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, 2002
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.)
of Incorporation or Organization)
4000 UNION PACIFIC AVENUE, 90023
CITY OF COMMERCE, CALIFORNIA (zip code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (323) 980-8145
NONE
Former name, address and fiscal year, if change since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the last 90 days. |X|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Common Stock, No Par Value, 69,785,148 Shares as of May 1, 2002
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,
2002 2001
------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash.................................................................... $ 8,469 $ 232
Short-term investments.................................................. 120,961 147,566
Accounts receivable, net of allowance for doubtful accounts of
$160 and $165 as of March 31, 2002 and December 31, 2001,
respectively......................................................... 4,607 3,523
Income tax receivable.................................................... - 1,384
Inventories............................................................. 67,237 66,528
Other................................................................... 3,224 3,886
---------- ----------
Total current assets................................................. 204,498 223,119
PROPERTY AND EQUIPMENT, at cost:
Land.................................................................... 22,502 20,715
Building and improvement................................................ 24,633 24,007
Leasehold improvements.................................................. 56,113 50,602
Fixtures and equipment.................................................. 33,683 28,421
Transportation equipment................................................ 2,921 2,836
Construction in progress................................................ 13,890 17,856
---------- ----------
153,742 144,437
Less-Accumulated depreciation and amortization.......................... (44,721) (40,798)
---------- ----------
109,021 103,639
OTHER ASSETS:
Deferred income taxes................................................... 15,688 15,688
Long term investments in marketable securities.......................... 34,357 533
Deposits................................................................ 296 296
Long term investments in partnerships................................... 4,698 4,702
Other................................................................... 5,801 4,181
---------- ----------
60,840 25,400
---------- ----------
$ 374,359 $ 352,158
========== ==========
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,
2002 2001
---------- -----------
(Unaudited)
CURRENT LIABILITIES:
Current portion of capital lease obligation............................... $ 41 $ 40
Accounts payable.......................................................... 14,224 15,244
Accrued expenses:
Payroll and payroll-related............................................ 4,176 2,771
Sales tax.............................................................. 2,652 3,011
Other.................................................................. 1,544 562
Workers compensation..................................................... 6,006 5,534
Due to shareholders...................................................... 920 1,655
Income taxes payable..................................................... 6,118 -
---------- ---------
Total current liabilities 35,681 28,817
---------- ---------
LONG-TERM LIABILITIES:
Deferred Compensation..................................................... 950 -
Deferred rent............................................................ 2,090 2,061
Capitalized lease obligation............................................. 1,627 1,637
---------- ---------
Total Long-term liabilities............................................. 4,667 3,698
---------- ---------
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 69,607,878 at March 31, 2001
and 69,506,103 at December 31, 2001................................. 158,052 156,154
Retained earnings........................................................ 175,959 163,489
---------- ---------
334,011 319,643
---------- ---------
$374,359 $352,158
========== =========
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, 2002 AND MARCH 31, 2001
(Amounts In Thousands, Except Per Share Data)
(Unaudited)
MARCH 31,
2002 2001
----------- -----------
NET SALES:
99 Cents Only Stores.......................................................... $149,647 $110,212
Bargain Wholesale (Includes sales to an affiliate of $1,803 in 2001).......... 13,456 14,758
----------- -----------
163,103 124,970
COST OF SALES................................................................... 98,861 76,899
----------- -----------
Gross profit................................................................. 64,242 48,071
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Operating expenses........................................................... 40,982 30,839
Depreciation and amortization................................................ 3,940 2,627
----------- -----------
44,922 33,466
Operating income............................................................. 19,320 14,605
----------- -----------
OTHER (INCOME) EXPENSE:
Interest income.............................................................. (757) (1,335)
