UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-11735
99 CENTS ONLY STORES
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2411605
(State or other jurisdiction (I.R.S. Employer Identification No.)
or organization)
4000 UNION PACIFIC AVENUE
CITY OF COMMERCE, CALIFORNIA 90023
(Address of Principal executive offices)
Registrant's telephone number, including area code: (213) 980-8145
NONE
Former name, address and fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the 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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, No Par Value, 19,433,822 Shares as of June 30, 1998
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
99 Cents Only Stores
Balance Sheets
(Amounts In Thousands)
June 30, December 31,
1998 1997
(Unaudited)
---------- ----------
Assets
Current assets:
Cash................................ $1,750 $882
Short-term investments.............. 47,763 26,191
Accounts receivable, net of
allowance for doubtful accounts of
$164 and $178 as of June 30, 1998
and December 31, 1997,
respectively...................... 2,173 1,510
Inventories......................... 46,335 43,114
Other............................... 748 673
-------- --------
Total current assets................ 98,769 72,370
Property and equipment, at cost:
Land................................ 9,080 8,072
Building and improvements........... 11,476 10,804
Leasehold improvements.............. 13,062 10,986
Fixtures and equipment.............. 9,927 8,473
Transportation equipment............ 822 558
Construction in progress............ 601 776
-------- --------
44,968 39,669
Less - accumulated depreciation
and amortization............. (12,255) (10,228)
-------- --------
Total property and equipment, net... 32,713 29,441
Other assets:
Deferred income taxes............... 5,947 5,947
Long term investments in marketable
Securities........................ 8,267 6,393
Investment in Universal............. 2,672 3,708
Deposits............................ 226 234
Other............................... 1,335 1,120
Receivable from affiliated entity... 5,680 230
-------- --------
24,127 17,632
-------- --------
Total assets........................ $155,609 $119,443
======== ========
The accompanying notes are an integral part of these balance sheets.
99 Cents Only Stores
Balance Sheets
(Amounts In Thousands)
June 30, December 31,
1998 1997
(Unaudited)
Liabilities and Shareholders' Equity ---------- ----------
Current liabilities:
Current portion of capital
lease obligation....................... $728 $704
Accounts payable......................... 6,566 5,534
Accrued expenses:
Payroll and payroll related............ 453 1,352
Sales tax.............................. 581 1,467
Liability for claims................... 392 396
Other.................................. 88 824
Workers' compensation.................. 844 1,091
Income taxes payable................... (397) 211
-------- --------
Total current liabilities................ 9,255 11,579
Long-term liabilities:
Deferred rent............................ 1,511 1,476
Accrued interest on capitalized lease
Obligation............................. 2,377 2,075
Capital lease obligation, net of
current portion........................ 7,635 8,005
-------- --------
11,523 11,556
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 - 40,000,000 shares
Issued and outstanding - 19,433,822
Shares at June 30, 1998 and
18,578,759 shares at December 31, 1997. 94,803 66,207
Retained earnings...................... 40,028 30,101
-------- --------
Total shareholders' equity............... 134,831 96,308
-------- --------
Total liabilities and shareholders' equity $155,609 $119,443
======== ========
The accompanying notes are an integral part of these balance sheets.
99 Cents Only Stores
Statements of Income
(Unaudited)
(Amounts In Thousands, except for per share data)
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
-------- -------- -------- --------
Net sales:
99 Cents Only Stores........... $56,695 $42,567 $108,177 $81,735
Bargain Wholesale.............. 15,062 11,247 26,462 22,823
-------- -------- -------- --------
Net sales...................... 71,757 53,814 134,639 104,558
Cost of sales.................. 46,436 34,501 86,273 67,829
-------- -------- -------- --------
Gross profit................... 25,321 19,313 48,366 36,729
Selling, general and
Administrative expenses...... 15,916 12,156 30,341 23,487
-------- -------- -------- --------
Operating income............... 9,405 7,157 18,025 13,242
Interest income, net........... 405 144 619 295
-------- -------- -------- --------
Income before minority
Interest..................... 9,810 7,301 18,644 13,537
Minority interest.. (495) - (1,236) -
-------- -------- -------- --------
Income before provision for
Income taxes................. 9,315 7,301 17,408 13,537
Provision for income taxes..... 3,930 2,932 7,481 5,492
-------- -------- -------- --------
Net income..................... $5,385 $4,369 $9,927 $8,045
======== ======== ======== ========
Earnings per common share:
Basic $0.28 $0.24 $0.53 $0.43
Diluted $0.28 $0.23 $0.52 $0.43
Weighted average number of
common
Shares outstanding:
Basic 18,999 18,526 18,820 18,521
Diluted 19,431 18,926 19,253 18,921
The accompanying notes are an integral part of these statements.
