UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
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
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
Former name, address and fiscal year, if change since last report:
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 Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the last 90 days. |X|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Common Stock, No Par Value, 51,492,148 Shares as of May 10, 2001
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
99 CENTS ONLY STORES
BALANCE SHEETS
(Amounts In Thousands, Except Share Data)
ASSETS
MARCH 31, DECEMBER 31,
2001 2000
------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash................................................................. $12,378 $9,034
Short-term investments............................................... 110,968 109,430
Accounts receivable, net of allowance for doubtful accounts
of $203 and $113 as of March 31, 2001 and December 31, 2000,
respectively...................................................... 3,586 3,569
Inventories.......................................................... 62,827 63,693
Other................................................................ 2,824 2,663
------------ ----------
Total current assets.............................................. 192,583 188,389
PROPERTY AND EQUIPMENT, at cost:
Land................................................................. 18,624 17,781
Building and improvement............................................. 17,919 17,357
Leasehold improvements............................................... 35,565 34,026
Fixtures and equipment............................................... 21,865 19,533
Transportation equipment............................................. 2,638 2,250
Construction in progress............................................. 11,597 5,091
------------ ----------
108,208 96,038
Less-Accumulated depreciation and amortization....................... (31,072) (28,636)
------------ ----------
77,136 67,402
OTHER ASSETS:
Deferred income taxes................................................ 12,841 12,841
Long-term investments in marketable securities....................... 1,890 2,867
Deposits............................................................. 323 308
Other................................................................ 4,997 5,478
------------ ----------
20,051 21,494
------------ ----------
$289,770 $277,285
============ ==========
The accompanying notes are an integral part of these
consolidated balance sheets.
Page 2
99 CENTS ONLY STORES
BALANCE SHEETS
(Amounts In Thousands, Except Share Data)
LIABILITIES AND SHAREHOLDERS' EQUITY
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(Unaudited)
CURRENT LIABILITIES:
Accounts payable............................................... $8,749 $12,622
Accrued expenses:
Payroll and payroll-related................................. 1,646 2,530
Sales tax................................................... 2,014 2,802
Other....................................................... 395 340
Workers compensation.......................................... 2,962 2,764
Income taxes payable.......................................... 8,105 552
---------- ----------
Total current liabilities 23,871 21,610
---------- ----------
LONG-TERM LIABILITIES:
Deferred rent................................................. 2,172 2,142
---------- ----------
Total Long-term liabilities 2,172 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-100,000,000 shares
Issued and outstanding 51,324,224 at March 31, 2001
and 51,303,075 at December 31, 2000...................... 138,716 138,487
Retained earnings............................................. 125,011 115,046
---------- ----------
263,727 253,533
---------- ----------
$289,770 $277,285
========== ==========
The accompanying notes are an integral part of these
consolidated balance sheets.
Page 3
99 CENTS ONLY STORES
STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2001 AND
MARCH 31, 2000
(Amounts In Thousands, Except Per Share Data)
(Unaudited)
MARCH 31,
2001 2000
---------- ----------
NET SALES:
99 Cents Only Stores....................................................... $110,212 $87,563
Bargain Wholesale (Includes sales to an affiliate of $1,803 in 2001)....... 14,758 13,239
----------- ----------
124,970 100,802
COST OF SALES................................................................ 76,899 61,300
----------- ----------
Gross profit.............................................................. 48,071 39,502
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Operating expenses........................................................ 30,839 24,875
Depreciation and amortization............................................. 2,627 1,905
----------- ----------
33,466 26,780
Operating income.......................................................... 14,605 12,722
----------- ----------
OTHER (INCOME) EXPENSE:
Interest income........................................................... 1,335 718
Interest expense.......................................................... - (185)
Other..................................................................... 360 -
----------- ----------
1,695 533
Income before provision for income taxes.................................. 16,300 13,255
PROVISION FOR INCOME TAXES................................................... 6,336 5,244
----------- ---------
NET INCOME................................................................... $9,964 $8,011
----------- ----------
EARNINGS PER COMMON SHARE:
Basic..................................................................... $0.19 $0.16
Diluted................................................................... $0.19 $0.16
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic..................................................................... 51,315 50,104
Diluted................................................................... 51,900 51,013
The accompanying notes are an integral part of these
consolidated financial statements.