Interest expense............................................................. 32 -
Other........................................................................ (360) (360)
----------- -----------
(1,085) (1,695)
Income before provision for income taxes..................................... 20,405 16,300
PROVISION FOR INCOME TAXES...................................................... 7,935 6,336
----------- -----------
NET INCOME...................................................................... $ 12,470 $ 9,964
----------- -----------
EARNINGS PER COMMON SHARE:
Basic........................................................................ $0.18 $0.14
Diluted...................................................................... $0.18 $0.14
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic........................................................................ 69,558 68,403
Diluted...................................................................... 70,925 69,183
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,
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................... $ 12,470 $ 9,964
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.................................. 3,940 2,627
Tax Benefit from exercise of non-qualified
employee stock options.......................................... 406 -
Other.......................................................... - (191)
Changes in assets and liabilities associated with
operating activities:
Accounts receivable............................................ (1,084) (17)
Inventories.................................................... (709) 866
Other assets................................................... (954) 304
Accounts payable............................................... (1,020) (3,873)
Accrued expenses............................................... 2,978 (1,616)
Worker's compensation.......................................... 472 198
Income taxes................................................... 7,502 7,553
Deferred rent.................................................. 29 30
Due to shareholders............................................ (735) -
---------- ----------
Net cash provided by operating activities............................ 23,295 15,845
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................... (9,322) (12,169)
Purchases of short-term and long-term investments................. (7,219) (561)
Net asset of discontinued operations.............................. - -
---------- ----------
Net cash used in investing activities.......................... (16,541) (12,730)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligation.............................. (9) -
Proceeds from exercise of stock options........................... 1,492 229
---------- ----------
Net cash provided by financing activities.................... 1,483 229
---------- ----------
NET INCREASE IN CASH................................................. 8,237 3,344
CASH, beginning of period............................................ 232 9,034
---------- ----------
CASH, end of period.................................................. $ 8,469 $ 12,378
========== ==========
NON CASH INVESTING AND FINANCING ACTIVITIES
Asset acquired under capital lease................................. $ - $ 1,703
Cash paid for interest............................................. 32 -
Cash paid for income taxes......................................... - -
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, 2001 audited financial statements and notes thereto
included in the Company's Form 10-K filed March 25, 2002. 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 California except
for seven 99 Cents Only Stores located in Las Vegas, Nevada and seven in
Phoenix, Arizona. 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, 2002 and 2001 (amounts in
thousands):
3 MONTHS ENDED
MARCH 31,
----------------------
2002 2001
--------- ----------
Weighted average number of common shares
outstanding-Basic............................... 69,558 68,403
Dilutive effect of outstanding stock options...... 1,367 780
Weighted average number of common shares
outstanding-Diluted............................. 70,925 69,183
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, 2002 and December 31,
2001, the fair value of investments approximated the carrying values and were
invested as follows (amounts in thousands):
(UNAUDITED)
MATURITY MATURITY
MARCH 31, WITHIN 1 YEAR DEC. 31, WITHIN 1 YEAR
2001 1 YEAR OR MORE 2001 1 YEAR OR MORE
------------ ----------- ----------- ---------- ---------- ---------
Municipal Bonds....... $144,002 $109,645 $34,357 $113,075 $112,542 $533
Corporate Securities.. 1,007 1,007 0 981 981 -
Commercial Paper...... 10,309 10,309 0 34,043 34,043 -
$155,318 $120,961 $34,357 $148,099 $147,566 $533
4. NEW AUTHORITATIVE PRONOUNCEMENTS
In June 2001, the FASB approve two final statements: SFAS No. 141,
"Business Combinations," which provides guidance on the accounting for business
combinations and was effective July 1, 2001 and SFAS 142, "Goodwill and Other
Intangible Assets," which defines when and how goodwill and other intangible
assets are amortized and was effective as of January 1, 2002 and did not have an
impact on the Company's financial position or results of operations.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations" (SFAS 143). This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement cost. SFAS 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002.
