UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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
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, 70,094,727 Shares as of October 1, 2002
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
99 CENTS ONLY STORES
BALANCE SHEETS
(Amounts In Thousands, Except Share Data)
ASSETS
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(Unaudited) (Audited)
CURRENT ASSETS:
Cash............................................................ $ 3,292 $ 232
Short-term investments.......................................... 112,162 147,566
Accounts receivable, net of allowance for doubtful accounts
of $165 as of September 30, 2002 and December 31, 2001,
respectively.................................................. 3,590 3,523
Income tax receivable............................................ 5,342 1,384
Inventories..................................................... 83,823 66,528
Other........................................................... 3,212 3,886
---------- ----------
Total current assets.......................................... 211,421 223,119
PROPERTY AND EQUIPMENT, at cost:
Land............................................................ 25,641 20,715
Building and improvements....................................... 27,476 24,007
Leasehold improvements.......................................... 64,935 50,602
Fixtures and equipment.......................................... 38,632 28,421
Transportation equipment........................................ 3,045 2,836
Construction in progress........................................ 11,989 17,856
---------- ----------
171,718 144,437
Less-Accumulated depreciation and amortization.................. (53,549) (40,798)
---------- ----------
118,169 103,639
LONG-TERM INVESTMENTS IN MARKETABLE SECURITIES.................. 42,959 533
OTHER........................................................... 27,018 24,867
---------- ----------
$ 399,567 $ 352,158
========== ==========
The accompanying notes are an integral part of these
interim financial statements.
Page 2
99 CENTS ONLY STORES
BALANCE SHEETS
(Amounts In Thousands, Except Share Data)
LIABILITIES AND SHAREHOLDERS' EQUITY
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(Unaudited) (Audited)
CURRENT LIABILITIES:
Current portion of capital lease obligation.................. $ 41 $ 40
Accounts payable............................................. 9,850 15,244
Accrued expenses:
Payroll and payroll-related............................... 3,045 2,771
Sales tax................................................. 2,882 3,011
Other..................................................... 1,935 562
Workers compensation........................................ 6,019 5,534
Due to shareholders......................................... - 1,655
---------- ----------
Total current liabilities 23,772 28,817
---------- ----------
LONG-TERM LIABILITIES:
Deferred compensation........................................ 950 -
Deferred rent............................................... 2,150 2,061
Capitalized lease obligation................................ 1,627 1,637
---------- ----------
Total Long-term liabilities 4,727 3,698
---------- ----------
COMMITMENTS AND CONTINGENCIES: - -
SHAREHOLDERS' EQUITY:
Preferred stock, no par value
Authorized-100,000,000 shares
Issued and outstanding-none................................. - -
Common stock, no par value
Authorized-100,000,000 shares
Issued and outstanding 70,094,727 shares at
September 30, 2002 and 69,506,103 shares
at December 31, 2001................................. 168,334 156,154
Retained earnings........................................... 202,734 163,489
---------- ----------
371,068 319,643
---------- ----------
$ 399,567 $ 352,158
========== ==========
The accompanying notes are an integral part of these
interim financial statements.
Page 3
99 CENTS ONLY STORES
STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(Amounts In Thousands, Except Per Share Data)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
--------- --------- --------- ---------
NET SALES:
99 Cents Only Stores..................................... $160,424 $130,799 $465,507 $363,534
Bargain Wholesale (includes sales to an affiliate of
$1,165 for the three months ended September 30, 2001
and $4,185 for the nine months ended September 30,
2001)................................................. 11,839 13,223 37,722 41,831
--------- --------- --------- ---------
172,263 144,022 503,229 405,365
COST OF SALES.............................................. 103,509 87,751 302,668 247,845
--------- --------- --------- ---------
Gross profit............................................ 68,754 56,271 200,561 157,520
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Operating expenses...................................... 43,577 36,329 126,840 100,985
Depreciation and amortization........................... 4,570 3,179 12,769 8,703
--------- --------- --------- ---------
48,147 39,508 139,609 109,688
--------- --------- --------- ---------
Operating income........................................ 20,607 16,763 60,952 47,832
OTHER INCOME:
Interest income......................................... (775) (937) (2,350) (3,364)
Other................................................... (360) (360) (1,080) (1,080)
--------- --------- --------- ---------
(1,135) (1,297) (3,430) (4,444)
--------- --------- --------- ---------
Income before provision for income taxes................. 21,742 18,060 64,382 52,276
PROVISION FOR INCOME TAXES................................. 8,487 6,892 25,139 20,215
--------- --------- --------- ---------
NET INCOME................................................. $ 13,255 $ 11,168 $ 39,243 $ 32,061
========= ========= ========= =========
NET EARNINGS PER COMMON SHARE:
Basic................................................... $0.19 $0.16 $0.56 $0.47
Diluted................................................. $0.19 $0.16 $0.55 $0.46
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic................................................... 70,043 68,995 69,830 68,635
Diluted................................................. 71,217 70,369 71,139 69,684
The accompanying notes are an integral part of these
interim financial statements.