99 Cents Only Stores
Statements of Cash Flows
(Unaudited)
(Amounts In Thousands)
Six Months Ended
June 30,
1998 1997
-------- --------
Cash flows from operating activities:
Net income ........................................ $9,927 $8,045
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 2,091 1,324
Loss from minority interest. ...................... 1,236 -
Changes in assets and liabilities
Associated with operating activities:
Accounts receivable................................ (663) (138)
Inventories........................................ (3,221) (348)
Other current assets............................... (75) (814)
Receivable from Universal.......................... (5,450) -
Other assets....................................... (207) (20)
Accounts payable................................... 1,032 (2,133)
Accrued expenses................................... (2,525) (361)
Workers' compensation.............................. (247) (27)
Income taxes payable............................... (608) (124)
Deferred rent...................................... 35 20
Accrued interest................................... 302 282
-------- --------
Net cash provided by operating activities 1,627 5,706
Cash flows from investing activities:
Investment in marketable securities................ (23,446) (1,622)
Purchase of property and equipment................. (5,299) (3,769)
Investment in Universal ........................... (264) -
-------- --------
Net cash used in investing activities.............. (29,009) (5,391)
Cash flows from financing activities:
Payments of capital lease obligation............... (346) (323)
Net proceeds from sale of stock.................... 27,307 -
Net proceeds from exercise of stock options........ 1,289 151
-------- --------
Net cash provided by (used) in financing activities 28,250 (172)
Net increase in cash............................... 868 143
Cash, beginning of period.......................... 882 3,375
-------- --------
Cash, end of period................................ $1,750 $3,518
======== ========
The accompanying notes are an integral part of these statements.
99 CENTS ONLY STORES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles. However, certain
information and footnote disclosures normally included in financial
statements prepared in conformity with generally accepted accounting
principles have been omitted or condensed pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). These statements
should be read in conjunction with the Company's December 31, 1997 audited
and pro forma financial statements and notes thereto included in the
Company's Form 10-K filed March 26, 1998. In the opinion of management, these
interim financial statements reflect all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the financial
position and results of operations for each of the periods presented. The
results of operations and cash flows for such periods are not necessarily
indicative of results to be expected for the full year.
Concentration of Operations in Southern California
All of the Company's retail stores are located in Southern California.
In addition, the Company's current retail expansion plans anticipate that all
planned 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.
2. Statements of Cash Flow
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
$7,915,000 and $5,480,000 for the six months ended June 30, 1998 and 1997
respectively. Interest payments for the six months ended June 30, 1998 were
$74,000 and $98,000 in 1997.
3. Earnings Per Common Share
Earnings per share calculations are in accordance with SFAS No. 128,
"Earnings per Share" (SFAS 128). Accordingly, "basic earnings per share" is
computed by dividing net income by the weighted average number of shares
outstanding for the year. "Diluted" earnings per share is computed by
dividing net income by the total of the weighted average number of shares
outstanding plus the dilutive effect of outstanding stock options (applying
the treasury stock method). Earnings per share amounts for 1997 have been
restated to reflect the adoption of SFAS No. 128.