Management does not expect that the adoption of SFAS 143 will have an impact on
the Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 was effective
for the financial statements issued for fiscal years beginning after December
15, 2001 and interim periods with those fiscal years. The adoption of SFAS 144
did not have an impact 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. Mr. Gold is also the
Chief Executive Officer and a director. Subsequent to December 31, 2001,
Universal ceased operations and closed its business. It is expected that
Universal will terminate its service agreement and lease arrangement with 99
Cents Only Stores some time during 2002. From January 1, 2002 to March 31, 2002,
the Company recorded $0.4 million and $0.4 million under a Services Agreement
and Lease Agreement, respectively, related to this transaction. 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.
Page 7
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, 2001. The Company evaluates segment
performance based on the net sales and gross profit of each segment. Management
does not track segment data or evaluate segment performance on additional
financial information. As such, there are no separately identifiable segment
assets nor is there any separately identifiable statements of income data (below
gross profit) to be disclosed.
The Company accounts for inter-segment transfer at cost through its
inventory accounts.
At March 31, 2002, 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
---------- ---------- -----------
2002
Net sales............. $149,647 $13,456 $163,103
Gross margin.......... 61,648 2,594 64,242
2001
Net sales............. $110,212 $14,758 $124,970
Gross margin.......... 45,247 2,824 48,071
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 March 31, 2002, operated a chain of 132
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 eighteen, twenty and twenty-six
stores in 1999, 2000 and 2001, respectively (fourteen, twenty and twenty five,
respectively, net of relocated stores). The Company opened nine stores through
March 31, 2002 (three stores in Southern California, three in Central
California, one in Las Vegas, Nevada and two in Phoenix, Arizona). The Company
plans to open an additional 22 net new stores during the remainder of the year,
including stores in Las Vegas, Nevada and Phoenix, Arizona. The Company has
secured sites for seven additional store locations. Bargain Wholesale sales over
the three years ended December 31, 2001 were primarily focused on large domestic
and international accounts and local and regional independent retailers. 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.
Page 8
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.
The Company currently targets larger locations for new store development which
are between 15,000 and 20,000 gross square feet. Although it is the Company's
experience that the 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect reported earnings. The estimates and assumptions are
evaluated on an on-going basis and are based on historical experience and on
other factors that management believes are reasonable. Estimates and assumptions
include, but are not limited to, the areas of customer receivables, inventories,
income taxes, self-insurance reserves, and commitments and contingencies.
The Company believes that the following represent the areas where more critical
estimates and assumptions are used in the preparation of the financial
statements:
INVESTMENTS: The Company records its investments, which are comprised primarily
of investment grade federal and municipal bonds and commercial paper, at fair
value. 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.
LONG-LIVED ASSET IMPAIRMENTS: The Company records impairments when the carrying
amounts of long-lived assets are determined not to be recoverable. Impairment is
assessed and measured by an estimate of future cash flows expected to result
form the use of the asset and its eventual disposition. Changes in market
conditions can impact estimated future cash flows from use of these assets and
additional impairments may be required should such changes occur.
SELF-INSURANCE RESERVES: The Company is self-insured in relation to worker's
compensation claims. The Company carries excess worker's compensation insurance,
which covers any individual claims up to the policy deductible amount. The
Company provides for losses of estimated known and incurred but not reported
insurance claims. These estimates are based on reported claims and actuarial
valuations. Should a greater amount of claims occur compared to what was
estimated, reserves recorded may not be sufficient and additional expense could
be incurred.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This report Form 10-Q 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 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 shareholders 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
Page 9
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 Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2001 and in this Form
10-Q.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
NET SALES: Net sales increased $38.1 million, or 30.5%, to $163.1 million in the
2002 period from $125.0 million in the 2001 period. Retail sales increased $39.4
million to $149.6 million in the 2002 period from $110.2 million in the 2000
period. The retail net sales increase was primarily attributable to the net
effect of nine new stores opened in the first three months of 2002, the full
quarter effect of 25 net new stores opened in 2001 and the 8.0% increase in same
store sales. Bargain Wholesale net sales were $13.5 million in the 2002 period
and were $14.8 million in the three months ended March 31, 2001. The three
months period ended in 2001 included $1.8 million in net sales to Universal
International, Inc. as compared to none in the same period of 2002.