Page 4
99 CENTS ONLY STORES
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(Amounts in Thousands)
(Unaudited)
SEPTEMBER 30,
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $39,243 $32,061
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................. 12,769 8,703
Tax benefit from exercise of non-qualified
Employee stock options......................................... 3,500 3,925
Other.......................................................... (17) (191)
Changes in assets and liabilities associated with
operating activities:
Accounts receivable............................................ (67) (1,861)
Inventories.................................................... (17,295) (4,522)
Other assets................................................... 674 (3,836)
Accounts payable............................................... (5,393) (2,444)
Accrued expenses............................................... 1,518 (1,220)
Workers compensation........................................... 486 613
Income taxes................................................... (3,958) 6,408
Deferred rent.................................................. 90 90
Due to shareholders............................................ (1,655) -
--------- ---------
Net cash provided by operating activities........................... 29,895 37,726
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............................. (27,281) (31,498)
Reduction (purchase)of short-term investments.................... 35,403 (13,039)
Purchases of long-term investments............................... (42,426) 1,514
Purchases of other assets........................................ (1,201) -
--------- ---------
Net cash used in investing activities.......................... (35,505) (43,023)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligation............................. (10) -
Proceeds from exercise of stock options.......................... 8,680 7,046
--------- ---------
Net cash provided by financing activities.................... 8,670 7,046
--------- ---------
NET DECREASE IN CASH................................................ 3,060 1,749
CASH, beginning of period........................................... 232 9,034
--------- ---------
CASH, end of period................................................. $ 3,292 $ 10,783
========= =========
The accompanying notes are an integral part of these
interim financial statements.
Page 5
99 CENTS ONLY STORES
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
conformity with accounting principles generally accepted in the United States
for interim financial information and in accordance with the rules and
regulations of the Securities and Exchange Commission ("SEC"). 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 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 April 1, 2002. In the opinion of
management, these interim financial statements reflect all adjustments
(consisting of normal recurring adjustments) necessary for a fair statement of
the results for 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 located in California, Nevada and
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 and nine months ended September 30, 2002 and 2001 (amounts in
thousands):
3 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2002 2001 2002 2001
------ ------ ------ ------
Weighted average number of common shares
outstanding-Basic............................... 70,043 68,995 69,830 68,635
Dilutive effect of outstanding stock options....... 1,174 1,374 1,309 1,049
------ ------ ------ ------
Weighted average number of common shares
outstanding-Diluted............................. 71,217 70,369 71,139 69,684
====== ====== ====== ======
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 September 30, 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
----------------------------------- ---------------------------------
SEPTEMBER WITHIN 1 1 YEAR OR DEC. 31, WITHIN 1 1 YEAR OR
---------- --------- ---------- --------- --------- ---------
30, 2002 YEAR MORE 2001 YEAR MORE
-------- -------- -------- -------- -------- -------
Federal Bonds...... $ 7,235 $ - $ 7,235 $ - $ - $ -
Municipal Bonds...... 99,730 78,490 21,240 113,075 112,542 533
Corporate Securities. 16,589 2,105 14,484 981 981 -
Commercial Paper..... 31,567 31,567 - 34,043 34,043 -
-------- -------- -------- -------- -------- -------
$155,121 $112,162 $42,959 $148,099 $147,566 $533
======== ======== ======== ======== ======== =======
4. NEW AUTHORITATIVE PRONOUNCEMENTS
In June 2001, the FASB approved 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 No. 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. These
statements 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). This statement
addresses financial accounting and reporting for long-lived assets and retains
requirements to recognize an impairment loss if the carrying value is not
recoverable from its undiscounted cash flows and to measure an impairment loss
as the difference between the carrying value and the fair value of the asset.