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 and six month periods ended June 30, follows (amounts in
thousands):
Three Months Six Months
Ended June, 30 Ended June, 30
(Unaudited)
-----------
1998 1997 1998 1997
----- ----- ----- -----
Weighted average number of common shares
outstanding-Basic....................... 18,999 18,526 18,820 18,521
Dilutive effect of outstanding stock
options................................. 432 400 433 400
------ ------ ------ ------
Weighted average number of common shares
outstanding-Diluted..................... 19,431 18,926 19,253 18,921
====== ====== ====== ======
4. New Authoritative Pronouncements
In fiscal year 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" (SFAS 130) and SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information" (SFAS 131). The adoption of SFAS
130 and SFAS 130 and SFAS 131 did not have a material impact on Company's
financial statement reporting.
5. Investment in Universal International, Inc.
In November 1997, the Company acquired approximately 48% of the
outstanding common stock of Universal International, Inc. ("Universal") for
$4 million in cash and inventory. The investment in Universal is accounted
for using the equity method of accounting. The investment is increased
(reduced) by a credit (charge) to income for 48% of the Universal income
(loss). Summary information relating to the results of operations and the
financial condition of Universal for fiscal 1997 and for the first six months
of 1998 and 1997 are as follows (amounts in thousands):
June 30 June 30 December 31,
1998 1997 1997
----- ----- -----
(Unaudited)
-----------
Sales................. $33,134 $27,219 $68,705
Net loss.............. (2,587) (5,670) (11,887)
Total assets.......... 33,578 33,229 31,388
Shareholders' equity.. 6,014 10,818 8,601
During the period from the purchase of 48% of the Universal common stock
to June 30, 1998, the Company made $5.7 million in advances to Universal.
On August 7, 1998, the Company reported it commenced its previously
announced exchange offer to purchase all of the shares of the outstanding
common stock of Universal. In addition the Company expects its proposed
merger with Odd's-N-End's Inc. ("Odd's-N-End's") will be complete in
September. Approximately 54.8% of Odd's-N-End's is owned by Universal. If the
acquisitions are consummated as proposed, the Company will issue to the
shareholders of Universal a maximum of 374,271 shares of the Company's common
stock and will pay to the holders of Odd's-N-End's common stock approximately
$830,000 in cash. As of June 30, 1998, Universal had a note receivable due
from Odd's-N-End's of approximately $10.7 million. Both transactions are
expected to close by the end of September 1998. Included in 99 Cents Only
Stores' results of operations for the six months ended June 30, 1998 is a
$1.2 million charge representing the Company's 48% share of the Universal
loss for the first six months of 1998.
6. Short-Term Investments
Investments in debt and equity securities are recorded as required by
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The Company's investments are comprised primarily of investment
grade federal and municipal bonds and commercial paper, primarily with short-
term maturities. The Company generally holds investments until maturity and
has not experienced any significant gain or loss from sales of its
investments. Any premium or discount recognized in connection with the
purchase of an investment is amortized over the term of the investment.
Certain long-term investments in marketable securities at December 31, 1997
have been reclassified to conform to the presentation at June 30, 1998. As of
June 30, 1998 and December 31, 1997, the fair value of investments
approximated the carrying values and were invested as follows (amounts in
thousands):
(Unaudited)
----------
Maturity Maturity
-------- --------
June 30, Within 1 to 2 December 31, Within 1 to 2
1998 1 year years 1997 1 year years
--------- ------ ----- --------- ------ -----
Federal Bonds $ 1,500 $ - $ 1,500 $ 1,500 $ - $1,500
Municipal Bonds 18,982 12,215 6,767 18,583 13,690 4,893
Commercial Paper 35,548 35,548 0 12,501 12,501 0
------- ------- ------- ------- ------- -------
$56,030 $47,763 $8,267 $32,584 $26,191 $6,393
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The Company has been engaged since 1976 in the purchase and sale of
name-brand, close-out and regularly available general merchandise. Since that
time, the Company has sold its merchandise on a wholesale basis through its
Bargain Wholesale division. On August 13, 1982, the Company opened its first
99 Cents Only Stores location and as of June 30, 1998, operates a chain of 57
deep-discount 99 Cents Only Stores. The Company's growth during the last
three years has come primarily from new store openings and growth in its
Bargain Wholesale division. The Company opened ten stores in 1997. The
Company opened six stores (including two relocations) in the first six months
of 1998 and plans to open an additional 7 stores during the last six months
of 1998. The Company has secured sites for all 7 of these additional store
locations.