GROSS PROFIT: Gross profit increased approximately $16.1 million, or 33.5%, to
$64.2 million in the 2002 period from $48.1 million in the 2001 period. The
increase in gross profit was due to higher net retail sales. Overall gross
profit margin was 39.4% in 2002 versus 38.5% in 2001. Gross margin was higher
primarily as a result of the increase in the retail sales as a percentage of the
total sales.
SELLING, GENERAL AND ADMINISTRATIVE: SG&A increased by $11.4 million, or 34.0%,
to $44.9 million in the 2002 period from $33.5 million in the 2001 period. As a
percentage of net sales, total SG&A increased to 27.5% from 26.8% in 2001. This
increase is primarily related to the California minimum wage increase in January
2002 and utility cost increases.
OPERATING INCOME: As a result of the items discussed above, operating income was
$19.3 million in 2002, an increase of $4.7 million, or 32.2%. Operating margin
was 11.9% in 2002 versus 11.7% in 2001.
OTHER INCOME (EXPENSE): Other income (expense) includes the interest income on
the Company's marketable securities and interest expense on the Company's
capitalized leases. Interest income was $0.8 million in 2002 and $1.3 million in
2001. This difference in interest income results from lower interest rates in
2002 than were in effect in 2001. The Company had no bank debt during the three
months ended March 31, 2002 or 2001. At March 31, 2002, the Company held $121.0
million in short-term investments and $34.4 million in long-term investments.
The Company's short-term and long-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 2002 and 2001 is $0.4 million and $0.4 million respectively, of
income under a lease agreement with Universal International, Inc., for a
distribution facility.
PROVISION FOR INCOME TAXES: The provision for income taxes was $7.9 million in
the 2002 period compared to $6.3 million in 2001. The effective rate of the
provision for income taxes was approximately 38.9% in 2002 and 2001.
NET INCOME: As a result of the items discussed above, net income increased $2.5
million to $12.5 million in 2002 from $10.0 million in the 2001 period. Net
income as a percentage of sales was 7.7% in 2002 and 8.0% in 2001.
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 requirements result primarily from purchases
of inventory, expenditures related to store openings and working capital
requirements for new and
Page 10
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.
Net cash provided by operations during the three months 2002 and 2001 was $23.3
and $15.8 million, consisting primarily of $12.5 and $10.0 million of net income
adjusted for non-cash items. In 2002, the Company provided $6.3 million in
working capital and other activities and in 2001, the Company provided $3.4
million in working capital and other activities. Net cash provided by working
capital and other activities primarily reflects the increases in taxes payable
and accrued expenses in the amount of $10.8 million and $6.1 million,
respectively.
Net cash used in investing activities during 2002 and 2001 was $16.5 and $12.7
million. Net cash used in investing activities reflects $9.3 million used for
capital expenditures including $7.7 million used to open new stores in 2002, as
compared to $12.2 million for capital expenditures, including $4.8 million used
to open new stores in 2001. The increase in net cash used in investing
activities primarily is due to the purchase of marketable securities, which
increased to $7.2 million in 2002 from $0.5 million in 2001.
Net cash provided by financing activities during 2002 and 2001 was $1.5 and $0.2
million, which represents the proceeds from the exercise of non-qualified stock
options. 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 2001, 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 $35.0 million in 2002 including acquired
properties. The Company's total planned expenditures in 2002 for additions to
fixtures and leasehold improvements of existing stores as well as for
distribution, systems, expansion and replacement will be approximately $10.0
million. The Company believes that its total capital expenditure requirements
(including new store openings) will approximate $45.0 million in 2002. The
Company intends to fund its liquidity requirements in 2002 out of net cash
provided by operations, short-term investments and cash on hand.