SFAS 144 was effective for the financial statements issued for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal years.
The adoption of SFAS 144 did not have an impact on the Company's financial
position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting For Costs
Associated with Exit or Disposal Activities" (SFAS 146). This statement requires
the recognition of costs associated with exit or disposal activities when they
are incurred rather than at the date of a commitment to an exit or disposal
plan. This statement is effective for exit or disposal activities initiated
after December 31, 2002.
5. RELATED-PARTY TRANSACTIONS
The Company leases certain retail facilities from its principal
shareholders. Rental expense for these facilities was approximately $1.9 million
for each of the fiscal years 1999, 2000 and 2001. We expect that rental expense
for these facilities in 2002 will be approximately $1.9 million.
Page 7
Effective September 30, 2000, the Company sold its discontinued operation,
Universal International, Inc. ("Universal") 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 Agreement with 99 Cents
Only Stores some time during 2002. From January 1, 2002 to September 30, 2002,
the Company recorded $1.1 million and $1.1 million of revenue under a Services
Agreement and Lease Agreement, respectively, and purchased $0.5 million of close
out inventory from Universal related to this transaction. From January 1, 2001
to September 30, 2001, the Company recorded $2.5 million and $1.1 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, 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 September 30, 2002, the Company had no customers representing more than
4.4% 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 month and the nine month
periods ended September 30, 2002 and September 30, 2001 follows (amounts in
thousands):
THREE MONTHS ENDED
SEPTEMBER 30 RETAIL WHOLESALE TOTAL
------ --------- -----
2002
----
Net sales............. $160,424 $11,839 $172,263
Gross margin.......... 66,324 2,430 68,754
2001
----
Net sales............. $130,799 $13,223 $144,022
Gross margin.......... 53,709 2,562 56,271
NINE MONTHS ENDED
SEPTEMBER 30 RETAIL WHOLESALE TOTAL
------ --------- -----
2002
----
Net sales............. $465,507 $37,722 $503,229
Gross margin.......... 192,961 7,600 200,561
2001
----
Net sales............. $363,534 $41,831 $405,365
Gross margin.......... 149,426 8,094 157,520
Page 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following management's discussion and analysis should be read in connection
with "Item 1. Financial Statements."
GENERAL
The Company has been engaged since 1976 in the purchase and sale of name-brand,
close-out and regularly available general merchandise. Since that time, the
Company has sold its merchandise on a wholesale basis through its Bargain
Wholesale division. On August 13, 1982, the Company opened its first 99 Cents
Only Stores location and as of September 30, 2002, operated a chain of 144 99
Cents Only Stores. The Company's growth during the last three fiscal years has
come primarily from new store openings. 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
twenty-one stores through September 30, 2002 (four stores in Southern
California, four in Central California, four in Northern California, three in
Las Vegas, Nevada, and six in Phoenix, Arizona). The Company plans to open an
additional 7 net new stores in the fourth quarter, including one store in
Phoenix, Arizona, one in Las Vegas, Nevada, and five in California. As of
September 30, 2002, the Company has secured sites for these additional store
locations. Bargain Wholesale sales are 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.
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 generally between 15,000 and 25,000 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,
investments, 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:
Page 9
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
from 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
impairments charges may be required should such changes occur.
SELF-INSURANCE RESERVES: The Company is self-insured in relation to workers'
compensation claims. 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 or a
higher cost 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 Form 10-Q contains statements that constitute "forward-looking statements"
within the meaning of Section 21E of the Securities and Exchange Act of 1934
(the "Exchange Act") and Section 27A of the Securities Act of 1933 (the "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 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 SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2001
NET SALES: Net sales increased $28.3 million, or 19.6%, to $172.3 million in the
2002 period from $144.0 million in the 2001 period. Retail sales increased 22.7%
or $29.6 million to $160.4 million in the 2002 period from $130.8 million in the
2001 period. The retail net sales increase primarily was attributable to the net
effect of twenty-one new stores opened in 2002, the full quarter effect of 25
net new stores opened in 2001 and the 1.1% increase in same store sales. Bargain
Wholesale net sales were $11.8 million in the 2002 period and were $13.2 million
in the 2001 period. The 2001 period included $1.2 million in net sales to
Universal as compared to none for the 2002 period.