Bargain Wholesale's growth has been primarily attributable to an
increased focus on large domestic and international accounts and expansion
into new geographic markets. The Company generally realizes a lower gross
profit margin on Bargain Wholesale's net sales compared to 99 Cents Only
Stores 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.
Comparable stores net sales increased 1.5% for the year ended December
31, 1997 and 1.5% in the first quarter of 1998. During the second quarter
ended June 30, 1998 comparable store sales were 5.8% compared to 0.6% in the
second quarter of 1997. This improvement primarily resulted from the effect
of the timing of the Easter holiday, which occurred in April in 1998 versus
March in 1997. 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 facility. In some of these situations, the Company
retained its existing store as 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.
For the year ended December 31, 1997, average net sales per estimated
saleable square foot was $354 per square foot. As the Company targets larger
locations for new store development it is expected that the sales per square
foot will be negatively impacted. Existing stores average approximately
15,000 gross square feet. Since January 1, 1995, the Company has opened 26
new stores (including two relocations in 1995, one in 1996 and two in 1998)
that average over 19,000 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 increased its net sales, operating income and net
income in the first half of 1998. For the first six months of 1998 it had net
sales of $134.6 million, operating income of $18.0 million and net income of
$9.9 million, representing a 28.8%, 36.1% and 21.3% increase over 1997,
respectively.
The Company has made in this Form 10-Q forward-looking statements within
the meaning of Section 27A of the Securities Act concerning the Company's
operations, expansion plans, economic performance, financial condition, the
pending acquisitions of Universal and Odd's-N-End's and their effect on the
Company's results of operations and the results of operations of Universal,
store openings, purchasing abilities, sales per square foot and comparable
store net sales trends and capital requirements. Such forward-looking
statements may be identified by the use of words such as "believe",
"anticipate," "intend" and "expect". Such forward-looking statements are
subject to various risks and uncertainties, certain of which are beyond the
Company's control. Actual results could differ materially from those
currently anticipated due to a number of factors, including certain risk
factors. Some of those factors include (i) the Company's ability to open new
stores on a timely basis and operate them profitably, (ii) the Company's
ability to integrate Universal and Odd's-N-End's, achieve anticipated
operating synergies and to operate their stores at multiple price points and
in different geographic locations, (iii) the orderly operation of the
Company's receiving and distribution process, (iv) inflation, consumer
confidence and other general economic factors, (v) the availability of
adequate inventory and capital resources, (vi) the risk of a disruption in
sales volume in the fourth quarter and other seasonal factors
(vii) dependence on key personnel and control for the Company by existing
shareholders and (viii) increased competition from new entrants into the
deep-discount retail industry. The Company does not ordinarily make
projections of its future operating results and undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise.
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
NET SALES: Net sales increased $17.9 million, or 33.3%, to $71.8 million in
the 1998 period from $53.8 million in the 1997 period. 99 Cents Only Stores
net sales increased approximately $14.1 million, or 33.2%, to $56.7 million
in the 1998 period from $42.6 million in the 1997 period, and Bargain
Wholesale net sales increased $3.8 million, to $15.1 million in the 1998
period from $11.2 million in the 1997 period. The increase in 99 Cents Only
Stores net sales was attributable to the net effect of four new stores
opened, the full quarter effect of 10 new stores opened in 1997, and a 5.8%
increase in comparable same store sales in the quarter ended June 30, 1998.
Comparable store sales were impacted by new store openings within a 3 mile
radius of existing stores. Included in the Bargain Wholesale net sales were
$5.0 million of sales, billed at cost, to Universal International, Inc.
Wholesale sales to non affiliates were affected negatively by a reduction in
sales to exporters.