Page 4
99 CENTS ONLY STORES
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(Amounts in Thousands)
(Unaudited)
MARCH 31,
2001 2000
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $9,964 $8,011
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization......................... 2,627 1,905
Benefit for deferred income taxes..................... - 4,674
Tax Benefit from exercise of non-qualified
employee stock options................................. - -
Other................................................. (191) -
Changes in assets and liabilities associated with
operating activities:
Accounts receivable................................... (17) (247)
Inventories........................................... 866 (1,719)
Other assets.......................................... 304 (137)
Accounts payable...................................... (3,873) (1,151)
Accrued expenses...................................... (1,616) (1,948)
Worker's compensation................................. 198 106
Income taxes.......................................... 7,553 124
Deferred rent......................................... 30 50
Accrued Interest...................................... - 172
----------- ----------
Net cash provided by operating activities................... 15,845 9,840
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment...................... (12,169) (15,777)
Purchases and redemption of short-term investments....... (561) 6,372
Net asset of discontinued operations..................... - (9,157)
----------- ----------
Net cash used in investing activities............... (12,730) (18,562)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligation..................... - (197)
Proceeds from exercise of stock options.................. 229 1,306
----------- ----------
Net cash provided by financing activities........... 229 1,109
----------- ----------
NET DECREASE IN CASH........................................ 3,344 (7,613)
CASH, beginning of period................................... 9,034 7,984
----------- ----------
CASH, end of period......................................... $12,378 $371
=========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
Page 5
99 CENTS ONLY STORES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States. However, certain information and footnote disclosures normally
included in financial statements prepared in conformity with accounting
principles generally accepted in the United States have been omitted or
condensed pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). These statements should be read in conjunction with the
Company's December 31, 2000 audited financial statements and notes thereto
included in the Company's Form 10-K filed March 22, 2001. In the opinion of
management, these interim consolidated financial statements reflect all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of the consolidated financial position and results of operations
for each of the periods presented. The results of operations and cash flows for
such periods are not necessarily indicative of results to be expected for the
full year.
CONCENTRATION OF OPERATIONS
The Company's 99 Cents Only Stores are primarily located in Southern
California and Central California except for four 99 Cents Only Stores located
in Las Vegas, Nevada and one in Phoenix, Arizona, opened on April 19, 2001. The
Company's current retail expansion plans for the 99 Cents Only Stores include
planned new stores in these geographic regions. Consequently, the Company's
results of operations and financial condition are substantially dependent upon
general economic trends and various environmental factors in those regions.
2. EARNINGS PER COMMON SHARE
Earnings per share calculations are in accordance with SFAS No. 128,
"Earnings per Share" (SFAS 128). Accordingly "basic" earnings per share is
computed by dividing net income by the weighted average number of shares
outstanding for the period. "Diluted" earnings per share is computed by dividing
net income by the total of the weighted average number of shares outstanding
plus the dilutive effect of outstanding stock options (applying the treasury
stock method).
The table below is a reconciliation of the basic weighted average
number of shares outstanding and the diluted weighted average number of shares
outstanding for the three months ended March 31, 2001 and 2000 (amounts in
thousands):
3 MONTHS ENDED
MARCH 31,
2001 2000
------ ------
Weighted average number of common shares
outstanding-Basic............................... 51,315 50,104
Dilutive effect of outstanding stock options...... 585 909
------ ------
Weighted average number of common shares
outstanding-Diluted............................. 51,900 51,013
====== ======
Page 6
3. SHORT-TERM INVESTMENTS
Investments in debt and equity securities are recorded as required by
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The Company's investments are comprised primarily of investment
grade federal and municipal bonds and commercial paper, primarily with
short-term maturities. The Company generally holds investments until maturity
and has not experienced any significant gain or loss from the sales of its
investments. Any premium or discount recognized in connection with the purchase
of an investment is amortized over the term of the investment. As of March 31,
2001 and December 31, 2000, the fair value of investments approximated the
carrying values and were invested as follows (amounts in thousands):
(UNAUDITED)
MATURITY MATURITY
MARCH 31, WITHIN 1 1 YEAR OR DEC. 31, WITHIN 1 1 YEAR OR
2001 YEAR MORE 2000 YEAR MORE
---------- ---------- ---------- --------- --------- ----------
Municipal Bonds...... $71,496 $69,606 $1,890 $65,621 $62,754 $2,867
Corporate Securities. 0 0 0 2,000 2,000 -
Commercial Paper..... 41,362 41,362 0 44,676 44,676 -
$112,858 $110,968 $1,890 $112,297 $109,430 $2,867
4. NEW AUTHORITATIVE PRONOUNCEMENTS
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 is effective in 2001
and management does not expect adoption of this standard to have a material
impact on the Company's financial reporting or results of operations.