GROSS PROFIT: Gross profit increased approximately $12.5 million, or 22.2%, to
$68.8 million in the 2002 period from $56.3 million in the 2001 period. The
increase in gross profit was due to higher net retail sales and favorable
purchase cost variances for close-
Page 10
out merchandise. Overall gross profit margin for the 2002 period was 39.9%
versus 39.1% for the 2001 period.
SELLING, GENERAL AND ADMINISTRATIVE: SG&A increased by $8.6 million, or 21.9%,
to $48.1 million in the 2002 period from $39.5 million in the 2001 period. As a
percentage of net sales, total SG&A increased to 27.9% for the 2002 period from
27.4% for the 2001 period. This increase primarily is related to the California
minimum wage increase in January 2002 and depreciation cost increases.
OPERATING INCOME: As a result of the items discussed above, operating income
increased $3.8 million, or 22.9%, to $20.6 million for the 2002 period from
$16.8 million for the 2001 period. Operating margin was 12.0% for the 2002
period versus 11.7% for the 2001 period.
OTHER INCOME: Other income includes interest income on the Company's marketable
securities and rental income from a lease agreement with Universal. Interest
income was $0.8 million for the 2002 period and $0.9 million for the 2001
period. The decrease in interest income is a result of lower interest rates
during the 2002 period than were in effect for the 2001 period. During 2002 and
2001, the Company had no bank debt. At September 30, 2002, the Company held
$112.2 million in short-term investments and $43.0 million in long-term
investments. The Company's short-term and long-term investments are comprised
primarily of investment grade federal bonds, municipal bonds and commercial
paper. The Company generally holds investments until maturity. In each of the
2002 and 2001 periods, the Company recorded $0.4 million of rent income under a
lease agreement with Universal.
PROVISION FOR INCOME TAXES: The provision for income taxes was $8.5 million in
the 2002 period compared to $6.9 million for the 2001 period. The effective rate
of the provision for income taxes was approximately 39.0% for the 2002 period
and 38.2% for the 2001 period. This variance results from available job tax
credits, the effective state tax rate and tax-free interest income earned.
NET INCOME: As a result of the items discussed above, net income increased $2.1
million, or 18.7%, to $13.3 million for the 2002 period from $11.2 million for
the 2001 period. Net income as a percentage of sales was 7.7% for the 2002
period and 7.8% for the 2001 period.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2001
NET SALES: Net sales increased $97.9 million, or 24.1%, to $503.2 million in the
2002 period from $405.4 million in the 2001 period. Retail sales increased
$102.0 million to $465.5 million in the 2002 period from $363.5 million in the
2001 period. The retail net sales increase primarily was attributable to the net
effect of twenty-one net new stores opened in the first nine months of 2002, the
full nine months effect of 25 net new stores opened in 2001, and a 3.7% increase
in comparable same store sales for the nine-month period. Bargain Wholesale net
sales were $37.7 million for the 2002 period and $41.8 million for the 2001
period. Included in Bargain Wholesale net sales for the 2001 period were $4.2
million of shipments to Universal at a 10% gross margin. No shipments to
Universal were made in the first nine months of 2002 as a result of the closing
of Universal.
GROSS PROFIT: Gross profit increased approximately $43.0 million, or 27.3%, to
$200.6 million in the 2002 period from $157.5 million in the 2001 period. The
increase in gross profit primarily was due to higher net sales volume and margin
improvement resulting from favorable product cost factors. The gross profit
margin as a percentage of net sales was 39.9% in the 2002 period versus 38.9% in
the 2001 period. The year to date retail gross margin was 41.5% for the 2002
period versus 41.1% for the 2001 period. The change in the retail gross profit
margin is due to product cost factors and category sales mix. The wholesale
gross profit margin was 20.2% for the 2002 period and 19.4% for 2001 period.
Page 11
SELLING, GENERAL AND ADMINISTRATIVE: SG&A increased by $29.9 million, or 27.3%,
to $139.6 million in the 2002 period from $109.7 million in the 2001 period. As
a percentage of net sales, total SG&A increased to 27.7% for the 2002 period
from 27.1% for the 2001 period. This increase was a result of the California
minimum wage increase in January 2002, which was partially offset by $1.1
million in management fees earned for administrative services provided to
Universal. Additional cost increases included depreciation.