GROSS PROFIT: Gross profit increased approximately $6.0 million, or 31.1%, to
$25.3 million in the 1998 period from $19.3 million in the 1997 period. The
increase in gross profit was due to higher retail net sales. The gross profit
margin was 35.3% in the 1998 compared to 35.9% in the 1997 period. The 0.6%
point decrease in the gross profit margin is due to the $5.0 million in
shipments, at cost, to Universal International, Inc. Excluding the shipments
to Universal, gross profit would have been 37.9%. This improvement then
results from the retail sales being a greater percentage of the total sales
mix in 1998 versus the same period in 1997.
SELLING, GENERAL AND ADMINISTRATIVE: SG&A increased by $3.8 million, or
30.9%, to $15.9 million in the 1998 quarterly period from $12.2 million in
the 1997 period. This was primarily due to increased costs associated with
new store growth. As a percentage of net sales, SG&A decreased slightly to
22.2% from 22.6%. The expense decrease as a percentage of net sales was
primarily due to incremental sales improvement.
OPERATING INCOME: As a result of the items discussed above, operating income
increased $2.2 million, or 31.4%, to $9.4 million in 1998 from $7.2 million
in 1997. Operating margin was 13.1% in 1998 and 13.3% in 1997. The margin was
affected by the variation in the gross margin percentage.
INTEREST INCOME (EXPENSE): Interest income (expense) relates to interest on
the Company's capitalized warehouse lease, net of interest earned on the
Company's cash balances and short-term and long-term investments. The change
in interest expense between 1998 and 1997 was due to interest earned on the
marketable securities. The Company's investments are comprised primarily of
investment grade federal and municipal bonds and commercial paper, primarily
with various maturities. The Company generally holds investments until
maturity and has not experienced any significant gain or loss from sales of
its investments. Any premium or discount recognized in connection with the
purchase of an investment is amortized over the term of the investment.
During 1998 and 1997, the Company had no bank debt.
LOSS FROM MINORITY INTEREST: The Company owns a 48% interest in Universal
International, Inc. Its share of the Universal loss from operations for the
period ended June 30, 1998 was $495,000. No tax benefit is applied to this
loss. Universal has tax loss carry-forwards of approximately $16 million as
of June 30, 1998.
PROVISION FOR INCOME TAXES: The provision for income taxes for the three
months ended June 30, 1998, was $3.9 million in 1998 compared to $2.9 million
in 1997. The effective rates of the provision for income taxes, exclusive of
the Company's loss from minority interest, was approximately 40.1% in 1998
and 40.2% in 1997. The change in the effective rate in 1998 from 1997 results
from the benefit of available tax credits. The Company's loss on investment
in minority interest is recorded net of effective tax.
NET INCOME: As a result of the items discussed above, net income increased
$1.0 million, or 23.3% to $5.4 million in 1998 from $4.4 million in the 1997
period. Net income as a percentage of sales was 7.5% in 1998 and was 8.1% in
1997.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
NET SALES: Net sales increased $30.1 million, or 28.8%, to $134.6 million in
the 1998 period from $104.6 million in the 1997 period. 99 Cents Only Stores
net sales increased approximately $26.4 million, or 32.4%, to $108.2 million
in the 1998 period from $81.7 million in the 1997 period. Bargain Wholesale
net sales increased $3.6 million, to $26.5 million in the 1998 period from
$22.8 million in the 1997 period. The increase in 99 Cents Only Stores net
sales, was attributable to the net effect of four new larger stores opened
and the closure of two smaller stores, the full six month effect of 10 new
stores opened in 1997, and a 3.7% increase in the six month comparable same
store sales in 1998. Comparable store sales were impacted by new store
openings within a 3 mile radius of existing stores. The increase in wholesale
sales for the six months ended June 30, 1998 as compared to the same period
in 1997 results from sales to Universal.