In 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.
5. RELATED-PARTY TRANSACTIONS
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 the Chief Executive Officer and a director. From January
1, 2001 to March 31, 2001, the Company recorded $0.8 million and $0.4 million
under a Services Agreement and Lease Agreement, respectively, related to this
transaction.
6. OPERATING SEGMENTS
The Company has two business segments, retail operations and wholesale
distribution. The retail segment includes 99 Cents Only Stores retail stores.
The majority of the product offerings include recognized brand-name consumable
merchandise, regularly available for reorder. Bargain Wholesale sells the same
merchandise at prices generally below normal wholesale levels to local, regional
and national distributors and exporters.
The accounting policies of the segments are described in the summary of
significant accounting policies noted in the Company's Annual Report on Form
10-K for the year ended December 31, 2000. The Company evaluates segment
performance based on the net sales and gross profit of each segment. Management
does not track segment data or evaluate segment
Page 7
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.
At March 31, 2001, the Company had no customers representing more than
4.5% of Bargain Wholesale's net sales. Substantially all of the Company's net
sales were to customers located in the United States.
Reportable segment information for the three months ended March 31,
2001 follows (amounts in thousands):
THREE MONTHS ENDED MARCH 31,
RETAIL WHOLESALE TOTAL
-------- --------- ---------
2001
Net sales............. $110,212 $14,758 $124,970
Gross margin.......... 45,247 2,824 48,071
2000
Net sales............. $87,563 13,239 $100,802
Gross margin.......... 36,324 3,178 39,502
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company has been engaged since 1976 in the purchase and sale of
name-brand, close-out and regularly available general merchandise. Since that
time, the Company has sold its merchandise on a wholesale basis through its
Bargain Wholesale division. On August 13, 1982, the Company opened its first 99
Cents Only Stores retail location and as of March 31, 2001, the Company operated
a chain of 104 deep-discount 99 Cents Only Stores. The Company's growth during
the last four years has come primarily from new store openings. The Company
opened thirteen, eighteen and twenty stores in 1998, 1999 and 2000, respectively
(eleven, fourteen and twenty respectively, net of relocated stores). The Company
opened six new 99 Cents Only Stores, including one relocation, through March 31,
2001, three in Southern California, two in Central California and one in Las
Vegas, Nevada. The Company plans to open at least 19 additional 99 Cents Only
Stores during the remainder of the year.
Bargain Wholesale's growth over the three years ended December 31, 2000
and the first three months of 2001 was primarily attributable to an increased
focus on large domestic and international accounts and expansion into new
geographic markets. The Company generally realizes a lower gross profit margin
on Bargain Wholesale's net sales compared to 99 Cents Only Stores retail net
sales. However, Bargain Wholesale complements the Company's retail operations by
allowing the Company to purchase in larger volumes at more favorable pricing and
to generate additional net sales with relatively small incremental increases in
operating expenses.
As part of its strategy to expand retail operations, the Company has at
times opened larger new stores in close proximity to existing stores where the
Company determined that the trade area could support a larger facility. In some
of these situations, the Company retained its existing store so long as it
continued to contribute store-level operating
Page 8
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. The Company has made in this Form 10-Q forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 concerning the Company's
operations, expansion plans, economic performance, financial condition, store
openings, purchasing abilities, sales per square foot and comparable store net
sales trends and capital requirements. Such forward-looking statements may be
identified by the use of words such as "believe", "anticipate," "intend" and
"expect" and variations thereof. Such forward-looking statements are subject to
various risks and uncertainties, certain of which are beyond the Company's
control. Actual results could differ materially from those currently anticipated
due to a number of factors. Some of those factors include: (i) the Company's
ability to open new stores on a timely basis and operate them profitably, (ii)
the orderly operation of the Company's receiving and distribution process, (iii)
inflation, consumer confidence and other general economic factors, (iv) the
availability of adequate inventory and capital resources, (v) the risk of a
disruption in sales volume in the fourth quarter and other seasonal factors,
(vi) dependence on key personnel and control of the Company by existing
shareholders, (vii) increased competition from new entrants into the
deep-discount retail industry and (viii) the Company's ability to open new
stores and operate them profitably in new regions such as Nevada and Arizona.