RISK FACTORS
TERRORISM AND THE UNCERTAINTY OF WAR MAY HAVE ADVERSE EFFECT ON OUR OPERATING
RESULTS
Terrorism attacks, such as the attacks that occurred in New York and Washington
D.C. on September 11, 2001, the response by the United States initiated on
October 7, 2001 and the acts of violence or war may affect the market on which
our common stock will trade, the markets in which we operate and our operations
profitability. Further terrorist attack on the United States or the United
States business may occur. The potential near-term and long-term effects these
markets may have for our customers, the market for our common stock, the market
for our products and the United States economy are uncertain. The consequence of
any terrorist attack, or any armed conflicts which may result, are
unpredictable, and we may not be able to foresee events that could have an
adverse effect on our markets or our business.
INFLATION MAY AFFECT OUR ABILITY TO SELL MERCHANDISE AT THE 99 CENTS PRICE POINT
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
Page 11
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 1999, 2000
and 2001, we opened eighteen, twenty and twenty six 99 Cents Only Stores,
respectively (fourteen stores in 1999 and twenty five 2001, respectively, net of
relocated stores). As of April 28, 2002, we opened twelve stores and expect to
open at least 19 additional stores in 2002. 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 CONCENTRATED IN SOUTHERN CALIFORNIA
All but 14 of our 99 Cents Only Stores are currently located in Southern and
Central California. The Company currently has seven stores in Las Vegas, Nevada
and seven stores 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
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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, 1999,
2000 and 2001, we recorded net inventory of $53.9 million, $63.7 million and
$66.5 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 profit, 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.
Page 13
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 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 $1.9 million,
$1.9 million and $1.9 million in 1999, 2000 and 2001, 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
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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 2000 and 2001, we generated approximately 29.6% and 29.9%, respectively,
of our net sales and approximately 32.7% and 35.3%, respectively, of our
operating income during the fourth quarter. If for any reason the Company's net
sales were to fall below norms during the fourth quarter it could have an
adverse impact on our profitability and impair our results of operations for the
entire year. Adverse weather conditions or other disruptions during the peak
holiday season could also affect our net sales and profitability for the 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 lease all but 17
of our stores at December 31, 2001. 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,
Page 15
our Chairman and Chief Executive Officer, and members of his immediate family
and certain of their affiliates beneficially own 22,736,245 shares of our voting
stock. As a result, they have the ability to influence all matters requiring the
vote of our shareholders, including the election of our directors and most of
our corporate actions. They can also control our policies and potentially
prevent a change in our control. This could adversely affect the voting and
other rights of our other shareholders and could depress the market price of our
common stock.
OUR STOCK PRICE COULD FLUCTUATE WIDELY
The market price of our common stock has risen substantially since our initial
public offering on May 23, 1996. Trading prices for our common stock could
fluctuate significantly due to many factors, including:
- - the depth of the market for our common stock;
- - changes in expectations of our future financial performance, including
financial estimates by securities analysts and investors;
- - variations in our operating results;
- - conditions or trends in our industry or in the industries of any of our
significant clients;
- - additions or departures of key personnel; and
- - future sales of our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk for its investments in
marketable securities. At March 31, 2002, the Company had $155.3 million in
marketable securities maturing at various dates through February 2004. The
Company's investments are comprised primarily of investment grade federal and
municipal bonds and commercial paper. The Company generally holds investments
until maturity, and therefore should not bear any interest risk due to early
disposition. We do not enter into any derivative or interest rate hedging
transactions. Any premium or discount recognized upon the purchase of an
investment. At March 31, 2002, the fair value of investments approximated the
carrying value.
Page 16
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 April 18, 2002;
Item 5 was reported.
(ii) Current report on Form 8-K filed on March 25, 2002;
Item 5 was 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 12, 2002 /s/ Andrew A. Farina
----------------------------
Andrew A. Farina
Chief Financial Officer
(Duly Authorized Officer)
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