GROSS PROFIT: Gross profit for the six months increased approximately $11.6
million, or 31.7%, to $48.4 million in the 1998 period from $36.7 million in
the 1997 period. The increase in gross profit was due to higher net sales and
an increase in the gross profit margin to 35.9% in the 1998 period from 35.1%
in the 1997 period. The 0.8% point increase in the gross profit margin is due
to a higher proportion of retail net sales, which typically have a higher
gross margin than wholesale sales and merchandise cost factors.
SELLING, GENERAL AND ADMINISTRATIVE: SG&A for the six months increased by
$6.9 million, or 29.2%, to 30.3 million in 1998 period from $23.5 million in
1997 period. This was primarily due to increased costs associated with new
store growth. As a percentage of net sales, SG&A was 22.5% in both 1998 and
1997. The total spending for SG&A was affected by minimum wage increases in
California which increased to $5.75 per hour in March 1998. Legislation has
been introduced in California to further increase the minimum wage from $5.75
to $6.75 per hour effective January 1999.
OPERATING INCOME: As a result of the items discussed above, operating income
increased $4.8 million, or 36.1%, to $18.0 million in 1998 from $13.2 million
in 1997. The operating margin increased to 13.3% in 1998 from 12.7% in 1997.
INTEREST INCOME (EXPENSE): Interest income (expense) relates to interest on
the Company's capitalized warehouse lease, net of interest earned on the
Company's cash balances and short-term and long-term investments. The change
in interest expense between 1998 and 1997 was due to interest earned on the
marketable securities. The Company's investments are comprised primarily of
investment grade federal and municipal bonds and commercial paper, primarily
with various maturities. The Company generally holds investments until
maturity and has not experienced any significant gain or loss from sales of
its investments. Any premium or discount recognized in connection with the
purchase of an investment is amortized over the term of the investment.
During 1998 and 1997, the Company had no bank debt.
LOSS FROM MINORITY INTEREST: The Company's owns a 48% interest in Universal
International, Inc. Its share of the Universal loss from operations for the
six months ended June 30, 1998 was $1.2 million. No tax benefit is applied to
this loss. Universal has tax loss carry-forwards of approximately $16 million
as of June 30, 1998.
PROVISION FOR INCOME TAXES: The provision for income taxes for the six months
ended June 30, 1998, was $7.5 million in 1998 compared to $5.5 million in
1997. The effective rates of the provision for income taxes, exclusive of the
Company's loss from minority interest, was approximately 40.1% in 1998 and
40.6% in 1997. The change in the effective rate in 1998 from 1997 results
from the benefit of available tax credits. The Company's loss on investment
in minority interest is recorded net of effective tax.
NET INCOME: As a result of the items discussed above, net income increased
$1.9 million, or 23.4% to $9.9 million in 1998 from $8.0 million in the 1997
period. Net income as a percentage of sales was 7.4% in 1998 and 7.7% in
1997.
Recent Developments
In November 1997, the Company acquired approximately 48% of the
outstanding Common Stock of Universal. On August 7, 1998, the Company
commenced its previously announced exchange offer to acquire all of the
issued and to-be-issued shares of the Common Stock of Universal. Pursuant to
the exchange offer, the Company will exchange one share of its common stock
for every 16 outstanding shares of Universal plus the associated common share
purchase rights. The offer is scheduled to expire on September 16, 1998. In
addition the Company expects its proposed merger with Odd's-N-End's Inc.
("Odd's-N-End's") will be complete in September, pending final approval by
the Securities and Exchange Commission. Approximately 54.8% of Odd's-N-End's
is owned by Universal. Together, these two companies operate 43 retail stores
in Minnesota and the surrounding upper Midwest region, eight retail stores in
Texas and 22 retail stores in upper New York State. If the acquisitions are
consummated as proposed, the Company will issue to the shareholders of
Universal a maximum of 374,271 shares of the Company's Common Stock and will
pay to the holders of Odd's-N-End's common stock approximately $830,000 in
cash. Universal has a note receivable due from Odd's-N-End's of approximately
$10.7 million as of June 30, 1998.