The Company does not ordinarily make projections of its future operating results
and undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Readers of this report should carefully read the risk factors included
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2000 and in this Form 10-Q.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
NET SALES: Net sales increased $24.2 million, or 24.0%, to $125.0 million in the
2001 period from $100.8 million in the 2000 period. Retail sales increased $22.7
million to $110.2 million in the 2001 period from $87.6 million in the 2000
period. The retail net sales increase was primarily attributable to the net
effect of six net new stores opened in the first three months of 2001, the full
quarter effect of 20 new stores opened in 2000 and the 2.2% increase in same
store sales. Bargain Wholesale net sales were $14.8 million in the 2001 period,
including $1.8 million in net sales to Universal, as compared to $13.2 million
in the same period of 2000.
GROSS PROFIT: Gross profit increased approximately $8.6 million, or 21.7%, to
$48.1 million in the 2001 period from $39.5 million in the 2000 period. The
increase in gross profit was due to higher net sales. Overall gross profit
margin was 38.5% in 2001 versus 39.2% in 2000. Gross margin was lower primarily
as a result of merchandise cost factors and product category mix factors.
SELLING, GENERAL AND ADMINISTRATIVE: SG&A increased by $6.7 million, or 25.0%,
to $33.5 million in the 2001 period from $26.8 million in the 2000 period. As a
percentage of net sales, total SG&A increased to 26.8% from 26.6% in 2000. This
increase is primarily related to a minimum wage increase in January 2001
partially offset by $0.8 million in management fees earned for administrative
services provided to Universal.
Page 9
OPERATING INCOME: As a result of the items discussed above, operating income was
$14.6 million in 2001, an increase of $1.9 million, or 14.8%. Operating margin
was 11.7% in 2001 versus 12.6% in 2000.
INTEREST INCOME (EXPENSE): Interest Income is directly related to interest
earned on the Company's cash balances and short-term and long-term investments.
During 2001 and 2000, the Company had no bank debt.
OTHER INCOME: Other income represents rental income from a building lease to
Universal.
PROVISION FOR INCOME TAXES: The provision for income taxes was $6.3 million in
the 2001 period compared to $5.2 million in 2000. The effective rate of the
provision for income taxes was approximately 38.9% in 2001 versus 39.6% in 2000.
This variance results from available tax credits and tax-free interest income
earned.
NET INCOME: As a result of the items discussed above, net income increased $2.0
million to $10.0 million in 2001 from $8.0 million in the 2000 period. Net
income as a percentage of sales was 8.0% in 2001 and 2000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations principally from cash provided by
operations, and has not generally relied upon external sources of financing. The
Company's capital requirements result primarily from purchases of inventory,
expenditures related to store openings and the working capital requirements for
new and existing stores. The Company takes advantage of close-out and other
special situation opportunities which frequently results in large volume
purchases, and as a consequence, its cash requirements are not constant or
predictable during the year and can be affected by the timing and size of its
purchases.
The Company maintains cash and short-term investments with highly
qualified financial institutions. At various times such amounts may be in excess
of insured limits.
As of March 31, 2001, the Company owned the land and buildings for 11
of its 99 Cents Only Stores retail store locations, a main warehouse and
distribution center in Los Angeles, California (where corporate headquarters are
located) and a distribution warehouse in Minnesota, which is currently leased to
Universal. The Company may acquire other locations in the future. Available cash
not immediately needed for such purposes has been invested in short-term
investment grade securities.