OPERATING INCOME: As a result of the items discussed above, operating income
increased $13.1 million, or 27.4%, to $61.0 million for the 2002 period from
$47.8 million for the 2001 period. Operating margin was 12.1% for the 2002
period versus 11.8% for the 2001 period.
OTHER INCOME: Other income includes interest income on the Company's marketable
securities and interest income under a lease agreement with Universal. Interest
income decreased $1.0 million, to $2.4 million for the 2002 period from $3.4
million for the 2001 period. The decrease in net interest income between 2002
and 2001 was primarily due to lower interest earned on short-term and long-term
marketable securities because of interest rate declines over the past year. At
September 30, 2002, the Company held $112.2 million in short-term investments
and $43.0 million in long-term investments. The Company's short-term and
long-term investments are comprised primarily of investment grade federal bonds,
municipal bonds and commercial paper. The Company generally holds investments
until maturity. In each of the 2002 and 2001 periods, the Company recorded $1.1
million of rent income under a lease agreement with Universal.
PROVISION FOR INCOME TAXES: The provision for income taxes was $25.1 million for
the 2002 period compared to $20.2 million for the 2001 period. The effective
rate of the provision for income taxes was approximately 39.0% for the 2002
period and 38.7% for the 2001 period. This variance results from available job
tax credits, tax-free interest income earned and changes in the effective state
tax rate.
NET INCOME: As a result of the items discussed above, net income increased $7.2
million, or 22.4%, to $39.2 million, or $0.55 per diluted share for the 2002
period, from $32.1 million, or $0.46 per diluted share, for the 2001 period. Net
income as a percentage of sales was 7.8% for the 2002 period and 7.9% for the
2001 period.
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 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 nine months ended September 30, 2002
was $29.9 million, which includes $39.2 million of net income before adjustments
for depreciation and other non-cash items of $16.3 million and also includes
$25.6 million of cash used for working capital. Net cash used for working
capital and other activities primarily reflects an increase in inventory of
$17.3 million, payment on accounts payable of $5.4 million and payment of $1.7
million due to shareholders as a result of the tax benefit of the sale of
Universal and other related transactions with Universal. Net cash provided by
operations during the nine months ended September 30, 2001 was $37.7 million,
which includes $32.1 million of net income before adjustments for depreciation
and other non-cash items of $12.4 million and also includes $13.5 million of
cash used for working capital.
Page 12
Net cash used in investing activities during the nine months ended September 30,
2002 and 2001 was $35.5 million and $43.0 million, respectively. Net cash used
in investing activities for the 2002 period reflects $27.3 million used for
capital expenditures, including $24.1 million used to open new stores. Net cash
used in investing activities in the 2001 period was $43.0 million, which
includes $31.5 million used for capital expenditures and $13.0 million for the
purchase of marketable securities. Other changes in net cash used in investing
activities in 2002 and 2001 are due to the purchase and sale of short and
long-term marketable securities.
Net cash provided by financing activities during the nine months ended September
30, 2002 and 2001 was $8.7 million and $7.0 million, respectively, each of 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 has pledged a $6.3 million FNMA bond with the State of California
Department of Industrial Relations as security for self-insured workers
compensation.
The Company plans to grow retail square footage of 99 Cents Only Stores at a
targeted annual rate of 25%. The average investment per new store opened in
2002, including leasehold improvements, furniture, fixtures and equipment,
inventory and pre-opening expenses, is approximately $660,000. The Company does
not capitalize pre-opening expenses. The Company's cash requirements for new
store openings are expected to total approximately $38.0 million in 2002, which
includes the acquisition of properties. The Company's total planned expenditure
in 2002 for additions to fixtures and leasehold improvements of existing stores,
as well as for distribution, systems, expansion and replacement equipment is
approximately $10.0 million. The Company believes that its total capital
expenditure requirements for 2002 (including new store openings) will be
approximately $48.0 million. The Company intends to fund its liquidity
requirements for 2002 out of net cash provided by operations, short-term
investments and cash on hand.