Currently the Company's ownership interest in Universal is accounted for
using the equity method. The impact of the inclusion of Universal in the
Company's financial statements for the six months ended June 30, 1998 was a
charge of $1.2 million. Upon consummation of the acquisition of Universal,
the Company will consolidate the results of operations of Universal with
those of the Company, and will preliminarily record approximately $8.1
million in goodwill on its balance sheet, which will be amortized over 30
years and will result in increased amortization expense in future periods.
Universal's business is seasonal. Historically, all of its earnings have been
generated in the fourth quarter, and it has incurred losses during the first
three quarters of the calendar year. As a result, shareholders equity is
likely to be lower and the amount of goodwill related to the acquisition of
Universal is likely to be of a greater magnitude at the closing date compared
to the current estimate of $8.1 million. The Company expects to continue to
provide financial support to Universal through the date of closing through
trade credit and other advances. Such amounts will be provided from the
Company's ongoing cash flows from operations and its existing working
capital.
On March 31, 1998, the Company announced that it had filed a
registration statement with the Securities and Exchange Commission covering a
public offering of an aggregate of 3,500,000 shares of Common Stock. Of the
shares offered, 750,000 were newly issued shares sold by the Company. The
balance of the shares were sold by certain shareholders of the Company. The
offering was consummated on April 30, 1998. The net proceeds of the offering
to the Company were $27.3 million. The Company did not receive any of the net
proceeds from the sale of shares by the selling shareholders and the selling
shareholders paid all of the expenses of the offering.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations principally from cash provided by
operations, and has not generally relied upon external sources of financing.
The Company's capital requirements result primarily from purchases of
inventory, expenditures related to store openings and the working capital
requirements for new and existing stores. The Company takes advantage of
close-out and other special situation opportunities which frequently results
in large volume purchases, and as a consequence, its cash requirements are
not constant or predictable during the year and can be affected by the timing
and size of its purchases.
The Company maintains cash and short and long-term investments with highly
qualified financial institutions. The Company's investments are comprised
primarily of investment grade federal and municipal bonds and commercial
paper, primarily with short and long-term maturities. The Company generally
holds investments until maturity and has not experienced any significant gain
or loss from sales of its investments. At various times such amounts may be
in excess of insured limits. As of June 30, 1998 the Company owned the land
and buildings for three of its current retail store locations and one future
store location. The Company may purchase other locations in the future.
Available cash not immediately needed for such purposes has been invested in
short-term investments grade securities.
During the six month period ended June 30, 1998 and 1997, net cash provided
by operations was $0.4 million and $5.7 million respectively. Inventories
increased $3.2 million in 1998 and increased $0.4 million in 1997.
Receivables increased $0.7 million, in 1998 and $0.1 in 1997 respectively.
Also in 1998 the Company's receivable from Universal increased $5.5 million.
Accounts payable increased $1.0 million in 1998 and decreased $2.1 million in
1997. Current income taxes payable decreased $0.6 million in 1998 and $0.1
million in 1997. In April 1998 the Company issued 750,000 shares of its
common stock in a secondary public offering and received net proceeds $27.3
million. Proceeds were reinvested in marketable securities and will be used
to retire Universal debt after the conclusion of the acquisition. Remaining
amounts will be used for on going working capital needs. Net cash used in
investing activities was $27.8 million in 1998, consisting of expenditures
for property and equipment of $5.3 million, $23.4 million in marketable
securities and the decrease in the Universal investment of $1.0 million. In
1997, cash flow from investing activities consisted of $3.8 million used for
capital expenditures and $1.6 million for marketable securities. In 1997, net
cash used in financing activities, included $0.2 million of proceeds from the
exercise of stock options, offset by $0.3 for payments on the capitalized
warehouse lease. The Company has no bank debt.
The Company leases its 880,000 square foot single level warehouse and
distribution facility under a lease accounted for as a capital lease. The
lease requires monthly payments of $70,000 and accrues interest at an annual
rate of 7.0%. At the lease expiration in December 2000, the Company has the
option to purchase the facility for $10.5 million. The Company currently
intends to exercise the option at the end of the lease. If the Company does
not exercise the purchase option, the Company will be subject to a $7.6
million penalty.