Net cash provided by operations was $15.8 million for the three months
period ended March 31, 2001. Inventories decreased $0.9 million. Other assets
decreased $0.3 million. The Company's accounts payable and accruals for the
three month period ended March 31, 2001 decreased by $3.9 million and $1.6
million, respectively. In the three month period ended March 31, 2000 cash
provided by operations was $9.8 million, inventories increased $1.7 million,
trade receivables increased $0.2 million and payables and accruals decreased
$3.1 million.
Net cash used in investing activities was $12.7 million in 2001,
consisting of expenditures for property and equipment of $12.2 million and an
increase of $0.6 million in marketable securities. In 2000, net cash used in
investing activities was $18.6 million, including capital expenditures of $15.8
million, an increase of $9.2 million in net assets of a discontinued operation
and a redemption of $6.4 million in the Company's common stock. Cash proceeds
from financing activities were $0.2 million in 2001, which represents proceeds
from the exercise of stock options. In 1999, proceeds from the exercise of stock
options were $1.3 million.
Page 10
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 is effective in 2001
and management does not expect adoption of this standard to have a material
impact on the Company's financial reporting or results of operations.
The Company plans to open new 99 Cents Only Stores at a targeted annual
rate of 25%. The Company's cash needs for new store openings are expected to
total approximately $23 million in 2001. Pre-opening expenses are not
capitalized by the Company. The Company believes that its total capital
expenditure requirements, including new store openings and existing store
refurbishment will increase to approximately $30 million in 2001. Capital
expenditures in 2001 are currently expected to be incurred primarily for new
store openings, improvements to existing stores and information systems. The
Company believes that cash flow from its operations will be sufficient to meet
operating needs, capital spending requirements and its stock repurchase program
for at least the next twelve months.
RISK FACTORS
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
Page 11
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 five of our 99 Cents Only Stores are currently located in
Southern and Central California. The Company currently has four stores in Las
Vegas, Nevada and one store in Phoenix, Arizona. In addition, our year 2001
retail expansion plan includes new stores in these regions. Accordingly, our
results of operations and financial condition largely depend upon trends in
these regions, but particularly in Southern California. For example, Southern
California 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. However, 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,
blackout or other disaster at our warehouses or stores 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 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
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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, including costs of utilities;
- 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.
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WE FACE RISKS ASSOCIATED WITH INTERNATIONAL SALES AND PURCHASES
Although international sales historically have not been important to
our consolidated net sales, they have contributed to growth in Bargain
Wholesale's net sales. In addition, some of the inventory we purchase is
manufactured outside the United States. There are many risks associated with
doing business internationally. Our international transactions may be subject to
risks such as:
- political instability;
- currency fluctuations;
- exchange rate controls;
- changes in import and export regulations; and - changes in tariff and
freight rates.
The United States and other countries have also proposed various forms
of protectionist trade legislation. Any resulting changes in current tariff
structures or other trade policies could lead to fewer purchases of our products
and could adversely affect our international operations.
WE COULD ENCOUNTER RISKS RELATED TO TRANSACTIONS WITH OUR AFFILIATES
We currently lease 12 of our 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.
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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, as of March 31, 2001, David
Gold, our Chairman and Chief Executive Officer, members of his immediate family,
certain of their affiliates, and members of our board of directors beneficially
own 24,624,129 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:
Page 15
- the depth of the market for our common stock;
- changes in expectations of our future financial performance, including
financial estimates by securities analysts and investors;
- variations in our operating results;
- conditions or trends in our industry or in the industries of any of
our significant clients;
- additions or departures of key personnel; and
- future sales of our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk for its investments in
marketable securities. At March 31, 2001, the Company had $112.9 million in
marketable securities maturing at various dates through August 2002. The
Company's investments are comprised primarily of investment grade federal and
municipal bonds and commercial paper. The Company generally holds investments
until maturity. Any premium or discount recognized upon the purchase of an
investment is amortized over the term of the investment.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None
b. Reports on Form 8-K
(i) Current Report on Form 8-K filed on March 14, 2001;
Item 5 was reported.
(ii) Current Report on Form 8-K/A filed on February 6, 2001;
Item 7 was reported.
(iii) Current Report on Form 8-K filed January 12, 2001;
Items 2 and 5 were reported.
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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: May 10, 2001 /s/ Andrew A. Farina
-------------------------
Andrew A. Farina
Chief Financial Officer
(Duly Authorized Officer)
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