RISK FACTORS
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 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, twenty and twenty-five stores, respectively, net of
relocated stores). As of September 30, 2002, we opened twenty-one stores and
expect to open 7 stores in the fourth quarter of 2002 which will be
approximately 23% new store growth and over 25% retail square footage growth. We
plan to grow retail square footage 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
Page 13
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 we will improve our results of operations when we
open new stores. 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 CALIFORNIA
All but 18 of our 99 Cents Only Stores are currently located in California. The
Company operates eight stores in Las Vegas, Nevada and ten stores in Arizona.
Accordingly, our results of operations and financial condition largely depend
upon trends in the California economy. If retail spending declines due to
economic slow-down or recession in California, we cannot assure you that our
operations will not be negatively impacted.
In addition, 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, as well as unexpected demands on our
transportation network, which 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 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.
Page 14
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.
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. In 2001 and 2002,
annual payroll expenses as a percentage of sales increased less than 1.0%.
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 overall
net sales, they have contributed to historical 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.
Page 15
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 in
each of 1999, 2000 and 2001. Through September 30, 2002, the Company recorded
$1.4 million in rental expense associated with these properties. 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 the Company 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. 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;
- - the amount and timing of operating costs and capital expenditures relating to
the growth of our business.
Page 16
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. As of September 30,
2002, we leased all but 19 of our stores and the Company owns its main warehouse
and distribution facility (where our executive offices are located). 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; CONCENTRATION OF OWNERSHIP BY OUR EXISTING OFFICERS AND
PRINCIPAL STOCKHOLDERS
In addition to some governing provisions in our Articles of Incorporation and
Bylaws, we are also subject to certain California laws and regulations which
could delay, discourage or prevent others from initiating a potential merger,
takeover or other change in our control, even if such actions would benefit our
shareholders and us. Moreover David Gold, our Chairman and Chief Executive
Officer, and members of his immediate family and certain of their affiliates
beneficially own as of September 30, 2002, 22,735,622, or 32.4% of shares
outstanding. 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;
- - the conditions of the market generally;
- - additions or departures of key personnel; and
- - future sales of our common stock.
TERRORISM AND THE UNCERTAINTY OF WAR MAY HAVE AN 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 other acts of violence or war may affect the market on which
our common stock will trade, the markets in which we operate and our
profitability. Further terrorist attacks on the United States or United States
businesses may occur. The potential near-term and long-term effects these
attacks 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.
Page 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk for its investments in marketable
securities. At September 30, 2002, the Company had $155.1 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 is amortized over the term of the investment. At September 30, 2002,
the fair value of investments approximated the carrying value.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14(c) and 15d-14(c) of the Securities Exchange
Act of 1934. Based upon that evaluation, our Chief Executive Officer and our
Chief Financial Officer concluded that our disclosure controls and procedures
are effective in timely alerting them to material information relating to 99
Cent Only Stores, required to be included in this quarterly report on Form 10-Q.
There have been no significant changes in our internal controls or in other
factors, which could significantly affect internal controls subsequent to the
date that the Company carried out its evaluation.
Page 18
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
99.1 Certification of Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
dated October 28, 2002.
99.2 Certification of Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
dated October 28, 2002.
b. Reports on Form 8-K
Current report on Form 8-K filed on July 26, 2002; Item 5
was reported.
Page 19
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: October 28, 2002 /s/ Andrew A. Farina
-------------------------------
Andrew A. Farina
Chief Financial Officer
(Duly Authorized Officer)
Page 20
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
OF 99 CENTS ONLY STORES
I, David Gold, certify that:
1. I have reviewed this quarterly report on Form 10-Q of 99 Cent Only Stores,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
Page 21
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 28, 2002
By /S/ DAVID GOLD
----------------------------------
David Gold
Chief Executive Officer
Page 22
CERTIFICATION OF
CHIEF FINANCIAL OFFICER
OF 99 CENTS ONLY STORES
I, Andrew Farina, certify that:
1. I have reviewed this quarterly report on Form 10-Q of 99 Cent Only Stores,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
Page 23
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 28, 2002
By /S/ ANDREW FARINA
-----------------------------------
Andrew Farina
Chief Financial Officer
Page 24
EXHIBIT INDEX
99.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 dated October 28, 2002.
99.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 dated October 28, 2002.
Page 25