The Company plans to open new stores at a targeted annual rate of 20%. The
average investment per new store opened in 1996, including leasehold
improvements, furniture, fixtures and equipment, inventory and pre-opening
expenses, was approximately $650,000. Pre-opening expenses are not
capitalized by the Company. The Company's cash needs for new store openings
are expected to total approximately $8.5 million in each of 1998 and 1999.
The Company's total planned expenditures in each of 1998 and 1999 for
additions to fixtures and leasehold improvements of existing stores are
approximately $600,000. The Company believes that its total capital
expenditure requirements (including new store openings) will increase to
approximately $11.4 million and $11.6 million in 1998 and 1999, respectively.
Capital expenditures in 1998 and 1999 are currently expected to be incurred
primarily for new store openings, improvements to existing stores and system
and general corporate infrastructure. The Company believes that cash flow
from operations and the April 30, 1998 secondary stock offering, will be
sufficient to meet operating needs, capital spending requirements and the
retirement of Universal debt and payment of overdue accounts payable of
Universal for at least the next twelve months.
Year 2000
The Company has completed an assessment of its existing software systems and
after reviewing various factors, one of which being the year 2000 issue, has
determined that certain modifications or upgrades to or replacements of
certain software is required. The Company anticipates that the required
changes to its existing computer systems will be substantially completed no
later than mid-1999. The year 2000 project cost is not anticipated to have a
material effect on the results of operations. The costs of the project and
the date on which the Company believes it will complete the changes to its
computer systems are based on management's best estimates, which were derived
utilizing numerous assumptions of future events. However, there can be no
guarantee that these estimates will be achieved and actual results could
differ materially from those anticipated.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The Company held its 1998 Annual Meeting of Stockholders on
May 12, 1998. There were two matters submitted to the shareholders. The first
matter was the election of eight directors to hold office for a one-year
term. The second matter was an amendment to the 99 Cents Only Stores 1996
Employee Stock Option Plan to increase the number of shares of the Company's
Common Stock reserved for issuance under the Stock Plan from 1,250,000 to
2,500,000 shares. The results of the voting for the directors, were
18,396,291 shares voted "for" each of the directors and 30,050 shares
"withheld" voting. The results of the voting for the increase in the number
of shares reserved for the stock option plan was 13,787,648 "for", 2,637,771
"against" and 11,801 "withheld".
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBIT 27.01 Financial Data Schedule
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
99 CENTS ONLY STORES
Date: August 14, 1998 /s/ Andrew A. Farina
Andrew A. Farina
Chief Financial Officer
EXHIBIT 27.1
99 Cents Only Stores
Financial Data Schedule
<PERIOD TYPE> 3-mos
<FISCAL YEAR END> Dec 31 1998
<PERIOD START> Jan 01 1998
<PERIOD END> June 30 1998
[CASH] 1,750
[SECURITIES] 47,763
[RECEIVABLES] 2,173
[ALLOWANCES] (164)
[INVENTORY] 46,335
<CURRENT ASSETS> 98,769
[PP&E] 44,968
[DEPRECIATION] (12,255)
<TOTAL ASSETS> 155,609
<CURRENT LIABILITIES> 9,255
[BONDS] 0
<PREFERRED MANDATORY> 0
[PREFERRED] 0
[COMMON] 94,803
<OTHER SE> 40,028 <FN 1>
<TOTAL LIABILITY AND EQUITY> 134,831
[SALES] 134,639
<TOTAL REVENUE> 134,639
[CGS] 86,273
<TOTAL COSTS> 30,341
<OTHER EXPENSES>
1,236
<LOSS PROVISION> 0
<INTEREST EXPENSE> 377
<INCOME PRE TAX> 17,408
<INCOME TAX> 7,481
<INCOME CONTINUING> 9,927
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
<NET INCOME> 9,927
<EPS PRIMARY> 0.53
<EPS DILUTED> 0.52
<FN1> Retained Earnings