBC and Citicorp Leasing, Inc. with respect to
the Lease Guaranty.(1)
10.10 Hawaiian Gardens Indemnity Agreement, dated as of March 25, 1996,
by and between the Registrant and HKJ Gold, Inc.(1)
10.20 North Broadway Indemnity Agreement, dated as of May 1, 1996, by and
between HKJ Gold, Inc. and the Registrant.(1)
10.21 Lease for 2606 North Broadway, Los Angeles, California, dated as of
May 1, 1996, by and between HKJ Gold, Inc. as Landlord and the
Registrant as Tenant.(1)
10.22 Grant Deed concerning 8625 Woodman Avenue, Arleta, California,
dated May 2, 1996, made by David Gold and Sherry Gold in favor of
Au Zone Investments #2, L.P., a California limited partnership.(1)
10.23 Grant Deed concerning 6101 Wilshire Boulevard, Los Angeles,
California, dated May 2, 1996, made by David Gold and Sherry Gold
in favor of Au Zone Investments #2, L.P., a California limited
partnership.(1)
10.24 Grant Deed concerning 6124 Pacific Boulevard, Huntington Park,
California, dated May 2, 1996, made by David Gold and Sherry Gold
in favor of Au Zone Investments #2, L.P., a California limited
partnership.(1)
10.25 Grant Deed concerning 14901 Hawthorne Boulevard, Lawndale,
California, dated May 2, 1996, made by Howard Gold, Karen Schiffer
and Jeff Gold in favor of Au Zone Investments #2, L.P., a
California limited partnership.(1)
10.26 Services Agreement, dated as of December 28, 2000, by and between
Universal International, Inc. and the registrant.
11.1 Statements Regarding Computation of Per Share Earnings*
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.*
27.1 Financial Data Schedule*
* Filed herewith
(1)Incorporated by reference from the Company's Registration Statement on
Form S-1
as filed with the Securities and Exchange Commission on May 21, 1996.
Exhibit 11.1
99 CENTS ONLY STORES
STATEMENTS REGARDING COMPUTATION OF
PER SHARE EARNINGS
(Amounts in Thousands, Except Per Share Data)
December 31,
1998 1999 2000
Income from continuing operations $26,49 $34,1 $38,85
2 38 8
Income (loss) from discontinued operations 201 (3,16 (1,050
7) )
(Loss) from disposal of discontinued operation - (9,00 -
0)
Net Income $26,69 $21,9 $37,80
3 71 8
Common Stock:
Shares outstanding from beginning of period 46,446 49,48 50,137
2
Pro-rata shares issuance 1,622 396 613
Basic weighted average number of common shares 48,068 49,87 50,750
outstanding 8
Common stock equivalents 1,059 1,100 972
Diluted weighted average number of common shares 49,127 50,97 51,722
outstanding 8
Income from continuing operations
Basic $0.55 $0.68 $0.77
Diluted $0.54 $0.67 $0.75
Income (loss) from discontinued operation
Basic $0.01 ($0.0 ($0.02
6) )
Diluted - ($0.0 ($0.02
6) )
(Loss) from disposal of discontinued operation
Basic - ($0.1 -
8)
Diluted - ($0.1 -
8)
Net Income
Basic $0.56 $0.44 $0.75
Diluted $0.54 $0.43 $0.73
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K, into the Company's previously
filed Registration Statement
File Nos. 333-26575, 333-80185 and 333-66729.
ARTHUR ANDERSEN LLP
Los Angeles, California
March 21, 2001
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-2000
[PERIOD-START] JAN-01-2000
[PERIOD-END] DEC-31-2000
[CASH] 9,034
[SECURITIES] 112,297
[RECEIVABLES] 3,569
[ALLOWANCES] (113)
[INVENTORY] 63,693
[CURRENT-ASSETS] 188,389
[PP&E] 96,038
[DEPRECIATION] (28,636)
[TOTAL-ASSETS] 277,285
[CURRENT-LIABILITIES] 21,610
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 138,487
[OTHER-SE] 115,046 <FN 1>
[TOTAL-LIABILITY-AND-EQUITY] 277,285
[SALES] 451,947
<TOTAL-REVENUE> 451,947
[CGS] 275,395
[TOTAL-COSTS] 116,647
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] (712)
[INCOME-PRETAX] 63,522
[INCOME-TAX] 24,664
[INCOME-CONTINUING] 38,858
[DISCONTINUED] (1,050)
[EXTRAORDINARY] -
[CHANGES] 0
[NET-INCOME] 37,808
[EPS-BASIC] $0.75
[EPS-DILUTED] $0.73
[FN]
<FN1> Retained Earnings